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Cogent Comments On The Tufts/Harvard Pilgrim Merger

Just a sampling of favorites from the wonkosphere:

Harvard Business School professor Regina Herzlinger, author of "Who Killed Health Care?," speaking on WBUR this morning about the danger of an arms race between insurers and hospitals:

“Here’s what happens: An 800-pound gorilla comes into your neighborhood and says, ‘Unless you pay me some money, I’m going to beat you up.’ So what are you going to do? You’re going to become an 800-pound gorilla yourself and then when that big insurer shows up and says, ‘Cut your prices or else,’ you’re going to say, ‘Or else what? I’m just as big as you. What the heck are you going to do to me?’"

Herzlinger pointed to a 2009 study of consolidation in other states. The National Bureau of Economic Research published an analysis showing that premiums increased 7 percent after two big health insurers merged. That’s because hospitals responded by banding together, and they were able to charge more for their procedures. So the insurers may want to bring down costs, but she said joining forces isn’t going to do it.


Paul Levy in Not Running A Hospital:A call for state-regulated transparency

Beyond survival, the Board members have to believe that the financial results for the combined entity would be greater than for each one standing alone. Some improvement in that regard can come from eliminating redundant positions and otherwise reducing administrative costs, and some can come from economies of scale in electronic processing of claims and payments. Some would likely come from increased leverage over providers, who will no longer be able to play off one firm against the other.

But what is to prevent some improvement from being derived by the market power of a duopoly, an improvement that would be solely based on extracting more from consumers than would otherwise be the case?

The answer here, as in other industries, must be state regulation....In essence, the insurance companies in the state have now positioned themselves as public utilities. The secrecy of rates, charges, premiums, actuarial methodology, and the like that have characterized the system have no place in a duopoly environment. To extent current law does not permit this kind of openness, the state should act to make it a condition for the future.

Steve Poftak of the Pioneer Institute: From a Moderately to Highly Concentrated Market

Steve links to the picture below of the state insurance market from the Massachusetts Division of Health Care Finance and Policy. And he writes:

If you look at the existing market (see slide 7), its already pretty concentrated, with BCBS at 41%, HP at 14% and Tufts at 13%. Taking all the competitors into account, the market has an HHI score of 2164, meeting the FTC’s definition of moderately concentrated. The merger will result in a revised score of 2509, a jump of 345 that moves the market into the ‘highly concentrated’ category.
To be fair, most state health insurance markets are pretty highly concentrated. The AMA does a regular concentration analysis of each state’s market. Their numbers differ from mine (see explainer below) but should be consistent internally. In some states, like Maine and Alabama, their health insurance market is a practical monopoly with a single insurer holding close to 80% of the policies in the state. Massachusetts still won’t be close to that, even after a merger.
My point is not to defend or criticize the merger, rather its to note that a concentrated industry will become more concentrated, although still at lower levels than many other states. Implications for cost control and consumers? Don’t know.

This program aired on January 26, 2011. The audio for this program is not available.

Carey Goldberg Twitter Editor, CommonHealth
Carey Goldberg is the editor of WBUR's CommonHealth blog.

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