Improving Hospital Competition: A Key to Affordable Health Care

(An updated version of this paper was published on January 31, 2020. Please refer to that publication for Avik Roy’s most current research on this topic.)

Executive Summary

One of the greatest challenges to affordable health care is the high cost of American hospitals. The most important driver of higher prices for hospital care, in turn, is the rise of regional hospital monopolies. Hospitals are merging into large hospital systems, and using their market power to demand higher and higher prices from the privately insured and the uninsured.

In 2018, Americans spent nearly $1.2 trillion on hospital care, representing approximately $9,200 for the median household, or 14.7 percent of median household income. That exceeds what the average family paid in federal income and payroll taxes. By 2026, projected hospital spending will exceed $13,000 per household: nearly one-fifth of household income.

Among the industrialized member countries of the OECD, the median hospital stay cost $10,530 and lasted 7.8 days in 2014. In the United States, the average hospital stay cost $21,063, despite lasting only 6.1 days. In other words, the average daily cost of a hospital stay in the U.S. was 2.6 times that of the OECD average of industrialized nations.

The centerpiece is a proposal to eliminate the ability of regional hospital monopolies to engage in exploitative pricing practices, and to restore competition to extremely concentrated hospital markets.

In 2011, James Robinson of the University of California reviewed hospital prices charged to commercial insurers for six common procedures: angioplasty, pacemaker insertion, knee replacement, hip replacement, lumbar fusion, and cervical fusion. He found that, on average, procedures cost 44 percent more in hospital markets with an above-average degree of consolidation.

It is problematic enough that regional hospital monopolies have the power to demand high prices. But on top of this, many hospitals engage in additional anticompetitive practices. Anna Wilde Mathews of the Wall Street Journal obtained secret contracts between insurers and hospitals revealing that these contracts often barred insurers from sending patients to “less-expensive or higher-quality health care providers.” Other hospitals precluded insurers from excluding some of the system’s hospitals from the insurer’s networks. Some contract provisions, including those from New York-Presbyterian Hospital and BJC HealthCare of St. Louis, prevented insurers from disclosing a hospital’s prices to patients.

Sometimes, states have been willing to take on the role of enforcing anticompetitive contracts. Many states have enacted any willing provider laws that require insurers to contract with every hospital in the state, regardless of what prices each hospital charges. Other states use network adequacy requirements to achieve a similar effect: forcing insurers to contract with large hospitals because doing so helps ensure that an insurer’s patients have enough hospital options. But restricting insurers’ ability to exclude high-cost hospitals from their provider networks limits their bargaining ability, and allows hospitals to charge higher prices.

This paper proposes several steps to improve hospital competition, thereby reducing the cost and improving the quality of hospital care.

The centerpiece is a proposal to eliminate the ability of regional hospital monopolies to engage in exploitative pricing practices, by capping reimbursement rates for private and individual payors at Medicare Advantage rates in extremely concentrated hospital markets, as measured by the Herfindahl-Hirschman Index, a widely-used measure of market concentration. The Medicare Advantage ceiling would not apply in competitive hospital markets, nor upon hospitals with less than 15 percent share in a given market.

Unlike antitrust enforcement from federal and state entities, this proposal would help address the problem of consolidation that has already happened, by giving regional hospital monopolies a choice: either remain consolidated but without exploitative pricing power, or voluntarily divest and restore a competitive provider market. No longer would hospitals merge for the sole purpose of increasing their pricing power: something that has been all too common over the past several decades.

We also propose:

• Discouraging future hospital mergers by significantly expanding the Federal Trade Commission’s hospital antitrust staff, allowing the FTC to regulate anticompetitive practices by nonprofit hospitals, and publishing — on a quarterly basis — data for every ZIP code or region regarding hospital market concentration.
• Encouraging new hospital competition by encouraging states through federal grants to eliminate certificate of need laws, any willing provider laws, network adequacy requirements, certificate of public advantage laws, and similar provisions; removing the Affordable Care Act’s ban on new physician-owned hospital construction; and barring the deployment of hospital-led accountable care organizations in concentrated markets;
• Transforming price and contractual transparency through an all-payer claims database, and through a requirement for public disclosure of payer-provider contracts, so as to flush out anticompetitive practices;
• Facilitating medical tourism and telemedicine through harmonization of state medical licensing, reference pricing, and scope of practice laws; and
• Integrating Veterans Health Administration hospitals into the broader health care system by allowing private patients to use VA hospitals, and by allowing VA hospitals to compete on price with non-VA hospitals.

Among policymakers in Washington, interest in the problem of hospital consolidation is rising. In January of 2019, Indiana Rep. Jim Banks (R.) introduced the Hospital Competition Act of 2019, which reflects most of the concepts described in this paper. Additional legislative and regulatory measures are also under development. Rep. David Cicilline (D., R.I.), who chairs the antitrust subcommittee of the House Judiciary Committee, has stated that hospital consolidation is one of his top priorities. The Trump administration has also expressed support for changes that would improve hospital competition.

Improving hospital competition will not only reduce the cost of U.S. health care, but also spur innovations in quality, patient service, and technology. We believe that these reforms, combined with others described in our broad reform plan, Affordable Health Care for Every Generation, can make health insurance affordable for every American living today, while also enabling our health care system to be fiscally sustainable for the generations to come.

Introduction

One of the greatest challenges to affordable health care is the high cost of American hospitals. The most important driver of higher prices for hospital care, in turn, is the rise of regional hospital monopolies. Hospitals are merging into large hospital systems, and using their market power to demand higher and higher prices from the privately insured and the uninsured.

A number of commentators have called attention to the vexing problem of “crony capitalism,” whereby politically connected industries persuade the government to give them financial and regulatory advantages over competitors and taxpayers. There is no better candidate for that description in the United States than the hospital industry.

In 2018, Americans spent $1.2 trillion on hospital care, representing 32.4 percent of national health expenditures, and far exceeding what the U.S. spends on national defense. That maps out to $14,613 for a family of four: fully one-quarter of median household income. By 2026, actuaries at the Centers for Medicare and Medicaid Services project hospital spending to exceed $1.8 trillion.

Given that roughly half of all U.S. health care spending is funneled through public programs, hospitals care a great deal about protecting their taxpayer-funded revenue streams. In 2017, hospitals and nursing homes together spent $101 million on lobbying, more than was spent by the automotive industry ($70 million), the defense aerospace industry ($69 million), and commercial banks ($67 million).

It’s the prices, stupid

Among the industrialized member countries of the OECD, the median hospital stay cost $10,530 and lasted 7.8 days in 2014. In the United States, the average hospital stay cost $21,063, despite lasting only 6.1 days. In other words, the average daily cost of a hospital stay in the U.S. was 2.6 times that of the OECD average of industrialized nations.

Not only are U.S. hospital stays shorter in length; Americans use hospitals less frequently than their industrialized peers. In 2014, the United States had 12,901 hospital discharges for every 100,000 residents. This compares favorably with the OECD average of 15,462. In 2015, 63 percent of U.S. hospital beds were occupied at any given time, compared to the OECD median of 74 percent.

As Gerard Anderson, Uwe Reinhardt, Peter Hussey, and Varduhi Petrosyan first explained in 2003, “on most measures of health services use, the United States is below the OECD median. These facts suggest that the difference in spending is caused mostly by higher prices for health care goods and services in the United States.” Further analyses of OECD data by Anderson et al. and Papanicolas et al. show that these disparities have continued.

Federal health care entitlements like Medicare and Medicaid have responded to the rising costs of hospital care by attempting to slow the growth of their reimbursement rates to hospitals for a wide range of services. Hospitals have sought to maintain their revenue growth, in turn, by raising the prices they charge to private insurers and the uninsured: a practice sometimes called cost-shifting.

However, while hospitals claim cost-shifting is necessary to compensate for the losses they claim they incur caring for Medicare and Medicaid patients, the overwhelming evidence is that hospitals are making money on all insured populations, and simply charging more to the privately insured because they can. For example, where Medicare rates have declined, rates for the privately insured have also declined: the opposite of what one would expect if lower Medicare rates were leading hospitals to charge higher rates to the privately insured.

A 2015 study by researchers at the U.S. Agency for Healthcare Research and Quality found that hospitals were charging private insurers 106.1 percent of Medicare rates in 1996, but 175.3 percent of Medicare rates in 2012. A 2019 study by the RAND Corporation, reviewing employers’ claims data, found that hospitals on average were charging the privately insured 241 percent of Medicare rates in 2017.

In his landmark 2013 article “Bitter Pill: Why Medical Bills Are Killing Us,” Steven Brill described an uninsured patient who was charged $283 for chest X-rays by his Texas hospital; that hospital routinely bills Medicare $20 for the same service. The Texas hospital charged $15,000 for routine lab tests for which Medicare pays several hundred dollars. A Connecticut hospital charged another uninsured patient $158 for a routine test called a complete blood count, for which Medicare pays $11.

Furthermore, there is no identifiable relationship between what hospitals charge for health care services and the quality that those hospitals provide. An analysis by Joe Carlson of Modern Healthcare of hospitals in 12 cities found, as so many others have, that “there is no consistent relationship between hospitals spending more to perform a procedure and their achieving better patient outcomes.”

A 2006 meta-analysis by William Vogt and Robert Town found little evidence that hospital mergers led to higher quality, either, despite hospitals’ claims to the contrary. Of the 11 studies they reviewed, two found a modest increase in health outcomes, two found increases on some measures and decreases on others, four found no effect, and three found a decrease in health outcomes.

Hospital consolidation is driving premiums upward

Hospitals have come to recognize that by consolidating their market power, they can force private insurers to accept higher prices.

In 2011, James Robinson of the University of California reviewed hospital prices charged to commercial insurers for six common procedures: angioplasty, pacemaker insertion, knee replacement, hip replacement, lumbar fusion, and cervical fusion. He found that, on average, procedures cost 44 percent more in hospital markets with an above-average degree of consolidation.

For example, as illustrated above, in competitive hospital markets, the average hospital charged $18,337 for a knee replacement; in a consolidated hospital market, the average hospital charged $26,713: a premium of 46 percent.

However, the average cost to the hospital for performing the knee replacement was nearly identical: $11,870 in competitive markets and $12,096 in consolidated markets.

In other words, nearly the entirety of the price premiums charged by consolidated hospitals flows down to the hospitals’ bottom lines in the form of profit, or what most hospitals call “contribution margin.” For the procedures studied by Robinson, consolidated hospitals earned more than twice their competitive peers in contribution margin.

A 2018 study by another group of researchers at the University of California, on behalf of Reed Abelson of the New York Times, examined the 25 metropolitan areas with the highest rate of hospital consolidation from 2010 to 2013. They found that the price of an average hospital stay increased between 11 and 54 percent in these regions.

The superior profitability of conslidated hospital systems leads to a vicious cycle, whereby weak hospitals in competitive markets either close or become vulnerable to acquisition by the larger, consolidated systems, making the problem even worse.

It is problematic enough that regional hospital monopolies have the power to demand high prices. But on top of this, many hospitals engage in additional anticompetitive practices. Anna Wilde Mathews of the Wall Street Journal obtained secret contracts between insurers and hospitals revealing that these contracts often barred insurers from sending patients to “less-expensive or higher-quality health care providers.” Other hospitals precluded insurers from excluding some of the system’s hospitals from the insurer’s networks. Some contract provisions, including those from New York-Presbyterian Hospital and BJC HealthCare of St. Louis, prevented insurers from disclosing a hospital’s prices to patients.

Sometimes, states have been willing to take on the role of enforcing anticompetitive contracts. Many states have enacted any willing provider laws that require insurers to contract with every hospital in the state, regardless of what prices each hospital charges. Other states use network adequacy requirements to achieve a similar effect: forcing insurers to contract with large hospitals because doing so helps ensure that an insurer’s patients have enough hospital options. But restricting insurers’ ability to exclude high-cost hospitals from their provider networks limits their bargaining ability, and allows hospitals to charge higher prices.

Hospitals merged to blunt pressure to reduce their prices

A substantial number of hospital mergers took place in the 1990s, in response to the rapid adoption of HMO-style managed care plans in the private insurance market. Prior forms of health insurance simply paid out what hospitals charged. Managed care plans, instead, strove to steer patients to low-cost, high quality hospitals.

Insurers had initially succeeded at keeping prices down by restricting wasteful utilization of costly services; hospitals, by consolidating their market power, could make up for this shortfall. Since 2000, aggregate hospital operating margins have tripled, from 2 percent to 6 percent.

Since the passage of the Affordable Care Act in 2010, the number of M&A transactions has increased. And because some of these mergers involved mergers of multi-hospital systems that themselves were the products of prior mergers, more recent transactions often have a greater effect on market concentration.

Hospitals’ anticompetitive acquisitions of physician practices

Hospitals have also found that they can increase their revenues by acquiring physician practices. This has allowed hospitals to gain greater revenue for the same care in two ways.

First, Medicare pays more for certain medical procedures performed in a physician’s office, if that physician’s office is owned by a hospital. This is related to the fact that Medicare consists of separate insurance benefits: Part A for hospital care (inpatient care), and Part B for care delivered in physician’s offices (outpatient care). Hospital-owned outpatient clinics are able to receive “facility fees” for a hospital’s overhead, above and beyond what a normal outpatient clinic would receive. This confers a financial advantage to hospital-owned clinics over non-hospital-owned clinics, incentivizing further consolidation.

There have been some reforms of this inequity; the Bipartisan Budget Act of 2015 limited the ability of hospitals to charge higher rates for clinics not on the hospitals’ grounds (so-called “off-campus” clinics). But hospitals should have no ability to charge higher rates for the same care: a principle known as site-neutral payment.

Second, hospitals take advantage of their newfound control of physician practices to steer those physicians’ patients to their hospital, as opposed to a competitor. An investigation by Anna Wilde Mathews and Melanie Evans of the Wall Street Journal revealed that hospitals have become increasingly aggressive about pressuring their physicians to steer more patients to their facilities as opposed to competitors.

“There was strong, strong emphasis to keep our patients internal and not let them leak out to unaffiliated physicians,” a cardiologist named Mrugesh Patel told the Journal. “Big Brother was always watching because they had all these computers, so they know who’s sending patients out of the system.” Hospitals also use non-compete agreements with physicians to prevent them from becoming independent competitors.

Measuring hospital market concentration

A common way to measure the degree of hospital market concentration is to use the Herfindahl-Hirschman Index, or HHI. An HHI score is the sum of the squares of the market share of each player in a given market. For example, in a market where there is only one hospital — a monopoly — with 100 percent market share, that market’s HHI score is 10,000 (100 squared).

A market with only two hospitals, in which one has 60 percent share and the other 40 percent, has an HHI of 5,200 (60 squared plus 40 squared).

The Federal Trade Commission considers markets to be “highly concentrated” if their HHI scores are 2,500 or higher.

In other industries, such as airlines or cell-phone carriers, the FTC routinely seeks to block mergers that would increase HHI scores above 2,500.
In the hospital industry, however, the median market HHI exceeded 2,500 in the year 2000, and reached 2,800 in 2013.

In other words, more than half of the hospital markets in the United States have reached a level of concentration that, in other sectors of the economy, would provoke an antitrust inquiry or lawsuit. Yet such litigation, in the hospital sector, has been scarce.

Proposals for increasing competition among hospitals

There are a number of public policy tools that we can use to increase provider competition, thereby lowering health care prices for consumers.

1. Encourage new competitive entrants

Government policy discourages new entrants from competing against incumbent hospitals. Many states have certificate of need laws that require entrepreneurs to jump over high bureaucratic hurdles before they can build a new hospital. States should repeal these laws. The federal government could help, too; if Congress gave the U.S. Department of Health and Human Services a $10 billion grant to encourage state-based pro-competitive policies, the funds could be allocated to states that liberalize their hospital markets in this and other ways.

The Affordable Care Act bars the construction of physician-owned hospitals that could, in many circumstances, offer valuable services at lower prices with higher quality. We propose repealing those sections of the Affordable Care Act that discourage and/or bar new hospital construction: provisions that were placed in the law at the behest of incumbent hospitals. While these bans would be lifted, insurers would be encouraged to prohibit physicians from referring patients to hospitals where they have an ownership stake.

2. Liberalize regulations that artificially increase hospitals’ market power

In the previous section, we encouraged the federal government to assist states in liberalizing their hospital markets through repeal of certificate of need laws. Two other categories of regulations artificially increase hospitals’ market power at the expense of insurers: any willing provider laws and network adequacy mandates. These problems are also addressable through the same framework.

Any willing provider laws require an insurer or a public program to contract with every participating hospital in a given market, regardless of that hospital’s pricing structure. Such provisions are common, for example, in Medicare and Medicaid, and some states expand such rules to the privately insured. The result is that insurers cannot exclude high-priced hospitals from their provider networks, reducing insurers’ bargaining power and enhancing that of high-priced hospitals.

Network adequacy mandates work in a similar fashion, but are slightly more flexible than any willing provider rules. For example, enrollees in Medicaid and the Affordable Care Act’s insurance exchanges require insurers to have a sufficiently expansive network that enrollees have ready access to a nearby hospital. Such regulations are well-intentioned—they ensure convenient access to providers who can deliver essential hospital care—but the end result is to enhance to power of regional or local hospital monopolies.

At a minimum, states should reform their network adequacy requirements to be as lightweight as possible. Ideally, they should eliminate them. One way to do so while maintaining provider access is to deploy reference pricing across a wide range of hospital services, as CalPERS did for orthopedic surgeries in California (see below). Reference pricing can achieve the same goals as narrower hospital networks—steering patients to the lowest-cost, highest-quality providers—while doing so in a way that allows all hospitals to participate, because all hospitals agree to honor the reference price, which may be significantly lower than their list price.

3. Transparency into hospital prices and anticompetitive contracts

The Federal Trade Commission has demonstrated that it simply does not have the bandwidth or the ability to enforce antitrust law when it comes to the thousands of insurer-hospital contracts in America. Subpoenaing each contract in order to review for anticompetitive language is infeasible, time consuming, and highly intrusive.

A simpler solution would be to establish an all-payer claims database, with full transparency into payer-provider contracts within 60 days, so as to give the public the ability to identify anticompetitive practices. The claims database would serve the additional purpose of creating price transparency for private insurers, allowing more efficient competition, especially from new entrants and other startups.

4. Facilitate medical tourism and telemedicine

One important way to encourage hospital competition is to allow patients to obtain hospital-based care outside their local area: a practice called medical tourism.

For example, many Dallas-area businesses fly their employees to Oklahoma so that they may be treated at the Surgery Center of Oklahoma, which openly publishes the prices it charges for various common surgeries. For example, the Surgery Center of Oklahoma charges $8,000 for a hysterectomy, far less than the $40,000 to $50,000 commonly charged at Dallas-area hospitals.

We propose building on these developments by making it easier for individual market insurers to use reference pricing within and across state lines, and even across international borders.

For example, an individual market plan could give an able-bodied enrollee $8,750 for a hysterectomy — enough to travel to Oklahoma and undergo surgery there — or use the same amount of money to defray the cost of the same procedure in Dallas.

Reference pricing, in this way, opens up regional hospital monopolies to competition from hospitals in other markets.

Indeed, when the California Public Employees’ Retirement System (CalPERS) adopted a form of reference pricing in 2008, its members found that costly hospitals were often willing to accept the reference price without additional charges.

From 2008 to 2012, CalPERS members enjoyed price reductions of 34.3 percent at high-cost facilities for orthopedic surgery, substantially reducing their premiums and out-of-pocket costs.

One technical difficulty in encouraging cross-state hospital competition is variation in medical licensing laws. The Department of Health and Human Services could work with the various U.S. medical specialty societies, and relevant state agencies, to harmonize state licensing laws and encourage cross-state reciprocity.

An important part of this effort would be to encourage states to liberalize scope of practice regulations, in order to allow nurse practitioners, physician assistants, pharmacists, and community health workers to provide care, appropriate to their training, at a lower cost than physicians can.
We could also do more to encourage international medical tourism, by liberalizing barriers that prevent American health insurers from paying for health care services received abroad.

Congress could encourage states to engage in these liberalizations and others, such as any willing provider laws, certificate of need laws, and certificate of public advantage laws, by appropriating $10 billion that the U.S. Secretary of Health and Human Services would disburse to states that engage in hospital market liberalization.

5. Integrate the Veterans Health Administration into the broader U.S. health care system

The Veterans Health Administration suffers from serious problems of redundancy, cost, quality, and access. It is time to consider integrating the Veterans Health Administration into the broader health care system.

In a reformed system in which veterans could gain access to private insurance options, civilians could also gain access to VA hospitals.

Indeed, VA hospitals could provide needed competition to private hospital monopolies. If the VA hospitals indeed offer higher quality at lower cost than civilian hospitals, the entire health care system would benefit from their competitive entry.

6. Discourage further hospital consolidation

The flip side of encouraging new competitive entrants is discouraging future hospital consolidation. The Federal Trade Commission challenges a very small number of hospital mergers, despite the large amount of anticompetitive and rent-seeking activity among large hospital systems. This is because the FTC has a limited bandwidth for challenging local mergers, given the frequency of large national mergers in other sectors of the economy.

Furthermore, the courts and the states actively stymie the ability of the FTC and the Department of Justice to challenge hospital mergers. A report from the Trump administration describes how states deploy certificate of public advantage (COPA) regulations to limit the ability of antitrust agencies to scrutinize hospital mergers. And while the FTC and the DOJ can sue to attempt to block a merger, these agencies are often opposed by judges who defer to hospitals’ prestige instead of considering the anticompetitive effects of further consolidation.

We propose quadrupling funding for the FTC, but restricting the additional funding to hiring additional hospital industry specialists, so that the agency could do more to challenge anticompetitive hospital mergers. Expanding staffing at a government agency may seem like a counterintuitive way to increase market competition, but antitrust litigation is an important, and underutilized, tool for combating anticompetitive hospital practices.The Affordable Care Act incentivizes hospitals to acquire physician practices through “accountable care organizations.” The theory was that such acquisitions would lead to more coordinated care. While there is no such evidence to date, hospital-led ACOs have led to further provider consolidation and higher prices. Congress and the Trump administration should work to constrain, if not eliminate, the ability of hospitals to worsen provider consolidation through ACOs.

Restoring competition to already consolidated hospital markets

While we believe that the above ideas are constructive, enacting them would likely achieve incremental gains in hospital competition. If we want to restore true affordability to hospital care where markets are already consolidated, we must directly address the problem of existing regional hospital monopolies.

Take the example of Yale-New Haven Health, the non-profit hospital mega-system owned by Yale University. Over time, Yale-New Haven Hospital acquired most of its neighbors; today, the Yale hospital system is a near-monopoly in southern Connecticut and Rhode Island. After 2012, when Yale-New Haven acquired crosstown rival St. Raphael’s, Yale controlled 98 percent of all hospital discharges in the city of New Haven.

In theory, federal antitrust agencies could sue to force Yale-New Haven Health to break up into smaller units: an uncertain and potentially disruptive process. For these reasons, the FTC and DOJ have generally not pursued this path.

We propose giving these mega-systems two choices:

• Remain consolidated, but without monopoly pricing power. If hospital market concentration in a non-rural region exceeds an extremely high threshold—an HHI above 4,000—hospitals in that region with greater than 15 percent market share would be required to accept rates from the privately insured and uninsured that are equal to or less than the median rate paid by a Medicare Advantage plan in that region. These regional monopolies or oligopolies would remain free to charge less than Medicare Advantage rates, or to engage in value-based insurance contracts with an aggregate spend that remains below MA rates.
• Voluntarily divest some of their holdings to restore competition to their hospital market. Alternatively, hospital mega-systems could choose voluntarily to divest some of their holdings, so as to bring hospital market concentration in their region below the HHI thresholds of 4,000 and 5,000 for urban and rural markets, respectively. They would then restore their ability to charge rates higher than Medicare Advantage plans pay, though their competitors would also be free to seek to gain share by charging less.

Along with helping to restore competition to concentrated markets, we believe that this approach would be more effective than antitrust enforcement in discouraging future anti-competitive hospital mergers, because most hospital mergers are consummated for the sole purpose of raising prices on the privately insured and uninsured.

Indeed, the goal of this proposal would be to arrive at an endpoint in which it was no longer needed, because every U.S. market enjoys robust hospital competition.

Absent an act of Congress, or as a complement to one, the Centers for Medicare and Medicaid Services should publish hospital HHI data by ZIP code, referral region, and/or Metropolitan Statistical Area on a quarterly basis. This quarterly publication could expand public awareness of hospital consolidation help identify trends over time, and also visualizations, like the one generated above by David Cutler and Fiona Scott Morton using data from the 2010 American Hospital Association Chartbook.

We propose pairing this reform with an increase in funding for rural hospitals that qualify for Critical Access Hospital status (CAH). Critical Access Hospitals are rural hospitals that provide 24-hour emergency services, 7 days a week, but with no more than 25 inpatient beds, and located at least 35 miles by car (or 15 miles in mountainous terrain) from any other hospital. Medicare pays these hospitals at an enhanced rate of 101 percent of those hospitals’ list prices (“reasonable costs”). By increasing that formula to 110 percent of reasonable costs, rural hospitals will have an additional cushion with which to remain independent of regional hospital monopolies.

Bipartisan interest in hospital competition reform

Among policymakers in Washington, interest in the problem of hospital consolidation is rising. In January of 2019, Indiana Rep. Jim Banks (R.) introduced the Hospital Competition Act of 2019, which reflects most of the concepts described in this paper. The bill seeks to improve competition among hospitals through the following measures:

• Authorizing a 400 percent increase in Federal Trade Commission (FTC) staff dedicated to ensuring that hospital mergers do not restrict competition and raise prices;

• Reducing the incentive for future consolidation by requiring hospitals in highly concentrated regions to accept Medicare reimbursement rates from commercial payers as a condition for participation in the Medicare program, [but this provision] would not apply to hospitals with less than 15% market share;

• Repealing the ban on construction of new physician owned hospitals;

• Providing grants to states that implement free market reforms to increase hospital competition [such as reforming certificate-of-need and scope-of-practice laws];

• Reducing cost of outpatient care by equalizing reimbursement rates for hospital outpatient departments and independent physician practices;

• Removing incentives to form Accountable Care Organizations that contribute to consolidated care; and,

• Requiring hospitals to publish the cost of their most 100 common services.

Additional legislative and regulatory measures are also under development. Rep. David Cicilline (D., R.I.), who chairs the antitrust subcommittee of the House Judiciary Committee, has stated that hospital consolidation is one of his top priorities. “When Democrats assume the responsibility of leadership in January, we will get to work immediately to promote competition and address monopoly power in health-care markets,” Cicilline told the Washington Post.

The Trump administration has also expressed support for changes that would improve hospital competition. In a detailed white paper entitled “Reforming America’s Healthcare System Through Choice and Competition,” the administration proposed equalizing all reimbursement rates between hospitals and outpatient clinics for the same services. (Last June, it proposed doing so for hospital-owned clinics that were not located on hospital grounds, in a move that would reduce Medicare spending by $610 million.) It also called on states to repeal or reform anti-competitive state mandates such as certificate-of-need and scope-of-practice laws.

One creative idea proposed in the white paper calls on Congress to “amend the Federal Trade Commission Act to extend FTC’s jurisdiction to nonprofit health care entities to prevent unfair methods of competition.” Today, the FTC has the authority under the Clayton Antitrust Act of 1914 to file suit to block mergers among nonprofit entities. However, the FTC is not allowed to investigate nonprofits for other anticompetitive behavior. As the white paper notes,

The jurisdictional limitation contained in the FTC Act creates an arbitrary and inefficient burden on the FTC’s ability to enforce the antitrust laws to prevent anti- competitive conduct by certain nonprofit entities. For example, nonprofit healthcare entities may structure an affiliation that has the economic effect of a merger but is technically an agreement between competitors — thus subject to Section one of the Sherman Act rather than a merger subject to the Clayton Act. Similarly, while investigating a merger involving nonprofit healthcare providers, FTC staff may discover an anti-competitive agreement subject to the Sherman Act. In both instances, because the FTC’s ability to enforce the Sherman Act through the FTC Act is limited to for-profit corporations, the FTC would have to refer these cases to the Antitrust Division at Justice, which has direct authority to enforce the Sherman Act without the limitations related to nonprofit entities.

States also have a role to play in tackling hospital consolidation: not only by removing the competitive barriers described in this paper, but also through their own abilities to enforce antitrust laws and audit anticompetitive hospital-insurer contracts.

The Trump administration has been active in this area as well. In March 2019, Don Rucker, the National Coordinator for Health Information Technology, proposed requiring hospitals and insurers to publicly disclose their prices and contractual arrangements, which would bring to light the vast array of anticompetitive practices that hospitals engage in to inflate prices and limit patient choice.

Conclusion

Hospitals have considerable political power, and regularly use it. They are often the largest or second-largest employer in a given congressional district, and stoke fears that they will go bankrupt without being able to charge three to five times what hospitals in other countries charge for the same care.

We cannot accept this state of affairs. Improving hospital competition will not only reduce the cost of U.S. health care, but also spur innovations in quality, patient service, and technology. Most importantly, it is a necessary step in building a health care system that is affordable for all Americans, and fiscally sustainable for future generations.