Fewer Hospitals May Lead to Higher Prices

Obamacare is coming and with it a new wave of hospital consolidation

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On July 16, two New York City hospital networks announced they were merging to create the largest health care system in the metropolitan area and one of the biggest in the country. The CEO of one of the hospitals said the merger would pave the way for more “efficient” and “integrated” care. Joining the two networks into one entity — to be called the Mount Sinai Health System — would also compensate for “the inability of the federal government or the state governments to be able to pay for the health care that people in the past have demanded,” he told the New York Times.

Put another way, the new large system will have more market power that may allow it to demand higher reimbursements from private insurers, ultimately raising costs for consumers.

Consolidation like this is happening all over the country, as hospitals acquire each other and merge in a trend that started decades ago and may be accelerated by the new health care law. This consolidation reduces competition in markets and gives hospitals more leverage to raise prices.

(MORE: Obamacare Delay Increases Costs and Complications)

“It’s very common that mergers between large entities, even in large urban areas, can have substantial anticompetitive effects,” says Martin Gaynor, a professor of economics and health policy at Carnegie Mellon University.

The new Affordable Care Act, which expands health-insurance coverage and cuts half a trillion dollars from Medicare, aims to slow the growth in health care spending by encouraging more coordinated patient care and rewarding quality over quantity. Architects of the law say new entities called “accountable care organizations” or ACOs, will encourage health care providers to work together and share in the savings that results from more efficient delivery of medicine. These new provider coalitions, which could be individual large systems providing integrated care or multiple providers working in concert, will be paid by Medicare, in part, based on the size of their populations, rather than for each separate health care service provided.

But ACOs may also reduce competition by encouraging hospital systems to be bigger simply to manage those larger populations. “Will some of these organizations be kind of sham organizations where they’re using the ACO label as cover and they’re actually anticompetitive organizations?” asks Gaynor. “That is a concern that I have.”

Melinda Hatton, general counsel for the American Hospital Association (AHA), says hospitals have no choice but to consolidate. Insurers are banding together, and the federal government underpays for services through Medicare and Medicaid, says Hatton. “I know there are a lot of academics who do studies, and God bless them,” she says. “But payers are increasingly using their leverage to drive down prices.”

(MORE: The Backstory Behind a Hospital Bill)

Carnegie Mellon’s Gaynor says there have been more than 1,000 hospital mergers since the 1990s. A report issued by the AHA in June says 551 hospitals were acquired by other health systems between 2007 and 2012, but says in most markets, there were still plenty of hospitals competing with one another afterward. (This will be true in New York City even after the Mount Sinai merger.) An AHA briefing paper points out that the ratings agency Moody’s said in 2012 that the financial outlook for hospitals was negative. AHA also argues that the fact that health-care-spending growth is relatively low right now proves that consolidation among hospitals is not driving prices upward.

Hatton says prices at a huge merged health care system may be higher than another smaller hospital because of better quality and patient preference. “An Apple computer costs more than a Dell computer. It’s a better computer, and it’s what people want,” she says.

A paper co-authored by Gaynor and funded by the nonpartisan Robert Wood Johnson Foundation, however, found that hospital mergers can increase prices dramatically. The paper, which analyzed previously published academic studies on the topic of hospital market concentration, concluded that consolidated hospital systems can drive prices as much as 20% to 40% higher. If a newly merged health care system is so dominant in a community that local insurers must have the system in their networks, the hospital has enormous leverage.

Gaynor’s research is challenging to do in part because the prices hospitals charge uninsured patients and private insurers are typically secret. Asked whether more price transparency might be able to prove that hospital consolidation does not drive up prices, Hatton said a better course would be for private insurers to spell out for their customers how much out-of-pocket costs would be for various treatments and procedures.

“I don’t know if, from a proprietary interest, putting out negotiated prices is something that actually adds to a competitive market,” says Hatton’s colleague Rick Pollack, executive vice president of the AHA.

It’s yet one more aspect of the health care industry that makes it different from others. Consumers (patients) don’t pay for goods (health care) directly. The presence of negotiated insurance contracts in the middle makes it all but impossible for those needing health care to be informed shoppers — even if there are multiple hospitals to choose from.

MORE: Bitter Pill: Why Medical Bills Are Killing Us

46 comments
ahandout
ahandout

Hatton says prices at a huge merged health care system may be higher than another smaller hospital because of better quality and patient preference. “An Apple computer costs more than a Dell computer. It’s a better computer, and it’s what people want,” she says.

You are not going to get an Apple, unless you want to pay out of pocket for it.  No matter if you have health insurance, or Medicare, you are NOT going to get the top of the line healthcare.  And then you add more people to the system under either case, private or government payee, you increase cost and decrease care.  Doctors cannot spend time with patients.  Who has not been to see a doctor who runs from room to room and hurries along giving him only enough time to be a high paid drug dispenser.

No, time for talking, here's some drugs, go away.

suupasugoi
suupasugoi

I've been both to a doctor's office an an urgent care center which claimed they accepted by crappy student insurance (aetna) and said there would be no copay, only to have a $250 bill trickle into the mail box months later. How can we shop based on price when we're given bold faced lies over the counter at the office? In one of those instances my doctor ordered a whole bunch of tests without mentioning price and I got to pay a $200 lab fee as well. Had she told me the price I would have said no thank you. You would think the free market people would be gnashing at the teeth to get some price transparency.

HenryMiller
HenryMiller

“the inability of the federal government or the state governments to be able to pay for the health care that people in the past have demanded."

How is it that "people" are allowed to "demand" that taxpayers pay their medical bills?

DavidM.Higgins
DavidM.Higgins

I live in a small Pacific Northwest town with two Hospitals.  They just keep getting bigger and bigger although the population of this Rural area has remained about the same.  What started out as Individual Buildings turned into complexes that spread out over acres around the original Hospital sites. BOTH Hospitals always have to have ALL of the Latest Multi-Million Equipment and although they are BOTH owned by Churches and are Technically 'Non-Profit' one of them has just gone through a Remodeling that makes it look like a cross between a Hollywood Spa and a Cathedral.  

I think MAYBE there is a REASON Health Costs keep going UP when the PROFITS for these 'Non-Profits' can build these Palaces and the Village of Buildings that surround them.    

Discursions
Discursions

If Time magazine is suggesting that making a commodity scarcer tends to make it more expensive, then golly, I guess Time has finally caught up with my high school economics class.  But we knew that Obamacare would increase costs years ago, when Time was cheerleading Obamacare.  In fact, we knew as soon as the AMA signalled early and often that it would support the ACA that healthcare costs would rise.  One way to bring down costs using federal dollars: build 100 (or 500)  new medical schools and break the back of the AMA's stranglehold on licensing new schools and new doctors.  There are tens of thousand of college grads each year who would make fine doctors but who can't get into medical schools.  Flood the market with physicians.  Guess what would happen to prices?  But Obama got in bed with the AMA at the very start, and they protected their monopoly.

ptcruiser5850
ptcruiser5850

If the goal was to reduce healthcare costs, ending third party pay and increasing the number of providers would be the order of the day.  The appropriate steps are being taken to limit access and increasing the cost of healthcare.

sedj4wd1
sedj4wd1

Methadone Clinics are a muti billion $ business they need traffic cops and Security to handle the people going there. that have abused their own bodies and Obama care will make good people pay for the worst of our population. My town we now have 5 drug stores in my town in New Hampshire and 3 gas stations "what does that tell you"? Obamacare is care for people on drug habits and good people to pay for methadone clinics.. hospital beds will fill beds like airports fill seats..There will be so much fraud from billing to even people being kept in Hospitals for the money they can get from insurance company's.. This is not the way to equality but will separate us domestically. Take from good people to pay the care for people that do not care about themselves. What we need is to teach self care and awareness not give into the weakness of others

ahandout
ahandout

It's not "may," it's will.  Fewer hospitals and doctors will lead to higher prices.  The media is being intentionally misleading, or they are as dumb as a box of rocks.

This is what we have been telling you all along.  You cannot add millions of people, have fewer doctors and hospitals and expect to lower costs.  Supply and demand.  Increase the demand and the price will rise.  I guess the liberal arts degrees didn't require and economic class.

calson33
calson33

Yeah, this was always going to happen.. but it's not due to the affordable care act. The problem was, and is the insurance companies. The only way we will have affordable health care is to remove the middle man.

orangeplasticfish
orangeplasticfish

WRONG!!!...Competition does NOT lead to lower costs in hospital business. Competing hospitals try maintain or get more revenue by investing in regionally redundant hardware. The result is actually higher costs per patient because each hospital does not have enough patients to allocate new hardware costs...Profit maximization, fee-based charging and additional testing to avoid malpractice suits also inflates costs...Countries that have a healthcare cost per GNP of 9% versus USA's 18%, make a point of minimizing regional redundant investments in hardware and services by hospitals. They all have universal health care as well where every citizen pays taxes and fees to support the national healthcare system.

cent-fan
cent-fan

So to paraphrase, Kate, because the insurance companies, hospitals, oil companies, banks, real estate speculators, or stock manipulators are greedy and squeezing average citizen for every drop it's somehow the big government's fault.  If the government were less or gone all together these venerable institutions would guarantee fairness, equity, and rainbows to great and small.  The market forces of desperate sick people coughing out the last of their savings would bend these larger and larger corporations to the will of the people.  Bad government!  Baaad government!

MrObvious
MrObvious

This is what's wrong with our healthcare system; for profit. Our care is not what's best for us - it's how much they can charge for the most basic care.

jamesf161
jamesf161

If you don't have enough competition, may I suggest that the government start some. The lack of profit margins makes it very affordable, and forces competition with a low cost entity.Anyway, this article is very speculative. Obamacare might cause hospital mergers? Well, they'll happen, sure, but you can't pinpoint Obamacare as the cause. It's not good journalism. Evidence or gtfo. I also dislike how the writer fails to deal with the issue in a proactive way, instead casually blaming Obamacare like repealing that will solve a 20 year old issue. Writing in such a reactive or just plain solution-less way only adds to or tendency to not proactively tackle issues and revert to partisanship.

michelemanion
michelemanion

What competition in hospital pricing?  As your feature article several months ago pointed out, hospitals pretty much charge whatever they want right now with their master charge lists. Free market competition has never worked in the healthcare arena--something everyone should have figured out by now.  With our private, free market approach, we pay more than double what other countries pay for significantly poorer results. Fears about removing competition would have been appropriate decades ago as this mess was developing, but are pointless scare tactics to discredit reform at this point.

retiredvet
retiredvet

Is this article trying to infer that the ACA is causing the health care "industry" consolidation that's been going on for twenty years?

gysgt213
gysgt213

"but says in most markets, there were still plenty of hospitals competing with one another afterward."


Maybe its just me but hospitals competing with one another like furniture stores does not sound like a health care system focused on patients and well, health care.  It does sound like a great idea to generate profits though.   Maybe we can look forward to the Groupon: Diabetes?  Get one amputation and the 2nd one is free.



ahandout
ahandout

@HenryMiller Welcome to the funda-mentally Obama-ed America.  You have enough losers on your side and vote yourself other people's money. 

allenwoll
allenwoll

@DavidM.Higgins 

Churches THEMSELVES constitute a scam -- So how can you expect anything else of any of their creations ? ? 

Now is the time for individual people to form Health Care Cooperatives operated by the Users, the Members, themselves : NO third parties AT ALL !

allenwoll
allenwoll

@Discursions 

What verifiable data do you have that shows an actual doctor shortage ? . I have had no difficulty in securing an appointment in a reasonable time even though I am on Medicare. 

smart1
smart1

@sedj4wd1 You apparently have no clue about what the ACA is actually about.  Google it.  Read it. It has already been responsible for stopping billions in fraud.  Does it have problems?  Yes.  I'm sure it will need to be worked on.  But you seriously need to read it if you think that they are going to be able to "keep people in hospitals" for payment.  They get away with that now, but that kind of stuff is what the ACA is going to be good for and will save money.

MrObvious
MrObvious

@sedj4wd1 

Fact

Old system - smaller pool of insured paying for people without with higher premiums. Premiums going up as insurance companies figure out how to throw more and more unhealthy people off insurance as to keep profits growing.

New System - more people in the pool paying for insured sick people and the premiums flatten and in some cases going down due to competition in state exchanges.

I can for the life of me not understand why people like to pay more - because they don't like some people getting healthcare?

You pay for it anyways - paying more seems like a red flag intellectually, but maybe your spite is worth the higher price tag.

smart1
smart1

@ahandou  We shall see, won't we?  If you think Obamacare isn't going to cut costs, think again.  Better yet - read it.  If you know anything at all about the medical field, hospital billing, or utilization review, there is no way you wouldn't think this is the best thing we have so far. 

MrObvious
MrObvious

@ahandout 

Dumbarse - none of it have ANYTHING to do with ACA.

It's the same consolidation that have been going on for decades.

Jesus. Speaking of box of rocks.

jhonny.ausemkock
jhonny.ausemkock

You're a clueless idiot. The (so-called) Affordable Healthcare Act never was anything more than a payoff TO the insurance companies themselves for their participation in its passage. In a nutshell, the government has now decreed that all Americans have to do business with them! Sweet deal for them, eh? Obamacare is 100% to blame for this scenario, it created it. Are you insane too? You want to bring costs down? First, get rid of this sorry excuse for a piece of legislation. Even some rank and file Democrats are starting to realize how nonsensical, unworkable, and unsustainable it is. Let us buy our own healthcare the way we buy our own groceries and everything will be fine. Stop artificially manipulating the market! Really if you just do that prices will fall.

cent-fan
cent-fan

@orangeplasticfish The classic example of hardware might be the CAT scan or MRI machine but the demand is such that they could probably create a franchise and make it a drive thru service.  I think the article tries to make the point that the real incentive of the hospitals behind the consolidation is to become a regional monopoly that insurance carriers can't avoid.  Any negotiated fees for services would break the hospital's way regardless of how many competing insurance carriers were floating around in the area.

Of course, if someone were to create a business that catered to helping sick people get treatment out of the expensive areas and do it in such a way as to not break their bank anyway then that could be a real kicker.

rivers
rivers

@cent-fan 

well, it will be more interesting as the corporation combination continue. there will be no use of  the insurance company , people will benefit from it.

united_we_stand
united_we_stand

@michelemanion free market competition never worked? we were far and away #1 in the world before the government got involved. The American free market system created the modern health care system and most the medicines. 

gysgt213
gysgt213

@retiredvet And you wonder why the ACA is unpopular.  Its reporting like this that leave the impression there is a problem with ACA not consolidation its self. The hospitals were already consolidating just like happens in almost every single for profit industry.

united_we_stand
united_we_stand

@gysgt213 no profits in medicine? who would become a doctor? Do you want the gov to force everyone into working assigned careers like the ussr? 

ahandout
ahandout

@allenwoll @DavidM.Higgins Are you speaking English?  If so, I need a translation, without the capital letters and the multiple question marks. 

Try making actual sentences.  It's a start.

jhonny.ausemkock
jhonny.ausemkock

@allenwoll @DavidM.Higgins including the government. Let the market rule. Let consumers choose! There is no more powerful force than an empowered public. Given the opportunity, we'll change their minds... or drive 'em out of business, one of the two. When anyone usurps our power of choice they are usurping our power, period, whether it is an insurance company or the Federal Government. Neither scenario is acceptable. Our health, our bodies, our choice. Hmm, sounds familiar doesn't it? Curious how no "progressive" women are singing their mantra about Obamacare. This law seeks to restrict their medical choices a lot more than the "pro-lifer" crowd ever did!   #hypocritecity

sedj4wd1
sedj4wd1

@smart1 @sedj4wd1 It happened to me not 1 month ago and I have proof . Not only that but they billed me for the same thing by 2 different billing Company's.. I wonder how many times this is done to insurance company's as well as Government.. I swear { I have the documents } 

sedj4wd1
sedj4wd1

@MrObvious have you filled out a Health care form lately ?  I have not seen a doctor in 40 years till a month ago . And even tho I said I was paying cash you have to show 3 years tax records and bank accounts . When this finally kicks in and for those that sign up will not be able to have a savings account to even how much there car is worth and if they rent or own there own home and what you eat and drink for the past 5 years . {fact} 

ahandout
ahandout

@MrObvious @ahandout Constantly stupid - you mean Obama lied again and Obamacare didn't add another 30 million people to an overtaxed healthcare system?  Your move.

smart1
smart1

@jhonny.ausemkock blah, blah, blah, blah, blah.  Obamacare will open the door to a solution.  It may not be the best thing we could come up with, but at least it's a start.  Got any better ideas?  Let's hear your plan.

gysgt213
gysgt213

@united_we_stand @michelemanion Umm, the government has always been involved.  You ever hear of  academic R&D the federal government by far provides the bulk of the money for research. Research the private sector will not pay for.   Ever hear of  patents.  Without the government involvement to enforce there would be no patents.  

bobcn
bobcn

@united_we_stand @gysgt213

"no profits in medicine?"

Unfortunately, with our ridiculous and broken private health care system, profits aren't a problem for the profiteers.  Hospital consolidation, which has been going on for decades, is entirely about profits.

jamesf161
jamesf161

I'm relatively certain the Soviet union did not assign careers to citizens. To my mind, there was more freedom of career as one could get any degree for free. And there were Soviet citizens who chose to study medicine. People would study it to help people even if it did not pay particularly well due to, say, government run healthcare.People certainly study medicine in my home country, even with an expansive public system.

allenwoll
allenwoll

@jhonny.ausemkock @allenwoll @DavidM.Higgins 

The problem is that "empowered public" that you speak of. . Unfortunately, clever propaganda -- of which there is a dense forest out there now -- pretty well dulls their view and therefore their potential power when acting individually. . People like to seize a mantra and hang on -- hang on to the point that they will support economic policies directly contrary to their own individual economic interests : These are the Mini-CONS -- some call them Trailer-Park Republicans : I call them dangerous ! 

The best thing would be for people to directly drive the insurance, the hospitals, the independent providers and the pharmacies out in the manner that I have suggested -- In that way, they would control both the payer-function AND the provider-function ! Hoo-Ray ! ! ! . AND give Big Pharma lots of grief ! !  

postingonline42
postingonline42

@jamesf161 James my father emigrated to the USA in 1979. yes, they assigned careers. I think there was some choice in what people could study, but my father was forbidden to study nuclear physics because they thought his last name sounded Jewish. Can you imagine the government telling you what not to study based on your name?

 They also assigned living space. As in you move to Moscow and work here-and-here. People cheated the system all the time or bribed officials to get where they wanted to go and a black market free economy emerged underneath the state one.

My father also predicted that more socialization in healthcare would lead to fewer choices, he said my choice to have a natural birth would be gone soon as i would have to go to the local hospital.