March 28, 2024

Economic Scene: Examinations of Health Costs Overlook Mergers

But when the Federal Trade Commission finally decided to look at the deal, it encountered an entirely different objective: to gain market power.

Mark Neaman, Evanston’s chief executive, had told his board that the deal would “increase our leverage, limited as it might be,” the investigation found, and “help our negotiating posture” with managed care organizations. The commission caught Ronald Spaeth, the Highland Park C.E.O., talking about the corporation’s three hospitals and explaining how “it would be real tough for any of the Fortune 40 companies in this area whose C.E.O.’s either use this place or that place to walk from Evanston, Highland Park, Glenbrook and 1,700 of their doctors.”

It was a great deal for the hospitals. The fees they charged to insurers soared. One insurer, UniCare, said it had to accept a jump of 7 to 30 percent for its health maintenance organizations and 80 percent for its preferred provider organizations.

Aetna said it swallowed price increases of 45 to 47 percent over a three-year period. “There probably would have been a walkaway point with the two independently,” testified Robert Mendonsa, an Aetna general manager for sales and network contracting. “But with the two together, that was a different conversation.”

And who was left holding the bag? Not the shareholders of UniCare or Aetna. It was the people who bought their policies, who either paid higher premiums directly or whose wages grew more slowly to compensate for the rising cost of their company health plans.

The commission’s unusual investigation of the aftermath of the Evanston-Highland Park deal produced its first successful antitrust case against a hospital merger since 1990, after a string of defeats in court. Highland Park and Evanston were forced to negotiate separately with insurers, rather than as a bundle. Collusion was forbidden.

What was learned from the investigation is more relevant than ever today. It should draw policy makers’ attention to an elephant in the room that appears to have been overlooked in the debate over how to rein in the galloping cost of health care: a lack of competition in what is now America’s biggest business — accounting for almost 18 percent of the nation’s gross domestic product.

Our anguished search for ways to slow runaway health spending has so far mostly focused on how to eliminate waste: Might the fee-for-service system used by health care providers across the nation provide perverse incentives for doctors and hospitals to prescribe costly yet pointless treatments? Are doctors prescribing every possible test to insulate themselves from any conceivable lawsuit?

The Obama administration is betting heavily on waste control to address the problem. It has offered incentives for accountable care organizations, which get a bundled payment to keep a patient in good health rather than charge for individual procedures. It has financed research into comparative effectiveness — hoping to steer patients to the best therapies.

What is missing from the stampede of policy innovation is something to tackle one of the best-known causes of high costs in the book: excessive market concentration.

Two decades ago, there were on average about four rival hospital systems of roughly equal size in each metropolitan area, according to research by Martin S. Gaynor of Carnegie Mellon University and Robert J. Town of the University of Pennsylvania. By 2006, the number of competitors was down to three.

The share of metropolitan areas with highly concentrated hospital markets, by the standards of antitrust enforcers at the Justice Department and the Federal Trade Commission, rose to 77 percent from 63 percent over the period.

And consolidation is continuing. Professor Gaynor counts more than 1,000 hospital system mergers since the mid-1990s, often involving dozens of hospitals. In 2002 doctors owned about three in four physician practices. By 2008 more than half were owned by hospitals.

If there is one thing that economists know, it is that market concentration drives prices up — and quality and innovation down.

Research by Leemore S. Dafny of Northwestern University, for instance, found that hospitals raise prices by about 40 percent after the merger of nearby rivals.

Other studies have found that hospital mergers increase the number of uninsured in the vicinity. Still others even suggest that market concentration may hurt the quality of care.

Article source: http://www.nytimes.com/2013/06/12/business/examinations-of-health-costs-overlook-mergers.html?partner=rss&emc=rss