By Diccon Hyatt
Its computer network is designed to digitize and streamline most aspects of hospital admission and treatment. Like the Hopewell hospital, Princeton is built to attract doctors as well as patients, with spacious, high-tech operating rooms.
The UMC Princeton features an advanced air circulation system designed to minimize the spread of airborne pathogens, thereby reducing infections.
A spacious, cutting-edge emergency department will give doctors access to the latest lifesaving technology. Patients can arrive by helicopter as well as ambulance.
All that land, architecture and technology didn’t come cheap: the 231-room hospital, with individual patient rooms, comes with a $447 million pricetag.
About 13 road miles separate the two hospitals, which together represent almost $1 billion worth of spending. The two new hospitals share the Trenton market with Robert Wood Johnson University Hospital at Hamilton, and St. Francis Medical Center in Trenton, according to the Dartmouth Healthcare Atlas of New Jersey.
With four hospitals in a small area, classical economics would predict competition between the rival institutions would drive prices down as each one competed for the business of consumers.
But Uwe Reinhardt, James Madison Professor of Political Economy and professor of economics and public affairs at Princeton University, an expert in healthcare economics, doesn’t think there is any chance of that actually happening.
“They will probably not want to wait 20 years to get their money back,” Reinhardt said. “They will probably be very aggressive in billing … hospitals in general try desperately to extract as much money from society as they can.”
Reinhardt said running a hospital is so expensive, the cost of actually building one, even an exceedingly expensive one, is a drop in the bucket. The ever-increasing costs of running a hospital are ultimately passed on to consumers, who buy insurance and taxpayers who fund Medicare and Medicaid.
Competition between hospitals such as the new ones in Mercer County does not drive down health-care costs because healthcare is not a normal market. Healthcare does not follow the normal laws of supply and demand that are familiar to every student of economics 101.
Reinhardt said he has heard the argument that it is patients who drive healthcare costs up by demanding expensive procedures.
“They always say patients demand these things. Have you ever demanded any of these things? When you go to the hospital, you do whatever they tell you that you need. It’s the supply side that drives healthcare, and no other industry is like that,” he said.
Instead, he said, the hospitals were more likely to compete for doctors by building excellent facilities and buying the latest medical equipment.
Economists generally study markets by looking at prices. However, even if a customer wanted to comparison shop between hospitals, that would be impossible.
“One of the very interesting things about the health-care sector is that it’s one of the very few sectors where prices are very carefully camouflaged, where no one knows what the prices are,” Reinhardt said. “At Princeton Hospital, for the same procedure, they would probably have 20 or 30 different prices and those prices could vary by a factor of two. Some payer pays twice what another payer pays them. You can’t even talk about the price.”
Not that Reinhardt hasn’t tried. As chair of the state Commission on Rationalizing Healthcare Resources, which produced a report in 2008, Reinhardt tried to discover what hospitals were actually charging patients for different procedures. Eventually, he decided to use his wife as a spy.
He dispatched his spouse, fellow Princeton professor and health policy expert Tsung-Mei Cheng, to pose as an uninsured immigrant whose family made $80,000 a year (too much to receive subsidized care) and ask how much it would cost to have a baby at an area hospital.
They couldn’t tell her, so Reinhardt dropped the ruse and called as the chair of the state commission and told the hospital they had been tested, and that they had failed the test.
Reinhardt recommended to Gov. Jon S. Corzine that the state force hospitals to reveal on their websites the cost to an uninsured patient of their 50 most common procedures.
“Of course, Corzine lacked the courage to ask them to do that,” Reinhardt recalled. “Good heavens, revealing prices, that is just worse than cursing in church to the healthcare industry. They want to keep everything very secret.”
Reinhardt said it is also hard to find out what deals the hospitals have struck with insurers. He said the secrecy makes it impossible to discuss healthcare in normal economic terms.
In the report of the New Jersey Commission on Rationalizing Health Care Resources, Reinhardt compared the costs paid by insurers to different New Jersey hospitals for the same service. One paid $2,708 to one hospital for an appendectomy, and $4,230 to another for the same procedure.
Reinhardt wrote in the report that hospitals also paid wildly variable costs for the same procedure, depending on who is paying for it.
“How could you even talk about competition?” he said. “How could you even talk about markets, when the most important ingredient that drives competition, which is price, is kept secret? It’s like putting you in front of a Macy’s in a shopping center, blindfolded, and saying to you, ‘go in there and buy a shirt efficiently.’ You don’t know the size of the shirt and you don’t know the material and you don’t know the price of anything.”
Reinhardt said foreigners are amazed when he explains to them how the American health-care system works. Americans pay twice as much per capita for healthcare than their counterparts in Germany and Canada, where there is socialized medicine, and do not have better health outcomes to show for it.
Reinhardt conceded that hospitals generally do a good job caring for patients.
“They all work like crazy to make patients well again, I don’t disagree with that,” he said. “They also work like crazy to suck every penny out of us.”
In a separate interview, Sujoy Chakravarty, assistant research professor at the Rutgers Center for State Health Policy, also speculated that competition could lead to higher quality care, but probably not lower prices.
“When more hospitals are entering a market, there is an increase in the level of competition and we believe competition is good,” Chakravarty said. “The assumption on which antitrust laws are based is that when there is a decrease in competition, there is less quality and less choice for consumers. Overall, when you have more hospitals and there is an increase in competition, it leads to greater choices for consumers and can lead to higher quality care.”
Chakravarty, who looked at hospital competition that took place between 1980 and 2000, said it was apparent from looking at where hospitals opened and closed that they preferred to open in areas where the population was growing, and where there were more elderly and high-income residents, and preferred to close where the cost of treating low-income patients would be high.
“It’s not a coincidence,” he said.
Professor Donka M. Mirtcheva, assistant professor of business at The College of New Jersey, wrote in an e-mail she believed there was evidence that more hospitals did in fact lead to lower prices due to pressure from insurance companies and the government, and at least led to a better situation for consumers than a monopoly.
“After the mid-1980s, no evidence was found for a ‘medical arms race,’” she wrote. “Competition resulted in substantial decreases in costs and improvements in outcomes, partly because of the increased Health Maintenance Organization (HMO) enrollments.
“In particular, increased competition was found to have no impact on hospital costs, lowered the hospital inflation rate, increased costs of not-for-profit hospitals, but not the costs of public and for-profit hospitals. Competition among managed-care providers brought about price competition thanks to the increased penetration of managed care into hospital insurance markets and Medicare prospective payment system.”
