The commercial healthcare market can show what spending areas could be cut Image By Benedic Ippolito This is a lightly edited excerpt of testimony recently provided to the U.S. Senate’s Health, Education, Labor, and Pensions hearing " Making Health Care Affordable: Solutions to Lower Costs and Empower Patients." The high cost of U.S. health care presents a consistent challenge for policymakers. Total spending now reaches nearly $5 trillion per year, with federal outlays accounting for $1.9 trillion, or 27% of the federal budget. Spending on public programs, like Medicare and Medicaid, directly strains the federal budget and is a major contributor to the nation’s long-run fiscal imbalance. High costs in the commercial health care market — where roughly 153 million people obtain coverage — increase premium costs for employees and employers. The total premium costs for an employer-sponsored insurance plan for a family now average over $25,000. That number is large relative to the median household income of roughly $80,000 and contributes to lower wage growth and employment. There are, thus, broad potential benefits to moderating the growth of health care spending. Successful efforts to do so can improve the country’s long-run fiscal outlook, increase wage growth for workers, lower out-of-pocket costs, increase available funds for other policy goals and much more. However, this does not argue in favor of indiscriminate cuts to health spending. A large portion of health care spending goes towards services or products that deliver significant value. Reducing spending in those areas is likely to lower welfare. Instead, policy should be designed to target settings where the link between spending and value is most tenuous. One setting where this is likely to be true is when markets suffer from imperfections like a lack of information or choice — either due to natural features of those markets or because of poorly designed policies. Regardless of cause, there is little reason to believe that spending reflects the preferences of consumers if they lack information to make choices or have few options to pick from. Policies that increase competition and transparency improve market functioning and directly address high prices or spending that deliver limited value to consumers. There are many areas where Congress can work towards these goals. Well-functioning health care markets rely on competition between firms to encourage higher quality and lower costs. These dynamics are weakened in cases where firms face few competitors. An extensive body of research has shown that greater concentration tends to result in higher prices and is not consistently linked to improvements in quality or access to care. Congress has several mechanisms through which it can lessen consolidation and improve competition in healthcare markets. One option is to give antitrust agencies — the Department of Justice and Federal Trade Commission — more information about potentially anticompetitive transactions and enhance their ability to impede them. Antitrust agencies are currently notified of potential mergers or acquisitions if the value of the transaction exceeds a certain limit, currently set at $126.4 million (adjusted annually). However, most hospital mergers and nearly all transactions involving physicians fall below this threshold. Congress could lower this reporting threshold and increase transparency into potentially concerning transactions. Some healthcare markets are systematically consolidated through a series of small transactions that, by themselves, are unlikely to trigger competitive concerns. However, the combined effect could result in heavily concentrated markets. Congress could require more insight into these transactions by requiring premerger notification once the accumulated value of transactions by a single parent company in a market exceeds a given level, even if the marginal acquisition alone does not. Some have also argued that Congress should consider lowering the bar antitrust agencies must meet when challenging such transactions. Read the full testimony here. Dr. Benedic Ippolito is a senior fellow at the American Enterprise Institute. *The opinions expressed in this column are those of the author and do not necessarily reflect the views of HealthPlatform.News.
