Jul 1, 2019 - Health

When a hospital wields monopoly power

Illustration of a giant health plus on top of a pile of cash, the ground underneath is cracking.

Illustration: Aïda Amer/Axios

NorthBay Healthcare, a not-for-profit hospital system in California, recently gave a candid look into how it operates, telling investors it has used its negotiating clout to extract "very lucrative contracts" from health insurance companies.

Why it matters: This is a living example of the economic theories and research that suggests hospitals will charge whatever they want if they have no or minimal competition.

Details: NorthBay owns two hospitals and several clinics in California's Solano County. Kaiser Permanente owns the only other full-service hospital in the county, and Sutter Health operates some medical offices. (A NorthBay spokesperson argued the system is "more akin to the David among two Goliaths.")

Three health insurers — Kaiser, Blue Shield of California and Anthem — have terminated their contracts with NorthBay over the past couple years. During a June 19 call with bondholders, executives explained why this has happened.

"We've been able to maintain very lucrative contracts without the competition. And what the payers are saying is, they would like us to be like 90% of the rest of the United States in terms of contract structure."
— Jim Strong, interim CFO, NorthBay Healthcare

Between the lines: NorthBay's revenue has increased by 50% over the past few years, from $400 million in 2013 to $600 million in 2018, due in large part to its natural monopoly and oligopoly over hospital services. This is exactly what we should expect to happen when sellers have the upper hand over buyers, economists say.

  • "As hospitals gain market power and as hospitals become the only game in town, they have an enormous amount of leverage against the insurers," said Sunita Desai, a health economist at NYU.

NorthBay also serves as a cautionary tale for price transparency, the latest health policy de jour.

  • "If the health care system is consolidated, consumers don't have anywhere else to go," Desai said. "Even if they see the prices of a given hospital, they're limited in terms of how much they can 'shop' across providers."

Flashback: "We find that nonprofit hospitals set higher prices when they have more market power all else being equal," federal antitrust regulators wrote in a 1996 study.

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