Market power strikes again

An interesting paper in Health Services Research by Dr. Seidu Dauda* looks at market power between payers and providers to tease out the effects of increasing concentration on prices. The effect that is actually being measured is how does the changing relationship of market power between payers and providers change prices.

The results aren’t surprising. Concentrated providers lead to price increases. Increasingly concentrated payers lead to price decreases. This is expected.

A hypothetical merger between two of five equally sized hospitals is estimated to increase hospital prices by about 9 percent (p < .001). A similar merger of insurers would depress prices by about 15.3 percent (p < .001). Over the 2003–2008 periods, the estimates imply that hospital consolidation likely raised prices by about 2.6 percent, while insurer consolidation depressed prices by about 10.8 percent....

What does this mean for policy?

The biggest policy implication is provider consolidation has been increasing. Hospital mergers are up. Individual providers are more likely to be affiliated with vertically integrated systems instead of working in solo or small provider groups.

This is partially a response to the ACA as it encourages providers to take on more actuarial, performance and population management risk. Bigger providers are more readily able to build the capital cushions needed to manage risk as well as attract sufficient patients to have big enough samples where statistical risk control techniques can actually work with some degree of success. Furthermore, they have argued that the increased requirements towards deployment and use of electronic medical records necessitates larger entities to fully amortize costs and gain network effect advantages.

More prosaically, the practice of integrating provider offices with hospitals leads to a marked shift in referral patterns. Doctors who work for a vertically integrated hospital-office combination are far more likely to send their patients to the hospital that they work with. This is not surprising. It is the entire point of buying a referral pattern.

Insurers on the other hand have been weakened. The ACA introduced co-ops and there has been a flurry of new entries to the market (Oscar, Clover, Zoom etc). Additionally, there has been a proliferation of payer-provider launches facilitated by consulting groups like Evolent**.

Anti-trust has been active on both the provider and payer side over the past several years. One of the great challenges in the US healthcare system is how much every unit of care costs. If and as hospitals acquire both increasing local market power and wider ranging referral patterns, insurers will have less ability to negotiate better prices.

A seminar that I attended last week raised an interesting question as to how the Swiss system has much lower administrative costs than the US system despite some facial similiarities. They use a single national fee schedule (TarMed). It is a form of all payer rate setting where the price is administratively set after technical and political negotiations. We won’t have that in the United States but finding more instances where insurers are able to collectively band together for take it or leave it common pricing would be a way to apply countervailing market pressure on consolidating providers.

Over the long run, market power had to be broken on the provider side and market power through either a universal all payer rate setting system or regional collaboratives or actual single point of payment systems will be needed to actually move the cost curve down instead of slowing the increase of the first derivative.

* Dauda, S. (2017). Hospital and Health Insurance Markets Concentration and Inpatient Hospital Transaction Prices in the U.S. Health Care Market. Health Services Research. doi:10.1111/1475-6773.12706

** Disclosure: I worked at UPMC, a launch owner of Evolent, and yelled at rejected Evolent claims that got routed into holds that should never need to be used. That fun blew up more than one weekend of my life.