Earlier this week, Paul Krugman passed along some interesting and relevant analysis about the decision by GE to spin off GE Capital and re-focus on being really good at making stuff.
There are two big lessons from GE’s announcement that it is planning to get out of the finance business. First, the much maligned Dodd-Frank financial reform is doing some real good. ….
GE Capital was a quintessential example of the rise of shadow banking. In most important respects it acted like a bank; it created systemic risks very much like a bank; but it was effectively unregulated, and had to be bailed out through ad hoc arrangements….Dodd-Frank tries to fix the bad incentives by subjecting systemically important financial institutions — SIFIs — to greater oversight, higher capital and liquidity requirements, etc.. And sure enough, what GE is in effect saying is that if we have to compete on a level playing field, if we can’t play the moral hazard game, it’s not worth being in this business. That’s a clear demonstration that reform is having a real effect….
Mike Konczal notes, GE — following in the footsteps of others, notably MetLife — is clearly desperate to get out from under the SIFI designation. It sure looks as if being named a SIFI is indeed what it’s supposed to be, a burden rather than a bonus
SIFI institutions are big and they have market power. They also had implicit subsidies of being too big to fail. Dodd-Frank is attempting to impose reasonable costs on being very large so as to recoup the implied subsidy of being too big to fail as well as minimizing the shrapnel of a TBTF institution exploding.
The medical provider market in the United States is concentrated and getting more concentrated as the number of hospital merges is increasing and more importantly, local vertical integration is happening all over the place as hospitals buy up specialist offices, primary care facilities, rehab facilities and then start insurance companies to lock their members in. Consolidated providers and fragmented payers means the price paid per unit of service delivered will be far closer to the providers’ ideal point than the payer’s ideal point. That applies to Medicare, Mediaid, CHIP, Exchange and every employer group plan.
Being too big where providers have significant market power should be counter-balanced. Last October I proposed the following:
The policy change would be to tie universal Medicare/Medicaid/CHIP reimbursement to a provider’s contribution to a set of regional HHI indexes. A three person PCP office has absolutely no market power so they would get full regular government reimbursment. A chain of hospitals that controls 30% of the regional hospital beds has some market power might see a 1.5% decrease in general govenrment reimbursement. Big City Medical Group which controls 70% of the high end specialists for an HHI contribution of 4,900 points might see a 5% reduction in high end specialty reimbursment for every government paid claim. BCMG which controls 12% of the primary care provider network would see regular reimbursement for primary care codes.
The goal is call the bluff that consolidation is about efficiency instead of capturing more consumer surplus and redistributing it to internal stakeholders and the local BMW dealership. If conslidation truly is an efficient option, a firm that is considering moving from regular reimbursement to a 1.75% penalty HHI index would be clearly demonstrating that they think there is a real efficiency gain to be had instead of monopolistic rent gains. Threshold firms would have an incentive to stay at their same size or slightly decrease, thus improving overall market competition on the provider side.
If there are real gains to be made from consolidation, then a 1% reduction in government reimbursement would be a worthwhile price to pay. If the gains are purely market power gains, then a 1% reduction in reimbursement will persuade some of the potentially consolidating providers to not consolidate. Market power will be more accurately priced.
Implied subsidies: GE losing SIFI and consolidating hospitalsPost + Comments (16)