BEYOND THE HEALTH CARE POLICY STATEMENTS:
WHERE DO WE GO FROM HERE
COMMISSIONER ROSCOE B. STAREK, III
FEDERAL TRADE COMMISSION
THE 30th ANNUAL ANTITRUST INSTITUTE ON
HEALTHCARE ANTITRUST DEVELOPMENTS
November 1, 1996
Good afternoon. Thank you for the opportunity to address the 30th Annual Antitrust Institute on Healthcare Antitrust Developments on what is a very interesting and exciting topic. Let me say before I begin that the views I express are entirely my own and do not necessarily represent the views of the Commission or any other Commissioner.
Over the past several years, Federal Trade Commission enforcement activity in health care markets has focused to a significant degree on concerted efforts by physicians and other health care providers to coerce higher prices or better terms from third-party payers than competitive markets would otherwise allow. A review of FTC cases shows that the Commission has devoted substantial resources to the investigation of refusals by health care providers to supply medical services except on collectively-determined terms -- actions that are often referred to as "boycotts." Evidence that boycotts have resulted in higher reimbursement rates for health care purchasers has served as the basis for several Commission enforcement actions involving health care providers.
Usually, the professed goal of the provider group under investigation is to "equalize the bargaining power" in negotiations with health care payers. The common thread in Commission enforcement actions involving provider groups is that the members have not integrated their practices or finances sufficiently to justify collective discussion among members or negotiations with payers over the terms of provider reimbursement. In the absence of genuine provider integration, this "equalization" rationale is not a legitimate defense to an antitrust enforcement action and may be found unlawful. In some instances, collective activity by providers may even be criminal violations of the antitrust laws.
On the other hand, concerted action by truly integrated joint ventures -- ventures in which members contribute capital and share the risk of poor financial performance, and which result in new or improved products or services -- does not violate the antitrust laws in the absence of a showing of market power. Therefore, the first -- and perhaps most important -- hurdle for venture organizers is to create an arrangement with sufficient economic integration to enable the network to avoid per se condemnation under the antitrust laws. In the absence of evidence of market power, adoption of an appropriate risk-sharing arrangement may eliminate FTC or Justice Department ("Agency") concerns over the venture altogether.
How do the newly revised Statements of Antitrust Enforcement Policy in Health Care ("Policy Statements") help providers over this all-important hurdle?
In my opinion, the two most important features of the newly revised Statements 8 and 9 involving physician and multi-provider networks are that they: (1) help to reduce uncertainty over the antitrust treatment of provider network joint ventures and (2) provide a more flexible framework for the treatment of new health care network arrangements by the antitrust enforcement authorities.
How do the newly revised Statements help reduce uncertainty surrounding the antitrust treatment of provider networks?
As Bob Leibenluft mentioned this morning, the revised Statements provide additional examples of arrangements by which financial risk can be shared among members of physician network joint ventures and multi-provider networks. The revised Statements significantly expand the types of financial risk-sharing arrangements that can qualify a network for safety zone or rule of reason treatment. This expanded universe of risk-sharing arrangements provides valuable guidance to network organizers when designing ventures in a way that minimize the risk of antitrust scrutiny by the Agencies.
It is important to remember that the examples of risk-sharing contained in the Statements do not foreclose consideration of other arrangements whereby network participants may share substantial financial risk. Both the FTC and the Justice Department recognize that new and creative risk-sharing arrangements are likely to emerge in the future, and we are going to remain flexible when we apply antitrust principles to health care provider joint ventures. It is also entirely possible that many of these new risk-sharing arrangements could qualify for rule of reason treatment. The revisions to the Statements are intended to discourage providers from assuming that a particular network does not qualify for rule of reason treatment merely because the particular risk-sharing arrangement does not appear in the list of examples. I can report to you that the Agencies went to great lengths to add language to the revised Statements emphasizing the Agencies' determination to remain flexible on this issue. In my opinion, this is a big step forward.
Another equally important feature of the revised Statement 8 is that it now provides for rule of reason treatment for certain types of physician networks even if the participants choose not to share financial risk at all.
Physician networks that do not involve financial risk sharing may be sufficiently clinically integrated to qualify the network for rule of reason treatment. The addition of clinical integration as a mechanism by which a physician network may qualify for rule of reason treatment is a significant improvement over earlier versions of Statement 8. This is a clear example of the Agencies' commitment to remain flexible and responsive to marketplace preferences of consumers, insurers, and providers alike.
I want to emphasize that physicians and other providers who are considering forming a network joint venture, but are unsure of the legality of their conduct, are invited to take advantage of the Federal Trade Commission's advisory opinion procedure. The Department of Justice's counterpart procedure is the business review letter.
The Agencies have committed to respond to a business review or advisory opinion request within 90 days of receipt of a request from a proposed physician network joint venture, and within 120 days of receipt of a request from a multi-provider network joint venture. If you ask us beforehand, we will give you our opinion whether the proposed arrangement appears to raise issues under the antitrust laws.
Unresolved Tensions in the Health Care Policy Statements
So what do I think of the new Policy Statements, and where are we likely to go from here?
Despite significant improvements in the 1996 version of the Policy Statements, certain policy tensions remain. What aspects of the Statements are likely to be the focus of future discussion?
Physician Membership Shares and Safety Zone Treatment
Comments received during the most recent round of revisions suggest a wide range of opinions regarding the proper limit on the percentage share of physician membership needed to qualify a physician network for safety zone treatment. Some groups wanted the percentage share thresholds raised substantially, while others indicated that the shares should remain the same or even be lowered.
The adoption of safety zones for physician network joint ventures represents an effort by the Agencies further to reduce uncertainty regarding the application of the antitrust laws to smaller networks. Underlying the adoption of safety zones, and the corresponding limitations of physician share membership, is the belief that smaller physician networks are less likely to pose significant risks of competitive harm than larger networks in normal circumstances.
As everyone knows, no precise percentage share boundaries separate networks cleanly into groups that do or do not pose a risk of anticompetitive injury. Not surprisingly, discussion inside and outside the Agencies regarding the appropriate limitations on percentage share physician membership reflects the never-ending debate over the market shares that enable firms to exercise market power generally. Smaller is believed to be less threatening to competition than bigger, but how much smaller?
There is no easy answer to this question. In setting thresholds for the safety zones, the Agencies have attempted to weigh the benefit of greater predictability in antitrust enforcement against the risk of antitrust harm. We think we have selected levels that appropriately balance these competing interests, but who can say for sure? One thing is certain: a vigorous debate over this issue is likely to continue in the future, and we at the FTC do not think that we have heard the last of this debate over percentages.
Risk-Sharing and Provider Networks
Even though the revised Statements provide additional examples of financial risk-sharing arrangements that can qualify a network for safety zone or rule of reason treatment, an argument can be made that the revised Statements do not go far enough.
The presence, absence, or degree of risk-sharing and/or economic integration should not be the primary concern in the analysis of agreements among competitors regarding price. As all of you understand, assessments of risk-sharing and integration are just proxies for the fundamental antitrust inquiry into whether a restraint is (1) reasonably necessary to the attainment of the procompetitive objectives of the arrangement and (2) likely to create procompetitive benefits that outweigh any risk of anticompetitive harm. Risk-sharing arrangements are not viewed by the Agencies as ultimately desirable in themselves; rather, they are simply vehicles for the realization of procompetitive efficiencies through joint venture arrangements.
Fortunately, the revised Statements explicitly recognize that new forms of risk-sharing are likely to emerge in the future that not only satisfy the requirements of substantial financial risk-sharing, but also achieve significant efficiencies to the benefit of consumers. That's why the revised Policy Statements emphasize that the Agencies will evaluate new forms of risk-sharing on a case-by-case basis.
What seems virtually certain, however, is that what constitutes sufficient financial risk-sharing in the context of the antitrust analysis of health care joint ventures will continue to be debated vigorously in the future. As new forms of risk-sharing emerge in health care markets, and the Agencies gain experience with such arrangements, the types of risk-sharing addressed in the Policy Statements could well proliferate.
Networks and Transaction Cost Savings
In some cases, a horizontal combination of competing providers can result in the creation of a "new" product yielding substantial efficiencies. The Supreme Court has told us that such combinations should be analyzed under the rule of reason.(1) In BMI, the Court held that substantial savings in transaction costs may be sufficient to warrant rule of reason treatment for a horizontal combination of competitors, even when such competitors are not integrated into a joint venture.
Although the revised Statements assert that more significant efficiencies are likely to result from a network's substantial financial risk-sharing or clinical integration, the Statements further provide that "the Agencies will consider a broad range of possible cost savings, including improved cost controls, case management and quality assurance, economies of scale, and reduced administrative or transaction costs."(2)
This sentence was purposefully added and is intended to highlight the broad range of efficiencies that -- at least, in theory -- may reduce concerns by the Agencies that a particular network poses a risk of anticompetitive harm. The sentence is also intended to encourage network organizers to focus on cost-containment and efficiency as the basis for a physician network and to articulate why a particular network will accomplish such goals. Indeed, it would be wise for organizers of a network to assume that they may be called upon to explain why the venture is procompetitive and thus worthy of consideration under the rule of reason.
But let's focus on the issue of transaction cost savings for a moment. Given the creativity of organizers of health care networks, and the possibility that such organizers might identify and quantify real transaction cost savings, the Agencies could well face a situation in the future where the evidence of transaction cost savings -- even in the absence of financial integration -- deserves serious scrutiny. What will the Agencies do when faced with such a situation? Must we follow the guidance of the Supreme Court in BMI and find that such ventures qualify for rule of reason treatment?
My own view -- a view that is guided by the Supreme Court analysis in BMI -- is that health care networks may indeed be invented in which transaction cost savings outweigh any threat of anticompetitive harm. In my opinion, such ventures would rightly be analyzed under the rule of reason even in the absence of financial risk-sharing by the providers. But we shall simply have to wait and see whether such ventures emerge to test the limits of the Agencies' beliefs regarding credible efficiency claims. One thing is for sure, however: the lively debate over whether the economic integration of competitors is even a necessary condition for rule of reason treatment of physician and multi-provider networks is likely to continue.(3)
Possible Market-Distorting Effect of the Statements
During the recent round of revisions, several commenters claimed that the Statements were preventing the formation of efficiency-enhancing physician and multi-provider networks. As causes of the market-distortion, critics cited the Statements' percentage limits on physician participation to qualify for safety zone treatment, the failure to consider transaction cost savings as potential sources of procompetitive efficiencies, and the Agencies' apparent unwillingness to apply the rule of reason to networks that fall outside the safety zones. Although little evidence is available to confirm or refute these assertions, the issues raised by such comments deserve consideration.
If you look at recent advisory opinions and business review letters issued by the Agencies discussing provider networks, you see that the Policy Statements are affecting the structure of many provider networks. Perhaps out of a desire to achieve greater certainty in the application of the antitrust laws to a particular network, network organizers appear to be using the safety zones as a "blueprint" for network structure, including physician share membership levels and the adoption of particular risk-sharing arrangements. Although this evidence suggests that the Policy Statements have had a real impact on the structure of competition in health care markets, whether such impact amounts to market distortion is much more difficult to assess.
The Agencies take this issue seriously and are likely to keep looking into whether the Health Care Policy Statements improperly distort competition in health care markets. Our goal is not to tilt in favor of one form of provider network over another, but merely to encourage competition among health care providers. You can be sure that we will remain sensitive to this issue.
Let me close my remarks by focusing on a broader issue relating to the Policy Statements that continues to bother me. If the full range of health care transactions falls properly within the ambit of the same antitrust laws that apply to other industries, why did the Agencies issue special health care antitrust enforcement policy statements?
One explanation I sometimes hear is that we have special guidelines for health care because the field is very complex and rapidly changing. The buyers and sellers of health care, it is argued, demand and require industry-specific "guidance" from time to time in order to keep their conduct within the law.
Perhaps that answers the question. But I cannot help thinking that there are other very complex industries for which there does not seem to be a need for special antitrust guidelines. Why should the health care industry receive special guidance from the Agencies when other industries do not?
The point here is that when we look at health care issues, we should be sure that we are applying the same analysis that we would apply to comparable conduct in other industries. When we analyze the antitrust implications of the conduct of five physicians, we would probably benefit from asking ourselves whether we would apply the same analysis to five auto mechanics engaged in substantially similar conduct. If for some reason the answer is "no," then it seems that we would be in the unhappy position of having to defend the proposition that health care antitrust is "different" after all.
Now that we have issued and twice revised the Statements, there is probably no going back: "the genie is out of the bottle." Will there be a continuing need for antitrust guidelines concerning health care transactions? Will other industries call out for special treatment, and perhaps for safe harbor protection? I am not sure what the answer will be. However, you can easily imagine the quandary in which the Agencies find themselves if industries request special treatment. Whether we like it or not, these are issues that the Commission and the Department of Justice will have to face again as long as we appear to be carving out health care as an industry worthy of special treatment.
1. See Broadcast Music, Inc. v. Columbia Broadcasting System, Inc., 441 U.S. 1 (1979) ("BMI").
2. Statements of Antitrust Enforcement Policy in Health Care, at 80, 123-24.
3. For further elaboration of my views on this controversial issue, see "Reinventing Healthcare Antitrust Enforcement," Prepared Remarks of Commissioner Roscoe B. Starek, III, before the Antitrust Common Ground Conference, Nashville, Tennessee (May 17, 1996).