Size, once past certain threshold values, may or may not matter during sex, there are too many interrelated variables to tease out a definitive statement.
However, size definitely matters in the ability of organizations to bear and spread risk. Insurance companies when they are operating in a manner that benefits the public are supposed to be experts at identifying and spreading risk throughout a population. The larger the population where risk can be spread, the closer the spread distribution of risk is to the absolute risk inherent in the population. The less variance between the risk pool and the aggregate risk, the cheaper the cost of covering and insuring against that risk becomes.
Obamacare has encouraged a trend that exisisted before 2009, and that is provider consolidation.
Thirty years ago, most docs either worked for themselves or worked for small practice partnerships where all of the docs knew all of the other docs in the practice. Today, more docs are working either directly for an insurer, for a hospital or are operating under one large corporate umbrella that has hundreds of doctors employed in dozens of specialties.
The same trend has occurred for hospitals. When there once was St. Patrick’s Hospital, East Nowhere General and Somewhere County Hospital in the city of East Nowhere, there is now the East Nowhere Medical Center with three campuses.
This trend was in place before Obamacare, but there were a couple of provisions within Obamacare that has encouraged the acceleration of this trend. The first and most important is the decision to reform payment models away from fee for service and towards a population health management model. The most notable program in this portfolio is the Accountable Care Organization project:
a capitation model where a provider group is given a fixed sum of money each year/month to take care of a roster of patients. This is the old HMO model, this is a part of the Accountable Care Organization (ACO) model, this is a “global budget” model. The idea behind this model is to get providers to be much more cost sensitive because their profit margin is dependent on not spending money.
A single hospital or a primary care provider group of four doctors and a thousand patients is too small to deal with the risk inherent in population health management. They may have the capacity to spread the costs of one or two patients whose costs are four standard deviations away from the acturarial mean but they can not take the cost impact of three of those patients. For instance a small PCP practice with two patients who have treatable Cystic Fibrosis would be financially destroyed in a ACO setting:
Laura and Cate’s daily regimen of two pills of Kalydeco costs $841 per day; that’s $307,000 each year, making it one of the world’s most expensive drugs. In most cases, private insurance picks up the bill. Medicare or Medicaid may pay as well. For patients themselves, the cost is about $15 for one month’s supply of the drug.
However a practice with one hundred providers and fifty thousand patients can more easily absorb the risk of having an unusually high number of CF patients both due to the size of their risk pool and the lower probability that there will be an unusual number of CF patients in that risk pool. For a small practice, the odds of getting at least one CF patient in a risk pool is low, but if there is one, there is a decent chance that patient has a sibling who also has CF.
There are two other significant policy changes that are driving provider consolidation. The first is the push by Medicare to pay for quality. Currently Medicare pays bonuses for hospitals and provider groups that have a very low rate of hospital re-admissions within thirty days of discharge, and penalties for groups that have poor rates of controlling re-admissions. Managing re-admissions means both performing high quality care in the hospital and aggressive risk management and follow-up out of the hospital. The follow-up and risk management (which can be as simple as making sure that Mrs. Smith gets a ride to her cardiologist three days after discharge) costs money. Centralizing follow-up has been a common business strategy.
The other major policy change has been the push towards electronic health records. Setting up an EMR system correctly is expensive and maintaining it so the data set is useful is also expensive. (Doing it on the cheap is extremely expensive and dangerous.)
However, the expense scales slower than patient volume, so a single EMR system covering 50,000 admissions is cheaper to implement and run then five systems covering 10,000 admissions apiece.
And finally there is the typical urge to merge for shareholder, consultant, and C-level capture of community and social value.
Consolidation increases the regional provider GINI co-efficient which means market power moves to favor providers marginally more.
Areas where there is a single dominant provider in either the entire market or a critical set of specialties will see the providers tell insurers “You either take my rate, or you can’t sell in this county as I’m the only provider in the region…”
We’ll come back to this point later next week. But before then, we’ll need to see what is happening with the insurance side of the payer-provider equations…
Hint… there may be some perverse incentives in play….