Hospital costs, not drug prices, are the real US healthcare scandal

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The writer is a surgeon in San Francisco

The parallels between banks’ skyscrapers in downtown Manhattan and today’s hospital behemoths are striking: sparkling glass windows, vast marble lobbies and expensively maintained greenery, with skyrocketing executive bonuses and global brand recognition to boot. Similarly, they have both been large-scale recipients of federal support. As hospitals struggled with Covid-19 last summer, the country’s largest and richest health networks absorbed billions of dollars of stimulus. The picture is reminiscent of Wall Street in 2008: much of America’s healthcare sector has become too big to heal.

A confluence of political arm-twisting, corporate collusion and quasi-monopoly power within some of America’s best-known medical institutions has sent the industry to record levels of spending. Over the past 20 years, the price of US hospital services has increased by more than 200 per cent, compared with average inflation of 60 per cent. Yet large hospital networks, which contribute three times more than drug prices to total US healthcare spending, have largely remained out of public and political scrutiny.

Unpaid medical bills, totalling an estimated $140bn last year, already make up America’s largest type of debt owed to collection agencies. As the US attempts to recover from the pandemic, the unabated rise of healthcare prices threatens to plunge more patients into financial despair. 

Today, more than 80 per cent of US hospital markets are “highly concentrated” and hospitals with established regional monopolies are able to increase the price of care year after year. Rising prices have trickled down to patients through higher insurance premiums. The pandemic hasn’t bucked this trend: hospital bills for Covid-19 ran into the hundreds of thousands per patient.

Insurers, initially intending to negotiate down the cost of services by aggregating demand, are instead following in lockstep. Reporters have uncovered restrictive, backroom contracts between health providers and insurers that privilege bigger hospital groups at the expense of smaller competitors and patients, a modern-day facsimile of Standard Oil and the railroads.

Large health providers argue that mergers increase operational efficiency, improve care co-ordination and lead to better outcomes for patients. But evidence for these claims remains scarce. Harvard economists showed that job growth in healthcare directly increased prices but did not improve health outcomes.

Health economists have proposed three approaches that could make healthcare services markets more competitive, improving patient care. The first is federal: reform Medicare payment policies that currently encourage consolidation; reduce the documentation burden for independent physicians; and make quality and cost data publicly available and easy to interpret.

The second is market-driven: encourage investment in independent primary care and specialist practices; in clinics located in stores; and in urgent care facilities, with outpatient surgical centres for specialised procedures.

The final approach is judicial: limit anti-competitive behaviour by blocking dangerous mergers. An example is the seven-year price cap and third-party oversight set on the Beth Israel Deaconess Medical Center and Lahey Health merger in 2018, which created the second largest hospital network in Massachusetts. On July 10, the Biden administration called for revision of federal merger guidelines to increase scrutiny of hospital consolidation.

Health system consolidation and the resulting price increases have become a runaway train. Unless we decisively establish safeguards against the monopolistic tendencies of hospitals, we risk allowing the industry to let America’s sickest citizens foot the bill.