An article published online first in the journal Health Affairs explores the strategies that institutional healthcare consumers—payors and purchasers—can use to fight price inflation in the face of provider consolidation.

In “Seeking Lower Prices Where Providers Are Consolidated: An Examination Of Market And Policy Strategies,” Ginsburg and Pawlson’s thesis is that healthcare consolidation is both inevitable and necessary, but dangerous: On one side, consolidation better positions providers to improve quality and increase efficiency, but on the other, it provides them with the leverage needed to drive prices higher.

Spending growth has slowed, but prices continue to rise, and the authors cite physician employment by hospitals as a factor. The advent of ACOs, increased administrative burden on physicians (including quality data reporting and Meaningful Use requirements) and concern about declining reimbursement are fueling the trend.

Efforts to control the cost of healthcare to date have failed; in fact, most payors’ benefits design dilute or eliminate patient incentives to seek lower-cost hospitals. In the outpatient setting, payors are not providing patients with price and quality information on providers.

The authors identify eight strategies to promote greater competition based on price and quality through private-payor initiatives and regulation where required.

Provider price and quality information. Patients need price and quality information on providers. Some national payors are developing information systems that can provide patients with out-of-pocket estimates; some employers are taking steps to educate employees on network prices of local providers; and Massachusetts has required payors serving state employees to have real-time price information on providers.

Quality information is a critical corollary, the authors say, because studies indicate that in the absence of quality information, “patients tend to use price as a proxy for quality.”

Limited provider networks. Popular during the 1990s, this strategy is making a comeback. Medicare Advantage plans, which employ narrow networks but cover one in four Medicare patients, have proven successful because they have been able to offer a richer benefits mix. Many of the plans offered in the state and federal insurance marketplaces also employ narrow networks.

The authors warn that too much regulatory intervention in the marketplaces could blunt the potential savings from narrow networks, recommending that regulators stick with basic consumer protections and let the marketplace be the incubator.

Point-of-service incentives to influence provider choice. Point-of-service (POS) incentives are designed to appeal to people who value choice; a prime example is tiered formularies in prescription drug benefit plans. This could be applied to providers, both hospitals and physicians, the authors say, and even refined to the service lines within hospitals, although the complexity of implementing the strategy in hospitals probably has been a limiting factor.

Reference pricing represents a more aggressive POS strategy and identifies specific procedures, a knee replacement, for example, and designates which providers have met the price and quality criteria.  If enrollees choose another site, they are responsible for anything above the reference price.

Medical societies have complained that this approach has not been sufficiently refined for providers, but the authors suggest that simple incentives will be more successful than overly complex ones.

Data to assess provider efficiency and quality.  The authors argue for the availability of all-payor claims data on providers to better assess cost and quality. While a number of states are developing these databases and requiring payors to submit claims data, few of them have the technical capability to provide access.

Supporting physician organization development. Physician organizations that assume risk and contract directly with payors are competition for hospitals and should be encouraged for their ability to eliminate unnecessary care, the authors write.  Private payors are fostering the development of such organizations by providing advice and financial assistance and, in some instances, buying large physician practices.

Governments also can play a role in encouraging physician organization development, and an example is CMS’s Advance Payment ACO Model. On the other hand, Medicare’s long-held hospital premium, a payment policy that pays higher rates for care delivered in hospitals than outpatient sites, encourages the employment of physicians by hospitals, the authors believe.

Limiting increases in provider consolidation. The Federal Trade Commission (FTC) must develop new policies related to hospital acquisition of physician practices, the authors believe. The policy of allowing independent practice associations (IPAs) that are clinically but not financially integrated to contract on behalf of member physicians with payors on a fee-for-service basis may be too permissive, for instance. Limiting the safe harbor to contracting arrangements for those providers that assume risk and report cost and quality data to the FTC is a potential solution.

Limiting charges for using out-of-network providers. The authors take the view that limiting out-of-network charges supports network contracting between providers and insurers by limiting incentives for providers to avoid network contracts.  In fact, they suggest that payors broaden these limits to a percentage of Medicare (150%, for example), particularly in heavily consolidated markets where market forces are weak. Another suggested approach is regulatory constraints on health insurance premium increases.

Direct regulation of payment. If such measures fail to increase competition, the authors suggest that governments could set rates, as in Maryland and West Virginia. Popular in the 1970s, rate setting would be considerably more complex by the wide variation in rates across payors.

The authors contend that consolidation will continue, and policy makers have no choice but to enact policies that encourage competition supported by regulation—or move to direct regulation of prices. Now that consumers are paying a greater share of the health care bill, they may be more willing than in the past to accept limits on choice.

Many analysts doubt that the market approach will have the desired effect on price increases, the authors note, and predict that we will see rate setti