Government Regulation and Intervention Part 2

1. Government Regulation and InterventionPart 2 Professor Vivian Ho Health Economics This material draws heavily from Santerre & Neun, Health Economics, Theories, Insights, and Industry Studies, Dryden Press.

2. Introduction • Causes and consequences of government intervention in health care. • Types of government intervention. • Case studies • Cigarette taxes. • Price ceilings on health care services. • Hospital antitrust litigation.

3. Provide public goods. Correct for externalities Impose regulations. Enforce antitrust laws. Sponsor redistribution programs. Operate public enterprises. Fund medical research. Tax cigarettes, pollution. FDA Bar hospital mergers. Medicare and Medicaid. VA hospitals Types of Government Intervention

4. Antitrust: Sherman Antitrust Act • Section 1: Every contract, combination in the form of trust or otherwise, or conspiracy, in restraint of trade or commerce among the several states or with foreign nations, is hereby declared illegal.

5. Section 2: Every person who shall monopolize, or conspire with any other person or persons to monopolize any part of the trade or commerce among the several states, or with foreign nations, shall be guilty of a misdemeanor.

6. The Act prohibits anticompetitive business practices that promote inefficiency and inequity in the marketplace, such as: • Price fixing - when business rivals enter a collusive agreement to refrain from price competition; fix the price of a good or service. • Hospitals in a given city cannot jointly establish the price of various hospital services.

7. Boycott - agreement among competitors not to deal with a supplier or a customer. • Physicians in an area can’t collectively agree to deny services to a particular managed care organization. • Market allocation - when competitors agree to compete with one another in specific market area. • Hospitals in the same city can’t collectively set geographic service boundaries.

8. Price fixing, boycotting, and market allocations are illegal per se. • The plaintiff must only prove these actions took place for the defendant to be in violation of the Act. • In contrast, rule of reason doctrine is used to evaluate horizontal mergers under the Act. • While horizontal mergers may force price above the competitive level, they may also create benefits which could be passed on to the customer.

9. Potential benefits of mergers • Economies of scale in production. • Organizational economies. • less administrative staff • Better access to technological innovations. • The potential anti- and pro-competitive effects must be weighed by the courts in determining the social desirability of a merger.

10. Antitrust in the health care industry • Is the health care industry subject to as much anti-competitive behavior as other industries? • Will mergers in health care help/harm consumer welfare? • Benefits of non-profit organizations • Consolidation on the consumer side to counteract consolidation on the provider side.

11. The Government’s View • Prior to the mid-1970s, antitrust was not widely applied in the health care field, because members of the medical profession claimed they were exempt. • 1975, Goldfarb v. Virginia State Bar (Supreme Court) “The nature of an occupation, standing alone, does not provide sanctuary from the Sherman Act…nor is the public service aspect of professional practice controlling in determining whether section 1 includes professions.”

12. 1982 - Arizona v. Maricopa Medical Society • Physicians formed a medical society which agreed on maximum reimbursement fees they could be paid by insurance companies that agree to send patients.

13. Plaintiff: “…periodic upward revisions of the maximum-fee schedules have the effect of stabilizing and enhancing the level of actual charges by physicians.” • Defendant: “…the schedules impose a meaningful limit on physicians’ charges…the advance agreement by doctors to accept the maxima enables the insurance carriers to calculate more efficiently the risks they underwrite and therefore serves as an effective cost-containment mechanism…”

14. Decision: “…The per se rule is violated here by a restraint that tends to provide the same economic rewards to all practitioners regardless of their skill, experience, training, or willingness to employ innovative and difficult procedures in individual cases. Such a restraint may also discourage entry into the market and may deter experimentation and new developments by new entrepreneurs.”

15. Antitrust and Hospital Mergers • Traditional Dept. of Justice Analysis • Define the product, and challenge mergers that lead to very high market concentration. • 50% market share by the proposed merged entity. • The DOJ tends to challenge mergers in rural areas and small cities.

16. 1997: DOJ challenged merger of 2 teaching hospitals in metropolitan New York. • Long Island Jewish, North Shore Manhasset. • New Argument: Unilateral Effects Analysis. • A merger would give the hospitals the ability to raise the price charged to managed care networks. • Managed care networks need a prestigious teaching hospital as an “anchor.”

17. Court’s Decision: The DOJ argument was not credible. 1) LI Jewish and N Shore had many competitors in the area. • 85% of their care was primary or secondary. • Tertiary care was available in several teaching hospitals nearby.

18. 2) The market had several other buyers in addition to managed care. • Fee-for-service patients. • Self-pay patients. • Physicians who control admissions. • Medicare and Medicaid. • Employers. • Government payers.

19. 3) Managed care executives gave conflicting testimony on the effects of the merger. • Is unilateral effects analysis flawed, or did the DOJ just “goof” in preparing their argument?

20. Redistribution • The government often taxes one group and uses the revenues to subsidize another. Why? • Interdependent utility functions. • Donors get utility from increasing the welfare of recipients. • Why is the government involved? • “free rider” problem.

21. Two notions of equity in redistribution programs • Vertical equity • “Unequals should be treated unequally.” • People who earn more should pay higher taxes. • Horizontal equity • “Equals should be treated equally.” • Two persons with the same income level should pay the same in net taxes.

22. Vertical equity in practice • How much more in taxes should higher income people pay? • Suppose high income households pay $4,000 in taxes on average, and low income households pay $2,000. Is this equitable?

23. If the high income household makes $100,000, they pay a 4% tax. • If the low income household makes $10,000, they pay a 20% tax. • The notion of equity in taxation depends not just on total tax revenues, but on income levels and tax rates as well.

24. In practice, vertical equity is achieved when the net tax system is sufficiently progressive. • Taxes as a fraction of income rise with income. • Federal income tax system.

25. Other forms of redistribution • Proportional. • The fraction of income going to taxes is constant as income rises. • The Medicare tax is a fixed % of payroll income. • Regressive. • The fraction of income going to taxes falls as income rises. • Sales tax

26. Implementing redistribution • Supply-side subsidies • Government funding aimed at reducing the costs of producing a consumer good or service. • Subsidy to a public hospital. • Tuition for nurses or doctors. • Potentially violates notion of vertical equity • if all persons have equal access to the subsidized product.

27. Demand-side subsidies - government funding for consumers. • In-kind: vouchers or reimbursements for specific services. • Food stamps, Medicare, Medicaid • Cash: government-provided income that people can use at their own discretion. • AFDC, Supplemental Security Income • Keep in mind: It is difficult to guarantee horizontal equity with multiple programs in operation.

28. Examining Differences in Drug Prices • New York Times, Sept 2000

29. Responding to Market Failures in Tuberculosis Control • Science, August 2001

30. Consumer Groups Accuse U.S. of Negligence on Food Safety • The New York Times, October 15, 2002

31. Back to the Start • Does government intervention correct for market imperfections, or is it ruled by special interest groups?

32. A Final Caveat • Market failure is a necessary, but not sufficient condition for government intervention. • It may cost the government $10m to correct a problem in the marketplace, which imposes $8m in damages. • While markets may fail and impose societal costs, the costs of government intervention may be greater.