The Debt Bomb That Taxpayers Won't See Coming

Steven Malanga wrote in WSJ on 29 March 2013:

State and local governments owe $7.3 trillion in promises they've made that were never approved by taxpayers.

Earlier this month, the Securities and Exchange Commission charged Illinois officials with making misleading statements to bond investors about the state's pension system. The agency detailed a long list of deceptive practices including failure to tell investors that the system was so underfunded that it risked bankruptcy.

Illinois taxpayers, as well as the holders of its debt, will ultimately bear the burden of the officials' misdeeds. But there is nothing unique about the Prairie State. For years, elected officials in states and municipalities across the country have been imprudently piling up obligations that are imposing serious strains on budgets, prompting higher taxes and cutbacks in services.

In January, city officials in Sacramento, California's capital, reported the results of a study they had commissioned on all the debt that the municipality had incurred. At a City Council meeting that the Sacramento Bee reported as "sobering," the city manager explained that Sacramento had racked up some $2 billion in obligations (mostly pensions and retiree health care). All this for a municipality of 477,000 residents with an annual

Sacramento finances are already stretched—the city has cut some 1,200 workers, or 20% of its workforce, in the past several years. Servicing its debt in years to come will only add more woe, especially given the intractability of public unions. The budget report noted that "While reducing staff is clearly not the preferred method for reducing costs, the city has a very limited ability to reduce the cost of labor absent cooperation from the city's employee groups."

According to studies by the Pew Center on the States, states and the biggest cities have made nearly three-quarters of a trillion dollars in promises to pay for retiree health-care insurance. Yet governments have set aside only about 5% of the money they'll need to pay for these promises.

This year a Chicago city commission reported that retiree health-care expenditures would soar from $109 million in this year's budget to $541 million in a decade. After concluding that the expenditures were unaffordable, one member of the commission proposed that retirees be required to sign on to the Illinois Health Insurance Exchange being created under President Obama's Affordable Care Act. Health insurance would be cheaper if it is subsidized by the federal government.

A December report by the States Project, a joint venture of Harvard's Institute of Politics and the University of Pennsylvania's Fels Institute of Government, estimated that state and local governments now owe in sum a staggering $7.3 trillion. Incredibly, the vast majority of this debt has never been approved by taxpayers, who are often unaware of the extent of their obligations.

Most state constitutions and many municipal charters limit borrowing and mandate voter approval. No matter. Politicians evade the limits, issuing billions of dollars in municipal offerings never approved by voters, sometimes with disastrous consequences. Courts have rubber-stamped many of these schemes.

The debt incurred by New Jersey for school projects is a case in point. In 2001, legislators in Trenton hatched a scheme to borrow a shocking $8.6 billion for refurbishing school buildings. The reaction to their plan in the press and among taxpayer groups was so negative that the politicians knew that voters would never approve it. So the legislature created an independent borrowing authority. Since it, and not taxpayers, would take on the debt, politicians claimed that there was no need for voters' consent.

Taxpayer groups challenged the maneuver. The state Supreme Court brushed aside their objections, arguing that there was already precedent for such borrowing.

New Jersey's Schools Construction Corp. quickly squandered half of the money on patronage and inefficient construction practices, so in 2005 the state borrowed another $3.9 billion. All of the debt is being repaid by taxpayers. The authority, which was dissolved several years ago, had no revenues of its own.

Next door, in New York, a scant 5% of the Empire State's $63 billion in outstanding debt has ever been authorized by voters, according to the state comptroller. The rest has been engineered through independent authorities such as the Transitional Finance Authority.

These authorities are designed to circumvent voters. Of the seven bond offerings that have gone before New York voters in the past 25 years, four have been defeated. But thanks to unsanctioned debt, New Yorkers bear the second-highest per capita debt burden in the nation, $3,258, according to a January report by the state comptroller. New Jersey is No. 1, at $3,964.

To prevent the pile-up of hidden debt, taxpayers need to spearhead a revolt that will narrow the ability of officials to mortgage their future. Any such revolt will first of all seek an end to government sponsored defined-benefit pension plans, through which politicians promise benefits years hence to current employees in a manner that potentially leaves taxpayers on the hook for unlimited liabilities. Simpler, defined-contribution plans featuring individual retirement accounts would make government pension systems less expensive and their accounting more transparent.

Similarly, reformers will have to rein in borrowing by independent authorities and other government entities created to circumvent current debt limits. No state or municipality should be allowed to issue any debt for which taxpayers are ultimately liable without voter approval.

Without such reforms, many states risk becoming like Illinois, where a $7 billion tax increase in 2011 was largely gobbled up by rising pension costs, leaving the state with a $9 billion backlog of unpaid bills and the prospect of new taxes to pay off its $271 billion in debt. This is a future in which rising taxes don't provide citizens new services but merely go to pay off hidden debts.

Mr. Malanga is a senior fellow at the Manhattan Institute. This column is adapted from a forthcoming issue of City Journal, where he is a senior editor.

A version of this article appeared March 30, 2013, on page A11 in the U.S. edition of The Wall Street Journal, with the headline: The Debt Bomb That Taxpayers Won't See Coming.

Health Insurers Warn on Premiums

Anna Wilde Mathews and Louise Radnofsky wrote in WSJ on 22 March 2013:

Health insurers are privately warning brokers that premiums for many individuals and small businesses could increase sharply next year because of the health-care overhaul law, with the nation's biggest firm projecting that rates could more than double for some consumers buying their own plans.

The projections, made in sessions with brokers and agents, provide some of the most concrete evidence yet of how much insurance companies might increase prices when major provisions of the law kick in next year—a subject of rigorous debate.

Health insurers are privately warning brokers that premiums for many individuals and small businesses could increase sharply next year because of the health-care overhaul law. Photo: Getty Images.

The role that pharmacies play in the health-care system is expanding. But that doesn't necessarily mean that consumers are better off. MarketWatch's Christopher Noble reports. (Photo: Getty Images)

The projected increases are at odds with what the Obama Administration says consumers should be expecting overall in terms of cost. The Department of Health and Human Services says that the law will "make health-care coverage more affordable and accessible," pointing to a 2009 analysis by the Congressional Budget Office that says average individual premiums, on an apples-to-apples basis, would be lower.

The gulf between the pricing talk from some insurers and the government projections suggests how complicated the law's effects will be. Carriers will be filing proposed prices with regulators over the next few months.

Part of the murkiness stems from the role of government subsidies. Federal subsidies under the health law will help lower-income consumers defray costs, but they are generally not included in insurers' premium projections. Many consumers will be getting more generous plans because of new requirements in the law. The effects of the law will vary widely, and insurers and other analysts agree that some consumers and small businesses will likely see premiums go down.

Starting next year, the law will block insurers from refusing to sell coverage or setting premiums based on people's health histories, and will reduce their ability to set rates based on age. That can raise coverage prices for younger, healthier consumers, while reining them in for older, sicker ones. The rules can also affect small businesses, which sometimes pay premiums tied to employees' health status and claims history.

[image] Associated Press

UnitedHealth Group, the nation's largest carrier, and other health insurers said premiums for some individuals and small businesses could rise.

The law's 2014 effect on larger companies is likely to be more limited. Many of the big changes coming next year won't touch them as directly as individual consumers and small businesses, though some will have to grapple with the cost of covering more workers or paying a penalty.

The possibility of higher premiums has become the latest focal point of the political tussle over the health law, which marks its third anniversary Saturday. Republican lawmakers have held hearings on the issue, and six GOP members of the House Energy and Commerce committee wrote last week to more than a dozen insurers asking them to turn over internal analyses on the law's impact on premiums and costs.

The insurance industry has also been talking publicly about big potential premium increases in lobbying for tweaks to the law.

The individual market includes about 15 million people, and around 18% of the roughly 149 million with employer coverage were at small companies, according to 2011 figures from the Kaiser Family Foundation. The individual market is expected to grow to around 35 million people by 2016 as a result of the law.

In a private presentation to brokers late last month, UnitedHealth Group Inc., the nation's largest carrier, said premiums for some consumers buying their own plans could go up as much as 116%, and small-business rates as much as 25% to 50%. The company said the estimates were driven in part by growing medical costs not directly tied to the law. It also cited the law's requirements that health status not affect rates and that plans include certain minimum benefits and limits to out-of-pocket charges, among other things.

Jeff Alter, who leads UnitedHealth's employer and individual insurance business, said the numbers represented a "high-end scenario," not an average. "There are some scenarios in which a member could see as much as a 116% increase or over," he said, though others, such as some older consumers, could see decreases. He said the company dwelled on the possible increases because it was trying to prepare brokers to speak with clients facing big jumps.

Other carriers have also projected steep rate increases during private meetings and conversations with brokers. Brokers say they are being told to prepare the marketplace for small-business and individual rate increases as carriers get ready to file specific rate proposals and plan designs with regulators.

Insurers are "not being shy that premiums are going to increase in 2014," and are urging brokers to "brace our clients," said John Lacy, vice president of group benefits at Bouchard Insurance, a brokerage in Clearwater, Fla. His firm has been hearing from carrier representatives that individual premiums in Florida could go up 35% to 50%, on average, and small-business rates around 30%, though it hopes to find strategies to blunt the impact.

Aetna Inc., in a presentation last fall to its national broker advisory council, suggested rates on individual plans not being grandfathered under the law could go up 55%, on average, and gave a figure of 29% for small business rates. Both numbers included 10 percentage points tied to medical-cost inflation, not the law. An Aetna spokesman said the numbers are "still generally in line with what we've been estimating," and represented the average impact in a typical state.

An official with Blue Cross & Blue Shield of North Carolina told a gathering of brokers last week that individual premiums could go up by as much as 40% to 50%, according to brokers who were present. A spokeswoman for the insurer said "we don't have final numbers" yet on premiums.

There has long been debate, even among insurance experts, over how the law will affect premiums. Because the effect is likely to vary, different measurements can arrive at different conclusions. The CBO analysis cited by the administration determined that average premiums for consumers who buy their own coverage would be 14% to 20% lower because of the law—if the law didn't change the types of plans they purchased.

But the CBO also suggested the law would lead to consumers buying more expensive plans, largely because it requires coverage to include certain benefits and limit charges such as deductibles. When this effect was taken into account, the average premiums would go up 10% to 13%, the agency said, though subsidies would ease the bite for most people. The agency also said small-business policies were likely to cost within a few percentage points of the amount they would have without the law.

Health and Human Services officials say competition among insurers, as well as provisions to limit their financial risk from attracting high-cost consumers, will exert downward pressure on premiums, and point to the tax subsidies that will limit many consumers' costs.

Subsidies will be available on a sliding scale for people with incomes of up to four times the federal poverty level—currently $45,960 for a single person and $94,200 a year for a family of four. More than half of the 35 million people expected to be in the individual market by 2016 are likely to qualify for credits. People whose incomes are around the poverty level could see almost all of the cost of their insurance subsidized, while people at the upper end will get only a small discount toward their premiums.

Write to Anna Wilde Mathews at anna.mathews@wsj.com and Louise Radnofsky at louise.radnofsky@wsj.com

The Bullying Pulpit

Thomas Sowell wrote on May 28, 2013 at Real Politics:

We have truly entered the world of "Alice in Wonderland" when the CEO of a company that pays $16 million a day in taxes is hauled up before a Congressional subcommittee to be denounced on nationwide television for not paying more.

Apple CEO Tim Cook was denounced for contributing to "a worrisome federal deficit," according to Senator Carl Levin -- one of the big-spending liberals in Congress who has had a lot more to do with creating that deficit than any private citizen has.

Because of "gimmicks" used by businesses to reduce their taxes, Senator Levin said, "children across the country won't get early education from Head Start. Needy seniors will go without meals. Fighter jets sit idle on tarmacs because our military lacks the funding to keep pilots trained."

The federal government already has ample powers to punish people who have broken the tax laws. It does not need additional powers to bully people who haven't.

What is a tax "loophole"? It is a provision in the law that allows an individual or an organization to pay less taxes than they would be required to pay otherwise. Since Congress puts these provisions in the law, it is a little much when members of Congress denounce people who use those provisions to reduce their taxes.

If such provisions are bad, then members of Congress should blame themselves and repeal the provisions. Yet words like "gimmicks" and "loopholes" suggest that people are doing something wrong when they don't pay any more taxes than the law requires.

Are people who are buying a home, who deduct the interest they pay on their mortgages when filing their tax returns, using a "gimmick" or a "loophole"? Or are only other people's deductions to be depicted as somehow wrong, while our own are OK?

Supreme Court Justice Oliver Wendell Holmes pointed out long ago that "the very meaning of a line in the law is that you intentionally may go as close to it as you can if you do not pass it."

If the line in tax laws was drawn in the wrong place, Congress can always draw it somewhere else. But, if you buy the argument used by people like Senator Levin, then a state trooper can pull you over on a highway for driving 64 miles per hour in a 65 mile per hour zone, because you are driving too close to the line.

The real danger to us all is when government not only exercises the powers that we have voted to give it, but exercises additional powers that we have never voted to give it. That is when "public servants" become public masters. That is when government itself has stepped over the line.

Government's power to bully people who have broken no law is dangerous to all of us. When Attorney General Eric Holder's Justice Department started keeping track of phone calls going to Fox News Channel reporter James Rosen (and his parents) that was firing a shot across the bow of Fox News -- and of any other reporters or networks that dared to criticize the Obama administration.

When the Internal Revenue Service started demanding to know who was donating to conservative organizations that had applied for tax-exempt status, what purpose could that have other than to intimidate people who might otherwise donate to organizations that oppose this administration's political agenda?

The government's power to bully has been used to extract billions of dollars from banks, based on threats to file lawsuits that would automatically cause regulatory agencies to suspend banks' rights to make various ordinary business decisions, until such indefinite time as those lawsuits end. Shakedown artists inside and outside of government have played this lucrative game.

Someone once said, "any government that is powerful enough to protect citizens against predators is also powerful enough to become a predator itself." And dictatorial in the process.

No American government can take away all our freedoms at one time. But a slow and steady erosion of freedom can accomplish the same thing on the installment plan. We have already gone too far down that road. F.A. Hayek called it "the road to serfdom."

How far we continue down that road depends on whether we keep our eye on the ball -- freedom -- or allow ourselves to be distracted by predatory demagogues like Senator Carl Levin.

One of Wall Street's Riskiest Bets Returns

Katy Burne wrote in WSJ on 4 June 2013

Investors are once again clamoring for a risky investment blamed for helping unleash the financial crisis: the synthetic CDO.

Anyone who lost their shirt in U.S. credit markets in 2008 might get a shock to hear this: Investors are again clamoring for a risky investment that was blamed for helping unleash the financial crisis. Katy Burne explains on MoneyBeat. Photo: Getty Images.

In a sign of how hard Wall Street is trying to satisfy voracious demand for higher returns amid rock-bottom interest rates, J.P. Morgan Chase & Co. and Morgan Stanley bankers in London are moving to assemble so-called synthetic collateralized debt obligations.

[image]

CDOs give investors a chance to bet on the creditworthiness of a basket of companies. Basic CDOs pool bonds and offer investors a slice of the pool. Synthetic CDOs pool, instead of the bonds themselves, insurance-like derivative contracts on the bonds.

Like their crisis-era predecessors, the new CDOs would be sliced up into different levels of risk and returns. Investors who want a chance at the highest returns would have to buy the riskiest slice.

While spreading risk in some ways, synthetic CDOs also can multiply the financial damage if companies fall behind on their debt payments.

During the financial crisis, CDOs pegged to soured mortgage loans caused losses to careen around the world.

Their catastrophic impact was denounced by many lawmakers and investors, and the market for all kinds of highly engineered financial instruments evaporated.

Some details of the deals being worked on at J.P. Morgan and Morgan Stanley aren't clear, including the size of the CDOs and which investment firms have expressed an interest in buying slices of them.

The banks declined to comment.

A small number of institutional investors recently approached the two banks and asked them if they would put together the synthetic CDOs, according to people familiar with the discussions.

The requests were made in London, a global center of derivatives trading.

J.P. Morgan and Morgan Stanley now are trying to line up more investors as buyers for the instruments, said a person familiar with the talks. An investor usually buys just one slice of a CDO, which usually is chopped into about six pieces.

The banks likely won't proceed with the CDOs unless they can sign up enough investors.

Before the financial crisis, CDOs and synthetic CDOs were a big cog in Wall Street's so-called structured-finance machine, bringing in substantial fees for securities firms that put together the deals. Above, a bull statue on Wall Street.

J.P. Morgan and Morgan Stanley aren't expected to invest in their own deals because of postcrisis rules that require banks to set aside large amounts of capital against possible losses on these types of investments.

The interest by potential investors in new synthetic CDOs shows that demand for higher returns is intense, said Brian Reynolds, chief market strategist at brokerage firm Rosenblatt Securities Inc. "Wall Street will create new, more complex, more risky structures to satisfy that demand," he said.

In the peak year of 2007, financial firms issued $634 billion of synthetic CDOs, according to data provider Creditflux. Sales fell to $98 billion in 2009. Since then, some hedge funds and banks have worked together to bundle derivatives into custom-made trades, but those private deals were often small and weren't evaluated by credit-rating firms.

A CDO driven by a different aim is also in the works. Citigroup Inc. now is selling a CDO using derivatives tied to the bank's portfolio of loans to shipping companies, but this deal isn't motivated by investor demand for higher returns.

Instead, the impetus for the roughly $500 million deal, being pitched only outside the U.S., is Citigroup's desire to make room on its balance sheet for new loans and hold less capital as a cushion against potential losses on the shipping loans, said a person familiar with the transaction.

Investors in the deal will be on the hook for some losses. In return, the deal is expected to pay an annual yield of 13% to 15%, according to the person familiar with the offering. Citigroup declined to comment.

It isn't clear how much investors would stand to earn on the synthetic CDOs being assembled by J.P. Morgan and Morgan Stanley. Investment-grade corporate bonds now yield less than 5%.

Efforts to pull off the deals show that banks and investors battered by CDOs during the financial crisis are increasingly willing to ignore bad memories in order to reach for higher returns. In markets ranging from commercial mortgage-backed securities to junk bonds, investors are eager to buy even the very riskiest investments, some of which now deliver yields of more 20% per year.

Before the crisis, CDOs and synthetic CDOs were a big cog in Wall Street's so-called structured-finance machine, bringing in substantial fees for securities firms that put together the deals.

In 2007, Goldman Sachs Group Inc. created a CDO called Abacus 2007-AC1 for hedge-fund firm Paulson & Co., which wanted to magnify a bet against the U.S. housing market.

The deal delivered a profit to the hedge-fund firm and founder John Paulson. But in 2010, Goldman paid $550 million to settle accusations by the Securities and Exchange Commission that other investors in the deal were misled. Goldman didn't admit any wrongdoing but said it had made mistakes in its marketing of the deal.

Investors are barreling into a related type of security tied to corporate debt, called collateralized loan obligations, or CLOs. So far this year, more than $35 billion of CLOs have been sold in the U.S., while European issuance is equal to more than $2 billion, according to Royal Bank of Scotland Group PLC.

The synthetic CDOs being built by J.P. Morgan and Morgan Stanley differ from their predecessors in some ways. For example, one middle slice has been harder to sell than other pieces because it doesn't yield enough, some investors complain. Since the crisis, credit-rating firms have made it tougher for deals to get top-notch letter grades.

In another difference, buyers of the least-risky slices would get more protection against potential losses than buyers of similar slices did before and during the crisis, said people familiar with the discussions.

Hedge funds are considered the likeliest buyers for riskier parts of the deals, which are the first slices to absorb losses.

Write to Katy Burne at katy.burne@dowjones.com

Bigness

This may interest you.  Three of us have been knocking around the terms “too big to fail” and “bigness.”  It began with the article below in an AARP publication.  The following was written by one of the three of us pretty well summarizes our view of the situation.  It is too bad because we are a far cry from what Jefferson, Adams, Franklin, Washington, and others had in mind 200 years ago.

Both are basically takers--of different sorts. Bigness is not best; adds complexity and since 1995 complexity has been proven to be the handmaiden of deception.

Both parties are political crooks- Dems steal from you with taxes and entitlements, giveaways. GOP supports bigs who are economic predators taking from the little guys, and those with lesser education --think oil, utilities, Comcast, banks, mortgage companies, hospitals, pharma.

Not a good set of options either way. And declining fast.  Must get back to creating value and stewardship fast.  Otherwise a fast boat to a rip off of the elderly for the younger ones to survive.

Here is an article from AARP's Bulletin for June 2013.

Let's see who benefits from "too big."  The article says that

hospitals are under pressure to control costs.  So, they merge. 

History shows that prices to patients actually increase after

mergers.  Hospitals argue that they gain greater leverage versus insurance companies.

Insurance companies, in turn, raise premiums to the public.  Now,

who benefits from bigness?

Do you believe that ObamaCare is going to provide better care for

patients and lower costs?

Hospital Mergers May Be Good for Business, But Patients Don't

Always Benefit

by Marsha Mercer, AARP Bulletin, June 2013

Wilson Medical Center has served the residents of the small, leafy

town of Wilson, N.C., for almost 50 years. But now this profitable

294-bed hospital — the only hospital in the county — may have to

become affiliated with a larger medical system.

hospital merger bigger better small communities community cost

patients lower brighter law health medicare medicaid mania coming

soon building eat small buildings big (Butch Martin/Getty Images)

What’s the impact on patients when smaller hospitals merge? — Butch

Martin/Getty Images

Rick Hudson, Wilson's chief executive, has hired a consulting firm

to advise the hospital on its options. He thinks the hospital may

not survive if it remains independent. "It would be malpractice on

my part as the CEO not to do what I can to make this hospital thrive and grow."

Wilson is part of a sweeping national trend that has hospitals

making vital changes — from joint operating agreements to outright

takeovers by larger hospitals and hospital systems.

Facing tremendous pressures to cut costs, hospitals also are

forming partnerships with doctors' practices and other health care

providers — all of which means medical care is becoming more

concentrated in fewer institutions.

What can patients in Wilson — and other communities — expect when

their familiar local hospital suddenly has a big new partner?

Higher prices for patients

While hospitals typically maintain they are merging or affiliating

for greater efficiency, higher quality of care and increased

savings, the most common consequence for patients is higher prices

for medical care, according to several decades of research.

A hospital merger boom in the 1990s, for example, increased patient

costs by 5 to 40 percent in areas where only a few hospitals

dominate, according to the Robert Wood Johnson Foundation. Large

systems with a number of hospitals tend to charge higher prices in

communities where they outnumber their rivals, says health

economist James C. Robinson of the University of California, Berkeley.

But Delos Cosgrove, M.D., president and CEO of the Cleveland

Clinic, which now has an extensive hospital system, champions the

wave of mergers and acquisitions as a way to improve patient care

and expand services.

Here's a look at what millions of patients in small towns and big

cities across the country are facing as U.S. hospitals undergo

fundamental changes.

What's happening to our hospitals?

Independent hospitals like Wilson are going the way of the corner

drugstore and neighborhood bank — with many taken over by a larger

rival or by a chain.

More than 100 hospital deals took place in 2012, double the number

just three years earlier. Of the 5,724 hospitals in the United

States, about

1,000 will have new owners in the next seven years or so, predicts

Gary Ahlquist, a senior partner with the consulting firm Booz &

Company. And hospitals that want to remain independent will have a

harder time staying afloat.

"The days of the stand-alone community hospital, in large part, are

numbered," says Larry Scanlan, author of Hospital Mergers: Why They

Work, Why They Don't. He compares today's independent hospitals to

the beloved hoagie sandwich shops that once dotted Philadelphia streets:

"The hoagie shop has disappeared. If you want a hoagie now, you go

to Subway."

Next page: Why is this happening? » Why is this happening?

Hospitals, already under intense pressure to lower costs and

improve care, have been losing patients. More and more surgeries

are performed in clinics and doctors' offices, so the patient

doesn't spend the night in the hospital.

The recession also cut the number of hospital patients as people

put off treatment, according to Caroline Steinberg, a vice

president with the American Hospital Association. Left with too

many empty beds, hospitals again began to consolidate with hospitals and doctors in 2010.

(Hospitals that hire physicians see an increase in patients, who

come to see their doctors for everything from tests to outpatient

surgeries.) "The logo on the front of the hospital might change,

but as long as your doctor has privileges there, ownership may not matter much."

Proponents of the Affordable Care Act, which is bringing millions

of new patients into the health care system and into hospitals, say

it aims to promote competition and lower the costs of care. To rein

in health care costs, however, the law reduces the rate of growth

in Medicare payments to hospitals.

And importantly, it also provides incentives for hospitals to hire

or form more partnerships with doctors' practices and other health

care providers to create "accountable care organizations" (ACOs),

which are designed to coordinate patient care. Instead of separate

fees for each procedure, ACOs will receive lump sum payments to

care for patients. The idea is that hospitals and other providers

will work harder to provide good care, control costs and keep patients healthy.

But ACOs and other measures in the law could encourage

consolidations rather than spur health care competition, some experts say.

Hudson of Wilson Hospital says changes in Washington as well as the

regional economy were a key reason he began looking for a partner

for his facility. He cites the health care law's lower Medicare

rates for hospitals, as well as the expenses involved in adopting

new quality controls and developing electronic record-keeping.

What can patients expect?

A system of hospitals has greater bargaining power with insurance

companies than a single hospital and can therefore demand higher

prices for its services. Robinson of Berkeley examined prices for

six major cardiac and orthopedic surgery procedures in hospitals in eight states.

His study, published in 2011, found that private insurers paid 13

to 25 percent more for procedures in areas where there was less competition.

In the end, patients wind up paying these increased costs of

consolidation — through higher insurance premiums, copayments,

deductibles and hospital bills.

And patient care may or may not improve. "There's no clear

indication that mergers produce better-quality care," says Thomas

L. Greaney, codirector of the Center for Health Law Studies at

Saint Louis University.

Of course, hospital systems vary, and Cleveland Clinic's Cosgrove

contends big, busy, experienced medical centers that perform a

number of procedures can offer better results and a wider range of

services. Over the past 12 years the Cleveland Clinic has grown to

include another three-hospital system and a two-hospital system, as

well as several independent community hospitals.

"We spent millions enhancing these facilities and investing them

with our mission, vision and values," he wrote recently. The system

spans three states and two foreign countries.

While people often have a sentimental attachment to locally run

hospitals, Gary Ahlquist says, "you may have to accept a loss of a

locally run institution to be sure you have an institution at all."

For patients, the more important relationship is with their

doctors, experts say. "The logo on the front of the hospital might

change, but as long as your doctor has privileges there, ownership

may not matter much," Scanlan says.

Next page: Who protects patients interests? » Who protects patient

interests?

The Federal Trade Commission (FTC) and U.S. Justice Department

police mergers, and many states also require mergers to be approved

by their state attorney general.

Health Tools

The FTC recently has "redoubled its efforts to prevent hospital

mergers that may leave insufficient options for inpatient hospital

services, leading to higher prices for health care," Edith Ramirez,

chairwoman of the FTC, told a Senate panel in April. In the last

two years, she said, the FTC has blocked mergers in Toledo, Ohio, and Rockford, Ill.

While the courts have tended to permit hospital consolidations,

that attitude may be changing. The U.S. Supreme Court ruled in

February that a multimillion-dollar merger of the only two

hospitals in a Georgia county would result in a virtual monopoly

that would substantially reduce competition. Jon Leibowitz, then

chairman of the FTC, hailed that as "a big victory for consumers

who want to see lower health care costs."

Meanwhile more hospitals are searching for suitors. As the American

Hospital Association's Steinberg says, "It's a very hard time to be

a hospital."

Marsha Mercer is a freelance journalist in the Washington, D.C., area.