Opinion | Hospitals Are a Problem. Competition Is the Answer.

Some things in health care are not so complicated. One rudimentary principle of economics applies in health care markets, as anywhere: When there’s less competition, prices are higher. This has been especially true for America’s hospitals, the largest driver of the increasing cost of health care.

Hospital systems have experienced rapid consolidation over the past three decades. An abundance of research examining hospital acquisitions and mergers over that period reveals some basic truths. When nearby hospitals merge, prices go up; cities with fewer competing hospitals exhibit higher prices; and even hospitals acquired by distant health systems increase prices more than unacquired, stand-alone hospitals. In fact, most of America’s unsustainable health care costs are driven by hospital care, and most of that price inflation over the past decades has been due to hospital mergers.

Perhaps for this reason, there is a newfound fervor in Washington to use antitrust laws more aggressively in the health care sector. Enforcement enthusiasts are both atop the Federal Trade Commission and the Department of Justice, and both agencies have taken steps to target concentrated health care markets. Among Health and Human Services Secretary Xavier Becerra’s accomplishments as California’s attorney general — and one of the reasons he was tapped for the job — was a landmark antitrust suit against a major hospital system. House and Senate committees in the last Congress held hearings that featured critics of hospital mergers and mega-mergers, and President Biden issued a sweeping executive order on “Promoting Competition in the American Economy,” which highlighted the hospital sector as one in which consolidation has been especially costly.

This has been a long time coming. Antitrust policymakers failed to halt the rapid consolidation of hospital markets in part because many judges and health policy leaders used to believe, falsely, that hospital consolidation led to efficiencies and better care delivery, and it took years of painstaking academic research to arrive at this updated understanding of the market. Although hospital systems continue to consolidate, policymakers are now armed with better analytical techniques and a wealth of evidence that can be used to stop the most egregiously anticompetitive mergers.

But if we’ve started succeeding in preventing further consolidation in hospital markets, we have invested far less thought into developing meaningfully competitive and innovative markets. It is folly to think that antitrust policy should solely consist of stopping bad things like additional hospital mergers. We also need to use the antitrust laws to usher in the benefits of genuine competition.

As the U.S. emerges from the pandemic, the timing for a renewed push to increase competition is ideal. The 20^th century model of health care delivery, in which patients get in-person care at designated brick-and-mortar facilities from licensed professionals, is reaching a turning point. Telemedicine, at-home care, and other delivery innovations — many of which achieved prominence when the pandemic struck — are offering new alternatives to hospitals, and data analytics are informing insurers how to better manage patients with chronic illness. Together, these innovations might forge a transformation away from a hospital-centric delivery system and towards an age of digital medicine.

But hospital monopolies, like all monopolies, harm markets not only by charging prices. They also impede innovation, and today’s hospital monopolies are working hard to endanger the arrival of this new age of medicine.

They are doing this through a variety of well-tested techniques. One is using their dominance to impose “all-or-nothing” contracts, which require insurers to pay for all of a hospital system’s services or drop out of the market altogether. This strategy prevents insurers from contracting with select providers — creating so-called “narrow networks” — that can direct patients to higher-value providers and stimulate competition between rival facilities. Hospital monopolists bundle their services together, which forces patients to pay for a system’s costly services if they want to rely on their critical services; for example, in order to have access to the only trauma center in town, patients must also commit to the hospital system’s oncologists and cardiologists, practices that would be vulnerable to competition from other providers and telemedicine companies. And hospital monopolists work to squeeze out small, nimble providers that might offer lower-cost alternatives to the multi-specialty giants; and if they fail to drive them out, they purchase them.

None of this is casual. Dominant hospitals are well aware of the threats that innovations pose to their business model. They know the health care market of the future puts less primacy on inpatient care and more on virtual care. They know that health care services are provided at higher quality and lower costs at facilities that do not suffer from the overhead and governance burdens of costly multispecialty centers. And they know that telemedicine and hospitals-at-home companies pose existential threats to their dominance.

Innovation in the health sector, though sorely needed, is unlikely to emerge without effective antitrust enforcement. But thus far, antitrust approaches in the health sector have remained stale, in part because competition law in the health sector has only expressed opposition to consolidation. It hasn’t yet said what it is for.

Better antitrust policy to combat hospital dominance means understanding the dysfunction of the current market and the benefits of certain innovations. It is not a blanket hostility to size or mergers but instead a targeted attention to where specific structural changes would bring transformational benefits.

If these insights into innovation were to guide our competition policy in the health sector, we would focus on activities that have not yet attracted the attention they deserve. Here are three of them.

Protect Independent Physicians

Policymakers should pay renewed attention to physicians as a competitive threat to hospital dominance.

Hospitals have been acquiring physician practices at a rapid rate, a trend that accelerated since the Covid pandemic, and nearly three-quarters of America’s physicians are now employed by hospitals or corporate entities. Current antitrust policy considers hospital acquisitions of physician practices as “vertical” mergers that are largely innocuous because they do not increase the concentration in either hospital or physician markets. But mounting evidence has shown that these acquisitions lead to higher costs, probably because many of these transactions are better described as mergers of substitutes rather than compliments.

In other words, many outpatient clinics offer similar services as those offered in hospitals, so when hospitals acquire physician practices, they eliminate competition. Worse, outpatient care is less costly than similar services offered inside hospitals, and medical advances continually expand what can be done in outpatient settings. The loss of the independent physician practice means the loss of the often better and almost always less expensive alternative.

The dynamic consequences of these acquisitions — the harm to innovation — are probably even more costly. Controlling physicians means controlling referrals, and hospitals rely on referrals for their most lucrative services. Reciprocally, the biggest threat to hospital dominance is if physicians direct their patients elsewhere, and the current market now offers real alternatives to traditional hospital care: specialty providers, regional providers with telemedicine follow-ups, hospital-at-home care and even physician practices that expand into secondary care. Moreover, many of these new practice models are built atop digital analytics, virtual technologies and innovative financing that have the potential to produce new care models that might upend hospital monopolies altogether.

Perhaps what is most frightening to hospitals is that many of these innovations are designed to promote population health such that people are kept out of the hospital, i.e., they are intended to drastically reduce our need for hospitals altogether. So, when hospitals acquire the source of these potential innovations, they don’t merely enshrine their monopoly position, they also engineer a future in which we continue our dependence on them.

Encourage New Business Models

Antitrust policy should help new business models for both hospitals and insurers. Too frequently, dominant hospitals and insurers work to foreclose the market to newcomers.

Conventional wisdom suggests that dominant insurers and dominant hospital systems would be at loggerheads over the price of medical services. In fact, these large entities often collude with each other to keep out other competitors. By promising each other that they won’t give smaller entities more favorable terms — these arrangements are commonly called most-favored-nation, or “MFN” contracts — giant payers and giant providers secure each other’s dominance. (This collusion-among-giants was discovered and challenged in Massachusetts and Michigan, but quiet cooperation between dominant payers and providers is widespread.)

Many large insurers pursue similar strategies with insurance brokers, demanding that they market their products either exclusively or on favorable terms. (An important case involving this conduct recently took place in Florida.) These efforts prevent new insurers and upstart providers, those most likely to introduce news business strategies and care models, from gaining traction in the marketplace. Victims of this market “foreclosure” usually are innovators: insurers with new price transparency features, physician-led ambulatory surgical centers that offer specialty care, and behavioral health providers that use new virtual technologies. Low-cost and high-value “centers of excellence,” which encourage patients to travel to destinations with specialized experts, also are harmed.

Antitrust laws can challenge this conduct as well. Although merger policy has been the primary antitrust instrument in the health sector, antitrust laws also prohibit monopolistic conduct that forecloses competition. The antitrust laws do not outlaw monopolies per se — and many rural regions cannot sustain more than one provider — but they do constrain a monopolist from leveraging its power to impede entry. Antitrust policy needs to recognize the potential of new business models, especially those that direct resources away from traditional hospital care, and preempt efforts to foreclose the market to them.

Protect Digital Startups

Finally, and related to both strategies above, antitrust enforcers must prevent the industry giants from consuming the world of digital startups. Perhaps today’s top competition policy concern is that Google, Facebook, and other dominant platforms have hijacked the entirety of Silicon Valley’s startups, such that few products reach the market without being purchased by one of the internet goliaths. The same is taking place in the health sector, as health care startups developing new diagnostics, therapies and delivery models are being purchased by market leaders.

It is hard to overstate the long-term harm this causes. When dominant hospitals purchase innovative in-home care companies, they remove their greatest threat. When insurance giants purchase start-ups with innovative digital analytics, care management
platforms, or virtual capabilities, they extend the viability of their 20^th century business model. These purchases are executed under the theory that the giants are adopting new technologies and are engineering change. The truth is that the opposite is happening: Change is halted, and the prevailing delivery model persists. They are the health sector’s version of catch-and-kill.

Current antitrust laws can help this smothering of innovation, but it won’t be easy. These acquisitions are products of voluntary agreements, and many start-up companies — including a recent rash of primary care practices — focus their efforts and garner investments precisely so they can be acquired by either a large insurer or health system. Industry leaders in pharmaceuticals and electronic health records are also frequent purchasers of start-ups.

The difficulty for antitrust law is to distinguish between socially beneficial acquisitions, such as those in which the start-up’s technologies are used fruitfully by the purchasing giants, from those that erase potential competition and sustain market power. This difficulty is not unique to the health sector, nor is it an easy one to navigate, but typical responses are either to allow or disallow all such acquisitions. The better approach is to scrutinize the underlying technologies and the potential they offer. Perhaps, in these particular questions, the complexity of health care should be addressed head-on.

The potential that antitrust policy can play in the health sector is illustrated by what might be the field’s crowning achievement in the modern era: the case against Microsoft in the 1990s. Contrary to the popular narrative, that case was not about stopping Microsoft from carving out a monopoly for Internet Explorer, its web browser. Instead, DOJ recognized that Microsoft was trying to prolong the centrality of its monopoly in desktop computing, and that its illegal maneuvers were aimed at preventing the emergence of new alternatives to Microsoft’s operating system. Those alternatives, once they were permitted to enter the marketplace, unleashed the world of internet-based platforms, mobile devices and a new generation of digital services.

The case was a victory for antitrust law because policymakers understood that Microsoft was inflicting harm far beyond the monopoly prices it charged. The real danger came from Microsoft’s efforts to impede transformational innovations. The suit wasn’t merely designed to beat back Microsoft’s economic power; it was to prevent Microsoft from asserting its control over a particular platform and to allow market innovators to usher in a new era of computing. In other words, the best way to stem the market power of Microsoft was to encourage the emergence of Google.

Like Microsoft, today’s hospital monopolies are the platforms that provide access to assorted medical services, and they are acting to prevent the growth and onset of physician practices, telemedicine companies, and other nimble and innovative providers that offer the path to new delivery paradigms. Antitrust policy needs to recognize not just the harm from hospital monopolies but the potential from new delivery innovations. Like policymakers demanding changes from Microsoft, today’s leaders must pursue an antitrust agenda that can facilitate a more affordable, more effective delivery system.

Today’s exuberance for antitrust enforcement is to be applauded, but antitrust is at its best when it is for something, not just against something, when it is visionary and not merely reactionary. Health care antitrust policy should be driven not by a generic aversion to concentration but by a careful understanding of how health care markets can work in this new digital era. The more policymakers know about where the market can go, the more effective and transformative antitrust policy will be.

Health care antitrust must be about more than combatting traditional mergers and instead should commit itself to nurturing a dynamic market, one that encourages entry, creativity, and innovation. The lessons of the Microsoft case tell us that if we can stop the monopolists from halting innovation, we will soon be able to usher in a new market paradigm, one that promises to increase competition and — finally — slow our spiraling health care costs.