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?
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?