Change, consolidation, and competition in health c

Change,Consolidation,andCompetitioninHealthCareMarketsMartinGaynorandDeborahHaas-WilsonMartinGaynoristheE.J.BaroneProfessorofEconomicsandHealthPolicy,CarnegieMellonUniversity,Pittsburgh,Pennsylvania,andResearchAssociate,NationalBureauofEconomicResearch,Cambridge,Massachusetts.DeborahHaas-WilsonisProfessorofEconomics,SmithCollege,Northampton,Massachusetts.Theire-mailaddressesare〈[e-mail]〉and〈[e-mail]〉,respectively.Thehealthcareindustryisbeingtransformed.Largefirmsaremergingandacquiringotherfirms.Alliancesandcontractualrelationsbetweenplayersinthismarketareshiftingrapidly.Withinthenextfewyears,manymarketsarepredictedtobedominatedbyafewlargefirms.AntitrustenforcementauthoritiesliketheDepartmentofJusticeandtheFederalTradeCommission,aswellascourtsandlegislatorsatboththefederalandstatelevels,arestrugglingwiththeimplicationsofthesechangesforthenatureandconsequencesofcompetitioninhealthcaremarkets.Inthispaperwesummarizethenatureofthechangesinthestructureofthehealthcareindustry.Wewillfocusonthemarketsforhealthinsurance,hospitalservices,andphysicianservices.Wewilldiscussthepotentialimplicationsoftherestructuringofthehealthcareindustryforcompetition,efficiency,andpublicpolicy.Aswillbecomeapparent,thisareaoffersanumberofintriguingquestionsforinquisitiveresearchers.ChangingHealthCareMarketsThehealthcareindustryinthelate1990shasseenthreesubstantial,interrelatedchanges:theriseofmanagedcareasamethodtofinanceanddeliverhealthcareservices;horizontalconsolidationwithinmarketsforinsurance,hospitalservices,andphysicianservices;andtheblurringoftheverticaldistinctionsbetweenthesemarkets.Wewilldiscusstheseinturn.ManagedCareTraditionalhealthcareinsuranceplans--likeBlueCross/BlueShield--donotrestricteithertheproviderortreatmentchoicesofpatientsordoctors.Managedcare,asitsnameimplies,involvesthosemethodsoffinancinganddeliveringhealthcareservicesthatmanage,orintervene,2incaredecisionsmadebypatientsordoctors.Theseformsofinterventionincludelimitingthetypesoftreatmentsorprovidersfromwhomtreatmentcanbeobtained,requiringadvanceapprovalofcertainkindsoftreatments,andreviewingtreatmentsprovided.Thereisanalphabetsoupofinsuranceplansgoingbyvariousacronymsthatarecollectivelyreferredtoasmanagedcareorganizations.Twoofthebest-recognizedcategoriesarehealthmaintenanceorganizations(HMOs),inwhichenrolleesmustreceivealloftheirprimarycarefromadesignatedprimarycarephysician,andinwhichcoverageisprovidedonlyfortreatmentfromaprespecifiedgroupofproviders,andpreferredproviderorganizations(PPOs),whichprovidecoveragefortreatmentobtainedfromanetworkofseparatehealthcareproviderswhohaveagreedtoprovidehealthcaretothePPO'senrolleesatdiscountedrates.Managedcareintheseandotherformshasgrowntobecomethedominantformofemployer-providedhealthinsurance.Theproportionofindividualswithemployer-providedhealthinsurancewhowereinmanagedcareplansrosefrom51percentin1993to73percentin1995(Jensenetal.,1997).Theonefeaturecommontoallmanagedcareorganizationsisthattheyprovidecoverageforhealthcareobtainedthroughapredeterminedgroupofhealthcareproviders,commonlyreferredtoasanetwork,thatisselectedbytheplan.Patientswhoreceivetreatmentoutsidethenetworkmustpayahighershare(sometimesall)ofthecosts.Undertraditionalreimbursementinsurance,aninsuredconsumerhaslittleincentivetoconsiderpriceinchoosingamongproviders.However,sincemanagedcareplansmarketthemselvestoemployerschiefly(somemightsaysolely)basedontheirabilitytoreducethecostsofhealthcarebenefits,priceisacriticalcriterionfortheselectionofprovidersintotheirnetwork.ThisresultofmanagedcarehasbeentermedbuyerdrivencompetitionbyDranove,ShanleyandWhite(1993).Itseemsclearthatthegrowthofmanagedcarehasledtoincreasedpricecompetitioninhealthcare3markets.ChangesintheHorizontalStructuresofHealthCareMarketsHealthcaremarketshaveseenwavesofcollaboration,integration,andoutrightmergertheselastfewyears.Themarkethassomanyplayers--hospitals,physicians,conventionalinsurers,andmanagedcareorganizations--thatitisdifficulttoderiveanoverallmeasureofconsolidation,butthetrendisunmistakable.Insurersormanagedcareorganizationsareintegratingwitheachother.Therewere62HMOmergersandacquisitionsin1996,upfrom28in1995(Japsen,1997);forperspective,592HMOswereinoperationin1996(InterStudy,1996).In1975,therewere128independentBlueCrossorBlueShieldplans;byMay1997therewereonly58(Moskowitz,1997).TwoheavilypublicizedexamplesaretheacquisitionofU.S.HealthcarebyAetnaHealthPlansin1996,creatingamanagedcareplanwith6.3millionmembers(Mlawsky,1996a),andtheacquisitionofFHPInternationalbyPacifiCareHealthSystemin1997,creatingamanagedcareorganizationwith3.9millionHMOenrolleesin15states,andanother5.3millionmembersaffectedinspecialtymanagedcareproducts(Mlawsky,1996b).Hospitalshavechangedownershipfrequently.1Between1994and1996,approximately41percentofthe5,200(non-federal)hospitalsintheUnitedStateswereinvolvedintransactionsinvolvingchangesinassetownership(Japsen,1996).From1985to1995,thenumberofhospitalsfellby9percent,from5,732to5,194,andthenumberofhospitalbedsfellby13percent,from1millionto