Price Gouging Could Impale Obama's Healthcare Law

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In recent weeks, I've talked to a handful of large healthcare firms and medical practices that offer specialty medical services. I asked them what kinds of prices they're soliciting from the new health plans now taking shape under Obamacare.

These providers said that they're demanding, and in some cases securing, pretty rich reimbursement rates from the new, Obamacare health plans.

If this trend broadens, it could impale the President's healthcare law.

To take care of patients that will be covered by the new insurance scheme, these providers are requesting payment rates that are higher than what they're being offered by Medicare. Some providers are even insisting on premiums over what they're paid by the existing private, employer-based health plans.

In short, the provider groups don't really want the Obamacare business, unless they can extract a premium for taking on these new contracts. Some of the Obamacare plans, stuck in markets where there are few competing groups of providers to choose among, are being forced to accept these high prices.

It wasn't supposed to play out this way. We were told providers would be discounting to get the volume of business that Obamacare offered as the new legislation banded large groups of patients into statewide insurance pools.

The exchanges, however, aren't looking like such attractive markets.

The people that now seem most likely to enter these state-based insurance pools, and buy the new coverage, represent a costly mix of patients with a lot of pre-existing medical conditions. The volume is also unlikely to materialize.

Most of all, providers say that they don't want to undercut their existing contracts, which in many cases were struck with the same insurance companies that are now offering the new Obamacare plans. Providers fear that if they discount in one market, they'll be forced to discount across all of their different segments.

So far from mining discounts, it's more likely that Obamacare plans could be gouged.

A central premise was that Obamacare would lower costs by giving health plans a negotiating edge over providers. But the consolidation that's now rampant in healthcare is starting to give certain providers counter leverage over health plans.

The architects of Obamacare have only themselves to blame for this phenomenon.

Many provider groups are locked into historical contracts with the existing insurance schemes. So even as they band together and gain market leverage, they can't quickly or easily bump up their rates. When it comes to the new Obamacare plans, providers are starting fresh. They can use their leverage to set a new price.

That's precisely what many are now doing.

The Affordable Care Act encouraged providers to consolidate into large, multispecialty groups as a way for doctors to be able to take on "capitated" financial risk. The entire arrangement is a throwback to the late 1990s and the advent of the original Health Maintenance Organizations (HMOs).

Under the scheme, doctors are paid lump sums of money to care for large groups of patients. The idea is to put the financial risk on the doctor for the cost of the medical care that they deliver. This was a central premise for how Obamacare would put financial pressure on providers as a way to help to lower healthcare costs.

This resurrection of that old, HMO model isn't unfolding as Obamacare's architects envisioned. Hospitals, in particular, are taking the financial bait that the new health law offers, and are using it to binge buy local medical practices. Their goal is to create geographic monopolies. At the same time, doctors have started to feel their own urge to merge. They're banding together to form large, integrated practices.

This is pushing up the cost of medical care. Healthcare, after all, is a local endeavor. That's why national solutions are innately flawed. No solution requires as much remote, central engineering as Obamacare. By driving local markets toward large structures that could take capitated risk, Obamacare has also created doctor monopolies that can now exert leverage on the prices for their services.

This is showing up first in the contracting over the Obamacare plans because that's where the newly empowered provider groups have their first chance at a fresh start. But expect this same pricing power to be flexed in other contracts as existing arrangements come due. This doesn't bode well for Obamacare, or the rest of us.

By driving the consolidation of providers, Obamacare has dismantled the last vestiges of local competition for medical services. Now the government will have to contend with the markets they eviscerated, and the cartels that they created.

American Enterprise Institute (AEI) Resident Scholar Scott Gottlieb, M.D. is a practicing physician.  He previously served in senior positions at the Food and Drug Administration (FDA) and the Centers for Medicare & Medicaid Services (CMS). 

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