Provider Consolidation in California

By March 29, 2018 Commentary

A report from the University of California indicates substantial provider consolidation in California over the last few years and examines the impact on prices and premiums.   (UC Report)   The authors used the typical Herfindal-Hirschmann index (HHI) and data on actual prices paid by various plans to providers.  The report is depressing because it so strongly confirms what we all should recognize by now–provider consolidation has been dreadful for efforts to control health spending.  An alarming proportion of California’s counties, and many of its most populous ones, are considered highly concentrated, which basically means there are very few providers competing and they have very large market shares, which is a recipe for higher prices.  California has 58 counties; 44 of them have highly concentrated hospital markets.  12 have highly concentrated primary care physician markets; 20 are that way for orthopedics, 22 for cardiology, 24 for oncology and 26 for radiology.  On the payer side, there is also significant concentration, with 52 counties having commercial insurance markets that are considered concentrated.  This dual concentration of payers and providers has been shown in other research to result in a mutually beneficial cooperative raising of provider prices and premiums.  Employers and consumers get screwed.

In addition to this concentration, California has experienced, as has the rest of the country, an ongoing absorption of physician practices by hospital systems, with the number of physicians controlled by hospitals rising from 24% in 2010 to 39% in 2016.  All this consolidation activity has resulted in higher prices and higher premiums.  Average inpatient prices in markets with HHIs above 1500 (considered concentrated) were 79% above those in areas with HHIs below that level.  Average physician prices, depending on the specialty, were 35% to 63% higher.  Northern California is more concentrated than Southern California and that is reflected in prices, even after adjusting for input cost differences that are 20% to 30% higher.   Premiums for ACA plans are 35% higher in Northern California than in Southern California.  In all honesty, I can’t understand that lack of interest policymakers have shown for tackling this issue.  I assume that it is due to political contributions or just uncertainty about what to do.  I think the answer is obvious–break up the hospital systems and force divestiture of all physician practices and other health care provider types.  And force downsizing of health plan market shares as well.  We won’t know what a competitive system can do for health spending unless we have one.

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