Fighting for Life: The Impact of Competition Between Hospitals on Healthcare

By Runlin Wang

Expanding Obamacare. Implementing Medicare-For-All. With these competing policy proposals, healthcare reform is proving to be a priority for politicians and the general public alike in the 2020 presidential campaigns. With progressive politicians vowing to fix healthcare by implementing a single-payer system, some Americans are starting to view the free market in health insurance as the culprit behind the costliness and inaccessibility of the U.S. healthcare model. While important, access to health insurance is not an immediate life or death matter, but the quality of patient care is. Today’s political rhetoric focuses heavily on flaws in the health insurance market; as a result, the implications of underregulated hospital competition on patient care are often neglected. Upon closer examination of competitive dynamics between hospitals in the United States and abroad, one finds that while competition in specific contexts enhances the delivery and availability of medicine, unrestrained competition between hospitals severely decreases the quality of treatment. Accordingly, the U.S. should focus on effectively regulating hospital competition, in order to provide better care for patients under its healthcare model.

Hospital Competition in the United States

Competition between hospitals encourages mergers and acquisitions, which contributes to lower quality of care within the healthcare system. Hospitals typically attempt to gain a competitive advantage over each other by providing unique benefits to patients; small clinics emphasize local, convenient care while tertiary medical centers boast specialized medical professionals and equipment. This comes at the expense of medium-sized community hospitals that are unable to fill either of these niches, as studies show that large hospitals are admitting an increasing number of patients that could have been treated in community hospitals. Hospital growth statistics reflect this idea that mid-sized hospitals are being out-competed; while large hospitals saw a 62% increase in the number of outpatient visits between 2000 and 2013, medium-sized institutions only had 17% more outpatients. Coupled with increasing costs of operation, many community hospitals, particularly those in rural areas, find themselves merging with other medium-sized hospitals or being acquired by a larger medical center due to financial challenges. The plight of Mercy Hospital in Fort Scott, Kansas exemplifies the challenges that mid-sized hospitals face. Facing decreased revenue and no feasible mergers, Mercy closed down in late 2018 and left the town of 8,000 Americans without a hospital in their municipality. While hospital consolidation does result in efficient economies of scale, fewer hospitals means increased patient concentration in remaining hospitals, which is correlated with lower quality of care given to each individual patient. Additionally, fewer hospitals results in increased fatality rates for acute time-sensitive diseases such as stroke, due to longer distances and travel times between hospitals. Thus, deregulated competition between hospitals results in lower quality care being delivered to the patient by the healthcare system as a whole, due to the increased prevalence of mergers and acquisitions.

Hospitals in the U.S. are also investing less into improving treatments due to competitive pressures. As predicted by laissez-faire principles, hospitals in the free market decrease spending on treatments with low or negative profit margins, such as dementia. Using data from 1,376 hospitals in the United States and the Logit Competition Index (LOCI) as an indicator of how much competition a hospital faces, a 2016 study investigated the impact of competition on dementia treatments. The analysis found that an increase of LOCI by 2 standard deviations results in a 1.4% increase in feeding tube placements in the last 6 months of dementia patients’ lives, which is strongly associated with poor quality care. This affirms that patients with unprofitable illnesses like dementia may be overlooked in competitive environments and receive lower quality of care. However, the same study also finds little statistically significant correlation between hospital competition and the quality of elective hip and knee replacement procedures, which are highly profitable. The question then arises: where is the hospital investing its resources saved from unprofitable treatments if the quality of profitable care is not improving either? Past analyses have determined that hospitals in a market system are instead channeling their resources on providing benefits to physicians and other health organizations to establish referral loyalty and expand their market share rather than on improving treatments.

Restricted Competition in a Single-Payer Model

Many of these issues associated with hospital competition in the American free market are absent in the single-payer model of the United Kingdom’s National Health Service (NHS). As medical institutions are fully funded by the government, medium-sized hospitals do not feel financial pressure to merge or close down. These hospitals remain open, keeping patient concentrations low and decreasing average distances to the nearest hospital. The government also subsidizes low profit and negative profit treatments, ensuring that these treatments do not decrease in quality due to market forces. Furthermore, British citizens are assigned a designated hospital by a local public agency, eliminating the incentive for hospitals to spend resources on gaining more patients. By establishing firm government control over hospitals, the NHS stifles competition between hospitals and ensures decent quality of care for patients. However, critics of the NHS rightfully argue that this uncompetitive system fosters inefficiency, as evidenced by lengthy patient wait times.

When the NHS responded to these concerns by introducing regulated competitive measures between hospitals, significant improvements to quality of care resulted. In 2006, the NHS implemented the “Payment by Results” (PbR) program. Rather than provide unconditional funding for hospitals, PbR mandated that the government would pay hospitals a set amount for each procedure. Furthermore, patients were now allowed to pick their hospital of choice from 5 options rather than being assigned to a hospital. These competitive measures resulted in a substantial increase in quality of care systemwide. Over the 4 years during which PbR was gradually implemented, the mortality rate from acute myocardial infarction, a statistic scientifically accepted as inversely proportional to quality of care, decreased by an average of 0.21% per year, bringing the UK numerous benefits that monetarily equate to over $475 million. Therefore, the NHS demonstrates how the integration of limited, strictly regulated hospital competition with a more socialist single-payer system can ensure both treatment quality and efficiency.

In closing, the United States should substantially increase its regulation of hospitals while also establishing guidelines that allow the government to facilitate limited competition between healthcare providers. While the current U.S. healthcare model isn’t a completely uncontrolled free market, it could still benefit substantially from embracing more left-wing regulatory policies similar to those of the NHS and other single-payer systems around the world. Fundamentally, these reforms would ensure that free market principles enhance, rather than detract from, the delivery and accessibility of healthcare. As unrestricted competition between hospitals only provides the best healthcare in a perfect world, our imperfect society can focus on regulating limited doses of competition within a government-controlled hospital system to provide better care for all Americans.