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New Paper on Provider Pricing Power

By November 28, 2012Commentary

An organization called Catalyst for Payment Reform has issued a lengthy white paper on the effects of provider consolidation on the health care industry.   (CPR Paper)    The paper summarizes much of what we have previously reported from other research work, including that most of our health spending growth is the result of unit price increases and our excess spending over other countries is due to higher prices.  Utilization in the United States is often not significantly higher than in other countries, in fact in many cases the United States has less utilization, probably because we have been more focused on solving the utilization part of the health spending equation.  But our prices and payments to providers of health services and products for the same treatments and goods are often much higher, sometimes multiples of what is paid in other developed countries.  These higher prices are partly a result of historical factors in a free economy, but especially in recent decades are more the result of unbridled provider market power, a fact also demonstrated in recent research.

This market power was first evident in hospital inpatient prices, but as hospitals have agglomerated other medical services and begun to employ doctors and buy physician practices, these enormous health systems have staggering control over a vast swathe of local health services in most markets.   Even though larger organizations theoretically could be more efficient, when providers can demand ever higher prices, they have no incentive to be efficient and the research shows that instead they just spend more, raising their costs.  The paper reviews methods to weaken this provider power, such as greater price transparency and consumer engagement, payment reforms and antitrust enforcement.  These methods are likely to be ineffective at this point, when we already have such high levels of concentration.  The only solution  really is structural–breakup these provider systems now.  Instead the reform law actually encourages greater consolidation through promotion of entities like accountable care organizations.  It will be no surprise if health spending begins to reaccelerate soon.

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