Accountable Care Organizations, Competition Policy and Antitrust Concerns

The Center for American Progress (CAP) recently put together a stellar panel on Accountable Care Organizations and Competition Policy. The panelists are listed below the video, and include the well esteemed Professor Tim Greaney– who taught here at Seton Hall Law last year as a Visiting Professor and has contributed a number of posts to HRW over these last few years.

CAP introduced the crux of the matter on its web page about as well as it can be expressed:

One of the most challenging questions facing ACOs is how to provide integration without sacrificing competition and the decreased cost and increased quality it produces. The Center for Medicare & Medicaid Services, the Federal Trade Commission, and the Department of Justice have already been carefully scrutinizing these issues. Will some ACOs threaten competition and eventually raise costs for consumers? To what extent can ACOs overcome the barriers set up by current antitrust regulation? How should the lessons from health care reform educate the role of antitrust enforcement and regulation? How should we approach health care antitrust issues in an era of ACOs?

Introductory remarks:
Christine Varney, Assistant Attorney General, Department of Justice

Featured panelists:
Christi Braun, Shareholder, Ober/Kaler
Tim Greaney, Co-Director, Center for Health Law Studies, Saint Louis University Law School
Melinda Hatton, Senior Vice President and General Counsel, American Hospital Association
Joe Miller, General Counsel, America’s Health Insurance Plans
Sharis Pozen, Chief of Staff of the Antitrust Division, Department of Justice

Moderated by:
David Balto, Senior Fellow, Center for American Progress

Repealing Insurers’ Antitrust Exemption Under McCarran-Ferguson: Less There Than Meets the Eye?

Tim Greaney, Saint Louis University School of Law

The House Judiciary Committee’s vote (20-9) to send H.R. 3596 , to the floor has been heralded by proponents as providing a significant spur to competition in health insurance. Sorry to rain on this parade, but there is less here than meets the eye.

The bill  would repeal, but only in part,  the McCarran-Ferguson Act’s limited exemption from antitrust law for health and malpractice insurers. The bill narrows McCarran’s reach, providing that “nothing in that act shall be construed to permit  insurers “to engage in any form of price fixing, bid rigging, or market allocations in connection with the conduct of the business of providing health insurance coverage or coverage for medical malpractice claims or actions.” A Senate bill with broader effect was the subject of hearings by the Senate Judiciary Committee last week.

Although, as I’ve argued elsewhere, competition in health insurance markets has been less than robust, the case law reveals only a handful of instances in which the exemption protected anti-competitive conduct in the health care sector. The most prominent example, Ocean State Physicians Health Plan, Inc. v. Blue Cross & Blue Shield of Rhode Island, 883 F.2d 1101 (1st Cir. 1989), involved an HMO’s challenge to the exclusionary effect of the dominant insurer’s pricing policy and its offering a rival HMO product. Ironically, this conduct would not appear to be covered by H.R. 3596 and hence would remain immune from antitrust scrutiny.  In addition, the Supreme Court has narrowly interpreted McCarran-Ferguson requirement that only the “business of insurance” is exempt; hence insurers’ actions vis a vis providers is not exempt.  Moreover, it appears that health insurers do not engage in the kind of activities that are most clearly protected by McCarran-Ferguson, viz. joint forecasts of future medical costs and cooperative ratemaking.

Despite these reservations, repeal is not altogether a bad idea.  Most antitrust authorities agree McCarran-Ferguson is not needed to protect pro-competitive conduct, which already is well-insulated under modern antitrust doctrine.  For example, the Antitrust Modernization Commission (a blue ribbon –and very mainstream– panel that examined antitrust policy a few years ago) concluded that McCarran-Ferguson immunity was unnecessary to accomplish the Act’s goal of allowing insurers to collect, aggregate, and review data on losses so that they can better set their rates to cover their likely costs. Insurance companies, it found, “would bear no greater risk than companies in other industries engaged in data sharing and other collaborative undertakings.” When insurers engage in anti-competitive collusion “they appropriately [should] be subject to antitrust liability.” Moreover in insurance lines other than health, such as property/casualty, the exemption may protect collective price fixing with few offsetting benefits for consumers.

It is also noteworthy that the Department of Justice stopped short of endorsing repeal.

Assistant Attorney General Varney testified as follows:

In sum, the Department of Justice generally supports the idea of repealing antitrust exemptions. However, we take no position as to how and when Congress should address this issue. In conjunction with the Administration’s efforts to strengthen insurance regulation and states’ role in setting and enforcing policies, the Department supports efforts to bring more competition to the health insurance marketplace that lower costs, expand choice, and improve quality for families, businesses, and government.

This carefully-worded statement (”in conjunction with …efforts to strengthen insurance regulation and states role in setting and enforcing policies“) seems to signal that the Justice Department is worried about hamstringing state regulatory efforts by allowing parallel antitrust scrutiny of insurance industry practices.  But I would have expected the Antitrust Division to take precisely the opposite position.  Perhaps the strongest argument for repeal of McCarran-Ferguson (and also redefining the state action doctrine) is that a system that relies on extensive state-based insurance regulation (and perhaps state-run exchanges) risks undermining the consumer benefits of competition should regulators become beholden to insurer or provider interests. If history is a guide, this is a legitimate concern.

Market Competition in Health Care: The EU’s Parallel Struggle

Last week, I took a break from U.S. health reform and attended a fascinating conference on Health Care and EU Law at Radboud University in the Netherlands.  It gave me the chance to step back and revisit a struggle common to most health care systems — the appropriate role for market competition.  Without drawing too many parallels here, the view from 30,000 feet confirms that like the United States, European health care systems (varied as they are) must decide the extent to which health care is an economic, commercial product versus a non-economic, public good.

In Europe, this tension is generated by the European Union’s internal common market of 27 member states.  European law — enunciated through treaties, directives, regulations, and decisions by the European Court of Justice — prohibits states from restricting the free movement of goods, persons, and services within the EU, and bans anti-competitive or protectionist arrangements.

But is health care a commercial product subject to these market rules?  Or can member states control their health care systems without worrying whether it restricts free movement or is anti-competitive?  Although EU law says that states shall retain responsibility for managing services of general interest like health care and social security, case law has bounded this authority in several high-profile free movement and competition cases.  For example, a series of court opinions has held that member states have limited authority to prevent their residents from traveling to other member states for health care, or even to require prior authorization before reimbursing for that care back in the home state. Read more

Principles for the Homestretch

House and Senate leaders will soon have to reconcile several different versions of health reform bills. The bills are complex, but some simple principles should guide the process of integrating them into a final product. As the press reports on a whirlwind of proposed laws, we need to ask of any particular proposal: Does it . . .

1) Increase productive competition in health care? Everyone talks about “increasing competition” among insurers and providers, but there are many ways to compete. Hospitals and doctors can game the reimbursement system. Insurers may not directly discriminate against the sick, but can find other ways to keep high-risk patients out of their plans, as even the most market-oriented health policy experts realize:

[T]o avoid patients with costly, complicated medical conditions, health plans could include in their networks relatively few doctors who specialize in treating those conditions, said Mark V. Pauly, professor of health-care management at the University of Pennsylvania’s Wharton School.

Both the Netherlands and Switzerland have already experienced problems in this area, even though the Netherlands has implemented risk-adjustment methods (which attempt to deter such “cherrypicking” and “lemondropping”) far more serious than anything proposed in current bills in the US. As Karen Pollitz has repeatedly argued, we’re going to need a much greater investment in insurance regulation to make any reform bill work.

2) Make it easier for uninsured or underinsured individuals to buy coverage? Many of the proposals for allocating and awarding subsidies for coverage sound exceedingly complex. We’re hearing about serious limitations on access to exchanges, subexchanges, burdensome “free rider” provisions, etc. Any particular provision may sound good in the abstract, but taken as a whole they could become an obstacle course that makes obtaining insurance coverage a miserable and exasperating experience for those supposedly aided by reform. During the second Bush administration, hundreds of thousands of children eligible for subsidized health insurance were not enrolled because states failed to make enrollment convenient enough for time- and cash-strapped parents. As Liebman and Zeckhauser remind us, “we must design systems for mere mortals, not the people who inhabit the models of traditional economists.” What seems easy to one of DC’s privileged elite can be very hard for an overworked mom or minimum wage-earning service worker.

I believe that the main reason a solid 2/3 to 3/4 of the country supports a public option is because it is a straightforward, transparent way to provide a backstop of health insurance for everyone. If Congress both rejects a public option and makes subsidies for private insurance as complex as the tax code, health reform risks becoming a model case of government failure. Last week’s negative votes on Rockefeller’s strong and Schumer’s weak public options could easily become a “you broke it, you bought it” moment for centrist Democrats and Republicans on the Senate Finance Committee.

3) Fairly distribute the burdens of reforming the health care system? This is the tax and finance question, and it promises to generate some epic battles on Capitol Hill. However the Senate Finance proposal ultimately evolves, it will be in tension with a House of Representatives that sees progressive taxation as a foundation for financing reform. The Baucus proposal to tax “high end”/Cadillac/”gold-plated” health plans may seem progressive, but it promises to gradually engulf even normal plans. While David Leonhardt offers some good economic arguments for such a tax, policymakers should be guided by Leonhardt’s observations on the propriety of taxing those at the very top of the income scale, who have disproportionately benefited from economic trends and tax cuts of the past decade.

4) Provide incentives for long-term cost-saving and preventive medicine? Comparative effectiveness research is a crucial tool for focusing pharmaceutical research on drugs that save lives. We have a shortage of primary care doctors vis a vis specialists. Reimbursement systems are too easy to game. Insurance markets are concentrated and need more competition and transparency. Any bill that ignores these problems (or fails to empower HHS or another agency to address them) can’t lead to truly sustainable universal coverage.

The health reform fight has been bruising, disappointing, and frustrating for many who care about health policy. Many unwise assumptions are already baked into leading bills. In the Senate, ostensibly Democratic lawmakers are promoting what are essentially Republican ideas and granting enormous subsidies to industries that may well betray them at the next electoral cycle. Nevertheless, there remain many opportunities for improving the final product at the beginning of the end of the legislative process.

Paying Attention to Competition: Payors, Providers and the Public Plan

Paying Attention to Competition: Payors, Providers and the Public Plan

Thomas (Tim) Greaney
Professor of Law and Director Center for Health Law Studies
Saint Louis University School of Law

Count me as a member of the Bill Sage School of Health Care Reform. Writing in Health Affairs, Professor Sage, a physician, law professor and Vice Provost for Health Affairs at the University of Texas, offered a slogan that should be on every Congressman’s wall: “It’s the delivery system, stupid.”

Somewhat overlooked in the debate over inclusion of a public plan option as part of the health reform legislation is the proposal’s potential to help deal with delivery system problems. There are a number of sound policy arguments favoring the public plan option. For example, it offers the promise of stability, choice, and innovation that may not be readily forthcoming in an unrestricted private market. Frank Pasquale and Ezra Klein have pointed to the “benchmark” function of such a plan, especially in exposing the various “gotcha” or “capricious” practices common in today’s less-than-transparent insurance business. But without cost control there is no reform at all. As the outline of legislation comes into focus it seems clear that in order to persuade law makers that costs will not continue to escalate, there needs to be some assurance that vigorous, efficient and competitive markets will emerge. Critical to achieving that goal are two things: putting in place a regulatory infrastructure to correct market failures and developing structurally competitive provider and insurance markets. As to the first issue, much depends on the scope of regulatory authority vested in insurance exchanges, for example, whether they will have the authority to set rules standards for health plans inside and outside the exchange. As to the structure of the market, there are reasons for serious concern. My view is that the public plan option can offer significant help in dealing with structural defects that have been a long time in the making.

If there is one thing that that finds almost universal agreement among health economists, it is that in America, health care “delivery” (we should abandon the misnomer ‘system’) is a fragmented hodgepodge of autonomous doctors, hospitals, facility owners, and vendors of technology, pharmaceuticals and equipment. Their lack of interconnectedness and coordination is at the core of most of the quality and cost problems Congress is now confronting. Add to that the fact that “consumer” decisions are filtered through a triple layer of agency (i.e. their employers, doctors, health plans). Moreover, as a result of lax antitrust enforcement and providers’ relentless efforts to gain “leverage”, many hospital and physician markets are now tight oligopolies or de facto monopolies. And one more: information on quality, outcomes and cost is scarce, and in some cases, unobtainable.

So its more than a little bit remarkable that conservative blogs and political operatives ignore the fundamental economic problems that reform must address: overcoming market failure and improving the competitive marketplace. Perhaps it is understandable. Their preferred solution, “consumer directed health care” which heroically assumes that individuals can and will effectively shop for low cost high quality care given the appropriate incentives (high deductible plans with health savings accounts), has been excoriated in the academic and policy literature. Looking at the uninsured market–the one place today where individuals shop on their own for insurance and services–Mark Hall and Carl Schneider put it well: “the market for uninsured medical services is a calamity.” Left to compare price, quality and outcomes under consumer directed model, Americans face overwhelming informational and practical hurdles. Uwe Reinhart’s colorful depiction of the defects inherent in consumers shopping for health services is apt :

Suppose, purchases of shirts by individuals were partly prepaid from collective funds assembled for large groups of shirt purchasers, although the individual buyer might also have to pay a part of the price. Suppose next that prospective buyers of shirts were led into a store stocked with boxes marked “Shirt.” The consumer would have free choice of boxes, although only the most vague idea of what actually was in each of the myriad of boxes. …Once a box with a shirt in it had been accepted by the consumer, he could not return it for a refund. A month or so after having received the box, the buyer would be sent a nearly indecipherable statement whose only comprehensible line is: Pay $56.95. It is only then that the buyer knows what the shirt has cost him or her. The shirt, by the way, may or may not fit.

But perhaps equally disconcerting is the apparent reluctance of Congressional reformers to tackle delivery reform head on. For better or worse, it appears likely that under reform legislation a reconstituted health insurance industry will do the heavy lifting of controlling cost and monitoring quality, tasks it has been disinclined to tackle in the past. The apparent logic is that by removing insurers’ perverse incentives to chase only good risks (healthy insureds) and create bureaucratic traps for providers and consumers, plans will have little choice but to do the right thing. This of course vests enormous faith in the regulatory mechanisms the new system will deploy: risk adjustment, community rating, the insurance exchange, standardized benefit packages, and so on.

Which brings us to the public plan option. Does it correct the myriad market failures and assure an efficient health delivery system emerges? Not by itself. However, if we are going to rely on the market interplay between insurers and providers in many hundreds of markets around the country (like politics, most health services and health insurance are local), then we need some assurance that each market will have vigorous intermediaries negotiating for consumers. Unfortunately, our experience with private health insurance over the last twenty years does not fill one with confidence that this kind of vigorous negotiation will emerge. First there is the behavior of insurers. As noted it has been more profitable to obtain good risks and in some case engage in questionable behavior (slow pay to providers; hassling their insureds, etc). The landscape of extraordinary health insurance profits, premiums increasing at rates far exceeding other sectors of the economy, and an inability or unwillingness to control health expenditures does not describe an industry which is benefiting consumers through vigorous competition.

But maybe that will change. The real question here is one of incentives. We’ve learned that most local insurance and provider markets are concentrated: dominant hospital systems of specialty services have formed single specialty groups. Economic studies reveal that increasing hospital concentration resulted in higher prices which in turn cause higher insurance premiums (and in fact increased disparities in access to care). Although research regarding insurance markets is less well developed, there is some evidence that insurance market concentration has resulted in higher premiums. Where dominant insurers face dominant providers–what economists call bilateral monopoly–the outcome depends on the strategic interactions of the parties. In the case of the now notorious “market covenant” involving Partners Health Care and Blue Cross of Massachusetts, the parties reached a mutually beneficial understanding to maintain hight premiums and high hospital charges.

In oligopolistic markets (only a few sellers) the dynamic in the health insurance industry suggest behavior consistent with self interested coordination rather than aggressive competition and price rivalry. Urban Institute economists John Holohan and Linda Blumberg summarized these propensities :

Dominant insurers do not seem to use their market power to drive hard bargains with
providers, [while]small insurers do not aggressively compete over price. Rather, rising
premiums and increased profitability of nondominant firms13 provide indirect evidence
of shadow pricing by smaller insurers; that is, smaller insurers do not seem to compete on
premiums to gain market share but rather seem to follow the pricing of the dominant insurer.

What might a public plan add to the mix? First, it will likely enjoy cost advantages associated with the infrastructure and experience of federal payment under the Medicare program. This can spur its rivals to emulate its methods and, well, just try harder (an old adage is that a benefit of monopoly is leading the “quiet life”). However, the principle competitive significance of the public plan may well lie in its independence. Although such plans will almost certainly be required to “float on their own bottom” (i.e. not receive federal subsidies), they should also be allowed to chart a course that does not necessarily maximize revenue as rivals do that engage in anticompetitive practices or collusive coordination. In this respect, the public plan should act as what economic theory calls the “maverick” competitor: one that breaks away from the closely-knit band of rivals. A second benefit might accrue from the public plan’s willingness to sponsor innovations in payment and delivery (such as those being developed by CMS for Medicare). In health insurance some cost control innovations are not routinely developed where reluctant to adopt because they cannot capture the long term benefits of efficient innovations. In short, the expectation is that the public plan will have the incentive and the market leverage to insist that providers change their ways.

There is no quick and easy way to change health care delivery arrangements that are deeply embedded in institutions and habits. The radical course, I would think, would be to subsidize a vast expansion of health insurance without putting in place institutions capable of improving a badly broken system.

Health Insurance, Competition & the McCarran-Ferguson Act

A post by Jordan Cohen on June 17 raised a very important point:  “what [do] we currently know about the role of competition in the health insurance market [?]” As Mr. Cohen makes the connection between cost and competition and another relating to slowing the rate of growth of health care expenses generally, his caveat raises an important concern that the information supporting conclusions in this regard may be less than optimum. One factor to consider is that competition, or the lack thereof, in the insurance industry is subject to the distortions of a wide, if not dizzying, array of often conflicting state regulation.

The McCarran-Ferguson Act (”the Act”) exempts the “business of insurance” from federal antitrust law. Which is to say that federal antitrust law applies only to the extent that “the business of insurance” is not regulated by state law.  The Act goes so far as to permit price fixing — joint ratemaking — if permissible under state law.  Hovenkamp Antitrust Hornbook, at 732.  In one case, Mackey v. Nationwide Insurance Co., 724 F.2d 419 (4^th Cir. 1984) (Superseded by Regulation as Stated in Home Quest Mort. LLC V. American Family Mut. Ins. Co., 340 F. Supp.2d 1177 (D.Kan. Oct. 12 2004), the Act even protected the practice of redlining on the reasoning that it “related to the particular types of risks [the] company [was] willing to insure against.”  State of Maryland v. Blue Cross and Blue Shield Assn., 620 F. Supp. 907, 916 (D.C. Cir. 1985) (referring to Mackey).

While the lack of competition in the health insurance industry may well have other causes, which may or may not be cured through a public plan, the Act, with its exemption from federal antitrust law has not helped.  Private competition may have more to offer than currently realized in the McCarran-Ferguson environment.  Repealing the Act coupled with increased antitrust enforcement would seem a relatively affordable first step if competition, with the ultimate goal of benefiting the consumers/patients, is the goal.

I believe the repeal of McCarran-Ferguson will happen and that  Professor Greaney is correct that increased antitrust enforcement and better antitrust laws in the health care industry generally should be forthcoming– but I am somewhat more optimistic than he that this will happen sooner rather than later. While in the Senate, then Senator Obama “introduced legislation to repeal the McCarran-Ferguson Act for medical malpractice insurance.”  Furthermore, his picks of Christine Varney as assistant attorney general for the Antitrust Division and Jonathan Leibowitz as chairman of the FTC are said to have members of the insurance industry concerned about greater antitrust enforcement as well as the elimination of the McCarran-Ferguson exemption. I would suggest that AIG’s self-destruction at taxpayer expense does not bode well for the Act either.

Jost on the Public Plan

Timothy S. Jost is one of the leading figures of the American health law academy. He has unparalleled knowledge of comparative health law, which he’s applied to the American debate in an impressive series of articles and books.

When I heard that Jost was writing on current debates, I really wanted his insights on our blog. Here is the first part of an essay he wrote making a case for a public option, which 83% of Americans support.

Why Public Plan Choice?
by Timothy Stoltzfus Jost

One of the most significant and innovative proposals of the 2009 health-reform debate has been the concept of public plan choice. Although the exact features of a public plan have not been specified, the public plan concept offers several significant benefits:

Cost control. Health reform cannot happen unless we can control the continual upwards spiral of health care costs. The public plan would control costs in three ways. First, it would be able to keep its costs down by not having to make a profit and by avoiding many of the administrative costs incurred by private insurers. Second, it would introduce competition into the health insurance industry. Although there may be, as Karl Rove asserted yesterday, 1300 health insurers in the United States, health insurance markets are segmented into the large group, small group, and nongroup markets and within each of those categories competition is exceedingly local. In 36 states, 65% of the small group market is controlled by 3 insurers; in 16 states one insurer controls half of the market. In any one locality, moreover, the market is even more concentrated. In my home town of Harrisonburg, Va., one insurer controls 86% of the market.

Private insurers simply do not compete; they simply take prices from providers and pass them on to consumers, driving the health care price spiral. A national public plan would introduce vigorous competition into every part of the country, forcing private insurers to compete for business and to bring down their premiums. Third, a national public plan would also have the bargaining clout to make providers moderate the increase in their prices, bringing down the cost of health care itself.

Choice. Right now the only choice available to most Americans is private insurance and, in many markets, small businesses have only a choice of one or two insurers. Americans want to have alternatives to choose among to best meet their needs. A public plan offers this.

Delivery System Reform. A national public plan could drive delivery system reform and improve the quality of care, as Medicare has been doing through its demonstration projects, payment reforms, and consumer information initiatives.

Transparency and Accountability. One of the most important developments in the health care reform debate over the past decade has been the data that has emerged from the Dartmouth research group on variations in health care spending. This data, discussed by Atul Gawande in his widely noted recent article on health care costs and the President in his speech at Green Bay, could only be collected because Medicare data are available to researchers. No comparable research can be done on the under 65 population because private insurers regard whatever data they have to be proprietary. Private insurers are also much more secretive about their coverage and utilization review policies. A public plan could make anonymized data available to researchers and be open with its subscribers about coverage and utilization policies.

A National Strategy. We have waited for decades for the states to make affordable health care available to Americans. A few have tried, most have failed. None have developed an effective alternative to private insurance. All Americans are experiencing the same problems with health care–lack of access, high costs, and uneven quality. We need a national strategy for health care reform that will help all Americans, not just some. We also need a national public plan that offers uniform benefits to all Americans and national bargaining power.