Comments on: Antitrust and Health Reform http://theincidentaleconomist.com/antitrust-and-health-reform/ Economics, Health Policy, Law, Life: Musings of Curious Minds. Fri, 12 Mar 2010 02:12:41 -0600 http://wordpress.org/?v=2.8 hourly 1 By: Bill http://theincidentaleconomist.com/antitrust-and-health-reform/comment-page-1/#comment-639 Bill Fri, 16 Oct 2009 21:03:05 +0000 http://theincidentaleconomist.com/?p=2355#comment-639 @Ian What I mean when I said--and if you read the entire sentence I think it is clear-- "McCarran does not facilitate concentration" in the industry is that it does not do so in a structural sense, ie., create fewer firms. Concentration is a term that I used in industrial organization economics sense. I made that clear by continuing in the sentence the following: "separating from that statement that it certainly does permit agreement on competitive terms among individual actors." That is, it does not structural concentration--lead to fewer firms--but it does permit agreement. And, since insurers can't agree on procurement--as it is not in"in the business of insurance" --the fact that McCarran supports more firms operating under a cartel umbrella does not support the view that it leads to monopsony procurement concentration as was the underlying thesis of the post. To the contrary, if you look at workers comps and other lines, there are many, many firms--and they all charge the rating bureau rates as the state minimum rate. As to Varney, Yes, market allocation could fall within McCarran, as does every violation of the antitrust law except boycott, coercion or intimidation, but it's been a while and would like to check if any recent decisions treat market division as to customersas boycott. I don't understand the remainder of the post other than if it says give insurers market power so they can fight with providers who use illegal contract terms to inhibit competition. My response would be to go after both: the insurer and the provider and let the antitrust laws apply to both the insurer and provider. That's the consumer protection and that's the way to help the market. @Ian What I mean when I said–and if you read the entire sentence I think it is clear– “McCarran does not facilitate concentration” in the industry is that it does not do so in a structural sense, ie., create fewer firms. Concentration is a term that I used in industrial organization economics sense. I made that clear by continuing in the sentence the following: “separating from that statement that it certainly does permit agreement on competitive terms among individual actors.” That is, it does not structural concentration–lead to fewer firms–but it does permit agreement. And, since insurers can’t agree on procurement–as it is not in”in the business of insurance” –the fact that McCarran supports more firms operating under a cartel umbrella does not support the view that it leads to monopsony procurement concentration as was the underlying thesis of the post. To the contrary, if you look at workers comps and other lines, there are many, many firms–and they all charge the rating bureau rates as the state minimum rate. As to Varney, Yes, market allocation could fall within McCarran, as does every violation of the antitrust law except boycott, coercion or intimidation, but it’s been a while and would like to check if any recent decisions treat market division as to customersas boycott. I don’t understand the remainder of the post other than if it says give insurers market power so they can fight with providers who use illegal contract terms to inhibit competition. My response would be to go after both: the insurer and the provider and let the antitrust laws apply to both the insurer and provider. That’s the consumer protection and that’s the way to help the market.

]]> By: Ian Crosby http://theincidentaleconomist.com/antitrust-and-health-reform/comment-page-1/#comment-638 Ian Crosby Fri, 16 Oct 2009 17:22:52 +0000 http://theincidentaleconomist.com/?p=2355#comment-638 @ Bill - I'm a little confused, because two posts back, you said "I do think McCarran can facilitate concentration in the industry." Are you backing off that statement? Do you disagree with Christine Varney's testimony on Wednesday that market allocation can fall within the scope of the McCarran exemption? What about actions in relation to their own insureds that, for example, increase switching costs for consumers and thereby barriers to entry for competitors? I'm not saying that any of these are good things, only that going after the carriers while giving providers a pass may just work to strengthen provider market power rather than benefit consumers. @ Bill – I’m a little confused, because two posts back, you said “I do think McCarran can facilitate concentration in the industry.” Are you backing off that statement? Do you disagree with Christine Varney’s testimony on Wednesday that market allocation can fall within the scope of the McCarran exemption? What about actions in relation to their own insureds that, for example, increase switching costs for consumers and thereby barriers to entry for competitors? I’m not saying that any of these are good things, only that going after the carriers while giving providers a pass may just work to strengthen provider market power rather than benefit consumers.

]]> By: Bill http://theincidentaleconomist.com/antitrust-and-health-reform/comment-page-1/#comment-635 Bill Fri, 16 Oct 2009 12:34:49 +0000 http://theincidentaleconomist.com/?p=2355#comment-635 I want to challenge the premise that McCarran leads to increased concentration on the sell side, separating from that statement that it certainly does permit agreement on competitive terms among individual actors. One of the premises of McCarran was that it would enable small carriers to enter a market, usually participating in a rating bureau which established rates for the group. And, indeed, that is what happens if you look at products such as workers comp insurance. You may have 30 or so carriers, each offering the same rate for the same policy coverage. The experience has been that when states have deregulated, permitting rate deviation, rates and policy premiums declined. I think we can agree that having a large number of carriers operating under a price-fix umbrella of a rating bureau mistates number of competitors for competition. But, it also demonstrates that McCarran, rather than reducing the number of ostensible "competitors", increases the number of fringe players who, according to the monopsony hypothesis of the post, would be unable to bargain for a better price. I think the issue of concentration and collusion on the sell side via McCarran is different than concentration on the buy side. Now, I do agree with you that a public option may be necessary, but not necessarily for monopsony purchasing reasons, but for yardstick measures and for the threat of new entry. Also, a public option (or even a national coop of states) also creates an opportunity for someone with a book of business to go to the 50,000 person community with one hospital that has resisted managed care (often in cahoots with the local Blue Plan) and offer a discount to get the new business, or offer to a would be outpatient surgery center some new business if the hospital doesn't discount or change managed care protocols. This may just be dreaming: it could be the public option would be just a dumping ground for bad risks of the health insurance industry; it could be that the public option would be too timid to adopt managed care protocols and limit doctor participation to get discounts and managed care changes from doctors. To say one is a public option is not to be a public option. Little devils are in devilish details. I want to challenge the premise that McCarran leads to increased concentration on the sell side, separating from that statement that it certainly does permit agreement on competitive terms among individual actors.

One of the premises of McCarran was that it would enable small carriers to enter a market, usually participating in a rating bureau which established rates for the group. And, indeed, that is what happens if you look at products such as workers comp insurance. You may have 30 or so carriers, each offering the same rate for the same policy coverage. The experience has been that when states have deregulated, permitting rate deviation, rates and policy premiums declined.

I think we can agree that having a large number of carriers operating under a price-fix umbrella of a rating bureau mistates number of competitors for competition. But, it also demonstrates that McCarran, rather than reducing the number of ostensible “competitors”, increases the number of fringe players who, according to the monopsony hypothesis of the post, would be unable to bargain for a better price.

I think the issue of concentration and collusion on the sell side via McCarran is different than concentration on the buy side.

Now, I do agree with you that a public option may be necessary, but not necessarily for monopsony purchasing reasons, but for yardstick measures and for the threat of new entry. Also, a public option (or even a national coop of states) also creates an opportunity for someone with a book of business to go to the 50,000 person community with one hospital that has resisted managed care (often in cahoots with the local Blue Plan) and offer a discount to get the new business, or offer to a would be outpatient surgery center some new business if the hospital doesn’t discount or change managed care protocols. This may just be dreaming: it could be the public option would be just a dumping ground for bad risks of the health insurance industry; it could be that the public option would be too timid to adopt managed care protocols and limit doctor participation to get discounts and managed care changes from doctors. To say one is a public option is not to be a public option. Little devils are in devilish details.

]]> By: Austin Frakt http://theincidentaleconomist.com/antitrust-and-health-reform/comment-page-1/#comment-634 Austin Frakt Fri, 16 Oct 2009 10:32:34 +0000 http://theincidentaleconomist.com/?p=2355#comment-634 @Bill & Ian - There is an issue about how, when, and why consumers would benefit from the market configuration of insurers and providers. That is, what's the (consumer) welfare-maximizing balance of market power? This is a fundamentally hard problem and only a few papers in the literature touch it, as far as I know. I do not believe economists have sufficiently studied this issue. The theoretical underpinnings of two-sided markets (which this is) are new and the data to address these issues are hard to come by. In a subsequent post I'll visit these issues. In the meantime, just to inform the debate, here are links to all my posts of relevance to this topic: http://theincidentaleconomist.com/two-sided-markets-part-ii/ http://theincidentaleconomist.com/accountable-care-organizations-health-insurer-market-power-and-antitrust/ http://theincidentaleconomist.com/who-has-power-health-insurers-vs-providers/ http://theincidentaleconomist.com/will-a-monopsonistic-health-insurer-reduce-premiums/ @Bill & Ian – There is an issue about how, when, and why consumers would benefit from the market configuration of insurers and providers. That is, what’s the (consumer) welfare-maximizing balance of market power?

This is a fundamentally hard problem and only a few papers in the literature touch it, as far as I know. I do not believe economists have sufficiently studied this issue. The theoretical underpinnings of two-sided markets (which this is) are new and the data to address these issues are hard to come by.

In a subsequent post I’ll visit these issues. In the meantime, just to inform the debate, here are links to all my posts of relevance to this topic:

http://theincidentaleconomist.com/two-sided-markets-part-ii/

http://theincidentaleconomist.com/accountable-care-organizations-health-insurer-market-power-and-antitrust/

http://theincidentaleconomist.com/who-has-power-health-insurers-vs-providers/

http://theincidentaleconomist.com/will-a-monopsonistic-health-insurer-reduce-premiums/

]]> By: Ian Crosby http://theincidentaleconomist.com/antitrust-and-health-reform/comment-page-1/#comment-633 Ian Crosby Fri, 16 Oct 2009 05:29:11 +0000 http://theincidentaleconomist.com/?p=2355#comment-633 @Bill - I believe the premise is that effects on competition among insurers for customers on the sell side can lead to increased concentration, which can result in increased market power on the part of individual insurers on the buy side. Austin can no doubt speak better to the economic consequences of this, but I don't expect you would find either of us saying that increased concentration in the insurance market is an unqualified good. Rather, the claim is that in the absence of a public option, and in the face of indications that reformers intend to go easy on providers to get them on board, to the point of perhaps facilitating their opportunities for collusion, focusing on competition among insurers may be barking up the wrong tree, and could lead to perverse consequences. I understand the research Austin cites to show that increased concentration in the insurance market can lead to provider monopoly busting without necessarily producing insurer monopsony. And certainly, some insurers who benefit from relaxed antitrust regulation are nonprofits and cooperatives who may be expected to pass savings on to their subscribers. For-profit insurers may be less inclined to do so, but they face the prospect of increased regulation as a result of reform, and increased political risk if their profits go through the roof in wake of it. In addition, it is not clear to me that concentration sufficient to confer an advantage on the buy side necessarily confers a completely offsetting advantage to set prices on the sell side. In sum, the point is a modest one: don't let ire at the insurance industry result in legislation that alters the balance of market power between insurers and providers without careful thought for the consequences. @Bill – I believe the premise is that effects on competition among insurers for customers on the sell side can lead to increased concentration, which can result in increased market power on the part of individual insurers on the buy side. Austin can no doubt speak better to the economic consequences of this, but I don’t expect you would find either of us saying that increased concentration in the insurance market is an unqualified good. Rather, the claim is that in the absence of a public option, and in the face of indications that reformers intend to go easy on providers to get them on board, to the point of perhaps facilitating their opportunities for collusion, focusing on competition among insurers may be barking up the wrong tree, and could lead to perverse consequences. I understand the research Austin cites to show that increased concentration in the insurance market can lead to provider monopoly busting without necessarily producing insurer monopsony. And certainly, some insurers who benefit from relaxed antitrust regulation are nonprofits and cooperatives who may be expected to pass savings on to their subscribers. For-profit insurers may be less inclined to do so, but they face the prospect of increased regulation as a result of reform, and increased political risk if their profits go through the roof in wake of it. In addition, it is not clear to me that concentration sufficient to confer an advantage on the buy side necessarily confers a completely offsetting advantage to set prices on the sell side. In sum, the point is a modest one: don’t let ire at the insurance industry result in legislation that alters the balance of market power between insurers and providers without careful thought for the consequences.

]]> By: Bill http://theincidentaleconomist.com/antitrust-and-health-reform/comment-page-1/#comment-632 Bill Fri, 16 Oct 2009 02:44:21 +0000 http://theincidentaleconomist.com/?p=2355#comment-632 Not to be a pest, I looked at one of the articles on increasing monopsony power by healthcare plans and consumer effects that formed the basis for the initial premise that McCarran somehow increased buyer power (it only affects competition on the sell side between carriers, not the buy side) and this would be beneficial to consumers. My initial reaction would have been that, unless the monopsonist was a coop non-profit that redistributed gains back to consumer owners, that monopsony would not necessarily benefit consumers. And, lo and behold, that's what the article said: monopsony has to be associated with non-profit ownership; having a private carrier with monopsony power does not solve the problem. So, going back to this post, McCarrans facilitation of concentration on the sell side does not benefit consumers unless there is a monopsony of a non-profit consumer HMO. I do not see how McCarrans facilitation of market power on the sell side translates into power on the buy side (if two carriers agree on rates, but can't agree on what to pay providers, sell side price goes up but nothing should change on the buy side since that can't be coordinated). Furthermore, you would have to posit that both carriers were nonprofit monopsonists who distributed gains back to their customers. Not to be a pest, I looked at one of the articles on increasing monopsony power by healthcare plans and consumer effects that formed the basis for the initial premise that McCarran somehow increased buyer power (it only affects competition on the sell side between carriers, not the buy side) and this would be beneficial to consumers.

My initial reaction would have been that, unless the monopsonist was a coop non-profit that redistributed gains back to consumer owners, that monopsony would not necessarily benefit consumers. And, lo and behold, that’s what the article said: monopsony has to be associated with non-profit ownership; having a private carrier with monopsony power does not solve the problem.

So, going back to this post, McCarrans facilitation of concentration on the sell side does not benefit consumers unless there is a monopsony of a non-profit consumer HMO. I do not see how McCarrans facilitation of market power on the sell side translates into power on the buy side (if two carriers agree on rates, but can’t agree on what to pay providers, sell side price goes up but nothing should change on the buy side since that can’t be coordinated). Furthermore, you would have to posit that both carriers were nonprofit monopsonists who distributed gains back to their customers.

]]> By: Bill http://theincidentaleconomist.com/antitrust-and-health-reform/comment-page-1/#comment-631 Bill Fri, 16 Oct 2009 00:16:59 +0000 http://theincidentaleconomist.com/?p=2355#comment-631 Ian, I do think McCarran can facilitate concentration in the industry, but I do not believe that once you give people power that they will exercise it in a way that improves public welfare--they operate for their own welfare. Ian,

I do think McCarran can facilitate concentration in the industry, but I do not believe that once you give people power that they will exercise it in a way that improves public welfare–they operate for their own welfare.

]]> By: Ian Crosby http://theincidentaleconomist.com/antitrust-and-health-reform/comment-page-1/#comment-630 Ian Crosby Fri, 16 Oct 2009 00:04:20 +0000 http://theincidentaleconomist.com/?p=2355#comment-630 @ Bill 3 - As an expert in McCarran-Ferguson, do you believe it has no impact in facilitating concentration in health insurance markets? @ Bill 3 – As an expert in McCarran-Ferguson, do you believe it has no impact in facilitating concentration in health insurance markets?

]]> By: Ian Crosby http://theincidentaleconomist.com/antitrust-and-health-reform/comment-page-1/#comment-629 Ian Crosby Thu, 15 Oct 2009 23:41:37 +0000 http://theincidentaleconomist.com/?p=2355#comment-629 @ Bill 2 - As for exchanging loss data, I don't believe the claim is that McCarran is necessary for such exchanges to occur, but rather that it may facilitate them, inasmuch as state antitrust regulators may be less aggressive in concluding that a particular arrangement operates as a vehicle for fixing prices. For the record, I don't believe that McCarran is an ideal vehicle for facilitating such exchanges. Leaving aside other issues, the ABA proposal for repealing McCarran while adopting safe harbor provisions for beneficial collaboration seems promising to me on this front. But I'm not sure that outright repeal without more, subjecting such exchanges to ex post review under the rule of reason, is the way to encourage them. If I were a large insurer considering the potential consequences of error in such review, I might just take my loss data and go home. @ Bill 2 – As for exchanging loss data, I don’t believe the claim is that McCarran is necessary for such exchanges to occur, but rather that it may facilitate them, inasmuch as state antitrust regulators may be less aggressive in concluding that a particular arrangement operates as a vehicle for fixing prices. For the record, I don’t believe that McCarran is an ideal vehicle for facilitating such exchanges. Leaving aside other issues, the ABA proposal for repealing McCarran while adopting safe harbor provisions for beneficial collaboration seems promising to me on this front. But I’m not sure that outright repeal without more, subjecting such exchanges to ex post review under the rule of reason, is the way to encourage them. If I were a large insurer considering the potential consequences of error in such review, I might just take my loss data and go home.

]]> By: Ian Crosby http://theincidentaleconomist.com/antitrust-and-health-reform/comment-page-1/#comment-628 Ian Crosby Thu, 15 Oct 2009 23:29:11 +0000 http://theincidentaleconomist.com/?p=2355#comment-628 @Bill 1 - I certainly do not pretend to your depth of knowledge in the area of McCarran-Ferguson, and am happy to benefit from it. But I believe you misunderstand me again. By "insurance practices that may help them to build and defend their market share" I am referring to their insurance relations with their customers and perhaps their interactions with each other in relation to the risk-spreading function (such as sharing rating information) that I understand to be exempt from federal antitrust scrutiny. I also understand that the exemption is total with respect to the business of insurance (other than boycotts, coercion, and intimidation) that is regulated by a state, and I didn't mean to suggest that the examples I gave were exhaustive. Rather, they were given as examples of potentially exempt conduct that may facilitate concentration on the insurer side. @Bill 1 – I certainly do not pretend to your depth of knowledge in the area of McCarran-Ferguson, and am happy to benefit from it. But I believe you misunderstand me again. By “insurance practices that may help them to build and defend their market share” I am referring to their insurance relations with their customers and perhaps their interactions with each other in relation to the risk-spreading function (such as sharing rating information) that I understand to be exempt from federal antitrust scrutiny. I also understand that the exemption is total with respect to the business of insurance (other than boycotts, coercion, and intimidation) that is regulated by a state, and I didn’t mean to suggest that the examples I gave were exhaustive. Rather, they were given as examples of potentially exempt conduct that may facilitate concentration on the insurer side.

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