Antitrust Laws in Health Care: Evolving Trends

Authorities have acted against mergers and acquisitions on behalf of consumers. Reform is on the horizon, and physician leaders should play a role in the process.

ABSTRACT: Federal laws prohibit collusion and restraint of competition because they reduce choices for consumer and increase prices. The effect of antitrust laws in health care is changing with the rapid evolution of the industry. Mergers and acquisitions are common, but federal authorities have acted against them on behalf of consumers. Meaningful reform is on the horizon, and physician leaders should play a role in this process.

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“Competition” is defined as a condition where different economic firms seek to obtain a share of a limited good by varying the elements of the marketing mix: price, product, promotion and place. Competition will give rise to development of new technologies and provide wider choices that leads to lowering of prices. In the alternate scenarios of “monopoly” (no competition) and “oligopoly” (little competition), the opposite will occur, leading to market consolidation, lack of competition and high prices.

The word “trust” in the 19th century was used in reference to big businesses. Large manufacturing companies emerged in the late 1800s and were thought to have complete market power. It was argued that for the American economy to succeed, small businesses should be given a chance and that individuals deserve free and fair competition. Sen. John Sherman was the proponent of the Sherman Antitrust Act of 1890, which prohibited restraints in trade and abuse of monopoly power and gave the Justice Department broad enforcing powers.

An 1889 political cartoon from the U.S. Senate Collection depicts the bosses of the Senate — monopoly corporate interests — as money bags standing behind the senators.

The Clayton Antitrust Act was enacted in 1914 to prevent anticompetitive acts. Other notable legislations are the Federal Trade Commission Act of 1914 (established the Federal Trade Commission1), the Robinson-Patman Act of 1936 (provided protection against price discrimination to small retailers), and the Celler-Kefauver Act of 1950 (closed the loopholes regarding asset acquisition by potential competitors to limit competition). The Celler-Kefauver Act is also referred to as an antimerger act, giving the government power to prevent vertical and conglomerate mergers that would limit competition. The FTC and the Department of Justice are the enforcers of antitrust laws in the United States.

Some well-known cases:

• Standard Oil Co. of New Jersey v. United States, 221 U.S. 1 (1911): One of the earliest examples of the government’s use of antitrust laws. In the late 1880s, Standard Oil (owned by John D. Rockefeller) had a large market share of the oil refining capacity. Standard Oil allegedly threatened to undercut prices in a “predatory pricing” scenario to force out the competitors. The federal government sought to prosecute Standard Oil under the Sherman Act. The issue before the court was to determine whether Congress has the power to prevent a company from acquiring numerous others through methods that are not illegal while posing significant restraints in trade because of its sheer size and market power. The Supreme Court concluded that it is within Congress’ power to regulate companies under the “commerce clause.” The court found Standard Oil showed an "intent and purpose to exclude others" demonstrated by its many mergers, acquisitions and business alliances. There was no evidence of consumer harm.2 This resulted in the breakup of Standard Oil into 34 separate companies.

• Kodak and antitrust lawsuits (1954): The film manufacturer had a long history of antitrust lawsuits. At one time, Kodak controlled 96 percent of the U.S. film and camera market. In 1921, it was prevented from selling private-label films. After this, Kodak marketed Kodacolor film that could be developed only by Kodak. It included a fee in the pricing structure for developing and delivery of film. This was found to be in violation of the antitrust laws in 1954.

• United States v. AT&T (1974): The Justice Department filed an antitrust case against AT&T, which was the sole provider of telephone services throughout the United States. Most of the telephonic equipment was produced by a subsidiary, Western Electric. This vertical integration allowed the company to have an almost monopoly in the communication technology. Later, AT&T agreed to break up the company into seven regional operating companies (also known as “Baby Bells”) providing local telephone services. This divesture reduced the book value of AT&T by 70 percent.

• United States v. Microsoft Corp., 253 F.3d 34 (D.C. Cir., 2001): In 1999, a coalition of 19 states and the Department of Justice alleged that Microsoft abused monopoly power on Intel-based personal computers in its handling of the operating system and web browser sales. Microsoft did this to prevent competition from Netscape, another browser. Even though the trial court ruled Microsoft should be split into two companies, Microsoft appealed and later settled with the federal government, stopping several practices the government challenged.

CURRENT ANTITRUST ISSUES

Several potential antitrust issues are brewing. In 2018, AT&T, the second-largest wireless carrier, bought Time Warner, a media company, for $85 billion. AT&T was sued by the Justice Department, but AT&T won approval from a judge. The Justice Department is appealing the decision. This verdict is expected to be followed by a wave of mergers and acquisitions. Comcast Corp. is bidding the entertainment assets of 21st Century Fox Inc. for $65 billion.

Sen. John Sherman of Ohio helped establish antitrust laws. | Library of Congress

Criminal charges in no-poach agreements is another area of the Justice Department’s current focus. The department has signaled it could file criminal charges over anticompetitive effects of business-to-business, no-poach agreements about employees. The Justice Department and the Federal Trade Commission announced they would criminally prosecute “wage fixing” and no-poaching agreements.3 Until then, only civil charges had been filed in these investigations.

Modern tech giants might act as monopolies and present new perspectives. In his book, Economics for the Common Good, Jean Tirole offers some answers.4 Tirole is a French thinker on market power and regulation who won a Nobel Prize in 2014 for work in this area. He thinks monopolies are not ideal, but they deliver value to consumers as long as potential competition keeps them on their toes.

COMPETITORS IN MODERN TIMES

To compete in modern markets, competitors sometimes need to collaborate. Competitive forces are driving firms toward complex collaborations on such goals as expanding into foreign markets, funding expensive innovation efforts, and lowering production and other costs. The FTC website has extensive directions about the issue of collaborating with competitors.5

In today's marketplace, competitors interact in many ways, such as trade associations, professional groups, joint ventures, standard-setting organizations and other industry groups. Such dealings often are not only competitively benign but procompetitive. But there are antitrust risks when competitors interact to such a degree that they are no longer acting independently, or when collaborating gives competitors the ability to wield larger market power together. For the most blatant agreements not to compete — such as price fixing, bid rigging and market division — the rules are clear. The courts decided many years ago that these practices are so inherently harmful to consumers that they are always illegal. For other dealings among competitors, the rules are not as clear-cut and often require intensive inquiry into their purpose and effect, including any business justifications. Enforcers must ask: What is the purpose and effect of dealings among competitors? Do they restrict competition or promote efficiency?

ANTITRUST LAWS AND HEALTH CARE

Why are antitrust laws important in health care today? These laws, enacted in the past century, have an important role because health care constitutes a significant portion of the U.S. economy. U.S. health care spending was $3.3 trillion in 2016, amounting to 17.9 percent of the nation’s gross domestic product6 and growing. The financial future of the Medicare Trust Fund is looking grim each year and it is currently projected to be depleted by 2026. Social Security Trust Funds for old-age benefits and disability insurance, taken together, could be depleted in 2034.7

EXPERT'S THOUGHTS

Mousa A. Al-Abbadi, MD, CPE, FCAP, FIAC, CPHQ, ABMQ, a member of the Physician Leadership Journal editorial board, comments on this article. Click here.

Competition in this vast market ultimately will benefit consumers by containing costs, improving quality and encouraging innovation. The FTC has provided wide-ranging guidelines to health care market participants, including physicians, hospitals, pharmaceutical companies, other sellers of health care products and insurers.8 Antitrust laws explicitly prohibit practices such as price fixing, bid rigging, market division and customer allocation. The exception here is competitors working together to a certain extent, to develop new products and services and meaningfully integrate practices to share the risks.8

According to a 1996 statement jointly issued by the trade commission and the Justice Department, physician network joint ventures will be analyzed under the rule of reason if such a collaboration increased efficiency.9 “Rule of reason” is a judicial doctrine of antitrust law that says a trade practice violates the Sherman Act only if the practice is an unreasonable restraint of trade, based on economic factors.

In the 1980s and early 1990s, the Justice Department successfully prosecuted several for-profit hospitals, such as American Medical International (1984) and Hospital Corporation of America (1986), and the nonprofit Rockford Memorial (1990). However, state and federal authorities suffered a series of setbacks in the late 1990s.10 Underlying issues in antitrust laws in health care are hospital-hospital relations, hospital-physician relations, and hospital-payer relations. An unanswered question in each of these areas is how government regulation and public purchasing affect competitive markets for hospital services. These relations are complex and open to various interpretations.

STATE ANTITRUST LAWS

Most states also have produced some type of antitrust statutes aligned with federal law. Many of state statutory provisions are similar to sections 1 and 2 of the Sherman Act, and sections 3 and 7 of the Clayton and Robinson-Patman acts. State laws generally include a provision that federal laws should guide courts’ interpretation of antitrust issues. The Federal Trade Commission has successfully litigated to limit the application of state laws in some cases.

MARKET POWER IN HOSPITAL MERGERS

In a typical merger case, the Justice Department can win if it properly defines the product and the geographic market and demonstrates that the postmerger entity will have the market power. Some of hospitals successfully argue they will not raise prices even after gaining market power. Some lower courts have expanded the geographic market areas of the hospitals, thus reducing their market power and shielding them from antitrust issues. This principle was applied in United States v. Carilion Health Service, 707 F. Supp. 840 (W.D. Va., 1989) where the Justice Department sought to prevent merger of two hospitals in Roanoke, Virginia.12

The court held that the market for primary and secondary services included a 16-county area surrounding Roanoke, and the market for tertiary services reached Charlottesville, Richmond and Winston-Salem and Durham in North Carolina. The court concluded that the government failed to prove that the planned merger would constitute an unreasonable restraint of trade.

The complex nature of the health care reimbursements and removed status of the client — that is, the patient — are unique. Health care market structure might not follow the conventional market structure, allowing the courts to draw conclusions based on the market power alone.

Hospitals, even those for profit, also act as social institutions. This factor might play out in a court battle, prompting the court to base judgments on” heart” rather than “cold laws.” The most common antitrust violations result from “horizontal” arrangements that involve collusive activities by competitors in a given market. Examples are a market for a specific drug or a geographic market for hospitals in a certain region. Certain categories of restraints, such as price fixing, group boycotts, bid rigging and market-allocation agreements are per se illegal. In other cases, activities that are generally legal may violate antitrust law because they have anticompetitive effects.13

Although antitrust laws generally prohibit conduct among competitors that seeks to restrain trade, it does not forbid all interactions between competitors. Forums designed to promote value-based purchasing by providing quality information and technical support to the participants—even if competitors—is legal under antitrust laws, as long as the participants do not collectively set uniform prices, fees, bonus amounts or other competitively sensitive terms. This arrangement is thought to encourage competition in the market by giving consumers more information to better evaluate the products or service providers.

Confronted with the legal issues already mentioned, the Justice Department suffered a string of losses in antitrust litigations against hospitals in late 1990s, and hospital mergers and acquisitions rose. More than 300 hospital acquisitions occurred between 2007 and 2012.14

COLLABORATION AMONG COMPETITORS

In 2000, the trade commission and the Justice Department published guidelines15 providing the analytical structure followed by the agencies in evaluating joint ventures. They are meant to clarify the law and not depart from the established judicial principles. A collaboration analysis starts with an examination of the “nature of the relevant agreement.” The agencies assess the anticompetitive effects of the collaboration itself and any agreements within the collaboration. A “rule of reason” analysis based on facts also could be used instead of the “per se” analysis to assess the procompetitive benefits of such collaborations.

Here are some well-known cases:

• ProMedica Health System v. Federal Trade Commission, 2010: ProMedica, a dominant system in the Toledo region of Ohio acquired rival St. Luke, a community health system, in 2010. This resulted in more than 50 percent market share for ProMedica in primary and secondary services and more than 80 percent in obstetrical services. The FTC challenged the merger under the Clayton Act with the state of Ohio. The chief administrative law judge ruled that ProMedica’s acquisition harmed competition and would allow ProMedica to raise prices of general acute care inpatient hospital services in Lucas County. The judge ordered ProMedica to divest St. Luke to an FTC-approved buyer within 180 days. ProMedica appealed the decision to the Sixth Circuit, which upheld the commission's order.16

• St. Alphonsus Medical Center v. St. Luke’s Health System, 2015: St. Luke’s Health System, the largest in Idaho, acquired Saltzer, a medical group with 16 primary care providers in Nampa, the state’s second largest city, 20 miles from Boise. St. Alphonsus Medical Center, located in Nampa, alleged that this violated the Clayton act. St. Luke’s had eight PCPs and St. Alphonsus had nine in the area. The trade commission and the state of Idaho filed a complaint in the District Court in 2015.

The District Court noted the troubled nature of U.S. health care and did not dispute that the merger might confer increased efficiency. Nonetheless, the court found that the “huge market share” of the postmerger entity “creates a substantial risk of anticompetitive price increases” in the market. The court ordered divesture, rejecting the St. Luke’s argument that the anticipated postmerger efficiencies excused the potential anticompetitive price effects. The U.S. 9th Circuit Court of Appeals affirmed the lower court’s verdict.17

• Partners HealthCare's acquisition of South Shore Hospital, 2015: Boston-based Partners Health Care (the largest in Massachusetts) and South Shore Hospital, located 17 miles south of Boston, executed an agreement for Partners to acquire three acute-care hospitals and 800 physicians in Greater Boston. A previous state attorney general proposed a settlement with Partners — a guarantee of no-price increase for a certain length of time. The District Court rejected the agreement18 in 2015. The new AG threatened to sue Partners if they pursued the acquisition any further. Partners later decided not to proceed with the acquisitions. Interestingly, the court noted Partners’ high quality of care among the accompanying public comments. The court also noted that that was not the question before it.

• Merger of Advocate Health Care Network and NorthShore University Health System called off: In 2014, Downers Grove, Illinois-based Advocate Health Care, with eight hospitals, and Evanston, Illinois-based NorthShore University Health System, with four hospitals, decided to merge to create the largest health care system in northern Chicago with a market power of more than 50 percent. The trade commission and the state of Illinois complained, but the District Court sided with the hospitals. On appeal, the 7th Circuit Court granted a request for a preliminary injunction, following which the parties abandoned the plans for merger19 in 2017. The court partly based its decision on the analysis of an expert, who used the Herfindahl-Hirschman Index, an accepted measure of market concentration. It is calculated by squaring the market share of each firm competing in a market and then summing the resulting numbers. The expert found the proposed merger would result in an unlawful increase in the market concentration.

• CVS acquisition of Aetna, 2018: CVS Health, the parent of CVS Pharmacy, acquired Aetna, one of the largest health care insurers. This has provoked a congressional hearing and reactions from stakeholders, including the American Medical Association, who asked regulators to block the deal. The AMA said20 the deal would result in an "increase in premiums due to a substantial increase in market concentration in 30 of 34 Medicare Part D regional markets." Drug spending and out-of-pocket costs would increase as Aetna and CVS fortify their dominant positions in the health insurance, pharmaceutical benefit management, retail and specialty pharmacy markets that already lack competition. In the past, attempts by Aetna to merge with competitor Humana and the acquisition of Cigna by Anthem were successfully challenged by the Justice Department. A U.S. district judge is considering delaying the CVS-Aetna merger.

• United and DaVita: Optum, a leading health services company, agreed to acquire DaVita Medical Group, one of the nation’s leading independent medical groups, in 2017 for $4.9 billion. Optum is a United Health Group subsidiary and a leading information- and technology-enabled health services business company. Denver-based DaVita operates medical groups in six Western states that serve 1.7 million patients through 300 clinics. The Federal Trade Commission has requested more information under the Hart-Scott-Rodino Antitrust Improvements Act.21

CRITICS OF ANTITRUST LAWS

Antitrust laws are in place to protect consumers and smaller businesses. However, some economists say that, in reality, these laws simply punish businesses that are doing well. Some companies are deemed natural monopolies, and critics say that they should be allowed to operate with immunity instead of being governed by heavy regulations.

Spencer Waller, in an analysis22, suggests that we should decide whether to pursue traditional antitrust laws in health care or change the course. Current antitrust laws are intended as laws of general applicability, subject to any legislative exemptions and immunities. The U.S. Supreme Court has referred antitrust laws as the “Magna Carta” of the enterprise system. Large body of case law precedents have been established over the years about antitrust issues. However, Waller notes that lower courts often wage a “guerilla campaign” and have carved out their own health care antitrust doctrines. On the contrary, the Supreme Court is consistent in applying the traditional view of antitrust laws to health care.

Accountable care organizations are a new initiative by Medicare to streamline clinical care, reduce costs and improve quality. Starting from pioneer ACO models in the late 2000s, there are 561 ACOs23 all over the country with 10.5 million assigned patients. Medicare envisions ACOs as providing coordinated, high-quality care to their patients. The goal of coordinated care is to ensure that the patients get the right care at the right time, while avoiding unnecessary duplication of services and preventing medical errors. When an ACO succeeds both in delivering high-quality care and spending health care dollars more wisely, the ACO will share in the savings it achieves for the program with Medicare, according to various formulas.24 There is an arduous process to get approval from the Centers for Medicare & Medicaid Services. The startup costs of an ACO could be up to $589,000 and the average annual operating cost is $1.27 million. In response to several queries about do’s don’ts, the trade commission and the Justice Department released guidelines in 2011 regarding ACOs participating in Medicare shared savings programs.25

Antitrust issues are more relevant to private payers rather than to Medicare, because they set their own fees. However, the federal McCarran-Ferguson Act26 exempts insurance businesses from most federal regulations, including federal antitrust laws to a limited extent. It is also worth noting that two interested parties — Medicare on one side and the Federal Trade Commission and the Justice Department on the other — have different positions on ACOs. The commission and Justice have no interest in making sure ACOs work. Medicare, on the other hand, has stayed away from antitrust issues and is immune to a certain extent because of its payment structure.

The Patient Protection and Affordable Care and the Health Care and Education Reconciliation acts, both enacted in 2010, seek to improve the quality and reduce the costs of U.S. health care. They encourage physicians, hospitals and other stakeholders to be responsible for the health of a population through integrated health care delivery systems. One delivery mechanism is the Medicare Shared Savings Program, implemented through ACOs. This was the motivation for the federal guidelines25 outlined earlier. Despite somewhat relaxed rules, the federal agencies clearly state that they are committed to fostering competition, even in ACO markets involving non-ACO participants. They are also closely monitoring ACO behavior.

The guidelines establish an “antitrust safety zone” for ACOs. ACOs can request an expedited review from the trade commission and the Justice Department for situations outside this safety zone. The guidelines specifically state that “antitrust laws treat naked price-fixing and market-allocation agreements among competitors as per se illegal.” The guidelines leave several gray areas that are still open to interpretation. ACOs and other practitioners are cautioned not to exceed their mandates in forming joint collaborations. The guidelines also stipulate that an ACO shall not have more than 30 percent of the primary service market share.

Another important caveat is that federal guidelines do not describe clearly what “clinical integration” means. They define it in broad, conceptual terms. This flexibility is a departure from the approach of CMS, Health and Human Services’ Office of Inspector General, Internal Revenue Service and other agencies that oversee the highly regulated health care sector27.

Agencies such as Medicare are a “monopsony” (lone buyer) power and providers are “price takers.” Because of this, traditionally there has been little interaction between Justice and Medicare in the antitrust enforcement realm. The effects of ACOs in the private insurers’ world is another unknown factor if ACOs expand to cover patients insured by private payers. Moving forward, CMS is going to share ACO participant data and claims data with the trade commission and the Justice Department.23

EFFICIENCY DEFENSE

It is common in health care for merging parties to argue that the transaction will result in greater efficiency. Bjorklund has extensively studied this issue.28 Before asserting an efficiencies defense, a plaintiff must first establish on the surface that a merger is anticompetitive. Once a plaintiff has established a prima facie showing of a Section 7 Clayton Act violation, the burden of proof shifts to the defendant to rebut the presumption of anticompetitive effects.

The entity or entities seeking the merger (usually the defendant) carry the burden of showing that the alleged efficiencies created by the merger are verifiable, not attributable to reduced output or quality, merger-specific and sufficient to outweigh the transaction’s anticompetitive effects. The evidence of the alleged efficiencies cannot be “mere speculation and promises about post-merger behavior.” In the St. Luke’s case, the court demanded proof of extraordinary efficiencies because of the high market concentration to refute anticompetitive concerns.

FUTURE OF HEALTH CARE ANTITRUST

New antitrust bills or amendments are likely to be introduced in both in the House and Senate in the near future. The Congressional Antitrust Caucus plans to back bills to “modernize” antitrust laws. A current House bill would direct antitrust agencies to study the impact of mergers by requiring the trade commission and Justice to assess a merger’s effect on price and quality of products, along with job cuts and pay.

Amendments to the Clayton Act also have been suggested. It is also important for various federal agencies such as Medicare, the trade commission and Justice to work together to formulate an efficient and dynamic antitrust policy.

Physicians, physician leaders and physician executives have a vital role to play in this regard. Physician organizations should advocate for modernized antitrust laws by lobbying and working with Congress. Exposure to business principles, including enrolling in business courses, will prepare the 21st-century physician to face these challenges.

As evidenced by the current laws and the court cases described earlier, it is clear the antitrust environment in health care is evolving. We cannot afford the ever-increasing cost of health care that threatens the very fabric of the U.S. economy and adversely affects its competitiveness. The options are either to retain the classic antitrust laws as currently practiced with some exceptions or change course.

The logical approach will be to develop comprehensive antitrust policies specific to health care. Even though this might be the ideal solution, the task can be difficult and long-drawn because of the current political environment and the clout of the stakeholders involved.

Dileep Kumar, MD, FACP, CPE, is a hospitalist for East Michigan Hospitalists, based in Port Huron.

REFERENCES

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