Elsa Pearson is a senior policy analyst at Boston University School of Public Health. She tweets at @epearsonbusph.
Health care mergers and acquisitions can have significant negative consequences on patients, providers, and communities. Yet, questionable deals keep getting approved. Inspired (read as: frustrated) by the pending merger in Rhode Island between Lifespan and Care New England, I dove into the antitrust machinery in place to stop these mega deals.
It’s clear that mechanisms already exist to curb potentially harmful mergers and promote industry competition. It’s also clear they aren’t being used to the fullest extent. Unless these checks and balances lead to mergers being denied, their power over the market is limited.
Experts have been raising the alarm on health care consolidation for a while. The research shows mergers rarely lead to better care quality, access, or prices. Proposed mergers must be assessed and approved based on evidence, not industry pressure. If nothing changes, the consequences will be felt for years to come.
Austin and I have a piece at the JAMA Forum (it’ll also come out in an upcoming issue of JAMA itself) explaining why health plans don’t really compete with one another over the treatments that they cover.
Doing so requires good evidence on how well therapies work, but that evidence is often lacking. Insurers lack the right incentives to develop the evidence on their own because other insurers will free-ride on their efforts. And the government can’t pick up the slack because Medicare is barred from considering costs in choosing what to cover.
The law also poses an obstacle. The favorable tax treatment of employer-sponsored coverage encourages employers to offer expansive health plans. The courts are reluctant to construe contractual terms to allow insurers to refuse coverage, and they will sometimes side with “expert” opinions about medical need even where evidence of a treatment’s efficacy is lacking. And legal rules (including state coverage mandates and the ACA’s essential health benefits rule, which applies to individual and small group plans) may prohibit insurers from restricting the scope of coverage.
In principle, we could change the law to encourage plans to compete on cost-effectiveness. In practice, we doubt it would work. …
So if you’re one of those people who’d prefer a cheap plan that excludes glitzy treatments, you’re out of luck. You’ve got to buy a plan covering all medically necessary care, even if that care has little proven value or is wildly expensive.
The lack of competition between health plans interacts with the increasing market power of providers in disconcerting and under-appreciated ways, as Clark Havighurst and Barak Richman nicely explain in this 2011 paper:
At the same time that health insurance ameliorates monopoly’s usual adverse effects on output and allocative efficiency, it greatly exacerbates monopoly’s other objectionable effect, the redistribution of wealth from consumers to powerful firms. In the textbook model, the monopolist’s higher price enables it to capture for itself much of the welfare gain, or “surplus,” that consumers would have enjoyed if they had been able to purchase the valued good or service at a low, competitive price. In health care, insurance puts the monopolist in an even stronger position by greatly weakening the constraint on its pricing freedom ordinarily imposed by the limits of consumers’ willingness or ability to pay. This effect appears in theory as a steepening of the demand curve for the monopolized good or service. …
Even under orthodox theory, therefore, health insurance enables a monopolist of a covered service to charge substantially more than the textbook “monopoly price,” thus earning even more than the usual “monopoly profit.” As serious as this added redistributive effect may be in theory, however, it is rendered even more serious in practice by certain deficiencies in the design and administration of real-world health insurance. For legal, regulatory, and other reasons, … insurers … pay for any service that is deemed advantageous (and termed “medically necessary”) for the patient’s health, whatever that service may cost. Consequently, available “close substitutes” for a provider’s services do not check its market power as they ordinarily would do. Indeed, putting aside the modest effects of cost sharing on patients’ choices, the only substitute treatments or services that insured patients will accept are those they regard as perfect ones. Unlike the situation when an ordinary monopolist sells directly to cost-conscious consumers, the rewards to a monopolist selling goods or services purchased through health insurance may easily and substantially exceed the aggregate consumer surplus that patients would derive at competitive prices.
Discussions of antitrust issues in the health care sector rarely, if ever, explicitly observe how health insurance in general or U.S.-style insurance in particular enhances the ability of dominant sellers to exploit consumers. … Yet, the effect we identify has potentially huge implications for consumers and the general welfare and thus for antitrust analysis not only of hospital mergers but also of other actions or practices capable of enhancing provider or supplier market power.
Monopoly in any market is bad. In the health care market, however, the presence of insurance—and especially insurance that is insensitive to the value of the treatments that it covers—makes monopoly much worse.
A couple of weeks back, I wrote that “I don’t see a non-wonk constituency pushing for the intensity of antitrust enforcement that’s needed” to tackle the growing market power of hospital systems. I heard from a former student and antitrust expert, who had this to say (he asked me to keep his name out of it):
I agree with the general premise with a slight deviation. There’s been a lot of attention paid to antitrust in this election from the populist wings of both parties (e.g., the public commentary regarding the AT&T/Time Warner announcement). However, a lot of the frustration is misplaced by focusing on large conglomerate mergers or vertical mergers where the anticompetitive effects may be muted. There needs to be more attention paid to smaller—and more frequent—deals that don’t get the national press coverage.
In an email back to him, I bemoaned the lack of state enforcement. States have antitrust laws, too. Why don’t they take the lead given that hospital markets are geographically confined? He replied:
I’ve been equally surprised by the lack of independent state-level antitrust enforcement. Beyond mergers, issues like market allocation and price fixing among hospitals and/or independent practices deserve more scrutiny than they’ve otherwise received. State AGs will often piggyback on FTC cases … [because] they just don’t have the resources or technical know-how to bring independent actions. Most of the states combine their antitrust and consumer protection functions in a single, small office, and focus on the latter mission at the expense of the former.
Perhaps too cynically, I also think state AGs are generally biding their time till they can run for governor or a Senate seat; angering major employers/corporations by blocking their mergers cuts into their potential contributions. And I suspect the interest level in state-level merger control is sensitive to industries to a greater degree than is federal antitrust. There’s a great empirical political economy dissertation to be written on the effects of political contributions and industry on state-level antitrust enforcement.
Depending on what the Trump administration does, all that could change. I don’t take see Trump’s comments on the AT&T/Time Warner deal as a pro-antitrust enforcement posture. It’s more likely he’s willing to take on media and telecom conglomerates and is generally antagonistic or agnostic towards antitrust beyond that narrow field. States may have to pick up the mantle.
When it comes to hospital consolidation, it seems that federal antitrust enforcers can’t and state antitrust enforcers won’t.
Ashish Jha has a new post on antitrust problems in the health-care industry:
A robust literature on the benefits of competition in the health care marketplace shows that when health care markets are competitive, prices tend to be lower, quality tends to be higher, and people have more choices for care. Competition is a remarkably powerful tool that needs to be wielded more effectively. The good news is that ensuring competition is already the law of the land. The problem is that with the pace of consolidation, monitoring potential anticompetitive effects will be increasingly difficult as the FTC is tasked with examining a rapidly increasing number of mergers. The FTC needs renewed focus from policy makers to ensure that it can do its job effectively.
I’m sympathetic: to my mind, market concentration is the most urgent problem facing the health-care system. For three reasons, though, I’m more skeptical than Ashish is that competition law offers a realistic path forward.
First, it’s not enough for the FTC to review new mergers more diligently. Market concentration is already here. In 2013, David Cutler and Fiona Scott Morton showed that half of all hospital markets are highly concentrated and another third are moderately concentrated. It’s only gotten worse since then. Scrutinizing new mergers is like trying to close the stable door after the horse has bolted.
Second, the impulse to promote integration will complicate efforts to prevent consolidation. To continue the barnyard analogies, how is the FTC supposed to separate the integration sheep from the consolidation goats? The answer isn’t black and white: lots of mergers will promote integration and increase market power. Antitrust law is poorly equipped to strike the balance, which partly explains why the FTC has faced skepticism from the courts in some of its recent enforcement cases.
Third, I don’t see a non-wonk constituency pushing for the intensity of antitrust enforcement that’s needed. There’s no appetite to break up hospital systems—and even if there were, there’s no chance that a Republican-controlled House of Representatives would fund such efforts. It’s not even clear that it’d be a good idea. The ACA pushes for integrated medical systems for a reason, and at least some consolidation is both inevitable and salutary.
But if competition law isn’t the answer, what is? When antitrust falters, the law has other tools at its disposal. As I’ve argued elsewhere, I suspect we’re going to see a rise of public utility regulation—direct, state-level regulation of the economic practices of hospital systems.
If you’re skeptical, consider the “surprise bills” law that California just enacted. Among other things, it limits out-of-network doctors who work at in-network facilities from charging patients more than 125% of Medicare rates. That’s a price control, no question about it. And the California legislature passed it with almost no dissenting votes. Other states, including Florida and New York, have adopted similar laws. (A terrific paper from Brookings, led by Mark Hall, dives into the details of surprise billing and what can be done to address it.)
Is this “creeping up on all-payer rate-setting,” as Austin put it? I don’t know, but I think it’s a real possibility. Whether that’d be good or bad is genuinely hard to say. But unless there’s a revolution in antitrust enforcement—and I don’t see that happening—something has to give.
Aetna has denied any link between the Justice Department’s effort to block its merger with Humana and the company’s departure from the exchanges. Turns out those denials are not so true. Jonathan Cohn and Jeff Young at the Huffington Post have unearthed a letter from Aetna’s CEO to the Justice Department before the antitrust suit was filed:
[I]f the [merger] deal were challenged and/or blocked we would need to take immediate actions to mitigate public exchange and ACA small group losses. Specifically, if the DOJ sues to enjoin the transaction, we will immediately take action to reduce our 2017 exchange footprint … [I]nstead of expanding to 20 states next year, we would reduce our presence to no more than 10 states .… [I]t is very likely that we would need to leave the public exchange business entirely and plan for additional business efficiencies should our deal ultimately be blocked. By contrast, if the deal proceeds without the diverted time and energy associated with litigation, we would explore how to devote a portion of the additional synergies … to supporting even more public exchange coverage over the next few years.
In some quarters, the letter will be taken to prove that Aetna tried to blackmail the administration. Maybe that’s right. But, as Cohn and Young point out, there’s some evidence that Aetna was just stating a fact: that blocking the merger really would change its financial calculus about whether to stay in some exchanges. The line between a sincere promise and a strategic threat can be hazy.
In fact, the kind of unseemly negotiation on display in the letter isn’t that uncommon, especially in closely regulated industries. Firms will say to regulators, “We can stay in the market if you do X, but if you do Y, we can’t.” Because regulators depend on those firms to supply services to the public, they have to take those statements into account. They might make a counter-offer: “What if we do Z? Can you live with Z?”
At the same time, regulators can’t just take firms at their word. As in any negotiation, the firms may posture and bluff. Indeed, they might sincerely but wrongly believe that the sky will fall if regulators do something they don’t like: firms are risk-averse and tend to underestimate their ability to cope with changes in law. Regulators have to walk a fine line, taking firms’ concerns seriously, but calling bullshit where necessary.
That’s why it’s so hard to make out whether Aetna’s threat was sincere or strategic. Maybe its financial situation really has deteriorated as a result of the antitrust suit, so much so that it can’t afford to stay in unprofitable markets. Maybe, though, it had to follow through with the threat to preserve its credibility for future negotiations, even if it’s worse off as a result.
Probably it’s a bit of both. Still, Aetna’s not likely to get the benefit of the doubt. Its pious denials give its behavior a ring of hypocrisy. And there’s something disquieting about its thinly veiled suggestion that the Justice Department should bless anti-competitive conduct for short-term political advantage. Playing hardball with regulators may be common—but it can also be risky.
Imagine you want to buy ten pieces of the thousands of pieces of Halloween candy your two kids have collected, but you don’t care from which kid you buy what amount of candy. Being a shrewd, candy-loving economist who studied physics and engineering, you figure you can get your kids to bargain down the candy price. Both being flush with candy (more than they can eat before you throw it away at Christmas time anyway), you figure each one will undercut the other to get a little cash. You’ll have your candy fix cheap!
But, suppose unbeknownst to you, they’ve agreed in advance to split whatever money they can extract from you in exchange for their candy. All of a sudden, what appeared to be two units (kids are “units” to physicist-engineer-economists) bargaining separately isn’t so much. Neither kid has an incentive to cut her price. If kid A loses the sale to kid B, what’s it to A? She still gets half the money. This is a cartel, despite seemingly separate bargaining units.
This is analogous to the story told in a new paper by Gautam Gowrisankaran, Aviv Nevo, and Robert Town. They explain why forcing hospitals within a hospital system to bargain with insurers separately does not fully address antitrust concerns.
In the Evanston Northwestern hospital merger case [summarized here], the FTC imposed a remedy requiring the Evanston Northwestern system to negotiate separately with MCOs (with firewalls in place) from the newly acquired hospital, Highland Park Hospital.
What could go wrong?
Even though the negotiations are separate, [one hospital] bargainer might internalize the incentives of the system, namely that if a high price discouraged patients from seeking care at [that hospital], some of them would still divert instead to other [system] hospitals which is beneficial for the parent organization. [… Under this theory,] [w]e find that the [separate bargaining units] remedy performs similarly to the base merger outcomes.
In other words, with the threat of patients going to competitors reduced, it’s no remedy at all.
The FTC in its Evanston decision hoped that this conduct remedy would re-inject competition into the market by reducing the leverage of the hospital that bargains separately […]. However, this remedy also reduces the leverage of the MCO since if it offers an unacceptable contract to [one hospital], some of its [] patients would certainly go to other [system] hospitals. […] Empirically, separate negotiations do not appear to solve the problem of bargaining leverage by hospitals.
The moral of the story is to buy your candy at the supermarket. You’d have known this if you’d actually studied economics in school.
The FTC intervenes when there is strong evidence that a merger between health care providers is likely to result in market power that will lead to an increase in prices — through higher insurance premiums and copayments — without corresponding quality improvements.
This is why merging organizations usually argue they’ll increase quality. Whether they actually do so is an empirical matter. Evidence to date is not encouraging.
For quality-related claims to succeed, however, they must be backed by evidence that quality improvements are both likely and attainable only by means of a merger.
Evidence!
The FTC also showed that there are different ways, short of a merger, for hospitals to achieve the benefits of clinical integration, including through the use of clinical practice protocols to ensure consistent treatment and financial incentives for meeting quality-of-care goals.
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.
The complexity of this undertaking highlights a fundamental enforcement reality. If it’s this hard for regulators to demonstrate why a patently worrisome acquisition should be blocked, it is even less likely that they will investigate or attempt to halt mergers for which potential effects are unclear. […]
Consolidation will surely continue before we can determine whether it is benign.
– Leemore Dafny, The New England Journal of Medicine
Austin and Aaron are participants in the Amazon Services LLC Associates Program, an affiliate advertising program designed to provide a means for sites to earn advertising fees by advertising and linking to amazon.com.
09/02/2021
Elsa Pearson
