New ‘black box’ data shows how powerful mergers are in driving U.S. health care costs

Where we live has a huge impact on how much we pay for health care.

That was one theme emphasized this week in a Center for Health Journalism webinar, which explored how hospital consolidation is contributing to rising health care costs. Professors Zack Cooper of Yale University and Martin Gaynor of Carnegie Mellon University shared their groundbreaking analysis of hospital prices and health care spending, and the wide variation it reveals across markets, while Marketplace reporter Dan Gorenstein offered journalists ideas on how to use the new data in their reporting.

Their research looked at insurance claims data for 27.6 percent of individuals with private employer-sponsored insurance between 2007 and 2011 to examine the variation in hospitals’ transaction prices. Their analysis presents the most comprehensive national portrait of health care spending and the variation among and within individual markets, they said.

“What we’ve tried to do is with this paper is crack open that black box,” Cooper said. “… This is something fundamentally different than we’ve ever been able to do before.”

What they found is striking. The variable that matters most when it comes to costs is a hospital’s market power: The more it monopolizes a market, the heftier its price tags for care.  

That’s different from Medicare, the government’s health insurance program for older and disabled Americans, where regions with higher costs typically are correlated with higher use of services. In fact, there’s virtually no correlation between places high in Medicare spending and those high in private insurer spending. Cooper pointed to Grand Junction, Colo., which ranks among the lowest-spending markets nationwide for Medicare spending but is among the most expensive when it comes to private insurance spending.

The most expensive places in the country for the privately insured to get certain procedures such as hip replacements are often surprising – and don’t necessarily correspond with high costs of living.  

“I didn’t expect the Dakotas or Wyoming to be the areas with some of the highest health care prices in the nation,” Cooper said.

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Researchers even found wide variation within large markets, such as Houston, where the most expensive hospital is five times more expensive for a MRI, a standard service, than the city’s cheapest option.

The researchers delved into the reasons for the costs variation, and called what they found “frightening.” While hospitals may claim they’re expensive because of their high quality, their pricing structure, or to make up for Medicare’s payment rates, a hospital’s market power was the most significant factor in explaining price variation.

Those findings have serious policy implications, especially as more and more regions find themselves dominated by a major player, said Gaynor: “In my view, we’re facing a great challenge to our health care system.”

There have been 1,200 mergers in the health care industry since 1994, and 457 alone from 2010-2014. It’s not just health care either — consolidation is a trend that’s becoming more and more prevalent throughout the U.S. economy, from entertainment to software.

While some hype the advantages of consolidation, bigger isn’t necessarily better, Gaynor said. Consolidation doesn’t necessarily mean integration. While there’s some evidence of improved quality, it’s far from a guarantee. Change is also more difficult within larger, more cumbersome organizations. And dominant players have the ability to say “take it or leave it” in communities where alternative hospitals might not exist.

“You have a less dynamic, innovative marketplace,” he said. “In my view, we’re facing a great challenge to our health care system.”

As a result, the country is going to need new, more vigorous policies to encourage competition between hospitals. If those attempts fail, the United States will be left with a more expensive, less responsive system dominated by a few giants, Gaynor said.

Transparency in pricing will be essential in encouraging more competition, according to Gaynor. He suggested a national data warehouse so that consumers and policy makers alike have good information about health care costs – and can act on it. (Cooper also envisions an app where consumers can easily compare costs for procedures within their area).

Gaynor also discussed other policy responses, from antitrust enforcement to policies that make it easier for new players to enter a market. There’s mixed evidence on hospital price regulation, he said, and politically it’d be tough to expand such policies beyond Maryland. But under the right circumstances, it’s a viable alternative, he said.

Dan Gorenstein, senior reporter for Marketplace’s Health Desk, emphasized the importance of this new research for journalists and suggested ways to turn the fresh data into a compelling story. Reporters need to help people understand how market consolidation affects the prices they pay — and that can be a tough task that requires journalists to connect the dots and show how abstract mergers result in concrete price changes in their premiums or next MRI, for example.

“Everyone is concerned with what they’re paying for their insurance premiums,” Gorenstein said. “When premiums go up, that’s a good time to dig in and say: ‘Why are premiums going up? How much does this have to do with consolidation?’”

Those answers can be best told through real-life examples: “Make the story come alive,” he told journalists.

Reporters can delve into the hospital landscape in their state or region and see if consolidation has increased pricing there. They should also be aware of the hospital’s role as a large employer in so many communities, Gorenstein said, calling it a “fascinating tension which I strongly urge you to explore.”

Putting that information out there can spark change, the panelists said, whether it’s on the health care policy side, or simply by making an otherwise unwitting consumer realize that traveling 10 miles for his health care could save thousands of dollars.

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Watch and listen to the full webinar here: