Making Price Competition Work

Part 1 of this two-part piece asked why Adam Smith’s “invisible hand” seems to be affected by a palsy that causes health care price competition to fail, especially when employers and employees select health plans. This part focuses on a second failure of price competition: when insurers build their networks. Our hearts don’t often bleed for health insurers, but it’s possible to feel a little sympathy as they struggle to assemble networks of the most cost-effective providers.

The insurers’ first problem is the data used to pick their preferred providers. Few carriers or PPOs have the analytical capability or the data base of the Dartmouth Atlas Project; most will be drawing conclusions from their own more or less limited claims data, along with possibly anecdotal perceptions of quality.

The insurers’ second problem is the need to include in their networks “essential” providers, like prestigious or sole community hospitals, or major specialist groups. These key providers are well aware that insurers will not want to alienate employers—or have gaps in their networks—and will set their prices accordingly. In the early days of managed care, insurers drove down prices by negotiating with subsets of providers, offering higher patient volumes in exchange for lower prices. It worked, right up until the big provider push-back against managed care in the 1990’s, when hospital mergers and amalgamation of specialist practices created quasi-monopolies that insurers are now unable to circumvent.

The insurers’ third problem is regulations restricting freedom to build their networks, enacted in many cases at the behest of provider associations and their supporters. Any willing provider, network adequacy, provider due process, freedom of choice, and point of service laws were often appropriate responses to the more egregious acts of managed care organizations, but sometimes were more clearly aimed at defending providers’ profits.  (Free market proponents will point out that GM would have been on the edge of bankruptcy years earlier if it had had to include every auto parts maker among its suppliers.)

The final insurer problem is the difficulty of network maintenance, which implies removing providers as well as adding them. Like the loss of a French chef’s Michelin star, removal from a major network may be seen as an attack on a provider’s competence, and can result not only in provider due process laws being invoked, but also legal and media campaigns designed to show the arbitrary nature of the insurer’s decision.   

As in Part 1, let’s suppose for one wildly optimistic moment that we could redesign our health care system without having to worry about the armies of lobbyists.

Let’s suppose that comprehensive provider performance data is available to insurers and the insured (which implies that January’s Appeals Court refusal to allow access to Medicare’s physician claims data would have to be reversed). Wouldn’t this help in creating best value networks –and identify physicians who best meet (or fail to meet) medical standards?

Let’s suppose that, to make life a little easier for insurers, the more egregious regulations limiting network design were eliminated. Wouldn’t removal of some of the restrictions on at least the top tiers of networks lead to lower premium rates?

Finally, let’s suppose that federal regulations on provider monopolies are changed to make the Justice Department’s health care antitrust guidelines less friendly to provider groups. Wouldn’t this give back to insurers some of the benefits of managed care that actually produced a (brief) reduction in health care costs in the mid-1990s?

Okay, enough threats. Providers and their lobbyists should be well able to defend themselves against the most alarming of these proposals. But, regardless of the supposed power of Adam Smith’s invisible hand, so long as health care costs continue to rise faster than GDP, providers and insurers need to fear the really BIG THREAT: government intervention in provider and insurer pricing—the same  as in other industrialized nations.

Roger Collier was formerly CEO of a national health care consulting firm. His experience includes the design and implementation of innovative health care programs for HMOs, health insurers, and state and federal agencies.

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