Can regulating hospital prices increase competition?

The headline might seem a contradiction to some: “How Price Regulation is Needed to Advance Market Competition.”

Free-market gospel is that government regulations tend to hamper competition, but a recent policy insight report published in Health Affairs made the case that years of freewheeling mergers and acquisitions in the hospital industry has not resulted in lower prices—on the contrary, prices have continued to rise despite expectations of higher efficiency among providers.

The article took aim at the ongoing consolidation of hospitals and health systems, saying, “Nearly 1,600 hospital mergers and acquisitions occurred in the US between 1998 and 2017. Strong evidence shows that hospital consolidation substantially raises prices with little, if any, positive impact on efficiency or quality.”

The wrong kind of exceptionalism

The authors of the study reviewed literature and interviewed health economists and concluded that the US is unique in assuming market competition requires price competition. “We cite authoritative international bodies that find that price regulation not only would limit prices directly but also would promote competition on other factors, including quality, broadly considered.”

Other top-performing economies view health care economics differently than the U.S., the report said, noting that Organization for the Economic Cooperation and Development (OECD) countries tend to favor regulation to restrain provider prices and strengthen competition in other aspects of health care delivery. According to the authors, OECD expert consensus found that competition for prices has uncertain results, but competition on quality can lead to better health outcomes.

“Both the OECD consensus statement and a comparable European Commission statement conclude that when prices are regulated, hospitals can compete by reducing unnecessary, often inappropriate- ate, services and care for patients in less costly settings,” the study said. “US hospitals can also reduce excessive overhead, including bloated management staffs and overly generous C-suite salaries, and can negotiate lower prices for goods and equipment they purchase. Further, effective price regulation could substantially reduce hospitals’ reasons to engage in additional price-increasing consolidation and instead encourage competition on quality and patient choice, with stronger incentives for improved operating efficiency.”

Limits to regulation

The analysis recognized that regulating prices has its own risks and will not magically solve all the problems of our health care system. The authors noted that price regulations in the 1970s and 1980s were associated with overly complex systems that failed to innovate and respond to changes in health care. And OECD countries have found that fixed hospital budgets can lead to unacceptable wait times for services.

However, the authors argued, regulations can and should be adjusted to address such concerns. Taking a “simpler is better” approach, the authors called for a two-pronged strategy: applying rate caps to out-of-network hospitals, and establishing flexible, all-payer hospital budgets that adjust to shifts in patient volumes. They also call for regulation to be pursued on the state government level, noting that Congress is so often polarized and deadlocked that it is unlikely to make progress on these kinds of reforms on the federal level.

“Based on experience with provider price regulations in the US and abroad, we propose that ‘lighter touch’ regulations using limits on permitted out-of-network prices and flexible budgets offer comparable control over prices with less administrative complexity and burden than offered by more commonly recommended direct limits on prices and price updates,” they write. “Legislators and policymakers should redirect their energies from debating whether to regulate hospital prices to discussing how best to do so.”