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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