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hospital mergers

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Much of the debate about the U.S. healthcare system is focused on the role of public financing (in terms of subsidies and, for some, the possibility of a public option or even a single-payer program). But no one seems to want to look at the other key part, the actual delivery of healthcare to American workers and others. And that, regardless of the system of financing, remains mostly in profit-oriented private hands (which, as I argued earlier this year, undermines patient-centered healthcare).

There are a few exceptions, such as the Veterans Health Administration and Indian Health Service, whereby the government directly employs nurses, physicians, and others to provide health services to targeted populations. But the rest of healthcare is provided by private  (profit and nominally nonprofit) individuals, groups, and corporations.

As I discussed on Friday, a significant sector of private healthcare is the increasingly concentrated and enormously profitable pharmaceutical industry. Hospitals (which I’ve commented on many times over the years) are, of course, another key sector (at close to $1 trillion in 2014). That’s where Americans receive most of their in-patient care, critical care (including many without health insurance in emergency rooms), and an increasing number of out-patient treatments. And while hospitals appear to be independent from and non-overlapping with physicians (whose services accounted for roughly $600 billion in 2014), that’s an optical illusion. Not only do they compete with one another (in surgery, imaging, and other ambulatory services), each is forced to work closely with the other: hospitals rely on physicians to admit patients to their facilities, refer to their specialists, and to use their lucrative diagnostic services (with, as it turns out, illegal kickbacks), while physicians tend to their own patients within hospitals and are contracted for “in-house” supervision. And, increasingly, hospitals are directly employing physicians (and other healthcare workers) as salaried and piece-rate workers.

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U.S. hospitals are, as it turns out, remarkably profitable. And, according to a recent analysis by Ge Bai and Gerard F. Anderson (unfortunately gated), 7 of the 10 of the most profitable hospitals (each exceeding more than $163 million in total profits from patient care services) are officially non-profit institutions.

According to Anderson,

The system is broken when nonprofit hospitals are raking in such high profits. The most profitable hospitals should either lower their prices or put those profits into other services within the community. We need to develop incentives that allow all hospitals to make a fair profit while at the same time keeping prices reasonable.

It’s true, many other hospitals (56 percent in their sample of acute-care facilities) are not profitable strictly in terms of patient services (the median hospital lost $82 per adjusted patient discharge). However, as the authors explain,

the median overall net income from all activities per adjusted discharge was a profit of $353, because many hospitals earned substantial profits from nonoperating activities—primarily from investments, charitable contributions (in the case of nonprofit hospitals), tuition (in the case of teaching hospitals), parking fees, and space rental. It appears that nonoperating activities allowed many hospitals that were unprofitable on the basis of operating activities to become profitable overall.

The most important factors boosting hospital profitability were markups (especially for uninsured and out-of-network patients and casualty and workers’ compensation insurers who often pay the hospital’s full charge) and the combination of system affiliation and regional power.

In fact, 50 hospitals in the United States are charging uninsured consumers more than 10 times the actual cost of patient care. All but one of the facilities are owned by for-profit entities. Topping the list is North Okaloosa Medical Center, a 110-bed facility in the Florida Panhandle about an hour outside of Pensacola, where uninsured patients are charged 12.6 times the actual cost of patient care. Community Health Systems operates 25 of the hospitals on the list. Hospital Corporation of America operates 14 others.

Again according to Anderson:

They are price-gouging because they can. They are marking up the prices because no one is telling them they can’t. These are the hospitals that have the highest markup of all 5,000 hospitals in the United States. This means when it costs the hospital $100, they are going to charge you, on average, $1,000.

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It should come as no surprise, then, that, while the total number of hospitals has remained relatively constant over time, the number of those hospitals in health systems has continued to increase, thereby increasing regional power, markups, and profitability.

In another recent study, by Richard M. Scheffler et al., the authors found that the hospital markets in two states (California and New York) “were moderately to highly concentrated,” with mean Herfindahl-Hirschman indices of 2,259 and 3,708, respectively.* They also found that more concentrated hospital markets were associated with higher premium growth.

As expected, then, there is a continuing strong movement of hospital mergers and acquisitions—with at least 100 deals covering 178 hospitals, involving the takeover of profit and especially non-profit organizations, in 2014—leading to increased concentration in the hospital sector of the U.S. healthcare industry.

As Martin Gaynor explains,

There has been so much consolidation that most urban areas in the US are now dominated by one to three large hospital systems — examples include Boston (Partners), the Bay Area (Sutter), Pittsburgh (UPMC), and Cleveland (Cleveland Clinic, University Hospital). It is also now more likely that further consolidation will combine close competitors, given how many mergers have already occurred.

Clearly, the provision of healthcare through U.S. hospitals—both profit and, at least officially, non-profit—is generating enormous profits for their owners and top executives. But it’s Americans workers, who are both hospital employees and consumers of hospital services, who are paying the price.

 

*To remind readers, the Herfindahl-Hirschman Index is often used to evaluate the potential antitrust implications of acquisitions and mergers across many industries, including health care. It is calculated by summing the squares of the market shares of individual firms. Markets are then classified in one of three categories: (1) nonconcentrated, with an index below 1,500; (2) moderately concentrated, with an index between 1,500 and 2,500; and (3) highly concentrated, with an index above 2,500.

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Rudy Van Gelder RIP

Posted: 28 August 2016 in Uncategorized
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Most of what I know of and appreciate in modern-classic jazz was made possible by recording engineer Rudy Van Gelder [ht: sw].

In Van Gelder’s hands, even the most furious music maintains a refined clarity, a center of calm assurance amid the turbulence. . .

And so it was, in both studio sessions (such as Eric Dolphy’s Out to Lunch) and live recordings (like John Coltrane’s Live At The Village Vanguard). 

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One of the biggest crime waves in America is not robbery. It is, as Jeff Spross [ht: sm] explains, wage theft.

In dollar terms, what group of Americans steals the most from their fellow citizens each year?

The answer might surprise you: It’s employers, many of whom are committing what’s known as wage theft. It’s not just about underpaying workers. They’re not paying workers what they’re legally owed for the labor they put in.

It takes different forms: not paying workers the federal, state, or local minimum wage; not paying them overtime; or just monkeying around with job titles to avoid regulations.

No one knows exactly how big a problem wage theft is, but in 2012 federal and state agencies recovered $933 million for victims of wage theft. By comparison, all the property taken in all the robberies of all types in 2012, solved or unsolved, amounted to a little under $341 million.

Remember, that $933 million is just the wage theft that’s been addressed by authorities. The full scale of the problem is likely monumentally larger: Research suggests American workers are getting screwed out of $20 billion to $50 billion annually.

Actually, employers steal from workers in at least two different ways: when they don’t pay them what they’re legally owed, and even when they do. In the former case, the laws and enforcement are weak—but at least prosecutors and labor groups are getting more aggressive about pursuing wage theft. Maybe, then, workers will be able to recover the back pay they’re owed and employers, instead of just paying small fines when they’re caught, might actually go to jail.

In the latter case, the theft that occurs even when workers are paid what they’re legally owed, is a bit more difficult, at least within existing economic institutions. That’s because, under the rules of capitalism, workers receive a wage (which, at least under certain circumstances, equals the value of their labor power). But then, beyond the labor-market exchange, when workers start to produce, they create value that is equal not only to their wages, but also an additional amount, a surplus. Even when workers receive their legally mandated wages, that extra or surplus-value is appropriated by their employers. It’s legal and, within the ethical code of capitalism, “fair.”

So, within contemporary capitalism, we should be aware of two kinds of wage theft, both committed by employers: the theft of legally mandated wages and the theft that occurs even when workers receive their legally mandated wages.

The first is a case of individual theft, the second a social theft. Both, it seems, are countenanced within contemporary capitalism—and workers are made to suffer as a result.

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As I’ve been discussing over the course of the past week, the U.S. healthcare system is a nightmare, at least for workers and their families. It costs more and provides less than in other countries. Employees are being forced to pay higher and higher fees (in the form of premiums, deductibles, and other charges). And it relies on a private health-insurance industry, which is increasingly concentrated and profitable.

What about the other part of the system, the actual provision of health care? I’m thinking, in particular, of the pharmaceutical industry (which I focus on in this post) and hospitals (which I’ll take up in a future post).

According to a recent study by the Wall Street Journal, consumers in the United States nearly always pay more for branded drugs than their counterparts in England (39 higher and 1 lower), Norway (37 higher and 3 lower), and Ontario, Canada (28 higher and 2 lower). Thus, for example, Lucentis (which is used for the treatment of patients with wet age-related macular degeneration and other conditions) costs $1936 in the United States but only $894 in Norway, $1159 in England, and $1254 in Ontario. The same is true for many other drugs, from Abraxane (for treating cancer) to Yervoy (for treating skin cancer).

Part of the reason is that, in other countries, public healthcare systems have substantial negotiating power and are able to bargain with pharmaceutical companies for lower prices (or, in the case of Canada’s federal regulatory body, to set maximum prices). The U.S. market, however, “is highly fragmented, with bill payers ranging from employers to insurance companies to federal and state governments.” In particular, Medicare, the largest single U.S. payer for prescription drugs, is legally prohibited from negotiating drug prices.

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On the other side of the market, the U.S. pharmaceutical industry has become increasingly concentrated through a wave of numerous and increasingly large merger-and-acquisition deals. According to Capgemni Consulting, since 2010, approximately 200 pharmaceutical and biotech deals have taken place per year in the United States. 2014 saw several of the largest deals in the pharmaceutical industry to date, including the $66-billion purchase of Allergan by Actavis, Merck unloading its consumer health unit to Bayer, GSK and Novartis’s multibillion-dollar asset swap, as well as Novartis’s animal health unit sale to Eli Lilly.

Although high-profile, major acquisitions outweigh other deals by value, over 90 percent of deals were relatively small in size (less than $5 billion). Clearly, the motivation in these smaller deals is different.

Failure of bigger pharmaceutical companies to consistently develop new drugs and pressure from shareholders to deliver returns have forced large pharmaceutical companies to look outside for innovative drugs. This has resulted in new drug approvals emerging as a major trigger for acquisitions.

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The fragmented, unregulated system of drug purchases in the United States, combined with growing concentration of the pharmaceutical industry, means that health technology—with a 20.9 percent net profit margin—is now the most profitable industry in the country.

High drug prices are one of the key factors behind rising U.S. healthcare costs, and one of the main reasons why American workers pay more and yet receive poorer healthcare than in other rich countries.

Addendum

As if to confirm my analysis of the role of the pharmaceutical industry in creating a nightmarish U.S. healthcare system, we now have the examples of the Epipen and Pfizer.

As Aaron E. Caroll explains, the story of EpiPens is not just about how expensive they’ve become; it also reveals “so much of what’s wrong with our health care system.”

Epinephrine isn’t an elective medication. It doesn’t last, so people need to purchase the drug repeatedly. There’s little competition, but there are huge hurdles to enter the market, so a company can raise the price again and again with little pushback. The government encourages the product’s use, but makes no effort to control its cost. Insurance coverage shields some from the expense, allowing higher prices, but leaves those most at-risk most exposed to extreme out-of-pocket outlays. The poor are the most likely to consider going without because they can’t afford it.

EpiPens are a perfect example of a health care nightmare. They’re also just a typical example of the dysfunction of the American health care system.

And then we have Pfizer’s purchase of part of AstraZeneca’s antibiotics business, which doesn’t involve the development of any new drugs but (for $550 million upfront plus an unconditional $175 million in January 2019, and possibly a further $850 million plus royalties), Pfizer will have the right to sell three approved antibiotics and two drugs in clinical trials in most markets outside the U.S. and Canada, plus an additional drug (Merem) in North America.