Money & The EconomyOpinion

Hospitals must be permitted to consolidate

When the marketplace determines that it is best served by a few very efficient sellers rather than many inefficient sellers, we should allow that to happen.

The escalating cost of healthcare in America has become a persistent economic challenge. Influencing everything from job creation and wage growth to national competitiveness and innovation, it has placed an increasing financial burden on consumers and employers alike.

While much attention has been focused on hospital consolidations as a primary culprit, such accusations miss a crucial point. Government interventions have played a significant role in worsening the problem, specifically by creating an uneven playing field between healthcare providers and insurance companies. This must be corrected.

Rural and smaller hospitals nationwide are grappling with a perfect storm of financial, price-rising pressures. Increased costs, higher demand for services, and reduced reimbursements from government programs like Medicaid and Medicare have pushed many hospitals to the brink of closure. In this challenging landscape, consolidation into larger hospital systems has emerged as a survival strategy, offering potential benefits such as improved patient care, access to cutting-edge technologies, and stability for local communities that depend on these institutions as frontline care providers and major employers.

However, the federal government, and the Federal Trade Commission (FTC) in particular, have recently served as a barrier to these necessary mergers. The unnecessarily stringent antitrust reviews and frequent challenges to hospital consolidations that Biden officials at the FTC have undertaken are hindering many institutions from achieving the scale needed to navigate today’s complex healthcare environment. This approach also fails to recognize the unique challenges faced by healthcare providers and the potential benefits of strategic consolidation.

Contrast this with the health insurance industry, which has undergone significant consolidation since the passage of the Affordable Care Act. The complex web of regulations and mandates implemented in its wake upended existing health insurance markets and forced many smaller insurers out. As a result, larger more efficient health insurance companies were allowed to merge and acquire competitors with relatively little government interference, resulting in a highly concentrated market.

Recent research by the Association of American Medical Colleges (AAMC) Research and Action Institute has shed light on this disparity. Their findings reveal that “the largest health systems have, on average, a combined 43.1% of the market share…in each state.” While this figure might seem substantial at first glance, it pales in comparison to the concentration in the insurance industry. The same study found that the top three large-group insurance firms command a staggering 82.2% of the market share.

This stark contrast illustrates the uneven playing field that has been created, largely due to inconsistent government policies. While hospital mergers face intense scrutiny and often outright opposition, insurance company consolidations have proceeded with minimal resistance. This imbalance has far-reaching consequences for the healthcare system.

This market concentration has led to some market power held by insurance companies that allows them to dictate terms to healthcare providers, influencing everything from reimbursement rates to coverage decisions. It can also result in higher premiums and increased out-of-pocket costs for patients as well as limit their provider networks, which restricts patient choice and potentially forces individuals to travel further for care or incur higher costs for out-of-network services.

Moreover, the focus on hospital consolidation as a primary driver of healthcare costs ignores the complex interplay of factors contributing to the problem. Government regulations, such as mandated electronic health record systems and complex billing requirements, have added significant overhead costs for healthcare providers. At the same time, reduced reimbursements from government programs have forced hospitals to seek other ways to remain financially solvent.

In light of these realities, the alarm over hospital mergers is not only misplaced but potentially harmful to the long-term health of our healthcare system. If insurance providers are allowed to wield such significant control in the marketplace, hospitals must be permitted to engage in their own necessary mergers to level the playing field. This balanced approach would allow healthcare providers to achieve the scale needed to negotiate effectively with insurers, invest in new technologies and treatments, and maintain high-quality care in communities across the country.

It’s time for policymakers to reassess their approach to healthcare consolidation as well as the marketplace dynamics between providers and insurers more broadly. Rather than viewing all hospital mergers with suspicion, they should consider the broader context of the healthcare market. A more nuanced policy that recognizes the challenges faced by healthcare providers and the potential benefits of strategic consolidation, particularly considering their challenges with insurers, could help address the root causes of rising healthcare costs and create a healthcare system that is both high-quality and economical.

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Michael Busler

Michael Busler, Ph.D. is a public policy analyst and a Professor of Finance at Stockton University where he teaches undergraduate and graduate courses in Finance and Economics. He has written Op-ed columns in major newspapers for more than 35 years.

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