Michael Hicks: Indiana’s hospital monopolies are worsening

Hicks

I gave testimony this week in front of the state’s new Health Care Cost Oversight Task Force. The committee had asked me to speak about Indiana’s astonishingly high healthcare costs, particularly in reference to hospitals, and I was happy to do so. I followed folks from the state’s Department of Insurance and an IUPUI professor who’d recently been paid by IU Health to provide a study on healthcare costs in Indiana.

In my testimony, I said that Hoosiers continue to pay much more for healthcare than most Americans. For hospitals alone, Hoosiers pay 34% more than residents of the average state. That’s $1,312 per year, or about $3,000 per year. I told the committee that there were multiple causes for these extra costs to Hoosier families, businesses and taxpayers.

Indiana residents are a bit older than the average American, and older folks use more healthcare services. We are also a bit less healthy than the typical American. We smoke more than most, eat less healthily and exercise less. These behaviors lead to higher healthcare spending, but they don’t affect the price of medical services. A knee replacement is billed the same for a 42-year-old marathon runner and a 58-year-old obese person.

The higher spending by Hoosiers is partially attributable to poor health. However, most of it (58% for hospitals) is due to five or six monopolized hospital systems that crowd out competition and jack up prices. Every study by economists has said roughly the same thing.

It is worth mentioning that the evidence from every study I’ve seen, including mine, reports that independent hospitals are free of this monopolization. Some may be ‘price followers’ but they routinely charge less than the not-for-profit systems that are supposed to be super efficient because of their size. That’s just more evidence of a monopoly problem among the big five hospital chains.

The hospital lobbyists claim that Indiana doesn’t spend enough on Medicaid. In reality, our per-recipient payments are only 0.07% lower than the national average, which makes this a very weak claim. Lobbyists also claim that insurance companies are the cause of higher prices. The U.S. Department of Commerce has been keeping track of spending for almost a century, and it turns out that Indiana’s net health insurance spending (premiums minus benefits) is only 40% of the national average. More lobbyist nonsense.

Interestingly, the IUPUI professor had previously claimed that all of Indiana’s high healthcare costs are due to the poor health and unhealthy behaviors of Hoosiers. That claim has always had empirical defects. In a study he conducted for IU Health, he claimed that our higher healthcare costs were due to high levels of smoking, obesity, diabetes and cardiovascular disease. However, he failed to mention that of the many states that performed worse than Indiana in these measures, no more than 18% paid higher healthcare costs. On average, in every category he studied, states that do worse than us pay less for healthcare.

A good, honest study would’ve reported those facts, but IU Health, who paid for the study, wouldn’t have wanted that. The good news is that the author has now changed his tune, and he admitted in testimony that market concentration (monopolization) is a problem. It is good to change your mind when you are mistaken.

Nothing I said to the committee was really new. Several economists over the past decade have reported these facts. And, except for the insurance data, I’ve seen it all reported in other legislative committees. There were two new results in my testimony. The first was the role of the Affordable Care Act. The second was the growing monopolization of physician and outpatient services.

Back in 1997, when the Department of Commerce data was first reported for hospitals, Hoosiers paid about the same as the rest of Americans for hospital services. It was about $2,315 per person in today’s dollars (we were $6 higher each year). The gap grew by less than $20 per year until 2010, after which it exploded to $43 per year. Between 2019 and 2021, the average American saw a $10 increase, but Hoosiers saw an increase of $175 per person. It’s almost like Indiana hospitals were sending a message to the legislature.

Regarding my other big finding, I reported the growing problems with physician and outpatient services. You see, since the Affordable Care Act was passed, hospital monopolies have been reverting to age-old anti-competitive behaviors. The economic jargon for this is ‘vertical integration,’ which is what the Gilded Age robber barons made famous. It is the buying up of physician practices and outpatient services.

The way this works is that you buy up rival hospitals, then you buy up all the physicians who might refer patients to other hospitals. That keeps out competitors. At the rate this is going, by 2025 there won’t be any independent physicians in many markets. The icing on the cake is forcing your physicians to sign noncompete clauses so they are forced to move if they want to practice medicine. The effect is pernicious.

Before 2010, Hoosiers spent less than the average American for doctor visits, but then hospitals started buying practices. Today we pay 10% more, or roughly $200 more, per person, per year. According to the IUPUI, that’s because we have become sicker since 2010. That’s a ludicrous claim, but I’m sure the founders at IU Health liked it.

Outpatient services are the other end of the market. Normally patients see orthopedists or oncologists outside the hospital. Oftentimes it is after they are released from surgery, after an ER visit or after seeing a doctor. But, if you own the physicians and hospitals, you might as well monopolize clinics. Back in 1997, Hoosiers paid less than 80% of what the average American did for outpatient services. In 2010, it rose to 91%. By 2021, the gap was down to a bit more than 1.5%. By 2025, we’ll be paying more for outpatient services, just because of growing monopolies.

For what it’s worth, Hoosiers do well in the markets that hospitals have largely ignored. We pay less for dental and paramedic services, and only slightly more for nursing homes. In all these markets, Indiana has a great deal of competition. Although, at least one major hospital chain recently settled an anti-trust case about paramedic services, so it is a matter of time before we pay more.

It is always an honor to testify to a state legislative committee, especially one whose members volunteered for a long and difficult task. I gave them several issues to think about as they go about their work. The most important one is simply to keep at the issue of hospital monopolies in Indiana with an honest eye. The data are increasingly clear, and the role of these monopolies in slowing our economy, which costs businesses and families billions of extra dollars each year, is something the General Assembly will need to address. The sooner, the better.

Michael J. Hicks is the director of the Center for Business and Economic Research and the George and Frances Ball Distinguished Professor of Economics in the Miller College of Business at Ball State University. Send comments to [email protected].