Upcoming antitrust case, FTC v. Phoebe Putney Health System — Part 2

On Friday, I posted about FTC v. Phoebe Putney Health System, the interesting upcoming case about the “state action” exception to antitrust law. Today, I’ll discuss an interesting amicus brief in the case, that of a bunch of economists; among the names that caught my eye (because I know something of their work from having studied industrial organization and related subjects in grad school) were Timothy Bresnahan, David Cutler, Gautam Gowrisankaran, and Mark Satterthwaite. The brief was written by Bernie Black of Northwestern University.

The hospital authority, which is the respondent in the case, argues, among other things, that it should get lighter antitrust treatment because, since it’s a nonprofit, we shouldn’t be afraid that they’ll use the merger to engage in antitrust activity. The brief argues:

  • On theoretical grounds, it’s not clear that nonprofits would refrain from exercising their market power by charging higher prices. You could imagine that a nonprofit would only be interested in serving their constituencies at low cost, in which case they might just be able to do so more efficiently after a merger. But nonprofits (that is, the folks who run nonprofits) could also care about other things, like prestige (a Joseph Newhouse paper from 1970 defines this as some combination of size, complexity, and quality). The economists’ brief says: “Prestige-maximizing hospitals will exploit market power by raising prices and using the resulting profits to fund facility growth and technology acquisitions. Thus,
    patients may be harmed if nonprofits obtain market power, particularly if the hospital’s choice of size and technology is not aligned with the preferences of the community.” The same goes if a hospital has “output preference,” some weighted average of profits and output. A paper by Thomas Philipson and Richard Posner shows (again, in the words of the economists’ brief) that “competition among such nonprofit firms will only maximize social welfare if nonprofit firms have exactly the same preferences as the community. They also show that nonprofit firms will exploit increased market power by increasing prices, just as a for-profit firm would.” So theory is ambiguous on whether we should expect merging nonprofits to exercise their market power.
  • How about empirics? “[N]early all studies that account for ownership form find that nonprofit hospitals exercise market power by raising prices.” The brief discusses a number of pieces of evidence. First, there are a few case studies of the effect of specific hospital mergers on prices. Second, there’s some evidence that post-merger hospitals have greater bargaining leverage, which they use to raise prices. Third, there are a few detailed models of competition in hospital markets which allow us “to empirically examine whether nonprofits with more bargaining leverage charge higher prices.” “All three studies find no difference in the extent to which nonprofits and for-profits exploit their ability to raise prices. These analyses provide further, strong evidence against lax antitrust scrutiny of nonprofits.” (One contrary study, by William Lynk, distinguished.)
  • How about the possibility of a merger leading to efficiencies? In general, this can be true; but for hospitals, the evidence is mixed, and according to the brief, “the most convincing evidence” is that for savings, you need actual integration of functions, not just combined ownership.
  • How about the argument that a merged (and more profitable) hospital will be able to afford more uncompensated care? First, “[t]he empirical evidence is that this does not happen in any systematic fashion.” Second, greater uncompensated care for some, if it happens, will be at the expense of higher prices for others. And third, what with Obamacare and all, there should be fewer uninsured people, so the need to care about uncompensated care should be less.

As I said earlier, I’m far from being an antitrust hawk; quite the opposite. But even less do I like a regime that treats government actors more charitably than private actors, thus providing incentives to move more activities into the more antitrust-immune public sector. This economists’ brief doesn’t address the public-private aspect, but it does address the for-profit/nonprofit aspect. And the evidence on how nonprofits act seems to be mixed enough that it’s unclear that a more lax antitrust regime is justified for nonprofits; certainly, it seems wrong to conclude that nonprofits will systematically act in ways that are more pro-consumer than their for-profit counterparts.