The Greedy Hospitals That Drive Up Healthcare Costs

There are no shortage of culprits in America’s expensive yet, at best, average healthcare outcomes. But chief among them, despite getting comparatively less attention compared to insurers, are hospitals. As Slate reports:

The health sector employs more than a tenth of all U.S. workers, most of whom are working- and middle-class people who serve as human shields for those who profit most from America’s obscenely high medical prices and an epidemic of overtreatment. If you aim for the crooks responsible for bleeding us dry, you risk hitting the nurses, technicians, and orderlies they employ. This is why politicians are so quick to bash insurers while catering to the powerful hospital systems, which dictate terms to insurers and have mastered the art of gaming Medicare and Medicaid to their advantage. Whether you’re for Obamacare or against it, you can’t afford to ignore the fact that America’s hospitals have become predatory monopolies. We have to break them before they break us.

What do I mean by that? Last fall, Mark Warshawsky and Andrew Biggs made a striking observation: From 1999 to 2013, the cost to employers of an average family health policy increased from $4,200 to $12,000 per year. In an alternative universe in which employer premiums had remained flat, salaries would have been $7,800 higher, a life-changing difference for most low- and middle-income families. To protect these families, many people want the government to pick up a bigger share of our hospital bills. But this just shifts the burden from employers to taxpayers. The Congressional Budget Office expects federal health spending to almost double as a share of GDP between now and 2039. With the exception of interest on the debt, all other federal spending will shrink. What this means in practice is that high medical prices charged by hospitals will gobble up taxpayer dollars that might otherwise have gone to giving poor people more cash assistance, welfare-to-work programs, and Pell grants; fixing potholes; sending missions to Mars; and who knows what else.

When you survey the health systems of other rich countries, you’ll find some that rely a bit more on private insurance markets than ours (like Switzerland) and others that rely a bit more on centralized bureaucracies (like Britain), but what you won’t find is a country where hospitals dare to charge such obscenely high prices. Avik Roy, a senior fellow at the Manhattan Institute and a conservative health reform guru, has observed that although the average hospital stay in the world’s rich countries is $6,222, it costs $18,142 in the U.S. Guess what? Spending three times as much doesn’t appear to yield three times the benefit.

And while both private and public insurance schemes are far from flawless, their efficiencies and improprieties are also, at least in part, driven by the power of hospitals:

When insurers have tried to play hardball with the hospitals that gouge them, as in the 1990s, when managed-care organizations kept rising healthcare costs in check for a few short years, hospitals pressured state legislatures to enact “selective contracting” and “any willing provider” laws that impeded MCOs from steering patients to facilities where they could negotiate good rates. Moreover, MCOs can’t do much if a local hospital buys up all of the nearby medical providers.

But wait a second. How is it that hospitals are also gouging Medicare? Medicare alone accounts for 20 percent of all national health expenditures, a number that, if anything, understates the extent of its influence. Shouldn’t Medicare be able to use its pricing power to get hospitals to play ball? Medicare offers standardized reimbursement rates for different services, which hospitals always insist are far too low. Yet for some routine medical procedures, the reimbursement rate is higher than the cost of performing the procedure (which, once you already have the equipment and the personnel, can be pretty low), meaning the hospital makes money off of the procedures. For other services, like giving a patient personal attention, the reimbursement rate is lower than the cost of providing the service, so this is where hospitals skimp. The unsurprising result is that we have a health system that is increasingly devoid of personal attention while at the same time generating an ever-higher volume of the medical procedures for which Medicare is willing to overcompensate.

As hospitals continue to merge and acquire competitors (including the less expensive office-based practices), this problem is likely to only get worse in the coming years. The solution? Well, here are two offered by a law professor cited in the Slate piece:

Our government can simply accept that the market power of hospitals will continue to increase while making more of an effort to force them to accept low reimbursement rates. This approach is certainly worth trying, yet it ignores the fact that because hospitals are big employers, they wield a great deal of political influence. Whenever bureaucrats try to tame hospitals, lawmakers ride to the rescue of the big medical providers.

The second path is to rely on antitrust enforcement to crack down on hospital mergers and acquisitions and, more importantly in the long run, to make it easier for new medical providers to enter the business and to compete with hospitals. Naturally, hospitals hate this kind of competition, particularly from specialized providers that focus exclusively on providing one or two medical services inexpensively. To the hospitals, these providers “cherry-pick” and “cannibalize” their most profitable business lines without ever having to take on the larger burdens of running hospitals. There’s some truth to these complaints, which is why governments should compensate hospitals directly for care that it wishes to subsidize. But we need smaller, more efficient competitors to keep the big hospitals in check and to drive down medical costs for society as a whole.

Curbing the power of the big hospitals isn’t a left-wing or a right-wing issue. Getting this right will make solving all of our health care woes much easier, regardless of where you fall on the wisdom of Obamacare. Let’s get to it.

Indeed, everyone should have an interest in reigning in on these oligarchic and predatory practices, whether to create a freer and more cost-effective market for medical care, or to subsequently expand access to such care among the less wealthy. Granted, hospitals are but one of several factors, but judging from the data cited in this article, they are a major player.

Thoughts?

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