By Evan Falchuk

Another of the many reasons why health insurance is so expensive is the wave of hospital consolidation over the last 15 years.

They’ve been merging into big local hospital systems, and national chains, with the number of stand-alone hospitals – and even just the pure number of hospitals – declining steadily. It’s a trend that in this recessionary environment and questions about health care reform may be accelerating.

Why is it happening?

A big reason is declining government payment rates to hospitals.

In an effort to control costs, Medicare and Medicaid programs have systematically limited payments to hospitals for their services.  Hospitals have tried to make up this shortfall by shifting costs onto private insurers through higher costs to them.

The best way to have leverage in those negotiations is to be a bigger, more important negotiating entity.  So merging into a big system makes perfect sense.  Some people think the resulting cost-shifting adds as much as 10% onto the cost of private insurance.

It also amplifies other trends in the health care marketplace.

In Massachusetts, for example, the dominant hospital system and dominant health insurer reportedly entered into a secret agreement in 2000 along these lines.  The insurer, in return for agreeing to pay significantly more for services from the hospital system, got a promise from the hospital system that it would always charge other insurers at least as much. What it meant was that the hospital got lots more money from all insurers, and the dominant insurer was able to know it would always have the cheapest cost structure of any insurer in the state.

Of course, it also meant significant premium increases for everyone to pay for this arrangement. It’s the kind of collusion that is reminiscent of the “trust busting” era of the early 20th century.

This time, though, the government doesn’t seem especially interested in it.  Indeed, earlier this year, the Massachusetts Governor, without irony, asked for the “vigorous cooperation” of Massachusetts hospitals and insurers to resolve the problem of high health care costs.