Duopoly:Monopoly or Ferret:Rat?

As I read Julie Donnelly's Boston Business Journal report about Howard Grant's testimony at the recent health care cost trends hearings, I was reminded of a humorous piece written by Art Buchwald many years ago.

It was about competition between the two airlines who ran shuttle services between New York and Washington, DC. It went something like this:

Art calls US Airways to complain: "I see you just raised your fares to New York."

"Yes, we did that to compete against Pan Am. They just raised their fares."

"Wait, I thought the idea of competition was to lower prices."

"Why would we do that? If we lowered our fares, and they followed suit, it would be a race to the bottom. We would both lose money."

Howard, who knows whereof he talks because of his experience with Geisinger Health System in Pennsylvania, was asking the state to refrain from prohibiting potential mergers between Lahey Clinic and other health provider organizations. Julie reports:

Grant said several large, well-integrated systems will have a better chance at lowering costs by treating patients in the most affordable location. He pointed to Lahey Health’s success in directing more patients to less expensive Beverly and Addison Gilbert Hospitals.

The cost containment law “will fail without the fragmented players coming together for legitimate competition, so we don’t cement in (price) disparities,” Grant said during Wednesday health cost hearings held by the state Health Policy Commission.

Grant countered arguments from health insurance executives that in the past, larger systems used leverage to gain higher reimbursements. He said it’s a different world now as we move towards a global payment system that pays to keep people healthy, rather than a fee-for-service system that pays for more procedures.

His testimony squarely sets forth the dilemma facing Massachusetts.  Currently, Partners Healthcare System reigns over the marketplace as a near monopoly provider, when we consider its scale and its ability to beat up the insurance companies.  Howard wants to create a bookend to PHS, presumably with an organization that goes beyond the current one (perhaps encompassing Atrius Health--the largest multi-specialty practice in the state--and BIDMC, the largest non-PHS academic medical center, along with its affilated community hospitals.)

The dilemma is that such an organization might be the only way to offset the power of PHS, but it might create an effective duopoly in the market, further squeezing out other remnants of competition and imposing its will on the insurers in similar fashion to PHS.  In the latter case, Art Buchwald's story would come to pass.

In a way, it's unfair that Howard has to ask the state to back off, because PHS was able to proceed with its empire-building while the government slept, eventually extracting billions in excess revenues from consumers.  Now, though, the Health Policy Commission is charged with reviewing such merger activity, adding a level of state attention that before would have only shown up as very difficult anti-trust cases.  But if you are concerned about the kind of market power that can skew rates and referrals, you don't have to get the level of market power required to win the burden-of-proof argument in anti-trust cases.  It is at that policy--rather than legal--level that the HPC is being asked to work. It is at that policy level that Howard makes his argument.  The problem is that he can't prove the case in advance. He is forced to ask for a display of trust.

Since the state legislature and governor have been shown to be unable or unwilling to take on the market power of PHS, the HPC might feel compelled to permit a growing Lahey-based ACO to be the ferret that takes on the rat.  But given the dangers of duopoly, the state will likely be left to design remedies that would be applied to the Lahey ACO if its market power grew out of whack. Or perhaps the HPC could implement general measures for the entire provider sector (e.g., total transparency of payment rates) that would militate against excessive market power by any participant.  If any of my readers would like to offer their ideas, please comment.