Market Power and Health Care Costs

It is widely known that Massachusetts has (nearly) achieved universal health insurance coverage but not (yet) overcome the health care cost problem (see the Kaiser Family Foundation’s Fact Sheet). If that cost problem is addressed it will be in the context of a provider market that includes some hospitals with substantial market power. An article by Liz Kowalczyk in today’s Boston Globe describes the large variation in payments by a single large insurer (Harvard Pilgrim) to hospitals and doctors for the same services.

Harvard Pilgrim’s testimony mirrors the results of a yearlong investigation by Attorney General Martha Coakley’s office, which found that the highest pay goes to the providers with the most clout and not as a reward to those hospitals and medical practices that provide the highest-quality care.

Naturally, some debate whether provider market power is the key to high health care costs. That debate will continue. But what should not be debatable is the basis for payment. If we wish to continue to pay high prices for medical care then I would like to see that money spent on quality, not quantity. To my mind, dominant (or even non-dominant) hospitals are entitled to relatively higher fees if they are justified with quality criteria.

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