Market Power and Provider Consolidation in Physician Markets

Because the United States relies largely on markets for health care delivery and financing, analysis of market power in the health care sector is of general interest to policy makers. Recent studies have indicated that provider consolidation has been a major contributing factor to increases in the cost of health care. In particular, there is a large literature showing that increased concentration in hospital markets can lead to higher prices for hospital care. However, although spending on physician services accounts for nearly 20% of health care expenditures and there are increasing concerns about physician practice consolidation and the effects of provider coordination resulting from the formation of Accountable Care Organizations (ACOs) under the Affordable Care Act (ACA), there has been little comparable systematic analysis of market power in physician markets. By linking a 20% sample of Medicare beneficiaries that we use to infer patient preferences to a unique dataset that includes information on private payers’ allowed prices for physician services for the year 2009, our study applies and estimates a model of option demand for physician services. We use our estimates to analyze the extent of market power possessed by physicians in a mid-sized metropolitan area and simulate the potential impact of further physician practice consolidation on the price of physician services. Preliminary results suggest the presence of market power for specialist physicians, and that the degree of market power possessed by physicians varies by specialty.