The Charge of the Uptight Brigade: Hospitals, antitrust theory, and the last war

BY BRUCE VLADECK

Having discovered that prices, even more than quantity, explain why health costs in the United States are higher than in other industrialized countries, the governmental and academic antitrust establishment has devoted increasing attention to mergers and consolidation among hospitals, and their purported contribution to the growth in health care costs. Like the French and British generals whose plans for World War I included horse-drawn cavalry, disciples of conventional antitrust theory are deploying well-tested weapons on a dramatically changed battlefield – and it’s not even clear how effective those weapons were in the past.

The consolidation of American hospital ownership and management may be as much an effect of broader changes as it is a cause. Consider the following:

• In the last 35 years, per capita utilization of inpatient hospital services in the United States has fallen by more than half, even as the population has gotten older;

• At least some of that utilization reduction is attributable to the explosive growth in outpatient surgery, imaging, and other services – often in facilities partly or wholly owned by physicians who also practice in the hospitals with which they’re competing;

• While inpatient utilization falls, the technological, financial, and human resources necessary to operate a full-service, high-quality hospital have increased dramatically, thereby increasing the physical and financial scale required for modern hospital operations;

• At the same time, changes in utilization patterns and demographic shifts have meant that Medicare and Medicaid cover an ever-increasing share of hospital patients, but both of those public payors set the prices they will pay administratively, through systems that are largely indifferent to the theoretical market power of individual suppliers;

• Medicare and Medicaid have also had to divert an increasing share of their payments to support inner-city and rural hospitals that, without explicit subsidies, could no longer survive in an increasingly competitive and cost-constrained marketplace; and

• Trends in both the (increasingly concentrated) private insurance markets and public policy are requiring hospitals to assume more and more financial risk, whether through formal mechanisms such as Accountable Care Organizations, or by more subtly transferring risk through “value-based purchasing” or high-deductible health plans, which put collection risk on providers rather than insurers. Both the infrastructure necessary to manage such risks and the financial reserves they require are beyond the reach of many small to medium-sized hospitals.

In short, the arithmetic of contemporary health care means that most small to medium-sized metropolitan areas, and many inner-city and rural communities, can no longer support a large enough number of independent hospitals to sustain anything close to conventional norms of competition.

Moreover, in larger markets, where it is still possible for the community to support more than a handful of hospitals, the evidence that increased hospital consolidation will lead to increased prices is surprisingly thin and inconsistent. Most of the academic studies cited in support of the antitrust presumption that having fewer competitors will lead to higher prices use data from an earlier era of health care delivery and health care finance, and often describe less than fully representative markets. 

More recent and comprehensive data, as analyzed by my colleagues Meg Guerin-Calvert and Jen Maki and myself, appear to suggest that the relationship between market concentration and prices in larger markets, all other things being equal, is pretty close to random. The full paper containing that data and analyses is available by clicking here. 

It would be foolish to assert that all mergers between hospitals, or between hospitals and large physician groups, serve the public interest, but the evidence base for assuming the contrary is weak to nonexistent. We need to start thinking – and talking – about these matters in a more sophisticated, realistic way.

Vladeck is a senior advisor to New York City-based health care consulting firm Nexera and was a former administrator of the Health Care Financing Administration (now the Centers for Medicare & Medicaid Services) from 1993 to 1997.