Lawton R. Burns ’73 on the Cost of Healthcare in America

In Big Med: Megaproviders and the High Cost of Health Care in America, Lawton R. Burns and co-author David Dranove trace a troubling transformation. Gone, for the most part, is the 1960s landscape of independent community hospitals and small, friendly, Marcus Welby-style doctors’ practices, as enormous healthcare systems that encompass dozens of medical centers and hundreds to thousands of physicians (plus a supporting cast of outpatient surgery centers, urgent care clinics, physical therapy practices, and even in-house health insurance plans) have become today’s “face of American medicine.”

Trouble is, bigger hasn’t meant better. Drug companies and health insurers take plenty of blame when experts talk about the astronomical costs and failures of U.S. healthcare. But Burns, professor of healthcare management at the University of Pennsylvania’s Wharton School, and Dranove, professor of strategy and health industry management at Northwestern University’s Kellogg Graduate School of Management, say large, integrated hospital systems—megaproviders—are quietly responsible for one-half to two-thirds of the nation’s healthcare costs. And their mammoth bureaucracies ignore or stifle meaningful changes that could make Americans healthier. Megaproviders’ size and influence often go unnoticed by consumers and even regulators, but the book offers solutions.

Burns, who also recently authored The Healthcare Ecosystem: Payers, Providers, Producers, spoke with health and medicine journalist Sari Harrar about the book.

Sari Harrar: What inspired Big Med?

Lawton Burns: David and I are both pretty passionate about healthcare. We both came up as assistant professors at the University of Chicago nearly 40 years ago, and we independently conduct research on healthcare systems, bringing different perspectives. David’s an economist and an expert on the horizontal integration of hospitals, while I have a background in sociology with experience in healthcare management and am an expert on the vertical integration of hospitals and doctors’ practices. David reached out to me and said, “I’d like to write a book on megaproviders—they’re merging horizontally and vertically.” So it was a match. We both felt some frustration about what was going on. Sometimes you just have to raise the level of alarm.

SH: How consolidated are healthcare services at this point?

LB: The consolidation of hospitals has been going on since 1967–68. We’re in the fourth wave of mergers, all spurred by things like changes in federal legislation, regulations, or insurance reimbursements. The number of U.S. hospitals in big systems has grown to about 70 percent. The remaining 30 percent are usually rural facilities or really strong urban facilities that don’t have to merge because they’re powerhouses on their own. At least 30 percent of physicians are employed by a hospital, and that’s creeping up. Most of the others are in groups, as partners or employed by other doctors—though private-equity groups are also buying up physician practices. Only about 15 percent of doctors are practicing independently.

SH: Why does that lead to higher costs?

LB: Hospitals are consolidated in local and now in regional markets. That means health insurance companies don’t have too many options as to whom they contract with. A large hospital system can tell an insurer: “We don’t like your rates. We’re not going to be in your network.” Then the insurer has to turn around and tell employers: “I’m sorry, but your employees won’t be able to use this major hospital system.” It becomes a game of chicken, where the hospital tells the insurance company, “We’re dropping you” or the insurance company tells the hospital: “Hey, we’re dropping you.” You see it all the time—they take it to the press, and eventually they settle. That settlement means higher hospital rates and, thus, higher prices for healthcare.

SH: What’s the impact on consumers’ health and wallets?

LB: There are no documented health benefits and some evidence that quality of care goes down. That’s partly because these systems are so big, they’re not necessarily focused on getting you better, they’re focused more at the executive management level on getting even bigger and throwing their weight around in the marketplace. Doctors become demoralized, too. And when megaproviders raise prices, insurance companies aren’t just taking those losses. They turn around and tell the employers who are providing the health insurance, or the employees: “Hey, you know, your insurance rates are going up, or your wages are going down to accommodate higher benefit costs.” At the end of the day, individuals are bearing the cost.

SH: What about the conventional wisdom that mergers streamline services and boost quality, such as when local hospitals affiliate with prestigious medical centers?

LB: Healthcare is labor intensive. The vast majority of costs are labor, not technology. You don’t get scale economies when it’s a people business. When I hear bigger, I think bureaucracy, layers of management, corporate and regional headquarters—that doesn’t sound efficient! And consumers still have to do their homework. The quality of cardiac bypass surgery you get at a local hospital affiliated with the Cleveland Clinic won’t necessarily be the same as you’d get if you went to the actual Cleveland Clinic. If you are really skeptical, you’d say that’s a marketing ploy. I think there’s some truth to that.

SH: These giant systems sound like monopolies. Where are the Federal Trade Commission and other government antitrust agencies?

LB: I call them oligopolies [limited competition in a market dominated by a few large actors]. In every major city you have two or three big systems. With so many consolidation deals going on, the FTC and Department of Justice don’t have enough money or manpower to go after everybody. They pick a handful of cases. Some they win, but they’re fighting a losing battle.

SH: What’s the solution?

LB: Basically, what we want to do is get more competition into these local hospital markets, because the research shows that competition fosters higher quality and lower cost. States should stop issuing Certificates of Public Advantage that give local hospitals immunity from federal antitrust laws. They should scrap laws that restrict new healthcare facilities built by newcomers to the market while protecting expansion by existing megaproviders. And hospitals and executives can be doing more to engage healthcare providers to provide higher-quality, lower-cost care.

SH: You studied sociology and anthropology at Haverford. How did you move into healthcare management?

LB: I got a Ph.D. in sociology from the University of Chicago and got interested in healthcare, particularly in hospitals. So I started teaching and doing research on hospitals and realized, I didn’t know enough about how hospitals worked. So while teaching during the day, I got an MBA in hospital administration at night. It was a tough two years, but I’m glad I did it. I’ve worked in administration for two hospitals after that, too. Healthcare is a complex ecosystem. You need to understand the business side to understand it.