Earlier this week, Paul Krugman passed along some interesting and relevant analysis about the decision by GE to spin off GE Capital and re-focus on being really good at making stuff.
There are two big lessons from GE’s announcement that it is planning to get out of the finance business. First, the much maligned Dodd-Frank financial reform is doing some real good. ….
GE Capital was a quintessential example of the rise of shadow banking. In most important respects it acted like a bank; it created systemic risks very much like a bank; but it was effectively unregulated, and had to be bailed out through ad hoc arrangements….Dodd-Frank tries to fix the bad incentives by subjecting systemically important financial institutions — SIFIs — to greater oversight, higher capital and liquidity requirements, etc.. And sure enough, what GE is in effect saying is that if we have to compete on a level playing field, if we can’t play the moral hazard game, it’s not worth being in this business. That’s a clear demonstration that reform is having a real effect….
Mike Konczal notes, GE — following in the footsteps of others, notably MetLife — is clearly desperate to get out from under the SIFI designation. It sure looks as if being named a SIFI is indeed what it’s supposed to be, a burden rather than a bonus
SIFI institutions are big and they have market power. They also had implicit subsidies of being too big to fail. Dodd-Frank is attempting to impose reasonable costs on being very large so as to recoup the implied subsidy of being too big to fail as well as minimizing the shrapnel of a TBTF institution exploding.
The medical provider market in the United States is concentrated and getting more concentrated as the number of hospital merges is increasing and more importantly, local vertical integration is happening all over the place as hospitals buy up specialist offices, primary care facilities, rehab facilities and then start insurance companies to lock their members in. Consolidated providers and fragmented payers means the price paid per unit of service delivered will be far closer to the providers’ ideal point than the payer’s ideal point. That applies to Medicare, Mediaid, CHIP, Exchange and every employer group plan.
Being too big where providers have significant market power should be counter-balanced. Last October I proposed the following:
The policy change would be to tie universal Medicare/Medicaid/CHIP reimbursement to a provider’s contribution to a set of regional HHI indexes. A three person PCP office has absolutely no market power so they would get full regular government reimbursment. A chain of hospitals that controls 30% of the regional hospital beds has some market power might see a 1.5% decrease in general govenrment reimbursement. Big City Medical Group which controls 70% of the high end specialists for an HHI contribution of 4,900 points might see a 5% reduction in high end specialty reimbursment for every government paid claim. BCMG which controls 12% of the primary care provider network would see regular reimbursement for primary care codes.
The goal is call the bluff that consolidation is about efficiency instead of capturing more consumer surplus and redistributing it to internal stakeholders and the local BMW dealership. If conslidation truly is an efficient option, a firm that is considering moving from regular reimbursement to a 1.75% penalty HHI index would be clearly demonstrating that they think there is a real efficiency gain to be had instead of monopolistic rent gains. Threshold firms would have an incentive to stay at their same size or slightly decrease, thus improving overall market competition on the provider side.
If there are real gains to be made from consolidation, then a 1% reduction in government reimbursement would be a worthwhile price to pay. If the gains are purely market power gains, then a 1% reduction in reimbursement will persuade some of the potentially consolidating providers to not consolidate. Market power will be more accurately priced.
boatboy_srq
Wouldn’t this be a good segue to a medical equivalent? SIMI instead of SIFI.
Also, is it worth revisiting ACA at this point to accommodate the electronic records costs? If the smaller institutions (as you mentioned previously) are facing roughly the same costs as the big players, allowing for that in the cost ratios may be defensible.
pseudonymous in nc
That’s a really smart reimbursement proposal that asks the question about whether consolidation is about efficiency, or rigging prices or jiggling which entity gets to bill for them. I can see there being advantages, for instance, in specialists being able to use BCMG’s labs or kit, but if it ends up on the bill as an outpatient hospital service instead of under the specialist copay, then it’s transparently a way to juice insurers and patients.
MattF
Interesting NYT article about a ‘gap’ in health care institutions between hospitals and pumped-up nursing homes.
Mnemosyne (tablet)
@boatboy_srq:
Personally, I would love to see the dreaded government mandate for EMRs saying that everyone has to use the same system, because having a dozen different systems that can’t talk to each other defeats the purpose. I would then be perfectly happy alloting money to smaller facilities and practices that are having a hard time affording the switch. I know, pipe dreams …
japa21
Excellent point. My wife, who retired last year from being an RN in a doctor’s office, viewed this process over several years. When she started there, it was a five doctore office, fully independent. Then it was purchased by a local hospital, along with several other practices. That hospital then bought another hospital and then was bought out by a national hospital conglomerate.
All of this was, for all intents and purposes, supposed to increase efficiency and lower operating costs. What it did do, in reality, was increase the bargaining power and increase insurance company reimbursements, as it became too critical a provider in the area to not have under contract.
I have no doubt there were efficiency and cost benefits. What it ultimately did, however, was increase the bottom line. A 1-2% drop in reimbursement would basically have still left them with either a more minimal icnrease in profit or status quo.
burnspbesq
Wouldn’t it be simpler to just, you know, enforce the existing antitrust laws?
Stop laughing, dammit!
NonyNony
@burnspbesq: If I didn’t laugh I’d cry.
Fair Economist
Oligopoly power is worth more that 1% in the medical business, where there is a lot of negotiating and the price range is enormous. We switched from a PPO to an HSA this because of a big bribe from my husband’s company, and it was a good switch according to my estimates. But, it turns out the HSA has much laxer price negotiations, WAY more than 1%, so we’re going to come out behind. And it’s even the same company!
But, 1% is better than nothing, and it could be increased in the future.
Richard Mayhew
@burnspbesq: Yep, or have the FTC default to a negative stance on all major medical consolidation instead of the default assumption towards approval.
@Fair Economist: I figure it would be a sliding scale, where dominant local providers in heavily concentrated markets (say HHI above 5,000, with Provider A’s HHI score of 3,000) would have a penalty far larger than Provider B in the same market at an HHI score of 200, and both would be paid at a lower rate than a provider group in Market #2 where the market HHI is 1,200 and the Lil Prov Group HHI is 77
I don’t have the details figured out, my boss would not want be to engage in a chasing down this shiny object for the next six months on company time to get a working model…
a hip hop artist from Idaho (fka Bella Q)
@burnspbesq:
@NonyNony:
My thoughts precisely. With a little practice, you have a promising future on the sad comedy circuit, burnsie.
Roger Moore
@burnspbesq:
The problem is that most anti-trust laws are looking at state or national scale, while the consolidation is most important at the local scale.
One question I have about this is where integrated payer/provider networks fit into the picture. They actually need some kind of size to work, and this might discourage that.
Richard Mayhew
@Roger Moore: Scale in and of itself is not bad, it is just when a single entity is the dominant entity in a market we have systemic issues. North Dakota might not be big enough to support integrated payer-providers that would get paid full rate, but if the integrated payer-provider system can be profitable at 98.24% regular reimbursement, then go ahead…
And honestly, there are numerous integrated payer-providers at the 100,000 to 250,000 insured covered lives level with under 10 hospitals, so some scale is needed, but they don’t need to own a market to succeed (see Kaiser, see Geissenger etc fpr IPPs that don’t have to dominate a market to work well)
boatboy_srq
@Mnemosyne (tablet): I’m OK with multiple interoperable systems: deciding on a single system could take longer than sorting out the hooks multiple systems would need in each other’s systems. We already have a useful base document type (PDF) which could be the basis for the interoperability. Technology (in the absolute) changes much faster than medical-specific tech: allowing flexibility here will only help.
schrodinger's cat
Its good news that GE has spun off its financial arm but how well is the private equity space regulated? Is not Blackstone now too big to fail?
pseudonymous in nc
@Fair Economist:
American health insurance choices, where you’re going to get screwed one way or another, and you only work out where you’re getting screwed after the fact.
liberal
Would that it were so.