When Hospitals Don’t Compete, Patients Pay the Price

By Sally C. Pipes
Friday, April 24, 2020

Here’s a newsflash: When businesses don’t need to compete for customers, they tend to raise prices.

Yet the progressive remedy to escalating healthcare costs isn’t to increase competition — it’s to eliminate it and put the government in charge of health care through Medicare for All.

There’s ample evidence that lack of competition is what plagues our nation’s healthcare system. Over the past few decades, large health systems have acquired local stand-alone hospitals and physician practices — and used their market power to wallop insurers and consumers.

To fight back, we shouldn’t nationalize health insurance. We should foster more competition among providers.

Hospital systems have steadily bought out their competition. Consider one recent study from the Health Care Cost Institute, which analyzed hospital markets in 112 metro areas in 43 states. Between 2012 and 2016, the hospital markets in more than two-thirds of these areas grew more concentrated. By 2016, 72% of metro areas qualified as “highly concentrated,” meaning that just a handful of hospital systems handled nearly all admissions in the area.

As hospital sectors become more concentrated, the price of inpatient care surges.

A 2018 paper from researchers at Yale, the University of Pennsylvania, Carnegie Mellon and Massachusetts Institute of Technology concluded that “prices at monopoly hospitals are 12% higher than those in markets with four or more rivals.”

Hospitals aren’t just buying each other — they’re snapping up independent physician practices, too. Between 2012 and 2015, the number of physician practices owned by hospitals increased 86%.

This consolidation costs patients. Physicians in the most concentrated markets charge 14% to 30% more than those in the least concentrated markets. On average, consolidation over the previous two decades caused an 8% increase in physician fees.

So how can we promote competition? We can start by abolishing the “certificate of need” laws. These laws require healthcare providers to convince state officials that there’s a need for their services before they’re allowed to open.

Certificate of need laws effectively give incumbent providers a veto over the entry of competitors into a market. Incumbents routinely lobby government officials, braying that a new hospital will lead to job losses. Policymakers are loath to upset politically powerful hospitals — and potentially lose their employees’ votes.

Those barriers to entry result in less competition and higher prices. States with certificate of need laws have 11% higher healthcare costs than those without them, according to a 2017 analysis from The Heartland Institute.

Greater price transparency can also foment competition. Thirty-six percent of patients use the internet or mobile apps to compare the quality and cost of different services, according to a 2018 UnitedHealthcare survey. More than 8 in 10 of those who shopped around found the process at least somewhat helpful. One in 10 changed both their provider and healthcare facility based on the information they learned.

Transparency isn’t just beneficial for consumers; it helps providers, too. Consider one study of six ambulatory surgical centers that posted their prices online. Five of the six reported a subsequent increase in revenue.

Competitive market forces have driven down costs and enhanced the quality of goods and services in every sector of our economy. It’s about time we tried the approach in health care.

Sally C. Pipes is President, CEO and the Thomas W. Smith fellow in healthcare policy at the Pacific Research Institute, a California-based, free-market think tank. She is also the author of False Premise, False Promise: The Disastrous Reality of Medicare for All (Encounter 2020). This piece originally ran in The Tennessean.

This column does not reflect endorsement by MD News.