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| The Way to Contain Health Care Costs | The Way to Contain Health Care Costs |
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| THE architects of the Affordable Care Act counted on competition in the health insurance market to keep costs down and quality high. While the law has accomplished many of its goals, its vision of a more competitive insurance market seems to be fading. | |
| The nation’s second-largest health insurer, Anthem, is poised to acquire Cigna, the fourth- largest. Aetna, the third-largest insurer, is seeking to acquire Humana, the fifth-largest. If approved by the Justice Department, these mergers would produce companies controlling about 35 percent of the health insurance market. These mergers would likely leave that market with far fewer competitors — a disappointing result for those who hoped it would increase “choice and competition.” Yet our research suggests that this apparent failure obscures a potential path to success, one that lies between competition and a fully regulated market. | |
| One reason behind the mergers is continued consolidation among hospitals and physician groups. From 2000 to 2013, the number of hospitals that were part of multisite health systems increased by 25 percent. More doctors are working for hospitals or for practices partly owned by hospitals; today, fewer than 20 percent of doctors are in solo practice. As provider organizations become larger, they gain more leverage in reimbursement-rate negotiations with insurers. To re-establish the bargaining balance between providers and insurers, insurers argue that they too must also get larger. | One reason behind the mergers is continued consolidation among hospitals and physician groups. From 2000 to 2013, the number of hospitals that were part of multisite health systems increased by 25 percent. More doctors are working for hospitals or for practices partly owned by hospitals; today, fewer than 20 percent of doctors are in solo practice. As provider organizations become larger, they gain more leverage in reimbursement-rate negotiations with insurers. To re-establish the bargaining balance between providers and insurers, insurers argue that they too must also get larger. |
| Our recently published research comparing New York and California, as well as previous analyses, suggest that there’s truth to the insurers’ argument. Consolidation in provider markets does raise health care prices. Insurer consolidation does reduce the prices paid to hospitals and physicians. Without further intervention, however, those price reductions don’t get passed along to consumers. | Our recently published research comparing New York and California, as well as previous analyses, suggest that there’s truth to the insurers’ argument. Consolidation in provider markets does raise health care prices. Insurer consolidation does reduce the prices paid to hospitals and physicians. Without further intervention, however, those price reductions don’t get passed along to consumers. |
| Fortunately, the health care law offers a way out of this cycle. Under the act, states have some flexibility in designing their marketplaces. States could, for instance, either accept all insurers who seek to participate or select a limited number to sell coverage. New York chose the first course, permitting all willing insurers to join; California chose the second, selecting 12 of the 32 insurers that initially showed interest. | Fortunately, the health care law offers a way out of this cycle. Under the act, states have some flexibility in designing their marketplaces. States could, for instance, either accept all insurers who seek to participate or select a limited number to sell coverage. New York chose the first course, permitting all willing insurers to join; California chose the second, selecting 12 of the 32 insurers that initially showed interest. |
| This choice was critical because Covered California, the state’s marketplace, used its leverage in selecting plans to keep initial premiums low. Before the marketplace opened, Covered California calculated how high premiums would need to be to cover the risks of covered populations and still generate a 2 percent profit for the insurers. California used these targets to select which insurers would be permitted to enter the market in the initial round. Then the state made a promise: Among those bidding for the first round, only those health plans selected would be permitted to offer plans for three years, except under unusual circumstances. | |
| California also went further than New York in standardizing coverage. Under the Affordable Care Act, insurers in all marketplaces must offer a defined set of “essential health benefits” in all plans, and may offer plans at four coverage levels: platinum, the most comprehensive and expensive plans, followed in descending order of cost and coverage benefits by gold, silver and bronze. California went beyond this standardization by requiring that within each coverage level, all insurers offer the same deductibles and cost-sharing, and cover identical benefits. This made it easier for consumers to shop on price alone, rather than allowing insurers to obscure higher prices through complex and opaque benefit designs. | California also went further than New York in standardizing coverage. Under the Affordable Care Act, insurers in all marketplaces must offer a defined set of “essential health benefits” in all plans, and may offer plans at four coverage levels: platinum, the most comprehensive and expensive plans, followed in descending order of cost and coverage benefits by gold, silver and bronze. California went beyond this standardization by requiring that within each coverage level, all insurers offer the same deductibles and cost-sharing, and cover identical benefits. This made it easier for consumers to shop on price alone, rather than allowing insurers to obscure higher prices through complex and opaque benefit designs. |
| New York, by contrast, permitted insurers to offer not just standard plans, but also alternative plans with different cost-sharing and benefit designs. | New York, by contrast, permitted insurers to offer not just standard plans, but also alternative plans with different cost-sharing and benefit designs. |
| When we examined the two states, we found that the effect of insurer competition differed greatly. In both states, areas with more hospitals had lower premiums compared with areas with fewer hospitals. But in New York, areas with fewer insurers had higher premiums, suggesting that insurers kept the benefits of greater bargaining power for themselves. | When we examined the two states, we found that the effect of insurer competition differed greatly. In both states, areas with more hospitals had lower premiums compared with areas with fewer hospitals. But in New York, areas with fewer insurers had higher premiums, suggesting that insurers kept the benefits of greater bargaining power for themselves. |
| In California, by contrast, areas with fewer insurers also had lower premiums. Why? With initial premiums set at modest but adequate levels, and a vibrant marketplace, there was no need to further threaten insurers who might consider large premium increases. If an insurer tried to raise its premiums too far, consumers could easily shop among the restricted set of insurers for an identical product and switch to an alternative plan. Even in areas with fewer insurers, competition was sufficient to keep cost growth down. | |
| The lesson here is that, especially in a health care system that is becoming more concentrated, competition and regulation can work together. | |
| Other states are getting into the act. Rhode Island has given its Department of Insurance authority to limit the price increases of inpatient and outpatient services; Massachusetts and Colorado have commissions that monitor costs and recommend action to keep increases in health care under control. | |
| Over time, we will learn more about how these alternative designs work. But one point is already clear: The choice between regulation and competition is a false one. To best manage our health care system, we will need both. | Over time, we will learn more about how these alternative designs work. But one point is already clear: The choice between regulation and competition is a false one. To best manage our health care system, we will need both. |