Posted by Bill Sandweg on 04 January 2021.
A recent study by the RAND Corporation discovered that hospitals across the United States charge private health insurers far more than they charge Medicare for the same services. The amount by which hospital bills exceed what they are paid by Medicare varies widely by location but one fact is consistent: prices are highest where there has been hospital consolidation.
The basis of our economic system is the free market. Goods and services, and hospitals offer both goods and services, are bargained for in the marketplace. Good products and services are more highly sought after and can command a higher price. Bad products and services have to charge less. Sometimes, even with lower prices, they cannot find a buyer and are pushed out of the market. The consumer is rewarded with good products and services at fair prices. The free market no longer works when it comes to hospital prices.
There is a lot wrong with our health care delivery system. We spend more money per person on health care than any other country in the world and yet our outcomes are well down the list of the best countries. Not only do we get so little for our money, we don’t even provide health care to all our citizens. By virtue of a historical accident during and soon after WWII, we developed a system in which health insurance was provided by employers. No job, no health insurance. As health care has become more expensive, many employers have either dropped health insurance as a benefit or required employees to bear a greater share of the costs. So now, even among people who have jobs, many don’t have health insurance.
The high cost of health care is creating an unsustainable burden on our system of employer-provided health insurance. The high cost of hospital care is a main driver of the ever-increasing cost of health care. Why is hospital care so expensive? Why doesn’t the free market deliver us good care at reasonable prices?
There are two main reasons the system is broken. The first is the pattern of consolidation among hospitals. In Arizona, our largest employer is Banner Health. It also operates about half of the hospitals in the state. The ones that are not Banner hospitals are usually operated by some other system that has multiple hospitals. The more consolidation that takes place, the fewer hospital competitors there are in the market. Basic economic theory applies here. The fewer competitors in the marketplace, the less competition and less competition means prices will be higher. The RAND study, and every other study of the subject, has found that the more hospital consolidation there is in a given market, the higher are the prices charged by hospitals there.
Health insurers that negotiate with hospital chains find them less willing to negotiate prices. They can and do adopt a “take it or leave it” approach. If there is nowhere else the health insurer can send its insureds for hospital care, it has no leverage and must accept whatever rates the hospital chain wants to charge.
The second main reason the system is broken is secrecy. For a free market to function, buyers must be able to compare prices. If a buyer does not know what sellers are charging for a particular product, there is no way the buyer can choose the best price. Hospitals, and especially hospital chains, treat their negotiations with health insurers as trade secrets. Once a deal is reached between a health insurer and a hospital, the hospital insists that the deal be kept confidential. Health insurers do not know what prices are available in the market and, therefore, cannot choose the best option. They are forced to negotiate in the dark.
Medicare, on the other hand, is the elephant in the room. Given the number of people covered by Medicare, even large hospital chains cannot afford to refuse Medicare patients. They are too large a portion of the population. Medicare studies the cost of hospital goods and services and sets what it considers to be a fair price. Now the shoe is on the other foot and the hospital must take what Medicare offers or refuse Medicare patients. Of course, hospitals claim that the prices set by Medicare are too low and explain that is why they charge private health insurers so much more.
The inability of private health insurers to get anywhere near the deal Medicare gets is creating pressure for some sort of change in the way we as a society deliver and price health care. Some proposed changes are relatively minor. Other changes are more radical. “Medicare for All” is an example of the far end of the spectrum. However it happens, the current system is broken and unsustainable and has to change. It will be up to Congress to pass legislation to force change. Legislation, of course, means lobbying and the hospital chains are very effective at it. Hopefully, good change is coming.