Physician Market Power, Prices and Utilization

Physicians are often referred to as the gatekeepers to the entire health system, because not only do they provide medical services directly, but they control access through order and referral writing to most other services.  A physician’s unique role, coupled with the widespread presence of third-party insurance, changes the normal supply and demand economic curves, leading to price insensitivity on the part of most patients, although the growth of high-deductible health plans is restoring some of that sensitivity.  Research from staffers at the Bureau of Economic Analysis examines the impact of physician market consolidation on prices and on utilization.  (BEA Paper)   The researchers used information from the SK & A database on physician practices and the MarketScan database on insurance claims to try to identify any link between concentration in a market and prices in the commercial health insurance marketplace.  The practices studied were orthopedics and cardiology.  Both of these specialties have undergone extensive consolidation among physician practices and with physician practices affiliating with larger health systems, but the level of concentration is highly variable across the country.  The researchers measured concentration at the highest level of aggregation, for example, stand-alone practice, multi-specialty practice or health system.

The researchers estimate that a 10% increase in physician concentration levels, using a common measure, is associated with about a 1% increase in physician fees.  Over the period from 1988 to 2008, this likely meant an 8% increase in fees from concentration increases alone.  Not surprisingly, in markets where there is greater commercial health plan concentration, the fee increases were lower.  The effect of higher fees on service utilization is complex.  It depends on the benefit levels for the patient, specifically the amount of out-of-pocket cost they will incur, as well as the seriousness of the services (cardiology and even orthopedic services are often hard to defer), and the physician’s incentive to achieve more income by ordering and performing more services.  Generally, higher fees would invent physicians to provide or supply more services and would incent patients to allow or “demand” fewer services.  But health care being the complex market it is, for orthopedics the higher consolidation and higher physician service prices appear to have no impact on the overall utilization of services but for cardiology there was actually a higher rate of utilization.  These findings overall suggest, consistent with common sense, that having fewer competing physician practices in a market leads to higher fees, with the effect more pronounced in markets with greater health plan competition, but also seems to lead to the same or higher utilization of services, contrary to what might occur in typical economic markets.  As the researchers suggest, an interesting next step would be to evaluate whether these effects on price and utilization have an impact on health outcomes.