Examining Competition in Group Health Care
Good morning Senator Specter and members of the Committee. My name is Dr. Mark A. Piasio. I am an orthopedic surgeon practicing in Dubois, Pennsylvania, and President of the Pennsylvania Medical Society.
First, let me thank you for allowing me to speak with you this morning to examine competition in group health care.
I would like to make it clear that our testimony is not intended as a corporate or personal attack on any of the market participants and the people who work for them. Each of them is doing what they think is best. However, each is “doing what comes naturally” in failed markets. This, we believe, is the fundamental cause of a host of problems and calls for extensive public policy analysis and response.
The lack of competition among health insurers in health delivery markets throughout the country and in Pennsylvania, as well as the consolidation of health insurers across the nation, raises serious concerns for the provision of quality patient care. As patient advocates, physicians are often undermined by market dominant insurers and prevented from providing necessary care through “take-it-or-leave-it” contracts and other insurer imposed cost-cutting mechanisms. These dysfunctional markets have produced:
- annual double-digit health insurance premium increases going back to the early 1990s
- unilateral decisions about hospital payment
- physician fee schedules that are unilaterally imposed and have provided stagnant or declining compensation
- substantial profit levels for health insurers
Insurer market consolidation is also detrimental to consumers from a financial perspective. While many large Pennsylvania insurers are posting huge profits and surplus reserves, premiums continue to skyrocket (Pennsylvania has some of the highest premiums in the nation), and patient cost sharing continues to increase without any increased benefit.
Physician payment, particularly in the Philadelphia market, continues to lag behind other geographic markets. For example, evaluation and management services in some cases are paying at 85 percent of the comparable Medicare rate. In the meantime, physician operating costs continue to escalate, driven primarily by professional liability costs.
From 2000 to 2004, Pennsylvania health insurers increased premiums 40 percent per enrollee, from $2,161 to $3,022, nearly double the U.S. average, while insurer surplus reserves rose from $5 billion to $6.8 billion. Total annual profits of Pennsylvania health insurers increased from $468 million in 2000 to $621 million in 2004. This translates to an annual per enrollee profit for Pennsylvania health insurers in 2004 of $93.45. The equivalent average annual per enrollee profit for health insurers in the rest of the country, as reported to the National Association of Insurance Commissioners, was $79.79 in 2004.
Overhead and profit percentages of Pennsylvania health insurers increased despite the fact that much of the revenue increase was pure price level change. Annual health insurer administrative costs per member more than doubled from $132 in 2000 to $270 in 2004. One of the classic hallmarks of a firm with monopoly power is the erosion of administrative efficiency. It is quite possible that the loss of administrative cost efficiency seen among Pennsylvania’s health insurers relates directly to the loss of incentive to maintain administrative cost efficiency in the presence of market power.
There is no evidence that larger health insurers are more efficient. To the contrary, published studies show that health insurers exhaust their economies of scale at 100,000 to 150,000 enrollees. Our own work confirms this conclusion, albeit at a slightly higher number. Insurers with one million, two million, four million, or five million enrollees are not any more efficient and may, in fact, be more inefficient than smaller ones.
So why aren’t these dysfunctional markets the subject of an antitrust investigation? The Sherman Act has two provisions that would appear to apply—prohibitions of (1) monopolization and (2) contracts, combinations and conspiracies in restraint of trade.
To prove monopolization or monopsonization, it is necessary to show that a firm has a dominant market share and has engaged in “prohibited conduct.” The dominant share test is met here. The question is whether there is prohibited conduct. Conduct that might fall under this category includes monopoly rents, diseconomies of scale, predatory pricing, price discrimination, product tie-ins (all product clauses), various contract provisions (or conduct in lieu of contract terms) including the combination of all products and most favored payer terms, discriminatory pricing in the sale of health insurance, and the 75 percent rule for product sales to employers.
Contracts, combinations, and conspiracies in restraint of trade are evaluated under per se and rule of reason standards. There are four substantial Blue Cross firms that operate in Pennsylvania: Independence, Highmark, Capital, and Northeast. Despite the fact that all four could easily compete in the southeast Pennsylvania market, only Independence offers products in the region. We understand that this is due to a division of markets agreement and non-competition agreement at the national level. If this is the case, the full ramifications of the agreement bear investigating.
There are, perhaps, reasonable arguments that the way southeast Pennsylvania markets are organized and operated does not violate the antitrust laws. However, we ask whether as a matter of public policy—good medical care and sound economics—such organization and operation is a “public good.” If the conclusion is that it is not, then changes in the antitrust laws that restore competitive balance are clearly warranted. The American Medical Association each year conducts a study focused on health insurance competition in the U.S. One aspect of this study is a determination of the Herfindahl-Hirschman Index (HHI) for each of the national geographic markets. Simply put, the HHI is a measure of competition of an overall market. The Federal Trade Commission (FTC) and the Department of Justice (DOJ) consider an HHI of over 1800 as a “highly concentrated” market, therefore little competition. The HHI for the Philadelphia MSA is 5129, four times the HHI indicator of little competition.
It was recently announced in the news media that the two largest Pennsylvania-based health insurers—Highmark and Independence Blue Cross—are merging. It is unclear what ultimate impact this merger will have on the geographic and product markets, but what is clear is that the statewide market share for commercial health insurance as well as the statewide HHI will increase to levels that would not be permitted under existing DOJ and FTC merger guidelines.
Entry into health insurance markets is not easy. If it were easy, much more competition would exist in large markets such as Philadelphia. Instead, entry is difficult even for large national payers like United Healthcare, which gained entrance into the Philadelphia market by acquiring Fidelity Insurance, Oxford, and Health Net as opposed to developing their own physician network and products.
Given the problems identified above, we believe a first response would be to restore full and open competition in these markets. A fully competitive private commercial insurance market is the best way to allocate scarce medical care resources. However, this will produce substantial economic and political issues.
A second response would be to institute regulatory oversight of market participants that hold and exercise market power. We recommend that the FTC and the DOJ develop a comprehensive research agenda that will provide greater insight into the issue of insurer market power.
There is a menu of options for policy intervention. These could include ways to reduce the size and dominance of existing insurers, limitations on dominant insurer conduct, development of effective countervailing power tools, and mechanisms to encourage and nurture new entry into concentrated markets.
Let me add that today, investigating this situation may be more important than ever before. The impact of the proposed merger between IBC and Highmark may affect more Pennsylvanians than any other health care transaction in the state’s history, perhaps more than any other business transaction that has occurred in the Commonwealth. Certainly, such a transaction would have a profound impact on physicians and the Medical Society. Consumers, other providers, employers and unions, the Medicare and Medicaid programs, regulators, the uninsured, and many other interest groups would be equally affected. A simplistic private regulatory response that shifts all of the responsibility to control costs to hospitals and physicians is unfair, improper, and does not deal with the real underlying causes of medical care cost inflation. More importantly, such a simplistic response will inevitably destroy hospitals and physicians financially, and will radically reduce patients’ access to quality medical care.
In conclusion, thank you for the opportunity to provide testimony today. I am hopeful that you will be able to have the appropriate federal regulatory agencies review the health delivery dynamics in Pennsylvania as well as the rest of the country. It is also important to carefully review the impending merger of Highmark and Independence Blue Cross.
Ultimately, what everyone wants is for patients to get appropriate care. But with the cost of insurance becoming unaffordable and the number of uninsured growing, many are not getting preventive and necessary care. Thus, the time has come to carefully look at the insurance markets and what can be done to correct them so that patients always have access to the care they need.
I’d be glad to answer any questions that members of the committee may have.
Last Updated: 8/7/2008