Federal Trade Commission

TIMOTHY J. MURIS Chairman

MOZELLE W. THOMPSON Commissioner

ORSON SWINDLE Commissioner

THOMAS B. LEARY Commissioner

PAMELA JONES HARBOUR Commissioner

Susan A. Creighton Director, Bureau of Competition

J. Howard Beales, III Director, Bureau of Consumer Protection

Luke Froeb Director, Bureau of Economics

William E. Kovacic General Counsel

Rosemarie Straight Executive Director

Anna H. Davis Director, Office of Congressional Relations

Report Drafters:

David A. Hyman, Special Counsel and Professor of Law and Medicine, University of Illinois

Sarah M. Mathias, Office of General Counsel for Policy Studies

Patricia Schultheiss, Bureau of Competition

Matthew Bye, Office of General Counsel for Policy Studies

Cecile T. Kohrs, Office of General Counsel for Policy Studies

Gail Levine, Deputy Assistant General Counsel for Policy Studies

Michael Wroblewski, Assistant General Counsel for Policy Studies

Susan DeSanti, Deputy General Counsel for Policy Studies

Nicole Gorham, Office of General Counsel for Policy Studies

Natalie Shonka, Office of General Counsel for Policy Studies

Report Contributors:

Alden F. Abbott, Assistant Director, Bureau of Competition

Jeffrey Brennan, Assistant Director, Bureau of Competition 

J. Elizabeth Callison, Bureau of Economics

Michael Cowie, formerly Assistant Director, Bureau of Competition

Philip Eisenstat, Deputy Assistant Director, Bureau of Competition

Mark Frankena, Deputy Director for Antitrust, Bureau of Economics

Elizabeth R. Hilder, Bureau of Competition

Thomas Krattenmaker, Bureau of Competition

Judith M. Moreland, Bureau of Competition

David Narrow, Bureau of Competition

Thomas Pahl, Bureau of Consumer Protection

Paul A. Pautler, Deputy Director for Consumer Protection, Bureau of Economics

Lee Peeler, Deputy Director, Bureau of Consumer Protection

Michael Vita, Assistant Director, Bureau of Economics

Oscar Voss, Bureau of Competition

John Wiegand, Bureau of Competition

Inquiries concerning this report should be directed to:

Sarah Mathias (202) 326-3254 or smathias@ftc.gov (Office of General Counsel, Policy Studies)
Antitrust Division

U.S. Department of Justice

R. HEWITT PATE Assistant Attorney General

Thomas O. Barnett Deputy Assistant Attorney General for Civil Enforcement

Makan Delrahim Deputy Assistant Attorney General for International, Policy, and

Appellate Matters

James M. Griffin Deputy Assistant Attorney General for Criminal Enforcement 

David A. Higbee Chief of Staff and Deputy Assistant Attorney General

J. Bruce McDonald Deputy Assistant Attorney General for Regulatory Matters

David S. Sibley Deputy Assistant Attorney General for Economic Analysis

Scott D. Hammond Director of Criminal Enforcement

J. Robert Kramer II Director of Operations

Kenneth Heyer Economic Director of Enforcement

Dorothy B. Fountain Deputy Director of Operations 

Report Contributors

Mark J. Botti, Chief, Litigation I Section

Robert A. Potter, Chief, Legal Policy Section

Elizabeth J. Armington, Assistant Chief, Economic Litigation Section

Edward D. Eliasberg, Jr., Attorney, Legal Policy Section

Leslie C. Overton, Counsel to the Assistant Attorney General

David C. Kelly, Attorney, Litigation I Section

Michael S. Spector, Attorney, Litigation I Section

Julia Knoblauch, Paralegal, Litigation I Section

William E. Berlin, formerly Attorney, Litigation I Section

Deborah A. Healy, Economist, Economic Litigation Section

Kenneth Danger, formerly Economist, Competition Policy Section

Jon B. Jacobs, Attorney, Litigation I Section

Steven B. Kramer, Attorney, Litigation I Section

Richard S. Martin, Attorney, Litigation I Section

Belinda A. Barnett, Senior Counsel to the Deputy Assistant Attorney General for Criminal Enforcement

Inquiries concerning this report should be directed to:

Mark J. Botti, Chief, Litigation I Section

(202) 307-0001 or Mark.Botti@usdoj.gov 
Acknowledgments:

The Agencies wish to note the expertise and time contributed by Hearings participants. For all of

their contributions, the Agencies convey their thanks.

The Agencies appreciate the willingness of agencies and individuals to review this report in

advance of publication. The Agencies thank the following agencies and individuals for their review of

this report: the Department of Health & Human Services (Agency for Healthcare Research and Quality;

Centers for Medicare & Medicaid Services; and the Offices of the Assistant Secretary for Planning &

Evaluation and the General Counsel); Department of Commerce; Department of Labor; Office of

Management and Budget; the National Economic Council; William S. Brewbaker, III, University of

Alabama; H.E. Frech, III, University of California, Santa Barbara; Paul B. Ginsburg, Center for Studying

Health System Change; Michael A. Morrisey, University of Alabama; and William M. Sage, Columbia

University. 

Cover:

Cover graphics obtained under license from Dynamic Graphics, Inc.
EXECUTIVE SUMMARY

Health care is a vital service that

daily touches the lives of millions of

Americans at significant and vulnerable

times: birth, illness, and death. In recent

decades, technology, pharmaceuticals, and

know-how have substantially improved how

care is delivered and the prospects for

recovery. American markets for innovation

in pharmaceuticals and medical devices are

second to none. The miracles of modern

medicine have become almost

commonplace. At its best, American health

care is the best in the world. 

Notwithstanding these extraordinary

achievements, the cost, quality, and

accessibility of American health care have

become major legislative and policy issues. 

Substantial increases in the cost of health

care have placed considerable stress on

federal, state, and household budgets, as

well as the employment-based health

insurance system. Health care quality varies

widely, even after controlling for cost,

source of payment, and patient preferences. 

Many Americans lack health insurance

coverage at some point during any given

year. The costs of providing uncompensated

care are a substantial burden for many health

care providers, other consumers, and tax

payers. 

This Report examines the role of

competition in addressing these challenges. 

The proper role of competition in health care

markets has long been debated. For much of

our history, federal and state regulators,

judges, and academic commentators saw

health care as a “special” good to which

normal economic forces did not apply. 

Skepticism about the role of competition in

health care continues. 

This Report by the Federal Trade

Commission (Commission) and the Antitrust

Division of the Department of Justice

(Division) (together, the Agencies)

represents our response to such skepticism. 

In the past few decades, competition has

profoundly altered the institutional and

structural arrangements through which

health care is financed and delivered. 

Competition law and policy have played an

important and beneficial role in this

transformation. Imperfections in the health

care system have impeded competition from

reaching its full potential. These

imperfections are discussed in this Report. 

The Agencies based this Report on

27 days of Joint Hearings from February

through October, 2003; a Commissionsponsored workshop in September, 2002;

and independent research. The Hearings

broadly examined the state of the health care

marketplace and the role of competition,

antitrust, and consumer protection in

satisfying the preferences of Americans for

high-quality, cost-effective health care. The

Hearings gathered testimony from

approximately 250 panelists, including

representatives of various provider groups,

insurers, employers, lawyers, patient

advocates, and leading scholars on subjects

ranging from antitrust and economics to

health care quality and informed consent. 

The Hearings and Workshop elicited 62

written submissions from interested parties. 

Almost 6,000 pages of transcripts of the

Hearings and Workshop and all written

submissions are available on the

Commission website. 

The Report addresses two basic

questions. First, what is the current role of

competition in health care, and how can it be
2

enhanced to increase consumer

welfare? Second, how has, and

how should, antitrust

enforcement work to protect

existing and potential

competition in health care? 

This Executive Summary

outlines the Agencies’ research,

findings, conclusions,

recommendations, and

observations. Subsequent

chapters provide in-depth

discussion and analyses. 

Chapter 1 provides an overview

and introduction. Chapter 2

focuses on physicians. Chapters

3 and 4 address hospitals. 

Chapters 5 and 6 consider

insurance. Chapter 7 focuses on

pharmaceuticals. Chapter 8 addresses a

range of issues, including certificate of need,

state action, long-term care, international

perspectives, and remedies. We begin with

a review of why health care issues are so

important.

I. CURRENT HEALTH CARE

CHALLENGES

A. Health Care Expenditures Are

Once Again Rising Dramatically

Health care spending in the United

States far exceeds that of other countries. 

Approximately 14% of gross domestic

product, or $1.6 trillion in 2002, is spent on

health care services in the United States. 

Federal, state, and local governments pay for

approximately 45 percent of total U.S.

expenditures on health care; private

insurance and other private spending

account for 40 percent; and consumer out-of

pocket spending accounts for the remaining

15 percent.

 

As Figure 1 reflects, in 2002, 31

percent of the $1.6 trillion spent by

Americans on health care went to inpatient

hospital care; that percentage has declined

substantially over the past twenty years, as

hospitalization rates and lengths of stay have

declined. Physician and clinical services

account for 22 percent, but physicians’

decisions and recommendations affect a far

larger percentage of total expenditures on

health care. Prescription drugs account for

about 11 percent; that percentage has

increased substantially over the past decade. 

The remaining 36 percent is split among

long-term care, administrative, and other

expenditures. 

The percentage of gross domestic

product spent on health care rose

substantially during the 1970s and 1980s,
3

but stabilized during most of the 1990s at

around 13.5 percent. In the last few years,

however, dramatic cost increases have

returned, attributable to both increased use

of and increased prices for health care

services. Inpatient hospital care and

pharmaceuticals are the key drivers of recent

increases in expenditures. These trends are

likely to continue – and even accelerate – as

new technologies are developed and the

percentage of the population that is elderly

increases. 

B. Health Care Quality Varies 

Quality has multiple attributes. 

Many health services researchers and

providers focus on whether the care that is

provided is based on empirical evidence of

efficacy. The Institute of Medicine defines

quality as “the degree to which health

services for individuals and populations

increase the likelihood of desired health

outcomes and are consistent with current

professional knowledge.” The Agency for

Healthcare Research and Quality defines

quality health care as “doing the right thing

at the right time in the right way for the right

person and having the best results possible.” 

Some consumers may focus on how long

they must wait for an appointment, and how

they are treated at the provider’s office. 

Many health care providers and health

services researchers treat the cost of care

(and the resources of consumers) as

immaterial; for them, you either provide

high quality care to a particular patient or

disease set, or you do not. 

From a consumer perspective, health

care quality encompasses several distinct 

factors, and the delivery system must

perform well on each if it is to provide high

quality care. These factors include whether

the diagnosis is correct, whether the “right”

treatment is selected (with the “right”

treatment varying, depending on the

underlying diagnosis and patient

preferences), whether the treatment is

performed in a technically competent

manner, whether service quality is adequate,

and whether consumers can access the care

they desire. Information is necessary for

consumers to make decisions regarding their

care, and determine how well the health care

system is meeting their needs. 

If we focus strictly on technical

measures, what is known about the quality

of health care in the United States? 

Commentators and panelists agree that the

vast majority of patients receive the care

they need, but there is still significant room

for improvement. Commentators and

panelists note that treatment patterns vary

significantly; procedures of known value are

omitted, and treatments that are unnecessary

and inefficacious are performed and tens of

billions of dollars are spent annually on

services whose value is questionable or

non-existent. As one commentator stated,

“quality problems . . . abound in American

medicine. The majority of these problems

are not rare, unpredictable, or inevitable

concomitants of the delivery of complex,

modern health care. Rather, they are

frighteningly common, often predictable,

and frequently preventable.”1

1

 Mark R. Chassin, Is Health Care Ready

for Six Sigma Quality?, 76 MILBANK Q. 565, 566

(1998). 
4

C. The U.S. Economy Typically Relies

on Market Competition

In the overwhelming majority of

markets, the government does not decide the

prices and quality at which sellers offer

goods and services. Rather, rivals compete

to satisfy consumer demand, and consumers

make decisions about the price and quality

of goods or services they will purchase. A

well-functioning market maximizes

consumer welfare when consumers make

their own consumption decisions based on

good information, clear preferences, and

appropriate incentives. 

Vigorous competition, both price and

non-price, can have important benefits in

health care as well. Price competition

generally results in lower prices and, thus,

broader access to health care products and

services. Non-price competition can

promote higher quality and encourage

innovation. More concretely, competition

can result in new and improved drugs,

cheaper generic alternatives to branded

drugs, treatments with less pain and fewer

side effects, and treatments offered in a

manner and location consumers desire. 

Vigorous competition can be quite

unpleasant for competitors, however. 

Indeed, competition can be ruthless – a

circumstance that can create cognitive

dissonance for providers who prefer to focus

on the necessity for trust and the importance

of compassion in the delivery of health care

services. Yet, the fact that competition

creates winners and losers can inspire health

care providers to do a better job for

consumers. Vigorous competition promotes

the delivery of high quality, cost-effective

health care, and vigorous antitrust

enforcement helps protect competition. 

At the same time, competition is not

a panacea for all of the problems with

American health care. Competition cannot

provide its full benefits to consumers

without good information and properly

aligned incentives. Moreover, competition

cannot eliminate the inherent uncertainties in

health care, or the informational

asymmetries among consumers, providers,

and payors. Competition also will not shift

resources to those who do not have them. 

The next section identifies some of the

features of health care markets that can limit

the effectiveness of competition.

II. FEATURES OF HEALTH CARE

MARKETS THAT CAN LIMIT

COMPETITION

A. The Health Care Marketplace is

Extensively Regulated

An extensive regulatory framework,

developed over decades, at both the federal

and state levels of government affects where

and how competition takes place in health

care markets. Much of the regulatory

framework arose haphazardly, with little

consideration of how the pieces fit together,

or how the pieces could exacerbate

anticompetitive tendencies of the overall

structure. Proposals for new regulatory

interventions have often focused solely on

their claimed benefits, instead of considering

their likely costs, where proposals fit into

the larger regulatory framework, and

whether proposals frustrate competition

unnecessarily. Failure to consider such

matters can reinforce existing regulatory

imperfections and reward incumbent

interests. Indeed, in health care, some

commentators see competition as a problem

to be tamed with top-down prescriptive
5

regulations, instead of an opportunity to

improve quality, efficiency, and enhance

consumer welfare. 

As a significant purchaser in most

health care markets, the government uses

regulations to influence the price and quality

of the services for which it pays. The

government’s actions as both purchaser and

regulator have profound effects on the rest

of the health care financing and delivery

markets as well. Price regulation, even if

indirect, can distort provider responses to

consumer demand and restrict consumer

access to health care services. Regulatory

rules also can reduce the rewards from

innovation and sometimes create perverse

incentives, rewarding inefficient conduct

and poor results. Restrictions on entry and

extensive regulation of other aspects of

provider behavior and organizational form

can bar new entrants and hinder the

development of new forms of competition. 

The scope and depth of regulation is also not

universal; providers offering competing

services are routinely subject to widely

varying regulatory regimes and payment

schedules.

B. Third-Party Payment Can Distort

Incentives

Health insurance shifts and pools the

risks associated with ill health. By

providing greater predictability, health

insurance protects the ill and their families

from financial catastrophe. Nonetheless,

third-party payment of health-related

expenses can distort incentives and have

unintended consequences.

Consumer Incentives. Insured

consumers are insulated from most of the

costs of their decisions on health care

treatments. The result is that insured

consumers have limited incentive to balance

costs and benefits and search for lower cost

health care with the level of quality that they

prefer. A lack of good information also

hampers consumers’ ability to evaluate the

quality of the health care they receive. 

Provider Incentives. Panelists and

commentators agreed that providers have a

strong ethical obligation to deliver high

quality care. The health care financing

system, however, generally does not directly

reward or punish health care providers based

on their performance. When this fact is

coupled with the consumer incentives

outlined above, the result is that providers

who deliver higher quality care are generally

not directly rewarded for their superior

performance; providers who deliver lower

quality care are generally not directly

punished for their poorer performance and,

worse still, may even be rewarded with

higher payments than providers who deliver

higher quality care. 

Payor Incentives. Insurers generally

offer coverage terms tied to professionally

dictated standards of care, restricting the

range of choices and trade-offs that

consumers may desire. Insurers aggregate

consumer preferences, but there can be

incentive mismatches because insurers

generally bear the costs but do not capture

the full benefits of coverage decisions and

because insurance contracts have a defined

term (usually annually) that is generally

shorter than the period of interest to the

consumer.
6

C. Information Problems Can Limit

the Effectiveness of Competition

The Lack of Reliable and Accurate

Information about Price and Quality. The

public has access to better information about

the price and quality of automobiles than it

does about most health care services. It is

difficult to get good information about the

price and quality of health care goods and

services, although numerous states and

private entities are experimenting with a

range of “report cards” and other strategies

for disseminating information to consumers. 

Without good information, consumers have

more difficulty identifying and obtaining the

goods and services they desire. 

The Asymmetry of Information

between Providers and Consumers. Most

consumers have limited information about

their illness and their treatment options. 

Consumers with chronic illnesses have more

opportunity and incentive to gather such

information, but there is still a fundamental

informational asymmetry between providers

and patients. There is also considerable

uncertainty about the optimal course of

treatment for many illnesses, given diverse

patient preferences and the state of scientific

knowledge.

 

Consumer Uncertainty about

Reliability of Health Care Information.

Uncertainty increases transaction costs,

fraud, and deception dramatically. Although

the Internet can provide access to

information about health care, it also

enhances the risks of fraud and deception

regarding “snake oil” and miracle cures. 

Information Technology. Health care

does not employ information technology

extensively or effectively. Prescriptions and

physician orders are frequently hand-written. 

Records are often maintained in hard copy

and scattered among multiple locations. 

Few providers use e-mail to communicate

with consumers. Public and private entities

have worked to develop and introduce

electronic medical records and computerized

physician order entry, but commentators and

panelists agreed that much remains to be

done. 

D. Cost, Quality, and Access: The

Iron Triangle of Trade-offs

Health policy analysts commonly

refer to an “iron triangle” of health care.2

The three vertices of the triangle are the

cost, quality, and accessibility of care. The

“iron triangle” means that, in equilibrium,

increasing the performance of the health care

system along any one of these dimensions

can compromise one or both of the other

dimensions, regardless of the amount that is

spent on health care.

Such tradeoffs are not always

required, of course. For example, tying

payments to health care providers to the

quality of services provided could improve

providers’ incentives to contain costs and

improve quality. Better quality also could

be achieved at less cost by reducing

unnecessary services and managing

consumers with chronic conditions more

cost-effectively. Competition has an

important role to play in accomplishing

these objectives. 

2

 WILLIAM L. KISSICK, MEDICINE’S

DILEMMAS: INFINITE NEEDS VERSUS FINITE

RESOURCES (1994). 
7

Nonetheless, trade-offs among cost,

quality, and access can be necessary. Those

trade-offs must be made at multiple levels

by multiple parties. Some consumers may

prefer a “nothing but the best” package of

medical care, but others are willing to tradeoff certain attributes of quality for lower

cost, or trade-off one attribute of quality for

another. For example, some consumers will

be more willing than others to travel in

exchange for lower prices, while others may

be more willing to travel in exchange for

higher quality care. Good information about

the costs and consequences of each of these

choices is important for competition to be

effective. 

E. Societal Attitudes Regarding

Medical Care

For most products, consumers’

resources constrain their demand. 

Consumers and the general public do not

generally expect vendors to provide services

to those who cannot pay for them. Few

would require grocery stores to provide free

food to the hungry or landlords to provide

free shelter to the homeless. By contrast,

many members of the public and many

health care providers view health care as a

“special” good, not subject to normal market

forces, with significant obligational norms to

provide necessary care without regard to

ability to pay. Similarly, many perceive

risk-based premiums for health insurance to

be inconsistent with obligational norms and

fundamental fairness, because those with the

highest anticipated medical bills will pay the

highest premiums. A range of regulatory

interventions reflect these norms. 

F. Agency Relationships

A large majority of consumers

purchase health care through multiple agents

– their employers, the plans or insurers

chosen by their employers, and providers

who guide patient choice through referrals

and selection of treatments. This

multiplicity of agents is a major source of

problems in the market for health care

services. Agents often do not have adequate

information about the preferences of those

they represent or sufficient incentive to serve

those interests.

III. HOW THE HEALTH CARE

MARKETPLACE CURRENTLY

OPERATES

Competitive pressures for cost

containment have spurred the development

of new forms of health care financing and

delivery. Government payors have adopted

new forms of payments for health care

providers to slow health care inflation. 

Private payors have adopted systems, such

as managed care and preferred provider

organizations, to encourage or require

consumers to choose relatively lower-cost

health care. Physicians have tried new types

of joint ventures and consolidation, and

hospitals have consolidated through merger

and the creation of multi-hospital networks. 

These new organizational forms offer the

potential for reducing costs and increasing

provider bargaining power. More recently,

strategies for improving the quality of health

care have gained attention. Health care

markets remain in flux. 
8

A. How Consumers Pay for Health

Care

Most Americans pay for health care

through health insurance. Most Americans

under the age of 65 obtain health insurance

through their employer or the employer of a

family member. Some Americans under the

age of 65 obtain coverage through a

government program or purchase an

individual insurance policy. Americans

aged 65 and over are almost always covered

by Medicare. In 2002, the Census Bureau

estimated that approximately 85 percent of

the total U.S. population had health

insurance coverage.

1. Publicly Funded Programs

Medicare. Medicare provides

coverage for approximately 40 million

elderly and disabled Americans. Medicare

Part A covers most Americans over 65, and

provides hospital insurance coverage. 

Although Medicare Part B is optional,

almost all eligible parties enroll, given

substantial federal subsidies to the program. 

Medicare Part B provides supplementary

medical coverage for, among other things,

doctors’ visits and diagnostic tests. Many

Medicare beneficiaries also purchase

Medicare Supplemental Insurance

(Medigap) policies or have coverage from a

former employer. Medigap policies are

federally regulated and must include

specified core benefits. 

In 1997, Congress enacted Medicare

+ Choice (M+C). M+C encouraged

Medicare beneficiaries to join privately

operated managed care plans, which often

offer greater benefits (e.g., prescription drug

coverage) in exchange for accepting limits

on choice of providers. In 2003, Congress

renamed M+C Medicare Advantage, and

enacted prescription drug benefits for

Medicare beneficiaries. 

Medicaid. Medicaid provides

coverage for approximately 50 million

Americans. Although the federal

government sets eligibility and service

parameters for the Medicaid program, the

states specify the services they will offer and

the eligibility requirements for enrollees. 

Medicaid programs generally cover young

children and pregnant women whose family

income is at or below 133 percent of the

federal poverty level, as well as many lowincome adults. Most states have most of

their Medicaid population in some form of

managed care. Medicaid pays for a majority

of long term care in the United States. 

Payments to Health Care Providers: 

Past and Present. Prior to 1983, Medicare,

as well as most other insurers, reimbursed

providers under a “fee-for-service” (FFS)

system based on the costs of the number and

type of services performed. Despite some

restraints on how much a provider could

claim as its costs, the result was to reward

volume and discourage efficiency. 

Commentators argued that the combination

of FFS payment, health insurance, and

consumers’ imperfect information about

health care created incentives for providers

to provide, and consumers to consume,

greater health care resources than would be

the case in competitive markets. In addition,

FFS payment dampened the potential for

effective price competition, because FFS

guaranteed reimbursement for claimed

charges. Thus, providers lacked incentives

to lower prices. 
9

Hospitals and Ancillary Services. In

response to increasing health care

expenditures, Congress directed the Center

for Medicare and Medicaid Services (CMS)

to adopt the inpatient prospective payment

system (IPPS) as a means to create a more

competitive, market-like environment for

hospital reimbursement by Medicare. The

IPPS took effect in 1983. The diagnosisrelated group (DRG) for the diagnosis at

discharge determines the amount that the

hospital is paid. Each DRG has a payment

weight assigned to it, which reflects the

average cost of treating patients in that

DRG. Hospitals receive this predetermined

amount regardless of the actual cost of care,

although adjustments are made for

extraordinarily high-cost cases (“outlier

payments”), teaching hospitals, and hospitals

that serve a disproportionate number of lowincome patients. 

Similarly, Congress directed CMS to

change its payment system for hospitalbased outpatient care provided to Medicare

beneficiaries. On August 1, 2000, the

payment system changed from a cost-based

system to the outpatient prospective

payment system (OPPS), under which CMS

reimburses hospitals based on one of about

750 ambulatory payment classifications

(APCs) in which an episode of care falls. 

Each APC has a general weight based on the

median cost of providing the service. 

Congress also directed CMS to adopt

prospective payment systems for skilled

nursing facilities and home health care

services, and those systems are currently in

effect. As of 2007, Medicare is scheduled to

begin a competitive bidding system to

determine which providers will offer durable

medical equipment to Medicare

beneficiaries.

Both the IPPS and the OPPS have

constrained expenditures more effectively

than the cost-based systems they replaced. 

With the introduction of IPPS, the increase

in hospital expenditures slowed, and average

length of hospital stay declined. The

adoption of prospective payment for home

health care services also had an immediate

impact on the number of beneficiaries that

received services and the average number of

visits.

Any administered pricing system

inevitably has difficulty in replicating the

price that would prevail in a competitive

market. Not surprisingly, one unintended

consequence of the CMS administered

pricing systems has been to make some

hospital services extraordinarily lucrative

and others unprofitable. As a result, some

services are more available (and others less

available) than they would be in a

competitive market. 

Physicians. Medicare pays for

physician services using the resource-based

relative value scale (RBRVS), a system for

calculating a physician fee schedule. CMS

calculates the fee schedule on the basis of

the cost of physician labor, practice

overheads and materials, and liability

insurance, as adjusted for geographic and

yearly differences. 

2. Employment-Based Insurance

Employers offer insurance to their

employees and retirees through various

sources, including commercial insurance

companies, employers’ self-funded plans, or

various combinations of the two. Employers
10

that offer health insurance through

commercial insurers usually negotiate on

behalf of their employees for a package of

benefits at a specified monthly premium per

person or per family. Some employers

choose to self-fund (self-insure) by

assuming 100 percent of the risk of expenses

from their employees’ health care coverage. 

Some employers create self-insured plans,

but contract with commercial insurance

companies to act as a third-party

administrator for claims processing, for

access to a provider network, or to obtain

stop-loss coverage. The applicability of

federal and state laws and regulations varies,

depending on the source of health care

coverage an employer makes available to

employees and retirees. 

Not all employers offer health

coverage, and some employers offer

coverage only to full-time employees. In

some sectors of the economy, employmentbased health insurance is less common. The

larger the employer, the more likely it is to

offer health insurance. Premiums and

coverage vary widely. The number of

people with employment-based insurance

fluctuated throughout the 1990s but has

currently stabilized at approximately 61

percent of the U.S. population.

The federal government subsidizes

employment-based health insurance through

the tax code. Employer contributions for

health insurance coverage are deductible to

employers, but are not considered taxable

income to employees and retirees. The

result is that employees can obtain health

care coverage through their employer with

pre-tax dollars. Although it is common

parlance to speak of “employer

contributions” to the cost of health care

coverage, employees and retirees ultimately

bear these costs in the form of lower salaries

and benefits.

Payments to Providers. In some

instances, private payors have copied the

payment strategies of the Medicare program

or have used Medicare payments as a

reference price for negotiation with

providers. For example, some payors

negotiate either a specified discount or a

specified premium relative to the payment

the Medicare program would make for a

specific episode of hospitalization or

service. To be sure, many payors do not rely

on these strategies, and instead structure

their own payment arrangements with

providers, including discounted per diem

payments to hospitals and negotiated

discounts off charges for other providers. 

3. Individual Insurance

In 1999, approximately 16 million

working-age adults and children – almost 7

percent of the population under 65 –

obtained health insurance coverage through

individually issued, non-group policies. 

Commentators suggest that this small

market share is due, in part, to the tax

subsidies provided for employment-based

coverage. Individual insurance policies are

generally more expensive and less

comprehensive than group policies. 

4. The Uninsured

Approximately 15 percent of the

population, or 44 millions Americans,

lacked health insurance at some point during

2002. A study by the Congressional Budget

Office found that 45 percent of the

uninsured were without coverage for four
11

months or less, and that only 16 percent of

the uninsured (or approximately 6.9 million

Americans) remained so for more than two

years. The uninsured are more likely to be

younger and less likely to have a regular

source of care, less likely to use preventive

services, and more likely to delay seeking

treatment. Studies indicate a variety of

adverse health consequences are associated

with being uninsured.

Medical treatment for the uninsured

is often more expensive than care of the

insured, because the uninsured are more

likely to delay treatment and receive care in

an emergency room. Hospitals typically bill

the uninsured full price for the services they

received, instead of the discounted prices

that hospitals offer insured patients pursuant

to negotiated contracts with their insurers. 

The uninsured bear some of the costs of

treatments themselves and often cannot fully

pay for the care they receive. The burden of

providing this uncompensated care varies

significantly among providers and regions. 

For example, the burden of uncompensated

care is greater in the South and West, where

a higher percentage of the population is

uninsured, than in the rest of the United

States. The costs of uncompensated

treatments for the uninsured are either paid

by taxpayers, absorbed by providers, or

passed on to the insured.

B. How Consumers Receive Health

Care: The Rise and Decline of

Managed Care

Burgeoning health care expenditures

in the 1960s and 1970s led to numerous

proposals to provide better incentives to

contain costs. Some commentators argued

that organizations that agreed to meet the

health care needs of a consumer at a set

price for a set period of time offered a

solution to this problem. Such prepaid

group practices existed in some parts of the

United States beginning in the early part of

the 20th century, but Congress took a

significant step in this direction with passage

of the Health Maintenance Organizations

Act of 1973 (HMO Act). The HMO Act

provided start-up funds to encourage the

development of HMOs, overrode State antiHMO laws, and required large firms to offer

an HMO choice to their employees. These

forces set the stage for the development of

managed care organizations (MCOs). 

Managed care means different things to

different people, and it has meant different

things at different times. There is general

agreement, however, that MCOs integrate

the financing and delivery of health care

services, albeit to varying degrees. In global

terms, managed care offers a more restricted

choice of (and access to) providers and

treatments in exchange for lower premiums,

deductibles, and co-payments than

traditional indemnity insurance.

MCOs historically relied on three

strategies to control costs and enhance

quality of care. One is selective contracting

with providers that must meet certain criteria

to be included in the MCO’s provider

network. Selective contracting can intensify

price competition and allow MCOs to

negotiate volume discounts and choose

providers based on a range of discounts. 

When MCOs and other insurers have a

credible threat to exclude providers from

their networks and send patients elsewhere,

providers have a powerful incentive to bid

aggressively to be included in the network. 

Without such credible threats, providers

have less incentive to bid aggressively, and
12

even MCOs with large market shares may

have less ability to obtain lower prices.

Another strategy is to use incentives

that shift some of the financial risk to

providers. Capitation, for example, pays

providers a fixed amount for each of the

patients for whom they agree to provide

care, regardless of whether those patients

seek care or the costs of their care exceeds

the fixed amount. Some physician groups

participating in capitation arrangements

underestimated these risks and went

bankrupt, and providers have become

increasingly reluctant to accept the risks of

capitation in recent years. Direct financial

incentives for providers in the form of

bonuses (or withholding a percentage of

payment) based on meeting clinical or

financial targets remain fairly prevalent,

with considerable variation in their details. 

A third strategy is utilization review

of proposed treatments and hospitalizations. 

This strategy involves an appraisal of the

appropriateness and medical necessity of the

proposed treatment. Many MCOs and other

insurers use utilization review in a variety of

forms. 

In recent years, many MCOs have

adopted a fourth strategy: increased costsharing. Cost sharing creates direct financial

incentives for consumers – through varying

co-payments and deductibles – to receive

care from particular providers or in

particular locations.

By the late 1990s, managed care had

grown so unpopular that commentators

began to refer to a “managed care backlash.”

Providers complained that their clinical

judgments were second-guessed; consumers

complained that managed care was

restricting choices, limiting access to

necessary medical care, and lowering

quality. These concerns resulted in a

number of federal and state legislative and

regulatory initiatives, as well as private

litigation against MCOs.

Commentators report a substantial

gap between consumer and provider

perceptions, on the one hand, and managed

care’s actual impact, on the other. They

point to surveys and studies showing that

consumers are generally satisfied with their

own MCOs, that MCOs do not provide

poorer quality care than FFS medicine, and

that “managed care horror stories” are often

exaggerated or highly unrepresentative. 

In recent years, more restrictive

forms of managed care have been eclipsed

by offerings with more choice and

flexibility. These offerings include point-ofservice (POS) plans, which allow patients to

select a primary care gatekeeper, yet use outof-plan physicians for some services. 

Preferred provider organizations (PPOs) are

similar to POS programs, but generally do

not require a coordinating primary care

physician. Instead, PPOs have a panel of

“preferred providers” who agree to accept

discounted fees. Some physicians who wish

to avoid managed care entirely have begun

“concierge practices,” where they provide

personalized care, including house calls, to

patients willing and able to pay out of pocket

for health care costs.

Public and private payors are also

experimenting with payment for

performance (P4P) initiatives. 

Commentators and panelists generally

agreed that P4P should be more widely
13

employed in health care. Many payors have

yet to adopt P4P programs, and some

providers have resisted such programs. The

development of P4P programs will require

better measurement of, and information

about, health care quality.

IV. HEALTH CARE PROVIDERS: 

NEW DELIVERY SYSTEMS,

NEW FORMS OF

ORGANIZATION, AND

COMPETITIVE PRESSURES

A. Physicians

Spending on physician services

accounts for approximately 22 percent of the

$1.6 trillion spent annually on health care

services. Total spending on physician

services increased at an average annual rate

of 12 percent from 1970-1993, and at 4 to 7

percent a year since then. In response to

increased competitive pressures from MCOs

and other payors to lower their prices, some

physicians have attempted to respond

procompetitively, while others have engaged

in anticompetitive conduct. 

Multiprovider Network Joint

Ventures. Historically, physicians were

predominantly solo practitioners, but many

physicians implemented network joint

ventures in response to managed care. The

1980s saw the emergence of two types of

joint ventures with physician members

(Independent Practice Associations (IPAs)

and Physician Hospital Organizations

(PHOs)). In general, IPAs are networks of

independent physicians that, among other

things, may contract with MCOs and

employers. PHOs are joint ventures

between a hospital (or more than one

hospital) and physicians who generally have

admitting privileges there; hospital and

physician members sometimes contract

jointly through the PHO with MCOs to

provide care to a population of patients. 

IPAs and PHOs are often integrated

to varying degrees financially (sharing

financial risk) or clinically (using various

strategies to improve the quality of care they

provide) or both. Such joint ventures may

provide various cost savings, such as

reduced contracting costs, and clinical

efficiencies, such as better monitoring and

management of patients with chronic

illnesses. IPAs and PHOs can also represent

attempts by providers to increase their

bargaining leverage with insurers. Some

contend that the primary advantage for

physicians and hospitals in forming a PHO

is that the member hospital(s) and

physicians present a united front for

bargaining with payors. In recent years, the

use of IPAs and PHOs has decreased, as

MCOs and providers have abandoned

capitation arrangements. 

One antitrust issue that physician

joint ventures confront with respect to their

contracting practices is how to avoid

summary condemnation under the antitrust

laws. The Health Care Statements outline

the key factors the Agencies will consider in

determining whether to apply the per se rule

or more elaborate rule of reason analysis to

particular conduct.3 These factors include

the degree of integration that the venture

achieves to obtain efficiencies and the extent

to which joint pricing is reasonably

3

 DEP’T OF JUSTICE & FEDERA L TRADE

COMM’N, STATEM ENTS O F ANTITRUST ENFORCEMENT

POLICY IN HEALTH CARE (1996), available at http://

www.ftc.gov/reports/hlth3s.pdf. 
14

necessary to achieve those efficiencies. 

The “Messenger Model.” 

Arrangements to allow networks of

providers to contract with payors, while

avoiding any agreement on price among the

providers, sometimes use a “messenger” to

facilitate contracting. The payor usually

submits a proposed fee schedule to an agent

or third party, who transmits this offer to the

network physicians. Each physician decides

unilaterally whether to accept the fee

schedule, and the agent transmits those

decisions to the payor. Providers may also

individually give the messenger information

about the prices or other contract terms that

the provider will accept, and the messenger

aggregates this information and markets it to

payors. Health Care Statement 9 describes

how to avoid antitrust problems when using

a messenger model, and provider networks

have used the model successfully. 

Nonetheless, physician networks using socalled “messengers” to orchestrate or

participate in price-fixing agreements have

resulted in considerable antitrust

enforcement activity in recent years.

Physician Collective Bargaining. 

Some physicians have lobbied heavily for an

antitrust exemption to allow independent

physicians to bargain collectively. They

argue that payors have market power, and

that collective bargaining will enable

physicians to exercise countervailing market

power. The Agencies have consistently

opposed these exemptions, because they are

likely to harm consumers by increasing costs

without improving quality of care. The

Congressional Budget Office estimated that

proposed federal legislation to exempt

physicians from antitrust scrutiny would

increase expenditures on private health

insurance by 2.6 percent and increase direct

federal spending on health care programs

such as Medicaid by $11.3 billion. 

Licensing Regulation and Market

Entry. State licensing boards composed

primarily of physicians determine, apply,

and enforce the requirements for physicians

to practice within a particular state. Various

state licensing boards have taken steps to

restrict allied health professionals and

telemedicine. Some states have limited or

no reciprocity for licensing physicians and

allied health professionals already licensed

by another state. The Report discusses the

anticompetitive potential of such

restrictions, as well as their rationales.

B. Hospitals

As with physicians, some hospitals

have responded to competitive pressures by

finding ways to lower costs, improve

quality, and compete more efficiently. Some

commentators contend, however, that a

number of hospital networks are exercising

market power to demand price increases

from payors, and seeking to forestall entry

by new competitors, such as single-specialty

hospitals. 

Hospital Networks. Over the past 20

years, many hospitals have merged or

consolidated into multi-hospital networks or

systems. Although the Agencies had

considerable early success in challenging

certain hospital mergers, the Agencies and

state enforcers have lost all seven hospital

merger cases they have litigated since 1994. 

Courts in these cases typically disagreed

with the Agencies on how to measure

relevant antitrust markets, how to assess the

prospects for entry to remedy any
15

anticompetitive effects, how to determine

the magnitude of any likely efficiencies, and

the relevance of the hospital’s nonprofit

status. The Commission has undertaken a

retrospective study to evaluate the market

results in several consummated mergers, and

one case is currently pending in

administrative litigation. 

Initially, national systems acquired

hospitals throughout the United States, but

recent acquisitions have been more

localized. Some believe that hospital

consolidation generally has promoted the

development of efficiencies and instilled life

back into failing hospitals. They point to the

savings from consolidated operations that

hospital networks may make possible. 

Others believe that a primary result of

consolidation has been to create hospital

market power, thus allowing hospitals to

increase their prices. Hospitals claim that

rising prices result not from market power,

but from a multitude of pressures they

confront, such as shortages of nurses and

other personnel, rising liability premiums,

the costs of improved technology, and the

obligations of indigent care.

Most studies of the relationship

between competition and hospital prices

have found that high hospital concentration

is associated with increased prices,

regardless of whether the hospitals are forprofit or nonprofit. Some studies have

found that merged hospitals experienced

smaller price and cost increases than those

that have not merged, except in highly

concentrated markets, where the pattern was

reversed. Another study found that some

systems’ acquisition of hospitals did not

produce efficiencies, because of a failure to

combine operations. Some have pointed out

that studies typically do not differentiate

among transactions that occur within local

markets and those that occur across markets,

such as national system acquisitions;

different types of consolidations might

reflect very different hospital strategies and

could have different efficiency effects.

 

Entry: Specialty Hospitals. 

Specialty hospitals provide care for a

specific specialty (e.g., cardiac) or type of

patient (e.g., children). Newer singlespecialty hospitals (SSHs) tend to specialize

in cardiac or orthopedic surgery, and

participating physicians often have an

ownership interest in the facility, for reasons

described infra. Some contend that SSHs

have achieved better outcomes through

increased volume, better disease

management, and better clinical standards. 

Others disagree, suggesting that

physician-investors send healthier, lower

risk patients to their SSH and sicker patients

to a general hospital to enable the SSH to

produce service less expensively yet still be

reimbursed at the same rates as the general

hospital. These commentators fear that

SSHs will siphon off the most profitable

procedures and patients, leaving general

hospitals with less money to cross subsidize

socially valuable, but less profitable care.

Some general hospitals facing

competition from SSHs have removed the

admitting privileges of physicians involved

with the SSH or otherwise acted to limit

physician access to the general hospital;

other general hospitals have established their

own single-specialty wing to prevent

physicians from shifting their patients to a

new entrant. Some commentators state that

general hospitals have used certificate of
16

need (CON) laws to restrict entry by SSHs. 

There are relatively few SSHs, and the vast

majority are in states without CON

programs. Debate about SSHs continues. A

recently imposed Congressional moratorium

on physician referrals to SSHs in which they

have an ownership interest and two

Congressionally mandated studies on SSHs

and general hospitals will likely affect the

future of SSHs.

Entry: Ambulatory Surgery Centers. 

Ambulatory surgery centers (ASCs) perform

surgical procedures on patients who do not

require an overnight stay in the hospital. 

Technological advances in surgery and

anesthetic agents have made it possible for

ASCs to perform a wide range of surgical

procedures. Medicare reimbursement has

had a profound effect on the number of

ASCs and the amount and types of surgery

performed in them. 

Commentators express divergent

views on ASCs, with some focusing on

likely benefits to consumers including

greater convenience, and others expressing

concerns about ASCs similar to those

regarding SSHs. Hospital reactions to deter

ASC entry and restrict competition have

been similar to those for SSHs.

Government Purchasing of Hospital

Services. Government-administered pricing

by CMS inadvertently can distort market

competition. For example, CMS never

decided as a matter of policy to provide

greater profits for cardiac surgery than many

other types of service, but the IPPS tends to

do so. This pricing distortion creates a

direct economic incentive for specialized

cardiac hospitals to enter the market; such

entry reflects areas that government pricing

makes most profitable, which may or may

not reflect consumers’ needs and

preferences. When the government is the

sole or primary payor for a service, such as

kidney dialysis or vaccines, paying too much

wastes resources, while paying too little

reduces output and capacity, lowers quality,

and diminishes incentives for innovation. 

Although CMS can set prices, its

ability directly to encourage price and nonprice competition is limited. With few

exceptions, CMS cannot force providers to

compete for CMS’s business or reward

suppliers that reduce costs or enhance

quality with substantially increased volume

or higher payments. CMS has limited ability

to contract selectively with providers or use

competitive bidding. Even straightforward

purchasing initiatives, such as competitive

bidding for durable medical equipment

(DME), have generated considerable

resistance, despite the success of a pilot

project for DME competitive bidding that

resulted in savings of 17 to 22 percent with

no significant adverse effects on

beneficiaries. Worse still, CMS’s payment

systems do not reward providers who deliver

higher quality care or punish providers who

deliver lower quality care. As the Medicare

Payment Advisory Commission reported,

the Medicare payment system is “largely

neutral or negative towards quality . . . . At

times providers are paid even more when

quality is worse, such as when complications

occur as the result of error.”4

4

 MEDICARE PAYMEN T ADVISORY

COMM ITTEE, REPORT TO CONGRESS: VARIATION AND

INNOVATION IN MEDICARE 108 (2003), available at

http://www.medpac.gov/publications/congressional_r

eports/June03_Entire_Report.pdf. 
17

CMS has worked to enhance quality

through public reporting initiatives. For

example, since CMS began public reporting

of quality information on dialysis care in

1996, the number of patients receiving

inadequate dialysis or experiencing anemia

has declined substantially. Since 2002,

CMS publicly reports on the quality of care

provided in nursing homes and by home

health agencies. Recently, CMS joined with

hospitals and the Quality Improvement

Organizations in Maryland, New York, and

Arizona to design pilot tests for publicly

reporting hospital performance measures. 

The Medicare Prescription Drug,

Improvement and Modernization Act of

2003 creates modest financial incentives for

hospitals to report such information. 

Examples of other government

initiatives include New York State, which

began to publicize provider-specific

outcomes for cardiac surgery in 1989. By

1992, one study found risk-adjusted

mortality had dropped 41 percent statewide,

giving New York the lowest risk-adjusted

mortality rate for cardiac surgery in the

nation. Studies show the mortality rate has

continued to fall. Pennsylvania reportedly

experienced similar improvements when it

began collecting and publishing riskadjusted report cards. 

Some have criticized these findings

on methodological and policy grounds. For

example, critics suggest that some of the

improvement in mortality rates in New York

resulted from the migration of high-risk

patients to other states for surgery, and that

data collection and risk adjustment methods

were flawed. A general criticism of such

“report cards” is that they discourage

providers from treating higher risk patients. 

More research is required to determine the

best methods for measuring and reporting on

hospital quality.

Private Purchasing of Hospital

Services. In recent years, contracting

between hospitals and private payors has

sometimes been controversial and

contentious. Some contend that many

hospital systems include at least one “musthave” hospital in each of the geographic

markets in which they compete. A “musthave” hospital is one that health care plans

believe they must offer to their beneficiaries

to attract employers to the plan. Payors

complain that hospital systems insist on

including all or none of the hospitals in a

system in the payor’s coverage plan. 

Consumer pressure for open networks has

made it more difficult for payors to exclude

an entire hospital system, and the presence

of a “must-have” hospital in the network

also increases a hospital’s bargaining power. 

Although some commentators believe that

particular hospitals and hospital systems

have the upper hand in bargaining in some

markets, bargaining advantage varies

substantially within and among different

markets.

In a few markets, certain payors have

experimented with “tiering” hospitals, which

results in different consumer co-payments

depending on the hospital. Hospital tiers

may be established based on a variety of

criteria. Tiering usually does not apply to

emergency care and may depend on where

routine and specialty services are offered. 

Tiering allows a payor to maintain a broad

network and include a “must-have” hospital,

yet still create incentives for consumers to

use lower cost hospitals. Hospitals usually

resist tiering, in some cases negotiating
18

contracts that prohibit tiering. Hospitals

express concern that low-cost facilities will

be mislabeled as low quality and high-cost

facilities as inefficient, and that tiering might

force poorer consumers to use only low-cost

hospitals.

Private-sector efforts are underway

to provide more information about quality. 

A number of private initiatives seek to make

quality-related information available to

employers, health plans, and consumers. 

The Health Plan Employer Data and

Information Set (HEDIS), developed by the

National Committee for Quality Assurance

to assess health plans, uses more than 50

measures of provider and plan performance

in areas such as patient satisfaction,

childhood immunization, and

mammography screening rates. 

Hospital Purchasing. Some

hospitals have joined group purchasing

organizations (GPOs) to consolidate their

purchases and achieve volume and other

discounts. GPOs have the potential to assist

hospitals in lowering costs. There have been

complaints about certain GPO practices. 

The Agencies investigate GPO practices that

appear to merit antitrust scrutiny. The

market-share safety zones contained in

Health Care Statement 7 do not constrain

Agency enforcement in cases involving

anticompetitive contracting practices.

 

Consumer Price and Quality

Sensitivity: The Need for Better

Information. Tiering represents an attempt

to force consumers to bear some of the

increased price associated with receiving

care at a more expensive hospital. Medical

savings accounts, which combine a highdeductible insurance policy with a tax

advantaged fund for paying a portion of

uncovered costs, are intended to accomplish

the same goal for most health care

purchasing decisions. For such strategies to

work, however, consumers will need reliable

and understandable information about the

prices and quality of the services among

which they must choose.

At present, most insured consumers

are “rationally ignorant” of the price of

medical services they receive, because

insurance largely insulates them from the

financial implications of their treatment. 

Even if consumers were interested in the

price of their care, they would find it very

difficult to obtain the information. The

pricing of health care services is complicated

and frequently obscure. Thus, proposals to

increase consumer price sensitivity must

develop strategies to increase the

transparency of pricing.

An analogous finding emerges for

quality measures. Although consumers

typically express interest in report cards,

they often do not use such information to

select health plans and providers. If the

information is usable, consumers will select

treatments that accord with their preferences. 

Publicly available report cards can motivate

providers to address quality deficiencies,

even when it does not appear that many

consumers rely on that information. Not all

consumers must be well-informed for the

market to deliver an efficient level of

quality. 

Pricing: Bulk Purchasing, Price

Discrimination, Cost-Shifting, and CrossSubsidies. Understanding health care

pricing requires an understanding of four

terms: bulk purchasing, price
19

discrimination, cost shifting, and cross

subsidies. The terms have distinct

meanings, although there is some overlap

between cost shifting and cross subsidies. 

Bulk purchasing occurs when large

organizations receive purchasing discounts

because of the volume of their purchases. 

Price discrimination involves charging

different consumers different prices for the

same services, based on differential demand. 

Cost shifting refers to raising the price

charged to one group of consumers as a

result of lowering the price to other

consumers. Cross subsidizing is the practice

of charging profit maximizing prices above

marginal costs to some payors or for some

services and using the surpluses to subsidize

other payors or other clinical services. 

Some panelists stated that costshifting is common in the medical

marketplace, but most commentators and

panelists disagreed, and stated that bulk

purchasing discounts and price

discrimination explain observable pricing

patterns. Panelists and commentators

agreed, however, that there are a range of

subsidies and cross-subsidies in the medical

marketplace. For example, providers lose

money by treating the uninsured, but make

money by treating the well insured. Any

administered pricing system has difficulty

replicating competitive prices. Thus, not

surprisingly, under Medicare’s administered

pricing system, some services are much

more profitable than others. 

Congress has also created direct

subsidies for certain hospitals. CMS pays

more to teaching hospitals (approximately

$5.9 billion in 1999) and to hospitals that

provide a disproportionate share of care to

the poor (approximately $5 billion per year). 

The existence of subsidies and crosssubsidies complicates any plan to give

consumers better price information and

increase their price sensitivity. Crosssubsidies can distort relative prices and

makes access to care contingent on matters

such as the number of uninsured that seek

care, the wealth of the community, and the

degree of competitiveness of the market for

medical services.

C. Pharmaceuticals

Competition between Brand-Name

and Generic Drug Manufacturers. The

availability of patent protection creates

innovation incentives for brand-name

pharmaceutical companies by excluding

others from making, using, or selling a

claimed invention for a specified period of

time. This protection helps ensure revenues

to pharmaceutical firms that they can use for

more research. Patent law also requires the

disclosure of information about the patented

invention that otherwise would remain a

trade secret and thus encourages competition

to design around brand-name patents. 

In 1984, Congress passed the

Hatch-Waxman Act, which has encouraged

competition from lower-priced generic

drugs. Hatch-Waxman has shaped

substantially the legal environment

governing Food and Drug Administration

approval of generic drug products, and

established a framework to balance

incentives for continued innovation by

brand-name firms with entry by generic drug

firms. 

The Commission has pursued several

enforcement actions to remedy actions by

particular firms to game certain Hatch-
20

Waxman provisions and deny consumers the

benefits of generic competition that

Congress intended. The Commission also

issued a study in July, 2002 that addresses

strategies among drug companies to affect

the timing of generic drug entry prior to

patent expiration. Congress has adopted the

two major recommendations proposed in

this study to preclude certain abuses of

Hatch-Waxman. 

Current Policy Debates. Concern

about pharmaceutical prices in the United

States has received much attention, and

discussion continues about how best to

address this issue. Certain policy choices

currently under debate might lead to

problems similar to those that this Report

identifies in other health care sectors. For

example, price regulation to lower

prescription drug prices could lead to

problems with administered pricing similar

to those described above. Government

purchasing that reflects monopsony power

would likely reduce output and innovation. 

PBMs. The use of pharmacy benefit

managers (PBMs) as intermediaries between

pharmaceutical managers and payors has

raised questions whether PBMs increase the

costs of pharmacy benefits. Pursuant to

Congressional direction, the Commission is

examining one aspect of these concerns: 

whether costs are higher if a payor uses a

mail-order pharmacy integrated with a PBM

rather than retail pharmacies or nonintegrated mail-order pharmacies. This

study is due in June, 2005. To date,

empirical evidence suggests that PBMs have

saved costs for payors.

Direct-to-Consumer Advertising. 

Some suggest that direct-to-consumer

advertising has increased prices for

consumers or caused them to consume

inappropriate prescription drugs. The

available evidence does not support these

allegations. Indeed, competition can help

address these information problems by

giving market participants an incentive to

deliver truthful and accurate information to

consumers. Nobel Laureate George Stigler

once observed that advertising is “an

immensely powerful instrument for the

elimination of ignorance.”5 Studies by the

FTC’s Bureau of Economics have confirmed

that advertising provides a powerful tool to

communicate information about health and

wellness to consumers – and the information

can change people’s behavior. Thus, good

information is a necessary building block

both for consumer empowerment and

enhanced health. 

V. RECOMMENDATIONS TO

IMPROVE COMPETITION IN

HEALTH CARE MARKETS

Competition has affected health care

markets substantially over the past three

decades. New forms of organization have

developed in response to pressures for lower

costs, and new strategies for lowering costs

and enhancing quality have emerged. 

Nonetheless, competition remains less

effective than possible in most health care

markets, because the prerequisites for fully

competitive markets are not fully satisfied. 

This list of recommendations focuses on

how to encourage the development of

prerequisites to competition such as good

information about price and quality. The

Agencies recognize that the work remaining

5

 George J. Stigler, The Economics of

Information, 69 J. POL. ECON. 213, 220 (1961).
21

to be done is complex and difficult and will

take time. A renewed focus on the

prerequisites for effective competition,

however, may assist policymakers in

identifying and prioritizing tasks for the near

future. 

Recommendation 1:

Private payors, governments, and

providers should continue

experiments to improve incentives

for providers to lower costs and

enhance quality and for consumers

to seek lower prices and better

quality.

a) Private payors, governments, and

providers should improve measures

of price and quality. 

As noted above, health care pricing

can be obscure and complex. Increased

transparency in pricing is needed to

implement strategies that encourage

providers to lower costs and consumers to

evaluate prices. Achievement of this goal

will likely require addressing the issue of

cross-subsidization, which encourages

providers to use pricing that does not reveal

the degree to which the well-insured may be

subsidizing the indigent, and more profitable

services may be subsidizing less wellcompensated care. 

A great deal of work already has

been done on measuring quality. Quality

measures exist for a considerable number of

conditions and treatments. The Agencies

encourage further work in this area. The

Agencies suggest that particular attention be

paid to the criticism that report cards and

other performance measures discourage

providers from treating sicker patients. If it

is not addressed, this criticism could

undermine the perceived validity and

reliability of information about quality.

b) Private payors, governments, and

providers should furnish more 

information on prices and quality to

consumers in ways that they find

useful and relevant, and continue to

experiment with financing

structures that will give consumers

greater incentives to use such

information. 

Information must be reliable and

understandable if consumers are to use it in

selecting health plans and providers. 

Research to date indicates that many

consumers have not used the price and

quality information they have received to

make decisions about health plans and

providers. Additional research into the types

of price and quality information that

consumers would use for those decisions

appears to be necessary. Further

experiments with varying co-payments and

deductibles based on price- and qualityrelated factors such as the “tier” of service

that consumers choose can help give

consumers greater responsibility for their

choices. Such responsibility will also likely

increase consumer incentives to use

available information on price and quality.

c) Private payors, governments, and

providers should experiment further

with payment methods for aligning

providers’ incentives with

consumers’ interests in lower

prices, quality improvements, and

innovation.
22

Payment methods that give

incentives for providers to lower costs,

improve quality, and innovate could be

powerful forces for improving competition

in health care markets. Although payors

have experimented with some payment

methods that provide incentives to lower

costs, no payment method has yet emerged

that more fully aligns providers’ incentives

with the interests of consumers in lower

prices, quality improvements, and

innovation. At present, for example, most

payments to providers have no connection

with the quality of care provided. 

A focus on the degree to which

providers’ incentives are compatible with

consumers’ interests is important. 

Compatible incentives and interests are more

likely to yield better results; incompatible

incentives and interests are more likely to

have unintended consequences that can lead

to worse results. Initiatives that address the

use of payment methods to align providers’

incentives with consumers’ interests are

necessary. These experiments should be

carefully analyzed to evaluate their

consequences, both intended and

unintended. 

Recommendation 2:

States should decrease barriers to

entry into provider markets.

a) States with Certificate of Need

programs should reconsider

whether these programs best serve

their citizens’ health care needs.

The Agencies believe that, on

balance, CON programs are not successful

in containing health care costs, and that they

pose serious anticompetitive risks that

usually outweigh their purported economic

benefits. Market incumbents can too easily

use CON procedures to forestall competitors

from entering an incumbent’s market. As

noted earlier, the vast majority of singlespecialty hospitals – a new form of

competition that may benefit consumers –

have opened in states that do not have CON

programs. Indeed, there is considerable

evidence that CON programs can actually

increase prices by fostering anticompetitive

barriers to entry. Other means of cost

control appear to be more effective and pose

less significant competitive concerns.

b) States should consider adopting

the recommendation of the Institute

of Medicine to broaden the

membership of state licensure

boards. 

State licensing boards are

disproportionately composed of licensed

providers, although some states require

broader representation. Many state licensing

boards have taken steps, such as restricting

allied health professionals (AHPs) from

independent practice and direct access to

consumers, that significantly reduce certain

forms of competition. State licensure boards

with broader membership, including

representatives of the general public, and

individuals with expertise in health

administration, economics, consumer affairs,

education, and health services research,

could be less likely to limit competition by

AHPs and new business forms for the

delivery of health care, and are less likely to

engage in conduct that unreasonably

increases prices or lowers access to health

care. 
23

c) States should consider

implementing uniform licensing

standards or reciprocity compacts to

reduce barriers to telemedicine and

competition from out-of-state

providers who wish to move in-state. 

When used properly, telemedicine

has considerable promise as a mechanism to

broaden access, lower costs, and improve

health care quality. When used improperly,

telemedicine has the potential to lower

health care quality and to increase the

incidence of consumer fraud. To foster

telemedicine’s likely pro-competitive

benefits and to deter its potential to harm

consumers, states should consider

implementing uniform licensure standards or

reciprocity compacts. Uniform licensure

standards and reciprocity compacts could

operate both to protect consumers and to

reduce barriers to telemedicine. State

regulators and legislators should explicitly

consider the pro-competitive benefits of

telemedicine before restricting it. Similar

considerations apply to the potential for

licensure to restrict competition from out-ofstate providers who wish to move in-state. 

Recommendation 3:

Governments should reexamine

the role of subsidies in health care

markets in light of their

inefficiencies and potential to

distort competition.

Health care markets have numerous

cross-subsidies and indirect subsidies. 

Competitive markets compete away the

higher prices and supra-competitive profits

necessary to sustain such subsidies. Such

competition holds both the promise of

consumer benefits and the threat of

undermining an implicit policy of

subsidizing certain consumers and types of

care.

Competition cannot provide

resources to those who lack them; it does not

work well when certain facilities are

expected to use higher profits in certain

areas to cross-subsidize uncompensated

care. In general, it is more efficient to

provide subsidies directly to those who

should receive them, rather than to obscure

cross subsidies and indirect subsidies in

transactions that are not transparent. 

Governments should consider whether

current subsidies best serve their citizens’

health care needs. 

Recommendation 4:

Governments should not enact

legislation to permit independent

physicians to bargain collectively.

Physician collective bargaining will

harm consumers financially and is unlikely

to result in quality improvements. There are

numerous ways in which independent

physicians can work together to improve

quality without violating the antitrust laws. 

Recommendation 5:

States should consider the

potential costs and benefits of

regulating pharmacy benefit

manager transparency.

In general, vigorous competition in

the marketplace for PBMs is more likely to

arrive at an optimal level of transparency

than regulation of those terms. Just as

competitive forces encourage PBMs to offer
24

their best price and service combination to

health plan sponsors to gain access to

subscribers, competition should also

encourage disclosure of the information

health plan sponsors require to decide with

which PBM to contract. To the extent the

Commission’s Congressionally mandated

study of PBMs provides relevant

information to the issue of PBM

transparency, it will be discussed in the

Commission’s study report. 

Recommendation 6:

Governments should reconsider

whether current mandates best

serve their citizens’ health care

needs. When deciding whether to

mandate particular benefits,

governments should consider that

such mandates are likely to reduce

competition, restrict consumer

choice, raise the cost of health

insurance, and increase the

number of uninsured Americans. 

State and federal governments

mandate numerous health insurance benefits. 

Proponents argue that mandates can correct

insurance market failures, and that the

required inclusion of some benefits in all

health insurance plans can be welfare

enhancing. Opponents argue that the case

for many mandates is anecdotal, and that

mandates raise premium costs, leading

employers to opt out of providing health

insurance and insured individuals to drop

their coverage. Opponents also note that

providers of the mandated benefit are

usually the most vigorous proponents of

such legislation, making it more likely that

the mandated benefits may constitute

 “provider protection” and not “consumer

protection.” The Commission has submitted

numerous competition advocacy letters on

this issue in the last fifteen years, focusing

on any willing provider and freedom of

choice provisions. 

 

For mandates to improve the

efficiency of the health insurance market,

state and federal legislators must be able to

identify services the insurance market is not

currently covering for which consumers are

willing to pay the marginal costs. This task

is challenging under the best of

circumstances – and benefits are not

mandated under the best of circumstances. 

In practice, mandates are likely to limit

consumer choice, eliminate product

diversity, raise the cost of health insurance,

and increase the number of uninsured

Americans. 

State and federal policy makers

should consider ways of evaluating these

risks in their decision making processes and

reconsider whether current mandates best

serve their citizens’ health care needs. 

VI. AGENCY PERSPECTIVES ON

ISSUES IN ANTITRUST

ENFORCEMENT IN HEALTH

CARE 

The Agencies have been active for

nearly 30 years in health care markets,

challenging anticompetitive conduct and

providing guidance to consumers and

industry participants. This section outlines

the Agencies’ perspective on several issues

in antitrust enforcement in health care

markets.
25

A. Perspective on Physician-Related

Issues

Physician Joint Ventures and Multiprovider Networks. Health Care Statement

8 provides that “physician network joint

ventures . . . will not be viewed as per se

illegal, if the physicians’ integration through

the network is likely to produce significant

efficiencies that benefit consumers, and any

price agreements (or other agreements that

would otherwise be per se illegal) by the

network physicians are reasonably necessary

to achieve those efficiencies.” Health Care

Statement 8 further notes that financial risksharing and clinical integration may involve

sufficient integration to demonstrate that the

venture is likely to produce significant

efficiencies.

1

st Observation:

Payment for performance

arrangements among a group of

physicians may constitute a form

of financial risk-sharing. 

In determining whether a physician

network joint venture is sufficiently

financially integrated to avoid per se

condemnation, the Agencies will consider

the extent to which a particular payment for

performance (P4P) arrangement constitutes

the sharing of substantial financial risk

among a group of physicians, and the

relationship between the physicians’ pricing

agreement and the P4P program. 

2

nd Observation:

The Agencies do not suggest

particular structures with which to

achieve clinical integration that

justifies a rule of reason analysis of

joint pricing, but the analysis of

whether a physician network joint

venture is clinically integrated may

be aided in some circumstances by

asking questions like those

outlined in Chapter 2. 

Attempts to achieve clinical

integration were discussed at length at the

Hearings. Panelists described a wide variety

of factors as possibly relevant to evaluating

clinical integration. Panelists and

commentators asked the Agencies to define

the criteria that the Agencies will consider

sufficient to demonstrate that a particular

venture is clinically integrated. The

Agencies do not suggest particular structures

with which to achieve clinical integration

that justifies a rule of reason analysis of joint

pricing, because of the risk that it would

channel market behavior, instead of

encouraging market participants to develop

structures responsive to their particular goals

and the market conditions they face. As an

aid to analysis, Chapter 2 of the Report

includes a broad outline of some of the kinds

of questions that the Agencies are likely to

ask when analyzing whether a physician

network joint venture is clinically integrated. 

B. Perspective on Hospital-Related

Issues

Hospital Mergers. The Agencies

will continue carefully to evaluate proposed

hospital mergers and to challenge those with

likely anticompetitive effects. Certain issues

addressed in hospital merger cases are

discussed below.
26

3

rd Observation: 

Research on hospital product

markets is encouraged. 

In most cases, the Agencies have

analyzed hospital product markets as a broad

group of acute, inpatient medical conditions

where the patient must remain in a health

care facility for at least 24 hours for

treatment, recovery or observation. The

Agencies continue to examine whether

smaller markets exist within the traditional

cluster product market definition or other

product market adjustments might be

warranted, and encourage research on these

matters. For example:

• The percentage of total health care

spending devoted to outpatient care

is growing. The Agencies encourage

research on whether services

provided in outpatient settings may

constitute additional relevant product

markets, and if so, whether those

services might be adversely affected

by a hospital merger. 

• In recent years, single-specialty

hospitals have emerged in numerous

locations. The Agencies encourage

further research into the competitive

significance of SSHs, including

whether payors can discipline

general acute care hospitals by

shifting a larger percentage of

patients to SSHs. 

• The Agencies encourage additional

research to validate or refute the

analytical techniques for defining

product markets suggested by

various commentators and panelists.

4

th Observation: 

Hospital geographic markets

should be defined properly. 

The definition of hospital geographic

markets has proven controversial. In

connection with this Report, the Agencies

undertook a substantial analysis of how best

to determine the contours of the relevant

geographic market in which hospitals

operate, consistent with the process

described in the 1992 Horizontal Merger

Guidelines (Merger Guidelines). The

Agencies’ conclusions are: 

a) The “hypothetical monopolist” test

of the Merger Guidelines should be

used to define geographic markets in

hospital merger cases. To date, the

Agencies’ experience and research

indicate that the Elzinga-Hogarty test

is not valid or reliable in defining

geographic markets in hospital

merger cases. The limitations and

difficulties of conducting a proper

critical loss analysis should be fully

considered if this method is used to

define a hospital geographic market. 

b) The types of evidence used in all

merger cases – such as strategic

planning documents of the merging

parties and customer testimony and

documents – should be used by

Courts to help delineate relevant

geographic markets in hospital

merger cases. Evidence regarding

the willingness of consumers to

travel and physicians to steer

consumers to less expensive

alternatives should also be

considered by Courts. 
27

c) The Agencies encourage additional

research to validate or refute the

analytical techniques for defining

geographic markets suggested by

various commentators and Hearings

participants.

5

th Observation: 

Hospital merger analysis should

not be affected by institutional

status. 

The best available evidence shows

that the pricing behavior of nonprofits when

they achieve market power does not

systematically differ from that of for-profits. 

The nonprofit status of a hospital should not

be considered in determining whether a

proposed hospital merger violates the

antitrust laws.

6

th Observation: 

The resolution of hospital merger

challenges through community

commitments should be generally

disfavored. 

The Agencies do not accept

community commitments as a resolution to

likely anticompetitive effects from a hospital

(or any other) merger. The Agencies believe

community commitments are an ineffective,

short-term regulatory approach to what is

ultimately a problem of competition. 

Nevertheless, the Agencies realize that in

some circumstances, State Attorneys

General may agree to community

commitments in light of the resource and

other constraints they face.

C. General Issues

7

th Observation: 

The safety zone provision of

Health Care Statement 7 does not

protect anticompetitive

contracting practices of group

purchasing organizations. 

Health Care Statement 7 and its

safety zone aim to address monopsony and

oligopoly concerns with the formation of a

GPO. This statement does not address all

potential issues that GPOs may raise. The

Agencies believe amending the statement to

address some, but not all potential issues, is

likely to be counterproductive. Health Care

Statement 7 does not preclude Agency action

challenging anticompetitive contracting

practices that may occur in connection with

GPOs. The Agencies will examine, on a

case-by-case basis, the facts of any alleged

anticompetitive contracting practice to

determine whether it violates the antitrust

laws. 

8

th Observation: 

Countervailing power should not

be considered an effective response

to disparities in bargaining power

between payors and providers. 

Although there appear to be

disparities in bargaining power between

some payors and some providers, the

available evidence does not indicate that

there is a monopsony power problem in

most health care markets. Even if it were

assumed that providers confront monopsony

health plans, the Agencies do not believe

that allowing providers to exercise
28

countervailing power is likely to serve

consumers’ interests. 

9

th Observation: 

Private parties should not engage

in anticompetitive conduct in

responding to marketplace

developments. 

The permissibility of unilateral and

collective provider conduct in response to

marketplace developments (including P4P,

tiering, SSHs, and ASCs) is raised in several

different settings in the Report. Generally

speaking, antitrust law permits unilateral

responses to competition. If there is specific

evidence of anticompetitive conduct by

individual providers or provider collusion in

response to marketplace developments, the

Agencies will aggressively pursue those

activities. 

10th Observation: 

The state action and NoerrPennington doctrines should be

interpreted in light of the

principles that justified those

doctrines in the first place. 

The state action and Noerr

Pennington doctrines curb competition law

to promote important values such as

federalism and the right to petition the

government for redress. Inappropriately

broad interpretations of these doctrines can

chill or limit competition in health care

markets. It is important to recognize both

the genuine interests these doctrines serve as

well as the anticompetitive consequences

that result from an overly expansive

interpretation of their scope. 

11th Observation: 

Remedies must resolve the

anticompetitive harm, restore

competition, and prevent future

anticompetitive conduct. 

Remedies are a critical issue in

implementing an effective competition

policy. Optimal enforcement must steer

between over-deterrence and underdeterrence. Over-deterrence may occur if

conduct that is not, in fact, anticompetitive

is challenged, or if excessive sanctions are

imposed on anticompetitive conduct. 

Under-deterrence may occur if

anticompetitive conduct is not identified and

addressed, or if inadequate remedies are

imposed in response to such conduct. The

Agencies must avoid both of these extremes

to effect optimal deterrence, while

recognizing that bringing cases helps create

a “compliance norm.” 

The Agencies view all

anticompetitive conduct as serious, and will

seek appropriate sanctions. In general, much

more stringent measures are necessary

against those who violate the antitrust laws

repeatedly or flagrantly and those who

facilitate anticompetitive conduct by

multiple parties. The Division will also

pursue criminal sanctions in appropriate

cases. Disgorgement and/or dissolution will

be sought in appropriate cases. 

VIII. CONCLUSION

The fundamental premise of the

American free-market system is that

consumer welfare is maximized by open

competition and consumer sovereignty –

even when complex products and services
29

such as health care are involved. The

Agencies play an important role in

safeguarding the free-market system from

anticompetitive conduct, by bringing

enforcement actions against parties who

violate the antitrust and consumer protection

laws. To be sure, in some instances

compelling state interests may trump or limit

free-market competition. The Agencies play

an important role here as well, by making

policy makers aware of the costs of

impediments to competition, and by

advocating for competitive market solutions. 

The Agencies do not have a

pre-existing preference for any particular

model for the financing and delivery of

health care. Such matters are best left to the

impersonal workings of the marketplace.

What the Agencies do have is a commitment

to vigorous competition on both price and

non-price parameters, in health care and in

the rest of the economy. Much remains to

be accomplished to ensure that the market

for health care goods and services operates

to serve the interests of consumers. This

Report identifies concrete steps to improve

competition in the health care marketplace,

and improve the application of competition

law to health care. 
TABLE OF CONTENTS 

EXECUTIVE SUMMARY

CHAPTER 1. OVERVIEW / BACKGROUND 

CHAPTER 2. INDUSTRY SNAPSHOT AND COMPETITION LAW:

PHYSICIANS

CHAPTER 3. INDUSTRY SNAPSHOT: HOSPITALS

CHAPTER 4. COMPETITION LAW: HOSPITALS 

CHAPTER 5. INDUSTRY SNAPSHOT: INSURANCE AND OTHER THIRD

PARTY PAYMENT PROGRAMS

CHAPTER 6. COMPETITION LAW: INSURERS

CHAPTER 7. INDUSTRY SNAPSHOT AND COMPETITION LAW:

PHARMACEUTICALS

CHAPTER 8. MISCELLANEOUS SUBJECTS

APPENDIX A HEARINGS AND WORKSHOP PARTICIPANTS

APPENDIX B PUBLIC COMMENTS

APPENDIX C GLOSSARY OF HEALTH CARE TERMS AND ACRONYMS

APPENDIX D SELECTED FEDERAL STATUTES 
CHAPTER 1: OVERVIEW/BACKGROUND

I. DEVELOPMENTS IN HEALTH CARE FINANCING AND DELIVERY ........... 1

A. Fee For Service Reimbursement and the Rise of Managed Care .............. 1

B. The Managed Care Backlash ......................................... 6

C. Recent Developments .............................................. 7

1. The Return of Open Networks and the Rise of Tiering ............... 7

2. Payment for Performance ...................................... 8

3. The Road Forward ........................................... 9

II. QUALITY ............................................................ 10

A. What Is Known About Health Care Quality? ........................... 12

B. Competition and Quality ........................................... 16

C. Barriers to Improving Quality ....................................... 17

1. Informational Barriers to Improving Quality ...................... 17

2. Payment Barriers to Improving Quality .......................... 25

D. Quality, Competition and Competition Law ............................ 28

III. INTRODUCTION TO COMPETITION LAW AND HEALTH LAW .............. 31

A. Basics of Competition Law ......................................... 31

B. Application of Competition Law to Health Care ......................... 33

1. Commission Health Care Related Activities ...................... 35

2. Division Health Care Related Activities ......................... 37

3. Private Litigation ........................................... 38

C. Health Law Overview ............................................. 38

1. Anti-Kickback ............................................. 38

2. Self-Referral Amendments ................................... 39

3. EMTALA ................................................. 39

4. Medical Malpractice ........................................ 40

D. Obligational Norms ............................................... 40

E. Conclusion ...................................................... 41
CHAPTER 1: OVERVIEW/BACKGROUND

I. DEVELOPMENTS IN HEALTH

CARE FINANCING AND

DELIVERY

Health care financing and delivery

arrangements have undergone dramatic

changes in the past several decades. This

section provides a brief overview of some of

these developments, including changes in

provider payment, the rise of managed care,

and the integration (and then partial disintegration) of health care delivery.1

 

A. Fee For Service Reimbursement 

and the Rise of Managed Care

For most of the twentieth century,

most consumers relied on independent

physicians to provide care. Pricing was feefor-service (FFS).2

 FFS payment was based

on the number and type of services

performed. Insurers imposed few

constraints on consumer choice of providers

and limited oversight of the type and extent

of care provided.3 FFS payment provided

little incentive for physicians and other

health care providers to coordinate and

integrate the care they rendered. FFS

arrangements conformed with public

sentiment that more care was better care, and

1

 There are numerous books on the issues

covered in this section. See DAVID DRANOVE, THE

ECONOMIC EVOLUTION OF AMERICAN HEALTH CARE:

FROM MARCUS WELBY TO MANAGED CARE (2000);

JAMES C. ROBINSON, THE CORPORATE PRACTICE OF

MEDICINE (1999); MICHAEL MILLENSON, DEMANDING

MEDICAL EXCELLENCE (1999); SHERRY GLIED,

CHRONIC CONDITION: WHY HEALTH RE FORM FAILS

(1997); CHARLES E. ROSENBERG, THE CARE OF

STRANGERS: THE RISE OF AMERICA’S HOSPITAL

SYSTEM (1995); ROSEMARY STEVENS, IN SICKNESS

AND IN WEALTH: THE RISE OF AMERICAN HOSPITALS

(1990); JOSEPH A. CALIFANO, JR., AMERICA’S

HEALTH CARE REVOLUTION: WHO LIVES? WHO

DIES? WHO PAYS? (1986); PAUL STARR, THE SOCIAL

TRAN SFORM ATION O F AMERICAN MEDICINE (1983);

ROSEMARY STEVENS, AMERICAN MEDICINE AND THE

PUBLIC INTEREST (1976); HERMAN M. SOMERS &

ANNE R. SOMERS, DOCTORS, PATIENTS, AND HEALTH

INSURANCE (1961). See also Special Issue: Kenneth

Arrow and the Changing Economics of Health Care,

26 J. HEALTH, POL., POL’Y & L. 823-1203 (Issue 5,

Oct. 2001); Paul B. Ginsburg, Remarks at the Federal

Trade Commission and Department of Justice

Hearings on Health Care and Competition Law and

Policy (Feb. 26, 2003), at page 58 (noting that

“history matters in health care markets”) [hereinafter,

citations to transcripts of these Hearings state the

speaker’s last name, the date of testimony, and

relevant page(s)]. Transcripts of the Hearings are

available at http://www.ftc.gov/ogc/healthcarehear

ings/index.htm#Materials.

This chapter does not address a number of

important issues, including the rise of medical

technology. See generally COUNCIL OF ECONOMIC

ADVISORS, ECONOMIC REPORT OF THE PRESIDENT,

HEALTH CARE AND INSURANCE 190-93 (2004);

PENNY E. MOHR ET AL., PROJECT HOPE CTR. FOR

HEALTH AFFAIRS, PAYING FOR NEW MEDICAL

TECHNOLOGIES: LESSONS FOR THE MEDICARE

PROGR AM FROM OTHER LARGE HEALTH CARE

PURCHASERS (2003) (submitted to Medicare Payment

Advisory Committee), available at 

http://www.medpac.gov/publications/contractor_repo

rts/Jun03_M edTechPay_PurchSrv(cont)Rpt2.pdf;

David M. Cutler & Mark McClellan, Is

Technological Change in Medicare Worth It?, 20

HEALTH AFFAIRS 11 (Sept./Oct. 2002); Barbara J.

McNeil, Hidden Barriers to Improvement in the

Quality of Care, 345 NEW ENG. J. MED. 1612 (2001); 

DAVID J. ROTHMAN, BEGINNINGS COUNT: THE

TECH NO LOGICAL IMPERATIVE IN AMERICAN HEALTH

CARE (1997); CALIFANO, supra; STARR, supra.

2

 Gail B. Agrawal & Howard R. Veit, Back

to the Future: The Managed Care Revolution, 65

LAW & CONTEMP. PROB. 11, 13 (2003).

3

 The principal limitation was that charges

had to be “usual, customary and reasonable.” 

Agrawal & Veit, supra note 2, at 13; GENERAL

ACCOUNTING OFFICE (GAO), MANAGED HEALTH

CARE: EFFECT ON EMPLOYERS’ COSTS DIFFICULT TO

MEASURE 1 (1993), available at

http://archive.gao.gov/t2pbat5/150139.pdf. 
2

the treating physician was best positioned to

judge the most appropriate care for any

given case.4

Policymakers began seriously

questioning the consequences of these

institutional arrangements in the late-1960s.

5

Commentators argued that the combination

of FFS payment, health insurance, and

consumers’ imperfect information about

health care limited the possibility of

effective price competition and created an

incentive for physicians to over-provide (and

consumers to over-consume) healthcare

resources.6 Some commentators argued that

organizations that agreed to meet the health

care needs of a consumer for a set time

period at a set price could solve these

problems.

7

 More generally, many

commentators argued that consumers should

be given greater control over health care

spending and treatment decisions.8 Over the

past three decades, state and federal policy

has encouraged the emergence of a range of

financing and delivery options, and

embraced, to varying degrees, price and nonprice competition in health care.

Managed care existed for most of the

20th century, but it did not spread widely

until the 1980s and early 1990s.9 In 1980,

the overwhelming majority of the population

was enrolled in an indemnity insurance plan

and managed care organizations (MCOs)

accounted for a small percentage of the

market. Fifteen years later, these patterns

had reversed, and various managed care

offerings accounted for an overwhelming

majority of the insured population.10 To be

sure, managed care means different things to

4

 ROBINSON, supra note 1, at 22, 24. 

5

 Tufts Managed Care Institute, A Brief

History of Managed Care 2 (1998), at

http://www.tmci.org/downloads/BriefHist.pdf (“In the

late 1960s and early 1970s, politicians and interest

groups of all stripes promoted various proposals for

reforming the nation’s healthcare system . . . . In

1971, the Nixon Administration announced a new

national health strategy: the development of health

maintenance organizations (HMOs ) . . . . In adopting

this policy, the Administration was influenced by

Paul Ellwood, MD of Minneapolis, who argued that

the structural incentives of traditional fee-for-service

medicine had to be reversed in order to achieve

positive reform.”).

6

 Burns 4/9 at 87; Carol J. Simon et al., The

Effect of Managed Care on the Incomes of Primary

Care and Speciality Physicians, 33 HEALTH SERVICES

RES. 2 (1998); Lawrence Casalino, Markets and

Medicine: Barriers to Creating a ‘Business Case for

Quality, 46 PERSP. BIO. MED. 38, 39-42 (2002); John

G. Day, Managed Care and the Medical Profession: 

Old Issues and New Tensions the Building Blocks of

Tomorrow’s Health Care Delivery and Financing

System, 3 CONN. INS. L.J. 1, 21 (1996); Sherry Glied,

Managed Care, in 1A HAND BOO K OF HEALTH

ECONOM ICS (Anthony J. Culyer & Joseph P.

Newhouse, eds. 2000). 

7

 Congress took a significant step in this

direction with the Health Maintenance Organization

Act of 1973 (HMO Act). The HMO Act provided

start-up funds to encourage the development of

HMOs, overrode State anti-HMO laws, and required

large firms to offer an HMO choice to their

employees. Glied, supra note 6, at 13.

8

 Agrawal & Veit, supra note 2, at 21-22. 

9

 Staff and group-model HMOs existed

throughout this period, but for much of the 20th

century had only a modest enrollment and were found

primarily in geographically limited areas – principally

California and the Pacific Northwest. Agrawal &

Veit, supra note 2, at 21-22; Thomas Mayer & Gloria

Gilbert Mayer, HMOs: Origins and Development,

312 NEW ENG. J. MED. 590 (1985).

10 Glied, supra note 6, at 710 (“Beginning in

the mid-1980s, enrollment in managed care plans in

the US grew very rapidly, more than 10% per year.”). 
3

different people, and it has meant different

things at different times.11 Commentators

generally agree, however, that MCOs

integrate, to varying degrees, the financing

and delivery of health care services.12 

Managed care encompasses a wide

array of institutional arrangements for the

financing and delivery of health care

services.13 Usually when one speaks of a

managed care organization, one is speaking

of the entity that manages risk, contracts

with providers, is paid by employers or

patient groups, or handles claims processing. 

The “tools” of managed care include the

creation of networks of preferred providers

or the hiring of a staff of employed

physicians to provide care, selective

contracting based on price, required

pre-authorization, restricted access to

specialists, restricted panels of providers,

higher copayments (and sometimes denial of

coverage) for out-of-network care,

capitation, bonuses, practice guidelines,

retrospective denials of coverage,

“real-time” utilization review, restricted

coverage of prescription drugs, disease

management for chronic illnesses,

limitations on benefits, and an emphasis on

prevention. 

In global terms, managed care offers

a more restricted choice of (and access to)

providers and treatments in exchange for

lower premiums, deductibles, and

co-payments than traditional indemnity

insurance. Stated differently, managed care

inverts, to varying degrees, the incentives of

a piece-work based fee-for-service system,

and employs a variety of supply- and

demand-side strategies to do so. 

MCOs typically use three strategies

to control costs and enhance quality of care: 

(i) selective contracting; (ii) direct financial

11 Cara S. Lesser et al., The End of An Era: 

What Became of the ‘Managed Care Revolution’ in

2001?, 38 HEALTH SERVICES RES. 337 (2003); James

C. Robinson, The End of Managed Care, 285 JAMA

2622 (2001). 

12 Glied, supra note 6, at 708 (“The term

managed care encompasses a diverse array of

institutional arrangements, which combine various

sets of mechanisms, that, in turn, have changed over

time.”); Jacob S. Hacker & Theodore R. Marmor,

How Not to Think About “Managed Care,” 32 U.

MICH. J.L. REF. 661, 667-68 (“W hat exactly

constitutes “managed care,” however, has never been

clear, even by its strongest proponents. Perhaps the

most defensible interpretation of ‘managed care’ is

that it represents a fusion of two functions that once

were regarded as largely separate: the financing of

medical care and the delivery of medical services.”).

See also COUNCIL ON MEDICAL SERVICE,

AMERICAN MEDICAL ASS’N, PRINCIPLES OF MANAGED

CARE 3 (4th ed.1999), available at http://www.amaassn.org/ama/upload/mm/363/principles.pdf (defining

“managed care” as “processes or techniques used by

any entity that delivers, administers and/or assumes

risk for health services in order to control or influence

the quality, accessibility, utilization, costs and prices,

or outcomes of such services provided to a defined

population.”); Academy for Health Mgmt, A Glossary

of Managed Care Terms, at http://www.aahp.org/

glossary/index.html (last visited July 13, 2004); Mark

A. Kadzielski et al., Managed Care Contracting: 

Pitfalls and Promises, 20 WHITTIER L. REV. 385, 387

(1998).

13 Health Maintenance Organizations

(HMO) are licensed health plans that agree to cover

all or most of an enrollees health needs for a

predetermined monthly fee, with a designated

physician acting as a gatekeeper. Point-of-Service

(POS) plans allow patients to select a primary care

gatekeeper, yet use out-of-plan physicians for some

services. Preferred Provider Organizations (PPOs)

are similar to POSs, but generally do not require a

coordinating primary care physician.
4

incentives; and (iii) utilization review.14

Selective contracting is used to create a

restricted networks of providers.15 Selective

contracting intensifies price competition and

allows payors to negotiate volume discounts

and choose providers based on a range of

criteria.16 The intensity of competition

increases with the number of providers and

covered lives in the relevant market, and

with the restrictiveness of the insurance

contracts found in the market (i.e., HMOs,

which have more limited panels than PPOs,

induce more intense price competition

among providers than would PPOs of

equivalent size).17 

When insurers have a credible threat

to exclude providers from their networks

and channel patients elsewhere, providers

have a powerful incentive to bid

aggressively. Inclusion in a restricted panel

offers the provider the prospect of

substantially increased revenue. Without

such credible threats, however, providers

have less incentive to bid aggressively, and

even managed care organizations with large

market shares may have less ability to obtain

low prices.18

Direct financial incentives can take a

14 GAO, supra note 3, at 8 (“Despite the

variety of managed care plans, most include the

following common cost control features: (1) provider

networks, with explicit criterial for selection; (2)

alternative payment methods and rates that often shift

some financial risk to providers; and (3) utilization

controls over hospitals and specialist physicians

services.”); SHERMAN FOLLAND ET AL., THE

ECON OM ICS OF HEALTH AND HEALTH CARE 252 (4th

ed. 2003); Simon et al., supra note 6, at 2 (“Managed

care includes a variety of cost-containment strategies

used by employers and insurers, such as utilization

review (UR), selective contracting, and financial

incentives.”).

15 FOLLAND ET AL., supra note 14, at 252;

Day, supra note 6, at 8-10. On selective contracting

more generally, see Simon et al., supra note 6, at 2

(stating physicians can be selected on the “basis of

their prices, quality history, treatment styles, their

willingness to abide by [utilization review], and their

willingness to accept financial risk”). 

16

 See Michael Morrisey, Competition in

Hospital and Health Insurance Markets: A Review

and Research Agenda, 36 HEALTH SERVICES RES.

191 (2001); Gabel 4/23 at 160; Jon Gabel,

Competition Among Health Plan 3 (4/23) (slides), at

http://www.ftc.gov/ogc/healthcarehearings/docs/0304

23jongabel.pdf. HMOs also relied on capitation,

preauthorization review, and primary care

gatekeepers. Gabel 4/23 at 160-61. Plans that

engage in selective contracting can also “deselect” a

provider who does not meet their needs and

requirements. TIMOTHY LAKE ET AL., MEDICARE

PAYMEN T ADVISORY COMM’N, MPR NO. 8568-700,

HEALTH PLANS’ SELECTION AND PAYMENT OF

HEALTH CARE PROVIDERS, 1999, at 72-73 (2000)

(final report). 

17 Gabel 4/23 at 160. Another panelist

stated that provider margins do not begin to fall until

at least three HMOs are competing, and that more

than 4 or 5 HMOs in a local market have no

additional effect on margins. Mazzeo 4/23 at 137-

138. Another panelist focused on competition in the

Medicare managed care market. Pizer 4/23 at 144. 

See also Alan T. Sorensen, Insurer-Hospital

Bargaining: Negotiated Discounts in PostDeregulation Connecticut, 51 J. IND USTRIAL ECON.

469 (2003) (noting the “ability of insurers to obtain

discounts [is] determined primarily by [the] ability of

insurer to channel patients to hospitals with which

favorable discounts have been negotiated”); Michael

Staten et al., Market Share and the Illusion of Power: 

Can Blue Cross Force Hospitals to Discount?, 6 J.

HEALTH ECON. 43 (1987) (“Blue Cross obtained

substantial discounts only when it had numerous

hospitals with which to potentially contract”).

18 Gabel 4/23 at 160; Douglas R. Wholey et

al., The Effect of Market Structure on HMO

Premiums, 14 J. HEALTH ECON. 81 (1995) (“[M]ore

competition, measured by the number of HMOs in the

market area, reduces HMO premiums”).
5

variety of forms, including capitation,

putting the physician on salary, and paying a

bonus (or withholding a percentage of

payment) based on meeting clinical and/or

financial targets.19 Capitation pays the

provider a fixed amount for each of the

patients for whom he agrees to provide care,

regardless of whether those patients seek

care. Payment is typically based on a set

number of dollars “per member-per month.” 

In the mid-1990s, many commentators

believed that capitation would become the

basis for compensating most providers. 

Capitation lost some of its allure when some

physician groups that had received

capitation payments underestimated the

associated costs, and were forced to file

bankruptcy.20 Payors also grew less

interested in capitation in the late-1990s, as

providers became increasingly reluctant to

accept the associated risks. Financial

incentives can also be employed to

encourage consumers to receive care from

particular providers or in particular

locations. Co-payments and deductibles are

well-recognized forms of demand

management.21 

Utilization review appraises the

appropriateness and medical necessity of the

proposed treatment.22 Utilization review can

be conducted on a retrospective, concurrent,

or prospective basis. Although many payors

use utilization review, the variety of forms it

takes limit the ability to draw general

conclusions about its effectiveness.

23

 

These strategies can have an effect

beyond the consumers covered by the MCO

if providers tend to adopt a unitary standard

of practice. Providers who must comply

with certain quality protocols or report their

performance for their MCO patients may

(whether consciously or unconsciously)

19 David Orentlicher, Paying Physicians

More To Do Less: Financial Incentives To Limit

Care, 30 U. RICH. L. REV. 155, 158-159 (1996);

GAO, supra note 3, at 10 (“Managed care plans also

use provider payment methods to control costs.”);

AMERICAN MEDICAL ASS’N, MOD EL MANAGED CARE

CONTRACT: WITH ANNOTATIONS AND

SUPPLEM ENTAL DISCUSSION PIECES 46 (3rd ed.

2002), available at http://www.ama-assn.org

/ama1/pub/upload/mm/368/mmcc-02-public.pdf;

Glied, supra note 6, at 714-716; Stephen Latham,

Regulation of Managed Care Incentive Payments to

Physicians, 22 AM. J.L. & MED. 399 (1996). 

20 Peter R. Kongstvedt, Compensation of

Primary Care Physicians in Managed Health Care

Plans, in ESSENTIALS OF MANAGED HEALTH CARE 85,

106 (Peter R. Kongstvedt ed., 4th ed. 2003). 

21

 See Haiden A. Huskamp et al., The Effect

of Incentive-Based Formularies on Prescription Drug

Utilization and Spending, 349 NEW ENG. J. MED.

2224 (2003) (copayments can affect pharmaceutical

spending and usage); Dana P. Goldman et al.,

Pharmacy Benefits and the Use of Drugs by the

Chronically Ill, 291 JAMA 2344 (2004)

(documenting substantial price responsiveness in

pharmaceutical use by the chronically ill); JOSEPH P.

NEWHOU SE, FREE FOR ALL? LESSONS FROM THE

RAND HEALTH INSURANCE EXPERIMENT (1993);

Willard G. Manning et al., Health Insurance and the

Demand for Medical Care: Evidence from a

Randomized Experiment, 77 AM. ECON. REV. 251

(1987). 

22

 See generally GAO, supra note 3, at 20

(“By reviewing physicians’ clinical decisions and

requiring authorization for some specialist and

hospital services, UR attempts to lower costs by

avoiding services that do not meet the reviewers’

standards for necessity of care.”).

23 DRANOVE, supra note 1, at 83 (“The

bottom line is that there are no studies to date that

provide a definitive answer about how UR affects

costs, nor are there any studies of whether UR

systematically affects quality.”). 
6

adopt those protocols for all their patients.24 

B. The Managed Care 

Backlash

Managed care grew so unpopular by

the late-1990s that most commentators

began referring to a “managed care

backlash.”25 Providers complained about the

second-guessing of their clinical judgment,

and argued that managed care undermined

the doctor-patient relationship and quality of

care.26 Consumers expressed concern that

managed care was restricting choices,

limiting access to necessary medical care,

and lowering quality.27 Consumers were

also exceedingly skeptical about the use of

direct financial incentives and utilization

review.28 These concerns resulted in a

substantial number of state and federal

legislative and regulatory initiatives

targeting more restrictive forms of managed

care, along with private litigation. These

24 Alex D. Federman & Albert L. Siu, The

Challenge of Studying Managed Care as Managed

Care Evolves, 39 HEALTH SERVICES RES. 7 (2004);

Lawrence C. Baker, Managed Care Spillover Effects,

24 ANN. REV. PUB. HEALTH 435 (2003); Kate M.

Bundorf et al., Impact of Managed Care on the

Treatment, Costs, and Outcomes of Fee-for-Service

Medicare Patients with Acute Myocardial Infarction,

39 HEALTH SERVICES RES. 131 (2004). 

25 Bloche 6/10 at 181; Lesser 9/9/02 at 76;

Peter Jacobson, Who Killed Managed Care: A Policy

Whodunit?, 47 ST. LOUIS L J. 365, 371 (2003) (noting

that physicians “provided some of the most

vociferous opposition to managed care that

contributed to the public backlash beginning in the

mid-1990s”); David Mechanic, The Managed Care

Backlash: Perceptions and Rhetoric in Health Care

Policy and the Potential for Health Care Reform, 79

MILBANK Q. 35, 40 (2001) (observing that

“[u]nhappy physicians contribute[d] to the managed

care backlash . . . .”); David A. Hyman, Regulating

Managed Care: What’s Wrong With A Patient Bill of

Rights, 73 S. CAL. L. REV. 221 (2000). See also

Special Issue The Managed Care Backlash, 24 J.

HEALTH, POL., POL’Y & L. 873-1218 (Issue 5, Oct.

1999).

26 Mechanic, supra note 25, at 41 (“Doctors

complain increasingly about not having sufficient

time for their patients, and our understanding of

managed care leads us to suspect . . . that time is

‘being squeezed out’ of the physician-patient

relationship.”); Jacobson, supra note 25, at 370

(observing that “[i]n a relatively short period of time,

managed care challenged and undermined . . . core

doctrines” such as the physician-patient relationship). 

See also American Chiropractic Ass’n, Comments

Regarding Health Care and Competition Law and

Policy (Sept. 9, 2003) [Submitted by Daryl D. Wills

& James D. Edwards] 1-3 (Public Comment)

[hereinafter links to FTC/DOJ Health Care Hearings

Public Comments are available at http://www.ftc.gov/

os/comments/healthcarecomments2/index.htm]. 

27 Agrawal & Veit, supra note 2, at 41

(noting a survey that reported 58% of Americans

thought managed care hurt care quality); Robert J.

Blendon et al., Understanding the Managed Care

Backlash, 17 HEALTH AFFAIRS 83 (July/Aug. 1998)

(citing surveys that found 45 percent of American

believed that managed care had decreased the quality

of health care for patients and that 54 percent of

Americans believed that managed care will reduce

quality of medical care in the future); Eleanor D.

Kinney, Tapping and Resolving Consumer Concerns

About Health Care, 26 AM. J.L. MED. 335, 339

(2000) (“Consumer concerns about health care vary

greatly but pertain primarily to three issues: quality,

cost and access.”); Mechanic, supra note 25, at 37

(“But a more fundamental reason for the public

perception is that most Americans are discomforted

by mechanism for doing so.”).

28 Mark A. Hall, The Theory and Practice of

Disclosing HMO Physician Incentives, 65 LAW &

CONTEMP. PROBS. 207, 214 (2002); Henry T. Greely,

Direct Financial Incentives in Managed Care: 

Unanswered Questions, 6 HEALTH MATRIX 53, 70

(1996) (discussing consumers’ concerns that managed

care’s use of direct financial incentives will lead to

different treatments, at some risk to patients’ health);

Robinson, supra note 11, at 2623.
7

initiatives have affected the forms of

managed care available in the marketplace,

although some commentators believe that

competitive responses to the backlash had a

bigger impact.29

Several commentators have argued

that there is a substantial gap between

consumer and provider perceptions and the

actual impact of managed care.30 These

commentators point to surveys and studies

which show that consumers are generally

satisfied with their own MCOs, that MCOs

do not provide worse quality care than FFS

medicine, and that managed care “horror

stories” are often exaggerated or highly

unrepresentative.31 Regardless, as Part C

reflects, less restrictive forms of managed

care have become extremely popular in

recent years.32 

C. Recent Developments

1. The Return of Open Networks and

the Rise of Tiering

New forms of health care delivery

have emerged, including preferred provider

organizations (PPOs), point-of-service

(POS) plans, and “concierge care.” PPOs

involve a broad network of providers, who

29

 See Ginsburg 2/26 at 60-61; M. Gregg

Bloche & David Studdert, Law as an Agent of Health

System Change, 23 HEALTH AFFAIRS 29 (Mar./Apr.

2004).

30

 See Richard I. Smith et al., Examining

Common Assertions about Managed Care, in

ESSENTIALS OF MANAGED HEALTH CARE, supra note

20, at 71 (examining common assertions about

managed care and concluding “[the] claims made by

opponents of managed care are often simply wrong”);

Mechanic, supra note 25, at 36 (arguing that many

have “a distorted understanding of the relation

between financial constraints and the provision of

accessible and competent health care,” and these

“factual misconceptions about managed care feed on

themselves, make the public anxious, and . . .

contribute to an atmosphere of distrust”); Hyman,

supra note 25, at 241-242. 

31 Smith et al., supra note 30, at 72 (noting

national surveys that “have reported high levels of

consumer satisfaction with managed care plans”);

Blendon et al., supra note 27, at 82 (“[M]ost insured

Americans, regardless of whether they have managed

care or traditional coverage, are satisfied with their

own health insurance plan.”); Robert H. Miller &

Harold S. Luft, HMO Plan Performance Update: An

Analysis Of The Literature, 1997-2001, 21 HEALTH

AFFAIRS 63 (July/Aug. 2002) (“Results from

seventy-nine studies suggest that both types of plans

provide roughly comparable quality of care . . . . 

Quality-of-care results in particular are

heterogeneous, which suggests that quality is not

uniform – that it varies widely among providers,

plans (HMO and non-HM O), and geographic

areas.”); Joseph M. Gottfried & Frank A. Sloan, The

Quality of Managed Care: Evidence from the

Medical Literature, 65 LAW & CONTEMP. PROBS. 103

(2002); R. Adams Dudley et al., The Impact of

Financial Incentives on Quality of Care, 76 MILBANK

Q. 649 (1998).

Negative consumer perceptions were

frequently fueled by negative media coverage and

political debate. Hyman, supra note 25, at 237-241;

Jacobson, supra note 25, at 381-385; Mechanic,

supra note 25, at 37 (“The chorus of opposition from

physicians and other professionals, negative media

coverage, repeated atrocity-type anecdotes, and

bashing by politicians all contribute to the public’s

discomfort with new arrangements.”). 

32

 See Robert E. Hurley et al., The Puzzling

Popularity of the PPO, 23 HEALTH AFFAIRS 59-60

(2004) (“Consumer backlash, intensified regulatory

pressures, provider disenchantment with risk, and the

unsustainable pricing practices of plans seeking to

buy entry into new markets all conspired to produce a

rapid reversal of fortune for the HMO product and

stimulate a massive migration in to PPO

arrangements.”); William M. Sage & Peter J.

Hammer, A Copernican View of Health Care

Antitrust, 65 LAW & CONTEMP. PROBS. 241 (2002). 
8

agree to accept discounted FFS payments in

exchange for participating in the network.33

POS programs generally require consumers

to select a primary care gatekeeper, yet allow

them to use out-of-plan providers for

services in exchange for a higher copayment. Some physicians who seek to

avoid managed care entirely have begun

concierge practices, where they provide

personalized care, including house calls to

patients willing and able to pay out of pocket

for health care costs.34 The price of these

options vary, with consumers facing greater

out-of-pocket costs if they select less

restrictive options. 

Health care financing has also moved

toward a tiered system of payment. As the

prior paragraph states, and Chapter 5

outlines in greater detail, consumers pay less

if they select a restricted managed care plan,

or use an in-network provider than if they

opt for a less restrictive plan or use an outof-network provider. As Chapters 3 and 6

explain, tiering is also being used for

hospitals and pharmaceuticals. Such

strategies expose consumers to an increased

share of the economic costs of their

decisions.35 

2. Payment for Performance

In health care, payment has generally

not been directly tied to the quality of the

services that are provided. Numerous

commentators have argued that payment for

performance (P4P) should be more widely

used. The Institute of Medicine (IOM)

recently recommended that financing and

delivery systems should “[a]lign financial

incentives with the implementation of care

processes based on best practices and the

achievement of better patient outcomes.36 A

prominent trade association of health plans

similarly advocates using “payment

incentives that reward quality care.”37 An

open letter in a prominent health policy

journal similarly argued that strong financial

incentives were necessary to motivate

providers to improve quality.38 Other

commentators suggest that “quality33

 See Hurley et al., supra note 32, at 56-58. 

34 Carl F. Ameringer, Devolution and

Distrust: Managed Care and the Resurgence of

Physician Power and Authority, 5 DEPAUL J. HEATH

CARE L. 187, 203 (2002). Some concierge practices

charge consumers on a FFS basis for the services they

provide, while others impose a flat fee on top of their

FFS charges. 

35

 See Brewbaker 9/9/02 at 22-26.

36 INSTITUTE O F MEDICINE (IOM), CROSSING

THE QUALITY CHASM: A NEW HEALTH SYSTEM FOR

THE 21ST CENTURY 184 (2001) (recommending that

financing and delivery systems “[a]lign financial

incentives with the implementation of care processes

based on best practices and the achievement of better

patient outcomes. Substantial improvements in

quality are most likely to be obtained when providers

are highly motivated and rewarded for carefully

designing and fine-tuning care processes to achieve

increasingly higher levels of safety, effectiveness,

patient-centeredness, timeliness, efficiency, and

equity.”).

37 AMERICA’S HEALTH INSURANCE PLAN,

BOAR D OF DIRECTORS STATEMENT: A COMMITMENT

TO IMPROVE HEALTH CARE QUALITY, ACCESS, AND

AFFORDABILITY (Mar. 2004), at http://www.ahip.org/

content/default.aspx?docid=428. See also Ignagni

5/27 at 59 (“We need to pay for quality and

effectiveness, not for overuse, misuse, and

underuse.”).

38 Donald M. Berwick et al., Pay for

Performance: Medicare Should Lead, 22 HEALTH

AFFAIRS 8 (Nov./Dec. 2003). See also Casalino 5/28

at 134 (“[P]hysicians for the most part don’t have an

incentive to improve quality . . . .”).
9

incentive programs should be viewed as part

of a broader strategy of promoting health

care quality through measuring and reporting

performance, providing technical assistance

and evidence-based guidelines, and,

increasingly, giving consumers incentives to

select higher-quality providers and manage

their own health.”39 Public and private

payors are experimenting with P4P.40 

Panelists noted that some providers

have resisted P4P and tiering programs, and

refused to provide information regarding the

quality of care they provide.41 Other

panelists noted that providers are concerned

about the reliability and validity of P4P

measures, and the fact that payors are

requiring them to invest in expensive

equipment without providing additional

funds or evidence that such investments are

cost-justified.42 

3. The Road Forward

As Chapters 2, 3, and 5 reflect, there

has been considerable ferment in the health

care financing and delivery markets in the

last three decades. Such “creative

destruction” is one of the benefits of a

competitive market.43 Because no single

arrangement is likely to satisfy everyone,

diversity of financing and delivery options

helps ensure that consumer welfare is

maximized. Finally, competition is a

process; as one commentator noted, “the

superiority of open markets ... lies in the fact

39 Meredith B. Rosenthal et al., Paying for

Quality: Providers’ Incentives for Quality

Improvement, 23 HEALTH AFFAIRS 127 (Mar./Apr.

2004).

40

 See David A. Hyman & Charles Silver,

You Get What You Pay For: Result-Based

Compensation for Health Care, 58 WASH. & LEE L.

REV. 1427 (2001); Arnold M. Epstein et al., Paying

Physicians For High Quality Care, 350 NEW ENG. J.

MED. 406 (2004); NAT’L HEALTH CARE PURCHASING

INSTITUTE, ENSURING QUALITY PROVIDERS: A

PURCHASER’S TOOLKIT FOR USING INCENTIVES (The

Robert Wood Johnson Foundation) (May 2002);

NAT’L COMM ITTEE FOR QUALITY ASSURANCE,

INTEGRATED HEALTHCARE ASS’N PAY FOR

PERFORMANCE PROGRAM: 2004 CLINICAL MEASURE

SPECIFICATIONS AND AUDIT RE VIEW GUIDELINES

(Dec. 2003); The Leapfrog Group, Leapfrog

Compendium, http://www.leapfroggroup.org/ir

compendium.htm (last visited July 13, 2004). 

In Britain, the National Health Service is

experimenting with a similar P4P strategy. Peter C.

Smith & Nick York, Quality Incentives: The Case of

U.K. General Practitioners, 23 HEALTH AFFAIRS 112

(Mar./Apr. 2004).

41 Milstein 5/30 at 32; Milstein 5/28 at 179;

Tuckson 5/30 at 113 (“There is no question that we

have experienced dominant players in the

marketplace who basically can say to us, and who say

to employers as well on whose behalf we operate, ‘we

don’t have to play this quality game because (A) we

have got the market; or (B) we are the only game in

town. And either way we can thumb our nose at this

thing and we will continue to do what we are doing

and provide lip service to the people who come here

saying we are going to give you some information

about quality.’”); Probst 5/29 at 90; Romano 5/28 at

95. 

42 Kumpuris 5/30 at 47; KELLY J. DEVERS &

GIGI Y. LIU, LEAPFROG PATIENT-SAFETY STANDARDS

ARE A STRETCH FOR MOST HOSPITALS 5 (Ctr. for

Studying Health Sys. Change, Issue Brief No. 77,

2004), available at http://www.hschange.org/

CONTENT/647/647.pdf; The Leapfrog Group,

Leapfrog’s Regional Roll-Outs Fact Sheet (June

2004), at http://www.leapfroggroup.org/FactSheets/

RRO_FactSheet.pdf; Hyman & Silver, supra note 40,

at 1462-1471.

43

 See JOSEPH SCHUM PETER, CAPITALISM,

SOCIALISM AND DEMOCRACY 83 (1945) (“This

process of Creative Destruction is the essential fact

about capitalism. It is what capitalism consists in and

what every capitalist concern has got to live in.”).
10

that the optimum outcome cannot be

predicted.”44 

II. QUALITY

Quality is an extremely important

multi-dimensional attribute of health care.45

Many health services researchers and

providers focus on whether the care that is

provided is evidence-based.46 Economists

typically view quality as a component of

non-price competition.47 The IOM defines

quality as “the degree to which health

services for individuals and populations

increase the likelihood of desired health

outcomes and are consistent with current

professional knowledge.”48 The Agency for

Healthcare Research and Quality (AHRQ)

defines quality health care as “doing the

right thing at the right time in the right way

for the right person and having the best

result possible.”49 Regulators and most

academic commentators have historically

employed a three-part framework (structure,

process, and outcome) to assess quality of

care.50 Some consumers may focus on how

long they must wait for an appointment, and

how they are treated when they arrive at the

provider’s office.51 Depending on which of

these attributes is emphasized and the

particular condition being evaluated, it is

possible for the same care to be

simultaneously deemed high quality and low

quality.52

44 MARTHA DERTHICK & PAUL J. QUIRK,

THE POLITICS OF DEREGULATION 124 (1985) (quoting

Alfred Kahn, former Administrator of the Civil

Aeronautics Board). See also Blumstein 2/27 at 18. 

45 Gaynor 5/28 at 70; Muris 2/26 at 7;

Kanwit 9/9/02 at 182. 

46 Thomas Bodenheimer, The American

Health Care System - The Movement for Improved

Quality in Health Care, 340 NEW ENG. J. MED. 488

(1999).

47

 See Pauly 5/28 at 31 (defining quality as

“whatever matters that isn’t quantity”); Rosenthal

5/28 at 163; William M. Sage & Peter J. Hammer,

Competing on Quality of Care: The Need to Develop

a Competition Policy for Health Care Markets, 32 U.

MICH. J.L. RE FORM 1069, 1072-73 (1999). But see

Gaynor 5/27 at 77 (“I don’t view . . . price and quality

competition as separate issues.”).

48 IOM, supra note 36, at 46. 

49 AGENCY FOR HEALTHCARE RESEARCH &

QUALITY, U.S. DEP’T OF HEALTH & HUMAN

SERVICES, NATIONAL HEALTHCARE QUALITY REPORT

10 (2003), at http://qualitytools.ahrq.gov/quality

report/download_report.aspx. 

50

 See Clancy 5/27 at 6-9; Kumpuris 5/30 at

43; Romano 5/28 at 50-61. Structural measures of

quality focus on whether particular organizational

structures are in place, such as a mechanism for

credentialing physicians who seek admission to a

medical staff. Process measures of quality focus on

whether particular inputs are in place, such as the

vaccination rate among a pediatric practice and the

number of nurses per patient in an ICU. Outcome

measures of quality focus on the results of medical

treatment, such as the five year mortality rate

following treatment for lung cancer. 

51 Darby 5/30 at 8-9 (“For example, patients

value having communication with their provider,

being able to have things explained to them in a way

that they can understand, and that the provider will

listen to them and answer the questions that they

have.”); John Kenagy, Service Quality in Health

Care, 281 JAMA 661 (1999).

52

 See Myers 5/29 at 218, 220. Even if one

uses the same definition, it is possible for an

institution to provide high quality care for some

conditions and low quality care for other conditions. 

See Clancy 5/27 at 12. An additional complication is

that “the proportion of healthcare . . . where there’s

clearly one right answer is clearly a minority of

what’s provided in healthcare.” Id. at 139. 
11

Several commentators and panelists

suggested that many health care providers

and health services researchers view quality

as effectively binary: a provider is either

delivering high quality care to a particular

patient or he is not doing so.53 This

paradigm treats the resources of the

individual consumer as immaterial to the

determination of whether the care is of

acceptable quality.54 Conversely,

economists and legal scholars sometimes

treat quality as an attribute that can be

traded-off against price and other attributes

of health care.55 Controversy can result from

these differing conceptions of quality; in one

Hearing session, panelists hotly disagreed

over the appropriateness of conducting a

cost-benefit analysis of improvements in

quality.56

53

 See Hammer 5/28 at 144 (“[F]rom a

professional paradigm or health services research

paradigm, there’s an absolutist or objective nature of

what quality is.”); Hammer 2/27 at 63; Hyman 5/28 at

276. See also William M. Sage et al., Why

Competition Law Matters to Health Care Quality, 22

HEALTH AFFAIRS 31 (Mar./Apr. 2003); James F.

Blumstein, Health Care Reform and Competing

Visions of Medical Care: Antitrust and State

Provider Cooperation Legislation, 79 COR NELL L.

REV. 1459, 1465-66 (1994).

54

 See, e.g., Blumstein 2/27 at 22-26; James

5/28 at 104-105 (“[V]ery often patients and

physicians define quality as spare no expense . . . . 

The reason that you’d engage in price competition

was a hope to increase your patient volume or your

treatment volume . . . [physicians] work on a

completely different set of incentives, price largely

being immaterial.”); Iezzoni 5/28 at 117 (“‘Throw

everything that you can possibly do for me, Doctor,’

is how some patients do define quality, although this

is going to vary from patient to patient.”); Lomazow

6/10 at 250 (“[D]o you want to run the system on

high octane or regular? Do you want to use factory

parts or do you want to use knock-offs or rebuilts? 

The American public deserves the best. They pay for

the best.”).

This paradigm similarly treats quality as a

purely technical matter that must be handled by

providers. See Sfikas 2/27 at 187 (“[W]hen it comes

to quality, the dental profession believes that it is the

dentists who understand quality”); Opelka 2/27 at 178

(“I am a physician and it is my mission to deliver,

what I believe is the highest quality of care to every

patient.”). See also Michael L. Millenson, “Miracle

and Wonder”: The AMA Embraces Quality

Measurement, 16 HEALTH AFFAIRS 183, 183

(May/June 1997) (describing an advertisement in the

New York Times in which a physician has her arm

around a patient; the headline reads “She’s my

patient. There’s no way I’ll let anyone put a price tag

on her life.”); Blumstein 2/27 at 25 (professional

paradigm “vested enormous authority in professionals

to make fundamental decisions about medical care”).

55

 See Sage 5/29 at 144 (“Competition law

treats quality as one attribute of a good or service

which must be traded off against price and other

attributes, while the medical profession has

historically regarding quality as a irreducible

minimum to be determined by physicians without

reference to cost.”); Hammer 5/28 at 143-144

(“[T]here’s an underlying conflict in the way that

economists and antitrust lawyers approach questions

of quality than health services research.”). See also

Sage et al., supra note 53, at 39. 

56

 Compare Modell 6/10 at 257 (“If . . . the

economist can put to me on paper what one in 400

excess mortality is worth, then I can address that

question. As a physician and as someone who has

spent hundreds of thousands of our own dollars trying

to make anesthesia safer, I can tell you, that number is

unacceptable to me”), with Bloche 6/10 at 257-58

(“You need to put a number on that one and 400. 

Ultimately, what is involved here is the need to come

up with a valuation of a life saved. What is this

particular method, this particular policy costing in

terms of, well, the cost of each life saved? . . . [W]hen

we lose those resources because we’re taking the

more expensive method of doing this, then we don’t

have those resources for other health care needs.”).

See also Guterman 5/29 at 268 (“One thing

that occurs to me is deciding sort of in whose eyes

quality is to be evaluated. We’ve got a number of

payers here and some providers and – you know, and
12

Commentators and panelists agreed

that health care quality actually encompasses

many distinct factors, and the delivery

system must perform well on each factor if it

is to provide high quality care.57 These

factors include whether the medical

diagnosis is correct, whether the “right”

treatment is selected (with the “right”

treatment varying, depending on the

underlying diagnosis and patient preferences

and resources), whether the treatment is

performed in a technically competent

manner, whether service quality is adequate,

and whether patients are able to access the

care they desire without undue travel and

inconvenience. Whether cutting edge

technology and treatments are available is a

component of health care quality, but it is

not the only consideration. Information is

necessary for consumers to make decisions

about the care they will receive, and

determine whether they are receiving the

type of care they prefer and can afford. 

Competition has an important role to

play in ensuring that consumers receive high

quality care, and informing consumers of the

costs and benefits of selecting a particular

provider or treatment. Competition law

promotes quality by encouraging consumer

empowerment through information

disclosure, and preventing market

participants from engaging in

anticompetitive conduct. At the same time,

competition law provides considerable

flexibility to market participants to act

collectively to improve quality of care. 

A. What Is Known About Health Care

Quality?

In recent decades, technology,

pharmaceuticals, and know-how have

substantially improved how care is delivered

and the prospects for recovery. American

markets for innovation in pharmaceuticals

and medical devices are second to none. 

The miracle of modern medicine has

become almost commonplace. Americans

reap the benefits of new and improved

drugs, cheaper generic drugs, treatments

with less pain and fewer side effects, and

treatments offered in a manner and location

consumers desire. At its best, American

health care is the best in the world. 

Commentators and panelists agree

that providers are committed to delivering

high quality care, that the vast majority of

consumers are getting the care they need,

and that there have been recent

improvements in quality of care.58 There is,

the title of the session is consumer information, but I

think there’s a real difference between what

consumers may want and what payers may want.”);

Delbanco 5/29 at 269-270 (noting importance of

deciding “who is the customer” in health care);

McGinnis 5/30 at 53-54 (“The lack of information,

and to some degree a lack of agreement on what

constitutes high-quality surgical care from both the

clinical and patient perspectives creates confusion.”).

57

 See Clancy 5/27 at 18-19; Myers 5/29 at

218-219, 264. 

58 AHRQ, supra note 49, at 2. See also

Carolyn Clancy, IPA Overview 28 (5/27) (slides), at

http://www.ftc.gov/ogc/healthcarehearings/docs/0305

27clancy.pdf; Fisher 5/27 at 42 (“I think physicians

are doing their best in settings of real complexity to

deliver care that they know should be delivered.”);

Ignagni 5/27 at 64; Kumpuris 5/30 at 49 (“The vast

majority of physicians are good doctors, motivated to

provide quality of care using evidence-based clinical

pathways. However, good doctors and bad systems

will still result in adverse and undesirable

outcomes.”); McGinnis 5/30 at 50-51; Tuckson 5/30

at 82-83 (“Physicians want to do the right thing.”);

Nielsen 5/30 at 225 (“We are all partners in this
13

however, still significant room for further

improvement. A 1998 literature review

noted that 

there are large gaps between the

care people should receive and the

care they do receive. This is true

for all three types of care – 

preventive, acute, and chronic – 

whether one goes for a check-up, a

sore throat, or diabetic care. It is

true whether one looks at overuse

or underuse. It is true in different

types of health care facilities and

for different types of health

insurance. It is true for all age

groups, from children to the

elderly. And it is true whether one

is looking at the whole country or a

single city . . . A simple average of

the findings of the preventive care

studies shows that about 50 percent

of people received recommended

care. An average of 70 percent . . .

received recommended acute care,

and 30 percent received

contraindicated acute care. For

chronic conditions, 60 percent

received recommended care and 20

percent received contraindicated

care.59

Commentators and panelists stated

that more recent studies have reached

similar conclusions.60 In particular,

morass, and we all have a vested interest in doing it

right.”); Gebhart 6/12 at 227; Kizer 6/11 at 71

(“There’s lots of good things that we do in health care

here in the U.S. as far as training of our practitioners;

having lots of diagnostic and treatment technology

diffused throughout our community; our biomedical

research program is the envy of the world and the

engine that’s driving development throughout the

world; and lots of technology.”); Greenberg 9/9/02 at

180. 

59 Mark A. Schuster et al., How Good Is the

Quality of Health Care in the United States?, 76

MILBANK Q. 517, 520-21 (1998). See also Mark R.

Chassin & Robert W. Galvin, The Urgent Need to

Improve Health Care Quality, 280 JAMA 1000

(1998). 

60

 See Berenson 5/30 at 239-40 (noting there

are “a couple of JAMA articles documenting quality

problems for the Medicare population on . . . 23

measures of [] well accepted process and some

outcome measures on quality . . . .”); Fisher 5/27 at

28 (“Errors result in the deaths of thousands. 

[Leape’s] estimate is that it’s the equivalent of three

jumbo jet crashes every two days, dying from a

consequence of errors”); Ignagni 5/27 at 133; Gaynor

5/28 at 73 (“It’s been very, very extensively

documented. There’s a lot of variation in quality.”);

Milstein 5/28 at 178-179 (“[Q]uality failure is severe

and invisible.”); Milstein 2/27 at 100-101 (“Large

employers and consumer organizations agree with the

Institute of Medicine’s reports over the last four years

that there’s a very wide gap between the health care

that Americans are getting and what health care could

and should be . . . . We think the optimality gap with

respect to American spending on health care could be

as large as 40 percent of the dollars that we’re

spending.”); Darling 2/27 at 114; Kanwit 6/25 at 29;

Kizer 6/11 at 72; Brewbaker 9/9/02 at 26-31.

See also AHRQ, supra note 49, at 2-3; Eve

A. Kerr et al., Profiling the Quality of Care in Twelve

Communities: Results From the CQI Study, 23

HEALTH AFFAIRS 247 (May/June 2004) (“Health care

quality falls far short of its potential nationally . . . . 

We find room for improvement in quality overall and

in dimensions of preventive, acute, and chronic care

in all of these communities; no community was

consistently best or worst on the various

dimensions”); Elizabeth A. McGlynn et al., The

Quality of Health Care Delivered to Adults in the

United States, 348 NEW ENG. J. MED. 2635 (2003)

(“Quality varied substantially according to the

particular medical condition, ranging from 78.7

percent of recommended care . . . for senile cataract
14

commentators and panelists noted that

treatment patterns vary significantly;

procedures of known value are omitted; and

treatments that are unnecessary and

inefficacious are performed. Moreover,

commentators and panelists noted that

considerable sums are spent annually on

services whose value is questionable or

non-existent.61 As one commentator stated,

“quality problems . . . abound in American

medicine. The majority of these problems

are not rare, unpredictable, or inevitable

concomitants of the delivery of complex,

modern health care. Rather, they are

frighteningly common, often predictable,

and frequently preventable.”62 

Commentators and panelists noted

to 10.5 percent of recommended care . . . for alcohol

dependence,” with overall average of half of

recommended care provided); Donald M. Berwick,

Errors Today and Errors Tomorrow, 348 NEW ENG.

J. MED. 2570 (2003); Earl P. Steinberg, Improving

the Quality of Care - Can We Practice What We

Preach?, 348 NEW ENG. J. MED. 2681 (2003); John

P. Burke, Infection Control - A Problem for Patient

Safety, 348 NEW ENG. J. MED. 651 (2003); Tejal K.

Gandhi et al., Adverse Drug Events in Ambulatory

Care, 348 NEW ENG. J. MED. 1556 (2003); Chunliu

Zhan & Marlene R. Miller, Excess Length of Stay,

Charges, and Mortality Attributable to Medical

Injuries During Hospitalization, 290 JAMA 1868

(2003) (concluding that failures in care processes for

18 medical complications resulted in more than

32,000 deaths, 2.4 million extra days in the hospital,

and more than $9 billion annually); Stephen F. Jencks

et al., Change in the Quality of Care Delivered to

Medicare Beneficiaries, 1998-1999 to 2000-2001,

289 JAMA 305 (2003); McNeil, supra note 1, at

1612 (“The public has just begun to recognize that

despite the enormous achievements of American

medicine and the American health care system, the

quality of care in this country needs to be and can be

improved.”).

61

 See Foster 5/29 at 198 (“[W]e all know

that mistakes do occur, and there is both overuse and

under-use of some diagnostic and treatment

procedures, as described in the Institute of

Medicine’s landmark reports, To Err is Human and

Crossing the Quality Chasm.”); Myers 5/29 at 217-

218 (“We cannot, of course, ignore the Institute of

Medicine studies that have been referenced earlier

and the studies that are in the hopper both within the

Institute of Medicine and by other agencies . . . .”);

Kumpuris 5/30 at 41 (“[E]fforts to improve health

care quality are not only needed, but long overdue. In

2001, the Institute of Medicine published ‘Crossing

the Quality Chasm’ which found that the United

States health care system does not uniformly and

consistently deliver high quality care to all patients. 

A diverse literature addresses this variation in health

quality and the difficulties in measuring those

differences. Although the conclusions of this

landmark IOM report are seldom disputed, the

reasons are far from agreed upon.”); O’Kane 5/30 at

67-70; Milstein 5/28 at 183-184 (“[T]he probability

of there being a great hospital that warrants a great

brand name, based on the current evidence, is close to

zero.”); Gebhart 6/12 at 222-223.

See also Schuster et al., supra note 59, at

518 (differentiating between too much care, too little

care, and the wrong care); Mark R. Chassin, Is Health

Care Ready for Six Sigma Quality?, 76 MILBANK Q.

565, 570-78 (1998) (differentiating between overuse,

underuse, and misuse); David P. Phillips et al.,

Increase in U.S. Medication-Error Deaths between

1983 and 1993, 351 LANCET 255 (1999); David W.

Bates et al., Incidence of Adverse Drug Events and

Potential Adverse Drug Events: Implications for

Prevention, 274 JAMA 29 (1995).

62 Chassin, supra note 61, at 566. See also

Bodenheimer, supra note 46, at 488; Medicare

Payment Advisory Committee (MedPAC), Quality of

Care in the Medicare Program, in REPORT TO THE

CONGRESS: VARIATION AND INNOVA TIO N IN

MEDICARE § 2, at 17 chart 2-1 (June 2003) (finding

between 2000 and 2001, when a patient was admitted

with a heart attack, 31 percent of patients did not

receive beta blockers within 24 hours of admission,

21 percent did not receive beta blockers upon

discharge, and 43 percent of smokers were not

advised to stop), at http://w3.votenet.com/newmed

pac/publications%5Ccongressional_reports%5CJun0

3DataBookSec2.pdf.
15

that medical treatments can injure

consumers. The IOM estimated that medical

errors during inpatient hospitalization

caused between 44,000 and 98,000 deaths

per year – making medical errors the eighth

leading cause of death in the United States.63

According to the IOM, every year medical

errors in the hospital kill more people than

motor vehicle accidents, breast cancer, and

AIDS – without even counting the

consequences of medical errors and low

quality care in the outpatient setting.64 To be

sure, these problems are not unique to

American health care.65

Commentators and panelists agreed

that “in American health care, geography is

destiny. Both the amounts and kinds of care

provided to residents of the United States are

highly dependent on two factors: the

capacity of the local health care system

(which influences how much care is

provided) and the practice style of local

physicians (which determines what kind of

care is provided).”66 The cost of care varies

63

 See INSTITUTE O F MEDICINE (IOM ), TO

ERR IS HUMAN 22 (1999). These figures have been

disputed. Compare Rodney A. Hayward & Timothy

P. Hofer, Estimating Hospital Deaths Due to Medical

Errors: Preventability is in the Eye of the Reviewer,

286 JAMA 415 (2001), and Christopher M. Hughes

et al., Deaths Due to Medical Errors are

Exaggerated in Institute of Medicine Report, 284

JAMA 93 (2000), with Lucian L. Leape, Institute of

Medicine Medical Error Figures Are Not

Exaggerated, 284 JAMA 95 (2000). See also Lucian

Leape, Error in Medicine, 272 JAMA 1851 (1994)

(estimating that injuries caused by physicians during

inpatient hospitalization accounted for 180,000

deaths per year). 

64 IOM, supra note 63, at 1. One panelist

noted that despite extensive publicity, Americans

dramatically underestimate the number of preventable

in-hospital deaths attributable to medical errors. 

Milstein 5/29 at 244. 

65

 See Kanwit 2/27 at 117; Elizabeth A.

McGlynn, There is No Perfect Health System, 23

HEALTH AFFAIRS 100 (May/June 2004).

66 Faculty of the Ctr. for the Evaluative

Clinical Sciences, Dartmouth Medical School, The

Dartmouth Atlas of Medical Care (1999), http://

www.dartmouthatlas.org/99US/chap_0_sec_1.php. 

See also Fischer 5/27 at 34-35; 40-41, 43; Milstein

2/27 at 122 (“[M]ost of the big dollar variation from

region to region in how much it costs . . . is not driven

by differences in consumer demand. It’s driven by . .

. supply-sensitive services . . . .”); Antos 9/30 at 119-

120 (“[T]here are large variations in practice patterns

across the United States that clearly indicate that

medical care is practiced in peculiar and often

inefficient ways”); Fisher 5/27 at 30-32; Bloche 6/10

at 169; Milstein 2/27 at 122-123 (“[M]ost of the big

dollar variation from region to region . . . is not

driven by differences in consumer demand. Its driven

by what Dartmouth would refer to as supply sensitive

services . . . only about 7 to 8 percent of health care

cost differences are rooted in what’s called preference

sensitive services . . . .”); Greaney 2/27 at 222; Elliot

S. Fisher et al., The Implications of Regional

Variations in Medicare Spending, Part 1, 138

ANNALS INTERN AL MED. 273 (2003); John E.

Wennberg et al., Geography And The Debate Over

Medicare Reform, 2002 HEALTH AFFAIRS (Web

Exclusive) W96, 96-97, at http://content.healthaffairs.

org/cgi/reprint/hlthaff.w2.96v1.

Such variation may not correspond to

consumer preferences. See generally Foundation for

Informed Medical Decision Making (“The decision

that will best serve a particular patient often depends

critically on the patient’s own preferences and values. 

The treatment that is best for one patient may not be

what is best for another who is in exactly the same

situation . . . a growing body of research shows that

when patients are well informed and play a significant

role in deciding how they are going to treat or

manage their health conditions, things work out

better. Informed patients feel better about the

decision process. Their decisions are more likely to

match up with their preferences, values and concerns. 

These patients are more likely to stick with the

regimens the treatment requires, and they often end

up rating their health after treatment as better.”), at

http://www.fimdm.org/shared_decision_making.php

(last visited July 14, 2004). See also Richard A.
16

as well: in the lowest quintile of regional

spending, it costs an average of $3,922 per

Medicare enrollee per year to provide care,

while in the highest quintile of regional

spending it costs $6,304 to provide care.67

One panelist noted that providers deliver

more services in high-cost areas, but the

additional services generally do not

correspond to higher use of evidence-based

protocols or better outcomes.68 For

example, one study found 56 percent of the

patients in the lowest spending region and

50 percent of patients in the highest

spending region received optimal treatment

for a heart attack.69 Similar patterns were

observed for the provision of preventative

care.70 One study indicates that there is an

inverse relationship between Medicare

spending per beneficiary and quality of care,

and higher spending actually purchases

lower quality care.71 

To summarize, health care quality

could be improved. The next section

considers the beneficial role of competition

in accomplishing this objective. 

B. Competition and Quality

The relationship between

competition and health care quality has not

been studied as extensively as the

relationship between competition and health

care cost. One panelist reviewed the

available studies and concluded that “the

best evidence thus far is that quality is

higher where we would think markets would

be more competitive.”72 

Deyo et al., Involving Patients in Clinical Decisions: 

Impact of an Interactive Video Program on Use of

Back Surgery, 38 MED. CARE 959 (2000); Joseph F.

Kasper et al., Developing Shared Decision-Making

Programs to Improve the Quality of Health Care, 18

QUALITY REV. BULL. 183 (1992); Michael J. Barry et

al., Watchful Waiting Versus Immediate

Transurethral Resection for Symptomatic Prostatism: 

The Importance of Patients’ Preferences, 259 JAMA

3010 (1988). 

67 Fisher 5/27 at 31; Elliot Fisher, What are

the Underlying Causes of Poor Quality and High

Costs? 6 (5/27) (slides), at http://www.ftc.gov/ogc/

healthcarehearings/docs/030527fisher.pdf. These

figures are adjusted for age, race, morbidity, and a

substantial number of other factors. 

68 Fisher 5/27 at 31-40. 

69

 Id. at 35-36. Elliot Fisher et al., The

Implications of Regional Variations in Medicare

Spending, Part 2: Health Outcomes and Satisfaction

with Care, 138 ANNALS OF INTERN AL MED. 288

(2003).

70 Fisher 5/27 at 35.

71 Katherine Baicker & Amitabh Chandra,

Medicare Spending, The Physician Workforce, and

Beneficiaries’ Quality of Care, 2004 HEALTH

AFFAIRS (Web Exclusive) W4-184, 187-88, at

http://content.healthaffairs.org/cgi/reprint/hlthaff.w4.

184v1. See also Fisher 5/27 at 39 (discussing his

study that showed “as you moved up to the highest

spending regions there’s a two and half percent higher

risk of death in the highest spending regions

compared to the lowest spending regions”);

Brewbaker 9/9/02 at 30.

72

 See Gaynor 5/27 at 78-79, 81-84; Wong

5/28 at 187-199; Town 5/28 at 199-209; Kessler 5/28

at 210-226; Gaynor 2/26 at 125. See also Gautam

Gowrisankaran & Robert Town, Competition, Payer,

and Hospital Quality, 38 HEALTH SERVICES RES.

1403 (2003) (“[E]stimates indicate that increasing

competition for HMO patients appears to reduce

prices and save lives and hence appears to improve

welfare. However, increases in competition for

Medicare appear to reduce quality and may reduce

welfare. Increasing competition has little net effect

on hospital quality for our sample.”); Daniel P.

Kessler & Mark B. McClellan, Is Hospital

Competition Socially Wasteful?, 115 Q.J. ECON. 577

(2000) (finding that welfare effects of competition in
17

More studies have been done

regarding the impact of consumer

information on quality. Information

regarding quality allows consumers to make

their own determinations of how best to

balance those attributes that are important to

them, obtain value for their money, and

drive improvements throughout the system. 

If consumers are poorly informed about

quality, providers may offer an inefficiently

low level of quality.73 Not all consumers

must be well-informed for the market to

deliver an efficient level of quality. All that

is required is that a sufficient number of

consumers be well-informed about prices

and quality levels of different sellers.74

These informed consumers can help drive

the market to a competitive outcome.

Consumers will use such information

to select health plans, providers, and

treatments that accord with their preferences

if the information is presented in a usable

fashion.75 Publicly available “report cards”

can motivate providers to address quality

deficiencies, even when it unclear whether

consumers are relying on such information.76

Although competition can play an

important role in enhancing quality of care,

there are informational and payment barriers

to effective competition. The next section

turns to these matters. 

C. Barriers to Improving Quality

1. Informational Barriers to

Improving Quality

In many markets, consumers have

ready access to reliable information with

the 1980s were ambiguous, but in the 1990s,

competition unambiguously improves social welfare,

in Medicare patients who suffered a heart attack). 

But see Kevin G. M. Volpp et al., Market Reform in

New Jersey and the Effect on Mortality From Acute

Myocardial Infarction, 38 HEALTH SERVICES RES.

515 (2003) (finding an increase in post-heart attack

mortality in New Jersey after competition increased

(as a result of repeal of rate-setting statute) and

subsidies for inpatient care for the uninsured

decreased). 

73

 See COUNCIL OF ECONOMIC ADVISORS,

ECONOMIC REPORT OF THE PRESIDENT, PROMOTING

HEALTH CARE QUALITY AND ACCESS 147 (2002) (“In

most market settings, consumers’ purchase decisions

are based on good information on the value of the

products they buy. But in healthcare the lack of good

information on the success of different treatments – in

terms of the best outcomes per dollar – means that

individuals and families have difficulty making

informed decisions, and insurance companies are not

rewarded for altering their coverage to encourage

high-value care.”).

74

 See Gaynor 5/27 at 81 (“[I]f you have

enough that are well informed and sellers can’t

readily discriminate between well-informed and

less-well-informed individuals, the well-informed

individuals can help drive the market.”); Herzlinger

5/27 at 94; Rosenthal 5/28 at 166. 

75

 See James 5/28 at 122-23; Fraser 5/28 at

329-330; JUDITH H. HIBBARD ET AL., AARP PUBLIC

POL’Y INSTITUTE, #2000-14, OLDER CONSUMERS’

SKILL IN USING COMPARATIVE DATA TO INFORM

HEALTH PLAN CHOICE: A PRELIMINARY ASSESSMENT

(2000) (finding consumers more likely to use

information that is presented in a usable fashion), at

http://research.aarp.org/health/2000_14_choice.pdf.

76 Judith H. Hibbard et al., Does Making

Hospital Performance Public Increase Quality

Improvement Efforts?, 22 HEALTH AFFAIRS 84

(Mar./Apr. 2003); Mark R. Chassin, Achieving and

Sustaining Improved Quality: Lessons From New

York State and Cardiac Surgery, 21 HEALTH AFFAIRS

48 (July/Aug. 2002); Eric C. Schneider & Arnold M.

Epstein, Influence of Cardiac-Surgery Performance

Reports on Referral Practices and Access to Care: A

Survey of Cardiovascular Specialists, 335 NEW ENG.

J. MED. 251 (1996). 
18

which to assess the quality of the goods and

services they intend to purchase. Such

information allows consumers to define and

exercise their preferences along the

dimensions of health care quality that are

important to them.77 Information regarding

quality is useful to consumers, providers,

payors, and state and federal agencies. 

Unfortunately, in health care, such

information is often difficult to obtain and is

not necessarily reliable.78 Panelists

discussed a variety of public and private

sector initiatives for increasing the

availability of information regarding

quality.79

77

 See Ignagni 5/27 at 48 (“[F]or our

competitive markets to work, information, access is

key.”); Romano 5/29 at 46-47 (“[M]arket-oriented

goals really focus on providing information that

addresses the asymmetry of information [in] the

marketplace and empowering consumers to demand

better health care, giving them the information, the

tools that they need to make better-informed choices

that theoretically maximize their utility.”); Stoddard

5/29 at 249 (“In theory, [if] patients are given

accurate information about the quality and price of

hospital and physician services[, t]hey will choose the

providers that offer the best value for them.”). See

also William M. Sage, Regulating Through

Information: Disclosure Laws and American Health

Care, 99 COLUM. L. REV. 1701 (1999). 

78 Fisher 5/27 at 123 (“I think it’s

remarkable to the degree to which we agreed on the

need for better information in health care.”); Probst

5/29 at 89-91 (noting difficulty in obtaining

information from hospitals about process measures of

quality); Millenson 5/27 at 104-113; Darling 2/27 at

78; Matthews 9/24 at 141-42 (noting difficulty in

obtaining information regarding price and value of

services); Knettel 6/25 at 114 (number one priority

should be “to put in place the infrastructure that’s

needed to provide for . . . much more transparent

health care purchasing decision-making.”);

Meghrigian 9/24 at 84 (“[M]any consumers are very

knowledgeable and able to tell who are and who are

not good physicians, but . . . many consumers still

don’t have an idea in terms of who is a good clinical

physician . . . .”). As one panelist noted, “historically,

decisions on which hospital to use have not been

based on information but have been based almost

exclusively on what the patient’s doctor has

recommended or where that patient’s doctor actually

practices.” Tirone 5/29 at 233. See also Frances H.

Miller, Illuminating Patient Choice: Releasing

Physician-Specific Data to the Public, 8 LOY.

CONSUMER L. REV. 125 (1995-1996).

A related set of issues is raised in teaching

hospitals, where there have been complaints about the

nature of disclosure regarding the level of

professional training of those rendering services and

the services that will be provided. Compare Wilson

6/10 at 8-31, with Bondurant 5/30 at 34-37. See also

Michael Greger, Comments Regarding Hearings on

Health Care and Competition Law and Policy

(Public Comment); Noreen Farrell Nickolas,

Comments Regarding Health Care and Competition

Law and Policy (July 17, 2003) (Public Comment). 

More broadly, information communication between

providers and consumers has a substantial impact on

consumer satisfaction and the risk of a malpractice

claim. See Levinson 5/30 at 161-174. 

Finally, some of the information that is

available is unreliable because it is false or deceptive. 

The Commission has played an important role in

addressing such conduct in health care, while

simultaneously encouraging truthful non-deceptive

advertising. See Timothy J. Muris, Everything Old is

New Again: Health Care and Competition in the 21st

Century, Prepared Remarks for the 7th Annual

Competition in Health Care Forum (Nov. 7, 2002), at

http://www.ftc.gov/speeches/muris/murishealthcaresp

eech0211.pdf. See also Carabello 6/12 at 161-178;

Lee 6/12 at 179-189; Koch 6/12 at 190-199. 

79 Foster 5/29 at 199-200; Tuckson 5/30 at

82 (“So CMS is about to come out with their

physician performance measures. The Bridges to

Excellence we just heard about. The IOM has its

guidance. NCQA has been leading this for years now. 

NQF has its performance measures that it is moving

forward with. The Leapfrog Group is moving from

hospitals to performance measurement. And at the

base of all of this for us is the essential organization,

the AMA’s Physician Consortium for Performance

Improvement. Lots of people are in the drama.”);

Milstein 5/30 at 33 (“[S]ignificant efforts by the

Leapfrog Group, the Consumer Purchaser Disclosure
19

CMS has joined with hospitals and

the Quality Improvement Organizations

(QIOs) in Maryland, New York, and

Arizona to design a group of pilot tests for

publicly reporting hospital performance

measures.80 There is also a voluntary publicprivate program for reporting the same

measures involving hospitals in every state.81

In addition, the Medicare Prescription Drug,

Improvement, and Modernization Act of

2003 provides that hospitals that report the

requested data of quality will receive a full

market basket update in hospital payments

during 2005-2007, and hospitals that do not

will have their payments reduced by 0.4

percent.82 

CMS has successfully used public

reporting of quality information to improve

dialysis care. Since public reporting began

in 1996, the number of patients receiving

inadequate dialysis or experiencing anemia

declined substantially.83 CMS is currently

using similar strategies for disseminating

quality information regarding home health

care and long term care providers.84 

Similarly, in 1989, New York state

began making provider-specific outcomes

for cardiac surgery (including coronary

artery bypass grafts (CABG)) publicly

available. By 1992, one study found riskadjusted mortality had dropped 41 percent

statewide, giving New York the lowest riskProject, and other progressive market forces, such asthose catalyzed by NCQA, are already promoting

such transparency-based market solutions.”); Dana

6/12 at 159 (“AHCA has developed a model to

encourage its state affiliates to begin developing a

satisfaction-based consumer guide. The model

focuses on reporting a nursing home’s three-year

trend of family satisfaction, family willingness to

recommend, and staff willingness to recommend, as

well as the inspection data, but presented as a

percentage of the 495 standards that each nursing

home must meet.”); Ignagni 5/27 at 53-54; Millenson

5/27 at 120; Kessler 5/29 at 68-73 (differentiating

between survey, process, and outcome report cards). 

80 CMS is using ten measures relating to

three medical conditions – acute myocardial

infarction (heart attack), congestive heart failure, and

pneumonia. See Foster 5/29 at 208-10; Guterman

5/29 at 178-79; Centers for Medicare & Medicaid

Services, CMS Hospital Three-State Pilot: Centers

for Medicare & Medicaid Services Fact Sheet (Feb.

18, 2004), at http://www.cms.hhs.gov/quality/

hospital/3StateFactSheet.pdf. One panelist noted

these measure are a subset of data already collected

by the Joint Commission of Accreditation of Health

Care Organizations. Tirone 5/29 at 236. 

81

 See Kahn 5/29 at 126-128; Foster 5/29 at

209; Centers for Medicaid & Medicare Services,

Hospital Quality Initiatives (HQI), http://www.cms.

hhs.gov/quality/hospital (last modified May 7, 2004). 

82 Medicare Prescription Drug,

Improvement, and Modernization Act of 2003, Pub.

L. No. 108-173, § 501, 117 Stat. 2066 (2003).

83 In 1994, the government began collecting

clinical information annually on four key care

indicators of quality for patients with end stage renal

disease. Centers for Medicaid & Medicare Services,

End Stage Renal Disease Program: Core Indicators

Project, at http://www.cms.hhs.gov/esrd/4.asp (last

modified May 16, 2002). In 1996, 26 percent of

patients received inadequate dialysis. By 2001, these

figures had declined to 11 percent. MedPAC, supra

note 62, at 19 chart 2-3.

84 Guterman 5/29 at 176-77; Centers for

Medicare & Medicaid Services, Nursing Home

Quality Initiative, at http://www.cms.hhs.gov/

quality/nhqi (last visited July 13, 2004); Centers for

Medicare & Medicaid Services, Home Health Quality

Initiative, at http://www.cms.hhs.gov/quality/hhqi

(last visited July 13, 2004). A number of

demonstration projects involving physicians are also

underway. Centers for Medicare & Medicaid

Services, Physician Focused Quality Initiative, at

http://www.cms.hhs.gov/quality/pfqi.asp (last visited

July 13, 2004). 
20

adjusted mortality.85 Studies show the

mortality rate has continued to fall.86

Pennsylvania experienced similar

improvements when it began collecting and

publishing risk-adjusted report cards.87

Several other states provide either volume

information for specific conditions or quality

ratings based on clinical quality measures.88 

The National Committee for Quality

Assurance (NCQA) also developed the

Health Plan Employer Data and Information

Set (HEDIS) to help assess health plans. 

HEDIS uses more than 50 measures of

provider and plan performance in areas such

as patient satisfaction, childhood

immunization, and mammography screening

rates. HEDIS scores have been shown to

affect employee plan choice.89 A number of

other private initiatives seek to make similar

quality-related information available to

employers, health plans, and the general

public.90 Additionally, AHRQ issues a

national report on the state of the quality of

care being provided.91

85

 See E.L. Hannan et al., The Decline in

Coronary Artery Bypass Graft Surgery Mortality in

NY State, 273 JAMA 209 (1995). 

86

 See E.D. Peterson et al., The Effects of

New York’s Bypass Surgery Provider Profiling on

Access to Care and Patient Outcomes in the Elderly,

32 J. AM. C. OF CARDIOLGY 993 (1998) (finding a 33

percent decrease in risk-adjusted mortality in New

York for CABG and a 19 percent decrease in riskadjusted mortality rates across the nation).

87

 See Arnold M. Epstein, Public Release of

Performance Data: A Progress Report From the

Front, 283 JAMA 1884, 1885 (2000); Martin N.

Marshall et al., The Public Release of Performance

Data: What Do We Expect to Gain?, 283 JAMA

1866 (2000).

88

 See, e.g., Illinois Health Care Cost

Containment Council, 2000 Hospital Care Buyer’s

Guides, at http://www.state.il.us/agency/hcccc/

consumerreports.htm#hcbg (last visited July 13,

2004); Virginia Health Information, Cardiac Care: 

Introduction, at http://www.vhi.org/info_cardiac.asp

(last visited July 13, 2004); Texas Health Information

Council, Indicators of Inpatient Care in Texas

Hospitals, 2002, http://www.thcic.state.tx.us/IQI

Report2002/IQIReport2002.htm (last visited July 13,

2004); Office of Statewide Health Planning &

Development, California Report on Coronary Artery

Bypass Graft (CABG) Surgery 1999 Hospital Data

(2003), at http://www.oshpd.cahwnet.gov/

HQAD/HIRC/hospital/Outcomes/CABG/ (revision

date Apr. 1, 2004); Pennsylvania Health Care Cost

Containment Council, Hospital Performance Reports,

http://www.phc4.org (last visited July 13, 2004);

Quality Counts (WI), at http://www.qualitycounts.org

(last visited July 13, 2004).

89 Nancy D. Beaulieu, Quality Information

and Consumer Health Plan Choices, 21 J.

HEALTH ECON. 43 (2002); G. J. Wedig & M.

Tai-Seale, The Effect of Report Cards on Consumer

Choice in the Health Insurance Market, 21 J. HEALTH

ECON. 1031 (2002). 

HEDIS scores may have a more limited

impact when consumers do not have a choice among

competing health plans, and when low-scoring plans

elect to withhold their scores. Bodenheimer, supra

note 46, at 490 (noting that 47 percent of employees

in large companies and 80 percent of employees in

small firms have no choice among health plans). If

employers rely on HEDIS scores in selecting the

plans to offer their employees, this would not be a

problem, but there is some evidence that employers

do not use HEDIS scores in this fashion. See infra

note 92, and accompanying text.

90

 See, e.g., Bridges to Excellence,

http://www.bridgestoexcellence.com/bte (last visited

July 13, 2004). The National Quality Forum

develops consensus standards and identifies best

practices. See Kizer 6/11 at 72-74, 79-84; National

Quality Forum, http://www.qualityforum.org (last

visited July 13, 2004).

91 Fraser 5/29 at 156. Congress mandated

annual reports by AHRQ. Irene Fraser, The Nexus of

Cost and Quality: Four AHRQ Initiatives 10-17

(5/29) (slides), at http://www.ftc.gov/ogc/healthcare
21

Although information on quality is

becoming more available, the benefits and

costs of information-driven strategies are

disputed. Panelists stated that consumers

will use report cards if they are designed

appropriately and the quality measures are

sufficiently salient.92 One panelist noted 

report cards have not had the desired effects

because “consumers are not aware of the

quality problems that have been observed in

health care,” and that performance reports

“have not really been designed to help

people make choices.”93 On the other hand,

one study found that employers did not use

data on quality to determine which health

plans they should offer to their employees,94

hearings/docs/030529fraser.pdf.

92

 See Romano 5/29 at 50-60; Patrick S.

Romano, Public Reporting on Provider Quality: 

What We Know, What We Need to Know 3 (5/29)

(slides) (describing studies), at http://www.ftc.gov/

ogc/healthcarehearings/docs/030529romano.pdf;

O’Kane 5/30 at 73 (“We don’t want to hear about

these HEDIS measures. We didn’t get a Ph.D. but we

are interested in hearing how this plan helps me stay

healthy, how well they take care of people with

chronic illness and so forth.”); Sofaer 5/30 at 214;

Dana 6/12 at 157-159 (“Most consumers don’t want

confusing clinical statistics or deficiency information. 

They simply want to know which facilities have the

most satisfied residents and families.”); Paul 6/11 at

247-248 (“What I hear from consumers a lot is that

outcome measures just resonate better for people. 

You know, it’s easier to understand infection rates or

death rates, mortality rates or whatever, than it is to

understand . . . the measures that we have on hospitals

. . . [and measures] that have to do with left

ventricular systolic dysfunction.”).

See also Jon Christianson et al., Early

Experience with a New Model of Employer Group

Purchasing in Minnesota, 18 HEALTH AFFAIRS 100,

112 (Nov./Dec. 1999); Robert Galvin & Arnold

Milstein, Large Employers’ New Strategies in Health

Care, 347 NEW ENG. J. MED. 939, 940-41 (2002).

Panelists and commentators identified a

number of reasons why consumers have not embraced

available quality information. See Foster 5/29 at 202-

04; Crofton 5/30 at 17 (“The first lesson that we

learned is that people want information about health

care quality but they won’t use that information

unless it is easy to understand and to apply”);

Hibbard 5/29 at 32-33; Delbanco 5/29 at 193;

Milstein 5/29 at 29-30; Ateev Mehrotra et al.,

Employers’ Efforts to Measure and Improve Hospital

Quality: Determinants of Success, 22 HEALTH

AFFAIRS 60 (Mar./Apr. 2003) (identifying six factors

that limit usability of report cards, including

ambiguity of goals, conflicts over the measurements

employed; questions of the benefits from public

release; lack of economic incentives; lack of

employer bargaining power; and failure to ask

hospitals to collaborate on the measurements); Arnold

Milstein & Nancy E. Adler, Out Of Sight, Out Of

Mind: Why Doesn’t Widespread Clinical Quality

Failure Command Our Attention?, 22 HEALTH

AFFAIRS 119 (Mar./Apr. 2003) (identifying several

behavioral economic reasons why consumers tolerate

low quality, including optimistic bias, bias in favor of

the individual, desire to trust providers, bias toward

authority, and cognitive dissonance); Judith H.

Hibbard et al., Making Health Care Report Cards

Easier to Use, 27 JOINT COMMISSION J. ON QUALITY

IMPROVEM ENT 591 (2001); Judith H. Hibbard et al.,

Increasing the Impact of Health Plan Report Cards

by Addressing Consumer Concerns, 19 HEALTH

AFFAIRS 138 (Sept./Oct. 2000) (noting importance of

making quality information readily accessible to

consumers).

One panelist identified several steps to make

report cards more useful to consumers, and stated that

the redesigned report card had a “viral effect” with

people talking about it and making recommendations

to one another. Hibbard 5/29 at 34-40. 

93 Hibbard 5/29 at 29-33 (“If you step back

and you look, the quality problem is not visible to

people. They don’t really think that there are

differences. And then we give them these reports that

are really hard to use and that require a lot of hard

work. So, is it really any wonder that people aren’t

using them?”); Foster 5/29 at 202-204. 

94 JON R. GABEL ET AL., WHEN EMPLOYERS

CHOOSE HEALTH PLANS DO NCQA ACCREDITATION

AND HEDIS DATA COUNT? (1998), at http://www.

cmwf.org/programs/health_care/gabel_ncqa_hedis_2
22

and another noted that the use of

performance measures for evaluating PPOs,

which account for a growing share of the

delivery market, is controversial.95 

Several panelists noted that the

usefulness of information disclosure

depends on the target audience and the

desired objectives. Different information

and disclosure strategies may be preferable,

depending on whether the goal is to “inform

policy makers,” “monitor progress over

time,” “provide some benchmarks for the

future, identify some areas for improvement

. . . [or] serve as a catalyst for action, both in

improving quality and improving the quality

of the measures and the data themselves.”96

Panelists also noted that the disclosure of

information to the public can “encourage

professionals to recognize and fix

deficiencies in health-care quality through a

kind of self-regulatory behavior.”97

A variety of other concerns were also

expressed about report cards and

information disclosure strategies.

98 One

panelist stated that providers believe payors

intend to use the results to lower payments

to providers instead of improve quality.99

Commentators and panelists identified

concerns about the clinical validity and

generalizability of particular measures, the

time-lag between treatment and the

generation of the report card, the way in

which results are risk-adjusted, and how

93.asp. 

95

 See Dennis P. Scanlon et al., Options for

Assessing PPO Quality: Accreditation and Profiling

as Accountability Strategies, 58 MED. CARE RES.

REV. S70 (2001); Lawrence C. Kleinman, Conceptual

and Technical Issues Regarding the Use of HEDIS

and HEDIS-like Measures in Preferred Provider

Organizations, 58 MED. CARE RES. REV. S37 (2001). 

96 Fraser 5/29 at 158. See also Fisher 5/27

at 29 (causes of poor quality and high cost are “a

flawed understanding of medical care . . . inadequate

information to support wise decisions and flawed

incentives.”).

97 Romano 5/29 at 47. See also Clancy 5/27

at 24 (“The literature to date suggest modest,

although a growing impact on consumer decisions

and a slightly more impressive impact on individual

providers.”); Romano 5/29 at 65 (“[T]he observed

effects of report cards on consumer choice are small,

transient, and hard to demonstrate in practice.”);

Guterman 5/29 at 173; Scully 2/26 at 36-37 (“It has a

big impact if you start putting patient quality

information out there because the boards of the

nursing homes start asking their employees, how

come we have the number one number of bed sores in

the community.”); Ginsburg 2/26 at 76-77

(“[H]ospitals pay a lot of attention to [report cards]

and they actually have a beneficial effect from

hospitals seeing where they’re weak and looking into

why they’re weak and trying to do something about it. 

We often don’t see much use of report cards by

employers or consumers and hospitals have been

resistant to them and have closed down some

efforts”). Whether the conduct is described as “selfregulatory” or as a predictable response to doing

poorly in a competitive market, the more important

point is that improvement follows from information

disclosure. 

98

 See Berenson 5/30 at 238; Nielsen 5/30 at

228; Nancy Nielsen, Health Care Competition Law

and Policy – Quality and Consumer Information: 

Physicians 4 (5/30) (“[I]t remains statistically

difficult to assess individual physician competence or

distinguish among physicians on outcomes”), at

http://www.ftc.gov/os/comments/healthcarecomments

2/030530nielsen.pdf; Probst 5/29 at 95. See also

Stephen F. Jencks, Clinical Performance

Measurement: A Hard Sell, 283 JAMA 2015 (2000). 

99 Sofaer 5/30 at 205 (noting that physicians

were convinced the dissemination of information

“was being done to reduce their income further”).
23

consumers will react to the information.100

Commentators and panelists also stated that

information disclosure may discourage

providers from treating high-risk patients,

and result in “gaming” of the system.101 

One panelist suggested that providers

would be more willing to collect information

if that information was not made available to

the public.102 Several panelists indicated

that providers believe information disclosure

will confuse consumers and cause

malpractice litigation.103 In general, the

Agencies encourage information

dissemination, because it allows consumers

to make better informed decisions.104 In

addition, commentators and panelists agreed

100

 See Foster 5/29 at 261; Gaynor 5/27 at

138 (“We do have to be careful. And we have to

understand the ways that patients make choices and

what matters to them because we don’t want to do

something like provide information about one part of

care that’s important and neglect another part of care

and find out that we’re actually worse off than we

were previously or worse off than we had intended”);

Sofaer 5/30 at 205, 206; Romano 5/29 at 61-62, 66;

Conlon 5/29 at 108, 111; Kahn 5/29 at 124;

Kumpuris 5/30 at 47. See also Mehrotra et al., supra

note 92, at 60; Thomas H. Lee et al., A Middle

Ground on Public Accountability, 350 NEW ENG. J.

MED. 2409 (2004); Lawrence P. Casalino, The

Unintended Consequences of Measuring Quality on

the Quality of Medical Care, 341 NEW ENG. J. MED.

1147 (1999).

101 Kessler 5/29 at 68, 78-83 (report cards

“provide an incentive for doctors and hospitals to

select healthy patients in order to game the report

card”); Guterman 5/29 at 262-63 (“[D]epending on

how you structure the measure, you can . . . comply

with better outcomes by reducing your risk at the

outset”); McGinnis 5/30 at 56-57 (“Bonuses based on

measures that are proxies for surgical quality at best

are likely to cause system gaming.”); Mays 5/30 at

142 (same); Nielsen 5/30 at 227; Foster 5/29 at 213

(noting study that found that publishing data on inhospital mortality resulted in a decline in in-hospital

mortality, but an increase in deaths in the 30-day

period post-discharge).

See also David Dranove et al., Is More

Information Better? The Effects of ‘Report Cards’ on

Health Care Providers, 111 J. POL. ECON. 555

(2003); Joshua H. Burack et al., Public Reporting of

Surgical Mortality: A Survey of New York State

Cardiothoracic Surgeons, 68 ANNALS THORACIC

SURGERY 1195, 1198 (1999) (documenting concern

of cardiothoracic surgeons about “gaming” of

reporting requirements); Nowamagbe A. Omoigui et

al., Outmigration For Coronary Bypass Surgery in

an Era of Public Dissemination of Clinical

Outcomes, 93 CIRCULATION 27 (1996); James G.

Jollis & Patrick S. Romano, Pennsylvania’s Focus on

Heart Attack – Grading the Scorecard, 338 NEW

ENG. J. MED. 983 (1998); John D. Clough, Lack of

Relationship Between the Cleveland Health Quality

Choice Project and Decreased Inpatient Mortality in

Cleveland, 17 AM. J. MED. QUALITY 47 (2002).

102 Conlon 5/29 at 97-99. 

103

 See id.; Clancy 5/29 at 140 (“If you

punish people now or sue them or sanction them

because of making errors, there’s a really easy way to

fix that problem . . . . that is, don’t report it.”);

Millenson 5/27 at 112 (“The hospital, backed by the

local medical society and the state hospital

association, argued persuasively that releasing

infection data would cause doctors to stop reporting

it.”); Ignagni 5/27 at 52 (“It is unreasonable to expect

healthcare providers to report errors and then have

that be grist for suits by plaintiffs’ attorneys. “);

Fisher 5/27 at 56 (“[M]edical errors . . . is interrelated

to the liability system and I think creates an innate

reluctance in healthcare to report bad outcomes.”);

Tuckson 5/30 at 125.

104

 See J. Howard Beales, Remarks Before

the Food & Drug Law Institute Conference on

Qualified Health Claims (Jan. 4, 2004), at

http://www.ftc.gov/speeches/beales/040114foodanddr

uglawinstitute.pdf; Howard Beales et al., Efficient

Regulation of Consumer Information, 24 J.L. &

ECON. 491, 492 (1981) (information “allows buyers

to make the best use of their budget by finding the

product whose mix of price and quality they most

prefer”); see also O’Kane 5/30 at 66 (“[W]e want to

be sure that consumers are focusing on: How much

health am I getting for my health care dollar?”).
24

that providers are less likely to modify their

behavior if information is not publicly

available.105

Public reporting of quality measures

can be a powerful incentive for providers to

improve.106 It is important, however, to keep

the costs, limitations, and potential adverse

consequences of information disclosure

strategies in mind. To be useful, an

information disclosure strategy must balance

cost-effectiveness, clinical validity, and

consumer saliency. 

Finally, information technology (IT)

is an important part of making information

available to consumers, providers, and other

interested parties. Panelists and

commentators agreed that the health care

marketplace does not employ information

technology extensively or effectively.107

Prescriptions and physician orders are

frequently hand-written.108 Records are

often maintained in hard copy and scattered

among multiple locations. Few providers

use e-mail to communicate with

consumers.109 Public and private entities

have worked to develop and introduce

electronic medical records and computerized

physician order entry, but commentators and

105 Hibbard 5/29 at 44-46 (noting

importance of public release, and the dilemma that

“what helps consumers the most there seems to be the

most resistance from providers on. So evaluable

reports that are explicit about high performers and

low performers and any kind of negative framing is

also strongly resisted.”); O’Kane 5/30 at 68.

See also Hibbard, supra note 76, at 84

(finding “public report hospitals” reported a

significantly higher number of quality improvement

activities in obstetrics (an average of 3.4 activities out

of 7), while “private report hospitals” reported an

average of 2.5 activities, and the “no measurement

hospitals”, 2.0 activities; for four cardiac quality

improvement activities, “public report hospitals”

reported an average of 2.5 improvement activities;

private-report hospitals, 1.5 activities; and no

measurement hospitals, 1.4 activities). 

106 Millenson 5/27 at 113 (noting that some

providers have a “continuing lack of conviction . . .

that improvement is needed” and suggesting that

public reporting could help remedy this belief);

Guterman 5/29 at 173 (noting that once the State of

Pennsylvania published quality information on

hospitals the information was put to use “because no

hospital wanted to be at the bottom of the list when it

came to quality.”); Casalino 5/28 at 137 (“Getting

publicly recognized for quality actually was one of

the most potent predictors of whether groups would

use care management processes.”); Lee 6/12 at 255

(“[I]f solid quality measures get put out there, it

produces the desired effect, which is it makes

consumers like . . . [me] sweat bullets and try to

create systems that make it better.”). See also supra

note 97. 

107

 See, e.g., Gingrich 6/12 at 11-12; Gaynor

5/27 at 82; Asner 9/25 at 34. See also Robert H.

Miller & Ida Sim, Physicians’ Use of Electronic

Medical Records: Barriers and Solutions, 23

HEALTH AFFAIRS 116 (Mar./Apr. 2004); David W.

Bates & Atul Gawande, Improving Safety with

information Technology, 248 NEW ENG. J. MED. 2526

(2003); Steinberg, supra note 60, at 2682 (“[W]e

must make greater use of information technology.”);

NEWT GINGRICH ET AL., SAVING LIVES AND SAVING

MONEY (2003); STEPHEN M. SHORTELL ET AL.,

REMAKING HEALTHCARE IN AMERICA: BUILDING

ORGANIZED DELIVERY SYSTEMS 40-41 (1996) (“It is

not possible to create clinically integrated care . . .

without certain functions such as information systems

and quality management in places.”).

108

 See Gingrich 6/12 at 11.

109

 See Thomas Bodenheimer & Kevin

Grumbach, Electronic Technology: A Spark to

Revitalize Primary Care?, 290 JAMA 259 (2003);

Lawrence Baker et al., Use of the Internet and e-mail

for Health Care Information: Results From a

National Survey, 289 JAMA 2400 (2003); Alissa R.

Spielberg, On Call and Online: Sociohistorical,

Legal, and Ethical Implications of e-mail for the

Patient-Physician Relationship, 280 JAMA 1353

(1998). 
25

panelists agreed that much remains to be

done.110 

2. Payment Barriers to Improving 

Quality

Commentators and panelists agreed

that there is not a “business case for quality”

in health care because payment

arrangements are rarely tied to the quality of

the services that are provided.111 The IOM

observed that “current [compensation]

methods provide little financial reward for

improvements in the quality of health care

delivery, and may even inadvertently pose

barriers to innovation.”112 The Medicare

Payment Advisory Commission more

bluntly noted that “at times providers are

paid even more when quality is worse, such

as when the complications occur as the

result of error.”113

These problems are not theoretical. 

After Duke University Hospital created an

integrated program to treat congestive heart

failure, consumers were healthier – but the

hospital lost money because of the resulting

decline in admissions and the absence of

complications.114 In Utah, ten hospitals had

a similar experience after implementing

practice guidelines for pneumonia

110 Tuckson 5/30 at 77; O’Kane 5/30 at

100. 

111

 See Scully 2/26 at 34; Millenson 5/27 at

105; Millenson 5/28 at 179; Tirone 5/29 at 241

(“[T]here is no business case for quality. The fact is

that those that we ask to invest resources to improve

the quality and safety of care are not those that

benefit in terms of the return on investment. Simply

put, the hospital that spends the money on its CPOE

[computerized physician order entry] and so forth, if

they are – the more safe they are, the higher quality

they give, in our current system, the less

reimbursement, the less income they will have. The

illogical extension of all this is that a really high

quality institution can, in effect, put itself out of

business.”); Stoddard 5/29 at 256 (“We think that

Medicare and other hospitals should begin to reward

hospitals financially if they improve staffing levels

and patient outcomes. We note that other respected

health care experts such as the Institute of Medicine

also reviewed and recommended new reimbursement

approaches that pay hospitals for demonstrated

higher-quality outcomes.”); Delbanco 5/29 at 259-

260. 

See also Steinberg, supra note 60, at 2682

(“The challenge, therefore, is not to demonstrate that

there already is a ‘business case’ for quality

improvement in health care; rather, it is to establish

new incentives that will create such a case.”); Uwe E.

Reinhardt, The Medicare World From Both Sides: A

Conversation with Tom Scully, 22 HEALTH AFFAIRS

167, 168 (Nov./Dec. 2003) (“Everyone with an M.D.

or D.O. degree gets the same rate, whether they are

the best or worst doc in town? Every hospital gets the

same payment for a hip replacement, regardless of

quality? We are very good at fixing prices and

paying quickly. But we have zero ability to monitor

utilization or differentiate payment based on quality .

. . . Having federal price fixing, no consumer

information or pricing sensitivity, and no

measurement of quality has led to predictable results: 

artificially high prices and uneven quality.”); Sheila

Leatherman et al., The Business Case for Quality: 

Case Studies and an Analysis, 22 HEALTH AFFAIRS

23 (Mar./Apr. 2003). 

112 IOM, supra note 36, at 19. See also

Hyman & Silver, supra note 40, at 1427-1485. 

113 MEDICARE PAYMEN T ADVISORY

COMM ITTEE (MEDPAC), REPORT TO CONGRESS:

VARIATION AND INNOVATION IN MEDICARE Ch. 7, at

108 (June 2003). 

114 Herzlinger 5/27 at 89. See also Regina

Herzlinger, A Better Way to Pay, MOD. HEALTHCARE,

Dec. 11, 2000, at 32 ; Lynn 5/30 at 197 (“There are

now six randomized control trials showing better

ways of taking care of patients with advanced heart

failure. Every single one of those programs has

folded at the end of the grant funding because it is not

sustainable under Medicare.”).
26

treatment.115 One panelist noted that current

payment systems for end of life care create

an economic disincentive for providers who

deliver “key elements of chronic care.”116

Commentators noted that existing

payment arrangements may paradoxically

make providers financially worse off if they

are better at delivering health care than their

competitors.117 Such payment arrangements

are economically perverse: no rational

system of compensation rewards an agent

(the provider) for making a principal (the

consumer) worse off.118

At any given level of payment,

commentators and panelists agreed that

providers are less likely to improve quality

of care if they suffer financially when doing

so.119 Commentators and panelists also

agreed that investments in quality

improvement are similarly likely to be

inadequate when costs are front-loaded, and

benefits are deferred – particularly if the

providers and payors incurring these costs

will not capture the benefits.120

Public and private payors and

providers are seeking to address these

problems by creating direct economic

incentives for the delivery of high-quality

care (pay for performance or P4P).121 CMS

115

 See James 5/28 at 232-233 (stating

protocol to reduce variation in care for hospitalized

patients with community acquired pneumonia

decreased complications, mortality, and net operating

revenues of hospital). See also IOM , supra note 36,

at 191-193 (proportion of patients suffering

significant complications declined from 15.3 to 11.6

percent, inpatient mortality rates fell from 7.2 to 5.3

percent, and costs fell by 12.3 percent primarily as a

result of expenses avoided through the lower

complication rate; “the cost savings in those ten small

rural hospitals totaled more than $500,000 per year,

but an analysis of net operating income showed a loss

to the facilities of over $200,000 per year”). See also

MedPAC, supra note 113. 

116 Lynn 5/30 at 197. See also Joanne Lynn

et al., Financing of Care for Fatal Chronic Illness: 

Opportunities for Medicare Reform, 175 W.J. MED

299 (2001). 

117 IOM, supra note 36, at 94 (“Even when

care delivery groups want to improve the quality of

the clinical processes . . . they can be severely limited

in their ability to pursue such strategies if providers

lose revenues from many quality improvement

activities because of the expenses of implementing

the improvements and the revenues lost as a result of

reduced care delivery.”); Steinberg, supra note 60, at

2682 (“The fourth and biggest problem that must be

addressed is the fact that current financial incentives

often discourage quality improvement . . . Physicians

and hospitals often face an outright economic

disincentive to invest in infrastructure that will

improve compliance with best practices.”). 

118 Tirone 5/29 at 241 (“What this all really

means is that we have a system that pays the same for

high-quality care as it pays for less than high quality

care, must be revised if we’re going to change the

paradigm”); Edelman 6/11 at 227 (“[I]f we give

incentives, we shouldn’t be giving incentives to things

that we are saying are not good care practices”);

Hyman & Silver, supra note 40, at 1480. 

119

 See supra notes 117-118, and

accompanying text.

120 Leatherman et al., supra note 111, at 27-

28 (noting problems that result from temporal

disconnect of costs and benefits of improvements). 

See also supra notes 117-118, and accompanying

text. 

121

 See Myers 5/29 at 223-24 (describing an

experimental incentive program connected to clinical

performance indicators for physicians); O’Kane 5/30

at 71-73; Mays 5/30 at 139-153; Paul 6/11 at 201

(“[W]e should be paying more for superior care.”). 

See also Epstein et al., supra note 40;

BRADLEY C. STRUNK & ROBERT HURLEY, PAYING

FOR QUALITY: HEALTH PLANS TRY CARROTS

INSTEA D OF STICKS (Ctr. for Studying Health Sys.
27

recently introduced a demonstration project

that pays modest financial incentives for

hospitals that score in the top 20 percent and

modest financial disincentives for hospitals

that score in the bottom 20 percent on

specified measures of quality for five

conditions.122 There are significant statutory

impediments to broader use of such

incentives by CMS in the Medicare

program.123 

 

Employers and private plans are also

experimenting pay for performance and

other strategies to reward providers that

adopt processes that are believed to improve

quality. The Pacific Business Group on

Health has been using incentive-based

performance targets for eight years in its

contracts with HMOs.124 HMOs that fail to

meet targets for patient satisfaction and

various clinical benchmarks (including

prenatal care, mammography, pap smears,

childhood immunizations, and cesarean

section) forfeit two percent of their fees. 

The Leapfrog Group, a coalition of 145

private and public organizations, is using its

purchasing power to encourage hospitals to

adopt computerized physician order entry

(CPOE), referrals to high volume hospitals

for certain procedures, and staffing intensive

care units (ICUs) with intensivists.125

Change, Issue Brief No. 82, 2004), available at

http://www.hschange.org/CONTENT/675/675.pdf. 

Robert A. Berenson, Paying for Quality and Doing It

Right, 60 WASH. & LEE L. REV. 1315 (2003). 

The United Kingdom is implementing a P4P

initiative for general practitioners in which about 18

percent of practice earnings will be at risk. See Peter

C. Smith & Nick York, Quality Incentives: The Case

of U.K. General Practitioners, 23 HEALTH AFFAIRS

112 (May/June 2004).

122

 See Centers for Medicare & Medicaid

Services, The Premier Hospital Quality Incentive

Demonstration: Rewarding Superior Quality Care: 

Centers for Medicare & Medicaid Services Fact

Sheet (Feb. 18, 2004), at http://www.cms.hhs.gov/

quality/hospital/PremierFactSheet.pdf For the first

three years, hospitals in the top 10 percent receive a 2

percent bonus of Medicare payments for the

measured conditions; hospitals in the second 10

percent are paid a 1 percent bonus. In the third year,

hospitals that fall below the bottom two deciles (as set

in the first year) will receive DRG payments that are

1 percent or 2 percent lower than would otherwise be

the case. 

CMS has a similar bonus program for

managed care plans that contract with Medicare

regarding the treatment received by individuals with

congestive heart failure. Paul 6/11 at 221. The

Medicare Prescription Drug, Improvement and

Modernization Act of 2003 also established a Care

Management Performance pilot that will pay bonuses

to physicians that adopt and use IT to improve quality

and reduce avoidable hospitalizations for chronically

ill patients. Medicaid News, Centers for Medicare &

Medicaid Services, CMS Urges States to Adopt

Disease Management Programs, Agency Will Match

State Costs (Feb. 26, 2004), at http://www.cms.hhs.

gov/media/press/release.asp?Counter=967. 

123 David A. Hyman, Does Quality of Care

Matter to Medicare?, 46 PERSP. BIO. MED. 55

(2003); Robert A. Berenson & Dean M. Harris, Using

Managed Care Tools in Traditional Medicare –

Should We? Could We?, 65 LAW & CONTEMP PROBS.

139, 144-145 (2002).

124 Helen Halpin Schauffler et al., Raising

the Bar: The Use of Performance Guarantees by the

Pacific Business Group on Health, 20 HEALTH

AFFAIRS 134 (Mar./Apr. 1999).

125 Leapfrog members have agreed to

reward those hospitals that meet these three standards

with public recognition and by steering patients to

those hospitals. Delbanco 5/29 at 186-87; David

Shaller et al., Consumers and Quality-Drive Health

Care: A Call to Action, 22 HEALTH AFFAIRS 97

(Mar./Apr. 2003). 

The Leapfrog initiative may have the

unintended effect of setting a standard of care for

malpractice litigation. See Michelle M. Mello et al.,

The Leapfrog Standards: Ready to Jump from

Marketplace to Courtroom?, 22 HEALTH AFFAIRS 47
28

Although more than a thousand hospitals are

participating in Leapfrog, one survey

showed that only six percent of hospitals had

fully implemented CPOE, 57 percent had

fully implemented ICU physician staffing,

and most hospitals were meeting one to two

of the six targets for referrals to high volume

hospitals for selected procedures.126 A

number of large health plans and hospital

networks are also experimenting with such

arrangements.127 Tiering can also be

employed to link financial incentives to

quality of care.128 Commentators and

panelists agreed that, to date, P4P has had

limited impact on the health care

marketplace.129

D. Quality, Competition and

Competition Law

“Enhancing quality” has long been

the invariant excuse of providers who

engage in anticompetitive conduct.130 As

Chairman Robert Pitofsky noted when

testifying before Congress on behalf of the

Commission, quality-of-care arguments

“have been advanced to support, among

other things, broad restraints on almost any

form of price competition, policies that

inhibited the development of managed care

organizations, and concerted refusals to deal

with providers or organizations that

represented a competitive threat to

physicians.”131 There are almost always

more narrowly tailored means of achieving

the same quality improvements without

employing the anticompetitive means

selected by self-interested providers. 

Some commentators and panelists

stated that antitrust law impedes providers’

efforts to improve quality.132 Providers

(Mar./Apr. 2003). 

126 Devers & Liu, supra note 42. 

127 Tuckson 5/30 at 82 (listing many of the

incentive experiments, but noting there may be a need

to develop an industry standard so that providers do

not get “whipsawed” by competing measures); Myers

5/29 at 221-222.

128

 See infra Chapter 3.

129 Devers & Liu, supra note 42, at 3. See

also MedPAC, supra note 113, Ch. 7, at 123. One

panelist noted that even if the incentives are

significant for any given health plan, that health plan

may not account for a sufficient share of a provider’s

practice to have a significant impact. Berenson 5/30

at 234. Another difficulty with P4P programs is that

although “it is nice to have marginal incentives to do

good . . . it is the base incentives that drive the

market.” Berenson 5/30 at 235. 

130

 See Sage et al., supra note 53, at 35;

Blumstein, supra note 53, at 1466-67 (“The threat to

quality is perceived as the physicians’ silver bullet in

the debate about health care policy.”); Apold 6/10 at

131-132 (“[T]he battle cry for anticompetitive

behavior is always one of quality.”); Sage 5/29 at

136 (“Before the mid-1970s, physicians invoked

quality with impunity to excuse anticompetitive

conduct”); Thomas L. Greaney, Quality of Care and

Market Failure Defenses in Antitrust Health Care

Litigation, 21 CONN. L. REV. 605, 605 (1989) (noting

complaints that quality will be undermined “as ethical

and professional norms give way to financial

incentives”).

131

 Prepared Statement Concerning the

“Quality Health-Care Coalition Act of 1998”: 

Hearing on H.R. 4277 Before the House Comm. on

the Judiciary, 105th Cong. (1998) (Statement of

Robert Pitofsky, Chairman, Federal Trade

Commission), at http://www.ftc.gov/os/1998/07/

camptest.htm.

132

 See Opelka 2/27 at 183; Sfikas 2/27 at

185-187. See also Sage et al., supra note 53, at 39-

43; David A. Hyman, Five Reasons Why Health Care
29

actually have considerable flexibility to act

collectively to improve quality of care. 

Through their professional societies and

other groups, health care professionals can

jointly provide information and express

opinions to health plans and the general

public.133 Physicians, for example, may

collectively explain to a health plan and the

general public why they think a particular

policy or practice is medically unsound and

may present medical or scientific data to

support their views.134 Finally, the Agencies

have never brought a case based solely on

providers’ collective advocacy with a health

plan on an issue involving patient care.135

Competition law also enhances

quality in ways that are not widely

appreciated. When providers engage in

anticompetitive conduct they can undermine

the quality of care actually received by the

population as a whole. Lower prices can

actually contribute to higher quality; as

several commentators noted, “when costs

are high, people who cannot afford

something find substitutes or do without. 

The higher the cost of health insurance, the

more people are uninsured. The higher the

cost of pharmaceuticals, the more people

skip doses or do not fill their

prescriptions.”136

Stated differently, when

anticompetitive conduct increases prices, it

makes it more difficult for many Americans

to obtain needed care. Estimates of the price

elasticity of health insurance vary, but many

small employers do not offer health

insurance at all because it is too

expensive.137 When employers offer health Quality Research Hasn’t Affected Competition Law

and Policy, 4 INT’L J. HEALTH CARE FIN. & ECON.

159 (2004). 

133

 See, e.g., Schachar v. Am. Acad. of

Ophthalmology, 870 F.2d 397 (7th Cir. 1989); DEP’T

OF JUSTICE & FEDERA L TRADE COMM’N,

STATEM ENTS O F ANTITRUST ENFORCEMEN T POLICY IN

HEALTH CARE §§ 4-5 [hereinafter HEALTH CARE

STATEMENTS], available at http://www.ftc.gov/repor

ts/hlth3s.pdf. 

134

 Prepared Statement Concerning the

“Quality Health-Care Coalition Act of 1999”:

Hearing on H.R. 1304 Before the House Comm. on

the Judiciary, 106th Cong. 5 (1999) (Statement of

Robert Pitofsky, Chairman, Federal Trade

Commission), at http://www.ftc.gov/os/1999/06/

healthcaretestimony.htm. 

135 In fact, Commission staff recently issued

an advisory opinion addressing the formation and

operation of a physician “healthcare advocacy

group.” See Letter from Jeffrey W. Brennan,

Assistant Director, Federal Trade Commission, to

Gregory G. Binford, Benesch Friedlander Coplan &

Aronoff LLP (Feb. 6, 2003), at

http://www.ftc.gov/bc/adops/030206dayton.htm.

136 Sage et al., supra note 53, at 35-36, 41. 

See also supra note 21; Kumpuris 5/30 at 42 (noting

the “interrelationship between health care quality and

the access to care. To address one and ignore the

other is not only mis-directed, but it represents a lack

of appreciation of the day-to-day realities of

delivering health care.”); O’Kane 5/30 (“[A]ccess and

cost-effectiveness of the system are very related

concepts. If the system is out of control, there will be

less access because people will have less insurance”). 

More generally, setting a supra-competitive

level of health care quality as the mandatory

minimum ignores both the short-term consequences

for price and access and the long-term consequences

of increased price and decreased access on the quality

of care that consumers actually receive. 

137

 See Roger Feldman et al., The Effect of

Premiums on the Small Firm’s Decision to Offer

Health Insurance, 32 J. HUMAN RESOURCES 635

(1997) (estimating a fairly high firm-level demand

elasticity for health insurance (-3.91 for single

coverage, -5.82 for family coverage), and calculating

that if monthly premiums to firms increased by $1,
30

insurance, price increases can result in

limitations on coverage, employees refusing

to sign up for insurance, and employers

dropping coverage.138 Numerous studies

establish that the lack of health insurance is

associated with deleterious consequences,

including increased mortality.139 

Thus, anticompetitive conduct that

raises prices, even if it is done in the name

of improving “quality,” is likely to have a

systemic adverse effect on the quality of care

actually provided to the population as a

whole.140 In a competitive market,

consumers consider various dimensions of

quality and price. Competition law exists to

promote and enhance consumer choice along

all of these dimensions. 

Provider complaints about the

antitrust laws miss the point of those laws. 

As one commentator noted: 

[T]he antitrust laws are concerned

with maximizing the long-term

welfare of consumers, but this is not

inconsistent with the interests of

efficient providers. The providers

who are most efficient and offer the

best-quality service at reasonable

prices will attract patients in a

competitive environment protected

by the antitrust laws. The providers

whose methods fall behind the times

and who rely on the protection of

concerted action to maintain their

position may lose ground. But that is

precisely what one should expect in

our free enterprise system.141

In an efficient market, consumer

preferences specify the targets at which

providers aim. When providers engage

in anticompetitive conduct, they frustrate

this process. By ensuring a competitive

marketplace and transparency of

information, competition law and policy

allows such demands to be satisfied, and

prevents self-interested provider groups

from preempting “the working of the

market by deciding for itself that

customers do not need that which they

demand.”142

the proportion of firms offering health insurance to

employees would decline by almost 2 percentage

points.). See also THE KAISER FAMILY FOUND. &

HEALTH RESEARCH & EDU CATION AL TRUST,

EMPLOYER HEALTH BENEFITS 2003 ANN UAL SURVEY,

at chart 12 (2003), at http://www.kff.org/insurance/

loader.cfm?url=/commonspot/security/getfile.cfm&Pa

geID=21185 [hereinafter Kaiser/HRET]; David A.

Hyman & Mark Hall, Two Cheers for

Employment-Based Health Insurance, 2 YALE J.

HEALTH POL’Y, L. & ETHICS 23, 26 (2001).

138

 See Kaiser/HRET, supra note 137, at

Chart 27-28. 

139

 See infra Chapter 5. 

140 The Agencies’ historical approach to

health care enforcement reflects this reality. The

Agencies have aggressively targeted providers who

blocked the development of cheaper forms of health

care delivery, even though the providers insisted they

were trying to ensure that all care was of the highest

possible quality. See Sage et al., supra note 53, at 35,

37. 

141 L. Barry Costilo, Antitrust Enforcement

in Health Care: Ten Years After the AMA Suit, 313

NEW ENG. J. MED. 901, 904 (1985).

142 FTC v. Indiana Fed’n of Dentists, 476

U.S. 447, 462 (1986). As a matter of substantive

antitrust law, Professional Engineers made it clear

that the desire of providers to ensure that only high

quality services were available was, in itself, an

insufficient basis to override the clear prohibitions of

the antitrust laws. Nat’l Soc’y of Prof. Engineers v.

United States, 435 U.S. 679, 695 (1978) (rejecting
31

III. INTRODUCTION TO

COMPETITION LAW AND

HEALTH LAW

As background to the succeeding

chapters, this chapter summarizes the

basics of competition law and offers a

brief history of the application of

competition law to health care markets. 

This chapter also provides an

abbreviated overview of several specific

forms of regulation that affect the

structure and performance of the health

care marketplace. 

A. Basics of Competition Law

Federal competition law stems

from a series of federal statutes,

principally the Sherman Act,143 the

Clayton Act,144 and the Federal Trade

Commission Act.145 

The Sherman Act prohibits

unilateral and collective conduct that

poses unacceptable dangers to

competition. Section 1 of the Sherman

Act declares unlawful “every contract,

combination . . . or conspiracy, in

restraint of trade,”146 while Section 2 of

the Sherman Act prohibits

“monopolization” and “attempted

monopolization.”147 Courts reviewing

Section 1 cases generally focus on

whether the allegedly conspiring parties

reach agreement, and whether that

agreement was unreasonably restrictive. 

By contrast, courts reviewing Section 2

cases generally examine whether the

defendant created or maintained a

monopoly through wrongful or

exclusionary means. 

The Clayton Act prohibits

the claim that markets could not adequately provide

for public health and safety as “nothing less than a

frontal assault on the basic policy of the Sherman

Act”). 

See also Blumstein 2/27 at 28 (“[A]ntitrust

law is the engine of the market paradigm.”); Frank H.

Easterbrook, Cyberspace Versus Property Law?, 4

TEX. REV. L. & POL. 103, 111 (1999). (“It is ironic

that just as a global network and automation are

reducing the costs of contracting, and moving us

closer to the world in which the Coase Theorem

prevails, people promote more and more

contract-defeating schemes. One is tempted to think

that they are concerned not about market failures but

about market successes - about the prospect that the

sort of world people prefer when they vote their own

pocketbooks will depart from the proposers’ ideas of

what people ought to prefer.”). 

143 15 U.S.C. §§ 1-7.

144

 Id. §§ 12-27.

145

 Id. §§ 41-61. In addition, state attorneys

general may enforce federal antitrust statutes. See

generally HERBERT HOVENKAM P, FEDERAL

ANTITRUST POLICY: THE LAW OF COMPETITION AND

ITS PRACTICE § 15.4, at 590-91 (2d ed. 1999)

(discussing role of state attorneys general in antitrust

enforcement). 

146 15 U.S.C. § 1 (1994) (“Every contract,

combination in the form of trust or otherwise, or

conspiracy, in restraint of trade or commerce among

the several States, or with foreign nations, is declared

to be illegal [and is a felony punishable by fine and/or

imprisonment] . . . .”).

147

 Id. § 2 (“Every person who shall

monopolize, or attempt to monopolize, or combine or

conspire with any other person or persons, to

monopolize any part of the trade or commerce among

the several States, or with foreign nations, shall be

deemed guilty of a felony [and is similarly

punishable] . . . .”).
32

mergers and acquisitions where the

effect “may be substantially to lessen

competition, or to tend to create a

monopoly.”148 The Clayton Act thus

reaches incipient threats to competition

that might escape the Sherman Act’s

reach. Under related legislation, parties

to proposed mergers that exceed

statutory thresholds are required to notify

the federal antitrust agencies of their

plans and afford the government a

limited opportunity to investigate before

the transaction is executed.149

Finally, Section 5 of the Federal

Trade Commission Act provides that

“unfair methods of competition in or

affecting commerce, and unfair or

deceptive acts or practices in or affecting

commerce are ... unlawful.”150 The

Supreme Court found this provision

provides the FTC with the authority to

attack conduct constituting a Sherman

Act violation.151 The FTC Act provides

no criminal penalties and is limited to

equitable remedies. Depending upon the

specifics of a case, the Commission

enforces the FTC Act either

administratively or through the courts. 

Advisory opinions are available for

parties interested in prospective

guidance as to the strictures of the FTC

Act.152 The Division offers business

review letters that perform much the

same function for the statutes that the

Department of Justice enforces.153 

The Agencies are the primary

antitrust enforcement authorities,

although state attorneys general and

private parties can also bring suit. For

example, both the Division and private

parties may sue to enforce the civil

provisions of the Sherman Act, which

authorize treble damages and broad

equitable relief. By contrast, only the

Division may enforce the criminal

provisions of the Sherman Act. 

Moreover, the federal laws assign each

Agency responsibility to enforce various

antitrust laws. Thus, both Agencies can

pursue violations of the Clayton Act, but

only the Commission may enforce the

FTC Act.

Because most of the antitrust

challenges to health care practices focus

on allegedly anticompetitive agreements,

an abbreviated analysis of the standards

for assessing such claims is warranted. 

In reviewing such claims, “the

development of horizontal restraints

jurisprudence suggests an analytic

framework that proceeds by several

identifiable analytical steps.”154 Some

conduct – such as naked agreements

among competitors to fix prices or

allocate markets – is viewed as

“inherently suspect owing to its likely

148

 Id. § 13(a).

149 Hart-Scott-Rodino Antitrust

Improvements Act, 15 U.S.C. § 18a (1976).

150 15 U.S.C. § 45.

151 FTC v. Cement Institute, 333 U.S. 683

(1948).

152 16 C.F.R. § 1.1. 

153 28 C.F.R. § 50.6.

154

 In re Polygram Holding, Inc., No. 9298,

at 29 (2003) (opinion of the Commission), at

http://www.ftc.gov/os/2003/07/polygramopinion.pdf.
33

tendency to suppress competition.”155

Such arrangements “always or almost

always tend to raise prices or reduce

outputs.”156 Such conduct merits

summary condemnation to prevent long,

expensive investigations and litigation

over conduct that is almost certain to

cause harm to consumers.157 Most of the

time, however, “conduct cannot be

adjudged illegal without an analysis of

its market context to determine whether

those engaged in the conduct or restraint

are likely to have sufficient power to

harm consumers.”158 Depending on the

case, the necessary analysis can be

sweeping or relatively constrained.159 As

several panelists noted, antitrust

investigations are factually intensive,

and “antitrust cases have to be done one

at a time.”160 

B. Application of Competition Law

to Health Care

Courts, lawmakers, and

commentators once believed that health

care markets should not be subject to

competition. Thus, it was widely

understood that there was a “learned

professions” exception to the antitrust

laws; government enforcers or private

parties only rarely pursued

anticompetitive conduct in health care.161

The existence of this exemption

remained an open issue until 1975 when

the Supreme Court explicitly determined

that the antitrust laws apply to “learned

professions.”162 One year later, the

Supreme Court held that the alleged acts

of a hospital were “sufficient to

establish” a “substantial effect” on

interstate commerce under the Sherman

155

 Id.

156 HEALTH CARE STATEMENTS, supra note

133, § 8, at 47, 57 n.36, citing Broadcast Music, Inc.

v. Columbia Broadcasting Sys., Inc., 441 U.S. 1, 21-

22 (1979). 

157 United States v. Socony-Vacuum Oil

Co., 310 U.S. 150 (1940); cf. Kanwit 9/9 at 197-98

(“I think we also need to remember what per se rules

apply to. They apply to price fixing, boycotts and

market allocations. I just cannot see the benefit to

consumers . . . in a time of [rising] health care costs

of having the DOJ or the FTC spend three years

looking at a physician group to determine under the

rule of reason whether a certain arrangement is or is

not violative of the antitrust laws. That is not going to

benefit consumers.”).

158

 Polygram Holding, No. 9298 at 29.

159

 Id. at 29-35.

160

 See, e.g., Feldman 4/23 at 96; Lerner

4/23 at 97-98 (“So, I think a lot of these things, I

agree, you have to look at the case you’re dealing

with and figure out what makes sense”); Monk 4/23 at

98 (“[W]hen you’re looking at a specific market, you

do have to factor in what the characteristics that are in

that market at that time and whether the

characteristics changed because there was a change in

- either the market was currently in balance or out of

balance”).

161 The Supreme Court applied the antitrust

laws to the activities of the American Medical

Association, but it did not expressly decide whether a

physician’s medical practice constituted “trade” under

the Sherman Act, leaving unsettled the extent to

which the antitrust laws could be applied to the

activities of the health care professions generally. 

Am. Med. Ass’n v. United States, 317 U.S. 519, 528

(1943). See also Gaynor 5/27 at 71-72. 

162 Goldfarb v. Va. State Bar, 421 U.S. 773,

787 (1975) (observing that the “nature of an

occupation, standing alone, does not provide

sanctuary from the Sherman Act . . . nor is the publicservice aspect of professional practice controlling in

determining whether § 1 includes professions”).
34

Act.163 

In Arizona v. Maricopa County

Medical Society, the Supreme Court

emphasized that the antitrust laws

applied fully to the health care

marketplace.164 The Court found that an

agreement among physicians to set

maximum prices charged to

policyholders was a per se violation of

the Sherman Act. 

For almost three decades, the

Agencies have continued to enforce the

competition laws by initiating

investigations, filing and litigating

complaints, filing amicus briefs in

private litigation, and writing advisory

opinions and business review letters for

the health care industry.165

The Agencies took an additional

step in the application of competition

law and policy to health care by issuing

the joint Department of Justice and

Federal Trade Commission Statements

of Antitrust Enforcement Policy in

Health Care (Health Care Statements) in

1993.166 The Agencies designed the

Health Care Statements “to advise the

health care community in a time of

tremendous change, and to address . . .

the problem of uncertainty concerning

the Agencies’ enforcement policy.” 167 

In response to comments and

changes in the health care marketplace

the Agencies expanded the Health Care

Statements in 1994 and amplified them

again in 1996. The Health Care

Statements currently specify a range of

circumstances that will not provoke

enforcement actions (also known as

“safety zones”) for hospital mergers,

hospital and physician joint ventures,

physicians’ provision of information to

purchasers, multi-provider networks, and

joint purchasing arrangements among

health care providers. The Health Care

Statements also provide a number of

examples applying antitrust analytical

principles to a particular set of healthcare related organizational arrangements. 

The Agencies also offer prospective

guidance relating to health care through

advisory opinions and business review

letters.168 

163 Hosp. Bldg. Co. v. Trustees of Rex

Hosp., 425 U.S. 738, 739-40 (1976).

164 457 U.S. 332 (1982).

165 For a comprehensive review of antitrust

health care cases brought by the Commission, see

HEALTH CARE SERVICES & PRODUCTS DIV., FEDERAL

TRADE COMM’N, FTC ANTITRUST ACTIO NS IN

HEALTH CARE SERVICES AND PRODUCTS (2004), at

http://www.ftc.gov/bc/hcupdate0404.pdf; B UREAU OF

COMPETITION, FEDERA L TRADE COMM’N, FTC

ANTITRUST ACTIONS IN PHARM ACEUTICAL SERVICES

AND PRODUCTS (April 2004), at http://www.ftc.gov/

bc/0404rxupdate.pdf. See also Muris 2/26 at 6;

Simons 9/9/02 at 99-108; Beales 9/9/02 at 108-113;

Scheffman 9/9/02 at 113-118. 

166 HEALTH CARE STATEMENTS, supra note

133. 

167

 Id. at 1. 

168 Prospective guidance was considered at a

hearing session on June 26, 2003. A complete lists of

the participant on this panel is available in Appendix

A and in the Agenda, at http://www.ftc.gov/ogc/

healthcarehearings/completeagenda.pdf. Two

panelists noted the importance of prospective

guidance. Grimes 6/26 at 176 (“I think a number of

panelists have pointed out that the advisory opinions

and business review letters are a critical part of this

effort.”); Johnson 6/26 at 171 (“[S]taff advisory
35

Finally, the Agencies have jointly

filed amicus briefs in a number of cases,

including a recent brief filed in the Sixth

Circuit, explaining the Agencies’

analysis of how the state action doctrine

should be applied to the conduct of

subordinate state entities, such as public

hospitals.169

1. Commission Health Care 

Related Activities

The Commission has long

challenged barriers to competition in

health care markets to foster innovative

and more efficient means of delivering

and financing health care.170 In the last

several years, the Commission has made

special efforts to protect competition in

pharmaceutical markets, given rapidly

rising drug expenditures that are causing

great concerns among patients,

employers, and government officials.171

The Commission has been especially

active in investigating and challenging

conduct that excludes or unduly delays

generic competition from pharmaceutical

markets.172 It has also reached important

settlement agreements in mergers in the

opinions and business review letters are valuable

components of the government’s overall antitrust

enforcement efforts. The processes ensure

compliance by the requesting parties, frequently with

implementation of competitive safeguards that private

counsel might not have deemed necessary. Further,

and perhaps more importantly, publication of detailed

reviews allows private practitioners to better counsel

their clients, discourages submission of duplicative

requests, and fosters enhanced antitrust compliance at

relatively low cost.”).

One panelist discussed how state attorneys

general handle advisory opinions. Cooper 6/26 at

184-193. Another panelist discussed how the Office

of the Inspector General of HHS handles advisory

opinions relating to the anti-kickback act. Robinson

6/28 at 193-203. The anti-kickback act is described

in greater detail infra at notes 190-191, and

accompanying text.

169

 See Amicus Brief of the U.S. Dep’t of

Justice, Jackson v. West Tennessee Healthcare, Inc.

(6th Cir. 2004) (No. 04-5387), available at

http://www.usdoj.gov/atr/cases/f203800/203897.htm;

Amicus Brief of the Federal Trade Comm’n, Jackson

v. West Tennessee Healthcare, Inc. (6th Cir. 2004)

(No. 04-5387), available at http://www.ftc.gov/os/

2004/06/040604jacksonhopitalamici.pdf; Amicus

Brief of the U.S. Dep’t of Justice, Surgical Ctr. of

Hammond, L.C. v. Hosp. Serv. Dist. No. 1 of

Tangipahoa Parish (5th Cir. 1998) (No. 97-30887),

available at http://www.usdoj.gov/atr/cases/

f2000/2052.htm; Amicus Brief of the Federal Trade

Comm’n, Surgical Ctr. of Hammond, L.C. v. Hosp.

Serv. Dist. No. 1 of Tangipahoa Parish (5th Cir.

1998) (No. 97-30887), available at

http://www.ftc.gov/ogc/briefs/surgical.htm.

170

 An Overview of Federal Trade

Commission Antitrust Activities: Hearing Before the

House Comm. on the Judiciary, Antitrust Task Force,

108th Cong. 2 (2003) (Testimony of Timothy J.

Muris, Chairman, Federal Trade Commission), at

http://www.ftc.gov/os/2003/07/antitrustoversighttest.h

tm.

171

 Id.

172

 See In re Schering-Plough, No. 9297

(2003), available at http://www.ftc.gov/os/adjpro/

d9297/031218commissionopinion.pdf (opinion of

Commission). See also In re Bristol-Myers Squibb

Co., No. C-4076 (Apr. 14, 2003) (consent order); In

re Biovail Corp., No. C-4060 (Oct. 2, 2002) (consent

order); In re Biovail Corp. & Elan Corp., PLC., No.

C-4057 (Aug. 20, 2002) (consent order); In re

Schering-Plough Corp., No. 9297 (Apr. 3, 2002)

(consent order as to American Home Products Corp.);

In re Hoechst Marion Roussel, Inc., No. 9293 (May

8, 2001) (consent order); In re Abbott Laboratories,

No. C-3945 (May 22, 2000) (consent order); In re

Geneva Pharmaceuticals, Inc., No. C-3946 (May 22,

2000) (consent order). 
36

pharmaceutical markets,173 and

successfully argued in an amicus brief

that improper pharmaceutical filings

before the Food and Drug

Administration are not immune from

antitrust review.174 

The Commission also issued a

recent, comprehensive study on generic

drug competition.175 This study

recommended legislative changes to the

statutory framework governing generic

drug entry to mitigate the possibility of

abuse of this framework. Most of these

recommendations were enacted by the

Medicare Prescription Drug and

Improvement Act of 2003.

Since the 1970s, the Commission

has had an active law enforcement

program targeting anticompetitive

practices among physicians and other

health care professionals. The types of

conduct within the health care

professions that have been subject to

Commission challenge over the decades

include agreements on price and pricerelated terms, agreements to obstruct the

entry of innovative forms of health care

financing and delivery, and restraints on

advertising and other forms of

solicitation.176

Since 2002, the Commission has

entered into 17 consent agreements with

physicians, their organizations, or their

non-physician consultants and agents,

settling charges that the respondents

have engaged in unfair methods of

competition – primarily involving joint

contracting with payors and other forms

of price-fixing.177

173 Muris, supra note 170, at 2 (citing such

cases as Pfizer Inc., No. C-4075 (May 27, 2003)

(consent order); Baxter International Inc. and Wyeth,

No. C-4068 (Feb. 3, 2003); and Amgen Inc. and

Immunex Corp., No. C-4056 (Sept. 3, 2002)).

174

 See Brief of Amicus Curiae of the

Federal Trade Comm’n, In re Buspirone Patent

Litigation & In re Buspirone Antitrust Litigation,

MDL Docket No. 1410 (JGK) (Jan. 8, 2002) (in

opposition to defendant’s motion to dismiss), at

http://www.ftc.gov/os/2002/01/busparbrief.pdf; see

also In re Buspirone, 185 F. Supp. 2d 363 (S.D.N.Y.

2002) (adopting Commission’s argument).

175 FEDERA L TRADE COMM’N, GEN ERIC

DRUG ENTRY PRIOR TO PATENT EXPIRATION: AN

FTC STUDY (2002), at www.ftc.gov/opa/2002/07/

genericdrugstudy.htm.

176

 See generally HEALTH CARE SERVICES &

PRODUCTS DIVISION, supra note 165. 

177

 See, e.g., In re Southeastern N.M.

Physicians IPA, Inc., No. 0310134 (June 7, 2004); In

re Cal. Pac. Med. Group, No. 9306 (May 11, 2004)

(final order); In re Tenet Healthcare Corp., C-4106

(Jan. 29, 2004) (final order); In re Mem’l Hermann

Health Network Providers, C-4104 (Jan. 8, 2004)

(final order); In re Surgical Specialists of Yakima,

C-4101(Nov. 14, 2003) (final order); In re S. Ga.

Health Partners, L.L.C., C-4100 (Oct. 31, 2003) (final

order); In re Physician Network Consulting, L.L.C.,

C-4094 (Aug. 27, 2003) (final order); In re Me.

Health Alliance, C-4095 (Aug. 27, 2003) (final

order); In re Anesthesia Med. Group, Inc., C-4085, &

Grossmont Anesthesia Services Med. Group, C-4086

(July 11, 2003) (final orders); In re Washington Univ.

Physician Network, C-4093 (Aug. 22, 2003) (final

order); In re SPA Health Org., C-4088 (July 17,

2003) (final order); In re Carlsbad Physician Ass’n,

C-4081 (June 13, 2003) (final order); In re R.T.

Welter & Assocs. (Oct.2, 2002) (final order); In re

Sys. Health Providers, C-4064 (Oct. 24, 2002) (final

order); In re Aurora Associated Primary Care

Physicians, L.L.C., C-4055 (July 16, 2002) (final

order); In re Physicians Integrated Services of

Denver, Inc., C-4054 (July 16, 2002) (final order); In

re Obstetrics & Gynecology Med. Corp. of Napa

Valley, C-4048 (May 14, 2002) (final order). See

also Palmisiano 9/9/02 at 244 (“In recent years,
37

Additionally, Commission staff

are currently evaluating the effects of

consummated hospital mergers in

several cities. The Commission will

announce the results of these

retrospective studies after determining

whether the mergers in question were

harmful to consumers.178 One case

arising out of this investigation is

currently in administrative litigation.179

2. Division Health Care Related

Activities

During the last three years, the

Division has pursued formal

investigations across the full range of

healthcare products and services. In

addition to the matters on which it has

taken formal enforcement or advisory

action, the Division has examined, or is

investigating, mergers and conduct of

managed care organizations, including

the review of four major mergers of

health plans. In one of these matters, the

Division publicly set forth the reasoning

that led it to clear the formation of the

nation’s largest health plan.180 

The Division has examined both

vertical contracting arrangements

involving health plans and providers as

well as allegations of horizontal

agreements among plans. Additionally,

the Division has or is investigating

mergers and conduct of providers (both

physicians and hospitals), including

allegations of horizontal agreements. 

These investigations, while not resulting

in challenges, have included criminal

inquiries into the conduct of managed

care plans, hospitals, and physicians. 

The Division’s civil conduct

investigations have encompassed

hospital conduct, blood products, and

retrospective examinations of a hospital

joint operating agreement and a multihospital joint selling venture, the latter

of which implemented mechanisms

intended to achieve clinical integration

without formal merger. The Division’s

formal merger investigations have

encompassed hospital mergers, senior

assisted living facilities, and diagnostic

imaging service providers. Finally, the

Division has actively provided counsel

to the Administration on health care

policy matters.

The Division has taken several

public enforcement actions, including a

merger challenge involving critical care

physicians and physician organizations have been the

subject of approximately 50 enforcement actions.”).

178 The Commission announced on June 30,

2004 that it had closed an investigation into the

aquisition of Provena St. Therese Medical Center by

Vista Health Acquisition. See News Release, Federal

Trade Comm’n, FTC Closes Investigation Into

Merger of Victory Memorial Hospital and Provena

St. Therese Medical Center (July 1, 2004), at

http://www.ftc.gov/opa/2004/07/waukegan.htm. 

179

 In re Evanston Northwestern Healthcare

Corp., No. 9315 (Feb. 10, 2004) (administrative

complaint), at http://www.ftc.gov/os/caselist/

0110234/040210emhcomplaint.pdf.

180

 See Dep’t of Justice, Department of

Justice Antitrust Division Statement on the Closing of

its Investigation of Anthem, Inc.’s Acquisition of

Wellpoint Health Networks, Inc. (M ar. 9, 2004), at

http://www.usdoj.gov/atr/public/press_releases/2004/

202738.htm#attach. 
38

monitors and orthopedic equipment,181

litigation resulting in a consent decree

against the Federation of Physicians and

Dentists,182 a case brought against the

dominant producer of prefabricated

artificial teeth in the United States,

183

and a consent decree requiring

dissolution of a physician organization

of over 1000 members.184 Additionally,

the Division has issued favorable

business review letters to two groups

requesting guidance regarding fee

surveys.185

3. Private Litigation

The majority of antitrust

challenges to health care activities arise

in private litigation. One study showed

that the Agencies brought only six

percent of the antitrust challenges to

health care practices involving quality of

care from 1985 to 1999.186 Most private

antitrust challenges are not successful: 

the same study found that plaintiffs won

favorable opinions only 14 percent of the

time; 67 percent of the judicial opinions

favored defendants, and the remaining

19 percent favored neither party.187 The

most common private antitrust healthcare litigation claims involved staff

privileges and exclusive contracting

cases.188

C. Health Law Overview

The states and the federal

government extensively regulate health

care.189 Many of these regulations are

described in greater detail in Chapters 2 -

8, infra. This section provides a basic

introduction to several important

provisions that are important to

understand the health care marketplace. 

1. Anti-Kickback

The Medicare and Medicaid

181 United States v. Gen. Elec. Co., 2004-1

Trade Cas. (CCH) ¶ 74,313 (D. D.C. 2004)

182 United States v. Fed’n of Physicians &

Dentists, Inc., 2002 Trade Cas. (CCH) ¶ 73,868 (D.

Del 2002).

183 United States v. Dentsply Int’l, Inc., 277

F. Supp. 2d 387 (D. Del. 2003). The case is currently

pending before the United States Court of Appeals for

the Third Circuit. The Division’s briefs may be

found at http://www.usdoj.gov/atr/cases/indx102.htm.

184 United States v. Mountain Health Care,

P.A., 2004 WL 938495 (4th Cir. N.C. May 3, 2004).

185

 See Letter from Charles A. James, U.S.

Dep’t of Justice, to Jerry B. Edmonds, Williams,

Kastner & Gibbs PLLC (Sept. 23, 2002), at

http://www.usdoj.gov/atr/public/busreview/200260.ht

m; Letter from R. Hewitt Pate, U.S. Dep’t of Justice,

to Diana West (May 25, 2004), at http://www.usdoj.

gov/atr/public/busreview/203831.htm.

186 Peter J. Hammer & William M. Sage,

Antitrust, Health Care Quality, and the Courts, 102

COLUM. L. REV. 545, 565 (2002). 

187

 Id. at 575; Hammer 5/28 at 146. 

188

 See Hammer & Sage, supra note 186, at

578. The incidence of private staff privileges cases

seems to be declining. It is possible the enactment of

the Health Care Quality Improvement Act of 1986, 42

U.S.C. §§ 11,101-11,152 (1994), which offers limited

protection from antitrust liability to peer review

decisions, may be responsible for this trend. See

Hammer & Sage, supra note 186, at 597-98; Hammer

9/10/02 at 22.

189 For example, depending on the state and

the type of provider, there may be restrictions on

entry, structure, and conduct. 
39

Anti-Kickback Statute (42 U.S.C.

§1320a-7b(b)) broadly criminalizes the

solicitation or receipt of remuneration in

connection with items or services for

which payment is made under Medicare

or Medicaid. 

There are statutory exceptions for

discounts, payments pursuant to a bona

fide employment relationship, group

purchasing organizations, waiver of

coinsurance obligations, and risk-sharing

agreements of managed care

organizations. There are also

administrative regulations creating

specific safe harbors and advisory

opinions covering a number of other

arrangements.190 

Those who violate the

anti-kickback statute are subject to

criminal and civil penalties and/or

exclusion from participation in the

Medicare and Medicaid programs. The

anti-kickback statute has had an

important effect on the structure of the

health care marketplace.191 

2. Self-Referral Amendments

The Self-Referral Amendments

(42 U.S.C. §1395nn) prohibit physicians

from referring Medicare and Medicaid

patients to ancillary providers in which

they or their family members hold a

financial interest and prohibit service

providers from billing for services

performed as a result of such referrals. 

The Self-Referral Amendments

apply to certain designated health

services. A financial interest includes an

ownership interest or a compensation

arrangement (the latter includes both the

giving and receiving of compensation). 

There are certain defined situations in

which a physician is permitted to receive

payment for the referral of a Medicare or

Medicaid patient to an entity in which he

or she has a direct or indirect financial

interest, including when the physician

has an ownership interest in a whole

hospital. 

The Self-Referral Amendments

create a strict liability offense, with

violation punishable by program

exclusion and substantial civil penalties. 

Like the anti-kickback statute, the SelfReferral Amendments have had an

important effect on the structure of the

health care marketplace.192 

190

 See, e.g., safe harbors set forth at 57 Fed.

Reg. 52,723 (Nov. 5, 1992) and 56 Fed. Reg. 35,952

(codified at 42 C.F.R. 1001.952). 

191

 See Blumstein 2/27 at 36; Hammer 2/27

at 63 (“Things that are necessary to police fraud and

abuse in a fee-for-service realm impairs substantially

what a hospital can do in terms of structuring its

business arrangements.”); Paul E. Kalb, Health Care

Fraud and Abuse, 282 JAMA 1163 (1999); David A.

Hyman, Health Care Fraud and Abuse: Market

Change, Social Norms, and “the Trust Reposed in the

Workmen,” 30 J. LEGA L STUDIES 531 (2001); James

F. Blumstein, Rationalizing the Fraud and Abuse

Statute, 15 HEALTH AFFAIRS 118 (Winter 1996);

James F. Blumstein, The Fraud and Abuse Statute in

an Evolving Healthcare Marketplace: Life in the

Healthcare Speakeasy, 22 AM. J. L. & MED. 205

(1996). 

192

 See infra Chapter 3 (discussing the rise

of single-specialty hospitals (SSHs). Physicians are

able to invest in SSHs and refer to them without

running afoul of the Self-Referral Amendments

because they have invested in a “whole hospital.” See

also Mallon 6/10 at 189, 193-94 (noting that

“payment shades practice” and effects of self-referral
40

3. EMTALA

The Emergency Medical

Treatment and Labor Act (42 U.S.C.

§1395dd) requires hospitals that receive

Medicare funding and have an

emergency department (ED) to provide

an appropriate medical screening

examination to any individual who

comes to the ED and requests one. 

Stabilizing treatment must be provided

to individuals with an emergency

medical condition. Violations are

punishable with civil penalties, program

exclusion, and private lawsuits brought

against individual hospitals. Like the

anti-kickback and Self-Referral

Amendments, EMTALA has had an

important effect on the health care

marketplace.193 

4. Medical Malpractice

Medical malpractice litigation is

governed by state tort law. To prevail in

a medical malpractice claim, the plaintiff

must prove that the provider-defendant

owed a duty of care to the plaintiff, that

the provider-defendant breached this

duty by failing to adhere to the standard

of care expected, and that this breach of

duty caused an injury (with associated

damages) to the plaintiff. Malpractice

litigation seeks to compensate

negligently injured consumers, deter

unsafe practices, and achieve corrective

justice. 

Numerous panelists and

commentators stated that the medical

malpractice system is in the midst of a

crisis.194 The American Medical

Association (AMA) has declared a

malpractice crisis in twenty states,

claiming that important health care

services are in short supply.195 Complete

consideration of this issue lies beyond

the scope of this Report, but it

significantly affects the health care

provisions on physician-owned physical therapy

services); Hammer 2/27 at 63; Kahn 2/27 at 76 (“One

of the unintended consequences of the Stark Law is

this issue of physician-owned specialty hospitals.”);

Fine 9/9/02 at 198. 

193

 See Brian Kamoie, EMTALA: 

Dedicating an Emergency Department Near You, 37

J. HEALTH L. 41 (2004); David A. Hyman, Patient

Dumping and EMTALA: Past Imperfect/Future

Shock, 8 HEALTH MATRIX 29 (1998).

194

 See Lomazow 6/10 at 196; Gingrich 6/12

at 25-26; M. Young 6/12 at 90; Michelle Mello et al.,

Caring for Patients in a Malpractice Crisis: 

Physician Satisfaction and Quality of Care, 23

HEALTH AFFAIRS 42 (July/Aug. 2004); David

Studdert et al., Medical Malpractice, 350 NEW ENG.

J. MED. 283 (2004); Kenneth E. Thorpe, The Medical

Malpractice ‘Crisis’: Recent Trends and the Impact

of State Tort Reforms, 2004 Health Affairs (Web

Exclusive) W4-20; Michelle Mello et al., The New

Medical Malpractice Crisis, 348 NEW ENG. J. MED.

2281 (2003); William M. Sage, Understanding the

First Malpractice Crisis of the 21st Century, 2003

HEALTH LAW HANDBOOK; Office of the Assistant

Secretary of Planning & Evaluation, Dep’t of Health

& Human Services, Confronting the New Health

Care Crisis: Improving Health Care Quality and

Lowering Costs By Fixing Our Medical Liability

System (2002), http://aspe.hhs.gov/daltcp/reports/

litrefm.pdf.

195

 See American Medical Ass’n,

Massachusetts named state in medical liability crisis

(June 14, 2004), http://www.ama-assn.org/

ama/pub/article/9255-8629.html. But see News

Release, General Accounting Office, Medical

Malpractice: Implications of Rising Premiums on

Access to Health Care (Aug., 2003),

http://www.gao.gov/new.items/d03836.pdf. 
41

marketplace.196

D. Obligational Norms

Many members of the public view

health care as a “special” good, not subject

to normal market forces, with significant

obligational norms to provide necessary care

without regard to ability to pay.197 Similarly,

risk-based premiums for health insurance are

perceived by many as inconsistent with

obligational norms and fundamental

fairness, because those with the highest

anticipated medical bills will pay the highest

premiums.198 A wide array of regulatory

interventions, ranging from EMTALA and

mandated benefits to community rating and

guaranteed issue, reflect these norms.199 

E. Conclusion

Commentators have extensively

analyzed the application of competition and

antitrust law to health care. In general, these

commentators have concluded that increased

competition has empowered consumers,

lowered prices, increased quality, and made

health care more accessible.200 The 

196

 See supra note 194; Fred J. Hellinger &

William E. Encinosa, U.S. Department of Health and

Human Services, The Impact of State Laws Limiting

Malpractice Awards on the Geographic Distribution

of Physicians 12 (2003); David A. Hyman, Medical

Malpractice: What Do We Know and What (If

Anything) Should We Do About It?, 80 TEX L. REV.

1639-1655 (2002); James F. Blumstein, The Legal

Liability Regime: How Well is It Doing in Assuring

Quality, Accounting for Costs, and Coping with an

Evolving Reality in the Health Care Marketplace?,

11 ANNALS HEALTH L. 125 (2002); Patricia M.

Danzon, Liability For Medical Malpractice, in

HAND BOO K OF HEALTH ECONOM ICS (Culyer &

Newhouse, eds., 2000).

197

 See Blumstein 2/27 at 21-22 (“This is not

purely a question about resource allocation, but it’s

also a question about a normative overlay of why

health care is different. Why do we care about access

to health care in ways that we don’t care about access

to certain other things? We worry about it because of

our concern about, broadly speaking, redistributive

values and some notion of egalitarianism.”); Hyman

6/25 at 86-87 (noting that many people describe

health care as a “merit good”); Mark Schlesinger &

Thomas Lee, Is Health Care Different? Popular

Support for Federal Health and Social Policies, 18 J.

HEALTH POLITICS, POL’Y & L. 551 (1993); Richard A.

Epstein, Why is Health Care Special?, 40 U. KANSAS

L. REV. 307 (1992).

198

 See, e.g., TIMOTHY S. JOST,

DISENTITLEMENT? THE THREATS FACING OUR

HAEALTH-CARE PROGRAMS AND A RIGHTS-BASED

RESPONSE (2003); Deborah Stone, The Struggle for

the Soul of Health Insurance, 18 J. HEALTH POL.,

POL’Y & L. 28 (1993). 

199

 See infra Chapters 2-8. 

200

 See generally Gaynor 5/28 at 73

(“[A]ntitrust enforcement is a critical element of

health policy”); Greenberg 5/28 at 316; Greaney

9/10/02 at 303 (“There are countless economic

studies, I think that show the demonstrable consumer

benefits that have flowed from the competition in the

health care industry.”); Greaney 2/27 at 135; Hanson

9/9/02 at 163 (“Competition often leads to quality

improvements, innovation and enhanced access to

medical services.”) 

See also Thomas Leary, Special Challenges

for Antitrust in Health Care, ANTITRUST, Spring,

2004 at 23; Thomas L. Greaney, Chicago’s

Procrustean Bed: Applying Antitrust Law in Health

Care, 71 ANTITRUST L. J. 857 (2004); Stuart M.

Butler, A New Policy Framework for Health Care

Markets, 23 HEALTH AFFAIRS 22 (Mar./Apr. 2004);

Clark Havighurst, I’ve Seen Enough! My Life and

Times in Health Care Law and Policy, 14 HEALTH

MATRIX 107 (2004); DEBORAH HAAS-WILSON,

MANAGED CARE AND MONOPOLY POWER: THE

ANTITRUST CHALLENGE (2003); Thomas Greaney,

Whither Antitrust: The Uncertain Future of

Competition Law in Health Care, 21 HEALTH
42

Agencies have long held that standard

antitrust analysis and doctrines apply to

health care markets. With rare exceptions,

the antitrust laws are rules of general

applicability, and they govern health care

markets in largely the same way that they

govern other markets. 

To be sure, as noted previously,

health care is extensively regulated. The

optimal balance between competition and

regulation is an enduring issue. Just over

thirty years ago, the Senate Judiciary

Committee, Subcommittee on Antitrust and

Monopoly held six days of hearings on

Competition in the Health Services Market. 

Senator Philip A. Hart opened the hearings

with the following prescient observations: 

Over the years, health care service

has been treated pretty much as a

“natural monopoly.” It has been

assumed that a community could

support only so many hospitals; that

providers just naturally control

supply and demand. And there may

be validity to such ideas. But, in this

area, as in many others which have

long been thought of as “natural

monopolies,” today questions are

being raised as to just how pervasive

the monopolization must be. Isn’t it

just possible, some are asking, that

turning competition loose, at least in

some sections, may not only lower

AFFAIRS 185 (Mar./Apr. 2002); Frank A. Sloan &

Mark A. Hall, Market Failures and the Evolution of

State Regulation of Managed Care, 65 LAW &

CONTEMP. PROBS. 169 (Autumn, 2002); RICHARD A.

EPSTEIN, MORTAL PERIL: OUR INALIENABLE RIGHT

TO HEALTH CARE? (1997); H.E. FRECH, COMPETITION

& MONOPOLY IN MEDICAL CARE (1996); AMERICAN

HEALTH POLICY: CRITICAL ISSUES FOR REFORM

(Robert Helms, ed. 1993); COMPETITIVE APPROACHES

TO HEALTH CARE RE FORM (Arnould, Rich & White,

eds. 1993); Frances H. Miller, Competition Law and

Anticompetitive Professional Behavior Affecting

Health Care, 55 MODERN L. REV. 453 (1992);

WARREN GREENBERG, COMPETITION, REGULATION

AND RATIONING IN HEALTH CARE (1991); Paul

Weller,”Free Choice” as a Restraint of Trade in

American Health Care Delivery and Insurance, 69

IOWA L. REV. 1351 (1984); Thomas E. Kauper, The

Role of Quality of Health Care Considerations in

Antitrust Analysis, 51 LAW & CONTEMP. PROBS. 273

(1988); COMPETITION IN THE HEALTH CARE SECTOR:

PAST, PRESENT AND FUTURE: PROCEEDINGS O F A

CONFERENCE SPONSORED BY THE BUREAU OF

ECONOM ICS , FEDERA L TRADE COMMISSION (Warren

Greenberg ed., 1978). See also DRANOVE, supra note

1; GLIED, supra note 1; ROBINSON, supra note 1;

Sage & Hammer, supra note 32; Blumstein, supra

note 53; Sage et al., supra note 53; GINGRICH ET AL.,

supra note 107; Epstein, supra note 197. 

To be sure, panelists and commentators

expressed concern about the use and/or direction of

competition in health care markets. See, e.g., Feder

2/27 at 153-156, 162; Len M. Nichols et al., Are

Market Forces Strong Enough to Deliver Efficient

Health Care Systems? Confidence is Waning, 23

HEALTH AFFAIRS 8 (Mar./Apr. 2004); Michael E.

Porter & Elizabeth Olmsted Teisberg, Fixing

Competition in U.S. Health Care, HARV. BUS. REV.

65 (June, 2004); M. Gregg Bloche, The Invention of

Health Law, 91 CAL. L. REV. 247 (2003); Clark

Havighurst, How the Health Care Revolution Fell

Short, 65 LAW & CONTEMP PROBS. 55 (2002); Uwe

Reinhardt, Can Efficiency in Health Care Be Left to

the Market?, 26 J. HEALTH, POL., POL’Y & L. 967

(2001); THOM AS RICE, THE ECON OM ICS OF HEALTH

RECONSIDERED (1998); Thomas Rice, Can Markets

Give Us the Health Care System We Want?, 22 J.

HEALTH, POL., POL’Y & L. 383 (1997); James A.

Morone, The Case Against Competition, in

COMPETITIVE APPROACHES TO HEALTH CARE

REFORM, supra; Lawrence D. Brown, Competition

and the New Accountability: Do Market Incentives

and Medical Outcomes Conflict or Cohere?, in

COMPETITIVE APPROACHES TO HEALTH CARE

REFORM, supra; Theodore R. Marmor and David A.

Boyum, The Political Considerations of

Procompetitive Reform, in COMPETITIVE

APPROACHES TO HEALTH CARE REFORM, supra.
43

the costs of health care but improve

its quality? . . . [W]e hope to develop

some suggestions as to areas where

restrictions on trade could be

replaced with competition to the

benefit of the health and pocketbooks

of consumers.201 

In the intervening thirty years, it has

become clear that health care is not a natural

monopoly, and that competition has an

important role to play in ensuring that

consumers can obtain the care they desire at

a price they are willing to pay. The

Agencies help maintain competition in the

health care financing and delivery markets,

and ensure that market participants can

compete to satisfy consumer demand.

201 Senator Philip A. Hart, Hearings Before

the Subcomm. on Antitrust & Monopoly of the

Senate Comm. on the Judiciary, 93rd Cong., 2nd

Sess. 1 (1974).
CHAPTER 2: INDUSTRY SNAPSHOT AND COMPETITION LAW: PHYSICIANS

I. OVERVIEW ........................................................... 1

II. INTRODUCTION ....................................................... 1

III. COMPETITION AND THE MARKET FOR PHYSICIAN SERVICES ............. 3

A. Provider Network Joint Ventures ...................................... 3

1. IPAs ...................................................... 3

a. Description of IPAs .................................... 3

b. IPA Efficiencies ....................................... 5

(i) Costs and Related Efficiencies ...................... 5

(ii) Quality of Care and Related Efficiencies .............. 7

2. PHOs ..................................................... 8

a. Description of PHOs ................................... 8

b. PHO Efficiencies ..................................... 10

(i) Costs and Related Efficiencies ..................... 10

(ii) Quality of Care and Related Efficiencies ............. 12

3. Summary ................................................. 13

B. Physician Compensation ........................................... 13

1. Physician Payment Arrangements .............................. 13

2. Messenger Model ........................................... 14

a. Description of the Messenger Model ...................... 14

b. Messenger Model Efficiencies and Antitrust Concerns ........ 16

3. Physician Collective Bargaining ............................... 17

a. Legal Landscape ...................................... 18

b. Countervailing Power ................................. 20

c. Physician Collective Bargaining Harms Consumers .......... 23

C. Licensure, Market Entry, and Practice Restrictions ....................... 25

1. Mechanisms to Regulate Physician and AHP Market Entry .......... 25

a. Regulation’s Impact on Cost, Quality, and Access ........... 27

b. Certification’s Impact on Cost, Quality, and Access .......... 28

2. AHPs and Provider Control of Licensure Boards .................. 29

3. State Restrictions on the Interstate Practice of Telemedicine ......... 31

IV. ANTITRUST ENFORCEMENT IN THE PHYSICIAN MARKETPLACE ......... 33

A. Private Litigation Involving Physician Privileges and Credentialing ......... 34

B. Provider Network Joint Ventures ..................................... 34

1. The Agencies’ Antitrust Analysis of Provider Network Joint Ventures . 35

2. Financial Integration ........................................ 35
ii

3. Clinical Integration ......................................... 36

a. Indicia of Clinical Integration ........................... 37

b. Are Joint Negotiations on Price Reasonably Necessary 

to Achieve Clinical Integration? ......................... 39

c. Further Guidance on Clinical Integration .................. 40

C. Physician Information Sharing ....................................... 41

D. Physician-Related Conduct Implicating the State Action Doctrine ........... 42
CHAPTER 2: INDUSTRY SNAPSHOT AND COMPETITION

 LAW: PHYSICIANS

I. OVERVIEW

As Chapter 1 details, competition has

spurred significant changes in the market for

physician services in the past several

decades. Chapter 2 discusses how many

physicians have sought to use innovative

joint ventures to provide consumers with

higher quality care at lower prices, while

others have sought to stifle competition

through conduct such as price-fixing and

restrictions on allied health professionals. 

Reflecting consumer concerns about the

quality, availability, and price of physician

services, we highlight the benefits to

consumers of competitive markets and

vigorous antitrust enforcement. 

This chapter first considers two types

of provider network joint ventures –

independent practice associations (IPAs) and

physician-hospital organizations (PHOs) –

that are part of the rapidly changing

marketplace for physician services. We then

discuss physician payment arrangements, the

messenger model, and physician collective

bargaining. Next, the chapter evaluates the

competitive impact of restricting physicians’

and allied health professionals’ market entry. 

Finally, we examine the application of

antitrust law to certain aspects of the

marketplace for physician services,

including private antitrust litigation about

credentialing, the Agencies’ analysis to

assess the financial and clinical integration

of joint ventures, and the ability of

physicians to share and use information

relating to quality improvements.

Representatives from physician

groups and organizations, attorneys,

economists, and scholars testified on these

matters over seven days of Hearings. 

Physician topic panels included Health Care

Services: Provider Integration (September

9, 2002); Physician Hospital Organizations

(May 8); Quality and Consumer

Information: Physicians (May 30); Quality

and Consumer Protection: Market Entry

(June 10); Prospective Guidance (June 26);

Physician Product and Geographic Market

Definition (September 24); Physician

Information Sharing (September 24);

Physician IPAs: Patterns and Benefits of

Integration (September 25); Physician IPAs: 

Messenger Model (September 25); and

Physician Unionization (September 26).1

II. INTRODUCTION

Spending on physician and clinical

services accounts for approximately 22% of

the $1.6 trillion spent annually on health

care services.2 Total spending on physician

services increased at an average annual rate

of 12 percent from 1970-1993.3 As Figure 1

reflects, the rate of increase in spending on

physician services has varied in the

intervening decade, but generally ranged

1

 Complete lists of participants on these and

other panels are available infra Appendix A and in

the Agenda, at http://www.ftc.gov/ogc/healthcare

hearings/completeagenda.pdf.

2

 See Stephen Heffler et al., Trends: Health

Spending Projections Through 2013, 2004 HEALTH

AFFAIRS (Web Exclusive) W4-79, 80 ex.1 (2004), at

http://content.healthaffairs.org/cgi/reprint/hlthaff.w4.

79v1.pdf. 

3

 Id. at 81 ex.2.
2

between four and seven

percent per year.4

Spending on physician

services is projected to

increase approximately

seven percent per year for

the next decade.5

Nevertheless, the

percentage of national

health spending devoted

to physician services is

likely to decline given

“[t]he continued shift of

care to other professional

services, negative updates

to the Medicare physician

payment rates, and faster

growth in other sectors

such as prescription drugs.”6 Although

physician services account for only 22

percent of total health care spending, the

treatment decisions of physicians profoundly

affect both the cost and quality of the other

health care services that consumers receive.7

The cost and geographic distribution

of physician services affect the accessibility

of those services. For several reasons,

including higher per capita incomes and

economies of scale in complementary health

care inputs, there are many more physicians

per capita in metropolitan areas than in nonmetropolitan and rural areas.8

4

 Centers for Medicare & Medicaid

Services, Health Accounts: National Health

Expenditures 1965-2013, History and Projections by

Type of Service and Source of Funds: Calendar

Years 1965-2013, at http://www.cms.hhs.gov

/statistics/nhe/default.asp#download (last modified

Mar. 24, 2004).

5

 Heffler et al., supra note 2, at 80 ex.1.

6

 Stephen Heffler et al., Health Spending

Projections For 2002-2012, 2003 HEALTH AFFAIRS

(Web Exclusive) W3-54, 63, at http://content.

healthaffairs.org/cgi/reprint/hlthaff.w3.54v1.pdf.

7

 Gail B. Agrawal & Howard R. Veit, Back

to the Future: The Managed Care Revolution, 65

LAW & CONTEMP. PROBS. 11, 49 (2002) (stating that

“reliance on medical judgment is inevitable in the

complex cases that account for the majority of health

care spending.”).

8

 See GENERA L ACCOUNTING OFFICE,

PHYSICIAN SUPPLY INCREASED IN METROPOLITAN

AND NONMETROPOLITAN AREAS BUT GEO GR AP HIC

DISPARITIES PERSISTED 6 (2003) (reporting that

metropolitan areas have more of the facilities and

equipment on which physicians depend than

nonmetropolitan areas and that specialists prefer to

practice in metropolitan areas because they handle

less prevalent but more complicated illnesses),

available at http://www.gao.gov/atext/d04124.txt;

INSTITUTE O F MEDICINE, THE NATION’S PHYSICIAN

WORKFORCE: OPTIONS FOR BALANCING SUPPLY AND

REQUIREMENTS 69 (1996) (“[A]n abundance of

physicians will not solve the problems of

maldistribution by geographic area or specialty.”).
3

III. COMPETITION AND THE

MARKET FOR PHYSICIAN

SERVICES

Provider network joint ventures have

the potential to reduce costs and improve

quality. Some physicians, however, have

responded to changes in the market for

physician services by engaging in collusive

anticompetitive conduct, seeking collective

bargaining rights, and manipulating

licensure regulations. The following

sections describe these developments and

assess their implications for the cost, quality,

and availability of health care. Some of

these sections contain recommendations to

enhance the performance of the physician

services market. 

A. Provider Network Joint Ventures

As Chapter 1 discusses, the Supreme

Court’s decisions in Goldfarb and Maricopa

clarified the antitrust laws’ application to

health care, and spurred numerous market

changes, including the development of

managed care. Many physicians responded

to managed care’s growth by implementing

network joint ventures to facilitate

contracting with managed care plans. This

section focuses on two joint venture types

(IPAs and PHOs) and describes their key

features and potential efficiencies.9 These

joint venture types are not immutable

categories; as managed care organizations

(MCOs) have reduced reliance on capitation

arrangements, some joint ventures have

dissolved while others have implemented

messenger models or invested in clinical

integration.10 These joint ventures also

compete with one another to recruit

physician-members and to obtain MCO

contracts.11

1. IPAs

a. Description of IPAs

IPAs are networks of independent

physicians that contract with MCOs and

employers.12 IPAs may be organized as sole

proprietorships, partnerships, or professional

9

 Some of the potential efficiencies

discussed in this Section may not constitute

efficiencies for the purposes of the Agencies’ antitrust

analysis of physician network joint ventures. 

10 For a discussion of the messenger model,

see infra notes 110-132, and accompanying text. For

a discussion of clinical integration, see infra notes

249-281, and accompanying text. As discussed in

Chapter 1, capitation involves a physician assuming

responsibility for a certain number of patients and

receiving a fixed amount for each of these patients

regardless of whether those patients seek care.

11 Joint ventures employ varying payment

options, including capitated contracts, fee-for-service

payment, and pay-for-performance incentives. For a

discussion of physician payment arrangements, see

infra notes 97-109, and accompanying text, and supra

Chapter 1. Joint ventures also employ varying

strategies to make themselves more attractive to

MCOs, including integrating financially, clinically, or

both. For a discussion of integration, see infra notes

249-281, and accompanying text. 

12 Gordon D. Brown, Independent Practice

Associations, in INTEGRATING THE PRACTICE OF

MEDICINE: A DECISION MAKER’S GUIDE TO

ORGANIZING AND MANAGING PHYSICIAN SERVICES

289, 290 (Ronald B. Connors ed., 1997); Peter R.

Kongstvedt et al., Integrated Health Care Delivery

Systems, in ESSENTIALS OF MANAGED HEALTH CARE

35 (Peter R. Kongstvedt ed., 4th ed. 2003); Kevin

Grumbach et al., Independent Practice Association

Physician Groups in California, 17 HEALTH AFFAIRS

227, 227 (May/June 1998). For a discussion of

MCOs, see supra Chapter 1. 
4

corporations.13 Physician-members

generally own IPAs, although individual

doctors, hospitals or physician practice

management companies also own some

IPAs.14 IPAs contract with physicians on

both an exclusive and nonexclusive basis.

15

IPAs have historically included primary care

physicians and specialists, although some

commentators have noted a trend toward the

formation of single-specialty IPAs.16 Many

IPAs are nonprofit.17

IPAs can be integrated (financially,

clinically, or both) to varying degrees or not

at all. Physicians participating in financially

integrated IPAs share financial risks. 

Clinically integrated IPAs seek to improve

the quality of care their member-physicians

provide though varied strategies. Physicians

who eschew financially or clinically

integrating an IPA may use a messenger

model to convey price and price-related

information to the payor.

Most IPAs emerged in the 1980s as a

reaction to managed care.

18 Panelists stated

that some physicians in smaller practices

thought that payors had the upper hand so

they formed IPAs to gain bargaining

leverage.19 Physicians were also concerned

about missing out on managed care

contracts, particularly contracts that included

capitation provisions.20 One commentator

stated that the Health Maintenance

Organizations Act of 1973 spurred the

growth of IPAs by recognizing them as an

acceptable form of organized medical

practice and providing funds for their

development.21 As MCOs have abandoned

capitation arrangements with providers, the

13 number of IPAs has declined in recent

 See Brown, supra note 12, at 290-92.

14

 See Lawrence Casalino, IPA Overview 4

(9/25/02) (slides) [hereinafter Casalino Presentation],

at http://www.ftc.gov/ogc/healthcarehearings/

docs/030925lawrencecasalino.pdf; Robin R. Gillies et

al., How Different is California? A Comparison of

U.S. Physician Organizations, 2003 HEALTH AFFAIRS

(Web Exclusive) W3-492, 494 (observing that

hospitals or HMOs own 18% of non-Californian

IPAs, physicians own nearly 70%, and non-physician

managers own about 12%. In California hospitals or

HMOs own more than 20% of IPAs, physicians own

approximately 50%, and non-physician managers

own about 25%), at http://content.healthaffairs.org/

cgi/reprint/hlthaff.w3.492v1.pdf. 

15 Grumbach et al., supra note 12, at 230

(noting that 40 percent of Californian IPAs use

exclusive contracts for some physicians).

16 Lawrence Casalino et al., Growth of

Single Specialty Medical Groups, 23 HEALTH

AFFAIRS 82 (M ar./Apr. 2004); Kongstvedt et al.,

supra note 12, at 35; Ginsburg 2/26 at 67.

17 Kongstvedt et al., supra note 12, at 35.

18 Casalino 9/25 at 10 (stating that IPAs

“were really more of a defensive strategy against

managed care.”); Asner 9/25 at 31-32.

19 Casalino 9/25 at 15, 97; Holloway 9/25 at

100; Asner 9/25 at 126; Doran 2/27 at 217 (stating

that physicians bargaining alone lack data and an

understanding of the negotiating process); TIMOTHY

LAKE ET AL., MEDICARE PAYMEN T ADVISORY

COMM’N, MPR NO. 8568-700, HEALTH PLANS’

SELECTION AND PAYM ENT O F HEALTH CARE

PROVIDERS, 1999, at 120 (2000) (final report) (“Most

of the entities were also formed to improve

negotiating power or leverage with health plans (67

percent) and to protect market share (78 percent).”).

20 Casalino 9/25 at 15 (stating that “if you’re

a small practice, you might be left out of HMO

contracts, but in a large IPA, you’re not likely to

be.”); Asner 9/25 at 31; Kongstvedt et al., supra note

12, at 35. 

21 Brown, supra note 12, at 290.
5

years.22

Statistics on the number and size of

IPAs vary.23 A panelist representing an IPA

trade association stated that there presently

are approximately 2,000 IPAs nationwide.24

One survey found that the number of IPAs

decreased from 1223 in 1996 to 771 in

2002.25 A national survey of physician

organizations found that there were at least

463 IPAs that contained more than 20

physician members in 2002.26 

One panelist noted that IPAs can

vary in size from about a dozen to more than

1,000 physician members.27 A national

survey of physician organizations found the

average number of doctors in an IPA was

233.28 Another study calculated an average

of 387 physicians per IPA nationwide, while

in California the average was 418.29

b. IPA Efficiencies

(i) Costs and Related Efficiencies

Panelists and commentators

disagreed about the impact of IPAs on the

cost of care and whether IPAs can create

efficiencies. Panelists stated that IPAs

reduce contracting costs by lowering

administrative and search costs for

physicians and allowing payors to contract

efficiently with pre-existing networks.30

Additionally, they asserted that IPAs may

generate efficiencies by integrating

information technology and billing systems,

using their collective purchasing power to

receive volume discounts, and performing

credentialing of physician-applicants.31 

Others expressed concern that

physicians may use IPAs to obtain increased

fees from payors.32 IPAs that engage in

payor contracting and are not integrated run

22 Casalino 9/25 at 7, 12-13, 93 (explaining

that “absent risk contracting, IPAs are struggling to

find a reason to exist”); Meier 9/25 at 70. But

see Asner 9/25 at 32 (stating “IPAs are still a very

successful model in the State of California”).

23

 See, e.g., Casalino 9/25 at 6.

24 Holloway 9/25 at 74.

25 HEALTH FORUM, LLC, AFFILIATE OF THE

AMERICAN HOSPITAL ASS’N, HOSPITAL STATISTICS 8

tbl.3 (2000 ed.); HEALTH FORUM, LLC, AFFILIATE OF

THE AMERICAN HOSPITAL ASS’N, HOSPITAL

STATISTICS 10 tbl.3 (2004 ed.). 

26 Casalino Presentation, supra note 14, at

3; Casalino 9/25 at 6; Gillies et al., supra note 14, at

502.

27 Meier 9/25 at 68.

28 Casalino 9/25 at 7.

29 Gillies et al., supra note 14, at 494.

30

 See Asner 9/25 at 32-34; Casalino 9/25 at

14-16; American Medical Ass’n, Physician IPAs: 

Patterns and Benefits of Integration, and Other

Issues (Sept. 25, 2003) 4 (Public Comment).

31 Asner 9/25 at 31-33; Peter R. Kongstvedt,

Primary Care in Managed Health Care Plans, in

ESSENTIALS OF MANAGED HEALTH CARE, supra note

12, at 92-93; Casalino 9/25 at 14-15. For a

discussion of private antitrust litigation involving

physician credentialing, see infra notes 241-247, and

accompanying text.

32

 See Kongstvedt, supra note 31, at 90

(contending that “[i]f relations between the IPA and

the health plan become problematic, the IPA can hold

a considerable portion (or perhaps all) of the delivery

system hostage to negotiations.”); Casalino 5/28 at

126; Scott D. Danzis, Revising the Revised

Guidelines: Incentives, Clinically Integrated

Physician Networks and the Antitrust Laws, 87 VA.

L. REV. 531, 535 (2001).
6

the risk of antitrust liability if they facilitate

price agreements among their members.33

IPAs also create an additional layer of

administration, which can increase

administrative costs – although physicianmembers in the IPA have an incentive to

minimize these expenses.34

One panelist suggested that financial

integration creates an incentive for

physician-members to provide “quality care

at the most cost effective price.”35 Another

panelist suggested that “pay for

performance” (P4P) strategies, which are

described in greater detail in Chapter 1 may

be a new form of financial integration.36 A

third panelist noted that P4P strategies have

been adopted on an industry-wide basis in

California.37 One study found that IPAs in

California use 35-50 percent more care

management strategies than physician

organizations in other parts of the country.38

The study identified two factors that strongly

correlated with this difference: IPAs in

California have greater exposure to external

incentives to improve services and greater

access to information technology than nonCalifornian IPAs.39

Panelists also considered whether

clinical integration can reduce the cost of

health care and create efficiencies. One

panelist stated physicians in clinically

integrated IPAs can do a better job

monitoring and managing patients with

chronic illnesses.

40 Such patients typically

comprise five percent of the patient

population but generate between 60 and 80

percent of health care costs.41 Another

panelist stated that clinical integration

allows physicians to share information more

33

 See, e.g., In re Physician Network

Consulting, L.L.C., No. C-4094 (Aug. 27, 2003)

(decision and order), available at

http://www.ftc.gov/os/2003/08/physnetworkdo.pdf; In

re Tex. Surgeons, P.A., No. C-3944 (May 18, 2000)

(decision and order), available at

http://www.ftc.gov/os/2000/05/texas.do.htm; In re N.

Lake Tahoe Med. Group, Inc., No. C-3885 (July 21,

1999) (decision and order), available at

http://www.ftc.gov/os/1999/08/northtahoe.do.htm; In

re Mesa County Physicians Indep. Practice Ass’n,

Inc., 127 F.T.C. 564 (1999); In re Southbank IPA,

Inc., 114 F.T.C. 783 (1991).

34

 See Casalino 9/25 at 17, 19; JAMES C.

ROBINSON, THE CORPORATE PRACTICE OF MEDICINE

148 (1999) (physician-members are “motivated to . . .

hold down expenses.”).

35 Asner 9/25 at 38.

36 Meier 9/25 at 64 (stating that pay for

performance “very well could be another example of

financial integration.”); see also Casalino 9/25 at 97

(observing that if physicians were paid based on

quality, they would “be more interested in developing

organized processes to improve quality.”).

37 Asner 9/25 at 36-37 (also stating “[t]here

are 25 other programs that are starting up across the

country that are using the pay-for-performance model

from California,” which cannot be implemented “with

physicians in individual private practices.”). 

38 Gillies et al., supra note 14, at 496-98,

499. Care management strategies include disease

management programs, use of guidelines and critical

pathways, use of hospitalists, and the like. 

39 External incentives include outside

reporting of patient satisfaction and outcome data,

and recognition for quality such as receiving better

contracts. Id.

40 Asner 9/25 at 40.

41

 Id. at 39.
7

effectively.42 Two panelists reported that

some IPAs employ care management teams

to coordinate patient care.43 On the other

hand, commentators noted that clinical

integration is very expensive, and cautioned

that physicians may prove unwilling to make

the necessary investment.44

(ii) Quality of Care and Related

Efficiencies

Some have stated that financial

integration provides physicians with

incentives to improve quality of care.45

Nevertheless, many physicians state that

financial incentives including capitation

arrangements reduce quality of care.46 One

commentator observed that “[t]he degree to

which capitation encourages organizations

to compete on quality and efficiency

depends on the market context within which

it is used.”47 

Panelists stated that clinical

integration can improve quality of care.48

One panelist observed that clinically

integrated IPAs can “provide technology,

clinical, and population management

programs to improve patient care and

outcomes.”49 A capitated IPA that

implemented certain clinical integration

initiatives “exerted a dramatic impact on

patterns of utilization and expenditure,”

noted one commentator.50 One study found

that, although many IPAs have implemented

organized care management programs to

improve the quality of care for their patients,

42 Burkett 9/9/02 at 144-45 (stating that his

organization’s clinical integration program provides

“benefits for the patients, for the health plans and for

the providers, all for different reasons, but much of it

revolves around the ability to share the information

that we use for patient care.”).

43 Asner 9/25 at 40; Casalino 9/25 at 11

(noting that some IPAs pro-actively try to manage

care to control costs and improve quality).

44

 See Hill 9/25 at 145; Hoangmai H. Pham

et al., Financial Pressures Spur Physician

Entrepreneurialism, 23 HEALTH AFFAIRS 70, 75-76

(Mar./Apr. 2004); DEP’T OF JUSTICE & FEDERAL

TRADE COMM’N, STATEM ENTS O F ANTITRUST

ENFORCEMEN T POLICY IN HEALTH CARE § 8(B)(1)

(1996) (holding that the Agencies require physician

network joint ventures to make a “significant

investment of capital, both monetary and human, in

the necessary infrastructure and capability to realize”

sufficient clinical integration efficiencies to enable

collective price-setting) [hereinafter HEALTH CARE

STATEMENTS], available at http://www.ftc.gov/

reports/hlth3s.pdf.

45 Peter R. Kongstvedt, Compensation of

Primary Care Physicians in Managed Health Care,

in ESSENTIALS OF MANAGED HEALTH CARE, supra

note 12, at 118 (“[C]apitation eliminates the FFS

incentive to overutilize”). Id. at 120 ( “[A] very large

body of literature shows that managed care systems

have provided equal or better care to members than

uncontrolled FFS systems.”).

46

 See, e.g., Kevin Grumbach, Primary Care

Physicians’ Experience of Financial Incentives in

Managed-Care Systems, 339 NEW ENG. J. MED.

1516, 1518-19 (1998). 

47 Lawrence Casalino, Canaries in a Coal

Mine: California Physician Groups and

Competition, 20 HEALTH AFFAIRS 97, 99 (July/Aug.

2001). 

48 Burkett 9/9/02 at 148; Asner 9/25 at 40

(observing that “under clinical integration there can

be monitoring and managing chronic patients, and

this will ensure high-quality, cost-effective care.”). 

49 Asner 9/25 at 33.

50 ROBINSON, supra note 34, at 147

(“Cardiology in the . . . region experienced a 30

percent drop in hospital utilization and a 20 percent

drop in claims costs in the first year.”).
8

the use of such processes is still “relatively

uncommon.”51 Some experts contend that

an integrated, or “closely knit” IPA may

provide a good environment for testing

whether quality programs can deliver hopedfor results.52

2. PHOs

a. Description of PHOs

A PHO is a joint venture between a

hospital and physicians who generally have

admitting privileges at the hospital.53

Physician and hospital members of a PHO

sometimes contract jointly with MCOs for

providing care to a population of patients. 

PHOs typically vary along four parameters: 

exclusivity, integration, ownership/control,

and organizational base.54 

First, PHOs can accept hospital

medical staff on an exclusive or

nonexclusive basis. Open PHOs allow most

medical staff to join and have minimum

credentialing requirements; specialists

usually dominate these PHOs.55 Closed

PHOs limit physician membership by

practice profiling or specialty type and are

more likely to form exclusive relationships

with physicians.56 PHOs that employ

practice profiling seek to use objective

practice data to determine which physicians

they should invite to join the PHO.57 PHOs

that recruit physician-members based on

specialty type reportedly focus on the

number of patients that the physicianmember will see.58

 

Second, PHOs are integrated

(whether financially, clinically, or both) to

varying degrees or not at all.59 Many PHOs

employ financial risk-sharing arrangements

51 Lawrence Casalino et al., External

Incentives, Information Technology, and Organized

Process to Improve Health Care Quality for Patients

with Chronic Disease, 289 JAMA 434, 439 (2003).

52 Thomas Bodenheimer et al., Primary

Care Physicians Should Be Coordinators, Not

Gatekeepers, 281 JAMA 2045, 2048 (1999). 

53 Lawton R. Burns & Darrell P. Thorpe,

Physician-Hospital Organizations: Strategy,

Structure, and Conduct, in INTEGRATING THE

PRACTICE OF MEDICINE, supra note 12, at 352; Miles

5/8 at 6; Guerin-Calvert 5/8 at 15.

54

 See generally Marren 5/8 at 30

(remarking that “if you have seen one PHO, you have

seen one PHO.”); Guerin-Calvert 5/8 at 20.

55 Kongstvedt et al., supra note 12, at 43;

Burns & Thorpe, supra note 53, at 353; Alison Evans

Cuellar & Paul J. Gertler, Strategic Integration of

Hospitals and Physicians 9 (May 1, 2002)

(unpublished manuscript), at http://faculty.haas.

berkeley.edu/gertler/working_papers/hospital_VI_5_

10_02.pdf. 

56 Cuellar & Gertler, supra note 55, at 10;

Kongstvedt et al., supra note 12, at 43, 45

(mentioning the emergence in recent years of closed

PHOs with only one type of specialist); Marren 5/8 at

37 (nothing that there are not many exclusive PHOs);

Burns & Thorpe, supra note 53, at 353.

57 Kongstvedt et al., supra note 12, at 43-44. 

Many PHOs have found it difficult to get the

necessary information in a timely manner so as to

profile physician-members comprehensively. An

additional complication is dealing with physicians

who refuse to adhere to profiling requirements after

they become members of a PHO. For a discussion of

the antitrust issues related to physician credentialing,

see infra notes 241-247, and accompanying text.

58 Kongstvedt et al., supra note 12, at 43. 

59 For a discussion of the antitrust issues

associated with clinical and financial integration, see

infra notes 252-281, and accompanying text.
9

with physician-members, such as partial or

full-risk contracts, although PHOs, as a

whole, appear to be moving away from fullrisk contracts.60

Third, ownership, control, and

capital structure vary. Physician-members

and hospitals jointly own most PHOs, but

some hospitals are sole owners.61 Although

hospitals generally provide a majority of

initial capitalization, some PHOs strive for

equal physician-hospital ownership.62

Physicians may own interests in a PHO

individually or through an entity such as an

IPA.63 PHOs can take the form of a limited

liability company, a general partnership, a

nonprofit corporation, or a general business

corporation.64 

Finally, PHOs can have different

organizational bases. PHOs can have a

hospital, multiple hospitals, or a hospital

system as their organizational base.65

Commentators often describe PHOs that

involve multiple hospitals or joint ventures

between multiple PHOs as super-PHOs.66

Panelists and commentators stated

that PHOs emerged in the 1980s largely as

“a defensive provider reaction to increasing

managed care penetration.”67 PHOs

subsequently became the most common

form of vertical integration among

physicians and hospitals.68 Approximately

60 percent of PHOs are nonprofit and 40

percent are for-profit.69 In 2002, 74 percent

of PHOs were open and 26 percent were

closed.70

Panelists noted that PHOs have

changed substantially in recent years.71

Many PHOs initially engaged in full or

partial risk contracting. As insurers and

providers abandoned capitated payment

60

 See, e.g., Guerin-Calvert 5/8 at 15, 18-20.

61 Kevin J. Egan & Rebecca L. Williams,

Vertically Integrated Networks, in HEALTH CARE

CORPORATE LAW: MANAGED CARE § 5.12.2, at 5-

105 to 5-107 (Mark A. Hall & William S. Brewbaker

III eds., 1999 & Supp. 1999); Kongstvedt et al.,

supra note 12, at 42. 

62 Kongstvedt et al., supra note 12, at 42;

Egan & W illiams, supra note 61, § 5.12.2, at 5-105.

63 Egan & W illiams, supra note 61, §

5.12.2, at 5-105.

64 Julie Y. Park, PHOs and the 1996

Federal Antitrust Enforcement Guidelines: Ensuring

the Formation of Procompetitive Multiprovider

Networks, 91 NW. U. L. REV. 1684, 1692 (1997).

65

 See Burns & Thorpe, supra note 53, at

353.

66

 See Miles 5/8 at 9; Burns & Thorpe,

supra note 53, at 353; Weis 5/8 at 38-39 (describing

the Advocate Health Care Network, which comprises

eight PHO joint ventures, including 2,400

independently practicing physicians and eight

Advocate hospitals).

67 Burns & Thorpe, supra note 53, at 352;

see also Weis 5/8 at 38; Miles 5/8 at 4; Kongstvedt et

al., supra note 12, at 41-42; Egan & Williams, supra

note 61, § 5.12.2, at 5-105.

68 Burns & Thorpe, supra note 53, at 352.

69 STEPHEN J. KRATZ, TAYLOR & COMPANY

AND AMERICAN ASS’N OF INTEGRATED HEALTHCARE

DELIVERY SYSTEMS (AAIHDS), PERSPECTIVES ON

INTEGRATED DELIVERY SYSTEMS AND IDS

EXECUTIVES 2 (1998/99).

70 HEALTH FORUM (2004 ed.), supra note

25, at 10 tbl.3.

71

 See Guerin-Calvert 5/8 at 14-15; Miles

5/8 at 6-7.
10

arrangements in favor of preferred provider

organizations (PPOs) and point of service

plans (POS plans), many PHOs scrambled to

identify a new role to fill.72 Numerous

PHOs have dissolved or failed in the last

eight years.73 One antitrust lawyer panelist

stated that his recent experience with PHOs

primarily involves converting them into

messenger model networks.74 PHOs that

engage in payor contracting and are not

integrated run the risk of antitrust liability if

they facilitate price agreements among their

members.75

b. PHO Efficiencies

(i) Costs and Related Efficiencies

Panelists and commentators differ on

whether PHOs can reduce costs or otherwise

result in efficiencies. Some contend that

PHOs can reduce the cost of negotiating

contracts between payors and physicians and

hospitals by offering “one-stop shopping.”76

As such, PHOs may enable payors to

contract more efficiently with physicians

with whom they have no existing contractual

arrangements. PHOs could also allow

providers to contract directly with selfinsured employers and certain Medicare and

Medicaid risk or managed contracts.77 

Commentators and panelists also

stated that PHOs may deliver economies of

scale by sharing administrative and

integration costs among physician-members

72 Miles 5/8 at 4; Guerin-Calvert 5/8 at 17-

18 (establishing that fewer PHOs are involved in fullrisk contracting); Weis 5/8 at 76; Ginsburg, 2/26 at

67-68 (noting “a sharp decline in physician hospital

organizations”); Lesser 9/9/02 at 83-84 (stating that

PHOs are less relevant following the decline in risk

contracting). But see Babo 5/8 at 41 (describing

Advocate Health Partners’ use of full risk contracts

with managed care). For a discussion of PPOs, see

infra Chapter 5.

73

 See Miles 5/8 at 4-5; Marren 5/8 at 36-37;

Nathan S. Kaufman, Market Dominance of PHO

Entities, HEALTHCARE FIN. MGMT., Aug. 1998

(“Many PHOs are either unprofitable, unsuccessful at

developing new business, or stalemates by politics”);

Lawton R. Burns & Mark V. Pauly, Integrated

Delivery Networks: A Detour on the Road to

Integrated Health Care?, 21 HEALTH AFFAIRS 128,

128 (July/Aug. 2002).

One survey found that the number of PHOs

declined from 1446 in 1994 to 1114 in 2002. 

HEALTH FORUM (2000 ed.), supra note 25, at 8 tbl. 3;

HEALTH FORUM (2004 ed.), supra note 25, at 10

tbl.3.

74

 See Miles 5/8 at 6-7. 

75 The Agencies have brought a number of

cases alleging that PHOs violated the antitrust laws. 

See, e.g., In re Piedmont Health Alliance, Inc., No.

9314 (Dec. 24, 2003) (complaint), available at

http://www.ftc.gov/os/caselist/0210119/031222comp

0210119.pdf; In re S. Ga. Health Partners, L.L.C.,

No. C-4100 (Oct. 31, 2003) (complaint), available at

http://www.ftc.gov/os/2003/11/sgeorgiacomp.pdf; In

re Me. Health Alliance, No. C-4095 (Aug. 27, 2003)

(complaint), available at http://www.ftc.gov/os/2003

/08/mainehealthcomp.pdf; United States v. Health

Choice of Nw. Mo., No. 95-6171-CV-SJ-6 (W.D.

Mo., filed Sept. 13, 1995) (complaint); United States

v. Healthcare Partners, No: 3:95CV01946 (D. Conn.,

filed Sept. 13, 1995) (complaint); United States v.

Women’s Hosp. Found., No. 96-389-BM2 (M.D. La.,

filed Apr. 23, 1996) (complaint).

76 Egan & W illiams, supra note 61, §

5.12.6, at 5-110; Kongstvedt et al., supra note 12, at

44; Burns & Thorpe, supra note 53, at 354; Weis 5/8

at 44; Park, supra note 64, at 1695.

77

 See Kaufman, supra note 73, at 3; Egan &

Williams, supra note 61, § 5.12.6, at 5-110. 

Presumably, such PHOs are integrated sufficiently to

avoid per se condemnation under the antitrust laws.
11

and hospitals.78 They further said that PHOs

may result in more efficient deployment of

physician resources, because these

arrangements allow physician-members to

concentrate on practicing medicine.79

Finally, they added that PHOs may reduce

legal expenses for hospitals and physicians

by enabling them to “present a unified front

and a common defense in the event of

malpractice claims.”80 

Others contend that the primary

advantage for physicians and hospitals in

forming a PHO is the increased bargaining

power gained from “presenting a united

front to payers.”81 They assert that providers

can use this additional bargaining power to

obtain higher prices from payors,

particularly if providers “raise barriers to

entry by forming exclusive relationships.”82

A panelist representing a health insurance

plan stated that PHOs have given providers

“greater negotiation leverage” and

“contributed to some of the runaway

inflation in health care costs.”83

Empirical studies of PHO pricing

have found mixed results.84 A recent study

of hospital and physician integration based

on organizations in Arizona, Florida, and

Wisconsin found that integration is

associated with an increase in prices,

especially when the integrated organization

is exclusive and located in less competitive

markets.85 Other studies have concluded

that physician-hospital affiliations generally

do not result in higher hospital prices.86 

78 Egan & W illiams, supra note 61, §

5.12.6, at 5-110; Dalkir 5/8 at 68 (observing that

efficiencies can be derived from physicians

organizing as a group and from physicians and

hospitals integrating).

79

 See Egan & W illiams, supra note 61, §

5.12.6, at 5-110; Miles 5/8 at 10 (explaining that

PHO physicians can refer their patients to other PHO

participants, which has “obvious[] pro-competitive

and efficiency justifications.”). But cf. Buxton 5/8 at

50 (suggesting intra-organization referrals may result

in overuse).

80 Egan & W illiams, supra note 61, §

5.12.6, at 5-110.

81 Burns & Thorpe, supra note 53, at 353;

see also Burns 4/9 at 70; Kongstvedt et al., supra

note 12, at 41-42. But see Miles 5/8 at 79 (observing

that managed care plans can have a phobia of dealing

with provider networks because the plans assume the

networks form only to obtain higher fees).

82 Cuellar & Gertler, supra note 55, at 7; see

also Guerin-Calvert 5/8 at 21-23; Dalkir 5/8 at 26;

Buxton 5/8 at 51-52 (listing examples of physician

groups demanding significant fees). For further

discussion of physician collective bargaining, see

infra notes 133-178, and accompanying text. 

83 Buxton 5/8 at 50; see also Hurley 4/9 at

18.

84 STEPHEN M. SHORTELL ET AL., REMAKING

HEALTH CARE IN AMERICA: THE EVOLUTION OF

ORGANIZED DELIVERY SYSTEMS 26 (2nd ed. 2000).

85 Cuellar & Gertler, supra note 55, at 25-

26.

86 Federico Giliberto & David Dranove, The

Effect of Physician-Hospital Affiliations on Hospital

Prices in California 1 (Nov. 30, 2003) (unpublished

manuscript) (finding that highly integrated hospital

and physician structures may slightly reduce prices);

Kaufman, supra note 73, at 1 (discussing research

that “showed no correlation between a hospital’s

physician integration strategy and its payments under

managed care. There is, however, a high correlation

between a hospital’s payments under managed care

and its institutional market position. Dominant

hospital systems got paid better than marginal
12

Some commentators doubt whether

PHOs actually lower the costs associated

with contracting.87 One commentator stated

that PHOs have not resulted “in any

meaningful improvement in contracting

ability. In many cases, MCOs already have

provider contracts in place and see little

value in going through the PHO.”88

(ii) Quality of Care and Related

Efficiencies

Panelists and commentators differed

on the ability of PHOs to improve quality of

care. Some stated that PHOs can

significantly improve quality by

coordinating patient care delivered to

consumers in the doctor’s office and the

hospital.89 They also stated that PHOs can

implement shared information systems.90 As

Chapter 1 reflects, many commentators state

such investments in information

infrastructures are a necessary first step in

improving quality of care.

One panelist representing a PHO

contended that financially integrated PHOs

can reduce costs and improve quality by

clinically integrating.91 This panelist also

suggested that physicians practicing

individually or in small groups that are not

financially or clinically integrated have

limited ability to improve quality, reduce

costs, and capture related efficiencies.

92 The

same panelist suggested that physicians

practicing in large groups do not readily

cooperate with one another, and hospitals

are the most likely entities to implement

programs to improve health care quality and

reduce costs.93 

Another panelist noted PHOs must

make significant investments in clinical

integration to improve quality of care.94 A

third panelist suggested that clinical

integration is improbable because of its high

implementation costs and potential antitrust

risks.95 A panelist representing a health

hospitals regardless of whether they had a PHO.”).

87

 See Kongstvedt et al., supra note 12, at

44-45; Burns & Thorpe, supra note 53, at 354.

88 Kongstvedt et al., supra note 12, at 44-45. 

89 Marren 5/8 at 34; Weis 5/8 at 46

(discussing the crucial role clinical integration can

play in creating efficiencies and improving patient

safety); Miles 5/8 at 79-80; Guerin-Calvert 5/8 at 23;

Babo 5/8 at 60; Vogt 9/9/02 at 69; Park, supra note

64, at 1693-94 (stating that “PHOs may permit . . .

consumers to obtain high quality at a lower price by

conducting or developing systems for utilization

review and quality assurance.”); Cuellar & Gertler,

supra note 55, at 4. But see Burns 4/9 at 77-78.

90

 See Cuellar & Gertler, supra note 55, at

4; Guerin-Calvert 5/8 at 18-19.

91

 See Weis 5/8 at 41-42, 60-62.

92

 Id. at 60-62.

93

 See id. at 60-62; Marren 5/8 at 31-32

(stating that physicians do not self-organize very

well). But see Kaufman, supra note 73, at 2 (stating

that “[h]ospitals . . . are less motivated than

[physician practice management companies] to

extract profit growth from the physician practices

they purchase and/or manage.”).

94 Guerin-Calvert 5/8 at 17; see also Marren

5/8 at 34-35, 36-37; Weis 5/8 at 61 (observing that

“some form of clinical or financial integration is

necessary in order to achieve quality improvement,

cost reduction and better patient safety.”); Burns &

Thorpe, supra note 53, at 354.

95 Miles 5/8 at 5, 7 (citing antitrust concerns

and the refusal of a state antitrust bureau to accept

clinical integration for antitrust analysis purposes);

see also Timothy S. Snail & James C. Robinson,
13

insurance plan stated that “there appears to

be no difference in the quality of care

offered by a PHO than that offered by

physicians and hospitals that contract

separately.”96 Although opinions regarding

PHOs vary significantly, there is relatively

little empirical research on PHOs, quality of

care, and clinical integration with which to

resolve these competing claims, and the

available evidence is decidedly mixed. 

3. Summary

Physicians have historically been

solo or small-group practitioners, competing

only with other such practitioners in their

particular product and geographic market. 

As the market for physician services has

evolved, and antitrust enforcement has

addressed anticompetitive conduct,

competition has emerged along multiple

dimensions. IPAs and PHOs compete for

physician-members and to contract with

payors. The forms and modes of

competition in the market for physician

services will inevitably vary over time as

conditions and preferences change. 

Competition helps deliver an optimum mix

of physician services at the lowest cost and

highest quality. The Agencies are

committed to vigorous price and non-price

competition and not to any particular model

for delivering health care. 

B. Physician Compensation

1. Physician Payment Arrangements

Insurers and others typically pay

physicians on an FFS, salaried, or capitated

basis.97 In FFS payment an insurer directly

pays an individual provider based on the

number and type of services that provider

performs.98 Some state that FFS improves

quality by rewarding physicians who do

more for their patients.99 Other

commentators are concerned that FFS

payment creates incentives for physicians to

over-provide healthcare resources because a

physician’s income is directly related to the

volume and intensity of services rendered.100

Capitation involves a physician

assuming responsibility for a certain number

of patients and receiving a fixed amount for

each of these patients regardless of whether

Organizational Diversification in the American

Hospital, 19 ANN. REV. PUB. HEALTH 417, 423

(1998).

96 Buxton 5/8 at 49-50 (suggesting also that

intra-organization referrals may result in overuse).

97 Sherry Glied, Managed Care, in 1A

HAND BOO K OF HEALTH ECONOM ICS (Anthony J.

Culyer & Joseph P. Newhouse, eds. 2000). The

payment arrangement that insurers use to pay a

physician network joint venture may be different from

the arrangement those joint ventures use to pay their

physician members. See James C. Robinson, Blended

Payment Methods in Physician Organizations Under

Managed Care, 282 JAMA 1258, 1258 (1999).

98

 See Academy for Health Management, A

Glossary of Managed Care Terms, at

http://www.aahp.org/glossary/index.html (last visited

June 22, 2004).

99

 See, e.g., Kongstvedt, supra note 45, at

123 (noting that sicker patients require more care and

doctors practicing on a FFS basis get paid more for

their time, energy and skills applied to such patients).

100

 See, e.g., David Orentlicher, Paying

Physicians More To Do Less: Financial Incentives

to Limit Care, 30 U. RICH. L. REV. 155, 158 (1996);

GLIED, supra note 97, at 723-25.
14

those patients seek care.101 Although some

state that capitation reduces the incentive to

provide excessive care,102 others are

concerned that capitation creates an

incentive for physicians to increase the

number of patients for whom they provide

care and simultaneously decrease the

services they actually provide.103 

Physicians employed by the

government, hospitals, or medical groups

typically receive a salary.104 Some

commentators state that medical groups or

organizations can align more carefully the

incentives of the physician with those of the

group by paying salaries.105 Others are

concerned that such arrangements also

create an incentive for physicians to

decrease the number of patients they are

responsible for and the services they

provide.106

 Medicare reimburses physicians on

an FFS basis, using the resource-based

relative value scale (RBRVS).107 The

Centers for Medicare & Medicaid Services

determine the RBRVS based on the cost of

physician labor, practice overheads,

materials, and liability insurance. The

resulting figure is adjusted for geographical

differences and is updated annually.108

Many private payors and MCOs base their

payment of physicians on this schedule.109

2. Messenger Model

a. Description of the Messenger Model

The messenger model is an

arrangement that allows contracting between

providers and payors, while avoiding pricefixing among competing providers.110

Health Care Statement 9 provides that

messenger models “can be organized and

operated in a variety of ways.”111 One

101 Orentlicher, supra note 100, at 158-159;

Casalino 9/25 at 7; GLIED, supra note 97, at 714-16.

102 Kongstvedt, supra note 45, at 118.

103

 See, e.g., Orentlicher, supra note 100, at

158-59.

104

 See Carol K. Kane & Horst Loeblich,

Physician Income: The Decade in Review, in

AMERICAN MEDICAL ASS’N, PHYSICIAN

SOCIOECONOMIC STATISTICS 7 (2002 ed.) (noting that

approximately 35 percent of physicians are salarybased employees).

105 Kongstvedt et al., supra note 12, at 48

(discussing the use of salaries to capture economies

of scales and to apply capital resources most

effectively). 

106 Orentlicher, supra note 100, at 159;

Henry T. Greely, Direct Financial Incentives in

Managed Care: Unanswered Questions, 6 HEALTH

MATRIX 53, 57 (1997).

107

 See generally American Medical Ass’n,

RVS Update Process (2002), at http://www.ama-assn.

org/ama1/pub/upload/mm/380/rucbooklet.pdf. For a

discussion of trends in Medicare spending on

physician services, see GENERA L ACCOUNTING

OFFICE, MEDICARE PHYSICIAN PAYMEN TS (2004),

available at http://www.gao.gov/new.items/

d04751t.pdf.

108

 See American Medical Ass’n, supra note

107.

109 Kongstvedt, supra note 45, at 127

(stating that private payors paid physicians 20 percent

more than the Medicare amount in 1999). 

110 HEALTH CARE STATEMENTS, supra note

44, § 9(C); Raskin 9/25 at 174. 

111 HEALTH CARE STATEMENTS, supra note

44, § 9(C); see also Arthur N. Lerner & David M.

Narrow, PPO Programs and the Antitrust Laws, in

THE NEW HEALTHCARE MARKET: A GUIDE TO PPOS
15

panelist described the traditional messenger

model as one involving a payor submitting

fee schedules to an agent or third party, who

transmits this schedule to the network

physicians.112 This panelist elaborated that

each physician decides individually whether

to accept or reject the fee schedule and the

messenger or agent communicates those

decisions to the payor.113 The payor may

then initiate another round of negotiations

with the network physicians or enter into

contracts with those physicians who

accepted its offer, observed the panelist.114

Commentators have discussed a

variation that involves the messenger

conveying to payors information obtained

individually from providers about the prices

or price-related terms that those providers

are willing to accept.115 The messenger may

aggregate this information into a

comprehensive schedule and market the

schedule to payors, and may receive

authority from individual physicians to

accept contractual offers on their behalf,

commentators have noted.116 They also

stated that agents must convey offers that do

not meet a physician’s preferred rate to those

physicians, because they are not empowered

to reject offers.

117 Agents also may help

physicians understand the contracts offered,

for example, by providing objective or

empirical information about the terms of an

offer.118 Messenger models can be used

creatively to facilitate contracting between

payors and providers, so long as they do not

facilitate anticompetitive agreements on

price or other terms.119

FOR PURCHASERS, PAYORS AND PROVIDERS 858

(Peter Boland ed., 1985).

112 Douglas C. Ross, Physician IPAS: 

Messenger Model 5 (9/25) (slides) [hereinafter Ross

Presentation], at http://www.ftc.gov/ogc/

healthcarehearings/docs/030925douglasross.pdf;

Ross 9/25 at 150-51 (also acknowledging that

physicians infrequently implement the traditional

messenger model).

113 Ross Presentation, supra note 112, at 5;

Ross 9/25 at 150; Kim H. Roeder, The 1996 Antitrust

Policy Statements: Balancing Flexibility and

Certainty, 31 GA. L. REV. 649, 671 (1997) (“The key

to the Messenger Model [is] that the individual

providers [make] independent, unilateral decisions

irrespective of what other providers would do and

regardless of the views of the agent acting as the

messenger.”).

114 Ross 9/25 at 150.

115 Edward Hirshfeld, Interpreting the 1996

Federal Antitrust Guidelines for Physician Joint

Venture Networks, 6 ANN. HEALTH L. 1, 29 (1997);

Ross 9/25 at 151.

116 Hirshfeld, supra note 115, at 29; Ross

9/25 at 151.

117 Hirshfeld, supra note 115, at 29; Miles

9/25 at 170.

118 Hirshfeld, supra note 115, at 29; Miles

9/25 at 167-68.

119 Commission staff recently issued an

advisory opinion that involved the messenger

collecting minimum payment levels for certain

procedures from each physician member. If a payor’s

offer exceeded these minimum payment levels for

more than 50% of network physicians, then the

messenger would contract on these physicians’

behalf. If the payor’s offer met the minimum

payment level for less than 50% of physician

members, then the payor would have to agree to bear

contract administration costs before the messenger

could enter a contract. Commission staff emphasized

in the advisory opinion that this arrangement would

be acceptable only if it were not used to facilitate

price collusion. See Letter from Jeffrey W. Brennan,

Federal Trade Commission, to Martin J. Thompson,

Manatt, Phelps & Phillips, LLP (Sept. 23, 2003)

(FTC Staff advisory opinion regarding Bay Area
16

Physician networks purporting to use

the messenger model have given rise to

considerable antitrust enforcement activity. 

In recent years, the Agencies have brought

numerous cases alleging physicians involved

in messenger models engaged in

anticompetitive conduct.120 These cases

have involved a diverse array of

allegations.121

b. Messenger Model Efficiencies and

Antitrust Concerns

Panelists and commentators

expressed differing views on whether the

messenger model can reduce costs for

providers and payors. Some stated that the

messenger model simplifies contracting and

contract administration, thereby reducing

physicians’ and payors’ transaction costs.122

Two panelists observed that an agent can

significantly reduce physicians’ transaction

costs by educating them about the terms of a

contract.123 Panelists also explained that a

properly implemented messenger model

cannot result in higher prices for payors,

because it is incapable of creating

countervailing market power for

physicians.124 Finally, one panelist observed

that networks risk incurring administration

costs for limited gain if only a minority of

network physicians accept a payor’s offer.125 

In contrast, some panelists and

commentators stated that the messenger

model is not a viable business strategy and

can increase costs for providers and

Preferred Physicians), available at

http://www.ftc.gov/bc/adops/bapp030923.htm. 

120

 See, e.g., In re Physician Network

Consulting, L.L.C., No. C-4094 (Aug. 27, 2003)

(decision and order), available at

http://www.ftc.gov/os/2003/08/physnetworkdo.pdf; In

re Carlsbad Physician Ass’n, No. C-4081 (June 13,

2003) (decision and order), available at

http://www.ftc.gov/os/2003/06/carlsbaddo.htm; In re

SPA Health Org., No. C-4088 (July 17, 2003)

(decision and order), available at

http://www.ftc.gov/os/2003/07/spahealthdo.pdf;

United States v. Fed’n of Physicians & Dentists, Inc.,

2002-2 Trade Cas. (CCH) ¶ 73,868 (D. Del., 2002);

United States v. Mountain Health Care, P.A., 2003-2

Trade Cas. (CCH) ¶ 74,162 (W.D.N.C. 2003). 

121 For example, so-called “messengers” in

several instances allegedly negotiated prices with

payors, refused to transmit price offers that were

deemed insufficient, or orchestrated price agreements

among network physicians. 

122

 See Miles 9/25 at 167 (stating also that

“messenger networks can help market their provider’s

services, hopefully increasing provider volume”);

Lerner 9/25 at 235-36 (suggesting that the messenger

model could facilitate a new payor’s entry into local

markets by creating provider networks with which the

payor could readily contract); Robert Leibenluft, Why

Physician Cartels Do Not Need a “Fresh Look” – a

Response to the AMA’s Testimony at the FTC Health

Care Competition Workshop 5 (Public Comment) 

[hereinafter links to FTC Health Care Workshop

Public Comments are available at http://www.ftc.gov/

os/comments/healthcarecomments/index.htm].

123 Miles 9/25 at 167-168 (stating that

messengers can educate physicians and their staff “to

make more rational contracting decisions”); Hill 9/25

at 228 (remarking that physicians are not trained to

understand contracts and that many physicians have

limited interest in such contracts).

124 Miles 9/25 at 168-169; Lerner 9/25 at

200; Ross 9/25 at 223-224.

125 Ross 2/25 at 150-151.
17

payors.126 Panelists contended that such

arrangements have high administrative costs

because they are complex to implement and

difficult to maintain.127 They observed that

agents frequently cannot determine the

antitrust implications of a particular course

of conduct and therefore require expensive

legal advice.128 Others noted that certain

messenger model variations actually can

prolong contract negotiations and increase

provider and payor transaction costs.129

Panelists and commentators also

differed on the messenger model’s

usefulness in avoiding antitrust concerns. 

Some stated that messenger arrangements

are useful in preventing violations of the

antitrust laws and lower the risk of being

compelled to disband a network to settle an

Agency investigation.130 One panelist noted

the model has been particularly useful for

erstwhile financially integrated physician

networks that need an alternative contracting

mechanism as risk sharing arrangements

have become less common.131 

Others noted that physician networks

purporting to use the messenger model have

been the focus of multiple Agency

investigations and consent settlements.132

3. Physician Collective Bargaining

Some physicians have lobbied

heavily for statutory or other legal changes

that would enable independent physicians to

bargain collectively by exempting them from

the antitrust laws.133 Those who support

126 Raskin 9/25 at 173 (“I have never found .

. . any business person, any administrator or

healthcare professional in any segment of the industry

who advocates the use of the messenger model for

any business purpose.”); Miles 9/25 at 214-215

(stating that “[m]essenger models are worthless,

except as interim tools.”).

127 Hill 9/25 at 147 (declaring that the

messenger model “is cumbersome, it’s difficult to

administer, and it’s not surprising that the messenger

model is often despised by physicians, hospitals, and

to our understanding even payors.”); J. Edward Hill,

Physician IPAs; Messenger Model 4 (9/25), at

http://www.ama-assn.org/ama1/pub/upload/mm/368/d

rhillftcstatement.pdf; Miles 9/25 at 169 (stating that

the messenger model is so “cumbersome” to

implement and maintain that it is “a pain in the butt”);

Jack R. Bierig, Physician-Sponsored Managed Care

Networks: Two Suggestions for Antitrust Reform, 6

HEALTH MATRIX 115, 122 (1996) (“The messenger

model is universally recognized as inefficient and

cumbersome, particularly given the thousands of

medical procedures and the large numbers of

physicians involved in physician networks.”). One

panelist noted the concern that physicians might

adopt the network fee schedule for use in their own

individual practices, thereby leading to increased

prices for payors and consumers. This panelist

further stated that such concerns have never been

empirically established. See Raskin 9/25 at 179-80. 

128 Hill 9/25 at 228; Miles 9/25 at 169-71.

129 Ross 9/25 at 156 (stating that some

versions of the messenger model can lead to “going

back and forth potentially forever”); Hill 9/25 at 147;

Miles 9/25 at 157 (stating that physicians may

provide “very, very high, unrealistic rates” under

some messenger arrangements because “they’re not

quite sure what they’re getting into”), 171.

130 Raskin 9/25 at 182-83.

131 Miles 9/25 at 166-7.

132 Marx 9/25 at 193-94; Raskin 9/25 at

173-174; Miriam L. Clemons, Don’t Shoot the

Messenger: Independent Physicians and Joint

Payment Contracting Using the Messenger Model, 32

U. MEM. L. REV. 927, 949 (2002).

133

 See American Medical Ass’n, Position

Paper on Antitrust Relief Legislation [hereinafter

AMA Position Paper], at http://www.amaassn.org/ama/pub/article/5910-6004.html (Last
18

such exemptions contend that physicians

need to bargain collectively to exercise

countervailing market power against

payors.134 The Agencies have consistently

opposed such exemptions because they are

likely to harm consumers by increasing costs

without improving quality of care. This

section describes the legal landscape for

physician collective bargaining, discusses

the competitive impact of countervailing

power, and considers the impact of

collective bargaining on the cost and quality

of health care.

a. Legal Landscape

Both labor and antitrust laws affect

the ability of workers to bargain

collectively.135 Antitrust law prohibits

competitors from price-fixing and engaging

in group boycotts. Labor law provides

exemptions from antitrust liability under

certain circumstances.136 Pursuant to the

National Labor Relations Act (NLRA),

employed physicians are generally allowed

to unionize and bargain collectively.137

Physicians who are self-employed or

independent contractors generally may not

collectively bargain without violating the

updated Oct. 6, 2003); Letter from Michael D.

Maves, American Medical Ass’n, to Spencer Bachus

& John Conyers, Jr., U.S. House of Representatives

(Mar. 21, 2003) (regarding HR 1120, the “Health

Care Antitrust Improvements Act of 2003”) (asserting

that “insurers are using these contracts to gain

increased control over how medical care is

delivered”) [hereinafter AMA Letter], at

http://www.ama-assn.org/ama/pub/article/5908-

7508.html. See generally Foreman 5/7 at 20-26

(representing the AMA); Stephen Foreman,

Countervailing Market Power (5/7) (slides), at

http://www.ftc.gov/ogc/healthcarehearings/docs/0305

07foreman.pdf; Donald Palmisano, Taking the Payer

Side Seriously: Why the Federal Trade Commission

Should Redirect Its Efforts in Health Care Antitrust

Enforcement (9/9/02) [hereinafter Palmisano (stmt)],

at http://www.ama-assn.org/ama/pub/article/5911-

6710.html; Crane 5/7 at 34-40 (noting health plan

consolidation and trend away from HMOs and

capitation, and suggesting that the FTC and Justice

Department revise Health Care Statement 8 of the

Health Care Statements to allow more latitude to

IPAs); Donald Crane, Statement (5/7), at

http://www.ftc.gov/ogc/healthcarehearings/docs/0305

07doncrane.pdf; Fred Hellinger & Gary Young, An

Analysis of Physician Antitrust Exemption

Legislation: Adjusting the Balance of Power, 286

JAMA 83 (2001).

134 Levy 9/26 at 45; Connair 9/26 at 23

(stating that “insurers have been able to strong-arm

physicians into signing one-sided contracts that give

managed care insurers the legal right to deny care,

compromise optimal care, and unfairly squeeze

doctors financially.”). Countervailing power involves

sellers (or buyers) faced with buyer (or seller) market

power acquiring their own market power (i.e., by

negotiating collectively and engaging in other

behavior that would otherwise be prohibited by the

antitrust laws) to offset that monopsony or monopoly

power. See infra notes 150-165, and accompanying

text. 

135 Sujit Choudhry & Troyen A. Brennan,

Collective Bargaining by Physicians – Labor Law,

Antitrust Law, and Organized Medicine, 345 NEW

ENG. J. MED. 1141 (2001).

136

 See, e.g., Marc L. Leib, White Coats and

Union Labels: Physicians and Collective

Bargaining, 42 ARIZ. L. REV. 803, 812-13 (2000).

137 National Labor Relations Act (NLRA),

29 U.S.C. § 157 (2004); Leib, supra note 136, at 813

(stating that the NLRA creates “a legally enforceable

right for employees to organize,” requires “employers

to bargain with employees through employee elected

representatives,” and gives “employees the right to

engage in concerted activities for collective

bargaining purposes or other mutual aid or

protection.”); Flaherty 9/26 at 30-31. Employee

bargaining rights vary, depending on whether the

physician works for a firm or the federal or state

government. 
19

antitrust laws.138 A few states have passed

legislation that exempts self-employed

physicians from the antitrust laws and

provides for state regulation of physician

collective bargaining.139 Other states and

Congress have also considered such

legislation.140 Commission staff submitted

competition advocacy letters commenting on

three such bills in Ohio, Washington, and

Alaska.141 

Until recently, physician interest in

unionization and collective bargaining was

limited. Organized medicine long opposed

physician unions.142 According to one

panelist, physicians began making more

concerted efforts to unionize and bargain

collectively in the 1970’s in response to the

emergence of large health care organizations

and changes in physician fees.143 The same

panelist noted that many physicians believed

that organized medicine was failing to

respond to these changes.144

The AMA remained opposed to

unionization until 1999 when it approved the

formation of Physicians for Responsible

138 Jeremy Lutsky, Is Your Physician

Becoming a Teamster: The Rising Trend of

Physicians Joining Labor Unions in the Late 1990's,

2 DEPA UL J. HEALTH CARE L. 55, 78 (1997); Levy

9/26 at 41-42. Some commentators have suggested

however that the National Labor Relations Board and

the courts “may yet conclude that some physicians

that contract with MCOs are de facto employees and

thus should be entitled to bargain collectively under

the NLRA.” William S. Brewbaker III, Physician

Unions and the Future of Competition in the Health

Care Sector, 33 U.C. DAVIS L. REV. 545, 564; Leib,

supra note 136, at 819-23.

In this Report, “collective bargaining” can

refer to bargaining by union members, which is

authorized by the NLRA, or non-unionized

physicians’ attempts to obtain the right to bargain

collectively.

139

 See Flaherty 9/26 at 32 (stating that in

certain states, including Texas and New Jersey, the

state attorney general regulates physician collective

bargaining); Ameringer 9/26 at 16; Tobey 5/7 at 47-

52 (discussing Texas’s experience); Mark Tobey,

Prepared Remarks (5/7), at http://www.ftc.gov/ogc/

healthcarehearings/docs/030507tobeytestimony.pdf. 

For a discussion of the state action doctrine, see infra

note 286, and accompanying text, and infra Chapter

8. 

140

 See TODD J. ZYWICKI ET AL., FEDERAL

TRADE COMM’N, NO. P011200, REPORT OF THE

STATE ACTION TASK FORCE 67 (2003) (stating that

legislatures in Ohio, Washington, and Alaska

considered passing such legislation in 2002), at

http://www.ftc.gov/os/2003/09/stateactionreport.pdf;

Leib, supra note 136, at 830 (writing in 2000 that

“Illinois, Delaware, the District of Columbia, New

Hampshire, New Jersey, New York, and Pennsylvania

have introduced bills to allow collective bargaining

by physicians.”) (footnote omitted); Quality

Health-Care Coalition Act of 1999, H.R. 1304, 106th

Cong. (1999) (sponsored by Rep. Tom Campbell);

Health Care Antitrust Improvements Act of 2003,

H.R. 1120, 108th Cong. (2003). 

141 Letter from Richard A. Feinstein, Federal

Trade Commission, to Robert R. Rigsby, Government

of the District of Columbia (Oct. 29, 1999), at

http://www.ftc.gov/be/hilites/rigsby.htm; Letter from

Joseph J. Simons, Federal Trade Commission, to

Dennis Stapleton, Ohio House of Representatives

(Oct. 16, 2002), at http://www.ftc.gov/os/

2002/10/ohb325.htm; Letter from Joseph J. Simons,

Federal Trade Commission, to Lisa Murkowski,

Alaska House of Representatives (Jan. 18, 2002), at

http://www.ftc.gov/be/v020003.pdf.

142 Ameringer 9/26 at 10-12 (stating that

organized medicine “saw unions as a threat to

professional . . . turf, and as antithetical to

professional values of individualism and

autonomy.”).

143

 Id. at 7-8.

144

 Id.
20

Negotiations (PRN).145 Initially, PRN was

“an AMA-affiliated labor organization

dedicated to representing physicians in

collective bargaining with employers.”146

Panelists primarily attributed the AMA’s

support for physician unionization to an

ongoing decline in the AMA’s total

membership and a determined lobbying

effort by the AMA’s younger physician

members.147 

News reports indicate that PRN’s

membership in 2002 was “only a few

hundred” individual members, its advocacy

for two Chicago physicians’ groups had

stalled, and that “AMA leaders, who fear

that union-management tensions would

compromise patient care, ha[ve] stymied the

group.”148 In March 2004, the AMA and

PRN separated; PRN now operates as an

independent physician labor organization.149 

b. Countervailing Power

Some physicians claim they need

countervailing market power to offset the

market power they allege health care

insurers possess. They contend that

monopsony power enables health plans to

approach “contract negotiations with a ‘takeit-or-leave-it’ attitude that puts physicians in

the untenable position of accepting

inappropriate contract terms.”150 The AMA

asserts that these terms include unreasonably

low fees and provisions that may harm

quality of care.151 

Some participants asserted that there

are numerous markets in which health care

insurers exercise monopsony power.152

145 The AMA also supported federal

legislation that would allow physicians to bargain

collectively, claiming it would “reduce the critical

imbalance in the health care marketplace and restore

some power to physicians so they can act in the best

interests of their patients.” AMA Letter, supra note

133. The Pennsylvania Medical Society has similarly

suggested that “regulatory and countervailing power

approaches may produce welfare-improving

outcomes.” Stephen Foreman & Dennis Olmstead,

Written Comments of the Pennsylvania Medical

Society 3 (9/9/02, dated Sept. 30, 2002), at

http://www.ftc.gov/ogc/healthcare/pms.pdf.

146 Flaherty 9/26 at 29.

147

 See Ameringer 9/26 at 15-16; Flaherty

9/26 at 29.

148 Joseph Weber, I Dreamed I Saw Dr. Joe

Hill Last Night; Tensions are running high in the

American Medical Assn. over a divisive question: 

Should doctors form labor unions?, BUS. WEEK

ONLINE, June 20, 2002; see also Lindsey Tanner,

Doctors Union Battles for Survival, ASSOCIATED

PRESS, May 9, 2002; Sara D. White, For the Record,

CRAIN ’S CHICAGO BUSINESS, May 13, 2002.

149 News Statement, Michael D. Maves,

American Medical Ass’n, AMA separation from PRN

(Mar. 10, 2004), at http://www.ama-assn.org/ama/

pub/article/1617-8441.html; Physicians for

Responsible Negotiation, at http://www.4prn.org (last

visited July 8, 2004).

150 AMA Letter, supra note 133.

151

 See, e.g., AMA Position Paper, supra

note 133; AMA Letter, supra note 133 (asserting that

“insurers are using these contracts to gain increased

control over how medical care is delivered”);

Catherine Hanson, On Integration, Physician Joint

Contracting, and Quality: Taking a Fresh Look at

Some “Settled” Questions (9/9/02), at

http://www.ftc.gov/ogc/healthcare/hanson.pdf;

Palmisano (stmt), supra note 133.

152

 See Foreman 5/7 at 54; Crane 5/7 at 35

(stating that California is a “a textbook example of

monopsony power” because health care insurer

mergers have left California with fewer, more

dominant health care insurers); George Koenig,

Additional Testimony Subsequent to FTC Workshop
21

Others disagreed, however, arguing that

physicians, rather than insurers, often

exercise market power.153 Although there

may be disparities in bargaining position

between some payors and some providers,

the available evidence does not indicate that

there is a monopsony power problem in

most health care markets.154

A proponent of countervailing power

theory stated that providers need this power

if health care insurers exercise monopsony

power.155 Nonetheless, those physicians

seeking to bargain collectively have sought

blanket exemptions from the antitrust laws. 

Several speakers opposed such

exemptions.156 As one panelist stated, “it’s

clear that a blanket exemption to the

antitrust laws for the purpose of allowing the

creation of countervailing power is

inappropriate.”157 Another speaker similarly

testified that allowing providers to acquire

countervailing market power is unnecessary,

impossible to implement, and bad public

policy.158

The Agencies believe that antitrust

enforcement to prevent the unlawful

acquisition or exercise of monopsony power

by insurers is a better solution than allowing

providers to exercise countervailing power. 

Joel Klein, the Assistant Attorney General in

1999, noted that a “better approach [than

allowing countervailing market power] is to

empower consumers by encouraging price

competition, opening the flow of accurate,

meaningful information to consumers, and

ensuring effective antitrust enforcement both

with regard to buyers (health care insurance

plans) and sellers (health care professionals)

of provider services.”159 

on Health Care and Competition Law and Policy

(Sept. 16, 2002) 2 (Public Comment); Meghrigian

9/24 at 85; American Medical Ass’n, Competition in

Health Insurance: A Comprehensive Study of U.S.

Markets Executive Summary (2003), at http://www.

ama-assn.org/ama/pub/category/12246.html.

153

 See Leibenluft 5/7 at 42-43; Noether 5/7

at 29, 32; MONICA NOETHER ET AL., CHARLES RIVER

ASSOCIATES, COMPETITION IN HEALTH INSURANCE

AND PHYSICIAN MARKETS: A REVIEW OF

“COMPETITION IN HEALTH INSURANCE: A

COMPREH ENSIVE STUD Y OF US MARKETS” BY THE

AMERICAN MEDICAL ASSOCIATION (2002) (Public

Comment) (Submitted by Robert Leibenluft). 

154

 See generally infra Chapter 6. 

155

 See, e.g., Foreman 5/7 at 21-22. 

156

 See, e.g., Noether 5/7 at 138; Monica

Noether, Health Insurance/Providers: Countervailing

Market Power (5/7) (slides), at http://www.ftc.gov/

ogc/healthcarehearings/docs/030507noether.pdf;

Gaynor 5/7 at 138; Greaney 2/27 at 221-222;

Matthews 9/24 at 137; Carson-Smith 2/27 at 193;

American Bar Ass’n, Comments Regarding The

Federal Trade Commission’s Workshop on Health

Care and Competition Law and Policy (Oct. 2002)

10-13 (Public Comment) [hereinafter ABA (public

cmt)].

157 Gaynor 5/7 at 19; Martin Gaynor,

Countervailing Power in Health Care Markets 12-13

(5/7) (slides), at http://www.ftc.gov/ogc/healthcare

hearings/docs/030507gaynor.pdf.

158

 See Leibenluft 5/7 at 40-46; Robert

Leibenluft, Statement on Behalf of the Antitrust

Coalition for Consumer Choice in Health Care 1-2,

10 (5/7), at http://www.ftc.gov/ogc/healthcare

hearings/docs/030507liebenluftt.pdf; Robert

Leibenluft, Letter to Member of Congress (Apr. 12,

2002) (Public Comment) (On Behalf of The Antitrust

Coalition For Consumer Choice in Health Care). 

159

 The Quality Health-Care Coalition Act

of 1999: Hearing on H.R. 1304 Before the House

Comm. on the Judiciary, 106th Cong. 14 (1999)

(Statement of Joel I. Klein, Assistant Attorney

General, U.S. Department of Justice) [hereinafter
22

Former FTC Chairman Robert

Pitofsky likewise remarked that “[f]rom a

policy and enforcement perspective, the

most effective response to the emergence of

excessive buyer power is not to permit the

aggregation of some form of countervailing

power. Rather, the appropriate response is

to try to prevent the aggregation of excessive

buying power in the first place.”160 As

Chapter 6 reflects, the Justice Department

has investigated and challenged health

insurer mergers that likely would have

resulted in monopsony power and

challenged health insurers’ use of most

favored nations clauses in contracts with

health care providers.

Panelists agreed that it is preferable

to use antitrust enforcement to address

monopsony concerns than to allow

physicians to accumulate countervailing

market power. One panelist stated, for

example, that the best policy response to the

existence of market power on one side of the

market is to remove it on a case-by-case

basis.161 Even a panelist who spoke in favor

of allowing countervailing market power

noted that restoring competition is the ideal

solution to a health insurer’s acquisition of

monopsony power.162

Indeed, even if we assume physicians

confront a monopsonist health plan that

neither unlawfully acquired nor unlawfully

exercised that power, authorizing physicians

to engage in collusive conduct will not serve

the interests of consumers.

163 A health

insurer with monopsony power is likely to

impose quantity restrictions that will

increase prices for consumers. If providers

were to acquire countervailing market

power, the result is likely to be further

quantity restrictions – increasing the prices

paid by consumers above those already

imposed by the monopsonist.164

Providers that obtain countervailing

market power also likely will cause

competitive harm to other market

participants that do not possess monopsony

power. One panelist suggested, for example,

that physicians may use their countervailing

market power to disadvantage non-physician

competitors, such as nurse midwives and

nurse anesthetists, or health care insurers

other than the monopsonist health care

insurer.165

The Agencies believe that statutory

or other legal changes allowing

countervailing market power are ill-advised

and unnecessary. To the extent monopsony

power exists in some markets, the Agencies

and state Attorneys General should address

such matters on a case-by-case basis. 

DOJ, H.R. 1304 Statement], at http://www.usdoj.gov/

atr/public/testimony/2502.htm.

160

 Robert Pitofsky, Thoughts on “Leveling

the Playing Field” in Health Care Markets, Remarks

Before the National Health Lawyers Association,

Twentieth Annual Program on Antitrust in the Health

Care Field (Feb. 13, 1997), at http://www.ftc.gov/

speeches/pitofsky/nhla.htm.

161 Gaynor 5/7 at 9; see also Noether 5/7 at

32.

162 Foreman 5/7 at 22, 25.

163

 But see id. at 23-24. 

164

 See Gaynor 5/7 at 12, 13, 16-17;

Brewbaker 9/26 at 58 (stating that “it’s just as likely

that we would see an additional economic welfare

loss from the addition of the second monopoly on the

seller’s side”).

165 Leibenluft 5/7 at 45-46.
23

c. Physician Collective Bargaining

Harms Consumers

The Agencies have consistently

opposed the creation of antitrust exemptions

for physician collective bargaining. In

congressional testimony, the Agencies have

identified various ways in which physician

collective bargaining likely will harm

consumers and other participants in the

health care system.166 

These harms include: (i) consumers

and employers facing higher prices for

health insurance coverage; (ii) consumers

facing higher out-of-pocket expenses as

copayments and other unreimbursed

expenses increase; (iii) consumers receiving

reduced benefits as costs increase; (iv)

senior citizens participating in Medicare

HMOs receiving reduced benefits; (v) the

federal government paying more for health

coverage for its employees; (vi) state and

local governments incurring higher costs to

provide health benefits to their employees;

(vii) state Medicaid programs incurring

higher costs to provide health benefits,

forcing them to increase taxes, cut benefits,

or reduce the number of beneficiaries; and

(viii) the number of uninsured increasing

due to more costly health insurance. The

balance of this section focuses on the impact

of physician collective bargaining on cost

and quality. 

Collective bargaining is likely to

increase substantially the price of health care

services, because providers collectively are

likely to demand higher fees and refuse to

negotiate individually.167 The Agencies have

extensive experience with the consequences

of alleged physician collective bargaining. 

For example, the Commission alleged

approximately 500 physicians and 15

hospitals that comprised the vast majority of

providers covering a large area of southern

Georgia conspired to fix prices and not to

deal with payors on an individual basis.168

According to the complaint, respondents

restrained competition among the providers

and forced payors to pay higher prices to its

providers, thereby increasing the cost of

healthcare for consumers.169 

In United States v. Federation of

Physicians And Dentists, the Division

alleged that the Federation had successfully

recruited virtually all of the private practice

orthopedic surgeons in Delaware, who

ultimately agreed to designate the Federation

as their exclusive agent to negotiate fee

levels with a particular payor. The

Federation then organized nearly all of its

members to terminate their contracts with

166

 Prepared Statement Concerning the

“Quality Health-Care Coalition Act of 1999”:

Hearing on H.R. 1304 Before the House Comm. on

the Judiciary, 106th Cong. 5 (1999) (Statement of

Robert Pitofsky, Chairman, Federal Trade

Commission) [hereinafter, FTC, H.R. 1304

Statement], at http://www.ftc.gov/os/1999/06/

healthcaretestimony.htm; DOJ, H.R. 1304 Statement,

supra note 159, at 5. 

167 FTC, H.R. 1304 Statement, supra note

166; Brewbaker, supra note 138, at 549-50

(“Legalized collective bargaining would permit

physician unions to function as doctors’ cartels,

raising physician fees and organizing professional

boycotts of MCOs and other institutions.”).

168

 In re S. Ga. Health Partners, L.L.C., No.

C-4100 (Oct. 31, 2003) (decision and order),

available at http://www.ftc.gov/os/2003/11/sgeorgia

do.pdf.

169

 In re S. Ga. Health Partners, L.L.C., No.

C-4100 (Oct. 31, 2003) (complaint), available at

http://www.ftc.gov/os/2003/11/sgeorgiacomp.pdf.
24

this payor with the expectation that this

would force that payor to accede to their fee

demands.170 There are many other examples

of such conduct.171

The Congressional Budget Office

(CBO) estimated that proposed federal

legislation to exempt physicians from

antitrust scrutiny and allow collective

bargaining “would increase expenditures on

private health insurance by 2.6 percent.”172

The CBO also predicted that such legislation

would increase direct federal spending on

healthcare programs such as Medicaid by

$11.3 billion and decrease tax revenue by

$10.9 billion over ten years.173 Other

estimates of the cost of an antitrust waiver

were substantially higher.174 Physician

groups have argued that the actual cost of

physician collective bargaining is likely to

be modest.

175

Whatever the impact on costs,

proponents of antitrust exemptions for

physicians often suggest that collective

bargaining will result in increased quality of

care.176 However, physician collective

bargaining has historically focused on

physician compensation and not on patient

care issues.177 Moreover, as Chapter 1

explains, current antitrust law already

permits physicians to work collectively on

legitimate quality of care issues. Given

these considerations, physician collective

170

 See R. Hewitt Pate, Opening Day

Comments (2/26), at http://www.ftc.gov/ogc

/healthcarehearings/docs/030226pate.pdf; see also

United States v. Fed’n of Physicians & Dentists, Inc.,

2002-2 Trade Cas. (CCH) ¶ 73,868 (D. Del., 2002).

171

 See supra Chapter 1.

172 CONG. BUDGET OFFICE, 106TH CONG.,

H.R. 1304: QUALITY HEALTH-CARE COALITION ACT

OF 1999, at 2 (Cost Estimate, Mar. 15, 2000), at

ftp://ftp.cbo.gov/18xx/doc1885/hr1304.pdf.

173

 Id.

174

 See HEALTH INSURANCE ASS’N OF

AMERICA, THE COST O F PHYSICIAN ANTITRUST

WAIVERS (2002) (incorporating findings of CHARLES

RIVER ASSOCIATES, THE NATIONAL COST OF

PHYSICIAN ANTITRUST WAIVERS (2002) (5 percent to

7 percent increase)); H.E. FRECH III & JAMES

LANGEN FELD, THE IMPACT O F ANTITRUST

EXEMPTIONS FOR HEALTH CARE PROFESSIONALS ON

HEALTH CARE COSTS 3-4 (2000) (Prepared for the

American Ass’n of Health Plans) (estimating “that

H.R. 1304 will increase health care expenditures by

$141 billion over a five year period, or 8.6 percent of

private health care costs during its peak year” and

“that by 2003 the bill would cause approximately 3

million more individuals to become uninsured.”), at

http://www.aahp.org/DocTemplate.cfm?Section=Anti

trust&template=/ContentManagement/ContentDispla

y.cfm&ContentID=1849. 

175 William S. Brewbaker III, Will Physician

Unions Improve Health System Performance?, 27 J.

HEALTH POL. POL’Y & L. 575, 597 (2002); see

generally Jacqueline M. Darrah, Perspectives on

Competition Policy and the Health Care Marketplace

11 (2/27) (“However you cut the pie, physician costs

today are simply not a significant factor driving

growth in overall healthcare costs.”), at http://www.

ama-assn.org/ama1/pub/upload/mm/368/febftctestimo

ny.pdf.

176 Monique A. Anawis, The Ethics of

Physician Unionization: What Will Happen If Your

Doctor Becomes a Teamster?, 6 DEPAUL J. HEALTH

CARE L. 83, 87 (2002); Brewbaker, supra note 175, at

585-86; Jeffrey Rugg, An Old Solution to a New

Problem: Physician Unions Take the Edge Off

Managed Care, 34 COLUM. J.L. & SOC. PROBS. 1, 7

(2000); Levy 9/26 at 41, 44-46; Flaherty 9/26 at 74-

75.

177

 See, e.g., Brewbaker, supra note 175, at

588-594; Brewbaker, supra note 138, at 575-577

(noting that the principal purpose of unionization is to

enhance the working conditions of the unionized

employees, with salary a major bargaining point).
25

bargaining is unlikely to improve the quality

of care that consumers receive.

178

C. Licensure, Market Entry, and

Practice Restrictions

Licensure impacts marketplace

competition. Through licensure

requirements, states may restrict market

entry by physicians and allied health

professionals (AHPs), and further limit the

scope of authorized practice.179 Most state

licensing boards are primarily composed of

licensed providers, although some states

require broader representation.180 The

Commission recently initiated administrative

litigation against a state licensing board,

alleging that it had taken steps unlawfully to

restrict AHPs from obtaining direct access to

consumers.181 

Many states have only limited or no

reciprocity for licensing out-of-state

physicians and AHPs seeking to practice instate.182 A number of state licensing boards

have also sought to restrict the practice of

telemedicine. This section considers each of

these issues and recommends strategies for

addressing the anticompetitive risks of state

regulation of the nature and form of

professional practice. 

1. Mechanisms to Regulate Physician

and AHP Market Entry

The states have traditionally assumed

responsibility for regulating physicians and

AHPs using three distinct mechanisms: (i)

occupational licensing or licensure; (ii)

certification; and (iii) registration.183

Licensure, the most restrictive method of

regulation, typically involves a mandatory

system of state-imposed standards that

practitioners must meet to practice a given

178

 See Roger D. Blair & Jill Boylston

Herndon, Physician Cooperative Bargaining

Ventures: An Economic Analysis, 71 ANTITRUST L.J.

989, 1014-15 (2004).

179 AHPs are individuals trained to support,

complement, or supplement the professional functions

of physicians, dentists, and other health professionals

in the delivery of health care to patients. They

include physician assistants, dental hygienists,

medical technicians, nurse midwives, nurse

practitioners, physical therapists, psychologists, and

nurse anesthetists. PATRICIA FRANKS ET AL., UNIV. OF

CALIFO RNIA, ALLIED HEALTH: 1970S-2000S: A

REVIEW OF KEY REPORTS 23-24 (2002) (citing U.S.

DEP’T OF HEALTH, EDUCATION, & WELFARE, A

REPORT ON ALLIED HEALTH PERSONNEL, DHEW NO.

(HRA) 80-28 (1979)), at http://www.futurehealth.

ucsf.edu/pdf_files/Allied%20Health%20Key%20Rep

orts%207-30-02%20final.101502.doc. See also

Ass’n of Schools of Allied Health Professionals,

Definition of Allied Health, at http://www.asahp.org/

definition.html (last visited July 8, 2004); Hawkinson

9/25 at 42-44 (describing the education, role, and

expertise of physician assistants).

180 INSTITUTE O F MEDICINE (IOM), ALLIED

HEALTH SERVICES: AVOIDING CRISES 238, 241

(1989), available at http://books.nap.edu/books/

0309038960/html/R1.html#pagetop.

181

 See, e.g., In re S.C. Bd. of Dentistry, No.

9311, at 1 (Sept. 12, 2003) (complaint), available at 

http://www.ftc.gov/os/2003/09/socodentistcomp.pdf.

182 U.S. DEP’T OF HEALTH & HUMAN

SERVICES, TELEMEDICINE REPORT TO CONGRESS 21-

24 (2001) [hereinafter HHS, TELEMEDICINE (2001)],

available at http://telehealth.hrsa.gov/pubs/report

2001/2001REPO.PDF; American Medical Ass’n

(AMA), Physician Licensure: An Update of Trends,

at http://www.ama-assn.org/ama/pub/category/2378.

html#introduction (last updated Sept. 4, 2003).

183

 See IOM, supra note 180, at 235-37; Sue

A. Blevins, The Medical Monopoly: Protecting

Consumers or Limiting Competition? 7 (Cato

Institute, Policy Analysis No. 246, 1995), at

http://www.cato.org/pubs/pas/pa-246.html.
26

profession.184 Autonomous boards,

comprised largely of members of the

regulated profession, determine applicants’

eligibility requirements, develop standards

of practice, and enforce disciplinary

actions.185 Physicians and other licensed

professionals must satisfy these

requirements to practice within the state. 

Certification generally refers to a

voluntary system of standards that

practitioners can choose to meet to

demonstrate accomplishment or ability in

their profession.186 Nongovernmental

agencies or associations typically set

certification standards.187 Certified health

professionals may use a predetermined title. 

Uncertified health professionals may still

practice within the field but may not use the

relevant title.188 Certification can serve as a

substitute for and a complement to licensure. 

Many physicians become board certified

within a specialty, in order to establish that

they have an appropriate level of knowledge,

skills, and experience.189

Registration is the least restrictive

mechanism for regulating health care

professionals because individuals simply

must file their name, address, and

qualifications with a government agency to

practice.190 Professionals generally are not

required to meet educational or experience

requirements to practice under a registration

system.191

a. Regulation’s Impact on Cost,

Quality, and Access

Commentators state that limits on

184 Morris M. Kleiner, Occupational

Licensing, 14 J. ECON. PERSP. 189, 191 (2000). For a

discussion of the state action doctrine issues that

licensure raises, see infra note 286, and

accompanying text, and infra Chapter 8.

185

 See BENJAMIN SHIMBERG ET AL.,

OCCUPATIONAL LICENSING: PRACTICES AND POLICIES

14 (1972) (stating that licensing boards “serve as

gatekeepers to determine the qualifications and

competence of applicants” and ensure “that standards

are adhered to by practitioners and, when necessary,

adjudicate disputes between the public and members

of the regulated occupation.”); CAROLYN COX &

SUSAN FOSTER, FEDERA L TRADE COMM’N, THE

COSTS AND BENEFITS OF OCCUPATIONAL REGULATION

1, 3 (1990); National Council of State Boards of

Nursing, Inc., Comments Regarding Hearings on

Health Care and Competition Law and Policy (July

31, 2003) (Public Comment) (Submitted by Donna

M. Dorsey).

186 SHIMBERG ET AL., supra note 185, at9

(citing U.S. DEP’T OF HEALTH, EDUCATION, &

WELFARE, REPORT ON LICENSURE AND RELATED

HEALTH PERS ON NEL CREDENTIALING (1971)). 

187

 Id. See also Nat’l Council of State

Boards of Nursing, Inc., Comments Re: Letter from

the National Boards for Certification of Hospice and

Palliative Nurses (Jan. 8, 2004) (Public Comment)

(Submitted by Donna M. Dorsey).

188 COX & FOSTER, supra note 185, at 43;

Blevins, supra note 183, at 7; Kleiner 6/10 at 35. 

189

 See American Medical Ass’n, Becoming

An M.D., at http://www.ama-assn.org/ama/pub/

category/2320.html (last updated Dec. 4, 2003);

Bureau of Labor Statistics, U.S. Dep’t of Labor,

Physicians and Surgeons, at http://www.bls.gov/oco/

ocos074.htm (last modified Feb. 27, 2004).

190

 See Blevins, supra note 183, at 7; COX &

FOSTER, supra note 185, at 49; MINNESOTA OFFICE

OF THE LEGISLATIVE AUDITOR, OCCUPATIONAL

REGULATION (99-05), at xii (1999), available at

http://www.auditor.leg.state.mn.us/ped/pedrep/9905-a

ll.pdf.

191 COX & FOSTER, supra note 185, at 49.
27

entry increase health care costs.192 However,

commentators and panelists disagreed on the

effects of licensing on quality of care. 

Several commentators contend that a stateenforced minimum quality standard is an

efficient response to the “limited

information patients have about quality and

the relatively high costs of obtaining

information.”193 Another commentator

noted that “[o]ccupational licensure creates a

greater incentive for individuals to invest in

more occupation-specific human capital

because they will be more able to recoup the

full returns to their investment if they need

not face low-quality substitutes for their

services.”194 Others argue that licensure may

not improve quality of care because the

requirements do not correspond to the

factors that influence quality.195 Moreover,

some maintain that licensure may decrease

the overall quality of care that consumers

receive by increasing prices, which can

cause some consumers to forego care.196

Empirical studies have found that

licensing regulation increases costs for

consumers.197 There are fewer studies on the

impact of licensure on quality, and these

studies have found mixed results.198 One

study found that licensure requirements can

reduce the likelihood of adverse outcomes

and increase quality of care.199 Another

study found that consumers in states with

tougher licensure requirements do not

receive higher quality care, because the

resulting increase in the price of care limits

consumer access.

200 A third study found that

licensure benefits the segment of consumers

who place more emphasis on quality.201

192

 See Kleiner 6/10 at 42; COX & FOSTER,

supra note 185, at vi (“Mandatory entry requirements

and business practice restrictions increase the cost of

providing professionals’ services and, as result,

increase prices as well.”).

193 SHERMAN FOLLAND ET AL., THE

ECON OM ICS OF HEALTH CARE 343 (2004); see also

COX & FOSTER, supra note 185, at 4-16 (discussing

rationales for licensure including asymmetric

information on quality, externalities, and the dual role

of professional as diagnostician and treatment

specialist).

194 Kleiner, supra note 184, at 191. 

195 COX & FOSTER, supra note 185, at vii;

Kleiner 6/10 at 37-38.

196

 See, e.g., Lawrence Shepard, Licensing

Restrictions and the Cost of Dental Care, 4 J.L. &

ECON. 185 (1978).

197

 See, e.g., Kleiner 6/10 at 42; Morris M.

Kleiner, Occupational Licensing and Health

Services: Who Gains and Who Loses? 5-6 (6/10)

(slides) (discussing study) [hereinafter Kleiner

Presentation], at http://www.ftc.gov/ogc 

/healthcarehearings/docs/030610kleiner.pdf.

198

 See Kleiner 6/10 at 39-40; Kleiner, supra

note 184, at 197.

199 Kleiner Presentation, supra note 197, at

5-6.

200 Morris M. Kleiner & Robert T. Kudrle,

Does Regulation Affect Economic Outcomes? The

Case of Dentistry, 43 J.L. & ECON. 547 (2000); see

also Sidney L. Carroll & Robert J. Gaston,

Occupational Restrictions and the Quality of Service

Received: Some Evidence, 47 S. ECON. J. 959 (1981)

(finding that licensure of electricians increased the

number of electrocutions because consumers

responded to the increased prices of licensed

electricians by doing repairs themselves); Kleiner

6/10 at 42 (discussing the “Mercedes Benz effect” of

licensure, which enables consumers to “get a high

quality service . . . or no service at all because no

other services are legally available.”).

201

 See Kleiner Presentation, supra note 197,

at 5-6; see also Lomazow 6/10 at 259-60 (“[T]his

whole issue of lesser trained versus more trained . . .

simply flies in the face of logic. I mean, and you can
28

Studies consistently have found that statebased licensure can harm consumer welfare

by serving as a barrier to provider

mobility.202

b. Certification’s Impact on Cost,

Quality, and Access

Some commentators state that

certification, rather than licensure, is a better

way to protect quality, increase consumer

choice, broaden access to care, and enhance

market competition.203 They state that

providing consumers with a choice of

certified or uncertified providers allows

consumers to receive care they might forego

under a licensure regime.204 Some

commentators also contend that certification

spurs competition and innovation by

creating increased opportunities for market

entry.205 

Others argue, however, that

certification does not adequately protect

consumers from low quality care and

suggest that consumers may not factor in

certain externalities when they select

uncertified health care providers.206

Moreover, if health plans only choose to

cover certified health care providers, a

certification regime may not markedly

increase the choices available to consumers. 

There currently is insufficient

empirical evidence to assess whether

certification provides many of the benefits of

licensure with fewer disadvantages.207 The

Agencies encourage further study of the

advantages and disadvantages of these two

methods for regulating physician and AHP

market entry.

2. AHPs and Provider Control of

Licensure Boards

Most state statutes delegate authority

for establishing and enforcing licensure

standards to state Boards of Medical

Examiners.

208 These boards typically

talk about studies and studies and studies, but it's just

illogical. You want the best. You want the people

that are best trained, the best qualified to do the thing. 

Do you want a certified plumber or do you want some

guy next door to come over?”).

202

 See Stanley J. Gross, Professional

Licensure and Quality: The Evidence (Cato Institute,

Policy Analysis No. 79, 1986) (citing studies on the

effects of professional licensing arrangements on

mobility in discussion of “Interstate Mobility”), at

http://www.cato.org/pubs/pas/pa079.html; Kleiner,

supra note 184, at 198; Kleiner 6/10 at 39, 49

(discussing the role of the Federal government and

practitioners in monitoring provider mobility and

licensure standards); Gingrich 6/12 at 16-17.

203

 See, e.g., COX & FOSTER, supra note

185, at 44-45.

204

 See generally id.

205

 See, e.g., id. at 45; Nat’l Board for

Certification of Hospice & Palliative Nurses,

NBCHPN Response to Hearings on Health Care and

competition Law and Policy Regarding Advanced

Practice Registered Nurse Task Force of the National

Council for State Boards of Nursing, Inc. (Sept. 30,

2003) 1-5 (Public Comment).

206

 See COX & FOSTER, supra note 185, at

45 (“[C]ertification may not lessen quality problems

associated with externalities (footnote omitted). A

consumer who chooses a noncertified doctor, for

example, may not take into account the possible

effect of his quality decision on others . . . .”).

207

 See Morrisey 6/10 at 254.

208 AMA, supra note 182; Blevins, supra

note 183, at 7 (“Professional health care associations

have been influential in setting the standards for

licensure laws in the United States.”).
29

promulgate regulations governing physicians

and related AHPs.209 Because most board

members are industry participants with

economic interests at stake, the potential

exists for the board to make decisions that

are contrary to consumers’ interests.210

Panelists and commentators have identified

varying ways in which provider-controlled

state-based licensure boards can limit

competition and harm consumers.211 

A panelist representing a dental

hygienists’ trade association described the

efforts of certain Boards of Dentistry to

prevent dental hygienists from obtaining

direct access to consumers.212 This panelist

stated that such Boards determinedly seek to

maintain control over dental hygienists and

contended that this control denies consumers

access to dental care.213 

This panelist also asserted that the

Boards of Dentistry in certain states have

prevented dental hygienists from obtaining

direct payment, despite those states’

Departments of Health authorizing such

hygienists to provide certain services to

209 Fed’n of State Medical Boards, Getting a

License - The Basics, at http://www.ama-assn.org

/ama/pub/category/2644.html (last updated Sept. 29,

2003); Byrd 6/10 at 67.

210

 See COX & FOSTER, supra note 185, at 1

(“Although the professions may seek to benefit

consumers, the possibility of a conflict of interest

exists. The regulators, in many cases, have a financial

interest in the profession they are regulating. Since

professionals’ self-interest may not coincide with the

public’s best interest, many have come to regard selfregulation with growing skepticism.”); IOM, supra

note 180, at 241; Apold 6/10 at 119; Bauer 6/10 at

227; Carolyn Buppert, Comments Regarding

Competition Law and Policy & Health Care (Aug.

30, 2002) (Public Comment); American Congress on

Electroneuromyography, Comments Regarding

Health Care and Competition Law and Policy (July

15, 2003) (Public Comment); Melissa M. English,

Comments Re: Anti-Competition Practives (July 22,

2003) (slides) 1-2 (Public Comment).

211

 See Gross, supra note 202 (discussing

empirical studies that have found “licensing has had a

profoundly negative effect” on the utilization of

paraprofessionals); Apold 6/10 at 119. 

Commentators and panelists also discussed other

barriers to entry for AHPs. See Mallon 6/10 at 187-

188; Newman 6/10 at 203-205; Lynne Odell-Holzer,

Comments Regarding FTC/DOJ Hearings Regarding

Anticompetitive Practices in Healthcare Industry

(Public Comment); Joe Holzer, Comments Regarding

Hearings on Healthcare Competition Law and Policy

(July 10, 2003) (Public Comment); Christine A.

Sullivan, Comments Regarding Hearings on Health

Care Competition Law and Policy (Sept. 19, 2003)

(Public Comment); Cathryn Wright, Comments

Regarding Hearings on Health Care Competition

Law and Policy (July 22, 2003) (Public Comment);

American Ass’n of Nurse Anesthetists, Comments

Regarding Hearings on Health Care and

Competition Law and Policy (Nov. 20, 2003) (Public

Comment) (Submitted by Frank Purcell); American

Ass’n of Nurse Anesthetists, New Economic

Perspectives on the Market for Anesthesia Services: 

Achieving Desired Reforms Through Fair

Competition, Nov. 2003 (Public Comment)

(Presented by Jeffrey C. Bauer); American

Chiropractic Ass’n, Comments Regarding Health

Care and Competition Law and Policy (Nov. 24,

2003) (Public Comment) (Submitted by Donald J.

Krippendorf & George B. McClelland). But see

American Medical Ass’n, Health Care and

Competition Law and Policy – Quality and

Consumer Information: Market Entry (June 10,

2003) (Public Comment); Frank A. Sloan & Roger

Feldman, Competition Among Physicians, in

COMPETITION IN THE HEALTH CARE SECTOR: PAST,

PRESENT, AND FUTURE: PROCEEDINGS O F A

CONFERENCE SPONSORED BY THE BUREAU OF

ECONOM ICS , FEDERA L TRADE COMMISSION pt.2, at

57-131 (Warren Greenberg ed., 1978).

212

 See Byrd 6/10 at 67-70, 75.

213

 See id. at 69-70. 
30

consumers without a dentist’s supervision.214

These arrangements, argued the panelist,

increase dental costs and decrease

consumers’ access to dental care.215 

The Commission recently alleged the

South Carolina State Board of Dentistry

“restrained competition in the provision of

preventive dental care services by

unreasonably restricting the delivery of

dental cleanings, sealants, and topical

fluoride treatments in school settings by

licensed dental hygienists.”216 The Board

contends that its challenged actions were

necessary to protect school children from

substandard care, including possible

injury.217

Many commentators state that

widening the membership of state licensure

boards will decrease the probability that

provider-dominated licensure boards will

harm competition.218 The Institute of

Medicine (IOM) recommended that “states

strengthen the accountability and broaden

the public base of their regulatory statutes

and procedures.”219 In particular, the IOM

recommended that “[l]icensing boards

should draw at least half of their

membership from outside the licensed

occupation; members should be drawn from

the public as well as from a variety of areas

of expertise such as health administration,

economics, consumer affairs, education, and

health services research.”220 

States should consider adopting the

IOM’s recommendation to expand the

membership of state licensure boards. Such

reform may reduce the possibility that these

boards will engage in conduct that increases

prices or decreases access to health care. 

3. State Restrictions on the Interstate

Practice of Telemedicine

 Interstate communications between

health professionals historically have not

been subject to licensing requirements.221

214

 Id. at 74.

215

 Id. at 74-75, 135 (stating that “the people

that are suffering the most [from restrictions on direct

payment] are our elderly and our underprivileged and

our school children who don't have access to offices

on Monday through Thursday from eight to five.”).

216

 In re S.C. Bd. of Dentistry, No. 9311, at

1 (Sept. 12, 2003) (complaint), at

http://www.ftc.gov/os/2003/09/socodentistcomp.pdf. 

For discussion of the state action issues this case

raises, see infra note 286, and accompanying text,

and infra Chapter 8. See generally Loeffler 6/10 at

79. 

217

 In re S.C. Bd. of Dentistry, No. 9311, at

8 (Oct. 22, 2003) (memorandum to support motion to

dismiss), at http://www.ftc.gov/os/adjpro/d9311

/031021scdentmemoinsupdismiss.pdf. 

218 IOM, supra note 180, at 249 (“Widening

the membership of regulatory boards has been one of

the most consistent recommendations made by critics

of state occupational regulation (e.g., Public Health

Service, 1977; Begun, 1981; Cohen, 1980; Shimberg,

1982).”).

219

 Id. at 256. 

220

 Id.

221 U.S. DEP’T OF HEALTH & HUMAN

SERVICES, TELEMEDICINE REPORT TO CONGRESS §

III.B. (1997) (noting that physician-to-physician

communication can take varied forms including “the

mailing of x-rays, clinical histories and pathological

and laboratory specimens for evaluation and

interpretation, and oral or written inquiries to another
31

As the Department of Health and Human

Services (HHS) noted, “the consulted

physician or other health professional [was]

regarded either as practicing medicine only

in his or her home state or as exempt from

licensure under the ‘consultation exception’

in the patient's state.”222 Developments in

technology have facilitated the practice of

telemedicine, which involves the use of

electronic communication and information

technologies to provide or support clinical

care at a distance.223 

Telemedicine can benefit consumers

in at least three ways.224 First, telemedicine

can give physicians and other health care

professionals the ability to provide high

quality medical services to rural or other

underserved areas.225 

Second, telemedicine can

significantly reduce a range of health-carerelated costs, including travel expenses and

costs arising from the duplication of

services, technologies, and specialists.226

With telemedicine, for example, a single

pathologist can provide services to a number

of locations. Finally, telemedicine networks

can enhance training and education in new

technologies for health care professionals,

particularly for those located in rural

areas.227 After surveying empirical studies

on the costs and benefits of telemedicine,

HHS observed “there may be real cost

savings to be realized from telemedicine.”228

Telemedicine can harm consumers in

at least four ways. First, telemedicine can

subject consumers to substandard care,

out-of-state physician involved in the patient's care or

in the form of a specific consultative request to a

physician with special expertise”) [hereinafter HHS,

TELEMEDICINE (1997)], available at http://www.ntia.

doc.gov/reports/telemed; AMA, supra note 182.

222

 See HHS, TELEMEDICINE (1997), supra

note 221, § III.B. 

223

 See HHS, TELEMEDICINE (1997), supra

note 221, § I.A.; see also INSTITUTE O F MEDICINE,

TELEMEDICINE: A GUIDE TO ASSESSING

TELECOMMUNICATIONS IN HEALTH CARE 16 (1996).

224 Telemedicine is not subject to the risks

of Internet fraud that have led the Commission to

bring over 300 law enforcement cases involving

auction fraud, investment fraud, “Nigerian scams,”

cross-border Internet fraud and identity theft. See

generally Prepared Statement on Efforts to Fight

Fraud on the Internet: Before the S. Spec. Comm. on

Aging, 108th Cong. (Mar. 23, 2004) (Statement of

Howard Beales, Director of the Bureau of Consumer

Protection, Federal Trade Commission), at

http://www.ftc.gov/os/2004/03/bealsfraudtest.pdf;

GENERA L ACCOUNTING OFFICE, INTERNET

PHARMACIES: SOME POSE SAFETY RISKS FOR

CONSUMERS AND ARE UNRELIABLE IN THEIR

BUSINESS PRACTICES (2004), available at

http://www.gao.gov/new.items/d04888t.pdf.

225

 See HHS, TELEMEDICINE (1997), supra

note 221, § I.A. (“Telemedicine also has the potential

to improve the delivery of health care in America by

bringing a wider range of services such as radiology,

mental health services and dermatology to

underserved communities and individuals in both

urban and rural areas.”); Waters 10/9 at 639-40;

Parente 10/9 at 640-41.

226

 See, e.g., Waters 10/9 at 617; Parente

10/9 at 640-41.

227 HHS, TELEMEDICINE (1997), supra note

221, § I.A. (“[T]elemedicine can help attract and

retain health professionals in rural areas by providing

ongoing training and collaboration with other health

professionals.”).

228 HHS, TELEMEDICINE (2001), supra note

182, at 41, 44-45; see also Parente 10/9 at 641;

Waters 10/9 at 652-53.
32

possibly from unlicensed providers.229

Individual states have a legitimate interest in

ensuring that out-of-state health

professionals meet the same standards as

professionals licensed within the state.230

Second, providers could use telemedicine to

perpetrate fraud against consumers.231

Third, “[t]elemedicine consultations might

involve personal medical records being

shipped over computer lines to other regions

of the country,” creating privacy and

confidentiality concerns.232 Finally, “[t]here

is significant uncertainty regarding whether

malpractice insurance policies cover services

provided by telemedicine.”233

The practice of telemedicine has thus

crystallized tensions between the states’ role

in ensuring patients have access to quality

care and the anticompetitive effects of

protecting in-state physicians from out-ofstate competition.234 Many states have

responded to telemedicine by enacting

legislation to restrict such practices. HHS

reported that 11 states had implemented

laws restricting the interstate practice of

telemedicine in 1997, and 26 states had

implemented such laws by 2001.235 These

states mostly require a physician to obtain

either a special license to engage in the outof-state practice of medicine or a full

unrestricted state medical license.236 Some

contend these laws may create a barrier to

entry that significantly increases costs and

decreases access without improving quality

of care for physicians who want to practice

telemedicine.237 

Commentators have debated varied

approaches to encourage the practice of

telemedicine. Some have argued that

229

 See FLA. STAT. ch. 456.065 (1) (2004);

Gary Winchester, Executive Summary, Prepared for

the Federal Trade Commission Office of Policy

Planning, Public Workshop: Possible Anticompetitive

Efforts to Restrict Competition on the Internet 3 (Oct.

9, 2002), at http://www.ftc.gov/opp/ecommerce

/anticompetitive/panel/winchester.pdf; Winchester

10/9 at 624-25, 643-44.

230 HHS, TELEMEDICINE (1997), supra note

221, § III.C.

231

 See, e.g., Winchester 10/9 at 624-25;

Stephen Parente, A Review of the Internet-Enabled

Medical Marketplace, Written Statement Prepared for

the Federal Trade Commission Office of Policy

Planning, Public Workshop: Possible

Anticompetitive Efforts to Restrict Competition on

the Internet 2 (Oct. 9, 2002), at http://www.ftc.gov

/opp/ecommerce/anticompetitive/panel/parente.pdf.

232 Edward T. Schafer, Telemedicine: An

Emerging Technology With Exciting Opportunities

for North Dakota, 73 N. DAK. L. REV. 199, 204

(1997); Roman J. Kupchynsky II & Cheryl S. Camin,

Legal Considerations of Telemedicine, 64 TEX. B. J.

20, 27-28 (2000).

233 WESTERN GOVERNORS’ ASS’N,

TELEMEDICINE ACTION REPORT (1995); Parente 10/9

at 642-43.

234 AMA, supra note 182; Parente, supra

note 231, at 4-5.

235 HHS, TELEMEDICINE (2001), supra note

182, at 21; see also AMA, supra note 182; Robert J.

Waters, Anticompetitive Efforts to Restrict Telehealth

Services on the Internet, Written Statement Prepared

for the Federal Trade Commission Office of Policy

Planning, Public Workshop: Possible

Anticompetitive Efforts to Restrict Competition on

the Internet 8-15 (Oct. 9, 2002), at http://www.ftc.gov

/opp/ecommerce/anticompetitive/panel/waters.pdf.

236

 See AMA, supra note 182; HHS,

TELEMEDICINE (2001), supra note 182, at 21; Waters

10/9 at 619-22 (discussing Oregon, Texas and

Nevada).

237

 See, e.g., Parente, supra note 231, at 4-5;

Parente 10/9 at 619.
33

Congress should pass national telemedicine

licensure laws to stop individual states from

protecting the economic interests of their

providers to the detriment of their citizens’

access to healthcare.238 Others contend that

telemedicine should be regulated on a stateby-state basis.239 The American

Telemedicine Association (ATA) has

proposed an alternative, which it argues is “a

compromise between full national licensure

and state-imposed unreasonable barriers” to

telemedicine.240 The ATA contends that

states should regulate physical face-to-face

encounters between physicians and patients

within state borders, but not virtual

consultations across state borders. They also

recommend that states should not restrict a

duly licensed physician from consulting a

physician in another state. 

When used properly, telemedicine

has considerable promise as a mechanism to

broaden access, lower costs, and increase

healthcare quality. When used improperly,

telemedicine has the potential to lower

health care quality and increase the

incidence of consumer fraud. To foster

telemedicine’s likely pro-competitive

benefits and to deter its potential to harm

consumers, states should consider

implementing uniform licensure standards or

reciprocity compacts. Uniform licensure

standards and reciprocity compacts could

operate both to protect consumers and to

reduce barriers to telemedicine. State

regulators and legislators should explicitly

consider the pro-competitive benefits of

telemedicine before restricting it. 

IV. ANTITRUST ENFORCEMENT

IN THE PHYSICIAN

MARKETPLACE

This section examines the

application of competition law to the

marketplace for physician services. It first

discusses the significance of private antitrust

litigation involving physician privileges and

credentialing. The section then discusses the

Agencies’ analysis of provider network joint

ventures, focusing on market developments

in financial and clinical integration. Finally,

this section addresses the ability of

physicians to share and use quality-related

information and the application of the state

action doctrine to licensure and physician

collective bargaining.

A. Private Litigation Involving

Physician Privileges and

Credentialing

The most common type of private

healthcare-related antitrust litigation raises

physician privilege or credentialing issues. 238 241 See, e.g., Parente 10/9 at 615-616.

239

 See AMA, supra note 182.

240

 ATA Policy Regarding State Medical

Licensure: Hearings on Telemedicine Before the

Subcomm. on Sci., Tech. & Space, S. Comm. on

Commerce, Sci. & Transp., 106th Cong. (1999)

(Attachment to Statement of Dr. Ronald K.

Poropatich, Member, Board of Directors, American

Telemedicine Association), at http://www.senate.gov

/~commerce/hearings/0915por2.pdf; see also Waters

10/9 at 618-620.

241 Peter J. Hammer & William M. Sage,

Antitrust, Health Care Quality, and the Courts, 102

COLUM. L. REV. 545, 568 (2002) (noting that 35

percent of health care antitrust disputes involving

quality between 1985 and 1999 raised these issues). 

The Commission has brought enforcement actions

involving physician privileging and credentialing

issues. See In re Med. Staff of Mem’l Med. Ctr., 110

F.T.C. 541 (1988) (consent order) (alleging the
34

These cases usually involve physicians

asserting that a hospital and/or its physician

peer review committee denied them

privileges for anticompetitive reasons.242

Physicians with hospital privileges may also

sue hospitals and/or their peer review

committee because these privileges have

been revoked or curtailed. 

Commentators state that the courts

largely have been “inhospitable” to these

cases, except when there has been “clear

evidence of bad faith by rival physicians on

the hospital’s medical staff[, which has]

resulted in large damage awards.”243 An

empirical study found that plaintiff

physicians prevail in only seven percent of

these cases.244 One set of commentators are

concerned, however, that these “staff

privileges cases have had problematic

effects on the legal analysis of quality-based

competition” because the “courts began

using quality to remove conduct from the

purview of competition law, rather than

factoring quality into an overall competitive

mix.”245

Congress created an antitrust safe

harbor for peer review decisions involving

quality that meet certain procedural

requirements in the Health Care Quality

Improvement Act of 1986.

246 This legislation

also enabled prevailing defendants to seek

recovery of attorney’s fees. The number of

physician privilege antitrust cases dropped

by approximately 10 percent in the decade

following the passage of this Act.247

B. Provider Network Joint Ventures

The antitrust analysis of joint

ventures and multi-provider networks has

received considerable attention from the

Agencies and commentators in recent

years.248 This issue is not unique to health

care; as the Commission recently stated, “no

analytical exercise is more important to U.S.

competition policy than defining the bounds

of acceptable cooperation between direct

rivals.”249 As noted previously, the Agencies

medical staff of a hospital in Savanna, Georgia,

acting through its credentials committee, conspired to

suppress competition by denying a certified nursemidwife’s application for hospital privileges without

a reasonable basis); In re Eugene M. Addison, M.D.,

111 F.T.C. 339 (1988) (consent order). 

242 For a description of physician peer

review processes, see Hammer & Sage, supra note

241, at 619. See generally Meghrigian 9/24 at 83-84. 

See also American College of Nurse-Midwives,

Addendum of Cases and Articles For Statement of

Lynne Loeffler for the American College of NurseMidwives (Public Comment).

243 Sage et al., Why Competition Law

Matters To Health Care Quality, 22 HEALTH AFFAIRS

31, 37 (Mar./Apr. 2003).

244 Hammer & Sage, supra note 241, at 575. 

The authors note that these figures raise questions

about the extent to which private counsel inform

clients of their dismal prospects before pursuing such

cases. See id. at 601. 

245 Sage et al., supra note 243, at 37.

246 42 U.S.C. S. § 11151 (1986).

247 Hammer & Sage, supra note 241, at 569,

597, 619. Although the number of cases dropped

after this legislation’s passage, the success rate for

plaintiffs did not change. Id.

248

 See, e.g., Thomas L. Greaney, A Perfect

Storm on the Sea of Doubt: Physicians,

Professionalism and Antitrust, 14 LOY. CONSUMER L.

REV. 481 (2002).

249

 In re Polygram Holding, Inc., 5 Trade

Reg. Rep. (CCH) ¶ 15,453 at 22,456 (FTC 2003),

available at http:www.ftc.gov/os/2003/07/poly
35

have brought numerous enforcement actions

against physician networks, and also issued

statements, advisory opinions, and business

review letters on this subject. 

1. The Agencies’ Antitrust Analysis

of Provider Network Joint

Ventures

Health Care Statement 8 describes

how the Agencies evaluate physician

network joint ventures. This statement sets

forth antitrust safety zones for exclusive and

non-exclusive physician network joint

ventures that, absent extraordinary

circumstances, the Agencies are unlikely to

challenge. Statement 8 then outlines the

analytical framework for joint ventures that

fall outside the antitrust safety zones. It

states that like transactions in other sectors

of the economy, “physician network joint

ventures will be analyzed under the rule of

reason, and will not be viewed as per se

illegal, if the physicians' integration through

the network is likely to produce significant

efficiencies that benefit consumers, and any

price agreements (or other agreements that

would otherwise be per se illegal) by the

network physicians are reasonably necessary

to realize those efficiencies.”250

This statement further notes that

financial risk-sharing and clinical integration

may involve sufficient integration to

demonstrate that the venture is likely to

produce significant efficiencies. Finally,

Statement 8 outlines the Agencies’ rule of

reason analytical framework and applies the

principles set forth in the statement to seven

examples of physician network joint

ventures.251

2. Financial Integration

Statement 8 notes that financial risk

sharing can generate significant efficiencies

by providing physicians with incentives to

cooperate in controlling the cost and

improving the quality of services they

render. It provides examples of

arrangements through which participants in

a physician network joint venture can share

substantial financial risk, including

capitation, global fee arrangements, feewithholds, and cost or utilization-based

bonuses or penalties.252 Statement 8 also

establishes that only those physician

networks that share substantial financial risk

can qualify for an antitrust safety zone on

the basis of their financial integration.

As Chapter 1 outlines and the Health

Care Statements acknowledge, financing

and delivery arrangements for health care

have changed substantially over the past

several decades.253 Some commentators and

panelists state P4P arrangements may have

important procompetitive benefits for

consumers.254 Chapters 1 and 3 describe

gramopinion.pdf.

250 HEALTH CARE STATEMENTS, supra note

44, § 8(B)(1).

251 Some panelists stated the Agencies may

increasingly confront physician network joint

ventures that require rule of reason analysis. See

Wiegand 9/24 at 4-5; Guerin-Calvert 9/24 at 26;

Feller 9/24 at 73. 

252 HEALTH CARE STATEMENTS, supra note

44, § 8.

253

 Id. § 8(A)(4).

254

 See, e.g., Asner 9/25 at 36; see also

supra note 36. 
36

these arrangements and consider their

potential to lower costs and increase quality. 

In determining whether a physician

network joint venture is sufficiently

financially integrated to warrant rule of

reason analysis, the Agencies will consider

the extent to which a particular P4P

arrangement constitutes the sharing of

substantial financial risk among the

members of the joint venture, whether that

sharing is likely to produce efficiencies, and

whether any price or otherwise per se illegal

agreements among the members are

reasonably necessary to achieve those

efficiencies. 

3. Clinical Integration

Health Care Statement 8 notes that

clinical integration can be evidenced by a

“network implementing an active and

ongoing program to evaluate and modify

practice patterns by the network’s physician

participants and create a high degree of

interdependence and cooperation among the

physicians to control costs and ensure

quality.”255 

This statement identifies three

arrangements that a clinical integration

program might include: (i) establishing

mechanisms to monitor and control

utilization of health care services that are

designed to control costs and assure quality

of care; (ii) selectively choosing network

physicians who are likely to further these

efficiency objectives; and (iii) the significant

investment of capital, both monetary and

human, in the necessary infrastructure and

capability to realize the claimed efficiencies. 

This section discusses

commentators’ perspectives on clinical

integration and presents a series of inquiries

the Agencies are likely to pose when

considering whether a physician network

joint venture is sufficiently clinically

integrated to avoid summary condemnation. 

Commission staff stated in an

advisory opinion to a proposed initiative

involving clinical integration that the

venture, as designed, did not warrant

summary condemnation.256 Commission

staff also closed an investigation into a

physician collaboration that created a

substantial degree of market concentration,

because the parties demonstrated the

collaboration created considerable

efficiencies (including improvements in the

quality of care).257

255 HEALTH CARE STATEMENTS, supra note

44, § 8(B)(1).

256 Letter from Jeffrey W. Brennan, Federal

Trade Commission, to John J. Miles, Ober, Kaler,

Grimes & Shriver (Feb. 19, 2002) (FTC Staff

advisory opinion regarding MedSouth, Inc.)

[hereinafter FTC MedSouth Letter], at

http://www.ftc.gov/bc/adops/medsouth.htm. See

generally Thomas B. Leary, The Antitrust

Implications of “Clinical Integration:” An Analysis

of FTC Staff’s Advisory Opinion to MedSouth, 47 ST.

LOUIS L.J. 223 (2003); Thomas B. Leary, The

Antitrust Implications of “Clinical Integration:” An

Analysis of FTC Staff’s Advisory Opinion to

MedSouth, Speech Before Saint Louis University

Health Law Symposium (Apr. 12, 2002), at

http://www.ftc.gov/speeches/leary/eicreview.pdf.

257 Timothy J. Muris, Everything Old is

New Again: Health Care and

Competition in the 21st Century, Prepared Remarks

for the 7th Annual Competition in Health Care Forum

(Nov. 7, 2002), at http://www.ftc.gov/speeches/muris/

murishealthcarespeech0211.pdf.
37

a. Indicia of Clinical Integration

Commentators and industry experts

describe various techniques and programs

for achieving clinical integration. 

Commentators primarily focus on four

indicia of clinical integration: (1) the use of

common information technology to ensure

exchange of all relevant patient data; (2) the

development and adoption of clinical

protocols; (3) care review based on the

implementation of protocols; and (4)

mechanisms to ensure adherence to

protocols. 

Panelists and industry experts also

have discussed other indicia of clinical

integration including physician

credentialing, case management,

preauthorization of medical care, and review

of associated hospital stays.258 Some also

have discussed the use of payment systems

to collect clinical data.259

Commentators described varied

information technology (IT) systems that can

facilitate, monitor, and control the utilization

of health care services.260 The FTC

MedSouth Letter discussed, for example, an

IT system that included “a web-based

electronic clinical data record system that

will permit MedSouth physicians to access

and share clinical information relating to

their patients.”261 

Some suggest that these systems can

significantly improve quality of care by

enabling physicians to collect and track

information about individual patients.262

One industry expert noted the “management

of information as it relates to promoting

health, treating illness and managing

disease” is a “major component of clinical

integration.”263 Some have observed that

clinical care information technology systems

are expensive to implement.264 One study

258

 See California Ass’n of Physician

Groups, Clarifying the Health Care Statements’

Policies of Clinical Integration and Ancillarity 7-9

(Public Comment) [hereinafter CAPG (public cmt)];

Robert F. Liebenluft & Tracy E. Weir, Clinical

Integration: Assessing the Antitrust Issues, in

HEALTH LAW HANDBOOK (forthcoming 2004 ed.)

(manuscript at 29-35, on file with the authors). For a

discussion of private antitrust litigation involving

physician credentialing, see supra notes 241-247, and

accompanying text.

259

 See, e.g., Bartley Asner, An IPA Based

Model for Clinical Integration in a PPO Setting, in

CAPG (public cmt), supra note 258, at i (discussing a

system of payment from an insurance company to a

PPO, which would enable the PPO to track claims

and gather additional data). 

260

 See, e.g., SHORTELL ET AL., supra note

84, at 159.

261 FTC MedSouth Letter, supra note 256.

262

 See, e.g., Robert H. Miller & Ida Sim,

Physicians’ Use of Electronic Medical Records: 

Barriers and Solutions, 23 HEALTH AFFAIRS 116, 116

(Mar./Apr. 2004) (stating that electronic medical

records have “the most wide-ranging capabilities and

thus the greatest potential for improving quality.”);

STEPHEN M. SHORTELL ET AL., REMAKING

HEALTHCARE IN AMERICA: BUILDING ORGANIZED

DELIVERY SYSTEMS 40-41 (1996) (“It is not possible

to create clinically integrated care . . . without certain

functions such as information systems and quality

management in places.”).

263 Teresa Mikenas Jacobsen & Maria Hill,

Achieving Information Systems Support for Clinical

Integration, in CLINICAL INTEGRATION: STRATEGIES

AND PRACTICES FOR ORGANIZED DELIVERY SYSTEMS

129, 129 (Mary Crabtree Tonges ed., 1998).

264 Miller & Sim, supra note 262, at 119

(“In most practices we studied, up-front costs [for

electronic medical records] ranged from $16,000 to
38

found that California-based IPAs are among

the most successful in implementing and

using IT systems, in part because they

employ more technical support staff.265

Commentators describe physicians’

selection and adoption of care management

protocols (CMPs) as another indicia of

clinical integration.266 A trade association

representing Californian physician groups

stated that these protocols can “delineate

utilization and quality goals for various

diagnoses.”267 This trade association also

described the process by which an IPA

might develop and revise clinical

protocols.268 MedSouth proposed to

implement between 100 and 150 such

protocols that would cover 80-90 percent of

the diagnoses that were prevalent in their

physician members’ practices.269 

Commentators have observed that

the selection and implementation of CMPs

can improve quality and generate

efficiencies for physician networks and

payors.270 Several commentators contend,

however, that clinical integration requires

networks to monitor and ensure compliance

with CMPs.271

b. Are Joint Negotiations on Price

Reasonably Necessary to Achieve

Clinical Integration?

A joint venture will escape summary

condemnation when joint price negotiations

are reasonably necessary to achieve

substantial efficiencies arising from the

clinical integration.272 Panelists and

commentators identified varying reasons

$36,000 per physician. Some practices incurred

additional costs (in the form of decreased revenue)

from seeing fewer patients during the EMR transition

period.”); Liebenluft & Weir, supra note 258

(manuscript at 32).

265 Gillies et al., supra note 14, at 494-96.

266

 See, e.g., CAPG (public cmt), supra note

258, at 5; Liebenluft & Weir, supra note 258

(manuscript at 29-30); Brown, supra note 12, at 289. 

See generally ABA (public cmt), supra note 21, at

19-22.

267 CAPG (public cmt), supra note 258, at 5.

268

 See id. at 5.

269 FTC MedSouth Letter, supra note 256.

270

 See Liebenluft & Weir, supra note 258

(manuscript at 16-17).

271

 See Peter R. Kongstvedt, Physician

Behavior Change in Managed Health Care, in

ESSENTIALS OF MANAGED HEALTH CARE, supra note

12, at 425 (“Physicians, like all of us, have habits and

patterns in their lives. Habits also extend to clinical

practices that are not cost-effective but that are

difficult to change.”); Liebenluft & Weir, supra note

258 (manuscript at 30-31, 33-34); FTC MedSouth

Letter, supra note 256 (proposing several steps to

ensure compliance with CMPs).

See also CAPG (public cmt), supra note

258, at 5-6 (networks must review their “physicians’

delivery of care to ensure compliance with efficiency

and quality goals identified in clinical protocols”);

Brian J. Anderson, Values and Value: Perspectives

on Clinical Integration, in CLINICAL INTEGRATION,

supra note 263, at 39, 54 (stating that “an integrated

system must be able to apply performance measures

across the span of care and service sites.”); Susan A.

Creighton, Diagnosing Physician-Hospital

Organizations, Remarks Before American Health

Lawyers Association Program on Legal Issues

Affecting Academic Medical Centers and Other

Teaching Institutions 2 (Jan. 22, 2004), at

http://www.ftc.gov/speeches/other/creightonphospeec

h.htm. 

272 HEALTH CARE STATEMENTS, supra note

44, § 8(B)(1).
39

why joint negotiations may be reasonably

necessary to implement and maintain a

clinical integration program. 

A trade association representing

Californian physician groups contended that

joint negotiation of contracts will ensure that

sufficient physicians across multiple

specialties participate in the venture.273

Physicians participate in IPA networks, this

association argued, because they can

delegate “the time and hassle of negotiating

contracts with payers” to the IPA.274

Moreover, the trade association suggested

that payors’ overall costs may not

necessarily increase, because a clinically

integrated IPA will deliver cost-effective

and efficient care. This trade association

also argued that clinically integrated IPAs

“can offer payers a single, comprehensive,

and integrated network” and should

therefore “be priced in the aggregate, not

through individual contracts with

physicians.”275 

Commentators similarly asserted that

joint pricing is necessary to ensure the active

and ongoing participation of an entire

group’s members.

276 These commentators

also contend that joint negotiations are

necessary to help physician members

recover the substantial time and financial

commitments that are necessary to

implement a clinical integration program.277

Finally, they argue that joint negotiations are

necessary to prevent physician members

from free-riding on the contributions of their

colleagues.278 

The extent to which joint contracting

is reasonably necessary to achieve efficient

clinical integration will vary, depending on

the facts and circumstances.279 The

Agencies will consider multiple factors to

determine whether collective negotiation is

reasonably necessary to accomplish the goal

of achieving clinical integration. 

Participants in a joint venture that is not

sufficiently integrated (whether financially

or clinically) face significant antitrust risk if

they attempt to contract jointly. 

c. Further Guidance on Clinical

Integration

Commentators and panelists asserted

that there is uncertainty regarding the nature

and extent of clinical integration that would,

in the Agencies’ view, avoid summary

condemnation of collective price setting or

other horizontal agreements on competitive

terms among physicians who participate in

273 CAPG (public cmt), supra note 258, at 8.

274

 Id. at 9.

275

 Id. at 10. See also Liebenluft & Weir,

supra note 258 (manuscript at 39) (explaining that a

physician network that has implemented a clinical

integration program “can sell a ‘new product’ – that

is, an integrated package consisting of more than

merely the individual physician services, but, rather,

an integrated package of those services tied to the

network’s clinical program.”).

276 Liebenluft & Weir, supra note 258

(manuscript at 39).

277

 Id. (manuscript at 39).

278

 Id. (manuscript at 39).

279

 See, e.g., Leary, supra note 256, at 16-17

(discussing the relationship between joint contracting

and non-exclusivity).
40

clinically integrated joint ventures.280

Several panelists and commentators

requested that the Agencies provide

additional guidance to address such

uncertainty.281 

The Agencies are committed to

eliminating unlawful restraints on vigorous

price and non-price competition in physician

markets, but not to any particular model for

financing and delivering health care. The

Agencies do not suggest particular structures

with which to achieve clinical integration

that justifies joint pricing, because it would

risk channeling market behavior rather than

encouraging market participants to develop

structures responsive to their particular

efficiency goals and the market conditions

they favor. 

Nonetheless, to help further guide

practitioners and counsel on the issue, below

is a broad outline of some of the kinds of

questions that the Agencies are likely to ask

when analyzing the competitive implications

of a physician network joint venture that

justifies joint action involving price or other

competitively significant terms on the

grounds that it is clinically integrated. The

Agencies emphasize that this list is not

exhaustive, and that these questions may be

more or less relevant, depending on factual

circumstances. Other questions, not listed

here, may be important, again depending on

the facts at issue.

1. What do the physicians plan to do

together from a clinical standpoint?

• What specific activities will (and

should) be undertaken?

• How does this differ from what each

physician already does individually?

• What ends are these collective

activities designed to achieve?

2. How do the physicians expect actually to

accomplish these goals?

• What infrastructure and investment

is needed?

• What specific mechanisms will be

put in place to make the program

work?

• What specific measures will there be

to determine whether the program is

in fact working?

3. What basis is there to think that the

individual physicians will actually

attempt to accomplish these goals?

• How are individual incentives being

changed and re-aligned?

• What specific mechanisms will be

used to change and re-align the

individual incentives?

280

 See, e.g., Liebenluft & Weir, supra note

258 (manuscript at 15).

281

 See Holloway 9/25 at 27 (stating that it

“is desirable for the FTC to issue definitive and clear

guidelines as to what level of clinical integration and

oversight is required”); Asner 9/25 at 85 (remarking

that “[w]e're looking for somewhat of a road map. It

can be very broad, but not as broad as exists in the

current guidelines. It doesn't have to be specific, a list

of things that you have to do. There is something in

between.”); Section of Antitrust Law, American Bar

Ass’n, Comments on the Public Hearings on Health

Care and Competition Law and Policy 15-17 (Public

Comment); American College of Surgeons,

Comments Regarding the Federal Trade Commission

(FTC) Workshop on Health Care Competition Law

and Policy (Sept. 30, 2003) 3-4 (Public Comment)

(Submitted by Thomas R. Russell). See generally

ABA (public cmt), supra note 21, at 25-26.
41

4. What results can reasonably be expected 

from undertaking these goals?

• Is there any evidence to support these

expectations, in terms of empirical

support from the literature or actual

experience?

• To what extent is the potential for

success related to the group's size

and range of specialities?

5. How does joint contracting with payors

contribute to accomplishing the

program's clinical goals?

• Is joint pricing reasonably necessary 

to accomplish the goals?

• In what ways?

6. To accomplish the group's goals, is it

necessary (or desirable) for physicians to

affiliate exclusively with one IPA or can

they effectively participate in multiple

entities and continue to contract outside

the group?

• Why or why not?

C. Physician Information Sharing

The sharing of information among

physicians can have procompetitive benefits,

but may also facilitate collusion or otherwise

reduce competition on prices or

compensation. Health Care Statement 6 sets

forth a safety zone for provider exchange of

price and cost information that the Agencies

will not challenge, absent extraordinary

circumstances.282 The statement also

outlines the Agencies’ antitrust analysis of

information exchanges that fall outside this

safety zone.283 

The Agencies have issued a number

of business review letters and advisory

opinions that apply the analytical framework

in Statement 6 to evaluate the antitrust

implications of physicians’ collecting and

disseminating information concerning

insurer payments for physician services.284

In general, the sharing of qualityrelated information among physicians and

consumers can reduce costs and increase

quality of care. As Areeda and Hovenkamp

note, “the great majority of exchanges of

information that do not pertain to either

price or output should be regarded as

harmless, at least when concerted refusals to

deal are not in issue.”285 The Agencies

encourage such information sharing, as long

as there are adequate safeguards to ensure

information exchange is not used for

anticompetitive ends. 

282 HEALTH CARE STATEMENTS, supra note

44, § 6.

283

 Id. § 6.

284

 See Letter from Charles A. James,

Department of Justice, to Jerry B. Edmonds,

Williams, Kastner & Gibbs PLLC (Sept. 23, 2002), at

http://www.usdoj.gov/atr/public/busreview/200260.p

df; Letter from Jeffrey W. Brennan, Federal Trade

Commission, to Gerald Niederman, Faegre & Benson

(Nov. 3, 2003), at http://www.ftc.gov/bc/adops/

mgma031104.pdf; Letter from Jeffrey W. Brennan,

Federal Trade Commission, to Gregory G. Binford,

Benesch Friedlander Coplan & Aronoff LLP (Feb. 6,

2003), at http://www.ftc.gov/bc/adops/030206dayton.

htm; American Medical Ass’n, Physician Information

Sharing 1 (Public Comment).

285

 See XIII PHILLIP E. AREEDA & HERBERT

HOVENCAM P, ANTITRUST LAW: AN ANALYSIS OF

ANTITRUST PRINCIPLES AND THEIR APPLICATION ¶

2111d1, at 49 (2nd ed. 2004).
42

D. Physician-Related Conduct

Implicating the State Action

Doctrine

As Chapter 8 describes in greater

detail, anticompetitive physician conduct

can be shielded from federal antitrust

scrutiny if it constitutes state action. 

Through enforcement actions and

competition advocacy, the Commission has

recently addressed this issue.286

286

 See supra Chapter 1.
CHAPTER 3: INDUSTRY SNAPSHOT: HOSPITALS

I. OVERVIEW ........................................................... 1

II. INTRODUCTION ....................................................... 1

III. DESCRIPTION OF HOSPITALS ........................................... 3

IV. HOW ARE HOSPITALS PAID: A HISTORICAL PERSPECTIVE ................ 4

A. Public Payors ..................................................... 5

B. Private Payors .................................................... 8

V. RISING HOSPITAL PRICES .............................................. 8

VI. PRESSURES ON HOSPITALS ............................................ 9

VII. REORGANIZATION OF THE HOSPITAL SYSTEM ......................... 10

VIII. ENTRY OF SPECIALTY HOSPITALS AND AMBULATORY 

SURGERY CENTERS .................................................. 17

IX. THE IMPACT OF GOVERNMENT PURCHASING .......................... 27

X. HOSPITAL/PAYOR CONTRACTING IN THE PRIVATE MARKET ............. 31

XI. CONSUMER PRICE SENSITIVITY AND INFORMATION .................... 35

XII. HOSPITAL PRICING: DISTINGUISHING AMONG BULK PURCHASING,

PRICE DISCRIMINATION, COST SHIFTING, AND CROSS SUBSIDIES ........ 36

XIII. CROSS SUBSIDIES AND COMPETITION ................................. 39
CHAPTER 3: INDUSTRY SNAPSHOT: HOSPITALS

I. OVERVIEW 

This chapter describes how hospitals

are paid, trends in hospital pricing, the

pressures hospitals face, and delivery

innovations, including hospital networks. 

Chapter 3 considers a number of current

controversies, including payor complaints

that hospitals are exercising market power

and hospital complaints about singlespecialty hospitals. Chapter 3 also examines

how government purchasing of hospital

services affects the health care marketplace. 

The next chapter considers hospital

competition law issues, beginning with

mergers. Chapter 4 describes and evaluates

geographic and product market definitions,

entry and efficiency issues, and the

significance of a hospital’s non-profit status. 

Chapter 4 also describes group purchasing

organizations, their potential efficiencies,

structure and incentives, contracting

practices, and Health Care Statement 7. 

Representatives from hospitals and

hospital organizations, as well as legal,

economic, and academic experts, and

government officials spoke at the Hearings. 

Hospital topic panels included Perspectives

on Competition Policy and the Health Care

Marketplace (February 27); A Tale of Two

Cities (February 28, April 11); Hospital

Round Table (March 26); Defining Product

Markets for Hospitals (March 26); Defining

Geographic Markets for Hospitals (March

26); Single Specialty Hospitals (March 27);

Contracting Practices (March 27); Issues in

Litigating Hospital Mergers (March 28);

Hospitals - Horizontal Networks and

Vertical Arrangements (April 9, 2003);

Hospitals - Non-profit Status (April 10);

Hospital Joint Ventures and Joint Operating

Agreements (April 10); Hospitals -

Post-Merger Conduct (April 11); Physician

Hospital Organizations (May 8, 2003);

Quality and Consumer Information: 

Hospitals (May 29); and Group Purchasing

Organizations (September 26).1 Many

industry representatives and experts also

testified at the Commission’s 2002 Health

Care Workshop.2

II. INTRODUCTION

In cities and towns throughout the

United States, hospitals are a key part of the

health care delivery system. Hospitals are

there when Americans give birth or die, are

injured, or live with a chronic illness. 

Hospitals respond to the health care

challenges in their communities, whether the

problem is SARS or syphilis, anthrax or

chicken pox, obesity or influenza. Hospitals

provide care to the rich and poor, the well

insured and the uninsured. 

 

Currently, payments to hospitals for

inpatient care account for approximately 31

percent of total health care expenditures in

the United States.3 The percentage of total

1

 For lists of participants in these and other

panels see infra Appendix A and in the Agenda, at

http://www.ftc.gov/ogc/healthcarehearings/completea

genda.pdf.

2

 A list of participants in the September

2002 FTC Health Care Workshop is available at

http://www.ftc.gov/ogc/healthcare/agenda.htm.

3

 Katharine Levit et al., Health Spending

Rebound Continues in 2002, 23 HEALTH AFFAIRS

147, 155 (Jan./Feb. 2004). 
2

expenditures devoted to

inpatient care has declined

over the past two decades,

along with declines in

hospital length-of-stay and

the per capita rate of

hospitalization.4 

During the period

1993-98, spending on

hospital inpatient care

increased by 3.4 percent per

year. The past four years

have seen annual increases

that are double or triple that

amount.5 

Figure 1 illustrates

how hospital expenditures and expenditure

growth have accelerated in recent years,

after modest or negative growth during the

prior five years.6 Expenditures for inpatient

care for the next two years are projected to

grow by approximately 6.2 percent per year.7

Federal and state governments are

responsible for almost 60 percent of

payments to hospitals for inpatient care.8

For some services, the Centers for Medicare

& Medicaid Services (CMS) is the sole

payor.9 CMS’s substantial share of hospital

spending influences the rest of the financing

4

 CENTERS FOR MEDICARE & MED ICA ID

SERVICES (CMS), THE CMS CHART SERIES,

PROGR AM INFORMATION ON MEDICARE, MED ICA ID,

SCHIP, AND OTHER PROGRAM S OF THE CENTERS FOR

MEDICARE & MEDICAID SERVICES §1, at 16, 18

(2002), available at http://www.cms.hhs.gov

/charts/series/.

5

 Levit, supra note 3, at 154-55.

6

 Centers for Medicare & Medicaid

Services, Health Accounts: National Health

Expenditures 1965-2013, History and Projections by

Type of Service and Source of Funds: Calendar

Years 1965-2013, at http://www.cms.hhs.gov

/statistics/nhe/default.asp#download (last modified

Mar. 24, 2004).

7

 Stephen Heffler et al., Health Spending

Projections Through 2013, 2004 HEALTH AFFAIRS

(Web Exclusive) W4-79, 89, at http://content.

healthaffairs.org/cgi/reprint/hlthaff.w4.79v1.pdf. 

8

 See Levit, supra note 3, at 154. Because

private insurance tends to cover a younger and

typically healthier population, it accounts for a

smaller share of overall health care spending. See

also Scully 2/26 at 27 (estimate by former

Administrator of CMS that it is responsible for 40-

50% of the average hospital’s gross revenue). 

9

 CMS was previously known as the Health

Care Financing Administration (HCFA). CMS is

responsible for administering the Medicare program

and oversight of the administration of the Medicaid

program by individual states. Day-to-day claims

processing for the Medicare program is handled by

approximately fifty carriers and intermediaries. CMS

is the sole payor for End Stage Renal Disease care

and is a significant payor for cataract surgeries.
3

and delivery markets for hospital services. 

Although CMS uses an administered

pricing system for Medicare, hospitals

engage in non-price competition to attract

Medicare and Medicaid beneficiaries, and

engage in price and non-price competition

for private payors and patients. As detailed

below, competition in the market for

hospital inpatient services has enhanced

quality and lowered prices. Private and

public payors are encouraging these

improvements by giving providers financial

and nonfinancial incentives to increase

quality and disseminate quality-related

information to patients.10

III. DESCRIPTION OF HOSPITALS

Hospitals fall into one of three

categories: (1) publicly owned hospitals, (2)

nonprofit hospitals, and (3) for-profit

hospitals. Although these classifications

might appear distinct and immutable, they

are not. Many nonprofit hospitals own forprofit institutions or have for-profit

subsidiaries. For-profit systems manage

nonprofit and publicly owned hospitals. 

Hospitals also may change their institutional

status. One study demonstrated that over a

thirteen year period, approximately one

percent of hospitals changed their

institutional status every year.11 

Nonprofit hospitals currently make

up about 61 percent of community hospitals

and have roughly 71 percent of inpatient

beds.12 For-profit hospitals comprise

approximately 15 percent of community

hospitals and 13 percent of inpatient beds. 

The remaining 24 percent of community

hospitals are run by federal, state, and local

governments, and account for 16 percent of

inpatient beds. Figure 2 shows the

distribution of beds among the categories of

hospitals and shows that these patterns have

not changed significantly over the past thirty

years.13 

Hospitals are also frequently

categorized as primary, secondary, tertiary,

and quaternary, dependent on the level and

complexity of care provided. For example, a

primary care hospital offers basic services

such as an emergency department and

limited intensive care facilities. A

secondary care hospital generally offers

primary care, general internal medicine, and

limited surgical and diagnostic capabilities. 

A tertiary care hospital provides a full range

of basic and sophisticated diagnostic and

treatment services, including many

specialized services. 

10

 See supra Chapter 1.

11 Jack Needleman et al., Hospital

Conversion Trends, 16 HEALTH AFFAIRS 187, 189-90

(Mar./Apr. 1997). Every conceivable conversion

permutation occurred; for-profits converted to

nonprofits and public hospitals; public hospitals

converted to for-profits and nonprofits; and

nonprofits converted to for-profits and public

hospitals. Id. 

12 The American Hospital Association

defines a community hospital as “all nonfederal,

short-term general, and special hospitals whose

facilities and services are available to the public.” In

2002, there were approximately 1,136 state and local

government hospitals, 3,025 nonprofit hospitals, and

766 for-profit hospitals that are classified as

community hospitals. AMERICAN HOSPITAL ASS’N,

HOSPITAL STATISTICS 2 tbl.1 (2004 ed.).

13 AMERICAN HOSPITAL ASS’N, supra note

12, at 2 tbl.1.
4

A quaternary hospital typically

provides sub-specialty services, such as

advanced trauma care and organ

transplantation. These distinctions,

however, are not always clear in practice, as

hospitals are not restricted to only offering

the services associated with one category. 

Hospitals provide either general

inpatient services or specialize in a

particular kind of patient (e.g., pediatric and

women’s hospitals) or condition (e.g.,

cardiac, orthopedic, psychiatric and

rehabilitation hospitals). 

Regardless of how one categorizes

private hospitals, they face similar market

pressures and competitive constraints. 

Hospitals seek to provide cost-effective care

and generate sufficient margins to continue

to provide care to the community. Indeed, it

is a misnomer to use the word “nonprofit;”

as hospital administrators are fond of saying,

“no margin, no mission.”14

IV. HOW ARE HOSPITALS PAID: 

A HISTORICAL PERSPECTIVE

Prior to 1983, Medicare and most

other insurers paid hospitals on a cost-based

reimbursement system.15 Under the costbased reimbursement system, hospitals

informed payors of the cost of the care that

was provided, and those amounts were then

14 LAURIE E. FELLAND ET AL., THE HEALTH

CARE SAFETY NET: MONEY MATTERS BUT SAVVY

LEADERSHIP COUNTS 4 (Ctr. for Studying Health Sys.

Change, Issue Brief No. 66, 2003), available at

http://www.hschange.org/CONTENT/591; Michigan

Health & Hospital Ass’n, No Margin No Mission: 

The Financial Realities of Michigan’s Nonprofit

Hospitals, at http://members.mha.org/margin/ (last

visited July 7, 2004). 

15 PAUL STARR, THE SOCIAL

TRAN SFORM ATION O F AMERICAN MEDICINE 385

(1983).
5

paid. Although there were some constraints

on how much a hospital could claim as its

costs, the result was to reward volume and

discourage efficiency. Payors picked up the

cost of each service, each ordered test, and

each day in the hospital. Additionally,

comprehensive health insurance (both

private and public) imposed minimal out-ofpocket costs on patients. Thus, insured

patients had little incentive to select lower

cost procedures or more efficient providers. 

As a passive payor of bills, the payor had no

control over expenditures. 

This payment system led to

substantial increases in health care spending. 

Payors sought to curb these costs through

various methods. Medicare implemented a

prospective payment system in 1983, and

has experimented with a range of strategies

for creating incentives for hospitals to

constrain their pricing. Private payors have

done the same, in many instances piggybacking off strategies developed by CMS. 

Medicaid programs have also adopted their

own pricing strategies. The rise of managed

care and other delivery-side innovations

have also had a significant impact on

hospital pricing.16

A. Public Payors

The most significant public payor is

CMS, which administers the Medicare and

Medicaid programs. In 1983, Congress

directed CMS largely to abandon cost-based

reimbursement for acute inpatient care

delivered to Medicare beneficiaries, and

adopt the inpatient prospective payment

system (IPPS).17 The IPPS was intended to

moderate the rising federal expenditures,

create a more “competitive, market-like

environment, and ... curb inefficiencies in

hospital operations engendered by

reimbursement of incurred cost.”18 Under

the IPPS, the amount a hospital receives for

treating a patient is based on the diagnosisrelated group (DRG) for the episode of

hospitalization. The DRG assigned to a

particular episode of hospitalization is based

on the diagnosis at discharge that justified

the hospitalization. Each DRG has a

payment weight assigned to it, based on the

average cost of treating patients in that

DRG. The average DRG cost reflects both

the very ill patients that require more

intensive care and the “healthy” ill who do

not cost as much to treat. Hospitals receive

this predetermined amount regardless of the

actual cost of care. 

Certain hospitals receive an adjusted

payment in excess of the standard DRG

amount. Teaching hospitals and hospitals

treating a disproportionate share of low16

 See supra Chapter 1. 

17 Some specialty hospitals are excluded

from the IPPS. Psychiatric hospitals, pediatric

hospitals, and certain designated cancer hospitals

remain under a cost-based system of reimbursement. 

CMS, however, has recently proposed a regulation to

shift psychiatric hospitals to prospective payment

methods as well. Long-term hospitals (average length

of stay is at least 25 days) and rehabilitation hospitals

are paid under a prospective payment system that

differs from the IPPS but operates on the same

principle.

18 Gregory C. Pope, Hospital Nonprice

Competition and Medicare Reimbursement Policy, 8

J. HEALTH ECON. 147 (1989).
6

income patients receive higher payments.19

All DRGs include a wage index, tied to the

geographic location of the hospital. 

Moreover, if the treatment of a particular

patient is exceptionally costly, an “outlier”

adjustment is added.20

Prior to August 1, 2000, CMS paid

hospitals for outpatient care on a cost-based

system. Since that date, hospitals, pursuant

to the Balanced Budget Act of 1997, are

paid for outpatient care under the outpatient

prospective payment system (OPPS). Under

OPPS, hospitals receive a predetermined

amount for all outpatient services or

procedures, based on which one of the

approximately 750 ambulatory payment

classifications (APCs) the episode of care

falls into. The OPPS encompasses all

evaluation and management services and

procedures provided by hospitals on an

outpatient basis. For example, the APC for

a particular outpatient surgical procedure

includes payment for all operating and

recovery room services, anesthesia, and

surgical supplies. Each APC is assigned a

general weight based on the median cost of

providing the service.21 

Effective October 1, 2000, Medicare

adopted a prospective payment system for

home health care services.22 Moreover, as of

2007, Medicare is scheduled to begin

employing a competitive bidding system to

determine which providers will offer durable

medical equipment to Medicare

beneficiaries.23

19

 See Centers for Medicare & Medicaid

Services, Acute Inpatient Prospective Payment

System, at http://www.cms.hhs.gov/providers/hipps

/ippsover.asp (last modified Mar. 10, 2003). These

adjustments were made because Congress concluded

that Medicare should pay more to hospitals that

incurred greater expenses as a result of having a

residency program, or having more patients who were

poor. See generally SEC’Y OF THE U.S. DEP’T OF

HEALTH & HUMAN SERVICES, HOSPITAL PROSPECTIVE

PAYMENT FOR MEDICARE: REPORT TO CONGRESS

48-49 (1982). See also COMM. ON WAYS & MEANS,

BACKGROUND MATERIAL AND DATA ON THE

PROGRAM S WITHIN THE JURISDICTION OF THE

COMMITTEE ON WAYS AND MEANS, H.R. REP. NO.

108-6, § 2, at 2-32, 2-44 (2004 Green Book),

available at http://waysandmeans.house.gov

/Documents.asp?section=813. 

20 CMS adjusted its treatment of outlier

payments in 2003, in response to concerns about

manipulation of the outlier payment adjustment by

some hospitals. See CENTERS FOR MEDICARE &

MEDICAID SERVICES, HEALTH CARE INDUSTRY

MARKET UPDATE: ACUTE CARE HOSPITALS 11

(2003), available at http://www.cms.hhs.gov/report

s/hcimu/hcimu_07142003.pdf.

21

 See II CENTERS FOR MEDICARE &

MEDICAID SERVICES, HEALTH CARE INDUSTRY

MARKET UPDATE: ACUTE CARE HOSPITALS,

APPEN DIX: MEDICARE PAYMEN T SYSTEMS (2002),

available at http://www.cms.hhs.gov/reports

/hcimu/hcimu_04292002_append.pdf.

22 Centers for Medicare & Medicaid

Services, The Home Health Prospective Payment

System (PPS), at http://www.cms.hhs.gov/providers

/hhapps/ (last modified June 3, 2004). 

23 The Medicare Prescription Drug,

Improvement, and Modernization Act of 2003

(MMA) instituted a phased-in competitive bidding

program for durable medical equipment, prosthetics,

and orthotics. CMS is required to establish

competitive bidding in the 10 largest metropolitan

statistical areas (MSAs) in 2007 and expand the

program to the 80 largest MSAs in 2009. Prices

negotiated in those areas may be applied nationwide. 

The legislation includes provisions to ensure quality,

protect small suppliers, and mandate multiple

winners.
7

The IPPS system was designed to

control rising inpatient hospital costs and

shift more care to the outpatient setting. The

OPPS was designed to control rising

outpatient costs. As Figure 3 reflects, both

systems constrained costs more effectively

than the cost-based systems they replaced.24

Because the government establishes prices

in the IPPS and OPPS, neither system

adequately reflects the prices that would

prevail in a competitive market. 

As described in greater detail in

Chapter 5, each state also has a Medicaid

program, which pays for care provided to the

poor and disabled.25 Within broad

guidelines established by Federal law, each

state sets its own payment rate for Medicaid

services and administers its own program. 

Medicaid programs either pay health care

providers directly on a fee-for-service basis,

or use prepayment arrangements such as

health maintenance organizations (HMOs). 

Many states have aggressively adopted

prepayment arrangements for the Medicaid

24 Figure provided by Centers for Medicare

& Medicaid Services, Program Information on

Medicare, Medicaid, SCHIP, and Other Programs, §

1, at 18 (June 2002), at http://www.cms.hhs.gov

/charts/series/sec1.pdf.

25

 See U.S. Census Bureau, Types of Health

Insurance Coverage, at http://www.census.gov/hhes

/hlthins/hlthinstypes.html (last revised Apr. 21, 2004). 
8

population.26 As Chapter 5 details, there are

other public payors.

B. Private Payors

In some instances, private payors

copied the reimbursement strategies of the

Medicare program, or used Medicare DRGs

as a reference price for negotiation.27 Thus,

some payors negotiate either a specified

discount or a specified payment relative to

the amount CMS would pay for a specified

treatment episode. More often, private

payors and hospitals negotiate discounts

from charges (e.g., they pay 85 percent of

billed charges) or a per diem rate. Some

contracts provide for a fixed payment for

inpatient services on a per-case basis. 

Outpatient payment provisions are typically

structured on a percentage-of-billed charges

or fee-schedule basis. 

V. RISING HOSPITAL PRICES

Expenditures on hospital services

have grown over the past two decades, but

the rate of spending growth has varied. As

noted previously, IPPS slowed the rate of

hospital expenditure growth. The rise of

managed care slowed the rate of expenditure

growth further; from 1993 through 1998,

hospital expenditures increased at an

average annual rate of 3.7 percent and in

some areas of the country, the per diem price

of a hospital stay actually decreased.28

In the past five years, rising hospital

prices have driven spending on hospitals

higher, even though hospital utilization is

declining.29 Analysts attribute rising

hospital prices to a variety of factors

including “hospitals’ increasing ability to

negotiate higher prices from private

payers.”30 

26 CENTERS FOR MEDICARE & MED ICA ID

SERVICES, STATE MEDICAID MANUAL, PART 2 –

STATE ORGANIZATION AND GENERAL

ADMINISTRATION §§ 2102(C), 2103(A), at

http://www.cms.hhs.gov/manuals/45_smm/sm_02_2_

2100_to_2106.2.asp; CENTERS FOR MEDICARE &

MEDICAID SERVICES, 2002 MEDICAID MANAGED

CARE ENROLLMENT REPORT (2002). 

27

 See, e.g., Shoptaw 4/11 at 61 (stating that

in the Little Rock market, “[r]eimbursement, . . . is

largely discounted with fee for service with DRGs

and per diems . . . .”).

28

 See supra Figure 3. See also Altman 2/28

at 13; Stuart H. Altman, Testimony of Stuart H.

Altman, Ph.D. 4 (2/28) (1997 marked the fourth

consecutive year for which the rate of spending

growth for inpatient hospital use declined)

[hereinafter Altman (stmt)], at http://www.ftc.gov/ogc

/healthcarehearings/docs/altmanstuarth.pdf; Stuart H.

Altman, Testimony of Stuart H. Altman, Ph.D. 3

Chart 2 (2/28) (slides), at http://www.ftc.gov/ogc

/healthcarehearings/docs/altmanstuart2.pdf.

29

 See Bradley C. Strunk & Paul B.

Ginsburg, Tracking Health Care Costs: Trends Turn

Downward in 2003, 2004 HEALTH AFFAIRS (Web

Exclusive) W354, 356-57 (spending on hospital

inpatient care per privately insured person rose 6.5

percent; spending on hospital outpatient care per

privately insured person rose 11 percent), at

http://content.healthaffairs.org/cgi/reprint/hlthaff.w4.

354v1. 

See also William Brewbaker, Overview of

the Health Care Marketplace: Structural, Legal and

Policy Issues 8 (9/2/02) (slides), at http://www.ftc

.gov/ogc/healthcare/brewbaker.pdf; Centers for

Medicare & Medicaid Services, Office of the

Actuary, The Nation’s Health Dollar: 2002

(reproducing charts entitled “Where It Came From”

and “Where It Went” from the Office of the Actuary,

National Health Statistics Group), at http://www.cms

.gov/statistics/nhe/historical/chart.asp (last modified

Jan. 8, 2004).

30 Levit, supra note 3, at 154-55. See also

Strunk & Ginsburg, supra note 29, at W357 (“This

trend is consistent with qualitative research, which
9

Two recent studies project spending

on inpatient hospital services will continue

to increase in the coming decade. CMS

estimated that expenditures on inpatient care

will grow at an average rate of 6.4 percent

per year until 2005, and then grow at a

slower rate of 5.6 percent through 2013.31

Thus, spending on hospital care is estimated

to total $934 billion in 2013, or a 55 percent

real increase per capita.32 These estimates

are premised on the expectation that rising

health care costs and a slowing economy

will make employers and consumers more

willing to accept restrictions on coverage. 

Similarly, another paper projected

expenditures on hospital services will

increase by 75 percent per capita.33 Thus,

experts predict spending on inpatient care

will increase much faster than inflation in

the coming decade. 

VI. PRESSURES ON HOSPITALS

Panelists listed a number of

pressures facing hospitals. These pressures

included increasing costs from the public’s

demand for the latest technology,34 the aging

of the population,35 shortages of nursing

staff and other hospital personnel (which

have forced hospitals to increase salaries),36

increased regulatory requirements,37 payor

demands for information,38 patient safety

has showed that many hospitals solidified their

negotiating leverage over plans during 2002 and 2003

and continued to use their formidable power to

demand large payment rate increases.”).

31 Heffler, supra at 7, at W4-90.

32

 Id. at W4-80.

33 David Shactman et al., Outlook for

Hospital Spending, 22 HEALTH AFFAIRS 12, 15

(Nov./Dec. 2003). The specific factors these authors

identified were the resurgence of inpatient spending,

rising outpatient care spending, increasing technology

costs, stable inpatient lengths of stay, expectations of

the baby-boom generation, and the increasing number

of obese and overweight individuals. 

34

 See Varney 2/27 at 201 (“[P]atients are

being treated earlier with more aggressive and new,

very expensive technologies ....”); Andrew 3/26 at

15; Morehead 3/26 at 25. One panelist

acknowledged the new and improved technology was

an important factor in rising costs, but suggested that

enhancements in the quality of care would ultimately

result in lower payments to hospitals. R. Ryan 3/26 at

33-34.

35 Sacks 3/26 at 41.

36

 See, e.g., Harrington 4/11 at 41-42, 44

(describing a recent increase of nurses’ salaries by $7

million, as well as capital investments in nursing

schools to increase enrollment); Kahn 2/27 at 71

(stating the primary driver, i.e., “the big banana,” of

hospital expenditures is compensation and benefits);

Varney 2/27 at 201 (“[C]ontributing to falling

margins is the skyrocketing growth of labor costs.”);

Strunk 3/27 at 160 (same); Argue 4/11 at 249-50

(same).

One New York hospital testified that

approximately 15 percent of nursing positions at its

facility are vacant and that radiology technicians are

also in short supply. The shortages create a cycle of

employees switching back and forth between

competing institutions, with each move increasing the

salary that is paid. See Andrew 3/26 at 10; Morehead

3/26 at 25 (an Ohio hospital system reporting a 30

percent raise for nurses over a three-year period); R.

Ryan 3/26 at 29-30 (a Washington, DC hospital

system noting a 20 to 30 percent vacancy rate of its

permanent staff positions); Bates 4/11 at 87.

37 Andrew 3/26 at 17.

38 Charles N. Kahn, III, Statement of the

Federation of American Hospitals 4-5 (5/29), at

http://www.ftc.gov/ogc/healthcarehearings/docs/0305

29charleskahn.pdf.
10

initiatives,39 meeting homeland security

requirements,40 the rising cost of liability

premiums41 and prescription drugs,42 and the

obligation of providing care to the

uninsured.43 Hospital representatives also

emphasized the impact of managed care and

the cuts imposed by the Balanced Budget

Act of 1997 on reimbursement.44 Panelists

asserted that these pressures explained and

justified recent hospital price increases.

45

VII. REORGANIZATION OF THE

HOSPITAL SYSTEM

Over the past 20 years, hospitals

have been consolidating into multi-hospital

systems.46 In 2001, almost 54 percent of

39 Sacks 3/26 at 44.

40 Harrington 4/11 at 43.

41 Varney 2/27 at 202.

42 Bates 4/11 at 86-87; Strunk 3/27 at 160;

Argue 4/11 at 250.

43

 See Varney 2/27 at 202 (noting

uncompensated care amounted to $21.5 billion in

2001); Kahn 2/27 at 72; Waxman 2/28 at 68;

Mansfield 4/25 at 84 (describing how one hospital

system had provided a total of $29 million of

expenses for unreimbursed services for 112,000

persons).

In 2000, uninsured patients accounted for an

average of 4.8 percent of all inpatient discharges, and

10.2 percent of emergency department discharges. 

Catherine G. McLaughlin & Karoline Mortensen,

Who Walks Through the Door? The Effect of the

Uninsured on Hospital Use, 22 HEALTH AFFAIRS 143,

150 (Nov./Dec. 2003). These averages do not reflect

an equally shared burden; the percentage of the

uninsured varies significantly from state to state, and

at individual hospitals within those states. For

example, in Little Rock, Arkansas, 13 percent of the

people are uninsured; in Boston, Massachusetts, 6.1

percent of the people are without insurance. See K.

Ryan 4/11 at 15-18; Allen 4/25 at 101; JOHN F.

HOADLEY ET AL., CTR. FOR STUDYING HEALTH SYS.

CHANGE, COMMUNITY REPORT NO. 12, HEALTH

CARE MARKET STABILIZES, BUT RISING COSTS AND

STATE BUDGET WOES LOOM IN BOSTON (2003), at

http://www.hschange.org/CONTENT/611/. In at

least one Southwestern state, the percentage of the

uninsured is approximately 25 percent. See ROBERT

J. MILLS & SHAILESH BHANDARI, U.S. DEP’T OF

COMM ERCE, HEALTH INSURANCE COVERAGE IN THE

UNITED STATES: 2002 (2003), at

http://www.census.gov/prod/2003pubs/p60-223.pdf. 

Over the next five to ten years, uninsured inpatient

stays are projected to increase by less than 1 percent,

emergency department use by the uninsured is

projected to increase 3.1 percent, and uninsured

outpatient visits are expected to increase by

approximately 2.3 percent. McLaughlin &

Mortensen, supra, at 151-52. 

44 Kahn 2/27 at 70 (asserting that in the mid

1990s, “hospitals arguably underpriced their products

to meet the demands of managed care contracts, . . .

and significant Medicare reductions”); Altman 2/28 at

18-19; Altman (stmt), supra note 28, at 6 (between

1997 and 2000 hospital operating margins in the U.S.

declined every year and by 2000 the operating margin

was 2 percent; in Massachusetts the operating margin

in 2000 averaged negative 1.4 percent); Fine 9/9/02

at 224 (“Hospitals have deferred and deferred acting

on plant, but now we have a situation with the baby

boomers coming through where demand for services

far outstrips our ability to meet that demand.”). 

45 Sacks 3/26 at 43 (e.g., in 2001 Advocate

Health Care’s operating margin was 2.59 percent; in

2002 it dropped to 1.8 percent “despite significant

cost reductions and efficiencies, $20 million savings

from our system-wide supply chain initiative,

centralized information systems, administrative

services that have taken real dollars in the tens of

millions out of our expense structure”); Shelton 3/26

at 48 (even hospitals with a positive cash flow do not

have enough cash to upgrade equipment, expand

services, or meet the growing utilization needs of an

aging population).

46 DEBORAH HAAS-WILSON, MANAGED

CARE AND MONOPOLY POWER: THE ANTITRUST

CHALLENGE 28 (2003). See also Deborah

Haas-Wilson & Martin Gaynor, Increasing
11

hospitals operated as part of a system, with

an additional 12.7 percent working in looser

health networks. In 1979, only about 31

percent of hospitals were part of a system.47

Consolidation presents an opportunity for

hospitals to compete more efficiently. 

Consolidated hospitals can employ

mechanisms to improve the quality of care

and limit duplication of services or

administrative expenses. Consolidated

hospitals may also be able to improve

quality if they centralize performance of

complex procedures for which greater

volume leads to higher quality. 

Consolidated hospitals could also use their

combined resources to track established

clinical quality measures and develop new

ones. 

Initially, national systems acquired

hospitals throughout the United States, but

recent acquisitions have been more

localized.48 For example, according to one

panelist, St. Louis has 31 hospitals. Four of

those hospitals are independent; the

remaining hospitals have joined one of four

local systems.49 Similarly, one academic

described the consolidation in San

Francisco: by 1999 “almost all hospitals ...

became part of one of four not-for-profit

hospital systems.”50 Another panelist

Consolidation in Healthcare Markets: What Are the

Antitrust Policy Implications?, 33 HEALTH SERVICES

RES. 1403 (1998) (“Healthcare providers and insurers

have been aligning in a plethora of coalitions as

mergers, networks, joint ventures, and contracts have

developed and dissolved with great rapidity. The

implications of this reorganization for healthcare

competition, and thus for costs, quality, and

innovation, are profound. The key questions are to

what extent these changes enhance efficiency and

quality, and to what extent they facilitate collusion

and market power.”); MARTIN GAYNOR & DEBORAH

HAAS-WILSON, CHANGE, CONSOLIDATION AND

COMPETITION IN HEALTH CARE MARKETS 19 (Nat’l

Bureau of Econ. Research, Working Paper No. 6701,

1998) (“The most extensive research evidence on

competitive conduct by firms in health care markets is

on hospitals; Dranove and White (1994) offer an

extensive survey. These studies use differing product

and geographic market definitions and research

methods, yet the consistency of the results is striking. 

Increased concentration is associated with increased

prices in markets for hospital services.”), available at

http://papers.nber.org/papers/w6701.pdf; David L.

Redfern, Competition in Healthcare Workshop (Oct.

8, 2003) (Public Comment). 

47 Bazzoli 5/29 at 12; Gloria J. Bazzoli, The

US Hospital Industry: Two Decades of

Organizational Change? 7 (5/29) (slides) (same)

[hereinafter Bazzoli Presentation], at

http://www.ftc.gov/ogc/healthcarehearings/docs/0305

29bazzoli.pdf. Not all mergers or consolidation into

systems have gone smoothly. See Waxman 2/28 at 64

(noting that the CareGroup system “merger has not

been stellar. Cultures clashed; strong central

leadership was not established; and over a period of

several years large amounts of money were lost.”).

48 David Dranove & Richard Lindrooth,

Hospital Consolidation and Costs: Another Look at

the Evidence, 22 J. HEALTH ECON. 983, 984 (2003);

Alison Evans Cuellar & Paul J. Gertler, Trends in

Hospital Consolidation: The Formation of Local

Systems, 22 HEALTH AFFAIRS 77, 80 (Nov./Dec.

2003).

49 Probst 5/29 at 84; Louise Probst, Hearing

on Hospital Market Competition 3 (5/29) (slides), at

http://www.ftc.gov/ogc/healthcarehearings/docs/0305

29probst.pdf; Scicchitano 3/27 at 182-83 (describing

the Long Island hospital environment as having “25

hospitals in Nassau and Suffolk [counties], with 21 of

them grouped into three health systems”).

50 HAAS-WILSON, supra note 46, at 28. See

also Joanne Spetz et al., The Growth of Multihospital

Firms in California, 19 HEALTH AFFAIRS 224, 225

(Nov./Dec. 2000) (Study of the California hospital

industry revealed at least half of all hospitals are

affiliated with multisite systems; by 1996, 83 percent

of Sacramento’s hospitals beds were held by three

hospital systems and in San Francisco three hospital

systems control 43 percent of the region’s hospital
12

described the Boston metropolitan area

consolidation as being one where “through

mergers and acquisitions ... the PCHI

[Partners Community HealthCare Inc.]

network now numbers 15 hospitals and more

than 5,000 physicians.”51 One study noted

dramatic consolidation in numerous

communities, including Cleveland, “where

two local hospital systems now control

nearly 70 percent of the area’s inpatient

capacity,” and Indianapolis and Phoenix,

where “hospitals have carved out

strongholds in key urban and suburban

areas, at times creating virtual monopolies in

geographic submarkets.”52

Hospitals may consolidate within a

single market or across markets, and

consolidation can occur over a broad

spectrum of possibilities.53 At one end of

the spectrum, consolidating hospitals have a

shared license and common ownership,

report unified financial records, and

eliminate duplicative facilities.54 At the

other end of the spectrum, a common

governing body owns the consolidating

hospitals, but the hospitals maintain separate

hospital facilities, retain their individual

business licenses, and keep separate

financial records. 

Hospital systems have varying

degrees of centralized control. One panelist

noted that some systems have a parent

organization that sets policy and makes key

decisions. At the other extreme, the same

panelist noted that some systems offer little

more than centralized administrative

oversight and capital financing.55 Another

panelist noted that “the various hospital

mergers that were particularly frequent in

the mid-1990s tended not to follow through

when it came to clinical integration ....”56

beds.).

51

 See Berman 2/28 at 80. 

52 CARA S. LESSER & PAUL B. GINSBURG,

BACK TO THE FUTURE? NEW COST AND ACCESS

CHALLENGES EMERGE (Ctr. for Studying Health Sys.

Change, Issue Brief No. 35, 2001), available at

http://www.hschange.org/CONTENT/295/. Not all

systems have succeeded. Some deals have come

apart because of discrepancies over control and

differences in mission and some deals have met

problems because the systems’ financial performance

was strained by assuming the debt load and excess

capacity of financially weak hospitals. See CARA S.

LESSER ET AL., CENTER FOR STUDYING HEALTH

SYSTEM CHANGE, COMMUNITY REPORT NO. 12,

CONSOLIDATION CONTINUES, FINAN CIAL PRESSURES

MOUNT: NORTHERN NEW JERSEY (1999), at

http://www.hschange.org/CONTENT/108/.

53 “Within market” consolidation is the

merger of two hospitals within the same product and

geographic market. “Across market” consolidation is

the joining of hospitals producing similar services in

different geographic and/or product markets.

54

 See Cuellar & Gertler, supra note 48, at

77; Dranove & Lindrooth, supra note 48, at 984;

Patricia Cameron, Personal Views of Patricia

Cameron 1 (Public Comment) (stating that “[w]hen

two hospitals in one market area . . . merge, and

consolidate services that were otherwise duplicative

(including management, overhead and advertising), it

appears that patients and physicians have

benefitted”); K. Smith 4/11 at 174-75 (stating that

one hospital system, as a result of its consolidation

efforts, had “eliminated almost all duplicative

overhead and patient care services that our system

had” and created “a single medical record for all three

hospitals” that is also “shared electronically amongst

all physicians”).

55

 See Bazzoli 5/29 at 18-19; Bazzoli

Presentation, supra note 47, at 16.

56 Ginsburg 2/26 at 61-62. See also C.

Baker 2/28 at 42 (alleging that in Massachusetts “the

hospitals that made up [one] care delivery system

continued to operate on a stand-alone basis with little
13

Panelists identified several reasons

for hospital consolidation, including the

reduction of excess capacity, the rise of

managed care, increased ability to assume

capitated financial risk, expansion of the

hospital’s delivery network, and service

consolidation and coordination.57 Analysts

have also suggested other factors that might

be driving consolidation, including the

desire to obtain economies of scale in

purchasing or production, access to capital

markets, and “specialization in labor or

management techniques.”58 

Some panelists assert hospital

consolidation has promoted efficiency, led to

savings, and instilled life back into failing

hospitals.59 Other panelists believe the

primary result of consolidation has been the

creation of hospital market power against

payors.60 One study examining

consolidation through mergers found that

hospitals that merged tended to be in lessconcentrated markets and in areas with

higher HMO penetration.61 Merging

hospitals were also more likely to have been

a member of a system, were larger, had

higher occupancy rates and case-mix

indexes, and higher pre-merger expenses and

clinical or systems integration”);Vincent Scicchitano,

Contracting Practices 6-8 (3/27), at

http://www.ftc.gov/ogc/healthcarehearings/docs/0303

27vincentscicchitano.pdf.

57 Ginsburg 2/26 at 62-63 (as hospitals

“were pressed to cut their costs, they had motivation

to take excess capacity out of the system”); Varney

2/27 at 215 (noting that in some areas with multiple

hospitals, each was operating “at 20, 30, 40 and in the

best cases, 60 percent capacity”); Eugene Anthony

Fay, Statement of the Federation of American

Hospitals – Hospital’s Non-Profit Status 4 (4/10)

(“Consolidation of operations brings efficiencies and

cost savings to the systems.”), at

http://www.ftc.gov/ogc/healthcarehearings/docs/0304

10fay.pdf; Fay 4/10 at 27 (same). The cost of excess

capacity can be daunting. One study found that an

empty bed cost $48,826 in 1995 dollars. Martin

Gaynor & Gerard F. Anderson, Uncertain Demand,

the Structure of Hospital Costs and the Cost of Empty

Hospital Beds, 14 J. HEALTH ECON. 291 (1995). See

also Morehead 3/26 at 20-22 (one panelist noting one

of the ways that its hospital system has addressed the

shift from inpatient to outpatient focus is to create a

regional network that includes large and small

hospitals, as well as ambulatory care centers); Lawton

R. Burns & Mark V. Pauly, Integrated Delivery

Networks: A Detour on the Road to Integrated

Health Care?, 21 HEALTH AFFAIRS 128, 129

(July/Aug. 2002).

58 Timothy S. Snail & James C. Robinson,

Organizational Diversification in the American

Hospital, 19 ANN. REV. PUB. HEALTH 417, 419

(1998). Empirical studies have shown, however, that

economies of scale in the production of hospital

inpatient services primarily occur in the 200 to 400

bed range. Id. at 435. See also Spetz et al., supra

note 50, at 226.

59

 See, e.g., Welch 2/28 at 112-113; F.

Miller 2/28 at 92; Mongan 2/28 at 32-33. But see

Greaney 2/27 at 237 (noting “there are a number of

studies that question whether efficiencies – promised

efficiencies – were realized”).

60

 See, e.g., Berman 2/28 at 80-81, 83;

Desmarais 2/27 at 168; Washington Business Group

on Health, Comments Regarding Competition Law

and Policy & Health Care (Sept. 30, 2002) (Public

Comment).

61 Robert A. Connor et al., Which Types of

Hospital Mergers Save Consumers Money?, 16

HEALTH AFFAIRS 62, 65 (Nov./Dec. 1997) (The data

set includes 122 within-market-area horizontal

hospital sets; merger is defined as two or more similar

corporations coming together into a single surviving

entity).
14

revenues.62 

One recent review examined the

operational consequences of hospital

consolidation.63 It found that when hospitals

that consolidated were geographically

distant, they generally had similar staffing

ratios, similar occupancy rates, and

substantial service duplication. For these

distant hospitals, typically both were

financially viable. Duplicative acute care

services were generally not eliminated,

unless one of the hospitals was more

specialized, was economically weaker or had

different staffing levels, or there existed a

substantial degree of competition between

the merging hospitals.64 One recent study

indicated that when systems acquired

hospitals, efficiencies did not materialize,

because of the failure to combine

operations.65

Most studies of the relationship

between competition and hospital prices

generally find increased hospital

concentration is associated with increased

prices.66 One study found that merged

hospitals experience larger price and cost

increases than those that have not merged,

except in less concentrated areas where these

patterns were reversed.67 Another study

using similar data and methods found that

merger cost and price savings were lower

than the first study when merging hospitals

were compared against rival institutions.68

62 Connor et al., supra note 61, at 71.

63 Snail & Robinson, supra note 58, at 434-

35.

64

 Id. See also DAVID DRANOVE, THE

ECONOMIC EVOLUTION OF AMERICAN HEALTH CARE

122 (2000) (“I have asked many providers why they

wanted to merge. Although publicly they all invoked

the synergies mantra, virtually everyone stated

privately that the main reason for merging was to

avoid competition and/or obtain market power.”).

65 Dranove & Lindrooth, supra note 48, at

996.

66 David Dranove et al., Price and

Concentration in Hospital Markets: The Switch from

Patient-Driven to Payer-Driven Competition, 36 J.L.

& ECON. 179, 201 (1993) (finding that market

concentration in California led to rate increases);

Glenn A. Melnick et al., The Effect of Market

Structure and Bargaining Position on Hospital

Prices, 11 J. HEALTH ECON. 217 (1992) (finding

market concentration appears to increase hospitals’

bargaining power with insurers and self-insurers);

Ranjan Krishnan, Market Restructuring and Pricing

in the Hospital Industry, 20 J. HEALTH ECON. 213,

215 (2001) (mergers that increase hospital market

share in specific hospital services, as measured 33

DRGs, show a corresponding increase in prices of

those services). But see Charles N. Kahn, III,

Statement of the Federation of American Hospitals 2

(2/27) (questioning the validity of various studies of

cost increases as related to consolidation), at

http://www.ftc.gov/ogc/healthcarehearings/docs/0302

27kahniii.pdf.

67 Connor et al., supra note 61, at 68. 

68 Heather Radach Spang et al., Hospital

Mergers And Savings for Consumers: Exploring

New Evidence, 20 HEALTH AFFAIRS 150, 156

(July/Aug. 2001). The changes included removing

rural hospitals from the sample, excluding hospitals

that are part of hospital systems from the

“nonmerging” group, and separating nonmerging

hospitals into nonmerging rival hospitals and

nonmerging nonrival hospitals. But see GuerinCalvert 4/10 at 209 (“And I think again in general,

what the studies show is that some mergers do result

in price increases that can’t be explained by cost

increases but that overall the patterns that we see is

actually pricing increasing at a slower rate than cost

increases.”).
15

One set of commentators has observed that

most empirical studies on concentration and

consolidation do not differentiate among

transactions that occur within markets and

those that occur across markets, even though

these transactions “might reflect very

different hospital strategies and

consequently, could have different effects on

efficiency.”69 

According to several panelists,

hospital systems try to make sure they have

at least one “must have” hospital in each

geographic market in which they compete.70

A “must have” hospital or hospital system is

one that health care plans believe they must

offer to their beneficiaries to attract

employers to their plan. According to some

panelists, this status allows the hospital or

hospital system to demand price increases.71

Consolidation has resulted in

complaints by payors about the exercise of

market power by hospitals.72 Some panelists

and commentators believe an important

motivation for the creation of multi-hospital

69

 See Cuellar & Gertler, supra note 48, at

77; Snail & Robinson, supra note 58, at 440.

70

 See, e.g., Berman 2/28 at 80-81 (hospitals

“have planned these mergers and affiliations

strategically to include anchor community hospitals”);

Charles D. Baker, Testimony of Charles Baker 9

(2/28) (Brigham and Massachusetts General “are

probably the two best-known tertiary hospitals in

New England and they contract together .... The fact

that they represent only two of many teaching

hospitals in Massachusetts doesn’t really matter. For

certain kinds of services, they are virtually the only

choice around.”) [hereinafter C. Baker (stmt)], at

http://www.ftc.gov/ogc/healthcarehearings/docs/0302

28baker.pdf; C. Baker 2/28 at 46-48 (same); Probst

5/29 at 85 (“[T]here’s one hospital in one of the

systems that, for different reasons, by many

consumers, is seen is a must-have hospital, which

makes it a little bit tougher, but really, every one of

the systems has a must-have hospital for a given

employer or a given, you know, consumer population,

and all the systems require – it’s all or nothing.”);

Scicchitano 3/27 at 183-84; Strunk 3/27 at 157-58.

71

 See, e.g., Berman 2/28 at 81-82 (Hospital

systems that own “virtually every hospital” in an

MSA aggregate power that makes them “literally ... a

must-have hospital system for area employers and

consumers.” Hospital systems then “use[] this

position to demand price increases ....”); C. Baker

(stmt), supra note 70, at 7 (consumer and employer

preferences make it very difficult for health plans to

discontinue their relationship with any hospital in its

service delivery area); C. Baker 2/28 at 46-47; C.

Baker (stmt), supra note 70, at 8 (Harvard Pilgrim

Health Care members pay more today for services

from hospital systems than if each hospital contracted

individually). See also Zwanziger 3/26 at 95 (“[I]n

every market that we looked at, where there is a

tertiary center, then every plan, without exception,

had at least one tertiary center in their network .... I

suspect that that’s because they really regard having

one tertiary center at least is an important part of their

ability to compete effectively.”); Jack Zwanziger,

Defining Hospital Markets 5 (3/26) (slides) (same),

at http://www.ftc.gov/ogc/healthcarehearings/docs

/zwanziger.pdf; Fred Dodson, Health Insurance

Monopoly Issues – Competitive Effects 7-8 (4/23)

(noting that provider systems impact insurance

product offerings, when systems refuse to participate

in tiering), at http://www.ftc.gov/ogc

/healthcarehearings/docs/030423freddodson.pdf.

72 As one pair of analysts noted, however,

“traditional economic theory says that a monopolist

firm in one market cannot leverage monopoly power

in a separate, competitive market, which makes it

difficult from the standpoint of market power to

understand why some hospital systems” are national.

Cuellar & Gertler, supra note 48, at 84. They further

note that more recent theories focusing on the nature

of bargaining between managed care firms and

providers may leave room to challenge this theory. 

Id. See also David Dranove & William D. White,

Emerging Issues in the Antitrust Definition of

Healthcare Markets, 7 HEALTH ECON. 167 (1998).
16

systems has been to gain market power to

secure higher reimbursement from payors.73

One panelist stated the various hospital

mergers occurring in the mid-1990s “tended

not to follow through when it came to

clinical integration and ultimately providers

have regained the leverage with health plans

that they had lost.”74 Another study

examined the relationship between market

power and pricing in nonprofit, multihospital systems. The investigation led to

two primary findings: (1) nonprofit

hospitals that were members of national or

regional systems appear to have priced their

services “more aggressively in the presence

of market power” than the hospitals did

when operating independently or as

members of local systems; and (2) nonprofit

systems showed a tendency to exercise

market power in the form of higher prices.75 

The rise of hospital systems has

affected market concentration in certain

markets. One study found that if hospital

system members within metropolitan

statistical areas (MSA) are treated as one

entity, nineteen MSAs became concentrated

between 1995 and 2000.76 Seven of the 19

MSAs showed an increase in HHI of at least

1,700. 

As discussed in Chapter 4, the

Agencies will continue to evaluate hospital

consolidation to determine whether

consolidation (or potential consolidation) in

any given market is anticompetitive.77

73 Spetz et al., supra note 50, at 226. See

also Kanwit 2/27 at 98 (“[H]ospital consolidation is

causing a rise in health care costs and affecting ... the

health plans’ ability to contract cost effective care

....”); American Ass’n of Health Plans, Additional

Talking Points in Response to AHA’s Study on

Hospital Costs (Public Comment); Kahn 2/27 at 111

(stating that consolidation has not been prevalent

across the country, but also noting that “hospitals

reduced their sizes in response to constraints for

managed care, in response to Medicare cutbacks, and

now that there are less beds and, in a sense, [hospitals

have] more market power in negotiating with

payors”); Binford 9/24 at 131 (noting “the advent of

hospital networks and the acquisition of many

heretofore independent and competing physician

practices, [] has enabled hospitals to really control the

negotiating process of not only their own contracts,

but physician contracts”); Langenfeld 4/11 at 192

(noting his observation that “[p]re-merger, perhaps

the acquired hospital has lower rates to private payors

than the acquiring hospital has. After the merger, the

acquiring hospital raises the rates up to its higher

level, which on average is a price increase. And I

have also observed that these rate increases can be as

much as 50 percent, or sometimes even more.”);

Greaney 2/27 at 136-37 (same). But see MARGARET

E. GUERIN-CALVERT ET AL., ECONOMIC ANALYSIS OF

HEALTHCARE COST STUDIES COMMISSIONED BY BLUE

CROSS BLUE SHIELD ASSOCIATION (2003) (finding

hospital merger activity does not explain the increases

in spending for hospital services), at

http://www.hospitalconnect.com/aha/press_room-info

/content/EconomistReport030225.pdf. 

74 Ginsburg 2/26 at 61-62. 

75 Gary J. Young et al., Community Control

and Pricing Patterns of Nonprofit Hospitals: An

Antitrust Analysis, 25 J. HEALTH POL., POL’Y & L.

1051, 1073 (2000). 

76 Cuellar & Gertler, supra note 48, at 82. 

The study used a change in the HerfindahlHirschmann Index (HHI) of 1,700 as the benchmark

for determining whether a market became highly

concentrated.

77 The Commission recently challenged a

consummated merger between Evanston

Northwestern Healthcare Corporation and Highland

Park Hospital. In re Evanston Northwestern

Healthcare Corp., No. 9315 (Feb. 10, 2004)

(complaint), at http://www.ftc.gov/os/caselist

/0110234/040210emhcomplaint.pdf. Moreover, the

Commission’s Bureaus of Economics and

Competition are evaluating the effects of

consummated hospital mergers in several cities. The
17

VIII. ENTRY OF SPECIALTY

HOSPITALS AND

AMBULATORY SURGERY

CENTERS

Specialty hospitals provide care for a

specific specialty (e.g., cardiac, orthopedic,

or psychiatric) or type of patient (e.g.,

children or women).78 Specialty hospitals

tailor their care and facilities to fit the

chosen type of condition, patient, or

procedure on which they focus. Specialty

hospitals are not new to the hospital

industry. Pediatric and psychiatric hospitals

have existed for decades. More recently,

numerous cardiac and orthopedic surgery

hospitals have opened or are under

construction. These single-specialty

hospitals (SSHs) differ from their

predecessors in that many of the physicians

who refer patients have an ownership

interest in the facility.79 SSHs may compete

with both inpatient and outpatient general

hospital surgery departments as well as with

ambulatory surgery centers.

There are relatively few SSHs. In

October 2003, the General Accounting

Office identified 100 existing SSHs with an

additional 26 under development. SSHs are

located in 28 states, but two-thirds are

located in only seven states.80 The GAO

concluded that “the location of specialty

hospitals is strongly correlated to whether

states allow hospitals to add beds or build

new facilities without first obtaining state

approval for such health care capacity

increases.”81 Ninety-six percent of the

opened SSHs and all 26 SSHs under

Commission will announce the results of these

retrospective studies as they are completed. The

Commission announced on June 30, 2004 that it had

closed an investigation into the acquisition of

Provena St. Therese Medical Center by Vista Health

Acquisition. See Press Release, Federal Trade

Comm’n, FTC Close Investigation Into Merger of

Victory Memorial Hospital and Provena St. Therese

Medical Center (July 1, 2004) and related documents

at http://www.ftc.gov/opa/2004/07/waukegan.htm.

78 G. Lynn 3/27 at 27 (“Historically, they

were children’s hospitals or psych. hospitals; now

they include heart hospitals, cancer hospitals,

ambulatory surgery centers, dialysis clinics, pain

centers, imaging centers, mammography centers and a

host of other narrowly focused providers generally

owned, at least in part, by the physicians who refer

patients to them.”).

79 Lesser 3/27 at 9-10 (A “key characteristic

of the specialty hospitals is physician ownership, and

this is something that really distinguishes the

speciality hospitals of today from the traditional acute

care hospitals and from some of the children’s

hospitals and other single-specialty hospitals that

we’ve seen in the past.”). 

As Chapter 1 notes, the Self-Referral

Amendments limit the ability of providers to receive

payment from Medicare for designated health

services delivered when the provider refers a

consumer to a facility in which the provider has an

ownership or investment interest. Investment in a

“whole hospital,” however, is not considered a

designated health service under the Self-Referral

Amendments. 

80 U. S. GENERA L ACCOUNTING OFFICE,

GAO-04-167, SPECIALTY HOSPITALS: GEO GR AP HIC

LOCATIONS, SERVICES PROVIDED AND FINANCIAL

PERFORMANCE 3-4 (2003) (Report to Congressional

Requesters) [hereinafter GAO, SPECIALTY

HOSPITALS], at http://www.gao.gov/new.items

/d04167.pdf. The seven states are Arizona,

California, Texas, Oklahoma, South Dakota,

Louisiana, and Kansas. Of those seven states, only

three (Texas, Oklahoma and Arizona) require all

hospitals to have an emergency room. Id.

81 GAO, SPECIALTY HOSPITALS, supra note

80, at 15. See also infra Chapter 8 (discussing

Certificate of Need programs). 
18

development are located in such states.82

The recently imposed moratorium on

Medicare payments to SSHs, and the results

of two Congressionally mandated studies on

the industry are likely to affect the future

development of these hospitals.83 Under the

moratorium, physicians may not refer

Medicare patients to a specialty hospital in

which they have an ownership interest, and

Medicare may not pay specialty hospitals for

any services rendered as a result of a

prohibited referral.84

Panelists identified a number of

market developments that encouraged the

emergence of SSHs, including: less tightly

managed care;85 the willingness of providers

to invest in a SSH;86 physicians’ desire to

“provide better, more timely patient care”;87

physicians looking for ways to supplement

declining professional fees;88 and the growth

of entrepreneurial firms, such as MedCath

and National Surgical Hospitals.89 Panelists

also stated that some providers desire greater

control over management decisions that

82 GAO, SPECIALTY HOSPITALS, supra note

80, at 15. According to the GAO report, as of 2002,

“37 states maintained certificate of need (CON)

requirements to varying degrees. Overall, 83 percent

of all specialty hospitals, 55 percent of general

hospitals, and 50 percent of the U.S. population are

located in states without CON requirements.” Id. 

See also Lawrence P. Casalino et al., Focused

Factories? Physician-Owned Specialty Facilities, 22

HEALTH AFFAIRS 56, 58-59 (Nov./Dec. 2003).

83 Under the MMA, the Medicare Payment

Advisory Commission (MedPAC) is required to study

the differences in costs between specialty hospitals

and community hospitals, the selection of patients,

the financial impact specialty hospitals have on

community hospitals, and the proportions of payment

between specialty hospitals and community hospitals. 

HHS will study the referral patterns of the physicians

with an ownership interest in specialty hospitals, the

quality of care provided, and the provision of

uncompensated care. Congress has placed a

moratorium on Medicare payments to any new

specialty hospital while the studies are ongoing. 

Congress has given the two agencies 15 months from

the date of enactment to complete the studies. MMA

§ 507(C)(1)-(2).

CMS issued guidance for exceptions to the

specialty hospital moratorium. See CENTERS FOR

MEDICARE & MEDICAID SERVICES, U.S. DEP’T OF

HEALTH & HUMAN SERVICES, CMS MANUAL

SYSTEM, PUB. 100-20 ONE-TIME NOTIFICATION:

CHANGE REQUEST 3036 (Mar. 19, 2004), at

http://www.cms.hhs.gov/manuals/pm_trans/R62OTN.

pdf; CENTERS FOR MEDICARE & MEDICAID SERVICES,

U.S. DEP’T OF HEALTH & HUMAN SERVICES,

MANUAL SYSTEM, PUB. 100-20 ONE-TIME

NOTIFICATION: CHANGE REQUEST 3193 (May 7,

2004), at http://www.cms.hhs.gov/manuals/pm_trans

/R79OTN.pdf. At least one forthcoming surgical

hospital, offering heart and surgical care, claims it

will not fall within Congress’s definition of a

specialty hospital because it will offer other services,

including thoracic treatment and ear, nose and throat

ailments as well as an emergency room with one bed

and one procedure room. See Hugo Martin, Group

Plans Hospital in Loma Linda, L. A. TIMES, Apr. 26,

2004, at http://www.latimes.com/news/local/state

/la-me-hospital26apr26,1,6653902.story?coll=la-new

s-state. 

84 MMA § 507.

85 Lesser 3/27 at 10-11.

86

 Id. at 10-11.

87 Alexander 3/27 at 34. See also Nat’l

Surgical Hospitals, Single Specialty Hospitals (Mar.

27, 2003) (Public Comment).

88 J. Wilson 4/11 at 66 (noting that as

doctors make less money from insurance companies,

they will “get into buying MRI machines, [] get into

surgery centers ... What [doctors are] doing is we’re

getting into ancillary activities in order to maintain

our standard of income and living”). 

89 Lesser 3/27 at 10-11.
19

affect their incomes and productivity.90

Several panelists suggested efficiency was

an important consideration for many

providers: specialty hospitals allow

“surgeons to start on time, do more cases in

a given amount of time, and get back to their

office on time.”91 One panelist asserted that

physicians view SSHs as a “a blank slate”

and an “opportunity to make improvements

in the care delivery process” by

“redesign[ing] the care delivery process in a

way to be more effective and efficient.”92 

Several panelists contended that

SSHs achieve better outcomes through

increased volume, better disease

management, and better clinical standards.

93

They attribute these positive outcomes to

their focus on a single specialty.94 For

example, MedCath stated that its focus has

allowed it to increase access to cardiac

monitored beds, “improve access to

emergency services,” “improve clinical

outcomes” and lower the cost of care by

having shorter hospital stays, discharging a

higher percentage of patients directly home,

and using the nursing labor pool

efficiently.95 

90

 See, e.g., D. Kelly 3/27 at 70 (“[I]t’s

because of the care, the control we have over the care

provided for their patients in the in-patient setting; the

empowerment within the hospital to help govern and

set up the operating standards ....”); Kane 4/11 at 74

(stating that many physicians are not looking to

increase their declining income, rather they are

starting specialty hospitals because they are

dissatisfied with general hospitals “because of the

inability to manage their day-to-day patient

interactions and their inability to provide high-quality

medical care”); Dan Caldwell, Health Care

Competition Law and Policy Hearings 2 (Public

Comment) (listing physicians participation in the

governance of a facility and physician efficiency as

influencing the development of SSH).

91 Rex-Waller 3/27 at 51. See also RexWaller 3/27 at 50 (specialty hospitals are responding

to a “demand born out of frustration with local acute

care hospital management that is unresponsive” to

surgeon and patient requirements). See also D. Kelly

3/27 at 70 (describing “the productivity enhancement

it provides to them because all of them are getting

busier and they need to find ways to be more

productive”); D. Kelly 3/27 at 81 (noting the savings

on expenses: “instead of spending 40 to 60 percent

of your total operating expense on labor, which is

typical in the United States in a fully integrated health

system, we do that at around 30 percent on a fully

allocated basis”); Alexander 3/27 at 35 (stating that

operating rooms in some markets “are at capacity”

and it is very difficult for physicians to schedule

elective surgeries at general hospitals).

92 Lesser 3/27 at 14. See also Alexander

3/27 at 33 (“Specialized facilities are a natural

progression and are a recognition that the system

needs to be tweaked, perhaps overhauled, to achieve

lower costs, higher patient satisfaction, and improved

outcomes.”).

93 Lesser 3/27 at 14-15 (noting that specialty

hospitals across the country have stated that by

“concentrating more cases in a particular facility,

specialty hospitals may help to lower per-case costs

and boost quality”). See also NEWT GINGRICH ET AL.,

SAVING LIVES AND SAVING MONEY (2003); REGINA

HERZLINGER, MARKET DRIVEN HEALTH CARE: WHO

WINS, WHO LOSES IN THE TRANSFORMATION OF

AMERICA’S LARGEST SERVICE INDUSTRY (1997). 

94 Numerous empirical studies indicate that

there is a relationship between the number of

particular procedures performed and the probability

of a good outcome. Harold S. Luft et al., Should

Operations Be Regionalized? The Empirical Relation

Between Surgical Volume and Mortality, 301 N. ENG.

J. MED. 1364 (1979); John D. Birkmeyer, Hospital

Volume and Surgical Mortality in the United States,

346 N. ENG. J. MED. 1128 (2002); Colin B. Begg,

Impact of Hospital Volume on Operative Mortality

for Major Cancer Surgery, 280 JAMA 1747 (1998). 

95 D. Kelly 3/27 at 72. 
20

A panelist representing MedCath

presented a study showing that 90 percent of

its patients were discharged directly to

home, compared to “72 percent for the peer

community hospitals and 70 percent for the

teaching facilities.”96 According to this

panelist, for each early discharge, MedCath

hospitals saved “Medicare over $1,000 per

discharge.”97 Other panelists stated that

physician-investors send healthier, lowerrisk patients to the SSH and sicker patients

to the general hospital.98 Several panelists

argued that this allows SSHs “to produce

service less expensively, while often being

paid the same or more than community

hospitals.”99 An April, 2003 GAO report

found that patients at specialty hospitals

tended to be less sick than patients with the

same diagnoses at general hospitals.100

Similarly, several panelists noted that

some SSHs do not provide emergency

departments and thus avoid the higher costs

of trauma treatment and indigent care.

101

Those panelists believe this gives SSHs an

unfair competitive advantage over 24-hour

hospitals with emergency departments.102

The October 2003 GAO study analyzed

96

 Id. at 74. See also Dennis I. Kelly,

Federal Trade Commission and Department of

Justice Hearings on Health Care and Competition

Law and Policy 10 (3/27) (slides) (average length of

stay for MedCath patient 3.84 days compared against

peer community hospital stay of 4.74 days; average

mortality rate for MedCath patient 1.94 percent

compared against peer community hospital rate of

2.35 percent; case mix index for MedCath patient is

1.42 compared against peer community hospital 1.17

case mix index), at http://www.ftc.gov/ogc

/healthcarehearings/docs/dkelly.pdf. 

97 D. Kelly 3/27 at 74.

98

 See, e.g., G. Lynn 3/27 at 30 (Specialty

providers decisions about whether and where to

provide care “have an effect on the physicians

personal financial interest.”); Mulholland 3/27 at 60

(“Physician ownership interests influence referrals. 

That’s almost intuitive and there have been some

studies that suggest that utilization increases.”).

99 G. Lynn 3/27 at 28. One panelist

disputed the claim that physicians send sicker patients

to general hospitals, stating that they want their “sick

patients in the heart hospital [where] I can take care

of them better.” Kane 4/11 at 80.

100 Letter from A. Bruce Steinwald,

Director, Health Care-Economic and Payment Issues,

General Accounting Office, to Bill Thomas,

Chairman, Committee of Ways and Means, House of

Representatives & Jerry Kleczka, House of

Representatives 11-12 (Apr. 18, 2003)

(GAO-03-683R), at http://www.gao.gov/new.items/

d03683r.pdf. The GAO examined all inpatient

discharge data from 25 urban specialty hospitals and

found that 21 of the 25 treated lower proportions of

severely ill patients than did area general hospitals. 

Id. at 4.

101 As Chapter 1 explains, if a SSH does not

have an emergency department or offer emergency

medical services, it is not required by the Emergency

Medical Treatment and Labor Act to provide an

appropriate medical screening examination to any

individual that requests one, and stabilizing treatment

to individuals with emergency medical conditions.

102

 See, e.g., G. Lynn 3/27 at 29; George

Lynn, Perspectives on Competition Policy and the

Health Care Marketplace: Single Specialty

Hospitals 2 (3/27), at http://www.ftc.gov/ogc

/healthcarehearings/docs/030327georgeflynn.pdf;

Lesser 3/27 at 10-11; Cara Lesser, Specialty

Hospitals: Market Impact and Policy Implications 6

(3/27) (slides) (considerable variation in scope of

emergency services provided) [hereinafter Lesser

Presentation], at http://www.ftc.gov/ogc

/healthcarehearings/docs/lesser.pdf; Dan Mulholland,

Competition Between Single-Specialty Hospitals and

Full-Service Hospitals: Level Playing Field or

Unfair Competition? 3 (3/27) (slides) [hereinafter

Mulholland Presentation], at http://www.ftc.gov/ogc

/healthcarehearings/docs/mulholland.pdf. See also

GAO, SPECIALTY HOSPITALS, supra note 80, at 4, 22.
21

whether SSHs provided care to Medicare

and Medicaid patients and had emergency

departments. As Table 1 shows, the study

found that there were modest differences

between the percentage of Medicare and

Medicaid patients who received treatment at

general hospitals and SSHs.103

Table 1:

General

Hospitals

Specialty 

Hospitals

Orthopedic

Medicaid

Admissions

10 % 8%

Cardiac Care

Medicaid

Admissions

6% 3%

Medicaid

Admissions for

Women’s Health

37% 28%

One panelist observed that general

hospitals are reluctant to have their

performance compared to specialty

providers who do not handle the same case

mix or have the same cost structures.104

Some panelists argued that the SSHs and

ambulatory surgery centers are inherently

risky for patients with multiple conditions. 

They argued that chronic disease

management, rather than fragmented

specialty services, will serve those patients

better.105

Several panelists were concerned

that SSHs would siphon off the most

profitable procedures and patients, leaving

general hospitals with less money to cross

subsidize other socially valuable, but less

profitable, care.106 As one panelist stated, “it

is the profitable services they are taking

away that jeopardizes a hospital’s capability

of providing unprofitable services.”107

Panelists expressed concern that “the

community [will] lose[] access to specific

services or ultimately to all hospital services

as the general hospital deteriorates or

closes.”108 Several panelists also suggested

that physicians that have an ownership

103 GAO, SPECIALTY HOSPITALS, supra note

80, at 18. There were larger differences in the

frequency of emergency departments (ED) at SSHs

and general hospitals. In particular, 92 percent of

general hospitals had an ED, but by contrast 72

percent of cardiac hospitals, 50 percent of women’s

hospitals, 39 percent of surgical hospitals, and 33

percent of orthopedic hospitals had an ED. Id. 

104 Probst 5/29 at 95. 

105 Andrew 3/26 at 12 (Hospitals believe

that the single-specialty hospitals do not take the

more difficult cases with comorbidities, “with patients

with greater acuity,” “the frailest of the frail, and the

poorest of the poor.”). 

106 Lesser 3/27 at 14-21; Lesser

Presentation, supra note 102, at 14-15; Ginsburg 2/26

at 66 (stating the “threat for specialized services does

have the potential to erode some of the traditional

cross subsidies that the health system is run on”);

Lesser 9/9/02 at 92. See also G. Lynn 3/27 at 31

(arguing that the Agencies must take into account the

effect specialty hospitals have on “the medical safety

net” of the community hospital). 

107 Morehead 3/27 at 42. See also

Harrington 4/11 at 76-77 (“We can’t afford to

continue to lose a percentage of our volume and thus

our revenue, and be able to provide the same quality

level of service that we provide ... if we continue to

be niched away.”); G. Lynn 3/27 at 28 (specialty

hospitals “threaten[] community access to basic

health services and jeopardizes patient safety and

quality of care”); Mulholland Presentation, supra

note 102, at 7 (community hospitals may be victims

of patient dumping and revenue loss threatens

community services).

108 G. Lynn 3/27 at 29.
22

interest in a SSH have an incentive to overrefer patients to that facility to maximize

their income.109 

The GAO summarized these

competing perspectives on SSHs: 

Advocates of these hospitals contend

that the focused mission and

dedicated resources of specialty

hospitals both improve quality and

reduce costs. Critics contend that

specialty hospitals siphon off the

most profitable procedures and

patient cases, thus eroding the

financial health of neighboring

general hospitals and impairing their

ability to provide emergency care

and other essential community

services.110

Market Reaction to SSH Entry.

According to several panelists, some general

hospitals facing competition from SSHs

have removed the admitting privileges of

physicians involved with a specialty

hospital.111 Several panelists stated that such

strategies are used to protect the viability of

the general hospital and to avoid the conflict

of interest that arises from a physician

ownership interest in a facility to which they

are referring patients.112 These panelists do

not believe that removing the hospital

privileges of physician-investors harms

competition, and suggest that a hospital is

not required “to sacrifice the interests of [its]

charitable institution in favor of the

physician’s self-interest.”113

109

 See, e.g., Lesser 3/27 at 16 (“Another

area of concern for speciality hospitals is the potential

for supply-induced demand, or demand that’s

generated due to the presence of these facilities. 

Again, the health services research that has been done

over the past decades really has shown that this issue

of supply-induced demand is particularly problematic

when physicians are owners and when there is excess

capacity.”); G. Lynn 3/27 at 30 (Specialty providers’

decisions about whether and where to provide care

“have an effect on the physicians personal financial

interest.”); Mulholland 3/27 at 60 (“Physician

ownership interests influence referrals. That’s almost

intuitive and there have been some studies that

suggest that utilization increases.”); Mulholland

Presentation, supra note 102, at 6; David Morehead,

A System in the Making 2-3 (3/27) (slides)

(physician-investors have inherent conflict of interest,

including financial conflicts) [hereinafter Morehead

Presentation], at http://www.ftc.gov/ogc

/healthcarehearings/docs/morehead030326.pdf. 

110 GAO, SPECIALTY HOSPITALS, supra note

80, at 1. 

111

 See, e.g., John G. Rex-Waller, Federal

Trade Commission & U.S. Department of Justice

Joint Hearing on Health Care & Competition Law

and Policy 11 (3/27), at http://www.ftc.gov/ogc

/healthcarehearings/docs/rexwaller.pdf; Dennis I.

Kelly, Statement of Dennis I. Kelly 17-18 (3/27)

[hereinafter D. Kelly (stmt)], at http://www.ftc.gov

/ogc/healthcarehearings/docs/030327denniskelly.pdf;

Kane 4/11 at 52. This strategy is sometimes referred

to as economic credentialing. D. Kelly (stmt), supra,

at 16-17 (stating that economic credentialing is

harmful to potential and existing competition from

SSHs). More generally, economic credentialing has

been defined as “the use of economic criteria

unrelated to quality of care or professional

competency in determining an individual’s

qualifications for initial or continuing hospital

medical staff membership or privileges.” American

Medical Association (AMA) House of Delegates

Resolution, H-230.975. 

112 Morehead 3/27 at 43-46.

113

 Id. at 47 (noting “you just can’t be a

partner and a competitor at the same time”);

Morehead Presentation, supra note 109, at 4 (A

“Board [is] not required to sacrifice charity’s interest

in favor of physician’s self-interest.”).
23

Panelists also described a number of

other responses by general hospitals to the

emergence of SSHs. One panelist stated that

some general hospitals have established their

own specialized single-specialty wing or

partnered with physicians on their medical

staff to open a SSH.114 Panelists also stated

that some general hospitals have reacted to

the competition by removing physicians

from the on-call rotation; making scheduling

surgeries more difficult; limiting physician

access to operating rooms; limiting

physicians’ “extra assignments” under which

the physician can earn professional fees;115

and using certificate of need laws to

encumber specialty hospital entry.116 

Panelists also stated that general

hospitals have entered into managed care

contracts with health plans that either

preclude SSH entry entirely, or result in the

“deselection” of physicians who invest in the

SSH from the insurance companies’ list of

preferred providers.117 Representatives of

SSHs noted that it is difficult to compete

against this behavior by providing lower

prices because they cannot provide the full

panoply of services a health plan requires.118

One panelist summarized the SSH

position as follows: general hospitals have

engaged in “stiff and coordinated resistence

... driven not by quality, cost efficiency, or

the desire to preserve the delivery of charity

care to the community, but rather by the fear

of having to compete, of having to look

within their respective institutions to

improve efficiencies and to enhance the

114 Lesser 3/27 at 12 (describing some

hospitals as taking a “kind of preemptive strike

strategy where the hospital establishes its own

specialty facility in an effort to ward off the

establishment of the competing facility in the

market”). See also The Wisconsin Heart Hospital’s

partnership with Covenant Healthcare, at

http://www.twhh.org.

115 Mulholland 3/27 at 66 (“Hospitals have

also determined to deny medical staff leadership

position or participatory rights, for example, votes or

active staff membership, to physicians with

investment interests in competitors.”); D. Kelly 3/27

at 76; Opelka 2/27 at 183 (“With the emergence of

physician-owned specialty hospitals, some general

hospitals have been denying privileges to those who

participate in these ventures, particularly in

geographic areas where there has been significant

consolidation of hospital ownership.”).

116 Rex-Waller 3/27 at 53-54; Alexander

3/27 at 38. A new Florida law that bars licensure of

any specialty hospital illustrates an example of this

allegation. The law bans specialty hospitals that treat

a single condition, and it eliminates its CON

requirement for new adult open-heart surgery and

angioplasty programs at general hospitals. The law

also exempts from CON the addition of beds to

existing structures, but new structures will still be

required to file a CON. Fla. Bill SJ 01740 (effective

July 1, 2004), amending FLA STAT. ch. 408.036,

.0361 (2003). On Certificate of Need (CON) laws,

see infra Chapter 8.

117 Kane 4/11 at 52 (“[S]hortly after the

heart hospital opened, we ran afoul of Blue Cross and

Blue Shield in some areas, ... we were what we call

deselected, and we were taken off the Blue Cross and

Blue Shield panels.”); D. Kelly 3/27 at 75. This

deselection caused some physicians to cease their

involvement with the SSH, after which they were

reinstated on insurance panels. Kane 4/11 at 52

(“Some of our young doctors felt like they just

couldn’t make it without the Blue Cross business and

they went elsewhere, .... Shortly after leaving our

group, ... they were [on] the Blue Cross Blue Shield

panels.”). But see Mulholland 3/27 at 69-70 and

Mulholland Presentation, supra note 102, at 17-22

(enumerating hospital actions against physicians who

invest in specialty hospital, suggesting they are all

“reasonable and pro-competitive responses to this

type of competition”).

118 Rex-Waller 3/27 at 53. 
24

timely delivery of patient care.”119 

Ambulatory Surgery Centers.

Ambulatory surgery centers (ASCs) perform

surgical procedures on patients who do not

require an overnight stay in the hospital. 

Approximately half of the ASCs are singlespecialty.120 Single-specialty ASCs

generally specialize in either

gastroenterology, orthopedics, or

ophthalmology.121 Most ASCs are small

(two to four operating rooms). ASCs’

ownership structures vary: some are

completely physician owned; some are

owned by joint ventures between physicians

and private or publicly traded companies;

some are owned by physician/hospital joint

ventures; and some are owned by hospitals

and hospital networks.122 Innovations in

technology have made it possible to offer a

broad range of services in ASCs.123

ASCs require less capital than SSHs,

and are generally less complex to develop

because they do not require the facilities

needed to offer care twenty-four hours a day,

seven days a week. ASCs generally do not

have emergency departments, and certificate

of need regulations often are not as rigorous

for ASCs, if they apply at all. ASCs were

originally intended to compete with hospital

inpatient units, but they now compete more

against hospital outpatient surgery units.124 

The number of ASCs has doubled in

the past decade, and currently total 3,371.125

Panelists indicated ASC development was

influenced by many of the same factors

spurring the growth of specialty hospitals. 

One panelist noted that ASCs were “a

common-sense, intelligent response to a

mature health care delivery system and

industry gripped by inefficiencies and to

health care spending being out of control.”126

Other reasons for ASC growth listed by

panelists included improved technology,127

physician demand for efficient surgical

119 Alexander 3/27 at 35. See also id. at 36

(“In an effort to forestall competition, two of the

hospital systems in Columbus ... recently passed

resolutions to revoke existing privileges of medical

staff members and to withhold new privileges solely

on the basis of a physician’s investment interest in

NASH or any competing specialty hospital.”). 

120 Beeler 3/26 at 59.

121 Casalino et al., supra note 82, at 59.

122 Beeler 3/26 at 60.

123 Rex-Waller 3/27 at 50 (stating that the

growth of ASCs “has been driven by technology,

technological advances, particularly in endoscopic

surgery . . . in surgical techniques, and in advanced

anesthetic agents”).

124 Casalino et al., supra note 82, at 59

(“ASCs primarily compete now with hospital

outpatient surgery departments, where most

outpatient surgery is performed.”). See also Beeler

3/26 at 63; Sacks 3/26 at 40.

125 Casalino et al., supra note 82, at 59 (“In

2000, 242 new ASCs were created, and 343 were

created in 2001, compared with an average of 166

annually in the preceding eight years.”). 

126 Alexander 3/27 at 32.

127 Technological changes include the

development of flexible fiberoptic scopes used for

colon cancer screening and upper GI procedures as

well as advancements in microsurgery and ultrasound

techniques used in cataract lens replacement. See

MEDICARE PAYMEN T ADVISORY COMM’N

(MEDPAC), REPORT TO THE CONGRESS: MEDICARE

PAYMEN T POLICY § 2F, at 140 (2003), at 

http://www.medpac.gov/publications/congressional_r

eports/Mar03_Entire_report.pdf. 
25

facilities,128 control and specialized staff, as

well as “patient demand for a noninstitutional, friendly, convenient setting for

their surgical care, and payor demand for

cost efficiencies as evidenced by the

ambulatory surgery center industry.”129 One

study also noted that ASCs offer patients

more “convenient locations, shorter wait

times, and lower coinsurance than a hospital

department.”130

Medicare reimbursement has had a

profound impact on the number of ASCs

and the amount of surgery performed in

them.131 Congress first approved coverage

of ASCs by Medicare in 1980, as part of an

effort to control health care spending by

providing low-risk surgeries in a lessexpensive ambulatory setting.132 Between

1982 and 1988, Medicare paid 100 percent

of the reasonable charges for approved

ambulatory procedures, and waived the

deductible and copayment that would apply

if the procedure were provided in an

inpatient setting.133 From 1988 to 2003, the

fee schedule has been based on an inflationadjusted 1986 cost survey for ambulatory

surgery. The ASC payment schedule has not

been adjusted for advances in technology

and productivity over the last 16 years; some

procedures that were once labor-andresource intensive are now much less costly

for ASCs to perform. The MMA freezes

Medicare payment rates for ASCs from 2005

through 2009 and directs the Department of

Health and Human Services to implement a

new payment system by 2008.134 

Although ASCs and hospital

outpatient departments perform some of the

same procedures, payment varies depending

on where the services are provided. Higher

reimbursement for services performed in a

hospital outpatient department may make

sense when a patient has multiple 

128

 See, e.g., MEDPAC, supra note 127, §

2F, at 140 (noting that the specialized settings may

have allowed physicians to perform procedures more

efficiently than in an outpatient setting and allowed

physicians to reserve surgical time).

129 Rex-Waller 3/27 at 50. See also Beeler

3/26 at 62 (noting the “development of new

technology and techniques for both the surgery itself

and anesthesia” have allowed providers to discharge

patients more quickly after surgery).

130 MEDPAC, supra note 127, § 2F, at 140

(assessing coinsurance is 20 percent lower in an

ASC).

131 The anti-kickback statute, described in

detail supra Chapter 1, has also had an effect on the

rise of ASCs. The anti-kickback statute generally

discourages physicians from investing in facilities to

which they refer patients, but a regulatory safe harbor

explicitly excludes ASCs from this prohibition. 

Office of the Inspector General, Programs: Fraud

and Abuse; Clarification of the Initial OIG Safe

Harbor Provisions and Establishment of Additional

Safe Harbor Provisions Under the Anti-Kickback

Statute; Final Rule, 64 Fed. Reg. 63,517 (Nov. 19,

1999). 

132 Omnibus Reconciliation Act of 1980,

Pub. L. No. 96-499, § 934, 94 Stat. 2599 (1980). See

also Shelah Leader & Marilyn Moon, Medicare

Trends in Ambulatory Surgery, 8 HEALTH AFFAIRS

158, 158-59 (Spring 1989). 

133 Leader & Moon, supra note 132, at 158-

59.

134 The MMA directs the GAO to conduct a

study comparing the costs of procedures in ASCs to

the cost of procedures furnished in hospital outpatient

departments, and make recommendations about the

appropriateness of using the outpatient prospective

payment system as a basis for paying ASCs. MMA §

626(d). 
26

Table 2: 

Medicare Reimbursement Rates for Procedures Performed by Hospital Outpatient

Department and ASCs

Description Hospital

Outpatient Rate

ASC Rate Percent Difference

Cataract removal/lens

insertion

$1,160 $973 -19%

After cataract laser surgery 246 446 81

Colonoscopy, diagnostic 413 446 8

Upper gastrointestinal

endoscopy, biopsy

387 446 15

Colonoscopy with removal of

lesion by snare

413 446 8

Epidural injection, lumbar or

sacral

250 333 33

Colonoscopy with biopsy 413 446 8

Colonoscopy with removal of

lesion by forceps

413 446 8

Upper gastrointestinal

endoscopy, diagnostic

387 333 -14

Cystoscopy 329 333 1

complicating factors making the surgery

more complex. One panelist also asserted

that hospitals should receive higher

payments for outpatient services because

they have higher overhead costs.135 Yet, as

Table 2 demonstrates, payment may be

higher, lower, or the same at ASCs and

hospital outpatient departments.136 These

differences create predictable incentives for

providers. As former CMS administrator

Tom Scully noted, when the ASC rate is

high “all of a sudden you start seeing ASCs

pop up all over the place to do

colonoscopies or to do outpatient surgery .... 

If the hospitals get paid a little more, they’re

going to have more outpatient centers.”137

Many of the concerns expressed by

135 panelists about SSHs were also expressed Andrew 3/26 at 118.

136 MEDPAC 2003, supra note 127, § 2F, at

143, Table 2F-3. 137 Scully 2/26 at 46.
27

about ASCs. Panelists asserted that ASCs

are eroding the outpatient market share of

hospitals that hospitals depend upon, that

ASCs do not care for Medicaid

beneficiaries, they “skim and cherry-pick on

the front end regarding [] the finances of the

patient,” and that ASCs only enter areas

where business is profitable.138 One ASC

representative suggested that reimbursement

should be modified based on the acuity of

the patient, but denied that ASCs refuse to

care for Medicaid patients.139

Market Reaction to ASC Entry.

Panelists indicated that many of the actions

taken to curb entry of specialty hospitals are

also being employed against ASCs. One

panelist suggested that entry and

competition for ASCs have been made

difficult by hospitals engaging in legislative

efforts to encumber ASCs with unnecessary

regulation and mandatory services.140

Another panelist described how some

hospitals have negotiated discounted prices

for inpatient services in exchange for

exclusive contracts for outpatient surgery.141

One panelist noted that some general

hospitals have revoked privileges of

physician-investors in ASCs, and used state

certificate of need (CON) laws to inhibit

ASC entry.142 

Competitive Evaluation of Entry. In 

general, the Agencies favor the elimination

of anticompetitive barriers to entry, on the

grounds that robustly competitive markets in

which entry and exit is determined by

market forces maximizes consumer welfare. 

Entry by SSHs and ASCs has had a number

of beneficial consequences for consumers

who receive care from these providers. It

cannot be overlooked, however, that

Medicare’s administered pricing system has

substantially driven the emergence of SSHs

and ASCs. 

Generally speaking, antitrust law

does not limit individual hospitals from

unilaterally responding to competition either

by terminating physician admitting

privileges or by approaching state

governments in connection with CON

proceedings.143 If there is specific evidence

of anticompetitive conduct by individual

hospitals or of hospitals colluding together

against efforts to open a SSH or ASC, then

the Agencies will aggressively pursue those

activities. 

IX. THE IMPACT OF

GOVERNMENT PURCHASING

CMS has tremendous bargaining

power in the market for medical services,

and providers are extremely responsive to

the signals sent by CMS.

144 Prior to the

138 Andrew 3/26 at 12; Sacks 3/26 at 41 (“It

is the profitable business, and that continues to be

picked away by this type of competition.”).

139 Beeler 3/26 at 116-117; Andrew 3/26 at

14-15.

140 Rex-Waller 3/27 at 53.

141 Beeler 3/26 at 63-64.

142

 Id. at 64.

143 Of course, under some circumstances, a

unilateral response can still constitute a violation of

Section 2 of the Sherman Act, and there are sham and

misrepresentation exceptions to the NoerrPennington doctrine. See infra Chapter 8. 

144

 See, e.g., Hammer 2/27 at 51-52 (noting

that Medicare should “be aware of its conduct that is

both market-shaping and market-facilitating. When
28

adoption of the IPPS, average hospital

length-of-stay had been stable for 7 years. 

Once IPPS went into effect, length of stay

began an immediate decline, the number of

inpatient cataract surgeries dropped

precipitously (from 630,000 to 211,000 in

one year), and the number of hospital

outpatient cataract surgeries immediately

increased by 128 percent.145 Similarly, the

adoption of prospective payment for home

health care had an immediate impact on the

number of beneficiaries that received

services and the average number of visits.146

Medicare’s administered pricing

system can also (albeit generally

inadvertently) make some services

extraordinarily lucrative, and others

unprofitable. The result of the pricing

distortions is that some services are more or

less available than they would be based on

the demand for the services – which in turn

triggers adaptive responses by providers.147

One panelist noted these difficulties are

compounded by the fact that the balance of

the population relies for its health care

services on an infrastructure built in

response to the excesses and inadequacies of

Medicare’s administered pricing system.148 

Consider cardiac care. 

Commentators and panelists suggested that

CMS never made a deliberate decision to

provide for greater profits for such services

relative to the amounts paid for other

inpatient services but the IPPS does so.149

General hospitals use these profits to

subsidize the provision of less profitable (or

unprofitable) services, but the pricing

distortion creates a direct economic

incentive for SSHs to enter the market. In

response, general hospitals complain to

legislators and try to find ways to limit the

expansion of competition. Absent the

distortions created by the excess profits for

cardiac services in Medicare’s administered

pricing system, the incentive for SSH entry

would be less. 

These difficulties are magnified Medicare chooses to reimburse a new technology, it

creates a new market.”). It should be noted, however,

that CMS would have even more power if it were

permitted to engage in selective contracting.

145

 See Pope, supra note 18; See also

AMERICAN HOSPITAL ASS’N, supra note 12, at 2 tbl.1;

Leader & Moon, supra note 132, at 159. 

146 CMS, supra note 4, § 3(D), at 9 (Persons

Served and Average Number of Visits by Home

Health Agencies).

147

 See, e.g., Hammer 2/27 at 52 (noting that

when CMS “has a misalignment of the regulatory

pricing system, . . . it creates competition gaming the

regulatory system); Scully 2/26 at 28, 46 (“So, when

the government, either Federal or State, is fixing

prices, the rest of the market’s flexibility to respond

to that is kind of muted . . . I can tell you when I drive

around the country and see where ASCs are popping

up, I can tell who we’re overpaying.”). 

148 Sage 5/29 at 148 (“Public purchasing

distorts prices, overbuilds capacity, and skews the

development and dissemination of technology.”). 

149

 See, e.g., Ginsburg 2/26 at 65

(“Medicare sets the DRG rates, ... but their

productivity gains are much faster in cardiovascular

services so that, in a sense, the rates become obsolete

fairly quickly ....”); KELLY DEVERS ET AL.,

SPECIALTY HOSPITALS: FOCUSED FACTORIES OR

CR EAM SKIMMERS? (Ctr. for Studying Health Sys.

Change, Issue Brief No. 62, 2003), available at

http://www.hschange.com/CONTENT/552/

(reporting statements of hospital executives that

certain surgical procedures (e.g., cardiovascular and

orthopedic) are among the most profitable surgeries,

and that it is unlikely that payors intended to create

these distortions in payment rates).
29

when the government is the sole or primary

purchaser of a good or service. Paying too

much wastes resources, while paying too

little reduces both output and capacity,

lowers the quality of the services that are

provided, and diminishes the incentives for

innovation.150 Some commentators have

suggested that these adverse consequences

have materialized in the market for

vaccines.151 

Although CMS can set prices, there

are limitations to CMS’s ability to create

incentives that encourage price and nonprice competition among providers. CMS

does not have the freedom to respond as a

private purchaser would to changes in the

marketplace. For example, CMS has only

limited authority to contract selectively with

providers or to use competitive bidding to

meet its needs.152 With limited exceptions,

CMS cannot force providers to compete for

CMS’s business or encourage suppliers to

reduce their costs and enhance their quality

by rewarding them with substantially

increased volume or substantially higher

payments if they do.153

Even straightforward purchasing

initiatives, such as competitive bidding for

durable medical equipment (DME), have

generated considerable resistance. A pilot

project resulted in Medicare savings

between 17 and 22 percent with no

significant adverse effects on

beneficiaries.154 Opponents of competitive

bidding have argued, however, that the

bidding process increased bureaucracy,

decreased consumer choice, threatened the

existence of small manufacturers, and

lowered quality.155 At least one industry

representative has called for the repeal of the

provisions mandating competitive

bidding.156

150 Pauly 2/26 at 93-94 (noting that “[i]f the

regulated price is too high, you’ll get excessive

socially inefficient quality. If the regulated price is

too low, you’ll get socially deficient quality . . . .”).

151 BOARD ON GLOBAL HEALTH & INSTITUTE

OF MEDICINE, MICRO BIAL THREATS TO HEALTH:

EMERGENCE, DETECTION, AND RESPONSE 187 (2003)

(“[O]nly four leading companies worldwide have

been responsible for developing new vaccines during

the past two decades. It was not mergers and

acquisitions that concentrated responsibility for

vaccine innovation ... rather, the economic forces

that drove firms out of the industry were the rising

costs of innovation, production ... and the shrinking

margins allowed by monopsony.”). 

152 42 U.S.C. §§ 1395, 1395a, 1395b. See

also supra Chapter 1.

153

 See Pauly 5/28 at 48 (“Administered

price can cause competition to be a function of

quality.”); David A. Hyman, Does Quality of Care

Matter to Medicare? 46 PERSP. BIO. & MED. 55-68

(2003). 

154 Centers for Medicare & Medicaid

Services, Evaluation of the Durable Medical

Equipment Competitive Bidding Demonstration, at

http://www.cms.hhs.gov/researchers/demos/DMECB.

asp (last modified Feb. 18, 2004). Centers for

Medicare & Medicaid Services, Medicare Pilot

Project For Durable Medical Equipment in Polk

County, Fla. (May 29, 1998), at http://www.cms.hhs

.gov/healthplans/research/dmeshrt.asp.

155 American Ass’n for Homecare, Myths

and Facts About Medicare Competitive Bidding for

Durable Medical Equipment (Sept. 5, 2002), at

http://www.aahomecare.org/govrelations/myths-cb.pd

f. See also Nat’l Ass’n for Homecare & Hospice

website, at http://www.nahc.org/NAHC/LegReg

/0304Landrieu_HME_signon.html. 

156 Cara C. Bachenheimer, Prescription for

Change, HOMECARE, Jan. 1, 2004, at http://www.

homecaremag.com/ar/medical_prescription_change/.
30

As Chapter 1 reflects, with limited

exceptions, CMS’s payment systems do not

reward higher quality care, or punish lower

quality care. Indeed, as the Medicare

Payment Advisory Commission (MedPAC)

noted, the Medicare payment system is

“largely neutral or negative towards quality. 

All providers meeting basic requirements are

paid the same regardless of the quality of

service provided. At times providers are

paid even more when quality is worse, such

as when the complications occur as the

result of error.”157 Former CMS

administrator Scully was more pointed: 

Medicare pays every hospital in a region

“the exact same amount for hip replacement

and the same amount for a heart bypass, if

you’re the best hospital or the worst

hospital.”158 

To be sure, these problems are not

unique to Medicare. The Institute of

Medicine noted that “current [compensation]

methods provide little financial reward for

improvements in the quality of health care

delivery, and may even inadvertently pose

barriers to innovation.”159 The Agencies

encourage the use of payment strategies that

create an incentive for providers to deliver

higher quality care to consumers. 

Medicare also includes a managed

care option, the Medicare Advantage (MA)

program.160 MA programs provide Medicare

beneficiaries with a range of managed care

options, including HMOs and preferred

provider organizations. MA allows

Medicare beneficiaries to join privately

operated managed care plans.161 The plans

are paid an administratively determined rate

by Medicare and plans also may charge an

additional premium and offer additional

benefits.162 Medicare beneficiaries who

joined MA plans often received greater

benefits (e.g., prescription drug coverage) in

exchange for accepting limits on their choice

of providers.163 In 2002, MA plans (then the

157 MEDICARE PAYMEN T ADVISORY

COMM’N, REPORT TO CONGRESS: VARIATION AND

INNOVATION IN MEDICARE 108 (2003), at

http://www.medpac.gov/publications

/congressional_reports/June03_Entire_Report.pdf.

158 Scully 2/26 at 34; Antos 9/30 at 123

(“We now have major financial rewards for the

system to not work right.”). See also Kahn 2/27 at 73

(noting that “at the end of the day, you have prices

that are arbitrarily set that really don’t relate very

closely to any kind of market scheme that we could

define”).

159 INSTITUTE O F MEDICINE, CROSSING THE

QUALITY CHASM: A NEW HEALTH SYSTEM FOR THE

21ST CENTURY 193 (2001). See Carolyn Clancy,

AHRQ and HHS Efforts to Improve Quality 28 (5/27)

(slides) (showing that only 10 percent of the

population receive excellent quality health care), at

http://www.ftc.gov/ogc/healthcarehearings/docs/0305

27clancy.pdf.

160 As part of the Medicare Prescription

Drug, Improvement and Modernization Act of 2003,

the Medicare+Choice program (M+C) was renamed

to Medicare Advantage (MA).

161

 See U.S. DEP’T OF HEALTH & HUMAN

SERVICES (HHS), MEDICARE & YOU: 2004, § 6, at

44-52, available at http://www.medicare.gov

/publications/pubs/pdf/10050.pdf.

162 Pizer 4/23 at 146-47; Steven Pizer,

Competition in the Medicare+Choice Program 5

(4/23) (slides) [hereinafter Pizer Presentation], at

http://www.ftc.gov/ogc/healthcarehearings/docs/pizer.

pdf; Steven Pizer & Austin Frakt, Payment Policy

and Competition in the Medicare+Choice Program,

24 HEALTH CARE FIN. REV. 83 (2002).

163

 See HHS, supra note 160, § 6, at 44-52;

Pizer Presentation, supra note 161, at 5; Pizer &

Frakt, supra note 161.
31

Medicare+Choice (M+C) plan) provided

health care to 5 million Medicare

beneficiaries, down from 6.35 million

enrollees in December 1999.164 One panelist

testified that although the Medicare program

has attempted to introduce competitive

pricing as a way to set payment rates to

M+C plans, to date none of those plans have

been successful.

165 As a result, Medicare

continues to establish the payment rates

administratively.166 According to this

speaker, to the extent plans compete, it

typically has been on the benefits they

provide.167

X. HOSPITAL/PAYOR

CONTRACTING IN THE

PRIVATE MARKET

Contracting between hospitals and

private payors has been controversial and

contentious. Several panelists asserted that

hospital systems routinely “terminate then

negotiate” for large increases in

reimbursement, and use the media to scare

the public.168 Panelists also stated that

hospital systems insist that all hospitals in

the system be included in a payor network

(“all or nothing contracts”), irrespective of

whether the payor actually wants to include

the entirety of the hospital system.169

Panelists representing hospitals responded

that they are protecting their institutions’

164 Pizer & Frakt, supra note 161, at 83 &

n.1.

165 Pizer 4/23 at 147.

166 Beginning in 2006, however, MA plans

will be paid under a new competitive method.

Plan bids will be compared to benchmarks calculated

for each area based on the costs of fee-for-service

Medicare. If a plan bid is higher than the benchmark,

the enrollee will pay the difference. If it is lower, 75

percent of the difference will go to the enrollee as

extra benefits or as a rebate; the remaining 25 percent

will be retained by the government. See Health

Policy Alternatives, Medicare Prescription Drug,

Improvement, and Modernization Act of 2003: 

Executive Summary 2 (Nov. 30, 2003), at

http://www.achp.org/media/hpaexecutive.pdf.

167 Pizer 4/23 at 147.

168

 See, e.g., Berman 2/28 at 80-82

(describing contract negotiations between Partners

HealthCare and Tufts Health Plan); Spetz et al., supra

note 50, at 226-27 (describing how, in Sacramento,

Sutter Health threatened to cancel contracts with Blue

Cross and other insurance plans if reimbursement was

not increased; other hospital systems followed Sutter

Health’s lead in Sacramento and in other regions in

California); Strunk 3/27 at 161; Iselin 3/27 at 180

(“We’ve seen quite a bit of brinkmanship, . . .

including . . . termination as a prelude to

negotiation.”); Lesser 9/9/02 at 87; Kanwit 9/9/02 at

175. 

If the contract between a hospital and payor

includes an “evergreen” clause, the contract renews

automatically unless one party serves the other party

with a notice of termination. Thus, the termination

notice may simply reflect the desire of one party to

renegotiate the terms of the contract. See Fine 9/9/02

at 222-23 (noting that “hospital contracts all contain

within them evergreen provisions, automatic renewal

provisions, that if cancellation or termination is not

effected within 60 or 90 days prior to the expiration

date, that contract automatically rolls over for another

three to five year term”).

169 Kanwit 2/27 at 98-99 (describing a

practice called “all or nothing” “where the hospital

systems [] requir[e] health plans to contract with

freestanding facilities, radiology facilities, [and]

ambulatory surgery facilities”); Strunk 3/27 at 161

(“[W]e’ve observed systems that contain a highly

reputable and desirable flagship hospital, threatening

to cut ties with the plan, unless the plan is willing to

contract with and provide favorable rates to the other

hospitals in the system, even if the other hospitals are

less desirable to the plan.”). Stephanie Kanwit,

Perspectives on Competition Policy and the Health

Care Marketplace 4-5 (2/27), at http://www.ftc.gov

/ogc/healthcarehearings/docs/kanwitstephanie.pdf.
32

interests and that their services had been

artificially and unsustainably underpriced in

the past.170 These dynamics have played out

in several markets in the past few years.171

Although commentators have noted that

particular hospitals and systems seem to

have the upper hand in some markets,

whether hospitals or health plans have

bargaining advantages varies substantially

within and among different markets.172

Generally speaking, payors seek to

contract with hospitals that contribute to the

marketability of their insurance products.173

Factors that affect marketability include the

price of coverage, the number of hospitals at

which care can be provided, the perceived

quality, desirability, and accessibility of

those institutions, and the alternative

insurance products that are available in the

market. Payors seek to balance the price of

the hospital services they must purchase to

offer insurance coverage against the

desirability of the resulting network to the

purchasers of their insurance products. If

patients view several hospitals as adequate

substitutes for one another, it will be easier

for the payor to threaten credibly to exclude

one or more of these hospitals. Conversely,

if enrollees will drop an insurance plan if

their preferred hospital is no longer in the

network, the hospital will find it easier to

insist on higher reimbursement. 

Multi-hospital systems frequently

seek to ensure that all system hospitals are

included in a payor network. Consumer

pressure for open networks has made it more

difficult for payors to exclude an entire

hospital system outright, which affects the

bargaining dynamics. In a few markets,

payors have sought to “tier” hospitals.174

Tiering results in different consumer

copayments (i.e., high or low cost sharing)

170

 See, e.g., F. Miller 2/28 at 92; Mongan

2/28 at 110.

171 JUSTIN WHITE ET AL., GETTING ALONG

OR GOING ALONG? HEALTH PLAN-PROVIDER

CONTRACT SHOW DOW NS SUBSIDE 2 (Ctr. for

Studying Health Sys. Change, Issue Brief No. 74,

2004), available at http://www.hschange.org

/CONTENT/641/.

172

 See, e.g., Scully 2/26 at 52 (describing

the Alabama market and stating “there is one

insurance in Alabama”); D. Hall 4/25 at 74-75

(stating that Blue Cross/Blue Shield “insure[s] and

control[s] about 80 percent of all the

non-governmental work in the State of Alabama”);

Mansfield 4/25 at 86-88 (describing the Little Rock

market as sharing one dominant hospital system and

one dominant insurance provider which have entered

a “partnership”); F. Miller 2/28 at 95-97 (describing

the Boston market and her belief that one hospital

system has negotiating power over insurers); Prairie

Health Purchasing Alliance, Comments Regarding

Competition Law and Policy & Health Care (Sept.

27, 2002) (Public Comment).

173

 See generally Gregory Vistnes,

Hospitals, Mergers and Two Stage Competition, 67

ANTITRUST L. J. 671, 674 (2000). A marketable

network is one that is not too expensive and includes

hospitals that enrollees and plan physicians want. 

Complex rules can make a plan less marketable. 

174 Monk 4/23 at 44; Arthur Lerner,

Statement of Arthur Lerner 2-3 (3/27) [hereinafter

Lerner (stmt)], at http://www.ftc.gov/ogc

/healthcarehearings/docs/030327arthurlerner.pdf; Jill

M. Yegian, Tiered Hospital Networks, 2003 HEALTH

AFFAIRS (Web Exclusive) W3-147, 148, at

http://content.healthaffairs.org/cgi/reprint/hlthaff.w3.

147v1.pdf; see GLEN P. MAYS ET AL., TIEREDPROVIDER NETWORKS: PATIENTS FACE COST-CHOICE

TRADE-OFFS 2 (Ctr. for Studying Health Sys. Change,

Issue Brief No. 71, 2003) (describing plans testing

tiered networks in Seattle, Washington, Miami,

Florida, Syracuse and northern New Jersey),

available at http://www.hschange.org/CONTENT

/627.
33

depending on the hospital at which care is

provided.175 Hospital tiers may be

established using a wide variety of criteria. 

Tiering generally does not apply to

emergency admissions, and may depend

upon where routine and specialty services

are offered.176 

 For payors, tiering offers a potential

response to multi-hospital system pressure

for inclusion of all system hospitals within a

payor network. Tiering allows the payor to

maintain a broad network, and include a

“must-have” hospital, but simultaneously

creates an incentive for consumers to use

lower-cost providers.177 Panelists offered a

range of views on the prospects of tiering.178

Blue Shield of California provides

one example of tiered hospital benefits. 

Blue Shield tiers within geographic areas

and seeks to promote choice among

community hospitals and teaching

hospitals.179 Hospitals are sorted by region

and teaching status and coverage benefits are

designed to operate within these groupings. 

Blue Shield also uses some quality

performance measures in its tiering

criteria.180 Hospitals are assigned to a

“choice” tier unless their prices exceed the

average for their region and teaching status,

in which case they are assigned to an

“affiliate” tier.181 Blue Shield introduced

this product in April 2002. Approximately,

one million of its 2.3 million members have

a tiered network benefit package. Blue

Shield tiers inpatient and outpatient services,

ambulatory surgery centers, and radiation

and chemotherapy services.182 

Similarly, Tufts Health Plan also

attempted to use tiering in Boston,

175 O’Kane 5/30 at 71 (tiering seen as a way

to reward quality); Robert Steinbrook, The Costs of

Admission: Tiered Copayments for Hospital Use,

350 NEW ENGL. J. MED. 2539 (2004). 

176 James C. Robinson, Hospital Tiers in

Health Insurance: Balancing Consumer Choice with

Financial Incentives, 2003 HEALTH AFFAIRS (Web

Exclusive) W3-135, 137, at http://content

.healthaffairs.org/cgi/reprint/hlthaff.w3.135v1.pdf. 

177 Lerner (stmt), supra note 173, at 12.

178

 See Strunk 3/27 at 206 (“We haven’t

seen huge savings from them yet, but

it is, you know, too early to tell. They had two tiers, a

preferred and I guess a non-preferred, . . . but it ended

up that [] a huge percentage of the hospitals ended up

being in the preferred tier anyway. So, in the end,

there wasn’t all that much steerage to do in the first

place . . . .”); Iselin 3/27 at 180 (“[W]here people

have tried tiering or floated it, it’s common that it is

outright refused.”). Other panelists suggested that

tiering may be an easy tool for payors. See GuerinCalvert 3/27 at 147 (“I would agree completely that

tiering of networks has proven to be the second

easiest and most likely tool that payors are turning to .

. . .”); Argue 3/28 at 50 (“[T]here are a number of

new mechanisms that are showing up in the

literature,” including tiering and “variable

premiums.”).

179 Robinson, supra note 175, at 139. 

180

 Id. at 140 (the measures are whether a

hospital participates in the Leapfrog program and a

facility’s scores on patient satisfaction surveys). Also

in California, PacifiCare has instituted a narrow, twotiered network and projects 6 to 16 percent premium

savings for its beneficiaries. Id.

181 Robinson, supra note 175, at 139-40 (the

tiering payment schedule divides the hospitals within

the individual market into the following categories: 

choice hospitals – HMO members have no admission

copayment and PPO members have a 30 percent

coinsurance; affiliate hospitals – HMO members have

a $150 admission copayment and PPO members

have 40 percent coinsurance).

182 Robinson, supra note 175, at 140.
34

Massachusetts.183 Teaching hospitals

provide the majority of hospital services

within Boston and are typically more

expensive than community hospitals.184

Tufts tried to use tiering to steer its members

to community hospitals.185 After a very

public battle, Tufts backed away from its

plans and made tiering voluntary for its

members. 

Some hospitals resist tiering, and if

they have sufficient bargaining power, they

can credibly threaten to withdraw from a

payor network if they are placed in an

unfavorable tier.186 Hospital systems can

similarly threaten to pull all of their

hospitals from a network if any system

hospital is placed in an unfavorable tier. In

some markets, hospital systems have taken

preemptive steps to negotiate contract

language with plans that prohibit tiering.187

Panelists and analysts noted a number of

reasons (beyond straight financial issues)

why hospitals may resist tiering. Low-cost

facilities fear being labeled as low quality

and high-cost facilities fear being deemed

inefficient.188 If tiering is price-driven, it

may be difficult for facilities to maintain

expensive areas of care like burn units,

trauma services, and emergency “standby”

capabilities.189 Hospital representatives also

expressed concern that individual hospitals

are not fungible substitutes, and tiering

might result in bad consumer choices.

190

Hospital representatives have also expressed

concern that tiering might force poor

consumers to patronize only low-quality,

low-cost hospitals.191 One critic of hospital

183 Berman 2/28 at 123.

184 Massachusetts Council of Community

Hospitals (MCCH), Cape Ann Economics Report for

MCCH (June 2001) (Public Comment)

(“Massachusetts residents now utilize a teaching

hospital setting for inpatient care 2.5 times the

national average”); Altman 2/28 at 17 (“We are in

love with our teaching hospitals . . . . And this is –

it’s just the nature of Massachusetts health care, and

if you are looking at teaching hospitals’ spending per

capita in 1998, which our task force looked at, we

spent $168 per capita, where the rest of the country

spent $42 per capita.”).

185 Robinson, supra note 175, at 140

(copayment for community hospital inpatient and

outpatient services are $350; copayment for tertiary

centers is $600).

186 Ginsburg 2/26 at 72 (“[W]e have seen

instances in our sites where hospitals have resisted

tiered networks, such as in California, basically by

threatening not to contract with the plan if they’re

placed in the lower, less attractive tier.”); Lerner

(stmt), supra note 173, at 3 (“[S]ome hospital systems

are demanding that ... [the system’s] services, be

included in the richest benefit tier of every product

the plan sells.”); Lesser 9/9/02 at 96-97. See also

Milstein 2/27 at 103-04 (suggesting the Agencies

“assure performance-based tiering of providers” and

not allow “[a]ggregated provider organizations to

restrain insurers from classifying individual providers

into performance tiers”).

187 MAYS ET AL., supra note 173 (describing

plan attempts to develop tiering thwarted by large

hospital systems that refused to participate and

threatened to drop out of the network).

188 Robinson, supra note 175, at 143.

189 Yegian, supra note 173, at 150.

190 Panelists compared hospital tiering to

pharmaceutical tiering, where there was greater

agreement that tiering could beneficially encourage

consumers to use generic drugs instead of branded

pharmaceutical equivalents. See, e.g., Altman 2/28 at

124-25.

191 MAYS ET AL., supra note 173 (noting

some fear that “designs based primarily on cost will

result in the most desirable providers – which could

be more costly – being placed in nonpreferred tiers,
35

tiering believes that tiering will put indigent

care, teaching facilities, and innovative

research at risk, and believes “there is no

justification for putting patients in the

middle of ... health care financing” –

particularly when the available information

about quality is less than perfect.192 

Because tiering is a relatively new

development, there are no systematic studies

available on the prevalence or consequences

of this strategy. Additional research would

be useful in determining whether consumers

in tiered plans actually use lower priced

hospitals, and whether they would have used

those hospitals without the tiering. 

XI. CONSUMER PRICE

SENSITIVITY AND

INFORMATION

Tiering represents an attempt to force

consumers to bear some of the increased

price associated with receiving care at a

more expensive hospital.193 Medical savings

accounts are intended to accomplish the

same goal.194 That is, both strategies attempt

to raise consumer sensitivity to the costs

associated with the health care decisions. 

For these strategies to work effectively,

however, consumers will need access to

good information about the price and quality

of the services they must choose between.195

A consumer facing a 25 percent co-payment

at one hospital and a 15 percent co-payment

at another can not accurately assess the

financial consequences of choosing one

hospital over the other absent good

making them accessible only to those who can pay

extra”). But see Robinson, supra note 175, at 145

(“[N]ontiered hospital networks do not subsidize the

poor at the expense of the rich. Low-quality hospitals

are not typically to be found in high-income

neighborhoods, and well-heeled consumers do not

drive across town to seek them.”). 

192 Thomas M. Priselac, The Erosion of

Health Insurance: The Unintended Consequences of

Tiered Products by Health Plans, 2003 HEALTH

AFFAIRS (Web Exclusive) W158, 160, at

http://content.healthaffairs.org/cgi/reprint/hlthaff.w3.

158v1.pdf.

193 Robinson, supra note 175, at 137 (“The

tiered designs are not conceptualized as a means to

insulate the health plans from hospital cost variation

but, rather, as a means to inform and sensitize the

patient, who previously was insulated from and

indifferent to the cost implications of hospital

choice.”); Yegian, supra note 173, at 147 (tiers make

“cost differences among hospitals more transparent to

consumers and allow consumers to decide whether a

high-cost facility merits additional out-of-pocket

spending”).

194 Medical Savings Accounts (MSA) and

Health Savings Accounts (HSA) are tax-exempt

accounts that allow consumers to accumulate savings

to pay for medical expenses. They have different

contribution levels, deductible ranges, and maximum

levels for out-of-pocket expenses. Both MSAs and

HSAs are part of the movement to consumer-driven

health care and put greater responsibility for health

expenses on the consumer. See Press Release, U.S.

Dep’t of Treasury, 21st Century Medicare: More

Choices – Better Benefits: Health Savings Account

(HSAs) (Dec. 22, 2003), at http://www.ustreas.gov

/offices/public-affairs/hsa/press/ (accessible through

“Fact Sheet on Health Savings Account”); infra

Chapter 5.

195

 See, e.g., Commissioner Thomas B.

Leary, Special Challenges for Antitrust in Health

Care, ANTITRUST MAG. 25, Spring 2004 (“It is

therefore worthwhile to consider the implications of a

system that would provide more information on

objective measures of the quality of medical care. If

this were possible, it would facilitate cost-benefit

tradeoffs by payors and ultimate consumers of

medical products and services. It could also

encourage compensation based more overtly on

outcomes rather than on inputs, and perhaps lead to a

more rational allocation of resources.”). 
36

information about the price of the services

that will be rendered at both hospitals.196 

Most insured consumers are

“rationally ignorant” of the price of the

medical services they receive, because

insurance largely insulates them from the

financial implications of their medical

treatment.197 Consumers who pay the same

co-payment regardless of the price of the

treatment they receive have no reason to

inquire into the price of the treatment, or to

factor that price into their decision. 

Consumers who have co-payments that vary

depending on where they receive care will

still focus on the amount of the co-payment,

and not on the total price of the services they

receive. Even if consumers are interested in

knowing the total price of the care they

receive, they would find it extremely

difficult to obtain that information, and are

likely to find it to be complicated and

obscure.198 Proposals to increase consumer

price sensitivity must confront this reality,

and develop strategies to increase the

transparency of hospital pricing. To be sure,

these difficulties do not apply to payors, who

deal with multiple providers in multiple

geographic and product markets, and use

pricing information to make contracting

decisions. 

XII. HOSPITAL PRICING: 

DISTINGUISHING AMONG

BULK PURCHASING, PRICE

DISCRIMINATION, COST

SHIFTING, AND CROSS

SUBSIDIES

Understanding hospital pricing

requires an understanding of four terms: 

bulk purchasing, price discrimination, cost

shifting, and cross subsidies. The terms

have distinct meanings, although there is

some overlap between cost shifting and

cross subsidies. 

Bulk purchasing usually occurs when

large organizations (e.g., insurance

companies) receive purchasing discounts

because of the volume of their purchases. 

196 Of course, consumers will also want

information about the quality of the services they will

receive at both hospitals. The availability of such

information is addressed in supra Chapter 1.

197 Herbert Simon, A Behavioral Model of

Rational Choice, in MODELS OF MAN (1957). 

198

 See Frech 3/26 at 198 (“[A] typical

hospital will have at least tens, and maybe hundreds

of payors with different prices. Not only that, the

prices – they’re not only different, the very bases of

the price, what gets priced, is different. You’ll have

charges, fee for service, you’ll get discounts off of

charges . . . .”); Herzlinger 5/27 at 89-90 (observing

“there is virtually no price quality information. You

ever try to find out what the price is for a certain

procedure? I mean you’d think [its] probably easier to

get some information out of the FBI.”); Busey 9/24 at

117-18 (“I think it’s fairly well known that there is a

lack of information or an uneven amount of 

information among players in the health care industry,

and I can illustrate that by asking any of you, do you

know how much your doctor charges for an office

visit, and do you know how much you pay, and does

it vary from the time of the year . . . . Again, that

information is not as readily available in this market

as it might be in other markets.”). See also Uwe E.

Reinhardt, Can Efficiency in Health Care Be Left to

the Market?, 26 J. HEALTH POL., POL’Y & L. 967, 986

(2001) (“[O]ne need only imagine a patient beset by

chest or stomach pain in Anytown, USA, as he or she

attempt to ‘shop around’ for a cost-effective

resolution to those problems. Only rarely, in a few

locations, do American patients have access to even a

rudimentary version of the information infrastructure

on which the theory of competitive market and the

theory of managed care rest. The price of health

services are jealously guarded proprietary

information.”). 
37

This type of purchasing can help reduce the

cost of health care because the bulk

purchasing capability can be used to obtain a

large discount. For example, insurance

companies often secure better hospital care

rates for their beneficiaries than uninsured

individual may obtain.199 There is nothing

unusual about this behavior and it has a long

history in commercial practice, in the courts,

and in economic analysis.

The conventional definition of price

discrimination is different ratios of price (P)

to marginal cost (MC) for the same service

across different buyers. That is P/MC for

consumer “j” is not equal to P/MC for

consumer “k”.200 For example, senior

citizens may pay less to watch the same

movie at the same time as other adults. Like

bulk purchasing, price discrimination has a

long history in commercial practice, in the

courts, and in economic analysis.201

Cost shifting refers to raising the

price charged to one group of consumers as

a result of lowering the price to other

consumers. An example would be a hospital

raising the price to privately insured patients

because the government lowered the price it

paid for Medicare patients.202 The hospital

raises the privately insured prices closer to

the profit maximizing level. There are three

essential elements to cost shifting:203 (1) the

company or hospital must have market

power that it has not exploited; (2) in

response to a payor lowering its price, the

company raises its prices to other payers;

and (3) the ability to cost-shift is limited by

the profit maximizing price. Some

economists will concede that cost-shifting

may exist as a matter of theory for non-profit

maximizing firms, but question whether it

actually occurs.204

199 Fraser 5/29 at 273 (noting the “huge gap

between the retail price and the negotiated price, the

only people who pay retail are the uninsured”);

Milstein 5/29 at 272 (“[R]ight now we have a

circumstance in many markets in this country in

which the difference between the negotiated price and

the rack rate, the retail rate, is breathtaking and bears

no resemblance to anything that would happen in

virtually any other industry.”); Roy Meidinger,

Health Industry: Great Intentions Gone Bad (Public

Comment).

200

 See GEORGE J. STIGLER, THE THEORY OF

PRICE 210 (4th ed. 1987). 

201 Certain types of price discrimination are,

however, prohibited by Section 2 of the Clayton Act

as amended in 1936. 

202

 See, e.g., Paul B. Ginsburg, Can

Hospitals and Physicians Shift the Effects of Cuts in

Medicare Reimbursement to Private Payors?, 2003

HEALTH AFFAIRS (Web Exclusive) W3-472, 473 (“An

example would be if hospitals raised prices to private

payers in response to Medicare payment rate

reductions.”), at http://content.healthaffairs.org

/cgi/reprint/hlthaff.w3.472v1.pdf. One analyst

believes that state legislators account for cost shifting

when setting Medicaid rates, and are more willing to

underpay hospitals than nursing homes because they

know Medicaid “is only 10 percent of hospitals’

revenues on the patient side, but it’s 60, 70, 80

percent of nursing homes’ revenue.” Jason S. Lee et

al., Medicare Payment Policy: Does Cost Shifting

Matter?, 2003 HEALTH AFFAIRS (Web Exclusive)

W3-480, 485 (referring to comments made by Stuart

Altman), at http://content.healthaffairs.org/cgi

/reprint/hlthaff.w3.480v1.pdf. 

203 MICHAEL A. MORRISEY, COST SHIFTING

IN HEALTH CARE: SEPARATING EVIDENCE FROM

RHETORIC, at Ch. 2 (AEI Press, 1994).

204 Economists have been skeptical about

the existence of cost-shifting. See David Dranove &

William D. White, Medicaid-Dependent Hospitals

and Their Patients: How Have They Fared?, 33

HEALTH SERVICES RES. 163, 165 (1998) (finding that

“although California hospitals dependent on

Medicaid were hit hard by Medicaid cutbacks in the
38

Cross subsidizing is the practice of

charging supracompetitive prices to some

payors or for some services and using the

surpluses to subsidize other payors or other

clinical services. Cross subsidization is

similar to cost shifting in that it can occur if

a non-profit-maximizing firm has market

power. Cross-subsidies can occur if there

are barriers to entry in a market and a nonprofit-maximizing firm receives greater

profits on some services (e.g., from

Medicare for cardiac services) that it uses to

underwrite the provision of other services.205

In a competitive market, such crosssubsidies are competed away.206 Hospital

panelists see cross subsidies not as a theory,

but as a fact of life: 

[If we] take away those profitable

services and leave the hospital, the

community hospital, with just the

unprofitable services, one of two

things is going to happen. Either

services will be diminished to the

community in a way that is not

transparent, in a way that they cannot

see that happening, or costs will be

shifted back to other payors, and

business and labor and consumers

end up absorbing them, once again,

not in a transparent way where they

can see what’s happening.207

period 1983-1992, they did not raise prices to

privately insured patients .... This suggests either (a)

that they were unable to cost-shift, and/or (b) that

they were not desirable to managed care payers.”);

MICHAEL A. MORRISEY, HOSPITAL COST SHIFTING, A

CONTINUING DEBATE (Employee Benefit Research

Inst., Issue Brief No. 180, 1996) (examining the

evidence on hospital cost shifting and suggesting cost

shifting, to the extent it may have once existed, no

longer exists because of competition in hospital

markets). See also Jack Zwanziger et al., Can Cost

Shifting Continue in a Price Competitive

Environment?, 9 HEALTH ECON. 211 (2000)

(providing evidence of the empirical importance of

cost-shifting). But see Desmarais 2/27 at 212-13

(stating that “our member [insurance] companies are

concerned about cost shifting, in that the public

payers are not paying the cost of the care for their

recipients and beneficiaries, and as a result it just

tends to add more pressure on the remainder of the

marketplace to try to ‘make up the difference ....’”).

205 Commentators state that for-profit

hospitals are less likely to offer non-remunerative

services. See Jill R. Horwitz, Why We Need the

Independent Sector: The Behavior, Law, and Ethics

of Not-for-Profit Hospitals, 50 UCLA L. REV. 1345,

1367-76 (2003) (finding increased probability of nonremunerative services offered by nonprofit hospitals);

Linda B. Miller, The Conversion Game: High

Stakes, Few Rules, 16 HEALTH AFFAIRS 112, 116

(Mar./Apr. 1997) (“These services – such as burn

units, perinatal intensive care units, transplantations,

and other sophisticated medical interventions – exist

overwhelmingly in the nonprofit sector and represent

an investment in a social good, not potential financial

returns.”). 

206

 See, e.g., Blumstein 2/27 at 30

(“[A]ntitrust evaluates conduct on grounds of

competition and efficiency. It encourages competing

away excess profits and cross-subsidization. This is

something that the health system has lived on for

many years, but it is hard to do when

super-competitive profits are being competed away

and that many monopolies are being targeted.”);

Brewbaker 9/9/02 at 33 (“We expect markets to

control cost for us, but we don’t like it when they

eliminate the cross subsidies that allow hospitals, for

example, to provide things like indigent care.”). 

207 G. Lynn 3/27 at 86. See also Opelka

2/27 at 180 (“Cost shifting was once the remedy to

ensure a stable practice, but this [is] no longer a

solution for surgeons.”); Mansfield 4/25 at 88-89

(“[A]cute care hospitals, ... [are] very dependent

upon being able to cross subsidize the losses we have

for patients who have medical DRGs by treating those

who are surgically or procedurally oriented.”); Joyce

Mann et al., Uncompensated Care: Hospitals’

Responses To Fiscal Pressures, 14 HEALTH AFFAIRS

263, 263 (Spring 1995) (“Hospitals historically have
39

As noted previously, Congress has

created direct subsidies for certain hospitals. 

CMS pays more (approximately $5.9 billion

extra in 1999) to teaching hospitals and it

pays more (approximately $5 billion per

year) to safety net hospitals that provide a

disproportionate share of care to the poor.208

More recently, the MMA includes a

provision for $250 million in extra payments

to hospitals in states that border Mexico, to

pay for the costs of providing emergency

care to undocumented aliens.209

Reliance on cross-subsidies, instead

of direct subsidies, to ensure access to care

makes the availability of such care

contingent on the location in which care is

provided, the wealth and insurance status of

those receiving care at any given hospital,

and the un-competitiveness of the market for

hospital services. Several panelists noted

that in some communities, hospitals make

substantial profits on one group and use

those funds to provide charity care to the

balance of the community.210 

In other locations, this approach is

not viable – particularly if those paying the

bills identify alternative locations to provide

care that choose not to engage in cross

subsidization. Cross subsidies distort

relative prices, resulting in inefficient

decisions by payors and patients. Cross

subsidies also complicate attempts to

provide consumers with better price

information. Finally, it is generally more

efficient to subsidize directly, rather than

pay higher prices elsewhere and cross

subsidize. 

XIII. CROSS SUBSIDIES AND

COMPETITION

As noted previously, cross subsidies

require either the exercise of market power

by a non-profit-maximizing firm, or a nonprofit-maximizing firm that receives supracompetitive profits on some services in a

market with barriers to entry. As

competition becomes more effective in

hospital markets, these cross subsidies will

tend to be competed away.211

Competition can help make health

care more affordable, but it cannot transfer

resources to those who do not have them. 

SSHs and ASCs may well enhance quality

taken it upon themselves to fill some of the gaps in

the U.S. health insurance system by treating

uninsured patients and then charging more to those

who can pay to offset the costs. This practice, known

as cost shifting, distinguishes the hospital sector from

nearly all other sectors of the economy.”).

208 MEDICARE PAYMEN T ADVISORY

COMM’N, REPORT TO THE CONGRESS: RETHINKING

MEDICARE’S PAYMEN T POLICIES FOR GRADUATE

MEDICAL EDUCATION AND TEACHING HOSPITALS

(1999), at http://www.medpac.gov

/publications/congressional_reports/august99.pdf.

209

 See Federal Reimbursement of

Emergency Health Services Furnished to

Undocumented Aliens, Pub. L. 108-173, tit. X, §

1011, 117 Stat. 2432 (Dec. 8, 2003). See also

U.S./MEXICO BORDER COUNTIES COALITION,

MEDICAL EMERGENCY: COSTS OF UNCOM PENSATED

CARE IN SOUTHW EST BORDER COUNTIES 47 (2002)

(estimating more than $200 million or about 25

percent of the uncompensated costs border hospitals

incurred resulted from emergency medical treatment

provided to undocumented immigrants), at

http://www.bordercounties.org/vertical/Sites/{B4A0F

1FF-7823-4C95-8D7A-F5E400063C73}/uploads/{F

AC57FA3-B310-4418-B2E7-B68A89976DC1}.PDF. 

210 G. Lynn 3/27 at 29.

211

 See supra note 206.
40

of care, lower prices, and improve access. 

From the perspective of those receiving care

at the SSH or ASC, that is a desirable

outcome. From the perspective of the

general hospital that relied on specialty care

to cross subsidize unprofitable patients and

services, and from the perspective of such

patients and perhaps others that the hospital

serves, the same outcome is undesirable.212

Competition has a number of effects

on hospitals, including the potential to

improve quality and lower costs. 

Competition will also undermine the ability

of hospitals to engage in cross-subsidization,

however. To address this issue, Congress

and state legislatures should consider

whether direct subsidies for desired conduct

are advisable.213

 

212

 See, e.g., Lesser 3/27 at 17-18 (“W hile

specialty facilities may lead to improved access for

certain services ... there may be a cost from the

broader system and societal perspective [] in terms of

the ability of general hospitals to maintain the

cross-subsidies necessary to fund other less profitable

services.”). 

213

 See COUNCIL OF ECONOMIC ADVISORS,

ECONOMIC REPORT OF THE PRESIDENT, at Ch. 4

(2002) (“Competition need not threaten the quality of

care received by those with the least ability to pay;

rather, government support and oversight can be

better directed to ensure that all Americans are able to

participate effectively in a competitive health care

system.”).
CHAPTER 4: COMPETITION LAW: HOSPITALS

I. INTRODUCTION ....................................................... 1

II. GEOGRAPHIC MARKET DEFINITION ..................................... 4

A. Elzinga-Hogarty, Critical Loss, and the Alternatives ...................... 5

1. Elzinga-Hogarty Test ......................................... 7

2. Critical Loss Analysis ....................................... 10

3. Alternative Analytical Techniques .............................. 14

B. Other Evidentiary Sources .......................................... 15

1. Hospital Strategic Planning Documents ......................... 16

2. Payor Testimony ........................................... 16

3. Patients’ Willingness to Travel – How Far and Why? ............... 19

4. Physicians’ Willingness and Ability to Steer Patients to Less 

Expensive Alternatives ...................................... 20

C. Summary ....................................................... 20

III. PRODUCT MARKET DEFINITION ....................................... 21

IV. ENTRY .............................................................. 25

V. EFFICIENCIES ........................................................ 25

VI. NONPROFIT STATUS OF HOSPITALS .................................... 29

VII. GROUP PURCHASING ORGANIZATIONS ................................ 34

A. What is a GPO? .................................................. 35

B. GPO Industry Overview ............................................ 36

C. Structure and Incentives ............................................ 37

D. Contracting Practices .............................................. 38

E. Statement 7 Does Not Protect Anticompetitive Contracting Practices ........ 45

VIII. TIERING AND PAY-FOR-PERFORMANCE ................................ 47
CHAPTER 4: COMPETITION LAW: HOSPITALS

I. INTRODUCTION

Analyses of the likely competitive

effects of hospital mergers have been an

important part of antitrust enforcement since

the FTC issued its first hospital merger

complaint in 1981.1 Most hospital mergers

and acquisitions do not present competitive

concerns.2 The Department of Justice and

Federal Trade Commission Statements of

Antitrust Enforcement Policy in Health Care

(Health Care Statements) specifically set

forth a safety zone for hospital mergers that

will be rarely (if ever) challenged by the

Agencies.3 Indeed, since 1981, the

Commission and DOJ have challenged

relatively few hospital mergers, in some

instances seeking relief only for part of the

transaction.4 The Agencies have used

consent orders to resolve competitive

concerns about several of these mergers.

5

Nonetheless, the Agencies have

found some hospital mergers likely to have

anticompetitive effects and had considerable

early success in litigating hospital merger

cases.6 From 1994 through 2000, however,

when there were approximately 900 hospital

mergers, the Agencies and state antitrust

enforcers lost all seven cases they litigated.7

1

 Am. Med. Int’l v. FTC, 104 F.T.C. 1

(1984), as modified by 104 F.T.C. 617 (1984) and

107 F.T.C. 310 (1986). The Commission decision

held that a for-profit hospital chain’s acquisition of a

competing hospital in the city and county of San Luis,

Obispo, California, violated § 7 of the Clayton Act

and § 5 of the FTC Act. The Commission found that

the acquisition lessened both price and nonprice

competition, and ordered divestiture of the acquired

hospital.

2

 U.S. DEP’T OF JUSTICE & FEDERA L TRADE

COMM’N, ANTITRUST ENFORCEMEN T POLICY

STATEMENTS IN THE HEALTH CARE AREA § 1 (1996)

[hereinafter HEALTH CARE STATEMENTS], available

at http://www.ftc.gov/reports/hlth3s.pdf. Agency

review of most proposed hospital mergers is typically

completed in less than a month. Id. § 1. See also J.

Jacobs 3/28 at 69. 

3

 HEALTH CARE STATEMENTS, supra note 2,

§ 1. The safety zone encompasses mergers between

two general acute-care hospitals “where one of the

hospitals (1) has an average of fewer than 100

licensed beds over the three most recent years, and

(2) has an average daily inpatient census of fewer

than 40 patients over the three most recent years,

absent extraordinary circumstances.” Id. This safety

zone does not necessarily apply if one of the hospitals

is less than five years old. Transactions that fall

outside the safety zone are not necessarily

anticompetitive and may be pro-competitive. 

4

 The Agencies challenge relatively few

mergers overall. In 2001, the Agencies were notified

of 2,376 total mergers (the FTC challenged 23 and

DOJ challenged 32) and a few of those were below

the thresholds for notification. FEDERA L TRADE

COMM’N STAFF, U.S. DEPARTMEN T OF JUSTICE,

ANTITRUST DIVISION, ANN UAL REPORT TO CONGRESS,

FISCAL YEAR 2002 (2003), available at

http://www.ftc.gov/os/2003/08/hsrannualreport.pdf. 

5

 See HEALTH CARE SERVICES & PRODUCTS

DIVISION, FEDERA L TRADE COMM’N, FTC ANTITRUST

ACTIONS IN HEALTH CARE SERVICES AND PRODUCTS

(2003), available at http://www.ftc.gov/bc/hcupdate

031024.pdf; U.S. Dep’t of Justice Antitrust Division,

Health Care Task Force: Recent Enforcement

Actions, at http://www.usdoj.gov/atr/public/

health_care/2044.htm; U.S. Dep’t of Justice Antitrust

Division Summary of Antitrust Division Health Care

Cases Since August 25, 1983, at http://www.usdoj.

gov/atr/public/ health_care/0000.pdf. 

6

 Martin Gaynor & William B. Vogt,

Competition Among Hospitals, 34 RAND J. ECON.

764, 764 (2003). 

7

 Id. at 764. The seven cases were: 

California v. Sutter Health Sys., 84 F. Supp. 2d 1057

(N.D. Cal.), aff’d mem., 2000-1 Trade Cas. (CCH) ¶

87,665 (9th Cir. 2000), revised, 130 F. Supp. 2d 1109

(N.D. Cal. 2001); FTC v. Tenet Healthcare Corp., 17

F. Supp. 2d 937 (E.D. Mo. 1998), rev’d 186 F.3d
2

Some scholars have strongly criticized the

courts’ reasoning in these cases.8 

The Agencies analyze hospital

mergers using the same analytical

framework they use for other mergers. The

1992 Horizontal Merger Guidelines (Merger

Guidelines) specify that “mergers should not

be permitted to create or enhance market

power or to facilitate its exercise.”9 Market

power “is the ability profitably to maintain

prices above competitive levels for a

significant period of time.”10 A merger also

may “lessen competition on dimensions

other than price, such as product quality,

service, or innovation.”11

To identify mergers that are likely to

cause competitive problems, the Merger

Guidelines provide for the examination of

several issues, including: 

• whether the merger, in light of

market concentration and other

1045 (8th Cir. 1999); United States v. Long Island

Jewish Med. Ctr., 983 F. Supp. 121 (E.D.N.Y. 1997);

FTC v. Butterworth Health Corp., 946 F. Supp. 1285,

1300-1301 (W.D. Mich. 1996), aff’d, 1997-2 Trade

Cas. (CCH) ¶ 71,863, 71,867-68 (6th Cir. 1997);

United States v. Mercy Health Services, 902 F. Supp.

968 (N.D. Iowa 1995), vacated as moot, 107 F.3d

632 (8th Cir. 1997); FTC v. Freeman Hosp., 911 F.

Supp. 1213 (W.D. Mo.), aff’d, 69 F.3d 260 (8th Cir.

1995); In re Adventist Health Sys., 117 F.T.C. 224

(1994). One of the seven cases was brought by state

antitrust enforcers without either Agency’s

involvement. See Sutter Health Sys., 84 F. Supp. 2d

1057.

8

 See Thomas L. Greaney, Night Landings

on an Aircraft Carrier: Hospital Mergers and

Antitrust Law, 23 AM. J.L. & MED. 191 (1997). As

Professor Greaney notes, in Freeman Hospital, the

FTC produced patient-origin data that showed a high

percentage of patients stayed in the government’s

proposed geographic market, as well as forward

looking testimony of market participants, including

competitors, buyers, and consumers. The Court

placed the Commission in a “Catch 22: hard

evidence like historical patient-origin data was

unacceptable because it did not address future

contingencies, and managed care testimony was

inadequate, although it addressed future

contingencies, because it lacked the specificity of

hard evidence.” Id. at 207-08. Similarly, Professor

Greaney noted that in Mercy Health Systems, the

courts ignored most of DOJ’s subjective and

objective evidence designed to provide a dynamic

analysis of the market and discounted opinion

testimony of the most knowledgeable market

participants, including third party payors and

physicians. Id. at 209-212. 

See also Peter Hammer & William Sage,

Critical Issues in Hospital Antitrust Law, 22 HEALTH

AFFAIRS 88, 90 (Nov./Dec. 2003) (noting merging

hospitals have persuaded some courts “that nonprofit

hospitals will not raise prices in the same manner as

would for-profits or businesses outside of health care

with comparable market share” and that relevant

geographic markets include hospitals 70 to 100 miles

away); William Sage et al., Why Competition Law

Matters to Health Care Quality, 22 HEALTH AFFAIRS

31, 41-42 (Mar./Apr., 2003) (some courts presume

nonprofit health facilities act in the public interest,

and that increased revenues will be spent on quality

improvements). 

As the current Chairman of the Federal

Trade Commission recently observed, “In hospital

merger cases, the government is zero for the last

seven. I don’t know the specifics of every case, but

what’s striking is the zero. I can certainly accept the

idea that the government should not have won them

all. But it seems very unlikely the government should

have lost them all.” William M . Sage, Protecting

Competition and Consumers: A Conversation With

Timothy J. Muris, 22 HEALTH AFFAIRS 101, 103

(Nov./Dec. 2003). 

9

 U.S. DEP’T OF JUSTICE & FEDERA L TRADE

COMM’N, HORIZONTAL MERGER GUIDELINES § 0.1

(1992 rev. 1997, efficiencies section only)

[hereinafter MERGER GUIDELINES], available at

http://www.ftc.gov/bc/docs/horizmer.htm. 

10 MERGER GUIDELINES, supra note 9, § 0.1.

11

 Id. § 0.1 n.6.
3

factors that characterize the market,

would be likely to have adverse

competitive effects;

• whether entry would be timely,

likely, and sufficient either to deter

or to counteract the competitive

effects of concern;

• whether there are efficiency gains

from the merger that meet the

Agencies’ criteria for examination;

and

• whether, but for the merger, either

party to the transaction would be

likely to fail, causing its assets to exit

the market.12

Merger analysis can begin with an

assessment of direct evidence of likely

anticompetitive effects.13 The Supreme

Court has stated that “the finding of actual,

sustained adverse effects on competition ...

is legally sufficient to support a finding that

the challenged restraint was unreasonable

even in the absence of elaborate market

analysis.”14 A number of lower court

decisions have followed this principle.15

Merger analysis also can begin with

the identification of relevant product and

geographic markets. A market is defined as

a product(s) and a geographic area in which

it is produced or sold, such that a

hypothetical profit-maximizing firm that

was the only present and future producer or

seller of those products in that area likely

would impose at least a “small but

significant and non-transitory” increase in

12

 Id. § 0.2. The last factor is sometimes

referred to as the “failing firm defense.” As the

guidelines explain:

A merger is not likely to create or enhance

market power or facilitate its exercise if the

following circumstances are met: 1) the

allegedly failing firm would be unable to

meet its financial obligations in the near

future; 2) it would not be able to reorganize

successfully under Chapter 11 of the

Bankruptcy Act [11 U.S.C. §§1101-1174

(1988)]; 3) it has made unsuccessful goodfaith efforts to elicit reasonable alternative

offers of acquisition of the assets of the

failing firm that would both keep its tangible

and intangible assets in the relevant market

and pose a less severe danger to competition

than does the proposed merger; and 4)

absent the acquisition, the assets of the

failing firm would exit the relevant market.

 Id. § 5.1. 

13

 e.g., In re Schering-Plough Corp., No.

9297 at 16-17 (Dec. 18, 2003) (discussing FTC v.

Indiana Fed’n of Dentists, 476 U.S. 447, 460-61

(1986)), available at http://www.ftc.gov/os/adjpro/

d9297/031218 commissionopinion.pdf. 

14

 Indiana Fed’n of Dentists, 476 U.S. at

460-61.

15

 See, e.g., Todd v. Exxon Corp., 275 F.3d

191, 206 (2d Cir. 2001) (evidence of “an actual

adverse effect on competition ... arguably is more

direct evidence of market power than calculations of

elusive market share figures”); Toys R’ Us v. FTC,

221 F.3d 928, 937 (7th Cir. 2000) (market power can

be proved “through direct evidence of anticompetitive

effects”); United States v. Baker Hughes Inc., 908

F.2d 981, 992 (D.C. Cir. 1990) (“‘Market share is

just a way of estimating market power, which is the

ultimate consideration,’ and ... ‘[w]hen there are

better ways to estimate market power, the court

should use them’” (quoting Ball Mem’l Hosp. v.

Mutual Hosp. Ins., 784 F.2d 1325, 1336 (7th Cir.

1986)).).
4

price.16 This market definition test is

sometimes referred to as the “hypothetical

monopolist” paradigm. A relevant market is

a group of products and a geographic area

that is no bigger than necessary to satisfy

this test.17 Analysis typically starts with a

narrow area that is broadened until a price

increase by the hypothetical firm would be

profitable because consumers have

insufficient substitution alternatives

available to defeat it.18

Hospital merger analysis raises a

number of significant issues, including how

best to define the geographic and product

markets, assess the prospects for entry and

the likelihood and magnitude of efficiencies,

and determine the relevance of a hospital’s

institutional status (for-profit or nonprofit). 

This chapter considers each of these issues,

and discusses relevant case law, academic

commentary and research, and testimony

and written presentations from the Hearings.

Chapter 4 also addresses the role of

group purchasing organizations (GPOs) for

health care systems, including the extent to

which GPOs act as agents of their buyermembers or as agents of the sellers that pay

the GPOs’ administrative fees. This section

also discusses the antitrust issues GPOs may

raise and the applicability of the Health

Care Statements to those issues. Chapter 4

concludes with a brief discussion of the

antitrust implications of tiering and pay-forperformance.19

II. GEOGRAPHIC MARKET

DEFINITION

The Agencies define hospital

geographic markets using the process set

forth in the Merger Guidelines. Panelists

agreed that the Merger Guidelines provide

an appropriate framework for defining and

analyzing hospital geographic markets.20

Although there is widespread agreement on

16 MERGER GUIDELINES, supra note 9, § 1.0. 

This test further assumes that the hypothetical profitmaximizing firm is not subject to price regulation and

that the terms of sale of all other products are held

constant. Id.

17

 Id. § 1.0. 

18 Seth Sacher & Louis Silvia, Antitrust

Issues in Defining the Product Market for Hospital

Services, 5 INT’L J. ECON. BUS. 181, 182-83 (1998) at

http://www.ftc.gov/ogc/healthcarehearings/docs/0303

26sethbsacher.pdf. 

19

 See also supra Chapter 1.

20

 See, e.g., Guerin-Calvert 3/26 at 125, 130

(suggests using the merger guidelines and the

hypothetical monopolist test; “although there is a

great deal that is unique and specific about health

care and hospitals in particular, [the best approach for

analyzing hospital industry competition and

transactions is] the same kinds of principles and the

same kinds of fact-intensive analysis that is used in all

other industries”); Margaret E. Guerin-Calvert,

Defining Geographic Markets for Hospitals 6-11

(3/26) (slides) [hereinafter Guerin-Calvert

Presentation], at http://www.ftc.gov/ogc/health

carehearings/docs/030326guerincalvert.pdf; Vistnes

3/26 at 147-148 (stating the geographic market

definition “should be driven, principally if not

exclusively, by the Merger Guidelines;” the key test is

whether a plan could divert enough patients to a

different hospital in a different region to make the

price increase unprofitable); Gregory Vistnes,

Geographic Markets and Hospital Competition 5

(3/26) (slides) [hereinafter Vistnes Presentation], at

http://www.ftc.gov/ogc/healthcarehearings/docs/vistn

es.pdf; Werden 3/26 at 201 (noting the merger

guidelines’ hypothetical monopolist paradigm is the

right approach); Gregory Werden, Hospital Mergers

and the Hypothetical Monopolist Test 2 (3/26)

(slides) [hereinafter Werden Presentation], at

http://www.ftc.gov/ogc/healthcarehearings/docs/werd

en.pdf; David Argue 3/28 at 41-42.
5

the basic framework, two well-known health

law scholars have written: 

[T]he law concerning hospital

[geographic] market definition is in a

shambles. Common sense suggests

that health care, like politics, is local. 

In the words of Judge Richard

Posner, “People want to be

hospitalized near their families and

homes, in hospitals in which their

own – local – doctors have

privileges.” However, courts have

stretched the geographic boundaries

of markets to strip merging hospitals

of market power and thereby shield

them from antitrust liability.21

In this section, we discuss the

controversies about how to define relevant

geographic markets for hospitals. We

discuss the use of the Elzinga-Hogarty test

and critical loss analysis to define hospital

geographic markets, including the views of

proponents and critics. We then describe

alternative analytical techniques and

evidentiary sources that Hearing panelists

and researchers proposed for defining

hospital geographic markets. The final

subsection summarizes the Agencies’

conclusions and recommendations

concerning geographic market definition

issues. This subsection includes the

conclusion that, to date, the Agencies’

experience and research indicate that the

Elzinga-Hogarty test is not valid or reliable

in defining geographic markets in hospital

merger cases. 

At the outset, we note that direct

evidence of anticompetitive effects may

make it unnecessary to define a relevant

market. For example, consummated merger

cases may present opportunities to assess

competitive effects without using detailed

market definitions.22

A. Elzinga-Hogarty, Critical Loss, and

the Alternatives

Since 1995, the Agencies have lost

several hospital merger cases because the

courts accepted the merging parties’ use of

patient flow data to perform either the

Elzinga-Hogarty test23 or critical loss

analysis24 to define the geographic market

much more broadly than the plaintiff

21 Hammer & Sage, supra note 8, at 90,

citing to United States v. Rockford Mem’l Corp., 898

F.2d 1278, 1285 (7th Cir. 1990).

22

 See, e.g., Michael Vita & Seth Sacher,

The Competitive Effects of Not-For-Profit Hospital

Mergers: A Case Study, 49 J. INDUS. ECON. 63

(2001) (using a control group methodology to assess

competitive effects). Here, the competitive effect of

the transaction is identified by comparing the change

in price at the merging hospitals to the change in

price (measured over the same time period) at a set of

“control” hospitals. The control hospitals are

hospitals in other geographic areas that are otherwise

similar to the merging hospitals. Note, however, that

a price increase by itself may not be sufficient to

prove anticompetitive effects.

23 The Elzinga-Hogarty test is named for the

two economists who first proposed this particular

analysis. See Kenneth Elzinga & Thomas Hogarty,

The Problem of Geographic Market Delineation in

Antitrust Suits, 18 ANTITRUST BULL. 45 (1973)

[hereinafter Elzinga & Hogarty, The Problem];

Kenneth Elzinga & Thomas Hogarty, The Problem of

Geographic Market Delineation Revisited: The Case

of Coal, 23 ANTITRUST BULL. 1 (1978) [hereinafter

Elzinga & Hogarty, The Problem Revisited]. 

24 The term “critical loss analysis” was first

used in an article: Barry Harris & Joseph Simons,

Focusing Market Definition: How Much Substitution

Is Necessary? 12 RES. IN L. & ECON. 207 (1989).
6

Agency.25 Commentators and panelists

observed that these cases reflect judicial

acceptance of implausibly large geographic

markets, judicial approval of mergers that

would not be permitted in any other

industry, and the lessening of competition in

the hospital services market.26 

All panelists agreed that neither the

parties nor the courts should use the ElzingaHogarty test as the sole basis for defining the

geographic market.27 As one panelist stated: 

“if [Elzinga-Hogarty] is the only tool that is

being used . . . it blurs everyone’s vision as

to who really are the competitors and the

alternatives that matter.”28 Panelists and

commentators identified numerous problems

with the application of critical loss analysis,

although panelists and commentators agreed

that it can be a useful tool.29

Several panelists offered alternative

analytical tools and other types of evidence

to use in defining the geographic market for

a hospital. Most panelists agreed that no one

piece of information is sufficient to define a

hospital’s geographic market.30 In essence, 25

 See FTC v. Tenet Healthcare Corp., 17 F.

Supp. 2d 937 (E.D. Mo. 1998), rev’d 186 F.3d 1045

(8th Cir. 1999). In this case, the Eighth Circuit relied

on both an Elzinga-Hogarty test and a critical loss

analysis to conclude that a broad geographic market

was appropriate. Similarly, in United States v. Mercy

Health Services, 902 F. Supp. 968 (N.D. Iowa 1995),

vacated as moot, 107 F.3d 632 (8th Cir. 1997), the

District Court relied on patient migration patterns,

regional hospitals’ outreach clinics, and the lack of

evidence that patients’ loyalty to their physicians

would prevent them from defeating a price increase to

find a broad geographic market. See also J. Jacobs

3/28 at 72-74 (noting DOJ lost the Mercy Health case

on the geographic market definition for all of these

reasons, but believes that the government could

address successfully some of these issues today);

California v. Sutter Health Sys., 84 F. Supp.2d 1057

(N.D. Cal. 2000) (insufficient evidence of a relevant

geographic market); FTC v. Freeman Hosp., 911 F.

Supp. 1213 (W.D. Mo.), aff’d, 69 F.3d 260 (8th Cir.

1995) (holding the Commission had failed to identify

a relevant geographic market). 

26

 See Hammer & Sage, supra note 8, at 90;

Frech 3/26 at 189-191; Greaney 2/27 at 141-42;

Greaney , supra note 8.

27

 See Werden 3/26 at 248-50 (the data may

provide descriptive information, but you cannot draw

strong conclusions); Guerin-Calvert 3/26 at 139;

Guerin-Calvert Presentation, supra note 20, at 17;

Frech 3/26 at 190-91 (noting that patient flow data

and the Elzinga-Hogarty ratios are useful background,

but make no sense when used as a bright line to

define the geographic market); Vistnes 3/26 at 251-

52; Argue 3/28 at 44 (Elzinga-Hogarty is a static

analysis and does not address the dynamic nature of

markets).

28 Guerin-Calvert 3/26 at 139; GuerinCalvert Presentation, supra note 20, at 17. 

29

 See, e.g., Harris 3/26 at 171-78, 222-24;

Guerin-Calvert 3/26 at 125, 130-31; Werden 3/26 at

201-205, 212-20, 248-50; Frech 3/26 at 189-90;

Daniel O’Brien & Abraham Wickelgren, A Critical

Analysis of Critical Loss Analysis, 71 ANTITRUST L.J.

161, 161-62 (2003); Michael Katz & Carl Shapiro,

Critical Loss: Let’s Tell the Whole Story, 17

ANTITRUST, Spring 2003, at 49-50; James Langenfeld

& Wenqing Li, Critical Loss Analysis in Evaluating

Mergers, 46 ANTITRUST BULL. 299, 299-301 (2001);

Kenneth L. Danger & H.E. Frech III, Critical

Thinking About ‘Critical Loss’ in Antitrust, 46

ANTITRUST BULL. 339, 340-42 (2001); David

Scheffman & Joseph Simons, The State of Critical

Loss Analysis: Let’s Make Sure We Understand the

Whole Story, 3 THE ANTITRUST SOURCE, Nov. 2003,

at http://www.abanet.org/antitrust/source/nov03/

scheffman.pdf.

30 Vistnes 3/26 at 144, 147-49; Vistnes

Presentation, supra note 20, at 4-5, 11-18; GuerinCalvert 3/26 at 131-33; Guerin-Calvert Presentation,

supra note 20, at 4, 12. See also Leibenluft 3/28 at 8-

9 (“[On] geographic market, it’s sort of a Catch 22. 

The courts require -- and, I think, rightfully so -- that
7

panelists agreed the courts should apply the

Merger Guidelines’ hypothetical monopolist

test in hospital merger cases, just as they do

in merger cases involving other industries

and products. The question is how to

implement the hypothetical monopolist test,

and what analytical frameworks and

evidence should be used to do so. 

1. Elzinga-Hogarty Test

The Elzinga-Hogarty test was

designed to analyze commodity movements,

not hospital mergers. It was proposed by

two economists in an article critiquing the

Agencies’ geographic market definitions in

two non-hospital merger cases.31 In one

case, the government relied on LIFO (“little

in from outside”) data to argue that an entire

state was the relevant geographic market for

beer products. In the second case, the

government relied on LOFI (“little out from

inside”) data to argue that the relevant

geographic market for commercial banking

was limited to a four-county area.32 Kenneth

Elzinga and Thomas Hogarty argued that a

proper geographic market analysis required

the use of both LIFO and LOFI statistics, but

observed that their analysis was not readily

applicable to heterogenous goods or

differentiated products.33 Hospitals

generally provide heterogenous or

differentiated goods and services.34

Nonetheless, the “Elzinga-Hogarty

test” has been used extensively in hospital

merger cases. The movement of a patient

who resides within the provisional

geographic market to a facility outside of

that area for hospital services is considered

an importation of hospital services into that

provisional geographic market, measured as

LIFO. The movement of a patient who

resides outside of the provisional geographic

market to a facility inside the provisional

geographic market for hospital services is

considered an exporting of hospital services

outside of the provisional geographical

the analysis be dynamic. What will happen if the

hospitals merge? As a result of that, the plaintiff is

faced with a difficult task. What they have is

traditional hard evidence which relates to, for

example, patient flow data, which reflects historical

patient patterns, and is historical conduct. But that

doesn’t reflect what might happen in the future. But

when the Government tries to find what may or look

to what may suggest what will happen dynamically,

then that evidence could be attacked as being

speculative or anecdotal.”); Feller 9/24 at 66

(discussing geographic markets for physician services

and also noting that “zip code analysis, however, only

presents a static and limited view of the relevant

geographic market”).

31 Elzinga & Hogarty, The Problem, supra

note 23; see also Elzinga & Hogarty, The Problem

Revisited, supra note 23. 

32 Elzinga & Hogarty, The Problem, supra

note 23, at 52-64.

33

 Id. at 72-75 & n.75 (“Where the

appropriate product market is a set of heterogeneous

goods, or where there is product differentiation, or

where there are important physical differences among

units within the product market, adding together

physical units will be difficult if not impossible. In

such cases, measuring output in sales instead of

physical units might be necessary.”).

34

 See, e.g., Zwanziger 3/26 at 92 (The

Elzinga-Hogarty approach “is poorly suited to

hospital mergers” because it does not recognize the

underlying heterogeneity on the supply or demand

side of hospital services.); Jack Zwanziger, Defining

Hospital Markets 2 (3/26) (slides) [hereinafter

Zwanziger Presentation], at http://www.ftc.gov/ogc/

healthcare hearings/ docs/ zwanziger.pdf.
8

market, measured as LOFI.35 Thus, under

the hospital application of the ElzingaHogarty test, evidence that few patients

leave and few patients enter an area

surrounding the merging hospitals is

interpreted to support the conclusion that the

area constitutes a relevant geographic

market.36 

Conversely, if the patient flow data

show large numbers of patients coming into

or going out of the area for inpatient hospital

care, then the geographic market is

hypothesized to be broader than originally

thought, and must include hospitals further

away from the merging hospitals. A

geographic market definition is usually

described as “strong” if less than 10 percent

of discharged patients from the merging

hospitals’ area come into or out of the area. 

If more than 10 percent (but less than 25

percent) of patients migrate in or out of the

hospitals’ core geographic area for in-patient

services, the market definition is considered

“weak.”37 

Panelists identified a number of

weaknesses with the use of the ElzingaHogarty test to define a geographic market

for hospital services.38 One panelist pointed

out that the Elzinga-Hogarty test takes a leap

in logic from a current level of patient

migration to the conclusion that patients

would respond to a small price increase by

using hospitals outside of the merging

hospitals’ core geographic area – a leap not

justified by either economic analysis or past

experience.39 Patients decide whether or not

to travel for health care services for a variety

of reasons, including perceived and actual

variations in quality, insurance coverage,

out-of-pocket cost, sophistication of

services, and family connections.40 

Although patient flow data may

show that patients go to hospitals beyond the

core zip code area, this does not mean that

their behavior reflects price sensitivity, or

that other consumers would travel if prices

increased.41 Stated differently, patient flow

data can show existing hospitalization

patterns, but offer no insight into what

patients will do in response to a price

35

 See Gregory Vistnes, Hospitals, Mergers,

and Two-Stage Competition, 67 ANTITRUST L.J. 671,

689 (2000); Sacher & Silvia, supra note 18, at 192-

93.

36

 See Vistnes, supra note 35, at 689;

Elzinga & Hogarty, The Problem, supra note 23, at

72-76; Elzinga & Hogarty, The Problem Revisited,

supra note 23, at 2-3.

37

 See Elzinga & Hogarty, The Problem, 

supra note 23, at 73-75; Elzinga & Hogarty, The

Problem Revisited, supra note 23, at 2. 

If the LIFO and LOFI are both 10 percent or

less, then the geographic market satisfies the “strong”

Elzinga-Hogarty test. If the LIFO and LOFI are both

25 percent or less then the geographic market satisfies

the “weak” Elzinga-Hogarty test. Elzinga & Hogarty,

The Problem Revisited, supra note 23, at 2.

38 Frech 3/26 at 190-97; Greaney 2/27 at

141-42 (noting that the courts naively interpret

Elzinga-Hogarty in health care cases, and that

because hospitals offer heterogeneous services and

patients have highly diverse preferences, this results

in “thoroughly wrong-headed precedents and

subdoctrines”).

39 Frech 3/26 at 190-95. 

40

 Id. at 195.

41 Zwanziger 3/26 at 232-33. See also id. at

97-99 (noting that large markets based on patient

flow data and Elzinga-Hogarty are incompatible with

research knowledge: travel distance is the most

important criteria for a patient in deciding which

hospital to use).
9

increase by the merged hospital.

 

Another panelist described this

phenomenon as the “silent majority fallacy.”

The E-H [Elzinga-Hogarty] approach

draws a conclusion about the entire

market from the behavior of those

consumers who express displeasure

with their local sellers by traveling

elsewhere. This is a valid logical

leap when travelers and non-travelers

have similar demands and related

market experiences. However, if the

two groups differ on dimensions

other than location, then E-H gives

rise to what we call the “silent

majority fallacy.” That is, if

travelers and non-travelers display

fundamentally different demand

behavior, either because they differ

in their taste for travel or their need

for local/non-local services, then

there is no necessary relationship

between the market experiences of

these two groups post-merger. If

travelers differ significantly from

non-travelers, then the presence of a

minority of travelers does not imply

that local firms lack market power

vis-a-vis the majority of consumers

who are non-travelers.42

The silent majority fallacy is a

particular problem with hospital merger

analysis, because the goods and services are

not fungible commodities, but are “highly

differentiated by location and other

dimensions.”43 Empirical evidence confirms

that “the majority of patients are truly

reluctant to travel and do not view distant

hospitals as close substitutes for most

services, even though a sizable percentage of

their neighbors may travel for care. Those

who do travel have distinct reasons for doing

so and the fact that they travel would not

inhibit merging local hospitals from

increasing prices substantially.”44 

One panelist also noted that in some

circumstances, the Elzinga-Hogarty test

cannot be satisfied. If the initial

specification of the geographic market does

not meet the required threshold for LIFO and

LOFI, expanding the geographic market may

not satisfy the required threshold either. The

result is that the geographic market expands

without limit.45 This problem alone casts

42 CORY CAPPS ET AL., THE SILENT

MAJORITY FALLACY OF THE ELZINGA-HOGARTY

CRITERIA: A CRITIQUE AND NEW APPROACH TO

ANALYZING HOSPITAL MERGERS 1 (Nat’l Bureau of

Econ. Research, Working Paper No. w8216, 2001)

[hereinafter CAPPS ET AL., SILENT MAJORITY]. See

also Cory Capps et al., Geographic Market Definition

in Hospital Merger Cases 4 (4/16) [hereinafter Capps

et al. (stmt)], at http://www.ftc.gov/ogc/healthcare

hearings/docs/030410capps2.pdf; Cory Capps, ForProfit and Non-Profit Pricing: The Empirical

Evidence (4/10) (slides), at

http://www.ftc.gov/opp/hc/030410corycapps.pdf

[hereinafter Capps Presentation]. See also Cory

Capps et al., Antitrust Policy and Hospital Mergers: 

Recommendations for a New Approach, 47

ANTITRUST BULL. 677, 713-14 (2002) [hereinafter

Capps et al., Antitrust Policy].

43 CAPPS ET AL., SILENT MAJORITY, supra

note 42, at 1-2.

44

 Id. 

45 Frech 3/26 at 195 (“[A]s you expand the

area to get to a high enough percentage to call it a

service area, you keep picking up more hospitals, and

that keeps making it more difficult” to reach a cutoff.). Professor Frech noted that even at the 75

percent level, the defendant’s expert could not find a

cut-off for the Poplar Bluff geographic market area in

the Tenet case. Id. at 195. 
10

serious doubt on the utility of the ElzingaHogarty methodology for hospitals. 

This same panelist suggested that the

Elzinga-Hogarty test systematically leads to

expansive geographic markets when zip

codes are selected based on the absolute

number of patients that come from a zip

code.46 There is tremendous variability in

the number of individuals that live in a

particular zip code. A hospital may have a

small share of total admissions from a

particular zip code, even though it gets a

significant number of patient admissions

from that zip code – and the ElzingaHogarty test, as used in hospital mergers,

will include such distant zip codes in the

market. According to this panelist, “a zip

code that has 20,000 people, that’s 40 miles

away, might get included if the hospital gets

50 patients from there, whereas ten zip

codes that are closer that only have a

thousand people each, might send 40 people

each, they would get excluded.”47 He

suggested that such large and distant zip

codes are particularly likely to be cities that

have hospitals in them, which skews the

results of the analysis from the outset.48

2. Critical Loss Analysis

Critical loss analysis has the

potential to provide a useful way to

implement the hypothetical monopolist test,

but it must be applied with great care.49

Problems with its application have led some

commentators to question the value of

critical loss analysis as an antitrust tool.50 

Conventional critical loss analysis

posits a particular price increase and asks

what proportion of the hypothetical

monopolist’s sales would have to be lost to

yield a net decrease in the hypothetical

monopolist’s profits.51 When critical loss

analysis is used to delineate a relevant

market, the first step is to calculate the

percentage loss in sales that would make a

given price increase unprofitable for a

hypothetical monopolist over a candidate

market. This calculation depends on the

price increase posited and on the

contribution margin (i.e., price minus

marginal cost, all divided by price) on the

sales that would be lost.52

46 Frech 3/26 at 192 (“[R]anking zip codes

by the number of patients usually gives the largest

market areas.”).

47

 Id. at 192-93. See also H.E. Frech, III et

al., Elzinga-Hogarty Tests and Alternative

Approaches for Market Share Calculations in

Hospital Markets, 71 ANTITRUST L.J. 921, 928-29,

941-47 (2004).

48 Frech 3/26 at 192-93. 

49

 e.g., Scheffman & Simons, supra note 27,

61 at 2-3; Harris 3/26 at 170-75; Werden 3/26 at 201-

04.

50

 See supra note 29.

51 One also can ask how much of a reduction

in its sales the hypothetical monopolist would be

willing to tolerate to sustain a given price increase. 

Only asking this alternative calculation actually

implements the Horizontal Merger Guidelines’

hypothetical monopolist test, but the analysis

described in the text yields roughly the same result

under plausible conditions. Werden 3/26 at 202-04;

Werden Presentation, supra note 20, at 4-5.

52 Harris 3/26 at 170-75. The formula for

the critical loss for an x% price increase is x/(x + m),

where m is the margin, expressed as a percentage

price. For example, if the margin is 60 percent, the

critical loss for a 5 percent price increase is 5/(5 + 60)

= .077, or 7.7 percent.
11

The second step is to estimate the

likely actual loss in sales that would result

from the hypothesized price increase, e.g.,

what percentage of patients likely would

stop patronizing the hospitals in the

candidate market in response to the price

increase.53 The estimated actual loss is then

compared to the calculated critical loss. If

the estimated actual loss exceeds the critical

loss, it is inferred that the price increase

would be unprofitable and the candidate

market is too small to be a market.54

One panelist described misuses of

the critical loss technique that practitioners

should avoid.55 Notably, typical applications

posit small (e.g., five percent) price

increases. Yet, the Merger Guidelines’

methodology for delineation of relevant

markets asks whether the profit-maximizing

price increase would be at least a small but

significant amount (e.g., five percent). Even

though a monopolist may find a five percent

price increase unprofitable, it may find a

larger price increase profitable.56 This

panelist presented an example based on the

stylized facts of several hospital merger

cases in which a five percent price increase

would be unprofitable, but any price

increase between 31 percent and 319 percent

would be profitable, and the hypothetical

monopolist would maximize its profits by

increasing price 175 percent.57 Thus, the

candidate market was a market under the

Merger Guidelines’ hypothetical monopolist

test, even though a five percent price

increase was unprofitable.

This panelist discussed other

problems that occur in some

implementations of critical loss analysis. 

The standard formula presumes constant

marginal cost and no avoidable fixed costs,

but actual cost functions may differ

significantly from this assumption. Also,

the standard formula implicitly assumes

proportionate increases in all prices, but the

profit maximizing strategy for hospitals may

involve highly disproportionate price

increases.58 This panelist also explained that

critical loss calculations must focus on the

margins for the patients that likely 

would be lost in the event of a price

increase.59

Much of the potential for abuse in

critical loss analysis involves the second

step – estimation of the actual loss. Some

practitioners have relied in inappropriate

ways on consumer surveys or patient flow

53

 Id. at 174-75. 

54 Scheffman & Simons, supra note 29, at 2-

3 (outlining a three-step process for conducting a

critical loss analysis); see also Katz & Shapiro, supra

note 29, at 49-50; O’Brien & W ickelgren, supra note

29, at 161.

55 Werden 3/26 at 204-05; Werden

Presentation, supra note 20, at 8.

56 Werden 3/26 at 204-05; Werden

Presentation, supra note 20, at 8, 11, 14.

57 Werden 3/26 at 209-17; Werden

Presentation, supra note 20, at 15-19.

58 Werden 3/26 at 204-05; Werden

Presentation, supra note 20, at 14. 

59 Werden 3/26 at 219-20 (noting that it is

important to properly calculate the margin, and that in

hospital mergers it is possible that not all patients

contribute the same margin – depending on which

patients are likely to leave if faced with a price

increase, the margin, and therefore, the critical loss,

may differ). For similar critiques, see Danger &

Frech, supra note 29; Langenfeld & Li, supra note

29. 
12

data to estimate the actual losses in sales that

would result from a price increase. For

example, some practitioners use patient flow

data to identify zip codes that are

“contestable.” 

These practitioners then argue that

the share of patients in these zip codes that

would stop patronizing certain hospitals in a

candidate geographic market in response to a

given price increase would be greater than

the critical loss, and that the geographic area

must therefore be expanded in order to

constitute a relevant geographic market.60

Data on existing travel patterns for residents

in a zip code, however, say nothing about

why patients select specific hospitals or how

a change in relative prices would affect

patient migration.61 One cannot infer that

just because some patients in a zip code

currently choose more distant hospitals,

others also would choose such hospitals if

the prices of the merging hospitals

increased.62

Recent commentary, some of it

published after the Hearings, has stressed a

link between the first and second steps of

critical loss analysis.63 As a simple matter of

arithmetic, the higher the contribution

margin, the smaller the critical loss will be

for a given price increase. The higher the

margin, the more it costs the hypothetical

monopolist to lose a sale, and so the smaller

the sales loss required to offset the profit

gain from making the remaining sales at a

higher price.64 

Yet if firms are maximizing profits

before the merger, high margins indicate that

those firms face low price elasticities of

demand.65 Otherwise, these firms could earn

greater total profits by reducing prices and

expanding sales. Moreover, a hypothetical

monopolist over any candidate market must

face a lower elasticity of demand than the

individual firms in that candidate market, so

high margins must imply a very low demand

60 Alternatively, these zip codes are

identified as “at risk” or “overlapping.” Harris 3/26

at 177-78; Frech 3/26 at 189-190.

61

 See CAPPS ET AL., SILENT MAJORITY,

supra note 42; Capps et al., Antitrust Policy, supra

note 42, at 679-82, 690-92, 694-704.

62 Frech 3/26 at 189-90 (noting that the

predicted actual loss is an important part of how

critical loss analysis is implemented, and as typically

implemented, critical loss analysis leads to

implausibly large geographic areas).

63 Danger & Frech, supra note 29 at 349-51;

Katz & Shapiro, supra note 29, at 49-50, 52-53;

Langenfeld & Li, supra note 29, at 302-03, 307-08;

O’Brien & Wickelgren, supra note 29, at 161-63.

64

 See Katz & Shapiro, supra note 29, at 50;

O’Brien & Wickelgren, supra note 29, at 161-62;

Scheffman & Simons, supra note 29, at 4. 

65

 See Katz & Shapiro, supra note 29, at 50-

51; O’Brien & W ickelgren, supra note 29, at 162;

Danger & Frech, supra note 29, at 349-51;

Langenfeld & Li, supra note 29, at 308-09, 323;

Michael Katz & Carl Shapiro, Further Thoughts on

Critical Loss, 3 THE ANTITRUST SOURCE, Mar. 2004,

at http://www.abanet.org/antitrust/source/march04

/katzshapiro.pdf; Daniel O’Brien & Abraham

Wickelgren, The State of Critical Loss Analysis: 

Reply to Scheffman and Simons, 3 THE ANTITRUST

SOURCE, Mar. 2004, at http://www.abanet.org/

antitrust/source/march04/obrienwickel.pdf. But see

Scheffman & Simons, supra note 29, at 5

(disagreeing with critiques that attempt “to infer, with

greater specificity, a value of AL [actual loss] from

incremental margins and (too simple an) economic

theory”).
13

elasticity for the candidate market. 

Hospitals’ experts commonly argue

that merging hospitals’ margins are high,

which implies that the critical losses are low. 

They argue that post-merger price increases

would be unprofitable because of the high

per-unit foregone profits on lost sales. In

essence, they argue that where the critical

loss is low, the actual loss will exceed the

critical loss. On this basis, they argue that

relevant geographic markets for hospital

mergers are broad.66 

Yet, as discussed above, high

margins also imply low demand elasticities. 

Low demand elasticities indicate that the

merged firm’s actual losses of sales would

be low. Because the actual losses may be

less than the critical losses when margins are

high, the relevant geographic market may in

fact be narrow.67 

Other commentators also have

described ways in which critical loss

analysis has been carried out incorrectly,

both for delineation of markets and for

competitive effects analysis.68 One article

cites four key problems in how courts have

applied critical loss analysis in recent

hospital mergers.

69

 

First, courts have failed to consider

whether a price increase greater than five

percent would be profitable. Second, courts

have failed to consider the fact that high

margins often mean a firm faces inelastic

demand and, therefore, actual losses would

be low. Third, courts did not consider that,

if prices increased, some consumers might

be diverted to one of the merged firms. 

Finally, courts have assumed, contrary to

economic theory, that firms in the area

66 One panelist defended critical loss at the

Hearings as an appropriate mechanism for analyzing

proposed hospital geographic markets. Harris 3/26 at

167, 173-74. This panelist recommended that the

parties and court closely examine documents, data,

and testimony to determine the elasticity of demand

and how many patients are likely to leave if faced

with an anticompetitive price increase. Harris 3/26 at

222-24. He did not, however, address the argument

that the premerger margin itself contains substantial

information about the likely switching behavior of

consumers.

67 Katz & Shapiro advocate focusing on

what they term the “aggregate diversion ratio” to

indicate whether the elasticity of demand for the

candidate market is sufficiently lower than the firmlevel demand elasticities so that the candidate market

is, in fact, a market. Suppose there are three products

in the candidate market, A, B, and C, and the price of

A is increased by five percent. The aggregate

diversion ratio is the percentage of sales lost by A

that is recaptured by B and C. Katz and Shapiro

argue that the actual loss is less than the critical loss if

and only if the aggregate diversion ratio exceeds the

critical loss. Katz & Shapiro, supra note 29, at 53-

54. See also O’Brien & Wickelgren, supra note 29,

at 184 (“We have shown that the inference typically

drawn from critical loss analysis – that high margins

make a merger less likely to be anticompetitive – is

often inconsistent with economic theory . . . . In our

opinion, critical loss analysis has led to enormous

confusion about the economic factors that govern

firms’ pricing incentives. The technique has been

misused so frequently that arguments that are

inconsistent with basic economic theory have almost

gained a measure of legitimacy in antitrust cases.”). 

68 Frech 3/26 at 189, citing to Danger &

Frech, supra note 29. See also Langenfeld & Li,

supra note 29, at 301, 313, 323-333; O’Brien &

Wickelgren, supra note 29, at 162, 168-73, 177-84;

Katz & Shapiro, supra note 29, at 50-51, 54-55.

69 Langenfeld & Li, supra note 29, at 323-

24, 332-33. Many of these same problems have been

identified by other researchers. See, e.g., Danger &

Frech, supra note 29, at 341-42; O’Brien &

Wickelgren, supra note 29, at 162, 184; Katz &

Shapiro, supra note 29, at 52-55.
14

surrounding the merged firm would keep the

same prices even though the merged firm

raised its prices.

70 Thus, critical loss

analysis may be useful in defining

geographic markets and for competitive

effects analysis only if it is applied

appropriately.

3. Alternative Analytical Techniques

One panelist proposed an alternative

analytical framework built on the

observation that hospitals compete in two

stages.

71 According to this panelist, the

Agencies typically focus on first-stage

competition, in which hospitals compete to

be included in the networks of health plans. 

At this point, health plans are the buyers,

and prices may be constrained if a health

plan can credibly threaten to, or actually,

exclude the merging hospitals from its

provider network and divert patients to

alternative hospitals. The focus for defining

the geographic market for this first stage of

competition is on hospital locations, not

patient locations.72 Once a hospital is in the

plan’s network, or in some cases even if it is

not, the hospitals then compete at the second

stage – for the individual patient. 

This panelist suggested that

defendants typically focus on second-stage

competition for patients and argue for

broader geographic markets based on patient

flow data.73 This level of competition

differs significantly from the first stage.74 A

two-stage analysis may result in different

geographic markets and different

competitive effects for each stage, because

the two stages involve different customers,

different means of competition, and different

70 Langenfeld & Li, supra note 29, at 332-

333. The formula for critical loss is x/(x + m), where

x is the percentage price change of interest (e.g., 5%)

and m is the premerger price cost margin ((p-c)/p),

expressed as a percentage. In equilibrium, m = 1/,,

where , is the elasticity of demand. If , is small and

premerger margins are therefore high, it will also be

true (by definition of elasticity) that a given price

increase will induce only small changes in quantity. 

See O’Brien & Wickelgren, supra note 29, at 167-68;

Katz & Shapiro, supra note 29, at 50-53; Danger &

Frech, supra note 29, at 342-50; Langenfeld & Li,

supra note 29, at 303-05, 334-337; But see

Scheffman & Simons, supra note 29, at 5-8 (arguing

that critiques of critical loss analysis that use the

formula (m = 1/,), or the Lerner Equation, use “the

simplest economic model of pricing” to infer that

actual loss would be equal or close to critical loss in

equilibrium and thereby inappropriately shift the

burden of proof to defendants).

71 Vistnes 3/26 at 145-146; Vistnes

Presentation, supra note 20, at 2, 4; Vistnes, supra

note 35, at 671-692.

72 Vistnes 3/26 at 148; Vistnes Presentation,

supra note 20, at 5; Vistnes, supra note 35, at 674-81,

692. See also Town 4/9 at 60-67 (discussing

simulation study that showed significant post-merger

price increases to HMOs even though an ElzingaHogarty analysis suggested little, if any competitive

harm; this suggests that it is important to focus on the

price negotiations between hospitals and payors and

the ability of a payor to exclude a particular hospital

if they cannot reach a price agreement).

73 Vistnes 3/26 at 157-60; Vistnes

Presentation, supra note 20, at 11-14; Vistnes, supra

note 35, 671-74, 681-84, 688-92. See also Frech

3/26 at 196-98 (agreeing that with managed care,

there are now two stages of competition, and that

patient flow data is static and only reflects

competition at the consumer or second-stage level,

but not at the payor or first-stage level, because

changes in payors’ hospital networks move too slowly

to be captured in the patient flow data). 

74 Vistnes 3/26 at 160; Vistnes Presentation,

supra note 20, at 13-14; Vistnes, supra note 35, at

681-84.
15

evidence.75 If anticompetitive effects are

demonstrated at either stage, the merger

should be enjoined, according to this

panelist.76 

Another panelist disagreed with the

two-stage analysis, noting that it might be

worth looking at “as a stylized construct,”

but that “the appropriate model in which to

analyze the factors that drive the pricing

decisions and the profitability decisions of

the hospitals are such that one cannot

separate out the two stages.”77 She

suggested that the distinction is even less

relevant now, because most plans have

inclusive provider networks. In these

circumstances, network inclusion provides

no assurance that patients will seek care at a

particular hospital.78 

Another panelist submitted a joint

statement proposing a different analytical

framework for analyzing geographic markets

in hospitals. The statement asserts that

because potential patients select managed

care organizations (e.g., health insurers)

prior to knowing what their medical needs

will be, the subsequent ex-ante pricing

makes the connection between patient flows

and pricing power tenuous.

79 For example,

the statement suggests that “100% of

patients place a high value on having access

to a local hospital,” but if they are part of the

20 percent of the group that develop a

serious medical condition, these same

patients may be willing to travel any

distance to go to the best hospital for their

condition.80 

As an alternative, the statement

proposes a formal demand analysis model

that would require data on patient and

hospital characteristics in addition to the

patient origin and destination data

traditionally used. Although this model is

more complex than patient flow analysis, the

statement contends it provides “a measure of

market power that, unlike patient flows, is

theoretically valid for differentiated goods

markets and is directly related to the prices

that hospitals are able to charge.”81

B. Other Evidentiary Sources

Panelists suggested numerous

additional sources of evidence that should be

75 Vistnes 3/26 at 146-47; Vistnes

Presentation, supra note 20, at 13-14; Vistnes, supra

note 35, at 672-74, 688. 

76 Vistnes 3/26 at 160; Vistnes Presentation,

supra note 20, at 14; Vistnes, supra note 35, at 672-

73. 

77 Guerin-Calvert 3/26 at 230. 

78

 Id. at 230-31. But see Vistnes 3/26 at 243

(arguing that even if all hospitals are in a plan’s

network today, as long as the plan can credibly

threaten to exclude the hospital, that possibility of

exclusion is a constraint on pricing).

79 Capps et al. (stmt), supra note 42, at 5.

80

 Id. at 5-6.

81

 Id. at 6. The authors refer readers to

another paper (Cory Capps et al., Competition and

Market Power in Option Demand Markets (April

2003) (unpublished manuscript)), in which they

“provide a step by step derivation and empirical

implementation of a market power measure that

correctly incorporates the ex-ante nature of hospital

pricing.” Id. at 6-7. These authors also published

another article outlining option demand analysis, as

well as two other analyses. The authors suggest that

the other two analytical techniques are not as accurate

as the formal option demand analysis, but they are

useful in defining hospital geographic markets. See

Capps et al., Antitrust Policy, supra note 42, at 681.
16

used to establish the geographic market for

hospital services. The recommended

sources include types of evidence typically

assessed in non-hospital merger cases: 

strategic planning documents and testimony

from the merging parties and their

competitors, and documents and testimony

from major purchasers of services from the

merging parties – here, third-party payors.

Panelists also suggested the use of

evidence that casts direct light on the

distances patients are willing to travel and

the reasons they are willing to do so, and

evidence that demonstrates the role, if any,

physicians can play in defeating a hospital’s

post-merger, anticompetitive price increases. 

Each of these categories of evidence are

considered below. 

1. Hospital Strategic Planning

Documents

The Agencies typically examine

strategic planning documents from the

merging parties and their competitors to

assess relevant market and other key issues

in merger analysis. Panelists suggested

using strategic planning documents from the

hospitals to help establish the proper

geographic market.82 Such documents may

specify the geographic regions in which a

hospital is marketing its services and the

hospitals it sees as its primary competition.83

In addition, a hospital’s strategic planning

documents frequently disclose the hospital

management’s assessment of the extent to

which the proposed merger will increase the

hospital’s negotiating power and its ability

to raise prices. Hospital strategic planning

documents can illuminate hospital

competition for both inclusion in payor

networks and for individual patients. 

2. Payor Testimony

For non-hospital mergers, the

Agencies regularly obtain the views of the

merging firms’ major customers to assess

issues such as relevant market definition and

competitive effects. These market

participants typically have the most price

negotiation experience with the merging

firms, as well as the most to lose from price

increases (or quality or other degradations) if

the proposed merger were to create market

power. On the other hand, major customers

also have much to gain from reduced prices

if the proposed merger would likely create

efficiencies that would be passed on to

customers. 

Courts, however, have been skeptical

about testimony from third-party payors in

hospital merger cases, even though these

payors routinely negotiate with hospitals

about price and other aspects of hospital

care. In Tenet, for example, the Eighth

Circuit questioned the district court’s

reliance on payor testimony that they “would

unhesitatingly accept a price increase rather

than steer their subscribers to hospitals”

outside of the core geographic area.84 The

Eighth Circuit believed that, although the

82 Guerin-Calvert 3/26 at 141-43, 226, 237-

39; Harris 3/26 at 223.

83

 See, e.g., Guerin-Calvert 3/26 at 141

(stating that documents show who the hospitals see as

their competitors and strategic plans of hospitals

competing with merging hospitals often show

strategies for taking patients from another hospital);

Guerin-Calvert Presentation, supra note 20, at 12.

84 FTC v. Tenet Health Care Corp., 186

F.3d 1045, 1054 & n.14 (8th Cir. 1999). 
17

testimony might have been truthful, the

payors “spoke to current competitor

perceptions and consumer habits and failed

to show where consumers could practicably

go for inpatient hospital services.”85 

By contrast, panelists stated that

payors can offer useful testimony on at least

two distinct issues.86 Payors have

considerable insight into hospital geographic

markets, because they must factor such

matters into their decision whether to

contract with a hospital in the first instance. 

Payors must strive to include a sufficient

number of hospitals in each geographic

market, because if they fail to do so, the plan

is less appealing to purchasers, including

benefit managers that must make

recommendations and decisions for

employers and other group purchasers.87

Accordingly, payors can offer useful

testimony on the extent to which particular

hospitals engage in price and non-price

competition with one another. 

Second, panelists suggested that

payor testimony also would be helpful in

determining whether payors can steer

patients to a lower-cost hospital if prices

increase post-merger.88 Several panelists

noted that payors used to create marketable

plans with limited provider networks and

thus could exclude a hospital if its prices

were not acceptable to the plan.89 Today,

many consumers demand choice and open

provider networks.90 Therefore, payors

frequently rely on mechanisms other than

excluding hospitals to divert marginal

85

 Tenet Health Care, 186 F.3d at 1054 &

n.14. See also Greaney 2/27 at 142 (finding it

inexplicable that two circuits have “adopted an

evidentiary rule of thumb that discounts the

credibility of the testimony of third party payers on

facts that are really central to their business ... when

[the testimony is] unimpeached, not impeached by a

showing of bias or other defects”).

86

 See, e.g., Leibenluft 3/28 at 15-16;

Vistnes 3/26 at 147-57.

87

 See, e.g., Vistnes 3/26 at 148-50;

Eisenstadt 3/28 at 60-61.

88

 See, e.g., Guerin-Calvert 3/26 at 140-43

(suggesting looking not only at what payors say about

which hospitals are critical to their networks, but at

what payors have done in the past to respond to

different market behaviors, such as price increases or

quality decreases); Guerin-Calvert Presentation,

supra note 20, at 13, 16, 18; see also Singer 3/28 at

37-38; Toby Singer, Issues in Litigating Hospital

Mergers 2-5 (3/28) (“In particular, the courts have

not been willing to believe the testimony of health

plans and others when it is contradicted by other

evidence, such as statistical evidence on market

definition,” citing to California v. Sutter Health

System, 84 F. Supp. 2d 1057 (N.D. Cal.), aff’d mem.,

2000-1 Trade Cas. (CCH) ¶87,665 (9th Cir. 2000),

revised, 130 F. Supp. 2d 1109 (N.D. Cal. 2001));

United States v. Long Island Jewish Medical Center,

983 F. Supp. 121 (E.D.N.Y. 1997); Adventist Health

System/Est, 114 F.T.C. 458 (1991), at

http://www.ftc.gov/ogc/healthcarehearings/docs/0303

28singertoby.pdf; Argue 3/28 at 49-51.

To be sure, a court will wish to assess the

consistency of a witness’s testimony with its

documents and evidence of its previous actions. With

respect to payor testimony, however, some judicial

skepticism appears to be based, at least in part, on

patient flow data. For the reasons discussed supra,

patient flow data does not provide reliable

information about what payors could do if faced with

hospital price increases. 

89 Guerin-Calvert 3/26 at 138-39.

90

 Id. at 138-39. Some believe that the

recent increases in insurance premiums are, at least in

part, due to these demands for more choice and

broader provider networks. See supra Chapter 1 and

infra Chapter 5. 
18

consumers to lower-cost alternatives.91 For

example, payors are currently experimenting

with tiered networks that provide differing

levels of coverage and co-payments based

on the facility at which care is received.92

Testimony regarding the feasibility and

performance of such strategies would be

helpful in determining the alternatives

available to payors in the event of postmerger price increases.93

Panelists expressed different views

on whether and to what extent payors can

“steer” patients and the types of evidence

that can help answer this question. One

panelist noted that if payors actually can

steer patients to (or away) from particular

institutions, the distances traveled to

hospitals should have grown in parallel with

the rise of managed care.

94 In fact, the

panelist noted, the distances patients travel

to hospitals have not changed very much

since the mid-1980s, and there is little

distinction between the distances traveled

for HMO versus non-HMO patients.95

Based on this evidence, the panelist

maintained that courts should not assume

that payors can effectively steer patients in

response to price increases.96

Another panelist suggested that

patient flow data may help show whether

and, if so, how payors can steer patients.97

This panelist asserted that payors have had

enough success in moving marginal

consumers to lower-cost hospitals that, in

most cases, they can discipline hospital price

increases.98 She also concluded that in many

cases, even if payors testify accurately that

they must have the merging parties in their

networks, that is not necessarily sufficient to

give the hospitals unilateral power over

91 Guerin-Calvert 3/26 at 134, 141 (referring

to cases where payors were able to move marginal

patients); Vistnes 3/26 at 152-56 (listing possible

strategies payors could use to divert patients: 

dropping a hospital from the network; adding

hospitals to the network to “dilute” the patient base;

creating incentives for patients to switch hospitals;

creating incentives for physicians to admit elsewhere;

and changing the physician panel); Vistnes

Presentation, supra note 20, at 8; Harris 3/26 at 180

(stating payors use various mechanisms to shift

patient choices, including different copays and

deductibles, tiered plans, and cafeteria plans).

92

 See supra Chapter 3.

93

 See, e.g., Guerin-Calvert 3/26 at 140-43;

Frech 3/26 at 186-88.

94 Frech 3/26 at 186-88. 

95

 Id. See also H. E. Frech III & Lee Rivers

Mobley, Managed Care, Distance Traveled and

Hospital Market Definition, 37 INQUIRY 369-384

(2000). 

96 Frech 3/26 at 186-88; Zwanziger 3/26 at

98-99 (describing research that suggests that travel

distance is the most important criteria for a patient in

deciding which hospital to use, and in California,

where managed care penetration went from 20

percent to 90 percent over a specific period of time,

the average travel distance changed very little over

that same period). 

97 Guerin-Calvert 3/26 at 134, 137, 141. 

But see Frech 3/26 at 197 (noting that turn-over

among the hospitals included in a plan is sufficiently

infrequent that patient flow data will often not capture

the dynamics of first-stage competition). 

98 Guerin-Calvert 3/26 at 140-41, 143; see

also Guerin-Calvert 3/26 at 252 (describing

documents in some markets that have included letters

from plans to physicians to use one hospital more

than another, and patient flow data subsequently

showed the shift of enrollees from one hospital to

another).
19

price.99 

Other panelists were more skeptical

about these claims. One panelist stated that,

although in theory payors have mechanisms

they could use to divert patients to other

hospitals, in practice these tactics are often

costly and counter-productive to a health

plan’s marketability and profitability.100

This panelist argued that it is difficult (if not

impossible) to target incentives to the

insured consumers who are most likely to be

affected. A payor must consider the cost of

providing a lower copayment to all patients,

not just the marginal patients the payor is

trying to steer.101 Moreover, other hospitals

may have higher prices than the merged

hospitals, even assuming price increases as a

result of the merger.102

3. Patients’ Willingness to Travel –

How Far and Why?

Several panelists suggested that

courts should give more weight to empirical

studies of patients’ willingness to travel to

receive health care. Studies indicate that

most patients prefer to be hospitalized close

to their homes.103 Some patients appear

willing to travel long distances for very

serious or complicated procedures, but many

patients prefer to receive such care in their

local hospital, even if their local hospital has

higher mortality rates and less experience

with such procedures.104 Some patients are

willing to receive care in a distant city

because they work or have family in that

city, or because of the hospital’s religious

affiliation.105 

Several panelists noted that such

migration patterns are unlikely to be price

sensitive, yet the application of the ElzingaHogarty test and critical loss analysis would

result in a large geographic market in such

99 circumstances, if enough patients traveled

 See Guerin-Calvert 3/26 at 141-43 (noting

that it is rare to find a compelling coordinated-effects

story in hospital markets and that the Chattanooga

case is the one exception where the court accepted a

coordinated effects theory of harm, referring to the

Seventh Circuit opinion in Hospital Corp. of America

v. FTC, 807 F.2d 1381 (7th Cir. 1986)); GuerinCalvert Presentation, supra note 20, at 18.

100 Vistnes 3/26 at 150-60.

101

 Id. at 154-56.

102 Vistnes 3/26 at 156; Vistnes

Presentation, supra note 20, at 9. But see FTC v.

Tenet Healthcare Corp., 186 F.3d 1045, 1054 & n.14

(8th Cir. 1999), rev’g finding for plaintiff in FTC v.

Tenet Health Care Corp., 17 F.Supp. 2d 937 (E.D.

Mo. 1998) (finding that district court erred in

rejecting more distant hospitals that were more costly

because in doing so it “underestimated the impact of

nonprice competitive factors, such as quality”). 

103

 See, e.g., Zwanziger 3/26 at 97-99;

Zwanziger Presentation, supra note 34, at 10; Frech

3/26 at 186-88. See generally Robert Town &

Gregory Vistnes, Hospital Competition in HMO

Networks, 20 J. HEALTH ECON. 733, 746-48 (2001). 

104

 See, e.g., Zwanziger Presentation, supra

note 34, at 9-10; Zwanziger 3/26 at 97-99. See

generally Town & Vistnes, supra note 103, at 746-

48. 

105 Zwanziger 3/26 at 98; see also Frech

3/26 at 194 (“[C]ustomers migrate from small towns

to larger cities for idiosyncratic reasons ... [including

h]igher quality, more sophisticated services, [and]

family connections.”).
20

for these non-price reasons.106

4. Physicians’ Willingness and

Ability to Steer Patients to Less

Expensive Alternatives

Several hearing participants

suggested that payors may be able to provide

financial incentives to physicians to steer

patients to less expensive hospitals.107 Some

of the proposals included requiring

physicians to agree to a financial risksharing contract, threatening physicians with

exclusion from a plan’s network, imposing

financial penalties on physicians who admit

patients to the higher-priced hospitals, and

providing bonuses to physicians who admit

to lower-priced hospitals.108 

Even though such incentives are

theoretically possible, it does not follow that

payors would find them useful or

desirable.109 Indeed, such incentives could

make a plan less marketable to employers

and consumers who value open networks

and unrestricted access to health care. Such

incentives also could interfere with

continuity of care, particularly if patients

must use a different physician when they are

diverted to a different hospital.110 These

incentives also are unlikely to be effective if

they require patients to travel long distances

and physicians to travel those same distances

to provide care. 

C. Summary

The definition of a relevant

geographic market has proven to be one of

the most daunting components of a hospital

merger case. Nonetheless, some guiding

principles are clear. The hypothetical

monopolist test of the Merger Guidelines

should be used to define geographic markets

in hospital merger cases. The types of

evidence used in all merger cases – such as

strategic planning documents of the merging

parties and customer testimony and

documents – should also be used to

delineate relevant geographic markets in

hospital merger cases. The Agencies believe

that courts have given insufficient weight to

payor testimony and documents in

particular. 

Empirical evidence is desirable on

certain issues, such as the extent of patients’

willingness to travel to distant hospitals in

response to a small, but significant and nontransitory increase in price. Patient

willingness to travel for non-price related

reasons does not provide a sufficient basis to

infer patient willingness to travel to distant

hospitals in response to price increases. 

The Agencies encourage further

106

 See, e.g., CAPPS ET AL., SILENT

MAJORITY, supra note 42; Capps et al. (stmt), supra

note 42, at 1-6, 9; Zwanziger 3/26 at 97-99; Frech

3/26 at 194.

107 Guerin-Calvert 3/26 at 252; Vistnes 3/26

at 153. 

108

 See, e.g., Vistnes 3/26 at 153-57.

109

 See, e.g., id.

110

 Id. at 153-54, 156-58 (suggesting

looking at whether there are overlapping hospitals

where physicians have or could likely have admitting

privileges or determining how far physicians are

willing to travel to perform daily rounds at the

hospitals in which they have patients admitted).
21

research to determine the circumstances in

which patients will travel to distant hospitals

in response to price increases. Empirical

evidence also is desirable on the extent to

which physicians can and will steer patients

to lower-cost hospitals in response to price

increases. To be persuasive, direct evidence

should show that such steering by physicians

is feasible, cost-effective, and likely.111 The

Agencies also encourage additional research

to validate or refute the alternative analytical

techniques discussed supra. 

 To date, and for the reasons

discussed supra, the Agencies’ experience

and research indicate that the

Elzinga-Hogarty test is not valid or reliable

in defining geographic markets in hospital

merger cases. In addition, if critical loss

analysis is used, it must be used with great

care to avoid the problems of application

discussed in this section. The use of the

Elzinga-Hogarty test and the misapplication

of critical loss analysis has led some courts

to find hospital geographic markets that are

improbably large. 

III. PRODUCT MARKET

DEFINITION

The Merger Guidelines provide the

framework for defining the relevant product

market for hospital services. The product

market has typically been defined as a broad

group of medical and surgical diagnostic and

treatment services for acute medical

conditions where the patient must remain in

a health care facility for at least 24 hours for

recovery or observation.112

Over the past twenty years, many

hospital merger cases have considered and

rejected outpatient services as part of the

relevant product market for hospitals. For

example, in In re Hospital Corp. of America,

106 F.T.C. 361 (1985), the Commission

noted that, although outpatient care for

certain services might be a separate relevant

market or markets, the evidence

demonstrated “that the core and vast

majority of an acute care hospital’s business

is acute inpatient care” and non-hospital

outpatient providers could not defeat postmerger anticompetitive behavior affecting

hospital inpatients.113 

The Seventh Circuit agreed,

observing that “although hospitals

increasingly are providing services on an

out-patient basis ... most hospital services

cannot be provided by nonhospital

providers; as to these, hospitals have no

competition from other providers of medical

services.”114 Similarly, in American Medical

111 Some steering mechanisms could

implicate federal and/or state anti-kickback and

physician self-referral laws. See supra Chapter 1. 

112 In American Medical International, Inc.

and Hospital Corp. of America, the FTC defined the

relevant product market as a group of general acute

care hospital services. Am. Med. Int’l, 104 F.T.C. 1,

107 (1984); In re Hosp. Corp. Am., 106 F.T.C. 361

(1985), aff’d, 807 F.2d 1381 (7th Cir. 1986). 

113

 Hosp. Corp. Am., 106 F.T.C. at 466. In

that case, the Commission noted that although “the

types of surgical procedures which can be handled on

an outpatient basis by surgicenters are increasing, this

suggests only that the cluster of inpatient services

offered by acute care hospitals is changing and does

not indicate that hospitals are becoming head-to-head

competitors with such outpatient providers.” Id.

114

 Hosp. Corp. Am., 807 F.2d at 1388. 

Similarly, in United States v. Rockford Memorial

Corp., 898 F.2d 1278, 1284 (7th Cir. 1990), the
22

International, 104 F.T.C. 1 (1984), the

Commission excluded outpatient services

from the product market.115 The Eleventh

Circuit also accepted inpatient acute-care

services as the relevant product market in

University Health.116 Only one court has

included outpatient providers within the

product market for inpatient services.117 

Panelists agreed that providers of

outpatient services, such as physicians’

offices, urgent care centers, and ambulatory

surgery centers, should generally not be

included in the product market definition for

hospital services.118 Panelists indicated that

from the perspective of payors and patients,

inpatient services are complementary and

bundled.119 Even if hospital prices are

increased, patients and payors cannot

separate nursing care, diagnostic tests, and

room and board from the other treatments

provided as part of a hospital stay and outsource them.120 Similarly, demand-side

substitution is improbable; a cancer or heart

attack patient is not going to substitute

obstetrical care if prices for cancer care or

heart attacks increase. Because outpatient

treatment is generally not a substitute for

inpatient care, there was agreement among

the panelists that outpatient providers are

(and were) correctly excluded from the

product market.121 

Seventh Circuit again affirmed the product market

definition as the “provision of inpatient services by

acute-care hospitals,” noting that other providers

cannot compete for many acute-care hospital services.

 The court further explained that, although patients

can choose in-patient hospital care or outpatient

providers for some services, those services that can

be provided on an outpatient basis are not a check on

acute-care in-patient services, because the prices of

the two are not linked. 

115

 See Am. Med. Int’l, 104 F.T.C. at 107.

116 FTC v. Univ. Health, Inc., 938 F.2d

1206, 1210-11, 1219 (11th Cir. 1991). 

117 United States v. Carilion Health Sys.,

707 F. Supp. 840 (W.D. Va.), aff’d, 892 F.2d 1042

(4th Cir. 1989) (unpublished opinion). 

118

 See, e.g., Sacher 3/26 at 66-70;

Zwanziger 3/26 at 95-96, 104-106.

119 Sacher 3/26 at 69-70; Seth Sacher, Issues

in Defining the Product Market for Hospital Services

5 (3/26) (slides) [hereinafter Sacher Presentation], at

http://www.ftc.gov/opp/hc/030326sethsacher.pdf;

Sacher & Silvia, supra note 18, at 183-85. See also

Zwanziger 3/26 at 92-98 (discussing heterogeneity on

both the supply- and demand-side and suggesting that

markets should be defined more narrowly to reflect

the different treatments provided and requested);

Zwanziger Presentation, supra note 34, at 2.

See Am. Med. Int’l, 104 F.T.C. at 107

(“Although each individual service that comprises the

cluster of general acute care hospital services may

well have outpatient substitutes, the benefit that

accrues to patient and physician is derived from their

complementarity. There is no readily available

substitute supplier of the benefit that this

complementarity confers on patient and physician. 

This is consistent with record evidence that shows

that those in the market only recognized other

hospitals, not suppliers of individual hospital

services, as their competitors.”).

120 Sacher 3/26 at 69-70.

121 Zwanziger 3/26 at 95-96; Zwanziger

Presentation, supra note 34, at 6; see, e.g., Univ.

Health, 938 F.2d at 1210-11; United States v.

Rockford Mem’l Corp., 898 F.2d 1278, 1284 (7th

Cir. 1990) (Posner, J.); Hosp. Corp. Am. v. FTC, 807

F.2d 1381, 1388 (7th Cir. 1986) (Posner, J.), aff’ing

In re Hosp. Corp. Am., 106 F.T.C. 361 (1985). One

panelist stated that despite the general acceptance of

this definition, both the parties and the courts have

suggested subtle differences in the product market

definition over the years. Sacher 3/26 at 65; Sacher

Presentation, supra note 119, at 6-7; Sacher & Silvia,

supra note 18, at 185-87, citing Carilion Health Sys.,

707 F. Supp. at 844-45 (noting the district court held
23

In the future it is likely that the

Agencies will have to determine whether

certain specialty hospitals should be

included in an inpatient product market for

particular proposed hospital mergers. 

Historically, the type of specialty hospital

(children’s, psychiatric, VA, military, and

rehabilitation) justified its exclusion from

the product market.122 In recent years,

specialty hospitals focusing on cardiac or 

orthopedic care have emerged in numerous

locations.123 General acute-care hospitals

view these specialty hospitals as competition

in the provision of such services and have

responded in a variety of ways.124

Several panelists discussed an

approach for defining an inpatient hospital

product market more narrowly. Instead of

treating acute inpatient treatment as an

aggregated group, panelists suggested the

possibility of grouping diagnosis related

groups (DRGs) together, based upon the

product market included certain clinics and other

providers of outpatient services, because, in a

significant number of cases, “patients or their doctors

can choose to have problems treated either in a

hospital or in an outpatient clinic or doctor’s office”);

Rockford Mem’l, 898 F.2d at 1284 (excluding

outpatient services, and specifically stating that it

found the district court’s discussion in Carilion

“unpersuasive as well as inconsistent with [its]

analysis in Hospital Corporation of America” and that

the Fourth Circuit’s opinion affirming the district

court was nonprecedential because the Fourth Circuit

chose not to publish it); United States v. Mercy

Health Services, 902 F. Supp. 968 (N.D. Iowa 1995),

vacated as moot, 107 F.3d 632 (8th Cir. 1997)

(excluding inpatient psychiatric care, substance abuse

treatment, rehabilitation services, and open heart

surgery); United States v. Long Island Jewish Med.

Ctr., 983 F. Supp. 121, 138-40 (E.D.N.Y. 1997)

(rejecting DOJ’s argument that the relevant product

market was “the bundle of acute care inpatient

services provided by anchor hospitals to managed

care plans,” and found separate primary/secondary

care and tertiary care product markets based on its

conclusion that the geographic markets for these

services differed); and FTC v. Tenet Healthcare

Corp., 17 F. Supp. 2d 937, 943 (E.D. Mo. 1998),

rev’d 186 F.3d 1045 (8th Cir. 1999) (product market

included primary and secondary acute care inpatient

services, but excluded tertiary and quaternary

services). 

The federal district court in Carilion refused

to draw a line between inpatient and outpatient

services, noting that primary care provided in hospital

emergency departments and specialty clinics, as well

as hospital-based outpatient surgery, chemotherapy,

and radiology may compete to some degree with

physicians’ office-based care and other free-standing

health care. Carilion Health Sys., 707 F. Supp. at

844-45. Other entities may include ambulatory

surgical and imaging centers (e.g., x-ray, CT, MRI). 

Hosp. Corp. Am., 106 F.T.C. 361 (1985); see also

Sacher 3/26 at 75.

122 Psychiatric and rehabilitation hospitals

provide a limited scope of care and do not offer

general acute care services. Children’s and VA

hospitals provide inpatient acute care similar to

general acute care hospitals, but are dedicated to a

specific group. Although a children’s hospital might

compete with a general hospital for a subset of the

general hospital’s patients, non-veterans cannot

substitute the VA for a general hospital. But see

Eisenstadt 3/28 at 59 (discussing issues about

mergers between complements generally and,

specifically, a merger between the premier adult

hospital system and the premier children’s hospital in

the Pittsburgh, Pennsylvania area. He noted that

although “there would be some modest to slight or

slight to modest increase in concentration in

pediatrics, that was not the principal concern; rather,

the primary concern related to the proposed

combination of the preferred adult system and the

premium pediatric hospital. In other words, the two

premier brand manufacturers were merging. There

was concern expressed about post-merger bundling,

denial of access to Children’s or unilateral price

increases” at one or more of the merging hospitals). 

123

 See supra Chapter 3. 

124

 Id. 
24

types of diseases and medical conditions

treated by particular types of physicians.125

In one study, this approach resulted in 48

service categories. Patient flow data can be

separately analyzed for each category.126

Panelists recognized, however, that payors

generally do not disaggregate services this

finely.127 

Conclusion. The Agencies continue

to believe that inpatient acute-care services

constitute a relevant product market. At the

same time, the percentage of total health

care spending devoted to outpatient care is

growing, and the percentage devoted to

inpatient care is declining. Over time, the

level of payment and changes in technology

may shift the provision of many inpatient

services into the outpatient setting.128 The

Agencies will continue to examine whether

services provided in outpatient settings may

constitute additional relevant product

markets, and if so, whether those services

might be adversely affected by a hospital

merger. The Agencies will also continue to

examine the competitive significance of

specialty hospitals, including whether and

under what circumstances payors might

discipline prices for cardiac or other services

at general acute care hospitals by shifting a

larger percentage of patients to specialty

hospitals that provide such services.

Although the Agencies currently

doubt the advisability and practicability of

conducting separate product market analyses

for many discrete markets – particularly

when payors do not define the product they

are purchasing in this fashion – the Agencies

will continue to examine whether smaller

product markets exist in addition to the

traditional product market definition. For

example, if more specialized medical

procedures raise more competitive concerns

than primary care services, there may be

some circumstances in which the product

market should be defined narrowly to

include only a specific service or limited

number of services. Similarly, it is possible

that expertise in one or more specific

specialities may make a hospital a “must

have” hospital for a payor’s network, which

could justify a separate product market

125 Sacher 3/26 at 80-83; Sacher & Silvia,

supra note 18, at 184, 190-98; Zwanziger 3/26 at 95-

96; Zwanziger Presentation, supra note 34, at 5-7. 

DRGs are a system for determining hospital

compensation based on the discharge diagnosis. 

Similar illnesses are aggregated together, and the

hospital is paid a set amount per DRG, irrespective of

the actual cost associated with the provision of

services. Medicare and many private insurers use this

system to compensate hospitals. 

126 Sacher 3/26 at 80-83; Sacher & Silvia,

supra note 18, at 184, 190-98. 

127 Panelists noted that payors typically

categorize services and hospitals by the complexity of

care; some hospitals provide primary, secondary, and

tertiary levels of care, others only primary or

secondary. Zwanziger 3/26 at 95. One panelist noted

that many payors believe they must have at least one

tertiary care center in their hospital networks in order

to compete for members. Zwanziger 3/26 at 95. 

Another panelist also noted that properly defining the

relevant product market, such as determining whether

tertiary care is or is not a part of the relevant market,

is a prerequisite to properly defining hospital

geographic markets. For example, if tertiary care is

excluded from the relevant product market, neither

patient flow data or other evidence related to tertiary

care is relevant to geographic market definition. See

Vistnes, supra note 35, at 684, 687-88. See also

Guerin-Calvert 3/26 at 128-29 (discussing differences

about geographic market definition often stem from

disagreements about the product market definition). 128 See, e.g., Sacher 3/26 at 75.
25

analysis.129

IV. ENTRY

The Merger Guidelines provide that

entry should be considered if it is likely to

occur within two years and to be sufficient

to deter or counteract anticompetitive effects

of a proposed hospital merger.130 Entry into

the inpatient general acute care hospital

services market by constructing a new

hospital or adding additional beds to an

existing facility is likely to exceed this timeframe. If the state requires that a Certificate

of Need (CON) be granted before building a

new hospital or increasing bed capacity, the

approval of the CON can take anywhere

from 18 months to several years.131

Compliance with other regulations will

require additional time. Thus, the likelihood

of timely and sufficient entry into the

inpatient general acute care hospital services

market is remote. 

V. EFFICIENCIES

The Merger Guidelines make clear

that efficiencies should be evaluated before

determining whether a proposed merger is

likely to be pro- or anti-competitive.132

Under the Merger Guidelines, the Agencies

will not challenge a merger if cognizable

efficiencies are of a character and magnitude

such that the merger is not likely to be

anticompetitive in any relevant market.133

Efficiencies are cognizable when they are

(1) merger-specific, (2) have been verified,

and (3) do not arise from anticompetitive

reductions in output or service.134

Hospitals often claim that their

merger will produce significant efficiencies,

and some courts have given significant

weight to these arguments. Claimed

efficiencies have included avoidance of

capital expenditures, reductions in

management and operational support jobs,

consolidation of specific services to one

location (e.g., all cardiac care at Hospital A

and all cancer treatments at Hospital B), and

reducing operational costs, such as

purchasing and accounting. 

Some hospitals claim that after the

merger they will be able to provide better

and more complex services to their patients. 

For example, in Tenet the merging hospitals

claimed they would realize significant

efficiencies, including: eliminating unused

129

 But see United States v. Long Island

Jewish Med. Ctr., 983 F. Supp. 121, 138-40

(E.D.N.Y. 1997) (rejecting DOJ’s argument that the

relevant product market was “the bundle of acute care

inpatient services provided by anchor hospitals to

managed care plans”).

130 MERGER GUIDELINES, supra note 9, § 3.

131 The FTC has opposed state CON

requirements as an unnecessary impediment to

competition in health care markets. See discussion

infra Chapter 8 for a more detailed discussion of

CON regulations and the competitive issues

surrounding them. 

132 MERGER GUIDELINES, supra note 9, § 4

(as revised April 8, 1997).

133

 Id. § 4.

134 Merger-specific efficiencies are “only

those efficiencies likely to be accomplished with the

proposed merger and unlikely to be accomplished in

the absence of either the proposed merger or another

means having comparable anticompetitive effects.” 

MERGER GUIDELINES, supra note 9, § 4. Cognizable

efficiencies are assessed “net of costs produced by the

merger or incurred in achieving those efficiencies.” 

Id.
26

beds, bringing open heart surgery to Poplar

Bluff, decreasing operating costs,

consolidating services, reducing staff levels,

and avoiding capital expenditures.135 The

district court rejected the hospitals’

efficiency claims. The Eighth Circuit found

that, although the district court may have

properly rejected the hospitals’ efficiencies,

it should have nonetheless considered the

claim that the merged entity would provide

better care to its patients. The appellate

court stated that “[t]he reality of the situation

in our changing healthcare environment may

be that Poplar Bluff cannot support two

high-quality hospitals;” and admonished the

district court for placing “an inordinate

emphasis on price competition.”136 

Some panelists were skeptical about

efficiency claims. Several panelists pointed

out that promised efficiencies may not

materialize.137 One panelist noted that

efficiency studies are often conducted to

support the HSR filing that the merging

parties must make with the Agencies; this

provides incentives for the parties to

estimate unrealistically high savings.138

Another noted that mergers can be great

failures if hospitals do not have specific

plans or are not willing to make tough

decisions at the outset, such as closing

facilities and consolidating hospital-based

physician groups.139 Institutional constraints

can make it difficult for merged hospitals to

combine and coordinate clinical

operations.140

For example, in Butterworth, the

district court accepted the merging hospitals’

claims that the proposed merger would

result in efficiencies in excess of $100

million in the form of capital expenditure

avoidance and operating efficiencies.141 One

135 FTC v. Tenet Healthcare Corp., 17 F.

Supp. 2d 937, 948 (E.D. Mo. 1998), rev’d on other

grnds, 186 F.3d 1045 (8th Cir. 1999).

136

 Tenet Healthcare Corp., 186 F.3d at

1055, 1054.

137

 See, e.g., Taylor 4/11 at 162-169; Balto

4/11 at 207-210 (noting that Blodgett/Butterworth’s

claimed efficiencies were mostly in avoidance of

capital expenditures, yet the hospitals have made

significant capital investments and claim they have

achieved $300 million in efficiencies). See also Paul

Pautler, Evidence on Mergers and Acquisitions, 48

ANTITRUST BULL. 119, 160-64, 172-76 (2003)

(reviews several studies that looked at post-merger

effects on prices and efficiencies, noting one study

found that the efficiencies may take a long time to

appear and that some studies found cost and price

reductions, and others found few efficiencies and

significant price increases); David Balto & Meleah

Geertsma, Why Hospital Merger Antitrust

Enforcement Remains Necessary: A Retrospective on

the Butterworth Merger, 34 J. HEALTH L. 129 (2001). 

But see Spectrum Health, Comments Regarding

Hearings on Health Care Competition Law and

Policy 1 (Public Comment) (arguing that in

connection with the Butterworth/Blodgett merger

“[o]perational efficiencies have saved the community

$373 million through 2001”) [hereinafter Spectrum

(public cmt)]. 

138 Taylor 4/11 at 162-169.

139 Hopping 4/11 at 184-86 (she also noted

mergers can be successful). 

140

 See, e.g., Balto 4/11 at 209-10 (noting

failure to consolidate services at

Blodgett/Butterworth because of physician

resistance); Hopping 4/11 at 183-90 (noting she has

been associated with hospital mergers that have

realized efficiencies, but to work, the hospitals must

have a specific plan and must be willing to make very

hard choices). 

141 FTC v. Butterworth Health Corp., 946 F.

Supp. 1285, 1300-1301 (W.D. Mich. 1996), aff’d by

an unpublished opinion, 1997-2 Trade Cas. (CCH) ¶
27

panelist reported, however, that

Blodgett/Butterworth never closed Blodgett

and consolidated services, at least in part

because physician groups did not want the

facility closed.142 Another panelist stated

that, six years after the merger,

Blodgett/Butterworth had realized less than

half of the $100 million of claimed

efficiencies.143 

Scholars have conducted numerous

studies on the effect of hospital mergers on

hospital costs.144 The results are mixed: 

some studies have found that merged

hospitals enjoy lower costs (or lower rates of

cost increase) than nonmerging hospitals;

others have found no differences in cost

experience between merging hospitals and

otherwise similar nonmerging facilities. 

One recent study found that the degree of

cost savings that merging hospitals realize

varies significantly depending on the extent

of consolidation. According to this study,

hospitals operating under a single license

post-merger generate “significant, robust,

and persistent” savings.145 In contrast, those

hospitals that conduct business under

separate licences post-merger do not

generate cost reductions. The authors

attribute this difference to the ability of more

fully merged hospitals to undertake

substantial changes in they way they operate

(including consolidation of services) that are

not available to hospitals operating under

separate licenses.146

71,863 (6th Cir. 1997) (district court also noted that

the efficiencies are, “by any account, a substantial

amount, and represent savings that would, in view of

defendants’ nonprofit status and the Community

Commitment, invariably be passed on to

consumers”).

142 Balto 4/11 at 209-10.

143 Taylor 4/11 at 167.

144 Jeffrey A. Alexander et al., The ShortTerm Effects of Merger on Hospital Operations, 30

HEALTH SERVICES RES. 827 (1996); Robert A.

Connor et al., Which Types of Hospital Mergers Save

Consumers Money? 16 HEALTH AFFAIRS 62

(Nov./Dec.1997); Robert A. Connor et al., The

Effects of Market Concentration and Horizontal

Mergers on Hospital Costs and Prices, 5 INT’L J.

ECON. BUS. 159 (1998); David Dranove & Mark

Shanley, Cost Reductions Versus Reputation

Enhancements as Motives for Mergers: The Logic of

Multihospital Systems, 16 STRATEGIC MGMT. J. 55

(1995); David Dranove et al., Are Multihospital

Systems More Efficient? 15 HEALTH AFFAIRS 100

(Spring 1996); Heather Radach Spang et al., Hospital

Mergers and Savings for Consumers: Exploring New

Evidence, 20 HEALTH AFFAIRS 150 (July/Aug. 2001).

145 David Dranove & Richard Lindrooth,

Hospital Consolidation and Costs: Another Look at

the Evidence, 22 J. HEALTH ECON. 983, 996 (2003).

146

 Id. Another study similarly found that

the impact of hospital mergers on quality differed by

type of consolidation. Vivian Ho & Barton H.

Hamilton, Hospital Mergers and Acquisitions: Does

Market Consolidation Harm Patients? 19 J. HEALTH

ECON. 767 (2000). Although the authors found no

evidence that mergers measurably affect inpatient

mortality, they found that post-acquisition,

independent hospitals had higher readmission rates

for heart attack patients and that post-acquisition,

hospital systems discharged newborn babies earlier. 

Id. at 788. See also Smith 4/11 at 170-183

(discussing the 1993 consolidation of a 225 bed

community hospital, a 325 bed Catholic hospital, and

a small Catholic hospital serving several small

communities to form Susquehanna Health System. 

He claimed the consolidated system saved $105

million in costs and returned savings of $117 million

to the community and third party payors pursuant to a

community commitment. This speaker also attributed

many of the cost savings to the extensive

consolidation and elimination of duplicative services

among the three hospitals, which required

compromises by all concerned.).
28

Even if a hospital merger is likely to

create cognizable efficiencies, those

cognizable efficiencies likely will not be

sufficient to reverse a hospital merger’s

potential to harm consumers in the relevant

market by preventing price increases in that

market.147 

As discussed in detail in Chapter 3,

supra, most studies of the relationship

between competition and hospital prices

generally find that increased hospital

concentration is associated with increased

prices.148 Some panelists and commentators

believe an important motivation for the

creation of multi-hospital systems has been

to gain market power to secure higher

reimbursement from payors.149 Indeed, one

academic health economist reported that “I

have asked many providers why they wanted

to merge. Although publicly they all

invoked the synergies mantra, virtually

everyone stated privately that the main

reason for merging was to avoid competition

and/or obtain market power.”150

 

In several merger cases, hospitals

have signed “community commitments” or

agreements with State Attorneys General,

promising not to raise prices for a specified

period or to pass onto consumers a specified

amount of money from the claimed

efficiencies.151 Some State Attorneys

General have signed these agreements in an

attempt to translate merger-induced cost

savings into price reductions to consumers. 

For example, in Butterworth/Blodgett, the

merging hospitals agreed: (1) to freeze list

prices for three years, (2) to freeze prices for

managed care plans at pre-merger levels, (3)

to limit profit margins by targeting a fiveyear rolling average for the merged entity

that would not exceed the average of

Moody’s and Standard & Poor’s upper

quartile profit margin for other national

147 MERGER GUIDELINES, supra note 9, § 4

(“To make [a determination that a merger is not likely

to be anticompetitive in any relevant market], the

Agency considers whether cognizable efficiencies

likely would be sufficient to reverse the merger’s

potential to harm consumers in the relevant market,

e.g., by preventing price increases in that market.”).

148

 See Chapter 3.

149

 Id.

150 DAVID DRANOVE, THE ECONOMIC

EVOLUTION OF AMERICAN HEALTH CARE 122 (2000).

151

 See FTC v. Butterworth Health Corp.,

946 F. Supp. 1285, 1302 (W.D. Mich. 1996), aff’d

by an unpublished opinion, 1997-2 Trade Cas. (CCH)

¶ 71,863 (6th Cir. 1997); United States v. Long Island

Jewish Med. Ctr., 983 F. Supp. 121, 149 (E.D.N.Y.

1997). Other states also have entered into decrees

with merging hospitals that provided for some type of

community commitment. See, e.g., Wisconsin v.

Kenosha Hosp. & Med. Ctr., 1997-1 Trade Cas.

¶71,669 (E.D. Wis. 1996) (consent decree);

Pennsylvania v. Capital Health Sys., 1995-2 Trade

Cas. ¶71,205 (M.D. Pa. 1995) (consent decree) (court

ordered merged hospitals to pass at least 80 percent

of the net cost savings to consumers); Pennsylvania v.

Providence Health Sys., 1994-1 Trade Cas. ¶70,603

(M.D. Pa. 1994) (consent decree). See also

Eisenstadt 3/28 at 66-68 (describing economic

modeling he and others conducted in connection with

a Pittsburgh hospital merger that showed the

component prices would increase and consumer

welfare would decrease, but the community

commitment did not address this issue, which in his

view was one of the most troublesome aspects of the

merger); E. Cooper 9/9/02 at 134 (noting State

Attorneys General in Pennsylvania and Wisconsin

“have crafted consent agreements that allow the

transaction to proceed, but placed restrictions on the

merged entity’s future conduct. Such restrictions,

usually characterized as regulatory by detractors and

creative by proponents, typically require the new

entry to pass along to consumers cost savings from

efficiencies claimed from the merger.”).
29

health care providers, (4) to serve the

medically needy, and (5) to ensure that the

board of the merged entity would continue

to reflect the interests of western

Michigan.152 Similarly, the merging

hospitals in Long Island Jewish Medical

Center entered into an agreement with the

Attorney General of the State of New York

to “pass on to the community cost savings

that will be achieved . . . [to] equal 100

million dollars during the five-year period

commencing January 1, 1998.”153 The

agreement further provided that up to 50

million dollars of the cost savings could be

used “to fulfill its mission to provide high

quality health care to economically

disadvantaged and elderly members of the

community.”154 

Community commitments are

temporary and may not represent a binding

constraint even during the period they are in

effect. Furthermore, such commitments do

not solve the underlying competitive

problem when a hospital merger has

changed market circumstances in ways that

increase the likelihood that market power

will be exercised. Community commitments

represent a distinctly regulatory approach to

what is, at bottom, a problem of competition

– and that problem will remain after the

commitment has expired.155

The Agencies do not accept

community commitments as a resolution to

likely anticompetitive effects from a hospital

(or any other) merger. The Agencies believe

community commitments are an ineffective

short-term regulatory approach to what is

ultimately a problem of competition. 

Nevertheless, the Agencies realize that in

some circumstances, State Attorneys

General may agree to community

commitments in light of the resource and

other constraints they face.

VI. NONPROFIT STATUS OF

HOSPITALS

The significance of institutional form

(nonprofit v. for-profit) has been an issue in

several hospital merger cases. In three early

cases, the Seventh and Eleventh Circuit

Courts of Appeals rejected the claim that

institutional form should figure in a merger

analysis. Thus, in HCA, the Seventh Circuit

noted that although “different ownership

structures might reduce the likelihood of

collusion, ... this possibility is conjectural,”

and that “adoption of the nonprofit form

152

 Butterworth Health, 1997-2 Trade Cas.

(CCH) ¶ 71,868. See also Butterworth Health, 946

F. Supp. at 1304-10; Spectrum (public cmt), supra

note 137, at 1-7 (noting that they have honored the

community commitment they entered in connection

with the Butterworth/Blodgett merger). 

153

 Long Island Jewish Med. Ctr., 983

F.Supp. at 149. 

154

 Id.

155 Sage et al., supra note 8, at 42-43; Kursh

10/1 at 89-91; Orlans 10/1 at 91-93. But see

Donahue 10/1 at 36-44 (Chief Deputy Attorney

General, Antitrust Section, Pennsylvania Office of the

Attorney General, discussing the pros and cons of

regulatory decrees used in connection with three

separate hospital mergers in Pennsylvania); Singer

10/1 at 44-45 (suggesting structural relief or blocking

the merger is an all-or-nothing solution, but the

conduct or regulatory remedy allows a community to

realize benefits from the merger, such as efficiencies,

and still guard against potential anticompetitive

effects).
30

does not change human nature.”156

Similarly, in University Health, the Eleventh

Circuit observed that “the Supreme Court

has rejected the notion that nonprofit

corporations act under such a different set of

incentives than for-profit corporations that

they are entitled to an implicit exemption

from the antitrust laws.”157 Finally, in

Rockford, the Seventh Circuit repeated and

elaborated its position that institutional form

was irrelevant to a merger analysis: 

We are aware of no evidence – and

the [appellees] present none, only

argument – that nonprofit suppliers

of goods or services are more likely

to compete vigorously than profitmaking suppliers . . . . If the

managers of nonprofit enterprises are

less likely to strain after that last

penny of profit, they may be less

prone to engage in profit-maximizing

collusion but by the same token less

prone to engage in profit-maximizing

competition.158

The relevant question for antitrust

analysis is not whether nonprofit hospitals

behave in a manner indistinguishable from

for-profit institutions, but rather whether

they would exploit merger-created market

power in ways harmful to consumers.159

Recently, some courts have asserted that

institutional form should matter – and

suggested that nonprofit hospitals, even if

they acquire market power, will not harm

competition or consumers. For example, in

Butterworth, the district court relied on the

nonprofit status of the merging hospitals as a

reason why the merger would not have

anticompetitive effects, and the Sixth Circuit

emphasized this fact in its opinion affirming

the district court.

160

 

Similarly, in Long Island Jewish

Medical Center, the court believed that the

merging hospitals were nonprofit

organizations that “have a genuine

commitment to help their communities,” and

“community service, not profit

maximization, is the hospitals’ mission.”161 

156 Hosp. Corp. of Am. v. FTC, 807 F.2d

1381, 1390 (7th Cir. 1986). 

157 FTC v. Univ. Health, Inc., 938 F.2d

1206, 1224 (11th Cir. 1991), citing Nat’l Collegiate

Athletic Ass’n v. Board of Regents, 468 U.S. 85, 100

n.22 (1984). 

158 United States v. Rockford Mem’l Corp.,

898 F.2d 1278, 1285 (7th Cir. 1990). 

159 It is immaterial if nonprofit hospitals

exploit market power in ways that differ from the

ways in which for-profit hospitals would exercise it. 

The issue is whether market power is exploited. 

160 FTC v. Butterworth Health Corp., 1997-

2 Trade Cas. (CCH) ¶ 71,863, 71,867-68 (6th Cir.

1997) (“[T]he hospitals’ expert witness testified that

there would be no economic incentive for the board

members of a nonprofit hospital to raise prices above

competitive levels when the board members

themselves had an interest in maintaining low prices. 

Because the boards of these hospitals are comprised

of community and business leaders whose companies

pay the health care costs of their local employees, the

district court found that undue price increases were

unlikely.”).

161 United States v. Long Island Jewish

Med. Ctr., 983 F. Supp. 121, 149, 146 (E.D.N.Y.

1997). See also Sage 5/29 at 149-50 (“[C]ourts may

misperceive antitrust claims involving hospital

mergers as calling into question the overall

trustworthiness of major community institutions ... . 

[N]onprofit health facilities are widely presumed to

be acting in the public interest, and this expectation is
31

The practical significance of a

hospital’s institutional form has been studied

extensively. One panelist (who was an

expert for the defendant in the

Butterworth/Blodgett case) stated that 

economic incentives made it likely that a

typical nonprofit hospital’s pricing behavior

would differ systematically from that of a

typical for-profit hospital.162 

This panelist argued that a number of

studies, including work he had performed,

indicated that nonprofits that attain market

power behave differently from for-profits

when it comes to pricing.163 This panelist

qualified this observation, noting that the

observed price effects in these studies are

averages and do not predict whether or not a

particular nonprofit hospital merger will

have an effect on price and do not preclude

the possibility of price discrimination

against certain customers.164 Moreover, this

panelist acknowledged that the empirical

evidence of a price effect is mixed.165

By contrast, several panelists

maintained that the best available empirical

evidence indicated no significant differences

between the pricing behavior of for-profit

and nonprofit hospitals.166 For example, one

panelist stated that “the preponderance of

the empirical evidence indicates that

an important part of the reason for according them

nonprofit status in the first instance. In Butterworth,

for example, the court assumed that increased

revenue to the merged hospital would be spent by the

board of trustees on improving quality and helping

the uninsured.”). 

162 Lynk 4/10 at 8. 

163

 Id. at 8, 19-20; William Lynk, Joint

FTC/DOJ Hearings on Health Care and Competition

Law and Policy 1-2 (4/10) (slides) [hereinafter Lynk

Presentation], at http://www.ftc.gov/ogc

/healthcarehearings/docs/030410williamjlink.pdf. 

Lynk’s 1995 study used California data from 1989

and looked at net prices in markets with more or less

concentration, specifically controlling for the

hospitals’ for-profit or nonprofit status, as well as

other factors. William J. Lynk, Nonprofit Hospital

Mergers and the Exercise of Market Power, 38 J.L. &

ECON. 437 (1995). Lynk then simulated the price

effects of a merger and found that for-profit hospitals

had more than an 8 percent increase in price and

nonprofit hospitals had a 4.1percent decrease in price. 

Id. at 453. Lynk also referenced and described

several other studies. Lynk Presentation, supra, at 1-

2.

164 Lynk 4/10 at 8, 20-2121-23; Lynk 4/10

at 11 (noting that different nonprofits can have

different incentives; a nonprofit hospital with local

governance and control may be aligned more with

local community interests than a nonprofit hospital

that is part of a larger nonprofit organization that

views it as a profit center to support the larger

organization’s other activities). See also Touzin 4/10

at 86-87, 92 (consumer group representative stating

that consumers perceive a difference between forprofit and nonprofit hospitals and that conversions of

hospitals from nonprofit to for-profit status often

result in boards comprised of out-of-state entities and

the board’s concern is its shareholders, not the

community in which it is located).

165 Lynk Presentation, supra note 163, at 7-

10. We note also that all of the studies cited by the

author are now dated; the most recent of these was

published in 1991.

166

 See, e.g., Capps 4/10 at 55-56; G. Young

4/10 at 33-37; Fay 4/10 at 24-25; Sloan 4/10 at 57,

65; Gaynor 5/27 at 77 (noting the “bulk of the

evidence in my opinion, however, shows that not-forprofits do exercise market power if given the

opportunity.”); Frank A. Sloan, Hospital Ownership

Conversions 21 (4/10) (slides) (no evidence of

upcoding studied diagnoses following conversion

from non-profit to for-profit status), at

http://www.ftc.gov/ogc/healthcarehearings/docs/0304

10sloan.pdf; David Dranove & Richard Ludwick,

Competition and Pricing by Nonprofit Hospitals: A

Reassessment of Lynk’s Analysis, 18 J. HEALTH

ECON. 87 (1998).
32

nonprofit hospitals use their market power in

roughly the same fashion as for-profit

hospitals.”167 Another panelist similarly

reported that the “literature suggests that, on

average, nonprofit hospitals do use market

power to obtain higher prices.”168

Recent empirical studies of pricing

behavior paint a fairly consistent picture. 

One study found that there was no

significant difference in how for-profit and

nonprofit hospitals exerted market power;

for-profit hospitals generally had higher

prices in 1986, but nonprofits increased their

prices faster from 1986 to 1994.169 A case

study of a nonprofit hospital merger in Santa

Cruz, California, found significant evidence

of post-merger price increases.

170 Another

study noted that “the most interesting result

for antitrust policy is the finding that

nonprofit hospital mergers lead to higher

prices, not lower ones, and that the price

increases resulting from a nonprofit merger

are getting larger over time.”171

Merger simulation studies have

produced a similar picture. One study found

nonprofit status did not lead to lower prices

in urban markets, but did result in modestly

lower prices in rural markets.172 Other

studies found no differences in pricing

behavior resulting from institutional

status.173

One panelist asserted that even if

there are no pricing differences between forprofit and nonprofit hospitals, there can be

167 Capps Presentation, supra note 42, at 19,

Capps 4/10 at 55-56. 

168 G. Young 4/10 at 33; Gary Young,

Nonprofit Ownership and Antitrust Policy 3-4 (4/10)

(slides), at

http://www.ftc.gov/opp/hc/030410garyyoung.pdf.

169 Robert Connor et al., The Effects of

Market Concentration From Horizontal Mergers on

Hospital Costs and Prices, 5 INT’L J. ECON. BUS.

159 (1998).

170 Michael Vita & Seth Sacher, The

Competitive Effects of Not-For-Profit Hospital

Mergers: A Case Study, 49 J. INDUS. ECON. 63, 76-

77 Tbls. III & IV, 80-82 (2001). An earlier study by

different authors found that hospital mergers resulted,

on average, in a 5 percent cost savings. Connor et al.,

supra note 169, at 159.

171 Emmett B. Keeler et al., The Changing

Effects of Competition on Nonprofit and For-Profit

Hospital Pricing Behavior,18 J. HEALTH ECON. 69

(1999). But see Lynk 4/10 at 15; Lynk Presentation,

supra note 163, at 7 (discussing this study’s results,

but adding that it confirmed a statistically significant

differential in price effects of concentration between

nonprofit and for-profit hospitals); Elaine Silverman

& Jonathan Skinner, Medicare Upcoding and

Hospital Ownership, 23 J. HEALTH ECON. 369-89

(2004) (finding that between 1989 and 1996, forprofit hospitals upcoded the pneumonia and stroke

DRGs for Medicare reimbursement more frequently

than not-for-profit and government hospitals).

172 Capps 4/10 at 50-51; Capps Presentation,

supra note 42, at 12. 

173

 See Town & Vistnes, supra note 103, at

749-50 (estimating hospital leverage in negotiations

with managed care organizations and finding no

statistically significant differences between non-profit

and for-profit hospitals’ pricing behavior); Capps et

al., Competition and Market Power in Option

Demand Markets (2003) (unpublished manuscript, on

file with Commission) (estimating consumers’

willingness to pay for the inclusion of specific

hospitals in their health plan network, and using price

regressions, predicted that leverage effects price and

that there is no difference between the behavior of

non-profits and for-profits). See also Capps 4/10 at

51-56; Capps Presentation, supra note 42, at 13-18.
33

other differences.174 Nonprofit hospitals

may have different long-term missions and

have a different level of public

accountability because of their long-term

community obligations.175 There is some

empirical evidence that institutional status

affects the mix of services provided by a

hospital.176 

This panelist also suggested that

board members of a for-profit hospital had

fiduciary duties to a different group of

individuals than would be the case if the

hospital was nonprofit.177 Another panelist

responded that “ownership variations are

distinctions without a significant difference

[and that all hospitals, irrespective of

ownership] have the same mission: to

provide the highest quality, appropriate

medical care possible to the patients they

serve, irrespective of the patient’s ability to

pay for such care.”178 Government statistics

indicate that on average, uncompensated

care accounts for a similar percentage of

total costs at for-profit and nonprofit

hospitals.179

Although institutional status has

loomed large in debates and legal disputes,

the best available evidence indicates that

nonprofits exploit market power when given

the opportunity to do so. Accordingly, the

profit/nonprofit status of the merging

hospitals should not be considered a factor

in predicting whether a hospital merger is

likely to be anticompetitive. 

174 Jacobson 4/10 at 70; Peter D. Jacobson,

Who Owns the Health Care Enterprise: Is the Notfor-Profit Form Obsolete? 3 (4/10) (slides)

[hereinafter Jacobson Presentation], at

http://www.ftc.gov/ogc/healthcarehearings/docs/jacob

son0304.pdf.

175 Jacobson 4/10 at 71-73; Jacobson

Presentation, supra note 174, at 4.

176

 See generally Jill R. Horwitz, Why We

Need the Independent Sector: The Behavior, Law,

and Economics of Not-For-Profit Hospitals, 50

UCLA L. REV. 1345 (2003). 

177 Jacobson 4/10 at 81-82; Jacobson

Presentation, supra note 174, at 12 (suggesting that

directors of a for-profit entity have a fiduciary duty to

maximize shareholder value, while directors of a

nonprofit entity have a fiduciary duty to both the

facility and to the community, requiring them to

balance their margin against their mission). See also

Roger G. Pariseau, Comments (Public Comment)

(recommending that all entities involved in health

care market should be nonprofit). 

178 Fay 4/10 at 24-25; Anthony Fay,

FTC/DOJ Hearings on Health Care and Competition

Law and Policy Statement of the Federation of

American Hospitals – Hospital’s Nonprofit Status 3

(4/10), at http://www.ftc.gov/ogc/healthcarehearings/

docs/030410fay.pdf. See also Sofaer 5/30 at 201-202

(noting that references to a “managed care

revolution” are misnomers, because there has been no

managed care, only managed cost, and that although

there was concern at one time about for-profit

medicine, that really has not been a concern,

“primarily because ... ‘non-profit’ facilities in health

care often behave so much like for-profit facilities in

health care.”).

179 Vogt 9/9/02 at 52 (“[T]he literature is

reasonably clear that the not for-profits don’t provide

very much more charity care, if more charity care at

all. In fact, what small difference there is in charity

care is accounted for by the location of the not-forprofit hospitals.”); see also Sloan 4/10 at 57; David

A. Hyman, Hospital Conversions: Fact, Fantasy,

and Regulatory Follies, 23 J. CORP. L. 741 (1998);

David Blumenthal & Nigel Edwards, The Tale of Two

Systems: The Changing Academic Health Center, 19

HEALTH AFFAIRS 86 (May/June 2000); Gabriel

Picone et al., Are For-Profit Hospital Conversions

Harmful to Patients and to Medicare?, 33 RAND J.

ECON. 507 (2002). 
34

VII. GROUP PURCHASING

ORGANIZATIONS

A group purchasing organization

(GPO) negotiates contracts with vendors of

medical supplies on behalf of its members. 

GPO members include hospitals, nursing

homes, home health agencies, and other

health care systems. Some Hearing

participants and industry commentators

assert that GPOs, acting as their members’

buying cooperatives, can be tremendous

engines of efficiency, allowing medical

buyers to pool their purchasing power to

lower health care costs. 

Nonetheless, others assert that

certain GPO contracting practices may raise

competitive concerns related to tying,

bundling, and exclusive dealing. The Senate

Judiciary Committee, through efforts by

Chairman Mike DeWine and Ranking

Member Herb Kohl of the Antitrust,

Competition Policy and Consumer Rights

Subcommittee, and the U.S. General

Accounting Office have examined this issue

in depth,180 and the issue was an important

topic in the Hearings and the Commission’s

Health Care Workshop.181

In the sections that follow, we

explain what a GPO is, describe its role as a

purchasing intermediary, and provide an

overview of the GPO industry structure. 

This section then discusses the various

organizational structures GPOs may adopt,

the potential incentives created by each, and

the various contracting practices used by

either GPOs or their suppliers and their

potential impact on competition. 

Finally, this section addresses

concerns expressed during the Hearings and

elsewhere that Health Care Statement 7,

which governs GPOs, impedes the

Agencies’ ability to challenge GPO practices

when, and if, they are anticompetitive. For

the reasons discussed below, the Agencies

believe these concerns are misplaced, and it

is not necessary to revise Health Care

Statement 7.182 This statement does not

provide a safety zone for the specific types

of conduct that some commentators have

criticized, including tying, bundling, or

exclusive dealing. In such situations, the

Agencies would analyze the conduct on a

case-by-case basis to determine whether it

may violate the antitrust laws.

180

 See, e.g., Hospital Group Purchasing: 

Has the Market Become More Open to Competition?: 

Hearing Before the Subcomm. on Antitrust,

Competition Policy and Consumer Rights of the S.

Comm. on the Judiciary, GAO-03-998T, 108th Cong.

(2003); Hospital Group Purchasing: Lowering Costs

at the Expense of Patient Health and Medical

Innovations?: Hearing Before the Subcomm. on

Antitrust, Competition Policy and Consumer Rights

of the S. Comm. on the Judiciary, GAO-02-690T,

107th Cong. (2002); Group Purchasing

Organizations: Use of Contracting Processes and

Strategies to Award Contracts for Medical-Surgical

Products: Before the Subcomm. on Antitrust,

Competition Policy and Consumer Rights of the S.

Comm. on the Judiciary, 108th Cong. (2003)

(testimony of U.S. General Accounting Office)

[hereinafter GAO Senate Testimony, Contracting];

Group Purchasing Organization: Pilot Study

Suggests Large Buying Groups Do Not Always Offer

Hospitals Lower Prices: Before the Subcomm. on

Antitrust, Competition Policy and Consumer Rights

of the S. Comm. on the Judiciary, 107th Cong. (2002)

(testimony of U.S. General Accounting Office)

[hereinafter GAO Senate Testimony, Pilot Study].

181

 See Transcript of Health Care Hearings

9/26 at 114-226; Transcript of Health Care Workshop

9/10/02 at 48-140. 

182

 See discussion infra Section E.
35

A. What is a GPO?

GPOs are entities that aggregate

health care providers’ purchasing volume

and contracting functions to negotiate

discounts with manufacturers, distributors,

and other vendors of medical products and

services.183 According to the Health Industry

Group Purchasing Association (HIGPA), 96

percent of all acute care hospitals in the

United States use the services of a GPO, and

on average, hospitals use at least two

GPOs.184 More than 70 percent of hospital

purchases are made through a contract

negotiated by a GPO.185 

GPOs negotiate contracts with

manufacturers of products that fall into two

general categories – commodities and

medical devices.186 Cotton balls, bandages,

and linens are examples of commodities for

which hospital clinical staffs generally do

not have strong preferences about the

manufacturer. High technology medical

devices such as pacemakers and stents are

examples of medical devices for which

hospital clinicians may have a preference as

to the manufacturer.187

GPOs are not wholesalers or

distributors, and they do not take possession

of, or title to, the products for which they

negotiate contracts.188 Vendors of medical

supplies and services generally submit bids

to a GPO in response to a “Request For

183

 See Health Industry Group Purchasing

Ass’n (HIGPA), Group Purchasing Organizations 6

(Public Comment) (submitted by Robert Betz)

[hereinafter HIGPA (public cmt)]; HERBERT

HOVENKAM P, COMPETITIVE EFFECTS O F GROUP

PURCHASING ORGANIZATIONS’(GPO) PURCHASING

AND PRODUCT SELECTION PRACTICES IN THE HEALTH

CARE INDUSTRY 1 (2002) (prepared on behalf of

Health Industry Group Purchasing Association). See

also American Bar Ass’n, Section of Antitrust Law,

Comments Regarding The Federal Trade

Commission’s Workshop on Health Care and

Competition Law and Policy (Oct. 2002) 27-34

(Public Comment).

184 HIGPA (public cmt), supra note 183, at

6 (discussing SMG MARKETING GROUP, 2002 SMG

MHS/GPO MARKET REPORT1 (2002)). See also

Robert Bloch et al., An Analysis of Group Purchasing

Organizations’ Contracting Practices Under the

Antitrust Laws: Myth and Reality 1 (9/26) (virtually

every hospital belongs to at least one GPO)

[hereinafter Bloch (stmt)], at http://www.ftc.gov/ogc/

healthcarehearings/docs/030926bloch.pdf; GAO

Senate Testimony, Pilot Study, supra note 180, at 5

(reporting that according to survey data from the

American Hospital Association, 68 percent of

hospitals belonged to GPOs in 2000; according to

HIGPA, 96-98 percent of hospitals belonged to a

GPO); Bailey 9/10/02 at 48-56 (discussing GAO’s

pilot study).

185 HIGPA (public cmt), supra note 183, at

6; Bloch (stmt), supra note 184, at 1 (citing Muse &

Associates, The Role of Group Purchasing

Organizations in the U.S. Health Care System, at 3

(March 2000)). 

186 GAO Senate Testimony, Contracting,

supra note 180, at 3.

187

 Id. at 3-4. According to HIGPA, other

products and services purchased through GPOs

include pharmaceuticals, dietary resources,

telecommunication services, and janitorial supplies. 

HIGPA (public cmt), supra note 183, at 6.

188

 See Bloch (stmt), supra note 184, at 7;

HIGPA (public cmt), supra note 183, at 6 (“GPOs do

not purchase products or force the purchase of a

particular product. Their value is based solely on

offering providers access to desired products at

reduced prices. Because most hospitals belong to

multiple GPOs, each with a unique set of contracts,

hospitals have choices – either choosing among GPO

contracts or going directly to the supplier to purchase

a particular product.”).
36

Proposal.”189 One panelist stated that GPOs

“simply negotiate a contract with a supplier

that all members of the GPO can access. 

This guarantees the GPO member that it will

receive a price no worse than the prenegotiated price on the GPO contract.”190

Hospitals and other health care providers

then purchase products and services directly

from the vendor pursuant to the prices and

contract terms specified in the GPO’s

contract with that vendor.191 

Others note that in many cases, the

GPO’s contract does not bind the health care

providers and they are free to negotiate

separately with the vendor.192 According to

one commentator, “GPO members have

substantial freedom to purchase alternative

products and do so in significant volumes,

particularly where the products in question

are differentiated.”193

B. GPO Industry Overview

The Hospital Bureau of New York,

established in 1910, is the first known

hospital GPO.194 According to HIGPA,

“[f]rom 1974 to 1999, the number of GPOs

grew from forty to 633 . . . [and] it is

estimated that approximately 200 GPOs

contract directly with suppliers, and that

twenty-six of these operate on a national

level.”195 One commentator asserted that

“when markets in this industry are properly

defined, no GPO has a market share as high

as 20%. Further, there are many GPOs, and

hospitals can and do join multiple GPOs or

switch memberships.”196 

In contrast, the GAO’s pilot study

focused on seven national GPOs, each with

purchasing volume of more than $1 billion. 

The GAO stated that the seven GPOs

collectively accounted for purchases totaling

approximately $43 billion, or “more than

85% of all hospital purchases nationwide

189 GAO Senate Testimony, Pilot Study,

supra note 180, at 7; Bloch (stmt), supra note 184, at

8.

190 Bloch (stmt), supra note 184, at 7-8.

191 GAO Senate Testimony, Pilot Study,

supra note 180, at 7.

192 Bloch (stmt), supra note 184, at 8. See

also HERBERT HOVENKAM P, GROUP PURCHASING

ORGANIZATION (GPO) PURCHASING AGREEMENTS

AND ANTITRUST LAW 2 (2004) (prepared for the

Health Industry Group Purchasing Association)

(agreements typically offer buyers a discount in

exchange for the buyers’ commitment to purchase a

minimum percentage of its needs from a specific

vendor); GAO Senate Testimony, Pilot Study, supra

note 180, at 5.

193 HOVENKAM P, supra note 192, at 2.

194 Bloch (stmt), supra note 184, at 3. 

195

 Id. at 4-5 (also claiming there were

approximately 900 GPOs in 2003, although many of

these are subsidiaries of “parent” GPOs, and work

regionally to recruit hospitals to participate in the

contracts negotiated by the parent GPO).

196 HOVENKAM P, supra note 192, at 6. In

another paper, HOVENKAM P, supra note 183,

Professor Hovenkamp reported “the following market

shares for the ten largest GPOs, based on 2001 data:”

Novation, 14.6%; Premier, 12.5%; AmeriNet, 4.6%;

MedAssets, 4.5%; Managed Health, 3.3%; Consort,

2.2%; HealthCare Purchasing Partners, 1.1%;

National Purchasing Alliance, 0.7%; AllHealth,

0.6%; and Innovatix, 0.6%. HOVENKAM P, supra note

192, at 9-10 & n.7. See also Bloch (stmt), supra note

184, at 19 (even largest GPO accounts for only 15

percent of total purchase volume of hospital

purchases of supplies and equipment).
37

made through GPO contracts.”197 Moreover,

according to the GAO, the two largest GPOs

in its study accounted for approximately 66

percent of total GPO purchasing.198

One panelist explained that the

numbers may differ depending on the study,

the years measured, and whether percentages

are based on all hospital purchases or only

on hospital purchases made through a

GPO.199 For example, this panelist noted

that the largest GPO accounts for 15 percent

of total purchases by hospitals, but 30

percent of purchases made by hospitals

through a GPO. Similarly, the second

largest GPO’s market share goes from 12

percent of all purchases to 25 percent of

purchases made through a GPO.200

C. Structure and Incentives

The GAO report explained that

“GPOs differ in their corporate structures

and their relationships with member

hospitals.”201 Member hospitals own some

GPOs; in other cases, shareholders that are

independent of the member hospitals own

the GPO.202 In some instances, suppliers

finance GPOs by paying administrative fees

that often are calculated as a percentage of

each member’s purchases of each supplier’s

products.

203 These fees are designed to

“cover [a] GPO’s operating expenses and

serve[] as its main source of revenue.”204

GPOs may distribute surplus fees to their

member hospitals as well.205 GPOs may be

for-profit or nonprofit organizations. 

Because of these differing structures,

some panelists and commentators question

the extent to which GPOs act as the agents

of their buyer-members, or as the agents of

the sellers that pay the GPOs’ administrative

fees. Because suppliers pay GPO fees, some

worry that GPOs may operate to increase

suppliers’ revenues – and, correspondingly,

GPO fees – rather than to minimize

members’ purchasing costs.206

197 GAO Senate Testimony, Contracting,

supra note 180, at 4.

198

 Id. But see MUSE & ASSOCIATES, THE

ROLE OF GROUP PURCHASING ORGANIZATIONS IN THE

U.S. HEALTH CARE SYSTEM 3 (2000) (prepared for

HIGPA) and Bloch (stmt), supra note 184, at 1

(GAO’s figures are in contrast to their estimates

suggesting GPO contracts cover purchases with an

annual value of approximately $150 billion).

199 Bloch 9/26 at 126-27.

200

 Id.

201 GAO Senate Testimony, Pilot Study,

supra note 180, at 6. 

202

 Id.

203

 Id. at 8. According to the GAO, the

“Social Security Act, as amended in 1986 allows

these fees, which would otherwise be considered

“kickbacks” or other illegal payments to the GPO.” 

Id. See also 42 U.S.C. § 1320a-7b(b)(3)(C); 42

C.F.R. 1001.952 (j) (setting forth safe harbor under

the Federal anti-kickback statute for certain GPO

fees). 

204 GAO Senate Testimony, Contracting,

supra note 180, at 5.

205

 Id. at 5 n.5.

206

 See, e.g., Strong 9/26 at 153-54; Bloch

9/26 at 127-30, 134-35; Clark 9/10/02 at 64, 118;

Manley 9/10/02 at 69 (all suggesting GPOs are the

buyers agent) but see Weatherman 9/26 at 180-81;

Everard 9/26 at 170; EINER ELHAUGE, THE

EXCLUSION OF COMPETITION FOR HOSPITAL SALES

THROUGH GROUP PURCHASING ORGANIZATIONS 29-

31 (2002); Hilal 9/26 at 143; Nova BioMedical,

Comments Regarding Hearings on Health Care
38

Some panelists stated that when

GPO members play important decisionmaking roles in the GPO, the GPO may be

more likely to act as the agent of its buyer

members. As one commentator put it,

“[m]any GPOs are owned by their members,

who sit on their boards, and are operated as

cooperatives. These boards have no interest

in procuring overpriced or substandard

products [on] behalf of their own

institutions.”207 Similarly, one CEO stated

that in his GPO the buyers 

make all of the [GPO] contracting

decisions ... [award] all of the

contract[s] ... decide which suppliers

get the contracts, what their

compliance requirements are going

to be, ... [and] the type of contract

that’s going to be awarded, whether

it’s a sole source contract, a dual

source contract, or a multi-source

contract ... [and that each health care

system] has a seat on [the] Board of

Directors ... see[s] financial

statements every month, ... help[s]

us set the budget ... [and has] a seat

on every single contracting body.208

Another panelist stated that hospitals

in such GPOs have “multiple opportunities

through surveys, through advisory boards,

advisory groups ... to have input into the

suppliers that are selected for contract in

[their] group purchasing organization.”209

Other panelists asserted, however,

that some GPOs act as the agents of the

suppliers. One panelist asserted that the

majority of GPOs “are financed and thereby

controlled by large medical product

companies rather than by the hospitals they

are supposedly the agents for ... . Fees and

other incentives running from large medical

manufacturers to GPOs allow such

manufacturers to inappropriately influence

the buying policies of the GPOs, because the

compensation of most GPO management is

almost always based on this fee income

rather than on the real savings to hospital

members.”210 As a result, another

contended, GPOs “are selling protected

market share to dominant suppliers in

exchange for fees.”211 Such seller payments

“may reflect side-payments being made in

exchange for the GPOs conferring a de facto

exclusivity that enhances the market power

of the incumbent device maker.”212

D. Contracting Practices

At the Hearings, panelists focused a

significant portion of the discussion on

Competition and Policy (Nov. 7, 2003) 3-5 (Public

Comment) (all suggesting concerns that GPOs may be

more concerned about suppliers’ interests)

[hereinafter Nova (public cmt)].

207 HOVENKAM P, supra note 183, at 5.

208 Strong 9/26 at 154.

209 Clark 9/10/02 at 64, 118; see also

Manley 9/10/02 at 69 (noting existence of product

“evaluation committees”). 

210 Weatherman 9/26 at 180-81; see also

Nova (public cmt), supra note 206, at 3-5.

211 Everard 9/26 at 170.

212 ELHAUGE, supra note 206, at 29. See

also Einer Elhauge, Antitrust Analysis of GPO

Exclusionary Agreements (Sept. 26, 2003) 19 (Public

Comment) (prepared on behalf of the Medical Device

Manufacturer’s Association) [hereinafter Elhauge

(public cmt)].
39

whether certain GPO contracting practices –

principally alleged tying, bundling, or

exclusive dealing practices – injure

competition. Such contracting practices

include allegations that GPOs negotiate solesource contracts with certain privileged

manufacturers; require hospitals to purchase

given volumes of certain supplies; bundle

contracts that offer price discounts to

purchasers of particular product groups; and

enter contracts with manufacturers that last

five years or more.213

GPOs’ critics stated that some

suppliers, in league with GPOs with

sufficiently large market share, can insist

upon a variety of anticompetitive GPO

contracting practices to exclude rival

suppliers from serving the buyers.214 They

argue that such practices can discourage

competitors from entering to bring down

prices, and can discourage the research and

development efforts necessary to produce

innovative health care products that may

improve on the incumbent’s product.215

Some charge, for example, that “if a large

GPO negotiates a sole-source contract with a

manufacturer, the contract could cause an

efficient, competing manufacturer to lose

business and exit from the market and could

discourage other manufacturers from

entering the market.”216 

Similarly, GPOs’ critics challenge

hospital “commitments” to purchase a given

volume to obtain a better price.217

According to one panelist, under such a

commitment, a hospital that buys an

unauthorized product not only loses its

better price on the complying product, but

213

 See, e.g., Strong 9/26 at 156 (do not

bundle disparate products, but do bundle branded

prescription drugs with generics to get discount on

branded); id. at 157 (generally, five year contracts

only used if significant amount of time and money

involved in product evaluation); Bloch 9/26 at 127-38

(noting GPOs under attack for various contracting

practices and provided his antitrust analysis of these

practices); Everard 9/26 at 166 (bundling); id. at 168

(even if contract not technically sole-source, hospitals

are not really free to purchase elsewhere because they

will lose significant discounts); Hilal 9/26 at 143-46

(discussing problems with bundling and large percent

of market his company is sometimes locked out of as

result of GPO contracting practices); Elhauge (public

cmt), supra note 212, at 12-13, 20-21 (discussing

problems with bundled and loyalty discounts and

rebates). See also GAO Senate Testimony,

Contracting, supra note 180, at 5-6; Novation,

Comment Regarding Competition Law and Policy &

Health Care (Sept. 30, 2002) 2-4 (Public Comment).

214

 See, e.g., Everard 9/26 at 168 (stating

that “manufacturers with market power are able to

exclude competitors, in some cases with the GPO

support and in some cases without”); Hilal 9/26 at

141 (arguing that GPOs “defend[] market share of

existing dominant suppliers” by blocking entrants

from serving the medical market); Elhauge (public

cmt), supra note 212, at 29-31.

215

 See, e.g., GAO Senate Testimony, Pilot

Study, supra note 180, at 1 (noting that “[s]ome

manufacturers – especially small manufacturers of

medical devices – allege that contracting practices of

some large GPOs have blocked their access to

hospitals’ purchasing decisionmakers [and that this]

den[ies] patients access to innovative or superior

medical devices”). 

216

 See, e.g., GAO Senate Testimony,

Contracting, supra note 180, at 6. A sole-source

contract, according to the GAO, is one that “give[s]

one of several manufacturers of comparable products

an exclusive right to sell a particular product through

a GPO.” Id. at 5. See also Nova (public cmt), supra

note 206, at 4-5 (GPOs impede companies such as

Nova from introducing new and innovative products

into the GPO’s member hospitals).

217

 See GAO Senate Testimony,

Contracting, supra note 180, at 5.
40

also must repay savings earned from having

enjoyed that better price for years.218 Critics

also challenge contracts that offer bundled

price discounts to purchasers of particular

product groups, and contracts of five years

or more that “can direct business to

manufacturers for an extended period.”219

The economic literature on tying,

bundling, and exclusive dealing practices

indicates that they can be efficient, although

under certain circumstances they may be

harmful to competition.220 Scholarly legal

commentary in recent years also has called

into question the anticompetitive

explanations for these practices and has

focused on efficiencies and the potential

welfare-enhancing aspects of these business

arrangements.221 Thus, courts typically

engage in a fact-intensive inquiry to evaluate

the competitive effects of such tying,

bundling, and exclusive dealing claims.

Courts reviewing tying claims

generally require that “(1) two separate

products or services are involved, (2) the

sale or agreement to sell one is conditioned

on the purchase of the other, (3) the seller

has sufficient economic power in the market

for the tying product to enable it to restrain

trade in the market for the tied product, and

(4) a not insubstantial amount of interstate

commerce in the tied product is affected.”222 

Courts reviewing the competitive

consequences of exclusive dealing contracts

typically analyze factors such as:

218

 See Holden 9/10/02 at 100-04; see also

Elhauge (public cmt), supra note 212, at 34.

219

 See GAO Senate Testimony,

Contracting, supra note 180, at 6; see also Everard

9/26 at 166 (citing “some of the GPO practices that

block innovation and ... lower costs,” such as

“supplier paid fees, sole source contracts, high

commitment levels, bundling of both products and

companies.); Sing 9/26 at 118-25 (summarizing GAO

report on GPOs and noting that certain GPO

“contracting strategies have the potential to reduce

competition” if the GPO or vendor has “a large

market share”).

220

 See, e.g., Keith N. Hylton & Michael

Salinger, Tying Law and Policy: A DecisionTheoretic Approach, 69 ANTITRUST L.J. 469 (2001). 

But see Elhauge (public cmt), supra note 212, at 1-46

(arguing why GPO contracting practices can be

anticompetitive).

221

 See, e.g., Richard A. Posner, ANTITRUST

LAW, at 229-32 (exclusive dealing), 251-56

(exclusive dealing), 197-207 (tying), and 234-36

(bundling) (2nd ed. 2001).

222 ANTITRUST LAW DEVELOPMENTS at 179

& n.998 (citing cases) (5th ed. 2002). The law of

bundled discounts is both unsettled and beyond the

scope of this report. Only one court of appeals has

squarely addressed bundled discounts, most recently

in LePage’s, Inc. v. 3M, 324 F. 3d 141 (3rd Cir.

2003) (en banc), cert denied, 2004 U.S. LEXIS 4768

(2004). The Supreme Court denied review after the

United States suggested that LePage’s was not “a

suitable vehicle for providing ... guidance” in this

area. Brief for the United States as Amicus Curiae,

2004 WL 1205191, 8 (May. 28, 2004). In its brief,

the United States stated that “the Third Circuit was

unclear as to what aspect of bundled rebates

constituted exclusionary conduct” and “provided few

useful landmarks on how Section 2 should apply as a

general matter in future cases involving bundled 

rebates.” Id. at 16. Although the Third Circuit “cited

the general principles” set out in Brooke Group Ltd.

v. Brown & Williamson Tobacco Corp., 509 U.S. 202

(1993) and other cases, it “failed to explain precisely

why the evidence supported a jury verdict of liability

in this case, including what precisely rendered 3M’s

conduct unlawful.” Id. The brief further noted that

“the court of appeals’ failure to identify the specific

factors that made 3M’s bundled discount

anticompetitive may lead to challenges to

procompetitive programs and prospectively chill the

adoption of such programs.” Id.
41

the degree of exclusion flowing from

the restraint, its duration and

terminability, the percentage of the

market foreclosed and other indicia

of the likely effect on competitors’

ability to operate, the availability of

alternative access routes to supplies

or customers, rivals’ ability to

employ countermeasures to defeat

the attempted exclusion, and,

ultimately, the likely impact of

raising rivals’ costs on competition

in a relevant market, including

consideration of any procompetitive

justifications.223

As a threshold matter, some panelists

and commentators questioned whether

allegations of exclusive dealing, tying, and

bundling are true. For example, one panelist

stated that “very few GPO contracts today

are, in fact, exclusive,” and unlike true

exclusive dealing contracts, sole source

contracts allow hospitals the freedom to buy

from others.224 Another commentator noted

that GPO loyalty rebate programs allow

buyers to purchase from rivals offering

lower prices.225 Other panelists noted that

many long-term contracts are qualified in

that “almost all GPO contracts can be

terminated on 60- to 90-days notice.”226

Some panelists argued that, even if

the GPOs were doing what their critics

alleged, these contracting practices can

actually increase, not decrease, consumer

welfare.227 For example, one source

reported that GPOs use the challenged

contracting practices “as incentives for

223 FTC STAFF REPORT, ENTERING THE 21ST

CENTURY: COMPETITION POLICY IN THE WORLD OF

B2B ELECTRONIC MARKETPLACES § 3, at 26 (2000)

(citations omitted) at www.ftc.gov/os/2000/10/

b2breport.pdf. As four Justices stated in a concurring

opinion in Tampa Electric Co. v. Nashville Coal Co.,

365 U.S. 320, 329 (1961), courts are to weigh “the

probable effect of the [exclusive dealing] contract on

the relevant area of effective competition, taking into

account the relative strength of the parties, the

proportionate volume of commerce involved in

relation to the total volume of commerce in the

relevant market area and the probable immediate and

future effects which preemption of that share of the

market might have on effective competition therein.” 

See also Jefferson Parish Hosp. District v. Hyde, 466

U.S. 2, 45 (1984) (O’Connor, J. concurring)

(advocating an analysis focused on “the number of

sellers and buyers in the market, the volume of their

business, and the ease with which buyer and sellers

can redirect their purchases or sales to others”). 

224 Bloch 9/26 at 132, 129-130; see also

Strong 9/26 at 160 (noting that, given the lack of

“noncompliance” penalties, GPO Consorta’s member

health care systems “decide who they want to deal

with. It’s not us that’s out calling those shots.”). 

Another panelist questioned the degree of freedom

actually offered, see Everard 9/26 at 168-69. For a

response to that point, see HOVENKAM P, supra note

183, at 12 (conceding that “purchases made outside

of the GPO contracting process will not necessarily

enjoy the quantity-generated cost reductions” of GPO

purchasing, but “[i]f that were not the case, then the

GPO would have no reason for existence”). See

generally id. at 24-29, for further argument that GPO

contract arrangements do not amount to

anticompetitive exclusive dealing.

225

 See HOVENKAM P, supra note 192, at 8-

10.

226 Bloch 9/26 at 132; see also Strong 9/26

at 157 (GPO Consorta has “included new technology

provisions in all our contracts on a go-forward basis

since the inception of our Code of Conduct. It allows

us to go outside a contract with a manufacturer for

new technology. In virtually all of our contracts, with

perhaps one or two exceptions, we have a 90-day

termination provision. That allows us to cancel a

contract if we can’t come to terms and move forward

and contract for that new technology.”).

227 Strong 9/26 at 156-57.
42

manufacturers to provide deeper discounts

and for hospital members to concentrate

purchasing volume to obtain better

prices.”228 

Some researchers and industry

representatives claim that providers who

make purchases pursuant to GPO contracts

generally save 10 to 15 percent of the price

they would otherwise pay.229 Also, GPO

contracts that bundle products can be

“simply ways of making products more

attractive, effectively cutting price, or

reducing costs by disposing of excess

inventory.”230 

One panelist asserted that programs

that allow suppliers to “reward [buyers’]

higher levels of compliance” can be

procompetitive “because they’re offering

increased dividends in exchange for

volume,” and because they standardize the

buyers’ products, which “leads to lower

inventory costs [and] the ability to

standardize patient care, leading to better

quality, better staff education and improved

safety.”231 This same panelist explained that

long-term contracts are sometimes necessary

in light of the costs of “large clinical

evaluations.” He explained the process

involved for clinically evaluating a

particular product:

The evaluation took 18 months. Our

direct costs were over $150,000 ... .

We looked at product utilization in

over 8,500 surgical cases in 60 of our

facilities with over 2,100 surgeons

participating. At the end of that

evaluation process, our owners said

this was too much work to award just

a three-year contract ... [and] they

decided to award a five-year

contract.232

He further stated that “strong” GPO

programs are needed to counter the growing

market power of suppliers that have

consolidated in recent years.233 Finally, he

also questioned whether the challenged

practices could really be injuring the

upstream supplier market, citing evidence

that the medical device market is

flourishing.234 

Others, however, question GPOs’

228 GAO Senate Testimony, Contracting,

supra note 180, at 5.

229 HIGPA (public cmt), supra note 183, at

7; MUSE & ASSOCIATES, supra note 198. 

230 HOVENKAM P, supra note 183, at 22.

231 Strong 9/26 at 160; see also

HOVENKAM P, supra note 183, at 18 (noting

importance of “scale economies”); Strong 9/26 at 153

(arguing that the administrative fees that suppliers

pay to GPOs are not to buy monopoly power but to

“allow[] the supplier to have one contract in the

market [and not] hundreds [to make with] individual

health care facilities ... [and to generate] marketing

and contract visibility ... contract implementation

support [and] contract evaluation”).

232 Strong 9/26 at 158-59.

233

 Id. at 163.

234 Strong 9/26 at 164; but see Weatherman

9/26 at 182 (challenging such assertions and noting

that “the influence of supplier fees running directly

from medical product’s vendors to the manager of the

GPO buyers completely confounds any such analysis

and creates such an appearance of unfairness and

corruption as to deter many venture capitalists from

funding new innovators in these markets”).
43

claimed efficiencies.235 For example, after a

pilot study, the General Accounting Office

reported that “GPOs’ prices were not always

lower and were often higher than prices paid

by hospitals negotiating with vendors

directly.”236

According to the GPO industry,

GPOs provide additional benefits to their

members, including reduced overhead costs

for purchasing departments. In addition,

GPOs claim to provide “assistance with

product-comparison analysis and

standardization of products.”237

Through GPOs, members may be able to

reduce their supply costs via group

purchasing, rebates, and surplus dividend

payments.238 

As one panelist stated, GPOs can not

only “eliminate wasteful administrative

duplication[,] ... they increase competition

between rival GPOs, manufacturers and

their member hospitals, all of which can

translate into lower prices and higher quality

for consumers.”239 Moreover, “GPOs assist

members in product selection, an activity

that would otherwise use up large amounts

of member staff time.”240 One estimate

suggested that hospitals would spend on

average $155,000 per hospital to duplicate

the administrative and other functions GPOs

provide.241

The structure and incentives of

individual GPOs may play an important role

in determining the level of efficiencies they

235

 See, e.g., Hilal 9/26 at 139 (questioning

GPOs’ claimed efficiencies); GAO Senate Testimony,

Pilot Study, supra note 180, at 3; Everard 9/26 at

173.

236 GAO Senate Testimony, Pilot Study,

supra note 180, at 3 (concluding that some hospitals

saved as much as 26 percent by purchasing via a GPO

contract, and others paid prices as much as 39 percent

higher using the GPO contract. The GAO pilot study

also found that hospitals with more than 500 beds

often obtained better prices on their own, but “small

and medium-sized hospitals were more likely to

obtain price savings using a GPO contract.” Id. See

also Lynn James Everard, Health Policy Statement

Number Seven And Marketplace Competition In the

Health Care Supply Chain: A Market-Based

Analysis 4 (9/26) (“There is no valid proof of the cost

savings claims of GPOs.”), at

http://www.ftc.gov/ogc/healthcarehearings/docs/0309

26everardadd.pdf. But see Bloch (stmt), supra note

184, at 6 (asserting that the GAO looked at only two

products in one city and broad conclusions about cost

savings cannot be drawn from such a small sample

and that GAO study “failed to consider the fact that

hospitals that obtain better pricing outside their GPO

often use the GPO contract as a starting point for their

negotiations with vendors”).

237

 See GAO Senate Testimony, Pilot Study,

supra note 180, at 6-7 (citing to GPO officials and a

GPO trade organization).

238 Strong 9/26 at 151-52; see also GAO

Senate Testimony, Contracting, supra note 180, at 1

(“By pooling the purchases of these products for their

hospital customers, GPOs may negotiate lower prices

from vendors (manufacturers, distributors, and other

suppliers), which can benefit hospitals and,

ultimately, consumers and payers of hospital care

(such as insurers and employers).”).

239 Bloch 9/26 at 127; see also Heiman 9/26

at 189-92 (citing variety of efficiencies offered by

GPOs); HOVENKAM P, supra note 183, at 1-2 (noting

savings due to GPOs). 

240 HOVENKAM P, supra note 183, at 3.

241 Eugene S. Schneller, The Value of

Group Purchasing in the Health Care Supply Chain 6

(2000), at http://wpcarey.asu.edu/hap

/hap_novation.cfm; See also Bloch (stmt), supra note

184, at 7 and n.24. See also Novation (public cmt),

supra note 213, at 2 (“[S]tudies show that if GPOs

did not exist, the average hospital would pay

$353,000 to replicate those purchasing functions.”).
44

obtain. For example, GPOs acting on their

members’ behalf may strive to achieve

efficiencies for the members.242 Thus, some

noted that when the challenged contracting

practices are arranged not by one rival

manufacturer seeking to foreclose others, but

by “a buyer or its agent” – i.e., the buyers or

their GPO – “in order to get lower prices

from the manufacture[r],” the practices are

likely to be pro-competitive.243 

One panelist suggested this

circumstance distinguishes the challenged

practices from typical tying and bundling

cases.244 Indeed, another panelist believed

that a GPO’s refusal to carry a given

manufacturer’s product likely reflects

buyers’ skepticism about the manufacturer’s

claims about its product, not any competitive

injury.245 

By contrast, some commentators

suggest that if suppliers control a GPO, the

organization may lack the incentive to

promote efficiencies for its members. Some

panelists suggested that such GPOs may

have an incentive to collude with suppliers

aiming to injure rival suppliers in a bid to

acquire market power over the market for

providing goods and services to the

buyers.246 Under this theory, the GPOs agree

to raise barriers against rival suppliers

through contract terms imposing tying,

bundling, or exclusive dealing arrangements

on the buyers.247 These terms seek to

“exclude rival manufacturers from

competing for hospital sales even when the

rival products are better or cheaper.”248

242

 See, e.g., Clamp-All Corp. v. Cast Iron

Soil Pipe Inst., 851 F.2d 478, 487-88 (1st Cir. 1988)

(Breyer, J.) (noting lack of evidence that a standardsetting organization misled “reasonably

sophisticated” buyers). 

243 Bloch 9/26 at 134-35; see also id. at 129

(distinguishing between “contracts and bundling

programs” that buyers initiate, and those that sellers

initiate, and noting that the former pose fewer

competitive concerns because they are “driven by the

economic interest of GPO member hospitals in

obtaining lower prices and quality products”).

244

 Id. at 134-35.

245 Strong 9/26 at 157-58 (questioning

manufacturers’ claims that their excluded products

are innovative, and trusting “the clinicians and the

other product users” to decide that question for

themselves); see also Goodman 9/10/02 at 85 (noting

GPOs’ “evidence-based decision making” with

respect to new technologies). 

246

 See, e.g., ELHAUGE, supra note 206, at

30 n. 86 (challenging assumption that because GPOs

are buyers’ agents, they act as “an ordinary” buyer

would, citing literature on agency costs showing that

“agents generally always have some incentive to

deviate from the interests of their principals”).

The buyers themselves also may have an

incentive to reach such agreements with suppliers, in

exchange for “side payments that split the seller’s

supracompetitive profits, or special discounts that

give the participating buyers market advantages over

other buyers and thus enhance the participating

buyers’ downstream market power.” ELHAUGE, supra

note 206, at 28; see also Hilal 9/26 at 147-48 (“GPOs

are not really collective bargainers .... [T]hey are,

rather, franchisers .... Why would hospitals allow

franchisers ... [to] make [their] li[ves] harder? Well,

perhaps if they’re part-owners of the franchising

operation, or if the income is excluded from

reimbursement computation ....”).

247

 See, e.g., ELHAUGE, supra note 206, at 9-

10; Hilal 9/26 at 143 (arguing that once a GPO grants

monopoly power to a supplier, a “newcomer”

supplier has difficulty entering because “for the new

[product] to be offered ... the customers would have

to be familiar with that product. For them to be

familiar with that product, that newcomer must have

access to the market,” which he argues is impossible

because of the GPOs).

248 ELHAUGE, supra note 206, at 1.
45

Although suppliers do not need GPO

support to attempt to exclude their rivals

from the downstream market,249 one panelist

suggested that the GPOs can streamline the

efforts to exclude.250

GPO members may also find it

difficult to pursue other means of procuring

goods for a variety of reasons. For example,

member hospitals may be contractually

bound to purchase certain supplies through a

given GPO; the efficiencies that GPOs

afford may outweigh their anticompetitive

costs; member hospitals may enjoy “sidepayments or special discounts” that give

them private incentives to stay; a race-tothe-bottom effect may persuade a hospital to

maintain its special GPO discount so that it

does not suffer vis-a-vis its rivals; or agency

problems that reward hospital administrators

for winning short-term price cuts regardless

of long-term harms may prevent hospitals

from taking action against these

anticompetitive practices.251

Others counter that GPOs are

unlikely to collude with suppliers in this way

for long, because buyers unhappy with the

anticompetitive results can always leave the

GPO for other means of purchasing

supplies.252 One panelist noted that GPOs

must compete for hospitals’ business and

that hospitals “are free to select GPOs that

best represent their interests.”253

E. Statement 7 Does Not Protect

Anticompetitive Contracting

Practices

Health Care Statement 7 addresses

the formation of a GPO. See Box 7-1. 

Some have proposed altering Statement 7,

citing to concerns about alleged

anticompetitive contracting practices.254 The

249

 See Everard 9/26 at 168-69 (“For

example, a multi-line supplier might be able to go to a

hospital who is considering buying a product from a

small company like Applied and say, you know, you

might be able to buy that product and you’re right,

you’re free to do it. However, if you choose to buy

from that supplier, you’re going to lose significant

discounts on all the other products that we sell to you. 

So ... the hospital is not really as free as one might

think.”).

250

 See Weatherman 9/26 at 181-82 (“[T]he

existence of GPOs makes anticompetitive contracting

incredibly easy and efficient for these large

manufacturers who would have to negotiate separate

contracts with thousands of individual hospitals

instead of with three or four large GPOs. So, the

GPOs provide a very efficient vehicle for the large

manufacturers to throw their weight around in the

market.”). 

251

 See ELHAUGE, supra note 206, at 36-42.

252 HOVENKAM P, supra note 183, at 23

(arguing that GPOs lack incentives to accept such a

“bribe” from suppliers, in part because it risks having

GPO members defect to other means of purchasing

supplies).

253 Clark 9/10/02 at 63; see also Burns

9/10/02 at 74 (noting existence of competition among

GPOs for hospitals’ business); Betz 9/10/02 at 108

(same).

254

 See, e.g., Everard 9/26 at 165-66 (stating

that Health Care Statement 7 does not “protect

patients and caregivers” and that “it must be revised

to address the economic realities of the current

medical product marketplace”); GAO Senate

Testimony, Pilot Study, supra note 180, at 1 (noting

that new concerns “have spurred calls for

reexamining federal antitrust guidelines regarding

GPOs” and stating that the antitrust guidelines

“afford[] GPOs considerable latitude to merge and

grow [and] has permitted the creation and growth of

the largest GPOs”). But see Bloch 9/26 at 219-23.
46

Box 4-1: Health Care Statement 7. This

statement provides in part: “The Agencies will

not challenge, absent extraordinary

circumstances, any joint purchasing arrangement

among health care providers where two

conditions are present: (1) the purchases account

for less than 35 percent of the total sales of the

purchased product or service in the relevant

market; and (2) the cost of the products and

services purchased jointly accounts for less than

20 percent of the total revenues from all products

or services sold by each competing participant in

the joint purchasing arrangement.”

Agencies, however, do not believe that it is

appropriate or wise to amend Statement 7,

because the statement and its safety zone

thresholds do not prevent and should not be

appropriately read as preventing antitrust

challenges to any of the alleged

anticompetitive contracting practices about

which panelists and others have raised

concerns.

Statement 7 and its safety zone

thresholds aim to address monopsony and

oligopoly concerns with the formation of a

GPO.255 This statement reflects concerns

that a particular GPO could (1) create

monopsony power, injuring competition in

the supplier market or (2) facilitate collusion

in the sale of hospital products or services,

injuring competition in the downstream

market.

Statement 7 does not address all

potential issues that GPOs may raise. For

example, it is silent on alleged exclusive

dealing, tying, and bundling concerns that

many panelists discussed in the Hearings. It

is also silent on other potential competitive

concerns, such as price-fixing, market

allocation, mergers, etc. No statement is

likely to cover every issue that could arise. 

The Agencies believe amending the

statement to address some, but not all

potential issues, is likely to be

counterproductive. For example, some

might argue that because certain issues were

discussed, Statement 7 implicitly endorses as

legal whatever conduct is not specifically

addressed. If a supplier coordinates with the

buyers, or with GPOs that have turned on

their buyers, to exclude rival suppliers,

Statement 7 would not protect such conduct

from antitrust challenge. 

In sum, Statement 7 governs Agency

actions examining monopsony and oligopoly

issues in connection with a GPO’s

formation. It does not preclude Agency

action challenging anticompetitive conduct –

such as anticompetitive contracting practices

– that happens to occur in connection with

GPOs. The Agencies will examine, on a

case-by-case basis, the facts of any alleged

anticompetitive contracting practices to

determine whether the practice violates the

antitrust laws. 

(defending Health Care Statement 7).

255 One panelist noted this point and

“urg[ed] the FTC to revisit the structure of the

guidelines” to make the point clear. Latham 9/10/02

at 93. It is hardly atypical for Agency guidelines to

address only a certain class of competitive issues. 

The Competitor Collaboration Guidelines also

address only a limited set of anticompetitive

concerns; they were not designed to address all

possible anticompetitive conduct associated with

competitor collaborations. See Antitrust Guidelines

for Collaborations Among Competitors, 2 n.5 (2000)

at http://www.ftc.gov/os/2000/04/ftcdojguide

lines.pdf. 
47

VIII. TIERING AND PAY-FORPERFORMANCE 

Commentators and panelists noted

that some providers have resisted tiering and

pay-for-performance programs, and refused

to provide information regarding the quality

of care they provide.256 When providers

collectively refuse to enter into such

arrangements or provide information to

purchasers, the Agencies will carefully

examine such conduct. As appropriate, the

Agencies will bring cases against providers

who collusively refuse to enter into such

arrangements or provide such information. 

The Agencies also will challenge unilateral

conduct or bundled contracting practices,

where appropriate.

256

 See supra Chapters 1 & 3. 
CHAPTER 5: INDUSTRY SNAPSHOT: INSURANCE AND OTHER THIRD

PARTY PAYMENT PROGRAMS

I. OVERVIEW ........................................................... 1

II. INTRODUCTION ....................................................... 1

III. REGULATORY FRAMEWORK ........................................... 2

A. McCarran-Ferguson Act ............................................ 2

B. State Laws and Regulations .......................................... 3

C. ERISA .......................................................... 4

D. HIPAA .......................................................... 4

E. COBRA ......................................................... 5

F. Mandated Benefits ................................................. 5

G. Federal Tax Code .................................................. 5

IV. EMPLOYMENT-BASED COVERAGE ...................................... 6

A. Sources and Regulation of Employment-Based Coverage .................. 7

B. Issues and Priorities ................................................ 9

V. INDIVIDUAL INSURANCE ............................................. 13

VI. PUBLICLY-FUNDED PROGRAMS ....................................... 14

A. Medicare ....................................................... 14

B. Medicaid ....................................................... 18

C. Other Public Programs ............................................. 20

VII. PPOS ................................................................ 21

VIII. THE UNINSURED ..................................................... 24

A. What Is the Impact of Not Having Insurance? ........................... 25
ii

B. Who Pays for Health Care for the Uninsured? .......................... 26

C. The Impact of Competition ......................................... 28

IX. CONSUMER-DRIVEN HEALTH CARE ................................... 28
CHAPTER 5: INDUSTRY SNAPSHOT: INSURANCE AND

 OTHER THIRD PARTY PAYMENT PROGRAMS

I. OVERVIEW

Chapter 5 provides an introduction to

health insurance, including the applicable

regulatory framework and sources of health

care coverage. Chapter 6 summarizes

competition law as it applies to the health

insurance industry and then analyzes current

controversies, including most favored nation

clauses, mandated benefits, and consumer

directed health plans. 

Representatives from insurance

groups and organizations, as well as legal,

economic, and academic experts, spoke at

the Hearings on insurance-related panels,

including: Health Insurance: 

Payor/Provider Issues (September 9, 2002);

Health Insurance Monopoly Issues: Market

Definition (April 23); Health Insurance

Monopoly Issues: Competitive Effects

(April 23); Health Insurance Monopoly

Issues: Entry and Efficiencies (April 24);

Health Insurance Monopsony: Market

Definition (April 24); Health Insurance

Monopsony: Competitive Effects (April

25); Health Insurance/Providers: 

Countervailing Market Power (May 7); Most

Favored Nation Clauses (May 7); Financing

Design/Consumer Information Issues (June

12); Mandated Benefits (June 25); and

Medicare and Medicaid (September 30).1

II. INTRODUCTION 

In 2002, the Census Bureau

estimated that approximately 85 percent of

the United States’ population had health

insurance coverage.2 Most Americans under

the age of 65 obtain health insurance

through their employer or a family

member’s employer. Many obtain coverage

through a government program or purchase

an individual insurance policy. Medicare

covers most Americans aged 65 and over. 

Many individuals also purchase additional

insurance to cover Medicare co-payments

and those health care goods and services for

which Medicare does not pay.

Health insurance and other third

party payment programs pay for a substantial

majority of health care services. As Chapter

1 notes, in 2002, national health

expenditures were approximately $1.6

trillion. Private health insurance paid for

$549.6 billion (35 percent), other private

funds paid for $77.5 billion (five percent),

and public funds paid for $713.4 billion (46

percent).3 Consumer out-of-pocket expenses

accounted for an additional $212.5 billion in

private expenditures (14 percent).4

1

 Complete lists of participants on these and

other panels are available infra Appendix A and in

the Agenda, at http://www.ftc.gov/ogc

/healthcarehearings/completeagenda.pdf.

2

 ROBERT J. MILLS & SHAILESH BHANDARI,

U.S. CENSUS BUREAU, HEALTH INSURANCE

COVERAGE IN THE UNITED STATES: 2002, at 1 (2003),

available at http://www.census.gov/prod/2003pubs

/p60-223.pdf. For more detail on the uninsured, see

infra Chapter 5, Section VIII.

3

 Stephen Heffler et al., Health Spending

Projections Through 2013, 2004 HEALTH AFFAIRS

(Web Exclusive) W4-79, 83 ex.4, at

http://content.healthaffairs.org/cgi/reprint/hlthaff.w4.

79v1?ck=nck. Consumer contributions to private

health insurance premiums are included in the amount

for private health insurance expenditures, not in the

amount for consumers’ out-of-pocket payments. Id.

at 86. 

4

 Id. at 83 ex.4.
2

Health insurance generally covers

hospitalization, emergency care, and a range

of clinical services. Coverage for

pharmaceuticals is more variable, but still

fairly common.5 Hospitalization accounted

for only 6.9 percent of consumers’ out-ofpocket health-related expenses in 2002,

while prescription drugs accounted for 22.9

percent.6 Prescription drugs are projected to

account for 32.5 percent of consumers’ outof-pocket health care expenses by 2013.7

Health insurance is subject to

extensive federal and state laws and

regulations. As noted previously,

Americans obtain insurance coverage from

various sources, including employmentbased insurance, individual insurance, and

Federal and State public sources, such as

Medicare and Medicaid. These sources

provide health care coverage through several

types of health plans, including traditional

indemnity (or fee-for-service (FFS)) plans,

as well as managed care plans, which

include health maintenance organizations

(HMOs), preferred provider organizations

(PPOs), and point of service plans (POSs).

This chapter first summarizes the

state and federal laws and regulations that

affect the health insurance industry. Next,

this chapter describes employment-based,

individually-purchased, and governmentfunded health care coverage, and considers

the impact of public purchasing on the

overall health care system. This chapter

then considers in more detail the PPO. This

chapter also discusses some issues

concerning the approximately 15 percent of

the American population that is without

health insurance at some point during the

year. Finally, this chapter discusses

consumer-driven health care initiatives and

proposals.

III. REGULATORY FRAMEWORK

The regulatory framework for health

insurance varies, depending on whether

coverage is individually-purchased,

employment-based, or governmentsponsored. The applicable regulatory

framework for employment-based health

insurance also may vary depending on

whether the employer purchases coverage

from a commercial insurer, self-insures the

health plan, or uses a combination of

approaches. 

A. McCarran-Ferguson Act

The McCarran-Ferguson Act was

adopted in 1945 to resolve a dispute over the

authority of state and federal governments to

regulate the business of insurance.8 The

McCarran-Ferguson Act clarified that the

states had the authority to tax, license, and

regulate insurance companies regardless of

5

 Id. at 80 ex.1.

6

 Id. at 87 ex.5.

7

 Id. 

8

 McCarran-Ferguson Act, 15 U.S.C. §§

1012-1014 (1945). The Act was a response to the

Supreme Court’s decision in United States v. SouthEastern Underwriters Ass’n, 322 U.S. 533 (1944), in

which the Supreme Court held that insurance is

commerce, and when transacted across state lines, is

interstate commerce and subject to federal law,

including the antitrust laws. This opinion reversed

the Supreme Court’s decision in Paul v. Virginia, 75

U.S. 168 (1869) and similar cases, in which the Court

had held insurance was not commerce within the

meaning of the Commerce Clause and was

accordingly not subject to federal regulation. See

South-Eastern Underwriters, 322 U.S. at 543-45.
3

the insurance company’s state of

incorporation, as well as the authority to

allow insurance companies to engage in

cooperative rate-making.9 Section 2(b) of

the McCarran-Ferguson Act specifically

reserved authority for Congress to enact

laws superceding state insurance laws and

regulations, as long as the federal law

specifically relates to the business of

insurance.10 

The McCarran-Ferguson Act

exempts the “business of insurance” from

the antitrust laws to the extent the states

regulate such business.11 Every state has

adopted a framework for regulating

insurance.12 Section 3(b) of the McCarranFerguson Act provides that “[n]othing

contained in this chapter shall render the

said Sherman Act inapplicable to any

agreement to boycott, coerce, or intimidate,

or act of boycott, coercion, or

intimidation.”13 Thus, the antitrust laws

generally apply to insurance company

mergers, monopolization, and other conduct

not constituting the “business of insurance,”

as well as to the specific forms of

anticompetitive conduct listed in the

McCarran-Ferguson Act.14 Chapter 6

discusses antitrust enforcement in this area.

B. State Laws and Regulations

Each state has its own laws and

regulations governing health insurance.15

Although these state rules vary greatly, each

9

 McCarran-Ferguson Act § 1012; Group

Life & Health Ins. Co. v. Royal Drug Co., 440 U.S.

205, 221, 224 (1979) (“[T]he primary concern of

both representatives of the insurance industry and the

Congress was that cooperative ratemaking efforts be

exempt from the antitrust laws” as long as they were

regulated by the state.).

10 McCarran-Ferguson Act § 1012(b).

11

 Id. §§ 1012(b).

12

 See, e.g., NAT’L ASS’N OF INSURANCE

COMM ISSIONERS (NAIC), ANN UAL REPORT 1 (2003),

at http://www.naic.org/about/docs/03_annual_

report.pdf.

13 McCarran-Ferguson Act § 1013(b). But

see American Chiropractic Ass’n, Comments

Regarding Health Care and Competition Law and

Policy (Sept. 9, 2003) 1 (Public Comment) (arguing

certain anticompetitive conduct is protected by the

McCarran-Ferguson Act and this puts individual

health care providers “at a distinct disadvantage” visa-vis insurers). 

14 McCarran-Ferguson Act § 1013. In a

trilogy of cases decided between 1978 and 1982, the

Supreme Court clarified that the McCarran-Ferguson

Act exempted the business of insurance, not the

business of insurance companies. The court

“identified three criteria relevant in determining

whether a particular practice is part of the ‘business

of insurance’ exempted from the antitrust laws by §

2(b): first, whether the practice has the effect of

transferring or spreading a policyholder’s risk;

second, whether the practice is an integral part of the

policy relationship between the insurer and the

insured; and third, whether the practice is limited to

entities within the insurance industry.” Union Labor

Life Ins. Co. v. Pireno, 458 U.S. 119, 129 (1982). 

See also Royal Drug, 440 U.S. at 221-24, 229-30

n.36 & 37; St. Paul Fire & Marine Ins. Co. v. Barry,

438 U.S. 531, 546, 551 (1978); American Bar Ass’n,

Section of Antitrust Law, Comments Regarding The

Federal Trade Commission’s Workshop on Health

Care and Competition Law and Policy (Oct. 2002) 7-

8 (Public Comment).

15

 See, e.g., KAREN POLLITZ ET AL.,

GEORGETOWN UNIV. INSTITUTE FOR HEALTH CARE

RESEARCH & POLICY, A CONSUM ER’S GUIDE TO

GETTING AND KEEPING HEALTH INSURANCE IN THE

DISTRICT OF COLUMBIA (2002), available at

http://www.healthinsuranceinfo.net/dc.pdf. This

website has consumer guides for all 50 states and the

District of Columbia.
4

state has an insurance commissioner charged

with ensuring that insurers are solvent and

do not engage in unfair or deceptive

practices.16 

C. ERISA

The Employee Retirement Income

Security Act of 1974 (ERISA) broadly

preempts state law to establish and preserve

uniform and exclusive federal regulation of

covered employee benefit plans.17 ERISA

regulates any plan, fund, or program

maintained for the purpose of providing

retirement benefits, as well as medical or

other health benefits for employees or their

beneficiaries.18 ERISA expressly permits

states to continue to enforce all state laws

that regulate the business of insurance, but it

prohibits states from declaring an employee

benefit plan that is covered by ERISA to be

an insurance company or engaged in the

business of insurance.19 A state law

regulates insurance if it is “specifically

directed toward entities engaged in

insurance” and “substantially affect[s] the

risk-pooling arrangement between the

insurer and the insured.”20

D. HIPAA

The Health Insurance Portability and

Accountability Act of 1996 (HIPAA), which

amended ERISA, the Public Health Service

Act, and the Internal Revenue Code,

establishes minimum federal standards and

requirements concerning guaranteed issue

and renewability of health coverage, limits

exclusions for preexisting medical

conditions, provides for credit against

maximum preexisting condition exclusion

periods for prior health coverage, prohibits

individual discrimination based on health

factors, and limits disclosure of personal

health information.21 HIPAA applies to both

employee benefit plans and state-regulated

insurers.22

16 NAIC, supra note 12, at 1. Many states

also have procedures for appealing coverage denials.

17 Employee Retirement Income Security

Act (ERISA) of 1974, 29 U.S.C. § 1001. 

18

 See James C. Dechene, Preferred

Provider Organizations, in HEALTH CARE

CORPORATE LAW: MANAGED CARE § 2.12.7, at 2-50

n.21 (Mark A. Hall & William S. Brewbaker III eds.,

1999 & Supp. 1999) (“ERISA requirements include,

for example, broad reporting and disclosure

requirements (29 U.S.C. §§ 1021 et seq.);

participation and vesting requirements (29 U.S.C. §§

1051 et seq.); funding requirements (29 U.S.C. §§

1081 et seq.); and fiduciary responsibilities (29

U.S.C. §§ 1101 et seq.).”).

19 29 U.S.C. § 1144(a), (b)(2)(A), (b)(2)(B). 

The “savings clause” allows for state regulation of

insurance, and the “deemer” clause prevents

employee benefit plans from being deemed to be

insurers. 

20 Ky. Ass’n of Health Plans, Inc. v. Miller,

538 U.S. 329, 123 S. Ct. 1471, 1479 (2003) (internal

citations omitted).

21 Health Insurance Portability and

Accountability Act (HIPAA) of 1996, Pub. L. No.

104-191, 110 Stat. 1936. See also U.S. Dept. of

Labor, Fact Sheet: HIPAA, at

http://www.dol.gov/ebsa/newsroom/fshipaa.html (last

visited June 23, 2004); U.S. Dep’t of Labor,

Frequently Asked Questions About Portability of

Health Coverage and HIPAA, at

http://www.dol.gov/ebsa/faqs/faq_consumer_hipaa.ht

ml (last visited June 23, 2004). HIPAA also contains

a number of provisions relating to fraud and abuse

enforcement, which are not addressed in this Report.

22

 See supra note 21. See also 29 U.S.C. §§

1181-1183 (ERISA); 42 U.S.C. §§ 300gg et seq.

(Public Health Service Act). 
5

E. COBRA

The Consolidated Omnibus Budget

Reconciliation Act of 1986 (COBRA)

provides for continuation of group health

coverage that would otherwise be

terminated.23 Former employees and their

dependents who lose coverage may

temporarily continue their health coverage at

group rates if they are willing to pay up to

102 percent of those rates, and they qualify

under the terms of the statute. COBRA

generally applies to group health plans

maintained by employers with 20 or more

employees in the prior year. It applies to

plans in the private sector and those

sponsored by state and local governments.24

F. Mandated Benefits

State and federal laws mandate

numerous health insurance benefits. 

Mandated benefits fall into three general

categories: (1) provider mandates, which

require health insurers to cover services

provided by certain providers or categories

of providers (e.g., any-willing provider laws,

freedom of choice, and laws mandating

coverage of services provided by a select

group of providers (e.g., massage therapists

or naturopaths)); (2) coverage mandates,

which require health insurers to cover

particular classes of individual patients and

conditions (e.g., mental health parity); and

(3) benefit mandates, which require health

insurers to provide a specified minimum

level of benefits (e.g., 48 hour post-partum

hospitalization, direct access to

specialists).25 Some states rarely mandate

benefits, while other states do so routinely.26

Federal law mandates a few benefits.27 

G. Federal Tax Code

The tax code subsidizes

employment-based health insurance. 

Employer contributions for employees’

health insurance coverage are deductible to

employers, but are not considered taxable

23 The Consolidated Omnibus Budget

Reconciliation Act (COBRA) of 1986, Pub. L. No.

99-509, 100 Stat. 1874. See also PENSION &

WELFARE BENEFITS ADMIN., U.S. DEPT OF LABOR,

HEALTH BENEFITS UNDER THE CONSOLIDATED

OMNIBUS BUDGET RECONCILIATION ACT (2001), at

http://www.labor.gov/ebsa/pdf/cobra99.pdf.

24 PENSION & WELFARE BENEFITS ADMIN.,

supra note 23, at 1-2.

25 Although there are three categories of

mandated benefits, this Report focuses primarily on

“provider mandates.” See infra Chapter 6. 

26 Gitterman 6/25 at 8-9 (noting that Idaho

has only ten mandated benefits, but Maryland has

52).

27 The federal Newborns’ and Mothers’

Health Protection Act requires group health plans and

insurers that provide benefits for hospital lengths of

stay in connection with childbirth to provide coverage

for a 48-hour hospital stay following a normal

delivery and a 96-hour hospital stay following a

cesarean delivery. The Mental Health Parity Act

generally requires group health plans and insurers to

provide for parity in lifetime and annual dollar limits

on mental health benefits with dollar limits on

medical and surgical benefits. The Women’s Health

and Cancer Rights Act requires plans and insurers to

provide coverage for post-mastectomy benefits,

including benefits for all stages of reconstruction of

the breast on which the mastectomy was performed,

surgery and reconstruction to produce a symmetrical

appearance, prostheses and treatment of physical

complications of the mastectomy, including

lymphademas. See infra Chapter 6.
6

income to employees.28 Thus, employees

obtain health care coverage through their

employer with pre-tax dollars, which results

in a tax subsidy for employment-based

health insurance of more than $100 billion

per year.29

IV. EMPLOYMENT-BASED

COVERAGE

The number of people with

employment-based insurance fluctuated

during the 1990s, but is currently stabilized

at approximately 61 percent of the

population.30 The significance of

employment-based health insurance varies

by industry. In some sectors of the economy

(e.g., construction, service industries, and

retail), employment-based health insurance

is less common than in other sectors of the

economy (e.g., finance and

manufacturing).31 Employer size matters as

well; the larger the firm, the more likely it is

that employees will be offered employmentbased health insurance.32 Not all employees

take advantage of employment-based health

insurance, and some employees obtain

coverage for themselves, but not for their

beneficiaries.33 Although it is common

parlance to speak of “employer

contributions” to the cost of health care

coverage, employees ultimately bear these

costs, in the form of lower salaries and

fringe benefits.34 

28 David A. Hyman & Mark Hall, Two

Cheers for Employment-Based Health Insurance, 2

YALE J. HEALTH POL’Y L. & ETHICS 23, 25 (2001).

29

 Id. (noting that exclusion from income in

a progressive tax system means that subsidy varies

with income, with greater subsidies going to those

with higher incomes). See also OFFICE OF MGMT. &

BUDGET, BUDGET OF THE U.S. GOVERNMENT:

ANALYTICAL PERSPECTIVES, FISCAL YEAR 2004

(2003) (estimating personal income tax expenditure

for health care at $130.2 billion), available at

http://www.whitehouse.gov/omb/budget/fy2004/pdf/s

pec.pdf; John Sheils & Randall Haught, The Cost of

Tax-Exempt Health Benefits In 2004, 2004 HEALTH

AFFAIRS (Web Exclusive) W4-106, 110 (estimating

personal income tax expenditure for health care at

$122.1 billion), at

http://content.healthaffairs.org/cgi/reprint/hlthaff.w4.

106v1.pdf. See also Stuart Butler, A New Policy

Framework for Health Care Markets, 23 HEALTH

AFFAIRS 22, 23 (Mar./Apr. 2004) (suggested that

families receive more than $140 billion in federal and

state tax relief “if they hand over the control of health

insurance to their employers.”). One panelist also

noted the “huge distortions created by the tax

system.” Francis 9/30 at 129.

30

 See MILLS & BHANDARI, supra note 2, at

1; John Holahan & Marie Wang, Changes In Health

Insurance Coverage: 1994-2000, 2002 HEALTH

AFFAIRS (Web Exclusive) W162, 163, at

http://content.healthaffairs.org/cgi/content/full/hlthaff.

w2.162v1/DC1. See also Hyman & Hall, supra note

28, at 26 (stating that approximately 177 million

Americans obtain health insurance coverage through

their employers); INSTITUTE O F MEDICINE (IOM),

COVERAGE MATTERS: INSURANCE AND HEALTH

CARE 8 (2001) (noting that in 2000, approximately 66

percent of the population under age 65 receive

employment-based health care insurance; most

Americans older than 65 years of age receive health

care coverage under the Medicare program). 

31 John Holahan & Marie Wang, Changes In

Health Insurance Coverage During The Economic

Downturn: 2000-2002, 2004 HEALTH AFFAIRS (Web

Exclusive) W4-31, 40, at http://content.healthaffairs

.org/cgi/reprint/hlthaff.w4.31v1?ck=nck. 

32 MILLS & BHANDARI, supra note 2, at 7-8

& fig.3; Holahan & Wang, supra note 31, at 39-40

ex.8. 

33 Hyman & Hall, supra note 28, at 26.

34

 See Darling 6/12 at 100-102 (“[A]ll

[health] benefits are foregone wages or other benefits

paid for by the worker”); Jonathan Gruber, Health

Insurance and the Labor Market, in 1A HANDBOOK

OF HEALTH ECONOM ICS 645, 699 (Anthony J. Culyer
7

A. Sources and Regulation of

Employment-Based Coverage

Employers offer health coverage to

their employees through various sources,

including commercial insurance companies,

employers’ self-insured plans, and various

combinations of the two.35 The applicability

of federal and state laws and regulations

varies, depending on the source of health

care coverage an employer makes available

to employees. 

Employers who offer health

insurance through commercial insurers

usually negotiate on behalf of their

employees for specific benefits at a specified

monthly premium per person or family.36

Historically, most employers paid a

percentage of the employees’ monthly

premium, but some employers are now

shifting to a fixed dollar contribution in an

effort to contain costs.37 Commercially

insured plans are generally subject to state

laws and regulations, and federal law.38 

Some employers choose to selfinsure their employees’ health insurance

plans by assuming 100 percent of the risk.39

If the employer fully self-insures the health

benefit plan, then it falls within the scope of

ERISA and the state cannot regulate it.40

The larger the firm, the more likely it is selfinsured.41

Some employers create self-insured

& Joseph P. Newhouse eds., 2000) (“[I]ncreases in

health insurance costs appear to be fully reflected in

worker wages ... .”). 

35

 See Am. Med. Sec. v. Bartlett, 915 F.

Supp. 740, 742 (D. Md. 1996), aff’d, 111 F.3d 358

(4th Cir. 1997). See also S. Allen 4/25 at 105-06 (in

Arkansas, commercial insurance products are

provided by three national plans, two large local

plans, and 64 in-state and out-of state third party

administrators, as well as self-insured plans providing

health coverage to 45 to 50 percent of the covered

population).

36 Commercial insurance companies include

both for-profit and not-for-profit entities. For-profit

companies include, among others, Aetna, Cigna, and

UnitedHealthCare. Although Blue Cross and Blue

Shield Plans traditionally have been nonprofit

companies, some have converted, or attempted to

convert, to for-profit status in recent years. See, e.g.,

S. Allen 4/25 at 105-06; Ginsburg 4/23 at 19.

37

 See Alain Enthoven, Employment-Based

Health Insurance is Failing: Now What?, 2003

HEALTH AFFAIRS (Web Exclusive) W3-237, 242-43

(stating that paying a fixed percentage of employees’

premiums rewards those that choose the most

expensive plan), at http://content.healthaffairs.org/cgi

/reprint/hlthaff.w3.237v1.pdf.

According to one report, employee

contributions in 1996 accounted for approximately 30

percent of total health insurance premiums. Robert

Kuttner, The American Health Care System: 

Employer-Sponsored Health Coverage, 340 NEW

ENG. J. MED. 248, 250 (1999). 

38 For example, the Public Health Service

Act (PHSA) and ERISA, as amended by HIPAA,

impose certain federal requirements on insurers. See

supra notes 21-22 and accompanying text. 

Employer-sponsored plans must also comply with

ERISA, even if they are fully insured.

39

 Am. Med. Sec., 915 F. Supp. at 742, 746. 

40

 See Metro. Life Ins. Co. v. Massachusetts,

471 U.S. 724 (1985); Am. Med. Sec., 915 F. Supp. at

742. See also Greg Kelly, Financing Design /

Consumer Information Issues 2 (6/12) [hereinafter G.

Kelly (stmt)], at 

http://www.ftc.gov/ogc/healthcarehearings/docs/0306

11gregkelly.pdf; G. Kelly 6/12 at 114.

41

 See, e.g., Gingrich 6/12 at 15-16; Holahan

& Wang, supra note 31, at 40; NEWT GINGRICH ET

AL., SAVING LIVES & SAVING MONEY 84 (2003).
8

plans, but contract with commercial

insurance companies to act as a third-party

administrator (TPA) for claims processing,

or for access to a provider network. ERISA

preemption of state law varies, depending on

the contractual relationship between the selfinsured plan and the commercial insurer.42

Some employers self-insure their

health plan up to a certain amount and

purchase an insurance policy to cover costs

that exceed that pre-determined, agreed upon

amount.43 This is often called “stop-loss”

coverage.44 For example, an employer may

choose to self-insure its employees’

aggregate health care expenditures up to a

maximum of $1 million per year, and

contract with a traditional insurance

company to cover any health care costs in

excess of that $1 million. ERISA generally

preempts state laws that apply to self-insured

plans, including plans that purchase such

stop loss insurance coverage.45 In American

Medical Security v. Bartlett, the Fourth

Circuit held that ERISA preempted a state

regulation that was designed to subject to the

state’s insurance laws self-insured plans

carrying stop-loss insurance below statespecified minimum levels.46

 

Most cases have held “that ERISA

preempts application of state insurance laws

to self-insured plans that have arrangements

with TPAs” to provide administration and

claims processing services.47 The case law

is mixed whether ERISA preempts state

laws if a self-insured plan contracts with an

insurer to provide access to a provider

network. For example, some courts have

held that a state’s any willing provider laws

will apply to PPOs established by an

insurance company, even if the insurer is

developing the PPO for use by an ERISA

plan.48 Others have held such laws are

42

 See generally Dechene, supra note 18, §

2.12.7, at 2-52. 

43

 Am. Med. Sec., 915 F. Supp. at 742. The

agreed upon amount is called the “attachment” point. 

There are two types of attachment points – specific

(or individual) and aggregate. The specific

attachment point is the amount above which the

insurer must reimburse the employer for eligible

claims made by an individual plan participant. The

aggregate attachment point is the amount above

which the insurer must reimburse the employer for

eligible claims made by all plan participants. Id. at

742.

44

 Id. at 742. 

45

 See Am. Med. Sec., 111 F.3d at 362. See

also Metro. Life Ins. Co. v. Massachusetts, 471 U.S.

724 (1985); Dechene, supra note 18, § 2.12.7, at 2-52

n.29. The Supreme Court considered the boundaries

of ERISA preemption in four recent cases: Aetna

Health Inc. v. Davila, 124 S. Ct. 2488 (2004);

Kentucky Ass’n of Health Plans, Inc. v. Miller, 538

U.S. 329 (2003); Rush Prudential HMO, Inc. v.

Moran, 536 U.S. 355 (2002); Pegram v. Herdrich,

530 U.S. 211 (2000).

46

 Am. Med. Sec., 111 F.3d at 362 (state

regulation was designed to force self-insured plans to

provide state mandated benefits if the employer was

reimbursed for employees’ eligible claims below

$10,000 per beneficiary).

47 Dechene, supra note 18, § 2.12.7, at 2-51

to 2-52 n.28 (citing to Children’s Hosp. v. Whitcomb,

778 F.2d 239 (5th Cir. 1985), Moore v. Provident

Life & Accident Ins. Co., 786 F.2d 922 (9th Cir.

1986), Ins. Bd. of Bethlehem Steel Corp. v. Muir, 819

F.2d 408 (3rd Cir. 1987), State Farm Mut. Auto. Ins.

Co. v. C.A. Muer Corp., 397 N.W.2d 299 (Mich. Ct.

App. 1986)).

48

 See, e.g., Stuart Circle Hosp. Corp. v.

Aetna Health Mgmt., 995 F.2d 500 (4th Cir. 1993);

Blue Cross & Blue Shield v. St. Mary’s Hosp., Inc.,

426 S.E.2d 117 (Va. 1993).
9

preempted by ERISA.49 The Supreme

Court’s recent decision in Kentucky Ass’n of

Health Plans, Inc. v. Miller does not settle

this area of the law.50

B. Issues and Priorities

One speaker provided an overview of

the priorities of employees and employers in

dealing with health insurance coverage.51

Employees want good coverage at a

reasonable price that is administratively

simple, covers alternative treatments, and

continues into retirement.52 Employees also

are concerned about costs.53 A 2002 study

reported that 43 percent of employees feared

that their employment-based coverage would

be cut back within the next year, 21 percent

feared they would not be able to afford the

increases in out-of-pocket expenses, and 8

percent feared they would lose their

employment-based benefits within one

year.54 From an employee perspective, if

premium increases are larger than salary

increases, take-home pay declines.55

Surveys reveal that choice is

important to many employees, but

employers vary greatly in the number of

49

 See, e.g., BPS Clinical Lab. v. Blue Cross

& Blue Shield, 522 N.W.2d 902 (Mich. Ct. App.

1994). The Supreme Court held that ERISA does not

preempt a New York state law that required hospitals

to impose varying surcharges on health insurers,

including self-insured ERISA plans. N.Y. State Conf.

of Blue Cross & Blue Shield Plans v. Travelers Ins.

Co., 514 U.S. 645 (1995). The Supreme Court did

note, however, that a state law that attempted to force

ERISA plans to adopt certain benefits might be

preempted. Id. at 668. The case does not clarify

whether state laws governing TPAs or PPOs are

preempted when contracting with ERISA plans. See

Dechene, supra note 18, § 2.12.7, at 2-54 to 2-55.

50 Kentucky Ass’n of Health Plans, Inc. v.

Miller, 538 U.S. 329, 123 S. Ct. 1471, 1476 n.1

(2003) (noting that Kentucky’s law was specifically

limited to “employee benefit plans ‘not exempt from

state regulation by ERISA.’”). For a discussion of

any willing provider laws see infra Chapter 6. 

51

 See M. Young 6/12 at 91-96; Michael

Young, Financing Design/Consumer Information

Issues 2-3, 7 (6/12) (slides) [hereinafter M. Young

Presentation], at http://www.ftc.gov/ogc

/healthcarehearings/docs/030612young.pdf.

52 M. Young 6/12 at 91-94. The same

panelist noted that although some administrative

hassles have been eliminated as electronic claims

processing becomes more prevalent, electronic

databases are not universal and many employees still

face administrative difficulties as they navigate the

health care system. Id. at 93. Many insurance

companies, on which employers rely to set the

standards concerning what treatments are covered,

also are slow to adopt coverage for alternative

treatments. Finally, he noted that the percentage of

large employers providing health benefits for retirees

appears to be dwindling quickly. Id. at 93-94. See

also THE KAISER FAMILY FOUND., EMPLOYER

HEALTH BENEFITS 2003 ANN UAL SURVEY § 11, at

132 (in 2003, 38 percent of large employers (200 or

more employees) offered health benefits to retirees

versus 66 percent in 1988; since 1991, the range has

fluctuated from a high of 46 percent in 1991 to a low

of 35 percent in 2000; in 2003, 10 percent of small

employers (less than 200 employees) offered such

benefits), available at

http://www.kff.org/insurance/ehbs2003-abstract.cfm.

53 M. Young 6/12 at 92.

54 M. Young 6/12 at 94-95; M. Young

Presentation, supra note 51, at 3 (citing a “Robert

Wood Johnson Foundation survey of 800 registered

voters, January 2002”).

55

 See, e.g., M. Young 6/12 at 92 (“[A] lot

of our clients will have employees whose payroll

deduction for health care will be greater than their

increase in their salary. And what happens is their

take-home pay becomes less”). Darling 6/12 at 101

(“[A]ll [health] benefits are foregone wages or other

benefits paid for by the worker”).
10

insurance plan options they offer their

employees.56 The larger the employer, the

more likely there will be more than one

coverage option, but the health plan options

can change from year-to-year.57

According to several panelists,

employers are questioning whether they

should be providing health insurance

coverage.58 One speaker cautioned that

employers cannot maintain the health care

financing structure the way it is and, without

changes, many employers will be forced to

take more drastic measures with respect to

providing employment-based health care

coverage.59 Another speaker suggested that

employers were likely to continue providing

health coverage, but the amount of money

they contribute will not keep pace with the

cost of health care.60 Some panelists

asserted that small employers face greater

challenges than large employers.61 

Some commentators criticize

employment-based insurance coverage

because it reflects the coverage preferences

of employers instead of employees.62 Others

argue that the existence of employmentbased health insurance impedes achieving

universal coverage.63 Some panelists

suggest that the regulatory environment

favors large employers over small employers

and those that purchase individual policies.64

56

 See, e.g., M. Young 6/12 at 91, 95;

KAISER FAMILY FOUND., supra note 52, § 4, at 62 (in

2003, 62 percent of covered workers had more than

one health plan option, and this percent has been

relatively stable since 1996).

57 M. Young 6/12 at 91-92; M. Young

Presentation, supra note 51, at 2. See also KAISER

FAMILY FOUND., supra note 52, § 4, at 64 (38 percent

of covered workers have just one plan option; 74

percent of large employers offered employees a

choice between at least two health plans versus 26

percent of small employers (less than 200 employees)

that offered a choice). 

58 Darling 6/12 at 107; M. Young 6/12 at

99.

59 M. Young 6/12 at 99; M. Young

Presentation, supra note 51, at 7 (structure of

employment-based health insurance has changed in

recent years: less tightly managed HMOs, more cost

sharing with employees, more choices of plans; more

drastic changes possible in future: consideration of

dropping coverage, consideration of consumer-driven

health plans).

60 Darling 6/12 at 107 (“[T]he amount of

money they [employers] pay will grow more slowly

than the cost of health care will, and therefore the

employees and their retirees will be spending a lot

more money”).

61

 See, e.g., M. Young 6/12 at 95-96;

Gingrich 6/12 at 15-16.

62

 See, e.g., EMPOWERING HEALTH CARE

CONSUM ERS THROUGH TAX REFORM (Grace-Marie

Arnett ed., 1999); Butler, supra note 29, at 23; Stuart

Butler & David B. Kendall, Expanding Access and

Choice for Health Care Consumers Through Tax

Reform, 18 HEALTH AFFAIRS 45, 46 (Nov./Dec.

1999); SHARON SILOW-CARROLL ET AL., IN SICKNESS

AND IN HEALTH? THE MARRIAGE BETWEEN

EMPLOYERS AND HEALTH CARE (1995); Uwe E.

Reinhardt, Employer-Based Health Insurance: A

Balance Sheet, 18 HEALTH AFFAIRS 124, 127

(Nov./Dec. 1999). See also Hyman & Hall, supra

note 28, at 26-27 (“[D]ifficulties with employmentbased insurance stem from the fact that someone

other than the ultimate consumer of health care is

making most of the decisions about what coverage to

purchase and how much to pay”); M. Young

Presentation, supra note 51, at 4.

63

 See, e.g., SILOW-CARROLL ET AL., supra

note 62; Reinhardt, supra note 62, at 127.

64 M. Young 6/12 at 95-96; G. Kelly 6/12 at

114-16; Gingrich 6/12 at 15-16. 
11

Despite these employee and

employer misgivings, as well as

commentator criticisms, one benefits

consultant stated that there is a continuing

role for employment-based coverage.65 He

noted that employers can devote greater

resources to understanding the various

insurance product offerings and can

represent a larger purchasing group than

individual employees. Employers generally

have greater negotiating power with

insurance companies than individuals.

66

Group underwriting spreads the risks and

provides lower administrative costs.67

Moreover, group policies generally provide

more benefits, such as prescription drug

coverage.68 Others note that employmentbased insurance coverage provides a stable

and effective source of coverage that is

valued by employees.69

One panelist argued that the tax

preference for employment-based health

insurance should be eliminated.70 He

suggested that an individual-based health

insurance system would be more conducive

to quality and price competition.71 He

explained that between 12 and 16 percent of

the U.S. workforce changes jobs each year,

and as a result, employers have little

incentive to offer health insurance plans that

invest in quality health care up-front because

they may be more costly in the short-run.72

He concluded that a system that enables

individuals to purchase a portable health

insurance plan, which they may keep for

decades, will foster development of a

market-based health care sector, including

health plans that focus on quality of care and

health for the long-term.73 

Several commentators also have

suggested eliminating the tax bias in favor of

65 M. Young 6/12 at 99; Darling 6/12 at

107. But see Gingrich 6/12 at 15. In fact, the tax

preferences for employment-based coverage likely

confers the most significant advantage. See Hyman &

Hall, supra note 28, at 25

66

 See M. Young 6/12 at 98; M. Young

Presentation, supra note 51, at 5. But see Gingrich

6/12 at 15 (“[W]e artificially constrain and raise the

cost of insurance for the self-employed, the

unemployed, small businesses, and family farms. 

There is no inherent reason we can’t have a

nationwide market based on something like eBay,

where people can go online with very little

intermediation cost and buy into a national risk pool

.... You should individually be able to buy group

insurance.”).

67 M. Young 6/12 at 98; M. Young

Presentation, supra note 51, at 10.

68 M. Young Presentation, supra note 51, at

10.

69

 See Darling 6/12 at 100 (referencing

employee surveys). This panelist emphasized the

importance employees place on health benefits,

stating that some large employers suspended their

contributions to employees’ 401(k) plans, but were

very modest with decreases in health benefits. She

noted that employees went on strike against Hershey

Corporation over an increase from 3 percent to 5

percent in employees’ contributions to health

coverage. Id. at 101-102. See also Hyman & Hall,

supra note 28, at 42-43.

70

 See Greenberg 6/12 at 63. 

71

 Id. at 64.

72

 Id. at 64-65 (the investment up-front

would render the plans less-costly in the long-run).

73

 Id. at 64-69. See also infra notes 200-

209, and accompanying text (discussing consumerdriven health care), and supra Chapter 1 (discussing

quality).
12

employment-based health insurance.74 One

commentator stated that as consumers begin

making their own decisions about health

insurance and care, market forces will

encourage the private sector to create more

information resources to enable consumers

to make more informed choices.75 Another

commentator stated that market forces in

health care “are badly distorted or blocked

by employers’ failure to offer employees

responsible choices; by the tax treatment of

‘employer-paid’ health insurance; by

providers’ resistance to the collection and

publication of quality-related information;

by provider monopolies; and by laws and

regulations that block the development of

high-quality, cost-effective alternatives to

fee-for-service (FFS) indemnity

insurance.”76 He suggested that these

problems are not insurmountable and that

market forces could be strengthened by a

number of steps, including providing

consumers with information, economic

incentives, and the ability to choose among

health plans.77 

One speaker described his

company’s actions to address rising health

care costs and to make employees more

cost-conscious. In 2003, the company

provided a fixed subsidy of $220 per month

to employees for health care coverage,

regardless of the health care plan they chose. 

His company also increased copayments for

office and emergency room visits,

introduced hospital deductibles, and carved

out the pharmacy benefit and introduced a

three-tier formulary.78 This panelist

explained that given his company’s “defined

contribution strategy, [the] employees are

well aware of the accelerating cost of health

care. Their response has been to move to

lower cost plans, even if it means more

hassles to access specialists.”79

One panelist argued that state and

federal regulations have undermined the

74 Butler, supra note 29, at 23 (suggesting

government “expand tax credits and other tax relief

for non-employer-sponsored coverage and for

consumers’ direct expenditures, preferably in

combination with a phased-in ceiling on the tax

exclusion”); Scott Harrington & Tom Miller,

Perspective: Competitive Markets for Individual

Health Insurance, 2002 HEALTH AFFAIRS (Web

Exclusive) W359, 360 (suggesting more comparable

tax treatment for all health insurance consumers), at

http://content.healthaffairs.org/cgi/reprint/hlthaff.w2.

359v1.pdf. See also Gingrich 6/12 at 6-21.

75 Butler, supra note 29, at 23-24. See infra

notes 200-209, and accompanying text, for a

discussion of consumer-driven health care. 

76 Alain Enthoven, Market Forces And

Efficient Health Care Systems, 23 HEALTH AFFAIRS

25, 25 (Mar./Apr. 2004) (stating that market forces in

this context “meet certain fundamental conditions,

including that the buyers are (reasonably well)

informed, are using their own money (at least at the

margin), and face a choice among competing

alternative suppliers”).

77

 Id. at 25-26 (suggesting that a fixed dollar

amount, rather than a fixed percentage of the

premium, as well as allowing employees to share in

the savings if they choose a lower-cost health plan, is

one way to provide incentives for employees to seek

greater value for their money). See also Enthoven,

supra note 37, at 242-43; Kelly Hunt et al., Paying

More Twice: When Employers Subsidize HigherCost Health Plans, 16 HEALTH AFFAIRS 150, 154

(Nov./Dec. 1997) (research findings, although not

definitive, suggested that between 1994-1995, “firms

that did not subsidize more expensive health plans

had lower price increases or greater price decreases

than those that did subsidize”).

78 Meyer 4/11 at 24-27. See also infra

Chapter 7.

79 Meyer 4/11 at 27-28.
13

performance of the health insurance

market.80 According to this panelist, HIPAA

and follow-on state regulations requiring

guaranteed issue and limiting the prices that

can be charged in the small-group insurance

market have had disastrous consequences.81

Guaranteed issue requires insurers that sell

coverage to employers in the small group

market to offer and sell that coverage to all

small employers in the market. This panelist

suggested that with guaranteed issue, a small

employer may choose to remain uninsured

until one of its employees needs extensive

medical care, knowing that regulations

require the insurance companies to issue

coverage and some state laws restrict the

price and type of coverage.82 This panelist

stated that such regulation causes “healthier

groups to leave the market, prices to

skyrocket, and insurers to stop offering

coverage.”83 Another panelist identified a

number of regulations that restrict

competition – sometimes by design, and

other times unintentionally.84

V. INDIVIDUAL INSURANCE

In 1999, approximately 16 million

working-age adults and children – almost

seven percent of the population under the

age of 65 – obtained health insurance

coverage through individually issued, nongroup policies.85 One set of commentators

suggest the small market share for individual

health insurance is due, at least in part, to the

tax-subsidies provided for employmentbased coverage.86 Individual insurance

policies generally are more expensive than

group policies because there is no spreading

of underwriting risk, and adverse selection

and marketing and administrative expenses

are greater than with group policies.87

80

 See G. Kelly 6/12 at 118; G. Kelly (stmt),

supra note 40, at 3, 5-6.

81

 See G. Kelly 6/12 at 115-16; G. Kelly

(stmt), supra note 40, at 3.

82 G. Kelly 6/12 at 115-18 (“Under [state]

guaranteed issue, an individual who becomes ill may

apply for private insurance coverage and must be

accepted. This is comparable to allowing a person to

purchase auto insurance for a car wreck after its

happened.”); G. Kelly (stmt), supra note 40, at 5-6. 

83 G. Kelly 6/12 at 118; G. Kelly (stmt),

supra note 40, at 5-6. This speaker indicated that

guaranteed issue resulted in a minimum monthly

premium for family coverage of $1,176 in Portland,

Maine, $3,576 in Trenton, New Jersey, and $1,113 in

Ithaca, New York. Conversely, in three states

without such laws, the monthly premium for

comparable family coverage was $355 in Madison,

Wisconsin, $410 in Arlington, Virginia, and $461 in

Pittsburgh, Pennsylvania. G. Kelly 6/12 at 116-17;

G. Kelly (stmt), supra note 40, at 4.

84 Francis 9/30 at 129-30.

85 IOM, supra note 30, at 41.

86

 See Harrington & Miller, supra note 74,

at 360 (suggesting “[b]roader access to more

comparable tax treatment for all health insurance

consumers, regardless of where or how they purchase

insurance, is needed to provide a deeper, more

diversified pool of potential customers and move the

individual market beyond a narrow niche role.”). 

87

 See GREG SCANDLEN, DEFINED

CONTRIBUTION HEALTH INSURANCE 17 (Nat’l Center

for Policy Analysis, Policy Backgrounder No. 154,

2000) (stating that expenses are higher because

insurance companies use agents to screen individuals

for the highest risks, “people in the individual market

are older, sicker and poorer than those in the group

market ... [and that] they are also unsubsidized by

either their employers or by the government ... [and]

lapse rates are high as people acquire coverage when

they have the money, and drop it when they run out of

funds”). See also G. Kelly (stmt), supra note 40, at 5;

Gingrich 6/12 at 15; Harrington & Miller, supra note

74, at 359.
14

Nonetheless, according to two panelists,

regulation has altered this situation in some

states, making small group coverage more

expensive than individual insurance.88

Consumers can obtain guidance about

purchasing individual policies from various

sources, including insurers, government,

industry associations, and independent

groups.

89

VI. PUBLICLY-FUNDED

PROGRAMS

Medicare and Medicaid pay for

approximately $500 billion in health care

expenses each year. Medicare provides

coverage for approximately 40 million

elderly and disabled Americans, and

Medicaid provides coverage for

approximately 50 million low-income

Americans.90 Although the programs are not

directly subject to the antitrust or consumer

protection laws enforced by the Agencies,

one panelist observed that these programs

“are dominant realities of the American

health care system. They influence the

nature of competition. They influence the

areas in which competition can exist, and the

rules under which it has to exist, and the

risks and rewards, and the institutional

framework within which all of those things

take place.”91 This section focuses on two

key government-funded programs:

Medicare and Medicaid. 

A. Medicare

In 1965 the Medicare Program was

created.92 Medicare initially provided

certain health care coverage to eligible

individuals age 65 or older, but was

expanded in 1972 to cover individuals under

age 65 with End-Stage Renal Disease

(ESRD) and some other disabilities.93

88 Most

 See G. Kelly 6/12 at 115-16; G. Kelly

(stmt), supra note 40, at 7 (noting that “the small

group market is, on average, much more expensive

than the individual market” and small business

members paid approximately 25 percent more than

individuals for insurance policies available on the

Internet); M. Young Presentation, supra note 51, at

10; M. Young 6/12 at 92. Individual policies,

however, often do not provide coverage as

comprehensive as that available in the group market,

and such pricing comparisons may not be based on

similar coverage. See also SCANDLEN, supra note 87,

at 17 (HIPAA requirements and other cost-increasing

regulations more prevalent in the small group

market).

89

 See, e.g., KAREN POLLITZ ET AL., supra

note 15, at 12; Agency for Healthcare Research &

Quality (AHRQ), Pub. No. 93-0018 , Checkup on

Health Insurance Choices (Dec. 1992), at

http://www.ahrq.gov/consumer/insuranc.htm (last

visited June 28, 2004); American Health Insurance

Plans (AHIP), Guide to Health Insurance, at

http://www.ahip.org/content/default.aspx?bc=41|329|

351 (last visited June 28, 2004).

90

 See, e.g., Antos 9/30 at 114 (there is some

overlap of coverage for the two programs, resulting in

approximately 80 million people being covered by

these two programs); Joseph Antos, Can Medicare

and Medicaid Promote More Efficient Health Care?

1 (9/30), at

http://www.ftc.gov/ogc/healthcarehearings

/docs/030930josephantos.pdf.

91 Hyman 9/30 at 112-13.

92 42 U.S.C. § 1395 et. seq. See also

Centers for Medicare & Medicaid Services (CMS),

Medicare Information Resource, at

http://www.cms.hhs.gov/medicare (last modified

Sept. 12, 2003). 

93 ESRD is chronic, irreversible kidney

disease. Patients with ESRD require dialysis, usually

3 times per week, to cleanse the blood of toxins,

which, if not removed through dialysis, will kill the

patient. There are approximately 400,000 people in
15

individuals who are eligible for either Social

Security Old-Age Benefits or Railroad

Retirement Benefits also are eligible for

Medicare.94 

Medicare has multiple parts. Part A

provides hospital insurance coverage. Most

people are eligible for Medicare Part A

because they or a spouse paid into the

program through payroll tax deductions

while they were employed.95 Part A helps

pay for inpatient hospital stays, skilled

nursing facility care, some home health care,

hospice care, and blood provided while in a

hospital or skilled nursing care facility.96

Medicare Part B is optional

supplementary medical insurance, covering,

among other things, doctors’ visits,

outpatient medical and surgical services and

supplies, diagnostic tests, and durable

medical equipment (e.g., wheelchairs,

hospital beds, and oxygen). Individuals

must pay a premium – $66.60 per month in

2004 – to participate in Part B.97 Premiums

cover approximately 25 percent of the

expenditures for Part B services.98 

Medicare does not pay for all

hospital or other medical expenses.99 Many

Medicare beneficiaries also purchase private

Medicare Supplemental Insurance Policies

the U.S. with ESRD, of whom 300,000 must receive

dialysis every other day. Cashia 9/30 at 164; Joseph

Cashia, National Renal Alliance: Success Starts with

Choosing the Right Partner 9 (9/30) (slides), at

http://www.ftc.gov/ogc/healthcarehearings/docs/0309

30cashia.pdf. Medicare pays for over 70 percent of

all dialysis treatments. One speaker testified about

several problems with the Medicare ESRD program: 

Medicare pays dialysis treatment centers only 30

percent of what it paid in 1984 (after accounting for

inflation); there is inconsistent state regulatory

oversight and credentialing; and there are payment

differentials between urban and rural treatment

centers. Cashia 9/30 at 167, 169-172.

94 42 U.S.C. § 1395 et. seq.

95 42 U.S.C. § 1395c. See also U.S. DEP’T

OF HEALTH & HUMAN SERVICES (HHS), MEDICARE &

YOU: 2004 (2004), available at

http://www.medicare.gov/publications/pubs/pdf/1005

0.pdf. Because Medicare is financed on a “pay-asyou-go” basis, the expenses of current beneficiaries

are paid with contributions from payroll taxes

imposed on those currently working. Individuals who

did not pay into Medicare through payroll taxes can

participate in Part A by paying a premium. 

96 HHS, supra note 95.

97

 See Id. The premium can be changed

annually. The monthly premium is usually taken out

of the recipient’s monthly Social Security, Railroad

Retirement, or Office of Personnel Management

Retirement payment. Other covered services include: 

ambulatory surgery center facility fees for approved

procedures, part-time or intermittent home health care

services, certain outpatient medical and mental health

therapies, and blood provided as an outpatient or as

part of a Part B covered service. 

98 The remaining 75 percent comes from

general revenues. 

99 For example, in 2003, Medicare

beneficiaries were responsible for the following costs

of hospital and medical care: (1) hospital stays –

$840 per day for the first 60 days, $210 per day for

days 61-90, and $420 per day for days 91-150; (2)

skilled nursing facilities – up to $105 per day for days

21-100; (3) blood – cost of the first three pints; (4)

Medicare Part B yearly deductible – $100 per year;

and (5) Coinsurance and copayments – 20 percent of

Medicare-approved amount for most covered

services, 50 percent of Medicare-approved amount

for outpatient mental health treatment, and

copayments for outpatient hospital services. See

generally, U.S. DEP’T OF HEALTH & HUMAN

SERVICES (HHS), CHOOSING A MEDIGAP POLICY: A

GUIDE TO HEALTH INSURANCE FOR PEOPLE WITH

MEDICARE, at http://www.medicare.gov/Publications

/Pubs/pdf/02110.pdf.
16

known as Medigap policies.100 Medigap

policies are federally regulated and must use

one of ten standardized policies. Some of

these standardized Medigap policies also

pay for some routine services and

prescription drugs.101

In 1997, Congress enacted Medicare

+ Choice (M+C) as Part C of Medicare. 

M+C was renamed Medicare Advantage

(MA) pursuant to the Medicare Prescription

Drug, Improvement, and Modernization Act

of 2003 (MMA).102 MA allows Medicare

beneficiaries to join privately operated

managed care plans.103 The plans are paid

an administratively determined rate by

Medicare and plans also may charge an

additional premium and offer additional

benefits.104 Medicare beneficiaries who

joined MA plans often received greater

benefits (e.g., prescription drug coverage) in

exchange for accepting limits on their choice

of providers.105 In 2002, MA plans were

providing health care to 5 million Medicare

beneficiaries, down from 6.35 million

enrollees in December 1999.106 Congress

added a new Part D to Medicare as part of

the MMA. Part D will provide some

coverage for prescription drugs for certain

eligible enrollees.107

According to the 2004 Medicare

trustees report, the program is unsustainable

in its current form.108 The unfunded

obligations of the program currently exceed

$6 trillion, and the Part A trust fund is

projected to be exhausted in 2019.109 The

trustees report indicates that the Part A trust

fund can be restored to actuarial balance “by

an immediate 108 percent increase in

program income or an immediate 48 percent

reduction in program outlays (or some

combination of the two),” with far greater 100

 See HHS, supra note 95, § 8, at 63-68

(entitled “Other Insurance and Ways to Pay Health

Care Costs”). Some Medicare beneficiaries receive

additional health insurance through employer

provided retirement programs. By statute, Medicare

is a secondary payor to such benefits. See generally,

KAISER FAMILY FOUND., supra note 52.

101

 See HHS, supra note 99.

102 Pub. L. No. 108-173, 117 Stat. 2066

(2003). Pursuant to Implementation of Medicare

Advantage Program, 42 U.S.C. § 1395w-21, any

legislative reference to Medicare + Choice is deemed

a reference to Medicare Advantage and MA.

103

 See HHS, supra note 95, § 6, at 43-54

(entitled “Medicare + Choice Plans”). 

104 Pizer 4/23at 146-47; Steven Pizer,

Competition in the Medicare+Choice Program 5

(4/23) (slides) [hereinafter Pizer Presentation], at

http://www.ftc.gov/ogc/healthcarehearings/docs/pizer.

pdf; Steven Pizer & Austin Frakt, Payment Policy

and Competition in the Medicare+Choice Program,

24 HEALTH CARE FIN. REV. 83 (Fall 2002).

105

 See HHS, supra note 95, § 6, at 43-54

(entitled “Medicare + Choice Plans”); Pizer 4/23 at

144; Pizer Presentation, supra note 104, at 2; Pizer &

Frakt, supra note 104, at 83.

106 Pizer & Frakt, supra note 104, at 83 &

n.1.

107 Pub. L. No. 108-173. 

108 39 BOAR DS O F TRUSTEES OF THE

FEDERA L HOSPITAL INSURANCE & FEDERAL

SUPPLEMENTARY MEDICAL INSURANCE TRUST FUNDS

ANN. REP. 1-21 (2004) (§ I, Overview) [hereinafter

2004 MEDICARE TRUSTEES REPORT], at

http://www.cms.hhs.gov/publications/trusteesreport/2

004/tr.pdf.

109 2004 MEDICARE TRUSTEES REPORT,

supra note 108, at 2 (“The financial status of the fund

has deteriorated significantly, with asset exhaustion

projected to occur in 2019 under current law

compared to 2026 in last year’s report.”).
17

adjustments necessary if changes are delayed

or phased in.110 

MA plans also have had

difficulties.111 One speaker stated that the

program was a failure because of pricing

problems and “incredible inflexibilities in

the administration of the program.”112 

Another speaker disagreed that Medicare

Plus Choice was a complete failure, but

noted that it is far from what it could have

been.113 One panelist testified that although

the Medicare program has attempted to

introduce competitive pricing to set the rates

the government pays to MA plans, to date

none of those efforts has been successful.114

As a result, Medicare continues to establish

the payment rates administratively. 

According to this speaker, to the extent

plans compete, it typically has been on the

benefits they provide.

115 This speaker

discussed some of his empirical research

findings, which show that in counties with

multiple MA plans competing for

beneficiaries, the plans competed based

upon premiums paid by Medicare

beneficiaries and extra benefits.116

 The Medicare program has a

significant effect on the overall U.S. health

care market. As one panelist remarked,

“Medicare’s administrative requirements

shape the business environment for

everybody in the health care sector ... and

changes to the Medicare program have

spillover effects on the rest of the market.”117

He stated that some Medicare policies, such

as hospital prospective payment, have

improved the health care system and

benefitted consumers.118 Nonetheless, he

argued that Medicare policy more often than

not fails “to promote innovation and

efficiency in the health care sector.”119 As

he explained, “Medicare and Medicaid

continue to rely on regulation and micromanagement rather than competition and

consumer choice,” undermining both the

ability and willingness of providers to

compete.120 Another speaker noted that

because hospitals have to abide by

Medicare’s rules for their Medicare patients,

those rules end up governing how hospitals

do business in the private sector as well.121 

Most panelists noted that there are

good aspects to the Medicare program, but

110 Social Security & Medicare Trustees,

Status of the Social Security and Medicare

Programs: A Summary of the 2004 Annual Reports,

http://www.ssa.gov/OACT/TRSUM/trsummary.html

(last visited July 15, 2004).

111 Antos 9/30 at 121.

112

 Id. at 122.

113 Francis 9/30 at 128.

114 Pizer 4/23 at 147.

115

 Id. at 147.

116

 Id. at 158 (noting that the amount of

competition in any given county also affected new

entry; i.e., the more competing plans, the less likely

entry would occur).

117 Antos 9/30 at 115.

118

 Id. at 115. See also Crippen 9/30 at 155.

119 Antos 9/30 at 115, 124. 

120

 Id. at 116, 122.

121 Francis 9/30 at 131.
18

suggested that it should be significantly

reformed.122 Several speakers stated that

Medicare impedes innovation in health

care.123 For example, one speaker explained

that Medicare regulations prohibit paying for

a physician visit unless the physician

physically sees the patient. This rule has an

important anti-fraud rationale, but it creates

difficulties when services are more

efficiently delivered without this

requirement. For example, a consultation

between a rural general practitioner and an

urban specialist might be beneficial to the

patient, but it is less likely to occur if the

urban specialist cannot bill for his services

unless the patient travels to his office.124

Several speakers noted that the

Medicare prescription drug benefit will be

helpful to beneficiaries, because it will help

in the management of chronic illness, and

fills an obvious gap in the benefit

package.125 Some expressed concern,

however, about the risks for innovation if

the Centers for Medicare & Medicaid

Service (CMS) start setting pharmaceutical

prices.126 

One speaker suggested that the

federal government should reform Medicare

to look more like the Federal Employees

Health Benefits Program (FEHBP), which

would empower consumers and have

positive spillover effects on the broader

health care market.127 He and others claim

such an approach would rely on “consumer

choice in a sensible way, with good, solid

federal oversight” to protect consumers.128

Another speaker agreed that there were

profound differences between FEHBP and

Medicare because the government relied on

competition in FEHBP and on

administratively designed benefits and

delivery arrangements in Medicare, with the

result that FEHBP beneficiaries have had

catastrophic and prescription drug coverage

for many years, while Medicare beneficiaries

only recently got both.129 According to this

speaker, Medicare’s legislative and

regulatory requirements make it extremely

difficult for CMS to adapt the program to

changes in health care delivery and

standards.130

B. Medicaid

In 1965, the Medicaid program was

122

 See, e.g., Antos 9/30 at 116, 121-23; established to provide health care coverage

Francis 9/30 at 132-37, 141-42; Lemieux 9/30 at 144,

146-47.

123 Francis 9/30 at 135-36; Antos 9/30 at

115, 124; Lemieux 9/30 at 147-53.

124 Francis 9/30 at 135. 

125 Lemieux 9/30 at 145-46, 150; Francis

9/30 at 136-37.

126 Antos 9/30 at 125-26 (cautioning that

short-term low prices are “seductive if you’re looking

at big budget deficits,” but could discourage longterm investment and innovation); Lemieux 9/30 at

151. See also infra Chapter 7. But see CENTERS FOR

MEDICARE & MEDICAID SERVICES, PUB. NO. CMS11054, THE FACTS ABOUT UPCOMING NEW BENEFITS

IN MEDICARE (2004), available at

http://www.medicare.gov/Publications/Pubs/pdf/1105

4.pdf (noting that the MMA specifically bars CMS

from negotiating drug prices).

127 Antos 9/30 at 122-23.

128

 Id. at 122-23. 

129 Francis 9/30 at 185-87.

130

 Id. at 128-37, 186-87. See also Antos

9/30 at 121-22; Lemieux 9/30 at 144-47.
19

for certain low-income families, as well as

certain low-income aged, blind, and disabled

individuals.131 The federal government sets

eligibility and service parameters for the

Medicaid program, and the states specify the

services they will offer and the eligibility

requirements for enrollees, and administer

the program.132 As a result, Medicaid

programs vary from state to state. Costs are

shared between the federal and state

governments, with federal contributions

varying based on the wealth of the state and

the amounts the state contributes toward the

program.133 

Medicaid programs generally cover

young children and pregnant women whose

family income is at or below 133 percent of

the Federal poverty level, as well as some

low-income elderly and disabled adults.134

A recipient’s resources also must be limited. 

The scope of services provided to Medicaid

recipients includes: inpatient and outpatient

hospital services, prenatal care, childhood

vaccines, physician services, and nursing

facilities services for persons aged 21 or

older.135

In 2002, total Medicaid enrollment

was 50.8 million, up from 44.2 million in

2000. Of the 50.8 million enrollees, 25.5

million were non-disabled children, 12.9

million were non-disabled, non-aged adults,

7.9 million were disabled, and 4.5 million

were aged.136 Children and adults who are

not disabled or aged accounted for the

greatest enrollment increases.

137 Total

Medicaid spending increased 25 percent,

from $205.8 billion in 2000 to $257.6 billion

in 2002.138 Increased spending for aged and

disabled individuals accounts for almost 60

percent of this spending increase, and these

131 42 U.S.C. § 1396 et. seq. See also CMS,

supra note 92. 

132 CMS, supra note 92. 

133

 See CENTERS FOR MEDICARE &

MEDICAID SERVICES (CMS), MED ICA ID: A BRIEF

SUMM ARY, at

http://www.cms.hhs.gov/publications/overviewmedicare-medicaid/default4.asp (last modified Jan.

28, 2004). 

134

 See Id. Generally, programs will cover

those who meet one of the following criteria: (1)

meeting the requirements for the Aid to Families with

Dependent Children (AFDC) program that were in

effect in the state on July 16, 1996; (2) children under

age 6 whose family is at or below 133 percent of the

Federal poverty level; (3) pregnant women whose

family income is below 133 percent of the federal

poverty level; (4) Supplemental Security Income

(SSI) recipients in most states; (5) recipients of

adoption or foster care assistance; (6) certain

protected groups who are permitted to keep Medicaid

benefits for a limited period of time (e.g., individuals

who are disqualified for cash assistance due to worker

income from other sources); and (7) all children born

after September 30, 1983, under age 19, whose

families’ income is at or below the federal poverty

level. Id.

135

 See Id. Other Medicaid services may

include family planning services and supplies, rural

health clinic services, home health care for persons

eligible for skilled-nursing service, laboratory and xray services, pediatric and family nurse practitioner

services and nurse-midwife services, and early and

periodic screening, diagnostic, and treatment services

for children under age 21. Id.

136 JOHN HOLAHAN & BRIAN BRUEN,

MEDICAID SPENDING: WHAT FACTORS CONTRIBUTED

TO THE GROWTH BETWEEN 2000 AND 2002? 4 (Kaiser

Comm’n on Medicaid & the Uninsured, Issue Paper

Pub. No. 4139, 2003), available at

http://www.kff.org/medicaid/loader.cfm?url=/commo

nspot/security/getfile.cfm&PageID=22135. 

137

 Id. at 4.

138

 Id. at 3.
20

individuals account for over 70 percent of all

Medicaid spending and 85 percent of

spending for prescription drugs.139

Most states have enrolled a

substantial majority of their Medicaid

population in some form of managed care.140

Many states have obtained waivers from

CMS, authorizing experimental

demonstration projects to cover uninsured

populations and to test new delivery

systems.141 

C. Other Public Programs

In 1997, as part of the Balanced

Budget Act, Congress created title XXI, the

State Children’s Health Insurance Program

(SCHIP).142 SCHIP “was designed as a

Federal/State partnership, similar to

Medicaid, with the goal of expanding health

insurance to children whose families earn

too much money to be eligible for Medicaid,

but not enough money to purchase private

insurance.”143 SCHIP gives grants to states

to provide health insurance coverage for

uninsured children in families with income

up to 200 percent of the federal poverty

level.144 In 2003, 5.8 million children were

enrolled in SCHIP at some point during the

fiscal year, up from 5.3 million children in

2002.145

Uninsured children who are not

eligible for Medicaid, under age 19, and who

are at or below 200 percent of the federal

poverty level meet the federal eligibility

criteria for SCHIP.146 Although states are

allowed to impose cost sharing provisions,

such as premiums, deductibles, or fees for

some services, states cannot impose costsharing for pediatric preventative care or

immunizations, or in amounts that exceed 5

percent of a family’s gross or net income.147

States have the option whether to

participate in SCHIP, and if they do, they

may provide coverage by expanding

Medicaid, expanding or creating a state

children’s health insurance program, or

some combination of both. As of September

139

 Id. at 2, 8. In 2002, Medicaid paid

approximately $92.3 billion (out of $257.6 billion in

total spending) for long term care. Id. at 7. 

140

 See CMS, supra note 133. 

141

 Id. These waivers are authorized by the

Social Security Act § 1115.

142

 See Centers for Medicare & Medicaid

Services (CMS), Welcome to the State Children’s

Health Insurance Program, at http://www.cms.hhs

.gov/schip/about-SCHIP.asp (last visited June 23,

2004). See also American Academy of Pediatrics,

The State Children’s Health Insurance Program, at

http://www.aap.org/advocacy/schipsum.htm (last

visited June 23, 2004).

143

 See CMS, supra note 142. 

144

 Id. News Release, U.S. Dep’t of Health

& Human Services (HHS), SCHIP Provided Health

Coverage to 5.8 Million Children in 2003 (Feb. 12,

2004) (“The SCHIP law authorized $40 billion in

federal funds over 10 years to improve children’s

access to health coverage.”), at

http://www.hhs.gov/news/press/2004pres/20040212.h

tml. SCHIP spending limits for fiscal years 1998

through 2007 are as follows: $4,295 billion for FY

1998; $4,275 billion for FY 1999 through FY 2001;

$3,150 billion for FY 2002 through FY 2004; $4,050

billion for FY 2005 through FY 2006; and $5 billion

for FY 2007. CMS, supra note 142. 

145 HHS News Release, supra note 144.

146

 See American Academy of Pediatrics,

supra note 142.

147

 See CMS, supra note 142; American

Academy of Pediatrics, supra note 142.
21

30, 1999, all states and U.S. territories had

an approved SCHIP plan.148 States also can

spend up to 10 percent of the funds to

provide coverage through a communitybased health delivery system or by

purchasing family coverage.149

Like Medicaid, states have enrolled

many of their SCHIP participants in

managed care. The states administer SCHIP

under Medicaid rules or by using alternative

health insurance plans that meet the actuarial

value of certain key health services.

There are a number of additional

public programs that provide care to specific

categories of individuals.150

TRICARE/CHAMPUS is a military health

care program for active duty and retired

members of uniformed services, their

families, and survivors. The Department of

Veterans Affairs provides medical assistance

to eligible veterans. The Indian Health

Service (IHS) provides medical assistance to

eligible American Indian and Alaska Native

people at IHS facilities. 

VII. PPOS

More than 100 million Americans

receive their health care benefits through a

PPO, whose structure and operation vary.151

PPO health benefit options are “a

configuration of benefit design features

offered through a contracted network [that]

may be assembled in a fully customized

fashion by a self-funded employer or offered

by an insurance carrier that develops

network-based products that are sold to

customers on an insured basis.”152

Providers, independent companies, and

hospital systems mostly own these networks,

which they establish by contracting with a

variety of providers, who typically are paid

on a discounted FFS basis.153 This section

focuses on PPO health benefit options.154

PPOs first emerged in the early

148

 See CMS, supra note 142.

149

 See Id. See also American Academy of

Pediatrics, supra note 142.

150

 See generally U.S. Census Bureau, Types

of Health Insurance Coverage, at

www.census.gov/hhes/hlthins/hlthinstypes.html (last

revised Apr. 21, 2004). 

151 Robert E. Hurley et al., The Puzzling

Popularity of the PPO, 23 HEALTH AFFAIRS 56, 58

(Mar./Apr. 2004); Andrew I. Batavia, Preferred

Provider Organizations: Antitrust Aspects and

Implications for the Hospital Industry, 10 AM. J.L. &

MED. 169, 175 (1984). See also

Eric R. Wagner, Types of Managed Care

Organizations, in ESSENTIALS OF MANAGED HEALTH

CARE 21 (Peter R. Kongstvedt ed., 4th ed. 2003);

Dechene, supra note 18, § 2.1, at 2-3 to 2-5; Lerner

4/24 at 96-98 (listing many types of PPOs).

152 Hurley et al., supra note 151, at 58. 

153 SHERMAN FOLLAND ET AL., THE

ECON OM ICS OF HEALTH AND HEALTH CARE 256

(2004); Stephen A. Norton & Stephen A. Zuckerman,

Reimbursement for Physician Services, in

INTEGRATING THE PRACTICE OF MEDICINE 78 (Ronald

B. Connors ed., 1997) (“A recent study of 30 PPO

plans indicates that the predominant payment method

for PPO providers was discounted FFS and that none

of the PPOs surveyed used capitation as a basic form

of physician reimbursement.”). Providers who

contract for inclusion in a PPO include IPAs, medical

groups, individual physicians, hospitals, and other

necessary facilities. 

154 For a discussion of physician network

joint ventures, see supra Chapter 2. 
22

1980s and have grown significantly in the

intervening decades. One survey found that

the number of PPOs increased sevenfold

between 1987 and 1994.155 Another survey

found that the number of employees enrolled

in PPOs doubled between 1994 and 2002,

and that in 2002, 50 percent of all employees

enrolled in health insurance used PPO

products.

156 It is difficult to obtain precise

and reliable data on the number of PPOs and

their exact enrollment.157 Commentators

attribute PPOs’ rapid expansion to private

insurers’ attempts to control spiraling

medical costs, providers’ defensive reactions

to the growth of HMOs, and consumer and

employer preferences for greater choice in

selecting primary care and specialized

physicians than many HMOs offered.158

Some commentators believe PPOs

have had considerable success in obtaining

volume discounts from physicianparticipants.159 One study found that two

national insurers offered physicians

payments that on average were

approximately 11 to 20 percent lower for

PPO products than for their indemnity

plans.160 Another commentator stated that

PPOs began by paying physicians about 20

percent less than their average charge, but

some “more aggressive” payors have asked

providers to accept a fixed discounted-fee

schedule for all services, often based on a

Medicare fee schedule.161

Commentators state that most

physicians are willing to accept the

discounted fees that PPOs offer because they

expect to obtain additional patients.162 Many

155 Norton & Zuckerman, supra note 153, at

78.

156 Donald Crane, Statement 4 (5/7), at

http://www.ftc.gov/ogc/healthcarehearings/docs/0305

07doncrane.pdf. See also S. Allen 4/25 at 105 (in

Arkansas, BCBS has 71 percent of its business in

PPOs).

157

 See Wu 4/23 at 128 (stating that it is hard

to find accurate data on PPO enrollment because

PPOs “lack many of the reporting and operating

standards that [apply to] HMOs.”); Timothy Lake,

Literature Synthesis: How Health Plans Select and

Pay Health Care Providers in their Managed Care

Networks 14-15, in TIMOTHY LAKE ET AL., MEDICARE

PAYMEN T ADVISORY COMM’N, MPR No. 8568-700,

HEALTH PLANS’ SELECTION AND PAYMENT OF

HEALTH CARE PROVIDERS, 1999 app.C (2000) (final

report) (“Analysis of PPO networks are made even

more complex by the prevalent practice of renting

rather than owning networks, as well as the existence

of national and local independent PPOs that rent out

each other’s services.”).

158 Dechene, supra note 18, § 2.1, at 2-3, §

2.2, at 2-5 (“Many [PPOs] were formed as a

defensive alternative to the growth of HMOs. The

initial physician-sponsored PPOs provided a vehicle

by which physicians could continue to practice

traditional fee-for-service medicine in a structure that

could compete with other managed care

organizations.”); Desmarais 2/27 at 167; Kanwit 4/25

at 54-55.

159 Norton & Zuckerman, supra note 153, at

78.

160 Diana Verrilli & Stephen Zuckerman,

Preferred Provider Organizations and Physician

Fees, 17 HEALTH CARE FIN. REV. 3 (1996).

161 Dechene, supra note 18, § 2.4.2.4, at 2-

13. PPOs turn to external benchmarks such as the

Medicare fee schedule because “[m]any providers

have marked up their list prices [in recent years] so

that the discounted prices do not represent much

reduction at all.” Id. at § 2.1, at 2-3.

162

 See FOLLAND ET AL., supra note 153, at

257 (“[T]he provider may enjoy a large increase in

patient care business by joining the network.”);

Norton & Zuckerman, supra note 153, at 78. 

Physicians also may agree to contracts with

discounted fees to avoid losing patients.
23

PPOs include a “rapid payment” clause for

certain claims, which makes their plans

more appealing to providers.163 Two

panelists noted that a consumer may end up

paying higher prices if their physician ceases

to participate in the PPO but the consumer

continues to see that physician.164 Some

panelists noted that physicians typically

participate in multiple PPO and HMO plans,

which can increase contracting costs.165 

Commentators question whether

PPOs provide sufficient incentives for the

delivery of cost-effective care.166 A panelist

observed that consumers enrolled in PPOs

can easily refer themselves to specialists,

which can lead to excess costs.167

Some commentators believe that

PPOs can improve quality of care by

implementing utilization review, creating

clinical protocols, and using credentialing.168

Although PPOs can undertake these steps on

their own, payors are encouraging such

strategies with economic incentives tied to

various quality measures.169 Others question

whether PPOs can improve quality,

contending that PPOs may not be able to

encourage or compel changes in physician

behavior.170 They also argue that PPOs may

not have sufficient access to quality-related

data to implement certain care quality

systems because “PPO participants are free

to use out-of-network providers and no

specific physician is responsible for all of

their care.”171

163 FOLLAND ET AL., supra note 153, at 257;

Wagner, supra note 151, at 21.

164

 See Crane 5/7 at 36; Feder 2/27 at 223.

165 Each PPO has its own administrative and

utilization requirements, and physicians must comply

with all of the requirements to be paid. Edward B.

Hirshfeld & Gail H. Thomanson, Medical Necessity

Determinations: The Need for a New Legal

Structure, 6 HEALTH MATRIX 3, 32-33 (1996);

Casalino 9/25 at 16 (stating that it is difficult for

physicians in solo or small group practice who

contract with multiple HMOs to comply with each

HMO’s utilization management process).

166 Batavia, supra note 151, at 175-76;

Dechene, supra note 18, § 2.4.2.4, at 2-13 (“While a

discounted-fee schedule can be an important cost

containment tool, it may be less effective than other

payment mechanisms, especially capitation, used by

HMOs.”); Burgess 4/9 at 107-108 (stating that FFS

creates incentives to overprovide health care

services).

167 Crane 5/7 at 38 (observing that PPO

“enrollees are allowed to directly refer to specialists. 

And, so, you can’t have precisely the same utilization

controls.”).

168 Peter R. Kongstvedt, Compensation of

Primary Care Physicians, in ESSENTIALS OF

MANAGED HEALTH CARE, supra note 151, at 85, 92

(discussing credentialing) [hereinafter Kongstvedt,

Compensation]; Peter R. Kongstvedt et al., Using

Data and Provider Profiling in Medical

Management, in ESSENTIALS OF MANAGED HEALTH

CARE supra note 151, at 379. 

169

 See Buxton 5/8 at 99 (stating that Blue

Cross and other payors are working on the use of

tiered fees for physicians to encourage higher quality

outcomes and also stating that such incentives are

“the wave of the future.”); Kongstvedt,

Compensation, supra note 168, at 137; Burgess 4/9 at

107-108 (noting some economists argue that a mix of

FFS and capitation helps balance incentives to under

and over-use health care services). For further

discussion of P4P programs, see supra Chapters 1

and 3.

170

 See Marren 5/8 at 79-80; Weis 5/8 at 74;

Hurley et al., supra note 151, at 65-67.

171

 See Hurley et al., supra note 151, at 65;

but see Dechene, supra note 18, § 2.4.2.3, at 2-12

(contending that provider-initiated PPOs may have

greater access to performance related data).
24

VIII. THE UNINSURED

Approximately 15 percent of the

population, or 44 million Americans, were

uninsured at some point during 2002.172

This section of the report describes the

demographics of the uninsured, the impact

of being uninsured, and the competitive

implications of these facts. 

There is no legal obligation to

purchase health insurance. Some

individuals can afford to purchase health

insurance, but voluntarily elect to bear the

risk of not doing so.173 For many others,

health insurance is prohibitively expensive

when weighed against the cost of food,

shelter, and basic necessities.174

The uninsured cut across a large

swath of the United States: some are young

and healthy, some are not; many are below

the poverty line and others are reasonably

wealthy. Those most likely to lack health

insurance are young adults (18 to 24 years

old), people with less education, and

Hispanics.175 In 2002, 23.5 percent of the

uninsured were in households with annual

incomes of less than $25,000; 8.2 percent

were in households with annual incomes of

$75,000 or more.176 The uninsured

population is large, but fluid. A substantial

majority of those currently uninsured will

not be uninsured a year from now; a

172 MILLS & BHANDARI, supra note 2 at 1, 4. 

This figure is the Census Bureau’s estimate of the

number of Americans who are without health

insurance at some point during the year. This

estimated figure varies significantly, however,

depending on the time period employed and the

survey data that is used. See Myths about the

Uninsured: Hearing on the Uninsured Before the

Health Subcomm., House Comm. On Ways and

Means, 108th Cong. (2004) (Statement of Len M.

Nichols, Vice President, Center for Studying Health

System Change) [hereinafter Nichols Statement], at

http://waysandmeans.house.gov/hearings.asp?formmo

de=view&id=1226; IOM, supra note 30, at 3

(“Estimates of the number of persons who lack

insurance vary depending on the survey .... Surveys

differ in their size and sampling methods, the ways in

which questions are asked about insurance coverage,

and the period over which insurance coverage or

uninsurance is measured.”).

173 Uwe E. Reinhardt, Is There Hope for the

Uninsured?, 2003 HEALTH AFFAIRS (Web Exclusive)

W3-376, 378-79 (“Not all ‘uninsured’ people, for

example, represent a social problem in the sense that

they are helpless victims of circumstance and require

help from other members of society.”), at

http://content.healthaffairs.org/cgi/reprint/hlthaff.w3.

376v1.pdf. See also Pauly 2/26 at 88 (“One fact is

there are a lot of low-income people who have a lot

better things to do with their money than spend it on

health insurance, and ... [t]here are a lot of people

who don’t value insurance as much as it costs. So,

they don’t buy it for various reasons.”).

174

 See INSTITUTE O F MEDICINE, HIDDEN

COSTS, VALUE LOST: UNINSURANCE IN AMERICA 43

(2003) (“Food, shelter, transportation, and clothing

account for 85 percent on average of the expenditures

of families living without health insurance.”).

175 MILLS & BHANDARI, supra note 2; See

also CON GRESS IONA L BUDGET OFFICE (CBO), HOW

MANY PEOPLE LACK HEALTH INSURANCE AND FOR

HOW LONG? 2 (2003), available at

ftp://ftp.cbo.gov/42xx/doc4210/05-12-Uninsured.pdf.

176 MILLS & BHANDARI, supra note 2, at 2

tbl.1, 6 fig.2, 7. Another way to look at the

characteristics of the uninsured is as a percentage of

the federal poverty level: 45 percent of the uninsured

are within 100 to 300 percent of the federal poverty

level, 36 percent are less than 100 percent of the

federal poverty level, and 19 percent have incomes

above 300 percent of the poverty level. In 2001, a

family income of three hundred percent of poverty

was $42,384. Reinhardt, supra note 173, at 379-80. 

Cf. JOHN HOLAHAN ET AL., THE NEW MIDDLE-CLASS

OF UNINSURED AMERICANS – IS IT REAL? 2 (Kaiser

Comm’n on Medicaid & the Uninsured, Issue Paper

Pub. No. 4090, 2003). 
25

Congressional Budget Office study found

that 45 percent of the uninsured were

without coverage for four months or less and

only 16 percent (or approximately 6.9

million Americans) remained uninsured for

more than 2 years.177 A second study

suggests that approximately 12 percent of

the uninsured remain so for more than four

years.178

A. What Is the Impact of Not Having

Insurance?

Being uninsured has significant

health and financial consequences. 

Numerous studies indicate that being

uninsured reduces consumption of health

care services and products.179 The uninsured

are less likely to have a regular source of

care, less likely to have had a recent

physician visit, less likely to use preventive

services, and more likely to delay seeking

treatment.180 One study indicates that those

who are uninsured for a full year receive

about half as much care in dollar terms

($1,253) per person as the privately insured

($2,484).181 A wide variety of adverse

health consequences are associated with

being uninsured.182

177 Pamela Farley Short & Deborah R.

Graefe, Battery-Powered Health Insurance? Stability

in Coverage of the Uninsured, 22 HEALTH AFFAIRS 

244, 247-48 (Nov./Dec. 2003); CBO, supra note

175, at viii fig.S2, 9 tbl.3. 

178 Short & Grafe, supra note 177, at 247.

179

 See IOM, supra note 30; INSTITUTE OF

MEDICINE, CARE WITHOUT COVERAGE: TOO LITTLE,

TOO LATE (2002) [hereinafter IOM, WITHOUT

COVERAGE]; INSTITUTE O F MEDICINE, HEALTH

INSURANCE IS A FAMILY MATTER (2002) [hereinafter

IOM, FAMILY MATTER]. The IOM reports

consolidate and critically appraise the evidence and

research regarding the impact of uninsurance on

individuals and communities. 

180 AMERICAN COLLEGE OF PHYSICIANS, NO

HEALTH INSURANCE? IT’S ENOUGH TO MAKE YOU

SICK: LIST OF REFERENCES AND ABSTRACTS 4-5

(1999), at http://www.acponline.org/uninsured

/lack-refs.pdf (citing, e.g., Marc L. Berk et al., Ability

to obtain health care: recent estimates from the

Robert Wood Johnson Foundation National Access to

Care Survey, 14 HEALTH AFFAIRS 139 (Fall 1995);

Andrew B. Bindman et al., Preventable

Hospitalizations and Access to Care, 274 JAMA 305

(1995); B. BLOOM ET AL., ACCESS TO HEALTH CARE

PART 2: WORKING-AGE ADULTS (Nat’l Ctr. for Health

Statistics, Vital Health Stat. Series 10, No. 197, Dep’t

of Health & Human Services Pub. No. (PHS)

97-1525, 1997); Helen R. Burstin et al., The Effect of

Change of Health Insurance on Access to Care, 35

INQUIRY 389 (1998-99); John A. Ayanian et al.,

Unmet Health Needs of Uninsured Adults in the

United States, 284 JAMA 2061 (2000)).

181

 See Jack Hadley & John Holahan, How

Much Medical Care Do The Uninsured Use, And

Who Pays For It?, 2003 HEALTH AFFAIRS (Web

Exclusive) W3-66, 70, at

http://content.healthaffairs.org/cgi/reprint/hlthaff.w3.

66v1.pdf. The article notes that some of the

difference is attributable to differences in age and

health status between the insured and uninsured, but

“research that takes these factors into account still

finds about a 50 percent differential.” Id. at 70.

182 For example, the uninsured have worse

medical outcomes and higher in-hospital mortality. 

See JACK HADLEY, THE KAISER COMM’N ON

MEDICARE & THE UNINSURED, SICKER AND POORER:

THE CONSEQU ENCES OF BEING UNINSURED 4, fig.7

(2002) (finding that research published in the past 25

years suggests that having health insurance reduces

mortality rates by 10 to 15 percent), at

http://www.kff.org/uninsured/upload/13970_1.pdf;

IOM , WITHOUT COVERAGE, supra note 179, at 4-5;

IOM, supra note 174, at 3 (“The relative mortality

rate for the insured and uninsured reflect a 25 percent

higher mortality rate within the uninsured

population.”); Colleen Berry & Julie Donohue, The

Uninsured in the U.S.: An Issue Brief, 1 HARVARD

HEALTH POL’Y REV. (Fall 2000), available at

http://hcs.harvard.edu/~epihc/currentissue/fall2000/ba
26

One study cautions that there is little

evidence on whether the association between

health insurance and health status is

causal.183 Research examining this point

shows that health improvements have

occurred for children and seniors under

policies that expanded Medicaid, children’s

health, and Medicare coverage, but the

evidence for non-elderly adults is less

conclusive.184

Medical treatment for the uninsured

is often more expensive than care of the

insured because the uninsured are more

likely to delay treatment and receive care in

an emergency department.185 Although one

study suggested that the marginal cost of

providing care in an emergency department

was not that much higher than in an

outpatient setting,186 hospitals have typically

billed the uninsured full price for the

services they received, instead of the

discounted prices that hospitals offer insured

patients.187 Pursuant to Department of

Health and Human Services (HHS)

Secretary Tommy Thompson’s direction,

CMS and the Office of Inspector General of

HHS issued guidance clarifying that

hospitals can provide discounts to uninsured

patients who cannot afford their hospital

bills without violating Medicare payment

rules.188 

B. Who Pays for Health Care for the

Uninsured?

The uninsured and their families bear rry.html; John Billings et al., Recent Findings on

Preventable Hospitalizations, 15 HEALTH AFFAIRS

239 (Fall 1996); A.B. Bindman et al., Preventable

Hospitalizations and Access to Health Care, 274

JAMA 305 (1995); P.D. Sorlie et al., Mortality in the

Uninsured Compared with that in Persons with

Public and Private Health Insurance, 154 ARCH.

INTERN. MED. 2409 (1994).

183 HELEN LEVY & DAVID MELTZER, WHAT

DO WE REALLY KNOW ABOUT WHETHER HEALTH

INSURANCE AFFECTS HEALTH? 33 (Economic

Research Initiative on the Uninsured, Working Paper

No. 6, 2001), reprinted in HEALTH POLICY AND THE

UNINSURED (Catherine McLaughlin ed. 2004),

available at

http://www.umich.edu/~eriu/pdf/wp6.pdf.

184 LEVY & MELTZER, supra note 183, at 34. 

See also Economic Research Initiative on the

Uninsured, Research Highlight No. 2, Q&A with

David Meltzer, M.D., Ph.D. (Mar. 2003), at

http://www.umich.edu/~eriu/qa-meltzer.html; Nichols

Statement, supra note 172, at 4 (“What has not been

proved by this standard is that universal coverage

would improve the health of all of the uninsured.”).

185 Levy 9/26 at 39 (noting that when the

uninsured do seek treatment, “acuity is greater and

treatment is more complicated.”) 

186 Robert M. Williams, The Costs of Visits

to Emergency Departments, 334 NEW ENG. J. MED.

642 (1996).

187 IOM, supra note 30, at 5. See also

Milstein 5/29 at 272; Fraser 5/29 at 273 (discussing

differences in hospital charges for the insured and

uninsured as rack rates versus negotiated prices). 

188 The Office of the Inspector General,

Hospital Discounts Offered to Patients Who Cannot

Afford to Pay Their Hospital Bills (Feb. 2, 2004), at

http://oig.hhs.gov/fraud/docs/alertsandbulletins/2004/

FA021904hospitaldiscounts.pdf; Centers for

Medicare & Medicaid Services, Questions On

Charges For The Uninsured (Feb. 17, 2004), at

http://www.cms.hhs.gov/FAQ_Uninsured.pdf. See

also News Release, U.S. Dep’t of Health & Human

Services, Text of Letter from Tommy G. Thompson

Secretary of Health and Human Services to Richard J.

Davidson President, American Hospital Association

(Feb. 19, 2004) (responding to letter inquiry from

hospital association indicating that hospitals have

been billing uninsured patients full charges, instead of

offering discounts), at http://www.hhs.gov/news

/press/2004pres/20040219.html. 
27

some of the costs for their health care. One

study found that uninsured persons

experiencing severe health problems had

higher out-of-pocket spending ($4,576

versus $1,912) and higher total medical

spending ($42,166 versus $26,957) than did

the insured.189 

In many instances, the uninsured

cannot pay for the care they receive. The

burden of providing this uncompensated

care varies tremendously. Only 7.9 percent

of the population is uninsured in Minnesota,

while in Texas, almost 25 percent of the

population is uninsured.190 Hospitals bear

the largest burden, because they must assess

and stabilize all patients with an emergency

medical condition, regardless of ability to

pay.191 Yet, even in the same geographic

area, the burden of providing

uncompensated care varies significantly

among hospitals.192

These costs are “absorbed by

providers as free care, passed on to the

insured via cost shifting and higher health

premiums, or paid by taxpayers through

higher taxes to finance public hospitals and

public insurance programs.”193 One study

estimated that the uninsured received almost

$100 billion in care in 2001. Federal, state,

and local governments paid for a majority of

this amount, through a “maze of grants,

direct provision programs, tax

189 James Smith, Healthy Bodies and Thick

Wallets: The Dual Relation between Health and

Economic Status, 13 J. ECON. PERSP. 145, 154 tbl.3

(1999). The study found no statistically significant

difference in the wealth effects of the illness on the

insured and uninsured. Id. Similarly, another study

found non-statistically significant differences in the

wealth impact on the insured and uninsured of being

diagnosed with a serious illness (cancer, diabetes,

heart attack, chronic lung disease, and stroke). See

HELEN LEVY, THE ECONOMIC CONSEQUENCES OF

BEING UNINSURED (Economic Research Initiative on

the Uninsured, Working Paper No. 12, 2002),

available at

http://www.umich.edu/~eriu/pdf/wp12.pdf. 

190 MILLS & BHANDARI, supra note 2, at 9-

10, tbl.4.

191

 See, e.g., M. Ryan 3/26 at 32 (“[W]ith a

high incidence of uninsured patients, we can find that

we have a high incidence of patients who become

inpatients for whom there is little or no

reimbursement. It creates a substantial drain on the

hospital resources. Yet, there is no way that we can

avoid those responsibilities and so we provide care.”). 

This obligation is imposed by the Emergency Medical

Treatment and Active Labor Act. See supra Chapter

1.

192

 See David A. Hyman, Hospital

Conversions: Fact, Fantasy, and Regulatory Follies,

23 J. CORP. L. 741, 758-60 (1998). Many people

believe that nonprofit hospitals obtain a tax

exemption because they provide charity care to the

uninsured. In fact, in most states, nonprofit hospitals

are not required to provide a specific amount of

charity care to receive a tax exemption. See id; Kevin

M. Wood, Legislatively-Mandated Charity Care for

Nonprofit Hospitals: Does Government Intervention

Make any Difference?, 20 REV. LITIG. 709 (2001);

David A. Hyman, The Conundrum of Charitability: 

Reassessing Tax Exemption for Hospitals, 16 AM.

J.L. & MED. 327, 332 (1990) (“A widely shared (but

incorrect) position is that charitable equals charity.”) 

Several class action lawsuits were recently

filed against a large number of nonprofit hospitals,

alleging that they “have distorted the extent of their

charity care while using punishing tactics to obtain

payments from uninsured patients.” See Holbrook

Mohr, Suit Alleges Lack of Charity at Nonprofit

Hospitals, WASH. POST, June 18, 2004, at E03. 

193 AMERICAN COLLEGE OF PHYSICIANS,

supra note 180, at 1. See also Hadley & Holahan,

supra note 181, at 79 n.1 (“‘Uncompensated care’ is

defined as medical care the uninsured receive but do

not pay for fully themselves. It includes reduced-fee

care; charity care, for which the uninsured do not pay

anything; and bad debts incurred by the uninsured.”). 
28

appropriations, and Medicare and Medicaid

payment add-ons.”194 Yet, approximately

$35 billion in completely uncompensated

care was still delivered in 2001.195 Hospitals

provided 60 percent of total uncompensated

care ($20.8 billion), and community health

centers and physicians each provided 20

percent ($7.1 billion and $6.8 billion).196 It

is unclear how much of these costs are

actually shifted to other payers.197 

C. The Impact of Competition

Our health care system relies on

hospitals, physicians, and clinics to provide

uncompensated care to the uninsured. 

Competition may help address some

problems of the uninsured, for example, by

lowering the price of insurance coverage and

medical care.198 Competition also may

worsen the problems of the uninsured,

however, by decreasing the ability of

providers to cross-subsidize some products

and services. Competition will not transfer

resources to those who do not have them.

199

Proposals to address these matters should be

carefully evaluated to ensure that the

consequences of any reform are procompetitive. 

IX. CONSUMER-DRIVEN HEALTH

CARE

Panelists discussed the disadvantages

of the current health care system, and the

potential benefits of a more consumer-driven

health care system. For example, Former

Speaker of the House Newt Gingrich spoke

at the Hearings and observed that “a third

party payment model is inherently conflictridden because you have the person

receiving the goods not responsible, the

person [providing the] goods confused about

who they’re responsible to, and the person

who is paying the money irritated with both

the provider and the patient.”200

Speaker Gingrich stated that there

are four drivers, to transforming the U.S.

health care system: the health care system

must emphasize patient safety and outcome;

embrace information technology (IT),

computing, and communications; focus on

quality and a culture of quality; and center

on the individual consumer.201 When

consumers have information and knowledge,

they will be empowered to make real

choices about their care and take

responsibility for their choices.

202 Other

panelists agreed that we need a more

194 Hadley & Holahan, supra note 181, at

78. 

195

 Id. at 69 ex.2; IOM, supra note 174, at 5

tbl.ES1. 

196 Hadley & Holahan, supra note 181, at

70-71. 

197 IOM, supra note 174, at 55-58.

198 See William M. Sage et al., Why

Competition Law Matters to Health Care Quality, 22

HEALTH AFFAIRS 31, 35-36 (Mar./Apr. 2003). 

199

 See Pauly 2/26 at 87 (“What competition

alone can never do, it can’t get all or even most of the

uninsured insured.”). 

200 Gingrich 6/12 at 9.

201

 Id. at 10-13.

202

 Id. at 12-13. Speaker Gingrich noted

that consumer choice also implies individual

responsibility and accountability. 
29

consumer-driven health care system,203 and

that there is considerable room for

improvement in health care IT and consumer

information.204 Two panelists suggested that

the government could play a role in creating

an IT infrastructure.

205

Consumer-driven health care relies

on consumers to make their own decisions

regarding the care they receive. Taxadvantaged savings accounts (Health

Savings Accounts, Health Reimbursement

Arrangements, and Flexible Spending

Accounts) can be used to pay for out-ofpocket health care expenses with pre-tax

dollars.206 Commentators and panelists

stated that when individuals are responsible

for paying for their health care costs up to a

certain amount, they are likely to become

more health conscious and more value

conscious about the health care products and

services they are purchasing.207 Panelists

generally supported greater development of

consumer-driven health care and individual

health savings accounts, but agreed that

203

 See Lansky 6/12 at 70-72; David Lansky,

A person-centered view of consumer information in

the health care marketplace (6/12) (slides)

[hereinafter Lansky Presentation], at

http://www.ftc.gov/ogc/healthcarehearings/docs/0306

12lansky.pdf; Comstock 6/12 at 111-13; Darling 6/12

at 103-04. 

204

 See Lansky 6/12 at 70-89 (reporting on

findings from studies and surveys conducted by the

Foundation for Accountability (FACCT)); Lansky

Presentation, supra note 203, at 4-16; Comstock 6/12

at 110-11; Gingrich 6/12 at 51-52 (“Everybody ought

to have an electronic health record. It ought to be

compatible across all the systems. All the major

providers of these kind of systems should be part of

an open systems architecture ....”).

205 Lansky 6/12 at 87-88; Gingrich 6/12 at

56-60; Lansky Presentation, supra note 203, at 17-24. 

See also Antos 9/30 at 117-121 (noting that CMS has

an enormous and potentially useful database of

information, and although patient and provider

privacy issues are important and need to be protected,

CMS makes it extremely difficult for researchers,

including consumer or business groups, to access it).

206 NEWT GINGRICH ET AL., SAVING LIVES &

SAVING MONEY 85 (2003). As of January 1, 2004,

employees may contribute to health savings accounts

that can earn tax free interest and be rolled over from

year to year. The accounts, however, are only

permitted in conjunction with eligible health

insurance plans. Eligible plans must have an annual

deductible of at least $1,000 for an individual and at

least $2,000 for a family, but the sum of the annual

deductible and the other annual out-of-pocket

expenses (other than premiums) cannot exceed

$5,000 for an individual or $10,000 for a family. See

MMA § 1201; Health Savings Account, Health

Savings Account Learning Center, at

http://www.ehealthinsurance.com/ehi/Welcome.ds

(last visited July 15, 2004).

207

 See Dwight McNeill, Do

Consumer-Directed Health Benefits Favor The

Young And Healthy?, 23 HEALTH AFFAIRS 186, 186,

191 (Jan./Feb. 2004) (noting that “[t]he espoused

active ingredient of consumer-directed benefits is

increased financial exposure to medical expenses to

motivate consumers to be more prudent purchasers as

they make price-sensitive choices” but that current

limitations on such issues as investment and

portability may limit their effectiveness); Jon R.

Gabel et al., Consumer-Driven Health Plans: Are

They More Than Talk Now?, 2002 HEALTH AFFAIRS

(Web Exclusive) W395, 396 (“At its heart, the

consumer-driven health care movement seeks to

combine incentives with information to enable

consumers to make informed choices about

non-life-threatening health care.”), at

http://content.healthaffairs.org/cgi/reprint/hlthaff.w2.

395v1.pdf; G. Kelly 6/12 at 36 (noting that “what is

going to be important going forward is for the

consumer to have value, which is the equation of both

price and quality .... [W]hen you spend your own

money, you do it wisely ... I know, since it’s money

out of my own pocket, what is the best mixture of

both price and quality. I’m not going to buy the most

expensive thing out there, but at the same time I’m

going to get the best deal for my money.”).
30

clear, accurate, and easily accessible

information will be necessary for consumers

to make informed choices.208 Panelists

noted a number of other barriers to a

consumer-driven health care system,

including provider culture and misaligned

financial incentives.209 

In general, panelists agreed that the

health care system has been designed around

the preferences of payers, providers, and

employers, and not consumers.210 A more

consumer-driven system has the potential to

lower costs, increase quality, and enhance

consumer welfare. 

208 Comstock 6/12 at 108-10; Lansky 6/12 at

70-71, 73-79 (providing three examples (one

personal, two based on his organization’s focus group

studies) of how consumers take control or express the

desire for more control by having access to more

information); Lansky Presentation, supra note 203, at

3, 5-21; National Women’s Law Center, Comments

Regarding Health Care and Competition Law and

Policy (Nov. 25, 2003) 8 (Public Comment) (noting

importance of consumer information, especially in

connection with women’s reproductive health

services, including treatment options); Shoptaw 4/11

at 59 (suggesting there will be a shift toward new

consumer-directed health care, including defined

contribution and medical savings accounts); but see

M. Young 6/12 at 97-98 (noting that “many

employers will embrace consumer-driven plans .... 

not because they philosophically believe it’s the right

thing, but quite frankly because they have no other

options and they are desperate”).

209

 See Comstock 6/12 at 108, 111-13. See

also Jon R. Gabel et al., Employers’ Contradictory

Views About Consumer-Driven Health Care: Results

from a National Survey, 2004 HEALTH AFFAIRS (Web

Exclusive) W4-210, 214, 217 & 218 n.13 (noting the

first evaluations of employers’ views about consumerdriven health care’s impact are ambiguous), at

http://content.healthaffairs.org/cgi/content/full/hlthaff.

w4.210v1/DC1; MARK A. HALL, MAKING MEDICAL

SPENDING DECISIONS: THE LAW, ETHICS AND

ECON OM ICS OF RATIONING MECHANISMS (1996).

210

 See Lemieux 9/30 at 145-146; Francis

9/30 at 177, 180.
CHAPTER 6: COMPETITION LAW: INSURERS 

I. INTRODUCTION ....................................................... 1

II. MERGERS OF HEALTH CARE INSURERS ................................. 1

A. Product and Geographic Market Definition .............................. 1

1. Product Market .............................................. 2

2. Geographic Market ........................................... 6

B. Competitive Effects ................................................ 6

C. Entry ............................................................ 8

D. Efficiencies ..................................................... 11

E. Conclusion ...................................................... 13

III. MONOPSONY POWER ................................................. 13

A. Product and Geographic Market Definition ............................. 14

B. Seller Switching Costs ............................................. 16

C. Competitive Effects ............................................... 17

1. Insurer Market Share and the Cost of Provider Withdrawal ........... 17

2. Distinguishing Lawful From Unlawful Behavior ................... 17

3. Lowering Prices Below the Competitive Level ..................... 19

4. Monopsony Power Absent Downstream Market Power .............. 19

D. Conclusion ...................................................... 20

IV. CURRENT CONTROVERSIES ........................................... 20

A. Most Favored Nation Clauses ....................................... 20

1. Prior Cases ................................................. 21

2. Competitive Concerns ........................................ 22

B. Mandated Benefits ................................................ 25

1. Claimed Benefits of Mandates ................................. 25

2. Claimed Disadvantages/ Inefficiencies of Mandates ................. 26

3. Any Willing Provider and Freedom of Choice Legislation: 

A Case Study of Mandates .................................... 29

4. Potential Responses to the Demand for Mandated Benefits ........... 31
CHAPTER 6: COMPETITION LAW: INSURERS

I. INTRODUCTION

In the health insurance industry,

health insurers are both sellers of insurance

to consumers and buyers of medical

services. As a result, mergers and other

conduct involving health insurers potentially

can raise issues related to both monopoly

and monopsony power. Chapter 6 discusses

some of these issues.

II. MERGERS OF HEALTH CARE

INSURERS

As discussed in Chapter 4, the

Agencies use the framework provided by the

1992 Horizontal Merger Guidelines (Merger

Guidelines)

1

 to evaluate whether a merger or

acquisition will likely “create or enhance

market power or ... facilitate its exercise.”2

Market power “is the ability profitably to

maintain prices above competitive levels for

a significant period of time.”3 As in Chapter

4’s discussion of hospital mergers, this

Chapter uses the framework of the Merger

Guidelines to discuss issues that arise in

connection with mergers or acquisitions

involving health care insurers.

A. Product and Geographic Market

Definition

Merger analysis can begin either with

an assessment of direct evidence of

anticompetitive effects,4 or the identification

of relevant product and geographic markets

and the calculation of the shares of market

participants and concentration ratios.5 A

relevant market typically is defined as a

product or group of products and a

geographic area in which the product or

groups of products is produced or sold such

that a hypothetical profit-maximizing firm,

not subject to price regulation, that was the

only present and future producer or seller of

those products in that area likely would

impose at least a “small but significant and

non-transitory” increase in price above the

competitive level, assuming the terms of sale

of all other products are held constant. A

relevant market is a group of products and a

1

 U.S. DEP’T OF JUSTICE & FEDERA L TRADE

COMM’N, HORIZONTAL MERGER GUIDELINES § 0.1

(1992) [hereinafter MERGER GUIDELINES], available

at http://www.ftc.gov/bc/docs/horizmer.htm. 

2

 Id. When a group of sellers combines to

exercise market power it is called oligopoly power.

3

 Id.

4

 E.g., In re Schering-Plough Corp., No.

9297, at 16-17 (Dec. 18, 2003) (opinion) (discussing

FTC v. Indiana Fed’n of Dentists, 476 U.S. 447, 460-

61 (1986), in which the Supreme Court said that “the

finding of actual, sustained adverse effects on

competition ... is legally sufficient to support a

finding that the challenged restraint was unreasonable

even in the absence of elaborate market analysis.”),

available at http://www.ftc.gov/os/adjpro

/d9297/031218commissionopinion.pdf. A number of

lower court decisions have followed this principle. 

See, e.g., Todd v. Exxon Corp., 275 F.3d 191, 206

(2d Cir. 2001) (evidence of “an actual adverse effect

on competition ... arguably is more direct evidence of

market power than calculations of elusive market

share figures”); Toys R’ Us v. FTC, 221 F.3d 928,

937 (7th Cir. 2000) (market power can be proved

“through direct evidence of anticompetitive effects”);

United States v. Baker Hughes Inc., 908 F.2d 981,

992 (D.C. Cir. 1990) (“‘[m]arket share is just a way

of estimating market power, which is the ultimate

consideration,’ and ... ‘[w]hen there are better ways

to estimate market power, the court should use them’”

(quoting Ball Memorial Hospital v. Mutual Hospital

Insurance, 784 F.2d 1325, 1336 (7th Cir. 1986)).

5

 See, e.g., FTC v. H.J. Heinz Co., 246 F.3d

708 (D.C. Cir. 2001); MERGER GUIDELINES, supra

note 1, § 0.2.
2

geographic area that is no bigger than

necessary to satisfy this test.6 Analysis

typically starts with a narrow market, which

is broadened until demand-side substitution

is sufficient to make the price increase

unprofitable.7

1. Product Market

In health insurance markets,

considerable attention has focused on the

definition of the relevant product market.8

One threshold issue is whether health

maintenance organizations (HMOs), point of

service plans (POSs), preferred provider

organizations (PPOs), and indemnity plans

are separate product markets or all part of a

single product market.9 A second issue is

whether self-insured employer plans are in

the same product market as commercial

insurers and health plans. 10

 The first issue arises in deciding

whether HMOs and PPOs are separate

product markets, either from each other or

from a market consisting of all health

insurance financing.11 Until recently, a

prominent and common characteristic of

many HMOs was the use of a closed panel

of physicians with a primary care physician

acting as a “gatekeeper,” but several

panelists noted a pronounced trend toward

less restrictive forms of managed care.12 As

a result, several panelists suggested that the

relevant product market should be defined

broadly.13

Two Seventh Circuit cases, Blue

Cross & Blue Shield v. Marshfield Clinic

14

and Ball Memorial Hospital v. Mutual

6

 MERGER GUIDELINES, supra note 1, § 1.0. 

7

 Id. §§ 1.11, 1.21; Seth Sacher & Louis

Silvia, Antitrust Issues in Defining the Product

Market for Hospital Services, 5 INT’L J. ECON. BUS.

181, 182 (1998). 

8

 See, e.g., Monk 4/23 at 38-49; Ginsburg

4/23 at 24-26; Desmarais 4/23 at 36-38.

9

 See, e.g., Monk 4/23 at 43-49; Ginsburg

4/23 at 25; Desmarais 4/23 at 36-38; Lerner 4/23 at

66; Feldman 4/23 at 52-64.

10

 See, e.g., Monk 4/23 at 39-40 (until

DOJ’s 1999 consent in United States v. Aetna Inc.,

1999-2 Trade Cas. (CCH) ¶ 72,730 (N.D. Tex. 1999),

the definition of the relevant product and geographic

markets for health insurance did not provoke

controversy; usually, the relevant geographic market

was at least statewide, and the relevant product

market included self- and fully-insured products, as

well as HMOs, PPOs, and indemnity plans); Ginsburg

4/23 at 26; Desmarais 4/23 at 42; Feldman 4/23 at 61-

64. 

11 The following analysis deals with group

comprehensive medical insurance and may not be

applicable to assessing transactions or practices

involving individual comprehensive medical

insurance, worker’s compensation, disability, longterm care, or dental insurance. See, e.g., Desmarais

4/23 at 32 (“From our perspective, it’s important to

realize that there’s really two distinct markets. 

There’s a group market for health insurance, as well

as an individual market. The two markets vary

considerably in terms of the economic, business and

regulatory considerations and we need to keep that in

mind.”); Feldman 4/23 at 56-57 (medicare health plan

market may be distinct from employer health plan

market). 

12 Ginsburg 4/23 at 21; 25-26; Desmarais

4/23 at 36-37; Monk 4/23 at 43-45; Lerner 4/23 at

67-68, 70-73. See also supra Chapter 1.

13

 See, e.g., Lerner 4/23 at 66-73; Monk

4/23 at 42-44, 48.

14 65 F.3d 1406 (7th Cir. 1995) (Posner,

C.J.).
3

Hospital Ins., Inc.,

15 suggest that HMOs and

PPOs are not, and cannot be, separate

markets. The Seventh Circuit indicated in

both cases that HMOs and PPOs are instead

part of a larger health insurance financing

market. 

In Marshfield Clinic, Blue Cross &

Blue Shield (Blue Cross) and their

subsidiary HMO alleged that the Marshfield

Clinic, a physician-owned clinic, and its

HMO had monopoly power in the HMO

market that they had acquired and

maintained through improper practices.16

The Seventh Circuit rejected the argument

that HMOs constituted a relevant product

market separate from other forms of health

care coverage. The court stated that “[a]n

HMO is basically a method of pricing

medical services,” and not a distinctive

organizational form or group of skills.17 The

court noted that Blue Cross’s ability to

contract with enough physicians to form a

PPO network in the same geographic area in

which it alleged the Marshfield Clinic had a

monopoly implies that Blue Cross also had

the ability to form an HMO.18 The court

concluded that “services offered by HMOs

and by various fee-for-service plans are both

provided by the same physicians, who can

easily shift from one type of service to

another if a change in relative prices makes

one type more lucrative than others.”19

In Ball Memorial Hosp. Inc. v.

Mutual Hospital Insurance, eighty acute

care hospitals alleged that Blue Cross’s

attempt to offer a PPO plan violated the

antitrust laws because Blue Cross had

market power and abused it.20 The hospitals

were concerned that if Blue Cross entered

the PPO market, it would exercise

monopsony power by lowering the prices it

paid to participating hospitals.21 The

hospitals also were concerned that once Blue

Cross lowered the prices it paid for their

services, the hospitals would be forced to

charge higher prices to other PPOs,

including their own, which would allow

Blue Cross to raise the costs of, and take

business away from, competing PPO plans.22

The Seventh Circuit held that market

power was a prerequisite to any finding that

Blue Cross violated the antitrust laws and

upheld the district court’s finding that Blue

Cross did not have market power. Blue

Cross’s lack of market power was based in

large part on the district court’s finding that

the product was health care financing, and

that the “Blues, other insurance companies,

hospitals offering PPOs, HMOs, and selfinsuring employers all offer methods of

financing health care.”23

15 784 F.2nd 1325 (7th Cir. 1986)

(Easterbrook, J.).

16

 Marshfield Clinic, 65 F.3d at 1407.

17

 Id. at 1409.

18

 Id. at 1410.

19

 Id. at 1411.

20

 Ball Mem’l Hosp.. 784 F.2d at 1330-31.

21

 Id. at 1331, 1339-40.

22

 Id. at 1331, 1338-40 (the hospitals raised

issues about cost-shifting and cross-subsidization in

this context). See supra Chapter 3 for further

discussion of this issue. 

23

 Ball Mem’l Hosp.. 784 F.2d at 1331,

1340. The court also stated that the “insurance

industry is not like the steel industry, in which a firm

must take years to build a costly plant before having

anything to sell. The ‘productive asset’ of the
4

As in all industries, the specific facts

of each matter must be carefully evaluated to

determine the parameters of health insurance

markets.24 One panelist explained that “it’s

important to keep an eye on the ball and

remember that the question is not, is there a

price difference between HMO products and

PPO products and ... whether there are

attribute differences between the products. 

The question is, assuming a competitive

equilibrium in both and then the competitive

equilibrium disappeared in one of them so

that then somebody tried to raise price,

would the change in relative price drive 

consumer response back and forth between

the segments.”25

In Aetna, the Division concluded that

“[b]y virtue of the benefit design

differences, pricing differentials, and other

factors, PPOs and indemnity plans are not

reasonable substitutes for HMO and HMOPOS products. Neither employers nor

employees view[ed] HMOs and PPOs as the

same product, and enrollees who le[ft] an

HMO disproportionately select[ed] another

HMO, rather than a PPO, for their next

plan.” The Division also concluded that a

“small but significant increase in the price of

HMO and HMO-POS products would not

cause a sufficient number of customers to

shift to other health insurance products to

make such a price increase unprofitable

[and, therefore,] HMO and HMO-POS plans

... are an appropriate relevant product

market within which to assess the likely

effects of the proposed acquisition.”26

insurance business is money, which may be supplied

on a moment’s notice, plus the ability to spread risk,

which many firms possess and which has no

geographic boundary.” Id. at 1335.

24 In U.S. Healthcare, Inc. v. Healthsource,

Inc., 986 F2d 589, 598-99 (1st Cir. 1993), the First

Circuit affirmed the trial court’s rejection of an

HMO-only market in favor of one that includes all

forms of health care financing. As the court

explained:

The problem with U.S. Healthcare’s

argument is that differences in cost and

quality between products create the

possibility of a separate market, not the

certainty .... [T]he issue ... would be

whether a sole supplier of HMO services ...

could raise price far enough over cost, and

for a long enough period, to enjoy monopoly

profits. Usage patterns, customer surveys,

actual profit levels, comparison of features,

ease of entry, and many other facts are

pertinent in answering the question.

See also Cont’l Orthopedic Applicances, Inc. v.

Health Ins. Plan of Greater N.Y., Inc., 40 F. Supp. 2d

109, 119 (E.D.N.Y. 1999) (“[N]either of those cases

[Marshfield Clinic and U.S. Healthcare], or for that

matter, any of the cases cited in the defendants briefs,

stand for the proposition that HMOs can never be a

separate viable product market.”) 

25 Lerner 4/23 at 67, 73 (noting that all of

the litigated cases have defined the market broadly,

but that the analysis in many of the cases “is either

thin or wrong-headed”). See also Arthur Lerner,

Health Insurance Monopoly Issues – Market

Definition 13 (4/23) (slides), at http://www.ftc.gov

/opp/hc/030423arthurlerner.pdf; Feldman 4/23 at 50-

51 (suggesting that the main problem with decision in

Marshfield Clinic is it defines a product market using

both supply and demand substitution, whereas the

Guidelines suggest only demand substitution should

be considered in defining a relevant product market),

52 (noting that although supply substitution is

relevant to antitrust analysis, its use should be limited

to identifying firms that participate in the relevant

market and to the analysis of entry); MERGER

GUIDELINES, supra note 1, §§ 1.32, 3. 

26 United States v. Aetna Inc., No. 3-99CV

1398-H ¶¶ 17-18 (June 21, 1999) (complaint)

[hereinafter Aetna Complaint], available at

http://www.usdoj.gov/atr/cases/f2500/2501.pdf; see

also United States v. Aetna Inc., No. 3-99
5

In other investigations conducted

both before and after Aetna, the Division

concluded that the relevant product market

was all managed care products, and not

HMOs or PPOs separately. As one panelist

stated, “[w]e need to study the reactions of

health plans, employers and employees as

the marketplace evolves. And ... any

analysis that takes place from here on out

needs to factor in the changing marketplace

that is emerging due to the managed care

backlash.”27 

Another panelist stated that “we

should look at the effect of macroeconomic

conditions on how to define product

markets. There’s soft empirical evidence

which demonstrates that the price elasticity

of demand for HMOs depends on

macroeconomic conditions .... It suggests

... that the state of the macroeconomic

economy might compress the price elasticity

during good times, pushing the products

possibly into the same market and then

pulling them back apart again.”28 This same

panelist stated, however, that at this time

“[t]here are distinct product markets for

different types of health insurance plans,

characterized by enrollees’ ability to “choose

their own doctor,” including the ability to

see specialist physicians without a referral 

and to use any hospital recommended by a

physician.”29

 The second issue is whether selfinsurance should be included as part of the

relevant product market.30 This issue is

highly fact-specific, and will turn on the

particulars of any given case. One panelist

suggested that analyzing “win-loss reports

from insurers and switching reports from

employers can tease out the level of

competition” that self-insurance provides,

and stated his conclusion “that both funding

types are in the same market.”31 Such

CV1398-H, at 5-6 (Aug. 3, 1999) (revised

competitive impact statement) [hereinafter Aetna

Impact Statement], available at

http://www.usdoj.gov/atr/cases/f2600/2648.pdf.

27 Monk 4/23 at 49; see also id. (“[F]rom

the evidence that I’ve been able to analyze ... HMOs

and PPOs generally do compete in the same relevant

market”).

28 Feldman 4/23 at 60-61. 

29 Roger Feldman, Health Insurance

Monopoly Issues – Market Definition 7 (4/23)

(slides), at http://www.ftc.gov/ogc/healthcarehearings

/docs/030423feldman.pdf; Feldman 4/23 at 52, 53-64

(discussing studies and demand elasticities that

support his belief that there are separate product

markets and noting that consumer price sensitivity

appears to be significant among comparable plans,

i.e., is across plans where non-price attributes such as

provider network and utilization controls are held

constant). 

30

 See, e.g., Desmarais 4/23 at 37

(“Obviously, if I’m an insurer and I have an employer

customer, I have to be mindful of the fact that that

customer, at any time, can decide to become selfinsured and to assume the responsibility and hire a

TPA, not necessarily my insurance company, and that

certainly has to color the relationships between the

employer customers and the insurers and TPAs in

which they do business.”).

31 Monk 4/23 at 42-43. See also id. at 45

(noting that bidding documents and broker

spreadsheets also provided useful insights); Feldman

4/23 at 96 (citing Portland, Oregon as an example of

why the assessment of self-insurance in the product

market has to be geographically specific: “[W]e

found that even large employers in the Portland

market just don’t want anything to do with selfinsurance. It’s virtually a fully-insured city for

reasons that are not entirely obvious to me.”). But see

Lerner 4/23 at 98 (suggesting that although employers
6

reports might also provide insight on

product market definition, geographic

market definition, and ease of entry.32

2. Geographic Market

The Agencies begin geographic

market analysis for mergers in this industry

with the location of each firm to determine

whether the merging firms sell in the same

areas.33 The Agencies then analyze the

available facts to assess whether the relevant

geographic market is larger or smaller than

the candidate market.34

For example, in Aetna the Division

alleged that “[t]he relevant geographic

markets in which HMO and HMO-POS

health plans compete are ... no larger than

the local areas within which managed care

companies market their respective HMO and

HMO-POS plans ... [because] [p]atients

seeking medical care generally prefer to

receive treatment close to where they work

or live, and many employers require

managed care companies to offer a network

that contains a certain number of health care

providers within a specified distance of each

employee’s home.”35 The relevant

geographic markets in that case were the

MSAs “in and around Houston and Dallas,

Texas.”36

B. Competitive Effects

The Merger Guidelines describe two

main theories of competitive harm:

unilateral effects and coordinated

interaction.37 When mergers or acquisitions

involving health care insurers have

threatened competitive harm, it has more

typically been through alleged unilateral

in Portland do not self-insure now, they might change

their minds if the price of other insurance products

went up); Monk 4/23 at 98-99 (noting that perhaps

employers in Portland do not self-insure because the

other available products are great, but if that were to

change, employers might choose to self-insure). 

32

 See Monk 4/23 at 42, 43 (noting that

perhaps self-insurance should not be included in the

relevant product market for small employers because

such employers may not find it “advantageous to

switch to a self-insured plan”). Obviously selfinsurance can only be part of the relevant product

market if employers view it as a substitute for

products offered by commercial insurers. 

33 MERGER GUIDELINES, supra note 1, §

1.21. The Division, in some recent cases, has used 

the United States Department of Commerce

Metropolitan Statistical Areas (MSAs) as a starting

point for defining geographic markets for insurance

company mergers.

34

 Id. See also Feldman 4/23 at 90 (“[I]f an

HMO ... raises its price, would buyers switch to

products produced outside the region? ... [T]he

answer is quite clear, geography matters.”).

35

 Aetna Complaint, supra note 26, ¶ 19. 

But see Monk 4/23 at 41 (arguing that although the

Merger Guidelines do not use supply substitution to

define markets, in his view “the ease and speed with

which these [health] plans can move from one part of

a state to another make insurance markets an

exception”). 

36

 Aetna Complaint, supra note 26, ¶ 20;

Aetna Impact Statement, supra note 26, at 7. See

also Monk 4/23 at 40 (“[M]y experience on more

recent mergers suggests that an MSA-based, fully

insured HMO market is still the Department of

Justice’s starting point.”); News Release, Dep’t of

Justice Antitrust Division, Statement on the Closing

of its Investigation of Anthem, Inc.’s Acquisition of

Wellpoint Health Networks, Inc. (M ar. 9, 2004), at 

http://www.usdoj.gov/atr/public/press_releases/2004/

202738.pdf.

37

 See MERGER GUIDELINES, supra note 1,

§§ 2.1, 2.2.
7

effects than through coordinated effects. 

The likelihood of adverse unilateral effects

usually is connected to whether each of the

merging firms’ products are each others’

best substitute.38 For example, in the Aetna

case, the Division alleged that “Aetna and

Prudential are among each other’s principal

competitors in the HMO and HMO-POS

markets in Houston and Dallas, and are

considered by employers to be close

substitutes in their product attributes and

quality.39

Several panelists suggested that the

more similar the merging companies are, the

more likely the entity could exercise market

power post-merger. One panelist presented

the results of an empirical study he

conducted, in which he compared mergers

involving locally-based health plans with

those involving national HMOs. He found

that these two types of HMOs are very

different and that the entry of a national

HMO is unlikely to impact significantly the

profits or competitiveness of a local HMO,

and vice-versa.

40 Thus, according to this

panelist, in a market with three local HMOs

and two national HMOs, the merger of the

two national HMOs might result in 

significant market power because its effects

would be similar to a two to one merger.41

Many hearing participants testified

that health insurance markets in most

geographic areas enjoy robust competition,

with “multiple health insurer competitors

and several product options, including

HMO, PPO, POS, and consumer directed

health plans.”42 One panelist explained that

“competitors within specific markets vary,

including regional and local plans serving

specific needs and geographies. There is a

wealth of competition for employers’

38

 Id. § 2.21 (“Substantial unilateral price

elevation in a market for differentiated products

requires that there be a significant share of sales in

the market accounted for by consumers who regard

the products of the merging firms as their first and

second choices, and that repositioning of the nonparties’ product lines to replace the localized

competition lost through the merger be unlikely.”)

39

 Aetna Complaint, supra note 26, ¶ 21;

Aetna Impact Statement, supra note 26, at 8.

40 Mazzeo 4/23 at 133-34, 139-42.

41

 Id. at 142-143. Of course, a health plan

merger does not necessarily have adverse unilateral

effects just because it is “big.” In the Division’s

recent investigation of the Anthem/WellPoint merger,

for instance, the Division learned from employers and

other market participants that, in addition to one of

the merging parties’ market shares being very small in

each of the nine states in which they competed,

neither of the WellPoint products was a close

competitor to Anthem in any of these states. Given

these facts, the Division concluded that this

transaction would not enhance Anthem’s ability to

increase prices, reduce quality, or otherwise reduce

consumer welfare in any of these markets. Dep’t of

Justice Antitrust Division, supra note 36. 

42 Fred Dodson, Health Insurance

Monopoly Issues – Competitive Effects 3 (4/23)

[hereinafter Dodson (stmt)], at http://www.ftc.gov

/ogc/healthcarehearings/docs/030423freddodson.pdf. 

See also Dodson 4/23 at 172; Darling 4/23 at 183-84;

Helen Darling, Health Insurance Monopoly Issues –

Competitive Effects 1 (4/23) [hereinafter Darling

(stmt)], at http://www.ftc.gov/ogc/healthcarehearings

/docs/030423darling.pdf; Wu 4/23 at 117; Lawrence

Wu, Economic Issues in Analyzing Competitive

Effects in Health Insurance Markets 4-14 (4/23)

(slides) [hereinafter Wu Presentation], at

http://www.ftc.gov/ogc/healthcarehearings/docs/0304

23wucompetitve.pdf.
8

 business. Additionally, employers can opt

to self-fund their insurance.”43

Another panelist stated that, although

large employers believe that health care

markets could be more competitive in

quality, service, innovation, and price, they

“are generally satisfied with the level of

competition among health plans and

insurers.”44 She noted that large employers

usually can choose from both national health

plans and smaller, regional plans to serve

their health insurance needs, and that most

insurers offer three to four products from

which employees may choose.45 Employers

also will conduct periodic assessments and

audits and will re-bid or re-negotiate their

health insurance contracts if not satisfied.46

Moreover, “[l]arge employers also have the

option to self-fund their benefits, use a

carrier or third party administrator to pay

claims, [or] contract with networks to get

appropriate discounts.”47

Other panelists stated that health

insurance markets are not sufficiently

competitive. One panelist presented data

indicating substantial insurer and hospital

concentration in numerous markets

throughout the United States, and stated that

this development has had serious

implications for premium levels and

payments to other providers (e.g.,

physicians).48 

C. Entry

The Merger Guidelines provide that

entry should be considered if it is likely to

occur within two years and be sufficient to

deter or counteract the anticompetitive

effects of the proposed merger.49 Entry

barriers to the health insurance industry may

include: state laws and regulations,

economies of scale, and firm reputation. 

According to an ongoing study of

health care markets in 12 geographic areas,

the studied markets fall into three categories:

(1) locales with a dominant Blue Cross plan,

(2) locales with three or four major plans,

typically one of which is a long-standing

local plan, and (3) markets that are more

fragmented, often lacking strong local plans. 

According to this study, in recent years

national plans have been unsuccessful

entering some of the Blue Cross dominant

markets, but have been important players in

some of the fragmented markets.50 

43 Dodson (stmt), supra note 42, at 3. See

also Dodson 4/23 at 172; Darling 4/23 at 186.

44 Darling (stmt), supra note 42, at 1. See

also Darling 4/23 at 183-86.

45 Darling 4/23 at 183, 185; Darling (stmt),

supra note 42, at 1.

46 Darling (stmt), supra note 42, at 1.

47

 Id.; see also Darling 4/23 at 185-87.

48 Stephen Foreman & Dennis Olmstead,

Written Comments of the Pennsylvania Medical

Society 3 (9/9/02), at

http://www.ftc.gov/ogc/healthcare/pms.pdf. See also

Gabel 4/23 at 159 (in last few years, “the insurance

industry has become less competitive”); Foreman

4/24 at 69-70; Hall 4/25 at 74-75, 78 (stating that

Blue Cross is dominant in Alabama).

49 MERGER GUIDELINES, supra note 1, § 3.

50 Ginsburg 4/23 at 10-12; Paul Ginsburg,

Competition in Health Insurance 6-7 (4/23) (slides)

(noting that the underwriting cycle was leading to

wider margins but that “exits from unprofitable

markets” continued) [hereinafter Ginsburg

Presentation], at http://www.ftc.gov/ogc

/healthcarehearings/docs/030423ginsburg.pdf.
9

The cost of establishing a network of

providers may delay entry, depending on the

type of insurance product. For example, in

Aetna the Division alleged that “[e]ffective

entry – entry and growth to minimum viable

scale – for an HMO or HMO-POS plan in

either Houston or Dallas typically takes two

to three years and costs up to $50 million.”51

Several panelists agreed that entry barriers

into health insurance markets appear to

exist. One panelist presented research data

suggesting that the health insurance industry

has become less competitive over the last

few years.52 This panelist pointed out that

recent premium increases usually would

have spurred increased HMO entry.53 HMO

entry is not occurring in most markets,

however, because many insurers and HMOs

were hurt during fierce price competition in

the mid-1990’s, Wall Street is wary of

HMOs with aggressive entry strategies, and

the cost of entry is greater now than in

previous periods.54 

Other panelists acknowledged that, at

least in some cases, state laws and

regulations can create entry barriers.55 One

panelist stated that the need to create a

provider panel is usually not a significant

barrier to market entry because existing,

51

 Aetna Complaint, supra note 26, ¶ 23. 

See also Aetna Impact Statement, supra note 26, at 8

n.4 (“Indeed, Aetna has acknowledged that on

average it costs between $600 and $1000 per enrollee

to build membership in a HMO.”); Aetna Complaint,

supra note 26, ¶ 23 (further noting that these costs are

substantially higher than those required for setting up

a PPO or indemnity plan). 

On the other hand, the Division also noted in

Congressional testimony that “there has been new

entry into various local [health plan] markets” and

that “[b]etween 1994 and 1997 over 150 new HMOs

were licensed across the country.” Statement: 

Hearing on H.R. 1304, The Quality Health-Care

Coalition Act of 1999, Before the House Comm. on

the Judiciary, 106th Cong. 8 (1999) (Statement of

Joel I. Klein, Assistant Attorney General, Department

of Justice Antitrust Division), available at

http://www.usdoj.gov/atr/public/testimony/2502.pdf. 

52 Gabel 4/23 at 159.

53 Gabel 4/23 at 163-64; Jon Gabel,

Competition Among Health Plans 11 (4/23) (slides)

[hereinafter Gabel Presentation], at

http://www.ftc.gov/opp/hc/030423jongabel.pdf

(suggesting that entry should have begun to increase

for at least three reasons: (1) four years of

underwriting profits, (2) growing profitability among

publicly traded managed care companies, and (3) a

limited number of competitors in many local

markets). See also Ginsburg 4/23 at 20 (noting that

“during the stage of the underwriting cycle when

premium trends are exceeding cost trends, you expect

to see exits from markets rather than entry, and from

our on-the-ground sense at 12 sites, we are still seeing

some exits, we’re not seeing any entry”); Ginsburg

Presentation, supra note 50, at 13.

54 Gabel 4/23 at 168-69; Gabel Presentation,

supra note 53, at 15.

55

 See, e.g., Desmarais 4/23 at 33, 35

(suggesting that in order “[t]o understand the current

insurance marketplace, it’s important to recognize

that insurers are subject to intense government

scrutiny of their business practices” and that state

policies sometimes reduce the number of insurers

willing to do business in a particular state); Stephen

Foreman, Competition Among Health Plans 11 (4/24)

[hereinafter Foreman (stmt)], at

http://www.ftc.gov/opp/hc/030423forman.pdf (noting

that entry barriers include costs of regulatory

approval, including capitalization). See also,

Senkewicz 4/24 at 8-17 (outlining state regulatory

procedures for insurers, but noting that state

regulators do not view the requirements as barriers,

but as good, sound regulation of an industry where

the transactions are not at arms-length). 
10

commercially-attractive provider networks

may be rented.56

A former insurance commissioner

for Missouri discussed several HMO

mergers that his office reviewed during his

tenure.57 His office approved three of the

four mergers because they were persuaded

by the parties’ arguments that entry was

easy, that there were no capacity constraints

on existing competitors (there were at least

ten HMO competitors), and that any of the

320 insurers in the state could easily enter

the HMO market.58 Over the past eight

years, however, the St. Louis HMO market

has become very concentrated, and there has

been no entry since the mid-1990s, he

reported.59 

This panelist suggested that entrants

face a Catch 22 – they need a large provider

network to attract customers, but they also

need a large number of customers to obtain

sufficient price discounts from providers to

be competitive with the incumbents. 

Second, he noted the possibility that there is

a first mover, or early mover, advantage in

the HMO industry, possibly resulting in later

entrants having a worse risk pool from

which to recruit members. Third, he noted

that trade name recognition may inhibit

entry.60

Other panelists agreed that the need

for scale economies and a good reputation in

the local market may create entry barriers. 

For example, historically, HMOs’ scale

economies were relatively low, requiring

approximately 65,000 enrollees.61 Recent

information from investigations and the

Hearings suggest this may no longer be the

case.62 One panelist noted that it is not

uncommon for employers to ask for new or

improved quality control and disease

56

 See Lerner 4/23 at 106-107 (suggesting

employer community could set up own HM O if

monopolist managed care plan unreasonably raised

rates, absent the monopolist “tying up the provider

community with exclusive contracts or something”);

Wu 4/23 at 118-19. But see Foreman (stmt), supra

note 55, at 9.

57 Angoff 4/24 at 39-45. 

58

 Id. See also American Bar Ass’n,

Comments Regarding the Federal Trade

Commission’s Workshop on Health Care and

Competition Law and Policy 8-9 (Public Comment).

59 Angoff 4/24 at 43-45.

60

 Id. at 46-49. See also Foreman (stmt),

supra note 55, at 7-8 (arguing that “mergers may have

the effect of increasing brand name loyalty even

though there has been no change in quality”); Angoff

4/24 at 52 (suggesting that perhaps the Guidelines

should be revised to state that “even when a merger

does not meet the Herfindahl thresholds, in a market,

where entry is particularly difficult, and efficiencies

are clearly not going to be created,” the merger

should be challenged). But see Lerner 4/24 at 119-20

(noting that the antitrust laws should not be used to

challenge inefficient mergers that do not raise

competitive concerns). 

61

 See Ruth S. Given, Economies Of Scale

And Scope As An Explanation Of Merger And Output

Diversification Activities In The Health Maintenance

Organization Industry, 15 J. HEALTH ECON. 685

(1996); Douglas Wholey et al., Scale And Scope

Economies Among Health Maintenance

Organizations, 15 J. HEALTH ECON. 657 (1996).

62

 See, e.g., Ginsburg 4/23 at 19 (noting that

one of the stated reasons for many of the recent health

insurance mergers is “to achieve scale economies

which presumably could come from the use of

information technology and marketing and the same

promotional programs and in-care management and

how to do it”); Given 4/24 at 30-31, 33-37

(suggesting that the need for larger economies of

scale and efficiencies, resulting in larger HMO size,

also may create greater barriers to entry).
11

management programs from health plans

seeking their business. Such programs often

cost more and require larger patient

populations than such programs did in the

past.63 

Moreover, some purchasers want to

deal with firms that are already in the

particular geographic market even if a firm

with a national reputation is seeking to enter

that market. For example, one panelist

stated that in recent years “the only ...

successful entry of national plans into

markets has come from purchasing hospitalowned health plans, and now that the

hospital-owned health plans are mostly

gone, I would not be surprised if we

wouldn’t – certainly, in the short term, I

wouldn’t expect to see much national plan

entry.”64

Conversely, other panelists suggested

that expansion by existing firms is relatively

easy. One panelist stated entry is easy

because existing health plans do not face

capacity constraints, the incremental cost of

expansion is small, and regulatory

requirements are generally minor.65 This

panelist explained that informed and

sophisticated employers and consultants

help to keep the markets competitive by

using competitive bidding to choose a health

plan, and switching readily based on price.66

Moreover, large employers often choose to

be self-insured, bypassing traditional

insurance plans altogether.67 This panelist

offered the Atlantic City, New Jersey,

market as an example of entry creating

effective competition.68 Another panelist

stated that “all that is required for a plan

already licensed in a state to expand to

another area of that state is to contract with

an existing provider network and then

market their new product.”69 

D. Efficiencies

The Merger Guidelines make clear

63

 See generally Ginsburg 4/23 at 18

(“Disease management and case management, these

are new areas and some companies are pursing it in a

more sophisticated way.”); Given 4/24 at 33.

64 Ginsburg 4/23 at 28-29. See also

Foreman (stmt), supra note 55, at 8 (arguing that

“developing credibility with employer-purchasers” is

an entry barrier).

65 Wu 4/23 at 119; Wu Presentation, supra

note 42, at 5; Wu 4/24 at 53-62 (discussing studies of

entry, expansion, and customer switching .between

health plans), 62 (concluding that, based on the

studies he has reviewed, entry and expansion have

been sufficient to take share away from the leading

firm and have reduced HMO concentration over time,

and that this evidence, along with facts about the

percentage of employees who have a choice of plans,

suggest that although there are switching costs, they

do not rise to the level of being a barrier to entry).

66 Wu 4/23 at 120-23; Wu Presentation,

supra note 42, at 6-11; Wu 4/24 at 57-62.

67 Wu 4/23 at 118.

68

 Id. at 123-24; Wu Presentation, supra

note 42, at 11 (showing that from January 1994

through December 1998, new entrants captured 47

percent of the HMO/POS market from six incumbent

firms and that the largest incumbent, Blue Cross &

Blue Shield of New Jersey, went from having 38

percent of the market to 21 percent). But see

Foreman 4/24 at 69 (arguing that more recent data

suggests that there are only two insurers left in the

Atlantic City, New Jersey market).

69

 Id. at 41. See also Id. (“In the late 1990s,

there were many examples in many states where

insurers rapidly expanded services from one part of

the state to the next and the data showed that this

expansion came at a very low price.”).
12

that efficiencies should be evaluated before

determining whether a proposed merger is

likely to be pro- or anti-competitive.70 The

Merger Guidelines provide that the

Agencies “will not challenge a merger if

cognizable efficiencies are of a character and

magnitude such that the merger is not likely

to be anticompetitive in any relevant

market.”71 Efficiencies are cognizable when

they are merger-specific, have been verified,

and do not arise from anticompetitive

reductions in output or service.72

 A merger may generate efficiencies

for the merged HMO or other health plan

that reduce the costs of hospitals, physicians,

or other providers that deal with it. For

example, one panelist discussed how HMOs

might achieve economies of scale.73 She

noted that HMOs might lower supply-side

costs by negotiating better prices with local

physician and hospital networks.74

Moreover, economies of scale may create

lower costs for complying with state

regulations, administering the HMO, or

implementing disease and utilization

management, she noted.75 She maintained

that these real cost savings are akin to a

technological innovation that lowers input

costs.76 

Another panelist suggested that

because the lower input price reflects

genuine cost savings in the supply chain,

overall welfare increases.77 The first

panelist discussed demand-side efficiencies

(including broader provider networks, more

financially stable and better managed

organizations, and a larger patient

population to provide a critical mass for

population health and disease management

programs) that may improve or increase the

value of the HMO to the customer.78 

Several panelists discussed the

number of enrollees an HMO needs to

achieve economies of scale. One panelist

stated that HMOs reach maximum

efficiencies with between 30,000 and 50,000

70 MERGER GUIDELINES, supra note 1, § 4

(as revised Apr. 8, 1997).

71

 Id. § 4.

72 Merger-specific efficiencies are “only

those efficiencies likely to be accomplished with the

proposed merger and unlikely to be accomplished in

the absence of either the proposed merger or another

means having comparable anticompetitive effects.” 

Id. Cognizable efficiencies are assessed “net of costs

produced by the merger or incurred in achieving

those efficiencies.” Id.

73 Given 4/24 at 27-34; Ruth Given,

National HMO Trends 6 (4/24) (slides) [hereinafter

Given Presentation], at http://www.ftc.gov/ogc

/healthcarehearings/docs/0304given.pdf. See also

Given at 4/24 at 111-12 (“[J]ust because you have

economies of scale doesn’t mean you have mergerspecific efficiencies”).

74 Given 4/24 at 33 (noting that plans may

need to be bigger to negotiate with providers who

also have gained greater market concentration);

Given Presentation, supra note 73, at 6.

75 Given 4/24 at 32-36; Given Presentation,

supra note 73, at 6.

76 Given Presentation, supra note 73, at 6;

Given 4/24 at 32-37; see also Schwartz 4/25 at 9.

77 Schwartz 4/25 at 9. See also Given 4/24

at 34-37; Given Presentation, supra note 73, at 6.

78 Given 4/24 at 34-37; Given Presentation,

supra note 73, at 6. 
13

enrollees.79 Another panelist suggested a

similar range to have economies of scale,

and observed that these efficiencies

generally apply up to 115,000 enrollees.80 A

third panelist observed that in very small

markets these scale economies may be

difficult to achieve, and some markets

probably cannot support large numbers of

health plans.81

Several panelists suggested that

researchers or the Agencies examine

whether consummated health insurance

mergers realized the efficiencies they

claimed premerger.82 To date, the Division

has reviewed very few health insurance

mergers where the parties claimed that the

merger would result in efficiencies that can

reasonably be accomplished only by the

proposed merger or other means having

comparable anticompetitive effects. 

E. Conclusion

The Agencies will continue to follow

the Merger Guidelines in health insurance

mergers and conduct a factually intensive,

case-specific assessment of whether a

particular transaction under review will

allow health plans to exercise market power

with regard to their customers.83

III. MONOPSONY POWER

Conceptually, monopsony power is

the mirror image of monopoly power. A

buyer has monopsony power when it can

profitably reduce prices in a market below

competitive levels by curtailing purchases of

the relevant product or services.84 The

exercise of monopsony power causes

competitive harm because the monopsonist

will reduce purchases of the input, shift

some purchases to a less efficient source,

supply too little output in the downstream

market, or do all three. When a

monopsonist reduces purchases of inputs to

79 Given 4/24 at 32 -33 (noting that an

article she wrote discussed maximizing efficiencies at

about 115,000 enrollees, but in that case she was

discussing the “whole state of California, and it’s

about 30- to 40,000 when you adjust for” the number

of geographic markets in which HMOs compete in

the state; further noting, however, that these numbers

may be biased low for current market conditions).

80 Gabel 4/23 at 165-66; Gabel Presentation,

supra note 53, at 9 (summarizing the literature about

HMO market structure and performance and noting

that local market competition increased between 1994

and 1997 despite national mergers, and that local

markets determine the level of competition).

81 Senkewicz 4/24 at 65-66.

82

 See Foreman 4/24 at 117; Angoff 4/24 at

117-118. See also id. at 122; Lerner 4/24 at 120,

123. Both panelists suggested that the Agencies work

more closely with state insurance regulators with

respect to health plan mergers.

83

 See, e.g., Feldman 4/23 at 96

(“Unfortunately, I think antitrust cases have to be

done one at a time”); Lerner 4/23 at 97-98 (“So, I

think a lot of these things, I agree, you have to look at

the case you’re dealing with and figure out what

makes sense”); Monk 4/23 at 98 (“[W]hen you’re

looking at a specific market, you do have to factor in

what the characteristics that are in that market at that

time and whether the characteristics changed because

there was a change in - either the market was

currently in balance or out of balance”). See also

Ginsburg 04/24 at 7 (“The key to performance by

health insurers is really the direction that they get

from employers, and I think the problems we have

now often stem from the type of directions or absence

of it that insurers are getting from employers, their

customers”).

84 Schwartz 4/25 at 8-9; see also Dick 4/25

at 4. When a group of buyers combines to exercise

market power it is called oligopsony power.
14

reduce input prices, society foregoes the

production of output whose value to

consumers exceeds the resource costs of

associated inputs, thereby creating a welfare

loss to society.85 To be sure, a buyer’s postmerger ability to lower the cost of inputs is

not necessarily an exercise of monopsony

power.86

The Agencies have brought several

cases that challenged the actual or potential

exercise of monopsony power.87 Two

relatively recent Division cases, both settled

by consent decree, alleged that the mergers

would have led to monopsony power in

some markets. United States v. Cargill,

Inc.88 involved a challenge to a merger of

grain purchasers, and United States v. Aetna,

Inc.89 involved a challenge to the merger of

two health care insurers, Aetna and

Prudential.

Monopsony concerns can arise in

health insurer mergers,

90 as well as in other

contexts, including market allocation

agreements among competing purchasers,

most favored nation (MFN) clauses, and

exclusive or quasi-exclusive dealing

contracts.91 Some of the Agencies’ MFN

cases can be seen as monopsony-related

matters, as they dealt with the power of

purchasers of services (such as dental,

vision, or hospital care services) to impose

contract terms on sellers of those services

(such as dentists, optometrists, or

hospitals).92

A. Product and Geographic Market

Definition

As with monopoly analysis, an

important aspect of monopsony analysis is

market definition. One panelist noted that

there are not many monopsony cases that

85 Schwartz 4/25 at 9-11; Marius Schwartz,

Buyer Power Concerns and the Aetna-Prudential

Merger, Address Before the 5th Annual Health Care

Antitrust Forum at Northwestern University School of

Law 4-6 (October 20, 1999) (noting that

anticompetitive effects can occur even if the conduct

does not adversely affect the ultimate consumers who

purchase the end-product), available at

http://www.usdoj.gov/atr/public/speeches/3924.wpd.

86 Schwartz, supra note 85, at 5; see also

Schwartz 4/25 at 9 (“If, for example, a merger

enables the now bigger buyer to get a lower price

because of efficiencies, for example, [when] it buys in

bulk, and that saves resources, and that’s what

enables a lower wholesale price, then that’s a good

thing. That is likely to also increase the amount of

the input that’s purchased and, therefore, is a good

thing for overall economic performance.”).

87 The Division defined monopsony markets

in both Aetna/Prudential and Cargill/Continental

Grain. Aetna Complaint, supra note 26, ¶ 27; Aetna

Impact Statement, supra note 26, at 9; United States

v. Cargill, Inc., No. 1:99CV01875 ¶¶ 17-19 (July 8,

1999) (complaint), available at

http://www.usdoj.gov/atr/cases/f2500/2552.pdf. See

also Schwartz 4/25 at 8-22. The Commission defined

monopsony markets in several cases, including In re

BP Amoco, PLC, Dkt. No. 3938 (Aug. 25, 2000),

complaint at ¶¶ 43-48 (complaint alleged that merger

would lessen competition in bidding for rights to

explore the Alaska North Slope). 

88 United States v. Cargill, Inc., 2000-2

Trade Cas. (CCH) ¶ 72,966 (D.D.C. 2000).

89 United States v. Aetna, Inc., 1999-2

Trade Cas. (CCH) ¶ 72,730 (N.D. Tex. 1999).

90

 See also supra Chapter 1.

91

 See Miles 4/25 at 44.

92

 See United States v. Med. Mut. of Ohio,

1999-1 Trade Cas. (CCH) ¶ 72,465 (N.D. Ohio

1999); United States v. Delta Dental of R.I., 943 F.

Supp. 172 (D.R.I. 1996); United States v. Vision

Serv. Plan, 1996-1 Trade Cas. (CCH) ¶ 71,404

(D.D.C. 1996).
15

clearly analyze market definition.93 Buyerside product market definition, in particular,

is an active area of academic and legal

inquiry, and is an area in which additional

research is desirable. 

Defining a buyer-side market

involves reversing the standard seller-side

formula to ask about the extent to which atrisk suppliers will substitute other outlets for

their products or services in response to a

small but significant and non-transitory

decrease in price. The crucial consideration

in defining monopsony product and

geographic markets, therefore, is whether

the buyers of the input in the putative market

successfully would be able to lower the price

they pay for the input or whether, instead,

the sellers have sufficient realistic

alternatives to allow them to circumvent the

price decrease.

Several additional monopsony

market definition-related points are worth

noting. First, purchasers of the input need

not compete in the output market to be

included in the relevant market for the

purchase of the input.94 Thus, it is possible

that public payors (e.g., Medicare and

Medicaid) and private payors (e.g., health

care insurers) do not compete in output

markets, but do compete in the market for

the purchase of services from health care

providers. Thus, purchasers of services

might be differentiated in their competitive

effectiveness just as sellers are differentiated

in some downstream markets.95 

Second, the same analytical tools

used in defining markets to assess seller

power can be applied when assessing buyer

power.

96 Third, a firm need not have sellerside market power in order to have buyerside monopsony power.97 Fourth, while the

Division previously treated the product

market in Aetna as physicians’ services,

rather than defining separate product

markets by physician specialty, monopsony

antitrust markets might be appropriately

defined in other circumstances for physician

specialties, hospitals, or other provider

93

 See Miles 4/24 at 130-31. This panelist

said that the cases that do address monopsony power

have not done a good job of analyzing market

definition issues, defining the market in terms of the

output market rather than the input market. Id. He

noted, however, that the Second Circuit’s decision in

Todd v. Exxon, 275 F.3d 191 (2d Cir. 2001), which

defined the product market by focusing on the

interchangeability, from the perspective of plaintiffemployees, of job opportunities in the oil industry

and job opportunities in other industries, handled

monopsony market definition in a sound manner. Id.

at 131-32. He also observed that United States v.

Socony-Vacuum Oil Co., 310 U.S. 150 (1940) and

Mandeville Island Farms v. American Crystal Sugar

Co., 334 U.S. 219 (1948), both involved monopsony

power issues in the form of naked price-fixing

agreements among buyers with market power. Id. at

127-28. 

94

 See id. at 134; Schwartz 4/25 at 11-12.

95

 See McCarthy 4/24 at 202; Blair 4/24 at

204 (noting that when patients need medical services,

“whether they’re represented by a commercial health

insurer or a government health insurer ... [they]

contribute to the demand that’s placed on the

physician’s time”); but see Foreman 4/24 at 204

(stating that it is a “non-answer” to tell physicians that

their “response to a monopsony reduction in prices

[should be] to expand your Medicare and Medicaid

patient list”).

96

 See Miles 4/24 at 134.

97

 See discussion of Cargill, infra notes 124-

128, and accompanying text.
16

groupings.98 Finally, as in other areas of

antitrust analysis,99 the presence or absence

of price discrimination can, at times, play an

important role in monopsony power

analysis.100

B. Seller Switching Costs

Seller switching costs are an

important part of monopsony analysis. 

Seller switching costs are the costs faced by

suppliers (e.g., health care providers) in

switching to different outlets (e.g., health

care insurers) for their services. High seller

switching costs make it more difficult for a

provider, when faced with lower

reimbursement from a monopsonist health

care insurer, to switch business to another

health care insurer. Consequently, high

seller switching costs make it more likely

that monopsonist health care insurers could

exercise market power against health care

providers. Although such switching costs

may vary depending on the specifics of a

market, they can be significant for health

care providers.101

 Seller switching costs for physicians

can be significant because: (1) a physician’s

time is perishable and (2) it can be difficult

for a physician to quickly replace lost

patients.102 Some have offered other reasons

that physician switching costs can be

significant. First, some have noted that such

switching costs may be greater when a seller

has invested in specialized assets and have

suggested that the training undergone by

physicians may be such an investment.103

Second, some have noted that seller

switching costs can be higher if the sellers

are not mobile and have suggested that

health care providers may not be

geographically mobile.104

Other panelists disagreed with the

notion that the seller switching costs faced

by providers are substantial, and argued that

some physicians are both geographically

mobile and are able to serve other health

98

 Aetna Complaint, supra note 26, ¶ 27;

Aetna Impact Statement, supra note 26, at 9; see also

McCarthy 4/24 at 166-67 (indicating that physician

product market definition, in the context of

monopsony, should be “basically specialty-specific”).

99

 See, e.g., United States v. Dairy Farmers

of Am., Inc., No. 6:03-206 (Apr. 24, 2003)

(complaint), available at http://www.usdoj.gov/atr

/cases/f200900/200972.pdf. 

100

 There was some disagreement among

Hearings participants about the extent of price

discrimination that actually occurs with respect to

physician services. Compare Schwartz 4/25 at 16

(noting that there was a good deal of evidence in

Aetna that “Aetna and other payors did not set their

prices to physicians uniformly on a market wide

basis, but rather, negotiated prices separately with

individual physicians or individual physician

groups”), with Frech 4/24 at 221 (stating that, once

one looks past large physician groups, health care

insurers do not engage in much price discrimination

with respect to physicians).

101

 See Foreman 4/24 at 175-77.

102

 See Schwartz 4/25 at 17; Foreman 4/24

at 175-77. This panelist added that the different

billing, quality assurance, and other systems that

insurers use can make it difficult for physicians to

switch to serving patients covered by another health

care insurer. Id. at 176-77.

103

 See Foreman 4/24 at 175-76; Frech 4/24

at 190.

104

 See Foreman 4/24 at 175-76. A related

question to the issue of physician mobility is how

quickly must provider migration remedy a

monopsony situation to make an antitrust remedy

inappropriate. See Frech 4/24 at 190. 
17

care insurers locally.105 These panelists also

suggested that physicians facing a

monopsonist may be able to respond by

filling their practices with cash paying

patients, closing their practices (i.e., not

taking on new patients from a health care

insurer), or encouraging existing patients

enrolled in the monopsonist health care

insurer to change to other health care

insurers.106 The Agencies believe these

competing claims are fact-specific empirical

propositions that can only be resolved in the

context of a particular matter.

C. Competitive Effects

1. Insurer Market Share and the

Cost of Provider Withdrawal

Two recognized analyses of market

share in the context of health care insurer

monopsony are: (1) the health care insurer’s

locality-wide share, which is the health care

insurer’s market share of patients or patient

dollars in a local market and (2) the health

care insurer’s share of each physician’s

business.107 The locality-wide share

indicates the size of the pool of patients

available to the provider, if that provider

were no longer to treat the monopsonist

health care insurer’s patients.108 

The share of each provider’s

business, which matters only because there

are switching costs, shows the number of

patients a provider would have to replace, if

the provider were no longer to treat the

health care insurer’s patients.109 If either

type of market share is high, a provider faces

high per-patient replacement costs if the

provider no longer treats the health care

insurer’s patients.110 If both market shares

are high (and other factors are present) then

a health care insurer merger or health care

insurer monopsony conduct could allow the

insurer to impose significant price

reductions on a nontrivial number of

providers.111

It is difficult, in the abstract, to state

market share thresholds for such monopsony

concerns. In part, this is because

determining the existence of monopsony

power requires the Agencies and courts to

look at other factors in addition to the health

care insurer’s market share. The classic

elements of monopsony power have been

described as: (1) a large market share on the

part of the purchaser; (2) an upward sloping

or somewhat inelastic supply curve in the

input market; and (3) an inability or

unwillingness for new purchasers to enter

the market or current purchasers to expand

the amount of their purchases in the

market.112

105

 See McCarthy 4/24 at 163-64, 189.

106

 See id. at 213-214; McCarthy 4/25 at

135; Miles 4/24 at 213.

107

 See Schwartz 4/25 at 17-19.

108

 See id. at 18.

109

 See id. at 19.

110

 See id. at 18-20.

111

 See id. at 21-22.

112

 See Miles 4/25 at 35-36. Some disagree

on whether the physician supply curve is upward

sloping or inelastic in many markets. Compare

McCarthy 4/24 at 217 (indicating that the physician

supply curve may be flat in many areas due to excess

capacity), with Foreman 4/24 at 218 (stating that

there is not “evidence of excess supply” and

“depending on the specialty ... [there are] some

intermediate term concerns about supply.”).
18

2. Distinguishing Lawful From

Unlawful Behavior

Of course, even if a health care

insurer has monopsony power, the issue for

antitrust purposes is whether the health care

insurer has obtained or maintained that

power through improper means.113 If

reimbursement levels are low due to

lawfully obtained and exercised health care

insurer market power, then there is no

antitrust violation. 

One area of health care insurer

activity that may sometimes be confused

with unlawful monopsony behavior is lawful

managed care contracting. Managed care

plans and other health care insurers can

legitimately lower health care provider

prices by increasing competition among

health care providers or engaging in other

activities that lower the costs of provider

services. Indeed, because one of the

purposes of managed care is to lower prices

closer to a competitive level, it can be

difficult to determine when a managed care

purchaser is exercising monopsony power.114

The First Circuit dealt with this issue

in Kartell v. Blue Shield of Massachusetts.

115

In Kartell, physicians sued Blue Shield,

alleging that its prohibition on “balance

billing” was an unreasonable restraint of

trade or an act of monopolization or

attempted monopolization.116 The First

Circuit, in rejecting this antitrust challenge,

assumed for purposes of its analysis that

Blue Shield had market power and that it

used the market “power to obtain ‘lower

than competitive’ prices.”117 The court said

that as long as the prices were not predatory,

or below anyone’s incremental cost, “a

legitimate buyer is entitled to use its market

power to keep prices down.”118

One way to distinguish monopsony

conduct from other market situations is to

look for indicia of such conduct.119 One 

113

 See Miles 4/25 at 43-44.

114

 See Frech 4/25 at 24-25. See also id. at

24-25 (noting that HMOs and PPOs can “improve

competition and lower prices” because they “perform

search[es] for consumers and they provide stronger

incentives for choice of the low-priced sellers”), 28

(also noting that “reducing prices towards the

competitive level is one of the general purposes of

managed care and ... – to the extent it happens – one

of the competitive benefits of managed care and

efficient health plans”).

115 749 F.2d 922 (1st Cir. 1984). 

116

 Id. at 923. Balance billing refers to the

practice whereby a provider bills patients for the

difference between what the insurer pays to the

provider and the provider’s billed charge for the

service. The prohibition on balance billing prohibits

the provider from collecting money, other than

copayments or deductibles, directly from the patient

and requires providers who sign a participating

provider agreement with Blue Shield “to accept as

payment in full an amount determined by Blue

Shield’s ‘usual and customary charge’ method of

compensation.” Id.

117

 Id. at 927. 

118

 Id. at 927-28, 929. The court also cited

to three additional circumstances that argued “against

any effort by an antitrust court to supervise the Blue

Shield/physician price bargain .... First, the prices at

issue are low prices, not high prices .... Second, the

subject matter of the present agreement – medical

costs – is an area of great complexity where more

than solely economic values are at stake .... Third,

the price system here at issue is one supervised by

state regulators.” Id. at 930-31.

119

 See Brewbaker 9/26 at 50-53 (listing

variety of factors indicating that payors lack

monopsony power). See also Timothy J. Muris,
19

panelist suggested possible indicia

including: (1) a decline in market output; (2)

a pattern of provider exit because of low

rates; (3) a large share of total market-wide

reimbursements from the alleged

monopsonist; (4) single rates for specialties

rather than contract negotiations; (5) low

reimbursement levels to providers; (6)

limited opportunities to treat noncommercial

patients; (7) low incomes for physicians and

low profit margins for efficient providers;

(8) no systematic excess capacity by

providers market-wide; (9) few rival health

care insurers; (10) low rates paid by rival

health care insurers; and (11) difficulty of

entry into the health care insurance

market.120 It is important to note that these

indicia are not, individually or collectively,

items that must be proven to show

monopsony conduct. 

3. Lowering Prices Below the

Competitive Level

Some have said that the Agencies

should be concerned whenever a transaction

or practice leads to a lowering of prices.121

A more appropriate way of framing this

issue is that the Agencies should be

concerned only if the transaction or practice

leads to prices below competitive levels. Of

course, this requires a determination of the

“competitive pricing level,” which is a

daunting task.122 Health care prices can be

defined in a number of different ways, and

even with an agreed-upon benchmark for

competitive reimbursement, it can be

difficult to know whether the price paid to

health care providers has changed.123 

4. Monopsony Power Absent

Downstream Market Power

Finally, it should be noted that

payors need not have monopoly power in

downstream markets to have monopsony

power in upstream markets.

124 Thus, in

cases such as Cargill, a monopsony may

affect suppliers but not consumers.125 In

Cargill, the Division challenged a merger

that would have created a monopsony

purchaser of grain in some local markets.126

The merging companies, however, sold

grain in world markets, in which they faced

competition from many other grain sellers.127

Thus, even if the merged firms imposed a

loss on farmers by cutting back the quantity

Everything Old is New Again: Health Care and

Competition in the 21st Century, Speech Before the

7th Annual Competition in Health Care Forum 16-18

(Nov. 7, 2002), available at http://www.ftc.gov/

speeches/muris/murishealthcarespeech0211.pdf

(noting that physicians who entered into consent

agreements to settle FTC allegations of

anticompetitive conduct were not located in areas

with high payor concentration – indicating that the

driving force behind such conduct was not an attempt

to offset monopsony power). 

120

 See McCarthy 4/25 at 65-69. See also

discussion of entry, supra notes 49-69, and

accompanying text. 

121

 See Foreman 4/25 at 122-23. 

122

 See Frech at 25. See also Kartell, 749

F.2d at 927-28 (noting the difficulty of determining

what is a reasonable or competitive price) and infra

Chapter 7 (discussing the difficulties of using price

controls to reflect competitive prices).

123

 See Frech 4/25 at 25-27.

124

 See Schwartz 4/25 at 11-12; Frech 4/25

at 29-30.

125

 See Schwartz 4/25 at 11-12.

126

 See id.

127

 See id.
20

of grain they bought from them, consumers

of the merging companies would not be

harmed because they had numerous other

sources of supply.128 The harm in the

upstream market, however, was sufficient to

prompt the Division to challenge the merger.

D. Conclusion

The Hearings confirmed two

important, interrelated points with respect to

monopsony power in the health insurance

sector. First, under the right circumstances,

monopsony power can be created or

exercised in this industry. The Agencies

consequently need to remain vigilant in

monitoring the market for such situations. 

Second, properly ascertaining whether

monopsony power has in fact been created

or exercised in this industry typically will

involve a case-specific, factually-intense

assessment. As panelists pointed out, “‘low

prices’ by themselves are not an indication

or certainly not proof of monopsony

power,”129 and correctly determining the

presence of monopsony power is “tricky.”130

IV. CURRENT CONTROVERSIES

A. Most Favored Nation Clauses

An MFN clause is a contractual

agreement between a supplier and a

customer that requires the supplier to sell to

the customer on pricing terms at least as

favorable as the pricing terms on which that

supplier sells to any other customer. In

health care markets, large insurance plans

impose these contractual agreements in

contracts with hospitals, physicians, and

other health care providers. MFNs are

sometimes also referred to as “most favored

customer clauses,” “prudent buyer clauses,”

or “nondiscrimination clauses.”

According to panelists at the

Hearings, MFNs may be anticompetitive or

procompetitive, depending on the

circumstances.131 Proponents of MFNs

argue that they allow an insurer to be

confident that the reimbursement it pays a

provider is no greater than the rates paid by

the insurer’s competitors. In certain

situations, however, an MFN clause may

harm competition either by substantially

raising the costs of the insurer’s rivals, or

reducing provider discounting in the

particular market.132

Under either theory, any savings in

provider costs to the firm imposing the MFN

must be weighed against any higher provider

costs incurred by that firm’s rivals.

133 The

128

 See id. at 12.

129 Miles 4/25 at 35.

130 Frech 4/24 at 31-32.

131 Overstreet 5/7 at 146 (noting that

“[t]here’s a fair consensus among economists that

have looked at these things that they can be procompetitive or anticompetitive depending on the

factual circumstances”); Kopit 5/7 at 126, 132-35;

Baker 5/7 at 139-43; Snow 5/7 at 154-55. 

132 As discussed infra notes 148-?, and

accompanying text, MFNs are typically used to

eliminate provider discounting if the insurer is

controlled by providers. 

133

 See Kopit 5/7 at 135-38 (suggesting that

MFNs imposed by insurers with market power are

likely anticompetitive unless they can be shown to

reduce cost, similar to the the Robinson-Patman Act’s

requirement that volume discounts be cost-justified). 

See also Overstreet 5/7 at 148, 190-92 (noting

importance of determining actual impact of MFN in

weighing theoretical claims that lower costs to the

firm imposing the MFN are offset by higher costs to
21

Agencies consider economic justifications

for MFNs when weighing their potential

competitive effects. 

According to some panelists,

justifications for MFN clauses in other

industries are not applicable when applied to

the health care industry.134 For example,

MFNs can facilitate long-term contracts in

industries such as natural gas, where it is

difficult to predict future price changes and

industry conditions. They also can be used

as a substitute “low-cost seller” signal in

industries in which it is difficult and costly

for consumers to search for price

information.135 

These justifications for MFNs likely

are not applicable to the use of MFNs in

health care markets. The “equitable”

argument in favor of MFNs that the largest

buyer in the market is entitled to a quantity

discount and to the best price is not

supported by antitrust economics, but it is

likely to be advanced by large buyers. In

any case, there is no need for a

counterintuitive blanket rule against MFNs. 

There may be situations, however, where an

MFN has an anticompetitive effect and as

noted above, in any investigation, the

agencies would weigh the cost savings to the

largest buyer against higher costs that may

be incurred by that firm’s rivals.

136

1. Prior Cases

The Agencies have brought several

cases involving MFNs.137 Only a few of

those cases have resulted in judicial

opinions, and they provide little guidance

other than that MFNs are not per se

lawful.138 Delta Dental Of Arizona and

RxCare involved provider-controlled

insurers that imposed an MFN in order to

eliminate provider discounting. Vision

Service Plan and Medical Mutual Of Ohio

involved insurers that were not providercontrolled and used their monopsony power

to raise their rivals’ costs. In Delta Dental

of Rhode Island the federal district court

issued an opinion that held that MFNs are

not per se lawful.139

Private litigation has had mixed

results. In both Ocean State and Kitsap v.

Washington Dental, courts found that the

MFN clauses at issue did not violate the

competing firms). 

134 Baker 5/7 at 141-43.

135

 See id. at 142-43.

136

 See generally Snow 5/7 at 156-57

(arguing “that in most cases, the largest buyer is

entitled to a quantity discount and to the best price”). 

See also discussion infra note 153; Kopit 5/7 at 136-

37 (suggesting some providers may have the incentive

to offer smaller insurers lower rates in order to fill

their remaining beds).

137 United States v. Delta Dental Plan of

Ariz., 1995-1 Trade Cas. (CCH) ¶ 71,048 (D. Ariz.

1995); United States v. Or. Dental Ser. 1995-2 Trade

Cas. (CCH) ¶ 71,062 (N.D.Cal. 1995); United States

v. Vision Serv. Plan, 1996-1 Trade Cas. (CCH) ¶

71,404 (D.D.C. 1996); United States v. Delta Dental

of R.I., 943 F. Supp. 172 (D.R.I. 1996); United States

v. Med. Mut. of Ohio, 1999-1 Trade Cas. (CCH) ¶

72,465 (N.D. Ohio 1999); In re RxCare of Tenn.,

Inc., 121 F.T.C. 762 (1996).

138

 e.g., Baker 5/7 at 143-45.

139

 Delta Dental of R.I., 943 F. Supp. at 176. 

In a case involving enforcement of an administrative

subpoena, the 6th Circuit made a similar observation. 

Blue Cross & Blue Shield of Ohio v. Klein, 117 F.3d

1420 (6th Cir. 1997) (unpublished opinion). See also

Kopit 5/7 at 127-31; Overstreet 5/7 at 153. 
22

antitrust laws.140 In Ocean State, the First

Circuit concluded, as a matter of law, that a

prudent buyer policy, essentially identical to

the MFN clauses in other antitrust cases, did

not constitute monopolization in violation of

Section 2 of the Sherman Act.141 In

Marshfield Clinic, the Seventh Circuit stated

that the suggestion that the MFN established

a price-floor for physicians’ prices is an

“ingenious but perverse argument.”142 The

court acknowledged that an MFN might be

misused to anticompetitive ends, but

concluded there was no evidence of such

conduct in that case.143

Other courts have recognized the

anticompetitive potential of MFN clauses. 

In United States v. Eli Lilly, the court found

that the MFN clause explained the existence

of prices higher than the competitive price,

although there was no evidence of

conspiracy.144 In Reazin v. Blue Cross &

Blue Shield, the court found that the MFN

provided evidence of Blue Cross’s market

power, and the Tenth Circuit explicitly

stated that the Ocean State decision did not

alter its conclusion with respect to Blue

Cross’s possession of monopoly power.145

Several other cases also have discussed the

anticompetitive potential of MFN clauses.146 

2. Competitive Concerns

MFNs, as used in health care

markets, may result in competitive harm

based upon two different theories.147 First,

MFNs can facilitate coordination among

health care providers in certain instances

where the insurer imposing the MFN is

provider-controlled.148 Under these

circumstances, the MFN can make cheating

on a cartel price more transparent and

140 provide an enforcement mechanism that can

 Ocean State Physicians Health Plan, Inc.

v. Blue Cross & Blue Shield of R.I., 883 F.2d 1101

(1st Cir. 1989); Kitsap Physician Serv. v. Wash.

Dental Serv., 671 F. Supp. 1267 (W.D. Wash. 1987). 

For a discussion of Ocean State, see Kopit 5/7 at 124-

27, 129-30, 134-35 and Snow 5/7 at 154-57. 

141

 Ocean State, 883 F.2d 1101 (1989). See

also Kopit 5/7 at 125-27. But see Independence Blue

Cross, July 23, 2003, Letter re: FTC/DOJ Hearings

on Health Care and Competition Law and Policy 1

(Public Comment) (arguing that Independence Blue

Cross’s “Prudent Buyer” clause is not an MFN

clause).

142

 Marshfield Clinic, 65 F.3d at 1415. 

143

 Id. See also Baker 5/7/03 at 144;

Jonathan Baker, Competitive Effects of Most Favored

Nation Clauses in Health Care Markets 12 (5/7)

(slides) [hereinafter Baker Presentation], at

http://www.ftc.gov/ogc/healthcarehearings/docs/0305

07baker.pdf; Kopit 5/7 at 119-21 (“One of the

interesting things about that is there was no MFN in

the case .... So, to say it was gratuitous, I’d say that’s

a fair statement.”).

144 United States v. Eli Lilly, 24 F.R.D. 285

(D.N.J. 1959).

145 Reazin v. Blue Cross & Blue Shield of

Kan., Inc., 899 F.2d 951, 971 n.30 (10th Cir. 1990). 

The Tenth Circuit noted that it did not need to reach

the question addressed in Ocean State of whether an

MFN clause could itself violate Section 2. Id. at 971

n.30.

146 Williamette Dental Group v. Oregon

Dental Serv. Corp., 882 P.2d 637 (Or. App. 1994); In

re Brand Name Prescription Drugs, 288 F. 3d 1028,

1033 (7th Cir. 2002); Baker 5/7 at 141-45; Baker

Presentation, supra note 143, at 8-12. 

147

 See, e.g., Baker 5/7 at 139-40.

148

 See Baker 5/7 at 139-40; Overstreet 5/7

at 146-47
23

be used against a price-cutting provider.149 

For example, according to the

allegations in RxCare, the Tennessee

Pharmacists Association organized most of

the pharmacies in Tennessee into a single

provider network that used an MFN clause

to discourage discounting and effectively

create a price floor. One of RxCare’s stated

goals was to “define and promote

appropriate compensation to pharmacists for

patient care.”150 The Commission’s

complaint alleged that RxCare and the

association used the MFN clause to restrain

“rivalry in the provision of pharmacy benefit

prescription services among Tennessee

pharmacies ... [and harm] consumers by

limiting price competition and entry into

pharmacy network services.”151

Second, insurers that are not

controlled by providers may impose MFNs

to deter hospitals or other providers from

granting discounts to competing health

insurers. Under this theory, the MFN may

create a barrier to entry or expansion by the

insurer’s rivals or may raise its rivals’ costs,

thereby making them less effective

competitors.152 Some panelists noted that

providers have less incentive than they

otherwise would to accept lower prices from

another health plan because they will have to

give the lower price to the dominant plan

with which they have the MFN agreement. 

Absent the MFN, panelists noted, some

health insurers may offer new or different

products, such as more restricted provider

panels or tiered co-payments. These

alternative insurers may have a greater

ability to bargain for lower prices because,

unlike many plans, they may have more

flexibility in excluding providers or creating

incentives for patients to choose low cost

providers, panelists explained. Providers

may favor the creation of these plans

because, panelists observed, they may

expand the size of the insured population by

making insurance options available to

people who otherwise could not afford

them.153 

Under this theory, the inability of the

incumbent health plan’s rivals to obtain

discounts may result in the outright

exclusion of rival health plans or new

entrants into the market and allow the

incumbent health plan to maintain or

achieve prices above the competitive

149

 See United States v. Delta Dental Plan of

Ariz., 1995-1 Trade Cas. (CCH) ¶ 71,048 (D. Ariz.

1995); United States v. Oregon Dental Serv., 1995-2

Trade Cas. (CCH) ¶ 71,062 (N.D.Cal. 1995); In re

RxCare of Tenn., Inc., 121 F.T.C. 762 (1996).

150 121 F.T.C. at 763 ¶ 2 (complaint).

151

 Id. at 764 ¶ 8.

152 Baker 5/7 at 140; Overstreet 5/7 at 147-

48. 

153 Hospitals, in order to fill their beds, may

compete with each other at the margin for the

additional patients that smaller insurers can provide

them. A hospital, similar to an airline seeking to fill

the seats on a flight, may be willing to serve those few

additional patients at rates closer to its marginal cost

than it would the bulk of its business. Kopit 5/7 at

136-37. The airline analogy may not capture the full

implications of this competition among hospitals over

incremental sales, however, because passengers on an

airplane do not compete with each other in a

downstream market, whereas insurers compete with

each other in the sale of health care insurance. The

disparity in hospital rates among competing plans

may affect that competition to a significant degree. 

See Snow 5/7 at 156-57.
24

level.154 In Reazin v. Blue Cross & Blue

Shield, for instance, the court noted there

was testimony that alternative delivery

systems, such as HMOs, “were the first real

challenge to our traditional system of

delivering financing of care ... [and] that

Blue Cross’s most favored nations clause

hindered the development of alternative

delivery systems, thereby interfering with

the introduction of competition.”155 The

Tenth Circuit observed that, at least in the

Kansas market, there were significant

barriers to entry and Blue Cross’s actions

were designed to maintain those barriers.156

Under either of these theories,

market power is an important part of the

analysis. Panelists noted that there is no

absolute market share threshold above which

a firm may be able to employ an MFN

anticompetitively.157 Indeed, the relevant

source of market power (and thus the

relevant market share inquiry) depends on

whether the theory of harm focuses on

seller-side or buyer-side imposition of the

MFN. For example, where the theory of

harm focuses on the first theory (facilitation

of provider coordination), the collective

market power of the participating providers

is an important consideration. 

Conversely, where the theory of

harm focuses on the second theory (raising

rivals’ costs or abuse of health insurer

monopsony power), the insurer’s market

power upstream is a relevant inquiry.158

Indeed, most of the cases finding MFN

clauses anticompetitive involved plans with

a dominant market share requiring providers

to agree to an MFN clause or a dominant

provider network requiring providers it

contracts with to agree to the MFN clause.159

154 Baker 5/7 at 140; Baker Presentation,

supra note 143, at 6. 

155 899 F.2d 951, 970 (10th Cir. 1990). For

example, Blue Cross had terminated its contract with

one hospital that was participating in an HMO. 

Moreover, it sent a letter to all other hospitals in its

service area warning that if they decided to pursue

vertical integration arrangements with insurers, Blue

Cross would be forced to reassess its relationship

with the hospital, and “[h]ospitals that wish to

continue their current relationship with Blue Cross

and Blue Shield, that do not seek to enroll subscribers

in other programs, and that wish to cooperate with

Blue Cross and Blue Shield as a major marketing arm

of the hospital, will experience no change in the

contractual relationship that has historically served

Kansans well.” Id. at 959 n.8.

156

 Id. at 972 & n.32 (rejecting Blue Cross’s

attempt to rely on Ball Memorial Hosp. Inc. v.

Mutual Hospital Insurance, 784 F.2d 1325 (7th Cir.

1986), for the proposition that entry barriers in the

health care financing market were always low). The

10th Circuit noted that entry barriers might be low in

Indiana, where Blue Cross only had 27 percent of the

market and there were 500 insurers currently doing

business in the state, but they were not low in Kansas. 

Interestingly, the plaintiff hospitals in Ball

Memorial were attempting to prevent Blue Cross

from entering the market with a PPO product that

competed with many of their own. 784 F.2d at 1339. 

In Reazin, Blue Cross was attempting to prevent the

hospitals from participating in alternative delivery

systems like HMOs and PPOs that might compete

with Blue Cross’s traditional indemnity plans. 899

F.2d at 964-65.

157

 See Kopit 5/7 at 132-33, 194-95;

Overstreet 5/7 at 147-48.

158

 See Kopit 5/7 at 132-3; Overstreet 5/7 at

147-48.

159

 See, e.g., RxCare of Tenn., 121 F.T.C.

762 (1996); Reazin, 899 F.2d at 971 n.30 (“[T]he

most favored nation clause here is not itself

challenged as unlawful monopolization. Rather, it is

only considered as evidence of, or as contributing to,

Blue Cross’ market or monopoly power”). See also

Baker 5/7 at 139 (noting that the cases in which
25

Panelists stated that, if the entity requiring

the MFN clause has market power, it is more

likely that the MFN clause will have

anticompetitive effects.160

According to one panelist, MFN

clauses may facilitate coordination among

providers, and dampen competition. 

Coordination is facilitated because providers

have less incentive to cheat on a price

agreement by accepting lower prices from

another health plan because they will have to

give the lower price to the dominant plan

with which they have the MFN agreement. 

Moreover, rival health plans may have less

incentive to bargain with providers, because

they know they cannot obtain a competitive

advantage.161 

Conclusion. The Agencies will

continue to challenge the use of MFN

clauses when the evidence suggests that such

terms violate antitrust law. 

B. Mandated Benefits

1. Claimed Benefits of Mandates

Proponents view mandates as a way

of providing access to benefits valued by

beneficiaries but withheld by employers or

insurers. Proponents see health care as a

“merit good,” “the provision of which

should not be limited to those who are able

to pay for medical care and who see the

wisdom in doing so.”162 Proponents also

argue that mandates correct for insurance

market failures, and that the required

inclusion of some benefits in all health

insurance plans can be welfare enhancing.163

More concretely, one commentator

has suggested that plans have an incentive to

offer inefficiently inadequate benefits

because health insurance contracts are, by

necessity, incompletely specified, and

mandates prevent post-contractual

opportunism and the exploitation of

informational asymmetries.

164 The same

commentator stated that mandates may also

help compensate for the bounded rationality

of consumers in choosing among health

insurance plans.165 

MFNs receive antitrust scrutiny usually involve a

dominant health plan); Kopit 5/7 at 131.

160

 See Overstreet 5/7 at 147 (noting that the

“concern in the upstream market is most likely to be a

competitive one when that market is concentrated, is

subject to oligopoly coordination; in the downstream

market, the concern is most likely to be a real issue

when the firm imposing the MFN has a large share of

the market”); Baker 5/7 at 139-140. But see Snow

5/7 at 156 (arguing that an MFN is “primarily a

device to prevent price discrimination. . . .[and] that

in most cases, the largest buyer is entitled to a

quantity discount and to the best price”).

161 Baker 5/7 at 139-41; Baker Presentation,

supra note 143, at 5. See also RxCare of Tenn., 121

F.T.C. 762. 

162 Russell Korobkin, The Efficiency of

Managed Care “Patient Protection” Laws: 

Incomplete Contracts, Bounded Rationality, and

Market Failure, 85 COR NELL L. REV. 1, 8 (1999). 

See also Lawrence H. Summers, Some Simple

Economics of Mandated Benefits, 79 AM. ECON. REV.

177, 178 (May 1989).

163 Korobkin, supra note 162, at 87-88.

164

 Id.

165

 Id. See also Summers, supra note 162,

at 178 (suggesting that individuals may “irrationally

underestimate the probability of catastrophic health

expenses, or of a child’s illness that would require a
26

Commentators have also suggested

that mandates can help solve the problem of

adverse selection.166 According to these

commentators, if employees have more

information about whether they will face

high medical bills than employers do,

employers that provide generous fringe

benefits may end up attracting employees

who are disproportionately likely to make

expensive claims. This dynamic might

discourage employers from offering

comprehensive benefits to employees. 

Two panelists noted that many

insurers and employers might be reluctant to

offer a benefit that attracts high cost

employees or beneficiaries.167 By requiring

all insurance plans to cover certain costly

illnesses, the risk is spread across a large

number of employers/health insurers. 

Finally, one panelist asserted that mandates

may be necessary to prevent discrimination

against particular conditions.168 In this view,

mandates ensure parity of access to

treatment.169

Proponents of mandates generally

argue that the costs of an individual

proposed mandate are low. For example,

one panelist stated that mental health parity

laws would, on average, result in premium

increases of less than one percent.170

Proponents of mandates also suggest that

any analysis of the cost of the mandated

benefit must consider the consequences of

failing to provide the mandated coverage.171 

2. Claimed Disadvantages/

Inefficiencies of Mandates

Opponents of mandated benefits

argue that forced inclusion of insurance

benefits raises premium costs, and may lead

employers to opt out of providing health

sustained leave”); Frank A. Sloan & Mark A. Hall,

Market Failures and the Evolution of State

Regulation of Managed Care, 65 LAW & CONTEMP.

PROBS. 169, 173 (Fall 2002) (“[T]he complexity of

the contract may make it very costly for the ordinary

consumer to make comparisons among the few

alternative plans most consumers have.”).

In such situations, consumers are likely to

adopt choice strategies that have various weaknesses. 

Herbert A. Simon, Rational Choice and the Structure

of the Environment, 63 PSYCHOL. REV. 129 (1956);

James G. March, Bounded Rationality, Ambiguity,

and the Engineering of Choice, 9 BELL J. ECON. 587,

590 (1978). For example, the greater the number of

plan attributes that must be compared and weighed,

the more likely it is that consumers will simply focus

on the price of the plan. Korobkin, supra note 162, at

88. 

166

 See Gitterman 6/25 at 19; Hyman 6/25 at

85. See also Summers, supra note 162, at 179.

167 Hyman 6/25 at 85; Greenberg 9/9/02 at

179-180 (noting risk selection problems in the health

care market). Cf. Herzlinger 5/27 at 92 (suggesting

that providers who treat sicker patients should receive

higher payments). 

168 Ibson 6/25 at 19 (noting employers often

single out “mental health disorders and impose

restrictive limits on care”).

169

 See id. at 22-24.

170

 See id. at 23 (referring to studies

performed by PricewaterhouseCoopers and the

National Advisory Mental Health Council). But see

Knettel 6/25 at 78-79 (arguing that flexible

interpretations of parity laws and carve out

arrangements have made impact of parity 

requirements “tolerable”).

171 Ibson 6/25 at 24 (arguing that untreated

depression costs the economy $44 billion per year in

lost productivity); Laser 6/25 at 47-48 (noting that

“there was no cost increase due to contraceptive

coverage ... and the savings of contraceptive

coverage outweigh the costs” including savings from

“fewer pregnancies, fewer deliveries, and healthier

newborns”).
27

insurance and employees to drop their

coverage.172 Opponents generally argue that

the market is likely to do a more efficient

job allocating resources between health

insurance and other consumer goods than

the alternatives.173 As one article states, “if

plans compete on price, choice, and quality,

they have incentives to cover services that

yield expected health benefits that are worth

their costs to consumers. Patients who want

comprehensive coverage can choose high

premium plans.”174 

Some assert that mandating benefits

takes away the option of lower-priced

insurance and forces consumers to pay for

insurance they may not want or to go

without coverage at all.175 As one panelist

noted, with mandates “you are banning what

are in effect the low cost health insurance

contractual alternatives ... that should, in

theory, begin to decrease insurance coverage

at least on the margin particularly for price

sensitive buyers.”176

Panelists and commentators noted

that it appears that legislative enthusiasm for

a particular mandate may be based on an

isolated anecdote, with little or no analysis

of costs and benefits.177 Mandates, as one

panelist observed, may create an illusion of

172

 See Kanwit 6/25 at 37-39; Gitterman

6/25 at 8 (“[W]hy mandate Cadillac coverage when

purchasers just want a Chevy.”); MARK A. HALL,

MAKING MEDICAL SPENDING DECISIONS: THE LAW,

ETHICS AND ECON OM ICS OF RATIONING ME CHANISMS

22, 24 (1997) (identifying mandates as an important

source of inefficiency, and observing that

“[e]conomists explain that it usually makes no sense

to mandate or encourage insurance that many

consumers are unwilling to buy.”).

Studies suggest twenty to twenty-five

percent of uninsured Americans lack coverage

because of benefit mandates. GAIL JENSEN &

MICHAEL MORRISEY, MANDATED BENEFIT LAWS AND

EMPLOYER-SPONSORED HEALTH INSURANCE 1 (1999)

(prepared for Health Insurance Ass’n of America),

available at http://www.insureusa.org/research/

jensen.htm; Frank A. Sloan & Christopher J.

Conover, Effects of State Reforms on Health

Insurance Coverage of Adults, 35 INQUIRY 280

(1998). See also Kanwit 6/25 at 38-39; T. Miller

6/25 at 63.

173 RICHARD A. EPSTEIN, MORTAL PERIL:

OUR INALIENABLE RIGHT TO HEALTH CARE? 429

(1997).

174 Patricia M. Danzon, Tort Liability: A

Minefield for Managed Care?, 26 J. LEGA L STUD.

491, 509 (1997). See also David A. Hyman,

Consumer Protection in a Managed Care World: 

Should Consumers Call 911?, 43 VILL. L. REV. 409,

437 (1998) (“Policy sellers must weigh whether

broadening coverage ... [is] worth doing if [it]

price[s] the policy out of the market – or result[s] in a

shift in the nature of coverage from that which is most

appealing to the covered pool as a whole.”).

175 Korobkin, supra note 162, at 22. See

also Kanwit 6/25 at 28 (arguing that mandates “drive

up the costs for employers and consumers”, “may

restrict consumer choice”, “discourage competition

among providers”, and “stifle innovative medical

advances in treatment and diagnosis because they

freeze current practice.”).

176 T. Miller 6/25 at 57.

177

 See, e.g., Kanwit 6/25 at 40 (describing

the New England Journal of Medicine study that

suggested that the mandated 48 hour maternity stay

mandate did not help infant health); Hyman 6/25 at

87 (noting use of “horror stories” to set regulatory

agenda); Clark Havighurst, American Health Care

and the Law: We Need to Talk!, 19 HEALTH AFFAIRS

84, 105 n.7 (July/Aug. 2000) (“Nothing could be

clearer, however, than that the signals that voters

(consumers wearing a different hat and having less

reason to think rationally or fully inform themselves)

send to their representatives do not invite rational

consideration of difficult trade-offs.”); David A.

Hyman, Regulating Managed Care: What’s Wrong

With A Patient Bill of Rights, 73 S. Cal. L. Rev. 221,

237-41 (2000).
28

getting benefits for free.

178 Legislators may

be motivated to pass mandates because they

can deliver a benefit to consumers but not

incur an on-budget cost. In general, tax

revenues are not required to pay for the

mandate, but the mandate is still a tax on

consumers.179 

Others note the need for many

mandates may be questionable; health

insurers have obvious economic incentives

to offer the benefits that consumers desire

and are willing to pay for – facts which cast

doubt on whether most mandates are costjustified.180 Finally, according to some

panelists and commentators, providers of the

mandated benefit are usually the most

vigorous proponents of legislation, making it

more likely that the mandated benefit

constitutes “provider protection” and not

“consumer protection.”181

One panelist noted compliance with

mandates is difficult for employers and

insurers operating in multiple states. When

a carrier or employer wants to provide

uniform benefits across its workforce, it

must adopt an aggregation of the most

restrictive provisions to ensure the offering

complies with all states simultaneously.182

Alternatively, the employer can create a selffunded employee benefit plan, which is not

subject to state mandated benefits laws.183

Commentators and panelists stated

that mandates also limit employers’ ability

to offer health insurance coverage.184 One

panelist described the employer as having a

pie that has a limited number of dollars for

health care coverage. Employers will

eliminate other benefits to offset the cost of

178 Gitterman 6/25 at 9 (“It’s hard for any

voter, consumer or worker to know for sure how he or

she is being affected by what ends up being a

confusing tax. This helps policymakers foster the

illusion that benefits can be provided and no one

bears the cost.”).

179 Uwe E. Reinhardt, Health Insurance for

the Nation’s Poor, 6 HEALTH AFFAIRS 101, 106

(Spring 1987) (“A pseudo-tax is a governmentmandated fiscal transfer among private individuals,

institutions, or business firms that can be referred to

by a name other than tax and that does not flow

through a public budget for which politicians can be

held accountable.”); DANIEL P. GITTERMAN &

ROBERT NORDYKE, PROVIDING CRED IBLE

INFORMATION AND IMPROVING HEALTH INSURANCE

REGULATORY IMPACT ANALYSIS IN CALIFO RNIA: A

REPORT TO THE CALIFORNIA HEALTH CARE

FOUNDATION 2 (1999).

180 Jensen & Morrisey, supra note 172, at 5. 

See also supra note 174, and accompanying text.

181

 See, e.g., Kanwit 6/25 at 39-40

(describing the mandates for autologous bone marrow

transplant (ABMT), a breast cancer treatment for

women for which there were no clinical trials, many

women died from the treatment, and ABMT was no

more effective than the standard treatment); T. Miller

6/25 at 66; Jensen & Morrisey, supra note 172, at 5;

Hyman, supra note 177, at 223. 

182 Knettel 6/25 at 76. Of course, these are

the very employers that may be best able to avoid the

state mandates by self-insuring.

183 The Employee Retirement Income

Security Act (ERISA) largely preempts self-insured

plans from state mandates. Thus, an employer may

avoid state regulation by providing its own insurance. 

See supra Chapter 5. 

184 Jensen & Morrisey, supra note 172, at 9-

10.
29

any mandated benefits.185 According to

several panelists, mandates increase

premiums and decrease wages and other

benefits employers might otherwise offer.186 

Other commentators assert that stateimposed mandated benefits

disproportionately affect small businesses

because they are less able to avoid the costs

of such mandates by self-insuring.187

Although determining the actual cost of an

individual mandated benefit can be difficult,

the aggregate cost of such mandates appears

to account for a substantial percentage of

premium cost.188 

Finally, some commentators have

noted the behavioral economic arguments in

favor of mandated benefits are theoretical,

and not based on empirical evidence

regarding the performance of the health

insurance market.189 Mandate proponents

presented no evidence that consumers

demand insufficient health insurance, and

there is some evidence that many consumers

actually demand excessive health

insurance.190 Mandate proponents presented

no evidence that government intervention is

likely to improve the efficiency of health

insurance benefit design, and there is some

evidence to the contrary.191 

3. Any Willing Provider and

Freedom of Choice Legislation: A

Case Study of Mandates

Any willing provider (AWP) laws

require managed care companies to include

in their networks any provider that is willing

to participate in the plan in accordance with

the plan’s terms.192 Freedom of choice

(FOC) laws are similar to AWP laws, but are

directed at consumers instead of

providers.193 Many states have adopted

AWP and/or FOC laws for at least some

185 Knettel 6/25 at 73-75 (noting that each

time a benefit is mandated that mandate “is going to

be offset by a benefit reduction of equal or greater

cost in some other area”). See also Sloan & Conover,

supra note 172.

186

 See T. Miller 6/25 at 64 (noting that

mandates “can also have offsetting effects in terms of

lower wages, decreased employment, reduced

generosity of fringe benefits as well”). See also

Gitterman 6/25 at 18; T. Miller 6/25 at 57.

187 As the costs of mandates rise, more firms

seek to self-insure to avoid the added expense of state

mandates, but some smaller businesses do not have

the necessary capital to do so. See Jensen &

Morrisey, supra note 172, at 10. As stop-loss

insurance with low attachment points has made selfinsurance available on a broader basis, this problem

has become less significant. 

188

 See Kanwit 6/25 at 37; Gitterman 6/25 at

15 (“One of the things that you have seen in the 1996

mental health parity debate is the incredible wide

range of estimates from each of these different

consulting groups. I think the costs were somewhere

between zero and 8 percent.”).

189

 See generally 6/26 at 6-105; Hyman,

supra note 177, at 234-36.

190 The substantial tax subsidy for

employment-based health insurance encourages

broader and deeper insurance coverage than would

otherwise be the case. Pauly 2/26 at 98; Clark

Havighurst, How the Health Care Revolution Fell

Short, 65 LAW & CONTEMP. PROBS. 55, 69-71 (2002).

191

 See generally Hyman, supra note 177.

192 Michael Vita, Regulatory Restrictions on

Selective Contracting: An Empirical Analysis of

‘Any Willing Provider’ Regulations, 20 J. HEALTH

ECON. 955, 956 (2001).

193

 See, e.g., id. (“[F]reedom of choice

(FOC) laws . . . obligate plans to reimburse for care

obtained from a qualified provider even if the

provider is not a member of the network”)
30

health care providers.194 

Commission staff has expressed

concerns about AWP and FOC laws, noting

that they could have anticompetitive effects

and harm consumers.195 These laws can

make it more difficult for health insurers to

negotiate discounts from providers in

exchange for the higher patient volume that

likely would result from restricted provider

networks.196 They can also limit

competition, by restricting the ability of

insurance companies to structure different

plans with varying levels of choice in

response to consumer demand.197 These

restrictions on competition may result in

insurance companies paying higher fees to

providers, which in turn generally results in

higher premiums, and may increase the

number of uninsured Americans.

 As Commission staff explained in its

most recent advocacy letter on this issue, 

Empirical evaluations of any willing

provider and “freedom of choice”

provisions indicate that these policies

result in higher health care

expenditures. One study found that

states with highly restrictive any

willing provider/freedom of choice

laws spent approximately 2% more

on healthcare than did states without

such policies. This finding likely

reflects the fact that these laws

reduce the ability of insurers to offer

less expensive plans with limited

provider panels. This interpretation

is supported by another study that

found that metropolitan areas with a

high intensity of any willing

provider/freedom of choice

regulation had HMO market shares

approximately 7% lower than

comparable areas without these

provisions. “Freedom of choice”

provisions reduced HMO market

share more than any willing provider

laws.198 

194

 See, e.g., id. (“By one count, 34 states

had enacted some form of FOC or AWP law by

1996”).

195

 See FTC staff comments on proposed

legislation that incorporated any willing provider or

“freedom of choice” provisions in the following

states: Rhode Island (Letter from Office of Policy

Planning et al., to Patrick C. Lynch, Attorney General

(Apr. 8, 2004)), at http://www.ftc.gov/os/2004/04

/ribills.pdf; Massachusetts (Letter from Bureau of

Competition, to John C. Bartley, Representative (May

30, 1989)); New Hampshire (Letter from Office of

Consumer & Competition Advocacy, to Paul J.

Alfano (Mar. 17, 1992)); California (Letter from

Office of Consumer & Competition Advocacy, to

Patrick Johnston, Senator (June 26, 1992)), at

http://www.ftc.gov/opa/predawn /F93/calpharm.htm;

Montana (Letter from Office of Consumer and

Competition Advocacy, to Joseph P. Mazurek,

Attorney General (Feb. 4, 1993)); New Jersey (Letter

from Office of Consumer and Competition Advocacy,

to E. Scott Garrett, Assemblyman (Mar. 29, 1993));

Pennsylvania (Letter from Office of Consumer and

Competition Advocacy, to Roger Madigan, Senator

(Apr. 19, 1993)); South Carolina (Letter from Office

of Consumer and Competition Advocacy, to Thomas

C. Alexander, Representative (May 10, 1993)); and

Nevada (Letter from Bureau of Competition, to David

A. Gates, Commissioner of Insurance (Nov. 5, 1986). 

196

 See, e.g., FTC Staff letter to Rhode

Island, supra note 195, at 6; Greenberg 6/12 at 68-69.

197

 See supra note 196.

198 FTC Staff letter to Rhode Island, supra

note 195. See also Michael A. Morrisey & Robert L.

Ohsfeldt, Do State ‘Any Willing Provider’ and

‘Freedom of Choice’ Laws Affect HMO Market

Share?, 40 INQUIRY 362 (2003/2004). 
31

Many provider groups support AWP

and FOC legislation.199 Commission staff

observed in its most recent advocacy letter

that “several scholars have noted that any

willing provider and ‘freedom of choice’

laws are more likely to appear in states with

limited managed care penetration, and

suggested that these provisions are actually

intended to preempt competition among

providers [provider protection], instead of

protecting the interest of patients.”200

4. Potential Responses to the Demand

for Mandated Benefits

As the number of mandated benefits

has risen, sensitivity to their cost

ramifications has increased. The Unfunded

Mandates Reform Act discourages Congress

from imposing unfunded mandates on other

governmental entities.201 The states have

developed a variety of strategies to weigh

the costs of mandated benefits, with varying

degrees of success.202 

There are four basic models for

mandatory review processes: (1) use of an

independent standing health care

commission or legislative advisory

commission/interim committee; (2) use of

an administrative agency; (3) use of

legislative research or fiscal staff; and (4)

use of proponent prepared and submitted

assessments to the legislative committee.203

Each model has procedural variations in the

review process including how the bills are

referred for evaluation and the specific

requirements of the impact analysis. Some

of the models may be more credible and

provide more objective information than

others. 

Conclusion. For mandates to

improve the efficiency of the health

insurance market, state and federal

legislators must be able to identify services

the insurance market is not currently

covering for which consumers are willing to

pay marginal cost. This task is challenging

under the best of circumstances – and

199

 See, e.g., Gene A. Blumenreich, United

States Supreme Court upholds “any willing

provider” statutes, 71 AANA J. 259 (Aug. 2003)

(Legal Brief of American Ass’n of Nurse

Anesthetists), at http://www.aana.com/legal/legbrfs

/2003/pdfs/p259-262.pdf; American Medical Ass’n,

H-285.984 Any Willing Provider Provisions and

Laws (AMA policy re: “Any Willing Provider” laws,

including opposing federal preemption of state AWP

laws), at http://www.ama-assn.org/apps/pf_new

/pf_online?f_n=browse&doc=policyfiles/HnE/H-285.

984.htm (last visited June 25, 2004); National

Community Pharmacists Ass’n, High Court Upholds

State Any Willing Provider Laws (from AMERICA’S

PHARMACIST, May 2003), at http://www.ncpanet.org

/leg_gov/notes_from_capitol_hill/2003/may.shtml

200 FTC Staff letter to Rhode Island, supra

note 195. But see Blumenreich, supra note 199

(noting that the American Association of Nurse

Anesthetists (AANA) supports AWP legislation,

arguing that these laws prohibit insurance companies

from discriminating against them). 

201 CON GRESS IONA L BUDGET OFFICE, CBO’S

ACTIVITIES UNDER THE UNFUNDED MANDATES

RE FORM ACT, 1996-2000 (2001), available at

ftp://ftp.cbo.gov/28xx/doc2843/UMRA-Paper.pdf;

Unfunded Mandates Reform Act (UMRA) of 1995,

Pub. L. No. 104-4, 109 Stat. 48. The UMRA requires

the Congressional Budget Office (CBO) to prepare an

analysis of the direct costs of any mandates and an

assessment of whether the bill authorizes or otherwise

provides funding to cover the costs of the mandate. 

202 Gitterman & Nordyke, supra note 179.

203 Gitterman 6/25 at 12-13. 
32

benefits are not mandated under the best of

circumstances. In practice, mandates may

limit consumer choice, eliminate product

diversity, and raise the cost of health

insurance. Mandates may also increase the

number of uninsured Americans, as

employers and employees opt out of the

market. 

State and federal policy makers

should consider expressly factoring these

risks into their decision making process, and

develop ways of insulating the process of

mandating benefits from their effects. 

Governments should reconsider whether

current mandates, including AWP and FOC

laws, best serve their citizens’ health care

needs.
CHAPTER 7: INDUSTRY SNAPSHOT AND COMPETITION LAW:

PHARMACEUTICALS 

I. OVERVIEW ........................................................... 1

II. BACKGROUND ON INNOVATION IN THE PHARMACEUTICAL INDUSTRY ... 2

A. Types of Innovation in the Pharmaceutical Industry ....................... 3

1. Discrete Innovation .......................................... 3

2. Incremental Innovation ....................................... 5

B. The Role of Competition in Spurring Pharmaceutical Innovation ............ 5

C. Policy Choices That Could Undermine Innovation and Competition in the

Pharmaceutical Industry ............................................. 7

III. COMMISSION INITIATIVES TO ENSURE CONSUMERS RECEIVE THE 

BENEFITS OF PHARMACEUTICAL COMPETITION ......................... 9

IV. PBMS: OVERVIEW AND POLICY QUESTIONS ........................... 10

A. What is a PBM? .................................................. 11

B. The PBM Formulary .............................................. 12

C. Flow of Payments for Drug Benefits and PBM Services ................... 13

D. Industry Overview ................................................ 14

E. Competition Between PBMs: The Bidding Process ...................... 15

F. Benefits of PBMs: The Evidence to Date .............................. 15

G. Issues Facing the PBM Industry ...................................... 16

1. Transparency .............................................. 16

2. Regulation and Litigation ..................................... 17

3. Integrated Mail Order Pharmacies .............................. 18

V. DIRECT TO CONSUMER ADVERTISING ................................. 18

A. The Effects of DTC Advertising ..................................... 19

B. DTC Advertising of Pharmaceuticals Must Not Be False and Misleading ..... 21
1

CHAPTER 7: INDUSTRY SNAPSHOT AND COMPETITION

 LAW: PHARMACEUTICALS

I. OVERVIEW 

The Hearings examined the impact

of competition law and policy on cost,

innovation, and access to drug products in

the pharmaceutical industry. After

reviewing the importance of patent

protection and competition in spurring

pharmaceutical innovation, the Hearings

focused on the role of pharmacy benefit

managers (PBMs) and the effects of directto-consumer (DTC) advertising on consumer

demand for, and pricing of, pharmaceutical

products. 

Representatives from the

pharmaceutical industry and legal,

economic, and academic experts spoke at the

Hearings on pharmaceutical topic panels,

including: Generics and Branded

Pharmaceuticals (September 10, 2002);

Advertising and Pharmaceuticals: DTC

Advertising and Promotion (September 10,

2002); and Pharmaceuticals: Formulary

Issues (June 26).1 This chapter provides a

brief overview of the drivers of competition

for pharmaceutical products, discusses

Commission initiatives in the

pharmaceutical industry and highlights the

contentious public issues surrounding PBMs

and DTC advertising.

To date, most empirical evidence

suggests that PBMs have lowered costs for

health plan sponsors. Nonetheless, the use

of PBMs as intermediaries between

pharmaceutical manufacturers and health

plan sponsors has raised public concern

about whether PBMs increase pharmacy

benefit costs for health plan sponsors and

their enrollees. Pursuant to a legislative

directive, the Commission is examining one

particular aspect of these allegations –

whether it costs more for a health plan

sponsor to use mail order pharmacy services

integrated with a PBM than to use nonintegrated mail order or retail pharmacies. 

Similarly, the effects of DTC

advertising have been subject to debate. 

Currently available empirical evidence does

not support the allegations that DTC

advertising increases inappropriate

prescription of, or prices for, pharmaceutical

products. Indeed, research shows that

truthful and non-misleading advertising

generally benefits consumers by providing

them with useful information about their

health care and treatment options.2

Nevertheless, definitive conclusions await

the development of better empirical

1

 A complete list of participants on these

and other panels is available infra Appendix A and in

the Agenda, at http://www.ftc.gov/ogc/healthcare

hearings/completeagenda.pdf. These issues were also

considered at a workshop held by the Commission on

September 10, 2002. A complete list of participants

in the workshop is available infra Appendix A and at

http://www.ftc.gov/ogc/healthcare/. 

2

 See, e.g., PAULINE M. IPPOLITO & JANIS K.

PAPPALARDO, FEDERA L TRADE COMM’N,

ADVERTISING NUTRITION & HEALTH: EVIDENCE

F ROM FOOD ADVERTISING 1977-1997 (2002),

available at http://www.ftc.gov/opa/2002/10

/advertisingfinal.pdf; PAULINE M. IPPOLITO & ALAN

D. MATHIOS, FEDERA L TRADE COMM’N,

INFORMATION AND ADVERTISING POLICY: A STUDY

OF FAT AND CHO LESTERO L CONSUMPTION IN THE

UNITED STATES, 1977-1990 (1996).
2

evidence about the effects of DTC

advertising of prescription drugs. 

II. BACKGROUND ON

INNOVATION IN THE

PHARMACEUTICAL

INDUSTRY

The role of prescription

pharmaceutical drugs has changed

significantly over the last 25 years. 

Medicines now exist to treat

conditions that previously had no

treatment or required lengthy

hospital stays and/or surgery,

allowing health care providers to

employ less invasive treatments.3 Advances

in science and technology have given

researchers more sophisticated knowledge of

the root causes of diseases. Scientists can

more effectively design medicines to attack

specific diseases, resulting in the invention

of new medicines.4

U.S. spending on pharmaceutical

products mirrors this changing role. U.S.

spending on pharmaceuticals increased to

$140.6 billion in 2001, more than triple the

amount in 1990.5 Total U.S. spending for

drug products accounts for approximately 11

percent of personal health care spending.6

Figure 1 shows the annual rate of increase in

spending on prescription pharmaceuticals

during the last decade.7 One report

estimates that approximately half of the

increase in spending is due to increased

utilization, and that the remainder of the

increase is split evenly between increases in

retail prices and increases in the use of more

expensive drugs.8

This increase in spending for

pharmaceutical products has been coupled

with an increase in research and

development (R&D) spending to develop

and bring to market new pharmaceutical

3

 PHARM ACEUTICAL RESEARCH &

MANU FACTU RERS O F AMERICA (PHRMA), INSIGHTS

2003: HIGHLIGHTS FROM THE PHARMACEUTICAL

INDUSTRY PRO FILE 3 (2003), available at http://www.

phrma.org/publications/publications//2003-10-07.892

.pdf.

4

 Id.

5

 Kaiser Family Found., Prescription Drug

Trends 1 (May 2003), at http://www.kff.org/rxdrugs

/loader.cfm?url=/commonspot/security/getfile.cfm&P

ageID=14267.

6

 Id.

7

 Centers for Medicare & Medicaid

Services, Health Accounts: National Health

Expenditures 1965-2013, History and Projections by

Type of Service and Source of Funds: Calendar

Years 1965-2013, at http://www.cms.hhs.gov

/statistics/nhe/default.asp#download (last modified

Mar. 24, 2004).

8

 Kaiser Family Found, supra note 5, at 2. 

See also Bhattacharjya 9/10/02 at 173. 
3

products. From 1990 to 2001, annual R&D

spending in the pharmaceutical industry

increased from $8 billion to $30 billion.9

The Commission examined

extensively the drivers behind this increased

R&D spending and pharmaceutical

innovation in its October 2003 Report, To

Promote Innovation: The Proper Balance of

Competition and Patent Law and Policy

(FTC Patent Report).

10 The FTC Patent

Report found both patents and competition

play an essential role in spurring innovation

in the pharmaceutical industry. Patents spur

innovation in several different ways. First,

patents create incentives for brand-name

companies to innovate by excluding others

from making, using, or selling a claimed

invention for a specific period of time. 

Second, patents disclose to the public

information that might otherwise remain a

trade secret. Such disclosure encourages

innovation by giving generic companies an

opportunity to design around brand-name

patents.11 Panelists at the Health Care

Hearings supported the FTC Patent Report’s

conclusion that patent protection is essential

to innovation in the pharmaceutical

industry.12 Innovation in this industry is

costly and unpredictable as it requires

significant amounts of pioneering research

to discover and test new drug products. 

Patent protection allows pharmaceutical

firms to recoup the substantial capital

investments made to discover, test, and

obtain regulatory approval of these new drug

products. Box 7-1 references some of the

empirical studies of the role of patents in

spurring innovation in the pharmaceutical

industry. 

A. Types of Innovation in the

Pharmaceutical Industry 

The FTC Patent Report describes

two main types of innovation: (i) discrete

innovation; and (ii) incremental

innovation.13 Innovation can occur at many

points along the continuum, from discrete to

incremental, but these categories help

classify innovation in the pharmaceutical

industry. 

1. Discrete Innovation

Discrete innovation focuses on the

“discovery and development of new

chemical or molecular entities to make small

9

 PHRMA, supra note 3, at 6 (these

expenditures are not adjusted for inflation).

10

 See FEDERA L TRADE COMM’N, TO

PROMO TE INNOVATION: THE PROPER BALANCE OF

COMPETITION AND PATENT LAW AND POLICY (2003)

[hereinafter FTC PATENT REPORT], available at

http://www.ftc.gov/os/2003/10/innovationrpt.pdf. 

The report also described the regulatory process used

by the Food and Drug Administration to ensure

pharmaceutical products are safe and effective. Id. §

3, at 6-9.

11

 Id. § 3, at 9 (“Panelists reported that

patent protection promotes innovation in the

pharmaceutical industry by creating incentives for

brand-name companies to innovate, and by disclosing

inventions, thereby encouraging generic companies to

innovate by designing around brand-name company

patents.”).

12 Bhattacharjya 9/10/02 at 177; Glover

9/10/02 at 182-83; Schultz 9/10/02 at 211; Lock

9/10/02 at 220-21; McCluskey 9/10/02 at 221.

13 Although these are the two main

categories, innovation may occur somewhere between

these two types. FTC PATENT REPORT, supra note

10, at 4.
4

Box 7-1 Empirical Studies on the Role of Patents in Spurring Innovation in the Pharmaceutical

Industry

Empirical studies have shown that patents play an essential role in spurring innovation in the

pharmaceutical industry. One study conducted by Edwin Mansfield analyzed a random sample of 100

firms, excluding very small firms, from twelve broadly defined industries. The study found patents to

be essential for the pharmaceutical and chemical industries in developing or introducing thirty percent

or more of their inventions. See Edwin Mansfield, Patents and Innovation: An Empirical Study, 32

MGMT. SCIENCE 173, 174-75 (1986); see also FTC, PATENT REPORT § 2, at 11 (citing Mansfield

study). The pharmaceutical industry participants reported that “60% of inventions would not have

been developed and 65% would not have been commercially introduced absent patent protection.” 

FTC, PATENT REPORT § 2, at 11 (citing Mansfield study); Mansfield, supra, at 175. 

Another study by Richard C. Levin, Alvin K Klevorick, Richard R. Nelson and Sidney G. Winter

analyzed survey responses from 650 R&D managers representing 130 lines of business. This study

found patents were especially important in the pharmaceutical drug industry to prevent duplication. 

See Richard C. Levin et al., Appropriating the Returns from Industrial Research and Development, in

BROOKINGS PAPERS ON ECONOMIC ACTIVITY 795-96 (1987); see also FTC, PATENT REPORT § 2, at 11

(citing Levin, Klevorick, Nelson and Winter study). 

A more recent study by Wesley M. Cohen, Richard R. Nelson and John P. Walsh found that in the

pharmaceutical industry patents were effective appropriability mechanisms for more than 50% of all

product innovations. WESLEY M. COHEN ET AL., PROTECTING THEIR INTELLECTUAL ASSETS:

APPROPRIABILITY CONDITIONS AND WHY U.S. MANUFACTURING FIRMS PATENT (OR NOT) 32 tbl.1

(Nat’l Bureau of Econ. Research, Working Paper No. 7552, 2000), at

http://papers.nber.org/papers/w7552.pdf; see also FTC, PATENT REPORT § 2, at 11-12 (citing Cohen,

Nelson and Walsh study).

molecule drug products.”14 The benefits of

investing large amounts of time and money

into such discoveries can be very high. For

example, “[t]he discovery of a chemical

molecule that is both efficacious and safe for

human usage can result in a totally new drug

product.”15 The benefits of discrete 

innovation, however, do not come without

high fixed costs and risks that the effort will

not produce a marketable product. Brandname companies can spend 10-15 years on

development for a new drug before the

product enters the market.16 During this

time brand-name companies incur

significant costs at a high risk that their

product may not make it out of clinical

trials.17

14

 Id. at 4-5.

15

 Id. at 5.

16

 Id. at 5; see Gregory J. Glover,

Competition in the Pharmaceutical Marketplace 3

(3/19/02) (stating that the average cost to develop a

new drug is $802 million) [hereinafter Glover (stmt)],

at http://www.ftc.gov/opp/intellect/020319gregoryj

glover.pdf.

17

 See Glover (stmt), supra note 16, at 3

(“On average, economists estimate that it takes 10-15

years to develop a new drug. Most drugs do not

survive the rigorous development process – only 20

in 5,000 compounds that are screened enter
5

2. Incremental Innovation

Incremental innovation “consists of

enhancing known chemical entities by

formulating new dosage forms or additional

methods of use for existing chemical

entities.”18 The term “incremental”

generally refers to advances in technology

that are built on the features or elements of

existing technology.19 Drugs formed this

way are referred to as incrementally

modified drugs (IMDs).

20

The FTC Patent Report describes

three ways incremental innovation is

achieved. One is through new formulations,

which include such things as changes in

dosage forms or new ways of administering

approved drugs. The second method is

combining two previously approved active

ingredients to form a new product. The third

is the use of derivatives of previously

approved drugs to form a new product.21

There are a variety of views about the

benefits of these modified drugs, ranging

from the view that IMDs bring significant

health enhancements to consumers to the

view that IMDs only serve to extend a

brand-name company’s “patent monopolies

beyond the patent expiry of the new

chemical entity ... by a matter of years, not

days or weeks or months.”22

B. The Role of Competition in

Spurring Pharmaceutical

Innovation 

Several panelists at the health care

hearings highlighted the importance of

competition to spur innovation. For

example, some panelists suggested that the

incentives to innovate provided by patent

rights should be balanced against the

competition provided by generic drugs.23

The FTC Patent Report has articulated how

competition spurs pharmaceutical

innovation. First, brand-name companies

with patented drugs are increasingly

competing with one another, particularly

within the same therapeutic class. Second,

provisions in the Hatch-Waxman

Amendments have fostered competition

from generics by streamlining the generic

drug approval process.24 

Competition Among Brand-Name

Companies. The FTC Patent Report

indicated that brand-name pharmaceutical

companies believe that competition among

brand-name companies continues to increase

because the period of market-exclusivity

between the introduction of a breakthrough

preclinical testing, and only 1 drug in 5 that enters

human clinical trials is approved by the FDA as being

both safe and effective.” ).

18 FTC PATENT REPORT, supra note 10, at 8.

19

 Id. at 8; see also THE NAT’L INSTITUTE

FOR HEALTH CARE MGMT., CHANGING PATTERNS OF

PHARM ACEUTICAL INNOVATION 5 (2002) [hereinafter

NIHCM, INNOVATION REPORT], available at http://

www.nihcm.org/innovations.pdf.

20 NIHCM, INNOVATION REPORT, supra

note 19, at 5.

21

 Id. at 5, 8.

22 FTC PATENT REPORT, supra note 10, at 9.

23 Lock 9/10/02 at 220-21; McCluskey

9/10/02 at 221.

24 FTC PATENT REPORT, supra note 10, at

10-12. Another form of competition that may affect

innovation is the competition among generic firms for

the same brand-name product.
6

medicine and the introduction of a

competing therapeutic agent has been

consistently shrinking.25 Although brand-tobrand competition may have increased in

those therapeutic areas in which demand for

the drugs is likely to increase, one

commentator has suggested that price

competition among several drug products in

a therapeutic class can be limited.26

Competition From Generic Drug

Products. The Hatch-Waxman

Amendments govern the generic drug

approval process and have played a major

role in spurring additional competition in the

pharmaceutical industry. The Amendments

“established a regulatory framework that

sought to balance incentives for continued

innovation by research-based pharmaceutical

companies and opportunities for market

entry by generic drug manufacturers.”27 The

Amendments also streamlined procedures

for allowing generic drug applicants an

opportunity to gain FDA approval prior to

patent expiration.28 Since enactment of

Hatch-Waxman in 1984, barriers to

competition have been lowered, and price

competition in those markets with generic

entry has increased significantly.29

Competition from generic drugs can

deliver large price savings to consumers,

because generic drugs are typically far less

expensive than their corresponding brandname versions. A Congressional Budget

Office (CBO) study attempted to quantify

the magnitude of this effect by analyzing

retail pharmacy data from 1993 and 1994. 

The study found that the average price of a

generic prescription was approximately half

of the average price of a brand-name

prescription.30 The CBO estimated that the

availability of generic drugs saved

purchasers between $8 billion and $10

billion in 1994 alone.31 

Other empirical economics literature

also finds procompetitive effects associated

25

 Id. at 10-11. See also Thomas H. Lee,

‘Me-Too’ Products: Friend or Foe?, 350 NEW ENG.

J. MED. 211 (2004).

26 FTC PATENT REPORT, supra note 10, at

10 n.46 (citing NIHCM, INNOVATION REPORT, supra

note 19, at 3).

27 FEDERA L TRADE COMM’N, GEN ERIC

DRUG ENTRY PRIOR TO PATENT EXPIRATION: AN

FTC STUDY, at i (2002) [hereinafter FTC GEN ERIC

DRUG STUDY], available at http://www.ftc.gov/os/

2002/07/genericdrugstudy.pdf; see also FTC PATENT

REPORT, supra note 10, at 11.

28 FTC PATENT REPORT, supra note 10, at

11. Brand-name companies must provide the FDA

with information regarding patents that cover their

drug products, which the FDA then lists in a

publication commonly known as the “Orange Book.” 

For an overview of Orange Book procedures, see

DuPont 9/10/02 at 162-68. See also 21 U.S.C. §

355(j)(7)(A); FTC GENERIC DRUG STUDY, supra note

27, at 25-37 (Chapter 3: “Settlements Related to

Paragraph IV Certifications”). Generic drug

companies that seek FDA approval prior to patent

expiration must give notice to brand-name companies

stating that the listed patents are invalid or not

infringed by the generic product. 

29 FTC PATENT REPORT, supra note 10, § 3,

at 11 n.50-51. 

30 CON GRESS IONA L BUDGET OFFICE, HOW

INCREASED COMPE TIT ION FROM GENERIC DRUGS HAS

AFFECTED PRICES AND RETURNS IN THE

PHARM ACEUTICAL INDUSTRY 28 (1998), available at

http://www.cbo.gov/showdoc.cfm?index=655&seque

nce=0.

31

 Id. at 31. See also McCloskey 9/10/02 at

197-98 (discussing how seniors benefit from generic

drug usage).
7

with the introduction of generic drugs.32

This literature points to significant short-run

competitive impacts of generic entry that can

lead to substantial benefits for consumers of

prescription drugs.33

The FTC Patent Report highlights

two provisions of Hatch-Waxman that have

played a significant role in spurring

increases in generic competition: the 180-

day exclusivity provision and the 30-month

stay provision. Under the 180-day

provision, the first generic firm to file an

application for a new drug is granted 180

days of marketing exclusivity if the generic

firm certifies that its product does not

infringe any of the brand-name company’s

patents on the drug product or if the generic

firm challenges the validity of the brandname company’s patent. During this 180-

day exclusivity period the FDA may not

approve subsequent generic applications for

the same drug.34 The 180-day exclusivity

provision has provided increased incentives

for a generic firm to be the first to file an

application to market its product. As the

first to file, a generic has the potential to

“reap the reward” of being the only generic

product in the market for a set period of

time.35 The provision also provides more

incentives for companies to challenge

patents and develop alternatives to patented

drugs.36 

A brand-name company may receive

a 30-month stay of FDA approval of a

generic applicant if the brand-name

company has received notice of the filing of

such a generic application and files suit for

patent infringement within 45 days of that

notice. 37 According to the legislative

history, the stay allows for the

commencement of a lawsuit and takes into

account the patent owner’s rights while still

encouraging generic entry.38

C. Policy Choices That Could

Undermine Innovation and

Competition in the Pharmaceutical

Industry 

 Both patent protection and

competition have led to substantial

investment and innovation in the

pharmaceutical industry. Certain policy

choices currently being debated, however,

have the potential to undercut certain aspects

of patent protection and competition. These

32

 See, e.g., DAVID REIFFEN & MICHAEL R.

WARD, GENERIC DRUG INDUSTRY DYNAM ICS (Bureau

of Econ. of the Federal Trade Commission, Working

Paper No. 248, 2002), available at http://www.ftc.

gov/be/workpapers/industrydynamicsreiffenwp.pdf;

see also Reiffen 9/10/02 at 204-10; Henry Grabowski

& John M. Vernon, Brand Loyalty, Entry and Price

Competition in Pharmaceuticals After the 1984 Drug

Act, 35 J.L. & ECON. 331 (1992). 

33 FTC PATENT REPORT, supra note 10, at

11 n.52 (an additional benefit is that generic

competition has forced brand-name companies to

develop new products to replenish their revenue

stream).

34 FTC GENERIC DRUG STUDY, supra note

27, at vi.

35 FTC PATENT REPORT, supra note 10, at

12.

36

 Id. at 12; see also Granutec, Inc. v.

Shalala, 139 F.3d 889, 891 (4th Cir. 1998). 

37 FTC PATENT REPORT, supra note 10, at

12; FTC GENERIC DRUG STUDY, supra note 27, at ii;

H.R. REP. NO. 98-857, at 27 (1984), reprinted in

1984 U.S.C.C.A.N. 2647.

38 FTC PATENT REPORT, supra note 10, at

12.
8

new policy choices warrant serious

discussion and debate. 

One policy choice involves price

regulation or price controls to lower

prescription drug prices. Levels of

prescription drug spending have increased in

recent years due to increases in both the

number of prescriptions and prices. Many

consumers face hardships in keeping up with

these escalating prices.39 Thus, the impetus

to consider price regulation or price controls

is understandable.

Before any move in this direction,

however, it is important to review the

history of attempts to solve public problems

through price controls. Price controls have

typically led to significant market place

distortions that harmed consumers.40 Price

controls are also difficult to administer.41

Price controls that reduce prices too low

reduce output and capacity, lower the quality

of the services that are provided, and

diminish the incentives for innovation,

including ongoing R&D.42 Thus, price

controls on pharmaceuticals have a

significant potential to harm consumers.43

Another policy choice surrounds

whether government should use its

purchasing power to purchase drugs on

behalf of consumers and thereby lower

prices. One risk of this approach is the

potential for the government to become a

“monopsonist.” As Chapter 6 reflects,

monopsony is “market power exercised by

buyers rather than sellers” that lets the buyer

“reduce the purchase price by scaling back

its purchases.”44 The 1992 Horizontal

Merger Guidelines (Merger Guidelines)

provide that market power encompasses the

ability of a single buyer “to depress the price

paid for a product to a level that is below the

competitive price and thereby depress

output. The exercise of market power by

buyers (‘monopsony power’) has adverse

effects comparable to those associated with

39 Lock 9/10/02 at 191-92 (describing how

many seniors cannot afford their prescription drugs

and how they sacrifice their financial savings to pay

for necessary medication).

40

 See, e.g., Stuart M. Butler, The Fatal

Attraction of Price Controls, in HEALTH POLICY

REFORM: COMPETITION AND CONTROLS (Robert B.

Helms, ed. 1993). See also W. Duncan Reekie, How

Competition Lowers the Costs of Medicines, 14

PHARMOECONOM ICS 107, 112 (1998); PATRICIA M.

DANZON ET AL., THE IMPACT O F PRICE REGULATION

ON THE LAUNCH DELAY O F NEW DRUGS – EVIDENCE

F ROM TWENTY -FIVE MAJOR MARKETS IN THE 1990S

(Nat’l Bureau of Econ. Research, Working Paper No.

9874, 2003).

41 Butler, supra note 40.

42 A study by the U.S. Department of Health

and Human Services warns that “[g]overnment

controls on drug access and pricing may result in

decreased revenues, which reduce monies available

for research and development” and thus lead to

slowed or delayed development and introduction of

new drugs into the marketplace. OFFICE OF THE

ASSISTANT SECRETARY FOR PLANNING &

EVALUATION, U.S. DEP’T. OF HEALTH & HUMAN

SERVICES, SECURING THE BENEFITS OF MEDICAL

INNOVATION FOR SENIORS: THE ROLE OF

PRESCRIPTION DRUGS AND DRUG COVERAGE 11

(2002).

43 John E. Calfee, Pharmaceutical Price

Controls and Patient Welfare, 134 ANN. INTERN.

MED. 1060 (2001).

44 IIA PHILLIP E. AREEDA ET AL., ANTITRUST

LAW: AN ANALYS IS OF ANTITRUST PRINCIPLES AND

THEIR APPLICATION ¶ 575, at 363 (2d ed. 2002). 
9

the exercise of market power by sellers.”45

A likely market effect of government-based

monopsony power would be not only lower

prices for pharmaceutical products, but also

reduced investment in R&D. Subsequently,

less innovation in the pharmaceutical

industry might result over the longer term. 

Once again, such a marketplace distortion

could lead to significant consumer harm.

III. COMMISSION INITIATIVES

TO ENSURE CONSUMERS

RECEIVE THE BENEFITS OF

PHARMACEUTICAL

COMPETITION

The Commission has pursued

numerous antitrust enforcement actions

affecting both brand-name and generic drug

manufacturers to ensure that consumers

receive the benefits of generic drug

competition. One type of conduct involves

allegedly anticompetitive agreements

between brand-name and generic

companies.46 

In a recent opinion, the Commission

ruled that Schering-Plough Corporation

(Schering), Upsher-Smith Laboratories, Inc.

(Upsher), and American Home Products

(AHP) entered into illegal agreements in

1997 and 1998 to delay the entry of lowercost generic competition for Schering’s

prescription drug K-Dur 20.47 Schering and

its potential generic competitors, Upsher and

AHP, settled patent litigation on terms that

included substantial payments by Schering

to those potential rivals in return for

agreement to defer introduction of the

generic products. The Commission held that

these provisions were unfair methods of

competition and entered an order that would

bar similar conduct in the future.48

The Commission also has taken

antitrust enforcement action against other

types of improper conduct. These actions

charged abuse of FDA regulations governing

patent listings49 and potentially

anticompetitive agreements between rival

generic manufacturers.50 For example, the

Commission alleged a decade-long pattern

of anticompetitive acts by Bristol-Myers

45 U.S. DEP’T OF JUSTICE & FEDERA L TRADE

COMM’N, HORIZONTAL MERGER GUIDELINES § 0.1

(1992), available at http://www.ftc.gov/bc/docs/horiz

mer.htm.

46

 See, e.g., In re Bristol-Myers Squibb Co.,

No. C-4076 (Apr. 14, 2003) (decision and order),

available at http://www.ftc.gov/os/2003/04/bristol

myerssquibb do.pdf; In re Abbott Laboratories, No.

C-3945 (May 22, 2000) (decision and order),

available at http://www.ftc.gov/os/2000/05/

c3945.do.htm; In re Geneva Pharmaceuticals, Inc.,

No. C-3946 (May 22, 2000) (decision and order),

available at http://www.ftc.gov/os/2000/05/

c3946.do.htm; In re Hoechst Marion Roussel, Inc.,

No. 9293 (May 8, 2001) (decision and order),

available at http://www.ftc.gov/os/2001/05/

hoechstdo.htm; FTC v. Mylan Laboratories, Inc., 62

F. Supp. 2d 25 (D.D.C. 1999), available at

http://www.ftc.gov/os/1999/07/mylan.pdf.

47

 In re Schering-Plough Corp. et al., No.

9297 (Dec. 8, 2003) (final order), available at

http://www.ftc.gov/os/adjpro/d9297/031218finalorder

.pdf, appeal docketed, No. 04-10688-AA (11th Cir.

filed Feb. 13, 2004). K-Dur is used to treat people

with low potassium.

48

 Id.

49

 See, e.g., Bristol-Myers, No. C-4076

(decision and order); In re Biovail Corp., No. C-4060

(Oct. 2, 2002) (decision and order), available at

http://www.ftc.gov/os/2002/10/biovaildo.pdf.

50

 In re Biovail Corp. & Elan Corp. PLC,

No. C-4057 (Aug. 15, 2002) (decision and order),

available at http://www.ftc.gov/os/2002/08/bioval

do.pdf.
10

Squibb (BMS) to obstruct the entry of lowprice generic competition for three of its

widely-used pharmaceutical products: two

anti-cancer drugs, Taxol and Platinol, and

the anti-anxiety agent BuSpar. BMS

allegedly abused FDA regulations to block

generic entry, misled the U.S. Patent and

Trademark Office to obtain unwarranted

patent protection, and filed baseless patent

infringement lawsuits to deter entry by

generics. 

According to the FTC’s complaint,

BMS’ illegal conduct protected nearly $2

billion in annual sales at a high cost to

cancer patients and other consumers, who –

being denied access to lower-cost

alternatives – were forced to overpay by

hundreds of millions of dollars for important

and often life-saving medications.51

In addition, the Commission issued

its comprehensive study of this industry,

Generic Drug Entry Prior to Patent

Expiration, in 2002.52 That study examined

whether the conduct that the FTC had

challenged represented isolated instances or

was more typical of pharmaceutical industry

business practices and whether certain

provisions of the Hatch-Waxman Act, which

govern generic drug entry, were susceptible

to strategies to delay or deter consumer

access to generic alternatives to brand-name

drug products.53 This study found that if left

unchecked, certain provisions of the HatchWaxman Act had the potential to be abused,

thereby preventing generic drugs from

becoming timely available.54

To combat this potential for abuse

and resultant delays in generic drug

competition, the Commission recommended

two major changes to the Hatch-Waxman

Act. These recommendations were to

provide only one 30-month stay per brandname drug product and to require

notification to the Commission of certain

types of pharmaceutical company

agreements.55 The recently enacted

Medicare Prescription Drug, Improvement,

and Modernization Act of 2003 (MMA)

includes these two significant

recommendations.56 The Commission will

continue to protect consumers from

anticompetitive practices that inflate drug

prices.

IV. PBMS: OVERVIEW AND

POLICY QUESTIONS

The growth of pharmacy benefit

51 The Commission cooperated in its

investigation of BMS with various state attorneys

general that had filed their own antitrust suits in

federal court. By agreement, the States deferred to

the Commission whereby the FTC assumed the lead

in negotiating the conduct limitation provisions

contained in the proposed order. The states entered

essentially the same injunctive terms in their orders. 

In addition to the injunctive relief, the states will

recover substantial monetary relief. See News

Release, Federal Trade Comm’n, FTC Charges

Bristol-Myers Squibb with Pattern of Abusing

Government Processes to Stifle Generic Drug

Competition (Mar. 7, 2003), at http://www.ftc.gov/

opa/2003/03/bms.htm.

52 FTC GENERIC DRUG STUDY, supra note

27.

53

 Id.

54

 Id. at ii.

55

 See Id. at ii-vi. 

56 Medicare Prescription Drug,

Improvement, and Modernization Act of 2003, Pub.

L. No. 108-173, tit. XI, 117 Stat. 2066 (2003).
11

managers (PBMs) is an important

development in providing consumer access

to prescription drugs. This section describes

PBMs’ role in administering pharmacy

benefit services on behalf of their clients

(i.e., health plan sponsors such as large

employers or health insurance carriers),

provides overview information about the

industry, and highlights the important public

policy issues that panelists discussed. Public

scrutiny has increased recently over PBMs’

role in administering pharmacy benefit

services. To date, the empirical evidence

suggests that consumers with prescription

drug insurance administered by a PBM save

substantially on their drug costs as compared

to cash-paying customers.57 At the behest of

Congress, the Commission is examining one

aspect of the PBM industry – whether

PBMs’ mail order pharmacies save money

for health plan sponsors and consumers as

compared to retail pharmacies and mail

order pharmacies not owned by PBMs. 

Congress has required the Commission to

complete this study by June 2005.

A. What is a PBM?

PBMs manage the pharmacy benefit

of group health plan sponsors, such as HMO

plans, self-insured employers, indemnity

plans, labor union plans, and plans covering

public employees.58 When an enrollee in

one of these plans purchases a drug at a

retail pharmacy, he or she presents a health

plan card identifying the source of insurance

coverage. The pharmacy will transmit the

insurance coverage information to the PBM,

which verifies coverage and determines if

the plan covers the prescribed drug, what the

plan owes as direct payment to the

pharmacy, and what the enrollee’s copayment will be (if any). The PBM

transmits this information back to the

pharmacy, logs the payment information on

its system, and transmits the billing

information to health insurers. These

insurers then remit payment to the PBM,

which forwards payment to the retailer. This

process, known as claims adjudication, is

handled electronically. Ninety-five percent

of patients with prescription drug insurance

coverage receive their benefits through a

PBM.59

In the words of one panelist, PBMs

are the “middlemen” between

pharmaceutical manufacturers and health

plans or employers.60 PBMs contract with

pharmaceutical manufacturers on behalf of

the plan sponsors to obtain brand-name and

generic drugs. One panelist noted that a

large customer base enables the largest

PBMs with the most covered lives to drive

the market share of any one pharmaceutical

drug product and, therefore, obtain the

lowest prices from pharmaceutical

manufacturers.61 PBMs use mail order

pharmacies or contract with retail

pharmacies to establish networks of nearby

pharmacies through which enrollees can

57

 See, e.g., GENERA L ACCOUNTING OFFICE

(GAO), EFFECTS O F USING PHARMACY BEN EFIT

MANAGERS ON HEALTH PLANS, ENROLLEES, AND

PHARMACIES (2003), available at http://www.gao.

gov/cgi-bin/getrpt?GAO-03-196. One weakness of

the GAO study, however, is the lack of a baseline for

comparing cost savings among customers with

prescription drug insurance coverage. 

58 Richardson 6/26 at 7.

59

 Id. at 8.

60 Calfee 6/26 at 46. 

61

 See Boudreau 6/26 at 57.
12

have their prescriptions filled. Most PBMs

contract with 90 percent of the retail

pharmacies in the region they serve.62

National PBMs have established networks

that include nearly all retail chain

pharmacies. In these contracts, the parties

agree to the dispensing fees that the PBM

will pay the retail pharmacy. 

B. The PBM Formulary

The main tool that PBMs use to

manage pharmacy benefits is the formulary,

which is a list of PBM-approved drugs for

treating various diseases and conditions.63

Through a formulary, the PBM controls the

price that health plans and enrollees pay and

may influence the use of various drugs and

the mix of drugs dispensed.64 Panelists

reported that although PBMs design

formularies, plan sponsors often demand a

customized formulary that addresses various

needs of their enrollees (e.g., cost

containment, access to certain medicines,

high generic substitution, etc.).65

One panelist described generally how

a formulary decision is made in a single

therapy class for its preferred national

formulary.66 The panelist stated that an

independent pharmacy and therapeutics

(P&T) committee first evaluates the drugs in

the particular class for clinical effectiveness

and safety. Each drug is then classified for

formulary purposes as “include on the

formulary,” “exclude from the formulary,”

or “optional.” The next step for drugs

classified as “optional” is that the P&T

committee ranks them on clinical

effectiveness, and then again by cost. The

“optional” drugs also are examined for their

market share and likely customer reaction if

the PBM were to prefer certain drugs over

others. After the rankings are complete, the

PBM decides which drugs to include on its

national formulary. As noted above, group

health plans may negotiate certain aspects of

a PBM’s preferred national formulary.

In deciding which drugs to include in

the formulary (and their placement within

various tiers on the formulary), two practices

come into play: (i) generic substitution; and

(ii) therapeutic interchange. Generic

substitution is the dispensing of a bioequivalent generic drug product that

contains the same active ingredient(s) as the

brand-name drug and is, among other things,

chemically identical in strength,

concentration, dosage form, and route of

administration as the substituted brand-name

product. Generic substitution generally

occurs when a consumer presents a

prescription for a brand-name drug and the

pharmacist fills the prescription with a

generic version of the drug product without

the need for prior physician authorization. 

Because generic drugs are substantially less

expensive than their brand-name

62 Richardson 6/26 at 9. 

63 Barrueta 6/26 at 87. 

64 Richardson 6/26 at 16; see also Academy

of Managed Care Pharmacy (AMCP), Comments

Regarding the June 26, 2003 Joint FTC-DOJ

Hearings on Health Care and Competition Law and

Policy (Pharmaceuticals: Formulary) (Aug.5, 2003)

2 (Public Comment) (“[A] well-desired, properly

administered formulary will assist in the effective

management of a patient’s overall health care.”).

65 Boudreau 6/26 at 65.

66

 Id. at 60-64. See also Barreuta 6/26 at

92.
13

counterparts, generic substitution lowers

prescription drug costs.67 

Therapeutic interchange involves a

pharmacist substituting a therapeutically

equivalent, but distinct, drug product for the

drug product referred to on the consumer’s

prescription (e.g., two brand-name drug

products that treat the same ailment). Prior

physician authorization is required before a

pharmacist is allowed to interchange one

brand-name drug for another.

The co-pays that enrollees must pay

are determined with all of these variables in

mind. Co-pays significantly influence drug

utilization. Most group health plan sponsors

negotiate a three-tiered co-pay arrangement

with the PBM, with the lowest co-pay for

generic drugs, the middle tier for brandname drugs with no generic equivalent, and

the highest co-pay for brand-name drugs

with a generic equivalent.68 Some plan

sponsors negotiate a fourth tier for drugs not

included on the PBM formulary, and socalled lifestyle drugs, e.g., drugs to combat

hair loss.69 The ascending rates of the copays are designed to create an incentive for

the enrollee to prefer the lowest cost, yet

clinically effective, alternative. 

Greater formulary compliance allows

the PBMs to negotiate with the

pharmaceutical manufacturer for better

prices, because formulary compliance is an

indication of the ability of the PBM to steer

enrollees to various drugs. Thus, formulary

compliance allows the PBM to negotiate

what it can deliver for the manufacturers in

terms of growth of their market share or

avoidance of the manufacturer losing market

share.70

Plan sponsors may negotiate with

PBMs to provide enrollees incentives to use

the PBM network pharmacies so that the

PBM has greater control of reimbursement

and adherence to formulary drugs. Those

incentives range from differential co-pays to

denial of coverage for out-of-network

purchases. Plan sponsors and PBMs also

negotiate over incentives for enrollees to use

mail order distribution for maintenance

medications.71 Mail order distribution

typically is handled through the PBMs’ own

internal mail order pharmacies or through

mail order pharmacies under contract with

another PBM.

C. Flow of Payments for Drug Benefits

and PBM Services

To perform its services, a PBM

enters contracts with healthcare plans, retail

pharmacies, and drug manufacturers. When

a PBM establishes retail networks, it

contracts with retail pharmacies on

reimbursement amounts for drugs dispensed

by the pharmacy. For a given drug, the price

that the PBM will reimburse a retail

pharmacy is stated as a discount from a

measure of wholesale price plus a

dispensing fee for the pharmacy. For brandname drugs, the “average wholesale price”

(AWP) as stated by the manufacturer is used

as a basis for the discount, so the price

67

 See Dicken 6/26 at 32.

68 Richardson 6/26 at 19. 

69

 Id. at 19.

70 Barreuta 6/26 at 91.

71 Maintenance drugs are those used for

treatment of chronic conditions, e.g., hypertension,

diabetes, etc.
14

formula would be, for example, “AWP -

10% + $2.00.” For generic drugs, the

average price used is the “maximum

allowable cost” (MAC) as specified by the

PBM, so the formula might be “MAC - 10%

+ $2.00.” Retail pharmacies are willing to

offer discounts from the reference price

(AWP or MAC) depending on the type of

plan sponsors covered by the PBM and the

exclusivity of the retail pharmacy network. 

The more exclusive the network, the larger

the discount retail pharmacies will offer,

believing that greater exclusivity is likely to

bring them more customers.

The PBM’s contract with a plan

sponsor covers the amount that the plan

sponsor will pay the retail pharmacy per

prescription of each drug, as well as separate

charges for the variety of PBM services that

the plan sponsor may utilize. The PBM’s

charge to the plan sponsor per script is

similar in form to the retail pharmacy

contract. For brand-name drugs, it is a

discount off AWP plus an administration

charge per script, e.g., “AWP - 5% + $0.10.” 

For generic drugs, the charge has the same

form except the discount will be from the

MAC as specified by the PBM.

Finally, the contract negotiated with

the pharmaceutical manufacturer may

provide a rebate off the fees owed by the

PBM based on (a) a percentage of AWP or

some other wholesale benchmark, (b)

achieving certain specified sales or market

share targets, (c) preferred placement of

certain drug products on the PBMs’

formulary, or (d) a combination of items (a)

- (c). In addition, the manufacturer may pay

the PBM an administration fee and a fee for

the PBM providing promotional services.

PBMs also may be paid for providing

services such as drug utilization reviews,

which analyze physician prescribing patterns

to identify physicians who prescribe high

cost drugs when lower cost alternatives are

available; disease management services,

which offer treatment information to, and

monitoring of, patients with certain chronic

diseases; or drug interaction reviews to

determine what other drugs patients may be

taking so that the pharmacist can ensure

against adverse reactions.72 In addition,

PBMs may offer specialty pharmacy

services, including the provision of certain

high cost, low utilization drugs that retail

pharmacies normally do not carry and that

may require special means of distribution

(e.g., refrigeration) or professional

administration. 

D. Industry Overview

It is estimated that there are 60

PBMs operating in the United States today. 

There are three independent, full-service

PBMs with national scope: Medco Health

Solutions, Inc. (Medco) (formerly MerckMedco), Express Scripts, Inc., and

Caremark, Inc..73 Some PBMs are owned by

significant retail supermarket/pharmacy

chains, e.g., CVS’s PharmaCare, Kroger’s

Prescription Plans, and Walgreen’s Health

Initiatives. Many large insurers such as

72 Richardson 6/26 at 21-22. 

73 The Commission announced that it had

closed its antitrust investigation into Caremark Rx,

Inc.’s proposed acquisition of Advance PCS on

February 11, 2004 without taking any further action. 

See Statement, Federal Trade Comm’n, Caremark Rx,

Inc./Advance PCS (Feb. 12, 2004), available at http:

//www.ftc.gov/os/caselist/0310239/040211ftcstateme

nt0310239.pdf.
15

Aetna and Cigna offer in-house PBM

functions. In addition, there are many

smaller, privately-held PBMs. The relative

size and ranking of these companies varies

according to the measure used, such as

annual prescription expenditures,

prescriptions per year, or covered lives.74

Each measure has its own shortcomings. 

Overall, however, the market share figures

present an industry in which three national

PBMs are major players; a large share,

anywhere from one-third to one-half,

includes health plans and retail pharmacy

chains offering PBM services; and local and

regional PBMs have a significant presence.75

E. Competition Between PBMs: The

Bidding Process

Group health plan sponsors generally

procure PBM services through a bidding

process. They typically issue requests for

proposals to several PBMs and then evaluate

the proposals based on costs and the package

of services offered by each bidder. Plan

sponsors, or their consultants, conduct these

bid processes. Smaller employers or health

plans with limited geographic scope likely

will have many choices among PBMs,

because smaller and more regionally

oriented PBMs can meet their needs. Larger

employers or health plans often turn to the

largest PBMs because of their experience in

serving large clients and their nationwide

network of pharmacies, although several

health plans and retail pharmacy chains

offering PBM services also could meet their

needs.

PBMs appear to compete on price

and non-price dimensions. One survey of

plan sponsors using PBM services showed

the financial terms of the bid (such as the

reimbursement rate and dispensing fee paid

to pharmacies, the rebates paid to plan

sponsors based on formulary drugs utilized,

mail order pricing, and administrative fees)

often were the key determinants in the

selection of the winning bid.76 This study

also found that plan sponsors were

concerned about non-price dimensions of

service, such as plan design, the extent of

the retail network, and mail order

components. Each term or feature is

balanced against each other and is driven by

the needs of the plan sponsor. For example,

some want to maximize generic substitution,

whereas others want to maximize rebates

from manufacturers.77

F. Benefits of PBMs: The Evidence to

Date

The General Accounting Office

released a study in January 2003 that

examined the effects of PBMs on the

Federal Employees Health Benefits

Program, enrollees, and pharmacies.78 The

report considered the prescription benefits

programs offered within three health plans

available to federal government employees. 

These three plans covered about 4.5 million

74 Richardson 6/26 at 11.

75

 Id. at 13. 

76

 See PRICEWATERHOUSECOOPERS LLP,

HEALTH CARE FINANCING ADMINISTRATION, STUDY

OF PHARM ACEUTICAL BENEFIT MANAGEMEN T (2001),

available at http://www.cms.gov/researchers/reports/

2001/cms.pdf.

77 Boudreau 6/26 at 65; see also Barrueta

6/26 at 105.

78

 See GAO, supra note 57.
16

lives. The largest of these plans, BCBS,

held contracts with two PBMs: 

AdvancePCS, which handled their retail

network; and Medco, which supplied their

mail order pharmacy benefits. Another plan,

GEHA, contracted solely with Medco. The

third plan, PacifiCare, used a PBM called

Prescription Solutions, which is a subsidiary

of PacifiCare, which also sells independent

PBM services.

Table 1: Discounts Relative to Cash 

 Prices

Generic

Drugs

Brand-Name

Drugs

Retail

Pharmacy

47% 18%

PBM’s Mail

Order

Pharmacy

53% 27%

The study compared prices that three

types of customers paid for 14 brand name

drugs and four generic drugs: (1) cashpaying customers, who buy at retail

pharmacies; (2) health plan sponsors and

their enrollees, who buy at retail pharmacies;

and (3) health plan sponsors and their 

enrollees, who buy from a PBM’s mail order

facility. Table 1 shows the results of the

study. The study found that the lowest

average prices for 30-day supplies were

obtained when the drug was purchased

through the PBM’s mail order pharmacy.79 

For generic drugs purchased through a retail

pharmacy, enrollees in health plans paid an

average 47 percent less than cash customers. 

G. Issues Facing the PBM Industry

1. Transparency 

Panelists discussed the significance

of rebate transparency in the PBM market,

including whether a PBM should be required

to disclose to plan sponsors the rebates that

pharmaceutical manufacturers pay PBMs for

meeting certain market share targets. One

panelist stated that armed with information

about rebates, plan sponsors can encourage

PBMs to compete more aggressively so that

the plan sponsor obtains lower prices.80 By

contrast, other panelists suggested that

rebate transparency can be handled through

private contracts, because there is no barrier

to a plan sponsor negotiating an arrangement

providing it with access to the PBMs’ rebate

information.81 Another panelist suggested

that many plan sponsors have placed a

greater emphasis on paying lower

administrative fees as a trade-off for

allowing PBMs to keep pharmaceutical

79 Similar relative cost saving for PBM

clients have also been documented. See Cindy Parks

Thomas et al., Impact of Health Plan Design And

Management On Retirees’ Prescription Drug Use

And Spending 2001, 2002 HEALTH AFFAIRS (Web

Exclusive) W408, at http://content.healthaffairs.org/

cgi/reprint/hlthaff.w2.408v1.

80 Balto 6/26 at 78. In addition to price,

plan sponsors may be concerned about other PBM

services such as network availability or access to a

wide variety of drug products. As Section D, supra

reflects, the current structure of the PBM industry

does not suggest the potential for a PBM to exercise

monopsony power over pharmaceutical

manufacturers. 

81 Calfee 6/26 at 99; Balto 6/26 at 99. See

also Hewitt Associations, LLC, Hewitt’s 2004 Future

Health Care Expectations Survey: An Overview, at

http://was4.hewitt.com/hewitt/resource/spkrsconf/sub

spkrsconf/teleconferences/tapes/10-08-03.pdf (last

visited June 22, 2004).
17

manufacturer rebates.82 

Vigorous competition in the

marketplace for PBMs is more likely to

arrive at an optimal level of transparency

than regulation of those terms. Vigorous

competition is also more likely to help

ensure that gains from cost savings are

passed on to consumers of health care

services, either as lower premiums for health

insurance, lower out-of-pocket costs (for

that portion of health care expenditures

borne directly by consumers through

deductibles and co-payments), or improved

services. Negotiated limitations on

transparency are unlikely to be so severe that

health plan sponsors cannot assess the price

and quality of the services they are

receiving. Just as competitive forces

encourage PBMs to offer their best price and

service combination to health plan sponsors

to gain access to subscribers, competition

also encourages disclosure of the

information health plan sponsors require to

decide on the PBM with which to contract. 

 

2. Regulation and Litigation 

The American Federation of State

County & Municipal Employees filed a

lawsuit in 2003 alleging that the largest

PBMs have engaged in unfair and deceptive

practices under California state law.83 The

complaint alleges that PBMs engage in

various forms of conduct designed to

increase their profits, instead of benefitting

employers and consumers. The case is

currently pending.

In April 2004, the United States

along with 20 states announced a settlement

of claims for injunctive relief and state

unfair trade practices against Medco.84 The

United States and the states alleged that

Medco encouraged physicians to switch

patients to different prescription drugs that

earned Medco higher rebates from

pharmaceutical manufacturers, but that

Medco failed to pass on these savings to

patients or their health plan sponsors. Both

the United States and the states alleged that

the drug switches resulted in increased costs

to health plans and patients, primarily in

follow-up doctor visits and tests. Medco

claims, however, that its plans and services

saved money for patients and health plans. 

The consent order requires Medco to pay

$29 million to states for damages, fees, and

restitution. Other federal allegations,

however, were not settled, and that case will

continue.

Two states and the District of

Columbia have enacted legislation

regulating PBM practices, and other states

are considering such legislation.85 Maine’s

82 Barrueta 6/26 at 105.

83 AFSCME v. AdvancePCS, No. BC

292227, at ¶ 4 (Cal. Super. Ct., Los Angeles Cty.

filed Apr. 4, 2003) (first amended representative

action and complaint), available at http://www.

hagens-berman.com/files/PBM%20Complaint%20-%

20Amended%20-%20NP1049738021600.pdf. 

84

 See News Release, U.S. Dep’t of Justice,

The United States Settles Its Anti-Fraud Claims for

Injunctive Relief and 20 State Attorneys General

Settle Unfair Trade Practices Claims Against Medco

Health Solutions (Apr. 26, 2004), at http://www.us

doj.gov/usao/pae/News/Pr/2004/apr/medcoinjunctiver

eliefrelease.pdf.

85 Rx Access Act of 2004, Act 15-410, 2004

Council of the Dist. of Columbia (D.C. 2004); Act to

Provide for the Regulation of Pharmacy Benefits

Management, H.B. 1311, 79th Leg. Assem., Reg.

Sess. (S.D. 2004); Act to Protect Against Unfair
18

statute was challenged on the basis of

ERISA preemption, and the District Court

issued a preliminary injunction enjoining

enforcement of the law.86 

3. Integrated Mail Order Pharmacies

As noted above, mail order has

grown in importance and, for maintenance

medications, can be an efficient and lowcost distribution channel. A recent study

funded by the retail pharmacy industry

identifies possible actions that PBMs could

employ to inflate their revenues.87 The two

main actions alleged include: steering

enrollees to higher priced products on which

the PBM earns larger rebates, regardless of

the overall cost of the drug to the health

plan; and artificially inflating AWP on

prescriptions filled by a PBM-owned mail

order pharmacy through the use of re-labeled

drugs. The authors refer to both of these

practices collectively as PBM self-dealing. 

Though no direct evidence of self-dealing is

given, the paper assumes that self-dealing

could result in higher profits for PBMs and

higher costs for plan sponsors. 

Congress has required the

Commission to study these allegations. In

particular, Section 110 of the MMA requires

the Commission to conduct a “Conflict of

Interest Study” that includes the following:

1. An assessment of the differences

in costs incurred by such enrollees

and plans for prescription drugs

dispensed by mail-order pharmacies

owned by PBMs compared to mailorder pharmacies not owned by

PBMs and community pharmacies.

2. Whether such group health plans

are acting in a manner that

maximizes competition and results in

lower prescription drug prices for

enrollees.

The statute requires the Commission

to make any necessary recommendations

concerning these allegations and to report its

findings in a study by June 2005. The

Commission expects that the results of this

study will inform the debate about the role

of PBMs in the industry.

V. DIRECT TO CONSUMER

ADVERTISING

The impact of direct to consumer

(DTC) advertising of prescription drugs on

demand for, and the prices of, prescription

drug prices has generated considerable

debate. This debate has grown louder as

DTC advertising has grown from $791

million in 1996 to $2.467 billion in 2000.88

A basic tenet of competition policy is that

truthful and non-misleading advertising

Prescription Drug Practices, S.B. 194, 121st Leg., 1st

Reg. Sess. (Me. 2003). See supra Chapter 6 for a

broader discussion of the competitive implications of

such mandates.

86 Pharm. Care Mgmt. Ass’n v. Rowe, Civ.

No. 03-153-B-W (D.Me. Mar. 9, 2004). 

87 JAMES LANGENFELD & ROBERT MANESS,

THE COST O F PBM “SELF-DEALING” UNDER A

MEDICARE PRESCRIPTION DRUG BEN EFIT (2003),

available at http://www.mpaginc.com/news/pbm

report.pdf.

88 Magazine Publishers of America (MPA),

Comments Regarding Competition Law and Policy &

Health Care (Sept.30, 2002) 2 (Public Comment)

[hereinafter MPA (public cmt)].
19

benefits consumers.89 The available

evidence suggests that, on balance, this is

true of DTC advertising of prescription

drugs. Commission staff have articulated

the beneficial effects of DTC advertising —

as well as evidence of potential costs — in

recent comments (DTC Comments) to the

Food and Drug Administration (FDA).90

This section briefly summarizes these

comments and provides insights gained from

the panelists on DTC advertising of

pharmaceutical products. 

A. The Effects of DTC Advertising

Panelists at the health care hearings

agreed that advertising increases consumer

and physician awareness of the potential

benefits of pharmaceuticals and helps close

the information gaps among pharmaceutical

manufacturers, doctors, and consumers.91

Panelists also presented evidence that shows

some patients have been prompted by DTC

advertising to talk to a doctor about a

condition that they had not discussed

previously.92 One panelist stated that DTC

advertising can increase compliance with

pharmaceutical usage regimes and can assist

in educating patients and health

professionals about the risks, diagnosis, and

treatment of a particular medical condition.93

The DTC Comments noted that a

number of major surveys have been

conducted to assess the effect of DTC

advertising on consumer attitudes,

experiences, and behavior. The general

consensus from these and other surveys is

that DTC advertising provides consumers

with useful information, stimulates

productive discussions between doctors and

patients, and encourages consumers to learn

more about previously undiagnosed

conditions.94

Physician attitudes toward DTC

89

 See, e.g., JOHN E. CALFEE & JANIS K.

PAPPALARDO, FEDERA L TRADE COMM’N, HOW

SHOULD HEALTH CLAIMS FOR FOODS BE REGULATED?

AN ECONOMIC PERSPECTIVE (1989); ALISON MASSON

& ROBERT L. STEINER, FEDERA L TRADE COMM’N,

GENERIC SUBSTITUTION AND PRESCRIPTION DRUG

PRICES: ECONOMIC EFFECTS O F STATE DRUG

PRODUCT SELECTION LAWS (1985).

90

 See Staff of the Federal Trade

Commission, In the Matter of Request for Comments

on Consumer-Directed Promotion, Public Hearing

Dkt. No. 2003N-0344, Comments Before the Dept. of

Health & Human Serv. Food & Drug Admin. 3 (Dec.

1, 2003) [hereinafter Comments at Dec. 2003 FDA

Pub. Hearing], available at http://www.ftc.gov/be/

v040002text.pdf.

Commission staff have also filed other

comments with the FDA on related issues. See Staff

of the Federal Trade Commission, In the Matter of

Request for Comment on First Amendment Issues,

Public Hearing Dkt. No. 02N-0209, Comments

Before the Dept. of Health & Human Serv. Food &

Drug Admin. (Sept. 13, 2002), available at

http://www.ftc.gov/os/2002/09/fdatextversion.pdf;

Staff of the Federal Trade Commission, In the Matter

of Direct-to-Consumer Promotion, Public Hearing

Docket No. 95N-0227, Comments Before the Dept.

of Health & Human Serv. Food & Drug Admin. (Jan.

11, 1996), available at www.ftc.gov/be/v960001.htm.

91 Calfee 9/10/02 at 258, 262; Raymond

9/10/02 at 279; Samp 9/10/02 at 292; Burkholder

9/10/02 at 245; see also MPA (public cmt), supra

note 88, at 2-4.

92 Calfee 9/10/02 at 262; Raymond 9/10/02

at 279. 

93 Raymond 9/10/02 at 279-81. 

94

 Comments at Dec. 2003 FDA Pub.

Hearing, supra note 90, at 6. This comment

summarizes the major consumer surveys relating to

DTC advertising of prescription drugs and is not

repeated here.
20

advertising are mixed. An FDA survey

reported that 40 percent of the physicians

surveyed felt that DTC advertising had a

positive effect on their patients and their

practices, 30 percent felt it had a negative

effect, and 30 percent felt it had no effect.95

Another recent survey found that the most

frequent complaints voiced by physicians

were that DTC advertising did not provide

information in a balanced manner, and that it

encouraged patients to seek treatments they

did not need (approximately 80 percent). On

the other hand, the same survey found that

more than 70 percent of physicians felt that

DTC advertising helped educate patients

about available treatments and 67 percent

felt that it helped them have better

discussions with their patients.96

The panelists also observed that

pharmaceutical manufacturers advertise

brand-name drugs to increase sales, to

complement physician detailing and

promotion, and to extend the blockbuster

nature of the drug advertised.97 They noted

that there were no DTC advertisements for

generic prescription drug products, because

these products rapidly gain market share by

virtue of their lower prices and state laws

requiring pharmacists to employ generic

substitution.98

There remains debate regarding the

impact of DTC advertising on the price and

quantity sold of prescription drugs, in part

due to the difficulties inherent in estimating

the empirical effects. Some panelists, for

example, suggested it was difficult to draw

conclusions about DTC on drug utilization

alone because of other forces such as

increased insurance coverage of drugs, an

increase in FDA approval of drugs, an

increase in the diagnosis of many chronic

conditions, and an increase in physician

detailing and the free samples provided to

physicians.99 In their survey of the research

literature, Commission staff noted that

empirical evidence on the effects of DTC

advertising on sales is mixed, with some

studies showing a positive effect, while

others do not. They described a number of

more recent studies showing a pattern where

DTC advertising expands the overall

demand for the relevant therapeutic class of

drugs, while typically failing to increase the

market share of the specific drug being

95 Kathryn Aikin, The Impact of Direct-toConsumer Prescription Drug Advertising on the

Physician-Patient Relationship, Direct-To-Consumer

Promotion: Public Meeting, Before the U.S. Food &

Drug Admin. Ctr. for Drug Evaluation & Research

(Sept. 22, 2003) (presentation slides of FDA),

available at http://www.fda.gov/cder/ddmac/aikin/

aikin.PPT.

96 Joel S. Weissman et al., Physicians

Report on Patient Encounters Involving Direct-ToConsumer Advertising, 2004 HEALTH AFFAIRS (Web

Exclusive) W4-219, 224, at http://content.health

affairs.org/cgi/reprint/hlthaff.w4.219v1.

97 Findlay 9/10/02 at 269-70; Calfee 9/10/02

at 293; Samp 9/10/02 at 287-88 (noting that

manufacturers advertise direct to consumers because

they believe DTC advertising can increase sales);

Carabello 6/12/03 at 170-71 (discussing her view that

advertising is “designed to spark the interest of the

health care consumer and prompt the buyer, the

patient, to access or purchase services”); see also

Lurie 9/10/02 at 272 (purpose of advertising is to get

someone to buy something).

98 Findlay 9/10/02 at 269-70; Samp 9/10/02

at 291-92.

99 Burkholder 9/10/02 at 250; Findlay

9/10/02 at 266-68. 
21

advertised.100 

In regard to the price effects of DTC

advertising, Commission staff noted the

absence of evidence that the costs of such

advertising are passed on to consumers in

the form of higher prices. They also pointed

out that the low volume of DTC

expenditures – 2.2 percent of total

prescription drug sales and 16 percent of

overall drug company promotion costs –

reinforces the view that such advertising

would have a limited effect (if any) on

price.101 Nevertheless, staff cautioned that

the issue of price effects remains unsettled

because there have been no well-controlled

tests designed to directly test the claim that

DTC advertising raises price. Such studies

are the best test of such a hypothesis. 

B. DTC Advertising of

Pharmaceuticals Must Not Be False

and Misleading

Panelists agreed that prescription

drug promotion must be fair and balanced

and include both benefit and risk

information to educate and inform

consumers about their health care

decisions.102 Panelists suggested that one of

the contentious issues with DTC advertising

of prescription drugs was whether benefits

and risks were presented in an

understandable manner.103 Panelists did not

claim that DTC advertisements were false

and misleading.104

To address the concerns of

conveying risks of prescription drugs in an

understandable manner, the Food and Drug

Administration (FDA) has sought public

comment concerning whether and how it

should alter its approach to regulating

100 MARTHA WOSINSKA, JUST WHAT THE

PATIENT ORDERED? DIRECT-TO-CONSUM ER

ADVERTISING AND TH E DEMAND FOR

PHARM ACEUTICAL PRODUCTS (Harvard Bus. School,

Marketing Research Paper No. 02-04, 2002) (while

DTC advertising expands total therapeutic class sales,

it only increases the sales of the particular brand if the

brand has a preferred status on the health insurer’s

formulary), available at http://ssrn.com/abstract_id

=347005; T. IIZUKA & G. JIN, THE EFFECT OF DTC

ADVERTISING IN THE PRESCRIPTION DRUG MARKETS

(Univ. of Md., Working Paper, Sept. 2003);

MEREDITH B. ROSENTHAL ET AL., KAISER FAM ILY

FOUND., DEMAND EFFECTS O F RECENT CHAN GES IN

PRESCRIPTION DRUG PROMOTION (2003), available at

http://www.kff.org/ rxdrugs/loader.cfm?url=/common

spot/security/getfile.cfm&PageID=14380. For a

useful review of these and other empirical

investigations into the demand effects of DTC

advertising, see GENERA L ACCOUNTING OFFICE,

PRESCRIPTION DRUGS: FDA OVERSIGHT OF DIRECTTO-CONSUMER ADVERTISING HAS LIMITATIONS

(Report to Congressional Requesters, 2002),

available at http://www.gao.gov/new.items/

d03177.pdf.

101 Meredith B. Rosenthal et al., Promotion

of Prescription Drugs to Consumers, 346 NEW ENG.

J. MED. 498 (Feb. 14, 2002). The authors also note

the skewed distribution of DTC expenditures across

drug classes, with the 20 largest drug classes

accounting for over 60 percent of total expenditures. 

As a result, the relative size of DTC advertising

expenditures will vary significantly across drug

classes.

102

 See generally, panel discussion 9/10/02

at 245-300. For an overview of the Food and Drug

Administration’s regulation of DTC advertisements,

see Frank 9/10/02 at 231-42.

103 Samp 9/10/02 at 290; see also

Burkholder 9/10/02 at 252.

104 Findlay 9/10/02 at 297. 
22

prescription drug advertising.105 In late

2003, the FTC staff filed a comment with

the FDA suggesting that consumers and

competition would benefit if the FDA

adopted more consumer-friendly and less

burdensome risk disclosure requirements.106

In early 2004, the FDA issued and sought

public comment on three draft guidance

documents designed to improve

communications to consumers and health

care practitioners about health conditions

and medical products.107 In May 2004, FTC

staff filed a comment generally supporting

the changes reflected in these guidance

documents, but also recommending that the

FDA conduct consumer research concerning

the risk disclosures they would require.108

The FDA continues to work with industry

and other interested parties to determine the

best way to inform consumers on

prescription drug issues. 

105 For an economic analysis of the costs

and benefits of drug advertising restrictions, including

the effect of FDA’s regulations on these costs and

benefits, see J. Howard Beales, III, Economic

Analysis and the Regulation of Pharmaceutical

Advertising, 24 SETON HALL L.J. 1370 (1994).

106

 See Comments at Dec. 2003 FDA Pub.

Hearing, supra note 90, at 3.

107

 See News Release, Food & Drug

Admin., New FDA Draft Guidance Aim to Improve

Health Information (Feb. 4, 2004), at

http://www.fda.gov/bbs/topics/NEWS/2004/NEW010

16.html. 

108

 See Staff of the Federal Trade

Commission, In the Matter of Request for Comments

on Agency Draft Guidance Documents Regarding

Consumer-Directed Promotion, Public Hearing Dkt.

No. 2004D-0042, Comments Before the Dept. of

Health & Human Serv. Food & Drug Admin. (May

10, 2004), available at

http://www.ftc.gov/os/2004/05/040512dtcdrugscomm

ent.pdf.
CHAPTER 8: MISCELLANEOUS SUBJECTS

I. CERTIFICATES OF NEED ............................................... 1

A. Rationale Behind CON Programs ..................................... 2

B. Competitive Concerns that CON Programs Raise ......................... 3

C. CON and Cost Control .............................................. 5

II. STATE ACTION AND NOERR DOCTRINES ................................ 6

A. State Action Doctrine ............................................... 6

B. Noerr-Pennington Doctrine ......................................... 10

III. LONG-TERM CARE ................................................... 11

A. Consumer Information ............................................. 12

B. Competition in the Market for Long-Term Care ......................... 14

IV. INTERNATIONAL PERSPECTIVES ...................................... 14

A. International Perspectives on Competition and Health Care ................ 15

B. Concentration of Health Care Markets ................................ 15

C. Consumer Information in Health Care Markets .......................... 16

V. REMEDIES ........................................................... 16

A. Civil Antitrust Remedies ........................................... 17

B. Criminal Antitrust Remedies ........................................ 19
CHAPTER 8: MISCELLANEOUS SUBJECTS

I. CERTIFICATES OF NEED

Introduction. State certificate of

need (CON) programs generally prevent

firms from entering certain areas of the

health care market unless they can

demonstrate to state authorities that there is

an unmet need for their services. Upon

making such a showing, prospective entrants

receive from the state a CON allowing them

to proceed.1 Proving that unmet need to

state authorities is sometimes expensive and

time-consuming.2 Industry representatives,

as well as legal, economic, and academic

experts on the health care industry, spoke on

the subject of CON at the Hearings on a

panel discussing Quality and Consumer

Protection: Market Entry (June 10).3 

Many CON programs trace their

origin to a repealed federal mandate. The

National Health Planning and Resources

Development Act of 19744 offered states

powerful incentives to enact state laws

implementing CON programs.5 By 1980, all

states except Louisiana had enacted CON

programs.6 Congress repealed the federal

law in 1986, but a substantial number of

states continue to maintain CON programs,7

“although often in a loosened form

compared to their predecessors.”8

The Agencies believe that CON

programs can pose serious competitive

concerns that generally outweigh CON

1

 See JOHN MILES, 2 HEALTH CARE &

ANTITRUST LAWS: PRINCIPLES AND PRACTICE § 16:1,

at 16-2, 16-5 to 16-6 (2003) (noting that CONs under

the federal Health Planning Act required providers to

“obtain state approval – a ‘certificate of need’ –

before spending set amounts on capital investments or

adding new health care services”); James F.

Blumstein & Frank A. Sloan, Health Planning and

Regulation Through Certificate of Need: An

Overview, 1978 UTAH L. REV. 3; Randall Bovbjerg,

The Importance of Incentives, Standards, and

Procedures in Certificate of Need, 1978 UTAH L.

REV. 83; Clark C. Havighurst, Regulation of Health

Facilities and Services by “Certificate of Need”, 59

VA. L. REV. 1143 (1973). 

2

 See Keith B. Anderson, Certificate of

Need Regulation of Health Care Facilities, FTC Staff

Prepared Statement Before North Carolina State

Goals and Policy Board 7 n.17 (Mar. 6, 1989). 

3

 Complete lists of participants on these and

other panels are available infra Appendix A and in

the Agenda, at http://www.ftc.gov/ogc/healthcarehear

ings/completeagenda.pdf.

4

 Pub. L. 93-641, 88 Stat. 2225 (1975)

(codified at 42 U.S.C. §§ 300k-300n-5), repealed,

Pub. L. 99-660, § 701, 100 Stat. 3799 (1986). 

5

 MILES, supra note 1, § 16:1, at 16-2.

6

 See, e.g., Morrisey 6/10 at 146; On

Certificate of Need Regulation: Hearing on H.B. 332

Before the Senate Comm. On Health and Human

Services (Ohio 1989) (Statement of Mark D. Kindt,

FTC Regional Director) (noting that by 1980, all

states except Louisiana had enacted CON legislation)

[hereinafter Kindt]. 

7

 See Davenport-Ennis 5/29 at 113-14;

Morrisey 6/10 at 146 (noting that by 2002, about 36

states and the District of Columbia retained CON

programs in some form); MILES, supra note 1, § 16:2,

at 16-9 (stating that “CON laws remain in many states

and the District of Columbia”). Quite recently,

Florida exempted from CON new adult open-heart

surgery and angioplasty programs at general hospitals

and the addition of beds to existing hospital

structures. Fla. Bill SJ 01740 (effective July 1,

2004), amending FLA STAT. ch. 408.036, .0361

(2003).

8

 MILES, supra note 1, § 16:1, at 16-2 to 16-

3. See also Len M. Nichols et al., Are Market Forces

Strong Enough to Deliver Efficient Health Care

Systems? Confidence is Waning, 23 HEALTH AFFAIRS

1, 11 (Mar./Apr. 2004) (noting that CON programs

“eroded through the 1990s”).
2

programs’ purported economic benefits. 

Where CON programs are intended to

control health care costs, there is

considerable evidence that they can actually

drive up prices by fostering anticompetitive

barriers to entry. Other means of cost

control appear to be more effective and pose

less significant competitive concerns. The

Report analyzes each of these points in turn

below. 

A. Rationale Behind CON Programs

CON programs had the major goal of

controlling costs by restricting provider

capital expenditures.9 The forces of

competition ordinarily limit excess supply,

but, according to a panelist representing the

American Health Planning Association,

“[c]ompetition in health care is ... very

different” than in other markets.10 Congress

appears to have shared this view in 1974; the

passage of the Health Planning Act reflected

a congressional belief that market failure

plagued the health care market, resulting in

“excess supply and needless duplication of

some services.”11

The system of cost-based

reimbursement may have driven the problem

that Congress sought to solve.12 When many

CON programs were established,

government or private insurance paid health

care expenses “on a retrospective cost

reimbursement basis.”13 This, coupled with

the general concern that patients would not

be sufficiently price sensitive and would

demand the perceived highest quality

services, led to the fear that health care

providers would expand their services –

sometimes to the point of offering

unnecessarily duplicative services – because

they competed largely on only non-price

grounds.14

Although cost-based reimbursement

is much less common today, some contend

that CON programs still have a role to play

in the health care marketplace. Indeed, one

panelist argued that in health care markets,

“providers control the supply of services. 

Medical practitioners direct the flow of

patients and therefore the demand for

9

 See Piper 6/10 at 53; Morrisey 6/10 at 146

(noting that CON programs “were established in the

‘70s to help control health care costs”). See also

MILES, supra note 1, § 16:1, at 16-4 (“[The primary

role of the Health Planning Act was to regulate the

supply of health care resources, particularly

institutional services, by requiring a CON from the

state before certain levels of capital expenditures

could be made or new services introduced.”); Kindt,

supra note 6, at 2-3 (noting that a “key justification”

for CON programs has been “the belief that health

care providers, particularly hospitals, would

undertake excessive investment in unregulated health

care markets,” driving up health care costs); PUBLIC

HEALTH RESOURCE GROUP, CERTIFICATE O F NEED

PROJECT REPORT 17-18 (2001). 

10 Piper 6/10 at 53-54 (observing that the

main aim of CON programs is to limit “excess supply

generating excess demand”). See also PUBLIC

HEALTH RESOURCE GROUP, supra note 9, at 18. 

11 MILES, supra note 1, § 16:1, at 16-4.

12

 See id.

13 Anderson, supra note 2, at 6. See also

Davenport-Ennis 5/29 at 114 (noting that at the time,

the federal government reimbursed health care

expenses on a “cost-plus basis, which did not provide

the cost control capability of today’s prospective

payment system”).

14 Morrisey 6/10 at 147; see

also Davenport-Ennis 5/29 at 114 (noting that

government officials intended CON to “retain rising

health care costs, to prevent unnecessary duplication

of resources and services, and [to] expand consumer

access to quality health care services”).
3

services.”15 In health care markets, he

stated, “supply generates demand[,] putting

traditional economic theory on its head.”16

Moreover, consumers lack the information

to compare prices, he said.17 Such problems

can lead to an inefficient allocation of health

care resources and higher health care costs,

some state.18 

Some commentators also suggest

that CON programs can enhance health care

quality and access.19 One panelist, for

example, stated that there are “few

mechanisms” other than the CON process

that promote “minimum patient volumes”

that contribute, he stated, to better quality

care.20 CON regulation also can address

cherry picking, preventing firms from, for

example, converting cancer “medical

practices to medical care facilities [that]

divert well-insured patients [from] local

hospital cancer programs” and “undermine[]

the ability of essential community hospitals

to provide a full array of oncology services

to the entire community.”21

B. Competitive Concerns that CON

Programs Raise

Many have criticized CON programs

for creating barriers to entry in the health

care market.22 As noted previously, CON

15 Piper 6/10 at 55.

16

 Id. at 62.

17

 Id. at 55 (noting, however, that

consumers do “suffer under the ultimate increased

costs in premiums and their taxes”). The same

panelist also cited empirical studies suggesting that

CON programs reduce health care costs, studies that

another panelist questioned. Compare Piper 6/10 at

57-61, and Thomas R. Piper, Comments Regarding

Hearings on Health Care and Competition Law and

Policy 5-13 (Public Comment) (discussing these and

other studies) [hereinafter Piper (public cmt)], with

Loeffler 6/10 at 127 (questioning those studies), and

with Piper 6/10 at 127-28 (responding to such

questions). See generally infra notes 37-42, and

accompanying text.

18

 See, e.g., MILES, supra note 1, § 16:1, at

16-4 (describing Congress’ concerns); Piper 6/10 at

62 (asserting that “[a]reas with more hospitals and

doctors spend more on health care services per

person”); PUBLIC HEALTH RESOURCE GROUP, supra

note 9, at 11 (“Adding providers usually mean

increases in costs.”); see also Piper 6/10 at 126

(noting that the fact that the public fisc is at stake

adds importance to the concern).

19 PUBLIC HEALTH RESOURCE GROUP, supra

note 9, at 5. 

20 Piper (public cmt), supra note 17, at 12

(noting, for example, that in CON-free states, “the

percentage of patients that had surgery in low volume

programs was three times higher than in states with

CON regulation”). 

21 Piper (public cmt), supra note 17, at 13-

14; see also Piper 6/10 at 54 (noting that CON

programs aim to overcome “market gaps and excesses

like the avoidance of low-income populations and

concentration of services in ... affluent areas”);

Nichols et al., supra note 8, at 11 (stating that today

“some states are considering reinstituting or

reinvigorating [CON programs] in response to

construction of physician-owned specialty facilities,

which has posed a competitive threat to community

hospitals”). But see Price 6/10 at 108 (would-be

entrant denying allegation of “cherry picking”);

Davenport-Ennis 5/29 at 115-16 (stating that CON

programs restrict the supply of cancer treatment

services such that “low-income, seriously ill, and

rural patients” who do not live near a hospital or

major medical center lose access to care).

22

 See Anderson, supra note 2, at 7;

Hennessy 6/10 at 95, 99-100 (“CON protects

incumbent providers . . . from competition” and is an

“impediment to innovation [and] quality

improvement” in health care); Blumstein & Sloan,

supra note 1; Bovbjerg, supra note 1; Havighurst,

supra note 1. The Commission has also noted the
4

regimes prevent new health care entrants

from competing without a state-issued

certificate of need, which is often difficult to

obtain. This process has the effect of

shielding incumbent health care providers

from new entrants. As a result, CON

programs may actually increase health care

costs, as supply is depressed below

competitive levels.23

Moreover, CON programs can retard

entry of firms that could provide higher

quality services than the incumbents.24 By

protecting incumbents, CON programs

likewise can “delay[] the introduction and

acceptance of innovative alternatives to

costly treatment methods.”25 Similarly,

CON programs’ “[c]urtailing [of] services or

facilities may force some consumers to

resort to more expensive or less-desirable

substitutes, thus increasing costs for patients

or third-party payers. For example, if

nursing home beds are not available, the

discharge of patients from more expensive

hospital beds may be delayed or patients

may be forced to use nursing homes far from

home.”26

Empirical studies indicate that CON

programs generally fail to control costs and

can actually lead to increased prices.

27

Supporting this conclusion, some panelists

offered examples of the anticompetitive

effects of CON programs. One panelist, for

example, noted that CON programs

“artificially limit[]” access to cancer

treatment, placing “vital therapies and

technologies out of [consumers’] reach” in

favor of “old technologies.”28 He stated that

his practice’s application to a state for a

certificate of need to introduce improved

cancer radiation technology faced opposition

in June 2002 from all of the state’s operators

of existing radiation therapy equipment. 

One year later, at the time of his testimony

in the Hearings, he noted that the state still

had not approved the CON application.29 By

contrast, in a bordering state without a CON

program, his practice was able to introduce

new cancer-fighting technologies rapidly.30

Another panelist stated that incumbent home

health service providers in her state have, for

23 years, successfully opposed the CON

application of her nursing service, thereby

barring its entry and “keep[ing] the

oligopoly in place.”31 The incumbents, she

impact of CON programs on entry and firm behavior. 

See In re Hosp. Corp. of Am., 106 F.T.C. 361,

489-501 (1985). 

23

 See Anderson, supra note 2, at 7-8; Kindt,

supra note 6, at 6-7.

24

 See, e.g., Anderson, supra note 2, at 7-9;

Kindt, supra note 6, at 6; Hosp. Corp. of Am., 106

F.T.C. at 495 (opinion of the Commission) (stating

that “CON laws pose a very substantial obstacle to

both new entry and expansion of bed capacity in the

Chattanooga market” and that “the very purpose of

the CON laws is to restrict entry”).

25 Anderson, supra note 2, at 9; Kindt,

supra note 6, at 6. 

26 Kindt, supra note 6, at 7.

27

 See generally infra notes 37-42, and

accompanying text.

28 Hennessy 6/10 at 92-93. 

29

 Id. at 95-96; see also id. at 96-97 (noting

similar opposition to application to introduce PET

scanning to state with CON program). 

30

 Id. at 95-98, 136.

31 Price 6/10 at 101-10.
5

stated, charge more for comparable services

than her service would.32 The barrier to

entry has likewise shielded incumbents from

the need to offer improved and innovative

services, she said.33 As a result, some

patients resort to services that “are not to

their liking” or simply are not served at all.34

Other panelists described how an incumbent

used the CON process as a barrier to entry in

a local surgical market,35 and how a CON

program restricted supply in a way that

jeopardized patients’ care.36

C. CON and Cost Control

Several panelists and commentators

stated that CON programs generally fail to

control costs.37 Indeed, one panelist

surveyed the empirical literature on the

economic effects of CON programs and

concluded that the “literature tends to

conclude ... that CON has been ineffective

in controlling hospital costs,” and that, to the

contrary, “[i]t may have raised costs and

restricted entry.”38 Commentators stated that

the reason that CON has been ineffective in

controlling costs is that the programs do not

put a stop to “supposedly unnecessary

expenditures” but “merely redirect[] any

such expenditures into other areas.”39 Thus,

a CON rule that restricts capital investment

in new beds does nothing to prevent

32

 Id. at 105.

33

 Id. at 106. 

34

 Id. at 102, 104 (reporting that she has

spoken to “young people who have been lying in their

own waste for three days with no one to come take

care of them”). 

35 Rex-Waller 3/27 at 58.

36 Davenport-Ennis 5/29 at 115-21.

37

 See Hennessy 6/10 at 93-94 (stating that

“CON is a failure as a cost containment tool” and that

the premiums in Kansas and Missouri are generally

the same, in spite of the fact that one state has a CON

program and the other does not); Anderson, supra

note 2, at 2-6 (summarizing empirical evidence and

finding that CON fails to regulate costs); Kindt, supra

note 6, at 3-5 (summarizing empirical studies on the

economic effects of CON programs and concluding

that “[t]here is near universal agreement among the

authors [of studies on the economic effects of CON

programs] and other health economists that CON has

been unsuccessful in containing health care costs”);

DANIEL SHERMAN, FEDERA L TRADE COMM’N, THE

EFFECT OF STATE CERTIFICATE-OF-NEED LAWS ON

HOSPITAL COSTS: AN ECONOMIC POLICY ANALYSIS

(1988) (concluding, after empirical study of CON

programs’ effects on hospital costs using 1983-84

data, that strong CON programs do not lead to lower

costs but may actually increase costs); MONICA

NOETHER, FEDERA L TRADE COMM’N, COMPETITION

AMONG HOSPITALS 82 (1987) (empirical study

concluding that CON regulation led to higher prices

and expenditures); KEITH B. ANDERSON & DAVID I.

KASS, FEDERA L TRADE COMM’N, CERTIFICATE OF

NEED REGULATION OF ENTRY INTO HOME HEALTH

CARE: A MULTI-PRODUCT COST FUNCTION ANALYSIS

(1986) (economic study finding that CON regulation

led to higher costs, and that CON regulation did little

to further economies of scale); cf. PUBLIC HEALTH

RESOURCE GROUP, supra note 9, at 4 (noting that the

“track record of the cost effectiveness of state CON

programs is decidedly mixed,” and that “[i]n some

states, the of effectiveness is at least partially

attributable to deficiencies in program operations and

to political environments in which legislative or highlevel executive branch intervention alters or affects

CON decision-making”). See also David S. Salkever,

Regulation of Prices and Investment in Hospitals in

the United States, in 1B HAND BOO K OF HEALTH

ECONOMICS, 1489-90 (A.J. Culyer & J.P. Newhouse

eds., 2000) (concluding that “there is little evidence

that [1970s-era] investment controls reduced the rate

of cost growth,” even though “inconsistent reports of

constraining effects on numbers of beds and diffusion

of some specialized services did appear”). 

38 Morrisey 6/10 at 148-49, 152-53.

39 Kindt, supra note 6, at 5.
6

hospitals from “add[ing] other kinds of

fancy equipment” and using that to compete

for consumers.40

As one commentator noted, “[t]he

regulation of supply through mechanisms

such as CON may have made sense when

most reimbursement was cost-based and

thus there was incentive to expand

regardless of demand but they make much

less sense today when hospitals are paid a

fixed amount for services and managed care

forces them to compete both to participate in

managed-care networks and then for the

plans’ patients.”41 The policy justification of

CON programs is particularly questionable

given the number of evolving supply and

demand-side strategies for controlling costs,

including those outlined in Chapter 1.

42

Conclusion. The Agencies believe

that CON programs are generally not

successful in containing health care costs

and that they can pose anticompetitive risks. 

As noted above, CON programs risk

entrenching oligopolists and eroding

consumer welfare. The aim of controlling

costs is laudable, but there appear to be

other, more effective means of achieving

this goal that do not pose anticompetitive

risks. A similar analysis applies to the use

of CON programs to enhance health care

quality and access. For these reasons, the

Agencies urge states with CON programs to

reconsider whether they are best serving

their citizens’ health care needs by allowing

these programs to continue. 

II. STATE ACTION AND NOERR

DOCTRINES

The state action and NoerrPennington doctrines curb competition law

in order to promote important values, such

as federalism and the right to petition the

government for redress of grievances.43

Inappropriately broad interpretations of

these doctrines, however, can chill or limit

competition in health care markets.44

Industry representatives, as well as legal,

economic, and academic experts on the

health care industry, spoke at the Hearings

on a panel discussing Competition Law and

Noerr Pennington/State Action issues on

June 11.45

A. State Action Doctrine

The state action doctrine precludes

federal antitrust scrutiny of certain state (and

state authorized) conduct. The state action

doctrine is rooted in principles of federalism

and respect for state sovereignty. As the

Supreme Court stated in the seminal state

40

 Id.

41 MILES, supra note 1, § 16:1, at 16-3. 

42

 See, e.g., Kindt, supra note 6, at 8-11;

Anderson, supra note 2, at 9-13 (same); DavenportEnnis 5/29 at 121 (citing means other than CON

programs “to regulate over-usage and over-referral”). 

But see PUBLIC HEALTH RESOURCE GROUP, supra

note 9, at 11 (stating that “[m]anaged care companies

have not created the competition and lower cost

solutions originally expected of them”). 

43

 See Havighurst 6/11 at 30-32. 

44

 See, e.g., Robin E. Remis, Health Care

and the Federal Antitrust Laws: The Likelihood of a

Harmonious Coexistence, 13 J. CONTEMP. HEALTH L.

& POL’Y 113, 123-25 (1996).

45 Complete lists of participants on these

and other panels are available infra Appendix A and

in the Agenda, at

http://www.ftc.gov/ogc/healthcarehearings/completea

genda.pdf.
7

action case, neither the Sherman Act nor its

history suggests that Congress intended the

antitrust laws to “restrain a state or its

officers or agents from activities directed by

the legislature.”46

The state action doctrine shields

activities of the state when it is acting in its

sovereign capacity, and actions of most

other entities and individuals if they are

acting in furtherance of a clearly articulated

state policy and are actively supervised by

the state.47 The clear articulation

requirement “ensures that these entities may

use anticompetitive mechanisms only if

those mechanisms operate because of a

deliberate and intended state policy.”48

Similarly, the active supervision requirement

“ensures that the entities are acting pursuant

to state policy, not their own private

interests ....”49

One panelist noted that antitrust law

is unsettled as to whether state regulatory

commissions and licensing boards must

satisfy both of these requirements.50 The

issue is better formulated as whether

regulatory commissions and licensing boards

that are substantially controlled by

incumbent providers are really state actors,

rather than private entities, for purposes of

assessing state action. When providers

substantially control a regulatory

commission or licensing board, there are

good reasons to require satisfaction of both

the clear articulation and active supervision

requirements of the state action doctrine.51

The Agencies have long opposed

improper extensions of the state action

doctrine. Unfortunately, some courts have

broadly interpreted the “clear articulation”

and “active supervision” requirements in

46 Parker v. Brown, 317 U.S. 341, 350-51

(1943). 

47

 See, e.g., Town of Hallie v. City of Eau

Claire, 471 U.S. 34, 40 (1985) (holding that a

municipality engaging in activity pursuant to state

policy qualifies as state action and no active

supervision required); Cal. Retail Liquor Dealers

Ass’n v. Midcal Aluminum, Inc., 445 U.S. 97, 105

(1980) (stating that “the challenged restraint must be

one clearly articulated and affirmatively expressed as

state policy [and that] the policy must be actively

supervised by the State itself”) (internal quotation

marks and citation omitted). See also discussion in

OFFICE OF POLICY PLANNING, FEDERA L TRADE

COMM’N, REPORT OF THE STATE ACTION TASK FORCE

1 (2003) [hereinafter FTC, STATE ACTION REPORT],

available at http://www.ftc.gov/os/2003/09/

stateactionreport.pdf; James F. Blumstein & Terry

Calvani, State Action as a Shield and a Sword in a

Medical Services Antitrust Context: Parker v. Brown

in Constitutional Perspective, 1978 Duke L.J. 389. 

48 FTC, STATE ACTION REPORT, supra note

47, at 1.

49

 Id. The active supervision requirement

similarly ensures that there is actual (and not simply

nominal) oversight by the state. 

50

 See Andrus 6/11 at 52 (“For licensing

boards, the Midcal test – because licensing boards are

quasi-state agencies or entities, it’s not absolutely

clear whether they need to satisfy both prongs of

Midcal ... We know that they have to satisfy the first

prong of Midcal, that is, the clear articulation

prong.”).

51

 See FTC, STATE ACTION REPORT, supra

note 47, at 15 (“[T]he active supervision test is

applied when the Court deems there to be an

appreciable risk that the challenged conduct may be

the product of parties pursuing their own interests

rather than state policy.”); Einer Elhauge, The Scope

of Antitrust Process, 104 HARV. L. REV. 668, 688

(1991) (“[F]inancially interested actors cannot be

trusted to decide which restrictions on competition

advance the public interest; politically accountable

actors can.”). 
8

ways that sweep more broadly than

necessary to protect the interests of

federalism.52 Health care has not been

immune to these overly broad

interpretations.53 

Panelists cited specific areas in

which entities might improperly invoke the

state action doctrine to shield

anticompetitive conduct in health care

markets, including: (1) efforts by the

medical staff of public hospitals to withhold

staff privileges from rival health care

providers;54 (2) state efforts to sanction

hospital mergers without federal antitrust

review;55 and (3) private efforts to use state

agencies’ frequent reliance on private

credentialing bodies to raise barriers to entry

or otherwise limit competition.56 

The Commission has an ongoing

advocacy role in encouraging states to

consider the competitive implications of

proposed legislation. For example, state

legislators have asked the Commission to

comment on draft legislation that would

shield physicians from antitrust liability for

collective bargaining. Commission staff

have responded by noting that “an antitrust

exemption (i) would authorize physician

price fixing, which is likely to raise costs

and reduce access to care; and (ii) would not

improve the quality of care, which can be

accomplished through less anticompetitive

means.”57 State reaction to Commission

advocacy on this point has been “varied but,

in large part, positive.”58

52 FTC, STATE ACTION REPORT, supra note

47, at 25-49; Delacourt 6/11 at 8, 134.

53

 See Jackson v. W. Tennessee Healthcare,

Inc., 2004 U.S. Dist. LEXIS 4571 (W.D. Tenn.

2004); Crosby v. Hosp. Auth. of Valdosta, 93 F.3d

1515, 1532 (11th Cir. 1996) (stating that “clear

articulation” test requires “only that the

anticompetitive conduct be reasonably anticipated,

rather than the inevitable, ordinary, or routine

outcome of a statute”) (quoting FTC v. Hosp. Bd. of

Dir. of Lee County, 38 F.3d 1184 (11th Cir. 1994));

Martin v. Mem’l Hosp. at Gulfport, 86 F.3d 1391 (5th

Cir. 1996). See also FTC, STATE ACTION REPORT,

supra note 47, at 29-33. 

54 Havighurst 6/11 at 40.

55

 Id. at 44-45.

56

 Id. at 46-48 (asserting that “[t]he

pharmacy profession has succeeded over the last ten

years in raising the minimum training for pharmacists

from five to six years,” resulting in “a huge shortage

of pharmacists” and cost increases); Lyon 6/11 at 60-

70 (arguing that a private, national nursing

organization has persuaded state nursing boards to

raise barriers to entry to the nursing profession by

adding certain certification or licensing

requirements); McClure 6/11 at 91-94, 112-13

(arguing that the American Dental Association has

persuaded some state dental boards to pursue

disciplinary action against dentists who advise their

patients to have fillings made with amalgam

containing mercury removed). 

57 FTC, STATE ACTION REPORT, supra note

47, at 67, citing Letter from Richard A. Feinstein,

Assistant Director, Federal Trade Commission, to

Robert R. Rigsby, District of Columbia Office of

Corporation Counsel (Oct. 29, 1999) (regarding Bill

No. 13-333), at http://www.ftc.gov/be/hilites/

rigsby.htm; Prepared Statement Concerning the

“Quality Health-Care Coalition Act of 1999”:

Hearing on H.R. 1304 Before the House Comm. on

the Judiciary, 106th Cong. 5 (1999) (Statement of

Robert Pitofsky, Chairman, Federal Trade

Commission), at http://www.ftc.gov/os/1999/06/

healthcaretestimony.htm; Letter from William J.

Baer, Director, Federal Trade Commission, to Rene

O. Oliveira, Texas House of Representatives (May

13, 1999) (regarding Senate Bill 1468), at

http://www.ftc.gov/be/v990009.htm.

58 FTC, STATE ACTION REPORT, supra note

47, at 67. One panelist explicitly supported the

FTC’s competition advocacy on this issue. 
9

Likewise, the Commission recently

issued a report on competition in the market

for online contact lens sales.59 The report

recommends that states considering

regulating the sellers of replacement lenses

assess the competitive effects of their

actions. Specifically, it cautions that

“requiring a professional license to sell

replacement contact lenses over the Internet

is likely to raise prices and/or reduce

convenience to consumers without

substantially increasing health

protections.”60 

The report noted that “consumers can

often achieve significant savings by

purchasing replacement lenses from sellers

other than their eye care providers,”

including from online vendors.61 The report

recognized, however, that patients could hurt

their eyes by getting and wearing

replacement contact lenses without a valid

prescription, and that requiring patients to

have valid prescriptions for their

replacement lenses induces them to get

regular eye exams.62 Imposing a

prescription requirement for contact lens

sellers, the report noted, thus may make

sense.63 

The critical policy question is

whether additional state regulation –

particularly regulation requiring contact lens

sellers to have a state professional license,

such as an optician’s license – is likely to

hurt, or help, consumer welfare. Although

such a licensing requirement may afford

some consumer benefits, those benefits may

be available through other, less restrictive

means, and the extra regulation may “induce

Internet sellers to charge higher prices or

exit the market entirely, harming

consumers.”64 Indeed, the resulting increase

in price or curtailed convenience in ordering

replacement lenses might lead some to

“over-wear their lenses or forgo replacement

lenses altogether.”65 For these reasons, the

report urged state decision-makers to

carefully tailor their regulatory efforts in this

area to promoting consumer welfare,

without enacting unnecessary licensing

requirements that could drive low-cost

Internet sellers from the market.66 

The Agencies have extensive

experience with the state action doctrine in

health care cases. As Chapter 2 reflects, a

case implicating the state action doctrine is

currently pending in administrative

litigation.67 As Chapter 1 similarly reflects,

Havighurst 6/11 at 46.

59

 See FEDERA L TRADE COMM’N, POSSIBLE

ANTICOMPETITIVE BARRIERS TO E-COMM ERCE:

CONTACT LENSES (2004), available at

http://www.ftc.gov/os/2004/03/040329clreportfinal.p

df. The report followed a 2002 public workshop on

possible barriers to competition in e-commerce

markets in contact lenses and nine other industries. 

Id. at 2-3. 

60

 Id. 

61

 Id. at 13. 

62

 Id. at 9.

63

 Id. at 15-16.

64

 Id. at 22-23.

65

 Id. at 23.

66

 See also supra Chapter 2 (noting similar

considerations apply to telemedicine). 

67

 See In re S.C. State Bd. of Dentistry, No.

9311, http://www.ftc.gov/os/adjpro/d9311/index.htm. 
10

the Agencies have jointly filed amicus briefs

regarding the scope of the state action

doctrine in several health care antitrust

cases. Deciding one of these cases en banc,

the Fifth Circuit made clear that courts

should not “infer ... a policy to displace

competition from naked grants of authority” 

that serve as “the enabling statutes by which

myriad instruments of local government

across the country gain basic corporate

powers.”68 To do otherwise would extend

Parker “downward, contrary to the teaching

that local instruments of government are

subject to the Sherman Act.”69 

B. Noerr-Pennington Doctrine

The First Amendment protects the

right to petition the government for redress

of grievances. Informed by that

Amendment, the Noerr doctrine immunizes

petitioning from scrutiny under the Sherman

Act, even when such petitioning is done “to

restrain competition or gain advantage over

competitors.”70 By shielding individuals’

rights to petition the government for redress

of grievances, Noerr acts as an “important

limitation on the antitrust laws.”71

Some courts have read this doctrine

too broadly. One important limitation on the

Noerr doctrine relates to the definition of

“petitioning the government.” The Noerr

doctrine does not cover every

communication to the government. Rather,

Noerr properly shields conduct directed

toward obtaining discretionary governmental

action.

The Commission has urged this point

in a case involving health care. As amicus

curiae in In re Buspirone, the Commission

successfully persuaded the court that a drug

manufacturer’s listing of a patent in the

Food and Drug Administration’s “Orange

Book” involves no discretionary government

decision or action for which a drug

manufacturer “petitions,” and thus does not

enjoy Noerr protection.72 In that case,

Bristol-Myers Squibb (BMS) had allegedly

foreclosed competition on one of its drugs

by improperly submitting patents for listing

in the Food and Drug Administration’s

(FDA) Orange Book. Under the Drug Price

Competition and Patent Term Restoration

Act,73 known popularly as the HatchWaxman Amendments, innovator drug

companies that list their drug patents in the

FDA’s Orange Book could, under certain

68 Surgical Care Ctr. of Hammond v. Hosp.

Serv. Dist. No. 1 of Tangipahoa Parish, 171 F.3d

231, 236 (5th Cir. 1999).

69

 Id. 

70 Andrx Pharm. v. Biovail, 256 F.3d 799,

817 (D.C. Cir. 2001), cert. denied, 122 S. Ct. 1305

(2002). The doctrine is named for the seminal cases

that treated it: Eastern R.R. Presidents Conference v.

Noerr, 365 U.S. 127 (1961), and United Mine

Workers v. Pennington, 381 U.S. 657 (1965).

71

 Prepared Statement: Hearing on Generic

Pharmaceuticals Before the S. Comm. on Commerce,

Sci., and Transp., 107th Cong. 5 (2002) (Statement of

Timothy J. Muris, Chairman, Federal Trade

Commission), at http://www.ftc.gov/os/2002/04/

pharmtestimony.htm; see also Delacourt 6/11 at 18

(noting that goal of Noerr doctrine is to “prevent

antitrust enforcement from halting or even chilling

legitimate political conduct”). 

72

 In re Buspirone Patent Litigation, 185

F.Supp.2d 363, 369 (S.D.N.Y. 2002). 

73 Pub. L. No. 98-417, 98 Stat. 1585 (1984)

(codified as amended at 21 U.S.C. § 355 and 35

U.S.C. § 271(e)), amending the Federal Food, Drug,

and Cosmetic Act, Pub. L. No. 52-675, 52 Stat. 1040

(1938) (codified as amended at 21 U.S.C. §§ 301-

397)).
11

circumstances, automatically win a stay of

FDA approval of any generic rival to that

drug for up to 30 months.74 BMS argued

that its submission of patent information for

listing in the Orange Book was a petitioning

of the government and was thus immune

from antitrust review under Noerr.

75 As the

Commission noted in its amicus brief,

however, a company’s Orange Book filing

constitutes the formulaic provision of data in

a manner that is informational and

mechanical. The FDA, in turn, lists the

provided data in the Orange Book in a

manner that is purely ministerial. The court

thus found that Orange Book listings are as

ministerial as tariff filings, which have

routinely been held to fall outside the scope

of Noerr immunity.76

Likewise, in the Commission’s

independent action against BMS, the

Commission alleged inter alia that BMS

“abus[ed] FDA regulations to block generic

entry; ma[de] false statements to the FDA in

connection with listing patents in the Orange

Book; engag[ed] in inequitable conduct

before the U.S. Patent and Trademark Office

to obtain patents; and fil[ed] baseless patent

infringement suits.”77 The Commission

stated that BMS’s conduct fell outside the

scope of Noerr. Among other reasons for

this conclusion, the Commission noted that

“just as the repeated filing of lawsuits

brought without regard to the merits, and for

the purpose of using the judicial process (as

opposed to the outcome of the process),

warrants rejection of Noerr immunity, so too

do the alleged repeated filing of patents on

the Orange Book without regard to their

validity, enforceability, or listability;

repeated filing of recklessly or deliberately

false statements with government agencies;

and filing of lawsuits brought with or

without regard to the merits, also cause the

actions challenged here to fall outside the

scope of Noerr’s protection.”78

Conclusion. The state action and

Noerr doctrines play important roles in

promoting such values as federalism and the

right to petition the government for redress

of grievances. Taken too far, these doctrines

can impede efforts to maintain vigorous

competition in the health care field. The

Agencies will continue to advocate in all

appropriate venues for interpretations of

these doctrines that are consistent with the

principles that justify the doctrines in the

first place. 

III. LONG-TERM CARE

Introduction. Long-term care

facilities play an important role in our health

care system. Industry representatives, as

well as legal, economic, and academic

experts on the health care industry, spoke at

the Hearings on a panel discussing

Competition Law and Long Term

Care/Assisted Living Facilities issues on

74

 See 21 U.S.C. § 355(j)(5)(B)(iii).

75

 See Buspirone, 185 F.Supp.2d at 369.

76

 See id. at 371.

77

 See Federal Trade Comm’n, Analysis to

Aid Public Comment: In re Bristol-Myers Squibb

Company, at http://www.ftc.gov/os/2003/03

/bristolmyersanalysis.htm. The matter was settled by

consent decree. See In re Bristol-Myers Squibb, No.

C-4076 (Mar. 7, 2003) (agreement containing consent

order), available at http://www.ftc.gov/os/2003

/03/bristolmyersconsent.pdf.

78 FTC, Analysis to Aid Public Comment,

supra note 77. 
12

June 11.79 

Several forces drive the market for

long-term care, including the aging of the

population, growing consumer awareness,

restrictions on entry imposed by CON, and

changing consumer preferences.80 Various

long-term care options are available,

including nursing homes, assisted living

facilities, home care, and adult care.81

Assisted living facilities are the most rapidly

growing form of senior housing.82 Panelists

discussed several challenges in the market

for long-term care, including consumer

information and the role of competition. 

A. Consumer Information

Long-term care facilities make

varying degrees of information available to

consumers. Marketing materials, contracts,

websites and publications, tours of care

facilities, and communications with

residents and families are the principal

means for disclosure of information.83

Information regarding nursing homes is also

available from public sources, including

state and federal agencies.84 Although these

sources provide a considerable volume of

information to consumers of nursing home

care, panelists stated that much work

remains to develop “ways to collect and

present accurate, meaningful information

that consumers can use.”85 One panelist

observed that less information is available

regarding assisted living facilities, and

expressed concern about the reliability of the

information that is disclosed.86 

Panelists noted that it is difficult to

provide consumer information regarding

quality of long-term care because of

difficulties defining and measuring

“quality.”87 One panelist noted that

79 Complete lists of participants on these

and other panels are available infra Appendix A and

in the Agenda, at http://www.ftc.gov/ogc

/healthcarehearings/completeagenda.pdf.

80 Thayer 6/11 at 147-48; Jan Thayer,

Assisted Living 19 (6/11) (slides) [Thayer

Presentation], at http://www.ftc.gov/ogc/

healthcarehearings/docs/030611thayer.pdf; U.S.

DEP’T OF HEALTH & HUMAN SERVICES, HIGH

SERVICE OR HIGH PRIVACY ASSISTED LIVING

FACILITIES, THEIR RESIDENTS AND STAFF: RESULTS

FROM A NATIONAL SURVEY 1 (2000) [hereinafter

HHS, ASSISTED LIVING SURVEY], available at

http://aspe.hhs.gov/daltcp/reports/hshpes.htm. 

81 Thayer 6/11 at 141. Hospice care is also

available to consumers with a terminal condition. 

82 HHS, ASSISTED LIVING SURVEY, supra

note 80, at 1.

83 Thayer 6/11 at 149; Thayer Presentation,

supra note 80, at 22-24; Love 6/11 at 172; Keren

Brown Wilson, Assisted Living: Evolving Model for

A New General of Elderly 12-13 (6/11) [K. Wilson

(stmt)], at http://www.ftc.gov/ogc/healthcarehearings/

docs/030611wilson.pdf; Manard 6/11 at 175-76. 

84

 See Centers for Medicare & Medicaid

Services, Dep’t of Health & Human Services,

Nursing Home Compare, http://www.medicare.gov/

NHCompare/home.asp (Page Last Updated Feb. 19,

2004).

85 Manard 6/11 at 174-75; Edelman 6/11 at

188.

86 Edelman 6/11 at 188; see also HHS,

ASSISTED LIVING SURVEY, supra note 80, at 2.

87 J. Lynn 5/30 at 178, 192-93; K. Wilson

(stmt), supra note 83, at 15-16; Jan Thayer, Written

Statement of Jan Thayer On Behalf of The National

Center for Assisted Living, Federal Trade

Commission/Department of Justice, Hearing on Long

Term Care/Assisted Living 5 (6/11) [hereinafter

Thayer (stmt)]; see also U.S. DEP’T OF HEALTH &

HUMAN SERVICES, OFFICE OF INSPECTOR GENERAL,
13

consumers care about both quality of care

and quality of life, but these terms mean

different things to different people, and

views on these subjects can change over

time.88 Panelists observed that consumer

information must be usable, reliable, and

relate to consumer values for it to have

beneficial consequences.89

Several panelists stated that too

much emphasis is currently placed on

measures of quality that are prone to

misinterpretation or that give an inaccurate

picture of the quality of services provided.90

One panelist pointed out that “almost every

measure of quality in a care system will look

better if the very sick die quickly.”91

Providers and regulatory agencies may also

focus on attributes of quality (e.g., safety)

that are less significant to consumers than

other attributes of quality (i.e., dignity).92

Panelists agreed that more research is

necessary to link the quality measures

collected by providers and regulatory

agencies to quality of care and quality of life

as experienced by consumers.

93 Panelists

expressed concern that regulations required

them to collect and disseminate information

that was irrelevant to what consumers cared

about (quality of care and quality of life).94

Panelists suggested several ways to

improve mandated disclosure of

information, consumer information,

including the development of standardized

quality measures,95 greater consideration of

the accessibility and usability of the

information,96 and enlisting the assistance of

family members.97 There was less

agreement on the use of formal contracts to

communicate information and address

provider liability concerns (“negotiated risk

NURSING HOME DEFICIENCY TRENDS AND SURVEY

AND CERTIFICATION PROCESS CONSISTENCY (Mar.

2003).

88 Thayer (stmt), supra note 87, at 5. 

89

 Id. at 5-6; J. Lynn 5/30 at 176. 

90 K. Wilson (stmt), supra note 83, at 16; K.

Wilson 6/11 at 163; Thayer (stmt), supra note 87, at

7; Manard 6/11 at 180. 

91 J. Lynn 5/30 at 196.

92 K. Wilson (stmt), supra note 83, at 5-6,

16-17; K. Wilson 6/11 at 156-58; Thayer (stmt),

supra note 87, at 7-8; Thayer 6/11 at 151-152. 

93 Thayer (stmt), supra note 87, at 7; see

also Thayer 6/11 at 151; Manard 6/11 at 180; K.

Wilson 6/11 at 162-63.

94 Thayer (stmt), supra note 87, at 8; K.

Wilson (stmt), supra note 83, at 17.

95 Thayer (stmt), supra note 87, at 6; Thayer

6/11 at 150; Manard 6/11 at 176, 178; J. Lynn 5/30 at

178-79; Joanne Lynn, Care to Count on When You

Need It Most - Reforming Health Care Policy For

Fatal Chronic Illness 16 (5/30) (slides), at

http://www.ftc.gov/ogc/healthcarehearings/docs/0305

30lynnjoanne.pdf. 

Several panelists stated that consumers want

more information on staffing patterns. Edelman 6/11

at 192-93; Paul 6/11 at 206-07; Love 6/11 at 218-19. 

One panelist suggested that the measures might

include the suitability of the long-term care facility

for consumers with a particular medical condition. 

96 Paul 6/11 at 203; Manard 6/11 at 178; see

also Edelman 6/11 at 194-96; K. Wilson (stmt), supra

note 83, at 7. 

97 K. Wilson (stmt), supra note 83, at 9;

Thayer (stmt), supra note 87, at 8.
14

agreements”),98 and on the effects of

increased compensation for workers.99 

B. Competition in the Market for

Long-Term Care

There are a number of impediments

to competition in the market for long-term

care.100 Many consumers are too sick, lack

the time, or have insufficient information to

shop around for nursing home care.101

Consumers interested in assisted living

facilities are less subject to these

impediments, but less information is

available for them to use. Medicare and

Medicaid are dominant purchasers in the

nursing home market; Medicaid covers more

than two-thirds of residents and Medicare

covers an additional 10 percent.102 Medicaid

plays a very small role and Medicare plays

no role in the market for assisted living

facilities.103 One panelist complained that

Medicare and Medicaid payment levels are

so low that nursing homes discriminate

against program beneficiaries when deciding

who to admit.104 Panelists and

commentators have complained that CON

restricts entry and protects incumbent

providers. 105 

The Agencies applaud the disclosure

of information to consumers in the market

for long-term care. The Agencies urge states

with CON programs involving long-term

care facilities to reconsider whether they are

best serving their citizens’ health care needs

by allowing these programs to continue.106

IV. INTERNATIONAL

PERSPECTIVES

Introduction. All health care

markets worldwide face the same triad of

challenges: reducing health care costs,

improving quality, and increasing access.

107

98 Assisted Living Federation of America,

ALFA Releases Negotiated Risk Manual (Apr. 3,

2000), at http://www.alfa.org/public/articles/

details.cfm?id=119; Eric Carlson, In the Sheep’s

Clothing of Resident Rights: Behind the Rhetoric of

“Negotiated Risk,” NAELA QUARTERLY, Spring

2003, at 1-2, available at http://www.nsclc.org/

articles/neg_risk_naela.pdf; K. Wilson (stmt), supra

note 83, at 7; see also K. Wilson 6/11 at 159-160;

Edelman 6/11 at 219-20.

99 K. Wilson (stmt), supra note 83, at 18;

Edelman 6/11 at 196-97; see also Manard 6/11 at

184.

100 J. Lynn 5/30 at 199; see also Thayer

(stmt), supra note 87, at 7.

101 J. Lynn 5/30 at 199; Manard 6/11 at 176.

102 Manard 6/11 at 173-74.

103 Thayer (stmt), supra note 87, at 8;

Manard 6/11 at 182.

104 Edelman 6/11 at 195-96

(“[D]iscrimination against Medicaid beneficiaries has

been a common problem for decades.”).

105 Price 6/10 at 103 (“[I]t is a Certificate of

Need process in Vermont that keeps the oligopoly in

place.”); see also supra notes 37-42, and

accompanying text. 

106

 See supra notes 37-42, and

accompanying text. 

107 William M. Sage & Peter J. Hammer, A

Copernican View of Health Care Antitrust, 65 LAW

AND CONTEMP. PROB. 241, 248 (2002)

(“[U]nderlying all health care systems are

qualitatively similar problems, resources, and

objectives.”); Peter S. Hussey et al., How Does the

Quality of Care Compare in Five Countries, 23

HEALTH AFFAIRS 89 (May/June 2004) (identifying

quality problems in health care delivery worldwide);

ORGANIZATION FOR ECONOMIC COOPERATION &

DEVELOPMENT (OECD), TOWARD S HIGH-
15

Industry representatives, as well as legal,

economic, and academic experts on the

health care industry, spoke at the Hearings

on a panel discussing International

Perspectives on Health Care and

Competition Law and Policy on September

30.108

Most countries employ a mix of

public and private financing and delivery

systems, coupled with substantial regulation

and subsidies.109 Panelists agreed that

competition law and policy play important

but constrained roles in their countries.110

Panelists also considered the significance of

market concentration and consumer

information in their respective countries. 

A. International Perspectives on

Competition and Health Care

In countries throughout the world,

people regard health care as “special.”111

This perception has led many to argue that

health care should not be subject to standard

antitrust principles, or that special

exemptions should be created.112 One

panelist observed that many in the health

care field are more concerned with why

competition laws are applied to health care,

and not with how such laws should be

applied.113 More generally, competition is

often viewed as irrelevant or even

destructive to health care quality.114 Efforts

by antitrust agencies to bridge this gap have

focused on education and outreach, but such

efforts have proven difficult.115 Antitrust

agencies need to engage in ongoing

competition advocacy to meet this

challenge.116

B. Concentration of Health Care

Markets

Health care markets worldwide are

becoming increasingly concentrated.117

Concentration can result in cost efficiencies

and economies of scale, but more

concentrated markets pose greater risks to

PERFORMING HEALTH SYSTEMS (2004).

108 Complete lists of participants on these

and other panels are available infra Appendix A and

in the Agenda, at http://www.ftc.gov/ogc/healthcare

hearings/completeagenda.pdf.

109 M. Jacobs 9/30 at 79-80; Purcell 9/30 at

56; Bhojani 9/30 at 13, 101. 

110

 See Purcell 9/30 at 74-75; Bhojani 9/30

at 16-17; M. Jacobs 9/30 at 87. Representatives of

the competition agencies of Australia, Ireland and

Taiwan testified at the Hearings.

111 Purcell 9/30 at 74-75, 91-93. 

112 Bhojani 9/30 at 17, 25-28; B. Cooper

9/30 at 38-39. 

113 Bhojani 9/30 at 16-17. 

114 Purcell 9/30 at 67, 74-75; M. Jacobs 9/30

at 86. 

115 Bhojani 9/30 at 16-19; Purcell 9/30 at

56; M. Jacobs 9/30 at 87 (challenges to antitrust

enforcement include “widespread professional and, to

a lesser extent perhaps, social opposition”).

116 M. Jacobs 9/30 at 85-88; Purcell 9/30 at

74-75. 

117 Liu 9/30 at 52-53 (noting concentration

of hospital markets and medical groups in Taiwan);

Purcell 9/30 at 61, 64-66 (noting concentration in

health insurance markets in Ireland); M. Jacobs 9/30

at 81-82 (noting concentration in multiple health care

financing and delivery markets in Australia and U.S.). 
16

competition.118 In addition, regulation can

easily create barriers to entry, which is likely

to worsen market concentration.119

C. Consumer Information in Health

Care Markets

Consumer information is a problem

in health care markets worldwide. Lack of

information is a significant problem for

many consumers.120 Restrictions on truthful

advertising create further barriers to

information flow.121 In some instances,

however, consumers also face an oversupply

of information and a paucity of resources to

compare such information.122 Some

countries have sought to address these

problems with standardized disclosures and

brochures.123 Consumer information

presents challenges for competition

agencies, governments, providers, and

individual consumers throughout the world.

V. REMEDIES

Introduction. Competition law is

only as good as the remedies it imposes. An

effective remedy must resolve the

anticompetitive harm, restore competition,

and prevent future anticompetitive

conduct.124 Optimal enforcement must steer

between over-deterrence and underdeterrence. Over-deterrence may occur if

conduct that is not, in fact, anticompetitive

is challenged, or if excessive sanctions are

imposed on anticompetitive conduct.125

118 M. Jacobs 9/30 at 82. See also supra

Chapter 3. 

119 Purcell 9/30 at 65-66 (“However

necessary risk equalization might be, it undoubtedly

represents a barrier to entry to the health insurance

market, as, of course, does the uncertainty about how

the whole scheme will operate.”). 

120 M. Jacobs 9/30 at 83 (“[I]n many

markets, there is almost no information at all.”). See

also supra Chapter 1. 

121 Purcell 9/30 at 107. See also supra

Chapter 7. 

122 B. Cooper 9/30 at 32 (“There’s actually a

lot of information out there. So consumers actually

have to deal with perhaps an oversupply of

information, but it’s very difficult to compare the

products of different funds the way the information is

presented. They’re comparing apples with oranges

and it makes life very hard.”); M. Jacobs 9/30 at 83. 

123 B. Cooper 9/30 at 32; Purcell 9/30 at 75. 

124

 See Robert Pitofsky, Antitrust at the

Turn of the Twenty-First Century: The Matter of

Remedies, 91 GEORGETOWN L.J. 169, 170 (2002)

(“Broadly speaking, the principal goals of antitrust

should be first, to deter anticompetitive conduct,

adjusting for the fact that much illegal conduct is not

detected; and second, to take illegal gains away from

the law violators and restore those monies to the

victims.”) See also Kursh 10/1 at 5-6 (“First and

foremost, the remedy must resolve the competitive

problem. The only legitimate goal of a civil antitrust

remedy, whether in a merger or a civil non-merger

context, is to restore competition to the marketplace .

. . . A second guiding principle [is that] [t]here must

be a close, logical nexus between the remedy and the

alleged violation . . . . The third guiding principle is .

. . that the remedy should promote competition and

not competitors . . . . And finally, but very

importantly, the remedy must be enforceable.”).

125

 See X PHILLIP E. AREEDA & HERBERT

HOVENKAM P, ANTITRUST LAW: AN ANALYSIS OF

ANTITRUST PRINCIPLES AND THEIR APPLICATION ¶

1741c, at 160 (2d ed. 2004) (“[F]urther inquiry may

be inadvisable because its expense or high error rate

would significantly deter desirable business behavior

without significantly deterring anticompetitive

behavior . . . This screening rationale applies . . . to

rule of reason inquiry because the litigation costs and

risks of error under that approach may exceed the

benefits of inquiry for many categories of cases.”);

Roxane C. Busey, American Bar Ass’n,

Commission’s Request for Comment on Remedial
17

Under-deterrence may occur if

anticompetitive conduct is not identified and

addressed, or if inadequate remedies are

imposed in response to such conduct.126 The

Agencies must avoid both of these extremes

to effect optimal deterrence, while

recognizing that bringing cases helps create

a “compliance norm.”127 As noted

previously, the Agencies have brought

almost twenty cases in the past two years

against providers allegedly engaged in

anticompetitive conduct. 

Industry representatives, as well as

legal, economic, and academic experts on

the health care industry, spoke at the

Hearings on a panel discussing Competition

Law and Remedies: Civil/Criminal on

October 1.128 Panelists disagreed on whether

the Agencies are over-deterring or underdeterring anticompetitive conduct in the

health care marketplace.129

A. Civil Antitrust Remedies

Civil remedies come in two basic

types (structural and conduct) and are

applied to two types of cases (merger and

non-merger). Enforcement officials must

assess whether the remedy should change

the structure of the industry, regulate the

conduct of the affected firms, or do both.130

Structural remedies, which require

the divestiture of some assets to preserve

competition, are more common in merger

cases.131 There is typically little need for

post-divestiture oversight because the

divestiture generally restores competition to

the pre-merger level.132 Because conduct

remedies can be difficult to formulate,

require ongoing oversight, and may be

difficult to modify in response to changed

circumstances, they are used less frequently

in merger cases.133 

Use of Disgorgement The Agencies rarely seek dissolution. (Public Comment) (noting

concern with duplicative liabilities and recoveries). 

126

 See, e.g., Pfizer, Inc. v. Government of

India, 434 U.S. 308, 315 (1978) (If plaintiffs are “not

permitted to seek remedy for their antitrust injuries,

persons doing business both in this country and

abroad might be tempted to enter into anticompetitive

conspiracies . . . .”). See HERBERT HOVENKAM P,

FEDERA L ANTITRUST POLICY: THE LAW OF

COMPETITION AND ITS PRACTICE §17 (2d ed. 1999);

WILLIAM BREIT & KENNETH G. ELZINGA, ANTITRUST

PENALTY REFORM: AN ECONOMIC ANALYSIS (1986).

127

 See generally TOM R. TYLER, WHY

PEOPLE OBEY THE LAW (1990).

128 Complete lists of participants on these

and other panels are available infra Appendix A and

in the Agenda, at http://www.ftc.gov/ogc/healthcare

hearings/completeagenda.pdf.

129

 Compare Bierig 10/1 at 70-72 and 109-

113, with Grady 10/1 at 56-60 and 116. 

130 O’Connor 10/1 at 24; Kursh 10/1 at 7.

131 Federal and State enforcers must balance

competing interests and concerns in arriving at the

appropriate structural remedy. See, e.g., Donahue

10/1 at 34-44. The enjoining of a proposed merger

also constitutes a structural remedy. 

132 O’Connor 10/1 at 26 (“The economists,

of course, tell us that structural remedies change the

incentive structure of the firms, and that compliance

is more likely with structural remedy than with

conduct remedies that require substantially more

judicial oversight.”); Kursh 10/1 at 7-8. 

133 An injunction barring some behavior

may put a firm at a disadvantage in reacting to

unforseen changes in the market. Kursh 10/1 at 7-9;

O’Connor 10/1 at 26 (“For example, there is general

agreement that divestiture is preferred in merger

cases.”). 
18

As the Commission wrote in its decision in

Indiana Federation of Dentists, dissolution

is appropriate “only in circumstances where

there is no significant function remaining for

an organization other than to repeat the

antitrust violations or in which a conduct

order would not reasonably be expected to

prevent repeating such violations.”134 Both

Agencies have settled a number of cases by

requiring the dissolution of the entity that

facilitated alleged anticompetitive

conduct.135 

Civil non-merger cases involve a far

broader range of settings and conduct.136

The Agencies have typically focused on

enjoining the conduct in question – a

strategy described by panelists and

commentators as “go and sin no more.”137 In

some instances, relief is also sought against

consultants and other parties who planned or

enabled the anticompetitive conduct.138

“Fencing-in provisions” are sometimes used

to prevent recurrence.139 The Agencies have

also required parties to terminate or modify

contracts,140 and generate written reports

regarding compliance efforts.

141

On rare occasions, disgorgement is

sought as well.142 Disgorgement is an

equitable remedy, designed to deprived the

wrongdoer of his unjust enrichment and to

deter others from future violations. The

Commission’s policy statement on

134 FTC v. Indiana Fed’n of Dentists, 101

F.T.C. 57 (1986). See also III PHILLIP E. AREEDA &

HERBERT HOVENKAM P, ANTITRUST LAW ¶ 653c, at

100 (2d ed. 2002) (“The strongest arguments for

dissolution, divestiture, or other structural relief

dissipating the monopolist’s power are deterrencebased. Such remedies are intended to prevent a

recurrence of § 2 violations by making the defendant

unable to engage in them.”).

135 United States v. Mountain Health Care,

P.A. 2003-2 Trade Cas. (CCH) P74,162, appeal

dismissed 2004 U.S. App. LEXIS 8641 (4th Cir.

2004); In re Carlsbad Physician Ass’n, No. C-4081

(May 2, 2003) (agreement containing consent order

to cease and desist), available at http://www.ftc.gov/

os/2003/05/carlsbadagree.pdf; In re Obstetrics and

Gynecology Med. Corp. of Napa Valley, No. C-4048

(May 14, 2002) (decision and order), available at

http://www.ftc.gov/os/2002/05/obgyndo.pdf. 

136 Kursh 10/1 at 9 (“[C]ivil non-merger

antitrust violations appear in infinite variety.”).

137 O’Connor 10/1 at 31; David Marx Jr.,

Messenger Models: What Can the Agencies do to

Prevent Provider Networks from Violating the

Antitrust Laws?, HEALTH LAW NEWS, April 2004, at

25. See also Singer 10/1 at 49 (“The core remedies

have been the typical cease and desist, don’t do it any

more remedies ....”).

138

 See In re Me. Health Alliance, No. C4095 (Aug. 27, 2003) (decision and order), available

at http://www.ftc.gov/os/2003/08/mainehealthdo.pdf;

In re Physician Network Consulting, No. C-4094

(Aug. 27, 2003) (decision and order), available at

http://www.ftc.gov/os/2003/08/physnetworkdo.pdf; In

re Aurora Assoc’d Primary Care Physicians, No. 011

0174 (May 9, 2002) (complaint), available at

http://www.ftc.gov/os/2002/05/auroracmp.pdf; Press

Release, U.S. Dep’t of Justice, Florida Physicians

Agree to Stop Illegal Joint Negotiations in Response

to Justice Department Lawsuit (Jan. 26, 1999), at

http://www.usdoj.gov/atr/public/press_releases/1999/

2196.htm. 

139 Kursh 10/1 at 10; Singer 10/1 at 49. 

Such provisions may prohibit even lawful conduct,

depending on the facts of the case and nature of the

harm and the market.

140 Kursh 10/1 at 11. 

141 Kursh 10/1 at 11.

142 Federal Trade Comm’n, Policy

Statement on Monetary Equitable Remedies in

Competition Cases, 68 FR 45820, 45821 (2003)

[hereinafter FTC, Monetary Equitable Remedies].
19

disgorgement outlines three factors that it

will consider when evaluating use of this

remedy.143 Three years ago, the Commission

pursued disgorgement in a monopolization

case in the healthcare industry, and secured a

settlement with Mylan Labs, Inc., of $100

million.144

Panelists debated the propriety of

disgorgement in health care cases. One

panelist stated that disgorgement will be

difficult to obtain because financial harm to

consumers often cannot be quantified.145

Another panelist believed disgorgement

should be employed more frequently to deter

anticompetitive conduct.146 One panelist and

commentators stated that the frequency of

alleged physician price fixing cases indicates

that physicians are insufficiently deterred by

existing remedies.

147 Another panelist

observed, however, that the Commission is

unlikely to seek disgorgement unless there

was a clear violation of the law that was “on

all fours with existing precedent.”148 The

Agencies will carefully consider whether

disgorgement is appropriate in all future

cases. 

Remedies may also have significant

consequences in other markets. 

Commentators have found that the

announcement of a Commission

enforcement action against an advertiser has

a significant impact on the advertiser’s share

price.149 Being the target of an enforcement

action is unlikely to enhance a provider’s

reputation.150

B. Criminal Antitrust Remedies

Some antitrust violations can give

rise to criminal sanctions. As noted

previously, the Division has exclusive

jurisdiction over enforcement of federal

criminal antitrust statutes. There have been

only a few criminal health care antitrust

cases.151 One panelist suggested that

criminal enforcement is inappropriate

because physicians do not understand the

antitrust laws, and do not intend to violate

143 FTC, Monetary Equitable Remedies,

supra note 142. The three factors are that: (1) the

underlying violation must be clear; (2) there must be

a reasonable basis for calculating the amount of

remedial payment; and (3) the value of seeking

disgorgement will be considered in light of other

remedies available in the matter, including private

actions and criminal proceedings. Id. 

144

 FTC v. Mylan Labs, Inc., Cv. 98-3114

(TFH) (D.D.C. Feb. 9, 2001) (alleged

monopolization; stipulated judgment included $100

million restitution); see Mem. Opinion, 62 F. Supp.

2d 25, 36-37 (D.D.C. 1999), revised and reaffirmed

in pertinent part, 99 F. Supp. 2d 1, 4-5 (D.D.C.

1999). 

145 Bierig 10/1 at 118.

146 Grady 10/1 at 115-16.

147

 Id. at 116 (“[T]he reason they haven’t

gotten the message is I don’t think they’re frankly

scared enough.”); Marx, supra note 137, at 28. 

148 Orlans 10/1 at 116-117.

149

 See Sam Peltzman, The Effects of FTC

Advertising Regulation, 24 J.L. & ECON. 403 (1981);

Alan Mathios & Mark Plummer, The Regulation of

Advertising by the Federal Trade Commission: 

Capital Market Effects, 12 RES. L. & ECON. 77

(1989).

150 Health care providers are greatly

concerned with their reputations. See William M.

Sage, Reputation, Malpractice Liability, and Medical

Error, in ACCOUNTABILITY: PATIENT SAFETY AND

POLICY RE FORM (Virginia A. Sharpe, ed., 2004).

151 Grady 10/1 at 53-56; Greaney 9/10/02 at

313.
20

them.152 Other panelists dismissed this

claim, and stated that both physicians and

their consultants should face criminal

sanctions in appropriate cases.153 The

Division is continuing to consider carefully

the appropriateness of criminal sanctions in

particular health care cases. 

Conclusion. Remedies are a critical

issue in implementing an effective

competition policy. If remedies are

inadequate, they will not have a credible

deterrent effect. If remedies are excessive,

they will over-deter, and discourage conduct

that is actually permissible. Balancing these

considerations is a difficult task. 

The Agencies view all

anticompetitive conduct as serious, and will

seek appropriate sanctions in light of the

considerations outlined previously. In

general, much more stringent measures are

necessary against those who violate the

antitrust laws repeatedly or flagrantly and

those who facilitate anticompetitive conduct

by multiple parties. The Division will also

pursue criminal sanctions in appropriate

cases. Disgorgement and/or dissolution will

be sought in appropriate cases. 

152 Bierig 10/1 at 68.

153 Grady 10/1 at 54-55, 94-95; O’Connor

10/1 at 103-04. 
APPENDIX A: 

WORKSHOP AND HEARINGS PARTICIPANTS 

PARTICIPANTS AT FTC WORKSHOP

SEPTEMBER 9-10, 2002

Primary Source: http://www.ftc.gov/ogc/healthcare/agenda.htm.

NAME AFFILIATION AS OF DATE OF TESTIMONY DATE

Sheila F. Anthony Commissioner, Federal Trade Commission 9/9/02

JoAnne Bailey U.S. General Accounting Office 9/10/02

J. Howard Beales, III Director, Bureau of Consumer Protection,

Federal Trade Commission

9/9/02

Robert Betz President/Chief Executive Officer, Health

Industry Group Purchasing Association 

9/10/02

Ashoke Bhattacharjya Senior Director, Business Information, Janssen

Pharmaceutica 

9/10/02

William Brewbaker, III Professor of Law, University of Alabama School

of Law

9/9/02

Ellen Burkett Clinical Director, MedSouth IPA 9/9/02

Rebecca Burkholder Director, Health Policy, National Consumer

League 

9/10/02

Lawton Robert Burns James Joo-Jin Kim Professor/Professor of

Health Care Systems and Management, Wharton

School of Business, University of Pennsylvania;

Director, Wharton Center for Health

Management & Economics

9/10/02

John E. Calfee Resident Scholar, American Enterprise Institute 9/10/02

Bruce Clark Assistant Vice President, Shared Services,

Intermountain Health Care 

9/10/02

Ellen S. Cooper Assistant Attorney General, Antitrust Division,

Maryland Office of the Attorney General

9/9/02

Helen Darling President, Washington Business Group on

Health

9/9/02

Henry R. Desmarais Senior Vice President, Policy and Information,

Health Insurance Association of America

9/9/02

Jarilyn Dupont Senior Legislative Counsel, Office of Policy,

Food & Drug Administration 

9/10/02
A-2

Steven Findlay Director, Research and Policy, National Institute

for Health Care Management Foundation

9/10/02

Stuart Fine Chief Executive Officer, Grand View Hospital;

representing American Hospital Association 

9/9/02

Stephen Foreman Director, Pennsylvania Medical Society Health

Services Research Institute; representing

American Medical Association

9/9/02

Lesley R. Frank Senior Advisor – Regulatory Counsel, Center

for Drug Evaluation and Research, U.S. Food &

Drug Administration 

9/10/02

Gregory Glover Partner, Ropes & Gray 9/10/02

Thomas L. Greaney Professor of Law/Co-Director, Center for Health

Law Studies, Saint Louis University School of

Law

9/10/02

Warren Greenberg Professor of Health Economics and Health Care

Sciences, George Washington University

9/9/02

Clifford Goodman Senior Scientist, The Lewin Group 9/10/02

Peter J. Hammer Assistant Professor of Law, University of

Michigan Law School

9/10/02;

5/28/03

Catherine I. Hanson Vice President/General Counsel, California

Medical Association

9/9/02

Larry Holden President, Medical Device Manufacturers of

American 

9/10/02

Stephanie W. Kanwit General Counsel/Senior Vice President, Public

Policy and Research, American Association of

Health Plans

9/9/02

William E. Kovacic General Counsel, Federal Trade Commission 9/10/02

Stephen Latham Director, Center for Health Law & Policy,

Quinnipiac University School of Law 

9/10/02

Thomas B. Leary Commissioner, Federal Trade Commission 9/10/02

Cara S. Lesser Senior Health Researcher, Center for Studying

Health System Change

9/9/02

Sarah Lock Senior Attorney, AARP Foundation Litigation 9/10/02
A-3

Peter Lurie Deputy Director, Health Research Group, Public

Citizen 

9/10/02

Deborah P. Majoras Principal Deputy Assistant Attorney General,

U.S. Department of Justice Antitrust Division

9/9/02

Carl Manley Vice President, Materials Management, Sentara

HealthCare 

9/10/02

Amanda McCloskey Director, Health Policy Analysis, Families USA 9/10/02

Timothy J. Muris Chairman, Federal Trade Commission 9/9/02

Donald J. Palmisano President Elect, American Medical Association 9/9/02

Sandra Raymond President/Chief Executive Officer, Lupus

Foundation of America 

9/10/02

David Reiffen Economist, Office of Economic Policy, U.S.

Treasury Department

9/10/02

Richard Samp Chief Counsel, Washington Legal Foundation 9/10/02

David Scheffman Director, Bureau of Economics, Federal Trade

Commission 

9/9/02

Bill Schultz Representing Generic Pharmaceutical

Association 

9/10/02

Joseph Simons Director, Bureau of Competition, Federal Trade

Commission 

9/9/02

Michael Wroblewski Assistant General Counsel, Office of Policy

Studies, Federal Trade Commission

9/10/02

William Vogt Assistant Professor of Economics and Public

Policy, H. John Heinz III School of Public

Policy and Management, Carnegie Mellon

University

9/9/02;

5/28/03

Lawrence Wu Vice President, National Economic Research

Associates, Inc.

9/9/02
A-4

PARTICIPANTS AT FTC/DOJ HEARINGS

FEBRUARY TO SEPTEMBER 2003

Primary Source: http://www.ftc.gov/ogc/healthcarehearings/completeagenda.pdf.

NAME AFFILIATION AS OF DATE OF TESTIMONY DATE

Edward Alexander President/Chief Executive Officer, Surgical

Alliance Corporation

3/27/03

Sharon Allen President/Chief Operating Officer, Arkansas

Blue Cross and Blue Shield

4/25/03

Stuart H. Altman Sol. C. Chaikin Professor of National Health

Policy, The Heller School for Social Policy &

Management, Brandeis University

2/28/03

Carl Ameringer Associate Professor of Political

Science/Director, Graduate Program in Public

Administration, University of Wisconsin

9/26/03

Ralph K. Andrew Director, Government Affairs, New York Eye

and Ear Infirmary

3/26/03

Meredyth Andrus Assistant Attorney General, Antitrust Division,

Maryland Office of the Attorney General

6/11/03

Jay Angoff Counsel, Roger G. Brown & Associates 4/24/03

Sheila F. Anthony Commissioner, Federal Trade Commission 4/11/03

Joseph Antos Wilson H. Taylor Scholar in Health Care and

Retirement Policy, American Enterprise

Institute; Adjunct Professor, School of Public

Health, University of North Carolina, Chapel

Hill

9/30/03

Susan Apold President, American College of Nurse

Practitioners; Dean of Nursing, College of

Mount St. Vincent

6/10/03

David A. Argue Corporate Vice President, Economists

Incorporated

3/28/03;

4/11/03;

9/24/03

Bartley Asner Chairman of the Board of Directors, California

Association of Physician Groups

9/25/03

Charles D. Baker President/Chief Executive Officer, Harvard

Pilgrim Health Care, Inc.

2/28/03
A-5

Jonathan B. Baker Professor of Law, American University

Washington College of Law

5/7/03

David Balto Partner, White & Case LLP 4/11/03;

6/26/03

Jonathan R. Bates President/Chief Executive Officer, Arkansas

Children’s Hospital

4/11/03

Anthony Barrueta Senior Counsel, Kaiser Foundation Health Plan,

Inc. 

6/26/03

Jeffrey C. Bauer Senior Vice President, Superior Consultant

Company, Inc.

6/10/03

Gloria Bazzoli Professor of Health Administration, Medical

College of Virginia, Virginia Commonwealth

University

5/28/03;

5/29/03

Carol Beeler Vice President, Operations, Health Inventures;

representing Federated Ambulatory Surgery

Association

3/26/03

Robert Berenson Senior Consultant, AcademyHealth 5/30/03

Harris A. Berman Chief Executive Officer, Tufts Health Plan 2/28/03

Sitesh Bhojani Commissioner, Australian Competition and

Consumer Commission

9/30/03

Jack Bierig Partner, Sidley Austin Brown & Wood LLP 10/1/03

Gregory G. Binford Partner, Benesch, Friedlander, Coplan &

Aronoff LLP

9/24/03

Roger D. Blair Huber Hurst Professor of Economics and Legal

Studies, University of Florida

4/24/03

Robert E. Bloch Senior Partner, Mayer, Brown, Rowe & Maw

LLP

9/26/03

Maxwell Gregg Bloche Professor of Law, Georgetown University

School of Law; Co-Director, Georgetown-Johns

Hopkins Joint Program in Law and Public

Health

6/10/03

James F. Blumstein Professor of Law, Vanderbilt Law School;

Director, Health Policy Center, Vanderbilt

Institute for Public Policy Studies

2/27/03

Thomas M. Boudreau Senior Vice President/General

Counsel/Corporate Secretary, Express Scripts

6/26/03
A-6

Stuart Bondurant Senior Special Assistant to the President,

Georgetown University for Medical Center

Affairs; representing Association of American

Medical Colleges

5/30/03

Jeffrey Brennan Assistant Director, Bureau of Competition,

Federal Trade Commission

6/26/03

William Brewbaker Professor of Law, University of Alabama School

of Law

9/26/03

James F. Burgess, Jr. Associate Professor, Boston University School

of Public Health

4/9/03

Lawton Robert Burns James Joo-Jin Kim Professor/Professor of

Health Care Systems, Wharton School of

Business, University of Pennsylvania; Director,

Wharton Center for Health Management &

Economics

4/9/03

Roxane Busey Partner, Gardner, Carton & Douglas 9/24/03

Bradford Buxton Senior Vice President, Health Care Management

Division, Blue Cross Blue Shield of Illinois

5/8/03

Tammi O. Byrd President-Elect, American Dental Hygienists’

Association

6/10/03

John E. Calfee Resident Scholar, American Enterprise Institute 6/26/03

Cory S. Capps Visiting Assistant Professor of Management &

Strategy, Kellogg School of Management,

Northwestern University

4/10/03

Laura Carabello Chief Creative Officer, CPRi Communications 6/12/03

Winifred Carson-Smith Counsel, American Nurses Association 2/27/03

Lawrence Casalino Assistant Professor, University of Chicago 5/28/03;

9/25/03

Joseph A. Cashia Chief Executive Officer/Co-Founder, National

Renal Alliance, LLC

9/30/03

Carolyn Clancy Director, Agency for Healthcare Research and

Quality, U.S. Department of Health and Human

Services

5/27/03;

5/28/03

William Cohen Assistant General Counsel, Office of Policy

Studies, Federal Trade Commission 

6/26/03
A-7

Marcia L. Comstock Chief Operating Officer/Board of Directors,

Wye River Group on Healthcare

6/12/03

Paul Conlon Vice President, Clinical Quality and Patient

Safety, Trinity Health; Clinical Assistant

Professor of Pharmacy, University of Michigan

5/29/03

Michael Connair Orthopedic Surgeon; Clinical Instructor, YaleNew Haven Hospital and the Hospital of St.

Raphael

9/26/03

Bruce Cooper Director, Professions Compliance Unit,

Enforcement and Coordination Branch,

Australian Competition and Consumer

Commission

9/30/03

Ellen S. Cooper Assistant Attorney General, Antitrust Division,

Maryland Office of the Attorney General

6/26/03

Donald Crane President/Chief Executive Officer, California

Association of Physician Groups

5/7/03

Christine Crofton Social Scientist, Center for Quality Improvement

and Patient Safety, Agency for Healthcare

Research and Quality, U.S. Department of

Health and Human Services

5/30/03

Dan L. Crippen Former Director, Congressional Budget Office 9/30/03

Jon Christianson Professor, Healthcare Management, University

of Minnesota

5/28/03

Serdar Dalkir Industrial Organization Economist,

Microeconomic Research Consulting Associates

5/8/03

Bernie Dana Consultant for Long Term Care

Management/Assistant Professor of Business,

Evangel University; representing American

Health Care Association

6/12/03

Charles Darby Co-Project Officer on Consumer Assessment of

Health Plans (CAHPS) Survey, Center for

Quality Improvement and Patient Safety,

Agency for Healthcare Research and Quality,

U.S. Department of Health and Human Services

5/30/03

Helen Darling President, Washington Business Group on

Health

2/27/03;

4/23/03;

6/12/03
A-8

Jacqueline M. Darrah Director, Health Law Division, American

Medical Association

2/27/03

Nancy Davenport-Ennis President/Chief Executive Officer, National

Patient Advocate Foundation

5/29/03

John Delacourt Assistant Director, Office of Policy Planning,

Federal Trade Commission

6/11/03

Suzanne Delbanco Executive Director, The Leapfrog Group 5/29/03

Henry R. Desmarais Senior Vice President, Policy and Information,

Health Insurance Association of America

2/27/03;

4/23/03

John Dicken Assistant Director for Health Care Issues, U.S.

General Accounting Office

6/26/03

Fred Dodson Vice President, Network Management,

PacifiCare of California

4/23/03

James A. Donahue, III Chief Deputy Attorney General, Antitrust

Section, Pennsylvania Office of Attorney

General

10/1/03

Timothy F. Doran Pediatrician; representing American Academy of

Pediatrics

2/27/03

Claudia H. Dulmage Attorney, U.S. Department of Justice Antitrust

Division 

6/26/03

Toby S. Edelman Attorney, Center for Medicare Advocacy 6/11/03

David Eisenstadt Co-Founder, Microeconomic Consulting and

Research Associates, Inc.

3/28/03;

4/10/03

William Encinosa Health Economist, Agency for Healthcare

Research and Quality, U.S. Department of

Health and Human Services

5/28/03

Lynn James Everard Co-Founder, The Foundation for Healthcare

Integrity

9/26/03

Eugene Anthony Fay Vice President, Government Affairs, Province

Healthcare Co.

4/10/03

Judy Feder Professor/Dean of Public Policy, Georgetown

University

2/27/03

Roger Feldman Blue Cross Professor of Health

Insurance/Professor of Economics, University of

Minnesota 

4/23/03
A-9

Howard Feller Partner, McGuire Woods LLP 9/24/03

Elliot Fisher Professor of Medicine and Community and

Family Medicine, Dartmouth Medical School

and the Center for the Evaluative Clinical

Studies

5/27/03

Mark Flaherty Attorney 9/26/03

Stephen Foreman Director, Pennsylvania Medical Society Health

Services Research Institute; representing

American Medical Association

4/24/03;

4/25/03;

5/7/03

Nancy Foster Senior Associate Director, Health Policy,

American Hospital Association

5/29/03

Walton Francis Economist and Policy Analyst 9/30/03

Irene Fraser Director, Center for Organization and Delivery

Studies, Agency for Healthcare Research and

Quality, U.S. Department of Health and Human

Services

5/28/03;

5/29/03 

H.E. Frech, III Professor of Economics, University of

California, Santa Barbara

3/26/03;

3/27/03;

4/24/03;

4/25/03

Jon Gabel Vice President, Health Systems Studies, Health

Research and Educational Trust; representing

American Hospital Association

4/23/03

Martin Gaynor E.J. Barone Professor of Economics and Public

Policy, H. John Heniz III School of Public

Policy and Management, Carnegie Mellon

University

2/26/03;

5/7/03;

5/27/03;

5/28/03

John E. Gebhart, III Chairman/Chief Executive Officer,

DoctorQuality, Inc.

6/12/03

Jeffrey Geppert Senior Analyst, Center for Primary Care and

Outcomes Research, Center for Health Policy,

Stanford University

5/28/03

Newt Gingrich Chief Executive Officer, The Gingrich Group 6/12/03

Paul B. Ginsburg President, Center for Studying Health System

Change

2/26/03;

4/23/03
A-10

Daniel P. Gitterman Assistant Professor of Public Policy and

Political Science, University of North Carolina,

Chapel Hill

6/25/03

Ruth Given Health Care Director, Deloitte Research,

Deloitte Consulting and Deloitte & Touche

4/24/03

Kevin Grady Partner, Alston & Bird LLP; Chair, American

Bar Association Section of Antitrust Law

10/1/03

Thomas L. Greaney Professor of Law/Co-Director of the Center for

Health Law Studies, Saint Louis University

School of Law

2/27/03

Warren Greenberg Professor of Health Economics and Health Care

Sciences, George Washington University

5/28/03;

6/12/03

Warren Grimes Professor of Law, Southwestern University

School of Law

6/26/03

Margaret E. Guerin-Calvert Principal, Competition Policy Associates, Inc. 3/26/03;

3/27/03;

4/10/03;

5/8/03;

9/24/03

Stuart Guterman Director, Office of Research, Development, and

Information, Centers for Medicare and Medicaid

Services

5/29/03

Dennis A. Hall President, Baptist Health System, Inc. 4/25/03

Peter J. Hammer Assistant Professor of Law, University of

Michigan Law School

2/27/03

Russell D. Harrington, Jr. President/Chief Executive Officer, Baptist

Health

4/11/03

Barry C. Harris Principal, Economists Incorporated 3/26/03;

4/23/03

Clark Havighurst Professor of Law, Duke University Law School 6/11/03

Curt Hawkinson Chair, Professional Practice Council, American

Association of Physician Assistants

9/25/03

Gary Heiman President/Chief Executive Officer, Standard

Textile

9/26/03

John Hennessy Executive Director, Kansas City Cancer Centers 6/10/03
A-11

Regina Herzlinger Nancy R. McPherson Professor of Business

Administration, Harvard Business School

5/27/03

Judith Hibbard Professor of Health Policy, University of

Oregon; Clinical Professor of Public Health and

Preventative Medicine, Oregon Health &

Sciences University

5/29/03

Said Hilal President/Chief Executive Officer/Member of

the Board of Directors, Applied Medical

Resources Corporation

9/26/03

J. Edward Hill Member, Board of Trustees, American Medical

Association

9/25/03

Albert Holloway, Jr. President/Chief Executive Officer/Founder, The

IPA Association of America

9/25/03

Debra Holt Economist, Bureau of Economics, Federal Trade

Commission

3/27/03

Jamie E. Hopping Chief Operating Officer, Ardent Health Services 4/11/03

Robert L. Hubbard Director of Litigation/Assistant Attorney

General, Antitrust Bureau, Office of New York

State Attorney General

4/10/03

Robert E. Hurley Associate Professor, Department of Health

Administration, Virginia Commonwealth

University; representing Center for Studying

Health System Change

4/9/03

David A. Hyman Professor of Law, University of Maryland

School of Law; Special Counsel, Federal Trade

Commission

6/25/03;

5/28/03

Ralph Ibson Vice President, Government Affairs, National

Mental Health Association

6/25/03

Lisa Iezzoni Health Services Researcher, Division of General

Medicine and Primary Care, Beth Israel

Deaconess Medical Center 

5/28/03

Karen Ignagni President/Chief Executive Officer, American

Association of Health Plans

5/27/03

Harold N. Iselin Partner, Couch White, LLP 3/27/03

Jon B. Jacobs Attorney, U.S. Department of Justice Antitrust

Division

3/28/03
A-12

Michael Jacobs Professor of Law, DePaul University College of

Law 

9/30/03

Peter D. Jacobson Associate Professor, University of Michigan

School of Public Health

4/10/03

Brent James Executive Director, Institute for Health Care

Delivery Research, Inter mountain Health Care

5/28/03

Clifton E. Johnson Partner, Hall, Render, Killian, Heath & Lyman,

P.S.C.

6/26/03

Charles N. Kahn, III President, Federation of American Hospitals 2/27/03;

5/29/03

James J. Kane, Jr. Cardiologist, Little Rock Cardiology Clinic,

P.A.

4/11/03

Stephanie W. Kanwit General Counsel/Senior Vice President, Public

Policy and Research, American Association of

Health Plans

2/27/03;

4/25/03;

6/25/03

Dennis I. Kelly Executive Vice President, Development &

Government Relations, MedCath Corporation

3/27/03

Greg Kelly Executive Director, Coalition Against

Guaranteed Issue

6/12/03

Richard Kelly Attorney, Bureau of Consumer Protection,

Federal Trade Commission

6/12/03

Daniel Kessler Professor, Stanford Business School 5/28/03;

5/29/03

Kenneth W. Kizer President/Chief Executive Officer, National

Quality Forum

6/11/03

Morris Kleiner Professor of Public Affairs and Industrial

Relations, Humphrey Institute of Public Affairs

and the Industrial Relations Center, University

of Minnesota

6/10/03

Anthony J. Knettel Vice President, Health Affairs, The ERISA

Industry Committee

6/25/03

Douglas D. Koch Professor/The Allen, Mosbacher, and Law Chair

in Ophthalmology, Cullen Eye Institute, Baylor

College of Medicine

6/12/03

William G. Kopit Senior Member, Epstein Becker & Green, P.C. 4/10/03;

4/11/03;

5/7/03
A-13

William E. Kovacic General Counsel, Federal Trade Commission 2/27/03

Andrew Kumpuris Visiting Professor in Healthcare Policy, 

Washington and Lee University

5/30/03

Gail Kursh Deputy Chief, Legal Policy Section/Special

Counsel for Federal-State Cooperation, U.S.

Department of Justice Antitrust Division

10/1/03

James Langenfeld Director, LECG, L.C.C.; Adjunct Professor,

Loyola University School of Law, Chicago

4/11/03;

5/7/03

David Lansky President, Foundation for Accountability 6/12/03

Rachel Laser Senior Counsel, National Women’s Law Center 6/25/03

Thomas B. Leary Commissioner, Federal Trade Commission 5/30/03

Thomas H. Lee Internist/Cardiologist/Chief Medical Officer,

Partners Community Healthcare, Inc.

6/12/03

Robert F. Leibenluft Partner, Hogan & Hartson LLP; representing

Antitrust Coalition for Consumer Choice in

Health Care

3/28/03;

5/7/03;

9/24/03

Jeff Lemieux Senior Economist, Progressive Policy Institute 9/30/03

Arthur N. Lerner Partner, Crowell & Moring, LLP 3/27/03;

4/23/03;

4/24/03;

9/25/03

Cara S. Lesser Senior Health Researcher, Center for Studying

Health System Change

3/27/03

Wendy Levinson Professor of Medicine/Vice-Chair, Department

of Medicine, University of Toronto

5/30/03

Mark Levy Executive Director, Committee of Interns and

Residents

9/26/03

Len-yu Liu Commissioner, Taiwan Fair Trade Commission 9/30/03

Lynne Loeffler Representing American College of Nurse

Midwives

6/10/03

Steven Lomazow Neurologist; representing American Academy of

Neurology

6/10/03

Karen Love Founder/Chair, Consumer Consortium on

Assisted Living

6/11/03
A-14

William J. Lynk Senior Vice President/Senior Economist,

Lexecon Inc.

4/10/03

George F. Lynn President/Chief Executive Officer, AtlantiCare;

representing American Hospital Association

3/27/03

Joanne Lynn Director, The Washington Home Center for

Palliative Care Studies

5/30/03

Brenda Lyon Professor, Indiana University School of Nursing;

representing National Association of Clinical

Nurse Specialists

6/11/03

Deborah P. Majoras Principal Deputy Assistant Attorney General,

U.S. Department of Justice Antitrust Division

2/28/03

Francis J. Mallon Chief Executive Officer, American Physical

Therapy Association

6/10/03

Barbara Manard Vice President, Long Term Care/Health

Strategies, American Association of Homes and

Services for the Aging

6/11/03

Stephen Mansfield President/Chief Executive Officer, St. Vincent

Health System

4/25/03

John P. Marren Partner, Hogan Marren, Ltd. 5/8/03

David Marx, Jr. Partner, McDermott, Will & Emery 9/25/03

Robert E. Matthews Executive Director, PriMed Physicians 9/24/03

Glen Mays Researcher, Center for Studying Health System

Change

5/30/03

Michael J. Mazzeo Assistant Professor, Kellogg School of

Management, Northwestern University

4/23/03

Thomas R. McCarthy Senior Vice President, National Economic

Research Associates, Inc.

3/27/03;

4/24/03;

4/25/03

Mark McClure Dentist, National Integrated Health Associates 6/11/03

LaMar McGinnis Clinical Professor of Surgery, Emory University

School of Medicine; Medical Director, Eberhart

Cancer Center, DeKalb Medical Center;

representing American College of Surgeons

5/30/03

Robert M. McNair, Jr. Partner, Drinker Biddle & Reath LLP 5/7/03
A-15

Peggy McNamara Policy Analyst, Center for Organization and

Delivery Studies, Agency for Healthcare

Research and Quality, U.S. Department of

Health and Human Services

5/28/03

Astrid Meghrigian Counsel, California Medical Association 9/24/03

Markus H. Meier Deputy Assistant Director, Bureau of

Competition, Federal Trade Commission

9/25/03

Joseph M. Meyer Director, Corporate Benefits Planning, ALLTEL

Corporation

4/11/03

John Jeff Miles Principal, Ober|Kaler 4/10/03;

4/24/03;

4/25/03;

5/8/03;

6/26/03;

9/25/03

Michael Millenson Mervin Shalowitz, M.D. Visiting Scholar,

Kellogg School of Management, Northwestern

University

5/27/03

Frances H. Miller Professor of Law, Boston University School of

Law

2/28/03

Tom Miller Director, Health Policy Studies, Cato Institute 6/25/03

Arnold Milstein Medical Director, Pacific Business Group on

Health; National Health Care Thought Leader,

Mercer Human Resource Consulting

2/27/03;

5/28/03;

5/29/03;

5/30/03

Jerome H. Modell Professor Emeritus, University of Florida,

College of Medicine; representing American

Society of Anesthesiologists

6/10/03

James J. Mongan President/Chief Executive Officer, Partners

HealthCare

2/28/03

David Monk Vice President, National Economic Research

Associates, Inc.

4/23/03

David Morehead Senior Vice President, Medical Affairs/Chief

Medical Officer, OhioHealth

3/26/03;

3/27/03

Michael Morrisey Professor, School of Public Health, University

of Alabama, Birmingham

6/10/03
A-16

Robert Moses Senior Vice President/Chief Counsel Health

Care, Oxford Health Plans

4/10/03

Dan Mulholland Senior Partner, Horty, Springer & Mattern, P.C. 3/27/03

Timothy J. Muris Chairman, Federal Trade Commission 2/26/03

Ryan Mutter Representing Center for Organization and

Delivery Studies, Agency for Healthcare

Research and Quality, U.S. Department of

Health and Human Services

5/28/03

Woodrow Myers, Jr. Executive Vice President/Chief Medical Officer,

WellPoint Health Networks

5/29/03

Russ Newman Executive Director, Professional Practice,

American Psychological Association

6/10/03

Nancy Nielsen Vice Speaker, House of Delegates, American

Medical Association

5/30/03

Monica Noether Vice President, Charles River Associates 5/7/03;

9/24/03

Kevin J. O’Connor Attorney, Godfrey & Kahn 10/1/03

Margaret O’Kane President, National Committee for Quality

Assurance 

5/30/03

Frank Opelka Chief, Division of Colon and Rectal Surgery,

Beth Israel Deaconess Medical Center;

representing American College of Surgeons

2/27/03

Melvin H. Orlans Special Litigation Counsel, Office of the

General Counsel, Federal Trade Commission

3/28/03;

10/1/03

Thomas Overstreet Vice President, Charles River Associates 5/7/03

R. Hewitt Pate Assistant Attorney General for Antitrust, U.S.

Department of Justice

2/26/03

Barbara Paul Director, Quality Measurement and Health

Assessment Group, Center for Beneficiary

Choices, Centers for Medicare and Medicaid

Services

6/11/03

Mark V. Pauly Bendheim Professor/Chair, Department of

Health Care Systems, Wharton School of

Business, University of Pennsylvania

2/26/03;

5/28/03
A-17

Thomas R. Piper Board of Directors, American Health Planning

Association; Director, Certificate of Need

Program and State Health Planning and

Department Agency, Missouri Department of

Health

6/10/03

Steven Pizer Assistant Professor of Health Services, Boston

University School of Public Health; Health

Economist, Department of Veterans Affairs 

4/23/03

Megan D. Price Director, Contracts & Communications,

Professional Nurses Services, Inc.

6/10/03

Louise Probst Executive Director, Gateway Purchasers for

Health and St. Louis Area Business Health

Coalition

5/29/03

Declan Purcell Appointed Member, Irish Competition Authority 9/30/03

Richard D. Raskin Partner, Sidley Austin Brown & Wood LLP 9/25/03

John G. Rex-Waller Chairman/President/Chief Executive Officer,

National Surgical Hospitals

3/27/03

John Richardson Director of Medicare, The Health Strategies

Consultancy

6/26/03

Vicky Robinson Chief, Industry Guidance Branch, Office of

Counsel to the Inspector General, U.S.

Department of Health and Human Services

6/26/03

Patrick Romano Associate Professor of Medicine and Pediatrics,

University of California, Davis, School of

Medicine 

5/28/03;

5/29/03

Meredith Rosenthal Health Economist, Harvard School of Public

Health

5/28/03

Douglas C. Ross Partner, Davis Wright Tremaine LLP 9/25/03

Kevin W. Ryan Project Director, Arkansas Center for Health

Improvement; Assistant Professor, College of

Public Health, University of Arkansas for

Medical Sciences 

4/11/03

Robert J. Ryan Senior Vice President/General Counsel,

MedStar Health, Inc.

3/26/03

Seth B. Sacher Principal, Charles River Associates 3/26/03;

4/11/03
A-18

Lee B. Sacks Executive Vice President/Chief Medical Officer,

Advocate Health Care

3/26/03

William Sage Professor of Law, Columbia University School

of Law

5/28/03;

5/29/03

Marius Schwartz Professor of Economics, Georgetown University 4/25/03

Vincent Scicchitano Senior Vice President, Business Operations, 

Vytra Health Plans

3/27/03

Thomas A. Scully Administrator, Centers for Medicare &

Medicaid Services, U.S. Department of Health

and Human Services

2/26/03

Mary Elizabeth Senkewicz Senior Counsel, Health Policy, National

Association of Insurance Commissioners

4/24/03

Peter M. Sfikas Chief Counsel/Associate Executive Director,

American Dental Association

2/27/03;

6/12/03

James D. Shelton Chairman/Chief Executive Officer, Triad

Hospitals, Inc.

3/26/03

Robert L. Shoptaw Chief Executive Officer, Arkansas Blue Cross

and Blue Shield

4/11/03

Merrile Sing Senior Analyst, U.S. General Accounting Office 9/26/03

Toby G. Singer Partner, Jones Day 3/28/03;

10/1/03

Frank Sloan J. Alexander McMahon Professor of Health

Policy and Management/Professor of

Economics, Duke University

4/10/03

Kirby O. Smith President/Chief Executive Officer, Susquehanna

Health System

4/11/03

Steven E. Snow Partner, Partridge Snow & Hahn LLP 5/7/03

Shoshana Sofaer Robert P. Luciano Professor of Health Care

Policy, School of Public Affairs, Baruch

College, City University of New York

5/30/03

Cathy Stoddard Registered Nurse, Allegheny General Hospital;

representing Service Employees International

Union

5/29/03

John W. Strong President/Chief Executive Officer, Consorta,

Inc.

9/26/03
A-19

Bradley C. Strunk Health Research Analyst, Center for Studying

Health System Change

3/27/03

Daniel Stryer General Internist, Agency for Healthcare

Research and Quality, U.S. Department of

Health and Human Services

5/28/03

Robert Taylor Managing Partner, Robert Taylor Associates 4/10/03;

411/03

Jan Thayer Chair, National Center for Assisted Living 6/11/03

Mozelle W. Thompson Commissioner, Federal Trade Commission 9/30/03

Anthony Tirone Director, Federal Relations, Joint Commission

on Accreditation of Healthcare Organizations

5/29/03

Mark Tobey Chief, Antitrust Section, Consumer Protection

Division, Office of the Attorney General, Texas

5/7/03

Dawn M. Touzin Director, Community Health Assets Project,

Community Catalyst

4/10/03

Robert Town Assistant Professor, Department of Health

Services Research and Policy, University of

Minnesota

4/9/03;

5/28/03

Reed Tuckson Senior Vice President, Consumer Health and

Medical Care Advancement, UnitedHealth

Group

5/30/03

Christine A. Varney Partner, Hogan & Hartson LLP; representing

American Hospital Association

2/27/03

Gregory Vistnes Vice President, Charles River Associates 3/26/03;

10/1/03

Michael Vita Assistant Director for Antitrust, Bureau of

Economics, Federal Trade Commission 

5/28/03

J. Mark Waxman President/General Counsel, CareGroup, Inc. 2/28/03

Elizabeth Weatherman Member, Healthcare Group, Warburg Pincus 9/26/03

Ernest I. Weis Chief Executive, Advocate Health Partners;

representing the American Hospital Association

5/8/03

Charles A. Welch President, Massachusetts Medical Society 2/28/03

Gregory J. Werden Senior Economic Counsel, U.S. Department of

Justice Antitrust Division

3/26/03
A-20

John Wiegand Attorney, Federal Trade Commission 9/24/03

John Wilson Orthopedic Surgeon, OrthoArkansas, P.A.;

President-Elect, Arkansas Medical Society

4/11/03

Keren Brown Wilson President, Jessie F Richardson Foundation 6/11/03

Robin Wilson Associate Professor of Law, University of South

Carolina School of Law

6/10/03

Herbert Wong Economist, Agency for Healthcare Research and

Quality, U.S. Department of Health and Human

Services

5/28/03

Lawrence Wu Vice President, National Economic Research

Associates, Inc.

4/11/03;

4/23/03;

4/24/03

Gary J. Young Associate Professor of Health Services/CoDirector, Program on Health Policy and

Management, Boston University School of

Public Health

4/10/03;

5/28/03

Michael Young Senior Vice President, Health & Welfare

Practice, Aon Consulting

6/12/03

Jack Zwanziger Director, Health Policy and Administration

Division, School of Public Health, University of

Illinois

3/26/03
APPENDIX B:

PUBLIC COMMENTS

FTC WORKSHOP ON HEALTH CARE AND COMPETITION LAW AND POLICY

SEPTEMBER 9-10, 2002

Primary Source: http://www.ftc.gov/os/comments/healthcarecomments/index.htm.

NAME TITLE OF COMMENT

American Bar Association,

Section of Antitrust Law 

• Comments Regarding The Federal Trade Commission’s

Workshop on Health Care and Competition Law and

Policy (Oct. 2002)

American College of Surgeons

(ACS) 

• Comments Regarding the Federal Trade Commission

(FTC) Workshop on Health Care Competition Law and

Policy (Sept. 30, 2002) [Submitted by Thomas R. Russell]

American Medical Association

(AMA)

• On Integration, Physician Joint Contracting, and

Quality: Taking a Fresh Look at Some “Settled”

Questions (Sept. 9, 2002) [Presentation by Catherine

Hanson]

Carolyn Buppert • Comments Regarding Competition Law and Policy &

Health Care (Aug. 30, 2002)

George H. Koenig • Additional Testimony Subsequent to FTC Workshop on

Health Care and Competition Law and Policy (Sept. 16,

2002)

Robert F. Leibenluft • Comments Regarding Competition Law and Policy &

Health Care (Sept. 30, 2002) [On Behalf of The Antitrust

Coalition for Consumer Choice in Health Care (ACCCHC)]

• Letter to Member of Congress (Apr. 12, 2002) (The

Antitrust Coalition For Consumer Choice in Health Care)

• Competition in Health Insurance and Physician Markets: 

A Review of “Competition in Health Insurance: A

Comprehensive Study of US Markets” By the American

Medical Association (Apr. 2002) (Prepared by Charles

River Associates) 

• “Why Physician Cartels Do Not Need a “Fresh Look” –

a Response to the AMA’s Testimony at the FTC Health

Care Competition Workshop
B-2

Magazine Publishers of

America (MPA)

• Comments Regarding Competition Law and Policy &

Health Care (Sept. 30, 2002) [Submitted by James R.

Cregan]

Roy J. Meidinger • Health Industry: Great Intentions Gone Bad 

Novation • Comment Regarding Competition Law and Policy &

Health Care (Sept. 30, 2002) [Submitted by Jody

Hatcher]

Pfizer Inc. • Comments of Pfizer Inc. in Response to FDA Request for

Comments on First Amendment Issues, Docket No. 02N0209 (Sept. 13, 2002) [George W. Evans & Arnold I.

Friede]

Prairie Health Purchasing

Alliance (PHPA)

• Comments Regarding Competition Law and Policy &

Health Care (Sept. 27, 2002) [Submitted by Benjamin

Vander Kooi, Jr.] 
B-3

David L. Redfern • Competition in Health Care Workshop (Oct. 8, 2002)

• Attachment 1 - Woman’s Clinic, Inc. v. St. John’s Health

System, Inc., Cause No. 01-3245-CV-S AE-ECF (Dec. 21,

2001) (First Amended Complaint)

• Attachment 2 - Compromise and Settlement Agreement

Between Sisters of Mercy Health System, St. Louis, Inc.

and State of Missouri 

• Attachment 3 - Executive Council of Greene County

Medical Society Memo (July 12, 2001); Letter from

Rosary Payne, Division Counsel, American Medical

Association (AMA) (Sept. 12, 2001); Sandy Z. Poneleit,

Doctors’ Departures Worry Medical Society,

SPRINGFIELD NEWS-LEADER (July 24, 2001) 

• Attachment 4 - Claudette Riley, Premiums Eat Up

Teachers’ Raises, SPRINGFIELD NEWS-LEADER (Sept. 6,

2001); Claudette Riley, Focus Put on School Health

Benefits, SPRINGFIELD NEWS - LEADER (Sept. 14, 2001);

Sandy Z. Poneleit, Companies’ Health Care Costs Soar,

SPRINGFIELD NEWS -LEADER (Feb. 15, 2002); Jack Wang,

Health Insurance Premiums Will Skyrocket for Some

State Employees, KY3 NEWS (Aug. 21, 2002); Cheryl

Capages, Economic Survey Reveals Local Optimism,

SPRINGFIELD BUS. J. 3 (Oct. 29 - Nov. 4, 2001);

Commerce Bank, 2002 Economic Survey Results

• Attachment 5 - American Medical Association,

Competition in Health Insurance: A Comprehensive

Study of U.S. Markets. (Nov. 2001)

Washington Business Group on

Health (WBGH)

• Comments Regarding Competition Law and Policy &

Health Care (Sept. 30, 2002) [Submitted by Helen

Darling]
B-4

FTC/DOJ HEARINGS ON HEALTH CARE AND COMPETITION LAW AND POLICY

FEBRUARY TO SEPTEMBER 2003

Primary Source: http://www.ftc.gov/os/comments/healthcarecomments2/index.htm.

NAME TITLE OF COMMENT

Academy of Managed Care

Pharmacy (AMCP)

• Comments Regarding the June 26, 2003 Joint FTC-DOJ

Hearings on Health Care and Competition Law and

Policy (Pharmaceuticals: Formulary) (Aug. 5, 2003)

• Principles of a Sound Drug Formulary System (Oct.

2000)

• Where We Stand: Regulation of Pharmacy Benefit

Management Companies (Approved by the AMCP Board

of Directors Apr. 3, 2002)

• Where We Stand: Formularies (Revised by the AMCP

Board of Directors Feb. 2003)

• Concepts in Managed Care Pharmacy: Formulary

Management (June 1998)

American Academy of

Pediatrics 

• Testimony Before the Federal Trade Commission on

Health Care and Competition Law and Policy (Feb. 27,

2003) [Presented by Tim Doran] 

American Association of

Health Plans (AAHP)

• Perspectives on Competition Policy and the Health Care

Marketplace (Feb. 27, 2003) [Statement of Stephanie

Kanwit]

• Additional Talking Points in Response to AHA’s Study on

Hospital Costs (Feb. 27, 2003) [Submitted by Stephanie

Kanwit]

• The Myth of Health Plan Monopsony Power (Apr. 25,

2003) [Presentation by Stephanie Kanwit]

• The Myth of Health Plan Monopsony Power (Apr. 25,

2003) [Statement of Stephanie Kanwit]

• Toward A More Accountable Regulatory System (June 25,

2003) [Presentation by Karen Ignagni]
B-5

American Association of Nurse

Anesthetists (AANA) 

• Comments Regarding Hearings on Health Care and

Competition Law and Policy (Nov. 20, 2003) [Submitted

by Frank Purcell]

• Selected Literature on Anesthesia Markets, Quality

Outcomes, and Responses to Anti-competitive Behaviors

• New Economic Perspectives on the Market for Anesthesia

Services: Achieving Desired Reforms Through Fair

Competition (Nov. 2003) [Presented by Jeffrey C. Bauer]

• John D. Klein, When Will Managed Care Come to

Anesthesia?, 23 J. HEALTH CARE FIN. 62 (1997)

• Ira P. Gunn, Health Educational Costs, Provider Mix,

and Healthcare Reform: A Case in Point - Nurse

Anesthetists and Anesthesiologists, 64 J. AM. ASS’N OF

NURSE ANESTHETISTS 48 (1996)

• Michael Pine et al.,Surgical Mortality and Type of

Anesthesia Provider, 71 AANA J. 109 (2003)

• Jeffrey H. Silber et al., Anesthesiologist Direction and

Patient Outcomes, 93 ANESTHESIOLOGY 152 (2000)

• Medicare and Medicaid Programs; Hospital Conditions

of Participation: Anesthesia Services, 66 Fed. Reg. 4,674

(2001)

• Quality of Care in Anesthesia (Oct. 23, 2003), at

http://www.aana.com/crna/prof/quality_silber2.asp

• Jerry Cromwell, Health Professions Substitution: A Case

Study of Anesthesia, in THE U.S. HEALTH WORKFORCE:

POWER, POLITICS, AND POLICY 219 (MARIAN OSTERWEIS ET

AL. ed., 1996)

• Testimony of Jan Stewart On Behalf of the American

Association of Nurse Anesthetists, Before the House

Judiciary Committee (June 22, 1999)

• Quality of Care in Anesthesia: Synopsis of Published

Information Comparing Certified Registered Nurse

Anesthetist and Anesthesiologist Patient Outcomes (2002)

American Bar Association,

Section of Antitrust Law 

• Comments on the Public Hearings on Health Care and

Competition Law and Policy (Dec. 18, 2003)
B-6

American Chiropractic

Association (ACA) 

• Comments Regarding Health Care and Competition Law

and Policy (Sept. 9, 2003) [Submitted by Daryl D. Wills

& James D. Edwards]

• Comments Regarding Health Care and Competition Law

and Policy (Nov. 25, 2003) [Submitted by Donald J.

Krippendorf & George B. McClelland]

• Brief of Appellants, American Chiropractic Association,

Inc. v. Trigon Health Care Inc. (4th Cir. 2003) (No.

03-1675) (Aug. 18, 2003)

American College of NurseMidwives

• Addendum of Cases and Articles For Statement of Lynne

Loeffler for the American College of Nurse-Midwives

(July 25, 2003)

American Congress on

Electroneuromyography 

• Comments Regarding Health Care and Competition Law

and Policy (July 15, 2003)

American Health Planning

Association (AHPA) 

• AHPA Testimony Support Information (June 10, 2003)

• Certificate of Need and Related Health Services

Regulation, Representative Publications and Reports 

• Health Service Volume and Treatment Outcome,

Representative Published Studies

• Comparative Studies of For-Profit and Not-For-Profit

Health Care Services, Representative Publications and

Reports

• Thomas R. Piper, Certificate of Need: Protecting

Consumer Interests
B-7

American Medical Association

(AMA)

• Health Care Competition Law and Policy – Quality and

Consumer Information: Market Entry (June 10, 2003)

• Physician Information Sharing (Sept. 24, 2003)

• Physician IPAs: Patterns and Benefits of Integration,

and Other Issues (Sept. 25, 2003)

• Physician IPAs: Messenger Model (Sept. 25, 2003) [Oral

Statement of J. Edward Hill]

• Health Care Competition Law and Policy – Quality and

Consumer Information: Physicians (May 30, 2003)

[Presented by Nancy H. Nielsen]

• The Impact of Monopsony on the Practice of Medicine:

Market Definition, Competitive Effects and

Countervailing Power Theory and Practice (Apr.-May

2003) [Presented by Stephen E. Foreman]
B-8

American Nurses Association • American Nurses Association, Testimony Before the

Federal Trade Commission and Department of Justice on

Perspectives on Competition Policy and the Health Care

Marketplace (Feb. 27, 2003) [Presented by Winifred

Carson-Smith]

• Attachment A - State Legislation Which Affects Nursing

Practice (1999 Chart) 

• Attachment B - Linda Pearson, Fifteenth Annual

Legislative Update: How Each State Stands on

Legislative Issues Affecting Advanced Nursing Practice,

28 THE NURSE PRACTITIONER 26 (2003)

• Attachment C - References to Advanced Practice Nurses

As Primary Care Providers in State Statute (Feb. 2002)

• Attachment D - States Which Offer Nurse Privileging

(2001 Chart)

• Attachment E - Joint Regulation of Advanced Nursing

Practice (1992, revised 1997)

• Attachment F - Letter from Geri Marullo, Executive

Director, American Nurses Association, to Dennis

O'Leary, President, Joint Commission on the

Accreditation of Healthcare Organizations (Mar. 17,

1995)

• Attachment G - Letter from Winifred Y. Carson, Nurse

Practice Counsel, American Nurses Association, to David

J. Rubben, Legal Counsel, Secretary, United Behavioral

Health (July 21, 1997)

Jonathan Bates • Comments Regarding Health Care Competition Law and

Policy (July 21, 2003)

Patricia Cameron • Personal Views

Dan Caldwell • Health Care Competition Law and Policy Hearings

(Editorial submitted to Modern Healthcare weekly

magazine) (June 5, 2003)

California Association of

Physician Groups (CAPG)

• Clarifying the Health Care Statements’ Policies of

Clinical Integration and Ancillarity (Mar. 2004)
B-9

Sandy Duffy • Testimony of Sandy Duffy, Before the Government Reform

Committee, Wellness and Human Rights Subcommittee

(May 8, 2003)

Einer Elhauge • Antitrust Analysis of GPO Exclusionary Agreements

(Sept. 26, [2]003) 

Melissa M. English • Comments Regarding Anti-Competition Practices (July

22, 2003)

Michael Greger • Comments Regarding Hearings on Health Care and

Competition Law and Policy: Specifically in Reference to

the Practice of Unauthorized Pelvic Exams in Medical

Training

Health Industry Group

Purchasing Association

(HIGPA) 

• Group Purchasing Organizations (Sept. 26, 2003)

[Submitted by Robert Betz]

Joe Holzer • Comments Regarding Hearings on Healthcare

Competition Law & Policy (July 10, 2003)

Independence Blue Cross • FTC/DOJ Hearings on Health Care and Competition Law

and Policy (July 23, 2003) [Submitted by John A. Daddis]

Institute on Health Care Costs

and Solutions 

• Transparency and Disclosure: The Route to

Accountability, 2 ISSUEBRIEF 1 (Mar./Apr. 2003)

James J. Kane, Jr. • Health Care Competition Law and Policy Hearings (June

4, 2003)

Massachusetts Council of

Community Hospitals (MCCH)

• Comments (Apr. 3, 2003) [Submitted by Donald J.

Thieme]

• Cape Ann Economics Report for MCCH (June 2001)

Robert M. McNair, Jr. • FTC/DOJ Hearings on Health Care and Competition Law

and Policy (July 24, 2003)

Woodrow A. Myers • Quality and Consumer Information (May 29, 2003)

National Association of Clinical

Nurse Specialists (NACNS) 

• Comments Regarding Health Care and Competition Law

and Policy (Nov. 24, 2003)
B-10

National Board for

Certification of Hospice and

Palliative Nurses (NBCHPN) 

• NBCHPN Response to Hearings on Health Care and

Competition Law and Policy Regarding Advanced

Practice Registered Nurse Task Force of the National

Council for State Boards of Nursing, Inc. (Sept. 30, 2003)

• Attachment A - Backgrounds and Qualifications of the

Content Expert Panel for the Advanced Practice

Palliative Care Certification Examination 

• Attachment B - Fifth Iteration Draft of the Voluntary

Consensus Standards for Quality Palliative Care

• Attachment C - Selected Provision of the Bylaws of

NCSBN

National Council of State

Boards of Nursing, Inc.

(NCSBN) 

• Comments Regarding Hearings on Health Care and

Competition Law and Policy (July 31, 2003) [Submitted

by Donna M. Dorsey]

• Comments Re: Letter from the National Board for

Certification of Hospice and Palliative Nurses (Jan. 8,

2004) [Submitted by Donna M. Dorsey]

National Surgical Hospitals • Single Specialty Hospitals (Mar. 27, 2003)

National Women's Law Center

(NWLC)

• Comments Regarding Health Care and Competition Law

and Policy (Nov. 25, 2003)

Noreen Farrell Nickolas • Comments Regarding Health Care and Competition Law

and Policy (July 17, 2003)

NOVA Biomedical • Comments Regarding Health Care and Competition Law

and Policy (Nov. 7, 2003) [Submitted by Howard Deahr]

Lynne Odell-Holzer • Comments: FTC/DOJ Hearings Regarding Anticompetitive Practices in Healthcare Industry

PacifiCare of California • Health Insurance Monopoly Issues – Competitive Effects

(Apr. 23, 2003) [Statement of Fred Dodson]

Roger G. Pariseau, Jr. • Comments

Partners • Comments (Apr. 11, 2003) [Submitted by Brent L. Henry]
B-11

Elissa Schoenlank • Federal Trade Commission and U.S. Department of

Justice Hearings on Health Care and Competition Law

and Policy (Feb. 25, 2003)

• Exhibit A - BlueCross BlueShield of Utica - Watertown

Comprehensive Coverage 

• Exhibit B - Letter from Woods McCahill, Medical

Director, Health Centers (Apr. 9, 2002) 

• Exhibit C - Letter from Debra Mangino, Memorial SloanKettering Cancer Center 

• Exhibit D - Letter from Kitty Houghtalling, Customer

Advocate Associate, BlueCross BlueShield, to Karl F.

Glindmyer, Examiner, Consumer Service Bureau, State of

New York Insurance Department (Sept. 3, 2002)

• Exhibit E - List of Account Services

Vincent Scicchitano • Contracting Practices (Mar. 27, 2003)

Service Employees

International Union (SEIU) 

• Comments Regarding Hearings on Health Care and

Competition Law and Policy

Spectrum Health • Comments Regarding Hearings on Health Care

Competition Law and Policy (June 26, 2003) [Submitted

by Michael Freed]

• Medicare Study Shows Best Care Isn’t Always the Most

Expensive, THE WALL STREET JOURNAL (Feb. 18, 2003) 

• Spectrum Health, Defining Health Care Value (Sept.

2002) 

Christine A. Sullivan • Comments Regarding Hearings on Health Care

Competition Law and Policy (Sept. 19, 2003)

Reed V. Tuckson • UnitedHealth Group Initiatives to Improve Quality,

Safety and Consumer Decision Making (May 30, 2003) 

Cathryn Wright • Comments Regarding Hearings on Health Care

Competition Law and Policy (July 22, 2003)
APPENDIX C:

GLOSSARY OF HEALTH CARE TERMS AND ACRONYMS

Primary Sources: The National Library of Medicine’s (NLM) controlled vocabulary database, Medical Subject

Headings (MeSH), at http://www.ncbi.nlm.nih.gov/entrez/query.fcgi?db=mesh, and Peter R. Kongstvedt, Glossary

of Terms and Acronyms, in ESSENTIALS OF MANAGED HEALTH CARE (Peter R. Kongstvedt ed., 4th ed. 2003).

TERM DEFINITION

Allied Health

Professional (AHP)

AHPs are individuals trained to support, complement, or supplement the

professional functions of physicians, dentists, and other health professionals in

the delivery of health care to patients. They include physician assistants,

dental hygienists, medical technicians, nurse midwives, nurse practitioners,

physical therapists, psychologists, and nurse anesthetists. 

Ambulatory Care Health care services provided to patients on an ambulatory basis, rather than by

admission to a hospital or other health care facility. The services may provided

at a hospital or a free-standing facility.

Ambulatory

Payment

Classification

(APC)

This is the method used by CMS to implement prospective payment for

ambulatory procedures. APC clusters many different ambulatory procedures

into groups for purposes of payment.

Ambulatory Surgery

Center (ASC)

Surgery performed on an outpatient basis, either hospital-based or performed in

an office or surgicenter.

Any Willing

Provider Laws

Any willing provider laws take many different forms, but they typically restrict

the ability of managed-care organizations to use a closed panel of physicians,

hospitals, or other providers.

Average Wholesale

Price (AWP)

Average Wholesale Price of brand-name pharmaceuticals, as stated by the

manufacturer, is used as a basis for determining discounts and rebates.

Capitation Capitation pays the provider a fixed amount for each of the patients for whom

he agrees to provide care, regardless of whether those patients seek care or not. 

Payment is typically based on a set number of dollars “per member-per

month.”

Care Management

Protocols (CMPs)

Care Management Protocols specify utilization and treatment standards for

various diagnoses. 

Certificate of Need

(CON)

A certificate issued by a governmental body to an individual or organization

proposing to construct or modify a health facility, or to offer a new or different

service. The process of obtaining the certificate is included in the term.

Certification Certification is a voluntary system of standards that practitioners can choose to

meet to demonstrate accomplishment or ability in their profession. 

Certification standards are generally set by non-governmental agencies or

associations. 
C-2

Chronic Illness Diseases which have one or more of the following characteristics: they are

permanent, leave residual disability, are caused by nonreversible pathological

alteration, require special training of the patient for rehabilitation, or may be

expected to require a long period of supervision, observation, or care. 

CMS Centers for Medicare and Medicaid Services. 

COBRA Consolidated Omnibus Budget Reconciliation Act of 1986.

Collective

Bargaining

Collective bargaining refers to bargaining by union members, which is

authorized by the NLRA, or non-unionized physicians’ attempts to obtain the

right to bargain collectively.

Computerized

Physician Order

Entry (CPOE)

Computer physician order entry (CPOE) is an electronic prescribing system. 

With CPOE, physicians enter orders into a computer rather than on paper. 

Orders are integrated with patient information, including laboratory and

prescription data. The order is then automatically checked for potential errors

or problems.

Coronary Artery

Bypass Graft

(CABG)

Surgical therapy of ischemic coronary artery disease, achieved by grafting a

section of saphenous vein, internal mammary artery, or other substitute

between the aorta and the obstructed coronary artery distal to the obstructive

lesion. 

Critical Loss

Analysis

A two step analysis is used to perform a critical loss analysis. The first step

identifies, for any given price increase, the amount of sales that can be lost

before the price increase becomes unprofitable. The second step considers

whether or not the actual level of sales lost due to the price increase will

exceed this amount. 

Diagnosis Related

Group (DRG)

DRGs form the cornerstone of the prospective payment system. A DRG is a

cluster of diagnoses that are expected to require comparable hospital resources

and lengths of stay. 

Durable Medical

Equipment (DME)

Devices which are very resistant to wear and may be used over a long period of

time. DME includes items such as wheelchairs, hospital beds, artificial limbs,

etc.

EMTALA Emergency Medical Treatment and Active Labor Act of 1986.

End-Stage Renal

Disease (ESRD)

An irreversible and usually progressive reduction in renal function in which

both kidneys have been damaged by a variety of diseases to the extent that they

are unable to adequately remove the metabolic products from the blood and

regulate the body’s electrolyte composition and acid-base balance. Chronic

kidney failure requires hemodialysis or kidney transplantation.

ERISA Employee Retirement Income Security Act.

Fee-for-Service

(FFS)

In FFS, a provider is paid based on the number and type of services that are

performed. 
C-3

Formulary A list of approved drugs for treating various diseases and conditions.

Group Purchasing

Organization (GPO)

A shared service which combines the purchasing power of individual

organizations or facilities in order to obtain lower prices for equipment and

supplies.

HIPAA Health Insurance Portability and Accountability Act of 1996 .

Health Plan

Employer Data and

Information Set

(HEDIS)

A set of standardized performance measures designed to ensure that purchasers

and consumers have reliable information with which to compare the

performance of MCOs. 

HerfindahlHirschman Index

(HHI)

The Herfindahl-Hirschman Index is a commonly accepted measure of market

concentration. It is calculated by squaring the market share of each firm

competing in the market and then summing the resulting numbers. The HHI

takes into account the relative size and distribution of the firms in a market. 

The HHI increases both as the number of firms in the market decreases and as

the disparity in size between those firms increases.

Independent

Practice Association

(IPA)

IPAs are networks of independent physicians that contract with MCOs and

employers. IPAs may be organized as sole proprietorships, partnerships, or

professional corporations.

Inpatient

Prospective

Payment System

(IPPS)

Medicare’s payment system for inpatient hospitals and facilities. The specific

amount that is paid is based on the DRG for the hospital admission.

Licensure A mandatory system of state-imposed standards that practitioners must meet to

practice a given profession.

MMA Medicare Prescription Drug, Improvement, and Modernization Act of 2003.

Managed Care

Organization

(MCO)

MCOs integrate, to varying degrees, the financing and delivery of health care

services.

Maximum

Allowable Cost

(MAC)

Maximum Allowable Cost, or Charge. The maximum that a vendor may

charge for something. This term is often used in pharmaceutical contracting. 

Medicare + Choice

(M+C)

Also known as Medicare Part C. The Balanced Budget Act of 1997 (BBA)

established the Medicare+Choice program. Under this program, an eligible

individual may elect to receive Medicare benefits through enrollment in a

Medicare+Choice plan, which generally takes the form of a MCO.

Medicare

Advantage (MA)

As of 2003, the new name for Medicare+Choice (M+C).
C-4

Medicare Payment

Advisory

Commission

(MedPAC)

The Commission was created by the BBA through a merger of the Prospective

Payment Assessment Commission and the Physician Payment Review

Commission. MedPAC reviews payment policies under Medicare Parts A and

B and the effects of Medicare Part C. MedPAC also evaluates the effect of

prospective payment policies and their impact on health care delivery in the

US. 

Medigap A supplemental health insurance policy sold by private insurance companies

that is designed to pay for health care costs and services that are not paid for by

Medicare and any private health insurance benefits. 

Metropolitan

Statistical Areas

(MSA)

Standard metropolitan statistical areas are defined by the U.S. Census so that

institutions and individuals gathering statistics on urban areas can use a

common definition. 

Most Favored

Nation (MFN)

A “Most Favored Nation” (MFN) clause is a contractual agreement between a

supplier and a customer that requires the supplier to sell to the customer on

pricing terms at least as favorable as the pricing terms on which that supplier

sells to other customers. These clauses are sometimes found in the contracts

health insurers enter into with providers. 

Outpatient

Prospective

Payment System

(OPPS)

Medicare’s system for payment to outpatient departments of hospitals and

other outpatient facilities. The specific amount that is paid is determined by

the relevant APC. 

Patient Flow Data Patient flow data identifies the zip code of each patient discharged from a

hospital. 

Payment for

Performance (P4P) 

Payment for Performance pays providers based on their success in meeting

specific performance measures. 

Pharmacy Benefit

Manager (PBM)

A company under contract with managed care organizations, self-insured

companies, and government programs to manage pharmacy network

management, drug utilization review, outcomes management, and disease

management. 

Physician-Hospital

Organization (PHO)

A PHO is a joint venture between a hospital and some or all of the physicians

who have admitting privileges at the hospital.

Point of Service

(POS)

A health insurance plan in which members do not have to choose how to

receive services until they need them. The most common use of the term

applies to a plan that enrolls each member in both an HMO (or HMO-like)

system and an indemnity plan. These plans provide different benefits,

depending on whether the member chooses to use plan providers or go outside

the plan for services.

Preferred Provider

Organization (PPO)

A health insurance plan with an established provider network (“preferred

providers) that provides maximum benefits when members use a preferred

provider. 
C-5

Quality

Improvement

Organization (QIO)

Organizations that contract with CMS to review care provided to Medicare

beneficiaries.

Resource-Based

Relative Value

Scale (RBRVS)

The RBRVS determines the rate at which Medicare reimburses physicians on

an FFS basis. The RBRVS is calculated based on the cost of physician labor,

practice overheads, materials, and liability insurance. The resulting figures are

adjusted for geographical differences and are updated annually.

Single Specialty

Hospital (SSH)

Specialized hospitals that provide treatment relating to a single specialty (e.g.,

cardiac or orthopedic services). Many of the physicians who refer patients to

an SSH have an ownership interest in the facility. 

State Action

Doctrine

First articulated in Parker v. Brown, the state action doctrine shields certain

anticompetitive conduct from federal antitrust scrutiny.

State Board of

Medical Examiners

State Boards of Medical Examiners are typically responsible for licensure and

promulgate regulations governing physicians and AHPs.

State Children’s

Health Insurance

Program (SCHIP)

Also referred to as Children’s Health Insurance Program (CHIP). A program

created by the federal government to encourage states to provide insurance

coverage for children. SCHIP is funded through a combination of federal and

state funds, and administered by the states in conformity with federal

requirements.

Telemedicine Telemedicine involves the use of electronic communication and information

technologies to provide or support clinical care at a distance.

Third-Party

Administrator

(TPA)

A firm that performs administrative functions (e.g., claims processing,

membership) for a self-funded plan or a start-up MCO. 

Utilization Review An organized procedure carried out through committees to review admissions,

duration of stay, professional services furnished, and to evaluate the medical

necessity of those services and promote their most efficient use.
APPENDIX D:

SELECTED FEDERAL STATUTES

Federal Trade Commission Act

15 U.S.C. § 45(a) 

15 U.S.C. § 46(f)

Sherman Act

15 U.S.C. § 1

15 U.S.C. § 2

15 U.S.C. § 3

Clayton Act

15 U.S.C. § 18
D-2

Federal Trade Commission Act

15 U.S.C. § 45. Unfair methods of competition unlawful; prevention by Commission

(a) Declaration of unlawfulness; power to prohibit unfair practices; inapplicability to foreign trade. 

(1) Unfair methods of competition in or affecting commerce, and unfair or deceptive acts or

practices in or affecting commerce, are hereby declared unlawful. 

(2) The Commission is hereby empowered and directed to prevent persons, partnerships, or

corporations, except banks, savings and loan institutions described in section 18(f)(3) [15 USCS

§ 57a(f)(3)], Federal credit unions described in section 18(f)(4) [15 USCS § 57a(f)(4)], common

carriers subject to the Acts to regulate commerce, air carriers and foreign air carriers subject to

the Federal Aviation Act of 1958 [49 USCS §§ 40101 et seq.], and persons, partnerships, or

corporations insofar as they are subject to the Packers and Stockyards Act, 1921, as amended [7

USCS §§ 181 et seq.], except as provided in section 406(b) of said Act [7 USCS § 227(b)], from

using unfair methods of competition in or affecting commerce and unfair or deceptive acts or

practices in or affecting commerce.

(3) This subsection shall not apply to unfair methods of competition involving commerce with

foreign nations (other than import commerce) unless-- 

(A) such methods of competition have a direct, substantial, and reasonably foreseeable

effect-- 

(i) on commerce which is not commerce with foreign nations, or on import

commerce with foreign nations; or 

(ii) on export commerce with foreign nations, of a person engaged in such

commerce in the United States; and

(B) such effect gives rise to a claim under the provisions of this subsection, other than

this paragraph. 

If this subsection applies to such methods of competition only because of the operation

of subparagraph (A)(ii), this subsection shall apply to such conduct only for injury to

export business in the United States . . . .

15 U.S.C. § 46(f). Publication of information; reports. 

To make public from time to time such portions of the information obtained by it hereunder as are in the

public interest; and to make annual and special reports to the Congress and to submit therewith

recommendations for additional legislation; and to provide for the publication of its reports and decisions

in such form and manner as may be best adapted for public information and use: Provided, That the

Commission shall not have any authority to make public any trade secret or any commercial or financial

information which is obtained from any person and which is privileged or confidential, except that the

Commission may disclose such information to officers and employees of appropriate Federal law

enforcement agencies or to any officer or employee of any State law enforcement agency upon the prior

certification of an officer of any such Federal or State law enforcement agency that such information will

be maintained in confidence and will be used only for official law enforcement purposes.
D-3

Sherman Act

15 U.S.C. § 1. Trusts, etc., in restraint of trade illegal; penalty

Every contract, combination in the form of trust or otherwise, or conspiracy, in restraint of trade or

commerce among the several States, or with foreign nations, is declared to be illegal. Every person who

shall make any contract or engage in any combination or conspiracy hereby declared to be illegal shall be

deemed guilty of a felony, and, on conviction thereof, shall be punished by fine not exceeding

$10,000,000 if a corporation, or, if any other person, $350,000, or by imprisonment not exceeding three

years, or by both said punishments, in the discretion of the court.

15 U.S.C. § 2. Monopolization; penalty

Every person who shall monopolize, or attempt to monopolize, or combine or conspire with any other

person or persons, to monopolize any part of the trade or commerce among the several States, or with

foreign nations, shall be deemed guilty of a felony, and, on conviction thereof, shall be punished by fine

not exceeding $10,000,000 if a corporation, or, if any other person, $350,000, or by imprisonment not

exceeding three years, or by both said punishments, in the discretion of the court.

15 U.S.C. § 3. Trusts in Territories or District of Columbia illegal; combination a felony

(a) Every contract, combination in form of trust or otherwise, or conspiracy, in restraint of trade or

commerce in any Territory of the United States or of the District of Columbia, or in restraint of trade or

commerce between any such Territory and another, or between any such Territory or Territories and any

State or States or the District of Columbia, or with foreign nations, or between the District of Columbia

and any State or States or foreign nations, is declared illegal. Every person who shall make any such

contract or engage in any such combination or conspiracy, shall be deemed guilty of a felony, and, on

conviction thereof, shall be punished by fine not exceeding $10,000,000 if a corporation, or, if any other

person, $350,000, or by imprisonment not exceeding three years, or by both said punishments, in the

discretion of the court.

(b) Every person who shall monopolize, or attempt to monopolize, or combine or conspire with any other

person or persons, to monopolize any part of the trade or commerce in any Territory of the United States

or of the District of Columbia, or between any such Territory and another, or between any such Territory

or Territories and any State or States or the District of Columbia, or with foreign nations, or between the

District of Columbia, and any State or States or foreign nations, shall be deemed guilty of a felony, and,

on conviction thereof, shall be punished by fine not exceeding $10,000,000 if a corporation, or, if any

other person, $ 350,000, or by imprisonment not exceeding three years, or by both said punishments, in

the discretion of the court. 
D-4

Clayton Act

15 U.S.C. § 18. Acquisition by one corporation of stock of another 

No person engaged in commerce or in any activity affecting commerce shall acquire, directly or

indirectly, the whole or any part of the stock or other share capital and no person subject to the

jurisdiction of the Federal Trade Commission shall acquire the whole or any part of the assets of another

person engaged also in commerce or in any activity affecting commerce, where in any line of commerce

or in any activity affecting commerce in any section of the country, the effect of such acquisition may be

substantially to lessen competition, or to tend to create a monopoly. 

No person shall acquire, directly or indirectly, the whole or any part of the stock or other share capital

and no person subject to the jurisdiction of the Federal Trade Commission shall acquire the whole or any

part of the assets of one or more persons engaged in commerce or in any activity affecting commerce,

where in any line of commerce or in any activity affecting commerce in any section of the country, the

effect of such acquisition, of such stocks or assets, or of the use of such stock by the voting or granting of

proxies or otherwise, may be substantially to lessen competition, or to tend to create a monopoly. 

This section shall not apply to persons purchasing such stock solely for investment and not using the

same by voting or otherwise to bring about, or in attempting to bring about, the substantial lessening of

competition. Nor shall anything contained in this section prevent a corporation engaged in commerce or

in any activity affecting commerce from causing the formation of subsidiary corporations for the actual

carrying on of their immediate lawful business, or the natural and legitimate branches or extensions

thereof, or from owning and holding all or a part of the stock of such subsidiary corporations, when the

effect of such formation is not to substantially lessen competition.

Nor shall anything herein contained be construed to prohibit any common carrier subject to the laws to

regulate commerce from aiding in the construction of branches or short lines so located as to become

feeders to the main line of the company so aiding in such construction or from acquiring or owning all or

any part of the stock of such branch lines, nor to prevent any such common carrier from acquiring and

owning all or any part of the stock of a branch or short line constructed by an independent company

where there is no substantial competition between the company owning the branch line so constructed

and the company owning the main line acquiring the property or an interest therein, nor to prevent such

common carrier from extending any of its lines through the medium of the acquisition of stock or

otherwise of any other common carrier where there is no substantial competition between the company

extending its lines and the company whose stock, property, or an interest therein is so acquired. 

Nothing contained in this section shall be held to affect or impair any right heretofore legally acquired:

Provided, That nothing in this section shall be held or construed to authorize or make lawful anything

heretofore prohibited or made illegal by the antitrust laws, nor to exempt any person from the penal

provisions thereof or the civil remedies therein provided. 

Nothing contained in this section shall apply to transactions duly consummated pursuant to authority

given by the Secretary of Transportation, Federal Power Commission, Surface Transportation Board, the

Securities and Exchange Commission in the exercise of its jurisdiction under section 10 of the Public

Utility Holding Company Act of 1935 [15 USCS § 79j], the United States Maritime Commission, or the

Secretary of Agriculture under any statutory provision vesting such power in such Commission, Board,

or Secretary.