Dr. Monopoly

Despite the intense scrutiny of the health care debate sparked by the Affordable Care Act (ACA), Americans have overlooked a simmering problem. Over the past three decades in cities all across the country, a movement towards hospital consolidation has changed the faces of medicine and its practitioners: Large institutions are merging and illegally raising prices to cushion their margins. Without powerful and consistent legal action, Americans’ fundamental relationship with their health care providers will soon be corrupted by monopolistic actions.

The story of two major nonprofit hospitals in Boston illustrates this aptly. On December 8, 1993, Boston learned that two of its largest and most prominent hospitals — Brigham and Women’s Hospital and Massachusetts General Hospital — had agreed to merge, forming the medical monolith Partners HealthCare. Over the past 20 years, Partners — the largest private employer in Massachusetts, with approximately 60,000 employees — has presented serious problems for the city’s health care beneficiaries. At the time of the merger, hospital officials argued that joining the two institutions would primarily serve to improve Boston’s health care; the merged hospitals would be more efficient as a single entity, thereby reducing overall administrative and treatment costs. Furthermore, the hospitals argued, the merger was necessary to keep insurance companies from extorting low prices by threatening to send patients to another hospital if health care providers didn’t pony up.

The merger was authorized, and the consequences were astounding. Shortly after Massachusetts’ Attorney General gave the go-ahead, Partners began growing rapidly. After just six years it encompassed eight different health care providers. Using this newly acquired market leverage, Partners struck a covert deal with one of the region’s largest insurance companies, Blue Cross Blue Shield of Massachusetts. Blue Cross consented to pay Partners’ higher prices for a variety of services if Partners forced the other major insurance companies to pay similarly high amounts. Both companies upheld their sides of the bargain flawlessly. The same year, Partners announced that it would no longer accept Tufts Health Plan insurance when Tufts refused to pay Partners’ “unjustifiably high prices.” Under pressure to provide coverage for its community, Tufts reneged later that year and surrendered to the high costs. Blue Cross’ pricing shows how exorbitant this racket had become: Between 2000 and 2009, the price tag they put on Partners’ care increased by 75 percent. When the Boston Globe discovered and revealed the clandestine deal in 2009, the Massachusetts Office of the Attorney General launched investigations against both companies for violation of antitrust law.

Partners HealthCare is not a stand-alone case. In 1994, about 56 percent of all US hospitals belonged to at least some form of health network — a group of health care providers that agree to pre-negotiated prices. By 2000, this figure had grown to about 72 percent. Another survey found that during the same time period, Americans living in metropolitan areas experienced an average “reduction from six to four competing local hospital systems.” During the 1980s, when the merger trend began, academics and journalists were divided on the implications, with much of the dispute revolving around the question of whether these merged hospitals would use their newfound market control to behave like monopolies. While the possibility is alarming, it’s important to note that monopolies do not yet control US health care markets; the typical metropolitan area still has multiple competitors, if fewer than before. But as hospitals gain control of larger market shares, they have the opportunity to abuse their control by unfairly forcing out competition and driving prices up drastically — all to the detriment of the consumer.

Consolidation, however, is not inherently bad. Many hospitals claim that by merging they are able to streamline their provision of care and purchase more effective equipment that a small hospital may struggle to afford. After the 1998 merger that created the New York-Presbyterian Healthcare System, former New York City Mayor Rudolph Giuliani praised the decision as one that would provide “better care and lower costs for patients.” Similarly, Dr. David Skinner, the CEO and vice chairman of the merged hospitals, highlighted the opportunities for the hospitals to improve the quality of care and the availability of services after the merger.

Nevertheless, in the 1990s the Federal Trade Commission (FTC) and the Department of Justice (DOJ) took seven soon-to-be-merged hospitals in urban areas across the country to court for monopoly concerns. Since the FTC and the DOJ had no precedent in the health care industry to support their claims of unfair pricing and anti-competitive measures, they brought precautionary data in the hopes of proving that the mergers, if permitted, would lead to antagonistic behavior towards consumers. But the hospitals won all seven cases because the judges found the government’s evidence unreliable.

Interestingly, the courts found solace in the hospitals’ nonprofit status. In many of the cases, judges presumed that because the hospitals operated programs serving those in need, they naturally wouldn’t engage in anti-competitive practices. One federal district court judge claimed that “community service, not profit maximization, is the hospitals’ mission.” But nonprofits are still businesses, and the courts’ trust would be severely tested.

Years later, the FTC returned to investigate the same institutions. The investigations confirmed that most hospital mergers induced price increases, although the magnitude of the increases was disputed. An FTC report revisited four of the seven hospitals tried in court and found that two of them — Evanston Northwestern Healthcare in Chicago and Sutter Medical Center in California — raised prices by a range of 23 to 50 percent, depending on the patient’s insurance. The research community continues to support and build upon these findings. One of the strongest studies, conducted by a professor at Northwestern University’s Kellogg School of Management, uncovered that mergers not only increase the new entity’s prices, but also affect competitors, whose prices increase by about 40 percent in the long run. Another oft-cited paper, published by Michael Vita, an FTC official, and Seth Sacher, an economic consultant, shows price increases of over 20 percent at merged hospitals and 17 percent at rival hospitals. Moreover, these studies only examined nonprofit hospitals, refuting the expectation that supposedly philanthropic hospitals would avoid the temptation to take advantage of monopolistic practices.

Although it is apparent that merged hospitals tend to unlawfully exploit their market power, that evidence alone does not prove their guilt. If hospital executives were indeed correct about mergers improving the quality of care, the benefits may outweigh the rising costs. Regrettably, research on the quality of care is lacking and inconcrete — and what findings there are conflict with each other. In a second report, the FTC ran a series of tests evaluating Highland Park Hospital’s quality of care before and after its acquisition by Evanston Northwestern Hospital and found that there was no change in most cases and a decrease in quality in a few cases. Overall, they found “little evidence that the merger caused quality to improve at Highland Park.” Other institutions couldn’t provide conclusive evidence towards either claim. The Robert Wood Johnson Foundation, a philanthropic organization that focuses on health, showed that a “slim majority of studies find that…increases in hospital concentration reduce quality” and that the most reliable studies pointed to a decline in quality as well. Although the findings are not irrefutable, it seems that care has actually worsened through consolidation, not improved as the mergers have claimed.

Yet for the sake of argument, let us suppose that these mergers actually did improve the quality of health care. It is vital to recognize that, even under these conditions, an American’s right to quality health care may still be compromised by nonprofit monopolies. Because of hospitals’ excessive market power, health insurance companies are forced to cover hospitals’ services regardless of the prices they demand. These cost increases are then passed on to consumers in the form of higher insurance premiums, which many Americans simply cannot afford. The main problem in the US health care system isn’t quality of care, but lack of access to it. The ACA is a step in the right direction in terms of lowering insurance costs, but if prices continue to rise, consumers will lose the access to care that cheaper coverage provides.

Unfortunately, since the release of this research, little has been done to correct the problem — or to publicize it. As a result of the issue’s obscurity, even informed elected officials may not be able to leverage its political capital. The simplest way to address health care monopolies seems to be through lawmaking: Instigate a national debate and hope that members of Congress take pro-consumer action. In an ideal world, this would not be difficult due to the bipartisan nature of antitrust measures. Given the political milieu, most economists and politicians — regardless of ideology or affiliation — agree that monopolies and companies with unjust control over a market corrode the free enterprise system and harm consumers. But until the United States overcomes its political gridlock and the public becomes more informed, the solutions will be stymied. Neither the FTC nor the DOJ has been able to bring a successful case to court since 2004, leaving the vast majority of monopolistic activity unregulated.

While not all mergers necessarily impact patients negatively, some monopolies do act immorally. And when they do, they can decrease the quality of care, raise costs and pressure competitors to either adjust to expensive demands or fold their services. The case of Partners HealthCare is a stark reminder: Patients were promised efficiency and handed higher bills. Not all mergers can, or even should, be prosecuted, but those that violate the right to accessible, affordable health care ought to face consequences. It is imperative that the FTC and others continue to publish research on this issue and promote productive solutions to problematic mergers in order to ensure that the most uncompetitive mergers and monopolies do not pass go, do not collect a fat check and go directly to jail.