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HHI Fallacy

The Fallacy of Using Herfindahl-Hirschman Index to Understand Markets -Part III – The Fallacy of Using Inpatient Care as a Proxy for Market Competition

As noted in an earlier post, the Federal government’s reliance on a measure of market share for acute care services as a proxy for overall healthcare market share is, at best, anachronistic. 

Inpatient hospital admissions continue to decline from their peak in 2008, representing fewer than 34M of the more than 1.6B healthcare episodes in 2021.1 2 Additionally, hospital revenues have represented less than 50% of total healthcare services revenues since 2016.3 For the Federal government to assess the competition for healthcare services in a market based on fewer than 6,000 providers which deliver less than 12% of the overall volume of all U.S. healthcare services and generate less than 50% of the revenues of those services has the benefit of simplicity, if nothing else. 

More importantly, hospitals are required – by government regulators – to provide services that other providers are not required to render. Hospitals are required to be open 24/7/365, unlike a physician's office or ambulatory surgery center, or physical therapy clinic, and hospitals must treat emergent patients without regard to the patient’s ability to pay.4,5 Moreover, government regulators prohibit certain services from being performed in any setting other than an acute care setting, most notably the “Inpatient Only” list.6 And, of course, there are many services, like trauma and burn and complicated deliveries, for which a hospital is a necessity. 

The result? Hospitals are deemed by certain regulators as being monopolistic for having 100% of the market share of certain services that no other provider is able or even allowed to render, many of which hospitals provide at a loss due to inadequate government reimbursement. Simultaneously, hospitals are prohibited to consummate mergers and acquisitions to address oversupply of many of those same services that result from declining demand. 

A more logical approach from government regulators would be to analyze competition for inpatient hospital services - the supply of which is, by government regulation, limited and the profitability of which is, because of government reimbursement, illusory - separate and distinct from competition for ambulatory services, the supply of which is abundant and the competition for which is fierce, particularly in states without certificate of need statutes.  

Instead of using a simplistic and random approach to calculating market share of a handful of providers as a proxy for the entire market, a more logical approach would be to analyze the supply of specialized services in a market in the context of the underlying demand for those select services. Instead of a myopic focus on potential price increases, America would be better served by a focus on the myriad benefits from wholesale elimination of completely duplicative services in a market. Despite glib and grim predictions of lower quality from market consolidation, logic suggests that market consolidation might reduce physician and nurse shortages in those markets, resulting in better quality and more efficient care. 

[1] https://www.aha.org/statistics/fast-facts-us-hospitals

[2] Trilliant Health all-payer claims database

[3] https://www.healthleadersmedia.com/sites/hlmp/files/files/Moodys%20-%20Not-for-profit-and-for-profit-hospitals-US%20-%2015Mar22%20%28002%29.pdf

[4] https://www.cms.gov/medicare/provider-enrollment-and-certification/surveycertificationgeninfo/downloads/scletter07-19.pdf

[5] https://www.cms.gov/Regulations-and-Guidance/Legislation/EMTALA

[6] https://www.cms.gov/newsroom/fact-sheets/cy-2022-medicare-hospital-outpatient-prospective-payment-system-and-ambulatory-surgical-center-0

 

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