Explainers

Hospitals and Monopolies


Rising health care costs continue to erode the American standard of living. For a typical American of family of four the annual cost of health care now surpasses $25,000, or roughly the equivalent to a payroll tax of 28 percent.  Such families pay more than $11,000 of this cost directly out their own pockets. The rest they pay in the form of forgone income as their employers make up for the mounting cost of company-sponsored health care plans by holding down raises and other forms of worker compensation.

Why do Americans have to pay so much for health care? Often we are told it’s because we go to the doctor too often or get too many treatments. But citizens in other countries like Germany see more doctors, spend more days in the hospital and undergo more procedures while paying far less for health care and living longer.

Instead, inflated prices are the big reason Americans pay so much more for health care than the citizens of other advanced nation, whether its the price of an MRI scan, or of a hip replacement. And the biggest factor driving up those inflated prices are monopolies and cartels that are cornering health care markets in every sector of the industry.

The trend toward monopoly in health care takes many forms, including growing market concentration in pharmaceuticals, medical devices, and health insurance. Yet a massive wave of hospital mergers and acquisitions is the single largest source of health care inflation. The trend is also causing many communities to lose their independent, local hospitals as the industry becomes dominated by giant corporate chains.

According to a study headed by Harvard health-care economist David M. Cutler, a full 40 percent of all hospital stays now occur in health-care markets where a single entity controls all the hospitals. Another 20 percent occur in regions where only two competing hospitals remain.

Not a single highly competitive hospital market still exists in any region of the United States, according to the standard metric used by the Federal Trade Commission to measure degrees of concentration, the Herfindahl-Hirschman Index.  By the same measure, nearly half of all hospital markets are uncompetitive, and another third are moderately concentrated.

For example, following its 2012 takeover of its last remaining local competitor, the Yale-New Haven Hospital System’s market share rose to 98 percent of inpatient discharges among New Haven residents. In the San Francisco Bay area, the giant hospital chain Sutter has amassed such market power—up to 100 percent of the market for inpatient hospital services in Berkeley and Davis—that it forces health care plans, including those run by large insurance companies and large employers, to sign contracts in which they promise not to steer patients to lower-cost hospitals. Monopolistic hospital chains are similarly abusing their increasing market power to drive up health care prices in metro areas throughout the country.

When hospitals buy out their competitors, the effect is almost always higher prices and lower quality. According to a literature survey by the Robert Wood Johnson Foundation, “The magnitude of price increases when hospitals merge in concentrated markets is typically quite large, most exceeding 20 percent.” A widely discussed recent study by Yale economist Zach Cooper and others, has found that if you stay in a hospital that faces no competition, your bill will be $1,900 higher on average than if you stay in hospital facing four or more competitors. If hospital mergers are creating efficiency gains, it’s hard to find instances in which the savings are being shared with customers.

As hospitals merge into monopolistic chains, the quality of management suffers even as the compensation of hospital CEOs and executives soars. Among people in the top one percent of this country’s income distribution, medical professionals now outnumber people who work in finance, including hedge fund managers and private equity executives.

In many American cities and towns, independent community hospitals that serve vital health care needs and provide badly needed jobs must either join chains or close. Access to health care is also undermined when remaining hospitals come under the control of chains headquartered elsewhere. When their local hospitals are bought out, studies show that communities are particularly likely to loose neonatal intensive care units, emergency departments, as well as pediatrics and obstetrics service.

 

Even as hospitals are merging horizontally with each other into giant chains, they are also consolidating vertically by buying out doctors practices. Today, more than half of physicians are employed by a hospital or a hospital system. Studies show that this form of consolidation also drives up prices with little benefits on quality. Doctors and hospital in effect become part of a local or regional cartel that dictates the prices that purchasers of health care must pay. When hospital chains control access to “must have” hospitals and doctors in prime locations, they are often able to force insurance companies, through so-called “tying” arrangements, into paying top dollar at all the hospitals the chain controls, even in second-tier facilities in backwater markets.

To cope with these rising prices, health insurers limit their customers’ choice of doctor and hospitals to ever narrower networks, so that we all pay not only in the form of higher prices, but also reduced access to health care.  Many of also pay by having to travel much farther to reach nearest hospital.

To make matters worse, consolidation among hospitals can help drive consolidation in other parts of the health care system. Insurers, for instance, are responding to hospital consolidation by engaging in their own frenzy of mergers and acquisitions as they try to match the increasingly concentrated market power of health-care providers. Taking market concentration in health care to the next level, hospital chains are responding in turn by forming or buying their own insurance companies, leading to the complete vertical and horizontal monopolization of health care markets.

These trends reflect in part a broader radical retreat from anti-trust enforcement that has lead to massive consolidation in almost all sectors of the American economy over the last generation. In the realm of health care, most of the damage has come about from judges making new case law. Though the Department of Justice and the Federal Trade Commission have continued to bring many textbook anti-trust cases against monopolistic health care providers, after the mid-1990s they began consistently losing in court as more and more judges came under the thrall of Chicago School antitrust theories that tend to justify monopolies generally or to define them away. Courts have often ruled, for instance, that a local hospital monopoly actually faces real competition because at least some of its patients came from distant communities where other hospitals existed.

The trend toward growing concentration among health care providers also reflects, however, the unintended consequences of policies that were supposed to reduce fraud and increase the quality of patient care. For example, over the last several decades, Congress has passed anti-kickback laws and other measures designed to prevent doctors from making money off their referrals. Yet in an era of lax anti-trust enforcement, health care providers in any community can get around these prohibitions against kickbacks simply by combining into a single enterprise.

Similarly, many provisions of the Affordable Care Act (“Obamacare”) have encouraged hospitals to merge on the theory that this will lead to economies of scale that will reduce health care inflation and allow for better integrated care. Under the ACA, for example, Medicare began moving toward a system in which it writes one check to all the different providers involved in, say, a knee replacement operation– surgeons, anesthesiologists, physical therapists, etc.– based on how well they performed as a team. This “bundled payment” approach encourages providers to be literally on the same team, i.e., working for a single enterprise.

Yet in the absence of coherent policies for preserving and managing competition in health care markets, the real-world results of health care consolidation, aside from many more closed hospitals, has mostly been price gouging and increasingly acute price discrimination against those who lack the market power to stand up to monopolistic providers.

Going forward, if the U.S. ever moves to a single payer system, the local monopolies that now dominate health care delivery would be able to dictate the prices that a “Medicare for all” pays them, much as sole-source Pentagon contractors are able to set their own prices.  Even with so-called “socialized medicine,” we need smart anti-trust policies to insure that monopolies don’t further damage our health care system.

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In America today, wealth and political power are more concentrated than at any point in our country’s history.

The Open Markets Institute, formerly the Open Markets program at New America, was founded to protect liberty and democracy from these extreme -- and growing -- concentrations of private power.

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