Horizontal consolidation in healthcare markets: can performance incentives preserve access to care?

We study the effects of hospital consolidations on access to care in a competitive healthcare market in the presence of performance incentives. We consider a transition from a “pre-merger” market configuration where a payer delegates services to a market with two competing hospitals to a “horizontally consolidated” configuration under which the same entity manages two hospitals. We focus on two research questions: How should the payer set access-based performance incentives in response to a horizontal market consolidation? What are the effects of consolidation on patient access to care? We use queueing dynamics to describe patient care processes and analyze the strategic interactions between hospitals and the optimal design of performance-based incentives in different market configurations. Specifically, we consider contracts where hospital compensation for delivering care includes a combination of fee-for-service payments and bonus components tied to the level of access to care patients receive. We derive the optimal bonus-type contracts that the payer can use to adapt to changes in market concentration, and we quantify the resulting impact on patient access to care and social welfare. In our analysis, we consider two alternative settings: the “fixed FFS” setting, where the fee-for-service component cannot be altered, and the “flexible-FFS” setting, where both the fee-for-service and the bonus components can be adjusted in response to changes in the market composition. Our analysis shows that the bonus-type performance incentives provide payer with the ability to protect patient access to care upon hospital consolidation in a wide range of problem settings, provided that the intensity of competition between the hospitals is sufficiently strong. If, otherwise, the intensity of competition is relatively weak, horizontal consolidation may compromise access to care.