Health care cronyism is fueling hospital consolidation and rising medical costs

Health care consolidation is a problem. Large hospital conglomerates are expanding, purchasing smaller hospitals and independent clinics. This isn’t market- or patient-driven consolidation. It isn’t bottom-up emergence of economies of scale. This is government regulation putting a finger on the scale and giving larger institutions an unfair advantage over their competition. It’s cronyism for tax-exempt systems that already rake in large revenues.

Ninety percent of metropolitan statistical areas are considered highly concentrated by antitrust standards. With this kind of monopoly power, hospital systems gain bargaining leverage over payors. They can raise prices without increases in quality. The increased cost to private insurers is passed on to patients via higher premiums. Half of U.S. health care expenditures go toward hospitals and clinics, and those numbers are rising.

The issue has even generated bipartisan action, with Sens. Mike Lee (R-Utah) and Amy Klobuchar (D-Minn.) holding hearings on hospital consolidation and the Biden administration issuing orders to combat it. But there are many federal programs that favor larger health systems over independent physician practices, and these are driving consolidation and harming the financial stability of smaller practices.

Under the 340B drug discount program, manufacturers are required to sell their medicines at steeply discounted prices to qualifying hospitals and safety-net clinics. While the program is often associated with community health centers, hospitals now account for 87 percent of drug sales at the 340B price. To be eligible for the discount, most hospitals must reach a minimum threshold of Medicaid and low-income Medicare inpatients, and there is evidence of strategic behavior to reach (but not exceed) that bare minimum. These institutions are gaming the system, which collectively totaled about $50 billion in 2021.

Hospitals are incentivized to do this because they can then resell the drugs to patients with private insurance or Medicare at much higher prices, reaping huge profits. Hospitals receive millions of dollars in net revenue annually from Medicare alone. The windfall is even greater for private insurance.

Signed into law in 1992, 340B is a well-meaning program aimed at assisting hospitals and clinics that serve vulnerable populations. Unfortunately, the potential for revenue has caused it to expand rapidly over the past few years. Recently, its size has been doubling approximately every three to four years.

This has led to consolidation because administrative guidance dating back to 1994 allows 340B hospitals to also obtain 340B discounts for patients treated at their satellite clinics. A large hospital hub can meet its minimum Medicaid and low-income Medicare inpatient share, and then buy drugs at the 340B discount for all the clinics it owns, even if those clinics don’t see a single Medicaid patient. Thus, an oncology clinic that has been acquired by a hospital can purchase its drugs at a massive discount that is unavailable to it as a private, independent clinic.

Additionally, even if these outpatient clinics see more privately insured patients and no Medicaid patients, they will never affect a hospital’s 340B eligibility because they are ignored in the inpatient metric. The cheaper drugs these 340B-eligible clinics purchase give a large competitive advantage to hospital-affiliated clinics. The independent clinic can’t compete. This advantage allows hospitals to purchase those independent clinics, increasing consolidation.

There are many reasons to reform the 340B discount. Addressing hospital consolidation is just one of them. The 340B program isn’t fulfilling its intended purpose, as most expansion has occurred in affluent communities. There are no requirements that profits from the program be reinvested in care for vulnerable communities. In fact, evidence shows that 340B hospitals avoid expansion into lower-income areas, preferring to boost services in wealthier communities.

340B reform can combat the unintended consequences of the program while preserving its intent of helping vulnerable patients. The program suffers from lack of transparency. Fair accounting standards should be used to track the drug purchases and resale, including at hospital hubs and satellite clinics. Furthermore, if these drugs are being resold at for-profit contract pharmacies, this data should be public.

Hospitals should be incentivized to see more Medicaid patients to keep their discount. This can be done by raising the relatively low eligibility threshold or by making the discounts proportionate to the share of the Medicaid population the hospital serves. The satellite clinics should also be held to that same standard. If they are not serving a disproportionate share of Medicaid and charity patients, they should not get the benefit of 340B discounts.

Congress and the Biden administration should send a clear message: This discount is for hospitals that primarily serve vulnerable patients. It is not a revenue stream to drive consolidation. Any serious effort at addressing health care consolidation must address 340B.

 Anthony DiGiorgio, DO, MHA, is a neurosurgeon, assistant professor at the University of California, San Francisco School of Medicine and the author of upcoming research for the Mercatus Center at George Mason University. He is also affiliated faculty at the Institute for Health Policy Studies at UCSF. Follow him on Twitter @DrDiGiorgio.