The Federal Trade Commission has put the hospital industry in its crosshairs. This year, the agency has successfully challenged four separate hospital mergers.
As a general rule, government meddling in the private sector is rarely wise. But the FTC has put its finger on a troubling trend in American health care. In recent years, a handful of giant hospital conglomerates has taken control of a larger and larger share of the hospital market.
This widespread consolidation has suppressed competition, raised prices and reduced choice across the sector. Patients — as well as healthcare professionals — are paying the price.
Fostering competition across all facets of the healthcare market deserves to be a national priority. Antitrust enforcement should be part of that effort. But federal and state officials must also scrap many of the ill-considered regulations that tend to favor incumbents and encourage consolidation in the first place.
According to a 2020 analysis from the consulting firm Deloitte, just 10 hospital systems control roughly one-quarter of the nation's hospitals. A separate report from the U.S. Department of Health and Human Services estimates that 348 hospitals changed ownership between 2016 and 2021. Mergers accounted for 15% of those transactions.
Hospitals are also buying independent physician practices. The number of hospital-owned practices more than doubled between 2012 and 2018, according to research from Avalere, a consultancy. By 2018, nearly one-third of physician practices are owned by hospitals.
Hospital systems argue that consolidation is good for patients. But the opposite is true. As the market grows less competitive, hospital chains have more freedom to raise prices. Prices are 12% higher in markets with one hospital compared with markets with four or more, according to a 2018 study published in the Quarterly Journal of Economics.
One study of 25 metropolitan areas found that, in most markets, hospital prices rose by between 11% and 54% in the years after a hospital merger.
There is also substantial evidence that greater market concentration leads to worse patient outcomes. When patients have limited provider options, hospitals have less incentive to maintain the highest standards of care.
So it's encouraging that the FTC has taken an interest in pushing back against hospital consolidation. But that consolidation is in part a response to other government policies that encourage hospitals to get bigger.
Consider the effects of COVID-19 relief spending. In many cases, already well-financed hospital behemoths used their generous federal COVID aid to acquire smaller competitors during a time when independent providers were struggling to get by.
Onerous regulations also create a strong incentive for hospitals to merge. Regulatory compliance costs hospitals nearly $39 billion a year, according to the American Hospital Association. That's roughly $1,200 per patient admission.
Smaller hospitals don't have the scale to spread those compliance costs over a greater number of paying customers. Selling to a bigger competitor may solve that problem. But the loss of a competitor is a recipe for higher prices.
Some regulations are far more direct in how they suppress competition. For instance, many states impose "certificate of need" requirements, whereby anyone looking to open a new hospital or even purchase a new piece of medical equipment must get government approval.
The rules effectively give incumbents a vote on whether to allow competitors onto their turf. They can lobby government officials and fund campaigns to push for rejection of a certificate of need.
Markets are perfectly capable of determining whether a locale needs a new healthcare facility. Investors won't fund one if there's not a good chance it'll offer a positive return.
Decades of government intrusion have distorted the healthcare market and created an environment that encourages consolidation, wittingly or not. Federal and state officials should make promoting competition their priority — not just by scrutinizing mergers but by rolling back regulations that restrict the supply of care.
Sally C. Pipes is president, CEO, and the Thomas W. Smith fellow in healthcare policy at the Pacific Research Institute. Her latest book is "False Premise, False Promise: The Disastrous Reality of Medicare for All," (Encounter Books 2020). Follow her on Twitter @sallypipes. Read Sally Pipes' Reports — More Here.
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