Bacon's Rebellion

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Monopoly Markets and Health Care Costs

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by

James A. Bacon
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Does Inova exercise monopoly pricing power in the Northern Virginia health market?
Does Inova exercise monopoly pricing power in the Northern Virginia health market?

by James A. Bacon

Hospitals justify mergers with other hospitals in the same healthcare market on the grounds that they eliminate redundancy and duplication, allowing them to pass along savings to consumers. Do the putative benefits actually occur? Or do hospitals simply use their larger market share to negotiate better deals with insurance companies and pocket the savings themselves?

A new study sheds some light on that debate. In “Mergers When Prices Are Negotiated: Evidence from the Hospital Industry,” economists Gautaum Gowrisankaran, Aviv Nevo and Robert Town utilize discharge data compiled by the Virginia Health Information Foundation to analyze the dynamics of the Northern Virginia healthcare marketplace. (None of the economists live in Virginia, incidentally.)  Among the conclusions:

  • If a proposed merger between Inova Health System and the Prince William Hospital had gone through in 2006, it would have resulted in average price increases across the system equivalent to a 3.1% increase over the Inova system or a 30.5% increase at just Prince William. That merger was blocked.
  • Breaking up the entire multi-hospital Inova System would lead to a 7% market-wide decline in prices.
  • Putting into force health care policies that require patients to pay 25% coinsurance rates, about 10 times higher than they do now, would result in 16% lower prices.

Very interesting findings. The obvious policy conclusion is that we should bust up health care systems and require patients to pay a higher share of their medical costs to make them more price sensitive. Unfortunately, it is impossible for an average Joe to understand, much less subject to critical evaluation, the methodology employed by the three economists. Really, could you possibly understand this?

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OK, OK, I believe you. Whatever you say!

With the caveat that I could have reached the same conclusion by shaking a juju stick over a spreadsheet and uttering magical incantations, I do believe this is a subject worth exploring. The degree of concentration in the hospital industry affects the pricing power of the players in that industry. Is there such a thing as too much pricing power? Too little pricing power? Could we get lower health care costs in Virginia by busting up monopolies like Inova, Sentara (Hampton Roads) and Carilion (Central Virginia)? Could we get lower costs if employees paid a higher share of their medical bills out of pocket?

Is anyone in Virginia even asking these questions?

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21 responses to “Monopoly Markets and Health Care Costs”

  1. larryg Avatar
    larryg

    As someone who has used the health care system the last year – I have paid particular attention ….

    1. – the dumbass system requires me to fill out a clipboard with my entire medical history (that I can remember) even time I visit a new doctor.

    think about this. vitally important information is not shared among medical providers unless you remember to write it down while sitting in a waiting room!

    wanna blame that on the government?

    2. – when is the last time the doctor or nurse lady said you’d need this and you’d need that and it would cost this much at Provider A and that much at Provider B or advised “shop around for the best price”?

    wanna blame that on the government?

    3. – at the front desk of most providers what does it say? Isn’t it something like have your cards ready – and perhaps “payment is expected at the time you receive services if you are not “covered”?

    what does that mean exactly?

    when I give them my cards – at each frigging provider by the way – they immediately trundle over to the copier to capture the info.

    weeks later, I receive a blow-by-blow summary of the damages and like most I anxiously search for the box that says “patient owes” and am relieved when I see it says 0.0 or sometimes 5.48 or some such.

    now tell me the truth folks.

    what is your experience?

    bonus question – is there anything else in your life in terms of financial transactions that looks anything like the way the medical care world looks like?

    If you owe $0.0 do you really care if the Doctor charged you $77 or $777.00?

    is this the govt fault?

    1. James A. Bacon Avatar
      James A. Bacon

      Wanna blame that on the government?

      Ask yourself, Larry, why is the health care sector, among all sectors of the American economy, so insensitive to the customer’s convenience. Do you reallly associate the private sector with a screw-the-customer attitude? Really?

      1. larryg Avatar
        larryg

        Jim, have you heard of “lemon” cars, or payday loans or impure food or adulterated drugs?

        Do you think drinking water purity would be assured if there were no regulations?

        what would you know and trust about food if there were no nutrition labels?

        do you think the private sector would, without regulations, put stuff in food that is harmful?

        do you think, without govt regs, we’d still have BPA in plastic? Do you think you’d even know there was BPA in plastic if not for the govt?

        I do not think the free market is 100% out to screw people but do you think the market without regulations would never screw people?

        history Jim what does history tell us on this issue?

  2. larryg Avatar
    larryg

    what’s happened is that technology has leaped so far ahead in some many areas, including medicine that the average person really is not equipped to understand the intricacies associated with various medical conditions much less dollars and cost-effective choices.

    they end up putting their trust is a particular doctor to navigate the choices and once they are locked in to a particular person – they’re not usually going to go “shopping” for another doctor or price other providers that the doctor is not familiar with. and this is even more true is the issue has life and death or lifelong impacts.

    You could have a system where every single medical condition is defined and, in fact we already do – since every doctor has to put down a series of standardized codes to describe your condition – but you could sit down and go through those codes and then look at a list of providers and their costs for dealing with those codes and you’d get nowhere fast.

    the idea that if consumers had more knowledge that they could make more informed and less costly choices is naive and in my view, hopelessly simplistic.

    You might shop around for a lower priced blood screen or root canal but would you really do that for a bypass ? Would you even know which medical pieces and parts would be used much less which doctors used which ones and how the costs compared – especially when you have to do something soon and really don’t have the luxury of “shopping around”?

    If someone wants to come out with a proposal to do this – I’d certainly entertain it but what we have is basically opposition to the current system and a fuzzy but largely undefined alternative proposal other than “let the free market work”.

    hells bells, half the folks out there don’t even try to figure out which automobiles have BAD repair records before they go buy something.

    they don’t know how their TV remote works much less their smartphone or how to pair their phone with the bluetooth in their new car….

    kids in the first grade – that’s right the first grade are being taught how to use Microsoft Word… by teachers who themselves do not understand how “templates” work in Ms word.

    truly – technology has far, far outpaced the average person’s ability to comprehend it in any serious way where they could make conscious choices and Medicine is no exception these days – IMHO of course.

    it’s a bonanza for the kid who has excellent fundamental reading, writing and science skills.. it’s the ticket to a good job but for most of the rest of society – we’re in the rearview mirror and fading fast when it comes to keeping up with technology.

  3. Ghost of Ted Dalton Avatar
    Ghost of Ted Dalton

    Mr. Bacon,

    I would love to see you address larryg’s points.

    I admire your writing. I am also sympathetic to less state-centric solutions to our ills.

    However, I have to agree with larryg. “Transparency” “shopping”, etc. sound great.

    BUT…the average person in this state simply doesn’t have the critical thinking skills to perform a lot of the tasks that would be necessary in a less state-centric health care model. Cancer care isn’t like shopping for a novel on the internet. It’s simply too big of a problem to quantify into a “good” or “service.” Which is what I always seem to hear from free market types. “Oh, you should be able to buy health care like you buy any other good or service.” As larryg says, “Try it.” It’s an impossible maze and you simply can’t “shop” for cancer care or other chronic disease care in any effective manner.

    And I’d also point to the “quick clinics” that were supposed to be a breakthrough on this front a few years ago. They’ve all but disappeared. I don’t know what the problems were, but I thought the idea of going into a drug store for a quick medical problem was a step in the right direction. But these seem to have disappeared as quickly as they appeared on the scene.

    And honestly, should people be required to have to apply such complicated knowledge to “shopping” for health care? The reality is this: If you want to lower health care costs, make a healthier society. I completely agree with you about biking and trails. I think nutrition is a huge component.

    A healthier society is going to use less health care services. That’s the way to lower health care costs and health care spending as a percentage of GDP. If that is the goal, then policymakers should be working like hell to improve fitness, nutrition, and healthy living rather than continuously blathering about health care costs. Sure there’s probably some efficiency, waste abuse, etc. that can be realized. But I doubt it would come close to the saving realized from a healthier society.

    But I admire your writing. Perhaps you can convince larryg and I that the average Virginian can navigate such a marketplace. Or perhaps the three of us could push for policy makers to address the “health” side of the equation rather than the “care” side? : )

    1. James A. Bacon Avatar
      James A. Bacon

      Ghost, Yes, shopping for health care is incredibly complex and intimidating, especially for anyone equipped with less than a graduate degree! To make it less intimidating…

      (1) We need to increase transparency for price and quality. There are some discretionary and relatively simple procedures that people could shop for by themselves — where to have a baby. Where to get non-emergency surgery.

      (2) For complex procedures or courses of treatment, such as cancer, people need help. Those who are lucky enough to be able to afford concierge medicine can buy that help today. For the other 90% of the population, insurance companies should provide that service. Everyone should have access to an advisor to help them through the maze. Trouble is, most people don’t buy their own insurance, their employers do, and most employers don’t see fit to provide that service. Meanwhile, that kind of service has been effectively outlawed under Obamacare, which punishes insurance companies for “administrative overhead.”

      (3) Hospitals and physician practices need to restructure themselves to become more customer friendly. You couldn’t design a less customer-friendly system if you tried than the one we have.

      The problem is, people like Larry see that system and call it “the free market.” Health care is probably the least “free” of any industry segment in the country. That’s why it’s so screwed up.

      1. larryg Avatar
        larryg

        1 – would the “free market” do this without govt insisting?

        2. – who will provide “help” to people in the “free market”?

        3. – customer friendly? really? Jim… geeze…….

        do you Know WHY the ERs are the way they are right now?

        it’s because they are slammed with people using them as free clinics and in doing that, competing for very expensive and scarce treatment facilities.

        the ERs in the US are the way the US provides Universal Health Care right now.

        this is what happens when health care is a ‘free market”.

        if the US repealed the EMTALA law, what would happen to people without insurance?

        we already know the answer to that question. Go back to the time when there was no EMTALA…and people were routinely turned away from ERs – especially pregnant women ….giving birth….

  4. larryg Avatar
    larryg

    In addition to healthier lifestyles, I feel one of the most important factors is access to regular care at a practice where there is a doctor even if you might be seen initially by a nurse practitioner or physician assistant – who can quickly escalate your case if things warrant it. You can’t do that as well at a doc-in-the-box type clinic where their goal is to get you in and out quick. that works fine if you have a minor issue like a cold but there are all kinds of people with all kinds of conditions that may or may not have what appears to be a “simple” cold when they walk it.

    If we had electronic medical records, the doc-in-box would work because he/she could pull up your history and have a much better idea of your situation but without it – it’s risky business.

    regular visits to a competent medical practice is how to detect problems early and get treatment earlier and with far less expense downstream when things get much more serious and expensive.

    Can you do something like that with a free market?

    I actually think you could if we had electronic medical records – which is a fairly common aspect in other countries that have universal health care.

    We have a lot of armchair experts these days it seems. We have folks who have no scientific background “researching” climate and then pronouncing scientists with PHDs who have spent decades studying climate that they are not on incompetent but they are engaged in a worldwide conspiracy to promote a lie.

    all of that from “reading up’ on an issue.

    to me, it’s the same approach to what is being promoted as “free market” healthcare.

    You can’t be a doctor by reading a few blogs in you idle time.

    and the truth of that is in your face when you are faced with a serious condition and you realize that “shopping around” is folly. The main ‘shopping around” you want is a doctor who has a good reputation who will take your insurance card. When that doctor tells you he needs an MRI stat from the local hospital, are you really going to dick around about where to find the best “value” MRI ?

    I’m willing to bet that there is an extremely high correlation of climate science skeptics who also believe in “free market” health care.

    what do you think?

    1. Ghost of Ted Dalton Avatar
      Ghost of Ted Dalton

      I completely agree with you. While I’m no MENSA, I do my best to shop for quality products and services.

      And I’m smart enough to know that I don’t have the knowledge and expertise of my physician. Nor do I see any utility in “price shopping” in the current health care structure.

      As you say…If your doctor recommends a test or procedure, are you going to go around and read a couple of blogs and say, “You know what, my doc is wrong?” Or are you going to “price shop” the procedure for days on end…? No.

      I think the problem is that most rational people with average IQ or higher realize that in this day of modern medicine, this is probably a good that isn’t meant to be put in a traditional “market” box.

      Read Steve Jobs (a guy who would be a poster child for the “market” solutions to health care considering his IQ and monetary resources) bio…..what would have happened if the guy had actually listened to his docs earlier in the process?

      I don’t know about climate change, but I think you’d find a high correlation b/w people who cite “market” solutions to health care and those who “cite” their grandparents who used to “trade vegetables to the doctor for a visit.” “Citing” what happened 75 years ago is not useful. But somehow people think that things are the exact same as they were 75 years ago when it comes to health care.

      1. larryg Avatar
        larryg

        I’m enjoying the dialogue “Ghost of..” … and hoping Jim B will offer his thoughts.

        the thing is – whether you are a Doctor or a Climate Scientist – you have a heavy duty formal education combined with a bunch of years of using your formal education to improve your knowledge.

        You and I cannot duplicate that by reading a few blogs or ambitiously-labelled ‘studies’ that come from sources that have an agenda.

        If I could carry my complete medical history on a USB or Micro-SD card OR have it stored on an encrypted server that I had to give the password for – I could engage in some free market practices.

        I could do even better if the govt did with Medical Providers what it did for banks and credit card companies – requiring them to list the costs of their services or what the govt required from food producers – provide a nutrition label or what the govt required for car manufacturers – provide a mileage sticker, etc.

        there is no secret what is going on with the Medical community.

        they make money by selling services and the more they sell the more they profit
        and this is totally separate and apart as to whether such services are cost-effective to you or to the insurance company or to Medicare and MedicAid.

        you go you use services. you pay. whether it actually benefits you healthwise is a whole other issue.

        as someone who has recently had to visit about a half dozen different providers on trying to track down something not right – I was shocked that each one of them will, for their specialty, check to see if your liver or your kidney or your pancreas is damaged or impaired or not but not of them will look at you holistically to see if there are cross- issues going on.

        they basically do tests to see what the status of an organ is and if it “passes”, that’s it. you are free to go.

        I asked: ” is it possible for something going on in the liver to affect the kidney” or vice versa…????

        and you know what you get? you get a quizzical look… like … that’s a side issue once they figure out that your kidney is failing or failed or not and they need to then – refer you. you can see how this starts to get into big money… but all of them make them money by “working” on you – not “curing” the problem.

        these guys are not that different from the car mechanic that replaces one part after another until they find the right bad part – and you pay for all the parts!

        THIS …IS … the “free market”.. and this is why a lot of people without insurance simply cannot go to a doctor until their damned liver HAS failed …and then they go to the ER. The folks who have insurance are only marginally better off in that the bills are covered even if they end up with the same liver failure!

        this is not something the average joe can figure out and make informed choices about It’s a swamp with fiscal quicksand for the unwary and stupid.

  5. Peter Galuszka Avatar
    Peter Galuszka

    “Require patients to pay a greater share of their health costs?”

    Once again, the author pushes his free market philosophy on a system he barely understands.

    The problem with American medical care is that it is not socialized enough. Most advanced countries have such systems. Health is not a commodity.

    Meanwhile, we are stuck with a system where there is no transparency, no clear information and a bunch of hospital corps. and managed care firms acting like Mafia Dons in bed with Medicare officials setting prices through private deals that no one else knows anything about. That is why no one can ask for or deny a service or a drug with any intelligence. The doctors prescribing typically have no idea what the patient’s health insurance will cover or how much he can afford. And, as “Ghost” says, trying to deal with cancer remedies is not exactly like buying a novel on the internet.

    Not to get personal, but I doubt the author has any real experience with the managed care system. I don’t think he has ever had to shop for health care plans. I don’t think he has ever been turned down because he is pushing 60 and has a “pre-existing condition.” Instead, he has benefited through corporate group care that he has gotten through his job or through his spouse.

    It is really too much for him to say that “the patient” must pay more. In fact, it shows the author lives in a bubble.

  6. larryg Avatar
    larryg

    I think Jim’s view is principled and well-intentioned but with a bind eye to certain realities.

    I agree though that people need to pay more especially with Medicare.

    If I told you, as a person under 65, that I could provide you with comprehensive health insurance that covered everything (but not dental and optical or long term care) – for $100 a month – how many people would take that deal and drop their other insurance that costs 5, 10 times as much?
    that’s a problem and it leads to an anti-entitlement mindset that is in play for extending health insurance to others who can’t afford it now.

    but unlike Jim, I do not think it’s a matter of simple disclosure of prices because it would be like telling people what the price of some component of their car is and then “shopping” around for that part – and then trying to find a mechanic who will install it for you … then the mechanic tells you that the problem is more than just that part and that part is not quite the right one.

    This is what Jim is expecting people to do with Medicare Care.

    you cannot be a doctor (nor an auto mechanic) by reading a parts or procedures price list.

  7. DJRippert Avatar
    DJRippert

    Always interesting to read the health care debates – especially when the talk turns to the Motherhood and Apple Pie of a “healthier society”.

    In some ways a healthier society adds considerable cost to our health care. Why? Because healthier people live longer and often fall into ill health for a long time at the end of their lives.

    You know who the bargain basement people are from a health care perspective? Smokers. Despite having high health care costs while they are alive smokers die so much younger than non-smokers they cost a lot less in total, lifetime health care costs.

    “Vanderbilt University economist Kip Viscusi studied the net costs of smoking-related spending and savings and found that for every pack of cigarettes smoked, the country reaps a net cost savings of 32 cents.”.

    http://www.huffingtonpost.com/2009/04/08/how-much-does-smoking-cos_n_184554.html

    Oh Dear! Perhaps none of what we think we know is actually correct.

    1. larryg Avatar
      larryg

      I’m not buying it. let’s see the study no title.. And here’s the basic problem: Just because you die earlier does not mean you die quick or cheap.

      A guy that has a massive heart attack at 39 will save money but a guy who spends 10 years dying of lung cancer is not going to die cheap.

  8. DJRippert Avatar
    DJRippert

    I think Jim’s point about people paying more of their own health care costs makes a whole lot of sense. What’s the alternative? Randomly pick a primary care physician and let him or her shop for you? Do you really think your primary care physician makes a study of every ear, nose and throat doc in your city and refers you only to the best? Heck no. They pick some guy they know from medical school or the local hospital or the golf course and send you off to see that doctor. You’d be a lot better off doing your own research.

    I would go so far as to give poor people money with which to shop for health care.

    Informed consumers who must live with the economic consequences of their decisions is a good idea.

    1. larryg Avatar
      larryg

      You can and should shop for better doctors but you cannot possibly know when he diagnoses you and recommends a specific course of treatment what the cost-effective options are. Most people in this world know as much about comparative medical diagnostics and treatment as they know the difference between one kind of gear in an automatic transmission from another.

      you should try to find a good Doctor – no question about it but once you’ve found a good doctor are you then going to price shop him with others?

      the whole concept is ludicrous libertarian loony tune stuff.

    2. larryg Avatar
      larryg

      re: ” I would go so far as to give poor people money with which to shop for health care.

      Informed consumers who must live with the economic consequences of their decisions is a good idea.”

      you should check out what is happening to US servicemen who receive an education benefit to spend when they leave the service.

      they’re NOT savy or informed consumers…. they fools with money and soon separated!

      why in the world would you give taxpayer money to someone who is totally uninformed (regardless of whether they are “poor” or not), to spend and think that they would “have to live with the consequences”?

      of what ? being snookered like the servicemen are right now?

      do you know what the number one question is that consumers of health care have ?

      here it is: ” does my plan cover it?”

      Whether it’s employee-provided health insurance or Medicare it’s the same question.

      Oh… and if Medicare says you are only 80% covered and you have to come up with the other 20% – … why…. that’s a govt death panel!

  9. Peter Galuszka Avatar
    Peter Galuszka

    Let’s see when comes to making patients pay more:

    Why not have private companies big up more than they have. They have been cutting for years– throwing the cost back on their employees or going with cheaper and cheaper plans.

    Why not police the net margins of the managed care firms

    Why not look for anti-trust practices among the big hospital corps who rule by monopoly in many places. The Wall Street Journal exposed Carilion in Roanoke a few years back for cannabilizing local medical practices and other possible competitors that could offer MRIs, CATs, etc. Turned out that the cost of a simply procedure in Roanoke was several times higher than it was in areas of comparable size that actually had competition.

    And Jim, The Ripper and LGross all want to stick it to the patient even more. Sad state of affairs. Damn. If I get another kidney stone my deductible is $25K. And that’s because I am self employed and had to get my own insurance — which is probably a rarity among participants in this blog.

  10. James A. Bacon Avatar
    James A. Bacon

    “Why not look for anti-trust practices among the big hospital corps who rule by monopoly in many places. ”

    I’m all in favor of that. In fact, the pricing power of the hospital cartels is precisely the topic of the original post!

  11. larryg Avatar
    larryg

    so the doc says you got a disease and the best hospital for treating it is Hospital X – and you’re going to price shop for others? Especially when your insurance coverage is the same no matter which one you pick?

    Most of us cannot even pronounce the name of what diagnosis are and have even less clue what it is, the different variants of it, and the different treatments for it.

  12. Peter Galuszka Avatar
    Peter Galuszka

    Right, Jim while you stick the poor sick patient with more of the expenses!

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