The Limits of Competition

For those of us with a touching faith in the ability of competition to control health care costs, a dispute in Pennsylvania provides a sobering warning, and a reminder of the power of near-monopoly in health care.
Pittsburgh-based Highmark Incorporated, the regional Blue Cross and Blue Shield parent, announced in June its intent to acquire the West Penn Allegheny Health System, a five-hospital system that is the second largest in Western Pennsylvania. The acquisition, which would depend on regulatory approval, would presumably give Highmark more control over hospital costs and help in limiting premium increases, as well as recapitalize a hospital group with serious financial problems.

What happened next is instructional but depressing. The University of Pittsburgh Medical Center, the region’s largest hospital group, announced that it would end its in-network relationship with Highmark as soon as its present agreement expires next year. The result would be a potential tripling of rates to Highmark for services at UPMC’s twenty hospitals as Highmark is forced to pay “retail” prices.

Testifying that the Highmark deal with West Penn Allegheny Health System would make Highmark a direct competitor, UPMC’s President made the issue very clear to a state legislative committee: “[this was] an inevitable decision dictated by the realities of competition.”

What lessons can be learned from this? First and most obvious is that major hospital groups are increasingly in control of the health care marketplace (UPMC has an extensive physician network and—ironically— also operates its own insurance plan) and will be ruthless in protecting their position.  Second, as a result of the first, it’s going to be very difficult for insurers to control the costs of care through the acquisition of providers—as UnitedHealth and others are attempting—unless the acquiree is dominant in its area.

There are implications for the move to ACOs, also. Encouraging tighter associations between physicians and hospitals may make for better coordination of care, but it will also lead to increasing numbers of medical center “fortresses,”  for which there is little or no competition—and no chance of future competition—and in which physicians and hospitals have the same interest: to maximize their joint billings.

Roger Collier blogs regularly at Health Care Reform Update.