Antitrust After Health Reform: Are Economists Ready?

In my post yesterday on the 2009 AcademyHealth Annual Research Meeting I mentioned accountable care organizations and antitrust. There is a relationship between the two and implications for health economics.

First of all, what is an accountable care organization? An ACO is a group of health care providers and institutions that are collectively responsible for (and held accountable to measures of) the health of a population. An ACO has an organizational structure that permits the encouragement of improvements in quality  and lower costs through payment incentives.

That’s a little hard to grasp so let’s get concrete. The Veterans Health Administration (VHA) is the largest ACO in the U.S. It is a clearly defined set of providers and facilities that are responsible for the care of groups of veterans enrolled in the VHA. Quality performance measurement and low cost are routine within the VHA and it is not hard to imagine a variety of possible payment systems that would (or currently do) promote quality improvement and/or cost efficiency. Other currently existing ACOs include Kaiser Permanente, Geisinger Health Systems, and the Mayo Clinic. In one way or another, from a collective pool of revenue physicians in an ACO that are associated with higher quality get paid more than those associated with lower quality.

(For further reading on ACOs see Creating Accountable Care Organizations: The Extended Hospital Medical Staff (Fisher et al, Health Affairs, December 2006) and the January 27, 2009 press release from The Dartmouth Institute for Health Policy and Clinical Practice and the Engelberg Center for Health Care Reform at Brookings.)

Almost by definition an ACO implies a degree of collusion between providers. After all, under an ACO structure a set of providers must agree on how to distribute a bundled payment. Thus, if the U.S. health care system moves toward an ACO model we will see greater provider consolidation, all other things being equal. Provider groups’ greater market power to negotiate higher payments will be a countervailing force against the promise of the ACO model to provide higher quality care at lower cost. Therefore, there would seem to be a set of antitrust issues associated with ACOs. I’m not an expert in such matters but I am willing to bet that considerations of antitrust will either be explicit in legislation that defines and authorizes ACOs or be raised latter in legal battles.

While ACOs suggest greater market power on the provider side, there has been considerable rhetoric about increased market power on the insurer side. One of the purposes of an insurer is to bargain provider payments downward. The greater the insurer’s market power (i.e. the more policyholders it represents) the better prices it can negotiate, all other things being equal. This, in fact, is one of the functions of a public plan and one of the reasons Medicare, the VHA, and other large purchasers can negotiate (or set) relatively low prices.

Recent publications suggest a high degree of market concentration among health insurers already exists, at least in certain markets (see Robinson, Consolidation and the Transformation of Competition in Health Insurance, Health Affairs 23(6) and Dafny, Are Health Insurance Markets Competitive?, NBER working paper 14572). Will health reform, should we get any, lead to a more or less competitive insurance market? More critically, what degree of market power among insurers is ideal? Greater market power may provide leverage to negotiate lower provider prices but it also makes it less likely the insurer will pass those lower prices on to consumers through lower premiums.

There must be an optimum degree of insurer power given the degree of provider power, one that maximizes benefits to the consumer. This is a complicated two-sided market problem. So far I have not found much evidence that economists are able to tackle such a complex problem (I’m still looking). Platform competition in two-sided markets is hard to model and this area of specialty is relatively new.

I worry that some issues will be settled and constraints imposed via antitrust lawsuits before the economics community can makes sense of things. Consumers will likely be harmed if courts do not have the tools necessary to make rational judgments. It wouldn’t be the first time.

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