Provider Market Power and Health Care Costs: Evidence from Claims Data

In any market-based health care system, one of the key drivers of health care costs is the level of competition faced by medical care providers.  Providers are likely to have market power in many parts of the country by virtue of offering the only or one of a small number of options patients have for treatment close to home.  All else equal, provider market power should result in higher reimbursements paid by insurers to providers.  A key limitation to empirical work to date has been the lack of data that are fully population representative and that provide detailed information about both the claim/charge submitted by a provider and the eventual payment/reimbursement made by an insurer.  Previous studies have either used convenience samples from databases that contain complete charge and payment information or random samples from data sources that do not provide the charge submitted by a provider and/or the amount paid by an insurer.    This study is based upon a new data source covering an entire population and providing complete and detailed data on charges and payments at the medical service level.  The New Hampshire All-Payer Claims Database (APCD) provides complete and detailed information on all of the 12 million claims for the 3.5 million privately-insured individuals in the state from 2007 to 2011.  This is combined with data on the market share of providers at the county, year, and practice specialty level.  The results of preliminary analysis of claims for cardiology, endocrinology and gastroenterology providers indicate that greater market concentration is associated with significantly higher charges submitted by providers, as well as significantly higher eventual payments.  However, more concentration is also associated with a significantly larger gap between charges and payment, suggesting that providers in more concentrated markets may overestimate their true bargaining power relative to insurers.  For example, an increase from the observed average level of provider market concentration in this sample (Herfindahl-Hirschmann index value of 0.09) to a moderate concentration level (Herfindhal-Hirschmann index value above 0.15) would be predicted to increase provider charges by $7.63 or 2 percent, while increasing payments by only $2.21 or 1.3 percent. These effects also vary by provider specialty.  Market concentration is highest for gastroenterology, and this is also the market where changes in concentration have the largest effects on both charges and payments.