Alabama Hospitals Need Competition

By Dr. Richard Menger

This is a guest opinion column

Alabama is facing a crisis regarding hospital operating costs. Alabama hospitals posted a 79% decrease in operating margin from 2019-2022. This has put rural hospitals at risk for closure. And, it’s about to get worse when the government, finally, ends the COVID-19 enhanced payments.

Leadership within the American Hospital Association are asking for more government payments. This call is understandable but subsides should be linked to policies that target the actual core nidus behind the problems in patient care delivery.

Reform needs to break up the large system of hospital mergers. acquisitions, and consolidation. This is destroying competition, limiting care options for patients, and burning out our physician and nurse workforce. The game of Hospital Monopoly needs to end.

Hospitals are having difficulty affording staffing. This is because hospitals have used crony capitalism to destroy market competition. Warring hospital groups bought up smaller hospitals, primary care practices, and surgical specialists practices. This has allowed giant healthcare systems to control the regional delivery of healthcare. For years, this artificially drove employee wages down as it reduced local competition for a talented workforce.

One of the more insightful works on this issue comes from the Kellogg School of Management at Northwestern and UCLA. In highly consolidated hospital labor markets, where skilled workers, like nurses, did not have different employer options, wage growth slumped. As hospitals consolidated, nurses lost approximately 1/3 of their annual wage growth compared to those in markets without consolidation.

As is typical, distortion of market forces creates alternative markets; nurses became increasingly willing to travel for higher wages. Nurses temporarily move or commute from outside a certain geographical radius to work at a non-local hospital. There is some complexity to the math but, it’s not unusual for a traveling nurse to make at least two times the salary of a local nurse. Covid-19 put this in an accelerator.

Indeed, total hospital expenses have increased $2.6 billion from pre-pandemic levels. Hospitals in the state of Alabama have spent 30% more on labor in 2022 than in 2019.

This, of course, is not sustainable. The solution is reform, accountability and competition.

The first solution is to reduce the administrative bloat of healthcare. Heavy administrator overwatch leads to burnout which results in less available healthcare workers.

Between 1975 and 2019, the number of physicians grew 150%. Between 1975 and 2010 the number of healthcare administrators grew 3200%. That’s a lot of administrators, and they are expensive. Hospital executive salary has increased 93% over ten years. This far outpaced any physician salary increase. Indeed, the average gap in salary between hospital executive and physician has grown to 5:1 from executive to surgeon, 12:1 from executive to pediatrician, and 44:1 from executive to nurse.

Again, this is not a capitalist victory. It’s crony capitalism via government subsidy. Reform needs to focus on the patient and the physician.

The second solution is the need to hold non-profit hospitals accountable when they receive government monies. As my colleague Dr DiGiorgio has noted hospitals mergers have led to the national exploitation of the well-intended 340B program. This is a national drug discount program in which manufacturers sell medicine at discounted prices to community health centers that treat low income or mostly Medicaid insurance patients. The goal was admirable, to help clinics that take care of vulnerable patients.

However, there is strong evidence regarding hospital systems strategic gaming of the system. Due to market consolidation, these large mega hospital systems are everywhere in their community. They can use that sprawling stature to manipulate the drug market. Hospitals can treat the minimum number of low income hospital patients and become eligible for 340B discount pricing. They are then able to charge full price in any clinic within their system even if that specific clinic only treats patients with private insurance. This creates a vicious cycle of consolidation as private practice clinics have a hard time competing with these ridiculous margins, especially in oncology. Indeed, the data shows that most of the expansion of the 340B program has occurred in affluent communities.

This is the not the intent of the program, and there needs to be accountability.

The third solution is to inject competition into the stale hospital dominated system. This will make care better. Recent rulings have usurped non-compete clauses, this can give doctors the ability to compete for wages in a regional market. It is a step in the right direction. The American Hospital Association (AHA) is lobbying against that.

The other injection of competition is to allow physician ownership of hospitals. Physicians provide care and create value and are more aligned with patient outcomes at less cost. As part of the lobbying for the Affordable Care Act, the AHA was able to influence legislation banning or severely limiting the concept of physicians owning a hospital.

Senator Lankford from Oklahoma has introduced the Patient Access to Higher Quality Health Care Act to undo this Obamacare ban on physician owned hospitals receiving federal payments. My colleague, Dr Brian Miller highlighted the benefits of this while addressing the caution and limitations. Of course, the AHA is lobbying against this legislation.

I understand the apparent potential need for what is essentially a hospital bailout. But, any government subsidy should look to fix the disease, not just mask the symptoms of the actual problem.