Domino Theory And The Health Care Industry

Have you ever heard of a concept known as domino theory? It was once cited by U.S. Presidents Eisenhower, Kennedy, and Johnson to justify America’s catastrophic military intervention in Vietnam.

The presidents argued that, if the South Vietnamese government was overthrown by communist forces, all of the other nations in Southeast Asia would fall to the communists in sequence like a row of dominoes. Eventually, of course, South Vietnam was indeed overrun by the communist military forces of North Vietnam. But no other nation in Southeast Asia ever followed suit.

In other situations, though, the domino effect has indeed generated a cascading series of events. When the United States government failed to save Lehman Brothers in late 2008, for instance, many political commentators warned that the failure of the Wall Street firm would trigger a domino effect that would lead to global economic collapse. Indeed, firms like AIG, Fannie Mae, General Motors, and Merrill Lynch disintegrated soon afterwards.

The domino effect appears to be impacting today’s health care industry as well. Over the past few decades, many cities have witnessed the consolidation of multiple hospitals into one or two dominant institutions, and then the absorption of physician groups and outpatient providers into hospital based “health systems.” The federal government has encouraged such activities by recognizing Accountable Care Organizations and other legal entities that require closer ties between provider units.

By and large, though, the health insurance sector has remained in a somewhat fragmented state. Some insurers have focused on certain types of insurance contracts, such as Humana and its Medicare plans. And others have operated within certain geographic areas, such as Kaiser Permanente in the western United States.

Last week, however, Aetna announced the acquisition of Humana in a multi-billion dollar deal, following Anthem Blue Cross Blue Shield’s offer to acquire Cigna last month. Why are these insurers suddenly taking an interest in acquiring their rivals?

Their interest can be attributed to the domino effect. When hospitals and other health providers consolidated into a small number of dominant organizations, they developed a significant negotiation advantage over the health insurers that sign payor contracts with them. The insurers are now deciding that they need to grow too, in order to neutralize their size disadvantage.

Of course, had the federal government maintained a rigorous antitrust policy, it might have prevented the consolidation of the provider market. But for many years, in industries ranging from health care to airline travel, the federal government has permitted many mergers and acquisitions that eliminate free market competition.

So it now appears that the health care industry is evolving towards a structure that will feature a small oligopoly of insurers across the nation and a small oligopoly (or monopoly) of providers in each regional market. The entire industry will be regulated under the Affordable Care Act and other federal and state laws.

This emerging structure shifts the American health care industry further and further away from the ideal principle of a free market capitalist economy with many competitors vying for business volume. Nevertheless, because so many dominoes have already fallen in this direction, it may be far too late to reverse course and adopt any other viable industry structure.