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The Structure of the Health Care Industry in America

By December 8, 2022Commentary

The structure of America’s health care system is highly anti-competitive, which results in the very high prices and spending we incur.  There are two primary groups in the health system–the medical services providers who provide care and the government and private health plans who largely pay for it.  Medical services providers have become highly vertically and horizontally consolidated.  Even the largest urban markets rarely have more than two or three hospital systems.  These hospital systems have purchased large numbers of physician practices and other medical care providers.  The hospitals use their market power and their ownership of multiple care providers and settings to demand high prices from private health plans.  They also waste money on fancy buildings, excessive numbers of administrative staff and excessive compensation for that staff, even when they are nominally non-profits.

On the payer side, about half of Americans get coverage from Medicare or Medicaid, which in their fee-for-service original versions just set the prices they will pay, subject to political pressure.  Private health plans have to bargain for providers over prices, but health plan markets are concentrated as well, which somewhat equalizes bargaining power and which leaves the groups and individuals who purchase private health insurance largely at the mercy of non-competitive premium pricing.  Medicare and Medicaid increasingly use private plans to deliver and manage the benefits of those programs.  Medicare Advantage, for example, now covers over half of all Medicare beneficiaries.  But the health plans contracting with these programs typically are able to insist on using the rates paid in the fee-for-service versions of the programs.

And then we have the drug category, which is fundamentally anti-competitive for the bulk of its spending.  Brand-name drugs have patent protection, which is frequently abused, and which is the sole source of the ability of drug companies to charge outrageous prices and earn huge profits.  For that reason I hold stock in most large drug companies.  I have given up hope that the government will rein in the drug company profit machine, so I figure I might as well try to get some of my money back in the form of dividends.

In recent years we have seen health plans buying medical providers, with UnitedHealth leading the pack; and medical providers opening or buying health plans.  This only makes the competitive situation worse and among other things allows health plans like UnitedHealth to escape limits on how large their insurance profits can be.  They just shift what would be health plan profits to their provider arms by raising what they pay to those providers.

I have futilely opined for years on the needed reforms to rein in health spending.  Not only should federal and state governments stop allowing any mergers of providers or health plans, or cross-purchases; the governments must force the breakup of these large systems.  Not only would prices and premiums decline but quality would almost certainly improve.

The Government Accounting Office has released a report on the current state of health plan markets, concluding that they have been highly consolidated, the concentration is growing and this trend has a deleterious impact on prices.  So when is Congress going to do something?  (GAO Report)

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  • James L. Edholm says:

    Excellent summary of our wounded health care system, Kevin. When I used to help businesses self-fund their health plans, by using an independent TPA to administer the claims, it was often possible to “build” our own network and then steer employees to the most competitive providers. I’m out of the business now, retired, but I’m certain it’s harder and harder as the system concentrates its power in fewer hands.

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