Kaiser Health News Opinion Column
Ian and I have a co-authored Kaiser Health News opinion column out today. We argue that repealing insurers’ antitrust exemption won’t change things much and isn’t likely to help consumers significantly. Further, a focus on competition in insurance markets has the potential to distract policymakers and the public from the principal source of increases in premiums: concentration in the provider market.
Here’s the opening paragraph:
It is well known that concentration in the health insurance industry is to blame for rapidly rising premiums. Well known, but wrong. Taking political advantage of this common misconception, last week the House passed a bill to repeal insurers’ antitrust exemption. But even if that bill becomes law it won’t do much good, and politicians’ distraction could actually harm consumers. It’s far more likely that premium increases are largely due to other factors.
Kinda makes you want to read the whole thing, right?
Seriously Depressing News
This is not at all surprising. According to a recent Pew Research poll only 26% of Americans know how many votes it takes to pass a bill through the Senate under normal rules (h/t Jon Chait).
I consider this news depressing. The less Americans know about how government actually works (or doesn’t) the less sensible is the public’s response to what it does (or doesn’t) do and the less likely it is that anything will be done to address the structural problems that pose large barriers to important change.
As Matt Yglesias points out, obstructionism works as a political tactic in a climate of ignorance:
But I’d say the fact that people don’t understand how this [the filibuster] works is an important element of what makes it so effective. To a small slice of Americans, the GOP’s minoritarian obstructionism is a heroic stand. To another small slice of Americans, the GOP’s minoritarian obstructionism is an undemocratic disaster. But to the majority of Americans it’s completely invisible and all they see is a Democratic Party that can’t get things done.
One only needs to observe what has happened to health reform to appreciate the relevance of government structure and process. If there is one thing I wish Americans knew right now it is that the majority in the Senate can’t act like one when the minority has the power to decide what bills come to a vote.
Obama was absolutely right when he said to Republican senators in Wednesday night’s SOTU address,
[I]f the Republican leadership is going to insist that 60 votes in the Senate are required to do any business at all in this town — a supermajority — then the responsibility to govern is now yours as well.
It is a political strength to have disproportionate control over the legislative agenda. As with any powerful tool that strength can be used for good or ill purposes. What will today’s minority choose? (My guess should not be surprising.)
Brief Commentary on the Supreme Court Campaign Finance Decision
My mother, Phyllis Frakt, sent me the following commentary on the Supreme Court’s campaign finance decision. It’s such brief commentary it feels more like a Twitter op-ed than a blog post.
“The law, in its majestic equality, forbids the rich as well as the poor to sleep under bridges, to beg in the streets, and to steal bread.” ~ French novelist Anatole France (1844 – 1924), The Red Lily, 1894, chapter 7
Now we also have the reverse: the law, in its majestic equality, allows the poor as well as the rich to bankroll candidates, to buy elections, and to overwhelm legislative agendas.
Kevin Drum on Campaign Finance
I’ve been asked by a reader for my thoughts on the Supreme Court’s Citizen United decision. I’d be overstepping the bounds of my expertise to say much, at least until I read a whole lot more about it. Given the distraction of the on-again off-again on-again health reform negotiations I may not get to it for a while, if ever. So the always level-headed Keven Drum will have to do for now:
I’m just enough of a First Amendment fundamentalist to believe that there are plausible arguments for allowing corporations to make political contributions; just enough of a realist to think that it might not make as much difference as a lot of people think; and just enough of a cynic to think that corporations might not be as eager to spend huge pots of political money in plain view of their customers as you might suppose. On the other hand, I’m not credulous enough to think that modern multinational corporations are mere voluntary assemblies of concerned citizens who deserve to be treated the same way as the local PTA. The world is what it is, and in a practical sense corporations have such enormous power that it would be foolhardy in the extreme to think that we can just blindly provide them with the same rights as individuals and then let the chips fall where they may.
In the end, I guess I think the court missed the obvious — and right — decision: recognizing that while nonprofit corporations created for the purpose of political advocacy can be fairly described as “organized groups of people” and treated as such, that doesn’t require us to be willfully oblivious to the fact that big public companies are far more than that and can be treated differently. Exxon is not the Audubon Society and Google is not the NRA. There’s no reason we have to pretend otherwise.
Independent of whether Kevin’s opinion is “the right” one, this illustrates his typical thorough take on an issue. He sees it from multiple angles, all of which have some degree of legitimacy. As is typical of most things, the right thing to do here may not be so clear cut. And what has been done may not make as big a difference as some believe it will.
Given I don’t follow Supreme Court rulings that closely I’m eager to read comments on this one. You’re smart (you read this blog), what do you think?
Intel, the FTC, and the State of Antitrust Law
Occasionally, an antitrust complaint comes along that is just a ripping good read, perhaps even for a non-lawyer. The Federal Trade Commission’s recent complaint against Intel is just such a one. It depicts a litany of strong-arm tactics and deception that the FTC claims has frustrated the ability of Intel’s few competitors to bring faster, cheaper microprocessors to consumers.
But what is most interesting to me as a lawyer is not what the FTC has alleged Intel did, but why it has claimed that conduct is illegal. For the FTC has not just challenged Intel’s conduct under the main monopoly statute, Section 2 of the Sherman Act, under which private suits and actions by the Department of Justice are also brought, but also under a special unfair competition statute, Section 5 of the FTC Act, that is only available in actions by the FTC.
Unfair competition under Section 5 of the FTC Act is ostensibly broader than monopolization under Sherman Act, though the FTC has had limited success in the past enforcing it against conduct that was not also an antitrust violation. Since those setbacks, however, courts have limited the scope of the antitrust laws on both economic and prudential grounds. “The result,” according to a statement by FTC Chairman Leibowitz and Commissioner Rosch, “is that some conduct harmful to consumers may be given a “free pass” under antitrust jurisprudence . . . .”
A separate statement by Commissioner Rosch identifies several examples of how courts have curtailed antitrust enforcement against conduct that may be harmful to consumers:
- Courts frequently admonish that the antitrust laws protect competition, not competitors. But in a highly concentrated market, harm to competitors may itself harm competition.
- Courts are often reluctant to condemn practices that decrease innovation without necessarily raising prices. But decreased innovation can harm consumer welfare every bit as much as monopoly pricing.
- Many courts have disparaged as “mere monopoly broth” claims based on a course of conduct whose constituent elements do not each themselves amount to antitrust violations. But acts that by themselves may be innocuous may have consequences in conjunction that are greater than the sum of their individual effects.
- Some cases have suggested that a monopolist’s intent is not relevant to the legality of its conduct. But what the monopolist hoped to achieve may be a very good indicator both of the likely consequences of its actions, and of the plausibility of its justifications for undertaking them.
In bringing unfair competition as well as monopolization claims against Intel, the FTC is setting up a test of its enforcement authority against harmful conduct that the lately-diminished antitrust laws may not reach. As an advocate of vigorous antitrust enforcement, I am not sure if I am more heartened by the FTC’s broad assertion of its mandate than I am discouraged at its acknowledgment that the state of the antitrust laws may have made that assertion necessary.
Behavioral Economics in the Supreme Court
The clash between a priori and experimental economics was joined in the Supreme Court last month in the case of Jones v. Harris Associates. The narrow question is the standard under which compensation to mutual fund managers should be judged excessive. But how the Court answers this question may have broad implications for future judicial recognition and remediation of market failure in diverse areas of law.
The question comes to the Court by way of a law-and-economics nerd’s equivalent of an Ali-Frazier bout. In the efficient-market corner, United States Seventh Circuit Court of Appeals Chief Judge and University of Chicago professor Frank Easterbrook dismissed concerns that most investors are too unsophisticated to compare prices on the ground that it generally takes just a few sophisticated investors to create sufficient competitive pressure to protect the rest. Against him, fellow Chicago professor and past Chief Judge Richard Posner marshaled empirical evidence that markets have in fact failed to curb excessive pay to fund managers.
While Posner couches his claim of market failure largely in terms of agency problems and moral hazard, a friend of the court brief by scholars Robert Litan, Joseph Mason, and Ian Ayres advances the argument on grounds of behavioral economics and informational asymmetries. The “cognitive anomalies” that they claim “render it nearly impossible for the vast majority of investors to assess the price-adjusted quality of mutual funds” include:
- “Misperceptions of chance” – e.g., the widespread and incorrect impression that “if a roulette wheel has repeatedly hit black, then red is somehow due.”
- “Sample-size neglect” which “means that investors will be far too likely to consider a few years of above-average mutual fund performance evidence of managerial skill when in reality it has been driven by the random fluctuations inherent to the stock market.”
- “Loss aversion” exacerbated by “mental accounting,” which causes investors to “segregate their portfolios based on the principle of limiting their disutility from losses” rather than “considering their financial investments in terms of an aggregate portfolio of investments as traditional financial economics assumes.”
The resulting “propensity to sell winners too early and hold losers too long,” coupled with information costs associated with identifying which funds are winners and losers net of fees, make it “difficult for investors to recognize and reward high-quality, low-cost mutual funds.”
The remainder of the brief goes on to show that high-cost, low-quality mutual funds are not being disciplined by the market, and concludes that the “few sophisticated investors” hypothesis advanced by Judge Easterbrook lacks empirical support. Nevertheless, Chief Justice Roberts and Justice Scalia were reportedly receptive to this theory during oral argument. Where the remaining Justices will come down remains to be seen. But if behavioral-economic arguments can attract a majority of the Court in this case, who can say what neo-classical economic orthodoxy will be the next to fall?
Gaming Frivolity
This past week, the Senate Judiciary Committee heard testimony on whether to overrule two recent Supreme Court decisions that made it much harder for plaintiffs to bring civil lawsuits. The decisions, Bell Atlantic v. Twombly and Iqbal v. Ashcroft, held that a court may dismiss a suit if it finds that the plaintiff’s claims are “implausible” even before the plaintiff has had an opportunity to obtain information from the defendant to prove its case.
Critics have slammed the decisions as barring the courthouse door to meritorious suits in which crucial information is solely in the hands of the defendant. An example of such a suit might be one alleging a price-fixing. In such a case, evidence showing that the defendant’s prices were the result of a conspiracy rather than simply meeting competition is not likely to be available to a plaintiff unless the defendant is compelled to produce it in a lawsuit. But under Twombly and Iqbal, a court could dismiss a price-fixing lawsuit before the plaintiff had the opportunity to obtain that information on the ground that the defendant’s actions appeared equally consistent with fair competition.
Supporters of these decisions counter that requiring a plaintiff to identify facts at the outset that tend to exclude innocent explanations is warranted in order to weed out frivolous lawsuits. They claim that otherwise, plaintiffs may blindly file meritless lawsuits that defendants will be coerced to settle rather than face the cost of litigation.
While the cases and editorial pages are replete with references to the scourge of frivolous litigation, it turns out that there is very little empirical support for the claim that courts are awash in it. And there are reasons to believe that defendants settle too few rather than too many of the kind of suits that Twombly and Iqbal seek to eliminate.
The game theory of frivolous litigation is nicely modeled in a 1997 article by law professor Robert G. Bone.* Among the many scenarios he analyzes is the case, like our price-fixing example, where a defendant knows at the outset whether a plaintiff’s case has merit, but the plaintiff can only find out before filing suit, if at all, though a very expensive investigation (bribing an insider, for example).
In this case, it turns out that the defendant’s best strategy is to fight every unmeritorious case, and offer to settle some but not all meritorious cases at the outset. The plaintiff’s best strategy is drop its case some of the time when the defendant declines to settle at the outset, not knowing whether or not its case has merit. Thus defendants never pay to settle unmeritorious cases, but plaintiffs sometimes unknowingly drop meritorious ones. The result is a transfer of wealth from uncompensated meritorious plaintiffs to guilty defendants, not from innocent defendants to frivolous plaintiffs.
Twombly and Iqbal, it turns out, are a solution in search of a problem. They should be repealed.
* Modeling Frivolous Lawsuits, 145 U. Pa. L. Rev. 519 (1997).
Does McCarran Matter?
We have argued that increased enforcement of competition laws against insurers without similar efforts against providers could have perverse consequences without a public option. And we’ve also observed that absent the threat of a public option, there is no reason to believe insurers would pass on to consumers the benefits of any market power they are allowed to maintain. In today’s companion post, Austin elaborates on the relationship between insurer market power and a public option.
In each instance, our remarks have been occasioned by Democratic efforts to repeal, in whole or in part, the 1945 McCarran-Ferguson Act, which provides a partial antitrust exemption that insurers currently enjoy. But they have not been premised specifically on the proposition that the exemption itself contributes to increased concentration in the health insurance market, or that such concentration would be diluted by repeal. I consider that question now.
The McCarran-Ferguson Act exempts from federal antitrust laws most aspects of “the business of insurance” to the extent regulated by the states. The exemption for “the business of insurance” applies to activities like issuing policies, underwriting risk, and setting premiums. But it does not apply to “the business of insurers” – for example, purchasing services from providers or engaging in mergers and acquisitions, in most circumstances. Nor does the exemption protect “boycott, coercion, or intimidation” from federal antitrust scrutiny.
Roughly, the exemption tracks the risk-spreading relationship between insurer and insured that has traditionally been the subject of state regulation, while mostly subjecting insurer-provider relationships and other non-insurance activities to federal scrutiny.
So what sorts of potentially market-concentrating conduct are left to exclusive state regulation after the exemptions to the exemption? Agreements to fix prices and to divide up markets are generally considered to be within the exemption’s scope. While the former type of agreement would not enhance the power of participants to bargain with providers, the latter surely could. If, for example, two insurers in a state were allowed to agree that one would market policies in one part of the state, while the other would take the rest, then each would have greater leverage over providers in its allocated region.
The same would be true in market segments, such as for large group, small group, and individual policies, that were the subject of an exempt agreement. Of course, state regulators are free to police such arrangements. But even weak policing is enough to displace federal regulation under McCarran-Ferguson.
Anticompetitive agreements are not the only conduct exempt from federal antitrust oversight. Some partial repeal proposals would still commit all manner of exclusionary conduct by individual insurers seeking to maintain or acquire monopoly to potentially lax state oversight. Federal law, for example, would still not reach a predatory pricing scheme in which a monopoly insurer lowered prices below its costs to deter entry by a new competitor in the expectation that it could recover its losses after successfully defending its monopoly. While there is much skepticism about the feasibility of predatory pricing outside markets with large economies of scale or scope, or high barriers to entry, the health insurance market has these features.
In short, there are reasons to believe, in theory, that the current antitrust exemption does promote lax regulation of practices that could lead to increased concentration in the health insurance market. Certainly, that market has come to be characterized by a high degree of concentration in recent years. While other factors have no doubt contributed to that concentration, it is not implausible that the antitrust exemption has contributed as well, whether through the conduct that it clearly allows, or the vagueness that it brings to enforcement against conduct that is not clearly outside its scope.
We don’t condone or promote the type of conduct that the antitrust exemption allows or encourages. But going easy on such conduct may be the price of maintaining the balance of power between insurers and providers if we do not enact a robust public option.
The “Amazon Law”: Sales Tax on Internet Purchases
Most individuals who shop online avoid sales tax. They are frequently breaking the law, but the law is unenforceable. Technically, sales tax is legally due on internet purchases if the item is taxable in a local store. One is supposed to remit the sales tax on internet purchases. States can’t easily enforce this requirement so most people don’t bother.
Now states have another way to collect sales tax on internet purchases. In the last several years two states, New York and Rhode Island, enacted laws that require internet retailers to collect state sales tax on purchases made to customers in those states. Such laws have, so far, been upheld in court even though the Supreme Court has ruled that sales tax collection is only required by retailers with in-state property, employees, or independent sales representatives.
Does Amazon.com or other online retailers meet these requirements? Yes, but only because two other Supreme Court decisions have ruled that an out-of-state seller has an in-state presence if it uses third parties to “establish or maintain a market.” All those in-state businesses that earn revenue when individuals click on website links to online retailers count as in-state presence for that online retailer. Those in-state businesses are considered representatives of the online retailer and help that retailer establish or expand its market. Amazon.com has lots of such arrangements, no doubt in every state.
Is it unfair for online retailers to collect and remit state sales tax? An argument they have made or will try to make is that they do not use local services so should not have to pay for them. That’s a silly argument. Local services are used by the individuals in the state who receive and enjoy the goods sold online. It takes roads and bridges to get books from Amazon.com to my house. It takes local schools to teach my children to read and thus to become Amazon.com customers, and so forth. Anyway, the online retailer doesn’t pay the tax. I do. It just collects it, like any other in-state retailer.
I agree with the sentiments expressed by Michael Mazerov in the July 23, 2009 Center on Budget and Policy Priorities report on this topic, from which I learned all of the information in this post. Mazerov is unambiguous in his support for a level playing field with respect to all state sales tax: that every retailer should collect and pay them in proportion to state sales, independent of the physical location of the point of sale. Until Congress acts to make this national law, states can collect some of the sales tax they would otherwise lose using the broader definition of in-state presence described above. That’s a start.
Antitrust and Health Reform
This post is co-authored by Austin Frakt and Ian Crosby.
In the wake of AHIP’s promotion of the report sham study it commissioned from PricewaterouseCoopers (PWC), Senate Democrats are pushing to repeal a 1945 statute that partially exempts insurers from national antitrust law. While it may be wise to regulate insurers at the national as opposed to the state level, legislating in anger is not. At this stage, however, this isn’t anywhere near serious legislation. It is a signal of Democrats’ intent and a warning shot across the bow of the insurance industry.
AHIP’s PWC provocation was not only poor politics, it was poor timing. Only days after its release Olympia Snowe traded a “yes” committee vote for a seat at the Senate negotiating table. It now seems less likely health reform legislation will emerge with a public option. That would be a victory for the industry and would place the burden of negotiating better treatment at lower cost on the private sector, with government regulators looking over the industry’s shoulder. It will take market muscle to shoulder that load.
But not too much market muscle. Taxpayers will be best served by insurers with sufficient market power to bargain down provider rates, but with not quite enough power to keep the savings (“rents”) for themselves. That is, we want low provider rates to translate into low premiums. Though liberals may be skeptical that this balance is achievable, it is not at odds with their objectives in principle. After all, one of the arguments for the public option is that it would be a large insurer with commensurately large negotiating power but would use that power on the behalf of consumers.
How to balance the power of insurers and providers is far from simple. Many have pointed to the alleged dominant market position of insurers as a substantial source of high health care costs. However, the health economics literature supports the notion that recent increased market power of insurers does not lead toward monopolistic pricing, but rather it provides a counter-balance to the power held by hospitals and provider groups.
Moreover, insurance companies are partially exempt from federal antitrust law for an important reason: so they can share rate-making data. This function actually benefits small insurers who would not otherwise have sufficient data to properly adjust premiums. Paradoxically, removing the legal cover for data sharing would harm small insurers more than large ones.
All this suggests that repealing the federal antitrust exemption for insurers may be misguided. Though the insurance antitrust exemption is a popular whipping boy for Democratic politicians, it is by no means clear that repealing it is practical or beneficial to consumers. Instead, antitrust law might better aid the cause of health care reform by first focusing on providers. While a few proposed hospital mergers have been blocked recently, it follows a long period of hospital consolidation.
Yet even here, antitrust exemptions may be inevitable to allow doctors and hospitals to negotiate bundled payments contingent on performance under the guise of accountable care organizations (ACOs). It is not unreasonable to worry that providers might try to use the ACO structure to lobby Congress and negotiate more favorable Medicare payments and regulation (in fact, such activities are constitutionally protected under the the Noerr-Pennington doctrine). So we have to encourage provider integration without unduly increasing the strength of providers with respect to insurers or their regulators. This will be hard indeed and could be harder still with a weakened insurance industry.
All this suggests a confused focus in Washington, though one consistent with populist sentiment. Insurers, rightly or wrongly, are the scapegoat and providers (with the exception of the drug industry) are viewed more favorably. There are clearly insurance reforms worth implementing, but weakening insurers’ market power while strengthening that of providers may not be one of them.
Beating up on the insurers feels good but may not be the right medicine.
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