Dueling Forces In Today's Healthcare Markets

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All types of monopoly are not created equal in the U.S. economy. In a forthcoming study later this month for the American Enterprise Institute, Barak Richman of Duke Law School emphasizes that health care providers with market power enjoy substantially more pricing freedom than monopolists in other markets.

Traditional antitrust enforcement tools have done little to halt extraordinary consolidation in local hospital markets over the last two decades, which drove higher price increases for inpatient services. Comprehensive, U.S.-style health insurance further enhances the pricing freedom of health care firms with market power. The Affordable Care Act of 2010 (ACA) does little to address the monopoly problem and may even worsen it.

We need better solutions to this chronic problem of too much concentration and too little competition. They include not just tighter review of new hospital mergers and consolidations, but also:

• Closer monitoring of the competitive effects of emerging Affordable Care Organizations (ACOs)

• Curbing new abuses of "state action" immunity

• Requiring unbundling of monopolized health care services

• Challenging anticompetitive terms in insurer-provider contracts

• Promoting interregional competition in health care services, and

• Encouraging nonmedical substitutes for "essential" health benefits

Problems of excessive concentration and insufficient competition in health care markets are not new, although their industry sector source has varied over time. For example, insurers were more dominant price-setters during the heyday of managed care in the 1990s. But more recently, markets for hospital services have presented the most serious competition policy issues.

Richman observes that whereas monopolies in other parts of the economy enable sellers to charge higher prices while reducing output, comprehensive third-party health insurance coverage enables many cost-insensitive patients to pay monopolist providers' asking prices rather than being induced to give up desirable health care goods and services. Hence, it amplifies the redistributive effects of health care monopolies (lower-income premium payers subsidize upper-income providers and insurance consumers) and inflicts allocation inefficiencies as well.

In other words, "too much of a good thing," at excessive prices. The combination of market concentration and generous insurance means consumers and providers end up overspending even more on costly health care.

Competition policy in health care is further hampered by judicial resistance to antitrust challenges to mergers involving nonprofit hospitals (which account for roughly three-quarters of hospital admissions, outpatient visits, and expenditures). Past cases have turned on skepticism by judges that local nonprofit hospitals would take advantage of their pricing power, and their belief that hospital monopolists would put to good use any market power they might possess. (As if nonprofit empire building never occurs!)

A less-noted future problem in health care policy involves the growing "competition" among dominant market players to obtain, maintain, or extend their market power advantages. The highly regulated and heavily subsidized regime ahead under the ACA already has triggered a feverish scramble among health industry firms (insurers, pharmaceutical manufacturers, physician practice groups, and device makers, as well as hospitals) to get bigger market share and also become better "connected" politically to ensure that they will be among the politically dependent survivor incumbents in the years ahead. With most of the key decisions in health care financing, coverage, and even treatment likely to be made in Washington, investments in winning future rounds of political competition is likely to trump responsiveness to market competition.

Prospects for addressing these competition problems in health care markets through conventional antitrust enforcement remain limited. Rolling back previous hospital mergers is quite difficult legally, impractical administratively, and often counterproductive economically. A more important target for better antitrust scrutiny is the imminent emergence of politically favored ACOs. Although promoted by the Obama administration as its latest magic bullet to reform our inefficient delivery system and reduce its projected future costs, ACOs could instead mutate into new vehicles to engineer and leverage greater monopoly power in already-concentrated health provider markets. The latest set of regulations to govern future ACOs need to be revised to ensure that their promised efficiencies in health care coordination and integration are more likely to outweigh the danger of even further consolidation of provider market power, and that such organizations remain truly accountable to patients and market forces (and not just to political patrons).

Richman recommends further additions to enhance the pro-competition, health-policy tool kit. The longstanding state action immunity doctrine, which essentially allows state regulation to immunize otherwise anticompetitive (and illegal) private conduct needs to be tightened. Three current court cases originating in Michigan (US v. Blue Cross Blue Shield of Michigan), North Carolina (North Carolina State Board of Dental Examiners v. FTC), and Georgia (FTC v. Phoebe Putney Health System) could provide federal appellate courts and perhaps the Supreme Court with new opportunities to limit abusive extensions of this antitrust immunity.

Another promising antitrust enforcement step could be to require hospitals and other provider entities to unbundle, at a purchaser's request, certain health care services so that the purchaser can negotiate their prices separately. Richman notes that permitting a hospital monopolist to tie unrelated services together expands its reach, profitability, and longevity - at the expense of consumer welfare. Drawing the exact lines for when to exercise this "unbundling" enhancement of anti-tying antitrust enforcement needs further work, but it is worthy of consideration for improved price competition.

Richman suggests another fruitful area for antitrust attention: Challenging anticompetitive terms in insurer-provider contracts. One common practice is for a dominant health care provider-seller to promise to give an insurer-buyer the same discount from its high prices it might give to a competing health plan. Such most-favored-nation (MFN) clauses can play a useful role in many commercial contracts, but they have been prone to anticompetitive abuse in certain highly concentrated health care markets recently (most notably in Massachusetts and Michigan). When MFN clauses protect insurers against their competitors' getting better deals, many of those insurers can become too likely to give in quickly to extortionate monopolist price demands.

Regulators have a necessary role in distinguishing better between restrictive agreements that achieve transactional efficiencies and agreements that restrict insurers' freedom to cut self-serving price deals with competitors. Other anticompetitive contractual practices worthy of closer regulatory scrutiny involve "anti-steering provisions" and "must include in network" guarantees.

The ACA poses some additional barriers to more vigorous competition in health services. Its "minimum medical loss ratio" rules for insurers may superficially appeal to some insurance purchasers, but they could further disarm payers in aggressive price negotiations with providers and stifle insurers' investments in innovative monitoring and improvement of health care delivery. The eventual scope and scale of the Act's regulatory requirements for "essential health benefits" also could discourage investments in low-cost, nonmedical alternative interventions that can produce results superior to mandated traditional care.

Richman also suggests a different mechanism to battle local monopolies in health care: Expanding the locus of competition. Future health policy should strive to encourage, not inhibit, interregional competition by reducing regulatory and reimbursement barriers to "medical tourism."

Instead of doubling down on the "metabolic eating disorder" triggered by public policies that encourage overconsumption of conventional, highly subsidized health insurance -- or resorting to tighter price controls and public-utility-style regulation of politically mandated coverage, we should consider some better remedial medicine - a stronger dose of market competition.


Mr. Miller is a resident fellow at the American Enterprise Institute, and the co-author of Why ObamaCare Is Wrong for America.

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