Increasing Hospital Concentration Could Lead to Higher Prices

(Bloomberg) -- Hospitals are big and getting bigger.

Across the U.S., markets for hospital services have become increasingly concentrated, as closures and consolidation mean fewer institutions are taking care of more patients, a new report suggests. Economists and policy makers say that gives hospitals power to negotiate higher prices.

Hospital care accounts for a third of American health-care spending, more than retail prescription drugs and the administrative costs of health insurance combined. Yet the hospital industry frequently escapes the criticism that insurance and pharmaceutical companies face from lawmakers and politicians who rail against rising medical costs.

“There’s a massive elephant in the room, and that elephant in the room is unit cost and prices,” said Niall Brennan, president and chief executive officer of the nonprofit Health Care Cost Institute, which released the report Tuesday.

As hospitals become more consolidated, many health economists say that they increase their leverage to negotiate higher prices from health plans. That in turn drives up insurance premiums. Research consistently shows that “reducing hospital competition leads to higher prices for hospital care,” according to a 2018 report by the U.S. Department of Health and Human Services.

The hospital industry has argued that consolidation is beneficial. Mergers improve quality and reduce cost, according to a recent study by the American Hospital Association. That finding, however, is contested by economists who study the issue.

The strategy may be necessary for many hospitals to survive, as more medical care is delivered outside of acute-care hospitals in cheaper settings like urgent-care clinics and surgical centers, or through telemedicine.

Competition is shrinking. In 2016, hospital markets in 81 metro areas were considered highly concentrated, compared with 75 in 2012, according to the Health Care Cost Institute’s report. In two-thirds of the metro areas studied, hospital markets became more concentrated between 2012 and 2016.

Metro Consolidation

The report relied on a measure commonly used in antitrust analysis that gauges how concentrated a market is based on the market share of competitors. It measured only the market for inpatient admissions, so it doesn’t reflect other services such as outpatient clinic visits or imaging.

By that measure, competition could diminish as hospitals close or merge. It could also be influenced by where patients choose to go, or how insurance networks steer them into certain facilities.

The group analyzed data from 4 million insurance claims for inpatient hospital stays between 2012 and 2016 from national health insurers including UnitedHealth Group Inc., Humana Inc. and CVS Health Corp.’s Aetna unit. The report did not have data on all markets.

The most concentrated metro areas in 2016 were Springfield, Missouri; Peoria, Illinois; and Cape Coral, Florida. The most competitive markets were New York; Riverside, California; and Philadelphia.

While the Health Care Cost Institute report doesn’t show that increasing market concentration causes price increases, it found a correlation between price and competition. It’s consistent with other research that shows shrinking competition leads to higher prices.

To contact the reporter on this story: John Tozzi in New York at jtozzi2@bloomberg.net

To contact the editors responsible for this story: Drew Armstrong at darmstrong17@bloomberg.net, Mark Schoifet, Timothy Annett

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