Vertical and Horizontal Consolidation in Health CareAnd Narrow Networks
Louis J. Auguste, MD, FACS

The Great Depression of 1929 had arguably a cataclysmic effect on American Society.  However, very few know that health care insurance was born from this troubled period.  Shortly after the creation of Blue Cross and Blue Shield, the commercial life insurance companies sought to gain and eventually gained approval to begin providing health insurance policies as well. Truman, through his tax policies, promoted the expansion of employer-sponsored health care insurance plans for the community. In this open market, free competition between insurance companies kept premiums and prices at a reasonable level. However, some 30 years ago, these insurance companies realized that by reducing competition, they could exert a better control on the market and dictate the terms of contract to both hospitals and individual consumers.  The government more or less turned a blind eye on these transactions and before the enactment of the Affordable Care Act, the BIG Three, United Health Care, Aetna and Blue Cross and Blue Shield controlled 80 % of the non-government health insurance market and effectively, were firmly in control of this sector of the economy.  If we exclude the critical access rural hospitals and the safety net urban hospitals, the immediate casualties were all the small stand-alone hospitals across the country that saw their reimbursement decline below the critical level of sustenance. Only the largest or the fittest institutions were spared. It soon became clear that to survive the onslaught, the smaller institutions had to join forces with the larger entities and the larger entities had to control an ever-larger proportion of the community in order to attempt to level the playing field with the insurance companies. This process of consolidation has followed two paths: a horizontal and a vertical path.

The horizontal path implies the merger of two entities of similar characteristics and purpose. Examples of such horizontal consolidation abound across the Greater New York area: Mount Sinai Hospital and Beth Israel Hospital, New York Hospital and Columbia Presbyterian Hospital, North Shore University Hospital, Long Island Jewish Medical center and Lenox Hill Hospital, etc…  At the national level, the largest nonprofit hospital system is Ascencion Health with 100 hospitals, while the largest for-profit hospital operator in the U.S. is Hospital Corporation of America, which controls 162 hospitals. These arrangements are mutually beneficial in so many ways.

First, the administrative staff can be unified, allowing to streamline the operation, eliminate the duplication of services and ipso facto cut cost. Second, a significant economy of scale can be achieved, since the combined institutions can buy equipment, materials and various supplies in bulk and at a lower price. The cost of some capital investment items, such as electronic health record systems, internet/intranet services, etc… can be shared between the different entities of the resulting health system. Finally, instead of competing against each other, the now consolidated hospitals can regionalize their care and focus on for example, Cancer care at one site or organ transplant services at another site.  Thus, two general hospitals, which were struggling to each maintain full occupancy in these individual specialized units, can both maximize the utilization of their services and perhaps develop a reputation, a brand that will allow them to draw consumers from other hospital systems and other geographic locations.

These horizontal consolidations are not solely focused on hospitals. Physician practices can perform horizontal mergers and acquisitions, in order to integrate the practice of medicine through multi-specialty groups, which can assume risk contracts from the insurance companies or the government.  Some of these groups have organized ACOs (Accountable Care Organizations) and realized substantial profit from Medicare for example, which they have the opportunity to keep and share between their members.

Besides the horizontal consolidation, the trend has been to support these mergers with vertical consolidation. A vertical consolidation may take many forms, but always with the ultimate goal to support or enhance the performance of the tertiary hospital center or centers, sitting at the top of the pyramid.

First, we have a hospital-to-hospital vertical consolidation, whereby smaller community hospitals in remote locations are tasked with the responsibility to recruit cases that can be referred to the major tertiary center. A small hospital that provides renal dialysis can refer patients in need of transplant surgery to the tertiary institution, the flagship of the health system. The maternity ward at a remote location can identify infants born with birth defects and refer them to the main hospital for corrective pediatric surgical procedures. We see such arrangement between Mercy Hospital in Valley Stream and Memorial Sloan Kettering Cancer Center, where an outpatient oncology clinic provides cancer care to the community but refers the cases exceeding their capacity to the motherhouse in Manhattan.

The vertical consolidation may also involve hospitals and physicians. Nationwide, 45 % of physicians have an employment agreement with a hospital, according to the American Hospital Association. This trend was at its peak five years ago, when hospitals were acquiring private practices in order to secure the referral of patients to their hospital facilities and prevent a diversion of the population towards other competing entities. Although only 25 % of physician specialists elected to join a hospital as of 2012 according to data published by the Advisory Board, that vertical association can be mutually profitable. For example, an orthopedist can bring in annually as much as $2,7 million to a hospital, in exchange for a median per annum compensation of $519,000.  Northwell Health has assembled over 3000 community physicians into PAN, their physician ambulatory network, which is expected to feed patients to the hospitalist services and the specialists at the main hospitals. NYU Langone has been very active recruiting physician practices all over Long Island and Manhattan.  Although there are no strict contractual agreements (yet) that all cases be referred to the flagship institution, NYU is working on a merger agreement with Winthrop Hospital and this may lead to a shift of the referrals from Northwell to NYU/Winthrop.

This vertical consolidation extends into support services for the tertiary medical centers as well, including home care services, histo-pathology laboratories, comprehensive radiological services, urgent care centers, rehabilitation and hospice facilities, integrating all aspects of health care and cornering all the needs of the population. Once a consumer accesses any of the services of the system, the goal is to keep him or her, so that there is never any need to leave and join competing networks. With increasing focus on health rather than disease management, such network can also include weight reduction centers and fitness centers, etc… which until recently, were not be considered part of a traditional health system.

The natural evolution of this process is the creation of a narrow, almost exclusive network of facilities and providers, whereby the affiliated consumers are restricted to receive their care in no other but the affiliated institutions of the system.  The first natural targets of such program are naturally the employees of these institutions. At Northwell, all employees, regardless of their insurance plan affiliation are encouraged to use the services of the system, with the promise that no co-pay will ever be charged to an employee at any of these facilities.

Eventually, the system wants to have a larger catchment area and see growth in their budding proprietary Insurance program, CareConnect, in order to keep the business (and the cash) all in the “house.” They will need a wide-spread network of hospital, which Northwell has started building, as they have expanded from Nassau County, into the Counties of Queens, Suffolk, Staten Island, New York, Brooklyn and the Hudson Valley.

Another aspect of such program is that once the system achieves adequate satisfaction among their clients and when they can demonstrate that their cost of care compares favorably with other providers of care at the national level, with excellent outcome, the service can be offered as a package to insurance companies. We see this already at work, where some major business entities contract with either the Mayo Clinic or the Cleveland Clinic to have for example all the coronary bypass procedures or all the joint replacements for their employees, performed at one location, including hotel expenses for their accompanying relatives.

As if all these changes were not enough to make health care in America unpredictable, the president-elect and the new congress have pledged to repeal the Affordable Care Act, without any clear-cut model for replacement. Since health care represents one sixth of the American economy, it is understandable that a sense of discomfort may be felt at all level. Value-Based payment was expected to be the new driving force behind all hospital and health care operations, but at this time, nothing is written in stone. One thing is certain, the system will adapt as it always does.  The question is: “at what cost?”

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