The health care prices villain– it’s the hospitals

I know I’ve made this point before, but it’s an important one.  Everybody likes to blame the insurance companies for our over-priced and inefficient health care system, but, really, they are just the hapless middlemen.  The greedy capitalists sucking us all dry?  The hospitals.  But, nobody wants to blame the hospitals because we think of the dedicated doctors saving lives, not the over-priced administrators figuring out if they can get away with charging $50 instead of $40 for each dose of ibuprofen.  It was also thanks to hospitals that i learned what it really means to be a non-profit.  (It means the top employees profit handsomely, but there’s no shareholder profits).  Anyway, this is all laid out nicely in a terrific Planet Money newsletter, so here you go:

Hospitals are a really important part of the American economy. Not just in terms of health and wellbeing, but in terms of dollars and cents. The largest chunk of America’s healthcare spending goes to hospitals. And the hospital sector is one of the largest sectors in the overall American economy, accounting for about 6 percent of America’s GDP. Hospitals do a lot of good things. They save lives. They create good jobs. But because of growing monopolization of them, Zack Cooper, an economist at Yale School of Public Health, worries that they’re becoming like a “dracula” that “sucks some of the vibrancy out of a lot of towns across the country.” 

Cooper and his colleague, Martin Gaynor, have crunched the numbers on hospitals using the government’s preferred way of measuring market concentration, and they’ve found that about 80% of America’s hospital markets are now “highly concentrated.” [emphases mine] “The average hospital market in the U.S. is just way over what the FTC and the DOJ would consider a healthy level of concentration,” Cooper says. Many of these markets, he says, are dominated by just one or two hospitals, giving them market power to suck extra money from communities for health procedures and emergencies. 

In addition to decades of mergers and acquisitions with hospitals gobbling up other hospitals, hospitals have also been increasingly buying up physician practices. Economists refer to this as “vertical integration.” Think steel manufacturers buying the railroad lines. Like with mergers and acquisitions, Cooper says, many of these deals have not received adequate scrutiny from federal regulators. 

The research clearly shows, Cooper says, that growing monopolization has raised prices for patients. Less competition means hospitals can charge higher prices and get away with it. They can pay lower wages and get away with it. And they can provide worse care and get away with it. “We want firms to compete and be incentivized to raise their quality to attract more consumers, and the more that hospitals merge, the less sharp those incentives become,” Cooper says. “We have evidence that death rates are literally higher in markets where hospitals face less competition.” 

The bizarre part of all this is that many of these monopolizing hospitals are technically considered “nonprofits.” There are, apparently, “a lot of nonprofits to be made in the healthcare industry,” Cooper jokes. He doesn’t take their “nonprofit” status very seriously. He sees it more like a game where instead of making profits that are distributed to shareholders, nonprofit hospitals take the extra money they make and use it for executive compensation and buying shiny stuff. Cooper says nonprofit hospitals tend to “overinvest in technology. And the irony of that is that you get even more expensive gizmos that are probably not necessary in the first place — and they suck more money into the healthcare system.”

Being a non-profit offers hospitals some quirky benefits. They don’t have to pay taxes like for-profit businesses do. And while the FTC can block anti-competitive mergers between non-profit hospitals, they are hamstrung in investigating non-profit hospitals for anti-competitive conduct under current law. “It’s sort of crazy,” Cooper says. 

Anyway, the larger point of the piece is that the Biden administration is actually trying to do stuff about this.  Hooray for them!  Tiny steps, to be sure, but if we are every going to substantially improve American health care, we’ve got to take on the hospitals and this is a start.  

About Steve Greene
Professor of Political Science at NC State

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