Thursday, September 24, 2015

Is the ACA reducing competition?

Published in Standard Examiner, August 26, 2015, Ogden, Utah

Vijay K. Mathur

The recent decision by the Supreme Court assures the future of the Affordable Care Act (ACA), enacted on March 23, 2010. However, former critics of the ACA in the Congress and elsewhere have not given up their dislike for the law. Some GOP congressmen are promising to put roadblocks in the ACA’s smooth operation. Other conservative critics of the ACA have now diverted their attention to another target. They claim the ACA would lessen competition among health-care providers and health-insurance markets due to merger activity.

Economists regard perfect competition in any industry as an ideal market structure, where there are a large number of sellers and easy entry into the industry (market). In reality we do not find any such ideal industry, but we do find less-than-ideal degrees of competition across industries. For example, retail grocery industry is more competitive than banking and airlines. Mergers in banking and airlines have resulted in increasing monopoly power in those industries. But we have not heard many complaints from conservative free marketers against those industries.

Mergers and acquisition in industries are guided by prospects of gaining market share that enhances monopoly power, and to benefit from cost reductions due to economies of scale. However, evidence of these gains in most mergers is mixed. Sometimes mergers are guided by self-interest of executives who stand to gain from mergers’ settlements.

The criticism of ACA is unwarranted because we expect different markets dealing with health care to respond by making changes in its structure, services, pricing strategies, consolidation, etc. Unlike other industries, the health care market has four major sectors besides government. They are hospitals, physicians’ services, insurance industry and consumers (including employers). The interaction between these sectors and the government will determine the degree of competition in the health-care market.

Herfindahl-Hirschman Index (HHI) measures the degree of concentration (monopoly power) in any market. An HHI of at least 2,500 shows high degree of concentration. The paper by Martin Gaynor, Kate Koo and Robert Town (GKT), Journal Of Economic Literature, June 2015, reports that hospital industry had a mean HHI of 3,261 in 2006, and more than 65 percent of metropolitan statistical areas were highly concentrated. This data shows high degree of monopoly power in hospital industry nationally even before the ACA.

Besides hospitals, physicians’ services represent the other major provider of health care. The GKT reports that, in general, physicians’ market is less concentrated than hospitals. However, studies show specialties like orthopedics, radiology, cardiology and oncology are more concentrated than primary care. High barriers to entry in medical schools, residencies in hospitals and length of training time increases concentration in specialties.

Reduction in barriers to entry in health providers’ market would provide incentive to new players to enter the market, thus reducing the monopoly power of incumbents. A case in point is the formation of Accountable Care Organizations (ACO) to serve Medicare patients, a large section of the health care market. ACOs are groups of doctors, hospitals and other health-care providers in the network who provide coordinated health care to Medicare patients. The ACA encourages ACOs using incentives to provide quality care. Also, telemedicine companies are now entering this market, thus threatening competition to traditional providers. Professors William Baumol, John Panzar and Robert Willig argue that even with few incumbents in the market, markets could be subject to competitive pressures if they remain contestable due to easy entry.

Anti-trust laws also restrain monopoly power. For example, in 2014 the Federal Trade Commission (FTC) denied merger of ProMedica, a dominant hospital services’ provider, and St. Luke Hospital. A petition by the company to review the FTC decision was denied by the U.S. Court of Appeals, 6th Circuit.

Merger activity in the health insurance industry is partly a response to consolidation in the hospital industry, thus providing a constraint on the pricing power of hospitals. Kaiser Family Foundation reports that, in 2013, HHI for the large-group insurance market was 4,038 for the U.S. and 3,114 for Utah.

In addition, increasing amounts of deductions and co-payments in insurance plans would make consumers more price-conscious, thus providing restraint on prices for health services. Therefore, the fear of lack of competition in health care at this time is unfounded and premature at best. GKT reports a bargaining model that shows that insurers that threaten to exclude hospitals from their networks have the ability to bargain for lower prices for consumers. Incorporating all sectors of health care market, Economist Incorporated reported in May 2006 that Utah’s health-care market is fairly competitive.

According to Peterson-Kaiser Health System Tracker, percentage change in per capita health care spending declined from 7.4 percent in 2001 to 2.9 percent in 2013. The ACA has lowered the trajectory of annual per capita spending growth rate in the future. Thus, it is too hasty to draw conclusions about market structure in health care post-ACA and its effect on cost, prices and quality of care.

Mathur is former chairman and professor of economics and now professor emeritus, Department of Economics, Cleveland State University, Cleveland, Ohio. His articles also appear in Mathur’s Blogonomics. He resides in Ogden.

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