The Incidental Economist

I just can’t keep everything on paper forever so I purge every so often. Today, I’m tossing my stack of printed two-sided market literature. That only reflects a lower interest in that area in the following narrow sense. I used to think that the lens of two-sided market theory was the right way to view the health care market. And in some instances it is or perhaps could be (e.g. employers or consumers on one side, providers on the other, insurance firms as the platform). But for my interests it isn’t.

I think the guts of the U.S. health care market dynamics pertain to the interaction of market power between insurers (or self-insured firms) and providers. The interesting policy questions are in the areas of antitrust enforcement and implications for health care costs and premiums. These aren’t two-sided market questions. Or if they are, as far as I know nobody has convincingly formulated them as such.

A better term for what I’m interested in would be a “two-level market.” Consumers pay premiums in exchange for health care from providers. But there’s a middleman, insurers. In some ways this is not that different from how consumers buy other goods. They pay prices for products produced by manufacturers with retailers in the middle. There are features of the health insurance market that distinguish it from most goods markets, however: information asymmetry (your doctor knows way more than you do about health care), two levels of imperfect competition (provers and insurers), geographic constraints (medical care is mostly local; you can’t buy hospital care on the internet from China (yet)).

So, even though it is interesting, I’m not as excited by two-sided market theory as I used to be. But I don’t want to lose track of the papers I’ve collected and read. So, here’s a list with links. It substitutes for my paper stack and takes zero space.

• Competition among health plans: A two-sided market approach, by David Bardey and Jean-Charles Rochet.
• Two-sided markets: A tentative survey, by Roberto Roson.
• Two-sided markets and electronic intermediaries, by Bruno Juillien.
• Some empirical aspects of multi-sided platform industries, by David Evans.
• Two-sided markets: An overview, by Jean-Charles Rochet and Jean Tirole.
• Two-sided markets: A progress report, by Jean-Charles Rochet and Jean Tirole.
• Competition in two-sided markets, by Mark Armstrong.
• One-sided logic in two-sided markets, by Julian Wright.
• Unveiling “invisible hands”: Two-sided platforms in health care markets, by Bronwyn Howell.
• A two-sided market analysis of digital health records under switching costs, byZafer Ozdemir et al.

Recently, I explained that there are many possible causes of high market concentration. Furthermore, its effect on consumer price and market entry is theoretically ambiguous. In principle, dominant firms in concentrated markets (such as those in many health insurance markets today) could benefit from economies of scale or scope. If the resulting cost savings are not retained by the dominant firms, consumers may benefit from lower prices. This could happen if there exists the plausible entry of a potential rival that would undercut the dominant firms if they raised their prices.

On the other hand,* if economies of scale or scope don’t exist or are not large, there may be no consumer benefit from market concentration. There only exists downside risk of higher prices, particularly in the presence of barriers to entry. An unpublished paper presented to the Chicago Fed in March 2010 by Hilliard, Ghosh, and Santerre (pdf of slides available) describes what is known about these factors with respect to health insurance, providing some useful references in the literature.

Demsetz (1973) argues that while the large firm‐sizes involved in concentrated markets may make collusion more likely, they may also allow exploitation of economies of scale and scope. Such concentrated markets may be beneficial to consumers, if the cost savings are passed on in the form of lower prices. There is little evidence, though, that scale and scope economies are important for health insurance. Engberg, et al. (2004) is the most recent study to reject the presence of scale economies in health insurance. …

The AMA suggests that exclusive control over health care provider networks acts as a sufficiently high entry barrier to prevent competitiveness. … [N]ew entry can … [also] be prevented if high concentration permits existing firms to prevent [rental] access to their networks in an effort to counter new business. Furthermore, contestability theory suggests that high sunk costs may deter entry by acting as an exit barrier (Baumol, et al. (1982)). … [I]mportant start‐up costs that are not recoverable include marketing and the cost of setting up provider networks (when renting is too expensive), which may be sufficient to deter entry. Perhaps the most significant barrier to entry, relatively unique to health insurers, is very high consumer switching costs. Samuelson and Zeckhauser (1988) show that status quo bias generates high insurance switching costs in general. This bias is amplified when most customers obtain health insurance through employer‐sponsored group plans with limited provider networks.

Not mentioned by the authors are barriers to entry associated with state regulation. If compliance with state rules about network adequacy or other properties of product offerings is challenging (perhaps due to lobbying by incumbent firms), that is a deterrence to entry as well.

*Economists always have another hand handy. Annoying, isn’t it?

References

Baumol, W. J., J. C. Panzar, and R. D. Willig, 1982, Contestable markets and the theory of industry structure (San Diego: Harcourt Brace Jovanovich).

Demsetz, H., 1973, Industry structure, market rivalry, and public policy, Journal of Law and Economics 16, 1‐9.

Engberg, J., D. Wholey, R. Feldman, and J. B. Christianson, 2004, The effect of mergers on firms’ costs: Evidence from the HMO industry, The Quarterly Review of Economics and Finance 44, 574‐600.

Samuelson, W., and R. Zeckhauser, 1988, Status quo bias in decision making, Journal of Risk and Uncertainty 1, 7‐59.

Imagine a highly concentrated market like, say, that for hospital services or health insurance. Does the fact that the market is highly concentrated encourage or deter entry by other firms? This is a harder question than it might seem.

By “highly concentrated” I mean, roughly, that most of the total market share is locked up by a small number of firms. At the extreme is a monopoly, one firm with 100% of the market share. A more technically useful notion of market share is the Herfindahl index (hereafter denoted H), which is the sum of squared market shares.  H is proportional to the degree to which the prices firms charge exceed marginal costs in homogeneous goods markets, those for which products produced by one firm are perfect substitutes for those produced by another. The higher H the higher the price markup.

However, few markets are perfectly homogeneous, but some are closer than others. Actually, hospital and health insurance markets are very far from homogeneous. One hospital can be quite different from another in many ways. It matters where you get your surgery! Insurance products differ in many dimensions. A high-deductible plan is not the same as a plan with first dollar coverage, for instance. Despite this, the FTC and DOJ still use H as a measure of market concentration in these industries. Thus, so do health economists, and so will I.

Back to the main line: what is the effect of H on entry? If a prospective entrant into the market–a new hospital, a new health insurer–comes along and observes the market’s structure (H), what does it do? Enter or not?

Well, if higher H implies higher markups over marginal cost that suggests a profit opportunity. A market with high H might therefore attract entrants, driving H and markups down to more competitive levels. That’s right, but not complete. It isn’t how a health economist would think. When considering a causal relationship, like H’s effect on prices and entry, one should always ask the next questions, “What affects the thing that we think affects the outcome? What causes it to be high or low?” In this case, “What affects H? Why would it be high or low?”

High H means high market concentration. But if high market concentration means high profits, which as argued above should invite entry pushing H lower, how has H remained high? What is causing the (presumed) market equilibrium at high levels of concentration?

An answer is barriers to entry, which could include factors that would cause prospective rivals to face higher costs (see my “Market predation” post on this). Another is product differentiation, which includes reputation effects. In a widely cited 1997 paper on banking markets, Amel and Liang explain,

[M]arket concentration may be an entry barrier to the extent that it reflects superior product differentiation or a first-mover advantage of incumbents. In the case of banking, if transactions costs of changing banks are high (Sharpe, 1996) or if incumbent firms can establish valuable reputations, then higher market concentration will be negatively correlated with entry.

Thus, from reasoning alone the effect of H on entry is ambiguous. It depends on whether there are entry barriers or not. One has to go to the data to learn, empirically, which way it goes for a given market at a given time. Amel and Liang did just that for banking markets and found that the effect of H on entry in banking markets (weakly) supports the entry barrier hypothesis.

Estimated coefficients on [H] are significant in only two [of eight] equations, and in both cases the coefficient is negative. …[T]he negative coefficients are more consistent with the hypothesis that high market concentration acts as an entry barrier rather than an indicator of the ability to collude. These results are generally consistent with previous empirical studies (e.g., Rose, 1977 and 1979; Hanweck, 1971; and Amel, 1989).

What about the health insurance or hospital industries? Does high market concentration invite entry or not? The fact that H has been increasing suggests not. We’ve already hypothesized about possible entry barriers in a prior post. The truth of the matter can only be revealed by a sound empirical analysis, however.

The following entertaining passage by Steve Landsburg is worth a read, as is the entire post from which it is excerpted.

[E]fficiency analysis strikes down political smokescreens. Like this: …

Economist: Your program [to subsidize health care for the poor] costs a billion dollars and delivers half a billion dollars worth of benefits. That’s inefficient. … [Y]ou could take that billion dollars and deliver a full billion dollars worth of benefits instead if you spent it a little differently. Why not just hand the cash out to poor people?

Politician: Because I don’t want to help all poor people. I only want to help sick poor people — and this is the only way I can think of to do that.

Economist: Ah. So your goal here is not to make the health care system work better after all. Instead it’s to transfer resources to sick poor people.

Politician: I guess so.

Economist: That’s fine. Now we can have a healthy debate about whether that’s what we want to do.

And now, you see, thanks to the economist’s insistence on thinking about efficiency, we end up having an honest debate about the politician’s real goal instead of a dishonest debate about the politician’s feigned goal. However the debate turns out, that’s a useful exercise.

I agree that thinking about efficiency is completely worthwhile. I’ve said so in blog posts and done so in my work. Making the not-too-risky inference from the above quote that Landsburg would consider the ACA a transfer program (since it subsidizes health care insurance for lower-income individuals an families), I agree with him on that too.

However, I disagree that the politician’s goal in his hypothetical is necessarily to redistribute wealth. In fact, I think the politician was duped by the economist. This reminds me of Greg Mankiw’s claim that the ACA is an merely an excuse to redistribute income. Here’s what I wrote in response:

There is a perfectly good reason why the ACA must be redistributive. By now we know how avoidance of adverse selection requires that a mandate accompany outlawing pre-existing condition exclusions. And low-income subsidies must accompany a mandate (if necessary, see Krugman for a review of the logic). If an individual can’t afford health insurance without a subsidy, it’s not helpful to provide one and to adjust the tax system to make the overall package distribution neutral. That’s like saying, “Can’t afford insurance? Let me help with the cost. Now pay me back.”

Putting this differently, there are externalities at work that justify redistribution. The goal is to address the externalities. Redistribution is just the necessary means.

You get how I use this blog, right? Here I am doing my paid work (you know, perfecting the health system ). As I do that, I’m reading stuff I want to make use of later. I put up posts like this one to help me assimilate what I’ve read and to keep track of it. There seems to be a positive externality by making this process public. What I’m reading is related in some way to my actual work, so you can make inferences from what I post about what I’m studying now and what some of the ideas will be in my future publications. In short, this blog is my notebook.

Sometimes I read a paper for its methods and the actual application is not related to what I’m studying. That’s true of the very well written 2007 article in Inquiry by Santerre and Vernon. It’s about the value of a mix of for-profit and non-profit nursing homes. I’m reading it for the way they handle the endogeneity of non-profit nursing home market share. But never mind that for now. There is something else interesting about it, as I’ll explain.

The authors draw inferences based on the observed relationship between quantity of nursing home use and non-profit market share, controlling for other supply and demand factors. A positive correlation implies that an increase in non-profit market share enhances consumer welfare; a negative correlation implies non-profits are overrepresented. They find a positive correlation. More non-profit nursing home market participation would increase consumer welfare by enhancing quality norms, though there are diminishing returns. For-profits play a useful role too. With their focus on cost efficiency and in competition with non-profits, they put downward pressure on price.

What’s interesting is that this work suggests the need for a hybrid system, one that has a good mix of for- and non-profits. Purity is not optimal. We need non-profits to boost quality in the market and for-profits as a check on price. There is also heterogeneity in consumer preference so a mix facilitates better matching of product characteristics to consumer demand.

The article references other, related work.

It should be noted that we are not alone in using quantity adjustments as a barometer of consumer welfare in the health care industry. For example, Abraham, Gaynor, and Vogt (2005) use quantity information to view how the market entry of new hospitals affects consumer welfare. They find that entry of the second and third firms increases quantity, which allows them to infer that market entry increases consumer welfare in the hospital services industry. Santerre and Vernon (2006) use information on the use of various types of hospital services to infer how ownership mix affects consumer welfare. They find that from a consumer perspective, nonprofit hospitals are over-represented in the inpatient sector, whereas for-profit hospitals are over-represented in the outpatient sector of the typical hospital services market.

In a 2003 JHE article, Grabowski and Hirth used related methods for addressing the endogeneity of non-profit market share. They also find that the presence of more non-profit nursing homes improves overall quality–including that provided by competing for-profit institutions.

Finally, a related and more broadly accessible 2006 Health Affairs paper by Schlesinger and Gray titled “How nonprofits matter in American medicine, and what to do about it” makes for good further reading. I may comment on it in a future post.

References

Abraham, J. M., M. S. Gaynor, and W. B. Vogt. 2005. Entry and Competition in Local Hospital Markets. National Bureau of Economic Research (NBER) Working Paper 11649. Cambridge, Mass.: NBER. [See also the Journal of Industrial Economics version.]

Santerre, R. E., and J. A. Vernon. 2006. The Consumer Welfare Implications of the Hospital Ownership Mix in the U.S.: An Exploratory Study. Health Economics 15(11):1187–1199.

A longtime reader (Austin says so) emails us:

This NEJM article relates the sustained problem we have had obtaining a key drug, Propofol.  I can understand how we end up with drug companies not wanting to make orphan drugs. Even after reading this article, it remains unclear why someone would not want to produce such a highly used medication. The price should go up, and producers respond by making more. This is not happening. Why arent markets working?

Well, I’m not an economist, but I think this is an example of a “perfect storm”.  Here is a small piece from the FDA-written NEJM piece:

Recently, the supply of one drug — the sterile injectable drug propofol, a fast-onset, short-acting sedative–hypnotic agent used for the induction and maintenance of anesthesia or sedation — has become critically low. In 2009, there were three manufacturers making propofol: Teva Pharmaceuticals, Hospira, and APP Pharmaceuticals. In early October 2009, Hospira recalled multiple batches of its propofol owing to the presence of particulate matter in the vials. In late October 2009, Teva recalled multiple lots of its propofol owing to possible microbial contamination. As of May 2010, Hospira had not yet returned propofol to the market and had expanded its recall to capture all product that might currently be in customers’ inventories, and Teva recently announced that it would not be returning to the market. This confluence of events has left only one company to supply propofol to the entire U.S. market — an unrealistic expectation, given anesthesiologists’ reliance on the drug.

Let’s recap.  Propofol is an excellent drug for anesthesia.  It starts working really fast, and its effects go away really fast when you stop adding it.  That’s exactly what you want.  But there are a number of factors that make it unappealing:

• Propofol is relatively difficult to produce.
• Propofol gets contaminated easily in use, as it has no preservatives.
• Propofol is generic, and therefore the price is lower than on patent drugs.  So it’s hard to make money.

In general, sterile injectables are especially prone to shortages because of these reasons.  As the NEJM piece notes:

Although shortages can occur with any drug, sterile injectable drugs such as propofol are particularly susceptible. Data collected by the Drug Shortage Program of the Food and Drug Administration (FDA) show that of 110 shortages that occurred in 2008, 39 involved sterile injectables (35%), and in 2009, the proportion rose to 73 of 157 drug shortages (46%).

Some time ago, three companies made propofol: Teva Pharmaceuticals, Hospira, and APP Pharmaceuticals.  But starting last October, the dominoes began to fall.  First, Hospira was forced to recall multiple batches of its drug because of contaminants in vials.  Soon after, Teva was forced to recall multiple batches of the drug because of  possible microbial contamination.  Instead of recovering, things got worse.  Six months later, Hospira was still recalling the drug and was not bringing any new propofol to market.

And then, in May, a Jury awarded a $500 million verdict for the first (of many) civil cases concerning a Hepatitis C outbreak linked to propofol use in a Las Vegas GI endoscopy center.  Teva took the brunt of that that verdict.  Faced with that massive payout, and more likely on the way, Teva bowed out of the propofol market.  Baxter (which merges with Hospira distributed the propofol) was also slapped with a nine-figure verdict in that trial, so it’s unlikely they will be bringing propofol back soon either.

That leaves only one company making all the propofol for the US.  That’s not enough.  We’ve got a shortage.

Our reader asks why the market failed.  I’m not sure it’s possible it could succeed here.  Sure, the remaining company could charge a fortune for the drug, but that won’t end the shortage.  And other companies aren’t likely to enter the field because it’s so hard to make and they would be open to the same dangers that Teva and Hospira/Baxter faced.  It’s just not a risk that I can see pharmaceutical companies taking, when they can make money in much less risky areas.

What should we do?  I don’t have a good answer.  I’ve seen the usual snark wondering how long it will be until “Obama determines that access to propofol is a right and forces Teva to initiate production”.  Teva is an Israeli company (many pharmaceutical companies are foreign corporations) so that’s not going to happen.  I expect that as we are forced to import replacement drugs from foreign markets we will hear the usual scare stories (ignoring that it was contamination in US-imported drugs that started all of this).  Some will blame the laywers, and some will blame the doctors, and some will blame the companies.

But the truth of the matter is that these types of drugs are not going to get any more profitable or enticing to make.  So how should we move forward in a non-socialist solution?  I’m looking at you, free marketeers…

UPDATE: Fixed sloppy language.

In what feels like (but may not be) his final NY Times Economix post relating to Arrow’s 1963 paper and his own 2001 article, Uwe Reinhardt offers a solemn warning,

[R]ead carefully the columns written by eminent economists in the major news media and their Congressional testimony. Count how many times the authors justify their recommendations with appeal to efficiency. …

Virtually all modern textbooks in economics … [do not acknowledge] the ethical dimensions of the concept. I use these texts in my economics courses as, I suppose, do most my colleagues around the world. But I explicitly alert my students to the ethical pitfalls in normative welfare economics. …

My advice to students and readers is: When you hear us economists wax eloquent on the virtue of greater efficiency — beware!

You’ll have to read the rest to get a better idea of what Reinhardt means by all this. Trust me, it’s worth a look. Personally encouraged by Reinhardt, I examined Arrow’s and his paper myself last year and offered my own warning,

My own sense is that it is asking far too much of welfare economics to point to a unique solution that optimizes a universally accepted criterion. Indeed, one ought to be suspicious of any claims of unique optimality. It is plausible that any such result is preordained by the form of the optimand, even if not explicitly stated. Extra-utility welfare analysis (also called extra-welfarism) can very likely recommend “optimal” policies distinct from “optimal” ones suggested by utility-based (welfarist) approaches.

But no approach has a unique claim to legitimacy. An unassailable argument does not exist for any one solution, whether public or private, to any problem, not even health care. Is this curse of nonuniqueness the death knell of welfare economics? Certainly not. The value of welfare economics in particular and economics in general is the clarity of thought it enforces. A welfare analysis of almost any type will lead the analyst to consider particulars and consequences that are opaque to casual thought. While it is relevant that health care is not a perfectly competitive market one misses the point of economics entirely to suggest that this renders it inaccessible to welfare analysis. Such a thought would be a grave mistake, especially since it appears as if private provision of health care and health insurance is here to stay.

The responsibility of the economist is to understand the assumptions and limitations of his tools. This is the great virtue of Reinhardt’s contribution. By expanding and clarifying Arrow’s words, … he makes those facets of neo-classical welfare analysis plain, not just to the economist, but likely to any clear thinker motivated to read it.

I bet you think I’m going to discuss the housing market. Nope. There’s another kind of foreclosure. It’s also a market phenomenon that occurs when the actions of one firm prevent another from remaining in or entering a market.

Foreclosure can be brought about by some of types of market predation I described yesterday. In particular, ”vertical behavior” can lead to foreclosure. Vertical behavior is any action taken by a firm to more tightly control its supply or product chain. When a baker buys a wheat distributor, he has vertically integrated. He now owns a source of one of his inputs. An exclusive contract between a movie production company and a cable television network is a “vertical restraint.” It “restrains” that network from offering rivals’ content.

In their Handbook of Health Economics chapter on antitrust and competition in health care markets, Gaynor and Vogt describe the relationship between vertical behavior and foreclosure in health care:

The other major form of vertical behavior that has been of concern in health care antitrust have been vertical restraints that tend to reduce competition in the of the markets involved. These include vertical integration, exclusive dealing, and most-favored-nations contracts. A commonly used term for this effect is “foreclosure.” The reason for concern is obvious. Consider a situation with a health insurance duopoly and a hospital monopoly. If one of the insurers integrates with the hospital or engages it in an exclusive contract, it will have the ability to foreclose the other insurer from the market, thereby gaining monopoly power. … Since vertical restraints both involve potential anti-competitive effects and efficiencies, antitrust cases involving (non-price) vertical restraints are judged on a rule of reason basis. This makes economic analysis of effects on competition and efficiencies essential in such cases. …

The courts for the most part have found … insufficient evidence of anti-competitive effects. As indicated previously, the vast bulk of exclusive dealing cases or vertical integration cases have been rejected by the courts impacts

Not surprisingly, the authors note that the economics literature has found that vertical integration and restraints have been found to be efficiency enhancing, lowering firm costs. Hence, one might expect insurers to enter into exclusive or long-term contracts with providers.

Gal-Or (1996) considers the … [exclusive contracting] problem … with differentiated insurers. With differentiated insurers foreclosure can occur in equilibrium. In this case, a provider who agrees to an exclusive deal with an insurer will likely accept a lower payment rate in return for a larger volume of patients. If both insurers sign exclusive deals with different providers, this benefits insurers by reducing the outside options of the providers and thus reducing their payment rates. Encinosa (1996) considers exclusive deals between HMOs and physician groups. There is an incumbent HMO which has a cost advantage over a rival, but must invest in order to serve the entire market. When the incumbent HMO is risk averse, it may engage in an exclusive deal with the single provider. This will result in foreclosure and is socially inefficient. At present, however, exclusive contracts per se appear to be relatively rare between insurers and health care providers. Long term services contracts are common, and may confer a degree of exclusivity on an insurer who is a large buyer.

It is worth noting that the Gaynor and Vogt chapter from which I quote about a decade old. I do not know if exclusive contracting between hospitals and insurers has become more common.

(See also: Anticompetitive exclusion: Raising rivals’ costs to achieve power over price, by Krattenmaker and Salop. There the authors describe exclusionary rights as the “bottleneck” or “essential facilities” problem when it locks up the entire supply the the “supply squeeze” or “quantitative foreclosure” when it locks up a portion of it. Also described is the “price squeeze” or “cartel ringmaster” when a dominant firm facilitates a discriminatory cartel among suppliers. Finally, there’s the “Frankenstein monster” (!!!) which comes about from an exclusive contract with one supplier that results in a residual market structure that facilitates collusion among the remaining ones faced by rivals.)

References

Gal-Or, Esther (1996), “Exclusionary equilibria in health care markets,” Journal of Economics and Management Strategy, 6(1): 5-43.

Encinosa, W.E. (1996), “Exclusive contracting in health care markets,” unpublished manuscript, University of Michigan.

This has more to do with health care than it may seem at first. Stick with me.

Whether there is solid evidence for it or not (I don’t know), many believe WalMart, Home Depot, and other big box stores engage in predatory pricing. The hypothesis is that they move into the outskirts of town, set prices low–even below their own costs–and drive the downtown mom and pop stores out of business. Then they raise prices, sit back and count their cash. Even if is a money losing strategy in the short term, in the long run driving competition out of business and cornering the market is a money maker (until the antitrust regulators show up, perhaps).

That’s one type of market predation. But there’s another: raising rivals’ costs. That’s also the title of a widely cited 1983 American Economic Review article on the topic by Salop and Scheffman. Engaging in practices that raise rivals’ costs has some advantages over predatory pricing. Salop and Scheffman explain,

It is better to compete against high-cost firms than low-cost ones. Thus, raising rivals’ costs can be profitable even if the rival does not exit from the market. Nor is it necessary to sacrifice profits in the short run for “speculative and indeterminate” profits in the long run. A higher-cost rival quickly reduces output, allowing the predator to immediately raise price or market share. Third, unlike classical predatory pricing, cost-increasing strategies do not require a “deeper pocket” or superior access to financial resources. In contrast to pricing conduct, where the large predator loses money in the short run faster than its smaller “victim,” it may be relatively inexpensive for a dominant firm to raise rivals’ costs substantially. For example, a mandatory product standard may exclude rivals while being virtually costless to the predator.

There are a variety of ways to raise rivals’ costs, including engaging in exclusive contracts with the lowest cost (or only) suppliers, supporting regulatory standards with which the predatory firm is already efficient, engaging in an ad or R&D war (if the predatory firm can do so at lower costs than its rivals due, say, to economies of scale), among others.

Turning to health care, it is by now well known (to readers of this blog at least) that the majority of hospital and insurance markets are highly concentrated, by FTC/DOJ standards, and have become more so over the past decade or two. How did this happen exactly?  The detailed story is probably different in every market. However, postulating that maneuvers by dominant firms to raise rivals’ costs played a role in at least some markets, what specific instantiations of them might health insurers or health care providers have implemented (or implement in the future)? Here I am speculating only. I invite readers to offer their own ideas, and suggest relevant academic literature should they be aware of any.

To raise rivals’ costs, health insurers might:

• Enter exclusive contracts with health care providers (locking up the most profitable network participants),
• Enter exclusive contracts with large employers,
• Establish relationships with more efficient agents and agent entities (UnitedHealth partners with AARP, for example),
• Conduct advertising blitzes during open enrollment periods (with the most efficient ad agencies or ad buys),
• Lobby state and federal lawmakers and regulators in support of rules more costly for rivals to comply with.

To raise rivals’ costs, health providers (let’s just focus on hospitals) might:

• Enter exclusive contracts with health care insurers (locking up the most profitable source of patients),
• Commence a medical technology arms race (provided the predator can obtain equipment at costs lower than that of rivals),
• Conduct ad campaigns,
• Lobby state and federal lawmakers and regulators in support of favorable rules (e.g. certificate of need regs).

I’m not making any moral judgments here. The aforementioned actions are consistent with sound business strategy and competition. Contracting with the lowest cost suppliers, perhaps preventing rivals from doing so if only due to the suppliers’ capacity constraints, is what we should expect from competitive pressures. Markets are just like this, or so I speculate. Any thoughts?

As mentioned at the end of my prior post in the Medicaid-IV series Janet Currie and Jon Gruber published a 1996 paper on the effect of Medicaid expansion on infant mortality and birth weight. Here’s the abstract:

A key question for health care reform in the United States is whether expanded health insurance eligibility will lead to improvements in health outcomes. We address this question in the context of the dramatic changes in Medicaid eligibility for pregnant women that took place between 1979 and 1992. We build a detailed simulation model of each state’s Medicaid policy during this era and use this model to estimate (1) the effect of changes in the rules on the fraction of women eligible for Medicaid coverage in the event of pregnancy and (2) the effect of Medicaid eligibility changes on birth outcomes in aggregate Vital Statistics data. We have three main findings. First, the changes did dramatically increase the Medicaid eligibility of pregnant women, but did so at quite differential rates across the states. Second, the changes lowered the incidence of infant mortality and low birth weight; we estimate that the 30-percentage-point increase in eligibility among 15-44-year-old women was associated with a decrease in infant mortality of 8.5 percent. Third, earlier, targeted changes in Medicaid eligibility, which were restricted to specific low-income groups, had much larger effects on birth outcomes than broader expansions of eligibility to women with higher income levels. We suggest that the source of this difference is the much lower take-up of Medicaid coverage by individuals who became eligible under the broader eligibility changes. Even the targeted changes cost the Medicaid program $840,000 per infant life saved, however, raising important issues of cost effectiveness.

This study shares the same methodological approach, and many of the strengths and weaknesses of the Currie and Gruber paper I reviewed previously. So, I’m not going to repeat myself. There is one element of this study worth emphasizing, however. As stated in the abstract, the authors examined two types Medicaid expansions in the 1980s, one targeted and one broad.

The targeted expansions were essentially modest changes to Medicaid eligibility around the edges of the program’s ties to AFDC (I’m obviously grossly simplifying). The broad expansion began in 1987 and liberalized the income cutoffs for pregnant women. By 1990 all states were required to cover pregnant women with incomes up to 133% of poverty and had the option of extending coverage up to 185% of poverty with federal matching funds.

Results of the study differ across the two types of expansions. The targeted expansion had much stronger effects:

[W]e find that a 30-percentage-point increase in eligibility under targeted programs would have been associated with a highly significant 7.8 percent decline in the incidence of low birth weight; a similar increase in eligibility under the broad programs would have decreased the incidence of low birth weight by only 0.2 percent. Similarly, a 30-percentage-point increase in targeted eligibility would have been associated with an 11.5 percent decline in infant mortality, compared to a 2.9 percent decline under the broad policy changes.

The authors attribute this difference in outcomes across type of expansion to different rates of take-up. Lower take-up under the broad expansion attenuated its effect. To the extent that these findings can be generalized, they would seem to suggest that the broad Medicaid expansion under the ACA will have relatively small effects on health. However, the ACA’s expansion comes with an individual mandate, so take-up should occur at a much higher rate than under the broad expansions in the 1980s.