Senate Finance Committee Issues Testimony From Yale University Associate Professor Cooper
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Overview1
In 2021,
The US relies on private markets to provide health care services and administer health insurance.
In part, this reliance on markets is a function of the sheer scale of the US health system. As a result, the health of the US health system is a function of the health of the markets that underpin our health system.
As I'll argue, the provider markets that underpin our health system are becoming increasingly concentrated. This rise in concentration is harmful to the public. Increasing consolidation raises provider prices (thus increasing health spending) and harms access to health care services (by increasing insurance premiums and out of pocket costs). In turn, rising health spending is putting pressure on government programs, lowering tax revenue, and leading to lower wages, job losses, and rising inequality among those with employer-sponsored insurance coverage. In short, efforts to guarantee the long-run sustainability of public insurance programs and rein in the growth of private insurance premiums cannot ignore rising consolidation and the shifting market landscape in the health care sector.
It is near universally accepted by economists that even when employers contribute to their employees' insurance premiums, these premiums and the cost of health care services are almost wholly borne by individuals and families, not by their employers or by insurers.4 In 2021, annual premiums for family coverage via an employer-sponsored insurance plan were
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1 My thanks to Yale PhD student
2 "National Health Expenditure Data,"
3 "GDP (current US$) -
4 Gruber, Jonathan, "The Incidence of Mandated Maternity Benefits," American Economic Review, 1994, Vol. 84(3), pp. 622-641; Baicker, Katherine, and
5 "Employer Health Benefits 2021 Annual Survey,"
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The rising cost of health care in the US is placing a financial burden on families and the federal government.7 From 2000 to 2021, insurance premiums in the US rose by 215%.8 This increase in premiums was driven by an increase in health spending. By contrast, median earnings during this period grew by only 73%.9 As a result, over the last two decades, the rising cost of health care has meant that families have had less money to spend on everything from food to housing to leisure and that the price of insurance has become out of reach for many.10 And even with full insurance coverage, 44% of adults in the US in 2018 were worried about affording a medical bill and 19% reported using up all or most of their savings on health care costs.11
Historically, most of the discussion of provider consolidation in the US has focused on the impact of, for example, hospital mergers on hospital prices. However, the way the US funds health care for the privately insured -- the ubiquity of and tax exclusion given to employer-sponsored health insurance -- means that consolidation that increases health spending is driving decreases in tax revenue, lower wages, job losses, and economic inequality. Theory neatly predicts and empirical evidence highlights that when health spending on those with employer-sponsored coverage goes up, this is paid for by workers in the form of lower wages and job losses.12 Job losses also impact health. A literature studying the effect of, for example, factory closures highlight that individuals who lose their job have an increased risk of death within a year, often from a suicide, an accident, or a drug overdose.13 Debt, less tax revenue, lower wages, job losses, and death: these are the consequences of provider consolidation and rising health spending in the US.14
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6 See: "2023 Corolla," Toyota, https://www.toyota.com/corolla; Capparella, Joey, 2022, "Top 25 Bestselling Cars, Trucks, and SUVs of 2021," Car and Driver, https://www.caranddriver.com/news/g36005989/bestsellingcars-2021/.
7 Tax revenues go down when increases in premiums for employer-sponsored coverage lower wages and employment. Likewise, tax revenue goes down when rising health spending increases the tax subsidies required for health insurance plans sold on exchanges.
8 Family coverage. "Employer Health Benefits 2021 Annual Survey,"
9
10 Tolbert, Jennifer,
11 Peterson-KFF Health System Tracker, 2020; Montero, Alex, "Americans' Challenges with Health Care Costs,"
12 Gruber, Jonathan, and
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Moreover, as recent work highlights, because insurance premiums do not vary markedly across workers, when health spending goes up, employer-sponsored health insurance discourages the hiring of non-college educated workers, since insurance premiums make up a higher share of their costs of employment.15 Indeed, Finkelstein et al., (2023) note, the scale of the effect of our employer-sponsored health insurance system on wage inequality is similar in magnitude to the measured effects of the outsourcing of jobs, robot adoption, and the decline in real minimum wage.16
Most health care services in the US are furnished by private firms. Private providers compete to deliver care to publicly and privately funded patients. Likewise, the majority of the public receives their health insurance from a private insurer via a market where insurers compete against one another. Indeed, even in publicly funded programs, like Medicare and Medicaid, more than half of the coverage is provided by private insurers. We rely on pharmaceutical firms to develop and manufacture drugs; we rely on pharmacy benefits managers (PBMs) to help firms and purchasers build formularies; we rely on private firms to distribute the vast array of medical products we consume across the country.
Ultimately, the health of the US health system is a function of the extent to which the underlying health care markets in the US are competitive. This competition disciplines the pricing of private firms and creates incentives for quality.17 Markets are not perfect. Markets can fail and all markets, particularly those for health care goods, insurance, and services, require oversight and external support to maintain competition. This oversight and support must include keeping health care markets from becoming overly concentrated, providing the information that supports market participants (e.g., quality and pricing information), and regulating parts of the market where competition will not produce efficient or equitable outcomes.
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13 Sullivan, Daniel, and
14 Cooper, Zack, et al., "Hospital Prices Grew Substantially Faster than Physician Prices for Hospital-based Care in 2007-14," Health Affairs, 2019, Vol. 38(2), pp. 184-189; Cooper, Zack, et al., "Variation in Health Spending Growth for the Privately Insured From 2007 to 2014," Health Affairs, 2019, Vol. 38(2), pp. 230236; Kluender, Raymond, et al., "Medical Debt in the US, 2009-2020," JAMA, 2021, Vol. 326(3), pp. 250256; Case, Anne, and
15 Finkelstein, Amy, et al., "The Health Wedge and Labor Market Inequality," Brookings, 2023, ("Finkelstein et al., 2023"); Saez, Emmanuel, and Gabriel Zucman, The Triumph of Injustice, 2019; Case and Deaton, 2020.
16 Finkelstein et al., 2023.
17 Gaynor, Martin,
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Markets in the health sector can function efficiently. Evidence clearly illustrates that when hospitals compete, hospitals deliver higher quality care and patients experience reductions in mortality.18 In competitive markets, the hospitals with higher prices have better outcomes and those higher prices tend to be cost effective.19 Similarly, higher quality hospitals tend to grow more over time - a signpost of a functioning market.20 This same logic applies to other sectors of the health system outside of hospitals, like the market for physician services or the market for private insurance.
However, ongoing changes in health care markets over the last two decades should have the warning lights on our dashboard blinking red. The changes occurring in US hospital markets parallel changes occurring in other parts of the US health system.21 From 2000 to the present, there have been well over 1,000 mergers among the nation's approximately 5,000 hospitals.22 Partly as a function of this consolidation, at present, nearly 90% of US metropolitan areas have hospital markets that make them "highly concentrated" according to the 2010
Like hospital markets, insurance markets in the US are also generally regarded as highly concentrated.25 More concentrated health insurance markets have higher premiums, and mergers of insurance companies raise premiums and lower payments to doctors.26 Physician markets, while less easily observed, are also regarded as highly concentrated. Higher concentration in physician markets is also associated with higher prices, and mergers between physician practices have been found to raise prices.27
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18 Cooper, Zack, et al., "Does Hospital Competition Save Lives? Evidence from the English Patient Choice Reforms,"
19 Cooper, Zack, et al., "Do Higher-Price Hospitals Deliver Higher-Quality Care?" NBER Working Paper 29809, 2022 ("Cooper, et al., 2022").
20 Chandra, Amitabh, et al., "Health Care Exceptionalism? Performance and Allocation in the US Health Care Sector," American Economic Review, 2016, Vol. 106(8), pp. 2110-2144 ("Chandra, et al., 2016").
21 Fulton, Brent D., "Health Care Market Concentration Trends in
22 Cooper, Zack, and
23 Fulton, 2017.
24 Gowrisankaran, Gautam,
25 "Competition in
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US health care markets are also evolving in new and distinct ways. There is increasing vertical integration: hospitals are acquiring physician practices, insurers are acquiring physician practices, and insurers are acquiring PBMs. There is a steady increase in private capital flowing into health care markets (ranging from venture capital, to private equity, to publicly traded companies).
Finally, there is the growing ubiquity of health care conglomerates: large firms like
As such, I applaud the Committee for hosting this hearing and its efforts to learn more about what drives consolidation in health care markets, as well as what might be done to keep the US health care markets functioning efficiently.
In this testimony, I will outline the major changes occurring in US health care provider markets. I will also offer some recommendations on ways to address rising concentration and thwart abuses of market power.
Learning from the Challenges and Changes in Hospital Markets
While studying the functioning of the US hospital industry is vital in its own right, understanding the impact of reductions of competition in the hospital industry in the US over the last three decades can provide important insights into the impact of competition and consolidation in the health sector more broadly. An analysis of the US hospital industry highlights how competition can drive quality and illustrates how some mergers can be harmful to patients and wider communities.
The hospital industry accounts for 5.7% of US GDP and 31.1% of health spending.28 When discussing provider market power, it is important to distinguish between payments made to providers by the Medicare and Medicaid programs and payments made by commercial insurance plans offered by for-profit and not-for-profit insurers. At a high level, Medicare pays hospitals using regulated payments implemented by the
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26 Dafny, Leemore,
27 Koch, Thomas, and
28 National Health Expenditure Data,
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During the 2000s, the
Economists are broadly concerned with rising market power across industries.34 However, a literature dating back to the 1960s generated a conventional wisdom that questioned whether competition could function in the hospital sector and posited that non-profit hospitals would behave differently from for-profit actors and not abuse their market power should they have it.
More recently, a growing body of work highlights that competition between hospitals can incentivize quality and generate efficient prices, and that non-profit hospitals often behave similarly to for-profits.35 A key takeaway from this literature: for markets to function, they must not become too highly concentrated, regardless of the tax status of market participants.
As Chandra et al. (2016) note, "a classic 'signpost of competition' in manufacturing industries is that higher productivity producers are allocated greater market share at a point in time and over time."36 In other words, better firms grow more quickly. The authors then assess, via analyzing the Medicare program, whether higher quality hospitals have higher market share and grow more quickly. The authors find that, when using measures of both outcomes (e.g., mortality and readmissions) and process (e.g., adherence to guidelines), higher quality hospitals have greater market share and experience more growth in market share over time. They conclude that "health care may have more in common with 'traditional' sectors subject to market forces than often assumed."
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29
30 Cooper, Zack, et al., "The Price Ain't Right? Hospital Prices and Health Spending on the Privately Insured,"
31 Selden, Thomas M., et al., "The Growing Difference between Public and Private Payment Rates for Inpatient Hospital Care," Health Affairs, 2015, Vol. 34(12), pp. 2147-2150.
32 Chernew, Michael E.,
33 Frakt, Austin B., "How Much Do Hospitals Cost Shift? A Review of the Evidence," Milbank Quarterly, 2011, Vol. 89(1), pp. 90-130; Glied, Sherry, "COVID-19 Overturned the Theory of Medical Cost Shifting by Hospitals,"
34 Berry, Steve,
35 Handel, Ben, and
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In Cooper et al. (2022), my coauthors and I analyze whether higher-priced hospitals deliver higher quality care - a simple test for assessing the extent to which the market for hospital care is functioning.37 We have two notable findings. First, patient death rates are markedly lower at highpriced hospitals. However, this positive correlation between prices and quality is only present in hospitals in unconcentrated markets where there is scope for competition (e.g., markets with a Herfindahl Hirschman Index (HHI) of less than 4,000). By contrast, in more concentrated markets, going to a higher-priced hospital raises health spending markedly with no effect on clinical outcomes. Second, we find that high hospital prices in competitive markets appear to be costeffective given their association with better outcomes.
Several studies find that hospitals facing more competition have better outcomes. Kessler and McClellan (2000) study outcomes for Medicare beneficiaries and observe that patients receiving care from hospitals in the most concentrated (least competitive) markets had mortality rates that are 4.4% higher than patients receiving care at hospitals in less concentrated (more competitive markets)38. Likewise, Cooper et al. (2011) and Gaynor, Moreno-Serra, and Propper (2013) study the effect of a set of reforms in the English National Health Service which gave patients a choice of their provider and forced hospitals to compete.39 This is a setting with regulated price that is quite analogous the markets hospitals face when offering care to Medicare beneficiaries. Both studies find that hospitals exposed to competition after these reforms lowered their mortality rates.
Consolidation in the Hospital Industry
From 1998 to 2017, as the
While some of the mergers that occurred had little or no impact on competition, many of the mergers that happened were between hospitals that were close competitors. My own calculations suggest that approximately 20% of mergers between 2000 and 2020 could be classified by the
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36 Chandra, et al., 2016.
37 Cooper, et al., 2022.
38 Kessler and McClellan, 2000.
39 Cooper, et al., 2011; Gaynor, Moreno-Serra, and Propper, 2013.
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There is now a large body of academic evidence on the impact of hospital mergers which yields four core conclusions.
* First, mergers of hospitals that are geographically proximate and are close substitutes to one another can lead to meaningful price increases.41 The literature shows that it is not uncommon for hospital mergers to generate price increases of 20% or more and, in some cases, they can generate price increases of more than 50%. Recently, two studies have found that mergers of hospitals that are not geographically proximate but share common customers can raise prices by between 10% and 20%. Of note, both non-profit hospitals and for-profit hospitals have been found to raise prices after mergers that lessen competition.42
* Second, the literature suggests that most mergers either have no effect on clinical quality or have led to modest reductions in clinical quality.43
* Third, the literature suggests that mergers of nearby competing hospitals tend not to reduce costs and that if there are cost reductions, it generally is not passed on to consumers.44 By contrast, there is some evidence of 4% to 7% cost savings among mergers involving hospitals that are not competitors (and thus are deals that are less likely to raise prices).45
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40
41 Town, Robert, and
42 Gaynor, Martin,
43 Beaulieu, Nancy D., et al., "Changes in Quality of Care After Hospital Mergers and Acquisitions,"
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* Fourth, consistent with theory, in addition to impacting product markets (e.g., the market for hospital services), mergers can give merging parties more bargaining power over their workers' wages (e.g., it gives hospitals market power in input markets). Here, recent work by Prager and Schmitt found that mergers which resulted in large increases in concentration led to 1.7 percentage points slower wage growth for nurses and pharmacy workers.46
While my testimony is focused on the impact of market power among providers, it is worth noting that similar patterns can be observed in insurance markets. There are two peer-reviewed studies that examine the impact of insurance mergers.47 Both studies found that premiums increased after the mergers in markets where the merging parties had the most overlap before the mergers occurred. One of these studies also found that insurance mergers led to a reduction in the payment rates to providers and, notably, did not find that these savings were passed on to consumers.48
Physician Markets
There are approximately a million physicians in the US.49 The market for physician services has experienced changes over the last two decades that, in many ways, parallel what happened in hospital markets.50 During this period, physician markets have experienced horizontal mergers (e.g., two physician practices merging), vertical integration (e.g., hospitals or insurers buying physician practices), and an expansion in the share of physician practices owned by private equity (PE) firms. From 2010 to 2016, the increase in concentration in physician markets paralleled the rise in concentration among hospital markets.51 At present, approximately 40% of US markets are "highly concentrated" for primary care services. Likewise, over the last decade, the share of physicians employed by hospitals roughly doubled and reached nearly 40%.52
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44 Craig, Stuart,
45 Schmitt, Matt, "Do Hospital Mergers Reduce Costs?"
46 Prager, Elena, and
47 Dafny, Duggan, and Ramanarayanan, 2012; Guardado, Jose,
48 Dafny et al., 2012.
49 "Professionally Active Physicians,"
50 Fulton, 2017.
51 Fulton, 2017.
52 Fulton, 2017.
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While both vertical and horizontal integration of physician practices could, in theory, lead to efficiency gains, the empirical evidence thus far suggests both types of transactions have raised the prices physicians negotiate with insurers and increased health spending on Medicare beneficiaries and the privately insured. For example, recently published work by economists at the
However, we should be vigilant about whether these transactions lessen competition and how they impact risk-adjustment coding, particularly in the Medicare Advantage program.
Addressing Consolidation in the Health Sector
Provider consolidation has adversely impacted the American public, lowered tax revenue, and raised health spending for the publicly and privately insured. There are, however, a number of steps that could be taken to avoid unintentionally incentivizing consolidation, strengthen antitrust enforcement laws and enforcement, promote competition in existing markets, and expand data availability and create a national claims database.
Avoiding Incentivizing Consolidation
Steps could be taken to lessen the incentive for firms to consolidate.
1. Firms might be merging to try to defray high (fixed) administrative costs. Here, for example, duplicative quality reporting requirements across Medicare and private insurers, as well as claims forms that differ across insurers, can raise administrative costs for hospitals.
This in turn might encourage mergers. As the
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53 Kock, Thomas, and
54 Dunn and Shapiro, 2014.
55
56 Scott, Kristin W., et al., "Changes in Hospital-Physician Affiliations in
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2. At present, the Medicare program often pays more for health care services if they are performed at hospital outpatient departments versus in a physician office. As a result, hospitals and physicians can receive higher payments and share the surplus post acquisition if the hospital buys the physician practice (e.g., they vertically integrate).
Academic research and MedPAC have suggested that this lack of site neutral payments encourages vertical integration and raises public and private health spending.59
3. The 340b program provides hospitals with discounted access to infused medications. The program is designed to offset the costs of delivery of these products to certain low-income populations. However, one consequence of the program is that it can allow certain hospitals with a 340b waiver to acquire these products at cheaper prices than certain physician practices. As the
Strengthening Antitrust Enforcement Laws and Enforcement
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57 "Policy Approaches to Reduce What Commercial Insurers Pay for Hospitals' and Physicians' Services,"
58 Cutler 2020.
59 "Aligning Fee-for-Service Payment Rates Across Ambulatory Settings," in Report to the
60 Desai, Sunita, and
61
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1. There is broad agreement from experts that the antitrust enforcement agencies are significantly underfunded, and funding for the
Recent legislation, for example, the Competition and Antitrust Law Enforcement Reform Act of 2021, would introduce large increases to the enforcement agencies' budgets.63
2. At present, the
3. At present, the Hart-Scott-Rodino (HSR) Act exempts deals with relatively small merging parties from reporting those transactions to the
4. The
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62 Gaynor Senate Testimony; Dafny, Leemore, "How Health Care Consolidation is Contributing to Higher Prices and Spending, and Reforms that Could Bolster Antitrust Enforcement and Preserve and
63 "S. 225 - Competition and Antitrust Law Enforcement Reform Act of 2021," Congress.gov, https://www.congress.gov/bill/117th-congress/senate-bill/225
64 "H.R.9510 - Stop Anticompetitive Healthcare Act of 2022", Congress.gov, https://www.congress.gov/bill/117th-congress/house-bill/9510.
65 Wollman, Thomas, "Stealth Consolidation: Evidence from An Amendment to the Hart-Scott-Rodino Act," American Economic Review: Insights, 2018, Vol. 1(1), pp. 77-94.
66 There are detailed suggestions on ways to achieve this in Baer, et al., 2020.
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Both Harvard's Leemore Dafny and
Promoting Competition
1. Certificate of Need (CON) laws are state regulations that, for example, necessitate a regulator's permission for new firms to enter a health care market (e.g., to build a new hospital or outpatient facility), for facilities to purchase new equipment (e.g., MRI scanners), or for facilities to expand (e.g., to add more inpatient or outpatient beds). At present, 35 states and
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67 "Statements of Antitrust Enforcement Policy in Health Care,"
68 Gaynor Senate Testimony; Dafny House Testimony.
69 "Certificate of Need Laws,"
70 Joint Statement of the
71 Gaynor, Ho, and Town, 2015; Mitchell, Matthew, "Do Certificate-of-Need Laws Limit Spending?" Mercatus Working Paper,
72 Cutler, David,
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2. Increasingly, hospital/insurer contracts contain so-called 'all or nothing' provisions, 'antisteering' provisions, and 'anti-tiering' provisions. 'All or nothing' provisions require that insurers include all a health system's sites in their network if they include any one site in their network. 'Anti-tiering' and 'anti-steering' provisions can require that insurers not take steps to increase cost sharing for certain hospitals or actively steer patients away from high-cost facilities. Collectively, these types of provisions can reduce competition and raise prices. States and federal regulators should be mindful of these types of provisions and, where appropriate, strongly discourage their use or seek to take enforcement action against them for limiting competition. Likewise,
Expanding the Availability of Data and Creating a National Claims Database
1. The Hospital Price Transparency Rule and the Transparency in Coverage Rule have increased the availability of provider pricing information in the health sector. At present, however, there are concerns about hospitals' and insurers' compliance with reporting requirements.73 Ultimately, it is vital that hospitals and other providers subject to reporting requirements adhere to the law and publicly post their data. Likewise, the data requirements could be expanded. At present, for example, the insurer data files list the prices each plan negotiates with providers. However, because the reporting requirements do not identify the volume of patients per plan or per procedure, it is extremely difficult to construct an average price per hospital. There are a handful of firms beginning to work with this data who have important insights about the ways that data reporting could be improved so that the data could be used more efficiently by patients, insurers, and providers.
2. At present, there is currently no national all-payer claims database that would allow policymakers, market participants, and researchers to observe utilization and prices for specific services across providers. While some states have created all-payer claims databases, many have not. We need a national claims database that would offer a national perspective on spending, pricing, and utilization across all the major funders of health care services in the US. As health spending in the US approaches 20% of US GDP, a national data set should be considered an infrastructure investment akin to highways and roads that will aid market participants, further research, and help spur delivery innovations.
Again, thank you for the opportunity to testify today.
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73 Kona, Maanasa, and
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Original text here: https://www.finance.senate.gov/imo/media/doc/20230605_sfc_testimony.pdf
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