ObamaCare Increases the Salience of Antitrust in Health Insurance Markets

From Last January: ObamaCare Increases the Salience of Antitrust in Health Insurance Markets from “Important” to “Essential”: As the extremely-sharp Aaron Edlin has taught me, apropos of the current wave of proposed health insurance mergers–Aetna-Humana, Anthem-Cigna, and Centene-HealthNet:

The coming of ObamaCare makes any willingness on the part of antitrust authority to allow these mergers to go through extremely dangerous and destructive policy indeed.

The imposition of the individual mandate to purchase health insurance makes maintaining competition in health insurance markets significantly more important. Usually, the exercise of market power and the ability to easily collude implicitly or explicitly made possible by large market shares are curved by the possibility of exit. The ‘exit the market and buy something else’ option for consumers is the one competitor that the firm cannot acquire and merge with. It is the one competitor with which the firm cannot collude, implicitly or explicitly.

Imposing an individual mandate to purchase is a wise policy in a market place where the major market failure is adverse selection. It threatens to be a catastrophic policy in the marketplace where the major market failure is the exercise of sellers market power.

We see this flashpoint–and it is a dangerous flashpoint–in health insurance right now. But the issues are actually much broader. Here is the wise Kevin Drum:

Kevin Drum: Our Four-Decade Antitrust Experiment Has Failed: “We have four airlines serving 80 percent of all passengers…

…We have four cable and Internet companies providing most of the nation’s cell-phone and television service. We have four big commercial banks, five big insurance companies (only three if two proposed mergers go through this year), and a handful of producers selling every major consumer product. Even when you think you have a choice, like in the array of online travel-booking sites, two companies (Expedia and Priceline) own all the subsidiaries…. Over the past few decades, America has undergone a sea change in antitrust law. It’s now all about ‘consumer welfare’—which means, in practice, that big mergers are fine as long as the mergees can make a credible case that the combined entity will be good for consumers. You will be unsurprised to learn that high-powered marketing departments are very good at collecting data to show exactly that, and that high-powered attorneys are extremely good at turning this data into bulletproof legal arguments. The result is that very few mergers are ever turned down.

But this siren call has led us down a long, blind alley. It turns out that in the short term, plenty of big mergers really can be good for consumers. In the longer term, though, very few are…. We’d be better off returning to an older, cruder rule: ensuring that there are plenty of competitors in every market and refusing to allow any single company to become too dominant. As near as I can tell, there’s a real tipping point around the number three or four. If a market is dominated by four companies or less, that’s when it starts to wither….

Needless to say, even a crude market share rule doesn’t make things simple. You’ll still have arguments over what counts as a single market (online advertising or the entire advertising industry?). You’ll have arguments over just how big a single company should be allowed to get (30 percent share or 50 percent share?). You’ll have industries where it’s not easy to have lots of competitors. And you’ll have some industries where the returns to scale to are so potent that small companies just flatly can’t compete. There’s no easy panacea. But ‘consumer welfare’ is an open invitation to thousand-page regulatory filings that dive deep down a rabbit hole and never come up for air…. Competition is the core engine of capitalism. If you have plenty of it, you can make do without a lot of other regulations. But once you allow competition to wither, there’s little choice left…. The federal government should do its best to ensure that markets have plenty of competition, and then it can afford to get out of the way and regulate fairly lightly. Other companies will do their work for them. What’s not to like?

June 14, 2016


Brad DeLong
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