The California competitive model

Abstract

California became very successful in controlling rising health care costs by promoting price competition through market-based, managed care policies. However, recent data reveal that the state has not been able sustain its initial success in controlling growth in hospital prices. Two powerful trends emerged in California that eroded the conditions needed to sustain price competition. To ensure timely access to emergency hospital services, government regulators enacted regulations that had the unintended effect of giving hospitals tremendous leverage when contracting with health plans. Also, antitrust authorities allowed hospitals to consolidate into multihospital systems by adding members that were not direct competitors in local markets. The combined effect of these policies and consolidation trends was a substantial reduction in the competitiveness of provider markets in California, which reduced health plans’ ability to leverage competitive provider markets and negotiate lower prices and other benefits for their members. Policy makers can and should act to restore competitive conditions.