The ever-rising cost of health care is becoming the most persistent economic problem in America. It is an issue that we have been grappling with for decades, and one for which policymakers at all levels keep coming up with one government “solution” after another. But like squeezing a balloon at one end, or a game of whack-a-mole, every time the government steps in to try and manage the problem, it invariably gets worse.
Consider the issue of consolidation within the healthcare industry. Some lawmakers and administration officials have tried to point an accusing finger at consolidation of hospital systems as a convenient scapegoat for the ongoing cost of health care woes, but a closer look reveals that it is not that simple. Government intervention in the industry, not business decisions by hospitals, is the real culprit where reduced competition and higher prices are concerned.
The constantly rising costs of health care have not only impacted patients. Providers have also been adversely affected by government putting its proverbial thumb on the scale. Hospitals, in particular, are being squeezed by what may be described as a perfect storm – higher costs of medical equipment, labor, and other inputs, increased demand for healthcare, and steadily reduced Medicaid/Medicare reimbursements – all of which have burdened them with enormous financial pressures. This has been felt most acutely by smaller rural and community hospitals, many of which have either closed in the past few years or are staring that impossibly hard decision in the face.
Consolidation into larger hospital systems has been viewed as a lifeline by many, and that is understandable. For a small, rural hospital on the financial ropes, merging to create or join an existing larger system means keeping the doors open, maintaining and improving both routine and emergency care for their patients, increasing access to new technologies and resources, and injecting new life into facilities that were on the verge of collapse. For the communities served by these facilities, it means maintaining a local health care option, and for many rural areas it also means maintaining an economic lifeline and tax base.
Despite these benefits, many policymakers continue to look at such consolidation with skepticism or worse. Believing that these mergers lead to monopolization and reduced competition, they are unfortunately drawing conclusions from outdated information and old biases that are no longer based in fact. Indeed, a closer look at the overall picture reveals that it is not hospital mergers, but consolidation within the insurance industry – brought about largely through government intervention – that is creating issues with competition.
New research by the Association of American Medical Colleges (AAMC) Research and Action Institute tells us that the increase in market power enjoyed by the top players in the health insurance industry can create enormous distortions and problems within that market. The report finds that comparing hospital consolidation with that seen in the insurance industry is night-and-day, noting that “the largest health systems have, on average, a combined 43.1% of the market share … in each state,” compared to the top three large-group insurance firms which enjoy a whopping 82.2% of the market.
It is difficult to lay blame on hospital mergers for reducing competition when it appears that it is the health insurance companies that have in fact acquired enough market share to distort the health care industry considerably. It is simple economics – when one segment of an industry holds that much market power over another segment, its influence over matters like how much they will reimburse providers for treatment is grossly outsized.
So how did this happen? We can’t entirely blame the insurance industry. They are merely reacting to the economic conditions thrust upon them. Over the years, the government, in a misguided attempt to make health care more affordable and accessible, has piled on coverage mandates and regulated rates. For example, the number of state-level health-insurance mandates has steadily grown since the 1960s, with the average state imposing nearly 40 as of 2015, and over the last decade mandate madness has surged due to the ACA's "Essential Health Benefits." The fact remains that when you marry mandates with the government’s other favorite tool for economic micromanagement – price controls – you create a near impossible situation.
That is precisely what happened in my home state of Colorado with the “Colorado Option,” a government-created insurance plan jam-packed with generous benefits that carriers were required to offer at below market rate, while simultaneously imposing a mandate to reduce their premiums by 5% per year. The result? Several insurance carriers that couldn’t make the numbers work left the state, concentrating market share in the precious few large carriers that remained.
Our health care system could use some systemic change, but blaming hospital consolidation and blocking necessary mergers is not where the focus needs to be. By diverting our attention from the real issues, most of which start with the government interfering in a problem and making it worse, we will fail to reach the real solutions that are needed.
