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Subject: qotd: Would busting up our consolidated health care market
Date: Mon, 11 Mar 2013 13:31:21 -0700
From: Don McCanne <email@example.com>
To: Quote-of-the-Day <firstname.lastname@example.org>
Health Affairs Blog
March 6, 2013
No Competition: The Price Of A Highly Concentrated Health Care Market
By Diane Archer
As health care costs swell, the private insurance system that covers
most working Americans is in crisis. Americans are paying higher and
higher premiums for increasingly threadbare coverage, and employers are
getting out of the business of providing health care altogether. Rising
costs cannot be attributed purely to improving technology or increasing
operating costs for providers, because Medicare has controlled per
capita spending more effectively than commercial insurers that provide
Rather, commercial insurers cannot contain costs because the pricing
mechanism for medical services is broken. When it comes to health care,
competition simply isn't working.
Prices in the private sector are out of control. On average, private
insurers pay 25 percent more than Medicare for physician services and 30
percent more for hospital care. What's more, both public and private
sector payment rates for doctors in America are far and away the highest
in the world, and research suggests that these high rates are among the
principal reasons health care is so much more expensive in this country
These international gaps are much wider in the private sector. For
instance, private payments for an office visit in the United States cost
70 percent more than those abroad, while public payments are 27 percent
Rather than being influenced by competition, health care prices are
largely set by insurers and providers with monopoly power to maximize
profits. Big hospital chains and provider groups dominate most local
markets and extract extremely high rates from dominant insurers, which
are motivated by fear of losing market share if they fail to attract
these providers to their networks.
Commercial health plans have little bargaining power when they negotiate
prices with monopolistic providers. In fact, even insurance industry
lobbyists admit that private health plans cannot hold down the cost of
health care. Insurers choose instead to adapt to this non-competitive
So what is to be done?
The Patient Protection and Affordable Care Act ("ACA") will for the
first time guarantee the overwhelming majority of Americans access to
good coverage, a huge step forward. But it expands coverage mostly by
relying on the dysfunctional private insurance market. There is no
evidence that the newly created exchanges will exert any downward
pressure on prices, given the experience of private plans to date.
Congress needs to recognize that players in the private health care
marketplace will continue to set excessive rates until they are stopped.
These exorbitant rates are not only hurting working people, they are
also driving up Medicare costs and imposing a massive burden on
taxpayers and the federal government. Doctors and hospitals are
conditioned to expect higher and higher rates and demand higher payments
from public programs.
Congress has three options to rein in runaway prices: It can use
Medicare-style techniques to set rates or rate ceilings in the
commercial marketplace, including in the new health insurance exchanges,
just as every other developed nation does. It can give people under 65
the choice of a public health insurance plan that works like Medicare,
competes against the private health plans, and brings down costs. Or it
can do both.
Over the long-term, the federal government might be able to address the
broken pricing mechanism by enforcing antitrust laws more aggressively
than before to break up monopolies in health care markets. But it is
worth remembering that even heavily regulated insurance markets – such
as Medicare Advantage or the exchange system in Massachusetts – have not
been particularly successful at controlling costs. The simple fact is
that the array of existing incentives for commercial insurers does not
tend to drive down prices. Given the direction of commercial insurance,
relying on the current version of "competition" is destined to
jeopardize access to health care for millions of working Americans while
driving public spending upward.
Comment: The increase in anti-competitive consolidation of hospitals
and physician groups is thought to be contributing to our high health
care spending, especially since private insurers have been very feeble
price negotiators in this concentrated market. Does that mean that we
need the government trust busters to step in to introduce more
competition in health care?
As Noble laureate Kenneth Arrow demonstrated a half century ago, there
are many reasons that merely busting up consolidated health systems
could never lead to a functioning competitive market in health care.
Besides, the cost escalation has always been with us, long before the
more intense consolidation efforts began. As far as the wish to achieve
lower prices through competition, we can forget about competing
hospitals, competing physician groups, competing accountable care
organizations, and, especially, competing private insurance plans.
As far as what we should do, Diane Archer suggests either extending
Medicare's administered pricing function to private insurers as well, or
providing a Medicare-like plan that competes with the private insurers,
During the debate over the "public option," we explained how merely
adding another insurance option, even though government-run, to our
highly dysfunctional, fragmented system of financing health care would
have very little impact on achieving our goals of universality, equity,
efficiency, and affordability.
Although government-administered pricing has been effective for
Medicare, using it for private insurers also would fall short of these
goals since the dysfunctional system would still remain in place. Even
combining price controls and a public plan option together would still
be inadequate, for the same reasons.
So what should we do? Instead of continuing to apply patches to our
current system, we should replace it with an improved Medicare that
makes health care affordable for all of us. There would be no need for
public option plans, nor for government rate setting of private
insurance, if we got rid of the overpriced and inefficient market of
private health plans.