Expert: Hospitals’ ‘Humongous Monopoly’ Drives Prices High

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