Costs of A Hospital Monopoly in One Underserved County

There is a growing body of evidence that hospital mergers lead to higher prices for consumers, employers, insurance, and government.  It is imperative to educate patients and lawmakers as to how the consolidation of hospitals and medical practices raise costs, decrease access, eliminate jobs, and ultimately reduce care quality as a result.  Lawmakers should focus on this “first pillar” of cost control as they go back to the drawing board. 

In 2010, there were 66 hospital mergers in this country. Since the Affordable Care Act went into effect the rate of hospital consolidation has increased by 70 percent. By creating incentives for physicians and health providers to coordinate under accountable care organizations (ACOs), the ACA hindered the ability of regulators to block hospital mergers while incentivizing hospital consolidation. 

In addition, there has been a dramatic increase in hospitals gobbling up independent providers and becoming powerful regional monopolies.  According to a 2012 study by the Robert Wood Johnson Foundation, “the magnitude of price increases when hospitals merge in concentrated markets is typically quite large, most exceeding 20 percent.” Forbes’ Avvik Roy, gave an excellent presentation on this particular subject in 2012.  “You have to get at the errors in public policies which drive the hospitals to merge.” He concluded that government must do more to fight consolidation among hospitals.  He is right.   

For years, the concern that mergers drove up prices was largely anecdotal.  A recent paper authored by Northwestern’s Leemore Dafny, Columbia’s Kate Ho, and Harvard’s Robin Lee provides some definitive proof that when hospitals consolidate, prices increase substantially.  The effect is actually worsened directly in proportion to proximity of the merging hospitals.  “If you are doing it because you think in the long run it will serve your community well, you should think twice,” Dafny said.  As of right now, cross-market mergers aren’t scrutinized at the state or federal level.  This must change.  A statement issued by the American Hospital Association (AHA) in response to Dafny’s paper said mergers provide patients with access to care and they are not a meaningful predictor of price change.

A study published by the National Bureau of Economic Research, conducted by Zack Cooper of Yale University, Stuart Craig of the University of Pennsylvania, Martin Gaynor of Carnegie Mellon, and John Van Reenen of the London School of Economics, sheds light on the real cost of reduced competition among hospitals: hospital prices are 15.3 percent higher when a hospital had no competition compared in markets with four or more hospitals, amounting to a cost difference of up to $2000 per admission. Hospital prices are 6.4 percent higher in markets with two hospitals and those with three are 4.8 percent more expensive when compared to markets with four hospitals.

The case for hospital consolidation has been supported by the American Hospital Association, the leading industry trade group, which spent $15 million on lobbying in 2015 (a decrease from $20 million in 2014).  Consolidation allows hospital conglomerates to control vast market shares, which has translated into political clout while allowing more leverage in negotiations with private insurers. 

“What’s been so interesting for me is to see how aggressive the American Hospital Association has been in coming after me,” says Cooper, who claims the American Hospital Association has funded a couple of critical reports about his paper. 

“I have never seen the evidence that consolidation improves quality in the health care space. I have never seen a study that comes out and says that consolidation makes things better,” says Cooper. Neither have I; consolidation does not improve quality.  Cooper, like Mr. Roy, suggests rigorous antitrust legislation and increasing competition among hospitals as possible solutions.

Harrison Medical Center is the hospital in which I was born and had expanded into two campuses before being “acquired” by CHI Franciscan Health two years ago.  CHI purchased numerous small medical practices, the last independent orthopedic group, and most recently, merged with the largest multispecialty physician group in the county, the Doctors Clinic. 

Prior to these mergers, 65% of physicians in Kitsap County, where I live, were independent.  That number has plummeted to a dismal 27%.  Both hospitals are currently owned and operated by CHI Franciscan and now they want to merge into one structure for an “ultra” monopoly.  Every cardiologist, oncologist, pulmonologist, urologist, and vascular and orthopedic surgeon in my county are employed or under contract with CHI Franciscan Health. 

In the last two years, Kitsap County has lost consumer choice, employer choice, physician choice, insurance choice and access for healthcare services. Physician groups merging with CHI Franciscan are forbidden from using the local ambulatory surgery center (ASC) for outpatient procedures.  The hospital insists on exclusive use of their Hospital Outpatient Department (HOPDs) instead.  It is a well-known fact costs at HOPDs are substantially higher when compared to identical procedures done at ASCs.  According to FAIR health, the cost difference (zip code specific) between the two locations is striking:


ASC – $1250 ($500 out of pocket)
HOPD: $4250 ($1000 out of pocket)


ASC $500 ($200 out of pocket)
HOPD: $4250 ($1250 out of pocket)

Arthroscopy of Knee: 

ASC – $3600 ($1070 out of pocket)
HOPD: $13,000 ($3900 out of pocket)

Hernia Repair: 

ASC – $2500 ($750 out of pocket)
HOPD: $19,000 ($5700 out of pocket)

The above estimates do not include the physician bill or charges for equipment. 

In 2009, President Obama spoke in Grand Junction, Colorado to highlight a locality where (to quote Tom Brokaw) “health care works”. Their unique model focused on provider-insurer partnerships to reduce Medicare costs and was lauded by policy makers and media outlets as the epitome of efficiency in healthcare but, the devil is always in the details.  The 50,000 residents of Grand Junction are served by a single hospital, much like Kitsap County, Washington soon.  It turns out Grand Junction is one of the most expensive healthcare markets in the country.  The lack of local competition helped drive Medicare costs down—Grand Junction had the third-lowest Medicare spending per beneficiary in 2011. However, the monopolistic conditions drove private prices way up —the city has the ninth-highest inpatient prices in the country.

The more government reduces payments to physicians, the more hospital consolidation is encouraged to decrease cost and leverage market forces.  This drives prices up for patients with private insurance.  Higher prices in less competitive markets amounts to higher premiums passed on to employers and individuals who see bigger bills under their high-deductible health plans.  Cities with higher premiums on the Affordable Care Act’s insurance exchanges tend to be those cities with high priced hospitals. Increased concentration in health care victimizes consumers, as hospitals leverage their market position and drive up prices.

Maybe it is time to borrow a page from the Justice Department playbook and scrutinize hospital consolidations more closely, blocking them if necessary for the “greater good.”  Recently, two federal judges blocked separate health insurance company merger attempts, Aetna-Humana and Cigna-Anthem.  The Justice Department opposed both because “the competition among these insurers that has pushed them to provide lower premiums, higher quality care and better benefits would be eliminated.”  Opposing creation of monopolies in healthcare is something both liberals and conservatives alike should hypothetically oppose.  We have 3.4 trillion reasons to sit up and pay attention. 

Niran Al-Agba is a pediatrician based in Washington State.

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27 replies »

  1. “Why are they so averse to trying to sell insurance across state lines?”

    Because it is a race to the bottom. People will buy what they can afford not what they need. Policies will be faux policies with price the only consideration with more risk group fractionalization and higher costs for each group.

    I suggest you read the contribution of Robert Laszewski on this blog:

  2. The days of PPO-based fee-for-service are passing, and the new models of “value-based” and risk-based care are faltering. If (big if) health plans are actually allowed to be sold across state lines, that is likely going to be critical to support the HCDP component of the triad that is more likely to be successful. It is a critical piece of the DPC + HSA + HDHP that is showing more promise in the real world. The HSA needs to be there for the times there is a donut hole of deductibles before the HDHP kicks in. The DPC is necessary because it gives time and resources to primary care to be able to actually shepherd-mentor patients toward higher value.

  3. Actually I am more than happy to compete on price. I would win hands down as long as the playing field considers my admission rate of zero for non special needs children and includes the facility fee. Asking for payment to be equal to current Medicare rates is not unreasonable. I am asking for reimbursement to increase to current Medicare. I can do fine and make enough to support my family on that. I use independent labs, independent radiology, and only send for necessary tests based on my quality data. I fail to see to whom your vitriol is aimed.

  4. What is so weird is everyone is so willing to experiment with everything else in healthcare. Why are they so averse to trying to sell insurance across state lines? How is it going to hurt?

  5. Crossing state lines for what purpose – to override mandates? The only reason this state line issue comes up is to reduce coverage.

    Let’s see, do I want cancer coverage or is that too expensive, do I want heart disease coverage, I think that is too expensive as well. Dividing risk groups into smaller populations does not reduce cost – especially for those who need the coverage.

  6. Niran, here in NC, UNC and Duke own off site docs offices and clinics, all designed to funnel tests and services to the hospitals. A once independent radiology clinic that charged $40 per shot, was purchased by UNC and now charges $250 per shot. Local PCPs working for UNC send their lab work to the hospital at 2-3x what would be possible at an independent lab. Only those paying cash care what the price is.

    How do you “incentivize” docs to work independent of hospitals, well your solution is to pay docs more. But that defeats the price problem and it does not stop hospitals from dominating the market. Narrow networks can restrict what docs insurance will pay for but what about, “You can keep your doctor.”

    No one in health care really wants to compete on price.

  7. Sure. That is “skin in the game” which discourages overuse of offices. Also, as the number of physicians dwindles and our patient loads increase, we have to triage more over the phone. This is difficult but we cannot see every patient on every given day like we used to be able to. The overwhelming numbers discourages overuse where I am at for those privately insured because copays are so high for ER visits already. Patients would rather wait a day to be seen if at all possible.

  8. Peter – you are confusing hospital monopoly with physicians employed by hospitals (not a monopoly yet.) If consumers understood it costs $256 (99213 at $56 plus facility fee $200) to see a primary care physician employed by a hospital versus $86 total (99214) to see me in my private office, they could have the choice to go outside the hospital system. The hospital undercodes the physician visit because they can (and more than make up for it in “room rental”.) This is information the public needs to know so they can head toward the cheaper and frankly (imo better) option.

    How you bring competition to an underserved county is by making it feasible for physicians to hang their own shingle and open up a private clinic. If you do not incentivize this, soon enough the hospital controls EVERYTHING.

  9. If physician can control their own offices, it is a large step away from consolidated monopolies. That is as good a start as any.

  10. I completely agree about opening up insurance to cross state lines. Allowing consumer/patient/employer choice. Thank you for commenting.

  11. If insurers really want to steer patients toward the most cost-effective high quality providers, they would embrace negative copays, at least for the expensive procedures. At the same time, we don’t want patients to schedule unnecessary visits to primary care doctors just to earn a negative copay. There needs to be a way to discourage that if it occurs.

  12. An important factor is the role of our health insurers. A few points:
    1. Except for a few markets, they are largely organized as oligarchies, with one player having more than 50% market share. The dominant insurer acts as a regional health care czar.
    2. The insurers are in essentially a cost plus business, and thus they hurt themselves when costs go down. (Their “plus” is well over 10%, when it should be 7%). The mentality is more as a funder of hospitals (this is their origin) rather than a purchasing agent for employers.
    3. When the dominant player does try to use their power to drive lower prices it tends to create consolidation.
    4. They sometimes do lobby against state mandates for more and more coverage…..but they in general just go along
    5. Insurers are heavily constrained by community expectations…..they seldom risk controversy by laying off employees (local politicians would object) and they are fearful of too much controversy by a contract negotiation spat with a hospital. And they turn a blind eye to deeply ingrained hospital accounting practices that are rife with confusing cross subsidization (a few services create lots of profit….like ambulatory surgery…..and they use those profits to prop up losing areas, not to mention paying for soaring marble and glass facilities).

    This all won’t change easily….that is why I support the notion of opening up health insurance to cross state line competition….including allowing patients/consumers/employers to buy national plans exempt from state mandates.

  13. Niran, you contradict your presentation. The term “monopoly” negates price transparency and cost control. Monopolies don’t need either of those. How would consumer knowledge lower prices in a monopoly when there is no choice?

    And how would you bring competition to your underserved county where market population limits market share?

  14. Agreed. I have asked this question more than a dozen times to various health policy experts, hospital CEOs, and insurance executives. No one can answer it. I suspect the hospitals do not want true transparency as they will lose in the cost comparison. How to get this important information out to the public is my current conundrum

  15. It doesn’t look like rocket science for insurers to make the comparison apples to apples. Why can’t they include the facility fee for the hospital owned practice to get an all-in cost for their 99213 and compare that cost to your 99214?

    They can figure out that a surgery performed in a hospital is more expensive than the same surgery performed in an ASC. They should be able to do that for all procedures and all billing codes. If they can’t, then shame on them.

  16. Barry- your ideas are good for incentivizing lower cost providers however the tallies do not take facility fee into account and are doing apple to orange comparison.

    For example, if I bill 99214 and received $86 and hospital employed physician is instructed to undercode at 99213, they are “costing” $56. The hospital can do this because they receive a “facility fee” aka room rental of $200 in addition to physician charge.

    My cost = $86. Employed doc = $256, but “looks” like $56 on stats to patients.

    My office is listed as “not cost efficient” on insurance website; employed doc listed as “cost efficient”. Do you see my problem?

  17. Thanks Dr Palmer. My fifth and final post for the DRexit series will be on taxing both for profit and non profit hospitals equally. There is good data to support this as an effective cost-cutting measure. Stay tuned …

  18. Everyone jumps to single payer. How about innovation? Price transparency and cost control would help considerably. Consumer knowledge and choice is best for patients.

  19. “Washington needs to get out of the regulation of healthcare.”

    And that will stop consolidated monopoly – how?

  20. The US government has a SUPER bad tendency to turn everything into the Post Office. Every time they think this sounds like a good idea/buzzword they should slap themselves in their own face. Washington needs to get out of the regulation of healthcare. I know many will say they deserve to be in it because they pay for care, but they have done NOTHING to improve it, only ever increase cost, decrease satisfaction, decrease quality, drive MDs out of medicine. Maybe its time to get out of the exam room and let MDs be MDs and let IT work directly with MDs to improve care. We know what we need. DC does not.

  21. I’ve experienced the result of market consolidation, in hospital prices and in outside clinics owned by hospitals. Service stays the same price is 2x – 3x, just because they can.

    So what do we do about it? Sounds like time for single pay price controls, or at least Medicare for all procedure prices.

    Don’t worry Trump will fix this.

  22. Good stuff, Niran. It is right out of the list of criteria for a free market described in the econ textbooks: “many buyers; many sellers”.

    Two other points: mergers and monopolistic behavior among hospitals simultaneously allows their “large” purchasing (monopsonic purchasing) of their labor forces including physician and nursing labor ==> lower wages, salaries, fees ==> reduction in power of patient agency and a dead weight financial loss to the community.

    Anti-trust also has to pay attention to “non-profit” to “for-profit” hospital conversions where administrators buy out a thriving community hospital and turn it into a money machine. Often there is only a trivial gift to a charity during these conversions.

  23. While I’m not prepared to speak to the issue of the effect of ACO’s on hospital consolidation, it’s quite clear to me that the main driver of hospital consolidation is to enhance market power in order to extract higher reimbursement rates from payers and, by extension, from patients as well.

    Most people don’t realize that there are surprisingly few economies of scale in the hospital business. There are some economies in the purchase of supplies, advertising can be spread over a larger revenue base and access to capital might be easier. That last factor may also make it easier for hospital systems to afford expensive new computer systems that are at least interoperable within its own network. However, since the hospitals’ largest cost by far is employee compensation (salary plus benefits), the cost structure doesn’t decrease with size and what few economies of scale there might be are probably offset by the increased administrative complexity of managing a larger organization across dozens or even hundreds of physical sites where healthcare is delivered.

    I favor consolidation on the insurance side because technology and scale matter more there just as it does it the banking industry. Fewer insurers would mean fewer permutations and combinations of reimbursement rates and documentation requirements for doctors to have to deal with. What I would also like to see is for private payers to create more incentives for patients to get care at the most cost-effective high quality providers. For example, if a low risk patient could safely get a hip or knee replacement at an ASC instead of the local high cost hospital, it would make sense, in my opinion, to actually pay the patient to do that in the form of a negative copay that shares a portion of the payer’s saving with the patient. If the patient is higher risk and the procedure should probably be done in a hospital for safety reasons, if it can be done at lower cost outside of the patient’s home area, pay for the patient and a companion to travel to a center farther away and also offer a negative copay to boot.

    Companies like Wal-Mart, Lowe’s and Boeing already have contracts with the Cleveland Clinic as a center of excellence for heart surgery where the CC has apparently offered a very competitive price. Presumably this is because the CC’s home region is not growing very rapidly and it is willing to provide significant price discounts to serve patients that it would not otherwise get as the discounted price is still significantly above the CC’s marginal cost of providing the care. That way, it can utilize some of its excess capacity that would otherwise sit idle.

    We’re a clever and innovative people. I don’t think it would be all that hard to push back against price gouging hospitals whether they are consolidating in their home region or not. One thing that would be helpful is the development of quality metrics that patients perceive as credible and doctors perceive as fair to them.

  24. I’m agnostic on the subject and don’t have a dog in the ACO fight.

    If the rate of consolidation was X% before ACOs and its X% (and not Y%) after ACOs, it’s reasonable to make my conclusion based on the penetration rates and time periods the author’s studied. However, as ACOs mature or as externalitis from ACOs present, I agree, the intervention must be reevaluated. Its too soon to draw a long-term conclusion.

    The paper looks at ACO impact only. Lots of other stuff going on concurrently.

    I dont think we disagree.

  25. Brad – The study you cite discusses that while the introduction of ACO’s did not change the trend toward consolidation (as it had already begun in 2008) it certainly did not reverse it. In my post, I discussed the timeline in relation to passage of the ACA and that “By creating incentives for physicians and health providers to coordinate under accountable care organizations (ACOs), the ACA hindered the ability of regulators to block hospital mergers while incentivizing hospital consolidation.” This is true.

    While the course for consolidation was not driven by ACO market penetration, I am not sure you can draw the conclusion that “consolidation was not impacted by introduction of ACO’s.” That might be a bit of a leap. Thank you for reading.