“Health care arms race:” Payers, providers scale up to boost negotiating power

Last year, the head of California’s health benefit exchange and a health economist opined that consolidation among health plan issuers offsets the urge to merge that’s also taking occurring among health care providers. A rough balance of market power between payers and providers will benefit buyers of health insurance, argued Peter V. Lee, executive director of Covered California and Victor R. Fuchs, emeritus professor of health economics at Stanford University. The enhanced market power of bigger plan issuers would exert pricing pressure to hold down provider fees, they asserted.

The primary rationale of the Lee/Fuchs position is the Patient Protection and Affordable Care Act’s requirement that individual and small group health plan issuers must devote at least 80 cents of every premium dollar to paying providers (85 cents for large group plans) and care quality improvements. That will force health plans to find ways to hold down health care costs since they are statutorily limited in terms of what they can keep for themselves, Lee and Fuchs contend.

The U.S. Department of Justice holds a far different view. It filed legal challenges last week to block proposed mergers of Anthem and Cigna and Aetna and Humana on antitrust grounds, contending the resulting market consolidation would harm market competition. Meanwhile, The Sacramento Bee editorialized that while it sympathizes with insurers looking for negotiating leverage to counter a similar consolidation among providers, it is concerned about the prospect of a “health care arms race” that would create megaliths on both the payer and provider sides, giving them enormous market power.

The rationale for preserving competition is to hold down prices consumers pay. Fewer sellers in a given market means consumers have less to choose from, lessening the deterrent to charge more since higher prices could mean consumers going to a competitor that charges less. The problem however as the health care market tends toward oligopoly (few sellers, many buyers), it offers a natural advantage to sellers. In an oligopolistic market, it’s not in any one seller’s interest to significantly undercut the other guy since competitors, like them, are big by definition and have staying power. They can ride out a competitor’s lower pricing and know that unless the competition has some unfair cost advantage, they can offer significant price discounts for only so long before they lose money or go out of business. Notably, health plans are amplifying the oligopoly effect on the provider side. As health plan networks narrow, consumers have fewer and fewer providers from which to choose.

Back to the Lee/Fuchs argument on the Affordable Care Act’s minimum loss ratio rule serving a forcing function to keep the lid on rising health care costs. In the first post on this blog in February 2010, Veteran Sacramento-based journalist and policy wonk Daniel Weintraub pointed out that it won’t necessarily result in lower premium rates for consumers. If health plan issuers devote 80 or 85 percent of premium dollars to care and care improvements as required under the Affordable Care Act, any increase in overall health care costs still gets proportionally passed on to consumers as the size of the overall health care cost pie grows. Similarly, so does the pot of premium dollars representing the 15 or 20 percent health plan issuers set aside to cover overhead and profit as underlying health care costs continue to ratchet upward.


Need a speaker or webinar presenter on the Affordable Care Act and the outlook for health care reform? Contact Pilot Healthcare Strategies Principal Fred Pilot by email fpilot@pilothealthstrategies.com or call 530-295-1473. 

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Frederick Pilot

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