Fairview-HealthEast deal continues trend of health systems bulking up

A continuing wave of mergers among hospitals and clinics is raising questions about whether consolidation is leading to more efficient care or higher costs.

The proposed merger next month of the Fairview and HealthEast hospital systems is the latest in the Twin Cities to highlight a debate that's playing out across the country.

Hospitals argue that mergers help control costs because larger health systems can better operate efficiently, coordinate care for patients and reduce duplication of services.

Consolidation critics counter that bulked-up hospital systems have power to demand high prices from health insurers, which translate into higher premiums for employers and individuals.

"The question is: Are these efficiencies sufficiently robust to offset the potential downside from a merger, which has to do with less competition and the potential for increased prices?" said Stefan Gildemeister, the state's health economist, without commenting directly on the Fairview-HealthEast merger.

"Efficiencies are possible, but they're not guaranteed," Gildemeister said. "The economic literature is pretty robust, however, in showing that less competition, or more consolidation, generally leads to increases in prices."

In Minnesota, two thirds of hospitals in 2015 were affiliated with a larger health care system, up 19 percent from 2006, according to state figures. The state's consolidation trend dates back at least 20 years, with the most recent large merger in 2013 when Park Nicollet, which includes Methodist Hospital in St. Louis Park, merged into Bloomington-based HealthPartners, which is both a health insurance company and operator of hospitals and clinics.

In late 2015, the Federal Trade Commission (FTC) sued to block three mergers due to concerns about growing market power for hospitals. The commission was successful in two of the cases.

"I remain very concerned about the rapid rate of consolidation among health care providers," said Edith Ramirez, former chairwoman of the FTC, in a speech last year.

Minneapolis-based Fairview Health Services and St. Paul-based HealthEast announced plans in March for a merger that would create one of the state's largest health systems. On Tuesday, the boards of the systems announced approval for the deal, with closing expected June 1.

While concerns might be growing nationally about consolidation, the FTC didn't find any problems with the proposed Twin Cities merger, said James Hereford, chief executive at Minneapolis-based Fairview Health Services. Fairview will be bigger after the merger, Hereford said, but still will face stiff competition from other large health systems in the state such as Minneapolis-based Allina and HealthPartners.

Fairview's hospitals are located in the west, north and south portions of the Twin Cities metro, whereas HealthEast operates in the east. Given the lack of geographic overlap, it wouldn't be surprising if regulators let the merger go forward, said Roger Feldman, a University of Minnesota health care economist who calls himself a critic of consolidation.

"None of these, in my view, is necessarily a fatal flaw for the merger," Feldman said, noting concerns about competition in Washington County, where both health systems, for example, have clinics in Hugo. "But I think they're all certainly things that should be looked at."

For the first time in several years, large employers say health care costs in Minnesota are rising faster than elsewhere in the country, according to a May report from the Minnesota Health Action Group, a coalition of large employers that sponsor health plans. Its annual survey found the cost trend in Minnesota is up 7.4 percent, compared with a 2.4 percent increase nationally.

Minnesota employers have watched many hospital mergers over the years and haven't seen financial benefits, said Carolyn Pare, chief executive of the group, which coordinates programs for quality health care at better prices.

"This is a systemic issue, where it's always about big against big, and you have to be bigger in order to negotiate with someone who is bigger," Pare said. "In every case — the consumer is the one that suffers the most whenever this game is played."

Hospitals argue that consolidation helps control costs in a sector where many other forces contribute to the overall tab, including the aging population. Pharmacy costs have been growing at a fast pace in recent years, whereas the cost of hospitalization has been relatively flat, they say.

"If you're in a system, the providers can more effectively coordinate your care — tests won't be repeated, they're sharing information," she said. "That improves quality as well as reduces the total cost of care."

Negotiating payment rates with insurers "wouldn't be a sole reason for combining or merging," Burt said, adding that she rejects the idea that hospitals somehow are gaining the upper hand. "I would argue that providers are being squeezed," she said.

In recent years, independent and rural hospitals have felt economic pressure to merge with larger systems, Burt said, in order to invest in costly upgrades. That's part of the reason that the hospital in Grand Rapids, Minn., merged with Fairview earlier this year.

HealthEast's profitability has been relatively weak over the years. Its financial situation, Burt said, may have forced a combination with another system.

Consolidation critics say they haven't seen data on the cost impact of the HealthPartners merger with Park Nicollet. But internal numbers show costs at Park Nicollet — traditionally a pricier health system — have since come closer to the more economical levels at HealthPartners, said Mary Brainerd, the health system's chief executive.

"If what you do with it is concentrate your market power and use that to increase prices, then I'd say that's a really poor result at a time when affordability is more critical than ever," she said. "Or you can look at it as an opportunity to find efficiencies and scale, and create a vision and plan for the future that addresses affordability."

Christopher Snowbeck • 612-673-4744