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Preferred Provider Organizations: Antitrust Aspects and Implications for the Hospital Industry

Published online by Cambridge University Press:  24 February 2021

Andrew I. Batavia
Andrew I. Batavia*
Affiliation:
University of California at Riverside; Health Science Research, Stanford University; Harvard Law School
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Abstract

The hospital industry is currently undergoing a substantial transformation as a result of changes in third party reimbursement mechanisms and a tendency toward a more competitive economic environment. Hospital administrators will have to demonstrate substantial flexibility in considering and implementing innovative institutional arrangements to ensure survival in this time of austerity. The Preferred Provider Organization (PPO) is a recent development in the health care industry involving the selective contracting for health care services. This Article examines the role of section 1 of the Sherman Antitrust Act in scrutinizing the PPO for anticompetitive effects, considering the divergent requisites for competition in the health care sector. The Article also proposes a modified Rule of Reason for application to the PPO and other innovative cost containment arrangements in the industry and considers the implications of such flexible application of conventional antitrust principles for the future of the hospital industry.

Type
Articles
Information
American Journal of Law & Medicine , Volume 10 , Issue 2 , Summer 1984 , pp. 169 - 188
Copyright
Copyright © American Society of Law, Medicine and Ethics and Boston University 1984

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References

1 See, e.g., Jefferson Parish Hosp. Dist. No. 2 v. Hyde, 104 S. Ct. 1551 (1984); Arizona v. Maricopa County Medical Soc'y, 457 U.S. 332 (1982).

2 See generally V. Fuchs, Who Shall Live? (1974) for an excellent early treatment of the divergent economic structure of the health care industry. For more recent analysis, see generally A New Approach To The Economics of Health Care (M. Olsen ed. 1981); P. Feldstein, Health Care Economics (1979); Issues In Health Economics (R. Luke & J. Bauer eds. 1982).

3 Communication Between the Antitrust and Health Law Bars: Appeals for More Effective Dialogue and a New Rule of Reason, 7 Am. J.L. & Med. i (1981). See generally Havighurst, , Professional Restraints on Innovation in Health Care Financing, 1978 Duke L.J. 303Google Scholar; Kallstrom, , Health Care Cost Control by Third Party Payers: Fee Schedules and the Sherman Act, 1978 Duke L.J. 645Google Scholar; The National Health Lawyers Association, Fourth Annual Program on Antitrust in the Health Care Field (Jan. 7 & 8, 1981) (background on the application of antitrust doctrine in the context of health care cost containment).

4 Lemkin, & Rich, , Hospital-Sponsored PPOs: A Practical Guide to Structural and Organizational Options, 37 Healthcare Fin. Mgmt. 80 (1983)Google Scholar.

5 See generally S. Tibbetts & A. Manzano, Preferred Provider Organizations: An Executive Guide (1984); Enthoven, An Economic Analysis of the “Preferred Provider Organization” Concept, in Preferred Provider Handbook (P. Boland ed.) (publication anticipated in 1985).

6 The most relevant section of the Sherman Antitrust Act to the PPO situation is section 1 which provides that: “[e]very contract, combination in the form of trust or otherwise, or conspiracy in restraint of trade or commerce among the several States or with foreign nations, is declared to be illegal.” 15 U.S.C. § 1 (1974).

7 Dep't of Health And Human Services, Ten Years of Short Stay Hospital Utilization And Costs Under Medicare: 1967-76, 5-8 (1980).

8 Hospital Prospective Payment System: Hearing before the Senate Committee on Finance, 98th Cong., 1st. Sess. 15, 16 (1983) (statement of Richard Schweiker, Secretary, HHS).

9 Social Security Amendments of 1983, Pub. L. No. 98-21, §601, 97 Stat. 65, 149-63 (1983).

10 The diagnosis related groups (DRG) method of case mix reimbursement system was developed by researchers at Yale University in the 1970's and premised upon the identification of various patient diagnoses. The complete universe of primary patient diagnosis is divided into 83 major categories, logically related in regard to anatomical or physiopathological classification, or in the manner in which they were clinically managed. The 83 major diagnosis categories are further subdivided according to the following variables: secondary surgical procedures, and patient age. See Blomquist, , Health Maintenance Organizations and State DRG Hospital Cost Control Programs: The Need for Federal Preemption, 10 Am. J.L. & Med. 1, 12 (1984)Google Scholar.

11 Hospital Prospective Payment System: Hearing before the Senate Committee on Finance, supra note 8 at 17-18.

12 See, e.g., 1982 Cal. Stat. ch. 328.

13 See J. Goldsmith, Can Hospitals Survive? (1981). See generally Iglehart, , New Jersey's Experiment With DRG-Based Reimbursement, 307 New Eng. J. Med. 1655 (1982)Google Scholar; A. Batavia, Prospects and Strategies for the Teaching Hospital Under Medicare DRG Reimbursement (Sept. 1983) (unpublished manuscript available at Stanford University).

14 See generally Sloan & Feldman, Competition Among Physicians, in Competition In The Health Care Sector 45 (W. Greenberg ed. 1978) (proceedings of conference sponsored by FTC).

15 A. Enthoven, Health Plan: The Only Practical Solution To The Soaring Costs of Health Care 15-32 (1980).

16 Fuchs, The Supply of Surgeons and the Demand for Operations, 13 J. Hum. Resources 35-56 (1978).

17 A . Enthoven, supra note 15, at 67-68.

18 Id. at 67.

19 Insurer Wages Own Cost-Shifting Campaign, 56 HOSP. 34-35 (1982).

20 1982 Cal. Stat. ch. 329; see also 1982 Cal. Stat. ch. 1594.

21 Young, & Saltman, , Medical Practice, Case-Mix and Cost Containment: A New Role for the Attending Physician, 247 J. A.M.A. 801 (1982)Google Scholar.

22 See id. at 802.

23 See id.

24 Blumberg, , Rational Provider Prices: Provider Price Changes for Improved Health Care Use, in Health Handbook 1049, 1060 (G. Chako ed. 1979)Google Scholar.

25 Cleverly, & Mullen, , Management Incentive Systems and Economic Performance in Health Care Organizations, 7 Health Care Mgmt. Rev. 7 (1982)Google Scholar; Masson, Executive Motivation, Earnings, and Consequent Equity Performance, 79 J. Pol. Econ. 1278-92 (1971); Monson, Chiu, & Cooley, , The Effect of Separation of Ownership and Control on the Performance of the Large Firm, 82 Q.J. Econ. 435 (1968)Google Scholar.

26 Blumenthal, Changing Trends in the Supply of Primary Care, 95 Annals Intern. Med. 772-74 (1981); Jacoby, , Physician Manpower: GMENAC and Afterwards, 96 PUB. HEALTH REP. 295 (1981)Google Scholar.

27 Culver, Hospital-Based Physician Compensation: Biting the Bullet, Hosp. Forum, Sept.-Oct. 1982, at 43, 49.

28 Physicians’ Financial Arrangements With Hospitals, 45 CONN. MED. 531 (1982).

29 See Maricopa, 457 U.S. 332; Hyde, 104 S. Ct. 1551. Note that the Hyde decision upheld exclusive dealing contracts between hospitals and anesthesiological firms under a Rule of Reason analysis. The author urges, however, that the opinion of the concurring Justices, written by Justice O'Connor, should provide the method of analysis for future antitrust challenges. The concurrence advocated abandonment of per se analysis in favor of an inquiry focused upon the adverse economic effects and potential economic benefits that a challenged arrangement may present. Hyde, 104 S. Ct. at 1569 (O'Connor, J., concurring). This broader market perspective analysis will manifest itself in a more cost competitive environment in which vertical restraints with strong efficiency justifications will be upheld under antitrust scrutiny.

30 S. Tibbitts & A. Manzano, supra note 5 at 2-3; Enthoven, supra note 5.

31 S. Tibbitts & A. Manzano, supra note 5 at 37-38; Enthoven, supra note 5.

32 Enthoven, supra note 5.

33 Id.

34 Id.

35 Id.

36 Id.

37 See, e.g., Arizona v. Maricopa County Medical Soc'y, 457 U.S. 332, 348 (1982).

38 See supra note 29 and accompanying text.

39 457 U.S. 332 (1982).

40 Id. at 335-36.

41 Id. at 342.

42 See generally Albrecht v. Herald Co., 390 U.S. 145, 152 (1968); Keifer-Stewart Co. v. Joseph E. Seagram & Sons, 340 U.S. 211, 213 (1951).

43 See Maricopa, 457 U.S. at 348.

44 Id.

45 Id. at 352-53.

46 Id. at 335.

47 Lerner, View From the Federal Trade Commission 197 (1983) (Informal Opinion on the Antitrust Status of PPOs by the Assistant Director of the Bureau of Competition, Federal Trade Commission). The term “parties” should be narrowly construed to mean individual hospitals, practitioners, and insurers.

48 Maricopa, 457 U.S. at 356-57.

49 Enthoven, supra note 5.

50 Luft, , How Do Health Maintenance Organizations Achieve Their “Savings“?, 298 New Eng. J. Med. 1336-43 (1978)CrossRefGoogle ScholarPubMed.

51 Maricopa, 457 U.S. at 357.

52 441 U.S. 1 (1979).

53 Id.

54 Id. at 20 (quoting White Motor Co. v. United States, 372 U.S. 353, 363 (1963)).

55 Winslow, Antitrust and Alternative Health Care Systems 23-30 (May 25, 1983) (informational statement of the Deputy Director of the Bureau of Competition, Federal Trade Commission, before the Antitrust and Health Care Sections of the Minnesota State Bar Association at St. Paul, Minnesota).

56 Broadcast Music, Inc., 441 U.S. at 20-21.

57 Id. at 21.

58 Maricopa, 457 U.S. at 355-57.

59 See supra notes 48-55 and accompanying text.

60 Maricopa, 457 U.S. at 352-54.

61 Lerner, supra note 47, at 196-97.

62 Maricopa, 457 U.S. at 356-57.

63 Winslow, supra note 55, at 14.

64 Id. at 14-15.

65 Id. at 15.

66 See generally E. Kintner, Federal Antitrust Law § 10.33, at 172 (on refusals to deal by non-competing combinations).

67 Id. § 10.20, at 131-32.

68 Sanders, & Bander, , Point of View: Multi-Institutional Arrangements in a Teaching Hospital Setting, 5 Health Care Mgmt. Rev. 25 (1980)Google Scholar; Wegmiller, , Shared Service Programs Are on the Rise, 54 Hospitals 147 (1980)Google Scholar.

69 540 F. Supp. 951 (W.D. Mich. 1982).

70 Id.

71 Id. at 1029. The district court's decision was reversed by the court of appeals in White & White, Inc. v. American Hosp. Supply Corp., 723 F.2d 495 (6th Cir. 1983) based on the court's redefinition of the relevent geographic markets involved. But see Business Review Letter of Department of Justice, Antitrust Division (June 30, 1982) (stating that the division would not challenge a group purchasing arrangement proposed by the Columbus Hospital Purchasing Consortium).

72 American Hosp. Supply Corp., 540 F. Supp. at 1029.

73 Cf. United States v. Hospital Affiliates Int'l, 1980-81 Trade Cas. (CCH) ¶ 63,721 (E.D. La. 1980) (condemning merger agreement of competing private psychiatric hospital under section 7 of the Clayton Act where acquisition would have resulted in substantial control of psychiatric beds in the area).

74 See generally L. Sullivan, Handbook of The Law of Antitrust § 68, at 186 (1977).

75 Maricopa, 457 U.S. at 339.

76 3 Trade Reg. Rep. (CCH) ¶ 22,036, 22,641 (June 8, 1983) (FTC Advisory Opinion to Health Care Management Associates).

77 Id. at 22,641.

78 Id. at 22,642.

79 Id.

80 Id. at 22,643.

81 L. Sullivan, supra note 74, at 192.

82 See Anderson v. Medical Serv., 1976-1 Trade Cas. (CCH) ¶ 60,884 (E.D. Va. Feb. 10, 1976).

83 Id. at 68,857 (citing 15 U.S.C. §§ 1011-1015 (1976)); see Group Life & Health Ins. Co. v. Royal Drug Co., 440 U.S. 205 (1979) (interpreting scope of “business of insurance“); see also Comment, The Scope of the “Business of Insurance” Provision of the McCarran-Ferguson Act: Virginia Academy of Clinical Psychologists v. Blue Shield of Va., 65 Minn. L. Rev. 1187 (1981).

84 The Sherman Act, 15 U.S.C. § 2 (1976) states:

Every person who shall monopolize, or attempt to monopolize, or combine or conspire with any other person or persons, to monopolize any part of the trade or commerce among the several States, or with foreign nations, shall be deemed guilty of a felony ….

85 In Travelers Ins. Co. v. Blue Cross, 481 F.2d 80 (3rd Cir. 1973), the third circuit refused to impose liability on an insurance company, stating:

In its negotiating with hospitals, Blue Cross has done no more than conduct its business as every rational enterprise does, i.e. get the best deal possible. This pressure encourages hospitals to keep their costs down; and for its own competitive advantage, Blue Cross passes along the saving thus realized to consumers. To be sure, Blue Cross’ initiative makes life harder for commercial competitors such as Travelers. The antitrust laws, however, protect competition, not competitors; and stiff competition is encouraged, not condemned.

Id. at 84.