Michael Hicks: HB1004 would restrict hospital monopolies

Indiana’s hospital industry is among the most monopolized in the United States, with several federal healthcare regions facing no competition. The wholly predictable result is that prices for routine medical procedures are among the highest in the world.

Not surprisingly, tax filings with the IRS reveal that Indiana’s not-for-profit hospitals are among the most profitable businesses in the United States. To be fair, they tell an entirely different story in press releases and to reporters. I’ll let you judge to whom they are telling the truth.

One result of this monopolization is that Hoosiers pay lot more for most common medical procedures. A whopping 97% of outpatient visits to the six biggest hospital systems are charged rates that are above the national average. Dozens of studies, from think tanks, universities and consultants have reported these facts. The most recent study, commissioned by the Indiana legislature, was performed by some of the world’s best healthcare economists at UC Berkeley. They report not merely higher prices, but that hospital system mergers caused price increases of almost 20% for local residents.

The monopolization of Indiana’s healthcare industry is so extensive that the six biggest hospital systems are no longer really hospital systems. They are in fact, diverse conglomerates that have acquired so many physician practices, clinics and outpatient services that no new hospital system can enter the market. In the jargon of anti-trust economics, it is one of the most extensive examples of ‘vertical integration’ since the Gilded Age monopolies.

These conglomerates are so lucrative that just last year, one of them made a nearly half-billion-dollar donation to Indiana University to mask its profits and still was more profitable than Walmart. In a typical year, these firms together deliver more than $2 billion or more to investment funds. These not-for-profit firms are shoveling money to Wall Street and tax havens in the Caribbean. In the last year before COVID, Indiana’s hospital profits alone accounted for a whopping 27% of all the state’s economic growth.

If this decade is as lucrative as the last 10 years, these ‘hospitals’ will generate more money in investment income than they do providing healthcare. This will force them to change their industrial classification from hospitals to financial investment firms. This outflow of income has slowed the Hoosier economy and made access to medical care more difficult for everyone. Indeed, part of the reason Hoosiers are less healthy than average Americans is that accessing medical care is prohibitively expensive.

Fortunately, the General Assembly has legislation that will go a long way in restoring competitive prices in Indiana healthcare. Though I think Indiana’s large hospital systems should still fear anti-trust litigation, these bills should be an easy vote for legislators. In my reading of the proposed laws, they do two big things to reduce the negative effects of hospital monopolies.

First, HB1004 makes it far more difficult for hospital monopolies to prevent competition from other providers. The legislation ends non-compete clauses that force out physicians from rural communities and make opening a new clinic impossible in most markets. These non-compete clauses are a textbook example of artificial barriers to entry. The legislation also prevents hospitals from charging higher facility fees for doctors’ visits, and they prohibit contracts that force physicians to steer patients to in-network clinics.

These laws also provide a tax incentive for new healthcare providers and ban the practice of hospital systems dictating medical care guidelines to their physicians. Altogether, these laws provide a huge step towards dismantling the monopolies that’ve been built up over the past decade. But, the really important parts are the price benchmarks for the industry.

Hoosiers pay much more for medical care than the average American. In some markets, like Fort Wayne, consumers pay more than 50% more for many procedures than do average Americans. HB1004 would set a benchmark at the average national price for all procedures. Hospitals that charge more than the national average will face a financial penalty.

Faithful readers will know that I am a free-market economist. I am deeply uncomfortable with government interfering in free markets. However, Indiana’s hospital monopolies are not remotely free markets. Ignoring these monopolies violates the core principles of free market advocates.

Indiana has six large hospital systems and dozens of smaller independent hospitals. Among the large network systems are plentiful evidence of monopolies. Among the smaller independent hospitals, the reverse is true. The independent hospitals actually charge less for procedures in places with less competition. That’s the intent behind the not-for-profit legislation. So, HB1004 treats system and independent providers differently, as it should.

The legislature has approached this problem deliberately, focusing on developing a good understanding of the many issues surrounding hospital monopolies. They’ve patiently waited for four very detailed think tank studies of individual pricing patterns in hospitals. They have collected studies from other academic research centers, think tanks and advocacy groups on all sides. They kept getting the same answer; the hospital monopolies are the immediate problem.

The General Assembly even asked the industry to develop its own path toward more competitive pricing. The industry ignored that simple request. One reason they can so easily snub the legislature is that hospital monopolies are the most powerful industry in Indiana. They make billions in profits, hire dozens of lobbyists and flood their local boards with university and not-for-profit leaders. It even turns out that IRS filings on donations by hospitals to local groups reveal an uncomfortable overlap with board members. One might go so far as to speculate that board members find it hard to raise difficult questions about hospital pricing, knowing how much their groups depend on these ill-gotten gains.

The legislature’s attempt to address widespread monopolies is too important to fall victim to the power of the hospital lobby. There are other issues that must also be addressed. We can make insurance markets more competitive and do more to make pharmacy pricing more transparent. We consumers need to be more involved in our healthcare, including choosing physicians and hospitals with an eye on price as well as quality. However, without first addressing hospital monopolies, none of these steps are possible.

There’s no perfect solution to the problem of hospital monopolies. It took more than a decade for this problem to clobber us, and the legislature has been working hard for several years to come up with this solution. Other states have wrestled with these monopolies. Some used the courts, others used single-payer systems. Indiana’s plan is the best, most market-friendly plan I’ve seen. It needs to pass this year.

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].