Tag: Monopoly

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

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

Posted on by Brad DeLong

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

Posted on by Brad DeLong

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: Paul von Ebers: Mega Health Insurance Mergers: Is Bigger Really Better?

Posted on by Brad DeLong

Must-Read: Paul von Ebers: Mega Health Insurance Mergers: Is Bigger Really Better?: “Health insurance… the announcement of three large mergers: Aetna/Humana, Anthem/Cigna, and Centene/HealthNet…

…But many benefits of megamergers put forward by these companies will not materialize, and there will be few benefits for consumers…. Scale economies, where fixed assets and overhead decrease with firm size, are very uncertain in health insurance mergers…. Studies in other industries suggest that even when economies of scale exist, the advantages dissipate with very large company sizes. Since administrative costs are a small portion of health insurance prices (10 to 15 percent, on average) it would take a large reduction in administrative costs to create a meaningful price reduction. For Aetna, this shouldn’t come as news….

Meanwhile, the American Hospital Association and the American Medical Association are worried that mega insurers will have more negotiating leverage in provider contracts with hospitals and doctors. The reality is more nuanced…. The impact of the Anthem/Cigna will depend on particular state circumstances. Anthem is the dominant insurer in states where it has the Blue brands and it usually pays lower prices for health care in those states. Anthem also has access to the Blue national network, which also generally pays lower prices. If Anthem converts the Cigna business to the Blue brands in those states, current Cigna customers will have lower medical costs…. Consolidation will somewhat increase the leverage mega insurers have with hospitals and doctors, but not as much as many expect…

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-read: Paul Krugman: “Robber Baron Recessions”

Posted on by Brad DeLong

Must-Read: But… but… but…

Is this the wrong graph somehow?:

FRED Graph FRED St Louis Fed

Yes, investment spending is weak relative to its past business-cycle peak values. But all of the relative weakness is in residential construction:

FRED Graph FRED St Louis Fed

You can say that business investment should be even stronger–high profits, high profit margins, depressed wage costs mean that capital’s complement labor is cheap, very low financing costs (if you can borrow risk-free). But business investment is also a function of capacity utilization, and you would not expect it to be high in a low-pressure economy, especially one in which confidence is low that the trend growth of nominal GDP will be sustained.

Why is this the wrong graph?

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

…thanks to a substantial decline in the percentage of G.D.P. going to workers. You might think that these high profits imply high rates of return to investment. But corporations themselves clearly don’t see it that way: their investment in plant, equipment, and technology (as opposed to mergers and acquisitions) hasn’t taken off, even though they can raise money, whether by issuing bonds or by selling stocks, more cheaply than ever before….

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… an economy with high profits but low investment, even in the face of very low interest rates and high stock prices.

And such an economy wouldn’t just be one in which workers don’t share the benefits of rising productivity; it 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. So lack of competition can contribute to ‘secular stagnation’ — that awkwardly-named but serious condition…. If that sounds to you like the story of the U.S. economy since the 1990s, join the club.