Time To Fight Health-Care Monopolization

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Above Photo:  By Crazypaco via CC 3.0

Compared to the discourse in the other party’s nomination process, the debate between Hillary Clinton and Bernie Sanders over health-care reform may have seemed thoughtful and on point. Clinton argued that Sanders’s “Medicare for all” plan was too expensive to ever become law and was also a threat to the progress achieved by the Affordable Care Act (ACA). Sanders criticized Clinton for compromising the progressive goal of a single-payer system that would make health care a right. Eventually, Clinton moved Sanders’s way a bit, announcing in May that she had her own plan for letting people buy into Medicare, and then in July that she supported a public option insurance plan.

Unfortunately, however, both sides scored mostly moot points, because both ignored a mega-trend in the business of health care: its increasing control by corporate monopolies. The massive increase in concentrated ownership occurring throughout the health-care sector could, at least in theory, lead to better coordinated care delivered at lower prices. This is the supposition behind key provisions of the ACA that directly and indirectly encourage health-care providers to merge. But experience has shown that consolidation, far from “bending the cost curve,” instead leads to higher prices, for the simple reason that mergers reduce competition.

This is no small matter. Health already accounts for nearly 20 percent of GDP, a far higher proportion than in any other advanced nation. Worse, the inflated cost of health care in the United States is largely driven by expenditures that don’t improve health and often cause harm to patients. Worse yet, these costs, even for those with insurance, continue to rise faster than the income of most Americans, becoming an ever-larger source of downward mobility and economic insecurity. These wasteful expenses prevent investments that would bring far higher returns to the economy and society as whole. The bottom line is a health-care system whose staggering waste and inefficiency is being made still worse by monopolization to the point of threatening America’s very standing in the world.

To fully appreciate why these trends matter so much to progressive agendas, let’s get clear first on what exactly Clinton and Sanders debated in the primary. Despite what many conservatives angrily charge, and what more than a few progressives approvingly believe, this wasn’t a debate about socialized medicine or anything like it.

Neither Sanders nor Clinton has ever called for nationalizing America’s hospitals or for turning private-practice doctors into public employees. Such systems work successfully in the United Kingdom and Scandinavia, but the only things like them in the United States are the hospitals and clinics owned and operated by the Department of Veterans Affairs. Sanders champions VA health care, and there is indeed a strong case to be made that the VA, for all its difficulties, outperforms the rest of the U.S. health-care system on many metrics. But Sanders has never proposed that all Americans should receive their health care directly from the VA or from any other agency of government.

Instead, both Clinton and Sanders presuppose that the delivery of American health care will remain almost entirely in the hands of private enterprise. Where they have differed is mainly in how they would go about subsidizing the different private sector players in the privately owned and operated health-care system.

Clinton’s approach, following that of the ACA, emphasizes a combination of mandates and premium subsidies to make sure that millions more Americans purchase private health insurance. By design, this approach gives more people more access to more health care. But it is also accurate to say that it creates a subsidy not just for health-care insurance companies, but also for private health-care providers—including hospital chains and group physician practices, as well as private drug companies, medical device makers, labs, and other enterprises up and down the health-care supply chain—by boosting the number of people who consume their products and services.

This is why both health-care insurers and health-care providers have, with few exceptions, supported the ACA. It’s good for business, and especially so at a time when fewer and fewer Americans can afford the cost of their own health care.

Sanders’s approach differed primarily in that he would cut or phase out subsidies to private health insurers and divert that flow of public money more directly to health-care providers. He would do this by expanding Medicare—a program that doesn’t deliver or even manage health care, but one that pays bills submitted to it by private enterprises in the health-care delivery business. It’s a considerable irony that if the VA similarly outsourced the delivery of health care to private sector contractors and became simply a payer of health-care bills, as many conservatives believe it should, progressives, including Sanders, would rightly denounce this as privatization.

So again, what we are really talking about in our health-care debates isn’t remotely about socialized medicine; it’s about what sectors of the private health-care industry should receive which subsidies.

Is there anything intrinsically or necessarily wrong with that? Maybe not. Government subsidies have long pervaded almost every sector of America’s mixed economy, from the financing of privately owned canals and railroads in the nineteenth century to homeownership, energy, agribusiness, and higher education today. It’s the American way.

But here’s the rub. No market, subsidized or unsubsidized, is likely to run efficiently or fairly if it’s cornered. And unfortunately this is what is happening to the American health-care sector at every level, giving the United States the worst of all worlds in health care. Sanders’s approach to health-care reform, as well as Clinton’s, arguably could be made to work, but not unless public policy gets much smarter about preventing, and in many instances rolling back, the ongoing monopolization of American health-care markets. Absent a groundswell in public opinion favoring true socialized medicine, health-care reform going forward has to be largely about spurring and managing competition through the use of antitrust and other competition policies.

The trend toward monopoly in health care takes many forms, starting with a massive wave of hospital mergers and acquisitions. According to a study headed by Harvard health-care economist David M. Cutler, 60 percent of hospitals in 2011 were controlled by larger holding companies. A full 40 percent of all hospital stays now occur in health-care markets where a single entity controls all of the hospitals. Another 20 percent occur in regions where only two competitors remain.

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. Meanwhile, the Chicago region’s largest hospital system, Advocate, is merging with its chief competitor, NorthShore. Though the Federal Trade Commission (FTC) determined “it will create a highly concentrated market that is presumptively illegal,” a federal judge recently declined to block it. 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.

According to the standard metric used by the FTC to measure degrees of concentration, the Herfindahl-Hirschman Index, not a single highly competitive hospital market remains in any region of the United States. By the same measure, nearly half of all hospital markets are uncompetitive.

In 2015, the pace of hospital mergers and acquisitions increased by 18 percent over the prior year and was up 70 percent from 2010.

Moreover, this rate of hospital consolidation in health care is accelerating rapidly. Just the first three months of this year saw 26 major merger and acquisition deals, including the consolidation of two privately owned hospital chains, Capella Healthcare and RegionalCare Hospital Partners, into a new Goliath controlling 16 regional health systems in 12 states with more than 13,000 employees, 2,000 affiliated physicians, and $1.7 billion in revenue. In 2015, the pace of hospital mergers and acquisitions increased by 18 percent over the prior year and was up 70 percent over the 2010 level.

Meanwhile, as hospitals have been merging horizontally with each other into giant chains, they have also been integrating vertically by absorbing record numbers of physician practices. More than one in four American doctors now works in a practice that is at least partially owned by a hospital, and another 7.2 percent are directly employed by hospitals or related holding companies. All told, according to the trade journal Becker’s Hospital Review, outside companies spent $3.2 billion in 2014 acquiring previously independent doctor practices.

This trend toward consolidation could, in theory, help to improve clinical practices, as defenders often note. For example, lack of communication and coordination among the many different specialists typically involved in patient care is a major source of medical errors, which according to the latest estimates, kill a quarter of a million patients in the United States each year on average.

At the same time, most of us have experienced the stress, tedium, confusion, and expense in time and money that results when different doctors order up redundant tests, don’t work from a common medical record, and fail to coordinate with the different pharmacies, labs, rehab centers, mental health professionals, nursing homes and other providers that may be part of our care or that of a loved one. If consolidation could overcome this dangerous fragmentation and bring about better coordination of care, that would be a very large benefit to patients and the health of the population overall.

Greater consolidation could also, in theory, create economies of scale in purchasing, and in some instances save money by allowing the closure of redundant facilities. Large-scale integrated delivery systems also lend themselves to payment innovations. The ACA, for example, encourages experiments in which Medicare writes one check to all the different players 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 may work best when providers are literally on the same team, i.e., working for a single enterprise.

Yet the real world results of health-care consolidation, aside from many more closed hospitals, has mostly been price-gouging. 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.” According to a widely discussed recent study by Yale economist Zach Cooper and co-authors, 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.

Beyond these dire effects are the higher costs associated with hospitals absorbing physician practices. A 2014 study of physician organizations in California found that groups owned by local hospitals charge 10 percent more per patient than physician-owned groups. Meanwhile, groups owned by multihospital systems, which tend to be even more monopolistic, charge nearly 20 percent more per patient. A 2015 study by the National Academy of Social Insurance found that “there is growing evidence that hospital-physician integration has raised physician costs, hospital prices and per capita medical care spending.”

Why does vertically integrating doctors and hospitals into a single enterprise lead to higher prices despite the potential efficiency gains? Consider the anti-competitive effects of these deals. Doctors play a large role in steering patients to different hospitals. Anti-kickback laws prevent hospitals from paying doctors for these referrals. Yet a large loophole is created when a hospital simply buys a doctor’s practice and puts him or her on its payroll. Such a deal not only allows a hospital to, in effect, buy referrals by making the doctors part of its own enterprise, it also forecloses future competition. To win the business of patients a hospital acquires by these means, a competitor would first need, in most instances, to convince these patients to change doctors.

Horizontal mergers between hospitals also often have deeply anti-competitive effects. Think about what happens when a single entity controls all the hospitals in town. No one will buy an insurance policy that has no local hospitals as part of its network, and so insurers are over a barrel when it comes to negotiating with monopolistic hospitals. This is all the more true when local doctors, labs, nursing homes, and other providers are also under the control of a single corporate monopoly. Moreover, when hospital chains control “must have” hospitals in certain 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.

This helps to explain why health insurers, too, are engaged in a frenzy of mergers and acquisitions. They need to combine in order to maintain market power over increasingly monopolistic health-care providers. In markets where insurers are highly concentrated, according to a study published in Health Affairs, hospital prices are approximately 12 percent lower than in markets where there are many insurers competing with one another in their contract negotiations with hospitals.

This is not to say that health insurers have the interests of consumers at heart, much less that they will serve the public interest if they become more monopolized. Instead of using their increased leverage over providers to cut premiums, monopolistic insurers will most often simply use that power to increase their profits.

Moreover, we are seeing still more extreme forms of concentration as insurers and providers combine into single entities. This trend is already well under way in cities such as Pittsburgh, where a monopolistic health-care provider, the University of Pittsburgh Medical Center, has not only integrated vertically into the insurance business (thus negotiating prices with itself), but has also blocked patients enrolled with its one remaining major insurance rival from accessing its doctors. We are headed toward a country in which two or three giant, self-dealing health insurer/provider combinations enjoy near-total monopolies in health-care markets across the country, thereby eliminating the last vestiges of competition and consumer choice. Basically the same dynamic is occurring everywhere in the health-care supply chain. In 2015, for example, mergers and acquisitions in the pharmaceutical industry reached all-time highs, rising in dollar amount by over 90 percent from the year before. Meanwhile, five or fewer firms control 75 percent or more of the market for most medical devices.

What’s to be done? A single-payer, “Medicare for all” approach won’t work if all it is doing is distributing subsidies to monopolists. Under a single-payer system, the federal government would have the ability, at least in theory, to set prices throughout the U.S. health-care system by turning the dial up or down on the amount of subsidies it paid to providers. But it is naive to expect that government regulators won’t become even more captured than they already are if economic, and therefore, political power becomes ever more concentrated in the industry they are supposed to regulate. Already, the federal government allows a committee of the American Medical Association to effectively determine what prices it pays Medicare providers.

More concretely, if the trend toward monopoly in health care continues, Americans won’t enjoy anything like the choice of doctors and hospitals that today’s Medicare beneficiaries do. And in the absence of any real competition within the system, one can expect declining quality and service levels as well, just as occurs wherever monopolies take hold.

The FTC has belatedly stepped up its scrutiny of hospital mergers, but it needs to do much more. Any large or even mid-sized metro area in the United States should have at least two, and preferably three or more enterprises competing to meet the health-care needs of the community. In the interest of improved care coordination, each of these enterprises could be vertically integrated, operating not just a hospital, for example, but an integrated network of doctors practices, outpatient clinics, labs, and related facilities. In the interest of efficiency, these enterprises might also be allowed to offer their own insurance plans. But experience has shown that such integration is unlikely to bring about clinical and economic benefits for patients, and for the community as a whole, in the absence of real competition, which federal policy needs to preserve and manage through more rigorous antitrust action.

At the same time, in order to make sure that competition in health care serves public purposes, we need to strictly prohibit price discrimination in health care. As I’ve argued in greater detail in the Washington Monthly, [see “After Obamacare,” January/February 2014], providers should not be able charge some customers more than others as they do today. Regardless of their market power, all payers, whether health insurers, large or small employers, or individuals purchasing health care on their own, should pay the same prices for the same services. This way, competition in health care will be about who can deliver the safest, highest-quality, most cost-effective care, rather than about who can corner whom.

In the absence of such reforms, the health-care system itself will continue to be a major threat to the health of Americans. Due to medical errors and other forms of harmful care, contact with the American health-care system is now the third leading cause of death in the United States. Life expectancy among major population groups in the United States, including middle-aged whites, is falling. Standard estimates are that one-third of the money Americans spend on health care is pure waste or worse, going for treatments that have no clinical benefits or that are harmful to patients.

In addition to these adverse consequences, our inefficient and uncompetitive system is damaging the U.S. economy. Currently, the cost of health care consumes nearly one of every five dollars in the economy and continues to grow at twice the rate of personal income. This is far more than the per capita cost of health care in all other advanced nations, yet Americans have the same or worse health outcomes. What this means in economic terms is that the United States is allocating far too many resources to wasteful, overpriced health care, and at the cost of investments that would bring far higher returns.

Indeed, the inflating cost of health care is the overwhelming reason why most Americans haven’t received a raise in years, and why employers increasingly make use of contract workers rather than taking on new employees that would receive benefits. This year, the total annual cost of health care for a typical family of four covered by a typical employer-sponsored plan surpassed $25,000, according to the actuarial research firm Milliman. Such a family will typically pay more than $11,000 of this cost directly out of its own pockets, through payroll deductions, copayments, and deductibles. They will also pay much more indirectly in foregone wages and other forms of compensation, and quite possibly more yet in the form of unemployment, as employers seek to escape their share of the mounting cost of providing health care for their employees.

True socialized medicine might be the answer. Or maybe truly competitive markets in health care would work better, especially if we structure health-care markets so that providers compete over who can produce the best health outcomes at the best prices. But what surely will not work is a health-care sector controlled by price-gouging monopolists.

  • PCM

    When I read this, my first thought was that investor-owners were concentrating not just to price-gouge in the short-term, but also to artificially inflate the value of their holdings in the event of an eventual public buyout or for-profit to non-profit conversion. I then realized that I needed a much better understanding of how the public buyout and for-profit to non-profit conversion provisions of HR 676, “Expanded & Improved Medicare for All,” would operate in practice. Section 103(a), “Requirement [of participating providers] To Be Public Or Non-Profit,” requires that converting owners be compensated for “reasonable financial losses” over 15 years, excluding lost business profits. Would it be wise to include language excluding compensation for that portion of value ascribable to a willfully acquired concentrated market position, or ascribable to the effects of other restraints of trade?

    My second thought was to wonder whether provider-side concentration can reach the point where it seriously impedes the ability of a single payer to monopsonistically bargain and set medical prices at a fair, sustainable, competitive-market level. If so, we may need to give the single payer concurrent (and possibly pre-emptive) antitrust enforcement authority with respect to healthcare providers. We may also need to include new, explicit antitrust standards for providers that the federal bench will have a harder time evading than it has existing antitrust laws of general application.

    I generally prefer single-payer insurance systems to national health services because they allow patients themselves to “financially discipline” substandard providers by switching to a different provider and depriving the substandard one of income. But if that strong an incentive to maintain a high standard of care and high level of service can be efficiently approximated in a national health service, I’m all for it.