Hopes Dim for More Competition

Community Report | By the Center for Studying Health System Change

Across many of the communities HSC studied, expectations that market competition would drive down health care costs and improve quality had largely gone unfulfilled. The competitive dynamics that policy makers and market theorists anticipated -- where health plans, hospitals and physician groups would compete aggressively on price and quality for employers' and consumers' business -- had failed to develop in most local markets.

Market Consolidation Reduces Competitive Pressure

Hospital mergers and acquisitions had reduced the number of independent competitors in many markets to a point where meaningful price competition was difficult to sustain. Health plan consolidation followed a similar pattern, with a handful of large insurers dominating most local markets. In these concentrated environments, hospitals gained pricing leverage over health plans, and health plans in turn passed cost increases on to employers and consumers through higher premiums. The resulting market structure left employers with few alternatives and limited bargaining power.

The Managed Care Backlash

The consumer and provider backlash against managed care restrictions during the late 1990s had weakened the primary mechanism through which health plans had previously constrained costs. Plans that once limited provider networks, required referrals for specialist visits and used utilization review to control spending had loosened these controls in response to market pressure. The shift toward broader networks and fewer restrictions meant that health plans had fewer tools to negotiate lower prices or manage utilization, contributing to the return of rapid premium growth.

Employer Response and Consumer Impact

Faced with double-digit premium increases and limited plan competition, employers adopted a familiar set of responses: raising employee premium contributions, increasing deductibles and copayments, reducing the scope of covered benefits and, in some cases, dropping coverage altogether. Small employers were hit hardest because they had the least bargaining leverage and the fewest options for self-insurance. The cost burden increasingly shifted to workers and their families, many of whom were ill-equipped to absorb it.

Structural Barriers to Competition

Several structural features of health care markets made genuine competition difficult to achieve. Health care was a local product -- patients generally needed to receive care from nearby providers, limiting the geographic scope of competition. Information asymmetries between providers and consumers made it hard for patients to comparison-shop on either price or quality. Certificate-of-need laws and other regulations restricted market entry in some states. And the complexity of insurance products made it difficult for employers and consumers to make informed choices among competing plans.

The cumulative picture from HSC's community studies was one of diminishing prospects for competition-driven cost containment in most local health care markets. Without external policy interventions -- whether through regulation, payment reform or structural changes to how health care was organized and delivered -- market forces alone appeared insufficient to control costs.

Sources and Further Reading

This report was published by the Center for Studying Health System Change as part of the Community Tracking Study, funded by the Robert Wood Johnson Foundation.