The Health Care and Antitrust Interface in an Era of Fundamental, Industry-Wide Realignments

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SMS Health Executives Forum

Naples, Florida

Date:
By: 
Christine A. Varney, Former Commissioner

Commissioner, Federal Trade Commission. The views expressed are those of the Commissioner and do not necessarily reflect the views of the Federal Trade Commission or any other Commissioner or staff.

I appreciate the opportunity to speak with the people at the business end of the health care industry that is, after all, the heart of the FTC's interest in the industry: the business of health care. The health care industry presents a continuing challenge to antitrust enforcers as we try keep competition alive in the managed care revolution. I believe that you, the health care business executives, offer us a valuable window on the realities of the marketplace. I welcome this opportunity to hear your thoughts.

I wanted to talk to you a little today about the major changes we see occurring in the industry. I don't need to tell you that health care delivery is going through a period of tremendous realignment. The Federal Trade Commission, for example, has just completed its final antitrust review of the largest hospital merger in U.S. history: Columbia/HCA Healthcare's $3 billion merger with Healthtrust, Inc., involving more than 280 hospitals nationwide. Congress is looking at major changes in the Medicare system that will, if enacted, dramatically affect health care generally and hospitals specifically. I wanted to talk to you about these changes, how the FTC fits into the picture, and how I view the FTC's proper role in enforcing the antitrust laws in health care markets.

As you know, the Commission, or the Antitrust Division of the Department of Justice, reviews hospital mergers. You also know that there has been continuing controversy over the role of antitrust enforcement in health care markets. I strongly believe that competition has played a positive role in improving the quality, if not the availability, of health care in this country. Antitrust enforcement is important in ensuring that competition remains vigorous. At the same time, your industry is continuing to experience unnecessary costs and inefficiencies. Consequently, the efficiency benefits of mergers may, in certain circumstances, outweigh the possible anticompetitive effects.

Last year, the Commission and the Antitrust Division of the Department of Justice promulgated the Health Care Policy Statements, providing substantial guidance about antitrust enforcement in health care markets. In the merger area, we recognized that certain hospital mergers were highly likely to be beneficial overall, in the sense that efficiencies resulting from consolidation outweighed any anticompetitive effects. The statements set forth a safety zone for mergers between two general acute care hospitals where one hospital has an average of fewer than 100 licensed beds over the three most recent years and has an average daily inpatient census of fewer than 40 patients over the three most recent years. This safety zone is a significant recognition that there can be important efficiencies to hospital mergers, particularly for small hospitals and those in rural areas. Generally, when reviewing a merger we first define a market, then look to the post merger market concentration in that market. If the resulting concentration puts the transaction in the "anticompetitive" realm, we will consider "defenses" to the anticompetitive of the transaction. The two most common defenses are "failing firm" or "efficiency justifications".

Sometimes in the past antitrust enforcers have been too dismissive of the efficiency defense in hospital merger investigations. Indeed, in the past, some have attached what I can only call "killer qualifications" to any defense based on asserted efficiencies. They have stated that first, they must show the efficiencies with "clear and convincing evidence"; second, that the parties must show they will pass on the efficiencies to consumers; and, third that they publicly air efficiencies from planned consolidations to the affected communities. The 1992 Joint FTC/DOJ Merger Guidelines, however, say nothing of the sort: they only require a showing of "significant net" efficiencies that cannot "reasonably be achieved . . . through other means." Private parties generally control efficiencies evidence therefore it makes sense to place the burden on parties to show efficiencies. However, a clear and convincing evidence requirement could be viewed as so strict that no one can practically meet it. Similarly, Chairman Pitofsky has advanced the view, with which I wholeheartedly agree, that the requirement of a "pass through" may be too harsh. Rather, my view is that, when a merger does not impose a severe threat to competition, efficiencies should be presumed to flow to the benefit of consumers.

The idea that any requirement that planned consolidations be publicly aired to the affected communities is not, in my judgement, a rational method of decision making in antitrust enforcement. Industries such as hospitals, which provide vitally needed services to the community but which suffer from chronic overcapacity, often need to make painful decisions involving layoffs and shifts in the provision of services. Such plans may, however, be efficiency-enhancing, by providing similar quality of care at lower cost. If such plans are publicly released, they could generate community or employee opposition to the merger. Requiring that such plans be publicly released could chill hospital merger proponents from advancing such efficiencies arguments, out of a fear that public airing of consolidation plans could bring pressure to rescind the merger.

In the future, I expect Commission staff to give more credence to legitimate efficiencies justifications.

The hospital merger safety zone in the Policy Statement is based on studies showing that general acute care hospitals under 100 beds were generally below minimum efficient scale. Of course, we need to know more about how efficiencies work in hospital mergers, particularly how to evaluate and quantify them. I encourage you to participate in three public hearings that the FTC is conducting in the next two weeks on efficiencies analysis in antitrust enforcement -- on October 26, November 2nd and 7th. I hope that we will be able to refine our analysis of efficiencies in hospital mergers as a result of those hearings.

I also hope that the Commission will examine in more depth some of the specific efficiencies arguments that have been raised by private parties in past hospital merger cases. For example, in last year's acquisition of Holy Cross Hospitals by Healthtrust, Inc., in Utah, the parties argued that the merging hospital systems achieve network and operational efficiencies through acquisition not possible through contracting or joint venturing. The parties sought to show that contracting and joint venturing are inefficient alternatives to outright merger because of the need to deter "gaming" on patient referrals as each hospital attempts to shift costly patients to other hospitals. They noted that, in this era of capitated payment structures, it is difficult, if not impossible, for joint venturing arrangements to prevent such gaming. Consequently, parties have argued that there is no other way short of a merger by which they can achieve such network efficiencies. On the other hand, I have heard that some in the industry do not believe that much gaming has in fact gone on in hospital joint venture networks. I would be interested in hearing about your experiences on this question.

I would be remiss if I did not describe another aspect to the ongoing debate about hospital mergers. Some public interest groups such as Citizens Action have argued that the latest wave of hospital mega-mergers is itself cause for concern. They note that third-party payers are, more and more, looking for providers that offer extensive geographic coverage. They argue that, by creating networks of hospitals, these mega-mergers may allow hospital chains to obtain dominant positions in regional geographic markets, such that they will be able to price supracompetitively. They also question the asserted efficiencies that these hospital chains argue are created by mega- mergers. For example, at least one study by the Health Care Advisory Board has suggested that network efficiencies tap out after four to six hospitals are grouped into a network system. At this point the focus of any antitrust inquiry into hospital mergers remains on defensible geographic markets, which for the most part are local ones for hospital services, rather than any regional markets. However, I believe we need to continue looking at all of the ramifications of the extensive realignments going on in the hospital industry, including regional network efficiencies.

The recent Columbia/HCA-Healthtrust merger review shows another aspect of our evolving approach toward hospital merger reviews. In addition to the divestiture of three hospitals in Salt Lake City, the Commission's settlement required the divestiture of four hospitals in Louisiana, Florida and Texas. In the extensive investigation we did on this merger, we worked closely with the Attorney Generals of Florida and Texas. I have called for, and I believe at least two other Commissioners have also supported, the Commission working more closely with state Attorneys General in hospital merger cases. Although large national mergers like Columbia/HCA and Healthtrust certainly require that the Commission take the lead, greater antitrust scrutiny by state officials is something I hope we'll see more of.

I want to turn now to talk a little about some of the changes proposed recently in Congress to reform the Medicare system, in particular H.R. 2425, the "Medicare Preservation Act of 1995." I am not here to debate the merits of the substance of this legislation. As an antitrust enforcer, however, I do want to express some concern about two provisions in the legislation. The first would confer broad immunity for doctors who engage in boycotts and price-fixing as long as they do so in order to promote quality. The second would give doctors limited antitrust immunity to collectively set the fees at which they will provide health care services to hospitals and third-party payers. I am afraid that these provisions will undermine the positive benefits of competition in the health care industry.

As you know, the antitrust laws forbid competitors, including doctors, from fixing prices as well as engaging in group boycotts and other blatantly anticompetitive behavior. This legislation would confer a broad immunity for doctors and their medical societies to engage in boycotts, price-fixing, and many other types currently of illegal conduct whenever their stated goal is the promotion of quality.

While I believe that the vast majority of doctors do not intentionally violate the antitrust laws, there have been some incidents in the past where medical professionals have banded together and sought to boycott hospitals, HMO's and other innovative health care delivery systems. For example, medical professionals have boycotted insurers to obtain higher fees; coerced hospitals into abandoning their efforts to introduce alternatives to traditional fee-for-service medicine, such as integrated multispecialty medical group practices, managed care plans, and hospital-owned primary care clinics; and used the hospital staff credentialling process to block the development of managed care and non-physician practice.

Moreover, doctors have engaged in anticompetitive activity in an effort to promote quality and protect patients. We have defendants who obstructed managed care plans on the grounds that they lead to low quality care, and have boycotted to obtain fee increases claiming that higher fees for physicians were necessary to ensure that high quality providers are available to consumers. In the Commission's landmark AMA case, for example, the Commission successfully struck down ethical rules against salaried employment, working for "inadequate compensation" and affiliating with non-physicians, all rules that the AMA argued were necessary in order to ensure quality of patient care.

I also do not believe that our current interpretation of the antitrust laws would bar any legitimate professional self-regulation activity. Current law permits collective efforts by physicians and other health care providers to certify and set standards, implement practice guidelines, and engage in legitimate peer review activities. Several FTC advisory opinions have approved peer review programs, including enforcement provisions to protect consumers from fraud and abuse. What is forbidden under current antitrust law standards is for medical groups to coercively impose on the market their view of what third-party payers and other consumers should want.

There is another aspect of this legislation that concerns me. Let me give you a little background first about the antitrust laws. The antitrust law's bar against competitors fixing prices is known as a "per se" rule. Because such a practice is almost always anticompetitive in effect, the law presumes that it is unlawful without a full blown resource-intensive examination into all of the conditions in the market. We call such an extensive examination a "rule of reason" inquiry and reserve that inquiry for practices that are not facially anticompetitive. This legislation would exempt physician provider networks from this "per se" rule against price- fixing whenever they negotiate with provider-service organizations run by hospitals and third-party payers, even though the doctors have not integrated their practices in any way or shared risk in any fashion. Although such behavior would still be actionable under a "rule of reason" inquiry, rule of reason investigations are notoriously resource-intensive and difficult to resolve. Paradoxically, the legislation does not confer a similar immunity on provider-service organizations involving hospitals and third-party payers, but rather requires that they financially integrate and share risk.

I am concerned that this aspect of the legislation could in fact undermine its goals. The immunity grant would permit providers who otherwise would compete on price to set collectively higher costs on the provider service organizations with which they contract. This would likely make the provider service organizations less effective providers, thereby impeding the legislation's objectives of controlling costs.

Indeed, by allowing competing providers to engage in collective bargaining with Medicare service organizations, the bill could have the unintended effect of dampening competition among those same providers for non- Medicare business. Providers who agree on Medicare prices may agree to similar price demands with non-Medicare plans. Such agreements may be very difficult to detect and prosecute, but could cause serious harm to patients who are the ultimate consumers of health care services. Consequently, there could be a spillover effect that could adversely impact the rest of the health care business.

I also do not believe that such broad immunity is really necessary for the scheme that the legislation proposes to create. Indeed, this legislation implicitly recognizes that this exemption is unnecessary by pointing out the proper way under the antitrust laws for competitors to get together and negotiate future fees collectively -- by integrating and sharing risk. The legislation establishes provider service organizations that can create set fees and establish provider panels, but only so long as they are financially integrated and share risk.

I understand that the AMA's desire for antitrust immunity is born out of frustration with what they saw as a mechanistic application of the antitrust laws in hospital mergers, provider joint ventures, physician networks, and other enterprises. However, since the introduction of the Health Care Policy Statements, the antitrust enforcement agencies have demonstrated appropriate flexibility when considering innovative provider arrangements that offer benefits to consumers. Recently, for example, an FTC staff advisory opinion gave the green light to a physician network even though it fell slightly outside the parameters of the safety zone for non-exclusive physician network joint ventures. Consequently, I believe there is no legitimate basis to bestow on the AMA an exemption from antitrust scrutiny. After all, we're not talking baseball.

I think you will find that we will always be flexible when considering innovative provider arrangements that will reduce the cost or improve the quality of medical care. What we will never condone are collusive practices that drive up health care costs and drive down quality. We believe that the American public and, ultimately, all segments of our great health care industry benefit from such a sensible antitrust enforcement posture. I look forward to continuing the dialogue between the antitrust enforcement agencies and your industry. Thank you.