Edward Lotterman
Sometimes bad events have positive side effects.
Here’s hoping that proves true for customers of UnitedHealth Group, where a ransomware hack at a subsidiary compromised health care data of perhaps a third of all Americans. Its CEO, Andrew Witty, underwent blistering attacks last week while giving testimony to Congress.
That got people’s attention. So maybe elected officials from both parties would be more open to taking action than in the past, not just on data security, but on abusive monopoly power in health care as a whole.
That is good. UnitedHealth, a Minnetonka-based health insurer that is expanding into evermore levels of care, is far too large and powerful. It should be broken up, as should be its major competitors.
Economists know, and once thought important, that large businesses with market dominance can abuse consumers. Moreover, they waste resources. When competition is stifled, fewer human needs are met with a given amount of resources.
In general, monopoly power of any significant degree disrupts market functioning and harms people. Governments can act, and many have, to correct this with overall success, even though this has become a near-dead issue in our nation of late.
Simple questions illustrate the scope and complexity of the problem: What business is UnitedHealth actually in? Does it provide health services to people or just administer them? Is Kaiser Permanente, the Oakland Calif.-based eight-state membership-model managed care provider its competitor? Or is it CVS drugstores and its Aetna insurance arm? Or McKesson, a one-time rug manufacturer now selling management systems.
These are complicated questions. And understanding all that is involved in complex monopoly issues requires a review of basic microeconomics. So here goes.
Seventy years ago, UC Berkeley economist Joe Bain argued that “structure, conduct and performance,” were key issues in examining market power.
“Structure” means the number of companies providing a good or service to a given market. Is there only one, as in the days when Western Union or AT&T dominated telegraphy and telephony? Or are there millions, as for shoveling snow from sidewalks or growing corn? The first extreme is “monopoly;” its polar opposite is “perfect competition.”
Monopoly is simple — only one producer or seller. Perfect competition is more complicated — several conditions must be true, including no barriers to getting in or out of the business and no firm being large enough to move prices.
Most markets fall in between these two extremes.
Once a company has a distinguishable brand, Cub Foods, Byerlys or Aldi, Subway or Jimmy Johns, it operates in “monopolistic competition.” Brand identity and other factors give each a degree of pricing power, though seldom much.
Oligopoly is different — instead of just one big dominant business, there are just a handful. Automakers, steel makers, airlines and appliance makers operate in oligopolistic markets — each competitor has a distinct brand with distinct customer loyalties and pricing power, and the barriers to entry are great. But they still compete. The same is true for UnitedHealth, Kaiser Permanente, CVS, HealthPartners and other health care insurer/providers.
However in health care these cut several ways. Pharmacy retailing is different from hospital operation is different from administering Tricare, the federal military health program or Medicare Advantage plans. Market relationships between the varied services and their providers, and their contract customers, employee benefit plans for example, skew options greatly.
So how do oligopolies come about? And what routes lead to market power?
One is “vertical integration,” as in the steel industry when a company owns not only the steel mill, but also the iron and coal mines, limestone quarries, steamships, barbed wire factories and retail warehouses. The taconite mine in Mountain Iron, Minn., owned by U.S. Steel was one end of a vertical chain, the humongous USS warehouse standing for decades at University Avenue and MN 280 was the other.
Such full-chain companies did not start that way. At some point a well-managed and capitalized firm bought up suppliers and customers.
“Horizontal integration” is another possible structure. One auto dealer buys up other dealers in their area, then branches to adjoining states. One independent hospital merges with another. Five single-practice ENTs form a clinic.
At times, both horizontal and vertical mergers occur. A century ago, the state of South Dakota built its own Portland cement plant to combat price abuses by private cement companies. Twenty years ago a Mexican-owned multinational cement producer bought it and promptly started buying up small family-owned ready-mixed concrete plants and precast concrete products factories, methodically working its way east along I-90. The federal government and that of South Dakota looked the other way. A Portland cement manufacturer buying up one concrete plant is vertical integration — it then reaching out to buy others is horizontal acquisition.
“Conglomerate” mergers are a third form in which seemingly unrelated businesses are brought into one corporation. A fad of the 1960s, conglomerates included Gulf & Western, an auto bumper manufacturer that eventually owned Paramount Pictures, Schrafft’s candies, Sega video games and a cement plant. Auto components maker Tenneco was a gas pipeline operator that acquired a nuclear aircraft carrier builder and J.I. Case farm equipment.
Supposedly there was “synergy” in conglomeration so that the whole would be more than the sum of highly unrelated parts. That proved not true. Yet large multipronged health corporations such as UnitedHealth incorporate some of their characteristics.
Health sector behemoths coalesced both horizontally and vertically. Doctor’s practices became clinics that became multi-clinic regional practices. Urban hospitals merged and then were acquired by statewide or multistate chains. Competing insurers, often originally established by providers, merged and then bought up hospitals and clinics. They took on administering federal activities like Medicare Advantage plans or Tricare. They bought pharmacies and “pharmacy benefit managers” and drug manufacturers.
This takes us from Bain’s understanding of “structure” to that of “conduct.” What business practices do such huge entities follow? Search for “largest health companies.” Then search them one by one. You will get lists of alleged sins, court decisions and consent decrees. Do understand, however, that contentious issues in health have always existed.
What about “performance?” Consumers and politicians focus on abuses in pricing or poor service by firms with market power and nothing to lose. Economists also look for waste in use of resources when there is little competition, poor quality control and lack of innovation.
Our country has amazing medical technologies and treatments, but mediocre health outcomes compared to other industrialized nations. We spend over 16% of the value of total output on health care, a third higher fraction than the next 10 highest nations. This 4%-of-GDP excess effectively is a tax on our economy. That is twice as big as the corporate income tax. It includes money transferred to health care business owners and money simply flushed down drains.
If we had never let our health care sector become so dominated by such large entities, we would be better off. But we did. It is much harder to break up established monopolies and oligopolies than to prevent their forming. First and foremost, there has to be political will.
Yet politicians in our great-grandparents’ generation did break up Standard Oil, International Harvester and sundry combinations of railroads. Bill Clinton’s Justice Department was within weeks of splitting Microsoft in two when the incoming George W. Bush administration ended the effort. The feds are now looking at Google in an ongoing antitrust effort targeting market dominance of internet search.
Reform and restructuring are daunting. Our politics are an ineffective mess. However, we have a history of success with bi-partisan commissions of experts and retired politicians, such as the 1983 Greenspan Commission to overhaul Social Security or the 9/11 Commission of five Republicans and five Democrats. How about we set up a similar commission for health care, including antitrust experts, and give it ample staff and budget. Then hope that gives responsible people in the two parties enough cover to get something done.
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St. Paul economist and writer Edward Lotterman can be reached at stpaul@edlotterman.com.
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