How Economic and Market Forces Influence Health CareCosts

In discussions about the high cost of health care, topics like chronic disease management and prescription drug costs are often cited. But the underlying health care economics and marketforces are critical to any conversation about the high cost of care in the U.S.

What is health care economics?

In a broad sense, the economics of health care analyzes the individuals, entities, and factors that influence our total health care costs:

  • Patients (consumers)
  • Providers
  • Hospitals and clinics
  • Insurance carriers
  • Government agencies
  • Public and private organizations

Patient choices can influence demand for certain services. Providers and hospitals areconstantly making decisions about what types of care to offer and what to charge for that care.Insurance carriers negotiate with providers and hospitals to agree on a reimbursement rate,then calculate the total monthly premiums they will charge patients based on a variety of factors.

In a well-functioning health care marketplace, demand for the lowest-cost, highest-quality carewould increase competition and drive prices down. But there are other factors that counteractnormal free-market principles of competition and choice in health care. These can sometimeswork against efforts at lowering costs, and include:

  • Consolidation that limits choice in the health care marketplace.
  • Opaque pricing that makes cost calculations and comparisons difficult.
  • Consumer demographics and behaviors that influence what care is available and what it costs.

Competition and consolidation in health care organizations

The trends toward consolidation in health care are not new. After a flurry of mergers andacquisitions in the 1990s, consolidation slowed in the 2000s. Then, beginning around 2010,another wave began. In 2007, about half (53%) of community hospitals belonged to a largerhospital system. By 2018, that increased to 67%.

Between 2007 and 2019, 19% of markets serving more than 11 million people had only a single hospital system. These markets were more likely to be in lower-income areas with fewer total physicians, further limiting care to vulnerable populations.

Small, rural hospitals and clinics often have slim operating margins and only limited access to capital. Market trends, like the need for more advanced technology and cybersecurity, drovemany such hospitals to consolidate with larger systems in the 2010s.

How opaque pricing affects consumer choices

Pricing transparency and information are essential to a healthy free market system. If someonewants to buy a car, for example, they can compare prices at multiple dealerships. They can alsocompare total mileage, taxes, accident history, and other things that affect a vehicle’s value.

Health care is unlike any other consumer industry. Patients who need care may not be in a position to research prices and choose between hospital systems. After a life-threatening emergency, such as a car accident or heart attack, the only concern is getting to the nearestfacility for treatment.

Even in the best of circumstances, like when a patient has time to conduct research, they may not be able to make an informed decision due to:

Lack of cost transparency in health care

Until recently, hospitals and health care providers were not required to share cost informationwith consumers. Most facilities don’t publicly and obviously display their prices. So patientsseek care without knowing the final cost. After treatment – sometimes weeks later – they get a bill.

The Affordable Care Act tried to break through this frustratingly opaque system by requiringhospitals to publish their costs for care. But compliance is not uniform across the industry. Analyses by investigative journalists found that costs varied significantly for the sameprocedure based on:

  • Where a member lives.
  • What insurance plan a member has.
  • Where a member goes for care.

Sometimes prices can vary by thousands of dollars for the exact same procedure at twohospitals within just a few miles of each other. Many patients still find it difficult to get a straight forward answer in advance on treatment costs. This makes it very hard – or impossible– to compare prices and shop around.

Third-party insurance models

Our third-party insurance model also affects patients’ ability to research health care costs. FewAmericans believe we should get rid of insurance coverage.

Many consumers are unaware of exactly how much their care costs in total. Unless they taketime to review data from their insurance claims, they only know what their portion of thepayment is. Insurance plans that require patients to cover copays and coinsurance up to a certain out-of-pocket amount each year can skew a person’s view of the total cost of their care.

Insurance may also limit a person’s ability to seek care outside of a specified network. Evenwhen the actual out-of-network care is less expensive overall, it might cost the patient moreout of pocket.

Consumer demographics, biases, and behaviors in seeking care

Many experts agree that access to more information can improve a person’s ability to makecost-effective decisions about their care. But there are other factors that influence our buyingchoices as well, especially in health care.

For example, a patient may believe that higher costs reflect higher-quality care and select moreexpensive facilities or physicians. They may request brand-name medications over generics. Providers may hesitate to push back because they want to give patients autonomy in their caredecisions.

Patient age and overall health can also impact health care decisions. For example, areas withaging populations often have higher total health care costs. That is true even if they operatewith a wide variety of choice and competition, and pricing transparency that helps consumersmake good care decisions.

Steps to improve competition and information

There is no single solution that can address the significant challenges facing health caremarkets. But providers, payers, and employers can take steps to help consumers get betterinformation to compare prices and make good decisions.

Educating patients about when it’s appropriate to use high-cost care touch points like the emergency room can help reduce unnecessary spending. Plans can also make sure there arelow-cost care options available within their network, such as:

  • Ambulatory surgical centers (ASCs).
  • Outpatient laboratory facilities.
  • Outpatient imaging centers.
  • Urgent care facilities.
Technology innovations that expand access to care may offer lower-cost options in cases whereconsolidation leaves patients few or no choices of where to go for care.
Data will also play a bigger role in driving patients to providers and facilities with the highest quality and lowest costs. As value-based care models overtake fee-for-service models, data willbecome an essential tool for everyone in the health care marketplace.
Care providers and payers can use data to pinpoint patient needs, both on an individual andpopulation level. They can also use it to analyze outcomes and improve care over time.Highmark collects, analyzes, and makes this data available to help employers and beneficiariesmake better data-driven care decisions.

How to lower health care costs

The market and economic forces at work in health care are just one piece of a large puzzle onwhy care costs so much. We look closely at several other factors that affect care costs andquality in this series:

  • Gale AH. Bigger but not better: hospital mergers increase costs and do not improve quality. Mo Med. 2015;112(1):4-5.

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