What leads to high prices in health care? Some might blame insurers, while others might look at the pharmaceutical industry. The punchline of course, is that there isn’t any health care boogeyman. There’s no single industry to blame for high prices. Instead, it has to do with how particular companies or industries behave. Where competition is lacking, prices tend to increase. A recent court decision upholding a proposed hospital merger – between Advocate Healthcare and Northshore Health Partners in Chicago – underscores this particularly well. Moreover, it underscores the need for states to be proactive in making health care competitive, instead of relying solely on high-risk litigation by federal agencies.
“States control who gets to practice medicine, they set standards for insurance networks, and regulate when hospitals are or aren’t allowed to set up shop.”
In September 2014, two of the largest hospital systems in Chicago announced a merger. The combination of Advocate Healthcare and Northshore Health Partners would create the 11th largest health system in the country. Though the FTC challenged the merger, on June 14th the court ruled against the FTC, which is now appealing the case. Though this case has received significant media attention, it’s really just a drop in the bucket. In the first quarter of 2016 for instance, there have already been nearly 30 hospital mergers, according to data from PWC.
For those who spend any time studying health care trends this is a red flag. Consistently, and across industries, economists tend to find that consolidation raises prices quite drastically. In the hospital sector, which is among the most well-studied, consolidation in already concentrated markets (most hospital markets are heavily concentrated already) can lead to price increases of over 20 percent.
In the Advocate merger, according to FTC analysis, the inpatient services market would become 68 percent more concentrated. The newly created system would control over half of the market. While the effect on prices isn’t entirely clear, if past is prologue, it would be significant. As a point of comparison, a prior merger of two smaller hospitals (which are now part of the Northshore system) is estimated to have led to price increases of between 10 to over 50 percent.
So what are policymakers left to do? The FTC’s primary tool – litigation – is powerful, but can be high risk. After a failed attempt to block a hospital merger in 1994, for instance, the FTC would not formally win a hospital merger challenge until 2011. The answer to an uncompetitive health care market, asJonathan Hartley and I argue in National Affairs, might lie with the states.
The reason this makes sense is simple: health care regulation is mostly local. States control who gets to practice medicine, they set standards for insurance networks, and regulate when hospitals are or aren’t allowed to set up shop.
Take, for example, New York’s very unique ban on for-profit hospitals – one of the only such laws in the country. Or the 36 states with so-called “certificate of need” (CON) laws on the books, which require government permission to build or expand health care facilities. Or that in most states, nurse practitioners still can’t practice to the top of their licenses.
These and other local regulations make health care markets less competitive, less transparent, and more expensive. The role of antitrust is of course still important. Last year, the Supreme Court issued a powerful decision in a case brought by the FTC against the North Carolina Board of Dental Examiners, refusing to grant the agency antitrust immunity. A tool to combat the most egregious anti-competitive behavior is critical.
But because the FTC’s resources are limited, and many state-level policies might be immune from national antitrust law, it falls to local policymakers to be proactive. Rather than protecting entrenched interests like large hospital systems, insurers, or medical societies, lawmakers should focus on fostering competition across health care wherever possible. The US health care system has many problems – too much competition isn’t one of them.
This piece originally appeared on Forbes.com's The Apothecary
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Yevgeniy Feyman is an adjunct fellow at the Manhattan Institute and a senior research assistant at the Department of Health Policy and Management at the Harvard School of Public Health. Previously, he was MI's deputy director of health policy. Follow him on Twitter here.
This piece originally appeared in Forbes