Tuesday, October 08, 2013

Duopoly:Monopoly or Ferret:Rat?

As I read Julie Donnelly's Boston Business Journal report about Howard Grant's testimony at the recent health care cost trends hearings, I was reminded of a humorous piece written by Art Buchwald many years ago.

It was about competition between the two airlines who ran shuttle services between New York and Washington, DC. It went something like this:

Art calls US Airways to complain: "I see you just raised your fares to New York."

"Yes, we did that to compete against Pan Am. They just raised their fares."

"Wait, I thought the idea of competition was to lower prices."

"Why would we do that? If we lowered our fares, and they followed suit, it would be a race to the bottom. We would both lose money."

Howard, who knows whereof he talks because of his experience with Geisinger Health System in Pennsylvania, was asking the state to refrain from prohibiting potential mergers between Lahey Clinic and other health provider organizations. Julie reports:

Grant said several large, well-integrated systems will have a better chance at lowering costs by treating patients in the most affordable location. He pointed to Lahey Health’s success in directing more patients to less expensive Beverly and Addison Gilbert Hospitals.

The cost containment law “will fail without the fragmented players coming together for legitimate competition, so we don’t cement in (price) disparities,” Grant said during Wednesday health cost hearings held by the state Health Policy Commission.

Grant countered arguments from health insurance executives that in the past, larger systems used leverage to gain higher reimbursements. He said it’s a different world now as we move towards a global payment system that pays to keep people healthy, rather than a fee-for-service system that pays for more procedures.

His testimony squarely sets forth the dilemma facing Massachusetts.  Currently, Partners Healthcare System reigns over the marketplace as a near monopoly provider, when we consider its scale and its ability to beat up the insurance companies.  Howard wants to create a bookend to PHS, presumably with an organization that goes beyond the current one (perhaps encompassing Atrius Health--the largest multi-specialty practice in the state--and BIDMC, the largest non-PHS academic medical center, along with its affilated community hospitals.)

The dilemma is that such an organization might be the only way to offset the power of PHS, but it might create an effective duopoly in the market, further squeezing out other remnants of competition and imposing its will on the insurers in similar fashion to PHS.  In the latter case, Art Buchwald's story would come to pass.

In a way, it's unfair that Howard has to ask the state to back off, because PHS was able to proceed with its empire-building while the government slept, eventually extracting billions in excess revenues from consumers.  Now, though, the Health Policy Commission is charged with reviewing such merger activity, adding a level of state attention that before would have only shown up as very difficult anti-trust cases.  But if you are concerned about the kind of market power that can skew rates and referrals, you don't have to get the level of market power required to win the burden-of-proof argument in anti-trust cases.  It is at that policy--rather than legal--level that the HPC is being asked to work. It is at that policy level that Howard makes his argument.  The problem is that he can't prove the case in advance. He is forced to ask for a display of trust.

Since the state legislature and governor have been shown to be unable or unwilling to take on the market power of PHS, the HPC might feel compelled to permit a growing Lahey-based ACO to be the ferret that takes on the rat.  But given the dangers of duopoly, the state will likely be left to design remedies that would be applied to the Lahey ACO if its market power grew out of whack. Or perhaps the HPC could implement general measures for the entire provider sector (e.g., total transparency of payment rates) that would militate against excessive market power by any participant.  If any of my readers would like to offer their ideas, please comment.


Anonymous said...

Transparency of payment rates sure seems to be the easiest and cheapest way to start, eh? Name me one legitimate (I emphasize that word) reason why that shouldn't happen.


Anonymous said...

Sounds like you are bringing back CareGroup and the PSN with a contracting relationship between Lahey and BIDMC. So what happens to the "losers" in this scenario of two giant players? Steward and NEMC either close, limp along or join with one of the surviving giant networks? Really the only thing keeping them open now is the number of jobs they provide as they continue to lose ground to the bigger players who get stronger and stronger with each passing year.

Nadeem said...

The US has the most diverse of healthcare systems. One thing it teaches - private sector market place frameworks do only one thing - raise costs and deliver an inequitable system.

Anonymous said...

When have we tried "private health sector market place frameworks" in the U.S.?

For markets to work people need to understand what products or services cost and be able to compare competing versions of similar or substitute products.

Except for small segments of the U.S. health marketplace (like lasic eye surgery or the medicare part D - drug insurance market) no one knows what health services cost when buying them, how good they are (quality) or in most cases until very recently, had any incentive to shop around for price.

This is not a private sector marketplace.

Until patients have a financial incentive to shop for lower cost health services and the information to make such decisions (cost and quality info) is readily available in a timely basis, there can be no real private sector marketplace.

IF we had a system, where Partners was competing with other networks of providers and patients (or companies or health purchasers)could compare the cost of annual care upfront with annual budgets per patient like old style capitation then we have the beginnings. As an example if Partners say charged 6000 a year per patient and say BID/Childrens/Atrius could provide the same care for 5500 and Tufts Med network could provide it for 5000, and patients could compare the quality of outcomes (which is basically the same for these three systems). That is the beginnings of a marketplace.

If someone wanted prettier hospital rooms they might want the Partners network. If someone wanted a less costly version of Partners with a more famous pedriatric hospital they could choose BID. If someone wanted high quality, but lower cost care, they could choose Tufts Med Network.

Thats one possible scenario for the future.

Anonymous said...

Well he found a great way to increase profits by only lowering the employee benefits cost and giving holiday bonuses for non-union employees while offering no bonuses or lowered benefits rates to union (read: all the nurses) employees. A nurse may pay up to $300 more per month for health insurance than a non-nurse employee would working the same number of hours. Disgraceful.