The Broken Health Care “Marketplace”

While Mitch McConnell goes on Meet the Press to praise free enterprise in American health care, he ignores the market concentration that gives us vastly more expensive care than comparable countries. As Blue Dogs and other Dems start to tap on the brakes of health reform efforts, they would do well to consider the work of Tim Greaney and David Balto. Both have recently delivered Congressional testimony that indicates just how far health care is from a well-functioning, competitive market.

Balto is hardly a leftist on antitrust matters; for example, he has aggressively defended some Google initiatives now under scrutiny by the DOJ. But even he is alarmed by the extraordinary trends toward concentration in health care:

Few markets are as concentrated, opaque and complex, and subject to rampant anticompetitive and deceptive conduct. As the health care debate progresses, many advocate for limited reform of the health insurance system. Their belief is that it is a fundamentally sound market and with a little dose of additional regulatory oversight, all the ills of the market will be cured. They could not be more mistaken.

As a former antitrust enforcement official, I strongly believe the mission of the Federal Trade Commission and Antitrust Division of the Department of Justice is vital to protecting consumers and competition. However, in the past administration, the priorities of those enforcement agencies were not effectively aligned with the critical priorities in the health care market, with the result that there is substantial anticompetitive and fraudulent activity that raises prices and costs for consumers and the American taxpayer, especially conduct by certain health care intermediaries—Health Insurers, Pharmacy Benefit Managers, or PBMs, and Group Purchasing Organizations, or GPOs.

The full testimony appears here. Balto argues that “the Bush administration did not bring a single case challenging anticompetitive conduct by insurance companies,” while it “spent a hugely disproportionate amount of time, money and effort prosecuting relatively small groups of doctors.” By the end of the testimony, it almost appears that Balto has made his case too well, given the limited resources of current antitrust enforcers. It is hard for me to imagine them investigating even a fraction of the schemes and situations he describes, though perhaps some high profile cases (and partnerships with state attorneys general) would have an in terrorem effect.

Tim Greaney’s testimony before the Senate Commerce Committee paints a similarly grim picture. Greaney notes that, “by 2003, ninety-three percent of the nation’s population lived in concentrated hospital markets.” He quickly identifies the core problem in an increasingly sickly health care antitrust jurisprudence: courts’ short-sighted failure to understand the unconventional economics of medicine:

Legal decisions approving mergers of competing acute care hospitals have been roundly criticized. The judicial missteps can be traced to the courts’ tendency to oversimplify antitrust analysis by adopting plain vanilla, Chicago School assumptions about markets while failing to incorporate the effects of market imperfections in their analyses. Most of these decisions found extraordinarily large geographic markets for basic acute care hospital services as they ignored the heterogeneity of demand for care and the fact that consumers exhibit different preferences for [and ability to] travel.

Other cases refused to recognize supply side heterogeneity, failing to appreciate that mergers of “must have” hospitals may give rise to anticompetitive effects. To right the ship, the FTC has brought two recent hospital merger cases and undertaken retrospective reviews of the outcomes of several hospital mergers. Unfortunately, developing legal precedent takes time and effort and mergers may be attractive to the hospital industry during a period of legal uncertainty and regulatory change. An important priority for the FTC therefore should be to undertake close scrutiny of all horizontal consolidations by hospitals– including joint ventures involving physician-controlled specialty hospitals and outpatient facilities, none of which have been challenged to date.

Greaney also notes substantial failures in antitrust enforcement against physicians, health insurers, and PBM’s.

While Balto and Greaney focus on improving competition policy, I’m left wondering: can this market be saved? Greaney argues that “the nation’s competitive infrastructure — provider and payor markets — is not well designed to produce cost savings if reform proposals simply turn over the job to the private market. . . . [and] this quandary lends strong support to the idea of having a public plan option to nudge private insurers toward more vigorous competition and to serve as a backstop where markets fail.” A highly concentrated health care marketplace has neither the means nor the motive to discipline costs–external competition has to prod it in that direction. Well-designed health insurance exchanges will be key to success here.

The Law, Blogs, and Why Senator Grassley Should Read Our Last Post

Yesterday’s post (among other things) questioned whether it might be too much to ask that a United States Senator (who has reaffirmed his opposition to a Public Option, but expressed an openness to Health Care Cooperatives) inform himself about a subject via a blog, or more precisely, posts on this blog:

This may be too much to ask, but Senator Grassley (or at least his staff) follows this blog on Twitter– or at least did before this post. But as regards the failed history of health insurance cooperatives in America, the essentially moribund state of those cooperatives which do still exist, and the difficulty of implementing an effective cooperative plan, he might be well served to read these posts by Professors Timothy S. Jost, “Jost on Cooperatives,” and Tim Greaney, “Market Entry by Health Care Cooperatives: Neither Quick nor Easy.”

Although we’ve yet to hear from Senator Grassley in regard to his reading (though last I looked, still following), the role of blogs in the law was nicely summed yesterday by the U.S. Bankruptcy Court, S.D.N.Y., in a decision in the General Motors case. The court cited Professor Stephen Lubben’s blog posts for the proposition that the word “‘interest’ has wholly different meanings as used in various places in the [Bankruptcy] Code.”  In fn. 96 (p. 54), the court directs:

See Postings of Stephen Lubben, Professor at Seton Hall Law School, to Credit Slips,http://www.creditslips.org/creditslips/2009/06/claim-or-interest.html (June 13, 2009, 8:25 PM EST); and http://www.creditslips.org/creditslips/2009/06/claim-or-interest-part-2.html (June 14, 2009, 6:42 PM EST).

Blogs are a fairly recent phenomenon in the law, providing a useful forum for interchanges of ideas. While comments in blogs lack the editing and peer review characteristics of law journals, and probably should be considered judiciously, they may nevertheless be quite useful, especially as food for thought, and may be regarded as simply another kind of secondary authority, whose value simply turns on the rigor of the analysis in the underlying ideas they express.

“Food for thought…whose value simply turns on the rigor of the analysis in the underlying ideas they express.” Well said Your Honor.

Professors Jost and Greaney are preeminent in their field. Senator Grassley?

Schumer v. Grassley, Face the Nation

On Face the Nation, Senator Chuck Grassley reaffirmed his opposition to a public option, stating that “the power of government is an unfair competitor.” He also, however, expressed an openness to health care cooperatives, if they are “in the area of what we have known in cooperatives in America– and there’s even a few insurance cooperatives already operating in America– if they’re within what we have known of cooperatives and the concept of cooperation for the last 150 years, I think we can reach a favorable compromise.”

This may be too much to ask, but Senator Grassley (or at least his staff) follows this blog on Twitter– or at least did before this post. But as regards the failed history of health insurance cooperatives in America, the essentially moribund state of those cooperatives which do still exist, and the difficulty of implementing an effective cooperative plan, he might be well served to read these posts by Professors Timothy S. Jost, “Jost on Cooperatives,” and Tim Greaney, “Market Entry by Health Care Cooperatives: Neither Quick nor Easy. ” Might I also suggest that as we look to reform healthcare in America, the spectre of legislating anew “what we have known” and functioned under is not particularly reassuring. The prospect of “overhauling” health care is appealing simply because “what we have known” doesn’t work.

And I guess the question is, with a filibuster-proof majority in the Senate, a proposal which includes a Public Option making its way out of the Senate’s HELP committee, and a similar proposal emanating from out of the House, ultimately how essential to the issue is what Chuck Grassley thinks ? Yes, he can wrangle and tie up a bill in the Finance Committee– but he and his Republican comrades in private insurance arms can’t tie up all the bills– nor do they have enough votes to quash, or even do more than delay a vote on a bill before the Senate for a mere 30 hours post-cloture. With the advent of the Democrat’s filibuster-proof majority, as long as those Democrats can muster the political will, might I suggest that Senator Grassley’s position has been relegated to being nothing more than a day plus 6 hours of inconvenience? But sure it would be nice to have the benefit of Senator Grassley’s expertise in health care.  Just as it would also be nice to have the entirety of Congress along for the ride instead of kicking an screaming and casting blame and aspersions along the way– but the American Public has seen fit to no longer grant the Republicans more than a “suggesting” seat at the table: their vote no longer essential, their power diminished accordingly– their views relegated to their own merit or lack thereof, void of the political power derived from a substantial bargaining position. Under these circumstances a compromise which leaves us with “reform” void of substantive change in the form of a public option is both unnecessary and, might I say, the result of a failure of will and command.

However, faced with strident opposition to the Public Option from Senator Grassley, the realization of Democratic Party power was evident in Senator Schumer’s response.  Schumer cited the “strong public option” contained within the current proposals from both the House and the Senate’s HELP Committee and stated that in “the Finance Committee, we’re trying to come to some form of compromise. But make no mistake about it, the President’s for this strongly and there will be a public option in the final bill.”

Spoken like a man with all the votes he needs.

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Healthy Competition? How a Competitive Health Insurance Market Influences Cost

With the Obama administration’s brisk movement on health care reform in recent weeks, there is an increasing  amount of dialogue about the administration’s desire for a government-based public insurance option. Advocates of the “public plan” argue that a government option would force private insurers to compete on price and quality.  A common refrain from those opposing a public plan is that such a plan would leverage government capital and regulatory power to bargain down prices, which would  decrease competition and consumer choice by overpowering private insurers. Since market competition is a resonating theme throughout the current discussion of health care reform, it would be constructive to discuss what we currently know about the role of  competition in the health insurance market.

The American Medical Association found that, in 2008, 94% of the markets for health insurance were highly concentrated. By itself, this figure may not be troubling. However, in that same year, a survey by the Kaiser Family Foundation found that wages had grown by 29% whereas the average insurance premiums had grown by 120%.

Two questions arise. First, how does consolidation in health care markets affect consumer cost? Second, how does increased consolidation in health care markets affect the quality of care? This post will focus on the first question. A subsequent post will concern the role of competition on the quality of care delivered.

With regards to cost, a widely cited study by Wholey et al. found that a larger number of HMOs is related to lower HMO premiums. Specifically, Wholey found that highly competitive markets with 17 competitors and 45 percent HMO market penetration had 11% lower premiums than those with average competition. For additional findings see also this study. In their 2008 testimony regarding the potential Highmark BCBS and Independence BCBS merger, the University of Pittsburgh Medical Center analyzed data from the AMA and the Department of Justice, finding that states possessing a greater diversity of market participants have, on average, 12% cheaper premiums.

However, it would be incorrect to presume a simple relationship between cost and competition.  For instance, one  study found that there is a competitive influence of increased HMO penetration on non-HMO premiums, and that increased HMO penetration can slow the rate of growth in addition to simply decreasing costs.

Moreover,  the ability of a competitive marketplace to lower costs can be explained by factors other than the increased leverage of insurers in concentrated markets. Read more

Making the Case for the Public Plan, Part II: Public Option as Private Benchmark

Ezra Klein has given a nice explanation of the advantages of public options in our health insurance ecosystem. He summarizes three different types of options that could develop, including a “trigger plan” (which be “triggered into existence [where] the private insurance market” failed), a “weak public plan” (which “couldn’t use the low rates that Medicare sets” and would just act as another insurer) and a “strong public plan” (which would basically be modeled on Medicare). Klein argues that, whatever public plan were adopted, “The existence of another option changes the market. Individuals will have access to private insurers, but they’ll no longer be stuck with them.”

I agree with Klein that a public option can help us achieve the trifecta of health reform–increasing access, reducing costs, and improving quality. Tyler Cowen challenged Klein today, and I’ll try to answer Cowen.

First, Cowen argues that the public plan will be very expensive, for if “public and private plans are to coexist, the public plan must be attracting the higher-cost customers, namely the higher medical risks.” Even if that’s the case, other industrialized nations have used prospective and retrospective risk adjustment to level the playing field between plans. As I noted yesterday, even private health insurance lobbies have conceded that “spread[ing] costs for the highest-risk individuals” is necessary to guarantee coverage for all. Risk-adjustment should not be seen as a subsidy—rather, it’s a way to keep a level playing field between the public and private plans.

Private insurers’ apparent acceptance of risk-adjustment may seem irrational if you think that they are only in the business of trying to gain the healthiest customers and shed the sickest. Tempting as it is, that cream-skimming is only one part of the broad range of things that insurers do. Many large insurers make substantial “administrative services only” revenue–for example, by administering self-insured employers’ plans. (In that way they avoid financial risk from sick insures–that risk is assumed by the employer funding the plan). Risk adjustment would further reduce their incentives to avoid people with pre-existing conditions. In terms of quality, private insurers can compete with the public plan on several dimensions, including identifying good providers, incentivizing best practices, and fairly determining access to treatment and payments for providers.

It’s that last function—coverage and payment determinations—where the public plan really has a chance at improving insurance for everyone. Today’s default for private insurers is secrecy in pricing, and opaque “gotchas” buried in thick plan documents. As Uwe Reinhardt has noted,
Read more

Greaney on the Public Plan

Is genuine health reform possible? Several recent developments are promising. President Obama’s big Congressional majorities (plus the Specter defection) are reminiscent of the Johnson-era milieu that led to Medicare and Medicaid. Key interest groups are less “Harry and Louise” and more “try to appease.” Most importantly, the failures of managed care, consumer-directed health care, and other artifacts of the “ownership society” are now self-evident. As unemployment rises, lack of insurance spikes, compounding the misery of many of those unlucky enough to get thrown out of work.

What could derail real health reform? Most likely, fake health care reform, particularly the kind that assumes there is something near a “free market” in operation now. As health care antitrust scholar Thomas Greaney argued yesterday, markets for health care are often very concentrated or riddled with barriers to entry:

The unfortunate fact is that a majority of the country is served by a few dominant insurers. (In 16 states, one insurer accounts for more than 50 percent of private enrollment; in 36 states, three insurers have more than 65 percent of enrollment). Likewise, because of lax antitrust enforcement, most markets are characterized by dominant hospital systems and little competition among high-end physician specialists.

In these circumstances, which economists call ‘bilateral monopoly,” the players often reach an accommodation in which they share the monopoly profits rather than compete vigorously. A prime example is the experience in Massachusetts, where Blue Cross/Blue Shield, the dominant insurer, reached an understanding with the dominant hospital system, Partners Healthcare, that entrenched higher prices for health insurance and hospital care.

Some might hold out hope that the Obama administration’s new emphasis on antitrust enforcement might solve that problem, but I would not hold my breath. After losing seven hospital merger cases in a row, the government is not exactly in a position to go storming into health care markets to demand competition. Only new antitrust laws are likely to accomplish much in that direction, and even if they were by some miracle adopted this year, I can’t imagine them having much effect within any reasonable time frame.
Read more

Taxing Health Benefits, Obama Administration Said To Be “Open”

In a recent post on this blog, Professor Tim Greaney noted that Senator Max Baucus had recently said that

the tax exclusion for employer health insurance payments was on the table, [with Senator Baucus] noting two characteristics that make it an appealing target:  regressivity and potential source of considerable “revenue.”  On these and other issues, Baucus stressed the critical role OMB scoring will play in shaping the ultimate design of the legislation.

Not to say that OMB “scoring” will be influenced by the predilections of its director, but nevertheless, those predilections may be worth noting. The New York Times reports

At a recent Congressional hearing, Senator Ron Wyden, an Oregon Democrat whose own health plan would make benefits taxable, asked Peter R. Orszag, the president’s budget director, about the issue. Mr. Orszag replied that it “most firmly should remain on the table.”

Mr. Orszag, an economist who has served as director of the Congressional Budget Office, has written favorably of taxing some employer-provided health benefits and using the revenue savings for other health-related incentives. So has another Obama adviser, Jason Furman, the deputy director of the White House National Economic Council.

The Times also noted that

When Senator Max Baucus, Democrat of Montana, advocated taxing benefits at a recent hearing of the Finance Committee, which he leads, Treasury Secretary Timothy F. Geithner assured him that the administration was open to all ideas from Congress. Mr. Geithner did, however, allude to the position that Mr. Obama had taken as a candidate.

The Times reports that sentiment elsewhere, however, was not quite as sanguine about the proposal: “Many Democrats, especially House liberals, are opposed. ‘It’s a dumb idea,’ said Representative Pete Stark of California, chairman of the Ways and Means Subcommittee on Health. “We have to maintain as much as we can of the employer payments.”

The Times article is well worth taking a moment or two to read; it relays a number of different viewpoints regarding the matter, and also features a political aspect certainly worth noting: during the presidential election campaign, Obama was quite critical of  a John McCain proposal to tax health benefits. Obama denounced the McCain plan as “the largest middle-class tax increase in history.” The Times reports that

At the time, even some Obama supporters said privately that he might come to regret his position if he won the election; in effect, they said, he was potentially giving up an important option to help finance his ambitious health care agenda to reduce medical costs and to expand coverage to the 46 million uninsured Americans. Now that Mr. Obama has begun the health debate, several advisers say that while he will not propose changing the tax-free status of employee health benefits, neither will he oppose it if Congress does so.

Senator Baucus on Delivery System Reform

Tim Greaney,

Director, Center for Health Law Studies

Chester A. Myers Professor of Law

Saint Louis University School of Law

Senator Baucus’ March 3 press conference sponsored by the Kaiser Family Foundation Health Care Reform Newsmaker Series: Sen. Max Baucus (D-MT) offered a few insights into the early state of the debate on health reform legislation.

Two points stood out.  First, he observed that “delivery reform” was for him a central element in designing reform legislation. Pressed to define what he meant, Baucus mentioned value based purchasing and the medical home concept.  Second, he stated that the tax exclusion for employer health insurance payments was on the table, noting two characteristics that make it an appealing target:  regressivity and potential source of considerable “revenue.”  On these and other issues, Baucus stressed the critical role OMB scoring will play in shaping the ultimate design of the legislation.

The known unknown here, however, is how some of the relatively novel delivery reforms like medical homes will be defined and implemented — and hence ultimately scored by OMB for their impact on system costs. One problem is that the “medical home” may encompass a wide range of delivery/financing arrangements. In general the medical home has been broadly defined as a physician-directed practice that provides care that is “accessible, continuous, comprehensive and coordinated and delivered in the context of family and community.” But as Bob Berenson and colleagues pointed out in Health Affairs last September,[1] few primary care medical practices are close to having the size, management capabilities and infrastructure (electronic and otherwise) to function as medical homes.  Transitioning to such practices (even on a virtual office basis) will surely take time, money, and a sea change in culture and practice style.  Estimating the pace and effectiveness of such change may prove as daunting as projecting next months Dow Jones average.

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[1] Robert Berenson et al., A House is Not a Home: Keeping Patients at the Center of Practice Design, 27 Health Affairs 1219 (Sept/Oct 2008)