[House Hearing, 115 Congress]
[From the U.S. Government Publishing Office]



 
            EXAMINING THE IMPACT OF HEALTHCARE CONSOLIDATION

=======================================================================

                                HEARING

                               BEFORE THE

              SUBCOMMITTEE ON OVERSIGHT AND INVESTIGATIONS

                                 OF THE

                    COMMITTEE ON ENERGY AND COMMERCE
                        HOUSE OF REPRESENTATIVES

                     ONE HUNDRED FIFTEENTH CONGRESS

                             SECOND SESSION

                               __________

                           FEBRUARY 14, 2018

                               __________

                           Serial No. 115-99
                           
                           
                           
                           
 [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]                          
 



      Printed for the use of the Committee on Energy and Commerce

                        energycommerce.house.gov
                        
                        
                        
                         _______________

                  U.S. GOVERNMENT PUBLISHING OFFICE
                   
30-071 PDF               WASHINGTON : 2019                            
                        
                        
                        


                    COMMITTEE ON ENERGY AND COMMERCE

                          GREG WALDEN, Oregon
                                 Chairman

JOE BARTON, Texas                    FRANK PALLONE, Jr., New Jersey
  Vice Chairman                        Ranking Member
FRED UPTON, Michigan                 BOBBY L. RUSH, Illinois
JOHN SHIMKUS, Illinois               ANNA G. ESHOO, California
MICHAEL C. BURGESS, Texas            ELIOT L. ENGEL, New York
MARSHA BLACKBURN, Tennessee          GENE GREEN, Texas
STEVE SCALISE, Louisiana             DIANA DeGETTE, Colorado
ROBERT E. LATTA, Ohio                MICHAEL F. DOYLE, Pennsylvania
CATHY McMORRIS RODGERS, Washington   JANICE D. SCHAKOWSKY, Illinois
GREGG HARPER, Mississippi            G.K. BUTTERFIELD, North Carolina
LEONARD LANCE, New Jersey            DORIS O. MATSUI, California
BRETT GUTHRIE, Kentucky              KATHY CASTOR, Florida
PETE OLSON, Texas                    JOHN P. SARBANES, Maryland
DAVID B. McKINLEY, West Virginia     JERRY McNERNEY, California
ADAM KINZINGER, Illinois             PETER WELCH, Vermont
H. MORGAN GRIFFITH, Virginia         BEN RAY LUJAN, New Mexico
GUS M. BILIRAKIS, Florida            PAUL TONKO, New York
BILL JOHNSON, Ohio                   YVETTE D. CLARKE, New York
BILLY LONG, Missouri                 DAVID LOEBSACK, Iowa
LARRY BUCSHON, Indiana               KURT SCHRADER, Oregon
BILL FLORES, Texas                   JOSEPH P. KENNEDY, III, 
SUSAN W. BROOKS, Indiana             Massachusetts
MARKWAYNE MULLIN, Oklahoma           TONY CARDENAS, California
RICHARD HUDSON, North Carolina       RAUL RUIZ, California
CHRIS COLLINS, New York              SCOTT H. PETERS, California
KEVIN CRAMER, North Dakota           DEBBIE DINGELL, Michigan
TIM WALBERG, Michigan
MIMI WALTERS, California
RYAN A. COSTELLO, Pennsylvania
EARL L. ``BUDDY'' CARTER, Georgia
JEFF DUNCAN, South Carolina

                                

              Subcommittee on Oversight and Investigations

                       GREGG HARPER, Mississippi
                                 Chairman
H. MORGAN GRIFFITH, Virginia         DIANA DeGETTE, Colorado
  Vice Chairman                        Ranking Member
JOE BARTON, Texas                    JANICE D. SCHAKOWSKY, Illinois
MICHAEL C. BURGESS, Texas            KATHY CASTOR, Florida
SUSAN W. BROOKS, Indiana             PAUL TONKO, New York
CHRIS COLLINS, New York              YVETTE D. CLARKE, New York
TIM WALBERG, Michigan                RAUL RUIZ, California
MIMI WALTERS, California             SCOTT H. PETERS, California
RYAN A. COSTELLO, Pennsylvania       FRANK PALLONE, Jr., New Jersey (ex 
EARL L. ``BUDDY'' CARTER, Georgia        officio)
GREG WALDEN, Oregon (ex officio)

                                  (ii)
                                  
                                  
                                  
                                  
                             C O N T E N T S

                              ----------                              
                                                                   Page
Hon. Gregg Harper, a Representative in Congress from the State of 
  Mississippi, opening statement.................................     1
    Prepared statement...........................................     3
Hon. Diana DeGette, a Representative in Congress from the State 
  of Colorado, opening statement.................................     4
    Prepared statement...........................................     6
Hon. Greg Walden, a Representative in Congress from the State of 
  Oregon, opening statement......................................     7
    Prepared statement...........................................     8
Hon. Frank Pallone, Jr., a Representative in Congress from the 
  State of New Jersey, opening statement.........................    10
    Prepared statement...........................................    11

                               Witnesses

Martin Gaynor, Ph.D., E.J. Barone University Professor of 
  Economics and Health Policy, Heinz College, Carnegie Mellon 
  University.....................................................    13
    Prepared statement...........................................    16
    Answers to submitted questions...............................   149
Leemore S. Dafny, Ph.D., Bruce V. Rauner Professor of Business 
  Administration, Harvard Business School........................    42
    Prepared statement...........................................    44
    Answers to submitted questions \1\...........................   154
Kevin A. Schulman, M.D., Professor of Medicine, Duke University, 
  and Visiting Scholar, Harvard Business School..................    66
    Prepared statement...........................................    69
    Answers to submitted questions...............................   156

                           Submitted Material

Subcommittee memorandum..........................................   126
Article of March 24, 2008, ``Building Something Worth Building 
  for All Patients,'' by Rep. Michael Burgess, Health Affairs 
  Blog, submitted by Mr. Burgess.................................   137
Statement of the National Community Pharmacists Association, 
  February 14, 2018, submitted by Mr. Griffith...................   144

----------
\1\ Dr. Dafny did not answer submitted questions for the record 
  by the time of printing.


            EXAMINING THE IMPACT OF HEALTHCARE CONSOLIDATION

                              ----------                              


                      WEDNESDAY, FEBRUARY 14, 2018

                  House of Representatives,
      Subcommittee on Oversight and Investigations,
                          Committee on Energy and Commerce,
                                                    Washington, DC.
    The subcommittee met, pursuant to call, at 10:17 a.m., in 
room 2322, Rayburn House Office Building, Hon. Gregg Harper 
(chairman of the subcommittee) presiding.
    Members present: Representatives Harper, Griffith, Burgess, 
Brooks, Collins, Barton, Walberg, Walters, Costello, Carter, 
Walden (ex officio), DeGette, Schakowsky, Castor, Tonko, Ruiz, 
Peters, and Pallone (ex officio).
    Staff present: Jennifer Barblan, Chief Counsel, Oversight 
and Investigations; Adam Buckalew, Professional Staff Member, 
Health; Zack Dareshori, Legislative Clerk; Lamar Echols, 
Counsel, Oversight and Investigations; Margaret Tucker Fogarty, 
Staff Assistant; Ed Kim, Policy Coordinator, Health; Jennifer 
Sherman, Press Secretary; Natalie Turner, Counsel, Oversight 
and Investigations; Hamlin Wade, Special Advisor for External 
Affairs; Jeff Carroll, Minority Staff Director; Evan Gilbert, 
Minority Press Assistant; Tiffany Guarascio, Minority Deputy 
Staff Director and Chief Health Advisor; Zach Kahan, Minority 
Outreach and Member Services Coordinator; Christopher Knauer, 
Minority Oversight Staff Director; Miles Lichtman, Minority 
Policy Analyst; Kevin McAloon, Minority Professional Staff 
Member; Andrew Souvall, Minority Director of Communications, 
Outreach and Member Services; and C.J. Young, Minority Press 
Secretary.
    Mr. Harper. The subcommittee convenes this hearing entitled 
``Examining the Impact of Healthcare Consolidation.''
    I want to welcome our witnesses, who will be introduced in 
more detail momentarily. The Chair will now recognize himself 
for purposes of an opening statement.

  OPENING STATEMENT OF HON. GREGG HARPER, A REPRESENTATIVE IN 
             CONGRESS FROM THE STATE OF MISSISSIPPI

    The price of healthcare in the United States has steadily 
risen for several decades. In 2016, U.S. healthcare spending 
was estimated to be around $3.3 trillion, and the gross 
domestic product related to healthcare spending was 17.9 
percent, an increase from 17.7 percent just the year before.
    Data shows that the increasing costs of healthcare are 
ultimately passed along to American workers and families. This 
trend is concerning for all Americans and is an issue the 
committee will continue to examine here today and in the 
future.
    While there are numerous factors contributing to the rising 
cost of healthcare, reports and studies show consolidation is a 
contributing factor.
    Consolidation is not a new phenomenon. It has been 
occurring for decades among hospitals, doctors, the 
pharmaceutical industry, and insurance companies.
    To date, most studies and data have focused on hospital and 
insurer consolidations. The effects of cross-market 
consolidations and other types of vertical consolidations are 
less clear.
    Horizontal hospital consolidation--the consolidation of 
hospitals into a single larger system--has grown at a rapid 
pace this past decade.
    According to the Medicare Payment Advisory Commission, 
MedPAC, hospital markets are now highly consolidated. In 2012, 
MedPAC found that a single hospital system counted for a 
majority of Medicare discharges in 146 of 391 metropolitan 
areas.
    Similarly, a researcher found that in 2016, 90 percent of 
metropolitan areas were highly concentrated for hospitals. 
Through vertical consolidation, hospitals have also acquired a 
significant number of physician practices over the past decade.
    A recent analysis shows that the number of physicians 
employed by hospitals increased by 49 percent between 2012 and 
2015. The Government Accountability Office found that between 
2007 to 2014 the number of vertically consolidated physicians 
nearly doubled, from 9,600 to 182,000.
    There also appears to be a significant amount of 
consolidation in the health insurance industry. The estimated 
nationwide market share of largest four insurers increased from 
74 percent in 2006 to 83 percent in 2014.
    Recently, the U.S. Department of Justice successfully 
blocked two mergers between major health insurance companies, 
noting that the mergers would violate antitrust laws and would 
lead to higher healthcare costs for consumers.
    Given DOJ's success in challenging these mergers, some 
analysts have speculated that we will start seeing more 
vertical integration in the healthcare space.
    Additionally, the FTC--Federal Trade Commission--has 
recently been successful challenging horizontal mergers of 
providers that supply similar services in geographic proximity.
    However, the FTC and DOJ do not appear to regularly 
challenge vertical consolidations. Since 2000, the FTC and DOJ 
have challenged only 22 total vertical mergers.
    The move towards consolidation raises questions as to what 
is really meant and what this really means for patients. 
Hospitals and providers contend that consolidation makes 
facilities more efficient by eliminating duplicative services, 
reducing administrative burdens, and improving quality of care.
    Physicians are incentivized for many reasons to consolidate 
with hospitals, including more payment stability and less 
financial and regulatory burdens.
    Many experts point to Medicare paying more for the same 
services at hospitals than at a physician's office as a leading 
factor in providers consolidating with hospitals.
    While many benefits of consolidation are difficult to 
measure, the majority of studies and literature shows that 
horizontal hospital consolidation leads to higher prices.
    For example, according to MedPAC, horizontal consolidation 
of hospitals has contributed to the discrepancy between prices 
Medicare pays hospitals and what commercial insurers pay.
    In fact, a study found that in 2012, the average private 
price was 75 percent higher than Medicare prices after 
hospitals consolidate. Additionally, a 2018 study looked at 
hospital and physician consolidations. It found that from 2007 
to 2013 almost 10 percent of physician practices reviewed were 
acquired by a hospital.
    After being acquired, the services offered by physicians 
increased an average of 14 percent. In response to the growing 
number of consolidations in the healthcare industry, in October 
of 2017, the Trump administration issued an executive order to 
foster greater competition in the healthcare markets and 
directing the administration to promote competition in and 
limit excessive consolidation in the healthcare system.
    Health and Human Services was directed to collect public 
comments on these issues, and we look forward to hearing and 
learning what innovative solutions HHS discovers during this 
process.
    Consolidation in the healthcare industry raises many 
important questions relating to competition and innovation. For 
instance: Why has consolidation increased during the past 
decade? Is consolidation good for patients? What changes could 
Congress or HHS make to encourage competition and innovation in 
healthcare?
    I welcome and thank the witnesses for being here. We look 
forward to their testimony.
    [The prepared statement of Mr. Harper follows:]

                Prepared statement of Hon. Gregg Harper

    The subcommittee convenes this hearing entitled ``Examining 
the Impact of Healthcare Consolidation.''
    The price of healthcare in the United States has steadily 
risen for several decades. In 2016, U.S. healthcare spending 
was estimated to be around $3.3 trillion, and the gross 
domestic product related to healthcare spending was 17.9 
percent, an increase from 17.7 percent just the year before. 
Data shows that the increasing costs of healthcare are 
ultimately passed along to American workers and families. This 
trend is concerning for all Americans and is an issue the 
committee will continue to examine here today and in the 
future.
    While there are numerous factors contributing to the rising 
costs of healthcare, reports and studies show consolidation is 
a contributing factor. Consolidation is not a new phenomenon. 
It has been occurring for decades among hospitals, doctors, the 
pharmaceutical industry, and insurance companies.
    To date, most studies and data have focused on hospital and 
insurer consolidations. The effects of cross-market 
consolidations and other types of vertical consolidations are 
less clear.
    Horizontal hospital consolidation--the consolidation of 
hospitals into a single larger system--has grown at a rapid 
pace the past decade. According to the Medicare Payment 
Advisory Commission (MedPAC), hospital markets are now highly 
consolidated. In 2012, MedPAC found that a single hospital 
system accounted for a majority of Medicare discharges in 146 
of 391 metropolitan areas. Similarly, a researcher found that 
in 2016, 90 percent of metropolitan areas were highly 
concentrated for hospitals.
    Through vertical consolidation, hospitals have also 
acquired a significant number of physician practices over the 
past decade. A recent analysis shows that the number of 
physicians employed by hospitals increased by 49 percent 
between 2012 and 2015.
    The Government Accountability Office found that between 
2007 to 2014, the number of vertically consolidated physicians 
nearly doubled from about 96,000 to 182,000.
    There also appears to be a significant amount of 
consolidation in the health insurance industry. The estimated 
nationwide market share of the largest four insurers increased 
from 74 percent in 2006 to 83 percent in 2014. Recently, the 
U.S. Department of Justice (DOJ) successfully blocked two 
mergers between major health insurance companies, noting that 
the mergers would violate antitrust laws and would lead to 
higher healthcare costs for consumers.
    Given DOJ's success in challenging these mergers, some 
analysts have speculated that we'll start seeing more vertical 
integration in the healthcare space. Additionally, the Federal 
Trade Commission (FTC) has recently been successful challenging 
horizontal mergers of providers that supply similar services in 
geographic proximity.
    However, the FTC and DOJ do not appear to regularly 
challenge vertical consolidations. Since 2000, the FTC and DOJ 
have challenged only 22 vertical mergers in total.
    The move toward consolidation raises questions as to what 
it really means for patients. Hospitals and providers contend 
that consolidation makes facilities more efficient by 
eliminating duplicative services, reducing administrative 
burdens, and improving quality of care. Physicians are 
incentivized for many reasons to consolidate with hospitals, 
including more payment stability and less financial and 
regulatory burdens. Many experts point to Medicare paying more 
for the same services at hospitals than a physician's office as 
a leading factor in providers consolidating with hospitals.
    While many benefits of consolidation are difficult to 
measure, the majority of studies and literature shows that 
horizontal hospital consolidation leads to higher prices.
    For example, according to MedPAC, horizontal consolidation 
of hospitals has contributed to the discrepancy between prices 
Medicare pays hospitals and what commercial insurers pay. In 
fact, a study found that in 2012, the average private price was 
75 percent higher than Medicare prices after hospitals 
consolidate. Additionally, a 2018 study looking at hospital/
physician consolidations found that from 2007 to 2013, almost 
10 percent of physician practices reviewed were acquired by a 
hospital. After being acquired, the services offered by 
physicians increased an average of 14 percent.
    In response to the growing number of consolidations in the 
healthcare industry, in October 2017, the Trump administration 
issued an Executive Order to foster greater competition in the 
healthcare markets and directing the administration to promote 
competition in and limit excessive consolidation in the 
healthcare system. Health and Human Services was directed to 
collect public comments on these issues.
    We look forward to learning what innovative solutions HHS 
discovers during this process.
    Consolidation in the healthcare industry raises many 
important questions relating to competition and innovation.
     Why has consolidation increased during the past 
decade?
     Is consolidation good for patients?
     What changes could Congress or HHS make to 
encourage competition and innovation in healthcare?
    I welcome and thank the witnesses, and look forward to 
their testimony.

    Mr. Harper. At this time, the Chair will recognize the 
ranking member of the subcommittee, Ms. DeGette.

 OPENING STATEMENT OF HON. DIANA DEGETTE, A REPRESENTATIVE IN 
              CONGRESS FROM THE STATE OF COLORADO

    Ms. DeGette. Thank you so much, Mr. Chairman.
    As we will hear from the witnesses today, we have seen a 
long-term trend in consolidation in the healthcare sector, 
where the market has become increasingly dominated by fewer and 
fewer companies.
    This trend goes back 20 years or more and, frankly, it had 
real impacts on consumers. Excessive consolidation leaves 
consumers with few choices, which not only limits their care 
options but also has the potential to raise prices.
    And it's not just individual consumers who are paying more. 
When Medicare's expenditures go up, then taxpayers suffer as 
well.
    You know, it's important to note consolidation is not per 
se negative. Hospital mergers can enable providers to combine 
resources and improve coordination of care.
    But, if increased market power allows them to raise their 
prices with no competitive alternatives, then entire 
communities can suffer.
    We have also seen increasing numbers of hospitals acquiring 
physician practices. Twenty Sixteen marked the first time that 
less than half of physicians own their own practice. Again, 
this can result in increased expenditures when the same 
services are now provided but at higher prices.
    Although hospitals point to the reduced inefficiencies and 
regulatory burdens on physicians that can result from these 
acquisitions, it's really clear that the delivery of care is 
changing, and not always to the benefit of patients and payers.
    Likewise, when insurance companies are able to pull their 
market power to negotiate lower rates, there can be positive 
results. But not so when they push the other competitors out of 
the market or when the savings are not passed on to consumers.
    For example, last year we saw the courts strike down two 
mergers between large insurers. These companies were already 
among the biggest players in the market, and it was recognized 
that the merged companies would stifle competition and 
innovation.
    It's really possible that we're going to see more attempted 
mergers of this kind, and consumers need to get advocates on 
their behalf.
    These issues affect all segments of the healthcare market, 
including prescription drugs. As you know, Mr. Chairman, I've 
long been concerned about the rising price of drugs, and 
insulin in particular.
    Congressman Tom Reed and I were the co-chairs of the 
Diabetes Caucus, and we are in the process of conducting an 
inquiry into insulin prices.
    Our early findings suggest that consolidation across 
different parts of the so-called drug supply chain is indeed 
affecting what patients pay for their medications.
    The problem has ramifications not just for consumers who 
rely on these medicines but also for the employers and public 
and private insurance companies that pay for them.
    And, so as we talk about these issues, it's important to 
know that pharmacy benefit managers have also seen this sort of 
consolidation we are going to hear about today.
    PBMs have an enormous influence in the prescription drug 
market, and yet the entire market is dominated by just a few of 
them.
    So I am eager to hear the witnesses' thoughts on these 
issues. It's going to be my line of questioning, so you can 
start to think about that now and what we can do to address it.
    Frankly, we also need more innovative solutions that have 
potential to upend the inefficiencies in the market. Amazon, 
J.P. Morgan, and Berkshire Hathaway recently made news when 
they announced a joint venture to reduce healthcare costs for 
their companies.
    Well, it remains to be seen how effective this merger will 
be, but it does show that there is a need in the market for 
innovation.
    Mr. Chairman, these are complex issues and we're not going 
to solve them today, even with our best efforts. While I 
recognize there can be legitimate and even good reasons for 
consolidation, the long-term trends are alarming, and the need 
for new approaches is clear.
    I look forward to hearing from the witnesses about what the 
research tells us are these underlying problems, what the real-
world effects are, and what we can do to help.
    And with that, I yield back.
    [The prepared statement of Ms. DeGette follows:]

                Prepared statement of Hon. Diana DeGette

    Thank you, Mr. Chairman. As we will hear from the witnesses 
today, we have seen a long-term trend in consolidation in the 
healthcare sector, where the market has become increasing 
dominated by fewer companies. This trend goes back 20 years or 
more, and it has real effects on all consumers.
    Excessive consolidation leaves consumers with few choices, 
which not only limits their care options, but can also raise 
their prices. And let's not forget that it is not just 
individual consumers who are paying more: when Medicare's 
expenditures go up, the taxpayers suffer as well.
    Consolidation does not always have to be negative. Hospital 
mergers can enable providers to combine their resources and 
improve coordination of care. But if their increased market 
power allows them to raise their prices with no alternative for 
consumers, entire communities can suffer.
    We have also seen increasing numbers of hospitals acquiring 
physician practices. Twenty Sixteen marked the first time that 
less than half of physicians owned their own practice. This can 
result in increased expenditures when the same services are now 
paid at higher rates. Although hospitals point to the reduced 
inefficiencies and regulatory burdens on physicians that result 
from these acquisitions, it is clear that the delivery of care 
is changing, and not always to the benefit of patients and 
payers.
    Likewise, when insurance companies are able to pool their 
market power to negotiate lower rates, there can be positive 
results--but not when they push all other competitors out of 
the market, or when the savings are not passed down to 
consumers.
    For instance, a year ago we saw the courts strike down two 
mergers between large insurers. These companies were already 
among the biggest players in the market, and it was recognized 
that the merged companies would stifle competition and 
innovation. It is very possible we will see more attempted 
mergers of this kind, and consumers need advocates on their 
behalf.
    These issues affect all segments of the healthcare market, 
including prescription drugs. As you know, Mr. Chairman, I have 
long been concerned about the rising price of drugs, and 
insulin in particular. Congressman Tom Reed (R-NY) and I are in 
the process of conducting an inquiry into insulin prices 
through the Diabetes Caucus. Our early findings suggest that 
consolidation across different parts of the so-called ``drug 
supply chain'' is indeed affecting what patients pay for their 
medicines. This problem has ramifications not just for the 
consumers who rely on these medicines, but also the employers 
and private and public insurance programs that pay for them.
    So as we talk about these issues, it is important to note 
that pharmacy benefit managers (PBMs) have also seen the sort 
of consolidation we will hear about today. PBMs have enormous 
influence in the prescription drug market, and yet the entire 
market is dominated by just a few PBMs. I am eager to hear the 
witnesses' thoughts on this problem, and what more can be done 
to address it.
    We also need more innovative solutions that have potential 
to upend the inefficiencies in the market. Amazon, J.P. Morgan, 
and Berkshire Hathaway recently made news when they announced a 
joint venture to reduce healthcare costs for their companies. 
While it remains to be seen how effective this venture will be, 
it clearly shows there is a need in the market for innovation.
    Mr. Chairman, these are complex issues, and the solutions 
will not be simple. While I recognize that there can be 
legitimate and even beneficial reasons for consolidation, the 
long-term trends are alarming, and the need for new approaches 
is clear. I look forward to hearing from the witnesses about 
what the research tells us are the underlying problems, what 
the real-word effects are, and what steps we can take to help.
    I yield back.

    Mr. Harper. The gentlewoman yields back.
    The Chair will now recognize the chairman of the full 
committee, Mr. Walden, for purposes of an opening statement.

  OPENING STATEMENT OF HON. GREG WALDEN, A REPRESENTATIVE IN 
               CONGRESS FROM THE STATE OF OREGON

    Mr. Walden. Well, thank you, Chairman Harper. We appreciate 
your leadership on these issues.
    As you mentioned in your opening statement, healthcare 
costs continue to rise in the United States. We are all paying 
higher costs.
    In 2016 alone, the U.S. spent about $3.3 trillion--that's 
more than $10,000 per person--on healthcare. And as I've said 
on numerous occasions, this committee is dedicated to 
investigating all of the cost drivers in our healthcare system 
from top to bottom.
    For example, we have been looking at the 340B drug pricing 
program for the past 2 years, and just last month we issued our 
report. Pretty comprehensive on the findings and 
recommendations.
    Last December, the Health Subcommittee held a hearing 
examining the drug supply chain and the impact each 
participant's supply chain has and the ultimate cost to 
patients.
    And today we want to explore consolidation in the 
healthcare industry and the impact consolidation has on 
consumers. Mergers and acquisitions are changing the healthcare 
landscape across the United States and over the past few years 
there is been a continuous stream of horizontal and vertical 
merger announcements between hospitals, insurers, physician 
groups, pharmaceutical companies, pharmaceutical benefit 
managers, pharmacies, and other healthcare firms, and those are 
just the deals we know about.
    Some mergers are so small they don't make it onto the 
congressional radar screen, and in the aggregate, however, even 
these small mergers could have an impact on consumers--
sometimes positively, sometimes negatively.
    So one of the central questions that I hope we explore 
today is, What does this consolidation mean for patients? My 
principle is: Put the consumers first and you'll have pretty 
good policy, because that means you've got competition, drives 
innovation and choice, and should drive down price.
    On the one hand, consolidation is potentially good for 
patients by reducing the cost of care and improving outcomes 
through improved efficiencies and better care coordination. It 
can be that.
    On the other hand, we are concerned that some consolidation 
could actually lead to higher prices for patients, doesn't lead 
to improved quality of care, and so we want to hear both 
perspectives today and what the right public policy position 
should be.
    So today, we also want to explore how consolidation impacts 
innovation. Last month, we all heard the news that Amazon, 
Berkshire Hathaway, and J.P. Morgan are going to partner, try 
to improve employee satisfaction, reduce healthcare costs for 
their United States employees.
    That sure caught my attention because, if you want to talk 
about disruptors, I think at least Amazon you'd put at the top 
of the list of how to disrupt things that are otherwise 
bureaucratically constrained. And with the horsepower of 
Berkshire Hathaway and J.P. Morgan, something big could happen 
in this space, and it needs to.
    Although we still know very little about their plans, I am 
intrigued by this partnership, and we will continue to monitor 
it closely, and when they are ready to come share information 
with us, we will be all open arms to hear how it's going to 
work.
    Similarly, a group of several hospital systems recently 
announced their decision to enter the generic drug industry and 
develop a not-for-profit generic drug company. One thing I'd 
like to hear more about today is whether consolidation makes it 
more or less likely that we will see innovation in the 
healthcare market.
    And finally, we also need a better understanding of what's 
driving consolidation, whether Congress should be trying to do 
anything about it.
    We have heard a lot about how disparities in payments 
across sites of service may result in market consolidation, and 
as a result Congress took a step toward equalizing payment 
rates across different sites of care through the Bipartisan 
Budget Act of 2015.
    But we continue to hear about some of these inequities in 
payment rates. And as I mentioned earlier, the committee has 
been closely examining the 340B program. During this work, we 
found 340B program creates an incentive for hospitals to 
acquire independent physician offices that are not eligible for 
340B discounts, especially in the oncology space.
    One report showed there was a 172 percent increase in the 
consolidation of community oncology practices since 2008. A 
recent article in the New England Journal of Medicine found, 
among other things, that the 340B program has been associated 
with hospital consolidation in hematology oncology.
    So as evidenced by these examples, the committee needs to 
carefully review these types of policies and ensure that any 
Federal policies that create incentives for consolidation are 
appropriate and ultimately benefit patients and consumers.
    [The prepared statement of Mr. Walden follows:]

                 Prepared statement of Hon. Greg Walden

    Thank you, Mr. Chairman, for holding this hearing on the 
very important issue of consolidation in the healthcare 
industry.
    As Chairman Harper mentioned in his opening statement, 
healthcare costs continue to rise in the United States. In 2016 
alone, the U.S. spent about $3.3 trillion-more than $10,000 per 
person-on healthcare.
    As I've said on numerous occasions, this committee is 
dedicated to investigating the cost drivers in our healthcare 
system from top to bottom.
    For example, we have been looking into the 340B Drug 
Pricing Program for the past 2 years. Just last month, the 
committee issued a comprehensive report detailing its 340B 
investigation and findings. Last December, the Health 
Subcommittee held a hearing examining the drug supply chain and 
the impact each participant in the supply chain has in the 
ultimate cost to patients.
    Today we want to explore consolidation in the healthcare 
industry and the impact of consolidation on consumers.
    Mergers and acquisitions are changing the healthcare 
landscape across the country. Over the past few years, there 
has been a continuous stream of horizontal and vertical merger 
announcements between hospitals, insurers, physician groups, 
pharmaceutical companies, pharmaceutical benefit managers, 
pharmacies, and other healthcare firms. And those are just the 
deals we know about-some mergers are so small they don't make 
it onto our radar. In the aggregate, however, even these small 
mergers may have an impact on consumers.
    One of the central questions that we want to explore today 
is what does this consolidation mean for patients? On the one 
hand, consolidation is potentially good for patients by 
reducing the cost of care and improving outcomes through 
improved efficiencies and better care coordination. On the 
other hand, we're concerned that some consolidation could lead 
to higher prices for patients and not improve the quality of 
care that they receive from their doctor. I look forward to 
hearing more on both perspectives from our witnesses today.
    Today we also want to explore how consolidation impacts 
innovation. Last month, we all heard the news that Amazon, 
Berkshire Hathaway, and JP Morgan are going to partner and try 
to improve employee satisfaction and reduce healthcare costs 
for their U.S. employees. Although we still know very little 
about their plans, I'm intrigued by this partnership and plan 
to continue to closely monitor it as the plans develop. 
Similarly, a group of several hospital systems recently 
announced their decision to enter the generic drug industry and 
develop a not-for-profit generic drug company. One thing I'd 
like to hear more about today is whether consolidation makes it 
more-or less-likely that we will see innovation in the 
healthcare market.
    Finally, we also need to better understand what is driving 
consolidation and whether Congress should be trying to do 
anything about it.
    We've heard a lot about how disparities in payments across 
sites of service may result in market consolidation, and as a 
result, Congress took a step toward equalizing payments rates 
across different sites of care through the Bipartisan Budget 
Act of 2015. We continue to hear concerns about inequities in 
payment rates.
    As I previously mentioned, the committee has been closely 
examining the 340B program over the past 2 years. During this 
work, we found that the 340B program creates an incentive for 
hospitals to acquire independent physician offices that are not 
eligible for the 340B discount-especially in the oncology 
space. One report showed that there was a 172 percent increase 
in the consolidation of community oncology practices since 
2008. A recent article in the New England Journal of Medicine 
found among other things that the 340B program has been 
associated with hospital consolidation in hematology-oncology.
    As evidenced by these examples, the committee needs to 
carefully review these types of policies and ensure that any 
Federal policies that create incentives for consolidation are 
appropriate and ultimately benefit patients and consumers.
    I would like to thank the witnesses for testifying here 
today and I look forward to hearing your testimony.

    Mr. Walden. I now yield to Dr. Burgess the remainder of my 
time.
    Mr. Burgess. Well, thank you, Mr. Chairman, and I want to 
take a moment to acknowledge that one of our witnesses this 
morning, Dr. Dafny, is the daughter of Nachum Dafny, who taught 
me neuroscience a long time ago at the University of Texas 
Medical School at Houston, affectionately known by the acronym 
``UTMUSH'' by its friends. But I understand Dr. Dafny is still 
active in teaching, and so I was grateful to learn that this 
morning and certainly want to welcome Dr. Dafny to our 
subcommittee.
    Mr. Chairman, I also have a unanimous consent request. It's 
probably just an oversight that we don't have a witness here 
talking about physician ownership of facilities.
    So I have a paper from Health Affairs. It was published 
March of 2008, and, while that was 10 years ago, it does not 
diminish the overall brilliance and the keen insights provided 
in this paper, and it was actually written by your humble 
chairman of the Health Subcommittee.
    So I ask unanimous consent to put that into the record.
    Mr. Harper. Without objection.
    [The information appears at the conclusion of the hearing.]
    Ms. DeGette. Wait a minute. I am going to have to reserve--
--
    [Laughter.]
    Ms. DeGette. I am going to reserve a point of order on 
that.
    Mr. Harper. It was questionable, but without objection, it 
is admitted.
    With that, the Chair will now recognize Mr. Pallone, the 
ranking member of the full committee, for the purposes of an 
opening statement.

OPENING STATEMENT OF HON. FRANK PALLONE, JR., A REPRESENTATIVE 
            IN CONGRESS FROM THE STATE OF NEW JERSEY

    Mr. Pallone. Thank you, Mr. Chairman.
    The issues we will hear about today are critical for 
understanding the healthcare market. We have continued to see a 
long-term trend of consolidation in the healthcare industry, 
including among providers and insurers, and it's important we 
look at these trends with careful scrutiny.
    While consolidation is not necessarily a bad thing, it's 
important we understand the implications for consumers. I often 
worry, Mr. Chairman, that the people who do the consolidation 
want to say that it's great and rosy and they do, you know, put 
out all kinds of propaganda and literature and billboards 
saying how great it is, but that doesn't necessarily mean it's 
the case.
    For example, when insurance companies merge they often cite 
the advantages of increased market power to reduce 
administrative costs and negotiate lower prices. However, that 
has not always been the result. In fact, research has shown 
that some insurer mergers have led to increased premiums for 
consumers, and this is something we need to be watching very 
closely.
    If the insurance market becomes dominated by fewer 
companies that only grow bigger, consumers will not benefit. 
For example, in 2016 the Department of Justice had to intervene 
in Aetna's acquisition of Humana as well as Anthem's 
acquisition of Cigna.
    The courts determined that those deals would have hurt 
competition and innovation, and 1 year ago today the two 
mergers were called off.
    Although those mergers were canceled, these trends are 
continuing and have been building for quite some time. Fifteen 
years ago, most States saw a third of their market controlled 
by a single insurer.
    That consolidation continues to accelerate to the point 
where in 2014 the top four insurers controlled 83 percent of 
the market nationwide.
    More recently, CVS Health announced that it would acquire 
the insurer Aetna. While it's still too early to tell what this 
merger will mean for consumers, it certainly raises questions 
about how competitive the market will be and how these types of 
vertical consolidations will affect the delivery of care.
    Instead of the market being dominated by a few large 
companies, it's important for consumers to have choices when 
picking their insurance plans. This insures not only a wider 
array of health benefits to fit their needs, but also brings 
down consumer costs.
    For instance, the Department of Health and Human Services 
found that higher numbers of insurers were associated with slow 
growth in insurance premiums.
    Providers have also not been immune to these consolidation 
trends. Between '98 and 2015, there were over 1,400 hospital 
mergers and acquisitions. Certainly, that's the case in my 
State of New Jersey. In 2015, the number of hospitals involved 
in such deals was more than three times what it was in 2008.
    Now, some consolidation in the market may be inevitable. 
But, just as we critically examine insurance mergers with an 
eye to the impact on consumers, our first concern with provider 
consolidation should also be with the patients who will be 
affected.
    Hospitals often point to the advantages of consolidation, 
such as reduced costs of capital and benefits of scale. 
However, we have also seen some evidence that mergers can lead 
to increased prices for hospital care. The GAO has found that 
it's also true in vertical consolidations. When hospitals 
acquire physician practices, Medicare expenditures can go up as 
care is provided in more expensive hospital outpatient 
settings.
    And prices should not be our only concern. While a larger 
hospital system may be able to provide more services, it's not 
at all clear that provider consolidation necessarily leads to 
better quality of care.
    So these are complex issues, and I look forward to hearing 
what the latest research says about the long-term trends in 
consolidation and, most importantly, what the effects are for 
consumers.
    And unless one of my colleagues wants the time, I'll yield 
back, Mr. Chairman.
    [The prepared statement of Mr. Pallone follows:]

             Prepared statement of Hon. Frank Pallone, Jr.

    The issues we will hear about today are critical for 
understanding the healthcare market. We have continued to see a 
long-term trend of consolidation in the healthcare industry, 
including among providers and insurers--and it is important we 
look at these trends with careful scrutiny.
    While consolidation is not necessarily a bad thing in all 
instances, it is important we understand the implications for 
consumers.
    For example, when insurance companies merge, they often 
cite the advantages of increased market power to reduce 
administrative costs and negotiate lower prices. However, that 
has not always been the result. In fact, research has shown 
that some insurer mergers have led to increased premiums for 
consumers. This is something we need to be watching very 
closely.
    If the insurance market becomes dominated by fewer 
companies that only grow bigger, consumers will not benefit. 
For example, in 2016, the Department of Justice had to 
intervene in Aetna's acquisition of Humana, as well as Anthem's 
acquisition of Cigna. The courts determined that those deals 
would have hurt competition and innovation, and 1 year ago 
today, the two mergers were called off.
    Although those mergers were canceled, these trends are 
continuing, and have been building for quite some time. Fifteen 
years ago, most States saw a third of their market controlled 
by a single insurer. That consolidation continues to accelerate 
to the point where in 2014, the top four insurers controlled 83 
percent of the market nationwide.
    More recently, CVS Health announced that it would acquire 
the insurer Aetna. While it is still too early to tell what 
this merger will mean for consumers, it certainly raises 
questions about how competitive the market will be and how 
these types of vertical consolidations will affect the delivery 
of care.
    Instead of the market being dominated by a few large 
companies, it is important for consumers to have choices when 
picking their insurance plans. This ensures not only a wider 
array of health benefits to fit their needs, but also helps 
bring down consumer costs. For instance, the Department of 
Health and Human Services found that higher numbers of insurers 
were associated with slowed growth in insurance premiums.
    Providers have also not been immune to these consolidation 
trends. Between 1998 and 2015 there were over 1,400 hospital 
mergers and acquisitions. In 2015, the number of hospitals 
involved in such deals was more than three times what it was in 
2008.
    Now, some consolidation in the market may be inevitable. 
But just as we critically examine insurer mergers with an eye 
on the impact on consumers, our first concern with provider 
consolidation should also be with the patients who will be 
affected.
    Hospitals often point to advantages of consolidation, such 
as reduced costs of capital and benefits of scale. However, we 
have also seen some evidence that mergers can lead to increased 
prices for hospital care.
    The Government Accountability Office has found that this is 
also true in vertical consolidations: when hospitals acquire 
physician practices, Medicare expenditures can go up as care is 
provided in more expensive hospital outpatient settings.
    And prices should not be our only concern here. While a 
larger hospital system may be able to provide more services, it 
is not clear that provider consolidation necessarily leads to 
better quality of care.
    These are complex issues, and I look forward to hearing 
what the latest research says about the long-term trends in 
consolidation, and most importantly, what the effects are for 
consumers.
    Thank you, I yield back.

    Mr. Harper. The gentleman yields back.
    I ask unanimous consent that the Members' written opening 
statements be made part of the record, and without objection 
they will so be entered into the record.
    I would now like to introduce our panel of witnesses for 
today's hearing. Today we have Dr. Martin Gaynor, the E.J. 
Barone University professor of economics and health policy at 
Carnegie Mellon University. Welcome, sir. We are glad to have 
you with us today.
    Next is Leemore Dafny. Dr. Leemore Dafny, who is the Bruce 
V. Rauner professor of business administration at Harvard 
Business School. Welcome, Dr. Dafny. We are honored to have you 
with us.
    And finally, Dr. Kevin Schulman, professor of medicine, 
visiting scholar at Harvard Business School, and associate 
director of the Duke Clinical Research Institute. We welcome 
you as well.
    I want to thank each of you for being here, providing 
testimony to us and insight into this important topic, and we 
look forward to the opportunity to discuss healthcare 
consolidation today.
    And I know that you're aware that the committee is holding 
an investigative hearing, and when so doing we have the 
practice of taking testimony under oath.
    Do any of you have an objection to testifying under oath?
    Seeing none, the Chair then advises you that under the 
rules of the House and the rules of the committee, you are 
entitled to be accompanied by counsel.
    Do you desire to be accompanied by counsel during your 
testimony today?
    Everyone has responded in the negative.
    In that case, if you would please rise, raise your right 
hand, and I will swear you in.
    [Witnesses sworn.]
    Thank you. They all have responded affirmatively, and thank 
you for that. You're now under oath and subject to the 
penalties set forth in Title 18, Section 1001 of the United 
States Code, and you may now give a 5-minute summary of your 
written testimony.
    And at this point, I will recognize Dr. Gaynor first for 
the purpose of his opening statement.
    Sir, you have 5 minutes.

  STATEMENTS OF MARTIN GAYNOR, PH.D., E.J. BARONE UNIVERSITY 
   PROFESSOR OF ECONOMICS AND HEALTH POLICY, HEINZ COLLEGE, 
 CARNEGIE MELLON UNIVERSITY; LEEMORE S. DAFNY, PH.D., BRUCE V. 
 RAUNER PROFESSOR OF BUSINESS ADMINISTRATION, HARVARD BUSINESS 
  SCHOOL; AND KEVIN A. SCHULMAN, M.D., PROFESSOR OF MEDICINE, 
 DUKE UNIVERSITY, AND VISITING SCHOLAR, HARVARD BUSINESS SCHOOL

                   STATEMENT OF MARTIN GAYNOR

    Dr. Gaynor. Thank you.
    Chairman Harper, Ranking Member DeGette, members of the 
subcommittee and the committee, thank you for holding a hearing 
on this vitally important topic and for giving me the 
opportunity to testify in front of you today.
    I am an economist who has been studying the healthcare 
sector and specifically healthcare markets and competition for 
nearly 40 years. I am the E.J. Barone University professor of 
economics and public policy at the Heinz College of Public 
Policy at Carnegie Mellon University in Pittsburgh, 
Pennsylvania.
    I served as the director of the Bureau of Economics of the 
Federal Trade Commission in 2013 and 2014, during which time I 
was involved in the many healthcare matters that came before 
the commission.
    I've also served the Commonwealth of Pennsylvania as a 
member of the Governor's Healthcare Advisory Board and as co-
chair of its working group on shoppable healthcare.
    The U.S. healthcare system is based on markets. The system 
will work only as well as the markets that underpin it. These 
markets do not function as well as they could or should.
    Prices are high and rising. They're incomprehensible and 
egregious--pricing practices. Quality is suboptimal, and the 
sector is sluggish and unresponsive, in contrast to the 
innovation and dynamism which characterize much of the rest of 
our economy. Lack of competition has a lot to do with these 
problems.
    There has been a great deal of consolidation in healthcare. 
There have been over 1,500 hospital mergers in the past 20 
years, with nearly 700 since 2010.
    The result is that many local areas are now dominated by 
one large, powerful healthcare system, such as Boston with 
Partners Health, Pittsburgh with University of Pittsburgh 
Medical Center, and the San Francisco Bay area with Sutter.
    Insurance markets are also highly consolidated. The two 
largest insurers have 70 percent or more of the market and more 
than one-half of all local insurance markets.
    Physician services markets have also become increasingly 
consolidated. Two-thirds of specialized physician markets are 
highly concentrated and 29 percent for primary care physicians.
    There have been a very, very large number of acquisitions 
of physician practices by hospitals, so much so that one-third 
of all physicians and 44 percent of primary care physicians are 
now employed by hospitals.
    There are a number of reasons for this consolidation, and 
of course they vary across transactions. These include attempts 
to enhance or entrench market position in order to maintain or 
increase rates, revenue, and profits to protect market share.
    There are also what one could call Newton's Third Law of 
Consolidation--for every action, there is an equal and opposite 
reaction. If payers consolidate, then insurance companies feel 
they must consolidate to protect their position. Providers then 
feel they must consolidate and so on, and you can have a 
vicious cycle, not a virtuous cycle, of consolidation for 
strategic reasons, not for reasons to improve the quality of 
care or help patients.
    Their responses to financial incentives unintended in 
payment policies, specifically site-specific payments for the 
same physician service, can be double or larger if a physician 
practice is owned by a hospital, and the 340B program makes 
drug discounts available to hospitals but not to independent 
physician practices.
    There are legitimate efforts to achieve scale for lower 
cost, avoid unnecessary duplication, accepting risk-based 
payments, better coordinate care, facilitate investments in 
care coordination and quality.
    There are also concerns about the future. There's been a 
great deal of upheaval in healthcare over the past few years 
for a variety of reasons, and sometimes entities feel that they 
are protecting themselves by consolidation.
    Last, one should be aware that there is a global merger 
wave happening, and there are many mergers throughout our 
economy. So there are undoubtedly factors that are not specific 
to healthcare but that have to do with what's happening in the 
economy as a whole.
    Extensive research evidence shows that consolidation 
between close competitors leads to substantial price increases 
for hospitals, insurers, and physicians without offsetting 
gains in improved quality or enhanced efficiency.
    Further, recent evidence shows that mergers between 
hospitals not in the same geographic area can also lead to 
increases in price. Just as seriously if not more so, evidence 
shows that patient quality of care suffers from lack of 
competition.
    Lack of competition and consolidation entrenches existing 
modes of organization and delivery of care and prevents the 
emerging of new and innovative ways of organizing care.
    Policies are needed to support and promote competition in 
healthcare markets. This includes policies to strengthen choice 
and competition and ending distortions that unintentionally 
incentivize consolidation.
    Now, there's no one policy that will achieve all of these. 
Rather, we need a constellation of policies that will work to 
mutually reinforce each other.
    These include focusing and strengthening antitrust 
enforcement, ending policies that unintentionally incentivize 
consolidation, ending policies that hamper new competitors and 
impede competition, promoting transparency so employers, policy 
makers, and consumers have access to information about 
healthcare costs and quality.
    We are facing a great challenge to our healthcare system. 
If left unchecked, consolidation could undermine our best 
efforts to control costs, improve care, and make our system 
more responsive and dynamic.
    We need new and vigorous policies to encourage beneficial 
organizational change and innovation. If we fail, we will 
likely have an even more expensive, less responsive health 
system that will be exceedingly hard to change.
    In my opinion, this is the number-one priority for 
healthcare. The time to act is now.
    Thank you.
    [The statement of Dr. Gaynor follows:]
    
    
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]    

        
    Mr. Harper. Thank you, Dr. Gaynor.
    The Chair will now recognize Dr. Dafny for 5 minutes for 
the purposes of an opening statement.
    Thank you.

                 STATEMENT OF LEEMORE S. DAFNY

    Dr. Dafny. Chairman Harper, Ranking Member DeGette, 
Representative Burgess--thank you for the kind remarks 
regarding my father, your professor at the University of Texas 
Medical School, Dr. Nachum Dafny--and all members of the 
subcommittee and committee.
    I thank you for the opportunity to testify before you today 
on the subject of healthcare industry consolidation. My name is 
Leemore Dafny, and I am an academic health economist with 
longstanding research interests in competition and 
consolidation across a range of healthcare sectors.
    I am currently the Bruce Rauner professor of business 
administration at the Harvard Business School and the John F. 
Kennedy School of Government.
    Previously, I was the deputy director for healthcare and 
antitrust at the Bureau of Economics at the Federal Trade 
Commission. I serve on a panel of health advisors to the 
Congressional Budget Office and as a board member of not-for-
profit research organizations including the American Society of 
Health Economists and the Healthcare Cost Institute.
    As you're aware, we have seen consolidation within and 
across a vast array of healthcare sectors, including hospitals, 
health insurers, and pharmaceutical companies.
    There is a substantial academic literature that finds 
horizontal mergers of competing healthcare providers tend to 
raise prices and very limited evidence to suggest there are 
offsetting benefits to patients in the form of improved 
quality.
    Economists, myself included, also find that less 
competition among health insurers tends to raise premiums. We 
have less extensive evidence on combinations across different 
sectors.
    But the evidence we have to date also finds systematic 
price and spending increases, in particular, after hospital 
systems acquire additional hospitals in the same State and 
after hospitals acquire physician practices.
    In a nutshell, research to date suggests that consolidation 
in the healthcare industry on average has not yielded benefits 
for consumers.
    Yet, I expect we'll continue to see consolidation. What 
drives consolidation is the expectation of a reward for the 
merging parties and their stakeholders. Those rewards are not 
likely to fall dramatically without some action.
    I see four primary rewards for consolidation.
    First, merging parties often improve their bargaining 
position, and that enhanced bargaining position can enable them 
to raise price and to spend the extra on either margin or 
mission, if they're so inclined.
    Second, merging parties often believe that scale economies 
will produce cost savings--again, fueling margin or mission.
    Third, there are reimbursement rules and programs 
implemented by the Centers for Medicare and Medicaid Services, 
CMS, that rewards certain kinds of consolidation.
    And fourth, many merging parties believe common ownership 
will produce integrated care, which will enable them to realize 
synergies across the many products and services that patients 
require.
    As I note in my written testimony, there isn't much 
evidence to support the beliefs regarding scale economies or 
integrated care, although every potential transaction needs to 
be evaluated on its own merits.
    Merging for a better bargaining position or to game 
loopholes created by CMS is not value creating and often 
reduces value.
    Achieving more competitive markets may in fact involve 
consolidation but only of the value-creating variety. There are 
steps Congress can take to promote more competitive markets.
    I believe it's a worthwhile investment to create public 
databases containing information about the ownership and 
financial links among different healthcare providers and net 
commercial prices for their services.
    This database could form the basis for regularly scheduled 
reports and public hearings on industry consolidation and its 
effects.
    My counterparts with expertise on the pharmaceutical 
industry can advise on a similar transparency effort with 
respect to prescription drugs.
    Second, additional funds could be appropriated to the 
Federal enforcement agencies for enforcement-focused research.
    Third, CMS could develop alternatives to its current 
policies, potentially reducing the benefits for consolidation 
that has already been consummated.
    Fourth, and most aggressive, Congress could provide 
financial incentives or impose regulatory requirements for 
employers to utilize or develop so-called private exchanges 
where employees can shop for their preferred health plans and 
make choices that reflect their own preferences.
    If consumers won't pay for a higher priced product that 
doesn't offer greater value to warrant a price premium, the 
incentive to merge so as to raise price will be diminished.
    Healthcare is poised to capture 1 in 5 dollars in the U.S. 
economy by 2020. The usual checks in place to impede 
anticompetitive consolidation are muted in most healthcare 
sectors.
    To borrow from the medical vernacular, watchful waiting is 
not, in my opinion, the wisest approach to pursue. Sometimes a 
surgical intervention is necessary.
    [The statement of Dr. Dafny follows:]
    
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    Mr. Harper. Thank you very much, Dr. Dafny.
    The Chair will now recognize Dr. Schulman for the purposes 
of an opening statement for 5 minutes.
    Welcome.

                 STATEMENT OF KEVIN A. SCHULMAN

    Dr. Schulman. Thank you very much. Thank you, Congressman 
Harper, Ranking Member DeGette, and members of the subcommittee 
and committee for inviting me to talk with you today.
    I would like to address the impact of hospital 
consolidation on innovation in healthcare markets. We've been 
talking about this already this morning, and I am going to 
frame my remarks around two different types of innovation.
    One is called organizational innovation, or how firms 
improve their performance over time, and the second is called 
disruptive innovation, or how markets evolve over time, and 
we've talked about both.
    First, I would like to discuss a concept called business 
architecture, or the manner in which firms make decisions that 
allow them to generate predictable performance over time.
    A business architecture is the product of leadership, 
culture, strategy, and internal organizational controls and 
processes. The ability of organizations to develop stable 
business architectures is one of the most revolutionary 
business concepts of the last century, compared to the chaos of 
the 19th century.
    There is a downside to this construct, however, in that 
often a business architecture, which is the way we make 
decisions, leads to a rigidity of business models that can be 
very difficult to dislodge.
    This lens of business architecture is critical to our 
assessment of healthcare policy related to hospitals. For the 
last decade, we have pursued an approach of asking hospitals to 
create new models of care to drive down healthcare costs.
    In essence, we have asked them to replace their stable 
business architectures that have made them successful as fee-
for-service providers. This would be a dramatic transformation 
if any business could achieve this goal.
    The business architecture of many hospitals revolves around 
admitting patients for treatment, especially patients with 
commercial insurance or those who require surgery.
    The hospital is treated as a profit center. In other words, 
the more the service is provided, the better financially for 
the system.
    In these models, providers and hospital networks exist to 
provide patient referrals for inpatient care. Hospital mergers 
extend this model by making clinical services even more costly 
in multihospital systems.
    To better understand the rigidity of the hospital business 
architecture, we asked a sample of chief financial officers 
about their planning for business transformation. We wanted to 
understand what types of investments would be required to pivot 
from a fee for service business model to the most extreme 
value-based payment model capitation.
    We found that none of the leaders we interviewed had a 
clear estimate of the investment that would be required for the 
same transformation and observed in the crosshair sample there 
significant disagreements about how a change in payment models 
would impact essential components of the budget models.
    Despite almost a decade to prepare for this transformation, 
there is little evidence of the development of the concrete 
business plans that would be required to successfully carry out 
business architecture change.
    One approach to organizational change is to create a new 
leadership role tasked with innovation--a chief innovation 
officer. These leaders could help guide the transformation of 
the delivery system to new models of care that we all desire.
    Eighty percent of the largest health systems in the United 
States have created such a role, and we surveyed a majority of 
these individuals. While the respondents were all enthusiastic 
and committed to innovation, we were very concerned after this 
research. These roles were not structured or budgeted for 
success.
    For example, when these respondents reported that their 
role was strategic--in other words, that they were responsible 
for this change--their median annual budget was only $3 
million. It's unlikely that investments of this magnitude can 
change business architectures within these enormous, 
multibillion-dollar organizations.
    Large hospital systems can have other impacts on 
innovation. Vertically integrated organizations are good at 
developing standard business processes but are not necessarily 
conducive to the type of physician-driven innovation that could 
drive new care models.
    In part, this concern could explain why there's little 
evidence of the quality of care improving when hospitals pursue 
physician employment models.
    One way to reconcile these findings is to realize that, 
rather than pursue business transformation that we have been 
seeking, hospitals have been actively pursuing an agenda 
related to market power. The impacts of market power on 
business strategy and hospital investments can have sustained 
impact over long periods of time.
    The other type of innovation I would like to discuss is 
disruptive innovation, or changes in business models within 
markets. Clay Christensen has described how technology 
innovation allows business innovation to bring about cost and 
quality improvements for consumers.
    At the core, Christensen suggests that business 
architecture of existing firms is so rigid that they can't 
respond to market changes that they plainly see and so are 
replaced by new entrants in a process of created destruction 
within markets.
    Hospital-led organizations are the type of large, 
inefficient firms theory suggests should be replaced. If you 
wake up with a sore throat, would you rather go to a hospital 
and pay for parking, wait to be seen, or just have a 
telemedicine consult to tell you whether or not you need 
antibiotics?
    The lack of disruptive innovation is a critical shortfall 
in the healthcare market. Not only could disruptive innovation 
drive development of novel clinical services for patients, but 
would shake up the market to spur existing hospitals to more 
fully embrace an innovation agenda.
    One recent study suggested that 50 percent of the increase 
in healthcare costs since 1996 is related to service and price 
intensity. This is the pattern of costs that would be expected 
to result from the migration of clinical services to the 
hospital-based business model with all of this consolidation.
    Overall, all of this is a tremendous price for American 
consumers to pay for the failure of an innovation agenda in 
healthcare.
    Thank you.
    [The statement of Dr. Schulman follows:]
    
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    Mr. Harper. Thank you, Dr. Schulman, and thanks to each of 
you for the summary of your testimony.
    It's now time for the Members to ask questions. Each Member 
will have 5 minutes, and as Chair I will recognize myself for 5 
minutes and begin.
    And I will start with you, Dr. Gaynor, if I may. As you 
have heard today, obviously, the cost of healthcare has 
steadily risen over the past several decades, and one of the 
factors that certainly we are looking at that's contributing 
are the number of consolidations that have occurred in the 
healthcare industry the past decade.
    So my two questions for you, Dr. Gaynor: What impact has 
consolidation had on patient cost, quality of care, and access 
to care, and are there any indications to you that patients are 
better off after consolidation or with that?
    Dr. Gaynor. Thank you, Chairman Harper.
    So the research evidence shows very clearly that 
consolidations between hospitals that are close competitors 
lead to very substantial price increases. Depending on the 
exact situations, it could be as high as 50 percent but not 
all.
    For insurers, again, there's extensive evidence that 
consolidation among insurers leads to higher premiums, and for 
physician practices, again, consolidation between physician 
practices that are close competitors lead to higher prices, in 
some cases substantial. And last, the acquisitions of physician 
practices by hospitals lead to higher prices for physician 
services and more spending.
    The evidence on the quality of care, I would say, is mixed. 
But overall it does not show gains for patients in terms of 
quality of care.
    If anything, there is some evidence that shows that 
clinical quality of care for patients can suffer when there's 
less competition between hospitals or doctors, and we do not 
see, again, consistent evidence of more coordination of care or 
lower costs of care.
    So this harms patients, first, because the costs of care 
are higher. As we know, that when the costs of care get higher, 
employers pay higher fringe benefit costs, and those get 
shifted back onto workers in the form of lower total 
compensation, whether it's lower wages, paying more out of 
pocket for health insurance or having less generous health 
insurance. The average American household hasn't seen an 
increase in their real standard of living--that of healthcare 
costs--in quite some time.
    So it doesn't appear on average that there are benefits 
that are being realized, and there are real costs.
    Mr. Harper. Thank you.
    And Dr. Dafny, should we be concerned about the increased 
numbers of consolidation in the healthcare industry?
    Dr. Dafny. Chairman Harper, thank you for the question.
    Given the data that Professor Gaynor has just described and 
that is described in our testimony, I would indeed be 
concerned, on average.
    I keep adding the ``on average'' because every 
consolidation needs to be considered on its merits, and there 
are a number of consolidations that are occurring right now 
that are pretty novel and I wouldn't propose that those be 
quashed just because on average consolidation hasn't----
    Mr. Harper. Sure. So you can point to some successful 
outcomes of some of these consolidations. Is that what you're 
saying?
    Dr. Dafny. I would like to be able to point to some 
successful consolidations. I co-authored a paper with a 
physician friend of mine, Dr. Tom Lee, called ``The Good 
Merger,'' about what would be the characteristics of a good 
merger and I am often asked, ``Can you spotlight one for us?,'' 
and I am searching still for a very nice example of it.
    But I am sure that they exist.
    Mr. Harper. Would the criteria be--as we look at these and 
try to see whether they are positive or negative--is it better 
outcome for the patient? Shouldn't that be at the heart of 
whether it is successful or not?
    Dr. Dafny. At the heart of whether it is successful, you'd 
have to consider multiple dimensions. I would certainly place 
patient outcomes at the top of the list. But it wouldn't be the 
only dimension I would score it.
    Mr. Harper. Cost possibly?
    Dr. Dafny. Cost would be pretty significant, and not just 
the cost to the hospitals themselves but the prices that they--
whether they pass through any cost savings.
    Mr. Harper. Do you believe that the consolidations will 
continue to increase in the future?
    Dr. Dafny. Undoubtedly.
    Mr. Harper. OK. Is there any type of healthcare 
consolidation that we don't know enough about to determine its 
impact on patients?
    Dr. Dafny. We don't know enough, in my view, about the kind 
of consolidation across the care continuum, if you will. In 
theory, if you combine hospitals and physicians and post-acute 
care providers and perhaps even some pharmacy elements, you 
might get an integrated package product that could be superior 
to the piecemeal approach that we have.
    We don't know enough about whether that is likely to work 
and also whether the markets are competitive enough that the 
price of that product would be affordable for the value.
    Mr. Harper. Thank you very much.
    At this time, the Chair will recognize the ranking member, 
Ms. DeGette, for 5 minutes for questions.
    Ms. DeGette. Thank you so much, Mr. Chairman.
    Dr. Dafny, I know the members of this subcommittee would 
love to have a copy of your paper, ``The Good Merger.'' If you 
could provide that to us, that would be great.
    Dr. Dafny. With pleasure.
    Ms. DeGette. Thanks. And then we'll help you continue to 
search for a good example.
    As I said in my opening statement, my colleague, Tom Reed, 
and I have been looking into insulin prices, and I think that 
our investigation, the facts we've learned, have broad 
implications from the consolidation issues here today.
    For example, the three largest PBMs control over two-thirds 
of the prescription drug market, and Dr. Dafny, you noted in 
your prepared testimony that consolidation enables PBMs to 
improve their bargaining position with drug companies.
    But wouldn't it be fair to say that PBM consolidation also 
might likely result in increased prices for prescription drugs 
like insulin?
    Dr. Dafny. I would say that we ought to do a merger 
retrospective on the most recent large PBM merger and see how 
that affected downstream prices to consumers.
    But, to the extent that a merger--that we've had more 
consolidation, I would expect, but I haven't seen formal 
statistical evidence to suggest, that prices would rise.
    Ms. DeGette. Dr. Gaynor, I know you have got some expertise 
in this as well. What's your view?
    Dr. Gaynor. Well, I agree with my colleague. I think, just 
as you suggested, Ranking Member DeGette, there is concern. We 
now really only have three PBMs, in effect, in this market, and 
once numbers get that small it is cause for concern.
    But I agree with Professor Dafny. At this point, I do not 
know of direct evidence on that. But it is time for a 
retrospective, and the Federal Trade Commission, of course, has 
authority through Section 6(b) of the Federal Trade Commission 
Act to conduct studies of this sort in the public interest. So 
that would certainly be a beneficial thing to pursue.
    Ms. DeGette. That's a good avenue.
    I mean, in general, if a market becomes too concentrated 
with one provider system, that could potentially lead to 
increases in prescription drug prices. Is that correct?
    Dr. Gaynor. Yes.
    Ms. DeGette. OK. Now, these inefficiencies in the market, 
we think, are also affecting employer-based health insurance.
    Dr. Dafny, you said the consumers in employer-based plans 
need to have more choices. What can we do to encourage that?
    Dr. Dafny. As you are aware, the majority of employers 
offer only one choice when they sponsor health insurance to 
their employees.
    Now, larger employers who employ more than half of 
employees tend to offer a little bit more--two, maybe three 
choices. But that's not a very large set, and therefore they 
tend to cater to the average consumer, don't allow you to vote 
with your feet for the kinds of tradeoffs you want to make.
    What could you do? Well, it is possible to encourage 
employers to offer more choices, particularly through a private 
exchange, which wouldn't be terribly different from what a 
public exchange would be.
    I am not a legal expert as to the mechanisms you would use. 
But there's ERISA. There should be some possibility there. Many 
years ago, it was required to offer an HMO to employees in 
order to encourage that possibility, and one could imagine 
minor tax preferences for the variety that you offer.
    Ms. DeGette. That's an interesting suggestion.
    Dr. Gaynor, back to you. A lot of people have been talking 
about entirely new approaches to providing healthcare to 
consumers, and we are all abuzz here about this news that 
Amazon is making that it's entering the healthcare business.
    You know, I know these ventures are still in their infancy. 
But do you have any thoughts about the potential of Amazon or 
some of these other initiatives to improve the consumer 
experience and bring down costs?
    Dr. Gaynor. Sure. Thank you.
    Let me give one hand, other hand--a typical economist kind 
of response. So on the one----
    Ms. DeGette. We'd be disappointed if you didn't.
    Dr. Gaynor. Right. Harry Truman is reported to say, ``Could 
somebody find me a one-handed economist?''
    So on the one hand--and this is the positive--a very 
positive aspect of this development is that executives at major 
corporations in the United States are paying attention to 
healthcare costs.
    For decades, healthcare costs have been a real issue for 
business in the United States. But, typically, it's the domain 
of human resources and executives. The C-Suite hired management 
really have not paid a lot of attention to this.
    So to have Amazon, J.P. Morgan, Berkshire Hathaway CEOs 
stand up and say, ``This is important, we are going to do 
something,'' is very, very encouraging.
    It's potentially a very innovative thing. I wish it the 
best of success. I hope it succeeds. We need more.
    Having said that, it's not clear to me exactly what they 
would do. Even these companies are small relative to the 
overall size of the system.
    There are very powerful, entrenched providers and insurers 
and pharma companies that can be very hard for any one 
employer, let alone three large employers, to deal with.
    And last, again--this is the other hand here--we have seen 
some of this before. If you've been around long enough--and I 
think I have enough gray in my beard to qualify on that 
account--employers have stood up in public before and said, 
``We are going to be doing something about this,'' and yet here 
we are.
    Ms. DeGette. Yes. OK. Thanks. Thanks, Mr. Chairman.
    Mr. Harper. Gentlewoman yields back.
    The Chair will now recognize the gentleman from Texas, Mr. 
Barton, for 5 minutes.
    Mr. Barton. Thank you, Mr. Chairman, and thank you for 
holding this important hearing.
    You know, there's a saying that people like myself that run 
for public office and have been around awhile kind of live by, 
and it's called ``no good deed goes unpunished.''
    Congress keeps trying to do the right thing in healthcare. 
We've adopted two policies that we thought were positive, but 
in terms of cost they don't seem to have helped much.
    One is we have a Medicare differential reimbursement 
between physician services provided in a physician's office and 
physician services provided in a hospital setting. We pay a 
higher rate because of the increased overhead charges if a 
physician works for the hospital and provides the services in 
the hospital.
    And it appears to me that a lot of these consolidations 
where hospitals are purchasing physician group practices are 
simply to get the higher reimbursement rate. Now, that's a 
simplification but it sure looks that.
    The other program where we've kind of been bitten in the 
bottom is the 340B program. We set up a system for certain 
hospitals that could get a discount under the 340B program. But 
they didn't have to pass that discount on to their patients, 
and we've had an explosion of hospital pharmacies applying and 
being accepted into the 340B program, and the oversight group 
that's supposedly auditing this have admitted that they don't 
have the personnel to really audit the program and that the 
cost of the program is going through the roof.
    So my question is, Would it be practical and possible that, 
if in the case of these physician practices being purchased by 
hospitals, we adopted a regulation or perhaps a statute that 
said Medicare is going to pay the lower of the reimbursement 
rate before the merger, instead of they always pay higher? 
Would that be practical to do something like that?
    Anybody can answer it.
    Dr. Dafny. I am happy to take it, Representative Barton.
    You have described the extended game of whack-a-mole that 
Congress is playing with various healthcare sectors and 
probably other sectors as well, and I want to return--I will 
answer your question, but I want to return to the point before. 
If we had a competitive downstream market, you might not have 
to play that game as much because market forces would walk away 
from health plans that overpaid for the same service rendered 
in a hospital than in a lower-cost site of service.
    So the original program was designed to cover costs, and 
hospitals are more costly and so you paid them more. But as you 
have noted, now it's being exploited.
    It's my understanding that Medicare has in place the policy 
already for future acquisitions to not be able to bill at the 
hospital rate, but to bill at their initial rate or the lower 
rate.
    The real question, I think, is about rolling back. Do you 
say over a certain period of time we are going to move towards 
site-neutral payments so as not to continue to encourage more 
spending in this inefficient way but recognizing that hospitals 
have revenue streams and employment and other things, so 
recognizing there may need to be some other form by which 
hospitals are compensated, but not in a way that distorts their 
incentives of where to supply services.
    Mr. Harper. OK.
    Dr. Gaynor. If I may just add something on top of what 
Professor Dafny said. One thing we see very commonly is that 
there are important spillover effects from the Medicare program 
onto what private health insurers do. And so a lot of private 
health insurers followed Medicare in adopting higher payments 
for hospital-based or hospital-owned practices.
    So the salutary effects of reform to Medicare payment would 
be not just on the Medicare program itself, although, 
obviously, that would be hugely beneficial, but could actually 
have larger effects that would affect what private insurers do, 
because right now private insurers continue with these larger 
payments.
    Then there are still incentives, in spite of what Medicare 
has done for a hospital as to acquired physician practices.
    Mr. Barton. Finally, on 340B, what if we adopted a statute 
or regulation that said whatever the discount is, it has to be 
passed through to the patient?
    Dr. Schulman. I think that would provide a huge incentive 
to go back to a practice model that we had that was much less 
expensive for consumers.
    When 340B was passed in 1992, there were 90 safety net 
hospitals that were eligible. There are now over 2,000 
hospitals that are eligible.
    Drugs, expensive medications, in 1992 were hundreds of 
dollars. They are now $100,000, and so, you know, if you can 
make $25,000 per drug on this discount, it's just a tremendous 
incentive to distort the market.
    Mr. Barton. I know my time had expired. But let me ask Dr. 
Dafny: Baylor Scott & White merger--good or bad?
    Dr. Dafny. You know, I am under oath. But also, I don't 
have evidence. I do have a quote, though--a paraphrase of a 
quote. I was surprised to read the CEO in charge of the 
transaction after the fact said, ``Well, once we are merged, we 
are going to figure out what efficiencies might be there.''
    In my world, I prefer you to consider that before you make 
a deal like this.
    Mr. Barton. Well, they're both in my district, you know, 
when they were separate. Now that they're merged, the biggest 
hospital actually in my district is the Baylor Scott & White 
Hospital in Waxahachie, and everybody loves them.
    With that, I yield back.
    Mr. Harper. The gentleman yields back.
    The Chair will now recognize the gentleman from New York, 
Mr. Tonko, for 5 minutes for questions.
    Mr. Tonko. Thank you, Mr. Chair, and welcome to our 
witnesses.
    I would like to start with the consolidation of providers 
and how that affects consumer prices.
    Dr. Dafny, in your testimony you state, and I quote, 
``horizontal mergers of competing healthcare providers tends to 
raise prices.'' And it's not just hospitals. You note that 
physician market concentration has also led to higher prices.
    Dr. Dafny, can you briefly explain how these different 
types of mergers can have harmful effects as they relate to 
consumer prices?
    Dr. Dafny. OK. So on a hospital side, let me start with 
that.
    On the hospital side, hospitals have bargaining power vis-
a-vis the insurers if they're unique in some way such that 
excluding them from an insurer network would force the insurer 
to have to lower premium or not be able to make sales.
    If two competing hospitals that are attractive to enrollees 
and are substitutable for one another decide to merge, then the 
insurer can't play them off against each other when negotiating 
rates.
    The insurer is likelier to need to include that joint 
entity in the insurer network, and therefore they can bargain 
for a higher price. Higher prices for healthcare services are 
then likely to be passed through as higher premiums.
    In the case of physician practices, there are a few 
different factors at play. Often, that's more of a vertical 
transaction upstream. The hospital is acquiring the physician 
downstream for a variety of reasons.
    One is, as Representative Barton was talking about, in 
order to be able to charge higher prices because the physician 
is now affiliated with a hospital, and that's just kind of a 
mechanistic element of Medicare and of other private insurance 
programs.
    Another motivation can be to funnel more physician 
referrals upstream to your hospital. And then finally, to the 
extent that there's a horizontal element, so now you have many 
more, say, of a specialty group, you can do the same thing. 
Negotiate to have that cardiology group included in an 
insurance network, they can charge a higher price, and there is 
evidence that I cited here that there are higher commercial 
insurance prices as a result of hospital acquisitions of 
multiple physicians.
    Mr. Tonko. Thank you. Thank you.
    When providers merge, they often cite the potential to 
leverage their combined size to reduce costs. However, Dr. 
Dafny, you have explained that there actually isn't much 
evidence to support this theory in practice.
    So why is that, and why are there insufficient incentives 
for providers to drive down costs?
    Dr. Dafny. So, I might aspire to reduce my costs following 
a merger. But at the same time, if I gain market power, I am 
going to have less of a market incentive to be efficient and be 
able to bring my price down. So there's less incentive to 
achieve it.
    And then it's quite possible that there's a lack of know-
how to get it done. I do cite one study by a student of mine 
who finds some cost reductions when a hospital system out of 
the area of another hospital acquires the target and can bring 
costs down.
    However, my own research shows, using a similar sample, 
that they bring prices up if they acquire a hospital in the 
same State. So even if costs go down, those don't seem to be 
passed through to consumers, and most studies don't find 
evidence that costs do go down.
    Mr. Tonko. OK. And again to Dr. Dafny, is the Medicare 
program particularly vulnerable to some of these problems, or 
do we see this in private insurance plans as well?
    Dr. Dafny. Medicare, as you know, has administered prices, 
so they're not as vulnerable to the post-merger price 
negotiations. But if you eliminate your rivals, then you also 
eliminate or reduce the incentive to compete on other 
dimensions that patients value.
    So that's one point. The second point is that, of course, 
Medicare has its rules that we discussed that reward certain 
kinds of consolidation, and so they'd be vulnerable in that 
respect as well.
    Mr. Tonko. Thank you.
    And with the time that I have left, I would like to turn to 
consolidation amongst insurers and how they tend to raise 
premiums.
    You did a study of what we call mega merger and found that 
premiums increased not just for enrollees of these insurers but 
even for enrollees of rival insurers.
    Can you tell me how these sorts of mergers can have that 
ripple effect throughout the insurance market?
    Dr. Dafny. Absolutely. It's what you'd expect in any 
oligopolistic market where there are just a couple of 
competitors.
    By merging, you're able to raise your price, because those 
customers who really like the product that you're offering 
can't get one from your substitute, assuming you merge with a 
substitute, and then that relaxes price competition for your 
rivals.
    So it's kind of a double whammy. It is not just when 
hospitals merge, say in a raised price, it's not just their 
prices that go up. It spills over to others in the marketplace.
    Mr. Tonko. Thank you very much, and with that I yield back, 
Mr. Chair.
    Mr. Harper. The gentleman yields back.
    The Chair will now recognize the gentleman from Virginia, 
the vice chair of the subcommittee, Mr. Griffith, for 5 
minutes.
    Mr. Griffith. Thank you very much, Mr. Chairman.
    Dr. Gaynor, you touched on it a little bit earlier. A lot 
of us have concerns about having only basically three PBMs left 
in the market after all the mergers, and in fact in 2015 at a 
Judiciary Committee hearing, Professor Thomas Greene suggested 
it was time, just as you did, maybe for the FTC to take a look 
at the PBM market and the effects of consolidation. Even FDA 
Commissioner Scott Gottlieb has mentioned in that same hearing 
that he was concerned that PBMs were using their increased 
market power to prevent other market participants from growing 
or merging. So I appreciate your comments this morning.
    And Mr. Chairman, I have and would ask unanimous consent to 
submit a letter I have received from the National Community 
Pharmacists Association outlining their concerns about PBM 
consolidation and the impact it is having on independent 
pharmacists.
    Mr. Harper. Without objection.
    [The information appears at the conclusion of the hearing.]
    Mr. Griffith. Thank you, Mr. Chairman.
    Is there anything you wanted to expand on that before I 
move to the next subject, Dr. Gaynor?
    Well, thank you. I appreciate you answering those questions 
from Ms. DeGette. As often in some of these occasions, she and 
I tend to be going after the same area.
    Dr. Dafny, I have a merger that has just occurred. It's a 
little bit unusual because the concerns primarily were, can we 
keep the hospital systems afloat? Two hospitals, East Tennessee 
and Southwest Virginia, merged. We are waiting to see if costs 
go up. People are very concerned about it. It just happened--
finalized last month. They are now Ballad Health. I would love 
to see your article on the good merger so I can start looking 
at some of those numbers.
    But the concern there was one of the hospitals actually 
went under in one of the two systems. They're two fairly large 
systems, by our standards in rural America, that merged. I 
think they have 21 hospitals now.
    So they're pretty good-sized. They're hoping they can stay 
afloat. That was our concern. It wasn't for financial reasons, 
that they were going to make more money. It's can they survive. 
Any comments? Do you know anything about that merger?
    Dr. Dafny. If I may, I am familiar with that transaction. 
In fact, I authored a public comment on it which may have been 
cosigned by my colleague here, Dr. Gaynor.
    Mr. Griffith. Were you pro or con?
    Dr. Dafny. I was concerned.
    Mr. Griffith. OK.
    Dr. Dafny. Concerned because the hospitals sought and were 
granted, as you're aware, a certificate of public advantage 
because the Federal enforcement authorities were concerned that 
there was effectively mergered a monopoly in many of these 
areas.
    And when you say the hospitals did so because they were 
concerned that they would remain afloat, what goes off in my 
head is a bell that says ``price increase, price increase.'' 
How are you going to remain afloat unless you thought your cost 
reductions could be so substantial jointly than apart? You 
might be trying to use your stronger negotiating position to 
wrest higher prices from commercial payers, and that would make 
the economic environment less competitive.
    I am aware the FTC did an extensive investigation, and if 
they had found those cost projections credible, I believe they 
wouldn't have tried to challenge the transaction. So I am 
concerned.
    Mr. Griffith. Yes. A number of my constituents are 
concerned, but we also want to make sure we have hospitals 
because, if you shut one down, it's not like there's another 
one right around the corner. It's usually around a mountain and 
down a mountain and up another mountain before you can get to 
the next hospital, and that creates concerns as well.
    But I appreciate that. Dr. Gaynor, you had something? Or 
Dr. Schulman.
    Dr. Gaynor. If I may just add something. The use of 
certificates public advantage to shield merging parties from 
antitrust scrutiny, I think, is not the right policy. I 
certainly understand the vulnerabilities and the concern over 
communities in these kinds of situations.
    But there are other ways to achieve these goals and, of 
course, as is well known, there is a failing firm defense for 
antitrust scrutiny. So that is taken into account. And the 
concerns that my colleague expressed certainly apply.
    Mr. Griffith. And I appreciate that.
    Dr. Schulman, I want to blow things up. I want you to think 
about it because I don't have time to get an answer per se. But 
I want you to think about ways we can help blow up and make the 
market more innovative.
    I really like that part of your statement and your 
concerns. Telemedicine--I think a big part of that is being 
held back by the CMS payment model and the fact it takes an act 
of Congress to get some new payment arrangements.
    I think we have to take a look at the Stark Act. I have 
rural areas that are underserved, where I have room in a 
nursing home, but they can't set up an opportunity there for 
somebody from the community to come in.
    I know we don't want them colluding on the nursing home 
patient. But we have space there that the community could use 
in an underserved area that we can't because we can't have 
telemedicine in the nursing home for a hospital an hour and a 
half away.
    Can you give us advice--and I am out of time--but can you 
give us advice on what laws we need to change to make the 
system for reimbursement on CMS more efficient to recognizing 
that there are new ways to do this?
    Dr. Schulman. Yes, absolutely. I think we have a limited 
amount of time. But the idea--when I got my licensure in North 
Carolina, they basically explicitly told me unless I saw the 
patient, you know, I would be in violation of the medical 
practice.
    So, you know, that's not the world that we live in today. 
We need to experiment with these kinds of innovation models, 
see which ones work and then deploy them.
    Mr. Griffith. Well, if you have language I would be very 
interested in it because I would like to blow up the way we do 
the reimbursements so we can blow up the medical system and 
make costs come down.
    I yield back, Mr. Chairman.
    Mr. Harper. The gentleman yields back.
    The Chair will now recognize the gentleman from California, 
Mr. Peters, for 5 minutes.
    Mr. Peters. Thank you.
    Just following on Mr. Griffith's comment, in the veterans 
mental healthcare field, I see a huge opportunity for 
telemedicine, and you have got all sorts of issues with 
reimbursements but also with cross-State licensing, and I would 
certainly enjoy working with the gentleman on figuring out ways 
to loosen that up.
    I had some questions about transparency and markets, and 
Mr. Gaynor, you talked about no publicly available data on 
total U.S. healthcare costs and utilization or prices for 
specific services or providers.
    Do you have an idea about the first steps you'd advise 
Congress to take to help Federal and State authorities achieve 
that kind of transparency about cost and quality?
    Dr. Gaynor. Sure. Thanks for asking the question.
    At present, the issue is not that the data aren't there. 
The data exist. We have great data from the Medicare program. 
CMS has done a great job with this. Medicaid resided at the 
State level, and private parties hold the data as well.
    But on the private side, it's not easy to access, and it's 
not easy to access in an aggregate way. So finding a way to 
encourage, support, finance these activities. So one 
possibility, we provide financing for a national data 
warehouse.
    Mr. Peters. But for what? What would it look like? So----
    Dr. Gaynor. Right.
    Mr. Peters [continuing]. You know, I would want to know 
what the money was being spent on.
    Dr. Gaynor. Of course. Of course.
    So one question is, What is actual total healthcare 
spending for the United States at any given point in time? 
Right now, we rely on estimates done very skilfully by the 
national health expenditure accounts at CMS. But they don't 
actually have comprehensive data from the private side.
    So for Congress and the U.S. Government, just knowing what 
that is, drilling down into those data, knowing what various 
things cost, being able to compare Medicare, private, Medicaid, 
and various issues. For businesses, being able to get that 
information. It's surprising, but many businesses don't know 
what things cost, let alone individuals.
    Mr. Peters. Well, with regards to that side of it rather 
than the regulatory side of it, which is sort of these 
aggregates you describe, can we expose the markets to this 
information in a way that helps consumers and users make better 
choices?
    Dr. Gaynor. Well, sure. The saying ``a little sunshine can 
be the best disinfectant'' I think is very real, and I can give 
my hometown of Pittsburgh as an example. We know that we have 
UPMC dominating the entire market, but nobody knows actually 
what the prices are for anything. My colleagues, Zack Cooper 
and Stuart Craig and John Van Reenen, studied this issue using 
data from about a third of all people with private health 
insurance in the United States, and we found huge amounts of 
variation for simple things like an MRI of your knee--600 
percent variation in a geographic market, but nobody knew that 
before.
    Mr. Peters. And Dr. Dafny, I guess you had some comments 
about this, too, with respect to information about ownership 
and financial links.
    Dr. Dafny. I do, and I have a bit of a response to your 
preceding question, if I may. Two acronyms--APCD and HPC. So 
the----
    Mr. Peters. Air Pollution Control District? Sorry.
    [Laughter.]
    Dr. Dafny. Probably not an exclusive acronym.
    Mr. Peters. Right.
    Dr. Dafny. All Payer Claims Database and the Health Policy 
Commission. So my new home State of Massachusetts--I've only 
been there a year and a half--uses its All Payer Claims 
Database to create summary measures across different hospitals 
of average commercial prices, and not just for certain kinds of 
procedures but also for an entire patient life that is 
attributed to a given system of care. So this State has decided 
to take the data that it has access to and put out transparent 
reports on it, which enables the public to weigh in on all 
sorts of consolidation, both one that the dominant system 
partners were trying to do a couple years ago--everybody used 
the HPC data to make their public comments and such, the deal 
did not happen--and right now there's another big deal that is 
under consideration, and many parties are using the data that 
the HPC put out to try to assess that transaction.
    So I think making the data available possibly through an 
All Payer Claims Database and possibly through State agencies 
who are responsible for monitoring, including notifications of 
material transactions, which is what the HPC does.
    Mr. Peters. So assuming that we have additional 
consolidation, though, any thoughts on exposing prices to 
consumers that can help them? Is there an example of someone 
doing that well?
    Yes. I got four seconds.
    Dr. Gaynor. New Hampshire. Well, I agree with what 
Professor Dafny said about Massachusetts. They've done a great 
job, not just assembling the data but using it in a meaningful 
way and bringing it to bear.
    New Hampshire also has an All Payer Claims Database, and 
there is some recent evidence on that by a young scholar named 
Zack Brown, who's joining the Economics Department at the 
University of Michigan, that shows that consumers actually did 
use the All Payer Claims Database for shopping, and it did 
drive prices down, and further, that providers responded to 
that because they knew there were some people out there 
looking. You don't have everybody in the market informed--just 
enough so that sellers know that somebody might not come to 
them if the price isn't competitive.
    And it did have impacts, but I think we are still in the 
infancy of these things.
    Mr. Peters. Thank you. My time is expired. Thank you, Mr. 
Chairman.
    Mr. Harper. The gentleman yields back.
    The Chair will now recognize the gentleman from Texas, Dr. 
Burgess, for 5 minutes.
    Mr. Burgess. Thank you, Mr. Chairman.
    Well, as you might imagine from my opening comments, I am 
interested in one of the things that's kind of been left out of 
this discussion, is physician ownership of facilities.
    And we live in a world where, unfortunately, it is possible 
for hospitals to own doctors but it is not possible for doctors 
to own hospitals, at least it hasn't been since March the 19th 
of 2010, when the Affordable Care Act was signed into law.
    So having come from a world--my dad started a physician-
owned hospital. It was in a pretty rural area of north Texas. I 
don't think there would have been a hospital there if he and 
six or seven of his partners had not decided to take the 
financial risk and do that. So I think there was a positive 
aspect to that as far as the delivery of care.
    But have we really gone to the point where no longer is it 
reasonable, feasible, or desirable for physicians to own the 
facilities in which they practice?
    And I will ask everyone that question. So, Dr. Gaynor, 
we'll start with you, and then we'll come down the line.
    Dr. Gaynor. Well, as you know, historically, physicians did 
own lots of hospitals, particularly smaller ones in rural 
areas, and that changed over a long period of time for a 
variety of reasons.
    I don't know specific evidence on the impacts of physician 
ownership, in part because, as you said, it's so rare. But 
there is some evidence on a related area having to do with 
ACOs, and it seems that physician-led ACOs do tend to be more 
effective than in hospital-led ACOs.
    So I don't want to make a great leap from there to 
physician ownership of all kinds of facilities, but that might 
suggest that there could be some gains from that.
    I think we want think carefully about this, but I don't 
know that it's sensible to completely exclude a large group of 
knowledgeable participants in the healthcare system from 
engaging in a certain way and possibly doing some innovative 
and beneficial things.
    Mr. Burgess. Yes, I agree with you. It makes no sense by 
virtue of the academic degree that I hold, I am excluded from a 
certain type of business process, but lawyers and even 
registered nurses could engage in that practice.
    Dr. Dafny, do you have anything you'd like to add?
    Dr. Dafny. I concur with Dr. Gaynor on this. I would say 
that I am aware of the moratorium on physician-owned specialty 
hospitals that would limit competition in the marketplace and 
so, all else equal, is likely to lead to worse service and 
higher prices.
    That said, I would say two things. One is that I am 
concerned about self-referrals, not just in that context, in 
general. So one would want to have controls in place to try to 
address that.
    The second is that there is research--it's not at the top 
of my head now--that suggests some cream skimming. You would 
typically want to send the cases that are riskier to a full-
service hospital.
    So I would just say--so I wouldn't be surprised if that 
were true, and that might well be really efficient. I would 
just say that then we ought to make sure that there are 
mechanisms to reimburse the hospitals appropriately.
    Mr. Burgess. I would just--and I do refer you to the 
article from Health Affairs from 10 years ago, because it is so 
well-written and so concise and puts the argument forward so 
reasonably--but I will just tell you, from my own experience, 
if I had a relatively minor case to do on a Friday morning, if 
I scheduled that in the hospital, I would be behind an 
orthopaedic procedure and possibly some other procedure and 
then, by golly, if I didn't start by noon or 1 o'clock, I could 
get bumped from an appendectomy in the emergency room, and I 
might spend all day waiting to get that case done.
    If it's scheduled at a physician-owned outpatient center--
``Doctor, we are glad to see you, your case is ready''--and 
literally before I've done the dictation on the first case, the 
next case is ready to go.
    So when time is so critical, if I've got a case that 
reimburses at a lower rate--say, it's a self-pay or Medicaid 
patient--do I want to go to the facility where I am going to 
burn all day waiting to get it done, or do I want to go to the 
facility where it's going to be done quickly and then I can get 
onto the next?
    So Dr. Schulman, I've come to you with the time I have 
left.
    Dr. Schulman. Yes. So I think at some level the 
generalization of this is a broader question: What's the 
optimal structure of the delivery system?
    You know, if we go back 20 years ago, this hearing would 
have been about how do doctors and insurance companies work 
together to keep patients out of hospitals. We spent a decade 
working on that.
    Our rhetoric has changed, and we are worried about now the 
tremendous costs that are coming from thinking about healthcare 
being centered in hospitals.
    And so maybe the pendulum has really swung way too far, and 
the way we can save money for Medicare and everything else is 
by addressing utilization, paying freestanding physicians to 
keep patients out of hospitals, and the big challenge is now 
the capital that's required to do all these things with the 
regulatory controls, with electronic health records and 
everything else, is very rarely available to individual 
physicians.
    Mr. Burgess. And then the other thing that's left out of 
this discussion is the advancing complexity of what we are able 
to do, tools that are available today that people hadn't even 
thought of 20 or 25 years ago when I was in medical school. It 
is indeed a new world, and in some cases it's very expensive. 
But I, for one, am grateful some of those things are available.
    Mr. Chairman, I will yield back and thank you for the 
recognition.
    Mr. Harper. The gentleman yields back.
    The Chair will now recognize the gentlewoman from Florida, 
Ms. Castor, for 5 minutes.
    Ms. Castor. Thank you, Mr. Chairman, and thank you to the 
witnesses who are here today.
    I would like to start by addressing an implication that was 
left, and I just want to make sure the record is clear. We've 
heard an argument that the 340B program, which helps bring 
vital medications to the country's most vulnerable patients, 
has somehow caused consolidation in the healthcare industry, 
and since we are citing Health Affairs articles I wanted to 
make sure for the record we cite the 2017 Health Affairs 
article that found little evidence that the expansion of 
hospital 340B eligibility contributed to hospital acquisitions 
of physician practices.
    Instead, researchers found that the increase in 
consolidation trends were tied to much broader trends, and I 
think that is clear and you don't have to be a healthcare 
expert to understand that.
    But I wanted to ask you, Dr. Gaynor, considering that 340B 
is such a small portion of the overall healthcare sector in 
America, isn't it fair to say that there are larger market 
forces at play that are driving hospital consolidation?
    Dr. Gaynor. Thanks for the question.
    Certainly, with regard to hospitals. With regard to 
physician practices, the effects--you're correct--are not going 
to be broadly across physician practices, because it doesn't 
touch all kinds.
    But oncology in particular, there is evidence that the 340B 
program does lead to consolidation, and I think the issue has 
been not about the program itself--I think it's broadly agreed 
it's a beneficial and important program--but really how the 
payments should be structured.
    Ms. Castor. And I think we all agree on greater 
transparency would be beneficial. But I just wanted to make 
sure that the implication was not left that 340B is the large 
driver of hospital consolidation. And yes, we have some issues 
involving oncology practices with----
    Dr. Gaynor. Yes. Yes, indeed.
    Ms. Castor. OK.
    Dr. Gaynor. Agreed.
    Ms. Castor. So, as we consider the trends of consolidation 
in healthcare overall, it is important to keep the focus on the 
patients and any cost savings that can be achieved and that 
these consolidations are not going to cost consumers more.
    So my takeaway from your testimony today is there's not a 
lot of evidence that demonstrates that mergers are resulting in 
improved care and cost savings.
    Dr. Dafny, you said you're still searching for examples of 
where consolidation has helped improve the quality of care 
overall, and you note that generally one of the arguments in 
favor of mergers is that they should enable more integrated 
care, which has been a goal of overall healthcare reforms, and 
that's rather appealing. That's an appealing argument.
    What does the research say about how effective mergers have 
been in improving integration of care, and why?
    Dr. Dafny. Thank you for the question, Representative 
Castor.
    When it comes to looking for a good merger, I am looking 
for one that's good on potentially multiple dimensions. So 
quality would just be one of those dimensions--better quality, 
but a huge price increase may not be worthwhile.
    You asked about whether mergers have led to more integrated 
care, and I will tell you that I have not seen research that 
has addressed that question directly, apart from when hospitals 
acquire physicians--and to the extent that you might think that 
physicians then would try to keep patients out of the hospital, 
and the hospital would be compensated for that somehow through 
the joint venture because they would be bearing some of the 
total risk for the span of that population--you might think 
spending would go down, and that is not what has happened. So 
to the extent that that's a measure of what the impact is of 
mergers on integrated care, then it's not very positive.
    I will add that, if you thought that these mergers were 
about integrating care, you ought to see a lot more across 
different kinds of providers than the same old provider but in 
lots of different areas or next door.
    Ms. Castor. OK.
    Dr. Gaynor, could you speak a bit further to this 
distinction and explain why benefits integration may help or 
hurt consumers?
    Dr. Gaynor. Sure. Well, just to follow up on this, 
consolidation is not integration. The acquisition--its 
transactions are very involved, they're a big deal, but in some 
sense, that's the easy part. Once the acquisition has happened, 
bringing the two entities together and integrating is really 
hard and, unfortunately, we have just not seen that.
    So why don't patients see the benefits of this? As my 
colleague just said, we don't tend to see more integrated care. 
We don't tend to see higher quality. So it just hasn't tended 
to be there for patients to realize, and informally one thing 
that market participants have said is the following: Raising 
prices is easy, lowering costs is hard. And there's a lot of 
truth to that. Driving down costs, integrating care, improving 
the quality of care is actually really, really hard work. It's 
not easy.
    Whereas, if one obtains a better negotiating position, then 
going around and getting a higher price is substantially easier 
than that.
    So, unfortunately, I think that the payoffs and the 
incentives move in such a way that they've led market 
participants to take the high prices and not do the hard work.
    I do want to be clear, though. This is not every 
transaction. I am not characterizing every transaction this 
way. I feel that there are good mergers out there, as well, 
but, again, maybe we'll find one one of these days, but I can't 
point to one specifically.
    Ms. Castor. Thank you very much.
    Mr. Harper. The gentlewoman yields back.
    The Chair will now recognize the gentleman from New York, 
Mr. Collins, for 5 minutes.
    Mr. Collins. Thank you, Mr. Chairman. I want to thank our 
witnesses. I think there's a lot of agreement across the board 
and concern about consolidations and the like not having the 
impact we wanted on healthcare cost.
    But back to a good merger. I have a very rural district--
you know, eight counties with a declining population, thanks to 
our Governor. We keep losing people in New York.
    So we look for a good merger. I have four, five, or six--I 
am going to call them a merger, I don't know, merger versus 
acquisition--but rural hospitals that, frankly, would have gone 
out of business had they not merged with a much larger 
healthcare system, either the city of Buffalo or city of 
Rochester, which reached out, took, in many cases, ownership 
and bought the hospital short of that hospital shutting down, 
and in doing so also were able to then extend orthopaedic 
services, cardiology services that, frankly, that small rural 
hospital wasn't even able to provide beforehand.
    So when you say we are searching for a good merger, isn't 
that an example of a good merger, having a large healthcare 
system buy an effectively bankrupt rural hospital that was 
unique but, frankly, was not offering a full menu of services?
    Dr. Dafny. It might well be. I would say that only a tiny 
fraction of mergers generate competition concerns. Fewer than 3 
percent trigger FTC investigations.
    So when I say I am looking for examples, it's because case 
studies have yet to be published to consider all the factors. 
Just keeping a hospital open in and of itself is not enough, in 
my view, for it to be good if that was realized, again, through 
price increases that made healthcare less affordable for people 
in the region.
    So I would need to do a more thorough analysis to address 
your question.
    Mr. Collins. Well, I know you're from Boston and nothing--
not putting it aside, if you get out to rural America, and it's 
a 2-hour drive--2 hours from, you know, Wyoming County or 
Orleans County, New York, into the city of Buffalo, and there's 
a single hospital and, literally, because of a decline in 
population, whether it's the number of births or otherwise, 
they don't have the ability to drive that revenue and certainly 
not provide, you know, the oncology, the cardiology services, 
to suggest you can't see a benefit when--if that hospital shuts 
down and those people have to drive an hour and a half to the 
next hospital--I am a little bit dumbfounded that you can't see 
the obviousness of that. And not to be insulting, unless--I 
mean, Boston, you can get your--other than the traffic--so I am 
truly concerned you can't see the obviousness of that benefit.
    Dr. Schulman. Yes, I think--I think we've all said, you 
know, each of these has to be examined on their own. North 
Carolina is facing a lot of the same issues. We are losing 
hospitals in all the rural counties, the same way in Virginia.
    But at the same time, you have to look at what's happening 
to the behavior of the consolidating systems. We are debating 
right now a merger of two very large systems. The rationale was 
they're going to improve access to rural healthcare, but 
there's really actually no evidence that in fact the planning 
is there.
    If in fact they don't do that, after the mergers there's no 
recourse, and we have talked about a certificate of public 
advantage. One of the hospitals that has operated under 
certificate of public advantage for a long time was Mission 
Hospital in Asheville, North Carolina. That certificate of 
public advantage is now expired, and the first thing they did 
was terminate their contract with the largest insurer in asking 
for rate increases.
    So, you know, I think each of these markets has to be 
looked at separately. So there are advantages, and rural 
healthcare is a huge challenge. Some of that is because the 
hospitals in the city offer much higher prices--salaries to 
their starting docs.
    Dr. Dafny. I mean, I will add to that, if I may.
    The technology of healthcare has changed. It used to be the 
case there wasn't much you could do for patients except for put 
them in the nearby hospital, quarantine them, and comfort them, 
and so every area had one.
    But as now we've grown more specialized, it may well not be 
an interest of those patients to have orthopaedic advanced 
cardiology, oncological services at low scale. So just to say 
that the hospital is open and has expanded services, as I said, 
wouldn't be enough for me to assess whether that----
    Mr. Collins. Well, so, again, not to belabor the point, but 
what they've done is, they'll send an orthopaedic one day a 
week to that rural hospital now that the patient's--you know, 
whether it's a knee or a hip--can now see a doctor 10 minutes 
away and not 2 hours away.
    So, again, not to be confrontational, but for somebody that 
lives in a very rural area as I do, we can't get hung up on--
you know, what's the price if there is no service? You know, 
talk about, you know, you can't put a price on that when there 
is no service.
    So I think you should look more into these rural--call them 
mergers or acquisitions--because in my case, it's that or 
nothing.
    So thank you very much. I yield back.
    Mr. Griffith [presiding]. The gentleman yields back.
    I now recognize Ms. Schakowsky of Illinois for 5 minutes.
    Ms. Schakowsky. Thank you. I want to apologize to our 
witnesses and just say I am the ranking member on another 
subcommittee, so I had to be there.
    Let me just say, or maybe just ask, I mean, I am assuming 
that when we are talking about rural hospitals that those 
States that have expanded Medicaid, that that has been helpful 
in many communities that would otherwise be underserved.
    Does anybody just want to say anything to that? I don't 
know. OK. You don't have to.
    All of you have acknowledged that we've seen rapid 
consolidation in hospitals. Specifically, this trend has 
resulted in a 22 percent increase in religious hospitals 
between 2001 and 2016. I don't know if research has been done 
on this, but this is a big concern for me. As we see more and 
more religious hospitals merge with nonreligious hospitals, 
many times the nonreligious hospitals are forced to observe 
religious prohibitions, particularly restrictions limiting 
access to a full range of reproductive services by denying 
abortion care, birth control, fertilization treatment, and I am 
concerned that consolidation limits access to reproductive 
care, particularly for women, communities of color, and LGBT 
people.
    Currently, one in six hospital beds are subjected to 
religious restrictions. Because hospitals treat the most 
serious health conditions like women suffering from 
miscarriages or ectopic pregnancies, I worry that accepting 
these restrictions in consolidation are causing hospitals to 
put business considerations before comprehensive patient care.
    So my question--anyone could answer--Dr. Dafny listed it as 
someone, but anyone can answer--does your work touch on an 
increase in religious and nonreligious hospital mergers 
acquiring, or strategic acquisition or strategic partnerships?
    Dr. Dafny. My published research does not address that. I 
am aware of two findings that are relevant, and I could tell 
you about them.
    One is there is a researcher at Kansas University, David 
Slusky, who has in fact shown that acquisitions of formerly 
nonreligious hospitals by specifically Catholic healthcare 
systems has led to a reduction in this slew of reproductive 
services that you described, would support that concern about 
the availability of those services.
    What isn't known is whether these patients then go 
elsewhere to receive some of those services.
    Ms. Schakowsky. If it's available in their communities.
    Dr. Dafny. If it's available.
    And then the second is in my own study, which is in the 
midst of a referee process, we have a section analysis that we 
did actually comparing the acquisition of hospitals by 
religious versus nonreligious systems, and the price increases 
that we find on average are not present for the acquisitions by 
the religious hospital systems.
    Ms. Schakowsky. Yes, Dr. Gaynor.
    Dr. Gaynor. Yes, thanks. Thanks, Representative Schakowsky. 
That's an excellent question.
    Broadly speaking, when a merger is being considered by an 
antitrust enforcement agency, the questions about impacts on 
consumers and consumer welfare and the points that you raise 
are certainly relevant and should be taken into account because 
price matters a great deal, of course, but what services are 
available to people and where and what the alternatives are as 
well as quality of care are also vitally important.
    Ms. Schakowsky. I hope that will be part of the 
considerations when we look at the issue of consolidation 
because, you know, a lot of people think a hospital is a 
hospital and don't know that the services they may want--they 
may be delivering a baby, would like to have a tubal ligation 
at the same time, find that that is not possible and require 
another procedure somewhere else, if they can possibly get it.
    So what effect do you think these mergers could have on 
access to full range of healthcare services? Do they 
disproportionately affect some groups more than others?
    I mean, I think probably what you have said would agree 
that, obviously, women, but I think it's also often people of 
color and LGBTQ community.
    As we think about ways to evaluate these mergers, then I am 
assuming that you all agree that other factors should be 
considered to ensure the full range of services that are 
maintained for reproductive health, and are there any red flags 
that would indicate the consolidation would result in reduced 
access to reproductive health services. I think you answered 
with the Kansas study. Any comments on that?
    And so let me ask this, then: What steps can we take to 
incentivize that a full range of reproductive healthcare 
services are maintained?
    Dr. Schulman. You know, I think we talked a little bit 
before about the organization of care, more generally, and at 
some level one of your questions is, you know, why are we 
organizing all the care around hospitals, especially women's 
services, which can be done in ambulatory settings, can be done 
in doctors' offices?
    Why did we let them get acquired by the hospital, and so 
how do you have a diversity of services in a community where 
there are different kinds of care models to address the needs 
of the entire population?
    Ms. Schakowsky. If they're available. I mean, we are 
talking about overall access to these kinds of procedures which 
I think lots of women want, and my time is up. But I think this 
cannot be shoved under the table as just another thing, since 
women are the majority of the population.
    And I yield back.
    Mr. Harper [presiding]. The gentlewoman yields back.
    The Chair will now recognize the gentleman from Michigan, 
Mr. Walberg, for 5 minutes.
    Mr. Walberg. Thank you, Mr. Chairman, and thanks to the 
panel for being here.
    Dr. Gaynor, on September 9th, 2011, the Ways and Means 
Health Subcommittee held a hearing on healthcare industry 
consolidation. You were a witness at that hearing.
    You testified on some of these issues and on consolidation 
since that time. What's changed in these last 7 years? Give us 
some hope.
    Dr. Gaynor. I have more gray hair.
    Mr. Walberg. At least you have hair.
    [Laughter.]
    Dr. Gaynor. Thank you.
    Mr. Walberg. Be gentle on the rest.
    Dr. Gaynor. So, yes. Unfortunately, I reviewed that 
testimony while preparing for this hearing, and I wish I had 
good news. But if anything, I would say that consolidation has 
accelerated.
    One might wonder, actually, how hospitals or doctors or 
insurers are finding anybody left to consolidate with. Almost 
30 percent of all hospitals have been involved in one or more 
transactions. But it's accelerated, and, like I said, I think 
we are finding a lot of insurance markets, hospitals, physician 
practice markets that are more and more concentrated, so there 
becomes less and less choice and less and less competition,
    And 7 years ago, I think, we were hoping, again, that we'd 
see some of this consolidation would lead to integration, lead 
to some new innovative forms of organizations and delivery, and 
as my colleagues Dr. Schulman and Dr. Dafny have said, we just 
haven't seen that. There are a few instances here and there, 
but it just hasn't happened.
    So I guess I will put the dismal in the dismal science, 
being an economist, and things have gotten worse, not better. I 
wish I could report differently.
    Mr. Walberg. At least I don't feel out of the normal, then. 
In my district, I can't think of a hospital that hasn't gone 
through some type of consolidation. All across my seven-county 
district and even with the medical practices, individual 
doctors, they're consolidating together in their own clinics, 
creative, until they get pulled into a hospital.
    One concern that we've heard is that regulators only 
scrutinize consolidation when a single proposed merger is seen 
as large enough to attract attention based on how consolidated 
the market will become if it goes through. The issue, however, 
is that a large number of small mergers and acquisitions might 
not attract Government attention but eventually may limit 
competition in the market.
    So, Dr. Gaynor, is it true that some physician acquisitions 
may be so small that Federal antitrust enforcers might not even 
know about increases in provider concentration in some markets?
    Dr. Gaynor. So thanks for the question.
    Yes, that's certainly possible, because they're small 
enough that there's not mandatory reporting requirements under 
Hart-Scott-Rodino acquisition law.
    But I think it's important to be aware that the agencies 
scrutinize these things, that they look for reports in the 
media, that they're actually market participants that report on 
things that seem troubling to them, and the number the FTC, for 
example, has pursued, physician consolidations--one in 
southeast Pennsylvania recently, another out on the West 
Coast--that did not meet the reporting requirements were 
relatively small.
    There is a very tough issue about that you just identified. 
What happens if the initial acquisition is not that big? It 
doesn't look troublesome, and then the next one and the next 
one. But then, unfortunately, you have got a problem.
    Mr. Walberg. Especially as you think of rural areas, as my 
colleague mentioned.
    Dr. Gaynor. Right. Right. Again, rural areas have their own 
special qualities. We do want to make sure that folks that live 
there have access to the kind of care that they need at a 
reasonable price, but we do have to be concerned about untoward 
effects there.
    So I think that looking at potential competition impacts is 
important. But I will be honest, that's challenging. We don't 
want to deny acquisitions or mergers that are potentially 
beneficial, and we don't want to get overly speculative.
    But these things do need to be taken into account. Now, 
ultimately the courts--if you go to court on this--are the 
arbiters on this, and I think that's actually in reality a very 
tough standard with the courts.
    Dr. Schulman. In our State, North Carolina, there's two 
very large health systems that are trying to merge, and what's 
really remarkable is that no one's in charge of the private 
health insurance market.
    You know, so we have impacts on Medicaid, impacts on 
Medicare, impacts on Blue Cross Blue Shield North Carolina, but 
there's not one office or commission like there is in 
Massachusetts that's responsible for monitoring the market.
    So we are out trying to collect primary data to see what 
the impacts of these mergers might be. The idea of having an 
all-payer database so that you knew that this cardiology 
practice is the only one left in this county and is about to 
get acquired would be really critical information to intervene 
long before you get to the Federal Trade Commission.
    Mr. Walberg. Thank you. My time is expired. I yield back.
    Mr. Harper. The gentleman yields back.
    The Chair will now recognize the gentlewoman from Indiana, 
the chair of the Ethics Committee, Mrs. Brooks, for 5 minutes.
    Mrs. Brooks. Thank you, Mr. Chairman.
    I have a question, Dr. Dafny, because we started to talk a 
little bit about Federal enforcement, and I don't think we've 
talked very much about Federal enforcement.
    In your written testimony, you indicate that Federal 
enforcement authorities have interpreted their enforcement 
authority in such a way that it's limited in scope. And I am a 
former U.S. attorney, not that I was involved in these kinds of 
issues, but something that caught my interest. More 
specifically, you indicated it's difficult to define markets in 
nonhorizontal transactions.
    Do you think we are likely to see more nonhorizontal 
transactions in the healthcare market as the Department of 
Justice and the FTC continue to successfully challenge 
traditional horizontal mergers? Can you talk a bit more about 
the enforcement landscape?
    Dr. Dafny. Absolutely, Representative Brooks. Thanks for 
the question.
    I have great interest in these consolidations and in the 
ability, or rather how limited the ability is, of antitrust 
enforcement to ensure competitive markets.
    As you're aware, antitrust enforcers have very narrow laws 
to enforce, and I mentioned in my testimony and will restate 
here that their interpretation of Section 7, the Clayton Act, 
which is the statute that is used to challenge mergers, is that 
they must define the relevant market in which competition would 
be diminished by the transaction, which, if you don't dwell on 
it too long, sounds like a perfectly sensible thing to do, but 
if you're an antitrust enforcer and you're versed in all the 
judicial precedents, then you realize whatever market you 
propose in one case could affect markets you might propose in 
another case.
    So the Federal Trade Commission has successfully won merger 
challenges by demonstrating that many hospital markets are 
quite small and a merger of rivals in a relatively narrow area, 
even if there are many competing providers in the general 
vicinity, can lead to significant price increases because 
people would like to be able to go to their nearest or very 
nearby hospital.
    When you talk about nonhorizontal, now we are--suppose the 
different hospitals in different towns in a State seek to 
merge, then they arguably would not be in the same relevant 
antitrust market for purchase--for the patients who are going 
to the hospital. But an insurer facing a conglomerate that has 
a substantial presence throughout the State may then have to 
pay a higher price to that consortium of hospitals because the 
insurer has a broader market and wants to be sure that it can 
offer multisite employers a comprehensive, broad network.
    So defining the relevant market when it comes to 
negotiating with insurers, that might be different than the 
market that you might use when you're thinking about patients 
accessing hospitals. And as a result, because of the way this 
has been interpreted, the Federal antitrust authorities seem 
very reticent to bring cases that involve combinations across 
different sectors, across different towns.
    Mrs. Brooks. So what type of tools do you think or 
knowledge might be necessary for Federal enforcement 
authorities to, you know, examine these proposed mergers or the 
mergers?
    And I think you mentioned it, the public database. Or what 
are some tools that you think would be helpful?
    Dr. Dafny. I think trying--the bigger mountain of evidence 
that one can build to support that this might be problematic if 
in fact it is will be helpful, which is one of the reasons I 
called for more enforcement-focused research. When I left the 
Federal Trade Commission, it was the first project I started to 
do.
    But there's not such a great volume of people who are 
trying to do enforcement-focused research. So I would put the 
data out there and allocate resources to the authorities so 
they can investigate this. And this is not just in hospitals, 
this is in pharmaceutical companies. If you merge but you're 
not making the same therapeutic line somehow, is competition 
diminished either in subsequent introductions or through the 
prices that you negotiate because you often negotiate with the 
same purchasers? There's a host of crossmarket questions that I 
think need to be investigated.
    Mrs. Brooks. Dr. Gaynor.
    Dr. Gaynor. Representative Brooks, very excellent question, 
and it's a broad issue. It's very important in healthcare. But 
it's important for the entire economy.
    So one thing that can be done and actually needs to be done 
is to revise the vertical merger guidelines. If I recall, and 
my memory is not wonderful, I think they were last revised in 
1984, and it's always been important, but particularly with so 
much consolidation at the horizontal level, the vertical 
issues, in my view, become even more prominent and salient in 
healthcare, but actually much more broadly as well.
    So that's one very concrete thing that can be done and I 
think would help address this issue.
    Mrs. Brooks. Thank you.
    Dr. Schulman, do you have any opinion on it?
    Dr. Schulman. Nothing.
    Mrs. Brooks. Thank you. I yield back.
    Mr. Harper. The gentlewoman yields back.
    The Chair will now recognize the gentleman from Georgia, 
Mr. Carter, for 5 minutes.
    Mr. Carter. Thank you, Mr. Chairman, and thank all of you 
for being here. I have a great deal of respect for your 
academic achievements and for your expertise in this area, and 
I thank you for that.
    There is currently a proposed merger between two companies, 
Luxottica--and they are an Italian company that makes eyeglass 
frames--and another company, Essilor, which is a French company 
that makes the lens itself.
    So here we have a proposed merger between these two 
companies. They will be owning not only the eyeglass frames but 
also the lens, as well, and oh, by the way, they will also own 
EyeMed, which is the second largest vision insurer in the 
country, and oh, by the way, they also own retail outlets such 
as Pearle Vision Center, such as LensCrafters--all fine 
businesses, but now you have this vertical integration, if you 
will, of a company that owns just about everything in that 
area, and now they will have the ability to drive market to 
their different companies.
    I wanted to ask you, Dr. Dafny, from a free market 
principle, does this make sense? I mean, is this the kind of 
thing we need to increase competition?
    I understand that competition dictating healthcare prices 
or corporations that dictate prices because they control the 
market. Which one works better?
    Dr. Dafny. I will be the economist again and say, you know, 
there are two sides of this. But what you described, the 
vertically integrated offering, might well be much more 
efficient than the piecemeal offering.
    So this could be beneficial. The question is, by combining, 
are they somehow lessening competition because might they 
withhold their frames from other purchasers, right?
    Mr. Carter. And that's exactly why I have a bill--imagine 
that--H.R. 1606, the DOC Access Bill, which addresses this, to 
address the free market principles and to have competition.
    Full disclosure: Prior to becoming a Member of Congress, I 
was a practicing pharmacist for over 30 years. I have witnessed 
firsthand the impact that PBMs and the consolidation of PBMs 
and drugs stores have had on patients.
    Now, this is something I--this may be the trainee training 
the trainer here. OK--this is the part that I think that I have 
seen firsthand that perhaps you haven't seen: the impact on the 
patient.
    In my 30 years of practice of pharmacy, I was a retail 
pharmacist and I serviced generations of families--
grandparents, parents, children, and grandchildren--and I've 
seen that, and they've become trustful of me and trustful of 
their community pharmacist, of their independent pharmacist, 
and you build up that relationship.
    And I've had them walk into my business, when I was still 
practicing, literally in tears, saying, ``I've got to go to 
another drug store. My family has used your drug store all our 
lives. My grandparents, my parents, they've used your 
pharmacies. I've used it for my children and for my 
grandchildren. Now I've got to go to another pharmacy because 
my insurance company owns that pharmacy, and they're telling me 
I have to go over there.''
    That's the real-life impact that we see through this 
consolidation. You mentioned before that PBMs control over 80--
there are three PBMs that control over 80 percent of the market 
share.
    Now, if you look at the mission statement of the PBMs, it 
will say that they are there to lower drug prices. I want to 
ask you, How is that working out?
    If it's working out well, Dr. Schulman, why is the 
President identifying escalating prescription prices as being 
one of the things that we need to address in this country?
    Dr. Schulman. I think, you know, we've been talking about 
PBMs a little bit today. This is the least transparent business 
model of any of the things we've been talking about in the 
country.
    So, in 2015, there were approximately $115 billion passed 
back from pharmaceutical manufacturers to PBMs and to drug 
distributors. Some of that was passed back to employers. Almost 
none of that was passed back to consumers.
    Mr. Carter. And do we know how much was passed back to 
employers?
    Dr. Schulman. We don't know.
    Mr. Carter. We don't, because--Dr. Gaynor, you said earlier 
that sunlight was the best transparency out there. It's 
infected out there. We have no transparency. Dr. Dafny, you 
said you were with the FTC. Why does the FTC not look into 
this? Why are they not doing something about this?
    Dr. Dafny. I mean, the FTC has jurisdiction to do certain 
things. They could do a study, and one thing we mentioned was a 
study of the effects of the last transaction that they did not 
challenge, a big merger in the----
    Mr. Carter. And this is getting worse before it gets 
better. Now all of a sudden we see where CVS Caremark is going 
to buy Aetna.
    Dr. Dafny. In fact, your description of the dental 
consolidation sounded very much like that integration.
    Mr. Carter. That was not intentional. But nevertheless, the 
point that I want to make here is that I think the one thing we 
may be missing is the impact it has on patients.
    This does have an impact on patients. When you talk about 
having trust between the healthcare provider and a patient, 
that is invaluable. Between a doctor and a patient, that 
relationship is so hard to build, and yet we have insurance 
company--and listen, I used to call these guys crooks, and I 
still do when I get upset. But they're not really crooks, 
they're smart businesspeople. They're exploiting the system 
that we here in Congress are not doing our job. We are not 
making the changes that should be made to prevent this from 
happening, and it frustrates me.
    Dr. Schulman. Well, we've talked about the impact to 
patients a good bit from a lot of these consolidations. The 
research that we've been talking about in terms of costs and 
quality, most of that used claims data. Very little of that 
actually interviewed patients to see what happens in towns when 
basically they raise the parking price at the hospital to----
    Mr. Carter. And you know it does impact them. It impacts 
accessibility. It impacts compliance.
    Dr. Dafny. I know your time is expired, but I have to say 
this, which is patients are an afterthought when it comes--if 
they even get to be an afterthought--when it comes to 
discussions of consolidation. I've been privy to a number of 
them.
    Mr. Carter. Thank you.
    Dr. Gaynor. Just one last plug to reinforce what you said 
is that all these things interact in a way that makes things 
worse. So the issues with choice of pharmacy are compounded by 
lack of choice, lack of competition in health insurance.
    If folks could say to the health insurance company, ``Go 
take a hike, I will go to another insurer that's offering me 
access to the pharmacy,'' then you bet you'd get access to 
these pharmacies. But if the insurers don't have to compete, 
they won't.
    Mr. Carter. Mr. Chairman, thank you for your indulgence.
    Mr. Harper. Thank you very much. The gentleman from Georgia 
yields back.
    The Chair will now recognize the gentleman from 
Pennsylvania, Mr. Costello, for 5 minutes.
    Mr. Costello. Thank you, Mr. Chairman.
    Dr. Gaynor, during the '90s, the FTC had lost multiple 
hospital merger cases, but since then it appears that they have 
successfully challenged multiple hospital mergers after 
refining their approach.
    Can you describe what the FTC did as a part of this 
retrospective study and how the FTC's approach to hospital 
merger review has changed?
    Dr. Gaynor. Yes. Representative Costello, thank you for the 
question. Good to see a fellow Pennsylvanian here, albeit----
    Mr. Costello. Some people would suggest that western 
Pennsylvania and eastern Pennsylvania, we----
    Dr. Gaynor. Yes. Yes. Albeit from that other part of the 
State.
    Anyhow, yes. So, as you note, the FTC encountered a string 
of losses in the courts in which merging hospitals defended the 
mergers on a variety of bases, either geographic markets that 
were very, very broad so there were lots of potential 
competitors in those supposed markets that were saying, ``We 
are not for profit, we wouldn't do anything naughty.''
    And the FTC, rather than prospectively going after mergers, 
took a break, commissioned a number of studies that looked at 
mergers that had actually occurred--between Evanston 
Northwestern Hospital and Highland Park Hospital in the suburbs 
of Chicago, between a number of hospitals in Wilmington, North 
Carolina, between Summit and Sutter in the Bay Area--and what 
those studies found is that those mergers which had already 
happened, which had been consummated and been consummated for a 
number of years, led to very substantial price increases. I 
think some of the price increases from the Bay Area merger were 
40 or 50 percent or higher--Evanston Northwestern, as well.
    And they didn't stop there. They looked at quality of care 
for patients because that's vitally important, and they did not 
see evidence of improvements and quality of care. Some 
declines, some no change. So what that did is, that gave them 
an evidence base to go into mergers to try and block a merger 
prospectively, which would change the presumption.
    Now, the other thing that happened at the same time is that 
researchers in academia have been undertaking a lot of studies 
because data had become more widely available, and that added 
to the evidence base, as well.
    And then the first merger they went after was a 
retrospective rather than a prospective--Evanston Northwestern 
and Highland Park.
    So that's how they swung things around. It was a concerted 
effort by then-Chairman Ramirez and the staff at the FTC.
    Mr. Costello. Thank you.
    Dr. Dafny, in your testimony you indicated you will expect 
that we will continue to see more consolidation. Why do you 
think we'll continue to see more consolidation? Will we see it 
more, do you predict, in standard horizontal consolidation, or 
will we start to see it more in vertical arrangements?
    Then the final point is if you could lend any observations 
on the health insurance industry and how, either through 
acquisition of assets that then creates an insurance company or 
an insurance company acquiring assets by way of hospital and 
physician practices, what kind of dangers might be inherent in 
that?
    Dr. Dafny. OK. I will try to address those questions in the 
time remaining.
    I believe we'll see more consolidation because the factors 
that are encouraging it don't seem to be changing. I went 
through some of the rewards in my testimony, but include the 
fact that if you merge you often have a better bargaining 
position, can raise your prices. You might be able to reduce 
your costs or think you could reduce your costs, even though 
there's not much evidence that that actually happens.
    And there are some administrative reasons. Medicare and 
private insurers reward certain kinds of consolidations--say, 
enabling hospitals to charge more for the same service that 
might be supplied by a physician independently more cheaply. So 
I think that the factors that are driving the consolidation are 
still present.
    I do believe that, because the Federal Trade Commission, 
the Department of Justice have been pretty active in horizontal 
merger enforcement in healthcare, that we are seeing more 
vertical or nonhorizontal consolidation. You're seeing hospital 
systems merging across different geographic areas, and their 
answer would be ``because we think we can do that, and we think 
we'll be better together,'' and the concern is to the extent 
that they compete, then they might have less of an incentive to 
be better once they've taken out a potential entrant or a 
rival.
    On the insurance side--now we are out of time--I would say 
that the results of research on insurance mergers also show 
premium increases when there's less competition in a market--
that a hospital or a group of providers that bears risk is 
going to be performing a lot of the functions of an insurance 
company. But so long as they can't offer health plans, then 
they may not be able to pass all the savings along to patients.
    Mr. Costello. How about access to care?
    Dr. Dafny. What about access?
    Mr. Costello. Well, in terms--is there concern over 
limiting access to care on that patient?
    Dr. Dafny. Well, I think, if you eliminate essential health 
benefits, you would have a concern--or allow the purchase of 
nonqualified plans or not enforce the individual mandate--I 
think you may have more access issues.
    Mr. Costello. Thank you. I yield back.
    Mr. Harper. The gentleman yields back.
    That concludes our hearing. We want to say a special thank 
you to each of you for taking the time. It's very informative--
very important topic for the future of healthcare.
    And at the end of the day, we should be considering patient 
care and outcomes and improved cost for those patients as we 
look at this ahead.
    I remind Members that they have 10 business days to submit 
questions for the record, and I ask that the witnesses agree to 
respond promptly should you have any questions.
    With that, the hearing is adjourned.
    [Whereupon, at 12:22 p.m., the committee was adjourned.]
    [Material submitted for inclusion in the record follows:]
    
    
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    [Dr. Dafny did not answer submitted questions for the 
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