Opinion: Here’s why local hospitals, not insurance companies, are to blame for exploding healthcare costs

As the threat from COVID-19 recedes, Americans can once again worry about rising medical costs. While they tend to blame drug companies, insurers or even the government, the lion’s share of the responsibility belongs with our healthcare providers, whose decisions account for 85% of health spending.

The providers most to blame are local hospital systems that dominate nearly every metro area, from Partners HealthCare in Boston to SutterHealth in the San Francisco Bay Area. These megaproviders don’t deliver better quality than smaller systems and independent providers; they just get paid more, sometimes twice as much for the same medical procedure.

That’s the real advantage of size.

Today’s megaproviders are the culmination of decades of consolidation. In the 1990s, hospitals faced Medicare cutbacks and the looming Clinton healthcare reforms. Some influential organizational theorists encouraged hospitals to integrate in the name of scale economies and care coordination. Despite the lack of evidence that integration could achieve these goals, hospital executives embraced the theory or perhaps used it as political cover to do what they really like to do—grow inorganically. Hospitals merged with each other, opened countless outpatient facilities and acquired tens of thousands of physician practices.

Things did not work out as planned. Peer-reviewed economic research failed to find significant cost savings. Quite the opposite occurred. Hospital mergers and physician-practice acquisitions led to immediate price increases averaging 10% or more above industry trends, with further price increases over time. Evidence on quality was inconclusive at best.

To this day, the data are not friendly to megaproviders. One prominent study found that rising provider prices are the biggest contributor to rising health spending, especially in concentrated markets.

Despite the threat posed by the hospital merger wave, antitrust agencies were initially unprepared to stop it, in part because judges seemed to trust the motives of hospitals. In the 1990s, the agencies lost seven consecutive merger challenges, even in places where hospitals merged to form a monopoly. Enforcement against hospital-physician integration was nonexistent, as antitrust laws tend to treat such vertical deals more leniently, and regulators focused attention on joint ventures among independent providers.

By the mid-2000s, antitrust agencies found their footing in hospital merger cases. Using methods pioneered by academic economists and backed by research, the Federal Trade Commission successfully challenged numerous mergers, including the proposed merger between the giant Advocate Health Care and NorthShore University HealthSystem in northern Illinois, and probably discouraged many more. It was a case of too little, too late, however, as the megaprovider disease had already metastasized.

What can be done to rein in megaproviders? Despite the research evidence and recent FTC victories, some courts remain skeptical that hospital mergers are a problem. This may reflect the broader phenomenon that Americans tend to hold providers harmless for the ills of our health system.

For starters, we need to acknowledge that megaproviders are the main cause of rising health spending, not the solution. Hopefully, judges will get the message and start trusting the economic evidence.

The next step is to rethink competition policy. There is some low-hanging fruit. States should scrap Certificate-of-Need laws that impose strict requirements on newcomers seeking to build new hospitals and outpatient facilities while taking a more lenient view of expansion by incumbents. States should also stop issuing Certificates of Public Advantage (COPA), which give local hospitals immunity from federal antitrust laws.

The antitrust agencies should continue their scrutiny of provider mergers in local markets to sustain as much competition as possible. The FTC’s recent successful action in Boise is a blueprint of what can go right when the agencies intervene. St. Luke’s Health System attempted to acquire Saltzer Medical Group, the largest physician group in the area. The FTC argued that an independent Saltzer could become a competitive alternative to St. Luke’s. Indeed, Salt Lake City-based Intermountain Health has acquired Saltzer, bringing much-needed competition to the growing Treasure Valley area.

Federal antitrust agencies should also increase reporting requirements for physician consolidation, whether hospitals are employing the physicians or physicians are merging with each other. Currently, these acquisitions are piecemeal—one or two physicians at a time—and fly under the antitrust radar. Hospitals, which employ about half the nation’s physicians, have taken full advantage of this unchecked opportunity for growth.

University of Chicago Press

Some regulations may be in order. States should increase regulatory scrutiny of “must-have” hospitals that get their clout from monopolizing high-end services such as neonatology, neurosurgery, and transplant surgery, that are too costly and technologically sophisticated for other hospitals to replicate. Force the must-haves to allow patients to access these services at regulated prices. The must-haves will become “might haves” with diminished power to raise prices on all of their other services.

At the same time, states should refrain from balancing budgets by slashing Medicaid payment rates, which are already about half the rates paid by commercial insurers and are the lifeblood of many independent providers, especially those in inner cities and rural counties. The prospect of financial ruin instigated the rise of megaproviders and, with looming Medicaid cuts piling on top of Covid-related losses, will cause many of the remaining independent providers and smaller systems to either shut down or seek the shelter of megaproviders. Neither serves the public interest.  

Some healthcare providers are more efficient and offer higher quality than others. Some of the best are organized around academic medical centers, while others were started by physicians. Some are relatively small, and, admittedly, some are megaproviders.

Whether we reform competition policy or turn government into the main healthcare provider with Medicare for All, we need to encourage experimentation. In too many places, there is only one vision for how best to deliver medical care—that of the local megaprovider. We must diminish their power. Megaproviders have long given us average quality at a high price. We must end their reign and rein them in.

David Dranove is a professor of strategy at Kellogg School of Management at Northwestern University in Evanston, Ill. Lawton Robert Burns is a professor at the Wharton School, University of Pennsylvania, in Philadelphia. They are the authors of “Big Med: Megaproviders and the High Cost of Health Care in America”.

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