GOVERNMENT ENFORCEMENT AND GUIDANCE IN HEALTH CARE ANTITRUST: MAINTAINING THE BALANCE
Robert F. Leibenluft
Assistant Director, Bureau of Competition
Federal Trade Commission
Presented at the American Bar Association 1997 Annual Meeting
Section of Antitrust Law
Renaissance Stanford Court
San Francisco, CA
August 5, 1997
As often has been noted, health care antitrust is a field where the actions and statements of the federal and state antitrust enforcement agencies, rather than case law, provide much of the guidance available for antitrust counseling. This is due both to the relative scarcity of litigated health care antitrust cases, and to the desire of many market participants for specific guidance on how the antitrust laws will be applied by the enforcement agencies to a wide variety of new organizations and relationships in a rapidly changing market. Consequently, the agencies have gone to extraordinary lengths to explain their enforcement policies and the likely application of antitrust principles to evolving market arrangements.
These circumstances have put the agencies -- which are primarily law enforcement bodies -- in an unaccustomed role. The reasons are easy to understand. On the one hand, while the agencies' enforcement programs have been quite active, relatively few cases, particularly nonmerger cases, have been contested. Consequently, we have a raft of consent orders and decrees on the books, but relatively few authoritative court decisions. Certainly, these consents offer guidance as to the agencies' enforcement policies; but as I will discuss later, they also have some limitations as a guide for conduct by nonparties.
On the other hand, the tremendous change in health markets that we have witnessed over the past decade or two has given rise to a strong desire by market participants for more specific guidance about the issues they face. The new market conditions, and the new relationships that have emerged as a result, have posed numerous, and often difficult, questions. We have attempted to meet this demand for guidance as much as possible; indeed, providing guidance to the industry is a very important part of our overall mission. A clear understanding by all concerned about the requirements of the antitrust laws is necessary for the market to function effectively, so that parties can avoid anticompetitive activities while being able to respond to market dynamics and consumer demand in innovative ways. We are aware, nonetheless, of the danger that guidance can become over-regulatory, and thereby frustrate innovation and competition.
The three goals I have mentioned -- maintaining an effective enforcement program, providing useful guidance, and avoiding undue interference with the market -- all serve to promote competition, but they are not without tensions. Today I would like to describe the various ways in which we have provided guidance to the market, discuss some of the limitations of that guidance, and explore the difficulties of balancing our desire to provide as much guidance as possible with the equally important goals of encouraging procompetitive innovation and assuring our ability to prosecute anticompetitive conduct. I will concentrate on health care, as that is what I know best. As always, I must caution that the views I express are my own, and do not necessarily represent the views of the Commission or any individual Commissioner.
The first place to look in order to determine the agencies' understanding of the antitrust laws and their enforcement intentions is at the cases we have brought. If I may refer very briefly to some "ancient history," the FTC, the Department of Justice, and the state attorneys general(1) have litigated, all the way to the Supreme Court, if necessary, the cases that have established the basic parameters of the applicability of the antitrust laws to health care and other professional markets.(2) These decisions, as well as the Commission's opinions in contested matters, provide the most detailed analyses of antitrust principles and their application in specific factual situations. The majority of our enforcement actions, however, end in consent orders, and a few of our most significant administrative cases were not appealed by the respondents.
The complaint that accompanies a consent order describes the conduct that was challenged in that particular matter.(3) The complaint usually contains a fairly detailed factual description of the underlying conduct, and recites our theory of the nature of the anticompetitive effects of the challenged conduct. Further information often can be found in the analysis to aid public comment (for FTC matters) or the competitive impact statement (for DOJ matters). At the FTC, we recently have expanded the analyses to aid public comment in order to provide more information about the background and theory of the case.
The orders themselves also may provide some guidance about the agencies' analysis, but there are a number of considerations that need to be kept in mind when using orders as a guide to conduct by nonparties. In my experience, some lawyers inappropriately regard consent orders as detailed guidelines for how similar transactions must be structured. For a number of reasons, this assumption can mislead.
Orders are designed to remedy particular instances of actual conduct that violates the law, and they must be enforceable. Several things flow from these facts. First, orders typically are crafted around very specific fact situations, and reflect the agencies' detailed knowledge of the market and the conduct or transaction involved. Much of this information is non-public. Moreover, the orders may contain "fencing-in" provisions that prohibit conduct that does not by itself violate the law, or impose obligations that normally would not be required of persons that the agencies did not believe had violated the antitrust laws. Conversely, the agencies may have satisfied themselves, based on a detailed examination of the specific market and the fact that the respondents are under order, that competition would not be harmed by arrangements that in other contexts might raise serious concerns.(4) Finally, orders may arise out of unusual fact situations, and thus may not be generally applicable outside their specific context. For example, our MAPI matter(5) involved a physician/hospital organization ("PHO"), but fundamentally, the case was about physician resistance to competition and managed care, and has only limited applicability to PHOs in general. The complaint alleges that the PHO operated essentially as a vehicle through which MAPI, a separate physician organization, carried on its illegal activities. While this is the first complaint in which the Commission has named a PHO as a respondent, it is important to note that the consent does not necessarily indicate how we would analyze PHOs that operate in other contexts.
Second, orders must be specific enough to be enforceable. They must set out as clearly as possible what conduct is prohibited and, by necessary implication, what is not prohibited, under the order. In some cases this may include a detailed description of permitted conduct, and the orders can appear to be highly "regulatory." Some orders, for example, have detailed descriptions of procedures that must be followed if a network employs a "messenger model."(6) This is done to provide clear standards for determining if the order has been violated; it does not necessarily mean that the law would be violated if nonparties do not follow the script set out in the order.
Drafting orders in conduct cases very often demands that we walk a fine line -- orders must be specific enough to effectively stop the alleged law violation and prevent further violations, while at the same time not impede potentially procompetitive conduct by the respondent or a successor entity. In some cases, it simply is not possible to define in advance all circumstances in which conduct that may fall within the terms of an order might be anticompetitive. One approach in such cases is to permit the entity to request prior Commission approval for certain kinds of ventures. In the MAPI order, for example, the parties explicitly are permitted to operate ventures that enter into agreements with physicians regarding terms of dealing with payers, if the physicians share substantial financial risk and are free to deal individually with payers. The parties also are permitted to operate or participate in other types of joint ventures involving collective price setting by physicians, if they receive prior approval of the Commission. Through this prior approval mechanism, the order allows for a variety of potentially procompetitive joint ventures, while not attempting to define in advance all the possibilities that would be permitted. The prior approval provision permits the parties to respond to changes in health care markets in ways that promote competition, while preserving the Commission's ability to prohibit actions that on balance are likely to be anticompetitive.(7)
Thus, I urge you to exercise caution in using a consent order as a specific guide to conduct by persons not covered by the order. Orders should be read in context, including the complaint and the analysis. Moreover, order provisions should not be read as a strict "cookbook" guide to conduct. In many cases, the order language may be more restrictive than what the law requires of others; in a few cases, following the letter of an order may not shield conduct that in a different context could violate the law.
In a few instances, state attorneys general have entered into consent agreements that permit hospitals in concentrated markets to merge, but impose on the merged entity certain conditions relating to pricing and other aspects of conduct. The Commission has not entered into such agreements, and frankly, I have serious doubts about their long-term effectiveness in protecting consumers. Generally, our position is that if a merger is anticompetitive, the only relief that will assure consumers of the benefits of competition is a full injunction or divestiture.
Decrees that attempt to regulate post-merger conduct inherently are subject to a number of limitations. Effective regulation of prices is very difficult in any circumstance. The necessary information is entirely under the control of the "regulated" party, and analyzing such information requires substantial expertise and resources. Determining whether to regulate prices, operating margin, or other factors poses thorny issues; and regulation may create disincentives for the hospital to reduce costs and operate efficiently, or create incentives to reduce quality of care. Moreover, even aggressive regulation cannot duplicate the operation of a competitive market. In the absence of competition it is impossible to know what is the "competitive" price that the regulation is supposed to approximate. For example, many of these orders limit price increases, but a competitive market might have resulted in price reductions, as is occurring in some areas. Furthermore, in the absence of new entry, the regulation must continue in perpetuity if consumers are not eventually to be left in the unfettered power of the merged entity. Finally, all of this, of course, is expensive. In a nutshell, competition rather than regulation provides the most effective incentives for hospitals to innovate, reduce costs, and improve quality and service.
I recognize, however, that some communities, such as those in rural areas, may not be able to support an unconcentrated hospital market with multiple providers that are of efficient scale and acceptable quality.(8) In those limited cases, carefully drafted regulatory conduct consents may be of some benefit, although they are intensively fact-specific. However, they certainly are "second best" to a competitive market, and have significant drawbacks, as I have discussed above.
Other types of remedies also have been used in some merger cases. The Department of Justice and the Florida Attorney General's office, for example, entered into a consent agreement that prohibited the two major hospitals in North Pinellas County from merging, but permitted them jointly to provide certain services and to share some administrative expenses.(9) At some point, however, joint venture activity may limit the incentives of the hospitals to compete with one another, even on services offered independently. Nevertheless, in some circumstances joint ventures may be a good way for hospitals to reduce costs while still preserving the benefits of competition for at least some patient services.
ENFORCEMENT POLICY STATEMENTS
While our litigated cases and consent orders provide some guidance to the market, health care providers repeatedly have requested further information. Providers in many markets are under tremendous pressure to operate more efficiently, and many networks, mergers, and other types of collaboration can create significant efficiencies and promote competition. Many of the ventures that seek our advice are small, locally-based organizations, that often are represented by general corporate counsel or lawyers who lack antitrust expertise. Nevertheless, these organizations often want assurances that their planned ventures will not result in an antitrust investigation. In an effort to ensure that the antitrust laws do not discourage or impede procompetitive ventures, the enforcement agencies have taken unprecedented steps to clarify what types of conduct or transactions are likely to be anticompetitive, and to offer providers assurances with respect to conduct that may benefit consumers.
In response to these demands for more guidance, the Federal Trade Commission and the Department of Justice issued their joint statements of enforcement policy in health care, now in their third incarnation. As you know, in 1993 the agencies issued a set of six policy statements concerning a variety of cooperative activities of concern to healthcare providers.(10) Within a year, the agencies produced an expanded set of guidelines(11) that addressed several additional areas of concern to the healthcare industry, provided a more comprehensive explanation of how the agencies apply antitrust standards and analyze cooperative arrangements under the law, and provided detailed examples of the application of antitrust laws to various factual situations. Almost a year ago we further revised the portion of the statements that cover physician networks and other health care multiprovider networks such as physician-hospital organizations (PHOs).(12)
The Policy Statements have a limited purpose: to explain the federal enforcement agencies' analysis of several common types of collaborative activity among health care providers, in a form that can be understood by non-antitrust lawyers, and hopefully by non-lawyers as well. The Statements provide some clear rules of thumb, including "antitrust safety zones" for certain types of arrangements and organizations, as well as a description of how the agencies analyze conduct that does not fall within a safety zone. These Statements, we believe, address providers' legitimate needs for guidance. At the same time, unlike proposals for altering the agencies' activities through legislative action,(13) they can easily be revised and updated as necessary to accommodate future market developments.
While the revised Policy Statements on the whole have been very well received, some have questioned whether offering this type of guidance is an appropriate function of the enforcement agencies. As I will explain, I believe that it is; but at the same time we are aware of the limitations inherent in this type of effort.
First, the existence of the Policy Statements can convey the mistaken impression that special antitrust rules apply to health care. The revised Statements emphasize, however, that the same antitrust principles that govern all other industries also apply to health care providers. Likewise, we apply the same basic principles to all types of competitors in the market. What the Policy Statements do is describe, based on our extensive experience in the area, just how these basic principles are applied to the health care sector.
Second, detailed guidance, and particularly the safety zones, can tend to drive market developments into the channels specifically discussed in the Statements. This may be a particular risk in regulated industries, such as health care, where providers are accustomed to looking to a detailed regulatory framework to guide their behavior. In our revisions last year, therefore, we clarified the role and effect of the antitrust safety zones, and emphasized their placement in the larger context of the principles contained in the Statements. Because the safety zones need to be simple to apply, they are based on very rough approximations of market share and do not entail the detailed analysis of the specific conduct and market characteristics that often is necessary to assess the impact of an arrangement on competition in the market. For these reasons, the safety zones describe a limited set of circumstances. We recognize the danger inherent in any safe harbor -- that it will tend to steer all behavior into the defined safe area. In the most recent version of the Statements, we have tried to make even clearer what we have said all along -- that the safety zones do not define the full range of legal conduct -- and to encourage providers to focus on developing innovative ways to serve consumers better, rather than on fitting into a safety zone.
There also are some more "global" objections to the agencies issuing policy statements: on the one hand, that they may work to the detriment of our enforcement program or be misapplied in contexts where they don't work; or, on the other hand, that the agencies should not espouse their views of the law, but rely only on the decided cases. Both of these are considerations that we bear in mind; but fundamentally, we believe that helping market participants understand our enforcement policies will best serve to achieve our overarching goal of protecting and encouraging competition in health care markets. The fact is that the case law does not answer many of the questions facing providers today: Maricopa, for example, does not address all of the crucial issues concerning provider networks.
The Commission and Department of Justice also are looking at other ways to offer information and guidance about their antitrust analysis. This past Spring, the FTC and DOJ announced revisions to Section 4 of the 1992 Horizontal Merger Guidelines, to enhance the discussion of the role that efficiencies play in our analysis of mergers. As you know, in many hospital merger cases claims are made that the merger will produce efficiencies that outweigh its possible anticompetitive consequences. This question also is of considerable interest to antitrust practitioners generally, and was the subject of much discussion at the FTC's Global Competition Hearings last year.
In addition, the FTC and DOJ have announced a project designed to consider the feasibility of clarifying and updating antitrust policies regarding joint ventures and other forms of collaboration among competitors. This project also grows out of the Global Competition Hearings, which underlined the extent to which firms in many industries are involved in a variety of collaborative ventures in areas including research, production, distribution, and purchasing. This project will build on the agencies' existing joint guidelines concerning health care and intellectual property. Public hearings on the first phase of this project began this summer, and will continue in the fall.
We also offer advice concerning particular proposed conduct through advisory opinions (from the FTC) and business reviews (from DOJ).(14) When the first Policy Statements were issued, the agencies promised that they would respond to requests for advice concerning health care issues within defined time limits. We have met that commitment. Since 1993, both the Commission staff and the Department of Justice have issued a large number of letters discussing various forms of provider collective action, providing concrete advice on a timely basis to providers considering specific proposed ventures. In addition, they illustrate how the agencies analyze actual fact situations, and thus can be very informative to the public at large.(15) We recently prepared a paper discussing the ins and outs of the advisory opinion process at the Commission, that also is available on the Internet. In addition, Commission staff are available to offer information and advice on an informal basis, and we do so frequently. My impression is that the bar and providers have found these programs to be useful.
Of course, advisory opinions have some limitations. First, because the opinions are prospective and generally are not based on extensive investigation by the agencies, they come with a number of caveats: they are based to a greater or lesser extent on the accuracy of the factual representations made in the requests, and they do not prevent the agencies from taking enforcement action in the future if the facts change or the representations are incorrect.(16) However, I am not aware of any health care advisory opinion or business review letter that has been revoked. Second, requests for opinions usually are made with respect to proposals that the requester believes can be approved, and both agencies permit requests to be withdrawn. Consequently, few negative opinions are likely to be issued; this, of course, eliminates the value to the bar that more negative opinion letters would provide. Finally, the letters state only the opinion of the issuing agency and do not bind third parties.
Clearly, some types of questions are more amenable than others to resolution in an advisory opinion context. "Legal" questions, such as whether a new type of arrangement would be analyzed under the per se rule or the rule of reason, can be well suited to prospective analysis -- subject of course, to the caveat that the analysis applies only if the arrangement operates as represented. Issues relating to market definition, or to competitive effects analysis under the rule of reason, are more difficult to deal with in a prospective context, and in some cases we cannot provide definitive answers.
We recognize the importance of providing as much guidance to health care providers as possible. To the extent that doing so permits providers intelligently to plan their business behavior, and antitrust counsel effectively to guide their clients toward antitrust compliance, we all win. Moreover, it is important for the agencies to explain their thinking so that we can engage in constructive dialogue with those who may believe that we should modify our policies to do more, to do less, or to do it differently.
Nonetheless, we always are aware of two equally important considerations: the need to promote market innovation and market-specific responses to consumer demand, and the requirements of our enforcement mission. If the guidance we give is too detailed or rigid, or if parties interpret our statements as defining the only way it is safe for them to behave, then innovative arrangements that could benefit consumers may be deterred. In addition, we remain law enforcement agencies, and it is crucial that we retain the ability to prosecute antitrust violators and obtain remedies that will ensure a competitive marketplace. Balancing these various considerations can be difficult. We welcome your thoughts on how we can continue to pursue all these goals.
1. Because of the local nature of many health care services and the active involvement of many state attorneys general, the states have had ample opportunity to bring enforcement actions and to provide guidance. The federal agencies often work cooperatively with the states on matters of mutual interest.
2. See American Medical Association, 94 F.T.C. 701 (1979), aff'd as modified, 638 F.2d 443 (2d Cir. 1980), aff'd by an equally divided Court, 455 U.S. 676 (1982); Arizona v. Maricopa County Medical Society, 457 U.S. 332 (1982); Indiana Federation of Dentists, 101 F.T.C. 57 (1983), rev'd, 745 F.2d 1124 (7th Cir. 1984), rev'd, 476 U.S. 447 (1986); National Society of Professional Engineers v. United States, 435 U.S. 679 (1978); FTC v. Superior Court Trial Lawyers Association, 493 U.S. 411 (1990); FTC v. University Health Inc., 1991-1 Trade Cas. ¶69,400 (S.D. Ga.) and 1991-1 Trade Cases ¶69,444 (S.D. Ga.), rev'd, 938 F.2d 1206 (11th Cir. 1991).
3. Reports of Commission actions, including complaints and orders, are available on the Internet at http://www.ftc.gov. Information about actions of the Department of Justice is available at http://www.usdoj.gov.
4. The Department of Justice, for example, has issued two consent orders and a business review letter dealing with "qualified managed care plans" ("QMCPs") that would be permitted to have most or all the physicians in a market as participating providers, but would be owned and controlled by a much smaller group of physicians who had economic incentives to control charges and utilization of the non-owning (subcontracting) participating physicians. See United States v. Healthcare Partners, Inc., 395-CV-01946RNC (D. Conn. 1995); United States v. Health Choice of Northwest Missouri, Inc., 95-6171-CV-SJ-6 (W.D. Mo. 1995). In these matters the Department evaluated whether the structure of the markets involved indicated that the arrangements creating a divergence of economic interests were sufficient to make exclusive behavior by all participating physicians unlikely. See Santa Fe, New Mexico Managed Care Organization at 5 (February 12, 1997) (business review letter). In a third case, the consent decree permitted the defendant to operate a QMCP only with the prior approval of the Department. United States v. Woman's Hospital Foundation, et al., 96-389-BM2 (M.D. La. 1996). In that matter, the Department was concerned about the greater potential for abuse of a QMCP involving only a single specialty, about past behavior indicating a potential for physician boycott of new entrants into the inpatient obstetrics market, and about the likely motivation of the parties in operating a QMCP. Competitive Impact Statement at 19. In all cases, whether a QMCP structure creates divergent economic interests sufficient to protect against anticompetitive effects is a question of fact specific to the market and QMCP structure in question. See U.S. Department of Justice and Federal Trade Commission, Statements of Antitrust Enforcement Policy in Health Care, 4 Trade Reg. Rep. (CCH) ¶ 13,153 (August 18, 1996) at 77-78.
5. Montana Associated Physicians, Inc./ Billings Physician Hospital Alliance, Inc., C-3704, 62 Fed. Reg. 11,201 (March 11, 1997) (consent order).
6. See, e.g., Montana Associated Physicians, Inc./ Billings Physician Hospital Alliance, Inc., C-3704, 62 Fed. Reg. 11,201 (March 11, 1997) (consent order ).
7. See also United States v. Woman's Hospital Foundation, et al., 96-389-BM2 (M.D. La. 1996) (operation of QMCP requires prior approval of DOJ).
8. For this reason, the Policy Statements provide a safety zone for mergers between two general acute care hospitals if one of them has fewer than 100 licensed beds, an average daily inpatient census of fewer than 40 patients over the most recent three years, and is at least five years old.
9. United States and State of Florida v. Morton Plant Health System and Trustees of Mease Hospital, 94-748-CIV-T-23E (M.D. Fla. 1994).
10. U.S. Department of Justice and Federal Trade Commission, Statements of Antitrust Enforcement Policy in the Health Care Area, 4 Trade Reg. Rep. (CCH) ¶ 13,151 (September 15, 1993).
11. U.S. Department of Justice and Federal Trade Commission, Statements of Enforcement Policy and Analytical Principles Relating to Health Care and Antitrust, 4 Trade Reg. Rep. (CCH) ¶ 13,152 (September 27, 1994).
12. U.S. Department of Justice and Federal Trade Commission, Statements of Antitrust Enforcement Policy in Health Care, 4 Trade Reg. Rep. (CCH) ¶ 13,153 (August 18, 1996).
13. See H.R. 2925, 104th Cong., 2d Sess. (1996).
14. Some state attorney general offices, for example, Florida's, also offer advisory opinions in health care.
15. Copies of advisory opinion and business review letters are available on the Internet at http://www.ftc.gov and http://www.usdoj.gov.
16. Moreover, FTC staff opinions are not binding on the Commission.