The ‘hospital trap’ that has destroyed the healthcare industry

Over four decades, hospitals consolidated power by purchasing physician practices and controlling referrals. Duke law professor Barak Richman argues that restoring competition requires untethering physicians and care delivery from hospital (local, near-) monopolies and returning hospitals to their proper role as destinations for serious illness rather than hubs of routine care.

America’s healthcare system did not arrive at its current cost structure by accident. It evolved through a long sequence of consolidations. Hospitals, once reserved primarily for severe illness, gradually became the organizing hub of nearly all medical care. Barak Richman, professor of law at Duke University with training in economics and business, describes the problem in stark terms: “We get most of our care from the wrong people in the wrong places at the wrong time.”

The observation is not rhetorical. It reflects a structural shift in how medicine is delivered. Historically, the hospital functioned as a destination. A patient went there when illness demanded intensive care. In today’s system, the hospital increasingly acts as the anchor around which all care revolves. Richman’s view is simple and almost architectural: “We want the hospital as a destination, not as an anchor.”

The path to that anchor began in the 1980s when hospitals realized that consolidation created negotiating power. When two hospitals negotiate jointly with insurers, the insurer loses leverage. Prices rise. The pattern repeated across American cities. Systems merged, acquired competitors, and expanded outward into physician practices.

The result is not just consolidation among hospitals but control over the flow of patients. As Richman explains, “The hospital became the conduit or the controller of all referrals and managed to self-refer to channel patients to the place where care is most expensive.” Independent physician practices gradually disappeared as hospitals purchased them. Once referrals passed through the hospital network, the hospital effectively governed the entire delivery system.

Economists have studied these mergers extensively. The results are remarkably consistent. Contrary to the promises that often accompany consolidation, hospitals rarely produce efficiencies when they merge. Costs do not fall, and quality does not measurably improve. What does change is bargaining power.

Richman states the point plainly: “The evidence suggests that when two hospitals merge, they do not provide either higher quality care or lower cost care. But they sure can negotiate for much higher prices.”

Healthcare markets behave differently from ordinary consumer markets. A family can postpone buying a new car or washing machine. It cannot postpone trauma care. Because emergency access to a local hospital is indispensable, hospitals possess an unusual form of pricing leverage.

That leverage produces a peculiar inversion in the system. Patients assume they are the customer. In reality, the patient often functions as something closer to the commodity being delivered between institutions. Richman phrases the dynamic bluntly: “In many ways the patient is the product for the health system and the insurer is delivering the product.”

Insurance further complicates the economics. Most Americans receive health coverage through employers and rarely see the full price of their premiums. Workers pay a portion, but the majority is hidden in compensation structures. Because individuals do not experience the full cost directly, price sensitivity weakens. Richman notes that “every dollar of health insurance is dollars coming out of your pockets even if you do not see it.”

When insurers negotiate with large hospital systems, they often face two choices. They can exclude the dominant hospital from their network, which is politically difficult and unpopular with employees, or they can accept the hospital’s price and pass the cost through higher premiums. In many markets, the latter strategy prevails.

This helps explain why healthcare spending in the United States continues to grow faster than other sectors of the economy. Richman argues that hospital consolidation has been a central driver of the trend. Local hospital monopolies have become extraordinarily profitable enterprises. As he observes, “hospital monopolies are among the most lucrative monopolies there are.”

The structural problem is not simply expensive medicine but concentrated control over the referral pipeline. Richman summarizes the dynamic with a simple institutional observation: “Without independent physicians the hospital really can call all the shots in our healthcare system.”

For decades, antitrust enforcement failed to prevent these mergers. Regulators occasionally challenged large consolidations but allowed many others to proceed. The result is that in many metropolitan areas, the consolidation process has already run its course. The obvious interventions that might have worked earlier are now more difficult.

Richman has written about this frustration in policy commentary and academic work on healthcare antitrust. The argument that appears in his essays and public commentary is not that hospitals must disappear, nor that the system should be nationalized. Instead, he proposes reversing the direction of integration.

The key step is restoring independent physician practices. Physicians outside hospital ownership could guide patients toward lower-cost outpatient care, preventive care, or community-based services that avoid hospitalization altogether. Hospitals would still exist, but their role would return to what it once was: treating serious illness.

Technology may accelerate this transition. Telemedicine, remote monitoring, and hospital-at-home programs allow certain types of care to occur outside expensive buildings. Yet even here, incentives matter. When hospital systems purchase such technologies themselves, adoption may slow because the systems depend on filled hospital beds for revenue. As Richman notes, “when a local hospital monopoly purchases hospital-at-home technologies… their priority really is to keep their beds full.”

The emergence of new intermediaries may offer another path forward. App-based insurance platforms and digitally coordinated care networks aimed at younger patients already exist. These models attempt to restore something closer to consumer behavior in healthcare: comparing prices, evaluating outcomes, and selecting providers more deliberately.

Still, the system cannot transform without pressure from the people who ultimately purchase insurance. Richman emphasizes a practical step available to workers today. Employees can push their employers to demand lower-cost insurance plans that rely less on dominant academic hospital systems. As he puts it, “the most important thing people can do is to engage with their employer and ask for low-cost insurance options.”

Healthcare debates often gravitate toward sweeping reforms. National systems, single payer proposals, and comprehensive redesigns appear regularly in policy discussions. Richman’s argument is narrower but potentially more realistic. The problem is structural concentration. Hospitals gradually absorbed the physicians and referral networks that once balanced their influence.

Undoing that concentration would not require dismantling the entire system. It would require rebuilding the competitive landscape around it.

The architecture of American medicine changed over four decades. Richman’s thesis is that restoring balance will require a similar architectural shift, one that moves care outward from the hospital and returns patients to the center of the system.

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