Competition policy in the era of the ACA

This month, Health Affairs published four insightful articles about the growing challenge of provider concentration. As Paul Ginsburg and Gregory Pawlson frame the problem,

[c]onsolidation within the health care industry is a double-edged sword: The integration of hospitals, physicians, and others across care settings has the potential to improve clinical quality and increase efficiency, but the consolidation of practices can also increase providers’ market power and thus their ability to command higher prices. Even before the enactment of the Affordable Care Act (ACA) in 2010, the tendency for health care providers to merge and affiliate with each other was increasing. Since then, the pace of consolidation has quickened. The ACA’s payment reform provisions, such as those related to accountable care organizations (ACOs) and bundled payment, have sent strong signals to providers to pursue clinical integration. Some of the desired integration can be achieved without mergers. Nonetheless, hospital mergers in 2010–12 increased by 25 percent, compared to 2007–09.

What’s to be done about this consolidation, which is probably the biggest long-term threat to the viability of the ACA’s market-based approach? Ginsburg and Pawlson throw out a bunch of possibilities: support narrow and tiered networks; use reference pricing; increase price transparency; and give consumers more information.

In the second piece in the series, William Sage argues that the market doesn’t function well because health-care services are sold in disaggregated units that frustrate sensible shopping. He therefore calls on Medicare and federal antitrust authorities to encourage providers to package health-care products in bundles—he calls them “competitive products”—that are more sensitive to both “clinical need and consumer demand.”

Both articles are sophisticated, thoughtful, and worth reading in full. What’s striking, however, is how little headway these approaches are likely to make in the face of serious market concentration. As Martin Gaynor explains in a thoughtful commentary,

a number of the private initiatives discussed by Ginsburg and Pawlson (narrow networks, tiered networks, reference pricing, and price and quality transparency) depend on the potential for the active exercise of choice. If consolidation has led to a market’s being dominated by a single firm, there may be no viable alternatives, and so these sorts of initiatives are simply not feasible.

Market concentration will similarly impede Sage’s proposal. In the absence of competition, a dominant provider can still charge exorbitant prices for its services, even if the services are repackaged as “competitive products.” Bruce Vladeck puts the point tartly in his own commentary: the “basic flaw in both Sage’s analysis and that of Ginsburg and Pawlson, which perfectly reflects the underlying bias in neoclassical economics, is the myth of the sovereign individual consumer.”

What’s the alternative, then? Gaynor, currently the director of the FTC’s Economics Bureau, is skeptical that antitrust law can roll back the market concentration that has already taken place, although he’s somewhat more optimistic about future antitrust enforcement. If antitrust proves inadequate, however, Ginsburg and Pawlson raise the possibility that rate regulation, largely abandoned in the 1980s, could come back into fashion, at least in those states with a large fraction of highly concentrated markets. Vladeck agrees, although he’s “skeptical of the political likelihood of a return to rate setting” and not “entirely convinced of its desirability.”

The rate-setting suggestion is provocative, and it reminded me of something Uwe Reinhardt wrote a few years back, where he argued that the health care system is at “a clearly delineated crossroads”:

On one road, Americans would seek better control over national health spending through an all-payer approach, such as the one operated by Maryland for the hospital sector. On the other road, Americans would seek better control of health care prices and national health spending through greater reliance on market forces for most of the health system. … The battle over US health policy in the coming decades is likely to be over which road to take.

The dearth of competition in many health-care markets is perhaps the strongest force pushing us down that road toward rate-setting. That should worry supporters of the ACA, who hope to see robust competition on the exchanges and in the employer market. It should also worry the ACA’s opponents, most of whom would find price controls even more distasteful than Obamacare.

Both Democrats and Republicans, then, have good reasons to cooperate on competition policy. Whether they can overcome their partisan rancor to do so is another question altogether.



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