The Affordable Care Act’s Rate Hikes

Health insurers around the nation are now submitting their premium rates to the government for inclusion in the online exchanges during the 2016 open enrollment period. Unsurprisingly, the rates are increasing significantly over 2015.

And why is that not surprising? The answer to that question might be found in a pair of other news stories that appeared in the press this past week. After Walgreens announced its intention to purchase Rite Aid, news spread of Pfizer’s ongoing negotiation to purchase Allergan.

In a sense, the first news story reflects a trend that is explained by the second news story. After all, pharmacies like Walgreens and Rite Aid purchase the drugs that are manufactured by firms like Pfizer and Allergan. As the manufacturers of any product category merge into more dominant sellers, customers will inevitably merge to keep pace and maintain their own market power.

Likewise, hospitals are now merging into health systems to more effectively transact with the physicians who are merging into provider networks. And as the federal government continues to promote the aggregation of Accountable Care Organizations, these hospital-based systems are increasingly seeking to become larger in order to negotiate more forcefully for both physician services and insurer contracts.

In fact, at every level of the health care industry, mergers and acquisitions are progressively eliminating competition by creating dominant monopolies and oligopolies. It’s the natural evolution of a health care market that is regulated by government officials who don’t seem to be overly concerned about enforcing anti-trust law.

So what happens when such consolidation occurs? Free from any level of competition that might constrain price hikes, the surviving health care organizations pass along rate increases more easily to their customers. Thus, commercial pharmacies charge health insurers more for their products, while health networks charge them more for their services.

And then health insurers pass along these higher costs to consumers on the Affordable Care Act (ACA) exchanges, and to government programs and private employers as well. Politicians then blame the ACA for the rate hikes, and vow to eliminate the law’s regulatory functions over the health care system.

Of course, the prices hikes that have sparked the ire of those politicians are largely attributable to the failure of the regulators to enforce anti-trust law to begin with. If the politicians succeed at abolishing the ACA, insurers will be free to increase their rates even more quickly. And if they fail, then the current trend of industry consolidation will nevertheless enable them to continue increasing rates, albeit more slowly.

In other words, whether or not we agree on the wisdom of passing the ACA into law, we should be able to concur that market competition in the health care sector (or in any other industry sector, for that matter) helps keep prices affordable for consumers.

But if competition in the health care sector continues to be eliminated through mergers and acquisitions, it won’t really matter whether the ACA remains in place. Health care will simply, and inevitably, become unaffordable for all of us.

Domino Theory And The Health Care Industry

Have you ever heard of a concept known as domino theory? It was once cited by U.S. Presidents Eisenhower, Kennedy, and Johnson to justify America’s catastrophic military intervention in Vietnam.

The presidents argued that, if the South Vietnamese government was overthrown by communist forces, all of the other nations in Southeast Asia would fall to the communists in sequence like a row of dominoes. Eventually, of course, South Vietnam was indeed overrun by the communist military forces of North Vietnam. But no other nation in Southeast Asia ever followed suit.

In other situations, though, the domino effect has indeed generated a cascading series of events. When the United States government failed to save Lehman Brothers in late 2008, for instance, many political commentators warned that the failure of the Wall Street firm would trigger a domino effect that would lead to global economic collapse. Indeed, firms like AIG, Fannie Mae, General Motors, and Merrill Lynch disintegrated soon afterwards.

The domino effect appears to be impacting today’s health care industry as well. Over the past few decades, many cities have witnessed the consolidation of multiple hospitals into one or two dominant institutions, and then the absorption of physician groups and outpatient providers into hospital based “health systems.” The federal government has encouraged such activities by recognizing Accountable Care Organizations and other legal entities that require closer ties between provider units.

By and large, though, the health insurance sector has remained in a somewhat fragmented state. Some insurers have focused on certain types of insurance contracts, such as Humana and its Medicare plans. And others have operated within certain geographic areas, such as Kaiser Permanente in the western United States.

Last week, however, Aetna announced the acquisition of Humana in a multi-billion dollar deal, following Anthem Blue Cross Blue Shield’s offer to acquire Cigna last month. Why are these insurers suddenly taking an interest in acquiring their rivals?

Their interest can be attributed to the domino effect. When hospitals and other health providers consolidated into a small number of dominant organizations, they developed a significant negotiation advantage over the health insurers that sign payor contracts with them. The insurers are now deciding that they need to grow too, in order to neutralize their size disadvantage.

Of course, had the federal government maintained a rigorous antitrust policy, it might have prevented the consolidation of the provider market. But for many years, in industries ranging from health care to airline travel, the federal government has permitted many mergers and acquisitions that eliminate free market competition.

So it now appears that the health care industry is evolving towards a structure that will feature a small oligopoly of insurers across the nation and a small oligopoly (or monopoly) of providers in each regional market. The entire industry will be regulated under the Affordable Care Act and other federal and state laws.

This emerging structure shifts the American health care industry further and further away from the ideal principle of a free market capitalist economy with many competitors vying for business volume. Nevertheless, because so many dominoes have already fallen in this direction, it may be far too late to reverse course and adopt any other viable industry structure.

Big Apple Hospitals: Too Big To Fail?

New York City is a pretty big town. It thus supports more service organizations than any other American city to cater to all of its residents.

No other American city, for instance, is covered by four major daily newspapers: the Times, News, Post, and Wall Street Journal. Not to mention Long Island’s Newsday and Newark’s Star Ledger!

And no other city supports nine professional sports teams, three in the National Hockey League alone. In addition to the fledgling professional teams in the Women’s NBA and Major League Soccer, along with minor league baseball teams in Brooklyn and Staten Island.

Of course, not every resident of the Big Apple reads a newspaper or roots for a sports team, and yet each should be concerned about maintaining his (her) health. So how many major hospital networks does the Big Apple need to serve its citizens?

From Hospitals to Health Systems

Hospitals are no longer simply destinations for people who become seriously ill or who require emergency treatment. They now reside at the heart of health systems, and they are focusing on the delivery and management of preventive care services.

In addition, many health systems are now growing into full-fledged Accountable Care Organizations (ACOs), entities that are responsible for managing all care for both mainstream consumers and patients with special needs. They are incorporating Patient Centered Medical Homes into their service networks, which serve as points of access for coordinating care and navigating the provider system.

Supporters of Libertarians like Ron Paul, and even traditional conservatives like Steve Forbes, might believe that these emerging entities were introduced by the Patient Protection and Affordable Care Act of 2009. In reality, though, they were already established by 2009, and few doubt that they will continue to expand whether or not the Act survives its Supreme Court hearing and the upcoming Presidential election.

The Columbus Comparison

So how many health systems does the nation’s largest city need? How many does it require to serve a bustling population of over eight million people, many of them elderly, obese, or with other severe medical conditions?

Let’s address that question with a comparative example. Nationwide Children’s Hospital of Columbus, Ohio, for instance, has established the nation’s largest pediatric ACO in a city of less than 1 million citizens. If Nationwide can succeed in a city like Columbus, then one would surmise that New York could easily support at least half a dozen major hospital systems.

In fact, considering the stunning diversity of the citizens of the Big Apple, far more than half a dozen systems may be both sustainable and appropriate. It now appears, though, that New York is well on its way to consolidating down to a mere three hospital networks.

The Drive to Consolidate

There is no single statistic that measures the size of a hospital network. A service oriented facility may provide many primary care services to uninsured patients but receive very little revenue for its efforts, whereas a cardiology or neurology unit in a teaching and research institution may earn significant revenues from relatively few surgeries.

Last week, though, two of the “largest” (as measured by any statistic) New York health systems signed an agreement to pursue a merger. New York University’s Landone Medical Center and Continuum Health Partners, itself a result of a merger between Beth Israel Medical Center and St. Luke’s Roosevelt, were the signatories.

A merger between the two entities would allow it to join New York Presbyterian Hospital and the New York City Health and Hospitals Corporation as the three major hospital networks in the city. If that occurs, The Mt. Sinai Hospital and a handful of other remaining independent players would then experience immense pressure to merge into the troika of dominant networks.

Banks vs. Hospitals

In an era when a small number of financial service institutions has generated an immense amount of systemic risk for our society by becoming “too big to fail,” can we afford to allow a small number of health care institutions to do the same? Are the financial and health care industry sectors analogous to each other in terms of the level of risk that industry consolidation imposes on us?

Let’s assume, for the sake of argument, that the hospitals of New York City consolidate eventually into three equally sized networks. If one of the networks should fail, could the government refuse to offer it a financial bail-out? The only alternative would be to rely upon the two remaining networks to immediately expand by 50% in order to serve the failed institution’s patients, an achievement that would likely prove impossible.

On the one hand, the economic forces that are driving hospitals to consolidate with each other may indeed be inexorable. But on the other hand, they are undoubtedly generating a daunting array of social and economic risks that deserve our immediate attention.