Can Market Competition Cure an Ailing Health System?

On March 12, 2004, the Center for Studying Health System Change (HSC) and Health Affairs convened a joint conference in Washington, D.C. to address a question that had grown increasingly urgent: was market competition capable of fixing the American health care system's mounting problems with cost, quality, and access? The conference brought together HSC researchers, health care executives, and policy experts to discuss findings from the fourth round of HSC's Community Tracking Study site visits to 12 nationally representative communities. The answer that emerged across every panel was sobering -- market forces, as they were operating in American health care, were failing to deliver the results that competition's advocates had long promised.

A Conference Born from Field Research

The conference grew out of something unplanned. After completing their site visits across the 12 communities -- which ranged in size from Boston to Lansing, Michigan -- HSC researchers noticed a consistent pattern in their interviews with employers, health plans, hospitals, and physician organizations. Respondents from nearly every market and every segment of the health care system expressed deep unease about the direction things were heading. They knew how to protect their own organizations in the short term, but many doubted that the system as a whole could sustain the strategies everyone was pursuing.

HSC Vice President Len Nichols, who presented the core findings, described this sentiment with a composite quote drawn from multiple respondents: "I know how to protect myself. I'm not sure the system can stand me protecting myself that much longer, but I don't know what else to do." That tension -- between individual self-preservation and collective unsustainability -- formed the thread running through the entire day's discussion.

Why Market Competition Was Falling Short

Nichols identified four major barriers preventing competition from delivering efficient health care. The first and most fundamental was provider market power. The managed competition model of the early 1990s had assumed that excess capacity among hospitals and physicians would give health plans leverage to force providers toward greater efficiency. But consolidation among hospitals over the preceding decade, combined with the consumer backlash that forced plans to maintain broad provider networks, had shifted bargaining power decisively toward providers. Hospitals with strong geographic positions, brand recognition, or affiliations with larger systems could demand higher payment rates and more favorable contract terms. Plans that tried to exclude expensive hospitals from networks found that employers and consumers would not accept the resulting products.

The second barrier was the information deficit. Effective competition required that buyers -- whether employers, health plans, or individual patients -- have access to meaningful data on the price and quality of medical services. In 2004, such information was almost entirely absent from the health care marketplace. Patients had little way of knowing what a hospital admission or surgical procedure would cost, much less how the quality of care at one facility compared with another. Without this information, price-based competition could not function, and providers faced minimal pressure to improve efficiency or demonstrate superior outcomes.

Third, the structure of health insurance itself undermined competitive dynamics. Because insurance shielded patients from most of the cost of care, consumers had little incentive to seek out lower-cost providers or question whether a recommended test or procedure was worth its price. Payment systems that rewarded providers for delivering more services rather than better outcomes reinforced this dynamic. The combination of insured patients, fee-for-service payment, and limited effectiveness information created a market where the normal mechanisms of competition -- price sensitivity, comparison shopping, reward for value -- barely operated.

Fourth, the competitive behavior actually occurring in health care markets was often directed toward the wrong goals. Rather than competing on overall cost-effectiveness or clinical quality, hospitals and physician groups were competing most fiercely for high-margin specialty services -- cardiac care, orthopedics, cancer treatment. This arms race diverted capital investment toward service lines that were already well supplied while leaving chronic shortages in areas like emergency care, primary care, and health information technology.

Employer and Health Plan Perspectives

The conference's first panel, moderated by Health Affairs editor John Iglehart, explored how employers and health plans experienced competition in their local markets. HSC researchers Robert Hurley of Virginia Commonwealth University and Sally Trude of HSC presented findings, while health care executives Christy Bell of Horizon Blue Cross Blue Shield in Newark, New Jersey, and David Garratt of William M. Mercer in Cleveland offered ground-level perspectives.

A key finding was that employers increasingly recognized their dependence on the local health care industry for jobs and economic vitality. One employer coalition leader told HSC researchers that while employers used to think they could simply pressure hospitals to lower prices, they had come to understand that aggressive cost-cutting could damage their local economy. This mutual dependence made confrontational cost-containment strategies politically and economically risky.

Health plans, for their part, found themselves caught between employers demanding lower premiums and providers demanding higher payment rates. The managed care backlash had stripped plans of their most effective cost-control tools -- narrow networks, gatekeeping, prior authorization -- and no comparably effective replacement had emerged. Plans were experimenting with tiered-provider networks, consumer-driven high-deductible designs, and incentive-based provider payment programs, but these products were still in early stages and had attracted limited employer and consumer interest.

Hospital and Physician Perspectives

The second panel, moderated by Paul Ginsburg, turned to the provider side. HSC researcher Mai Pham and Northwestern University's David Dranove from the Kellogg School of Management presented research findings, while Nancy Auer of Swedish Hospital in Seattle and David Delaney of Community Health in Indianapolis offered practitioner viewpoints.

The discussion highlighted how provider competition was driving a different kind of arms race than policymakers had hoped for. Instead of competing by offering better value to patients and purchasers, hospitals and medical groups were investing in profitable specialty facilities and equipment, recruiting top specialists, and expanding into lucrative service lines. The growth of physician-owned specialty hospitals was a particularly contentious topic, as these facilities competed with full-service hospitals for profitable elective cases while being exempt from the EMTALA-driven obligation to maintain emergency departments.

Dranove, an economist who had studied health care competition extensively, argued that competition in health care often produced results opposite to what economic theory predicted in other industries. In markets where hospitals had consolidated into dominant systems, the resulting market power led to higher prices rather than the efficiency gains that mergers typically promised. And even in markets with multiple hospital systems, competition tended to manifest as investment in high-profile clinical programs and amenities rather than as price competition or quality differentiation.

Policy Perspectives and the Search for Solutions

The afternoon's policy panel, moderated by Nichols, featured Jack Meyer of the Economic and Social Research Institute, Bill Scanlon of the General Accounting Office, Sarah Mathias of the Federal Trade Commission, and Marilyn Dahl of the New Jersey Department of Health and Senior Services. The discussion addressed what policy tools might redirect competitive forces toward better outcomes.

The FTC perspective centered on antitrust enforcement as a way to prevent excessive provider consolidation, which the agency viewed as a significant contributor to rising prices. But panelists acknowledged that antitrust policy alone could not fix a market where the fundamental conditions for effective competition -- transparent pricing, quality measurement, and cost-sensitive purchasing -- were largely absent.

The state-level perspective from New Jersey highlighted the regulatory challenges of managing a health care market where hospital consolidation, specialty facility competition, and uncompensated care burdens all intersected. State regulators faced the challenge of balancing consumer access, provider viability, and cost containment with limited tools and political capital.

Three Competing Visions

Nichols framed the broader policy debate in terms of three competing visions for health care reform. The first, gaining momentum at the time, was individual empowerment -- giving consumers more direct control over health care spending through mechanisms like health savings accounts and high-deductible insurance plans. The second, at the opposite end of the spectrum, was a single-payer system where the government served as both buyer and regulator. The third was managed competition -- a middle path where health plans competed on price and quality under rules set by government and employers.

None of these visions commanded consensus at the conference or in the broader policy world. The managed competition model of the 1990s had been tried and found politically unsustainable. Individual empowerment depended on price and quality information that did not yet exist. Single-payer approaches faced deep political opposition. The conference ended without a clear prescription, reflecting the state of the health policy debate more broadly.

Looking Back from the Present

The 2004 conference captured a health care system at an inflection point. The managed care era's cost-containment gains had evaporated, providers had regained pricing power, employers were struggling with relentless premium increases, and the ranks of the uninsured continued to grow. The conference's central finding -- that competition as practiced in American health care was not producing efficient, equitable, or high-quality outcomes -- would become a recurring theme in health policy discussions for years to come.

Many of the ideas discussed at the conference -- better price transparency, quality measurement, payment reform, and more effective antitrust enforcement -- would eventually become central elements of subsequent reform efforts, including provisions of the Affordable Care Act. But in March 2004, those reforms were years away, and the immediate reality was a market where competition was generating plenty of activity but precious little progress toward the health system goals that everyone claimed to share: affordable access to high-quality care.

Sources and Further Reading

Agency for Healthcare Research and Quality — Federal agency for health care quality research.

CMS — Quality Initiatives — Federal quality measurement and improvement programs.

Health Affairs — Peer-reviewed health policy research.

Robert Wood Johnson Foundation — Health policy research and programs.

Commonwealth Fund — Research on health care quality and system performance.