Editor's Note: We don't usually do this, but our friend and sometimes colleague The Passive Aggressive Paperpusher had some things to say and offers up this post. Enjoy:
This Wall Street Journal article from last summer gives a quick overview of the Greater Pittsburgh medical insurance and medical provider markets.
newly combined Highmark-West Penn will face off against... UPMC. The prestigious $8 billion,19-hospital network employs 2,881 doctors and has about 56% of the inpatient market share in Allegheny County...On the provider side, there is the UPMC gorilla, the Allegheny General dog, and then numerous independent or small chains of community hospitals (Heritage Valley, Excela Health.) The payor/insurance side is dominated by Highmark. UPMC runs an insurance company but its definately a secondary business interest for UPMC as the true money maker is the medical/hospital side of the non-profit. Aetna, United Healthcare and Cigna also compete in the commercial group medical market.
UPMC, which is the region's biggest provider. Highmark has reserves of $3.71 billion and market share of more than 50% in western Pennsylvania...
That is the overview of the two interrelated healthcare markets in Western Pennsylvania. Each side is dominated by a single large player, and those players each have a sideline business that is on the other gorilla's turf. The silverbacks have been beating their chests and bleating for the past six months until political pressure forced a one year cooling off period earlier this week.
So why did this happen, and why will the 2013 contract negoatiations be just as nasty.
CASH money homey.
Let me back up and go back to grad school for a moment. The two markets are highly consolidated, the GINI co-efficients are relatively high. Now what is a GINI coefficient?
The Gini coefficient (or Gini ratio) is a summary statistic of the Lorenz curve and a measure of inequality in a population.Gini co-efficients are a quick glance way of measuring market power and consolidation. The higher the Gini co-effcient, the more concentrated an industrial sector, and the more the largest players in that market sector can be price makers instead of price-takers. Price-taking behavior is the underlying assumption of Econ 101 market competition as it assumes no one producer or buyer is big enough to move a market. That is not the case in Western Pennsylvania healthcare.
The Gini coefficient ranges from a minimum value of zero, when all individuals are equal, to a theoretical maximum of one in an infinite population in which every individual except one has a size of zero.
In an interrelated set of markets like medical provision and medical paying, an interesting exercise is to compare the Gini co-efficients between the sectors. This produces an outcome grid like the one below:
Currently the Western Pennsylvania health markets are stuck in the top left hand corner --- two gorillas both attempting to apply market pressure against the other to capture as much consumer surplus as possible. Each gorilla would like to move the situation to a High-Low combination and capture much more consumer surplus. The Econ 101 solution space is the bottom right hand corner where the consumer (us) is not getting royally shafted.
UPMC's strategic goal is to fracture the insurance market so that it, as the dominant provider, does not have to deal with a countervailing payor organization that can take its 3 million members and go home. Closing out access to most UPMC hospitals would force Highmark consumers and more importantly, their HR departments to begin to look elsewhere. The UPMC play was never intended to wipe-out Highmark, just defenestrate it. The was combined with new contracts signed with national insurance carriers that gave them in-network access to UPMC hospitals. These steps would minimize market concentration in the insurance/payor market, and thus allow UPMC to maintain a long-term upper hand in all rate negoatiations.
Highmark's strategic goal is to survive as an 800 pound gorilla/dominant player. They have a tougher hand to play, for if PPACA is upheld, in 2014, the state health insurance exchanges will simplify and lower the costs of entry for new insurers to enter the Western PA market. That will naturally lower the payor Gini co-efficient and favor large, integrated providers who can hold the individually weaker insurers over a barrel.
If Allegheny General was to close, there would be no counter-vailing provider with which Highmark could credibly threaten to redirect their customers to if UPMC got too expensive. The community hospitals are too small and too general for high end/specialized care to fill that roll. Highmark will most likely seek to first rebuild AGH, and then begin to cherry pick some of the healthy community hospitals. This will allow Highmark to create one of the two highly likely vertically integrated medical care silos in Western Pennsylvania over the next decade.
So that is the basic outline of what the fight is about: it is barely about reimbursement rates.
The Passive Agressive Paperpusher is the author of several blogs and a regular contributor to The Angry Drunk Bureaucrat. Join him at 3 PM on Monday December 26 on ADB+ where he will take readers' questions.