Hospitals vs. insurers: oligopsonies counter oligopolies
Some notes from a 2002 article from that noted "radical rag," the Wall Street Journal. The authors were Yochi J. Dreazen, Greg Ip and Nicholas Kulish.
An oligopoly, a market in which a few sellers offer similar products, isn't always avoidable or undesirable. It can produce efficiencies that allow firms to offer consumers better products at lower prices and lead to industry-wide standards that make life smooth for consumers.
But an oligopoly can allow big businesses to make big profits at the expense of consumers and economic progress. It can destroy the competition that is vital to preventing firms from pushing prices well above costs and to forcing companies to change or die. Rates for cable television, for instance, have soared 36%, almost triple the amount of overall inflation, since the industry was deregulated in 1996 and then consolidated in a few big firms. The Organization of Petroleum Exporting Countries is a classic oligopoly. Members manipulate their control over the supply of oil to force consumers to pay prices well above levels at which market forces would otherwise set them.
The authors go on to describe a classic oligopoly versus oligopsony conflict. It starts in the Boston area, where three large insurance companies had managed to grab three-quarters of the market, allowing them to dictate large discounts from the local hospitals. If an individual hospital didn't want to play ball, patients could be sent to another one.
In self-defense, the hospitals started combining, forming a defensive oligopsony.
The most significant was the December 1993 merger of two of the most prestigious, Massachusetts General Hospital and Brigham & Women's -- a combination that created Partners HealthCare System Inc. "In order to increase your leverage in a competitive environment, you need to increase your size," says Richard Averbuch, a spokesman for the Massachusetts Hospital Association. In 1993, metropolitan Boston had 34 separate hospital networks. Today it has 12 -- and life for patients is already changing.
In the fall of 2000, nearly 200,000 of the 900,000 members of one big HMO, Tufts Health Plan, got letters announcing that they would no longer be able to use hospitals or physicians affiliated with Partners. The reason: Tufts wouldn't accept the fee increases Partners wanted. The uproar was enormous. Without Partners, says James Roosevelt Jr., Tufts general counsel, so many HMO members and their employers "would drop us that we wouldn't have a health network anymore." Even people who never used Partners' doctors wanted the option of going to the top teaching hospitals in town in case of a serious illness. "They would switch their health plan even though that wasn't where they normally went for their medical care." Tufts went back to Partners, and agreed to a fee increase of 30% over three years.
The oligopsony stood tall against the oligopoly. The consumers? Well, hey got the health provider they wanted, but doubtless fees went up as well.
