How Oligopolists Rationalize Their Market Domination: the Examples of Sutter Health and the Carilion Clinic

Advocates of laissez faire commercialized health care often trumpet the advantages of competitive markets as a rationale for deregulation.  While there are theoretic, and possibly empiric reasons to think that competitive markets are the optimal way to distribute goods and services, we recently discussed aspects of health care that make it extremely hard for health care markets to be ideally competitive. 

Meanwhile, two news articles gave some case-based evidence about how current health care markets are hardly competitive.  

Sutter Health

A Bloomberg article focused on Sutter Health in northern and central California. Sutter Health commands a substantial part of a very large market:

Sutter Health Co., the nonprofit that owns Sutter Davis, has market power that commands prices 40 to 70 percent higher than its rivals per typical procedure -- and pacts with insurers that keep those prices secret.

Sutter can charge these prices because it has acquired more than a third of the market in the San Francisco-to-Sacramento region through more than 20 hospital takeovers in the last 30 years, according to executives of Aetna Inc., Health Net Inc. and Blue Shield of California, who asked not to be named because their agreements with Sutter ban disclosure of prices.

Also,

Operating as a nonprofit, it has $8.8 billion in revenues, 24 hospitals, 17 outpatient surgery clinics and a 3,500-doctor network, making it the largest health-care provider in an 11- county region -- from San Francisco Bay to the Sierra Nevada mountains -- where 10 million people live.

Sutter has 35 percent of the revenue and 36 percent of beds that compete for patients in the region, according to a state hospital database, including 100 percent of beds the state tracks in Placer and Amador counties east of Sacramento.

Sutter care seems to cost a lot more than care from other doctors and hospitals:

After Mark Logsdon tore a ligament in his knee skiing at Lake Tahoe in March, he returned home to suburban Sacramento and had an MRI scan at Sutter Davis Hospital.

Sutter’s price for the knee scan was $1,271, payable by Logsdon and his insurer. Exactly the same MRI at one of the local imaging centers owned by Radiological Associates of Sacramento would have cost $696 -- 45 percent less.

A few other examples of Sutter's prices compared to others;

'Instead of leveraging its system to be more cost- effective, we’ve seen Sutter leveraging its system for monopoly pricing,' said Peter V. Lee, who in June became director of health-care delivery system reform for the U.S. Department of Health and Human Services. Lee was interviewed while he worked at the Pacific Business Group on Health, a coalition that includes Chevron Corp., Walt Disney Co., General Electric Co., and Wells Fargo & Co.

In San Francisco, Aetna pays Sutter’s California Pacific Medical Center in a range with a midpoint of $4,700 for an abdominal CT scan, compared to $3,200 at St. Francis Memorial Hospital, owned by Catholic Health Care West. For colonoscopies, Aetna’s midpoint price is $3,200 at Sutter’s flagship CPMC and $2,800 at St. Francis Memorial.

In Palo Alto, Aetna pays Sutter $349 per visit for new patients to see Manju Deshpande, a family doctor in Sutter’s Palo Alto Medical Foundation clinic. Three miles away, Paul Ford’s Stanford Medical Group receives $222. If the patient needs an immunization, Aetna pays Palo Alto Medical $85, and Stanford Medical, $16. Deshpande removes wax from the ear for $175. Ford scoops it out for $104.

Down the road in Silicon Valley, when obstetrician Sarah Azad, a solo practitioner, delivers a baby for a patient covered by Aetna, the insurer pays her $2,052. When Nicole Wilcox of Sutter’s Palo Alto Medical Foundation does the same job, Aetna pays Sutter $5,890.

The doctors practice blocks apart in Mountain View, California. Performance isn’t an issue -- Azad has Aetna’s top rating for quality of care and trained Wilcox during residency.

The Sutter CEO, of course, denies there is a problem:

Sutter operates in a competitive market, Chief Executive Officer Patrick Fry, 53, said in an interview. 'I don’t see Sutter Health as having market power, given the choices that employers can make,' Fry said. 'The market has a lot of room to make a lot of decisions.'

The people who most praise competitive markets often seem to be those who have done the most to reduce the competitiveness of these markets.  The CEO also trotted out another old saw, that his organization has grown not to charge more, but to be more efficient.

While Sutter may have higher 'unit' prices than its competitors, Fry said, it is not the most costly for patients over the long run because its integration of hospitals and doctor groups allows it to provide more efficient care, cutting down on the number of procedures.

'Our mission isn’t to maximize profits,' Fry added. 'Our mission, to the extent we can, is to optimize services.' Insurers and patients have many alternatives to Sutter, according to Fry.

That is a tune would-be monopolists have been singing at least since the days of the "robber barons" and their monopolies such as Standard Oil.

Of course, he is likely to defend a system that makes so much money and pays him and his buddies in top management so much, (and, contrary to his statement above, seems to have maximized profits):

Sutter, with 48,000 employees, was among the most profitable hospital groups in the U.S. in 2009, with income of $697 million, up more than three-fold from 2008 due to large investment gains, on revenue that grew 6 percent to $8.8 billion.

Its 5.2 percent operating margin -- or operating income as a percentage of revenue -- was 73 percent higher than the median for all nonprofit hospital systems in 2009, according to Standard & Poor’s.

As of Dec. 31, Sutter had a $2.63 billion investment portfolio. Sutter paid Fry $2.8 million in 2008, according to its latest Internal Revenue Service filing. His top 14 lieutenants made between $830,000 and $1.8 million each.

The article on Sutter emphasized how the strategic use of secrecy has helped Sutter maintain its remunerative ways:

Sutter doesn’t allow its prices to be disclosed on insurers’ websites because it believes the information is often misleading and doesn’t reflect the variables of each patient’s case, [Sutter spokesman William] Gleeson said.

Of course, keeping prices secret just makes the market even less like an ideally competitive one:

As Sutter’s confidentiality terms show, the actual prices that hospitals receive are often kept secret by insurers. Patients in need of hospital care, especially in emergencies, often can’t travel very far, restricting competition. And if they have health insurance, they have little incentive to price shop.

Finally, the article reminds us that the latest fad from health policy and health management circles (which seem increasingly to overlap), "accountable care organizations," may just be a pretext for even more market consolidation:

The federal Patient Protection and Affordable Care Act is looking for $500 billion in savings over the next decade to help pay for extending coverage to 32 million uninsured Americans. Yet it doesn’t address the problem of market concentration -- and may make it worse, said Robert Berenson, a physician and policy analyst at the Urban Institute in Washington D.C.

The 'unchecked' clout of hospital and physician groups in California is a 'cautionary tale for national health reform,' Berenson said in a February article in the journal Health Affairs. He warned that incentives in the new legislation to improve treatment by promoting doctor-hospital alliances -- called 'accountable care organizations' -- could backfire by strengthening providers’ bargaining leverage.

Carilion Clinic
A Washington Post article discussed the example of Carilion Clinic in Virginia, whose increasing market power we had blogged about in 2008:

Railroads put this city on the map, but the king of the domain is now health care -- or rather, the Carilion Clinic.

Carilion owns the two hospitals in town and six others in the region, employs 550 doctors and has set off a bitter local debate: Is its dominance a new model for health care or a blatant attempt to corner the market?

The Carilion story emphasized again how the "accountable care organization" meme is being used to justify market consolidation, allowing health care oligopolies to appear politically correct:

Carilion says it represents an ideal envisioned by the nation's new health-care law: a network that increases efficiency by bringing more doctors and hospitals onto one team, integrating care from the doctor's office to the operating room. The name for such networks, which the new law strongly promotes with pilot programs, is accountable care organizations, or ACOs -- providers joining together to be 'accountable' for the total care of patients, with incentives from insurers to keep people healthy and costs down.

Note that this political correctness is also used to justify further consolidation of power by limiting outside referrals:

Independent doctors say Carilion is urging its employees to refer patients only to providers within the Carilion network, cloaking its expansion in the lingo of health-care reform.

Of course, the Carilion CEO also denies anything but the most altruistic intent, but he too is making a lot of money from the current system:

[Edward] Murphy, Carilion's chief executive who earned $2.3 million in 2008, acknowledges that providers holding excessive leverage over insurers is cause for concern but argues that ACOs can be a corrective.

Summary

We noted earlier this week that multiple kinds of uncertainty (e.g., about diagnosis, prognosis, and the effects of treatment), and information asymmetry make it theoretically difficult for the health care market to be truly competitive. Meanwhile, there is increasing evidence that the market is actually uncompetitive. Although there are many hospitals and health insurers across the US, in many areas there are very few insurers and very few hospitals or hospital systems from which to choose. We have previously blogged about how market dominant hospital systems seem to be able to charge more than any others.

In the 1960s, it became recognized that physicians' professionalism, hospitals' devotion to their missions, and sometimes even (gasp) government regulation might partially compensate for distortions in the health care market. However, as supposed free market advocates became more powerful, they pushed for the commercialization of medicine and hospitals, reducing professionalism and mission support, and the hollowing out government regulation. (However, why did the people who attacked medical societies' codes of ethics as monopolistic have no interest in attacking market domination by insurers or hospital systems?  Inquiring minds want to know.)

As we said last time, true health care reform would help physicians and other health care professionals uphold their traditional values, including, as the AMA once stated, "the practice of medicine should not be commercialized, nor treated as a commodity in trade." True health care reform would put health care "delivery" back in the hands of mission-focused, not-for-profit organizations, which put patients' health, safety and welfare first.

Meanwhile, these latest stories about market dominating hospital systems suggest some additional lessons.

Secrecy is the would-be monopolist's best friend. However, it is hard to think of very many kinds of information that hospitals really ought to be able to keep as proprietary secrets. As usual, sunshine is the best disinfectant.

There seems to be a strange and increasing alliance between politically- correct academic theorists and proponents of raw economic power. The theorists' notion of "accountable care organizations" seems to have become a great foil for would-be monopolists, yet the theorists have done nothing to show how their creation would really bring "power to the people." Meanwhile, maybe "ACO" should stand for "aggressive care oligopoly." Meanwhile, be extremely skeptical of the latest health care fad, especially when it is supported both by academics and CEOs.