The nonprofit think tank Catalyst for Payment Reform has found links between provider market concentration and increasing healthcare costs, and in a new report outlines a number of recommendations for finding value-based payment delivery models.
Catalyst for Payment Reform, a group backed by large employers and health plans, conducted the study along with the consulting firm Global Health Payment. The last two decades of provider consolidation, with peaks in the late 1990s and mid-2000s, has been a major driver of America's high healthcare costs, the report found, and it hasn't yielded significant gains in clinical outcomes.
Provider consolidation isn't necessarily problematic, the authors noted, and many insurance markets are comparably concentrated. The study found, though, that significant payment variation across and within markets for both hospital and physician services has led to the use of "enhanced market power to raise prices inappropriately to weaken the effects of or stifle competition."
That, combined with insurance premium increases in many markets, has boded ill for American consumers and the country in general, the authors wrote, citing a McKinsey study concluding that nearly a quarter of U.S. health spending is wasted on services that are avoidable or of little clinical value.
The Catalyst for Payment Reform study aggregated data on provider consolidation using the Herfindahl-Hirschman index, or HHI, a measure of market competitiveness calculated by squaring the market share of each company and adding the resulting numbers. A maximum score of 10,000 indicates a monopoly-controlled market and U.S. regulators consider scores above the 2,000 range to indicate markets that are somewhat concentrated.
Over the past two decades of provider consolidation, as many hospitals merged with competing facilities or joined multi-hospital systems, the average market consolidated from five hospitals, with an average HHI score of 2,000, to four, with an HHI of 2,500, and then three, with an HHI of 3,333. (For comparison, the most competitive state health insurance market in 2009, Oregon, had an HHI of 1,272, while average markets had HHIs between 3,000 and 4,000., and Alabama, the most concentrated market, where Blue Cross Blue Shield has a roughly 90 percent market share, had an HHI of 8,166.)
Consolidation has been more prevalent in smaller and medium markets, the report found, with the most concentrated markets, having HHI scores above 3,300, including the metro areas of Cleveland, Pittsburgh, Norfolk, Memphis, Rochester and Long Island.
Provider consolidation, the researchers estimated, accounted for between 10 percent and 50 percent of price increases throughout the 2000s, and roughly half of hospital admissions for privately-insured patients occurred in the 94 most concentrated markets.
The researchers cite the findings of several economists and the Federal Trade Commission in several cases of price climbs. After the Evanston, Illinois Northwestern hospitals merged with nearby Highland Park hospitals to form the NorthShore University system, healthcare prices increased 20 percent in the northern Chicago suburbs, and after the merger of two competing San Francisco-area hospitals, Summit and Alta Bates, prices increased by about 30 percent.
[See also: A ripe time for value-based design, says insurer SeeChange]
While cautioning against the potential excesses of concentration by providers or payers, the authors wrote that health plan, rather than provider, concentration can in some cases act as a check and balance on rising costs, citing the findings of RAND and FTC studies.
"On the other hand," the authors wrote, "if health plan concentration gets too great, as middlemen to the ultimate purchasers of care, these companies can mark up the premiums they charge their customers and keep the cost savings from negotiating lower provider prices."
Indeed, across the country and over time, market power has varied and shifted between payers and providers, the authors said. "As a result, public policy that systematically shifts the relative market power from one sector of the healthcare industry to another may have an ameliorative effect in one market and a detrimental effect in another."
With nearly 60 percent of Americans enrolled in employer-sponsored insurance today -- accounting for about 21 percent of the nation's overall healthcare spending -- Catalyst for Payment Reform executive director Suzanne Delbanco said finding value-based payment and delivery models for private insurance is a key part of addressing healthcare financial sustainability.
As private payers and providers negotiate prices, "upward pricing is increasingly the result due, in part, to cost shifting and price discrimination by providers," Delbanco said. Better understanding of rate determination in commercial markets, Delbanco said, can lead to more competitive models that foster innovation and savings.
The report recommends dozens of market-based solutions, including more cost transparency, consumer-directed health plans, value-based insurance designs, network and tiered pricing and direct contracting. Direct contracting is one approach large employers have experimented with -- to the fear of some health plans -- and Delbanco said it's also one of dozens of things that can help eliminate market inefficiencies by stoking more competition.
The report also pointed to public-private collaborations that lead to payment reforms, such as all-payer claims databases, Accountable Care Organizations, global and population-based payment models and the promotion of "baseball style" arbitration to settle claims disputes as methods that can help keep costs in check.