February 22, 2021

Hospital market concentration and dominance

 Overcoming the Market Dominance of Hospitals

The facts:

Consolidation has been a predominant business strategy for hospitals and physicians in the United States for decades. Hospitals consolidate to gain market share and use resulting leverage to charge higher prices to private payers or employers large enough to self-insure. One major reason this may occur with relatively little resistance is the nature of health care markets. Numerous plans compete to offer health insurance to employers, and employers that self-insure must select from among these plans or third-party administrators (TPAs).

To attract employers, payers and TPAs strive to offer large networks of clinicians and health care centers to minimize care disruptions for employees. But when most physicians in a region are employed by a large hospital network, private payers and employers often have limited options other than to contract with that network, forcing them to tolerate 6% to 10% increases in prices each year.7 Adding to their leverage, these large networks often offer differentiated services like organ transplants or advanced specialty therapies that make them a “must-have” in private-payer or employer networks. Thus, the financial incentive for hospitals to merge or acquire physicians to gain must-have status is high.

Hospital consolidation is also supported by the nature of antitrust regulations, which are limited by how markets are defined. Since the 1990s, academics and regulators have defined local markets in health care using tertiary hospital catchment areas or hospital referral regions (HRRs). HRRs were constructed based on referral patterns of cardiovascular and neurosurgery hospitalizations from 1992-1993 Medicare data for research purposes.8 Yet these outdated HRRs meant for research are frequently used in antitrust enforcement today, despite the hospital mergers that have occurred since their development. In 2018, a review of community hospitals reported that 3491 of 5198 hospitals (67%) belonged to a multihospital health system, compared with just 2524 of 4956 (51%) in 1998.

Take-away message:

 COVID-19 has the potential to exacerbate the nation’s history of hospital consolidation. Stronger incentives to counteract consolidation could protect patients against potential adverse effects of anticompetitive hospital networks. Policy makers and regulators should consider legislation that defines and regulates market-dominant hospitals MDHs, while promoting asset redistribution via market-dominant hospitals redistribution fund  MRF, as a potential safeguard to the adverse consequences of the consolidation trend