The Patient Protection and Affordable Care Act, Consolidation, and the Consequent Impact on...

7/29/2019 The Patient Protection and Affordable Care Act, Consolidation, and the Consequent Impact on Competition in Health Care

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ThePatientProtectionandAffordableCareAct,Consolidation,andtheConsequentImpactonCompetitioninHealthcare

SubcommitteeonRegulatoryReform,CommercialandAntitrustLaw

CommitteeontheJudiciary

UnitedStatesHouseofRepresentatives

BarakD.Richman*BartlettProfessorofLawandBusinessAdministration

DukeUniversity

I. Introduction.......................................................................................................................................1

II. ExplainingPastFailuresinAntitrustPolicy..................................................................... ...4

A.DispellingtheMyththatNonprofitHospitalsDoNotExercisePricingPower....6

B.DispellingtheMyththatNonprofitHospitalsUseProfitsforCharitablePurposes............................................... ............................................. ............................................ ...10

III. TheParticularCostlinessofHealthcareProviderMonopolies:MarketPower+Insurance.........................................................................................................................................15

A.SupraMonopolyPricing...........................................................................................................16

B.MisallocativeConsequences........................................... .................................................. .......19

IV. ANewAntitrustAgenda............................................................................................................22

A.TheSpecialProblemofAccountableCareOrganizations..........................................24

B.RequiringUnbundlingofMonopolizedServices......................................... ...................29

C.ChallengingAnticompetitiveTermsinInsurerProviderContracts......................32

V. Conclusion.......................................................................................................................................35

*ManyoftheideasexpressedhereinarederivedfromscholarshipcoauthoredwithClarkC.Havighurst.


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I. IntroductionThankyouMr.Chairmanandmembersofthecommittee.Itisanhonortotestify

beforeyouonatopicthatisextraordinarilyimportanttoournationslongterm

fiscalhealth.

LateststatisticsrevealthattheUnitedStatesspendsnearly18%ofitsGross

DomesticProductonhealthcareservices.ThisisnearlytwicetheaverageforOECD

nationsandfarmorethan#2,whichspendslessthan12%.Viewedanotherway,

theUnitedStatesinpurchaseadjusteddollarsspendsmorethantwoandahalf

timestheOECDaveragepercapitaonhealthcareandmorethanoneandahalf

timesthesecondlargestspender.Yetinspiteofourleadershipinhealthcare

spending,wearesafelyinthebottomhalfofOECDnationsonmostmeasuresof

healthcareoutcomes.

Wearespendingtoomuchandgettingtoolittleinreturn,andthenationsimply

isonanunsustainabletrajectory.Alldiscussionsabouthealthcarepolicyshould

beginwiththerecognitionthatcurbinghealthcarespendingneedstobeamongour

highestnationalpriorities.Thecostofprivatehealthinsuranceisbankrupting

companiesandfamiliesalike,andthecostofpublichealthcareprogramsareputting

unmanageableburdensonthefederalandstatebudgets.

Manystudiessuggestthatthecostofhealthcareisunsustainablenotbecausewe

consumetoomuchhealthcare,butbecausewepaytoomuchforthehealthcarethat

wedoconsume.Inotherwords,asonestudyputitfamously,ItsthePrices,


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Stupid.1Andoneofthemostseverecontributorstotheriseofhealthcareprices

hasbeenthealarmingriseinmarketpowerbyhealthcareproviders.

Thepastseveraldecadeshavewitnessedextraordinaryconsolidationinlocal

hospitalmarkets,withaparticularlyaggressivemergerwaveoccurringinthe

1990s.By1995,mergerandacquisitionactivitywasninetimesitslevelatthestart

ofthedecade,andby2003,almostninetypercentofAmericanslivinginthenations

largerMSAsfacedhighlyconcentratedmarkets.2Thiswaveofhospital

consolidationalonewasresponsibleforsharppriceincreases,includingprice

increasesof40%whenmerginghospitalswerecloselylocated.3Evenafterthis

mergerwaveinthe1990spromptedalarm,asecondmergerwavefrom2006to

2009significantlyincreasedthehospitalconcentrationin30MSAs,andthevast

majorityofAmericansarenowsubjecttomonopolypowerintheirlocalhospital

markets.4

1GerardF.Andersonetal.,ItsthePrices,Stupid:WhytheUnitedStatesIsSoDifferentfromOtherCountries,HEALTHAFFS.,MayJune2003,at89.2WilliamB.Vogt&RobertTown,HowHasHospitalConsolidationAffectedthePriceandQualityofHospitalCare?RobertWoodJohnson(2006);ClaudiaH.Williams,et.al.,HowHasHospitalConsolidationAffectedthePriceandQualityofHospitalCare?ROBERTWOODJOHNSONFOUND.,(2006),availableatwww.rwjf.org/files/research/no9policybrief.pdf3Id.Forsurveysofhowhospitalconsolidationshaveincreasedhospitalprices,seeGloriaJ.Bazzolietal.,HospitalReorganizationandRestructuringAchievedThroughMerger,27HEALTHCAREMGMT.REV.7(2002);MartinGaynor,Competitionand

Qualityin

Health

Care

Markets,2FOUNDATIONS&TRENDSINMICROECONOMICS441

(2006);seealsoWilliamB.Vogt,HospitalMarketConsolidation:TrendsandConsequences(2006),NATLINST.FORHEALTHCAREMGMT.,availableathttp://nihcm.org/pdf/EVVogt_FINAL.pdf(documentingtheextentofprovidermarketconcentrationamonghospitals&otherproviders).4CoryCapps&DavidDranove,MarketConcentrationofHospitals(June2011),availableat:http://www.ahipcoverage.com/wpcontent/uploads/2011/10/ACOs

CoryCappsHospitalMarketConsolidationFinal.pdf


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Hospitalsandhospitalnetworksdidnotachievethismarketdominancethrough

superiorskill,foresight,andindustry,5whichwouldbeunobjectionableunderthe

antitrustlaws.Tothecontrary,thisconsolidationoccurredbecauseofmergersand

acquisitions,andpermittinghospitalmarketstoachievesuchremarkablelevelsof

consolidationrepresentsamajorfailureofourantitrustpolicy.Thereisplentyof

blametosharebothDemocraticandRepublicanAdministrations;Congress,the

Executive,andtheCourtsbutwearenowinapositionwherewemustcopewith

hospitalmonopolists.Inotherwords,wenotonlymustresistanyadditional

consolidationthatcreatesgreatermarketpower,butwemustdeveloppolicytools

thatstemtheharmthatcurrenthospitalmonopolistsareinapositiontoinflict.

Mytestimonyisdividedintothreeparts.Thefirstbrieflyreviewssomeofthe

failuresofantitrustpolicythatpermittedhospitalconsolidations,withafocuson

courtdecisionsinthe1990s.Thesecondpartexplainswhyhospitalandhealthcare

providermonopolypowerisespeciallycostly,evenmorecostlytoAmerican

consumersthanwhatonemightcallatypicalmonopolist.Thethirdpart,

discussesavailablepolicyinstrumentstoprotecthealthcareconsumersagainst

currentandgrowinghospitalmonopolists.Ofparticularinterestismonitoringthe

unfurlingofAccountableCareOrganizations(ACOs),whichareencouragedbythe

PatientProtectionandAffordableCareAct(ACA)and,thoughaimingtoaddress

importantfailuresincoordinatingcare,poseaseriousdangertocreatingadditional

providermarketpower.

5UnitedStatesv.AluminumCo.ofAmerica,148F.2d416,430(2dCir.1945)(Hand,J.)(Thesuccessfulcompetitor,havingbeenurgedtocompete,mustnotbeturneduponwhenhewins.)


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II. ExplainingPastFailuresinAntitrustPolicyEversincetheantitrustlawswerefirstappliedsystematicallyinthehealthcare

sectorinthemid1970s,somejudgesandcommentatorshaveresistedgivingthe

statutorypolicyoffosteringcompetitionitsdueeffectinhealthcaresettings.6

Between1995and2000,forexample,antitrustenforcersencounteredjudicial

resistancewhenchallengingmergersofnonprofithospitals,sufferingasixcase

losingstreakinsuchcasesinthefederalcourts.7Althoughmostofthosepro

mergerdecisionsostensiblyturnedonfindingsoffact(mostlyinidentifyinga

geographicmarketinwhichtoestimatethemergersprobableeffectson

6ForcasesinwhichtheSupremeCourtfounditnecessarytooverrulelowercourtsattemptstoinferspecialantitrustexemptionsorcraftsofterantitrustrulesforhealthcareproviders,seeNationalGerimedicalHospitalandGerontologyCenterv.BlueCrossofKansasCity,452U.S.378(1981)(rejectingimpliedexemptionformarketallocationagreementsbrokeredbyhealthplanningagenciescreatedunderfederalstatute);Patrickv.Burget,486U.S.94(1988)(rejectingstatelegislaturesencouragementofphysicianpeerreviewinhospitalsasabasisforexemptingabusesfromfederalantitrustremedies);SummitHealthv.Pinhas,500U.S.322

(1991)(easingstandardforestablishingpotentialeffectofhospitalmedicalstaffdecisionsoninterstatecommerce);Arizonav.MaricopaCountyMedicalSocy,457U.S.332(1982)(treatingphysicianscollectiveagreementsonmaximumpricesasunlawfulbecauseclaimofprocompetitiveeffectswasfaciallyunconvincing);FTCv.IndianaFederationofDentists,476U.S.447(1986)(upholdingadequacyofevidencetosupportFTCfindingthatdentistsagreementtodenyinsurersaccesstopatientsxrayswasanticompetitive,notprocompetitive).ButseeCaliforniaDentalAss'nv.FTC,526U.S.756(1999)(raisingFTCsburdenofproofinfindinganticompetitivecollectiveactionbyhealthprofessionals).ThelatterdecisioniscriticallyexaminedinClarkC.Havighurst,HealthCareasa(Big)Business:TheAntitrustResponse,26J.HEALTHPOL.POLY&L.939,94953(2001).Theantitrust

movementinhealthcarewastriggeredinpartbytheSupremeCourtsrejectionin1975ofgeneralantitrustimmunityforthesocalledlearnedprofessions.Goldfarbv.VirginiaStateBar,421U.S.773(1975).SeegenerallyCARLF.AMERINGER,THEHEALTHCAREREVOLUTION:FROMMEDICALMONOPOLYTOMARKETCOMPETITION(2008).7U.S.FED.TRADECOMMNANDU.S.DEPT.OFJUSTICE,IMPROVINGHEALTHCARE:ADOSEOFCOMPETITIONch.4,at12n.7(2004),availableathttp://www.usdoj.gov/atr/public/health_care/204694.htm(accessed13May2009)[hereinafterDOSEOFCOMPETITION].


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competition),thosefindingswereoftensoarbitraryastosignifyjudicialskepticism

aboutthewisdomofapplyingantitrustlawrigorouslyinhospitalmarkets.8Evenas

nonprofithospitalsbecametheprimaryproviderofthenationshospitalcare

responsiblefor73%ofadmissions,76%ofoutpatientvisits,and75%ofhospital

expenditurestheytendedtoenjoyselectivescrutinyundertheantitrustlaws.

Implicitly,andoftenexplicitly,thejudgesseemedtoharborabeliefthatnonprofit

hospitalseitherwouldnotexerciseorwouldputtogooduseanymarketpowerthey

mightpossess.9

Thecourtsinabilityovertimetoapplyantitrustlawrigorouslytothebig

businessofhealthcareandtheFTCsfailureinconvincingthemtodoso,and

8Fordiscussionsofthesecasesandofthegeneralambivalencetowardscompetitioninhealthcaremarkets,seeBarakD.Richman,AntitrustandNonprofitHospitalMergers:AReturntoBasics,156U.PA.L.REV.121(2007);MartinGaynor,WhyDontCourtsTreatHospitalsLikeTanksforLiquefiedGasses?SomeReflectionsonHealth

CareAntitrustEnforcement,31J.HEALTHPOL.POLY&L.497(2006);ThomasL.Greaney,NightLandingsonanAircraftCarrier:HospitalMergersandAntitrustLaw,

23AM.J.L.&MED.191(1997).9ThedistrictjudgeinFTCv.ButterworthHealthCorp.,946F.Supp.1285(W.D.Mich.1996),wasespeciallyunambiguousinchampioningnonprofithospitalsasbenignmonopolists:

Permittingdefendanthospitalstoachievetheefficienciesofscalethatwould clearly result from the proposed merger would enable theboardofdirectors of the combinedentity tocontinue the quest forestablishment of worldclass health facilities in West Michigan, acoursetheCourtfindsclearlyandunequivocallywouldultimatelybeinthebestinterestsoftheconsumingpublicasawhole.

Id.at1302.Likewise,thejudgerevealedahostilitytopricecompetitionbetween

hospitals,remarkingthat[i]ntherealworld,hospitalsareinthebusinessofsavinglives,andmanagedcareorganizationsareinthebusinessofsavingdollars.Id.TheButterworthcourtwasnotaloneinitspredilections.AMissourijudge,reviewingahospitalmergerchallengedbytheFTC,remarkedtothefederalagency,Idontthinkyouvegotanybusinessbeinginhere....ItlookstomelikeWashington,D.C.onceagainthinkstheyknowbetterwhatsgoingoninsouthwestMissouri.IthinktheyoughttostayinD.C.FTCv.FreemanHosp.,69F.3d260,263(8thCir.1995)(quotingdistrictcourtoralhearing).


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Congressfailureininstructingthemtodosoisoneimportantreasonwhymany

healthcaremarketsarenowdominatedbyfirmswithalarmingpricing

power.10Fortunately,thegovernmenthasmorerecentlywonbacksomeofthelegal

grounditlost.

A.DispellingtheMyththatNonprofitHospitalsDoNotExercisePricingPower

In2007,theFederalTradeCommission(FTC),inacasechallengingamergerof

nonprofithospitalsonChicagosNorthShore,foundconvincingproofthat,following

themerger,thenewentityhadsubstantiallyraisedpricestomanagedcare

organizations.11Thecasewasunusualbecause,ratherthaninterveningtostopthe

acquisitionwhenitwasfirstproposed,theCommissioninitiateditschallengefour

yearsafterthemergerwasconsummated.Bringingthecaseatthatstage

accomplishedtwothings:First,itmadeitunnecessaryfortheCommissiontoseeka

preliminaryinjunctionagainstthemergerinfederalcourtwhereantitrust

enforcershadlostthesixpreviouscases.Second,challengingacompletedmerger

gavetheCommissionsstaffanopportunitytodemonstrateinfact,andnotjustin

theory,thatnonprofithospitalsgainingnewmarketpowerwilluseittoincrease

10Forsurveysofhowhospitalconsolidationshaveincreasedhospitalprices,seeG.B.Bazzoli,etal.,HospitalReorganizationandRestructuringAchievedthroughMerger,27HEALTHCAREMANAGEMENTREV.7(2002);MartinGaynor,Competitionand

Qualityin

Health

Care

Markets,2FOUNDATIONSANDTRENDSINMICROECONOMICS441

(2006);WilliamB.Vogt,HowHasHospitalConsolidationAffectedthePriceandQualityofHospitalCare?,THESYNTHESISPROJECT,at9(2006).SeealsoSeeWilliamB.Vogt,HospitalMarketConsolidation:TrendsandConsequences,EXPERTVOICES,NIHCMFoundation,availableat:http://nihcm.org/pdf/EVVogt_FINAL.pdf(documentingtheextentofprovidermarketconcentrationamonghospitals&otherproviders).11InreEvanstonNorthwesternHealthcareCorp.,2007WL2286195(F.T.C.2007).


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prices.ThedirectproofobtainedintheEvanstonNorthwesterncasemakesit

unlikelythatfuturefederalcourtswillallowtheconsummationofmergersof

nonprofithospitalsundertheillusionthatsuchmergersdonothavetheusualanti

competitiveeffects.

TheFTCsfindingsinEvanstonNorthwesternalsodiscreditedexpert

economictestimonythatonecourthadcitedprominentlyinapprovingahospital

mergerinGrandRapids,Michigan.Thattestimonyrestedonempiricalresearch

purportingtoshowthatinconcentratedmarketsnonprofithospitalsgenerallyhad

lowerpricesthancorrespondingforprofits.12Althoughthatresearchhadbeen

effectivelydiscreditedinlatereconomicstudies,13thefactsfoundinEvanston

Northwesternshouldputfinallytorestthenotionthatnonprofithospitalsare

immunefromthetemptationtoraisepriceswhentheyareinapositiontodoso.

EvanstonNorthwesternsfindingsalsoundercutthecommonbeliefthat

communityleadersonanonprofithospitalsgoverningboardarevigilantabout

healthcarecosts.ThejudgeintheGrandRapidscasepermittedthemergerinpart

becausethechairmenofthetwohospitalsboardseachrepresentedalargelocal

12FTCv.ButterworthHealthCorp.,946F.Supp.1285,1297(W.D.Mich.1996)(citingexpertsfindingssuggestingthatasubstantialincreaseinmarketconcentrationamongnonprofithospitalsisnotlikelytoresultinpriceincreases).Theexpertcitedbythecourt,WilliamJ.Lynk,reachedthesameconclusioninscholarlyarticles.WilliamJ.Lynk,NonprofitHospitalMergersandtheExerciseofMarketPower,38J.L.&ECON.437(1995);WilliamJ.Lynk,PropertyRightsandthe

Presumptionsof

Merger

Analysis,39ANTITRUSTBULL.363,377(1994).

13SeeDOSEOFCOMPETITION,supranote7,ch.4,at33(concludingthebestavailableevidenceindicatesthatnonprofitsexploitmarketpowerwhengiventheopportunitytodoso);DavidDranove&RichardLudwick,CompetitionandPricingbyNonprofitHospitals:AReassessmentofLynksAnalysis,18J.HEALTHECON.87(1999);EmmettB.Keeler,GlennMelnick,&JackZwanziger,TheChangingEffectsofCompetitiononNonProfitandForProfitHospitalPricingBehavior,18J.HEALTHECON.69(1999).


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ArecentreportbytheMassachusettsAttorneyGeneraldocumentshow

nonprofithospitalsinthatstatehaveaggressivelyexploitedtheirmarketpower,

evenwhenhealthcarecostswerestranglingpublicandprivatebudgets.18

FollowingMassachusettsspassageofthenationsfirstlegislativeefforttoachieve

universalhealthcoverage,thestatelegislaturedirectedtheAttorneyGeneralto

analyzethecausesofrisinghealthcarecosts.Theresultingreportconcludedthat

pricesforhealthservicesareuncorrelatedwitheitherqualityorcostsofcarebut

insteadarepositivelycorrelatedwithprovidermarketpower.19Thereportfurther

observedthatprominentnonprofitacademicmedicalcentersspecifically,the

MassachusettsGeneralHospitalandBrighamandWomensHospital,whichhad

mergedin1993tocreatePartnersHealthCareweremostresponsiblefor

leveragingtheirmarketandreputationalpowertoextracthighpricesfrom

insurers.20ReportingbytheBostonGlobehadpreviouslyshownthesurprising

extenttowhichPartnerswasabletoextractextraordinarypricesinagreements

withpresumablycostconsciousinsurers.21Forexample,whensomeinsurers,such

astheTuftsHealthPlan,resistedPartnersdemandsforpriceincreasesandtriedto

assemblenetworkswithBostonsotherhospitals,Partnerslaunchedanaggressive

18MassachusettsAttorneyGeneral,ExaminationofHealthCareCostTrendsandCostDriversPursuanttoG.L.c.118G,6(b)(March16,2010),availableat:http://www.mass.gov/Cago/docs/healthcare/final_report_w_cover_appendices_glossa

ry.pdf[hereinafterHealthCareCostTrends]19Id.

at1633.

20Id.;seeespecially2930.21SpecialReport:UnhealthySystem,availableat:http://www.boston.com/news/specials/healthcare_spotlight/(detailingspecialreportingonPartnersHealthCare,culminatinginathreepartseries);AHealthcareSystemBadlyOutofBalance,BostonGlobe,Nov.16,2008;FueledbyProfits,aHealthcareGiantTakesAimatSuburbs,BostonGlobe,Dec.21,2008;AHandshakeThatMadeHealthcareHistory,BostonGlobe,Dec.28,2008.


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marketingcampaignthattriggeredthreatsbymanyofTuftscorporatecustomersto

switchinsurers.22

Theforegoingobservationsshouldfinallydispelanyimpressionthat

nonprofithospitals,ascommunityinstitutions,cansafelybeallowedtopossess

marketpoweronthetheorythat,asnonprofits,theycanbetrustednottoexercise

it.

B.DispellingtheMyththatNonprofitHospitalsUseProfitsforCharitablePurposes

Federaljudgesmayhavetoleratedmergersconferringnewmarketpoweron

nonprofithospitalslessbecausetheythoughtthehospitalswouldnotexercisethat

powerthanbecausesuchhospitalsseemedtodifferfromconventionalmonopolists

inwaysthatshouldlessensocialconcernabouttheirenrichment.Specifically,

nonprofit,taxexempthospitalsarerequiredbytheirchartersandthefederaltax

codetoretaintheirprofitsandusethemonlyforcharitablepurposes.Thus,ifone

couldassumethattheredistributionsofwealthresultingfromtheexerciseof

marketpowerbynonprofithospitalsrungenerallyfromrichertopoorerrather

thanintheoppositedirection,therewouldbeatleastanargumentforviewing

nonprofithospitalmonopoliesasbenignforantitrustpurposes.Althoughsuchan

argumentwouldbebasedonaquestionablereadingoftheantitruststatutes,one

22AHandshakeThatMadeHealthcareHistory,id.,(describingthehumiliationexperiencedbytheTuftsHealthPlansCEOashecavedtoPartnerspricedemandsandbecameanobjectlessonforotherinsurers,alessontheywouldnotsoonforget[asthe]thebalanceofpowerhadshiftedtoPartners).InOrlando,insurerUnitedHealthcareexperiencedsimilarthreatsasitresistedarequestfora63percentpriceincreasebytheregionsleadingnonprofithospitalchain.LindaShrieves,400,000FearTheyllHavetoSwitchDoctors,ORLANDOSENTINEL,Aug.7,2010.


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widelynotedcaseallowedprestigiousuniversitiestoactanticompetitivelyinorder

todirecttheirlimitedscholarshipfundstowardlowerincomestudents.23One

easilysensesinhospitalmergercasesasimilarjudicialdispensationinfavorof

nonprofitenterprisesthatcombineforseeminglyprogressivepurposes.24

Buthoweverantitrustdoctrineviews(orshouldview)monopoliesdedicated

toprogressivepursuits,itisfarfromclearthatnonprofithospitalsreliablyusetheir

dominantmarketpositionstoredistributewealthonlyinprogressivedirections.

TheInternalRevenueCodescharitablepurposesrequirementhasbeeninterpreted

verybroadly,allowingsuchhospitalstospendtheiruntaxedsurplusesonanything

thatarguablypromoteshealth.25Thisincludesmuchmorethanjustcaringforthe

indigent.Indeed,manyexempthospitalsarelocatedinareasthatneedrelatively

littleinthewayoftrulycharitablecare,eitherbecausethecommunityisrelatively

affluentanditspopulationwellinsuredorbecauseapublichospitalassumesmost

ofthecharityburden.Moreover,althoughallhospitalsinevitablysubsidizethe

treatmentofsomeuninsuredpatients,manyoftodaysuninsuredaremembersof

themiddleclassandnotobviouscandidatesforsubsidiesfromtheinsured

23UnitedStatesv.BrownUniv.,5F.3d658(3dCir.1993).Readingthisrulingasanendorsementoftheuniversitiesredirectionofscholarshipfundstoneedierstudentswouldatleastlimitsubstantially(andprudently)thekindofworthypurposeacartelofnonprofitentitiesmayofferasanantitrustdefense.24See,

e.g.,supranote9.

25Rev.Rul.69545,19692C.B.117(1969).Ironically,thiscontroversialruling,relaxinganearlierrequirementthatanexempthospitalmustbeoperatedtotheextentofitsfinancialabilityforthosenotabletopayfortheservicesrendered,Rev.Rul.56185,19561C.B.202,cameatatimewhentheMedicareandMedicaidprogramswererelativelynewandprivatehealthinsurancewasexpanding,allseeminglyreducingtheneedfornonprofithospitalstobecharitableintheoriginalsense.


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population.26Finally,federal,state,andlocalgovernmentsseparatelyand

substantiallysubsidizenonprofithospitalsmostclearlycharitableactivities,both

throughspecialtaxexemptionsandreliefandbydirectsubventions;suchactivities

thereforeshouldnotcountsignificantlyinestimatingthenetdirectionof

redistributionseffectedbyhospitalsthroughtheexerciseofnewlyacquiredmarket

power.

Thus,truecharityhasinrecentyearsaccountedforonlyarelativelysmall

fractionofwhatnonprofithospitalsdoinreturnfortheirfederaltaxexemptions.

Indeed,suchhospitalscanusuallyqualifyforexemptionmerelybyspendingtheir

surplusesonmedicalresearch,ontrainingvarioustypesofhealthcarepersonnel,

and,mostimportantly,onacquiringstateoftheartfacilitiesandequipment,which

(ironically)canalsosecureandenhancetheirmarketdominance.27Manyofthese

26Supplementalcensusdatafrom2007showedthatnearly38%ofAmericas

uninsuredcomefromhouseholdswithover$50,000inannualincomeandnearly20%fromhouseholdswithover$75,000.SeeU.S.CENSUSBUREAU,INCOME,POVERTY,ANDHEALTHINSURANCECOVERAGEINTHEUNITEDSTATES21table6(August2007),http://www.census.gov/prod/2007pubs/p60233.pdf.ImplementationofthePPACAwillgreatlyreducehospitalscharityburdens,leavingillegalaliensastheprincipalcategoryoftheuninsured.27OnPartnersHealthCaresuseofitssurplusestobuildnewandbetterfacilitiesandexpandintonewmarkets,therebysecuringadditionalmarketpower,seeFueledbyProfits,aHealthcareGiantTakesAimatSuburbs,BOS.GLOBE,Dec.21,2008.

Notonlydoestaxexemptioncreateopportunitiesfordominantfirmstoincreasetheirdominance,butanonprofitfirmlackingsuchdominancemaybe

ineligibleforexemptionandthusataseverecompetitivedisadvantagepreciselybecauseitfacescompetitionandthereforelacksthediscretionaryfundsnecessarytodemonstratehowitbenefitsthecommunity.Taxpolicythusrewards,fosters,andprotectsprovidermonopoly,onlyensuringthatmonopolyprofits,howeverlarge,arenotputtoobjectionable,nonhealthrelateduses.Cf.GeisingerHealthPlanv.Commissioner,985F.2d1210(3dCir.1993)(denyingtaxexemptiontononprofithealthplaninpartbecauseitwasnotaprovider,butonlyarrangedfortheprovision,ofhealthservicesandalsobecause,althoughitplannedtosubsidize


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activitiesconfersignificantbenefitsoninterestsandindividualsrelativelyhighon

theincomescale.28Tobesure,mostoftheactivitiesandprojectsfinancedfrom

hospitalsurplusesarehardtocriticizeintheabstract.Butmanyofthemarenotso

obviouslyprogressiveintheirredistributiveeffects(orotherwisesoobviously

worthyofpublicsupport)thatantitrustprohibitionsshouldberelaxedsothat

hospitalscanfinancemoreofthem.

Inanycase,financinghospitalactivitiesandprojectsofanykindfrom

hospitalsmonopolyprofitscausestheircoststofallultimatelyandmoreorless

equallyonindividualsbearingthecostofhealthinsurancepremiums.The

incidenceofthisfinancialburdenthuscloselyresemblesthatofaheadtaxthat

is,oneleviedequallyonindividualsregardlessoftheirincomeorabilitytopay.Few

methodsofpublicfinancearemoreunfair(regressive)thanthis.Thosewhotakea

benignviewoftheseeminglygoodworksofhealthcareprovidersshouldfocus

moreattentiononwho(ultimately)paysforandwhobenefitsfromthosenominally

charitableactivities.29

premiumsforsomelowincomesubscribers,ithadbeenunabletosupporttheprogramwithoperatingfundsbecauseitoperatedatalossfromitsinception).28Manyphysicians,forexample,benefithandsomelyfirstfromthevaluabletraininghospitalsprovideandlaterfromusingexpensivehospitalfacilitiesandequipmentatnodirectcosttothemselves.Thetaxauthoritiesregardsuchprivatebenefitsas

merelyincidentaltothehospitalslargerpurposeofpromotingthehealthofthecommunity.SeeI.R.S.Gen.Couns.Mem.39,862(Dec.2,1991):Inourview,someprivatebenefitispresentinalltypicalhospitalphysicianrelationships....Thoughtheprivatebenefitiscompoundedinthecaseofcertainspecialists,suchashearttransplantsurgeons,whodependheavilyonhighlyspecializedhospitalfacilities,thatfactalonewillnotmaketheprivatebenefitmorethanincidental.29SeegenerallySymposium,WhoPays?WhoBenefits?DistributionalIssuesinHealthCare,LAW&CONTEMP.PROBS.,Autumn2006.


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Theregressiveredistributiveeffectsofnonprofithospitalsmonopolies

appearnevertohavebeengivendueweightinantitrustappraisalsofhospital

mergers.30Tobesure,pureeconomictheorywithholdsjudgmentontherightness

orwrongnessofredistributingincomebecauseeconomistshavenoobjectivebasis

forpreferringonedistributionofwealthoveranother.Buttheantitrustlawsenjoy

generalpoliticalsupportprincipallybecausetheconsumingpublicresentstheidea

ofillegitimatemonopolistsenrichingthemselvesattheirexpense.31Thisiswhy

mergersofallkindsaresuspectintheeyesofantitrustenforcers:theymaybean

easyandunjustifiedshortcuttogainingmarketpower.Althoughproponentsof

consolidationsincreasingconcentrationinprovidermarketsusuallytout

efficienciestheyexpecttoachievebycombiningandrationalizingoperations,the

opportunitytoincreasetheirbargainingpowervisvisprivatepayersisthe

likelierexplanationforallsuchmergersinconcentratedmarkets.32

30Underreasonableassumptions,ahospitalmergercreatingnewmarketpowerwouldraiseinsurancepremiumsbyroughly3percent,increasingtheheadtaxonthemedianinsuredfamilybyroughly$400peryear,hardlyatrivialamount.Inaddition,accordingtooneestimate,hospitalmergersinthe1990scausednearly700,000Americanstolosetheirprivatehealthinsurance.RobertTownetal.,TheWelfareConsequencesofHospitalMergers(NatlBureauofEcon.Research,WorkingPaperNo.12244,2006).31HERBERTHOVENKAMP,FEDERALANTITRUSTPOLICY:THELAWOFCOMPETITIONANDITSPRACTICE50(3ded.2005)([T]heprimaryintentoftheShermanActframers[was]thedistributivegoalofpreventingmonopolistsfromtransferringwealthawayfromconsumers.)32See

DAVIDDRANOVE,THEECONOMICEVOLUTIONOFAMERICANHEALTHCARE:FROMMARCUS

WELBYTOMANAGEDCARE122(2000):Ihaveaskedmanyproviderswhytheywantedtomerge.Althoughpubliclytheyallinvokedthesynergiesmantra,virtuallyeveryonestatedprivatelythatthemainreasonformergingwastoavoidcompetitionand/orobtainmarketpower.SeealsoRobertA.Berensonetal.,UncheckedProviderCloutinCaliforniaForeshadowsChallengestoHealthReform,29HEALTHAFF.699,699(2010).,at6(quotingalocalphysicianassaying,Whyarethosehospitalsandphysicians[integrating]?Itwasntforincreasedcoordinationof


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A.SupraMonopolyPricing

Inthetextbookmodel,monopolyredistributeswealthfromconsumersto

powerfulfirms.Themonopolistshigherpriceenablesittocaptureforitselfmuchof

thewelfaregain,orsurplus,thatconsumerswouldhaveenjoyediftheyhadbeen

abletopurchasethevaluedgoodorserviceatalow,competitiveprice.Inhealth

care,insuranceputsthemonopolistinanevenstrongerpositionbygreatly

weakeningtheconstraintonitspricingfreedomordinarilyimposedbythelimitsof

consumerswillingnessorabilitytopay.Thiseffectappearsintheoryasa

steepeningofthedemandcurveforthemonopolizedgoodorservice.Whereas

mostmonopolistsencounterareductionindemandwitheachpriceincrease,health

insurancemutesthemarginalconsequencesofrisingprices.

Ifhealthinsurersweredutifulagentsoftheirsubscribersandperfectly

reflectedsubscriberspreferences,theywouldreflectconsumersdemandcurveand

payonlyforservicesthatwerevaluedbyindividualinsuredsatlevelshigherthan

themonopolyprice.Deficienciesinthedesignandadministrationofrealworld

healthinsurance,however,preventinsurersfromreproducingtheirinsureds

preferencesandheavilymagnifymonopolypower.Forlegal,regulatory,andother

reasons,healthinsurersintheUnitedStatesareinnoposition(asconsumers

themselveswouldbe)torefusetopayaprovidershighpricewheneveritappears

toexceedtheserviceslikelyvaluetothepatient.Instead,insurersareboundby

bothdeeprootedconventionandtheircontractswithsubscriberstopayforany

servicethatisdeemedadvantageous(andtermedmedicallynecessaryunder


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rathergenerouslegalstandards)forthepatientshealth,whateverthatservicemay

cost.33

Consequently,closesubstitutesforaprovidersservicesdonotcheckits

marketpowerastheyordinarilywouldforothergoodsandservices.Indeed,

puttingasidethemodesteffectsofcostsharingonpatientschoices,theonly

substitutetreatmentsorservicesthatinsuredpatientsarelikelytoacceptarethose

theyregardasthebestonesavailable.Unlikethesituationwhenanordinary

monopolistsellsdirectlytocostconsciousconsumers,therewardstoamonopolist

sellinggoodsorservicespurchasedthroughhealthinsurancemayeasilyand

substantiallyexceedtheaggregateconsumersurplusthatpatientswouldderiveat

competitiveprices.

Thus,healthinsuranceenablesamonopolistofacoveredservicetocharge

substantiallymorethanthetextbookmonopolyprice,therebyearningevenmore

thantheusualmonopolyprofit.Themagnitudeofthemonopolyplusinsurance

distortionhassometimesevensurpriseditsbeneficiaries.34Ofcourse,sincethird

partypayors(andnotpatients)arecoveringtheinterimbill,theseextraordinary

profitsmadepossiblebyhealthinsuranceareearnedattheexpenseofthose

33SeegenerallyTimothyP.Blanchard,MedicalNecessityDeterminationsAContinuingHealthcarePolicyProblem,JournalofHealthLaw37,no.4(2003):599627;WilliamSage,ManagedCaresCrimea:MedicalNecessity,TherapeuticBenefit,andtheGoalsofAdministrativeProcessinHealthInsurance,DukeLawJournal53

(2003):597;EinerElhauge,TheLimitedRegulatoryPotentialofMedicalTechnologyAssessment,VirginiaLawReview82(1996):15251617.34FortrulystunningexamplesofthepriceincreasingandprofitgeneratingeffectsofcombiningUSstylehealthinsuranceandmonopoly,seeGeetaAnand,TheMostExpensiveDrugs,Parts14,WallStreetJournal,November1516,December1,28,2005;inthisseries,seeespeciallyHowDrugsforRareDiseasesBecameLifelineforCompanies,November15,2005,A1(inwhichonedrugcompanyexecutiveisquotedassaying,Ineverdreamedwecouldchargethatmuch.)


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bearingthecostofinsurance.Insureds,evenwhentheiremployersarethedirect

purchasersofhealthinsurance,areultimatelytheonesseeingtheirtakehome

shrinkfromhikesininsurancepremiumscausedbyprovidermonopolies.

Discussionsofantitrustissuesinthehealthcaresectorrarely,ifever,

explicitlyobservehowhealthinsuranceingeneralorU.S.styleinsurancein

particularenhancestheabilityofdominantsellerstoexploitconsumers.Although

scholarshavepreviouslyobservedthatpricesforhealthservicesaremuchhigherin

theUnitedStatescomparedtootherOECDnations(withoutobservabledifferences

inquality),35andalthoughmanyhaveobservedthatprovidermarketpowerhas

beenasignificantfactorininflatingthoseprices,36fewhaveobservedthe

synergisticeffectsofmonopolyandhealthinsurance.

Perhapsmorenotably,despitethehugeimplicationsforconsumersandthe

generalwelfare,thespecialredistributiveeffectsofmonopolyinhealthcare

marketsarenotmentionedintheantitrustagenciesdefinitivestatementsof

enforcementpolicyinthehealthcaresector.37Antitrustanalysisofhospital

mergersaswellasofotheractionsandpracticesthatenhanceprovideror

suppliermarketpowermustthereforeexplicitlyrecognizetheimpactofinsurance

onhealthcaremarkets.Thenationwillfinditfarharder,perhapsliterally

impossible,toaffordPPACAsimpendingextensionofgeneroushealthcoverageto

additionalmillionsofconsumersifmonopolistsofhealthcareservicesandproducts

cancontinuetochargenotwhatthemarketbutwhatinsurerswillbear.

35See,e.g.,DianaFarrelletal.,AccountingfortheCostofU.S.HealthCare:ANewLookatWhyAmericansSpendMore,(McKinseyGlobalInstitute,2008).36Seesupra,notes23.37Seesupra,note7.


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B.MisallocativeConsequences

Allowingproviderstogainmarketpowerbymergernotonlycauses

extraordinaryredistributionsofwealthbutalsocontributestoinefficiencyinthe

allocationofresources.Inironiccontrasttotheoutputrestrictionsassociatedwith

monopolyineconomictheory,themisallocativeeffectscitedheremostlyinvolvethe

productionandconsumptionoftoomuchratherthantoolittleofagenerally

goodthing.Thesemisallocationsareboththeoreticallyandpracticallyimportant.

Theyprovidestillanothernewreasonforspecialantitrustandothervigilance

againstprovidersmonopolisticpractices,particularlyscrutinizinganticompetitive

mergersandpowerfuljointventures.

Evenintheabsenceofmonopoly,conventionalhealthinsuranceenables

consumersandproviderstooverspendonoverlycostlyhealthcare.Thisis,of

course,thefamiliareffectofmoralhazardeconomiststermforthetendencyof

patientsandproviderstospendinsurersmoneymorefreelythantheywouldspend

thepatientsown.Tobesure,somemoralhazardcostsarejustifiedasan

unavoidablepricetoprotectindividualsagainstunpredictable,highcostevents.

ButAmericanhealthinsurersaresignificantlyconstrainedinintroducing

contractual,administrative,andothermeasurestocontainsuchcosts.U.S.style

healthinsuranceisthereforemoredestructiveofallocativeefficiencythanhealth

insurancehastobe.Althoughuncontrolledmoralhazardisaproblemthroughout

thehealthsector,combininginefficientlydesignedinsurancewithprovider

monopoliescompoundstheeconomicharm.


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Theextraordinaryprofitabilityofhealthsectormonopoliesalsointroducesa

dynamicsourceofresourcemisallocationbygreatlystrengtheningtheusual

inducementforfirmstoseekmarketdominance.Theintroductionsofnew

technologieshavebeenamajorsourceperhapsprimary,responsibleforasmuch

as4050percentofhealthcarecostincreasesoverthepastseveraldecades.38And

eventhoughmanyinnovationsofferonlymarginalvalue,theirmonopolypower

underintellectualpropertylawssecurelucrativepaymentsfrominsurerswhose

handsaretied.Althoughmanyhaverecognizedthatnewtechnologiesarea

principalsourceofunsustainableincreasesinhealthcarecosts,andseveralothers

haverecognizedhowthemoralhazardofinsurancehasbothfueledtechnology

drivencostincreasesanddistortedinnovationincentives(towardcostincreasing

innovationsattheexpenseofcostreducinginnovations),39fewhaveappreciated

thecontributingroleofinsuranceinexacerbatingthemonopolieseffects.

38DanielCallahan,HealthCareCostsandMedicalTechnology,inFromBirthtoDeathandBenchtoClinic:TheHastingsCenterBioethicsBriefingBookforJournalists,Policymakers,andCampaigns,ed.MaryCrowley(Garrison,NY:TheHastingsCenter,2008),7982.SeealsoPaulGinsburg,ControllingHealthCareCosts,NewEnglandJournalofMedicine351(2004):159193;HenryAaron,Serious&UnstableCondition(Washington,DC:BrookingsInstitutionPress,1991).39SeeAlanM.Garber,CharlesI.Jones,andPaulM.Romer,InsuranceandIncentivesforMedicalInnovation(workingpaper12080,NationalBureauofEconomicResearch,2006);BurtonWeisbrod,TheHealthCareQuadrilemma:AnEssayonTechnologicalChange,Insurance,QualityofCare,andCostContainment,Journalof

EconomicLiterature29,no.2(June1991):52352;SheilahSmith,JosephP.Newhouse,&MarkFreeland,Income,Insurance,andTechnology:WhyDoesHealthSpendingOutpaceEconomicGrowth?HealthAffairs28,no.5(2009):127684.SeealsoDanaGoldmanandDariusLakdawalla,UnderstandingHealthDisparitiesacrossEducationGroups(workingpaper8328,NationalBureauofEconomicResearch,2001)(suggestingthatpopulationwideincreasesineducationhaveencouragedpursuitofpatientintensiveinnovationsthatincreasecosts,ratherthansimplertechnologiesthatreducethem).


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Providermonopoliesalsoinflicteconomicharmbyspendingheavilyto

sustaincurrentmonopolybarriers.Indeed,RichardPosnerhastheorizedthat

monopolysmostseriousmisallocativeeffectisnottheoutputreductionrecognized

intheoreticalmodelsbutinsteadisthemonopolist'sstrenuouseffortstoobtain,

defend,andextendmarketpower.40Amonopolistiswillingtoinvestuptothe

privatevalueofitsmonopolyinmaintainingit(andkeepingoutcompetitors),and

themorelucrativethemonopoly,themoreafirmwillbeinducedtoinvestheavily

insustainingmonopolybarriers.Sincesomanymonopoliesaremaintainedwith

legalandregulatorybarrierscertificateofneedlaws,accreditation,andcontracts

restrictingprovidernetworks,forexamplemuchofthiseffortisspentonlegaland

politicalresourcesthatfritterawaytheprivatevalueofthemonopoly,ratherthan

reinvestinginactivitiesthatcreateadditionalsocialvalue.Evenmanagersof

nonprofitfirms,thoughtheyhavenointerestinprofitsassuch,haveincentivesto

maintainmonopoliestofundtheconstructionandexpansionofempiresthat

enhancetheirselfesteemandprofessionalinfluence.Suchempirebuildingismost

easilyaccomplishedbyobtainingmarketpowerandusingittogeneratesurpluses

withwhichtofurtherentrenchandextendthefirmsdominance.

Inlightofthedisproportionatelylargeshareofnationalresourcesalready

beingspentonhealthcareintheUnitedStatescomparedtoeveryothernationin

theworld,andespeciallyonceonerecognizestheextraordinarypricingfreedom

thatU.S.stylehealthinsuranceconfersonmonopolistprovidersandsuppliers,the

enormousburdenofdistortivehealthsectormonopoliesprovidecompelling,even

40RichardA.Posner,AntitrustLaw:AnEconomicPerspective,2nded.(UniversityofChicagoPress,2001),1318.


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alarming,reasonstoapplytheantitrustlawswithparticularforce.Antitrust

policymakers,Ibelieve,areuptothetaskofrestoringcompetitioninhealthcare

marketswhereitislacking,butitwillrequiretargetingprovidersandsuppliersof

healthservicesseekingtoachieve,entrench,andenhancemarketpower.

IV. ANewAntitrustAgenda

Cangovernment,throughantitrustenforcementorotherwise,doanythingabout

theproblemofproviderandsuppliermarketpowerinhealthcaremarkets?

Althoughtheenforcementagenciesandcourtsshouldcertainlyscrutinizenew

hospitalmergersandsimilarconsolidationswithgreaterskepticism,preventing

newmergerscannotcorrectpastfailurestomaintaincompetitioninhospitaland

othermarkets.Enforcersmaychallengethelegalityofpreviouslyconsummated

mergers,astheFTCdidintheEvanstonNorthwesterncase,buttherearepractical

andjudicialdifficultiesinfashioningaremedythatmightrestorethecompetition

thattheoriginalmergerdestroyed.TheFTCwasunwilling,forexample,todemand

thedissolutionofEvanstonNorthwesternHealthcareCorp.andinsteadmerely

ordereditsjointlyoperatedhospitalstonegotiateseparatecontractswithhealth

plansaremedy,incidentally,thatgavethenegotiatingteamofneitherhospitalany

reasontoattractbusinessfromtheother.41AlthoughtheFTCmightseekmore

substantialreliefinothersuchcases,thegeneralruleseemstobethatold,unlawful

41Despitelosingthoroughlyonthemerits,therespondentdeclareditselfthrilledwiththeFTCsremedy.SeeNorthShoreUniversityHealthSystemsFTCRulingKeepsEvanstonNorthwesternHealthcareIntact,pressrelease,August6,2007,www.northshore.org/aboutus/press/pressreleases/ftcrulingkeepsevanstonnorthwesternhealthcareintact/(accessedMay3,2012).


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mergersareamenabletolaterbreakuponlyintheunusualcasewherethe

componentpartshavenotbeensignificantlyintegrated.42Inanycase,giventheir

pastskepticismaboutantitrustenforcementinhealthcaremarkets,andespecially

theirhandinblessingmanymergersthatoughtnowbeunwound,courtswouldbe

hardtoenlistinanantitrustcampaigntorollbackearlierconsolidations.43

Thus,apolicyagendacapableofredressingtheprovidermonopolyproblemin

healthcarewillneedtoemployotherlegalandregulatoryinstruments.Afirstorder

ofbusinesswouldbetofastidiouslypreventtheformationofnewprovider

monopolies.Becausehealthcareproviderscontinuetoseekopportunitiesto

consolidateeitherthroughtherecentwaveofformingAccountableCare

Organizations(ACOs)orthoughalternativemeansthereremainseveralfronts

availableforpolicymakerstowageantitrustbattle.Inaddition,anarrayofother

enforcementpoliciescantargetmonopolistsbehavingbadlythosetryingeitherto

expandtheirmonopolypowerintocurrentlycompetitivemarketsortoforeclose

theirmarkettopossibleentrants.Thus,severalfrontsremainavailablefor

policymakersseekingtorestorecompetitiontohealthcaremarkets.Anewantitrust

agendabeginswithrecognizingtheextraordinarycoststohealthcareprovider

monopoliesandcontinueswithaggressiveandcreativeantimonopolyinterventions.

42See,forexample,UnitedStatesv.E.I.duPontdeNemours&Co.,353U.S.586(1957);seealsoPhillipAreedaandHerbertHovenkamp,AntitrustLaw2nded.(NewYork:AspenPublishers,2003):1205b.43Forachroniclingofgovernmentchallengestomergersthatlostinfederalcourt,seeDoseofCompetition,supranote7.Foranexplorationofjudicialresistancetoenforcingtheantitrustlawsagainsthospitals,seeRichman,supranote8.


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A.TheSpecialProblemofAccountableCareOrganizations

AprimarytargetforarevivedantitrustagendaistheemergingAccountable

CareOrganizations,whosedevelopmenttheAffordableCareActisdesignedto

stimulate.TheACAencouragesproviderstointegratethemselvesinACOsforthe

purposeofimplementingbestpracticesandtherebyprovidingcoordinatedcareof

goodqualityatlowcost.Asaninducementforproviderstoformandpractice

withinthesepresumptivelymoreefficiententities,theACAinstructstheMedicare

programtosharewithanACOanycostsavingsitcandemonstrate,permitting

proposedACOseithertokeepanysavingsbeyondaminimumsavingsrate(MSR)

ofupto3.9%whilebeinginsuredagainstlossesifsavingsarenotobtainedorto

keepsavingsbeyondanMSRof2%whilebeingexposedtotheriskoflosses.44

ACOsarebeinghailedasameaningfulopportunitytoreformourdeeplyinefficient

deliverysystem,buttheunintendedconsequencesofpromisinghealthpolicy

initiativesofteninvestprematurelyinprojectsthatultimatelydisappoint.The

formationofACOsrunthespecificriskofcreatingevenmoreaggregationofpricing

powerinthehandsofproviders.

ACOs,intheory,couldofferanattractivesolutiontoproblemsstemming

fromthecomplexityandfragmentationofthehealthcaredeliverysystem.45

Togetherwithgoodinformationsystemsandcompensationarrangements,vertical

integrationofcomplementaryhealthcareentitiescanachieveimportantefficiencies

44SeeDepartmentofHealthandHumanServices,MedicareProgram;MedicareSharedSavingsProgram:AccountableCareOrganizations,42CFRPart425,FederalRegister76,no.212(November2,2011):67802,6798588.45EinerElhauge,ed.,TheFragmentationofUSHealthCare(Oxford,UK:OxfordUniversityPress,2010).


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forgingcollaborationsamongentiremarketsofphysiciansandhospitals,entities

thatwouldotherwisecompetewitheachother.TheNewYorkTimeshasreported

agrowingfrenzyofmergersinvolvinghospitals,clinicsanddoctorgroupseagerto

sharecostsandsavings,andcashinonthe[ACOprograms]incentives.49Infact,

providersmainpurposeinformingACOsmaynotbetoachievecostsavingstobe

sharedwithMedicarebuttostrengthentheirmarketpoweroverpurchasersinthe

privatesector.ACOsmaybethelatestchapterinthesteadyaccumulationof

marketpowerbyhospitals,healthcaresystems,andphysiciangroups,asequelto

thewavesofmergersinthe1990swhenhealthcareentitiessoughttocounter

marketpressurefrommanagedcareorganizations.50

Antitrustpolicymakersthereforeshouldcarefullyscrutinizetheformationof

ACOs.Conventionalantitrustreasoningappropriatelypermitspurportedefficiency

claimstotrumpconcernsaboutconcentrationonthesellersideofthemarket,and

anyreviewofaproposedACOwouldcertainlyconsiderthepotentialbenefitsof

verticalintegration.Butanyantitrustanalysisshouldalsorecognizethathealth

insurancegreatlyexacerbatesthepriceandmisallocativeeffectsofmonopoly.

NotwithstandingthespecialefficiencyclaimsthatcanbemadeonbehalfofACOs,

potentialnotonlytoproducehigherqualityatlowercostbutalsotoexacerbatethetrendtowardgreaterprovidermarketpower);andJeffGoldsmith,AnalyzingShiftsinEconomicRiskstoProvidersinProposedPaymentandDeliverySystemReforms,HealthAffairs29,no.7(2010):1299,1304.(Whetherthesavingsfrombettercare

coordinationforMedicarepatientswillbeoffsetbymuchhighercoststoprivateinsurersofaseeminglyinevitable...waveofproviderconsolidationremainstobeseen.).49RobertPear,ConsumerRisksFearedasHealthLawSpursMergers,NewYorkTimes,November20,2010.50BarakRichmanandKevinSchulman,ACautiousPathForwardonAccountableCareOrganizations,JournaloftheAmericanMedicalAssociation305,no.6(February9,2011):60203.


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thepotencyofhealthcaremonopoliesprovidesastrongwarrantforanespecially

stringentanticoncentration,antimergerpolicyinthehealthcaresector.These

heighteneddangersshouldbeweighedheavilyinappraisinganACOslikelymarket

impact.

Antitrustpolicymakersthereforeshouldcarefullyscrutinizetheformationof

ACOs.Conventionalantitrustreasoningappropriatelypermitsefficiencyclaimsto

overcomeconcernsaboutconcentrationonthesellersideofthemarket,andany

reviewofaproposedACOwouldcertainlyconsiderthepotentialbenefitsofvertical

integration.Butanyantitrustanalysisshouldalsorecognizethathealthinsurance

greatlyexacerbatesthepriceandmisallocativeeffectsofmonopoly.

NotwithstandingthespecialefficiencyclaimsthatcanbemadeonbehalfofACOs,

thepotencyofhealthcaremonopoliesstronglywarrantsespeciallystringentanti

concentration,antimergerpolicyinthehealthcaresector.Theseheightened

dangersshouldbeweighedheavilyinappraisinganACOslikelymarketimpact.

ItremainsunclearwhatroletheFTCandDOJhaveinapplyingthisnecessary

levelofscrutinytonewACOproposals.Buttheantitrustagenciessurelyenjoya

gooddealofdiscretioninensuringthatACOcomplieswiththeprinciplesof

competition.Theagenciescoulddemandaheightenedshowingthataproposed

consolidationwillgenerateidentifiableefficiencies,andtheysimilarlymight

demandthatanACO'sproponentsassumetheburdenofshowinganabsenceof

significanthorizontaleffectsinlocalsubmarket.Theagenciessimilarlycould

imposedemandingcurestoillegalconcentrations,perhapsencouragingthevertical

integrationenvisionedbyPPACA'sproponentswhilereducingthehorizontal


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collaborationthatproviderssoroutinelypursue.Finally,theagenciescouldalso

imposeconduct(i.e.nonstructural)remediestopotentiallyharmfulACOs,suchas

requiringnonexclusivecontractualarrangementswithpayorsandwithregional

hospitals,orpledgingtoundocertainintegrationsifpricesproceedtoriseabovea

certainthreshold.HowtheFTCandDOJmonitortheformationofACOscould

determinewhethertheACAmeaningfullyadvancesa(desperatelyneeded)

reorganizationofhealthcaredeliveryormerelyoffersaloopholetopermitgreater

consolidation.

TheCMSmightalsoserveameaningfulroleinpreventingACOsfrom

furtheringanticompetitiveharminhealthcaremarketplaces.Thefinalrulespermit

CMStosharesavingswithACOsonlyafterashowingofqualitybenchmarks,which

CMSadministratorsoughttotakeseriously.Therulesalsorequirecostandquality

reporting,andCMSmightrequireademonstrationofmeaningfulquality

improvementsandcostsavingsinordertoreceiveacontinuedshareofMedicare

savings.CMSmightevenconditionanACO'spermissiontomarkettoprivatepayers

onademonstrationthatitspricestoprivatepayersdidnotincreasesignificantly

followingitsformation.

Onemightwonder,ofcourse,whetheragovernmentalsinglepayerlike

Medicarehasthemission,theimpulse,ortherequisitecreativitytobehelpfulin

makingprivatemarketsforhealthserviceseffectivelycompetitive.PerhapsCMS's

newCenterforMedicareandMedicaidInnovationcouldshapetheinstitution's

capacitytoaffectreform.Itmightbeequallylikely,unfortunately,thatMedicare

willaimtopreserveitsownsolvencybyencouragingtheshiftingofcoststothe


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privatesectorandmayevenrewardACOscostshiftingascostsavings.Thisis

thedangerwithusingalargeandunavoidablyinflexiblebureaucracytoengineeran

efforttoinduceinnovation.Nonetheless,yougotowarwiththebureaucracyyou

have,andCMSoughttoconcentrateondevelopingcompetitionorientedregulations

andcautiouslymonitorthemarketimpactofemergingACOs.

B.RequiringUnbundlingofMonopolizedServices

Anyefforttorestorepricecompetitioninhealthcaremarketsmustincludea

strategythattargetsalreadyconcentratedmarkets.Antitrustenforcerstherefore

needtodeveloppolicyinstrumentsthattargetcurrentmonopolists,bothtolimitthe

economicharmtheyinflictandtothwarttheireffortstoexpandtheirmonopoly

power.

Onepromisinginitiativecouldbetorequirehospitalsandotherprovider

entitiestounbundle,atapurchasersrequest,certainservicesforthepurposesof

negotiatingprices.Providersroutinelybundleservicesforunifiedpayments,and

manysuchbundlesserveefficiencypurposes.Someservicesaresointertwinedthat

separatingthemprovescostly,andsimilarly,manyclinicallyrelatedservicesoffer

efficiencieswhensoldtogether.However,whenprovidersbundleservicesin

marketstheyhavemonopolizedwithservicesinwhichthereiscompetition,amenu

ofanticompetitiveconsequencescanresult:themonopolistcansqueezeoutrivals

inthecompetitivemarket,creatingforitselfanothermonopoly;andbysquelching

rivalsinthecompetitivemarket,themonopolistlimitstheabilityofentrantsto

challengeitsholdonthemonopolizedmarket.Themagnifiedconsequencesof


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healthcaremonopoliesshouldheightenconcernoverpracticesthatcanexpandor

enshrineprovidermonopolists.

Thegeneralantitrustruleontyingisthatafirmwithmarketpowermaynot

useittoforcecustomerstopurchaseunwantedgoodsorservices.51Ifthisprinciple

isinvokedtofrustratehospitalspracticeofnegotiatingcomprehensivepricesfor

largebundlesofservices,purchaserscouldthenbargaindownthepricesofservices

withgoodsubstitutes.52Ifahospitalstillwishedtofullyexploititsvarious

monopolies,itwouldhavetodosoindiscretenegotiations,makingitshighest

pricesvisible.Healthplanscouldthenhopetorealizesignificantsavingsby

challengingsuchmonopolies,eitherbyinducingenrolleestoseekcareinalternative

venues(effectivelyexpandingthegeographicmarket)orbyencouragingnewentry.

Oftenthemerethreatofnewentryissufficienttomodifyamonopolistsdemands,

butentryismorecredibleifthemonopolizedserviceisdiscreteandassociatedwith

adistinctpricethatentrantscantarget.

Todate,therehavebeenonlylimitedenforcementeffortstoprevent

hospitalsfromtyingtheirservicestogetherinbargainingwithprivatepayers.53

Althoughhospitalswouldpredictablyarguethatbundlinggenerallymakesfor

51SeeJeffersonParishHosp.Dist.No.2.v.Hyde,466U.S.2(1984).52Theabilitytoleveragemarketpowerinonesubmarketintopriceincreasesinacompetitivemarkethelpsexplainwidepricevariationforlikeservicesincommon

geographicmarkets.SeePaulB.Ginsburg,WideVariationinHospitalandPhysicianPaymentRatesEvidenceofProviderMarketPower,HSCResearchBriefno.16(November2010),www.hschange.com/CONTENT/1162/(accessedMay25,2012).53Inaprivatesuit,adominanthospitalchainwassuedbyitslonerivalfor,amongotherthings,bundlingprimaryandsecondaryserviceswithtertiarycareinsellingtotheareasinsurers.SeeCascadeHealthSolutionsv.PeaceHealth,515F.3d883,89091(9thCir.2008).Thedistrictcourtpermittedcertainclaimstoproceedtotrial,includingaclaimofillegalbundleddiscounts,butdismissedthetyingclaim.


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efficientnegotiatingandstreamlineddeliveryofcare,theaddedcostsofbargaining

servicebyservicecouldbeeasilyoffsetbythelowerpricesresultingfromgreater

competition.Recentscholarshipontyingandbundlingconfirmsthatpermittinga

hospitalmonopolisttotieunrelatedservicesexpandsthemonopolysreach,

profitability,andlongevityandharmsconsumerwelfare.54Theextremeharmfrom

healthcaremonopoliesmakeshospitalstyingpracticesparticularlyvulnerableto

antitrustattack.

Aworkablerulewouldpermitantitrustlawtoempowerapurchaserto

demandseparatepricesfordivisibleservicesthatarenormallybundled.55

Althoughonehopesthatantitrustcourtsandacrediblethreatoftrebledamages

woulddiscourageaprovidermonopolistfromretaliatingagainstanypurchaserthat

aggressivelychallengesitsanticompetitivepractices,thecostsanddelayfromsuch

complexantitrustactionssuggestthatpublicenforcementshouldsupplement

privatesuits.Properlyauthorizedregulatorscouldeitherenableindividualpayers

todemandunbundlingtofacilitatetheireffortstogetbetterprices,orregulators

coulddemanditthemselves.Effectiveunbundlingrequestscouldtriggermore

competitionandgreaterefficiencybothinthetiedsubmarketswheremonopolyis

notaproblemandalsointhetyingmarketswhereitis.

54SeeEinerElhauge,Tying,BundledDiscounts,andtheDeathoftheSingleMonopolyProfitTheory,HarvardLawReview123,no.2(2009):397481.55ThisproposalisinlinewithrecommendationsfromtheAntitrustModernizationCommission,ReportandRecommendations(April2007):96,http://permanent.access.gpo.gov/lps81352/amc_final_report.pdf(accessedMay9,2012).Whatisdivisibleinhealthcareisofcoursesubjecttodebate,justasmostservicesaccusedofbeingbundledareoftendefendedasasingleproduct.See,forexample,JeffersonParishHosp.,466U.S.,1922.


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C.ChallengingAnticompetitiveTermsinInsurerProviderContracts

Restrictivetermsincontractsbetweenprovidersandinsurersareanother

potentiallyfruitfulareaforantitrustandregulatoryattentionindealingwiththe

providermonopolyproblem.Acommonpractice,forexample,isforaprovider

sellertopromisetogiveaninsurerbuyerthesamediscountfromitshighpricesas

anyitmightgivetoacompetinghealthplan.Suchpriceprotection,paymentparity,

ormostfavorednation(MFN)clausesarecommonincommercialcontractsand

servetoobviatefrequentandcostlyrenegotiationofprices.Theirefficiency

benefitsmaysometimesbeoutweighedbyanticompetitiveeffects,however.Thus,a

providermonopolistmayfindthatalargeandimportantpayeriswillingtopayits

veryhighpricesonlyiftheproviderpromisestochargenolowerpricestoits

competitors.SuchasituationapparentlyaroseinMassachusetts,wherethe

Commonwealthslargestinsurer,aBlueCrossplan,reportedlyaccededtoPartners

HealthCaresdemandforaverysubstantialpriceincreaseonlyafterPartnersagreed

toprotectBlueCrossfrom[its]biggestfear:thatPartnerswouldallowother

insurerstopayless.56

Antitrustlawcanofferreliefagainstaprovidermonopolistagreeingtoan

MFNclausetoinduceapowerfulinsurertopayitshighprices.Becausesuchclauses

protectinsurersagainsttheircompetitorsgettingbetterdeals,manyarelikelyto

56AHandshakeThatMadeHealthcareHistory,BostonGlobe,Dec.28,2008.TheMassachusettsattorneygeneralhasnotedthatsuchpaymentparityagreementshavebecomepervasiveinproviderinsurercontractsinthecommonwealthandhasexpressedconcernthatsuchagreementsmaylockinpaymentlevelsandpreventinnovationandcompetitionbasedonpricing.OfficeofAttorneyGeneralMarthaCoakley,ExaminationofHealthCareCostTrendsandCostDrivers(March16,2010),4041.


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giveintooquicklytoevenextortionatemonopolistpricedemands.Butthe

availabilityofanantitrustremedy(whichwouldprobablybeonlyaprospective

ceaseanddesistorderratherthananawardoftrebledamagesforidentifiable

harms)mightnotbesufficienttodeterapowerfulproviderfromgrantingMFN

statustoadominantinsurer.Alternatively,regulatoryauthoritiescouldpresumably

prohibitdominantprovidersfromconferringsuchstatus.Regulatorspresumably

wouldbeinasgoodapositionasanypartytodistinguishbetweenrestrictive

agreementsthatachievetransactionalefficienciesfromagreementsthatrestrict

insurersfreedomtocutpricedealswithcompetitorsandreducepressureon,and

opportunitiesfor,allinsurerstoseeknewandinnovativeservicearrangements.

AmorepotentantitrustattackonanticompetitiveMFNclauseswouldaimat

thedominantinsurerdemandingthem,ratherthanatthecooperatingprovider.

TheDepartmentofJustice(DOJ)suedBlueCrossBlueShieldofMichigan,a

dominantinsurer,toenjoinitfromusingMFNclausesinitscontractswithMichigan

hospitals.TheDOJallegedthatsuchrestrictionsonproviderpricecompetition

reducedcompetitionintheinsurancemarketbypreventingotherinsurersfrom

negotiatingfavorablehospitalcontracts.57Inthewakeofthegovernments

initiativeinMichigan,whichresultedinasettlement,Michigan(andsubsequently

severalotherstates)haveprohibitedtheuseofMFNagreementsbetweenhealth

insurersandproviders.EvenwithoutstateregulationsprohibitingMFNclauses,the

DOJtheorymetsufficientsupportthatinMassachusetts,forexample,theBlueCross

57SeeComplaintat12,UnitedStatesv.BlueCrossBlueShieldofMich.(E.D.Mich.2010)(No.2:10CV14155);seealsoDavidS.Hilzenrath,U.S.FilesAntitrustSuitAgainstMichiganBlueCrossBlueShield,WashingtonPost,October18,2010.


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planshouldnowthinklongandhardbeforerenewing(orenforcing)theMFNclause

initscontractwithPartnersHealthCare.

Othercontractprovisionsthatthreatenpricecompetitionarealsoinusein

providerinsurercontractsinMassachusetts,accordingtotheCommonwealths

AttorneyGeneral.Inparticular,socalledantisteeringprovisionsprohibitan

insurerfromcreatinginsuranceproductsinwhichpatientsareinducedtopatronize

lowerpricedproviders.Undersuchacontractualconstraint,ahealthplancouldnot

offermoregenerouscoveragesuchasreducedcostsharingforcareobtained

fromanewmarketentrantorfromamoredistant,perhapsevenanoutofstateor

outofcountry,provider.OthercontractualtermsinuseinMassachusetts(and

presumablyinotherjurisdictionsaswell)guaranteeadominantproviderthatitwill

notbeexcludedfromanyprovidernetworkthatthehealthplanmightofferits

subscribers.

Thecontractualtermsnotedhereallhavethepotentialtoenshrinethe

cooperativesupremacyofdominantprovidersanddominantinsurers.The

resultingcompetitivehardextendsbeyondthesustenanceofhighprices.These

partnershipsalsoforecloseopportunitiesforconsumerstobenefit,bothdirectlyas

patientsandindirectlyaspremiumpayers,frominnovativeinsuranceproductsthat

competinghealthplansmightotherwiseintroduce.Antitrustlawcanprohibitthe

useofsuchanticompetitivecontracttermsthatprotectprovidermonopoliesand

curbinsurerinnovation,andinsuranceregulatorsmightbarsuchprovisions

wherevertheythreatentoprecludeeffectivepricecompetition.Theseactions

remainavailableeveninthecontinuedpresenceofaprovidermonopoly.


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V. ConclusionThereisanurgentneedtorecognizetheunusuallyseriousconsequences,for

bothconsumersandthegeneralwelfare,ofleavinginsuredhealthcareconsumers

exposedtomonopolizedhealthcaremarkets.Becausehealthinsurance,especiallyas

itisdesignedandadministeredintheUnitedStates,hugelyexpandsamonopolists

pricingfreedom,providerswithmarketpowerinflictwealthredistributingand

misallocativeeffectssubstantiallymoreseriousthanconventionalmonopolypower.

Vigorousnottentativeorcircumspectenforcementoftheantitrustlawscan

mitigatetheharmsfromprovidermarketpower.Retrospectivescrutinyonearlier

horizontalmergersofhospitalsorotherproviderscouldhelpcorrectdecadesof

ineffectualenforcement,butiflookingbackwardsremainsunlikely,renewedrigor

movingforwardisallthemoreessential.Partiesproposingnewmergersand

alliances,whethertraditionalassociationsornewACOs,mustconvincinglyshow

thattheirreorganizationeitherleadstoonlyaminimalincreaseinmarketpoweror

createsspecificefficiencies.Traditionalmarketdefinitionsshouldalsobeexpanded,

recognizingthatinterregionalcollaborationscanalsoreducecompetitionin

growinghealthcaremarketsandcangenerateadditionalpricingpower.Other

measuresshouldtargetcurrentmonopolists,soastopreventtheenshrinementor

expansionoftheirmarketdominance.Anantitrustorregulatoryinitiativetocurb

hospitalstyingpracticesandtoprohibitanticompetitivecontractsbetweenpayers

andprovidersperhapsasremediesforearliermergersfoundunlawfulafterthe


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factmightalsoreduceandcontaintheharmfromproviderpricingfreedom.Such

policiesmightcurtailmonopolisthospitalsabilitytoenshrinetheirmarketposition

andforecloseentry,tospreadtheirpricingpowerintoadjacentmarkets,orto

extractgreaterrentsfrombuyerswithfewalternatives.

Enthusiastsformarketorientedsolutionswouldalsoseektorestrainprovider

marketpowerbyencouragingcreativityamongthirdpartypurchasers.Health

plansthatbypass,orfosternewcompetitorsfor,localmonopolistspromoteprice

andqualitycompetitionwhereitiscurrentlylackingandcouldunderminethe

potencyofinsuranceplusmonopolies.Aprocompetitionregulatoryagendamight

seekwaystofacilitateinterregionalcompetitionandempowerthirdpartypayors

toseekflexibleandcreativestrategiestostimulateprovidercompetition.

Additionalhopeliesinthepossibilitythathealthinsurersandthirdparty

purchaserswillpurchase(andthatACAregulationswillletthempurchase)proven

nonmedicalinterventionsthatimprovehealthandreducehealthcarecosts.The

exorbitantpricesformonopolizedmedicalservicesshouldencouragehealth

insurerstodevelopcreativealternatives,bothseekingeffective(andlesscostly)

substitutesandreorganizingwhathasbecomeafragmented,errorprone,and

inefficientdeliveryofcare.

Unfortunately,fewhealthinsurershaveshownaneagernesseithertocontest

providermarketpowerortopursuemeaningfulinnovationstoprovidingcarefor

theirsubscribers.AsinvestigationsinMichiganandMassachusettsreveal,insurers

alltoooftenbecomecoconspiratorswithprovidermonopolists,agreeingto

exclusiveagreementsthatprotectboththemselvesandmonopolistsbut


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perhapsviastickershockinducethemtodemandlowercostalternatives.

Moreover,theinsuranceexchangesmightofferaplatformfornewentryinthe

insurancemarket,thusinjectingsomedynamismintoanindustrydesperatelyin

needofcreativeideas.Andregardlessofhowthenewinsurancemarketstake

shape,antitrustpolicymakersandotherregulatorsstillhavethecapacitytofoster

valueenhancinginnovationbothbypreventingtacticsthatmightenshrinethe

currentmonopolistregimeandalsobypromotingthedevelopmentofnew

insuranceproducts.Althoughcurrenttaxpoliciesandregulationshavedulledmany

insurersintobeingagentsforprovidersratherthanfortheirsubscribers,there

remainsapotentopportunityforthirdpartypayorstoinjectthehealthcaresector

withvaluecreatinginnovationsthatredesignboththeofferingsandthedeliveryof

care.

WhateverthePPACAmayachieve,itslegacyandcosttothenationwilldepend

largelyonwhethermarketactors,regulators,andantitrustenforcerscaneffectively

addresstheprovidermonopolyproblemandtoinstilldesperatelyneeded

competitionamongproviders.Aggressiveantitrustenforcementcanprevent

furthereconomicharmandperhapscanundocostlydamagefromprovidersthatin

errorwerepermittedtobecomemonopolists.Butultimately,creativemarketand

regulatoryinitiativeswillbeneededtounleashthecompetitiveforcesthat

consumersneed.Wherethereisdanger,thereisopportunity,andcompetition

orientedpoliciescanandshouldyieldsubstantialbenefitsbothtopremiumpayers

andtoaneconomythatbadlyneedstofindthemostefficientusesforresourcesthat

appear to become increasingly limited

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