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Everyone's heard of "death panels" it seems. But what the heck is the Herfindahl-Hirschman Index? And what does it have to do with health care reform?
Well, before I explain it precisely, let me just start off by comparing to death panels. First off, the Herfindahl-Hirschman Index exists. Death panels do not. Second, death panels go well with Carmina Burana. The Herfindahl-Hirschman Index? Not so much. Maybe a Bach Fugue. Or Music For 18 Musicians. Third, the Herfindahl-Hirschman Index actually does have something to do with health care reform. Death panels do not.
Okay, I know the suspense is killing you. So what is the Herfindahl-Hirschman Index, anyway? Simple: it's a measure of market concentration, which allows us quantify precisely how concentrated a market is. You take the market share (percentage) of each participant in a given market, and square it. You add up all the squares and that's the Herfindahl-Hirschman Index (or "HHI" for short, now that I'm in demystification mode.). If there are 100 market participants, all with an equal 1% share in the market, the HHI is 100. If there's just one company-a complete monopoly, the HHI is 10,000. If there's 10 companies each with an equal 10% share, the HHI is 1,000. But the HHI allows us to compare any configuration, not just these easy-to-describe cases. (I first learned about the HHI last December; I'll tell a little story about that at the end of this diary.)
The Federal Trade Commission and the Department of Justice Anti-Trust Division regard markets with an HHI of less than 1,000 as "competitive", those with HHI's of more than 1,000, but less than 1,800 as "concentrated," and those with an HHI of 1,800 or more as "highly concentrated." A 2007 report by the AMA, "Competition in health insurance: A comprehensive study of U.S. markets (pdf)," covering 44 states and 313 Metropolitan Statistical Areas (MSAs) found that virtually all the combined PPO & HMO markets in country were highly concentrated. (As were the PPO and HMO markets considered separately.) Here's a chart I generated of the state markets:
And here are the MSAs:
The extreme concentration shown in these charts is a clear and compelling reason why there's a need for a public option to ensure the existence of a genuine competitive market.
More background and information from the AMA survey on the flip.
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The report explains government use of the HHI as follows:
HHI analysis
The 1997 Federal Trade Commission (FTC)/DOJ Horizontal Merger Guidelines (1997 Merger Guidelines) define market concentration as measured by the HHI as follows: - Markets with an HHI less than 1,000 are "not concentrated." The DOJ and FTC will generally not restrict merger activity in markets where the post-merger HHI is less than 1,000.
- Markets with an HHI between 1,000 and 1,800 are "concentrated." Under the 1997 Merger Guidelines, a merger in these markets that raises the HHI by more than 100 points may raise significant competitive concerns.
- Markets with an HHI above 1,800 are "highly concentrated." Under the 1997 Merger Guidelines, a merger in these markets that raises the HHI by more than 50 points may raise significant competitive concerns, and mergers that raise the HHI more than 100 points are presumed to be anti-competitive.
Under the 1997 Merger Guidelines, barriers to market entry and other qualitative factors are also considered to determine whether it is likely that a merger will result in market power for the merged entity.
In summarizing their findings, the report first addressed concentration in metro areas, which is what actually describes the market as individuals, families and small businesses experience it directly:
A. Metropolitan areas
This edition of the study analyzed 313 MSAs. This compares with 292 metropolitan areas in the 2005 study, 84 in the 2003 study, 70 in the 2002 study, and 40 in the 2001 study.
In terms of market concentration (HHI), the study found the following: - In the combined HMO/PPO product market, 96 percent (299) of the MSAs are highly concentrated (HHI>1,800), applying the 1997 Merger Guidelines.
- In the HMO product market, 99 percent (309) of the MSAs are highly concentrated (HHI>1,800), applying the 1997 Merger Guidelines.
- In the PPO product market, 100 percent (313) of the MSAs are highly concentrated (HHI>1,800), applying the 1997 Merger Guidelines.
In addition to the HHI, the study also included an analysis of dominant individual insurers. The main findings were summarized as follows:
B. Market share
In terms of market share of individual insurers, the study found the following for each product market:
HMO/PPO product market
- In 96 percent (299) of the MSAs, at least one insurer has a combined HMO/PPO market share of 30 percent or greater.
- In 64 percent (200) of the MSAs, at least one insurer has a combined HMO/PPO market share of 50 percent or greater.
- In 24 percent (74) of the MSAs, at least one insurer has a combined HMO/PPO market share of 70 percent or greater.
- In 5 percent (15) of the MSAs, at least one insurer has a combined HMO/PPO market share of 90 percent or greater.
HMO product market
- In 98 percent (306) of the MSAs, at least one insurer has a HMO market share of 30 percent or greater.
- In 64 percent (201) of the MSAs, at least one insurer has a HMO market share of 50 percent or greater.
- In 37 percent (117) of the MSAs, at least one insurer has a HMO market share of 70 percent or greater.
- In 16 percent (49) of the MSAs, at least one insurer has a HMO market share of 90 percent or greater.
PPO product market
- In 97 percent (304) of the MSAs, at least one insurer has a PPO market share of 30 percent or greater.
- In 76 percent (238) of the MSAs, at least one insurer has a PPO market share of 50 percent or greater.
- In 36 percent (112) of the MSAs, at least one insurer has a PPO market share of 70 percent or greater.
- In 9 percent (28) of the MSAs, at least one insurer has a PPO market share of 90 percent or greater.
In the tables below, I present the data from all 44 states covered, along with the most- and least-concentrated MSA in each state.
Those are truly astonishing levels of concentration--levels that most other industries could only dream of. In light of all the above, there should be no doubt whatsoever that the health insurance market in America is anything but a competitive free market.
Indeed, this was not the first time the AMA had conducted such a survey. And matters are only getting worse, as they noted:
Over the five years since the AMA's first study, the country's largest health insurers have continued to pursue aggressive acquisition strategies. The largest insurer, WellPoint Inc. (formed from the merger of Anthem Inc. and WellPoint Health Networks), has acquired 11 health insurers since 2000. The second-largest health insurer, UnitedHealth Group (United) has also acquired 11 health insurers since 2000.
To put this in perspective, in 2000, the two largest health insurers, Aetna and United, had a total membership of 32 million lives. As a result of mergers and acquisitions since 2000, the top two insurers today, WellPoint and United, each have memberships, respectively, of 34 million and 33 million, totaling more than 67 million covered lives. Together, WellPoint and United control 36 percent of the national market for commercial health insurance. In 2004 and 2005, 28 mergers valued at a total of $53.8 billion were completed or announced, which exceeded the value of all the deals completed in the previous eight years. (Corporate Research Group, The Managed Care M&A Explosion, 2005).
Observers predict that large health insurers will continue to acquire their smaller competitors. WellPoint's new chief executive officer stated in February that mergers will be one of the key drivers of WellPoint's future growth. Further, in March, United announced its proposed acquisition of Sierra Health Services, the largest health plan in Nevada. The AMA has asked the U.S. Department of Justice (DOJ) to block the merger, because if the merger is approved United will control 56 percent of the Nevada marketplace (compared with its current 11 percent market share).
Indeed, they've been at war with the FTC and the DOJ for a while now. In March 2005, former AMA President Donald J. Palmisano, M.D., J.D. wrote:
Health insurance markets out of whack
The American Medical Association (AMA) has a very different perspective on health insurance markets from that reflected in the Federal Trade Commission (FTC)/Department of Justice (DOJ) report, A Dose of Competition, and in the January 2005 Physician News Digest interview with Mark Botti, an attorney with the DOJ. Our perspective is based on objective data and the experience of practicing physicians.
The AMA is very concerned that federal regulators continue to turn a blind eye toward the reality that in much of the country health insurance markets are not competitive. Health insurers have amassed significant market power through mergers and acquisitions but have received minimal scrutiny. Mr. Botti himself can point to just one instance where the federal agencies have challenged a health insurer merger: the 1999 Aetna/Prudential merger.
In contrast, physicians have been placed under a far higher level of scrutiny than is warranted by their comparative economic strength in today's market. In April 2002, the FTC announced its intention to "find and bring" cases against physicians. Between April 2002 and December 2004, it brought 21 complaints against physician entities. Of these, 20 entities decided to settle rather than engage in a protracted and financially devastating legal battle with the FTC. This scrutiny is misplaced given that physicians are by far the least consolidated component of the health insurance industry.
It is important to remember that physicians play a critical role as patient advocates in an environment where health insurers have limited accountability for decisions that impact patients. The physicians' role as patient advocate can be undermined when they have no leverage in negotiating contracts with health insurers. The AMA has found that in much of the country physicians face a true David and Goliath battle when dealing with health insurers
This article was published in the Physicians News Digest shortly after an earlier edition of the 2007 study was published. The AMA is hardly the most progressive organization around. But they have considerable clout and they make an excellent point here--one that is certainly not just in their own self-interest. And yet, how many here have ever even heard about the HHI?
In general, we know about this problem only anecdotally, when this study shows that there is overwhelming data available. Why isn't that data part of the debate?
Could it be because including that data in the debate would simply end it?
How I Learned About The Herfindahl-Hirschman Index
I learned about the Herfindahl-Hirschman as a result of my coverage of air pollution issues around the ports of LA and Long Beach. Over the past several years, the two ports, under great public pressure over a period of many years, have begun working on a joint plan to reduce air pollution. It's called the "Clean Air Action Plan." One of the most important and controversial components of this is their plans to reduce truck pollution.
I say "plans" because the two ports have passed separate plans which share a number of elements in common, while differing in a number of significant ways. Even though the heart of the plans is a tremendous give-away subsidizing the mother of all "cash for clunkers" programs, the trucking industry is fighting it tooth and nail, and has had the support of a wide range of powerful allies, including the Federal Maritime Commission (FMC), which has not gone to court in a truck-related case since the early 1970s--long before the current law governing its authority was passed. To say they know nothing about truck-related decisionmaking is an understatement--they "know" plenty of things that just aren't so.
One of things they "know" is that the combined plans of the two ports would create a dangerously concentrated, uncompetitive market that would drive up trucking costs. Of course, their plans would drive up trucking costs, because the truckers are woefully underpaid, lacking any sort of bargaining power, which is one reason why the trucks they drive are the dirtiest trucks on the road. Changes in the plans would undoubtedly drive up costs--but not because they would decrease competition. And it was in a deposition for the ports in fighting the FMC's court filing that I first learned of the HHI.
The FMC's chief economist, Roy Pearson, claimed that "key aspects" of the ports' to plans "will likely transform the drayage [port trucking] market from a perfectly competitive market to a severely constrained market."
Since we're talking about tens of thousands of truckers--most of them mis-classified as "independent owner operators", working for over a thousand different trucking companies, the claim is utterly ludicrous, once you learn about the HHI.
The Port of LA's plan was specifically intended to consolidate the trucking market--for the simple reason that under-capitalized firms could not be counted on to maintain new trucks, even if the initial purchases were very heavily subsidized. A second, equally important reason is that firms must reach a certain size before they have enough business to ensure that drivers will not make a great number of trips carrying no load, thus polluting the air needlessly. But reaching the size for a company to operate successfully would still leave room for hundreds of companies--and a market with hundreds of competitors simply cannot become concentrated in the way that the HHI measures, unless anti-trust regulations are purposely neglected, and a few large players are allowed to dominate. Merely reducing the number of firms from ~1000 to ~200 would have no anti-competitive effect on pricing at all, according to the government's own guidelines, chief among which are the HHI and instructions for employing its guidance.
And that's how I learned about the HHI, through a corporate scam, backed by Bush Administration appointees, which tried to allege a dangerous lack of competition would result, where the HHI clearly indicated that that was utterly absurd.
The situation with health care plan markets is exactly the opposite--it's hyper-concentrated, very anti-competitive, and the big boys are fighting tooth and nail precisely to keep it that way.
In both cases, the HHI is a readily-understandable tool for separating truth from fiction.
Ain't math grand? |
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