An Exploration of Healthcare Consolidation & Its Merits

Wasan Rafat and Ethan Aidam

Abstract

Over the past few decades, the healthcare industry has experienced rapid consolidation, hiking the price of healthcare for consumers through direct care and the purchase of pharmaceutical drugs. An analysis of vertical and horizontal consolidation reveals that American consumers are being forced to sacrifice a greater part of their wages to pursue vital treatment. Healthcare consolidation erodes market competition, preventing smaller healthcare providers and insurance companies from thriving in, or even simply entering, the market. This dynamic, in turn, restricts patients from seeking affordable care. These restrictions extend from primary care appointments to reproductive care to major procedures. On the legislative level, the United States government must not allow monopolistic maneuvers to isolate civilians from comprehensive care. As such, measures such as free care pools, antitrust laws, and lower fee schedules are essential to the safety and health of individuals.

Introduction

There have been 1,877 hospital mergers from 1998 to 2021. Concurrently, healthcare conglomerates like UnitedHealth Group continue to gain market power from industries such as pharmaceuticals and insurance.¹ Such organizations often employ one of the following strategies: vertical or horizontal consolidation. Vertical integration occurs when a singular healthcare organization offers a broad range of services that relate to its central mission, either directly or through partner companies. Conversely, horizontal integration involves two or more practices that amalgamate into one organization.² Both tactics have been linked to an increase in patient premiums without notable improvements in quality.³ To address these challenges, policymakers must champion antitrust legislation and work to create policies that link expansion to lower fee schedules, free care pools, and discounted services for the most vulnerable.

Proponents of healthcare insurance mergers have claimed that such consolidation will lower consumer drug prices and cut into drug manufacturers’ massive, unethical profits. For instance, when CVS Health agreed to purchase the insurance company Aetna, they argued that the merger would reduce drug prices because larger organizations would have greater bargaining power to negotiate prices with pharmaceutical companies. They further claimed that eliminating the middleman between the insurance and drug companies would bolster efficiency and patient satisfaction.⁴ In the long term, however, experts find that mergers eliminate market competition; newer and smaller insurance companies struggle to enter the market because they are incapable of negotiating prices to the same degree that larger organizations, with greater market power, can. Thus, in the private insurance market between 2006 and 2014, the sum of market shares of the leading four providers increased from 74 percent to 83 percent.⁵ This dynamic stifles competition, which in turn increases prices. Indeed, over 1,200 drugs saw an average rise of 31.6% in prices between 2021 and 2022, outpacing inflation.⁶

Federal and State Interventions to Reduce Healthcare Costs

The aforementioned issues have dire implications for the accessibility and efficiency of the healthcare system. Rising prices prevent many consumers from purchasing drugs and healthcare services. This harsh reality is particularly true for the 27 million Americans who are uninsured.⁷ It also applies to those with insurance who cannot afford the premiums, deductibles, and copays associated with care. In response, legislators have proposed various policies—such as state-based free care pools and adjusted fee schedules for services—which aim to reduce the cost of healthcare for struggling Americans.

For instance, free care pools established through the Medicaid Section 1115 waiver are crucial tools for maintaining the accessibility and affordability of healthcare services despite healthcare consolidation. The Section 1115 waiver allows states to create uncompensated care pools that reimburse healthcare providers for the cost of uncompensated care, particularly for those serving low-income and uninsured individuals.⁸ In addition, certain states have implemented lower fee schedules that apply to the uninsured. In Massachusetts, for instance, individuals with incomes up to three times the federal poverty level (FPL)[b] can access cost-sharing reductions and discounted/subsidized services. As of 2024, the cut-off is set to rise to five times the FPL.⁹ Overall, states have begun to take the initiative in providing services to those who cannot afford it themselves, especially in the face of rampant healthcare consolidation.

While state-level interventions help to reduce the adverse impacts of healthcare consolidation on local consumers, ultimately, federal regulations are necessary to protect healthcare market competition. Both the Federal Trade Commission (FTC) and the Department of Justice’s (DOJ) Antitrust Division have a responsibility to oppose price increases as a result of healthcare mergers. In the past decade, the FTC and DOJ have successfully challenged around a dozen horizontal hospital mergers.¹⁰ Unfortunately, this pales in comparison to the 900 hospital mergers occurring each decade, and each of these victories comes at extraordinary costs to enforcement agencies. The FTC and DOJ lack the resources to combat pre-merger entities that are incentivized to spend millions in the hopes of gaining market power. This creates leeway for mergers, especially vertical mergers, which are rarely challenged by antitrust enforcers. Increasing the budgets for critical federal enforcement agencies would allow them to litigate and set new precedents to protect competition.¹¹ Investment into the FTC and the DOJ promises substantial returns, as deterring consolidation and anticompetitive practices will reduce healthcare prices.

Moreover, government agencies must strengthen their capacity to identify and prosecute anticompetitive practices, given that current healthcare regulations are unsuited for countering contemporary consolidation schemes. It wasn’t until February 2023 that the DOJ announced the withdrawal of its Statements of Antitrust Enforcement Policy issued in 1996.¹² The document prescribed the agencies’ guidelines for a legal healthcare merger but did not address vertical, “cross-market” consolidation. In withdrawing the document, the DOJ took a necessary step to match its statutes to the evolution of healthcare market practices. Still, several outdated regulations require renewal. For instance, the FTC is restricted from investigating nonprofit organizations and insurance companies. These restrictions prevent the FTC from examining anticompetitive hospitals and vertical mergers with insurance companies. In an effort to amend these restrictions, U.S. Representatives Pramila Jayapal (WA-07) and Victoria Spartz (IN-05) introduced the bipartisan Stop Anticompetitive Healthcare Act in 2022.¹³ The passage of this bill would allow the FTC to investigate nonprofit hospitals prioritizing profits over patient care. Overall, strengthening the budgetary support and investigative capabilities of federal antitrust agencies is imperative to address the changing nature of healthcare consolidation and safeguard market competition.

Conclusion

Consolidation continues to reshape the healthcare industry, resulting in higher prices for pharmaceuticals and essential medical services.¹⁴ The uptick in both vertical and horizontal mergers has stifled competition in the market, forcing struggling Americans to devote an even greater portion of their earnings towards managing health. In response, recent legislative efforts include the establishment of state-funded uncompensated care pools, discounted fee schedules, and antitrust measures to safeguard against monopolistic tactics. While considerable strides have been made to protect the people, America has a long way to go before each individual— regardless of income or insurance status—has access to quality care at an affordable price.

Acknowledgments

Thank you to Dr. Sanjay Saini, M.D., and Shreyas Rajesh for providing feedback on this paper. Their editorial assistance is greatly appreciated.

About the Authors

Wasan Rafat is an undergraduate student at Harvard University concentrating in Chemical and Physical Biology as well as History and Science. She is interested in pursuing a career in medicine and global health equity.

Ethan Aidam is an undergraduate student at Harvard University on the track of studying Biomedical Engineering with a secondary in Global Health and Health Policy. He has considerable interest in the development of biomedical devices, drugs, and their global applications.

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