IDEAS FOR REAL HEALTH REFORM - Duke University

Electronic copy available at: http://ssrn.com/abstract=2163749Electronic copy available at: http://ssrn.com/abstract=2163749

REPEAL AND REPLACE

I D E A S F O R R E A L H E A LT H R E F O R M

A PROJECT OF THE AMERICAN ENTERPRISE INSTITUTE

Concentration in Health Care Markets: Chronic Problems and Better Solutions

Barak D. Richman

1150 Seventeenth Street, NWWashington, DC 20036202.862.5800www.aei.org

Electronic copy available at: http://ssrn.com/abstract=2163749Electronic copy available at: http://ssrn.com/abstract=2163749

BEYOND REPEAL AND REPLACE


By Barak D. Richman

A PROJECT OF THE AMERICAN ENTERPRISE INSTITUTEJUNE 2012

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All types of monopoly are not created equal in the USeconomy. In this study, Barak Richman of Duke Uni-versity Law School emphasizes that health careproviders with market power enjoy substantially morepricing freedom than monopolists in other markets.

Though problems of excessive concentration andinsufficient competition in health care markets are notnew, markets for hospital services have recently pre-sented the most serious competition policy issues. Tra-ditional antitrust enforcement tools have done little tohalt the extraordinary consolidation in local hospitalmarkets over the last two decades, which has drivenhigher price increases for inpatient services. Compre-hensive, US-style health insurance further enhances thepricing freedom of health care firms with market power.

The Patient Protection and Affordable Care Act of2010 (PPACA) does little to address the monopolyproblem and may even worsen it. The highly regu-lated and heavily subsidized regime ahead under thePPACA already has triggered a feverish scrambleamong health industry firms (insurers, pharmaceuti-cal manufacturers, physician practice groups, anddevice makers, as well as hospitals) to get bigger mar-ket share and also become better connected politicallyto ensure that they will be among the politicallydependent survivor incumbents in the years ahead.With most of the key decisions in health care financ-ing, coverage, and even treatment likely to be made in

Washington, investments in winning future rounds ofpolitical competition are likely to trump responsive-ness to market competition.

The PPACA poses some additional barriers tomore vigorous competition in health services. Its“minimum medical loss ratio” rules for insurers maysuperficially appeal to some insurance purchasers butcould further disarm payers in aggressive price nego-tiations with providers and stifle insurers’ investmentsin innovative monitoring and improvement of healthcare delivery. The eventual scope and scale of the act’sregulatory requirements for “essential health benefits”also could discourage investments in low-cost, non-medical alternative interventions that can produceresults superior to mandated traditional care.

Richman observes that whereas monopolies inother parts of the economy enable sellers to chargehigher prices while reducing output, comprehensivethird-party health insurance coverage enables manycost-insensitive patients to pay monopolist providers’asking prices rather than being induced to give updesirable health care goods and services. This means“too much of a good thing,” at excessive prices. Thecombination of market concentration and generousinsurance means consumers and providers end upoverspending even more on costly health care.

We need better solutions to this chronic problemof too much concentration and too little competition,

Editor’s Note

including not just tighter review of new hospitalmergers and consolidations but also

• Closer monitoring of the competitive effects ofemerging affordable care organizations;

• Curbing new abuses of “state action” immunity;

• Requiring unbundling of monopolized healthcare services;

• Challenging anticompetitive terms in insurer-provider contracts;

• Promoting interregional competition in healthcare services; and

• Encouraging nonmedical substitutes for “essen-tial” health benefits.

Richman looks at each of these solutions in detail inthis thought-provoking paper.

Instead of doubling down on the “metabolic disor-der” triggered by public policies that encourage over-consumption of conventional, highly subsidized healthinsurance—or resorting to tighter price controls andpublic utility–style regulation of politically mandatedcoverage, we should consider some better remedialmedicine—a stronger dose of market competition.

Thomas P. Miller is a resident fellow at AEI. He directsAEI’s Beyond Repeal and Replace project.


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Executive Summary

Health care providers with market power enjoy sub-stantially more pricing freedom than monopolists inother markets, for a reason not generally recognized:US-style health insurance. Consequently, monopoliesin health care cause undesirable redistribution ofwealth and inefficient allocation of resources, both ofwhich burden consumers at levels beyond those ofother monopolists.

The unusual costliness of monopoly power inhealth care markets demands far more policy atten-tion than it has received. For starters, the health sec-tor needs a more aggressive antitrust policy thateffectively prevents the creation of new provider mar-ket power through mergers, alliances, or governmentimmunity. An immediate need is ensuring that theformation of accountable care organizations under thePatient Protection and Affordable Care Act (PPACA),which in theory might achieve efficiencies throughvertical integrations, do not primarily lead to hori-zontal integrations that give providers additional mar-ket power.

However, because antitrust policy has been soinadequate for so long in the health sector, andbecause it remains unlikely that courts or enforcementagencies will undo past mergers that created thesepowerful provider monopolies, policymakers shouldpursue additional strategies for contesting existing

monopolies. One approach is to apply antitrust rulesagainst “tying” arrangements so that purchasers cancombat providers’ profit-enhancing practice of over-charging for large bundles of services instead of tryingto exploit separately any monopolies they possess invarious submarkets. Another strategy is to use antitrustor regulatory rules to prohibit anticompetitive provi-sions, such as “antisteering” or “most-favored-nation”clauses, in provider-insurer contracts. Policymakerscould also help restore price competition in monopo-lized markets by enabling private payers to negotiateprices for specific provider services and encouraginginsurers to expand the scope of competition—viamedical tourism, for example, or configuring innova-tive health care delivery that bypasses many of theembedded costs in the current system.

Some commentators have suggested that theprovider monopoly problem is severe enough to war-rant consideration of a more radical alternative: regu-lating provider prices. By restricting how insurers canpurchase health services, the PPACA might effectuatea regulatory regime that significantly limits price andnonprice competition. However, even under thePPACA room remains for creative regulatory policiesthat enhance competition in health care markets andencourage better uses of our increasingly scarcehealth care dollars.

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Introduction

Health care providers and suppliers with monopolypower impose enormous costs on both private andpublic budgets, yet their distortions on the US mar-ketplace have avoided sorely needed scrutiny andredress.1 In fact, many policymakers and commenta-tors have taken a benign view of health care monop-olies, suggesting that they serve important publicpurposes and thus should receive favorable treat-ment from antitrust rules designed to require com-petition. The truth is, however, that health caremonopolies—for-profit and nonprofit alike—aremore, not just equally, harmful to both consumersand the general welfare than monopolies of otherkinds. They lead to higher prices, create greater inef-ficiencies, and cause larger economic rents fromfavorable regulatory treatment than even typicalmonopolists. They impose economic costs that sim-ply are not sustainable.

The main culprit responsible for making healthcare monopolies so costly is health insurance—atleast, the kind that covers most Americans—and therules, regulations, and customs that shape its provi-sion in US markets. Certain features of US-style healthinsurance greatly enhance the pricing freedom of healthcare firms with market power, producing much largermonopoly profits and much greater redistribution of

wealth than would result from monopoly power inmarkets where consumers face prices directly. US-style health insurance also fosters serious inefficien-cies in resource allocation, albeit not the kind ofmisallocation that economic theory normally associ-ates with the exercise of monopoly power.2

These distortive consequences of combiningmonopoly power with US-style health insurance willonly amplify after the Patient Protection and Afford-able Care Act (PPACA), enacted by Congress in 2010,expands the ranks of the insured. The PPACA notonly does little to address the current monopoly prob-lem but will even add substantially to providers’ andsuppliers’ profits by increasing the pervasiveness ofUS-style insurance. Indeed, many elements in thePPACA restrict the freedom of third-party purchasersto choose less expensive coverage and limit variationin insurance products, which will further enshrine theharmful features of US-style insurance that magnifythe costs of monopoly power. Unless a more effectivecompetition policy can be implemented in the healthsector, many millions of additional Americans willsoon carry exactly the kind of health coverage thatcurrently serves provider and supplier monopolists sowell. If anything, the PPACA makes a strong antimo-nopoly policy in health care even more imperative.

One initial policy recommendation is that mergers,consolidations, and other potentially monopolistic

practices of health care providers—including the veryrecent wave of efforts to consolidate market poweraround so-called accountable care organizations(ACOs)—should be subject to special, not relaxed,vigilance by antitrust agencies and courts. Butbecause antitrust policy has for too long permittedhealth care monopolies to grow in many markets, weneed other policy initiatives to mitigate the harm fromalready-concentrated provider markets. Policymak-ers, therefore, should scrutinize whether currenthealth care monopolists are seeking to illegallyexploit, expand, or enshrine their market power.Common practices such as bundling services,demanding exclusive dealings with insurers, andrestricting price shopping should invite rigorousantitrust attention. Policymakers could also helprestore price competition in monopolized markets byenabling private payers to negotiate prices for specificprovider services and encouraging insurers to expandthe scope of competition—via medical tourism, forexample, or configuring innovative health care deliv-ery that bypasses many of the embedded costs in thecurrent system.

Despite its great economic costs and conse-quences, the potency of this combination ofmonopoly power and the US-style insurancesystem has gone largely unnoticed by the antitrustagencies and economists. It is additionally trou-bling that Congress largely ignored these severelydetrimental aspects of the American system offinancing health care, including its potential to fur-ther enrich industry monopolists and imposeunbearable inefficiencies, when deliberating andenacting the PPACA.

Nonetheless, policymakers and industry leadersstill can avail themselves of several tools to infusecompetition into health care markets. The case for a

more rigorous competition policy in the health caresector is significantly stronger than even its advocateshave generally appreciated. Despite past failure to rec-ognize fully the dangers of health care monopolies,today’s innovative payers, nonmonopolist providers,and policymakers can exert sufficient competitivepressures to begin controlling costs and bringingvalue to premium payers.

How Health Insurance Compounds the Harmsof Provider Monopoly

The past several decades have witnessed extraordi-nary consolidation in local hospital markets, with aparticularly aggressive merger wave occurring in the1990s. By 1995, hospital merger and acquisitionactivity was nine times its level at the start of thedecade, and by 2003, almost 90 percent of Ameri-cans living in the nation’s larger metropolitan statisti-cal areas (MSAs) faced highly concentrated providermarkets.3 This wave of hospital consolidation, pre-dictably, was alone responsible for price increases forinpatient services of “at least five percent and likelysignificantly more,” and similarly responsible forprice increases of 40 percent where merging hospi-tals are closely located.4 A second merger wave from2006 to 2009 significantly increased the hospitalconcentration in thirty MSAs,5 and the vast majorityof Americans are now subject to monopoly power intheir local hospital markets.

In economic theory, monopolies are objectionablebecause they enable sellers to charge higher pricesand thereby cause some consumers (who would bewilling to pay a competitive price) to forgo enjoy-ment of the monopolized good or service. Fortu-nately, such output-reducing effects are greatlylessened in health care markets because the manypatients covered by health insurance can easily paymonopolist providers’ asking prices rather thanbeing induced to give up these desirable goods andservices. But unfortunately, precisely because there isno output reduction in response to monopoly priceincreases, health insurance both amplifies the redis-tributive effects of provider and supplier monopolies


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Certain features of US-style health

insurance greatly enhance the pricing

freedom of health care firms

with market power.

and inflicts allocative inefficiencies that are arguablymore distortive and costly than those caused by typ-ical monopolists.

Supra-Monopoly Pricing. In the textbook model, amonopoly redistributes wealth from consumers topowerful firms. The monopolist’s higher price enablesit to capture for itself much of the welfare gain, or “sur-plus,” consumers would have enjoyed if they had beenable to purchase the valued good or service at a lowercompetitive price. In health care, insurance puts themonopolist in an even stronger position because con-sumers do not face, and therefore are not deterred by,monopoly prices. This effect appears in theory as asteepened demand curve for the monopolized good orservice. Whereas most monopolists encounter reduceddemand with each price increase, health insurancemutes the marginal consequences of rising prices.

If health insurers perfectly represented their sub-scribers’ preferences, their policies would reflect con-sumers’ demand curves and pay for services at pricesthat individual insureds would, absent insurance, bewilling to pay themselves. But deficiencies in thedesign and administration of real-world health insur-ance prevent insurers from reproducing theirinsureds’ preferences and thus heavily magnifymonopoly power. For legal, regulatory, and other rea-sons, health insurers in the United States are in noposition (as consumers themselves would be) torefuse to pay a provider’s high price even if it appearsto exceed the service’s likely value to the patient.Instead, insurers are bound by both deep-rooted con-vention and their contracts with subscribers to pay forany service deemed advantageous (and termed “med-ically necessary” under rather generous legal stand-ards) for the patient’s health, whatever the cost.6

Consequently, close substitutes for a provider’s serv-ices do not check its market power as they ordinarilywould for other goods and services. Indeed, puttingaside the modest effects of cost sharing on patients’choices, the only substitute treatments or servicesinsured patients are likely to accept are those theyregard as the best ones available. Unlike the ordinarymonopolist that sells directly to cost-conscious con-sumers, the rewards to a monopolist who sells goods or

services purchased through health insurance may eas-ily and substantially exceed the aggregate consumersurplus patients would derive at competitive prices.

Thus, health insurance enables a monopolist of acovered service to charge substantially more thanthe textbook “monopoly price,” thereby earningeven more than the usual “monopoly profit.” Themagnitude of the monopoly-plus-insurance distor-tion has sometimes surprised even its beneficiaries.7

Of course, since third-party payers (and notpatients) are covering the interim bill, these extraor-dinary profits made possible by health insurance areearned at the expense of those bearing the cost ofinsurance. Insureds, even when their employers arethe direct purchasers of health insurance, are ulti-mately the ones seeing their take-home pay shrinkfrom hikes in insurance premiums caused byprovider monopolies.

Discussions of antitrust issues in the health caresector rarely, if ever, explicitly observe how healthinsurance in general, or US-style insurance in par-ticular, enhances dominant sellers’ ability to exploitconsumers. Although scholars have previouslyobserved that prices for health services are muchhigher in the United States than in other Organisationfor Economic Co-operation and Development(OECD) nations (without observable differences inquality),8 and although many have observed thatprovider market power has been a significant factor ininflating those prices,9 few have observed the syner-gistic effects of monopoly and health insurance.

Perhaps more notably, despite the huge implica-tions for consumers and the general welfare, the spe-cial redistributive effects of monopoly in health caremarkets are not mentioned in the antitrust agencies’definitive statements of enforcement policy in thehealth care sector.10 Antitrust analysis of hospitalmergers—as well as of other actions and practices thatenhance provider or supplier market power—musttherefore explicitly recognize the impact of insuranceon health care markets. The nation will find it farharder, perhaps literally impossible, to afford thePPACA’s impending extension of generous health cov-erage to millions of additional consumers if monopo-lists of health care services and products can continue

CONCENTRATION IN HEALTH CARE MARKETS Barak D. Richman

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to charge not what consumers would prefer to bearbut instead what insurers, because of severe marketfailures, are required to bear.11

Misallocative Consequences. Allowing providers togain market power through mergers not only causesextraordinary redistributions of wealth but also con-tributes to severely inefficient resource allocation. Inan ironic contrast to the output restrictions associatedwith monopoly in economic theory, the misallocativeeffects cited here mostly involve the production andconsumption of too much—rather than too little—ofa generally good thing. These misallocations are boththeoretically and practically important. They providestill another new reason for special antitrust and othervigilance against providers’ monopolistic practices,particularly scrutinizing anticompetitive mergers andpowerful joint ventures.

Even in the absence of monopoly, conventionalhealth insurance enables consumers and providers tooverspend on costly health care. This is, of course, thefamiliar effect of moral hazard—economists’ term forthe tendency of patients and providers to spendinsurers’ money more freely than they would spendthe patient’s own. To be sure, some moral-hazardcosts are justified as the unavoidable price of protect-ing individuals against unpredictable, high-costevents. But American health insurers are significantlyconstrained in introducing contractual, administra-tive, and other measures to contain such costs. US-style health insurance, therefore, is constrained inlimiting the allocative inefficiencies from moral haz-ard. Although uncontrolled moral hazard is a prob-lem throughout the health sector, combininginefficiently designed insurance with providermonopolies compounds the economic harm.

The extraordinary profitability of health-sectormonopolies also introduces a dynamic source ofresource misallocation by intensifying firms’ usualinducement to seek market dominance. The introduc-tions of new technologies have been a primary sourceof health care cost increases over the past severaldecades—responsible for as much as 40–50 percent.12

And even though many innovations offer only mar-ginal value, their monopoly power under intellectual

property laws secure lucrative payments from insurerswhose hands are tied. Although many have recognizedthat new technologies are a principal source of unsus-tainable increases in health care costs, and several oth-ers have recognized how the moral hazard of insurancehas both fueled technology-driven cost increases anddistorted innovation incentives (toward cost-increasinginnovations at the expense of cost-reducing innova-tions),13 few have recognized that this is a general prob-lem with combining monopoly with insurance ratherthan a generic inefficiency from moral hazard.

Provider monopolies also inflict economic harmby spending heavily to sustain current monopoly barriers. Indeed, Richard Posner has theorized that amonopoly’s most serious misallocative effect is not theoutput reduction recognized in theoretical models butinstead the monopolist’s strenuous efforts to obtain,defend, and extend market power.14 This is especiallytrue for health care monopolists because so manyare maintained with legal and regulatory barriers—certificate-of-need laws, licensure requirements, andregulations restricting limitations on provider net-works, for example. Thus, health care monopolistsare willing to spend heavily (up to the private value ofthe monopoly) on legal and political resources thatimpede competition. This contrasts starkly with thenarrative in which we reward monopolies (withmonopoly profits) for their investing in the “superiorskill, foresight, and industry” that creates social value.15

Mergers of all kinds deserve serious scrutiny fromantitrust enforcers because they often amount to aneasy and unjustified shortcut to gaining marketpower. Although proponents of consolidations inhealth care provider markets usually tout anticipated


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The extraordinary profitability of

health-sector monopolies introduces

a dynamic source of resource

misallocation by intensifying firms’

usual inducement to seek

market dominance.

efficiencies from combining and rationalizing opera-tions, such efficiencies are seldom identified with pre-cision, and the opportunity to increase theirbargaining power vis-à-vis private payers appears to bethe far likelier explanation for all such mergers in con-centrated health care markets.16

In light of the disproportionately large share ofnational resources already being spent on health carein the United States compared to every other nationin the world,17 the enormous burden of distortivehealth-sector monopolies provide compelling, evenalarming, reasons to apply the antitrust laws with par-ticular force against health care providers and suppli-ers with market power. If antitrust enforcement is notup to the task of restoring competition in marketswhere it is lacking, political actors may resort insteadto regulatory measures of mixed economic wisdom.

The Problem of Nonprofit Hospitals. Nonprofit hos-pitals remain the primary provider of the nation’s hos-pital care, responsible for 73 percent of admissions, 76percent of outpatient visits, and 75 percent of hospitalexpenditures.18 Yet ever since the antitrust laws werefirst applied systematically in the health care sector inthe mid-1970s, some judges and scholars have resis-ted giving the statutory policy of fostering competitionits due in health care settings, especially in casesinvolving nonprofit hospitals. Between 1995 and2000, for example, antitrust enforcers encounteredsustained judicial resistance when challenging mergersof nonprofit hospitals and suffered a six-case losingstreak in such cases in the federal courts.19

Although most of those pro-merger decisionsostensibly turned on findings of fact (mostly in iden-tifying a geographic market in which to estimate themerger’s probable effects on competition), those find-ings were often so arbitrary as to signify judicial skep-ticism about the wisdom of applying antitrust lawrigorously in hospital markets.20 The government hasmore recently won back some of the legal ground itlost,21 but its inability to apply antitrust law rigor-ously and systematically in the big business thathealth care has become is one important reason whymany health care markets are now dominated byfirms with alarming pricing power.22

One source of judicial resistance to antitrustenforcement in these cases—and a source of protec-tion for would-be nonprofit hospital monopolists—was the belief, espoused by some vocal academics, thatnonprofit hospitals do not exploit monopoly powerthey might enjoy. This view is now widely discredited,with abundant empirical evidence reporting that non-profit hospitals do, as economic theory would predict,take advantage of their pricing power.23

Moreover, as the previous section of this reportmakes clear, this wrangling over whether nonprofitmonopolists are less likely to behave worse than for-profit ones severely missed the most important theo-retical concerns and empirical evidence. Whileresearchers fretted over whether organizational forminfluenced pricing policies, they did not recognizethe overwhelming danger of combining hospitalmonopolies—for-profit and nonprofit alike—withUS-style insurance.

A second source of judicial resistance to antitrustenforcement has been the implicit, and often explicit,belief harbored by many judges that nonprofit hospi-tals monopolists would put to good use any marketpower they might possess.24 Great reason exists toquestion this judicial presumption as well. Non-profit, tax-exempt hospitals are required by theircharters and the federal tax code to retain their prof-its and use them only for “charitable” purposes.Thus, if one could assume that the exercise of marketpower by nonprofit hospitals generally shifts wealthfrom richer individuals to poorer ones, rather thanthe opposite, there would be at least an argument forviewing nonprofit hospital monopolies as benign forantitrust purposes. Although such an argumentwould be based on a questionable reading of theantitrust statutes, one widely noted case allowedprestigious universities to act anticompetitively todirect their limited scholarship funds toward lower-income students.25 One easily senses in hospitalmerger cases a similar judicial dispensation in favorof nonprofit enterprises that raise prices for seem-ingly progressive purposes.

But however antitrust doctrine views (or shouldview) monopolies dedicated to progressive pursuits, itis far from clear that nonprofit hospitals reliably use


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their dominant market positions to redistribute wealthonly in progressive directions. A controversial rulingby the Internal Revenue Service interpreted the Rev-enue Code’s charitable-purposes requirement verybroadly, allowing hospitals to maintain tax-exempt sta-tus if they expend untaxed surpluses on anything thatarguably “promotes health.”26 This includes muchmore than just caring for the indigent. In fact, that rul-ing (which relaxed an earlier requirement that anexempt hospital “must be operated to the extent of itsfinancial ability for those not able to pay for the serv-ices rendered”27) came when the Medicare and Med-icaid programs were relatively new and private healthinsurance was expanding. Certainly the pervasivenessof public and private insurance, particularly if thePPACA is fully implemented, undermines the primaryrationale behind encouraging nonprofit hospitals to becharitable in the original sense. Moreover, federal,state, and local governments separately and substan-tially subsidize nonprofit hospitals’ most clearly chari-table activities, through both special tax exemptionsand direct financial assistance. Thus, activities thatwere provided originally in exchange for tax-exemptstatus are now largely paid for through direct govern-ment tax subsidies or insurance payments.

In fact, true charity has in recent years accountedfor only a relatively small fraction of what nonprofithospitals do in return for their federal tax exemp-tions.28 Such hospitals can usually qualify for exemp-tions merely by spending their surpluses on medicalresearch; training various types of health care person-nel; or, most important, acquiring state-of-the-artfacilities and equipment, which (ironically) can alsosecure and enhance their market dominance. Many ofthese activities confer significant benefits on interestgroups and individuals that are relatively high on theincome scale. To be sure, most of the activities andprojects financed from hospital surpluses are hard tocriticize in the abstract. But many of them are not soobviously progressive in their redistributive effects (orotherwise so obviously worthy of public support) thatantitrust prohibitions should be relaxed so hospitalscan finance more of them.

These minimal requirements for tax exemption pro-vide no assurance that nonprofit hospital monopolists

are spending their extraordinary surpluses only toaddress individuals’ or society’s most pressing needs.Indeed, only if one takes the common but unthinkingor self-serving view that health spending, like beauty, isits own excuse for being is it possible to believe thatnonprofit hospitals’ discretionary activities and projectsnecessarily represent socially appropriate uses for theresources consumed. To the contrary, managers of non-profit firms have incentives to maintain monopolies tofund the construction and expansion of empires thatenhance their self-esteem and professional influence.Such empire building is most easily accomplished byobtaining market power and using it to generate sur-pluses with which to further entrench and extend afirm’s dominance.

For several decades, ever since private insurance,Medicare, and Medicaid substantially reduced hospi-tals’ charitable burdens and began to pour newresources into health care, nonprofit monopolies havebeen channeling funds into health care uses that,other than being labeled “charitable” for tax purposes,have never been reliably legitimized as priorities byeither market or political processes. In fact, overpro-duction and overconsumption of health services iscurrently an arguably bigger problem than scarcity.Therefore, permitting nonprofits to accumulatemonopoly power to subsidize the provision of addi-tional health services exacerbates, not solves, thenation’s health care crisis. In the aftermath of a deeprecession, policies that increase spending on expen-sive but questionably or marginally valuable healthservices can only divert newly scarce (often bor-rowed) resources away from what many consumersor taxpayers might regard as far more essential uses.

A Head Tax. The bulk of the financial responsibilityto sustain providers’ supra monopoly pricing, excessoutput, and “charitable” activities ultimately falls moreor less equally on individuals bearing the cost of healthinsurance premiums. To be sure, local and federal tax-payers pick up part of the bill through subsidies, enti-tlement programs, assorted multipliers in Medicarereimbursement, and the like. But the lion’s share of thisfinancial burden falls on private premium payers in amanner that closely resembles a “head tax”—that is, a


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tax levied equally on individuals regardless of theirincome or ability to pay. Few methods of publicfinance are more regressive and unfair than this. Thosewho take a benign view of the seemingly good worksof health care providers should focus more attentionon who (ultimately) pays for and who benefits fromthose nominally charitable activities.29

The regressive redistributive effects of nonprofithospitals’ monopolies appear never to have beengiven due weight in antitrust appraisals of hospitalmergers.30 To be sure, pure economic theory with-holds judgment on the rightness or wrongness ofredistributing income because economists have noobjective basis for preferring one distribution ofwealth over another. But the antitrust laws principallyenjoy general political support because the consum-ing public resents the idea of illegitimate monopolistsenriching themselves at the public’s expense.31

In sum, certain judges’ sanguine attitude towardnonprofit monopolies has contributed to what now isa crisis in provider markets. The ubiquity of nonprofithospitals with market power now constitutes a sig-nificant source of the provider monopoly problem inhealth care. Recognizing the extraordinary pricingfreedom that US-style health insurance confers onmonopolist providers, along with the magnifiedlosses in efficiency and distributional equity that suchpricing freedom causes, one can conclude only thatthese judicial sympathies played significant roles inwhat can only be described as a colossal failure ofantitrust enforcement.

A New Antitrust Agenda?

Can government, through antitrust enforcement orotherwise, do anything about the problem ofprovider and supplier market power in health caremarkets? Although the enforcement agencies andcourts should certainly scrutinize new hospital merg-ers and similar consolidations with greater skepti-cism, preventing new mergers cannot correct pastfailures to maintain competition in hospital andother markets. Enforcers may challenge the legalityof previously consummated mergers, as the Federal

Trade Commission (FTC) did in the Evanston North-western case, but practical and judicial difficulties infashioning a remedy make it difficult to restore thecompetition that the original merger destroyed. TheFTC was unwilling, for example, to demand the dis-solution of Evanston Northwestern Healthcare Corp.and instead merely ordered its jointly operated hos-pitals to negotiate separate contracts with healthplans—a remedy, incidentally, that gave the negotiat-ing team of neither hospital any reason to attractbusiness from the other.32 Although the FTC mightseek more substantial relief to unwind other mergers-to-monopoly, the general rule seems to be that old,unlawful mergers are amenable to later breakup onlyin the unusual case when the component parts havenot been significantly integrated.33

In any case, given their past skepticism aboutantitrust enforcement in health care markets,34 courtswould be hard to enlist in an antitrust campaign toroll back earlier consolidations. Thus, a policy agendacapable of redressing the provider monopoly problemin health care will need to employ other legal andregulatory instruments. A first order of businesswould be to fastidiously prevent the formation of newprovider monopolies, since health care providers con-tinue to seek opportunities to consolidate—throughthe recent wave of ACOs, in particular. Moreover,health care providers are seeking to consummatemergers by claiming, through questionable legal argu-ments, immunity from the antitrust laws. Finally, anarray of other enforcement policies can target monop-olists behaving badly—those trying to either expandtheir monopoly power into currently competitivemarkets or foreclose their market to possible entrants.Thus, several fronts remain available for policymakersto wage antitrust battles. A new antitrust agendabegins with recognizing the extraordinary costs tohealth care provider monopolies and continues withaggressive and creative antimonopoly interventions.

The Special Problem of Accountable Care Organi-zations. A primary target for a revived antitrustagenda is the emerging ACOs, whose developmentthe PPACA is designed to stimulate. The PPACAencourages providers to integrate themselves in ACOs


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for the purpose of implementing “best practices” andthereby providing high-quality coordinated care at alow cost. To induce providers to form and practicewithin these presumptively more efficient entities, thePPACA and its implementing regulations instruct theMedicare program to share with an ACO any cost sav-ings it can demonstrate, permitting proposed ACOseither to keep any savings beyond a minimum savingsrate (MSR) of up to 3.9 percent while being insuredagainst losses or to keep savings beyond an MSR of 2percent while being exposed to the risk of losses.35

ACOs are being hailed as a meaningful opportunity toreform our deeply inefficient delivery system, butpromising health policy initiatives often lead to disap-pointing projects and unintended consequences. Oneserious risk in forming ACOs is that they may createeven more aggregation of pricing power in the handsof providers.

ACOs, in theory, could offer an attractive solutionto problems stemming from the complexity and fragmentation of the health care delivery system.36

Together with good information systems and com-pensation arrangements, vertical integration of com-plementary health care entities can achieveimportant efficiencies by reducing medical errors,eliminating duplicative services and facilities, andcoordinating elements needed to deliver high-quality,patient-centered care.37

Skeptics, who include FTC CommissionerThomas Rosch, note that “available evidence suggeststhat the cost savings [from ACOs] will be very smallto nonexistent” and warn that any purported reduc-tions in expenditures “will simply be shifted to payorsin the commercial sector.”38 Others have warned thatefforts to replicate early successes in integrated deliv-ery systems—which serve as models for reformers’aspirations—have often failed, partly because manyphysicians are reluctant to forgo the lucrative possi-bilities of unconstrained fee-for-service practice andpartly because physicians who do integrate with hos-pital systems predictably resist adhering to efficiency-enhancing management. Moreover, many ACOs arereportedly being sponsored by hospitals, which anyefficient delivery system would use sparingly. Hospi-tal investments might be designed to preempt control

of ACOs, rather than harness their potential efficien-cies, so any cost savings would come at the expenseof others.

In contrast to the varying views on their potentialbenefits, there is widespread agreement that ACOscould engineer and leverage greater monopoly powerin an already-concentrated health care market.39

Organizers of ACOs are forging collaborations amongentire markets of physicians and hospitals, entitiesthat would otherwise compete with one another. TheNew York Times has reported “a growing frenzy ofmergers involving hospitals, clinics and doctor groupseager to share costs and savings, and cash in on the[ACO program’s] incentives.”40 In fact, providers’main purpose in forming ACOs may not be to achievecost savings to share with Medicare but to strengthentheir market power over purchasers in the private sec-tor. ACOs “may be the latest chapter in the steadyaccumulation of market power by hospitals, healthcare systems, and physician groups, a sequel to thewaves of mergers in the 1990s when health care enti-ties sought to counter market pressure from managedcare organizations.”41

Antitrust policymakers therefore should carefullyscrutinize the formation of ACOs. Conventionalantitrust reasoning appropriately permits efficiencyclaims to overcome concerns about concentration onthe seller side of the market, and any review of a pro-posed ACO would certainly consider the potentialbenefits of vertical integration. But any antitrustanalysis should also recognize that health insurancegreatly exacerbates the price and misallocative effectsof monopoly. Notwithstanding the special efficiencyclaims that can be made on behalf of ACOs, thepotency of health care monopolies strongly warrants


10

Permitting nonprofits to accumulate

monopoly power to subsidize the

provision of additional health services

exacerbates, not solves, the nation’s

health care crisis.

especially stringent anticoncentration, antimergerpolicy in the health care sector. These heighteneddangers should be weighed heavily in appraising anACO’s likely market impact.

It remains to be seen whether the FTC and Depart-ment of Justice (DOJ) will have the opportunity toapply this necessary level of scrutiny. The revised rules,released by the Centers for Medicare and MedicaidServices (CMS) in November 2011 to implement theACOs “Shared Savings Plan,” indicate that the antitrustagencies will apply the Rule of Reason to determinewhether a proposed ACO will violate the ShermanAct, and proposals in which an ACO’s independentparticipants have low shares within a relevant marketcan fall within a “safety zone” to evade scrutiny alto-gether. Moreover, unlike the proposed rules in March2011, antitrust review will not be mandatory for pro-posed ACOs.

This leaves the implementing agencies with a greatdeal of discretion—and keeps their feet far from theproverbial fire—in ensuring that an ACO complieswith the principles of competition. The agenciescould demand a heightened showing that a proposedconsolidation will generate identifiable efficiencies,and they similarly might demand that an ACO’s pro-ponents assume the burden of showing an absence ofsignificant horizontal effects in local submarket. Theagencies could also impose demanding structuralremedies to illegal concentrations, perhaps encourag-ing the vertical integration envisioned by the PPACA’sproponents while reducing the horizontal collabora-tion that providers so routinely pursue. Finally, theagencies could impose conduct (nonstructural) reme-dies to potentially harmful ACOs, such as requiringnonexclusive contractual arrangements with payersand, especially, with regional hospitals. How the FTCand DOJ monitor the formation of ACOs could deter-mine whether the PPACA meaningfully advances a(desperately needed) reorganization of health caredelivery or merely offers a loophole to permit greaterconsolidation.

The CMS might also fill an independent role inmeaningfully preventing ACOs from furthering anti-competitive harm in health care marketplaces. Thefinal rules permit the CMS to share savings with

ACOs only after they meet quality benchmarks,which the CMS administrators ought to take seri-ously.42 The rules also require cost and quality report-ing, and the CMS might require a demonstration ofmeaningful quality improvements and cost savings toreceive a continued share of Medicare savings. TheCMS might even condition an ACO’s permission tomarket to private payers on its demonstration that itsprices to private payers did not increase significantlyfollowing its formation.

One might wonder, of course, whether a govern-mental single payer like Medicare has the mission,impulse, or requisite creativity to foster competitiveprivate markets for health services. Perhaps the CMS’snew Center for Medicare and Medicaid Innovationcould shape the institution’s capacity to affect reform.It might be equally likely, unfortunately, that Medicarewill aim to preserve its own solvency by encouragingthe shifting of costs to the private sector—and it mayeven reward ACOs’ cost shifting as cost savings.43 Thisis the danger with using a large and unavoidably inflex-ible bureaucracy to engineer an effort to induce innova-tion. Nonetheless, you go to war with the bureaucracyyou have, and the CMS should concentrate its sub-stantial resources on developing competition-orientedregulations that cautiously monitor the market impactof emerging ACOs.

Challenging “State Action” Immunity. A commonsubplot in antitrust law has cartels or monopolistsavoid liability by obtaining sanction from a state orlocal government. The “state action immunity” doc-trine permits states to regulate and even authorize anti-competitive conduct, provided that (1) there is aclearly articulated policy designed to displace compe-tition, and (2) the state actively supervises the conductunder the regulatory scheme.44 The upshot is thatstates can, if they so choose, immunize anticompeti-tive conduct from Sherman Act liability. Predictablebeneficiaries of state protection have included astatewide collaboration of raisin growers,45 regionalmotor carriers seeking to set common rates,46 and atown’s politically powerful billboard monopolist.47

The doctrine’s parameters, which turn on what con-stitutes a “clear articulation” and “active supervision,”


11

are notoriously limber.48 Nonetheless, recent efforts byhealth care providers to invoke the doctrine havepushed the outer bounds of reason.49 Perhaps the prof-itability of health care monopolies has encouragedproviders to develop new, previously ridiculed legalarguments that would protect their market dominancefrom prosecution. In any event, the growing popularityof invoking state action immunity, and the breadth ofthose invocations, needs to be stopped in its tracks, asthe last thing either antitrust law or health policy needsis immunity for health care monopolists. Limiting thescope of state action immunity might be the next bat-tlefront in antitrust enforcement in the health sector.

Three recent efforts to expand state action immu-nity are now unfolding (unsurprisingly, all involvingthe health care industry):

1. In Michigan, the DOJ is suing the state’s Blue-Cross BlueShield for engaging in anticompeti-tive agreements with the state’s dominantprovider.50 BlueCross claimed that it is immunefrom the Sherman Act because “Michigan cre-ated Blue Cross Pursuant to a ComprehensiveHealth Care Regulatory Scheme.”51

2. In North Carolina, the state’s Board of DentalExaminers has attracted FTC scrutiny in itsefforts to block nondentists in the state fromproviding teeth-whitening goods or services.52

The board sued to block the FTC proceeding,claiming that it is “an agency of the sovereignState of North Carolina” and thus is beyond the FTC’s prosecution.53

3. Parties pursuing a merger of two hospitals inAlbany-Dougherty County, Georgia—a mergerthat would unquestionably create a monopoly—have claimed immunity from an FTC challengebecause the county’s Hospital Authority nomi-nally owns the acquiring hospital and thuswould own the monopoly.54

Each of these immunity claims stands on extremelyshaky logic. When Michigan, like all states, enacted acomprehensive regulatory scheme, it issued no clear

articulation that the regulatory structure would encour-age or condone anticompetitive contracting. AlthoughNorth Carolina ostensibly authorized the Board of Den-tal Examiners to engage in some self-governance, it didnot give the board exclusive control over economicactivity that requires no dental expertise. And theAlbany-Dougherty County Hospital Authority’s offer-ing of a sham cover for a merger-to-monopoly is nei-ther consistent with articulated Georgia policy noractively supervised by state policymakers. The properscope of the state action immunity doctrine immunizesnone of this anticompetitive conduct.

The district court in Michigan appropriatelyrejected BlueCross’s immunity claim, and the SixthCircuit affirmed that ruling following BlueCross’s inter-locutory appeal. The district court in North Carolinasimilarly dismissed the dentists’ motion to dismiss (fol-lowing two very erudite opinions by FTC commis-sioners Kovacic and Rosch that rejected immunity),and the litigation is now pending before the FourthCircuit following the dentists’ appeal. Remarkably, in atragically terse opinion, the Eleventh Circuit con-curred with hospitals’ claim for immunity. Reasoningthat the state granted the county Hospital Authoritythe power to purchase hospitals, the court ruled, “Ingranting the power to acquire hospitals, the legislaturemust have anticipated that such acquisitions wouldproduce anticompetitive effects.”55 The FTC has peti-tioned the Supreme Court to review the case.

These three cases offer the circuit courts and theSupreme Court the opportunity to clarify the stateaction immunity doctrine and limit the growinglypopular maneuver among health care providers to getprotection for anticompetitive conduct. Leaving asidethe providers’ weak doctrinal arguments, both thecourts and antitrust enforcers should recognize theconsequences of leaving unchallenged a legal oppor-tunity for provider monopolists to avoid prosecution.The dangers of permitting monopolists to dominatecertain markets are exacerbated when a monopolisthas an additional opportunity to exploit a politicalprocess that bestows monopoly power. Both the like-lihood of monopolization and the potential for politi-cal graft are greatly increased. In a highly regulatedand highly subsidized industry in which political


12

machinery already serves private ambitions, the bor-ders of a doctrine that protects politically connectedmonopolists need to be carefully patrolled.

Requiring Unbundling of Monopolized Services.Any effort to restore price competition in health caremarkets must include a strategy that targets already-concentrated markets. Antitrust enforcers thereforeneed to develop policy instruments that target currentmonopolists, both to limit the economic harm theyinflict and to thwart their efforts to expand theirmonopoly power.

One promising step could be to require hospitalsand other provider entities to unbundle, at a pur-chaser’s request, certain services so that the purchasercan negotiate prices. Providers routinely bundle serv-ices for unified payments, which can increase effi-ciency and reduce costs associated with providingclosely intertwined services. However, whenproviders bundle monopolized and unmonopolizedservices, anticompetitive consequences can result: themonopolist can squeeze out rivals in the competitivemarket, creating for itself another monopoly, and bysquelching rivals in the competitive market, themonopolist limits entrants’ ability to challenge itshold on the monopolized market. The magnified con-sequences of health care monopolies should heightenconcern over practices that can expand or enshrineprovider monopolists.

The general antitrust rule on tying is that a firmwith market power may not force customers to pur-chase unwanted goods or services.56 If this principleis invoked to frustrate hospitals’ practice of negotiat-ing comprehensive prices for large bundles of serv-ices, purchasers could then bargain down the pricesof services with good substitutes.57 If a hospital stillwishes to fully exploit its various monopolies, itwould have to do so in discrete negotiations, makingits highest prices visible. Health plans could thenhope to realize significant savings by challenging suchmonopolies, either by inducing enrollees to seek carein alternative venues (effectively expanding the geo-graphic market) or by encouraging other providers toenter the monopolized market. Often the mere threatof new entry is sufficient to modify a monopolist’s

demands, but entry is more credible if the monopo-lized service is discrete and associated with a distinctprice that entrants can target.

To date, there have been only limited efforts to pre-vent hospitals from tying their services together inbargaining with private payers.58 Although hospitalswould argue that bundling generally makes for effi-cient negotiating and streamlined delivery of care, theadded costs of bargaining service by service could beeasily offset by the lower prices resulting from greatercompetition. Recent scholarship on tying andbundling confirms that permitting a hospital monop-olist to tie unrelated services expands the monopoly’sreach, profitability, and longevity and harms con-sumer welfare.59 The extreme harm from health caremonopolies makes these practices particularly appro-priate for antitrust scrutiny.

A workable rule would permit antitrust law toempower a purchaser to demand separate prices fordivisible services that are normally bundled.60

Although one hopes that antitrust courts and a cred-ible threat of treble damages would discourage aprovider monopolist from retaliating against any pur-chaser that aggressively challenges its anticompetitivepractices, the costs and delays from such complexantitrust actions suggest that public enforcementshould supplement private suits. Either regulatorscould enable individual payers to demand unbundlingto facilitate their efforts to get better prices or regula-tors could demand it themselves. This could triggermore competition and greater efficiency in both thetied submarkets where monopoly is not a problemand the tying markets where it is.

Challenging Anticompetitive Terms in Insurer-Provider Contracts. Restrictive terms in contractsbetween providers and insurers are another poten-tially fruitful area for antitrust and regulatory atten-tion in dealing with the provider monopoly problem.A common practice, for example, is for a provider-seller to promise to give an insurer-buyer the samediscount from its high prices it might give to a com-peting health plan. Such price-protection, payment-parity, or most-favored-nation (MFN) clauses arecommon in commercial contracts and reduce frequent


13

and costly renegotiation of prices. However, their anti-competitive effects may sometimes outweigh their effi-ciencies. Thus, a provider monopolist may find that alarge and important payer is willing to pay its veryhigh prices only if the provider promises not to chargelower prices to its competitors. Such a situation appar-ently arose in Massachusetts, where the common-wealth’s largest insurer, a BlueCross plan, reportedlyacceded to Partners HealthCare’s demand for a verysubstantial price increase only after Partners agreed to“protect Blue Cross from [its] biggest fear: that Partnerswould allow other insurers to pay less.”61

Antitrust law can offer relief against a providermonopolist that secures its high prices through anMFN clause with a powerful insurer. Because suchclauses protect insurers against their competitors’ get-ting better deals, many insurers are likely to give in tooquickly to even extortionate monopolist pricedemands. But the availability of an antitrust remedy(which would probably be only a prospective cease-and-desist order rather than an award of treble dam-ages for identifiable harms) might not be sufficient todeter a powerful provider from granting MFN status toa dominant insurer. Alternatively, regulatory authori-ties could prohibit dominant providers from confer-ring such status. Regulators presumably would be inas good a position as any party to distinguish betweenrestrictive agreements that achieve transactional effi-ciencies and agreements that restrict insurers’ freedomto cut price deals with competitors. Regulators mightalso be sensitive to how MFN clauses can reduce pres-sure on, and opportunities for, all insurers to seek newand innovative service arrangements.

A more potent antitrust attack on anticompetitiveMFN clauses would aim at the dominant insurerdemanding them, rather than at the cooperatingprovider. The DOJ has recently sued BlueCrossBlueShield of Michigan, a dominant insurer, to enjoinit from using MFN clauses in its contracts with Michi-gan hospitals. It alleges that such MFN restrictionspreclude provider price competition and have thusprevented other insurers from negotiating favorablehospital contracts.62 Because the MFN clauses in theMichigan case are alleged—and seem likely—to haveraised prices paid by BlueCross’s competitors and by

self-insured employers, they provide promising tar-gets not just for public enforcement but also for pri-vate actions by injured purchasers, in which damageswould be measured (and then trebled, in accordancewith the Sherman Act) by any higher costs the restric-tions forced them to incur. Indeed, in the wake of thegovernment’s suit in Michigan,63 the threat of privatelawsuits might quickly end large insurers’ use of MFNagreements. In Massachusetts, for example, the Blue-Cross plan should now think long and hard beforerenewing (or enforcing) the MFN clause in its con-tract with Partners HealthCare.

Other contract provisions that threaten price com-petition are also in use in provider-insurer contracts inMassachusetts, according to the commonwealth’sattorney general.64 In particular, so-called “antisteer-ing” provisions prohibit an insurer from creatinginsurance products in which patients are induced topatronize lower-priced providers. Under such a con-tractual constraint, a health plan could not offer moregenerous coverage—such as reduced cost sharing—for care obtained from a new market entrant or from amore distant, perhaps even an out-of-state or out-of-country, provider.65 Other contractual terms in use inMassachusetts (and quite possibly in other marketswhere BlueCross is dominant) guarantee a dominantprovider that it will not be excluded from any providernetwork the health plan might offer its subscribers.

The contractual terms noted here all enshrine thecooperative supremacy of dominant providers anddominant insurers. The resulting competitive harmextends beyond the sustenance of high prices. Thesepartnerships also foreclose opportunities for con-sumers to benefit, both directly as patients and indirectly as premium payers, from innovative insur-ance products that competing health plans might oth-erwise introduce. Antitrust rules can prohibit the use


14

ACOs could engineer and leverage

greater monopoly power in an

already-concentrated

health care market.

of such anticompetitive contract terms to protectprovider monopolies and curb insurer innovation,and insurance regulators might also bar such provi-sions wherever they threaten to preclude effectiveprice competition. These actions remain available evenin the continued presence of a provider monopoly.

Prospects for Meaningful Competition

Many commentators have suggested that the providermonopoly problem is severe enough to warrant con-sidering the more radical alternative of regulatingprovider prices. Indeed, a growing number of healthpolicy scholars have already concluded that “becauseantitrust policy has proved ineffective in curbing . . .providers’ market power to win higher payments,policy makers need to consider approaches includingprice caps and all-payer rate setting.”66 Seeking priceregulation, as opposed to market-oriented, solutionsto the growing provider monopoly problem mightbecome even more attractive after the PPACA, as theact puts in place a regulatory framework that mean-ingfully restricts how insurers can purchase healthservices. It seems that a policy apparatus akin to util-ity regulation would emerge naturally from the insur-ance exchanges and current provider monopolists,wherein dominant providers assume the role of a pro-tected quasi-public utility and policymakers set pricesand output.

Conceding to a utility model means giving up thepotential benefits of competition. Even though thecurrent system arguably is the worst of all possibleworlds—unrestrained private spending andunabashed private profit motives secured with publicregulations that discourage entry or structuralchange—many, especially economists, maintain faithin the entrepreneurial promise of market forces.Wholesale reconfiguration of the delivery system andattention to individualized needs, for example, aremore likely to emerge from a decentralized system.Thus, even with a highly concentrated provider market, public policies and private initiatives canstimulate competition in health care and the result-ing benefits of market forces. The likelihood that

competition-oriented initiatives will succeed is a func-tion both of the conviction underlying those policiesand the flexibility that the PPACA’s regulators furnishto market innovators.

Administrative Restraints and Interregional Com-petition. The PPACA’s passage was largely motivatedby Americans’ deep frustration with (and, often, dis-trust of) insurance companies. To be sure, America’sinsurers have not done much to endear themselves totheir subscribers, failing to convince many Americansthat they possess the commitment and innovative zealto create greater value in the health care deliverysystem they finance. In response, the PPACA limitswhat health plans can spend on administration,including imposing a “medical loss ratio” that requiresinsurers to expend a minimum percentage of theiroperating budget on health care services.67

Among the “administrative” costs this limits areinvestments in monitoring and improving the deliv-ery of care. Such monitoring and organizational costsare frequently decried as costly intrusions on the doctor-patient relationship, but they have the poten-tial to meaningfully streamline and even transformthe delivery of care. Requiring minimum expendi-tures in medical services will only exacerbate theharms of moral hazard, including excessive con-sumption, overincentives to use expensive but cost-ineffective technologies, and restrictions on payers’ability to negotiate competitive prices. Anyone con-cerned with provider monopolies would be alarmedthat medical loss ratios might further disarm payers inaggressive price negotiations with providers. But thelarger cost in restricting administrative expenses is thepossibility that it will stamp out innovations in theorganization of health care delivery.

The most effective mechanism in battling localmonopolies in health care might be the same mecha-nism used to combat costly local or domestic produc-ers of other goods: expanding the locus ofcompetition. Some self-insured employers havealready begun to creatively exploit national competi-tion, searching outside local markets to provide healthcare for their employees. North Carolina–based Lowe’sCompany Inc., for example, now encourages its


15

employees to travel to the Cleveland Clinic for heartprocedures, citing the clinic’s superior outcomes andlower costs compared to local providers.68

Although most insurers are committed to preserv-ing mutually beneficial relationships with localproviders, some have also started searching for out-of-network providers to deliver care to their subscribers.United Healthcare, for example, has experimentedwith offering its insureds from across the UnitedStates the option to seek care from Mayo Clinic physi-cians and hospitals as in-network providers.69 Someadventurous employers and insurers are even sendingtheir subscribers abroad. BlueCross BlueShield ofSouth Carolina has even created a subsidiary for med-ical tourism, Companion Global Healthcare, thatmaintains a network of international doctors andaccredited institutions in thirteen countries, includingThailand, India, Costa Rica, Ireland, and Turkey.70

When purchasers of health care services startshopping nationally and internationally for providers,competitive forces awaken with the potential toreshape provider strategies. Many providers haveaimed to capitalize on the expanding markets forhealth care travel, with several specialty hospitals inthe United States now seeking to attract patients frominsurers and other medical intermediaries.71 In thesame vein, providers outside the United States—forexample, in the Cayman Islands and India—are mar-keting themselves to self-insured employers andinsurers seeking high-quality services at competitiveprices for their subscribers.72

Although traveling for health care might introducea new set of costs, it is a highly effective way to infusecompetition into locally monopolized markets. More-over, the effects of such competition should not beunderestimated. Broadening the geographic marketushers in new providers that can introduce new strate-gies, training, and orientations toward health caredelivery. Exposure to diverse strategies and new orga-nizational delivery mechanisms can only intensifycompetition that rewards cost-reducing innovationslocal monopolies are not inclined to pursue.73

In short, facilitating interregional competitioncould loosen the grip of some monopolists. Becausecertain health care services can be delivered only by

local providers (although distance technologies con-tinue to push the envelope), meaningfully reducingthe costs of health care monopolies will continue torequire the other initiatives I have described. Theemergence of medical tourism offers enormouspotential to bring down health care costs and improvequality. However, the PPACA’s implementation—and,in particular, its calculation and employment of themedical loss ratio—might hamstring insurers andself-insured employers from investing in this innova-tive form of shopping for health care.

“Essential Health Benefits” and Far-SightedHealth Care. Another of the PPACA’s regulatoryrequirements—perhaps the most important and cer-tainly, given its import, the most underscrutinized—is its requirement that by 2014, all health plans, boththose offered in insurance exchanges and thoseoffered externally, cover, at minimum, “essentialhealth benefits.”74 Such benefits must be “equal to thescope of benefits provided under a typical employerplan, as determined by the Secretary [following a sur-vey of private plans].”75

Some have already observed that this requirementmeans that “consumers with this new statutory enti-tlement . . . will be locked into a system reflecting nottheir own preferences, values, and interests but thoseof the health care industry itself and its most elite cus-tomers. They will have little opportunity to purchaseless costly coverage in order to put the availableresources, either their own or society’s, to what theymight regard as better use.”76 Federal rules that definewhat insurers must offer as benefits actually impose asmuch, if not more, of a “mandate” on consumers thandoes the general “individual mandate” to purchaseinsurance. Constitutional challenges to the PPACA—alleging infringements to personal liberty—have


16

Although traveling for health care

might introduce a new set of costs, it is

a highly effective way to infuse compe-

tition into locally monopolized markets.

focused exclusively on the latter requirement to pur-chase minimum coverage,77 but the final scope andscale of the essential health benefits provision is morelikely to be the biggest constraint on consumer free-dom. This requirement might also prevent meaning-ful reform to health care delivery that, in addition toproviding value to consumers, could effectively chal-lenge health care monopolists.

Perhaps the most burdensome feature of theessential health benefits requirement is its preoccu-pation with traditional medical services. Much hasbeen written about the nation’s unsustainablereliance on expensive traditional care, but a growingbody of literature has additionally suggested that amenu of low-cost, nonmedical alternatives can pro-duce results superior to traditional care. New Jersey’sMedicaid program, featured recently in the NewYorker, has both improved outcomes and reducedcosts for expensive patients by providing counselorsand social workers to address life habits that exacerbatedebilitating chronic illnesses.78 The key has been trans-forming the delivery system from one that responds toconsumers seeking medical services to one that aggres-sively targets patients with behavioral interventions.Similar efforts have proven effective in Massachusetts,where a variety of nonmedical interventions—a tar-geted intervention for hypertension self-management,tailored behavior change goals and skills training, peersupport groups, informational resources through web-site and telephone support, and periodic telephonecounseling calls—proved similarly successful in reduc-ing obesity and hypertension in a high-risk, socioeco-nomically disadvantaged patient population.79

These results largely confirm earlier successes inMedicaid demonstration projects80 and researchexamining health effects of Head Start programs,81

which found links between behavioral interventionsand far-sighted health behaviors. Although no magicformula or established regimen reliably induces use-ful behavioral changes, the potential health benefitsfrom nonmedical interventions are undeniable.Health plans eager to experiment with low-cost andcreative nonmedical interventions—especially thoseinterested in preempting costly medical care—shouldbe encouraged to do so.

Just as monopoly power in local markets shouldspur provider competition across regions, monopolypower in markets for traditional health care servicesshould spur a search for viable nonmedical substitutes.To be sure, there is a reason Medicaid beneficiaries—who do not have the luxury of protesting unconven-tional benefits packages—have been the ones subjectto experimentation with nonmedical interventionsthus far; similarly, there is a reason that Medicaidadministrators, rather than private payers, have beenthe ones forced to experiment. Indeed, private insuredswould need a deep appreciation of both the unsus-tainability of current spending trajectories and theenormous savings (and comparable outcomes) avail-able from nonmedical interventions before being com-fortable with such a move. But because our trajectoryis indeed dire, pursuit of a foundational reconceptual-ization of health care delivery is not so far-fetched. Theimplementation of PPACA’s regulations—how medicalloss ratios are calculated and what qualifies as essentialhealth benefits, for example—will significantly deter-mine whether federal policies encourage or impedethis sort of experimentation.

Conclusion

There is an urgent need to recognize the unusuallyserious consequences, for both consumers and thegeneral welfare, of leaving insured consumersexposed to monopolized health care markets.Because health insurance, especially as it is designedand administered in the United States, hugelyexpands a monopolist’s pricing freedom, marketpower causes wealth-redistributing and misallocativeeffects substantially more serious than conventionalmonopoly power. Although this point has beenalmost completely absent from the antitrust and eco-nomics literature,82 its importance plausibly dwarfsall other factors responsible for the extraordinarilyhigh cost of US health care.83

Vigorous, rather than tentative or circumspect,enforcement of the antitrust laws can mitigate theharms from provider market power. Retrospectivelyscrutinizing earlier horizontal mergers of hospitals or


17

other providers could help correct decades of ineffec-tual enforcement, but if looking backward remainsunlikely, renewed rigor moving forward is all the moreessential. Parties proposing new mergers and alliances,whether traditional associations or new ACOs, mustconvincingly show that their reorganization eitherleads to only a minimal increase in market power orcreates specific efficiencies. Other measures shouldtarget current monopolists to prevent the enshrine-ment or expansion of their market dominance. Anantitrust or regulatory initiative to curb hospitals’bundling practices and prohibit anticompetitive con-tracts between payers and providers—perhaps asremedies for earlier mergers found unlawful after thefact—might also significantly reduce the extraordinarypricing freedom that hospital and other monopolistsenjoy by virtue of US-style health insurance.

Another path to reducing the power of providermonopolies is to encourage creativity among third-party purchasers. Health plans that bypass, or fosternew competitors for, local monopolists promote priceand quality competition where it is currently lacking,thus undermining the potency of insurance plusmonopolies. A pro-competition regulatory agendashould seek ways to facilitate such interregional com-petition, or at the very least scrutinize how medicalloss ratio rules and other regulations might impede it.Additional hope lies in the possibility that healthinsurers and third-party purchasers will purchase(and that PPACA regulations will let them purchase)proven nonmedical interventions that improve healthand reduce health care costs. The exorbitant prices for

monopolized medical services should encouragehealth insurers to develop creative alternatives, bothseeking effective (and less costly) substitutes and reor-ganizing what has become a fragmented, error-prone,and inefficient delivery system.

Unfortunately, health insurers have not shownmuch eagerness to either contest provider marketpower or pursue meaningful innovations providingcare for their subscribers. As investigations in Michi-gan and Massachusetts reveal, insurers all too oftenbecome coconspirators with provider monopolists,agreeing to exclusive agreements that protect boththemselves and monopolists but gouge consumers.Insurers’ failure to act as aggressive purchasing agentsfor consumers is due partly to how the true cost ofinsurance remains hidden and partly to consumers’undue reluctance to accept anything less than thebest. If consumers were both aware of the true cost oftheir health coverage and conscious that they, ratherthan someone else, are paying for it, they surelywould demand more value from their insurers. But UShealth plans appear inadequately motivated to reducecosts and overly hesitant to adopt innovative strategieswith associated legal or political risks. Any hope for thefuture of US health care is tempered by doubts aboutthe ability and willingness of US health insurers—as well as insurance regulators and elected officialswho purchase insurance for public employees—totake the aggressive actions needed to procure appro-priate, affordable care.

The PPACA, by expanding the reach of healthinsurance to many additional millions of Americans,has the potential to aggravate and extend the signifi-cant shortcomings of such insurance. Not only doesthe new law seem to have no effective answer to theproblem of provider and supplier monopolies, but itsbroad extension of coverage is likely to furtheramplify the uniquely harmful effects of their marketpower. Moreover, its new regulatory requirements—imposing medical loss ratios and essential health ben-efits, for example—might constrain innovationsamong payers that might create interregional providercompetition or reconfigure a deeply inefficient healthcare delivery system. Despite these new regulatorylayers, antitrust policymakers and other regulators


18

The exorbitant prices for monopolized

medical services should encourage

health insurers to develop creative

alternatives, both seeking effective (and

less costly) substitutes and reorganizing

what has become a fragmented, error-

prone, and inefficient delivery system.

still have the capacity to foster value-enhancing innovation—primarily by preventing the continuedenshrinement of current monopolies. And althoughcurrent tax policies and regulations have turned manyinsurers into agents for providers rather than for theirsubscribers, a potent opportunity remains for third-party payers to inject the health care sector withvalue-creating innovations that redesign both theofferings and the delivery of care.

Whatever the PPACA may achieve, its legacy andcost to the nation will depend largely on whether mar-ket actors, regulators, and antitrust enforcers can effec-tively address the provider monopoly problem andinstill desperately needed competition amongproviders. In the near future, the cost problem may

become so serious that the temptation to adopt dra-conian measures, such as direct price controls, will beirresistible. Competition-oriented policies, however,could yield substantial benefits both to premium pay-ers and to an economy that badly needs to find themost efficient uses for its increasingly limited resources.

Barak D. Richman is professor of law and businessadministration at Duke University, senior fellow at theKenan Institute for Ethics at Duke University, and amember of the advisory board of the American AntitrustInstitute. Many of the ideas expressed here had their origins in work coauthored with Clark C. Havighurst,William Neal Reynolds Professor Emeritus of Law atDuke University.


19

21

1. For an exception that proves the rule, see Avik Roy, “Hospital Monopolies: The Biggest Driver of HealthCosts That Nobody Talks About,” The Apothecary, August22, 2011, www.forbes.com/sites/aroy/2011/08/22/hospital-monopolies-the-biggest-driver-of-health-costs-that-nobody-talks-about/ (accessed May 2, 2012)

2. The misallocation stems from incentives to produceand purchase too much, rather than too little, of services andproducts from providers with monopoly power. For a moredetailed and documented exposition of how US-style healthinsurance inflates the various costs of monopoly in healthcare markets, see Clark C. Havighurst and Barak D. Rich-man, “Distributive Injustice(s) in American Health Care,”Law and Contemporary Problems 69, no. 4 (Autumn 2006):7, 13–31. See also Clark C. Havighurst and Barak D. Rich-man, “The Provider Monopoly Problem in Health Care,”Oregon Law Review 89, no. 3 (2011): 847–84.

3. William B. Vogt and Robert Town, How Has HospitalConsolidation Affected the Price and Quality of Hospital Care?(Robert Wood Johnson Foundation, Research SynthesisReport 9, February 2006), www.rwjf.org/files/research/no9researchreport.pdf (accessed May 3, 2012); Claudia H.Williams, William B. Vogt, and Robert Town, How Has Hos-pital Consolidation Affected the Price and Quality of HospitalCare? (Robert Wood Johnson Foundation, Policy Brief 9,February 2006), www.rwjf.org/files/research/no9policybrief.pdf (accessed May 3, 2012).

4. Ibid. For surveys of how hospital consolidations haveincreased hospital prices, see Gloria J. Bazzoli et al., “Hospi-tal Reorganization and Restructuring Achieved throughMerger,” Health Care Management Review 27, no. 1 (2002):7–20; Martin Gaynor, “Competition and Quality in HealthCare Markets,” Foundations & Trends in Microeconomics 2, no.6 (2006): 441–508. For documentation of the extent of

provider market concentration among hospitals and otherproviders, see also William B. Vogt, “Hospital Market Con-solidation: Trends and Consequences,” NIHCM FoundationExpert Voices (November 2009), http://nihcm.org/pdf/EV-Vogt_FINAL.pdf (accessed May 3, 2012).

5. Cory Capps and David Dranove, Market Concentrationof Hospitals (Bates White Economic Consulting Analysis,June 2011), www.ahipcoverage.com/wp-content/uploads/2011/10/ACOs-Cory-Capps-Hospital-Market-Consolidation-Final.pdf (accessed May 3, 2012).

6. See generally Timothy P. Blanchard, “Medical Neces-sity” Determinations—A Continuing Healthcare PolicyProblem,” Journal of Health Law 37, no. 4 (2003): 599–627;William Sage, “Managed Care’s Crimea: Medical Necessity,Therapeutic Benefit, and the Goals of Administrative Processin Health Insurance,” Duke Law Journal 53 (2003): 597;Einer Elhauge, “The Limited Regulatory Potential of MedicalTechnology Assessment,” Virginia Law Review 82 (1996):1525–1617.

7. For truly stunning examples of the price-increasingand profit-generating effects of combining US-style healthinsurance and monopoly, see Geeta Anand, “The MostExpensive Drugs,” Parts 1–4, Wall Street Journal, November15–16, December 1, 28, 2005; in this series, see especially“How Drugs for Rare Diseases Became Lifeline for Com-panies,” November 15, 2005, A1 (in which one drug com-pany executive is quoted as saying, “I never dreamed wecould charge that much.”).

8. Diana Farrell et al., Accounting for the Cost of U.S.Health Care: A New Look at Why Americans Spend More,(McKinsey Global Institute, 2008); Gerard Anderson et al.,“It’s the Prices, Stupid: Why the United States Is So Differ-ent from Other Countries,” Heath Affairs 22, no 3 (2003):89–105.

Notes

9. See notes 3–4.10. David A. Hyman et al., Improving Health Care: A Dose of

Competition (US Federal Trade Commission and US Depart-ment of Justice, 2004), www.ftc.gov/reports/healthcare/040723healthcarerpt.pdf (accessed May 3, 2012).

11. Section 1003 of the PPACA, which amends § 2794the Public Health Service Act (42 USC 300gg - 91 et seq.),includes “rate review” provisions that require either state orfederal officials to review notices of health insurance rateincreases that exceed 10 percent. Theoretically, these con-straints would prevent insurers from dramatically increasingrates that might be triggered by increases in providermonopoly power. Critics have countered that the provisionscause insurers to preemptively issue rate increases becausethey know future increases might be capped. In any event,constraining insurers’ ability to increase premium rates isunlikely to constrain provider monopolists from seekingevery last dollar from third-party and first-party payers.

12. Daniel Callahan, “Health Care Costs and Medical Tech-nology,” in From Birth to Death and Bench to Clinic: The HastingsCenter Bioethics Briefing Book for Journalists, Policymakers, andCampaigns, ed. Mary Crowley (Garrison, NY: The HastingsCenter, 2008), 79–82. See also Paul Ginsburg, “ControllingHealth Care Costs,” New England Journal of Medicine 351(2004): 1591–93; Henry Aaron, Serious & Unstable Condition(Washington, DC: Brookings Institution Press, 1991).

13. See Alan M. Garber, Charles I. Jones, and Paul M.Romer, “Insurance and Incentives for Medical Innovation”(working paper 12080, National Bureau of EconomicResearch, 2006); Burton Weisbrod, “The Health CareQuadrilemma: An Essay on Technological Change, Insur-ance, Quality of Care, and Cost Containment,” Journal of Eco-nomic Literature 29, no. 2 (June 1991): 523–52; SheilahSmith, Joseph P. Newhouse, & Mark Freeland, “Income,Insurance, and Technology: Why Does Health SpendingOutpace Economic Growth?” Health Affairs 28, no. 5 (2009):1276–84. See also Dana Goldman and Darius Lakdawalla,“Understanding Health Disparities across EducationGroups” (working paper 8328, National Bureau of Eco-nomic Research, 2001) (suggesting that population-wideincreases in education have encouraged pursuit of patient-intensive innovations that increase costs, rather than simplertechnologies that reduce them).

14. Richard A. Posner, Antitrust Law: An Economic Perspec-tive, 2nd ed. (University of Chicago Press, 2001), 13–18. Tobe sure, firms’ general preference for reaping, rather thansquandering, profits serves to ameliorate the full potential forwasteful spending. See William F. Baxter, “Posner’s AntitrustLaw: An Economic Perspective,” The Bell Journal of Econom-ics (1977): 609–19.

15. United States v. Alcoa, 148 F.2d 416, 430 (2d Cir.1945).

16. See David Dranove, The Economic Evolution of Ameri-can Health Care: From Marcus Welby to Managed Care

(Princeton, NJ: Princeton University Press, 2002), 122. (“Ihave asked many providers why they wanted to merge.Although publicly they all invoked the synergies mantra, vir-tually everyone stated privately that the main reason formerging was to avoid competition and/or obtain marketpower.”) See also Robert A. Berenson, Paul B. Ginsburg, andNicole Kemper, “Unchecked Provider Clout in CaliforniaForeshadows Challenges to Health Reform,” Health Affairs29, no 4 (2010): 699, 704. (Quotes a local physician as say-ing, “Why are those hospitals and physicians [integrating]? Itwasn’t for increased coordination of care, disease manage-ment, blah, blah, blah—that was not the primary reason.They wanted more money and market share.”)

17. In 2009, the United States spent $7,960 per capita intotal health care expenditures (purchasing power parityadjusted), nearly twice the OECD average, and 17.4 percentof its GDP, with no other OECD nation spending more than12 percent. See Organisation for Economic Co-operationand Development, OECD Health Data 2011, www.oecd.org/document/30/0,3746,en_2649_37407_12968734_1_1_1_37407,00.html (accessed May 25, 2012).

18. American Hospital Association, AHA Hospital Statistics(Washington, DC: Author, 2012).

19. Hyman et al., Improving Health Care, ch. 4, 1–2 (note 10).20. For discussions of these cases and of the general

ambivalence toward competition in health care markets, seeBarak D. Richman, “Antitrust and Nonprofit Hospital Merg-ers: A Return to Basics,” University of Pennsylvania Law Review156 (2007): 121–150; Martin Gaynor, “Why Don’t CourtsTreat Hospitals Like Tanks for Liquefied Gases? Some Reflec-tions on Health Care Antitrust Enforcement,” Journal ofHealth Policy, Policy and Law 31 (2006): 497–510; Thomas L.Greaney, “Night Landings on an Aircraft Carrier: HospitalMergers and Antitrust Law,” American Journal of Law andMedicine 23 (1997): 191–220.

21. See, for example, In the Matter of Evanston Nw.Healthcare Corp., 2007 WL 2286195, *53 (FTC 2007).

22. See note 3 above.23. Hyman et al., Improving Health Care; Capps and Dra-

nove, Market Concentration of Hospitals.24. The district judge in FTC v. Butterworth Health Corp.,

946 F. Supp. 1285 (WD Mich. 1996), was especially unam-biguous in championing nonprofit hospitals as benignmonopolists, stating, “Permitting defendant hospitals toachieve the efficiencies of scale that would clearly result fromthe proposed merger would enable the board of directors ofthe combined entity to continue the quest for establishmentof world-class health facilities in West Michigan, a course theCourt finds clearly and unequivocally would ultimately be inthe best interests of the consuming public as a whole”(1302). Likewise, the judge revealed a hostility to price com-petition between hospitals, remarking, “In the real world,hospitals are in the business of saving lives, and managedcare organizations are in the business of saving dollars.” The


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Butterworth court was not alone in its predilections. A Mis-souri judge, reviewing a hospital merger challenged by theFTC, remarked to the federal agency, “I don’t think you’vegot any business being in here. . . . It looks to me like Wash-ington, D.C. once again thinks they know better what’s goingon in southwest Missouri. I think they ought to stay in D.C.”See Federal Trade Commission v. Freeman Hospital, 69 F.3d260, 263 (8th Cir. 1995) (quoting district court hearing).

25. United States v. Brown University, 5 F.3d 658 (1993).26. Rev. Rul. 69-545, 1969-2 C.B. 117. 27. Rev. Rul. 56-185, 1956-1 C.B. 202. 28. Even while the ranks of the uninsured, both in aggre-

gate and as a percentage of the population, grew steadilythroughout the past three decades, uncompensated care as afraction of total health expenditures remained constant.Uncompensated care is estimated to approach $56 billion in2008, but as much as 75 percent was paid for by federal andstate subsidies. Hospitals provided $35 billion in uncom-pensated care that same year, with over 80 percent paid bypublic subsidies. Uncompensated care provided by hospitalshas similarly remained steady, at 6 percent of hospital costs,over the same period. See John Hadley, Teresa Coughlin,and Dawn Miller, “Covering the Uninsured in 2008: CurrentCosts, Sources of Payment, and Incremental Costs,” HealthAffairs 27, no. 5 (September 2008): w399–415.

29. See generally Clark C. Havighurst and Barak D.Richman, eds., “Who Pays? Who Benefits? DistributionalIssues in Health Care,” Law and Contemporary Problems 69,no. 4 (2006).

30. Under reasonable assumptions, a hospital merger creat-ing new market power would raise insurance premiums byroughly 3 percent, increasing the “head tax” on the medianinsured family by roughly $400 per year, hardly a trivialamount. In addition, according to one estimate, hospital merg-ers in the 1990s caused nearly 700,000 Americans to lose theirprivate health insurance. See Robert Town et al., “The WelfareConsequences of Hospital Mergers” (working paper no.12244, National Bureau of Economic Research, 2006).

31. Herbert Hovenkamp, Federal Antitrust Policy: The Lawof Competition and Its Practice, 3rd ed. (St. Paul, MN: Thom-son/West, 2005), 50. (“[S]tatements [made during debates]may suggest that the primary intent of the Sherman Act’sframer was not economic efficiency at all, but rather the dis-tributive goal of preventing monopolists from transferringwealth away from consumers.”)

32. Despite losing thoroughly on the merits, the respond-ent declared itself “thrilled” with the FTC’s remedy. SeeNorth Shore University Health Systems “FTC Ruling KeepsEvanston Northwestern Healthcare Intact,” press release,August 6, 2007, www.northshore.org/about-us/press/press-releases/ftc-ruling-keeps-evanston-northwestern-healthcare-intact/ (accessed May 3, 2012).

33. See, for example, United States v. E.I. du Pont deNemours & Co., 353 U.S. 586 (1957); see also Phillip Areeda

and Herbert Hovenkamp, Antitrust Law 2nd ed. (New York:Aspen Publishers, 2003): 1205b.

34. For a chronicling of government challenges to merg-ers that lost in federal court, see Hyman et al., ImprovingHealth Care. For an exploration of judicial resistance toenforcing the antitrust laws against hospitals, see Richman,“Antitrust and Nonprofit Hospital Mergers.”

35. See Department of Health and Human Services,Medicare Program; Medicare Shared Savings Program: Account-able Care Organizations, 42 CFR Part 425, Federal Register 76,no. 212 (November 2, 2011): 67802, 67985–88.

36. Einer Elhauge, ed., The Fragmentation of US HealthCare (Oxford, UK: Oxford University Press, 2010).

37. Alain C. Enthoven and Laura A. Tollen, “Competi-tion in Health Care: It Takes Systems to Pursue Qualityand Efficiency,” Health Affairs (September 7, 2005),doi:10.1377/hlthaff.w5.420.

38. Remarks of J. Thomas Rosch before the ABA Sectionof Antitrust Law, November 17, 2011.

39. See America’s Health Insurance Plans, AccountableCare Organizations and Market Power Issues (October 2010),www.ahip.org/Workarea/linkit.aspx?ItemID=9222(accessed May 25, 2012); Berenson, Ginsburg, and Kemper,“Unchecked Provider Clout” (which notes ACOs’ “potentialnot only to produce higher quality at lower cost but also toexacerbate the trend toward greater provider marketpower”); and Jeff Goldsmith, “Analyzing Shifts in EconomicRisks to Providers in Proposed Payment and Delivery SystemReforms,” Health Affairs 29, no. 7 (2010): 1299, 1304.(“Whether the savings from better care coordination forMedicare patients will be offset by much higher costs to pri-vate insurers of a seemingly inevitable . . . wave of providerconsolidation remains to be seen.”).

40. Robert Pear, “Consumer Risks Feared as Health LawSpurs Mergers,” New York Times, November 20, 2010.

41. Barak Richman and Kevin Schulman, “A CautiousPath Forward on Accountable Care Organizations,” Journalof the American Medical Association 305, no. 6 (February 9,2011): 602–03.

42. The final rule requires that ACOs achieve the qual-ity performance standard on 70 percent of the measures ineach domain. Although this dilutes the requirementsunder the proposed rule, the rule asserts, “If an ACO failsto achieve the quality performance standard on at least 70percent of the measures in each domain we will place theACO on a corrective action plan and re-evaluate the fol-lowing year. If the ACO continues to underperform in thefollowing year, the agreement would be terminated. Webelieve requiring ACOs to achieve the quality performancestandard on 70 percent of the measures in each of the 4domains establishes a feasible standard, while signaling toproviders that they need to devote significant focus to performance in each domain.” See Department of Healthand Human Services, Medicare Program. How the CMS


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implements ACO evaluations will heavily determine theprogram’s trajectory and success.

43. The notion of “cost shifting”—the idea that providerscan readily raise their prices to private payers to recoup what-ever they may lose because Medicare decides to pay themless—has been largely discredited. Even a monopolistprovider would most likely be charging private payers a profit-maximizing price already. See Havighurst and Richman, “TheProvider Monopoly Problem,” 22 (note 40); Vivian Wu, “Hos-pital Cost Shifting Revisited: New Evidence from the BalancedBudget Act of 1997,” International Journal of Health CareFinance and Economics 10, no. 1 (2010): 61–83; Austin Frakt,“How Much Do Hospitals Cost Shift? A Review of the Evi-dence,” The Milbank Quarterly 89, no. 1 (2011): 90–130;Michael A. Morrisey, Cost Shifting: Separating Evidence fromRhetoric (Washington, DC: American Enterprise Institute, 1994).

44. California Retail Liquor Dealers Assn. v. Midcal Alum.,445 U.S. 97 105 (1980). (The challenged restraint isimmune from Sherman Act scrutiny if it is “clearly articu-lated and affirmatively expressed as state policy.”)

45. Parker v. Brown, 317 U.S. 341 (1943).46. Southern Motor Carriers Rate Conf. v. United States, 471

U.S. 48 (1985).47. Columbia v. Omni Outdoor Advertising, 499 U.S. 365

(1991).48. The state action doctrine has been criticized repeat-

edly for its overbreadth. See, for example, Report of the StateAction Task Force, Office of Policy Planning, Federal TradeCommission (September 2003).

49. For a recent appraisal of growing state action immu-nity claims, including a disproportionate share made byhealth care providers, see Peter C. Carstensen, “ControllingUnjustified, Anticompetitive State and Local Regulation:Where Is Attorney General ‘Waldo’?,” Antitrust Law Journal(forthcoming).

50. This suit and related conduct are discussed in detail inthe section of this paper on anticompetitive agreementsbetween providers and insurers.

51. United States v. Blue Cross Blue Shield of Michigan, CivilAction No. 10-cv-14155-DPH-MKM, Defendant’s Motion toDismiss, 9.

52. Docket No. 9343, In the Matter of the North CarolinaBoard of Dental Examiners, FTC File No. 081-0133. TheDental Board is accused of sending letters to nondentistteeth-whitening providers that they were practicing dentistryillegally, ordering them to stop, and issuing threats to somewho were considering opening teeth-whitening businesses.The Dental Board also allegedly sent letters to third parties—mall owners and property management companies—warningthem that their tenants were engaging in illegal conduct.

53. North Carolina State Board of Dental Examiners v. FTC,No. 11-1679 (4th Cir. 2011), Br. of Appellant.

54. FTC v. Phoebe Putney Health System, No. 11-12906(11th Cir. 2011).

55. Ibid.56. See Jefferson Parish Hosp. Dist. No. 2. v. Hyde, 466 U.S.

2 (1984).57. The ability to leverage market power in one sub-mar-

ket into price increases in a competitive market helps explainwide price variation for like services in common geographicmarkets. See Paul B. Ginsburg, “Wide Variation in Hospitaland Physician Payment Rates Evidence of Provider MarketPower,” HSC Research Brief no. 16 (November 2010), www.hschange.com/CONTENT/1162/ (accessed May 25, 2012).

58. In a private suit, a dominant hospital chain was suedby its lone rival for, among other things, bundling primaryand secondary services with tertiary care in selling to thearea’s insurers. See Cascade Health Solutions v. PeaceHealth,515 F.3d 883, 890–91 (9th Cir. 2008). The district courtpermitted certain claims to proceed to trial, including a claimof illegal bundled discounts, but dismissed the tying claim.

59. See Einer Elhauge, “Tying, Bundled Discounts, and theDeath of the Single Monopoly Profit Theory,” Harvard LawReview 123, no. 2 (2009): 397–481.

60. This proposal is in line with recommendations fromthe Antitrust Modernization Commission, Report and Recom-mendations (April 2007): 96, http://permanent.access.gpo.gov/lps81352/amc_final_report.pdf (accessed May 9, 2012).What is “divisible” in health care is of course subject todebate, just as most services accused of being bundled areoften defended as a single product. See, for example, Jeffer-son Parish Hosp., 466 U.S., 19–22.

61. “A Handshake That Made Healthcare History,” BostonGlobe, Dec. 28, 2008. The Massachusetts attorney generalhas noted that such payment-parity agreements havebecome “pervasive” in provider-insurer contracts in the com-monwealth and has expressed concern that “such agree-ments may lock in payment levels and prevent innovationand competition based on pricing.” Office of Attorney Gen-eral Martha Coakley, Examination of Health Care Cost Trendsand Cost Drivers (March 16, 2010), 40–41.

62. See Complaint at 1-2, United States v. Blue Cross BlueShield of Mich. (E.D. Mich. 2010) (No. 2:10-CV-14155); seealso David S. Hilzenrath, “U.S. Files Antitrust Suit AgainstMichigan Blue Cross Blue Shield,” Washington Post, October18, 2010.

63. As of writing, the DOJ’s suit against BlueCrossBlueShield of Michigan (BCBS) has survived BCBS’s motionto dismiss in the district court and BCBS’s assertion of stateaction immunity on interlocutory appeal before the SixthCircuit. Depositions are now proceeding under the districtcourt’s supervision.

64. Examination of Health Care Cost Trends, 40–44.65. The following section explores possibilities for

insurers and employer-purchasers of health care stimulat-ing provider competition, both within and across statelines. See the “Administrative Restraints and InterregionalCompetition” section.


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66. Berenson, Ginsburg, and Kemper, “UncheckedProvider Clout,” 699.

67. PPACA § 9016, 124 Stat. at 872 (providing for a min-imum “medical loss ratio”). Moreover, although insurersmay use administrative expenses to limit their provider net-works and will therefore sometimes be in a position to bar-gain for lower prices, those health plans offered throughexchanges are additionally required to “ensure a sufficientchoice of providers,” which might make it difficult to excludea dominant provider of an important service. See § 1311(c)(1)(B), 124 Stat. at 174.

68. Harlan Spector, “Lowe’s Will Bring Its Workers toCleveland Clinic for Heart Surgery,” Cleveland.com, Febru-ary 17, 2010, www.cleveland.com/healthfit/index.ssf/2010/02/post_27.html (accessed May 4, 2012). (“The arrange-ment was attractive enough that Lowe’s will pay travel andlodging expenses for patients and a companion, and waive a$500 deductible and other out-of-pocket costs.”)

69. Mayo Clinic, “Mayo Clinic and UnitedHealthcareAnnounce New Network Relationship,” news release, Octo-ber 7, 2010, www.mayoclinic.org/news2010-rst/5993.html(accessed May 4, 2012).

70. M. P. McQueen, “Paying Workers to Go Abroad forHealth Care,” Wall Street Journal, September 30, 2008.(“Insured Americans are starting to see some unusual optionsin their health-provider networks: doctors and hospitals inSingapore, Costa Rica and other foreign destinations.”)

71. Jennifer Lubell, “New Tourist Attractions,” ModernHealthcare, June 15, 2009.

72. Geeta Anand, “The Henry Ford of Heart Surgery,”Wall Street Journal, November 25, 2009 (detailing plans tobuild a 2,000-bed general hospital in the Cayman Islandswhere “procedures, both elective and necessary, will be pricedat least [50 percent] lower than what they cost in the U.S.”).

73. Barak D. Richman et al., “Lessons from India in Organizational Innovation: A Tale of Two Heart Hospitals,”Health Affairs 27, no. 5 (2008): 1260–70.

74. PPACA § 1302(b)(2)(A), 124 Stat. at 164. Plan bene-fits offered in insurance exchanges may then differ only withrespect to cost-sharing requirements. For the time being,self-insured Employee Retirement Income Security Actplans, and a shrinking number of “grandfathered” fullyinsured plans outside the exchange markets, will escape theessential benefits requirement.

75. Ibid. The proposed rule allows for some minimal state-by-state flexibility in determining the Essential Health Benefitsrequirement, allowing states to select certain existing insuranceplans as their benchmark for the essential health benefits pack-age. Center for Consumer Information and Insurance Over-sight, Centers for Medicare and Medicaid Services, EssentialHealth Benefits Bulletin (December 16, 2011).

76. Clark C. Havighurst and Barak D. Richman, “WhoPays? Who Benefits? Unfairness in American Health Care,”Notre Dame Journal of Law, Ethics, and Public Policy 25

(2011): 493–526.77. See Florida v. Dept. of Health & Human Services, No. 11-

400 (certiorari granted, November 14, 2011). For my own takeon constitutional challenges to PPACA, see Barak D. Richman,“On the Constitutionality of Health Care Reform,” North Car-olina Medical Journal 71, no. 3 (2010): 232–38.

78. Atul Gawande, “The Hot Spotters,” New Yorker, Janu-ary 24, 2011.

79. Gary G. Bennett et al., “Obesity Treatment for Socioe-conomically Disadvantaged Patients in Primary Care Prac-tice,” Archives of Internal Medicine 172, no. 7 (2012): 565–74.

80. See, for example, Margo L. Rosenbach et al., “Accessfor Low-Income Children: Is Health Insurance Enough?”Pediatrics 103, no. 6 (1999): 1167–74 (finding that a school-based health insurance program that replaced traditional fee-for-service insurance and offered outreach through theschool lunch program and a private managed care contrac-tor increased consumption of preventative care, decreasedhospital utilization, and improved health outcomes).

81. Janet Currie and Duncan Thomas, “Does Head StartMake a Difference?” American Economic Review 85, no. 3(1995): 341–64 (finding improved immunization ratesamong Head Start enrollees); Kate Irish, Rachel Schumacher,and Joan Lombardi, Head Start Comprehensive Services: A KeySupport for Early Learning for Poor Children (Center for Lawand Social Policy, January 2004) (finding higher rates ofscreening for medical conditions, immunizations, and den-tal care for Head Start enrollees).

82. Scholars have previously observed that prices forhealth services are much higher in the United States com-pared to other nations in the Organisation for Economic Co-operation and Development (without observable differencesin quality). See, for example, Gerard Anderson et al., “It’s thePrices, Stupid: Why the United States Is So Different fromOther Countries,” Heath Affairs 22, no 3 (2003): 89–105.Many have observed that provider market power is a factor ininflating those prices. See sources in notes 3-4 above. But fewhave observed the synergistic effects of monopoly and healthinsurance. For example, although Anderson et al. note “vary-ing degrees of monopoly power on the sell side of the mar-ket,” their only other suggested explanation for high prices isthat “the buy side of the U.S. health system is relatively weakby international standards.” The authors seem not to recog-nize that health insurance itself raises monopolists’ prices orthat the private “buy side” is especially (for reasons givennotes 45–51 above and accompanying text), although notinevitably, helpless in fighting cost battles in the US system.

83. Excess health care spending in the United States wasrecently estimated to be $650 billion per year, equal to nearly5 percent of gross domestic product. See Eric Jensen andLenny Mendonca, Why America Spends More on Health Care(National Institute for Health Care Management, 2009),www.nihcm.org/component/content/article/409 (accessedMay 4, 2012).


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