Some interesting economic issues surround the campaign against Allina and other health maintenance organizations being waged by Minnesota Attorney General Mike Hatch. But it’s not yet clear whether efficiency or fairness will improve as a result.
First, some background. Allina is a large, Twin Cities-based HMO that grew in a series of mergers of hospitals, clinics and insurers over a decade. It reached its current structure in 1994 when Medica, largely a health insurer, merged with HealthSpan, a conglomerate of 17 hospitals and more than 40 clinics.
In early 2000, Minnesota’s attorney general initiated investigations of excessive costs at Minnesota HMOs. All such organizations in Minnesota are nonprofits; Minnesota law prohibits for-profit HMOs from doing business in the state; and Minnesota law gives the attorney general responsibility for ensuring that nonprofits are operated for the public good.
Later in 2000, after federal auditors challenged certain spending by Allina, Hatch announced it would be the target of his first investigation. Last week, Allina announced that it was splitting back into two separate organizations. One will operate as a health insurer while the other will administer hospitals and clinics.
Where is the economics in this? First, there is a question of who minds the store at large nonprofits. Until recently, most such organizations tended to be small, with well-defined geographic, religious or ethnic constituencies that took an active interest in the organization.
But those grass-roots connections grew more tenuous as medical nonprofits grew and lost their original religious or ethnic constituencies. Some became entities with annual budgets in the billions. They were as large as many for-profit corporations.
Corporations are responsible to their shareholders. Such governance is not perfect; recent decades are replete with examples of corporate CEOs who ran roughshod over the interests of shareholders. But the legal relationships are clear, and there are a number of government agencies, such as the Securities and Exchange Commission, ensure that managers follow the rules in regard to shareholders.
Classical economics assumed that managers always worked in the owners’ best interests. That was not always true, and in recent years economic theorists have worked on what are called the “principal-agent” problems. How do the principals (shareholders) ensure that an agent (hired management) works in their interests?
But with large contemporary nonprofits such as Allina, it isn’t clear who is the agent and who is the principal. Without clear lines of responsibility, organizations with economic muscle can easily work counter to the public good.
The second economic issue is one of anti-competitive concentration in health care. The U.S. has a muddled system of health care provision and financing, with a complicated mix of for-profit and nonprofit, public and private institutions. But in any geographic area, the public is badly served if there is a lack of competition in health care provision. In any sector, monopolies usually lead to higher costs and poorer service.
Federal antitrust laws and the U.S. Justice Department are charged with limiting anti-competitive activity among firms engaged in interstate commerce. But while they have taken on large for-profits such as AT&T, IBM and Microsoft, the feds historically have ignored monopolistic behavior by nonprofits and within limited geographic areas, such as a single state or metropolitan area.
Hatch’s actions have brought these same issues–institutional accountability and anti-competitive behavior–to public scrutiny. But there are some principal-agent aspects to Hatch’s populist methods. Is Hatch working only to protect the vulnerable public, or is he engaging in self-aggrandizing populism to further his own political ambitions?
There are parallels with J.P. Morgan’s role in the financial panic of 1907. Morgan, from his commanding position on Wall Street, mounted a campaign for private banks to pump liquidity into the U.S. economy to prevent further bank failures and continued deterioration of the economy. The public grudgingly realized that the old plutocrat had done a great public service.
But they also decided that the national economy was too important to be left to the whims and will of one individual. This experience helped establish the Federal Reserve system six years later, so that an institution, rather than an individual, would be given this important task.
We should take a lesson from that experience. Maintaining effective local competition and accountability in health care is too important to be left to the discretion of one elected official.
© 2001 Edward Lotterman
Chanarambie Consulting, Inc.