April 9, 2023
Some More Truth About Hospital Monopolies
This is not a trick question. What do Harvard, Yale, Cal Berkeley, Princeton, the Rand Corporation, the London School of Economics, Carnegie Mellon and Ball State all have in common? Two things. First, each institution has one or more economists who’ve published a study finding hospital monopolies or monopoly pricing in Indiana. Second, Indiana’s hospital lobbyists have criticized each of these researchers and the findings of their research. The gist of their criticism is that we are all biased, or in cahoots, or simply not knowledgeable about the issue.
To be fair, those complaints could all be true. We could all be precisely wrong in the same way. Although, in my experience, getting two economists to agree on almost anything is about as common as a white buffalo. Still, there is an alternative explanation; the hospital lobbyists aren’t telling the truth, because the truth hurts. Indiana has a hospital monopoly problem.
The main issue is whether or not Indiana’s large hospital monopolies are overcharging, and whether that is tied to their high levels of monopolization. Not surprisingly, I think the evidence is pretty clear. The nation’s most respected think tank, the Rand Corporation, has completed five different studies of the issue, using data provided by hospitals and insurers. They report Indiana statewide has among the very highest prices in the country, and in at least one place the highest.
Another group of academic economists created the ‘healthcare pricing project’ that collected data for more than a decade. In a series of papers published in the leading economics journals over the last decade, they report a nearly exact same set of findings. Indiana has a hospital monopoly problem.
My work, and that of the healthcare pricing project, compared these prices to the level of monopolization, finding results that strongly conclude a monopoly is to blame for these higher prices. But, there’s other data that points to a problem.
The federal government collects spending patterns of families across the nation. That data reports that Hoosiers spend a whopping 32.4 percent more of their family budgets on hospitals than does the average American. The healthcare lobby claims that is because we are sicker than the typical American. That is nonsense. The CDC ranks us 29th in overall health, but of the 21 states ranking lower than us, only two spend more per person on health spending than Hoosiers do.
The National Academy for State Health Policy just released data that shows the actual cost of hospital services over the past decade grew by less than 10 percent, while billing of patients and insurers almost doubled. That’s why hospital reports to the IRS show annual profits of 20 to 30 percent, and per worker profits of $25,000 to more than $40,000 are the industry norm for Indiana’s large hospital systems. These are three to five times the typical profit rate for not-for-profit hospitals in the U.S. This is just more clear evidence of monopoly pricing.
Still, the healthcare lobby claims that all these studies and all these data are wrong. They say they are out of date and that the economists studying them are unqualified, biased or just plain ignorant of the complexities of hospital pricing. They argue that hospital pricing is so complex, that only hospital officials or their accountants can fully understand it. Let me offer a different explanation.
The ‘complexity’ and lack of transparency of medical billing is a purposeful part of their ability to charge monopoly prices. That is why the Trump Administration enforced a pricing transparency rule on hospitals. Sadly, transparency has largely failed, because the rules have too many loopholes for hospitals to work around. A couple examples make clear what is really going on.
Imagine you are a healthy 45-year-old runner in need of an artificial knee. This is a relatively straightforward procedure, requiring a surgeon, surgical nurses, anesthesiologists and other skilled technicians. You’ll probably spend a couple days in the hospital, receiving ‘round the clock nursing care, visits by hospitalists and occupational therapists. You’ll be fed, receive pain medication and have your dressing changed.
The knee replacement surgery will require an artificial knee, surgical equipment and supplies sourced mostly from the U.S. and a few other developed countries. You might eat salmon for lunch, imported from South America, a salad from Mexico and fruit from Costa Rica. The medical professionals will be licensed in Indiana, and the oxygen and anesthetics produced in FDA-regulated facilities in the U.S.
There are no more than 1,000 manufactured parts to this work, from individual sutures to the anesthesia, and you interact with perhaps three dozen hospital employees. They are regulated by two or three government bodies and source their products from a half dozen nations.
Your hospital will do several of these procedures per day, but I challenge you to figure out how much you will pay for this. You might be able to find a range of costs that vary by 50 percent, but you have to see through a clunky website to get even that. Let’s compare that pricing experience with another regional monopoly we all complain about—Cable Television.
Imagine you wish to buy a Cable TV subscription. You probably have the choice of two or maybe three providers. That immediately makes the experience less monopolized than about half the healthcare markets in Indiana. However, this is a far more complex service to deliver.
Cable TV typically requires ground installation of a cable at your home, and installation of a cable box. That cable is routed through a utility right-of-way with regulatory oversight by county, state and federal entities. Once completed, the TV shows you watch are delivered through contract from hundreds, if not thousands, of different media companies. These companies broadcast in multiple languages, with near-universal translation services provided by advanced language algorithms.
Your Cable TV shows are financed by thousands of different banks and investors, and involve constantly changing contracts, across multiple jurisdictions. Rules about who owns a movie from then1930s or a YouTube video from 2015 vary across 170 nations where they are shown. The signal to your Cable TV is routed through a constellation of ground antennas and communication satellites, each of which have several hundred thousand component parts. These satellites are sourced from dozens of nations, and regulated by international treaty, transmitting to dozens of countries in carefully managed orbit. Providing Cable TV is hundreds of times more complex than a knee replacement.
It is funny that pricing information about your Cable TV service isn’t just abundant, it is incessant. That is not because Cable TV companies are kind, thoughtful and caring. They are ruthless profit maximizers, just like the executives of Indiana’s not-for-profit hospital systems. The reason it so much easier to find pricing information about Cable TV than a knee replacement is simply that Cable TV providers are far less monopolized than your local hospital. It is time to remedy the hospital monopoly problem in Indiana.
About the Author
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