Overcoming the pricing power of hospitals.

AMID A PERIOD OF UNPRECEDENTED CHANGE AND IMprovement in the US health system, the changes leading to larger local hospitals and health systems, including academic medical centers, are cause for concern. For decades, the dominant business strategy of local hospitals and health systems has been to gain local and regional market share and use that local market power to increase prices charged to private payers. This model has been successful because large businesses must select health plans that satisfy the physician and hospital preferences for hundreds if not thousands of employees. Consequently, employers opt for broad and inclusive networks. This reduces their bargaining power, forcing employers to become price takers and tolerate 8% to 10% yearon-year increases in hospital prices. Moreover,healthplansseemtohavebecomeimmunetothese price increases for 2 reasons: first, any single hospital, no matter how egregious its price increases, has only a small effect on total premiums. Second, price increases are common to all insurers,anddonotconstituteacompetitivedisadvantage.However, inamarketwhereallhospitalsaggressivelyincreaseprices, the net effect is large.