Proposed LVHN merger would raise prices
The proposed merger between Lehigh Valley Health Network and Jefferson Health is a terrible idea, and one that regulators should quickly condemn. Consolidation among health care providers leads inexorably to higher prices for patients.
The Centers for Medicare & Medicaid Services has finally begun to achieve some meaningful price transparency in health care, notwithstanding the fact that hospitals have had to be dragged kicking and screaming to comply. But all the price transparency in the world is useless if there are no competitors to compete.
While LVHN and Jefferson share little market overlap now, this does not tell the full story. We are fortunate in the Lehigh Valley to have two viable health care competitors in St. Luke’s and LVHN; we used to have more, but two is still better than one.
However, this proposed merger would result in either St. Luke’s becoming a second-place competitor, allowing the new Jeff/LVHN entity to call the tune for prices in the Lehigh Valley, or force St. Luke’s into the arms of an even bigger system to remain a viable competitor. In either case, prices for health care and health insurance would rise, and patients would lose.
Adding insult to injury, is the fact that Jefferson is a so-called integrated finance and health care provider, selling health insurance in addition to providing health care. The integrated finance and health care model enriches providers at the expense of patients.
One of the most important functions served by health insurers, albeit not as well as it might be, is to act as a sort of buyers-cooperative in negotiating lower prices with hospitals/providers. In the integrated model, the hospital/provider is negotiating with themselves. If this seems like putting the fox in charge of the hen house, that’s because it is precisely that.
In Western Pennsylvania, University of Pittsburgh Medical Center has used this model to devastating effect. Even if these integrated systems accept patients covered by health plans sold by other companies — and some do not — these integrated providers certainly negotiate a lower price with their in-house insurance provider, at least until they have driven all other insurers out of the marketplace, and then the sky’s the limit for health care prices and health insurance premiums.
The Valley has already suffered from rampant vertical integration in health care. Vertical integration refers to hospitals/health systems buying various levels of doctor practices: primary (general practitioners), secondary (specialist care provided following a referral from primary care) and tertiary (highly specialized services following a referral from secondary care). Vertical integration is used to essentially lock patients into one health system for all their care. For example, if a patient’s general practitioner is owned by St. Luke’s and the patient needs a specialist, they will likely be referred to a St Luke’s specialist.
If LVHN, Jefferson or any other provider were serious about helping patients and not lining their own pockets, they would commit to charging all patients reasonable and fair prices for the care they provide. Specifically, they would commit to charging no patient more than 125% of the Medicare fee for service price.
Instead, hospitals’ set shockingly excessive list prices, that are, on average, about 500% of the Medicare price. Even prices negotiated by commercial health insurers are about 2 ½ times the Medicare price. Everyone, except for Medicare patients, is grossly overpaying for health care. Moreover, the more market power a provider has, the higher its prices.
Some claim Medicare prices are too low, and hospitals lose money treating Medicare patients. Others claim hospitals make a robust profit on Medicare and are gaming the system when they claim to lose money on Medicare. Given that hospitals voluntarily agree to participate in Medicare and may revoke their agreement at any time, it is reasonable to assume that hospitals find Medicare prices profitable. Thus, all should agree that 125% of the Medicare price would provide a very healthy profit for hospitals, even though it is half of the commercial insurance price.
Don’t let the nonprofit status of health care providers fool you. In health care, nonprofit charitable tax-exempt hospitals are really wolves in sheep’s clothing; their behavior related to pricing, billing and profit is no different than that of for-profit providers.