These results epitomize the natural outcome of successful provider financial strategies nationwide dating to the managed-care backlash of the mid-1990s. Providers (hospitals and physicians) have consolidated to gain market power, which they used to obtain major price concessions from private insurers. By 2003, roughly 90% of the population in larger metropolitan areas faced highly concentrated markets of two to three large health systems, down from six to 12 independent hospitals two decades ago.
Economists have estimated that hospital prices for privately insured patients have increased by as much as 50% more in highly consolidated markets than in highly competitive markets, with a mixed impact on quality. At the same time, providers have maximized revenue from administered pricing systems (especially Medicare) through excessive use of imaging, testing, specialty care, aggressive end-of-life interventions and other discretionary services. For instance, Medicare per capita spending for physician services increased by 60% from 2000 to 2009; increases in per capita service use accounted for almost 90% of that growth. It was no surprise that Congress inserted alternative payment systems opportunities into the Patient Protection and Affordability Act; as the Medicare Payment Advisory Commission and others have concluded, the fee-for-service system rewards volume over quality or value. Payment systems need to change toward more bundled and accountable units of service.
However, everyone recognizes that bundled payment alternatives will take a while to be fully implemented nationwide, because of the fragmented, uncoordinated nature of many local provider markets and the lack of provider expertise and infrastructure necessary to effectively manage care and financial risk. A recent analysis of provider payment methods in Massachusetts, for instance, showed that 95% of payments to physicians were still fee for service as late as 2009, despite the fact that three-quarters of physicians in the state report belonging to larger entities for purposes of contracting and potentially for risk-sharing, and more than half of private insurer payments are to seven very large, well-organized physician groups with the resources, if not always the will, to build an accountable infrastructure. Movement into integrated delivery systems has been slow, even in a state where reform has already been implemented.