Federal Hospital Regulations Are a Competition-Killing Mess. A New Bill Promises To Fix That.

Consolidation in hospital markets is one cause of rising healthcare costs.

In some parts of America, it can take up to 34 minutes to drive to the nearest hospital. With more than 100 rural hospitals having shuttered since 2010, that problem is only getting worse.

Fewer hospitals mean a lack of competition and, as a result, higher prices for patients. There's not a single cause for the decreasing level of competition among hospitals—particularly in rural areas—but experts point to a combination of factors, including a rise in hospital mergers and government regulations that protect large hospitals from competition.   

The rise of regional hospital monopolies is "the most important driver of higher prices for hospital care," writes Avik Roy, conservative health care scholar and founder of the Foundation for Research on Equal Opportunity. Those monopolies have allowed hospitals to "persuade the government to give them financial and regulatory advantages over competitors and taxpayers," Roy writes.

Some of those advantages include Certificate of Need (CON) laws, which require potential new providers to prove that there is a "need" for a new provider in an area that already has a hospital. In practice, these regulations, fervently supported by established hospitals, help protect the monopoly power (and high profits) of large hospitals, and raise prices for patients. Another regulation that has helped exacerbate hospital market consolidation is the Affordable Care Act's ban on new physician-owned hospitals, smaller competitors of large hospitals.

What's to be done about all this? Rep. Jim Banks (R–Ind.) has a few ideas.

Banks' Hospital Competition Act seeks to bring down the cost of health care by improving competition in the world of health care providers. Banks' bill would incentivize states to repeal CON laws—as 15 states already have—and repeal the ban on new physician-owned hospitals. The bill also includes other provisions to lower costs through competition, such as requiring hospitals to share the costs of their 100 most frequently performed procedures and quadrupling Federal Trade Commission staff on hospital consolidation issues.

In a video posted to Facebook, Banks described the bill as "an ambitious first step towards expanding competition in the hospital sector, which has protected for too long by special interests."

The bill would also make hospitals in highly concentrated health care markets accept Medicare reimbursement rates, which are lower than private insurance rates, from commercial payers.

Still, some lawmakers and hospital industry groups argue that CON laws help prevent duplicative, unnecessary, and costly health care facilities, which is why the federal government once incentivized states to enact CON laws, but the laws have instead raised costs and reduced access, particularly in rural areas. There's also evidence that hospital mergers do lower administrative costs, but those cost reductions are seldom passed on to patients in the form of lower prices.

The New York Times found that, in metropolitan areas that experienced a major hospital merger, the cost of the average hospital stay rose between 11 and 54 percent more than costs in the rest of the state from 2010 to 2013. Other studies, from a Health Affairs paper on California's hospital services to a study from the progressive Center for American Progress, support the conclusion that hospital consolidation spurs rising patient costs, while failing to provide better quality care.

On the whole, the bill takes a much more coherent view of antitrust policy than many wannabe trust-busters in Congress have. The bill focuses on clear consumer harms created by market concentration—namely higher prices—which are the traditional justification for intervening in the case of monopoly, as opposed to an amorphous concept of "bigness." And given that mergers do often reduce administrative costs, monopolistic hospitals should be able to absorb lower reimbursement rates.

The Hospital Competition Act is by no means a comprehensive solution to America's sky-high health care costs. However, the bill would allow for more competition in health care, bringing the U.S. closer to an affordable market system that could serve people of all income levels a little better.