Since the passage of the Affordable Care Act in 2010, most of America's health-care policy discussion has focused on insurance expansion as a way to "bend the curve" of the country's outsized health-care spending. The Obama administration has touted the ACA as a reform that not only extends coverage to millions of Americans, but also reduces the long-term cost of care. Yet if one looks under the hood of our health-care system, the big cost driver isn't a lack of access to preventive care. Rather, hospital care, which comprises about a third of national health-care spending, is the single biggest line item in the nation's health-care bill.
“In order to actually reduce costs and put patients first, policymakers should prioritize reforms at the state level, where health-care markets operate.”
Understanding the hospital sector, and particularly the transformative effects of consolidation on that sector, is critical to diagnosing America's health-care cost disease. Over the last few decades, state and federal policies and regulations have encouraged this consolidation of hospitals, a trend that has only been exacerbated by the ACA. As a result, hospitals have assumed more market power, producing worse outcomes and higher prices for patients.
In order to actually reduce costs and put patients first, policymakers should prioritize reforms at the state level, where health-care markets operate. Through policies that reduce barriers to entry for innovative firms, pay providers based on outcomes, and increase the transparency of costs for both patients and insurers, states can begin to introduce more competition into health-care markets and better serve patients. Such reforms would also push back against the legacy of regulations that have enhanced the market power of hospitals in recent years at the expense of patients.
THE ROOTS OF CONSOLIDATION
Before embarking on a history of consolidation in the industry, understanding hospital spending patterns is crucial. After all, if we assume that heavily consolidated hospital markets are more expensive (and they are), and that the more expensive they are the more we spend on hospitals (and we do), trends in hospital spending are an indispensable tool for gaining insight into the competitive dynamics of the industry.
In the late 1980s and early '90s, hospital spending grew at a staggering rate of 8% to 10% annually. The exact reasons for this spending growth aren't entirely clear (though Medicare reimbursement policies were certainly a driver), but the prevalence of conventional insurance policies — which tended not to impose serious utilization restrictions on members (like co-pays, co-insurance, networks, and pre-authorization, for instance) — likely contributed.
This is a somewhat convincing explanation, not only because it rests on solid theoretical ground, but also because the expansion of managed care in the industry throughout the early to mid-'90s coincided with a significant slowdown in spending growth. Before the late '80s and early '90s, "traditional" insurance was generous and mostly open-ended. Typically, a patient would go to a doctor or hospital, pay a co-pay, and the insurer would pay the bill with little thought. But as health-care spending grew unabated, insurers (both public and private) needed a way to slow the growth of such spending. The managed-care boom was their response.
Unlike the traditional insurance of years past, Health Maintenance Organizations (HMOs) and Preferred Provider Organizations (PPOs) relied on a variety of approaches, including network and utilization management, to reduce unnecessary consumption of health-care resources. When patients chose to see a doctor out of their network...
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Yevgeniy Feyman is an adjunct fellow at the Manhattan Institute and a senior research assistant at the Department of Health Policy and Management at the Harvard School of Public Health. Previously, he was MI's deputy director of health policy. Follow him on Twitter here.
Jonathan Hartley is an economics writer and researcher and an MBA candidate at the Wharton School of the University of Pennsylvania.
This piece originally appeared in National Affairs