Campbell Bill to Except Health Care Professionals from Antitrust Criticized by AAI

Oct 18 1999
Testimony and Interventions

Rep. Henry Hyde, ChairmanCommittee on the JudiciaryRHOB Room 2110U.S. House of RepresentativesWashington, DC 20515

Dear Chairman Hyde:

The American Antitrust Institute, an independent consumer-advocacy, education, and research organization focusing on competition issues,1 strongly opposes the passage of HR 1304 (the "Quality Health-Care Coalition Act of 1999"), a bill that has been referred to the House Committee on the Judiciary. HR 1304 has the stated aim "[t]o ensure and foster continued patient safety and quality of care."2 HR 1304 would ostensibly accomplish this goal by allowing physicians and other health-care professionals to bargain collectively with health plans, free from the usual antitrust restrictions on such activity.3

In our view, although HR 1304 is motivated by real problems in the health-care system, it is far more anti-competitive than its purposes require. Any benefits of the bill, we feel, would be more than outweighed by its predictable harms. Substantially higher health-care costs would be borne by the many consumers who would suddenly be subject to cartel pricing, including those for whom any quality-related benefits of the bill would be small or nonexistent.4

History teaches us to be leery of both businesses and professional service providers seeking protection from the forces of competition. Time and again, collusion has proved inimical to consumer interests, even when it comes cloaked in the rhetoric of professionalism and quality enhancement -- as it often does.5 With the high degree of market power that HR 1304 would make available to physicians, the temptation to collude against consumer interests is likely to prove irresistible, even for the most well-intentioned professionals.

In the few U.S. industries that are exempt from the antitrust laws or are subject to only limited antitrust scrutiny -- such as the business of insurance and the business of running agricultural co-operatives -- the antitrust exemptions or limitations have generally been accompanied by regulatory oversight of the competitive process.6 HR 1304, on the other hand, would toss out the antitrust laws without adding any such regulation, leaving the consumer without the benefits of either antitrust law or public regulation.7

It is important to note that for most medical services, the relevant geographic market is at least the size of a metropolitan area, and in some cases is larger. In many such markets, it is unlikely that health plans have enough market power to force quality concessions on unwilling health-care professionals. For example, in 18 of the nation's 20 largest metropolitan statistical areas, the largest single HMO/POS plan in the area covers fewer than 20% of its residents, according to Interstudy MSA Profiles, 1998, as cited in testimony by The Antitrust Coalition for Consumer Choice in Health Care. In about half of these cases, the figure is less than 10%. Clearly, these are not monopolies or anything close to them. HR 1304 does not limit its antitrust immunity to those precise parts of the country where health-plan market shares are high, but applies to all markets equally. Thus, it is dangerously overbroad in its coverage.

More importantly, HR 1304 overreaches by addressing a supposed quality problem with an antitrust exemption that touches not only quality, but also price. Given a particular choice of quality level, HR 1304 allows physicians and other health-care professionals to collude with impunity on the prices they will charge for that level of quality. This cannot plausibly advance the bill's stated goal of helping patients. For instance, if all of the obstetricians in a given county banded together to demand a 15% (or 20%, or 30% . . .) increase in the price of a Caesarian section -- as they could do under HR 1304 -- how could this ameliorate poor quality practices by local health insurers?

Collusion on price is likely to lead to nothing but -- of course -- higher prices. According to a recent study by Charles River Associates, the increase in professional-service prices resulting from HR 1304 would raise health-care costs by about $17.8 - $27.4 billion annually, or roughly $77 - $119 out of the pocket of every insured person in the country.8 That's the amount consumers would pay due to increased prices, on the assumption that they would purchase the very same services as they do today. (It does not include the cost of any expansion in the number of medical procedures performed.)

Whatever the exact figures, no elaborate studies are needed to see why price would increase substantially under HR 1304. Consider the case of physicians. If all the physicians in a particular specialty and a particular geographic region banded together, as this bill invites them to do, they would have tremendous market power, far outweighing the power of most health plans.9 Most of the services performed by physicians have no acceptable substitutes. Consumers are at their mercy. What's more, new entry into the market is slow and unpredictable. Unlike entry into most other businesses, entry into a particular medical specialty is restricted by state licensing requirements. And organizations of physicians significantly influence the state-licensing process, as well as helping to make decisions about how many residencies to allow in each specialty in a given year -- which is the main determinant of the supply of potential entrants in future years.

On top of the projected price increases, the Charles River Associates study projects additional yearly costs in the range of $14.8 - $52.6 billion due to the expected increase in the number and intensity of medical procedures carried out under managed-care plans, plus the resulting increase in health-care utilization by non-managed-care plans. This cost projection calls for a more nuanced analysis. If the increase in utilization actually raises quality from a sub-optimal level to a more nearly optimal level, and costs increase concomitantly, then consumers may indeed benefit. However, there is ample reason to believe that health-care professionals, if left to set quality unilaterally with no budget constraints whatsoever, would choose a super-optimal level of utilization, because they themselves would profit from extra medical procedures, even ones that consumers do not want to pay for.

This brings us to another fundamental problem with HR 1304: it implicitly assumes that health-care professionals are the best arbiters of health-care utilization levels. They are not. Neither are insurers. Certainly, health-care professionals are experts regarding the clinical aspects of medicine, and can provide valuable information to consumers on that topic. But typically they are not experts in the cost side of the cost/quality tradeoff. They cannot know about the budget constraints of their particular patients, and about the competing needs that must go unmet when consumers spend their money on high insurance premiums -- needs such as education, housing, food, and so on. Indeed, under a fee-for-service model, health-care professionals have a strong financial incentive to increase the number and intensity of medical procedures beyond their efficient levels, since each new procedure brings additional revenue to the care-giver. While insurers are experts in cost-containment, they have an economic bias that may lead to under-utilization. Only consumers themselves, and groups of consumers, can integrate information about quality with information about cost, to select the preferred cost/quality balance. Therefore, consumer opinion, not the opinions of physicians or insurers, should primarily inform any legislative decisions about the optimal quality of health care.10

In the past, health-care providers have been known to resist cost-containment efforts through collusive action.11 How much more would they do this if collusion were suddenly legalized? Health-care professionals would likely view the faceless, profit-focused health plans as the deserving victims of their collusion. But employers and consumers would bear the ultimate economic burden.

The AMA's Dr. Anderson testified that in the view of his organization, "it is not healthy for any group to have virtually unlimited power over a matter as significant and sensitive as the kind of medical treatment needed by an individual with an illness or injury." "When that unlimited power exists," he continued, "it is inevitable that distortions will occur . . ." Although he was talking about insurers, HR 1304 would give health-care professionals precisely the sort of power Dr. Anderson was talking about.

If health-care professionals are concerned about shortcomings in the quality of care in this country, there are many things they can do jointly that pose minimal antitrust threat, if carried out under the guidance of competent antitrust counsel. For example, they can jointly

(i) lobby for a powerful version of the "patients' bill of rights" that has a chance to become law in the near future -- including an expansive right to sue health plans for malpractice-like behavior, and an accessible, independent process for reviewing a health plan's medical decisions that are called into question by the patient and physician;

(ii) press for more rigorous antitrust enforcement against health-plan mergers, or for additional legislation limiting the market power of a single health plan in any given region;

(iii) inform health plans, employers, and patient groups about quality issues, including the irresponsible practices of health plans; and

(iv) form networks or new managed-care companies, which compete directly with sub-standard health plans.

Health care is an industry in transition, and there are likely to be problems with both the clinical and economic sides of the business, as patients, employers, insurers, and health-care providers cast about for the best model. But jettisoning antitrust policy altogether, in this large and important area of the economy, is a meat-cleaver solution that would do far more harm than good.


Albert A. Foer, PresidentAmerican Antitrust Institute

Matthew D. Siegel, Research FellowAmerican Antitrust Institute

Bcc: Cong. Conyers; Sen. Hatch; Sen. Leahy; Sen. DeWine; Sen. Kohl

1 The AAI is described on its web site, The AAI is supported by donations from a variety of foundations, law firms, corporations, trade associations, individuals, and others. Certain contributors or prospective contributors may have an interest consistent with the positions taken here, although all positions are derived through an independent internal process. 2 Along the same lines, E. Ratcliffe Anderson, Jr., chief executive officer of the American Medical Association, said in testimony before the House Committee on the Judiciary that "[t]he need to level the playing field in health care contract negotiations is not about restoring some market power to physicians. It is about restoring the balance in favor of adequate representation and appropriate treatment of patients." 3 Both statutory and non-statutory labor exemptions assure that antitrust laws do not apply to the collective bargaining of trade unions directed to promoting the employment interests of their members. In HR 1304, many independent contractors are seeking permission to bargain jointly. Health-care professionals who are employees can already form unions, and so do not need HR 1304. 4 In the 1970s and early 1980s, physicians had nearly complete control over the level of medical care given, and they did not typically provide substantial discounts to large payers as they do today. This was a major cause of the well-known crisis in health-care costs, leading to the managed-care system that we have today. Under HR 1304, not only would physicians be free to specify the level of care, but they would also have legal sufferance to build monopolies through open collaboration, which they did not have during the health-care crisis. Thus, cost increases resulting from HR 1304 might rival what we saw in the 1970s and early 1980s. 5 See F.T.C. v. Indiana Federation of Dentists, 476 U.S. 447 (1986), and National Soc. of Professional Engineers v. U.S., 435 U.S. 679 (1978). These cases share a common theme with the debate on HR 1304. In all three circumstances, a group of professionals whose professional training, desire for more enjoyable work, and economic interests all instruct them to select a high level of utilization of their services to solve a particular problem, band together to guarantee such high utilization, despite its added costs, claiming that the restraint on trade is compelled by ethics or quality concerns. 6 The Capper-Volstead Act of 1922 strengthened the antitrust exemption for agricultural co-ops, but simultaneously (in Sec. 2) authorized the Secretary of Agriculture to proceed against co-ops that have monopolized or restrained trade "to such an extent that the price of any agricultural product is unduly enhanced." The McCarran-Ferguson Act of 1945 reserved to the states the power to regulate and tax the business of insurance, thus exempting the industry from antitrust law. However, according to the act, the federal antitrust statutes are to be applied to the "business of insurance to the extent that such business is not regulated by State Law." Both of these examples point to the same general principle: Federal antitrust law is weakened only as other government authorities are given oversight of the competitive process, so that industries will rarely be left with no regulatory or statutory enforcement of fair competition. 7 Perhaps the closest precedent in American history for what is proposed in HR 1304 is the National Recovery Act of 1933, Depression-era legislation that encouraged associations of businesses to set prices and other terms of trade. In effect, antitrust law was suspended and the industrial associations functioned as industrial governments. These associations were unable to solve a series of political problems and could not deliver on re-employment. The eventual response was the arrival of Thurman Arnold as head of the Antitrust Division in 1937 and the revival of antitrust enforcement. We see no reason to believe that HR 1304 would be any more successful. 8 The study was apparently commissioned by an interested party for purposes of opposing physician negotiation legislation. We have not examined the methodology used and therefore do not endorse the precise findings of the study. We do endorse the logic that concludes that if physicians and other health care providers are permitted to collude, consumers will pay significantly more for health care. 9 It is interesting to note that the American Academy of Nurse Practitioners, the American College of Nurse Midwives, the American Optometric Association, the American Physical Therapy Association, and similar groups have joined forces to oppose HR 1304, even though the bill would grant them the same freedom to collude against health plans that it confers on physicians! These groups oppose the bill because they fear that physicians will use their superior leverage to crush their non-physician competitors, for instance, by refusing to deal with health plans that allow these other professionals to carry out certain procedures. These fears are not merely theoretical. For instance, in Medical Staff of Memorial Med. Ctr., 110 F.T.C. 541 (1988), a group representing the majority of the practicing physicians in Savannah, Georgia, protested when hospital privileges were granted to a nurse-midwife, and several obstetricians affiliated with the group threatened to shift patients to another hospital based on the decision; and in Wilk v. American Med. Ass'n, 895 F.2d 352 (7th Cir.), cert. denied, 498 U.S. 982 (1990), the Seventh Circuit Court of Appeals declared unlawful a boycott by the American Medical Association, which sought to prevent physicians from referring patients to or accepting patients from chiropractors. 10 The competence of consumers to quality-shop in the health-care market was addressed by the U.S. Supreme Court in F.T.C. v. Indiana Federation of Dentists, 476 U.S. 447 (1986). There the Court dealt with a claim by health-care professionals that health insurers competing for clients would tend to make inaccurate decisions about utilization levels, in particular, that the insurers would refuse to pay for certain necessary dental procedures if they were allowed to evaluate the patients' x-rays without considering other information that was available only to the dentist. "The argument is, in essence, that an unrestrained market in which consumers are given access to the information they believe to be relevant to their choices will lead them to make unwise and even dangerous choices," wrote the Court. "Such an argument amounts to 'nothing less than a frontal assault on the basic policy of the Sherman Act'" [quoting National Soc. of Professional Engineers v. U.S.]. 11 For instance, in Mesa County Physicians Independent Practice Ass'n, FTC Dkt. No. 9284, 63 Fed. Reg. 9549 (Feb. 25, 1998), 85% of the physicians in a single county banded together to negotiate higher prices with managed-care plans; in FTC and Commonwealth of Puerto Rico v. College of Physicians-Surgeons of Puerto Rico, Trade Reg. Rep (CCH) 24,335 (D.P.R. 1997), physicians called an eight-day strike, during which they refused to provide non-emergency care, in order to achieve their goal of higher compensation for care to the indigent; and in Trauma Assocs. of N. Broward, Inc., 118 F.T.C. 1130 (1994), ten trauma surgeons refused to deal individually with two hospitals, threatened to stop providing trauma services if their price terms were not met, and walked out of one trauma center, forcing it to close.