The U.S. health care system is characterized by silos on many different levels. Care is not coordinated well. Primary care providers send patients along to others for specialized care and each doctor mostly treats their own specialty. Hospitals and clinics too are disconnected from each other. If a patient gets an MRI at one facility and then presents at another, there is little incentive for the second hospital or clinic to rely on the first MRI.
In my early days as a health economist, it became something of a fad for health policy analysts to argue that the U.S. health care system needed more vertical integration. Basically, your doctor needed a boss, who oversaw numerous doctors coordinating your care. I recall reading numerous articles with titles like, “does your doctor need a boss?” The Cato Institute published an article on the topic in 2009, as did many others. In a Kaiser Family Foundation Health News podcast, Rice University economist Vivian Ho even talked about how years ago she believed it would be beneficial for hospitals to employee doctors, saying:
I started this whole research agenda sort of 10-15 years ago, and I thought bigger was going to be better. I thought because of economies of scale and that if you allowed hospitals to acquire physician practices, there would be less duplication of services, you’d save money.
It was a common view on both the right and the left. Lost in the discussions of the benefits of vertical integration was the fact doctors, hospitals and clinics were not (are not) competing on price, quality, or efficiency. Without an incentive to become efficient and pass the savings on to consumers any saving would not benefit patients. More from Vivian Ho:
But then the problem is there’s no mechanism that forces a provider to pass any savings onto the consumer. So there may be economies of scale, it’s just you and I as consumers aren’t able to enjoy any of those benefits.
But I do think the issue of the cost of healthcare and the cost of health insurance premiums is the biggest problem putting a burden on the average American citizen… I’ve worked in this career for this entire time, and things aren’t getting better. They’re actually getting much worse.
The result of allowing hospitals to grow bigger and scoop up physician practices for their own benefit should have been obvious to economists. It was assumed that hospitals, health plans and other stakeholders would raise prices more slowly rather than seek monopoly positions. A primary reason it is getting much worse is consolidation in the health care industry. Health insurers are consolidating. The three biggest health insurers control 50% of the private health insurance market. The three biggest pharmaceutical benefit managers (PBMs) control 80% of the drug market. Ninety percent of the market for medical supplies is controlled by the three biggest group purchasing organizations. Virtually all major metropolitan areas are now dominated by a handful of hospitals systems. Indeed, Nearly half of metro areas have only one or two hospitals or health systems providing inpatient care. According to KFF Health News:
Health systems, doctor groups, and insurers are merging and coalescing into ever-bigger giants. While these mergers are good for business, studies show the escalating consolidation in health care is driving up prices, harming patient outcomes, and decreasing choice for people who need care. A recent study found that six years after hospitals acquired other hospitals, they had raised prices by 12.9%, with hospitals that engaged in multiple acquisitions raising their prices by 16.3%.
Those market factors contributed to a landscape where a dose of the antiviral Paxlovid given in a hospital costs $4,500; magnetic resonance imaging costs $15,000; and joint replacements cost $100,000.
Hospitals buying physician practices and opening clinics is of no benefit if patients are steered to expensive hospital services. Health insurance companies owning PBMs and hospitals does not benefit consumers if the exorbitant fees just pad insurer’s profit margin. Business strategies that may work well for companies in a competitive environment do not have the same benefits in health care due to the lack of competition (caused by third party payment). KFF asks the question: will the Federal Trade Commission (FTC) under the Trump Administration aggressively police anticompetitive behavior or allow further consolidation Perhaps a better question is what can be done to disentangle decades of strategic investments by the health care industry with the goal of gouging consumers and employers? It is an important topic that has profound effects on medical prices.
KFF Health News: As Health Companies Get Bigger, So Do the Bills. It’s Unclear if Trump’s Team Will Intervene