Nonprofit Health Care Market Concentration and the Public Interest

Inquiry, Summer 2011 | Go to article overview

Nonprofit Health Care Market Concentration and the Public Interest


During the federal health care reform debates, concerns arose from several corners about health plans being too heavily concentrated in some markets. Various Democratic leaders even called for a public plan option and/or new nonprofit "co-op" plans to expand competition in such markets.

More recently, the U.S. Department of Justice (DOJ) has filed a suit against Blue Cross Blue Shield of Michigan alleging that the plan inappropriately used its market position through the negotiation of "Most Favored Nation" provisions in its contracts with many hospitals.

At the same time, concerns also have been raised about the consolidation of health care providers, especially hospitals, and the considerable market concentration that could occur with the creation of accountable care organizations (ACOs). What are the forces behind market concentration? Is such concentration good or bad with respect to the public interest? What role is government playing, and should it play, to protect the public interest in markets that currently are concentrated or have the potential to be concentrated?

These are among the issues explored in the following discussion, another in Inquiry's ongoing Dialogue series, co-sponsored by the Alliance for Advancing Nonprofit Health Care to provide a variety of voices on important nonprofit health care issues. The panelists for this discussion, held on April 18, 2011, were: Howard Berman, retired president and CEO of The Lifetime Healthcare Companies, Inc., of Rochester, N.Y., and publisher of Inquiry; Arthur (Art) Lerner, partner at Crowell & Mooring LLP in Washington, D.C.; Patrick Madden, retired president and CEO of the Sacred Heart Health System in Pensacola, Fla., (now residing in Nashville, Tenn.); and Lawrence (Larry) Van Horn, associate professor of health care management and executive director, health affairs, at the Owen Graduate School of Management, Vanderbilt University, in Nashville. Bruce MePherson, president and CEO of the Alliance for Advancing Nonprofit Health Care in Washington, D.C., moderated the discussion.

Bruce McPherson: Given that concerns over too much market concentration were primarily directed at health plans during health care reform deliberations, let's start there. First, have mergers and acquisitions played a big role in health plan market concentration?

Arthur Lerner: The American Medical Association has been releasing studies annually on health plan market concentration, but if you look at the places with the most concentration, mergers don't appear to have had any impact. For instance, if there is a large Blues plan in a particular state or region, it likely grew that way over many decades.

McPherson: Does health plan concentration create barriers to new entrants or otherwise reduce competition?

Howard Berman: The capital costs involved in entering the health plan market are relatively small. For instance, large employers can self-insure whenever they want and go to whomever they want for administrative services and stop-loss coverage. They just need cooperating provider networks. In contrast, the capital costs of building a hospital, for instance, are much higher and can create a significant barrier to entry.

Moreover, the larger the health plan's market share, the more vulnerable it is to competitors. Thirty percent of the differential in premium rates is arguably due to demographic factors. I could enter a market and offer low-cost products to the demographically favorable segment. Market loyalty tends to be very fluid on the health insurer side, even more so in today's weak economy. With a large market share, however, I can't do this. I become responsible for the market and can't "cherry pick" it.

Lerner: Despite what Howard said, the federal government and some states have been recently acting on the belief that there can be barriers to entry or expansion when large plans are able to get substantial price concessions from providers. …

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