Health care's dilemma: Competition or collaboration?

By Steven Pearlstein
Washington Post Staff Writer
Tuesday, November 23, 2010; 11:13 PM

These days, most health reformers can agree about two things.

They believe, based on pretty good evidence, that growing concentration among insurers, hospitals, pharmacy benefit managers and drug companies helps explain why health-care costs are rising faster than the cost of everything else.

Insurance companies merge to gain greater clout in negotiating with hospitals and other providers, then the providers merge to gain leverage over the insurers. At any one time, in any one market, one side or the other might have the upper hand, but there is little evidence that the benefits from this endless cycle of consolidation actually flow to those of us who ultimately pay the bills.

The other thing most reformers believe is that the best way to deliver affordable quality care is through organizations such as the Mayo Clinic, which coordinate physician and hospital services under one roof and are paid not on the basis of how many procedures they do but on the quality of the care they provide. These organizations tend to rely on salaried doctors, make extensive use of electronic medical records and evidence-based "best practices," and, in effect, take on much of the risk traditionally borne by insurers. Several provisions of the new health-care reform law encourage the formation of such "accountable care organizations."

Here's the dilemma: The only way for the health-care industry to move toward accountable care is to further accelerate a process of consolidation that has already reduced competition and increased market power. Hospitals are once again busily buying up physician practices and outside laboratories that used to compete with them, incorporating them into their "systems." And independent physicians who used to compete with one another are quickly merging into multi-specialty practices, offering a full range of services to large blocks of patients for fixed annual fees - an arrangement known as "capitation."

You can see where all this could lead in any community where one provider group or another has already gained enough market power that it can pretty much dictate prices to insurers.

In Northern Virginia, for example, the Inova hospital chain is so dominant that no insurer can remain competitive if it tries to exclude Inova from its network of approved providers, despite Inova's premium prices. Now imagine what would happen if Inova decided to form an "accountable care organization" by buying a large, respected pediatric practice or a prestigious group of cancer surgeons, or by entering into an exclusive agreement with the imaging centers with which it now competes.

Such a move might bring patients more-efficient and more-effective care. But there's little doubt that it would also further enhance Inova's already considerable market power while putting smaller hospitals, physician practices and labs at an even greater competitive disadvantage. Moreover, if any cost savings were to result from this consolidation, there's little evidence that Inova or any other hospital organization would voluntarily pass those savings on in the form of lower premiums.

These fears are not just theoretical. Because of its early embrace of "managed care," California is already farther along the path toward this new model of health care. And a study published earlier this year by Health Affairs found that this kind of consolidation is one reason that California has some of the higher health costs and health premiums in the nation. In some cases, private insurance companies pay "must-have" hospitals and powerful physician groups twice the rate they are paid by Medicare, with double-digit annual rate increases now routine.

On the other hand, at a recent conference called to discuss the antitrust implications of consolidated care organizations, Jon Leibowitz, chairman of the Federal Trade Commission, cited the progress made in Grand Junction, Colo., in the years since his agency filed an antitrust suit against doctors for banding together to negotiate fees with insurers - in effect, agreeing not to compete against each other on price. In settling the suit, the FTC allowed the doctors to engage in limited collaboration, but only in ways that could lead to cost savings and better medical care. As a result of their efforts, Leibowitz reported, Grand Junction now has some of the lowest health-care costs and best medical outcomes in the country.

I doubt there is an easy way to resolve this policy conflict. For the next few years, hospitals, physician groups and insurers probably need some latitude to experiment. At the same time, it may be necessary to exclude from those early experiments the hospital chains and physician groups that already have achieved market power and are apt to try to leverage it to further advantage.

Moreover, to the degree that we let providers collaborate rather than compete against one another, we also may have to find new "all-payer" mechanisms, as they are called, that would allow insurers to collectively negotiate rates with hospital chains and accountable-care organizations. Market power vs. market power.

The one thing we surely ought to have learned by now is that health care does not operate like most other markets - and never will. Competition will always be imperfect, information will always be asymmetrical, and we'll never eliminate the inherent conflict of interest of having doctors and hospitals decide how much of their services we should consume.

In such a market, government may be required to step in with more direct regulation and competition management than traditional antitrust rules now provide.

On a personal note, I'm about to become a college professor. Starting next fall, I'll be the Clarence J. Robinson professor of public and international affairs at George Mason University, teaching undergraduate courses on the basic principles of economics, economic policy and the media. I'll also continue to write this column once a week and moderate The Post's On Leadership Web site. I've been at The Post nearly 23 years, during which I've had great gigs as an editor, reporter, foreign correspondent and columnist. Now, as I head into my 60s, George Mason has offered me the opportunity to teach some of what I've learned to its large, energetic and diverse student body. The new schedule won't start until next summer, which is a good thing, since I have lots of books to read between now and then.

Have a wonderful Thanksgiving. The column resumes next week.

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