American health care needs more competition, not less, to bring down prices

American health care needs more competition, not less, to bring down prices

Here’s a newsflash: when businesses don’t need to compete for customers, they tend to raise prices.

Yet the progressive remedy to perpetually escalating health-care costs is not to increase competition — it’s to eliminate it completely and put the government in charge of health care, via Medicare for All.

There’s ample evidence that a lack of competition is what plagues our nation’s health-care system. Over the past few decades, large health systems have acquired local stand-alone hospitals and physician practices — and used their market power to wallop insurers and consumers.

To fight back, we shouldn’t nationalize health insurance. We should foster more competition among health-care providers.

Hospital systems have steadily bought out their competition. Consider one recent study from the Health Care Cost Institute, which analyzed hospital markets in 112 metro areas in 43 states. Between 2012 and 2016, the hospital markets in more than two-thirds of these areas grew more concentrated. By 2016, 72% of metro areas qualified as “highly concentrated,” meaning that just a handful of hospital systems handled nearly all admissions in the area.

As hospital sectors become more concentrated, the price of inpatient care surges. In Nashville, health costs are approximately 7% higher than the national median. The Nashville metro area’s healthcare prices are in the top third nationwide.

A 2018 paper from researchers at Yale, the University of Pennsylvania, Carnegie Mellon and the Massachusetts Institute of Technology concluded that “prices at monopoly hospitals are 12 percent higher than those in markets with four or more rivals.”

Hospitals aren’t just buying each other — they’re snapping up independent physician practices, too. Between 2012 and 2015, the number of physician practices owned by hospitals increased 86%. As of January 2018, hospitals owned roughly 80,000 physician practices throughout the United States.

 This consolidation has cost patients. Physicians in the most concentrated markets charge 14 to 30% more than those in the least concentrated markets, according to a 2014 study. On average, consolidation over the previous two decades caused an 8% increase in physician fees.

So how can we promote competition? We can start by abolishing the certificate-of-need laws in force in more than two-thirds of states, including Tennessee. These laws require healthcare providers to convince state officials that there’s a need for their services before they’re allowed to open.

Certificate-of-need laws effectively give incumbent providers a veto over the entry of competitors into a market. Incumbents routinely lobby government officials, braying that a new hospital will lead to job losses. Policymakers are loath to upset politically powerful hospitals — and potentially lose their employees’ votes.

Those barriers to entry result in less competition and higher prices for consumers. States with certificate of need laws have 11% higher healthcare costs than those without them, according to a analysis from the Heartland Institute.

 A Mercatus Center study found that repealing certificate-of-need laws in Tennessee would likely result in the development of 63 new hospitals, including 25 rural hospitals. Such a move would also reduce annual health spending by $223 per capita.

Outcomes would be better, too, absent certificate-of-need laws. The Mercatus analysis found that deaths from post-surgery complications in Tennessee would decline more than 5% without certificates of need. Hospital readmission rates and mortality rates from heart attacks, heart failure, and pneumonia would also decline.

Greater price transparency can also foment competition. Consumers are eager to shop around for care. Thirty-six percent of patients use the internet or mobile apps to compare the quality and cost of different services, according to a 2018 UnitedHealthcare survey. More than eight in 10 of those who shopped around found the process at least somewhat helpful. One in 10 changed both their provider and healthcare facility based on the information they learned.

Competitive market forces have driven down costs and enhanced the quality of goods and services in every sector of our economy. It’s about time we tried the approach in health  care.

Sally C. Pipes is president, CEO, and the Thomas W. Smith fellow in healthcare policy at the Pacific Research Institute.

Read More

Subscribe to our newsletter:

Nothing contained in this blog is to be construed as necessarily reflecting the views of the Pacific Research Institute or as an attempt to thwart or aid the passage of any legislation.