A Very Weak Case for Hospital Mergers

One consequence of Obamacare is hich can reduce competition and increase prices. Writing in the Wall Street Journal, Dr. Kenneth L. Davis, MD, CEO and President of Mount Sinai Health System in New York City, puts forward a number of claims in favor of hospital consolidation. Each assertion is weak, making an unconvincing argument overall.

First, Dr. Davis asserts that the new goal of hospitalization is not to make any individual patient well, but rather to improve “population health management.” Dr. Davis’s theory of population health management leads him to conclude that “stand-alone hospitals have neither the number of patients to manage the actuarial risk of population management, nor the geographic coverage to serve a large population. Hence the reason for allowing strategic hospital mergers.”

Wait a minute: Actuarial risk is managed by insurers, not providers. When we talk about insuring buildings, we look to property insurers to take on actuarial risk, not construction companies. The latter have to manage engineering, budgetary, and other risks. Similarly, hospitals already have enough medical risks to manage, without expecting them to take on actuarial risk as well.

Second, Dr. Davis asserts many benefits of size, which in business school we would call economies of scale and scope. For example: “Combining smaller hospitals with large medical centers gives more patients access to top specialists.”

How, exactly, does that happen? The buildings have not moved, so there is no physical improvement in access. Quite the contrary, America’s non-profit hospitals are notoriously unfocused, combining wards doing different things that would operate better as specialized “focused factories.”

An example of this is the Surgery Center of Oklahoma, where forty surgeons perform certain surgeries, posted on a list on a website that anyone can easily find, day in and day out. They don’t deliver babies, provide chemotherapy, or do organ transplants. However, most such hospitals are owned by physicians, instead of non-profit corporations, and so are discriminated against by federal and state laws.

Third, Dr. Davis claims that larger health systems better serve “community needs.” Specifically:

Critical services such as pediatrics, psychiatry and obstetrics, which often rely heavily on Medicaid for payment, can leave hospitals at a financial loss. In a successful merger, the reduction of back-office expenses and elimination of clinical duplication….. can allow several hospitals in the larger network to continue offering these services.

That sounds fair enough—qqqexcept that it contradicts another of the hospitals’ lobbying priorities: To expand Medicaid because it improves hospital revenues. What is more likely is that larger hospitals are more able to develop sophisticated accounting procedures that makes it impossible for outsiders to understand the true cost structure of various parts of the system. This enables hospitals to increase revenues, because third-party payers still rely more on cost-plus measurements than value-added metrics to determine fees.

So, arguments in favor of hospital consolidation are weak. The question is: What is to be done about it? My own preference is that the Federal Trade Commission, which frequently examines hospital mergers for antitrust violations, keep out of it. Almost all hospital mergers are within one state, and state antitrust laws should be relied upon to respond to undue concentration.

Even better, forget about antitrust law altogether and open the market to more choice. This would entail revisiting and repealing a whole swathe of federal and state laws and regulations preventing specialization and for-profit ownership of health facilities.

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For the pivotal alternative to Obamacare, please see the Independent Institute’s widely acclaimed book: Priceless: Curing the Healthcare Crisis, by John C. Goodman.