Tuesday, May 25, 2010

qotd: Bust trusts or bust phony competition?

American Bar Association/American Health Lawyers Association 
May 24, 2010
Antitrust and Healthcare
Remarks by Christine A. Varney, Assistant Attorney General, Antitrust Division, U.S. Department of Justice 


The Patient Protection and Affordable Care Act (the Affordable Care Act), called for by the President and enacted by Congress on March 21, relies, in part, on the belief that robust competition and expanded choice will expand coverage while containing cost. 

Yet, like many reforms driven by the power of competition to create consumer welfare, the success of these legislative and regulatory efforts will depend as much upon healthy competitive markets free from undue concentration and anticompetitive behavior as it will upon regulatory change. In short, enactment of the Affordable Care Act makes effective antitrust policy more important than ever. 

The repeal of the antitrust exemption in the McCarran-Ferguson Act as it applies to the health insurance industry would give American families and businesses, big and small, more control over their own health care choices by promoting greater insurance competition and outlawing anticompetitive health insurance practices like price fixing, bid rigging, and market allocation that drive up costs for all Americans.

Two significant aspects of the Affordable Care Act are the establishment of new competitive marketplaces — known as Exchanges — for individuals and small employers to purchase health insurance, and the formation of Accountable Care Organizations (ACOs) and other initiatives to provide for more efficient delivery and payment of Medicare services and Medicaid pediatric services. There can be no doubt that the success of the Exchanges and the ACOs will depend, in large part, on effective competition, both among health care insurers and providers.

The ultimate goal of health care reform is to harness the power of competition, together with regulation, to expand coverage, improve quality, and control the cost of health care for all Americans. The role of antitrust is to ensure that competition is preserved and protected, so that it is there to be harnessed.

I. Enforcement

The goals of health care reform cannot be achieved if mergers between significant insurers in a particular market substantially reduce competition; nor can those goals be realized if dominant insurers use exclusionary practices to blockade entry or expansion by alternative insurers. The same is true if health care providers use supposedly quality-improving or cost-reducing measures simply to raise prices.

Over the last ten years in numerous investigations across the country, the Division has found that many providers give the best discounts only to insurers with significant market share. Thus, new entrants cannot negotiate for competitive provider discounts because they have few enrollees, and they cannot win new enrollees because they do not have competitive discounts. This situation makes it difficult for insurers to enter new geographic areas or for insurers with small enrollment to expand within existing markets.

The Division is committed to vigorously, but responsibly, scrutinizing mergers in the health care industry that appear to present a competitive concern. If we determine that our initial concerns were well founded, we will not hesitate to block the merger or to require the settlement concessions necessary to protect consumers. On the other hand, if we find that the merger may not substantially lessen competition, we will promptly close the investigation and allow the parties to try to show, through the competitive process, that better business methods can deliver more efficient medical care and medical insurance to American consumers.

II. Competition Advocacy

It is important to keep in mind that successful antitrust enforcement also includes effective competition advocacy. (Examples of DOJ competition advocacy are given for Michigan and California.)

III. Entry Project

First, and foremost, we confirmed that the biggest obstacle to an insurer's entry or expansion in the small- or mid-sized-employer market is scale.  New insurers cannot compete with incumbents for enrollees without provider discounts, but they cannot negotiate for discounts without a large number of enrollees. This circularity problem makes entry risky and difficult, helping to secure the position of existing incumbents.

Second, we concluded that it may be easier to enter less concentrated markets, with competition between several large but relatively equal-sized insurers, than it is to enter a market with one or two dominant plans. This is a vitally important finding because it illustrates that a critical economic assumption in antitrust analysis — namely, that the higher profits often associated with concentrated markets will attract new entrants who will help restore competitive pricing — is sometimes made without an adequate evidentiary basis. Indeed, this assumption fails to account for barriers to entry, including barriers based on the inability of entrants to achieve economies of scale that will allow them to compete with incumbents.

One partial explanation for the presence of this phenomenon in health insurance markets comes from our third finding, which is that new entrants or niche players are more likely to receive provider discounts comparable to their competitors' in less concentrated markets than they are in markets dominated by one or two plans.

Finally, our interviews reconfirmed that brokers typically are reluctant to sell new health insurance plans, even if those plans have substantially reduced premiums, unless the plan has strong brand recognition or a good reputation in the geographic area where the broker operates.

IV. Innovation and Efficiency in Health Care Delivery

It is important to keep in mind that not all provider networks involve sufficient financial, clinical, or other economic integration to apply the rule of reason to joint price negotiations with payers. For example, an arrangement among competing providers simply to engage in joint billing, joint collection services, or even joint purchasing of medical supplies or services is generally not the type of economic integration needed to allow providers jointly to set their reimbursement rates under the rule of reason. Rather, such steps simply reflect an effort to coordinate and share some administrative expenses or to receive volume purchasing discounts. 

The economic integration that justifies application of the rule of reason to joint price negotiations with payers requires the sharing of some form of financial risk, such as an agreement by providers to accept a capitated rate, a predetermined percentage of revenue from a health plan, or sufficient clinical integration to induce the group's members to improve the quality and efficiency of the care they provide. While there is no particular formula that can cover all types of legitimate clinical integration, the key is that there must be sufficient clinical integration to motivate the kinds of changes that can achieve real cost-containment or other performance benchmarks.

The Affordable Care Act's development of ACOs is a good example of how providers might work together to deliver more efficient, high-quality care without inhibiting competition, so long as their collaborations are properly constructed. For example, the ACO encourages competing physicians, and possibly other providers, to coordinate care for a defined Medicare population through redesigning care protocols, utilizing health IT, investing in infrastructure, and meeting quality targets. If the ACO meets quality-of-care and cost targets, it can share the savings with HHS.

Properly constructed, ACOs have the potential to improve health care delivery and drive down costs. Thus, as reform moves forward, the Justice Department will work closely with HHS and providers to offer whatever guidance may be needed to ensure that providers pursue beneficial integrated ACOs without running afoul of the antitrust laws.

In conclusion, let me say that I hope I have made clear that the Justice Department believes that antitrust has — and will continue to have — an essential role to play in health care. If health care reform is to harness the power of competitive markets to produce more and more efficient systems, then we must be up to the challenge of ensuring that our health care markets are, in fact, as competitive as possible — protected from undue concentration or anticompetitive conduct with vigorous but responsible enforcement and effective competition advocacy. In this dynamic environment, a successful effort will require more than "business as usual." It will require that we provide clear and accessible guidance to health care consumers, providers, and payers so that there is the predictability needed for health care reform to succeed. I think you will find the Department of Justice generally, and the Antitrust Division specifically, up to the task of ensuring that reform is achieved, competition is maintained, and consumers are benefited.

Comment:  According to Christine Varney, "The Patient Protection and Affordable Care Act (the Affordable Care Act), called for by the President and enacted by Congress on March 21, relies, in part, on the belief that robust competition and expanded choice will expand coverage while containing cost."

This is a remarkable statement. Think about it. The President and Congress believe that competition between private health plans will contain costs when decades of experience with the private insurance industry has proven that this is a false belief. Competing private plans have failed miserably in controlling costs. 

And the promise of competition within the state insurance exchanges? Private insurers currently have free rein of the markets with virtual unlimited ability to compete. Yet we've seen consolidation and concentration within markets, as less dominant companies withdraw. It is likely that only a few major players will be interested in participating in the exchanges. A small player would be unlikely to attract an adequate number of physicians and hospitals to be included in their networks, and consequently would be unable to attract enough individuals to sign up with a plan with such sparse networks. The belief that the state exchanges will promote robust competition between private insurers, which the free market hasn't done, is a pipe dream.

Now think about costs under the Medicare program. Although a non-competitive government program, Medicare has been far more effective in controlling costs than have the private insurance plans. In fact, the private insurance industry has often followed Medicare's lead in innovations in the financing of health care. 

The attempt to introduce private competition into the Medicare program has been a dismal failure. The care covered by the private plans (Medicare plus Choice, and then Medicare Advantage) has cost more than care provided in the traditional Medicare program for individuals with comparable health care needs. The private plans have been totally unsuccessful in their efforts to compete on a cost basis with our public program - Medicare.

Now back to that remarkable statement - the one that says that the President called for and Congress enacted the Affordable Care Act on the belief that robust competition would contain costs. What a sham! President Obama has known all along that the private insurance industry has failed and that it would take a single payer national health program to cover everyone while controlling costs. He has said as much. The members of Congress know that as well. Why else would they keep saying that if this doesn't work (which policy science tells us it can't) then we'll have single payer?

The last thing we need is the Department of Justice providing antitrust oversight of a dysfunctional private insurance market when the obvious solution is to establish our own public monopsony which controls costs through global budgeting and other proven single payer mechanisms. A monopsony eliminates the need for competition to control costs. That would be detrimental in the private sector, but it would be highly beneficial when it is our own public program. 

If we get rid of the private, anti-competitive insurance trusts, then we don't even need the Department of Justice trust busters on the scene.

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