Confidence Waning in Competition as Health Care System Cure

Health Affairs Studies Examine Competition, Physician Entrepreneurialism and Other Market Trends

News Release
March 12, 2004

Alwyn Cassil: (202) 264-3484

ASHINGTON, D.C.—Confidence in market competition to spur high-quality, affordable health care is waning in communities across the country, according to research by the Center for Studying Health System Change (HSC) published in the March/April edition of the peer-reviewed journal Health Affairs.

As belief fades that market forces can spur greater efficiency, health care leaders in 12 communities across the country are reconsidering the idea of government intervention in the health care system. However, there were no clarion calls for specific reforms and a lack of confidence in government’s ability to improve the situation.

"There was general recognition that ’fault’ lies all around and that all sectors—including public programs—need to change their behavior for high-quality, effective health care to become more affordable in the long run," according to the study. "Perhaps, it is this recognition of shared blame and shared self-interest in the status quo… that has led a diverse array of leaders to begin to look to government as a focal point for a solution, at least as a convener or referee among stakeholders with diverse interests."

The Health Affairs article—"Are Market Forces Strong Enough To Deliver Efficient Health Care Systems? Confidence is Waning"—cites four main barriers to efficient health care systems: 1) provider market power has thwarted vibrant price and quality competition; 2) the absence of competing integrated health delivery systems; 3) employers’ inability to push the system toward efficiency and quality; and 4) insufficient health plan competition.

"There’s plenty of competition in local health care markets—unfortunately, it’s competition based on reputation and amenities, not price and clinical quality, which would help consumers make more informed, cost-conscious health care choices," said Len M. Nichols, Ph.D., lead author of the study and vice president of HSC, a nonpartisan policy research group funded principally by The Robert Wood Johnson Foundation. Nichols co-authored the study with HSC President Paul Ginsburg, Ph.D.; Robert A. Berenson, M.D., an HSC consulting researcher and senior fellow at The Urban Institute; Jon Christianson, Ph.D., an HSC consulting researcher from the University of Minnesota; and Robert E. Hurley, Ph.D., an HSC consulting researcher from Virginia Commonwealth University.

The study and several accompanying articles provided the framework for discussion at a joint HSC-Health Affairs conference—"Can Competition Cure an Ailing Health Care System?"—held today in Washington, D.C., that brought together providers, employers, insurers and policy experts to explore the limits and benefits of health care competition. A conference webcast, sponsored by The Robert Wood Johnson Foundation, is available at

With the path to more efficient health care systems blocked by a lack of effective competition among providers, possible policy solutions must create more effective countervailing power than employers and patients alone and with their health plan agents have to date mustered. Two sources of possible countervailing power are vigorous antitrust enforcement and economic regulation, including rate regulation and explicit limits on resources going into health care, for example, through certificate-of-need laws. The study also cited the need for state-of-the art evidence-based medicine and technology assessment information and comparative quality information about providers as part of any strategy to improve health care system efficiency.

Two other Health Affairs articles by HSC researchers explore in detail how physicians are responding to current market conditions. The first article, "Financial Pressures Spur Physician Entrepreneurialism," by HSC Senior Health Researcher Hoangmai H. Pham, M.D.; Kelly Devers, a former HSC health researcher and now an associate professor at Virginia Commonwealth University; Jessica H. May, an HSC research assistant; and Berenson, describes how recent revenue and cost pressures have led physicians to aggressively raise prices and service volume and provide fewer less-lucrative, traditional services. As a result, physicians’ business practices are contributing to rising service use and hindering cost containment.

The second article, "Growth of Single-Specialty Medical Groups," by Lawrence P. Casalino, M.D., an HSC consulting researcher from the University of Chicago; Pham of HSC; and Gloria Bazzoli, Ph.D., an HSC consulting researcher from Virginia Commonwealth University, explores how specialist physicians increasingly are forming large single-specialty medical groups, especially in orthopedics and cardiology. A key factor driving the formation of large single-specialty groups is the ability to invest profitably in outpatient imaging and surgical facilities. Specialists also are forming large groups to gain negotiating leverage over health plans.

The articles published in Health Affairs are based on HSC’s fourth round of site visits in 2002-03 to 12 nationally representative communities—Boston; Cleveland; Greenville, S.C.; Indianapolis; Lansing, Mich.; Little Rock, Ark.; Miami; northern New Jersey; Orange County, Calif.; Phoenix; Seattle; and Syracuse, N.Y.

As part of the Community Tracking Study, HSC sends a team of researchers every two years to each community to interview local health system leaders, including representatives of major health plans, hospitals, physician organizations, employers, benefit consultants and state and local policy makers. In-depth, one-on-one interviews provide insight into the changing dynamics of local health care markets.

The following four articles by HSC researchers also appear in the March/April edition of Health Affairs:

The Puzzling Popularity of the PPO, by Robert E. Hurley, Bradley C. Strunk and Justin S. White

Discontent with the undesirable features of health maintenance organizations (HMOs) has fueled surging growth in preferred provider organizations (PPOs). While employers, consumers and providers seem to know what they don’t want from HMOs, the advantages offered by PPO designs are unclear, in part, because of difficulties in determining what actually constitutes a PPO arrangement. The PPO industry itself appears to characterize itself less by what a PPO is than by what it is not—namely an HMO. Even less clear is what value PPOs yield in controlling costs, providing care management and promoting quality improvement. PPO growth also represents a retreat from the 1990s’ era of benefit expansion because financing these benefits, particularly via provider discounts, has proved unsustainable. In this vein, the PPO option is an instrument for private purchasers to realign what they wish to pay for health benefits with what they believe they can afford to pay. For consumers, continued PPO growth almost certainly translates into paying more to try to hold onto what they have.

What is Driving Hospital Patient-Safety Efforts?, by Kelly J. Devers, Hoangmai H. Pham and Gigi Liu

The Institute of Medicine’s report, "To Err is Human," described the alarming prevalence of medical errors and recommend a range of activities to improve patient safety. Three general ways to stimulate hospitals to reduce medical errors are professionalism, regulation and market forces. Although some believe that market forces are becoming more important, the study found that a quasi-regulatory organization—the Joint Commission on Accreditation of Healthcare Organizations—is the primary driver of hospital patient-safety initiatives. Professional and market-based efforts also have helped, but hospitals report that these efforts have had less impact to date.

Popular Medicaid Programs Do Battle with State Budget Pressures: Perspectives form Twelve States, by John F. Hoadley, Peter Cunningham and Megan McHugh

Many are concerned that growth of state Medicaid and State Children’s Health Insurance Program (SCHIP) spending, along with limited political clout among beneficiaries, make these programs extremely vulnerable during a time of serious state budget constraints. But observations based on HSC site visits show that states have so far largely avoided major cuts that would seriously harm beneficiaries’ access, primarily because programs have more support among coalitions of public officials, health care providers and local advocates than commonly assumed. However, decisions in many states to shelve planned Medicaid and SCHIP expansions show the limits of this surprising level of support.

Medicaid Managed Care: The Last Bastion of the HMO?, by Debra A. Draper, Robert E. Hurley and Ashley C. Short

As the private sector moves away from tightly managed health maintenance organizations (HMOs), states continue to rely on HMOs for Medicaid beneficiaries because they offer guaranteed access to comprehensive benefits at a predictable cost. Plans that focus on Medicaid are becoming more central to states’ programs as commercial plans exit. Publicly traded, Medicaid-focused plans also are emerging. Medicaid participating plans are aggressively managing costs and care, contrasting sharply with commercial insurance where the trend is toward less intrusive managed care. In this context, state Medicaid managed care programs are facing important policy challenges related to plan participation, mainstreaming and product design.

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The Center for Studying Health System Change is a nonpartisan policy research organization committed to providing objective and timely research on the nation’s changing health system to help inform policy makers and contribute to better health care policy. HSC, based in Washington, D.C., is funded principally by The Robert Wood Johnson Foundation and affiliated with Mathematica Policy Research, Inc.

Health Affairs, published by Project HOPE, is a bimonthly multidisciplinary journal devoted to publishing the leading edge in health policy thought and research. For more information, contact Jon Gardner at Health Affairs at (301) 656-7401, ext. 230, or via e-mail,