Competition in the U.S. Healthcare System?

With majorities in both houses of Congress and the presidency, Republicans are poised to put in place their long desired political agenda  to dismantle our governments’ obligations (they call it “interference”) in health care.  Getting rid of Obamacare (PPACA) and replacing it with the American Health Care Act is the beginning of this process. Their agenda rests on the faulty premise that “market-driven” competition in the U.S. healthcare system will lower costs and improve the quality of care.  Unfortunately, the economics that governs the buying and selling of health care is much more complex than the buying and selling of most other goods and services.  Therefore, when Republicans say “more competition in the U.S. healthcare system and less regulation will bring down costs”, they are applying free market assumptions that simply do not exist in the U.S. healthcare system.  Increased competition is simply not the magic pill for solving the lack of healthcare affordability in the United States.  This simplistic reasoning fails to acknowledge the pervasive commercialization (and its ramifications) that defines our healthcare system. Let’s briefly take a look at competition in the U.S. healthcare system.

Layers of Competition in the U.S. Healthcare System

Competition in the U.S. healthcare system occurs, or doesn’t occur, across many layers of private businesses.  These layers include the following:

  1. Competition within the U.S. Healthcare Delivery System
    1. Competition between healthcare providers of the same specialty (for outpatient services)
    2. Competition between hospitals
    3. Competition between other healthcare facilities (ambulatory surgical, physical therapy, rehabilitation, nursing homes, and hospice to name a few)
  2. Competition between health insurance companies
  3. Competition between companies that provide healthcare products (drugs, medical equipment, etc.)

Competition between healthcare product companies (layer 3 above) is different from the other two layers given above.  Healthcare delivery and health insurance companies compete in local marketplaces and healthcare product companies compete nationally.   Local marketplaces are diverse and, commercially speaking, some are more profitable than others (they contain higher concentrations of people with money to spend on health care). The more profitable marketplaces attract greater competition between all healthcare businesses.  Rural locations and areas with financially unfavorable demographics (e.g., inner cities with high density of poor people) do not find many healthcare businesses eager to compete for customers.

competition in the U.S. healthcare system

Who Are the Sellers and Buyers in Healthcare?

For any product or service sold, there are final buyers and often many layers of sellers that together contribute to the final product or service. In a competitive marketplace, each of the layers of sellers must deliver the best product at the lowest cost or they will lost buyers to those that do. In the figure below, I have drawn a simple diagram showing the sellers and buyers of healthcare products and services in the United States. I have highlighted the payers in the chain because they are a unique layer found only in the healthcare industry. Payers (including insurance companies) insulate the sellers of healthcare products and services from the end-users, the patients.

competition in the U.S. healthcare systemThe important observations to be made from the figure above are as follows:

  • If the U.S. healthcare system operated in a fully competitive environment, each of the layers above would have to deliver the best product at the lowest cost or suffer loss of buyers. (not the case)
  • Prescription drug companies do not have to show that their products deliver the best value, they simply have to convince enough doctors to prescribe them.
  • The healthcare delivery layer (in red) does not operate for the delivery of the best product/service at the lowest cost. Buyers do not demand it and therefore the businesses in this layer can concentrate on maximizing income and profits.
  • Payers (including insurance companies) insulate patients from the sellers of healthcare products and services.  This encourages patients to not seek healthcare value.
  • Patients may be the final end users of healthcare products and services but they lack information to judge best value. Their buying habits are controlled by payers and healthcare delivery businesses (primarily doctors).  Both groups keep information intentionally from patients.

Local Monopolies in Healthcare

No discussion of competition in the U.S. healthcare system would be complete with a discussion of local monopolies. When a business gains monopolistic control of a market (i.e., they are the only ones selling a product or service that people want or need), then they can charge whatever price they choose. When the product or service can mean life or death to a buyer, then the buyer will be willing to pay whatever the company demands. While our governments (federal and states) have anti-trust laws to protect consumers against monopolistic practices, their enforcement concentrates on mergers and acquisition activity that keeps out would-be competitors. These laws do not address the pricing power of monopolistic health care systems and medical groups that operate in local marketplaces.

Unlike the healthcare product business, the healthcare delivery and health insurance businesses are highly localized. Healthcare consumers largely use the services of healthcare professionals, hospitals, and other medical facilities near their homes whenever possible. The local population is therefore a captive group of customers for local healthcare delivery businesses. If there are shortages of specific healthcare delivery businesses (e.g., a medical specialty like orthopedic surgeons) in local marketplaces, then these businesses do not have to “compete” for customers—they can name whatever prices the market will bear. Anti-trust laws are not applied to this monopolistic situation because no orthopedic surgeons would come into a community where the delivery of better value is not rewarded and there are plenty of other communities where his/her services are in short supply. When outside forces (like our government) does not demand the delivery of healthcare value, these businesses can concentrate on maximizing income ahead of all else.

In healthcare delivery and health insurance, these local monopolistic conditions have prevailed for decades throughout most of the United States because of a shortage of doctors, local demographic conditions, and the commercial nature of our healthcare system. A high density of higher paying customers invites lots of competition while the opposite attracts only those that are enticed with higher incomes or guaranteed profits.

Whenever the Herfindahl-Hirschman Index (HHI), a measure of market concentration (i.e., how close the market is to being a monopoly), is calculated for health insurance and healthcare delivery companies, the results show pervasive uncompetitive (monopolistic) marketplaces (with few exceptions). For example, the HHI scores for health insurance companies in the individual, small group, and large group markets (provided by Kaiser Family Foundation on a state level) all show widespread monopolistic environments. While Wisconsin stands out as one of the most competitive marketplaces in the country, I would suspect that Wisconsinites from more rural areas probably have fewer choices in all health insurance and healthcare delivery businesses than do people in higher density areas. Analysis by the Commonwealth Fund revealed that there is little competition anywhere in the nation in the Medicare Advantage plan market.  Doctors in uncompetitive markets charge more  than doctors in competitive markets simply because they can.

Any government attempt at payment reform, delivery of accountable care, or quality measurement is met with healthcare industry resistance and healthcare industry reshuffling to maintain income, profits, and control. Health insurance and health delivery businesses don’t compete; they join forces for mutually beneficial commercial interests. In response to Obamacare (PPACA) reforms,  health insurance and healthcare delivery businesses have been consolidating and creating joint ventures with the primary goal of gaining control over ever larger pieces of the healthcare services pie within a given locale. Insurance companies are buying  doctors’ practices and hospitals. Hospitals are buying doctors’ practices (as well as out-patient surgery and post-operative rehabilitation facilities) and even selling insurance plans for patients using their facilities. A dizzying array of business associations are keeping many healthcare businesses (and their lawyers) well compensated.

competition in the U.S. healthcare system

In my town, the lone hospital (owned by a national hospital management company) bought the only cardiology group practice in town in 2015 (you might want to read about how the physicians in this cardiology group bilked the government out of Meaningful Use incentive payments in an earlier blog post). This hospital also owns other doctors’ practices to control more and more of the local healthcare services marketplace. This convoluted healthcare delivery business model includes outpatient services billed under another business entity (incorporated in another state) which includes 36 other doctors in 9 primary specialties. Any blood work and imaging is funneled through hospital-owned facilities (unless the patient insists on other arrangements). If this new business arrangement has delivered any measurable improvements in healthcare value, the hospital is not advertising them for all to see. These businesses do not advertise their ties to each other and most patients are not aware of them.  I’m afraid that the only benefit this consolidation has delivered is to the income and profits of the healthcare businesses involved.

The end result of consolidation is higher prices. This is the environment that the Republicans in Congress want to turn all health care in the United States over to.

Summary—Competition in the U.S. Healthcare System

In a competitive free marketplace, the most successful seller of a product or service delivers the best value. Unfortunately, in the U.S. healthcare system, delivery of the best value is not a necessary condition for success in any of the healthcare layers described above. Therefore, free-market competition in the U.S. healthcare system does not exist in most of our country. Health insurance and health delivery businesses don’t compete; they join forces for mutually beneficial commercial interests and the creation of local monopolies. Federal and state anti-trust laws are not applied to stop the creation of local non-competitive healthcare environments where pricing power of the biggest players means greater income and profits.

The Republican agenda being forwarded today rests on the premise that competition in the U.S. healthcare system will triumph to reduce healthcare prices, especially when the marketplace is allowed to operate without government interference. They are being paid handsomely by the healthcare businesses that will profit from the business.  My message to all patients and potential patients…Hold on to your wallets and hope you stay healthy.


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