This is part one of a two-part article. On July 23, 2004, the DOJ Antitrust Division and the Federal Trade Commission (FTC) issued their long-awaited report, Improving Health Care: A Dose of Competition (the Report), concerning the joint hearings on health care and competition law and policy held during 2003. Significantly, the Report marks the agencies' first comprehensive guidance in the health care arena since the 1996 DOJ and FTC Statements of Antitrust Enforcement Policy in Healthcare (the Healthcare Policy Statements). If the FTC's health care workshop is included, the joint hearings encompassed more than 50 sessions held on 27 days in September 2002 and from February to September 2003. The Report is based on testimony and written comments from over 300 participants, as well as independent research by the agencies. While most of the hearings focused on the "big three" players in health care — hospitals, physicians, and health plans — participants included not only representatives of those groups but also federal and state government officials, employers, attorneys, patient advocates, economists, and academics, and the hearings also covered topics pertaining to group purchasing organizations (GPOs), allied health professionals, and pharmaceutical companies. The resulting record contains almost 6000 pages of transcripts, presentations, written submissions, and agendas from the hearings.

What, if any, are the Report's practical implications for hospitals and physicians? Does the Report identify specific do's and don'ts for providers, or only general observations and recommendations? This article is a sequel to an earlier paper written in February 2004, which sought to draw conclusions from the joint hearings' voluminous record before the Report was issued. The earlier paper, Antitrust Issues Affecting Physicians and Physicians Organizations, was originally presented at AHLA's Physicians and Physician Organization Institute in February 2004, and was then republished in AHLA's Health Lawyers Weekly (June 11, 2004). Now that the agencies have published their own take on those findings, we can revisit the earlier paper's conclusions in light of the Report's stated recommendations and observations, as well as subsequent public comments by officials from both DOJ and the FTC elaborating on the Report. These subsequent comments provide a gloss and additional insight on the Report's more guarded commentary.

The Report's Scope and Its Broad Lessons
The Report addresses issues extending far beyond those pertaining to hospitals and physicians, and certainly addresses more topics than can or will be evaluated in any detail here. Much of the Report is devoted to discussing general observations on competition in the health care arena, and aspirational goals such as improving measures of price and quality, giving consumers more information on prices and quality, and giving consumers greater incentives to use such information. Few would argue with these statements. But while they may appear to offer little in the way of practical guidance to hospitals or physicians, the discussion provides several general principles that are important to providers.

First, the Report makes clear that open competition and consumer choice maximizes consumer welfare — even in the health care sector involving complex products and services — and more specifically, makes clear that the antitrust laws apply to health care actors. While this may seem unremarkable, and it should be, there are still individuals and groups of health care providers who do not believe the antitrust laws should be enforced against them. The Report should disabuse them of that notion. Second, the Report is itself tangible evidence of both the DOJ Antitrust Division's and the FTC's continued commitment to policing the health care sector. Third, and more specifically, the Report demonstrates that the 1996 Healthcare Policy Statements are flexible guidelines, and the agencies are willing to consider new ideas within the framework of the Policy Statements. And the Report contains a surprising amount (even for someone who was involved in the hearings) of specific guidance for hospitals and physicians, and a relatively clear indication of the agencies' enforcement agenda. Part One of this article below examines hospital issues. Part Two, which will appear in the next issue of the Health Law Alert, will address the Report's discussion of physician issues.

Hospitals: Signals of New or Renewed Enforcement Trends?
For the most part, the Report's discussion and stated perspectives on hospital-related issues focus on merger enforcement. All four observations identified under "Hospital-Related Issues" in the Executive Summary of the Report pertain to hospital merger-related issues. Similarly, the chapter addressing "Competition Law: Hospitals" devotes only a single paragraph among its 47 pages to hospital contracting practices (other than those pertaining to GPOs). One must turn to comments made by agency officials after the Report was issued to find statements on the agencies' enforcement priorities relating to hospital contracting practices.

Hospital Mergers
The considerable attention devoted to hospital mergers in the Report, as well as the FTC's recently completed retrospective review of consummated hospital mergers and DOJ officials' acknowledgment that they too have retrospectively reviewed at least one merger and are currently reviewing a prospective hospital merger, makes clear that neither the FTC or DOJ are abdicating their enforcement responsibilities in this area, despite predictions to the contrary based on their losing all six merger challenges brought between 1994 and 2000. The FTC's retrospective merger review has thus far resulted in one complaint being filed in administrative litigation. In the matter of Evanston Northwestern Healthcare Corp. and ENH Medical Group, Inc., Docket No. 9315, File No. 011 0234 (Feb. 10, 2004), available at www.ftc.gov/ os/caselist/ 0110234/ 0110234.htm. In fact, agency officials have stated that they do not view their merger enforcement record in the 1990s as a losing streak. They disclaim the need to change their approach to analyzing mergers; instead, according to agency officials, their record in public as well as nonpublic merger challenges confirm that merger enforcement is having an effect. For example, they point to three mergers evaluated by DOJ (including one merger challenged but not enjoined after trial) that were abandoned at various points prior to being consummated, others that were never pursued because of agency scrutiny, and still others that were structured differently or the hospitals' own analysis (e.g., potential merger-specific, cognizable efficiencies) was sharpened by the specter of agency enforcement. The three instances of mergers being abandoned were: DOJ's investigation of a proposed merger of two hospitals in Cape Girardeau, Missouri; DOJ's investigation of the Mease-Morton Plant merger in the Tampa, Florida area; and post-trial in U.S. v. Mercy Health Servs., 902 F. Supp. 968 (N.D. Iowa 1995), vacated as moot, 107 F.3d 632 (8th Cir. 1997).

Consistent with this view, the Report states that the agencies will continue to use the analytical framework set forth in the 1992 Horizontal Merger Guidelines to evaluate hospital mergers. U.S. Department of Justice and Federal Trade Commission, Horizontal Merger Guidelines (1992 rev. 1997 efficiencies section only), available at http://www.ftc.gov/bc/docs//horizmer.htm. The Report contains lengthy discussions of the myriad issues surrounding geographic and product market definition, which will not be repeated in detail here. In general, the Report reaffirms the importance of data in merger analysis, especially to define geographic and product markets. The Report criticizes certain methods, specifically the Elzinga-Hogarty test, and endorses others, such as properly applied critical loss analysis to implement the "hypothetical monopolist" paradigm, for using data to define markets. The Elzinga-Hogarty test has been used extensively in hospital mergers despite being a tool originally designed to analyze commodity movements, such as coal. It is described in detail in the Report. The Report notes that critical-loss analysis has the potential to provide a useful way to define markets, but must be applied with great care. It is described in detail in the Report. The Report also encourages courts to use the same types of evidence in analyzing hospital mergers as is used in any other merger cases, such as the parties' strategic planning documents and customer testimony and documents. Finally, agency officials state that their retrospective merger reviews will inform and educate the agencies' prospective analysis in future merger investigations.

Two additional points pertaining to hospital mergers made by the Report bear mentioning. First, the Report emphatically states that the agencies will not accept, and recommends that state attorneys general should not accept, "community commitments" from merging hospitals to resolve hospital merger challenges. Community commitments — agreements to pass on to consumers a specified amount of money resulting from the merger efficiencies or not to raise prices for a specified period — were a device much in vogue during the hospital merger boom in the mid to late 1990s. Second, the Report also clearly rejects treating merging hospitals differently or more leniently based their nonprofit status — which many commentators believe was one factor influencing courts and contributing to the agencies' losses in merger cases in the 1990s.

In sum, although the Report indicates that the agencies will vigorously enforce the antitrust laws as they apply to hospital mergers, we will have to wait until the next cycle of increased hospital merger activity to evaluate whether the agencies follow through on their promise to do so.

Hospital Contracting Practices
Although not really addressed by the Report itself, agency officials highlighted three areas of concern regarding hospital contracting practices that will receive scrutiny by the FTC and DOJ going forward.

The first contracting practice raising potential antitrust concern is bundling, also known as full-system contracting or "forcing" or all-or-nothing contracting, where a hospital system demands that a payor include all system hospitals in the payor's network. The Report states only that the agencies will challenge unilateral bundled contracting practices "where appropriate." While this practice does not always or even usually violate the antitrust laws, agency officials' comments after the Report signal that this practice will receive increased attention, and that it is more likely to raise concern where a hospital system with market power uses that power to both demand inclusion of all its hospitals and resist tiering or other mechanisms to incentivize patients to use lower-cost hospitals. Tiering allows a payor to include a must have hospital and maintain a broad network, while at the same time steering consumers to lower-cost facilities by applying different copayments to different hospitals. (For a discussion of bundling and tiering, see Report, ch. 3 at pp. 31-35.) It also should be noted that the Report recognizes that there are legitimate reasons why hospitals may resist tiering, such as fear of low-cost facilities being labeled as low quality and high-cost facilities labeled as inefficient; difficulty in maintaining expensive services such as burn units, trauma services, and emergency "stand-by" capability; and jeopardizing indigent care, teaching functions, and innovative research by hospitals.

A second area of concern addressed by my earlier paper and discussed at length in the Report, but without a clear statement of its enforcement priority, is conduct by a dominant hospital to exclude entry by single-specialty hospitals (SSHs) or ambulatory surgery centers (ASCs). In addition, the Report states in the context of hospital product market definition that "the Agencies encourage further research into the competitive significance of SSHs, including whether payors can discipline general acute care hospitals by shifting a larger percentage of patients to SSHs." Report, Executive Summary at p. 26. (For a discussion of the issue, including the testimony on SSHs at the hearings, prior to release of the Report, see Antitrust Issues Affecting Physicians and Physicians Organizations, v, at pp. 18-25.) This conduct includes not only contracting practices through which the hospital excludes the SSH or ASC, but also economic credentialing whereby the hospital refuses or terminates privileges to physicians who are investors in the competing facility and other actions by hospitals in response to competition from ASCs or SSHs. The Report concludes that the antitrust laws do not prohibit individual hospitals from unilaterally terminating physicians' privileges or lobbying state governments in connection with certificate of need (CON) proceedings to oppose entry by these competitors. The Report does not specifically address the legality of exclusive contracting with payors in this context, but somewhat vaguely states that the agencies will aggressively pursue activities where there is "specific evidence of anticompetitive conduct by individual hospitals or of hospitals colluding together." Report, ch. 3 at 27. In subsequent comments, agency officials referred to these countermeasures by hospitals as real practices that have a bite, indicating a greater concern than the Report reveals. At a minimum, it seems likely that preventing cream-skimming of profitable services by competing SSHs or ASCs from general acute-care hospitals, although a legitimate public policy debate for Congress or state legislatures, will not constitute an antitrust defense justifying otherwise anticompetitive conduct by hospitals against efforts to open an SSH or ASC.

The third area of concern pertaining to hospitals identified by agency officials is joint contracting and pricing by hospitals in claimed clinically integrated networks, such as joint operating agreements. Although the May 7, 2003, session of the hearings was devoted specifically to this topic, the Report does not discuss the issue. Finally, the Report's recommendations are not limited to private parties. The Report prominently concludes that state CON programs more often than not hinder desirable open competition by creating barriers to entry and expansion by potential competitors. It remains to be seen whether individual states with existing CON programs will heed the agencies' advice, but to the extent any state does, the modification or elimination of CON requirements will have a significant impact on hospital competition.

Prior to joining Ober|Kaler, Mr. Berlin was involved in managing and conducting the Joint Hearings on behalf of the DOJ, and was the moderator for several sessions.

The DOJ/FTC joint report is available on the FTC's website at: www.ftc.gov/ reports/healthcare/
040723healthcarerpt.pdf.

The agendas, transcripts, presentations, and written comments from each session of the joint hearings, including those topics addressed in more detail in this article, are available at www.ftc.gov/ogc/healthcarehearings/index.htm.

The 1996 Healthcare Policy Statements are available at www.ftc.gov/reports/hlth3s.pdf.