What insurers do (and don’t do) with market power

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.”

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.

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.