Published 4/1/2015
Alexandra E. Page, MD

Consolidation Trends in Health Systems, Hospitals, and Payers

The last wave of hospital consolidations occurred in the 1990s as a response to changing healthcare markets in the wake of managed care. Although the rationale for consolidation was to build volume and control costs, that era of mergers led to higher prices with no demonstrable benefit.

Today, building volume and controlling costs remain important motivators, but declining reimbursements and the requirements of the Accountable Care Act (ACA) are spurring another wave of consolidation—one that extends beyond hospitals and health systems to include physician practices and payer (insurance) groups.

The ACA, for example, encourages integration as a means to achieve population-based health care, care coordination, and risk-based payments. Increased regulatory demands—including reporting and information technology requirements—also contribute to this trend.

Hospitals/health systems
There were 25 percent more health system mergers during 2010–2012 than during 2007–2009; during the first quarter of 2014, the number of mergers was 10 percent higher than during the same period in 2013. To justify these consolidations, health systems cite potential benefits such as improved quality and patient access to care as well as potential for cost reductions. However, most studies demonstrate that hospital consolidations result in higher health costs.

When mergers occur in concentrated markets, price increases could be substantial. A study comparing patient expenditures in California found that per patient spending for multihospital-owned physician groups was 19.8 percent higher than in independent, physician-owned groups.

Whether consolidation results in efficiencies and quality is unclear. Martin Gaynor, director of the Federal Trade Commission (FTC) Bureau of Economics, has said, “We’ve seen almost no evidence of real efficiency claims. That doesn’t mean it won’t happen, but the most recent evidence doesn’t support those claims.”

Although higher volume can be associated with higher quality for certain rare or complex procedures, the overall relationship between quality and volume is not linear. It’s even been suggested that assuming “larger is better” may represent misguided cause and effect: high-quality health systems became larger because they deliver higher quality than other systems. Additionally, the delivery of high-quality care in large hospitals may reflect utilization of processes and data sharing, mechanisms of integrated health care that can be realized without formal consolidation.

Practice acquisition/ physician employment
A common way for a health system to concentrate its market is by employing physicians, often by purchasing existing practices in that market. Physician employment can increase negotiating power with payers for both hospital and physician services. This leverage, combined with the mark-up for physician services provided in a hospital outpatient setting over a freestanding physician office, promotes increased healthcare costs. These increased expenditures include hospital, pharmaceutical, laboratory, and ancillary services as well as professional fees.

Shared savings models such as accountable care organizations have specifically encouraged integration, often through the acquisition of physician practices. Frequently, specialists can be left out of the employment equation. Employing referring (primary care) physicians can control patient volume and thus indirectly affect the specialists.

Increased antitrust scrutiny
In response to hospital and health system consolidation, the FTC has become more watchful. During a 2014 roundtable discussion on consolidation, the FTC representative noted, “The agency’s key goal is to allow new market entrants. Once competition is suppressed in a market, it is extremely difficult to get it back.”

Similarly, Edith Ramirez, JD, FTC chair, recently wrote that the “increasing consolidation that’s occurred among health care providers over the past two decades represents a worrisome trend.” She also warned hospitals that consolidations to improve quality must provide evidence that such improvements are “likely and attainable only by means of a merger.”

AAOS Now has previously reported on a high profile antitrust case in Idaho (see “A Brief Overview of Antitrust Issues Facing Surgeons,” AAOS Now, March 2014), but mergers and acquisitions have also been challenged in Georgia, Massachusetts, and Ohio. In these cases, consolidation occurred in the same geographic market. Multimarket systems, which expand by opening hospitals in multiple cities, are less likely to raise antitrust concerns, but may also lead to higher prices.

Payer, insurance consolidation
Similarly, progressive consolidation of insurers has occurred, as larger groups acquire smaller groups. This concentration can not only lead to fewer choices and higher premiums for consumers, but also affect physician contracts.

According to the most recent report by the Government Accountability Office on competition and concentration (December 2014), the five largest commercial insurers control about 50 percent of all covered lives. By comparison, a decade ago, it took 20 payers to control 50 percent of covered lives. In 41 percent of major metropolitan areas, a single dominant insurer controls at least 50 percent of the market share. In Alabama, for example, Blue Cross/Blue Shield has 97 percent of the total enrollment in the small group market.

This concentration may represent an unintended consequence of the minimum loss ratio established by the ACA for insurance companies. In some cases, concentration has been an entry barrier for new insurers in a market. In other cases, smaller payers that want to sell just their health insurance line to larger groups may be unable to do so.

Regulatory agencies are beginning to monitor payer consolidation. In 2010, the Department of Justice blocked a merger between Blue Cross/Blue Shield of Michigan and Physicians Health Plan of Mid-Michigan, citing the fact that the merger would have given the company excessive ability to control physician reimbursement rates.

Alexandra E. Page, MD, chairs the AAOS Health Care Systems Committee. She can be reached at alexe.page@gmail.com

Bottom Line

  • Hospital and health system consolidation is accelerating and is associated with increased costs to consumers and payers.
  • Requirements of the ACA—including the need for infrastructure and population health control—are cited as rationale for the recent wave of consolidations.
  • Purchasing of physician practices and employment of physicians by hospitals are associated with higher costs across the board.
  • Insurance companies are achieving market concentration across the country, which can affect physician contracts and consumer choices.


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