“ThePatientProtectionandAffordableCareAct,Consolidation,andtheConsequentImpactonCompetitioninHealthcare”

SubcommitteeonRegulatoryReform,CommercialandAntitrustLaw

CommitteeontheJudiciaryUnitedStatesHouseofRepresentatives

BarakD.Richman*BartlettProfessorofLawandBusinessAdministration

DukeUniversity

I. Introduction.......................................................................................................................................1

II. ExplainingPastFailuresinAntitrustPolicy........................................................................4

A.DispellingtheMyththatNonprofitHospitalsDoNotExercisePricingPower....6

B.DispellingtheMyththatNonprofitHospitalsUseProfitsforCharitablePurposes...........................................................................................................................................10

III. TheParticularCostlinessofHealthcareProviderMonopolies:MarketPower+Insurance.........................................................................................................................................15

A.Supra‐MonopolyPricing...........................................................................................................16

B.MisallocativeConsequences....................................................................................................19

IV. ANewAntitrustAgenda............................................................................................................22

A.TheSpecialProblemofAccountableCareOrganizations..........................................24

B.RequiringUnbundlingofMonopolizedServices............................................................29

C.ChallengingAnticompetitiveTermsinInsurer‐ProviderContracts......................32

V. Conclusion.......................................................................................................................................35

*ManyoftheideasexpressedhereinarederivedfromscholarshipcoauthoredwithClarkC.Havighurst.

1

I. Introduction

ThankyouMr.Chairmanandmembersofthecommittee.Itisanhonortotestify

beforeyouonatopicthatisextraordinarilyimportanttoournation’slong‐term

fiscalhealth.

LateststatisticsrevealthattheUnitedStatesspendsnearly18%ofitsGross

DomesticProductonhealthcareservices.ThisisnearlytwicetheaverageforOECD

nationsandfarmorethan#2,whichspendslessthan12%.Viewedanotherway,

theUnitedStatesinpurchase‐adjusteddollarsspendsmorethantwo‐and‐a‐half

timestheOECDaveragepercapitaonhealthcareandmorethanone‐and‐a‐half

timesthesecondlargestspender.Yetinspiteofourleadershipinhealthcare

spending,wearesafelyinthebottomhalfofOECDnationsonmostmeasuresof

healthcareoutcomes.

Wearespendingtoomuchandgettingtoolittleinreturn,andthenationsimply

isonanunsustainabletrajectory.Alldiscussionsabouthealthcarepolicyshould

beginwiththerecognitionthatcurbinghealthcarespendingneedstobeamongour

highestnationalpriorities.Thecostofprivatehealthinsuranceisbankrupting

companiesandfamiliesalike,andthecostofpublichealthcareprogramsareputting

unmanageableburdensonthefederalandstatebudgets.

Manystudiessuggestthatthecostofhealthcareisunsustainablenotbecausewe

consumetoomuchhealthcare,butbecausewepaytoomuchforthehealthcarethat

wedoconsume.Inotherwords,asonestudyputitfamously,“It’sthePrices,

2

Stupid.”1Andoneofthemostseverecontributorstotheriseofhealthcareprices

hasbeenthealarmingriseinmarketpowerbyhealthcareproviders.

Thepastseveraldecadeshavewitnessedextraordinaryconsolidationinlocal

hospitalmarkets,withaparticularlyaggressivemergerwaveoccurringinthe

1990s.By1995,mergerandacquisitionactivitywasninetimesitslevelatthestart

ofthedecade,andby2003,almostninetypercentofAmericanslivinginthenation’s

largerMSAsfacedhighlyconcentratedmarkets.2Thiswaveofhospital

consolidationalonewasresponsibleforsharppriceincreases,includingprice

increasesof40%whenmerginghospitalswerecloselylocated.3Evenafterthis

mergerwaveinthe1990spromptedalarm,asecondmergerwavefrom2006to

2009significantlyincreasedthehospitalconcentrationin30MSAs,andthevast

majorityofAmericansarenowsubjecttomonopolypowerintheirlocalhospital

markets.4

1GerardF.Andersonetal.,It’sthePrices,Stupid:WhytheUnitedStatesIsSoDifferentfromOtherCountries,HEALTHAFFS.,May‐June2003,at89.2WilliamB.Vogt&RobertTown,HowHasHospitalConsolidationAffectedthePriceandQualityofHospitalCare?RobertWoodJohnson(2006);ClaudiaH.Williams,et.al.,HowHasHospitalConsolidationAffectedthePriceandQualityofHospitalCare?ROBERTWOODJOHNSONFOUND.,(2006),availableatwww.rwjf.org/files/research/no9policybrief.pdf3Id.Forsurveysofhowhospitalconsolidationshaveincreasedhospitalprices,seeGloriaJ.Bazzolietal.,HospitalReorganizationandRestructuringAchievedThroughMerger,27HEALTHCAREMGMT.REV.7(2002);MartinGaynor,CompetitionandQualityinHealthCareMarkets,2FOUNDATIONS&TRENDSINMICROECONOMICS441(2006);seealsoWilliamB.Vogt,HospitalMarketConsolidation:TrendsandConsequences(2006),NAT’LINST.FORHEALTHCAREMGMT.,availableathttp://nihcm.org/pdf/EV‐Vogt_FINAL.pdf(documentingtheextentofprovidermarketconcentrationamonghospitals&otherproviders).4CoryCapps&DavidDranove,MarketConcentrationofHospitals(June2011),availableat:http://www.ahipcoverage.com/wp‐content/uploads/2011/10/ACOs‐Cory‐Capps‐Hospital‐Market‐Consolidation‐Final.pdf

3

Hospitalsandhospitalnetworksdidnotachievethismarketdominancethrough

“superiorskill,foresight,andindustry,”5whichwouldbeunobjectionableunderthe

antitrustlaws.Tothecontrary,thisconsolidationoccurredbecauseofmergersand

acquisitions,andpermittinghospitalmarketstoachievesuchremarkablelevelsof

consolidationrepresentsamajorfailureofourantitrustpolicy.Thereisplentyof

blametoshare—bothDemocraticandRepublicanAdministrations;Congress,the

Executive,andtheCourts—butwearenowinapositionwherewemustcopewith

hospitalmonopolists.Inotherwords,wenotonlymustresistanyadditional

consolidationthatcreatesgreatermarketpower,butwemustdeveloppolicytools

thatstemtheharmthatcurrenthospitalmonopolistsareinapositiontoinflict.

Mytestimonyisdividedintothreeparts.Thefirstbrieflyreviewssomeofthe

failuresofantitrustpolicythatpermittedhospitalconsolidations,withafocuson

courtdecisionsinthe1990s.Thesecondpartexplainswhyhospitalandhealthcare

providermonopolypowerisespeciallycostly,evenmorecostlytoAmerican

consumersthanwhatonemightcalla“typical”monopolist.Thethirdpart,

discussesavailablepolicyinstrumentstoprotecthealthcareconsumersagainst

currentandgrowinghospitalmonopolists.Ofparticularinterestismonitoringthe

unfurlingofAccountableCareOrganizations(“ACOs”),whichareencouragedbythe

PatientProtectionandAffordableCareAct(“ACA”)and,thoughaimingtoaddress

importantfailuresincoordinatingcare,poseaseriousdangertocreatingadditional

providermarketpower.

5UnitedStatesv.AluminumCo.ofAmerica,148F.2d416,430(2dCir.1945)(Hand,J.)(“Thesuccessfulcompetitor,havingbeenurgedtocompete,mustnotbeturneduponwhenhewins.”)

4

II. ExplainingPastFailuresinAntitrustPolicy

Eversincetheantitrustlawswerefirstappliedsystematicallyinthehealthcare

sectorinthemid‐1970s,somejudgesandcommentatorshaveresistedgivingthe

statutorypolicyoffosteringcompetitionitsdueeffectinhealthcaresettings.6

Between1995and2000,forexample,antitrustenforcersencounteredjudicial

resistancewhenchallengingmergersofnonprofithospitals,sufferingasix‐case

losingstreakinsuchcasesinthefederalcourts.7Althoughmostofthosepro‐

mergerdecisionsostensiblyturnedonfindingsoffact(mostlyinidentifyinga

geographicmarketinwhichtoestimatethemerger’sprobableeffectson

6ForcasesinwhichtheSupremeCourtfounditnecessarytooverrulelowercourts’attemptstoinferspecialantitrustexemptionsorcraftsofterantitrustrulesforhealthcareproviders,seeNationalGerimedicalHospitalandGerontologyCenterv.BlueCrossofKansasCity,452U.S.378(1981)(rejectingimpliedexemptionformarket‐allocationagreementsbrokeredbyhealthplanningagenciescreatedunderfederalstatute);Patrickv.Burget,486U.S.94(1988)(rejectingstatelegislature’sencouragementofphysicianpeerreviewinhospitalsasabasisforexemptingabusesfromfederalantitrustremedies);SummitHealthv.Pinhas,500U.S.322(1991)(easingstandardforestablishingpotentialeffectofhospitalmedicalstaffdecisionsoninterstatecommerce);Arizonav.MaricopaCountyMedicalSoc’y,457U.S.332(1982)(treatingphysicians’collectiveagreementsonmaximumpricesasunlawfulbecauseclaimofprocompetitiveeffectswasfaciallyunconvincing);FTCv.IndianaFederationofDentists,476U.S.447(1986)(upholdingadequacyofevidencetosupportFTCfindingthatdentists’agreementtodenyinsurersaccesstopatients’x‐rayswasanticompetitive,notprocompetitive).ButseeCaliforniaDentalAss'nv.FTC,526U.S.756(1999)(raisingFTC’sburdenofproofinfindinganticompetitivecollectiveactionbyhealthprofessionals).ThelatterdecisioniscriticallyexaminedinClarkC.Havighurst,HealthCareasa(Big)Business:TheAntitrustResponse,26J.HEALTHPOL.POL’Y&L.939,949‐53(2001).TheantitrustmovementinhealthcarewastriggeredinpartbytheSupremeCourt’srejectionin1975ofgeneralantitrustimmunityfortheso‐called“learnedprofessions.”Goldfarbv.VirginiaStateBar,421U.S.773(1975).SeegenerallyCARLF.AMERINGER,THEHEALTHCAREREVOLUTION:FROMMEDICALMONOPOLYTOMARKETCOMPETITION(2008).7U.S.FED.TRADECOMM’NANDU.S.DEPT.OFJUSTICE,IMPROVINGHEALTHCARE:ADOSEOFCOMPETITIONch.4,at1‐2n.7(2004),availableathttp://www.usdoj.gov/atr/public/health_care/204694.htm(accessed13May2009)[hereinafterDOSEOFCOMPETITION].

5

competition),thosefindingswereoftensoarbitraryastosignifyjudicialskepticism

aboutthewisdomofapplyingantitrustlawrigorouslyinhospitalmarkets.8Evenas

nonprofithospitalsbecametheprimaryproviderofthenation’shospitalcare—

responsiblefor73%ofadmissions,76%ofoutpatientvisits,and75%ofhospital

expenditures—theytendedtoenjoyselectivescrutinyundertheantitrustlaws.

Implicitly,andoftenexplicitly,thejudgesseemedtoharborabeliefthatnonprofit

hospitalseitherwouldnotexerciseorwouldputtogooduseanymarketpowerthey

mightpossess.9

Thecourts’inabilityovertimetoapplyantitrustlawrigorouslytothebig

businessofhealthcare—andtheFTC’sfailureinconvincingthemtodoso,and

8Fordiscussionsofthesecasesandofthegeneralambivalencetowardscompetitioninhealthcaremarkets,seeBarakD.Richman,AntitrustandNonprofitHospitalMergers:AReturntoBasics,156U.PA.L.REV.121(2007);MartinGaynor,WhyDon’tCourtsTreatHospitalsLikeTanksforLiquefiedGasses?SomeReflectionsonHealthCareAntitrustEnforcement,31J.HEALTHPOL.POL’Y&L.497(2006);ThomasL.Greaney,NightLandingsonanAircraftCarrier:HospitalMergersandAntitrustLaw,23AM.J.L.&MED.191(1997).9ThedistrictjudgeinFTCv.ButterworthHealthCorp.,946F.Supp.1285(W.D.Mich.1996),wasespeciallyunambiguousinchampioningnonprofithospitalsasbenignmonopolists:

Permittingdefendanthospitalstoachievetheefficienciesofscalethatwould clearly result from the proposed merger would enable theboard of directors of the combined entity to continue the quest forestablishment of world‐class health facilities in West Michigan, acoursetheCourtfindsclearlyandunequivocallywouldultimatelybeinthebestinterestsoftheconsumingpublicasawhole.

Id.at1302.Likewise,thejudgerevealedahostilitytopricecompetitionbetweenhospitals,remarkingthat“[i]ntherealworld,hospitalsareinthebusinessofsavinglives,andmanagedcareorganizationsareinthebusinessofsavingdollars.”Id.TheButterworthcourtwasnotaloneinitspredilections.AMissourijudge,reviewingahospitalmergerchallengedbytheFTC,remarkedtothefederalagency,“Idon’tthinkyou’vegotanybusinessbeinginhere....ItlookstomelikeWashington,D.C.onceagainthinkstheyknowbetterwhat’sgoingoninsouthwestMissouri.IthinktheyoughttostayinD.C.”FTCv.FreemanHosp.,69F.3d260,263(8thCir.1995)(quotingdistrictcourtoralhearing).

6

Congress’failureininstructingthemtodoso—isoneimportantreasonwhymany

healthcaremarketsarenowdominatedbyfirmswithalarmingpricing

power.10Fortunately,thegovernmenthasmorerecentlywonbacksomeofthelegal

grounditlost.

A.DispellingtheMyththatNonprofitHospitalsDoNotExercisePricingPower

In2007,theFederalTradeCommission(FTC),inacasechallengingamergerof

nonprofithospitalsonChicago’sNorthShore,foundconvincingproofthat,following

themerger,thenewentityhadsubstantiallyraisedpricestomanaged‐care

organizations.11Thecasewasunusualbecause,ratherthaninterveningtostopthe

acquisitionwhenitwasfirstproposed,theCommissioninitiateditschallengefour

yearsafterthemergerwasconsummated.Bringingthecaseatthatstage

accomplishedtwothings:First,itmadeitunnecessaryfortheCommissiontoseeka

preliminaryinjunctionagainstthemergerinfederalcourt–whereantitrust

enforcershadlostthesixpreviouscases.Second,challengingacompletedmerger

gavetheCommission’sstaffanopportunitytodemonstrateinfact,andnotjustin

theory,thatnonprofithospitalsgainingnewmarketpowerwilluseittoincrease

10Forsurveysofhowhospitalconsolidationshaveincreasedhospitalprices,seeG.B.Bazzoli,etal.,“HospitalReorganizationandRestructuringAchievedthroughMerger,”27HEALTHCAREMANAGEMENTREV.7(2002);MartinGaynor,CompetitionandQualityinHealthCareMarkets,2FOUNDATIONSANDTRENDSINMICROECONOMICS441(2006);WilliamB.Vogt,HowHasHospitalConsolidationAffectedthePriceandQualityofHospitalCare?,THESYNTHESISPROJECT,at9(2006).SeealsoSeeWilliamB.Vogt,HospitalMarketConsolidation:TrendsandConsequences,EXPERTVOICES,NIHCMFoundation,availableat:http://nihcm.org/pdf/EV‐Vogt_FINAL.pdf(documentingtheextentofprovidermarketconcentrationamonghospitals&otherproviders).11InreEvanstonNorthwesternHealthcareCorp.,2007WL2286195(F.T.C.2007).

7

prices.ThedirectproofobtainedintheEvanstonNorthwesterncasemakesit

unlikelythatfuturefederalcourtswillallowtheconsummationofmergersof

nonprofithospitalsundertheillusionthatsuchmergersdonothavetheusualanti‐

competitiveeffects.

TheFTC’sfindingsinEvanstonNorthwesternalsodiscreditedexpert

economictestimonythatonecourthadcitedprominentlyinapprovingahospital

mergerinGrandRapids,Michigan.Thattestimonyrestedonempiricalresearch

purportingtoshowthatinconcentratedmarketsnonprofithospitalsgenerallyhad

lowerpricesthancorrespondingfor‐profits.12Althoughthatresearchhadbeen

effectivelydiscreditedinlatereconomicstudies,13thefactsfoundinEvanston

Northwesternshouldputfinallytorestthenotionthatnonprofithospitalsare

immunefromthetemptationtoraisepriceswhentheyareinapositiontodoso.

EvanstonNorthwestern’sfindingsalsoundercutthecommonbeliefthat

communityleadersonanonprofithospital’sgoverningboardarevigilantabout

healthcarecosts.ThejudgeintheGrandRapidscasepermittedthemergerinpart

becausethechairmenofthetwohospitals’boardseachrepresentedalargelocal12FTCv.ButterworthHealthCorp.,946F.Supp.1285,1297(W.D.Mich.1996)(citingexpert’sfindingssuggesting“thatasubstantialincreaseinmarketconcentrationamongnonprofithospitalsisnotlikelytoresultinpriceincreases”).Theexpertcitedbythecourt,WilliamJ.Lynk,reachedthesameconclusioninscholarlyarticles.WilliamJ.Lynk,NonprofitHospitalMergersandtheExerciseofMarketPower,38J.L.&ECON.437(1995);WilliamJ.Lynk,PropertyRightsandthePresumptionsofMergerAnalysis,39ANTITRUSTBULL.363,377(1994).13SeeDOSEOFCOMPETITION,supranote7,ch.4,at33(concluding“thebestavailableevidenceindicatesthatnonprofitsexploitmarketpowerwhengiventheopportunitytodoso”);DavidDranove&RichardLudwick,CompetitionandPricingbyNonprofitHospitals:AReassessmentofLynk’sAnalysis,18J.HEALTHECON.87(1999);EmmettB.Keeler,GlennMelnick,&JackZwanziger,TheChangingEffectsofCompetitiononNon‐ProfitandFor‐ProfitHospitalPricingBehavior,18J.HEALTHECON.69(1999).

8

employerand“testifiedconvincinglythattheproposedmerger[was]motivatedbya

commondesiretolowerhealthcarecosts....”14Inthissamevein,aproponentof

anotherhospitalmergernotlongagogaveassurancethatallowingitwouldnot

causehealthinsurancepremiumstoincreasebecauseseveralhospital“board

members...areemployerswhoworryaboutthecostofhealth‐care.”15Economists

generallyagree,however,thatemployeesthemselves,notemployers,ultimately

bearthecostoftheirownhealthcoverageinreducedwagesorotherfringe

benefits.16Tobesure,employersareneverhappytopayhigherinsurance

premiumsandwouldprefertoincreasetheiremployees’compensationinmore

visibleways.Buttheyareultimatelycommittingtheirworkers’money,nottheir

own(ortheirshareholders’),inhospitalboardrooms.Moreover,nonprofithospitals

havefewlegalorinstitutionalreasonstoengageinonlyprogressive

redistribution.17Ingeneral,communityleadersonnonprofithospitalboardshave

littleincentivetoresistanyhospitalprojectthatseemsgoodforthecommunityifit

canbefinancedfromthehospital’sreservesandfuturesurpluses.

14946F.Supp.at1297.15FeliceJ.Freyer,HospitalMergerReactionCautious,PROVIDENCEJOURNAL‐BULLETIN,July29,2007,atB1(describingproposedmergerofRhodeIsland’stwolargesthospitalsystems).SeealsoFTCv.FreemanHospital,911F.Supp.1213,1222(W.D.Mo.1995)(“ifanonprofitorganizationiscontrolledbytheverypeoplewhodependonitforservice,thereisnorationaleconomicincentiveforsuchanorganizationtoraiseitspricestothemonopolylevel,evenifithasthepowertodoso”)16SeegenerallyJonathanGruber,HealthInsuranceandtheLaborMarket(Nat’lBureauofEcon.Research,WorkingPaperNo.6762,1998)(reviewingtheempiricalliteratureandfinding“afairlyuniformresult:thecostsofhealthinsurancearefullyshiftedtowages”).17SeeTimothyGreaney&KathleenBoozang,Mission,MarketandTrustintheNonprofitHealthcareEnterprise,5YALEJ.HEALTHLAW&POL.1(2005);ClarkC.Havighurst&BarakD.Richman,DistributiveInjustice(s)inAmericanHealthCare,LAW&CONTEMP.PROBS.,Autumn2006,at22‐24.

9

ArecentreportbytheMassachusettsAttorneyGeneraldocumentshow

nonprofithospitalsinthatstatehaveaggressivelyexploitedtheirmarketpower,

evenwhenhealthcarecostswerestranglingpublicandprivatebudgets.18

FollowingMassachusetts’spassageofthenation’sfirstlegislativeefforttoachieve

universalhealthcoverage,thestatelegislaturedirectedtheAttorneyGeneralto

analyzethecausesofrisinghealthcarecosts.Theresultingreportconcludedthat

pricesforhealthservicesareuncorrelatedwitheitherqualityorcostsofcarebut

insteadarepositivelycorrelatedwithprovidermarketpower.19Thereportfurther

observedthatprominentnonprofitacademicmedicalcenters—specifically,the

MassachusettsGeneralHospitalandBrighamandWomen’sHospital,whichhad

mergedin1993tocreatePartnersHealthCare—weremostresponsiblefor

leveragingtheirmarketandreputationalpowertoextracthighpricesfrom

insurers.20ReportingbytheBostonGlobehadpreviouslyshownthesurprising

extenttowhichPartnerswasabletoextractextraordinarypricesinagreements

withpresumablycost‐consciousinsurers.21Forexample,whensomeinsurers,such

astheTuftsHealthPlan,resistedPartners’demandsforpriceincreasesandtriedto

assemblenetworkswithBoston’sotherhospitals,Partnerslaunchedanaggressive18MassachusettsAttorneyGeneral,ExaminationofHealthCareCostTrendsandCostDriversPursuanttoG.L.c.118G,§6½(b)(March16,2010),availableat:http://www.mass.gov/Cago/docs/healthcare/final_report_w_cover_appendices_glossary.pdf[hereinafter“HealthCareCostTrends”]19Id.at16‐33.20Id.;seeespecially29‐30.21SpecialReport:UnhealthySystem,availableat:http://www.boston.com/news/specials/healthcare_spotlight/(detailingspecialreportingonPartnersHealthCare,culminatinginathree‐partseries);“AHealthcareSystemBadlyOutofBalance,”BostonGlobe,Nov.16,2008;“FueledbyProfits,aHealthcareGiantTakesAimatSuburbs,”BostonGlobe,Dec.21,2008;“AHandshakeThatMadeHealthcareHistory,”BostonGlobe,Dec.28,2008.

10

marketingcampaignthattriggeredthreatsbymanyofTufts’corporatecustomersto

switchinsurers.22

Theforegoingobservationsshouldfinallydispelanyimpressionthat

nonprofithospitals,ascommunityinstitutions,cansafelybeallowedtopossess

marketpoweronthetheorythat,asnonprofits,theycanbetrustednottoexercise

it.

B.DispellingtheMyththatNonprofitHospitalsUseProfitsforCharitablePurposes

Federaljudgesmayhavetoleratedmergersconferringnewmarketpoweron

nonprofithospitalslessbecausetheythoughtthehospitalswouldnotexercisethat

powerthanbecausesuchhospitalsseemedtodifferfromconventionalmonopolists

inwaysthatshouldlessensocialconcernabouttheirenrichment.Specifically,

nonprofit,tax‐exempthospitalsarerequiredbytheirchartersandthefederaltax

codetoretaintheirprofitsandusethemonlyfor“charitable”purposes.Thus,ifone

couldassumethattheredistributionsofwealthresultingfromtheexerciseof

marketpowerbynonprofithospitalsrungenerallyfromrichertopoorerrather

thanintheoppositedirection,therewouldbeatleastanargumentforviewing

nonprofithospitalmonopoliesasbenignforantitrustpurposes.Althoughsuchan

argumentwouldbebasedonaquestionablereadingoftheantitruststatutes,one

22“AHandshakeThatMadeHealthcareHistory,”id.,(describingthe“humiliation”experiencedbytheTuftsHealthPlan’sCEOashecavedtoPartners’pricedemandsand“becameanobjectlessonforotherinsurers,alessontheywouldnotsoonforget[asthe]thebalanceofpowerhadshifted”toPartners).InOrlando,insurerUnitedHealthcareexperiencedsimilarthreatsasitresistedarequestfora63percentpriceincreasebytheregion’sleadingnonprofithospitalchain.LindaShrieves,400,000FearThey’llHavetoSwitchDoctors,ORLANDOSENTINEL,Aug.7,2010.

11

widelynotedcaseallowedprestigiousuniversitiestoactanti‐competitivelyinorder

todirecttheirlimitedscholarshipfundstowardlower‐incomestudents.23One

easilysensesinhospitalmergercasesasimilarjudicialdispensationinfavorof

nonprofitenterprisesthatcombineforseeminglyprogressivepurposes.24

Buthoweverantitrustdoctrineviews(orshouldview)monopoliesdedicated

toprogressivepursuits,itisfarfromclearthatnonprofithospitalsreliablyusetheir

dominantmarketpositionstoredistributewealthonlyinprogressivedirections.

TheInternalRevenueCode’scharitable‐purposesrequirementhasbeeninterpreted

verybroadly,allowingsuchhospitalstospendtheiruntaxedsurplusesonanything

thatarguably“promoteshealth.”25Thisincludesmuchmorethanjustcaringforthe

indigent.Indeed,manyexempthospitalsarelocatedinareasthatneedrelatively

littleinthewayoftrulycharitablecare,eitherbecausethecommunityisrelatively

affluentanditspopulationwell‐insuredorbecauseapublichospitalassumesmost

ofthecharityburden.Moreover,althoughallhospitalsinevitablysubsidizethe

treatmentofsomeuninsuredpatients,manyoftoday’suninsuredaremembersof

themiddleclassandnotobviouscandidatesforsubsidiesfromtheinsured

23UnitedStatesv.BrownUniv.,5F.3d658(3dCir.1993).Readingthisrulingasanendorsementoftheuniversities’redirectionofscholarshipfundstoneedierstudentswouldatleastlimitsubstantially(andprudently)thekindofworthypurposeacartelofnonprofitentitiesmayofferasanantitrustdefense.24See,e.g.,supranote9.25Rev.Rul.69‐545,1969‐2C.B.117(1969).Ironically,thiscontroversialruling,relaxinganearlierrequirementthatanexempthospital“mustbeoperatedtotheextentofitsfinancialabilityforthosenotabletopayfortheservicesrendered,”Rev.Rul.56‐185,1956‐1C.B.202,cameatatimewhentheMedicareandMedicaidprogramswererelativelynewandprivatehealthinsurancewasexpanding,allseeminglyreducingtheneedfornonprofithospitalstobecharitableintheoriginalsense.

12

population.26Finally,federal,state,andlocalgovernmentsseparatelyand

substantiallysubsidizenonprofithospitals’mostclearlycharitableactivities,both

throughspecialtaxexemptionsandreliefandbydirectsubventions;suchactivities

thereforeshouldnotcountsignificantlyinestimatingthenetdirectionof

redistributionseffectedbyhospitalsthroughtheexerciseofnewlyacquiredmarket

power.

Thus,truecharityhasinrecentyearsaccountedforonlyarelativelysmall

fractionofwhatnonprofithospitalsdoinreturnfortheirfederaltaxexemptions.

Indeed,suchhospitalscanusuallyqualifyforexemptionmerelybyspendingtheir

surplusesonmedicalresearch,ontrainingvarioustypesofhealthcarepersonnel,

and,mostimportantly,onacquiringstate‐of‐the‐artfacilitiesandequipment,which

(ironically)canalsosecureandenhancetheirmarketdominance.27Manyofthese

26Supplementalcensusdatafrom2007showedthatnearly38%ofAmerica’suninsuredcomefromhouseholdswithover$50,000inannualincomeandnearly20%fromhouseholdswithover$75,000.SeeU.S.CENSUSBUREAU,INCOME,POVERTY,ANDHEALTHINSURANCECOVERAGEINTHEUNITEDSTATES21table6(August2007),http://www.census.gov/prod/2007pubs/p60‐233.pdf.ImplementationofthePPACAwillgreatlyreducehospitals’charityburdens,leavingillegalaliensastheprincipalcategoryoftheuninsured.27OnPartnersHealthCare’suseofitssurplusestobuildnewandbetterfacilitiesandexpandintonewmarkets,therebysecuringadditionalmarketpower,see“FueledbyProfits,aHealthcareGiantTakesAimatSuburbs,”BOS.GLOBE,Dec.21,2008.

Notonlydoestaxexemptioncreateopportunitiesfordominantfirmstoincreasetheirdominance,butanonprofitfirmlackingsuchdominancemaybeineligibleforexemption–andthusataseverecompetitivedisadvantage–preciselybecauseitfacescompetitionandthereforelacksthediscretionaryfundsnecessarytodemonstratehowit“benefitsthecommunity.”Taxpolicythusrewards,fosters,andprotectsprovidermonopoly,onlyensuringthatmonopolyprofits,howeverlarge,arenotputtoobjectionable,non‐health‐relateduses.Cf.GeisingerHealthPlanv.Commissioner,985F.2d1210(3dCir.1993)(denyingtaxexemptiontononprofithealthplaninpartbecauseitwasnotaprovider,butonlyarrangedfortheprovision,ofhealthservicesandalsobecause,althoughitplannedtosubsidize

13

activitiesconfersignificantbenefitsoninterestsandindividualsrelativelyhighon

theincomescale.28Tobesure,mostoftheactivitiesandprojectsfinancedfrom

hospitalsurplusesarehardtocriticizeintheabstract.Butmanyofthemarenotso

obviouslyprogressiveintheirredistributiveeffects(orotherwisesoobviously

worthyofpublicsupport)thatantitrustprohibitionsshouldberelaxedsothat

hospitalscanfinancemoreofthem.

Inanycase,financinghospitalactivitiesandprojectsofanykindfrom

hospitals’monopolyprofitscausestheircoststofallultimatelyandmoreorless

equallyonindividualsbearingthecostofhealthinsurancepremiums.The

incidenceofthisfinancialburdenthuscloselyresemblesthatofa“headtax”–that

is,oneleviedequallyonindividualsregardlessoftheirincomeorabilitytopay.Few

methodsofpublicfinancearemoreunfair(regressive)thanthis.Thosewhotakea

benignviewoftheseeminglygoodworksofhealthcareprovidersshouldfocus

moreattentiononwho(ultimately)paysforandwhobenefitsfromthosenominally

charitableactivities.29

premiumsforsomelow‐incomesubscribers,ithadbeen“unabletosupporttheprogramwithoperatingfundsbecauseitoperatedatalossfromitsinception”).28Manyphysicians,forexample,benefithandsomelyfirstfromthevaluabletraininghospitalsprovideandlaterfromusingexpensivehospitalfacilitiesandequipmentatnodirectcosttothemselves.Thetaxauthoritiesregardsuch“privatebenefits”asmerely“incidental”tothehospitals’largerpurposeofpromotingthehealthofthecommunity.SeeI.R.S.Gen.Couns.Mem.39,862(Dec.2,1991):“Inourview,someprivatebenefitispresentinalltypicalhospital‐physicianrelationships....Thoughtheprivatebenefitiscompoundedinthecaseofcertainspecialists,suchashearttransplantsurgeons,whodependheavilyonhighlyspecializedhospitalfacilities,thatfactalonewillnotmaketheprivatebenefitmorethanincidental.”29SeegenerallySymposium,WhoPays?WhoBenefits?DistributionalIssuesinHealthCare,LAW&CONTEMP.PROBS.,Autumn2006.

14

Theregressiveredistributiveeffectsofnonprofithospitals’monopolies

appearnevertohavebeengivendueweightinantitrustappraisalsofhospital

mergers.30Tobesure,pureeconomictheorywithholdsjudgmentontherightness

orwrongnessofredistributingincomebecauseeconomistshavenoobjectivebasis

forpreferringonedistributionofwealthoveranother.Buttheantitrustlawsenjoy

generalpoliticalsupportprincipallybecausetheconsumingpublicresentstheidea

ofillegitimatemonopolistsenrichingthemselvesattheirexpense.31Thisiswhy

mergersofallkindsaresuspectintheeyesofantitrustenforcers:theymaybean

easyandunjustifiedshortcuttogainingmarketpower.Althoughproponentsof

consolidationsincreasingconcentrationinprovidermarketsusuallytout

efficienciestheyexpecttoachievebycombiningandrationalizingoperations,the

opportunitytoincreasetheirbargainingpowervis‐à‐visprivatepayersisthe

likelierexplanationforallsuchmergersinconcentratedmarkets.32

30Underreasonableassumptions,ahospitalmergercreatingnewmarketpowerwouldraiseinsurancepremiumsbyroughly3percent,increasingthe“headtax”onthemedianinsuredfamilybyroughly$400peryear,hardlyatrivialamount.Inaddition,accordingtooneestimate,hospitalmergersinthe1990scausednearly700,000Americanstolosetheirprivatehealthinsurance.RobertTownetal.,TheWelfareConsequencesofHospitalMergers(Nat’lBureauofEcon.Research,WorkingPaperNo.12244,2006).31HERBERTHOVENKAMP,FEDERALANTITRUSTPOLICY:THELAWOFCOMPETITIONANDITSPRACTICE50(3ded.2005)(“[T]heprimaryintentoftheShermanActframers[was]thedistributivegoalofpreventingmonopolistsfromtransferringwealthawayfromconsumers.”)32SeeDAVIDDRANOVE,THEECONOMICEVOLUTIONOFAMERICANHEALTHCARE:FROMMARCUS

WELBYTOMANAGEDCARE122(2000):“Ihaveaskedmanyproviderswhytheywantedtomerge.Althoughpubliclytheyallinvokedthesynergiesmantra,virtuallyeveryonestatedprivatelythatthemainreasonformergingwastoavoidcompetitionand/orobtainmarketpower.”SeealsoRobertA.Berensonetal.,UncheckedProviderCloutinCaliforniaForeshadowsChallengestoHealthReform,29HEALTHAFF.699,699(2010).,at6(quotingalocalphysicianassaying,“Whyarethosehospitalsandphysicians[integrating]?Itwasn’tforincreasedcoordinationof

15

Insum,atragicfailureofantitrustenforcement—fueledinnosmallpartby

certainsanguineattitudestowardnonprofitmonopolies—contributedtowhatis

nowacrisisinprovidermarkets.Asaresult,therearefewmarketsinwhichprice

competitionkeepspricesforspecifichospitalandotherhealthcareservicesand

goodsneartheirmarginalcost.Theubiquityofnonprofithospitalswithmarket

powernowconstitutesasignificantsourceoftheprovider‐monopolyproblemin

healthcare.

III. TheParticularCostlinessofHealthcareProviderMonopolies:MarketPower+Insurance

Ineconomictheory,monopolyisobjectionablebecauseitenablesasellerto

chargehigherpricesthatthencausesomeconsumers,whowouldhappilypaythe

competitiveprice,toforgoenjoymentofthemonopolizedgoodorservice.

Monopoliststhusdivertscarceresourcestoless‐valuedusesandreduceaggregate

welfare.Fortunately,suchoutput‐andwelfare‐reducing(misallocative)effectsare

greatlylessenedinhealthcaremarketsbecausethelargenumberofpatientswith

healthinsurancecaneasilypayprovidermonopolists’askingpricesfordesirable

goodsorservicesratherthanbeinginducedtoforgotheirconsumption.

Unfortunately,however,healthinsurancehasother,possiblymoresevere

consequencesbecauseitbothamplifiestheredistributiveeffectsofproviderand

suppliermonopoliesandcontributestoallocativeinefficiencyofadifferentand

arguablymoreseriouskind.

care,diseasemanagement,blah,blah,blah–thatwasnottheprimaryreason.Thewantedmoremoneyandmarketshare.”)

16

A.Supra‐MonopolyPricing

Inthetextbookmodel,monopolyredistributeswealthfromconsumersto

powerfulfirms.Themonopolist’shigherpriceenablesittocaptureforitselfmuchof

thewelfaregain,or“surplus,”thatconsumerswouldhaveenjoyediftheyhadbeen

abletopurchasethevaluedgoodorserviceatalow,competitiveprice.Inhealth

care,insuranceputsthemonopolistinanevenstrongerpositionbygreatly

weakeningtheconstraintonitspricingfreedomordinarilyimposedbythelimitsof

consumers’willingnessorabilitytopay.Thiseffectappearsintheoryasa

steepeningofthedemandcurveforthemonopolizedgoodorservice.Whereas

mostmonopolistsencounterareductionindemandwitheachpriceincrease,health

insurancemutesthemarginalconsequencesofrisingprices.

Ifhealthinsurersweredutifulagentsoftheirsubscribersandperfectly

reflectedsubscribers’preferences,theywouldreflectconsumers’demandcurveand

payonlyforservicesthatwerevaluedbyindividualinsuredsatlevelshigherthan

themonopolyprice.Deficienciesinthedesignandadministrationofreal‐world

healthinsurance,however,preventinsurersfromreproducingtheirinsureds’

preferencesandheavilymagnifymonopolypower.Forlegal,regulatory,andother

reasons,healthinsurersintheUnitedStatesareinnoposition(asconsumers

themselveswouldbe)torefusetopayaprovider’shighpricewheneveritappears

toexceedtheservice’slikelyvaluetothepatient.Instead,insurersareboundby

bothdeep‐rootedconventionandtheircontractswithsubscriberstopayforany

servicethatisdeemedadvantageous(andtermed“medicallynecessary”under

17

rathergenerouslegalstandards)forthepatient’shealth,whateverthatservicemay

cost.33

Consequently,closesubstitutesforaprovider’sservicesdonotcheckits

marketpowerastheyordinarilywouldforothergoodsandservices.Indeed,

puttingasidethemodesteffectsofcostsharingonpatients’choices,theonly

substitutetreatmentsorservicesthatinsuredpatientsarelikelytoacceptarethose

theyregardasthebestonesavailable.Unlikethesituationwhenanordinary

monopolistsellsdirectlytocost‐consciousconsumers,therewardstoamonopolist

sellinggoodsorservicespurchasedthroughhealthinsurancemayeasilyand

substantiallyexceedtheaggregateconsumersurplusthatpatientswouldderiveat

competitiveprices.

Thus,healthinsuranceenablesamonopolistofacoveredservicetocharge

substantiallymorethanthetextbook“monopolyprice,”therebyearningevenmore

thantheusual“monopolyprofit.”Themagnitudeofthemonopoly‐plus‐insurance

distortionhassometimesevensurpriseditsbeneficiaries.34Ofcourse,sincethird‐

partypayors(andnotpatients)arecoveringtheinterimbill,theseextraordinary

profitsmadepossiblebyhealthinsuranceareearnedattheexpenseofthose33SeegenerallyTimothyP.Blanchard,“MedicalNecessity”Determinations—AContinuingHealthcarePolicyProblem,”JournalofHealthLaw37,no.4(2003):599–627;WilliamSage,“ManagedCare’sCrimea:MedicalNecessity,TherapeuticBenefit,andtheGoalsofAdministrativeProcessinHealthInsurance,”DukeLawJournal53(2003):597;EinerElhauge,“TheLimitedRegulatoryPotentialofMedicalTechnologyAssessment,”VirginiaLawReview82(1996):1525–1617.34Fortrulystunningexamplesoftheprice‐increasingandprofit‐generatingeffectsofcombiningUS‐stylehealthinsuranceandmonopoly,seeGeetaAnand,“TheMostExpensiveDrugs,”Parts1–4,WallStreetJournal,November15–16,December1,28,2005;inthisseries,seeespecially“HowDrugsforRareDiseasesBecameLifelineforCompanies,”November15,2005,A1(inwhichonedrugcompanyexecutiveisquotedassaying,“Ineverdreamedwecouldchargethatmuch.”)

18

bearingthecostofinsurance.Insureds,evenwhentheiremployersarethedirect

purchasersofhealthinsurance,areultimatelytheonesseeingtheirtake‐home

shrinkfromhikesininsurancepremiumscausedbyprovidermonopolies.

Discussionsofantitrustissuesinthehealthcaresectorrarely,ifever,

explicitlyobservehowhealthinsuranceingeneralorU.S.‐styleinsurancein

particularenhancestheabilityofdominantsellerstoexploitconsumers.Although

scholarshavepreviouslyobservedthatpricesforhealthservicesaremuchhigherin

theUnitedStatescomparedtootherOECDnations(withoutobservabledifferences

inquality),35andalthoughmanyhaveobservedthatprovidermarketpowerhas

beenasignificantfactorininflatingthoseprices,36fewhaveobservedthe

synergisticeffectsofmonopolyandhealthinsurance.

Perhapsmorenotably,despitethehugeimplicationsforconsumersandthe

generalwelfare,thespecialredistributiveeffectsofmonopolyinhealthcare

marketsarenotmentionedintheantitrustagencies’definitivestatementsof

enforcementpolicyinthehealthcaresector.37Antitrustanalysisofhospital

mergers—aswellasofotheractionsandpracticesthatenhanceprovideror

suppliermarketpower—mustthereforeexplicitlyrecognizetheimpactofinsurance

onhealthcaremarkets.Thenationwillfinditfarharder,perhapsliterally

impossible,toaffordPPACA’simpendingextensionofgeneroushealthcoverageto

additionalmillionsofconsumersifmonopolistsofhealthcareservicesandproducts

cancontinuetochargenotwhat“themarket”butwhatinsurerswillbear.35See,e.g.,DianaFarrelletal.,AccountingfortheCostofU.S.HealthCare:ANewLookatWhyAmericansSpendMore,(McKinseyGlobalInstitute,2008).36Seesupra,notes2‐3.37Seesupra,note7.

19

B.MisallocativeConsequences

Allowingproviderstogainmarketpowerbymergernotonlycauses

extraordinaryredistributionsofwealthbutalsocontributestoinefficiencyinthe

allocationofresources.Inironiccontrasttotheoutputrestrictionsassociatedwith

monopolyineconomictheory,themisallocativeeffectscitedheremostlyinvolvethe

productionandconsumptionoftoomuch—ratherthantoolittle—ofagenerally

goodthing.Thesemisallocationsareboththeoreticallyandpracticallyimportant.

Theyprovidestillanothernewreasonforspecialantitrustandothervigilance

againstproviders’monopolisticpractices,particularlyscrutinizinganticompetitive

mergersandpowerfuljointventures.

Evenintheabsenceofmonopoly,conventionalhealthinsuranceenables

consumersandproviderstooverspendonoverlycostlyhealthcare.Thisis,of

course,thefamiliareffectofmoralhazard—economists’termforthetendencyof

patientsandproviderstospendinsurers’moneymorefreelythantheywouldspend

thepatient’sown.Tobesure,somemoral‐hazardcostsarejustifiedasan

unavoidablepricetoprotectindividualsagainstunpredictable,high‐costevents.

ButAmericanhealthinsurersaresignificantlyconstrainedinintroducing

contractual,administrative,andothermeasurestocontainsuchcosts.U.S.‐style

healthinsuranceisthereforemoredestructiveofallocativeefficiencythanhealth

insurancehastobe.Althoughuncontrolledmoralhazardisaproblemthroughout

thehealthsector,combininginefficientlydesignedinsurancewithprovider

monopoliescompoundstheeconomicharm.

20

Theextraordinaryprofitabilityofhealth‐sectormonopoliesalsointroducesa

dynamicsourceofresourcemisallocationbygreatlystrengtheningtheusual

inducementforfirmstoseekmarketdominance.Theintroductionsofnew

technologieshavebeenamajorsource—perhapsprimary,responsibleforasmuch

as40‐50percent—ofhealthcarecostincreasesoverthepastseveraldecades.38And

eventhoughmanyinnovationsofferonlymarginalvalue,theirmonopolypower

underintellectualpropertylawssecurelucrativepaymentsfrominsurerswhose

handsaretied.Althoughmanyhaverecognizedthatnewtechnologiesarea

principalsourceofunsustainableincreasesinhealthcarecosts,andseveralothers

haverecognizedhowthemoralhazardofinsurancehasbothfueledtechnology‐

drivencostincreasesanddistortedinnovationincentives(towardcost‐increasing

innovationsattheexpenseofcost‐reducinginnovations),39fewhaveappreciated

thecontributingroleofinsuranceinexacerbatingthemonopolies’effects.

38DanielCallahan,“HealthCareCostsandMedicalTechnology,”inFromBirthtoDeathandBenchtoClinic:TheHastingsCenterBioethicsBriefingBookforJournalists,Policymakers,andCampaigns,ed.MaryCrowley(Garrison,NY:TheHastingsCenter,2008),79–82.SeealsoPaulGinsburg,“ControllingHealthCareCosts,”NewEnglandJournalofMedicine351(2004):1591–93;HenryAaron,Serious&UnstableCondition(Washington,DC:BrookingsInstitutionPress,1991).39SeeAlanM.Garber,CharlesI.Jones,andPaulM.Romer,“InsuranceandIncentivesforMedicalInnovation”(workingpaper12080,NationalBureauofEconomicResearch,2006);BurtonWeisbrod,“TheHealthCareQuadrilemma:AnEssayonTechnologicalChange,Insurance,QualityofCare,andCostContainment,”JournalofEconomicLiterature29,no.2(June1991):523–52;SheilahSmith,JosephP.Newhouse,&MarkFreeland,“Income,Insurance,andTechnology:WhyDoesHealthSpendingOutpaceEconomicGrowth?”HealthAffairs28,no.5(2009):1276–84.SeealsoDanaGoldmanandDariusLakdawalla,“UnderstandingHealthDisparitiesacrossEducationGroups”(workingpaper8328,NationalBureauofEconomicResearch,2001)(suggestingthatpopulation‐wideincreasesineducationhaveencouragedpursuitofpatient‐intensiveinnovationsthatincreasecosts,ratherthansimplertechnologiesthatreducethem).

21

Providermonopoliesalsoinflicteconomicharmbyspendingheavilyto

sustaincurrentmonopolybarriers.Indeed,RichardPosnerhastheorizedthat

monopoly’smostseriousmisallocativeeffectisnottheoutputreductionrecognized

intheoreticalmodelsbutinsteadisthemonopolist'sstrenuouseffortstoobtain,

defend,andextendmarketpower.40Amonopolistiswillingtoinvestuptothe

privatevalueofitsmonopolyinmaintainingit(andkeepingoutcompetitors),and

themorelucrativethemonopoly,themoreafirmwillbeinducedtoinvestheavily

insustainingmonopolybarriers.Sincesomanymonopoliesaremaintainedwith

legalandregulatorybarriers—certificate‐of‐needlaws,accreditation,andcontracts

restrictingprovidernetworks,forexample—muchofthiseffortisspentonlegaland

politicalresourcesthatfritterawaytheprivatevalueofthemonopoly,ratherthan

reinvestinginactivitiesthatcreateadditionalsocialvalue.Evenmanagersof

nonprofitfirms,thoughtheyhavenointerestinprofitsassuch,haveincentivesto

maintainmonopoliestofundtheconstructionandexpansionofempiresthat

enhancetheirself‐esteemandprofessionalinfluence.Suchempirebuildingismost

easilyaccomplishedbyobtainingmarketpowerandusingittogeneratesurpluses

withwhichtofurtherentrenchandextendthefirm’sdominance.

Inlightofthedisproportionatelylargeshareofnationalresourcesalready

beingspentonhealthcareintheUnitedStatescomparedtoeveryothernationin

theworld,andespeciallyonceonerecognizestheextraordinarypricingfreedom

thatU.S.‐stylehealthinsuranceconfersonmonopolistprovidersandsuppliers,the

enormousburdenofdistortivehealth‐sectormonopoliesprovidecompelling,even40RichardA.Posner,AntitrustLaw:AnEconomicPerspective,2nded.(UniversityofChicagoPress,2001),13–18.

22

alarming,reasonstoapplytheantitrustlawswithparticularforce.Antitrust

policymakers,Ibelieve,areuptothetaskofrestoringcompetitioninhealthcare

marketswhereitislacking,butitwillrequiretargetingprovidersandsuppliersof

healthservicesseekingtoachieve,entrench,andenhancemarketpower.

IV. ANewAntitrustAgenda

Cangovernment,throughantitrustenforcementorotherwise,doanythingabout

theproblemofproviderandsuppliermarketpowerinhealthcaremarkets?

Althoughtheenforcementagenciesandcourtsshouldcertainlyscrutinizenew

hospitalmergersandsimilarconsolidationswithgreaterskepticism,preventing

newmergerscannotcorrectpastfailurestomaintaincompetitioninhospitaland

othermarkets.Enforcersmaychallengethelegalityofpreviouslyconsummated

mergers,astheFTCdidintheEvanstonNorthwesterncase,buttherearepractical

andjudicialdifficultiesinfashioningaremedythatmightrestorethecompetition

thattheoriginalmergerdestroyed.TheFTCwasunwilling,forexample,todemand

thedissolutionofEvanstonNorthwesternHealthcareCorp.andinsteadmerely

ordereditsjointlyoperatedhospitalstonegotiateseparatecontractswithhealth

plans—aremedy,incidentally,thatgavethenegotiatingteamofneitherhospitalany

reasontoattractbusinessfromtheother.41AlthoughtheFTCmightseekmore

substantialreliefinothersuchcases,thegeneralruleseemstobethatold,unlawful

41Despitelosingthoroughlyonthemerits,therespondentdeclareditself“thrilled”withtheFTC’sremedy.SeeNorthShoreUniversityHealthSystems“FTCRulingKeepsEvanstonNorthwesternHealthcareIntact,”pressrelease,August6,2007,www.northshore.org/about‐us/press/pressreleases/ftc‐ruling‐keeps‐evanston‐northwestern‐healthcareintact/(accessedMay3,2012).

23

mergersareamenabletolaterbreakuponlyintheunusualcasewherethe

componentpartshavenotbeensignificantlyintegrated.42Inanycase,giventheir

pastskepticismaboutantitrustenforcementinhealthcaremarkets,andespecially

theirhandinblessingmanymergersthatoughtnowbeunwound,courtswouldbe

hardtoenlistinanantitrustcampaigntorollbackearlierconsolidations.43

Thus,apolicyagendacapableofredressingtheprovidermonopolyproblemin

healthcarewillneedtoemployotherlegalandregulatoryinstruments.Afirstorder

ofbusinesswouldbetofastidiouslypreventtheformationofnewprovider

monopolies.Becausehealthcareproviderscontinuetoseekopportunitiesto

consolidate—eitherthroughtherecentwaveofformingAccountableCare

Organizations(“ACOs”)orthoughalternativemeans—thereremainseveralfronts

availableforpolicymakerstowageantitrustbattle.Inaddition,anarrayofother

enforcementpoliciescantargetmonopolistsbehavingbadly—thosetryingeitherto

expandtheirmonopolypowerintocurrentlycompetitivemarketsortoforeclose

theirmarkettopossibleentrants.Thus,severalfrontsremainavailablefor

policymakersseekingtorestorecompetitiontohealthcaremarkets.Anewantitrust

agendabeginswithrecognizingtheextraordinarycoststohealthcareprovider

monopoliesandcontinueswithaggressiveandcreativeantimonopolyinterventions.

42See,forexample,UnitedStatesv.E.I.duPontdeNemours&Co.,353U.S.586(1957);seealsoPhillipAreedaandHerbertHovenkamp,AntitrustLaw2nded.(NewYork:AspenPublishers,2003):1205b.43Forachroniclingofgovernmentchallengestomergersthatlostinfederalcourt,seeDoseofCompetition,supranote7.Foranexplorationofjudicialresistancetoenforcingtheantitrustlawsagainsthospitals,seeRichman,supranote8.

24

A.TheSpecialProblemofAccountableCareOrganizations

AprimarytargetforarevivedantitrustagendaistheemergingAccountable

CareOrganizations,whosedevelopmenttheAffordableCareActisdesignedto

stimulate.TheACAencouragesproviderstointegratethemselvesinACOsforthe

purposeofimplementing“bestpractices”andtherebyprovidingcoordinatedcareof

goodqualityatlowcost.Asaninducementforproviderstoformandpractice

withinthesepresumptivelymoreefficiententities,theACAinstructstheMedicare

programtosharewithanACOanycostsavingsitcandemonstrate,permitting

proposedACOseithertokeepanysavingsbeyondaminimumsavingsrate(“MSR”)

ofupto3.9%whilebeinginsuredagainstlossesifsavingsarenotobtainedorto

keepsavingsbeyondanMSRof2%whilebeingexposedtotheriskoflosses.44

ACOsarebeinghailedasameaningfulopportunitytoreformourdeeplyinefficient

deliverysystem,buttheunintendedconsequencesofpromisinghealthpolicy

initiativesofteninvestprematurelyinprojectsthatultimatelydisappoint.The

formationofACOsrunthespecificriskofcreatingevenmoreaggregationofpricing

powerinthehandsofproviders.

ACOs,intheory,couldofferanattractivesolutiontoproblemsstemming

fromthecomplexityandfragmentationofthehealthcaredeliverysystem.45

Togetherwithgoodinformationsystemsandcompensationarrangements,vertical

integrationofcomplementaryhealthcareentitiescanachieveimportantefficiencies

44SeeDepartmentofHealthandHumanServices,MedicareProgram;MedicareSharedSavingsProgram:AccountableCareOrganizations,42CFRPart425,FederalRegister76,no.212(November2,2011):67802,67985–88.45EinerElhauge,ed.,TheFragmentationofUSHealthCare(Oxford,UK:OxfordUniversityPress,2010).

25

byreducingmedicalerrors,obviatingduplicativeservicesandfacilities,and

coordinatingelementsneededtodeliverhighquality,patient‐centeredcare.46

Skeptics,whoincludeformerFTCCommissionerThomasRosch,notethat

“availableevidencesuggeststhatthecostsavings[fromACOs]willbeverysmallto

nonexistent”andwarnthatanypurportedreductionsinexpenditures“willsimply

beshiftedtopayorsinthecommercialsector.”47Othershavewarnedthateffortsto

replicateearlysuccessesinintegrateddeliverysystems—whichserveasmodelsfor

reformers’aspirations—haveoftenfailed,inpartbecausemanyphysiciansare

reluctanttoforgothelucrativepossibilitiesofunconstrainedfee‐for‐servicepractice

andinpartbecausephysicianswhodointegratewithhospitalsystemspredictably

resistadheringtoefficiency‐enhancingmanagement.Moreover,manyACOsare

reportedlybeingsponsoredbyhospitals,whichanyefficientdeliverysystemwould

usesparingly.HospitalinvestmentsmightbedesignedtopreemptcontrolofACOs,

ratherthanharnesstheirpotentialefficiencies,soanycostsavingswillcomeatthe

expenseofothersandnotthemselves.

IncontrasttothevaryingviewsonthepotentialbenefitsofACOs,thereis

widespreadagreementthattheycouldengineerandleveragegreatermonopoly

powerinanalready‐concentratedhealthcaremarket.48OrganizersofACOsare

46AlainC.EnthovenandLauraA.Tollen,“CompetitioninHealthCare:ItTakesSystemstoPursueQualityandEfficiency,”HealthAffairs(September7,2005),doi:10.1377/hlthaff.w5.420.47RemarksofJ.ThomasRoschbeforetheABASectionofAntitrustLaw,November17,2011.48SeeAmerica’sHealthInsurancePlans,AccountableCareOrganizationsandMarketPowerIssues(October2010),www.ahip.org/Workarea/linkit.aspx?ItemID=9222(accessedMay25,2012);Berenson,Ginsburg,andKemper,“UncheckedProviderClout”(whichnotesACOs’

26

forgingcollaborationsamongentiremarketsofphysiciansandhospitals,entities

thatwouldotherwisecompetewitheachother.TheNewYorkTimeshasreported

“agrowingfrenzyofmergersinvolvinghospitals,clinicsanddoctorgroupseagerto

sharecostsandsavings,andcashinonthe[ACOprogram’s]incentives.”49Infact,

providers’mainpurposeinformingACOsmaynotbetoachievecostsavingstobe

sharedwithMedicarebuttostrengthentheirmarketpoweroverpurchasersinthe

privatesector.ACOs“maybethelatestchapterinthesteadyaccumulationof

marketpowerbyhospitals,healthcaresystems,andphysiciangroups,asequelto

thewavesofmergersinthe1990swhenhealthcareentitiessoughttocounter

marketpressurefrommanagedcareorganizations.”50

Antitrustpolicymakersthereforeshouldcarefullyscrutinizetheformationof

ACOs.Conventionalantitrustreasoningappropriatelypermitspurportedefficiency

claimstotrumpconcernsaboutconcentrationonthesellersideofthemarket,and

anyreviewofaproposedACOwouldcertainlyconsiderthepotentialbenefitsof

verticalintegration.Butanyantitrustanalysisshouldalsorecognizethathealth

insurancegreatlyexacerbatesthepriceandmisallocativeeffectsofmonopoly.

NotwithstandingthespecialefficiencyclaimsthatcanbemadeonbehalfofACOs,“potentialnotonlytoproducehigherqualityatlowercostbutalsotoexacerbatethetrendtowardgreaterprovidermarketpower”);andJeffGoldsmith,“AnalyzingShiftsinEconomicRiskstoProvidersinProposedPaymentandDeliverySystemReforms,”HealthAffairs29,no.7(2010):1299,1304.(“WhetherthesavingsfrombettercarecoordinationforMedicarepatientswillbeoffsetbymuchhighercoststoprivateinsurersofaseeminglyinevitable...waveofproviderconsolidationremainstobeseen.”).49RobertPear,“ConsumerRisksFearedasHealthLawSpursMergers,”NewYorkTimes,November20,2010.50BarakRichmanandKevinSchulman,“ACautiousPathForwardonAccountableCareOrganizations,”JournaloftheAmericanMedicalAssociation305,no.6(February9,2011):602–03.

27

thepotencyofhealthcaremonopoliesprovidesastrongwarrantforanespecially

stringentanti‐concentration,antimergerpolicyinthehealthcaresector.These

heighteneddangersshouldbeweighedheavilyinappraisinganACO’slikelymarket

impact.

Antitrustpolicymakersthereforeshouldcarefullyscrutinizetheformationof

ACOs.Conventionalantitrustreasoningappropriatelypermitsefficiencyclaimsto

overcomeconcernsaboutconcentrationonthesellersideofthemarket,andany

reviewofaproposedACOwouldcertainlyconsiderthepotentialbenefitsofvertical

integration.Butanyantitrustanalysisshouldalsorecognizethathealthinsurance

greatlyexacerbatesthepriceandmisallocativeeffectsofmonopoly.

NotwithstandingthespecialefficiencyclaimsthatcanbemadeonbehalfofACOs,

thepotencyofhealthcaremonopoliesstronglywarrantsespeciallystringentanti‐

concentration,anti‐mergerpolicyinthehealthcaresector.Theseheightened

dangersshouldbeweighedheavilyinappraisinganACO’slikelymarketimpact.

ItremainsunclearwhatroletheFTCandDOJhaveinapplyingthisnecessary

levelofscrutinytonewACOproposals.Buttheantitrustagenciessurelyenjoya

gooddealofdiscretioninensuringthatACOcomplieswiththeprinciplesof

competition.Theagenciescoulddemandaheightenedshowingthataproposed

consolidationwillgenerateidentifiableefficiencies,andtheysimilarlymight

demandthatanACO'sproponentsassumetheburdenofshowinganabsenceof

significanthorizontaleffectsinlocalsubmarket.Theagenciessimilarlycould

imposedemandingcurestoillegalconcentrations,perhapsencouragingthevertical

integrationenvisionedbyPPACA'sproponentswhilereducingthehorizontal

28

collaborationthatproviderssoroutinelypursue.Finally,theagenciescouldalso

imposeconduct(i.e.non‐structural)remediestopotentiallyharmfulACOs,suchas

requiringnonexclusivecontractualarrangementswithpayorsandwithregional

hospitals,orpledgingtoundocertainintegrationsifpricesproceedtoriseabovea

certainthreshold.HowtheFTCandDOJmonitortheformationofACOscould

determinewhethertheACAmeaningfullyadvancesa(desperatelyneeded)

reorganizationofhealthcaredeliveryormerelyoffersaloopholetopermitgreater

consolidation.

TheCMSmightalsoserveameaningfulroleinpreventingACOsfrom

furtheringanticompetitiveharminhealthcaremarketplaces.Thefinalrulespermit

CMStosharesavingswithACOsonlyafterashowingofqualitybenchmarks,which

CMSadministratorsoughttotakeseriously.Therulesalsorequirecostandquality

reporting,andCMSmightrequireademonstrationofmeaningfulquality

improvementsandcostsavingsinordertoreceiveacontinuedshareofMedicare

savings.CMSmightevenconditionanACO'spermissiontomarkettoprivatepayers

onademonstrationthatitspricestoprivatepayersdidnotincreasesignificantly

followingitsformation.

Onemightwonder,ofcourse,whetheragovernmentalsinglepayerlike

Medicarehasthemission,theimpulse,ortherequisitecreativitytobehelpfulin

makingprivatemarketsforhealthserviceseffectivelycompetitive.PerhapsCMS's

newCenterforMedicareandMedicaidInnovationcouldshapetheinstitution's

capacitytoaffectreform.Itmightbeequallylikely,unfortunately,thatMedicare

willaimtopreserveitsownsolvencybyencouragingtheshiftingofcoststothe

29

privatesector—andmayevenrewardACOs’costshiftingascostsavings.Thisis

thedangerwithusingalargeandunavoidablyinflexiblebureaucracytoengineeran

efforttoinduceinnovation.Nonetheless,yougotowarwiththebureaucracyyou

have,andCMSoughttoconcentrateondevelopingcompetition‐orientedregulations

andcautiouslymonitorthemarketimpactofemergingACOs.

B.RequiringUnbundlingofMonopolizedServices

Anyefforttorestorepricecompetitioninhealthcaremarketsmustincludea

strategythattargetsalready‐concentratedmarkets.Antitrustenforcerstherefore

needtodeveloppolicyinstrumentsthattargetcurrentmonopolists,bothtolimitthe

economicharmtheyinflictandtothwarttheireffortstoexpandtheirmonopoly

power.

Onepromisinginitiativecouldbetorequirehospitalsandotherprovider

entitiestounbundle,atapurchaser’srequest,certainservicesforthepurposesof

negotiatingprices.Providersroutinelybundleservicesforunifiedpayments,and

manysuchbundlesserveefficiencypurposes.Someservicesaresointertwinedthat

separatingthemprovescostly,andsimilarly,manyclinicallyrelatedservicesoffer

efficiencieswhensoldtogether.However,whenprovidersbundleservicesin

marketstheyhavemonopolizedwithservicesinwhichthereiscompetition,amenu

ofanticompetitiveconsequencescanresult:themonopolistcansqueezeoutrivals

inthecompetitivemarket,creatingforitselfanothermonopoly;andbysquelching

rivalsinthecompetitivemarket,themonopolistlimitstheabilityofentrantsto

challengeitsholdonthemonopolizedmarket.Themagnifiedconsequencesof

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healthcaremonopoliesshouldheightenconcernoverpracticesthatcanexpandor

enshrineprovidermonopolists.

Thegeneralantitrustruleontyingisthatafirmwithmarketpowermaynot

useittoforcecustomerstopurchaseunwantedgoodsorservices.51Ifthisprinciple

isinvokedtofrustratehospitals’practiceofnegotiatingcomprehensivepricesfor

largebundlesofservices,purchaserscouldthenbargaindownthepricesofservices

withgoodsubstitutes.52Ifahospitalstillwishedtofullyexploititsvarious

monopolies,itwouldhavetodosoindiscretenegotiations,makingitshighest

pricesvisible.Healthplanscouldthenhopetorealizesignificantsavingsby

challengingsuchmonopolies,eitherbyinducingenrolleestoseekcareinalternative

venues(effectivelyexpandingthegeographicmarket)orbyencouragingnewentry.

Oftenthemerethreatofnewentryissufficienttomodifyamonopolist’sdemands,

butentryismorecredibleifthemonopolizedserviceisdiscreteandassociatedwith

adistinctpricethatentrantscantarget.

Todate,therehavebeenonlylimitedenforcementeffortstoprevent

hospitalsfromtyingtheirservicestogetherinbargainingwithprivatepayers.53

Althoughhospitalswouldpredictablyarguethatbundlinggenerallymakesfor

51SeeJeffersonParishHosp.Dist.No.2.v.Hyde,466U.S.2(1984).52Theabilitytoleveragemarketpowerinonesub‐marketintopriceincreasesinacompetitivemarkethelpsexplainwidepricevariationforlikeservicesincommongeographicmarkets.SeePaulB.Ginsburg,“WideVariationinHospitalandPhysicianPaymentRatesEvidenceofProviderMarketPower,”HSCResearchBriefno.16(November2010),www.hschange.com/CONTENT/1162/(accessedMay25,2012).53Inaprivatesuit,adominanthospitalchainwassuedbyitslonerivalfor,amongotherthings,bundlingprimaryandsecondaryserviceswithtertiarycareinsellingtothearea’sinsurers.SeeCascadeHealthSolutionsv.PeaceHealth,515F.3d883,890–91(9thCir.2008).Thedistrictcourtpermittedcertainclaimstoproceedtotrial,includingaclaimofillegalbundleddiscounts,butdismissedthetyingclaim.

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efficientnegotiatingandstreamlineddeliveryofcare,theaddedcostsofbargaining

servicebyservicecouldbeeasilyoffsetbythelowerpricesresultingfromgreater

competition.Recentscholarshipontyingandbundlingconfirmsthatpermittinga

hospitalmonopolisttotieunrelatedservicesexpandsthemonopoly’sreach,

profitability,andlongevityandharmsconsumerwelfare.54Theextremeharmfrom

healthcaremonopoliesmakeshospitals’tyingpracticesparticularlyvulnerableto

antitrustattack.

Aworkablerulewouldpermitantitrustlawtoempowerapurchaserto

demandseparatepricesfordivisibleservicesthatarenormallybundled.55

Althoughonehopesthatantitrustcourtsandacrediblethreatoftrebledamages

woulddiscourageaprovidermonopolistfromretaliatingagainstanypurchaserthat

aggressivelychallengesitsanticompetitivepractices,thecostsanddelayfromsuch

complexantitrustactionssuggestthatpublicenforcementshouldsupplement

privatesuits.Properlyauthorizedregulatorscouldeitherenableindividualpayers

todemandunbundlingtofacilitatetheireffortstogetbetterprices,orregulators

coulddemanditthemselves.Effectiveunbundlingrequestscouldtriggermore

competitionandgreaterefficiencybothinthetiedsubmarketswheremonopolyis

notaproblemandalsointhetyingmarketswhereitis.

54SeeEinerElhauge,“Tying,BundledDiscounts,andtheDeathoftheSingleMonopolyProfitTheory,”HarvardLawReview123,no.2(2009):397–481.55ThisproposalisinlinewithrecommendationsfromtheAntitrustModernizationCommission,ReportandRecommendations(April2007):96,http://permanent.access.gpo.gov/lps81352/amc_final_report.pdf(accessedMay9,2012).Whatis“divisible”inhealthcareisofcoursesubjecttodebate,justasmostservicesaccusedofbeingbundledareoftendefendedasasingleproduct.See,forexample,JeffersonParishHosp.,466U.S.,19–22.

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C.ChallengingAnticompetitiveTermsinInsurer‐ProviderContracts

Restrictivetermsincontractsbetweenprovidersandinsurersareanother

potentiallyfruitfulareaforantitrustandregulatoryattentionindealingwiththe

providermonopolyproblem.Acommonpractice,forexample,isforaprovider‐

sellertopromisetogiveaninsurer‐buyerthesamediscountfromitshighpricesas

anyitmightgivetoacompetinghealthplan.Suchprice‐protection,payment‐parity,

or“most‐favored‐nation”(MFN)clausesarecommonincommercialcontractsand

servetoobviatefrequentandcostlyrenegotiationofprices.Theirefficiency

benefitsmaysometimesbeoutweighedbyanticompetitiveeffects,however.Thus,a

providermonopolistmayfindthatalargeandimportantpayeriswillingtopayits

veryhighpricesonlyiftheproviderpromisestochargenolowerpricestoits

competitors.SuchasituationapparentlyaroseinMassachusetts,wherethe

Commonwealth’slargestinsurer,aBlueCrossplan,reportedlyaccededtoPartners

HealthCare’sdemandforaverysubstantialpriceincreaseonlyafterPartnersagreed

to“protectBlueCrossfrom[its]biggestfear:thatPartnerswouldallowother

insurerstopayless.”56

Antitrustlawcanofferreliefagainstaprovidermonopolistagreeingtoan

MFNclausetoinduceapowerfulinsurertopayitshighprices.Becausesuchclauses

protectinsurersagainsttheircompetitors’gettingbetterdeals,manyarelikelyto

56“AHandshakeThatMadeHealthcareHistory,”BostonGlobe,Dec.28,2008.TheMassachusettsattorneygeneralhasnotedthatsuchpayment‐parityagreementshavebecome“pervasive”inprovider‐insurercontractsinthecommonwealthandhasexpressedconcernthat“suchagreementsmaylockinpaymentlevelsandpreventinnovationandcompetitionbasedonpricing.”OfficeofAttorneyGeneralMarthaCoakley,ExaminationofHealthCareCostTrendsandCostDrivers(March16,2010),40–41.

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giveintooquicklytoevenextortionatemonopolistpricedemands.Butthe

availabilityofanantitrustremedy(whichwouldprobablybeonlyaprospective

cease‐and‐desistorderratherthananawardoftrebledamagesforidentifiable

harms)mightnotbesufficienttodeterapowerfulproviderfromgrantingMFN

statustoadominantinsurer.Alternatively,regulatoryauthoritiescouldpresumably

prohibitdominantprovidersfromconferringsuchstatus.Regulatorspresumably

wouldbeinasgoodapositionasanypartytodistinguishbetweenrestrictive

agreementsthatachievetransactionalefficienciesfromagreementsthatrestrict

insurers’freedomtocutpricedealswithcompetitorsandreducepressureon,and

opportunitiesfor,allinsurerstoseeknewandinnovativeservicearrangements.

AmorepotentantitrustattackonanticompetitiveMFNclauseswouldaimat

thedominantinsurerdemandingthem,ratherthanatthecooperatingprovider.

TheDepartmentofJustice(DOJ)suedBlueCrossBlueShieldofMichigan,a

dominantinsurer,toenjoinitfromusingMFNclausesinitscontractswithMichigan

hospitals.TheDOJallegedthatsuchrestrictionsonproviderpricecompetition

reducedcompetitionintheinsurancemarketbypreventingotherinsurersfrom

negotiatingfavorablehospitalcontracts.57Inthewakeofthegovernment’s

initiativeinMichigan,whichresultedinasettlement,Michigan(andsubsequently

severalotherstates)haveprohibitedtheuseofMFNagreementsbetweenhealth

insurersandproviders.EvenwithoutstateregulationsprohibitingMFNclauses,the

DOJtheorymetsufficientsupportthatinMassachusetts,forexample,theBlueCross

57SeeComplaintat1‐2,UnitedStatesv.BlueCrossBlueShieldofMich.(E.D.Mich.2010)(No.2:10‐CV‐14155);seealsoDavidS.Hilzenrath,“U.S.FilesAntitrustSuitAgainstMichiganBlueCrossBlueShield,”WashingtonPost,October18,2010.

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planshouldnowthinklongandhardbeforerenewing(orenforcing)theMFNclause

initscontractwithPartnersHealthCare.

Othercontractprovisionsthatthreatenpricecompetitionarealsoinusein

provider‐insurercontractsinMassachusetts,accordingtotheCommonwealth’s

AttorneyGeneral.Inparticular,so‐called“anti‐steering”provisionsprohibitan

insurerfromcreatinginsuranceproductsinwhichpatientsareinducedtopatronize

lower‐pricedproviders.Undersuchacontractualconstraint,ahealthplancouldnot

offermoregenerouscoverage—suchasreducedcost‐sharing—forcareobtained

fromanewmarketentrantorfromamoredistant,perhapsevenanout‐of‐stateor

out‐of‐country,provider.OthercontractualtermsinuseinMassachusetts(and

presumablyinotherjurisdictionsaswell)guaranteeadominantproviderthatitwill

notbeexcludedfromanyprovidernetworkthatthehealthplanmightofferits

subscribers.

Thecontractualtermsnotedhereallhavethepotentialtoenshrinethe

cooperativesupremacyofdominantprovidersanddominantinsurers.The

resultingcompetitivehardextendsbeyondthesustenanceofhighprices.These

partnershipsalsoforecloseopportunitiesforconsumerstobenefit,bothdirectlyas

patientsandindirectlyaspremiumpayers,frominnovativeinsuranceproductsthat

competinghealthplansmightotherwiseintroduce.Antitrustlawcanprohibitthe

useofsuchanticompetitivecontracttermsthatprotectprovidermonopoliesand

curbinsurerinnovation,andinsuranceregulatorsmightbarsuchprovisions

wherevertheythreatentoprecludeeffectivepricecompetition.Theseactions

remainavailableeveninthecontinuedpresenceofaprovidermonopoly.

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V. Conclusion

Thereisanurgentneedtorecognizetheunusuallyseriousconsequences,for

bothconsumersandthegeneralwelfare,ofleavinginsuredhealthcareconsumers

exposedtomonopolizedhealthcaremarkets.Becausehealthinsurance,especiallyas

itisdesignedandadministeredintheUnitedStates,hugelyexpandsamonopolist’s

pricingfreedom,providerswithmarketpowerinflictwealth‐redistributingand

misallocativeeffectssubstantiallymoreseriousthanconventionalmonopolypower.

Vigorous—nottentativeorcircumspect—enforcementoftheantitrustlawscan

mitigatetheharmsfromprovidermarketpower.Retrospectivescrutinyonearlier

horizontalmergersofhospitalsorotherproviderscouldhelpcorrectdecadesof

ineffectualenforcement,butiflookingbackwardsremainsunlikely,renewedrigor

movingforwardisall‐the‐moreessential.Partiesproposingnewmergersand

alliances,whethertraditionalassociationsornewACOs,mustconvincinglyshow

thattheirreorganizationeitherleadstoonlyaminimalincreaseinmarketpoweror

createsspecificefficiencies.Traditionalmarketdefinitionsshouldalsobeexpanded,

recognizingthatinterregionalcollaborationscanalsoreducecompetitionin

growinghealthcaremarketsandcangenerateadditionalpricingpower.Other

measuresshouldtargetcurrentmonopolists,soastopreventtheenshrinementor

expansionoftheirmarketdominance.Anantitrustorregulatoryinitiativetocurb

hospitals’tyingpracticesandtoprohibitanticompetitivecontractsbetweenpayers

andproviders—perhapsasremediesforearliermergersfoundunlawfulafterthe

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fact—mightalsoreduceandcontaintheharmfromproviderpricingfreedom.Such

policiesmightcurtailmonopolisthospitals’abilitytoenshrinetheirmarketposition

andforecloseentry,tospreadtheirpricingpowerintoadjacentmarkets,orto

extractgreaterrentsfrombuyerswithfewalternatives.

Enthusiastsformarket‐orientedsolutionswouldalsoseektorestrainprovider

marketpowerbyencouragingcreativityamongthird‐partypurchasers.Health

plansthatbypass,orfosternewcompetitorsfor,localmonopolistspromoteprice

andqualitycompetitionwhereitiscurrentlylackingandcouldunderminethe

potencyofinsurance‐plus‐monopolies.Apro‐competitionregulatoryagendamight

seekwaystofacilitateinter‐regionalcompetitionandempowerthird‐partypayors

toseekflexibleandcreativestrategiestostimulateprovidercompetition.

Additionalhopeliesinthepossibilitythathealthinsurersandthird‐party

purchaserswillpurchase(andthatACAregulationswillletthempurchase)proven

non‐medicalinterventionsthatimprovehealthandreducehealthcarecosts.The

exorbitantpricesformonopolizedmedicalservicesshouldencouragehealth

insurerstodevelopcreativealternatives,bothseekingeffective(andless‐costly)

substitutesandreorganizingwhathasbecomeafragmented,error‐prone,and

inefficientdeliveryofcare.

Unfortunately,fewhealthinsurershaveshownaneagernesseithertocontest

providermarketpowerortopursuemeaningfulinnovationstoprovidingcarefor

theirsubscribers.AsinvestigationsinMichiganandMassachusettsreveal,insurers

all‐too‐oftenbecomeco‐conspiratorswithprovidermonopolists,agreeingto

exclusiveagreementsthatprotectboththemselvesandmonopolistsbut

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unforgivinglygougeconsumers.Insurer’failuretoactasaggressivepurchasing

agentsofconsumersispartlyduetothehidingofthetruecostofinsuranceand

partlyduetoconsumers’unduereluctancetoacceptanythinglessthanthevery

best—evenclosesubstitutes.Ifconsumerswerebothawareofthetruecostoftheir

healthcoverageandconsciousthatthey,ratherthansomeoneelse,arepayingforit,

theysurelywoulddemandmorevaluefromtheirinsurers.DominantU.S.health

plansappearinadequatelyincentivizedtoreducecostsandoverlyhesitanttoadopt

innovativestrategieswithassociatedlegalorpoliticalrisks.Anyhopefulnessforthe

futureofU.S.healthcareistemperedbydoubtsabouttheabilityandwillingnessof

U.S.healthinsurers—aswellasinsuranceregulatorsandelectedofficialsthat

purchaseinsuranceforpublicemployees—totaketheaggressiveactionsneededto

procureappropriate,affordablecare.

TheACA,byprovidingconventionallygeneroushealthinsurancetomany

millionmoreAmericans,hasthepotentialtoaggravateandextendthesignificant

shortcomingsofsuchinsurance.Notonlydoesthenewlawseemtohaveno

effectiveanswertotheproblemofproviderandsuppliermonopolies,butitsbroad

extensionofcoverageislikelytofurtheramplifytheuniquelyharmfuleffectsof

theirmarketpower.Moreover,itsnewregulatoryrequirements—theimpositions

ofmedicallossratiosandessentialhealthbenefits,forexample—mightconstrain

innovationsamongpayorstocreateinter‐regionalprovidercompetitionand

reconfigureadeeplyinefficienthealthcaredeliverysystem.

However,theACAalsohasthecapacitytoopenuptheinsurancemarket.Many

consumerswill,forthefirsttime,realizethefullcostofhealthinsurance,which

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perhaps—viastickershock—inducethemtodemandlower‐costalternatives.

Moreover,theinsuranceexchangesmightofferaplatformfornewentryinthe

insurancemarket,thusinjectingsomedynamismintoanindustrydesperatelyin

needofcreativeideas.Andregardlessofhowthenewinsurancemarketstake

shape,antitrustpolicymakersandotherregulatorsstillhavethecapacitytofoster

value‐enhancinginnovation—bothbypreventingtacticsthatmightenshrinethe

currentmonopolistregimeandalsobypromotingthedevelopmentofnew

insuranceproducts.Althoughcurrenttaxpoliciesandregulationshavedulledmany

insurersintobeingagentsforprovidersratherthanfortheirsubscribers,there

remainsapotentopportunityforthird‐partypayorstoinjectthehealthcaresector

withvalue‐creatinginnovationsthatredesignboththeofferingsandthedeliveryof

care.

WhateverthePPACAmayachieve,itslegacyandcosttothenationwilldepend

largelyonwhethermarketactors,regulators,andantitrustenforcerscaneffectively

addresstheprovidermonopolyproblemandtoinstilldesperatelyneeded

competitionamongproviders.Aggressiveantitrustenforcementcanprevent

furthereconomicharmandperhapscanundocostlydamagefromprovidersthatin

errorwerepermittedtobecomemonopolists.Butultimately,creativemarketand

regulatoryinitiativeswillbeneededtounleashthecompetitiveforcesthat

consumersneed.Wherethereisdanger,thereisopportunity,andcompetition‐

orientedpoliciescanandshouldyieldsubstantialbenefitsbothtopremiumpayers

andtoaneconomythatbadlyneedstofindthemostefficientusesforresourcesthat

appeartobecomeincreasinglylimited.