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Economist: Hospital, Payer Consolidation Hurting Market

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Drops in the number of major hospitals and major health insurers seem to contributing to increases in the cost of health coverage, Martin Gaynor told lawmakers today.

Gaynor, an economist at Carnegie Mellon University in Pittsburgh, appeared at a hearing on health care industry consolidation organized by the House Ways and Means Committee’s health subcommittee.

David Balto, a senior fellow at the Center for American Progress Action Fund, Washington, testified that the Federal Trade Commission has been particularly aggressive about physicians’ efforts to team up to negotiate prices, even though the federal government has never even tried to Slice of the piedemonstrate that physicians have managed to gain enough clout to have “market power.”

In theory, forcing physicians to negotiate with payers on their own might be good for the payers’ profitability, but, in reality, federal regulators almost never try to block mergers or acquisitions involving physician practices, and doctors’ inability to team up in negotiations contributes to fragmentation of care, Balto testified, according to a written version of his remarks posted on the Ways and Means website.

In addition, “autonomous providers are too weak to bargain with insurance companies, leading to increasingly reduced reimbursement rates and assembly line health care,” Balto said.

If doctors could team up, they could be advocates for patients when “insurance companies cross the line and engage in abusive and deceptive conduct,” Balto said.

Gaynor said data on the effects of physician practice consolidation on health care markets is sparse.

In 2008, one team looked at a measure of market concentration – the Herfindahl-Hirschmann Index (HHI) – for physician practices.

HHI values range from 0 for a perfectly competitive market to 10,000 for a market in which one monopolistic firm controls the entire market.

The team found that a 1% increase in the HHI went hand in hand with a 1% to 4% increase in physician prices, Gaynor said.

The team finds that “the health insurer HHI has no statistically significant impact on physician prices,” Gaynor said.

Gaynor also talked about the effects of mergers on hospital prices.

One team has reported this year that a hospital merger in the northern suburbs of Chicago led to a 20% increase in prices, and another researcher has found that a California hospital merger led to price increases of 28% to 41%.

The vast majority of researchers conducting similar hospital merger pricing studies have found that the mergers led to increases of 10% or more, Gaynor said.

Gaynor noted that Leemore Dafny of Northwestern University has found that the 1999 merger of the health insurance operations of Aetna Inc., Hartford (NYSE:AET), and Prudential Financial Inc., Newark,

N.J. (NYSE:PRU), probably increased health insurance premiums about 7%, reduced physicians’ earnings by about 3% and increased nurses’ earnings by about 0.6%, because of moves to try to cut costs by substituting nurses for physicians.

In the Medicare supplement insurance market, two carriers dominate the market. A 1% increase in the percentage of the business that those two firms control in a particular market seems to correlate with a 0.26% increase in premiums, Gaynor said, citing research by Amanda Starc of Harvard University.

Gaynor recommended against viewing letting providers gang up as a cure for insurers ganging up, or letting insurers gang up as a cure for providers ganging up.

“Having market power on both sides does not necessarily improve matters,” Gaynor said. “It can do so, but it can also make things worse. If the only way firms have to increase their bargaining power is by restricting the quantity they sell, then countervailing power will make things worse than market power on only one side of the market.”

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