01/14/2005

The July 2004 Joint DOJ/FTC Antitrust In Healthcare Report's Practical Implications For Hospitals And Physicians

William E. Berlin
202-326-5011
weberlin@ober.com

Appeared in Health Lawyers Weekly
January 14, 2005

On July 23, 2004, the Department of Justice (DOJ) Antitrust Division and the Federal Trade Commission (FTC) issued their long-awaited Report concerning the joint hearings on healthcare and competition law and policy held during 2003.¹ Significantly, the Report marks the agencies' first comprehensive guidance in the healthcare arena since the 1996 DOJ & FTC Statements of Antitrust Enforcement Policy in Healthcare (Healthcare Policy Statements).² If the FTC's healthcare workshop is included, the joint hearings encompassed more than fifty sessions held on twenty-seven days in September 2002, and from February to September 2003.³ 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 healthcare—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.⁴

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.⁵ 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.

I. 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 healthcare 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 healthcare sector involving complex products and services. More specifically, the Report makes clear that the antitrust laws apply to healthcare actors. While this may seem unremarkable, and it should be, there are still individuals and groups of healthcare 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 healthcare 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.

II. 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.⁶ One must turn to comments on the Report by agency officials after it was issued to find statements on the agencies' enforcement priorities relating to hospital contracting practices.

A. 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 official's 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 nor 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 2000.⁷ 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 non-public 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 were structured differently or the hospitals' own analysis (e.g., potential merger-specific, cognizable efficiencies) was sharpened by the specter of agency enforcement.⁸

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.⁹ The Report contains lengthy discussions of the myriad issues surrounding geographic and product market definition, which will not be repeated in detail here.¹⁰ 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.¹¹ 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.¹² 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.¹³ 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 non-profit status—which many commentators believe was one factor influencing courts and contributing to the agencies' losses in merger cases in the 1990s.¹⁴

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.

B. 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, "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."¹⁵ 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.¹⁶ 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.¹⁷

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).¹⁸ 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 ASC's 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.¹⁹ 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."²⁰ 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 SSH's or ASC's 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 a 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 hearings included a separate session devoted specifically to this topic, the Report does not discuss this issue.²¹

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.

III. Physicians: Continued Enforcement Priorities and New Integration Guidance
As is the case with hospital enforcement, the Report's discussion of physician issues, comments by agency officials on the Report after it was released, the sheer number of cases recently filed (and usually simultaneously settled) against provider networks, and the increasing severity of remedies obtained in those cases demonstrate the agencies' continued if not heightened antitrust enforcement agenda relating to physicians. At the same time, the Report endorses new financial integration mechanisms and increased flexibility in recognizing clinical integration in analyzing the legality of provider network joint ventures.

A. Provider Network Joint Ventures
In his remarks at the press conference announcing the release of the report, then-FTC Chairman Timothy Muris commented on the "audacity" and "large-scale" of provider networks engaging in naked price fixing two years ago. Echoing those comments, the head of the FTC's healthcare enforcement section stated that the number of networks violating the antitrust laws was "striking." In the two years since then, the FTC has filed suit and/or entered into consent decrees in nineteen provider network cases. Although the use, or more accurately the misuse or abuse, of the messenger model (an arrangement that allows contracting between payors and unintegrated providers while avoiding price-fixing by those competing providers) was the source of the antitrust violation in most of those cases, the Report provides no new guidance on this issue.²²

B. Increasingly Severe Remedies
Instead, the Report focuses primarily on the remedies for this and other antitrust violations resulting from provider networks. The Report states that "much more stringent measures" are necessary for flagrant or repeated violations, and also for those who facilitate violations by others.²³ Assistant Attorney General Hew Pate highlighted this aspect of the Report in his comments at the same press conference mentioned previously, warning that DOJ would not hesitate to pursue criminal remedies in the healthcare arena where warranted in cases of egregious conduct. In later presentations, DOJ officials have stated that the Antitrust Division does not have any set guidelines but will evaluate whether to apply criminal remedies in healthcare matters on a case-by-case basis. The same official took pains to dispel the notion that criminal remedies are never appropriate in healthcare matters, and noted that DOJ has considered criminal action in several recent matters but ultimately decided to pursue only civil relief.

Additionally, the Report states that disgorgement and/or dissolution will be sought in appropriate healthcare cases. Subsequent comments by agency officials explain that dissolution will be appropriate where there is "no procompetitive justification whatsoever" for the violative conduct, and that disgorgement or restitution will be sought where the violation is clear, there is a reasonable basis to calculate the amount of the defendant's "unjust enrichment," and this remedy will be valuable because other remedies including criminal prosecution or private actions are unlikely.²⁴

C. Provider Responses to Payor Monopsony Power
Another question addressed in my earlier paper was whether payors possess monopsony power in healthcare markets in the United States, and if so, what can physicians legally and effectively do to "level the playing field."²⁵ Several days of testimony at the hearings were devoted to the monopsony power issue.²⁶ The Report unambiguously summarizes those findings by stating that "the available evidence does not indicate that there is a monopsony power problem in most health care markets."²⁷

The Report also clearly rejects (or, more accurately reaffirms the agencies' prior rejection of) countervailing market power as a tool for physicians to combat real or perceived payor market power.²⁸ Countervailing market power is the aggregation of market power through otherwise unlawful collusion by physicians. In fact, agency officials stated that "leveling the playing field" is never a justification for price fixing. They explained that it is impossible to determine the degree of countervailing power that would be proper, and even if possible, there is danger of "spill-over" from the market power theoretically proper to balance the payor's market power to additional market power unreasonably restraining competition. And the agencies take a particularly dim view of physician (or, for that matter, hospital) collusion to impede perceived innovative contracting practices discussed elsewhere in this paper such as pay-for-performance arrangements or tiering mechanisms.²⁹

This section of the Report concludes that "[t]o the extent monopsony power exists in some markets, the Agencies and state Attorneys General should address such matters on a case by case basis."³⁰ The Report explains that it is preferable to use antitrust enforcement to address monopsony power rather than to allow physicians to accumulate countervailing market power. Following its own advice, DOJ scrutinized potential health plan monopsony power resulting from two recent health plan mergers. Although neither merger was ultimately challenged, the DOJ's statements on the closing of each merger investigation (one issued only three days before the Report) highlighted the respective investigations' focus on whether the merger between two plans would create market or monopsony power.³¹

The Report and comments by agency officials also emphasized that not only the acquisition through mergers, but also the improper use or abuse of monopsony power (i.e., monopsony conduct) is a concern. The Report indicates that this can be a competitive concern where, for example, a health plan with monopsony power imposes a most-favored-nations (MFN) contract provision to deter hospitals or other providers from granting discounts to competing health insurers. An MFN is a contractual agreement between a plan and provider that requires the provider to sell to the plan on pricing terms at least as favorable as the pricing terms under which that provider sells to any other plan. A monopsonist health plan's imposing an MFN can create a barrier to entry by new competing health plans or increase their costs thus making the rival plan a less effective competitor.³² The agencies, and particularly the DOJ, have brought several cases challenging insurers' imposition of MFNs (although none since 1999). Agency officials caution, however, that it is not a violation for a health plan simply to pay providers less than they seek in contract negotiations.

As is the case regarding hospital issues, the Report's guidance on responses to health plan bargaining or monopsony power is not limited to private parties. In the context of addressing mechanisms to "level the playing field" between physicians and payors, the Report concludes that state governments (or for that matter, the federal government) should not enact legislation permitting collective bargaining by independent physicians. According to the agencies, collective bargaining leads to higher prices and is unlikely to result in higher quality care.³³

Finally, in the Report, the agencies encourage physician information sharing provided that it is conducted pursuant to the analytical framework of Healthcare Policy Statement 6 to provide adequate safeguards ensuring the information is not used for anticompetitive ends.³⁴ As noted in my earlier paper, the Statement 6 conditions are very specific and may be hard to meet, so information sharing may not be an effective mechanism for many physicians to "level the playing field" in negotiating with payors.

D. Financial and Clinical Integration
On the bright side for physicians, the Report specifically identifies another form of financial integration that the agencies will recognize in conducting joint venture analysis of provider networks under the antitrust laws, and also promises increased flexibility in analyzing clinical integration arrangements by provider networks.

Healthcare Policy Statement 8, last revised in 1996, describes how the agencies evaluate physician network joint ventures, and in outlining the analysis that will be applied to joint ventures, Statement 8 notes that "physicians' integration through the network is likely to produce significant efficiencies that benefit consumers, and any price agreements . . . by the network physicians [that] are reasonably necessary to realize those efficiencies" will be evaluated under the antitrust rule of reason (which balances those efficiencies against anticompetitive effects) rather than summarily condemned as per se illegal.³⁵ Statement 8 provides examples of acceptable, substantial financial integration through risk-sharing such as capitation, global fee arrangements, fee-withholds, and cost or utilization based bonuses or penalties.

In keeping with the Report's emphasis on improving measures of price and quality, giving consumers more information on prices and quality, and giving consumers and providers greater incentives to use such information, the Report recognizes that payment for performance (P4P) arrangements among physicians may constitute a form of financial risk sharing in addition to those mechanisms outlined in Statement 8.³⁶ P4P arrangements generally "align financial incentives with the implementation of care processes based on best practices and the achievement of better patient outcomes," rewarding physicians for achieving "increasingly higher levels of safety, effectiveness, patient-centeredness, timeliness, efficiency, and equity."³⁷

Statement 8 also acknowledged that certain clinical integration arrangements could produce sufficient efficiencies to justify joint negotiation by providers; however, Statement 8 has been criticized for failing to provide adequate guidance and detail specifying the parameters of acceptable clinical integration. The Report expressly seeks to fill that void, and contains considerable discussion of the indicia and applicable analytical framework the agencies will apply in evaluating clinical integration arrangements.³⁸ The four primary indicia of clinical integration identified in the Report are: (1) the use of common information technology to ensure exchange of all relevant patient data; (2) the development and adoption of clinical protocols; (3) care review based on the implementation of protocols; and (4) mechanisms to ensure adherence to protocols.³⁹ The Report also contains a broad outline of the types of inquiries the agencies are likely to make when analyzing the competitive implications of a clinical integration arrangement. Those questions merit repeating here:

1. What do the physicians plan to do together from a clinical standpoint?
   • What specific activities will (and should) be undertaken?
   • How does this differ from what each physician already does individually?
   • What ends are these collective activities designed to achieve?
2. How do the physicians expect actually to accomplish these goals?
   • What infrastructure and investment is needed?
   • What specific mechanisms will be put in place to make the program work?
   • What specific measures will there be to determine whether the program is in fact working?
3. What basis is there to think that the individual physicians will actually attempt to accomplish these goals?
   • How are individual incentives being changed and re-aligned?
   • What specific mechanisms will be used to change and re-align the individual incentives?
4. What results can reasonably be expected from undertaking these goals?
   • Is there any evidence to support these expectations, in terms of empirical support from the literature or actual experience?
   • To what extent is the potential for success related to the group's size and range of specialties?
5. How does joint contracting with payors contribute to accomplishing the program's clinical goals?
   • Is joint pricing reasonably necessary to accomplish the goals?
   • In what ways?
6. To accomplish the group's goals, is it necessary (or desirable) for physicians to affiliate exclusively with one IPA or can they effectively participate in multiple entities and continue to contract outside the group?
   • Why or why not?⁴⁰

Finally, the Report and particularly subsequent comments by agency officials emphasize that they do not endorse any particular model for financing and delivering healthcare or any particular structure with which to achieve clinical integration for fear that this would channel market behavior. Instead, the agencies encourage market participants to develop innovative arrangements on their own that are responsive to their own efficiency goals and market conditions. In turn, the agencies will flexibly apply Statement 8 to those integration arrangements. Agency officials noted, however, that they have seen very few P4P arrangements, and few clinically integrated provider networks (although there have been more in the last year). Agency officials and the Report also emphasize that an important overarching question in their analysis of both financial and clinical integration (reflected in the inquiries enumerated above) is the extent to which joint contracting is reasonably necessary to achieve efficient financial or clinical integration—i.e., why do the providers need to jointly negotiate prices in order to integrate? An arrangement that fails this inquiry will not pass muster.

IV. Conclusion
The Report clearly has practical implications for physicians and hospitals. Although those providers may not like all of the agencies' findings and conclusions based on the testimony and commentary adduced at the joint hearings, the Report and subsequent elaboration by officials provide specific guidance on issues such as contracting practices and negotiations with payors, and the contours of permissible affiliation through mergers or joint ventures, as well as an indication of the FTC's and DOJ's enforcement agenda in the healthcare sector over the next few years.

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