The corrosive combination of nonprofit monopolies and U.S.-style health insurance: Implications for antitrust and merger policy

Law and Contemporary Problems

Volumn 69, Issue 4, 2006, Pages 139-158

  Richman, Barak D ^a  

^a DURHAM UNIVERSITY   (United Kingdom)

Author keywords

[No Author keywords available]

Indexed keywords

EID: 33947420125     PISSN: 00239186     EISSN: None     Source Type: Journal    
DOI: None     Document Type: Article

References (165)

1. For a brief overview of commonly identified sources of rising health care expenditures, see Henry J. Aaron, Serious and Unstable Condition 38-53 (1991) (attributing rising expenditures to the stimulation of demand through third-party payment, rising provider compensation, the aging of the American population, malpractice litigation, and (especially) the growth of expensive new technologies).
2. Clark C. Havighurst & Barak D. Richman, Distributive Injustice(s) in American Health Care, 69 Law & Contemp. Probs. 7, 24 (Autumn 2006).
3. Id at 18.
4. See FTC v. Tenet Healthcare Corp., 186 F.3d 1045, 1047 (8th Cir. 1999);
5. FTC v. Freeman Hosp., 69 F.3d 260, 273 (8th Cir. 1995);
6. California v. Sutter Health Sys., 84 F. Supp. 2d 1057, 1085 (N.D. Cal. 2000), aff'd, 130 F. Supp. 2d 1109 (N.D. Cal. 2001);
7. United States v. Long Island Jewish Med. Ctr., 983 F. Supp. 121, 149 (E.D.N.Y. 1997);
8. FTC v. Butterworth Health Corp., 946 F. Supp. 1285, 1302-03 (W.D. Mich. 1996), aff'd, 121 F.3d 708 (6th Cir. 1997) (unpublished table decision);
9. United States v. Mercy Health Servs., 902 F. Supp. 968, 989 (N.D. Iowa 1995), vacated as moot, 107 F.3d 632 (8th Cir. 1997);
10. In re Adventist Health Sys., 117 F.T.C. 224, 224 (1994).
11. Thomas L. Greaney, Whither Antitrust? The Uncertain Future of Competition Law in Health Care, Health Aff., Mar.-Apr. 2002, at 185.
12. See infra Part II.
13. Butterworth Health Corp., 946 F. Supp. at 1302.
14. E.g., Judge Posner, infra note 16;
15. Judge Tjoflat, infra note 17;
16. Professors Dranove & Ludwick, infra note 63.
17. Havighurst & Richman, supra note 2, at 23.
18. Id.
19. See infra Part II.
20. See infra Part III.
21. See infra Part IV.
22. Hosp. Corp. of Am. v. FTC, 807 F.2d 1381, 1390 (7th Cir. 1986) (citations omitted).
23. Id. at 1391.
24. United States v. Rockford Mem'l Corp., 898 F.2d 1278,1285 (7th Cir. 1990).
25. Judge Posner also reiterated that nonprofits are likely to pose greater danger to competition than for-profits, adding "[t]he ideology of nonprofit enterprise is cooperative rather than competitive. 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." Id.
26. FTC v. Univ. Health, Inc., 938 F.2d 1206, 1224 (11th Cir. 1991).
27. In addition, Judge Tjoflat invoked National Collegiate Athletic Ass'n v. Board of Regents, 468 U.S. 85, 100 n.2 (1984), to conclude 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."
28. Univ. Health, 938 F.2d at 1224.
29. Richard Schmalbeck observes in this volume that nonprofit hospitals enjoy a similar generosity from tax courts and IRS rulings. Richard L. Schmalbeck, The Impact of Tax-Exempt Status: The Supply-Side Subsidies, 69 Law & Contemp. Probs. 121, 124-27 (Autumn 2006).
30. 707 F. Supp. 840 (W.D. Va. 1989), aff'd, 892 F.2d 1042 (4th Cir. 1989) (unpublished table decision).
31. Id at 849.
32. Id.
33. See id. at 847-48.
34. See United States v. Carilion Health Sys., No. 89-2625, 1989 WL 157282 (4th Cir. Nov. 29, 1989).
35. 911 F. Supp. 1213 (W.D. Mo. 1995), aff'd, 69 F.3d 260 (8th Cir. 1995).
36. Under the FTC's alternative market definitions, the proposed merger would create a market with a Herfindahl-Hirschman Index (HHI) of between 2288 and 4356. Id at 1222.
37. The hospitals argued that the merger would result in an HHI between 1322 and 1624. Id.
38. Under the Department of Justice's merger guidelines, a market is not "highly concentrated" until the HHI reaches 1800. Dep't of Justice & Fed. Trade Comm'n, Horizontal Merger Guidelines, 57 Fed. Reg. 41,552 41,558 (Sept. 10, 1992), available at http://www.usdoj.gov/ atr/public/guidelines/horiz_book/hmg1.html.
39. Freeman Hosp., 911 F. Supp. at 1222 (citations omitted).
40. Id. at 1227.
41. See FTC v. Freeman Hosp., 69 F.3d 260 (8th Cir. 1995).
42. The court briefly confirmed that the hospitals' nonprofit status did not defeat the FTC's jurisdiction in the case. Id at 266-67.
43. Korematsu v. United States, 323 U.S. 214, 246 (1944) (Jackson, J., dissenting).
44. It appears that the Freeman opinion did not capture widespread attention. In United States v. Mercy Health Services, another challenge to a proposed merger of two nonprofit hospitals, the court wrote, "The hospitals have also asserted as a defense their non-profit status and procompetitive intent. The hospitals cite United States v. Carilion Health for the proposition that the non-profit status of the hospitals can be considered in determining whether the hospitals would act in an anticompetitive manner. The government points out, this is a questionable legal proposition. No other courts have explicitly adopted this theory of defense." 902 F. Supp 968, 989 (N.D. Iowa 1995) (citation abridged), vacating as moot 107 F.3d 632 (8th Cir. 1997).
45. 946 F. Supp. 1285 (W.D. Mich. 1996), aff'd, 121 F.3d 708 (6th Cir. 1997) (unpublished table decision).
46. Id. at 1294.
47. For general acute inpatient care, the post-merger HHI would be between 2767 and 4521, reflecting a gain of 1064 to 1889 points as a result of the merger. For primary inpatient care, the post-merger HHI would range from 4506 to 5079, reflecting a gain of 1675 to 2001 points. The court concluded that "the proposed merger would result in a significant increase in the concentration of power in two relevant markets, and produce an entity controlling an undue percentage share of each of those markets." Id.
48. For concentration standards under the Department of Justice's merger guidelines, see supra note 25.
49. Butterworth, 946 F. Supp. at 1296.
50. Id.
51. (citing FTC v. Freeman Hosp., 911 F. Supp. 1213, 1222 (W.D. Mo. 1995), aff'd, 69 F.3d 260 (8th Cir. 1995)).
52. Id.
53. Id. at 1297, 1302.
54. In addition, the court gave significant weight to a "Community Commitment" that the hospitals signed, which pledged to freeze certain prices, limit profit margins, and maintain a commitment to serve the medically needy. Id. at 1298.
55. The document, which the FTC regarded as "unenforceable, illusory, or inadequate," was designed "to assuage any purchaser concerns and to reiterate [the hospitals'] strong conviction that the purpose and intent of the transaction is to reduce costs." Id. (alteration in original).
56. FTC v. Butterworth Health Corp., No. 96-2440, 1997 WL 420543, at *3 (6th Cir. July 8, 1997).
57. Greaney, supra note 5, at 188.
58. James F. Blumstein, The Application of Antitrust Doctrine to the Healthcare Industry: The Interweaving of Empirical and Normative Issues, 31 Ind. L. Rev. 91, 117 (1998). Though academic defenders of Butterworth were fewer in number, some did weigh in, including one who praised the court for using expert testimony and empirical evidence to "reconsider[] old presumptions in the light of new evidence."
59. Michael S. Jacobs, Presumptions, Damn Presumptions and Economic Theory: The Role of Empirical Evidence in Hospital Merger Analysis, 31 Ind. L. Rev. 125, 142 (1998).
60. 946 F. Supp. at 1302.
61. FTC v. Freeman Hosp., 69 F.3d 260, 263 (8th Cir. 1995) (alteration and omissions in original) (quoting from the district court's oral denial of the temporary restraining order).
62. Federal Trade Comm'n & U.S. Dep't of Justice, Improving Health Care: A Dose of Competition, ch. 4, at 1 (2004), available at http://www.usdoj.gov/atr/public/health_care/204694.pdf, at 165.
63. See, e.g., William M. Sage, Protecting Competition and Consumers: A Conversation with Timothy J. Muris, Health Aff., Nov.-Dec. 2003, at 101, 103 (quoting the former Chairman of the Federal Trade Commission as saying, "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").
64. See Greaney, supra note 5, at 193.
65. See Complaint, In re Evanston Northwest Healthcare Corp., No. 9315 (Fed. Trade Comm'n Feb. 10, 2004), available at http://www.ftc.gov/os/caselist/ 0110234/040210emhcomplaint.pdf;
66. Federal Trade Comm'n, Evanston Northwestern Healthcare Corp. and ENH Medical Group, Inc., http://www.ftc.gov/os/adjpro/d9315/index.htm (last visited May 9, 2006) (showing all actions taken in the case).
67. In re Evanston Northwestern Healthcare Corp., No. 9315, at 120-22 (Fed. Trade Comm'n Oct. 20, 2005) (ALJ initial decision), http://www.ftc.gov/ os/adjpro/d9315/051020initialdecision.pdf.
68. Michael R. Bissegger, FTC ALJ Finds That Evanston Hospital Merger Violated Antitrust Law and Orders Divestiture (Oct. 28, 2005), http://www.ebglaw.com/article_1198.html.
69. Id.
70. The court in Carilion relied on expert testimony to arrive at two key factual findings that favored the defendants. First, the court concluded, "as a general rule hospital rates are lower, the fewer the number of hospitals in an area" - in other words, nonprofit market concentration is correlated with lower prices. 707 F. Supp. at 846.
71. And second, "charitable, nonprofit hospitals tend to charge lower rates than for-profit hospitals," suggesting that nonprofits do not utilize market power like for-profits. Id.
72. The court offered little analysis explaining how it arrived at these conclusions but mentioned in a footnote that the FTC's expert witness, who predicted that the merger would increase prices, "did not explain the basis of his findings to the court's satisfaction," and that the defendant's witness "raised serious questions about [the FTC's] method of analysis." Id. at 846 n.6.
73. The defendants' expert witness, David Eisenstadt, was also employed by the Butterworth defendants. See FTC v. Butterworth Health Corp., 946 F. Supp. 1285,1290 (W.D. Mich. 1996), aff'd, 121 F.3d 708 (6th Cir. 1997).
74. In Freeman, the court dedicated slightly more of its opinion to exploring the nature and economic effects of nonprofits and rested its analysis chiefly on a published article by William Lynk, who also served as the defendants' chief expert witness. See FTC v. Freeman Hosp., 911 F. Supp. 1213, 1222 (W.D. Mo. 1995), aff'd, 69 F.3d 260 (8th Cir. 1995)
75. (citing William J. Lynk, Property Rights and the Presumption of Merger Analysis, 39 Antitrust Bull. 363, 377 (1994) [hereinafter Lynk, Property Rights]). The court drew upon the article to support the proposition, "if a nonprofit organization is controlled by the very people who depend on it for service, there is no rational economic incentive for such an organization to raise its prices to the monopoly level even if it has the power to do so."
76. Id.;
77. see also supra note 26 and accompanying text. It then examined "who controls the hospitals" and, after revealing that twelve of the Board's eighteen members were owners, employees, or retirees of local businesses, concluded, "the vast majority of the combined Board of Trustees is comprised of persons who indirectly represent the interests of hospital consumers."
78. Id at 1222-23.
79. Consequently, the court reasoned, "it would not be in these individual Board member[s'] best economic interest to permit prices to be raised beyond a normal competitive level." Id at 1223;
80. see also id. at 1227 (reiterating the same conclusion).
81. The Butterworth opinion engaged in a more empirical analysis to determine how nonprofits set prices. Similar to the court in Freeman, it began by citing another Lynk article, which concluded from an empirical study of California hospital markets that "on balance increased nonprofit market share is associated with lower, not higher, prices." 946 F. Supp. at 1295
82. (quoting William J. Lynk, Nonprofit Hospital Mergers and the Exercise of Market Power, 38 J.L. & Econ. 437, 459 (1995) [hereinafter Lynk, Hospital Mergers]). The court then accepted expert testimony from Lynk, who was also an expert witness for the Butterworth defendants, that analyzed the Grand Rapids hospital market that included the merging parties. Lynk "concluded that in Michigan, too, higher hospital concentration is associated with lower nonprofit hospital prices."
83. Id. Finding this evidence consistent with pledges from the hospitals' chairmen (who "have community interests at heart") that the merger was intended to lower health care costs and to improve quality, and not to increase prices, the court concluded that the merger would enhance consumer welfare.
84. See id at 1296-97, 1301-03.
85. (These findings were also consistent with observations the judge himself made during tours of the hospitals, in which he noted that the hospitals were "well-maintained" and during which he became convinced that the Board of Directors will adhere to their "fiduciary reponsibilities" to renovate and upgrade their facilities. Id. at 1301.)
86. Lynk, Property Rights, supra note 49, at 372.
87. See id. at 366.
88. See id. at 368-70.
89. Lynk, Hospital Mergers, supra note 49, at 442-43, 445-46.
90. The sample excludes hospitals in Los Angeles County and federal hospitals because, Lynk reasoned, those institutions catered to outlier populations. Id. at 442.
91. Kaiser hospitals and some others were also excluded because they do not release pricing data. Price data was time-lagged from individual hospital data to allow for prices to adjust to market conditions. Id. at 442.
92. Id. at 449, 452.
93. Id. at 453.
94. Id. at 459.
95. Glenn Melnick et al., Market Power and Hospital Pricing. Are Nonprofits Different?, Health Aff., May-June 1999, at 167, 168.
96. Mary Chris Jaklevic, Ownership and Pricing, Modern Healthcare, Oct. 6, 1997, at 2, 16 (quoting David Dranove of Northwestern University's Kellogg Graduate School of Management).
97. Additional controversy arose out of Lynk's employment in the consulting group Lexecon because Dennis Carlton, one of the Journal of Law and Economics editors, was also one of Lexecon's principals. Id.
98. The journal's editors, however, said Professor Carlton had recused himself when the editors selected Lynk's article for publication. See Dennis W. Carlton, Letter to the Editor, Professor: Article Was Misleading, Modern Healthcare, Dec. 1, 1997, at 52;
99. Sam Peltzman, Letter to the Editor, Journal Story Gave Incomplete Account, Modern Healthcare, Oct. 20, 1997, at 28.
100. John Simpson, Fed. Trade Comm'n & Richard Shin, U.S. Dep't of Justice, Do Nonprofit Hospitals Exercise Market Power? 16 (Nov. 1996), http://www.ftc.gov/be/workpapers/wp214.pdf.
101. Emmett B. Keeler et al., The Changing Effects of Competition on Non-Profit and For-Profit Hospital Pricing Behavior, 18 J. Health Econ. 69, 72-76 (1999).
102. Id at 72-73.
103. Id. at 83.
104. David Dranove & Richard Ludwick, Competition and Pricing by Nonprofit Hospitals: A Reassessment of Lynk's Analysis, 18 J. Health Econ. 87, 87 (1999).
105. The two sources of bias are Lynk's simultaneous use of correlated coefficients and potential correlations due to omitted variables. Id at 88.
106. The first problem arises because both hospital market share and market concentration are used as explanatory variables, so a merger affects two - not one - coefficients, thus creating a simultaneity bias (where it is hard to measure the movement in one coefficient while holding the other constant). Id at 88-89.
107. Dranove and Ludwick correct this bias by examining only post-merger prices set by merged hospitals. Id. at 89.
108. The second problem is caused by Lynk's failure to measure the severity of patients' claims properly. Id at 90-91.
109. This might invite an omitted variable bias, such as if hospitals in highly concentrated markets specialized in delivering expensive care for severely ill patients. Id.
110. Dranove & Ludwick correct for this source of bias by controlling illness severity by measuring the number of secondary diagnoses accompanying a hospital claim. Id.
111. Dranove & Ludwick note that ideally, service quality should be controlled as well. See id. at 90-91.
112. Like Keeler et al., supra note 60, Dranove and Ludwick also exclude Medicare and Medicaid patient claims from the data but found the different sample still produced Lynk's same results when Lynk's empirical specification was used.
113. Id at 92. Dranove and Ludwick also restrict the sample to hospitals in markets with an HHI greater than 0.10, thus eliminating hospitals in highly diffuse markets.
114. Id. They otherwise make every effort to execute analyses identical to Lynk's.
115. Id at 97.
116. William J. Lynk & Lynette R. Neumann, Price and Profit, 18 J. Health Econ. 99, 100-01 (1999).
117. Id. at 101-08.
118. Lynk & Neumann then reexamine pricing data from the Butterworth hospitals to reveal that updated analyses confirm Lynk's testimony in that case that the nonprofit hospitals would price lower than comparable for-profits. Id at 108-10.
119. Id. at 101 (emphasis added).
120. On the question of the nature of ownership, however, Lynk & Neumann are far less conciliatory, maintaining there are institutional differences between for-profits and nonprofits that demand attention. See id. at 110-11.
121. They assert in closing: [I]f a hospital were effectively controlled by those with interests parallel to the interests of hospital consumers, it is hard to see why those who control such a hospital would consciously choose to exercise any monopoly power that the hospital might possess. To assume that they would willfully do so is to deny the principle of self-interest. Id.
122. Improving Health Care, supra note 42.
123. Id. ch. 4 at 31.
124. Id.
125. The studies listed, in addition to those cited above, include: Robert Connor et al., The Effects of Market Concentration and Horizontal Mergers on Hospital Costs and Prices, 5 Int'l J. Econ. Bus. 159 (1998);
126. Michael G. Vita & Seth Sacher, The Competitive Effects of Not-For-Profit Hospital Mergers: A Case Study, 49 J. Indus. Econ. 63 (2001);
127. Elaine Silverman & Jonathan Skinner, Medicare Upcoding and Hospital Ownership, 23 J. Health Econ. 369 (2004).
128. See Improving Health Care, supra note 42, ch.4 at 32 nn.169-71.
129. Improving Health Care, supra note 42, ch. 4, at 33.
130. See supra notes 45-46.
131. Though antitrust law is chiefly concerned with matters of efficiency, the concern over higher prices fits neatly within our emphasis on distributive justice. So, in addition to the traditional objections to a monopolist's supracompetitive prices, we also detail how the health system redistributes wealth in undesirable ways, including the preponderance of inflated prices that channel dollars from middle-income consumers to wealthy providers. Havighurst & Richman, supra note 2, at 14 (referring to the "regressive redistribution of income from consumers to producers").
132. Havighurst & Richman, supra note 2, at 30.
133. Id at 15 ("By effectively steepening the demand curve a monopolist faces, health insurance enhances the monopolist's pricing freedom and ability to exploit consumers, enabling it to charge even more than the theoretical 'monopoly price.'");
134. id. at 31 (describing "the tendency of insurance to induce consumption that would not otherwise occur").
135. See, e.g., Nat'l Collegiate Athletic Ass'n v. Bd. of Regents, 468 U.S. 85, 107-08 (1984) ("Restrictions on price and output are the paradigmatic examples of restraints of trade that the Sherman Act was intended to prohibit.");
136. Broad. Music, Inc. v. Columbia Broad, Sys., 441 U.S. 1, 19-20 (1979) ("[O]ur inquiry must focus on... whether the practice facially appears to be one that would always or almost always tend to restrict competition and decrease output....").
137. Havighurst & Richman, supra note 2, at 24.
138. Cal. Dental Ass'n v. FTC, 526 U.S. 756, 784-85 (1999) (Breyer, J., dissenting) (evaluating a restraint's likely effect on prices to determine whether it is anticompetitive);
139. Robert H. Bork, The Antitrust Paradox: A Policy at War with Itself 91 (1978) ("The whole task of antitrust can be summed up as the effort to improve allocative efficiency without impairing productive efficiency so greatly as to produce either no gain or a net loss in consumer welfare.").
140. Havighurst & Richman, supra note 2, at 31 (describing "the tendency of insurance to induce consumption that would not otherwise occur").
141. This is particularly true when one considers the dynamic consequences of moral hazard, whereby subsidized demand stimulates investments in expensive new technologies in which many consumers would prefer not to invest. See id. at 29;
142. see also Mark Pauly, The Tax Subsidy to Employment-Based Health Insurance and the Distribution of Well-Being, 69 Law & Contemp. Probs. 83, 99-100 (Autumn 2006).
143. FTC v. Butterworth Health Corp., 946 F. Supp. 1285, 1300, 1306 (W.D. Mich. 1996), aff'd, 121 F.3d 708 (6th Cir. 1997).
144. See also United States v. Long Island Jewish Med. Ctr., 983 F. Supp. 121, 146 (E.D.N.Y. 1997).
145. This, in fact, is a precondition to obtaining nonprofit status. See Schmalbeck, infra note 95 and accompanying text.
146. But see United States v. Brown Univ., 5 F.3d 658, 672 (3d Cir. 1993) (allowing "the undisputed public interest in equality of educational access and opportunity" to be considered as justification for a group of colleges' collusion on financial aid).
147. For criticisms of Brown University, see Lee Goldman, The Politically Correct Corporation and the Antitrust Laws: The Proper Treatment of Noneconomic or Social Welfare Justifications Under Section 1 of The Sherman Act, 13 Yale L. & Pol'y Rev. 137, 148 (1995) ("Even assuming that the defendants genuinely intend to benefit the public, they still cannot be trusted to balance properly the asserted public interest benefits against the resulting harms to competition so long as they receive direct financial advantages.").
148. Havighurst & Richman, supra note 2, at 20.
149. See supra note 74 and accompanying text.
150. Judge Posner also holds this view, see supra, note 14, and Judge Easterbrook apparently does as well. Easterbrook remanded a Sherman Act section 2 claim against Blue Cross/Blue Shield to determine whether the nonprofit defendants had sufficient market power to shift costs to rivals.
151. ee Ball Mem'l Hosp. v. Mut. Hosp. Ins., 784 F.2d 1325, 1340-41 (7th Cir. 1986).
152. It is possible that the surplus from supracompetitive prices is whittled away in inflated salaries, administrative inefficiencies, or undesired quality improvements. See Havighurst & Richman, supra note 2, at 22-23 ("[I]n the absence of either market discipline or effective political oversight, there is no assurance that easily gained revenues will not be squandered in low-priority activities, in overpaying for inputs, or simply through managerial slack.").
153. But this kind of waste can itself be characterized as a subsidy. See id.
154. See supra Part IV.B.
155. Havighurst & Richman, supra note 2, at 20-21.
156. Id at 24.
157. See, e.g., FTC v. Ind. Fed. of Dentists, 476 U.S. 447, 459 (1986) (holding a group of dentists liable for collectively refusing to submit x-rays to insurance companies and thus maintaining an information imbalance);
158. Arizona v. Maricopa County Med. Soc'y, 457 U.S. 332, 341, 357 (1982) (holding that "maximum" price-fixing by a group of doctors violates the Sherman Act);
159. Am. Med. Ass'n v. FTC, 638 F.2d 443, 447 (1980) (reviewing an FTC order forbidding medical associations from interfering with doctors' non-deceptive advertising).
160. Rev. Rul. 56-185, 1956-1 C.B. 202 (1956).
161. Schmalbeck, supra note 18, at 124 (internal citations omitted).
162. IHC Health Plans, Inc. v. Comm'r, 325 F.3d 1188, 1197 (10th Cir. 2003).
163. Schmalbeck, supra note 18, at 128
164. (citing IHC Health Plans, 325 F.3d at 1197).
165. United States v. Long Island Jewish Med. Ctr., 983 F. Supp. 121, 146 (E.D.N.Y. 1997).