Hospital Consolidation is Not the Main Culprit - Workforce Shortages Are

In a recent feature article in The Wall Street Journal entitled, “As Hospitals Grow, So does Your Bill,” the reporter essentially claims that hospital consolidation over the past two decades, as well as their purchase of physician practices, has been a primary driver of healthcare cost increases without delivering on their promises of increased care quality and efficiency.?

While it is undeniable that there has been significant consolidation among hospitals (1,887 hospital mergers between 1998-2021, according to recent congressional testimony by the RAND Corporation), and that the emerging “healthcare systems” have acquired thousands of physician practices to the point that now more than 50 percent of physicians are system employees, there has been a comparable level of consolidation among the commercial health insurance companies that account for approximately 70 percent of hospital revenues.

According to the most recent update of an American Medical Association report entitled, “Competition in Health Insurance: A Comprehensive Study of U.S. Markets,” 73 percent of the nation’s largest metro areas rank as “highly concentrated” insurance markets. In 90 percent of these areas, at least one insurer held a commercial share of 30 percent or more, and in nearly half of these markets, a single insurer’s share was at least 50 percent.

Looking at it another way, a study released just last month from the Association of American Medical Colleges shows that the largest health systems hold, on average, a combined 43 percent market share in each state, while the top three group insurers have an average of 82 percent market share in each state. ?

I could cite many more studies that point to consolidation of health systems and insurers, but while the numbers may vary somewhat, it is clear is that there has been significant consolidation in both camps. Health systems and insurers believe – with some justification – that they need to consolidate to offset the scale advantage being aggressively pursued by their counterparties. Large provider organizations theoretically have more leverage to negotiate higher reimbursement rates from commercial payers, and dominant payers have more leverage to negotiate lower rates from providers.

Healthcare Consolidation has been a Zero-Sum Game

This makes consolidation in healthcare a bit different from the equally rampant consolidation in many other industries (think airlines, tech, banking, etc.) in that it has been essentially a zero-sum game in which neither health systems nor insurers are “winning” despite ongoing efforts to reduce direct competition. Further complicating the picture is the more recent trend for providers to assume risk and insurers to acquire providers. An example of the latter is that UnitedHealth Group, the nation’s largest commercial insurer with 2023 revenues of $372 billion, also has become the nation’s largest employer of physicians. ?

This is not in any way to condone or encourage continued horizontal or vertical consolidation in healthcare, which has reduced competition without yet having demonstrated measurable benefits in terms of reduced costs to consumers or improved health outcomes, but consolidation is not the main driver of healthcare cost increases that some would suggest. While it may be a factor, and should continue to be diligently monitored and, when necessary, policed by the FTC, workforce shortages are the man driver of cost increases at this point.

Labor has been the Main Cost Driver?

The increase in the size of hospital bills that the aforementioned Wall Street Journal article alluded to has been caused by multiple factors, including expensive advances in medical, surgical and pharmaceutical therapies, but none is more significant than the recent and dramatic increase in labor costs.?

I have mentioned in previous blogs that – based on my direct experience – urgent care labor costs have been permanently reset at rates about 30 percent higher than they were prior to the pandemic due to a shortage of workers caused by burnout and other factors and the corresponding need to replace them with more expensive permanent and contract employees. I have also stressed that these labor cost increases were not unjustified in many cases, but they have unquestionably caused healthcare costs to spike.

Similar labor cost increases have occurred in all other areas of healthcare. An American Hospital Association (AHA) study published last year – summarized here in an article published by Healthcare Finance – reported that:?

Compared to before the pandemic, hospital total expense per patient, as measured by median total expense per adjusted discharge, rose 22.5% – due largely to a 24.8% increase in labor expense per adjusted discharge from 2019 to 2022. Total expense rose 17.5%, and?total labor expense jumped 20.8% over the same period.

Relying on labor from contract staffing firms contributed to higher overall labor expenses.?Total contract labor expense skyrocketed 257.9% from 2019 to 2022 as a result. Contract labor full-time equivalents (FTEs) jumped 138.5% over the three-year period, and the median wage rate paid to contract staffing firms rose 56.8% as organizations competed for a limited pool of qualified healthcare professionals.

Hospitals were not the only provider organizations to experience staffing issues. Labor shortages at skilled nursing facilities contributed to challenges for hospital clinicians trying to transition patients to the appropriate post-acute care setting. Labor expense per FTE rose 30.8% while FTEs at skilled nursing facilities declined 18% from 2019 to 2022.

The AHA study mentioned other factors driving higher overall costs, including increased supply chain and drug costs, and increased investments in cybersecurity, but these cost increases were secondary to the labor cost increases. The workforce issues that caused the dramatic labor cost increases must be addressed on a priority basis through multiple strategies, including the following:

• Expansion of educational programs and increases in state subsidization of programs in nursing and other high-need categories, as well as those designed to address shortages in underserved geographic areas.
• Implementation of regulatory changes that enable all healthcare workers to practice at the tops of their licenses and across state lines, and empowering of lower-level healthcare workers to broaden skill sets through micro-credentialing programs.
• Making it easier for internationally trained healthcare workers to practice in the U.S., and ramping up efforts to increase diversity in the healthcare workforce, particularly among Black and Hispanic individuals who are underrepresented,?
• Leveraging of technology, including expanded use of telehealth and robotics to increase the geographic reach of healthcare workers, enable hybrid working, and handle routine tasks. ?

In addition, we must continue to move away from fee-for-service to a more value-based system that at least gives equal weight to the prevention of chronic diseases – which are costing the U.S. healthcare system an estimated $3.7 trillion annually; transition more care to less expensive and more consumer friendly outpatient settings (including “hospital in the home”); and reduce the administrative burden that is wasting billions of healthcare dollars and causing a growing number of physicians and other healthcare professionals to abandon patient care. More to come on these themes in future blogs. ??

Respectfully yours,

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