Healthcare consolidation perverted by pricing power

Last week, I noted Eduardo Porter's warning that the ACA was spurring hospital consolidation, which increases the hospitals' pricing power. That's the downside of consolidation. Below, that post is updated with a snapshot of the upside of consolidation, realizable when the power to set prices lies elsewhere.
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Eduardo Porter today spotlights a key factor in healthcare inflation: consolidation among hospitals and other healthcare providers:

What is missing from the stampede of policy innovation is something to tackle one of the best-known causes of high costs in the book: excessive market concentration. 

Two decades ago, there were on average about four rival hospital systems of roughly equal size in each metropolitan area, according to research by Martin S. Gaynor of Carnegie Mellon University and Robert J. Town of the University of Pennsylvania. By 2006, the number of competitors was down to three. 

The share of metropolitan areas with highly concentrated hospital markets, by the standards of antitrust enforcers at the Justice Department and the Federal Trade Commission, rose to 77 percent from 63 percent over the period. 

And consolidation is continuing. Professor Gaynor counts more than 1,000 hospital system mergers since the mid-1990s, often involving dozens of hospitals. In 2002 doctors owned about three in four physician practices. By 2008 more than half were owned by hospitals. 

If there is one thing that economists know, it is that market concentration drives prices up — and quality and innovation down. 

Research by Leemore S. Dafny of Northwestern University, for instance, found that hospitals raise prices by about 40 percent after the merger of nearby rivals.

Unfortunately, the main remedy to undue provider pricing power is politically out of reach in the United States, though applied in every other wealthy country. That is, government price-setting. Countries providing universal health insurance -- that is, every other wealthy country in the world -- almost universally empower government to impose uniform pricing, whether via single payer or filtered through private insurance.

Fee-for-service undoubtedly creates incentives for providers to prescribe unnecessary treatment. But fee-for-service is pretty much the way of the world, and countries where it is in force still pay far less per capita and per procedure than the United States. That's because their governments impose a uniform price schedule and ours doesn't.

UPDATE 6/16: Economist Robert Frank, looking at Sweden's efficient system of state-run universal healthcare, cites evidence that the problem is not consolidation per se but consolidation enabling pricing power:

But when illness strikes, the Swedish health care system responds efficiently. Managers have exploited economies of scale by consolidating services into fewer but larger hospitals. The American system has also gone through consolidation, but, by contrast, boutique hospitals are also more common here — partly in response to demands from patients with very high-cost health plans. In large hospitals, CT scanners and other expensive diagnostic and treatment machines are in nearly constant use, versus only a few hours of weekly use in some small ones. 

Larger hospitals with heavier patient flows also enable their staff to hone their skills through specialization and experience. If you are getting a knee replacement or coronary bypass surgery, you want teams that do scores of such procedures each month.