Imagine you are in a room with 15 strangers, possibly having coffee or catching up on phone calls before your next session at ANESTHESIOLOGY® 2021. Each of you has a blue card made of the highest-quality stock paper. I walk into the room and announce that I have 16 orange cards made of the same paper stock. I indicate that I am acting as a broker for an eccentric surgeon who is willing to pay $100 for each pair of cards – one orange and one blue – that I can round up for her. I approach each of you separately to negotiate a price to buy your blue card so I can subsequently sell the pair to the surgeon. What price do you think we negotiate? Based on numerous experiments with a variety of sample sizes and individuals with myriad backgrounds, the transaction described here typically results in a “fair game” where we negotiate to split the $100 evenly; that is, I would pay each of you $50 and I would net $50 after selling a pair to the surgeon. The cards are worthless if not paired.
Now consider a similar scenario except this time I have only 12 orange cards. I am needed for each pair; four of you in the room are not needed to complete the transaction with the surgeon. What price do you think we negotiate as I move from person to person to strike a deal? The equilibrium answer in this game is significantly less than $50, although the exact amount based on experiments varies depending on characteristics and preferences of the players. What if you and the other 15 individuals could discuss the potential transaction and form groups to negotiate with me? What if I had to gather all pairs before the surgeon would pay me anything? There are many possible scenarios and potential “games” to play. Obviously, negotiated prices are sensitive to the relationship between buyers and sellers and their relative market power.
In economics, markets are often described based on the concentration of buyers or sellers (producers), and highly concentrated markets garner the attention of regulators and policymakers. The table presents common classifications of different market structures.
A monopoly is considered undesirable because it can negotiate higher prices for its goods or services. This can result in inefficiencies, loss of social (economic) welfare, and suboptimal supply (e.g., poor access to health care). On the other hand, a monopsony may demand prices that are insufficient to support growth and quality in the products or services being purchased. Oligopolies and oligopsonies can have similar effects, although to a much lesser extent. Many economists argue that even with very few buyers and sellers, the benefits of a competitive market are achieved.
The Federal Trade Commission (FTC) is the regulatory body that monitors the concentration of producers in various markets to prevent unfair methods of competition in commerce. The FTC may refer evidence of criminal antitrust violations to the Department of Justice (DOJ). These agencies often use the Herfindahl-Hirschman Index (HHI) as a measure of market concentration. The HHI is calculated by squaring the market share of each hospital or health system competing in the market and then summing the resulting numbers. For example, in a market consisting of four hospitals with shares of 20%, 20%, 30%, and 30%, the HHI is 2,600 (202 + 202 + 302 + 302 = 2,600). The agencies generally consider markets in which the HHI is between 1,500 and 2,500 points to be moderately concentrated and consider markets in which the HHI is more than 2,500 points to be highly concentrated (asamonitor.pub/3acN1pH).
Reviews of studies of hospital markets found that concentrated markets are associated with higher hospital prices (Health Aff (Millwood) 2017;36:1530-8; The Synthesis Project 2012; Policy Brief No.9:1-7). Thus, hospitals and health systems in a market that represent, or may represent after a proposed merger, a monopoly or concentrated oligopoly are likely to become organizations of interest to the FTC.
A major hurdle in demonstrating that an organization has unfair market power, and in calculating the HHI to challenge a merger, is appropriately defining “the market.” To define a market, both geography and product need to be specified. The market for a pediatric liver transplant program is substantially larger geographically and less competitive than the market for obstetrics in an urban setting. In rural health care, an HHI calculation may not be warranted; the monopoly structure is sometimes the only business organization that makes sense to serve a community effectively.
In defining hospital markets, the FTC and DOJ historically relied on simple geographic boundaries or the Elzinga-Hogarty test, which analyzes patients entering and leaving a geographic area for hospital services (Law Contemp Probl 1988;51:165-94). Partly due to the limitations of these early methods used to define a market, the antitrust enforcement agencies only challenged a handful of the approximately 1,000 hospital mergers and acquisitions between 1993 and 2000, and they were largely unsuccessful (Antitrust Law Journal 2004;71:921-47). To challenge mergers and assess relative market power, newer approaches based on economic analyses were introduced with increasing success. These economic approaches included willingness-to-pay analysis, hospital merger simulation, and diversion analysis (NBER 2001;Working Paper No.8216:1-50; The Journal of Industrial Economics 2013;61:243-89; The Antitrust Bulletin 2014;59:443-78).
In the market for physician services, several studies have examined the association between market concentration and payments. Overall, these studies found that higher concentration was associated with higher physician fees across a range of services (Health Aff (Millwood) 2017;36:1530-8). Sun et al. found that in markets that moved from the bottom quartile of concentration of orthopedic physicians to the top quartile, physician fees paid by private payers increased by $168 per procedure compare to the $261 decline in fees observed absent changes in market concentration (Health Aff [Millwood] 2015;34:916-21). In a separate study, however, Sun et al. found that private insurer payments to anesthesiologists in more concentrated markets were not significantly different from payments in less concentrated markets (Anesthesiology 2015;123:507-14). Dunn and Shapiro examined claims for medical services provided by cardiologists and orthopedists and found that physicians in more concentrated markets charged higher service prices; a physician in the 90th percentile of market concentration charged 14% to 30% higher fees than a physician in the 10th percentile. Their estimates imply that physician consolidation has caused about an 8% increase in fees on average over the years 1988-2008 and substantially higher increases in concentrated markets (Journal of Law and Economics 2014;57:159-93).
The FTC continues to be interested in the impact of hospital and physician concentration on prices. In January 2021, the FTC issued orders to six health insurance companies to provide information that will allow the agency to study the effects of physician group and health care facility consolidation that occurred from 2015 through 2020 (asamonitor.pub/3uTEJuE).
Although concerned about hospital and physician concentration, the FTC seems less concerned about concentrated insurer markets. In 2018, there were four states where a single large group insurer had 90% or greater market share. There were 13 states where the top two insurers had 90% or greater market share, and there were 30 states where the three largest insurers had combined market share of the commercial large group market of 90% or more (asamonitor.pub/2QwqI7y). The Government Accountability Office found that the three largest insurers' market share in the small group and individual market also exceeded 80% (asamonitor.pub/3ssxtVe). In its 2020 update on competition in health insurance, the American Medical Association (AMA) reported that 74% of the insurance markets were highly concentrated (HHI>2,500), up from 71% in 2014 (asamonitor.pub/3adYqp0).
Several studies of insurer markets have found that higher health insurer concentration leads to higher premiums (Health Aff (Millwood) 2017;36:1530-8). One study found that real premiums increased by approximately seven percentage points as a result of insurer market concentration and that consolidation facilitated the exercise of monopsonistic power vis-a-vis physicians (Am Econ Rev 2012;102:1161-85). Another study that found insurer premiums to be higher for plans sold in markets with higher levels of insurer concentration also found higher premiums for plans in markets with higher levels of hospital market concentration (J Health Econ 2015;42:104-14).
Identifying a market depends on defining both the relevant geography and the specific products or services being bought and sold. This makes it often difficult to label the buyers or sellers in a market as an oligopsony or oligopoly. As in the example of pairing orange and blue cards above, to assess unfair market power, the key is to determine who has the better hand and to what extent the game has affected price.
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I appreciate the opportunity to contribute brief articles on health economics to the ASA Monitor. Special thanks to Jennifer Rock-Klotz, ASA Manager of Analytics & Research Services, for her research assistance. Although these topics may not be of everyday concern to anesthesia professionals, I hope that you are as curious as I am. I welcome your suggestions for future issues.
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