Health Care/Antitrust August FTC and DOJ Release Report On Health Care Competition. Executive Overview and Implications for Your Organization

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1 Client Memorandum Health Care/Antitrust August 2004 FTC and DOJ Release Report On Health Care Competition By Roxane C. Busey 1 and Ashley E. McKinney 2 Executive Overview and Implications for Your Organization On July 23 rd, the Federal Trade Commission ( FTC ) and Department of Justice ( DOJ ) jointly issued a 361- page report on health care competition that has the following implications for your organization: Physician network (IPA or PHO) The report provides some additional guidance on clinical integration by setting forth a series of questions that any network pursuing clinical integration should address. The report also states that certain pay for performance arrangements may constitute financial integration. Telemedicine Provider Physician or practice group Hospital Health care facility The report recommends that state governments adopt uniform telemedicine licensing standards and expand membership on state licensing boards to include non-physicians to reduce barriers to entry in the telemedicine provider market. The agencies continue to oppose legislation that would allow independent physicians to collectively bargain with payors. The agencies will continue to evaluate hospital mergers in accordance with the agencies 1992 Horizontal Merger Guidelines. The agencies continue to criticize use of the Elzinga-Hogarty test in hospital merger cases, and assert that critical loss analysis has been misapplied in these cases. The report reaffirms that the antitrust laws generally do not limit individual hospitals from unilaterally responding to competition from physicianowned hospitals and ASCs by terminating their staff privileges or by opposing CONs. The report recommends that (i) state governments abolish CON laws to reduce barriers to entry in the health care facilities market and (ii) federal and state governments reexamine the role of subsidies in health care markets in light of their inefficiencies and potential to distort competition. GPO The agencies clarify that the safety zone of Statement 7 of the agencies 1996 Statements of Antitrust Enforcement Policy in Health Care is not a safe harbor for anticompetitive contracting practices and that such behavior is subject to antitrust scrutiny. PBM Payor The report discourages state legislation of PBM contracting practices. The report recommends that the federal and state governments reexamine the effects of insurance benefit mandates and any willing provider laws in order to reduce the cost of care. The agencies will continue to challenge (i) most favored nation clauses where they are anticompetitive and (ii) monopsony power that results in prices below competitive levels. 1 Roxane C. Busey is a partner at Gardner Carton & Douglas practicing in the area of antitrust health care. Ms. Busey served as Chair of the ABA Antitrust Section in and as a Chair of the ABA Antitrust Section s Task Force on the FTC/DOJ Hearings on Health Care. 2 Ashley E. McKinney is an associate at Gardner Carton & Douglas practicing in the area of health care, including antitrust health care. She currently serves as an editor of the ABA Antitrust Section s Health Care Chronicle.

2 Introduction The report, Improving Health Care: A Dose of Competition, 3 is based on 27 days of joint hearings from February through October of last year, an FTC workshop in September, 2002, and independent research. The report focuses on the role of competition in improving the quality of health care and reducing costs to consumers as well as the role of antitrust enforcement in protecting competition. The agencies make six general recommendations and eleven observations in this report. All of these recommendations and observations reaffirm basic antitrust principles and are consistent with positions the agencies have previously taken. Through recommendations and observations, the agencies seek to improve competition in the health care industry by advocating the removal of barriers, such as regulation and the lack of available information, to improving quality. All but one of the agencies recommendations is directed principally to other branches of government. The only recommendation addressed to private parties encourages payors, providers and governments to improve the information on price and quality that is available to consumers. The key recommendations and observations in the report 4 are as follows: Physician Integration The report confirms that the agencies will continue to evaluate provider networks in accordance with Statement 8 of the agencies 1996 Statements of Antitrust Enforcement Policy in Health Care ( Health Care Statements ). Statement 8 establishes two safety zones for physician networks, both of which concern financially integrated networks. In addition to the four examples of financial risk sharing set forth in the Health Care Statements, 5 the report announces that the agencies will consider the extent to which a particular pay for performance ( P4P ) arrangement constitutes the sharing of substantial financial risk among the physician members, whether that sharing is likely to produce efficiencies, and whether any price or otherwise per se illegal agreements among the physician members are reasonably necessary to achieve those efficiencies. In the hearings, commentators and panelists stated that P4P arrangements among physician members of networks may have important procompetitive benefits for consumers. Statement 8 recognizes that clinical integration may also achieve procompetitive benefits, but provides little guidance on the components of clinical integration. The only other guidance on clinical integration is a 2002 FTC Advisory Opinion 6 in which the FTC concludes that it will not challenge a physician network that is clinically integrated. In the report, the agencies decline to set forth more specific standards for clinical integration for fear of channeling market behavior rather than encouraging market participants to develop structures responsive to their particular efficiency goals and favorable market conditions. The agencies do, however, set forth a series of questions they are likely to pose when examining whether a network is sufficiently integrated. These questions concern the joint clinical activities of the physicians, support mechanisms to accomplish their goals, incentives for individual performance, performance measures, the relation between the joint pricing and program goals, and the exclusivity of the network. Practitioner Licensure and Telemedicine The agencies find that states, in their licensing role, may restrict market entry or competition by physicians and allied health providers. Increased barriers to entry for telemedicine result in increased costs to consumers and generate mixed results for health care quality. Licensing boards, often comprised of professional members with competing financial interests, may make decisions that may not be in the best interests of consumers. A consequence of restricting the use of telemedicine has been its impact on communications between health providers. In the past, these communications have not been the subject of state licensing requirements. The rapid growth of technology, including telemedicine, has resulted in states demonstrating concern about those communications. Some states have enacted laws or policies that provide consumer protection but restrict provider communications, which may not be in the best interest of patients. The agencies find that when used properly, telemedicine can benefit consumers by providing high quality services, improving access to rural or underserved areas, reducing costs, and enhancing training and education in new technologies. To foster telemedicine s pro-competitive benefits, the agencies recommend that states consider uniform licensure standards or reciprocity compacts, which could protect consumers while reducing barriers to telemedicine. Additionally, the report encourages states to consider adopting an Institute of Medicine 2

3 recommendation to expand the membership of state licensure boards beyond professional members. Physician Collective Bargaining and Monopsony Power The report reaffirms the agencies opposition to physician collective bargaining laws. According to the agencies, such laws are likely to lead to higher prices without improving quality. The report cites a March 2000 Congressional Budget Office estimate that proposed federal legislation permitting physician collective bargaining would increase expenditures on private health insurance by 2.6% and would increase direct federal spending on healthcare programs by $11.3 billion. The agencies also believe that antitrust enforcement is a better solution to the unlawful acquisition or exercise of monopsony power by insurers than the exercise of countervailing power by physicians. A payor has monopsony power when it can profitably reduce prices in a market below competitive levels by curtailing purchases of the relevant product or service. The agencies state that they will remain vigilant in monitoring the payor market for the creation or exercise of monopsony power. Hospital Mergers The report reaffirms that the agencies will continue to evaluate hospital mergers in accordance with the agencies 1992 Horizontal Merger Guidelines ( Merger Guidelines ). 7 The report addresses geographic and product market definitions. According to the agencies, use of the Elzinga- Hogarty test and misapplication of critical loss analysis in hospital merger cases have produced geographic market definitions that are too broad. The agencies believe that the hypothetical monopolist test of the Merger Guidelines should be used to define the relevant geographic market. Strategic planning documents and customer testimony also should be used to delineate the relevant geographic market. Empirical evidence, such as the willingness of patients to travel to another hospital in response to a local price increase, also should be used. Regarding the relevant product market, the agencies state that in the future, it is likely that they will have to determine whether certain specialty hospitals should be included in an inpatient product market for a proposed merger. The agencies stated that with the shift from inpatient to outpatient care, they will continue to examine whether outpatient services may constitute additional relevant product markets that may be affected by a proposed hospital merger. The agencies also will continue to examine whether smaller product markets for particular services exist. The report also addresses entry and efficiencies. The agencies believe that the likelihood of timely and sufficient entry into the inpatient general acute care hospital services market is remote. The report cites studies showing mixed results on the effect of hospital mergers on hospital costs. The agencies believe that even if a hospital merger were likely to create cognizable efficiencies, those efficiencies would likely be insufficient to outweigh the potential harm to consumers from price increases. The agencies also criticize the use of community commitments entered into by state attorneys general and the merging hospitals. According to the agencies, this regulatory approach does not remedy the underlying effect of the hospital merger on competition. Finally, the agencies believe that the charitable status of a hospital should have no effect on merger analysis. Specialty Hospitals and Ambulatory Surgery Centers The report considered the effect of single specialty hospitals and ambulatory surgery centers on competition. It noted that in many cases Medicare s administered pricing system makes some services extraordinarily lucrative and others unprofitable, thus providing incentive for specialty hospitals and ambulatory surgery centers to enter the market. General hospitals often use profits from the more profitable services to subsidize the less profitable ones. The report confirms that, generally speaking, the antitrust laws do not limit a hospital from unilaterally responding to this new competition by terminating physicians privileges or by opposing CON applications. Certificate of Need The report recommends that state governments consider abolishing certificate of need ( CON ) laws. The agencies believe that CON laws create barriers to entry in the marketplace and do not control health care costs. The agencies note that specialty hospitals are a form of competition that may benefit consumers, and that the majority of specialty hospitals have opened up in states that do not have CON laws. 3

4 GPOs The report examines the role of group purchasing organizations ( GPOs ) as purchasing intermediaries. Statement 7 of the Health Care Statements addresses GPO formation. The agencies state that Statement 7 does not prevent the agencies challenge of anticompetitive contracting practices, and that it would be unwise to revise Statement 7 to address some but not all types of conduct issues that GPOs may raise. PBMs The report discourages the regulation of pharmacy benefit managers ( PBMs ) as a means of eliciting information on contract terms. Competition, and not regulation, should encourage the disclosure of contract terms, according to the agencies. This recommendation follows a recent federal district court opinion 8 granting a motion by a trade association of PBMs for a preliminary injunction barring enforcement of Maine s Unfair Prescriptive Drug Practices Act. 9 This act requires PBMs to disclose to their clients the following: (i) any conflict of interest; (ii) all financial and utilization information requested by a client relating to the provision of benefits; and (iii) all financial terms and arrangements for remuneration of any kind that apply between the PBM and any pharmaceutical manufacturer or labeler, among other requirements. The recommendation also follows the FTC s announcement 10 in March regarding the manner in which it will conduct the PBM Conflict of Interest Study required by Section 110 of the Medicare Prescription Drug Improvement Act ( MPDIA ). 11 Most Favored Nation Clauses The agencies will continue to challenge the use of most favored nation ( MFN ) clauses where there are anticompetitive effects. An MFN clause provides that the supplier will sell to the customer on pricing terms at least as favorable as the supplier s pricing terms for any other customer. Panelists stated that MFNs may be anticompetitive or procompetitive, depending on the circumstances. The agencies will consider economic justifications for MFNs when weighing their potential competitive effects. Insurance Benefit Mandates The report recommends that governments reexamine the effects of insurance mandates. Insurance mandates are laws that require managed care companies to offer a defined benefit to their insured. The report finds that mandates are likely to increase the cost of health insurance. The increased cost of health insurance may restrict choice, eliminate product diversity and reduce access to health care. Any Willing Provider Laws The report recommends that governments reexamine the effects of any willing provider ( AWP ) laws. AWP laws require managed care companies to include in their networks any provider that is willing to participate in the plan in accordance with plan terms. The report finds that AWP laws are likely to decrease payor bargaining power with providers. As a result, there may be higher premiums and an increase in the number of uninsured. Quality Considerations The report also emphasizes the need for better information and increased competition with respect to quality of care. The report notes that most payments to providers have no relationship to the quality of care provided and that many providers are leery of report cards and other public quality measures due to malpractice issues. 3 The report is available on the FTC s website at and the DOJ s website at 4 The report also addresses health care subsidies, remedies, the state action doctrine, Noerr-Pennington, and direct to consumer advertising, among other topics. 5 The four examples of financial risk sharing in the Health Care Statements are capitated contracting, contracting for a predetermined percentage of premium dollars, withhold arrangements, and global fee (or case rate) arrangements. 6 See Busey and McKinney, FTC Issues First Advisory Opinion on Clinical Integration as Support for Physician Negotiations with Payors, March, 2002, available at: 7 The FTC is currently challenging, retrospectively, the merger of Evanston Hospital and Highland Park Hospital. The complaint is pending before an administrative law judge. 8 Pharmaceutical Care Management Association v. Rowe, 307 F. Supp. 2d 164 (D. Me. 2004) Me. Rev. Stat. Ann FTC announces Pharmacy Benefit Manager Conflict of Interest Study (3/26/04), available at: 11 MPDIA requires the FTC to study whether the cost to group health plans of using mail-order pharmacies integrated with PBMs is more than the cost of using non-integrated mail-order pharmacies or over-the-counter retail pharmacies. 4

5 ANTITRUST ATTORNEYS Braun, David Busey, Roxane C Campbell, Thomas Cusack, John T D'Attomo, John J DeBlasio, Antonio Farber, Allen Fiebig, Andre Garner, Gary W Kelleher, Patrick Koch, Peter Shonder, Steven S HEALTH CARE ATTORNEYS Allaband, Kendra M Anderson, Keith R kanderson@gcd.com Ashton, Kathryn B kashton@gcd.com Barker, Jr., James A jbarker@gcd.com Boochever, Stephen sboochever@gcd.com Breuer, Jennifer R jbreuer@gcd.com Bryant, Jr., L. Edward ebryant@gcd.com Capizzi, Mary Devlin mcapizzi@gcd.com Cicero, Anita acicero@gcd.com Considine, Eileen M econsidine@gcd.com D'Andrea, John J jdandrea@gcd.com Fayed, Ramy rfayed@gcd.com Fried, Saundra N sfried@gcd.com Ganiban, Jeffrey T jganiban@gcd.com Glaser, D. Louis lglaser@gcd.com Gournis, Stephanie Dodge sgournis@gcd.com Green, Philip D pgreen@gcd.com Guenthner, III, L. Robert rguenthner@gcd.com Hardwick, Maureen Donahue mdonahue@gcd.com Jamieson, Ballard, Jr bjamieson@gcd.com Kite, Steven B skite@gcd.com Korley, Tiana M tkorley@gcd.com Lutz, Holley Thames hlutz@gcd.com Mack, Lauren lmack@gcd.com McCann, Robert W rmccann@gcd.com McKay, Kathleen kmckay@gcd.com McKinney, Ashley E amckinney@gcd.com Mehta, Mina mmehta@gcd.com Nelson, Mark D mnelson@gcd.com Newman, C. Brooks cbnewman@gcd.com Olderman, Neil S nolderman@gcd.com Rock, Patrick prock@gcd.com Sigel, Carin csigel@gcd.com Stickler, K. Bruce bstickler@gcd.com Stottlemyer, Elizabeth D estottlemyer@gcd.com Sullivan, T.J tsullivan@gcd.com Swill, Douglas B dswill@gcd.com Taylor, Kelley M ktaylor@gcd.com Uhrig, Paul L puhrig@gcd.com Waters, Robert J rwaters@gcd.com Wilson, Mary G mwilson@gcd.com CH01/