I testified before the Senate on hospital consolidation.
As my co‐panelist and Carnegie‐Mellon health economist Martin Gaynor testified, “the majority of hospital markets are highly concentrated, and many areas of the country are dominated by one or two large hospital systems with no close competitors.” According to one study, “90 percent of Metropolitan Statistical Areas (MSAs) were highly concentrated for hospitals.” And “the largest health system has over 50 percent of the market in 62 percent of areas in the country (commuting zones).”
Excessive or inefficient hospital consolidation is a real problem. It reduces entry and competition, increases health care prices, and can reduce health care quality. Gaynor continues:
One of our key findings is that hospitals that have fewer potential competitors nearby have substantially higher prices. For example, monopoly hospitals’ prices are on average 12 percent higher than hospitals with 3 or more potential competitors nearby. The prices of hospitals who have one other nearby potential competitor are on average 7.3 percent higher. We also examine all hospital mergers in the United States over a five year period, and find that the average merger between two nearby hospitals (5 miles or closer) leads to a price increase of 6 percent. Further, our evidence shows that prices continue to rise for at least two years after the merger. Last, we find that hospitals that face fewer competitors can negotiate more favorable forms of payments, and resist those they dislike – a serious issue for payment reform.
That last part means that hospitals can resist insurers’ efforts to create payment incentives for hospitals to provide lower‐cost, higher‐quality care.
In my testimony, I explained government doesn’t need new powers to stop inefficient consolidation. Government just needs to stop encouraging it:
Inefficient consolidation…is not merely a driver of higher prices and lower quality. It is also a symptom of a greater problem. By and large, inefficient consolidation is the result of government interventions that disable the normal market mechanisms of entry, cost‐consciousness, and competition from doing what they do in other sectors of the economy: improving quality while reducing prices.
I then discuss how government regulation, government encouragement of excessive insurance, and government purchasing of medical care (e.g., Medicare) all have the unintended consequence of encouraging producers to consolidate in ways that harm competition and consumers.
Rather than give government even more powers–which would no doubt lead to still more unintended consequences–Congress and state legislatures should roll back the interventions that produced the highly concentrated hospital, clinician, and health insurance markets we see today.
You can read the particular steps policymakers should take in my written testimony.
Commentary by Michael F. Cannon. Originally published at Cato At Liberty. https://www.cato.org/blog/testimony-excessive-government-reduces-competition-health-care-markets