USC professor finds health plan consolidation leads to lower hospital costs: Q&A with Glenn Melnick
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Glenn Melnick, Ph.D. is professor and Blue Cross of California chair in healthcare finance at the University of Southern California (USC), and a senior economist with RAND Corporation. Melnick recently authored a study for RAND, commissioned by the Robert Wood Johnson Foundation and published in Health Affairs detailing the affect of health plan consolidation on hospital pricing. Melnick spoke with Healthcare Finance News Senior Editor Chris Anderson about the study findings.
What was the scope of this study?
This was a nationwide study. We looked at data from more than 300 metropolitan statistical areas, which covered about 90 percent of the population.
What were your findings?
We had two sets of data. One for insurance for which we calculated a concentration index that measures how much competition there is in a market, and we also calculated how much competition each hospital faced in their markets. There is a rich set of literature on hospital competition that had shown hospitals that face less competition can charge higher prices. There is a lot less research on the insurance side, so we wanted to look at what happens to hospital prices depending on whether markets are more or less concentrated and also what happens when we are facing hospital markets that are more or less concentrated. First, what we found was confirmation of other studies: less hospital competition leads to higher hospital prices. Then we found that there was a relation between prices in MSAs and how concentrated the insurance markets were, but it was not a straight-line relationship. That means on average we found that as insurance markets became more concentrated hospital prices were two or three percentage points lower. But it turns out that there is very little effect in most markets. We found the greatest effect on pricing was in markets where health plans are the most concentrated.
What was the impetus for studying health plan consolidation affects on hospital pricing?
I have done a lot of research on provider markets. During the healthcare debate, the focus was primarily on the health insurance market and very little on provider markets. In my research, I found that the structure of provider markets was very important, if not the most important determinant of trends in healthcare spending. The premiums appear to be driven more by rising hospital prices and not by lack of competition in insurance markets.
What are the current dynamics of the health insurance market?
Health insurance markets, while they need to be regulated to prevent excess concentration, which would lead to reduced competition, are much more dynamic than provider markets. That is, entry into the insurance market is a lot easier than entry into the hospital market. I was less concerned about lack of competition in an insurance market. For instance, let's say premiums get really high, well a large employer could switch to their own self-funded plan and that limits how much insurers can raise their premiums above competitive levels.
Did you study corresponding premium costs?
We did not. Someone could say: 'this is all well and good, but how do you know this benefits consumers?' That's a good question and one for further research, but what this shows is that the structure of these two markets is also important to take into account in terms determining hospital prices. There have been some studies in the last 18 to 24 months that look at the affects of competition for the insurance market and they find what you would expect: More competition leads to lower premiums. I think the results of our study will show that they will also need to take into account the structure of hospital markets.