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Obamacare Won't Bend the Cost Curve Without Further Government Regulation

Obamacare is not going to bend the cost curve downward. In fact, there are reasons to think it may exacerbate monopolistic practices which lead to overcharging. That's the premise of a new piece in Washington Monthly which suggests further government regulation will be needed before we see the cost curve bend in the proper direction.

The piece by Phillip Longman and Paul S. Hewitt was highlighted today by Ryan Cooper at the Washington Post. Cooper seems to think it's an argument for Democrats sticking with Obamacare despite some bad polling. I don't really see that. If anything, the piece strikes me as an admission that another Obamacare promise is unlikely ever to come to fruition. If the piece is correct, something we were already promised will actually require another massive regulatory fix to accomplish. If the polls tell us anything it's that Democrats will have a hard time selling Obamacare mark II at this moment in time.

But let's start this story in the beginning. Back in 2009 and 2010, the White House Director of Health Policy used to talk a lot about "bending the cost curve." Obamacare, we were told, was going to help do that in a number of way including electronic medical records and preventative care. But it turns out there were elements of the plan which were liable to bend the cost curve in the opposite direction. We did not hear much about these before the bill was passed.

Health care inflation has dropped in recent years but the authors of a new piece in Washington Monthly point out, contrary to frequent claims by the President, that Obamacare plays a small part in that if it plays any part at all:

the biggest reason behind the slowdown in cost growth is one that everyone hopes will go away, namely the lingering effects of the Great Recession. According to a study by the Henry J. Kaiser Family Foundation, about 77 percent of the slowdown comes from negative economic factors such as persistently high unemployment.

The other 23 percent, the study estimates, comes from factors within the health care system that are holding down utilization. Most prominent of these is the sharp rise of the percentage of Americans who now have high-deductible health insurance plans, and who are accordingly, for better or worse, consuming less health care. Says Kaiser Foundation President and CEO Drew E. Altman, “The problem of health costs is not solved.”

Price inflation is set to resume next year and the authors offer no reason to think Obamacare will make a significant dent in it. On the contrary, giving a few million people insurance should increase competition for the same resources and drive costs upward. But there's another driver of costs which could be more significant. Obamacare encourages consolidation and integration of health resources:

At the Department of Health and Human Services (HHS) on Independence Avenue, the message stresses the vast savings possible through a less “fragmented” and more “integrated” health care delivery system. With this vision in mind, HHS officials have been encouraging health care providers to merge into so-called accountable care organizations, or ACOs.

An essential feature of an ACO, as defined by the Affordable Care Act, is that it organizes and coordinates care among a broad range of previously independent specialists and other providers, somewhat like a health maintenance organization (HMO). Providing this coordination requires scale, and in practice has often entailed hospitals merging or forming business partnerships with one another and buying up the practices of local doctors.

But consolidation turns out to be one of the major drivers of increased costs. The problem, according to the authors, is local monopolies:

Clearly, bigness in health care can lead to efficiency and lower prices. But just as in other industries, bigness in health care can also lead to monopolistic pricing and other abuses. And sadly, rampant, unregulated monopolization of health care is what has been going on in virtually every medical community in America, as hospitals, doctors, and other providers combine in ways that drive up costs for everyone without improving care.

The authors offer a bit of data to support the idea that more monopolistic power yields significantly higher prices for the same services.

For example, Berkeley health care economist James C. Robinson has studied the prices hospitals charge insurance companies (and, by extension, insured patients) for different procedures. In concentrated markets, the price for a pacemaker insertion averages $47,477, but in markets that remain comparatively competitive the cost of the procedure averages $30,399.

Similarly, providers in concentrated markets make far larger profits on the procedures they perform. Thus, for example, in concentrated markets, the average hospital makes a return of $20,000 above its direct costs on every angioplasty it performs. But in more competitive markets, while the margin is still astoundingly high, at $10,900, it is nonetheless 90 percent less than in concentrated markets.

So Obamacare does not appear to have bent the cost curve yet and seems poised to bend it upward in the future by creating more service monopolies. What is needed, the author argue, is a way to prevent the increasingly monopolistic practices of hospitals. Their recommendation is to introduce some threshold at which institutions become subject to "common carrier" requirements.

Common carrier means that a medical group which hit the limit, say 40 percent of hospital business in a given area, would have to publish a price list and charge everyone who used their services the same amount. In theory, this would prevent them from leveraging their market-share to gouge consumers. Meanwhile, those who fall under the cap (smaller hospitals or groups) would not be subject to the common carrier rules and could undercut the big group's prices.

The piece ends with an appeal of sorts to both sides of the aisle. The authors argue that single-payer, whatever its merits, is not going to happen soon. Those on the left holding out for that option should keep in mind that, in the meantime, costs will continue to mount and that Democrats will be blamed when this happens. In short, don't let the perfect (in their minds) be the enemy of the good.

On the other hand, the authors point out that their suggestion is less intrusive than outright government price controls and maintains some room for market activity. "It’s basically the only way to create the conditions under which markets in health care can operate efficiently even in theory" they write, adding "You will not find Adam Smith defending the notion that the hidden hand works in monopolized markets with secret prices."

No doubt experts on both sides will weigh in or the policy recommendation. I do wonder what might happen if Republicans embraced this plan or one like it which could arguably sold as a distinct, market-oriented solution to a problem Obamacare seems designed to exacerbate. As 2014 approaches it would certainly be advantageous for Republicans to have something else to offer in case polls showing outright repeal is a minority viewpoint remain constant.


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