Consolidation in California’s Health System Leads to Higher Prices and Premiums

The Issue

Integration and consolidation among health care providers and health plans has the potential to improve the coordination and quality of patient care. However, when markets become highly concentrated — served by a single or a few large health care organizations — competition is curtailed and health care prices and insurance premiums tend to rise.

In a Commonwealth Fund–supported study in Health Affairs, researchers explored the effect of market consolidation across California between 2010 and 2016 on outpatient visit prices and premiums for individual coverage on the Covered California marketplace. The study focused on two measures of consolidation: the percentage of physicians in practices owned by hospitals and the total market share controlled by hospitals, health plans, and physician practices in a particular area.

What the Study Found

• The number of physicians in hospital-owned practices increased from 25 percent to 40 percent across select California counties between 2010 and 2016.
• Hospital employment increased more steeply among specialists than primary care physicians. Among the specialties studied (i.e., cardiology, hematology/oncology, orthopedics, and radiology), employment rose to 54 percent from 20 percent. In comparison, primary care physician employment increased to 38 percent from 26 percent.
• Premiums for individual coverage rose the most, by 12 percent, in areas with both high consolidation among hospitals and a high percentage of hospital-owned physician practices.
• Prices of specialty outpatient visits were 9 percent higher in areas with 100 percent hospital-physician employment compared to areas with average levels. Prices of primary care visits were 5 percent higher in areas with high versus average hospital-physician employment.
• Seven counties were identified as “hot spots,” or markets with concerning levels of health care mergers and consolidation that could be limiting competition.

The Big Picture

The significant price increases in California markets with high hospital-physician employment and hospital consolidation point to the need for careful scrutiny of health care mergers and acquisitions. Additional research is needed to determine if the price increases are tied to improvements in patient care. For instance, if care is more expensive because it is more comprehensive, then overall utilization and spending should decrease. At the same time, regulatory laws and actions may be needed to prevent some health care organizations from attaining unfair market advantages that shut out rivals and raise prices.

The Bottom Line

In California, hospital acquisition of physician practices, particularly in markets with limited hospital competition, is associated with higher prices for outpatient visits and higher insurance premiums on the individual marketplace.