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Is competition lowering the cost of health care?

Increase competition and watch prices fall. That cherished principle of economists may work with many products, but it is contradicted in the health care field.

Hospitals, health maintenance organizations, ambulatory care centers, physicians' offices, and others compete with one another more than ever before--and health care costs are still outpacing inflation by a wide margin. The cost of health care increased 7.7 per cent in 1986, seven times faster than the Consumer Price Index, according to the Bureau of Labor Statistics. Late last year, Data Resources of Lexington, Mass., a forecasting service, said the 1987 increase in health care prices would be 6.7 per cent, compared with a Consumer Price Index rise of 3.9 per cent.

A Dec. 20, 1987, article in Hospitals ("Will '88 Be the Year of Price Competition?") noted these trends while outlining a case for the argument that competition increases health care costs. The article cited two studies: * Collecting data from 5,732 U.S. hospitals, two California professors documented, a 26 per cent higher average cost per admission and a 15 per cent higher average cost per patient at hospitals in the most competitive markets (markets with more than 10 neighboring hospitals in a 24-kilometer radius). James Robinson, Ph.D., professor at the School of Public Health, University of California, Berkeley, and Harold Luft, Ph.D., professor at the Institute of Health Policy Studies, University California School of Medicine, San Francisco, published their findings in the June 19, 1987, issue of the Journal of the American Medical Association.

The researchers concluded from their study, and from other studies of competition in the late '70s and early '80s, that the more neighboring competitors a hospital has, the greater the costs, the longer the average stay, and the higher the nursing wages. Another finding: Neighboring competitors are likely to offer the same or similar specialized services.

"At least until 1983," Dr. Luft explained, "hospitals with a lot of nearby neighbors were engaged in a competitive struggle--not for patients but for physicians. And the way in which hospitals competed was to offer the most additional services, the latest in technology, and the best nurse-to-bed ratio."

So competition existed then, but it was not price competition. This was, of course, when third-party payers still reimbursed hospitals on a cost basis. Price didn't matter in the hospital industry at that time, Dr. Luft observed. * A more recent look at health care costs suggests that not much has changed since prospective payment. Catherine McLaughlin, Ph.D., professor of economics at the University of Michigan, and Jeffrey Merrill of the Robert Wood Johnson Foundation, Princeton, N.J., reported initially--in the winter 1986 issue of the Journal of Health Politics, Policy and Law--on the impact of HMOs in 25 of the largest standard metropolitan statistical areas (SMSAs) between 1971 and 1981. Growth of HMOs in an SMSA was associated with fewer admissions to hospitals but higher hospital expenses.

A follow-up study, published in the June 1987 issue of Health Services Research, showed that hospital costs were higher in competitive HMO markets. And more recently, Dr. McLaughlin interviewed hospital administrators, HMO administrators, and corporate benefit managers in 21 large, medium, and small cities across the U.S. Asked about competition, most said hospitals have to fight harder for patients than they did in the past, but few saw the competition centering on prices.

"This is old-fashioned rivalry, just as you see in the auto industry, the soft-drink industry, or the candy industry," Dr. McLaughlin commented. "And it involves the costly practice of trying to convince the consumer, either in terms of actual or perceived differences in quality, that your product is better."

Nevertheless, a number of economists expect hospitals to engage increasingly in price competition . It will be interesting to see how consumers react. Will they welcome lower costs or perceive them, rightly or wrongly, as a reduction in quality and thus opt for higher-priced services?
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Author:Fitzgibbon, Robert J.
Publication:Medical Laboratory Observer
Article Type:editorial
Date:Feb 1, 1988
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