Thanks for the question… we really don’t have the necessary ingredients for a free market in health care, so expecting that it will work to keep prices down is unreasonable and in fact it does not.

Couple of examples, branded drugs by law have a period in which their patents give them monopolies on their product, where there are equally efficacious products then alternatives help keep pricing reasonable… but where there is no equal product pharma companies routinely raise prices to levels that would not exist in a competitive market… proof… when the drug goes generic the prices drop like a stone in most instances…

In many states you must get a CON to open a health care facility, CON stands for certificate of need. The idea was that be insuring a limited number of health care facilities were available that the average cost would go down since these facilities would be a full capacity and could spread their overhead over a larger revenue base. The logic is sound, except, not having any competition means health facilities can raise prices and no other facilities exists to keep them in line.

Another example, if you have a heart attack, are you going to ask the ambulance to give you time to shop who has the best rates on emergency and cardiac care or are you going to the closest facility that can treat the heart attack. That is an example, where even where competition exists in geographic area, time is of the essence and there is not time to waste.

Anesthesia groups, emergency room groups, radiologists, etc. often have contracts with hospitals to be the only group at that facility. Practically, there are some benefits, because in those contracts are the stipulation that the group treat every patient regardless of their ability to pay. But it also means that managed care plans can’t negotiate effectively since there are no other groups at that hospital.

I put together several super large single specialty groups that had so much market share, health plans had to have us in their network or they would be noncompetitive. The results we were able to command as much as 50% more reimbursement for the same procedures. Consolidation in the health care provider market is making it increasingly hard for health plans to get any leverage in negotiating lower rates for health care.

If you live in a rural area or even some suburban area, you will find even small or medium sized specialty groups are virtual monopolies. There are good reasons for this, including the ability to share call and cover for one another in a seamless way, but they also provide these groups incredible contract negotiating strength allowing them to dictate reimbursement rates.

To be sure there are some examples of competition working great. The most often quoted is lasik surgery which as an elective procedure does not have the ability to negotiate like other providers. Since health plans could ask you to drive as much as an hour to get it done if that was necessary to pressure providers to give them better pricing. Generic drugs are another good example in most (not all instances) of competition keeping prices down (my health plan changes pharma companies regularly for one of the generic medications I take and a I suspect pricing is a major reason behind the switch).

In contrast, Medicare and Medicaid do not negotiate provider pricing, they listen to industry appeals, but in the end they decide how much they are going to pay for a health care product or service and providers either accept the reimbursement or they don’t do business with Medicare or Medicaid. That is how Europe works and the pricing power is pretty powerful. To get health care costs under control we will need to do the same thing in this country where the free market is not working.

But I am not advocating a single payer system, because single payers are notoriously bad at managing the utilization of health care. I was the CFO from one of the largest fiscal intermediaries for Medicare and Medicaid if not the largest. While single payers have great pricing power, they are very weak at dealing with abuse of health care. Abuse is very different than fraud. Fraud is essentially billing for something you did not do. Abuse includes performing a medical service that was not necessary. Because private health insurance companies have a “profit” motive and are pit against one another by employers, they have to figure out how to manage care to achieve high quality with the least amount of medical services… this dual pressure of cost and quality outcomes are not present in a single payer system.

So perhaps the optimal system is leverages the strength of government single payer pricing (where markets don’t work) and matches it with the ability of private health insurance companies to manage the sometimes conflicting goals of quality and cost.

I hope this answers your question… if it did not then respond again and I will try better next time…