• Why law is hard: Antitrust in health care and class action suits

    I don’t grok law easily, despite the fact that I’m genetically related to many in the legal profession (nearly all U.S.-based Frakts are known to be related; more than half of the adult ones that I have any substantial relationship with are lawyers). Antitrust law is so closely related to health care issues of interest to me that I am increasingly forcing myself  to try to understand some of it despite the challenges.

    Fortunately, a colleague tipped me off to a key issue, which I’d not have discovered easily on my own. Once I got my mind around it, it is not so complex, or actually it is complex but that’s not a barrier to understanding the issue. Rather, it’s why it is an issue. Let me explain. The following actually happened, but I’m going to abstract away and simplify all the unimportant specifics to highlight the key issue.

    Two hospitals merged. The increased market power the new entity possessed was found by an antitrust court to have led to an unacceptable level of price-setting power. Remedies pertaining to how the new hospital was permitted to negotiate prices were imposed.

    Later, a bunch of individual people (health insurance policyholders), employers, and insurers tried to bring a class action lawsuit against the merged hospital, seeking damages for high monopoly-based pricing. Despite the fact that a judge had ruled that the merged hospital possessed illegal market power, the class action petition was denied because the plaintiffs did not satisfy the definition of a class. Why not?

    One reason was that the definition of a class is that members of the class must suffer a common impact. That is, the effect of the alleged illegal market power must be, in some legal sense I don’t fully understand, equivalent for each member of the class.

    The rub is that the effect of hospital price increases on insurers, employers, and policyholders is different. The financial and fiduciary arrangement among the entities is very complicated. Is the effect of hospital price increases on direct purchasers (insurers and self-insured firms) different than on indirect ones (ultimately, policyholders)? Who pays what portion of a hospital price increase? How would damages, therefore, be allocated among members of the class?

    The impression I get from the colleague who brought this issue to my attention is that courts are throwing up their hands, as if to say, “It’s too messy and complicated. We give up!” The upshot is that at this time it is not fully clear how to handle certain legal issues pertaining to health care provider market power.

    Well, no wonder I’m confused about it! So are the experts. (I look forward to corrections, clarifications, and pointers to further reading from readers who are more knowledgeable in this area than am I.)

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    • Speaking of antitrust, why does no one ever seem to discuss the inordinate power that the Federal Government has in strong-arming providers into prices that they deem appropriate? The argument in favor may be that the consumer benefits from these artificially low prices, but in the long run if the prices are lower than the costs then the consumers will be harmed by a contraction in the provider pool (Drs. who decide they don’t want to work for a given wage, hospitals who can’t find a way to balance their budget, etc.).

    • Trey, my understanding is that the original Medicare bill contained a noninterference clause like that in the Medicare Prescription Drug, Improvement, and Modernization Act which took effect in 2006 (Part D). By noninterference, I mean that the Federal government would not interfere with market prices. But beginning in 1983 with the DRG system for hospitals and in 1992 with the RBRVS system for physicians, price controls were introduced by the Federal government. It probably is just a matter of time until price controls are applied to pharmaceuticals. That will lead to another clash between short-run (consumer surplus) and long-run (more new life-saving drugs) objectives as you point out.

    • My student Erica Rice wrote a nice piece for the Boston University Law Review on this hospital antitrust case, the Evanston Hospital merger:

      http://www.bu.edu/law/central/jd/organizations/journals/bulr/documents/RICE.pdf