Code Red: Two Economists Examine the U.S. Healthcare System

October 11, 2010

ACOs and the Looming Antitrust Crisis

Filed under: Competition,Research methods — David Dranove and Craig Garthwaite (from Oct 11, 2013) @ 12:57 pm

The Federal Trade Commission recently held a day-long workshop focusing on Accountable Care Organizations. ACOs will vertically integrate hospitals and doctors and, in the process, achieve what previous incarnations of vertical integration could not. Let’s forget about whether ACOs will actually fulfill the dream of efficient healthcare delivery and focus on the FTC angle – will the creation of ACOs require the creation of provider market power and should he FTC therefore look the other way?

Many health economists have documented the perils of provider market power. Some of my own research has been instrumental in turning the tide against providers, whose monopolizing tendencies used to get a free pass from the courts. But as policy makers move ACOs to the fore, providers are hoping to sweep antitrust under the rug.

The latest salvo comes from the AHA, which last week released a study challenging two recent studies of hospital market power and then strains to connect their findings to ACOs. The AHA report goes a bit overboard in its criticism of these studies. One study consists of little more than anecdotes and should not be criticized for being anything else. The other study is more complex and the criticism is equally complex, mostly along the lines of “if you had measured things slightly differently, your results would have been slightly different.” The AHA report would have readers believe that these two studies represent the entire body of knowledge about hospital mergers. Having summarily dismissed them, the argument against FTC enforcement would seem complete.

The AHA report fails discuss two lengthy review articles prepared on behalf of the FTC and the Robert Wood Johnson Foundation, both of which find overwhelming published evidence that hospital consolidations lead to higher prices. I wrote many of the papers cited in both studies, and the theoretical and empirical advances that I made during the last decade helped form the backbone for FTC recent hospital merger enforcement policy. The authors of the AHA report seem to have ignored my work.

It is not hard to understand why. The reports’ authors work for Lexecon/Compass, a litigation firm whose economists have spent the past two decades testifying on behalf of merging hospitals. (Full disclosure: I sometimes consult on behalf of plaintiffs in hospital antitrust cases.) Over the years, the Lexecon/Compass economists have done exemplary work for their clients, convincing the courts that their clients lacked market power and therefore could not raise prices. Yet time and again these same hospitals substantially raised their prices after the mergers were consummated. The result is that market after market – from the Bay Area to Milwaukee, Cleveland, and Boston, just to name a few – is dominated by a vanishingly small number of hospital systems, and hospital prices have risen through the roof.

Even if we ignore the overwhelming evidence on the evils of hospital market power, it is important to ask what any of this has to do with ACOs. The AHA wants us to believe that all hospital mergers are just part of the effort to create ACOs. But ACOs are more about vertical integration between doctors and hospitals than they are about horizontal hospital mergers, and there is no obvious reason why hospitals have to merge for ACOs to work. Some hospital mergers do have a vertical component, such as when a teaching hospital acquires a community hospital. But my own research has shown that such mergers can increase profitable referrals to the teaching hospital while pushing unprofitable patients outside the system.

Hospitals may not have much of a case for relaxing antitrust enforcement, but physicians might. Like hospitals, many physicians have spent the last two decades merging with one another and have often faced antitrust challenges from the FTC. Physicians will argue that by organizing into groups, they can better afford the information technologies envisioned for ACO success and may also be better positioned to establish internal monitoring and control systems. While the argument is theoretical at this point, all of the benefits of ACOs are theoretical, and the doctors’ theories do have the benefit of being grounded in basic economics of organizations.

Parties to a merger are always quick to tout the synergies they will create and deny that their combination will lead to higher prices. Hospitals played this game with the utmost success in the 1990s and much of the 2000s, and the courts approved hospital mergers on the weakest of theoretical and empirical evidence. Now that the theory and evidence is weighing against mergers, hospitals are playing the ACO card. If they succeed, I fear that any hope of reining in hospital spending will be forever lost.

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