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Recent Developments in Antitrust Law and Their Implications for the Clinton Health Care Plan

Published online by Cambridge University Press:  01 January 2021

Extract

Although the details of the Clinton health care plan have yet to emerge from the continuing policy debate over the shape and size of the administration’s reform measures, one thing has become increasingly clear. Several recent developments in antitrust law will have important implications for what the plan will permit and how it will work.

By all accounts, the broad outline of the administration’s plan revolves around the development of large and powerful consumer groups who, with the help of sophisticated, government-established intermediaries, will presumably purchase health care wisely and well. This alliance of massed consumer purchasing and government information-gathering will, it is hoped, produce a health care market more in competitive balance than the current version, which is widely regarded as dominated by powerful providers who dictate terms to small, uninformed buying groups.

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Copyright © American Society of Law, Medicine and Ethics 1993

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References

See, for example, Stout, Hilary and Wartzman, Rick, “WithHealth Care PackageNearing Completion, Clinton Must Now Make Some Tough Decisions,” The Wall Street Journal, May 18,1993, at A18.Google Scholar
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FTC Commissioner Dennis Yao has worried aloud that the Clinton plan could eventually lead to oligopolistic collusion among powerful provider networks formed in response to the plan's empowerment of consumers. 64 Antitrust & Trade Reg. Rptr. 451 (April 22, 1993); and an op-ed piece in The Wall Street Journal speculated that “the majority of health care in the greater Los Angeles area—a region of 13 million people—will soon be delivered by 10 or fewer giant medical networks.” See Sidney Marchasin, “In California, Merger Mania Afflicts Hospitals,” The Wall Street Journal, June 2, 1993, at A14.Google Scholar
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The Supreme Court's first, and most famous, acknowledgement that professional services might require special antitrust treatment came in Goldfarb v. Virginia State Bar, 421 U.S. 773, 788-89 (1975), fn. 17, where the Court stated that: “(i)t would be unrealistic to view the practice of professions as interchangeable with other business activities, and automatically to apply to the professions antitrust concepts which originated in other areas. The public service aspect, and other features of the professions, may require that a particular practice, which could properly be viewed as a violation of the Sherman Act in another context, be treated differently.” In no case, however, has the Court ever found it appropriate actually to treat professional restraints of trade differently from others.Google Scholar
See, for example, Goldfarb v. Virginia State Bar, 421 U.S. 773 (1975) (lawyers); FTC v. Superior Court Trial Lawyers Association, 493 U.S. 411 (1990) (lawyers); National Society of Professional Engineers v. United States, 435 U.S. 679 (1978) (engineers).Google Scholar
See, in this regard, FTC v. Indiana Federation of Dentists, 476 U.S. 447 (1986) (upholding FTC ruling that group of dentists who refused to submit x-rays to dental insurers for use in benefits determinations engaged in “unfair method of competition”); Jefferson Parish Hospital District No. 2 v. Hyde, 466 U.S. 2 (1984) (declaring, among other things, that the informational imperfections in the market for the purchase of hospital services were inconsequential to the antitrust analysis of the alleged tying arrangement at issue); and Arizona v. Maricopa County Medical Society, 457U.S. 332 (1982) (treating an agreement by physicians to offer insurance companies and their customers a cap on medical fees—an agreement, in other words, to set maximum prices—as if it held the same prospect of competitive harm as an agreement fixing minimum prices).Google Scholar
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Since the early days of antitrust law, courts have taken two separate approaches to allegations of anticompetitive behavior under Section One of the Sherman Act—the rule of reason and the per se rule. Because most business conduct could be deemed to be in restraint of trade—contracts restrain the signatories, partnerships restrain the partners—the Sherman Act has been interpreted to make illegal only those restraints that are unreasonable. See Chicago Board of Trade v. United States, 246 U.S. 231 (1918); Piraino, Thomas A. Jr., “Reconciling the Per Se and Rule of Reason Approaches to Antitrust Analysis,” 64 S. CAL. L. Rev. 685, 689 (1991). Under the “rule of reason” standard, courts engage in a factual inquiry into the “competitive circumstances and justifications of business conduct” to determine the reasonableness of any alleged restraint. Id. The per se rule of illegality developed in response to the burdensome, often unnecessary, and sometimes fruitless factual inquiry required by the “rule of reason” standard. Under the per se rule, “[p]ractices clearly having a ‘pernicious effect on competition’ and lacking ‘any redeeming virtue’ could be conclusively presumed to be illegal without inquiry into competitive purpose or market effect.” Id. at 691. This categorical and absolutist approach has the weakness of occasional overbreadth, but it reduces the time and expense of litigation and provides clear guidelines for courts and businesses. Id. at 691–92.Google Scholar
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According to the Supreme Court, “market power” is a necessary, but not sufficient, precondition to the possession of “monopoly power.” Traditionally, firms have converted market power to monopoly power by willfully acquiring or maintaining the former, or by engaging in some type of impermissible exclusionary conduct. See, e.g., United States v. Grinnell Corp., 384 U.S. 563, 570–71 (1966) (possession of 87 percent of the relevant market share and “willfully” maintaining that share constituted monopolization).Google Scholar
See Landes, William M. and Posner, Richard A., “Market Power in Antitrust Cases,” 94 Harv. L. Rev. 937, 939–52 (1981); Schmalensee, Richard, Comment, “Another Look at Market Power,” 95 Harv. L. Rev. 1789 (1982); Hay, George, “Market Power in Antitrust,” 60 Antitrust L.J. 807 (1992); Denis, Paul T., “Market Power in Antitrust Merger Analysis: Refining the Collusion Hypothesis,” 60 Antitrust L.J. 829 (1992).Google Scholar
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In particular, the independent service organizations alleged that Kodak had violated Section One of the Sherman Act by unlawfully tying the sale of service for Kodak machines to the sale of parts and that Kodak had violated Section Two of the Act by unlawfully monopolizing and attempting to monopolize the service market for Kodak copying and micrographic machinery. 112 S.Ct. at 2078.Google Scholar
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Id. at 2085. According to the Court, the lifecycle price of a piece of equipment is the total cost to the buyer of owning that equipment over its useful life: the purchase price plus the lifetime costs of replacement parts and service. In order to estimate accurately the lifetime cost of owning Kodak equipment, for example, the buyer would need to know “data on price, quality, and availability of products needed to operate, upgrade or enhance the initial equipment, as well as service and repair costs, including estimates of breakdown frequency, nature of repairs, price of service and parts, length of ‘down-time’ and losses incurred from ‘down-time.’” Id.Google Scholar
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A report published in 1990 by a bipartisan federal commission studying the state of health care in America estimated that only 10 to 20 percent of all medical procedures used today have undergone randomized clinical trials, the most conclusive method of testing the efficacy of a particular procedure. U.S. Bipartisan Commission on Comprehensive Health Care (The Pepper Commission), A Call for Action: Final report (1990).Google Scholar
On June 23, 1993, the New York Times reported that the head of the federal agency that rates the quality of the care provided by hospitals to their Medicare patients had held up the release of this year's rating on the ground that the methodology behind the rating system was “flawed.” New York Times, June 23, 1993, at p. A9 (National Ed.). See also e.g., David Eddy & Billings, “The Quality of Medical Evidence: Implications for Quality of Care,” Health Aff., Spring 1988, 19, 20 (“for at least some important practices, the existing evidence is of such poor quality that it is virtually impossible to determine even what effect the practice has on patients, much less whether it is preferable to the outcomes that would have occurred with other options”).Google Scholar
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Not, of course, because these mergers will necessarily create a large enough entity but rather because they will focus attention on the merging parties and their markets and give enforcement agencies the opportunity to check those for the kind of information gaps found by Kodak to have the potential for conferring market power.Google Scholar
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They could, for example, anticipate a merger and protect themselves from supra-competitive pricing by entering into long-term contracts; or they could confront merged entities with the prospect of their own entry into the sellers' market, either through internal expansion or merger. See, e.g., Hovenkamp, Herbert, “Mergers and Buyers,” 77 U. Va. L. Rev. 1369 (1991).Google Scholar
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In F.T.C. v. University Health, Inc., 938 F.2d 1206, 1213 (11th Cir. 1991), the Court of Appeals rejected the sophisticated consumer defense, stating that the insurance companies who would purchase hospital services from the hospital formed by the merger at issue are not “truly large buyers,” and arguing that since the insurers would be likely to pass along to their consumers any price increases by the hospital, collusion by the remaining hospitals in the market would “likely go unchecked.” It is arguably unlikely that the “pass-along” scenario envisioned in this case by the Court of Appeals would occur after the implementation of the Clinton plan, and thus more likely that the sophisticated consumer defense would be more useful to firms desirous of merging.Google Scholar
Bear in mind that buyers who have perfect information, or something approaching it, will know before purchasing a particular product how much it will cost for them to switch to a compeitive model, should the product in question prove more expensive to operate than anticipated. One who buys a product, fully cognizant of possible switching costs, presumably considers that factor in making its initial purchase decision, and cannot reasonably be said to have fallen prey to market power. In this sense, switching costs are just a subspecies of the larger category of informational costs.Google Scholar
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Alternative health care providers are also known as non-physician personnel, and as “allied” providers. By some counts there are more than 200 separate occupations in the highly labor-intensive health services market, only a few of which are strictly medical in nature. See Havighurst, Clark, Health Care Law and Policy 444–45 (Foundation Press 1988).Google Scholar
The justifiably famous case of Wilk v. A.M.A., 719 F.2d 207 (7th Cir. 1983) details the bizarre lengths to which organized medicine has gone to exclude chiropractors from respectable medical circles; but other cases testify to similar efforts undertaken by physicians' groups against other types of alternative providers. See, for example, Idaho Ass'n. of Naturopathic Physicians v. FDA, 582 F.2d 849 (4th Cir. 1978) (naturopaths); Maguire v. Thompson, 957 F.2d 374 (7th Cir. 1992) (naprapaths); Guess v. North Carolina, 393 S.E.2d 833 (N.C. 1990) (homeopaths); Andrews v. Ballard, 498 F.Supp. 1038 (S.D.Tex. 1980) (acupuncturists)Google Scholar
Section One of the Sherman Act, in particular, prevents this type of conduct. See Wilk v. A.M.A., supra note 55.Google Scholar
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