Monday, May 19, 2014

qotd: Vladeck: Provider Concentration And The Failure Of Market Theory

Health Affairs
May 19, 2014 (online)
Paradigm Lost: Provider Concentration And The Failure Of Market Theory
By Bruce C. Vladeck

The belated rediscovery of provider prices as a significant contributor
to the high costs of US health care (although the data were there in the
literature all along), coupled with the presumed role of provider
concentration in producing some of the upward pressure on prices, has
created a serious conundrum for those who seek to apply conventional
economic reasoning to matters of health policy. The conundrum arises
from the conflict between the presumed per se undesirability of
increased concentration and the fact that many of the causes of that
increase may themselves be highly desirable — or at least practically

The dilemma posed for policy makers and analysts arises from the
assumption that increased concentration is intrinsically a bad thing,
even though many good things seem to be happening as provider
concentration progresses. On the one hand, the number of independent
health care providers appears to be decreasing as a result of hospital
mergers and acquisitions, the agglomeration of physicians into larger
and larger group practices, and the alignment of physician practices
with hospitals. The relationship between increased provider
concentration and increased prices has long been conventional wisdom
(even if recent data and analyses have called that wisdom at least
partially into question). Ergo, such increases in concentration should
be opposed.

On the other hand, at least some of the factors driving increased
concentration are widely believed to improve care and population health,
or at least to encourage greater efficiency in the delivery of health
care services. These factors include growing clinical integration across
previously atomized providers; the dramatic reduction in use of
inpatient services, which decreases the number of full-service hospitals
needed in any given market; the mandatory adoption of expensive
information technologies; and the growing experimentation with payment
schemes in which providers bear at least some degree of financial risk.

Sage: 'Getting The Product Right'

Sage is trying to address the very real and very significant costs of
the inefficiency that permeates the US health care system. Recognizing
that the power to influence prices that comes with increased market
power theoretically reduces the incentives for efficiency, Sage proposes
to reduce that power by redefining what health care payers buy. This, in
turn, would presumably give consumers greater ability to make informed,
price-sensitive decisions about which health services they wished to

Antitrust analysis is generally complicated in markets with
differentiated products. Sage's proposal would either exacerbate that
problem or require the creation of a new authoritative regulatory
structure to determine exactly how new products should be defined.

Ginsburg And Pawlson: Let Consumers Decide What To Buy

The authors' theory seems to be that if increased provider consolidation
limits the ability of insurers to exert downward pressure on prices,
then the solution to high prices is transferring an increasing share of
the purchasing function to individual consumers through higher
out-of-pocket liabilities and the development of tiered networks, which
offer different prices to consumers with ostensibly different
preferences. However, this prescription only exacerbates the underlying
problem. No matter how much information — the magical potion in many
market-based approaches to health policy — atomized consumers may have,
it is almost certainly less than that of even the most indolent
insurance company.

Ginsburg and Pawlson also appear to be in favor of narrowing provider
networks as a way of reducing providers' leverage in negotiations with
payers and thereby holding prices down. They note that in the 1990s such
policies engendered significant consumer resistance because of the
restrictions they imposed on access to providers. However, they seem not
to mind the fact that such resistance may be minimized in the future by
the growing inability of many households to afford the kind of health
care they prefer. Such an approach not only fails to counteract the
growing economic inequality in this country but also appears to
legitimate it.

The Myth Of The Sovereign Consumer

One effect of changes in health financing in the past two decades is
unavoidably clear, if too often overlooked or minimized in importance by
the health policy community: The average individual with health
insurance is considerably worse off now than twenty years ago.
Out-of-pocket payments are much higher, for both premiums and
copayments; cash on the barrelhead is increasingly required for services
that used to be provided first and billed for afterward; and the numbers
of avaricious debt collectors and medically related bankruptcies
continue to soar.

At the same time, consumers are regularly inundated with self-serving or
downright erroneous information from health insurers, providers, and
entrepreneurs alike about health care services and their use that
carries the implicit message that any illness or financial difficulty is
essentially the fault of the consumer.

It is ironic that the increased unaffordability of routine health care
is exactly the problem that historically led to the creation of health
insurance programs in both the public and private sectors. Those who are
quick to applaud the expected demise of employer-sponsored coverage in
the United States overlook the extent to which large employers, eager at
least to not offend their employees, historically used their purchasing
power with insurers to protect those employees (as well as to maintain
an enormous de facto cross-subsidization of the less healthy employees
and family members by the healthier ones).

Of course, government insurance programs wield this purchasing power
more directly, more openly, and—when it comes to the effect on provider
prices and the minimization of out-of-pocket liabilities for individual
households—far more effectively. In other words, Medicare and Medicaid,
and their beneficiaries, are much less at risk of increased prices
resulting from provider concentration than are most private insurers or
privately insured people.

Those who are uneasy about further increasing the government's role in
minimizing price growth in health care might do well to compare today's
high-deductible plans to the historical experience of Blue Cross plans
with private-sector monopoly control (which hardly ever paid hospitals
more than their actual costs) and first-dollar coverage.

As a proud former rate setter in both state and federal governments, I
confess to an absence of alarm at these authors' recognition that if
none of their nostrums work, rate regulation may become increasingly
unavoidable. But I am skeptical of the political likelihood of a return
to rate setting; nor am I entirely convinced of its desirability. The
exercise of government power is one way to constrain sellers in
concentrated markets, but not the only one.

It is conceivable, for instance, that one explanation of the relatively
low rate of hospital price increases in recent years is that private
insurers, in response to some of the first- and second-order pressures
generated by the Affordable Care Act, are actually negotiating
aggressively with hospitals, instead of just passing on increases to
their customers or enrollees, as was standard practice in the past.

Instead of continuing to try to impose axiomatic and solipsistic
theories on a reality to which they increasingly fail to apply, we need
to figure out what kind of health care system we really want and how
much we are prepared to pay for it. Then we need to invent or
reconfigure the social institutions that we will have to have to get
that system.

Comment by Don McCanne

In health care, there is plenty of evidence that cooperation benefits
patients much more than does competition. Working together to provide
the best care for the patient is far better than competing to obtain the
best business outcome for the health care providers. The current
increasing consolidation in the health care delivery system shines light
on these conflicting dynamics.

In this paper, Bruce Vladeck provides a perspective in response to
different views of this topic released in online papers and presented at
a Health Affairs briefing this morning, sponsored by The Commonwealth
Fund. Although the discussion was primarily about the impact of provider
concentration in the health care marketplace, the issues go well beyond

As Vladeck mentions, historically the Blue Cross plans exerted private
sector monopoly control while providing first dollar coverage. Now the
coverage has deteriorated, impairing access to care and leaving patients
exposed to major costs. The dynamic that we need to be looking at is not
the balance between the market clout of the consolidating health care
providers and the purchasing power of insurers as representatives of the
payers, rather the important dynamic, again according to Vladeck, should
be configuration of the social institutions that will allow us to pay
for the health care system that we really want.

Although Vladeck suggests that insurers may have become more aggressive
price negotiators, he nevertheless makes it clear that the government
price setters - Medicare and Medicaid - have had much more clout.

Consolidation that improves efficiency, effectiveness and access for the
benefit of the patient is great. Other nations have shown that you do
not need to limit consolidation or concentration to prevent overpricing
in such imbalanced markets. All you need is government price
administration such as we would have with a single payer financing
system. That would eliminate the superfluous private insurers with their
wasteful administrative excesses and inefficiencies that stem from our
dysfunctional fragmentation of health care financing.

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