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When hospitals merge, you pay

By Jay MacDonald ·
Friday, March 15, 2013
Posted: 6 am ET

While we were all transfixed watching last year's health insurance Super Bowl that pitted President Barack Obama's historic health care reform against 26 opposing states, consumers were quietly being mugged under the bleachers by the very free-market forces that prompted the big game in the first place.

At first blush, hospital consolidation seems to promise the same improvements the Affordable Care Act is after: more efficient and better integrated health care. If the big fish are swallowing the little fish and doctors are leaving small, inefficient practices to work for big, well-funded hospitals, it's all good news for consumers, right? After all, where would you rather receive your health care, a hospital or a strip mall?

Unfortunately, the dark side of hospital consolidation is potentially higher costs. And guess who pays.

As the pro-market American Enterprise Institute recently pointed out, hospital mergers over the past 30 years have created a kind of oligopoly, which is a market dominated by a small number of sellers. When that occurs, competition decreases and prices increase, which pretty accurately describes the current muddle of American health care. Federal courts that could have blocked some questionable mergers didn't.

In AEI's view, health insurance companies aren't the problem. Instead, size gives bulked-up health care providers negotiating power to set advantageous rates with health insurers, and they do so with impunity. In fact, so entrenched are these health care highwaymen that AEI claims their power to plunder now exceeds any attempt to contain them, including the Affordable Care Act.

There's evidence to support this view. According to the Robert Wood Johnson Foundation, between 1999 and 2003, hospital consolidation through mergers and the acquisition of physician practices raised consumer prices an average 5.5 percent in the West, 6.7 percent in the Southwest, 7 percent in the East, 7.4 percent in the Midwest and 9.4 percent in the South.

But Martin Gaynor, an economist at Carnegie Mellon, says that's where any finger-pointing by insurers starts to rotate 180 degrees.

"All the evidence very clearly shows consolidation leads to higher prices," he says. "Guess who pays for those higher prices? One might think insurers would eat them. No, they don't. It goes into higher premiums. When premiums go up, employers just pass them right on to their workers, either in the form of lower wages or reduced benefits."

In their defense, hospitals maintain that size enables them to obtain capital to invest in costly reforms such as electronic records, which will help them save money in the long run by providing more efficient care and preventing medical errors and redundant treatments.

The Affordable Care Act attacks this cost spiral with a host of new carrot-stick propositions wielded by a power greater than both insurers and providers: the federal Medicare system. Insurers and providers will no doubt continue to argue like kids in the back seat over who's to blame for health care inflation, but there's no question that Medicare is driving the minivan now.

Will health reform lower prices soon, or ever? Weigh in with your vote.

Follow me on Twitter: @omnisaurus

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Jay MacDonald is a contributing editor and co-author of "Future Millionaires' Guidebook," an e-book by Bankrate editors and reporters.

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