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.

You may also like...