Jun 06, 2019

Competition as the Engine for Lowering Healthcare Costs

Seema Verma
Administrator, Centers for Medicare & Medicaid Services

History tells us that when monopolies form prices rise, innovation sputters, and consumers suffer.  It is curious why advocates for single-payer, government-run solutions ignore this reality, as if healthcare is somehow exempt from economic forces.  Turning our healthcare payment system into a government-run monopoly is a recipe for high costs and long wait times.  The role of government policies should be to facilitate a competitive healthcare market where consumers have options, and providers must prove their value and compete on the basis of cost, quality, and innovation to attract business.  Only a truly free and competitive market will provide patients with more choices that can deliver both lower costs and higher quality.

The stakes are high.  By 2027, nearly one in every five dollars spent in America is projected to be spent on healthcare.  To address this issue, it is important to first understand the factors behind this trend.  A recent study in JAMA showed that healthcare utilization is not significantly different between the US and comparable countries, but prices are much higher in America.[1]  There are many drivers of high prices, but provider consolidation is an important one – when there are fewer competitors, patients have fewer choices and prices go up.  Worst of all, when a single monopoly controls a market, there is no restraint on costs, and no pressure to improve quality.

The government can exacerbate this problem. One example of the effect that a lack of competition can have is the Obamacare Exchanges, where, until recent efforts have helped stabilize the market, premiums shot up as insurers left the market.  Previous government policies led to an exodus from the Exchanges, leaving many counties with just one insurer.  A recent paper in Health Affairs estimated that Exchange plan premiums were 50 percent higher, on average, in areas with only one insurer compared to areas with more than two insurers.[2]

Government policies have stymied competition across many fronts and have been a major driver of healthcare consolidation.  The thicket of regulations that CMS has rolled out over the years has significantly accelerated consolidation.  The costs to comply with CMS regulations have, in many cases, become too high for small, independent physicians to bear – from requirements regarding EHRs to new regulations under MACRA – forcing them to become employees of hospitals.  According to a survey by the American Medical Association, the percent of clinicians with ownership status in their practice declined from 53 percent in 2012 to 47 percent in 2016, with young physicians more than three times as likely as older physicians to be employed by hospitals.[3]  Independent physicians are increasingly selling their practices to hospital systems, and new physicians often start their careers as employees of larger systems.

This consolidation has unfortunate implications for our healthcare system.  We have seen many examples of anti-competitive behavior by large hospital systems, including hospitals thwarting price transparency, hospitals demanding that insurers include them in their networks, and hospitals discouraging the inclusion of competitor systems in insurers’ networks.[4]  Large hospital systems also exert pressure on physicians to keep referrals in-house, even when referrals to outside systems could result in higher quality or lower costs.  A recent analysis of Medicare bills for nearly a million doctors found that doctors acquired by a hospital system increase referrals to their new employer nine-fold after the acquisition.[5] 

But the Trump Administration is turning the tide, focusing on unleashing innovation and choice.  One of the first initiatives launched at CMS under this Administration was “Patients over Paperwork,” which involves updating regulations that are outdated, duplicative, or overly burdensome.  CMS’s effort to promote price transparency is also an effort to inject competition into the healthcare market, as price transparency would allow patients to compare providers and suppliers on the basis of cost.  Beginning this year, under updated guidance issued by CMS, hospitals must make public a list of their standard charges online, which we consider to be a first step toward achieving this goal.

Recently, CMS changed our payment policies to promote site-neutral payment for clinic visits.  A patient today often must pay more for the same healthcare service if they go to an office owned by a hospital system than if they go to an independent physician office.  Our site-neutral payment policy ensures real competition and puts all doctors on a level playing field, which benefits patients.  We estimate that beneficiary copayments will be $380 million lower this year as a result of these changes.  To further promote site neutrality and increase competition, we have been working to ensure that patients can receive procedures in settings outside a hospital when care can safely and effectively be provided in other settings.  Specifically, we have expanded the number of surgical procedures that Medicare will pay for at Ambulatory Surgical Centers (ASCs) to promote patient choice.

Our site neutral policies build on other changes we have put forth to promote competition and counter the push toward consolidation.  This includes setting payment for prescription drugs under the 340B drug discount program to more closely match the actual price of the drug.  We noticed that some hospitals were buying up physician-owned clinics, giving these clinics access to discounted 340B prices.  Hospitals billed Medicare for the full sales price of the drug however, generating extra profit.  We have changed our payment for 340B drugs furnished in hospital outpatient departments to more closely match the discounted drug prices to remove this incentive for consolidation.

We have also made changes to Medicare’s main program for Accountable Care Organizations or ACOs, which are groups of healthcare providers that band together to coordinate care.  ACOs may be eligible for waivers of certain laws, including those designed to prevent providers from benefiting financially from self-referrals.  Under the old rules for the program, providers could form ACOs and access these waivers with no real consequence if they failed to lower costs. Under our recent redesign of the program, called “Pathways to Success,” all ACOs must agree to progress quickly to real financial risk, so as to not provide an incentive for consolidation without ensuring accountability.  And our changes to the ACO program are designed to encourage participation by ACOs led by physician practices, an option that can provide practices with an alternative to consolidating with hospital systems.  Our overhaul of the ACO program is projected to generate savings to Medicare of $2.9 billion over ten years.

These are just a few examples of our initiatives.  CMS will continue to reduce regulatory burden and bolster competition in order to support independent practices and increase choices for patients.  It is imperative that America move to a dynamic healthcare market in which providers innovate and prove their value to patients, instead of perpetuating the inefficiency and cost growth that have put our nation on an unsustainable trajectory. 

Proposals to create a single payer system would move in the opposite direction.  This form of central control would have the all-too-predictable consequence of driving consolidation, leading to a system controlled by a few powerful providers, and not by patients. Instead, we believe that individual Americans and their doctors, not the government, must have the power to make healthcare decisions that work best for them and their families.


[1] https://jamanetwork.com/journals/jama/fullarticle/2674671

[2] https://www.healthaffairs.org/doi/full/10.1377/hlthaff.2018.0054

[3] https://www.ama-assn.org/sites/ama-assn.org/files/corp/media-browser/public/health-policy/PRP-2016-physician-benchmark-survey.pdf

[4] https://www.wsj.com/articles/behind-your-rising-health-care-bills-secret-hospital-deals-that-squelch-competition-1537281963

[5] https://www.wsj.com/articles/the-hidden-system-that-explains-how-your-doctor-makes-referrals-11545926166