A team of high-powered university researchers claimed in a recently published study that health care prices rise for consumers as the number of hospitals serving an area shrink.* The study argues that monopoly hospitals charge prices that are 15.3% higher than areas that have at least four hospitals. Some highlights of the study are:
Measures of hospital market structure are strongly correlated with higher hospital prices. Being for-profit, having more medical technologies, being located in an area with high labor costs, being a bigger hospital, being located in an area with lower income, and having a low share of Medicare patients are all associated with higher prices. However, even after controlling for these factors and including HRR fixed effects, we estimate that monopoly hospitals have 15.3 percent higher prices than markets with four or more hospitals. Similarly, hospitals in duopoly markets have prices that are 6.4 percent higher and hospitals in triopoly markets have prices that are 4.8 percent higher than hospitals located in markets with four or more hospitals. While we cannot make strong causal statements, these estimates do suggest that hospital market structure is strongly related to hospital prices (p.3)....
There is a large literature on hospital competition (see Gaynor, Ho, and Town 2015), which has generally found that hospital prices are substantially higher in more concentrated markets. The majority of this literature, however, uses estimates of transaction prices (usually based on charges) rather than actual data on transaction prices and mostly employs data from just one state - California.
We extend the literature by using a new, comprehensive database that covers a larger population in more detail than anything previously examined. Previous work has relied on data covering particular states, small groups of cities, or groups of companies. We capture claims for individuals with employer-sponsored insurance from three of the five largest insurers in the US. Moreover, rather than using charges or estimated prices, we have the actual transaction prices that capture the true payments made for care (p.8)....
In addition, Wu (2010) finds that hospitals with greater market power were able to make larger private price increases in response to cuts in public reimbursement rates. (p.24, footnote)...
For-profit hospitals (the omitted base ownership form) have higher prices than government hospitals, but there is not a significant difference between the prices of for-profit and not-for-profit hospitals. (p.30)...
The main data we use in this analysis are insurance claims between 2007 and 2011 from three of the five largest US insurers: Aetna, Humana, and UnitedHealthcare (the Health Care Cost Institute dataset). The data include more than eighty-eight million unique individuals and account for approximately 5 percent of total health spending and 1 percent of GDP annually. (p.1)
The results of the study shouldn't surprise anyone who has a basic understanding of economics. However, Watchdog.org reporter Eric Roehm used the results to question whether the certificate of need process used in many states such as Mississippi deny access to health care by limiting the supply of hospitals. Mr. Roehm argued in a Wall Street Journal essay that CON's limit healthcare options and raise prices. Think of Jackson taxicabs. Mr. Roehm wrote:
When the 124-bed StoneSprings Hospital Center opened in December, it became the first new hospital in Loudoun County, Va., in more than a century. That’s more remarkable than it might at first seem: In the past two decades, Loudoun County, which abuts the Potomac River and includes growing Washington suburbs, has tripled in population. Yet not a single new hospital had opened. Why? One big reason is that StoneSprings had to fight through years of regulatory reviews and court challenges before laying the first brick.Mississippi has suffered under the certificate of need rules for quite some time. It is the one subject besides SLRP that causes a bipartisan code of silence to take place in the Mississippi legislature. The Republicans in Mississippi claim to be conservative. They shriek that Obamacare is ruining the country and taking away our freedom. However, they say absolutely nothing about this form of regulatory crony capitalism that favors privileged hospitals and denies Mississippians access to health care through higher prices and fewer hospitals. The Democrats are silent as well as they were literally on the take for the Mississippi Hospital Association for many years and did their bidding while the hospitals funded some of their own causes (Redistricting fights, anyone?).
County officials and the Hospital Corporati on of America, or HCA, began talking about building a new hospital in 2001. But Virginia is one of the 36 states with a “certificate of need” law, which requires health-care providers to obtain a state license before opening a new facility. Getting a license is supposed to take about nine months, according to the state Health Department. HCA first submitted an application in July 2002 but didn’t win approval for a new facility until early 2004.
Then the plan faced a series of legal challenges from the Inova Health System, an entrenched, multibillion-dollar competitor. Over decades Inova has become the dominant player in the Virginia suburbs. In 2008 the Federal Trade Commission blocked its attempt to acquire another independent hospital, saying that Inova already controlled roughly 75% of the market in Northern Virginia, and that further consolidation would be anticompetitive. That said, by all accounts the not-for-profit Inova’s 16,000 employees and five hospitals provide state-of-the-art health care, and it is regularly ranked as one of the nation’s top medical systems.
When it took up arms against HCA, Inova alleged that the certificate of need hadn’t been properly granted. Years of legal wrangling followed, and Inova tried to appeal all the way to the Virginia Supreme Court, which declined to hear the case in 2008.
Inova ultimately lost in court, but it was simultaneously backing public campaigns to try to pressure local officials to stop StoneSprings with zoning rules. Mailings and newspaper advertisements portrayed HCA as a carpetbagging mega-corporation. “What’s the deal?” asked an ad in the Loudoun Times-Mirror that highlighted a stake in HCA owned by Merrill-Lynch, which it assailed as “one of the first Wall Street companies that needed financial rescue as it suffered under the weight of its bad decisions.”.... Rest of essay.
It’s not hard to understand why Inova might fight so hard to keep out challengers: There’s a direct correlation between prices and competition. In a paper released in December, economists with Yale, Carnegie Mellon and the London School of Economics evaluated claims data from Aetna, Humana and UnitedHealth. They found that rates were 15.3% higher, on average, in areas with one hospital, compared with those serviced by four or more. In markets with a two-hospital duopoly, prices were 6.4% higher. Where only three hospitals compete they were 4.8% higher.
Research by Chris Koopman of the free-market Mercatus Center suggests that Virginia could have 10,000 more hospital beds and 40 more hospitals offering MRIs if the certificate of need restrictions did not exist. “In many instances, they create a quasi-monopoly,” he says. “In essence, it’s a government guarantee that no one will compete with you, until you get notice and an opportunity to challenge that person’s entry into that market.”
If the legislature does address the CON process, the Mississippi Hospital Association will show up with fancy charts about health-care jobs and dollars given to a community by member hospitals will be erased if certificates of need are abolished. There is also the matter of high-powered lobbyists and contributions (See Sam Mims' campaign finance reports, for example.). Don't forget the social media and letter-writing campaigns that would take place if some foolhardy legislative committee chairman took up the matter. No small affair to ignore for politicians. But there is the Tea Party, right? Wrong. Facebook fights seem to take the place of real fights as the Tea Party ignores this problem as well.
Governor Phil Bryant issues executive orders and goes to court against Blue Cross as he loudly proclaims his worries about Mississippians having "'access to health care". Remember that fight several years ago? The Governor somehow forgets about "access to healthcare" when it comes to discussing the certificate of need process.
The certificate of need process is never mentioned in Mississippi politics. The same politicians who regularly complain about how Mississippi is a poor state that suffers from a lack of healthcare or that too much money is spent on Medicaid have no interest in doing something that will lower prices and provide more healthcare to Mississippians at no cost to the taxpayers. It will however, impact the bottom line of their hospital masters.
So economics, free markets, lower health care costs, and more health care for all be damned. Studies will continue to roll out that state what everyone already knows but nothing will be done. Mississippi will continue to remain in last place and that my friends, is the bottom line .
*The team is Stuart Craig (University of Pennsylvania), Martin Gaynor (Carnegie Mellon University, University of Bristol, and NBER), John Van Reenen (Centre for Economic Performance, LSE, and NBER)