Less competition yields higher prices among provider groups

Health Affairs published a study showing that counties that are dominated by large provider practices tend to have higher prices than counties that are not so dominated. This finding makes sense given that concentration of providers means less competition, and less competition usually means that the market would bear higher prices than if there were more competitors. Nevertheless, it's interesting to see empirical evidence to support what people learned in economics classes.

What's ironic is that as people have been talking about the rapidly increasing price of health care, providers have been consolidating into larger and larger systems. Part of this has to do with how physicians will be compensated in the future, where it's easier for larger groups to bear risk (through structures known as Accountable Care Organizations).

I think that some of this consolidation also has to do with how concentrated the buyers (insurance companies) of these medical services are. It's not hard to imagine large insurance companies demanding low prices from smaller physician groups, but being unable to extract similar concessions from larger groups. After a while, physicians who were working in smaller practices might simply decide that they would be better rewarded for less work by simply joining a larger group, thereby eliminating some choices for the insurance companies. Hence, a short-term optimization for insurance companies (saving money on procedures provided by small groups) leads to a worse long-term scenario for them (higher prices overall).

There are clearly reasons that medical care can benefit from larger groups of providers; however, these benefits might also come with a financial cost.