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Hospital Consolidation Demands Closer Scrutiny

Health care providers have been consolidating at an increasing rate in recent years. Nowhere is this more prevalent than in hospitals, where individual institutions and hospital systems are merging and buying one another at an alarming rate. Onerous regulations created by the Affordable Care Act are part of the problem, but hospitals are also taking advantage of government subsidies to increase their profits. Unfortunately, hospital consolidation is hurting patients and taxpayers by increasing costs, decreasing access to care and distorting the market.

One can be forgiven for believing that hospitals adapting to new market realities is how the market should work. If hospitals operated in a free market, that might be the case. But many hospitals receive millions in taxpayer-funded subsidies, payments and tax incentives that distort the market and increase their bottom lines. Worse, many nonprofit hospitals take advantage of legal loopholes to skirt the rules that permit their special tax status, reaping the benefits of lower taxes without providing benefits promised to their communities.

The profit motive makes the free market system the best economic system ever tried. It creates more wealth and prosperity for more people than any other system. But when the government uses legislation and tax policy to pick winners and losers, the free market is distorted and the profit motive incentivizes the wrong outcomes.

Simply put, subsidies and tax incentives are creating the wrong incentives for hospitals, and the resulting consolidation is hurting patients. As hospitals consolidate, patients lose out because costs increase without any tangible improvements in care.

Questionable business practices at hospitals are increasing. Mayo Clinic — one of the most internationally recognized health care systems and research groups — has cut services at some hospitals in recent months, citing profitability concerns. But Mayo’s revenue in 2016 was $11 billion – a 6.6 percent increase over 2015. In fact, President and CEO John Noseworthy boasted of the Mayo Clinic’s “strong financial performance” at the same time it consolidated its practices and reduced services. All this from the best hospital in the nation according to U.S. News & World Report.

Consolidation is troubling for residents who live near their local hospitals. They face increased prices and fewer services when hospitals consolidate and some facilities close. Even when hospitals don’t close, they cut services to cut costs. One hospital in Illinois went so far as to stop admitting overnight patients to save money. This is unacceptable. Residents shouldn’t have to travel long distances for treatment or fear going out at night because their local hospitals are closed.

The effects of consolidation ripple throughout the entire health care system. Hospital mergers hurt small providers especially hard, and millions of Americans depend on them. In fact, small providers are less competitive and less profitable in these environments, as they are not able to compete with the number of services provided by a hospital – even if they provide better services in many instances.  Independent providers — already struggling to stay open due to regulations imposed by the ACA — are facing additional pressures thanks to hospital consolidation. The Federal Trade Commission is keeping a close eye on hospital mergers, but so far they continue.

When small providers are pushed out of the market by anti-competitive forces, patients are left with fewer choices, higher prices — and in some cases, lower quality care. If we are truly interested in lowering costs, improving access to care and increasing patient choice, the American health care system requires greater competition, not less; more providers competing on price and choice, not hospital consolidation driven in part by market distortions like government subsidies.

Hospitals with fewer competitors charge more than 15 percent more, or nearly $2,000 more per admission, and prices rise whether or not the hospitals improve care. Patients are left with higher prices and fewer choices for care. Having fewer hospitals in an area means less competition, which decreases pressure to innovate or improve health outcomes. Local residents have no choice but to accept the new status quo.

As our nation continues to debate how to fix our broken health care system, we must consider how hospital consolidation is distorting the market and driving prices up and access down. The American health care system is market-based, but the market is anything but free. Repealing onerous regulations introduced by the ACA and decreasing taxpayer subsidies for hospitals that don’t need them would be steps in the right direction.

Hospitals aren’t the only bad actors in American health care, but so far they haven’t received the scrutiny they deserve. Things will not improve until that changes.

 

Gerard Scimeca is an attorney and vice president of Consumer Action for a Strong Economy, a free-market oriented consumer group.

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