It is the passing of an era. After some 40 years, for-profit Health Maintenance Organizations, or HMOS, will be able to operate in Minnesota. The Legislature recently repealed a ban on for-profit HMOs, enacted in the 1970s, when this form of providing health insurance was a new phenomenon indeed.
The practical results on consumers and companies probably will be small. But the move is an occasion to reflect on why we think differently about how and when for-profit firms, nonprofit enterprises, or government itself, should provide goods and services. Neither side of the political spectrum is very consistent in their thinking on this. But economists generally are.
Along with most other economists, I operate from a default view that private businesses should not be banned from providing any good or service unless there are strong economic or social reasons for such a ban. And this position in the discipline may come as much from dogma as from anything else.
Also note that some of the strongest opposition to letting private, for-profit firms run HMOs in the state comes from the similarly dogmatic, inherently suspicious view that for-profit businesses, especially large corporations, are inclined toward illegal and immoral practices. Indeed, some would say, there are market incentives toward such practices.
In between these poles, there are many in the ideological center who don’t have any particular animus toward making money or any conviction that unfettered markets are always optimal, but nonetheless have plenty of well-founded skepticism about U.S. health care sectors.
So why did Minnesota impose a ban on for-profit HMOs when we never banned for-profit doctors’ practices or hospitals or health policies issued by for-profit insurance companies? I think one implicit economic argument back in the 1970s was one of the vulnerability of an infant industry to predatory pricing.
Put in everyday terms, when the first HMOs were few in number, small and financially weak, people feared that large, well-established and well-capitalized for-profit insurers that already sold traditional health policies would horn into this new market by setting up their own HMOs. The financial strength of such insurance companies would allow them to price the services of their subsidiary HMOs very aggressively — in other words, cheaply — driving the weaker fledgling non-profits out of business. Then the big boys would be able to exercise monopolistic power and raise prices dramatically. That is predatory pricing and it should be familiar to anyone who followed American Airlines over the years.
That is one possible rationale for the ban. There are others.
Skeptical economists might see ”rent seeking,” the abuse of political power by some entity to secure public policies that feather their own financial nest. This scenario would see the initial HMOs as a new business model for health care that held promise of economies of size and scope. The early entrants had a “first mover” advantage over latecomers. If they could get laws enacted to keep a whole class of potential competitors out of the market, it would perpetuate their own monopoly power. As nonprofits, they did not have the same incentive to maximize profits for shareholders. But there are plenty of incentives for the managers of nonprofit entities to increase the size of their organizations and thus earn higher compensation. When you get to very large organizations, the day-to-day incentives for managers don’t differ much between “for-profit” and “nonprofit.”
The fact that the industry association for nonprofit HMOs has lobbied heavily over the years to preserve the law supports the “rent-seeking” explanation. But Minnesota is a notoriously low-margin state for health providers, with fees for procedures below those in many other states. The historic nonprofits may have tried to establish and defend a monopoly position, but it is hard to argue that were able to do much here to increase their own wealth.
Over many years, legislative opponents of the nonprofit ban have argued that letting for-profits participate would increase choices for consumers, create more competition between HMO providers and thus motivate beneficial efficiency and innovation. Economic theory and history of other sectors supports this.
However, whether this actually will be true for HMOs in Minnesota remains to be proven. Margins already are low and it is hard to imagine corporate HMO heads salivating at the prospect of getting into the lucrative bonanza of Minnesota health provision.
Minnesota was not alone. At one time 12 states had such bans that were slowly repealed over time until we were the last state left. And now there are none. There is little indication that the public in those states suffered from repeal, but it is also hard to identify any great flowering of efficiency or service after repeal elsewhere.
Are there any general lessons to learn? Economists have focused much energy over the years to discern when government must act to provide some vital good or service to be produced — say fire protection or tornado warnings — and when leaving things to private companies is fine, say providing onions, automobiles or bowling balls. But there has been little scholarship on circumstances where nonprofits are the optimal providers in any market.
Historically nonprofits arose where a market was thought too small for profit-making firms to invest in necessary sales structures or administration. Miners formed burial funds and farmers organized township mutual insurance agencies when commercial insurance companies scorned these markets as too small to bother with.
Such mutuals — essentially ownership by the customers — also took root where information was valuable but scarce and the members of some voluntary association had ways of compiling information that was superior to that of for-profit companies. The close relationships between members helped nonprofits be more responsive.
For-profit competitors assert that nonprofits have gotten governments to grant them special treatment that gave these smaller entities tax or regulatory advantages over profit-seeking companies. Commercial banks make the same argument about credit unions.
In some cases, once humble mutuals have grown to enormous size. Some remain responsive — the uniformed services mutual that I have gotten insurance from for decades is one of the best- run enterprises I have ever dealt with. And my college teachers insurance and retirement mutual is one of the worst. And it is not clear to me why either should have any advantages in terms of taxation or regulation. Their managers probably would respond that at their scale, the advantages over a purely commercial firm are small.
Compare this arrangement to those in other countries, especially poor ones, and the importance to the U.S. economy of nonprofit enterprises, from religious hospitals and schools to mutual insurance and investment funds, falls into sharper relief. These entities have added diversity and responsiveness to our economy that is sorely lacking in nations having cultures and institutions that are less propitious to nonprofits than ours.
Having had this idiosyncratic 40-year ban on profit-making businesses in a key sector and now repealing it constructs an interesting experiment. Just how things now change, if at all, will teach us something about the wisdom or silliness of the Legislature a generation ago. My own prediction is that it will turn out to have been something like the federal law, still on the books, that prohibits anyone from trading in onion futures. It is hard to find evidence that this decades old law either helped or seriously harmed anyone. That will probably prove true for Minnesota’s HMO law.