Antitrust & Rural Health

An Issue Paper Adopted By The National Rural Health Association, May 1996



The Purpose Of Antitrust Enforcement: To Protect And Encourage Competition

"The major federal antitrust laws prohibit price fixing, boycotts and similar agreements among competitors that produce anti-competitive effects. They also prohibit mergers, acquisitions or joint ventures that would lessen competition or create monopolies. The antitrust laws are designed to preserve competition, not competitors. Consumer choice is increased by assuring that providers do not collude to restrict the range of prices and available services, and by assuring that providers compete for patients by offering a range of desirable services at reasonable prices." (1.)


A Key Health Policy Question: Where Competition, Where Cooperation?

What balance, if any, do we need to achieve in health care between competition and collaboration? An advocate for pure competitive models might remind us that "good fences make good neighbors." But there is more to Robert Frost's poem "Mending Wall": "I let my neighbor know beyond the hill, and on a day we meet to walk the line and set the wall between us once again..." Even this American icon to self-sufficiency is expressed within the cultural context of selective cooperation. Competition and cooperation are not mutually exclusive; both have deep roots in our culture. (2.)

The formation of appropriate public policy on the question of applying antitrust laws to health care is particularly tough because on this topic many of us firmly hold contradictory values that lead us to develop contradictory goals. With health care, we want to avoid wasting scarce public resources (and we typically define duplicative services as wasteful), but we seek consumer choice and competitive markets that by definition require alternative, duplicative services. Such is the duality the issue of antitrust and health care forces us to address.

Antitrust laws have been around for a 100 years but they generally have not been seen as relevant to health care until recently. Given the unique economics and characteristics of the industry, any policy discussion about antitrust and rural health has to grapple with the question of the applicability of traditional antitrust laws to health care overall. In addition, consideration needs to be given that rural health fits the competitive model even less well and is probably less appropriately a target for traditional antitrust enforcement. (3.)


The Rural Specific Questions?

On one hand, the benefits of strong antitrust enforcement are likely to be seen as a benefit, as rural providers and networks have become increasingly concerned about potential "predatory" practices of large health care and insurance systems. On the other hand and probably more obvious, antitrust laws are seen as a possible limitation to the development of local rural health systems. Depending upon which perspective one chooses, either a positive or negative "spin" can be put on rural network formation; the following are practical examples of this point:


From the perspective of a natural chronology of policy development, it is still early days. The competitive pressures in rural markets are still relatively new. On one hand, we may not yet have seen the most egregious attempts to colonize vulnerable rural markets; on the other, most rural providers have just begun to seriously address the need for greater collaboration in order to operate in increasingly competitive markets.

We must think through the solution for
a problem that is only now beginning to be experienced.

The primary issue for rural advocates today is not so much whether we've had antitrust problems in the past but how we can assure antitrust protection for local care givers and communities in the future while at the same time we move more rapidly towards the greater use of collaborative models that unavoidably bring with them the need to address traditional antitrust restraints. Those who benefit from rural providers remaining fragmented and vulnerable to "take-over" are the first to attempt to deflect the discussion by claiming there has been little evidence of need. It is our job to describe and solve that need as it is now unfurling.

How should long standing antitrust principles apply to rural communities? The dominant paradigm that health care is reinventing itself into mutually exclusive vertically integrated competing systems does not describe well much of rural health. Local networks of rural providers are organizing themselves "horizontally" so as to contract with multiple, vertically integrated competing systems. In other (more "remote") rural areas a non-competitive model based on a single system is seen by some as more appropriate. Does antitrust enforcement need to be modified to encourage competitive models in rural areas? Should antitrust enforcement be limited in areas where the success of competitive models is determined to be very unlikely?


Federal Antitrust Enforcement - What We Know

The U.S. Department of Justice and the Federal Trade Commission has issued "nine statements of their antitrust enforcement policies and analytical principles ("safety zones") relating to mergers and various joint activities in the health care area." (4.) A summary of their first eight principles developed by the North Carolina Rural Health Research Program is noted below in a condensed format: (5.)

1. Mergers. Most mergers between two hospitals where one has fewer than 100 beds and a three year average occupancy below 40% will fall within a safety zone.

2. Joint Ventures Involving High Technology. Generally no challenge if only includes the minimum number necessary to own or operate the equipment.

3. Joint Ventures Involving Specialized Clinical Services. Agencies have never challenged an integrated joint venture providing a specialized or expensive service.

4. Collective Provision of Non-Fee Related Information. Supplying purchasers with outcome data or jointly developing practice parameters is generally acceptable.

5. Fee-Related Information. A third party must be responsible for managing the collection of information that will be given to purchasers. If information is shared among or available to competing providers, it must be more than three months old.

6. Provider Participation in Exchanges of Price and Cost Information. Same as above.

7. Joint Purchasing Arrangements. Generally not challenged if purchases are less than 35% of total sales of product/services in the market and the cost of product/services being purchased accounts for less than 20% of each purchasers revenues.

8. Physician Joint Ventures. Not generally challenged if a non-exclusive physician network comprising 30% or fewer of the physicians in each physician specialty who practice in a market if there is 'substantial' financial risk for its participants.


Federal Antitrust Enforcement - What We Don't Know

The Agencies' ninth statement pointed up the existing ambiguities in applying these principles to health care systems and multi-provider networks: "Because multiprovider networks are relatively new to the healthcare industry, the Agencies do not yet have sufficient experience evaluating them to issue a formal statement of antitrust enforcement policy or to set out a safety zone. The Agencies recognize, however, that guidance on antitrust issues raised by multiprovider networks is of vital importance to the health care industry." (6.)

The Supreme Court declined to take up the bludgeon offered it by BlueCross against Marshfield, lending credence to Marshfield's oft stated position that this was not a case primarily about antitrust but an example of an insurer's attempt to use the law to coerce a business deal and provider compliance. However, speculation about the motivation of individual behaviors in this case should not deflect us from the ongoing need to fine tune our understanding of what constitutes appropriate antitrust enforcement in rural health. "The real suspense will come when enforcement officials try to reconcile apparent contradictions between federal antitrust guidelines and the Marshfield opinion written by federal appeals court Judge Richard Posner, which is now law. In overturning the original jury verdict against Marshfield, Posner offered a much less restrictive interpretation of the market power of physician networks than the policy currently enforced by antitrust officials." (7.)
Several statements from Commissioner Christine A. Varney of the Federal Trade Commission have indicated, at least a personal willingness, to develop more flexible federal guidelines (it has been speculated that this flexibility may be driven by the threat of H.R. 2925 discussed later in this paper):

"In rural areas, for example, the number of providers is by nature limited. I would caution against any rule that would, across the board, make it impossible for rural area providers to engage in procompetitive exclusive arrangements. I stress procompetitive arrangements, because I also believe that consumers in rural areas should be able to expect the same procompetitive benefits of the antitrust laws that we afford consumers everywhere. My sense is that much of the special nature of rural markets will be captured by efficiencies arguments and, consequently, that the best way to ensure that we are sensitive to rural concerns is by being sensitive to efficiency concerns." (8.)

" 'I would like to see us attempt if possible to expand the safety zones' offered for provider networks, as well as emphasize that the agency should take a 'sliding scale' approach to analysis of such cooperative arrangements among competitors." (9.)


While the politics of these issues percolate, more rural networks are making use of their right to apply for a business advisory letter from the federal Department of Justice under current federal rules and interpretation. The Rural Wisconsin Health Cooperative and, it appears from the published list of favorable business advisory letters, others have found the Department of Justice trying to be helpful. Business advisory letters are being approved that facilitate rural providers entering into collective discussions with HMOs and other payers that stop just short of allowing discussion/negotiation about price amongst rural "competitors."


Federal Policy Option - Modify Antitrust Laws To Better Reflect Rural Conditions

Congress is in the process of considering modifying the application of the antitrust laws to health care provider networks that provide health care services. It is thoughgt that rural providers would be able to form more collaborative solutions to the challenges of serving rural communities if they can anticipate being judged under the "rule of reason" rather than being at risk for having their conduct judged illegal per se. ("Per se" violations relate to conduct such as competitors agreeing up front what they will charge a third party; this conduct has been traditionally codified as never justified as they are acts "so pernicious that they always will be condemned." (10.) ) Under such an approach, all such conduct would be judged on the basis of its reasonableness, taking into account all relevant factors affecting competition, including the effects on competition in properly defined markets.

"House Judiciary Chairman Henry Hyde (R-IL) and House Ways and Means Chairman Bill Archer (R-TX) has introduced the "Antitrust Health Care Advancement Act of 1996" (H.R. 2925). This legislation would require that the conduct of a health care provider network, as defined in the legislation, be judged on the basis of its reasonableness ("rule of reason" treatment). This means that legitimate physician networks would not automatically be subject to the "per se" illegal rule with its criminal penalties if the network meets the substantive criteria of the bill."

"H.R. 2925 would not exempt provider networks, as defined in the legislation, from the antitrust laws. The bill merely applies the well-established rule of reason test to the conduct of legitimate provider networks, which means that networks that engage in anticompetitive conduct in any market would be in violation of the antitrust laws and could be prosecuted to the full extent of the law." (11.)


State Policy Option - Exercise State Immunity From Antitrust Enforcement

"Immunity from antitrust laws can be created when, for public policy reasons, lawmakers or the courts determine that overwhelming benefit is created by the immunity granted." (12) One such type of immunity known as "state action immunity" is widely seen as a potential rural health policy alternative, or supplement, to antitrust enforcement. It is increasingly being used around the country. To date, at least 21 states have passed laws that intend to establish a process by which providers can apply for an immunization by the state of various collaborative arrangements, a process frequently referenced as obtaining a Certificate of Public Advantage (COPA): (13.)

Colorado,Florida, Georgia, Idaho, Kansas,
Maine, Minnesota, Montana, Nebraska, New York,
North Carolina, Ohio, Oklahoma, Oregon, South Carolina,
Tennessee, Texas, Vermont, Washington, Wisconsin, and Wyoming.


The initial use of these laws has been limited given (1) uncertainty about their effectiveness as a preemption of federal enforcement, (2) an understandable preference among providers to avoid unnecessarily committing to state COPA regulations and (3) the still developing perceived need by rural providers for greater collaborative enterprises. Over the year, announcements in the media seems to indicate a marked increase in the number and size of projects for which a COPA has been given. The following news items give some sense of the diverse use states are beginning to make of the state action immunity doctrine.

State COPA statutes are new and untested; what is most known about them comes from the application of state action immunity principles in other arenas. In FTC v. Tocor Title Ins. Co., the Supreme Court held that a "system of passive regulation did not constitute active supervision, because the mere potential for state supervision is not an adequate substitute for a decision by the state. Unfortunately, the court only decided what does not qualify as active supervision but failed to clearly say what does constitute sufficient active supervision." (19.)

In addition to determining how to operationalize "active, substantive" state supervision, other questions states need to consider include:


NRHA Policy

a. NRHA believes that the conduct of a health care provider network should be judged on the basis of its reasonableness ("rule of reason" treatment) and not automatically be subject to the "per se" illegal rule.

b. NRHA will aggressively promote the timely development of rural sensitive network guidelines by the Department of Justice and Federal Trade Commission.

c. NRHA will promote the passage and implementation of rural sensitive state action immunity legislation and regulation within each state.

These initiatives should explicitly address what is to be expected by rural providers and communities in terms of both antitrust protection and restrictions.


NRHA Statement Of Outcome

There are three desired outcomes to the above noted possible positions:

a. the resolution of a major uncertainty factor re rural network development.

b. a set of federal guidelines that facilitates rural providers working collaboratively with each other and being able to jointly and fairly negotiate with payers.

c. maximizing the use of state action immunity in non-competitive markets.


Notes

1. HMO Managers Letter, Group Health Association of America, 3/17/94.

2. Size, Tim. "Strategic Alliances: Some Lessons from Experience" in Partners for the Dance: Forming Strategic Alliances in Health Care, edited by Arnold D. Kaluzny, Howard S. Zuckerman, and Thomas C. Ricketts, III.. Ann Arbor, MI: Health Administration Press, 1995, p 40.

3. Conversation with Burton A. Wagner, health lawyer with Katten, Muchin & Zavis, of Madison, Wisconsin, April 10th, 1996.

4. The Statements of Enforcement Policy and Analytical Principles Relating to Health Care and Antitrust issued by the U.S. Department of Justice and the Federal Trade Commission on September 27, 1994, 1.

5. Rural Healthcare Providers and the Law; An Issue Brief, North Carolina Rural Health Research Program, Cecil G. Sheps Center for Health Services Research, February, 1966, 4.

6. The Statements of Enforcement Policy and Analytical Principles Relating to Health Care and Antitrust, 67.

7. American Medical News, American Medical Association, April 15th, 1996, page 1.

8. "New Directions At The FTC: Efficiency Justifications In Hospital Mergers And Vertical Integration Concerns, Prepared Remarks Of Commissioner Christine A. Varney, Federal Trade Commission, Before The Health Care Antitrust Forum, Holiday Inn­p;Mart Plaza, Chicago, Illinois," May 2, 1995

9. BNA's Health Law Reporter, April 4th, 1996, page 498.

10 The Role Of Antitrust Immunity In The Washington State Health Care Market, Report To The Washington State Legislature, Antitrust Division, Office of the Attorney General, State of Washington. December 15, 1995, 5.

11. "Physician Antitrust Relief," Press Release, American Medical Association, February 26, 1996.

12. The Role Of Antitrust Immunity In The Washington State Health Care Market, Report To The Washington State Legislature, 11.

13. Moscovice, Ira.. "State Action Immunity: What Have Other States Done?," presentation to a policy forum sponsored by the Wisconsin Network for Health Policy Research and the Rural Wisconsin Health Cooperative, January 30th, 1996.

14. HMO Managers Letter, Group Health Association of America, April 10th, 1995

15. ModernHealthcare, February 12th, 1996, 46.

16. ModernHealthcare, February 12th, 1996, 30.

17. ModernHealthcare, March 11th, 1996, 30.

18. ModernHealthcare, March 11th, 1996, 32.

19. The Role Of Antitrust Immunity In The Washington State Health Care Market, Report To The Washington State Legislature, page 14.