Runaway Costs and Hospital Monopolies

Employee contributions to medical insurance premiums (family coverage, 2018 by state — Virginia is the highest. By a longshot.

by James C. Sherlock

Healthcare costs are crowding out other spending by citizens and governments. All Virginians know this. Few understand, though, that their elected leaders in Richmond, who are recipients of huge campaign contributions from hospital interests, bear a significant share of the blame and some are actively working to increase costs further.

Virginia had the highest priced commercial health insurance in the country in 2018. (See chart above.) At $6,597, the 2018 average annual employee premium contribution for family health insurance coverage was the highest in the nation. The premium for single coverage in Virginia was the third highest.

The Affordable Care Act exchange is no better. The Centers of Medicare/ Medicaid database lists 16,900 lines of Silver plans and locations nationally in 2018. Virginia had 22 of the 55 highest priced, including 14 of the top 16. In the worst case in the nation, a 40-year-old couple with two children in the Charlottesville area paid almost $39,000 in premiums in 2018 for the less expensive of the only two family Silver policies available on the ACA exchange. Both were offered by Sentara’s Optima Health. With that policy, their out-of-pocket costs were capped at $14,700. Both policies were HMOs with no coverage for out-of-network providers. It was a Sentara network.

Hospital systems in Virginia’s five largest metro areas, either own their own health plans and insurers or have joined exclusive partnerships with one. Sentara, the largest, controls 63 corporations, 43 of which are for profit. Its non-profit subordinates include Optima Health and Sentara providers except its ambulatory surgery centers, which are for-profit partnerships.

Captive insurers are required to represent only their clients’ interests and their own when “negotiating” prices with fellow captive providers and when negotiating network access by competing providers. Yet the Charlottesville example and similar situations in Hampton Roads and Harrisonburg are difficult to explain any other way.

Nationally, health insurance premiums increased between 2013 and 2017 from $633 billion to $855 billion, or 35%. Incurred claims increased by exactly the same percentage. Over the same period, healthcare utilization increased less than 1%. Higher prices paid to healthcare providers and pharmaceutical makers are likely responsible.

Virginia health system profits

A Navigant study of the nation’s largest health systems showed that operating margins in 2018 averaged 2.92%. Health system reports to the Commonwealth showed the combined operating margin of acute care hospitals here was 8.2%. The difference between 3% and 8% with 2018 operating revenue of about $22 billion is over a billion dollars in one year. Those extraordinary Virginia margins were in years before Medicaid expansion and the accompanying reimbursement increases that could add another billion dollars in profits.

Regional monopolies are in control when pricing inpatient procedures to commercial insurers. All insurers including Medicare and Medicaid pay between 1.5 times and three times more for procedures performed in hospitals than by the same physicians in independent ambulatory care centers.

The Virginia Department of Health (VDH) has severely restricted ambulatory care access by awarding only 71 certificates for ambulatory surgical centers (ASCs), about half of them to hospitals. The hospitals’ only competition in ambulatory care comes from fewer than 40 certificate-holding ambulatory surgical centers and the few diagnostic imaging centers. Maryland has 20% fewer people than Virginia but more than seven times as many ASCs, the vast majority physician-owned.

Ambulatory care including surgery and imagery for the vast majority of patients can be accomplished either in hospital outpatient departments or in detached ambulatory surgical centers. The same surgery by the same surgeon is far less expensive in the — unless a hospital owns that ASC and bills the procedures at hospital rates.

So, how did this happen?

The answer is found in bad public policy badly executed. We can directly thank Virginia’s Certificate of Public Need (COPN) and its irresponsible administration by VDH since 1973.

The COPN law enacted in 1973 gave VDH control over the construction and expansion of new hospitals, ambulatory care and diagnostic imagery centers and over the equipment necessary to operate them. Virginia has thus limited supply in the face of growing demand and some are apparently surprised that prices have risen.

Without legislative direction for 47 years, VDH years has used the COPN process both to create hospital monopolies in nearly every region of Virginia but Richmond and to severely restrict the creation of outpatient facilities as competitors to those hospitals. Monopolies have consequences, including control of prices and suppression of competitors.

Lawmakers have made no serious attempt either to limit rates of growth of the prices charged by those monopolies or to oversee their business practices. Both COPN and the permissive provider regulatory regime remain in place because, in creating regional monopolies, VDH simultaneously created a powerful political interest in most General Assembly districts.

Some hospital systems are both monopolies and self-declared non-profit charities. No state agency oversees the business activities of healthcare providers, monopolies or not. The Virginia Department of Taxation apparently counts on the Internal Revenue Service to oversee tax exempt entities, which avoid hundreds of millions in state and local taxes every year. Nationally, there are 250,000 self-identified entities large enough to warrant review of such things as executive salaries and charitable mission compliance. The IRS simply doesn’t do it.

The Justice Department is blocked from enforcing federal antitrust laws because the monopolies have been granted by the state. The Virginia Antitrust Act has never been enforced. Virginians would have been in a far better place if the Commonwealth had never passed COPN. But here we are and the General Assembly is poised to make it worse — lower access, less competition and higher cost. More on that soon.

James C. Sherlock, a Virginia Beach resident, is a retired Navy Captain and a certified enterprise architect. As a private citizen, he has researched and written about the business of healthcare in Virginia. 

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15 responses to “Runaway Costs and Hospital Monopolies

  1. It’s a decent argument. Not sure it is true unless the highest priced states for healthcare line up with this map:

    No, Obamacare did not reduce costs, in fact, it increased them, primarily because of the part of the law that said no insurance company could deny anyone for pre-existing conditions AND they could not have annual or lifetime caps so that took them to higher premiums, deductibles and higher out-of-pocket.

    So I doubt seriously that CON is the sole driver by a long shot!

    Hospitals use some services to essentially subsidize their uncompensated care losses. You take that away and what happens?

    Odds are that the hospitals with high numbers of uncompensated care are going to go belly-up including most rural and inner city.

    Where we are right now on health care is the health care equivalent of “stick it to the guy behind the tree”. Everyone is doing everything they can to shift costs to someone else.

    CON won’t fix this. I’m not sure it won’t make it worse if it becomes a zero-sum game that hospitals end up on the short end of.

    The “free market” is not going to fix this. Just look at prescription drug prices. Who you gonna blame for that – the government?

  2. Thanks for an excellent analysis. The comparison with Maryland (“Maryland has 20% fewer people than Virginia but more than seven times as many ASCs”) is devastating. COPN laws, particularly as applied to health care facilities, simply are not in the public interest.

    • More sourcing would help. What is the source of that chart used as the opening art? We have no idea at all…..quite damning, if true, but I have no idea where it came from.

  3. Steve. My mistake. The source is Sara R. Collins, David C. Radley, and Jesse Baumgartner, Trends in Employer Health Care Coverage, 2008–2018: Higher Costs for Workers and 
Their Families (Commonwealth Fund, Nov. 2019)

    • OK. Clearly some regional trends, with DC, MD and NC also way up above the mean.

      • If you look at Obamacare – the insurance plans offered and their prices is determined by Zip Code.

        Why is that? It’s because health care prices VARY by zip code – even IF the entire state has CON!

        how can that be if CON is disrupting competition?

  4. Our basic problem is that those who advocate a free market in health care don’t deal with the realities which is that in a true free market, the insurance companies are allowed to deny coverage to high risk and/or charge much higher premiums, deductibles and cap coverage.

    That’s how a free market really works.

    You cannot make rules that keep insurance companies from doing that without having much higher costs and then thinking that CON will fix it.

    What CON does is it allows cherry picking of some services for low-end providers… who may well not have the same quality services.

    Beyond that, insurance companies reimburse based on prevailing costs in a given zip code. Is there data that shows that things that are controlled by CON are actually cheaper in places where it’s not?

    This reminds me of a few years back where folks were saying that tort laws make health care more expensive. Haven’t heard that argument in a while. why not?

  5. Don’t call it INSURANCE….
    Car insurance doesn’t cover pre existing damage.
    Fire insurance doesn’t cover that have already burned down.
    Welfare covers pre existing Conditions… Insurance doesnt….
    PS,,, and if you like your doctor you can keep…. oops,,, forget that

    • Tom Gun – you’re wrong guy.

      car insurance, for instance, won’t cover you if you had a serious problem and failed to fix it – like bald tires.

      Fire insurance will not insure you unless you meet code – etc.

      health insurance is different anyhow.

      You want Medicare to deny folks with pre-existing conditions?

      where would you draw that line.

      your proposal would affect 70 million people with employer-provided as well as the millions with Obamacare.

      Do you think those folks would accept that and not vote out of office the elected who voted to do that?

      Ask the GOP in Virginia how Virginians feel about health care.

      every single country in the developed world treats everyone the same regardless of health status – everyone gets health care. Those that want more can buy more but no one is denied access to basic health care.

      But that is exactly your proposal, right?

  6. Thanks Sherlockj. I will read it but my experience with TJ is that they advocate a particular point of view and are not really objective.

    I favor facts over beliefs.

    I’ve started reading the handbook and it starts off like I suspected. It thinks that govt regulation is the problem and it has “ideas” to push the govt back and allow the free market in.

    Tell me WHERE in the world – on planet earth this has been done. How many of the developed countries healthcare systems – do this?

    You guys are advocating for something of which there is no real world analog….

    In every single developed country on earth – it’s the govt that has designed and configured health care and those countries have the longest longevity – people live longer and die at lower rates from fatal diseases.

    The simple fact is – if the govt prevents health insurance companies from using medical underwriting as the basis for their insurance, all these other things about “free market” are nibbling around the edges.

    Take Direct Primary Care – which you cite as an accomplishment. For the folks who don’t know – what this means is billing the patient directly and not insurance.

    This is going to improve the health care of low income people?

    come on .

    I would challenge you to a debate on the merits… right here..

  7. “In the worst case in the nation, a 40-year-old couple with two children in the Charlottesville area paid almost $39,000 in premiums in 2018 for the less expensive of the only two family Silver policies available on the ACA exchange. Both were offered by Sentara’s Optima Health. With that policy, their out-of-pocket costs were capped at $14,700. ”
    @sherlockj this is simply stunning. And should be alarming in the same way student loan debt is alarming. Both are growth cripplers.

  8. The question is – do the critics of the current system want insurance companies to be able to refuse to cover people with pre-existing conditions and/or charge them more for those without.

    And I’m talking about employer-provided insurance here – not just other kinds of insurance.

    Would you support insurance companies to be able to deny coverage to employees with companies that offer health insurance?

    yes or not – no vacillation.

    If you do support this – do you also want candidates for office to also promise this – that if elected they will advocate to allow insurance companies to deny coverage based on age or health status?

    Again. No vacillation. No weasel words. Just a plain yes or not answer.

    this is an election issue. It is, in part, why the Dems are not in charge of the GA.

  9. Mr. Sherlock, this is an excellent post, and it gets to the heart of one of the drivers of high healthcare costs in Virginia (hospital monopolies and high market concentration) and highlights an area where the state government could make a difference.

    Larry, you immediately misinterpreted and bastardized Mr. Sherlock’s analysis in your comments. You reduced his argument to Certificate of Public Need = Bad and proceeded from there to go on a tangent about healthcare models in other countries. But here are TWO parts to his basic thesis:

    “The answer is found in bad public policy badly executed. We can directly thank Virginia’s Certificate of Public Need (COPN) and its irresponsible administration by VDH since 1973.” (Note that this same description could apply to Dominion Energy with some rewording.)

    Mr. Sherlock then logically goes to provide data on the result of this combination — reduced competition and high costs. All of this could be addressed by the state government to control costs and improve choice without any policy changes at the federal level.

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