Fragmented markets inflate healthcare spending

A new study reveals that the number of competitors in a given market may be less important than the type of competitors when analyzing healthcare costs.

Sufficient competition, even between only two health systems, generally translated to lower healthcare costs, according to a report from the Healthcare Financial Management Association, Leavitt Partners and McManis Consulting, with support from the Commonwealth Fund. The reseach examnined cost indicators using commercial data from 2012 to 2014, and Medicare data from 2007 to 2015.

Low-cost markets typically have at least one integrated delivery system as a significant competitor. They also tend to have closely aligned physicians as well as good data visibility and means to share it efficiently.

Even if there were sufficient competition in a market like Los Angeles, costs were higher in part because the market lacked adequate coordination and data sharing.

"Lower-cost markets tend to have good mechanisms for sharing information and good information sources," said James Landman, director of healthcare finance policy at the HFMA. He cited as examples Minneapolis/St. Paul, which has a prominent state-run not-for-profit group, and Billings, Mont., where employers work closely with third-party administrators and consulting firms to understand costs of care across providers. "There was very good information flow between significant care purchasers."

For instance, the largest health plan in Montana had a patient-centered medical home initiative since 2009 with required reporting on five chronic conditions and 28 metrics, with annual payments tied to metric benchmarks.

Notably, while health plan and hospital concentration had a statistically significant impact on predicting baseline total cost of care and growth in costs, the impact was relatively small compared to other factors, including environmental conditions related to average daily temperature and metropolitan versus rural settings as well as proportion of patients with chronic diseases.

More fragmented markets generally have higher costs. Independent specialty physician groups often competed directly with health systems, as did specialty surgical facilities or hospitals.

Patient care was also more vertically segmented in higher-cost markets where higher-, middle-, and lower-income groups received care in different networks. Typically, there was less focus on utilization and an emphasis on what services will generate the most revenue.

"These findings suggest that the type of competition may be more important than how much competition is in a market," said HFMA CEO Joseph Fifer.

The report also analyzed value-based payment models, which have penetrated broadly in some markets, but not deeply in most. Most providers only took on upside risk, and have minimal incentive to take on more given the voluntary nature of these programs and the structure of physician compensation packages. Yet, researchers acknowledged that accountable care organizations, Medicare shared-savings programs and other alternative reimbursement models had just started to take shape over the reporting period.

One of the report's interviewees described most of the available value-based models in use as "just fee-for-service in disguise."

"We won't know if the models work unless the incentives prompt widespread change," Landman said.

Physicians are still being compensated primarily on volume, not on the quality or efficiency of the care delivered, researchers said.

The study found no statistically significant correlation between the penetration of value-based payment models and growth in the total cost of care for Medicare or commercial payers in more than 900 markets throughout the U.S. Limited prevalence of these models, the lack of strong financial incentives for managing the total cost of care, healthcare organizations' preference for an incremental approach to risk, and employers' reluctance to change benefit design, among other factors, restricted the impact.

One health system executive said the company was reluctant to take on more risk because "our negotiations are very much driven by our perception of how much risk we are willing to take."

Retaining employees is also paramount, especially as the unemployment rate drops. Employers were hesitant to switch to lower-cost coverage models if it limited provider choice.

Investment in technology management also capped return, which dissuades providers from "still unproven" value-based models, as one executive described. The report highlighted care management for 60,000 consumers in a risk-based insurance product in the Portland, Ore., market that included $1.5 million in annual expense from fees for care management technology, as well as between $3.5 million and $4 million in labor and related costs.

Health plan competition also seemed to be a significant factor, especially with respect to encouraging innovation in payment models and plan design within a market.

The report recommended higher utilization of episode-based payments, reference-based pricing, on-site health centers for employees, and consumer-driven models that are tied to more effective transparency tools and target the needs of specific patient populations.