View all Articles
Commentary By Chris Pope

Interstate Competition Could Make Healthcare More Affordable

The Senate Judiciary Committee recently held a hearing to investigate consolidation in healthcare markets. Hospitals are increasingly buying up other medical providers to increase negotiation leverage with insurers. Over recent years, rising hospital expenditures have been the primary factor in rising healthcare costs.

Yet, whatever market power hospitals possess is limited to local areas, and even the largest hospital system accounts for a tiny fraction of the industry nationwide. Given the astronomic prices associated with many surgical procedures and legal requirements that insurers cover all services at local providers, the most effective way to check the pricing power of hospitals may be to broaden the market — allowing hospitals and insurers to compete without artificial restrictions at state lines.

After a decade of fighting over the Affordable Care Act, politicians of both parties may be eager for a break from talking about healthcare. Yet, for many people, the situation remains hard to bear. In 2020, the combination of premiums and deductibles required an average family of four to pay $25,011 before receiving insurance coverage of medical services.

As part of the March 2020 American Rescue Plan Act, Congress expanded subsidies for low- and middle-income adults to purchase plans from the individual market. Yet, over the long run, increasing the generosity of subsidies for health insurance will likely further inflate the cost of medical services. Nor does it do much to help the 50% of the United States population that receives health insurance coverage through their employers, which also faces steadily rising costs. At some point, it will become necessary to rein in the growth of healthcare costs, rather than covering them with ever-more-generous subsidies.

Over recent years, the cost of insurance has increased across all states. But, as a new Manhattan Institute issue brief demonstrates, it has done so unevenly. For example, whereas monthly benchmark premiums in New Mexico rose from $226 in 2014 to $324 in 2021, those in Wyoming soared from $419 to $791.

This in part reflects differences in the ACA’s risk pool: States where individual markets have attracted disproportionately sicker enrollees have experienced faster-increasing premiums.

It also reflects long-standing differences in healthcare costs: Rural areas are incapable of spreading high fixed medical costs over large patient populations. And it reflects an interaction between the two effects: Insurers from states whose premiums were higher when ACA regulations were phased in found it harder to attract healthier enrollees.

The costliest healthcare markets also suffer disproportionately from a lack of competition. As a rural state, Wyoming is unable to maintain vigorous competition between local hospital systems. That makes it hard for insurers to negotiate good rates, hindering competition between insurers. Indeed, for 2021, only a single insurer was willing to sell insurance plans on the individual market in Wyoming.

Hospitals are treasured as pillars of their communities, especially in isolated and rural areas, where they are scarce. Understandably, members of Congress wish to protect the ability of facilities to deliver care locally. Yet, while it may have made sense 80 years ago to support the local delivery of every medical service, the growing specialization and capital intensity of every hospital procedure no longer make this the case. It is clear that not every county can support cutting-edge neurosurgery, and many states may be unable to do so.

Health insurers are bound by law to pay for local treatment of medical procedures within local areas. A study by Blue Cross Blue Shield found the typical cost of knee replacement surgery can vary from $11,317 to $69,654, depending on the state. The obligation of insurers to cover the bulk of such costs means they are passed on to individuals paying insurance premiums, regardless of whether individuals personally opt for cost-effective providers. When medical costs in a state are high, these will mostly be passed on.

Clearly, emergency care services must be provided locally, but emergency care accounts for less than 7% of hospital spending. For most hospital procedures, competition is feasible and should be supported. Given the consolidation of providers into large medical systems covering local geographic areas, and the economies of scale with hospital care, such competition must cross state lines.

______________________

Chris Pope is a senior fellow at the Manhattan Institute. Follow him on Twitter here. Based on a recent MI report.

This piece originally appeared in Washington Examiner