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Here's the real reason health care costs keep going up

  • The merger between Steward and IASIS is bad news for American health care costs.
  • Hospitals have the most pricing power and are most responsible for cost spikes.
  • Obamacare made hospital mergers more attractive and the AHCA does nothing to stop that.
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Just when it seemed like the furious pace of hospital mergers in America was slowing down, we learned Friday morning that Boston-based Steward Health Care System will buy Tennessee-based IASIS Healthcare for $1.9 billion. The deal will make Steward the largest private for-profit hospital operator in the country with 36 hospitals across 10 states.

This is not good.

Because the more hospitals merge, the more it costs all of us for our health care. In fact, the fast pace of hospital mergers over the last few years is most likely the biggest reason for the sudden spike in health insurance premium costs. Obamacare made this problem worse and there's nothing in the current Republican replacement to fix it. That's no coincidence. The hospital industry has both political parties under its sway.

First, let's look at the numbers. From 1998 to 2012, the roughly 5,000 or so hospitals in the United States saw 1,133 mergers and acquisitions. Then, according to health industry researchers Irving Levin Associates, things got even more heated. From 2013 to 2015, merger and acquisition activity among U.S. hospitals and health systems set new records.

The total number of health care transactions for 2015 was 1,503 deals, the first time annual deal volume broke the 1,500 or the 1,400 mark. And the 1,318 deals recorded in 2014 was the first time the number of deals broke the 1,200-mark. Total deal value for 2015 was more than $557 billion, a 44 percent increase from 2014's total of $388 billion. There was a slowdown in the furious pace in 2016, mostly because the process of absorbing these massive mergers takes time. But also, we did see some token regulatory resistance to the continued merger mania.

The culprit for the spike in mergers isn't hard to figure out: Obamacare. Once the ACA started to really go into effect, the increase in the number of people with health insurance made the hospital business potentially more profitable.

Insurance companies had to struggle to figure out how to cover people with pre-existing conditions while keep premiums down. Hospitals, however, got a big influx of paying customers. So they pounced, not only by consolidating traditional hospital facilities, but also by accelerating the already existing policy of buying up private practices and even many of those urgent care facilities we've seen popping up across the country over the past decade.

"If the Republicans really want to do something about getting costs down and not just passing a bill to say they passed it, they need to focus on boosting competition in the hospital business."

It's important to note that hospitals charge higher rates for care than private practice or other medical facilities, even to Medicare. So when a hospital buys up a formerly private practice, it can and does charge the third party insurance or Medicare payer more for essentially the same service that was less expensive the day before. Who wouldn't want to take advantage of a deal like that?

When most hospital mergers are announced, the merging entities often promise the public that the newly combined company will be able to cut prices. But a 2016 analysis by Modern Health Magazine found that simply wasn't true.

Obamacare enables the jump in prices because the only people hospitals can count on to pay up are people who have insurance or Medicare. Now millions more Americans have insurance thanks to Obamacare and millions more Americans also have Medicare because of the aging Baby Boomer population.

The Republican Obamacare replacement bill makes a similar mistake. It includes an effort to improve insurance company competition, but what good will more insurers do if the hospitals are allowed to keep raising prices? Remember, hospitals are the suppliers in this tight supply-and-demand equation. Insurers are just the way for people to get access to the supply. That's a crucial difference.

Why aren't the hospitals getting at least some pressure from state and federal politicians in the form of a crackdown on their pricing or monopolistic consolidation? The simple answer is that hospitals are savvy political lobbyists that employ massive numbers of people in any given state.

The website OpenSecrets.org shows that the American Hospital Association lobby group was the fourth most active lobbying group among a list of more than 3,700 total lobbyists for 2016. And unlike most other lobbyist donors, the AHA's donations were remarkably even between Republicans and Democrats.

Health insurance companies are major lobbyists and donors as well, but they don't have quite the same clout as hospitals. That's because the hospitals have more employees and are rightfully seen by the politicians as a more crucial service provider in their states and districts.

Your congressman and state legislator are simply counting the votes, the campaign donations, and thinking about the voters' fury if a hospital closes down in their region. And while we did see some federal cautions imposed on hospital mergers in 2016, it simply was not enough.

If the Republicans really want to do something about getting costs down and not just passing a bill to say they passed it, they need to focus on boosting competition in the hospital business. They can start by shining a bright light on this latest Steward/IASIS deal and then making sure the Senate version of the AHCA sets competitive antitrust rules for hospitals throughout the country.

If they don't, not much is going to change when it comes to the more important issue of the cost of our medical care as opposed to the price of our insurance premiums.

Commentary by Jake Novak, CNBC.com senior columnist. Follow him on Twitter @jakejakeny.

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