Academic journal article Law and Contemporary Problems

The Corrosive Combination of Nonprofit Monopolies and U.S.-Style Health Insurance: Implications for Antitrust and Merger Policy

Academic journal article Law and Contemporary Problems

The Corrosive Combination of Nonprofit Monopolies and U.S.-Style Health Insurance: Implications for Antitrust and Merger Policy

Article excerpt

I

INTRODUCTION

Rising health care costs are a matter of universal alarm, and in addition to the popular causal explanations, (1) Clark Havighurst's and my centerpiece paper for this symposium (hereafter Distributive Injustices) identifies a new culprit: "the corrosive combination of nonprofit monopolies and U.S.-style health insurance." (2) Not only has market power in the health care sector, which we observe pervades the industry, unleashed a torrent of supracompetitive--and even supramonopoly--prices, but much of the recent rise in health costs is directly attributable "to increasing supply-side market power as a result of hospital consolidations and the growth of provider organizations." (3) If this is so, one might expect help from federal antitrust enforcers to put a halt to growing hospital market power. Unfortunately, antitrust enforcers have sustained a regrettable losing streak: though the Federal Trade Commission (FTC), Department of Justice (DOJ), and state antitrust enforcers have mustered a number of ambitious challenges to proposed hospital mergers, their record in these challenges since 1994 contains seven losses and zero victories. (4) The losing streak has been sufficiently severe to cause one knowledgeable commentator to suggest that "the role of antitrust law in monitoring the health care industry faces an increasingly uncertain, and perhaps diminishing, future." (5)

This paper aims to reinvigorate antitrust scrutiny of the health care industry by highlighting certain observations made in Distributive Injustices that have important implications for the antitrust debate over hospital market concentration. That debate has revolved around, and has devolved into, the question of how nonprofit hospitals set prices. Since 1994, courts have largely reasoned that because nonprofits, by law, may not distribute profits to shareholders, they do not (and would not) abuse market power like for-profit institutions and raise prices to monopoly levels. (6) They have reached this conclusion while expressing substantial sympathy for nonprofit hospitals and hostility toward health care institutions that do seek profits, making declarations such as, "In the real world, hospitals are in the business of saving lives, and managed care organizations are in the business of saving dollars." (7) Some judges and many academics retort that though nonprofits do not seek to maximize returns to shareholders, they seek returns of other kinds and therefore would utilize market power--including implementing monopoly prices--just as for-profit hospitals do. (8)

Distributive Injustices brings a new perspective to this antitrust policy debate. Like many academics, we warn of rising hospital consolidation as a source of rising prices, but we argue that the effects of market concentration are severely magnified because of U.S.-style private insurance. We observe that assorted political, regulatory, and institutional constraints prevent U.S. insurers from denying coverage for health services, even if those services are priced at gouging levels. Moreover, since the income tax exclusion induces employers to provide health insurance, workers remain largely unaware of these prices, even as they are the ultimate payers, and thus are not positioned to make informed decisions as to whether those prices exceed their willingness to pay. As a result, U.S.-style insurance is unable and unwilling to confront providers with monopoly power and instead succumbs to inflated prices; meanwhile, the moral hazard that accompanies health insurance leads insurers to pay for inflated levels of consumption.

Nonprofit monopolists, we submit, are equally as likely to translate their market power into inflated prices. But our objection to nonprofit market power goes beyond the question of whether it leads to higher or lower prices--we also express concern that such power both reduces allocative efficiency and enables providers to avoid the scrutiny of market competition. …

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