Government Regulation
and Intervention
Part 2
Professor Vivian Ho
Health Economics
This material draws heavily from Santerre & Neun, Health Economics,
Theories, Insights, and Industry Studies, Dryden Press.
Introduction
Causes and consequences of
government intervention in health care.
 Types of government intervention.
 Case studies

– Cigarette taxes.
– Price ceilings on health care services.
– Hospital antitrust litigation.
Types of Government Intervention

Provide public goods.
 Fund medical research.

Correct for externalities
 Tax cigarettes, pollution.

Impose regulations.
Enforce antitrust laws.
Sponsor redistribution
programs.
Operate public
enterprises.
 FDA
 Bar hospital mergers.
 Medicare and Medicaid.



 VA hospitals
Antitrust: Sherman Antitrust Act
Section 1:
Every contract, combination in the form
of trust or otherwise, or conspiracy, in
restraint of trade or commerce among
the several states or with foreign
nations, is hereby declared illegal.


Section 2:
Every person who shall monopolize, or
conspire with any other person or
persons to monopolize any part of the
trade or commerce among the several
states, or with foreign nations, shall be
guilty of a misdemeanor.
The Act prohibits anticompetitive business
practices that promote inefficiency and
inequity in the marketplace, such as:

Price fixing - when business rivals enter
a collusive agreement to refrain from
price competition; fix the price of a good
or service.
 Hospitals
in a given city cannot jointly
establish the price of various hospital
services.

Boycott - agreement among competitors
not to deal with a supplier or a
customer.
 Physicians
in an area can’t collectively
agree to deny services to a particular
managed care organization.

Market allocation - when competitors
agree to compete with one another in
specific market area.
 Hospitals
in the same city can’t collectively
set geographic service boundaries.

Price fixing, boycotting, and market
allocations are illegal per se.
 The
plaintiff must only prove these actions
took place for the defendant to be in
violation of the Act.

In contrast, rule of reason doctrine is
used to evaluate horizontal mergers
under the Act.
 While
horizontal mergers may force price
above the competitive level, they may also
create benefits which could be passed on
to the customer.
Potential benefits of mergers
Economies of scale in production.
 Organizational economies.

– less administrative staff
Better access to technological
innovations.
 The potential anti- and pro-competitive
effects must be weighed by the courts in
determining the social desirability of a
merger.

Antitrust in the health care industry
Is the health care industry subject to as
much anti-competitive behavior as other
industries?
 Will mergers in health care help/harm
consumer welfare?

 Benefits
of non-profit organizations
 Consolidation on the consumer side to
counteract consolidation on the provider
side.
The Government’s View


Prior to the mid-1970s, antitrust was not
widely applied in the health care field,
because members of the medical profession
claimed they were exempt.
1975, Goldfarb v. Virginia State Bar (Supreme
Court)
“The nature of an occupation, standing alone, does
not provide sanctuary from the Sherman Act…nor
is the public service aspect of professional
practice controlling in determining whether
section 1 includes professions.”

1982 - Arizona v. Maricopa Medical
Society

Physicians formed a medical society
which agreed on maximum
reimbursement fees they could be paid
by insurance companies that agree to
send patients.

Plaintiff:
“…periodic upward revisions of the maximum-fee
schedules have the effect of stabilizing and
enhancing the level of actual charges by
physicians.”

Defendant:
“…the schedules impose a meaningful limit on
physicians’ charges…the advance agreement by
doctors to accept the maxima enables the
insurance carriers to calculate more efficiently
the risks they underwrite and therefore serves as
an effective cost-containment mechanism…”

Decision:
“…The per se rule is violated here by a restraint
that tends to provide the same economic
rewards to all practitioners regardless of their
skill, experience, training, or willingness to
employ innovative and difficult procedures in
individual cases. Such a restraint may also
discourage entry into the market and may
deter experimentation and new developments
by new entrepreneurs.”
Antitrust and Hospital Mergers

Traditional Dept. of Justice Analysis
 Define
the product, and challenge mergers
that lead to very high market concentration.
 50% market share by the proposed
merged entity.
 The
DOJ tends to challenge mergers in
rural areas and small cities.
1997: DOJ challenged merger of 2 teaching
hospitals in metropolitan New York.
Long Island Jewish, North Shore
Manhasset.
 New Argument: Unilateral Effects
Analysis.

 A merger
would give the hospitals the
ability to raise the price charged to
managed care networks.
 Managed care networks need a prestigious
teaching hospital as an “anchor.”
Court’s Decision: The DOJ argument
was not credible.
1) LI Jewish and N Shore had many
competitors in the area.
 85%
of their care was primary or
secondary.
 Tertiary care was available in several
teaching hospitals nearby.
2) The market had several other buyers in
addition to managed care.
 Fee-for-service
patients.
 Self-pay patients.
 Physicians who control admissions.
 Medicare and Medicaid.
 Employers.
 Government payers.
3) Managed care executives gave
conflicting testimony on the effects of
the merger.

Is unilateral effects analysis flawed, or
did the DOJ just “goof” in preparing their
argument?
Redistribution
The government often taxes one group
and uses the revenues to subsidize
another. Why?
 Interdependent utility functions.

 Donors
get utility from increasing the
welfare of recipients.

Why is the government involved?
 “free
rider” problem.
Two notions of equity in redistribution
programs

Vertical equity
 “Unequals
should be treated unequally.”
 People who earn more should pay higher
taxes.

Horizontal equity
 “Equals
should be treated equally.”
 Two persons with the same income level
should pay the same in net taxes.
Vertical equity in practice

How much more in taxes should higher
income people pay?

Suppose high income households pay
$4,000 in taxes on average, and low
income households pay $2,000. Is this
equitable?

If the high income household makes
$100,000, they pay a 4% tax.

If the low income household makes
$10,000, they pay a 20% tax.
 The
notion of equity in taxation depends
not just on total tax revenues, but on
income levels and tax rates as well.

In practice, vertical equity is achieved
when the net tax system is sufficiently
progressive.
 Taxes
as a fraction of income rise with
income.
 Federal income tax system.
Other forms of redistribution

Proportional.
 The
fraction of income going to taxes is
constant as income rises.
 The Medicare tax is a fixed % of payroll
income.

Regressive.
 The
fraction of income going to taxes falls
as income rises.
 Sales tax
Implementing redistribution

Supply-side subsidies
 Government
funding aimed at reducing the
costs of producing a consumer good or
service.
 Subsidy to a public hospital.
 Tuition for nurses or doctors.

Potentially violates notion of vertical
equity
 if
all persons have equal access to the
subsidized product.
Demand-side subsidies - government
funding for consumers.
 In-kind: vouchers or reimbursements for
specific services.

 Food

stamps, Medicare, Medicaid
Cash: government-provided income that
people can use at their own discretion.
 AFDC,
Supplemental Security Income
Keep in mind: It is difficult to guarantee
horizontal equity with multiple programs
in operation.
Examining Differences in Drug Prices
– New York Times, Sept 2000
Responding to Market Failures in
Tuberculosis Control
– Science, August 2001
Consumer Groups Accuse U.S. of
Negligence on Food Safety
– The New York Times, October 15, 2002
Back to the Start

Does government intervention correct
for market imperfections, or is it ruled by
special interest groups?
A Final Caveat
Market failure is a necessary, but not
sufficient condition for government
intervention.
 It may cost the government $10m to
correct a problem in the marketplace,
which imposes $8m in damages.
 While markets may fail and impose
societal costs, the costs of government
intervention may be greater.
