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From 2002 to 2020, health care prices rose, and over 1,000 American hospitals merged. Economic theory tells us mergers may generate scale economies, which lower health care costs. However, they may also reduce hospital competition, which increases health care prices. Most economists conclude that the available evidence suggests hospital mergers have caused health care prices to increase.
In a recent National Bureau of Economic Research working paper, “Who Pays for Rising Health Care Prices? Evidence from Hospital Mergers,” a world-class set of authors examines the economic consequences of increasing health care prices, specifically on the consequences of price increases caused by hospital mergers.
They begin by noting that employer-sponsored health insurance plans cover more than 50% of Americans. Merger-related price increases mean employer-sponsored plans pay hospitals more for each procedure, meaning health insurance companies charge more for health insurance. Since employers now have to pay more for their employees’ health insurance, it is more expensive to hire employees, so employers’ demand for workers decreases. Lower demand for workers means lower wages and reduced employment.
The higher health care costs lower demand for low-wage workers more than for high-wage workers since the percentage increase in health care costs is higher for low-wage workers. For example, assuming insurance prices are the same for all of a company’s workers, a 1% increase in insurance prices is twice as large for a worker earning $50,000 as for a worker earning $100,000. Higher health care premium prices also encourage employers to offer less generous health insurance.
The authors find that reduced competition, which causes higher health care prices, damages local economies by reducing employment, workers’ earnings and local tax revenue. They also note that higher health care prices are associated with increased suicides and overdoses. They find that almost all the negative consequences fall on those earning less than $100,000 a year, which increases income inequality.
During the period of the authors’ study, inpatient hospital care prices increased 42.3%, and outpatient hospital care increased 24.1% for privately insured patients. The authors estimate that health care price increases from 2007 to 2014 reduced workers’ income by 2.7%, increased unemployment 0.86%, and led to about 10,000 additional deaths from suicides and overdoses.
The authors conclude that mergers causing health care price growth raise labor costs, reduce the competitiveness of non-health-care-related American businesses, raise government costs, reduce government revenue and increase income inequality.•
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Bohanon and Horowitz are professors of economics at Ball State University. Send comments to ibjedit@ibj.com.
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