Death by Monopoly

In the recent GOP presidential debate, the candidates practical fell over each other in their fervor to condemn Obamacare. Critics of Obamacare – including many politicians and healthcare industry executives – argue that America would be better served by a system that relies more on competition and less on regulation.

It's ironic that while health care CEOs and their allies praise competition in theory, in practice they run full speed to get away from competition.The main strategy to avoid competition is mergers and acquisitions. More than 100 deals were completed in the industry last year, a 14 percent increase from 2013, according to the Wall Street research firm Irving Levin Associates. Those mergers have resulted in dramatically increased concentration in the industry, at multiple levels. For instance, hospitals are acquiring other hospitals: San Francisco, for example, is now down to three significant hospital chains. At the same time, hospitals are gobbling up specialty medical practices, and turning previously-independent physicians into employees. In 2000, one in 20 specialists were hospital employees; now the ratio is one in four.

Hospital execs claim that all this consolidation will make hospitals more efficient, leading to lower prices as per the policy aims of Obamacare. But many observers inside and outside the industry are skeptical: "When you already have most or all of the benefits of enormity, I'm not sure becoming even bigger confers more economic benefit," said Michael Bernstein, former president of Wisconsin's Blue Cross and Blue Shield plan, who is now involved in health care private equity.

It's not that more scale provides significant operating efficiencies, though: more scale is primarily if not solely a way to eliminate competition and raise prices, though this is rarely said out loud by the businesses doing the merging. Wharton business school professor Lawton Burns led a study of cost and quality in 15 major health care markets. According to him, the data prove that "providers consolidate to gobble up more of the market, so they can reduce competition and thereby raise prices." A study by the Robert Wood Johnson foundation reached the same conclusion: "Hospital consolidation generally results in higher prices. This is true across geographic markets and different data sources." The study went on to say that "Prices increase 40 percent or more when merging hospitals are closely located."

Sadly, this situation illustrates the difficulty of crafting regulation, particularly for complex and opaque markets. The Affordable Care Act created a lot of pressure on insurance companies and health care to find operating efficiencies and then pass the savings onto consumers.. And in some states like California, where the population is large, and state level regulation is aggressive, cost reductions have been achieved. But in many parts of the countries the providers have begun to consolidate, increase their pricing power, and avoid passing savings on to consumers. If we lived in a world where states made a good faith effort to implement the regulations as passed, and where Congress had the political will to fine-tune the system, the cheating could be detected and stopped. But in the current political climate, that's difficult.

More than money is at stake. New research at Stanford Business School shows that as health care consolidates, quality suffers (through lack of meaningful competition to make providers do their best work). More patients actually die. Stanford professors Nicholas Bloom and Stephan Seiler studied outcomes and costs in a range of U.K. cities which had experienced different amounts of consolidation. The difference was stark: Adding a single rival to a given market improved heart attack survival rates by 10 percent. Seiler explains why: "If you're competing with other hospitals, you actually have to be innovative and use good managerial practices."

This year the Federal Trade Commission will be called upon to approve or block some major health care mergers on anti-trust grounds. If they judge that the mergers will make health care markets less competitive, they can turn down a proposed merger on antitrust grounds. Every year in the U.S. 735,000 people have a heart attack, and 610,000 people die of heart failure. Let's hope the commissioner's hearts are strong and their minds are clear as they consider the stakes.