Health care consolidation and the changing health care marketplace. A review of the literature and issues.

This Issue Brief examines the academic literature and issues in consolidation of the hospital sector in the context of responses to changes in the competitive environment. It analyzes the motivations for consolidation as well as its effects. Hospital merger activity has increased dramatically in recent years. The current wave of mergers is primarily a reaction to a competitive environment that is placing a greater emphasis on controlling costs and forcing high-cost providers out of the market. The growth of managed care has placed considerable pressure on providers of health care and, in particular, on hospitals. The evolution of insurance companies' behavior helps explain the recent hospital consolidation movement. As managed care has become the dominant type of coverage in the last decade, insurance companies have become more active in trying to control costs--a reversion to their previous practices before the advent of managed care. Insurance companies have placed cost constraints on providers, both in the early years of health insurance and currently, when there are strong competitive forces. Hospitals claim that their primary merger motives are improving efficiency and the quality of care. The empirical evidence on this claim is mixed. Vertical integration (between suppliers and buyers of health care services, such as between hospitals and physicians) has appealed to hospitals because of their need to obtain more patients. More research is needed to explore the effects of vertical integration in the health care sector. In one of the more significant recent legal rulings, the U.S. Justice Department lost a 1997 case challenging the merger of two hospitals in the New York City metropolitan area. This, along with other recent losses by the antitrust authorities, does not bode well for the government's ability to prevent hospital mergers in metropolitan areas. It is difficult to generalize on an appropriate antitrust policy for hospital mergers. Hospital consolidation is likely to continue at a rapid pace. Since some developments may reduce the cost of employee benefits while others may increase the cost of these benefits, the final effect on the provision of health care benefits by employers is uncertain. Employers must pay close attention to the hospital consolidation movement because it will lead to important changes in the provision of health care benefits.

Differences in private health insurance coverage for working male Hispanics.

In 1993, 33.8% of all nonelderly adult Hispanics living in the United States lacked health insurance coverage (either private or public), compared to 8.1% of the entire nonelderly population. Because Hispanics are more likely to be uninsured than any other ethnic group and because they are the fastest growing minority group in the United States, the increase in the Hispanic population is likely to increase the proportion of the population without health insurance. Particularly striking are differences in private health insurance coverage among the three major Hispanic groups--Cuban-Americans, Mexican-Americans, and Puerto Ricans. In this paper, regression-based decomposition analysis is used to explain the sources of differences in private health insurance coverage among working males in these three group. The results indicate that among the study population, Cuban-Americans have higher rates of private health insurance coverage than Mexican-Americans and Puerto Ricans, and that wage rates, levels of education, age, occupation, and marital status explain most of the difference.

The response of the dominant firm to competition: the Ocean State case.

The Ocean State antitrust case illustrates the operation of the competitive marketplace in health insurance. Blue Cross, the dominant firm in Rhode Island, responded competitively to the entrance of a new competitor, Ocean State, in three ways: 1) a most-favored-nation clause, 2) creation of a PPO offering similar benefits as Ocean State, and 3) an adverse selection policy. These actions are assessed to be legitimate competitive responses and the decisions of the higher courts overturning the jury verdict against Blue Cross are supported.

Health insurance without provider influence: the limits of cost containment.

In our previous paper, we showed that market forces can play a significant role in controlling health care costs and that a considerable amount of cost containment effort was pursued by third-party insurers in Oregon in the 1930s and 1940s. Although physicians were able to thwart this cost-control effort, a 1986 Supreme Court decision, FTC v. Indiana Federation of Dentists, found that a boycott of insurers by dentists violated Section 5 of the Federal Trade Commission Act. Further investigation of recent developments, including the recent Wickline v. California decision, indicates that the primary barriers to cost containment today are not obstructive tactics by providers or provider-controlled health insurance plans. Rather, the primary barriers are increases in the development and diffusion of new technology and society's apparent preference for paying for new tests and procedures regardless of economic efficiency.

An economic analysis of the Maricopa decision.

In Arizona v. Maricopa County Medical Society the United States Supreme Court ruled in a 4-3 decision that the Maricopa Foundation for Medical Care, a nonprofit Arizona corporation, had violated Section 1 of the Sherman Act by engaging in a maximum price-fixing scheme. The Supreme Court in this decision, however, failed to consider the economic impact of the Maricopa Foundation on the cost and quality of health care. The Court's adoption of a per se approach in Maricopa can have a negative impact upon the competition which the antitrust laws are attempting to promote. By focusing only on the narrow aspect of price fixing, the Court ignored (1) the potential of the Maricopa Foundation to contain costs, (2) the potential competitive effect that the foundation may have on third-party carriers and organizations in the marketplace, (3) the relationship of maximum price fixing to economic performance, and (4) the nature of competition in the health care marketplace. This article describes the background of Maricopa as well as the Supreme Court decision. It describes foundations for medical care with special emphasis on the Maricopa Foundation and analyzes Maricopa from an economic rather than the traditional legal perspective, emphasizing how the two perspectives might differ. Attention is paid to the concept of maximum price fixing in the health care marketplace. The concluding section evaluates the Supreme Court decision.

The dominant firm in health insurance.

Blue Cross, the largest insurer of hospital costs in most parts of the U.S., has a varying market share by area. This paper examines the factors affecting the market share of Blue Cross by state. The regression analysis finds that the Blue Cross discount has an important impact upon market structure and that certain regulatory factors have had an impact while others, such as the premium tax, have not. Hypotheses related to the effects of consumer demand and the structure of the industry on Blue Cross market share are also tested and largely rejected.

The determinants of HMO enrollment and growth.

This paper analyzes why HMO enrollment and growth have varied greatly among states. Using Tobit analysis, a number of variables are related to state HMO market share in 1976 and the change in HMO market share from 1966 to 1976. Higher hospital costs and mobile populations are shown to have encouraged HMO development. There is some evidence that the extent of unionization and the presence of group practices encourages HMO enrollment and growth. Legal restrictions on HMO development imposed at the state level appear to have had little effect upon HMOs. In particular, certificate-of-need laws have not impeded HMO enrollment and growth. Consequently, our results suggest that the enrollment and growth of HMOs respond more to impersonal market and demographic conditions than to certain legal restrictions.

The competitive response of Blue Cross to the health maintenance organization.

The health maintenance organization (HMO) is an alternative to the traditional fee-for-service health care system in the United States. Other studies have shown that the HMO reduces hospital utilization and offers greater benefit packages than fee-for-service. This paper tests whether the presence of HMO's provides effective competitive pressure on Blue Cross, the largest insurer of hospital costs. The cross sectional regression analysis supports the hypotheses that Blue Cross has reduced hospital utilization and increased benefit packages in response to HMO competition. Consequently, competitive forces are shown to be operative in at least one area of health care.

The competitive response of Blue Cross and Blue Shield to the health maintenance organization in Northern California and Hawaii.

The health maintenance organization (HMO) can provide an alternative to the predominant form of health care delivery in the United States, fee-for-service. Although market penetration of the HMO is relatively low in most parts of the country, the HMO has achieved a significant market share in a number of states. This paper examines the competitive response of Blue Cross and Blue Shield to the introduction of the HMO in two geographic regions with significant HMO activity, northern California and Hawaii. The evidence obtained from extensive interviews indicates that Blue Cross and Blue Shield plans have responded to HMO competitive pressure by establishing their own HMOs and by altering traditional procedures. HMO competition has stimulated Blue Cross and Blue Shield to make greater cost control efforts and to offer larger benefit packages. These results can have important policy implications for the role that HMOs are to play in cost containment.

The effect of physician-controlled health insurance. U.S. v. Oregon State Medical Society.

The trial record in an antitrust case against the Oregon State Medical Society, finally decided in 1952, was examined to reconstruct the behavior of a competitive market for health insurance coverage. Health insurers, called "hospital associations," were found to have engaged individually in cost-control efforts similar to, but possibly more aggressive than, today's utilization review under professional sponsorship. The subsequent disappearance of these insurer-initiated cost controls in Oregon is traced to the medical society's organization of a competing Blue Shield plan as a model of insurer conduct and to a simultaneous boycott by physicians of the hospital associations as long as they persisted in questioning doctors' practices. Some modern parallels are noted, and the advantages of fostering privately sponsored cost-control efforts are suggested.