Competitive Ideas for Reducing Healthcare Costs
Nino Monea, Class of 2017, recently proposed that making price information for medical care available to consumers online would increase the transparency in healthcare shopping, which in turn would lead to greater competition among healthcare providers and lower costs to consumers. Mr. Monea’s analysis focused on the relationship between healthcare providers (hospitals, doctors, etc.) and consumers (you and me), but this is only one of three relationships in the healthcare industry where increasing competition can lead to price reductions. In addition to competition between providers for consumers, proposals to encourage competition must also consider competition between payers (insurance companies) for consumers and competition between providers for payers.
This comment will explore the impact of increasing competition in all three of these relationships and argue that lowering healthcare costs through competition would be best accomplished by focusing on competition between payers for consumers and between providers for payers. I also suggest a few ways in which legislation can be used to this end. It should be noted at the outset that these suggestions are offered only because they demonstrate ways in which competition can be increased. These proposals have other important policy implications, which I ignore for the purpose of maintaining a limited scope.
II. The Provider-Consumer Relationship
It makes sense to begin the discussion by assessing the relationship which Mr. Monea focused on: the relationship between providers and consumers. In doing so, it emerges that there is room to increase competition between providers for consumers in order to lower prices, but the impact is stymied by the role of payers. Third party payers, insurance companies, hide pricing for medical services, making it so most consumers never see the sticker price of their medical care. When a consumer goes to a doctor or hospital, that individual is responsible for the cost only up until they reach their annual deductible. Once a consumer’s cost of care surpasses his or her deductible, most insurance plans require that the consumer only pay a copay, a small, standard fee, or coinsurance rate, a percentage of the costs, for their medical care. For individuals receiving health coverage through their employer, the average deductible in 2013 was $1,135. For those with copays, a system of greater price clarity—even if fully realized—will only save money up until they reach the $1,135 mark because after that point, consumers pay a standard copay for all of their providers within their network and so become indifferent to provider prices. For those with coinsurance plans, consumers remain price sensitive, but their value to saving becomes pennies on the dollar, decreasing the incentive to perform diligent research on cutting costs. Moreover, many plans offer out-of-pocket maximums, which cap the amount that someone with that plan can pay each year on their healthcare. Once the maximum is reached, insurance companies pay the full costs of medical care, leaving consumers indifferent to prices. Sticker prices might be reduced through greater competition, but total savings to consumers is unlikely to significantly increase through competition in this area.
III. The Payer-Consumer Relationship
The next relationship to assess is that between consumers and payers. Greater competition among insurance companies for consumers would translate into lower prices for consumers. One of the major achievements of the Affordable Care Act was the establishment of state online marketplaces, formally called “exchanges,” where consumers can shop for health insurance. The marketplaces encourage competition between payers by allowing consumers to compare prices and features of various plans on one website. In Massachusetts, for example, an individual student in Cambridge can log onto the Massachusetts Health Connector, type in their name and zip code, and compare 103 options from 9 different companies sorted by 5 levels of comprehensiveness. A website can most always be modified to help increase clarity and transparency, but the reductions in health spending stemming from even greater price transparency between consumers and payers would be negligible.
But there are at least two other ways new legislation could increase competition in this area. The first is by reducing barriers to entry for new competitors. Such legislation might include favorable tax laws for new entrants or reductions in the red tape that prevents new competitors from entering a given state’s insurance market. In doing so, a state can increase the supply of insurance companies, furthering the competition between them. The second option is to allow consumers to insure with companies across state lines. Presently, most states only allow for in-state health insurers to offer health coverage to consumers, and this limitation is largely a relic of history that does not serve a present, practical purpose. If, however, more states passed legislation opening up their borders to out-of-state insurers, or the federal government made a law forcing the issue, consumers would have access to a greater number of insurance companies. In this model, state marketplaces would be replaced by a national or regional marketplaces of insurance plan options. In doing so, consumers would gain access to a dramatically increased number of insurance suppliers, increasing competition between payers for consumer business, and ultimately resulting in reduced healthcare costs for consumers. Increasing the number of insurance companies reduces the bargaining power of payers in their negotiations with providers which puts an upward pressure on prices, but this point is addressed with a proposal in the Section IV below.
IV. The Provider-Payer Relationship
The final relationship to be considered is that of the payer and the provider, and here too more competition could reduce prices for consumers. Insurance companies rarely pay a provider’s sticker price for healthcare. Instead, payers and providers negotiate over the prices that are to be paid for various treatments. These negotiated costs are then passed on to the consumers through insurance premiums. If the hospital maintains the upper hand during a negotiation, the hospital can set high rates for reimbursement, and insurance companies will pay those rates in order to keep that hospital in the health plan. Those costs are then shifted to consumers. In some areas, health care providers hold regional monopolies, giving them strong pricing power and allowing them to drive up costs. Increasing insurance company bargaining power in these negotiations, however, will result in lower negotiated prices which translates into lower healthcare premiums for consumers. Increasing competition between hospitals for inclusion in health plans can help increase payers’ bargaining power.
One option to increase the bargaining power of insurance companies in its negotiations with providers is to increase the number of available health systems in any given area. This would reduce health care costs because if one health system demands high prices, insurance companies can negotiate with that health system’s competitors and exclude that first health system from its insurance plans. Health systems available in a given region could be increased in a number of ways. States could subsidize the creation of new health systems or by providing tax or other incentives for new health systems to enter particular markets, for example. Alternatively, state attorney generals could apply anti-trust laws on a regional level to break up local healthcare monopolies or oligopolies. Utilizing existing anti-trust law or passing specific, health system based anti-trust legislation, however, should be done cautiously because breaking up larger health networks might damage economies of scale, negating the advantages of reduced hospital bargaining power.
Another way to increase bargaining power of insurance companies vis-à-vis healthcare providers is to restrict the number of hospitals with which insurance companies can negotiate discounted rates. If each insurance company is restricted to negotiating with only one health system in each region, those health systems would compete by lowering prices in order to be the preferred system of an insurance company so that people with that company’s coverage utilize their medical services. Insurance would then cover medical care provided in-network and emergency services. Beyond increasing competition, such a mandate would promote greater coordination of patient care as patients will receive most of their medical care within one health system. Enhanced coordination will lead to reduced costs for providers and a greater quality of care for patients such that they will then need to spend even less on healthcare. Increasing the number of insurance companies available to consumers does reduce payer bargaining power as alluded to in the end of Section III, but requiring each payer to form selective contracts with one provider greatly reduces that effect by shifting the burden of competition onto the providers who must compete in order to be included on insurance plans.
Increasing competition between providers for consumers can help lower prices, but this effect is likely to be small given the role of payers in the healthcare system. Instead, any legislation intending to reduce the cost of health care by increasing competition should focus on competition between payers for consumer and competition between providers for payers. Legislation addressing these important relationships can be state or national. State legislatures can pass laws to make their states more welcoming to new insurance companies to increase the supply of insurers. Congress can pass a bill to amend the Affordable Care Act and to establish a national or regional marketplaces for insurance in place of individual state marketplaces. Both of these proposals would increase the number of payers available to consumers, increasing competition between them and incentivizing payers to reduce their prices. Another method is to increase competition among healthcare systems for contracts with payers in order to increase the bargaining power of payers, resulting in lower prices for consumers. Increasing competition can be accomplished through breaking up larger health systems or through requiring payers to contract with only one provider at a time. Increasing competition in all three relationships, however, would be the most comprehensive approach and have the greatest impact on reducing healthcare prices for consumers.
[*] J.D. Candidate, Harvard Law School, 2017; B.A., University of Pennsylvania.
 See Elise Gould, Econ. Pol’y Institute, Increased health care cost sharing works as intended: It burdens patients who need care the most (May 8, 2013), https://www.epi.org/publication/bp358-increased-health-care-cost-sharing-works/ [https://perma.cc/G8AK-TZGM].
 Matthew Rae, Nirmita Panchal & Gary Claxton, Kaiser Family Foundation, Snapshots: The Prevalence and Cost of Deductibles in Employer Sponsored Insurance (Nov. 2, 2012), https://www.kff.org/health-costs/issue-brief/snapshots-the-prevalence-and-cost-of-deductibles-in-employer-sponsored-insurance/ [https://perma.cc/UWP7-MGYN].
 Copays, Deductibles and Coinsurance: How do out-of-pocket costs work?, Cigna, https://www.cigna.com/individuals-families/understanding-insurance/copays-deductibles-coinsurance [https://perma.cc/9K7F-9Y49].
 See Massachusetts Health Connector, State of Massachusetts, https://www.mahealthconnector.org/ [https://perma.cc/VTA3-C6SG].
 See Richard Cauchi, Allowing Purchases of Out-of-State Health Insurance, Nat’l Conf. of State Legislatures, http://www.ncsl.org/research/health/out-of-state-health-insurance-purchases.aspx [https://perma.cc/XSJ5-EUJZ].
 Stephen T. Parente, Roger Feldman, Jean Abraham & Yi Xu, Consumer Response to a National Marketplace for Individual Health Insurance, 78 J. Risk & Ins. 389 (2010), available at https://onlinelibrary.wiley.com/doi/full/10.1111/j.1539-6975.2010.01393.x [https://perma.cc/RED8-R2QF].
 See Clark C. Havighurst & Barak D. Richman, The Provider-Monopoly Problem in Health Care, 89 Ore. L. Rev. 847 (2011).
 Peter Ubel, Are Insurance Companies the Key to Lower Prices?, Forbes (Oct. 1, 2012), https://www.forbes.com/sites/peterubel/2012/10/01/are-insurance-companies-the-key-to-lower-prices/ [https://perma.cc/A2R7-BNX3].
 Avik Roy, Hospital Monopolies: The Biggest Driver of Health Costs That Nobody Talks About, Forbes: The Apothecary (Aug. 22, 2011, 7:00 PM), https://www.forbes.com/sites/theapothecary/2011/08/22/hospital-monopolies-the-biggest-driver-of-health-costs-that-nobody-talks-about/ [https://perma.cc/35VJ-HCRT].
 See Improve Care Coordination, U.S. Dep’t of Heath and Human Servs., https://www.healthit.gov/topic/health-it-basics/improve-care-coordination [https://perma.cc/GW8A-WYML].