The voices of Urban Institute's researchers and staff
April 17, 2015

A framework for addressing the high price of US health care

April 17, 2015

Why are US health care prices so high? Why do they differ so much from hospital to hospital, or city to city? These features have defined US health care for decades, but it wasn’t until a landmark 2010 report in Massachusetts that people started paying attention to the issue.

The upshot of that report was that the high and varying prices defied most logical explanations.

The study found that “price variations are not correlated to (1) quality of care, (2) the sickness or complexity of the population being served, (3) the extent to which a provider is responsible for caring for a large portion of patients on Medicare or Medicaid, or (4) whether a provider is an academic teaching or research facility. Moreover, (5) price variations are not adequately explained by differences in hospital costs of delivering similar services at similar facilities.”

Rather, prices were correlated with market leverage in the negotiations with insurers as measured by the relative market position of the various hospitals and physician groups in Massachusetts.

The Massachusetts problem has now been documented in many health care markets across the country. Some hospitals are able to negotiate unit prices as much as three to five times greater than other hospitals.

Further, studies show that market power—the ability to raise and keep prices higher than would prevail in a well-functioning competitive market—is a primary reason why US health care spending is so much higher than other countries.

Although the pricing power issue has come into its own, with analysts tracing the problem to growing concentration of providers through mergers and acquisitions, much less effort has been expended on what to do about the problem.

What can we do about health care market power?

To help fill the policy void, the National Academy of Social Insurance (NASI) convened an expert panel in June 2013 to examine the role and impact of market power in the US health care system. Today, NASI released its findings in a new report: Addressing Pricing Power in Health Care Markets: Principles and Policy Options to Strengthen and Shape Markets. I was privileged to co-chair the panel with Bill Hoagland, senior vice president at the Bipartisan Policy Center.

Given the great variation in health care markets and underlying social and political cultures of the various states and communities, there is no ready policy fix for the nation. We didn’t attempt to make recommendations for preferred approaches; instead, our goal was to array possibilities for consideration. We could only scratch the surface of the strengths and weaknesses of the various options, which clearly would have to be adapted for the particular circumstances within different jurisdictions.

A broad range of possibilities

Further, much of the limited discussion to date about how to address payer and provider consolidation and resulting high prices tends to focus on pure models—approaches either based on competition or on regulation.

On the one hand, we could take health care out of its protected environment and expose it to real market forces based on consumer choice and demand—break down the current regulatory barriers to entry, such as having state government approve the need for new hospitals and purchase of costly new technology; make price and quality information much more transparent and available to consumers; and increase the direct costs to consumers of their health care choices, supported by quality of care metrics to compare providers’ actual performance.

On the other hand, we could emulate most developed countries’ health care systems and accept that markets do not work well in health care and move instead to all-payer government rate-setting and, now in Maryland, all-payer global budgeting. In short, we could eliminate price negotiations between insurers and providers and instead empower state governments or an independent commission to determine the payment rates or budgets for hospitals and other providers.

This is not a “single payer” system that advocates and detractors have argued over for decades—because it doesn’t replace commercial insurance companies or make physicians government employees. Rather, it is referred to as “all-payer,” continuing a pluralistic public and private insurance market but with prices consistent across the various payers.

One of our goals was to fill in the space between these polar alternatives, neither of which is politically likely nationally or in most states. The report emphasizes that government may need to regulate markets in some ways to assure meaningful competition, such as via vigorous antitrust enforcement.

It also presents approaches to placing ceilings on excessive prices that particular hospitals command without requiring the full commitment to a regime of setting prices or budgets for all hospital services for all payers. Pure models of competition or regulation should not necessarily be the gold standard. The real world doesn’t neatly sort out along ideological lines.

Illustration by Adrienne Hapanowicz, Urban Institute.

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