California's attorney general has launched a broad investigation into whether growing consolidation among hospitals and doctor groups is pushing up the price of medical care, reflecting increasing scrutiny by antitrust regulators of medical-provider deals.
The office of the attorney general, Kamala D. Harris, has sent subpoenas, known as civil investigative demands, to several big hospital operators in the state, including San Francisco-based Dignity Health and San Diego's Scripps Health and Sharp HealthCare. Northern California's 24-hospital Sutter Health system has also received one, as has Santa Barbara-based Cottage Health System, according to people with knowledge of the matter. Subpoenas have also gone to major California health insurers, those people said.
Dignity Health has been tentatively selected to take Ashland Community Hospital into its fold as part of the nation's fifth-largest hospital system that now includes 40 hospitals, 150 care centers and about 65,000 employees. The decision has raised some concerns locally because of the Catholic-affiliated organization's positions on abortions and assisted suicide. Because the hospital operates under a long-term lease with the city of Ashland, the City Council will have a say in approving whatever lease arrangement emerges out of an alliance.
The California attorney general's probe, which has been under way for several months, is examining hospital systems' reimbursement from the insurers, according to people with knowledge of the matter. The regulator appears to be focusing on whether the systems' tie-ups with physicians, as well as ownership of hospitals, have given them the market power to boost prices in a way that violates antitrust law, these people said.
Nationally, health-care providers are rapidly merging into bigger health systems, moves that they say will improve efficiency. The number of hospital deals last year, 86, was the biggest since 2000, according to Irving Levin Associates, a research firm that tracks health-care transactions.
Also, nearly a quarter of all specialty physicians who see patients at hospitals are now employed by the hospitals, according to an estimate from the Advisory Board Co. That is more than four times the 5 percent in 2000. Among primary-care doctors who see patients in hospitals, the employed share has doubled to about 40 percent in the same time frame.
The American Hospital Association said consolidation doesn't routinely drive up prices; the California Hospital Association referred questions to the national group. Hospitals are merging and employing more doctors in order to streamline and improve care, under pressure from health regulators urging a more integrated approach under the federal health overhaul law, said Melinda Hatton, AHA's general counsel.
"The antitrust agencies and national health-care policy don't seem to be really in sync at this point," she said.
Some research suggests that mergers can drive up health-care prices. A 2010 study published in the journal Health Affairs said concentration among health-care providers in California had led to "a definite shift in negotiating strength toward providers, resulting in higher payment rates and premiums."
An evaluation of the Health Affairs study funded by the AHA said it was flawed because it relied on "anecdotal observations" and didn't adequately examine such factors as consumer preference that could lead to differences in hospital reimbursement.
Some state reviews are already in place. In California, takeovers of nonprofit hospitals typically must be cleared by the attorney general's office under laws regulating charities, and if their dollar value is large enough they also get a federal antitrust examination.
The Federal Trade Commission, which has filed several recent suits to block hospital acquisitions, is also closely watching hospitals' purchases of doctor groups, and mergers that combine physician practices, Richard Feinstein, director of the FTC's bureau of competition, said in an interview.
For example, the FTC and the Nevada attorney general recently announced a settlement with Renown Health, a Reno, Nev.-area hospital system that acquired two cardiology practices. The pact requires Renown to release as many as 10 physicians from their noncompete agreements. A Renown spokesman declined to comment.
Some state regulators often work with the federal agencies, but some are also ramping up their own activities. Massachusetts' attorney general has produced reports that warned of some health-care providers' ability to win higher reimbursements. In Pennsylvania, the attorney general in June announced an agreement with the prominent Geisinger Health System, which was acquiring a nearby community hospital, requiring it to keep the new hospital's rate negotiations with insurers separate from those of the system's flagship facility for eight years.
In some transactions, "you're losing the dynamics of competition," said James Donahue III, Pennsylvania's chief deputy attorney general. The Geisinger agreement likely saved local employers millions of dollars, he said.
Frank Trembulak, Geisinger's chief operating officer, said the community hospital was "failing," and its payment rates were inadequate. Geisinger will upgrade it with electronic medical records and other expensive changes, he said. Also, he said, merging it fully with the system would improve efficiency and integration of services.
Reach Wall Street Journal reporter Anna Wilde Mathews at email@example.com.