Hospital Mergers Are Driving Up Health Care Costs

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Throughout the pandemic, hospitals have shouldered a heavy burden of care for the sickest Covid-19 patients. Each wave of coronavirus infection stretched emergency units to capacity and drove doctors and nurses to exhaustion. It’s never been clearer that these institutions are essential to Americans’ well-being.

Unfortunately, though, the financial pressures of the pandemic will lead more hospitals and physician practices to merge. Policy makers need to pay closer attention to this trend, which started long before Covid-19, because it threatens to make U.S. health care even more expensive.

Hospitals account for roughly a third of America’s $3.8-trillion-a-year medical bill (nearly double what other affluent countries pay per capita). As they grow bigger, hospital systems strengthen their pricing power. Companies have to include them in the health-care networks they offer their employees, limiting their ability to negotiate discounts. In most communities, even the largest employer represents only a small share of a big hospital’s business. In monopoly markets, prices are 12% higher than in places with four or more competing hospitals, research shows.

As hospital prices rise, they push up insurance premiums for employers. That expense gets passed to employees in the form of bigger premium contributions, greater out-of-pocket costs (co-pays and deductibles), and lower wages. Taxpayers take a hit, too, as the employer-health-insurance tax exclusion — already the largest federal tax subsidy — expands.

Hospital operators often contend that they need high private prices to make up for low Medicare and Medicaid rates. Studies cast doubt on this. Hospitals raise private prices just as much when Medicare and Medicaid revenues are increased. And consolidation doesn’t mean better care.

Companies are ever more alarmed by the cost. In Colorado, where some hospitals’ prices are triple Medicare rates, businesses have begun banding together with school districts to strengthen their leverage with hospitals. In a recent Kaiser Family Foundation survey, hundreds of large private employers said they’d like to see government limit hospital prices. Their concern is understandable. Federal and state policy makers need to study a variety of strategies to deal with hospitals’ outsized market power.

For a start, the Federal Trade Commission should be given more authority to apply antitrust rules to nonprofit hospitals, which are involved in most mergers. In addition, hospital markets should be defined more locally for antitrust purposes than they have been. Hospitals monopolize cities and neighborhoods, not entire regions. Any hospital that dominates the market for a specific medical service — neurosurgery, say, or cardiology — should be required to contract with all insurers in the area.

For competition to work as it’s supposed to, transparency on prices is crucial. Here, the Trump administration made a stride in the right direction by pushing hospitals to publish prices. Since Jan. 1, they have been required to post in easily readable form their basic charges for a few hundred services that are considered shoppable, along with the rates they negotiate with various payers. Already, this has revealed astounding variation. At one California hospital network, some C-section deliveries covered by private insurance cost nearly $40,000 more than others, and prices for joint replacements differ by almost $55,000. Knowing this can help employers strike better terms.

Unsurprisingly, hospitals have tried to nullify this change — either hiding the data from web searches or failing to post it at all. Roughly half of all hospitals haven’t revealed their negotiated prices. The penalty for noncompliance is trivial, just $300 a day per hospital. Paying $100,000 a year to keep prices secret might be too good a bargain to resist; a hospital can make that much money on a single surgery. This needs to change. The penalties should be increased until they work.

What about the simpler approach of directly restricting hospital prices? States have the authority. Montana, for example, limits inpatient hospital payments for state employees to 220%–225% of Medicare rates. For 50 years, Maryland has set hospital prices for all payers, and has had some success keeping spending down. Since 2010, Rhode Island has capped hospital price increases for commercial insurers. At the very least, if effective competition cannot be revived, these schemes deserve closer study, to see which work best and might be more widely applied.

Containing the ongoing surge of U.S. health costs ought to be a national priority. The challenge admits of no easy solutions, and many different approaches will have to be tested. But business as usual is an option the country can no longer afford.

Editorials are written by the Bloomberg Opinion editorial board.

©2021 Bloomberg L.P.

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