Originally published 1/3/11 in The Fiscal Times
Beyond the legal challenges, a major new hurdle is emerging for the health care reform law. Recent studies show that the major players in the health care marketplace – insurers, hospitals and physician practices – are consolidating, which increases the likelihood they will collude on prices charged to employers and to consumers and defeat cost control measures in the law.
Government officials are already grappling with the issue as they move to implement one of the signature cost control elements of reform – the formation of Accountable Care Organizations(ACOs). Conceived as a delivery system alternative to health maintenance organizations, ACOs are supposed to achieve greater coordination of care by linking together physician practices and hospitals, and will be financially rewarded if they improve quality while lowering costs.
The rules for ACOs, which are being written now, won’t go into effect until next year and will only apply to the Medicare market. While the Centers for Medicare and Medicaid Services (CMS) is likely to endorse several different payment models, the law calls for sharing savings when the Medicare payments for beneficiaries covered by the ACO fall below recent regional trends.
Top officials at the Centers for Medicare and Medicaid Services are already worried some of the new entities will become a vehicle for recouping Medicare losses. Raising rates in the private market would ultimately undermine any short-term savings achieved by Medicare, since increases in a region’s top line health care tab would eventually force Medicare to raise its own rates.
“There will be parties out there who want to repackage what they do and call it an ACO,” CMS administrator Donald Berwick told a forum at the Brookings Institution earlier this week. “We have to maintain the integrity of markets and not let concentrated entities emerge.”
That’s exactly what happened in California over the last decade after hospitals merged and physicians joined large independent practices to counter the price-dictating bargaining power of insurance industry HMOs. The number of hospital beds shrank, hospital prices doubled and overall health care costs rose 10.6 percent between 1999 and 2005, which was even higher than the unacceptably high national health care inflation, according to a recent study of the California market.
A national study conducted for the Robert Wood Johnson Foundation found that after the merger wave between 1990 and 2003, 90 percent of large metropolitan area hospitals wielded excessive market power as defined by the Federal Trade Commission. The study suggested the mergers raised prices by anywhere from 5 to 40 percent (depending on how close the merged facilities were to each other) and probably led to lower quality.
The fear now is that “ACOs could make an existing problem marginally worse,” said Robert Berenson, a senior fellow at the Urban Institute, who conducted the California survey. “The issue is market power.”
It isn’t just mergers and consolidation that give provider groups greater market power. Sometimes insurers need to include prestigious institutions within their networks – like Cedars Sinai Hospital in Los Angeles, which caters to Hollywood stars and is the focal point for their high-profile charitable endeavors. No insurer can afford not to have Cedars Sinai in its network, even though it charges the highest fees in the state and has Medicare utilization rates more than twice the national average, according to the Dartmouth Atlas of Health.
Some large hospital chains use their dominant status in a few of their markets to drive up rates everywhere in the chain. Sutter Health, for instance, which has more than two dozen medical centers and hospitals in separate northern California cities, requires insurers to sign “all or none” contracts, according to Berenson.
Blue Shield of California, the dominant insurer in the state, wanted CMS to set the ground rules for ACOs. “In order to qualify for safe harbor treatment under antitrust laws,” Paul Markovich, chief operating officer of Blue Shield, wrote, the agency must insist that “an ACO . . . that is part of a multi-provider network or system . . . will not require payers to negotiate with the network or system on an all-or-nothing basis that would require the payer to include network or system facilities or physicians that are not part of the ACO.”
Meanwhile, the insurance industry continues to come under fire from consumer groups and the medical profession for its monopolistic practices. While the insurance exchanges, which were ruled unconstitutional by a Florida federal court earlier this week, were designed to address the lack of competition in the individual and small group market, they will have minimal impact on large groups which deal mainly with major insurers like UnitedHealth, Wellpoint, Cigna and Aetna.
The American Medical Association’s bi-annual survey of the nation’s health insurance marketplace, released Tuesday, found 60 percent of the nation’s metro areas where two insurers had a combined share of 70 percent or more of the market. That’s up from 53 percent two years ago.
“High concentration levels in health insurance markets are largely the result of consolidation, which likely has led to the exercise of market power and, in turn, harm to consumers and providers of care,” the report said. “Past and future consolidation of health insurers should raise serious antitrust concerns.”
America’s Health Insurance Plans, the industry trade group, commissioned a study the last time the AMA issued its report that faulted its methods. “Research examining competition in health care markets increasingly points to provider consolidation as a significant factor contributing to rising health care costs,” said Robert Zirkelbach, a spokesman for America’s Health Insurance Plans, the industry trade group.
Most experts who study the dysfunctional health care marketplace say both sides are correct when it comes to accusations about excessive market power. “I would say both provider and insurer concentration are problematic to high quality, efficient and sustainable health care system,” said Len Nichols, director of the Center for Health Policy Research and Ethics at George Mason University. “In different markets, insurers, hospitals or physician groups wield disproportionate market power. Where one has it, the others and consumers suffer.”
The net effect of these dueling monopolies, he said, is that where providers can easily demand higher prices. Insurers, because they face minimal competition, simply pass those costs along. The tab for both is paid by employers, families and government agencies.
The Federal Trade Commission, which didn’t file any cases against hospital mergers between 1999 and 2007 and has only filed three since, promises to step up its monitoring of the health care sector. But it generally looks favorably on the emergence of ACOs, at least as conceived under the reform law. “We need to make sure that they drive down health care costs,” FTC chairman Jon Leibowitz said recently, “but vertical integration can sometimes be good.”
“We’ll have a better chance of holding down costs through rate regulation than by using antitrust,” argued Berenson of the Urban Institute. “Where there is a dominant insurer or two, there is no competitive pressure to take on provider market power. It is easier to get along.”