How The Hospital Lobby Fights Against Affordable Health Care

As the below chart shows, the price of hospital care in the United States for the privately insured and the uninsured has doubled over the last two decades. In 2014, U.S. hospitals charged 2.6 times more per day for a hospital stay than did hospitals in other advanced nations.

Because hospital spending is the largest component of U.S. health spending—representing one-third of the total—rising hospital prices threaten the affordability of health care and health insurance for those who can least bear their expense.

As I explain in my recent paper for FREOPP, Improving Hospital Competition: A Key to Affordable Health Care, the biggest driver of rising prices for hospital care has been the growth of regional hospital monopolies, as larger hospital systems acquire smaller ones to weaken the negotiating power of private health insurers.

In the paper, I propose several steps for combating hospital consolidation, including:

• Eliminating exploitative pricing practices by hospital monopolies, by giving them the choice of either (1) voluntarily divesting some of their holdings so as to re-create a competitive hospital market, or (2) establishing a high threshold of hospital market concentration, above which hospital monopolies and oligopolies would not be able to charge private insurers more than they charge Medicare;
• Quadrupling the Federal Trade Commission’s budget to investigate anticompetitive practices by hospitals and litigate anticompetitive hospital mergers;
• Repealing the Affordable Care Act’s ban on the construction of new, physician-owned hospitals, so as to remove a barrier to entry for new hospital competition;
• Ending the Medicare practice of paying hospitals more than independent physician offices for the same health care services (also known as site-neutral payment); and
• Appropriating $10 billion for the U.S. Department of Health and Human Services to support states that enact laws and regulations that improve hospital competition, such as: repealing certificate of need laws, ending certificate of public advantage agreements, reforming network adequacy requirements, reforming scope of practice regulations, and reforming hospital staffing mandates.

Nearly all of the above concepts are reflected in a new bill, the Hospital Competition Act of 2019, introduced in Congress by Indiana Rep. Jim Banks and co-sponsored by Arkansas Rep. Bruce Westerman. Hospital lobbyists are gathering to oppose the bill, for obvious reasons: it would eliminate the ability of regional hospital monopolies to engage in exploitative pricing practices.

Here are some of the misleading claims that we’re hearing hospital lobbyists use to oppose the bill, along with the actual facts:

Claim: Requiring hospital monopolies to charge private insurers no more than Medicare “undermines the free market” and is “anti-competitive.”

Fact: Monopolies aren’t markets. And monopolies, by definition, exist where competition is absent. Incentivizing hospital monopolies to restore competitive markets by divesting some of their holdings is pro-competition. Under the FREOPP proposal and the Banks bill, hospital monopolies are free stay monopolies, but they will no longer be able to take advantage of their monopoly power to charge exploitative prices or engage in anti-competitive practices.

Today, if two hospitals want to merge, and the result is a market with a Herfindahl-Hirschman Index above 2,500 (a measure of market concentration), the Federal Trade Commission and the Department of Justice may sue to block the merger, leading to years of uncertainty as the litigation winds its way through the courts. Indeed, the FTC and DOJ have the authority today to sue to break up hospital systems that have too much market power. They simply have declined to use it.

Our proposal and the Banks proposal can be thought of as a lighter — and more transparent — version of antitrust enforcement. Under our concept, urban markets with HHIs above 4,000 and rural markets with HHIs above 5,000 — in other words, extremely concentrated markets — would be incentivized to increase competition.

Indeed, a side effect of this measure will be to also increase insurer competition. Today, insurers are consolidating in order to match the market power of regional hospital monopolies. Restoring competition to hospital markets will incentivize competition among private insurers as well.

Claim: If hospital monopolies paid rates similar to Medicare’s for the privately insured, it would be “both unwise and unsustainable.”

Fact: Medicaid’s reimbursement rates to hospitals are slightly lower than Medicare’s rates (see the chart above). So if Medicare’s reimbursement rates are “both unwise and unsustainable,” why is the Federation of American Hospitals, along with every national and state-based hospital trade group, lobbying for states to expand Medicaid?

FAH, the trade group representing for-profit hospitals, “strongly supports Medicaid expansion for all states,” even though Medicaid has the lowest hospital reimbursement rates of any payor. If hospitals are making money on Medicaid patients, they are certainly making money on Medicare’s reimbursement rates. And so they should; Medicare’s rates, after all, are more than double what insurers pay hospitals in other advanced countries on a per-diem basis.

Claim: Requiring hospital monopolies to charge private insurers no more than Medicare represents the “proverbial ‘camel’s nose under the tent’ for those seeking single payer health care” and would “introduce federal rate-setting similar to a single-payer system.”

Fact: As noted above, if hospitals are opposed to single-payer health care, why is the Federation of American Hospitals, along with every national and state-based hospital trade group, lobbying for states to expand Medicaid, a form of single-payer health care? Reasonable people can differ on the value of Medicaid expansion, but no one who advocates for Medicaid expansion can credibly claim to support free-market health care.

The Affordable Care Act’s expansion of Medicaid is, in fact, the largest expansion of single-payer health care in America in a half-century. It crowds out private coverage—where reimbursements are set through voluntary, private contracts—with Medicaid coverage, where reimbursement rates are set through direct government schedules and/or government-negotiated capitation contracts. If you support the Medicaid expansion, you support the largest expansion of the government’s role in setting rates in generations.

Support for single payer health care is rising precisely because of skyrocketing hospital prices for the privately insured and uninsured. Those who oppose single payer will only succeed if they show how competition and markets can do a better job of making hospital care affordable. The status quo has only made things worse.

Under both the FREOPP proposal and the Banks bill, insurers and hospitals would remain free to negotiate reimbursement rates. But in extremely concentrated hospital markets — representing twice as high a threshold as the Federal Trade Commission uses for antitrust litigation — hospital monopolies and oligopolies would no longer be able to charge more than what Medicare pays, which is already more than double what insurers in other advanced countries pay. Hospital monopolies would be free to charge private insurers less than Medicare, and also to negotiate innovative arrangements like value-based risk-sharing contracts, so long as the aggregate spending on those contracts did not exceed what Medicare would pay. Hospitals in competitive or moderately concentrated markets would remain free to charge private insurers rates that are higher than Medicare’s, as would smaller hospitals with less than 15 percent market share that reside in highly consolidated hospital markets.

Claim: Repealing the Affordable Care Act’s ban on construction of new physician-owned hospitals is “anti-competitive.”

Fact: The argument that increasing hospital competition is “anti-competitive” is positively Orwellian. Hospital monopolies claim that physician-owned hospitals are beyond the pale because physicians have an incentive to refer patients to hospitals they own. But, as an investigation by the Wall Street Journal has revealed, the worst actors when it comes to physician self-referrals are incumbent hospital systems. Incumbent hospitals have been aggressively buying up physician practices so as to steer physicians’ patient volume to themselves.

It’s relatively simple to ensure that physician-owned hospitals don’t engage in self-dealing, through reporting requirements and transparency. But more competition—and stronger antitrust measures—are necessary to deal with the far more pernicious problem of hospital mega-systems buying up physician practices.

Claim: It’s ignorant to pay hospitals and independent doctors’ offices the same price for the same health care services. Hospitals deserve higher prices.

Fact: In a truly free market—with which hospital monopolies are unfamiliar—if a competitor has a lower cost structure and can provide the same service or product at a lower price, that competitor deserves more market share. General hospitals should get out of the business of providing services that others can provide at lower cost, and focus on the things that only they can do well.

Claim: It “undermines states’ rights” to offer them federal grants that help them make their hospital markets more competitive and less expensive.

Fact: In fact, it enhances states’ rights to offer states resources by which they can voluntarily make their health care systems better. More competitive hospital markets make states more economically and fiscally competitive, which in turn helps state budgets and encourages job growth.

Claim: Hospital lobbyists are eager to engage in a serious debate about how to lower the cost of American hospital care.

Fact: Hospital lobbyists have never put forth a serious proposal that would lower American hospital prices: the most expensive in the world, by a wide margin. Nonetheless, we should do everything we can to make U.S. hospitals more competitive.

Thanks to advances in medical technology, fewer and fewer health care services need to take place in a hospital. The average hospital length of stay for a given episode of care keeps decreasing. These are good things for public health. But hospitals haven’t found a way to scale down their facilities and fixed costs to align with these trends.

Are there regulations or mandates that force hospitals to maintain bloated facilities where leaner ones would perform better? I’ve asked hospital leaders for insight into this, and have gotten painfully little in return.

One thing that hospital leaders bring up is nurse staffing mandates, which force hospitals to maintain arbitrary ratios of nurses to patients in their wards, in ways that drive up hospital costs. The state grants that I have proposed can be used to encourage states to liberalize their nurse staffing mandates. Massachusetts recently rejected a ballot initiative that would have imposed such staffing mandates there. (The Hospital Competition Act does not include staffing mandates in its state grant provision.)

Another thing that comes up is the Emergency Medical Treatment and Active Labor Act of 1986, or EMTALA, a mandate that forces hospitals to care for anyone who shows up in their emergency room, regardless of their ability to pay or the legality of their immigration status. Hospitals receive Disproportionate Share Hospital Payments, or DSH, from Congress to make up for the cost of “uncompensated care.” It’s worth revisiting the combination of EMTALA and DSH, in light of the last three decades of health care policy, so as to ensure that hospitals have the flexibility they need to thrive in a competitive market.

I’m open to any and all ideas that would help make hospital care in the U.S. more affordable. But the status quo is not it. One way or another, the current practice of regional hospital monopolies exploiting their market power to charge unaffordable prices will not last. It will either be solved by single payer, or by a more competitive market. Hospital leaders have an opportunity—and a responsibility—to be part of the solution.