Cottage Hospital and Sansum Clinic, Santa Barbara, California’s two largest health care providers, gave up on their proposed merger because of regulatory delays and a lack of clarity from the Federal Trade Commission, the government agency that protects us from uncompetitive trade practices and monopolies. Cottage is now our only remaining hospital and Sansum is our largest medical clinic. Both are large, state-of-the-art providers.
After almost four years, Cottage and Sansum called off their attempt to create cost savings from a more efficient organization. In a fast-changing health care world, the uncertainty of their status made it difficult for them to plan for the future.
It is likely that the FTC believes that these kinds of vertical mergers in the health care system will give the resulting organization “monopolistic” pricing power because a lack of competition which will lead to higher costs for consumers of health care services.
That may be correct, but it is not what is driving up health care costs and the problems with our health care system.
Our health care system is broken. It has been breaking since the creation of tax policies for employer-sponsored health insurance (WWII), the creation of Medicare (1965), and the increasing regulation of the health care industry, especially after Obamacare (Affordable Care Act, 2010).
Because of these programs and regulations, there is no “free market” in health care and there hasn’t been for many, many years. As a result, the market has been herded into politically favored policies which has led to a decline in competition and rising costs. No one questions this outcome, but the causes are usually blamed on the failure of “free enterprise”. As economist Milton Friedman once observed, if you put the government in charge of the Sahara Desert they would run out of sand. This is more than an amusing anecdote: governments’ long history of intervention into economic affairs is a sorry one of rising costs and shortages.
Health care is no different than any other product or service purchased by consumers. A good analogy is to compare health care to other industries. Defenders of regulation are quick to point out that health care is different than other products or services because lives depend on it.
But, there is one other product that is vital to health, well-being, and survival: food. It is more important than health care: without enough food, we would soon starve and die. There is very little regulation of the food industry yet our markets provide the most diverse, varied, high quality, and abundant food products available from the whole world. And the reason is that there are lots of competitors vying for our food dollars. This is exactly the opposite of health care markets. One can only imagine what would happen to food if there was an Affordable Food Act. For you fans of socialism, I recommend a visit to Venezuela, once the wealthiest country in South America, where citizens are facing starvation on the Maduro Diet.
The result of this regulation of the health care industry (about one-sixth of GDP) is that providers are being squeezed and everyone wonders why that occurs. Physicians are getting smaller reimbursements from insurance companies and Medicare, which is why some doctors are dropping out of Medicare and many health insurance programs.
Hospitals are getting squeezed by the same forces, plus an additional hit from regulations which direct them to provide more and better services despite the costs. According to Cottage, “Last year  our hospitals covered more than $132 million in costs of care unreimbursed by the government (for patients using Medi-Cal, Medicare and other government programs) —up from $124 million the previous year.” Emergency room visits went from 70,000 in 2014 to almost 76,000 in 2015 (latest available data).
On a national basis, health insurance costs have climbed while deductibles have skyrocketed. New 2017 plan premium increases range from 15% to 22%, and deductibles are roughly doubling. At the same time those insurers that are still left are pulling out of unprofitable markets.
The cost of Medicare (a single-payer system) is expected to almost double by 2026; it already consumes 15% of the federal budget. According to the Kaiser Family Foundation, it is expected to be insolvent by 2028. Unfunded Medicare liability is about $27 trillion.
Enter Cottage and Sansum and their desire to merge.
Because of these distortions of the health care market, hospitals must do something to remain profitable. This has been the driving force of mergers as size matters in this business. It is possible that costs at Cottage/Sansum will increase post-merger and it is possible that private physicians will face greater pressures as a result. Yet if they can’t be profitable we will find ourselves with declining services and even higher prices.
These are unfortunate outcomes, but the blame should be directed at the laws that broke the system in the first place.
If the merger were to create uncompetitive trade practices (it wouldn’t), it is not the fault of free enterprise.
No monopolies have ever existed in history unless competition was suppressed by government action. I realize that this will create disbelief in those who haven’t studied the economics of competition and the history of the so-called Robber Barons, but those are the facts. The only Robber Barons in the days of relatively unfettered market competition were those created by government protection or government subsidies.
Yet modern economics persists in believing that monopolies are the natural result of free market competition. The Federal Trade Commission, a creation of Progressive thinking in 1915, was founded on a rock of bad economics. Today, actual harm to the markets need not be proven—only the potential of anti-competitive behavior determined by a theory that assumes a perfect world of players with perfect knowledge and perfect competition. A dynamic, constantly changing real world never behaves like that. Unless, of course, the government rigs the table.
In their quest to be profitable and survive, Cottage and Sansum are treated like modern day robber barons by the FTC. In our broken system, things cost what they cost and no wishing will change that. The question is: who will pay the cost? Right now it seems that it will be the health care providers. It can’t last.
The solution is not more regulation, but less. No single-payer system will solve it either. The solution is more competition and less regulation. Loosen the noose on the system and let the market be flooded with competing health care providers who offer us a cornucopia of health care options. I want to see a supermarket of choices, not empty shelves.