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Big Hospitals, Bigger Bills


In the current issue of National Review, Avik Roy has an excellent piece on the perverse effects of hospital consolidation. Unfortunately the article is behind a paywall, but he gets right to the nub of the problem in the opening paragraphs:

In 1994, two eminent Boston hospitals, Massachusetts General Hospital and Brigham and Women’s Hospital, merged. Officials hailed it as a new era for integrated, high-quality care. The state’s secretary of health and human services signed off on the merger without a public hearing, with the blessing of Republican governor William Weld.

The merged hospital entity, called Partners HealthCare, immediately went about raising rates for insurers. Blue Cross Blue Shield of Massachusetts, the state’s largest private insurer, wanted to fight — in 2000, at a gathering of the company’s executives, some suggested refusing to pay the higher fees. But executive Peter Meade delivered a cold slap of reality: “Excuse me, did anyone here save anyone’s life today? We are a successful business up against people that save people’s lives. It’s not a fair fight.”

As Avik has detailed elsewhere, the power imbalance between big hospitals and insurers can drive up health care prices by as much as 44 percent. If you have a subscription to NR, read the whole thing; if not, check out this video of a talk Avik gave in 2011 on this topic. He does a great job laying out the problem, as well as offer some solutions. He comes to the conclusion that the solution lies either in adopting a single payer system or in reducing the market power of providers.

No matter where we turn in health care reform, a similar choice between market-based reform and some version of single payer confronts. We at VM have our own reasons for supporting the market over federal control on this issue, but what seems clear is that, above all else, our current mixed system is unsustainable.

[Photo of stethoscope and money courtesy of Shutterstock.]

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  • bpuharic

    This is one of the reasons the ‘free market’ system advocated by the right in healthcare is impossible

    Regional medical organizations are able to set their own prices via monopoly control of healthcare practitioners. Deregulation leads, as Adam Smith pointed out, to businessmen conspiring against public interest, but the right insists that deregulation is the way to go

    And this is not unique. Many industries across the US are oligopolies with 3 or 4 large companies in control. As Nobel prize winners Robert Solow and Joseph Stiglitz have pointed out, the conditions under which a ‘free market’ happen are virtually impossible to achieve. It’s a theoretical construct which does not exist.

    But the right insists that evidence be ignored. No matter how many monopolies or oligopolies we have, we can’t regulate businesses because that’s ‘socialist’

    Adam Smith would have disagreed..

    • free_agent

      Why don’t we apply the antitrust laws vigorously?

  • Anthony

    Avik Roy: “the bottom line is not reassuring; it’s that there are no simple solutions to this very serious problem which is why we need to pay far more attention to it than we do.” (see Flow of Increased Health Costs)

    • Andrew Allison

      Actually, there are two simple solutions. One is to force patients to recognize the price being paid for healthcare by making low-deductible insurance more costly; the other, as Prof. Mead points out, is single-payer insurance with optional private insurance for those who want, and can afford better care.

      • ljgude

        What you describe Andrew is very close to what we have in Australia. Everyone pays a Medicare levy in Australia and gets government healthcare. Because it is a separate levy every taxpayer know exactly how much they are paying. People can and do buy private insurance too which gives choice of Doctor, access to private hospitals, and freedom from the waiting lists in the public system. To show one way these two systems complement each other, when waiting lists get longer more people sign up for private health insurance. When private insurance premiums rise, people drop their insurance and rely on the public system. Private hospitals and doctors are incentivised to control costs. There are actually functioning medical systems outside the US that have a lot of this figured out. Australia does this for under 10% of GDP, the Swiss do it differently with private health insurance a lot closer to the US system under the ACA for 11% of GDP. The US does it for 16% -theoretically capped by the ACA at 17.5% of GDP by 2017. Some sources put it at 17.5% already. There is your pachyderm in the operating theater. The US system costs twice as much as it should and has slightly worse health outcomes than the best mixed systems like Australia.

        • bpuharic

          The key phrase here is ‘alot of other people have figured this out’

          The American right thinks that we have NOTHING to learn from others. Our way of doing things is perfect. Everybody else is socialist so they’re a failure

          As you show, lots of things work well when they’re invented by others. Amazing.

  • Fat_Man

    Thank you WRM. The Roy article is excellent.

  • free_agent

    Har! Even at the time, it was admitted by many that the *purpose* of the merger was to create a monopoly in name-brand hospital care.

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