Chapter 16
Regulation and Antitrust Policy in Health Care
16.1 INTRODUCTION
The regulation of markets takes three general forms. Direct regulation refers to intervention in markets by regulatory agencies to control price, quantity, or quality by direct action, such as instituting price controls, establishing professional licensure requirements, or assessing and regulating the quality of services. Indirect regulation refers to regulatory activities that affect price, quantity or quality by enforcing the competitive behavior of firms in the market or by changing the structure of the market. Governments also intervene in markets through public ownership and operation of health care facilities and services. The use of the term regulation in this chapter will generally refer to direct regulation.
16.1.1 The Concept of Economic Regulation
There are two different views of why economic regulation exists. According to the first view, economic regulation is generally motivated by the objective of reducing the extent of market failure. According to the second view, it is the result of producers or consumers working through the political process to further their own interests.
16.1.2 Regulation as a Means of Correcting Market Failure
Health care markets are characterized by imperfect information on the price and quality of health care services. Thus incomplete information may prevent socially optimal outcomes in health care markets.
The direct regulation of health care providers, therefore, may be a response of governments to the perception that the consumer lacks information about quality and thus that the workings of competitive, private-enterprise health care markets may not produce the best outcomes in terms of social welfare.
16.1.3 Regulation as a Political Good
George Stigler, in his seminal work on the economic theory of regulation (1971), supplemented by work by Peltzman (1976) and others, pointed out that regulatory legislation may redistribute wealth. This effect of regulation is important given that the behavior of legislators is likely to be motivated by their wish to remain in office. If there is competition between special interest groups in the democratic system, that competition may take the form of exchanges of political support for legislation favorable to the objectives of the interest groups. If the political process works in this manner, well-organized interest groups with a high per capita stake in the outcomes of legislation will tend to dominate larger interest groups with a smaller per capita stake.
The economic theory of regulation suggests that providers may be able to dominate the legislative and regulatory process. This suggestion is a hypothesis and not a conclusion of the economic theory of regulation. What are the actual health care-related outcomes of real-world legislative and regulatory processes is an empirical question. Very active lobbying activities are pursued by health care provider groups as well as health care consumer groups.
16.2 REGULATION OF HEALTH CARE
16.2.1 Regulation of Hospitals and Long-Term Care Facilities
Direct regulation of hospitals includes supply side measures such as certificate-of-need requirements for the entry of new hospitals or the addition of new services. Demand side regulations include price controls imposed through the reimbursement practices of government programs such as Medicare and Medicaid. Price controls may also affect the supply side by motivating greater efficiency and reducing lengths of stay. Regulation of hospital service quality includes licensure, peer review, and utilization review.
16.2.2 Regulation of Hospital Quality
Hospitals are licensed by a state licensing agency, usually the state health department. In addition, hospitals participate in self-regulation by seeking accreditation from the Joint Commission on Accreditation of Healthcare Organizations.
Hospital quality is also regulated by peer review organizations (PRSs), which were established under the Tax Equity and Fiscal Responsibility Act (TEFRA) of 1982, an act that made numerous changes to Medicare. The PROs are independent contractors whose mission is to “ensure the quality, effectiveness, efficiency, and economy of health care services provided to Medicare beneficiaries.
16.2.3 Supply Side Regulation of Hospitals
The PROs may also review utilization of care. Certificate-of-need regulation is a form of supply side regulation. Its stated purpose is to restrict the building of hospitals and the addition of major facilities in order to prevent duplication of facilities or excessive capital expenditures. Since 1986, several states have ended certificate-of-need regulation of hospitals. A retrospective study of the consequences of ending certificate-of-need regulation found that such regulation had only a modest containing effect on hospital costs (Conover and Sloan 1998).
16.2.4 Demand Side Regulation of Hospitals
Hospital prices and charges are subject to extensive regulation. Studies of the effectiveness of price regulation of hospitals have generally found that hospitals entered a new competitive era in the early 1980s, as Medicare’s PPS, which paid providers prospectively based on diagnosis rather than retrospectively, tended to reduce days of stay and hospital occupancy rates and increase price competition among hospitals (Dranove et al. 1993). The increase in price competition was reinforced by the rapid development of managed care and the greater purchasing power of large payer groups.
16.2.5 Regulation of Long-Term Care Facilities
Long-term care in the US is provided in nonprofit and for-profit nursing homes, which are regulated by state and federal agencies. Licensing is by state health departments. Nursing homes may also pursue self-regulation by seeking accreditation through the Joint Commission.
Nursing homes are regulated on the supply side by state certificate-of-need regulation that restricts construction and capacity increases.
Whatever price regulation of nursing homes exists is primarily a result of the reimbursement systems used by Medicare and Medicaid.
16.2.6 Regulation of Physician Services
Traditionally, physicians were paid on a fee-for-service basis. Currently, 80-90 percent of physician fees are paid by third-party payers, who possess some control over price and utilization. Physicians are also subject to regulation intended to ensure high quality of care.
16.2.7 Regulation of Physician Quality and Utilization
The primary regulation of physician quality is through state licensure—the granting of licenses to practice medicine to those who meet specific criteria.
Peer review organizations monitor the utilization patterns and the professional quality of hospitals and physicians. Scheutzow (1999) reviewed the practice of peer review organizations and concluded that, because of the failure to report incidents and other problems, the present peer review process is ineffective.
16.2.8 Regulation of the Pharmaceutical Industry
The production of pharmaceuticals is regulated by the Food and Drug Administration. The distribution and dispensing of pharmaceuticals is regulated at the state level by the licensing of pharmacists and by requirements that apply to pharmacy operations.
16.2.9 Food and Drug Administration Regulation of Drugs
Patents on new drugs provide a monopoly position for a period of time that may extend beyond the 20-year standard for American patents (the possibility of extension is to allow for the considerable time required by the regulatory process).The total time lag from the beginning of research and development of a new drug to bringing it to market may be 10 years, and the total development cost may run into the hundreds of millions of dollars. (Abbott 1997).
16.2.10 State Regulation of Pharmacists
State boards of pharmacy regulate registered pharmacists. The state boards regulate pharmacist quality through licensure and through requirements for continuing education. The increasing importance of mail-order pharmacies may restrict the ability of state boards to control the quality of dispensing within state boundaries (Conlan 1997).
16.2.11 Regulation of Health Insurance and Managed Care
In the US, regulation of insurance is practiced at the state level. The growing tendency of large employers to self-insure and utilize third-party administrators is significant. (Frech, 1993). As a result of this trend, a larger portion of the market escapes regulation.
In fact, state regulators more and more have turned their attention to regulating the behavior of managed care organizations.
Federal regulation of health insurance traditionally has been restricted mostly to Medicare and Medicaid, which are public health insurance programs.
16.3 ANTITRUST POLICY
16.3.1 Conceptual Framework
Perfectly competitive market yields long-run equilibrium in which all firms produce at minimum LRAC and P = MC. This equilibrium yields both technical and economic efficiency. Technical efficiency refers to tendency of firms to produce goods and services at minimum LRAC due to price competition among firms and relatively small scale of each firm compared to market demand. Economic efficiency refers to equality of P and MC, suggesting that allocation of resources cannot be improved by moving them from their present use to a different one. When competitive market is transformed into monopolistic market, then total output would decline. P would ↑. Fig. 16-1, p.358.
16.3.2 Structure of Health Care Markets
16.3.2.1 Hospitals:
One major structural trend in 1980s and 1990s in US was rapid growth of for-profit hospital corporations. Another trend was increasing rate of mergers. Mergers may be motivated by pursuit of increased market power, pursuit of increased efficiency, or both.
16.3.2.2 Physician Services
Have traditionally been produced by physicians practicing alone or in small group practices. Trend toward cost containment in hospitals and development of managed care networks have contributed to reduction in discretionary power of physicians in determining price and quality of services. One response has been formation of larger practices and other physician networks.
16.3.2.3 Health Insurers and Managed Care Plans
16.3.3 Antitrust Policy: History and Institutions
Sherman Act of 1890: most prominent piece of antitrust legislation in US. Clayton Act of 1914.
Federal Trade Commission Act also passed in 1914.
Dept of Justice has primary responsibility for public enforcement of Sherman Act. The FTC enforces FTC Act and section 2 of Clayton Act.
16.3.4 Price fixing and Conspiracy in Restraint of Trade in Health Care Markets
Per se rule: evidence of direct communication between competitors is sufficient to find a violation of section 1 of Sherman Act.
In Arizona vs. Maricopa County Medical Society (1982), 2 physician groups utilized relative value schedules to establish maximum prices for medical services. Court ruled that this approach to setting maximum physician fees was subject to per se rule against price fixing.
16.3.5 Mergers in Health Care Markets
Horizontal merger: between firms that compete in same product and geographic market. (e.g., merger of 2 community hospitals in same metropolitan area)
Vertical merger: between firms that have a buyer-seller relationship (e.g., acquisition of physician group practice by HMO).
Conglomerate merger: between firms that are neither horizontally nor vertically related. (e.g., acquisition of community hospital by banking corporation).
Blackstone and Fuhr state that 40 to 60 hospital mergers occurred per year in 1980s but Dept of Justice and FTC challenged fewer than 10 in total. In some cases, mergers were not challenged because hospitals were not in same geographic market.
For mergers between large hospitals, antitrust agencies use “rule of reason”, in which consideration is given to whether a merger may have substantial anticompetitive effect and if so, whether anticompetitive effect is offset by precompetitive efficiencies.
16.3.6 Quality Competition and Antitrust Policy
Quality competition among insurers or managed care organizations is related to attributes such as access to specialists, freedom of choice among providers, and treatment capacity. Quality competition among providers is based on attributes such as credentials, location, and treatment outcomes (Sage and Hammer 1999).
There is a developing trend toward greater provision of information about health care quality. The greater availability of information offers the promise of improved quality competition and a reduction in the likelihood that markets will provide service quality that is suboptimal.
16.3.7 Antitrust Issues Related to Managed Care
One of the most important trends in the health care sector during the past 20 years has been the rise of managed care plans, selective contracting, and integrated health networks. This growth appears to have promoted competitive efficiencies in health care and has likely reduced the rate of increase in health care costs. At the same time, the rise could eventually result in increased market power on the part of buyers or sellers of health care and ultimately lead to an increase in the prices paid by consumers (Schaactman and Altman 1995).
The managed care industry has followed a path of consolidation through merger. In 1998, the largest 10 HMO providers accounted for almost two-thirds of the total HMO enrollment in the US. Feldman and colleagues (1999) found that, while national HMO concentration increased from 1994 to 1997, most local HMO markets were less concentrated in 1997 than in 1994 because of the entry of new firms.
16.3.8 Federal Antitrust Policy Guidelines
A major landmark in health care antitrust policy was the issuing of The Statements of Enforcement Policy and Analytical Principles Relating to Health Care and Antitrust by the Dept of Justice and Federal Trade Commission in 1993 (revised in 1994 and 1996). The provisions of the statements address the following nine areas: