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Maybe It’s the Providers that Are the Cause of Spending Increases.

By March 1, 2010Commentary

Hey, yoo-hoo, look over here, no, not over there, here!  That must be what it feels like to some health services researchers in regard to causes of growth in health spending.  While policymakers can’t seem to spend enough time bashing insurers for premium increases, very little attention is being paid to the cause of most of those increases–provider price hikes.  Wonder if political contributions and lobbying has anything to do with that?  The body of research on provider pricing is getting harder to ignore.  We have posted in the last couple of months on the Rhode Island hospital payment study, the Massachusetts AG Report, the AJMC article on provider pricing’s role in private payer geographic variation in spending and now there are two more studies on the subject.

Health Affairs has an online article examining hospital pricing in California and its impact on health plans.  (Health Affairs Article) The study details the shift in California from payer negotiating strength in the 1990s to the current hospital and physician leverage which has led to several years of double digit price increases.  Hospitals have consolidated and developed other techniques to make it difficult for payers to credibly threaten to drop them from networks.  Physicians have linked with hospitals or IPAs to achieve the same goal.  Regulators have passively sat by.  As the authors point out, the supposed virtue of these integrated systems was better, more efficient care but whether quality has improved or not, costs have increased very rapidly.  Payment reforms which create accountable care organizations may exacerbate this problem.

The second study appeared in Health Services research and looked at the relationship between HMO penetration in a market and hospital concentration.  (HSR Article) The study found that high-HMO penetration markets was associated with a 4% reduction in hospital costs and revenue in the late 1990s but only a 2% reduction in the 2000s.  This appears to be due to greater hospital concentration and bargaining power.  Today, hospitals in competitive hospital markets with high HMO penetration receive about 20% less revenue than do hospitals in concentrated hospital markets.  The authors attribute this effect almost entirely to prices, not utilization.

The facts have become obvious and the remedy is pretty obvious too.  Either break up the hospitals and force them to disgorge ownership of non-core hospital services and stop employing or linking with physicians, and take measures to limit physician negotiating leverage, which could create more free-market pricing; or take regulatory steps such as all-payer rates or private payer rate schedules, such as workers’ compensation regulators have established in many states.  Don’t expect quick action, given the political realities, but also don’t expect any significant reduction in overall health spending until these provider pricing issues are addressed.

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