In our national quest to identify and rein in the villains who are driving the cost of U.S. health care to staggering heights, the role of hospitals has been overlooked. This Kaiser Family Foundation analysis corrects that oversight, revealing that hospitals are by far the biggest cost driver in our system, and examining the reasons why. Unmentioned in the analysis is the impact of mergers and acquisitions on overall costs. Yet a July 2018 analysis by the National Council on Compensation Insurance fills that gap, concluding that “Research to date shows that hospital mergers increase the average price of hospital services by 6%−18%.” Considering that there has been an unprecedented wave of hospital consolidations since 2010, when the Affordable Care Act incentivized the formation of Accountable Care Organizations, the impact of hospital mergers on healthcare costs must not be ignored.
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As voters fume about the high cost of health care, politicians have been targeting two well-deserved villains: pharmaceutical companies, whose prices have risen more than inflation, and insurers, who pay their executives millions in salaries while raising premiums and deductibles.
Although the Democratic presidential candidates have devoted copious airtime to debating health care, many of the country’s leading health policy experts have wondered why they have given a total pass to arguably a primary culprit behind runaway medical inflation: America’s hospitals.
Data shows that hospitals are by far the biggest cost in our $3.5 trillion health care system, where spending is growing faster than the gross domestic product, inflation and wage growth. Spending on hospitals represents 44% of personal expenses for the privately insured, according to the Rand Corp.
Kaiser Family Foundation.
A report this year from researchers at Yale and other universities found that hospital prices increased a whopping 42% from 2007 to 2014 for inpatient care and 25% for outpatient care, compared with 18% and 6% for physicians.
So why have politicians on both the left and right let hospitals off scot-free? Because a web of ties binds politicians to the health care system.
Every senator, virtually every congressman and every mayor of every large city has a powerful hospital system in his or her district. And those hospitals are as politically untouchable as soybean growers in Iowa or oil producers in Texas.
As hospitals and hospital systems have consolidated, they have become the biggest employers in numerous cities and states. They have replaced manufacturing as the hometown industry in a number of Rust Belt cities, including Cleveland and Pittsburgh.
Can Kamala Harris ignore the requests of Sutter Health, Kaiser Permanente, UCLA or any of the big health care systems in California? Can Elizabeth Warren ignore the needs of Partners HealthCare, Boston’s behemoth? (Bernie Sanders may be somewhat different on this front because Vermont doesn’t have any nationally ranked hospitals.)
Beyond that, hospitals are often beloved by constituents. It’s easy to get voters riled up about a drugmaker in Silicon Valley or an insurer in Hartford. It’s much riskier to try to direct their venom at the place where their children were born, that employed their parents as nurses, doctors and orderlies, that sponsored local Little League teams, that was associated with their Catholic Church.
And, of course, there’s election money. Hospital trade groups, medical centers and their employees are major political donors, contributing to whichever party holds power — and often to the out-of-power party as well. In 2018, PACs associated with the Greater New York Hospital Association, and individuals linked to it, gave $4.5 million to the Democrats’ Senate Majority PAC and $1 million to their House Majority PAC. Its chief lobbyist personally gave nearly a quarter of a million dollars to dozens of campaigns last year.
Sen. Sanders has called on his competitors for the Democratic nomination to follow his lead and reject contributions from pharma and insurance. Can any candidate do the same for hospitals? The campaign committees of all 10 candidates participating in the upcoming Democratic debate have plentiful donations linked to the hospital and health care industry, according to Open Secrets.
But the symbiosis between hospitals and politicians operates most insidiously in the subtle fueling of each other’s interests. Zack Cooper, a health economist at Yale, and his colleagues looked at this life cycle of influence by analyzing how members of Congress voted for a Medicare provision that allowed hospitals to apply to have their government payments increased. Hospitals in districts of members who voted “yea” got more money than hospitals whose representatives voted “nay,” to the collective tune of $100 million. They used that money to hire more staff and increase payroll. They also spent millions lobbying to extend the program.
Members who voted yea, in turn, received a 25% increase in total campaign contributions and a 65% increase in contributions from individuals working in the health care industry in their home states. It was a win-win for both sides.
To defend their high prices, medical centers assert that they couldn’t afford to operate on Medicare payments, which are generally lower than what private insurers pay. But the argument isn’t convincing.
The cost of a hospital stay in the United States averaged $5,220 a day in 2015 — and could be as high as over $17,000, compared with $765 in Australia. In a Rand study published earlier this year, researchers calculated that hospitals treating patients with private health insurance were paid, overall, 2.4 times the Medicare rates in 2017, and nearly three times the rate for outpatient care. If the plans had paid according to Medicare’s formula, their spending would be reduced by over half.
Most economists think hospitals could do just fine with far less than they get today from private insurance.
While on paper many hospitals operate on the thinnest of margins, that is in part a choice, resulting from extravagance.
It would be unseemly for these nonprofit medical centers to make barrels of money. So when their operations generate huge surpluses — as many big medical centers do — they plow the money back into the system. They build another cancer clinic, increase CEO pay, buy the newest scanner (whether it is needed or not) or install spas and Zen gardens.
Some rural hospitals are genuinely struggling. But many American hospitals have been spending capital “like water,” said Kevin Schulman a physician-economist at Stanford. The high cost of hospitals today, he said, is often a function of the cost of new infrastructure or poor management decisions. “Medicare is supposed to pay the cost of an efficient hospital,” he said. “If they’ve made bad decisions, why should we keep paying for that?”
If hospitals were paid less via regulation or genuine competition, they would look different, and they’d make different purchasing decisions about technology. But would that matter to medical results? Compared with their European counterparts, some American hospitals resemble seven-star hotels. And yet, on average, the United States doesn’t have better outcomes than other wealthy nations. By some measures — such as life expectancy and infant mortality — it scores worse than average.
As attorney general in California, Kamala Harris in 2012 initiated an antitrust investigation into hospitals’ high charges. But as a senator and presidential candidate, she has been largely silent on the issue — as have all the other candidates.
As Uwe Reinhardt, the revered Princeton health economist who died in 2017, told me, “If you want to save money, you have to pay less.” That means taking on hospital pricing.
So fine, go after drugmakers and insurers. And, for good measure, attack the device makers who profit from huge markups, and the pharmacy benefit managers — the middlemen who negotiate drug prices down for insurers, then keep the difference for themselves.
But with Congress returning to Washington in the coming days and a new Democratic debate less than two weeks away, our elected officials need to address the elephant in the room and tell us how they plan to rein in hospital excesses.
Kaiser Health News (KHN) is a national health policy news service. It is an editorially independent program of the Henry J. Kaiser Family Foundation which is not affiliated with Kaiser Permanente.
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