Is consolidation the answer to healthcare’s fragmentation problem?

Is consolidation the answer to healthcares fragmentation problem?

Adam Smith would disagree, Karl Marx would be appalled, and heck even Milton Friedman and Ayn Rand would be raising objections. But for some peculiar reason, there are enough contemporary lesser economic minds scattered throughout the entire philosophical spectrum, that are advocating for, and enabling the execution of, a government induced transition of our health care system to an oligopoly model of business.

It all started with someone stating that our health care system is broken, and my guess is that a multitude of otherwise very intelligent people took that to mean literally broken into a multitude of useless shards of uneven size and quality. Hence the frantic attempts to glue the “fragmented” Humpty Dumpty system together again, and unlike the legendary efforts of all the King’s horses and all the King’s men, it seems that we are well on our way to putting together something that never was, and arguably never should be.

Consolidation is the name of the game. Health systems are buying each other and are morphing into insurers. Private equity is buying whatever it can buy. Insurers are buying each other and are buying health systems and everybody is buying physician practices. In health care nowadays, either you are buying something, or you are selling yourself, and sometimes you do both. While these unholy matrimonies are executing, those who sell technology for health care are following a similar consolidation path, because small firms are rarely able to service large corporations adequately. The government who initiated, or wholeheartedly endorsed, all this fragmentation rhetoric, kicked off the consolidation bonanza by chartering Accountable Care Organizations (ACOs) and by imposing a slew of regulations favoring large health systems, not the least of which is the acquisition and prescribed use of very expensive and very complex health information technology.

And the early, anecdotal, results are beginning to trickle in. The New York Times published an article about the consolidation battles of two saintly health systems in Idaho (St. Luke and St. Alphonsus), waging holy war on each other for the right to acquire more physician practices, and with them, more patients to refer to more services within the system. Area doctors seem distraught and the prices of medical services in the larger St. Luke system seem to have tripled following each acquisition. The hundreds of comments to the article include many more similar stories from all over the country. The NYT article is not the first one to highlight the inflationary effects of mending our broken health care system, and you can find plenty more anecdotal stories here, here and here, and for those insisting on being surprised, there is always the early 2010 Health Affairs study of California-style defragmentation effects on the price of health care, and a grim warning regarding the implications to health care reform.

The fascinating part of this process is that health information technology is being cited by all players as a major driver for consolidation itself and also for the subsequent increase in costs of services. Information technology, if you remember, was supposed to reduce costs for the health care industry just like it did for other industries. Instead, it seems that the complexity and unaffordability of technology is driving small providers to sell themselves to the highest bidder, and the ensuing oligopoly is then justifying its immediate price increases by the need to outfit its newly purchased assets with state of the art information technology.  It seems that the fancy brand-name buckets of glue used to put the health care Humpty together are way too expensive. The apologists for the consolidation trend observe that this is just an upfront investment and soon we will be reaping the benefits just like all those other industries. These editorial opinions ignore the fact that Walmart never increased its prices to account for the world’s most sophisticated supply-chain software system and neither did anybody else in those other industries. They also ignore the Kaiser experiment in our own backyard, where billions of dollars in technology, over many years, may have resulted in better quality (according to Kaiser), but had no beneficial effect on consumer premiums for Kaiser plans, which are keeping pace with all other less integrated and less technologically advanced entities.

Many health care technologists are accusing doctors of misusing technology to emulate the inefficient paper chart process and hence are failing to realize the benefits of new technology. My guess is that we have a very similar problem with health care reformers, who are envisioning technology as the glue needed to create 19th century business models for health care, because it worked so well for railroads, banks and car manufacturers. And to that end, the technology paradigm forced on health care is big, heavy, slow, expensive and in every way corporate and duly regulated by government. It feels like iron from an era that has ended about 10 years ago. The disgruntled physicians, who are complaining about health information technology not being like their iPhones or their Facebook, are instinctively recognizing that both the technology and the business models it enforces are dead.

From a technology point of view, the information age is over. This is the collaboration age and information availability is assumed, just like electricity is assumed. When I can sit in my kitchen and casually chat with a colleague in Karachi, while we are both working on the same Google document and can see each other’s edits in real time, as if we were in the same room, huddled around the same table, and at zero cost to both of us, there is suddenly no ability to comprehend why having two (or seventeen) physicians coordinate patient care necessitates the formation of a new corporate structure supported by technology yet to be built and standards yet to be defined. We have the technology to support all the lofty goals of true health care reform, and the technology itself is dirt cheap, which makes economies of scale, once available from physically owning and controlling as many means of production as possible, insignificant in modern service industries. Those dwindling economies of scale are of course outweighed by the monopoly’s age old ability to set prices, which may be nice for the conglomerate, but not so nice for the rest of us.

The assumption that a corporate office must control everything, including customers, through computerized means, in order to create efficiency and accountability is only true if that efficiency is to be reflected in the corporate bottom line, and said accountability is to corporate shareholders, or the corner office. The assumption that government must dictate and regulate every aspect of the business and its technology tools in order to protect consumers is only true if the business is a large monopolistic corporation. It doesn’t matter how greedy you think doctors are, a million doctors running hundreds of thousands of small businesses cannot do a fraction of the damage one monopoly can do with a proverbial stroke of a pen. Thousands of hospitals operating independently, largely as contractors for those independent doctors, can never muster the necessary clout to unilaterally raise prices or hoard information, and hundreds of insurers (or fund administrators) negotiating separately, can never drive hospitals, doctors or patients into bankruptcy. And government’s job is to ensure that everybody plays by a clear and simple set of rules.

This is what we mean when we say that health care is local. This is what Adam Smith’s books were all about. And this is what we should be doing (with or without a single payer). Instead of erecting regulatory barriers to simple collaboration, we should be smashing any large pieces left over from times when Humpty Dumpty was ruling the walls on which it was sitting, because health care is not literally broken or fragmented. It is distributed.

Margalit Gur-Arie is a partner at EHR pathway, LLC and Gross Technologies, Inc. She blogs at On Healthcare Technology.

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  • Laurie Morgan

    Nice post. Can’t think of a single industry in which consolidation of market power has lowered prices or improved quality for customers (in fact it’s usually higher prices, lower quality, or both!), yet the Obamacare model seems to assume that will happen. The only good news is that the inevitable increase in costs for everything will at some point make it attractive for entrepreneurs to address worsening patient satisfaction and higher prices with creative solutions.

    • Margalit Gur-Arie

      Walmart lowered prices, but the goods they sell are not the same goods the smaller stores sold. They just vaguely look the same before they break, shrink or stop working.

  • ninguem

    Still another example, and thanks for pointing it out. Contrary to some assertions seen on this site, when healthcare consolidates, in fact you do NOT get economy of scale, and the cost of healthcare actually goes UP.

    • Margalit Gur-Arie

      Here is my question. Are all these mergers and acquisitions even intended to accomplish anything other than increased market power?

      • ninguem

        Well, lots of lip service about more efficiency and quality and lower cost. In fact, it’s nothing more than increased market power.

        But you know that, of course.

  • Brian Stephens MD


    You can have any 2 (but will have to accept the third as a reality!)

    Our society is still under the delusion they can have all three.
    Grow up people.

    I really like your statement toward the end of the post about “healthcare is local.”
    it’s the en vogue thing to “eat local” these days….
    we should have a campaign to “Keep health local”.

    • Margalit Gur-Arie

      Thanks for the comment. I agree. If the small establishments could get together and spend 1 cent on the IT dollar to market the importance of locally owned and managed health care, it could make a difference….

      Maybe someone should start a “Visit Your Community Doctor” month, or something like that…. :-)

  • buzzkillerjsmith

    You’re covering a lot of ground in this post, Margalit, so just a few comments:

    1. The idea that health information technology will save money and improve care is a hypothesis, not a fact. Recently the NY Times came out with an article stating that RAND, whose 2005 report was all in favor of HIT, has come out with another report stating essentially that the promises of HIT have not come to pass. So the idea is now, oh, we’re just not using it right, and if we did, it would save money and improve care. Give it time, they say. I’ll believe it when I see it.

    2. The idea that health organization consolidation will save money and improve care is a hypothesis, not a fact. As you well know, oligopolies, in the absence of price caps, can increase costs and decrease output.

    3. The whole point of all these initiatives, from the government’s standpoint, is to save money. The lip service paid to care improvement is pure propaganda, but somewhat effective, as casual observers are reduced to confusion, if they’re even paying attention, and passivity in any case. And those that actually know about health care are outnumbered and disorganized.

    The implication is that if new patterns of care, like the PCMH, don’t save money, they will be dropped like a bad habit. And the utility of these proposed new patterns is unproven.

    4. Hard rationing will save money. It might be the only way. Time will tell.

    Maybe I’m wrong. I’ve been wrong before. But I see no panacea.

    • Margalit Gur-Arie

      Unfortunately, I think you’re right….

      You may want to look at this NEJM article I just saw today
      The guys is admitting outright that dual eligibles are better off with their FFS arrangement and will be hurt by moving to managed care, and then proceeds to offer suggestions on how to lure these poor and unfortunate people into managed care through an “active choice mechanism whereby beneficiaries are forced to choose…” and has the temerity to suggest that this linguistic insanity “promotes self-determination and the exercise of real options”.

      I think we are going to cut costs by denying care, and by definition the biggest bang for the buck will be found amongst the poorest and the sickest. We will call it managed care or self-determination or whatever sounds palatable enough to those not directly affected. As for the rest of the country, the expectations will be slowly reset to gradually accept a bit less every day…. it worked in every other industry.

      • Brian Stephens MD

        I dont think the politicians will ever cut their own throats by “denying” care, at least not in a traditional straight forward sense.

        Politicians have made it quite clear of their intentions to cut cost on the backs of the providers (whom it is politically easy to beat up on.)
        They just cut fee schedules, increase regulation, and harass with threat and bounty hunters to the point that providers will just stop providing the care that they no longer want to pay for.

        Then when the public cries out that they cant find anyone to give them their Medicare benefits or the care is mediocre and untimely, The politicians will simply shrug and say,”of course you have your benefits, we cant help it those mean, nasty, greedy doctors wont do it for you.”

        win win for the politicians and a loss for everyone else.

        • Margalit Gur-Arie

          Politically Correct Denial of Care (PCDC)? :-)

  • drgg

    the problem seems to be that the lip service says that the motivation is to save money but the actuality is it seems more important for the corporations to grow and make money. perhaps obama thinks he can do both.???

    • Margalit Gur-Arie

      drgg, I believe you got it right. I don’t know what the government is thinking,
      but I am willing to assume that they are trying to do the right thing.
      The problem is the same as with everything else we do right now: our
      elected government is not calling the shots. It is reduced to having to act within the constraints imposed by corporations. I don’t see how we can do both….. looks to me like a zero sum game, and I can’t think of any precedent where the thieves got rich and their victims ended up better off…..

  • newheart807

    This is a very important piece that raises many issues.

    It is a clarion for common sense and a call to action if the doctor-patient relationship, that saintly etherial god to which we allegedly prostrate ourselves, is to survive. Hell, it’s a call to action if the medical profession itself can survive.

    KevinMD posted the following piece here in March, 2012:

    It clearly lays out what now is becoming a greater reality. It is of extreme urgency that your patients understand what is happening. Copy this current blog or the one attached and hand it to them to read.

    Not only do we need to become active, they do as well for if they do not, their choices for healthcare and a doctor, should they be fortunate enough to see one, will become slim to none in the future.

    As for we physicians, only 35% of us will be in private practice by 2015 if you believe what you read and see. What we and our employed colleagues will then face is starting to occur now; that is, the Government; i.e., we, will be telling us how to practice.

    Comparative Effectiveness Research, or CRE, results will be foisted upon us through the auspices of the United States Preventative Health Service Task Force. Seem Kafkaesque to you?

    It is the new reality and if you do not get ahead of it to stop it, there will truly be no further reason to think of medicine as a profession but as something performed by 9-5 automatons sitting in front of a computer and punching in data.

    This is the future if we do nothing, if we do not call our patients and ourselves to arms and redress our grievances through political action and through the ballot box.

    Should we do nothing, then we will deserve the government that we get and the 9-5 job we will have.

    Mitchell Brooks, M.D.

  • drgg

    This is the best blog I’ve read on this site. And everyone is in agreement. It is clear that doctors need their own voice. I really don’t know why the AMA has failed us but they have. I think doctors will need to have our own organization truly lobbying for us. I would contribute to an organization that was really lobbying for us.
    I know we are all busy getting bombarded by mangled care and being swallowed up by the sharks. What shall we do? It is against our philosophy to be a corporation but it seems like that is the only way to survive—To be a powerful corporation and have lobbyists. It is easy to say and hard to do. We went to medical school not business school. But I’m not sure how else to survive in this morass. It requires thought. But it requires money. I have a hunch that just about everyone on this board would contribute to an organization that represents us. It would be such a relief for all of us to just know that someone is on our side. The government is not exactly on our side. I mean who has more power, with medicare reimbursement? The DME’s or us? Does anyone else have any ideas of a way to organize effectively?

    • Margalit Gur-Arie

      Thank you drgg. I couldn’t agree with you more. There is a void in honest representation for medicine as a profession. I have been making this point for years now, with no success at all. The problem is that this should not be a political issue and it should not be about money either. Whatever representative body is put in place should be above the fray of monied politics. I don’t think a lobbying corporation is what you need (and I may be wrong). This needs to be, and clearly stated to be, an advocacy concerned with proper medical care for the people. If you do that right, and it need not require huge amounts of cash, you will get hundreds of millions of voting citizens to join your cause.
      This blog may just be the perfect place to start. After all Kevin is an expert at social media, most posters here are very well connected (including the anonymous ones) and personally, I would volunteer my time by the buckets to get this off the ground…..

      • drgg

        thank you Margalit. I love reading your articles and posts. You always make excellent points. I can see you are working hard at this. I don’t know what to think anymore about what could be a solution as well. I am at a loss. But i agree some sort of medical organization. But I am relieved there are smart thinkers like yourself out there that see the problem. At least one does not feel so alone.
        Not sure if you got my email about johnson and johnson and other big pharma having negative impact on the European Healthcare system economically. I’m not sure why not more is written on this blog about big pharma. Anyway it was in new yorktimes today under business section if you’re interested.

        • Margalit Gur-Arie

          I’ll check it out. I don’t see an email though.

          My email is margalit dot gurarie at gmail dot com

          …and I am at a loss as well… strange times….

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