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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

Applied to health care, a common carrier regime might work like this: A hospital over a certain threshold of market power—let’s say, one-third or more of a community’s beds—would be required to publish a full schedule of its prices for all its different services and procedures. It would also be required to charge all customers the same price, whether those customers were large or small insurance companies, employers, or individual patients.

Hospitals already draw up such a schedule of prices, known in the business as a “charge master,” but hardly anyone except people without insurance are actually charged the prices on the charge master, and many hospitals won’t even give you a copy. Under a common carrier regime all commercial customers would pay the same published price.

A common carrier hospital could also not discriminate between independent doctors and doctors employed by or otherwise affiliated with hospitals. All would have the same scheduling rights and pay the same overhead allocations for services such as operating rooms, CAT scans, and intensive care beds. A common carrier physician group, likewise, would have a single rate structure.

From the consumer’s point of view, all common carriers would be effectively “in network,” in the sense that all customers would pay the same price. Meanwhile, nothing would prevent common carriers from integrating with an insurer to operate an ACO or HMO, so long as they did not use their pricing power to disadvantage competing health plans.

Or to think of it another way, common carrier health care providers would effectively be part of a community’s basic infrastructure. They might be publicly or privately owned, or run by a nonprofit or for-profit organization. But equal access to this infrastructure would be a given rather than itself a subject of competitition. Who would want to live in a town where all the local businesses—restaurants, lawyers, copy centers, hardware stores—competed not over which produced the best product or service, but over which could use its market power to win the most concessions on the prices it paid for basic inputs like water, electricity, or the cost supporting the local road network? We should not think of health care infrastructure as being categorically different.

With lower barriers to market entry, competition among health plans would no longer be primarily over who can use their pricing power to maximize market share. Rather, it would be over who can provide the most value to the consumer. The plans most likely to gain acceptance by price-sensitive consumers will be those that implement the most efficient clinical protocols—a balance that Intermountain calls “the best clinical result at the lowest necessary cost.”

Providers that didn’t meet the threshold for being designated common carriers (in our example, those with one-third or less market share) would remain free to gain market share by underbidding the published prices of the giants. But if these providers grew too large, they, too, would become common carriers. Conversely, large institutions could divest their way out of common carrier status. This incentive structure limits the need for antitrust enforcement, while helping to ensure that the economic returns to bigness result from actual efficiencies rather than pricing power.

But, of course, this set of incentives does not remove the need for more vigorous antitrust enforcement. A hospital or ACO with a 100 percent monopoly in its local market might well impose high costs and inefficiencies on all of its customers equally. In practice, there are certainly towns too small to support more than one hospital or ACO, but we need a Federal Trade Commission that is empowered to ensure that wherever possible there are at least two that are operating in true competition with one another.

Conservatives might object that it is beyond government’s competence to perfectly calibrate the balance of concentration and competion in each local health care market. But as politicially and administratively difficult as this approach will be, it’s basically the only way to create the conditions under which markets in health care can operate efficiently even in theory. You will not find Adam Smith defending the notion that the hidden hand works in monopolized markets with secret prices.

The only actual sustainable alternative is to have government directly set prices and thereby allocate resources in health care. Some liberal readers may well say, “Yes, let’s just do that.” But whatever the merits of that model, it is not going to happen anytime soon in America at the federal level.

What will happen, though, on our current course, is unrelenting health care inflation that could easily, as we’ve seen, bring the equivalent of a new 28 percent payroll tax on middle-income families by 2030. If the Republicans manage to kill Obamacare, then they will take ownership of that reality. If Obamacare survives but the ongoing inflation in health care continues, then a majority of Americans will conclude that the Democrats are the ones to blame. Either way, it would seem that both parties have an enormous interest in taking on monopoly in medicine and in using true, all-American competition to stop the price gouging.

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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