The game of hospital monopoly.
Healthcare consolidation is reducing your choices and raising your prices.
Readers of a certain age will remember a time when hospitals were run by local governments or by true non-profit organizations — often religious groups. You had the “Methodist'' hospital, the “Catholic” hospital, or the “Jewish” hospital. Those days are long gone. Today, hospitals tend to belong to certain “systems.” If you’ve lived in a particular metropolitan area for the past decade, you’ve likely watched as hospitals and clinics merged or were bought one by one by a major system or another. In 2007, just over half of all hospitals belonged to a “system.” By 2018, it was two-thirds.
This is the process of healthcare consolidation happening before your eyes. It includes mergers, acquisitions, affiliations, and even closures between clinics and hospitals within the healthcare system. Today, in the second installment of our series on America’s healthcare system, I want to explain how and why that happens — and the consequences for you and me. It’s a story of power, size, and above all, greed. Let’s cut in.
What drives healthcare consolidation?
In a word: profit. In the U.S., healthcare is a business. The sale of healthcare services translates into profit margins for healthcare providers, be they clinics, hospitals, pharmaceutical companies, medical device manufacturers, etc. But healthcare businesses exploit a number of complexities of healthcare to maximize their earnings.
For one, the consumer isn’t usually the one paying for healthcare. As we discussed in our last post, you pay your insurer for the privilege of being insured — meaning that they will pay for your healthcare if and when you get sick (sometimes!). That means that the consumer is usually only paying for healthcare indirectly, leaving the insurance industry to negotiate prices on their behalf. But because insurance is only a middleman, they don’t really care about the prices in the form of reimbursements, per se, just what they can skim off the top. That means they have little incentive to negotiate prices down on behalf of consumers.
Rather, reimbursement rates get negotiated based on competitors’ rates. If you’re an insurance company, you’re negotiating to make more money off of a transaction than other insurance companies. If you’re a hospital, you’re negotiating to make more money off of a transaction than another hospital. But because healthcare is, by definition, local — you can only get healthcare where you are — there are a limited number of patients that need care, and a limited number of places that they can get it.
That’s where size matters: bigger clinics and hospitals can command better reimbursement rates from insurance companies. After all, these insurance companies wouldn’t want to lose their business because they can’t offer their beneficiaries access to the largest hospitals in town.
Because bigger hospital systems can command better reimbursement rates, they make more money per transaction than their competitors. That allows them to grow, command even better rates, and drive the cycle forward. As they grow and strangle their competition, they force them either to shut down — or sell. And that’s exactly what happens.
The big buy up the small or shut them down. This is particularly true for small physician-owned practices that can’t compete with larger hospital-owned practices. Between 2005 and 2015, the proportion of doctors employed by hospitals grew by nearly 20%.
The consequences of consolidation at scale.
For patients, the consequences of the game of hospital monopoly are devastating. First, there’s less choice. In 2020, a year defined by a global pandemic where hospitals found themselves overflowing, 47 hospitals went bankrupt or closed. This often occurs after larger systems buy smaller ones and close the lowest performing ones — usually in low-income communities with low rates of insurance. Many of 2020’s hospital closures were in rural communities, forcing people to drive hours for medical care. But even in communities where mergers or acquisitions put hospitals under the same “system” umbrella, it means that there are few options to choose from when seeking care.
One might think that consolidation should reduce healthcare costs. After all, larger hospital systems should be able to take advantage of economies of scale as they grow. One part of that is true: operating costs drop by 15-30%. However, average prices increase by 6-18%. Why? Because they can. Without competition, consolidation allows hospitals to flex their monopolistic muscles and inflate prices despite reductions in cost. You pay more for something that costs them less because you have no choice.
Consolidation makes healthcare providers money. But it hurts patients. It means less choice, less access, and higher prices. It also means the difference between life and death for too many Americans in rural communities whose local hospitals shut down.
Next week, we’ll talk about the patients that the system fails worst of all.