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Opinion

The Necessity Of Exploiting Pricing Power in a Post-Consolidated Health Care World

Americans are forced to spend over $1 trillion annually on health care services that do not improve their health. What causes this is not the amount of health care services we consume.

Compared to similar countries, the United States falls well below average in utilizing hospital and physician services. What drives health care spending are health care prices. For example, U.S. drug prices are two to six times higher than what the rest of the world spends.

In early December, the Trump administration issued a lengthy report attempting to address the price or affordability problem. Its solution can be learned by simply reading the report’s title, “Reforming America’s Healthcare System Through Choice and Competition.” The administration recognizes the health care industry, like numerous others, is today highly consolidated.

Per the Federal Trade Commission, approximately 75 and 90 percent of insurance companies and hospitals, respectively, in urban markets are defined as highly concentrated. Introducing competition or market forces, the administration believes, will erode industry price gouging. Sadly, the report constitutes motivated reasoning since its argument is more ideological than reality-based.  

To drive competition, one would expect administration officials to argue for vigorous antitrust enforcement. They do not. Instead, the report simply states the administration will “continue monitoring market competition.”

This is unsurprising since the Republican party has opposed antitrust enforcement at least since Robert Bork wrote “The Antitrust Paradox” 40 years ago. This view was recently displayed last year when the Republican-led Congress attempted to pass two laws that would have significantly curtailed the FTC’s ability to challenge corporate mergers and disallowed plaintiffs to bring class-action lawsuits with antitrust claims.

The report could have also expressed a desire to take executive regulatory action to curb a pricing power. The administration has instead taken the view that government regulations impede competition.  They are burdensome, per se. In December, the administration doubled down by announcing the creation of a special office of health care regulatory reform to further reduce regulatory burden.

The administration’s indifference to antitrust enforcement and executive rulemaking should not go unappreciated. Failure to enforce the former causes the latter. When rulemaking inhibits market efficiency, it is termed “regulatory capture” because dominate players in consolidated markets are able to exert undo regulatory influence to their advantage.

This report also argues that patients can drive competition by behaving as typical, discriminating consumers. It is unrealistic to define health care services as a normal market commodity such that the health care industry is forced to compete for patients shopping for value. Economist Kenneth Arrow long ago argued compellingly, and the subsequent evidence supports, the complexity and/or uncertainty in medical diagnoses, treatments and quality leave patients, particularly those lying on a gurney, unable to determine to what extent price reflects value. This is why the evidence shows that neither the availability of one’s medical record nor price transparency tools is associated with lower spending or with lower prices for shoppable tests or visits.

The question remains: What can be done to address health care affordability in a post-consolidated health care market.

What happens when a consolidated market in an industry where a patient is unable to shop for value is obvious. This is why no country in the world relies on markets to constrain health care prices. What countries do instead is exploit their buying or monopsony power to contain price growth.  Fortunately, this is happening with increasing frequency among states where opportunities to drive more affordable health can be defined largely as versions of price controls.

Maryland’s hospital all-payer rate-setting system that the state has employed since the 1970s also now  aligns annual hospital spending with the state’s overall economic growth rate and a per capita spending growth rate that is below national Medicare per capita average. Since 2012, Massachusetts has used an annual state health care cost growth target albeit with mixed success.

This past November, the state agreed to allow Beth Israel Deaconess Medical Center and Lahey Health System to merge on the condition the new system accept a seven-year price cap and commit to eight years of funding for low-income and underserved communities. The agreement will avoid an estimated $1 billion in state spending over seven years.

Oregon’s coordinated care organizations have also been able to hold state Medicaid spending below a targeted 3.4 percent annual growth rate. Arkansas and Tennessee have used bundled payments moreover for surgical procedures to reduce Medicaid spending.

In North Carolina, state officials are looking to replicate Montana’s success in pegging its health plan hospital rates to Medicare reimbursement. Over the past three years, Montana has saved its state employee plan approximately 7 percent in annual spending.

In other states, for example in Iowa, Minnesota, Missouri, New Jersey and Washington, officials are working to establish Medicaid buy-in programs that will both save participants out-of-pocket spending and have price control spillover effects in their commercial insurance markets.

The value in the administration’s report is in its de facto admission that the federal government will not aggressively enforce antitrust legislation, much less unwind consummated mergers, or similarly exercise executive regulatory authority. Absent these efforts and patients’ ability to discern or shop for value, if we want affordable health care, we have to price health care affordably.

 

John Rother is the president and CEO of the National Coalition on Health Care. David Introcaso is NCHC’s vice president of policy.

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