Market Concentration and Health Care Economics

Market concentration is the concept that allows different distributions of the shares of various companies’ production within a market. In other words, it is a measure of monopolistic phenomena that helps one to determine the extent to which a single firm has control or dominance within a market. Market power is the extension of this phenomenon and describes the ability of a company to raise prices as a result of its monopoly of the market (in a market where competition is fierce, prices are more likely to fall than they are to rise—unless there is collusion among firms).
Market concentration can be measured by the concentration ratio, which assesses the combined market share of the top companies within a specific industry; share refers to any relevant indicator, such as employment, sales, etc. The Herfindahl-Hirschman Index is one type of market concentration measure and is taken by squaring the percentage of market share of industry companies and adding them. If the index is low, it means there is a lot of competition. If it is high, it means the market is concentrated in the hands of a few companies (Cutler, Morton, 2013). Market power can be measured in a variety of ways, such as by conducting a cross-section regression analysis to see where industry profit rates are; price-concentration studies; auction data, and so on. Mergers, monopolization and collusion are all indicators of market power, too, and measuring these can help determine where the power is. All of these terms relate to the principle of competition because they are, in essence, opposed to it: market concentration and market power are means by which a dominant player can eradicate competition and take the market for itself. Amazon is a good example of this happening today in the retail space. Because it has investors who do not care if the company loses money on every transaction, just so long as it gobbles up market share, the company is able to continue to grow and branch out.
In the health care industry, market power and choice are important concepts that determine the extent to which patients feel they have real options when it comes to obtaining health care. Representatives responsible for crafting legislation to help protect patients and to ensure that the health care industry sees free market competition must also consider the health care companies themselves and their need to be able to produce a profit and operate under the red tape of governmental regulation. It is, without question, a difficult balance to achieve.
As a result health care legislation has impacted the country in diverse ways. The ACA was passed to help make health care more affordable and more available to everyone—but part of the justification of this law was the concept that all people would be mandated to buy insurance so that more people could be covered. The fact that not everyone has done this (because prices are still too high and paying the penalty is less expensive, especially for people who do not feel they need health care) shows how difficult it is to legislate a solution to the problem of health care costs.
Health care providers are also at a loss, as they must seek reimbursement for treating patients on Medicare, etc. Smaller hospitals are forced into consolidation—which means that the major health care providers are creating a monopoly and obtaining more market power thanks to the ACA. As Cutler and Morton (2013) put it: “The Affordable Care Act (ACA) reduced the growth of Medicare hospital reimbursement by about 1.5 percentage points annually, the latest in a series of payment reductions stretching backmanyyears. Cash-strapped state governments have reduced fees to inpatient institutions. The presumed revenue enhancement from expanded insurance coverage may not occur if states choose not to adopt the ACA Medicaid offer; 26 states have stayed out initially. These financial challenges will make it even more difficult for weaker hospitals to survive on their own” (p. 1967). What this means is that the legislation passed to supposedly help people obtained better insurance has really just led to the consolidation of power in the marketplace and the means for health care organizations to develop market power and for market concentration to appear in the industry.
As the current trends in health care reimbursement continue to lead to this type of exodus of smaller providers from the market, the larger organizations are becoming even larger. The key stakeholders in this arrangement are, of course, the legislators, lobbyists, politicians and organization leaders conspiring to ensure that the system benefits them long enough to secure their total dominance of the industry. By passing the ACA, these stakeholders were able to accomplish a monopolist’s dream. As Pope (2014) has shown, the law “accelerates the pernicious growth of market consolidation in American health care.” For the consumer, this means prices will not come down—and it means that for organizations who are resisting the pressure to merge, there will be severe lack of funds because of reimbursement policies implemented at the top, where collusion is the new norm.
In conclusion, health care in America is as much a business as it is anything else—and that means there are cutthroat practices to be found as there are in nearly every industry: collusion between government and business is par for the course and the name of the game is market concentration—the objective to secure market power. How is it achieved? By passing legislation like the ACA, which punishes providers through a complex arrangement of tit-for-tat accounting, and prompts small organizations to abandon the market or merge with larger organizations.

References
Cutler, D., Morton, F. (2013). Hospitals, market share, and consolidation. JAMA,
310(18): 1964-1970.
Pope, C. (2014). How the Affordable Care Act fuels health care market consolidation.
Retrieved from http://www.heritage.org/health-care-reform/report/how-the-affordable-care-act-fuels-health-care-market-consolidation