Tag: Antitrust

Will Competition in Health Insurance Survive? The Odds Are Better After Yesterday

Posted on by Brad DeLong

Guest Post from Michael DeLong: Will Competition in Health Insurance Survive? The Odds Are Better After Yesterday

Will competition in health insurance survive?

The answer after yesterday is “perhaps”.

The federal courts, at their lowest district court level, have just weighed in on the side of more competition and fewer behemoth health insurance companies; on the side of more competition and fewer monopolies and near monopolies. This matters for consumers: monopolies are bad news, and monopolies where what is being sold is a very expensive necessity—which health insurance coverage is—very bad news for consumers, and so for societal well-being. If we are to retain a market-based health insurance system, people need effective options. A market in which there is only one insurance company, or two companies that collude to match each other’s prices, has all the bureaucratic drawbacks of a single-payer system plus all the drawbacks of a monopoly.

The federal courts have weighed in because two health insurance companies, Aetna and Humana, decided to attempt a merger to form a behemoth company. President Obama’s Department of Justice decided to challenge the merger. The case went to trial. Last December 21st the Department of Justice wrapped up its case against the $37 billion Aetna-Humana health insurance merger, arguing that it should be blocked. Why? Harm to consumers: the merger would be anticompetitive in that it would harm consumers by making them pay higher premiums and offering them fewer choices. George W. Bush-appointed federal Judge John Bates pondered how to decide this case for a month.

This case and decision is very important for the health, the well being, and the pocketbooks of all Americans who participate or will participate in Medicare. It is most immediately important for the seventeen million senior Americans who have chosen Medicare Advantage plans, which are offered by private companies and in which Medicare pays these companies to cover their benefits. The merger would create Medicare Advantage monopolies in 70 counties and harm competition in 364 counties, where Medicare Advantage serves about 1.6 million seniors, of which almost 980,000 are enrolled with Aetna or Humana. In these areas the resulting MA market would have too few insurance companies for there to be any credible curb to prices by competition.

The merger would also eliminate competition between Aetna and Humana on the public exchanges in at least Florida, Georgia, and Missouri, which would greatly reduce choice for over 700,000 people. This reduction of choice would severely impact people with low or moderate incomes, who make up a disproportionate share of the exchanges.

Judges Bates decided to block the Aetna-Humana merger. He wrote that “the Court is unpersuaded that the efficiencies generated by the merger will be sufficient to mitigate the transaction’s anticompetitive effects for consumers.” In short, he agreed with the Department of Justice’s argument that if Aetna were to acquire Humana, competition in Medicare Advantage would be greatly harmed. The Department successfully argued that people choose Medicare Advantage because it offers them (given their particular circumstances) a much better deal than traditional Medicare. Medicare Advantage plans, like normal Medicare, cover doctor and hospital visits. But they sweeten the deal by offering things like dental, vision, and hearing benefits in exchange for limiting the network of doctors and hospitals patients can go to. For those who don’t place a high value on choice-of-doctor—or those who positively do not want the hassle but want to be steered—this is not much of a sacrifice. And if you have bad teeth, the dental coverage is worth a great deal. The Justice Department lawyers pointed out that even when Medicare Advantage prices spike, 85% of seniors that change their plans switch to other Medicare Advantage plans, and very few of them switch out into traditional Medicare. Thus they had substantial evidence for their claim that the merger will hurt competition and consumers.

An important part of the background to this case is that Aetna dropped out of the Affordable Care Act’s health exchange in eleven states after the government sued to block the merger. Aetna claimed this was an independent business decision, but the Justice Department said otherwise. It implied that Aetna was attempting to pressure the Obama administration into dropping its opposition to a harmful merger by threatening to weaken Barack Obama’s signature initiative. Lawyers during the case showed exchanges where Aetna CEO Mark Bertolini referred to Obama administration’s decision to block the merger and said that the administration had “a short memory, no loyalty, and very thin skin.” The Justice Department concluded by posing the question: can Aetna evade antitrust scrutiny by just withdrawing temporarily from markets?

Aetna and Humana argued that there would still be effective competition after the merger because they would sell 290,000 Medicare Advantage accounts to Molina—a health insurance company that primarily focuses on Medicaid. Molina has tried in the past to branch out and gain a share of the Medicare Advantage market. It has twice failed, and currently has only 424 Medicare Advantage members! In internal documents produced during the trial, Molina admitted “we do not have the same level of administrative expertise…we are woefully unresourced to take this [divestitures] on.” And 290,000 is a very small share of the 3.1 million Medicare Advantage patients currently covered by Humana. Odds are those 290,000 would soon flow back out of Molina’s coverage.

Past divestitures, most notably in the 2012 Humana-Arcadian merger, have failed to preserve competition. For Aetna-Humana’s claims about preserving competition to be credible, it would have had to propose divestitures orders of magnitude greater—millions of insurance policies—and made them to another insurance company with successful experience in running Medicare Advantage. The Department of Justice’s complaint proposed divesting insurance plans in a total of 364 counties in 21 states to meet antitrust requirements for preserving competition.

The trial could have gone the other way.

Aetna and Humana strenuously argued at the trial that Medicare Advantage and standard Medicare are really very close to each other. They claimed that Aetna-Humana’s market power to raise prices would be sharply curbed by the ability of patients to vote with their feet for traditional Medicare in response. And they claimed that Aetna’s withdrawal from the exchanges—no matter whether it was an independent business decision or a threat—was simply not relevant to the case.

If it had gone the other way, it would have been a substantial defeat for consumers. Past evidence is overwhelmingly clear that health insurance mergers lead to higher premiums. Little if any savings are ever passed on to consumers. Aetna-Humana would have become one of the nation’s largest insurance companies, able to wield substantial market power. The Aetna-Humana behemoth would have been dominant in Medicare Advantage in 364 counties across 21 states with 1.6 million seniors being served. In some counties the merged company would have wielded incredible power—in Polk County, Iowa, Aetna-Humana would have 79% of the Medicare Advantage market; in Shawnee County, Kansas, 100%. That would have been bad news for consumers. But it would have been very good news for investors in and executives of health insurance companies. Aetna-Humana’s profits would have likely jumped way up.

Moreover, a decision the other way would have been a starting gun for a new wave of additional health insurance mergers to further decimate competition.

Therefore Judge Bates’s disapproval of the Aetna-Humana merger is a substantial victory for consumers, for affordable health care, and for the continued survival of a market-based health insurance system. The health insurance merger frenzy over the past decade is likely stopped. Competition in Medicare Advantage going forward will be much stronger than had the merger gone through.

In addition, this outcome to the trial means that the ACA exchanges will also be stronger going forward. Fewer of them will likely fail due to insufficient competition. The danger for the exchanges is that health insurance companies raise prices, and then find that only the expensive-to-treat sign up for policies. Competition that forces health insurance companies to earn profits through efficiency rather than price increases makes the ACA exchanges healthier as well. Some of the exchanges do have their problems. But the solution should be to promote competition between insurers to benefit consumers, not to consolidate health insurance markets into one gargantuan entity. And the more options on the federal and state exchanges, the better the deals available to consumers.

Aetna has withdrawn from several state exchanges. But it has kept its options open so it can return and compete on the markets again if it seems profitable. In some exchanges Aetna lost money. In others it made substantial profits, most notably in Florida: $36 million in 2016.

Our health care and health insurance systems here in America are drastically underperforming: we spend more than twice as much money and resources on doctors, nurses, hospitals, and pharmaceuticals as the typical rich North Atlantic country, and yet on average our health is worse. Unless we want to accept our current broken system, our options are either to disrupt the entire health sector and move to a single-payer system or find ways to make health insurance markets competitive and functional. The ACA was one attempt to do that. The encouragement of competition for Medicare patients via offering government subsidies to insurance companies that would enter the Medicare Advantage market was another. The success of each of these still hangs in the balance. But things look a little brighter now than the looked last falls.

Michael M. DeLong is a community organizer, and was Director of the Coalition to Protect Patient Choice http://www.thecppc.com. Read the CPPC’s coverage of the Aetna-Humana trial at http://www.thecppc.com/cppc-blog/date/2016-12

Beating America’s Health-Care Monopolists: Fresh at Project Syndicate

Posted on by Brad DeLong

J. Bradford DeLong and Michael M. DeLong: Beating America’s Health-Care Monopolists: BERKELEY – The United States’ Affordable Care Act (ACA), President Barack Obama’s signature 2010 health-care reform, has significantly increased the need for effective antitrust enforcement in health-insurance markets. Despite recent good news on this front, the odds remain stacked against consumers.

As Berkeley economics professor Aaron Edlin has pointed out, consumer abstention is the ultimate competitor. Companies cannot purchase or contrive a solution to consumers who say, “I’m just not going to buy this.” But the ACA requires individuals to purchase health insurance, thus creating a vertical demand curve for potential monopolists. Under these conditions, profits – and consumer abuse – can be maximized through collusion. Read MOAR at Project Syndicate

ObamaCare Increases the Salience of Antitrust in Health Insurance Markets

Posted on by Brad DeLong

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?

Must-read: Ben Thompson: “Antitrust and Aggregation”

Posted on by Brad DeLong

Must-Read: Ben Thompson: Antitrust and Aggregation: “What ultimately undid Microsoft…

…and why that $95 billion revenue figure was a peak; the current trailing twelve month number is $87 billion–was that even as Windows continued to have a monopoly on laptops and desktops the definition of a computer was dramatically expanded to include smartphones (and, to a lesser extent, tablets). And while many Microsoft partisans argue that the antitrust-related restrictions caused the company to miss mobile, the truth is Apple’s iPhone succeeded by being a very different product than Windows, and Android leveraged a very different business model; if anything Microsoft’s PC dominance meant their mobile failure was inevitable as the company was ill-equipped to think differently…

Must-read: Ben Thompson: “Antitrust and Aggregation”

Posted on by Brad DeLong

Must-Read: Ben Thompson: Antitrust and Aggregation: “With zero distribution costs and zero transaction costs…

…consumers are attracted to an aggregator through the delivery of a superior experience, which attracts modular suppliers, which improves the experience and thus attracts more consumers, and thus more suppliers in the aforementioned virtuous cycle. It is a phenomenon seen across industries including search (Google and web pages), feeds (Facebook and content), shopping (Amazon and retail goods), video (Netflix/YouTube and content creators), transportation (Uber/Didi and drivers), and lodging (Airbnb and rooms, Booking/Expedia and hotels)…. All things being equal the equilibrium state in a market covered by Aggregation Theory is monopoly: one aggregator that has captured all of the consumers and all of the suppliers.

This monopoly, though, is a lot different than the monopolies of yesteryear…. Consumers are self-selecting onto the Aggregator’s platform because it’s a better experience. This has completely neutered U.S. antitrust law, which is based on whether or not there has been clear harm to the consumer… it’s why the FTC has declined to sue Google for questionable search practices….

Once competitors die the aggregators become monopsonies — i.e. the only buyer for modularized suppliers. And this, by extension, turns the virtuous cycle on its head: instead of more consumers leading to more suppliers, a dominant hold over suppliers means that consumers can never leave, rendering a superior user experience less important than a monopoly that looks an awful lot like the ones our antitrust laws were designed to eliminate….

There was one remedy from the European Commission settlement with Microsoft that actually worked out quite well: Windows was required to document interoperability protocols for work group servers, which while designed for the benefit of established competitors like Sun, was actually more important for the open-source Samba project. Samba made it possible for non-Windows PCs and servers to be fully compatible with Windows-based networks, making it viable to use a Mac or Linux machine in corporate environments, or (more importantly) in corporate data centers, one of the first areas where the Windows monopoly started to come apart. Of course Windows remained dominant on the desktop thanks to its application lock-in…. Both of these approaches — interoperability and API disclosure — could be solutions when it comes to defusing the market power of aggregators…

Must-read: Paul Krugman: “Robber Baron Recessions” (Competition Policy)

Posted on by Brad DeLong

Must-Read: A few words on judicial doctrine, economic thinking, and political economy…

Back when Robert Bork in his The Antitrust Paradox proposed large-scale rewriting of laws from the bench to privilege “economic efficiency” above all of the other somewhat-conflicting goals of our competition policy and so bring order to a disordered piece of the law, I saw it as neutral-to-good. But the default judicial judgment of any merger then became:

  1. It must reduce costs via economies of scale
  2. It is not inefficient unless it reduces the quantity supplied–and companies these days are so clever at price discrimination that they can still find a way to serve those low-value consumers whose willingness-to-pay is only a little bit larger than monopoly cost.

And the government faced a very steep Sisyphean uphill boulder-rolling to rebut those presumptive judgments and block, well, block much of anything.

And it has turned out that, in practice, both (1) and (2) have been largely wrong…

Paul Krugman: Robber Baron Recessions: “Profits are at near-record highs…

…Suppose that those high corporate profits don’t represent returns on investment, but instead mainly reflect growing monopoly power… [with] corporations… able to milk their businesses for cash, but with little reason to spend money on expanding capacity or improving service…. Such an economy… would also tend to have trouble achieving or sustaining full employment. Why? Because when investment is weak despite low interest rates, the Federal Reserve will too often find its efforts to fight recessions coming up short….

Do we have direct evidence that such a decline in competition has actually happened? Yes, say a number of recent studies, including one just released by the White House…. The obvious next question is why competition has declined. The answer can be summed up in two words: Ronald Reagan… [who] didn’t just cut taxes and deregulate banks; his administration also turned sharply away from the longstanding U.S. tradition of reining in companies that become too dominant in their industries. A new doctrine, emphasizing the supposed efficiency gains from corporate consolidation, led to what those who have studied the issue often describe as the virtual end of antitrust enforcement….

Still, better late than never. On Friday the White House issued an executive order directing federal agencies to use whatever authority they have to ‘promote competition.’… For we aren’t just living in a second Gilded Age, we’re also living in a second robber baron era. And only one party seems bothered by either of those observations.

Must-note: Pro-Market Writers: The White House Acknowledges: The U.S. Has a Concentration Problem; President Obama Launches New Pro-Competition Initiative

Posted on by Brad DeLong

Must-Note: The Economist has long had a house style of no bylines–a deliberate institutional decision about the voice with which they want to speak that has, I think, more downsides the upsides. But we can argue about that.

But what I discovered today is that Pro-Market: The blog of the Stigler Center at the University of Chicago Booth School of Business has bylines only for Luigi Zingales, Asher Schechter, and Guy Rolnick. The rest are merely anonymous “Pro-Market Writers”.

This cannot be the right approach, for a large number of reasons that I’m sure you can think of as well as I:

Pro-Market Writers: The White House Acknowledges: The U.S. Has a Concentration Problem; President Obama Launches New Pro-Competition Initiative: “The White House acknowledged the steep price Americans pay due to anti-competitive behavior…

…across our economy, too many consumers are dealing with inferior or overpriced products, too many workers aren’t getting the wage increases they deserve, too many entrepreneurs and small businesses are getting squeezed out unfairly by their bigger competitors, and overall we are not seeing the level of innovative growth we would like to see. And a big piece of why that happens is anti-competitive behavior—companies stacking the deck against their competitors and their workers. We’ve got to fix that, by doing everything we can to make sure that consumers, middle-class and working families, and entrepreneurs are getting a fair deal.

The first action in Obama’s new initiative is to open the market for set-top cable boxes. The administration has singled out the set-top box market as an example of anti-competitiveness leading to inferior and overpriced products for consumers…

Must-read: William Cavanaugh and Jack Figura: “Merrick Garland on Efficiencies”

Posted on by Brad DeLong

Must-Read: William Cavanaugh and Jack Figura: Merrick Garland on Efficiencies: “A Garland appointment would likely be bad news for those who seek to justify mergers based on the efficiencies…

…In 2001 Judge Garland joined an opinion rejecting an efficiency defense in the merger context, and in a different context in a 1987 article, he critiqued an efficiency-based approach to the state action doctrine…. The ‘revisionist’ model of the state action doctrine, as put forth by UCLA law professor John Wiley and Seventh Circuit Judges Richard Posner and Frank Easterbrook, among others… incorporate[d] an ‘efficiency test,’ where a state or local regulation would be subject to federal antitrust scrutiny if it ‘restrain[ed] market rivalry without responding directly to a substantial market inefficiency.’… Garland… criticized the efficiency test as bearing ‘sobering’ parallels to the Supreme Court’s much-criticized decision in Lochner v. New York….

The role of efficiencies continues to be often debated in the merger context, where proponents of mergers have pointed to alleged post-merger efficiencies as a defense against challenges under Section 7 of the Clayton Act.  The Horizontal Merger Guidelines issued by the U.S. Department of Justice and the Federal Trade Commission recognize the role that efficiencies may play…. In 2001, Judge Garland joined an opinion rejecting an efficiency defense in FTC v. H.J. Heinz Co…. cautioned that that any defendant relying on the defense would have to prove ‘extraordinary efficiencies’ that could not be obtained absent a merger and could not rely on ‘mere speculation and promises about post-merger behavior’…

Must-read: David Dayen: “The Most Important 2016 Issue You Don’t Know About”

Posted on by Brad DeLong

Must-Read: David Dayen: The Most Important 2016 Issue You Don’t Know About: “We’ve seen plenty of economic issues discussed…

…in this presidential election…. But… practically every major American industry has become extremely concentrated, and this creeping monopolization has increased inequality, created economic hazards where they previously didn’t exist, and heightened public anxiety…. A remarkable hearing in Washington yesterday actually addressed this. And senators from both parties agreed with unusual bluntness and unanimity: Far more needs to be done to fight monopolies and keep them from hurting our economy and our people. Here’s why this hearing was important: We’ve had antitrust laws on the books for over a century to fight industry consolidation. But weak enforcement and an ideological disposition to trust the market to self-correct has diminished antitrust to almost nothing. The fact that both parties want the government to stop monopolies could finally force the agencies to get aggressive and protect the economy.

At a Senate Judiciary subcommittee hearing on antitrust oversight, the first such hearing in three years, everyone—Democrats, Republicans, and the two witnesses, Federal Trade Commission (FTC) chair Edith Ramirez and assistant attorney general of the antitrust division William Baer—agreed that there had been a ‘tsunami’ of mergers and acquisitions (M&A) recently…. Senator Mike Lee, the Utah Republican who chairs the subcommittee, worried that the agencies lack the resources to deal with the merger wave. Ranking member Amy Klobuchar, the Minnesota Democrat, questioned the ‘conduct remedies’ agencies use in lieu of blocking mergers…. Perhaps nobody lit into the antitrust agencies more than Connecticut Democrat Richard Blumenthal…. There have been some successful merger challenges in recent years, from Time Warner Cable/Comcast to Sysco/U.S. Foods to AT&T/T-Mobile. But… more often the agencies impose conditions….

When questioned… the antitrust enforcers appeared to pad their stats. Ramirez, the FTC chair, mentioned on numerous occasions a $1.2 billion settlement with Teva Pharmaceuticals, over a ‘pay-for-delay’ deal it reached with generic manufacturers, preventing competition to its sleep-disorder drug Provigil. But Klobuchar pointed out that the total harm to consumers in increased prices has been estimated between $3.5 and $5.6 billion. ‘The defendant got to keep 70 to 80 percent of the profits,’ Klobuchar said. Ramirez only replied that the FTC tries to estimate the appropriate penalty. We need competition because it benefits consumers on price and quality—there’s no incentive for a monopoly to deliver good service if consumers have no options. We need it because consolidation creates a few winners economically amid many losers, and they use that power to influence politics and take even more gains. We need it because any problem with one big bank or one big food distributor magnifies when the company is one of a precious few. Amazingly, Wednesday’s hearing showed that antitrust policy is not a partisan issue…

Must-read: Richard Mayhew: “The Nitty Gritty of Cost Control”

Posted on by Brad DeLong

Must-Read: Richard Mayhew: The Nitty Gritty of Cost Control: “This is not sexy, this is not lucrative…

…this is not the way political programs are built as the slogan ‘Minor administrative changes to marginally increase competition by redefining scope of service delivery laws when do we want them —NOW’ does not fit on a bumper sticker. However these are the types of gains that need to be made to reduce the guild power of high end medical providers. Most of the people, most of the time, don’t need high end care.  Their basic needs can be met by trained individuals who are not over-trained…. Basic dental services, basic primary care services, basic preventative services can often be performed perfectly adequately at the master or bachelor level clinician level instead of a doctorate level clinician level.  Those rules are overwhelmingly determined at the state level, so that is where the long slow slog of reform needs to come.