Rising Healthcare Costs: It's Time to Blame Hospitals, Not Just Insurers

Last Updated Feb 25, 2010 3:00 PM EST

In the political kabuki that's replaced rational thought in the healthcare debate, health-insurance companies are the bad guys, end of story. But it has long been apparent that doctors and hospitals are just as responsible -- if not moreso -- for the escalating costs that threaten to put healthcare beyond the reach of the average American.

A new report from the Center for Studying Health System Change found that large, consolidated healthcare systems in California have used their market clout to charge private insurers much higher rates insurers than individual hospitals or physician groups could get on their own. Some healthcare providers are being paid twice what Medicare pays on a per-unit basis.

Says Robert Berenson, the study's lead author:

Provider market power is the elephant in the room that no one wants to talk about in the national health care reform debate.
Of course, it's not exactly news that when hospitals and physician networks get bigger, they have more market power and can obtain higher rates. But the researchers found that this was a pattern across all of the communities they studied. What's more, providers considered essential to a health plan network -- such as smaller, specialized hospitals and big independent practice associations -- could generally get what they wanted. The only factors that deterred California providers from demanding even more, the researchers found, was competition from Kaiser Permanente, the big non-profit HMO, and the fear that local employers couldn't pay the freight.

This phenomenon is not confined to California. Last year, the Boston Globe ran a three-part series describing how elite Boston hospitals drove up healthcare costs in Massachusetts by playing hardball with insurers.

The HSC findings, released in the midst of President Obama's healthcare summit, have major implications for reform. For one thing, they show the need for systemic restructuring to contain costs. Capping insurance premiums by government fiat won't do it. Also, the study indicates that while it makes sense to have hospitals and physicians collaborate to improve quality, closer ties between these providers may result in higher insurance rates, as they have in California. Unless a market mechanism can be found to deal with this issue, the authors indicated, there may be no alternative to government-imposed price controls on providers.

Meanwhile, insurance companies continue to draw attacks from every quarter -- particularly from hospitals and doctors, unsurprisingly enough. The AMA released its annual report on the consolidation of insurers, noting that in 24 of the 43 states it studied, the two largest insurers had a combined market share of 70 percent or more. Last year, that was true in just 18 of the 42 states studied, the AMA said.

AMA President James J. Rohack argues that the growing market dominance of the big insurers produced higher premiums without increased consumer benefits, and called for Congress to bring insurance companies under federal antitrust laws without delay. But it's unlikely that that would have the slightest effect on costs; in fact, having more plans in a market might mean they would all have to pay doctors and hospitals more.

So, if physicians and hospitals are as guilty as insurers, why isn't that part of the debate? When experts as prominent as Berenson (a former high-ranking Medicare official) and coauthor Paul Ginsburg (former executive director of the Medicare Payment Advisory Commission) say this is a problem, why aren't policy makers listening? The short answer is "politics." It's a lot easier for politicians to accuse a multi-billion-dollar, profit-making company like WellPoint of screwing up health care than to say that it's the fault of your doctor and your hospital. But in this case, all parties -- including patients who demand more care than they need -- are really to blame. Until everyone admits this, we'll continue spinning our wheels.

Image via Flickr user brykmantra, CC 2.0

  • Ken Terry

    Ken Terry, a former senior editor at Medical Economics Magazine, is the author of the book Rx For Health Care Reform.