Boosting competition among hospitals, health systems will improve health care

The United States depends on competition to maintain a robust health care system. Health care markets with vibrant competition offer services at lower cost, provide more appropriate care, and, most important, deliver better patient outcomes than do less-competitive markets. Unfortunately, in many places in the U.S., health care markets are not very competitive and, even more worrisome, are becoming less so over time. There are ways to fix that, but they aren’t always obvious.

The Affordable Care Act sparked a flurry of new entrants into the health insurance marketplace when it was enacted in 2010. Since then, however, 19 states are back to having only a small number of insurers in their individual health insurance markets, as was the case before the ACA. A reduction in competition has also occurred in hospital markets. By 2016, roughly 90 percent of metropolitan hospital markets had very low levels of competition; the situation is even worse in rural regions. That means these markets lack an essential tool — competition — for aligning health care quality and costs.

Analysts have urged policymakers at the state and federal levels to address these market concentration problems using the standard tools of competition policy: more rigorous enforcement of antitrust laws and reducing barriers to entry. Yet as we wrote recently in the journal Health Affairs, these conventional tools often don’t achieve much. The forces that limit competition in many provider and insurer markets can’t be overcome through antitrust enforcement. Changes in the technology of medicine, as well as the underlying geography of health care, have limited the opportunities for markets to support enough competitors.

Consider hospitals. Most people have a strong preference for using a hospital near their homes, meaning that hospital markets are largely local. Forty years ago, many regions were able to support several competing local hospitals. But over the past 40 years, hospital use has declined substantially. Hospital stays have become shorter and the number of admissions has fallen, even as the population has grown. In consequence, the total number of days Americans spent in hospitals in 2013 was nearly one-third lower than it was in 1975.

In a growing number of communities across the country, there just isn’t enough demand to sustain multiple competing community hospitals. Making matters worse, community hospitals must compete with large tertiary academic medical centers, which also face declines in demand, as well as with free-standing clinics.

Large medical centers seek out routine cases — the kind that can be effectively treated in community hospitals, usually at lower cost — and demand that insurers pay high rates for this care in exchange for access to complex, must-have services that only these hospitals can provide.

At the same time, free-standing clinics, which have lower operating costs than community hospitals, siphon away from community hospitals less-complicated but often higher-profit cases that can be treated on an outpatient basis.

For many community hospitals, the only viable choices are to integrate into a system with an academic medical center, merge with a competing hospital, or close. All three diminish local hospital competition.

The decline of community hospitals has had repercussions for insurance markets. Insurers today compete mainly by building networks of providers that are attractive to consumers. In markets with few hospital choices, insurers have difficulty developing these networks or negotiating better rates from hospitals.

Some experts see these declines in competition as a call to move to a fully regulated system, where all prices are established by the government and competition doesn’t play a role. But rejecting competition could be throwing the baby out with the bathwater and foregoing the real benefits to consumers of greater provider choices.

We believe that health policymakers should consider expanding the arsenal of regulatory tools they use to promote competition. Our research suggests that tools developed to address analogous problems in a broad range of industries — from utilities and railroads to news services and diagnostic software — might work in the health care sector. For example, one approach to the problem of tertiary care hospitals squelching competition in their local community hospital markets might draw from the “essential facilities doctrine,” in which a monopolist controls an essential facility. Under this approach, a hospital could be required to provide all insurers access to selected high-complexity services at regulated prices while the hospital could not, in turn, require that insurers then contract with it for less complex services.

Another approach, already in use in the Medicare durable equipment program, would have insurers compete to win the rights to provide coverage in a given area for a specified length of time, rather than competing within the market. Local residents wouldn’t have a selection of insurers to choose from at a point in time — only one insurer would offer coverage in the market — but when contracts were periodically re-bid, how well insurers performed, in terms of price and quality, would determine which insurer would win the next coverage contract.

Conventionally competitive markets may not be feasible in many local areas and in many components of health care. Where they are feasible, approaches that mix regulation and competition may help improve them. Such approaches are complex. They cannot generate all of the gains that are possible in a well-functioning, competitive market and they can have unintended consequences.

Yet appropriately designed regulatory policy can help maintain options that provide real value to consumers.

Sherry A. Glied, Ph.D., is dean of the Robert F. Wagner Graduate School of Public Service at New York University. Stuart H. Altman, Ph.D., is professor of national health policy at the Heller School for Social Policy and Management at Brandeis University. They report no conflicts of interest or financial disclosures.