As part of our ongoing effort to raise awareness of health services research and increase its application in policy and practice, AcademyHealth is pleased to announce a new partnership with the researchers and authors over at The Incidental Economist. Starting today, we’ll be featuring regular contributions by Austin Frakt, Ph.D., and Aaron Carroll, M.D., M.S., on the subjects of health care costs, delivery system transformation, and public and population health – areas AcademyHealth has identified as a priority in the current policy environment. As regular contributors, they’ll be discussing current events with an eye toward how new and existing research informs the issues. We’re proud to be part of the discussion Drs. Frakt and Carroll have started on their wildly successful blog, and look forward to continuing the conversation here. Won’t you join us? Today's post is written by Austin Frakt, Ph.D. Since this is my first post on the AcademyHealth blog, some readers may not know that over at my place I used to write a lot about insurer market power, i.e., the ability of health plans to negotiate lower prices with providers and/or demand higher premiums from consumers. (See this FAQ entry.) Three recent articles give me a good excuse to return to the topic. And, the new relationship with AcademyHealth gives me a good reason to do so right here. Naturally, we care about insurer market power because of a real or perceived connection to the prices they pay providers and, in turn, the premiums we pay them. But insurers aren't the only entity that matters in price setting. Providers are on the other side of the table, so their market power matters too (pdf). Let's start with a brief overview of the market power of providers. I promise to come back to that of insurers. In a recent Health Affairs article Bob Berenson and colleagues deliver the latest in a body of work suggesting that providers -- hospitals mostly, though some physician groups too -- have amassed considerable bargaining clout and are using it to drive up prices. The following figure, from other new work by Sommers, White, and Ginsburg illustrates this phenomenon. The "hospital market basket index" (the bottom, dashed line) measures hospital costs. The "hospital producer price index, private payers" (the top, sold line) measures the prices hospitals charge non-government payers. The two lines were more or less parallel through 2002 and then prices began to grow relative to cost. That's consistent with the idea that over the past decade hospitals are using their increasing negotiating leverage to command higher prices from private payers. Berenson et al.'s paper tells us much more, though. (For one summary, see Sarah Kliff.) The authors find that insurers are rolling over.

"To a large extent, health plans have accepted the reality of provider leverage and its effects on employer health care costs. An interviewee in the Boston market observed, “There is a dynamic in the market that makes it impossible for a private payer to change anything. They [the insurers] never recovered from Tufts [Health Plan] trying to take on Partners and getting beaten down. It scared everyone off.…It showed that employers would not support plans in showdowns against hospital systems.”
(More on that Tufts-Partners showdown here.) At the very least, this should make us think hard about the likely effects of proposals to increase competition among insurers. Doing so would weaken their bargaining position with respect to providers, leading to price increases. Another recent paper by Bates, Hilliard, and Santerre (ungated working paper available) summarizes the evidence.
Feldman and Wholey (2001) find that greater health maintenance organization (HMO) buying power leads to lower hospital prices and greater hospital output, as a monopoly-busting model predicts. Similarly, Bates and Santerre (2008) show that greater HMO and preferred provider organization (PPO) market concentration relate to more hospital inpatient and outpatient services, respectively. More recently, Moriya, Vogt, and Gaynor (2010) find that increases in health-insurer market concentration are significantly associated with decreases in hospital prices.
So, case closed, right? Pump up insurer market concentration to beat back monopolistic hospitals. Not so fast! Just because an insurer with clout may get a better deal from a hospital, what makes that insurer pass that deal on to consumers through lower premiums? An insurer with little to no competition -- just the type to negotiate the lowest hospital prices -- would have little to no incentive to charge commensurately lower premiums. On the contrary, an insurer with market power would charge higher premiums, leading to less coverage. Indeed, that's what Bates, Hillard, and Santerre found.
A 10% increase in health-insurer market concentration reduces the percentage of nonelderly people purchasing [individual market insurance] by 8.4%. [...] The relationship [...] is found to be stronger in states without rate regulations than states with rate regulations.
A similar effect was not found in the group market likely because employers (particularly large ones) have bargaining clout that offsets that of insurers. Conclusion: Less competition among insurers can help reduce provider prices, but with a side-effect of increasing premiums and lack of coverage. Rate regulation can help counter the latter. Another approach is to increase the bargaining clout of consumers, e.g., by aggregating them in exchanges. This would make the individual market behave a bit more like the group market, for which Bates, Hillard, and Santerre found no relationship between insurer market concentration and coverage.   Austin Frakt is a health economist at the Department of Veterans Affairs and Boston University’s Schools of Medicine and Public Health. He blogs on health economics and policy at The Incidental Economist.   References Bates L, Santerre R. (2008). Do health insurers possess monopsony power in the hospital services industry? International Journal of Health Care Finance and Economics 8(1). Feldman R, Wholey D. (2001). Do HMOs have monopsony power? International Journal of Health Care Finance and Economics 1(1): 7–22. Moriya A, Vogt W, Gaynor M. (2010). Hospital prices and market structure in the hospital and insurance industries. Health Economics. Policy and Law 5: 459-479.