An emerging trend in the health care market over the last several decades is that of consolidation. Large hospitals, typically those affiliated with major research universities, have been buying up smaller regional health centers. Rather than independent hospitals and doctors “hanging a shingle,” medical care is increasingly delivered through one of these large health systems. Partners HealthCare in Massachusetts, The University of Texas system, and the Carolinas Healthcare system out of Charlotte are good examples.
But, why would this cause prices to go up, rather than down? Don’t “economies of scale” allow companies to become more efficient as they grow larger, and eventually allow them to produce the same goods at lower prices?
Unfortunately, that has not been how consolidation has played out in health care. Rather than cut costs, it has allowed large health systems to exert regional monopoly power and demand higher prices from consumers and insurance companies. Additionally, the fact that patients are shielded from direct health care prices by insurance coverage allows health systems to increase prices even more than they would otherwise.
In earlier eras of health care, with multiple health care providers in a region, in order to stay in the good graces of the insurance companies (and thus keep the patients insured by those companies in their beds), the providers had to compete on price to some extent. But more recently, when one large hospital system is the only game in town, the power shifts from the insurers to the hospital, and the hospital can charge what it wants. Hospitals know this; this is why consolidation has become such a pervasive strategy.
The literature linking consolidation to increased health care prices is robust, which I have included below.
Resources on this topic
Classic article: The Robert Wood Johnson Foundation reviewed the evidence on health system consolidation, finding that it both increases prices and decreases quality of care. Link
Lay press: Reihan Salam of National Review has written about consolidation in Slate. Link
- A study reported in JAMA came to the same conclusion.
- Looking at if from the other direction, a different study in JAMA found that increased competition among doctors lowers health care prices.
- Commentary on consolidation in JAMA.
- Responding to consolidation with anti-trust enforcement?
- An extensive review of the topic in JAMA.
- A National Bureau of Economic Research paper finds similar price effects resulting from increased hospital consolidation.
- Evidence from California, as reported by Kaiser Health News