Competition Policy and Organizational Fragmentation in Health Care.pdf

Electronic copy available at: /abstract=1395792 Competition Policy and Organizational Fragmentation in Health Care Thomas (Tim) Greaney* Once upon a time and a very good time it was, advocates for market based approaches to health policy had a coherent story to tell. Cost and quality would remain suboptimal as long as fee for service medicine persisted and the myriad market imperfections that impede efficiency went unchecked. Things could be righted however by adopting principles associated with managed care together with pursuing sensible antitrust enforcement and government deregulation to clear away the private and regulatory underbrush obstructing market forces. Economic theorists and policy experts agreed that these steps would effectively address information, agency, and moral hazard problems and begin to glue together the pieces of our fragmented delivery system. And, for a while, things seemed to work out as promised. Providers began to reorganize into firms and other integrating arrangements and health insurers adopted financial and contractual measures designed to align provider incentives with consumer needs. Regulators directed policies at removing obstacles to competition and antitrust enforcers sought to encourage efficient consolidation while blocking cartels and provider oligopolies. Spiraling costs leveled off for a while and both payment systems and provider organizations began to adapt to market forces. But things changed. A powerful backlash against managed care (precipitated in part by insurers’ short-sighted and sometimes abusive tactics) gave rise to regulations that undermined some of the methods managed care had used effectively while payors voluntarily withdrew from active involvement in care management. Managed care and the competition-enhancing practices it had begun to spawn -- integration and rivalry-- unraveled. Several important lessons for competition policy emerge from the demise of