U.S. Department of Justice Seal

     DEPARTMENT OF JUSTICE


UPDATE ON ANTITRUST DIVISION HEALTH CARE

ENFORCEMENT ACTIVITIES

MARCH 1995 - FEBRUARY 1996



GAIL KURSH

CHIEF, HEALTH CARE TASK FORCE

ANTITRUST DIVISION

U.S. DEPARTMENT OF JUSTICE


BEFORE THE


NATIONAL HEALTH LAWYERS ASSOCIATION


WASHINGTON, DC


FEBRUARY 22, 1996

.

UPDATE ON ANTITRUST DIVISION HEALTH CARE

ENFORCEMENT ACTIVITIES -- MARCH 1995 - FEBRUARY 1996

I. INTRODUCTION

During the past year, the Antitrust Division filed one criminal and three civil non-merger health care cases, appealed a negative decision in the Dubuque hospital merger case, and closed one HMO merger investigation contingent on a restructuring of the deal. We also issued twelve health care business review letters (all positive).

The Antitrust Division remains committed to preserving competition and protecting and maximizing consumer welfare in health care markets. At the same time, as health care markets evolve, the antitrust laws are flexible enough to adjust and respond accordingly -- promoting behavior that increases efficiencies and consumer benefits and discouraging behavior that impedes the development or availability of competitive alternatives.

II. MULTIPROVIDER NETWORKS

This past year, the Division took its first enforcement actions against multiprovider networks, in the form of PHOs (physician hospital organizations). While our 1994 Health Care Policy Statements did not provide a "safety zone" for multiprovider activities, they did discuss, in Statement 9, the antitrust principles that the agencies would apply in analyzing such activities. Our analysis of two such entities resulted in two separate civil cases -- one in Danbury, Connecticut and one in St. Joseph, Missouri. Both cases were filed on September 13, 1995.

  1. Facts and Complaints

* In each case, a monopoly hospital had joined with a substantial number (in Danbury, virtually all) of the physicians in the market to form a PHO, set prices for health care services, and dictate contract terms and conditions to managed care payers.

* The PHOs established or negotiated fee-for-service schedules for the doctors and negotiated contracts with managed care payers on behalf of the hospital and competing physicians. In Danbury, the hospital also decided to limit the size and mix of its medical staff to restrain competition among doctors and gain an advantage over its outpatient competitors.

* At no time did the competing physicians, in either case, integrate their practices or share substantial financial risk.

* The complaints charged that the defendants in each case entered into an agreement that unreasonably restrained price and other competition among physicians, depriving consumers and third-party payers of the benefits of free and open competition in violation of Section 1 of the Sherman Act.

* The complaints further charged that the defendants forced managed care plans to negotiate through the PHOs and jointly negotiated fees on behalf of competing doctors. In Danbury, defendants also pressured members of the medical staff to perform a substantial percentage of the doctors' outpatient procedures at the hospital.

* The complaints also alleged that these actions forestalled the continued development of managed care plans and caused higher prices for medical services in these communities. In addition, the complaint in Danbury charged that the hospital unlawfully maintained its market power in general acute care inpatient services and gained an unfair advantage in markets for outpatient services in violation of Section 2 of the Sherman Act.

  1. The Consent Decrees

* Proposed final judgments in both cases would prevent defendants from negotiating collectively for competing physicians, unless they are financially integrated, and would substantially limit the number of physicians in any relevant market controlling the negotiating organization.

* The proposed Danbury judgment would also prevent Danbury Hospital from continuing to abuse its monopoly power. Thus, the proposed judgments stop the unlawful conduct of the defendants and protect against its recurrence.

* The judgments also provide guidance to the defendants in setting up an organization or engaging in conduct that is unlikely to pose antitrust concerns. For example, the defendants may negotiate collectively for competing physicians only where the physicians share substantial financial risk and membership or ownership is limited, where exclusive, to 20%, or where nonexclusive, to 30% of the physicians in any relevant physician market. (In the St. Joseph's judgment, negotiating organizations must be non-exclusive).

* Substantial financial risk may be achieved through capitation or other incentives to achieve cost-containment goals, such as withholding a percentage of fees due, to be distributed only if certain cost containment goals are met.

* The defendants may also market a financially integrated managed care plan with a larger physician panel than that comprising just owners or members by subcontracting with additional physicians, provided the plan bears risk for those subcontracting physicians.

* Also, the judgments allow defendants to use an agent or "messenger" to facilitate the transfer of information between individual physicians and purchasers of physician services. While the terms of this provision essentially follow the Policy Statements' description of a messenger model, they expand upon the Policy Statements' descriptions of the type of activity in which a messenger may engage without violating the antitrust laws.

* Finally the judgments prohibit the hospitals from conditioning the provision of its inpatient hospital services on contracting with, or utilizing various plans, programs, or services in which the hospital has . an ownership interest. The Danbury judgment further prohibits Danbury Hospital from continuing to abuse its control over admitting privileges with the purpose of reducing competition with the hospital in any line of business, including managed care, outpatient surgery or radiology, and physician services.

III. MOST FAVORED NATION CASES

Last year, the Division brought several cases challenging the use of most-favored-nation clauses (MFNs) in insurance company contracts with providers. These clauses require that if a provider offers a more favorable rate or deeper discount to any payer than he or she gives to the payer using the MFN clause in its contract, the same rate must be offered to the MFN payer. Since these clauses tend to be used by payers for whom providers are doing a large volume of business, they can discourage providers from dropping their rates for any other payers because of the significant reduction in income this will engender from the MFN payer. In 1994, the Division brought actions against Arizona Delta Dental and Vision Service Plan, ending in consent decrees enjoining further use of MFN clauses. In 1995, we brought an action against a similar plan in Oregon -- Oregon Dental Service.

* Oregon Dental Service ("ODS") contracts with businesses, governmental agencies, and others to provide prepaid dental care coverage to their employees. More than 90% of the licensed dentists in Oregon contract with ODS, and payments from ODS represent significant portions of these dentists' income.

* ODS adopted and enforced an MFN clause in its contracts with dentists. This caused significant numbers of dentists to refuse to discount their fees and prevented other dental insurance plans from attracting sufficient dentists to compete with ODS. As a result, some plans left the market, and others had their ability to attract and serve patient groups severely restricted.

* ODS paid the fees set by each of its provider dentists up to a maximum amount for each procedure (set at the 90th percentile of the fees of all ODS dentists for that procedure). When a dentist submitted a fee schedule in which fees were below the ODS maximum, ODS informed the dentist of the maximum fee amounts so the dentist could raise fees to that level. This had the effect of stabilizing fees at the maximum level.

* On April 10, 1995, the Division filed a civil antitrust case against ODS to stop its use of MFN clauses and its dissemination of information about maximum allowable fees for dental procedures.

* The court entered a consent decree on July 14, 1995. It enjoins ODS from maintaining, adopting, or enforcing an MFN clause or similar provision in its contracts with dentists, from taking any other action to influence any dentist to refrain from offering discount fees or participating in any dental plan, and from disclosing the maximum allowable or acceptable fees for any dental procedure.

IV. MERGERS

The Division continues carefully to analyze mergers in the health care field to determine whether proposed mergers threaten to lessen competition in any properly defined relevant market. During the past year, the Division investigated over nine hospital mergers and three mergers involving HMOs or other health care plans. We also have looked closely at a number of physician practice consolidations.

Two significant enforcement efforts this year in the health care merger area concerned United Healthcare's acquisition of MetraHealth and the appeal of the Dubuque Hospital merger decision.

  1. United Healthcare Purchase of MetraHealth Companies

On September 19, 1995, the Division announced that it would close its investigation of United Healthcare's $1.65 billion purchase of MetraHealth Companies if the parties completed plans to sell MetraHealth's HMO serving the greater St. Louis metropolitan area.

* United Healthcare is one of the nation's largest and most experienced operators of, inter alia, HMOs, point of service plans, and PPOs. MetraHealth is a joint-venture company formed by Metropolitan Life and the Travelers Insurance Companies to combine their health care businesses. Although mostly indemnity, MetraHealth also offers managed health care plans.

* Our investigation to determine the probability of anticompetitive effects ultimately focused on HMOs in the St. Louis area.

* The State of Missouri also investigated and issued an order requiring the divestiture of MetraHealth's St. Louis subsidiary to an approved purchaser within a short period, with a hold-separate order until a buyer is found. That order and the contemplated spin-off resolved our concerns, and thus we agreed to close our investigation if the spin-off occurs.

  1. Dubuque Hospitals Merger

* On June 10, 1994, the Antitrust Division filed a complaint challenging the merger of the only two general acute-care hospitals in Dubuque, Iowa (Mercy Health Center and Finley Hospital).

* The complaint alleged this was a merger to monopoly that would result in higher prices and lower quality for hospital services. Although the hospitals alleged that the merger would permit substantial efficiencies, we concluded that the loss of competition from the merger would dwarf any possible short-term cost savings that could be achieved only through the merger.

* The case went to trial in September, 1994. Among the issues in dispute were: product market; rural hospital competition; geographic market and competitive harm; likelihood of new entry; and efficiencies, non-profit status/community-board, and procompetitive intent defenses. Every issue was resolved in the government's favor, except geographic market. And, on that basis, the court entered final judgment in favor of the hospitals.

* Specifically, the court found that the government's case rested too heavily on past conditions and failed to utilize a dynamic approach to antitrust analysis. While it agreed with us that rural hospitals near Dubuque were not adequate substitutes for basic acute care services and thus would be unable to prevent the merged hospital from acting in an anticompetitive manner, it concluded that several regional hospitals 70 to 100 miles away were viable substitutes for acute care services and thus were in a relevant geographic market with the Dubuque hospitals.

* On December 19, 1995, the government filed a protective notice of appeal (i.e., the appeal being subject to the approval of the Solicitor General), and defendants filed their notice of cross-appeal, which we have moved to dismiss.

V. CRIMINAL ENFORCEMENT

In the first criminal antitrust case filed in the health care area since our cases against pharmaceutical companies, U.S. v. Bolar Pharmaceutical, in 1992, and Tucson dentists, U.S. v. Alston, in 1990, a Texas trade association of optometrists was charged by information with fixing prices for eye examinations in central Texas on December 15, 1995.

* The Lake Country Optometric Society was charged with participating in a conspiracy between November, 1992, and February, 1994, to suppress and eliminate competition in the provision of optometric services to patients in central Texas.

* The information charged that the defendant and unnamed co-conspirators met to discuss the prices being charged for eye exams, agreed to raise the prices charged and adhere to the new prices, and then monitored and enforced compliance with the price agreement.

* The maximum penalty for a corporation convicted of a Sherman Act violation occurring after November 16, 1990, is the greatest of $10 million, twice the gross pecuniary gain the corporation derived from the offense, or twice the gross pecuniary loss caused to the victims of the crime.

VI. BUSINESS REVIEWS

During 1995, the Division issued twelve business review letters in the health care area.

* Five business review letters involved provider-controlled networks, including primary and specialist physicians in the Memphis area, dermatologists in South Carolina, podiatrists in Georgia, and dermatologists in southern Florida. The Division issued favorable business review letters for all of the provider networks.

* Two letters involved manufacturing and distributing of prosthetics and orthotics.

* Two letters involved nursing homes, one a statewide network of nursing homes, another a nationwide referral service and data base for such facilities.

* One letter involved the marketing by an insurance company of its internally-developed health care fraud detection procedures.

* One letter involved a group of cancer research institutions aggregating data from clinical trials in order to show that clinical trials are cost- effective alternatives to traditional treatment.

* One letter involved the formation of a group of independent clinical laboratories to compete with large national labs in California.

A summary of all health care business reviews issued since September, 1993, is attached. We continue to assess our own internal procedures for handling business review requests, with an eye to making our process as efficient, effective, and responsive as possible.