The study assessed the relationship between competition among medical providers and prices paid by PPOs for the most commonly billed services within 10 prominent physician specialties. The researchers developed innovative measurements to make the comparisons.

To establish what prices various medical practices were paid for services, the study used Truven Analytics MarketScan Commercial Claims and Encounters database, which contains the prices paid to physicians for more than 49 million privately insured people from all over the United States. The study obtained the number of claims and mean price paid for each service in 1,058 counties representing all 50 states.

One of the main challenges of the study was identifying which doctors were working within what physician practice. The researchers figured this out using data available from the Medicare program.

“One thing that’s nice about Medicare is it’s a very large insurer that operates in virtually every area of the country,” said Bundorf. “Most physicians see at least some Medicare patients, so we can see lots of physicians and cover the entire country with that data set.”

To measure competitiveness, researchers drew inspiration from the business world. Using the Medicare data, they adapted a standard economic competition measure to track physician practice competition for different U.S. regions. The Hirschman-Herfindahl Index uses the relative sizes of practices to measure market concentration. A higher HHI indicates a less competitive market, for example one dominated by one large practice, and a lower HHI indicates higher competition.

Less competition, higher prices

Results showed that the top 10 percent of areas with the least competition had prices ranging from $5.85 to $11.67 higher for “intermediate” office visits than those of the 10 percent of markets with the highest levels of competition. Studying a measure that averaged prices across multiple types of office visits, in their most conservative model, being in the top 10 percent of areas with the least competition was associated with 3.5 to 5.4 percent higher mean price. The researchers point out that in 2011, private insurers in the United States spent nearly $250 billion on physician services. In that context, these small percentage increases could translate to tens of billions of dollars in extra spending.

“These larger organizations might have better processes in place to optimize care,” said Bundorf. “But our research also points out, well, wait a minute: We also have to think about the effect on prices and try to balance those two things when we think about how to form policy about these organizations.”

Additionally, they found that between 2003 and 2010 prices increased more rapidly in areas that were less competitive. Even when there is no change in HHI, practices in less competitive areas could continue to drive up prices, the study said.

The findings shed light on the importance of developing policies that will promote a balance between spending and the quality of the care, Baker said.

“Sometimes it can be tempting to say our goals for the health-care system should be only about taking care of patients and doing it as well as possible — we don’t want to worry about the economics,” said Baker. “But the truth is we do have to worry about the prices because the bill does come even if you wish it wouldn’t.”

Another Stanford co-author of the study is research assistant Zachary Levin.

The National Institute for Health Care Management provided funding for the work. Baker and Bundorf received consulting fees from the institute during the study for participation in an award-selection screening panel. Baker also received consulting fees from Kaiser Permanente.

Information about Stanford’s Department of Health Research and Policy, which also supported the research, can be found http://hrp.stanford.edu.