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The reality of hospital system monopolies

I write a lot about hospital consolidations and the monopoly problem in health care (See here, here, here, here, and here). It’s widely accepted that hospital system consolidation and physician acquisitions are a significant factor in rising health care costs. This phenomenon is highlighted in this morning’s Axios “Vitals” newsletter concerning NorthBay Healthcare in Calfornia: 

NorthBay Healthcare, a not-for-profit hospital system in California, recently gave a candid look into how it operates, telling investors it has used its negotiating clout to extract “very lucrative contracts” from health insurance companies.

Why it matters: This is a living example of the economic theories and research that suggest hospitals will charge whatever they want if they have little or no competition, Axios’ Bob Herman reports.

Details: NorthBay owns two hospitals and several clinics in California’s Solano County. Kaiser Permanente owns the only other full-service hospital in the county, and Sutter Health operates some medical offices. (A NorthBay spokesperson argued the system is “more akin to the David among two Goliaths.”)

Three health insurers have terminated their contracts with NorthBay over the past couple years. During a June 19 call with bondholders, executives explained why this has happened.

“We’ve been able to maintain very lucrative contracts without the competition. And what the payers are saying is, they would like us to be like 90% of the rest of the United States in terms of contract structure.”

— Jim Strong, interim CFO, NorthBay Healthcare

Between the lines: NorthBay’s revenue has increased by 50% over the past few years, from $400 million in 2013 to $600 million in 2018, due in large part to its natural monopoly and oligopoly over hospital services.

  • This is exactly what we should expect to happen when sellers have the upper hand over buyers, economists say.

 

To me, this is a startling admission by NorthBay CFO. However, this is an unsurprising admission in a world where hospital monopolies dominate the health care landscape. Large hospital systems use their monopoly power to extract the highest possible reimbursements on procedures that they can from insurers. These contracts with insurers are sometimes filled with anti-competitive language that hurts patients in the long run. 

Anti-trust enforcement is virtually the only power that state and federal government have to mitigate the concerning trend of hospital consolidations. However, there are federal and state level policies that foster the environment where hospital consolidations are feasible and lucrative enough for health care sector entities to further them. 

That’s why, we at the John Locke Foundation, are strong supporters for North Carolina to repeal its Certificate of Need laws. These laws breed medical monopolies by nature, and we see the negative effects on patients when their only choice in a market is a large hospital system. Stopping or slowing consolidations and acquisitions will be difficult. The easier way to fix this is to correct anti-competitive laws that allow market incumbents to use their power to dictate prices. That directly translates to higher insurance premiums and out-of-pocket expenses for employees and families. Health care markets will work a lot better if we let them operate more freely. 

Jordan Roberts / Health Policy Analyst

Jordan joined the Locke Foundation in the summer of 2018 as Health Care Policy Analyst. He analyzes state and national health policy issues with an eye toward removing governm...

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