Hospitals Industrial Organization Public Policy

The perils of health systems

Last week I reviewed an article on some of the potential positives and negatives of large, integrated health systems. A recent 60 Minutes episode talks about some of the perils by examining how Sutter health system has become a near monopoly provider in Northern California. Consider the following interaction between Leslie Stahl of 60 minutes and Glenn Melnick, a health economist at USC.

Glenn Melnick: …[Sutter Health] have monopoly powers in a number of these counties, right? And their prices went up. The next year, they went up even faster. And they figured out, “Wow, this really works!”
Lesley Stahl: You might look at that and say, “That’s monopolistic.” Someone else might look at it and say, “Wow, that’s smart business. That’s- that’s really clever. Good for them!”
Glenn Melnick: If Sutter is able to raise their prices by improving quality, value, and service, that’s fine. What they came up with is a model that allowed them to acquire market power, and get higher prices without doing any of those good things for consumers. 
In the lawsuit, evidence showed that Sutter’s quality of care, while well-regarded, was generally comparable to other hospitals in California, and that its higher prices have been contagious. 
Glenn Melnick: So we called it the “Sutter effect,” where if you have a large, dominant system like this, they raise their prices high, all their competitors can raise their prices higher. So there’s kind of this second-order effect: that this type of behavior leads to much higher prices across the board. 

One key issue is a lack of price transparency, an issue that has been well-known in health care for many years. Hillary Ronen–a City Councilwomen in San Francisco (and my wife’s cousin!) laments this lack of transparency

A reason their health costs were so high, she says, is because Sutter was able to block the city and its insurer, Blue Shield of California, from steering employees to hospitals with lower prices. And it was able to prevent Blue Shield from telling the city what Sutter’s hospitals would charge for individual procedures.
Hillary Ronen: Sutter won’t allow us to see how much they charge for their services. It– it’s unbelievable. And so we can’t comparison shop. And they keep naming their price, and I feel like I’m handcuffed to do anything about it. 
Lesley Stahl: The insurance company, Blue Shield?
Hillary Ronen: Yes.

While the Sutter case makes a good story, the increased provider consolidation is happening across the country. Elizabeth Mitchell, the CEO of Pacific Business Group on Health, notes this trend is nationwide. Further, hospital prices are the key driver of health care spending.

Elizabeth Mitchell: This is happening in Maine. It’s happening in Texas. It’s happening across the country, the largest health systems are buying up everything. 
Lesley Stahl: Do you think that this is the main reason that health costs are going up?
Elizabeth Mitchell: We have seen the data. It is the largest driver of health care cost increases. It’s hospital prices. And they’re not providing more services. And the quality isn’t increasing. They are just charging more for the same thing. It is just the prices. And they do it because they can. 

Watch the full episode here.

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