Trustbusters on the march
The possibility it will lead to lower health care prices remains slim, and distant.
The Biden administration’s reinvigorated Federal Trade Commission earlier this month filed suit to stop proposed hospital system mergers in Utah, where for-profit giant HCA wants to buy five hospitals from for-profit Steward Health Care, and in central New Jersey, where non-profit RWJBarnabas Health wants to acquire non-profit St. Peter’s HealthCare.
The complaints follow on the heels of recent challenges to mergers in northern New Jersey, where the FTC sued to stop Hackensack Meridian’s takeover of the Englewood Healthcare Foundation; and the Philadelphia region, where it opposed a proposed merger between Jefferson Health, the major academic medical center with 14 hospitals, and Albert Einstein Healthcare, a struggling small system with four hospitals.
Clearly, the trustbusters are again on the march. But there’s little evidence to suggest antitrust enforcement will have a significant impact on hospital prices, which in the U.S. are the highest in the world.
Conservative judges rule
The federal courts, which will be dominated by conservative judges for the foreseeable future, will have the final say. The most recent decision in health care doesn’t bode well for the government agencies prosecuting antitrust violations.
In December 2020, a federal district court judge ruled the FTC’s challenge to the Philadelphia area merger failed to prove it would result in higher prices for insurers, which is the only benchmark contemporary antitrust jurisprudence considers when judging the effects of consolidation. The two systems completed the merger last October.
The decision followed conservative antitrust dogma that has been in force since the late Judge Robert Bork claimed in his 1978 book, The Antitrust Paradox, that the only thing that mattered in antitrust law is whether mergers raised prices. As Harvard public health professor John McDonough notes in a new commentary in the Milbank Quarterly, “Bork’s idea, central to that era’s neoliberal revolution, asserted that any merger or consolidation that promoted ‘consumer welfare’ in the form of lower prices to someone was de facto legal.”
The contemporary challenge to that idea came from Lina Khan, whom Biden appointed to chair the FTC. While a law student at Yale, she authored Amazon’s Antitrust Paradox, a 2017 law journal article that described how predatory pricing by a market monopolist destroyed competition and undermined innovation even as it delivered lower prices. “Through this strategy, the company has positioned itself at the center of e-commerce and now serves as essential infrastructure for a host of other businesses that depend upon it” she wrote. “Elements of the firm’s structure and conduct pose anticompetitive concerns—yet it has escaped antitrust scrutiny.”
While this is an important debate in considering the ill-effects of predatory pricing in e-commerce, it is hardly relevant to what goes on in health care. As the Kaiser Family Foundation noted in an issue brief in 2020, “a wide body of research has shown that provider consolidation leads to higher health care prices for private insurance. This is true for both horizontal and vertical consolidation.” Moreover, three-quarters of all metro area hospital markets are considered “highly concentrated.”
A new issue brief from Health Affairs documents the impact this has had on commercial (not government) spending on health care. Spending per enrollee grew nearly 22% between 2015 and 2019, with higher prices accounting for two-thirds of the growth. Increases in the quantity of services, whether through population growth, medical innovation or overuse, accounted for just a fifth of the additional spending.
You would think insurers, who represent the employers who pay most of the tab, would be up in arms by these hefty increases. Yet the four major insurers in the Philadelphia region called in to testify in the Jefferson-Einstein case gave mixed testimony on the effects of the merger. Only two supported the FTC’s case while one expressed no concern about the merger. The other declined to testify.
Insurers lack incentives to compete
Why would health insurers greet higher prices with a big ho-hum?
The simple answer is that it’s not their money. They are intermediaries. More than 60% of the nation’s workforce gets its health insurance from employers who are self-insured. They hire insurers as third-party administrators (TPAs) of their plans. These insurance company-run TPAs receive a set free, usually a percentage of total claims, for administering the plan. The more expensive the claims, the higher the fee.
The same absence of incentive to pursue lower prices exists for insurers who sell plans to the other 40% of employers. The prices of their plans depend on their actuaries’ projections of anticipated claims for the coming year times whatever rates they negotiate with providers. If they underestimate the claims or fail to negotiate a manageable price, they simply turn around the following year and raise rates to make up for the shortfall.
Now, in theory, lower provider prices would enable them to lower rates and win more business. But that presumes effective competition in the insurance market.
Alas, as the annual American Medical Association survey points out, nearly three-quarters of the nation’s 384 metro areas have “highly concentrated” insurance markets — almost exactly the same percentage of metro areas whose hospital markets are considered highly concentrated. If you operate in a monopolistic or duopolistic insurance market, higher prices are good for you because they translate into higher commercial premiums, which translate into higher profits for your plans. As with their TPA plans, who cares when it’s somebody else’s money.
Why employers put up with this nonsense one of the enduring mysteries of America’s dysfunctional health insurance system. Perhaps, and I’m just speculating here, it’s because most big employers operate in highly concentrated markets themselves, where their freedom to engage in price gouging goes largely unchecked. Their self-interest dictates not calling attention to their own behavior, which might happen if they call out their colleagues in the insurance industry.
It’s their own version of the golden rule: Do unto others what others are doing unto you. That’s what you get in an economy where virtually every sector is now dominated by oligopolistic giants.
The alternative to antitrust
In her law school paper, FTC chief Khan outlined two possible approaches to reversing the harms caused by excessive industry concentration. The first lay in more rigorous application of antitrust law: preventing mergers, busting up monopolies, policing predatory pricing.
The alternative is rate regulation, which exists for health care in its Medicare and Medicaid programs but not for insurance-run plans. Government-set prices has allowed price inflation in Medicare to trail well behind commercial inflation.
But the net effect of price regulation in just one part of the system is higher prices in the unregulated part of the system, what in effect is cross-subsidization that preserves provider profits and margins. The latest Rand study shows commercial payer rates are 224% higher on average than Medicare’s rates.
While the Biden administration continues to focus on renewing antitrust enforcement, the clamor for rate regulation in health care is growing louder. Michael Chernew, the former vice chair of the Medicare Payment Advisory Commission, and two colleagues at Harvard recently proposed a flexible rate-setting regime to deal with “the harms associated with market failures in health care.”
They called for caps on the highest service prices in a market and caps on annual price growth for all providers and insurers. They also called for renewed regulatory oversight at the state or federal level to address potential evasion of regulated prices.
That would be a faster and surer path to lower prices than breaking up monopolies and praying “the market” will work its magic.