Concentration in Health Care Markets: Chronic Problems and Better Solutions

July 2, 2012

Health care providers with market power enjoy substantially more pricing freedom than monopolists in other markets, for a reason not generally recognized: U.S.-style health insurance. Because of the unique role health insurance plays in the market, monopolies are particularly powerful and debilitative, says Barak D. Richman, professor of law and business administration at Duke University.

The particular harm of health insurance is that it shields participants from the true cost of health care, thereby seeming to provide a net good to enrollees while actually enabling hospital monopolies to increase costs.

  • In economic theory, monopolies are objectionable because they enable sellers to charge higher prices and thereby cause some consumers (who would be willing to pay a competitive price) to forgo enjoyment of the monopolized good or service.
  • Such output-reducing effects are greatly lessened in health care markets because the many patients covered by health insurance can easily pay monopolist providers' asking prices rather than being induced to give up these desirable goods and services.
  • But unfortunately, precisely because there is no output reduction in response to monopoly price increases, health insurance amplifies the monopolistic power of health care suppliers.

This tendency is particularly troubling for the health care industry for two separate reasons. First, the sector has seen huge waves of consolidation and acquisition on the local hospital level in recent years.

  • In 1995, hospital merger and acquisition activity was nine times its level at the start of the decade, and by 2003, almost 90 percent of Americans living in the nation's larger metropolitan statistical areas (MSAs) faced highly concentrated provider markets.
  • This wave of hospital consolidation was responsible for price increases for inpatient services of at least five percent.
  • Also, it was responsible for price increases of 40 percent where merging hospitals are closely located.
  • A second merger wave from 2006 to 2009 significantly increased the hospital concentration in 30 MSAs, and a majority of Americans are now subject to monopoly power in their local markets.

The second reason why this trend is particularly troubling is that the implementation of the Affordable Care Act (ACA) will exacerbate the problem. By insuring more Americans, the ACA will further expand hospitals' monopolistic power.

Source: Barak D. Richman, "Concentration in Health Care Markets: Chronic Problems and Better Solutions," American Enterprise Institute, June 2012.

For text:

http://www.aei.org/files/2012/06/12/-concentration-in-health-care-markets-chronic-problems-and-better-solutions_171350288300.pdf

 

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