Deborah Haas-Wilson

Change, Consolidation, and Competition in Health Care Markets

The health care industry is being transformed. Large firms are merging and acquiring other firms. Alliances and contractual relations between players in this market are shifting rapidly. Within the next few years, many markets are predicted to be dominated by a few large firms. Antitrust enforcement authorities like the Department of Justice and the Federal Trade Commission, as well as courts and legislators at both the federal and state levels, are struggling with the implications of these changes for the nature and consequences of competition in health care markets. In this paper we summarize the nature of the changes in the structure of the health care industry. We focus on the markets for health insurance, hospital services, and physician services. We then discuss the potential implications of the restructuring of the health care industry for competition, efficiency, and public policy. As will become apparent, this area offers a number of intriguing questions for inquisitive researchers.

Are Invisible Hands Good Hands? Moral Hazard, Competition, and the Second Best in Health Care Markets

The nature and normative properties of competition in health care markets have long been the subject of much debate. In this paper we consider what the optimal benchmark is in the presence of moral hazard effects on consumption due to health insurance. Intuitively, it seems that imperfect competition in the health care market may constrain this moral hazard by increasing prices. We show that this intuition cannot be correct if insurance markets are competitive. A competitive insurance market will always produce a contract that leaves consumers at least as well off under lower prices as under higher prices.

Arrow and the information market failure in health care: the changing content and sources of health care information.

Kenneth Arrow’s “Uncertainty and the Welfare Economics of Medical Care,” published in the American Economic Review in 1963, makes profound contributions in the areas of health economics and, more generally, in the economics of information. At the time Arrow was writing this article, unlike today, there was almost no scholarship on the economics of information. The only article on this topic published at that time in the economics literature was “The Economics of Information” by George Stigler (1961), and its focus was on consumers’ information about price rather than quality. In Public Health Reports, however, Selma Mushkin had published “Toward a Definition of Health Economics” in which she discussed how consumers’ lack of information about quality could result in market failure in medical markets. She wrote, “. . . they [consumers] reveal considerable absence of accurate knowledge about the quantity and quality of health services required. The nature of the medical service itself and its intangible character reinforce the consumer’s lack of knowledge about his purchases, and impede a rational choice that could guide the allocation of resources” (Mushkin 1958: 787). This essay is organized into three parts. First is a description of Arrow’s contributions with respect to information problems leading to market failures in medical care markets. Second, it is shown that theo-

Hospital Mergers and Competitive Effects: Two Retrospective Analyses

Abstract We present empirical analyses of the effects of two hospital mergers – both occurring in the northern suburbs of Chicago in 2000 – on the pre‐ and post‐merger prices negotiated with commercial health insurers. Using difference‐in‐differences methodology and data on actual transaction prices, specifically the prices paid by private health insurance companies and patients for inpatient care, we find one of the mergers was anticompetitive. Relative to price increases at other hospitals, the merger between Evanston Northwestern and Highland Park Hospitals led to large and statistically significant post‐merger price increases. Our results are robust across data sources, control groups, and case‐mix adjustment methods.

PHYSICIAN NETWORKS AND THEIR IMPLICATIONS FOR COMPETITION IN HEALTH CARE MARKETS

The physician market is being transformed in dramatic ways [1]. One of the most notable areas of change has been tremendous growth in physician networks, such as independent practice associations (IPAs). As of August 1996, there were approximately 4000 IPAs with an average of 300 physicians each, up from approximately 1500 in 1990 [2]. Physician networks are made up of otherwise independent physicians that join together to market themselves collectively to health insurers, and in some cases, directly to employers. Normally, independent competitors are not allowed to set prices jointly. The key question here is whether these networks represent an efficient response to the changing structure of health care markets or strategic attempts to increase market power.

Two Hospital Mergers on Chicago's North Shore: A Retrospective Study

We provide an in-depth analysis of the price effects of two hospital mergers that occurred in the north shore suburbs of Chicago in early 2000: Evanston Northwestern Healthcares (ENH) purchase of Highland Park Hospital (HPH) and the merger of St. Therese Medical Center (STMC) and Victory Memorial Hospital (VMH). Using standard difference-in-differences methods with data from multiple sources, including health insurance data with actual transactions prices, we find that the ENH/HPH merger led to a large and statistically significant post-merger price increase. We find no evidence of a price increase after the STMC/VMH merger. These results are robust across data sources, control groups, and case mix adjustment methods.

Uncertain Times: Kenneth Arrow and the Changing Economics of Health Care

This volume revisits the Nobel Prize-winning economist Kenneth Arrow’s classic 1963 essay “Uncertainty and the Welfare Economics of Medical Care” in light of the many changes in American health care since its publication. Arrow’s groundbreaking piece, reprinted in full here, argued that while medicine was subject to the same models of competition and profit maximization as other industries, concepts of trust and morals also played key roles in understanding medicine as an economic institution and in balancing the asymmetrical relationship between medical providers and their patients. His conclusions about the medical profession’s failures to “insure against uncertainties” helped initiate the reevaluation of insurance as a public and private good. Coming from diverse backgrounds—economics, law, political science, and the health care industry itself—the contributors use Arrow’s article to address a range of present-day health-policy questions. They examine everything from health insurance and technological innovation to the roles of charity, nonprofit institutions, and self-regulation in addressing medical needs. The collection concludes with a new essay by Arrow, in which he reflects on the health care markets of the new millennium. At a time when medical costs continue to rise, the ranks of the uninsured grow, and uncertainty reigns even among those with health insurance, this volume looks back at a seminal work of scholarship to provide critical guidance for the years ahead. Contributors Linda H. Aiken Kenneth J. Arrow Gloria J. Bazzoli M. Gregg Bloche Lawrence Casalino Michael Chernew Richard A. Cooper Victor R. Fuchs Annetine C. Gelijns Sherry A. Glied Deborah Haas-Wilson Mark A. Hall Peter J. Hammer Clark C. Havighurst Peter D. Jacobson Richard Kronick Michael L. Millenson Jack Needleman Richard R. Nelson Mark V. Pauly Mark A. Peterson Uwe E. Reinhardt James C. Robinson William M. Sage J. B. Silvers Frank A. Sloan Joshua Graff Zivin

Mergers between Competing Hospitals: Lessons from Retrospective Analyses

Abstract In April 2002, the Federal Trade Commission (FTC) announced the Hospital Merger Retrospective Project to study consummated hospital mergers. This project was precipitated by a long string of unsuccessful hospital merger challenges by the FTC, the US Department of Justice, and the state of California. Accordingly, a principal goal of the retrospective study included “studying consummated hospital mergers to determine whether particular hospital mergers have led to higher prices”. The studies presented here represent the output of this project. Collectively, these studies provide important empirical insights into a variety of issues relevant to hospital antitrust analysis, including the scope of relevant geographic markets in hospital merger analysis, the relevance of not‐for‐profit status on post‐merger pricing behavior, and the impact of hospital mergers on clinical quality.

Kenneth Arrow and the Changing Economics of Health Care: “Why Arrow? Why Now?”

Why Arrow? Why now? Kenneth Arrow is a Nobel laureate and one of the most important economists of our time. “Uncertainty and the Welfare Economics of Medical Care” (Arrow 1963) is a landmark contribution to health economics that is required reading in health economics, health policy, and health law courses. While most of Arrow’s economic insights transcend time and can fit comfortably with modern economic theory, his institutional analysis of medical markets is layered in amber. This turns out to be a blessing. By offering a point of reference that only time and distance can provide, Arrow’s interpretation of medical markets circa 1960 affords an extraordinarily useful framework for understanding the health care economy and health care policy of today. The year 1963 evokes an era as well as a specific date. It was a time of innocence and Camelot. People had faith in their government, in the functioning of private markets, and in the family doctor. The Dodgers beat the Yankees in the World Series, Cleopatra played in the movie theaters, and television audiences tuned in to My Favorite Martian and The

The Use of Multiple Control Groups and Data Sources as Validation in Retrospective Studies of Hospital Mergers

In their Comment on “Hospital Mergers and Competitive Effects: Two Retrospective Analyses”,1 Gregory Adams and Monica Noether argue there are reasons to doubt our conclusion, the opinion of the Administrative Law Judge, and the opinion of the Federal Trade Commission that the merger of Evanston Hospital with Highland Park Hospital was anticompetitive. First, to set the record straight, this conclusion/opinion is not based on empirical results “alone” (as claimed by Adams and Noether). The conclusion that the Evanston merger lessened competition and facilitated the ability of the merged hospital to exercise market power is based on other evidence as well. For example, in a document written shortly after the merger, hospital executives stated the post-merger price increases were due to the increased market power of the merged hospital: