Hospitals, mergers, and two-stage competition

Antitrust Law Journal

Volumn 67, Issue 3, 2000, Pages 671-690

  Vistnes, Gregory ^a  

^a NONE

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EID: 0034400950     PISSN: 00036056     EISSN: None     Source Type: Journal    
DOI: None     Document Type: Article

References (29)

1. The author's views reflect, in part, his involvement in several of these cases. FTC v. Tenet Healthcare Corp., 17 F. Supp. 2d 937 (F.D. Mo. 1988), rev'd, 186 F.3d 1045 (8th Cir. 1999); FTC v. Freeman Hosp., 911 F. Supp. 1213 (W.D. Mo.), aff'd on other grounds, 69 F.3d 260 (8th Cir. 1995) (Joplin); FTC v. Butterworth Health Corp., 946 F. Supp. 1285 (W.D. Mich 1996), aff'd in unpublished op., 1997-2 Trade Cas. (CCH) ¶ 71,863 (6th Cir. 1997) (Grand Rapids); United States v. Long Island Jewish Med. Ctr., 983 F. Supp. 121 (E.D.N.Y. 1997) (Long Island); United States v. Morton Plant Health Sys., Inc., 1994-2 Trade Gas. (CCH) ¶ 70,759 (M.D. Fla. 1994) (final consent judgment) (Clearwater); United States v. Mercy Health Servs., 902 F. Supp. 968 (N.D. Iowa 1995), vacated as moot, 107 F.3d 632 (8th Cir. 1997) (Dubuque); State of California v. Sutter Health, No. C-99 3803 (N.D. Cal. Aug. 10, 1999) (complaint).
2. HEALTH INSURANCE INSTITUTE OF AMERICA, 1996 SOURCEBOOK OF HEALTH INSURANCE DATA 21 (reporting 1995 KPMG Peat Marwick data).
3. For traditional Medicare, Medicaid, and indemnity plans that do not selectively contract, only second-stage competition is relevant. The two-stage analysis pertains to Medicare HMOs and to those states in which Medicaid recipients can choose among alternative plans that in turn selectively contract with hospitals.
4. See David Dranove et al., Price and Concentration in Local Hospital Markets: The Switch from Patient-Driven to Payer-Driven Competition, 36 J.L. & ECON. 179 (1993). The authors label these two types of competition as "payer-driven" and "patient-driven" competition. They argue, however, that managed care penetration causes payer-driven competition to displace patient-driven competition, rather than to create the additional level of competition described in this article.
5. This helps explain why plans that face less competition may include fewer hospitals in their network. Without the fear of losing enrollees to a competitor, those plans can more credibly threaten to drop hospitals from their network. Not surprisingly, this heightened bargaining leverage seems to have allowed at least some "monopoly" state Medicaid programs to realize much lower contract prices than their commercial (and more competitive) counterparts.
6. See Jessica Vistnes et al., The Effect of Competition on Employment-Related Health Insurance Premiums (working paper Nov. 1999, on file with author), in which the authors model and empirically test this two-stage game between plans.
7. Employers generally limit the number of plans with which they contract and the number of each plans' insurance products they offer to their employees: based on 1995 data, 50% of firms with over 200 employees offer only one plan to their employees, while another 24% offer only two plans. See HEALTH INSURANCE INSTITUTE OF AMERICA, supra note 2, at 21.
8. In some cases, however, hospitals may introduce price competition into the second stage of competition by waiving co-payments or deductibles in an effort to attract individual patients. For reasons discussed below, plans often attempt to prohibit such behavior. See infra text accompanying notes 22-23.
9. That incentive may be lower if reducing the size of the network reduces the plan's attractiveness.
10. In terms of equation (2), the "reduced reward" corresponds to an effective increase in D = C - P.
11. This linkage between second-stage competition and contract prices suggests why within-network steering may have a limited ability to foster first-stage competition. If within-network steering reduces a hospital's reward from being designated a network hospital, hospitals' incentive to set low prices falls. Thus, plans' use of within-network steering as a means of controlling hospital prices could be counterproductive. More generally, the
12. United States v. Morton Plant Health Sys., Inc., 1994-2 Trade Cas. (CCH) ¶ 70,759 (M.D. Fla. 1994) (consent decree).
13. United States v. Long Island Jewish Med. Ctr., 983 F. Supp. 121, 140 (E.D.N.Y. 1997).
14. DOJ's Verified Complaint at ¶ 3, United States v. Long Island Jewish Med. Ctr., No. 97-3412 (E.D.N.Y. 1997) (complaint).
15. See David Dranove & William White, Specialization, Option Demand, and the Pricing of Medical Specialists, 5 J. ECON. & MGMT. STRATEGY 277 (1996); David Dranove, Emerging Issues in the Antitrust Definition of Healthcare Markets, 1 ELECTRONIC HEALTH ECON. LETTERS 10 (Nov. 1997). These authors also raise the possibility of narrowly defined relevant markets, at least in part because of what they refer to as individuals' "option demand" for localized or specialized hospital care.
16. See David Dranove & William White, Specialization, Option Demand, and the Pricing of Medical Specialists, 5 J. ECON. & MGMT. STRATEGY 277 (1996); David Dranove, Emerging Issues in the Antitrust Definition of Healthcare Markets, 1 ELECTRONIC HEALTH ECON. LETTERS 10 (Nov. 1997). These authors also raise the possibility of narrowly defined relevant markets, at least in part because of what they refer to as individuals' "option demand" for localized or specialized hospital care.
17. Patient flow data includes information on the Zip Codes in which hospitals' patients live.
18. For more detail on the Elzinga-Hogarty approach, see, e.g., Kenneth G. Elzinga & Thomas F. Hogarty, The Problem of Geographic Market Delineation in Antimerger Suits, 18 ANTITRUST BULL. 45 (1973); Kenneth G. Elzinga & Thomas F. Hogarty, The Problem of Geographic Market Delineation Revisited: The Case of Coal, 23 ANTITRUST BULL. 1 (1978); Michael G. Vita et al., Economic Analysis in Health Care Antitrust, 47 J. CONTEMP. HEALTH L. & POL'Y 73 (1991). Zwanziger and Melnick propose a variant of the Elzinga-Hogarty approach that also rests on the notion that, if different patients living in the same Zip Code choose different hospitals, those hospitals compete. Jack Zwanziger & Glenn Melnick, The Effects of Hospital Competition and the Medicare PPS Program on Hospital Cost Behavior in California, 7 J. HEALTH ECON. 301 (1988). The courts have also been asked to adopt another variant of that test in which individual Zip Codes are labeled "contestible" or "competitive" if at least 20% (or some other threshhold) of patients living in that Zip Code choose hospitals other than the merging (or in some circumstances the market) hospitals.
19. For more detail on the Elzinga-Hogarty approach, see, e.g., Kenneth G. Elzinga & Thomas F. Hogarty, The Problem of Geographic Market Delineation in Antimerger Suits, 18 ANTITRUST BULL. 45 (1973); Kenneth G. Elzinga & Thomas F. Hogarty, The Problem of Geographic Market Delineation Revisited: The Case of Coal, 23 ANTITRUST BULL. 1 (1978); Michael G. Vita et al., Economic Analysis in Health Care Antitrust, 47 J. CONTEMP. HEALTH L. & POL'Y 73 (1991). Zwanziger and Melnick propose a variant of the Elzinga-Hogarty approach that also rests on the notion that, if different patients living in the same Zip Code choose different hospitals, those hospitals compete. Jack Zwanziger & Glenn Melnick, The Effects of Hospital Competition and the Medicare PPS Program on Hospital Cost Behavior in California, 7 J. HEALTH ECON. 301 (1988). The courts have also been asked to adopt another variant of that test in which individual Zip Codes are labeled "contestible" or "competitive" if at least 20% (or some other threshhold) of patients living in that Zip Code choose hospitals other than the merging (or in some circumstances the market) hospitals.
20. For more detail on the Elzinga-Hogarty approach, see, e.g., Kenneth G. Elzinga & Thomas F. Hogarty, The Problem of Geographic Market Delineation in Antimerger Suits, 18 ANTITRUST BULL. 45 (1973); Kenneth G. Elzinga & Thomas F. Hogarty, The Problem of Geographic Market Delineation Revisited: The Case of Coal, 23 ANTITRUST BULL. 1 (1978); Michael G. Vita et al., Economic Analysis in Health Care Antitrust, 47 J. CONTEMP. HEALTH L. & POL'Y 73 (1991). Zwanziger and Melnick propose a variant of the Elzinga-Hogarty approach that also rests on the notion that, if different patients living in the same Zip Code choose different hospitals, those hospitals compete. Jack Zwanziger & Glenn Melnick, The Effects of Hospital Competition and the Medicare PPS Program on Hospital Cost Behavior in California, 7 J. HEALTH ECON. 301 (1988). The courts have also been asked to adopt another variant of that test in which individual Zip Codes are labeled "contestible" or "competitive" if at least 20% (or some other threshhold) of patients living in that Zip Code choose hospitals other than the merging (or in some circumstances the market) hospitals.
21. For more detail on the Elzinga-Hogarty approach, see, e.g., Kenneth G. Elzinga & Thomas F. Hogarty, The Problem of Geographic Market Delineation in Antimerger Suits, 18 ANTITRUST BULL. 45 (1973); Kenneth G. Elzinga & Thomas F. Hogarty, The Problem of Geographic Market Delineation Revisited: The Case of Coal, 23 ANTITRUST BULL. 1 (1978); Michael G. Vita et al., Economic Analysis in Health Care Antitrust, 47 J. CONTEMP. HEALTH L. & POL'Y 73 (1991). Zwanziger and Melnick propose a variant of the Elzinga-Hogarty approach that also rests on the notion that, if different patients living in the same Zip Code choose different hospitals, those hospitals compete. Jack Zwanziger & Glenn Melnick, The Effects of Hospital Competition and the Medicare PPS Program on Hospital Cost Behavior in California, 7 J. HEALTH ECON. 301 (1988). The courts have also been asked to adopt another variant of that test in which individual Zip Codes are labeled "contestible" or "competitive" if at least 20% (or some other threshhold) of patients living in that Zip Code choose hospitals other than the merging (or in some circumstances the market) hospitals.
22. For further discussion about the problems of using patient flow data to define geographic markets, see, e.g., Gregory Werden, The Limited Relevance of Patient Migration Data in Market Delineation for Hospital Merger Cases, 8 J. HEALTH ECON. 363 (1989); Vita et al., supra note 33; Gregory Vistnes, Hospital Mergers and Antitrust Enforcement, 20 J. HEALTH POL. POL'Y & L. 175 (1995); Gregory S. Vistnes, Defining Geographic Markets for Hospital Mergers, ANTITRUST, Spring 1999, at 28.
23. For further discussion about the problems of using patient flow data to define geographic markets, see, e.g., Gregory Werden, The Limited Relevance of Patient Migration Data in Market Delineation for Hospital Merger Cases, 8 J. HEALTH ECON. 363 (1989); Vita et al., supra note 33; Gregory Vistnes, Hospital Mergers and Antitrust Enforcement, 20 J. HEALTH POL. POL'Y & L. 175 (1995); Gregory S. Vistnes, Defining Geographic Markets for Hospital Mergers, ANTITRUST, Spring 1999, at 28.
24. For further discussion about the problems of using patient flow data to define geographic markets, see, e.g., Gregory Werden, The Limited Relevance of Patient Migration Data in Market Delineation for Hospital Merger Cases, 8 J. HEALTH ECON. 363 (1989); Vita et al., supra note 33; Gregory Vistnes, Hospital Mergers and Antitrust Enforcement, 20 J. HEALTH POL. POL'Y & L. 175 (1995); Gregory S. Vistnes, Defining Geographic Markets for Hospital Mergers, ANTITRUST, Spring 1999, at 28.
25. For further discussion about the problems of using patient flow data to define geographic markets, see, e.g., Gregory Werden, The Limited Relevance of Patient Migration Data in Market Delineation for Hospital Merger Cases, 8 J. HEALTH ECON. 363 (1989); Vita et al., supra note 33; Gregory Vistnes, Hospital Mergers and Antitrust Enforcement, 20 J. HEALTH POL. POL'Y & L. 175 (1995); Gregory S. Vistnes, Defining Geographic Markets for Hospital Mergers, ANTITRUST, Spring 1999, at 28.
26. As mentioned earlier, the costs of diversion could exceed the benefits if diversion were to hospitals with higher prices. Those costs could also be high if implementing a steering mechanism would antagonize many of the plan's enrollees. For example, although it has sometimes been suggested that plans could steer enrollees between network hospitals by having their physician suggest (but not require) that they use an alternative hospital, many plans seem wary of such tactics, especially given the increasing public perception that health plans care only about profits and not about their enrollees' health.
27. In the DOJ's 1994 Clearwater, Florida, case, the inflow into the government's alleged geographic market was approximately 28%, while the outflow was approximately 14%. United States v. Morton Plant Health Sys., Inc., 1994-2 Trade Cas. (CCH) ¶ 70,759 (M.D. Fla. 1994) (consent decree). Patient inflow and outflow from the government's proposed geographic market were also high in the DOJ's 1997 Long Island hospital case. United States v. Long Island Jewish Med. Ctr., 983 F. Supp. 121 (E.D.N.Y. 1997).
28. Dranove, supra note 31; Dranove & White, supra note 31.
29. Dranove, supra note 31; Dranove & White, supra note 31.