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Hospital Mergers: Where "Efficiency" Means Price Hikes


Obamacare isn’t the only huge, potentially dangerous transformation of our health care system currently underway. The NYT reports that the pace of hospital consolidation has rapidly increased in the last several years, rivaling the centralization frenzy of the 1990s:

Hospitals are merging faster and in greater numbers than they have in years. After holding steady through much of the 2000s, the number of deals doubled to 105 in 2012 from 50 in 2009, according to Irving Levin Associates, a health care research firm. That is still less than half the annual peak during the last merger wave, in the late 1990s, but [consulting firm Booz & Company] and others say this is only the beginning.

Booz has even predicted that 1,000 of America’s 5,000 hospitals could combine in the next few decade. The causes of this trend are complex. The NYT article notes that the ACA has a hand in incentivizing consolidation, but that certainly isn’t the only factor. Others include reduced patient admissions and lower cash flow from the federal government.

An era of systemic consolidation is bad news for a lot of reasons. Insurers will have less power to bargain for lower prices, and doctors will be forced to work for big firms rather than their own practices. And it will hit consumers where it hurts: “’The rhetoric is all about efficiency,’ said Karen Ignagni, the chief executive of America’s Health Insurance Plans, a trade group that represents insurers. ‘The reality is all about higher prices.’”

Any reform aimed at lowering health care prices has to take this trend very seriously—and carefully think through how to counteract it.

[Photo of stethoscope and money courtesy of Shutterstock.]

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  • Andrew Allison

    The Department of Justice thinks gun-running, stirring up racial hatred and opposing a merger of two major airlines strongly supported by the employees are more important than the effect of hospital consolidation on consumers.

  • Fat_Man

    WRM: I believe that you linked Avik Roy’s National Review article pointing to hospital mergers as drivers of health care costs. It is highly relevant in this context.

  • Thirdsyphon

    I can’t believe I’m to the right of the freaking National Review on *anything*, let alone on health care, but. . .has anyone stopped to consider the possibility that massive consolidation of the health care industry might in the end turn out to be a *good* thing?

    There are two basic paths that consolidation of this industry might follow, and only one of them is bad for consumers.

    The “bad” model of industry consolidation is what I’ll shorthand here as the “Funeral Home Fiasco.” Funeral homes used to be a very much a “mom and pop” industry dominated by small local players who competed with each other and kept prices down. Then, between about 1995 and 2010, a handful of large conglomerates with names like the Lowen Group quietly bought the small players out. The “branding” on the local funeral parlors remained the same, but the conglomerates were able to collude with each other to drive prices way, way up. To date, there’s been no effective consumer or legislative response. . . but I’d posit that there are things about the funeral market that make it uniquely suited to this kind of manipulation that don’t exist elsewhere: disoriented, desperate consumers; the absence of pricing transparency and “product reviews”; public revulsion at the notion of a “funeral brand”; and a lack of repeat interactions, to name a few.

    Some of these elements are present in the health care industry, to be sure, but on balance I think it’s more likely to follow the “good” path of consolidation, which I’ll shorthand as the “Best Buy Breakthrough.”

    Consumer electronics was, for years, a market dominated by small, local shops run by ripoff artists. Buying a television set or stereo in the 1970s and 1980s closely resembled the experience of buying a used car. There was no way to really ascertain what the fair price of a given product was, or how well anything performed, or what you really needed. Then, in the 1990s, a pair of major players emerged: Best Buy and Circuit City, and life suddenly became much, much easier. The two chains were at each others’ throats, and because their ads typically ran in the same publications, there was comprehensive transparency and real competition. The buying experience improved as well: high-pressure sales tactics would just drive people away into the arms of their arch-rival. If something similar happened in healthcare, i.e.: consolidation into three or four nationally known and branded healthcare “chains,” the result for consumers could be surprisingly positive. . .to the likely chagrin of the consolidators themselves, but to the great and lasting benefit of everyone else.

    I’ll probably never again be in a position to say these words to WRM or to the National Review, which broke this story, so I’m savoring this, but. . .

    Have you no faith in the market? Let free enterprise get on with its noble work!

    • Andrew Allison

      Forgive me, but I simply couldn’t resist ;<)

      Has anyone stopped to consider the possibility that massive consolidation of the health care industry into a single payer system might in the end turn out to be a *good* thing?

      • Thirdsyphon

        Why, *that* never once crossed my mind. . but what an intriguing proposition! Please go on! 😀

        • Andrew Allison

          Since you ask LOL. I’ve suggested more than once in response to WRM’s manifest distaste for single-payer healthcare that the issue is adequate healthcare for all and the best they can afford for those who can versus the present for- profit (of the insurance companies and providers) which delivers worse outcomes at higher cost than single-payer systems. Simply put, there’s far too much money being siphoned off in insurance company overhead and profit and healthcare providers trying to compensate for the inadequate reimbursement for the services provide to insured patients and the mandated care of the uninsured.

          • cubanbob

            A large part of the insurance company overhead is denying over billing and fraud. Something Medicare doesn’t do well.

      • cubanbob

        Single payer-a monopoly-why would that end well?

    • bpuharic

      When is an oligopoly a ‘free market’? Adam Smith himself observed that businessmen would collude to reduce competition.

      • Thirdsyphon

        The trick is to find the edge- the “sweet spot” of consolidation that maximizes efficiency, but not quite enough to blunt the edge of cutthroat, back-stabbing competition. Our antitrust regulators are extremely good at that.

        • bpuharic

          A free market is one where prices for commodities are set by the market

          Oligopolies set their own prices. They are generally not subject to market forces. I know, because at one time I was involved in one. I was a sales engineer for chemicals where the market leader, Dow, controlled about 60% of the market. We watched them. When they raised their prices we did the same. Not before.

          I think it’s almost an oxymoron to have an oligopolistic healthcare market, since the demand is inelastic vs price.

          • Andrew Allison

            Your thesis has a fundamental flaw: healthcare is, by-and-large, not optional.

          • bpuharic

            Uh…Andrew…that’s what the term ‘inelastic’ means.

          • Andrew Allison

            See above.

          • bpuharic

            If oligopolies control prices of commodities that are inelastic to price that means there is no free market. “Free Market” is a technical term. It exists like an ideal gas exists, that is, it doesn’t. It’s a theoretical construct.

          • Andrew Allison

            Duh! But what does that have to do with your argument?

        • Andrew Allison

          About that bridge LOL

  • Jane the Actuary

    Systematic consolidation could have some long-term positives, if these hospital/doctor corporations reached the size at which they could offer a staff-model prepaid health plan with all necessary specialties and hospital servics “under one roof” as it were — and if legislation contained some carrots and sticks to get us there. In ideal circumstances, this would produce coordination of care among providers, or at least have a better chance of it, if they were all co-workers rather than practicing independently.
    In the short-term, absent such a system, further consolidation will produce more instances of what periodically now occurs, when hospitals/hospital systems battle with insurers, and, I think, tend to win because an insurer isn’t in a position to exclude the hopsital(/system) from its network. I imagine this compounds the cost increases coming from the building spree (with “spa-like amenities”) that hospitals are on; at least, in the Chicago area, it seems that not a day goes by without another hopsital advertising its new all-private-room building. Maybe we need some anti-trust waivers to allow insurers to negotiate as a block against overpriced hopsitals?

    • Maynerd

      You may get your wish. A single payer system is the inevitable byproduct of Obamacare. I hope you don’t mind waiting longer for mediocre services. On the bright side, it will be cheaper!

      • bpuharic

        Why mediocre services? More of a talking point than fact.

        And remind me..if you don’t have health insurance….how long do you wait to see a doctor?

        • cubanbob

          There are plenty of walk in urgent care clinics. The average person spends on average of a thousand dollars a year on medical care. With a high deductible major medical plan, an income replacement plan like Aflack that would be far less than buying a bronze plan with Obamacare yearly.

        • J D

          I am uninsured in the United States. I recently called a GP office and was scheduled to see him that afternoon. He ordered a CT scan, which I received less than one hour later at a different location. I was billed at a 50% discount for the GP visits (still high for a poor person), and paid less than half of the listed price for the scan.

          Keep playing with your Public Policy Chemistry set though, guy. Being at the mercy of your illusion of explanatory depth is a real thrill.

          • bpuharic

            Mooch. Leach. Someone paid for your healthcare. If you REALLY had the strength of your convictions, you loser, you would have paid full price instead of expecting ME to pick up the tab for you, all the while telling me how wonderful the system is, you right wing loser

          • J D

            I paid half the inflated price used to gouge insurance companies, actually. It wasn’t subsidized.

          • bpuharic

            Sure it was subsidized you socialist hypocrite. Because they made up the money they lost subsidizing YOU by jacking up MY insurance costs. That’s how socialism works.

          • J D

            They didn’t lose money on my bill, which was not negotiated. Are you claiming that care paid out-of-pocket, immediately and as billed, is what drives hospitals to gouge insurance companies?

          • bpuharic

            Yes, that’s what I’m claiming. I’m a volunteer EMT and former student nurse. You got your reduced healthcare costs paid for by me. No wonder you’re so happy! It’s always nice when a socialist can pick someone’s pocket then tell us how wonderful the free market is!

          • J D

            Are you avoiding making an explicit explanation? That you almost became a nurse doesn’t tell me anything about billing. It seems clear to me that the price I paid was more than the cost of services to the hospital, but less than they are able to opportunistically charge insurance companies, in which case your moral framing is stupid, and tendentious (a pattern). I suspect my bills were close to an actual market price.

            I note for the second time that your initial claim was that the uninsured are unable to see healthcare providers, the opposite of which has been my experience.

          • bpuharic

            Sure it tells you about billing. I gave someone paper slippers so they could go to the bathroom? Their account got billed for it. You don’t really think aspirin pills cost $20 a pill do you? You don’t pay that? Someone else does.

            There is no ‘market price’ in US healthcare since there’s virtually no competition and the market is inelastic. There’s no competitition because local healthcare providers are members of consortiums, such as in my hometown of Pittsburgh…where healthcare is run by the UPMC healthcare system. Most doctors work for them or contract with them and UPMC bills insurance companies. It’s the same nationwide.

            The fact is about 26,000 people die in the US every year due to lack of healthcare access (go google it yourself)

            You were lucky because of socialism which you deplore. I paid for your healthcare. Quite frankly you should just thank me and shut up.

          • J D

            Your first paragraph, the only one you needed to write, is barely coherent. You appear to blame those who pay up-front for the fact that hospitals have the power to gouge the insured. I didn’t put you into a weak bargaining position,your chemistry set did. I didn’t indicate an inability to pay, nor did I negotiate my bill.That market prices are currently distorted does not mean that they are not possible under other arrangements.

            Also, I do not confuse redistribution for socialism. You can stop, too.

            As far as shutting up and saying thank you, Amen! The Occupy crowd should valorize high earners for overwhelmingly paying for the public services their lives are predicated upon.

          • bpuharic

            Yeah I know. You can’t understand how you’re a free market socialist can you? You have other people paying for your medical care then glory in your ability to rook the system

            Face it. I paid for your medical care, socialist. I’ve seen it happen over and over again. Hospitals simply pass along the loss from you to people who pay their way like I do.


  • Anthony

    Avik Roy: “In debates about health care, we spend a lot of time arguing over how we buy it: whether through government payers, private insurers, or health savings accounts. But there’s an equally important story, one that nearly everyone in the political class has neglected: how we sell health care.” Hospitals are at center of this story and play important role in middle-income Americans wage stagnation as Roy sees it. His Aug. 7th article certainly provides context to Quick Take’s topic.

  • Jim__L

    Start applying the Sherman Anti-Trust Act to hospitals.

    We need a president who’s willing to start swinging that sword…

  • Lorraine Barron

    Consolidating hospitals and doctors selling their practices to huge hospitals may have both positive and negative effects. Remember the 1990″s? Why do you think it will be better this time?

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