Pricing Power in Health Care Markets

The National Academy of Social Insurance convened an expert panel to investigate issues related to pricing power in health care and what policy steps might be taken to address its existence.  (NASI Report)  For over two decades health plans and large provider groups and systems have seesawed in a battle over reimbursement.  Many hospitals have merged and they have increasingly acquired physician practices and other types of care providers.  At the same time there has been significant consolidation among health plans.  The worst outcome, which we have seen evidence of, is that dominant health plans agree to make relatively high and growing payments to dominant provider systems, and just pass the costs on to the ultimate payers–government, employers and individuals.  Governments, which account for an increasing proportion of health care spending, can to some extent avoid the problem by dictating prices, but this merely shifts the struggle from the market to the political arena.  In general, research suggests that 50% to 80% of health spending growth is due to unit prices.  So this must be addressed if spending growth is to be restrained.

The report generates a set of policy principles that are hard to disagree with.  The authors recognize that market competition is usually the best way to increase efficiency, improve quality and moderate prices.  Competitive markets are most likely to have prices that reflect real costs of providing a service or product and the value delivered, and to encourage innovation.  At the same time, health markets are very local and where there is excess provider or health plan concentration, regulators may need to step in.  Appropriate regulation could include aggressive antitrust enforcement (amen, but a little late for that in many markets), prohibiting certain provider contracting practices and even direct price regulation.  But the authors also note that any regulatory approach risks capture or undue influence by vested provider or health plan interests.  They also endorse the price transparency and consumer engagement initiatives and new care approaches like ACOs or medical homes, as long as they don’t create further market concentration.  The report contains a great deal of useful background information and a thoughtful analysis of each of the various policy steps that might be tried to minimize the effect of market power on health care unit prices.