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Health Plan and Hospital Market Concentration

By September 20, 2011Commentary

For decades hospitals and health plans have waged battles over reimbursement and each has accused the other of having market power that either causes excessive hospital price increases or may limit appropriate reimbursement.  An article in Health Affairs reports on research that examines the relationship between health plan concentration, hospital concentration and hospital prices.   (HA Article) The authors examined urban hospital and health plan markets across the entire country, creating indices to reflect the concentration level of each.  They also devised a formula to derive hospital pricing in each market.

Only about 10% of markets are in the most competitive category for health plans.  Hospital market concentration does not vary as much as does health plan concentration and in 90% of markets hospital concentration is greater than health plan concentration.  As expected, higher health plan concentration reduces hospital prices and higher hospital concentration increases them.  Hospital concentration appears to have a greater effect; each 1000 point increase in health plan concentration produced 2.5% lower prices but each 1000 point increase in hospital concentration resulted in 8.3% higher prices.  Since most hospitals are in fairly concentrated markets for their own services, but in unconcentrated health plan areas, hospitals don’t appear to face much danger of having prices negotiated down.

As the authors make clear, there is no reason to be concerned about health plan consolidation or market power unless hospital markets become much less concentrated.  In fact, health plan consolidation may be the only thing keeping hospitals from adopting even more egregious pricing.  The authors suggest not breaking up hospital systems, but requiring the individual hospitals in a system to bargain separately.  That might help, but the supposed gains in efficiency that multi-hospital systems create are actually non-existent.  Research suggests that bigger hospital systems with more market power actually have higher costs because they have more revenue and profits to spend.  And they don’t have any quality advantage.  The appropriate remedy is to ban multi-hospital systems and force the break-up of existing ones.  Once that is accomplished, any potential danger from health plan consolidation can be addressed.

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