Abstract

http://ssrn.com/abstract=2137227
 


 



Healthcare Intermediaries: Competition and Healthcare Policy at Loggerheads?


Diana L. Moss


American Antitrust Institute

May 7, 2012

American Antitrust Institute Working Paper

Abstract:     
Competitive concerns in the U.S. healthcare industry have focused largely to date on providers, such as large hospital and managed care organizations. Recent attention has been drawn, however, to potential competitive concerns in other important parts of the supply chain, namely intermediaries or “middlemen.” Of particular interest are Pharmacy Benefit Managers (PBMs) and buying groups such as Group Purchasing Organizations (GPOs) and Physician Buying Groups (PBGs). Healthcare intermediaries can enhance economic efficiency by achieving scale and scope economies through access to larger product portfolios and multiple distribution networks. Buying group intermediaries can also reduce transactions costs by negotiating prices on behalf of multiple buyers, thus aggregating demand and leveraging buying power to obtain more favorable pricing for health plans, hospitals, and physician practices. In doing so, buying groups can potentially counteract the exercise of seller market power elsewhere in the supply chain. Intermediaries thus offer, at least in principle, benefits to competition and consumers.

Intermediary markets, however, have undergone fundamental changes, and those changes may provide a powerful motivation for re-examining the conventional wisdom. For example, mergers of intermediaries drive higher levels of market concentration and create dominant firms. Vertical integration also extends the influence of some intermediaries to other levels in the supply chain. Some intermediary markets may therefore be conducive to anticompetitive outcomes that are not outweighed by claimed efficiencies. Yet federal antitrust authorities generally have not challenged intermediary conduct or consolidation, much like the merger approved by the Federal Trade Commission (FTC) in April 2012 between the two largest PBMs, Express Scripts and Medco.

The foregoing developments in intermediary markets lay the groundwork for growing competitive concerns, including exclusionary practices and anticompetitive agreements. Anticompetitive practices impair beneficial vertical and horizontal competition while unduly influencing outcomes in markets upstream and downstream of intermediaries, many of which are highly concentrated. A complex overlay of legislated safe harbors, antitrust exemptions, and tailored antitrust policies governing the evaluation of healthcare intermediaries exacerbate competitive concerns.

Intermediary conduct that is potentially designed to constrain competition affects a number of participants in the healthcare supply chain. Smaller manufacturers of pharmaceuticals, medical devices, and medical supplies, smaller distributors, and independent pharmacies are particularly exposed. Intermediate consumers of medical products (e.g., hospitals and physician practices) bear the adverse effects of antitcompetitive practices, which are passed on to insurers and, in turn, to the ultimate consumer or patient. The potential harm that flows from exclusionary practices is reflected in the traditional antitrust metrics of higher prices, restricted output, lower quality, less choice, barriers to entry, and slower innovation.But it is also apparent in more indirect ways that threaten to impair the achievement of healthcare policy goals such as affordable healthcare, choice in medical products, a stable supply chain, and diversity of supply.

This American Antitrust Institute (AAI) White Paper examines the competitive role of healthcare intermediaries. These entities have become increasingly powerful and entrenched in the supply chain, a fact that has not escaped the attention of Congress, regulators, and state antitrust enforcers. The White Paper does not conclude that intermediary practices are anticompetitive – only thorough antitrust investigations can do that. However, it does articulate, using examples, the reasons that the conduct of certain healthcare intermediaries may be potentially detrimental to competition and consumers. Section II examines major features of intermediaries that are relevant to the analysis. Section III examines the intersection between public policy concerns and competition issues in healthcare. Section IV gives a brief overview of antitrust enforcement issues and the state of the law involving bundled discounts and exclusive contracts. To illustrate potential competitive and public policy concerns, Section V presents three case studies of healthcare intermediaries: (1) pediatric vaccines and PBGs, (2) drug shortages and GPOs, and (3) pharmacy choice and PBMs. Section VI concludes with policy recommendations and suggestions for further study.

Number of Pages in PDF File: 24

Keywords: antitrust, healthcare

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Date posted: August 28, 2012  

Suggested Citation

Moss, Diana L., Healthcare Intermediaries: Competition and Healthcare Policy at Loggerheads? (May 7, 2012). American Antitrust Institute Working Paper. Available at SSRN: http://ssrn.com/abstract=2137227 or http://dx.doi.org/10.2139/ssrn.2137227

Contact Information

Diana L. Moss (Contact Author)
American Antitrust Institute ( email )
P.O. Box 20725
Boulder, CO 80308
United States
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