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Competition and Market Forces

Rising Prices and Health Care “Empires”

  • 1Philip R. Lee Institute for Health Policy Studies, University of California, San Francisco

The rate of growth of health care expenditures in the United States in 2018 vs 2017 was actually below the annual rate of growth of the US economy as a whole, according to the Centers for Medicare & Medicaid Services (CMS) Office of the Actuary. However, this is more of a reflection of the high annual rate of growth in the US economy in 2018 than a slowing in health care expenditures, which grew at an annual rate of growth of 4.6%.

The average annual rate of growth in national health care expenditures over the past 7 years has been 4.5%. In 2018, the United States spent $3.3 trillion on health care, which corresponded to a 17.7% share of the US economy as a whole. The rate of health care expenditure growth in the United States is not coming under control, and what is most concerning is the source of this growth and what it portends about the future health care landscape.

Major Contributors to Spending Growth

There are 3 major contributors to growth in health care expenditures: (1) the size, age, and gender mix of the population; (2) the intensity of service use; and (3) the prices for products and services. As in other industrialized countries, population growth in the United States is relatively low. It has averaged 0.7% per year over the past 7 years. The CMS estimates that the contribution of population factors to the annual rate of growth of health care expenditures in 2018 was only 13%.

The CMS also estimates that health care utilization grew on a per-capita basis, but at a slower rate in 2018 than in 2017. It accounted for one-third of the annual growth in total health care expenditures. The deceleration in the use of services may be attributable to the increasing number of uninsured individuals, who use health care resources at a lower rate compared with the insured population. There were 1 million more uninsured Americans in 2018 compared with 2017.

This leaves increasing health care prices as the major reason for the growth in health care expenditures in 2018, accounting for more than half (53%) of the growth in health care expenditures between 2017 and 2018. This was the sharpest increase of any year since the implementation of insurance expansion in 2014 as a part of the Affordable Care Act.

High prices for health care services is a well-known aspect of the US health care system. International comparisons reveal US prices that are many times higher than charged in European and other high-income countries for the vast majority of diagnostic and therapeutic procedures. For example, outpatient computed tomography and magnetic resonance imaging scans are priced 4 to 5 times higher in the United States than in the Netherlands and Switzerland. Such price differences are even greater for hospital-based care. The prices for cardiac bypass, angioplasty, hip replacement, knee replacement, appendectomy, hysterectomy, and normal delivery are all 2 to 4 times higher in the United States than in other industrialized countries.

Effect of Consolidation

Although the causes of the substantially higher health care prices in the United States compared with those of other countries are not fully understood, one likely factor unique to the US health care system is the rapid consolidation of hospitals and physicians. US physicians are increasingly working for hospitals, and hospitals are in turn merging to formulate large chains. Although there is the potential for these larger health systems to create more efficient, integrated delivery systems, this does not appear to be happening on a widespread scale. The most visible aspect of what health system consolidation does is limit competition, which results in higher prices. This is despite the fact that the vast majority of these consolidated health systems are nonprofit entities.

Consolidated health systems have exhibited a range of anticompetitive behaviors to undermine health insurers’ attempts to negotiate lower prices. One strategy hospitals employ is to set extremely high out-of-network emergency service prices. Threatened with the risk of these high out-of-network costs in geographic areas where their enrollees might use emergency services, health insurers succumb to accepting higher in-network prices for hospital services than they otherwise would. Another anticompetitive practice employed by health systems is leveraging control of the hospital market in one area by requiring insurers to contract with all or none of the hospitals in a chain across regions, even if some of these might be the most expensive in other markets. Such tactics undermine the ability of health plans to use selective contracting with health care facilities to deliver higher value for their enrollees.

Thus far, the federal response to the consolidation of physicians and hospitals has been nonexistent. Most states have also done little to intervene. But the outcome of a recent case in California might signal a change.

California Attorney General Xavier Becerra accused Sutter Health, a health system chain of 24 hospitals and more than 12 000 physicians, of antitrust violations. The suit alleged that Sutter Health was using anticompetitive practices to raise health care costs. Sutter agreed to settle the case by paying a fine of $575 million, to cease from employing anticompetitive practices such as all or none contracting, and to have a state-appointed official monitor compliance. The settlement stopped short of requiring the breakup of Sutter Health.

Time will tell whether this high-profile case will slow rising prices in California or if other states will bring similar cases against entities that consolidate hospitals and physicians and use their size to limit competition. In many regions of the United States, such consolidation may already have undermined competition to the point that curbing some of the most egregious anticompetitive practices, such as those identified in the Sutter Health case, will not be sufficient to reduce the potential for unfettered increases in health care prices. If this approach fails, policy makers may need to consider either dismantling large health systems to restore competition or implementing price controls to compensate for the market failure.

There has been considerable public attention focused on the lack of competition among banking and high-tech companies, but it is increasingly evident that this is an emerging issue in health care as well. And we are all paying the price for it.

Article Information

Corresponding Author: Andrew B. Bindman, MD, Philip R. Lee Institute for Health Policy Studies, University of California, 3333 California St, San Francisco, CA 94118 (andrew.bindman@ucsf.edu).

Conflict of Interest Disclosure: Dr Bindman reports that there was an interpersonal agreement contract between the Centers for Medicare & Medicaid Services and the University of California, San Francisco, for services he provided on a part-time basis.

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