Policies for easing the consolidation burden


Published 4/1/2019
Madeline Kroll

The Consolidation Effect: Preserving Choice and Competition in America’s Healthcare System

On Dec. 3, 2018, the secretaries of Health and Human Services, Labor, and the Treasury issued a report in response to Executive Order 13813, which directed the administration to facilitate the development and operation of a healthcare system providing high-quality care at a reasonable cost by promoting choice and competition. The report confirmed what many already know too well—fewer choices and rising costs are increasingly real problems for the American healthcare system. As out-of-pocket healthcare spending continues to climb, many are looking for ways to increase choice and competition, ultimately reducing costs.

Impact on price and quality

As markets for both healthcare providers and hospitals have become more concentrated in the past decade, hospital spending has nearly doubled. Hospital spending currently represents nearly a third of total U.S. healthcare spending ($1.2 trillion, or 32.4 percent)—the largest component by far. By 2026, the Centers for Medicare & Medicaid Services (CMS) projects that hospital spending will exceed $1.8 trillion.

Data now show that the rise of regional hospital monopolies has driven the increasing prices. According to an article by the Foundation for Research on Equal Economic Opportunity, the monopolies have long used their market power to demand higher prices from both the insured and uninsured. In addition, many hospitals engage in anticompetitive behavior through insurance contracts, further propagating exploitative pricing practices.

Federal healthcare programs like Medicare and Medicaid have responded to the rise in hospital costs by attempting to slow the growth of their reimbursement rates for a variety of inpatient procedures and services. Hospitals have responded through a practice called cost-shifting, in which they raise prices for the insured and uninsured for those same procedures and services.

There have been few quantifiable correlations between what hospitals charge for healthcare services and the quality of the care provided. As reported in an article in The New York Times, studies have found that rates of mortality and major health setbacks grew as competition fell. The same studies have found that increasing competition and choice among hospitals improved quality, whereas greater market concentration led to significantly higher spending.

Some states have policed anticompetitive practices through any willing provider laws, which require insurers to contract with every hospital in the state, regardless of price or size. In other states, network adequacy laws are used to achieve a similar effect.

On the federal level, no national policy regulates such practices. In fact, varying reimbursement rates across sites of service may further exacerbate the problem of consolidation and its effects. Typically, the Federal Trade Commission investigates mergers that would result in a “highly concentrated” market as measured by the Herfindahl-Hirschman Index (HHI). Currently, more than half of U.S. hospital markets have a market concentration or HHI that would prompt an antitrust investigation or litigation in other sectors of the economy. However, few investigations have taken place within the hospital sector.

AAOS has long supported measures to expand patient choice and increase the quality of care provided through competition. The trend of consolidation in markets across the country continues to create high barriers to essential care. AAOS has advocated for policies and changes in several areas that would ease the burden of consolidation on patients and the system.


Antitrust laws are designed to prevent restraints on trade that harm consumers and less powerful competitors. Any action the Department of Justice takes to counter anticompetitive behavior must ensure a level playing field for all participants. AAOS has significant concerns, especially related to the McCarran-Ferguson Act, which effectively exempts insurance companies from the antitrust laws that physicians are required to follow. Although the exemption once protected small insurance companies, it has led to consolidation and concentration within the health insurance industry.

During the 115th Congress, AAOS supported the Competitive Health Insurance Reform Act of 2017, which sought to amend the McCarran-Ferguson Act to ensure that federal antitrust laws apply to the business of health insurance. The bill overwhelmingly passed the House but was not considered in the Senate. The bill was reintroduced in the 116th Congress, and AAOS maintains its support. AAOS will continue to advocate for and support legislation that enables equitable negotiations between physicians and health insurance plans to ensure access to quality care. Allowing physicians to negotiate with dominant insurers on a level playing field ensures heightened quality standards for patient care, removes administrative barriers, and allows physicians to engage in care coordination endeavors without fear of antitrust prosecution.

Physician-owned hospitals

Section 6001 of the Affordable Care Act (ACA) restricts patient choice by limiting the ability of physician-owned hospitals (POHs) to expand and serve Medicare and Medicaid patients. Eliminating that provision would permit physicians to address the growing demand for high-quality healthcare services in their communities and allow patients to receive care at the hospital of their choice. AAOS is very supportive of POHs, as they are consistently the highest-rated hospitals by CMS’ star rating system. POHs also have lower readmission rates, higher patient satisfaction ratings, fewer risk-adjusted complications, lower mortality rates, and lower infection rates. Additionally, they are among the most cost-effective and efficient providers of health care in the country—providing complex medical care at rates far below those charged by non-POHs.

During the 115th Congress, AAOS helped secure more than 80 cosponsors for the Patient Access to Higher Quality Healthcare Act. The legislation would lift the expansion and new construction restrictions on POHs that were included in the ACA. Additionally, a Senate companion bill was introduced for the first time, for which AAOS helped secure more than 10 original cosponsors. Similar language was included in Rep. Jim Banks’ (R-Ind.) recently introduced Hospital Competition Act of 2019, which aims to combat the rising cost of health care and is endorsed by AAOS.

AAOS continues to work with a coalition of orthopaedic practices and the Physician Hospital Association to develop a demonstration program through the Center for Medicare and Medicaid Innovation, which would allow POHs to expand. It is working at the state level on state action waivers that also would lift POH restrictions.

Site neutrality

Traditionally, Medicare has used different payment systems depending on where a beneficiary receives services (e.g., inpatient, outpatient, ambulatory surgical center [ASC], emergency department, physician office). Payments that vary by facility site derived from the idea of payments based on total resources used in the provision of healthcare services. This has long been a part of Medicare and Medicaid payments and remains the central part of payment systems like the Physician Fee Schedule.

Significant variation is all too common in the Medicare payment system and has resulted in inefficient care and increased consolidation of physician practices into hospital systems, and payment variation has an important impact on patient choice. Hospital outpatient departments (HOPDs) receive significantly greater reimbursement for the exact same services provided in an outpatient physician office setting. Payment policies that support this disparity in the HOPD setting encourage the acquisition of office-based physician practices, further restricting patient access to care in the lower-cost community setting. Data continue to demonstrate the negative effects that hospital acquisition of independent physician practices has on patient costs and access.

CMS and Congress have explored eliminating this approach in favor of site-neutral payments. AAOS is generally supportive of efforts to reduce payment differentials by site for the same services. Expanding site-neutral payment policy—and equalizing rates for office visits and in-office procedures as well as ASC procedures—will continue the progress made toward addressing healthcare inefficiency and choice, while increasing necessary competition in the healthcare system.

Hospital Competition Act of 2019

Rep. Banks’ Hospital Competition Act of 2019 aims to combat the rising cost of health care by increasing choice among hospital providers and addresses several AAOS priorities, including lifting restrictions on POHs, discouraging hospital consolidation and certificate of need laws, expanding site-neutral payments, and increasing price transparency.

“It’s not every day that a bill comes along [that] so closely mirrors not one but several of our legislative and regulatory goals,” said former AAOS President David A. Halsey, MD. As the problem of hospital consolidation continues to grow, AAOS will advocate for policies that promote choice and competition for providers and patients.

The language of Rep. Banks’ legislation also is reflected in the Fair Care Act of 2019, introduced by Rep. Bruce Westerman (R-Ark.), which works to address the major drivers of healthcare costs, as well as obstacles that prevent individuals from receiving insurance. AAOS is currently reviewing the legislation.

Improving choice and competition in the 116th Congress

As it engages with a new Congress, AAOS will continue to advocate for policies that foster an environment of choice and competition. Not only do such policies help the healthcare system as a whole, they also advance principles of AAOS that strive to improve and increase access to high-quality specialty medicine. AAOS believes a patient-centered focus must be at the forefront of legislation and regulation.

Madeline Kroll is a manager in the AAOS Office of Government Relations.


  1. Roy A: Improving Hospital Competition: A Key to Affordable Health Care. Available at: https://freopp.org/improving-hospital-competition-a-key-to-affordable-medicine-343e9b5c70f. Accessed March 22, 2019.
  2. Frakt A: Hospital Mergers Improve Health? Evidence Shows the Opposite. Available at: https://www.nytimes.com/2019/02/11/upshot/hospital-mergers-hurt-health-care-quality.html. Accessed March 22, 2019.