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January/ February 2014 After Obamacare

A frenzy of hospital mergers could leave the typical American family spending 50 percent of its income on health care within ten years—and blaming the Democrats. The solution requires banning price discrimination by monopolistic hospitals.

By Phillip Longman and Paul S. Hewitt

Sadly, neither the administration nor its critics have a solution to health care inflation that is anywhere near adequate to the problem. But fortunately, we do have options that would dramatically reduce health care inflation, and that can be explained without using phrases like “In Sweden, they …”

To be sure, as the population ages and effective new medical technologies come along, future generations of Americans may well want to consume more of at least some types of health care, and may be willing to pay more for it. But that doesn’t mean we have to remain punished by rampant health care inflation—that is, by paying higher prices year after year for the same treatments and procedures, such as, say, an MRI scan, an angioplasty, or a prostatectomy.

Moreover, we can fix this problem without waiting for a political consensus to emerge that would allow for the creation of a single-payer system at the federal level (something that even Democrats, negotiating among themselves, could not agree to in 2010). Nor does this approach involve the typically Republican strategy of cutting insurance coverage so that individuals bear more financial risk.

But first we need to understand who and what is causing this inflation.

From two different sides of the Mall in Washington one can hear two very different-sounding messages about how to control health care inflation. At the Department of Health and Human Services (HHS) on Independence Avenue, the message stresses the vast savings possible through a less “fragmented” and more “integrated” health care delivery system. With this vision in mind, HHS officials have been encouraging health care providers to merge into so-called accountable care organizations, or ACOs.

An essential feature of an ACO, as defined by the Affordable Care Act, is that it organizes and coordinates care among a broad range of previously independent specialists and other providers, somewhat like a health maintenance organization (HMO). Providing this coordination requires scale, and in practice has often entailed hospitals merging or forming business partnerships with one another and buying up the practices of local doctors.

Meanwhile, on the other side of the Mall, officials at the Federal Trade Commission (FTC) have been sounding a different note. Their pronouncements are about the need to counter the record numbers of hospitals and doctors’ practices that are merging and using their resulting monopoly power to drive up prices. Under the Obama administration, the FTC has stepped up antitrust actions against health care providers of all stripes, though the mergers and consolidations continue at a ferocious pace.

If the assumptions behind these two messages seem at least superficially contradictory, that’s because they are. Yet both are simultaneously true in different ways. Taming health care inflation requires being clear about just how that is so. And it requires doing a far better job than the Obama administration has done thus far in crafting a coherent policy that takes both truths into account.

Let’s start with the assumption that larger, more integrated health care systems are capable of delivering greater value in health care. It is importantly true that several such systems have proven records of combining low cost and high quality.

This magazine, for example, has long championed the “still-news-to-most-people” story of how the Veterans Health Administration has become a benchmark of health care quality and efficiency. (See “Best Care Anywhere.”) Another prominent example of the potential for large integrated systems to deliver exceptional value is Intermountain Healthcare, a network of hospitals and clinics in Utah and Idaho that many experts have described as a model for health reform. Researchers at Dartmouth estimate that if all providers adopted the coordinated care and integrated electronic medical records used by the Intermountain system, overall health care spending in the U.S. would fall by 40 percent, without any reduction in quality.

Clearly, bigness in health care can lead to efficiency and lower prices. But just as in other industries, bigness in health care can also lead to monopolistic pricing and other abuses. And sadly, rampant, unregulated monopolization of health care is what has been going on in virtually every medical community in America, as hospitals, doctors, and other providers combine in ways that drive up costs for everyone without improving care.

Start with the sheer number of hospital mergers, which has become staggering. In recent years, the tally has run up from fifty-two in 2009, to seventy-two in 2010, to ninety in 2011, and reaching 105 in 2012. In 2012, only 13 percent of hospitals surveyed said they intend to remain independent from other hospitals or systems. Booz & Company, a consulting firm, reckons that an additional 1,000 hospitals could merge in the next five to seven years.

Announced Hospital Consolidations by Year

This trend of increasing concentration has been building since the 1990s and is a major reason why health care costs rose dramatically during the last decade. By 2009, the mega-trend of consolidation already meant that most Americans were living in metro areas where there was little if any competition between hospitals.

The FTC uses a measure called the Herfindahl-Hirschman Index (HHI) to gauge how competitive or monopolistic different industries are in different markets. Back in 1990, the typical American metro area had a hospital market with an HHI number of 1,576, which the FTC characterizes as “moderately concentrated.” By 2009, 80 percent of metro areas had hospital markets with HHI numbers above 2,500, considered “highly concentrated.” Of these, 10 percent ranked as pure monopolies (with HHIs of 10,000). Based on FTC standards, fewer than 6 percent of hospital markets were robustly competitive even before the latest round of mergers took off.

Most individual doctors are also combining forces, either by joining large multi-specialty group practices that are aligned with hospitals or by becoming salaried employees of hospitals and hospital chains. In the San Francisco Bay Area, for example, two large group practices, Brown & Toland Physicians and Hill Physicians, have thousands of doctors who negotiate fees as a group. Meanwhile, the percentage of physicians employed by or affiliated with hospitals rose from 43 percent in 2000 to 57 percent in 2009. This year, only 33 percent of physicians will be “totally independent,” according to estimates by Accenture, a consultancy.

What are the consequences of this increasing concentration in health care? It is not right to say the trend is inherently harmful. As we’ve seen, the example of Intermountain and other large, integrated systems shows that there are huge potential clinical and economic advantages to bigness in health care. But in practice, even when the mergers and acquisitions are done in the name of coordinating and otherwise improving care, they often wind up creating local monopolies that abuse their market power.

How do we know this? Because there is a clear pattern of hospitals raising their prices dramatically after mergers, and of prices being the highest where there is the least competition. Often, the level of gouging is extraordinary. According to studies synthesized by the Robert Wood Johnson Foundation, when hospitals merge in already concentrated markets, the price increases often exceed 20 percent, and sometimes more than even 40 percent.

Phillip Longman and Paul S. Hewitt are, respectively, a senior editor at the Washington Monthly and the author of Best Care Anywhere: Why VA Healthcare Would Be Better for Everyone; and a former deputy commissioner for policy at the Social Security Administration and current vice president for research at the Council for Affordable Health Coverage. The views expressed in this article do not necessarily reflect those of the CAHC or its members.

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