Antitrust and Unfair Competition Law

Competition: Winter 2017-18, Vol. 27, No. 1

UNCERTAINTY AND SCIENTIFIC COMPLEXITY: AN INTRODUCTION TO ECONOMIC FORCES THAT DRIVE CURRENT DEBATES IN HEALTHCARE ANTITRUST

By Paul Wong, Ph.D.1

Healthcare antitrust is a subset of antitrust law and economics that focuses on the healthcare industry. A vast number of lawyers and economists have devoted their careers to this "sub"-field addressing a large and integral part of our nation’s (and California’s) economy. Healthcare accounts for 18 percent of national GDP (over $3 trillion)2 and is, perhaps, one of the most important "goods" that our society consumes, since it is essential to the welfare and wellbeing of each of us. The "antitrust" component of healthcare antitrust is equally important and interesting, as the structure of the American healthcare system is unique globally for its reliance on competition.3 The healthcare system in the United States is also virtually unparalleled due to the presence of nearly every canonical market "friction."4 As I discuss below, there are many topical and complicated questions that practitioners (lawyers, economists, regulators, and courts) continue to grapple with in healthcare antitrust. Greater discussion can help evolve thing surrounding the more complicated issues, and because of all of the economic twists and turns that healthcare presents, there are countless ideas and concepts that can be generalized to inform antitrust law and economics as they are applied in other industries. So, for my colleagues in all areas of law and economics, it is worth following issues in healthcare antitrust closely in the years to come.

There are two economic forces ever present in healthcare that I will focus on in this article. First, many industry actors, including patients, providers,5 and payors,6 face a tremendous amount of uncertainty, and each of those actors faces asymmetry in that uncertainty. This breeds a host of market frictions, such as adverse selection and agency problems, which may complicate the application of the standard paradigm that antitrust law follows. Second, the scientific complexity of medicine necessitates a high level of specialization and intricate technology. This creates strong economies of scale and scope and requires coordination among different industry actors, which may also complicate the application of the standard paradigm. In turn, the healthcare financing and delivery system was built with these forces in mind, but it has evolved in such a way that there is a web of interlinking actions for every episode of care, and government plays a large role as both an industry actor and a regulator.

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All of this‚ÄĒthe economic forces of uncertainty and scientific complexity, coupled with a complicated healthcare system‚ÄĒimplies that it is important to distinguish economic conduct that is unlawful and reduces social welfare from economic conduct that is naturally occurring or that ultimately benefits society. This places a great onus on healthcare antitrust practitioners to evaluate matters on a case-by-case basis (even more so than would otherwise be true) since there may not be clear-cut archetypes to follow for any given healthcare antitrust matter. I will provide some examples to illustrate these points, including those involving ambiguities over contracting at various stages of the healthcare financing and delivery system, the role of Accountable Care Organizations (ACOs), and debate concerning the potential for market power.

I. BACKGROUND

Separately, antitrust law and the healthcare industry are each straightforward enough to define. Broadly speaking, antitrust law has three main principles. First, it establishes that competition should operate freely‚ÄĒseparate economic entities should not cooperate or collude in any instance where their natural incentive is to otherwise compete head-to-head. Many models in the economic literature hold that unfettered competition achieves the socially optimal outcome.7 Second, it states that monopoly (or more broadly significant "market power") is likewise bad for society‚ÄĒa firm holding a monopoly may not face the incentive to produce its goods or services at the socially optimal price and quantity. Third, various activities might violate the first two general principles under some conditions, including price discrimination, exclusive dealings, multi-product tying, and mergers of competing firms. These three principles are intended to apply to nearly all industries, healthcare included.

The healthcare industry can be divided into two segments. First, it consists of what I shall call the "payor-provider" segment, which includes all actors focused on the direct delivery of healthcare. This includes patients (i.e., "consumers"), insurance companies ("payors"), hospitals ("facility providers"), and physicians ("professional providers"). This segment also includes government (e.g., Medicare, Medicaid, and the Veterans Administration), other benefits managers (e.g., stand-alone pharmacy benefits managers and stand-alone dental and vision insurers), other facility providers (e.g., laboratories, dialysis centers, and pharmacies), other professional providers (e.g. , mid-level practitioners, registered nurses, and therapists), and other suppliers (e.g., firms focused on the delivery or rental of medical equipment and supplies). Each of these actors interacts within a large network of relationships and transactions. Second, the healthcare industry also consists of what I shall call the "pharmaceutical and medical device" segment, which includes all of the actors focused on the creation, development, and regulation of medical technology. This includes large and small pharmaceutical and medical device companies, generic pharmaceutical companies, other medical supply companies, government regulators (e.g., the United States Food and Drug Administration), and diversified technology, electronics, and chemical companies (e.g., Philips, 3M, and Johnson & Johnson). Due to the size and complexity of both segments, I will focus mainly on the payor-provider segment in this article, and I will treat "healthcare" as synonymous with payor-provider matters. This is not to diminish the importance or complexity of the pharmaceutical and medical device segment, but rather to acknowledge that this segment’s issues are disparate and complex enough that they deserve discussion in a separate article.

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Healthcare antitrust is the intersection of antitrust law and policy and the healthcare industry (again, here, payor-provider). The field investigates and applies antitrust principles to any and all of the healthcare actors, their relationships, and their economic interactions. As the cacophonous list above perhaps implies, the many actors, coupled with a host of economic issues that come in-tow, are what make healthcare antitrust unique and interesting.

To that end, healthcare antitrust primarily encounters two primal economic forces that make analysis more difficult: (a) uncertainty and (b) scientific complexity. Uncertainty arises, for example, because patients do not know when or with what severity a health malady might strike. Patients may, as a consequence, seek out insurance coverage from payors and care from providers, but even these specialized actors may not be able to perfectly forecast the severity or timing of patients’ healthcare needs. Moreover, patients may privately know that healthcare is needed before payors and providers find out, and some patients may then have an incentive to withhold information from payors and providers.8 Uncertainty arises for other reasons as well, including the fact that there may not be consensus over the definition of "quality" in a given clinical setting, an actor may not fully observe the price of a transaction, and there may be ambiguity concerning the proper course of medical treatment. These issues create a variety of market frictions, including adverse selection,9 moral hazard,10 and agency problems,11 all of which may or may not impede the benefits of competition as compared with other industries.12

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Scientific complexity exists because treatment of medical conditions is highly individualized to a given patient, and it requires complicated medical technology and skilled, specialized professionals and techniques. These requirements, in turn, breed the need for expensive equipment and complex organizations, and require coordination among multiple actors and institutions. Economies of scale and scope are borne out of all of these factors‚ÄĒ complicated equipment can be better mastered with more frequent use, physicians may require breadth in their case work and high enough volume to maintain their specialized skills, or a given medical condition might require two or more specialists to work together. For instance, some surgeons may require more than ten years of post-graduate schooling and training and, even then, require repeated practice to master complicated procedures.13 As another example, the medical literature increasingly recognizes the joint incidence of medical conditions and the value of treating these conditions jointly,14 and it has pushed for better coordination of care across different providers, such as primary care physicians and specialists or surgeons and rehabilitation providers.15 These benefits of specialization and coordination provide an impetus for different industry actors to work in concert, and this, in turn, fuels incentive for firms to merge and integrate or for independent actors to communicate and coordinate‚ÄĒall behaviors that may fall under a watchful eye from antitrust regulators.

The healthcare financing and delivery system has evolved to account for these economic realities. To address market frictions and scientific complexity, the system exhibits a web of different payments and interactions among the many actors for even the provision of a single routine incidence of care. Likewise, because of market frictions, both federal and state governments play a large role as healthcare payors,16 which consolidates a significant proportion of patients into one purchasing body, but also leads to a large and complicated regulatory framework that must interact with the competitive process. Economies of scale and scope created by scientific complexity push some actors toward centralization and integration, but this leads to a significant number of independent actors (namely patients) at one level of the system who must interact with large actors (government, payors, and hospitals) at other levels of the system, creating tension between heterogeneity and uniformity. And finally, the market frictions and dynamic changes in medical technology and techniques have pushed policymakers to create a substantial amount of healthcare-specific law and regulation, which must coexist with general antitrust law.

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Navigating these issues to conform to the three basic antitrust principles requires practitioners to undertake detailed analyses. For example, because of the market frictions and the complicated healthcare system meant to address these frictions, collaboration, coordination, and multidimensional strategies may be needed to improve the delivery of healthcare. It is important to identify when competition in a market has been harmed by misconduct versus when a market has merely failed due to large market frictions. To name a commonly cited worry, it is possible that price competition among insurers in the face of adverse selection can drive outright market failure.17 If insurers develop ways to discriminate against patients or if payors and providers coordinate extensively to share information, this may address some of the potential causes of market failure, but it may also blunt competition between some actors. Whether that runs counter to general antitrust principles must be determined for each case and circumstance. As another example, because of the scientific complexity of the industry and the specialization and coordination it drives, there may be large benefits to integration and mergers. It is important to separate situations in which consolidation of firms is carried out in the name of economies of scale and scope, and those in which consolidation is merely an attempt to gain market power. For instance, a merger of many small physician groups into a large multi-specialty group practice may help coordinate care across specialties or allow the group to bear greater financial risk, but it may also run the risk of creating a large, indispensable physician practice on which payors or hospitals rely significantly. These sorts of ambiguities are issues that must be weighed in nearly every healthcare antitrust matter.

I will list a few of the more current and interesting antitrust questions (and cases) that arise out of the environment described above and will devote the rest of the article to discussing these in more detail. First, contracting ambiguities abound in healthcare antitrust. It may be difficult without detailed analysis to determine whether a given contract is lawful (i.e., good for competition and society) or unlawful (i.e., harmful to society and competition). To name some recent and specific questions that have been raised:

  • Who is the true "customer" for hospitals and how are prices actually set?
  • Are exclusive or bundled (or both) contracts lawful, and is it possible to establish general antitrust rules for healthcare that guide these behaviors?

Second, there is a recent emphasis on the importance of Accountable Care Organizations (ACOs) for improving quality and lowering healthcare costs, yet the competitive implications of ACOs are still the subject of much controversy.18 Further, some healthcare providers are finding it difficult to balance healthcare policy encouraging building ACOs on the one hand, with antitrust law limiting certain types of coordination on the other hand. This has raised questions of its own:

  • What are the benefits of ACOs? Are they financial, clinical, or both? And what delineates coordination from collusion?
  • Does the push toward designing and building ACOs by industry and in policy (e.g., the Affordable Care Act (ACA)) justify greater healthcare consolidation?

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Third, it may require extensive analysis to measure and determine market power (or lack thereof) in healthcare antitrust. Healthcare is a prime example of an industry in which simple metrics, such as market share, do not tell the whole story about market power. Regulators and courts may ask as a result:

  • Does market power exist in a given healthcare market?
  • What can or should be done if it does?

Some have raised concerns about different levels of the industry, including insurers, such as large national insurance carriers, hospitals, such as multi-hospital systems and Academic Medical Centers (AMCs), and physicians, such as large multi-specialty group practices. All three of the above areas of inquiry are on the frontline of healthcare antitrust today.

This also applies specifically to California, as many of these same healthcare antitrust issues are at play within the state. First, California has long been a leader in integrated healthcare delivery systems, and there is much innovation and experimentation with ACOs (or ACO-like models) in California. Second, California has many different markets and a large variety of firm sizes and structures. Some have raised concerns about market power within California. And finally, third, California is active and deeply involved in healthcare policy relative to other states. For example, California’s public health insurance exchange ("Covered California") is among the largest in the country and continues to evolve,19 and California is constantly seeking ways to adjust the healthcare financing and delivery system.20

II. AMBIGUITIES IN HEALTHCARE CONTRACTING

There are many antitrust questions about contracting in healthcare that lack a prima facie answer. To understand why this is the case, consider the way that healthcare is typically financed and delivered in the United States. First, individuals (i.e. , patients) make payments to insurers (or the government) via insurance premiums (taxes). Then, insurers negotiate coverage and prices with providers on behalf of the patients the insurers represent. Finally, patients and physicians (and/or insurers) jointly decide when and how much care is utilized, and insurers and patients (via co-payments) reimburse providers for the healthcare services actually rendered. All told, this series of multiple payments and decisions creates a triangular set of transactions rather than the linear chain that is typical in most industries.

If the structure of the system alone is not enough to convince one of the difficulties in evaluating contracting in healthcare, consider some other nuances that complicate healthcare transactions:

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  • Insurers typically negotiate the prices of healthcare services, but often patients and physicians are unaware of these prices when deciding how or when to receive care.
  • The primary decision to receive care (and what or how much) might be significantly influenced by any one of the three typical actors, which may shift from case to case:
    • The patient may have strong personal preferences and "self-refer" himself or herself to a given provider or request a particular type of care.21
    • The physician may have other clinical considerations and, based on those, direct the location or type of care provided, notably if the patient is a complicated case or the physician needs a particular care team or specialized technology.
    • The insurer may influence the location or type of care via benefit design (e.g., a narrow insurance network) or by steering activity (e.g., prior authorization).
  • Contracts are designed to correct or take into account numerous market frictions, including:
    • Uncertainty over medical outcomes and the ultimate costs of care.
    • Private information, which generates adverse selection, moral hazard, and agency problems.
    • A high degree of heterogeneity on one side of the market that is not necessarily matched on the other side of the market.
  • Medical specialization and the need for coordination of care create large economies of scale and scope for insurers and providers, often causing these actors to be large, diverse, and cover vast geographies. These actors must transact both with one another and with individual patients, and contracts must be sufficiently adaptable and complex to account for both types of interactions.

These are just some of the wrinkles that must be considered when analyzing a particular contract in healthcare.

Notably, the challenges for healthcare antitrust analysis described above raise an ongoing question that was particularly salient in recent hospital merger litigations. Unlike many other industries, there is a debate in healthcare concerning who is the "purchaser" and what is the "transaction" to be analyzed. When assessing the competitive effects of a hospital merger or the economic impact of a given contract (between different providers or between insurers and a provider), should one place more emphasis on the data and reactions of insurers or patients, and are the most relevant economic decisions the negotiations of prices in advance of the provision of care or the individual choices to utilize care once it is needed? Moreover, how does one measure price if it is stochastic and varies with every patient, and might insurers be at once purchasers and direct competitors to the providers at issue?

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These questions were very much at the forefront of Federal Trade Commission, et al. v. Advocate Healthcare, et al., in which the courts attempted to weigh the effect of the merger between two hospital systems in Chicago.22 Much of the analysis of competitive effects in the case centered around measures of patient substitution, such as patient-level diversion ratios,23 yet both the district court and court of appeals held that "insurers, not patients, are the most relevant buyers" of hospital services.24 As these courts found, insurers are the ones that negotiate prices, and they might be considered purchasers of healthcare whose opinions are relevant to the analysis of a given hospital merger. On the other hand, however, as stated in the analysis of competitive effects in the case, patients may make the ultimate decision on whether to receive care, and patients’ decisions may not perfectly mirror testimony by insurers.

The presence of two relevant groups of actors, patients and insurers, on the purchasing side of the market poses other practical issues for antitrust analysis as well. For example, most of the data relevant to the analysis of providers follows the actions and choices of patients, such as patient-level market shares and diversion ratios. Modeling the mechanisms by which insurers react to patient preferences requires relatively complex economic theories.25 In addition, government antitrust agencies also look to testimony by insurers in hospital merger cases, but there may be problems with placing significant weight on insurers’ testimony if opposing (or supporting) the merger serves insurers’ other interests. In FTC v. Advocate, the court acknowledged this concern noting that insurers might have acted "because they believed the merger would improve their own competitive position."26

The same economic forces discussed above must also be acknowledged in analyzing exclusive or bundled contracts in healthcare. On one hand, these sorts of contracts may make economies of scale and scope possible,27 and these economies have been documented in the medical and economic literature.28 Healthcare firms may enter into exclusive contracts, such as when a hospital contracts exclusively with one anesthesiology physician group; or into bundled contracts, such as when an insurer enters into a capitation arrangement with a large independent physicians association, to streamline incentives or eliminate duplication across separate providers. In the case of the anesthesiologists’ exclusive contract, increased volume and more focused training created by exclusivity may help eliminate errors and improve patient outcomes, and in the case of the capitation arrangement, financial risk sharing may prompt the association to eliminate redundant care. Moreover, these same contracts may also help eliminate agency problems or other incentive frictions that may exist between different actors. For example, the capitation contract may also encourage physicians to recommend alternative treatments outside of their primary specialties.

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Exclusive or bundled contracts might also lead to antitrust problems under certain circumstances. Exclusive contracts may be designed to exclude competitors and to allow a firm to gain market power, and bundled contracts may be designed to gain an unfair competitive advantage if only some firms offer the bundled products. Regulators and courts, to their credit, have recognized that the possible anticompetitive effects of these sorts of contracts do not automatically disqualify any and all of them in healthcare. The risk of exclusion or unfair advantage must be weighed against the welfare enhancing gains in scale and scope or the benefits of aligning different actors’ incentives. However, there may sometimes be limits to this balance. For some, economies of scale or scope may be exhausted above a certain point, or excluding even a single firm may have strong effects on competition if the market in question is already highly concentrated. Healthcare antitrust analyses must weigh these tradeoffs when evaluating exclusive or bundled contracts.

There is a recent case in California to illustrate the continuing ambiguity that exclusive or bundled contracts present in healthcare. In Sidibe, et al. v. Sutter Health, the Sutter Health hospital system in Northern California has been accused of unlawful efforts to bundle different healthcare services, such as inpatient and physician services, and to prevent insurers from steering patients toward competing healthcare providers.29 It is possible, however, that these actions may instead be legitimate attempts by Sutter Health to ensure adequate economies of scope and scale. This is happening in other parts of the country, as well. For example, in Methodist Health Services v. OSF Healthcare System, St. Francis Hospital (i.e., OSF Healthcare) was accused of unlawful exclusive contracting to the exclusion of Methodist Hospital. In this case, however, the Seventh Circuit ruled that St. Francis’ exclusive contracts were, in fact, lawful means to capitalize on economies of scale.30

As these recent cases help illustrate, analysis of healthcare contracting and matters involving the healthcare financing and delivery system are not necessarily straightforward. The complex dance that patients, insurers, and providers must perform is borne out of the uncertainty and scientific complexity inherent in the healthcare industry, and that dance breeds a variety of other economic questions. These questions lay the groundwork for healthcare antitrust practitioners of the future.

III. ACCOUNTABLE CARE ORGANIZATIONS: GOOD OR BAD IN THE EYES OF ANTITRUST?

There has been a strong push by industry participants and policymakers toward building ACOs and other coordinated healthcare systems. It is intended that these collections unite actors at different stages of the healthcare industry, such as between hospitals and physicians or between physicians of different specialties, in order to take greater responsibility for overall patient care and better coordinate different treatments. Perhaps best publicized, there are numerous provisions in the ACA, which provide strong incentives for providers to build new ACOs.31

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The push to create ACOs encompasses the two ideas discussed throughout this article. First, the economic and medical literature has documented how sharing financial risk (i.e., distributing the effects of an uncertain future) helps address the conflicting incentives of separate providers.32 As different providers coordinate and bear the consequences of their actions together, they can better act in a patient’s interest and provide "patient-centered" care.33 For instance, a patient with a knee injury might be treated effectively with surgery or with intensive physical therapy. If a surgeon is prescribing care without financial integration with other providers, the surgeon has less of an incentive to recommend physical therapy. An ACO that financially unites the surgeon with a therapist, however, might increase the surgeon’s incentive to recommend physical therapy. Second, the specialization that medical science often necessitates causes different providers to coordinate irrespective of the structure of the healthcare financing, and this, in turn, creates natural benefits from economies of scale and scope. For instance, medication adherence is beneficial for patients with chronic conditions, and it has been shown to reduce overall medical costs.34 Coordination between a patient’s primary care provider and a prescribing specialist may facilitate adherence, and this coordination may be more likely if the two physicians are part of the same organization. An ACO may help promote this coordination (and, hence, provide benefits to patients) by reducing the physicians’ burden in executing the coordination or by providing a financial vehicle through which the physicians can share in the overall cost savings. In examples like these in healthcare, the economic forces of uncertainty and scientific complexity press firms to cooperate, coordinate, and integrate with a frequency that is not present in other industries.

But both coordination and scale have raised antitrust concerns in some cases. It may be important to see where coordination stops and collusion begins, or where efficient scale ends and market power begins. For example, coordination between a hospital and a rehabilitation center may be in the name of coordinating patients’ transfers between facilities and any follow-on ("post-acute") care, and this should be separated from a scheme to foreclose a competing rehabilitation center. The core principles of antitrust warn of the potential anticompetitive effects of coordination and the accrual of scale, and this tension raises two ongoing issues for healthcare.

First, there is still no bright-line consensus concerning the boundary between collusion and coordination among ACOs. To this end, the federal antitrust agencies concede that there is no textbook model of financial or clinical integration that is sure to pass muster under antitrust law.35 On the financial side, I have often heard questions like these in my own work with providers:

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  • How much "partial" capitation is enough to qualify as financial integration?
  • Do informational firewalls provide a limit to financial collaboration?
  • Can organization-wide joint contracting be done with only the merger of a select set of assets or operations?
  • And on the clinical side, I have heard questions in a similar vein:
  • Is merging Electronic Health Records (EHR) systems enough to qualify as clinical integration?
  • Can clinical coordination be achieved strictly by a professional services contract or does it require a full merger of assets?

These sorts of questions help illustrate the fact that there is a continuum of firm structures, service contracts, and collaboration efforts, many or all of which could justifiably be called ACOs for their ability to coordinate some facets of patient care.

For the antitrust analysis of the continuum of ACO structures, there can be a tension at work in how ACOs bring about changes in referral patterns, clinical practices, and duplication of services. ACOs may create new insurance products or help patients navigate the delivery system, which may change practices for the better. On the other hand, it is possible that an ACO can be designed to limit access for some actors in the market, such as by altering the referrals from a physician group to various hospitals. Depending on the circumstances, this may constitute anticompetitive foreclosure, or it may simply be competition at work, as when the competing hospitals outside the ACO still have many options for referrals.

These realities‚ÄĒa continuum of financial and clinical integration and a tension in how ACOs may alter the market‚ÄĒmake it important to separate legitimate actions from attempts to gain market power. In the above example, it may be important to determine whether the second hospital is suffering from anticompetitive theft of referrals or whether the reduction in referrals is due to the success and high quality of the newly created ACO‚ÄĒ or it may be that both legitimate and anticompetitive effects and motives are at work at once. It is the purpose of healthcare antitrust analysis to distinguish these effects from one another, but this can require extensive, detailed analysis.

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Second, the antitrust requirements in building an ACO must also be balanced against the many goals of recent healthcare regulations. Actors at all levels of the healthcare financing and delivery system are facing this quandary. Insurers are being pushed to create additional economies of scale to meet new reporting requirements36 and thinning margins.37 Providers, given their difficulties in navigating financial and clinical integration, can find that ACO-like coordination is hard or impossible without a merger of assets. Further, these same providers are finding that meeting quality incentives (e.g., forming "centers of excellence")38 are difficult without expanded scale and centralization. As with the cases above, these moves to integrate and consolidate could come into conflict with antitrust principles in some markets. Antitrust authorities are generally unwilling to accept merely "the ACA compels us" as justification for a given merger. Further, industry participants at times express frustration that "the left hand" of government is not talking with "the right hand" of government.

These issues are at work in California as well. The Kaiser Permanente health system (which includes a health insurer, a hospital operator, and a physician group), for one, contains perhaps the most notable and longest standing example of a well-functioning, high-quality ACO. Yet other insurers and providers may struggle to replicate Kaiser’s same offerings and high-quality care without also replicating its firm structure through a merger. And if competing with Kaiser does require a merger, are antitrust authorities willing to accept a dual motive‚ÄĒcompete on par with an integrated system and comply with the intentions of the ACA‚ÄĒas sufficient justification for the merger?

IV. CHALLENGES IN ASSESSING MARKET POWER IN HEALTHCARE MARKETS

For some, consolidation in healthcare may raise concerns about market power. Recent cases involving health insurance mergers (United States, et al. v. Anthem, et al. and United States, et al. v. Aetna, et al.) have drawn attention to concentration in commercial insurance markets.39 Or, as another example, it has been alleged that a BCBS firm accounts for a large fraction of the commercially insured population in many states.40 Still other cases have drawn attention to concentration and the potential for market power among hospitals.41 This may or may not implicate large hospital systems or it may implicate important AMCs. It may even implicate integrated health networks, as I have discussed above. And, finally, even physicians are not immune from suspicion. Recent economic literature has brought attention to the potential effects of physician mergers.42

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Yet the economic literature does allow for the notion that market power is hard to attain, and that, in fact, a small number of firms are required to preserve competition. For example, two firms may be sufficient to maintain prices at competitive levels.43 Or, it may be possible for the threat of entry alone to provide a constraint on existing firms’ behavior.44 Yet some of these theories rely on specific conditions, such as:

  • Continuing economies of scale and scope;
  • Savvy consumers who are willing to switch products or suppliers;
  • Strong foresight by various actors;
  • The absence of barriers to entry.

In healthcare, these conditions may or may not exist, depending on the state of the market at issue and how the various actors and levels of the delivery system interact with one another. For example, it is clear that there are economies of scale that are created by the scientific complexities of the industry, yet it can be unclear how quickly marginal returns diminish for a given set of specialties. And while insurers are typically sophisticated buyers with strong foresight, individual patients may not match insurers in this regard. If patients anticipate the future with little accuracy, this may diminish their incentive to substitute to new healthcare products or to invest in preventative care. And on top of all this, the forces of uncertainty and scientific complexity drive variation across markets, and this can affect how much bite the above conditions hold.

When assessing the implications of concentration and market power, there are a number of other questions that are raised:

  • If a firm is found to have market power, can one effectively "unscramble the eggs"?45 Even if one could for a single firm, what about the instance in which insurers, hospitals, and physicians are all large, consolidated firms in the same market?
  • Which behaviors or contracts should be allowed for those with alleged market power, particularly if they are necessary to address the other economic frictions in healthcare?
  • If one were to re-fragment the industry, does this run against the aims of health policy? Is coordination harmed or are economies of scale lost if firms are broken apart?

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Ongoing work in healthcare antitrust and healthcare policy may help address these questions.

V. CONCLUSION

In this article, I offered an overview of healthcare antitrust. Healthcare is unique among industries due to two key forces: (a) all actors in the industry face an enormous amount of uncertainty, and (b) there is a strong need for coordination and scale driven by scientific complexity and specialization. These forces have given rise to a complex healthcare financing and delivery system that weaves together many different actors and exhibits a host of economic frictions. These, in turn, drive a number of notable, ongoing issues in healthcare antitrust. First, courts and regulators must work to determine and understand which contracts are permissible under antitrust law. Second, the industry and policymakers continue to make a large push toward ACOs and emphasize coordination among different healthcare actors, yet ACOs must be careful not to operate at odds with antitrust law. Third, some worry about market power given ongoing concentration among insurers, hospitals, and physicians, but if market power exists for these healthcare actors, the best way forward requires additional analysis and thought. These issues are worth following as healthcare antitrust moves forward. They will not only have bearing on how the healthcare industry evolves, but they may also help inform other areas of antitrust law and other industries.

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Notes:

1. Paul Wong, Ph.D., is an economist and Senior Consultant in the Los Angeles office of NERA Economic Consulting. I thank the editors of this publication for their hard work and helpful comments, in particular Anna Fabish and Bob Freitas. I thank Bibeka Shrestha and Thomas McChesney for their assistance with my research. I am also grateful to have received comments from Lawrence Wu, President of NERA.

2. Sean P. Keehan, et al., National Health Spending Projections Through 2020 Economic Recovery And Reform Drive Faster Spending Growth, 36 Health Affairs 553 (2017).

3. Martin Chalkley and James M. Malcomson, Government Purchasing of Health Services, 1 Handbook of Health Economics 847 (2000).

4. Martin Gaynor and William B. Vogt, Antitrust and Competition in Health Care Markets, 1 Handbook of Health Economics 1405, 1409 (2000) ("Health care markets are characterized by multiple imperfections, in large part deriving from the uncertainty and asymmetry of information between buyers and sellers that are inherent in the nature of health and medical care.").

5. The term "provider" is generally used in health care to mean any person or firm providing a health care service or good, including both those mainly providing facilities and infrastructure ("facility provider"), such as hospitals, and those mainly providing labor and professional services ("professional provider"), such as physicians.

6. Insurance companies and government programs (e.g., Medicare) are referred to as "payors" because they are typically responsible for the majority of reimbursement of providers on behalf of patients at the point of care.

7. This concept dates back to Adam Smith’s "Invisible Hand." Somewhat more recently, William S. Comanor and Harvey Leibenstein, Allocative Efficiency, X-Efficiency and the Measurement of Welfare Losses, 36 Economica 304 (1969); Ross Parish and Yew-Kwang Ng, Monopoly, X-efficiency and the Measurement of Welfare Loss, 39 Economica 301 (1972).

8. For example, an uninsured patient may have a pre-existing health condition, such as diabetes. If the patient were insured, the patient’s diabetes [Q: should the word ‘medications’ be inserted here?] would likely be covered by insurance and the patient would pay less money out of pocket. The insurer, on the other hand, would rather not cover that condition and pay additional costs of care all else equal. The patient, as a result, has an incentive to withhold information about the preexisting condition when applying for insurance coverage. This is a standard example of adverse selection. George A. Akerlof, The Market for Lemons: Quality Uncertainty and the Market Mechanism, 84 The Quarterly Journal of Economics 488 (1970); Michael Rothschild and Joseph Stiglitz, Equilibrium in Competitive Insurance Markets: An Essay on the Economics of Imperfect Information, 90 The Quarterly Journal of Economics 629 (1976).

9. Ibid.

10. Bengt Holmstrom, Moral Hazard and Observability, 10 Bell Journal of Economics 74 (1979).

11. Sanford J. Grossman and Oliver D. Hart, An Analysis of the Principal-Agent Problem, 51 Econometrica 7 (1983).

12. Gaynor and Vogt, supra note 3.

13. Ann Barry Flood, et al., Does Practice Make Perfect?, 22 Medical Care 98 (1984); Harold S. Luft, et al., The Volume-Outcome Relationship: Practice-Makes-Perfect or Selective-Referral Patterns?, 22 Health Services Research 157 (1987); Martin Gaynor, et al., Recent Developments in Health Economics: The Volume-Outcome Effect, Scale Economies, and Learning-by-Doing, 95 The American Economic Review 243 (2005).

14. See, e.g., Steven L. Gortmaker, et al., Chronic Conditions, Socioeconomic Risks, and Behavioral Problems in Children and Adolescents, 85 Pediatrics 267 (1990) at 267 ("Analyses confirmed that chronic physical conditions were a significant risk factor for behavior problems . . . ."); Danson R. Jones, et al., Prevalence, Severity, and Co-occurrence of Chronic Physical Health Problems of Persons with Serious Mental Illness, 55 Physician Services 1250 (2004) (studying "co-occurrence of physical illness within a representative sample of persons with serious mental illness").

15. Thomas Bodenheimer, Coordinating Care‚ÄĒA Perilous Journey Through the Health Care System, 358 The New England Journal of Medicine 1064 (2008).

16. Keehan, et al., supra note 1.

17. Rothschild and Stiglitz, supra note 7.

18. Centers for Medicare and Medicaid Services, Accountable Care Organizations (ACO), https://www. cms.gov/Medicare/Medicare-Fee-for-Service-Payment/ACO; Elliott S. Fisher and Stephen M. Shortell, Accountable Care Organizations: Accountable for What, to Whom, and How?, 304 J. Am. Med. Assoc 1715 (2010).

19. Covered California, Key Ingredients to Creating a Viable Individual Market That Works for Consumers, http://hbex.coveredca.com/data-research/library/CoveredCA_Key_Ingredients-05-18-17.pdf.

20. See, e.g., California Secretary of State, Prop 61: State Prescription Drug Purchases. Pricing Standards. Initiative Statute, http://voterguide.sos.ca.gov/en/propositions/61/.

21. Gaynor, et al., supra note 12.

22. FTC v. Advocate Health Care Network, et al., No. 1:15-cv-11473, 2016 WL 3387163 (N.D. Ill. Jun. 20, 2016); FTC v. Advocate Health Care Network, et al., No. 1:15-cv-11473, 2017 U.S. Dist. LEXIS 37707 (N.D. Ill. Mar. 16, 2017). See also, Federal Trade Commission, et al., v. Penn State Hershey Medical Center, et al., No. 16-2365, 2016 WL 5389289 (M.D. Pa. Sept. 27, 2016).

23. FTC v. Advocate, N.D. Ill. Mar. 16, 2017, supra note 21 at 14.

24. Ibid. See also FTC v. Advocate Health Care, et al., No. 16-2492 (7th Cir. Oct. 31, 2016) at 24 ("If patients were the relevant buyers in this market, those numbers would be more compelling since diversion ratios indicate which hospitals patients consider substitutes. But as we have explained, insurers are the most relevant buyers.").

25. Martin Gaynor and William B. Vogt, Competition Among Hospitals, 34 The RAND Journal of Economics 764 (2003); Cory Capps, et al., Competition and Market Power in Option Demand Markets, 34 The RAND Journal of Economics 737 (2003).

26. FTC v. Advocate, N.D. Ill. Mar. 16, 2017, supra note 21 at 24.

27. Ilya R. Segal and Michael D. Whinston, Exclusive Contracts and Protection of Investments, 31 The RAND Journal of Economics 603 (2000).

28. Flood, et al. and Luft, et al., supra note 12.

29. Sidibe, et al. v. Sutter Health, No. 14-16234 D.C. No. 3:12-cv-04854-LB (9th Cir. Jul. 15, 2016).

30. Methodist Health Services Corp. v. OSF Healthcare System, No. 1:13-cv-01054-SLD-JEH (7th Cir. Jun. 9, 2017) at 4 ("[A]n insurance company may get better rates from a hospital in exchange for agreeing to an exclusive contract, as exclusivity will drive a higher volume of business to the hospital.").

31. Centers for Medicare and Medicaid Services, supra note 17.

32. Kurt C. Stange, et al, Defining and Measuring the Patient-Centered Medical Home, 25 Journal of General Internal Medicine 601 (2010); Paul Wong, et al., Features of Patient-Centered Primary Care and the Use of Ambulatory Care, 20 Population Health Management 294 (2017).

33. Ibid.

34. Michael Sokol, et al., Impact of Medication Adherence on Hospitalization Risk and Healthcare Cost, 43 Medical Care 521 (2005).

35. Statement of Antitrust Enforcement Policy Regarding Accountable Care Organizations Participating in the Medicare Shared Savings Program, 76 Fed. Reg. 67,026, 67,028 (Oct. 28, 2011) ("The Agencies emphasize that [Accountable Care Organizations (ACOs)] outside the safety zone may be procompetitive and legal. An ACO that does not impede the functioning of a competitive market will not raise competitive concerns. The creation of a safety zone reflects the view that ACOs that fall within the safety zone are highly unlikely to raise significant competitive concerns; it does not imply that ACOs outside the safety zone necessarily present competitive concerns.").

36. Centers for Medicare and Medicaid Services, Mandatory Insurer Reportingfor Group Health Plans (GHP), https://www.cms.gov/Medicare/Coordination-of-Benefits-and-Recovery/Mandatory-Insurer-Reporting-For-Group-Health-Plans/Overview.html.

37. National Associate of Insurance Commissioners, Medical Loss Ratio, http://www.naic.org/cipr_ topics/topic_med_loss_ratio.htm.

38. Deborah Tolmach Sugerman, Centers of Excellence, 310 J. Am. Med. Assoc. 994 (2013).

39. United States of America, et al. v. Aetna Inc., et al., No. 16-1494, 2017 WL 325189 (D.D.C. 2017); United States of America, et al. v. Anthem Inc., et al., No. 16-1493, 2017 WL 527923 (D.D.C. 2017).

40. Jerry L. Conway, D.C., et al. v. Blue Cross Blue Shield, et al., No. 2:13-CV-20000-RDP (N.D. Ala.).

41. FTC v. Advocate and FTC v. Penn State, supra note 21; Sidibe v. Sutter, supra note 28.

42. Thomas G. Koch, et al., How Vertical Integration Affects the Quantity and Cost of Care for Medicare Beneficiaries, 52 Journal of Health Economics 19 (2017); Thomas Koch and Shawn W. Ulrick, Price Effects of a Merger: Evidence from a Physicians’ Market, FTC Working Paper Series (2017), https:// www.ftc.gov/system/files/documents/reports/price-effects-merger-evidence-physicians-market/ working_paper_333.pdf.

43. Andreu Mas-Colell, Michael Dennis Whinston, and Jerry R. Green, Microeconomic Theory 387(1995) (the Bertand model with two players yields perfect competition).

44. Gloria J. Hurdle, et al., Concentration, Potential Entry, and Performance in the Airline Industry, 38 The Journal of Industrial Economics 119 (1989).

45. Federal Trade Commission, Statement of the Federal Trade Commission’s Bureau of Competition on Negotiating Merger Remedies (2012), https://www.ftc.gov/system/files/attachments/negotiating-merger-remedies/merger-remediesstmt.pdf.

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