Are Hospitals Grabbing a Bigger Share of the Healthcare Pie?

Last Updated Aug 30, 2008 1:58 PM EDT

The U.S. healthcare system is sometimes best thought of as a three-way tug-of-war between payers (private insurers and the feds), providers (hospitals and doctors) and suppliers (drug and medical-device makers). No, patients don't really figure into this analogy -- at best, they're trussed up in the middle somewhere.

Most big changes in the system result when one of the three players temporarily seizes the upper hand. In the mid-1990s, for instance, managed-care companies were successful at forcing providers to accept all manner of treatment limitations, and thus held down costs and profited enormously while hospitals and doctors suffered. The pharmaceutical industry is just coming off a similar winning streak, during which it raised prices with impunity thanks to ad-fueled consumer demand for many of its drugs.

These days, with profits and, in many cases, membership drooping at many insurers, Joe Paduda of Managed Care Matters suggests that perhaps hospitals have once again managed to assert their dominance. I'm not entirely convinced, but it's an interesting argument. For instance:
All this suggests to Joe that the big hospital chains have -- somehow -- managed to find a way to shift their costs onto insurers. This could conceivably involve a shift to more lucrative treatments, a greater volume of procedures (i.e., if doctors do more things to patients, it doesn't matter as much if you have fewer patients), or simply better negotiating leverage resulting in lower discounts offered to big health plans.

And maybe that's true. For instance, iIt's worth noting that one of Joe's commenters argues that manage-care companies used to employ crack negotiators, but have since stopped paying them as well, with the result that many now work for hospitals. On the other hand, it's only one quarter of data, so I'd want to see more before I really begin to believe that any of this is true.

On top of that, there's the fact that broader trends in the healthcare industry spell real trouble for hospitals as well. As I wrote back in May:
WellPoint and other major insurers clearly intend to bolster their sagging businesses by raising health-insurance premiums. As insurance grows more expensive for employers, many are likely to scale back or drop coverage. That means hospitals will end up treating a greater number of underinsured or uninsured patients, leading to more bad debt, more aggressive collections procedures, and in some cases, draconian measures such as forcing patients to pay in advance for cancer care and other expensive treatments (along with the resulting bad PR).

All of which suggests, at best, another round of contraction and consolidation among both insurers and hospitals, as they struggle to shift rising healthcare costs onto consumers and businesses that are increasingly unable to pay for them. At worst, it could mean the beginning of a death spiral for the byzantine and inefficient U.S. healthcare system. Nothing seems more likely to precipitate a general healthcare crisis than the continued collapse of employer-provided health insurance, and it's hard to see how that ends short of some form of dramatic government takeover that could shake all three industries to the core -- and possibly even legislate health insurers out of business.
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    David Hamilton is the assistant managing editor of CNET News. He has been writing and editing business and tech coverage for about two decades -- the majority of that at the Wall Street Journal in both Tokyo and San Francisco. He is a two-time winner of the Overseas Press Club award and has written for numerous magazines and blogs, including Slate, Science, VentureBeat, CBS Interactive's BNET, California Lawyer and the New Republic.

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