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Hospital-owned doctors get paid double
A hospital system can demand double because it controls capacity that every insurer's network needs: a ton of beds and an ultra special surgery center that some patients require. To get access, the insurer has to pay double for the system's primary care doctors.
Consolidation feeds on itself. The payer market is ultra consolidated, with basically four large players controlling it. Hospital systems get big to have negotiating power against insurers like Blue Cross, and the two sides reach loggerheads where nothing gets done and everybody overpays.
The market works efficiently when the counterparties are small. With smaller payers and smaller hospital systems, negotiations come out reasonable. When one side holds a third of the healthcare in a state and the other holds a third of its employees, there is no alternative, so a deal must be reached.
Why do hospitals charge more for the same service?
Hospital outpatient departments can bill a facility fee in addition to the physician's fee. Medicare pays more for many services delivered in a hospital outpatient department than in a physician's office, as MedPAC has documented. Commercial insurers often pay still more. When a hospital buys a practice, the same visit can move to the higher rate.
How does consolidation raise prices?
A 2019 study in the Quarterly Journal of Economics by Zack Cooper, Stuart Craig, Martin Gaynor, and John Van Reenen found that hospitals in local monopolies charged prices about 12 percent higher than hospitals in markets with four or more competitors. The effect came from reduced competition for insurers' business. Insurers have fewer alternatives when one system holds the key hospitals in an area. Mergers within a region have been linked to higher prices in many other studies.
Why do hospital systems keep merging?
Larger systems gain leverage in negotiating with insurers, since a network without them would leave a gap. They can also spread fixed costs and share administrative staff. The Federal Trade Commission has challenged some hospital mergers on antitrust grounds. Buying physician practices adds referral flow to their hospitals.
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