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HHI Fallacy

The Fallacy of Using Herfindahl-Hirschman Index to Understand Markets Part I – A Reflection on Recent Events

Recently, this quote piqued my interest: 

“This should be a lesson learned to hospital systems all over the country and their counsel: the FTC will not hesitate to take action in enforcing the antitrust laws to protect healthcare consumers who are faced with unlawful hospital consolidation,” FTC Bureau of Competition Director Holly Vedova said in the release. “Had this transaction been allowed to proceed, it would have combined the second and fourth largest healthcare systems in Salt Lake City and the Wasatch Front region of Utah, resulting in higher prices, less innovation, and lower quality care for patients. I am glad that patients and healthcare providers will not have to endure any more uncertainty while waiting for courts to rule on the FTC’s legal challenges.”1 

It is unclear why the FTC has focused for four decades on this group of community hospitals, which Steward bought from Iasis, which bought them from Paracelsus, which bought them from Champion, and which in 1995 were owned by…HCA. The fact that the FTC is focused on this transaction, considering other healthcare industry transactions on which they could  be focused, recalls Jerry Tarkanian’s quip that “the NCAA was so mad at Kentucky they gave Cleveland State two more years of probation.”  

The truth is that Salt Lake City doesn’t need four health systems to be competitive – and, based upon one notable economic model, might be more competitive with only two. The Salt Lake City market for inpatient hospital services, and many like it, exhibit certain characteristics of “Cournot competition,” where two or more firms with identical cost functions compete to produce similar goods.2  

Antitrust provisions limiting price discovery have historically prevented game theory from taking hold in healthcare, but the advent of price transparency for hospitals and payers largely removes that barrier. As we have previously noted, the hospital business is a negative-sum game:  

“The most difficult problems are negative-sum situations, where the pie is shrinking. In the end, the gains and losses will all add up to less than zero. This means that the only way for a party to maintain its position is to take something from another party, and even if everyone takes his or her share of the "losses," everyone still loses in comparison to what they currently have or really need. This type of situation often sparks serious competition.”3  

In 2022, the Federal government’s reliance on a measure of market share of providers of inpatient hospital services as a proxy for overall healthcare market share is, at best, anachronistic. 

While one Federal government agency actively prevents consolidation of inpatient hospital services, another seemingly endorses it. The Medicare Hospital Insurance trust fund, out of which Medicare Part A benefits, i.e., inpatient hospital services, are paid, is now projected to be depleted in 2028.4 In its 2022 Annual Report, the Medicare Board of Trustees included this statement: 

“The financial projections in this report indicate a need for substantial changes to address Medicare’s financial challenges. The sooner solutions are enacted, the more flexible and gradual they can be. The early introduction of reforms increases the time available for affected individuals and organizations—including health care providers, beneficiaries, and taxpayers—to adjust their expectations and behavior. The Trustees recommend that Congress and the executive branch work closely together with a sense of urgency to address these challenges.”5 

A time will come when, in the words of Dr. Martin Luther King, Jr., it is “too late” to make changes that are essential to preserve the U.S. healthcare system as it currently exists. The “fierce urgency of now” mandates a new approach to understanding healthcare markets in order to make economically rational decisions about providing Americans with the care that they need. 

In this series, we will explore: definitional concepts of a market economy and, more importantly, a market; why understanding individual markets is essential for every stakeholder in the healthcare economy; how to use data to analyze markets; and why using the Herfindahl-Hirschman Index to analyze competition for healthcare services is outdated, flawed, and ultimately quixotic. 

 

[1] hca-calls-off-deal-to-buy-utah-hospitals.html

[2] https://www.princeton.edu/~dixitak/Teaching/MicroHighCalculus/Notes&Slides/Lec16.pdf

[3] https://www.beyondintractability.org/essay/sum

[4] https://www.cms.gov/files/document/2022-medicare-trustees-report.pdf

[5] Ibid, page 11.