[Senate Hearing 117-786]
[From the U.S. Government Publishing Office]
S. Hrg. 117-786
ANTITRUST APPLIED: HOSPITAL
CONSOLIDATION CONCERNS AND SOLUTIONS
=======================================================================
HEARING
before the
SUBCOMMITTEE ON COMPETITION POLICY,
ANTITRUST AND CONSUMER RIGHTS
OF THE
COMMITTEE ON THE JUDICIARY
UNITED STATES SENATE
ONE HUNDRED SEVENTEENTH CONGRESS
FIRST SESSION
__________
MAY 19, 2021
__________
Serial No. J-117-19
__________
Printed for the use of the Committee on the Judiciary
[GRAPHIC NOT AVAILABLE IN TIFF FORMAT]
www.judiciary.senate.gov
www.govinfo.gov
______
U.S. GOVERNMENT PUBLISHING OFFICE
54-246 WASHINGTON : 2026
COMMITTEE ON THE JUDICIARY
RICHARD J. DURBIN, Illinois, Chair
PATRICK J. LEAHY, Vermont CHARLES E. GRASSLEY, Iowa, Ranking
DIANNE FEINSTEIN, California Member
SHELDON WHITEHOUSE, Rhode Island LINDSEY O. GRAHAM, South Carolina
AMY KLOBUCHAR, Minnesota JOHN CORNYN, Texas
CHRISTOPHER A. COONS, Delaware MICHAEL S. LEE, Utah
RICHARD BLUMENTHAL, Connecticut TED CRUZ, Texas
MAZIE K. HIRONO, Hawaii BEN SASSE, Nebraska
CORY A. BOOKER, New Jersey JOSH HAWLEY, Missouri
ALEX PADILLA, California TOM COTTON, Arkansas
JON OSSOFF, Georgia JOHN KENNEDY, Louisiana
THOM TILLIS, North Carolina
MARSHA BLACKBURN, Tennessee
Joseph Zogby, Chief Counsel and Staff Director
Kolan L. Davis, Republican Chief Counsel and Staff Director
SUBCOMMITTEE ON COMPETITION POLICY,
ANTITRUST AND CONSUMER RIGHTS
AMY KLOBUCHAR, Minnesota, Chair
PATRICK J. LEAHY, Vermont MICHAEL S. LEE, Utah, Ranking
RICHARD BLUMENTHAL, Connecticut Member
CORY A. BOOKER, New Jersey JOSH HAWLEY, Missouri
JON OSSOFF, Georgia TOM COTTON, Arkansas
THOM TILLIS, North Carolina
MARSHA BLACKBURN, Tennessee
Ajay Kundaria, Democratic Staff Director
Wendy Baig, Republican Staff Director
C O N T E N T S
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OPENING STATEMENTS
Page
Klobuchar, Hon. Amy.............................................. 1
Lee, Hon. Michael S.............................................. 3
WITNESSES
Cannon, Michael.................................................. 9
Prepared statement........................................... 36
Questions submitted with no response returned................ 103
Gaynor, Professor Martin......................................... 5
Prepared statement........................................... 62
Responses to written questions............................... 105
Hochman, Rodney.................................................. 11
Prepared statement........................................... 42
Responses to written questions............................... 112
McCracken, Beth.................................................. 7
Questions submitted with no response returned................ 104
Miller, Brian.................................................... 15
Prepared statement........................................... 50
Responses to written questions............................... 121
Qadeer, Ahmer.................................................... 13
Prepared statement........................................... 98
Responses to written questions............................... 129
APPENDIX
Items submitted for the record................................... 35
ANTITRUST APPLIED: HOSPITAL
CONSOLIDATION CONCERNS AND SOLUTIONS
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WEDNESDAY, MAY 19, 2021
United States Senate.
Subcommittee on Competition Policy, Antitrust,
and Consumer Rights,
Committee on the Judiciary,
Washington, DC.
The Committee met, pursuant to notice, at 2:34 p.m., in
Room 226, Dirksen Senate Office Building, Hon. Amy Klobuchar,
Chair of the Subcommittee, presiding.
Present: Senators Klobuchar [presiding], Blumenthal, Lee,
Hawley, Blackburn, and Grassley.
Also present: Senators Durbin and Grassley.
OPENING STATEMENT OF HON. AMY KLOBUCHAR,
A U.S. SENATOR FROM THE STATE OF MINNESOTA
Chair Klobuchar. All right. Thank you very much for being
here for this important hearing. I thank Senator Lee,
especially, and his staff, for helping us to plan and spearhead
this hearing. Today we're going to be focusing--and I also
thank Senator Durbin, the Chairman, for being here already. It
couldn't be a more important and timely topic. Today we're
going to focus on the impact of hospital consolidation on
patients' healthcare costs, healthcare workers, and healthcare
innovation.
All Americans deserve access to quality, affordable
healthcare, and we know there is a lot of work to make that a
reality. We can lower cost to consumers by addressing
skyrocketing prescription drug prices. To bring down those
prices, I have introduced bipartisan legislation to expand
access to cost-saving generic drugs, deter pharmaceutical
companies--it's a bill that Senator Grassley and I have--from
blocking cheaper generic alternatives, and I know Senator Lee
has actually done work on this as well with the CREATES Act.
Also allowing personal importation of more affordable drugs
from Canada. I believe we also should allow Medicare to
negotiate for the best possible price for prescription drugs.
Healthcare is a personal matter for everyone, and that's
why we need to look at hospital competition and consolidation.
Hospitals are a growing area of cost in our healthcare system.
It's about $1 of every $3 we spend on healthcare in this
country. The expenditures for hospitals hit $1.2 trillion in
2019, and that figure is growing fast, up by more than 6
percent compared to the year before. We can't address a
challenge of healthcare costs in this country without also
including hospitals in the conversation. That's why we're here
today.
The rise in concentration in the American economy goes
across industries, from cat food to caskets, and hospitals are
no exception. We have had about 1,600 hospital mergers in this
country in the last 20 years. Ninety percent of all
metropolitan areas have highly concentrated hospital markets.
We've also seen hospitals buying physician practices at a fast
pace, and now about one-third of all doctors work for a
hospital. Many hospitals actually charge more for doctor
services when they can say they own the doctors' practices.
That results, of course, in higher cost.
Hospital mergers can reduce choices for patients about
where to receive the care as emerging hospitals align with one
powerful insurer or another. That can suddenly leave those who
have developed meaningful relationships with their doctors to
fend for themselves. When someone is sick, one of the last
things they want to hear is that their hospital has been bought
and they no longer have access to the doctors they trust who
have been treating them for years.
These are real human costs, and we need to talk about how
they relate to hospital consolidation and market power.
Especially if you have more and more doctors working for the
hospitals, you could see that happening more easily.
I am particularly grateful to have Beth McCracken with us
as a witness today. Beth is a cancer patient from Pennsylvania
who lost access to her doctors in the aftermath of a turf
dispute involving a hospital acquisition causing her and her
family incredible stress during a difficult time and quite
possibly delaying her diagnosis until her cancer had
progressed. Beth, we look forward to hearing from you remotely,
and thank you for being with us today and giving patients a
voice in this important conversation.
Financial costs are important as well, but it is the human
cost that I feel particularly strongly about--that with the
antitrust and competition policy problems associated with
hospital mergers. We know there can be advantages to hospitals
merging, like the possibility of reducing overhead cost. The
research does show, however, that hospital mergers can result
in higher prices.
A 2018 study found that hospital prices are 12 percent
higher in monopoly markets compared to those with four or more
competing hospitals. Mergers of hospitals in the same market
raised prices by an average of 6 percent. Hospital mergers can
also reduce incentives to innovate in the way that they deliver
care as Dr. Miller will explain in his testimony.
Hospital systems are major employers in many communities.
Sometimes they are the largest employer. The Bureau of Labor
Statistics estimates that over 5 million Americans work in
hospitals. We must also consider the effects of hospital
consolidation on healthcare workers. A recent economic study
found that for the mergers that increased hospital
concentration the most, wages for nursing and pharmacy workers
were 6.8 percent lower than they would have been absent the
merger.
As in other markets, consolidation can drive a vicious
cycle. Insurers merge, resulting in bargaining power against
hospitals. That pressures the hospitals to merge too so they
can combat the power of insurers. It repeats and repeats. A
vicious cycle. It's a cycle of consolidation, and we see it
throughout the economy as one side tries to accumulate power
through mergers only to be thwarted by the response of its
trading partners to merge as well. In any case, we must make
sure, first of all, that our Federal agencies have the
resources to investigate these types of cases.
I'm very pleased, and I want to thank Senator Durbin that
the bill Senator Grassley and I have, to change the merger fee
structure, passed on a voice vote out of the Senate Judiciary
Committee just last week. It will give our agencies, the
Department of Justice to Antitrust, as well as FTC, additional
resources that they need while taking on Facebook and Google,
the biggest companies the world has ever known, trillion and
trillion dollar companies, that can't then also look at
important topics like healthcare consolidation or online travel
or pharmaceuticals or so many other areas.
We also need to reform our antitrust laws. When mergers are
anticompetitive, they must be stopped. That's why I have
proposed legislation to reform merger law and make it easier to
stop anticompetitive merger before their effects hurt consumers
in the form of higher costs or lower quality care. We also have
to be able to look backward. We can do that now. That's what
the breakup of AT&T was about. However, we can make it easier
to look backward by giving our agencies the tools they need to
do it. That's also part of my bill that is industry wide.
We now are going to explore these issues in the hearing. I
want to thank our witnesses, but first I'd like to turn it over
to Senator Lee for his opening remarks. Senator Lee.
OPENING STATEMENT OF HON. MICHAEL S. LEE,
A U.S. SENATOR FROM THE STATE OF UTAH
Senator Lee. Thank you, Madam Chair. Today's discussion is
really important. While there are certainly differing views on
how these things play out and drastically different views on
the state of competition in hospital markets, there are a
couple of observations that I think are more or less
universally shared. First, recent decades have witnessed a
massive number of hospital mergers, and second, that almost
every hospital market is now moderately to highly concentrated.
Concentration doesn't always lead to higher prices and
lower quality, but it can and it frequently has in hospital
markets. Multiple studies have identified case after case of
direct competitors merging, and then after merging, raising
prices for patients and for insurers, many times with no
accompanying improvement in quality of care or in patient
outcomes.
The same dynamic often plays out when a hospital buys a
physician group, another practice that has become increasingly
common. Vertical integration is ordinarily expected to result
in some efficiencies and quality improvements that can benefit
consumers, but when hospitals buy physician practices, we often
simply see price increases.
For students of basic economics much of this is
unsurprising, but it is compounded by the particularly
vulnerable position in which most consumers in these markets
often find themselves. There are patients facing life-
threatening injuries and illnesses. For some of them, their
course of treatment will reshape their health and finances,
sometimes for the rest of their lives and amidst these
challenges, we absurdly expect them to behave as rational
consumers, comparing the options in the market, that is, when
they're fortunate enough to have any options, and then
attempting to make life or death decisions, sometimes with
minimal information. For all these reasons, it's absolutely
crucial that policymakers understand how we can improve
competition in hospital markets.
Antitrust enforcement is one obvious and certainly
important tool. Consumers rely heavily on State and Federal
competition authorities to protect hospital markets from
anticompetitive mergers and anticompetitive conduct, but
antitrust enforcement is only a remedial tool.
How can we address the drive to consolidate in the first
place? Those of us in Congress need not look terribly far in
order to provide some answers to that question. You know, we--
we understand that the largest drivers of hospital
consolidation often come from Government interventions in
healthcare, including many interventions cooked up within these
very halls.
At times, Medicare reimbursement rules make the same
medical service more profitable for hospital-owned physician
practices than for independent physicians, incentivizing
hospitals to acquire physician practices and for the physicians
themselves to sell out. Stark Laws and related CMS rules,
limiting physician self-referrals intended to prevent
overutilization and to prevent excessive billing, have also
pushed hospitals and physician practices in many, many
instances to merge.
Then, let's not forget Obamacare. The very premise behind
accountable care organizations is the notion that bigger is
better, that vertical integration will allow healthcare
providers to achieve better coordination of care for patients.
Yet we've gotten--what we've obtained, what we've actually seen
as an outcome, often has been the additional consolidation and
higher prices without corresponding improvements to quality.
Obamacare also functionally banned the creation or expansion of
physician-owned practices--or of physician-owned hospitals
rather--depriving hospital markets of competition from
physicians attempting to improve the care that they offer and
also to lower prices.
Things are not necessarily better at the State level.
Occupational licensing, something that I've been passionate
about for years, continues to harm competition. When market
incumbents collude to exclude new competition, under the
pretense of State action, everyone loses. I hope Congress can
fix the problem by passing the Restoring Board Immunity Act.
In addition, Certificate of Need laws in many States
prevent the entry of new hospital competitors or expansion of
existing facilities. In some States, permission to open a new
hospital is subject to approval by market incumbents themselves
and this kind of dynamic produces predictable results,
predictable results that are not good and that do not favor the
consumer, but rather favor, quite predictably, market
incumbents.
The theme here is perverse and it's disheartening.
Government steps in to restructure the healthcare market,
pushing market participants to consolidate in the process, and
then shows up to punish them for trying to consolidate. It's
bad for patients, it's bad for providers, and it's bad for
hospitals. It also means just as higher healthcare costs are
passed on to insurers and employers and then ripple across the
rest of the economy, that antitrust enforcement resources
dedicated to these problems aren't available to address
competition concerns throughout the rest of the economy.
Again, to make this perfectly clear, Congress is
appropriating taxpayer money for antitrust enforcement, that is
then being syphoned off to fix competition problems of
Congress's own making. This is something we've got to grapple
with. We can't ignore this problem. I hope today's hearing will
help to shed light on these problems so that Congress,
patients, providers, regulators, and antitrust enforcers alike
can all work together to improve competition in hospital
markets. I look forward to hearing from each of our witnesses
on how best to accomplish that shared goal. Thank you, Madam
Chair.
Chair Klobuchar. Very good. I'm going to introduce the
witnesses and then swear them in. We begin with Martin Gaynor.
He is an economics professor at Carnegie Mellon University,
former Director of the Bureau of Economics at the FTC. His
research focuses on competition and incentives in healthcare
and on antitrust policy. He's also a founder of the Healthcare
Cost Initiative, an independent, nonpartisan nonprofit devoted
to advancing knowledge about U.S. healthcare spending.
Ms. Beth McCracken is a patient who lives in Pittsburgh,
Pennsylvania, and she will testify about her experiences when
hospitals and insurers limited access to her doctors.
Michael Cannon, director of health policy studies at the
Cato Institute. Previously, he served as a domestic policy
analyst for the U.S. Senate Republican Policy Committee. He is
a member of the Board of Advisors at Harvard Health Policy
Review.
Mr. Rodney Hochman is the president and CEO of Providence
St. Joseph Health, a company with 51 hospitals and nearly 1,000
clinics in Alaska, California, Montana, New Mexico, Oregon,
Texas, and Washington. He's also chair of the American Hospital
Association.
Ahmer Qadeer is the director of strategic initiatives for
the Service Employees International Union.
Mr. Brian Miller is an internist and health policy expert
and an assistant professor at the Johns Hopkins School of
Medicine. He previously served as a special advisor to the
FTC's Office of Policy Planning, assisting in merger review and
enforcement in the healthcare center--sector.
If you could stand, including our witnesses remotely.
[Witnesses are sworn in.]
Chair Klobuchar. Thank you. All right. Why don't we get
started? We'll first start with Dr. Martin Gaynor.
STATEMENT OF PROFESSOR MARTIN GAYNOR,
E.J. BARONE UNIVERSITY PROFESSOR
OF ECONOMICS AND PUBLIC POLICY, CARNEGIE
MELLON UNIVERSITY, PITTSBURGH, PENNSYLVANIA
Professor Gaynor. Thank you. Chair Klobuchar, Ranking
Member Lee, and Members of the Subcommittee, thank you for
holding a hearing on this vitally important topic and for
giving me the opportunity to testify in front of you today.
I'm an economist who has been studying the healthcare
sector, and specifically healthcare markets and competition,
for nearly 40 years. I'm a professor of economics and public
policy at the Heinz College of Public Policy at Carnegie Mellon
University. I served as the Director of the Bureau of Economics
at the Federal Trade Commission during 2013, 2014, during which
time I was involved in the many healthcare matters that came
before the commission.
Over the next few minutes, I will briefly summarize for the
Committee the basic facts about healthcare markets, the
considerable research evidence on competition in healthcare,
and my views on steps that can be taken to help make these
markets work for the benefit of consumers.
Healthcare is a very large and very important sector of our
economy. Not only is the healthcare sector nearly one-fifth of
the economy and larger than the entire economy of France, but
it has a critical impact on our health and well-being.
Hospitals are the largest part of the sector and at over $1
trillion one of the largest industries in the entire U.S.
economy.
Our healthcare system is based on markets, so the system
will work only as well as these markets that underpin it.
Unfortunately, these markets do not function as well as they
could or should. Prices are high and rising. There are
egregious pricing practices, quality is suboptimal, and the
sector is sluggish and unresponsive in contrast to the
innovation and dynamism which characterize much of the rest of
our economy. Lack of competition has a lot to do with these
problems.
There's been a great deal of consolidation in healthcare.
There have been nearly 1,600 hospital mergers over the past 20
years. The result is a majority of local areas are now
dominated by one large, powerful health system, for example
Partners in Boston, UPMC in Pittsburgh, and Sutter in the San
Francisco Bay Area. Moreover, there have been tens of thousands
of physician practice acquisitions by hospitals, resulting in
over one-third of physicians now working in hospital-owned
practices.
This massive consolidation in healthcare has not delivered
for Americans. It has not given us better care or enhanced
efficiency. It has not given us greater responsiveness or
better service. On the contrary, extensive research evidence
shows that consolidation between close competitors results in
higher prices and patient quality of care suffers from lack of
competition, including a substantially increased risk of death.
Hospital mergers can also harm competition in labor
markets. This can depress wages, distort hiring decisions, and
harm incentives for investment in human capital. Recent
evidence shows impacts of hospital mergers that are consistent
with these concerns. There are also concerns about
anticompetitive conduct. Firms who have acquired market power
want to keep it, since dominant health systems use restrictive
contracts with insurers to try to hamper the free flow of
patients to competitors, thereby harming competition and
enhancing their market power.
There are also extensive reports of health systems engaging
in data blocking, impeding the flow of patient information
providers outside the system. This has the potential to harm
competition by making it more difficult for patients to switch
providers. That most hospital markets are dominated by one
large health system, there is considerable potential for this
kind of conduct to seriously harming competition. All of this
is causing serious harm to patients and to the healthcare
system as a whole.
Policies are needed to support and promote competition in
healthcare markets. These include ending or reforming policies
that unintentionally incentivize consolidation, ending or
reforming policies that hamper new competitors and impede
competition, focusing and strengthening antitrust enforcement.
In particular, give the DOJ and FTC the resources they need so
they can not only do more enforcement in existing areas, but
can proactively invest to address new and developing issues.
Kudos for passing a bill that does exactly that.
In addition, permit the FTC to enforce against
anticompetitive conduct by not-for-profits, require simple
reporting of small transactions that fall below the Hart-Scott-
Rodino reporting requirements, so that the enforcement agencies
can track physician practice mergers and hospital acquisitions
of physician practices. Adopt legislation to strengthen
antitrust enforcement as, for example, in the Competition and
Antitrust Law Enforcement Reform Act of 2021, introduced by
Senator Klobuchar.
Have the FTC and DOJ issue revised guidelines for antitrust
enforcement in healthcare. The guidelines were last issued in
1996. A lot has changed since that time and a refreshed and
revived set of healthcare guidelines will provide important
guidance to market participants and courts.
Last, establish a national healthcare data base; that's
comprehensive publicly available data on U.S. healthcare
spending, utilization, prices, and ownership. This is a
critical investment in our national infrastructure that will
make vitally important information available to businesses,
Government, and citizens. Thank you.
[The prepared statement of Professor Gaynor appears as a
submission for the record.]
Chair Klobuchar. Thank you very much and right on time.
Next up we have Beth McCracken, patient. Beth.
STATEMENT OF BETH McCRACKEN,
PATIENT, PITTSBURGH, PENNSYLVANIA
Ms. McCracken. Giving me the opportunity to share this--my
story. In western Pennsylvania we have two major health
insurance companies, Highmark and UPMC. In the 1990s, a decade
before Obamacare, UPMC began buying hospitals and doctors'
practices in the region, creating an integrated system whereby
they were both the insurer and the provider. Among the
hospitals they acquired were the Eye & Ear Hospital of
Pittsburgh and the Hillman Cancer Center.
By 2012, UPMC owned tax-exempt real estate in Allegheny
County worth $1.6 billion. As a public charity, it avoided
paying $42 million in property taxes to municipalities, schools
in the county. This nontaxpaying nonprofit, built on taxpayer
dollars, made over a billion dollars in 2020.
In 2013, Highmark bought a troubled hospital system and
created an integrated system known as the Allegheny Health
Network. UPMC took umbrage at Highmark stepping into their
territory and declared that Highmark subscribers could no
longer utilize UPMC providers and facilities. Because UPMC had
been at the game longer, they controlled the vast majority of
specialized services in the Pittsburgh area. Thousands of
patients were on the brink of losing access to their
physicians.
The Pennsylvania legislature intervened and negotiated a
consent decree whereby patients who were under treatment as of
June 2014 could continue to see their doctors for a period of 5
years. The consent decree was set to expire on June 30th, 2019,
at which time all crisscross system services would cease.
In 2013, I began experiencing severe pain in the left side
of my face and extending into my left ear. I was diagnosed with
trigeminal neuralgia and referred to UPMC Neurosurgery
Associates. Two brain surgeries, multiple procedures and
medications did not stop the pain. The neurosurgeon wanted me
to see--wanted to refer me to UPMC Eye & Ear Institute;
however, I have Highmark Insurance through my wife's employer,
and I was barred from access to any additional UPMC providers.
Over the next 2 years I saw five in-network ENTs, all of
whom told me that the nerve condition was causing the pain.
Then in early 2018, my dermatologist discovered evidence of
cancer in my ear. I had been misdiagnosed all along.
With the cancer diagnosis I fell into an exception in the
consent decree, and I was again referred to Eye & Ear
Institute, but because of the insurance issues I requested to
stay in-network. I had surgery in July 2018, but by that time
the cancer had spread too far for that surgeon's expertise. He
couldn't even identify what type of cancer it was. At this
point I was told I had to see the experts at Eye & Ear.
In December 2018, they identified a rare cancer and in
early 2019 I underwent a 14-hour operation followed by 6 weeks
of radiation at the Hillman Cancer Center. The pain was finally
gone, but so was one of my ears. I could not help but believe
that had I had access to the doctors at Eye & Ear sooner, I
might actually still have them both. It took 6 years for me to
find a team of doctors who were able to help me, only to face
the reality that I would soon lose them when the UPMC Highmark
decree was set to expire. This included my team at Hillman
Cancer Center. I was told that my only option was the Cleveland
Clinic, which was a 2-hour drive from Pittsburgh. The idea of
being cutoff from my doctors was terrifying.
Patients, local leaders, and advocates banded together
demanding that UPMC negotiate with Highmark to guarantee access
to the providers and services that were in patients' best
interest. Highmark was willing to negotiate, but UPMC refused.
With Attorney General Josh Shapiro's involvement at the 11th
hour an agreement was reached, and a 10-year contract was
signed. That agreement finally allowed me to quit fighting for
my healthcare and to begin caring for my health.
These integrated systems are spreading across the country.
In the future you may find yourself back in the private sector,
subject to whatever insurance is available to you. The lack of
access to care because of the insurance card you carry can
literally be a matter of life and death. Giant nonprofits could
not be permitted to care more about their profit share than
they do about patient care.
Finally, a PET scan in October 2019 revealed that the
cancer had metastasized to my lungs. With this cancer, if
metastasis occurs, it typically occurs 5 to 10 years after the
initial diagnosis. Mine occurred within the same year. I
believe that the delays described allowed that to happen.
As I stated previously, denial of access to the proper care
can literally be a matter of life and death. I have always said
that this is not just about me. It's about the thousands like
me. If my legacy can be that I helped even one person avoid
that happening to--what happened to me, then I can be proud
that I did something important and significant in my lifetime.
Thank you very much.
[The prepared statement of Ms. McCracken appears as a
submission for the record.]
Chair Klobuchar. Thank you very much, Beth, for speaking
out. Next up, Michael Cannon, who's the director of health
policy studies at the Cato Institute.
STATEMENT OF MICHAEL CANNON, DIRECTOR OF HEALTH
POLICY STUDIES, CATO INSTITUTE, WASHINGTON, DC
Mr. Cannon. Thank you very much, Chair Klobuchar, Ranking
Member Lee, Members of the Subcommittee and the broader
Committee for inviting me to testify today.
The U.S. health sector is not serving consumers as it
should or could. Excessive, often unconscionable, prices
threaten to wipe out savings of even insured Americans. Low
quality care costs lives and eludes quality improvement
efforts, and inefficient provider consolidation is an important
contributor to both these deficiencies. The economics
literature finds that most consolidation among hospitals,
physicians, and insurance companies increases prices and/or
reduces quality.
Inefficient consolidation, however, is not merely a driver
of high prices and lower quality, it is also a symptom of a
greater problem. By and large, inefficient consolidation is the
result of Government interventions that disable the normal
market mechanisms of entry, cost consciousness, and competition
from doing what they do in other sectors of the economy,
improving quality while reducing prices. Simply put, Government
does not need new powers to combat hospital consolidation.
Government merely needs to stop encouraging consolidation. Many
Government interventions often produce unintended consequences.
Among other effects, they create incentives for the type of
consolidation that gives producers the ability to charge higher
prices than they could in competitive markets.
I want to briefly discuss three categories of Government
intervention into the health sector that encourage inefficient
provider consolidation: Government regulation, Government
encouragement of excessive insurance, and Government purchasing
of medical care.
First, government regulation. Complying with Government
regulations generally imposes high fixed costs but low marginal
costs, which encourages consolidation. Many healthcare-specific
regulations create specific incentives to consolidate. These--
this category of regulations includes the Affordable Care Act's
minimum loss ratio regulations and so-called State Certificate
of Need laws which require new entrants into the market to
obtain permission from the Government before they can compete.
The second category is Government encouragement of
excessive insurance. There are various Government policies that
encourage consolidation by encouraging more comprehensive
health insurance than consumers would choose on their own.
These include both the tax exclusion for employer-sponsored
health insurance and laws that require consumers to purchase
minimum levels of coverage. ``Insurance reduces price
competition,'' the economist Kenneth Arrow wrote, ``by removing
the incentive on the part of individuals, patients and
physicians to shop around for better prices for hospitalization
and surgical care.'' Encouraging consumers to purchase more
coverage than they would prefer means that we pay for more
medical care through health insurance. That reduces the number
of buyers in the healthcare market and encourages producers to
consolidate.
Finally, number three, Government purchasing of medical
care. This third category, in Government purchasing of medical
care, results in pricing errors. The Medicare program, when it
purchases medical care, it sets the prices that the program is
going to pay for medical goods and services. Medicare,
inevitably, gets those prices wrong. Senator Klobuchar referred
to one way that Medicare gets those prices wrong when she
mentioned that she supports having Medicare negotiate with
pharmaceutical manufacturers in order to reduce the prices that
Medicare pays. This is a tacit admission that Medicare
overpays.
Medicare overpays in many other categories as well and what
we call sight of service differentials, which is really just a
fancy name for Government pricing errors, encourage hospitals
and physician practices to consolidate in order to capture and
split the benefits of the excessive Medicare prices that the
program pays to hospitals over and above the prices that it
pays to physicians for those same services. Once those firms
merge, not only do taxpayers pay more for the same services via
the Medicare program, but those firms' greater market power
allows them to increase prices on private payer as well.
What do we do about this? As I mentioned at the outset,
Government doesn't need more power in order to reduce
inefficient hospital consolidation. It just needs to stop
encouraging such consolidation. States can do so by repealing
Certificate of Need Laws and Any Willing Provider Laws. They
can do so by repealing or overhauling clinician licensing laws
so that they no longer block new categories of health
professionals' innovations in medical education and innovations
in healthcare delivery.
At the Federal level, though, it might be a much heavier
lift. The Federal Government should, as Professor Gaynor
recommends, repeal network adequacy laws. I would go a little
farther than Professor Gaynor and advocate that the Congress
repeal the Government price controls that give rise to the--
such law. We can find those price controls in the Medicare
Advantage program and in the ACA.
Ultimately, in order to reduce the incentives Congress
creates for consolidation, Congress will need to reform
Medicare, Medicaid, and the tax treatment of health insurance
to change who controls the $4 trillion that this country spends
on healthcare. Make that person the consumer and consumers will
be more cost conscious and impose greater price discipline on
the healthcare industry than they do when Government encourages
excessive levels of health insurance. I thank you very much for
your time, and I look forward to your questions.
[The prepared statement of Mr. Cannon appears as a
submission for the record.]
Chair Klobuchar. Thank you very much, Mr. Cannon. Next up,
Dr. Ronald Hochman, who is the president and CEO of Providence
and Chair of the American Hospital Association.
STATEMENT OF RODNEY HOCHMAN, PRESIDENT
AND CEO OF PROVIDENCE ST. JOSEPH HEALTH,
CHAIR OF THE AMERICAN HOSPITAL ASSOCIATION,
RENTON, WASHINGTON
Dr. Hochman. Good afternoon, Chair Klobuchar, Ranking
Member----
Chair Klobuchar. You want to talk a little louder? We can't
hear you.
Dr. Hochman. Good afternoon----
Chair Klobuchar. There you go. Perfect. Perfect.
Dr. Hochman. You got me here. Good afternoon, Chair
Klobuchar, Ranking Member Lee, and Members of the Subcommittee.
I'm Dr. Rod Hochman, Chair of the Board of Trustees for the
American Hospital Association. I'm pleased to be here today
representing our nearly 5,000 member hospitals, health systems,
and other healthcare organizations.
Thank you for your support as our hospitals and health
systems have cared for millions of patients with COVID over the
past 17 months. Our healthcare workers are heroes, and they
continue to serve on the front lines of the pandemic. I've
served in the medical field for 42 years as an immunologist and
rheumatologist, and I currently serve as the president and CEO
of Providence, an integrated, not-for-profit health system
serving the western United States.
Providence treated the Nation's first confirmed COVID case
on January 20th, 2020. In those early days we knew much less
about the virus, but we knew we needed to act fast and
decisively save lives and protect our caregivers and
communities. Thanks to our scale and integration, we brought
our clinicians together virtually every morning to share
learnings and best practices. We rapidly scaled up telehealth
capabilities, going from 70,000 virtual visits in 2019 to 1.7
million in 2020, and we were able to carefully manage our PPE
supply, predicting the next hot spots, and shipping supplies to
those areas. Integrated health systems throughout the Nation
undertook similar efforts to help their communities. Let me
give you a few examples.
Barnes-Jewish Christian Healthcare, an integrated system
with 14 hospitals serving the metropolitan St. Louis and
surrounding States, used its scale to purchase large quantities
of PPE that was in short supply at the pandemic's inception.
The PPE helped keep BJ's staff safe. It also allowed the health
system to prepare for a surge of COVID patients and protect
those patients who did not have the virus.
Atrium Health, an integrated system with 42 hospitals
serving North Carolina and several adjacent States, formed a
public-private partnership that included Honeywell and
Charlotte Motor Speedway to provide 1 million doses of COVID
vaccine by July. Hundreds of Atrium's physicians, advanced
practice providers, and other employers--employees volunteered
their time to make this vast mass vaccination effort a success.
These and other efforts by integrated hospital systems
would not have been possible without the scale and scope to
ramp up quickly and deploy the enormous amounts of resources to
respond to this unprecedented crisis. As a physician with four
decades of experience caring for patients, I can tell you that
the integration is key to strengthening healthcare in this
country and ensuring every community, whether rural, urban, or
suburban, has access to affordable, evidence-based care.
As you know, our rural hospitals are facing a crisis.
Integration has been critical in supporting access to care in
rural communities. Integrating with larger systems gives many
rural facilities' access to supplies, capital and technology,
needed to continue serving their communities. Without this
integration, many rural hospitals would be forced to close
their doors. We know from experience and research by the
Charles River Associates that integration actually reduces
operating cost, improves quality, and does not increase
revenues per admission. That last part is worth underscoring
because it is inconsistent with claims that hospital
transactions are all about acquiring market power to increase
prices.
The fact is that the price most consumers pay for
healthcare is reflected in the premiums set by the commercial
insurance companies that face little competition. Data from the
American Medical Association shows a steady progression of
consolidation to now nearly 75 percent of all commercial health
insurance markets and when an insurance market is highly
concentrated, insurers reduce provider payments and do not pass
those savings on to consumers. This is why health systems have
increasingly engaged in alternative arrangements to lower
costs, increase quality and convenience for consumers.
One example is the Henry Ford Health System in Michigan
which entered into a direct contract arrangement with General
Motors. To win that contract, Henry Ford had to demonstrate its
ability to change care delivery, offer comprehensive clinical
and administrative connectivity, and take on the growing
financial risk and meet quality requirements. This would be
impossible without integration.
I'm extremely proud of the 6 million women and men, our
nurses, doctors, housekeepers, security and administrative
teams, and so many more, who work at America's hospitals and
health systems. Each and every day they care for patients,
comfort families, and protect communities. Thank you for the
opportunity for being here today, and I look forward to your
questions.
[The prepared statement of Dr. Hochman appears as a
submission for the record.]
Chair Klobuchar. Thank you. Thank you very much. Thank you,
Dr. Hochman. Next up is Ahmer Qadeer. With the----
Mr. Qadeer. Thank you.
Chair Klobuchar [continuing]. SEIU, and thank you.
STATEMENT OF AHMER QADEER,
DIRECTOR OF STRATEGIC INITIATIVES,
SERVICE EMPLOYEES INTERNATIONAL
UNION, NEW YORK, NEW YORK
Mr. Qadeer. Thank you, Senator Klobuchar, Senator Lee,
Members of the Subcommittee and Committee. Thank you for
holding a hearing today on this important topic and for giving
me the opportunity to testify before you today. My name is
Ahmer Qadeer, and I'm here on behalf of the Service Employees
International Union, SEIU. SEIU is the largest union of
healthcare workers in our county. Our union represents more
than a million healthcare workers, including physicians,
nurses, service and maintenance workers and many other
hospital-based employees. I'm testifying today to comment on
how concentration in hospitals may impact the wages, benefits,
working conditions of healthcare workers.
Health systems have been consolidating at a brisk pace with
consolidation particularly acute at the largest health systems.
Between 2013 and 2018, the average size of health systems was
stable, but at the largest systems, those with over 30
hospitals, the average number of hospitals increased
significantly. In short, in health systems, as in many other
parts of the economy, big firms are getting bigger.
Consider a description from Samuel Hazen, the CEO of HCA
Healthcare Incorporated, the largest hospital system in the
country. Mr. Hazen told investors on his firm's first quarter
2021 conference call, ``We are operating at an all-time high on
market share. We're pushing the overall market share for the
company across 43 domestic markets into the low 27 percent
zone.'' A very high-water mark.
Another HCA executive told investors that company hospitals
were an important part of the communities in which they operate
and often one of the biggest employers. There is substantial
empirical evidence that when employment is concentrated among
fewer firms and workers had fewer employment options, it leads
to lower wages.
A 2017 study demonstrated that moving from the 25th
percentile of concentrated labor markets to the 75th percentile
is associated with a 15 to 25 percent decline in wages. Simply
put, as employer concentration rises, wages fall.
A 2020 study estimated that more than 10 percent of the
U.S. work force are likely in labor markets where employer
concentration suppressed wages by at least 2 percent.
Furthermore, several million workers are in markets where
employer concentration suppressed wages by at least 5 percent.
The research on employer concentration in the hospital industry
is consistent with findings about the broader economy.
An American Economic Review article examined the effects of
hospital mergers between 2000 and 2010 on the wages of hospital
workers. The study looked at more than 1,300 hospitals and
found that mergers that increased hospital concentration to
high levels reduced the wages of nurses and other healthcare
occupations. The negative effects of employer concentration are
not limited to wages, but also include benefits and working
conditions. Workers in concentrated labor markets are more
likely to experience wage theft, health and safety code
infractions, and other contraventions of labor laws.
Excessive employer concentration does not just lead to
lower wages and benefits, but also diminishes the quality of
life of workers, their families, and their communities. For
instance, Pittsburgh's one of the most highly concentrated
hospital markets in the country and UPMC the largest health
system. Workers at UPMC described wages and benefits so low
that many workers rely on food stamps and incur medical debt.
Leslie Poston, an administrative assistant, described,
``UPMC is my employer, my insurer and my healthcare provider,
not to mention the largest private sector employer in
Pennsylvania. They know how much I make and that I'm thousands
of dollars in debt to the hospital I work at.'' Poston and
other UPMC workers describe circumstances where wages and
benefits are so low that the hospital's employees need charity
to meet their basic needs.
Antitrust regulation has not been an effective bulwark
against the negative labor market effects of employer
consolidation. As Senator Klobuchar pointed out in her book,
there are notable instances where antitrust laws protected
workers. African-American doctors brought suit under the
Sherman Act to force integration at Chicago Hospitals. SEIU
brought suit against hospitals for colluding to depress wages
for nurses. These are isolated examples, and much more can be
done to expand the available policy tools for promoting fair
and competitive labor markets.
Let me touch on some specific solutions that would address
the concerns of workers in healthcare and other segments of the
economy. One, requiring that all merger reviews include an
analysis of labor market impacts.
Two, because there's a limited history of antitrust labor
law and labor enforcement, we need bright-line standards
established for anticompetitive consolidation and practices in
labor markets.
Three, directives prohibited--prohibiting anticompetitive
worker restraints, such as noncompete restrictions, are
important to counteract key ways that employers abuse their
power over workers.
Antitrust enforcement in labor markets need not be all or
nothing. Negative labor market effects can be offset by
collective bargaining, wage boards, sectoral standards for
working conditions, broad based bargaining and other labor
market supports can attenuate negative impacts of employer
concentration. It is important at this moment to strengthen
antitrust law to explicitly protect competition in labor
markets through readily available tools, including merger
reviews, providing clear causes of action for monopsony, and
preventing employer abuses, such as restrictions on workers
seeking the best job they can find.
Throughout the COVID-19 pandemic, healthcare workers have
cared for us. They have tended our families. They have kept us
alive. In communities across the country, we clapped for
healthcare workers as they ended their shifts, but they deserve
much more than praise and gratitude. They deserve living wages,
good benefits, and safe workplaces. Empirical research shows
that excessive employer consolidation can undermine these
conditions.
I hope you'll consider strengthening antitrust applications
that have the potential to protect workers from abusive
employer concentration. Thank you. I look forward to your
questions.
[The prepared statement of Mr. Qadeer appears as a
submission for the record.]
Chair Klobuchar. Thank you. Thank you very much. Next up,
and our last witness, is Dr. Brian Miller.
STATEMENT OF BRIAN MILLER, ASSISTANT
PROFESSOR OF MEDICINE, JOHN HOPKINS
SCHOOL OF MEDICINE, WASHINGTON, DC
Dr. Miller. Thank you. Chairwoman Klobuchar, Ranking Member
Lee, and distinguished Members of the Subcommittee. My name is
Brian Miller, and I practice hospital medicine at the Johns
Hopkins Hospital in Baltimore, where I care for hospitalized
patients with a variety of ailments, including COVID. I serve
as an Assistant Professor of Medicine and Business at the Johns
Hopkins University.
I thank you for holding this hearing today on hospital
consolidation, an issue of long-standing interest to me as both
a practicing physician and as someone whose mother has
experienced the harms of hospital consolidation. Today I will
focus on the harms of hospital consolidation, combatting
consolidation and promoting market entry through a forum of
anticompetitive laws.
The FTC and DOJ do excellent work. The issue is that they
cannot combat consolidation that is driven by other Government
policies and laws that place a finger on the scale in favor of
consolidation. My colleagues today have characterized the many
harms of consolidation in the hospital markets, which comprise
31 percent of healthcare spending in 2019.
I wanted to highlight a harm that has not been mentioned: a
loss of innovation from a lack of competition. This is best
illustrated through the low labor productivity growth in the
hospital industry from 1993 to 2017, which averaged 0.4 percent
per year, according to the Bureau of Labor Statistics, and was
negative 1.5 percent annually from 2001 to 2007.
In looking for competition policy solutions, I agree with
my colleague Michael Cannon of the Cato Institute that the lack
of site neutral payment is a Government pricing error driven by
a fee-for-service system that pays different rates for the same
service provided at different types of facilities, which drives
consolidation amongst hospitals and physician practices as a
form of payment policy arbitrage.
A partial fix was attempted through the Bipartisan Budget
Act of 2015. CMS attempted to fix the problem once and for all
with the 2019 payment policy rule and was sued by industry and
lost in court. CMS again tried to fix this problem in 2020 and
has succeeded so far in court challenges from industry, while
industry is now appealing to the Supreme Court. Congress can
support CMS in fixing this by providing clear statutory
authority to fix this payment policy arbitrage issue which
drives physician hospital consolidation.
Stark Law is another area in which we can combat
consolidation. Driven by research on imaging, physical therapy,
and other self-referral services in the 1980s and 1990s,
showing higher utilization with physician self-referred
services, Government picked the winner and banned physicians
from self-referral for designated health services, placing its
finger on the scale in favor of corporate-owned enterprises who
do engage in self-referral.
In 2021 the world is different with over one-third of
Medicare and one-half of Medicaid spending directed to plans as
a form of risk adjusted capitation. Plans use tools such as
prior authorization and prepayment claims editing to address
fraud, waste, and abuse. Congress can help by re-examining the
function of Stark Laws and repealing those that are clearly
anticompetitive.
Finally, physician-owned hospitals represent one of the few
policy levers by which we can encourage market entry in the
hospital market. The story here is similar. The hospital
industry raised concerns about cherry-picking patients and
hospitals favoring private insurance. These are payment policy
issues, not competition issues, and the evidence from
Government studies was mixed, showing, for example, that the
total community benefit from physician-owned hospitals is
greater than that of general hospitals when taxes are included.
Foreclosure effects are significant. In 2010 alone, 75
projects did not meet the deadline, and $2.5 billion in
economic activity was lost. This provision is inconsistent with
goals of the ACA of expanding coverage, improving quality, and
lowering costs.
In conclusion, rigid Government interventions distort
markets and favor consolidation. The Government should not
favor one market participant over another, and we need to use
the right tools, regulatory solutions for regulatory problems.
Changing the antitrust statutes is the wrong tool to treat the
problem of consolidated hospital markets. Thank you, and I look
forward to your questions.
Chair Klobuchar. Thank you to all the witnesses. I think
I'll start out with Professor Gaynor. You've written
extensively about the negative impacts of excessive hospital
consolidation on the price and quality of hospital services. We
know these impacts can impose significant costs on our
healthcare system and more importantly on patients.
Last week, as I noted, we passed out the bill that Senator
Grassley and I have, with bipartisan support, to raise merger
filing fees on the largest transactions. I guess I'd start out
with you, Professor Gaynor, and if you could answer. How does
this help? Why would increasing enforcement resources help
improve enforcement against anticompetitive hospital mergers?
Do you think more can be done that hasn't been done?
Professor Gaynor. Senator Klobuchar, thank you for the
question. Yes. I do think more can be done. The agencies are
working flat out. They are strained with the resources that
they have. The--simply the amount of horizontal merger filings
have--it's skyrocket--skyrocketing over time, and the agencies'
budgets have been flat. That does not take into account any
other kind of enforcement issues nor the kinds of studies that
are necessary for them to do their jobs well now and the
future. They absolutely need more resources in order to keep up
with the issues that they're facing, both in the hospital
sector, but more broadly.
Chair Klobuchar. Dr. Miller, you spent time working at the
FTC. Do you think additional resources would help to improve
hospital enforcement?
Dr. Miller. Thank you, Senator Klobuchar. I have to agree.
The hospital mergers group often works 14 hours a day, and they
regularly pass on transactions due to a lack of staffing. I
think that additional funding and staff would help with
enforcement.
Chair Klobuchar. Very good. We don't agree on everything,
but we agree on that. I guess that's a ``yes'' or ``no.'' Yes.
Dr. Miller. Yes.
Chair Klobuchar. Okay. Good. I note that that bill would
actually decrease the costs on small hospital--on small--any
mergers of any kind--increase it on the big mega mergers.
Something I answered questions of from Senator Cruz last week.
Ms. McCracken, based on your experience as a patient, how
do you think things should have gone? What do you think
patients in your situation should expect when they approach a
hospital system seeking medical care?
Ms. McCracken. Initially, when my neurosurgeon said, ``You
need treatment X at--you need to see physician X at facility
X,'' I should have been able to go and see who that doctor
thought was the best provider for me to see at that point, and
the--it's just as simple as that. I should have just been able
to walk down two floors in the exact same hospital and gone to
the Eye & Ear Institute because he felt that that was the best
place for me to be.
Senator Klobuchar. Good. Professor Gaynor, her experience,
Ms. McCracken's experience, makes me think about patients in
rural areas. In your opinion, how can consolidation affect
healthcare services in rural communities?
Professor Gaynor. Thank you for the question, Senator
Klobuchar. I think that our fellow citizens who live in rural
communities are particularly vulnerable. If there's
consolidation there, and if prices go up, then they have to
travel a long way to wherever the next alternative is. They're
left without really good alternatives.
Moreover, another thing that frequently happens when there
are acquisitions or mergers within rural areas, is that
services are completely eliminated or reduced in some areas,
which also leaves our fellow citizens living in those places
quite vulnerable. If obstetric services get cut and you live 2
hours or more from the next closest place with obstetric
services, then you're in a very tough situation.
Chair Klobuchar. Very good. Professor Gaynor, one more
thing. What sorts of effects do the restrictions, contract
restrictions with insurers that restrict them from designing
plans that could reduce cost--what kind of effects do those
have?
Professor Gaynor. Those can be really harmful to
competition. I think it's important to understand how
competition in the healthcare sector works. Competition on
price occurs via insurers and hospitals negotiating. If a
hospital is important to have in the network and they offer
value for what they're giving, then they'll be included in the
network and that's--it's those negotiations that drive the
prices, and then who's in the network has to do with what the
choices are for enrollees.
That's why this can be particularly pernicious. If dominant
hospitals impose restrictions on insurers such as you are not
permitted to inform your enrollees about lower cost options or
better value options, you are not permitted to take our
hospitals and put them in a less favored tier because they are
more expensive or maybe they're not even as good. Restrictions
like these are intended to restrict choice by individuals,
weaken competitors and weaken competition. They can be very,
very damaging.
Chair Klobuchar. Okay. Thank you. Mr. Qadeer, I've long
been concerned about the impact of mergers on labor markets.
We've been hearing increasing concerns about monopsony effects
from consolidation, including in the case of healthcare
workers, which you described some of these concerns in your
testimony. Do you think that Federal and State antitrust
enforcers are doing enough to address potential harms to the
labor markets from health system mergers? What would you like
to see, and do you think giving the agencies, an earlier
question I asked, greater resources would help?
Mr. Qadeer. There's a real gap in enforcement between labor
cases and product cases. There's a--there--since the 1960s
there's--there isn't been about 2,300 product cases and less
than a hundred, less than a hundred, labor market cases. In
general, I would say there isn't enough enforcement in labor
markets. Certainly, I think that more resources could help.
The kinds--kinds of things that we think need to happen in
antitrust law, to ensure fair competition in labor markets, are
requiring--require merger reviews to have an analysis of labor
markets, establishing kind of clear, bright-line standards for
anticompetitive consolidation and practices, and then--and then
efforts to restrict--to end the restrictions on the ways that
employers can abuse their power over workers with noncompete
restrictions and other kinds of vehicles.
Chair Klobuchar. Thank you very much. Next up, Senator Lee.
Senator Lee. Thanks so much, Madam Chair. Mr. Cannon, let's
start with you. You mentioned in your testimony the fact that
in many instances State licensing officials, State licensing
laws of one sort or another, are used to block new categories
of healthcare providers or, in some instances, other kinds of
innovations in healthcare or how it's provided.
There are a lot of cases in which these State licensing
boards themselves are asked to either license and authorize or
not authorize, not license what would, if approved, be new
competitors to them thus creating a perverse incentive because
if these boards approve them then they've got new competitors
to deal with, and they've got to react by some combination of
lowering prices and offering superior quality.
This is one of the many reasons why I've long supported
efforts to bring about reform in occupational licensing. I was
wondering if there are any specific reforms that you'd
recommend in this area, and are there some States that are
doing it right that other States ought to try to emulate?
Mr. Cannon. Thank you for the question, Senator. Yes. There
are things that both the Federal and State governments can do
in this area. There's not much the Federal Government can do in
my view because occupational licensing occurs at the State
level. States have the power to do that under, you know, their
general police powers and the Federal Government does not
really have authority to interfere with State regulation of
clinicians unless those regulations act as a barrier to trade
between the States. The commerce power, the Congress calls it
the Constitution, gives Congress the power to make commerce
regular between States.
One reform that we have discussed at the Cato Institute is
to--for Congress to pass a law that redefines the locus of the
practice of medicine from the location of the patient to that
of the provider. If Congress did this then what this would
essentially do is tear down barriers to interstate telemedicine
because right now I can--I live in Virginia. I could travel to
New York to see a specialist, but unless that specialist is
licensed in the Commonwealth of Virginia, that specialist could
not provide me a telemedical consultation over the internet.
They would be violating Virginia's licensing laws because
Virginia defines the location of the practice of care as where
I am--the patient am sitting.
If the Federal Government redefines that for the purposes
of State occupational licensing laws, as the location of the
physician, then that physician could see patients in Virginia,
patients all across the country, via telemedicine. That's one
important step that I think the Federal Government could take.
Senator Lee. States, just to be clear, States,
overwhelmingly if not universally, do define it that way.
They--right? They define it as----
Mr. Cannon. As the location of the patient.
Senator Lee. Yes.
Mr. Cannon. Yes.
Senator Lee. Yes.
Mr. Cannon. We have seen some activity at the State level
that has been very encouraging at the beginning of the COVID-19
pandemic. Policymakers, Governors of both political parties--I
think even Democrats may have been better on this score than
Republicans--have recognized that a lot of these clinician
licensing laws, regulations, block access to care for people,
and so they rolled them back for the duration of the public
health emergency, including restrictions on telemedicine.
Some States have even gone so far as to enact reforms that
would recognize the licenses issued by other states--Arizona is
one--so that if you are and this is, this goes beyond the
health professions. If you have a license to practice medicine
or a nursing license from another State, if you come to
Arizona, you can fill out a form and essentially obtain an
Arizona license. That tears down the barrier to competition
that Arizona's clinician licensing laws create.
We at the Cato Institute have advocated eliminating
clinician licensing laws entirely because while their stated
purpose is to improve the quality of care and they do that in
some instances, on the whole they either don't add much to the
quality protections that would exist in the absence of
licensing--I would argue that in many cases they reduce the
quality of care--but they most certainly, as Governors around
the country have implicitly agreed, they certainly block access
to care by raising prices and blocking competition. There's a
lot of opportunity for reform here at both the Federal and
State levels.
Senator Lee. Someone told me once that a pilot once
licensed to fly a jet airplane, in theory by law, by virtue of
an occupational license, could fly a 747 if the owner of a 747
wanted to entrust that pilot with that, such that the license
itself becomes less important in certain fields than other
qualifications above and beyond the license. Is there some
parallel here in some cases to the healthcare industry?
Mr. Cannon. Most of the quality protections that protect
patients in our healthcare sector from incompetent physicians
or other medical professionals don't come from clinician
licensing. They come from the medical malpractice system. They
come from hospital credentialing, board certification, and so
forth. Licensing adds--I say licensing adds very little if
anything to the quality of protections that would exist in its
absence.
Senator Lee. Thank you. Dr. Miller, we hear a lot about the
high cost of healthcare and the lack of transparency in
hospital markets. These can seem like abstract, esoteric or
even academic issues. Can you describe to us how choice and
competition end up impacting patients?
Dr. Miller. Thank you, Senator Lee. They definitely do, and
I would say a lack of choice and competition is one of the
biggest harms. The labor--lack of innovation--we think about
patients with heart failure. They're admitted to the hospital
through the emergency room. They come up to the floor. We
prescribe diuretics. Take fluid off. Get them off oxygen. Much
of the processes through which the hospital works and which
clinical care operates have not changed since my late father
graduated from medical school in 1973.
We cheat--treat heart failure the same way. A nurse charts
the urine output on paper and then puts it in electronic health
record. They did that in 1973 and they do that in 2021. The
reason this has not changed is because innovation, which is the
lifeblood of competition, has not occurred due to
consolidation. Thank you.
Senator Lee. Thank you. Thank you, Madam Chair.
Chair Klobuchar. Very good. Senator Blumenthal.
Senator Blumenthal. Thanks, Madam Chair, and thank you for
having this hearing, Senator Klobuchar and Ranking Member Lee,
on this really profoundly important topic that literally
touches every American's lives.
I want to focus for the moment on private equity deals and
their impact on quality of care and the financial incentives
that go into healthcare decisions regarding financing and
economics. Private equity deals in healthcare, including
hospitals, have nearly tripled over the past decade, up from 41
billion in 2010 to 120 billion in 2019. The total over the last
10 years has been 750 billion of private equity going into
about 100 hospital deals in the last 3 years alone.
Consolidation is a core part of the private equity business
model through roll-up and buy and bill strategies. Loans
finance the vast majority of the 750 billion spent on private
equity healthcare during the last decade. Those deals mean that
the private equity funds, the ones who engage in control, are
not on the hook for the loans. Instead, private equity funds
structure the deal so that the acquired healthcare providers
are responsible for repaying the debt that the private-equity
funds used to purchase them.
This structure has far-reaching, dramatic, profound
consequences for our healthcare system. Large hospital chains,
under private equity management, have been forced to sell off
and close hospitals to meet their debt burden. The incentives
and self-interest of the private equity funds drive the
finances rather than respect and care for the patients who are
there or the professional staff who assure quality care.
Let me ask you, Professor Gaynor, how significant of a role
does the burdening of hospitals with debt play in the closure
of hospitals or the need for hospitals to merge with larger
systems to stay afloat, in other words, the consolidation of
healthcare?
Professor Gaynor. Senator Blumenthal, thank you for the
question. Let me mention actually a report that was just
released the other day by Laura Alexander of the American
Antitrust Institute and Richard Scheffler at University of
California Berkeley that goes into a lot of detail on some of
these things.
I'd say that there is real concern about the role and the
impact of private equity in healthcare exactly as you indicated
because the model is to come in, take over an underperforming
firm, turn things around, at least on certain balance sheets
quickly, and then sell it for a profit. Private equity
investors are not in that for the long term. That can work in
some circumstances, but healthcare is quite a different matter.
That's one.
I don't think we know at this point the extent to which
private equity has played a role in consolidation. That's
something I think we need to know more about. Moreover, I'd add
to that that we need to know more about the behavior of private
equity-owned firms. There's evidence that suggests that private
equity firms, not surprisingly, are hyper-responsive to the
competitor environment. If the market is competitive, they will
be very aggressive, but if it's less competitive, they will
take every advantage of profit opportunities, more so even than
typical investor-owned firms. I think it's an important issue.
Thank you.
Senator Blumenthal. Thank you. That's an excellent answer,
and I might just say that my question is, in part, based on
that study by the American Antitrust Institute, but really the
point of the question is we need to know much more about the
real-life impacts of these private equity deals. Their
incentives are not aligned with patient care, in fact, not
aligned with necessarily professional care.
The private equity companies don't want to run these
hospitals long term. Often their business model is to buy the
hospitals, consolidate them, merge them and then sell the
resulting entities at a profit. The private equity model
generates short term revenue. It has long term consequences for
patients often at the expense of the viability of the hospital.
I'll just give you one example.
Private equity companies have been known to buy hospitals
only to sell of their underlying real estate, the basic real
estate, that underlies the hospitals, forcing the hospital to
lease back their own facilities from real estate investment
trusts and leaving the hospitals financially vulnerable.
A particularly egregious case of a private equity company
stripping a hospital of its real estate is that of the
Hahnemann University Hospital in Philadelphia, which was
purchased in 2018 by Paladin Healthcare, a private equity fund.
The company invested no money, none, in improving the hospital
and shut it down 18 months later with a plan to sell the real
estate in a rapidly gentrifying neighborhood and leaving the
neighborhood without a key healthcare provider.
My point is that these private-equity investments in
healthcare markets have gone unchecked and unreviewed for far
too long in staggering numbers with absolutely profoundly
important consequences. I strongly believe that Congress needs
to study this relationship, as you suggested.
I, again, thank the Chair for focusing on this issue as a
matter of antitrust law, but it's also fundamental healthcare
interests as well that are at stake. Thank you, Madam Chair.
Chair Klobuchar. Thank you very much. Next up we have
Senator Hawley.
Senator Hawley. Thank you, Madam Chair. Thank you for
holding this hearing. I want to--Professor Gaynor if I could
just start with you. I want to pick up right where Senator
Blumenthal just left off. Let me ask you about some of the
research as it relates to private equity backed mergers and
acquisitions. Does any of the research that you have seen or
conducted, reviewed, indicate that private equity backed
mergers or acquisitions in this industry have any relevance to
patient outcome, access to healthcare, or otherwise improve the
long-term financial viability of hospitals?
Professor Gaynor. Yes. Thanks for the question. This is an
area, I just, I think I'm reiterating, where we need to know a
lot more. I think we're starting to get evidence on this.
Actually, there's more evidence now, to my knowledge, from the
nursing home industry than from hospitals, but we don't have
extensive evidence yet. There are reasons to be concerned, I
think, just thinking about the business model, but this is an
area where we definitely need more evidence to have good
information about this.
Senator Hawley. Yes. I certainly, I agree with that, and I
have to say I am concerned. I'm concerned about the--the
possibility that private equity and their intervention here is
actually helping drive consolidation in a way that is unhealthy
for this industry, and that is particularly--can be
particularly harmful for rural communities like many that make
up my State.
I want to shift and ask you now, if I could, Professor
Gaynor, about rural healthcare access. You noted in your
testimony, and this caught my attention, that hospital mergers
lead to or can enhance monopsony power in labor markets, and
that this can depress wages--this is your testimony--below the
efficient level, distort hiring decisions, and in the long run,
harm incentives for investment in human capital. I would be
particularly interested to hear your thoughts on the effects of
hospital mergers, monopsony power, in rural markets. Can you
say something about that?
Professor Gaynor. Thanks. That's an excellent question. In
some ways it's a mirror image of the issue that occurs in
product markets. If workers in rural areas have few
alternatives in order to find employment, they would have to
travel a longer distance, then employers in that area have more
market power as buyers, more monopsony power.
If you have, say, and this is typical in many places, say,
a hospital is one of the biggest employers in town, or there
are two hospitals, and now there's a merger or they're acquired
by another entity, then where do the people in those
communities have to turn for employment? Wages start getting
pushed down, or they just don't rise as much. Working
conditions change, number of hours offered or required, so on
and so forth. If the next available employment is hours away,
then you don't have a lot of alternatives and that gives the
employer a lot of monopsony power. That can cause substantial
damage in those markets as well.
As I said, it's not only wages. I mean, wages are obviously
very important, and hours, but then it affects investment in
human capital, which affects productivity. That affects
individuals, but it affects the entire economy. There can
really be far-reaching consequences.
Senator Hawley. Do you think it might also reflect
retention rates in the industry and, as you said, if in a rural
community--it certainly is true that the town that I grew up in
that we had a hospital located in my town, only one. It was a
very small town. It was the only one in the county, I believe,
the only hospital in the county.
There's not a lot of options there for employees at that
hospital to go to other hospitals, but if there's not
investment--if their wages are being held down--if there's not
a lot of investment in them, if the quality of work is poor,
then they may leave the industry altogether and may try to find
a job in a completely different sector. I mean, do you see any
of that? Do you worry about that because of the effects of
consolidation in rural America?
Professor Gaynor. Oh. Sure. As a matter of fact, it can
cause people to leave the geographic area entirely. Even, you
know, monopsony power or market power of any kind, isn't
infinite. You can't depress the wage to zero. You can't raise
the price of a product to infinity. At some point the wages get
low enough, people will leave. Either they will go to another
employer in the same area, or they will leave that area and
migrate elsewhere. Of course, if that starts to happen, then
that has ripple effects on the entire town, the entire area,
because you start to lose people who were earning money, and
that affects the businesses in that area, and it can have
really profound negative consequences.
Senator Hawley. What do you think might be the effect on
access to care, healthcare access, and quality of care in these
rural settings if we start to see this sort of cycle begin and
play out?
Professor Gaynor. Yes. It could be--it could be a vicious
cycle. I want to be clear that I am talking about this
deductively. I don't know of evidence that specifically shows
these effects, but it makes sense that if you get a cycle like
this started, then it can feed on itself and you can get what
are basically tipping points where things were all right, and
they start going downhill, and all of it's starting--they just
start going downhill very rapidly. There is a real potential
for that.
Senator Hawley. Let me ask you, finally, just a broader
question about healthcare costs and wage stagnation. Research
suggests that rising healthcare costs have been a major
contributing factor to wage stagnation for working class people
in our country in the last few decades. My question is, what
impacts are--do you--does the data show that rising healthcare
costs have had on worker compensation packages and wage growth?
Can you give us a sense of that? Do you know?
Professor Gaynor. Yes. Just briefly to set this up, here's
what happens. Suppose there's a merger between hospitals that
are close competitors. Their market power is enhanced. They
raise prices substantially. Who pays for that initially? It's
the private health insurers in the area. They then turn around
and raise their premiums to employers, and then employers pass
that on to their workers.
Either wages are not what they otherwise would be. Usually,
it's wages grow a lot more slowly, or workers pay a larger
share of the cost of the premium, or the generosity of the
health insurance gets reduced. It may also even affect hours or
whether people are employed as well. It cycles all the way
around from the higher hospital prices in affecting the wallets
of workers.
It's not like buying a quart of milk. Right? If a
supermarket raises the price of a quart of milk by 25 cents,
you and I see that immediately when I go to the cash register,
but nonetheless it still comes around.
What does the evidence show? The evidence shows that that's
exactly what happens and there's actually a recent study by
some folks at Rand that shows that hospital mergers, I think,
on average in their study, led to something like a $521
increase in prices, and that led to approximately the same
size--sorry, in prices--same size decrease in workers' wages.
Yes. Workers are directly affected. You can look at charts
that show what's happening to workers' wages growing very
slowly. Health insurance, health costs are going like this.
Health premiums are going like this. All of that is evidence
consistent with healthcare costs being born in large part by
workers and affecting their wages.
Senator Hawley. Thank you, Madam Chair.
Chair Klobuchar. Very good. I think Senator Grassley, is he
going to----
Senator Grassley. Thank you, Senator Klobuchar.
Chair Klobuchar. You're remote. There's your voice. Voice
of God. Thank you, Senator Grassley.
Senator Grassley. Thank you. Say, as you know, I was a
larger largely rural State, and I'm particularly interested in
how these mergers and acquisitions affect rural hospitals in
our communities. I'm going to ask Professor Gaynor a question
and I think I should be fair to Dr. Hochman and ask him if he
wants to react to what's--Professor Gaynor says.
In Dr. Hochman's testimony, Professor Gaynor, he references
studies that show reduction in costs related to merged
hospitals. However, in your testimony, you reference studies
that showed the opposite is true. Could you help me understand
what is actually happening with costs to the consumers?
Professor Gaynor. Thank you for the question, Senator
Grassley. First, the costs--the cost that I think I referred
to, and I suspect that Dr. Hochman referred to, are the costs
of the firm operating costs. The consumer are what comes on
down. Those are not exactly the same thing.
Let me start with the latter. When hospitals that are close
to each other and are close competitors merge, prices go up, 5
percent, 10 percent, 20 percent, 40, 50, in some cases 65
percent. As I just said in responding to Mr. Hawley, that comes
back, and that comes out of workers' pockets. Some studies show
dollar for dollar. That's one.
As far as what happens to the costs, there's a lot of
research evidence, and that research evidence on average does
not show that costs are reduced. There are some studies that do
show cost reductions. There's actually, I'd say, a very good
study that was published in a scientific journal a couple years
ago that does show significant cost reductions from hospital
mergers. This is an important exception, not from mergers that
are hospitals in the same market. In other words, not when
hospitals are competitors.
As far as the studies that Dr. Hochman referred to, done by
Charles Rivers Associates, those were commissioned by the
American Hospital Association. Those were paid for by the
American Hospital Association. Those were not subjected to any
scientific review whatsoever, and they are not consistent with
the scientific evidence done by independent researchers and
subject to rigorous scientific review.
Senator Grassley. Dr. Hochman, would you like to respond,
or should I go on to my next question?
Dr. Hochman. Oh, no. I'd love to have a chance to respond.
Chair Klobuchar. Yes. He should. He hasn't been able to
respond yet, so. I'll ask, I'll give him a chance as well. Go
ahead.
Dr. Hochman. I've got a long list here because it's really
interesting. First of all, I want to thank you so much for all
that you've done for hospitals and particularly for rural
hospitals, Senator Grassley. It's made all the difference in
the world and particularly, you know, for the critical access
hospitals which I know you've championed. We have 14 of them in
our system, and without your work we would not be able to have
them exist.
Thank you so much for that support and, as you know, as the
American Hospital Association had before COVID-19 as one of its
top priorities, rural hospitals in the United States. This is
not an issue around consolidation. The fact is that rural
hospitals have been struggling. We've lost a 126 over the last
10 years. We lost 20 last year. They're in difficult financial
situation, and we think there's a number of different ways that
we can help rural hospitals, one of which is association with
larger systems, but it's not the only solution to that issue.
The second is, I--you know, I'm listening to the so-called
studies and I, you know, respectfully, Professor Gaynor, we
just don't buy the data. You know, I, as someone who's spent 42
years in the front line of healthcare, taking care of patients,
working in health systems, I think all of my colleagues are
stunned at hearing what we're hearing here. On the labor front,
we have a scarcity of labor. My labor costs are going up.
Chair Klobuchar. Dr. Hochman. Dr. Hochman.
Dr. Hochman. Yes.
Chair Klobuchar. I promise I'll let you answer those
questions when Senator Grassley--I want to give Senator
Grassley a chance to finish up asking his questions. Is that
okay? Then you can go back----
Dr. Hochman. Sure.
Chair Klobuchar [continuing]. After that. Okay. Senator
Grassley, you can have the time you need. Thank you.
Senator Grassley. This should also be to Dr. Hochman, and
this will probably be my last question, and I'll submit some
for answer in writing. Last Congress I reached out to two
different nonprofit hospitals to ask them about their billing
and collection practices. Those hospitals were University of
Virginia Medical Center Charlottesville and the Methodist Le
Bonheur Healthcare Hospital in Memphis.
Those hospitals had news stories written about them because
of their aggressive debt collection practices against low-
income patients even though they were nonprofit hospitals.
After those stories broke and after I sent my letters, those
hospitals changed their debt collection practices. They also
decreased the fees that they would charge different low-income
patients.
Here's my question to you, Dr. Hochman. How widespread are
the aggressive debt collection practices such as lien
enforcement on homes and wane wage garnishments by other
nonprofit hospitals throughout the country?
Dr. Hochman. Senator, we couldn't agree with you more in
that, you know, particularly if the AHA and my own health
system, we put forward in April of last year new standards for
all of the things around billing and collections, getting rid
of all those egregious processes, such as liens and others and
really establishing the base that at 200 percent of the, you
know, net poverty level those patients should not be billed for
anything that happens. In my own system it's up to 400.
I think all that work I think that has to be something that
the AHA is strongly looking at. I--we can share with you all
the guidelines that we have put in place as standard practice
for all hospitals in the United States.
Senator Grassley. Thank you, Madam Chairman.
Chair Klobuchar. Thank you, Senator Grassley. Dr. Hochman,
I promised I was going to let you finish up your answer. You
were--I think you were addressing some of the labor issues
because I know that you haven't had a chance to answer some of
these----
Dr. Hochman. Sure.
Chair Klobuchar [continuing]. Questions that have been
raised.
Dr. Hochman. I mean, I----
Chair Klobuchar. Mm-hmm.
Dr. Hochman. Thank you so much, Senator. You know, on
labor, you know, labor's our most important element. I mean, we
couldn't have fought through this pandemic without all of our,
you know, all of the labor folks that we've had. What we've
found is the scarcity of labor. Actually, during COVID-19 we
were struggling hard in order to get enough nurses. One of the
things that we wanted help on is that we there were some
egregious practices on the part of a number of the staffing
companies that were raising our prices to get traveling nurses.
We just don't see it. You know, whether it's our food
service workers, they are a precious commodity for us. We have
seen, if anything, steady increases in the labor costs which
went to wages and better benefits--and we've seen when, in the
case of Yale New Haven, when they merged with Saint Raphael
Health System, they saved 500 jobs and were able to get
benefits that were far better than what was in place before. I
just--from the front line, I would say this as someone who's
been out in the trenches in healthcare, we're just not seeing
it on the labor side.
Chair Klobuchar. All right. Do we have another Senator that
wanted to--no. Okay. Senator Lee and I will just finish up
here. There's a vote pending. Mr. Qadeer, do you want to
respond on the labor issue?
Mr. Qadeer. I appreciate Dr. Hochman saying that labor and
workers are the most important element and that we couldn't
have gotten through the pandemic without them. We certainly
agree on that.
I think the study I referenced in my testimony, one of the
things that makes it so remarkable is that, as Dr. Hochman was
saying, there is a scarcity of healthcare workers, and despite
that scarcity--I mean, this study took place in the midst of
markets where there were--where there was a scarcity of labor
of healthcare workers and nurses in particular, and yet the
findings are still robust that hospital consolidation creates
monopsony power which depresses wages--right--and the findings
were that wages don't rise as much in labor markets where
hospitals are consolidated as compared to wages in other types
of markets.
Chair Klobuchar. Okay. Senator Lee.
Senator Lee. Thank you so much. Okay. I'm going to try to
move quickly through this round. We'll have to make it
something of a lightning round since they've just called a
vote.
Chair Klobuchar. Yes. Senator Lee, you take your time. I
think Senator Blackburn is going to ask questions maybe----
Senator Lee. Oh.
Chair Klobuchar [continuing]. In 5 minutes or so. Just go
ahead. Go ahead.
Senator Lee. Fantastic. Dr. Miller, we'll start with you.
Why not just allow physicians to pool capital and compete
against hospitals?
Dr. Miller. Thank you, Senator Lee. I think that's exactly
what we should be doing. We had a earlier discussion about
private equity investing in hospitals causing harm to patients,
also investing in practices in medical groups. Indeed, the
American Antitrust Institute came out with a report on this
today. I think the answer is not less competition. The answer
is more competition.
Senator Lee. Right. That would certainly provide that,
wouldn't it?
Dr. Miller. Absolutely.
Senator Lee. By people who know the industry fairly well,
and therefore know where prices could be reduced and also know
where quality could be improved.
Dr. Miller. Exactly. They could pool their capital and
the--for example, the rural physician could have access to
capital and operate--open and operate a hospital in a market
which is not served or underserved by their nonprofit and for-
profit competitors.
Senator Lee. Mr. Cannon, you talk in your testimony a
little bit about how Federal policy, including Federal tax
policy, ends up affecting the type of health insurance that
people purchase. Among other things, you refer to the fact that
by creating the advantageous tax treatment for employer
sponsored tax--in employer sponsored health insurance, you end
up incentivizing people purchasing more. How does this affect
competition, and what do you think we ought to be doing to
improve competition by looking at tax policy?
Mr. Cannon. Both by virtue of distorting the after-tax
price of employer-sponsored insurance relative to other uses of
income by lowering the after-tax price and by virtue of the
fact that in an employer-sponsored insurance plan, it feels
like it's someone else's money that the employer is spending,
even though, as Professor Gaynor mentioned, it's really the
worker's money that the employer is spending.
Both of these effects of the tax preference for employer
sponsored insurance encourage employers to purchase for their
workers more comprehensive insurance than those workers would
choose on their own. This is fairly noncontroversial among
economists. What that means----
Senator Lee. I assume that's compounded also by regulatory
requirements we put on top of those.
Mr. Cannon. Correct. There are lots of mandated benefit
laws at both the State and Federal level that require consumers
to purchase insurance that they don't want.
The effect of this is consumers are more heavily insured.
Less of the money that they're spending on their healthcare is
coming directly out of their own pocket. It's coming from an
insurance company or their employer, so they don't really care
as much as they would if that were their money on the line.
There is significant evidence that shows if you reduced these
excessive levels of coverage, then you can actually reduce
prices because excessive insurance encourages excessive prices
for medical care because the consumer doesn't care about those
prices anymore and insurers are not very good at keeping those
prices down.
If you pare back the excessive coverage then what happens
is you do get price competition, price competition that could
even overcome the effects of hospital consolidation. There were
a series of experiments conducted about 10 years ago by
Safeway, by CalPERS, the California Public Employee Retirement
System, that made patients--that pared back excessive coverage,
that made patients more cost conscious when they were consuming
things like lab tests and even hip and knee replacements, in
the case of the CalPERS experiment. The prices for hip and knee
replacements--they did this because the prices for hip and knee
replacements across the State of California varied from
$12,000--the hospital charges varied from $12,000 to $60,000,
and the insurance companies could not get those really high
prices down largely because those hospitals had such market
power.
When they made the consumers conscious about the cost of
their hip and knee replacements, amazing things happened. The
consumer started asking about price information from the
hospitals. They got the price information and, over a 2-year
period, the high price hospitals in California reduced their
prices for hip and knee replacements by 37 percent. That's
$16,000 per procedure. When do we ever see, well, price
reductions at all in healthcare, but price reductions of that
magnitude over so short a period of time?
It happened because these insurance companies did an
experiment where they pared back the excessive coverage they
had been providing, and consumers got broader access to, or got
access to--they didn't reduce access to care for any of these
consumers the way the experiment was conducted, but they did
reduce the prices of these services, the consumers were able to
tame the hospitals with market power in the ways that insurers
wouldn't because it was the consumers themselves deciding,
``Well, I'll go someplace else.''
Senator Lee. What skin in the game did the consumer have in
that circumstance?
Mr. Cannon. What----
Senator Lee. Why did they care whether it was $12,000 or
$50,000?
Mr. Cannon. Fancy health policy term for it is reference
pricing, but what the insurance company did was it said, ``We
will pay $30,000 for a hip or knee replacement, and you can go
to whatever hospital you want to go to. If they charge you more
than $30,000, you're paying 100 percent of that marginal
cost.'' All of a sudden, consumers had an incentive to go to
the lower priced hospitals or demand lower prices from the
high-priced hospitals, and they did both and both things
occurred. There was a big shift in volume away from the high-
priced hospitals and the high-priced hospitals had to reduce
their prices.
Senator Lee. Based on your review of that case study, is
there anything there indicating a diminution in quality as
consumers----
Mr. Cannon. No.
Senator Lee [continuing]. Shifted toward lower priced
alternatives?
Mr. Cannon. No. The insurers picked $30,000 because they
could not determine any quality-based reason to pay a hospital
any more than that for those procedures.
Senator Lee. Okay. There--are there any policy proposals
that we can take from that example that we ought to fold in to
Federal healthcare policy?
Mr. Cannon. You want to eliminate incentives that the
Federal Government creates for excessive levels of health
insurance that abet those sorts of excessive prices that
consolidated markets or concentrated markets give rise to. The
way you do that is by reforming those two features of the tax
exclusion for employer-sponsored insurance that I measured--
mentioned before. You can do so by converting it to an
exclusion for money that the worker takes and puts into a
health savings account that they could then use to purchase
health insurance or medical care on a tax-free basis just as
employers now use--or can purchase health benefits on a tax
preferred basis.
Senator Lee. I've run out of time. I appreciate the Chair
for letting me take that, but I think it's very important.
You're--what you're talking about is allowing that favorable
tax treatment to follow the consumer rather than the employer.
Individuals rather than big corporations creates better
competition, lowers prices, increases quality.
Mr. Cannon. Exactly.
Senator Lee. Thank you.
Chair Klobuchar. All right. Senator Blackburn, who's
remote.
Senator Blackburn. Thank you, Madam Chairman.
Chair Klobuchar. Thank you.
Senator Blackburn. To our witnesses, thank you for a very
spirited debate. This has been helpful today. Rural hospitals
have been one of my focuses. I wanted to come to Dr. Hochman
for just a little bit on this issue. We know that rural
hospitals are facing a shortage of health professionals and
resources, and COVID has really exacerbated the problems in our
rural areas. Sometimes, what we have seen in Tennessee, is
sometimes these hospitals are relying on transfers from larger
health systems to care for patients' intensive needs.
Dr. Hochman, I'd love for you to discuss for just a few
seconds how healthcare systems have come around some of these
rural facilities that are in underserved areas and have really
kind of helped stand with them during COVID.
Dr. Hochman. Thank you very much, Senator Blackburn. You
know, I think, you know, what we've seen during COVID is that
the rural hospitals needed our help. Whether they were
affiliated or part of our network, we hooked up a number of our
rural hospitals with telehealth to get the specialists out
there. I think telehealth is one of the things that's going to
be incredibly important to rural healthcare. The other--go
ahead.
Senator Blackburn. Go ahead.
Dr. Hochman. Then the other thing I think we need to help
our rural healthcare partners with is making sure, ensuring
that they can get the doctors and professionals that they need
out there because people want to get care close to home. If we
lose rural healthcare, we're going to lose something that--
people want to get care in the communities they live--and also
looking at the different models of rural healthcare. What
services are needed? What are the, you know--so if someone's is
a little bit sicker, how do we ensure that they're able to move
seamlessly without an effect on the patient if they need care
somewhere else?
Senator Blackburn. Sometimes that takes a larger facility
being able to work in coordination with those community health
centers in order to get them in there.
Mr. Cannon, let me ask you this. You know, you talk about
telehealth. We talk about getting healthcare workers into rural
areas. Senator Durbin and I have been working on that. We have
legislation that would do that. Let's look at Senator
Klobuchar's bill. If this bill were to pass and be signed into
law, what effect would it have on our rural communities that
are facing hospital closures?
Mr. Cannon. I apologize, Senator, I'm not familiar enough
with the bill to provide an opinion.
Senator Blackburn. Okay. Thank you for that. If you would
look at the bill, and then I will submit that to you for a
response in writing.
Mr. Cannon. I would be happy to do so.
Senator Blackburn. That sounds good. Dr. Hochman, let me
come back to you. What other options do our rural communities
have in seeking adequate healthcare if their local hospital
struggles to remain open and is at risk of closing and there is
not a larger hospital group that they can come under that
umbrella?
Dr. Hochman. We're going to need some flexible funding
support for those hospitals so they're able to--be able to keep
their services in their community. We think there are some
public-private funding opportunities for those local hospitals.
I think we got to be really innovative about rural healthcare.
Before the pandemic, that's what we were spending a lot of our
time and energy on was trying to figure those pieces out. I
think it's doubly so.
You know, rural hospitals as well, as you know, mental
health problems are paramount, right? They're having to serve
all the patients in those communities. I think whatever we see
in other hospitals is magnified so greatly in the rural
community that we really need to put a full court effort on all
of that. That's what we think. It deserves different funding
options, different ways to pay for care, different ways to
provide personnel and training and the use of telehealth as
well.
Then also, not necessarily being taken over by large
hospitals that we see, let's say in a place like Tennessee, but
how do they affiliate in a way that they can be supported so
that they can stay independent and take care of their patients?
Senator Blackburn. Yes. We hear a good bit about that from
our rural communities. Another thing that is discussed often is
the average out-of-pocket cost that a patient pays and over the
past decade the escalation rate of that out-of-pocket cost.
Mr. Cannon, let me ask you this. How has intervention by
the Federal Government into the healthcare delivery system and,
especially if we're talking about the last decade, through the
Affordable Care Act, how has that caused escalation in cost?
How has it caused consolidation of insurance and affected
access to care?
Mr. Cannon. As I mentioned in my written testimony and
mentioned in my remarks, economist Kenneth Arrow explained, 50
years ago, that insurance increases prices because it reduces
the incentives for patients, providers to shop around for
lower-cost hospital and surgical care and other types of care
as well.
To the extent the Affordable Care Act expanded health
insurance coverage--there are many benefits to expanding health
insurance coverage--but to the extent it did that, it made
patients less cost conscious about the care that they are
consuming, encouraged, then, people who were insured to consume
more care than they did, but--than they would have otherwise,
and required them, as mentioned with Senator Lee, to purchase
types of coverage that they--types of coverage they would not
have wanted to purchase.
The main takeaway is that we already paid for a larger
share of healthcare in this country through third parties than
just about any other OECD country except for maybe one or two.
Patients are more insulated from the cost of their care here in
this country than in other countries. What that does is it puts
upward pressure on prices and encourages sort of consolidation
that we're talking about here.
The Affordable Care Act has been part of that, not only on
the financing side, we've been discussing coverage levels, but
also on some of the regulations that the Affordable Care Act
introduced. The minimum loss ratio regulations that I mentioned
in my testimony, the pre-existing conditions provisions in the
ACA also encourage consolidation in various ways and I think
have, you know, similar effects of other regulations that
encourage consolidation on prices.
Senator Blackburn. Thank you. Thank you, Madam Chairman.
I've got a couple of other questions. I'll submit those for
written response. Thanks.
Chair Klobuchar. Perfect. Thank you very much, Senator
Blackburn. I think we're coming to an end here. I just--I had
one last question here for Dr. Gaynor. As I look at some of the
things that could happen here that are straightforward, we had
some good discussions about the resources where there's some
bipartisan support. We've talked about some of the labor
issues, the consolidation, what's been happening by looking
backward, looking forwards. We talked about the financing at
length. A number of Senators asked about that and the effect on
that as a driver.
My question, Dr. Gaynor, one last thing, I don't think
we've discussed is in 1996, the Department of Justice, I think
people have mentioned this, and Federal Trade Commission issued
a lengthy series of guidelines about their approaches to
antitrust enforcement in healthcare, covering mergers, data
sharing agreement and multi-provider networks. That's quite a
while ago. A lot has changed. Do you think the agency should
issue new guidelines on hospital antitrust enforcement and if
so, what should those guidelines include?
Professor Gaynor. Thank you, Senator Klobuchar. A very able
summary. One could have said, ``Healthcare. Who knew it was so
complicated?'' Yes, the agencies did coordinate on guidelines.
As a matter of fact, they included talking about things like,
guess what, A.C.O.s and other things. It's been a long time. A
lot has changed. I think it would be a very worthwhile
investment for the Antitrust Division and for the Federal Trade
Commission to sit down and update and revise those guidelines.
One thing, of course, is simply incorporating what we know
about horizontal mergers, both on the efficiencies side, what
the evidence really says, and on the potential harm side, and
make a clear statement about what that means, what the agency's
stances will be. They'll be very valuable to market
participants. They'll get a clear signal from the agencies, and
it will be valuable to the courts.
Also, nonhorizontal mergers, we've talked a lot about this,
particularly hospital acquisitions of physician practices.
That's something that's very different now than it was in 1996.
The same kind of thing. What do we know about these things?
What are the Agencies' stances on this? Anticompetitive
conduct, we've talked about that a bit. That's also something
that is a much more prominent issue now than it was then. I
think that updating those guidelines, talking about that,
providing clarification, would be very important and very
valuable.
I want to be clear. It's not really for the agencies' sake
primarily. It's important to market participants. Everybody has
to know what's expected, what the rules of the road are, and it
will help courts as well. Courts have a very hard time with
antitrust in general and with healthcare in particular, and I
think this kind of thing can also help the courts function
better. Thank you.
Chair Klobuchar. Okay. Last word, Dr. Hochman. Do you want
to--would you like to see those guidelines change? I have a
feeling you'd say to change them in a different way, but----
Dr. Hochman. Yes. I would.
Chair Klobuchar [continuing]. Do you want to respond?
Dr. Hochman. Yes. Absolutely. I think they need updating. I
would also say that, you know, there's a pretty vigorous
process that goes in place. Again, speaking from the front
lines and when Vice President Harris was the Attorney General
in California, we dealt with a lot of issues with her, and I've
got to tell you they were very vigorous in terms of what we
should or shouldn't do. We're seeing a lot of that. I think,
you know, for the audiences that, you know, there's many, many
deals that never go through because they shouldn't go through.
To think that the enforcement process that we have today is
inadequate is wrong. You know, I think, you know, there's
always things I think that could be done better, and I think
we'd submit to you some ideas that we would have for how to
make this better. Overall, I think we need to understand that
there is a pretty rigorous process in place that exists both at
the FTC level, but also at the attorney general level. I know
Senator Blumenthal, we've got a lot of former attorney generals
that are there, and they're pretty vigorous about deciding what
makes sense and what doesn't make sense.
I just leave--need to leave you with one thought and I--you
know, I know I'm a minority here, but I can tell you
consolidated systems have saved lives during COVID. Doctors
work together. Scientifically, the quality gets better. I'm
sorry. For those of you, you know, who are kind of listening to
this, I just don't buy it. The quality has gotten better when
doctors, hospitals work together for patients.
Remember that our sole objective in my 42 years is the
health of the communities that we're dealing with. We care most
about the patients. That's what we're there to do, and to serve
the communities that we're in. I have to really greatly differ
with some of the opinions that you've heard. We'd be glad to
give you some more of our information as we take care of the
COVID pandemic, which is still in place as we speak today.
Thank you, Senator Klobuchar.
Chair Klobuchar. All right. Thank you very much. We are
going to keep the Record of this hearing open for a week, and
I'm sure there will be more to come on all of this, but I want
to thank all of our witnesses, both those remote and those in
the room. It was a vigorous discussion. We had a lot of
Senators participate, both the Chair and the Ranking Member
were here, which meant a lot. Senator Lee and I will move
forward together on this. Thank you very much.
Chair Klobuchar. The hearing is adjourned.
[Whereupon, at 4:28 p.m., the Subcommittee was adjourned.]
[Additional material submitted for the record follows.]
A P P E N D I X
Miscellaneous submissions:
Alianza, Alex, statement......................................... 155
Mercatus Center, Addressing Anticompetitive Conduct and
Consolidation in Health Care Markets.......................... 149
Physcian Hospitals of America.................................... 157
Rodney Hochman Biography......................................... 97
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