House Democrats reintroduced a bill Tuesday that would revoke the health insurance industry’s exemption from antitrust laws — a liberal priority that failed to make the cut for President Obama’s healthcare reform law.
Reps. Peter DeFazio (D-Ore.) and Louise Slaughter (D-N.Y.) introduced the measure, which would subject health insurers to federal antitrust laws. […]
“There is a fundamental lack of understanding of what the McCarran-Ferguson Act does and does not do,” AHIP spokesman Robert Zirkelbach said in a statement. “This Act is extremely limited in scope and has nothing to do with competition within the health insurance industry.”
State insurance regulators have said the 1945 law that gave insurers a partial exemption from antitrust laws does not open the door to price-fixing or rigged markets, and the Congressional Budget Office has said the Democrats’ bill probably would not affect premiums.
In 2009, Ian Crosby explained to TIE readers what McCarran-Ferguson does and doesn’t do.
The McCarran-Ferguson Act exempts from federal antitrust laws most aspects of “the business of insurance” to the extent regulated by the states. The exemption for “the business of insurance” applies to activities like issuing policies, underwriting risk, and setting premiums. But it does not apply to “the business of insurers” – for example, purchasing services from providers or engaging in mergers and acquisitions, in most circumstances. Nor does the exemption protect “boycott, coercion, or intimidation” from federal antitrust scrutiny.
Roughly, the exemption tracks the risk-spreading relationship between insurer and insured that has traditionally been the subject of state regulation, while mostly subjecting insurer-provider relationships and other non-insurance activities to federal scrutiny.
Ian and I were not optimistic that striking the McCarran-Ferguson exemption would have significant effects on premiums. That doesn’t mean that McCarran-Ferguson’s has no effect on competition. We wrote,
There are exempt insurance practices that, at least in theory and under certain conditions, could help insurers defend and expand their market share against competitors. But the exemption simply does not shield the most straightforward kinds of conduct that make companies big.
The Phoebe Putney decision is here. Prior TIE coverage of this case here. From the 11th Circuit opinion Dec 9:
Memorial’s (and thus PPHS’s and PPMH’s) only real competitor is Palmyra Park Hospital, Inc. (“Palmyra”), a subsidiary of HCA, Inc. established in Albany in 1971. Palmyra consists of 248 beds and provides essentially the same services as Memorial. Memorial controls 75 percent and Palmyra 11 percent of their geographic market.
Nevertheless, the merger was approved under the “state action” doctrine – which exempts states from antitrust law when they act in a sovereign capacity. In this case, the state actor was the local hospital authority rather than the State of Georgia.
This is an important and unfortunate decision, allowing local hospital districts to facilitate state action mergers. The state action doctrine makes more sense if the state’s residents are paying the bills for monopolies, but in health care, many of the bills are paid by CMS and the rest by private health plans.
The 11th Circuit simply assumed that Georgia knew what it was doing when it authorized local hospital authorities:
[T]he Georgia legislature must have anticipated anticompetitive harm when it authorized hospital acquisitions by the authorities… The legislature could hardly have thought that Georgia’s more rural markets could support so many hospitals that acquisitions by an authority would not harm competition. We therefore conclude that, through the Hospital Authorities Law, the Georgia legislature clearly articulated a policy authorizing the displacement of competition.
Our hospital antitrust system is broken – every year we have effective competition in fewer geographic areas.
Bloomberg reports that Walgreens, Krogers, Safeway and other stores are suing Wyeth and Teva for conspiring to keep a generic version of the Effexor XR antidepressant off the shelf by buying junk patents, adding them to the Orange Book and suing to block generic entry with full knowledge the patents were not being infringed. Teva is in the suit as it was the first to file for generic status and agreed to a “pay for delay” deal (FTC background paper here; Scott Hemphill’s academic paper here).
Drug companies call these activities “product lifecycle management.” This case alleges it is a violation of the Sherman Antitrust Act. I pulled the complaint from PACER, which alleges Wyeth made $2.5 billion from these sham patents:
“11. As a result of Defendants’ exclusionary conduct, generic versions of Effexor XR were illegally blocked from the marketplace from June 2008 through at least June 2010. During this period of foreclosure, U.S. annual sales of Effexor XR topped $2.5 billion. Direct purchasers paid significantly more for extended release venlafaxine hydrochloride capsules during this two year window (and continue to pay more for Effexor XR and its generic equivalents) than they would have paid in the absence of Defendants’ illegal and anticompetitive acts.”
The complaint alleges that Wyeth defrauded the US Patent and Trademark Office in order to abuse the FDA Hatch-Waxman process:
“46. Wyeth submitted six sequential applications that led to three method of use patents, the ‘171, ‘958, and ‘120 patents. All three patents are, and have always been, unenforceable; they only issued because Wyeth defrauded the PTO. These patents prevented generics from coming to market in June of 2008.”
In addition to the drug stores, the suit is also brought “as the assignee” of the big 3 drug wholesalers – Cardinal Health; AmerisourceBergen; and McKesson. What will they say about Merck Pfizer’s lifecycle extension plans for Lipitor?
What happens when an unstoppable force meets the immovable object? The Governor threatens to pass a law.
Duopoly Bilateral monopoly litigation between the largest health system and the largest insurer in western Pennsylvania is turning into a nasty battle. An update from KHN:
Last week during a speech at the Pennsylvania Press Club in Harrisburg, Gov. Tom Corbett said he’s “deeply” concerned.
“In my mind, they are both charities and they are both nonprofits and something is getting lost in between,” he said. “And I will work with the Legislature, if necessary, to address this.”
The real story here is that Highmark tried to inject some competition into the Pittsburgh market for health care services. Usually the duopolists bilateral monopolists get along just fine, to the detriment of consumers.
For a round up on most pending major health care antitrust litigation, including this case, see my TIE post from June.
My summary: If a provider is clinically integrated enough to qualify as a Medicare ACO, that’s good enough for antitrust law too. From the October 20, 2011 DoJ/FTC joint Final Statement:
The Agencies have determined that CMS’s eligibility criteria are broadly consistent with the indicia of clinical integration that the Agencies previously set forth in the Health Care Statements and identified in the context of specific proposals for clinical integration from health care providers. The Agencies also have determined that organizations meeting the eligibility requirements for the Shared Savings Program are reasonably likely to be bona fide arrangements intended to improve the quality, and reduce the costs, of providing medical and other health care services through their participants’ joint efforts.
In other words, familiar health care antitrust rules will apply. As for safe harbors, an ACO will be considered “highly unlikely to raise significant competitive concerns” if institutional providers participate non-exclusively and the combined market share is 30% or less. Behavior the government hopes to discourage includes:
Blocking commercial payers that want to direct or incentivize patients to choose certain providers;
Tying sales of ACO services to sales of other services (ie, the ACO cannot require health plans wanting ACO services to contract with all of provider’s network for non-ACO services);
Contracting with ACO non-primary care physicians, hospitals, ASCs, or other providers on an exclusive basis (only primary care docs can be exclusive);
Restricting a commercial payer’s ability to provide cost and quality performance data and information to its enrollees; and
Sharing sensitive price information amongst competing ACO members.
All very sensible; as we’ve said before, ACOs raise competitive concerns and don’t need special antitrust exceptions.
In this morning’s Boston Globe, Robert Weisman reports that the Beth Israel Deaconess Harvard Hospital lost 150 physicians in a defection to an upstart venture capital funded rival, Steward Health Care:
But a law firm hired by Beth Israel suggested that some incentives Steward offered Whittier violate federal and state “anti-kickback’’ statutes. Those laws prohibit paying for business that can be billed to government health insurers. A spokesman for Steward, a fast-growing, for-profit health care company, said its contract with Whittier is legal.
My money is on Steward on this legal issue:
The feds are showing growing fraud & abuse law flexibilities for ACO models, which is where Steward is heading
The draft FTC/DOJ Joint Statement on ACO Antitrust Enforcement attracted 127 written comments by health system stakeholders and lobbyists (synonyms?). The new Final Joint Statement was released yesterday. Who won this battle? Let’s narrow our focus on comments by 3 big players: AHIP was concerned about provider market power against health plans and certainly didn’t want to see additional anti-competitive flexibilities (prior TIE health care antitrust coverage here, generally concerned about growing provider market power); MGMA , naturally, wanted fewer limits on medical group market power. AHA focused on procedural issues.
Providers got 2 concessions, one major and one minor. The latter is a very reasonable grandfather rule, extending the Joint Statement to groups formed before the passage of the ACA. The more important change was to eliminate any mandatory antitrust review as a part of the Medicare ACO process. This provision, similar in some ways to the Hart-Scott-Rodino Act (pre-merger notification to the FTC/DOJ), would have required many ACOs to pass mandatory antitrust review before ACO approval. In the new Final Joint Statement, all antitrust reviews are voluntary. This result generally tracks the AHA and MGMA comments. AHIP avoided any substantive relaxation in health care antitrust rules.
In short, the providers failed to get any weakening of substantive antitrust rules, but obtained some procedural flexibility. Antitrust lawyers and economists will still have plenty of ACO work.
Independent physicians cannot jointly negotiate prices and contracts with health plans. But someone in Massachusetts wants to overturn state and federal antitrust laws so doctors can wring more money out of Blue Cross. Here’s the bill, H00279. Adding insult to injury, the bill purports to be:
An Act to enable the formation of accountable care organizations
Remember – ACOs don’t need relaxed antitrust rules (TIE)
Organized medicine has tried to violate the Sherman Act for years: in the 1990s, the AMA tried to create special physician unions to stand up to health plans. Dozens of physician organizations have been sanctioned by the government for illegally fixing prices without proper financial or clinical integration. One Supreme Court case example is Arizona v. Maricopa County Medical Society, 457 US 332 (1982). See my recent health care antitrust update for more examples.
The specific legal tool is the “state action exemption” from antitrust laws. State monopolies in toll roads and sewage services are legal, so long as the State does it directly or supervises it closely.
In H00279, the goal is to let independent physicians jointly negotiate with health plans under the supervision of the Attorney General:
“It is the intention of the General Court [MA legislature] to authorize health care professionals to jointly negotiate with carriers and other purchasers of health care services, and to qualify such joint negotiations and related joint activities for the State-action exemption to the Federal antitrust laws through the articulated State policy and active supervision provided in this act…” (at §2(14)).
The FTC is currently fighting Georgia’s attempt to borrow the state-action exemption without adequate supervision in the Phoebe Putney case at the 11th Circuit. In the proposed MA legislation, the AG is given oversight, but not much discretion to act in the public interest. The deck is stacked against the AG in the bill, giving the physicians an easy litigation route to challenge state supervision.
h/t to my student, Michael Rugnetta, who spotted the bill
UPDATED – the case remands back to the district court – see at the bottom
Certificate of Need (CON) laws are a holdover from President Nixon’s foray into health planning:
The concept of certificate of need regimes, which many states enforce, is to avoid private parties making socially inefficient investments in health-care resources they might make if left unregulated. A certificate of need program corrects the market by requiring preapproval for certain investments and, in theory, thereby ensures that providers will make only necessary investments in health care. Yakima Valley Memorial Hospital v. Washington, 2011.
President Reagan signed the repeal of federal support for CONs in 1986, but many states kept CON statutes on the books (see the detailed 50-state survey by NCSL), including the State of Washington.
The Yakima Valley Memorial Hospital occasionally performed percutaneous coronary interventions (PCI) in emergencies, but wanted to offer the procedure on an elective basis. Examples of PCIs include moneymakers such as stent implantation and laser angioplasty.
Responding to evidence that higher procedural volumes improve quality, the State of Washington gave PCI licenses only if it projected 300 procedures a year at the facility. For Memorial, that meant that the only local PCI license would remain in the hands of its competition, the for-profit Yakima Regional Medical and Cardiac Center. Unless Memorial could prove an unmet need for at least 300 additional PCIs a year in Yakima, it will never get a license to compete.
Health care lawyers see situations like this every day, with CON laws essentially defending market power and preventing competition, but also arguably improving quality by concentrating complex procedures into focused factories. Memorial loses this case under state law.
But Memorial had exceedingly clever attorneys, who won last week at the 9th Circuit with a novel argument: state CON laws violate the dormant commerce clause:
Here, the barrier to interstate commerce is the requirement of a certificate of need to offer elective PCI to all patients, instate or out-of-state. By virtue of the certificate of need requirement, the Department prevents Memorial from soliciting out-of-state patients and competing in an interstate market to offer elective PCI services, activities that clearly involve interstate commerce. See Summit Health, Ltd. v. Pinhas, 500 U.S. 322, 329-30 (1991). Under Pike such incidental effects on interstate commerce are an unconstitutional barrier to trade if they are “clearly excessive in relation to the putative local benefits.” Pike, 397 U.S. at 142.
Unless the Supreme Court takes the case, or the 9th Circuit reverses en banc (ie, the entire 9th Circuit agrees to hear the case instead of just the 3 judge panel), many CON laws are now unconstitutional in the 9th Circuit, which is a radical earthquake to many local health care markets.
UPDATE #2: As pointed out in the comments, this case remands to the district court now, where the case will be reheard to see whether the PCI license restriction violates the dormant commerce clause under the standard articulated by the 9th Circuit. We’ll have to wait and see what the district court says, but the case opens a constitutional front for all CON litigation in the 9th Circuit (especially in Washington), which is still a big deal. Apologies for my error and thanks for the comment.
After a quiet decade, suddenly health care antitrust is hot:
1. Provider contracting
MA DHCFP Hearings (June 2011) – several CEOs of Massachusetts hospitals and health plans call for some form of state pricing intervention to combat excessive market power by a dominant provider (Partners). They do this in an official hearing, with cameras recording. See the videos here and here.
DoJ v. United Regional Health Care System of Wichita Falls, Texas – on February 25, 2011, DoJ announced a settlement with the hospital:
… that prohibits it from entering into contracts that improperly inhibit commercial health insurers from contracting with United Regional’s competitors. The department said that United Regional unlawfully used these contracts to maintain its monopoly for hospital services in violation of Section 2 of the Sherman Act, causing consumers to pay higher prices for health care services…
“Unfettered competition among hospitals is vital to ensuring that patients receive high-quality, low-cost health care,” said Christine Varney, Assistant Attorney General in charge of the Department of Justice’s Antitrust Division. “Today’s settlement prevents a dominant hospital from using its market power to harm consumers by undermining its competitors’ ability to compete in the marketplace.”
The case is about BCBS Michigan’s Most Favored Nation clauses in contracts with their customers, i.e. hospitals. The Complaint alleges that BCBS enters into two types of these MFN clauses. The first type, “MFN-Plus,” with 22 hospitals “require the hospital to charge some or all other commercial insurers more than the hospital charges Blue Cross, typically by a specified percentage differential.” The second type of MFN clauses merely require the hospital to give BCBS prices that are equal to the lowest offered to rivals. According to the Complaint, “Blue Cross currently has agreements containing MFNs or similar clauses with at least 70 of Michigan’s 131 general acute care hospitals. These 70 hospitals operate more than 40% of Michigan’s acute care hospital beds.” The allegation is that BCBS has used MFN clauses to raise its own costs, but disproportionately raise the costs of its rival hospitals.
The case will is interesting because while there is a robust theoretical empirical literature on the possible competitive harms arising from of MFN’s, economists have also identified pro-competitive justifications for the contracts. Indeed, one observes MFNs in all sorts of product markets which cannot plausibly be said to involve firms with market power.
2. State action doctrine
FTC v. Phoebe Putney Health System, Inc. On June 27, 2011, a federal district court ruled that the state action doctrine protects the $195mm purchase of Palmyra Medical Center from HCA, Inc. The purchaser is the Hospital Authority of Albany-Dougherty County, a governmental entity. The Hospital Authority also owns the Phoebe Putney Health System, a private non-profit corporation. After the acquisition, the Hospital Authority will lease Palmyra to Phoebe Putney for $1 per year. If the acquiring party had been Phoebe Putney or HCA, the state action doctrine would not have applied.
The Antitrust Division believes that repealing the state action exemption for public hospitals in Tennessee will likely promote competition and benefit consumers. In the United Regionalcase, the Antitrust Division and Texas challenged United Regional’s contracting practices because we did not think that the antitrust exemption under Texas law (that allowed for United Regional’s formation) extended to United Regional’s contracting practices. By contrast, if a public hospital in Tennessee engaged in similar conduct, under current state law, that conduct would be exempt from an antitrust challenge under Jackson.
Federal ACOs are deemed to meet clinical integration rules (not a surprise). The statement breaks ACOs into 3 categories, depending on market share. Those with less than 30% market share get a free pass; those with more than 50% get mandatory federal review; those in the middle can request review. Healthcare antitrust lawyers full employment act. (from TIE)
4. Provider/health plan duopoly
West Penn Allegheny v. UPMC & Highmark (Nov. 2010)– this private antitrust suit finds the weaker hospital chain alleging an attempted duopoly by the dominant health plan (Highmark) and the largest health system (UPMC). (2009 Pittsburgh Post-Gazette story here). The federal district court dismissed the complaint, but on Nov. 29, 2010, the 3rd Circuit reversed, a victory for West Penn. The ABA Section of Antitrust blog asks whether this case should head to the Supreme Court.
2011 update: to make things more complicated, this week the WSJ reports that Highmark has agreed to purchase West Penn Allegheny, which will apparently render the suit moot. UPMC – which owns its own health plan – is retaliating by promising to refuse to renew its provider contracts with Highmark.
(h/t – I attended the American Health Lawyers Association annual meeting this week in Boston (1400 health lawyers in attendance!). The antitrust updates were useful in pulling this summary together)
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02/20/2013
Austin Frakt
