End the policies that protect hospital monopolies

From payment distortions to certificate-of-need laws, government rules often reward consolidation and block new entrants. Reforming them would spur competition and lower costs.

This is the third piece in a multi-part series in the Boston Globe, where I lay out solutions that can help curb healthcare spending in America. Read Part 1 and Part 2 in this series on my Substack.

For this piece I’m pleased to be joined by my colleague Dr. Tom Tsai, associate professor of health policy and management at Harvard T.H. Chan School of Public Health and co-director of the Healthcare Quality and Outcomes Lab at Harvard School of Public Health.

Please feel free to weigh in.

---

In my last op-ed, I argued that in many communities, consolidation of health care providers has driven up prices by weakening competition. But preventing consolidation that does not provide benefits, or even breaking up consolidated systems that behave badly, is likely not enough. If we want health care markets to work — if we want prices to fall without sacrificing quality — the policies that shield established health care systems and stymie innovation must be removed.

For decades, federal and state rules have made it easier for large health systems to expand than for new competitors to emerge. Payment policies often reward consolidation through complex regulatory and financial structures that make it difficult for independent providers to thrive. Licensing laws can slow or prevent new facilities from opening. The Affordable Care Act banned an entire category of physician-owned hospitals from being created or expanded. Many of these policies were adopted with good intentions, but in today’s highly concentrated markets, they often protect dominant systems from competition.

The path forward will need to restore the patient-doctor relationship and allow delivery models that place doctors and patients back at the center of medical decision-making. If policy makers are serious about affordability, we must lower barriers to physician-led, patient-centered health care. Four reforms deserve immediate attention.

Adopt site-neutral payments

Today, Medicare — and often private insurers — pay dramatically different rates for the exact same service depending on where it is delivered. A routine cystoscopy, a simple urologic procedure in a physician’s office, is reimbursed at roughly $204 under Medicare. The same procedure performed in a hospital-owned outpatient clinic costs more than $540 — more than 2.5 times as much — even when the patient and procedure are identical.

These payment differentials were originally justified by modest differences in overhead and patient complexity. Over time, some hospitals took this as an incentive to acquire independent practices and reclassify routine care as hospital-based services. The result is predictable: The care doesn’t change but prices rise.

The Medicare Payment Advisory Commission has repeatedly recommended aligning payments across settings to eliminate these distortions. Site-neutral payments would dampen the incentive for private equity or hospital acquisitions that are not beneficial to patients and encourage independent practices and new competitors. When identical care is delivered, it should be paid the same — regardless of the logo on the building.

Repeal certificate-of-need laws

Certificate-of-need laws function to protect incumbent providers from competition. Created in the 1960s to prevent duplicative services, these laws now function primarily as barriers to entry. In states that retain them, new hospitals, expansions, or even the purchase of major medical equipment require lengthy regulatory approval — a process existing health systems can challenge, delay, or block.

Decades of research show that CON laws are associated with fewer hospitals, fewer ambulatory surgery centers, and in many instances higher prices. The Federal Trade Commission and the Department of Justice have repeatedly urged states to reconsider these laws because they suppress competition rather than promote it.

Markets cannot function efficiently if new competitors are prevented from entering them due to outdated regulations. States that are serious about affordability should eliminate CON laws and similar entry barriers.

Unlock the potential of ambulatory surgery centers

Ambulatory surgery centers are an excellent example of what is lost when entry barriers protect established health care systems. A rapidly growing share of surgical care can be delivered safely in ambulatory and and office-based settings at substantially lower cost (and far greater convenience for patients) than in hospital operating rooms. National studies consistently find that procedures performed in such centers cost 20 to 50 percent less than the same procedures in hospital outpatient departments, with comparable clinical outcomes.

Yet in many states — including Massachusetts — independent ambulatory surgical centers face significant regulatory hurdles, often through certificate-of-need programs that can substantially delay new entrants. As a result, Massachusetts has among the fewest ambulatory surgery centers per capita in the country, and many procedures that could be delivered safely in lower-cost settings are instead performed in higher-priced hospital facilities.

Expanding access to ambulatory surgery centers would not eliminate the need for full-service hospitals. It would simply allow routine surgical care to migrate to more efficient settings when clinically appropriate — lowering prices while preserving quality.

Allow physician-owned hospitals to compete again

The Affordable Care Act effectively froze the creation and expansion of most physician-owned hospitals, citing concerns that they would selectively treat healthier or more profitable patients. Subsequent research has largely failed to find this effect, and several studies suggest Medicare spending may be lower at certain physician-owned facilities compared with traditional hospitals.

What physician-owned hospitals clearly represent is an alternative ownership model — often smaller, more specialized, and more directly accountable to the clinicians delivering care. In some highly concentrated markets dominated by large health systems, prohibiting new physician-owned hospitals removes a potentially important source of competition.

Obviously not every physician-owned hospital is superior, and safeguards are necessary to prevent cherry-picking of patients. But the empirical evidence doesn’t support blanket restrictions against these types of hospitals — and if the goal is affordability and access while preserving quality, allowing physician-owned hospitals to enter and grow in markets would be good.

If Congress and state leaders adopted site-neutral payments, repealed certificate-of-need laws, reopened the door to physician-owned hospitals, and allowed independent ambulatory surgery centers to flourish, these changes would go a long way to improving competition in many health care markets. Prices would become more affordable. Quality would likely improve. Patients would have more choices. And care would be more centered in places patients and physicians find convenient. If state and federal policy makers did all this, the system would finally begin to work for patients.