modern hospital building emergency

Certificate of need programs require hospitals to demonstrate community need for their services before building new facilities.

How Health System Consolidation Affects Consumer Costs

By Jack Pitsor and Shannon Sweeney | Aug. 24, 2022 | State Legislatures News | Print

Health care costs continue to confound policymakers, employers and consumers. Hospital, physician and clinical services now comprise more than half of U.S. health care expenditures.

With industry consolidation on the rise, an increasing number of states are developing strategies to assess and address the impact of mergers and acquisitions on health care costs. Pre- and post-transaction oversight, contract restrictions and certificate of need programs may provide policymakers with tools to preserve healthy competition, control prices and ensure access and quality of care for consumers.

Increasing Consolidation

Horizontal consolidation occurs when similarly situated providers, such as two hospitals, merge. Vertical consolidation occurs when entities performing complementary services combine—such as a hospital acquiring a physicians’ practice. Consolidation, whether horizontal or vertical, may occur for a variety of reasons, including preserving a provider’s financial viability, managing fixed costs, protecting against market uncertainty or gaining negotiating power and market share.

Some argue that mergers and acquisitions allow for greater care coordination, efficiency among providers and increased quality of care. However, research on the impact of consolidation on the price, quality and efficiency of health care remains mixed. Various studies conclude that consolidation results in higher health care prices, driven by the increased market power and decreased competition of health systems.

To maintain competition, some states are considering strategies to oversee consolidation in the health care market.

State Oversight of Consolidation and Contracting

Policymakers are proposing legislation that would authorize various state entities, such as attorneys general offices or departments of health, to be notified of potential mergers, approve transactions and oversee the consolidation process.

Nevada now requires notification of any health care acquisition or merger, regardless of size, creating awareness of consolidating moves and allowing the state to challenge proposed mergers. Similarly, Oregon adopted legislation requiring consolidating health care practices to give notification and receive approval from the relevant state agencies. Oregon’s model also requires consolidating practices to detail how the proposed transaction would affect access and equity.

Contracting oversight is another mechanism for policymakers to address concerns about anticompetitive in already consolidated markets. Most states have restricted the use of certain anticompetitive clauses in contracts between health care providers and insurers. These include, for example, all-or-nothing clauses, which require an insurer to contract with all facilities in a health system if it wants to include any facilities in a plan, or exclusive contracting clauses, in which a provider tries to prevent an insurer from contracting with other providers.

Indiana enacted legislation in 2020 prohibiting provider contract provisions that limit an insurer’s ability to disclose health care claims data to employers (i.e., gag clauses). In 2021, Indiana enacted additional legislation to prohibit contracts that limit an insurance carrier’s or health care provider’s ability to disclose charges, fees and out-of-pocket costs to a patient.

Certificates of Public Advantage and Certificates of Need

State policymakers also are addressing consolidation and anti-competitiveness, and their potential effects on health care prices, by implementing certificate of need (CON) and certificate of public advantage (COPA) programs.

CON programs require health care facilities to demonstrate community need and obtain state-level approval before making major capital expenditures, such as building new facilities in a specified area. The programs operate on the premise that restricting duplicative services and efficiently using resources will control costs and expand services. However, opponents suggest that the opposite may be true.

A recently established Connecticut task force considered such measures as instituting price caps tied to cost-growth benchmarks; measuring quality of care; and assessing the impact of consolidation on equity and care provided to underserved populations. Thirty-five states and the District of Columbia currently maintain CON programs.

COPA statutes and regulations permit states to approve health care mergers in exchange for increased oversight after a merger occurs. COPA recipients receive immunity from state antitrust claims for the duration of the certificate. Currently, 18 states have COPA programs, starting with Texas’ legislation in 1993.

Jack Pitsor was a policy associate and Shannon Sweeney is an intern in NCSL’s Health Program.

NCSL acknowledges Arnold Ventures for its support of this publication.

Please note that NCSL takes no position on state legislation or laws mentioned in linked material, nor does NCSL endorse any third-party publications; resources are cited for informational purposes only.

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