This note briefly analyzes the scholarly work of Leemore Dafny, who recently has been appointed as the FTC's first Deputy Director for Health Care and Antitrust, beginning August 1. A Harvard- and M.I.T.-educated economist, Dafny was previously a research professor specializing in hospital and health services at Northwestern University's Kellogg School of Management and a Faculty Research Associate at the National Bureau of Economic Research. Dafny has published more than a dozen articles about hospitals and health care economics. As detailed more fully below, her research, using empirical data and statistical methods, supports the structural proposition that greater market concentration leads to higher prices for consumers.
Throughout her career, Dafny's research has focused on hospitals and health insurance plans. While the FTC does not have authority over the health insurance industry, it can investigate and block mergers between hospitals or between other health care providers. Dafny's scholarly work relies on empirical methods and statistical tools and tends to show such mergers are bad for consumers because concentrated markets lead to increased costs.
In one of her most recent articles, Dafny focused on the value of consumer choice regarding health care providers and insurers. The study found people value choice in health care so much that they would be willing to pay more than 20 percent higher premiums if they got the choice of plans and services they wanted. Another article tried to quantify the cost of a lack of choice for consumers and found fewer choices in health insurance providers, on average, led to a seven percent increase in premium costs.
In another article, published in the New England Journal of Medicine, she and her co-author argued price transparency in hospitals can be bad for consumers because it encourages hospitals and insurers to raise prices. Indeed, in a paper prepared for the Alberta Health Service in Canada, she advocated creating a sealed bid system for the state health service, where doctors would bid for the right to perform surgeries and charge a fixed cost, including all follow-up services and complications. In a limited market such as health care, Dafny has argued that when everyone has the same information, hospitals have less of an incentive to offer even one insurance company a discount. If a hospital charged one price to company A and a lower price to company B, in a transparent system company A would know immediately and, most likely, demand the lower price. Rather than give in to the lower price, Dafny argues hospitals are more likely to not offer a discount to anyone and keep prices higher.
The New England Journal of Medicine article also attacked "most favored nation" clauses in hospital/insurance company contracts where a hospital promises to always charge an insurance company the lowest prices offered to any insurer. Dafny argued such clauses are anti-consumer because they keep new competitors out of the health care market (by destroying a new company's ability to compete on price) and remove any incentive to lower prices charged to consumers. The FTC's sister agency in enforcing antitrust laws, the Department of Justice, recently has brought actions against insurance companies for using such clauses.
The general theme in Dafny's research is that bigger may be better for some entities in the health care industry, but not for consumers. Two of Dafny's articles found that large health insurers can become so powerful that they dictate the prices they are willing to pay (to doctors and hospitals) and the prices they are willing to accept (to employers who offer health plans to employees). This high level of market power, Dafny's research found, gives health insurance companies the ability to squeeze employers in good times as well as bad. Without a meaningful choice, Dafny found employers simply accept increased premium costs without the insurer having to risk losing the employers' business.
While the FTC does not have the ability to regulate the insurance industry, it has signaled its willingness to look closely at other aspects of the health care industry, particularly hospital mergers. In hiring an empirical economist whose research shows concentrated health care markets lead to higher prices, Dafny's appointment signals an even stronger likelihood that the FTC will closely scrutinize further health care consolidations, including monopsony or power buyer effects.