A Policy and Regulatory Framework to Promote Care Delivery Redesign and Production Efficiency in Health Care Markets

Policymakers and the media have been increasingly attentive to mergers and acquisitions and other potentially anticompetitive practices of hospitals, physicians, and other health care providers. Consolidation has the potential to increase efficiency and help some struggling providers keep their doors open in relatively underserved areas. Still, it can also reduce market competition and ease pressure on providers to lower prices or invest in quality improvements. A substantial body of evidence shows that consolidation has led to higher prices without clear evidence of improvements in quality, which has implications for consumers and employers.¹

This excerpt from a recent Kaiser Family Foundation research brief summarizes the typical story line and concern with any proposed health care merger or acquisition. Such concern is now unsurprisingly widespread, given the dramatic trend of consolidation in health care over the past three decades in the United States, resulting in highly concentrated markets with large health systems currently controlling a significant proportion of care delivery across the country.^2, 3 The formation and growth of health care systems can occur through the horizontal combination of like providers (e.g., hospitals) or the vertical integration of different levels of providers either through acquisition or affiliation, such as primary care or single or multispecialty physician practices in addition to hospitals.⁴ Health systems may also operate and acquire in the insurance or risk industry, adding another dimension to an already complex and multidimensional organizational structure. Although the specific markets as well as the acquiring and acquired contestants may vary, the purported claims regarding the likely benefits of consolidation made by those who seek to combine do not change nor do the concerns raised about the potential negative consequences likely to be experienced by consumers, practicing providers such as physicians, and taxpayers that fund public health benefit programs. For example, proposed mergers and acquisitions are typically justified on the promise of production efficiencies, quality improvements through improved care coordination, and better patient/consumer experiences. Regulators and consumer watchdogs, on the other hand, worry about increased leverage to raise transaction prices by the consolidated entity, even if the newly formed organization may experience operational efficiencies. However, even with aggressive and successful antitrust regulation and enforcement, which are mainly designed to prevent further consolidation, it may be practically challenging to increase competition and reduce concentration from the status quo.⁵ In such cases where markets are already highly concentrated, the regulatory and policy goal should be to ensure that access and quality do not suffer and that prices are fair. Importantly, not all consolidation in health care is necessarily negative and can indeed be beneficial to consumers and society, but the potential positive side is unlikely to materialize without policy and regulatory oversight.^2, 6 To assess the consequent harms and benefits of consolidation in specific and tangible ways, it is crucial to understand how the various aspects of restructuring, reorganization, and potentially innovative redesign in how care is delivered may improve quality and efficiency and reduce cost.^7, 8

In this article, we discuss why reliance on transaction prices and market share alone is not sufficient for effective health policy development and regulatory enforcement in health care markets that are imperfectly competitive. We discuss the need to better measure the output produced by health care suppliers and to capture the costs of producing that output. We also discuss the need to measure transaction prices more accurately and to tie these prices to the cost of production. For illustrative purposes, we focus on one health care provider type that has grown significantly in recent years, often through consolidation that promises better outcomes at lower prices: health care delivery systems. We discuss health systems and their specific production objective, termed care delivery redesign (CDR), with the goal of measuring and monitoring the implementation and impact of CDR to understand how it is related to transaction prices, costs of production, and quality of output produced.

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