Health Care Antitrust Enforcement Issues

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The Health Trustee Institute

Cleveland, Ohio

Date:
By: 
Janet D. Steiger, Former Chairman

Good afternoon. It is a pleasure to be here today as a panelist for the Health Trustee Institute to discuss antitrust, hospital mergers, and innovation in health care delivery. As usual, the views I express are my own. They are not necessarily those of the Commission or any other Commissioner.

Unprecedented developments in health care markets, including the emergence of innovative types of collaborative arrangements, have added to the challenge of antitrust enforcement in the health care arena. FTC and Department of Justice staff monitor the evolution of markets and provide as much information and guidance as possible to the public. They meet periodically with representatives of various provider groups and payers to discuss new developments in the health care industry. Meetings such as these contributed to issuance by the Agencies of an expanded set of health care Statements of Enforcement Policy last September.

Before I discuss the Statements of Enforcement Policy, some staff advisory opinions relating to the Statements, and proposed antitrust exemptions and loosening of antitrust standards under the proposed Medicare legislation, let me describe briefly some basic antitrust principles as they apply to health care. Antitrust law is based on the premise that competition generally benefits consumers by producing the best mix of quality, goods and services at the lowest prices. In assessing possible restraints on competition, the Commission examines the market from the point of view of the consumer. The Commission seeks to determine whether the actions in question will promote or hinder consumers' interest in being able to choose among a variety of quality and price options according to their own needs.

The FTC enforces the antitrust laws to ensure that competitive forces will be allowed to stimulate the development of health care delivery systems desired by consumers. Through sound antitrust enforcement, the FTC has eliminated anticompetitive restraints and thus has helped market forces create an environment in which innovative forms of health care delivery could emerge to compete on their merits.

Hospitals and physicians may act together to provide guidance for patients, innovative services and health care delivery plans, credentialling of physicians, advocacy of positions before Governmental bodies, and improvement of quality of health care services. The antitrust laws allow physicians who sufficiently integrate their practices by sharing financial risk to act jointly, in general, unless such activity monopolizes or is an attempted monopolization of a market.

When physicians do not integrate and share substantial financial risk, concerted activities such as price-fixing, allocating customers or markets, and other restraints on competition are per se illegal or condemned if no plausible efficiency justification exists under the antitrust laws. This means that no further analysis of the market is necessary because such activities almost always have the effect of raising prices or decreasing quality or service to the detriment of consumers.

The 1994 policy Statements expand upon the previous Statements, issued in September 1993, which clarified the antitrust enforcement intentions of the two Agencies as to six forms of collaborative activities among health care providers. The expanded set of Statements includes policies on three additional types of activities, and expands the "antitrust safety zones" for several others. The 1994 Statements help to clarify what health care providers can do together in certain instances with little or no antitrust risk. The 1994 Statements do not represent a change in antitrust enforcement policy -- they can and should be viewed in harmony with our past policies and enforcement actions, as well as the joint venture analysis employed generally by the Commission.

The hospital merger Statement provides an antitrust safety zone for small hospital mergers and explains the Agencies' analysis of hospital mergers that fall outside the safety zone. The Statement notes that the Agencies have challenged only a handful of the hundreds of hospital mergers that have occurred in recent years. Many hospital mergers outside the safety zone will not pose serious competitive problems and the Commission will not challenge them.

As a general point, the Statements note:

"[M]ost of the nine statements set forth herein give health care providers guidance in the form of "antitrust safety zones," which describe the circumstances under which the Agencies will not challenge conduct under the antitrust laws. The inclusion of certain conduct within the antitrust safety zones does not imply that conduct falling outside the safety zones is likely to be challenged by the Agencies. The Agencies want to emphasize this point to the health care community to ensure there is no misunderstanding of the meaning of the safety zones. Antitrust analysis is inherently fact-intensive. The statements set forth an outline of the analysis the Agencies will use to review conduct that falls outside the antitrust safety zones."

The agencies use the "rule of reason" to analyze mergers, including hospital mergers outside the safety zone. The rule of reason analysis is set forth in the 1992 Horizontal Merger Guidelines. The "rule of reason" measures whether the anticompetitive activity may have a substantial anticompetitive effect, and if so, whether that potential effect is outweighed by any procompetitive efficiencies.

Under the Merger Guidelines, each case is evaluated for anticompetitive effects based on its own particular facts and circumstances. Following the Merger Guidelines in considering hospital mergers, the Commission carefully considers the relevant market in each case, relying on the statements and documents of the parties, customers, including indemnity insurance providers and managed care operations, and competitors. The Commission also examines the percentages of physicians who have overlapping privileges at the merging hospitals, patient-flow data, relevant state and local area statistics, and the likelihood that patients and insurers would turn to hospitals farther away in the event of a price increase.

The Commission uses the data compiled to determine the concentration in the relevant market as measured by the Herfindahl-Hirschmann-Index ("HHI"), assess the impact of likely, timely, and sufficient entry to defeat possible price increases or service and quality decreases by the merged firm, and evaluate whether the merger will facilitate tacit coordination or collusion among the remaining players or will facilitate the exercise of unilateral market power by the merged entity that would make price increases or quality and service decreases more likely. In assessing the likely competitive effects of the merger, the Commission will examine all relevant information, including any complaints about the proposed merger or information about competitive performance of the market under investigation.

The Commission also evaluates evidence to assess whether the merger will likely lead to efficiencies that could lower costs; whether those lower costs, if they exist, would be passed along to consumers; and whether those efficiencies are specific to the proposed merger.

I believe that the analysis of the facts specific to each merger case should continue to guide antitrust analysis. Indeed, the results of surveys of the antitrust bar and knowledgeable industry participants throughout the United States strongly support the view that evaluation of mergers should examine all relevant factors and not be based on concentration numbers alone. Hence, the relative concentration of an industry provides a useful starting point to examine competitive conditions and does not provide a dispositive guide as to whether the Commission should undertake enforcement action.

One recent example of the rule of reason analysis, in the health care context, is an FTC staff advisory opinion provided to the Eastern Ohio Physicians Organization ("EOPO"). The advisory opinion examined a joint venture arrangement among physicians that included over 30% of the community physicians (over 38% of general practitioners and over 33% of pediatricians) and a much higher percentages of certain health care specialists. Even though the safety zone for non-exclusive physician joint venture networks is capped at 30%, the advisory opinion concluded that EOPO's non-exclusive contracts with the number of physicians proposed did not appear likely to permit the network to raise prices above the competitive level or to impede the development of competing physician networks. The advisory opinion noted that the proposal to provide comprehensive physician services on a risk- assuming basis held the potential to create significant efficiencies.

A second staff Advisory Opinion provided yesterday to the Columbine Family Health Center in Black Hawk, Colorado, evaluates a proposed joint operating agreement between a general acute care hospital in Denver and Columbine for the provision of outpatient, primary, occupational, and urgent medical care services in a rural area outside Denver. The parties proposed to coordinate the operation of and share some costs associated with operating separate clinics on shared premises, with hours of operation that overlapped only in part. One provision of the agreement governed which party would treat certain kinds of cases during hours when both clinics were in operation, and the referral for follow-up care of patients seen when only one clinic was open. The agreement did not override the patient's choice of provider or govern prices to be charged by either party. The arrangement did not fall within the coverage of Statement Three, which relates to hospital joint ventures for specialized clinical or other expensive health care services, because the hospital and Columbine do not appear to operate a single facility on a shared basis, Columbine is not a hospital, and the joint venture does not involve the joint operation of a specialized or other expensive clinical service. Nonetheless, the Advisory Opinion evaluated this proposed agreement under a rule of reason standard. The Advisory Opinion stated that the provision on patient referrals was reasonably ancillary to the goal of assuring that services were available to patients during all normal business hours without each party having to offer full-time coverage at its clinic. Moreover, the Advisory Opinion noted that anticompetitive effects appeared unlikely because the proposal does not override a patient's choice of facility, establish prices to be charged by Columbine or the hospital, restrict either party from offering services at other locations, or limit the availability of services from a number of other providers.

Returning to the Statements of Enforcement Policy now, I would like to point out that the 1994 Statements include three new Statements. Statement 5 covers the collective provision by health care providers of fee-related information to purchasers of health care services. The 1993 Statements did not cover such fee-related information because of the Agencies' concerns about sanctioning any conduct that might lead to price-fixing. However, after further discussion with health care industry members about the need for providers to be able to communicate fee information and how it could be used by payors, we became convinced that such information sometimes can help purchasers efficiently develop payment terms, whether submitted in response to a request from the purchaser or at the initiative of providers. Recognition of concerns of the health care industry led to the creation of a safety zone, which is available if three conditions are met:

  1. the collection of the information is managed by a third party; 
  2. any information that is shared among competing providers must be more than three months old (information provided only to purchasers may be current); and 
  3. information may be shared among the providers only if there are at least five providers reporting such data, no individual provider's data represents more than 25% of the reported statistic on a weighted basis, and the information is sufficiently aggregated so that recipients cannot identify the prices charged by any individual provider.

This Statement distinguishes the collective provision of fee information from the collective negotiation of fees; the latter activity may constitute illegal price-fixing.

Statement 3 clarifies the Agencies' approach to hospital joint ventures formed to provide specialized clinical or other expensive health care services. It is important to note, as this Statement does, that the federal enforcement Agencies have never challenged an integrated joint venture among hospitals. The Statement recognizes that such ventures can produce significant efficiencies and, as with any other kind of legitimate joint venture, will be assessed under the rule of reason. Although the Statement does not set forth the parameters of a safety zone, this is not meant to imply that these kinds of joint ventures necessarily pose any greater antitrust risk than do other forms of collaborations; instead, it indicates the Agencies do not have sufficient experience with such joint ventures to formulate a precise safety zone.

Statement 9, the third new Statement, discusses multiprovider networks, which may include providers that otherwise compete, as well as providers offering complementary or unrelated services. A wide variety of multiprovider networks have been brought into being or are being planned in response to health industry evolution: The antitrust issues they raise can be horizontal, vertical, or both. Some of these new multiprovider networks describe themselves as physician-hospital organizations (PHOs), and they can vary significantly in their form and operations. It has been said, "if you've seen one PHO, you've seen one PHO." Given the novelty, diversity, and complexity of these networks, there is insufficient experience to formulate bright line "safety zones" governing the legality of their formation or operation.

Statements 8 and 9 emphasize the importance of significant economic integration if a multiprovider network contains competitors agreeing on price or market (or service) allocations. For example, if the physician component of the PHO is not integrated and does not have substantial risk sharing, the joint negotiation of physicians' prices is not made legal merely because there is a hospital component in the organization. Nor does the opportunity of physicians to "opt out" of a PHO's price agreements necessarily salvage an otherwise unlawful agreement. A concern in some markets is the possibility that formation of a PHO could lead to market power. We would be concerned with any entity that achieves market power at either the hospital or physician level, and uses that power to affect prices, restrict entry, or exclude competing health plans.

We appreciate the largely favorable response we have received for the Statements of Enforcement Policy. The Statements have reduced some uncertainty, and clarified for many health care providers how they can proceed with procompetitive collaborations. We are aware that we have not eliminated all antitrust uncertainty felt by health care providers or their counsel. For those who are concerned that the Statements do not answer all of the questions that arise in this time of rapid change, they have the opportunity to seek prompt specific guidance from the Agencies concerning the collaborative activity they wish to pursue.

SPECIAL ANTITRUST RULES AND EXEMPTIONS FOR PHYSICIANS H.R. 2425

"the Medicare Preservation Act of 1995" contains two antitrust provisions that the Commission and the Department of Justice have opposed.

Section 15221 of H.R. 2425, "Exemptions from Antitrust Laws for Certain Activities of Medical Self-Regulatory Entities," provides a special antitrust exemption for medical groups' setting or enforcing of "standards" that are "designed to promote quality of care of health care services." The concern is that such an exemption will allow medical societies to set standards under the guise of "quality of care" that could lead to conduct harming consumers in the form of price-fixing and boycotts, among other activities. The antitrust laws in the past have prevented such anticompetitive activities.

When it comes to "standard setting" and concerted action to restrain trade unreasonably under the guise of protecting patients, antitrust enforcement is essential to prevent agreements to deter new entry or inhibit development of new and innovative delivery or service methods. Hospitals could be victimized by so-called "standard setting," and the antitrust laws are designed to protect them from this behavior.

The Commission has brought many enforcement actions since its 1975 complaint in the seminal American Medical Association case that eliminated certain ethical restraints that prohibited physicians from joining managed care organizations. Even in the 1990's, the Commission has dealt with many cases in which providers threatened group boycotts, refusals to deal, and refusals to credential physicians if competitors entered the market. For example, the Commission charged the Medical Staff of Broward General Medical Center in Broward County, Florida, with a conspiracy to restrain trade by preventing the Cleveland Clinic, a multi-specialty group practice I am certain that you are familiar with, from opening a facility in partnership with Broward General Medical Center. In September 1991, the Commission charged that the Medical Staff of Broward General Medical Center and its chief entered into a conspiracy to prevent, delay, and limit competition from the Cleveland Clinic through threats of boycott, refusals to deal except on collective terms, refusals to process applications for medical staff privileges sent by Cleveland Clinic physicians, and other anticompetitive activities. The Medical Staff signed a consent agreement to cease and desist from the alleged anticompetitive conduct.

The second provision of H.R. 2425, Section 15021, "Special Antitrust Rule for Provider Service Networks," would exempt certain groups of health care providers from the per se rule against price-fixing that currently applies to all other sectors of our economy. Again, the per se rule means that if competitors agree to fix prices, the conduct can be condemned without further inquiry into its effects because such agreements are almost always harmful to consumers.

The legislation establishes that certain provider organizations may contract directly with the Medicare program to provide all covered services in return for agreeing to a monthly capitation payment. These organizations are called "provider-sponsored organizations" ("PSO's"). Provider service networks ("PSN's") are groups of providers that may contract with a PSO -- in essence as subcontractors -- to provide services to Medicare beneficiaries.

Physicians have complained that the antitrust laws do not provide physicians with flexibility needed to advocate collectively on behalf of patients or to deal with health insurers. Some of the complaints reflected by physicians are addressed in the language providing relaxed antitrust standards for PSN's.

Section 15021(a) provides that the conduct of a PSN or its members in fixing prices would be evaluated only under the "rule of reason" antitrust analysis, rather than under the per se rule generally applicable to price fixing by competitors. Legitimate joint ventures of physicians already receive "rule of reason" treatment, for example, where their members share substantial financial risk. This is because risk-sharing among members of the group gives each member an incentive to assure that the group as a whole provides services in a cost-efficient manner. Because providers practicing under the PSO share substantial risk and have capitation, a PSO would be evaluated under the rule of reason standard. Under Section 15021(a), however, members of a PSN who do not share any financial risk, and thus do not have the same incentives to achieve cost-savings, would be able to set fees collectively for services provided through a PSO without regard to the usual per se rule against price-fixing.

The PSN could harm providers in a PSO under the language of H.R. 2425 by agreeing on collective price terms and then threatening a group boycott or refusal to deal if the PSO refuses to accept the providers' terms. In such a case, even though the anticompetitive conduct is clear and no countervailing efficiencies are produced, the bill would require the antitrust agencies to conduct a resource-intensive analysis of the market under the rule of reason.

Another concern is that the providers in a PSN who provide services through the PSO's may unintentionally dampen competition in provision of medical services outside the Medicare context. Providers who agree collectively on fees in the PSO context may implicitly agree to adhere to similar fee demands when dealing with other plans. Even absent bad intentions, once competing providers have met to negotiate their fees for PSO business, the information they have exchanged and understandings they may have reached could likely spill over into dealings with other organizations that provide health care benefits to non-Medicare patients.

Before I close, I would like to make one final point on the proposed special antitrust rules and exemptions for physicians. At its core, the proposed special rules and exemptions from traditional antitrust enforcement standards for physicians may be based on faulty premises about the nature of competition in health care and how antitrust law applies to physicians. We also saw this when there was a proposal for the exemption of hospitals just a few years ago. One premise is that due to market imperfections, competition in health care does not work to contain costs and ensure quality. The other premise is that the antitrust laws are unable to deal with markets, such as health care, that do not resemble perfect competition. In my view, however, the record of antitrust enforcement in the health care field shows that competition is important to containing costs and ensuring quality, and that antitrust enforcement is able to prevent harmful conduct without interfering with joint conduct that is truly justified.