Transcript Competition and Monopoly - University of South Carolina

Competition and Monopoly
HSPM 712
Competition
• How supply and demand work
– How “efficient” a market is
– As well as how equitable
• … depends on competition
Competition in insurance, for example
• Textbook ideal:
– Lower price
– Better coverage -- Higher medical loss ratio
• Oops! I mean “health benefit ratio.”
– Better service
• We get that (?), but also
– Underwriting (higher premiums for the predictably
sick)
– Pre-existing condition exclusions
– Retroactive cancellation
Textbook competition
• Each firm is a price-taker
– Each is too small to influence market
– Demand curve is flat
• Each firm expands production to the rate at
which its marginal cost rises to equal the
price.
• The price sends a good signal to consumers.
– What you pay equals the opportunity cost
Textbook monopoly
• Firm is price-maker
– Demand curve has a slope
• Seller restricts production
– To raise the price
– Leads to “welfare loss” or “consumer surplus” loss
• Similar math to welfare loss from moral hazard in
health insurance
Monopoly theory and antitrust laws
• Monopoly and Competition Theory
• "Monopoly" means one seller. It comes from Greek
words meaning one (mono) seller (polein, which is
Anglicized to "poly"). The term is used broadly to
include industries of several sellers who act as one. The
correct term for a "buyers' monopoly," where there is
only one buyer, is "monopsony."
• "Oligopoly" means a small number of sellers. The
automobile industry is an example of an oligopoly. So is
the hospital services industry in most small to mediumsized market areas.
Monopoly theory and antitrust laws
• Monopoly and Competition Theory
• Where is the dividing line between oligopoly
and competition? The functional distinction is
this: An oligopoly exists if one seller's actions
can affect another seller's demand.
Structure, Conduct, and Performance
• Economists analyze a market under three
categories: Structure, Conduct, and
Performance.
• Structure is the context in which the actors in
the market make their decisions.
• Conduct is what decisions the actors make.
• Performance is what we get as a result in
terms of efficiency and equity.
Structure
• Concentration: How many sellers are in the
market and how big the bigger sellers are
relative to the market as a whole.
• Barriers to entry: How hard it is for a new firm
to enter the market. Another way to think of
this is: Are there potential competitors?
• Product differentiation: Can you tell one
firm's product from another's?
Conduct
• Collusive behavior. Do the firms attempt to act
as one?
• Competitive behavior. Do the firms attempt to
undercut each other?
• Product differentiation. How do the firms try
to distinguish their products?
Performance
•
•
•
•
Whether costs are minimized
Whether prices are high relative to cost
Quality
Pace of technological progress and innovation.
Structure-Conduct relation
• Structure determines whether conduct matters.
• Conduct doesn't matter in a perfectly competitive
market, because any firm that doesn't minimize
cost and keep its price low is out of business.
• Conduct matters in monopolized markets. The
monopolist may or may not take advantage of its
position.
• Conduct is most complex in oligopolized markets.
An oligopoly can act like a monopoly, like
competition, or like something else that conforms
to neither of those models.
Natural monopolies
• Natural monopolies -- if it is most efficient to
have one seller serve an entire market. Local
utility service may be an example, because it
would be costly to have two sets of water
pipes, electrical lines, or telephone lines to
each house.
Natural oligopolies
• Industries may be natural oligopolies, if there
are economies of scale (larger size is less
costly) to the point that the minimum
efficient size firm is a substantial portion of
the market. In automobiles, for example,
minimum efficient sizes are large enough that
it is doubtful that there could be more than a
dozen or so mass-market automobile
companies world-wide.
What monopolies do
(that we don't like)
• Restrict output and raise price
– Transfer income to themselves, a distributional issue.
– Efficiency is lost, because society forgoes the
opportunity to turn relatively low value resources into
relatively high value products.
• Allow costs to rise, thanks to lack of competitive
pressure. (Allocation issue.)
• Retard or distort innovation, to defend the
monopoly. (Allocation issue.)
• Concentrate political power.
Antitrust laws
Laws against monopolies in the United States:
• Sherman Act of 1890
• Clayton and Federal Trade Commission Acts of
1914.
Sherman Act
• The Sherman Act of 1890 makes it illegal to
"monopolize, or attempt to monopolize, ...
any ... trade or commerce..."
• This law is aimed at market structure. The U.S.
Justice Department has the responsibility for
enforcing this law.
The Clayton and Federal Trade
Commission Acts of 1914
• Prohibit monopolistic mergers and certain
other forms of anti-competitive behavior.
• These laws are aimed more at conduct.
• The Federal Trade Commission was
established by this legislation to enforce this
law.
Justice Dept. and the FTC
• That's why we have two government agencies,
Justice and the Federal Trade Commissin,
involved in antitrust law enforcement.
• In the 1990’s, for example, it was the FTC that
required Columbia/HCA to sell its Aiken hospital
when it acquired a hospital in Augusta.
• Also back then, the Justice Department sued two
hospitals in Dubuque, Iowa, that were merging to
form a local monopoly.
“Antitrust”
• Calling anti-monopoly laws "antitrust" has its roots in the 1880's.
• The "trust" was a specific form of corporate organization used by
Standard Oil as it grew by merger towards being a national oil
refining monopoly. Stockholders in corporations joining Standard
Oil gave their shares of stock to Standard Oil. In return they got
trust certificates giving them part ownership of Standard Oil.
• State courts declared this arrangement illegal under then-existing
state corporation law.
• Standard Oil might have had to break up, but New Jersey came to
its rescue by legalizing the holding company, allowing New Jersey
corporations to own shares in other corporations. (Today, every
state allows this.)
• Standard Oil dumped the trust form of organization, moved its
corporate headquarters to New Jersey, and became a holding
company.
• Nevertheless, the press applied the term "trust" to all large firms
that were attempting to monopolize their markets, and the term
has stuck to this day.
State antitrust exemptions
relevant to health care
• Federal McCarran-Ferguson act (1945)
– Insurance is “commerce” and can be regulated by
the U.S. and the states
– The Sherman Act does not apply to insurance
companies in states that regulate insurance.
• This exemption of state-regulated industries
from antitrust law is why Palmetto Health
Alliance has a Certificate of Public Advantage.
Measuring structure
The concentration ratio
• is the portion of the market controlled by the
top X number of firms.
• You choose the X.
• Pretty straightforward, if you have market
share data.
Concentration ratio example –
Columbia-area hospitals 1995
Measuring structure
• The Herfindahl-Hirschman Index (HHI)
• The HHI measures concentration with the sum
of the squares of the market shares of all the
firms in the market.
• An HHI near 0 indicates that no firms are large
relative to the market -- a competitive
structure.
• An HHI of 1 means that there is just one firm
in the market -- a monopoly structure.
HHI for Palmetto Health merger
Palmetto Health’s
Certificate Of Public Advantage
• Revenue per patient* will not rise faster than
inflation
• Will not monopolize medical practice
• Savings given to community
– Savings were anticipated from reduced
duplication, spreading fixed cost over more
patients
• * adjusted for case mix
COPA irony
• A COPA must be actively enforced by the state.
• Otherwise, a Federal court might find that the
COPA was not being strictly enough enforced to
provide immunity from Federal antitrust action.
• Hospitals "will be forced to monitor and even
encourage active state participation as a security
measure against antitrust liability."
• Palmetto Health finances its own regulation, by
giving DHEC money to pay for independent audits
of PHA’s COPA compliance.
Diagnosis-Related Groups
for Hospital Payment
• Medicare introduced DRGs in 1983, phasing it
in through 1988. SC Medicaid adopted DRGbased payment in 1986. Modified to hybrid
system in 1987.
• DRG-based prospective payment puts every
patient into one of about 600 DRGs, according
to the patient's diagnoses.
• The DRG determines the payment to the
hospital (except for very long stay outliers).
DRG’s
Diagnosis-Related Groups
for Hospital Payment
• Each DRG has a "weight" that represents the
cost of treating such a patient relative to the
average of all patients.
• Payment = (The dollar amount for a DRG with
weight = 1) multiplied by the weight of
patient’s DRG.
• Adjusting one dollar amount adjusts all the
payments.
SC Medicaid shortly after DRG’s
started
391 Normal newborn
Neonate with other
390 significant problems
Full term neonate with
389 major problems
0.2883
$364.12
0.8347 $1,054.23
1.1672 $1,474.17
• OBS DRG DIAG1 DIAG2
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1
2
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11
21
22
23
24
27
28
391
391
391
391
391
391
391
391
391
391
391
391
391
391
391
391
391
V3000
V3001
V310
V3000
V3000
V3000
V3001
V3001
V3000
V3000
V3001
V3000
V3000
V3000
V3101
V3000
V3000
605
7661
7661
605
7746
7746
7661
• OBS DRG DIAG1 DIAG2 DIAG3 DIAG4 DIAG5
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•
•
•
•
•
•
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•
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•
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1
2
3
4
5
6
7
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9
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12
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14
15
16
17
390
390
390
390
390
390
390
390
390
390
390
390
390
390
390
390
390
V3000 7525
7786 7660
V301 7526 V718
V3000 7526
V3101 7784
V3000 4279
V3000 37205
V3000 76408
V3000 7526
V3000 7706
V3001 71965 7706 7746
V3000 7661 74910
V3000 7793
V3000 7706
V3000 75501
V3001 7526
V3001 V718
• OBS DRG DIAG1 DIAG2 DIAG3 DIAG4 DIAG5
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•
•
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•
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•
•
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•
1
2
3
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389
389
389
389
389
389
389
389
389
389
389
389
389
389
389
389
389
V3000 7701
V3001 7731
7701 7718 V3001 0389 7792
7718
V3001 7708 5531
V3000 76408 7731
V3000 7661 7731
V3101 7731
V3000 7731
V3000 7731
V3000 7454
V3000 7708
V3001 7731
7756 7824
V3001 7708 7718 75462 7746
V3001 7795 7863 7706
7732 7526
RBRVS
Resource-Based Relative Value System
for physician payment
• In the late 1980s, Medicare led a direct attack
on how physicians set their prices. Medicare
implemented the Resource-Based Relative
Value System for paying doctors.
• It's now used, in various forms, by private as
well as public payers.
RBRVS = DRGs for doctors?
• No
– DRG-based payment is prospective. It pays a
certain amount per case, regardless of what
resources the hospital puts in to the patient’s
care.
– RBRVS is fee-for-service payment
RBRVS = DRGs for doctors?
• But Yes in the sense that
– Both came from the US government
– Both simplify payment-setting
• Both based on giving a weight to each unit of service
• Weight is proportional to the cost of the service
• Costs are determined by formula, not existing market
prices
• Payment = (Payment for a service with weight = 1) ×
(Weight of the service)
Historical context
– Roe, B.B., "The UCR Boondoggle: A Death Knell for
Private Practice?" N Engl J Med, July 2, 1981,
305(1), pp. 41-45.
• Medicare used Usual and Customary Rates as
the basis for pricing doctor services.
• Invited abuse. In 1981, a heart surgeon could
do three 2-4 hour coronary bypass surgeries
per week at $2500 each and make $350,000
annually.
RBRVS
• RBRVS was intended to set fees by simulating the fees
the market would have set if the market functioned
properly.
• With prices having a consistent relationship with cost.
• Hsiao, W.C., Braun, P., Dunn, D., Becker, E.R., DeNicola,
M., Ketcham, T.R., "Results and Policy Implications of
the Resource-Based Relative-Value Study," N Engl J
Med, September 29, 1988, 319(13), pp. 881-888.
• This article, which is printed second in the original
magazine, gives the general idea of RBRVS.
Physician work measure for RBRVS
• Hsiao, W.C., Braun, P., Yntema, D., Becker, E.R.,
"Estimating Physicians' Work for a ResourceBased Relative Value Scale," N Engl J Med,
September 29, 1988, 319(13), pp. 835-841.
• This article (printed first in the NEJM issue)
looks specifically at how they measured the
physician's work entailed in any particular
procedure.
The goal
• Hsiao, an actuary by training, was later a major
consultant to the Taiwan government for the
reform of its health insurance system.
• Here, he suspected that physician fees were out
of proportion to cost, with some surgical
specialties much more handsomely reimbursed
than primary care.
• Making the fees proportional to cost would
encourage physicians to pursue careers in
"primary care, rural practice, and out-of-hospital
services," rather than flocking to surgical
specialties.
RBRVS formula
• RBRV = (TW)(1+RPC)(1+AST)
• Resource-Based Relative Value = (Total Work)×
(Specialty Practice Cost Index)×(Specialized
Training Cost Index)
• Specialty practice cost is hired labor and
capital
• Specialized training cost is the opportunity
cost of spending time in residency.
Total Work formula
• Total Work = Time×(Complexity Index)
• Complexity index = “sweat factor”
• Includes Pre- + Intra- + Post-service work
• Based on surveys of physicians
Compares actual Medicare payments with what Medicare
would pay if proportional to RBRV and total-payment-neutral
Potential RBRVS impact
• If Medicare fees were adjusted to the RBRVS but
total spending unchanged ("budget-neutral"),
thoracic surgery, ophthalmology fees would drop
>40%. General surgery fees would drop about
15%.
• Internal medicine fees would rise >30%. Family
practice fees would rise >60%.
• Ontario's negotiated fee schedule more uniform
relative to RBRV than mean Medicare payment.
Limitations of RBRVS
– which Hsiao recognized:
• The CPT-4 classification system for physician
services, like any classification system, has
variations within the classes. Some docs, such as
those who treat poor people, may have more
difficult patients within RBRV classes.
• No extra payment is allowed for better outcomes.
RBRVS is based on resource inputs, not benefits.
There's no financial incentive for higher quality.
As implemented by SC Medicaid
• Naus, F., Medical Management Institute 1991
• Nose fracture CPT 21325
RVU category US SC adj SC RVU
Work RVU
174 0.971 169.1
Overhead RVU 120 0.874 105.1
Malpractice
RVU
20 0.457 9.14
Total
314
283.3