Why Does a Hospital Monopoly Want to Re-Open the Economy?
The University of Pittsburgh Medical Center has strong views on the right way to manage Covid. It also has deep conflicts of interest.
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Today I’m changing the format. I want to cover a bunch of stories more lightly, instead of writing one main big essay. Let me know what you think. I’m going to cover hospital monopolies lobbying to reopen the economy, the attack on the World Trade Organization, and an action by DOJ Antitrust on a criminal antitrust settlement and one on a giant textbook merger. I also had a bit of a public tiff over whether the Federal Reserve is a mere innocent plumber, or an architect of unfair bailouts to corporate America.
First, some housekeeping. I was on the Intercept’s podcast System Update with Glenn Greenwald discussing China. Also, I wrote a piece for the American Compass, a new conservative think tank, on the problem of corruption and private power.
Monopoly Hospitals: At least one large hospital system is advocating an end to most lockdowns in America. Earlier this week, Dr. Steven Shapiro, the chief medical and scientific officer of the University of Pittsburgh Medical Center (UPMC), offered aggressive views to politicians on the need to reopen the economy. Coronavirus, he said, is not that dangerous except to marginalized populations, but a lockdown is quite harmful. “In sum,” Shapiro said, “this is a disease of the elderly, sick and poor.” He made the case that protecting seniors matters, but aside from that, a reopened economy will mean that “though infectious cases may rise…, the death rate will not.”
Shapiro’s views are not necessarily wrong, but they fit with a pattern on the part of top UPMC officials of attempting to get business back to normal. Last month, for instance, UPMC doctor and top executive Donald Yealy argued that the death rate from Coronavirus is 0.25%, which is much lower than the commonly assumed 1% rate, and that the disease is not worse than the flu. More interestingly, in mid-March, UPMC refused to cancel non-COVID elective procedures, even after the governor of Pennsylvania issued an order to do so, prompting an open letter of protest from hundreds of its own physicians. UPMC also encouraged its surgeons to get around state bans on non-Covid related elective procedures by using terms such as “urgent,” “cancer,” “unstable” and “relief from suffering.”
Getting back to normal, as UPMC is trying to do, isn’t necessarily wrong. It is important to reopen the economy, and people shouldn’t delay care, especially for cancer or critical non-Covid conditions. Certainly the system has taken steps to mitigate infections inside its hospitals and various facilities, and I’ve also heard from some of you who are patients at UPMC that you like the care you receive. But there is a conflict of interest at work, because UPMC’s financial goals align with reopening their non-Covid practice. UPMC generates revenue from high-cost outpatient elective procedures; 46% of the revenue of hospital systems in Western Pennsylvania come from such procedures. And the nature of the market structure for hospital services means there’s a lot of pressure to open back up this stream of cash.
There’s a giant monopoly problem in hospitals, which means hospitals have come to depend on charging excessively high prices for surgeries. Since the 1980s, and accelerating after the passage of Obamacare, hospitals have sought to merge with one another so they can have more bargaining power against insurance companies and doctors. UPMC is the system that took over Western Pennsylvania, with 41% market share of in that region, and 58% of market share for the medical-surgical market in Allegheny County (which contains Pittsburgh). Though technically a nonprofit, UPMC has $20 billion of annual revenue, and its executives make millions of dollars a year, as they would at any large corporation. UPMC has bought dozens of hospitals, doctor’s practices, as well as facilities for physical, occupational, speech and specialty therapies, and assisted senior living. It is also vertically integrated, with its own insurance company that has hundreds of thousands of customers in the region.
There are good arguments for scale and consolidation in health care - UPMC customers often have a good experience, and the Veterans Administration and many systems abroad are both large and efficient. So the problem here isn’t necessarily the size or growth. It’s that the growth is happening, at least in part, to acquire market power over pricing. The symptoms of monopolization, like reduced supply and higher prices, are there. In 2019, UPMC cut the number of beds and its medical admissions and observation cases dropped by 1%, even as its physician service revenue per weekday revenue jumped 7%.
UPMC is also becoming something of a global empire; it is working with the Wanda Group to build five hospitals in China, eye surgery specialty services in Ireland, and it runs a transplant and specialty surgery hospital in Palermo, Italy, and a national oncology treatment and research center in Kazakhstan. All of this is likely on hold, because the Coronavirus has cut a key source of revenue - high-priced elective procedures - to virtually nothing.
This dynamic is reproducing itself across America; roughly half of the massive drop in economic activity across the whole economy is a result of a collapse in health care spending. In 2003, health care analysts noted that American health care was far more expensive than anywhere else in the world. Why? The paper’s titled was self-explanatory: “It’s The Prices, Stupid: Why The United States Is So Different From Other Countries.” Higher prices are a result of pharmaceutical prices and health insurance companies, but also, critically, giant vertically integrated hospital systems like UPMC. (One good solution, IMHO, is Rep. Jim Banks’s legislation on hospital competition and pricing.)
Now we’re seeing what happens when these necessary but overpriced procedures go on hold. Hospital executives start lobbying aggressively to reopen as soon as possible. Is that a good idea? I am not sure. But there’s surely a conflict of interest when the hospital executive says it is, even if that executive wears a white coat and carries a stethoscope.
Federal Reserve: Plumber or Planner? Readers of BIG know that the Fed is now subsidizing corporate debt aggressively. It gave $3 billion to Carnival Cruise Lines, and helped cut Boeing’s borrowing costs.
In my day job I work at a think tank, the American Economic Liberties Project. A group of non-profits, including mine, just sent a letter to the Federal Reserve, asking the Fed to take its powerful political position seriously, and impose limits in its lending program against mergers and private equity leveraged buy-outs. Our view, like Adam Tooze, is that the Fed is the key actor in our planned economy, and it will get increasing heat as it chooses winners and losers.
But that’s not how the Fed sees its own role, and it’s not how many beat reporters on the Fed see it either. To them, the Fed is a neutral plumber, just fixing leaky pipes in the economy. This week, I got into a tiff on Twitter with a number of economists and beat reporters for the Federal Reserve, who took issue with the claim the Fed is conveying something of value by implicitly guaranteeing corporate liabilities. To take one as an example, Jeanna Smialek of the New York Times in a tweet storm targeted my observation on the Boeing bailout, noting that “the Fed did not buy Boeing debt,” but merely helped to “revive a choked market.” This is the Fed as plumber narrative.
Language matters. And the description you pick, plumber or planner, is a political choice.
An End to the World Trade Organization? Senator Josh Hawley is beginning a campaign to get the United States to withdraw from the World Trade Organization. While there will be a fair amount of gnashing of teeth from globalization advocates, the truth is that the United States through the Bush and then Obama administrations, has been demanding that the WTO follow its own rules, and the WTO simply refuses to do so.
For instance, the U.S. just rejected a WTO decision on the trade in a specialized form of paper, essentially claiming that the decision itself was illegitimate. One might easily see this as Trump-ian bluster, but if you look closer, the U.S. reasoning is pretty compelling. Not a single person on the body making the decision was a legitimate judge according to WTO rules. One was even a Chinese state official, despite the explicit rule that judges must be “unaffiliated with any government.” On a more prosaic level, appellate bodies must return decisions within 90 days, according to Article 17.5 of the Dispute Settlement Understanding. This one’s been sitting out for 528 days. Letting cases drag on for years, as industries die, is against WTO rules for good reason. It’s just that the WTO tends to ignore its own rules.
Another good example is the WTO leadership simply choosing to use its budget - which is partially financed by America - to set up a parallel enforcement mechanism with China and the EU to get around the legitimate American exercise of its authorities under the WTO to prevent appointments of appellate judges. There’s no authority to take American money and use it to set up an institution to undermine American rights at the WTO, without American consent. But that’s the way this institution works. They just don’t follow their own written rules, and then scream at America as protectionist for pointing that out.
It is hard to see any path for reform, because those at the organization simply do not adhere to the underlying text that the United States agreed on. You can rewrite rules, but what does that matter if the institutional culture is such that written rules don’t matter? If you want to understand more about this problem, I highly recommend this debate between two globalization advocates and Trump trade official Steven Vaughn. But to be clear, the populist left at Public Citizen has been leading the charge here for years, so this is not unique to the Trump administration or the right.
In terms of the broader point, what Senator Hawley is saying is not protectionism, but calling for a return to the New Deal framework of fomenting trade among democracies, while protecting critical supply chains and domestic production. Strategic trade management, he argues, is part of geopolitics, and it’s time to be deliberate about those choices again.
Trump DOJ Antitrust Division Shows Crime Pays: A week and a half ago, the Department of Justice proudly bleated out a press release titled “Leading Cancer Treatment Center Admits to Antitrust Crime and Agrees to Pay $100 Million Criminal Penalty.” The DOJ got Florida Cancer Specialists & Research Institute LLC to plead guilty to colluding with a rival cancer treatment operator in the chemotherapy and radiology market, and pay $100 million. Sounds good, right?
There are two little problems. First as the DOJ notes, the total revenue “from the provision of oncology treatments affected by this conspiracy totaled more than $950 million.” I’m no financial genius, but it does seem like paying $100 million to keep $950 million in revenue from a criminal conspiracy is a good investment. Crime pays, apparently.
It gets worse, because victims were also screwed in the way the DOJ brought the charges. Six weeks earlier, a settlement with Florida Cancer Specialists for just $7 million was approved by a New Jersey court. Now had DOJ told this court about their criminal case, it’s quite likely that amount would have been gone far higher, and victims would have gotten back some of the money stolen from them. But the DOJ didn’t say anything. Maybe the DOJ thought it could get more leverage if it kept silent. Maybe there was some sort of collusion here. Regardless, what the DOJ did is ugly and wrong.
As one antitrust lawyer told me, “When its own interests are served, the DOJ knows well how to interject itself into civil antitrust actions, and to make ex parte, sealed filing with the court. How can it explain failing to do so here? Congress ought to ask.”
Textbook and Antitrust: The DOJ Antitrust Division did a good thing by forcing textbook giants Cengage and McGraw Hill to cancel their merger. This merger was obviously anti-competitive, the goal was to effectively get rid of paper textbooks so that students can’t buy used copies, and then create textbooks as a high priced subscription service. The DOJ wouldn’t allow them to merge without selling off enough pieces so that the merger wouldn’t be worth it. Good call.
Thanks for reading. If you see examples of market power in this pandemic, let me know.
And if you liked this essay, you can sign up here for more issues of BIG, a newsletter on how to restore fair commerce, innovation and democracy. If you want to a book to hunker down with while sheltering in place, read my book, Goliath: The 100-Year War Between Monopoly Power and Democracy.
P.S. Reader Max L. responded to my observation that Facebook has done little innovating as of late.
Big fan of the blog here. I couldn’t help but notice in this edition the comment that “there’s little innovation coming out of Facebook these days” and felt obliged to point out evidence to the contrary.
I’m a computer science student at MIT and my research is in computational cognitive science (which you could loosely term ‘AI’), and in my recent experience I’ve come across a number of innovative initiatives from Facebook that I can’t ignore. Note first that I am definitely not a fan of Facebook and think that their products are problematic, that they have too much market power &c.
Two striking examples that come to mind are the open source libraries ReactJS and Pytorch, as well as the more recent papers in cognitive science that they have published. Pytorch is the most popular library in the world for machine learning. It was released in 2016 and is maintained by the Facebook AI Research team. (Tensorflow, Google’s counterpart, has fallen out of favor in the last few years). ReactJS is another extremely popular library for web development. It is maintained by another Facebook team. The influence of both these pieces of technology has been huge in the software development and research community. Similarly, there are a number of really interesting computational social science papers coming out of Facebook AI Research.
You could argue that this innovations are inadequate for one of the biggest companies in the world, but that’s a different conversation.
This is a fair point. What I meant to say is that Facebook isn’t innovating around its social networking user experience, which is why TikTok was able to take a Vine-like experience and explode in popularity. Facebook’s control of the advertising market killed fair competition in the U.S., and meant that competitors could emerge only if they were subsidized to lose money for a long time. That’s why TikTok is part of a Chinese corporation.
To take Max's argument on more directly, I would analogize Facebook as akin to General Motors and Ford in the 1960s. Both corporations did do engineering innovations, but very little of it ended up improving their cars. Only in the 1970s and 1980s, when they faced Japanese competitors (who often used American innovations that American corporations had refused to incorporate into products), did they finally begin to retool. Had GM not rolled up much of the auto industry in the 1920s, or had the DOJ broken up GM in the 1950s or 1960s (as is nearly tried to do), American carmakers would not have gone through such pain and cost hundreds of thousands of jobs.
This dynamic, of innovation happening inside monopolies but not showing up in their products, is fairly common. In one of the very first issues of BIG, I noted that Standard Oil prevented its Indiana subsidiary from selling an innovative new product it had discovered how to refine. When the company was finally broken up in 1911, its Indiana subsidiary, now independent, went ahead with the new business line. We call this product gasoline.
This dynamic isn’t quite the same as Facebook. After all, Facebook is providing an engineering public good, and a lot of others get to use it. But the production of knowledge about machine learning is not inherent to an advertising monopoly. Nor are “really interesting computational social science papers” coming out of Facebook Research division a sign of innovation. In fact Facebook’s control of what should be publicly available data stores means that the corporation is likely throttling the amount of research that could happen. Only those at Facebook, or those who get Facebook’s permission, are allowed to play with this public data. So while interesting papers are coming from people at Facebook who can use Facebook-controlled data for research purposes, that’s really just a function of the fact the Facebook is in command of what should be public resources.
In other words, it’s like saying “the glass isn’t nearly empty, it’s one tenth full!”