Pricing power.
Pricing power is one of the main targets of health reform. (The Pricing Power Playbook, by Rick Ott, is one of many titles aimed at helping sellers get the highest price and profit margin on what they sell.)
Since states still regulate their markets and what policies must cover, controls on pricing may prove difficult to impose on insurers. The hope is that more open markets, provided for in the law, will change this.
But there is another form of pricing power, against which insurers have until now been powerless. This is the pricing power of hospitals.
As Forbes notes in “America’s Most Profitable Hospitals” this week, some hospitals manage profit margins of 30-50% these days, thanks to limited local competition. Insurers must pay whatever these hospitals charge, and hospitals collect one-third of all health care spending.
This is not a profit vs. non-profit story, however. Some hospitals on the list are religious and University-affiliated non-profits.
A Princeton economist contacted by Bloomberg blamed market consolidation for the big profits. He suggested anti-trust enforcement as a solution.
An accompanying investigation bore this out, in part, with the example of Sutter Health, which controls one-third of the market in the San Francisco-Sacramento corridor and can thus charge premium prices.
But a big part of health reform aims to shift this power balance.
There is a reason why United Healthcare is buying health IT companies that track where the insurer’s money goes, and why at the same time the company is rolling out new plans that dramatically limit the choice of doctors and hospitals from which patients choose.
It’s about pricing power. Know what everyone is charging and only pay for the best value. It’s what consumers would do themselves if they had the data.
The next step could be for insurers to buy hospitals and medical groups. HMO companies like Kaiser and InterMountain already own their own facilities. They choose what technologies to use, what best practices to follow, and can thus deliver high-quality care for less.
That’s not a bug in health reform. It’s a feature. For costs to be controlled someone must have pricing power on the buy side. To get a bill passed the Administration gave much of this power to insurers, while promising to impose discipline on Medicare and Medicaid more directly.
That’s not all there is to it, of course. Wellness programs, a move toward capitation or the medical home instead of fee-for-service, limiting the spread of chronic conditions, spreading the risk to everyone, these also enter into it.
But underneath everything is this issue of pricing power. When insurers control most of a state’s insurance market, they have pricing power. When hospitals control much of the health care in a region, they have pricing power.
Effective competition reduces pricing power. Big buyers can dictate to big sellers in ways little buyers cannot. Drop by your local WalMart or Costco if you don’t believe me.
While much of the focus over the next few years will be on insurers and insurance markets, expect more of insurers to speak softly and wield a big stick on the buying side of health care.
