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Home / News & IndustryManaged Care Insight and Analysis
Updated: August 24, 2010
California Hospital-Physician Deals Undermining Cost Savings

While the high cost of private health insurance has drawn plenty of attention in the health reform debate, another driver of higher premiums has gone largely unexamined – the growing market power of hospitals and physicians to negotiate higher payment rates, according to a Center for Studying Health System Change (HSC) study published by Health Affairs.

The study examined the growing market power of many California hospitals and physicians, finding that providers are using various strategies, such as tighter alignment of hospitals and physician groups, to negotiate significantly higher payment rates from private insurers. The study was funded by the California HealthCare Foundation.

"Provider market power is the elephant in the room that no one wants to talk about in the nationalhealthcare reform debate," said HSC senior consulting researcher Dr. Robert A. Berenson of the Urban Institute. He co-authored the study with HSC President Paul B. Ginsburg and Nicole Kemper, a former HSC research analyst.

"Reform proposals that encourage hospitals and physicians to integrate have the potential to improve quality and increase efficiency, but the savings may not be passed on to private payers if provider market power to command higher prices goes unchecked," Ginsburg added.

The authors conclude that "unless market mechanisms can be found to discipline providers’ use of their growing market power, it seems inevitable that policy makers will need to turn to regulatory approaches, such as putting price caps on negotiated private-sector rates and adopting all-payer rate setting.

The article, "Unchecked Provider Clout in California Foreshadows Challenges to Health Reform," draws on HSC site visits to six diverse California markets – Fresno, Los Angeles, Oakland/San Francisco, Riverside/San Bernardino, Sacramento and San Diego – between October and December 2008 to study regional differences in health care affordability, access and quality.

The study identified three key factors in California that are driving the shift of negotiating power from private insurers to hospitals and physicians:

  • Consumer demand for broader provider networks following the managed care backlash;
  • Consolidation of hospitals into larger, powerful systems and tighter alignment with physicians; and
  • Growing hospital and physician capacity constraints.

The authors note that "negotiating as a system across a broad geographic area avoids antitrust scrutiny, which focuses on local market concentration. At the same time, this strategy permits hospital systems with leverage in some markets to negotiate high rates elsewhere as well."

Address: Center for Studying Health System Change, 600 Maryland Ave. SW, #550, Washington DC 20024; (202) 484-5261,

  This article was taken from:
Pay-For-Performance Reporter

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