Editor’s note: This post is part of a Health Affairs Blog symposium stemming from “The New Health Care Industry: Integration, Consolidation, Competition in the Wake of the Affordable Care Act,” a conference held recently at Yale Law School’s Solomon Center for Health Law and Policy. Links to all posts in the symposium will be added to Abbe Gluck’s introductory post as they appear, and you can access a full list of symposium pieces here or by clicking on the “Yale Health Care Industry Symposium” tag at the bottom of any symposium post.

High and highly variable provider prices in health care markets, largely resulting from consolidation, have finally emerged as a health care problem deserving policy action. After two waves of very active hospital merger and acquisition activity, first in the 1990s and now in the 2010s, most health care markets for hospital services now are considered “highly concentrated” using the standard measure of market concentration—the Herfindahl-Hirschman Index.

Comparable waves of hospitals’ employment of physicians occurred in the same periods. Research increasingly confirms that both horizontal consolidation of hospitals and vertical consolidation of hospitals and physicians gives providers increased leverage in their negotiations with insurers over prices for provider services.

The Limits Of Antitrust In Addressing Consolidation And Prices

Although the word antitrust naturally conjures up the legacy of “trust busting” that President Theodore Roosevelt accomplished with regard to railroads and bank monopolies, today there actually is little antitrust enforcement can do about extant monopolies legally acquired. Indeed, antitrust law tolerates the exercise of market power to raise prices, reduce output, and, perhaps even compromise quality. It intervenes only where the monopolist wrongfully exercises its market power to exclude or harm actual or would-be competitors. The result is that antitrust focuses mostly on proposed, possibly anticompetitive merger and acquisition activity; it does not address the pricing power of already market-dominant health care systems and medical groups.

Furthermore, providers often have leverage to demand high prices for reasons unrelated to consolidation activity. Geographic isolation permits natural monopolies — the markets are concentrated, but not from consolidation. Hospitals that provide a unique service otherwise unavailable in the market for regulatory or other reasons—for example, a designated Level 1 trauma center or organ transplant facility—may be able to leverage that advantage to negotiate higher rates for their other services as well.

Hospitals can also gain pricing power from being a “must have” hospital essential to making a health plan marketable to consumers, sometimes because of the hospital’s reputation. Yet, competition theory would seek to reward providers that achieve pricing power from reputation and certainly would not seek to punish them through antitrust action. In all these circumstances, there is no antitrust problem, but nevertheless, prices for services may exceed the Medicare standard by 250 percent or even much more.

Beyond Antitrust

For these and other reasons, then, policymakers need to consider a range of approaches beyond antitrust to address high prices. These range from making markets more competitive by removing imposed barriers to entry such as Certificate of Need programs, to overtly regulatory approaches that assume market failure at least with regard to prices, such as the all-payer rate review approach in Maryland. The National Academy of Social Insurance (NASI) has produced a report detailing the range of policy options.

Given the recent attention paid to proposed large insurance company mergers, it is important to note that the NASI report did not recommend encouraging more insurer consolidation in the hopes that providing powerful countervailing negotiating clout would restrain provider prices and insurance premiums. There is evidence that more dominant insurers do obtain lower prices. But as Leemore Dafny has explained, while market-dominant insurer monopsonies do negotiate lower provider prices than insurers in more competitive markets, they have no need to pass through those lower prices to consumers in the form of restrained premium increases. Besides, a dominant insurer need not get low prices but only the most favorable prices from providers to frustrate performance and entry of current and would-be insurer competitors.

The vogue in health policy is payment reform to obtain higher value. Some have suggested that payment reform can be a successful policy approach to restraining prices, for example, through shared savings incentives for accountable care organizations (ACOs), an “on ramp” to ultimately placing ACOs at risk for “total cost of care” or a “global budget.” However, the focus of ACO activity has been on restraining growth in the volume of services, largely because of its formulation as a Medicare initiative — since Medicare imposes administered prices, variations in the program’s spending are not related much to pricing differentials.

The situation is the reverse for privately insured. Here, variation in transaction price, not service use, is the primary driver of spending variations. That’s why setting spending targets for commercial ACOs logically requires specific attention to the role of price and price variations. Borrowing from the Medicare approach of basing spending targets on a provider’s historic spending for its attributed beneficiaries, trended forward by an external factor for inflation, would possibly constrain price increases.

However, this would “bake in” the very large price variations in the ACO providers’ historical spending base. The approach is inherently unfair to ACOs based in lower-priced provider entities and, in effect, rewards providers for their prior exercise of market power. Yet, the Medicare payment method seems to be the dominant approach being used in commercial insurance-ACO arrangements, at least initially in shared-savings programs. No surprise, there: Powerful health care systems would not agree to participate otherwise.

The right approach—for Medicare as well—could include providing a spending target based on a blend of ACO-specific and community average spending, weighted initially toward the ACO’s historic spending and over time moving to the community average. It could also include providing differential updates to previously high-spending and low-spending ACOs, so that the actual targets converge toward the median over time. Consistent with these suggestions, CMS recently proposed altering its payment method to balance an ACO’s historic costs with regional spending in traditional Medicare. But again, the ACOs with market power are simply able to reject this reasonable transition approach.

So yes, commercial insurance ACOs can conceivably help bend the spending curve for high-cost hospital-based provider organizations, albeit with the acceptance of the high-spending base. And ACOs based in medical groups and independent practice associations have the opportunity to shop for hospital care and demand more competitive prices from hospitals, at least in markets which still have alternative providers with which to contract. But, fundamentally, as long as hospital-based systems have market power, are in highly concentrated markets with little effective competition, and continue the progression to hospital employment of previously independent physicians, it is hard to see how payment reform via the ACO strategy can successfully address the problem of high prices as a primary driver of health spending. If the main problem driving excessive health spending for privately insured patients relates to excessive transaction prices, payment strategies designed mostly to reduce service use may not do the job.

Even more fundamentally, for all the deserved promise of total-cost-of-care payment, the still gentle payment designs in current Medicare demonstrations and some commercial insurance approaches have not fundamentally altered the business models that lead to financial success in the hospital sector. The key to success there is premised on volume-based payment, with prices that particularly reward intensive, technology-based services. The strategies that hospitals adopted in the early part of this century, as manifested by branding and marketing profitable service lines, are alive and well on a broad scale, even as the rhetoric hospitals often adopt emphasizes value — payment for outcomes on both cost and quality.

Some within a hospital system may sincerely espouse ACO-based population health and actively work to implement the approach, while others, perhaps more influential in the organization, remain committed to maintaining the service-line based revenue engine that seems inimical to population health objectives. Recently, The Washington Post reported on A Cancer Building Boom Fueled by Economics and an Aging Population. One quote from the article captures the reason for the boom:

The economics of [cancer treatment] are good,” said Patrick Duke, managing director at CBRE Healthcare (a health care real estate company).“…That’s a touchy subject for some people, but it’s the reality. There are a lot of patients out there; it affects everybody. The procedures and the drugs are well reimbursed. It’s a big business.

It is hard to blame hospital executives for ambivalence about how big a jump to take in the direction of population-based payment, given that the dominant payment models remain volume-based. If we were serious, we would quickly move beyond on-ramps and training wheels to provide a real population-based payment model. Doing that would help distinguish enterprises truly committed to new payment and organizational business models from those that probably should probably remain under volume-based payment methods, even if those who make the jump represent a minority of hospital systems.

Improving ‘Legacy’ Payments

What I prefer to call “legacy payment” methods (and not “fee-for-service” because most of these payment methods, including DRGs, are not fee-for-service) can be improved substantially to address the medical arms race that continues to dominate health care delivery. In short, instead of relying mostly on creating new, “value-based” payment models, payment policy changes focused on legacy payment methods can also improve the value of care provided by fundamentally altering the kind and mix of services produced.

For many organizations, accommodating to different winners and losers within legacy payment models would be a lot easier than fundamentally reformulating their business models and recreating their cultures. This approach would likely also reduce the challenge of distinguishing between consolidation and integration to better manage population health and the same organizational changes to further raise transaction prices under volume-based payment.