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ThePatientProtectionandAffordableCareAct,Consolidation,andtheConsequentImpactonCompetitioninHealthcare
SubcommitteeonRegulatoryReform,CommercialandAntitrustLaw
CommitteeontheJudiciary
UnitedStatesHouseofRepresentatives
BarakD.Richman*BartlettProfessorofLawandBusinessAdministration
DukeUniversity
I. Introduction.......................................................................................................................................1
II. ExplainingPastFailuresinAntitrustPolicy..................................................................... ...4
A.DispellingtheMyththatNonprofitHospitalsDoNotExercisePricingPower....6
B.DispellingtheMyththatNonprofitHospitalsUseProfitsforCharitablePurposes............................................... ............................................. ............................................ ...10
III. TheParticularCostlinessofHealthcareProviderMonopolies:MarketPower+Insurance.........................................................................................................................................15
A.SupraMonopolyPricing...........................................................................................................16
B.MisallocativeConsequences........................................... .................................................. .......19
IV. ANewAntitrustAgenda............................................................................................................22
A.TheSpecialProblemofAccountableCareOrganizations..........................................24
B.RequiringUnbundlingofMonopolizedServices......................................... ...................29
C.ChallengingAnticompetitiveTermsinInsurerProviderContracts......................32
V. Conclusion.......................................................................................................................................35
*ManyoftheideasexpressedhereinarederivedfromscholarshipcoauthoredwithClarkC.Havighurst.
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1
I. IntroductionThankyouMr.Chairmanandmembersofthecommittee.Itisanhonortotestify
beforeyouonatopicthatisextraordinarilyimportanttoournationslongterm
fiscalhealth.
LateststatisticsrevealthattheUnitedStatesspendsnearly18%ofitsGross
DomesticProductonhealthcareservices.ThisisnearlytwicetheaverageforOECD
nationsandfarmorethan#2,whichspendslessthan12%.Viewedanotherway,
theUnitedStatesinpurchaseadjusteddollarsspendsmorethantwoandahalf
timestheOECDaveragepercapitaonhealthcareandmorethanoneandahalf
timesthesecondlargestspender.Yetinspiteofourleadershipinhealthcare
spending,wearesafelyinthebottomhalfofOECDnationsonmostmeasuresof
healthcareoutcomes.
Wearespendingtoomuchandgettingtoolittleinreturn,andthenationsimply
isonanunsustainabletrajectory.Alldiscussionsabouthealthcarepolicyshould
beginwiththerecognitionthatcurbinghealthcarespendingneedstobeamongour
highestnationalpriorities.Thecostofprivatehealthinsuranceisbankrupting
companiesandfamiliesalike,andthecostofpublichealthcareprogramsareputting
unmanageableburdensonthefederalandstatebudgets.
Manystudiessuggestthatthecostofhealthcareisunsustainablenotbecausewe
consumetoomuchhealthcare,butbecausewepaytoomuchforthehealthcarethat
wedoconsume.Inotherwords,asonestudyputitfamously,ItsthePrices,
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Stupid.1Andoneofthemostseverecontributorstotheriseofhealthcareprices
hasbeenthealarmingriseinmarketpowerbyhealthcareproviders.
Thepastseveraldecadeshavewitnessedextraordinaryconsolidationinlocal
hospitalmarkets,withaparticularlyaggressivemergerwaveoccurringinthe
1990s.By1995,mergerandacquisitionactivitywasninetimesitslevelatthestart
ofthedecade,andby2003,almostninetypercentofAmericanslivinginthenations
largerMSAsfacedhighlyconcentratedmarkets.2Thiswaveofhospital
consolidationalonewasresponsibleforsharppriceincreases,includingprice
increasesof40%whenmerginghospitalswerecloselylocated.3Evenafterthis
mergerwaveinthe1990spromptedalarm,asecondmergerwavefrom2006to
2009significantlyincreasedthehospitalconcentrationin30MSAs,andthevast
majorityofAmericansarenowsubjecttomonopolypowerintheirlocalhospital
markets.4
1GerardF.Andersonetal.,ItsthePrices,Stupid:WhytheUnitedStatesIsSoDifferentfromOtherCountries,HEALTHAFFS.,MayJune2003,at89.2WilliamB.Vogt&RobertTown,HowHasHospitalConsolidationAffectedthePriceandQualityofHospitalCare?RobertWoodJohnson(2006);ClaudiaH.Williams,et.al.,HowHasHospitalConsolidationAffectedthePriceandQualityofHospitalCare?ROBERTWOODJOHNSONFOUND.,(2006),availableatwww.rwjf.org/files/research/no9policybrief.pdf3Id.Forsurveysofhowhospitalconsolidationshaveincreasedhospitalprices,seeGloriaJ.Bazzolietal.,HospitalReorganizationandRestructuringAchievedThroughMerger,27HEALTHCAREMGMT.REV.7(2002);MartinGaynor,Competitionand
Qualityin
Health
Care
Markets,2FOUNDATIONS&TRENDSINMICROECONOMICS441
(2006);seealsoWilliamB.Vogt,HospitalMarketConsolidation:TrendsandConsequences(2006),NATLINST.FORHEALTHCAREMGMT.,availableathttp://nihcm.org/pdf/EVVogt_FINAL.pdf(documentingtheextentofprovidermarketconcentrationamonghospitals&otherproviders).4CoryCapps&DavidDranove,MarketConcentrationofHospitals(June2011),availableat:http://www.ahipcoverage.com/wpcontent/uploads/2011/10/ACOs
CoryCappsHospitalMarketConsolidationFinal.pdf
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Hospitalsandhospitalnetworksdidnotachievethismarketdominancethrough
superiorskill,foresight,andindustry,5whichwouldbeunobjectionableunderthe
antitrustlaws.Tothecontrary,thisconsolidationoccurredbecauseofmergersand
acquisitions,andpermittinghospitalmarketstoachievesuchremarkablelevelsof
consolidationrepresentsamajorfailureofourantitrustpolicy.Thereisplentyof
blametosharebothDemocraticandRepublicanAdministrations;Congress,the
Executive,andtheCourtsbutwearenowinapositionwherewemustcopewith
hospitalmonopolists.Inotherwords,wenotonlymustresistanyadditional
consolidationthatcreatesgreatermarketpower,butwemustdeveloppolicytools
thatstemtheharmthatcurrenthospitalmonopolistsareinapositiontoinflict.
Mytestimonyisdividedintothreeparts.Thefirstbrieflyreviewssomeofthe
failuresofantitrustpolicythatpermittedhospitalconsolidations,withafocuson
courtdecisionsinthe1990s.Thesecondpartexplainswhyhospitalandhealthcare
providermonopolypowerisespeciallycostly,evenmorecostlytoAmerican
consumersthanwhatonemightcallatypicalmonopolist.Thethirdpart,
discussesavailablepolicyinstrumentstoprotecthealthcareconsumersagainst
currentandgrowinghospitalmonopolists.Ofparticularinterestismonitoringthe
unfurlingofAccountableCareOrganizations(ACOs),whichareencouragedbythe
PatientProtectionandAffordableCareAct(ACA)and,thoughaimingtoaddress
importantfailuresincoordinatingcare,poseaseriousdangertocreatingadditional
providermarketpower.
5UnitedStatesv.AluminumCo.ofAmerica,148F.2d416,430(2dCir.1945)(Hand,J.)(Thesuccessfulcompetitor,havingbeenurgedtocompete,mustnotbeturneduponwhenhewins.)
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II. ExplainingPastFailuresinAntitrustPolicyEversincetheantitrustlawswerefirstappliedsystematicallyinthehealthcare
sectorinthemid1970s,somejudgesandcommentatorshaveresistedgivingthe
statutorypolicyoffosteringcompetitionitsdueeffectinhealthcaresettings.6
Between1995and2000,forexample,antitrustenforcersencounteredjudicial
resistancewhenchallengingmergersofnonprofithospitals,sufferingasixcase
losingstreakinsuchcasesinthefederalcourts.7Althoughmostofthosepro
mergerdecisionsostensiblyturnedonfindingsoffact(mostlyinidentifyinga
geographicmarketinwhichtoestimatethemergersprobableeffectson
6ForcasesinwhichtheSupremeCourtfounditnecessarytooverrulelowercourtsattemptstoinferspecialantitrustexemptionsorcraftsofterantitrustrulesforhealthcareproviders,seeNationalGerimedicalHospitalandGerontologyCenterv.BlueCrossofKansasCity,452U.S.378(1981)(rejectingimpliedexemptionformarketallocationagreementsbrokeredbyhealthplanningagenciescreatedunderfederalstatute);Patrickv.Burget,486U.S.94(1988)(rejectingstatelegislaturesencouragementofphysicianpeerreviewinhospitalsasabasisforexemptingabusesfromfederalantitrustremedies);SummitHealthv.Pinhas,500U.S.322
(1991)(easingstandardforestablishingpotentialeffectofhospitalmedicalstaffdecisionsoninterstatecommerce);Arizonav.MaricopaCountyMedicalSocy,457U.S.332(1982)(treatingphysicianscollectiveagreementsonmaximumpricesasunlawfulbecauseclaimofprocompetitiveeffectswasfaciallyunconvincing);FTCv.IndianaFederationofDentists,476U.S.447(1986)(upholdingadequacyofevidencetosupportFTCfindingthatdentistsagreementtodenyinsurersaccesstopatientsxrayswasanticompetitive,notprocompetitive).ButseeCaliforniaDentalAss'nv.FTC,526U.S.756(1999)(raisingFTCsburdenofproofinfindinganticompetitivecollectiveactionbyhealthprofessionals).ThelatterdecisioniscriticallyexaminedinClarkC.Havighurst,HealthCareasa(Big)Business:TheAntitrustResponse,26J.HEALTHPOL.POLY&L.939,94953(2001).Theantitrust
movementinhealthcarewastriggeredinpartbytheSupremeCourtsrejectionin1975ofgeneralantitrustimmunityforthesocalledlearnedprofessions.Goldfarbv.VirginiaStateBar,421U.S.773(1975).SeegenerallyCARLF.AMERINGER,THEHEALTHCAREREVOLUTION:FROMMEDICALMONOPOLYTOMARKETCOMPETITION(2008).7U.S.FED.TRADECOMMNANDU.S.DEPT.OFJUSTICE,IMPROVINGHEALTHCARE:ADOSEOFCOMPETITIONch.4,at12n.7(2004),availableathttp://www.usdoj.gov/atr/public/health_care/204694.htm(accessed13May2009)[hereinafterDOSEOFCOMPETITION].
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competition),thosefindingswereoftensoarbitraryastosignifyjudicialskepticism
aboutthewisdomofapplyingantitrustlawrigorouslyinhospitalmarkets.8Evenas
nonprofithospitalsbecametheprimaryproviderofthenationshospitalcare
responsiblefor73%ofadmissions,76%ofoutpatientvisits,and75%ofhospital
expenditurestheytendedtoenjoyselectivescrutinyundertheantitrustlaws.
Implicitly,andoftenexplicitly,thejudgesseemedtoharborabeliefthatnonprofit
hospitalseitherwouldnotexerciseorwouldputtogooduseanymarketpowerthey
mightpossess.9
Thecourtsinabilityovertimetoapplyantitrustlawrigorouslytothebig
businessofhealthcareandtheFTCsfailureinconvincingthemtodoso,and
8Fordiscussionsofthesecasesandofthegeneralambivalencetowardscompetitioninhealthcaremarkets,seeBarakD.Richman,AntitrustandNonprofitHospitalMergers:AReturntoBasics,156U.PA.L.REV.121(2007);MartinGaynor,WhyDontCourtsTreatHospitalsLikeTanksforLiquefiedGasses?SomeReflectionsonHealth
CareAntitrustEnforcement,31J.HEALTHPOL.POLY&L.497(2006);ThomasL.Greaney,NightLandingsonanAircraftCarrier:HospitalMergersandAntitrustLaw,
23AM.J.L.&MED.191(1997).9ThedistrictjudgeinFTCv.ButterworthHealthCorp.,946F.Supp.1285(W.D.Mich.1996),wasespeciallyunambiguousinchampioningnonprofithospitalsasbenignmonopolists:
Permittingdefendanthospitalstoachievetheefficienciesofscalethatwould clearly result from the proposed merger would enable theboardofdirectors of the combinedentity tocontinue the quest forestablishment of worldclass health facilities in West Michigan, acoursetheCourtfindsclearlyandunequivocallywouldultimatelybeinthebestinterestsoftheconsumingpublicasawhole.
Id.at1302.Likewise,thejudgerevealedahostilitytopricecompetitionbetween
hospitals,remarkingthat[i]ntherealworld,hospitalsareinthebusinessofsavinglives,andmanagedcareorganizationsareinthebusinessofsavingdollars.Id.TheButterworthcourtwasnotaloneinitspredilections.AMissourijudge,reviewingahospitalmergerchallengedbytheFTC,remarkedtothefederalagency,Idontthinkyouvegotanybusinessbeinginhere....ItlookstomelikeWashington,D.C.onceagainthinkstheyknowbetterwhatsgoingoninsouthwestMissouri.IthinktheyoughttostayinD.C.FTCv.FreemanHosp.,69F.3d260,263(8thCir.1995)(quotingdistrictcourtoralhearing).
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Congressfailureininstructingthemtodosoisoneimportantreasonwhymany
healthcaremarketsarenowdominatedbyfirmswithalarmingpricing
power.10Fortunately,thegovernmenthasmorerecentlywonbacksomeofthelegal
grounditlost.
A.DispellingtheMyththatNonprofitHospitalsDoNotExercisePricingPower
In2007,theFederalTradeCommission(FTC),inacasechallengingamergerof
nonprofithospitalsonChicagosNorthShore,foundconvincingproofthat,following
themerger,thenewentityhadsubstantiallyraisedpricestomanagedcare
organizations.11Thecasewasunusualbecause,ratherthaninterveningtostopthe
acquisitionwhenitwasfirstproposed,theCommissioninitiateditschallengefour
yearsafterthemergerwasconsummated.Bringingthecaseatthatstage
accomplishedtwothings:First,itmadeitunnecessaryfortheCommissiontoseeka
preliminaryinjunctionagainstthemergerinfederalcourtwhereantitrust
enforcershadlostthesixpreviouscases.Second,challengingacompletedmerger
gavetheCommissionsstaffanopportunitytodemonstrateinfact,andnotjustin
theory,thatnonprofithospitalsgainingnewmarketpowerwilluseittoincrease
10Forsurveysofhowhospitalconsolidationshaveincreasedhospitalprices,seeG.B.Bazzoli,etal.,HospitalReorganizationandRestructuringAchievedthroughMerger,27HEALTHCAREMANAGEMENTREV.7(2002);MartinGaynor,Competitionand
Qualityin
Health
Care
Markets,2FOUNDATIONSANDTRENDSINMICROECONOMICS441
(2006);WilliamB.Vogt,HowHasHospitalConsolidationAffectedthePriceandQualityofHospitalCare?,THESYNTHESISPROJECT,at9(2006).SeealsoSeeWilliamB.Vogt,HospitalMarketConsolidation:TrendsandConsequences,EXPERTVOICES,NIHCMFoundation,availableat:http://nihcm.org/pdf/EVVogt_FINAL.pdf(documentingtheextentofprovidermarketconcentrationamonghospitals&otherproviders).11InreEvanstonNorthwesternHealthcareCorp.,2007WL2286195(F.T.C.2007).
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prices.ThedirectproofobtainedintheEvanstonNorthwesterncasemakesit
unlikelythatfuturefederalcourtswillallowtheconsummationofmergersof
nonprofithospitalsundertheillusionthatsuchmergersdonothavetheusualanti
competitiveeffects.
TheFTCsfindingsinEvanstonNorthwesternalsodiscreditedexpert
economictestimonythatonecourthadcitedprominentlyinapprovingahospital
mergerinGrandRapids,Michigan.Thattestimonyrestedonempiricalresearch
purportingtoshowthatinconcentratedmarketsnonprofithospitalsgenerallyhad
lowerpricesthancorrespondingforprofits.12Althoughthatresearchhadbeen
effectivelydiscreditedinlatereconomicstudies,13thefactsfoundinEvanston
Northwesternshouldputfinallytorestthenotionthatnonprofithospitalsare
immunefromthetemptationtoraisepriceswhentheyareinapositiontodoso.
EvanstonNorthwesternsfindingsalsoundercutthecommonbeliefthat
communityleadersonanonprofithospitalsgoverningboardarevigilantabout
healthcarecosts.ThejudgeintheGrandRapidscasepermittedthemergerinpart
becausethechairmenofthetwohospitalsboardseachrepresentedalargelocal
12FTCv.ButterworthHealthCorp.,946F.Supp.1285,1297(W.D.Mich.1996)(citingexpertsfindingssuggestingthatasubstantialincreaseinmarketconcentrationamongnonprofithospitalsisnotlikelytoresultinpriceincreases).Theexpertcitedbythecourt,WilliamJ.Lynk,reachedthesameconclusioninscholarlyarticles.WilliamJ.Lynk,NonprofitHospitalMergersandtheExerciseofMarketPower,38J.L.&ECON.437(1995);WilliamJ.Lynk,PropertyRightsandthe
Presumptionsof
Merger
Analysis,39ANTITRUSTBULL.363,377(1994).
13SeeDOSEOFCOMPETITION,supranote7,ch.4,at33(concludingthebestavailableevidenceindicatesthatnonprofitsexploitmarketpowerwhengiventheopportunitytodoso);DavidDranove&RichardLudwick,CompetitionandPricingbyNonprofitHospitals:AReassessmentofLynksAnalysis,18J.HEALTHECON.87(1999);EmmettB.Keeler,GlennMelnick,&JackZwanziger,TheChangingEffectsofCompetitiononNonProfitandForProfitHospitalPricingBehavior,18J.HEALTHECON.69(1999).
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ArecentreportbytheMassachusettsAttorneyGeneraldocumentshow
nonprofithospitalsinthatstatehaveaggressivelyexploitedtheirmarketpower,
evenwhenhealthcarecostswerestranglingpublicandprivatebudgets.18
FollowingMassachusettsspassageofthenationsfirstlegislativeefforttoachieve
universalhealthcoverage,thestatelegislaturedirectedtheAttorneyGeneralto
analyzethecausesofrisinghealthcarecosts.Theresultingreportconcludedthat
pricesforhealthservicesareuncorrelatedwitheitherqualityorcostsofcarebut
insteadarepositivelycorrelatedwithprovidermarketpower.19Thereportfurther
observedthatprominentnonprofitacademicmedicalcentersspecifically,the
MassachusettsGeneralHospitalandBrighamandWomensHospital,whichhad
mergedin1993tocreatePartnersHealthCareweremostresponsiblefor
leveragingtheirmarketandreputationalpowertoextracthighpricesfrom
insurers.20ReportingbytheBostonGlobehadpreviouslyshownthesurprising
extenttowhichPartnerswasabletoextractextraordinarypricesinagreements
withpresumablycostconsciousinsurers.21Forexample,whensomeinsurers,such
astheTuftsHealthPlan,resistedPartnersdemandsforpriceincreasesandtriedto
assemblenetworkswithBostonsotherhospitals,Partnerslaunchedanaggressive
18MassachusettsAttorneyGeneral,ExaminationofHealthCareCostTrendsandCostDriversPursuanttoG.L.c.118G,6(b)(March16,2010),availableat:http://www.mass.gov/Cago/docs/healthcare/final_report_w_cover_appendices_glossa
ry.pdf[hereinafterHealthCareCostTrends]19Id.
at1633.
20Id.;seeespecially2930.21SpecialReport:UnhealthySystem,availableat:http://www.boston.com/news/specials/healthcare_spotlight/(detailingspecialreportingonPartnersHealthCare,culminatinginathreepartseries);AHealthcareSystemBadlyOutofBalance,BostonGlobe,Nov.16,2008;FueledbyProfits,aHealthcareGiantTakesAimatSuburbs,BostonGlobe,Dec.21,2008;AHandshakeThatMadeHealthcareHistory,BostonGlobe,Dec.28,2008.
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marketingcampaignthattriggeredthreatsbymanyofTuftscorporatecustomersto
switchinsurers.22
Theforegoingobservationsshouldfinallydispelanyimpressionthat
nonprofithospitals,ascommunityinstitutions,cansafelybeallowedtopossess
marketpoweronthetheorythat,asnonprofits,theycanbetrustednottoexercise
it.
B.DispellingtheMyththatNonprofitHospitalsUseProfitsforCharitablePurposes
Federaljudgesmayhavetoleratedmergersconferringnewmarketpoweron
nonprofithospitalslessbecausetheythoughtthehospitalswouldnotexercisethat
powerthanbecausesuchhospitalsseemedtodifferfromconventionalmonopolists
inwaysthatshouldlessensocialconcernabouttheirenrichment.Specifically,
nonprofit,taxexempthospitalsarerequiredbytheirchartersandthefederaltax
codetoretaintheirprofitsandusethemonlyforcharitablepurposes.Thus,ifone
couldassumethattheredistributionsofwealthresultingfromtheexerciseof
marketpowerbynonprofithospitalsrungenerallyfromrichertopoorerrather
thanintheoppositedirection,therewouldbeatleastanargumentforviewing
nonprofithospitalmonopoliesasbenignforantitrustpurposes.Althoughsuchan
argumentwouldbebasedonaquestionablereadingoftheantitruststatutes,one
22AHandshakeThatMadeHealthcareHistory,id.,(describingthehumiliationexperiencedbytheTuftsHealthPlansCEOashecavedtoPartnerspricedemandsandbecameanobjectlessonforotherinsurers,alessontheywouldnotsoonforget[asthe]thebalanceofpowerhadshiftedtoPartners).InOrlando,insurerUnitedHealthcareexperiencedsimilarthreatsasitresistedarequestfora63percentpriceincreasebytheregionsleadingnonprofithospitalchain.LindaShrieves,400,000FearTheyllHavetoSwitchDoctors,ORLANDOSENTINEL,Aug.7,2010.
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widelynotedcaseallowedprestigiousuniversitiestoactanticompetitivelyinorder
todirecttheirlimitedscholarshipfundstowardlowerincomestudents.23One
easilysensesinhospitalmergercasesasimilarjudicialdispensationinfavorof
nonprofitenterprisesthatcombineforseeminglyprogressivepurposes.24
Buthoweverantitrustdoctrineviews(orshouldview)monopoliesdedicated
toprogressivepursuits,itisfarfromclearthatnonprofithospitalsreliablyusetheir
dominantmarketpositionstoredistributewealthonlyinprogressivedirections.
TheInternalRevenueCodescharitablepurposesrequirementhasbeeninterpreted
verybroadly,allowingsuchhospitalstospendtheiruntaxedsurplusesonanything
thatarguablypromoteshealth.25Thisincludesmuchmorethanjustcaringforthe
indigent.Indeed,manyexempthospitalsarelocatedinareasthatneedrelatively
littleinthewayoftrulycharitablecare,eitherbecausethecommunityisrelatively
affluentanditspopulationwellinsuredorbecauseapublichospitalassumesmost
ofthecharityburden.Moreover,althoughallhospitalsinevitablysubsidizethe
treatmentofsomeuninsuredpatients,manyoftodaysuninsuredaremembersof
themiddleclassandnotobviouscandidatesforsubsidiesfromtheinsured
23UnitedStatesv.BrownUniv.,5F.3d658(3dCir.1993).Readingthisrulingasanendorsementoftheuniversitiesredirectionofscholarshipfundstoneedierstudentswouldatleastlimitsubstantially(andprudently)thekindofworthypurposeacartelofnonprofitentitiesmayofferasanantitrustdefense.24See,
e.g.,supranote9.
25Rev.Rul.69545,19692C.B.117(1969).Ironically,thiscontroversialruling,relaxinganearlierrequirementthatanexempthospitalmustbeoperatedtotheextentofitsfinancialabilityforthosenotabletopayfortheservicesrendered,Rev.Rul.56185,19561C.B.202,cameatatimewhentheMedicareandMedicaidprogramswererelativelynewandprivatehealthinsurancewasexpanding,allseeminglyreducingtheneedfornonprofithospitalstobecharitableintheoriginalsense.
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population.26Finally,federal,state,andlocalgovernmentsseparatelyand
substantiallysubsidizenonprofithospitalsmostclearlycharitableactivities,both
throughspecialtaxexemptionsandreliefandbydirectsubventions;suchactivities
thereforeshouldnotcountsignificantlyinestimatingthenetdirectionof
redistributionseffectedbyhospitalsthroughtheexerciseofnewlyacquiredmarket
power.
Thus,truecharityhasinrecentyearsaccountedforonlyarelativelysmall
fractionofwhatnonprofithospitalsdoinreturnfortheirfederaltaxexemptions.
Indeed,suchhospitalscanusuallyqualifyforexemptionmerelybyspendingtheir
surplusesonmedicalresearch,ontrainingvarioustypesofhealthcarepersonnel,
and,mostimportantly,onacquiringstateoftheartfacilitiesandequipment,which
(ironically)canalsosecureandenhancetheirmarketdominance.27Manyofthese
26Supplementalcensusdatafrom2007showedthatnearly38%ofAmericas
uninsuredcomefromhouseholdswithover$50,000inannualincomeandnearly20%fromhouseholdswithover$75,000.SeeU.S.CENSUSBUREAU,INCOME,POVERTY,ANDHEALTHINSURANCECOVERAGEINTHEUNITEDSTATES21table6(August2007),http://www.census.gov/prod/2007pubs/p60233.pdf.ImplementationofthePPACAwillgreatlyreducehospitalscharityburdens,leavingillegalaliensastheprincipalcategoryoftheuninsured.27OnPartnersHealthCaresuseofitssurplusestobuildnewandbetterfacilitiesandexpandintonewmarkets,therebysecuringadditionalmarketpower,seeFueledbyProfits,aHealthcareGiantTakesAimatSuburbs,BOS.GLOBE,Dec.21,2008.
Notonlydoestaxexemptioncreateopportunitiesfordominantfirmstoincreasetheirdominance,butanonprofitfirmlackingsuchdominancemaybe
ineligibleforexemptionandthusataseverecompetitivedisadvantagepreciselybecauseitfacescompetitionandthereforelacksthediscretionaryfundsnecessarytodemonstratehowitbenefitsthecommunity.Taxpolicythusrewards,fosters,andprotectsprovidermonopoly,onlyensuringthatmonopolyprofits,howeverlarge,arenotputtoobjectionable,nonhealthrelateduses.Cf.GeisingerHealthPlanv.Commissioner,985F.2d1210(3dCir.1993)(denyingtaxexemptiontononprofithealthplaninpartbecauseitwasnotaprovider,butonlyarrangedfortheprovision,ofhealthservicesandalsobecause,althoughitplannedtosubsidize
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activitiesconfersignificantbenefitsoninterestsandindividualsrelativelyhighon
theincomescale.28Tobesure,mostoftheactivitiesandprojectsfinancedfrom
hospitalsurplusesarehardtocriticizeintheabstract.Butmanyofthemarenotso
obviouslyprogressiveintheirredistributiveeffects(orotherwisesoobviously
worthyofpublicsupport)thatantitrustprohibitionsshouldberelaxedsothat
hospitalscanfinancemoreofthem.
Inanycase,financinghospitalactivitiesandprojectsofanykindfrom
hospitalsmonopolyprofitscausestheircoststofallultimatelyandmoreorless
equallyonindividualsbearingthecostofhealthinsurancepremiums.The
incidenceofthisfinancialburdenthuscloselyresemblesthatofaheadtaxthat
is,oneleviedequallyonindividualsregardlessoftheirincomeorabilitytopay.Few
methodsofpublicfinancearemoreunfair(regressive)thanthis.Thosewhotakea
benignviewoftheseeminglygoodworksofhealthcareprovidersshouldfocus
moreattentiononwho(ultimately)paysforandwhobenefitsfromthosenominally
charitableactivities.29
premiumsforsomelowincomesubscribers,ithadbeenunabletosupporttheprogramwithoperatingfundsbecauseitoperatedatalossfromitsinception).28Manyphysicians,forexample,benefithandsomelyfirstfromthevaluabletraininghospitalsprovideandlaterfromusingexpensivehospitalfacilitiesandequipmentatnodirectcosttothemselves.Thetaxauthoritiesregardsuchprivatebenefitsas
merelyincidentaltothehospitalslargerpurposeofpromotingthehealthofthecommunity.SeeI.R.S.Gen.Couns.Mem.39,862(Dec.2,1991):Inourview,someprivatebenefitispresentinalltypicalhospitalphysicianrelationships....Thoughtheprivatebenefitiscompoundedinthecaseofcertainspecialists,suchashearttransplantsurgeons,whodependheavilyonhighlyspecializedhospitalfacilities,thatfactalonewillnotmaketheprivatebenefitmorethanincidental.29SeegenerallySymposium,WhoPays?WhoBenefits?DistributionalIssuesinHealthCare,LAW&CONTEMP.PROBS.,Autumn2006.
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Theregressiveredistributiveeffectsofnonprofithospitalsmonopolies
appearnevertohavebeengivendueweightinantitrustappraisalsofhospital
mergers.30Tobesure,pureeconomictheorywithholdsjudgmentontherightness
orwrongnessofredistributingincomebecauseeconomistshavenoobjectivebasis
forpreferringonedistributionofwealthoveranother.Buttheantitrustlawsenjoy
generalpoliticalsupportprincipallybecausetheconsumingpublicresentstheidea
ofillegitimatemonopolistsenrichingthemselvesattheirexpense.31Thisiswhy
mergersofallkindsaresuspectintheeyesofantitrustenforcers:theymaybean
easyandunjustifiedshortcuttogainingmarketpower.Althoughproponentsof
consolidationsincreasingconcentrationinprovidermarketsusuallytout
efficienciestheyexpecttoachievebycombiningandrationalizingoperations,the
opportunitytoincreasetheirbargainingpowervisvisprivatepayersisthe
likelierexplanationforallsuchmergersinconcentratedmarkets.32
30Underreasonableassumptions,ahospitalmergercreatingnewmarketpowerwouldraiseinsurancepremiumsbyroughly3percent,increasingtheheadtaxonthemedianinsuredfamilybyroughly$400peryear,hardlyatrivialamount.Inaddition,accordingtooneestimate,hospitalmergersinthe1990scausednearly700,000Americanstolosetheirprivatehealthinsurance.RobertTownetal.,TheWelfareConsequencesofHospitalMergers(NatlBureauofEcon.Research,WorkingPaperNo.12244,2006).31HERBERTHOVENKAMP,FEDERALANTITRUSTPOLICY:THELAWOFCOMPETITIONANDITSPRACTICE50(3ded.2005)([T]heprimaryintentoftheShermanActframers[was]thedistributivegoalofpreventingmonopolistsfromtransferringwealthawayfromconsumers.)32See
DAVIDDRANOVE,THEECONOMICEVOLUTIONOFAMERICANHEALTHCARE:FROMMARCUS
WELBYTOMANAGEDCARE122(2000):Ihaveaskedmanyproviderswhytheywantedtomerge.Althoughpubliclytheyallinvokedthesynergiesmantra,virtuallyeveryonestatedprivatelythatthemainreasonformergingwastoavoidcompetitionand/orobtainmarketpower.SeealsoRobertA.Berensonetal.,UncheckedProviderCloutinCaliforniaForeshadowsChallengestoHealthReform,29HEALTHAFF.699,699(2010).,at6(quotingalocalphysicianassaying,Whyarethosehospitalsandphysicians[integrating]?Itwasntforincreasedcoordinationof
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A.SupraMonopolyPricing
Inthetextbookmodel,monopolyredistributeswealthfromconsumersto
powerfulfirms.Themonopolistshigherpriceenablesittocaptureforitselfmuchof
thewelfaregain,orsurplus,thatconsumerswouldhaveenjoyediftheyhadbeen
abletopurchasethevaluedgoodorserviceatalow,competitiveprice.Inhealth
care,insuranceputsthemonopolistinanevenstrongerpositionbygreatly
weakeningtheconstraintonitspricingfreedomordinarilyimposedbythelimitsof
consumerswillingnessorabilitytopay.Thiseffectappearsintheoryasa
steepeningofthedemandcurveforthemonopolizedgoodorservice.Whereas
mostmonopolistsencounterareductionindemandwitheachpriceincrease,health
insurancemutesthemarginalconsequencesofrisingprices.
Ifhealthinsurersweredutifulagentsoftheirsubscribersandperfectly
reflectedsubscriberspreferences,theywouldreflectconsumersdemandcurveand
payonlyforservicesthatwerevaluedbyindividualinsuredsatlevelshigherthan
themonopolyprice.Deficienciesinthedesignandadministrationofrealworld
healthinsurance,however,preventinsurersfromreproducingtheirinsureds
preferencesandheavilymagnifymonopolypower.Forlegal,regulatory,andother
reasons,healthinsurersintheUnitedStatesareinnoposition(asconsumers
themselveswouldbe)torefusetopayaprovidershighpricewheneveritappears
toexceedtheserviceslikelyvaluetothepatient.Instead,insurersareboundby
bothdeeprootedconventionandtheircontractswithsubscriberstopayforany
servicethatisdeemedadvantageous(andtermedmedicallynecessaryunder
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rathergenerouslegalstandards)forthepatientshealth,whateverthatservicemay
cost.33
Consequently,closesubstitutesforaprovidersservicesdonotcheckits
marketpowerastheyordinarilywouldforothergoodsandservices.Indeed,
puttingasidethemodesteffectsofcostsharingonpatientschoices,theonly
substitutetreatmentsorservicesthatinsuredpatientsarelikelytoacceptarethose
theyregardasthebestonesavailable.Unlikethesituationwhenanordinary
monopolistsellsdirectlytocostconsciousconsumers,therewardstoamonopolist
sellinggoodsorservicespurchasedthroughhealthinsurancemayeasilyand
substantiallyexceedtheaggregateconsumersurplusthatpatientswouldderiveat
competitiveprices.
Thus,healthinsuranceenablesamonopolistofacoveredservicetocharge
substantiallymorethanthetextbookmonopolyprice,therebyearningevenmore
thantheusualmonopolyprofit.Themagnitudeofthemonopolyplusinsurance
distortionhassometimesevensurpriseditsbeneficiaries.34Ofcourse,sincethird
partypayors(andnotpatients)arecoveringtheinterimbill,theseextraordinary
profitsmadepossiblebyhealthinsuranceareearnedattheexpenseofthose
33SeegenerallyTimothyP.Blanchard,MedicalNecessityDeterminationsAContinuingHealthcarePolicyProblem,JournalofHealthLaw37,no.4(2003):599627;WilliamSage,ManagedCaresCrimea:MedicalNecessity,TherapeuticBenefit,andtheGoalsofAdministrativeProcessinHealthInsurance,DukeLawJournal53
(2003):597;EinerElhauge,TheLimitedRegulatoryPotentialofMedicalTechnologyAssessment,VirginiaLawReview82(1996):15251617.34FortrulystunningexamplesofthepriceincreasingandprofitgeneratingeffectsofcombiningUSstylehealthinsuranceandmonopoly,seeGeetaAnand,TheMostExpensiveDrugs,Parts14,WallStreetJournal,November1516,December1,28,2005;inthisseries,seeespeciallyHowDrugsforRareDiseasesBecameLifelineforCompanies,November15,2005,A1(inwhichonedrugcompanyexecutiveisquotedassaying,Ineverdreamedwecouldchargethatmuch.)
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bearingthecostofinsurance.Insureds,evenwhentheiremployersarethedirect
purchasersofhealthinsurance,areultimatelytheonesseeingtheirtakehome
shrinkfromhikesininsurancepremiumscausedbyprovidermonopolies.
Discussionsofantitrustissuesinthehealthcaresectorrarely,ifever,
explicitlyobservehowhealthinsuranceingeneralorU.S.styleinsurancein
particularenhancestheabilityofdominantsellerstoexploitconsumers.Although
scholarshavepreviouslyobservedthatpricesforhealthservicesaremuchhigherin
theUnitedStatescomparedtootherOECDnations(withoutobservabledifferences
inquality),35andalthoughmanyhaveobservedthatprovidermarketpowerhas
beenasignificantfactorininflatingthoseprices,36fewhaveobservedthe
synergisticeffectsofmonopolyandhealthinsurance.
Perhapsmorenotably,despitethehugeimplicationsforconsumersandthe
generalwelfare,thespecialredistributiveeffectsofmonopolyinhealthcare
marketsarenotmentionedintheantitrustagenciesdefinitivestatementsof
enforcementpolicyinthehealthcaresector.37Antitrustanalysisofhospital
mergersaswellasofotheractionsandpracticesthatenhanceprovideror
suppliermarketpowermustthereforeexplicitlyrecognizetheimpactofinsurance
onhealthcaremarkets.Thenationwillfinditfarharder,perhapsliterally
impossible,toaffordPPACAsimpendingextensionofgeneroushealthcoverageto
additionalmillionsofconsumersifmonopolistsofhealthcareservicesandproducts
cancontinuetochargenotwhatthemarketbutwhatinsurerswillbear.
35See,e.g.,DianaFarrelletal.,AccountingfortheCostofU.S.HealthCare:ANewLookatWhyAmericansSpendMore,(McKinseyGlobalInstitute,2008).36Seesupra,notes23.37Seesupra,note7.
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B.MisallocativeConsequences
Allowingproviderstogainmarketpowerbymergernotonlycauses
extraordinaryredistributionsofwealthbutalsocontributestoinefficiencyinthe
allocationofresources.Inironiccontrasttotheoutputrestrictionsassociatedwith
monopolyineconomictheory,themisallocativeeffectscitedheremostlyinvolvethe
productionandconsumptionoftoomuchratherthantoolittleofagenerally
goodthing.Thesemisallocationsareboththeoreticallyandpracticallyimportant.
Theyprovidestillanothernewreasonforspecialantitrustandothervigilance
againstprovidersmonopolisticpractices,particularlyscrutinizinganticompetitive
mergersandpowerfuljointventures.
Evenintheabsenceofmonopoly,conventionalhealthinsuranceenables
consumersandproviderstooverspendonoverlycostlyhealthcare.Thisis,of
course,thefamiliareffectofmoralhazardeconomiststermforthetendencyof
patientsandproviderstospendinsurersmoneymorefreelythantheywouldspend
thepatientsown.Tobesure,somemoralhazardcostsarejustifiedasan
unavoidablepricetoprotectindividualsagainstunpredictable,highcostevents.
ButAmericanhealthinsurersaresignificantlyconstrainedinintroducing
contractual,administrative,andothermeasurestocontainsuchcosts.U.S.style
healthinsuranceisthereforemoredestructiveofallocativeefficiencythanhealth
insurancehastobe.Althoughuncontrolledmoralhazardisaproblemthroughout
thehealthsector,combininginefficientlydesignedinsurancewithprovider
monopoliescompoundstheeconomicharm.
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Theextraordinaryprofitabilityofhealthsectormonopoliesalsointroducesa
dynamicsourceofresourcemisallocationbygreatlystrengtheningtheusual
inducementforfirmstoseekmarketdominance.Theintroductionsofnew
technologieshavebeenamajorsourceperhapsprimary,responsibleforasmuch
as4050percentofhealthcarecostincreasesoverthepastseveraldecades.38And
eventhoughmanyinnovationsofferonlymarginalvalue,theirmonopolypower
underintellectualpropertylawssecurelucrativepaymentsfrominsurerswhose
handsaretied.Althoughmanyhaverecognizedthatnewtechnologiesarea
principalsourceofunsustainableincreasesinhealthcarecosts,andseveralothers
haverecognizedhowthemoralhazardofinsurancehasbothfueledtechnology
drivencostincreasesanddistortedinnovationincentives(towardcostincreasing
innovationsattheexpenseofcostreducinginnovations),39fewhaveappreciated
thecontributingroleofinsuranceinexacerbatingthemonopolieseffects.
38DanielCallahan,HealthCareCostsandMedicalTechnology,inFromBirthtoDeathandBenchtoClinic:TheHastingsCenterBioethicsBriefingBookforJournalists,Policymakers,andCampaigns,ed.MaryCrowley(Garrison,NY:TheHastingsCenter,2008),7982.SeealsoPaulGinsburg,ControllingHealthCareCosts,NewEnglandJournalofMedicine351(2004):159193;HenryAaron,Serious&UnstableCondition(Washington,DC:BrookingsInstitutionPress,1991).39SeeAlanM.Garber,CharlesI.Jones,andPaulM.Romer,InsuranceandIncentivesforMedicalInnovation(workingpaper12080,NationalBureauofEconomicResearch,2006);BurtonWeisbrod,TheHealthCareQuadrilemma:AnEssayonTechnologicalChange,Insurance,QualityofCare,andCostContainment,Journalof
EconomicLiterature29,no.2(June1991):52352;SheilahSmith,JosephP.Newhouse,&MarkFreeland,Income,Insurance,andTechnology:WhyDoesHealthSpendingOutpaceEconomicGrowth?HealthAffairs28,no.5(2009):127684.SeealsoDanaGoldmanandDariusLakdawalla,UnderstandingHealthDisparitiesacrossEducationGroups(workingpaper8328,NationalBureauofEconomicResearch,2001)(suggestingthatpopulationwideincreasesineducationhaveencouragedpursuitofpatientintensiveinnovationsthatincreasecosts,ratherthansimplertechnologiesthatreducethem).
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Providermonopoliesalsoinflicteconomicharmbyspendingheavilyto
sustaincurrentmonopolybarriers.Indeed,RichardPosnerhastheorizedthat
monopolysmostseriousmisallocativeeffectisnottheoutputreductionrecognized
intheoreticalmodelsbutinsteadisthemonopolist'sstrenuouseffortstoobtain,
defend,andextendmarketpower.40Amonopolistiswillingtoinvestuptothe
privatevalueofitsmonopolyinmaintainingit(andkeepingoutcompetitors),and
themorelucrativethemonopoly,themoreafirmwillbeinducedtoinvestheavily
insustainingmonopolybarriers.Sincesomanymonopoliesaremaintainedwith
legalandregulatorybarrierscertificateofneedlaws,accreditation,andcontracts
restrictingprovidernetworks,forexamplemuchofthiseffortisspentonlegaland
politicalresourcesthatfritterawaytheprivatevalueofthemonopoly,ratherthan
reinvestinginactivitiesthatcreateadditionalsocialvalue.Evenmanagersof
nonprofitfirms,thoughtheyhavenointerestinprofitsassuch,haveincentivesto
maintainmonopoliestofundtheconstructionandexpansionofempiresthat
enhancetheirselfesteemandprofessionalinfluence.Suchempirebuildingismost
easilyaccomplishedbyobtainingmarketpowerandusingittogeneratesurpluses
withwhichtofurtherentrenchandextendthefirmsdominance.
Inlightofthedisproportionatelylargeshareofnationalresourcesalready
beingspentonhealthcareintheUnitedStatescomparedtoeveryothernationin
theworld,andespeciallyonceonerecognizestheextraordinarypricingfreedom
thatU.S.stylehealthinsuranceconfersonmonopolistprovidersandsuppliers,the
enormousburdenofdistortivehealthsectormonopoliesprovidecompelling,even
40RichardA.Posner,AntitrustLaw:AnEconomicPerspective,2nded.(UniversityofChicagoPress,2001),1318.
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alarming,reasonstoapplytheantitrustlawswithparticularforce.Antitrust
policymakers,Ibelieve,areuptothetaskofrestoringcompetitioninhealthcare
marketswhereitislacking,butitwillrequiretargetingprovidersandsuppliersof
healthservicesseekingtoachieve,entrench,andenhancemarketpower.
IV. ANewAntitrustAgenda
Cangovernment,throughantitrustenforcementorotherwise,doanythingabout
theproblemofproviderandsuppliermarketpowerinhealthcaremarkets?
Althoughtheenforcementagenciesandcourtsshouldcertainlyscrutinizenew
hospitalmergersandsimilarconsolidationswithgreaterskepticism,preventing
newmergerscannotcorrectpastfailurestomaintaincompetitioninhospitaland
othermarkets.Enforcersmaychallengethelegalityofpreviouslyconsummated
mergers,astheFTCdidintheEvanstonNorthwesterncase,buttherearepractical
andjudicialdifficultiesinfashioningaremedythatmightrestorethecompetition
thattheoriginalmergerdestroyed.TheFTCwasunwilling,forexample,todemand
thedissolutionofEvanstonNorthwesternHealthcareCorp.andinsteadmerely
ordereditsjointlyoperatedhospitalstonegotiateseparatecontractswithhealth
plansaremedy,incidentally,thatgavethenegotiatingteamofneitherhospitalany
reasontoattractbusinessfromtheother.41AlthoughtheFTCmightseekmore
substantialreliefinothersuchcases,thegeneralruleseemstobethatold,unlawful
41Despitelosingthoroughlyonthemerits,therespondentdeclareditselfthrilledwiththeFTCsremedy.SeeNorthShoreUniversityHealthSystemsFTCRulingKeepsEvanstonNorthwesternHealthcareIntact,pressrelease,August6,2007,www.northshore.org/aboutus/press/pressreleases/ftcrulingkeepsevanstonnorthwesternhealthcareintact/(accessedMay3,2012).
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mergersareamenabletolaterbreakuponlyintheunusualcasewherethe
componentpartshavenotbeensignificantlyintegrated.42Inanycase,giventheir
pastskepticismaboutantitrustenforcementinhealthcaremarkets,andespecially
theirhandinblessingmanymergersthatoughtnowbeunwound,courtswouldbe
hardtoenlistinanantitrustcampaigntorollbackearlierconsolidations.43
Thus,apolicyagendacapableofredressingtheprovidermonopolyproblemin
healthcarewillneedtoemployotherlegalandregulatoryinstruments.Afirstorder
ofbusinesswouldbetofastidiouslypreventtheformationofnewprovider
monopolies.Becausehealthcareproviderscontinuetoseekopportunitiesto
consolidateeitherthroughtherecentwaveofformingAccountableCare
Organizations(ACOs)orthoughalternativemeansthereremainseveralfronts
availableforpolicymakerstowageantitrustbattle.Inaddition,anarrayofother
enforcementpoliciescantargetmonopolistsbehavingbadlythosetryingeitherto
expandtheirmonopolypowerintocurrentlycompetitivemarketsortoforeclose
theirmarkettopossibleentrants.Thus,severalfrontsremainavailablefor
policymakersseekingtorestorecompetitiontohealthcaremarkets.Anewantitrust
agendabeginswithrecognizingtheextraordinarycoststohealthcareprovider
monopoliesandcontinueswithaggressiveandcreativeantimonopolyinterventions.
42See,forexample,UnitedStatesv.E.I.duPontdeNemours&Co.,353U.S.586(1957);seealsoPhillipAreedaandHerbertHovenkamp,AntitrustLaw2nded.(NewYork:AspenPublishers,2003):1205b.43Forachroniclingofgovernmentchallengestomergersthatlostinfederalcourt,seeDoseofCompetition,supranote7.Foranexplorationofjudicialresistancetoenforcingtheantitrustlawsagainsthospitals,seeRichman,supranote8.
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A.TheSpecialProblemofAccountableCareOrganizations
AprimarytargetforarevivedantitrustagendaistheemergingAccountable
CareOrganizations,whosedevelopmenttheAffordableCareActisdesignedto
stimulate.TheACAencouragesproviderstointegratethemselvesinACOsforthe
purposeofimplementingbestpracticesandtherebyprovidingcoordinatedcareof
goodqualityatlowcost.Asaninducementforproviderstoformandpractice
withinthesepresumptivelymoreefficiententities,theACAinstructstheMedicare
programtosharewithanACOanycostsavingsitcandemonstrate,permitting
proposedACOseithertokeepanysavingsbeyondaminimumsavingsrate(MSR)
ofupto3.9%whilebeinginsuredagainstlossesifsavingsarenotobtainedorto
keepsavingsbeyondanMSRof2%whilebeingexposedtotheriskoflosses.44
ACOsarebeinghailedasameaningfulopportunitytoreformourdeeplyinefficient
deliverysystem,buttheunintendedconsequencesofpromisinghealthpolicy
initiativesofteninvestprematurelyinprojectsthatultimatelydisappoint.The
formationofACOsrunthespecificriskofcreatingevenmoreaggregationofpricing
powerinthehandsofproviders.
ACOs,intheory,couldofferanattractivesolutiontoproblemsstemming
fromthecomplexityandfragmentationofthehealthcaredeliverysystem.45
Togetherwithgoodinformationsystemsandcompensationarrangements,vertical
integrationofcomplementaryhealthcareentitiescanachieveimportantefficiencies
44SeeDepartmentofHealthandHumanServices,MedicareProgram;MedicareSharedSavingsProgram:AccountableCareOrganizations,42CFRPart425,FederalRegister76,no.212(November2,2011):67802,6798588.45EinerElhauge,ed.,TheFragmentationofUSHealthCare(Oxford,UK:OxfordUniversityPress,2010).
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forgingcollaborationsamongentiremarketsofphysiciansandhospitals,entities
thatwouldotherwisecompetewitheachother.TheNewYorkTimeshasreported
agrowingfrenzyofmergersinvolvinghospitals,clinicsanddoctorgroupseagerto
sharecostsandsavings,andcashinonthe[ACOprograms]incentives.49Infact,
providersmainpurposeinformingACOsmaynotbetoachievecostsavingstobe
sharedwithMedicarebuttostrengthentheirmarketpoweroverpurchasersinthe
privatesector.ACOsmaybethelatestchapterinthesteadyaccumulationof
marketpowerbyhospitals,healthcaresystems,andphysiciangroups,asequelto
thewavesofmergersinthe1990swhenhealthcareentitiessoughttocounter
marketpressurefrommanagedcareorganizations.50
Antitrustpolicymakersthereforeshouldcarefullyscrutinizetheformationof
ACOs.Conventionalantitrustreasoningappropriatelypermitspurportedefficiency
claimstotrumpconcernsaboutconcentrationonthesellersideofthemarket,and
anyreviewofaproposedACOwouldcertainlyconsiderthepotentialbenefitsof
verticalintegration.Butanyantitrustanalysisshouldalsorecognizethathealth
insurancegreatlyexacerbatesthepriceandmisallocativeeffectsofmonopoly.
NotwithstandingthespecialefficiencyclaimsthatcanbemadeonbehalfofACOs,
potentialnotonlytoproducehigherqualityatlowercostbutalsotoexacerbatethetrendtowardgreaterprovidermarketpower);andJeffGoldsmith,AnalyzingShiftsinEconomicRiskstoProvidersinProposedPaymentandDeliverySystemReforms,HealthAffairs29,no.7(2010):1299,1304.(Whetherthesavingsfrombettercare
coordinationforMedicarepatientswillbeoffsetbymuchhighercoststoprivateinsurersofaseeminglyinevitable...waveofproviderconsolidationremainstobeseen.).49RobertPear,ConsumerRisksFearedasHealthLawSpursMergers,NewYorkTimes,November20,2010.50BarakRichmanandKevinSchulman,ACautiousPathForwardonAccountableCareOrganizations,JournaloftheAmericanMedicalAssociation305,no.6(February9,2011):60203.
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thepotencyofhealthcaremonopoliesprovidesastrongwarrantforanespecially
stringentanticoncentration,antimergerpolicyinthehealthcaresector.These
heighteneddangersshouldbeweighedheavilyinappraisinganACOslikelymarket
impact.
Antitrustpolicymakersthereforeshouldcarefullyscrutinizetheformationof
ACOs.Conventionalantitrustreasoningappropriatelypermitsefficiencyclaimsto
overcomeconcernsaboutconcentrationonthesellersideofthemarket,andany
reviewofaproposedACOwouldcertainlyconsiderthepotentialbenefitsofvertical
integration.Butanyantitrustanalysisshouldalsorecognizethathealthinsurance
greatlyexacerbatesthepriceandmisallocativeeffectsofmonopoly.
NotwithstandingthespecialefficiencyclaimsthatcanbemadeonbehalfofACOs,
thepotencyofhealthcaremonopoliesstronglywarrantsespeciallystringentanti
concentration,antimergerpolicyinthehealthcaresector.Theseheightened
dangersshouldbeweighedheavilyinappraisinganACOslikelymarketimpact.
ItremainsunclearwhatroletheFTCandDOJhaveinapplyingthisnecessary
levelofscrutinytonewACOproposals.Buttheantitrustagenciessurelyenjoya
gooddealofdiscretioninensuringthatACOcomplieswiththeprinciplesof
competition.Theagenciescoulddemandaheightenedshowingthataproposed
consolidationwillgenerateidentifiableefficiencies,andtheysimilarlymight
demandthatanACO'sproponentsassumetheburdenofshowinganabsenceof
significanthorizontaleffectsinlocalsubmarket.Theagenciessimilarlycould
imposedemandingcurestoillegalconcentrations,perhapsencouragingthevertical
integrationenvisionedbyPPACA'sproponentswhilereducingthehorizontal
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collaborationthatproviderssoroutinelypursue.Finally,theagenciescouldalso
imposeconduct(i.e.nonstructural)remediestopotentiallyharmfulACOs,suchas
requiringnonexclusivecontractualarrangementswithpayorsandwithregional
hospitals,orpledgingtoundocertainintegrationsifpricesproceedtoriseabovea
certainthreshold.HowtheFTCandDOJmonitortheformationofACOscould
determinewhethertheACAmeaningfullyadvancesa(desperatelyneeded)
reorganizationofhealthcaredeliveryormerelyoffersaloopholetopermitgreater
consolidation.
TheCMSmightalsoserveameaningfulroleinpreventingACOsfrom
furtheringanticompetitiveharminhealthcaremarketplaces.Thefinalrulespermit
CMStosharesavingswithACOsonlyafterashowingofqualitybenchmarks,which
CMSadministratorsoughttotakeseriously.Therulesalsorequirecostandquality
reporting,andCMSmightrequireademonstrationofmeaningfulquality
improvementsandcostsavingsinordertoreceiveacontinuedshareofMedicare
savings.CMSmightevenconditionanACO'spermissiontomarkettoprivatepayers
onademonstrationthatitspricestoprivatepayersdidnotincreasesignificantly
followingitsformation.
Onemightwonder,ofcourse,whetheragovernmentalsinglepayerlike
Medicarehasthemission,theimpulse,ortherequisitecreativitytobehelpfulin
makingprivatemarketsforhealthserviceseffectivelycompetitive.PerhapsCMS's
newCenterforMedicareandMedicaidInnovationcouldshapetheinstitution's
capacitytoaffectreform.Itmightbeequallylikely,unfortunately,thatMedicare
willaimtopreserveitsownsolvencybyencouragingtheshiftingofcoststothe
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privatesectorandmayevenrewardACOscostshiftingascostsavings.Thisis
thedangerwithusingalargeandunavoidablyinflexiblebureaucracytoengineeran
efforttoinduceinnovation.Nonetheless,yougotowarwiththebureaucracyyou
have,andCMSoughttoconcentrateondevelopingcompetitionorientedregulations
andcautiouslymonitorthemarketimpactofemergingACOs.
B.RequiringUnbundlingofMonopolizedServices
Anyefforttorestorepricecompetitioninhealthcaremarketsmustincludea
strategythattargetsalreadyconcentratedmarkets.Antitrustenforcerstherefore
needtodeveloppolicyinstrumentsthattargetcurrentmonopolists,bothtolimitthe
economicharmtheyinflictandtothwarttheireffortstoexpandtheirmonopoly
power.
Onepromisinginitiativecouldbetorequirehospitalsandotherprovider
entitiestounbundle,atapurchasersrequest,certainservicesforthepurposesof
negotiatingprices.Providersroutinelybundleservicesforunifiedpayments,and
manysuchbundlesserveefficiencypurposes.Someservicesaresointertwinedthat
separatingthemprovescostly,andsimilarly,manyclinicallyrelatedservicesoffer
efficiencieswhensoldtogether.However,whenprovidersbundleservicesin
marketstheyhavemonopolizedwithservicesinwhichthereiscompetition,amenu
ofanticompetitiveconsequencescanresult:themonopolistcansqueezeoutrivals
inthecompetitivemarket,creatingforitselfanothermonopoly;andbysquelching
rivalsinthecompetitivemarket,themonopolistlimitstheabilityofentrantsto
challengeitsholdonthemonopolizedmarket.Themagnifiedconsequencesof
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healthcaremonopoliesshouldheightenconcernoverpracticesthatcanexpandor
enshrineprovidermonopolists.
Thegeneralantitrustruleontyingisthatafirmwithmarketpowermaynot
useittoforcecustomerstopurchaseunwantedgoodsorservices.51Ifthisprinciple
isinvokedtofrustratehospitalspracticeofnegotiatingcomprehensivepricesfor
largebundlesofservices,purchaserscouldthenbargaindownthepricesofservices
withgoodsubstitutes.52Ifahospitalstillwishedtofullyexploititsvarious
monopolies,itwouldhavetodosoindiscretenegotiations,makingitshighest
pricesvisible.Healthplanscouldthenhopetorealizesignificantsavingsby
challengingsuchmonopolies,eitherbyinducingenrolleestoseekcareinalternative
venues(effectivelyexpandingthegeographicmarket)orbyencouragingnewentry.
Oftenthemerethreatofnewentryissufficienttomodifyamonopolistsdemands,
butentryismorecredibleifthemonopolizedserviceisdiscreteandassociatedwith
adistinctpricethatentrantscantarget.
Todate,therehavebeenonlylimitedenforcementeffortstoprevent
hospitalsfromtyingtheirservicestogetherinbargainingwithprivatepayers.53
Althoughhospitalswouldpredictablyarguethatbundlinggenerallymakesfor
51SeeJeffersonParishHosp.Dist.No.2.v.Hyde,466U.S.2(1984).52Theabilitytoleveragemarketpowerinonesubmarketintopriceincreasesinacompetitivemarkethelpsexplainwidepricevariationforlikeservicesincommon
geographicmarkets.SeePaulB.Ginsburg,WideVariationinHospitalandPhysicianPaymentRatesEvidenceofProviderMarketPower,HSCResearchBriefno.16(November2010),www.hschange.com/CONTENT/1162/(accessedMay25,2012).53Inaprivatesuit,adominanthospitalchainwassuedbyitslonerivalfor,amongotherthings,bundlingprimaryandsecondaryserviceswithtertiarycareinsellingtotheareasinsurers.SeeCascadeHealthSolutionsv.PeaceHealth,515F.3d883,89091(9thCir.2008).Thedistrictcourtpermittedcertainclaimstoproceedtotrial,includingaclaimofillegalbundleddiscounts,butdismissedthetyingclaim.
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efficientnegotiatingandstreamlineddeliveryofcare,theaddedcostsofbargaining
servicebyservicecouldbeeasilyoffsetbythelowerpricesresultingfromgreater
competition.Recentscholarshipontyingandbundlingconfirmsthatpermittinga
hospitalmonopolisttotieunrelatedservicesexpandsthemonopolysreach,
profitability,andlongevityandharmsconsumerwelfare.54Theextremeharmfrom
healthcaremonopoliesmakeshospitalstyingpracticesparticularlyvulnerableto
antitrustattack.
Aworkablerulewouldpermitantitrustlawtoempowerapurchaserto
demandseparatepricesfordivisibleservicesthatarenormallybundled.55
Althoughonehopesthatantitrustcourtsandacrediblethreatoftrebledamages
woulddiscourageaprovidermonopolistfromretaliatingagainstanypurchaserthat
aggressivelychallengesitsanticompetitivepractices,thecostsanddelayfromsuch
complexantitrustactionssuggestthatpublicenforcementshouldsupplement
privatesuits.Properlyauthorizedregulatorscouldeitherenableindividualpayers
todemandunbundlingtofacilitatetheireffortstogetbetterprices,orregulators
coulddemanditthemselves.Effectiveunbundlingrequestscouldtriggermore
competitionandgreaterefficiencybothinthetiedsubmarketswheremonopolyis
notaproblemandalsointhetyingmarketswhereitis.
54SeeEinerElhauge,Tying,BundledDiscounts,andtheDeathoftheSingleMonopolyProfitTheory,HarvardLawReview123,no.2(2009):397481.55ThisproposalisinlinewithrecommendationsfromtheAntitrustModernizationCommission,ReportandRecommendations(April2007):96,http://permanent.access.gpo.gov/lps81352/amc_final_report.pdf(accessedMay9,2012).Whatisdivisibleinhealthcareisofcoursesubjecttodebate,justasmostservicesaccusedofbeingbundledareoftendefendedasasingleproduct.See,forexample,JeffersonParishHosp.,466U.S.,1922.
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C.ChallengingAnticompetitiveTermsinInsurerProviderContracts
Restrictivetermsincontractsbetweenprovidersandinsurersareanother
potentiallyfruitfulareaforantitrustandregulatoryattentionindealingwiththe
providermonopolyproblem.Acommonpractice,forexample,isforaprovider
sellertopromisetogiveaninsurerbuyerthesamediscountfromitshighpricesas
anyitmightgivetoacompetinghealthplan.Suchpriceprotection,paymentparity,
ormostfavorednation(MFN)clausesarecommonincommercialcontractsand
servetoobviatefrequentandcostlyrenegotiationofprices.Theirefficiency
benefitsmaysometimesbeoutweighedbyanticompetitiveeffects,however.Thus,a
providermonopolistmayfindthatalargeandimportantpayeriswillingtopayits
veryhighpricesonlyiftheproviderpromisestochargenolowerpricestoits
competitors.SuchasituationapparentlyaroseinMassachusetts,wherethe
Commonwealthslargestinsurer,aBlueCrossplan,reportedlyaccededtoPartners
HealthCaresdemandforaverysubstantialpriceincreaseonlyafterPartnersagreed
toprotectBlueCrossfrom[its]biggestfear:thatPartnerswouldallowother
insurerstopayless.56
Antitrustlawcanofferreliefagainstaprovidermonopolistagreeingtoan
MFNclausetoinduceapowerfulinsurertopayitshighprices.Becausesuchclauses
protectinsurersagainsttheircompetitorsgettingbetterdeals,manyarelikelyto
56AHandshakeThatMadeHealthcareHistory,BostonGlobe,Dec.28,2008.TheMassachusettsattorneygeneralhasnotedthatsuchpaymentparityagreementshavebecomepervasiveinproviderinsurercontractsinthecommonwealthandhasexpressedconcernthatsuchagreementsmaylockinpaymentlevelsandpreventinnovationandcompetitionbasedonpricing.OfficeofAttorneyGeneralMarthaCoakley,ExaminationofHealthCareCostTrendsandCostDrivers(March16,2010),4041.
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giveintooquicklytoevenextortionatemonopolistpricedemands.Butthe
availabilityofanantitrustremedy(whichwouldprobablybeonlyaprospective
ceaseanddesistorderratherthananawardoftrebledamagesforidentifiable
harms)mightnotbesufficienttodeterapowerfulproviderfromgrantingMFN
statustoadominantinsurer.Alternatively,regulatoryauthoritiescouldpresumably
prohibitdominantprovidersfromconferringsuchstatus.Regulatorspresumably
wouldbeinasgoodapositionasanypartytodistinguishbetweenrestrictive
agreementsthatachievetransactionalefficienciesfromagreementsthatrestrict
insurersfreedomtocutpricedealswithcompetitorsandreducepressureon,and
opportunitiesfor,allinsurerstoseeknewandinnovativeservicearrangements.
AmorepotentantitrustattackonanticompetitiveMFNclauseswouldaimat
thedominantinsurerdemandingthem,ratherthanatthecooperatingprovider.
TheDepartmentofJustice(DOJ)suedBlueCrossBlueShieldofMichigan,a
dominantinsurer,toenjoinitfromusingMFNclausesinitscontractswithMichigan
hospitals.TheDOJallegedthatsuchrestrictionsonproviderpricecompetition
reducedcompetitionintheinsurancemarketbypreventingotherinsurersfrom
negotiatingfavorablehospitalcontracts.57Inthewakeofthegovernments
initiativeinMichigan,whichresultedinasettlement,Michigan(andsubsequently
severalotherstates)haveprohibitedtheuseofMFNagreementsbetweenhealth
insurersandproviders.EvenwithoutstateregulationsprohibitingMFNclauses,the
DOJtheorymetsufficientsupportthatinMassachusetts,forexample,theBlueCross
57SeeComplaintat12,UnitedStatesv.BlueCrossBlueShieldofMich.(E.D.Mich.2010)(No.2:10CV14155);seealsoDavidS.Hilzenrath,U.S.FilesAntitrustSuitAgainstMichiganBlueCrossBlueShield,WashingtonPost,October18,2010.
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planshouldnowthinklongandhardbeforerenewing(orenforcing)theMFNclause
initscontractwithPartnersHealthCare.
Othercontractprovisionsthatthreatenpricecompetitionarealsoinusein
providerinsurercontractsinMassachusetts,accordingtotheCommonwealths
AttorneyGeneral.Inparticular,socalledantisteeringprovisionsprohibitan
insurerfromcreatinginsuranceproductsinwhichpatientsareinducedtopatronize
lowerpricedproviders.Undersuchacontractualconstraint,ahealthplancouldnot
offermoregenerouscoveragesuchasreducedcostsharingforcareobtained
fromanewmarketentrantorfromamoredistant,perhapsevenanoutofstateor
outofcountry,provider.OthercontractualtermsinuseinMassachusetts(and
presumablyinotherjurisdictionsaswell)guaranteeadominantproviderthatitwill
notbeexcludedfromanyprovidernetworkthatthehealthplanmightofferits
subscribers.
Thecontractualtermsnotedhereallhavethepotentialtoenshrinethe
cooperativesupremacyofdominantprovidersanddominantinsurers.The
resultingcompetitivehardextendsbeyondthesustenanceofhighprices.These
partnershipsalsoforecloseopportunitiesforconsumerstobenefit,bothdirectlyas
patientsandindirectlyaspremiumpayers,frominnovativeinsuranceproductsthat
competinghealthplansmightotherwiseintroduce.Antitrustlawcanprohibitthe
useofsuchanticompetitivecontracttermsthatprotectprovidermonopoliesand
curbinsurerinnovation,andinsuranceregulatorsmightbarsuchprovisions
wherevertheythreatentoprecludeeffectivepricecompetition.Theseactions
remainavailableeveninthecontinuedpresenceofaprovidermonopoly.
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V. ConclusionThereisanurgentneedtorecognizetheunusuallyseriousconsequences,for
bothconsumersandthegeneralwelfare,ofleavinginsuredhealthcareconsumers
exposedtomonopolizedhealthcaremarkets.Becausehealthinsurance,especiallyas
itisdesignedandadministeredintheUnitedStates,hugelyexpandsamonopolists
pricingfreedom,providerswithmarketpowerinflictwealthredistributingand
misallocativeeffectssubstantiallymoreseriousthanconventionalmonopolypower.
Vigorousnottentativeorcircumspectenforcementoftheantitrustlawscan
mitigatetheharmsfromprovidermarketpower.Retrospectivescrutinyonearlier
horizontalmergersofhospitalsorotherproviderscouldhelpcorrectdecadesof
ineffectualenforcement,butiflookingbackwardsremainsunlikely,renewedrigor
movingforwardisallthemoreessential.Partiesproposingnewmergersand
alliances,whethertraditionalassociationsornewACOs,mustconvincinglyshow
thattheirreorganizationeitherleadstoonlyaminimalincreaseinmarketpoweror
createsspecificefficiencies.Traditionalmarketdefinitionsshouldalsobeexpanded,
recognizingthatinterregionalcollaborationscanalsoreducecompetitionin
growinghealthcaremarketsandcangenerateadditionalpricingpower.Other
measuresshouldtargetcurrentmonopolists,soastopreventtheenshrinementor
expansionoftheirmarketdominance.Anantitrustorregulatoryinitiativetocurb
hospitalstyingpracticesandtoprohibitanticompetitivecontractsbetweenpayers
andprovidersperhapsasremediesforearliermergersfoundunlawfulafterthe
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factmightalsoreduceandcontaintheharmfromproviderpricingfreedom.Such
policiesmightcurtailmonopolisthospitalsabilitytoenshrinetheirmarketposition
andforecloseentry,tospreadtheirpricingpowerintoadjacentmarkets,orto
extractgreaterrentsfrombuyerswithfewalternatives.
Enthusiastsformarketorientedsolutionswouldalsoseektorestrainprovider
marketpowerbyencouragingcreativityamongthirdpartypurchasers.Health
plansthatbypass,orfosternewcompetitorsfor,localmonopolistspromoteprice
andqualitycompetitionwhereitiscurrentlylackingandcouldunderminethe
potencyofinsuranceplusmonopolies.Aprocompetitionregulatoryagendamight
seekwaystofacilitateinterregionalcompetitionandempowerthirdpartypayors
toseekflexibleandcreativestrategiestostimulateprovidercompetition.
Additionalhopeliesinthepossibilitythathealthinsurersandthirdparty
purchaserswillpurchase(andthatACAregulationswillletthempurchase)proven
nonmedicalinterventionsthatimprovehealthandreducehealthcarecosts.The
exorbitantpricesformonopolizedmedicalservicesshouldencouragehealth
insurerstodevelopcreativealternatives,bothseekingeffective(andlesscostly)
substitutesandreorganizingwhathasbecomeafragmented,errorprone,and
inefficientdeliveryofcare.
Unfortunately,fewhealthinsurershaveshownaneagernesseithertocontest
providermarketpowerortopursuemeaningfulinnovationstoprovidingcarefor
theirsubscribers.AsinvestigationsinMichiganandMassachusettsreveal,insurers
alltoooftenbecomecoconspiratorswithprovidermonopolists,agreeingto
exclusiveagreementsthatprotectboththemselvesandmonopolistsbut
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perhapsviastickershockinducethemtodemandlowercostalternatives.
Moreover,theinsuranceexchangesmightofferaplatformfornewentryinthe
insurancemarket,thusinjectingsomedynamismintoanindustrydesperatelyin
needofcreativeideas.Andregardlessofhowthenewinsurancemarketstake
shape,antitrustpolicymakersandotherregulatorsstillhavethecapacitytofoster
valueenhancinginnovationbothbypreventingtacticsthatmightenshrinethe
currentmonopolistregimeandalsobypromotingthedevelopmentofnew
insuranceproducts.Althoughcurrenttaxpoliciesandregulationshavedulledmany
insurersintobeingagentsforprovidersratherthanfortheirsubscribers,there
remainsapotentopportunityforthirdpartypayorstoinjectthehealthcaresector
withvaluecreatinginnovationsthatredesignboththeofferingsandthedeliveryof
care.
WhateverthePPACAmayachieve,itslegacyandcosttothenationwilldepend
largelyonwhethermarketactors,regulators,andantitrustenforcerscaneffectively
addresstheprovidermonopolyproblemandtoinstilldesperatelyneeded
competitionamongproviders.Aggressiveantitrustenforcementcanprevent
furthereconomicharmandperhapscanundocostlydamagefromprovidersthatin
errorwerepermittedtobecomemonopolists.Butultimately,creativemarketand
regulatoryinitiativeswillbeneededtounleashthecompetitiveforcesthat
consumersneed.Wherethereisdanger,thereisopportunity,andcompetition
orientedpoliciescanandshouldyieldsubstantialbenefitsbothtopremiumpayers
andtoaneconomythatbadlyneedstofindthemostefficientusesforresourcesthat
appear to become increasingly limited