March 1, 2021
David Burda
Economics Policy System Dynamics

Can Competition Save Us from Higher Healthcare Prices?

In properly functioning markets, competition reduces prices and improves the quality of products and services. The dictum applies to healthcare as much as it does any other industry because healthcare is an industry like every other industry in terms of responding to economic incentives.

The problem, of course, in healthcare is that most markets don’t function properly. We get higher prices for little or no improvement in the quality of products and services that would justify the higher prices.

The challenge for policy makers is how to make healthcare markets function properly so care gets more affordable for patients and, at the same time, gets better for patients.   

A new report from researchers at the Rand Corp. compared the effect on hospital prices of three policy options—regulation, price transparency and competition. You can download the 89-page analysis from Rand here

I won’t bore you with the details or the methodology, which are only interesting to healthcare policy geeks like me, so I’ll get right to the point. Regulation beats competition and transparency when it comes to lowering the prices hospitals charge to commercial health plans for care to their enrollees.

Here’s the win, place and show, in 2018 dollars, from the report: 

  • Regulation would reduce hospital prices paid by health plans by $61.9 billion to $236.6 billion annually, depending on the level prices were capped above the prices that Medicare pays 
  • Competition would reduce hospital prices paid by health plans by $6.2 billion to $68.9 billion annually, depending on the level of decrease in market concentration 
  • Price transparency would reduce hospital prices paid by health plans by $8.7 billion to $26.6 billion annually, depending on level of shoppable services and employer intervention 

The reason regulation is so much more effective in reducing hospital prices is because it has a very short and direct line between cause and effect. This is how much more than Medicare you can charge. Boom.

It’s not that competition and price transparency don’t have the potential to be as effective. They do. But the line between cause and effect is long and anything but direct. The antitrust lawyers I know compare busting up an existing hospital merger to unscrambling eggs. You probably can do it. But who has time? The effectiveness of price transparency depends not only on shoppable services but consumer-minded and engaged patients, user-friendly transparency tools and incentives from employers and health plans. You might hit on or two of those but not all. 

At the same time, strict rate regulation at the state or federal level, though most effective according to the Rand analysis, likely won’t happen because the hospital lobby will fight it tooth and nail. It smacks of government-run, single payer healthcare, and opponents will brand it as the first step toward socialized medicine. It won’t fly politically.

What are we supposed to do if the three policy options outlined by Rand are unworkable? The answer gets back to the opening dictum in this blog post—functioning markets. What we need are regulatory interventions that make healthcare markets work better for consumers. Things like stronger and more nuanced antitrust enforcement, stronger oversight of anticompetitive behaviors, removing artificial barriers to competition for institutions and practitioners, and incentivizing new market entrants.

It may take the threat of rate regulation to do all those things and more. But so what? It’s time to do something about rising healthcare prices and the decreasing affordability of care for patients.

If you’d like to learn more on this topic, please read the following blog posts. We write about this topic all the time: 

Thanks for reading.

Stay home. Stay safe. Stay alive. The vaccine is coming. Really. Eventually. 

About the Authors

David Burda

Dave is 4sight Health’s biggest news junkie, resident journalist and healthcare historian. He began covering healthcare in 1983 and hasn’t stopped since. Dave writes his own column, “Burda on Health,” for us, contributes weekly blog posts, and manages our weekly e-newsletter and weekly podcast, 4sight Friday and 4sight Roundup. Dave believes that healthcare is a business like any other business, and customers—patients—are king. If you do what’s right for patients, good business results will follow. Follow Burda on Twitter @DavidRBurda and on LinkedIn.

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