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Consolidation

PERSPECTIVE

Monopoly, Monopsony, And Market Definition: An Antitrust Perspective On Market Concentration Among Health Insurers

Abstract

 
James Robinson uses the Herfindahl-Hirschman Index (HHI) to compute the concentration of commercial health insurance markets in most of the states during the past four years. The HHI is the analytical foundation for the federal antitrust merger guidelines, so we consider his findings from an antitrust perspective. Market concentration provides an important benchmark for antitrust analysis, but it does not, standing alone, indicate the presence of problematic (anticompetitive) behavior or a problem that antitrust law can solve. Even if it did, there are major problems in treating individual states as discrete insurance markets. Unless the market is correctly defined, any analysis of market concentration is thoroughly unreliable.

We respond to Robinson’s observations from the perspective of antitrust enforcers—albeit enforcers at an agency (the Federal Trade Commission, or FTC) that, by statute, has no jurisdiction over the business of insurance.² Our perspective is informed by the recently issued FTC/U.S. Department of Justice (DOJ) report, Improving Health Care: A Dose of Competition, and the twenty-seven days of hearings that formed the report’s foundation.³

Antitrust law focuses on the problem of market power. Market power is when sellers (or buyers) have the ability to profitably maintain prices above (or below) competitive levels for a lengthy period of time. When sellers exercise market power, it is called "monopoly." When buyers exercise market power, it is called "monopsony." Both monopoly and monopsony decrease consumer welfare. Health insurers are both buyers of medical services (from providers) and sellers of health insurance (to consumers and employers), so they can raise both monopsony and monopoly concerns. Absent direct evidence of anticompetitive effects, antitrust analysis of market power focuses on the identification of relevant product and geographic markets and calculation of market shares and concentration ratios.

Importance of the HHI. The first important point is to appreciate the significance of the Herfindahl-Hirschman Index (HHI), which Robinson used to calculate market concentration. The HHI forms the analytical foundation for the FTC/DOJ merger guidelines. It represents the sum of the squares of the market share of individual competitors in the market. In a market with a single seller, the HHI is 10,000. The merger guidelines provide that an HHI below 1,000 corresponds to an "unconcentrated" market; an HHI between 1,000 and 1,800 corresponds with a "moderately concentrated" market; and an HHI above 1,800 corresponds to a "highly concentrated" market. The HHI is used as a screening tool to assess whether a proposed merger is likely to have anticompetitive consequences. The guidelines provide that different presumptions apply, depending on the extent of postmerger market concentration and the increase in HHI that will result from the merger. For example, a merger that results in an unconcentrated market "ordinarily require[s] no further analysis" because it is unlikely to have adverse competitive effects, but where the postmerger HHI exceeds 1,800, it is "presumed that mergers producing an increase in the HHI of more than 100 points are likely to create or enhance market power or facilitate its exercise."⁴

Robinson’s results indicate that many states have moderately or highly concentrated health insurance markets. However, high HHIs do not demonstrate that market power exists or is being exercised. Even if it could be shown that a health insurer has market power, the issue for antitrust purposes is whether the insurer has obtained or maintained that power through improper means. Absent such evidence, the sole fact that a market is concentrated is unlikely to attract the interest of an antitrust enforcer.

With one exception, high levels of concentration have never been thought sufficient by themselves to merit an antitrust challenge. In the late 1970s the FTC briefly flirted with using a "no-fault" theory of antitrust liability to deconcentrate various industries without proof of improper conduct. It dropped this approach after developments in the case law and criticism from antitrust experts led it to conclude that no-fault cases would receive a hostile reception in the courts.⁵ No competition agency has sought to revive this strategy in the intervening twenty-odd years.

Market definition. Second, the HHI is used to calculate market concentration only after the scope of the product and geographic market is determined. The validity of the HHI as a screening tool depends entirely on proper prior definition of the relevant market. As Judge Richard Posner has observed, "The definition of the market in which to measure the market shares of the merging parties and their competitors is critical; given enough flexibility in market definition a surprising number of innocuous mergers can be made to appear dangerously monopolistic."⁶ Similarly, Robert Pitofsky, former chairman of the FTC, has observed that "knowledgeable antitrust practitioners have long known that the most important single issue in most enforcement actions—because so much depends on it—is market definition."⁷ The market-definition process was farcically described by Nobel laureate George Stigler:

Consider the problem of defining a market within which the existence of competition or some form of monopoly is to be determined. The typical antitrust case is an almost impudent exercise in economic gerrymandering. The plaintiff sets the market, at a maximum, as one state in area and including only aperture-priority SLR cameras selling between $200 and $250. This might be called J-Shermanizing the market, after Senator John Sherman. The defendant will in turn insist that the market is worldwide, and includes not only all cameras, but also portrait artists and possibly transportation media because a visit is a substitute for a picture. This might also be called T-Shermanizing the market, this time after the Senator’s brother, General William Tecumseh Sherman. Depending on who convinces the judge, the concentration ratios will be awesome or trivial, with a large influence on his verdict.⁸

An individual state is clearly a relevant parameter for regulatory purposes, and considerable data are available on a state-by-state basis. However, as Robinson correctly observes, the fundamental difficulty is that there is no evidence that individual states constitute relevant geographic markets for health insurance—and there is considerable evidence to the contrary. The American Medical Association’s (AMA’s) recent study of market concentration expressly cautioned that "in states with large populations, statewide data can be very misleading because individual insurers will concentrate business in specific areas of the state."⁹ For this reason, antitrust analysis of health insurance geographic markets employs metropolitan statistical areas (MSAs) and even individual ZIP codes to properly define the relevant market. Bluntly stated, if an entire state is not a relevant geographic market, the existence of high HHIs in that state has no competitive (or probative) significance.

Long-term deconcentration. Third, by focusing on the past four years, the study observes the extent of long-term deconcentration in the market for health insurance. Once upon a time (until about sixty years ago), Blue Cross and Blue Shield were the only health insurers in most states, and each Blue entity had exclusive territorial rights to its individual state markets. Entry by commercial insurers, for-profit conversion of some Blue plans, self-insurance, and antitrust enforcement have changed the competitive landscape. Also, although several health insurers have had stable profits in a time of rising costs, there is no particular reason to believe that health insurers, in general, are receiving supracompetitive profits for the services they provide.

The role of provider self-interest. Fourth, the principal complainants about market concentration among health insurers are providers—and their self-interest in the matter should be obvious. Conversely, consumer assessments matter in assessing whether market concentration is a problem. At the FTC/ DOJ health care hearings, panelists representing employers testified that health insurance markets in most geographic areas enjoy healthy competition, with multiple insurer-competitors offering multiple product options. In addition, most employers can self-insure and thereby avoid most of the problems that might otherwise result from health insurance market concentration.

Lawful versus unlawful behavior. Finally, it is important to distinguish lawful managed care contracting from unlawful monopsony behavior. Robin-son recognizes this distinction in his paper, but many provider groups treat disparities in bargaining power between insurers and providers as prima facie evidence of anticompetitive behavior. Managed care plans and other health insurers can legitimately lower health care providers’ prices by increasing competition among providers or engaging in other activities that lower the costs of providers’ services. Because one purpose of managed care is to lower prices closer to a competitive level, it can be extremely difficult to determine when a managed care purchaser is exercising monopsony power.

Even if a health insurer is actually exercising monopsony power, there is precedent (written by then Judge and now Supreme Court Justice Stephen Breyer) indicating that "a legitimate buyer is entitled to use its market power to keep prices down," as long as the prices are not too low (that is, below incremental cost or predatory).¹⁰ Ascertaining whether monopsony power has, in fact, been created or exercised generally requires a lengthy, fact-intensive investigation.

To be fair, although Robinson uses the tools of antitrust (the HHI) to calculate market concentration, he never suggests that antitrust enforcement offers a solution to the problems he identifies. Unfortunately, Robinson’s paper casts little light on whether the market for health insurance is actually concentrated, and he offers no evidence that would justify an antitrust investigation, let alone an enforcement action. This is because his study focuses on where the light is bright (that is, analyzing health insurance markets on a state-by-state basis, where data are available) instead of looking at actual geographic and product markets, where evidence of antitrust violations, if any, might be found.

Editor's Notes

Top Editor's Notes NOTES

 
David Hyman (dhyman{at}law.uiuc.edu) is special counsel, Federal Trade Commission (FTC), and a professor of law and medicine at the University of Illinois in Urbana-Champaign. William Kovacic (wkovacic{at}law.gwu.edu) is general counsel, FTC, and a professor of law at the George Washington University in Washington, D.C.

The authors’ views are their own and should not be imputed to the Federal Trade Commission or to any of the commissioners.

NOTES

Top Editor's Notes NOTES

 

1. J.C. Robinson, "Consolidation and the Transformation of Competition in Health Insurance," Health Affairs 23, no. 6 (2004): 11–24.[Abstract/Free Full Text]
2. By statute, the Department of Justice has authority to enforce the antitrust laws against insurance companies. Individual states also have plenary regulatory authority over insurance companies.
3. Federal Trade Commission and Department of Justice, Improving Health Care: A Dose of Competition (Washington: FTC/DOJ, 2004).
4. FTC/DOJ, "1992 Horizontal Merger Guidelines [with April 8, 1997, Revisions to Section 4 on Efficiencies]," www.ftc.gov/bc/docs/horizmer.htm (18 August 2004).
5. Timothy J. Muris, chairman, FTC, "Improving the Economic Foundations of Competition Policy," Remarks at the George Mason University Law Review’s Winter Antitrust Symposium, 15 January 2003, www.ftc.gov/speeches/muris/improveconfoundatio.htm (18 August 2004).
6. R.A. Posner, Antitrust Law: An Economic Perspective (Chicago: University of Chicago Press, 1976), 125.
7. R. Pitofsky, "New Definitions of Relevant Market and the Assault on Antitrust," Columbia Law Review 90, no. 7 (1990): 1805, 1807.
8. G.J. Stigler, "The Economists and the Problem of Monopoly," in The Economist as Preacher and Other Essays (Chicago: University of Chicago Press, 1982), 38, 51.
9. American Medical Association, Competition in Health Insurance: A Comprehensive Study of U.S. Markets (Chicago: AMA, 2003). The executive summary can be downloaded at www.ama-assn.org/ama1/pub/upload/mm/368/execsumfinal.pdf (18 August 2004).
10. Kartell v. Blue Shield of Massachusetts, 749 F.2d 922, 927–931 (1st Cir. 1984).

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