Paradigm Lost: Provider Concentration And The Failure Of Market Theory

By Bruce C. Vladeck
Health Affairs, May 19, 2014 (online)

The belated rediscovery of provider prices as a significant contributor to the high costs of US health care (although the data were there in the literature all along), coupled with the presumed role of provider concentration in producing some of the upward pressure on prices, has created a serious conundrum for those who seek to apply conventional economic reasoning to matters of health policy. The conundrum arises from the conflict between the presumed per se undesirability of increased concentration and the fact that many of the causes of that increase may themselves be highly desirable — or at least practically unavoidable.

The dilemma posed for policy makers and analysts arises from the assumption that increased concentration is intrinsically a bad thing, even though many good things seem to be happening as provider concentration progresses. On the one hand, the number of independent health care providers appears to be decreasing as a result of hospital mergers and acquisitions, the agglomeration of physicians into larger and larger group practices, and the alignment of physician practices with hospitals. The relationship between increased provider concentration and increased prices has long been conventional wisdom (even if recent data and analyses have called that wisdom at least partially into question). Ergo, such increases in concentration should be opposed.

On the other hand, at least some of the factors driving increased concentration are widely believed to improve care and population health, or at least to encourage greater efficiency in the delivery of health care services. These factors include growing clinical integration across previously atomized providers; the dramatic reduction in use of inpatient services, which decreases the number of full-service hospitals needed in any given market; the mandatory adoption of expensive information technologies; and the growing experimentation with payment schemes in which providers bear at least some degree of financial risk.

Sage: ‘Getting The Product Right’

Sage is trying to address the very real and very significant costs of the inefficiency that permeates the US health care system. Recognizing that the power to influence prices that comes with increased market power theoretically reduces the incentives for efficiency, Sage proposes to reduce that power by redefining what health care payers buy. This, in turn, would presumably give consumers greater ability to make informed, price-sensitive decisions about which health services they wished to consume.

Antitrust analysis is generally complicated in markets with differentiated products. Sage’s proposal would either exacerbate that problem or require the creation of a new authoritative regulatory structure to determine exactly how new products should be defined.

Ginsburg And Pawlson: Let Consumers Decide What To Buy

The authors’ theory seems to be that if increased provider consolidation limits the ability of insurers to exert downward pressure on prices, then the solution to high prices is transferring an increasing share of the purchasing function to individual consumers through higher out-of-pocket liabilities and the development of tiered networks, which offer different prices to consumers with ostensibly different preferences. However, this prescription only exacerbates the underlying problem. No matter how much information — the magical potion in many market-based approaches to health policy — atomized consumers may have, it is almost certainly less than that of even the most indolent insurance company.

Ginsburg and Pawlson also appear to be in favor of narrowing provider networks as a way of reducing providers’ leverage in negotiations with payers and thereby holding prices down. They note that in the 1990s such policies engendered significant consumer resistance because of the restrictions they imposed on access to providers. However, they seem not to mind the fact that such resistance may be minimized in the future by the growing inability of many households to afford the kind of health care they prefer. Such an approach not only fails to counteract the growing economic inequality in this country but also appears to legitimate it.

The Myth Of The Sovereign Consumer

One effect of changes in health financing in the past two decades is unavoidably clear, if too often overlooked or minimized in importance by the health policy community: The average individual with health insurance is considerably worse off now than twenty years ago. Out-of-pocket payments are much higher, for both premiums and copayments; cash on the barrelhead is increasingly required for services that used to be provided first and billed for afterward; and the numbers of avaricious debt collectors and medically related bankruptcies continue to soar.

At the same time, consumers are regularly inundated with self-serving or downright erroneous information from health insurers, providers, and entrepreneurs alike about health care services and their use that carries the implicit message that any illness or financial difficulty is essentially the fault of the consumer.

It is ironic that the increased unaffordability of routine health care is exactly the problem that historically led to the creation of health insurance programs in both the public and private sectors. Those who are quick to applaud the expected demise of employer-sponsored coverage in the United States overlook the extent to which large employers, eager at least to not offend their employees, historically used their purchasing power with insurers to protect those employees (as well as to maintain an enormous de facto cross-subsidization of the less healthy employees and family members by the healthier ones).

Of course, government insurance programs wield this purchasing power more directly, more openly, and—when it comes to the effect on provider prices and the minimization of out-of-pocket liabilities for individual households—far more effectively. In other words, Medicare and Medicaid, and their beneficiaries, are much less at risk of increased prices resulting from provider concentration than are most private insurers or privately insured people.

Those who are uneasy about further increasing the government’s role in minimizing price growth in health care might do well to compare today’s high-deductible plans to the historical experience of Blue Cross plans with private-sector monopoly control (which hardly ever paid hospitals more than their actual costs) and first-dollar coverage.

As a proud former rate setter in both state and federal governments, I confess to an absence of alarm at these authors’ recognition that if none of their nostrums work, rate regulation may become increasingly unavoidable. But I am skeptical of the political likelihood of a return to rate setting; nor am I entirely convinced of its desirability. The exercise of government power is one way to constrain sellers in concentrated markets, but not the only one.

It is conceivable, for instance, that one explanation of the relatively low rate of hospital price increases in recent years is that private insurers, in response to some of the first- and second-order pressures generated by the Affordable Care Act, are actually negotiating aggressively with hospitals, instead of just passing on increases to their customers or enrollees, as was standard practice in the past.

Instead of continuing to try to impose axiomatic and solipsistic theories on a reality to which they increasingly fail to apply, we need to figure out what kind of health care system we really want and how much we are prepared to pay for it. Then we need to invent or reconfigure the social institutions that we will have to have to get that system.

In health care, there is plenty of evidence that cooperation benefits patients much more than does competition. Working together to provide the best care for the patient is far better than competing to obtain the best business outcome for the health care providers. The current increasing consolidation in the health care delivery system shines light on these conflicting dynamics.

In this paper, Bruce Vladeck provides a perspective in response to different views of this topic released in online papers and presented at a Health Affairs briefing this morning, sponsored by The Commonwealth Fund. Although the discussion was primarily about the impact of provider concentration in the health care marketplace, the issues go well beyond that.

As Vladeck mentions, historically the Blue Cross plans exerted private sector monopoly control while providing first dollar coverage. Now the coverage has deteriorated, impairing access to care and leaving patients exposed to major costs. The dynamic that we need to be looking at is not the balance between the market clout of the consolidating health care providers and the purchasing power of insurers as representatives of the payers, rather the important dynamic, again according to Vladeck, should be configuration of the social institutions that will allow us to pay for the health care system that we really want.

Although Vladeck suggests that insurers may have become more aggressive price negotiators, he nevertheless makes it clear that the government price setters – Medicare and Medicaid – have had much more clout.

Consolidation that improves efficiency, effectiveness and access for the benefit of the patient is great. Other nations have shown that you do not need to limit consolidation or concentration to prevent overpricing in such imbalanced markets. All you need is government price administration such as we would have with a single payer financing system. That would eliminate the superfluous private insurers with their wasteful administrative excesses and inefficiencies that stem from our dysfunctional fragmentation of health care financing.