Addressing high hospital prices in concentrated markets
Federal and state agencies are taking a close look at market concentration as part of an ongoing effort to address high hospital prices.
Government regulation may be needed to counter the price pressure created by hospitals in concentrated markets, according to health care experts.
Federal and state agencies are taking a close look at market concentration as part of an ongoing effort to address high and rising hospital prices. Authorities also are challenging practices such as anti-tiering and anti-steering provisions in contracts, which heighten the bargaining leverage of dominant health care systems. More recently, policymakers and think tanks have introduced proposals to regulate prices directly in concentrated provider markets.
“The policy action needed to address high-price providers in concentrated markets will likely entail some form of regulation,” according to a new report in “Health Affairs.” “Unraveling past mergers is very difficult, and some markets might not be large enough to support multiple providers.”
Related: 5 states with the most and least health insurance market concentration
Creating policies to address high-price providers in less-concentrated markets is more controversial. One rationale for regulating high-price providers only in concentrated markets is that consumers in those markets have fewer alternatives and therefore cannot easily avoid high prices. In un-concentrated markets, consumers can, in theory, substitute away from high-price providers, and pro-competitive strategies are certainly worthwhile to pursue in those markets.
One concern with policies that target high-price hospitals, even when they are in un-concentrated markets, is that they may provide higher-quality care that justifies their prices. However, several studies document enormous price variation even for standardized services for which objective quality differences are minimal.
“In principle, reducing prices may adversely affect quality, and it is unclear whether doing so would decrease or improve the value of care,” the report said. “There currently is no consensus on the magnitude of any effect of price reductions on provider quality. Although pro-competitive reforms are taking shape and will hopefully improve market performance in many cases, many markets are likely to be left behind, either because consolidation has already occurred or because they are not able to support many competing providers.”
Recent bipartisan proposals to regulate hospitals in highly concentrated markets demonstrate an appetite to curb the exercise of hospital market power.
“Our results suggest that if the goal is to cap the highest excesses of pricing, policymakers can narrow the market definition so that most markets are classified as noncompetitive, effectively extending regulation to most high-price hospitals,” according to the report. “Yet many high-price hospitals would be missed with even very narrow market definitions, such as the HSA. Alternatively, hospital price regulation efforts may be more effective if they are focused on the outcome of interest directly instead of market structure.”
In either case, policymakers could start with modest approaches, such as capping the highest prices; tracking outcomes and gradually pushing the caps downward; and monitoring trade-offs between savings and any unintended consequences for access or quality.
“If commercial health-care prices continue to increase at their current pace, calls for price regulation will grow louder,” the report concluded. “Policies that address high prices regardless of the underlying market structure would be more consistent with a policy goal of constraining high prices. In some cases, these policies may entail promoting competition between hospitals in the same market, but if there are not enough hospitals in a market or if procompetitive policies are not successful at lowering the upper tail of the price distribution, regulation focusing on the most expensive providers may be needed.”
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