Anyone who drives through Pittsburgh, Pennsylvania, cannot help but notice the black tower that looms over the confluence of the Monongahela and Allegheny Rivers. Originally built as the headquarters of U.S. Steel, the tower now houses the corporate offices of the University of Pittsburgh Medical Center, or UPMC, the largest employer in what was once known as “Steel City.” From a single hospital in 1990, UPMC has grown into a medical colossus, with 40 hospitals in the region and revenue in 2017 of $16 billion. That’s what Whole Foods made that year nationally.
The UPMC hospital system, which has been written about before in these pages, is hardly alone in both its monopoly of hospital-based medical care in a single region and its national-corporation-sized revenue. Northwell Health, on Long Island, New York, with 12 hospitals in the Long Island region, took in $9 billion in 2017, on par with Adobe Systems. The Sutter system, which operates more than two dozen hospitals in Northern California, made $12 billion that year, as much as Tesla. The top 10 hospital systems raked in nearly $90 billion, rivaling Boeing, Hyundai Motors, IBM, and Johnson & Johnson combined.
These numbers are both alarming and unsurprising. Care delivered by hospitals accounted for 31 percent—about $1.2 trillion—of the $4.1 trillion we spent in total in the U.S. last year. That’s up from $882 billion for hospitals a decade ago. The cost of health care keeps going up, bankrupting families and depressing wages for average workers, and a major reason for its meteoric rise is the giant hospital chains that have come to dominate the health care landscape.
Fifty years ago, most hospitals were stand-alone institutions, fixtures of the local community that served as sources of pride as well as medical care. Today, more than half of hospitals are part of regional systems, many of them with a dozen or more hospitals. Maybe you have one or two of these behemoths in your city or town. Their names are often familiar and respected; less well recognized is their monopolistic behavior and their effect on how much we pay for health care. With the publication of Big Med, the authors David Dranove and Lawton R. Burns offer an exhaustive—if occasionally exhausting—analysis of the consolidation of U.S. hospitals and the effect it has had on both the cost and quality of health care.
Big Med traces the rise of what Dranove and Burns, longtime experts in hospital organization and business strategy, have dubbed “megasystems.” Few if any hospital systems existed in 1965, when the passage of the Medicare Act kicked off an escalating price war in health care that continues to this day. Back then, hospitals, along with the American Medical Association and private insurers, knew that government coverage of health care would lead to some form of price control. They lobbied hard against the legislation and threatened to refuse to care for Medicare patients. To get the legislation passed, hospital payments were set up as a cushy cost-plus system, in which hospitals billed for their costs and received a 2 percent bonus on top. Like military contractors of “Beltway bandit” fame, hospitals milked cost-plus for all it was worth, extending the number of days the average patient spent in the hospital to increase costs, for example, and giving them unneeded tests. Within a decade, Medicare spending was going up at an alarming rate.
Once Medicare implemented cost control measures in the 1980s, hospitals turned to private insurers to make up the difference. Where the government could set prices, private insurers had to negotiate with providers. By the 1990s, consolidation had become the go-to tactic for hospitals to maintain the upper hand. Between 1980 and 1993, there were 300 mergers between hospitals; by 1998, it was up to 500 a year.
The Federal Trade Commission and the Department of Justice, the two federal agencies in charge of enforcing antitrust law, have proved nearly powerless to prevent hospital consolidation, which went on hyperdrive in the early 2000s. Today, we pay the highest prices in the world for everything from a suture in the emergency room to a day in the ICU. In Germany, where government regulates medical prices, a knee replacement costs $22,000, including the surgeon and five nights in the hospital. In the U.S., the same procedure will run you as much as $51,400, and that’s for the hospital bill alone. A coronary angioplasty procedure costs $6,390 in the Netherlands and $32,230 in the U.S. An MRI goes for $191 in Spain and can cost as much as $3,000 in the U.S.
Hospital consolidation, the authors write, has gone hand in hand with an increasingly corporate management culture. The vast majority of hospitals and hospital systems are nonprofit, an IRS designation that provides billions of dollars in tax breaks to institutions focused on the public good, yet many nonprofit hospitals reward their administrators as if they were for-profit corporations. One particularly glaring example: In 2018, Philip Ozuah, CEO of New York City’s Montefiore Medical Center, a six-hospital system whose flagship is a safety net hospital that serves some of the poorest neighborhoods in the country, made $13.8 million. The hospital system took in $3.9 billion. By contrast, the top executive of the Red Cross, an international nonprofit with 600 chapters and $3.6 billion in revenue, saw about $800,000 in total compensation. Many hospital systems have diversified into investments, like real estate, that have nothing to do with caring for patients. Meanwhile, many of the workers at the bottom rung of hospitals—janitors, cafeteria workers, and even some nurses—don’t have employer-sponsored insurance and can barely make ends meet.
Some of Big Med’s most astute analysis comes in highlighting the promises, made by health policy experts and battalions of paid consultants, that consolidation would lead to less expensive and better care. Hospitals, went the theory, would see greater efficiency through economies of scale and “synergy,” two of the many corporate buzzwords that slithered into health care discussions by the 2000s. Certainly hospitals were (and still are) in need of some efficiency. They waste billions of dollars a year in unused and discarded supplies. Their supply chains are chaotic and fragile, a situation brought into sharp relief by shortages of PPE during the pandemic. And their processes are not standardized, so nurses and doctors might perform the same task one way on Monday and another on Wednesday. John Toussaint, a physician and CEO of Catalysis, a health care efficiency consulting organization, once conducted an informal study by shadowing a nurse for a week with a stopwatch. Three and a half hours out of every eight-hour shift were spent searching for supplies.
Then there’s the so-called clinical waste, which is another phrase for poor-quality care. Patients and their families may get a taste of this during a hospital stay, when a CT scan must be repeated because the records can’t be transferred efficiently from another institution. Or when getting discharged from the hospital takes an entire day. But the most insidious clinical waste actually harms patients. This happens when they don’t get care they need or they do get care they don’t need, including unnecessary or useless medical treatments, tests, drugs, and surgeries. Even many hospitalizations could have been avoided had the patient gotten higher-quality (and less expensive) community-based care.
While the consolidation of hospitals was supposed to fix the wasted effort and supplies, vertical integration with community physician practices was billed as the solution to fix clinical waste. Today, more than half of physicians are effectively owned or employed by a hospital, even though most continue to practice in their same offices in their communities. This was supposed to eliminate both missed care and unnecessary care, which combined are estimated to cost the U.S. anywhere from $400 billion to $800 billion a year.
How’s that working out? The authors argue that there’s no evidence that megasystems are consistently providing higher-quality care than stand-alone hospitals, and they are no less wasteful, and certainly no less expensive, than smaller institutions. Neither vertical integration nor horizontal mergers have brought down costs or led to higher-quality care.
Like many books about health care, Big Med is long on analysis, which it does smartly, and short on solutions. The authors throw up their hands toward the end of the book, seemingly in despair. They are not optimistic that regulators will be able to rein in merger mania, but there hardly seems to be any point, since much of the country has already congealed into a few giant systems. They highlight the few truly integrated systems, like Kaiser Permanente, in the West and mid-Atlantic regions, and Geisinger, which has several hospitals and physician practices in eastern Pennsylvania, as exemplars of efficient, high-quality care. Their hospitals are more efficient than most, and the various primary care physicians and specialists in these systems work together in a coordinated way to ensure that patients get what they need (and avoid what they don’t). But Dranove and Burns say there’s no chance that the rest of the country can follow the lead of the Kaisers and Geisingers because it hasn’t happened thus far.
I’m a little more hopeful than the authors are because there are forces at work today that could be putting hospitals in such a bind that they have no choice but to change their business practices. As the saying goes, in crisis there is opportunity, and the hospital sector has recently been through a huge crisis in the pandemic. First of all, hospitals are facing labor shortages. Nurses, dispirited and exhausted by the pandemic on top of the constant churn of chaotic practices and poor management, are quitting in droves. Nearly 40 percent of doctors said the pandemic was making them consider early retirement, and even without the pressures of COVID-19, two out of five doctors will be age 65 or older within the decade. With clinical staff in short supply, hospitals must rely on contract workers, who are more expensive.
Compounding the rising cost of labor, some medium-sized hospitals haven’t recovered from the loss in revenue they suffered when patients stayed away and regulators placed limits early in the pandemic on elective surgeries, which are a hospital’s bread-and-butter high-margin services. Credit is getting tight, and while the giant academic centers, many of which are sitting on millions if not billions in cash, will be fine, some experts predict that many midsized hospitals will be threatened by bankruptcy. (Members of Congress will probably step in to prop up small rural hospitals in their districts and states.) On top of that, socially conscious investors have begun using environment, social, and governance criteria to rate companies on their social responsibility, and at least some hospitals will not exactly shine in one or more of these arenas.
One result of all of this is that at least some hospitals seem prepared, as never before, to consider a different model of payment. Most medical care is now paid for as a fee-for-service. Surgeons are paid for each surgery, primary care doctors for each office visit, and hospitals for every admission and every day a patient is in a bed. Health care policy experts have long pointed to paying hospitals a “global budget” to care for patients in a way that encourages greater efficiency and better care.
Global budgeting could enable two things. First, hospitals would have to streamline their processes and quit wasting supplies in order to live within their means. Second, they could invest in providing care based in the community—in clinics and in patients’ homes. Most hospitals now operate like any business: They want to keep their beds filled because that’s how they get paid. “Heads in beds” is the hospital administrator’s motto. If hospitals have a fixed budget for the year, they want to care only for people who really need to be hospitalized—patients who need abdominal surgery, for instance, and heart attack victims. But for many patients with, say, an exacerbation of heart failure or diabetes, being hospitalized can be avoided with good community-based care, which is also a lot less expensive.
This is, of course, an oversimplified picture of what will be a messy, complicated process that won’t be easy for small hospitals and megasystems alike. Insurers, especially Medicare and Medicaid, will have to monitor hospitals so they don’t cheat and try to save money simply by stinting on needed hospital care. But there are signs that it’s not impossible. Medicare has already been experimenting with global budgeting of hospitals in Maryland. Between January 2014 and June 2018, Medicare saved more than $1 billion on hospital payments in the state, and the quality of both hospital-based and community care appears to have improved. While $1 billion over five years isn’t much, it occurred over a period when Medicare spending in the rest of country’s hospitals was only going up. Maybe Dranove and Burns are right, and there’s little hope for fixing health care short of blowing it up. But if ever there were a time when hospitals might be under the right kind of pressure to make real changes in their business practices and the way they deliver care, now would seem to be it. As the country tries to rein in the cost of health care, Big Med offers a forceful argument for focusing our attention on hospitals.