NCPA - National Center for Policy Analysis


July 15, 2004

America's health care system features plenty of competition, but it's the wrong kind, says a new study in the Harvard Business Review. As opposed to other industries, where competition drives up value and lowers prices for consumers, competition in the health care field is zero-sum: value is divided and costs are merely transferred, say researchers.

The reason is that there is much less competition at the consumer level due to third party payment.

For example:

  • Health plans, hospitals and networks compete for the business of employers, but health care professionals do not compete for consumers' business in the diagnosis and treatment of specific conditions.
  • The health care industry's main objective is to reduce costs, and participants try to reduce their own costs by transferring them elsewhere
  • Most costs are borne by third parties, giving consumers little incentive to demand greater value in the services they receive for the dollars other pay.
  • Health care markets offer local competition instead of regional or national competition.
  • Insurance companies attract healthy subscribers, raise rates for everyone else, and restrict treatments, rather than helping subscribers choose the best-value care for specific conditions.

Under "positive-sum" competition, the researchers explain, all restrictions on choice at the disease or treatment level would disappear, including preapprovals for referrals. Information on treatments, alternatives and providers' experience would be made available to consumers to enable comparison-shopping. Pricing for treatments would be transparent and billing would be simplified.

The goal of the health care industry, say authors Michael Porter and Elizabeth Teisburg, should be competition that increases value for consumers, lowers costs and provides information and excellent care to subscribers.

Source: Michael E. Porter and Elizabeth Olmsted Teisberg, "Redefining Competition in Health Care," Harvard Business Review, June 2004.


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