U.S. Department of Justice Seal



Address by

Assistant Attorney General
Antitrust Division
U.S. Department of Justice

Before the
National Council of Community Hospitals

Washington, D.C.

March 18, 1994

The subject of my remarks today -- antitrust health care issues in the Clinton Administration -- could not be more current. The Administration has presented its plan for implementing changes in the current health care system, and Congress is engaged in active deliberations on the issue of how best to reform the nation's health care system. Before discussing that issue, however, let me first focus on some specific enforcement actions of the Antitrust Division in the health care area.

First, I want to discuss a topic of great potential importance to many of you here today, hospital mergers. As many of you know, last September the Division and the FTC issued Statements of Antitrust Enforcement Policy in the Health Care Area. One of those Statements specifically addressed hospital mergers. We had heard concerns from small hospitals in rural areas that the antitrust laws were preventing potentially efficient merger transactions that could lower hospital costs to consumers. As a result, we established a safety zone that would allow such hospitals to consolidate their operations and thus lower costs to consumers. A hospital merger transaction falls within the safety zone if one of the hospitals has under 100 licensed beds, has an average inpatient census of fewer than 40 patients and is at least five years old.

In assessing merger transactions falling outside of the safety zone, the Division applies the same analysis that it uses in all industries -- the 1992 Merger Guidelines. In analyzing hospital mergers in particular, often a key area of inquiry is whether the merger will allow the merging parties to realize efficiencies that could not otherwise be realized, and whether such benefits will outweigh the potential anticompetitive harm. I would note in this regard that claims of efficiencies are easy to make, but more difficult to establish. Generalized claims without backup support, or claims relying on flawed studies, or claims based on reorganization that is not supported by testimony of the doctors involved simply will not be sufficient to persuade the Division that the transaction is good for consumers.

Finally, with respect to hospital mergers, some have argued that the enforcement decisions of the Division and the FTC are inconsistent. That is simply wrong. The Statements of Antitrust Enforcement Policy were a joint effort, and the 1992 DOJ/FTC Merger Guidelines, which are used to analyze mergers outside the safety zones, also were a joint product of the Agencies. Both Agencies are reading from the same page on health care generally and hospital mergers in particular. When there are differences in enforcement, those differences stem from differences in facts, not differences in how the Agencies enforce the antitrust laws. Many of you may be familiar with the cases of proposed hospital mergers in Manchester, New Hampshire and Pueblo, Colorado. It is solely the factual differences between those two situations that led to the different enforcement actions. In Pueblo, only two hospitals were in the market (and those of you who have been to Pueblo know that there is no town close enough to Pueblo to justify expanding the market beyond Pueblo), while in Manchester, our comprehensive investigation revealed that numerous others competitors existed in nearby communities. It was geographic market definition, based on facts, that led to the differing results, not different enforcement policies.

My talk today is topical, because earlier this week the Antitrust Division filed an antitrust case against eight hospitals and two associations in Utah. The hospitals were charged with illegally conspiring to exchange current and prospective wage information regarding registered nurses. The complaints allege that the effect of the conspiracy was to stabilize registered nurse entry wages and limit the amount and frequency of wage increases. This could lead, of course, to a shortage of nurses and harmful effects on health care -- a principal reason that wages, like prices, must be the result of a competitive market. In addition to the Statement of Antitrust Enforcement policy on hospital mergers, one of the other Statements addressed hospital participation in exchanges of cost and price information. We are generally aware that such exchanges are occurring with increasing frequency in the industry. It is important, however, that hospitals and their counsel structure such exchanges to avoid competitive concerns.

The safety zone contained in the Statement covers written surveys managed by third parties that exchange historical (more than three month old) and aggregated data. Exchanges of individual competitors' present and future wages and prices are likely to be anticompetitive. As the complaints allege, we believed that to be the case in Utah, and that was why we filed suit. The eight hospitals have now agreed to conform their actions to the Health Care Policy Statements.

The Antitrust Division is first and foremost an enforcement agency. Its role is to bring challenges to actions that harm consumers. In many industries, such actions can have nationwide implications. In the health care industry, however, it is typically the case that markets are local, not regional or nationwide. But the amount of commerce affected in the case being litigated is not an appropriate gauge of its importance. The Division chooses its enforcement actions with an eye to cases that can establish important general principles. The precedential effect of such health care cases extends far beyond the limited local market that is the focus of the particular case.

Two issues that the Division plans to examine carefully are the effects of most favored nations clauses and potential vertical foreclosure issues. Most favored nations clauses can be anticompetitive when imposed by a company with a dominant market share. Hospitals, for example, may be unwilling to work out a certain level of reimbursement with smaller plans, if they have to agree to the same level of reimbursement for the dominant plan. Such clauses, therefore, could prevent lower consumer prices and inhibit new entry. The Division filed an opinion letter in September, 1993, with the Pennsylvania Insurance Commission expressing its concern about such a contract with Blue Cross/Blue Shield of Western Pennsylvania, and we are actively looking for cases to challenge conduct in this area in markets in which we believe it poses a problem.

The Division would be concerned about vertical foreclosure risks to competition if a healthcare plan signs contracts (particularly exclusive contracts) with such a large percentage of the available providers that new plans are not able to enter the market because of a shortage of available providers. One case in which this fact pattern was alleged is Healthsource v. Healthtrust. We also are actively seeking other cases in this area.

Many of you are intimately familiar with the proposals for health care reform. I am proud to be a member of President Clinton's Administration, in part because he has had the courage to address this area, which is crucial to everyone in this country. The President's proposal, the Health Security Act, is premised on the cornerstone principle that competition is important in health care. The Act seeks to encourage competition, by having more plans directly competing to sign up consumers. I firmly believe that competition protected by effective and reasonable antitrust enforcement policies should and will continue to play a prominent role as health care markets evolve.

I am also proud of the fact that the Act contains no antitrust exemptions. With health reform "on the table," there are doctors and others that would like to operate in a fashion to create broad antitrust exemptions in the health care area. I oppose those efforts. Over time, it has been recognized that antitrust exemptions can harm competition, and thus increase costs, decrease quality, and discourage innovation. Those that support exemptions typically assert that the antitrust laws are so rigid that they generally would prohibit either efficient provider cooperation or consolidation of resources that would significantly reduce health care costs. Quite frankly, this is a characterization of the antitrust laws that is fundamentally wrong; it is not supported by governmental enforcement policy or court decisions.

While price fixing among independent providers remains clearly illegal, the courts and the federal enforcement agencies have increasingly recognized that many forms of collaborative activity among rivals can have procompetitive effects. Modern antitrust analysis appreciates the benefits of risk reduction and economies of scale and scope. As a result, joint ventures and mergers generally receive favorable treatment under the antitrust laws. Our Health Care Policy Statements recognize these realities in their analysis

Ironically, the fact that modern antitrust law is sufficiently flexible to take into account a wide variety of economic circumstances has created its own set of concerns. Many members of the health care industry began complaining that the lack of hard and fast antitrust standards with respect to health care was potentially delaying or impeding efficiency-enhancing, cost-cutting efforts. The Division was concerned that such complaints might in some cases be justified.

As a consequence, the Division, in conjunction with the FTC, undertook a review of its health care enforcement program with an eye towards releasing a series of explanations of its policies that could be relied on by the industry. The Agencies met with a variety of parties to seek input as to the types of guidance that industry participants thought was necessary. The Agencies also brought to bear their own knowledge of potential areas of concern based on investigations the Agencies had undertaken. Such efforts culminated on September 15, 1993, with the issuance of six Statements of Antitrust Enforcement Policy in the Health Care Area.

I will not go into the specifics of the Statements, since they speak for themselves, but I will say that the issuance of these Statements should be a clear manifestation of our willingness to respond to the needs of the industry.

Moreover, the Agencies have committed to a continuing process to further help the industry understand the application of the antitrust laws. We realized that no Statements, no matter how expansive, could hope to cover every potential antitrust question that might arise in the health care context. As a result, the Agencies took the extraordinary step of establishing an expedited process to enable health care providers to obtain further guidance as to the government's antitrust enforcement intentions with respect to particular proposed conduct. Moreover, the Statements contain the commitment that the Agencies will issue additional general statements as warranted. By these actions, we will continue to seek to substantially reduce uncertainty as to the application of the antitrust laws to the health care industry.

The Health Security Act contains two specific sections that have antitrust implications. First, the Act would repeal the McCarran-Ferguson exemption for health insurers. Second, Section 1322(c) of the Act recognizes that providers may jointly present and justify their requested fees with alliances with respect to the fee-for-service plan. This allows alliances, which would operate as state agencies or creatures of state law, to have the benefit of as much information as possible to avoid potential errors that could undermine the purposes of health care reform. It also avoids the potential for lengthy, expensive litigation with each alliance over the exact contours of the state action doctrine, with attendant years of uncertainty as to the status of fees set and collected under alliance plans. Finally, it is fully consistent with existing antitrust doctrine; under the antitrust laws parties have the right to collectively provide information to an entity of the state (the so-called "Noerr-Pennington" doctrine).

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I would like to leave you with a few general thoughts. First, the antitrust laws have made a significant contribution to the economic vitality of this nation by fostering competitive pricing and innovation in a wide variety of product and service markets. Second, there is reason to believe that many of the deficiencies in our current health care system are the result of too little competition, not too much. Consequently, I have every reason to believe that the economically sophisticated antitrust policies developed by the courts and the antitrust agencies can and will have a salutary effect on the rapidly changing health care environment.

I hope that you share my view. If not, let me assure you that we will continue the dialogue. For in the end, we share the same goals -- to provide all Americans with a health care system characterized by competitive prices, efficiency, innovation and high quality services.