Government Encourages Hospital Consolidation, Sues Hospitals for Consolidation

Politico notes new evidence that larger hospitals are helping to increase health care cost growth. According to a recently published report in the journal Health Affairs, larger, more prestigious hospitals end up with more market power as a result of their increased desirability, and are thus able to bargain for higher payments from insurers. "What we found is that the leverage of some hospitals is growing," one of the study's authors tells Politico. "That's a contributor to rising health care spending."

Politico's report opens by indicating that President Obama's 2010 health care law isn't responsible for the increased ability of large and growing hospitals to extract higher prices. That's true. But the health care overhaul will likely exacerbate the trend toward hospital consolidation and increased costs. And the subsidies provided government-run health programs have already helped encourage hospitals to grow larger than they might have in the absence of government handouts.

Avik Roy, a health policy fellow at The Manhattan Institute, put together a helpful flowchart showing how government health subsidies encourage provider consolidation and drive up costs.

And although the 2010 health law probably isn't responsible for drastic increases in costs due to consolidation yet, it may be in the future. As Berkeley health economist James Robinson noted in a study last year, the Accountable Care Organizations (ACOs) created under the law, which encourage providers to work together in ever-larger teams, are likely to end up increasing the ability of large provider networks to demand higher reimbursements. This is also the position of at least one federal agency, the Federal Trade Commission, which has made a point of suing a number of providers for pursuing consolidation efforts like the ones that the Obama administration is encouraging through the Department of Health and Human Services. Lawmakers in Massachusetts, meanwhile, just released details of a new health care cost control scheme designed to respond to Bay State hospital consolidation in part by monitoring the prices that hospitals charge to insurers.

Here, then, is the story so far. The government helped encourage hospitals to expand starting in the late 1960s, with the introduction of Medicare, which created a large new source of dedicated funding for providers. (Massachusetts Institute of Technology health economist Amy Finkelstein estimates that Medicare was associated with a 23 percent increase in hospital spending between 1965 and 1970, and had an even larger effect in the five years following.) As hospitals  continued to grow over the years, they also continued to contribute to the growth of health spending and increasingly higher costs for health care. So in 2010 the federal government put in place a law with an alleged cost-saving mechanism — ACOs — that is in fact likely to exacerbate the cost-increasing effects of larger hospitals. The FTC meanwhile is busy suing some hospitals for consolidating and coordinating in the essentially the same way that the health care overhaul is designed to encourage those hospitals to do. And Massachusetts, which passed a state-level model for what would become the federal law, is preparing a massive price control scheme in response to the increased consolidation and coordination that coincided with the passage of its own health care overhaul. It's the bureaucratic equivalent of an M.C. Escher painting, but not nearly as pleasant to look at.