Health Care Provider Market Power: Implications for Consumers

Overview

The lingering effects of the Great Recession slowed demand for health care services across much of the United States. But according to findings from the Center for Studying Health System Change's (HSC's) 2010 site visits to 12 nationally representative metropolitan communities, the economic downturn did remarkably little to curb the aggressive competition among dominant hospital systems for well-insured patients or to reduce their pricing power over private insurers.

Published as HSC Issue Brief No. 135 in May 2011 and authored by Laurie E. Felland, Joy M. Grossman, and Ha T. Tu, the study documented market dynamics across Boston, Cleveland, Greenville (S.C.), Indianapolis, Lansing (Mich.), Little Rock (Ark.), Miami, northern New Jersey, Orange County (Calif.), Phoenix, Seattle, and Syracuse (N.Y.). Nearly 550 interviews were conducted with health plan executives, hospital leaders, physician organizations, employers, benefit consultants, insurance brokers, community health centers, consumer advocates, and state and local policymakers between March and October 2010.

Dominant Hospitals Maintained Their Clout

Across the 12 communities, most large hospitals and hospital systems weathered the recession with strong bottom lines, even in hard-hit markets like Cleveland and Miami. Revenues dipped as privately insured patients struggled with out-of-pocket costs, shifted to Medicaid, or lost coverage altogether. Demand for elective procedures fell. But "must-have" hospitals — large systems and flagship institutions that health plans cannot afford to exclude from their networks — continued to negotiate payment rate increases from private insurers that outpaced their cost growth. These higher commercial rates offset losses on Medicaid and sometimes Medicare patients.

Smaller, independent hospitals and those serving predominantly low-income populations did not fare as well. Without bargaining leverage to secure rate increases, they absorbed cost pressures with fewer financial cushions. Many physician practices remained price-takers in negotiations with insurers, seeing flat or minimal payment increases even as practice expenses continued to grow.

Geographic Expansion and Hospital-Physician Alignment

Hospitals continued to compete aggressively for patients, with geographic expansion strategies becoming more widespread. Systems were building new capacity, acquiring existing providers, and opening outpatient centers and freestanding emergency departments in affluent suburbs and growth areas to capture well-insured patients and referral streams. In Cleveland, Indianapolis, and Miami, hospital systems built networks of outpatient centers featuring physician offices, labs, imaging equipment, and urgent care clinics.

Hospital employment of physicians accelerated significantly since 2007, broadening from specialists to include primary care physicians across many markets. Hospitals viewed physician employment as a way to capture referrals, build service lines, and position themselves for new payment models like accountable care organizations. Physicians, facing financial pressures and growing uncertainty about the future under health reform, were increasingly seeking the stability of employment in larger organizations. While some markets like Cleveland and Greenville were nearing saturation in hospital-physician alignment, others like northern New Jersey and Miami were still in the early stages.

Premium Increases and Consumer-Driven Plans

Large provider rate increases were generally passed through to employers as premium hikes, intensifying the cost pressures of the recession. Steep premium increases drew regulatory scrutiny in several states, with Massachusetts and New York imposing rate review on individual and small-group market plans in 2010. Observers noted that to have a meaningful impact on costs, regulators would need to address underlying provider payment rates rather than just insurer premiums — though mustering political will to curb rates at prominent hospital systems proved difficult.

Consumer-driven health plans (CDHPs) with high deductibles saw significant growth across most markets, often starting from a negligible base. In Boston, CDHPs reached 15 percent of commercial enrollment and half of small-group enrollment by 2010. But the broader consumerism movement lagged behind. Tools providing actionable, provider-specific price and quality information remained limited, and public awareness and use of available transparency tools was low. Many employers adopted CDHPs purely for premium savings rather than to promote genuine consumer engagement in care decisions.

Narrow Networks and Benefit Redesign

Limited-network and tiered-network products made headway in the individual and small-group markets in some communities, though they had not gained traction among large employers. Blue Cross Blue Shield of Massachusetts took a notable approach by offering products with hospital tiering in Boston, imposing large out-of-pocket penalties for using higher-cost hospitals, including the flagship facilities of Partners HealthCare System. Reports indicated that about one-third of individual and small-group accounts renewing in early 2011 switched to one of these tiered products.

Wellness programs also proliferated, spreading beyond products demanded by large self-insured employers to target smaller group segments. Prevention and wellness components had become standard in most commercial products, though actual employer adoption of more comprehensive wellness products remained modest, particularly among cost-constrained small businesses.

The Safety Net Under Pressure

The recession pushed more people toward safety net providers at a time when state and local governments could least afford to support them. The share of the population that was uninsured or on Medicaid ranged from about 22 percent in Boston to 48 percent in Miami. Federal stimulus funding through the American Recovery and Reinvestment Act (ARRA) helped shore up the safety net, enabling new federally qualified health centers (FQHCs) to open in five communities and providing grants for expanded capacity at existing centers.

ARRA's Medicaid maintenance-of-effort requirements prevented states from cutting eligibility, which indirectly helped both hospitals and health centers by keeping patients insured. However, free clinics that were ineligible for federal grants depended on private donations and volunteers, and some saw support decline. Several states cut optional Medicaid benefits for adults, reducing access to dental, mental health, and vision services for low-income populations.

Bracing for Health Reform

Hospitals, physicians, and insurers generally viewed the coverage expansions under the Affordable Care Act favorably, but all expressed anxiety about protecting revenues as reform provisions phased in. Providers worried that primary care physician supply, already tight in some markets, would be insufficient to handle additional demand from newly insured patients, particularly if payment rates remained low. Hospitals and large physician groups were exploring accountable care organizations and other risk-based payment approaches, but in most markets the early reaction was increased anxiety about payment adequacy.

Safety net providers were especially concerned about whether support would continue for people who remained uninsured after the coverage expansions scheduled for 2014. The Congressional Budget Office estimated that undocumented immigrants would account for one-third of the 23 million people expected to remain without coverage, and providers in communities with large immigrant populations — Orange County, northern New Jersey, and Miami — worried that public and private funding for the uninsured could shrink as a result.

About HSC

The Center for Studying Health System Change conducted site visits to 12 nationally representative communities every two to three years as part of the Community Tracking Study (CTS). In each community, researchers interviewed representatives of major hospital systems, private insurers, physician organizations, employers, and other stakeholders. HSC was a nonpartisan policy research organization based in Washington, D.C., affiliated with Mathematica Policy Research.

Sources and Further Reading

Health Affairs — Peer-reviewed journal of health policy thought and research.

Kaiser Family Foundation — Health Costs — Data on health spending, premiums, and employer-sponsored insurance.

Commonwealth Fund — Research on health system performance, access, and equity.

Robert Wood Johnson Foundation — Health policy research and programs.

FTC — Health Care Competition — Federal enforcement actions on health care market competition.