PND: Can you summarize your main conclusions and recommendations in the report, "Improving Health Care: A Dose of Competition," jointly released July 2004 by the Justice Department and the Federal Trade Commission?

MJB: The report analyzes the state of health care competition in the United States and affirms the commitment of both agencies to the protection of economic competition among providers and payors. We based that analysis on 27 days of publicly-held joint hearings, our institutional experience with these markets, and research into health care policy writings. The report reviews changes in consumers’ response to managed care, the history and implications of different managed care strategies, and physician and provider responses to demands for choice and flexibility.

The report reaches several key conclusions:

· Vigorous economic competition among health care providers, health plans and other health care firms improves consumer welfare.

· Health care expenditures are likely to continue to rise significantly.

· Imperfections in the health care system have impeded competition from delivering fully its potential benefits.

· Government regulation has a significant impact on market performance.

· The third-party payment system may significantly distort market participants’ incentives.

· Improvements in the information and incentives of consumers may translate into better cost containment and improved quality.

The report makes six specific recommendations:

1. Private health plans, governments and providers should continue to experiment to improve incentives for providers to lower costs and enhance quality and for consumers to seek lower prices and better quality.

2. States should reduce barriers to entry into provider markets through reconsideration of their certificate of need programs, broader membership on their licensing boards, and changed licensing requirements to permit more use of telemedicine and greater competition from out-of-state providers.

3. Governments should reexamine the role of subsidies.

4. Governments should not pass laws permitting independent physicians to bargain collectively.

5. Governments should study the regulation of the transparency of pharmacy benefit managers.

6. Governments should reconsider the benefits of health insurance benefits mandates.

PND: Why do you oppose collective bargaining by physicians?

MJB: The report describes our serious concern over the acquisition or exercise of monopsony power by health plans and the harm that could result to physician markets and consumers from such health plan conduct. The report reviews enforcement actions taken against health plans and states our strong commitment to policing the conduct of health plans. In fact, the Department is devoting substantial resources on an ongoing basis to the investigation of health plan mergers and conduct.

The report also reviews the market for physician services. It analyzes physician joint ventures, such as clinical integration of their services, whereby physicians may work jointly to provide services in a manner that complies with the antitrust laws. Unfortunately, the agencies have found numerous instances of physician organizations that either had the intent to increase, or had the effect of increasing, physician bargaining power to the detriment of consumers and the market. The report should be quite helpful to physicians wishing to understand how such ventures might be organized in compliance with the antitrust laws and sets forth some key questions that we are likely to ask when analyzing implications of a joint venture on competition. One specific recommendation – number four – addresses physicians and derives from our review of physician and health plan markets. Though we share physicians’ concern that health plans can acquire and might abuse monopsony power, we differ in how to address that concern. Some physicians have proposed a self-help response to the exercise of monopsony power by health plans, namely physician collective bargaining. The report demonstrates, however, that physician collective bargaining while beneficial to some physicians, would likely harm consumer welfare. In economic theory, allowing physicians to wield countervailing market power may well make worse any consumer harm resulting from a health plan’s market power. Moreover, physicians are not likely to limit their collective bargaining to only those markets or to only such a degree necessary to redress any monopsony power they perceive (accurately or not) health plans are exercising. Rather, physicians, once working collectively to establish their level of reimbursement, are likely to act generally against all health plans, government and private. Physician bargaining ventures may also act to benefit physicians at the expense of non-physician health care providers. The report concludes that the better response is targeted enforcement against health plans that unlawfully attempt to acquire or exercise monopsony power, as well as the more general reforms intended to educate individual consumers, and improve the performance of health care markets. Accordingly, recommendation number four states that governments should not pass laws encouraging or protecting collective bargaining by independent physicians.

PND: The report appears to reject the argument that health insurance companies have market power that rises to the level of monopsony power. What threshold would have to be met, particularly considering that some Pennsylvania Blues plans control 60 percent or more of their product market?

MJB: Although the report does reflect a significant reservation over whether health plans have monopsony power as broadly as some provider groups have contended, the report does not reject the proposition that some health plans have or may exercise monopsony power. To the contrary, the report observes that monopsony power can be created or exercised in health plan markets and identifies enforcement actions the Department has taken against plans where they acquired or illegally exercised that market power. Though high market shares, properly measured, can be an important signal about the possible presence of market or monopsony power, the agencies apply a full and more careful analysis. The presence of strong competitors or the likelihood and ability of new entrants, as well as other factors, may make high market share an inadequate indication, standing alone, of monopsony power. Although I do not mean to endorse the observation that Pennsylvania Blues have 60 percent or higher share (they may or may not in a properly defined market), we would likely view a 60 percent share as a significant, initial indication of market power. Please note, however, that the requirement of a properly defined market is a technical one which requires careful evaluation. For example, we have included Medicare and Medicaid payments to physicians in determining health plan market shares. This more accurately reflects each health plan’s share of a physician’s total revenue. Finally, it bears emphasis that the mere possession of market power is not unlawful. Just as a group of physician specialists in some communities may possess a strong market position and substantial market share without violation of the antitrust laws, so may a health plan. We would typically examine whether health plans have illegally acquired or abused their market power, not whether they merely possess it. For example, we would typically not consider the decision of a physician or health plan to merely charge or pay what the market would bear to be abuse of market power.

PND: The reimbursement/cost equation is producing shortages of physician services in some specialties and geographic areas in Pennsylvania. Shouldn’t health insurers respond?

MJB: This is a topic not directly addressed by the report, nor does it pose a question directly related to anything within the Antitrust Division’s ability to address. We do not have the authority to compel market participants to take any particular action (for example, here, raising reimbursement rates), absent an antitrust violation and an evaluation of what action would remedy that violation. Nor am I in a position to validate or dispute the assertion of physician shortages and the assertion that the reimbursement/cost equation produced those shortages. Absent a careful study of the situation you describe, I could not comment on whether or how insurers might respond to it.

PND: You recommend that private payors, government and providers should continue experiments to improve incentives for health care providers to lower costs and enhance quality. A recent Congressional Budget Office report said that there haven’t yet been enough broad population-based studies or clinical trials to demonstrate that disease management programs cut costs. What is your view of that stance?

MJB: We believe our recommendations fit well with those of the CBO – both reports reflect a commitment to forward progress in the use of new arrangements to control costs and improve quality of care. We have recommended continued marketplace experimentation, which would include further study and potentially the use of disease management systems. The scope of the reimbursement and clinical systems contemplated by our report is broader than the disease management systems literature that the CBO studied. The CBO report, while expressing the view that the evidence is inconclusive on whether practice care guidelines would in fact reduce health care costs if the guidelines were applied broadly, does not recommend abandonment of these efforts. Indeed, the CBO report appears only to caution against the conclusion that such programs, again if applied broadly, would pay for themselves by saving more than is spent on them. In fact, the CBO report sets forth some important thoughts on methodology for evaluation of future efforts and incentives to control costs that may contribute to evaluation of the marketplace experimentation that we recommended.

PND: The DOJ/FTC report suggests abolishing Certificate of Need (CON) requirements to spur competition among specialty and acute care hospitals, which will ultimately lower cost. What data did the report use to arrive at this recommendation?

MJB: We examined the impact of CONs through a number of lenses. First, we considered the historical evolution of CON programs. They arose as a response to a cost-based reimbursement system. We concluded that the substantial retreat from cost-based reimbursement has significantly undermined the original rationale for CON programs. Second, we examined the potential harms of the CON regulatory framework on competition, and in particular on entry into markets. We reported on the manner in which CON laws impede entry. In the report, we also reviewed the competitive benefits that consumers appear to receive from the entry of single-specialty hospitals and ambulatory surgery centers. We observed that the CON process provides an opportunity for incumbents in markets to impede the entry of single-specialty hospitals and ambulatory surgery centers, which are often owned or supported by physicians who wish to compete with more established providers. CON laws, by impeding entry, appear to have just the opposite effect from their original purpose: they drive up costs. Third, we directly examined the literature (including literature comparing health care costs across states in light of their CON programs) and heard from panelists on whether CON laws, despite the erosion of their original purpose and their tendency to impede entry, nonetheless, controlled costs. Our review concluded that states with CON laws do not appear to control costs effectively and pose the risk of impeding competitive entry.

PND: Since Pennsylvania’s CON sunset in 1996, there has been a large growth in the number of ambulatory surgery centers in this state. Isn’t that going to lead to greater utilization and higher costs, and possible quality erosion stemming from lower volume per facility?

MJB: Although the availability of new health care facilities and technology may lead to an increase in utilization and in a limited sense to higher costs if the new technology or facility is more expensive than existing ones, we would expect a proper functioning market to strike the proper balance among cost, quality and utilization and, on that basis, would generally view the growth of ambulatory surgery centers and any associated changes in utilization and costs as a positive development. One factor that cuts against that presumption is that Medicare’s administered pricing system, rather than purely market forces, has contributed to the entry of ambulatory surgery centers. Our report, nonetheless, reviews literature on the overall impact of ambulatory surgery centers and describes improvements in the cost and quality of care that have resulted from the entry of these centers. Expert panelists at the hearing generally supported these observations and the conclusion that consumers have benefited from the growth of ambulatory surgery centers.

PND: Can you explain your position on government subsidies in health care? Hospitals, particularly those located in low-income regions, are struggling with the costs of charity care. How are they going to survive?

MJB: The report recognizes the benefits of subsidies in health care. Subsidies attempt to ensure access to adequate quality health care, ideally without regard to individual ability of the patient to pay. The report describes hospital use of cost-shifting and cross-subsidization strategies to subsidize care. Such hospital strategies depend on the exercise of market power. However, the report generally encourages greater competition in health care markets, including hospitals markets. That increased competition would potentially reduce the market power of hospitals and thus a hospital’s ability to cost-shift or cross-subsidize. The report observes that cost-shifting and cross-subsidization are inefficient ways to provide charity care because they distort relative market prices and thus, elimination of those private subsidies should provide an overall benefit to consumer welfare from increased competition. The report observes that it is generally more efficient to subsidize directly unprofitable patients and services, and specifically recommends that "Congress and state legislatures should consider whether direct subsidies" are advisable, essentially to replace the private subsidies which would be eliminated through better performing markets.

PND: Please explain your position on physician integration and joint pricing by physician networks.

MJB: We believe strongly that physician integration may help improve the quality of care while controlling the cost of its delivery. We recognize that physicians may reasonably need to price jointly their services to achieve such beneficial integration. Physicians have both the right and the ability to structure their integration efforts to avoid a charge of price fixing. Both the structure and scope of physician ventures, however, require consideration. Even a venture properly integrated may run afoul of the antitrust laws if it includes so many physicians in a market that they gain substantial market power. The agencies remain vigilant to abuse by physician groups. Over the last decade, the Department of Justice and the Federal Trade Commission have identified and challenged many instances of physicians paying lip service to the concept of integration while in fact merely taking steps to increase their bargaining power and reimbursement. Despite the necessity of our taking such actions to protect consumers, and contrary to the perception physician groups may have from our taking those actions, we are quite receptive to physician joint venture efforts, just as we would be to any group of competitors’ efforts to improve the quality and cost of services. We have expended substantial effort to provide guidance in the report and in prior statements and guidelines on how we will analyze physician integration and joint pricing. We will undoubtedly continue to provide guidance on how established antitrust principles apply to new forms of physician integration and joint pricing. For example, in the report, we examine one recent market development – pay-for-performance arrangements – and comment on how we would review physician pay-for-performance joint ventures.

PND: The report warns that government prescription drug purchasing that reflects monopsony power could reduce output and innovation. Since pharmaceutical companies are large organizations with a considerable bargaining clout, physicians may wonder why your concern does not extend to monopsony power of health insurers vis-a-vis physician reimbursement – and the impact that has on the practice of medicine.