The Monop-sony-and–oly of Healthcare: A Call to Government Action

MONOPSONY – DO NOT PASS GO AND DO NOT COLLECT $200

Let’s start this week’s discussion with a fundamental economic principle: market competition is beneficial for both consumers and businesses. Competing for consumer attention and dollars incentives businesses to respond to consumer needs, innovate their product(s), and offer clients more for their dollar. A component of this principle is that monopolies are not good for competition. Businesses that operate in a market (based either on geography or product) without competitors have no reason to save consumers money or sufficiently meet consumer needs; owning a market means a business can force consumers to accept their terms as consumers have no alternative to accessing the goods and services.

In addition to a monopoly, monopsonies also have potential to drive down competition in a market. What is a monopsony, you ask? Good question. Where a monopoly refers to a market dominated by one seller (consider a single health system in a county), a monopsony refers to “a market condition in which there is only one buyer.” One type of buyer in our healthcare analogy is a health insurer, which buys services sold by providers.

Now, before we proceed further in the Health Economics 101 tutorial, there is one thing that we need to address. While the United States’ healthcare system is predicated on free enterprise and market forces (presumably on the premise of market efficiencies and the power of consumer choice), the U.S. healthcare market is, in reality, profoundly uncompetitive. Last month, the American Medical Association (AMA) released its updated research into the competitive potential within health insurance markets as indicated by the level of concentration among health insurers. The report, Competition in Health Insurance: A Comprehensive Study of U.S. Markets, looks at the rate at which commercial health insurance markets are becoming increasingly concentrated within a fewer number of insurer entities. (Spoiler alert: UnitedHealth Group and the Blues take prominent placements in this list.) To the surprise of few, the AMA found that the majority of commercial health insurance markets are now considered highly concentrated (according to the Herfindahl-Hirschman Index) and the growth of highly concentrated markets has also accelerated significantly in recent years. Given the dual roles of health insurers within a market as both sellers (coverage to consumers) and buyers (services from providers), this increased concentration creates monopolistic and monopsonistic impact on local, regional, and national health markets, to the detriment of patients and consumers.

THE PROBLEM(S)

While monopolies and monopsonies are bad for competition, generally, their impact is both compounded and more significant in the healthcare sector. For example:

• A study on premium rates among ACA marketplace plans found an increase in premium costs to be negatively associated with the number of insurers offering the plans
• Analyses by the Centers for Medicare & Medicaid (CMS) found benchmark premiums reduced by 2.5% when counties added one additional insurer between coverage years
• Hospitals and providers were found to receive less income in communities where the 1999 Aetna and Prudential merger resulted in the combined company having a high market share

The takeaway point is that, as they consolidate entities and concentrate their power, health insurers leave little room for consumers and providers to reintroduce balance into the market. Consumers need health insurance coverage, and are limited by the options made available in the geography in which they live. When the coverage available does not meet consumer needs or is prohibitively expensive, the end result is an individual going out with health insurance (save for those instances where individuals may receive subsidies by the government aid in paying premiums for marketplace plans). The result: health insurers keep on keeping on.

Providers have slightly more opportunity than consumers to combat a concentrated health insurance market by increasing their own market share. This is accomplished (predominantly) through mergers, acquisitions, and contracting partnerships. Of course, this defensive (or aggressive?) consolidation strategy on the provider side further perpetuates an arms race between payers and providers within the market, as we previously discussed in our article evaluating the cost of provider consolidation. However, providers may not want to merge with or acquire (or be acquired by) another practice, and there are antitrust considerations at play when looking at contracting networks. (It is important to note here that the AMA report does not address the impact of provider concentration on the healthcare market; but that’s a topic for another day.)

SO NOW WHAT?

The stated purpose by the AMA of its report is to “help researchers, policymakers, and federal and state regulators identify markets where consolidation involving health insurers may cause competitive harm to consumers and providers of care.” The report does not explicitly state any calls to action, but there is a clear inference: correcting market failures and providing a stable (fair) space for stakeholders to compete is the role of the government. Furthermore, it is a role that only the government can fill (as compellingly argued by Nixon’s health economist, Alain Enthoven – you read that right, Nixon’s guy). Here are a few recommendations we have as to what that (concrete) government action might be:

1. Update the federal cadre of antitrust tools – There are multiple tools used by the federal government to assess the impact of, prevent against, and interrupt concentration within the healthcare sector. Given the percent of health insurance markets that are considered highly concentrated, and the continued increase of this percent over time, it is fair to assume that, collectively, these tools are not up to snuff for the current times. (And we aren’t the only ones who think so.) Up for re-visitation should be everything from the prominent use of the HHI (which could, for example, ignore the impact on concentration of cross-market consolidation) to what is considered a “large transaction” that automatically requires review by the Federal Trade Commission or Department of Justice.
2. Innovate our understanding of how concentration impacts the market health of healthcare – We all know the delivery and coverage of healthcare has changed drastically over the years. The advent of health information technology, the requirement to transition reimbursement to alternative payment models, and the establishment of essential health benefits that insurers must cover are among but a few of the ways in which we have made our healthcare infrastructure increasingly complicated. With these advances, and associated complexities, must come new understanding about how changes in the number of healthcare players impact a patient’s ability to receive care. The inability for patients and providers to pick their insurers from a truly competitive market has effects that resound in more ways than increased premiums. For example: insurers tend to partner with specific technology firms, which could experience their own lack of competition as the number of insurers dwindles. This not only impacts the vibrancy of the technology sector (already under scrutiny for many other reasons), but also begs the question as to whether or not insurers really are opting for the technology that produces the highest quality care for patients. We must see investment by the federal government to conceptualize a framework that considers the wide-reaching ripple effects of concentration in the health insurer market and the research to flush out the details.

For the providers in the room, especially those who may not want to wait for the federal government to act on your behalf, we also think there are things you can proactively do that may soften, but certainly not entirely mitigate, the effect of a highly concentrated health insurer market:

1. Develop a comprehensive contracting strategy – We have said it before, and we will say it again: providers must invest the time and resources to honestly understand what they need, want, and will not accept from a payer contract. In addition to accounting for the “now,” a strong contract should also consider a future state: what services you would like to offer. While important to adhere to this strategy, generally, we firmly believe it is imperative to do when navigating contract negotiations with your market’s dominant payer. This contract will likely control the largest portion of your patient revenue, and should therefore set you up to optimize your reimbursements and incentives. Additionally, a contract with your market’s dominant insurer can serve as a model for how to establish arrangements with other payers.
2. Explore contracting partnerships to expand market share – We understand that providers look to increase the number of patients their practice(s) care for as part of their overarching business model. This becomes more complicated to accomplish when you have few payers with which to contract. Considering your options to partner, collaborate, or contract with other providers in your area may be a key initiative to help increase your own power within the market. (It is imperative to keep in mind that these opportunities must be looked at through the lens of all applicable anti-trust laws as discussed above.) One increasingly popular method through which providers are partnering is through Independent Practice Associations (which we previously wrote about), and may offer a sustainable option for providers who wish to remain operationally independent while increasing their patient market share.

LOOKING AHEAD

The AMA releases its report on concentration within the health insurance market on an annual basis, and we expect future years to mirror the findings from 2021: (1) more state and metropolitan statistical area markets are becoming highly concentrated; (2) the degree of concentration within a market is increasing; and (3) the number of insurers controlling the market are decreasing. There is a reason market competition is considered a fundamental economic principle: without it, innovation, consumer protection, and cost control (among many other factors) are all disincentivized. While it may seem easier to try and address other components of the healthcare sector, we believe it is essential to take time to understand and appreciate the ramifications of the AMA report. A lack of competition among health insurers has the potential to destabilize an already constantly-in-flux infrastructure. We should all be requiring action now.