The growing market power of hospitals and physicians to negotiate higher payment rates has gone largely unexamined, according to a report by the Center for Studying Health System Change.
Published Thursday in Health Affairs, the study examined the growing market power of many California hospitals and physicians, finding that providers are using various strategies, such as tighter alignment of hospitals and physician groups, to negotiate significantly higher payment rates from private insurers.
"Provider market power is the elephant in the room that no one wants to talk about in the national healthcare reform debate," said Robert A. Berenson, MD, of the Urban Institute.
Berenson coauthored the study along with HSC President Paul B. Ginsburg, and Nicole Kemper, a former HSC research analyst.
"Health insurers have been squarely in the crosshairs and blamed for the high cost of private insurance, while the role of growing hospital and physician market power has escaped scrutiny," Berenson said.
The study, which was funded by the California HealthCare Foundation, suggests that California offers a cautionary tale for reform proposals that encourage hospitals and physicians to form tighter relationships through accountable care organizations.
"Reform proposals that encourage hospitals and physicians to integrate have the potential to improve quality and increase efficiency, but the savings may not be passed on to private payers if provider market power to command higher prices goes unchecked," Ginsburg said.
The authors conclude that "unless market mechanisms can be found to discipline providers' use of their growing market power, it seems inevitable that policy makers will need to turn to regulatory approaches, such as putting price caps on negotiated private-sector rates and adopting all-payer rate setting. Indeed, some purchasers who believe strongly in the long-term merits of increased integration of care delivery believe that price regulation may be a prerequisite for payment reforms that encourage integration."
The Health Affairs article draws on HSC site visits to six California markets between October and December 2008 to study regional differences in healthcare affordability, access, and quality. The six markets - Fresno, Los Angeles, Oakland/San Francisco, Riverside/San Bernardino, Sacramento, and San Diego - were chosen to reflect a range of economic, demographic, healthcare delivery, and financing conditions in California.
The study identified three key factors in California that are driving the shift of negotiating power from private insurers to hospitals and physicians:
- consumer demand for broader provider networks following the managed care backlash;
- consolidation of hospitals into larger, powerful systems and tighter alignment with physicians;
- growing hospital and physician capacity constraints.
The authors note that "negotiating as a system across a broad geographic area avoids antitrust scrutiny, which focuses on local market concentration. At the same time, this strategy permits hospital systems with leverage in some markets to negotiate high rates elsewhere as well."
Certain providers - especially hospitals - have achieved "must-have" status, meaning they must be included in a plan's provider network to make the plan acceptable to customers. "Must-have" hospitals, by definition, have market leverage over health plans, because plans cannot plausibly threaten to exclude them.
According to the authors, "part of the rationale for tighter relationships between hospitals and organized physician groups is similar to that proposed nationally for accountable care organizations: to work together as an integrated delivery system to improve quality and efficiency." Nevertheless, the authors believe that one clear goal of alliances among California hospitals and physicians is to improve negotiating clout for both.