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Healthcare Consolidation in California Leading to Higher Prices, Study Finds

Allison Inserro
Consolidation in California’s healthcare system has had a noticeable impact on measures of vertical integration and premiums for insurance bought through the exchanges established under the Affordable Care Act, according to a study published Tuesday in Health Affairs.
Consolidation in California’s healthcare system has had a noticeable impact on measures of vertical integration and premiums for insurance bought through the exchanges established under the Affordable Care Act, according to a study published Tuesday in Health Affairs.

The study examined data from 2010 to 2016 looking at hospital, physician, and insurer markets. Researchers conducted an analysis of “hot spots,” meaning markets that could raise flags for regulators in terms of both horizontal concentration (such as hospital–hospital mergers) and vertical integration (hospitals’ acquisition of physician practices).
While other studies have looked at the impact of healthcare consolidation on prices nationally, the authors said that local healthcare markets differ. California, however, is unique in that the state is mostly rural while also containing some of the nation’s most densely populated urban areas; its healthcare system already has a high level of integration and managed care, and it has a supply of healthcare providers slightly above national averages.

The authors measured market concentration by computing Herfindahl-Hirschman Indices (HHIs) for insurance, hospitals, primary care physicians, and specialists. The HHI is a standard measure used by the Federal Trade Commission and Department of Justice to assess competition. HHIs are low in markets served by many providers, signaling a more competitive market, and are higher as providers narrow.

The market concentration measure also included the percentages of primary care physicians and specialists working in hospital-owned practices. Market concentration values ranged from 0 to 6.

The percentage of physicians in practices owned by a hospital increased from about 25% in 2010 to more than 40% in 2016. Some researchers think hospitals are using the purchases of physician practices to increase referrals; in addition, doctors working in a hospital-owned practice can add a facility fee, which raises prices.

During the same time period nationally, the share of office-based physicians who worked in hospital-owned practices increased from 30% to 48%.

The estimated impact of the increase in vertical integration from 2013 to 2016 in highly concentrated hospital markets was found to be associated with a 12% increase in marketplace premiums. The impact of hospital concentration on premiums became larger as vertical integration increased, the authors wrote.

For physician outpatient services, the increase in vertical integration was also associated with a 9% increase in specialist prices and a 5% increase in primary care prices.

The researchers said there was little change in the market concentration of insurers and hospitals during the study period, but both were highly concentrated according to federal guidelines.

There was significant variation in market concentration across the state’s 58 counties, the study said.

In 2016, 7 counties were high on all 6 measures used in the hot-spot analysis (4 horizontal concentration and 2 vertical integration measures), and 5 counties were high on 5. This signals the need for regulatory scrutiny, the study said.

While it is possible that consolidation could have benefits, such as improved care coordination, rising prices are also a concern, the authors wrote, and more needs to be done to understand the relationship between quality, which varies across the state, and market concentration.

Authorities can take some measures to alleviate effects from consolidation, the researchers wrote. There are 3 bills that have been introduced in the California legislature that deal with healthcare consolidation and its impact on prices.

The authors cited their finding that vertical integration was linked with higher primary care and specialty physician prices, suggesting the need for increased attention to this issue.


Scheffler RM, Arnold DR, Whaley CM. Consolidation trends in California’s health care system: impacts on ACA premiums and outpatient visit prices. Health Aff (Millwood). 2018;37(9):1409-1416. doi: 10.1377/hlthaff.2018.0472.

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