How Hospital Mergers Increase Health Costs, and What to Do About It

The Bulfinch Building of the Massachusetts General Hospital. Image via Wikipedia

Last summer, I penned a blog post entitled “Hospital Monopolies: The Biggest Driver of Health Costs That Nobody Talks About.” It ended up being one of my most widely-read pieces last year. “I agree that changing the way we buy health care is important,” I wrote then. “But there’s an entire other side to that equation that we completely ignore: changing the way we sell health care.”

In November, the Massachusetts Association of Health Plans asked me to speak at their 2011 annual conference, on the topic of hospital consolidation. Given Massachusetts’ central role in the debate over health reform, and the top-notch health policy thinkers in the Boston area, I readily accepted.

In the 31-minute video below, I cover a number of historical topics, including: (1) how hospital mergers spiked in response to pressure from insurers to reduce health spending; (2) how early studies from economists failed to identify how hospital mergers drive up the price of health care; (3) how newer studies suggest that concentrated hospital markets lead to pricing increases of as much as 44 percent; (4) how government-subsidized health programs, such as Medicare, drive the problem of hospital consolidation. If you want to follow along, download the slides before watching the video.

In the second half of the talk, I discuss what can be done about the problem. There are basically two plausible approaches: (1) increase the market power of payors, either using single-payer health care or private insurance monopsonies; or (2) decrease the market power of providers, so that both payors and providers are equally fragmented. To me, option (2) makes much more economic sense, and is also more politically practical than trying to achieve single-payer health care.

However, as I discuss in the talk, the problem is that when the U.S. Department of Justice and the Federal Trade Commission have tried to block anti-competitive hospital mergers in court, judges have sided with the hospitals, against the officials at DOJ/FTC. So judges need to do a better job of understanding the economic evidence that weighs against hospital mergers.

In addition, we need to be mindful of how accountable care organizations, or ACOs, could worsen provider consolidation. We need to modernize the certificate-of-need regulations, and other laws, that stymie the construction of new hospitals that can compete with the well-connected incumbents. And we need to harmonize state medical licensing laws, so that insurers can send their patients to cheaper providers across state and national borders.

I got some excellent questions in the Q&A portion of the talk. Nancy Turnbull of Harvard asked me: in places where the “horses have already left the barn” and the hospitals have already merged, what can we do about it? Lynn Nicholas, CEO of the Massachusetts Hospital Association, asked: aren’t insurer monopolies also a problem? Others pointed out the fact that longer-term trends of decreasing hospital utilization are also driving consolidation, which makes it harder to justify building new hospitals.

Watch the video to see how I responded. The bottom line is not reassuring: it’s that there are no simple solutions to this very serious problem, which is why need to pay far more attention to it than we do.

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