Health Care’s Biggest Problem Is Getting Worse

And 2020 Democrats don’t have a plan to fix it.

Many liberals and a growing number of Democratic presidential candidates have embraced a bold idea for reforming America’s broken healthcare system. The idea most in vogue—and the most debated—throughout the 2020 election has been to abolish private insurance in favor of a government-run national system, otherwise known as “Medicare for All.” Advocates of “single-payer” generally blame rapacious insurers as the principal villains of the current system, responsible for sky-high premiums and out-of-pocket expenses. Replacing for-profit insurance companies with a government program, the logic goes, would bring lower costs and coverage to everyone

But this singular focus on insurers means that the presidential hopefuls are neglecting an even bigger problem with far-reaching consequences for millions of Americans: the dominance of hospital monopolies in a growing number of health care markets nationwide.

Monopolies, in general, mean bad news for consumers. Health care is no exception. Mounting evidence shows that hospital consolidation exacerbates the system’s worst failings, bringing higher prices, fewer choices, and lower quality care to patients. And it’s only getting worse.

According to new research from the Health Care Cost Institute, nearly three out of four metro areas—72 percent—had “highly concentrated” hospital markets in 2016. Moreover, says HCCI senior researcher William Johnson, “almost 70 percent of metro areas were more concentrated in 2016 than they were in 2012.” This includes places like Milwaukee, Wisconsin, and Houston, Texas, which were “moderately concentrated” in 2012 but were “highly concentrated” just four years later. The most concentrated areas were places with populations under 300,000, like Springfield, Missouri. More densely populated areas, such as New York City and Philadelphia, were more competitive.

This trend has left Americans in concentrated hospital markets in a precarious position. A 2012 meta-review by economists Martin Gaynor and Robert Town found price hikes are especially dramatic—as much as 20 percent—when hospitals in already concentrated markets merge further. Even worse, the ultimate potential casualty of consolidation is often patient wellbeing. For instance, one major study by Daniel Kessler and Mark McClellan (later administrator of the Centers for Medicare and Medicaid Services) found that among Medicare beneficiaries, heart attack victims in more concentrated markets were 4.4 percent more likely to die than patients in the least concentrated markets. Gaynor and Town found similar results from other studies in their review. When hospitals stop having to compete for patients, their attention to quality suffers.

Driving the current state of concentration is a tidal wave of hospital mergers over the last decade. Local and regional facilities are disappearing, swallowed up by increasingly large and powerful hospital systems. Since 2016, hospitals have announced more than 350 mergers and acquisitions, according to the consulting firm Kaufman Hall. These include deals among such giants as HCA Healthcare, which runs 185 hospitals in 21 states, and Sanford Health, whose planned merger with UnityPoint Health this year would make it one of America’s 15 largest non-profit hospital systems.

These deals are getting bigger and more numerous. Kaufman Hall reports that, in 2018, seven transactions involved the sale of hospitals or hospital systems with net revenues of $1 billion or more, and that the average size of an acquisition was $409 million.

Defenders of hospital mergers, like the American Hospital Association, argue that consolidation can bring efficiencies of scale, encourage innovation, and lower costs, all of which should lead to better outcomes for patients. Unfortunately, the weight of research shows otherwise. Competition, not consolidation, is better for patients.

Monopoly hospital systems are more likely to use their power to extract extra profit—in other words, to act like monopolists—than to benefit patients. HCCI’s research, for instance, found that the metro areas with the greatest increases in concentration also tended to see the largest increases in price (although the researchers are careful to note that the relationship is one of correlation, not causation).

But even if prices don’t go up as a result of greater concentration, they don’t necessarily go down. A 2019 study by Stuart Craig, Matthew Grennan, and Ashley Swanson of the University of Pennsylvania found that merged hospitals don’t save money by reducing costs on hospital supplies that they presumably buy in greater bulk. Instead, the researchers found that mergers can result in expected savings of just 0.5 percent, after reviewing supply purchases made by 1,100 hospitals over a six-year period. “Our findings urge skepticism of the use of hospital purchasing efficiencies as justification for … hospital mergers,” they wrote.

The real reason for mergers is market power. As Gaynor and Town write, “Studies find that consolidation was primarily for the purpose of enhanced bargaining power with payers,” i.e., insurers. Simply put, when there is only one provider network in town, insurers have no choice but to pay what’s demanded unless they themselves gain leverage by—guess what?—consolidating. In fact, some evidence suggests that both insurers and hospitals are locked in a self-reinforcing arms race for monopoly power.  “Both are trying to strengthen their bargaining positions in order to raise or lower prices for their own individual profits,” says HCCI’s Johnson.

Interestingly, some of the best evidence for concentration’s negative impacts on patient health comes from the United Kingdom’s National Health Service (NHS), where the government introduced market reforms in 2006 to deconcentrate its hospital market. Before then, the NHS had essentially created hospital monopolies by assigning every patient to a designated hospital, resulting in long waits and poor-quality care. The 2006 reforms allowed patients to choose from five hospitals, forcing the hospitals to compete against each other for treatment dollars. The results were significant. Writing in JAMA, health economist Austin Frakt reported that even a 10 percent decrease in market concentration was associated with shorter hospital stays and fewer deaths. “Hospital competition is an important and significant driver of quality and outcomes improvement,” Frakt writes. “…[N]othing focuses the mind like an existential threat from a competitor.”

Unfortunately, none of the leading Democratic proposals for universal coverage includes a robust plan for attacking hospital consolidation. Rather, the principal goal of Medicare for All and like plans is simply access to coverage, with little regard to cost and quality of care.

Despite candidates’ interest in breaking up monopolies in tech or financial services, as Senator Elizabeth Warren has proposed and others have said they are willing to consider, hospitals are a sector that’s remained relatively unscathed in Democrats’ health care plans.

While it’s unquestionably the case that too many Americans lack affordable coverage, the goal of universal coverage can’t be achieved by expanding a broken system to all Americans at great taxpayer expense. The drive for affordable access to care must be coupled with reforms that ensure better quality and more innovation at a lower cost. For that to happen, Democratic candidates have to start by drawing more attention to the real root of the problem. They have to embrace a word that’s so far been largely missing from their rhetoric and proposals for an expansive government role in health care: competition.

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Anne Kim

Anne Kim is Washington Monthly contributing editor and the author of Abandoned: America’s Lost Youth and the Crisis of Disconnection.