Something in our health care system tastes like chicken. No, it’s not a new cough syrup. Rather, it’s the scheming between large hospitals and health insurance companies that’s been cooked.
Recently, the CEO of one of the nation’s largest chicken producers along with three other executives were indicted by the Justice Department for allegedly conspiring to fix prices on chickens sold to stores and restaurants. This is exactly what hospital and insurance executives are doing, albeit not with poultry.
By colluding with hospitals and each other, large health insurance companies are engaging in the same price-fixing regarding physician and hospital prices. They first agree behind closed doors to excessively high hospital payments. This then leads them to artificially lower physician in-network rates. Ultimately, their end-goal becomes crystal clear: driving independent medical practices out of business.
As any student who has studied economics will tell you, competition improves quality and lowers prices. Conversely, regional consolidation and monopoly formation lead to lower quality and higher prices. The roughly 900,000 doctors in this country are unable to compete for higher quality and lower cost services. This is because giant hospital systems and health insurers are colluding to set physician prices so they can completely control the health care process. In turn, they form powerful — and profitable — regional monopolies. Hospital and insurance executives are the winners. American patients and consumers are the losers.
Here’s how their scheme works. Hospitals have become the modern health care marketplace, and there are really two types of fees charged at a hospital. One is the physician’s professional fees. These fees are for actual professional medical services. The second tranche of fees is the hospital’s “facility fee” or “technical fee.” These include the cost of housing and facilitating the service, such as the wages of nurses and technicians, and medical equipment costs.
Hospitals and insurers negotiate contracts for both hospital-employed physicians and hospital technical services. However, the contracts are created so that physician fees are much lower than what the physicians will actually be paid. In conjunction, the facility or technical fee is much higher than what the facility will really receive. The hospitals then “kick back” a large portion of the technical fee to physicians to augment their artificially low professional fees.
The ramifications are clear. This hospital-insurer collusion has the effect of dramatically and artificially reducing in-network physician rates. Independent physicians cannot compete with hospital-employed physicians. They cannot accept insurance contracts, because the rates are too low and not reflective of real costs. If these physicians remain out-of-network, patients will be reluctant to see them because of higher co-pays and co-insurance payments.
This forces physicians to become employed by hospitals. As hospitals absorb more physicians, they have more control over the them. Unsurprisingly, they can pressure these physicians to do more procedures and make more hospital referrals. In exchange, hospitals then have more leverage with health insurers to raise rates further.
To combat this collusion, the solution is simple. Hospitals should pay their employed physicians based on their collections from insurers. Only then will payers negotiate physician rates in good faith. The benefits of this approach are many: Market forces would be restored, physicians would start to move back into more efficient and less expensive independent practice, and overall costs would start to come down.
Today, one also must wonder whether the dire problems dealing with COVID-19 that states like New York have experienced aren’t partly related to hospitals’ oversized political clout. This is another real driver of rising health care costs — the malignant growth of not-for-profit hospitals. These hospitals have seen massive increases in total collections over the past decade and have rewarded their CEOs with substantial increases in pay. As giant hospitals consolidate and gobble up smaller hospitals and physicians, they have more monopoly power.
This hospital-insurer collusion — and subsequent market consolidation — have only led to incredible increases in cost. Hospitals ironically point their finger at physicians, who are mostly just going out of business. It’s high time that, instead of hospital and insurance executives, we put physicians back in charge of health care. Only then will the rising tide of health care costs ebb.
• Andrew Langer is president of the Institute for Liberty.
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