United States: The Federal Trade Commission And The Department of Justice Provide New Guidance: Antitrust Enforcement Against Health Care Providers to Remain a Top Priority

The Federal Trade Commission and the Department of Justice (together the Agencies) recently issued a 361-page report "Improving Health Care: A Dose of Competition" (the Report). The Report, which was issued by the Commissioners of the FTC and the DOJ (as opposed to staff attorneys at the Agencies), describes the Agencies’ current thinking on the application of the antitrust laws and their enforcement priorities in the health care industry. This article distills the key information that health care providers — including physician and other provider network joint ventures, hospitals and hospital networks, pharmacy benefits managers, group purchasing organizations, health insurance companies and pharmaceutical companies — need to understand to ensure their own antitrust compliance to avoid unnecessary antitrust problems or investigations and to benefit from the antitrust compliance and market competition of their suppliers, customers and competitors.

The Report recognizes the economic significance of the health care industry, affirms the applicability of antitrust principles and advocates for increased competition as the best means to achieve lower costs, improved quality and better access for health care consumers. The Report also criticizes government regulation to the extent it distorts provider response to consumer demand, reduces the rewards from innovation and hinders the development of new forms of competition. Although the Report primarily is a policy statement, it also provides some important new guidance for industry participants. Most importantly, the Report indicates that:

• Antitrust investigations and enforcement action against health care providers will remain a top priority for the Agencies. In particular, provider network joint ventures, hospitals, group-purchasing organizations, insurance companies and pharmaceutical companies should anticipate continued scrutiny.

• The Agencies will continue to rely on traditional analytical methodologies, as described in the 1992 Horizontal Merger Guidelines¹ (Merger Guidelines) and the "1996 Statements of Antitrust Enforcement Policy in Health Care"² (the Statements) to define markets and assess competitive effects.

• The Agencies will not recognize an antitrust defense based on arguments that anticompetitive conduct, such as naked price-fixing by health care providers, was undertaken in response to the countervailing power of a dominant or abusive purchaser, such as a health insurance company. According to the Report, the Agencies have determined that countervailing power is not an effective response to disparities in bargaining power between payors and providers. Moreover, they question whether the available evidence would indicate a monopsony power problem in most health-care markets

• The Agencies will seek increasingly stringent remedies, such as dissolution of provider networks or other organizations that are found to "facilitate anticompetitive conduct by multiple parties," disgorgement of improperly obtained revenues, and criminal sanctions against those who violate the antitrust laws repeatedly or flagrantly.

The Report includes six sets of recommendations designed to encourage the federal and state governments to adopt policies that promote competition by improving measures of price and quality, encouraging market participants to use the measures of price and quality and decreasing regulatory barriers to entry. The Agencies encourage federal and state governments, along with payors and provider groups, to "continue experiments" to develop:

• Improved measures of price and quality

• Financing structures that give consumers greater incentives to use information about the price and quality of provider services

• Payment methods that align providers’ incentives with consumers’ interests in lower prices, quality improvements, and innovation

The Report directs the federal and state governments to reexamine whether the use of health care subsidies and health benefits mandates may create inefficiencies or a potential to reduce competition, restrict consumer choice, raise the cost of health insurance, and increase the number of uninsured Americans. It admonishes states to:

• Reconsider the merits of Certificate of Need legislation;

• Reject collective bargaining legislation (i.e., designed to create antitrust immunity for joint physician negotiation with payors);

• Broaden the membership of state licensure boards;

• Create uniform licensing standards and reciprocity compacts to reduce barriers to telemedicine and to competition from out-of-state providers who wish to move in-state; and

• Promote pharmacy benefit manager transparency.

Provider network joint ventures will remain a top enforcement priority for the Agencies. Since 2002, the Agencies have filed suit or entered into consent agreements with participants in 18 provider networks. The Report warns that participants in provider networks will continue to "face significant antitrust risk" if their activities are not antitrust compliant. It explains that:

• Under the antitrust laws, individual physicians or physician practice groups will be viewed as "rivals." Absent substantial integration, joint contracting will not be tolerated even where there is a perceived need to "level the playing field" against a dominant or abusive insurance company

• It generally is procompetitive for a payor – even one with very high market share – to force physicians to compete with one another for the payor’s business and to accept lower reimbursement rates, as long as the physicians are not being forced to accept predatory or below cost reimbursement

• Payor allegations that a particular provider network or group of physicians is blocking its efforts to implement a new payment methodology or to obtain discounts through competitive negotiations with providers will be considered seriously

• The Agencies will seek increased penalties, including dissolution, disgorgement and criminal sanctions against participants in a noncompliant network

However, a provider network may facilitate an agreement on price and price-related terms and engage in legitimate collective price negotiations if the network participants are financially or clinically integrated and their joint pricing activities are reasonably necessary to create efficiencies that benefit payors and patients. A network may achieve substantial financial integration using a variety of risk-sharing mechanisms, including traditional feefor- service or capitation arrangements as well as more novel "pay for performance" arrangements. A network may achieve substantial clinical integration using a variety of mechanisms including common information technologies and systems as well as developing, implementing and enforcing clinical protocols. In analyzing whether a proposed provider network joint venture will achieve clinical integration, the Agencies will ask:

The Agencies will continue to devote substantial resources to investigating and challenging hospital deals – despite having lost each of their past seven merger challenges at the district court or appellate court level. In evaluating consummated mergers, the Agencies will look for direct evidence of anticompetitive effects. For prospective deals, the Agencies will use the "hypothetical monopolist" paradigm described in the Merger Guidelines, which requires (1) defining the relevant product and geographic markets and (2) assessing the likely competitive impact of a proposed merger. In analyzing competitive impact, the Agencies will rely heavily on strategic planning documents of the merging hospitals and other nearby hospitals, as well as the views of payors and local employers. They also will consider:

• Evidence that patients have previously switched, or considered switching, between hospitals in response to relative changes in price (or other competitive variables)

• Evidence that the merging hospitals based prior business decisions on the prospect that patients might switch to other hospitals in response to relative changes in price

• The influence the merger may have on downstream competition faced by buyers (e.g., payors) in their output markets (e.g., health plans). In particular, the Agencies will consider whether payors could market viable health plans absent contracts with the merging hospitals (and their medical staffs), or whether they would be required to accept a small but significant price increase rather than attempting to do so

• The timing and cost required to shift patients to other hospitals to avoid an anticompetitive price increase by the merging hospitals

In defining relevant geographic markets for hospital services, the Agencies will no longer rely on "Elzinga- Hogarty" statistical analysis of patient discharge data, despite their historical use of – and judicial endorsement of – this methodology. As explained in the Report, Elzinga-Hogarty analysis may result in an implausibly large geographic market definition when it shows that large numbers of patients enter or exit an area for hospital services. The Report states that patients may travel to more distant hospitals for a variety of reasons, including perceived and actual variations in quality, insurance coverage, out-of-pocket costs, sophistication of services and family connections. Accordingly, pre-merger patient discharge data should not be used to predict the post-merger willingness of other patients to switch away from local hospitals in response to anticompetitive price increases. The Agencies also will reject "improper use" of critical loss analysis by merger proponents, especially to the extent it relies on current patient discharge data to estimate post-merger responses to an anticompetitive price increase.

The Agencies will remain skeptical of merger defenses based on efficiencies claims, and simply reject "community commitments" and the "non-profit status" of hospitals as a basis for approving an otherwise anticompetitive deal. Under traditional Merger Guidelines analysis, claimed efficiencies must be merger-specific, verifiable and must not arise from anticompetitive reductions in output or services. The Agencies will question whether an efficiencies study prepared in connection with HSR filings reflects unrealistically high estimated savings. They will assess whether the parties have specific plans, including whether they intend to immediately consolidate facilities, integrate hospital-based physician groups, or take other actions, to achieve projected efficiencies.

A Group Purchasing Organization (GPO) negotiates contracts with vendors of medical supplies on behalf of provider members. The GPO industry faces intense scrutiny from federal legislators and agencies, including the Senate Judiciary Committee and the Antitrust, Competition Policy and Consumer Rights Subcommittee and the U.S. General Accounting Agency, in addition to the FTC.³ Proponents contend that GPOs create purchasing power and efficiencies by pooling the purchasing power of providers. Critics argue that GPOs can reduce competition among manufacturers of medical supplies as a result of tying, bundling and exclusive dealing arrangements. The Report indicates that the Agencies will continue to assess the competitive impact of particular GPOs, even as the Senate Judiciary Committee considers legislation to regulate GPOs, and the Centers for Medicare and Medicaid Services formulates an interim final rule on whether a GPO’s administrative fees should be included in the pharmaceutical manufacturers’ calculation of the "average sales price."

The Report clarifies and limits the antitrust protection afforded to GPOs under the safety zone provided in Statement 7 of the Health Care Statements. The safety zone relates only to size and formation issues with respect to whether a GPO may create monopsony power (i.e., by permitting members to exercise market power as purchasers of medical products or supplies) or eliminate pricing competition among participants (i.e., by permitting collusion on their downstream pricing of hospital products or services). It does not apply to a GPO’s operations or preclude Agency action challenging the improper use of tying, bundling, exclusivity or other potentially anticompetitive contracting practices.

The Agencies will perform a fact-intensive inquiry to evaluate, on a caseby- case basis, allegations of a GPO’s anticompetitive conduct. In particular, they will carefully evaluate allegations that a GPO with a large market share has:

• Implemented minimum volume purchasing requirements, bundled discounting agreements, long-term contracts (e.g., 5 years) and other agreements

• With the anticompetitive purpose and effect of benefiting a particular manufacturer by excluding competing manufacturers from selling to the GPO members, increasing barriers to entry, and discouraging research and development.

In the event of an investigation, the Agencies will consider whether a particular GPO has created substantial efficiencies and cost-savings by:

• Creating incentives for manufacturers to offer deeper discounts in exchange for volume purchases

• Standardizing the buyers’ products

• Reducing manufacturers’ costs by disposing of excess inventory

• Reducing the participant’s overhead, administrative and other costs associated with product comparisons and purchasing

Health insurance companies should anticipate increased merger enforcement as well as continued scrutiny of agreements involving most-favored-nations clauses, exclusive or quasi-exclusive dealing arrangements and market allocation agreements. A particular agreement or transaction may take on heightened competitive significance as a result of recent market consolidation and increased market share. The Agencies will evaluate concerns relating to the creation or abuse of monopoly power in the sale of insurance products or monopsony power in the purchase of medical services from health care providers. In evaluating the competitive effects of any transaction or agreement, the critical issues are likely to include product market definition and ease of entry.

• Product Market Definition. The critical issue with respect to market definition will be whether separate relevant product markets exist for indemnity and managed care (HMO, PPO, POS) insurance products, and whether self-insurance should be included as part of the relevant product market. At least one court has held that there is a single health insurance financing market which includes indemnity, HMO and other products. The DOJ has reached the same determination in several investigations, but has also determined that there were separate health insurance product markets based on evidence that customers did not view PPOs and indemnity plans as reasonable substitutes for HMO and HMO-POS products.⁴

• Ease of Entry. A detailed, market-specific analysis of entry may be a determinative issue in future investigations and enforcement actions. Entry barriers may include state laws and regulations, economies of scale and firm reputation. In particular, barriers to entry may be high where an entering network needs a large provider network to attract customers, but also needs a large number of customers to obtain sufficient price discounts from a provider to be competitive with incumbents, or where the trade name recognition of a first-mover or early movers may inhibit entry. On the other hand, barriers may be low where existing firms can readily expand because they do not face capacity constraints, the incremental cost of expansion is low and regulatory requirements are minor.

In addition, merger proponents should anticipate increased scrutiny of cost-saving and efficiencies claims, and should document efficiencies that could reasonably be accomplished only by the proposed merger or other means that similarly would reduce competition.

The Commission will continue to devote considerable resources to protecting consumers from anticompetitive practices that result in higher prices to consumers. Both brand-name and generic drug manufacturers will continue to face substantial antitrust risk as a result of improper agreements, "sham" patent activities and litigation, abuses of regulatory processes and other conduct that results in the improper delay of the entry of generic drugs. Other top enforcement priorities will include investigating allegations that pharmacy benefits managers (PBMs) and direct-to-consumers advertising (DTC) improperly inflate consumer demand for, and the prices of, pharmaceutical products.

• Pharmacy Benefits Managers. PBMs typically administer the pharmacy benefits and contract with pharmacies and pharmaceutical manufacturers on behalf of health plans or employers. Most empirical evidence suggests that PBMs have lowered costs for health plan. However, many critics argue that some PBMs improperly steer enrollees to higher priced products on which the PBM earns large rebates, which it does not pass on to enrollees or artificially inflate the average wholesale prices on prescriptions filled by the PBM-owned mail order pharmacy by using re-labeled drugs. The Commission is continuing to assess, pursuant to a Congressional mandate, whether PBMs with integrated mail order pharmacies are improperly increasing health plan costs and expects to issue a report on this issue next spring. In the meantime, the Commission recommends that states carefully consider the potential costs and benefits of regulating PBM transparency.

• Direct-to-Consumer (DTC) advertising. DTC advertising has become a top priority for the Commission as expenditures have grown from $791 in 1996 to over $2.46 billion in recent years.⁵ The Commission generally recognizes that truthful and non-misleading DTC advertising can benefit consumers, stimulate productive discussions between doctors and patients, and encourage consumers to learn more about previously undiagnosed conditions. Nonetheless, the Commission will continue to examine DTC advertising practices to determine whether they increase inappropriate prescriptions of, or prices for, pharmaceutical products.

There should be no doubt that recent trend of heightened health care antitrust enforcement will continue. The Report underscores the importance of antitrust compliance and of ensuring that all industry participants benefit from market competition — and the antitrust compliance of their suppliers, customers and competitors. Industry participants should anticipate that antitrust allegations will be aggressively investigated by the Agencies. Even an investigation that does not lead to an enforcement action can be very costly and disruptive to normal business operations. A determination that a health care provider has failed to comply with the antitrust laws may have far more serious consequences, including dissolution, disgorgement and criminal sanctions.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.