A rarely considered component of America’s healthcare cost crisis is the persistence of demonstrably false theories undergirding its health policy. No Federal or state antitrust theory is more demonstrably false than the notion that hospital monopolies inevitably lead to higher prices.
The Department of Justice and the Federal Trade Commission use the Herfindahl-Hirschman Index (HHI) to measure market concentration.
“The agencies generally consider markets in which the HHI is between 1,000 and 1,800 points to be moderately concentrated, and consider markets in which the HHI is in excess of 1,800 points to be highly concentrated. See U.S. Department of Justice & FTC, Merger Guidelines § 2.1 (2023). Transactions that increase the HHI by more than 100 points in highly concentrated markets are presumed likely to enhance market power under the Horizontal Merger Guidelines issued by the Department of Justice and the Federal Trade Commission. See id.”1
Based on that definition, many suppositions have been published about how hospital monopolies lead to higher prices, and almost all are wrong.
Of course, the phrase "generally consider" is a rather nebulous construct, and the word “presumed” does a lot of work in that paragraph. According to Merriam-Webster, “presume” is a transitive verb with these meanings:
"1. To undertake without leave or clear justification
2. to expect or assume especially with confidence
3. to suppose to be true without proof
4. to take for granted”2
So, said differently, based on an increase of 100 in the HHI index for a market, the Federal government “supposes to be true without proof” that the level of competition in that market is materially impacted. Conclusions without factual support are even worse than presumptions, which makes it even more troubling that HHI is deemed to be relevant, much less determinative, in measuring competition in hospital markets.
The truth will set you free, even if it comes out a little at a time, in the words of Miranda Lambert’s song “White Liar.” The truth about HHI as a measure of market pricing power in healthcare is this: there is no meaningful correlation or relationship between a hospital’s HHI index and negotiated rates.
We first demonstrated this in our 2023 Trends Shaping the Health Economy Report.
Because of the enduring power of the lie in regulatory, policy and academic circles, we decided to use health plan price transparency data published in accordance with CMS’s Transparency in Coverage initiative to demonstrate the truth.
The first series of graphs compare the HHI index of 1,757 hospitals with the negotiated rate each hospital receives from UHC Choice Plus for a select group of high volume medical DRGs.
As we have previously written, the correct response to anyone who utters the phrase “percent of Medicare” is “whose base rate?” Because Medicare base rates vary widely due to differences in each hospital’s Medicare wage index, teaching status, etc., it is interesting to analyze a hospital’s commercially negotiated rate as a percentage of its Medicare base rate. As reimbursement experts know, the difference in the Medicare wage index alone is more than 2X between Lauderdale County, AL and Alameda County, CA.
To account for the difference in Medicare base rates among hospitals, the second series of graphs compare the HHI index for 1,399 hospitals with the UHC Choice Plus negotiated rate converted into a percentage of the calculated Medicare base rate for each hospital.
These correlation analyses confirm that that anyone claiming that hospital monopolies inevitably lead to higher prices is, at best, naive. The persistent perpetuation of this falsehood by a select few stakeholders invites questions about either their intelligence or motive.
A related fallacy, which we have repeatedly disproven, is that “monopoly” status is inevitably profitable. Once, again, for emphasis:
This analysis seems to confirm Peter Drucker’s observation that hospitals are “the most complex human organization ever devised,” owing to the high capital costs, labor costs and regulatory burden of operating a facility that is required to treat anyone walking through the door 24/7.3 While commercially negotiated rates are a component of a hospital’s financial success, a myriad of other factors – market demographics, governance, medical staff quality, etc. – are equally or more important.
With that in mind, it is interesting to analyze the five “monopoly” hospitals that appear to be flexing their “market power” in the correlation analyses above. Each is a tax-exempt hospital with fewer than 8,000 annual admissions, and four of the hospitals have a commercial payer mix of less than 45%, which is less than 32% for three hospitals. The Medicaid payer mix is more than 20% for four hospitals and more than 25% for three of them. The CBSA in which each hospital is located has a population older than the U.S. average and a per capita income level below the U.S. average, while the poverty level in four markets exceeds the U.S. average. The reality of this “monopoly pricing power” is that those commercial rates are essential to keeping at least three of those hospitals from closing.
The fact that so many U.S. health policy shibboleths are deeply flawed or demonstrably false – like the Affordable Care Act (the ACA) and value-based care and narrow networks and monopoly pricing power – is damning because the flaws are so obvious to anyone who thinks critically. Many falsehoods persist because, at a cursory level, they seem logical, while others are often a feature, not a bug. In the words of Upton Sinclair, “it is difficult to get a man to understand something, when his salary depends on his not understanding it.”
I have written recently – and frequently – about the perils of the ACA’s codifying cost-plus insurance on the Marketplace Exchange and the crucial difference between value-based care as a lucrative business strategy but a fatuous health policy.
As to narrow networks, one only needs a vague familiarity with the concept of a bell curve to understand that there is a statistical limit on the number of “narrow networks” that can be “high value.” In turn, the differential value of a “high-value network” on a per member per month basis is inversely correlated with the network’s capacity – logically, 90% of the population cannot access a top decile “high-value network.” As a result, if every payer and provider offers a “narrow network,” then no one does, as the core deliverable is restricted access, not quality or value. Moreover, anyone who has ever worked in healthcare services knows that there is a measurable difference in quality in a practice with two physicians, much less a market with multiple health systems offering the same service lines.
As to the health economy’s pricing characteristics, stakeholders ascribe entirely too much value to the assertion in RAND’s Prices Paid to Hospitals by Private Health Plans report that the “[p]rices paid to hospitals during 2022 by employers and private insurers for both inpatient and outpatient services averaged 254 percent of what Medicare would have paid,” while overlooking RAND’s observation that there is “wide variation in prices among states.”4 Anyone who understands that the average American is 5’6” and has one testicle might question the value of the “254% of Medicare” assertion. More importantly, an expert who carefully reviewed RAND’s methodology might call into question numerous aspects of the report.
No one who knows anything about the hospital industry would measure “each hospital’s market share by measuring each hospital’s share of beds relative to the total number of beds in a metropolitan statistical area,” and many would be skeptical of measuring quality by using “CMS’s overall hospital star ratings from Hospital Compare.”5 Yet, the RAND report is treated as gospel in many health policy circles, while the “percent of Medicare” heuristic has a cultic hold on stakeholders who are either unaware of or uninterested in the fact that Americans pay actual, not relative, prices for healthcare services.
An unbiased but thoughtful observer of America’s flawed health policies might wonder whether health economy stakeholders, like Lieutenant Kaffee, “can’t handle the truth” or instead, like Fleetwood Mac, want to believe “sweet little lies.” A more cynical observer might wonder what motives lie beneath the enduring power of the obvious lies that undergird, and thereby undermine, U.S. health policy.
Unlike Colonel Jessup, I have the time and the inclination to expose the truth about the flawed policies that threaten the U.S. healthcare system as we know it. What I see recalls this famous dialogue from Ernest Hemingway’s “The Sun Also Rises”:
“How did you go bankrupt?” Bill asked.
“Two ways,” Mike said. “Gradually and then suddenly.”6
Does your salary depend upon not understanding – and then acting upon - what is true about the U.S. healthcare system?