A Road Map For Action On Health Care Spending And Value: Part II – Price Regulation And Supports For Competition

This is the second in a four-part series on the Health Affairs Council on Health Care Spending and Value’s February 2023 report, “A Road Map for Action.” Each piece details one of the four priority areas within the report, which include recommendations on how the US can take a more deliberate approach to moderating health care spending growth while maximizing value. I served as co-chair of this initiative, along with former FDA Commissioner Dr. Margaret Hamburg. This piece outlines our recommended actions on price regulation and supports for competition.

Why does the US spend more per capita on health care than any other nation? Well, according to renowned health care economist Dr. Uwe Reinhardt, “It’s the prices, stupid.”

While that’s putting it simply, many believe, like Dr. Reinhardt so often stated, that our health care spending is more in large part because we are willing to pay more for it. And recent data suggest that we are indeed willing to pay a lot more for health care services. In fact, about 20% of our nation’s GDP was attributed to health care in 2020.

But it’s not just our willingness to pay more for health care in the US – and spending more or paying higher prices than other countries isn’t necessarily a bad thing. But doing either without seeing an improvement in quality of care is a problem. And this is exactly what is happening: high rates of growth when it comes to prices that are disproportional to the health and equity produced. This places a significant and increasing burden on everyone including our families, companies, and government.

Relatively high US private-sector prices are a key driver of high US health care spending, but clearly many other factors are at play as well. Notably, the US is also an outlier among nations in the absence of any mechanism to make collective decisions about what health care services should be covered or available and how to restrain how much is spent.

And, when the Health Affairs Council on Health Care Spending and Value started convening, it was evident that we shared tremendous concern about the ability for Americans – both at the government level and at that employer and individual level — to continue to pay for needed health care services as prices continued to climb without any sign of slowing down.

Defining The Problem

The Council agreed: we cannot continue to pay exorbitant amounts for health care without seeing better health and better equity in return. This was nonnegotiable.

We focused on two key priorities to uphold affordability and curb excessive prices when developing recommendations: 1) cultivating better competition, and 2) supplementing with regulation, as needed, in certain markets.

After extensive research and review, prioritizing better competition within health care quickly became one of the Council’s top priorities. In the US, our highly nuanced free market healthcare system has become uniquely immune to natural market forces that keep prices of traditional free markets competitive. This is a complex and unique challenge. And it’s due to a number of actors within health care –like large scale industry consolidation, lack of price transparency, and misaligned payment incentives—resulting in our free market system often failing to act as such. Though not the focus of the report, each of these offer opportunities to greatly improve the market dynamics.

Further, in terms of regulation, the Council agreed that oversight was necessary in some settings to slow the rapid growth of prices. Small markets – like rural areas – can act as monopolies due to limited population size and thus stall competition that would slow price growth. In such instances, the Council explored local regulation opportunities to slow this growth. However, it is important to note that the Council recognized that regulators can, and do, get it wrong and advised cautious application of any government intervention.

The Recommendations

With these two priorities in mind, the Council formulated four recommendations focused on negotiated health care prices in the private sector. These recommendations include both regulatory and non-regulatory approaches in three chief market categories: markets that cannot be competitive due to population size (such as rural communities), markets that are currently not competitive but could become so with intervention (rural and suburban communities with relatively large populations), and markets that are already competitive.

Here are the four recommendations:

1. Increased State and Federal Monitoring of Market Competitiveness: The Council recommends additional attention at the state and federal level on market competitiveness and scrutiny of proposed mergers, which can be undertaken by the states, the Federal Trade Commission, or the Department of Justice. This recommendation, broadly focused on improved state and federal monitoring of competitiveness, requires more funds, expanded authority, and increased state and federal collaboration. It serves as the foundation for the three recommendations that follow.
2. Limited Price Regulation in Markets that Cannot be Competitive: In markets where the population is too small to support multiple competitors – like rural settings – natural monopolies can occur. In such cases, the Council supports states in setting all-payer price maximums to be calculated in a number of ways including as a percentage of Medicare price levels in chosen benchmark markets. The Council recommends state-level intervention in these markets because states are much more aware of particular access issues and other circumstances that might be impacting these types of markets.
3. Conditional Price Regulation in Markets that Could Potentially be Competitive But Are Not: In markets where the population size is sufficient to support at least moderate competition, steps can be taken to foster competition through incentives for additional market entrants, implementing performance improvement plans for firms engaging in anticompetitive behavior, or by breaking up existing monopolies in the region. The preference here is to increase the number of competitors by inducing market entrants through policy and incentives, and, if competitiveness does not improve in a specific period, states – as a last resort- should move to maximum price setting. Of note, easing licensure requirements to expand telemedicine and virtual care could also increase provider access and competition in these areas.
4. Additional Supports for Competition in Markets that are Currently Competitive: In markets that are already competitive, primarily urban areas with large populations, the Council doesn’t recommend price regulation but rather increased monitoring of competitiveness and merger activity in light of the current climate.  

Moving Forward

These recommendations all work to improve competitiveness within differing markets and regions and put us on the right path to provide better value care that is more affordable and leads to improved outcomes. Affordability is a key word here.

When the recommendations were first released, I reached out to Larry Van Horn, Ph.D., a friend and Executive Director of Health Affairs at Vanderbilt University, and asked him about his thoughts. He said: “We must focus on the affordability of health care services for individual patients because with affordability comes access. Proponents of value-based care always rely on increasing quality or outcomes, but few discuss reducing price. This is nearly 20% of the US economy where people are making purchase decisions, every day, not knowing the price. That is un-American.” I agree.

And while our recommendations on prices focused on state and federal action, a number of exciting new companies are leading this charge to prioritize not only accessibility but also affordability and transparency. For example, Paul Ketchel, founder of Nashville-based MDsave, has sought to solve the price problem in health care by pre-negotiating up-front bundled prices for more than 1500 procedures to give employers and patients insight into their spending. He shared with me how federal actions on price transparency in recent years have affected positive, private-sector change: “Government price transparency regulations are beginning to have a significant effect on lowering prices for the self-insured. At MDsave, we are seeing the exposure of contracted reimbursement data driving hyper-demand for direct contracting solutions in 2023. As more employers and vendors move to direct models many are seeing healthcare cost savings of 30% or more in year one of their direct relationships.”

As we work to implement the comprehensive recommendations outlined above, we must do so with a focus on improving access and health equity. Not only should we be working to curb growth, but we should also be working to make the cost of needed health services more accessible and affordable.

Prioritizing and improving competition and selectively using price regulations, when necessary, will allow us to substantially better health and equity for all Americans. Just because we are willing to pay more for health care services doesn’t mean we should. By pulling on the levers that have been prohibiting natural free market forces, we are charting a way forward for more accessible and affordable care that produces meaningful improvement in our nation’s health outcomes.