The U.S health care system consumes nearly one-in-five dollars of income. The latest figures are Americans pay nearly $4.5 trillion annually for medical care. Of that, about one-third is spent on hospital care. That is about double the proportion of GDP spent on physician care and three times the amount spent on drugs. Hospitals are also buying physician practice and employing the doctors who treat patients. That suggests at some point in the near future hospitals will capture about half of health care expenditures, accounting for 9% to 10% of GDP.
A new study finds that hospitals are consolidating their positions in metropolitan areas and gobbling up rivals to control more of their markets. Everyone knows what a monopoly is and why it’s bad. If only one large hospital system supplies a region with hospital care, prices are going to be much higher than if there is competition among half a dozen providers. If there are only two hospital providers, a cartel will exist where one provider allows the other to take the lead and set prices and match them. Prices will likely be as nearly high as if there were only one provider. In nearly half of metro areas (47%) the region is dominated by only one or two large hospital systems.
Nearly one in five (19%) metropolitan statistical areas (MSAs) were controlled by a single health system, and more than one in four (27%) markets were controlled by two systems in 2022 (see Figure 1). In more than four of five metropolitan areas (82%), one or two health systems controlled more than 75 percent of the market. These markets all met the definition of highly concentrated markets based on thresholds in current antitrust guidelines (see below). One health system controlled at least half of the market in three out of four MSAs (75%) and at least a quarter of the market in nearly every MSA (98%).
Indeed, the analysis found that 97% of metropolitan areas are highly concentrated and dominated by only a few hospitals systems. In 2010 slightly more than half of hospitals (56%) were affiliated with a health care system. Today more that two-thirds (67%) are part of a larger health care system.
Most system-affiliated hospitals in 2022 (53%) were part of a system with at least 15 hospitals, and 22% were in a system with at least 50 hospitals. Systems with at least 100 hospitals accounted for 13% of system-affiliated hospitals.
Hospitals affiliate and consolidate to gain market share and boost market power. Large health care systems have the power to negotiate as one unit and demand that insurers and health plans pay similar prices market wide. For instance, if one side of a major city has hospital competition, while another side of the city is more concentrated, insurers are not able to take advantage of lower prices in the more competitive area. Rather, prices are negotiated as one system.
The Federal Trade Commission is just now realizing that hospital consolidation jacks up prices that consumers and employers pay for medical care. Hospital care is local. A hospital in Dallas doesn’t really compete with a hospital in Fort Worth, even though the two cities set side-by-side. Most hospital care is paid by third parties and inpatients have little incentive to comparison shop. Thus, most patients opt the flashiest hospital that is near their home.
In some industries, consolidation boosts economies of scale and increases efficiency. In health care, any increase in efficiency benefits the health care system, not patients. The purpose of consolidation is twofold: cut costs and boost prices. The U.S. health care system is not competitive. Sadly, it’s gone on so long it will be hard to reverse at this point.