Evaluation of Healthcare Consolidation

Topics: Health care, Health insurance, Health economics Pages: 7 (4064 words) Published: October 31, 2014

right642593Healthcare Provider Consolidation and its effect on the Pharmaceutical IndustryThe driving forces behind the change and how Pharma can respond450000Healthcare Provider Consolidation and its effect on the Pharmaceutical IndustryThe driving forces behind the change and how Pharma can respond4000310515center5/1/2014 33000950005/1/2014

420003263900880008851265T. Daniel MooreRutgers business school450000T. Daniel MooreRutgers business school 1282890162048

Introduction
Why Provider Consolidation Matters to the Pharmaceutical Industry There is a wave of massive consolidation amongst US-healthcare providers. That consolidation is coming as payers try to reduce healthcare spending. In total, providers including hospitals, physicians and other healthcare professionals will account for 60% of all US healthcare spending by 2021, a 69% increase from 2012 CITATION Kee12 \l 1033 (Keehan, et al., 2012). Conversely, drug costs account for about 12% of US healthcare spending. Furthermore, total spending is expected to increase by 70% by 2021 from 2.81 billion in 2012 to 4.78 billion by 2021 CITATION Kee12 \l 1033 (Keehan, et al., 2012). This increase is driven almost entirely by provider costs. Payers, including commercial insurance, employers, and the government, will be looking for ways to reduce costs. This growth has spurred payers to cut costs by reducing reimbursements and changing reimbursement structures. Provider consolidation is the primary method to fight against this belt tightening. In the past this was accomplished via in a variety of methods including restricting networks and reducing payments. Additionally, tiered drug coverage was developed to control costs CITATION Agr12 \l 1033 (Agres, 2012). However, as provider networks consolidate and become larger, they gain increasing leverage with payers. In some areas, a single provider can account for up to 40% market share CITATION Hea13 \l 1033 (Healthcare Economics Editorial Board, 2013). This market share translates in bargaining leverage. As leverage increases they can place ever increasing pressure on payers to keep reimbursement rates high. To be competitive in the marketplace, payers cannot simply raise premiums. Thus, many payers are turning to drug coverage as a way to make up income lost to increase payments to providers. In response, to cost pressures the stake holders and their relative importance are changing in this landscape CITATION Kee12 \l 1033 (Keehan, et al., 2012). The pharmaceutical industry must understand the history of this development and the incentives in these large and complex systems or risk losing billions of dollars. Figure SEQ Figure \* ARABIC 1 Comparison of healthcare spending by category for 2012 and projected for 2021. Source Keehan et. Al. Health Affairs June 2012

Provider Consolidation Landscape
There is a clear trend in the provider landscape recently: consolidation. The consolidation movement is being led by hospital systems. These systems are merging hospitals themselves as well as buying up physician practices, making them employees of the hospital systems. There are also blurred lines between health insurance companies and traditional providers like hospitals and doctors’ offices. This trend is also going the other way, as large hospital systems are themselves becoming payers. Hospital Mergers

There have been an increasing number of hospital mergers in recent years CITATION Kee12 \l 1033 (Keehan, et al., 2012). These have increase from only a handful in the early 2000s to over 100 mergers in 2012. These hospital mergers include both for profit and not for profit hospitals. Some markets have seen more consolidation than others. Nationally, no hospital system accounts for more than 5% of the total market share CITATION Kee12 \l 1033 (Keehan, et al., 2012). This is up from less than 1% market share for the largest hospital systems in the early 2000s CITATION Rob05 \l 1033 (Robinson, Managed Consumerism...

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