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An Economic Analysis of the Joint Purchasing Safety Zone

Published online by Cambridge University Press:  01 January 2021

Roger D. Blair  and
Jill Boylston Herndon
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Extract

It is undeniable that health care costs have been increasing at an alarming rate. During the ten-year period between 1983 and 1993, the medical care component of the Consumer Price Index (CPI) rose at an average annual rate of 10 percent while the overall CPI increased by only 4.5 percent per year. These dramatic increases have obvious societal implications. For those without health insurance, a serious illness may mean personal bankruptcy. For those with health insurance coverage, premiums are rising while coverage is shrinking. Employers are struggling to continue providing health insurance to their employees. Irrespective of whose fault it really is, much of the blame has been directed at health care providers.

Faced with mounting criticism regarding the costs of delivering health care, the industry struck back. It claimed that collaboration—not competition—was necessary to reduce health care costs and improve efficiency, but that antitrust uncertainty deterred such collaborative efforts.

Type
Article
Information
Journal of Law, Medicine & Ethics , Volume 23 , Issue 2 , Summer 1995 , pp. 177 - 185
Copyright
Copyright © American Society of Law, Medicine and Ethics 1995

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References

The medical care index was 100.6 in 1983 and 201.4 in 1993. Thus, the index rose by (201.4 – 100.6)/100.6 = 100.2 percent. The average annual increase over this period was about 10 percent.Google Scholar
The CPI was 99.6 in 1983 and 144.5 in 1993. Thus, the CPI rose by (144.5 – 99.6)/99.6 = 45.1 percent. The average annual increase in the CPI over this period was 4.5 percent.Google Scholar
For compelling anecdotes, see, for example, Eckholm, Erik, “Frayed Nerves of People Without Health Coverage,” New York Times, July 11, 1994, at A1.Google Scholar
Collaborative activities that restrain trade violate Section 1 of the Sherman Act (15 U.S.C. § 1 (1988)), and expose the collaborators to fines, possible imprisonment, and civil suits for treble damages.Google Scholar
In September 1993, the DOJ and the FTC issued their initial enforcement policy statements. Based on experience and comments received, the enforcement policy has been refined. On September 27, 1994, the DOJ and the FTC released their Statements of Enforcement Policy and Analytical Principles Relating to Health Care and Antitrust (see Special Supplement, Antitrust & Trade Regulation Report, Vol. 67, No. 1682, Sept. 29, 1994: S1–S25). These policy statements addressed the following: (1) mergers among hospitals, (2) hospital joint ventures involving high-technology or other expensive health care equipment, (3) hospital joint ventures involving specialized clinical or other expensive health care services, (4) providers’ collective provision of non-fee-related information to purchasers of health care services, (5) providers’ provision of fee-related information to purchasers of health care services, (6) provider participation in exchanges of price and cost information, (7) joint purchasing arrangements among health care providers, and (8) physician network joint ventures.Google Scholar
Monopsony power is buying power, that is, the influence that a large buyer has on market prices through adjustments in the quantity purchased.Google Scholar
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For monopoly, allocative inefficiency arises because the monopolist restricts the quantity produced and thereby allocates too few resources to the production of the monopolized good or service. Analogously, the monopsonist restricts its purchases and thereby causes allocative inefficiency because too little is purchased and too few resources are allocated to the production of the monopsonized good or service.Google Scholar
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This is analogous to the Lerner index of monopoly power. For further analysis, see Blair, Roger D. Harrison, Jeffrey L., “Cooperative Buying, Monopsony Power, and Antitrust Policy,” Northwestern University Law Review, 86 (1992): 331–67.Google Scholar
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In this case, one needs the dominant buyer model (see Blair, and Harrison, , supra note 22). Landes and Posner used the dominant seller model to analyze market power on the selling side (Landes, William M. Posner, Richard A., “Market Power in Antitrust Cases,” Harvard Law Review, 94 (1981): 937–96). We have modified their model to deal with market power on the buying side.Google Scholar
Since Qg = Qs-Qn, and Substituting the usual definitions of elasticity of demand and supply, one obtains the expression in (3).Google Scholar
The calculation of the BPI is Google Scholar
The calculation of the BPI is Google Scholar
The 73 percent is obtained by solving the following expression for x: Google Scholar
In fact, the DOJ and the FTC already do this in evaluating mergers under Section 7 of the Clayton Act.Google Scholar
Williamson developed this analysis in a merger context (Williamson, Oliver E., “Economies as an Antitrust Defense: The Welfare Tradeoffs,” American Economic Review, 58 (1968): 18–34). We have adapted his analysis for purposes of examining buying power.Google Scholar
Williamson has shown that, under plausible assumptions regarding the elasticity of demand, rather modest cost savings lead to gains in productive efficiency that outweigh the loss in allocative efficiency (id.). Similar results are likely to hold here as well.Google Scholar