The Quiet Fight against Bigger Hospitals

In its efforts to fight the rising cost of healthcare, the Biden administration is taking an approach that hasn't got much attention in the media -- probably because it's not obvious how it's related.

Just let this simmer:

One analysis looking at 25 metropolitan areas with the highest rates of hospital consolidation from 2010 through 2013 found that the price private insurance paid for the average hospital stay increased in most areas between 11% and 54% in the subsequent years.

The Federal Trade Commission and Department of Justice have been working to more aggressively block hospital mergers (two companies combining to create a joint company) and acquisitions (a company buying another to take it over). Let's look into why this is related to healthcare prices and how it's playing out.

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Why Do Big Hospitals Matter

In economics, there has been a great deal of investigation into how the size of businesses in a space can affect the products sold to consumers and wages paid to workers.

Ideally, if a company is overcharging a product or underpaying workers, consumers take their business elsewhere and employees continue job-searching, respectively.

However, when a company is a very large force in a market, it can skew those environmental forces that are supposed to bring down costs of goods, improve customer experience, and pay workers fairly.

Large firms in a market have additional freedom to charge more, because there aren't enough other businesses to compete and drive down prices or bring wages up. These large firms can also prevent new businesses from entering the market. Large firms may outcompete entrants through greater brand recognition and customer loyalty, or more predatorily, slash prices to take on short-term losses and drive the new competitor out of business.

On the other side of this, a single employer has more power to keep wages for workers lower if those job applicants don't have many other choices of employer.

Notable incidents of a few firms controlling national manufacturing, rail, and oil in the late 1800's spurred the creation of the first "antitrust" laws. These laws gave the federal government the authority to break up or prevent the expansion of massive companies to protect consumers, workers, and overall competition in markets.

Take this excerpt from Lina Khan, a legal scholar who is important later in this story:

"For one, competition policy would prevent large firms from extracting wealth from producers and consumers in the form of monopoly profits... Another distinct goal was to preserve open markets, in order to ensure that new businesses and entrepreneurs had a fair shot at entry. Several Congressmen advocated for the Federal Trade Commission Act because it would help promote small business"

These antitrust laws were strengthened with the Clayton Antitrust Act in 1914, and for decades, federal courts strictly blocked companies from controlling large portions of market share.

A new brand of economic theory, however, would come to challenge conventional wisdom about competition born out of the "Chicago School" of economics, inspired by University of Chicago economists like Milton Friedman.

The Chicago School had significant influence over the Reagan administration's policy, including in guidelines for how to pursue antitrust.

The DOJ's Antitrust Division and Federal Trade Commission (FTC) are the two main bodies for antitrust law enforcement in the US. Generally, the DOJ focuses on industries like airlines, banks, and telecom, whereas FTC deals more with industries where consumer spending is high: computer technology, Internet services, food, energy, and most importantly for us right now, healthcare and pharmaceuticals.

New interpretations of antitrust law suggested that market concentration is not necessarily bad. This class of legal scholars argued that market concentration can also be the result of abnormally high productivity and value provided by a firm.

However, and this has been a great critique of the hands-off approach to antitrust enforcement taken over the past 4 decades, concentration does not necessarily have to be the result of higher value delivered to customers. Some economists call these instances of high market concentration as having "rent-seeking" firms, which means they are extracting wealth from a market without delivering value.

Consider this comment from an article by the National Bureau of Economic Research which refers to rent-seeking concentration as "negative concentration":

Over the past 20 years, however, negative concentration has become relatively more prevalent in the United States. Recent increases in concentration have been associated with weak productivity growth and declining investment rates.

Telecom is a notable example of these rent-seeking outcomes and why American consumers pay more than twice the amount for cell phone and broadband services compared to other developed countries.

In healthcare, it's not surprise that concentration in healthcare providers can mean that hospitals get away with charging more for services and paying burned out medical professionals even less.

It may not be shocking to see that amidst an affordability crisis in healthcare, the valuation of merger and acquisition deals for healthcare businesses just keeps going up.

Lina Khan and the FTC

Lina Khan has made a name for herself as a legal scholar in the area of antitrust. As a law student, she wrote the influential "Amazon Antitrust Paradox" article, which was published by Yale Law Journal, cited in this amazing newsletter issue in the last section, and laid out an analysis of antitrust policy in the US and how the growth of Amazon lays bare serious issues in how antitrust policy is enforced in the US.

She went on to continue as the legal director for the Open Markets Institute, which had to split from the New America think tank over OMI's criticism of the market power of Google. Google happened to be a funder of New America.

Making a name for herself as a Big Tech critic and antitrust scholar, Lina Khan was appointed and confirmed to be chair of the FTC under the Biden administration in mid-2021.

Since then, an emboldened FTC has pursued aggressive antitrust policy alongside the DOJ. One recent victory blocked RWJBarnabas Health's acquisition of a healthcare system in central New Jersey after the FTC filed a lawsuit to block the deal over evidence that the deal would raise prices and worsen care.

After collaboration between the FTC and Rhode Island Attorney General, a proposed merger was blocked in February while a federal appeals court upheld the blocking of another New Jersey merger.

What are the Results

“There’s not a lot the FTC can do to challenge hospitals’ ability to raise prices once they have acquired market power”

UC Hastings Professor Thomas Greaney's comment above likely explains an attitude being pursued by the FTC right now.

In the face of exploding healthcare costs and widespread frustration with a lack of improvement in patient care, the FTC's actions to block mergers sends a clear message that the federal government is interested in preventing healthcare providers from dominating their local markets.

Vast bodies of research have already demonstrated that concentration of these markets raises prices while stifling the options for employees to have reasonable work schedules and compensation.

Market dynamics tend to take years to play out, so the results of these renewed antitrust lawsuits will likely not be immediately visible, and it will likely not do much in situations where health systems have already successfully finished massive expansions.

Unsurprisingly, it seems that devoting hundreds of millions of dollars to merger and acquisition instead of reinvestment in patient experience and staff may finally expose itself as an unsustainable practice in the world of hospital finance.