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David Brodwin's blog

Death by Monopoly

In the recent GOP presidential debate, the candidates practical fell over each other in their fervor to condemn Obamacare. Critics of Obamacare – including many politicians and healthcare industry executives – argue that America would be better served by a system that relies more on competition and less on regulation.

It's ironic that while health care CEOs and their allies praise competition in theory, in practice they run full speed to get away from competition.The main strategy to avoid competition is mergers and acquisitions. More than 100 deals were completed in the industry last year, a 14 percent increase from 2013, according to the Wall Street research firm Irving Levin Associates. Those mergers have resulted in dramatically increased concentration in the industry, at multiple levels. For instance, hospitals are acquiring other hospitals: San Francisco, for example, is now down to three significant hospital chains. At the same time, hospitals are gobbling up specialty medical practices, and turning previously-independent physicians into employees. In 2000, one in 20 specialists were hospital employees; now the ratio is one in four.

Hospital execs claim that all this consolidation will make hospitals more efficient, leading to lower prices as per the policy aims of Obamacare. But many observers inside and outside the industry are skeptical: "When you already have most or all of the benefits of enormity, I'm not sure becoming even bigger confers more economic benefit," said Michael Bernstein, former president of Wisconsin's Blue Cross and Blue Shield plan, who is now involved in health care private equity.

It's not that more scale provides significant operating efficiencies, though: more scale is primarily if not solely a way to eliminate competition and raise prices, though this is rarely said out loud by the businesses doing the merging. Wharton business school professor Lawton Burns led a study of cost and quality in 15 major health care markets. According to him, the data prove that "providers consolidate to gobble up more of the market, so they can reduce competition and thereby raise prices." A study by the Robert Wood Johnson foundation reached the same conclusion: "Hospital consolidation generally results in higher prices. This is true across geographic markets and different data sources." The study went on to say that "Prices increase 40 percent or more when merging hospitals are closely located."

Sadly, this situation illustrates the difficulty of crafting regulation, particularly for complex and opaque markets. The Affordable Care Act created a lot of pressure on insurance companies and health care to find operating efficiencies and then pass the savings onto consumers.. And in some states like California, where the population is large, and state level regulation is aggressive, cost reductions have been achieved. But in many parts of the countries the providers have begun to consolidate, increase their pricing power, and avoid passing savings on to consumers. If we lived in a world where states made a good faith effort to implement the regulations as passed, and where Congress had the political will to fine-tune the system, the cheating could be detected and stopped. But in the current political climate, that's difficult.

More than money is at stake. New research at Stanford Business School shows that as health care consolidates, quality suffers (through lack of meaningful competition to make providers do their best work). More patients actually die. Stanford professors Nicholas Bloom and Stephan Seiler studied outcomes and costs in a range of U.K. cities which had experienced different amounts of consolidation. The difference was stark: Adding a single rival to a given market improved heart attack survival rates by 10 percent. Seiler explains why: "If you're competing with other hospitals, you actually have to be innovative and use good managerial practices."

This year the Federal Trade Commission will be called upon to approve or block some major health care mergers on anti-trust grounds. If they judge that the mergers will make health care markets less competitive, they can turn down a proposed merger on antitrust grounds. Every year in the U.S. 735,000 people have a heart attack, and 610,000 people die of heart failure. Let's hope the commissioner's hearts are strong and their minds are clear as they consider the stakes.

David Brodwin is a co-founder and board member of American Sustainable Business Council. This article appeared in U.S. News & World Report August 24, 2015.

Free Trade Done Right

The Trans-Pacific Partnership is starting to falter as negotiators wrestle over the last, deeply contentious issues. This might not be a bad thing. I have pointed out earlier (here, here and here) the problems with the treaty.

But some supporters, who prioritize the economic benefits of trade, have challenged me to offer a better alternative. So let's recap the legitimate points of both sides. Then, I'll sketch out an approach to capture the benefits of freer trade without the problems of the Trans-Pacific Partnership.

The deal's opponents make four key arguments: It will lead to job loss and downward wage pressure, particularly on less skilled workers. It favors multinationals over small and local businesses, which are needed for resilient and equitable communities. It undercuts governments seeking to use policy to promote public goals such as cutting smoking and making drugs more affordable. It triggers a race-to-the-bottom on environmental and quality-of-life issues: climate change, pollution, workplace safety, human trafficking and others.

The pact is opposed by a diverse array of interests and people: small business, local economic development, sustainable business, labor, environmentalists, economic justice advocates and others.

However, not all the opposition is motivated by the greater good. Some if it is pure protectionism reflecting politically powerful domestic constituencies. Canada seeks to protect its dairy industry. Japan protects its rice farmers.

Moreover, the proponents of trade have some valid arguments to make, too: Lower tariffs do encourage trade, and that creates value for both importers and exporters. Trade raises living standards, "on average," in both importing and exporting countries. (Let's set aside for the moment the question of whether the phrase "on average" conceals mounting inequality.)

Recently an idea was broached among climate economists that can be extended to trade. William Nordhaus reflected on the fact that any country that imposes a price on carbon risks damaging its home economy as long as other countries continue to spew carbon and make money. It's a real concern. Many who acknowledge the existence of climate change nonetheless doubt whether the U.S. should tax carbon unilaterally while other major emitters stand by.

To solve the problem, Nordhaus proposed that we create a "Climate Club" of participating nations. Nations join the club by pledging to accept a significant price on carbon or take other measures to cut carbon output. Within the club, members trade with other members much as they do today, with low or no tariffs involved. But members penalize non-members by applying a tariff on imported goods from non-member countries. The tariff could be based crudely as a percent of price, or it could be based on the products' carbon content. (The latter is tougher and more expensive to implement but does more to reduce carbon.)

This is truly a market-friendly solution. Every country is free to join the club or not. The countries that choose to join can relax in knowing that they're nobody's chump when it comes to global trade. This tends to reduce domestic political opposition to taking action on climate.

This is a good idea for cutting carbon. But why stop here? Why not have a "Workers Club"? Nations in the Workers Club would agree to abide by a fairly basic package of protections such as anti-slavery, minimum wage (pegged to local cost of living), workplace safety, right to organize and so on. It's not much by the standards of advanced countries, but this could be life-changing in many parts of the world. As with the Climate Club, countries that join the Workers Club would enjoy lower tariffs than countries that don't. If tariff levels were set realistically, it would replace the race to the bottom with a race to the top.

The same club idea can be applied to other challenges. Why not an "Honest Taxes" club? It would reward countries that do a good job of getting everyone to pay their share, and bring pressure on countries like Greece where well-connect elites dodge taxes with no consequences.

The objection to the Trans-Pacific Partnership is not an objection to trade in general. And it is not a denial of the benefits that lower tariffs can bring. But it is a rejection of the using the lure of trade as a cudgel to undermine legitimate government aims and block important safeguards. That's the aspect we need to reject as we pursue economic growth. The "Club" idea shows a way to pursue freer trade while encouraging sustainable and equitable economic development. That's the club we need to join.

David Brodwin is a co-founder and board member of American Sustainable Business Council. This article appeared in U.S. News & World Report August 10, 2015.