Competition can’t rein in health care costs

Like many policy debates, there are two principal schools of thought regarding how to rein in health care costs, with many variations on the themes. One school believes that competition is key to bringing down health care costs, which we can achieve through price transparency and other means. The other believes that an all-payer system with negotiated prices is the way to go.

Because health care costs are growing so quickly, in a 2015 report, the National Academy for Social Insurance reviews the range of options for controlling costs. Spending growth for health care is projected to be 5.7 percent annually until 2023, way higher than the rate of inflation. By then, health care spending will account for about 19.3 percent of GDP.

Proponents of competition to bring down costs have little data to support their position. It’s hard to imagine how consumer choice would bring down costs because the health care market differs from other markets in three fundamental ways. First, insurance keeps people from making health care decisions based on price, as they do with other goods (although copays and deductibles can keep people from getting needed care altogether). Second, putting aside insurance, there’s precious little reliable health care data that allows people to make decisions based on price and quality that would drive competition. And, third, even with good data, we generally defer to health care experts to decide the services we need. Medical professionals are trained, and we lack the skills to know better.

Furthermore, commercial insurers are unable or unwilling to use their market power to rein in prices in meaningful ways. In fact, the Medicare managed care plans tend to piggy back on the prices Medicare has negotiated for health care services. As Wendell Potter explains, insurers drive profits by dropping unprofitable business lines not by bringing down prices.

To make matters worse, consolidation of provider markets has led to insurers having even less clout today than they’ve had in the past to drive down prices. Areas with consolidated provider markets have been shown to drive up prices 12 percent in a year.

The health care marketplace is always in flux, with new entrants, as well as mergers and acquisitions of companies, which often drives up prices. And, while these market shifts also may drive innovations, it can be hard to see the value. No commercial business worth its salt is prone to share its best practices with its competitors.

In sharp contrast, an all-payer or single-payer system, like Medicare, can both drive system change and control prices. Medicare is our most powerful tool for driving system-wide improvements in the health care marketplace. It can offer price and quality transparency. It also reins in prices through negotiated rates.  Some argue that if we extended Medicare to the entire marketplace it would disincentivize market winners and losers from innovating.  But, many innovations happening today are not public and not benefiting our health care system.

We would be smart to take a page from Medicare, along with the rest of the developed world, and implement policies that prevent big increases, let alone wild surges, in health care prices. For sure, these price increases feed the financial goals of the medical industrial complex, but the they do little to promote value in our health care system.