As Bay Area Hospitals Consolidate, Will Costs Go Up or Down?

Save ArticleSave Article

Failed to save article

Please try again

This article is more than 7 years old.

The Bay Area's health care systems -- think Stanford, Sutter, John Muir and more -- are continuing to align and consolidate in different ways to expand across the region, a new analysis shows, and it's unclear if this will lead to lower or higher health care costs.

The report, from the Oakland-based California HealthCare Foundation (CHCF), serves as a summary of the transformation in the Bay Area's health care market over the last few years since the foundation's last report on the subject in 2012.

Maribeth Shannon, director at CHCF, referred to "an arms race."

"Providers see health plans consolidating and they want to have a similar level of leverage when they negotiate" with health insurers, she said. "The idea [is] that you have to be strong to get a good price in this market."

The analysis, conducted for the foundation by Mathematica Policy Research, called out three specific health system regionalization efforts and the different ways they were achieving their goals:

  • Stanford Health Care reached across San Francisco Bay to acquire ValleyCare, based in Pleasanton. The goal of such an expansion, the report says, is for Stanford "to support an expansion of its health plan."
  • UCSF and John Muir Health -- also on opposite sides of San Francisco Bay -- formed a partnership aimed at building a "network large enough to compete with systems like Kaiser and Sutter" throughout the Bay Area.
  • Sutter Health, meanwhile, is consolidating its own operations. The foundation's report cites multiple rounds of reorganization over the past few years, and says Sutter now is attempting to merge its three Bay Area foundations with the goal of extending the successful Palo Alto Medical Foundation model to other sites. But the analysts predict that will be a tall order, given the foundations'  different "histories and physician cultures."

And what of patients? Ha Tu, senior health researcher of Mathematica Policy Research and lead author of the study, predicts the increasing consolidation, "at least in the short term, will result in more provider competition and more choices for consumers, but over the longer term, it remains to be seen whether it's a sustainable thing."


Glenn Melnick, a health economist at USC, flatly rejects that the consolidation will ever benefit consumers.

"What's happening," he said, "is they're getting together to negotiate contracts, and that's it. I'm very cynical."

Northern California as a whole has long had higher health care prices than Southern California.  Melnick described "monstrous health care enterprises who are just building on existing market power to expand and protect it in the future."

Both the foundation's Shannon and lead author Tu stressed that future cost savings are unknown. While more consolidation can lead to higher prices, efficiencies can improve, Shannon said, but she added it's not clear now if those efficiencies would be robust enough to offset price hikes.

Tu pointed to a desire by many health systems to be more competitive against health giant Kaiser.

At both Sutter and UCSF/John Muir "they are very well aware they need to lower their cost structures significantly and do population health effectively," Tu said in reference to the push to move away from fee-for-service medicine, which can lead to unnecessary care and waste. "Whether they can do that is a big challenge and an open question."

In the report, analysts also looked at safety net providers and the challenge posed by increased demand as millions more Californians have coverage, in the wake of the full implementation of the Affordable Care Act. Just over one-third of Californians are now covered by Medi-Cal, and primary care providers are in short supply, the report said.

"The primary care physicians that are needed to serve that population just don't exist," Shannon said. "What we need are innovative ways of meeting the health care needs of that population."

Providing behavioral health care to patients in the face of expanded health insurance access and regulations requiring coverage "parity" -- that health insurers must provide equal coverage for mental health conditions -- is an "enormous problem," Shannon said, and many patients are facing long wait times to access care.

"It's a significant problem," she said, "and it's long been simmering, it's been below the surface for a long time, and now parity has brought it up to the top."