Monday, November 14, 2011

Price Discrimination and Hidden Negotiations

Uwe Reinhardt of the New York Times blog Economix recently wrote about an issue that has been perplexing me of late. How do hospitals and providers in the same state and even the same community charge such different prices for the exact same services they provide? Similarly but in the reverse, how do health insurance companies, seemingly competing with each other in the same market, pay such different prices for the exact same services? Isn't our free market health care system supposed to lower costs through good old-fashioned market competition?

I thought so, but it doesn't seem to.

The contribution of high and rising unit costs to our overall health cost crisis was the subject of the recent September Health Affairs issue. The same cost conundrum was detailed in 2003 and has been described in many other times and places as well. In addition to describing the problem, the recent Health Affairs issue also includes a section devoted to "strategies to cut costs" which includes the following ideas: a weight loss program, telehealth innovation, successful collaborative care models, and bundled payment reform. But haven't we seen this all before?

None of these ideas address the fact that price discrimination and hidden negotiations are contributing to the rising costs in our system. There seems to me to be three (overly simplistic) options to reduce high unit costs.

  1. Improve price competition among payers and providers. Massachusetts recently introduced recommendations on provider price reform. One recommendation was to open up the secret negotiations that now take place between hospitals and insurance companies in an effort to introduce transparency to the process. The goal is to reduce some of the variability that now exists by introducing real competition back into the "market."
  2. The second idea was also approached in the same recommendation set and is considerably farther left. Regulate prices. If the market can't be relied upon to drive competition, the other option is to strip competition from the system entirely. In this setting I can imagine some immediate concerns: heavy government control, decreased innovation, lower salaries, not mention a serious lack of political feasibility. There is a third option, however.
  3. Many countries (Germany, Switzerland, Belgium) operate systems whereby providers and payers negotiate prices on a regional level, but in a coordinated fashion. The negotiations do not occur between individual hospitals and insurance companies, but rather take place between formed coalitions. This encourages active participation, allows for regional variability, but eliminates the price discrimination and hidden negotiation practices currently employed in the US.
Even with a very introductory understanding of economics I am able to see that the current system of price setting is extremely inefficient. It neither allows the free market to function (which requires widely available information among all parties involved) nor for government oversight. In the current system monopoly (in markets where large providers dominate) and monopsony (in markets where large insurance dominates) run free. Both are market failures.

We must move from a hidden process of back-room deals to a more transparent and competitive system. If we are not able to, government price regulation may be our only choice, because our high and growing unit costs are entirely unsustainable.



  1. The argument that I have heard against transparency in those negotiations is that it will actually drive up prices. I believe they would argue that the market functions like an oligopoly, so if the insurance companies know each others prices, they will implicitly reduce their reimbursements. Thus, all would gravitate to the same low reimbursement rate. I assume that a game theory analysis could be applied. I think this argument is bogus, however, mostly because it is made by insurance companies who are profit seeking. If we are going to continue with the concept of a free health care market, it is inconceivable to have private negotiations. I would be interested in hearing more about the regional negotiations sometime.


  2. Yeah the regional negotiations are what we talked about in class today. Called "all-payer" and there are some articles by Uwe Reinhardt about them that was mentioned in class as well.