Can ‘Medicare For All’ Help Address Spiraling Healthcare Prices?
Far more attention has been devoted to the ways in which industry consolidation has driven up health costs than to proposals on how to remedy the situation. But the introduction of Medicare for All and Medicare for More bills—however dim their short-term prospects are—has changed the terms of the debate.
Here are the main facts about consolidation: As a handful of health insurers have become dominant in many markets, health systems have done likewise in order to maintain or improve their negotiating positions. That has proved to be an effective strategy in many cases. Even dominant health plans cannot do without the largest hospital systems in their areas.
A substantial body of research shows that health systems use their market power to raise prices. For example, a 2016 study found that hospital prices in California grew by an average of 76% per admission between 2004 and 2013. Prices at hospitals belonging to large, multi-hospital systems grew substantially more (113%) than prices paid to all other California hospitals (70%). By the end of the period, average prices per admission at hospitals in the largest systems exceeded prices at other hospitals by about $4,000, or 25%.
A recent RAND study found that that commercial insurers paid hospitals an average of 241% of Medicare rates in 2017. One interpretation of this data, the researchers said, “is that hospitals, especially ‘must-have’ hospitals, have used their negotiating leverage to extract unreasonable price concessions from health plans.”
Health systems have also integrated vertically with physicians as their practice purchases have accelerated in recent years. While hospitals offer a variety of explanations for employing physicians, the real reasons boil down to two: They want to lock up the doctors who refer patients to their facilities, and they want to make sure their competitors don’t lock up those same doctors.
Meanwhile, hospitals use their market power to negotiate higher commercial payment rates for their employed doctors. A study of claims data from commercial insurers found substantial differences between the prices negotiated by employed groups and private practices across the country.
Most important to hospitals is the downstream revenue generated by employed physicians. In 2016, the average net revenue that each employed doctor generated for her hospital was $1.56 million, up 7.7% from $1.45 million in 2013, according to physician search firm Merritt Hawkins. In 2019, the same company conducted a survey showing that independent and employed physicians generated an average of $2.38 million each for their affiliated hospitals.
What The Government Can Do
What all of this shows is that much of the growth in health spending can be attributed to industry consolidation. However, the Federal Trade Commission has tried to stop very few hospital mergers; and, as health economist Paul Ginsburg has pointed out, federal antitrust policy doesn’t directly address hospital acquisitions of physician practices. Even if the FTC were to suddenly take an interest in healthcare mergers and the courts were more disposed to rule against not-for-profit entities, consolidation has gone too far for antitrust regulators to have much effect.
My argument, in brief, is that the Medicare for All and Medicare expansion proposals create a new space for countering industry consolidation.
Obviously, if the U.S. adopted a single payer system, the government could set hospital fee-for- service payments or give each hospital a global budget. But if Medicare for All meant that hospitals would get paid at Medicare rates, both conservative and liberal experts say, many hospitals would be seriously damaged.
During the transitional period, states could curtail health systems’ market power by adopting “all-payer” models similar to those in Maryland and West Virginia. Under Maryland’s law, every insurer, including Medicare, Medicaid, and private health plans, pays uniform hospital rates negotiated between the state and the hospitals. In Ginsburg’s view, it would be impractical for other states to replicate this model, which Maryland introduced 40 years ago, because commercial rates are now so much higher than Medicare and Medicaid rates. A more feasible approach, he said, would be to emulate West Virginia, which sets only commercial insurance payments to hospitals. But in either case, an all-payer system would eliminate the ability of dominant health systems to extract higher rates from private payers.
To prevent hospitals from using their market power to obtain higher rates for their employed physicians, the government could simply prohibit them from employing doctors. This would not only curtail spending growth, but would also allow more physicians to form group practices and ACOs in which they could be incentivized to pursue value-based care. The incentive of hospital-employed doctors to emphasize value-based care will always be limited, because hospitals’ business model is based on filling beds, not emptying them.
But the states could enact stronger laws that prohibit hospitals from directly or indirectly employing doctors. It’s unclear whether most hospitals would be worse off economically if their medical staffs were independent rather than employed. Considering the losses that hospitals incur on their owned practices, some hospitals would benefit financially from divesting them. The hospitals’ main concern would be to prevent competitors from controlling their referring doctors. If no health system could employ physicians, that wouldn’t be a problem.
Considering the variability of states’ responses to the Affordable Care Act, it’s not likely that all or most of them would enact all-payer laws or corporate practice of medicine statutes that applied to hospitals. Realistically, only the federal government could make these things happen. Perhaps all-payer laws in some states—at first just for commercial plans–could help pave the way for a single-payer system under the gradualist scenario of Medicare for America.
In the current environment, there is no political will to make such radical changes. Congress would have the impetus and the popular support to move in this direction only if the country were transitioning toward a single payer system. But I believe that that day is coming, and when it arrives, it would be far better to eliminate the market power of hospitals than to reduce their revenues to the point where many of them could no longer function properly or would be forced to close.
Ken Terry is a veteran healthcare journalist and the author of Rx for Health Care Reform (Vanderbilt University Press, 2007). A version of this article, which originally appeared at The Health Care Blog, is adapted from a forthcoming book
