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Expert: Hospitals’ ‘Humongous Monopoly’ Drives Prices High

By Jay Hancock

March 4th, 2013, 5:54 AM

The American Enterprise Institute didn’t plan its panel last week on hospital consolidation to coincide with Steve Brill’s much-talked-about Time magazine article on hospital prices. But the Friday session could have taken the piece, Bitter Pill: Why Medical Bills Are Killing Us, as its text. Participants mentioned it several times.

The basic message, delivered at the pro-markets AEI by prominent economic and legal scholars, is that the hospital market is broken and may not be fixable by the health law or other attempts at reform. They blamed much of the high price of health care on mergers over the past 30 years that have given hospitals “oligopoly” power to charge prices far higher than what would exist with more competition.

“Finally the evidence is catching up with the reality that we have a humongous monopoly problem in health care,” said Robert Murray, a consultant and former director of Maryland’s unique hospital rate-setting commission. Quoting former Medicare administrator Bruce Vladeck, he described the current system as “a massive environment for the reallocation of income” from households and employers to health care providers.

Barak Richman, law professor at Duke University, was even harsher: “We are in a real disaster,” he told the audience. “The house indeed is on fire. It’s been on fire for a long time.”

Judges got much of the blame. Thinking that monopolistic mergers of nonprofit hospitals would prove less harmful than combinations of for-profit companies in other industries, the courts approved deals that never would have been allowed in, say, the supermarket business. The judges were wrong, evidence shows. Health care’s unique financing system — in which employers pay most expenses and demand rarely slackens no matter how high prices go — gives consolidated hospitals even more power than conventional oligopolists, said Richman.

What to do? The Federal Trade Commission, the antitrust watchdog, has been winning cases opposing hospital mergers. A big victory came last month when the Supreme Court upheld the FTC’s power to challenge a Georgia hospital deal that the agency argued would create a monopoly. But the FTC’s hot streak may have come too late.

“Once there’s been a lot of consolidation it’s very hard to undo,” said Carnegie Mellon economist Martin Gaynor. “Unfortunately a lot of that has already occurred in the hospital sector.”

Many hold hope for accountable care organizations, alliances of doctors and hospitals working together under incentives to deliver better care more efficiently. The AEI panel was skeptical. ACOs have the potential to be “an anti-competitive sham” dominated by hospitals, Gaynor said.

The use of high-quality, out-of-town hospitals by large employers, exemplified by Walmart’s recent agreement with Mayo Clinic and other providers, might help, said Gaynor.

“That opens up local markets to competition from distant providers,” he said.

But Murray was skeptical of distant competition as well as ACOs and hopes of getting consumers to compare prices and be better health-care shoppers.

“Do we really think we can be good consumers when we are in the back of an ambulance going to the emergency room?” he asked. “All of these things are peanuts. They won’t make a difference overall.”

He even questioned whether Maryland’s system of hospital rate-setting, which he ran for years, could work elsewhere. His ideas: rationalize the system by giving primary care doctors more power and increasing their pay, and limit all payments to some multiple — “call it 150 percent, 125 percent” — of Medicare reimbursement. Princeton economist Uwe Reinhardt made a similar suggestion Friday on the New York Times’ Economix blog.

Regulators aren’t out of ammo, Richman argued. They can challenge contractual terms between hospitals and insurers that limit competition, for example. He took comfort in the FTC’s ability to oversee ACOs, which, after all, he said, involve more provider combinations. But he suggested they’ll need to pay attention.

“ACOs do involve consolidation, and with consolidation we might see the exacerbation of all the problems we’ve seen,” Richman said. “What we have in the industry, in the provider market, is a hard-wired market strategy to seek and exploit market power.”

Related KHN Stories:

California Hospitals: Prices Rising Rapidly, But Quality Varies

As They Consolidate, Hospitals Get Pricier

10 Responses to “Expert: Hospitals’ ‘Humongous Monopoly’ Drives Prices High”

  1. Kelly says:

    This article is the best evidence yet to promote more reasons that support single-payer universal healthcare.

    “Do we really think we can be good consumers when we are in the back of an ambulance going to the emergency room?”

    The above statement alone says it all.

    It’s time to crack down on these outrageous monopolies and put control of our corrupt healthcare market back into the hands on consumers. Only government can do that. Big government!

  2. Marketplace change takes time. When a monopoly is formed in a market, it can maintain its monopolistic position as long as it continues to drive prices down. Competitors are always willing to jump into a market where a price umbrella is formed and where they see an opportunity to make money while being able to capture share, generally by offering better service/products at a lower price. Hospitals are a big business….and markets are local. It takes time to create the price umbrella and yet more time for others to position themselves to move into the market. The free marketplace system made this country great. The profit potential has driven innovation and marketplace competition. Marketplace forces are efficient over time. Let’s stop having knee jerk reactions drive policy…instead, let’ trust in what made this country great, free market competition.

  3. Pamela says:

    These are not marketplace forces at work and there is no good end result that can be achieved from our current status. The bogus fees and outrageous profits commandered by a US Healthcare system run amok are so out of control that the only way to bend the cost curve in the future is via government intervention. Medicare, a government program, is the best example of successful health care cost control in this country. Not perfect, but it works. Systemwide health reform can happen but the money hungry hospital CEOs, Pharma execs, etc need to start things off by giving up their million dollar-plus salaries since it’s clear that nothing they’ve been doing has come close to being worth that level of compensation.

  4. stan says:

    Market competition made America great? Great for who? Poverty in America is at an all time high. The number of Americans who live within 125 percent of the federal poverty level reached an all-time high of 66 million in 2012. A family of four at 125 percent of the poverty level — the threshold for legal aid and other government assistance programs — makes $28,800 a year, according to government data. Add to that the fact that America has over 50 million Americans with no health insurance whatsoever and another 26 million more Americans that are underinsured and you have the audacity to say that America is great? A corrupt Wall Street and the trickle-down economics that has been used from 2001 until 2009 gave us the worst recession since the Crash of 1929 and you can say, with a straight face, that market competition made America great? Where do you get the chutzpah to make such outrageously false claims?

  5. Jane says:

    The Affordable Care Act only acts to enforce the current staus quo of the hospitals and will make them even more powerful. Who do you think now owns most of the physician practices? In our area there is only one independent physician practice, and they are struggling to stay afloat. They are a high quality, high value group but cannot compete with the huge salaries hospitals are offering docs to “come into the fold.” As an employer, we are looking at ways to partner with the independents, be it physicians, surgery centers, imaging, etc. Hospitals should go back to being what they were meant to be – a place for the seriously ill to go to be treated. Big government is not the answer – just ask any vet who has to use the VA system.

  6. wayne says:

    Jane,

    I’m a Veteran with an 85 percent service connected disability. I’ve been using the VA for over 15 years. I would not trade my VA care for any civilian healthcare plan that the private insurers currently offer. Those private plans stink! The only thing Veterans must deal with is a priority list. If I need a routine doctor’s appointment, maybe I’ll wait 6 to 8 weeks to see a doctor. Anything that is not routine gets pushed to the head of the line. If I have an emergency, I dial 911 and it’s covered by the VA. So, big government works for me quite well. What’s the big deal if I must wait while other Veterans with more serious needs go ahead of me. It’s no different that when I served on active duty. You see, in the military, we are like one big family. Like brothers and sisters. Veterans look out for each other and nobody gets left behind. I know that’s very hard for you to understand. Nut, unless you served in the military, you would never understand. In the military, you never assume you’ll be first. You always defer to others. In civilian life, the motto is “ME FIRST AND TO HELL WITH EVERYONE ELSE!” Not so in the military. That’s why veterans do so well in the VA system. We don’t consider ourselves above our brother and sisters. Anyone who tells you the the VA system is a bad system is a liar. Plain and simple!

  7. Riply says:

    Hey Wayne,

    Nut?

    Is that a typo?

    Didn’t you really mean to type a B and not and N?

    After all, B and N are right next to each other on my keyboard.

  8. Riply says:

    By the way Wayne, thanks for your service! Thanks for risking your life. Veterans deserve everything they were promised.

  9. Mike Inmaryland says:

    I have worked within the Maryland system and within the Medicare system in most of the other states. Clearly, what has screwed up the system is too much government. Monopoly? If you want to talk about monopolyies, the Feds and state gov’ts dicate trems that we have to live with and must pass shortfalls along to other payers. If medicare and medicaid paid even what it costs hospital to serve their patients, we would have much lower priv insurance premiums. If they allowed tort reform and other make-sense reforms, again we would be better off than now. If you want thing s to be even more screwed up –let the gov’t in deeper. BTW–all of you naysayers usually say the same thing–”Let’s control costs” and then when you are on the gurney going into the ER it’s “spare no expense”.

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