Regulators use new 'travel cost/models in merger enforcement
Jul 26, 2013
The antitrust agencies – the Federal Trade Commission’s (FTC) Bureau of Competition and Department of Justice’s (DoJ) Antitrust Division – are on a roll. After a decade of losses, they have successfully challenged seven hospital mergers. While their goal remains the same – protecting competition between hospitals for preferred spots in payer networks – how they go about meeting it has changed. And that change appears to be fueling a more aggressive posture toward hospital mergers.
The agencies now use “travel cost” models to analyze hospital mergers with the result that they are finding bigger merger effects in smaller markets. The term “travel cost” comes from environmental economics, where similar models are used to evaluate pollution abatement programs. The agencies refer to the model as “hospital merger simulation,” “willingness to pay,” or “patient choice.”
Although the agencies are careful to qualify their public statements – that the methodology is just one of many enforcement tools they use, and that any model must “fit” the commercial realities of a particular case – the new methodology seems to be behind a number of enforcement decisions. How did we get here? In 2002, after seven straight unsuccessful merger challenges, then-FTC Chairman Timothy Muris announced that the agency would study consummated mergers to gain a better understanding of how hospitals compete and how mergers change that competition. About the same time, the agencies also began to develop formal models of the bargaining between health plans and hospitals to evaluate hospital mergers. In these models, a hospital’s bargaining power is derived from its location and from cost of travel time for prospective patients. How the travel cost methodology works. Since most medical care in the United States is covered by third-party insurance, out-of-pocket patient expenses are only a fraction (sometimes zero) of the price. To infer value, economists use travel costs as a proxy for the “price” that consumers pay to consume hospital services. In other words, the value of a hospital to a patient is determined, in part, by how far patients are willing to travel to get to it.
To implement the methodology, economists first estimate a “choice model” that determines the probability that a particular patient goes to a particular hospital. The choice probabilities are determined by both patient and hospital characteristics, and they typically vary with travel time (patients prefer closer hospitals), with quality (patients prefer hospitals with lower mortality and morbidity risk), by acuity (patients undergoing elective surgery are willing to travel further), and by political and geographic boundaries (patients are reluctant to cross state lines or rivers).
The choice model determines the value of a particular hospital to a health plan’s network by calculating the “harm” to consumers if the hospital declines to participate in a network, thereby removing it as a choice for patients. The methodology measures this harm in terms of an individual’s “willingness to pay” for a given hospital, which is measured in minutes of travel time.
To convert the bargaining power of a hospital, measured in minutes of travel time, into a monetary value, the agencies relate observed prices for hospital services to the measures of bargaining power. Because the bargaining power (in minutes) is small relative to the price for the service, the imputed travel cost can be quite large; one estimate is in excess of $125 per minute. This is well above the value of time typically used in travel cost studies of environmental harm (about $25 per hour). The sensitivity of h...
Topic: Advocacy and Public Policy