Noticing the Elephant in the Room: Bigger Hospital Networks Charge More for the Same Service

We recently discussed a report on hospital prices here in Rhode Island, which showed that hospitals that are part of hospital systems were paid more for the same services than independent hospitals.  The price differences could not be explained by quality of care or severity of illness.  The results suggested that market power determines the price of hospital services, and that increasing concentration of power in hospital networks is likely to further increase costs, without improving quality of care. 

The end of last week, a similar report out of the neighboring state of Massachusetts was announced.  As reported by Liz Kowalczyk in the Boston Globe,

Massachusetts insurance companies pay some hospitals and doctors twice as much money as others for essentially the same patient care, according to a preliminary report by Attorney General Martha Coakley. It points to the market clout of the best-paid providers as a main driver of the state’s spiraling health care costs.

The yearlong investigation, set to be released today, found no evidence that the higher pay was a reward for better quality work or for treating sicker patients. In fact, eight of the 10 best-paid hospitals in one insurer’s network were community hospitals, which tend to have less complicated cases than teaching hospitals and do not bear the extra cost of training future physicians.

Coakley’s staff found that payments were most closely tied to market leverage, with the largest hospitals and physician groups, those with brand-name recognition, and those that are geographically isolated able to demand the most money.

While market power predicted pricing, quality of care and severity of illness did not.

The report shows that a small group of about 10 hospitals statewide command significantly higher payments than the other 55, ranging from 10 to 100 percent more than their competitors for similar work.

While academic medical centers are widely thought to be the most costly, the report noted that one major teaching hospital that treats some of the state’s sickest patients was paid less than dozens of others with healthier patients.

The investigation also discovered that hospitals that treat large numbers of poor patients, who can be more expensive to care for, are as a group paid 10 percent to 25 percent less than average by commercial insurers.

Finally, the report showed that increasing prices per unit of service, not increasing amounts of service, accounted for most of the rising costs of hospital care.

Coakley’s investigators found that Massachusetts health care costs, which are growing by 7.5 percent annually, are mostly the result of rising prices, not patients getting more imaging tests, surgery, and other procedures. For one major insurer, provider price increases accounted for 80 percent of the total growth in medical expenses between 2006 and 2009.

We have tried to encapsulate the concerns that motivated starting the Health Care Renewal blog as "concentration and abuse of power" in health care. Here is a stark of example of that.

Lots of hospital insiders have tried to sell increasing concentration of power among hospitals as a way to decrease costs, improve quality, and improve access. The American experience going back to the 19th century, however, has been that market concentration increases costs regardless of quality or access. The two reports from Rhode Island and Massachusetts suggest that as hospitals combine in hospital systems, and these systems become more oligopolistic, costs, but not quality or access increase.  Of course, the insiders within the system are likely to keep selling the idea, because their pay doubtless goes up as the system gets bigger.

As I have said many times, real health care reform will require reversing the trend towards concentrated power, maybe most directly by breaking up oligopolies such as large hospital systems, and changing health care organizations' leadership and governance to reduce the incentives to expand regardless of how expansion affects patient care.

Post Title → Noticing the Elephant in the Room: Bigger Hospital Networks Charge More for the Same Service

Dialysis Providers and the Restraint of Competition

This story almost made it under the radar. Our local Providence Journal provided this exclusive,

Two area dialysis clinic operators — American Renal Associates and Fresenius Medical Care Holdings — have signed consent orders with the Federal Trade Commission settling charges that they unlawfully tried to restrain competition.

According to the FTC, the parties entered into an asset purchase agreement on Aug. 3, 2005, under which ARA proposed to purchase five Rhode Island dialysis clinics from Fresenius. The agreement also required Fresenius to close an additional three clinics — two in Rhode Island and one in Fall River. The parties terminated the asset purchase agreement on March 13, 2006, after FTC staff raised antitrust concerns.

The FTC’s complaint alleges two separate violations of antitrust laws. The commission charges that the agreement between ARA and Fresenius to close three Fresenius clinics was an agreement to eliminate competition in the affected areas of East Providence, North Providence and Fall River. The effect of this elimination of competition would have been an increase in ARA’s ability to raise prices in these areas and to reduce ARA’s incentives to improve service and quality.

Also, commission charged that ARA’s proposed acquisition of two Fresenius clinics in Warwick would substantially reduce competition for outpatient dialysis services in the Warwick/Cranston area.

According to the FTC, agreements to pay a competitor to exit a market, such as the one allegedly negotiated between ARA and Fresenius, are illegal.

Although the report was local, it involved actions by two large commercial provider of dialysis services, Fresenius Medical Care Holdings, part of Fresenius Medical Care, a German firm claiming to be the world's largest provider of services to patients with chronic renal disease, and American Renal Associates, which claims to be one of the largest US dialysis providers. As such, it indicates the goals of the leaders of these organizations, and the means they will utilize to achieve these goals. Fresenius has received much more coverage lately for its efforts to stave off proposed reductions in payments for large doses of epoetin to treat anemia in dialysis patients, even given that such aggressive treatment has not shown to provide any clear benefit to patients.

This story is particularly interesting because it is, to my knowledge, one of the few reports of an anti-trust action against commercial health care service providers in the US, even though the provision of health care services is more and accomplished by corporations that grow ever larger and more powerful. This suggests that one way such organizations may grow large and powerful is by collaborating with others with whom they are ostensibly competing.

On the other hand, this is just one of many stories, found on Health Care Renewal, the other blogs that now act as health care watchdogs, and of course in the news media, of health care organizations bumping up against legal limits in their pursuit of money.

The problem is that these stories are scattered around blogs and the news media, and very rarely in medical and health care journals. I believe that were they better aggregated, physicians and the public alike would realize how much of health care is now driven by the self-interest of the leaders of large health care organizations, and how little is unfortunately driven by the needs of patients and the advancement of science.

Post Title → Dialysis Providers and the Restraint of Competition