Report Reaffirms That Dominant Providers Are Driving Up Health Care Spending

Health Affairs has published an interesting new study arguing that dominant providers in California are driving up health care costs by using their leverage to demand higher reimbursement rates from private payers. “California providers have implemented various strategies that have strengthened their leverage in negotiating prices with private health plans,” Robert Berenson, Paul Ginsburg, and Nicole Kemper conclude. “When negotiating together, hospitals and physicians enhance their already significant bargaining clout”:

On average nationally, commercial insurers’ hospital and physician payment rates are nearly 30 percent and 20 percent higher, respectively, than Medicare rates. Evidence from two decades of hospital mergers and acquisitions nationally demonstrates that consolidating hospital markets drives up prices, with disagreement only over the magnitude of the increases. Some researchers have concluded that formation of hospital systems has primarily served to increase market power—not improve quality or efficiency of patient care—at least in the short run….A single “must-have” hospital can develop enough clout to obtain payment rates much higher than Medicare’s, acknowledging that many providers believe Medicare payments to be inadequate.

The study warns that certain provisions in the House and Senate health care bill, like the language encouraging providers to establish Accountable Care Organizations (ACO), would increase providers’ bargaining power and drive up private payer rates. It suggests that “[u]nless market mechanisms can be found to discipline providers’ use of their growing market power,” lawmakers should seriously consider lowering spending through “regulatory approaches, such as putting price caps on negotiated private-sector rates and adopting all-payer rate setting.”

In Massachusetts, Gov. Deval Patrick is listening. Last month, Patrck introduced legislation giving the state insurance commissioner “authority to review and reject rates charged by hospitals, physician groups, medical imaging centers, and insurers” after a study of the Massachusetts health insurance system concluded that “insurance companies pay some hospitals and doctors twice as much money as others for essentially the same patient care.”

Patrick is hoping to prevent providers (and payers) from using their leverage to artificially inflate prices by relying on a strategy popular in the 1970s and 1980s, when at least 30 states — including Massachusetts itself — used all-payer rate setting to contain health care spending. Lawmakers established rate boards that considered “the differences in labor markets and how much a hospital pays in wages; the amount of charity care the hospital does; and whether it treats a large number of severely ill patients” and set rates accordingly.

Price setting proved somewhat effective, but most states abandoned the practice in the hopes that managed competition could deliver lower rates. Today, Maryland is the only state that continues to maintain an all-payer rate setting system, but the strategy is also used in France, the Netherlands, Japan, Australia and Germany. In Maryland, hospitals have enjoyed a steady profit margin of 2.5% to 3% and boast the nation’s second-slowest increase in hospital costs.

Still, it’s unclear how much money price setting can save in the rest of the nation. A recent RAND study of 12 options for reducing health care spending in Massachusetts, for instance, ranked traditional hospital all-payer rate setting as the second most likely tool for changing the trajectory of health care growth. The report concluded that, “at a maximum, hospital rate setting could reduce health spending in Massachusetts by nearly 4 percent between 2010 and 2020.” RAND warns however, that providers could try to undermine rate setting by unbundling certain services, increasing admissions or length of stay.

There are no silver bullets that alone would reduce the rate of growth in health spending, but federal lawmakers need to consider solutions to provider price gauging, as it seems that it’s more than a convenient way for insurers to deflect blame for premium increases.