By Diane Archer

Health Affairs Blog, March 6, 2013

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 employer-sponsored coverage.

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 than elsewhere.

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 higher.

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 environment.

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.

http://healthaffairs.org/blog/2013/03/06/no-competition-the-price-of-a-highly-concentrated-health-care-market/

Comment:

By Don McCanne, M.D.

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, or both.

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.