Economics even I understand

There’s an article up at Newsweek on how the Massachusetts health care reform plan has not only dropped the rate of uninsurance, but also held costs steady:

But despite an influx of patients, total hospital costs haven’t grown more than usual. New efficiencies probably helped: thousands fewer patients now use the ER for routine care or show up because of a preventable condition. And the average length of a hospital stay is down an hour per person. But University of Pennsylvania economist John Kolstad, who coauthored the study, speculates that the real heroes could have been insurers, who bargained with hospitals. If the same clout is exercised nationally, optimists may be right about reform’s cost savings.

I’m not the economist around here, but even I get this.  Groups with more market share have more negotiating power.  If insurers control more of the population, then they can negotiate harder with providers for lower costs.  It’s also one of the reasons that single-payer systems cost less in general.  As a monopsony, that payer has a lot of power and can push costs way down.

Conversely, as hospitals and physisians merge and group, they have a lot more negotiating power.  They can demand more money, and this drives costs up.  Austin and Uwe Reinhardt had posts on this recently.

This is also one of the reasons I’m skeptical about the consumer-driven idea that leaving the negotiating in the hands of individuals will bring costs down.  If individual patients are up against providers and their groups, who do you think will win?  And which way do you think that will drive costs?

(h/t Wonkbook, and here’s the full manuscript)

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