For now, replacing the Affordable Care Act (ACA) is on hold and efforts to repair it are starting to garner some bipartisan support. But what is also needed is an overhaul of the health-care market, not just the ACA exchanges. Today, consumers face a broken and unsustainable health-care system while the stock prices of the five largest insurance companies have increased by 20 percent to 30 percent in 2017.
The inability to control costs is being exacerbated by the rapid consolidation of physician practices, hospitals, and other aspects of the U.S. health system, which we address in our just-released study in the September issue of Health Affairs. Our study found that the market power of hospitals, physicians, and insurance companies accounts for a significant part of what needs fixing.
According to U.S. Department of Justice and Federal Trade Commission Horizontal Merger Guidelines, over 90 percent of metropolitan areas are highly concentrated for hospitals, 65 percent are highly concentrated for specialists, and almost 40 percent are highly concentrated for primary-care doctors. Over half of all insurers are now in highly concentrated markets and 45 percent of the ACA exchanges are projected to have one or no insurer in 2018. Concentrated markets mean higher prices for consumers.
Our study used a national database on prices paid for hospital and physician services from 2010 to 2014. The data used were taken from a file of 50 million insured individuals in group plans and Medicare Advantage. We found that hospital and physician market power significantly raised prices when markets became more concentrated: hospital prices increased by 11 percent, cardiology prices went up by 7 percent, radiology prices increased by 11 percent, and hematology/oncology prices increased by a whopping 21 percent.
But what was more dramatic was the impact of insurer market power. When insurers’ markets became more concentrated, they were able to bargain down these price increases by about half. This creates a policy dilemma. The mitigating impact on prices is a good thing, but who benefits? There is little evidence that the benefits of reduced prices are passed on to consumers.
A recent report by the Council of Economic Advisors details the increase in market power in the United States and notes its threat to the competitiveness of the economy. Health care is on the list of affected industries. This same concern was noted last March at the conference on market concentration at the University of Chicago. In the past, we have dealt with the problem of excess market power in a forceful way. In 1911, we broke up Standard Oil, and in 1982 we broke up the Bell System. Future consolidation has lost steam with the Anthem-Cigna and Aetna-Humana mergers being nixed in the courts. But before we go down this path – what other options are available?
A recent approach to reducing health-care costs is to leave the insurance companies out and negotiate directly with hospitals and doctors. Companies such as Intel, Boeing, Walmart, Lowe’s, and Oracle, as well as the governments of San Francisco and Wisconsin, are doing just that. These companies and governments assume risk and act as their own insurance companies. Our paper suggests that with enough market power these entities could reduce provider prices in highly concentrated provider markets and pass them on to their members. They could also use their market power to get volume discounts on procedures such as knee and hip replacements. Many of these entities are currently operationalizing their direct interaction with providers in the form of employer-directed accountable care organization (ACO) three-year contracts.
According to David Lansky, president and chief executive officer of the Pacific Business Group on Health (PBGH), “Employers undertaking these direct arrangements often expect to achieve cost trends at or below the rate of general inflation – rather than the rate of medical costs, which have been growing over 50 percent faster.” This successful model can be expanded with smaller businesses collectively purchasing. Under the ACA, states with active purchaser exchanges experienced slower premium growth (11 percent) than states that used the more hands-off clearinghouse exchange model (26 percent). These private and public sector approaches would seem to be a useful way to start to repair the health-care market.
Richard M. Scheffler is a distinguished professor of health economics and public policy and the director of the Nicholas C. Petris Center on Health Care Markets and Consumer Welfare at the University of California, Berkeley. Daniel R. Arnold is the research director of the Nicholas C. Petris Center on Health Care Markets and Consumer Welfare at the University of California, Berkeley.