Unintended Consequences
Policy + Politics

Unintended Consequences

Some say more coordination within hospital-physician provider networks cuts costs, but one case study shows that increased integration points toward monopoly


Ever try shopping for a different hospital or physician network?

For most privately-insured Americans, choosing a different doctor or hospital requires changing insurers. Yet in the nation's most populous state, changing insurers doesn't make much difference—you're likely to be stuck with the same hospitals, doctors, and insurance cost coverage, according to a new study

Why? There's essentially no competition in most markets in California. The study by researchers at the Urban Institute and the Center for Studying Health System Change documented how physician and hospital networks in California have become concentrated in recent years. There are now just one or two networks in five of the six largest markets in the state, a level of concentration that in other industries would be seen as violating antitrust rules.

The lack of competition among doctors and hospitals—who are the primary providers of care in the U.S.—will have major implications for national efforts to control health care costs, the study warned. "Unchecked provider clout" by these networks will undermine many of the reforms that President Obama and the Democratic majority are banking on to hold down costs in the years to come.

"The trends in California suggest an urgent need for policy makers to address the issue of growing provider market strength," wrote Robert A. Berenson, Paul B. Ginsburg, and Nicole Kemper in an article that appears in the April issue of Health Affairs. "In our judgment, more active antitrust enforcement will not do the job. Rather, more direct regulatory approaches need to be actively considered."

How will this set back cost control efforts? The pending legislation calls for limiting cost growth in Medicare and Medicaid by creating networks that link primary care physicians, specialists, and hospitals. Dubbed accountable care organizations (ACOs), these coordinated groups will become responsible for managing the care of a large group of patients for a set fee.

In many ways, ACOs are like latter-day health maintenance organizations (HMOs), which were the dominant form of health insurance in the 1990s. They were going to hold down costs, too. Unfortunately, insurers' ham-handed denials of physician-ordered services triggered a patient rights rebellion, which undermined their authority. HMOs eventually became just another failed experiment in cost control, passing along cost increases with few questions asked.

Could the same thing happen to the ACOs? ACO proponents claim these new organizations will provide higher quality care at a lower cost to the government. They claim the ACOs will save money by coordinating care for people with multiple chronic diseases.

It's a heady vision, but this latest study found reason for skepticism. The health care sector in the nation's largest state has already evolved into highly integrated hospital-physician provider networks, the researchers found. But with five of the six largest markets in the state dominated by one or two networks, they were able to use that market power to charge exorbitant rates.

"Whatever their merits in improving quality and efficiency, California-style integrated care systems currently produce higher prices that undermine cost containment," the researchers wrote. They arrived at their conclusion after interviewing 300 officials at hospitals, physician groups, health plans and large employers in the six largest markets in California.

They discovered that the physician networks created in wake of the managed care backlash had amassed extraordinary bargaining power over insurers by avoiding competition with rival networks in the community. In fact, supposedly "rival" networks often had 97 to 98 percent overlap on their physician panels. Why? Insurers demanded it so they could successfully compete for customers.

"If plans cannot exclude providers from their network because of customers' demands for broad networks, they cannot credibly threaten network exclusion," they wrote. "That fact undermines their ability to resist providers' demands for higher payment rates." Hospitals had become similarly concentrated. Sometimes the hospitals belonged to large statewide chains that negotiated uniform rates, which had the perverse effect of pulling up prices in markets where there was still competition. In some cases, prestige facilities like Cedars-Sinai Medical Center in Los Angeles were able to charge whatever the market would bear since no health plan in the sprawling L.A. region could afford to eliminate Cedars-Sinai—with its Hollywood clientele—from its network.

The area with the lowest insurance rates—Fresno—had the least care coordination, the study found. In fact, physicians there were envious of market clout their colleagues had achieved in other areas. "Why are those hospitals and physicians [integrating]? It wasn't for increased coordination of care, disease management, blah blah blah—that was not the primary reason," a Fresno physician told the researchers. "They wanted more money and market share."

The study issued a bleak warning. Forcing doctors and hospitals to form networks under the "accountable care" umbrella might further the creation of local monopolies that will demand higher rates, not pass along savings. "Unless market mechanisms can be found to discipline providers' use of their growing market power, it seems inevitable that policy makers will need to turn to regulatory approaches," they wrote.

What regulatory approaches could curb the excessive market power of the physician-hospital networks gathered into the new ACOs? They recommended either price controls on private insurance rates, perhaps set by a rate commission with teeth.

Another option would be adopting rules that will force networks to charge all payers, whether government or private, the same price. That way, monopolistic networks won't be able to shift their billing to the private sector if Medicare and Medicaid "underpay" the exorbitant rack rates set by the monopolists.

Merrill Goozner is the author of "The $800 Million Pill: The Truth behind the Cost of New Drugs."