High and Rising Health Care Costs. Part 3: The Role of Health Care Providers

One commonly held explanation for high and rising health care costs in the United States points to the market power of health care providers. This third article of a 4-part series examines how the prices and quantities of health care services interact to influence health care expenditures. The article also reviews cost-containment strategies that are designed to reduce prices and quantities of services. One major difference between the costs of care in the United States and those in other developed nations is the price per unit of care--physician fees, payments per hospital day, and pharmaceutical prices. Greater quantities of high-priced innovative technologies in the United States also contribute to higher expenditures in the United States compared with other nations. During the 1990s, payers were partially successful in slowing cost growth by reducing the prices of physician and hospital payments, but more recently, hospitals increased their market power by consolidation and could demand higher prices. Quantities and costs of services for Medicare beneficiaries vary markedly among geographic regions, with research showing an association between health care costs and the supply of hospital beds and specialist physicians. These findings suggest that limiting the supply of resources may reduce the quantity, and thereby the costs, of health services. Shifting the financial risk of health care costs from insurers to providers, as has been done with the Medicare diagnosis-related-group payment and capitation reimbursement, can also be effective in containing costs.