THOUGHTS ON "LEVELING THE PLAYING FIELD"
IN HEALTH CARE MARKETS
FEDERAL TRADE COMMISSION
National Health Lawyers Association
Twentieth Annual Program on
Antitrust in the Health Care Field
February 13, 1997
I appreciate the opportunity to speak to you today about an idea that we frequently hear raised in discussions about health care markets: the concept of "leveling the playing field." The idea of a level playing field -- and what role antitrust should play in bringing it about -- is sort of a lighting rod, eliciting widely diverse and intensely-held opinions by different interest groups. Today, I will try to provide some clarification to the debate, and suggest the role that antitrust enforcement should play in assuring a level playing field.
Preparing for today's remarks gave me the opportunity to consider how antitrust enforcement in health care markets has changed since my last term as an antitrust enforcer in the late 1970s. Less than a year after the Supreme Court's 1975 opinion in Goldfarb(1) dispelled any doubts that the federal antitrust laws applied to the conduct of professionals, the Commission's health care antitrust enforcement program was underway. Back then, a large part of our efforts -- both in litigation and advocacy -- was dedicated to making the fundamental point that, notwithstanding the peculiar characteristics of health care markets, competition has an important role to play in this area.
During my earlier tenure, the Commission decided the American Medical Association case(2) and issued its complaints against the Michigan State Medical Society and the Indiana Federation of Dentists. From today's perspective, the restraints at issue in those cases seem so naked and pernicious that it may be hard to understand how ground-breaking the actions seemed in their day. But that is largely because of the increased recognition of the importance of open markets and the competitive process has become part of our conventional wisdom.
If the 1970s was the decade of recognizing why competition matters, I would suggest that the 1990s is the decade of recognizing the importance of forms of cooperation that promote competition. As pressures to control health care costs and assure quality continue, there is an increasing recognition of the efficiencies that can come about through cooperation and collaboration. Practically every week we hear about a new form of collaborative arrangement in the health care field, involving various combinations of insurers, providers and purchasers. Although these cooperative efforts often involve novel arrangements, antitrust analysis is sufficiently resilient to face the task of distinguishing innovative responses to market demands from collective resistance to these market forces. Indeed, it is fair to say that potential efficiencies are one of the core issues of contemporary antitrust, and health care is no exception.
At the same time, however, in health care as in no other area, there appears to be a recurring need to return to first principles, and to talk about why competition and antitrust enforcement make sense. Indeed, as markets have become more competitive and our antitrust analysis more sophisticated, and even as policy makers rely more and more on competition as a useful tool for improving the delivery of health care, the question continues to be raised: is competition a good idea in this context? I suspect this is a debate that will continue for some time, and I welcome the opportunity to be a part of it.
This leads me to my topic for today: leveling the playing field in health care. It is a phrase that one hears often in discussions about health care competition. At first blush, leveling the playing field sounds like exactly what antitrust enforcement is all about -- that is, eliminating obstacles to free and open competition. But it is important to examine carefully what people mean when they argue that there is a need to level the playing field. The notion of a level playing field is used in a variety of ways, and sometimes to promote or justify arrangements that are inconsistent with antitrust principles. Today I'd like to explore various "level playing field" concepts and their implications for our enforcement mission.
Before I begin, however, let me make two disclaimers. First, my comments here today are my own, and not those of the Commission or any other Commissioner. Second, one type of "level playing field" argument -- that is, leveling of the playing field among purchasers of hospital services -- is discussed in the district judge's opinion in the Butterworth-Blodgett hospital merger case, which is currently on appeal to the Sixth Circuit. I am recused from that matter, however, and will have no comments about that particular variation on leveling the playing field.
I. Leveling the Playing Field: Concerns of Sellers Who Deal with Big Buyers
We frequently hear arguments about the need to level the playing field in the context of providers' dealings with health plans. We are told that large buyers have an unfair advantage in negotiations with individual health care providers, and they negotiate prices that are unfairly low. The argument continues that because individual providers are unable to effectively bargain, they are not adequately compensated and that consumers will eventually suffer because they will not receive adequate care.
There actually may be two distinct level playing field arguments presented here. One is a contention that the antitrust laws prevent providers from organizing provider-controlled plans that can compete on an equal footing with insurance companies. The second is a claim that providers need to be able to band together to exercise countervailing power in their negotiations with buyers, and that antitrust law should not interfere with such efforts aimed at equalizing bargaining power. It is important to recognize that these two types of level playing field arguments reflect two fundamentally different responses to concerns about large managed care plans. One response is to create a product that is designed to be more attractive to consumers and compete directly with insurer-controlled plans. The other involves responding to the perceived market power of buyers through the exercise of countervailing power.
Let's examine these arguments. First, let's consider whether antitrust law stands in the way of a "level playing field." In particular, does it prevent effective cooperation among providers to compete with insurer-controlled plans? Then let's focus on whether the creation of countervailing power is the right result for consumers or for the allocation of resources in the economy generally. Or to put that question slightly differently, even if there is excessive concentration among buyers, is increasing seller concentration the right remedy?
As to the first issue, antitrust law gives providers a great deal of latitude to act collectively in circumstances in which consumers are likely to benefit. Over the past several years, the enforcement agencies have reviewed and approved a wide variety of collaborations among competing providers. The recent revisions to the joint FTC/Department of Justice health care guidelines are a response to the large number and diversity of these arrangements. These collaborations are properly analyzed under the rule of reason when they involve integration that may enhance efficiency and benefit consumers and the joint price setting is reasonably necessary to achieve that procompetitive goal. As the revised guidelines make clear, while such integration may involve financial risk-sharing, it need not; and ventures that involve other types of beneficial integration are entitled to rule of reason treatment as well. But where evidence of integration is absent, antitrust law properly suspects that the endeavor is a "sham," with little purpose except to fix prices.
I will leave the discussion of the revised guidelines for other speakers at this program, but let me offer two observations. First, the revised guidelines give greater emphasis to providers' ability to organize networks in a variety of ways without raising antitrust problems. There is no single or preferred method to organize a provider network. Rather, the goal is to encourage innovation that will stimulate competition and benefit consumers.
Second, to the extent that prior versions of the guidelines may have been interpreted to suggest there was a "cap" on the size of provider networks, that erroneous impression has been corrected. The revised guidelines clarify that networks larger than the safety zone thresholds may be approved under the rule of reason. In fact, in the past few years the agencies have approved several provider-sponsored networks above those thresholds.
Efficiency-enhancing conduct by groups of competing providers is already permitted under the antitrust laws and encouraged by the guidelines. Provider networks that pass muster under the rule of reason can contract directly with employers and other payers and thereby compete with health plans that providers believe offer fees and other contractual terms that they consider unfair or bad for patients. Thus, in this sense, antitrust already embraces and accommodates providers' desires for a level playing field.
To the extent, however, that the level playing field argument is about creating a countervailing force in order to neutralize a perceived imbalance in bargaining power, antitrust law will not be receptive. Over the last two decades, the Commission has brought numerous cases challenging health care providers' collective efforts to increase reimbursement levels.(3) And in Michigan State Medical Society, the Commission specifically rejected the Society's argument that its actions were justified in part because of the "superior bargaining power" of the large insurers.(4)
In other contexts, as far back as the Supreme Court's opinion in Philadelphia National Bank, the courts have rejected the notion that the need to acquire "countervailing power" somehow justified an otherwise illegal arrangement.(5) Let me give you a slightly more contemporary example from the cable TV marketplace. In 1979, four major movie studies created a pay movie channel, known as Premiere, through a joint venture. The venture included an exclusivity provision (which dedicated the films exclusively to the venture for a nine-month period) and the Justice Department challenged this provision among others. Premiere sought to justify the restraint as a "rational economic response" to the monopsony power of HBO (which allegedly had even greater power at the buyer level). The court soundly rejected this argument and held the restraint per se illegal.(6)
Even in those cases where courts have been sympathetic to imbalances of bargaining power, they have not countenanced otherwise illegal activity, such as price fixing. In United States v. Alston, Judge Kozinski expressed some sympathy for the notion that particular features of health care markets would justify some collective actions by providers to "level the bargaining imbalance" with insurers. He made it clear, however, "price fixing or a group boycott," are not proper means of leveling this imbalance. Rather, the appropriate response is to permit health care providers to provide information about their fees.(7) Collective provision of fee information to purchasers is, with appropriate safeguards, consistent with the antitrust laws, as the health care guidelines make clear. That is because such joint action can provide procompetitive benefits, by assisting purchasers in efficiently developing reimbursement terms to be offered to providers, and not because it serves to establish any countervailing power. To the extent that Alston may be interpreted as countenancing the exercise of market power by sellers simply to counter the power of buyers, I believe it is inconsistent with established antitrust law.
Now the larger question: Is the rejection of an "unequal bargaining power" defense good public policy? Does the current analytical framework make sense here, or would consumers be better off if we let provider groups acquire market power to give them greater leverage in their dealings with large purchasers? Would greater bargaining power for sellers necessarily lead to better quality and prices for consumers?
Let's consider the argument that prices paid to providers may be too low. As then-Judge, now-Justice, Breyer observed in the Kartell case, we should be reluctant to condemn an arrangement that appears to bring lower prices for consumers. As you will recall, Kartell was one of a number of cases in which providers attempted to use the antitrust laws to challenge insurer cost-containment programs. Arguments that the agreements between insurers and providers amounted to unlawful price fixing were rejected, and suggestions that large Blue Cross Blue Shield plans were using significant market power to extract noncompetitive prices from providers were likewise unavailing. As Judge Breyer explained:
The Congress that enacted the Sherman Act saw it as a way of protecting consumers against prices that were too high, not too low. And, the relevant economic considerations may be very different when low prices, rather than high prices, are at issue. These facts suggest that courts should be cautious -- reluctant to condemn too speedily -- an arrangement that, on its face, appears to bring low price benefits to the consumer.(8)
What about quality? It is argued that some large health plans force providers to reduce services and that quality of care suffers as a result. While health care quality is a complicated subject, in part because of differing views on how to define and measure quality,(9) let me offer a few, cautious thoughts.
As the Supreme Court observed in Professional Engineers,(10) the antitrust laws reflect a fundamental premise that consumer choice, rather than the collective judgment of sellers, should determine the mix of price and quality options available in the marketplace. Indeed, the interests of providers and consumers are not necessarily coincident. The judgment of health care providers concerning what patients should want can differ markedly from what the patients themselves are asking for in the marketplace. Perhaps the most well-known illustration of providers usurping consumer choice was the Indiana Federation of Dentists case, where the Supreme Court unanimously affirmed a Commission decision halting a conspiracy among dentists to frustrate a cost containment program. The Court rejected the argument that providers should be able to "protect" patients by imposing the providers' will on the market and thus denying consumer choice. In the words of the Court, the antitrust laws do not permit a group of providers to "to pre-empt the working of the market by deciding for itself that customers do not need that which they demand."(11)
Of course, often it is an employer, acting on behalf of its employees, rather than the consumer directly, who determines the choice of health plan. However, employers should have an incentive to demand cost-effective health care services on behalf of their employees, that is, high quality as well as low prices. Indeed, there are increasing signs that many employers are seeking to assess the quality as well as the price of health plans, because they seek "value" for the health care dollars that they spend.(12) In addition, some employers are experimenting with new ways to increase the role of informed choice by their employees.(13) And while many consumers may have difficulty evaluating the available options because of limited information about quality, much attention is being given to ways to develop information systems and quality measurements that would allow more informed decisionmaking about quality.(14)
I think the Court's approach to quality issues in Professional Engineers is sound public policy. Providers play a vital role in assuring a high quality health care system. Providers can, and certainly do influence quality by expressing their views to managed care plans, working on quality assurance programs and, as suggested earlier, offering their own alternatives to existing plans. But I see no basis to conclude that permitting the exercise of countervailing market power would be the right prescription for concerns about quality.
Does all of the above suggest that antitrust enforcers do not have any concerns about buyer power? Not in the least. Excessive buying power is known as "monopsony," the flip side of monopoly. Legal and economic theory, of course, recognizes true monopsony power -- the power to depress prices below competitive levels -- as an evil because, like monopoly, it misallocates resources. In response to monopsony power some producers may produce less or cease producing a product altogether, resulting in less than optimal output of the product or service, and over the long run, higher consumer prices, lower quality, or substitution of less efficient alternative products.(15) Enforcement actions involving large buyers are relatively rare, however, because an effective monopsony typically requires not only a large market share, but also certain non-structural factors as well. But even where monopsony does in fact exist, commentators do not suggest that the correct cure is to permit sellers to acquire countervailing power.(16)
From a policy and enforcement perspective, the most effective response to the emergence of excessive buyer power is not to permit the aggregation of some form of countervailing power. Rather, the appropriate response is to try to prevent the aggregation of excessive buying power in the first place. This is a consideration in our investigations of both mergers and conduct. For example, as we review consolidations of managed care plans, we consider whether the transaction is likely to injure competition through the creation of buyer, as well as seller, power.(17) Where there is evidence that such power will distort a competitive market and thereby harm consumers, enforcement action may be appropriate.
Similarly, we are alert to the activity of buyer cartels. For example, in 1992, the Commission issued a consent order against six nursing homes ending an alleged boycott of registries that provided temporary nursing services to nursing homes. According to the complaint, the boycott followed an increase in prices charged to the nursing homes by the registries.(18) While joint purchasing arrangements can be efficiency-enhancing, antitrust enforcement may be necessary where buyers engage in restraints of trade to depress prices.
II. Leveling the Playing Field: Competitive Advantages Among Sellers
Another dimension of the level playing field concept involves relationships among horizontal competitors. For example, one group of competitors may seek to exclude another group of competitors from the playing field, or hobble them by raising their costs. Many enforcement actions have challenged unreasonable obstacles to entry by new forms of health care delivery and financing. The Commission has a long record of challenging concerted efforts to exclude new competitors and forms of competition in health care, including obstruction of entry by HMOs,(19) non-physician providers,(20) hospital-sponsored clinics,(21) and other "alternative" arrangements.(22) Enforcement actions have facilitated the entry of efficient competitors, leading in turn to lower prices and better services for consumers.
For example, in the early 1990s the Commission issued a series of orders against alleged threatened boycotts by physicians to prevent local hospitals from pursuing an affiliation with the Cleveland Clinic, a nationally-known provider of comprehensive health care services.(23) The Clinic, which operated as a multi-specialty group medical practice, offered a predetermined "global fee" or "unit price" covering all aspects of many services, such as surgery. The Commission's complaints alleged that when the Clinic sought to establish a facility in Florida, local physicians sought to prevent its physicians from gaining hospital privileges by threatening to boycott the hospitals. The Commission's orders prevent such activity from continuing or recurring.
The Commission has also taken action to remedy other types of alleged anticompetitive provider conduct such as obstructing hospital privileges for HMO physicians,(24) and boycotting a hospital that was planning to open an HMO facility.(25) Likewise, the Commission has challenged private conspiracies to obstruct nurse midwives and podiatrists from obtaining hospital privileges.(26) Our goal in these actions is to eliminate private agreements that obstruct new competitors from getting on the playing field and competing for acceptance by consumers in the marketplace.
On the other hand, the notion of leveling the playing field may sometimes suggest some sort of enforced equality among competitors. For example, parties may seek to use the antitrust laws to gain equal access to advantages possessed by a competitor or group of competitors. These might include claims about exclusions from provider-sponsored health plans; denial of hospital staff privileges; exclusion from professional associations; denial of access to group-buying groups; or denial of accreditation or certification. While in some cases these types of conduct may unreasonably restrict competition, they require careful analysis. As Northwest Wholesale Stationers teaches,(27) membership organizations cannot exist without membership rules, and such rules are not inherently anticompetitive. On the other hand, exclusion of providers can harm competition where those providers are unable to compete effectively without access to the entity in question.
The health care guidelines specifically address the antitrust analysis of exclusions of providers from a provider-sponsored network.(28) They emphasize that the focus of the inquiry is whether the exclusion reduces competition among providers in the market, and not whether a particular competitor has been harmed. The guidelines describe various ways that such exclusions could serve to foster competition by, for example, enabling a network to achieve quality and cost-containment goals and enhancing its ability to compete against other networks. Analysis of an exclusion requires an assessment of the extent to which providers or classes of providers cannot compete effectively without access to the network, and any legitimate procompetitive reasons for the exclusion.
Arguments about the need for a level playing field, which focus solely on the competitor, rather than competition and consumer welfare, are not particularly helpful in assessing whether the allegedly unfair conduct produces efficiencies that outweigh any harm to competition. This is the key to understanding why some level playing field arguments do not strike a responsive chord with antitrust enforcers. Distinguishing arrangements that antitrust law should condemn from those that should be encouraged demands careful attention to efficiency. Level playing field arguments, however, often tell us nothing about efficiencies. Uncritical acceptance of these arguments would permit aggregations of market power that offer no efficiencies, or condemn efficient arrangements. Only where a level playing field argument is based on bringing efficiency to the market will it be useful in antitrust analysis.
A vital function of the antitrust laws in the operation of health care markets is to keep markets open and competitive, so that new ways of delivering and financing health care services can compete for acceptance by purchasers. Over the past two decades, federal antitrust enforcement has succeeded exceptionally well in facilitating the emergence of new and more efficient health care delivery systems by vigorously challenging anticompetitive efforts by health care providers to impede those innovations.
Efficiency will be our guide on when to intervene to assure a level playing field in health care markets. If the claim is that some players need protection from competitive pressures exerted by legitimate activities, whether by their customers or competitors, then antitrust will provide no assistance. But if the field is "tilted" because some players -- sellers or buyers -- have improperly colluded, excluded efficient providers, or obtained market power, you can expect antitrust to step in as referee.
1. Goldfarb v. Virginia State Bar, 421 U.S. 773 (1975).
2. American Medical Ass'n, 94 F.T.C. 701 (1979), aff'd as modified, 638 F.2d 443 (2d Cir. 1980), aff'd by an equally divided court, 455 U.S. 676 (1982).
3. See, e.g., Michigan State Medical Society, 101 F.T.C. 191 (1983); Southbank IPA, 114 F.T.C. 783 (1991) (consent order); Trauma Associates of North Broward, Inc., C-3541 (consent order), 59 Fed. Reg. 63,805 (Dec. 9, 1994); Puerto Rican Physiatrists, C-3583 (consent order), 60 Fed. Reg. 35,907 (July 12, 1995); Physicians Group, Inc. C-3610 (consent order)(Aug. 11, 1995); Montana Associated Physicians, Inc., C-3704 (consent order) (Jan. 13, 1997).
4. 101 F.T.C. at 293.
5. United States v. Philadelphia Nat'l Bank, 370 U.S. 321, 370 (1963) ("If anticompetitive effects in one market could be justified by procompetitive consequences in another, the logical upshot would be that every firm in an industry could, without violating 7, embark on a series of mergers that would make it as large as the industry leader.").
6. United States v. Columbia Pictures Indus., 507 F. Supp. 412 (S.D.N.Y. 1980), aff'd mem., 659 F.2d 1063, (2d Cir. 1981).
7. United States v. Alston, 974 F.2d 1206, 1214 (9th Cir. 1992).
8. Kartell v. Blue Shield, 749 F.2d 922, 930-31 (1st Cir. 1984) (finding that Blue Shield's ban on balance billing did not violate the antitrust laws), cert. denied, 471 U.S. 1029 (1985).
9. See, e.g., David Blumenthal, "Quality of Health Care -- Part I: Quality of Care - What is it?" 335 N. Eng. J. of Med. 891 (Sept. 19, 1996).
10. National Society of Professional Engineers v. United States, 435 U.S. 679 (1978).
11. 476 U.S. 447, 462 (1986).
12. See, e.g., Sean Sullivan, "Health Care Coalitions and the Pursuit of Value," Employee Benefits Digest, at 2 (April 1996).
13. See, e.g., Steve Wetzell, Consumer Clout: The Buyers Health Care Action Group Wants Informed Patients To Drive the Health Care Market, 79 Minn. Medicine 15 (Feb. 1996).
14. See Marc A. Rodwin, Consumer Protection and Managed Care: The Need for Organized Consumers, 15 Health Affairs 110 (Fall 1996) (describing proposals to require managed care organizations to provide increased information to enable consumers to choose among plans and foster competition); R.H. Brook, E.A. McGlynn, and P.D. Cleary, Measuring Quality Care, 335 N. Eng. J. of Medicine 966 (Sept. 26, 1996); A. Epstein, Performance Reports on Quality - Prototypes, Problems, and Prospects, 333 N. Eng. J. of Medicine 57 (July 6, 1995); General Accounting Office, Health Care: Employers and Individuals Consumers Want Additional Information on Quality (Sept. 29, 1995).
15. See generally Roger D. Blair & Jeffrey L. Harrison, Monopsony 36-43 (1993); Herbert Hovenkamp, Federal Antitrust Policy, 1.2b (1993).
16. Economists have studied the question of a bilateral monopoly (when a monopoly encounters a monopoly) for years and have found little evidence that the result would benefit consumers e.g., lead to lower prices or higher output. Some commentators have suggested that when monopoly encounters monopsony the result is often not lower, but higher prices for consumers. Why? Because each side recognizes the power of the other and they negotiate an agreement to share the monopoly profits. See Herbert Hovenkamp, Mergers and Buyers, 77 Virginia Law Rev. 1369 (1991) (explaining why mergers which appear to create countervailing seller power do not necessarily lead to lower prices for consumers).
17. The Commission has brought cases challenging mergers which would have enabled buyers to exercise monopsony power. See, e.g., Phillips Petroleum Corp., C-3634 (consent order) (Dec. 28, 1995); InterNorth, Inc., 106 F.T.C. 312 (1985).
18. Debes Corp., 115 F.T.C. 701 (1992).
19. Forbes Health System Medical Staff, 94 F.T.C. 1042 (1978) (consent order).
20. State Volunteer Mutual Insurance Corp., 102 F.T.C. 1232 (1983) (consent order).
21. See Medical Staff of Good Samaritan Regional Medical Center, C-3554, 60 Fed. Reg. 10,864 (Feb. 28, 1995) (consent order); Medical Staff of Dickinson County Memorial Hospital, 112 F.T.C. 33 (1989) (consent order); Medical Staff of John C. Lincoln Hospital & Health Center, 106 F.T.C. 291 (1985) (consent order).
22. See, e.g., Iowa Chapter of American Physical Therapy Association, 111 F.T.C. 199 (1988) (consent order); Michigan Optometric Association, 106 F.T.C. 342 (1985) (consent order); Sherman A. Hope, M.D., 98 F.T.C. 58 (1981) (consent order).
23. Diran Seropian, M.D., 115 F.T.C. 891 (1992) (consent order); Medical Staff of Holy Cross Hospital, 114 F.T.C. 555 (1991) (consent order); Medical Staff of Broward General Medical Center, 114 F.T.C. 542 (1991) (consent order).
24. Eugene M. Addison, M.D., 111 F.T.C. 339 (1988) (consent order).
25. Medical Staff of Doctors' Hospital of Prince Georges County, 110 F.T.C. 476 (1988) (consent order).
26. Medical Staff of Memorial Medical Center, 110 F.T.C. 541 (1988) (consent order); Health Care Management Corp., 107 F.T.C. 285 (1986) (consent order); North Carolina Orthopaedic Ass'n, 108 F.T.C. 116 (1986) (consent order).
27. Northwest Wholesale Stationers, Inc. v. Pacific Stationery & Printing Co., 472 U.S. 284 (1985).
28. Department of Justice & Federal Trade Commission, Statements of Antitrust Enforcement Policy in Health Care 122-23 (1996).