What can be done to ensure healthcare providers compete?

Your employer has bad news: your health insurance premiums are going up again; maybe not as much as in the past, but more than the increase in your paycheck. Your employer has talked with several different insurance companies, but the story is the same with each: there are fewer hospitals in your city, and if you want access to the biggest one – the one that all your neighbors say you should go to if your kids get very sick – then the premiums will be much higher than last year before the hospital merger in your community.  

This scenario is repeated in countless communities around the country. Lively competition is replaced by a market that seems to be dominated by a few hospital systems and physician practices, with prices getting even higher, in some cases as a result of hospitals merging and buying the practices of area physicians. In some places, the number of competing insurers has shrunk as well; they could drive a harder bargain with hospitals, but they usually don’t. They keep price hikes low enough to avoid losing customers or they just pass on the higher cost to the consumer, despite their growing leverage. This situation is even more troublesome because the cost of health care doesn’t correlate with the quality of care provided.  

{mosads}The use of market power—or the ability to raise and keep prices higher than would prevail in a competitive market – is the key reason the United States spends so much more on healthcare than other countries. Little has been done by policymakers to address the issue of market power. Indeed in some instances, decisions made by policymakers have had the unintended consequence of creating more market concentration. That needs to change and the time to do it is now, or we risk a U.S. health care system in which consumers have fewer options, while costs continue to escalate. 

Recently, the National Academy for Social Insurance convened a panel of experts from across the health care spectrum to address the issue of market power in local health care markets. The panelists included leaders in the provider and insurance communities, economists and antitrust experts. It may surprise people that a group with such different backgrounds were able to agree on a set of principles to address the impact of increased consolidation in local health care markets.  

First and foremost, the group agreed that increasing the competition level in health care markets is the best way to motivate providers to increase the efficiency, and improve the costs and quality of care delivered. When competitive health care markets work well, they weed out inefficient providers and give those paying for care more leverage to keep costs down.  

Second, the group recognized that what may work for one city or region may not work for others; there isn’t a one-size-fits-all or silver-bullet approach to addressing the issue of market power. Some communities may be able to create more competition by increasing the number of doctors and hospitals, by increasing cost and quality transparency or by limiting the use of anti-competitive contracting practices by plans and providers. But some markets may have experienced such high levels of consolidation that pro-market policy options are not enough. These communities may instead create an independent board or commission to monitor mergers, competition and overall health care spending; others may want to go further, and impose a ceiling on the payment rates negotiated by health plans and providers, using Medicare as a benchmark. 

For policymakers, tackling the lack of competition is like climbing a mountain. Even the initial steps — creating more competition – may be difficult, but they must be explored before more regulatory action further down the path is considered. Although addressing the issue of market power will be difficult, health care prices are too high to ignore. With health care delivery undergoing significant and rapid changes, changes in policy must address how providers are organized and do business, if we are to create the efficient and high-quality health care system of the future that we seek. 

Berenson is an Institute fellow at the Urban Institute. In this position he conducts research and provides policy analysis primarily on health care delivery issues, particularly related to Medicare payment policy, pricing power in commercial insurance markets, and new forms of health delivery based on reinvigorated primary care practices. Hoagland is a senior vice president at the Bipartisan Policy Center, where he helps direct and manage fiscal, health, and economic policy analyses for BPC. The two served as study panel co-chairs for the report, Addressing Pricing Power in Health Care Markets: Principles and Policy Options to Strengthen and Shape Markets.