The missing villain in the healthcare drama

When it comes to rising costs, what about hospital consolidation? A shout-out to Eduardo Porter for pointing that out

Eduardo Porter, the New York Times economics columnist, deserves a shout-out for his column last Wednesday challenging a meme that’s been circulating for some time in health policy circles—and echoed in the media.

As the meme goes, the chief villains responsible for the high cost of American healthcare are waste, overtreatment, fee-for-service medicine, unaccountable hospitals, and paying for treatments that don’t work. So it’s not surprising that the fixes contemplated by Obamacare revolve around accountable care organizations to manage patients more effectively, bundled payments to get rid of fee-for-service, and disclosure of healthcare prices to bring on transparency. But are the accepted villains really the central villains, or just the easiest ones to target?

Porter suggests another culprit. What’s missing in this stampede of policy innovation, he says, is “one of the best-known causes of high costs in the book: excessive market concentration.”

Steven Brill, the journalist and entrepreneur who wrote the groundbreaking “Bitter Pill” piece about healthcare costs in Time magazine, made a similar point in his interview with CJR last week. He noted that the Affordable Care Act “doesn’t address the basic problem of the cost of healthcare. It deals with who pays the costs, not what the costs are.” And the ACA indeed did not tackle a hard one—the growing concentration and power of hospital systems and the physician practices they increasingly own, which gives them the leverage to control the price of care.

Porter begins with a success story from the Federal Trade Commission, which investigated—and challenged—a merger between two suburban Chicago hospitals and the subsequent high prices they charged insurers. Aetna said it experienced price increases of 45 to 47 percent over a three-year period. Policyholders were the losers. They “either paid higher premiums directly” or their wages grew more slowly to compensate for the rising cost of their company health plans,” Porter pointed out. In the end, the FTC forced the two hospitals to negotiate separately with insurers, and prohibited them from colluding on prices.

Porter argues that the FTC’s victory over the hospitals should

draw policy makers’ attention to an elephant in the room that appears to have been overlooked in the debate over how to rein in the galloping cost of healthcare: a lack of competition.

He cited the work of Carnegie Mellon’s Martin Gaynor and the University of Pennsylvania’s Robert Town. Gaynor has noted more than 1,000 hospital-system mergers since the mid-1990s. Town reports that 20 years ago there were on average about four rival hospital systems about equal in size in each metropolitan area. By 2006, the number was down to three.

That raises another question: What’s the insurance companies’ role in the growing market concentration in healthcare? To be sure, insurers are buying other carriers and have been for some time—setting up a battle of hospital giants versus insurance giants, which will determine what employers and individuals will pay. Obama administration officials have suggested that small carriers are fostering competition in the new exchanges. “Affordable Insurance Exchanges will offer Americans, competition, choice, and clout,” Secretary of Health and Human Services Kathleen Sebelius told readers of a NewsHour blog awhile back. But that may not be the full story.

As insurance consultant, Robert Laszewski, wrote in a recent blog post about one requirement of Obamacare that requires insurers to pay out a certain percentage of the premiums it collects in claims. That requirement, he says,

may have driven out a great many ‘less efficient’ competitors. They may be less efficient but these little guys have also been the ones that have kept the big guys on their toes over the years. The rules may have caused more market consolidation meaning the big guys are more dominant than ever.

More unintended consequences, which make good stories! Several reporters and news outlets have been doing outstanding work on the market concentration beat. Last year the National Journal’s Margot Sanger-Katz reported on the Chicago hospital mergers and concluded that as hospitals consolidate, “the 2010 health care reform law is likely to make it much worse. A law designed to lower costs will likely raise them instead.” One of the reasons, she wrote, is that current regulations protect new Accountable Care Organizations being set up by hospital systems from tough anti-trust scrutiny. (Accountable Care Organizations are HMO-like organizations that are responsible for managing the care of a given population.)

In addition to Sanger-Katz, the work of reporters at The Charlotte Observer, the Raleigh News & Observer, The Tampa Bay Times, the Pittsburgh Post-Gazette, and The Wall Street Journal come to mind.

There’s much more to report on, and Porter’s piece offers another template for further exploration.

Follow @USProjectCJR for more posts from Trudy Lieberman and the rest of the United States Project team, including our work on healthcare issues and public health at The Second Opinion.

Related stories:
What We’re Learning About Hospitals, Part One

Brill’s big breakthrough

Holes in a Holy Grail?

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Trudy Lieberman is a longtime contributing editor to the Columbia Journalism Review. She is the lead writer for The Second Opinion, CJR's healthcare desk, which is part of our United States Project on the coverage of politics and policy. She also blogs for Health News Review. Follow her on Twitter @Trudy_Lieberman. Tags: , , , , ,