Can Market Competition Cure What Ails Healthcare

John McCracken, PhD

The size and administrative complexity of American healthcare is profound. In 2023 national healthcare spending was more than $4.5 trillion, approximately $13,500 per capita, more than the GDP of all but one other nation of the world. There are more than 6000 hospitals, over a million physicians and more than 900 private payers, all subject to a labyrinth of conflicting incentives and constrained by overwhelming regulatory complexity.

The result is a healthcare system fraught with high costs, uneven quality, access disparities, lack of transparency and excessive market power. No one would disagree that system-wide reform is needed. Given the long-standing American preference for market-based solutions, it is often argued that the best way to deal with these problems is more free-market competition and less government interference.

It is therefore appropriate to ask whether this solution is actually feasible in the industry as it exists today, i.e., whether market competition can cure—or at least improve—what ails healthcare.

A competitive economy is one where buyers and sellers are able to freely interact to exchange goods and services according to the laws of supply and demand. While some level of government regulation may be necessary, by and large market incentives and the profit motive guide economic decision making, which in turn leads to more efficient and productive outcomes.

For this to occur however, there are two absolutely essential prerequisites:

• Price transparency, where both buyers and sellers are easily able to identify and negotiate the prices of goods and services, and:
• Many independent buyers and sellers and an absence of excessive market power or dominance.

Absent either of these prior conditions, traditional market-based solutions cannot exist.

Price Transparency

Price transparency and discovery are a cornerstone of a market economy. In order to shop effectively, buyers must be able to compare and negotiate prices among sellers, which in turns fuels competition and works to restrain spending. This condition is not present in healthcare today for two reasons:

First, state and federal government arbitrarily sets non-negotiable prices on 49% of all healthcare spending, up from 36% three decades ago. Moreover, government’s share is likely to continue rising in the years ahead. Government determined prices are established based on the availability of public funds and the relative political power of market participants, not on the actual costs of services purchased, if they are even known by government price-setters.

Second, there is widespread lack of transparency in prices set by the major service providers, including hospitals, physicians and the manufacturers and distributors of pharmaceuticals. Since 2021, hospitals have been required to publicly post standard charges and negotiated rates for the health services and procedures they offer. The purported objective is to enable employers and patients to compare prices and promote competition. The latest compliance update, however, three years after the rule took effect, determined that fewer than 35% of hospitals are fully compliant. Moreover, the pricing data that is available is hard to find, complicated and suffers from a large degree of duplication and irrelevance. Also, the variation in the file types and structures that are used by reporting hospitals makes it impossible to access the data across hospitals using a common file processing technique. The bottom line is that hospital prices are virtually as uncomparable as they were before the rule was established.

Physician prices are equally difficult to compare. Approximately 52% of practicing physicians were employed by hospitals and health systems at the end of 2021, and another 22% were employed by other corporate entities, primarily health plans and private equity. These corporate employers are able to obscure physician pricing through intercompany eliminations, opaque pricing structures and complex coding and billing algorithms, with the result that accurate estimates for complex services are virtually unavailable.

In short, the requirement of price transparency and discovery essential for effective market competition is far from being met in healthcare. Notwithstanding federal rulemaking, the major provider and supplier interests in healthcare appear to want to keep it that way. As a result, there is little prospect that price transparency will significantly improve in the foreseeable future.

Excessive Market Power

A second requirement for effective market competition is the presence of many buyers and sellers and an absence of excessive market power. Over the past three decades, however, increasing industry consolidation has led to the dominance of vertically integrated systems and local market oligopolies capable of charging non-competitive prices well above marginal costs. In fact, there are few truly competitive health care markets left. Nearly 75% of U.S. hospital markets have been designated as highly concentrated, 65% of the markets for specialist physician services are highly concentrated, and 95% of commercial health insurance markets are deemed to be highly concentrated. Substantial research indicates that this level of industry consolidation has led to anti-competitive practices and rising healthcare prices charged by both health plans and providers.

Can Government Save the Day?

Can Government legislation/regulation reverse these trends sufficient to restore the conditions that will allow market competition to work its magic?

Don’t count on it.

The healthcare industry can be characterized as an ecosystem of competing interests, each resistant to any change that might jeopardize its relative advantage. Tribalism, where near-term advantage takes precedent over long-term solutions, is the rule, not the exception. In 2023 the healthcare sector spent over $745 million in state and federal lobbying, significantly more than any other industry. There are over 3300 registered healthcare lobbyists, 50% of whom are former government employees, whose job it is to stop, delay or deflect any legislative or regulatory changes that might disadvantage their clients.

Another barrier to government led transformation is the rickety and often self-defeating complexity of U.S. public policy, which has become a true kludgeocracy. A “kludge” is defined by the Oxford English Dictionary as “an ill assorted collection of parts assembled to fulfill a particular purpose…a clumsy but temporarily effective solution to a particular fault or problem.” A kludgeocracy is a public policy structure built and run on quick fixes. It’s one in which the government tries to solve complex problems in unsystematic ways, with patches and quick fixes as opposed to creating a fundamentally new policy approach. The end result is a policy mechanism that is substantially more complicated than is warranted by the problem it’s trying to solve.

An example is the Affordable Care Act, which attempted to reap the benefit of combining both free-market principles and government oversight. But with 955 pages of legislative language and thousands of pages of enabling rules, amendments, regulations, executive orders and administrative actions, it has significantly contributed to administrative bloat and mind-numbing complexity.

An Unstable System

The U.S. healthcare sector is capital dependent, heavily leveraged and has a low level of public trust. In a recent national poll 69% of adults surveyed agreed “the system is fundamentally flawed and needs major change” vs. only 9% who disagreed; and 74% believed “the government should impose price controls for hospital services, prescription drugs and insurance premiums,” vs. 7% who disagreed.

The current situation is unsustainable; an industry as large and important to America’s welfare as healthcare cannot maintain this status quo. It is an unstable system and—like all unstable systems—eventually will be reorganized and restructured. It is unlikely to be transformed, however, by internally-led reform, technocratic government regulation or the intrusion of global tech players, national retailers or private equity rollups. When a major industry reorganization occurs, history demonstrates that it often occurs relatively swiftly, with significant disruption to entrenched incumbents, e.g. the experiences of the banking, airline and telecommunications industries. The same is likely to prove true for healthcare.

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John McCracken is Clinical Professor of Healthcare Leadership and Management in the Jindal School of Management, The University of Texas at Dallas.