Charles River Associates analysis of the AMA study of health insurance markets

Executive Summary

Since representative Thomas Campbell (R-CA) introduced the “Quality Health Care Coalition Act of 1999” (H.R. 1304) during the 106th Congress, attempts to enact physician antitrust waiver legislation at both the federal and state levels have generated considerable debate. The American Medical Association recently commissioned an evaluation of concentration in health insurance markets as part of an attempt to regenerate interest in waiver legislation.

Although the report purports to be “A Comprehensive Study of US Markets,¹” the scope of the report is actually quite limited. Review of the competitive concerns raised by the AMA report reveals that it has misinterpreted or ignored important market dynamics. A more complete analysis demonstrates the effectiveness of the market in ensuring competition among insurers both as sellers of insurance and purchasers of physician services. In addition, regulatory intervention is available to correct any weakness in the market. The concentration measures reported by the AMA are misleading or inappropriate for several reasons:

  Market Definition: The AMA reports concentration measures using overly narrow product and geographic market definitions, leading to an exaggeration of health insurance concentration levels.

  Inaccurate Depiction of Merger Guidelines: The AMA report ignores important determinants of competition described in the Department of Justice (DOJ)/Federal Trade Commission (FTC) Horizontal Merger Guidelines such as potential entry, merger efficiencies, and factors hindering anticompetitive behavior.

  Failure to Measure Competition in Physician Services: The AMA report omits any analysis of the market for physician services, instead drawing inappropriate connections between health insurance concentration levels and competition by managed care organizations in the purchase of physician services.

In focusing solely on market concentration among HMOs and PPOs, the AMA's analysis ignores a number of significant characteristics of the market dynamics that shape current interactions between managed care plans and physicians. These include:

  Fierce Competition in Health Insurance: Competition among health insurers remains fierce, characterized by multiple large competitors with marginal profits. Ease of entry into new markets and expansion in existing markets by health insurers assures that such competition is maintained.

  Changing Healthcare Environment: The shift in consumer preferences toward broad provider networks and decreased utilization controls has given physicians the upper hand in contract negotiations.

  Alternative Revenue Sources for Physicians: Physicians have alternative sources of revenue that remain unaffected by negotiations with managed care organizations (MCOs). The average physician practice derives less than half its revenues from managed care contracts, and revenues that are derived from such contracts are spread across multiple insurers.

  Must-have Physicians: Physicians can engage in a variety of legitimate behaviors to make themselves a crucial part of any physician network, thereby enhancing their negotiating position. These “must-have” physicians possess market power of their own in negotiations with insurers.

  Physician Consolidation and Negotiating Power: Consolidation among physicians has produced large health care provider groups that enjoy significant leverage in negotiations with managed care organizations. Several of these provider groups have successfully negotiated rate increases or other conditions with insurers.

  Adequacy of Existing Antitrust Laws: Existing antitrust laws allow physicians substantial leeway in their negotiations with insurers. A review of DOJ and FTC actions indicates that a variety of coordinated arrangements among physicians have been allowed. At the same time, antitrust scrutiny of insurers continues to ensure that competition is maintained.

Fundamentally, the debate regarding physician antitrust waivers requires consideration of two questions. First, what justifies physician antitrust waivers? The AMA study provides no answer, relying only on insurer concentration levels while ignoring existing regulatory scrutiny of health insurers, indications of competitive managed care behavior, and increasing health care provider consolidation. Second, what is the likely outcome of granting antitrust waivers to health care providers? Since such waivers are designed to increase physician leverage over health plans, it is reasonable to infer that health care costs to insurers would rise. Given the recent substantial increase in health insurance premiums, any policy that threatens to add another source of cost increases to already spiraling health care inflation should be considered with extreme caution.

¹: “Competition in Health Insurance: A Comprehensive Study of US Markets.” American Medical Association, November 2001.