Author: Elizabeth Weeks

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Competition, Regulation, and Fragmentation

Anup Malani’s and Frank Pasquale’s after-the-jump colloquy on the role of markets versus regulation provides a nice introduction to Tim Greaney’s chapter on “Competition Policy and Organizational Fragmentation in Health Care.”  Greaney’s chapter engages that dichotomy, focusing on regulated markets, i.e., antitrust policy and its failure to reduce fragmentation.  Greaney opens by acknowledging the myriad market imperfections that impede health care delivery (I’d add to Frank’s cannon of literature on this topic, Kenneth Arrow’s classic 1963 essay, “Uncertainty and the Welfare Economics of Medical Care.”) and offers the perhaps counterintuitive suggestion that market forces, deregulation, and sensible antitrust enforcement could reduce fragmentation.  By design, managed care aimed to address some of the most notable flaws in health care markets, including agency issues, information deficits, and moral hazard.  Greaney observes that managed care was, for a time, moving promisingly in the direction of efficient, quality-enhancing consolidation.  Seemingly in support, regulators favored integration and generally rebuffed providers’ antitrust challenges to managed care companies, concluding that local health insurance markets were competitive and lacked significant barriers to entry.

But the managed care backlash, combined with regulators’ failure to appreciate unique conditions in health care markets, and the distorting effects of other, health care-specific regulations, halted the move toward integration.  On the first point, Greaney observes courts’ “consistent failure to adapt legal analysis to the peculiar economics of competition in the health care sector,” instead “adopting plain vanilla, Chicago school assumptions about markets,” with the result of courts defining extraordinarily large geographic markets, ignoring heterogeneity of demand, and failing to consider consumers’ differing preferences for travel.  (I am reminded of one of my favorite, for pure reading pleasure if not principled analysis, antitrust opinions, Marshfield Clinic, in which Judge Posner rebuffs the plaintiffs’ suggested “dizzying series of concentric circles,” sending the court on “a hunt for the snark of delusive exactness,” rather than simply relying on county borders to define the relevant geographic market.)   Adding to the problem, antitrust regulators, spurred, Greaney suggests, by providers’ and consumers’ growing unease with managed care practices,  began to question the very premise of managed care competition — that “vigorous bargaining” by managed care organizations would pressure providers to reorganize themselves and adopt more cost-efficient, integrated arrangements.  Finally, an overlay of other regulations, including the federal anti-kickback and Stark laws, state certificate of need laws, and remnants of the corporate practice of medicine doctrine, erected additional barriers to “efficiency-enhancing cooperation among rivals.”

I tend more toward the pro-market, rather than pro-regulatory side of the debate, which is why I’ve always been intrigued by the antitrust paradox (in the lower-case, non-strict Borkian sense) intriguing:   If the end is free market competition, how is more government regulation the means?  The idea is that the government’s regulatory hand guides and protects the competitive marketplace, unblocking clogs and correcting other flaws or failures in the stream of commerce.  If that is an accurate description of antitrust policy, and if we accept the premise that health care markets are inherently flawed, then we should expect antitrust regulation to be omnipresent in the area.  But, as Greaney carefully accounts, employing his wealth of knowledge and experience as an academic and prosecutor, health care antitrust policy has been inconsistent and misdirected, leaving unfulfilled the promise of sensibly regulated competition.

With the decline of managed care competition as a strategy to reduce fragmentation, what alternatives remain?  The prevailing market-oriented approach of consumer-directed health care (CDHC) offers little hope, Greaney concludes.  CDHC simply tosses health care consumers back into the admittedly flawed health care market.  While CDHC certainly addresses moral hazard by making patients more cognizant of their spending choices, it does little to address agency, information, and market power problems.  Greaney convincingly explains why CDHC will likely not reduce, and may even increase, fragmentation.  I had hoped for some rest-easy, promising end to the tale, suggesting how the guiding hand of sensible antitrust policy could enhance the current market and make it all better.  Alas, Lewis Carroll’s story did not end happily either, and we are left to hunt for the snark with thimbles, care, forks, and hope.

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Waldo’s Optimal Fragmentation

Thank you Frank, Glenn, and Concurring Opinions for inviting me to participate in the online Fragmentation book review symposium.  As serendipity would have it, your timing could not have been better, for two reasons.

First, just last week in my Health Care Finance class here at the University of Georgia, we began the chapter on “The Structure of the Health Care Enterprise,” which opens, as those familiar with the Furrow, Greaney, et al. Health Law casebook know, with a classic fragmentation scenario:  Our 35-year-old patient, Waldo, a recurring character throughout the casebook, must navigate the late 1970s health care system and all of its poorly coordinated care, minimal attention to quality, self-interested referrals, fee-for-service payment, and balance-billing flaws.  Students are urged to observe the deficiencies and incentives driving the U.S. health care “system” — or lack thereof — and prepare, in future chapters, to compare Waldo’s treatment under, first, 1980s managed care and, later, contemporary consumer-driven health care.  Preparing for this Symposium primed me for discussing the Waldo example with my students.

Second, over the weekend I presented at the Midwestern Law and Economics Association conference, where I had the good fortune to see my friend and mentor, David Hyman.  Thanks again to the upcoming Symposium, I had just read David’s chapter on my flight to Denver and could engage his thoughts on the Fragmentation book.  As I commented to David, what I find so refreshing and valuable about this book is that it does not start from the well-worn and, to me, uninteresting, suggestion made whenever one is asked to talk about what’s wrong with the United States health care system:  “Well, really, don’t we just need universal health care, a single-payor system?  If Canada can do it, why can’t we?”  (I mean no disparagement to Vickie Williams’s excellent post earlier today on this point, for those who are less jaded than I.)  Instead, the book accepts the system we have — an admittedly disjointed amalgam of government programs and regulations, along with competitive markets and incentives — and asks how it might be improved.

David’s chapter focuses on payment systems as a source of fragmentation and provides some nice examples even within particular health care programs or payors.  For example, Medicare A (hospitalization) providers have no incentive to consider Part B (outpatient and physician services) providers’ costs because the Parts operates as “payment silos,” under distinct reimbursement methodologies, with no need to coordinate care or service delivery.  With dually eligible beneficiaries, the fragmentation is even worse:  Medicare faces higher costs if poor quality care in Medicaid-covered long-term care settings precipitates an acute hospitalization, while Medicaid faces higher long-term care costs if Medicare prescription drug coverage fails to treat beneficiaries’ chronic conditions.  The chapter suggests some payment reform strategies, such as medical homes, pay-for-performance, and bundled payments, which have been debated and adopted to varying degrees by government and private payors, including in the recent Patient Protection and Affordable Care Act.

The end of the chapter was the most provocative.  In David’s characteristically contrarian, and, to me, always entertaining way, he concludes by begging the question:   Before we get all worked up about fragmentation and how to fix it, we should step back and consider that, at least in some cases, we seem to (and, he would suggest, at least sometimes, should) prefer fragmented health care delivery.  He points to the popularity of Wal-Mart retail clinics, medical tourism, and specialty hospitals.  And I would add the decline of managed care, rise of concierge medicine, and popularity of $4 prescription drugs.  Of course, as David acknowledges, those trends reveal other, deeper flaws in our health care delivery “system.”  But before jumping on the de-fragmentation bandwagon, Waldos should consider carefully what they may have to give up.