The Role of Economic Analysis in Healthcare Antitrust: Cutting-Edge Economics Meets the

Anomalies of the Healthcare System

AHLA Antitrust Practice Group Mid-Year Luncheon Orlando, FL

February 2012

Cory Capps, PhD

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Topics

• Hospital and health plan ownership concentration Neither is as straightforward to characterize as you might expect

• A provocative paper: The Increased Concentration Of Health Plan Markets Can Benefit Consumers Through Lower Hospital Prices Glenn A. Melnick, Yu-Chu Shen, and Vivian Yaling Wu, Health Affairs, September 2011 Turning countervailing market power on its head?

• Bilateral market power

• The role of economics in healthcare antitrust Hospital and other provider mergers Health plan mergers Conduct cases

February 2012 Economic Analysis in Healthcare Antitrust

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Economic Analysis in Healthcare Antitrust

Are hospital “markets” concentrated?

• Taking geographic boundaries as given, hospital ownership concentration is fairly easy to measure reliably American Hospital Association data; CMS Hospital Cost Reports

• Analytically convenient geographic units, while useful for broad summaries, do not generally correspond to relevant antitrust markets

February 2012

See C. Capps and D. Dranove, “Market concentration of hospitals,” June, 2011,

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Economic Analysis in Healthcare Antitrust

Are hospital “markets” concentrated?

• Williams, Vogt, and Town, “How has hospital consolidation affected the price and quality of hospital care?” RWJF Policy Brief no. 9, February 2006

February 2012

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Economic Analysis in Healthcare Antitrust

Are health plan “markets” concentrated?

• Many health plan mergers and acquisitions—not all are overlapping, though.

Hospital systems selling off their plans Combining Blues in non-overlapping geographies

Unbranded competition? BC vs. BS competition?

Mergers of overlapping rivals

• AMA’s annual Competition in Health Insurance report, 2011 Update: 83% of MSAs: health plan HHI > 2,500 95% of MSAs: one health plan with a share of 30% or more 47% of MSAs: one health plan with a share of 50% or more

• AMA letter to AAG Christine Varney, July 8, 2009:“The AMA’s study indicates that numerous insurers possess the sort of monopsony power in physician markets that the DOJ claimed to exist in its challenges of UnitedHealthcare’s acquisition of PacifiCare and Aetna’s acquisition of Prudential’s national health insurance lines. In those cases, the DOJ embraced the notion of a localized market in which health insurers purchase physician services.”

February 2012

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Economic Analysis in Healthcare Antitrust

Are health plan “markets” concentrated?

• The data relied upon by the AMA appear to be unreliable Capps (2009) Dafny, Dranove, Limbrock, and Scott Morton (2011):

“We conclude that the [four] publicly-available sources of data on health insurance market shares are unreliable. They show great variability across years relative to both a reasonable prior and to the variability exhibited in hospital discharge data. They do not reflect merger activity. In addition, they omit important components of the market such as self-insured health plans.”

• Based on DOJ cases, the MSA appears to be at least a reasonable approximation to a relevant geographic market for health plan mergers (national accounts aside) Aetna-Prudential; United-PacifiCare; United-Sierra; BCBS-Montana

• Reliable data on enrollment by carrier within MSAs are hard to find Self-funded enrollment is particularly hard to measure but accounts for more than half of

commercial health plan enrollment Further complications from non-insurer TPAs and rental networks The reverse of the challenge with respect to hospitals

February 2012

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Economic Analysis in Healthcare Antitrust

Measurement aside, is concentration problematic?

• Hospitals: A broad body of economic studies find that more concentrated hospital

markets have higher prices or that mergers that combine closely substitutable hospitals can lead to higher prices

See Town & Vistnes RWJF study for 20+ citations

• Health Plans: Effects of market power on premiums are theoretically ambiguous

1. Market power in the sale of health plans: increased premiums*2. Market power in the purchase of provider services: lower reimbursement

rates that could lower premiums The subject of the recently published study by Melnick, Shen, and Wu

(MSW, Health Affairs, September 2011)

February 2012

See Dafny, Duggan, and Ramanarayanan, “Paying a Premium on your Premium? Consolidation in the U.S. Health Insurance Industry,” American Economic Review, forthcoming

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Economic Analysis in Healthcare Antitrust

MSW: The Increased Concentration Of Health Plan Markets Can Benefit Consumers Through Lower Hospital Prices*

• MSW gather (1) MSA-level data on hospital ownership concentration and health plan concentration and (2) estimates of hospitals’ commercial prices for 2001-2004 The empirical cautions described above apply to the MSW concentration data on

both sides of the market

• MSW landscape highlights: As measured by MSA-level HHIs for hospitals and health plans, the hospital side

is more concentrated than the health plan side in more than 90% of MSAs “64 percent of hospitals operate in markets where health plans are not very

concentrated” (HHI < 1800) “7 percent [of hospitals] are in the most concentrated health plan markets” (HHI >

3200) “Contrary to conventional wisdom, very few hospitals operate in markets with only

a few dominant health plans” This finding is not due to MSW’s use of older data—the 2002 AMA report studied

70 MSAs and concluded that 87% had an HHI over 1800

February 2012

The views expressed herein may not be those of Drs. Melnick, Shen, and/or Wu.

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Economic Analysis in Healthcare Antitrust

MSW: The Increased Concentration Of Health Plan Markets Can Benefit Consumers Through Lower Hospital Prices*

• Main findings: “A 1,000-percentage-point increase in the hospital [HHI] raises [hospital] prices by

approximately 8.3 percent” “Higher health plan concentration is associated with lower hospital prices on average” But “hospital prices are significantly affected only when health plan [HHIs] are above

3200” MSW find that, all else equal, when the health plan HHI is over 3200, hospital prices are,

on average, 12% lower “More concentrated health plan markets can counteract the price-increasing effects of

concentrated hospital markets”

• MSW policy implications: “Regulators should continue to monitor health plan consolidation . . . But they should also

adopt proactive policies to increase hospital market competition” “Because [large hospital systems” may provide increased efficiency and quality, we do not

recommend breaking them up. But regulators could require hospitals in systems to negotiate independently with health plans.” Easier said than done! The “Evanston Remedy”—Effective at the end of the day?

February 2012

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Economic Analysis in Healthcare Antitrust

Is this “beneficial”?

• Health plan monopsony power is harmful if the effect is to reduce the output of provider services below the efficient level Monopsony is the mirror image of monopoly: a monopsonist reduces its purchases of an input in order to

reduce the price it pays for that input

Reducing the output of provider services mechanically decreases the consumption of provider services by end consumers

• MSW offer a countervailing market power story in arguing that, at least on this account, health plan concentration is beneficial Providers routinely make this argument—AMA efforts for state and federal collective bargaining antitrust

exemptions; hospital mergers

Beneficial if (1) the effect of provider market power is to raise price and reduce output and (2) health plan market power acts in the other direction

• In a simple world, it would be possible to distinguish harmful from beneficial health plan concentration by examining the effect on the volume of provider services rendered Suppose providers exercise market power by resisting care management and risk-bearing

In this case, health plan market power could efficiently reduce output

February 2012

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Economic Analysis in Healthcare Antitrust

Mutually reinforcing health plan and provider concentration?

• In May of 2010, AAG Varney described the results of DOJ’s internal review of health plan entry barriers:* “New insurers cannot compete with incumbents for enrollees without provider

discounts, but they cannot negotiate for discounts without a large number of enrollees. This . . . makes entry risky and difficult.”

“New entrants or niche players are more likely to receive provider discounts comparable to their [insurer] competitors’ in less concentrated markets . . . .”

“It may be easier [for a new health plan] to enter less concentrated markets, with competition between several large but relatively equal-sized insurers, than it is to enter a market with one or two dominant plans.”

• When provider markets are competitive, prices will be pushed down to costs for all customers

• So the dynamic identified by AAG Varney would only exist when there is both provider and health plan market power.

February 2012

* Christine Varney, Remarks as Prepared for the ABA/AHLA, May 24, 2010, http://www.justice.gov/atr/public/speeches/258898.pdf.

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Economic Analysis in Healthcare Antitrust

Mutually reinforcing health plan and provider concentration?

• A variant of this argument lies at the core of the West Penn vs. UPMC/Highmark case: 3rd Circuit, November 29, 2010, overturning the District Court’s granting of

UPMC’s and Highmark’s motion to dismiss: “The plaintiff says that pursuant to the conspiracy, the dominant hospital system used its power in the provider market to insulate the health insurer from competition, and in exchange the insurer used its power in the insurance market to strengthen the hospital system and to weaken the plaintiff.”

DOJ closed its investigation Highmark is at a contracting impasse with UPMC and now intends to acquire

West Penn UPMC has the second largest health plan in Western Pennsylvania

February 2012

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Economic Analysis in Healthcare Antitrust

Economics in other healthcare antitrust contexts

• Provider merger analysis commonly includes econometric analysis ProMedica-St. Luke’s; OSF-Rockford Health System Diversion analyses—analogous to non-healthcare cases, such as TaxAct Econometric analysis of bargaining leverage—”willingness-to-pay”

• Health plan mergers Most recent case, in Montana, was small and resolved via consent decree Standard unilateral effects toolkit is likely to apply to health plan mergers E.g., Upward Pricing Pressure analyses based on matching customers

• Conduct cases MFNs. US v. BCBS of Michigan. What are the economic effects of MFNs? Vertical restrictions and bundled discounts.

When are bundled “discounts” pro-competitive and when do they restrict competition? See DOJ’s Competitive Impact Statement in United Regional.

February 2012

The Role of Economic Analysis in Healthcare Antitrust: Cutting-Edge Economics Meets the

Anomalies of the Healthcare System

AHLA Antitrust Practice Group Mid-Year Luncheon Orlando, FL

February 2012

Cory Capps, PhD

15

Economic Analysis in Healthcare Antitrust

Citations• Glenn A. Melnick, Yu-Chu Shen, and Vivian Yaling Wu, “The Increased Concentration Of Health Plan Markets Can Benefit

Consumers Through Lower Hospital Prices,” Health Affairs, September 2011.• Williams, Vogt, and Town, “How has hospital consolidation affected the price and quality of hospital care?” RWJF Policy

Brief no. 9, February 2006.• C. Capps and D. Dranove, “Market concentration of hospitals,” June 2011,

http://www.ahipcoverage.com/wp-content/uploads/2011/06/ACOs-Cory-Capps-Hospital-Market-Consolidation-Final.pdf. • AHA, Letter to AAG Christine Varney, July 8, 2009,

http://www.ama-assn.org/ama1/pub/upload/mm/399/antitrust-health-insurance-competition-letter.pdf. • AMA, Competition in Health Insurance report, 2011 Update,

https://catalog.ama-assn.org/Catalog/product/product_detail.jsp?productId=prod1940016.• C. Capps, “Comment, Project No. P092900,” Submission of America’s Health Insurance Plans to the Department of Justice

and the Federal Trade Commission on the Horizontal Merger Guidelines Review Project, November 2009, http://www.ftc.gov/os/comments/horizontalmergerguides/545095-00009.pdf

• L. Dafny, D. Dranove, F. Limbrock, and F. Scott Morton, “Data Impediments to Empirical Work on Health Insurance Markets,” B.E. Journal of Economic Analysis & Policy 11, n. 2, Article 8 (2011).

• C. Capps, “Buyer Power in Health in Health Plan Mergers,” Journal of Competition Law and Economics 6, n. 2 (2010).• Christine Varney, Remarks as Prepared for the ABA/AHLA, May 24, 2010,

http://www.justice.gov/atr/public/speeches/258898.pdf.• West Penn Allegheny Health System Inc. v. UPMC, No. 09-4468 (3d Cir. Nov. 29, 2010),

http://www.ca3.uscourts.gov/opinarch/094468p.pdf.• Docket No. 9346, In the Matter of ProMedica Health System, http://www.ftc.gov/os/adjpro/d9346/index.shtm• Docket No. 9349, In the Matter of OSF Healthcare System, http://www.ftc.gov/os/adjpro/d9349/index.shtm• US v. United Regional Health Care System, http://www.justice.gov/atr/cases/unitedregional.html • US v. H&R Block, Inc. and TA IX L.P., http://www.justice.gov/atr/cases/handrblock.html• US v. Blue Cross Blue Shield of Michigan, http://www.justice.gov/atr/cases/bcbsmfn.html• US v. Blue Cross Blue Shield of Montana et al., http://www.justice.gov/atr/cases/bcbsmnw.html

February 2012

Federal Trade Commission

Christopher GarmonBureau of Economics

Economic Analysis and Health Care Antitrust Enforcement

The opinions expressed in this presentation are my own and not necessarily those of the Commission or any individual Commissioner.

Federal Trade Commission

• Health care markets differ from traditional markets in:1. How prices are determined

through negotiations

2. How consumers (patients) choose largely ignoring price

3. The amount of data available for analysis

• These three factors shape the economic tools used in current health care antitrust enforcement

Health Care vs. Traditional Markets

Federal Trade Commission

• Data is plentiful for health care (esp. hospital) analysis Hospital inpatient discharge data Recent efforts to make other health data available as well:

All-payer claims data Health Care Cost Institute

• Downside: Temptation to use data without accounting for the unique aspects of

health care markets Elzinga-Hogarty Critical loss analysis

Health Care Data

Federal Trade Commission

• Bargaining: Prices are set in hospital/health plan negotiations How does a merger affect each side’s “threat point?”

Hospital’s threat point improves as diversion is internalized Health plan’s threat point may worsen with “all-or-nothing” bargaining

• Patient Choice: Choices are largely based on non-price factors

Proximity, clinical quality, amenities, etc.

Health Care Markets

Federal Trade Commission

• Discrete Choice Modeling Model of patient choice as a function of provider characteristics, patient

characteristics, and provider-patient characteristics (e.g., driving time between patient and provider), but not price

• Tools: Diversion

If a hospital is dropped from a health plan network, where will the patients go?

Hypotheticals If a hospital adds a service, how will that change demand?

Competition metrics Willingness-to-Pay, patient-weighted HHI Merger simulation

Tools for Economic Analysis

Federal Trade Commission

• ProMedica/St. Luke’s ALJ’s decision:

“Diversion analysis is a commonly used method to quantify the degree of substitutability between hospitals.” “Based on the diversion analysis, … ProMedica is St. Luke’s closest substitute, … St. Luke’s is ProMedica’s second-closest substitute.” “Professor Town’s willingness to pay model predicts that the volume-weighted average price will increase by 16.2 percent”

Examples

Federal Trade Commission

• Phoebe Putney/Palmyra: Palmyra recently awarded certificate of need for obstetrics services After obstetric services are introduced, what is the estimated diversion

between the hospitals?

Examples

Federal Trade Commission

• How accurate are hospital merger simulations?• Patient price sensitivity?• Should capacity be included in the models?• Vertical issues (e.g., hospital employment of

physicians)• “Upward Pricing Pressure” index for health care

providers • Explicitly including health plans in the model

Areas for Future Research