The antitrust fallacy
Why busting up big health systems won't bring down hospital prices
There’s a growing consensus on Capitol Hill that health system consolidation is the primary driver of outrageously high hospital bills. More vigorous antitrust enforcement is one way to bring down prices, politicians on both sides of the aisle say.
“When mergers are anticompetitive, they must be stopped,” Sen. Amy Klobuchar (D-Minn.) said last week in opening her Judiciary subcommittee’s hearing on hospital mergers.
“Policymakers understand how we can improve competition in hospital markets,” said Sen. Mike Lee (R-Utah), ranking member of the subcommittee. “Antitrust enforcement is one obvious and important tool.”
The New York Times’ health insurance reporter jumped into the fray with a hard-hitting follow-up report that claimed the $178 billion in COVID-19 relief aid for providers was used to “sustain the big chains’ spending sprees as they expanded even more by scooping up weakened competitors and doctors’ practices.” Rep. Katie Porter (D-Cal.) called on the Federal Trade Commission to investigate whether bailout funds were used to increase market share instead of patient care.
Yet even the most strident advocates of vigorous antitrust enforcement admit the savings for health care consumers would be small. A recent paper by economists Zack Cooper of Yale University and Martin Gaynor, who directed the bureau of economics at the FTC during the Obama administration and is now at Carnegie Mellon University, said an across-the-board 10% reduction in hospital market power would lower hospital prices by just ½ of 1% and save just $2.5 billion a year for the privately insured – a minuscule portion of the more than $1 trillion Americans spend each year on hospital care.
Consolidation a long-standing trend
Hospitals have been consolidating into large chains for decades. No one disputes that fact. The American Hospital Association, which represents non-profit hospitals with 80% of the nation’s total in-patient capacity, claims financial necessity drives most mergers. Merger activity rises when the rate of increase in healthcare spending slows and vice versa.
Source: GoozNews; data from KaufmanHall merger report and CMS Office of the Actuary
“Often they are prompted by financial pressures that can limit a hospital’s ability to marshal the resources needed to effectively care for its community,” Dr. Rod Hochman, the CEO of Renton, Wash.-based Providence Health and chair of the AHA’s board of trustees, testified last week. “Mergers with larger hospital systems can provide community hospitals the scale and resources needed to decrease costs.”
Just as important, he said, is achieving the “scale and capital investment” for hospitals and health systems “to take on risk and participate in alternative payment models. Provider payment is moving away from volume-based systems in an effort to focus on patient outcomes while reducing costs.”
What he failed to note in his testimony is that Providence is in the midst of a nasty divorce proceeding in California where Hoag Hospital in toney Newport Beach is accusing Providence of failing to pursue the goal of improving population health, the ostensible reason for their 2013 merger. Instead, the suit, which is seeking to break up the merger, alleges that Providence used Hoag’s excellent balance sheet and high prices to shore up its own finances.
Last January, I noted that the incoming Biden administration faced a stark choice in how it should approach the enduring problem of reining in high health care costs.
Either it can dramatically expand antitrust enforcement and rely on competition to drive down the exorbitant price Americans pay for hospital and physician services. Or it can vigorously pursue payment reform and aggressively push providers into risk-based payment arrangements where margins and income will depend on delivering better outcomes at lower cost. To do a little of each guarantees the new administration will fail at both.
In April, I reported how the new leadership at the Centers for Medicare and Medicaid Services is taking a go-slow approach to payment reform. The architects of the accountable care pilot projects included in the Affordable Care Act are pushing for more rapid expansion of the programs.
Go-slow means no-go
The administration’s failure to put payment reform at the center of its cost control strategy provided the opening for antitrust advocates to seize center stage.
It’s also given new impetus to those who would weaken the so-called Stark laws that prevent creation of new physician-owned hospitals. The idea is to create new competitors. This ignores the first law of health care economics, which postulates that under piecework-style fee-for-service reimbursement, suppliers of health care services are incentivized to create unnecessary demand because those who hold the prescribing pen own the facilities.
Supporters of more rigorous antitrust policy also ignore the concomitant concentration that has taken place in the insurance sector. If one uses the same yardstick used to measure hospital consolidation, nearly three-quarters of the nation’s metropolitan areas have highly concentrated insurance markets, according to the American Medical Association’s annual survey of insurer market power. Nearly half of markets have a single dominant insurer with at least 50% market share.
Private employers and the 160 million Americans whom they insure pay the price when both sides in a hospital-insurer price negotiation operate in oligopolistic markets. Hospitals can demand higher prices knowing insurers have few alternatives. Moreover, if they are an academic medical center or have the most prestigious name in a region, they become “must have” to round out networks and often charge whatever the market will bear.
Insurers, who also act as third-party administrators for self-insured employers, similarly know employers have nowhere else to go. Moreover, given that health insurance is a low-margin business where medical loss ratios are carefully regulated, it’s in their interest to simply pass along price increases. The more they get charged, the more they can raise rates. And when you make a flat 4% or 5% margin on total costs, the larger your top revenue line, the larger your profits.
Antitrust advocates also overestimate the cost control potential in the growing role that private insurers are playing in administering Medicaid and Medicare. Those two taxpayer-financed programs together account for nearly 40% of total health care spending. Over three-quarters of Medicaid recipients are now in managed care plans run by private insurers. The share of the elderly in insurer-run Medicare Advantage plans is now 43% and rising every year.
The federal and state governments overseeing both programs pay the private insurers risk-adjusted capitated payments. They believe in that approach because in any given year, it limits taxpayer exposure and, in theory, incentivizes insurers to look for ways to eliminate unnecessary spending or prevent illness.
But the private insurers turn around and, for the most part, pay providers through fee-for-service. The major exception is managed care organizations that pay capitated rates to start-up primary care practices like Oak Street Health and ChenMed to manage their most medically needy and therefore highest risk patients, many of whom are dually eligible for both programs.
At last week’s hearing, Brian Miller, professor of medicine and business at The Johns Hopkins University School of Medicine in Baltimore, enthusiastically endorsed the switch to insurer-run managed care in public programs. “Incentives within a capitated model are very different, as the health plan or integrated delivery system loses money from fraud, waste, and abuse – including inappropriate utilization or induced demand,” he testified.
Unfortunately, that incentive disappears when providers receive fee-for-service reimbursement from the insurer and the insurer can simply turn around and recover any unanticipated losses in the following year’s rates.
The price control alternative
For most of the past decade, I served as editor and columnist for Modern Healthcare, which put me in close contact with many of the top leaders of the U.S. hospital industry. I took them at their word when they said they were investing heavily in population health management and supported their pleas for a gradual transition from fee-for-service medicine to taking on financial risk for the patients under their care. Yet whenever anyone suggested bold moves in that direction – like making bundled payments or capitation mandatory – their official representatives in Washington actively resisted, usually with some variation of the complaint that most hospitals weren’t ready to take on that much financial risk.
A forthcoming paper from Robert Berenson of the Urban Institute and Robert Murray, the former head of the Maryland Hospital Services Cost Review Commission argues price controls, not antitrust, is the best way put an end to constant price increases. Maryland is the only state in the union with all-payer hospital pricing, where every public and private payer pays the same rates. “If everybody gets the same price, then they’ll compete on everything else,” Berenson said. “You get better competition over quality, service and innovation when prices are regulated.”
The paper will lay out four possible approaches to using price controls to hold down surging hospital rates:
Place a cap on out-of-network prices, which will serve as a limit on what in-network hospitals can charge;
Put a ceiling on the prices charged to private insurers, which have gone up far more quickly than either Medicare or Medicaid rates;
Peg future price increases for all payers to either economic growth or the consumer price index; or
Establish an all-payer pricing system like Maryland and establish global budgets for each hospital whose increases over time are based on inflation and increases in utilization.
I think the last approach is the most promising. While the political obstacles are formidable, it is a more achievable goal than a government-run, single-payer system because it could win support from corporate leaders who pay most of the tab for their employees health insurance and doesn’t put an end to the private health insurance industry. For progressives looking for an alternative political strategy to making health care accessible and affordable for all, a single-pricing system could be structured in such a way that it achieves all the same goals as a single-payer system.
I’ll explore these issues more fully in the next issue of GoozNews.