Over the last several years, most of the blame for the dramatic increase in healthcare costs has been directed towards the health insurance industry. Proponents of this view claim that unchecked consolidation in the health insurance industry has created “dominant” insurers in many states, resulting in a decrease in insurer competition that has permitted insurers to increase insurance premiums to insureds. A recent Rand Corporation study, however, takes a different view. The principal cause of the increase in healthcare costs has been dominant hospitals, not dominant insurers, the report claims, and large insurers have been able to act as a check on the ability of large hospitals to increase their charges for covered services.
Examining hospital cost data from the period 2001-2004, the Rand report suggests that insurer consolidations have had a positive effect for consumers, because larger insurers have been more successful at thwarting hospital price increases. Specifically, the report indicates that in cities in which the fewest number of health insurers operate, insurers pay, on average, 12 percent less for hospital services than those in cities in which many insurers operate. Based upon this data, the report’s author, economist Glenn Melnick, concludes that “As long as there is enough competition to keep health plans honest, the consolidation [of health insurers] has a good result on [hospital] prices” for consumers. On the other hand, Melnick finds that where a hospital is “dominant,” the hospital is more likely to have successfully pushed through price increases for its services.
Accordingly, in a press release accompanying the report, Melnick concludes that “If policymakers are interested in lowering costs they should find a way to restore competition among hospitals,” and that permitting providers (hospitals, physicians, etc.) to act collectively, as contemplated by the Affordable Care Act, may actually increase, rather than decrease, healthcare costs. Melnick’s views are clearly not in the majority at the moment. Indeed, a September 9 hearing of the House Ways and Means Health subcommittee on healthcare costs focused almost exclusively on the impact of health insurer consolidation on costs, not on the impact of provider consolidation. That being the case, whether Melnick’s report will gain much attention, or have an impact on this debate, remains to be seen. Stay tuned.