Physician concentration drives up prices

Less Physician Practice Competition Is Associated With Higher Prices Paid For Common Procedures

By Daniel R. Austin and Laurence C. Baker
Health Affairs, October 2015


Concentration among physician groups has been steadily increasing, which may affect prices for physician services. We assessed the relationship in 2010 between physician competition and prices paid by private preferred provider organizations for fifteen common, high-cost procedures to understand whether higher concentration of physician practices and accompanying increased market power were associated with higher prices for services. Using county-level measures of the concentration of physician practices and county average prices, and statistically controlling for a range of other regional characteristics, we found that physician practice concentration and prices were significantly associated for twelve of the fifteen procedures we studied. For these procedures, counties with the highest average physician concentrations had prices 8–26 percent higher than prices in the lowest counties. We concluded that physician competition is frequently associated with prices. Policies that would influence physician practice organization should take this into consideration.


The existence of an association between concentration and prices should underscore the importance of continued attention to the challenges posed by provider consolidation, especially given that consolidation among physician groups is likely to continue. Increased health care expenditures attributable to higher prices without improved outcomes for patients would generate inefficiency in the US health care system at a time when the opposite is badly needed. Policies that balance any benefits of larger organizations with the potential for problematic price increases, possibly including appropriate antitrust oversight, are needed as the country seeks to ensure efficient, high-quality patient care.



By Don McCanne, MD

Consolidation of physician practices has been promoted as a means of improving efficiency and quality of care by means of integrating health care services. But this has raised the concern that concentration is anticompetitive and thus may result in higher health care prices. This study looks at that possibility.

Although outrage is often expressed at some of the very high prices that physicians charge for procedures, those prices are rarely paid since Medicare and Medicaid dictate the actual amount they pay, and private insurers contract for allowable charges for their network providers. Only patients who are uninsured or who are using out-of-network providers face the full charges, but, even then, lower prices are often negotiated on an individual basis, or sometimes the patient simply defaults on the bill. So in considering health care costs in general, it is the authorized payments that count and not the list prices.

This study, in fact, confirmed that where physician practices are more concentrated, prices insurers paid for health care are higher. So physician concentration is anticompetitive and results in higher payments. But are physicians the bad guys who are making us pay more for health care than we should be?

Looking closer at this study, the prices analyzed were those paid to in-network physicians in preferred provider organizations (PPOs) representing larger employers. This is where insurers should be able to deliver on their promises of lower prices. By representing larger employers, the insurers contracting with the physicians who would be included in the networks should be able to extract from them their most competitive prices.

But that didn’t happen. The insurers were not able to drive a better bargain in markets with physician concentration. Physicians in less concentrated markets were able to provide their services for lower prices, so that means that insurers actually were paying excessive prices in the concentrated markets.

Some say that the costs of large integrated systems are higher, so the prices had to be higher. But this belies the claim that integration of services increases efficiency, thereby reducing prices. What this actually shows is that the PPOs were not as effective negotiators when faced with provider concentration.

Compare that with the publicly-administered pricing that takes place in a single payer national health program. The amount paid is based on actual costs with fair margins, not on whatever the market will bear. What we don’t need are wimpish insurers who charge us outrageous administrative fees for a job they don’t even do well. Let’s get rid of them.