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Less Competition Allows Practices to Charge More, Raise Prices Faster

STANFORD, CA – Competition significantly drives down what physician practices can charge, according to a new study which also found that areas with fewer health care options also saw much more rapid price increases between 2003 and 2010.

The study, conducted by researchers from Stanford University School of Medicine and the National Bureau of Economic Researchers, found that the top 10% of areas with the least competition had prices ranging from $5.85 to $11.67 higher for "intermediate" office visits than those in the 10% of markets with the highest levels of competition.

Overall, according to the report published in the Journal of the American Medical Association, in the most conservative model, being in the top 10% of areas with the least competition was associated with 3.5% to 5.4% higher mean price.

The study was focused on prices paid in 2010 for office visits by preferred provider organizations (PPOs), the most common type of health insurance plan held by privately insured people in the United States.

Included was data from 1,058 U.S. counties in urbanized areas, representing all 50 states. The researchers determined the average price PPOs paid per county for office visits by established patients to physicians in 10 specialties. They then used a price index measuring the county-weighted average price for 10 types of office visits with new and established patients relative to national average prices. The specialties were internal medicine, family practice, cardiology, dermatology, gastroenterology, neurology, general surgery, orthopedics, urology, and otolaryngology.

"The research comes out of trying to understand some dramatic changes that have occurred in the health-care system over a couple of decades," said lead author Laurence Baker, PhD, professor of health research and policy at Stanford.

A factor in lowering competition is the shift from practices with one or two doctors toward larger, more complex organizations with many physicians, according to the report.

"This has always been an important issue, and now it's even more important as policy moves us more and more toward larger practices," added co-author Kate Bundorf, PhD, associate professor of health and research policy.

Bundorf pointed out that, because of the issue of competition, the push from the private sector and Medicare to form larger practices may be a mixed blessing. While the benefits of larger groups are clear, she said, there has been little evidence on how the lessened competition affects national healthcare spending.

"It's an important question for the U.S. health-care system right now. If we move toward larger practices, how can we get the benefits but avoid the challenges higher prices would create?" Baker questioned.