Minnesota has a hospital merger problem.
But it didn’t begin last fall when Sanford Health and Fairview Health Services announced their intention to merge. It began in the 1980s and accelerated in the 1990s in response to mergers of unprecedented size among health insurance companies. By the early 2000s, Minnesota’s hospital sector had been transformed into a few hospital chains, each of which dominated its own region – Mayo in the south, Allina across much of the eastern part of the state and Essentia in the north, for example. By 2002, Minnesota’s health insurance industry was the sixth most concentrated in America. Three insurance companies controlled 89% of Minnesota’s commercial market.
By the mid-1990s, merger mania in Minnesota’s health care system was driving up health care costs across the state. According to the National Health Expenditure Accounts maintained by the Centers for Medicare and Medicaid Services, per capita health care costs in Minnesota went from average to 10% above the national average during the latter half of the 1990s, and has stayed at approximately that level ever since 2000. In 2020, for example, Minnesota spent $7,533 per capita on health care, 9.1% above the national level of $6,906.
The fact that Minnesota became a high-cost state shortly after consolidation accelerated in the health insurance and hospital sectors should have surprised no one. Long before gigantic size became a priority for insurance and hospital CEOs, research by economists had established that consolidation drives prices up in nearly all sectors of the economy. The problem is especially acute in health care because competition has never been vigorous in health care. “Hospital consolidation generally results in higher prices,” concluded the Robert Wood Johnson Foundation in a 2012 review of the research. Martin Gaynor, an economist at Carnegie Mellon, testified to Congress that “mergers between hospitals not in the same geographic area can also lead to increases in price.”
The same is true of health insurance. According to the Commonwealth Fund, “Research shows consolidation in the private health insurance industry leads to premium increases, even though insurers with larger local market shares generally obtain lower prices from health care providers.”
Of course, Minnesota is not the only state that is now burdened with a highly consolidated health care system. Huge insurance companies and hospital chains dominate markets all across the country. Minnesota does, however, have the distinction, along with California, of leading the nation down the consolidation path almost a half-century ago. Minnesota, led by the Twin Cities market, and California, led by the San Francisco-Sacramento market, led the nation in promoting the “health maintenance organization.” By 1989, almost half of the San-Francisco-Sacramento and Twin Cities markets had been taken over by HMOs. The HMOs, which pioneered a set of cost-control tactics collectively called “managed care,” used their burgeoning market power to extract enormous discounts from hospitals.
The HMOs were able to do this because, unlike traditional insurance companies, they limited patient choice of hospital, and that in turn gave the HMOs the power to shift large blocs of patients away from hospitals that refused to cave to the HMOs’ demands for large discounts. When George Morrow resigned as CEO of Physicians Health Plan (the largest of the HMOs taking over the Twin Cities in the 1980s), he told CityBusiness, “In Minnesota, we’ve built a managed care industry on the backs of the hospitals.” Hospitals responded to the HMOs’ demands for large discounts by merging with each other and buying up clinics in order to wield market power commensurate with that of the HMOs. HMOs and other insurance companies responded by merging among themselves. And around the vicious cycle went.
The race to get big will continue as long as our dysfunctional health care system continues to reward gigantism. For the last four decades, gigantism in health care has been rewarded with the power to demand higher prices from customers and lower fees, wages, and prices from suppliers of goods and labor. Antitrust laws should be more aggressively enforced, especially in the case of mergers as large as the proposed Sanford-Fairview merger. But we should not look to antitrust agencies to stop the race to gigantism. Antitrust lawsuits are too slow and too expensive. We need legislation that removes the incentive to get big in the first place, namely, “all-payer” or preferably “single payer” legislation that creates an agency similar to a public utilities commission that has the authority to set uniform hospital prices or budgets.
Kip Sullivan is a member of the Health Care for All Minnesota advisory board.