Last month, the state’s largest health-care firm, IU Health, announced it would freeze prices through 2025. That end date is tentative, and the plan is short on public details. However, there has been enough reporting about the issue that we can begin to understand how financially important this is for businesses and consumers. It is also useful to interpret this decision in light of the overall hospital monopoly problem in Indiana.
IU Health has claimed that this price freeze will save Hoosiers about $1 billion over the five-year freeze from 2021 through 2025. This may be correct, but this not-for-profit hospital system earned $1.2 billion in profits in 2020. Numbers of this size seem almost abstract and difficult to assess without more context. By comparison, IU Health’s profit rate is four times higher than what Walmart has posted in any of the 52 years it is been a corporation. Last year, IU Health reported profits of more than $33,000 per employee.
IU Health has been able to sustain what economists term supra-normal profits for many years because it has become a strong regional monopoly in many parts of the state. This allows the firm to price its medical services at more than three times the federal reimbursement level. This is high by national standards, but to be fair to IU Health, it isn’t even the worst in Indiana on some measures.
IU Health claims that it can achieve national parity on prices in three to seven years. My arithmetic suggests it’ll take more than a dozen years of price freezes to get back to national averages. But, IU Health could freeze its prices for another 40 years before it got close to exhausting its $9 billion in accrued profits.
To put the scale of IU Health’s monopoly in context requires digesting some shocking facts. This sprawling firm could give away all its health-care services for free through all of 2022, pay all its bills and employees and would still finish the year with more savings than the entire state of Indiana’s Rainy Day Fund, which is now at record levels.
The simple truth is that the IU Health price freeze is a public relations gimmick that will have no noticeable effect on the lives or finances of Hoosiers. But, the notion that IU Health would spend $1 billion over five years on a public relations gimmick illustrates the deep legal and legislative challenges it anticipates. The firm is right to be worried.
Indiana is among the very worst places for health-care spending in the nation. In 2019, I authored a couple of studies that caused the hospital lobby to target me with remarkable vigor.
The problem for Indiana’s hospitals is that I was right. In fact, I wasn’t even the first economist to identify the problem, nor am I the most recent. There are literally dozens of studies from well-respected think tanks and university professors documenting the monopoly pricing problem in Indiana. Ironically, the consultants hired by the hospital association reported levels of market power in Indiana that are everywhere above the threshold set by the U.S. Department of Justice.
You don’t need a lot of economic theory and statistical models to understand the problem. The price freeze gimmick is a tacit admission of the pricing problem many economists identified in Indiana. Even more convincingly, we have actual price data with which to compare hospitals, and the East Central Indiana hospital monopoly is ground zero for these shenanigans.
East Central Indiana’s federally designated health care market is a textbook monopoly. There are three hospitals in the region, each owned by IU Health. Since the Indiana legislature pressured hospitals to report prices into a public database, we can make clear comparisons about their monopolistic pricing practices. In the Muncie area and the surrounding counties, normal childbirth costs between $19,488 and $21,305. In nearby Anderson, where two hospitals compete for business, normal childbirth costs between $2,671 and $7,380.
This is profoundly hurtful to local businesses and consumers. From 2010 to 2019, Muncie and Delaware County’s total Gross Domestic Product grew by an accumulated $914 million. But, over those same years, the accrued profit by IU Health Ball Memorial Hospital alone was $596 million. That’s right, profits to this local not-for-profit hospital swallowed 65.2% of all the economic growth in Muncie and Delaware County from 2010 to 2019.
More shockingly, the total cost of providing this health care over this time grew by only $118 million. Profits grew at nearly five times of the cost of health care in Muncie from 2010 to 2018. Again, these are the data the hospital reports to the Internal Revenue Service. They tend to use other data in their public relations and op-ed columns. I will leave it to the reader which data to believe.
None of this was necessary. Had Indiana enforced anti-trust laws using federal guidelines, almost no hospital acquisition would have occurred over the past quarter century. But it gets worse: Once the not-for-profit hospital system created its networks, it began to solidify its power and set prices like old-school monopolists. It bought physicians practices just like a monopolist seeking to control the upstream markets. It bought affiliated health providers so it could control the downstream market.
Indiana’s hospital systems are the modern equivalent of gilded-age robber barons. One exquisite example is that in early 2020, during the midst of legislative hearings on hospital monopolies, the highest-priced hospital system in the state took its entire board of directors to the Naples, Florida, Ritz-Carlton for a board retreat, where room prices there begin at $1,200 a night.
Congress, the Department of Justice and the Indiana Legislature will surely continue to tighten the oversight of hospitals, but hospitals’ real fear is civil litigation. There are 6.5 million individual plaintiffs in Indiana and another 250,000 employers who provide health insurance. There are also thousands of frustrated physicians, nurses and other health-care workers who see the effect of this monopoly on patients and communities. The current pandemic required personal sacrifice, heroism and exhausting work schedules for these workers. For their not-for-profit employers, it was the profit opportunity of a lifetime.