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

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

Must-Read: Richard Scheffler and Sherry Glied: States Can Contain Health Care Costs. Here’s How

Must-Read: Perhaps even very large health-insurance entities can be made to behave competitively if their regulator is clever enough…

Richard Scheffler and Sherry Glied: States Can Contain Health Care Costs. Here’s How: “THE architects of the Affordable Care Act counted on competition in the health insurance market to keep costs down and quality high…

…[But] its vision of a more competitive insurance market seems to be fading. The nation’s second-largest health insurer, Anthem, is poised to acquire Cigna, the fourth-largest. Aetna, the third-largest insurer, is seeking to acquire Humana, the fifth-largest. If approved by the Justice Department, these mergers would produce companies controlling about 35 percent of the health insurance market. These mergers would likely leave that market with far fewer competitors….

Our research suggests that this apparent failure obscures a potential path to success, one that lies between competition and a fully regulated market…. States could, for instance, either accept all insurers who seek to participate or select a limited number to sell coverage. New York chose the first course, permitting all willing insurers to join; California chose the second, selecting 12 of the 32 insurers that initially showed interest. This choice was critical because Covered California, the state’s marketplace, used its leverage in selecting plans to keep initial premiums low…. New York, by contrast, permitted insurers to offer not just standard plans, but also alternative plans with different cost-sharing and benefit designs.

When we examined the two states, we found that the effect of insurer competition differed greatly. In both states, areas with more hospitals had lower premiums compared with areas with fewer hospitals. But in New York, areas with fewer insurers had higher premiums, suggesting that insurers kept the benefits of greater bargaining power for themselves. In California, by contrast, areas with fewer insurers also had lower premiums. Why? With initial premiums set at modest but adequate levels, and a vibrant marketplace, there was no need to further threaten insurers who might consider large premium increases. If an insurer tried to raise its premiums too far, consumers could easily shop….

Over time, we will learn more about how these alternative designs work. But one point is already clear: The choice between regulation and competition is a false one. To best manage our health care system, we will need both.

Must-Read: Michael Hiltzik: Mergers in the Healthcare Sector: Why You’ll Pay More

Must-Read: Because people must purchase health insurance under ObamaCare, the demand curve has a steeper slope–and thus oligopoly and monopoly are even more dangerous and destructive than they typically are:

Michael Hiltzik: Mergers in the Healthcare Sector: Why You’ll Pay More: “Aetna is seeking to merge with Humana in one of the two proposed health insurance mega-mergers facing state and federal scrutiny…

…the other deal would combine Anthem and Cigna. Lower prices. More efficient healthcare. More innovation. Better customer service. That’s what hospital and insurance companies say, anyway.  But here’s what the data say: Hospital and insurance mergers almost always lead to higher costs, lower efficiencies and less innovation. The reason is simple: Mergers reduce competition–and it’s competition that drives down prices and encourages more efficiency and innovation. Some healthcare mergers have been outright disasters for consumers; studies of mergers that took place in the 1990s and early 2000s showed price increases of as much as 40% in communities that lost competition. These findings are important because we are deep into a new era of healthcare consolidation. In 2015, 112 hospital mergers were announced nationwide; that’s 18% more than a year earlier, and a 70% increase over 2010…

Must-Read: Marco Arment: Avoiding Blackberry’s Fate

Must-Read: Marco Arment: Avoiding BlackBerry’s Fate: “Before the iPhone, RIM’s BlackBerry was the king of smartphones…

…When the iPhone came out, the BlackBerry continued to do well for a little while. But the iPhone had completely changed the game…. The BlackBerry’s success came to an end not because RIM started releasing worse smartphones, but because the new job of the smartphone shifted almost entirely outside of their capabilities, and it was too late to catch up…. No new initiative, management change, or acquisition in 2007 could’ve saved the BlackBerry. It was too late, and the gulf was too wide.

Today, Amazon, Facebook, and Google are placing large bets on advanced AI, ubiquitous assistants, and voice interfaces…. If they’re right — and that’s a big ‘if’ — I’m worried for Apple…. [in] big-data services and AI…. Apple can do rudimentary versions of all of those, but their competitors — again, especially Google — are far ahead of them, and the gap is only widening. And Apple is showing worryingly few signs of meaningful improvement or investment in these areas….

If Google is wrong, and computing continues to be defined by a tightly controlled grid of siloed apps that you poke a thousand times a day on a smooth rectangle of manufacturing excellence, Apple is fine…. But if Google is right, that’s a big problem for Apple.

Must-read: Ben Thompson: “Obsoletive: Revolutionary Products in Tech Don’t Disrupt–They Obsolete”

Must-Read: Ben Thompson (2013): Obsoletive: Revolutionary Products in Tech Don’t Disrupt–They Obsolete: “[Christiansenian] disruption is low-end…

…a disruptive product is worse than the incumbent technology on the vectors that the incumbent’s customers care about. But, it’s cheaper, and better on other vectors that different customers care about. And, eventually, as the new technology improves, it takes the incumbent’s market.

This is not what happened in cell phones. In 2006, the Nokia 1600 was the top-selling phone… the BlackBerry Pearl the best-selling smartphone. Both were only a year away from their doom, but that doom was not a cheaper, less-capable product, but in fact the exact opposite: a far more powerful, and fantastically more expensive product called the iPhone…. The problem for Nokia and BlackBerry was that their specialties–calling, messaging, and email–were simply apps: one function on a general-purpose computer. A dedicated device that only did calls, or messages, or email, was simply obsolete. An even cursory examination of tech history makes it clear that ‘obsoletion’–where a cheaper, single-purpose product is replaced by a more expensive, general purpose product–is just as common as ‘disruption’–even more so, in fact…. The Mac (and PC), iPod, and iPhone weren’t so much disruptive as they were obsoletive. They absorbed a wide range of specialized tools for a price far greater than any one of those tools cost on their own….

Christensen’s theory of disruption remains an incredibly elegant and insightful framework for understanding why some companies–like Microsoft, to name the best example–decline. But it’s dramatically over-applied in technology. Most new products are simply better… while the most revolutionary products… are obsoletive. They are more expensive, more capable, and change the way we live…

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

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

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: Dan Wang: “Why Should Dole Own Container Ships?”

Must-Read: Dan Wang: Why Should Dole Own Container Ships?: “Meet Dole, the World’s Full-Stack Banana Company…

Bright yellow container ships call on the Port of San Diego every Monday and Tuesday. They’re owned by the Dole Food Company, and the ocean containers they carry are all branded with the familiar Dole logo. Perhaps you’ve seen its ships in San Diego Bay or one of its containers on a truck. Shouldn’t we be surprised to learn that an importer owns and operates its own ships? It’s probably not the comparative advantage for even the largest importers. And here’s the thing: Dole isn’t one of the country’s top three importers of containerized cargo. Instead it’s the fifth…. Shouldn’t we expect Dole to be even less likely than Home Depot (#3), Sears (#6) or Dollar Tree (#10) to own container ships? After all, fruits are supposed to be seasonal products, while companies like Walmart could be using their ships all year round to import their products. Why doesn’t Dole simply charter ships or buy freight space like other carriers?…

Dole is the world’s largest producer of bananas…. Bananas are grown year-round… imported on a fairly consistent basis…. Ecuador to San Diego isn’t a very active tradelane…. Dole ships have their own cranes on board. This is again an indication that the ports that Dole frequents aren’t as well developed as it would like…. It doesn’t stop at ships: Dole directly owns and operates some of the banana plantations in Central America…