Unchecked Provider Clout In California Foreshadows Challenges To Health

Faced with declining payment rates, California providers have implemented various strategies that have strengthened their leverage in negotiating prices with private health plans. When negotiating together, hospitals and physicians enhance their already significant bargaining clout. California’s experience is a cautionary tale for national health reform: It suggests that proposals to promote integrated care through models such as accountable care organizations (ACOs) could lead to higher rates for private payers. Because antitrust policy has proved ineffective in curbing most provider strategies that capitalize on providers’ market power to win higher payments, policy makers need to consider approaches including price caps and all-payer rate setting. I n current health reform discussions and proposed legislation, providers’ growing market power to negotiate higher payment rates from private insurers is the “elephant in the room” that is rarely mentioned. Here, in our study of the current negotiating environment in California, we explain that growing market power for providers caused a shift that gave providers a stronger bargaining position over health plans, leading in turn to higher insurance premiums. Further, we explore why some of the proposed payment reforms and organizational delivery models—including so-called accountable care organizations (ACOs)—that have been championed at the national level have the potential not only to produce higher quality at lower cost but also to exacerbate the trend toward greater provider market power. Such provider dominance could offset some or all of the potential of reforms to lower premiums through increased efficiency in delivery. The trends in California suggest an urgent need for policy makers to address the issue of growing provider market strength. In our judgment, more active antitrust enforcement will not do the job. Rather, more direct regulatory approaches, including all-payer rate setting, need to be actively considered. On average nationally, commercial insurers’ hospital and physician payment rates are nearly 30 percent and 20 percent higher, respectively, than Medicare rates. Evidence from two decades of hospital mergers and acquisitions nationally demonstrates that consolidating hospital markets drives up prices, with disagreement only over the magnitude of the increases. Some researchers have concluded that formation of hospital systemshas primarily served to increase market power—not improve quality or efficiency of patient care—at least in the short run. A recent study has shown that in California, after a downward trend in hospital prices for private-pay patients in the 1990s, a rapid upward trend began about 1999 that produced average annual increases of 10.6 percent over the period 1999–2005. The study’s authors concluded that the source of the near-doubling of California hospital prices remains “something of a mystery.” Analysis of Medicare Cost Report data by the Medicare Payment Advisory Commission (MedPAC), although national, shows that inpatient costs per admission increased only 5.5 percent doi: 10.1377/hlthaff.2009.0715