The Role of Economic Analysis in Healthcare Antitrust: Cutting-Edge Economics Meets the Anomalies of the Healthcare Syst

1. The Role of Economic Analysis in Healthcare Antitrust: Cutting-Edge Economics Meets the Anomalies of the Healthcare System AHLA Antitrust Practice Group Mid-Year Luncheon Orlando, FL February 2012 Cory Capps, PhD

2. Topics • Hospital and health plan ownership concentration • Neither is as straightforward to characterize as you might expect • A provocative paper: The Increased Concentration Of Health Plan Markets Can Benefit Consumers Through Lower Hospital Prices • Glenn A. Melnick, Yu-Chu Shen, and Vivian Yaling Wu, Health Affairs, September 2011 • Turning countervailing market power on its head? • Bilateral market power • The role of economics in healthcare antitrust • Hospital and other provider mergers • Health plan mergers • Conduct cases Economic Analysis in Healthcare Antitrust

3. Are hospital “markets” concentrated? • Taking geographic boundaries as given, hospital ownership concentration is fairly easy to measure reliably • American Hospital Association data; CMS Hospital Cost Reports • Analytically convenient geographic units, while useful for broad summaries, do not generally correspond to relevant antitrust markets • See C. Capps and D. Dranove, “Market concentration of hospitals,” June, 2011, Economic Analysis in Healthcare Antitrust

4. Are hospital “markets” concentrated? • Williams, Vogt, and Town, “How has hospital consolidation affected the price and quality of hospital care?” RWJF Policy Briefno. 9, February 2006 Economic Analysis in Healthcare Antitrust

5. Are health plan “markets” concentrated? • Many health plan mergers and acquisitions—not all are overlapping, though. • Hospital systems selling off their plans • Combining Blues in non-overlapping geographies • Unbranded competition? BC vs. BS competition? • Mergers of overlapping rivals • AMA’s annual Competition in Health Insurance report, 2011 Update: • 83% of MSAs: health plan HHI > 2,500 • 95% of MSAs: one health plan with a share of 30% or more • 47% of MSAs: one health plan with a share of 50% or more • AMA letter to AAG Christine Varney, July 8, 2009: “The AMA’s study indicates that numerous insurers possess the sort of monopsony power in physician marketsthat the DOJ claimed to exist in its challenges of UnitedHealthcare’s acquisition of PacifiCare and Aetna’s acquisition of Prudential’s national health insurance lines. In those cases, the DOJ embraced the notion of a localized market in which health insurers purchase physician services.” Economic Analysis in Healthcare Antitrust

6. Are health plan “markets” concentrated? • The data relied upon by the AMA appear to be unreliable • Capps (2009) • Dafny, Dranove, Limbrock, and Scott Morton (2011): “We conclude that the [four] publicly-available sources of data on health insurance market shares are unreliable. They show great variability across years relative to both a reasonable prior and to the variability exhibited in hospital discharge data. They do not reflect merger activity. In addition, they omit important components of the market such as self-insured health plans.” • Based on DOJ cases, the MSA appears to be at least a reasonable approximation to a relevant geographic market for health plan mergers (national accounts aside) • Aetna-Prudential; United-PacifiCare; United-Sierra; BCBS-Montana • Reliable data on enrollment by carrier within MSAs are hard to find • Self-funded enrollment is particularly hard to measure but accounts for more than half of commercial health plan enrollment • Further complications from non-insurer TPAs and rental networks • The reverse of the challenge with respect to hospitals Economic Analysis in Healthcare Antitrust

7. Measurement aside, is concentration problematic? • Hospitals: • A broad body of economic studies find that more concentrated hospital markets have higher prices or that mergers that combine closely substitutable hospitals can lead to higher prices • See Town & Vistnes RWJF study for 20+ citations • Health Plans: • Effects of market power on premiums are theoretically ambiguous • Market power in the sale of health plans: increased premiums* • Market power in the purchase of provider services: lower reimbursement rates that could lower premiums • The subject of the recently published study by Melnick, Shen, and Wu (MSW, Health Affairs, September 2011) • See Dafny, Duggan, and Ramanarayanan, “Paying a Premium on your Premium? Consolidation in the U.S. Health Insurance Industry,” American Economic Review, forthcoming Economic Analysis in Healthcare Antitrust

8. MSW: The Increased Concentration Of Health Plan Markets Can Benefit Consumers Through Lower Hospital Prices* • MSW gather (1) MSA-level data on hospital ownership concentration and health plan concentration and (2) estimates of hospitals’ commercial prices for 2001-2004 • The empirical cautions described above apply to the MSW concentration data on both sides of the market • MSW landscape highlights: • As measured by MSA-level HHIs for hospitals and health plans, the hospital side is more concentrated than the health plan side in more than 90% of MSAs • “64 percent of hospitals operate in markets where health plans are not very concentrated” (HHI < 1800) • “7 percent [of hospitals] are in the most concentrated health plan markets” (HHI > 3200) • “Contrary to conventional wisdom, very few hospitals operate in markets with only a few dominant health plans” • This finding is not due to MSW’s use of older data—the 2002 AMA report studied 70 MSAs and concluded that 87% had an HHI over 1800 • The views expressed herein may not be those of Drs. Melnick, Shen, and/or Wu. Economic Analysis in Healthcare Antitrust

9. MSW: The Increased Concentration Of Health Plan Markets Can Benefit Consumers Through Lower Hospital Prices* • Main findings: • “A 1,000-percentage-point increase in the hospital [HHI] raises [hospital] prices by approximately 8.3 percent” • “Higher health plan concentration is associated with lower hospital prices on average” • But “hospital prices are significantly affected only when health plan [HHIs] are above 3200” • MSW find that, all else equal, when the health plan HHI is over 3200, hospital prices are, on average, 12% lower • “More concentrated health plan markets can counteract the price-increasing effects of concentrated hospital markets” • MSW policy implications: • “Regulators should continue to monitor health plan consolidation . . . But they should also adopt proactive policies to increase hospital market competition” • “Because [large hospital systems” may provide increased efficiency and quality, we do not recommend breaking them up. But regulators could require hospitals in systems to negotiate independently with health plans.” • Easier said than done! • The “Evanston Remedy”—Effective at the end of the day? Economic Analysis in Healthcare Antitrust

10. Is this “beneficial”? • Health plan monopsony power is harmful if the effect is to reduce the output of provider services below the efficient level • Monopsony is the mirror image of monopoly: a monopsonist reduces its purchases of an input in order to reduce the price it pays for that input • Reducing the output of provider services mechanically decreases the consumption of provider services by end consumers • MSW offer a countervailing market power story in arguing that, at least on this account, health plan concentration is beneficial • Providers routinely make this argument—AMA efforts for state and federal collective bargaining antitrust exemptions; hospital mergers • Beneficial if (1) the effect of provider market power is to raise price and reduce output and (2) health plan market power acts in the other direction • In a simple world, it would be possible to distinguish harmful from beneficial health plan concentration by examining the effect on the volume of provider services rendered • Suppose providers exercise market power by resisting care management and risk-bearing • In this case, health plan market power could efficiently reduce output Economic Analysis in Healthcare Antitrust

11. Mutually reinforcing health plan and provider concentration? • In May of 2010, AAG Varney described the results of DOJ’s internal review of health plan entry barriers:* • “New insurers cannot compete with incumbents for enrollees without provider discounts, but they cannot negotiate for discounts without a large number of enrollees. This . . . makes entry risky and difficult.” • “New entrants or niche players are more likely to receive provider discounts comparable to their [insurer] competitors’ in less concentrated markets . . . .” • “It may be easier [for a new health plan] to enter less concentrated markets, with competition between several large but relatively equal-sized insurers, than it is to enter a market with one or two dominant plans.” • When provider markets are competitive, prices will be pushed down to costs for all customers • So the dynamic identified by AAG Varney would only exist when there is both provider and health plan market power. • * Christine Varney, Remarks as Prepared for the ABA/AHLA, May 24, 2010, http://www.justice.gov/atr/public/speeches/258898.pdf. Economic Analysis in Healthcare Antitrust

12. Mutually reinforcing health plan and provider concentration? • A variant of this argument lies at the core of the West Penn vs. UPMC/Highmark case: • 3rd Circuit, November 29, 2010, overturning the District Court’s granting of UPMC’s and Highmark’s motion to dismiss: “The plaintiff says that pursuant to the conspiracy, the dominant hospital system used its power in the provider market to insulate the health insurer from competition, and in exchange the insurer used its power in the insurance market to strengthen the hospital system and to weaken the plaintiff.” • DOJ closed its investigation • Highmark is at a contracting impasse with UPMC and now intends to acquire West Penn • UPMC has the second largest health plan in Western Pennsylvania Economic Analysis in Healthcare Antitrust

13. Economics in other healthcare antitrust contexts • Provider merger analysis commonly includes econometric analysis • ProMedica-St. Luke’s; OSF-Rockford Health System • Diversion analyses—analogous to non-healthcare cases, such as TaxAct • Econometric analysis of bargaining leverage—”willingness-to-pay” • Health plan mergers • Most recent case, in Montana, was small and resolved via consent decree • Standard unilateral effects toolkit is likely to apply to health plan mergers • E.g., Upward Pricing Pressure analyses based on matching customers • Conduct cases • MFNs. US v. BCBS of Michigan. What are the economic effects of MFNs? • Vertical restrictions and bundled discounts. • When are bundled “discounts” pro-competitive and when do they restrict competition? • See DOJ’s Competitive Impact Statement in United Regional. Economic Analysis in Healthcare Antitrust

14. The Role of Economic Analysis in Healthcare Antitrust: Cutting-Edge Economics Meets the Anomalies of the Healthcare System AHLA Antitrust Practice Group Mid-Year Luncheon Orlando, FL February 2012 Cory Capps, PhD

15. Citations • Glenn A. Melnick, Yu-Chu Shen, and Vivian Yaling Wu, “The Increased Concentration Of Health Plan Markets Can Benefit Consumers Through Lower Hospital Prices,” Health Affairs, September 2011. • Williams, Vogt, and Town, “How has hospital consolidation affected the price and quality of hospital care?” RWJF Policy Brief no. 9, February 2006. • C. Capps and D. Dranove, “Market concentration of hospitals,” June 2011, http://www.ahipcoverage.com/wp-content/uploads/2011/06/ACOs-Cory-Capps-Hospital-Market-Consolidation-Final.pdf. • AHA, Letter to AAG Christine Varney, July 8, 2009, http://www.ama-assn.org/ama1/pub/upload/mm/399/antitrust-health-insurance-competition-letter.pdf. • AMA, Competition in Health Insurance report, 2011 Update, https://catalog.ama-assn.org/Catalog/product/product_detail.jsp?productId=prod1940016. • C. Capps, “Comment, Project No. P092900,” Submission of America’s Health Insurance Plans to the Department of Justice and the Federal Trade Commission on the Horizontal Merger Guidelines Review Project, November 2009, http://www.ftc.gov/os/comments/horizontalmergerguides/545095-00009.pdf • L. Dafny, D. Dranove, F. Limbrock, and F. Scott Morton, “Data Impediments to Empirical Work on Health Insurance Markets,” B.E. Journal of Economic Analysis & Policy 11, n. 2, Article 8 (2011). • C. Capps, “Buyer Power in Health in Health Plan Mergers,” Journal of Competition Law and Economics 6, n. 2 (2010). • Christine Varney, Remarks as Prepared for the ABA/AHLA, May 24, 2010, http://www.justice.gov/atr/public/speeches/258898.pdf. • West Penn Allegheny Health System Inc. v. UPMC, No. 09-4468 (3d Cir. Nov. 29, 2010), http://www.ca3.uscourts.gov/opinarch/094468p.pdf. • Docket No. 9346, In the Matter of ProMedica Health System, http://www.ftc.gov/os/adjpro/d9346/index.shtm • Docket No. 9349, In the Matter of OSF Healthcare System, http://www.ftc.gov/os/adjpro/d9349/index.shtm • US v. United Regional Health Care System, http://www.justice.gov/atr/cases/unitedregional.html • US v. H&R Block, Inc. and TA IX L.P., http://www.justice.gov/atr/cases/handrblock.html • US v. Blue Cross Blue Shield of Michigan, http://www.justice.gov/atr/cases/bcbsmfn.html • US v. Blue Cross Blue Shield of Montana et al., http://www.justice.gov/atr/cases/bcbsmnw.html Economic Analysis in Healthcare Antitrust

16. Economic Analysis and Health Care Antitrust Enforcement Christopher Garmon Bureau of Economics The opinions expressed in this presentation are my own and not necessarily those of the Commission or any individual Commissioner.

17. Health Care vs. Traditional Markets • Health care markets differ from traditional markets in: • How prices are determined • through negotiations • How consumers (patients) choose • largely ignoring price • The amount of data available for analysis • These three factors shape the economic tools used in current health care antitrust enforcement

18. Health Care Data • Data is plentiful for health care (esp. hospital) analysis • Hospital inpatient discharge data • Recent efforts to make other health data available as well: • All-payer claims data • Health Care Cost Institute • Downside: • Temptation to use data without accounting for the unique aspects of health care markets • Elzinga-Hogarty • Critical loss analysis

19. Health Care Markets • Bargaining: • Prices are set in hospital/health plan negotiations • How does a merger affect each side’s “threat point?” • Hospital’s threat point improves as diversion is internalized • Health plan’s threat point may worsen with “all-or-nothing” bargaining • Patient Choice: • Choices are largely based on non-price factors • Proximity, clinical quality, amenities, etc.

20. Tools for Economic Analysis • Discrete Choice Modeling • Model of patient choice as a function of provider characteristics, patient characteristics, and provider-patient characteristics (e.g., driving time between patient and provider), but not price • Tools: • Diversion • If a hospital is dropped from a health plan network, where will the patients go? • Hypotheticals • If a hospital adds a service, how will that change demand? • Competition metrics • Willingness-to-Pay, patient-weighted HHI • Merger simulation

21. Examples • ProMedica/St. Luke’s • ALJ’s decision: • “Diversion analysis is a commonly used method to quantify the degree of substitutability between hospitals.” • “Based on the diversion analysis, … ProMedica is St. Luke’s closest substitute, … St. Luke’s is ProMedica’s second-closest substitute.” • “Professor Town’s willingness to pay model predicts that the volume-weighted average price will increase by 16.2 percent”

22. Examples • Phoebe Putney/Palmyra: • Palmyra recently awarded certificate of need for obstetrics services • After obstetric services are introduced, what is the estimated diversion between the hospitals?

23. Areas for Future Research • How accurate are hospital merger simulations? • Patient price sensitivity? • Should capacity be included in the models? • Vertical issues (e.g., hospital employment of physicians) • “Upward Pricing Pressure” index for health care providers • Explicitly including health plans in the model