Market Concentration in Health Care: Government Is the Problem, Not the Solution

To improve health care quality and reduce health care prices, state and federal legislators must repeal or drastically overhaul regulations, tax distortions, and entitlement programs that encourage producers to consolidate

• The U.S. health sector is not serving consumers as it should or could
• Low-​quality care costs lives, while bad policy confounds efforts to improve quality
• Market concentration contributes to these deficiencies
• Markets for hospitals, physician services, and health insurance have exhibited increasing concentration over time
• In 2016, markets for specialist physicians exhibited a high degree of concentration in 65 percent of metropolitan areas
• Hospitals are also driving consolidation in markets for physician services
• Increasing competition in health care markets may literally be a matter of life and death

To improve health care quality and reduce health care prices, state and federal legislators must repeal or drastically overhaul regulations, tax distortions, and entitlement programs that encourage producers to consolidate.

• Eliminating harmful regulation and letting consumers control the $4 trillion that fuel the U.S. health sector would restore the normal market mechanisms of entry, competition, and price-​consciousness that combat inefficient consolidation

Nearly all government regulation inadvertently encourages inefficient consolidation

• In general, regulation imposes high fixed costs but low marginal costs.
• The greater the overall regulatory burden, the greater the incentives for inefficient consolidation. The fixed costs of regulatory compliance inhibit entry, grant larger firms a price advantage that grows as the firm grows, and therefore encourage firms to merge with their competitors.

Consumer price-consciousness acts as a check on providers' ability to amass market power and charge excessive prices

• To the extent consumers are price-​conscious, they respond to excessive prices by switching to lower-​price providers.
• Government policies that encourage excessive levels of coverage upset that balance and lead to inefficient consolidation
• The tax exclusion for employer-​sponsored health insurance diminishes price-­consciousness when consumers purchase both medical care and health insurance
• Enabling excessive coverage diminishes the market's ability to punish inefficient consolidation

To curb inefficient consolidation, government should repeal or drastically curtail regulations that encourage it

• Eliminating any government regulation with high fixed costs and low marginal costs would reduce incentives for health care providers, insurers, and other producers to consolidate and would increase competition by removing barriers to market entry
• Since 1976, federal regulators have issued more than 208,000 final regulations.
• The costlier the regulation, the more that eliminating it would remove incentives for inefficient consolidation and encourage competition

Bottom Line

• Any-willing-​provider regulations protect high-​price providers from price competition by preventing insurers from steering enrollees toward more-​efficient providers
• The result is higher prices and premiums
• Network-​adequacy regulations inhibit competition among both insurers and providers and "can also undermine attempts by insurers to promote competition" and lower prices
• Repealing or reducing these regulations would reduce market concentration and higher premiums

Eliminating anti-​competitive government policies in health care may literally be a matter of life and death

• To start, Congress should repeal federal network-​adequacy regulations and the "community rating" price controls that give rise to them.
• Congress should reform the tax code and Medicare to make consumers fully price-​conscious
• If consumers controlled the majority of the $4 trillion that fuel the U.S. health sector, they would punish inefficient consolidation and excessive prices because they personally would reap the benefits of switching to more-​efficient providers. Patients would not pay hospitals twice as much as what a physician's office charges for the same service. 

https://www.cato.org/briefing-paper/market-concentration-health-care-government-problem-not-solution#