Andrea Donovan’s job gets harder every day, and not for lack of clients. Donovan is an elder-care consultant in Chicago, and in an average year, she helps 150–200 individuals and their families choose the right nursing or care home. But she says the news she has to break to them about fees worsens steadily: “The costs are skyrocketing. It’s very seldom that people have enough money that they don’t have to worry.” In metropolitan Chicago, semiprivate rooms in nursing homes average about $11,000 a month, says Donovan, and individuals need to run down their savings before the government will take over payments— assuming the home will accept Medicaid.
And then there is the changing care-home market. Data released this year by the Department of Health and Human Services show that sales of care homes rose substantially after 2016, when just 3–5 percent of skilled-nursing facilities changed hands in an average quarter, compared with peaks of 8 percent in 2019–21. Such sales can directly affect patients, as Donovan saw firsthand when the mom-and-pop retirement community where she once worked was subsumed into a larger health-care organization with owners who were centered on margins. Because of that focus, she recalls, “the bigger group turned a well-run operation into a mess.”
Consolidation is a fact of life in the United States, with big tech and big oil in headlines. As a moniker, big health care is less familiar, yet consolidation is sweeping through the health-care sector too. “It’s clearly an arms race of consolidation between insurers and health-care providers, each trying to improve bargaining power,” says Chicago Booth’s Chad Syverson.
The race has implications for investors, employees, and, most profoundly, patients. Anecdotally, Donovan says mergers are one of the reasons so many of her clients are looking to switch retirement homes. They can do all the research—on quality of food, or nurse-to-resident ratios—and choose a great residence, only to have those elements change with new owners.
From a more macro view, the effects of this merger activity are not totally clear (and what in health care is?), but research suggests reason for concern, from diminished patient outcomes to higher prices to less choice. More optimistically, some of that same research also offers ideas for how to approach a force that could, if harnessed, contribute to improving a labyrinthine and often dismaying health-care system.
What is big health care?
The share of big companies in US economic activity has increased steadily for the past 100 years. (For more, read “Rising corporate concentration continues a 100-year trend.”) But different industries have driven that increase at different times, and in the 21st century, the service sector has been among the leaders.
In service, health care is hot. Research links concentration generally to economies of scale, and in health care, many companies appear to seek these through mergers. Consolidation rose between 2010 and 2016 among primary-care physicians, hospitals, and other health-care subsectors—markets that were already considered to be highly concentrated. Analyses from academia and the private sector suggest the trend has continued, and predict more mergers and acquisitions ahead.
M&A made a full recovery
After much uncertainty due to the coronavirus, health-care M&A picked up in 2021, led by deals in physician medical groups, long-term care, e-health, and other services.
Whereas fewer grocery-store options or broadband services are quickly noted by consumers, changes in health-care ownership can fly under the radar because of the complexity and highly localized nature of the market. If your hometown newspaper has closed, the fact that your state has been a hotbed of hospital M&A over the past 10 years might appear in a government report but never make the news. If your doctor’s office was bought by a private-equity firm (as were more than 300 practices between 2013 and 2016), you might not know unless the office informed you. And if your kidneys are functioning as they should, you will have little cause to know that two-thirds of all dialysis centers in the US are run by two large companies, compared with one in five 30 years ago.
Antitrust authorities don’t always notice the dealmaking either—because it often happens via transactions that do not meet the bar for mandatory disclosures to the Federal Trade Commission. US law only makes companies report large mergers—typically those valued above $100 million—to the federal agencies that are responsible for policing M&A activity. Chicago Booth’s Thomas Wollmann finds that as a result of these exemptions for smaller transactions, most mergers go unnoticed by the authorities, effectively escaping enforcement. He calls this phenomenon “stealth consolidation” and finds that in the health-care industry it can increase hospitalization rates and decrease survival rates. Looking at over 4,000 sales of dialysis centers, only half of which were reported to authorities, he finds that when a merger was reported to the FTC (which has de facto responsibility for policing these deals), the transaction was carefully scrutinized. The government blocked almost every sale resulting in a local duopoly or monopoly. But when a merger was exempt from reporting requirements, it was never challenged, regardless of the effect it would have on the structure of the market.
This had an effect on patient health. When the FTC got involved, hospitalization and death rates were unaffected by changed ownership. In contrast, when deals that dented competition but escaped antitrust scrutiny went through, patients at affected facilities were more likely to be hospitalized, and more likely to die.
Wollmann calculates that the benefits, in dollars, of scrutinizing every deal are about 100 times the costs of the FTC’s higher workload—using economists’ standard value for a year of human life. For individuals, the benefits are arguably priceless.
Where does it hurt?
While researchers agree that big health care is getting bigger—often under the radar—they disagree about the implications. Among the findings, a “preponderance of evidence suggests that hospital consolidation leads to higher prices,” according to a 2020 report by the Medicare Payment Advisory Commission. “What’s harder to get at,” says Syverson, “is the mechanisms behind those outcomes.”
The picture is even blurrier on quality of care. A 2020 investigation, led by Harvard’s Nancy D. Beaulieu, of almost 250 hospital mergers finds that among acquired hospitals, patient experiences—measured by patients’ ratings, their impressions of whether nurses and doctors communicated well, and their determination of whether they would recommend the facility to others—declined following acquisition. Readmission and mortality rates held steady.
Small mergers can have a big impact
The health-care industry ranks high in terms of the value and share of undisclosed mergers. Service industries such as health care tend to focus on local markets, and even minor deals can result in significant changes to market structure and company behavior.
A study published last year, however, led by H. Joanna Jiang of the Agency for Healthcare Research and Quality, suggests that acute patients at rural hospitals that had merged with another hospital or been bought by a multihospital health system stood a better chance of surviving than those at comparison hospitals that had not been part of a merger.
Brigham Young’s Paul Eliason, the FTC’s Benjamin Heebsh (a Duke PhD student at the time), and Duke’s Ryan McDevitt and James Roberts investigated the impact of dialysis-center buyouts on the running and performance of the acquired centers, both in terms of finances and patient health. Following a buyout, the researchers find, once-independent facilities “converge to the behavior of their new parent companies.” In the dialysis setting, this meant new owners replaced nurses with cheaper, less-skilled staff, modified medication regimes to maximize Medicare payments, and kept people on dialysis longer than perhaps necessary by failing to put eligible individuals forward for kidney transfers. Consistent with Wollmann’s findings, hospitalization and death rates for patients rose at the targeted centers after a buyout.
These changes contributed to higher profit margins at the acquired centers, the researchers find. Yet Syverson notes that consolidation in health care does not always even improve financial performance. He and colleagues at Carnegie Mellon, Columbia, and Harvard studied a 2007 hospital-chain takeover that resulted in a conglomerate of more than 200 facilities. One of their findings was how successful the acquiring chain was in implementing the management changes it had planned for its new stable of hospitals—to the detriment, as it turned out, of the combined company. The new hospitals’ performance, in terms of both profitability and patient outcomes, did not change, while profit margins at the original stable of hospitals fell.
Ahead of the takeover, writes Dartmouth’s Anant K. Sundaram in a case study of the deal, analysts had been bullish: “They were in agreement that the combination offered many synergy opportunities.” Says Syverson, “It’s the difference of looking at inputs versus outputs.” The buyers changed what they wanted to change; it’s just that these intended improvements failed to produce the increases in efficiency that consolidation, in general, promises. (Read more about the takeover in “How hospital mergers can go wrong.”)
Research suggests that market dynamics can play an important role in undermining long-running collusion.New Competition Can Be the Best Antitrust Medicine
Big companies make up an increasingly large share of the economy.Rising Corporate Concentration Continues a 100-Year Trend
An ounce of prevention
If both patients and investors are potentially ill served by consolidation, the case grows for intervention. But how best to put on the brakes? “The government looks at basically every bank merger that happens,” says Wollmann. “It looks at every airline merger and at certain communications deals. Should it start looking at every health-care merger?”
Alternatively, the FTC could lower the threshold for reporting deals—especially because this threshold has risen much more steeply than inflation over the past two decades. Before a December 2000 amendment to landmark antitrust legislation from a quarter-century earlier, any deal worth more than $5 million was scrutinized; today, that threshold is $101 million, which leaves many takeovers unexamined in a sector where, for example, the average dialysis center is worth just $4 million.
Yet work by Booth’s Christopher Stewart suggests that changing the threshold might not be enough because companies game the system. With Stanford’s John Kepler and Vic Naiker at the University of Melbourne, Stewart analyzed all US M&A activity between 2001 and 2019 and finds a disproportionate number of deals involved target companies valued at just under the FTC’s premerger notification threshold.
Companies employ several methods to limbo their way under the mark, according to Kepler, Naiker, and Stewart, most of which sweeten the deal for directors and managers of the target firm, sometimes at the expense of shareholders. They might manipulate the superficial deal value by reducing the transaction price but promising managers at the target company a continued role postsale; they might promise to top up a deal five years in, contingent on sales; or they might offer cash rather than stock, eliminating requirements that managers or directors stay tied to the merged group for any set period.
The market power these companies gain is worth the subterfuge, the researchers find. Their analysis suggests that when competitors do deals that fall just under the FTC reporting threshold, postdeal margins are a percentage point higher than the equivalent margins of companies that bought firms valued just above the reporting threshold.
Regulators are not restricted from looking at deals smaller than the threshold, and having them do so more regularly might eliminate the incentive to play the system. But they have to notice the deals first—at a time when fewer news outlets are there to report them, and delisting from public markets is on the increase. “The attention-grabbing deals are the merger of the Dollar Tree and Dollar General, not two medical centers most people have never heard of,” Stewart says.
Antidotes beyond antitrust
We might also do a better job of understanding what sort of owner has what sort of impact on patients. Booth’s Constantine Yannelis has been looking at how private-equity purchases of nursing homes affect the people living in them, and the results are stark. “They’re laying off staff and essentially drugging patients instead,” says Yannelis. “That’s our main finding.” (For more, read “When private equity takes over nursing homes, mortality rates jump.”)
Yannelis, along with University of Pennsylvania’s Atul Gupta, NYU’s Sabrina T. Howell, and NYU PhD student Abhinav Gupta, looked at about 1,700 nursing homes bought by PE firms between 2004 and 2015. They noted that government spending per patient at the homes rose by an average of 11 percent postpurchase. Costs also rose, and they changed in nature, with the new owners shifting some nursing homes’ spending so that instead of paying third parties, the homes often directed money back to the PE fund that owned it. For example, if the deal loaded debt onto the company, improving the fund’s return on its cash investment, “costs went from paying staff to paying interest payments,” says Yannelis. If the fund bought the property on which the home was based, rental fees came out of operational costs and landed back with the PE parent. If the fund wanted to improve the way the home was run, it may have charged consulting or “monitoring” fees for implementing its plans.
Patients paid the price
At 1,700 nursing homes from 2004 to 2015, patient outcomes deteriorated after the homes were bought by private-equity firms.
The chances, meanwhile, that a nursing-home resident died in the facility or within 90 days of leaving increased by 10 percent. Nurses became less available. There was a drop in a key federal quality-of-care measure, composed of elements such as drug storage and labeling standards and facilities’ success in avoiding patient abuse.
Antitrust regulators cannot protect against these sorts of effects, Yannelis believes, in part because most do not have the background in corporate finance that would help them spot and stem the strategies private equity seems to employ in nursing-home settings. But because the government pays the vast majority of annual nursing-home costs through Medicaid and Medicare, it could use tools to better balance the needs of the patient and taxpayer with the need of the PE fund—or any other owner—to run a profitable business.
Syverson does not see the solution as either-or: Medicare and Medicaid can work toward aligning incentives, and regulators can begin taking a more nuanced look at competition—expanding their definition of harm beyond rising prices. “You could get the FTC to really be more skeptical about whether the companies can do what they’re promising,” he argues. Hoped-for synergies could be more closely scrutinized, “debunking those that are implausible (and therefore unlikely to offset possible anticompetitive outcomes) and helping to identify ‘good mergers,’” write Syverson and his colleagues in their analysis of the 2007 hospital-chain deal.
Regulators outside the antitrust arena might also play a role by shining light on the workings of the health-care sector and letting the market react. A study by Stanford’s Kepler, Booth’s Valeri Nikolaev and Stewart, and Booth predoctoral scholar Nicholas Scott-Hearn observes that publishing reports on the quality of health-care facilities can help lure new entrants to the market: in dialysis, competitors were 30 percent more likely to open a center of their own near poor-quality centers following the publication of the reports.
And barriers to entry could be a target. Research by Northwestern’s Amanda Starc and Wollmann investigating the generic-drugs market finds that while potential competitors are eager to exploit cartel arrangements by undercutting the cartel prices, red tape can delay the new entrants’ arrival on the scene by years. (Read more in “New competition can be the best antitrust medicine.”)
Many of these approaches would require significant government investment and changes to the way established regulators and other institutions operate. But if politicians from both sides of the aisle have united by standing up to big tech, perhaps they could do the same for health care. An informed public would, of course, help drive that political will. As Stewart puts it, “This is worse than having to pay more for a bottle of milk.”
- John M. Barrios and Thomas G. Wollmann, “A New Era of Midnight Mergers: Antitrust Risk and Investor Disclosures,” Working paper, January 2022.
- Nancy D. Beaulieu, Leemore S. Dafny, Bruce E. Landon, Jesse B. Dalton, Ifedayo Kuye, and J. Michael McWilliams, “Changes in Quality of Care after Hospital Mergers and Acquisitions,” The New England Journal of Medicine, January 2020.
- Paul Eliason, Benjamin Heebsh, Ryan McDevitt, and James Roberts, “How Acquisitions Affect Firm Behavior and Performance: Evidence from the Dialysis Industry,” Quarterly Journal of Economics, December 2020.
- Martin Gaynor, Adam Sacarny, Raffaella Sadun, Chad Syverson, and Shruthi Venkatesh, “The Anatomy of a Hospital System Merger: The Patient Did Not Respond Well to Treatment,” Working paper, November 2021.
- Atul Gupta, Sabrina T. Howell, Constantine Yannelis, and Abhinav Gupta, “Does Private Equity Investment in Healthcare Benefit Patients? Evidence from Nursing Homes,” Working paper, February 2021.
- H. Joanna Jiang, Kathryn R. Fingar, Lan Liang, Rachel M. Henke, and Teresa P. Gibson, “Quality of Care Before and After Mergers and Acquisitions of Rural Hospitals,” JAMA Network Open, September 2021.
- John Kepler, Vic Naiker, and Christopher Stewart, “Stealth Acquisitions and Product Market Competition,” Journal of Finance, forthcoming.
- John Kepler, Valeri Nikolaev, Nicholas Scott-Hearn, and Christopher Stewart, “Quality Transparency and Healthcare Competition,” Working paper, March 2022.
- Amanda Starc and Thomas Wollmann, “Does Entry Remedy Collusion? Evidence from the Generic Prescription Drug Cartel,” Working paper, March 2022.
- Anant K. Sundaram, “Community Health Systems, Inc.’s Acquisition of Triad Hospital, Inc.,” Tuck School of Business at Dartmouth case study, August 2013.
- Thomas Wollmann, “How to Get Away with Merger: Stealth Consolidation and Its Effects on US Healthcare,” Working paper, July 2021.
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