Study finds little correlation between market concentration and high healthcare prices

The findings have implications as healthcare policymakers consider ways to curb prices.

Any steps taken to regulate hospital prices for commercially insured patients should look beyond highly concentrated markets, according to a published analysis.

As reported in Health Affairs (login required), Harvard University researchers analyzed 2017 claims and found that many higher-price hospitals are in markets that would be defined as competitive based on antitrust guidelines.

“Policies that target the undesired outcome of high price directly, whether as a trigger or as a screen for action, are likely to be more effective than those that limit action based on market concentration,” the researchers wrote.

Key findings and relevance

The researchers defined high-price hospitals as those in the top quartile of price, adjusted for wages.

They found a prevalence of such hospitals in markets spanning four separate tiers of concentration. For example, in markets with a Herfindahl-Hirschman Index (HHI) score of at least 4,000 — well beyond the 2,500 threshold that indicates high concentration — 34.1% of hospitals fell into the high-price category for inpatient care.

But the share of hospitals with high-priced inpatient care was not vastly lower — 26.5% — where HHI scores were less than 1,500, which indicates a competitive market.

Market competitiveness had even less correlation with pricing of outpatient care: 25.4% of hospitals in markets with HHI scores of more than 4,000 were categorized as high-price, while the share was actually higher — 28.8% — in competitive markets.

“These findings remained qualitatively similar for alternative definitions of ‘high-price’ hospitals, hospital providers and HHI measures,” the researchers noted.

An HHI score of more than 4,000 has become relevant in healthcare policy circles. Two 2019 congressional bills put forth language requiring that commercial health plans limit payment to Medicare rates for hospitals with market shares of at least 15% in urban markets with an HHI score of at least 4,000 or rural markets with a score of at least 5,000.

Even though the bills did not make it past the committee phase, they serve as indications of the scrutiny being applied to healthcare prices.

Conclusions and caveats

“Policies that address high prices regardless of the underlying market structure would be more consistent with a policy goal of constraining high prices,” the Harvard researchers wrote. “In some cases, these policies may entail promoting competition between hospitals in the same market, but if there are not enough hospitals in a market or if procompetitive policies are not successful at lowering the upper tail of the price distribution, regulation focusing on the most expensive providers may be needed.”

The researchers acknowledged concerns that reducing prices may adversely affect quality and cited a lack of clarity about any such correlation.

In addition, categorizing whether markets are competitive in the first place can be problematic. The researchers noted the range of “complex incentives and institutional behavior” that may affect market performance regardless of how concentrated the market is.