"REINVENTING HEALTH CARE ANTITRUST ENFORCEMENT"
COMMISSIONER ROSCOE B. STAREK, III
FEDERAL TRADE COMMISSION
THE ANTITRUST COMMON GROUND CONFERENCE
MAY 17, 1996
Good morning. It is a pleasure to be here today to introduce this morning's program on the antitrust analysis of hospital mergers, HMO mergers and physician networks. I would like to express my sincere thanks to General Burson for his kind introductory remarks and for hosting this conference. As always, I must remind you that my remarks today reflect only my own views and not necessarily those of the Commission or of any other Commissioner.
The Commission is rethinking and revising portions of its health care antitrust enforcement policy, with a primary focus on the antitrust analysis of physician network joint ventures. It is perhaps a testament to the rapid pace of change in the markets for health care services that we find ourselves engaged in this process of re-examination so soon after the release of the Health Care Enforcement Policy Statements issued jointly by the Commission and the Antitrust Division in 1993 and 1994.(1) Of course, this reappraisal may also have some attenuated relationship to recent Congressional consideration of legislation that would mandate rule-of-reason analysis of physician networks meeting certain statutory criteria.(2) With the agency now in the thick of its review -- and in all likelihood still a while away from any official statement -- this may be an opportune time to share a few thoughts about antitrust analysis of health care in general and physician networks in particular. My purpose is not to advocate specific policy proposals, but rather to question the conventional wisdom and to explore briefly the policy implications of some "core principles" to be considered as we re-examine health care enforcement policy. The first question will be familiar to all of you: "Is health care somehow 'different' for purposes of antitrust enforcement?" The second question is: "What is the appropriate place for the Supreme Court's Maricopa decision(3) in the Commission's antitrust analysis?" The third question is: "What should we be considering in our antitrust analysis of physician networks?"
1. Is Health Care Different?
My first core principle -- not a very controversial one -- is: The purpose of the antitrust laws(4) is to facilitate the process by which market competition results in the development of products and services demanded by consumers, at the lowest prices consistent with costs and consumer preferences. Although the antitrust enforcement agencies can and should intervene under certain circumstances of market failure, antitrust is a market-oriented legal regime. The antitrust laws reflect a policy judgment that consumers, rather than the State -- and rather than buyer or seller cartels -- should determine the variety and prices of the goods and services that are supplied.(5) Of course, there are various statutory and implied exemptions to the antitrust laws,(6) and some those exemptions relate to health care.(7)
To this first core principle, I would add a second: With the exception of a few legally-exempted activities, the full range of health care transactions falls properly within the ambit of the same antitrust laws that apply to other industries.(8) Why, then, did the antitrust enforcement agencies issue special "health care antitrust enforcement policy statements"? One explanation I sometimes hear is that we have special guidelines for health care because the field is very complex and changing rapidly. The buyers and sellers of health care, it is further argued, demand and require industry-specific "guidance" from time to time in order to keep their conduct within the law.
Perhaps that answers the question adequately. But I cannot help thinking that there are other very complex industries for which there does not seem to be a need for special antitrust guidelines. This is not a fatal objection, however, since not every antitrust problem can be addressed at once. Nevertheless, the first two core principles suggest that when we are developing health care antitrust policies, we should be sure that we are applying the same analysis that we would apply to comparable conduct in other industries. For example, when analyzing the antitrust implications of the conduct of five physicians, we would probably benefit from asking ourselves whether we would apply the same analysis to five auto mechanics engaged in substantially similar conduct. If for some reason the answer is "no," then it seems that we would be in the unhappy position of having to defend the proposition that health care antitrust is "different" after all.
2. Whither Maricopa?
If I were a betting man, I would bet that the Supreme Court's Maricopa decision(9) is one of the most frequently cited cases in briefs and law review articles dealing with issues of health care antitrust. Fourteen years after it was handed down, Maricopa is still the Alpha and Omega of the enforcement agencies' antitrust analysis of physician networks, as is clear from the 1994 Health Care Enforcement Policy Statements. As we review those Policy Statements, we may also want to rethink the central place of Maricopa in the health care antitrust firmament.
In Maricopa, the Supreme Court held per se unlawful maximum fee schedules prepared by two foundations established and controlled by the Maricopa County Medical Society,(10) whose membership comprised 70 percent of the practicing physicians in Maricopa County, Arizona.(11) Significantly, the Medical Society foundations -- rather than buyers, such as sponsors of medical insurance plans -- originated the fee schedules the Court condemned as per se unlawful.(12) Moreover, the Medical Society's rank-and-file members agreed by a majority vote to accept the fee schedules drafted by the Medical Society administration as the maximum prices they would charge for treating "patients insured under plans approved by" the Medical Society.(13) The Medical Society also performed utilization review and acted as an administrator for the insurance companies, but there is no indication that the Maricopa physicians ever entered into, or actively considered, any type of financial "risk-sharing arrangements."
Upon this rock, a mighty temple was built. But does it bear the weight placed upon it?(14) From an enforcement perspective, Maricopa appears to be a comparatively -- and perhaps deceptively -- straightforward case. The rank-and-file vote of Medical Society members accounting for 70 percent of the physicians in the geographic market left little doubt that (1) there was "an agreement among hundreds of competing doctors concerning the price at which each will offer his own services to a substantial number of consumers,"(15) and (2) the members of the Medical Society could collectively exercise market power.(16) Among the many problems with Maricopa, however, is that it provides little guidance for harder -- and perhaps more typical -- cases in which the evidence of agreement is uncertain, smaller percentages of the physicians in a relevant market are involved, and the doctors can plausibly claim some type of financial risk-sharing. When we debate the relevance of Maricopa, it is important to bear in mind that that 1982 decision predates much of the near-transformation of health care financing that has stemmed from the explosion of managed care. Perhaps the Supreme Court would apply the same analysis and reach the same result if presented today with a similar case.(17) But it is far from certain that the current Court would apply the same analysis and reach the same result if presented with a more challenging and equivocal physician network case. Recall that Maricopa was decided on a 4 to 3 vote, and three of the four Justices who voted in the majority are no longer on the Court.(18)
Returning briefly to my second core principle, if health care is not "different" for purposes of antitrust analysis, why should Maricopa figure so much more prominently than other leading horizontal restraint cases -- such as BMI(19) or NCAA(20) -- in the agencies' current analysis of physician joint ventures? In BMI, the Supreme Court reviewed an arrangement under which competing composers deliberately entered into what appeared to be a horizontal price-fixing conspiracy. Acting as the agent of the songwriters, BMI marketed the rights to thousands of songs through a blanket license mechanism that fixed the royalties charged for many competing songs at one blanket license price.(21) The Court rejected the application of the per se rule to this price-fixing scheme because the arrangement dramatically reduced otherwise prohibitive transaction costs and thereby expanded the availability of royalties to songwriters and of songs to licensees.(22) If the songwriters had been barred from agreeing to fix their royalty rates through BMI, far less licensing would have occurred.(23)
Despite the Supreme Court's BMI analysis -- reaffirmed two years after Maricopa in the NCAA decision(24) -- I am not aware of any Business Review Letter or Advisory Opinion issued by the antitrust enforcement agencies that applies BMI to analyze and approve a physician network joint venture.
3. Physician Networks
Last December, it was announced that the Commission's staff would gather information about new types of physician network arrangements that may offer efficiency benefits to be taken into account in antitrust analysis. Over the past several months, the Bureau of Competition and the Antitrust Division have been seeking information on the needs of health care "buyers, how well these needs are being met by existing types of networks, and the potential benefits and costs of other types of arrangements."(25) More specifically, the Bureau of Competition has been investigating whether types of integration among participants in health care provider networks -- other than capitation and similar risk-sharing arrangements -- are likely to produce efficiencies that should trigger rule of reason analysis. I commend them for undertaking this project, and I hope that it will lead to more flexible standards for the evaluation of physician networks. But I also hope that the reevaluation of the Commission's enforcement approach to physician network arrangements will not stop there.
The presence, absence, or degree of risk-sharing and/or economic integration is not the primary concern in the analysis of agreements among competitors regarding price.(26) Assessments of risk-sharing and integration are just proxies for the fundamental antitrust inquiry into whether the restraint in question (1) is reasonably necessary to the attainment of the procompetitive objectives of the arrangement and (2) will create procompetitive benefits that will outweigh any anticompetitive consequences. I hope that the current review will look beyond proxies.
Much of the concern about the impact of antitrust law on physician network joint ventures relates to joint pricing decisions made by members of the networks. An agreement (or "plan") among physicians on common terms of dealing with third-party payers can give rise to efficiencies while simultaneously reducing or eliminating competition among the physicians on the terms of their contracts with payers. So it is completely appropriate to subject such agreements among physicians to antitrust scrutiny.(27) But the 1994 Enforcement Policy Statements focus initially, not on the reasonableness of the agreement, but on the indicia of economic integration. According to the Policy Statements, a critical consideration is that the physician members of plans entailing horizontal agreement on price assume substantial financial risk in connection with the plans' operation, through some type of commitment to provide specified medical care to a covered population in exchange for a fixed periodic payment. In other words, the physician organizations are expected to bear some or all of the risk usually borne by an insurance company or a self-insured employer.
The 1994 Enforcement Policy Statements contain two examples of substantial risk-sharing:
- (1) when the venture accepts capitation contracts; and
(2) "when the venture creates significant financial incentives for its members as a group to achieve specified cost-containment goals," such as a "risk withhold" -- i.e., "withholding from all members a substantial amount of the compensation due to them, with distribution of that amount to the members only if the cost-containment goals are met."(28)
Although the enforcement agencies are currently looking into other types of economic integration that might be added to this short list, I am not sure of the utility of an inquiry into proxies that may or may not provide indicia of the procompetitive or anticompetitive nature of a physician network agreement. Why not just evaluate most physician networks under the rule of reason?
If the 1994 Policy Statements' inquiry into economic integration proxies for the "reasonableness" of physician networks is based on Maricopa, that reliance is misplaced. Maricopa does not say that physician networks with horizontal price agreements are to be analyzed under the rule of reason only when such networks entail significant economic integration and/or risk-sharing. Rather, the decision notes a few of the characteristics that may distinguish the lawful conduct of a single firm from that of a group of "independent competing entrepreneurs" engaged in price-fixing and suggests that if a group of doctors were to combine into a single firm, the combination would be treated as a single firm for antitrust purposes.(29) To conclude from Maricopa that every physician network joint venture entailing agreement on fees is per se unlawful absent narrowly-defined economic integration and risk-sharing is to make a policy mountain out of a judicial molehill. The case simply does not say what so many have apparently read it to say.
How, then, do we answer the three questions posed at the outset? First, health care is not "different," and we must make sure that policy statements or guidelines do not prescribe special treatment for health care. Second, the commanding presence of Maricopa in health care antitrust should be reconsidered and scaled back. Third, what we should be thinking about in relation to physician networks is the rule of reason.
Thank you again for the opportunity to share my thoughts with you this morning.
(1)U.S. Department of Justice and Federal Trade Commission, Statements of Enforcement Policy and Analytical Principles Relating to Health Care and Antitrust, 4 Trade Reg. Rep. (CCH) ¶ 13,152 (Sept. 27, 1994); U.S. Department of Justice and Federal Trade Commission, Antitrust Enforcement Policy Statements in the Health Care Area, 4 Trade Reg. Rep. (CCH) ¶ 13,151 (Sept. 15, 1993).
(2)The Commission and the Department of Justice issued joint letters in opposition to a provision in the House Medicare reform bill (H.R. 2425) that would have required application of the antitrust rule of reason -- rather than per se condemnation -- to collective price negotiation between Medicare provider sponsored organizations and groups of doctors who did not "share financial risk," as the concept of "risk-sharing" has been articulated in the 1994 Health Care Enforcement Policy Statements. See generally letter from Anne K. Bingaman and Robert Pitofsky to The Honorable Pete Stark (Oct. 10, 1995); letter from Anne K. Bingaman and Robert Pitofsky to The Honorable Patrick J. Leahy (Oct. 31, 1995); letter from Anne K. Bingaman and Robert Pitofsky to The Honorable Slade Gorton (Oct. 31, 1995).
(3)Arizona v. Maricopa County Medical Society, 457 U.S. 332 (1982).
(4)The Federal Trade Commission is empowered to prevent unfair methods of competition under Section 5 of the Federal Trade Commission Act, 15 U.S.C. § 45, and also enforces the Clayton Act, 15 U.S.C. § 12 et seq. Under its Section 5 authority, the Commission also may challenge activities that violate Sections 1 and 2 of the Sherman Act, 15 U.S.C. §§ 1, 2.
(5)See FTC v. Indiana Federation of Dentists, 476 U.S. 447, 462 (1986) (groups of competitors may not lawfully "pre-empt the working of the market" by deciding for themselves what customers need, rather than allowing the market to respond to what consumers demand); accord, National Society of Professional Engineers v. United States, 435 U.S. 679 (1978). As a general matter, then, it will not profit a firm to come before the Commission or a federal court and argue that the antitrust laws have not been violated because competition is the wrong policy in a given case. See, e.g., United States v. Socony-Vacuum Oil Co., 310 U.S. 150, 221 (1940) ("Congress has not left with us the determination of whether or not particular price-fixing schemes are wise or unwise, healthy or destructive.").
(6)See generally AMERICAN BAR ASSOCIATION, SECTION OF ANTITRUST LAW, ANTITRUST LAW DEVELOPMENTS 963-1166 (3d ed. 1992) (survey of exemptions from the federal antitrust laws).
(7)See generally Andrew M. Gardner & Michael L. Kayman, Antitrust Exemptions and Immunities, in ANTITRUST AND EVOLVING HEALTH CARE MARKETS 201 (Edward B. Hirshfeld et al., eds. 1995).
(8)See Socony-Vacuum, 310 U.S. at 222 ("[T]he Sherman Act, so far as price-fixing agreements are concerned, establishes one uniform rule applicable to all industries alike.").
(10)The fee schedules in Maricopa applied only to certain fee-for-service health insurance plans. 457 U.S. at 339-40.
(11)See also id. at 354 n.29 ("In this case it appears that the fees are set by a group with substantial power in the market for medical services . . .") (emphasis added).
(12)Id. at 339-40.
(13)Id. at 335-36, 339-41.
(14)Just over a year after Maricopa was announced, the Fifth Circuit noted that the case had already "drawn criticism, both on the Court, . . . (Powell, J. dissenting), and off." St. Bernard General Hosp., Inc. v. Hospital Service Ass'n of New Orleans, Inc., 712 F.2d 978, 986 (5th Cir. 1983) ("It is clear that the refusal of the Supreme Court [in Maricopa] to look beyond the surface effect of the pricing arrangements and examine instead the underlying competitive effects prohibits potentially beneficial as well as blatantly mon opolistic restraints on pricing."), cert. denied, 466 U.S. 970 (1984). See also National Bancard Corp. (NaBanco) v. Visa U.S.A., Inc., 779 F.2d 592, 601 (11th Cir.) ("The Court [in Maricopa] apparently abandoned its BMI [Broadcast Music, Inc. v. Columbia Broadcasting System, Inc., 441 U.S. 1 (1979)] standards and followed a formalistic approach which indicated that all price fixing was per se violative even if it created efficiencies."), cert. denied, 479 U.S. 923 (1986); Peter M. Gerhart, The Supreme Court and Antitrust Analysis: The (Near) Triumph of the Chicago School, 1982 Sup. Ct. Rev. 319.
(15)Maricopa, 457 U.S. at 357.
(17)It is not at all clear that the Maricopa majority was factually and legally justified in condemning the physician network agreement under a per se analysis. Justice Powell's dissent in Maricopa, 457 U.S. at 357 (joined by Chief Justice Burger and Justice Rehnquist), effectively challenges the application of the per se rule to Maricopa's facts. A recent commentary notes that, according to Justice Powell's reading of the record and the applicable law:
- (1) the [Medical Society] foundations did not foreclose any competition;
(2) physicians were free to participate in other medical insurance plans;
(3) insurers were free to participate with nonfoundation physicians;
(4) the physicians were only committed to the foundation plans for one year and were free to withdraw thereafter;
(5) insurers . . . had not indicated any opposition to the foundations' plans; and
(6) at least seven insurers had willingly chosen to contract with the foundations to develop their maximum fee schedules.
Kevin E. Grady, A Framework for Antitrust Analysis of Health Care Joint Ventures, 61 Antitrust L.J. 765, 776 (1993) (citations omitted).
(18)The majority consisted of Justices Brennan, White, Marshall, and Stevens.
(19)Broadcast Music, Inc. v. Columbia Broadcasting System, Inc., 441 U.S. 1 (1979).
(20) National Collegiate Athletic Ass'n v. Board of Regents of the University of Oklahoma, 468 U.S. 85 (1984).
(21)BMI, 441 U.S. at 8-9, 19-20, 24.
(22)It would be difficult to argue that the Court applied the rule of reason to the BMI licensing arrangement because the songwriters were engaged in the type of risk-sharing and economic integration mentioned in the Maricopa majority opinion as factors distinguishing price-fixing conspiracies from procompetitive pricing agreements. The BMI songwriters were not joint owners or contributors of risk capital. Integration was limited to sales, monitoring and enforcement against unauthorized use. BMI, 441 U.S. at 20. See also NaBanco, 779 F.2d at 599 ("The blanket license in BMI was a practical necessity because it was virtually impossible for thousands of composers to negotiate individually over the use of each song, for each user to report the amount of use, and for each composer to police the use of his works by authorized and unauthorized users."); Richard D. Raskin, Antitrust Issues for Independent Health Care Providers: "Integration" and the Per Se Rule, in ANTITRUST AND EVOLVING HEALTH CARE MARKETS, supra n.7, at 85 ("The price agreement at issue in BMI did not involve financial integration.").
(23)BMI, 441 U.S. at 22-24.
(24)NCAA, 468 U.S. at 98-104, 113-19 (horizontal agreements among competing universities on price and output of televised football games evaluated under the rule of reason).
(25)See Mark D. Whitener, Antitrust, Medicare Reform and Health Care Competition, Address Before the American Enterprise Institute (Dec. 5, 1995).
(26)See, e.g., Raskin, in ANTITRUST AND EVOLVING HEALTH CARE MARKETS, supra n.22, at 73, 75-76 ("A joint venture can achieve efficiencies without financial integration -- and can achieve integration without efficiencies.").
(27)As Judge Kozinski has explained:
[H]ealth care providers who must deal with consumers through [managed care] plans . . . face an unusual situation that may legitimate certain collective actions. Medical plans serve, effectively, as the bargaining agents for large groups of consumers . . . . Uniform fee schedules -- anathema in a normal, competitive market -- are standard operating procedure when medical plans are involved. In light of these departures from a normal competitive market, individual health care providers are entitled to take some joint action (short of price fixing or a group boycott) to level the bargaining imbalance created by the plans and provide meaningful input into the setting of the fee schedules.
United States v. Alston, 974 F.2d 1206, 1214 (9th Cir. 1992) (emphasis added) (reversing JNOV acquittals of defendants convicted by a jury of conspiracy to fix prices).
(28)Enforcement Policy Statements at 70, 4 Trade Reg. Rep. (CCH) ¶ 13,152 at 20,788.
(29)Maricopa, 457 U.S. at 356-57.