Health Reformers Need an Antitrust Agenda

by Reihan Salam

Barak Richman, a professor at Duke University Law School, is one of the leading experts on the role of monopoly power in U.S. health care markets, a neglected issue that is absolutely central to whether or not health-system reform efforts from the left and the right succeed in the coming years — indeed, Richman has written that the monopoly power of hospitals “plausibly dwarfs all other factors responsible for the extraordinarily high cost of US health care.” In “Concentration in Health Care Markets: Chronic Problems and Better Solutions,” he offers a number of ideas on how we might encourage competition among medical providers:

Vigorous, rather than tentative or circumspect, enforcement of the antitrust laws can mitigate the harms from provider market power. Retrospectively scrutinizing earlier horizontal mergers of hospitals or other providers could help correct decades of ineffectual enforcement, but if looking backward remains unlikely, renewed rigor moving forward is all the more essential. Parties proposing new mergers and alliances, whether traditional associations or new ACOs, must convincingly show that their reorganization either leads to only a minimal increase in market power or creates specific efficiencies. Other measures should target current monopolists to prevent the enshrine- ment or expansion of their market dominance. An antitrust or regulatory initiative to curb hospitals’ bundling practices and prohibit anticompetitive con- tracts between payers and providers—perhaps as remedies for earlier mergers found unlawful after the fact—might also significantly reduce the extraordinary pricing freedom that hospital and other monopolists enjoy by virtue of US-style health insurance.

Another path to reducing the power of provider monopolies is to encourage creativity among third-party purchasers. Health plans that bypass, or foster new competitors for, local monopolists promote price and quality competition where it is currently lacking, thus undermining the potency of insurance plus monopolies. A pro-competition regulatory agenda should seek ways to facilitate such interregional competition, or at the very least scrutinize how medical loss ratio rules and other regulations might impede it. Additional hope lies in the possibility that health insurers and third-party purchasers will purchase (and that PPACA regulations will let them purchase) proven nonmedical interventions that improve health and reduce health care costs. The exorbitant prices for monopolized medical services should encourage health insurers to develop creative alternatives, both seeking effective (and less costly) substitutes and reor- ganizing what has become a fragmented, error-prone, and inefficient delivery system.

Unfortunately, health insurers have not shown much eagerness to either contest provider market power or pursue meaningful innovations providing care for their subscribers. As investigations in Michi- gan and Massachusetts reveal, insurers all too often become coconspirators with provider monopolists, agreeing to exclusive agreements that protect both themselves and monopolists but gouge consumers. Insurers’ failure to act as aggressive purchasing agents for consumers is due partly to how the true cost of insurance remains hidden and partly to consumers’ undue reluctance to accept anything less than the best. If consumers were both aware of the true cost of their health coverage and conscious that they, rather than someone else, are paying for it, they surely would demand more value from their insurers. But US health plans appear inadequately motivated to reduce costs and overly hesitant to adopt innovative strategies with associated legal or political risks. Any hope for the future of US health care is tempered by doubts about the ability and willingness of US health insurers— as well as insurance regulators and elected officials who purchase insurance for public employees—to take the aggressive actions needed to procure appro- priate, affordable care.

The PPACA, by expanding the reach of health insurance to many additional millions of Americans, has the potential to aggravate and extend the significant shortcomings of such insurance. Not only does the new law seem to have no effective answer to the problem of provider and supplier monopolies, but its broad extension of coverage is likely to further amplify the uniquely harmful effects of their market power. Moreover, its new regulatory requirements— imposing medical loss ratios and essential health benefits, for example—might constrain innovations among payers that might create interregional provider competition or reconfigure a deeply inefficient health care delivery system. Despite these new regulatory layers, antitrust policymakers and other regulators still have the capacity to foster value-enhancing innovation—primarily by preventing the continued enshrinement of current monopolies. And although current tax policies and regulations have turned many insurers into agents for providers rather than for their subscribers, a potent opportunity remains for third- party payers to inject the health care sector with value-creating innovations that redesign both the offerings and the delivery of care.

Though Richman published “Concentration in Health Care Markets” under the auspices of the right-of-center American Enterprise Institute, he supports the goal of universal coverage. But like the Christensen Institute’s Devin Bean and Ben Wanamaker, he is very skeptical about the wisdom of regulating medical loss ratios and essential health benefits, as these regulations have the potential to limit the kind of business model innovation that could appreciably lower the cost of care by undermining current provider monopolies.

Right now, conservative critics of the Affordable Care Act are focused on delaying or repealing the individual mandate, but they aren’t also seeking to delay or repeal guaranteed issue. Guaranteed issue without an individual mandate all but guarantees that large numbers of healthy people will choose to forego coverage. Others are focused on repealing the medical device tax and other levies earmarked for financing coverage expansion, measures that might make sense for any number of reasons, yet which will increase future deficits. Focusing on rolling back the regulation of medical loss ratios and essential health benefits, in contrast, would encourage new entrants in the insurance market and business model innovation more broadly. A deregulation-first focus would be good for consumers, and it would also be good for businesses that have to pay for medical care and businesses that want to do a better job of delivering it.

Many health reform advocates emphasize the productivity-enhancing potential of integrated care systems, and the Accountable Care Organizations (ACOs) provided for in PPACA represent, in theory, a strategy for spreading their reach and their benefits. The problem, according to Richman, is that there is a danger that ACOs will be used not as a vehicle for efficiency-enhancing vertical integration, but rather as a vehicle for competition-dampening horizontal integration, in which providers seek to entrench their market power by linking up with competitors. 

P.S. And if you want to read more about the monopoly power of hospitals, I highly recommend reading Avik Roy’s recent National Review article, “An Arm and a Leg.”