- Health care providers with market power enjoy more pricing freedom than monopolists in other markets
- Traditional antitrust enforcement did little to halt extraordinary consolidation in local hospital markets over the last two decades
- The Affordable Care Act (ACA) does little to address to address the monopoly problem and may even worsen it
- The ACA will entrench dominant incumbents, chill innovative start-ups, and encourage consolidation to increase market share
- We need better solutions to the chronic problem of too much concentration and too little competition in health care markets
- An expanded tool kit of pro-competitive policies should include:
- closer monitoring of emerging accountable care organization
- curbing new abuses of “state action” immunity
- challenging anticompetitive terms in insurer-provider contracts
- promoting interregional competition in health care services
- removing or limiting regulatory barriers to entry by new health sector competitors, and
- empowering consumers and private purchasers with better information tools
Thank you Chairman Goodlatte, Subcommittee Chairman Bachus, Committee Ranking Member Conyers, Subcommittee Ranking Member Cohen, and Members of the Subcommittee for the opportunity to testify today on health care consolidation and competition under the Affordable Care Act (ACA).
I am testifying today as a health policy researcher and a resident fellow at the American Enterprise Institute (AEI). I also will draw upon previous experience as a senior health economist at the Joint Economic Committee, member of the National Advisory Council for the Agency for Healthcare Research and Quality, and health policy researcher at several other Washington-based research organizations (including several years as co-editor of the Washington Antitrust Report at the Competitive Enterprise Institute).
All types of monopoly are not created equal in the U.S. economy. Health care providers with market power enjoy substantially more pricing freedom than monopolists in other markets. Traditional antitrust enforcement tools have done little to halt extraordinary consolidation in local hospital markets over the last two decades, which drove higher price increases for inpatient services. Comprehensive, U.S.-style health insurance further enhances the pricing freedom of health care firms with market power. The Affordable Care Act of 2010 (ACA) does little to address the monopoly problem and may even worsen it.
Problems of excessive concentration and insufficient competition in health care markets are not new, although their industry sector source has varied over time. For example, insurers were more dominant price-setters during the heyday of managed care in the 1990s. But more recently, markets for hospital services have presented the most serious competition policy issues. Havighurst and Richman observe that whereas monopolies in other parts of the economy enable sellers to charge higher prices while reducing output, comprehensive third-party health insurance coverage enables many cost-insensitive patients to pay monopolist providers' asking prices rather than being induced to give up desirable health care goods and services. Hence, it amplifies the redistributive effects of health care monopolies (lower-income premium payers subsidize upper-income providers and insurance consumers) and inflicts allocation inefficiencies as well. 
In other words, "too much of a good thing," at excessive prices. The combination of market concentration and generous insurance means consumers and providers end up overspending even more on costly health care. The combination of market concentration and generous insurance means consumers and providers end up overspending even more on costly health care.
Competition policy in health care has been further hampered by judicial resistance to antitrust challenges to mergers involving nonprofit hospitals (which account for roughly three-quarters of hospital admissions, outpatient visits, and expenditures). Past cases have turned on skepticism by judges that local nonprofit hospitals would take advantage of their pricing power, and their belief that hospital monopolists would put to good use any market power they might possess. (As if nonprofit empire building never occurs!)
Effects of the ACA on Health Care Competition
A less-noted future problem in health care policy involves the increased "competition" among dominant market players to obtain, maintain, or extend their market power advantages. The highly regulated and heavily subsidized regime ahead under the ACA already has triggered a feverish scramble among health industry firms (insurers, pharmaceutical manufacturers, physician practice groups, and device makers, as well as hospitals) to get bigger market share and also become better "connected" politically to ensure that they will be among the politically dependent survivor incumbents in the years ahead. With most of the key decisions in health care financing, coverage, and even treatment likely to be made in Washington, investments in winning future rounds of political competition is likely to trump responsiveness to market competition. Heavily regulated health care providers and insurers increasingly will have to focus more on dealing with the mandates, rules, and payment incentives of their main “customers” – government administrators, and less on the needs and wants of their patients and other private payers.
Hence, we have seen even more health care marketplace consolidation since passage of the ACA. To be sure, most of the consolidation in hospital markets occurred during the “merger wave” of the mid-1990s. But the more important policy question today is whether the ACA has made a bad problem worse. The primary effect of the law and its increasingly dense web of regulation has been to encourage a substantial increase in vertical integration and consolidation of health care services; mostly in the form of acquisitions of physician practices by hospitals.
As my AEI colleague Scott Gottlieb pointed out last year in testimony before this subcommittee, the trend toward physicians working as salaried employees has accelerated in recent post-ACA-enactment years. The majority of those physician employment contracts (and related arrangements) are with hospitals. Insurers have largely been trying to play a catch-up game in tightening contractual links to physicians.
The more sanguine view of this trend among ACA advocates is that it represents overdue efforts to better integrate and coordinate health care delivery, in response to the law’s new payment incentives (e.g., accountable care organizations, bundled payments, electronic health records adoption, value-based reimbursement). Such increased vertical, and even horizontal, consolidation potentially could improve the allocation of health care resources through less duplication, improved transitions between sites of care, reduced hospital readmissions, and better information sharing. But it also risks coming into conflict with pro-competition policies favoring greater price transparency, improved quality reporting, and lower prices. Well-integrated health provider networks, or health systems, may face less competition, lock in patients to non-interoperable health IT systems, and leverage market power across health services domains.
One strong factor in the move toward greater consolidation of health care services – particularly between hospitals and physicians – is the continued likelihood of tighter reimbursement limits combined with cost-increasing mandates that would shift more financial risk to providers. More physicians are selling their small practices, shedding business costs, and seeking the “shelter” of salaried arrangements with hospitals or larger physician groups. On the other end of these transactions, hospitals and physician groups that can accumulate more capital, acquire in-demand practitioners, and increase patient referrals may be tempted to gain undue market power, demand higher rates, and increase health care costs; instead of just becoming more efficient and delivering higher value care.
Thus far, those who are skeptical of such pro-competitive consolidation have past history on their side.
On the health insurance side of the market, post-ACA-enactment consolidation has not been as rapid, thus far. However, longer-term factors suggest that this is likely to change. The new health exchanges, recently relabeled “marketplaces” (without market prices!), are structured to gravitate toward more standardized corridors of coverage. They are based on a limited set of actuarial-value tiers, cost-sharing limits, and bureaucratic pre-approval; then reinforced by a broader insurance regulatory scheme of mandatory essential health benefits, first-dollar coverage of preventive services, premium rate review, new medical loss ratio (MLR) ceilings on insurers’ profits and administrative costs, and a thickening web of additional “guidance.”
For example, the minimum MLR rules for insurers may superficially appeal to some insurance purchasers, but they could further disarm payers in aggressive price negotiations with providers and stifle insurers' investments in innovative monitoring and improvement of health care delivery. MLR rules also could inhibit new entry by start-up insurance carriers lacking sufficient investment capital cushions to overcome initial marketing and administrative expenses. The eventual scope and scale of the ACA’s regulatory requirements for essential health benefits also could discourage investments in low-cost, nonmedical alternative interventions that can produce results superior to mandated traditional care.
It is important to distinguish between short-term effects as the ACA exchanges begin their first shake-down year of implementation and the more likely long-term dynamics of this more heavily regulated and tax-subsidized “market” for individual and small-group insurance. Given the potential leverage that state and federal exchange administrators may eventually exercise over participating insurers, the most likely scenario to unfold as the costs of guaranteed benefits squeeze against the supply of revenue from tax subsidies and enrollees’ discounted premiums is for a few surviving large insurers to gain a dominant share of the coverage provided in the exchanges, as they gravitate more toward a regulated public utility model (e.g., captive customers, low but predictable rates of return, economies of scale in managing regulatory compliance costs, and commodity-like products). Whether this dynamic might eventually spill over into the larger employer-based health insurance market remains conjectural, but not implausible, at this point.
Health Firms Grow Bigger & Politics Reigns Supreme
Passage of the ACA triggered a new wave of defensive consolidation in the health care sector, instead of just presenting better opportunities to reconfigure operations and business relationships to become more efficient. Anticompetitive strategies were predictable responses to the new law’s incentives and penalties. The elegant theory of how the ACA’s payment incentives and regulatory guidance will inspire more coordinated, high-value care within larger, more vertically integrated health care systems needs to be tempered by some more likely political and economic realities.
Entrenching Dominant Incumbents
The ACA’s reimbursement schemes and regulatory burdens are more likely to entrench large, existing players in health care markets than to encourage start-up innovators. The law is designed to limit returns on private capital invested in health care services and products; indeed it often frames private profits as reducing the resources needed for direct patient care (e.g., rate review thresholds, MLR limits, formulaic “productivity adjustments” in reimbursement, rebate-like taxes on health care providers, insurance cooperative subsidies, and mandated benefits). However, these very rules bias the evolving health system further against entry by the new, innovative entrepreneurs most likely to search for hyper-profitable new ways to reengineer inefficient health care practices, products, and systems.
Under the ACA’s regime of complex, confusing, and costly regulation, it will take a larger village of lawyers, lobbyists, and lines of credit to comprehend, cope, and comply (or maneuver). Growing bigger, or staying large, becomes the best hedge against political and regulatory risks. Too big to fail may not be guaranteed, but too small to survive becomes more likely.
The evolving regulatory balance, of course, remains unsteady and not fully charted. Possible settings could range all the way from eventual “capture” and protectionism for the largest producers that last longest at the bargaining table, to gains from trade in political markets to override economic ones, and to the most likely one in this case – symbiosis. Although some symbiotic relationships (obligate ones) require both parties to depend entirely on each other for survival, more “parasitic” ones benefit one party while the other is harmed. It remains to be seen whether the government side of the ACA relationship with the health industry can succeed instead in achieving ectosymbiosis, in which it lives on its junior partners in the health industry, or even “inside” of them.
Market Imperfection vs. Government Failure
Most apologists for a heavier role for government intervention in health care usually begin by asserting that “health care is special” and its markets inevitably are riddled with imperfections that justify greater regulation. Yet health policy in the U.S. has spent decades trying to implement such corrective strategies, with a mounting record of government failure. Excessive levels of third-party payment, lack of price transparency, barriers to entry, opaque cross-subsidies, unsustainable unfunded liabilities in health entitlement programs, rewarding volume rather than value, lagging adoption of information technology, excessive reimbursement and inadequate reimbursement – these are arguably greater reflections of flawed public policy more than of malfunctioning private markets.
The two sectors of the U.S. economy traditionally plagued by rising costs, uneven quality, poor value, and disparities for decades have been health care, and primary and secondary education – the two most heavily regulated and publicly subsidized ones. Yet the next doses of stronger government-centric remedies are always promised to work better than the last ones.
For example, the ACA promises that Medicare should lead the way to innovative health care delivery reform. Meanwhile, it remains a predominantly fragmented, fee-for-service system that has reimbursed providers for greater volume of services rather than higher quality and better outcomes; sets thousands of administered payments that distort prices elsewhere; saddles younger and future generations with crushing unfunded liabilities; and launches dozens of demonstration projects designed to be “inconclusive.” But it keeps the HHS inspector general’s staff busy tallying large estimated amounts of fraudulent and improper payments.
Yes, Medicare is such a dominant influence across the health care sector that it really does have to help lead the way to better performing care delivery. It just hasn’t done much of that thus far.
ACA advocates warn that providing too many health care choices in private markets will cause information overload for hapless consumers, who need a handful of more standardized price, coverage, and treatment options. Evidently, similar mental processing constraints do not apply to purchasers or providers facing tens of thousands of pages of often late-arriving and shape-shifting new regulatory guidance under the ACA.
This Time Is Different?
Antitrust enforcers should be congratulated for recently ending their long losing streak in the courts in challenging hospital mergers seemingly likely to reduce competition and raise prices. But prospects for addressing competition problems in the ACA-era of health care markets through conventional antitrust enforcement remain limited. Rolling back previous hospital mergers is quite difficult legally, impractical administratively, and often counterproductive economically. The hospital consolidation horse not only left the barn several decades ago; it’s taken several laps around the track.
In any case, application of pro-consumer-welfare antitrust policy enforcement has a spotty record and it remains more of a late-20th-Century development. Indeed, just about any sorts of effective antitrust constraints on medical practitioners were virtually unprecedented until the exemption for “learned professionals” began to erode in the mid-1970s. Moreover, antitrust law often applies its rules of health care competition differently for market participants than for government regulators and policymakers. Administered prices and rate setting represent business as usual for the latter, whereas price-fixing by private parties is per se illegal. The “state action” doctrine not only authorizes regulatory constraints on market competition; it may encourage private special interest groups to stretch its boundaries and provide cover for their anticompetitive strategies. In the political arena, Noerr-Pennington immunity applies to actions where private individuals seek anticompetitive action from the government (short of “sham” litigation) which might otherwise violate federal antitrust laws.
The Search for More Effective Policy Solutions
The better version of antitrust policy still has an important role to play in ensuring more competitive health care practices. We need better solutions to the chronic problems of too much concentration and too little competition. Beyond tighter review of new hospital mergers and consolidations, they should include:
- Curbing new abuses of "state action" immunity,
- Challenging anticompetitive terms in insurer-provider contracts,
- Requiring unbundling of monopolized health care services,
- Promoting interregional competition in health care services, and
- Removing or limiting regulatory barriers to entry by new health sector competitors,
- Ensuring that new accountable care organizations deliver on their promises rather than facilitate aggregation and abuse of market power, and
- Empowering consumers and private purchasers with better information tools.
The longstanding state action immunity doctrine, which essentially allows state regulation to immunize otherwise anticompetitive (and illegal) private conduct, needs to be tightened. Although the Supreme Court appeared to make progress on this front earlier this year in a case from Georgia, subsequent legal developments appear to have hampered the shaping of an effective remedy.
One troublesome practice in insurer-provider contracts is for a dominant health care provider-seller to promise to give an insurer-buyer the same discount from its high prices it might give to a competing health plan. Such most-favored-nation (MFN) clauses can play a useful role in many commercial contracts, but they have been prone to anticompetitive abuse in certain highly concentrated health care markets recently (most notably in Massachusetts and Michigan). When MFN clauses protect insurers against their competitors' getting better deals, many of those insurers can become too likely to give in quickly to extortionate monopolist price demands. Regulators have a necessary role in distinguishing better between restrictive agreements that achieve transactional efficiencies and agreements that restrict insurers' freedom to cut self-serving price deals with competitors. Other anticompetitive contractual practices worthy of closer regulatory scrutiny involve "anti-steering provisions" and "must include in network" guarantees.
Another promising antitrust enforcement step suggested by Richman and Havighurst could be to require hospitals and other provider entities to unbundle, at a purchaser's request, certain health care services so that the purchaser can negotiate their prices separately. They note that permitting a hospital monopolist to tie unrelated services together expands its reach, profitability, and longevity - at the expense of consumer welfare. Drawing the exact lines for when and how to exercise this "unbundling" enhancement of anti-tying antitrust enforcement needs further work (such as where to set market concentration thresholds for its application), but it is worthy of consideration for improved price competition.
A different mechanism to battle local monopolies in health care would involve expanding the locus of competition. Future health policy should strive to encourage, not inhibit, interregional competition by reducing regulatory and reimbursement barriers to both domestic and international versions of "medical tourism." Other “market opening” supply-side policies should extend to revision of scope of practice restrictions at the state level and reconsideration of current limits on expansion of physician-owned hospitals.
An important target for careful antitrust scrutiny involves the emergence of politically favored accountable care organizations (ACOs). Although promoted by the Obama administration as one of its magic bullets to reform our inefficient delivery system and reduce its projected future costs, ACOs could instead mutate into new vehicles to engineer and leverage greater monopoly power in already-concentrated health provider markets. The regulatory framework to govern ACOs has been revised since its initial incarnation but still needs to be monitored closely to ensure that promised efficiencies in health care coordination and integration are more likely to outweigh the danger of even further consolidation of provider market power, and that such organizations remain truly accountable to patients and market forces (and not just to political patrons).
Finally, we should remember that information is power within health care markets. The June 2011 report by the Attorney General of Massachusetts on “Health Care Cost Trends and Cost Drivers” in the state noted the following: Its health care markets lacked transparency in price and quality information. Variation in prices was not correlated to the methodology used to pay for health care services (risk sharing versus fee for service). Globally paid providers did not have consistently lower total medical expenses. The report emphasized that health care markets must be responsive to the “purchaser” (i.e., consumers and employers), armed with necessary incentives and information.
The ACA promises to enhance and expand health information, but it relies more on measurement and dissemination through government-mediated, centralized channels, rather than a more pluralistic market-based competition to discover, refine, and deliver it. Expansion of all-payer claims data bases, outcome-based performance measurement, and wider access to Medicare claims data for qualified entities may help on the supply side, but , the ACA’s complex cross-subsidies, administered prices, and rating restrictions are likely to suppress necessary information about the full costs of health care services and discourage consumers’ incentives to seek it.
Instead of doubling down on the "metabolic eating disorder" triggered by public policies that have encouraged overconsumption of conventional, highly subsidized health insurance -- or resorting to tighter price controls and public-utility-style regulation of politically mandated coverage, we should consider some better remedial medicine - a stronger dose of market competition.
1. Barak D. Richman, Concentration in Health Care Markets: Chronic Problems and Better Solutions (Washington, DC: American Enterprise Institute, June 2012), 4-7.
2. Clark C. Havighurst and Barak D. Richman, “Distributive Injustice(s) in American Health Care,” Law & Contemp. Probs, Autumn 2006.
3. Katherine Baicker and Helen Levy, “Coordination versus Competition in Health Care Reform,” New England Journal of Medicine 369 (9): 789-791.
5. Scott E. Harrington, “Medical Loss Ratio Regulation under the Affordable Care Act,” Inquiry 50: 9-26; Scott E. Harrington. Regime Change for Health Insurance Regulation: Rethinking Rate Review, Medical Loss Ratios, and Informed Competition (Washington, DC: American Enterprise Institute, December 2010).
6. See, for example, Henry J. Aaron and Kevin W. Lucia, “Only the Beginning – What’s Next at the Health Insurance Exchanges?” New England Journal of Medicine (online first, September 4, 2013), www.nejm.org/doi/full/10.1056/NEJMp1308032?query=TOC.
7. See Sheryl G. Stolberg, “Reaping Profit After Assisting on Health Law,” New York Times, September 18, 2013, A1.
8. “Symbiosis,” Wikipedia, en.wikipedia.org/wiki/Symbiosis.
9. See Goldfarb v. Virginia State Bar, 421 U.S. 773 (1975).
10. See Richman, 2012. at 11-13.
11. See, for example, Eastern Railroad Presidents Conference v. Noerr Motor Freight, Inc., 365 U.S. 127 (1961); United Mine Workers v. Pennington, 381 U.S. 657 (1965); and California Motor Transport Co. v. Trucking Unlimited, 404 U.S. 508 (1972).
12. Federal Trade Commission v. Phoebe Putney Health System, Inc. et al., 568 US __ (2013), www.supremecourt.gov/opinions/12pdf/11-1160_1824.pdf March
13. Richman, 2012, at 15-16, 18; Aaditya Mattoo and Randeep Rathindran, “How Health Insurance Inhibits Trade in Health Care,” Health Affairs 25(2): 358-368.
14. Office of Attorney General Martha Coakley. Examination of Health Care Cost Trends and Cost Drivers (Boston, MA: June 22, 2011).