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.

It’s no secret that health care expenditures in the United States, both per capita and in absolute terms, far exceed those of any other developed nation. Bringing our health care costs under control requires effective oversight and regulation at the state and federal levels, as well as efficient coordination between state and federal entities. Given the recent policy focus on vertical integration (particularly hospital-physician integration) as a means to improve care coordination and reduce waste in the health care system, state governments have a critical role to play in both monitoring the impact of increased vertical integration on health care markets and implementing policy deterrents to avoid increased prices and harm to competition.

To control health care costs, we must both reduce overutilization and constrain prices. Just like going to the grocery store, the amount of your bill depends on how many items you buy and also the price of each item. Imagine going to a high-end grocery store (you know the one): you can limit your utilization by only purchasing four items, but still spend $50 because the prices are high.

Many recent health care cost control efforts have focused almost entirely on curbing overutilization. For example, the Medicare Shared Savings Program encourages health care entities to integrate to form Accountable Care Organizations (ACOs). ACOs realign incentives for providers to coordinate care and reduce waste by allowing them to share in the savings from doing so. By rewarding saving money rather than providing additional services, ACOs encourage providers to avoid redundancies in tests and procedures and keep patients well, rather than treating them extensively once they are ill. These and other payment and delivery reforms, such as bundled payments and value-based purchasing, create powerful incentives for health care providers to integrate to better manage population health and financial risk in the shift away from fee-for-service payment.

But as a policy measure, vertical health care integration presents a double-edged sword. While health care integration has potential to reduce wasteful and unnecessary use of services, it also risks further consolidating the health care industry and increasing health care prices.

Rather than controlling costs, vertical integration, especially in the form of hospital ownership of physician practices, has been associated with increases in hospital prices, per patient expenditures, and physician prices. Furthermore, another recent study found minimal changes in utilization in vertically integrated entities, suggesting that vertical integration may drive up costs without counterbalancing reductions in utilization. While this area of research is still somewhat preliminary, the emerging data suggest that vertical integration can have significant negative effects on price and competition in health care markets.

Our commercial health care markets rely on competition to discipline prices. When competition is compromised through consolidation and accumulation of market power, few systemic checks exist to limit price increases.

Federal antitrust regulation offers a powerful means to promote competition and prevent anticompetitive mergers and collaborations, but it cannot be the only tool. The Federal Trade Commission and the Department of Justice do not have the resources or the capacity to police all of the health care consolidation occurring across the country. While the agencies have dramatically increased antitrust enforcement in health care in recent years, they have focused on preventing anticompetitive horizontal mergers (uniting two or more competitors), rather than conducting ongoing oversight and monitoring to try to ensure that the competitive benefits outweigh the harms. But achieving the goals of vertical integration requires permitting the integration to occur and then monitoring for potential harm to competition, which would be very time and resource intensive for the federal agencies to tackle alone.

Because of the limits of federal antitrust enforcement, states are uniquely situated to complement and supplement federal efforts to address the potential harm to competition from increased health care consolidation. As such, states have an opportunity and an obligation to assist in health care cost containment. Doing so will improve the health of their citizenry, their businesses, and their budgets. Further, given the dearth of evidence on vertical integration, state experimentation may speed our understanding of different regulatory models’ effectiveness under a variety of market conditions.

The Importance Of Data Collection: All-Payer Claims Databases

To inform their policy approach, states need health care price, utilization, and quality data. Eighteen states have enacted an all-payer claims database (APCD) to collect this data. An APCD is a large-scale, state-run database that collects health care claims and provider data on price, quality, and utilization from all payers in the state. Though APCDs are often thought of as tools for promoting consumer price transparency, their functions go way beyond just providing pricing information to consumers. APCDs offer a way for policymakers to monitor how health policy reforms, like ACOs, affect health care quality, utilization, and price under various market conditions, and how effective different regulatory policies are in preventing harm to consumers.

In a major blow to states’ health care oversight authority, on March 1st the Supreme Court ruled in Gobeille v. Liberty Mutual Insurance Co. that the Employee Retirement Income Security Act (ERISA) invalidates state APCD reporting requirements with respect to employee health plans. This ruling throws cold water on state efforts to collect the comprehensive price, quality, and utilization data needed to oversee their health care markets.

States may have to rely on data from a much narrower band of payers, look to the federal government to mandate the type of data collection needed from employer-based plans, or turn to providers to report the data instead of plans. Even for non-ERISA plans, there are several resource, practical, technical, and legal challenges in establishing an APCD. But these challenges must be overcome for us to gain control over health care prices. Access to reliable data is essential to inform future state action.

State Options To Oversee Vertical Health Care Integration

States hoping to promote beneficial integration can manage the potential downsides of vertical integration by offering integrating entities a quid pro quo that requires submission to price and quality oversight. We highlight several models for state oversight in order of least to most state regulation of the market. As with anything, the stronger the oversight, the more challenging the option may be politically, especially in areas with powerful hospital systems that provide jobs and drive local economies.

State antitrust enforcement or immunity

States can tighten or relax antitrust enforcement to achieve certain policy goals. For instance, state attorneys general can use their parallel antitrust enforcement authority to seek to prevent and regulate anticompetitive combinations of health care entities. While state antitrust enforcement is a useful tool to target some of the most egregious anticompetitive behavior, in many instances it is too blunt an instrument to engage in delicate balancing between encouraging the potential benefits of vertical integration and mitigating its risks.

On the other end of the spectrum, states can encourage integration by immunizing health care entities from state and federal antitrust enforcement through use of state action immunity. At least 13 states have legislative authority to immunize health care entities from antitrust enforcement — three via state action immunity and 10 via health-related “certificates of public advantage” (COPA). In exchange for antitrust immunity, consolidating entities agree to ongoing oversight and restrictions on their potentially anticompetitive behavior, such as price increases, future acquisitions, or payer contracting practices.

In a recent case study of a COPA in Asheville, North Carolina, the authors found it unclear whether the COPA effectively counteracted the loss of competition in the area, but they concluded that COPAs may be an underused resource to gain “light-handed, targeted” oversight over otherwise unregulated post-consolidation activities of integrated providers. COPAs are not without risks, however. The FTC has expressed strong reservations about COPAs, raising concerns that rather than being necessary to encourage procompetitive integration, the immunity will only protect entities engaging in the most anticompetitive behavior.

ACO Certification

Unlike for Medicare ACOs, there is no regime of oversight for commercial ACOs. Three states (Massachusetts, New York, and Texas) have established ACO certification programs. With ACO certification, the state can offer a range of regulatory incentives to the ACO, such as antitrust immunity or approval to assume financial risk, in exchange for more searching antitrust review up front and continued oversight on price and quality. States that certify ACOs can increase data gathered from ACOs and remove certification if ACOs become anticompetitive, but the oversight will not reach all market actors or all vertically integrating entities.

Rate Oversight Commission Or Insurance Rate Review

Beyond just focusing on ACOs, some states have established independent commissions to oversee health care prices in their state. These commissions typically have authority to study statewide health care cost growth and proposed mergers to make policy or enforcement recommendations. Perhaps the most prominent example is Massachusetts’ Health Policy Commission. States can vest their commission with regulatory authority, such as the ability to implement price caps or approve hospital budgets.

A rate oversight commission can institutionalize oversight and health policy expertise, analyzing data from across the state and provider types. Such a body, however, must be independent, avoid agency capture, and coordinate with the APCD, state attorney general, insurance commissioner, and other state health agencies.

States can also increase the rate review authority held by the insurance commissioner. All state commissioners already have insurance rate review authority, but their powers vary in strength and scope. Insurance rate review focuses on premium rate increases rather than on provider prices, but limiting the ability of insurance companies to raise premiums puts pressure on providers negotiating with the health plans.

To have the strongest effect, states can grant the insurance commissioner the ability to impose a cap or regulatory limit on provider price increases. The best, and perhaps only, example of this is Rhode Island’s Insurance Commissioner, who limits hospital rate increases for health insurers to the Consumer Price Index – Urban plus 1 percent. This model has the benefit of building on existing institutions, but it also locks in the existing pricing disparities between must-have and have-not providers.

Caps on Private Rates

An intermediate step between monitoring and setting provider rates is to establish a cap on providers’ private health care prices, typically described as a percentage of Medicare rates, such as 125 percent or 175 percent of Medicare rates. Price caps limit the extent of price variation by imposing a ceiling on prices, but they still permit providers to compete below the cap. Price caps are simpler from a regulatory perspective than rate setting because they set the cap at a percentage of Medicare rates. But, by building off of Medicare, the cap incorporates all the flaws of the Medicare pricing system, as well as its strengths.

Provider Rate Regulation

Last, states can address provider pricing power by directly regulating provider prices. The prototypical system of rate regulation is Maryland-style all-payer rate setting, under which provider prices are regulated like a utility and all payers pay hospitals the same rate for a given service. States could also set rates for private payers, like West Virginia, without having to obtain a waiver to include Medicare prices.

Rate regulation can effectively counteract providers’ pricing power, eliminate unwarranted price discrimination and variation, constrain hospital prices, and reduce hospital administrative costs. But it needs to be paired with global budgets or limits on total provider revenues to curtail the incentive to increase volume. Even Maryland’s rate setting model has moved from fee-for-service to global budgets and caps on total hospital cost growth, with some promising early results.

Summing Up

The double-edged sword of health care integration offers potential benefits for quality and care coordination alongside risks of increased health care consolidation, market power, and rising prices. States have a critical role to play in supplementing and complementing federal efforts to balance the risks and benefits of vertical integration in health care. States can experiment with different means of achieving the benefits of integration, while requiring oversight on price and quality.

While states have several oversight models to choose from, all require extensive price and claims data. Thus, no matter what policy option a state chooses, it should start with enhanced data collection and analysis despite new hurdles. State participation is critical if we are to bend the health care cost curve.