Cui Bono Blues

23 October 2010 at 9:43 pm Scott Masten Leave a comment

| Scott Masten |

No, not some long lost Robert Johnson classic. I’m referring to the Justice Department’s suit filed earlier this week against Blue Cross Blue Shield of Michigan, with “hints” from the Justice Department that more health industry suits are in the pipeline. The allegation is that BCBCM used most-favored nation agreements with hospitals to reduce “competition in the sale of health insurance in markets throughout Michigan by inhibiting hospitals from negotiating competitive contracts with Blue Cross’ competitors.”

I don’t know enough about the case to say anything about its merits at this point. But I do find curious the DOJ’s choice of a nonprofit for its demonstration project on controlling healthcare costs through the antitrust laws. It reminds me of [uh-oh, here it comes — Ed.]

the so-called Overlap Group case of the 1990s in which the DOJ charged the Ivy League universities and MIT with price fixing for coordinating financial aid awards. [I knew it! — Ed.] It is hard to think of markets that differ more from the standard product markets of economic theory than health care and higher education, both comprised of highly complex, heterogeneous, and noncontractible services. And, of course, both cases involve nonprofit defendants, which raises the question, to whose benefit? Unlike standard product markets involving for-profit firms where the motive for exclusion or collusion is straightforward, the motive for such behavior in cases involving nonprofits is, at a minimum, more complicated. Even if the nondistribution constraint that characterizes nonprofits works imperfectly, the absence of owners who can compel distribution of corporate surpluses, and practical limits on how much employees could appropriate through compensation and perquisites, must at least weaken the incentive for anticompetitive conduct. In any event, if the benefits of such conduct are distributed to employees, that should be possible to demonstrate. According to its website, BCBCM has a 92% claims ratio. If BCBCM’s employees are enjoying exorbitant compensation and perqs, shouldn’t this be much lower? (Under Obamacare, health insurers will only be required to maintain an 80 to 85% ratio next year.) On the other hand, if BCBCM’s practices are allowing it to provide more or better coverage for Michigan residents, is this where DOJ should be concentrating its resources? After all, if BCBCM succeeded excluding all of its competitors, which the DOJ alleges is its objective, we would end up with a single-payer system, which some consider necessary for the efficient provision of health insurance anyway!

Like the Overlap case, this one represents a big, novel suit in a politically conspicuous market. Cui bono, indeed!