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How a hospital expansion will drive up costs for its patients.
A monopoly is a company or group that obtains exclusive control over a commodity or service. As an economist (and someone with common sense), I know that monopolies are bad. They drive up prices and lower the quality and availability of goods and services. Precisely because of this, the United States has laws and governmental agencies that look for monopolies and police them.
Fortunately, for most products and services paid for by Americans do not fall under true monopolies. Most of our economy is a global economy and because we can easily buy goods and services from multiple competitors, it keeps prices stable, and the consumer gets the best value he or she can. Just think about what Amazon has done to open competition all sorts of products.
Healthcare, however, does not work that way. There is an old saying that all healthcare is local. This is true because it is not really possible to travel long distances to receive healthcare. It is important to understand this because many people believe that monopolies and monopolistic power are some of the factors driving up health care costs in this country.
Up in Massachusetts, a political battle has been brewing over a massive expansion to one of the state’s largest hospital systems. Mass General Brigham is proposing a $2.3 billion expansion that includes a new tower at its flagship hospital in Boston, an addition to its Brigham and Woman’s Faulkner Hospital, and three ambulatory care centers in the suburbs.
The plan has drawn concerns from the Health Policy Commission. On January 25, the eleven-member panel unanimously concluded that these expansions would drive up spending for commercial insurance patients as much as $90 million a year and will hike up insurance premiums.
How is it possible that a hospital expansion could drive up costs that much? Firstly, delivery systems that reach the size of Mass General Brigham have incredible negotiation leverage against the insurance companies. They can negotiate reimbursement rates that are much higher than smaller or more fragmented systems. So, any expansion of the services under these delivery systems often come at a ridiculously high price.
Secondly, it is well documented that healthcare delivery systems who own (rather than contract) their own physician groups and outpatient care create higher costs than independent practices. This is because physicians who are employed by these hospital systems are either incentivized or even required to utilize other services within the system, rather than referring their patients to most cost-effective option. For example, a physician inside the system is required to send their imaging or their surgeries to other offices in the system, which would cost more than sending the patient to an independent imaging center or ambulatory surgery center (ASC). Similarly, surgeons who are employed by these systems usually must do their surgeries in the hospital rather than taking their services to a freestanding ASC for a much lower cost.
Remember what I said earlier about monopolies? These sorts of practices fall directly into that definition. Huge hospital systems, like Mass General Brigham, are driving up the healthcare costs by refusing to utilize cheaper, outsourced options.
This expansion in Massachusetts is important because hospitals and hospital delivery systems make up roughly one-third or all healthcare costs in this county. The other two-thirds are split almost equally between pharmacies, pharmaceuticals, and physicians. When we look at the data on the drivers of healthcare cost inflation, it is clear that hospitals and pharmaceuticals are leading the way.
Contrary to what BlueCross BlueShield of North Carolina thinks, independent physician groups contracted with hospitals are not driving up healthcare costs. Physician compensation has barely been keeping up with inflation over the last several decades. Simply put, our healthcare cost increase problems are not related to physicians and physician compensation. If anything, they are the ones holding the line.
If we are going to address healthcare costs honestly and accurately in this country, we have to deal with pharmaceuticals, and perhaps more urgently, very expensive, massive, and growing hospital and delivery systems.