Hospital Competition is an Oxymoron Today. It Shouldn’t Be.

In recent testimony before the House of Representatives, Rick Pollack, president and CEO of the American Hospital Association, defended the trend of hospital consolidation: “Hospitals are coming together with other providers to provide patients with high-quality, well-coordinated care, and it is contributing to lower cost growth.”

He’s half right: In the wake of the Affordable Care Act, the number of hospital merger and acquisition deals jumped from 52 in 2009 to more than 100 in 2014, according to Irving Levin Associates. But the economic evidence suggests consolidation drives costs up, not down – and may even hurt patient care. If policymakers don’t find more ways to inject competition into hospital markets soon, bigger price increases are likely waiting just a few years down the road.

When Congress passed the ACA, it launched a new wave of hospital and health system consolidations – big firms getting even bigger. The bigger hospitals have more market power, allowing them to command higher prices from insurers and employers. Those costs are passed along to consumers in the form of higher insurance premiums and lower take home pay.

Two thorough literature reviews, from 2006 and 2012, found that hospital consolidation generally results in higher prices. And when hospitals merged in already concentrated markets, the price increase was dramatic, often exceeding 20 percent. While hospital cost growth is at an all-time low, the slowdown is in line with an overall slowdown in medical cost growth over the past 15 years. And the slowdown appears to be ending.

While defenders of consolidation point to California market leader Kaiser Permanente as a success story, they ignore the managed care giant’s failures in Texas and South Carolina. There’s also scant evidence that consolidation improves quality of care. The number of procedures where volume gained from consolidation indicates better clinical outcomes is limited, and most hospital systems have already reached diminishing marginal returns from size. Two studies explicitly found lower mortality across a variety of conditions for patients in less concentrated hospital markets.

Hospital CEOs defend mergers by arguing that they help to fund investments in care coordination that are needed to better manage patient health.  That’s reasonable on paper, and it is supported by general economic thinking. Yet it is too often coming at the expense of competition, and the evidence consistently suggests that less competition leads to higher prices and worse quality. Further, financial integration isn’t necessary for clinical integration – Delta doesn’t need to merge with American Airlines in order to “coordinate” your flights.

Traditionally, the Federal Trade Commission and Department of Justice challenged such anticompetitive mergers. The FTC is doing its best – and it certainly has an effect – but the agency challenges less than 1 percent of proposed hospital mergers. And while antitrust remedies will always be important, they can’t create competition if it isn’t there already. A better solution is to drive competition from the bottom-up through reforms that allow nimble new competitors to repackage health care goods and services at higher quality and lower cost, reducing the use of expensive hospital systems. The irony is that while health care firms are getting bigger and more powerful, start-ups like Kayak, Airbnb, and Uber are reshaping entire industries, making them more affordable and accountable to consumers.

Health care is long overdue for similar tech-based disruption. But if antitrust litigation can’t stymie the merger frenzy, who can prepare the ground for the next generation of care providers? The onus falls on states, which already control the vast majority of health care regulation.

Traditionally, states have defended large incumbent hospitals. Thirty-six states and the District of Columbia have enacted certificate of need laws (CON) that limit competition among hospitals; thirty states prohibit the corporate practice of medicine, barring new companies from owning and operating – and thus reorganizing – health care facilities. But the tides may be shifting. With the Cadillac Tax soon to hit generous, state-funded union insurance plans, Medicaid reform being undertaken around the country, and a growing number of Americans with high deductible plans, states can’t simply stick their heads in the sand when it comes to hospital pricing, safety, and quality.

States looking to get ahead of the curve should revise their anti- competitive regulations and start encouraging new entrants.  Competitors have just begun to enter heavily regulated healthcare markets. Oscar Health has made a run at competing for customers on Obamacare exchanges in New York and New Jersey.  ZoomPlus, a payer that also owns a network of urgent care centers in the Pacific Northwest is seeking to be a “Kaiser 4.0” and is competing with juggernaut Kaiser Permanente in Oregon. Other start-up innovators like One Medical Group, HealthSparq, and Anima are all repackaging health care for the digital era, but they need reform-minded governors and legislators to level the playing field with entrenched incumbents if we want to sweep away the old rules designed to keep expensive legacy systems unchallenged.

Hospitals are the biggest single share of U.S. health care spending, and often, what’s good for hospital revenues is a lost opportunity to keep someone healthy. True clinical integration that incentivizes cost-efficient, quality care is a laudable goal for hospitals and is already permitted under antitrust guidelines. We just shouldn’t rely on hospitals to compete against their financial interests, anymore than we’d expect Best Buy to invent Amazon. Competition remains vital as ever, and the industry’s future belongs to the states willing to lead the way.

Paul Howard is a senior fellow and director of Health Policy at the Manhattan Institute. Yevgeniy Feyman is a fellow for Health Policy at the Manhattan Institute.

Morning Consult