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Competition Law for the 21st Century | Competition Law | Mergers And Acquisitions
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US Federal Trade Commission: 1999--AnnRpt%20on%20Competition%20Policy
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LEGAL ISSUES IN THE WAKE OF THE BERGER COMMISSION
Law and Policy of Health Care Competition for the Twenty-First Century
By Martin Bienstock
During the 1990s, the national health care delivery system entered a period of hyper-competition—a period of rapid change and increased competition that threatened many facilities’ very survival. The advent of managed care, reductions in average lengths of stay, the proliferation of ambulatory care centers, and other competitive pressures combined to create crisis conditions for many facilities. New York State facilities were especially hard hit when the state eliminated the price control system that protected their proﬁtability. On the other hand, federal antitrust regulators continued their policy of emphasizing health care competition, and refusing to treat the health-care industry as a unique industry. They successfully prosecuted their ﬁrst successful anti-merger case in years, declined to provide safeharbor rules for hospital clinical integration, and issued letter rulings that set a high hurdle for clinical integration. This article describes ﬁrst the competing policies underlying these competing approaches. Section I provides the context for the state’s extraordinary charge to the Berger Commission that it align supply with need, by describing the gate-keeping and support system in which New York State health care is provided. It describes how market failure pervades the health care delivery system, and explains how a rational legislature might determine that a centrally planned health care delivery system might be preferable to a free-market system. Section II describes the counterpoint: antitrust laws, and recent efforts by federal regulators to employ those laws in the health care arena. It describes the free-market theory that underlies their approach, and their recent efforts to oppose health care mergers, and to limit the scope of health care joint ventures. Section III describes the legal synthesis between these two points; it shows how the State Action Doctrine is designed to address potential conﬂicts between state policies and the antitrust laws, and how health care entities who integrate in a manner that ensures consistency with the state’s goals may be protected from antitrust prosecution. That is, by carefully crafting mergers and joint ventures to align with the state’s public health goals, and submitting those joint ventures to active state supervision, those activities may be exempt from the antitrust laws. Section IV describes the policy implications of applying the State Action Doctrine to health care mergers and joint ventures. It concludes that applying the doctrine in the context of New York health care does not change the underlying cost-beneﬁt analysis applied to mergers and joint ventures so much as afford an opportunity to change the locus of decision-making from antitrust regulators to health care regulators. Section V provides a brief look ahead to the future.
“In the past few years, two different regulatory systems have adopted nearly diametrically opposed responses to the benefits and challenges of increased integration.”
In this hyper-competitive environment, providers began anew to examine opportunities to combine with each other in new and creative ways. Increased integration presented them with an opportunity to create new health care products and new methods of delivering services, reducing cost and improving quality. Increased integration presented them with an opportunity to achieve economies of scale and scope, and to improve planning. Increased integration also presented them with an opportunity to drive a harder and more lucrative bargain with payers, increasing proﬁtability but at the same time potentially driving up the cost of health insurance. In the past few years, two different regulatory systems have adopted nearly diametrically opposed responses to the beneﬁts and challenges of increased integration. On the one hand, the New York State legislature created the Commission on Health Care Facilities in the 21st Century (popularly known as the “Berger Commission,” after its chair, Stephen Berger) and charged it to “align bed supply with need.” Thus, New York State responded to competitive pressures by reinforcing its pre-existing paradigm of a planned health-care marketplace, in which centralized planning supersedes competition as a means of allocating resources.
NYSBA Health Law Journal | Fall 2008 | Vol. 13 | No. 3
to be comprised of 37 medical surgical. Signiﬁcant grant programs. a new facility proposing to open its doors must demonstrate that (1) there is a public need for its services. how many beds in each facility are to be used for what purpose. the Commission issued 57 mandates. and it did. 5 alcohol detox. In total. New York’s Centrally Planned Health Care Delivery System The Berger Commission The 2005 New York State budget created a new commission invested with extraordinary power: the Commission on Health Care Facilities in the 21st Century was empowered to restructure entirely the state’s hospital and nursing-home system. and it did. In New York State. continue to support providers by making funds available based upon need. NYSBA Health Law Journal | Fall 2008 | Vol. (2) the facility is ﬁnancially feasible and (3) its operators are of good character and competence. Nevertheless. such as the HEAL program. It was empowered to re-shape entirely a hospital’s service mix. A. actually proceeded reasonably from the structure of New York State’s health care delivery system. By limiting facilities and programs to those that are needed. Its 57 mandates go on for pages. and subsidizes a large portion of health care demand within New York State. C. It is instead based upon a gatekeeping model. Once facilities have passed through the gate and become providers. the proliferation of ambulatory care centers—these and other competitive pressures combined to reduce demand signiﬁcantly. in great and intricate detail. the state set reimbursement rates for all payers. requiring 81 facilities to engage in a broad range of activities. In sum. requiring more than 20 facilities to engage in some form of consolidations. and converting other hospitals from full-service to outpatient facilities. however. the state continues to be the largest payer for health care services. It was empowered to require hospitals to consolidate. It works far less well in a period of shrinking demand. the state continues to maintain a gate-keeping system. Through the Medicaid program. The Regulatory Context The state’s Certiﬁcate of Need (CON) program is perhaps the most signiﬁcant form of gate keeping. how contracts are to be negotiated. the national health care delivery system entered a period of hyper-competition. The advent of managed care. thereby ensuring that providers would be proﬁtable. If the Commission’s powers appear extraordinary. these changes were ampliﬁed when the state eliminated the price control system that 23 The legislature’s preference for central planning over market economics. The Need to Restructure A gatekeeping system of this kind—designed to limit supply and then to support existing providers—may function adequately in a growing industry. adding them in others. until 1993. eliminating services in some hospitals. requiring the closure of facilities from Queens to Buffalo. There was already little of the “invisible hand” at work in the health care marketplace because the marketplace is not based on a free-market model. signiﬁcant reductions in average lengths of stay. the state gate-keeping function effectively replaces competition with centralized planning. when these providers face reduced demand for their services. characterized by a signiﬁcant drop in demand for hospital services. The elimination of that system signiﬁcantly curtailed state protection. should expand its certiﬁed capacity to 85. the state makes signiﬁcant efforts to protect them. and various subsidy programs. and it did. . . 23 psychiatry. During the late 1990s. and. the transition from a protected system to a competitive system is still quite limited.LEGAL ISSUES IN THE WAKE OF THE BERGER COMMISSION I.”) Reﬂecting the nature of its charge. The CON process continues to serve not only as a gatekeeper. and then provide signiﬁcant support to existing providers. supply with need. in the process restructuring more than one-quarter of the facilities in the State. 3 . and opened the delivery system to some level of competition. B. . centralized decision-making would be utilized as a means of allocating resources. Medicaid payments continue to take account of facilities’ underlying costs. Indeed. . (“Eastern Long Island Hospital. some aid programs are directed speciﬁcally to ﬁnancially low-performing facilities. if not dangerous. 13 | No. and 20 alcohol rehabilitation . how management is to be structured. Under the Certiﬁcate of Need program. while seemingly extraordinary. but also to protect established providers from facing new competitors.” No “invisible hand” of the market was at work here. . currently certiﬁed for 80 beds. the legislature’s rationale supporting these powers appears even more so: the legislature directed the Commission to restructure the health care system in order to “align . in which the state signiﬁcantly restricts entry into the health care delivery system while providing support for approved providers. Even an existing facility that merely wishes to add a new health-care service must obtain approval from the Department of Health and the State Hospital Review and Planning Council. the state subsidizes the supply of hospitals. from mergers to joint ventures to afﬁliations. describing in the process how hospitals are to be governed. Through its tax-exempt loan program. “competition” is decried throughout the report as a wasteful. It was empowered to close down hospitals and nursing homes entirely. practice.
providers were guaranteed a return on their investment. often do not take cost into account at all when they purchase health care services because their costs will be indemniﬁed by their insurers. An obscure provision of the Public Health Law authorizes the Commissioner of Health to suspend. however. induce increased demand for medical services. In that model.” Moral hazard exists because patients. Second.LEGAL ISSUES IN THE WAKE OF THE BERGER COMMISSION had previously sheltered hospitals from competition. New York’s gate-keeping system was especially ill-suited to such a period because the system was designed to protect incumbent providers. and one secular—were built in the 1970s. acting rationally. that is. by their very existence. for example. these facilities would respond not by eliminating excess capacity (which would yield limited NYSBA Health Law Journal | Fall 2008 | Vol. a small city in which two hospitals with different missions—one Catholic. First. Finally. however. the industry suffers signiﬁcantly from “moral hazard. empty hospital beds. to expect state regulators to close down businesses. modify.2 It is exceedingly unrealistic. exclusively run by) not-for-proﬁt entities. or convert it to other uses. 3 The fact that the Berger Commission grew naturally from the state’s regulatory system begs the question: why does the state maintain such a system? Originally. health care outcomes are exceedingly difﬁcult to quantify. Third. When the state eliminated price controls. These factors and others have combined to produce observable distortions in the health care market. when Certiﬁcate of Need laws and central planning were ﬁrst adopted. Even when patients face co-payments. even when their value is not commensurate with their cost. many facilities struggled with break-even or even negative ﬁnancial margins. information on quality is limited. Faced with today’s inadequate demand. payers reimbursed providers on a cost-plus basis. for example. or reduce its size. D. those payments are typically capped. policy-based explanation. or revoke a hospital operating certiﬁcate in order to conserve resources. This policy-based argument would maintain that 24 . hospitals will compete with each other to provide the most expensive equipment and attractive amenities. and are then paid for the very services that they themselves had recommended were necessary. For example. the industry is dominated by (and in New York. While health care is not unique in suffering from this problem— your car mechanic. As a result. limit. highlights the ineffectiveness of the regulatory system in eliminating excess capacity. in the face of the signiﬁcant excess capacity identiﬁed by the Commission. “Roemer’s Law” states that a “built bed is a ﬁlled bed”. Similarly. based on the demands of the market.1 That is. research has shown that a “medical arms race” will occur in a market in which patients are unconcerned about costs. Defenders of the system argue that such protection is necessary to level the uneven playing ﬁeld that existing providers face. presents you with the very same conﬂicts—health care is unique in the way it combines the agency problem with other ﬂaws of the health care markets. One explanation for the continued existence of CON is that it is maintained to protect entrenched institutional interests (such as hospitals) against encroachment by new competitors (such as ambulatory surgery centers). Accordingly. Market failure rises from a number of causes. the need for the Berger Commission to effect a controlled reduction in capacity became clear. since they are called upon to provide extensive un-reimbursed public goods. The Policy Context: Why the Certiﬁcate of Need Law Persists and Planning Commissions Are Necessary CON is necessary because market failure pervades the health care marketplace. the Commissioner may close a hospital or nursing home. when demand for hospital beds was greater than today. A more comprehensive. however. this justiﬁcation ceased to exist. 13 | No. In these circumstances. would invoke economic theory and patient safety to justify maintaining the Certiﬁcate of Need process. In these markets. because most patients exhibit some unique combination of health deﬁcits. so that the patient has no incentive to avoid high-cost procedures and treatments. Consider. Not-for-proﬁt entities may persist in their markets long after a for-proﬁt entity would have abandoned them. and consumers are frequently unable to differentiate between providers based upon rational criteria. and excess capacity forces hospitals to compete with each other for physician referrals. the state regulatory system included a safety valve designed to eliminate such excess capacity. the industry suffers from the problems of agency: physicians diagnose patients. which make their decisions not based upon optimizing proﬁts but upon fulﬁlling their missions. a gatekeeping method was needed to ensure that facilities did not create excess capacity to take advantage of guaranteed proﬁts. The fact that this provision has been used only once. especially in as sensitive an industry as health care. recommend treatment. and the gatekeeping system appears at ﬁrst blush to be inefﬁcient. In theory.
Of necessity. This can in some circumstances be a mixed blessing. Nevertheless. Competition also demands failure. however. and selective contracting. payers overly empowered by a competitive marketplace may negotiate a rate that is inadequate to pay for their fair share of hospital costs. They undercut consumer choice. the absence of good outcome information interferes with this effective response. Payers may be able to negotiate a lower price in a competitive marketplace than in a non-competitive marketplace. one or the other hospital might fail. The Federal Antitrust System: Competition Based Federal antitrust regulators have adopted a starkly contrasting position. the health care delivery system is not nearly equal to the sum of its parts. which is not likely in the near future. the more likely it will be performed well. quintessential public goods that need to be maintained in appropriate locations to protect the public health. efﬁciency. but also has adverse health effects. Too many of its citizens are uninsured. competition at least serves as a check on a provider’s untrammeled power to raise prices indiscriminately. And even if this policy choice is misguided. the more frequently a procedure is performed. Under this argument. much as it does throughout the rest of the economy. competition could provide an important beneﬁt by reducing the price of services. 3 tition may produce negative outcomes. though—quality. “competition” between hospitals may produce a host of undesirable outcomes. weaken markets’ ability to contain healthcare costs. and stiﬂe innovation. creating increasing risks for patients. volume is an important element of health care quality. and growing ever more so at a rapid and unsustainable pace. quality information would force competitors to combine and create a better product. In these circumstances. exceptionally talented doctors and nurses apply cutting-edge technologies within an almost haphazard delivery system. Those high-tech services would induce greater demand from the hospitals’ existing physicians and their patients by providing new opportunities for spending. in health care. Along all of the other important dimensions. such as through new purchases of high-tech services. II. Too much competition could also force the closure of hospital emergency departments. CON laws create a barrier to entry and are thus anathema to the free market. This type of market distortion is not only economically wasteful. the facilities would nevertheless struggle to remain open and fulﬁll their not-for-proﬁt mission to the point at which their return on capital would ordinarily not justify their existence. competition can and should be employed to increase value across the entire health care system. costs would escalate—even while payers played the facilities against each other in negotiating lower rates. New York State could choose to move toward the more competitive system. but the underlying strategy for addressing those distortions would change from acceptance to comprehensive reform. Even in these circumstances. It could eliminate the Certiﬁcate of Need process and reduce subsidies. Competition. For those who are insured. Market distortions would continue to exist. can have the effect of diluting volume. due to various market failures a non-competitive market in New York State may produce lower overall costs. as a recent book by Harvard economists Porter and Teisberg has argued the United States faces today a crisis in the value produced by its health care system. so that procedures of the highest quality (and expense) often substitute for more effective (and lower-cost) procedures. For example. as the failing hospital ﬁlls up with unnecessary hospitalizations. so that no one will have the necessary volume to perform at optimum levels. once it is made the Berger Commission becomes a rational outgrowth of the system. rather than engage in planning at all. That is. In certain circumstances. The result is that the (non-)system is extraordinarily expensive. 25 . the new technology would help each facility to attract physicians from the competing hospital. even overall cost—compeNYSBA Health Law Journal | Fall 2008 | Vol. and one that results in excessive costs for untreated conditions. replacing competition with central planning becomes a reasonable policy choice. Absent such reform. than a competitive marketplace. an often deadly condition for those it afﬂicts. 13 | No. but only after a long period of wasteful spending. then. central planning (and the Berger Commission) remains a rational response to today’s New York State health care marketplace. When their best efforts failed. and better quality.LEGAL ISSUES IN THE WAKE OF THE BERGER COMMISSION savings) but by trying to induce greater demand. Of course. As a senior ofﬁcial at the Justice’s Department’s Antitrust Division recently explained: Certiﬁcate of Need laws pose a substantial threat to the proper performance of healthcare markets. and then pass along their savings to consumers. however. In addition. It could encourage quality measures. In ordinary markets. Ultimately.3 More generally. but failing hospitals pose a particular challenge to patient health. By their very nature.
mergers can produce signiﬁcant savings and efﬁciencies. the antitrust enforcement agencies have outlined a multi-factor framework to determine whether anti-competitive effects are likely to occur. “acute care hospitals”) and geographic market (e. the very fact that the merged hospitals had increased their prices was sufﬁciently powerful to satisfy many of the requirements typically necessary to demonstrate an antitrust violation. the Federal Trade Commission (FTC) recently issued a decision in the Evanston case that cast signiﬁcant uncertainty on any hospital merger that has the effect of increasing the prices charged to managed-care companies. and that Winthrop Hospital and New York Hospital at Queens would continue to compete in the secondary market. Seeking to reverse the tide.8 Health care mergers. It ﬁled a complaint more than four years after the merger had been completed.6 First. or hinder innovation.g. By delaying the suit. Instead it merely required that the ENH and Highland Park create separate negotiating teams. they deﬁne the product market (e. In contrast. in ordinary circumstances—that is. First. A brief discussion of each follows. Indeed. however. the FTC did not require ENH to divest itself of its acquisition. real world experience. Instead.LEGAL ISSUES IN THE WAKE OF THE BERGER COMMISSION Based on this type of analysis. the court held that Manhattan hospitals would continue to compete with North Shore for tertiary services. It created almost a tautology: if health care facilities merge and increase their prices to managed-care companies. the Evanston panel created an inference that where there is a price increase. the antitrust laws prohibit parties from merging if the merger may substantially reduce competition or create a monopoly. it might not have been able to demonstrate that ENH had power in that market. Facilities not named in the Commission report could face potential liability if they simply. the FTC was able to demonstrate. Three aspects of the decision stand out. but for the legislative command that established the Commission—some of the mergers and consolidations required by the Commission would have been subject to signiﬁcant scrutiny under the antitrust laws. through actual. In the North Shore merger. the FTC rejected its arguments that quality improvements justiﬁed the price increases. a neighboring facility in the Chicago suburbs. Thus. Second. while joint ventures may create economies. 3 Generally speaking. however. They then analyze the merged ﬁrm’s market power within those markets and the likelihood that it would be able to exercise its power to adversely affect competition. entered the types of arrangements mandated by the Commission. Courts were apparently sufﬁciently sensitive to the unique nature and mission of hospitals that they were reluctant to prohibit even mergers opposed by federal regulators on antitrust grounds.g. on their own. The ultimate goal is to determine the transaction’s probable effect on competition in a relevant market. then the merger would violate the antitrust laws. establish a ﬁrewall between them. that the merger had the effect of increasing the prices that hospitals could charge to managed-care companies. antitrust regulators have continued vigorously to prosecute health care facilities much as they do other industries. the relevant market would be determined by reference to that increase. for example. reduce quality. “the Capital District region”) affected by a merger. including those by not-forproﬁt hospitals.7 If the merger is likely to raise prices above a competitive level for a signiﬁcant period of time. the FTC relied upon the post-merger price increase to help it deﬁne the relevant geographic market. the FTC brought a postmerger challenge to Evanston Hospital’s acquisition of Highland Park Hospital. 1. and offer all of its managed-care contracting partners the opportunity NYSBA Health Law Journal | Fall 2008 | Vol. Two types of integration are at the forefront of federal antitrust prosecutions: mergers and clinical integrations.. In Evanston. For example. even though ENH had invested more than $100 million in improving quality of care. are subject to the same antitrust laws as mergers in other industries.4 Similarly.. while under the New York view described above. one of the most important and contentious issues in hospital antitrust cases is determining the scope of the geographic market. the North Shore case found that the hospital system’s promise to reinvest $100 million in savings by investing half in the community and half in quality care justiﬁed the anti-competitive effects of the merger. 13 | No. then they have demonstrated sufﬁcient market power to make the merger unlawful. Prior to Evanston. these arrangements are not viewed favorably by the FTC when they involve joint negotiations designed to reduce price. by relying on the price increase to help it establish the market. Had the Evanston panel been required ﬁrst to establish a relevant market.5 Because mergers are most often analyzed prospectively. government agencies had lost seven consecutive cases seeking to enjoin hospitals from merging with each other9 (including the Department of Justice’s challenge to the North Shore-Long Island Jewish Medical Center 26 . Mergers merger10). despite its ﬁndings that the merger violated the antitrust laws. Finally.
Joint Ventures In the case of physicians. Those rules generally provide that a joint venture must include an active program to evaluate and modify practice patterns. are per se illegal. that were sanctioned by the legislature in the Berger legislation. If an agreement is not per se illegal. 13 | No. The true test is whether it promotes or suppresses competition. the federal regulators have argued that safe-harbor provisions would provide too ready a roadmap for hospitals to enter an agreement whose true purpose was anti-competitive. Under its precedent. reasonably necessary to) realizing those efﬁciencies.) In the case of hospital joint ventures. and will not be viewed as per se illegal if (1) the integration is likely to produce signiﬁcant efﬁciencies that beneﬁt consumers. such as joint negotiations. That is. such as mergers. On the other. with the increased rates themselves serving as evidence of anti-competitive effect. then it is subject to a rule-of-reason analysis. and its effect.16 or not to compete on certain products. however.11 As Justice Brandeis observed. however.13 Courts have accordingly divided agreements into two categories. no matter what their actual effect on the market.17 for example. While courts might eventually uphold the merger. the nature of the restraint. the Greater Rochester IPA recently received a letter ruling that its integrated delivery system justiﬁed a joint negotiation strategy. both because a plaintiff may prevail in such cases without a signiﬁcant investment of resources and because federal prosecutors may pursue criminal sanctions. there is far less guidance on which to rely. in which courts look to the facts peculiar to each case. in which “need” is pre-determined and excess capacity is to be abhorred. the federal government has provided safe-harbor rules that allow physicians to enter joint ventures without running afoul of the antitrust laws. The American Hospital Association has for years unsuccessfully sought guidance from federal regulators. planned health care market. the remedy focused exclusively on price. including by seeking the establishment of safe-harbor provisions for hospital-based clinical integration. and have issued advisory opinions that imply a high hurdle for such integration. including the market’s condition before and after the restraint was imposed. the antitrust laws adopt a competition approach and seemingly proscribe the very types of coordinated activities.LEGAL ISSUES IN THE WAKE OF THE BERGER COMMISSION to renegotiate its contracts. 3 27 .14 Agreements among competitors to ﬁx prices. the FTC did engage in the traditional physician-type analysis—that is.19 III. and did it justify joint negotiations (it did not). are analyzed under the rule of reason. Many hospitals are concerned that it is not even entirely clear that hospitals may use clinical integration to justify joint negotiations. (In one case. they have declined to provide any safe-harbor rules that would allow hospitals to engage in joint ventures. The AHA has argued that the same types of clinical integration that may justify physician’s joint contracting also may apply to joint efforts by hospitals themselves to improve quality or reduce costs. Joint ventures are subject to section 1 of the Sherman Act. however. Suburban Health Organization (SHO). Nevertheless. The FTC has supplemented the safe harbor rules with letter rulings that permit physicians to negotiate jointly with managed care companies as part of their clinical integration. merged hospitals—which may have merged for myriad reasons—must be concerned that any increase in their negotiated rates would make them vulnerable to an antitrust challenge. NYSBA Health Law Journal | Fall 2008 | Vol. Some agreements are deemed so pernicious that they are considered “per se illegal”—it is illegal to enter such agreements.15 or divide markets. and (2) any agreements to engage in anti-competitive conduct (such as jointly negotiating contracts) is “ancillary to” (i.e.12 Determining whether an agreement promotes or suppresses competition. On the one hand. the uncertainty and potential costs might well discourage them from merging in the ﬁrst place. the state has expressed the goal of creating a centralized. entails signiﬁcant costs. The absence of any safe-harbor provisions. was there clinical integration (there was). every agreement “restrains” trade.) In any event. there is literally no established legal precedent on which to rely in creating a clinically integrated hospital joint venture that justiﬁes potentially anti-competitive behavior. At the same time that federal regulators continue to prosecute health-care mergers.18 Providers are (and should be) extremely wary of entering any agreement that might be a per se violation. the lack of relevant precedent and the threat of per se liability and potential criminal sanction cast a pall over even valuable clinically integrated facilities that seek to negotiate jointly. which prohibits any agreements that restrain trade.. and must have a high degree of interdependence to control costs and ensure quality. however. The Evanston decision creates signiﬁcant uncertainty for merging hospitals. (For example. 2. Synthesis I: The State Action Doctrine The two competing streams described above create the difﬁcult cross-currents in which potential merger or joint venture partners must operate in New York. Joint ventures.
Thus. Mid-Hudson was established prior to the repeal of price controls. both located in Poughkeepsie. That is. private activity is immune from scrutiny under the antitrust laws only when (1) the state has articulated a clear policy to allow the conduct. In the two cases in which courts have relied upon the CON process to identify the state’s clearly articulated policy. hospitals and nursing homes may be able to merge or enter joint ventures under the protection of the State Action Doctrine that they might otherwise be reluctant to undertake. but would allocate services between the two hospitals. they do not necessarily require a Certiﬁcate of Need. This doctrine recognizes that state regulatory systems are often created to temper.” As described above. after Berger. and would be renewed only if certain targeted goals were met. and have those processes serve as a means of supervising the hospital. it authorized up to $1 billion in health care grants for projects “consistent with objectives and determinations of the [Berger] Commission. they have rejected a facility’s use of the State Action Doctrine because the conduct at issue had not been supervised by the state to insure that progress was being made towards achieving the state’s regulatory objectives. In that case. if not override. a hospital merger might be approved conditionally. the CON process would identify a public health goal and approve and supervise the applicant’s conduct in reaching that goal. Francis court left about the state’s intended policy. or a HEAL NY grant.20 The following discussion describes how immunity might apply to facilities that merged or integrated in a manner that improved the health care delivery system. they established Mid-Hudson Health as a “hospital-without-walls”. 13 | No. St. Francis and Vassar Brothers. In either case. Two processes available in New York might implicate the State Action Doctrine. Accordingly. St. the state could actively supervise a merger by establishing a parent corporation or a newly merged hospital for a “limited life. The conduct likely would then be immune from antitrust attack. 3 28 . Francis. the state could condition its CON approval on the facility implementing and maintaining particular processes. and (2) the state actively supervises the conduct to ensure that it complies with the state policy. In that case. there is another regulatory system that might afford state action immunity from the antitrust laws: the HEAL NY capital grant program. For example. Clinical Integration A facility that received an appropriate Certiﬁcate of Need appeal might qualify for state action immunity. the doctrine authorizes states to employ regulatory systems even when those systems authorize private activity that would otherwise violate antitrust law and doctrine. Together. the health care delivery market place is to be centrally planned and highly regulated. state action immunity might be conferred through a Health Care Efﬁciency and Affordability Law of New Yorkers (HEAL NY) capital grant. Merely receiving a Certiﬁcate of Need. In this way. A facility might address this issue by submitting a CON application that implicitly or explicitly required active state supervision. the state would be compelled to actively supervise the facility to ensure that state goals were being met. In order to satisfy the State Action Doctrine. there is little doubt that a facility submitting a CON could meet the ﬁrst test. but the court case was decided after the repeal of price controls. the Berger Commission legislation resolves whatever doubts the St. with the hospital required to demonstrate improvements in quality and efﬁciency of care. The court speciﬁcally limited its holding to the pre-repeal period. For example. Mergers However. 1. the effects of pure market competition. 2. In New York v. even one that includes joint contracting. the state NYSBA Health Law Journal | Fall 2008 | Vol. That is. In the case of mergers. suggesting that the price controls themselves were central to the holding that the state had a clearly articulated purpose to replace competition with central planning. planned health care economy.” The hospital’s authority to operate would terminate at some regular interval.21 the federal court concluded that New York State’s Certiﬁcate of Need process is a clearly articulated state policy that satisﬁes the State Action Doctrine. the objectives and determinations of the Berger Commission themselves reﬂected the legislature’s intention to avoid competition and utilize planning as a means of allocating health care resources. The court ruled that the CON process through which Mid-Hudson was established represented a clearly articulated state policy to allow the arrangement between them. had agreed to allocate services between them. MidHudson would not provide any services. the state must also actively supervise the facilities’ conduct. that the state has in place a clear policy to replace competition with a centralized. Alternatively. would not be sufﬁcient to provide immunity. state action immunity might be conferred through the Certiﬁcate of Need process. Under established case law. When two facilities engage in a clinical integration.LEGAL ISSUES IN THE WAKE OF THE BERGER COMMISSION The State Action Doctrine is the legal doctrine designed to address precisely this type of conﬂict. however.22 HEAL NY clearly articulated a state policy in support of regulation. In the case of clinical integration.
they might include a ﬁrewall of the type employed in Evanston. Syntheses II: Improving Health Care Through the State Action Doctrine The preceding discussion highlighted how the state legislative and regulatory system might give rise to state action immunity for private conduct undertaken in furtherance of the state’s policies. The common sense approach. the private conduct would then be exempt from the antitrust laws. One simple approach would involve approving integration activities when they would improve the overall quality. they should be capable of implementation with limited price increases.e. A model for this approach already exists. or some other criterion. providers seeking state protection might include in any proposed integration some methods for ensuring fair pricing. In each case. health care competition may be ultimately inefﬁcient. active state supervision is also required. providers could capture all of the ﬁnancial beneﬁts of integration. the Commissioner of Health and the Public Health Council could approve of the overall effect of a merger or integration. They would also need to submit applications that included an active state supervisory role over their venture. 13 | No. overall. Under these laws. Alternatively. That is. If overall a proposal would improve health care. The more comprehensibly any agreement addressed the issue of price. If accepted and actively supervised by the state. In egregious situations. As with the CON process. If adopted and funded by the state. departments of health grant applications for a “certiﬁcate of public advantage. and not the FTC or DOJ. is whether and when the doctrine should be employed. the active supervision requirement would force public disclosure of the beneﬁts and burdens of integration. 3 29 . They might also include some method of dispute resolution. Perhaps a more important question. IV. a clearly articulated state purpose is a necessary but not sufﬁcient condition for the State Action Doctrine. a merger will be approved even if it has anti-competitive effects.. the proposal was required to identify a means for active supervision by the state. efﬁciency and quality-improving activities would be protected. however. while detrimental activities would not. clinical integration will be approved if the integration is likely to produce signiﬁcant efﬁciencies and joint negotiations are “ancillary” (i. though essentially a mirror of existing antitrust standards. This common-sense approach has the additional advantage of being entirely consistent with traditional antitrust law. Under that application process. The Department’s HEAL NY Phase 4 grant application process is an example of a process that provided an opportunity for antitrust exemption. the requirements of the State Action Doctrine would then be met. and nevertheless charge payers unfair monopoly prices. or the support or concurrence of payers. If proposals truly created economic efﬁciencies. NYSBA Health Law Journal | Fall 2008 | Vol.” A certiﬁcate is granted when the department of health determines that. the beneﬁts and burdens of integration would be weighed by those with the most immediate knowledge of the local health care economy. and antitrust enforcement agencies would ensure at least that the beneﬁt/burden analysis was performed and enforced.LEGAL ISSUES IN THE WAKE OF THE BERGER COMMISSION has through the HEAL NY program articulated a clear policy to allow (and fund) Commission “look-alikes” and other activities consistent with the objectives of the Commission. it would be rejected.” In the event that a proposal implicated antitrust concerns. efﬁciency and safety of the health care delivery system. As described above. if it would not. The common sense approach would thus mirror those employed by the antitrust agencies. When such a threat existed. one crucial question would involve the impact of any integration on the prices charged to payers. but the absence of competition may lead to monopoly pricing. applicants were invited to submit a proposal for “Berger look-alikes. would undoubtedly increase the chances that the proposal would meet with approval. the likely beneﬁts from an integration outweigh any disadvantages attributable to a reduction in competition. to comparable providers. Nevertheless. reasonably necessary) to realizing those efﬁciencies. State power would not be unlimited. In the early 1990s. of course. assuming that the requirements of the State Action Doctrine were met. Similarly. it would be approved. would have the substantial effect of moving the locus of antitrust decision-making from federal (and state) antitrust regulators to state health industry regulators. applicants who sought to engage in a joint venture would need to seek approval for that conduct through a state grant. Under traditional merger analysis. provided the merger will create efﬁciencies that would offset those anti-competitive effects. the more likely that antitrust regulators would ﬁnd that the state had “actively supervised” the parties’ actions. Proposals might include limits on rate increases that were linked to Medicaid or Medicare reimbursement rates. 18 states adopted State Hospital Cooperation Laws. Accordingly. Including a pricing element in any proposal.
C. 30 NYSBA Health Law Journal | Fall 2008 | Vol. combinations or conspiracies in restraint of trade. Competition in Healthcare and Certiﬁcates of Need. Soc’y. 15 U. 58 N.. United States. 46 (1990).C. 21. among other things. The history of the restraint. Maricopa County Med. In New York. Inc. July 2004. he provides day-to-day counsel on implementation of the Berger Commission report. Sungard Data Sys. Merger Guidelines § 1.S. Target Sales. Midcal Aluminum. prohibits “any contracts. and before that at a large New York City law ﬁrm. Looking Ahead 3.D. Public Health Law. Arizona v. 2d 172. 289 F. v. the evil believed to exist. He has also litigated a number of large. Mark J. is Special Counsel to the New York State Department of Health. Supp. at 618–23. Botti. e. 97 (1980).N. In re Evanston Northwestern Health Care (FTC 2007). In any event. 2003). California Retail Dealer’s Assoc. join NYSBA’s Health Law Section (attorneys only). See Herkimer v.S. “As health care reform continues at all levels of government. Addyston Pipe & Steel Co. 4. subd.shtm. 418 U. since many hospitals operate in overlapping service areas and naturally compete with each other. aff’d on other grounds. Prior to joining the Department of Health. See also Marine Bancorp. United States v. 6. 181 (D. 445 U.S. 16. 2d 378 (S. See Improving Health Care. Of course. 10. 643 (1980).LEGAL ISSUES IN THE WAKE OF THE BERGER COMMISSION V. Statement 8 at § B1. 310 U. good policy requires a constant re-examination of its underlying premises.Y. available at http://www. 498 U.. 983 F.” In truth. When market forces dynamically alter the landscape— such as with the hyper-competition that preceded the Berger Commission—then competition will evolve on its own.C. then. Chapter 4. 175 U. New York’s health system is ultimately a hybrid of competition and central planning. to ensure that changing facts do not render existing policies obsolete. it is critical that our understanding of the relative roles of regulation and competition keep pace. 11.. gov/bc/docs/horizmer. § 2806.S. the gatekeeping system does not regulate the price that hospitals may charge.N. 1–2 and n. BBG of Georgia. See. are all relevant facts.D. 172 F. it is critical that our understanding of the relative roles of regulation and competition keep pace. The state’s regulatory gate-keeping system controls the supply of health care providers only at the entry point. 231 (1918). 7.S. 17. Chicago Board of Trade v. 20. 13 | No. It is my hope that this article has contributed to this understanding. This article began by identifying the diametrically opposed approaches taken by the State of New York regulatory system. § 1. The Sherman Act. 19. Palmer v. Public Health Law. Supp. v. the purpose or end sought to be attained. id. 18. As health care reform continues at all levels of government. 2. Supp. Inc. 2001). § 4. both regulation and competition play a central role in the health-care delivery system.ftc.ftc. 14. Even a perfectly devised central planning system that could adjust immediately to excess supply would still allow for signiﬁcant competition. 446 U. Inc... Endnotes 1. before a joint session of the Health and Human Services Committee of the State Senate and The CON Special Committee of the State House of Representatives of the General Assembly of the State of Georgia.S. 121 (E. where. precedent-setting cases in New York as an Assistant Attorney General. the reason for adopting the particular remedy.S.. Inc.2d 1069 (1983). 15.Y. 9.. available at http://justice. 246 U. Francis Hosp. 13. available at http://www. who use free-market principles in analyzing integrations. Socony-Vacuum Oil Co.gov/atr/public/ comments/223754. United States v. 3 . some form of price controls would be necessary) and encourages it. 332 (1982).g.gov/os/adjpro/d9315/070806opinion. 88 A. which both reﬂects a system of competing hospitals (since in the absence of competition.2d 704 (3d Dep’t 1982) (approving Health Commissioner’s conversion of hospital to nursing home Martin Bienstock.D. Esq. and federal antitrust enforcers.. 457 U. St. 15 U. 6.S.pdf. he served as a Senior Assistant Counsel to the Governor. Long Island Jewish Medical Center.. 1992 DOJ/FTC Merger Guidelines. Axelrod.7..Y 1997).S. which employs a centrally planned health care system.pdf. United States at 238. United States.21. despite Department’s failure to promulgate regulations). 12. 211 (1899). however. Like what you’re reading? To regularly receive issues of the Health Law Journal. 22.S.D. Inc. 8. Health Care Statements. Understanding and delimiting a proper role of both is critical to understanding and improving the public health.” Chicago Board of Trade v. 150 (1940). Clayton Act. 5. § 2818. § 18. United States v. A Dose of Competition: A Report of the Federal Trade Commission and the Department of Justice. New York v. Catalano. pp. v.
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