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It's the Prices, Advanced Capitalism, and the Need for Rate Setting — Stupid

Published online by Cambridge University Press:  01 January 2021

David M. Frankford
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Abstract

Competition cannot stem the rise of health care expenditures because it leaves agency diffuse and transferred in part to the institutions of advanced capitalism, which excel in generating demand for their services. The United States should turn to state rate setting to concentrate purchasing power.

Type
Symposium Articles
Information
Journal of Law, Medicine & Ethics , Volume 44 , Issue 4: Health Reform: Assessing the Affordable Care Act and Moving Forward , Winter 2016 , pp. 569 - 575
Copyright
Copyright © American Society of Law, Medicine and Ethics 2016

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References

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With regard to horizontal concentration in hospital markets, Gaynor reports that from 2010-2014 there were 457 hospital mergers, and that as a result, “most urban areas in the US are now dominated by one to three hospital systems….” Gaynor, supra note 17, at 5. With regard to vertical concentration, see text infra at note 19.Google Scholar
For hospital concentration, see, e.g., Cooper, Z. et al., The Price Ain't Right? Hospital Prices and Health Spending on the Privately Insured, No. w21815. National Bureau of Economic Research (2015), available at <http://www.healthcarepricingproject.org/sites/default/files/pricing_variation_manuscript_0.pdf> (last visited October 5, 2016); M. Gaynor and R. Town, “The Impact of Hospital Consolidation — Update,” Robert Wood Johnson Synthesis Project Policy Brief No. 9 (2012), available at <http://www.rwjf.org/en/library/research/2012/06/the-impact-of-hospital-consolidation.html> (last visited October 5, 2016). One recent study found increased prices even when hospitals in different, within-state local markets merge, a finding that is particularly troubling because antitrust law and officials are usually concerned only with concentration in local markets. See L. Dafny, K. Ho, and Robin S. Lee, The Price Effects of Cross-Market Hospital Mergers 2016, No. w22106, National Bureau of Economic Research (2015), available at <http://www.nber.org/papers/w22106> (last visited October 5, 2016). For physician concentration, see, e.g., D. R. Austin and L. C. Baker, “Less Physician Practice Competition Is Associated with Higher Prices Paid for Common Procedures,” Health Affairs 34, no. 10 (2015): 1753-1760; L. C. Baker et al., “Physician Practice Competition and Prices Paid by Private Insurers for Office Visits,” JAMA 312, no. 16 (2014): 1653-1662; E. Sun and L. C. Baker, “Concentration in Orthopedic Markets Was Associated with a 7 Percent Increase in Physician Fees for Total Knee Replacements,” Health Affairs 34, no. 6 (2015): 916-921. For vertical concentration, see text and note infra at note 19. (last visited October 5, 2016); M. Gaynor and R. Town, “The Impact of Hospital Consolidation — Update,” Robert Wood Johnson Synthesis Project Policy Brief No. 9 (2012), available at (last visited October 5, 2016). One recent study found increased prices even when hospitals in different, within-state local markets merge, a finding that is particularly troubling because antitrust law and officials are usually concerned only with concentration in local markets. See L. Dafny, K. Ho, and Robin S. Lee, The Price Effects of Cross-Market Hospital Mergers 2016, No. w22106, National Bureau of Economic Research (2015), available at (last visited October 5, 2016). For physician concentration, see, e.g., D. R. Austin and L. C. Baker, “Less Physician Practice Competition Is Associated with Higher Prices Paid for Common Procedures,” Health Affairs 34, no. 10 (2015): 1753-1760; L. C. Baker et al., “Physician Practice Competition and Prices Paid by Private Insurers for Office Visits,” JAMA 312, no. 16 (2014): 1653-1662; E. Sun and L. C. Baker, “Concentration in Orthopedic Markets Was Associated with a 7 Percent Increase in Physician Fees for Total Knee Replacements,” Health Affairs 34, no. 6 (2015): 916-921. For vertical concentration, see text and note infra at note 19.' href=https://scholar.google.com/scholar?q=For+hospital+concentration,+see,+e.g.,+Cooper,+Z.+et+al.,+The+Price+Ain't+Right?+Hospital+Prices+and+Health+Spending+on+the+Privately+Insured,+No.+w21815.+National+Bureau+of+Economic+Research+(2015),+available+at++(last+visited+October+5,+2016);+M.+Gaynor+and+R.+Town,+“The+Impact+of+Hospital+Consolidation+—+Update,”+Robert+Wood+Johnson+Synthesis+Project+Policy+Brief+No.+9+(2012),+available+at++(last+visited+October+5,+2016).+One+recent+study+found+increased+prices+even+when+hospitals+in+different,+within-state+local+markets+merge,+a+finding+that+is+particularly+troubling+because+antitrust+law+and+officials+are+usually+concerned+only+with+concentration+in+local+markets.+See+L.+Dafny,+K.+Ho,+and+Robin+S.+Lee,+The+Price+Effects+of+Cross-Market+Hospital+Mergers+2016,+No.+w22106,+National+Bureau+of+Economic+Research+(2015),+available+at++(last+visited+October+5,+2016).+For+physician+concentration,+see,+e.g.,+D.+R.+Austin+and+L.+C.+Baker,+“Less+Physician+Practice+Competition+Is+Associated+with+Higher+Prices+Paid+for+Common+Procedures,”+Health+Affairs+34,+no.+10+(2015):+1753-1760;+L.+C.+Baker+et+al.,+“Physician+Practice+Competition+and+Prices+Paid+by+Private+Insurers+for+Office+Visits,”+JAMA+312,+no.+16+(2014):+1653-1662;+E.+Sun+and+L.+C.+Baker,+“Concentration+in+Orthopedic+Markets+Was+Associated+with+a+7+Percent+Increase+in+Physician+Fees+for+Total+Knee+Replacements,”+Health+Affairs+34,+no.+6+(2015):+916-921.+For+vertical+concentration,+see+text+and+note+infra+at+note+19.>Google Scholar
Even without the proposed Aetna-Humana and Anthem-Cigna mergers, which threaten to reduce the big five to three, the figures are very troubling. In the commercial market “[i]n 2004, the largest insurers controlled more than half the market in 16 states and at least one-third of the market in 38 states. Between 1998 and 2006, the fraction of health care markets that were concentrated to levels high enough to raise antitrust concerns, according to the U.S. Department of Justice's Horizontal Merger Guidelines, increased from 68 percent to 99 percent.” National Academy of Social Insurance, “Addressing Pricing Power in Health Care Markets: Principles and Policy Options to Strengthen and Shape Markets,” (2015): 11, available at <https://www.nasi.org/sites/default/files/research/Addressing_Pricing_Power_in_Health_Care_Markets.pdf> (last visited October 5, 2016). In more detail, “AMA data show that 64 percent of commercial health insurance markets are already highly concentrated. Twenty percent of these markets [greatly exceed the standard criteria for high concentration]. Fifty-three percent of those markets have two insurers that account for 65 percent or more of the combined market for HMO, PPO, and POS insurance services. Other studies indi-cate that in 74 percent of states, the three largest insurers hold 80 percent or more of the market share in each of the individual, small group, and large group market segments. Nationally, the share of the largest four insurers increased from 74 to 83 percent from 2006 to 2014.” “Antitrust Review of the Aetna-Humana and Anthem-Cigna Mergers,” T. Greaney and D. Moss to William J. Baer, January 11, 2016, at 3-4, Published by the American Antitrust Institute, available at <http://www.anti-trustinstitute.org/sites/default/files/Health%20Insurance%20Ltr_1.11.16.pdf> (last visited October 5, 2016). In the Medicare Advantage market, “97 percent of markets in U.S. counties are highly concentrated and therefore lacking in significant MA plan competition. Competition is considerably lower in rural counties than in urban ones. Even among the 100 counties with the greatest numbers of Medicare beneficiaries, 81 percent do not have competitive MA markets. Market power is concentrated among three nationwide insurance organizations in nearly two-thirds of those 100 counties.” B. Biles, G. Casillas, and S. Guterman, “Competition among Medicare's Private Health Plans: Does It Really Exist?” The Commonwealth Fund (2015): 1, available at <http://www.commonwealthfund.org/publications/issue-briefs/2015/aug/competition-medicare-private-plans-does-it-exist> (last visited October 5, 2016).+(last+visited+October+5,+2016).+In+more+detail,+“AMA+data+show+that+64+percent+of+commercial+health+insurance+markets+are+already+highly+concentrated.+Twenty+percent+of+these+markets+[greatly+exceed+the+standard+criteria+for+high+concentration].+Fifty-three+percent+of+those+markets+have+two+insurers+that+account+for+65+percent+or+more+of+the+combined+market+for+HMO,+PPO,+and+POS+insurance+services.+Other+studies+indi-cate+that+in+74+percent+of+states,+the+three+largest+insurers+hold+80+percent+or+more+of+the+market+share+in+each+of+the+individual,+small+group,+and+large+group+market+segments.+Nationally,+the+share+of+the+largest+four+insurers+increased+from+74+to+83+percent+from+2006+to+2014.”+“Antitrust+Review+of+the+Aetna-Humana+and+Anthem-Cigna+Mergers,”+T.+Greaney+and+D.+Moss+to+William+J.+Baer,+January+11,+2016,+at+3-4,+Published+by+the+American+Antitrust+Institute,+available+at++(last+visited+October+5,+2016).+In+the+Medicare+Advantage+market,+“97+percent+of+markets+in+U.S.+counties+are+highly+concentrated+and+therefore+lacking+in+significant+MA+plan+competition.+Competition+is+considerably+lower+in+rural+counties+than+in+urban+ones.+Even+among+the+100+counties+with+the+greatest+numbers+of+Medicare+beneficiaries,+81+percent+do+not+have+competitive+MA+markets.+Market+power+is+concentrated+among+three+nationwide+insurance+organizations+in+nearly+two-thirds+of+those+100+counties.”+B.+Biles,+G.+Casillas,+and+S.+Guterman,+“Competition+among+Medicare's+Private+Health+Plans:+Does+It+Really+Exist?”+The+Commonwealth+Fund+(2015):+1,+available+at++(last+visited+October+5,+2016).>Google Scholar
See, e.g., Dafny, L. S., “Are Health Insurance Markets Competitive?” American Economic Review 100, no. 4 (2010): 1399–1431, available at <https://www.aeaweb.org/articles.php?doi=10.1257/aer.100.4.1399> (last visited October 5, 2016); L. Dafny, M. Duggan, and S. Ramanarayanan, “Paying a Premium on Your Premium? Consolidation in the US Health Insurance Industry,” American Economic Review 102, no. 2 (2012): 1161-1185, available at <https://www.aeaweb.org/articles.php?doi=10.1257/aer.102.2.1161> (last visited October 5, 2016).Google Scholar
In local markets where fragmented providers face an insurer with market power, providers' prices either fall or stabilize. However, some evidence shows that these prices are not reflected in lower premiums for plan sponsors. See Dafny, Duggan, and Ramanarayanan, supra note 49. When the situation is reversed — when consolidated providers face fragmented insurers — providers' prices rise. Insurers pass these increases onto payers in the form of higher premiums. See, e.g., Town, R. et al., The Welfare Consequences of Hospital Mergers, No. w12244. National Bureau of Economic Research (2006), available at <http://www.nber.org/papers/w12244> (last visited October 5, 2016); E. E. Trish and B. J. Herring, “How Do Health Insurer Market Concentration and Bargaining Power with Hospitals Affect Health Insurance Premiums?” Journal of Health Economics 42 (July 2015): 104-114. Finally, when both sides of the provider-insurer market are consolidated, one can infer from available evidence that concentrated insurers do not pass along any profits they might wrest from consolidated hospitals. See Dafny, Duggan, and Ramanarayanan, supra note 49; R. M. Scheffler et al., “Differing Impacts of Market Concentration on Affordable Care Act Marketplace Premiums,” Health Affairs 35, no. 5 (2016): 880-888. Indeed, some evidence exists that the two sides just shake hands, sharing together the increased premiums imposed on plan sponsors. See T. Greaney, “New Health Care Symposium: Dubious Health Care Merger Justifications — The Sumo Wrestler and ‘Government Made Me Do It' Defenses,” Health Affairs Blog(blog), February 24, 2016, available at <http://healthaf-fairs.org/blog/2016/02/24/dubious-health-care-merger-justifications-the-sumo-wrestler-and-government-made-me-do-it-defenses/> (last visited October 5, 2016); S. Rosenbaum and D. M. Frankford, Law and the American Health Care System, 2nd ed. (New York: Thomson Reuters/Foundation Press, 2012): at 1339-1341. It seems that consolidation at either or both levels results in higher premiums. (last visited October 5, 2016); E. E. Trish and B. J. Herring, “How Do Health Insurer Market Concentration and Bargaining Power with Hospitals Affect Health Insurance Premiums?” Journal of Health Economics 42 (July 2015): 104-114. Finally, when both sides of the provider-insurer market are consolidated, one can infer from available evidence that concentrated insurers do not pass along any profits they might wrest from consolidated hospitals. See Dafny, Duggan, and Ramanarayanan, supra note 49; R. M. Scheffler et al., “Differing Impacts of Market Concentration on Affordable Care Act Marketplace Premiums,” Health Affairs 35, no. 5 (2016): 880-888. Indeed, some evidence exists that the two sides just shake hands, sharing together the increased premiums imposed on plan sponsors. See T. Greaney, “New Health Care Symposium: Dubious Health Care Merger Justifications — The Sumo Wrestler and ‘Government Made Me Do It' Defenses,” Health Affairs Blog(blog), February 24, 2016, available at (last visited October 5, 2016); S. Rosenbaum and D. M. Frankford, Law and the American Health Care System, 2nd ed. (New York: Thomson Reuters/Foundation Press, 2012): at 1339-1341. It seems that consolidation at either or both levels results in higher premiums.' href=https://scholar.google.com/scholar?q=In+local+markets+where+fragmented+providers+face+an+insurer+with+market+power,+providers'+prices+either+fall+or+stabilize.+However,+some+evidence+shows+that+these+prices+are+not+reflected+in+lower+premiums+for+plan+sponsors.+See+Dafny,+Duggan,+and+Ramanarayanan,+supra+note+49.+When+the+situation+is+reversed+—+when+consolidated+providers+face+fragmented+insurers+—+providers'+prices+rise.+Insurers+pass+these+increases+onto+payers+in+the+form+of+higher+premiums.+See,+e.g.,+Town,+R.+et+al.,+The+Welfare+Consequences+of+Hospital+Mergers,+No.+w12244.+National+Bureau+of+Economic+Research+(2006),+available+at++(last+visited+October+5,+2016);+E.+E.+Trish+and+B.+J.+Herring,+“How+Do+Health+Insurer+Market+Concentration+and+Bargaining+Power+with+Hospitals+Affect+Health+Insurance+Premiums?”+Journal+of+Health+Economics+42+(July+2015):+104-114.+Finally,+when+both+sides+of+the+provider-insurer+market+are+consolidated,+one+can+infer+from+available+evidence+that+concentrated+insurers+do+not+pass+along+any+profits+they+might+wrest+from+consolidated+hospitals.+See+Dafny,+Duggan,+and+Ramanarayanan,+supra+note+49;+R.+M.+Scheffler+et+al.,+“Differing+Impacts+of+Market+Concentration+on+Affordable+Care+Act+Marketplace+Premiums,”+Health+Affairs+35,+no.+5+(2016):+880-888.+Indeed,+some+evidence+exists+that+the+two+sides+just+shake+hands,+sharing+together+the+increased+premiums+imposed+on+plan+sponsors.+See+T.+Greaney,+“New+Health+Care+Symposium:+Dubious+Health+Care+Merger+Justifications+—+The+Sumo+Wrestler+and+‘Government+Made+Me+Do+It'+Defenses,”+Health+Affairs+Blog(blog),+February+24,+2016,+available+at++(last+visited+October+5,+2016);+S.+Rosenbaum+and+D.+M.+Frankford,+Law+and+the+American+Health+Care+System,+2nd+ed.+(New+York:+Thomson+Reuters/Foundation+Press,+2012):+at+1339-1341.+It+seems+that+consolidation+at+either+or+both+levels+results+in+higher+premiums.>Google Scholar