How the Lockdowns Will Drive Up Healthcare Costs
The covid-19 lockdowns have done untold amounts of economic damage, most of which has yet to reveal itself. Permanent unemployment for millions, countless bankruptcies, rent defaults and much more will jar the economy for the foreseeable future.
But one other consequence that is receiving virtually no attention is how the lockdowns will cause healthcare to become even more unaffordable.
According to this July 31 article by Pew Trusts, “The pandemic has wreaked havoc on all levels of medicine, not least of which are primary care doctors,” and “few have come close to full recovery.”
Because of lockdown orders and fears of being overrun by covid patients, hospitals and physician practices for months severely cut back on noncovid procedures, which cratered providers’ bottom lines.
The crisis has pushed many primary care practitioners “to the brink,” according to the Pew article, “threatening them with insolvency.”
The only alternative to closing up shop facing many private practices is to join a larger hospital network. Such a shift would serve to further consolidate healthcare providers, “which health policy experts generally agree would reduce patient access and drive up costs,” according to the Pew article.
Healthcare Consolidation Has Been Accelerating in Recent Years
Should further consolidation of medical care providers occur, it will continue a trend that has been rapidly increasing over the past several years.
According to this February 2019 RevCycle Intelligence article, “Hospital acquisitions of physician practices continues to be a strong trend in the healthcare space.” The article specifically noted that “hospitals acquired approximately 8,000 physician practices between July 2016 and July 2018. That number is on top of the 5,000 hospital acquisitions of physician practices from July 2015 to July 2016.”
Indeed, hospital acquisition of private practices has more than doubled from 2012 to 2018 according to the article: “the number of physicians employed by hospitals or health systems increased by more than 70 percent, growing from 94,700 employed physicians in mid-2012 to 168,800 employed physicians by the start of 2018.”
What are some of the impacts of this rising consolidation?
“Hospital acquisition of physician practices has been shown to increase prices and funnel more care through hospitals,” wrote Alex Kacik in a February article in Modern Healthcare. “Physician consolidation has caused about an 8% increase in fees on average over the past 20 years and substantially higher increases in concentrated markets.”
As Martin Gaynor, professor of economics and health policy at Carnegie Mellon, said in the article, “The evidence shows that when physician practices are acquired by hospitals, three things happen: Prices go up after the acquisition, total spending goes up and referral patterns change. All those are causes for concern.”
Research has revealed just how dramatic the cost increases can be. One study from 2017 showed that cancer costs were 60 percent higher when patients underwent chemotherapy at a hospital-based center as compared to an independent one, according to this RevCycle Intelligence article.
Also, a 2016 US News and World Report article highlighted a study “analyzing 25 metropolitan areas with the highest rate of hospital consolidation between 2010 and 2013. The analysis revealed that in the years following mergers, the average price of hospital stays in most areas increased between 11% and 54%.”
Causes of Consolidation, and How Obamacare Made It Worse
Why the trend toward consolidation?
“Merging with a hospital enables physicians to shoulder the financial burden of running a practice in a time when reimbursement rates are falling and providers are under increased pressure to decrease their costs,” noted Jacqueline LaPointe in the February 2019 RevCycle Intelligence article.
With regard to falling reimbursement rates, government programs Medicaid and Medicare are largely to blame. To contain rising costs and strain on government budgets, legislators have steadily frozen and cut reimbursement rates to providers caring for enrollees in these programs.
According to a 2015 report by the Federal Reserve Bank of Minneapolis, “With rising enrollments, the federal government has attempted to control expenditures by tightening the allowable costs that providers can claim for reimbursement—so much so that the operating margin (payments minus cost) for the average Medicare and Medicaid patient has been in the red for a decade and a half.”
In response to suffering financial losses for a growing share of patients, “providers have increased what they charge a shrinking base of patients with private insurance.”
Many independent practices, however, don’t have the negotiating power to demand higher reimbursement rates from massive insurance providers. The report cites an Accenture report that “attributed much of the decline of independent physicians to reimbursement pressures.”
Skyrocketing compliance costs is also a key factor, and Obamacare has played no small role in their dramatic rise.
The Federal Reserve report quotes a member of the Montana Medical Association who “said ‘exploding’ regulatory compliance costs stemming from the Affordable Care Act and other government regulation have ‘significantly driven the vertical integration…forcing doctors out of private practice.’”
A major driver of these costs, according to the report, is the federal mandate for electronic health records (EHR), expensive systems used to track medical histories and provide access for authorized users. To insure “interoperability” among providers, the Federal Reserve report notes, “EHR requires entirely new information technology systems, and hardware and software costs can quickly run into the millions—often with additional zeroes.”
“It’s an expensive ordeal, and there is no reimbursement for that,” said Jerry Jurena, president of the North Dakota Hospital Association.
“And expense aside, few small providers have the technical know-how to properly manage such systems,” the report added.
The bureaucratic red tape is crushing. “Health care organizations are required to gather truckloads of data on patients, fill out binders of paperwork and jump through other operational hoops to be reimbursed and to meet patient safety and other requirements,” according to the Federal Reserve report. “A 2014 survey of about 20,000 doctors by the Physicians Foundation found that doctors spend 20 percent of their time on nonclinical paperwork, and that doesn’t consider the compliance efforts of other workers.”
Expensive EHR mandates weren’t the only aspect of Obamacare putting pressure on healthcare providers to further consolidate.
Indeed, consolidation was one of the intended outcomes of the 2009 act. “Obamacare's architects thought hospital consolidation would streamline care, improve the quality of medical services, and generate savings for patients,” noted this 2019 Forbes article. “Obamacare encouraged consolidation by incentivizing providers to coordinate care and adjusting Medicare payments to make mergers a smarter financial option.”
As a 2016 US News and World Report article pointed out, “No part of health care was supposed to be spared – doctors, hospitals, insurers, pharmaceutical companies and others were given regulatory and financial incentives to merge.” The designers of Obamacare, according to the article, “were convinced that consolidation in health care would lead to decreased health care spending by eliminating duplication, standardizing treatment protocols and incentivizing better utilization.”
Looking back more than a decade later, we see clearly that they miscalculated.
How Consolidation Makes Healthcare More Expensive
Students of markets should readily understand why current consolidation would drive up healthcare costs. The current trends are not market-based outcomes, but orchestrated by government interventions.
Increasing red tape and administrative mandates drive up costs. Medicaid and Medicare freeze or reduce reimbursement rates, forcing providers to compensate via higher reimbursements from private pay patients. This prompts smaller private practices to seek large networks that can both provide economies of scale with the rising compliance costs and can leverage their near-regional monopoly to negotiate those higher reimbursements from insurance providers.
The Federal Reserve report sums it up nicely:
Consolidation helps providers on both ends: It offers centralized expertise in dealing with regulation and paperwork associated with Medicare and Medicaid reimbursements, as well as federal regulation in general, making these patients comparatively less expensive. In the private-payer market, consolidation also expands networks and limits competition, helping to maintain pricing leverage with health insurance companies and the employer plans they sponsor, which have much higher profit margins.
The result is fewer choices for patients, less competition, and a bloated army of administrators required to keep up with government regulations. A perfect recipe for higher healthcare costs.
The trend of healthcare consolidation is not a new development, but it will undoubtedly be worsened by the covid-19 lockdowns. The resulting rise in healthcare costs will be especially burdensome on a devastated economy likely facing a prolonged struggle back to recovery.
Chalk this up as yet another victim of the lockdowns that no one is talking about.