Competition Policy and Organizational Fragmentation in Health Care

Thomas (Tim) Greaney
Once upon a time and, a very good time it was, advocates for market
based approaches to health policy had a coherent story to tell. Cost and
quality would remain suboptimal as long as fee-for-service medicine
persisted, and the myriad market imperfections that impede efficiency
went unchecked. Things could be righted however, by adopting
principles associated with managed care, together with pursuing sensible
antitrust enforcement and government deregulation to clear away the
private and regulatory underbrush obstructing market forces. Economic
theorists and policy experts agreed that these steps would effectively
address information, agency, and moral hazard problems and begin to
glue together the pieces of our fragmented delivery system. And, for a
while, things seemed to work out as promised. Providers began to
reorganize into firms and other integrating arrangements and health
insurers adopted financial and contractual measures designed to align
provider incentives with consumer needs. Regulators directed policies at
removing obstacles to competition and antitrust enforcers sought to
encourage efficient consolidation while blocking cartels and provider
oligopolies. Spiraling costs leveled off for a while and both payment
systems and provider organizations began to adapt to market forces.
But things changed. A powerful backlash against managed care
(precipitated in par t by i nsurers‘ short-sighted and sometimes abusive
tactics) gave rise to regulations that undermined some of the methods
managed care had used effectively while payers voluntarily withdrew
from active involvement in care management. Managed care and the
competition-enhancing practices it had begun to spawn, integration and
Chester A. Myers Pr ofessor of Law and Director, Center for Health Law
Studies, Saint Louis University School of Law. This paper was originally
presented at the Harvard Law School Petrie-Flom Center for Health Law
Policy Conference, ―Our Fragmented Health Care System: Problems and
Solutions.‖ The author thanks participants for insights and suggestions.
A version of this chapter is published in volume 72 of the University of
Pittsburg Law Review.
120 Competition as Public Policy
rivalry, unraveled. Several important lessons for competition policy
emerge from the demise of the managed care era. First, a number of
factors deeply embedded in the nation‘s health care apparatus
encouraged resistance to competition. Even during the heyday of
antitrust enforcement and market-favoring policies, many institutions and
organizational structures changed little, as social norms and market
imperfections proved to be powerful counterweights to conventional
market incentives. In addition, many statutes, judicial decisions, and
governmental financing programs operated at cross purposes with the
goals of competition policy. Nor are things likely to improve soon.
Today‘s emerging market-oriented paradigm, ―consumer directed health
care,‖ which requires consumers to shoulder responsibility for making
comparisons on the price, intensity, and quality of services they receive,
threatens to increase fragmentation and does little to address the
underlying imperfections of health care markets.
A central challenge for all health care reform proposals currently
being discussed is finding the means to effectively channel market forces
given many deeply embedded features of our system and the peculiar
economics of health care delivery and financing. This essay traces the
path of competition law in health care and explains its chicken-and-egg
relationship with provider organizational arrangements. It explores a
central puzzle for future health care policy: why have market forces
failed to counteract organizational fragmentation? Answering this
question requires an understanding of why competition policy is
inexorably linked to the organizational structures of health care providers
and payers and how the fragmentation that bedevils those arrangements
has undermined its success. The article concludes with a negative
assessment of recent ―consumer directed‖ approaches, finding them
likely to increase fragmentation and incapable of delivering the benefits
of competition.
A. How Competition Policy Tried to Deal with Fragmentation and
Why It Failed
1. Antitrust Law’s Two-Pronged Approach
Historically, much of what can be broadly classified as ―competition
policy‖ in health care is found in the application of antitrust principles to
the conduct and structure of provider and payer organizations rather than
in any sweeping statutory enactments. Although some landmark

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