California Provider Leverage Drives Health Care Cost Increases

I blogged yesterday about health plan powerlessness to control cost per unit – the major driver of excess health care costs in the US compared to other developed OECD countries. 

As if on cue, Health Affairs published an article from the Center for Health System Change pointing out that this is exactly what has happened in California.  A combination of public demand for full provider choice and consolidation of hospitals and physicians has left health plans with little power to control overall costs.

A direct quote:

“Physician overlap in two prominent health plan networks was 9798 percent. This reality weakens the position of health plans. If plans cannot exclude providers from their network because of customersdemands for broad networks, they cannot credibly threaten network exclusion. That fact undermines their ability to resist providersdemands for higher payment rates.

Although it doesn’t seem possible that prices could have increased even faster, it turns out that providers sometimes don’t wield all available leverage power in negotiations. In effect, they leave “money on the table” because
-          Hospitals and big physician groups worry that raising prices too high will chase business away from the local geography
-          Hospitals and big physician groups worry that raising prices for smaller health plans might increase health plan concentration
-          Kaiser Permanente in Northern California has large market presence and drives costs down in that market.

I am convinced that more integration of provider groups can lead to higher quality of care – and more cost-effectiveness, too.   This quote from a physician who had moved from Fresno, a non-integrated market, gives me pause:

The good thing about the systems not being highly integrated and coordinated [in Fresno] is that premiums are lower. Why are those hospitals and physicians [integrating]? It wasnt for increased coordination of care, disease management, blah, blah, blahthat was not the primary reason. They wanted more money and market share.

Many observers have commented on the importance of vigorous enforcement of antitrust regulations.  However, this article points out that some characteristics that make a hospital a “must have,” high-leverage facility, such as reputation and provision of unique services, are not addressed by antitrust enforcement. 

The authors conclude that policy makers should consider price caps and all-payer rate setting.  Of course, all-payer rate setting would likely require Medicare and Medicaid to pay substantially higher rates.  Since Medicare is already woefully underfunded and the states are chafing at Medicaid costs, no one will be enthusiastic about an approach which increases Medicare and Medicaid liabilities.

The market helped control prices when hospitals and care delivery systems genuinely competed against each other. In the current environment, where health plans must have a contract with all providers, hospitals (and delivery networks) have become akin to utilities. Utilities are usually subject to price regulation.