Monopoly Basics

Hospitals & Monopoly

Rising health care costs continue to erode the American standard of living. For a typical American family of four, the annual cost of health care now surpasses $28,000. Families pay more than $12,000 of this amount in premium and out-of-pocket charges. The remainder is paid by the family indirectly, as employers reduce raises and other forms of worker compensation to cover ever-growing health care costs. From 1999 to 2016, health economist Martin Gaynor notes, workers’ health insurance premiums increased by 242 percent. Over the same period, workers’ wages only increased by 60 percent.

Why do Americans have to pay so much for health care? Often we are told it’s because of overutilization. But citizens in other countries like Germany see doctors more, spend more days in the hospital and undergo procedures at roughly similar rates while paying far less for health care and living longer. The U.S. actually deploys fewer health resources per capita than other OECD countries: fewer doctors and nurses, fewer medical school graduates, and fewer hospital beds. “It’s not that we’re getting more; it’s that we’re paying much more,” notes Gerard F. Anderson, a professor in the Johns Hopkins University Bloomberg School’s Department of Health Policy and Management.

Rather than overutilization, inflated prices are what drive U.S. health costs so much higher than in other peer nations. In OECD countries, the median cost of a hospital stay in 2014 was $10,500; in the U.S., that same stay was over $21,000. And this price difference is in spite of the fact that the average U.S. hospital stay is among the shortest in the OECD.

We are often told the price of U.S. health care reflects its superior quality. But for all that Americans pay, U.S. health metrics overall lag behind those of peer nations. Our life expectancy, which is now falling for substantial segments of the population, ranks below that of Chile, Slovenia, and much of the European Union.

What explains these disparities? One large and often overlooked factor is the increasing monopolization of health care markets. The trend includes growing market concentration in pharmaceuticals, medical devices, and health insurance. Yet even more consequential for the cost of health care is the increasing monopolization found among hospitals, which accounts for the majority of U.S. health care spending.

Not a single highly competitive hospital market remains 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 (HHI). By the same measure, the hospital markets in 90% of Metropolitan Statistical Areas are officially highly concentrated.

When hospitals buy out their competitors, the effect is almost always higher prices. 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 recent and widely discussed study by Yale economist Zack 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 a 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. Even among hospitals operating in different regions, when mergers occur, the effect is higher prices, typically running between 7 percent and 17 percent, according to studies.

Hospital consolidation also often leads to reduced access and quality of care. 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. By 2017, approximately two-thirds of hospitals in the U.S. had been subsumed by a chain. As the industry becomes dominated by corporate entities, many communities are losing their independent, local hospitals. While hospitals close for a variety of reasons, a brief review of the 21 hospital closures in 2018 reveals that over half were closed by their parent corporation, typically for not providing enough revenue. As happened in Immokalee, Florida, large hospital systems may even obstruct grassroots efforts to open local hospitals in areas of great need. Because of consolidation, many Americans have to travel much farther to reach the nearest hospital, which can have dire health care consequences for people with medical emergencies.

Hospital mergers are also reducing the efficiency of local health care markets. In the San Francisco Bay area, the Sutter hospital conglomerate amassed such market power – up to 100 percent of the market for inpatient hospital services in Berkeley and Davis – that it forced health care plans to sign contracts in which they promised to steer patients to Sutter hospitals and not lower-cost hospitals.

As hospitals merge into larger and larger entities, compensation for hospital CEOs and executives is soaring. From 2005 to 2015, the average major nonprofit medical center CEO compensation rose by 93 percent, while the average health care worker wage rose 8 percent.

Today, the hospital chains are expanding not just by buying other hospitals, but also by buying out doctors’ practices. In 2016, for the first time ever, a majority of physicians did not own the place where they practiced, a decrease of roughly 30 percent compared to 1983. This trend drives up prices with little benefit to quality.

Researchers from Northwestern University found that acquired physicians charge an average of 14% more for the same services after they have been acquired, with increases going up even more when the physicians are acquired by a monopolist hospital. The researchers blamed nearly half of the increase on an “exploitation of the payment rules,” or gaming the complicated insurance payment system. The combined hospital-and-doctor conglomerate effectively becomes part of a regional, vertically integrated monopoly that dictates the prices that patients and insurers must pay.

Insurers are responding by engaging in a merger frenzy of their own. By 2018, the American Medical Association and others found that insurers are highly concentrated in 57 percent to 73 percent of Metropolitan Statistical Areas. In turn, hospital chains are seeking to maintain their power by forming or buying their own insurers.

These trends have unfolded in part because of legal doctrines that over the last 40 years have led to a broader retreat from antitrust enforcement. Though the Department of Justice and the Federal Trade Commission (FTC) have continued to bring many antitrust cases against monopolistic health care providers, they have suffered a series of losses as increasing numbers of judges came under the thrall of libertarian antitrust theories that tend to define away monopolies. Courts have ruled, for instance, that a local hospital monopoly is not actually a monopoly because at least some patients traveled to that hospital from areas where other hospitals were located.

The FTC’s ability to regulate is also weakened by several hospital-specific quirks. First, many smaller mergers and acquisitions are under the reporting threshold to the FTC, so the FTC may not learn of them in detail or in time. Second, the FTC is not permitted to prosecute anticompetitive practices by nonprofit organizations, which comprise nearly half of hospitals in the U.S.

The trend toward growing concentration among health care providers also reflects 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 antitrust 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; since the passage of the ACA, hospital consolidation has more than doubled, with a record-setting number of mergers occurring in 2017.

Hospitals have cited the theory that their integration will lead to economies of scale that will reduce health care inflation and allow for better-integrated care. 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, the local monopolies that now dominate health care delivery present a deep threat to meaningful health care reform. Even under a “single-payer” or “Medicare for all” payer system, health care monopolies might well have a power akin to sole-source Pentagon contractors as their size, political power, and lack of competition allows them to set their own prices. Meaningful reform of the American health care system requires shrewd use of competition policy to tame monopolies and restructure health care markets.

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

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