Indiana’s anticompetitive market inflates costs, report says

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Not-for-profit healthcare providers dominate the Indiana market, creating an anticompetitive dynamic that has driven higher-than-average healthcare spending, according to a new study.

Households in the most concentrated healthcare markets pay more than double per procedure compared to those in the most competitive markets, a new policy brief from the Ball State University’s Center for Business and Economic Research shows.

In the most lopsided market, where there are roughly 0.12 unaffiliated hospitals per 100,000 residents, the average cost of outpatient services range between 3.65 and 4.43 times the Medicaid reimbursement rate, according to the preliminary analysis of Indiana’s 17 Affordable Care Act market regions that used Rand Corp. pricing data and data from not-for-profit hospitals’ Forms 990. In the most competitive markets, where there are 2.25 unaffiliated hospitals per 100,000 residents, the average outpatient services cost between 1.57 and 3.08 times the Medicaid reimbursement rate.

This lack of competition seems most acute in metropolitan markets rather than rural areas, said Michael Hicks, lead author of the study and Ball State’s Center for Business and Economic Research director and economics professor. He noted that Fort Wayne, South Bend, Evansville and other metros face more concentrated markets than more rural areas.

“The monopolization problem linked to the holdings of not-for-profits and the competitive advantage they receive through the not-for-profit designation is problematic,” Hicks said.

Profits, or what the institutions refer to as excess revenue over expenses, in Indiana’s most concentrated markets averaged $82 million, while profits in the least concentrated markets averaged $2.3 million, according to the study. All told, not-for-profit hospitals in Indiana collected more than $1.78 billion in profits in 2015.

Meanwhile, healthcare costs for Indiana residents have far outpaced non-healthcare costs over a 20-year span, rising from $4,207 a year in inflation-adjusted dollars in 1997 to $7,962 in 2017. The typical Hoosier spends 4.4% more of their annual income on healthcare than the average American, according to federal data.

An Indiana resident paid $330 less than the national average for healthcare in 1997; that individual paid $819 more than the national average in 2017. Concurrently, outcomes have lagged, suggesting access obstacles, Hicks said.

Some of the limitations of the study include a lack of robust data to conduct a full test across all in-patient services as well as partial sub-state data on personal consumption expenditures.

The Indiana Hospital Association said that much of the data is flawed. The profit calculations factor in all of Ascension’s cash reserves and investments, which isn’t a fair portrayal since Ascension is national in scope, said Brian Tabor, IHA president. The profit margins are quantified using 990 data, which is often unverified and inaccurate, he said. As a whole, Indiana is quite competitive, Tabor maintained. A related Health Care Cost Institute analysis found that the Indianapolis area was only moderately concentrated.

“We all know that the current trajectory of healthcare spending is unsustainable. Our members are working hard at bending the cost curve and at the same time maintain their commitment to improve access and provide high-quality care, and when we have an analysis that misses the mark, it is not helpful in getting the conversation where it needs to go,” said Tabor, adding that he also took exception with some of the “flawed” recommendations that would ultimately pull resources from the community.

The study joins a growing compendium of research linking less competition to higher prices. A related national analysis found that prices at monopoly hospitals were 12% higher than those in markets with four or more rivals. Mergers in concentrated markets often lead to price increases in the range of 20% to 30%, and can surge up to 50%, experts said.

Hospital associations and executives counter that costs will be held down over the long run due to efficiencies of scale.

Within Indiana, Hicks noted in the study, market concentration appears strongly correlated with an organization’s size, suggesting that the negative impact of market power, not the benefit of scale economies influence pricing.

Looking ahead, the ongoing trend of hospitals, health systems and other providers joining forces is not expected to slow.

“It is very rare that markets have seen greater efficiencies (following hospital mergers) and that those have been passed onto the consumer,” said Fred Bentley, managing director at Avalere Health. Bentley noted that the study didn’t address health insurer consolidation, which has a significant impact on pricing.

To restore competition, Hicks recommended beefing up antitrust enforcement, ending certificate of need and local non-compete clauses, and unraveling mergers. Profitable not-for-profit providers should be taxed at rates consistent with the private sector. At minimum, investments should be more restricted, he said.

The not-for-profit market conditions in Indiana have failed to sustain competition and must be incentivized to refrain from anticompetitive practices, Hicks said.

“There is intentional complexity on this issue that is benefiting the hospitals and their capacity to mysteriously price services,” he said.

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