Health Care Costs Driven Lower By Competition

Study finds practices in less competitive markets are able to charge more for services.

The cost of health care is lower in markets where more competition exists, according to the results of a recent study.

Published October 22, 2014 in the Journal of the American Medical Association, researchers from Stanford University examined how competition effects the price for office visits paid by preferred provider organizations, which are the most common health insurance plan of privately insured individuals in the United States.

"The research comes out of trying to understand some dramatic changes that have occurred in the health-care system over a couple of decades," said the lead author, Laurence Baker, PhD, in a press release.

The study noted the major shift of small practices into more complex groups with many physicians, which reduces competition among physician practices. As a result, researchers assessed how differences in the level of competition within a region affects payment to doctors.

"This has always been an important issue, and now it's even more important as policy moves us more and more toward larger practices," said study co-author Kate Bundorf, PhD, in a press release.

A push from the private sector and through Medicare to encourage large practices to be formed was thought to improve the efficiency of the health care system. For example, doctors in a group can more efficiently exchange patient medical history information, in addition to a staff that supports large patient volume.

Yet to be considered, however, was how these larger groups would impact health care spending.

"It's an important question for the US health care system right now," Baker said. "If we move toward larger practices, how can we get the benefits but avoid the challenges higher prices would create?"

Through an analysis of the prices paid to physicians from more than 49 million privately insured people in the United States, the researchers examined the number of claims and mean price paid for each service in 1058 counties from all 50 states.

The study revealed the top 10% of practices with the least competition had prices ranging from $5.85 to $11.67 higher for intermediate office visits than practices from 10% of the markets with the highest competition levels.

When examining averaged prices across multiple types of office visits, practices in the top 10% of areas with the least competition had a higher mean price of 3.5 to 5.4%. The researchers note that the small percentage increases translate into tens of billions of dollars in extra spending.

"These larger organizations might have better processes in place to optimize care," Bundorf said. "But our research also points out, well, wait a minute: We also have to think about the effect on prices and try to balance those two things when we think about how to form policy about these organizations."