Monopolies Threaten Health Care Cost Controls
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The Fiscal Times
February 3, 2011

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.

spent 25 years as a foreign correspondent, economics writer and investigative business reporter for the Chicago Tribune and other publications. He is the author of the 2004 book, The $800 Million Pill: The Truth Behind the Cost of New Drugs.