Tools needed to balance market power

July 15, 2013

When hospitals consolidate, what will fix the effect on pricing?

A decade ago, large hospitals were buying up smaller ones, but today, consolidation has taken on a whole new meaning. The accountable care trend, provider burnout/buyout and rate cuts are contributing to the massive merger activity of the past several years.

And as most economists will agree, consolidation causes prices increases.

According to Paul Ginsburg, president of the Center for Studying Health System Change, speaking at a recent press conference, the movement away from the fragmented fee-for-service delivery model is creating a new dynamic for bundled payment, pay based on comprehensive care and rewards for quality.

“Many are enthusiastic about these delivery approaches, but additional tools are needed to address market power,” Ginsburg says.

Competition Lacking

While some consolidation can have a positive effect on care coordination, for example, the impetus in today’s market seems purely financial. Far-reaching hospital systems in a market that lacks competition quickly become the “must have” providers that insurers can’t sidestep. When negotiations slant in favor of the provider, rates rise.

“Organizations representing physicians very strongly believe that the future should be physician-led organizations as opposed to physicians working for hospitals,” Ginsburg says. “If you have physician-led organizations, it means markets are more competitive because under ACOs or bundled payments they benefit from steering patients to hospitals or facilities that offer better value.”

He notes two possible policy approaches to address hospital price increases: foster greater competition in the market; or regulate prices directly.

“In terms of things the government can do, price transparency is not on my list,” he says. “The main upside of the government publishing price data is to influence policymakers.”

Rather than simply posting hospital charges or payments publicly, payers would be better off with benefit design that rewards patients for choosing wisely. As hospitals begin competing for patients who are specifically looking for value, prices go down and quality goes up. Ginsburg says the most effective price-transparency policy is one that ultimately leads to lower prices.

Suzanne Delbanco, executive director of Catalyst for Payment Reform, says consumers have not had the motivation to pay attention to prices because typical insurance product designs have allowed them to be insulated from real costs. However, employers are beginning to experiment with more incentives for choosing efficient care, such as value-based designs and reference-pricing models.

Progress is slow. CPR recently rated each state according to its transparency laws and found far more "D" and "F" grades than "A"s and "B"s.