The Sleeper Health Cost Policy

A shorter version of this column has been published by Axios.

Presidents Biden’s Executive Order instructing agencies to develop policies to promote competition in the economy hasn’t received much attention, but could lead to new efforts to control health costs if his administration and Congress respond with measures to stem consolidation in the health care industry and promote competition to drive down prices.

The research is clear that consolidation in the hospital industry drives up costs, in some cases by as much as fifty percent. Perhaps surprisingly consolidation generally does not  improve quality of care. Insurers and employers are not in a position to bargain for lower prices with hospitals or to establish narrower networks they believe deliver greater value when one or two hospital systems are the only games in town and own most of the medical practices.

Mergers led to more consolidation even before COVID hit, with two thirds of hospitals in a system, and most metropolitan areas already deemed highly concentrated hospital markets. Private equity firms were behind many of the mergers. The pace of mergers is likely to pick up with the bigger fish eating the smaller ones as COVID has made smaller and rural hospitals and smaller medical practices more fragile.  With the cat party out of the bag on market consolidation there isn’t a lot of time to waste.

The FTC and the DOJ’s Anti-Trust Division lack the staff to examine most mergers and in some cases the authority needed to ensure that markets remain competitive. While they can review mergers, they do not generally have the authority to intervene, for example, to stop non-competitive practices by non-profit hospital systems.  Fifty seven percent of all hospitals are technically non-profit, including some of the largest health systems in many parts of the country.  FTC also lacks the authority to monitor the hospital acquisitions of large numbers of smaller practices which individually fall under the threshold for requiring notification of the FTC. States face a similar array of limitations to their authority.

The Executive Order establishes a White House Competition Council, but it is vague on what actions might follow in health. Either it or a private effort could productively review FTC, D0J and state authority and capacity and make recommendations for administrative and legislative actions. HHS Secretary Xavier Becerra made his name in health, in part, by going after Sutter Health for its anti- competitive pricing practices as Attorney General in California and could play a central role in such an effort.

Of course, the hospital industry would fiercely resist any effort to beef up anti-trust action and promote competition to drive down prices. Hospitals have been sitting on the sidelines happily watching policymakers go after drug costs. But drugs represent ten percent of health spending while hospitals represent thirty four percent.

A more aggressive policy aimed at anti-competitive mergers and consolidation in the hospital industry would aim right at high hospital prices that drive up health spending. And while the industry would resist it, it might appeal to both Democrats who favor regulation and Republicans who favor competitive markets. Depending on follow through, the Biden executive order could be a sleeper health cost policy.

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