Imagine an instance where McDonald’s was mandated to purchase fries from Burger King – or GM was required to buy auto parts from Ford. Intuitively and economically, this does not make sense. Yet, that is exactly what the legislature is trying to do in Pennsylvania.
The two parties in question though do not make fries or cars; the University of Pittsburgh Medical Center (UPMC) and Highmark are in the healthcare market. Those two companies have successfully and voluntarily done business with one another for years until Highmark acquired the West Penn Allegheny Health System in April 2013 after 18 months of vetting by the state Department of Insurance. At that time, the Pittsburgh Post-Gazette reported that the move was a clear attempt by Highmark to “establish an integrated health care delivery system […] to compete with, and be an alternative to, the regionally dominant UPMC.” However, Highmark is dominant in this geographic area in the health insurance market.
UPMC did not take too kindly to its business being threatened and is deciding not to renew a contract with Highmark when it expires at the end of the year. That private business decision apparently upset some in the Pennsylvania legislature. Republican and Democratic legislators have joined forces to propose a bill that will mandate that UPMC accept Highmark’s contract and, in essence, be forced to buy from its competitor.
Further, Highmark is pushing the legislature to adopt a policy that would mandate hospitals contract with “any willing insurer.” That language would put insurers in the driver’s seat and allow them to gain from such arrangement – whether with UPMC or another hospital group.
Government policy should not pick winners and losers, yet these bills clearly show preference for Highmark. In a Pittsburgh Business Group on Health survey, 28 percent of employers noted that they would replace Highmark coverage with coverage from a national provider if UPMC and Highmark do not reach a deal. Simultaneously, another 53 percent of employers noted they would allow employees to choose between Highmark and a national plan, thus increasing competition in the health insurance market in the Pittsburgh area. Competition is a good thing for consumers.
So, put simply, Highmark stands to face more competition without a voluntary deal with UPMC. If the government forces UPMC to deal, Highmark will earn higher profits. It is no wonder then that Highmark is resorting to pressuring legislators.
Only in very rare cases should the government intervene in contract disputes involving two private parties and this should only occur if the intervention clearly benefits consumers. However, there seems to be absolutely no evidence that consumers would truly benefit from forcing UPMC to contract with Highmark. It is not clear how consumers benefit from eliminating competition and choice. Facts are needed not rhetoric.
Even if a thorough analysis shows that consumers would somehow benefit from this government intervention. The next question is how will prices be determined? The current proposal is for binding arbitration which has been use to solve other contract disputes. However, in this case, there are thousands of prices that must be agreed upon. This seems like an extremely difficult task with high administrative cost and no guarantee that prices would be appropriate. Let the private market figure it out.
The U.S. economy is based on the free negotiations between private companies. Lawmakers and consumers alike should realize that any intervention in Highmark and UPMC’s dispute is a bad precedent to set for all businesses and would harm consumers.
Steve Pociask is president of the American Consumer Institute Center for Citizen Research (ACI) and Dr. Joseph P. Fuhr, Jr., professor of economics at Widener University in Chester, Pennsylvania. Professor Fuhr is also teaches and conducts research in health economics and is a Senior Fellow at ACI. For more information, visit www.theamericanconsumer.org. This piece was published and is available at the Pittsburgh Gazette.