Study: Consolidation Lowers Hospital Costs

September 15, 2011

Increased consolidation among health plans nationally may benefit consumers by lowering hospital prices, at least in those regions where health plans are the most consolidated, according to a new RAND Corporation study.

Increased consolidation among health plans nationally may benefit consumers by lowering hospital prices, at least in those regions where health plans are the most consolidated, according to a new RAND Corporation study.

Researchers found that hospital prices were about 12% lower in the metropolitan areas with the fewest health plans, lending support to the view that when health plans become bigger they can negotiation lower prices from health providers.

The study, published in the September edition of the journal Health Affairs, also found that regions where hospital ownership is more consolidated generally have higher hospital prices. But those prices can be driven lower when health plans also are consolidated.

The results suggest that contrary to conventional wisdom, very few hospitals operate in markets with only a few dominant health plans. The study found that 64% of hospitals operate in markets where health plans are not very consolidated and only 7% were in the most-concentrated health plan markets. Researchers say the findings show that hospitals face less competition in their own markets than health plans face in theirs. More than 90% of all hospitals operate in markets where the hospital market concentration exceeds the health plan market concentration.

“Our findings suggest that if policymakers are interested in lowering costs, they should find a way to restore competition among hospitals, in addition to assuring competition among health plans,” said Glenn A. Melnick in a press statement. Melnick is an economist at RAND and the Blue Cross of California Chair in Health Care Finance at the USC School of Policy, Planning and Development. “There has been great consolidation among hospitals and physician practices, and that consolidation has allowed hospitals and doctors to raise prices.”