FTC Staff Comment Before the North Dakota Attorney General Concerning S.B. 2295, 2426 to Authorize Certain Cooperative Agreements Among Health Care Providers

V930010
UNITED STATES OF AMERICA
FEDERAL TRADE COMMISSION
WASHINGTON, D.C. 20580
COMMISSION AUTHOR~7r~
March 	8, 	1993
The 	Honorable David W. 	Huey
Assistant Attorney General
State Capitol
600 	East 	Boulevard
Bismarck, 	North Dakota 58505-0040
Dear 	M.r. 	Huey:
The 	staff 	of 	the 	Federal 	Trade 	Commissionl is 	pleased 	to
submit 	this 	response 	to your 	request 	for 	views 	on Senate 	Bills
2295 	and 	2426, 	which 	would authorize 	certain cooperative
agreements 	among hospitals 	or other 	health care 	providers 	and
immunize 	those 	agreements 	from 	antitrust 	liability. 	Competition
in 	health 	care markets 	has 	benefited consumers, 	and 	antitrust
enforcement 	has 	been 	a 	significant 	factor 	in 	the emergence 	of
potentially procompetitive methods 	of 	delivering 	health 	care
services, 	such as 	managed care. 	Statutory antitrust 	exempticns
c~uld permit behavior that 	injures 	consumers 	and the 	economy. 	We
know 	of 	no 	instances 	of 	antitrust 	challenges 	to 	cooperative
agreements 	to 	improve efficiency or 	enhance 	the 	quality of 	care;
thus, 	we 	question whether 	granting 	antitrust 	immunity 	is
necessary 	to achieve 	the 	goals 	sought. 	Because 	it may be
di!fic~l~ to 	ensure 	that 	these 	agreements, 	once 	authorized,
contin~~ to 	operate 	as 	intended, 	we 	recommend 	that, 	if 	programs
such 	as 	these 	bills 	would 	authorize 	are 	nonetheless 	adopted,
measures 	be 	taken 	to 	make 	it 	easier 	to 	terminate 	agreements 	that
fail 	to 	achieve 	those 	goals.
I. 	Interest 	and experience of 	the 	Federal Trade Commission.
" .
The 	Federal 	Trade Commission 	is 	empowered 	to 	prevent 	unfair
methods 	of 	competition and unfair 	or 	deceptive 	acts 	or 	practices
in or 	affecting 	commerce. 2 Pursuant 	to 	this 	statutory mandate,
the 	Commission encourages 	competition 	in 	the 	licensed
professions, 	including the 	health care 	professions, 	and 	in 	the
delivery 	of 	health care 	services 	generally, 	to 	the 	maximum 	extent
0'
j
1 These 	comments 	are 	the 	views 	of 	the 	staff 	of 	the 	Federal
Trade 	Commission, 	and do 	not 	necessarily 	represent 	the views 	of 	the
Commission or 	any 	individual 	Commissioner.
2 15 	U.S.C. 	§S 	41 	~ 	seq.

The Honorable 	David Huey
P~ge 2
, compatible with 	other 	state 	and 	federal 	goals. 	For 	several
years, 	the Commission 	and 	its 	staff 	have 	investigated 	the
competitive 	effects 	of 	business 	practices 	of 	hospitals 	and 	health
care 	professionals.' 	The Commission 	has 	investigated 	and 	t~ken
action concerning the 	competitive 	effects 	of 	mergers 	between
hospitals.· 	The 	staff 	of 	the 	Commission 	has 	also 	commented, 	in
response 	to 	requests, 	on 	legislative 	and 	regulatory proposals
that may 	affect 	competition and consumer 	interests. 	On 	several
occasions, 	the 	staff 	of 	the 	Commission 	has 	commented on 	the
effects 	of 	state 	certificate-of-need 	("CON") 	laws 	on competition
among hospitals 	and other 	health care 	providers. 5 The 	staff 	of
the 	Commission has 	authored 	three 	studies 	dealing with CON
regulation.'
3 ~, 	~., 	American Medical 	Association, 	94 	F.T.C. 	701
(1979), 	aff'd 	as 	modified, 	638 	F.2d.~43 	(2d Cir. 	:~SO), 	aff'd 	by
an 	egyally divided 	court, 	455 	u.s. ·676 	(1982); 	Medical 	Staff 	of
Doctors' 	Hospital 	of 	Price George's 	County, 	110 	F.T.C. 	47(, 	(1988);
Eugene 	M. 	Addison. 	M.p., 	111 	F.T.C. 	339 	(1988); 	Medical 	Staff 	of
Holy Cross 	Hospital, 	No. 	C-3345 	(consent 	order, 	Sept. 	10, 	1991);
Medical 	Staff 	of 	Broward General 	Medical 	Center, 	No. 	C-3344
(consent order, 	Sept. 	10, 	1991).
• See, 	e.g., 	FTC v. 	Columbia 	Hospital 	Corp., 	No. 	93-30-CIV-
FTM-23D 	(M.D.Fla., 	complaint 	filed 	Februa17, 	1993); 	FTC v.
University Health. 	Inc., 	1991-1 	Trade 	Cas. 	(CCH) 	!!69,400, 	69,44~
(S.D. 	Ga.), 	rey'd, 	938 	F. 	2d 	1206 	(11th Cir. 	1991); 	Hospital
Corporation of 	America, 	106 	F.T.C. 	361 	(1985), 	aff'd, 	807 	F.2d 	1381
(7th Cir. 	1986), 	cert. 	de3ied, 	481 	U.S. 	1038 	(1987); 	American
Medical 	Int'l, 	104 	F.T.C. 	1 	(1984).
5 ~, 	~, 	Comments 	to 	the 	Maryland Health Resources
Planning Commission 	(August 	6, 	1987); 	Georgia 	Senate 	(March 	4,
1988); 	Michigan House 	of 	Representatives 	(March 	7, 	1988);
Pennsylvania House 	of 	Representatives 	(March 	30, 	1988); 	Georgia
Senate 	(February 	6, 	1989); 	Nebraska 	Senate 	(February 	22, 	198~).
~ Al22 Statement 	of 	Keith B. 	Anderson, 	Special 	Assistant 	to 	the
Director, 	Bureau 	of 	Economics, 	Federal 	Trade Commission, 	before 	the
North Carolina 	State Goals 	and 	Policy 	Board 	(March 	6, 	1989;;
Testimony 	of Mark D. 	Kindt, 	Regional 	Director, 	Cleveland Regional
Office, 	Federal 	Trade 	Commission, 	before 	the 	Ohio 	Senate 	Health 	and
Human Services 	Committee 	(June 	21, 	1989).
, 	Keith 	B. 	Anderson 	and 	Davip 	I. 	Kass, 	Certificate 	of 	Need
Regulation 	of 	Entry 	into 	Home 	Health 	Care: 	A Multi-Product 	Cos~
Function Analysis, 	FTC 	Bureau of 	Economics 	Staff 	Report 	(1986);
Monica 	Noether, 	Competition Among 	Hospitals, 	FTC 	Bureau 	of
Economics 	Staff 	Report 	(1987); 	Daniel 	Sherman, 	The 	Effect 	of 	State
Certificate 	of 	Need Laws 	on Hospital 	Costs: 	An 	Economic 	Policy
Analysis 	(1988).

The 	Honorable David Huey
Page 	3
II. 	Description of 	S.B. 	2295 	and S.B. 	2426.
Each 	of 	these 	bills 	provides 	a 	means 	for 	issuing a
"certificate of 	public 	advantage" 	to 	a 	ccoperative 	agreement
among 	health care 	providers. 	The 	intended effect 	of 	these
certificates, 	which 	is 	explicit 	in S.B. 	2295 	and 	implicit 	in S.B.
2426, 	would 	be 	to 	immunize 	these 	agreements 	against 	antitrust
liability.
A. 	S.B. 	2295.
Under this 	bill, 	institutional 	health care 	providers 	may,
through 	their boards 	and 	directors, 	negotiate 	with 	each other
about 	allocating equipment 	or 	services, 	immune 	from 	state 	or
federal 	antitrust 	liabi:ity so 	long 	as 	their 	discussions 	are
deEigped tc 	~educe costs, 	improve 	access, 	or 	improve 	quality of
care.' 	Immunity would not 	extend to 	discussions 	that 	involved
predatory pricing or price 	fixing. 8 Parties 	reaching 	a
cooperative 	agreement 	through 	such negotiations 	could obtain 	a
"certificate of 	public 	advantage" 	for 	it 	from 	the 	state 	attorney
general, 	which would 	immunize 	the 	agreement 	from 	state 	or 	federal
antitrust 	liability.9 	The 	agreement 	could deal 	with 	sharing or
allocating patients, 	personnel, 	programs, 	support 	services,
facilities, 	or 	procedures. lo A certificate would be 	issued 	if
the 	attorney general 	determined 	that 	the 	benefits 	likely to
result 	from 	the 	agreement 	substantially outweighed 	any
disadvantages 	attributable 	to 	a 	reduction 	in competition 	like~y
to 	result, 	and 	that 	any 	such 	reduction 	in comPetition was
reasonably necessary to 	obtain the 	likely benefits. II 	The
likely bel.ofits 	must 	include 	at 	:'east one 	of 	the 	following:
enhanced quality of 	care, 	preservation of 	facilities, 	increased
cost 	efficiency, 	improved 	use 	of 	resources 	and equipment, 	or
avoidance 	of 	duplicated 	resources. 12 In determining whether 	the
reduction 	in comPetition 	is 	necessary, 	the 	attorney 	general must
7 	S.B. 	2295, 	53rd LegiS. 	Assembly, 	S2. 	(1993).
a M.
9 19. 	S3. 	It 	is 	not 	clear whether 	the 	final 	agreements,
unlike 	the 	negotiations 	leading 	to 	them, 	could 	encompass 	price
fixing 	or predatory 	pricing and 	S~ill retain 	antitrust 	immunity.
10 .I,g. 	S1(2).
11 14. 	§4 ( 1) •
12 Id. 	§4(2).

The Honorable 	David Huey
Page 	4
consider the 	impac~ on payors' 	ability 	to 	negotiate 	"optimal
payment 	and 	service 	arrangements~, possible 	reductions 	in
competition among 	other 	health care 	providers, 	and 	whe~ner there
are 	less 	anticompetitive 	alternatives. 13 The 	certificates 	would
apparently be 	of 	indefinite duration. 14
B. 	S.B. 	2426, 	556-16.
These 	provisions u of 	this 	bill 	are 	substantively nearly
the 	same 	as 	S.B. 	2295, 	but 	it 	differs 	from 	S.B. 	2295 	in 	some
details, 	particularly concerning coverage 	and 	procedures.
Although 	S.B. 	2426 	does 	not 	confer 	antitrust 	immunity 	as
explicitly as 	S.B. 	2295 	does, 	that 	apPears 	to 	be 	its
intention. 16 	S.B. 	2426 	would 	apply only 	to 	hospitals 	and 	their
affiliates, 	and would 	not 	apply 	to mergers 	or 	other outright
transfers 	of 	control. 17 Certificates 	would be 	issued by 	the
department 	of 	health, 	although 	applications 	would 	also 	be 	filed
with the 	attorney general, 	who 	must 	be 	consulted 	about 	possible
reductions 	in 	competition and would 	be 	notified of 	the 	action
taken. 18 	Hearings 	would 	be 	required 	before 	certificates 	were
issued,19 	and 	a 	certificate could be 	issued only 	if 	the
applicants 	carry 	the 	burden of 	showing, 	by 	"clear and 	convincing
13 .Isl. 	54 ( 3) •
14 The attorney 	general 	could revoke 	a 	certificate on
determining that 	the 	balance 	no 	longer 	favored 	the 	reduction 	in
competition, 	but 	the 	certificate 	holder 	could 	contest 	that 	action.
M. 	5 	5.
U 	The 	rest 	of 	the 	bill 	proposes 	other 	changes 	in 	health
insurance 	and 	health care 	services.
16 The 	scope 	of 	the 	immunity 	it 	would 	grant 	to 	the 	negotiation
process 	is 	slightly 	different. 	S.B. 	2426, 	53rd 	Legis. 	Assembly, 	55
a, 	16 	(1993). 	Under 	S.B. 	2426, 	the 	conduct 	of 	the 	parties 	in
negotiating 	an 	agreement 	would 	be 	"lawful 	conduct" 	if 	an
application 	for 	a 	certificate 	is 	filed 	(even 	if 	the 	certificate 	is
not 	ultimately 	issued); 	by contrast, 	S.B. 	2295 	does 	not 	condition
immunity 	for 	negotiations 	on 	filing 	an 	application 	for 	a
certificate. 	On 	the 	other hand, 	S.B. 	2426 	does 	not 	identify 	price
fixing 	or 	predatory 	pricing 	as 	matters 	that 	could 	not 	be 	discussed
without 	losing 	immunity.
17 M., 	5 	16 •.
18 M., 	SS8, 	9.
19 Id., 	Sa.

The 	Honorable David Huey
Page 	5
evidence," 	that 	the 	likely advantages 	outwei~hed the
disadvantagt.s 	from 	reduction 	in 	competition. 	The 	lists 	of
possible 	benefits 	and 	disadvantages 	are 	essentially 	the 	same 	as
in S.B. 	2295, 	except 	that 	S.B. 	2426 	also 	calls 	for 	considering
possible 	adverse 	effects 	on 	the 	quality, 	availability, 	and price
of 	health care 	services.
S.B. 	2426 	also 	sets 	out detailed procedures 	and 	standards
for 	actions 	by 	the 	attorney general 	to 	enjoin 	and cancel
agreements. 	In 	an 	action 	to 	enjoin 	an 	agreement 	for 	which 	an
application 	has 	been 	filed, 	the 	parties 	would 	bear the 	burden of
demonstrating 	that 	it passed the 	cost-benefit 	test 	by clear 	and
convincing evidence; 	in considering 	the 	possible 	reduction 	in
competition, 	the 	court would consider whether 	it 	constituted 	an
unreasonable 	restraint 	of 	trade 	under 	state 	or 	federal 	law. 21
In 	an 	action 	to 	cancel 	an agreement 	after 	a 	certificate 	is
issued, 	the 	attorney 	general 	would bear the 	burden 	of 	showing, 	by
a 	preponderance 	of 	the 	evidence, 	that because 	of 	changed
circumstances, 	the benefits 	of 	maintaining 	the 	agreement 	(plus
the 	unavoidable 	costs 	of 	cancelling 	it) 	were outweighed by 	the
disadvantages 	of 	the 	loss 	of 	competition. n The 	parties 	to 	an
agreement 	shown 	to 	have 	been obtained by 	fraud 	or coercion could
salvage 	it 	by demonstrating, 	by clear and 	convincing 	evidence,
that 	it passed 	the 	cost-benefit 	test.~
III. 	Hospital competition, 	joint ventures, 	and mergers.
The 	premise 	of 	each of 	these 	bills 	appears 	to 	be 	that
antitrust 	litigation 	or prosecution, 	or 	the 	fear 	of 	antitrust
liability, 	~revents or 	inhibits 	beneficial 	agreements 	among
hospitals 	or other providers 	of 	health care 	services. 	We 	believe
it 	would 	be 	useful 	to 	review the 	record of 	antitrust 	enforcement
involving 	hospital 	mergers 	and 	cooperative 	agreero~nts, to 	show
20 	T"l 	9	~., 	S 	•
21 .I.d.., 	S13.
n 	It would 	apparently 	not 	be 	possible 	for 	the 	attorney 	general
to 	initiate 	a 	challenge 	to 	a 	certificated 	agreement 	on 	the 	grounds
that 	the 	grant 	of 	the 	certificate 	had been 	in 	error, 	unless 	the
action 	is 	brought within 	40 	days 	after 	the 	department 	of 	health
issues 	the 	certificate. 	M., 	SS 	13, 	14. 	It 	is 	unclear whether
showing changed 	circumstances 	would 	also 	be 	necessary 	for 	the
department 	of 	health 	to 	revoke 	a 	certificate. 	Id., 	S 	10.
23 111., 	§14.
\
\
\
\

The 	Honorable 	David 	Huey
Page 	6
how 	the 	kinds 	of 	benefits 	described 	in 	S.B. 	2295 	and 	S.B. 	2426
have 	been cnnsidered 	in 	that 	process. 24
The Commission's 	antitrust 	enforcement 	activities 	concerning
hospital 	mergers 	and 	joint ventures 	attempt 	to 	m&~ntain the
competitive market 	forces 	needed 	to 	make 	the 	current 	health 	care
system work, 	and provide 	opportunities 	for 	improvements 	in 	the
system to make 	it work 	better.~ 	The 	Commission believes 	that
competition significantly 	improves 	the 	performance 	of 	hospitals
within 	the 	existing 	health care 	system. 	Competition will
continue 	to play 	such a 	role 	in 	foreseeable 	circumstances.
The 	clearest benefit 	to 	consumers 	of 	competition 	in 	the
hospital 	industry 	results 	from 	the 	ability of 	third-party payers,
such 	as 	health maintenance 	organizations 	and preferred provider
plans, 	to 	contain costs. 	Under various 	forms 	of 	"managed care,"
health plans 	use 	their 	ability to 	contract 	selectively with
hospitals, 	and their 	extensive 	knowledge 	of 	hospitals' 	prices 	and
quality of 	care, 	to 	direct 	their beneficiaries 	to 	the 	hospitals
offering 	the best combination of 	cost-effectiveness 	and 	quality
of 	care reasonably 	available 	to 	them. 	This 	strategy encourages
hospitals 	to reduce 	costs 	(while 	maintaining 	acceptable 	levels 	of
quality of 	care), 	by 	rewarding 	hospitals 	that 	do 	so 	with
additional 	patients, 	or 	at 	least by 	steering 	patients 	away 	from
high-cost 	institutions. 	Consumers 	benefit 	from 	this 	process 	in
two 	ways: 	~rom how 	it may 	tend 	to 	control 	increasing hospital
costs 	generally, 	and 	from 	the 	ability to 	choose 	health care
paYment 	plans 	that 	offer 	cost-reducing 	features.
Managed care 	competition 	for 	hospital 	and 	other 	health
services 	is 	becoming 	increasingly widespread, 	and many 	efforts 	to
reform America's 	health 	care 	system would rely more 	heavily 	upon
24 The 	following 	discussion 	is 	based on a 	statement 	the
Commission 	recently 	submitted 	to 	a 	joint committee 	of 	Congress
concerning 	antitrust 	enforcement 	in 	health care. 	Testimony 	of 	the
Federal 	Trade 	Commission, 	Before 	Subcommittee 	on 	Investment, 	Jobs
and 	Prices, 	Joint 	Economic 	Committee 	(June 	24, 	1992).
~ The 	Commission 	is 	not 	in 	a 	position 	to 	make 	broad
predictions 	or recommendations 	about what 	the 	hospital 	industry
will 	or 	should 	look 	like 	in 	the 	next 	century. 	The 	Commission'S
involvement 	in the 	health 	care 	field 	is 	limi~ed to 	the 	enforcement
of 	certain 	antitrust 	and 	consumet protection 	statutes. 	While 	that
role 	is 	important, 	the 	Commission~s experience 	with 	and 	expertise
in 	health care 	is 	limited 	and 	specialized, 	as 	compared 	to 	agencies
such 	as 	the 	Department 	of 	Health 	and Human Services, 	whose
regulatory 	responsibilities 	are 	much broader 	and more 	extensive 	and
which 	is 	also 	responsible 	for 	the 	formulation 	of 	general 	health
care 	policy.

The Honorable 	David Huey
Page 	7
it. 	The 	information 	gathered 	in our 	investigations, 	where 	we
frequently 	obtain the 	perspective 	of 	managed 	care 	payers,
generally 	indicates 	that 	managed 	care 	slows 	hospital 	price
increases 	where 	health plans 	have 	at 	least 	several 	hospitals 	to
choose 	from 	in 	the 	markets 	they 	serve. 	This 	occurs 	because 	the
plans 	can engage 	hospitals 	in 	a 	competitive process 	to 	obtain 	low
prices, 	and 	can 	avoid 	doing business 	with 	those 	hospitals
unwilling 	or unable 	to 	offer 	cost-effective care. 26 The
Commission places 	particular 	importance 	in its 	hospital 	merger
enforcement 	activities 	on 	the 	preservation of 	the 	hospital
alternatives 	needed 	to make competition work.
The 	benefits 	of 	competition to 	the 	American 	health 	care
system extend even 	to 	markets 	where 	managed care 	has 	not 	taken
hold. 	For example, 	even 	the 	less 	intensive price 	competition
that 	prevail~ in non-managed 	care markets 	places 	additional
pressure 	on 	unusually 	high-cost 	hospitals 	to 	confront 	their
inefficiencies 	and 	take 	the 	steps 	necessary 	to 	contain their
costs.
This 	will 	be of 	particular 	importance 	as 	the 	Medicare
system, 	and other payers 	with 	aggressive 	cost-containment
programs, 	place more 	stringent 	re~ursement limitations 	on
inefficient 	hospitals. 	Medicare 	in particular, 	through 	its
prospective reimbursement 	system, 	is 	already 	forcing 	hospitals 	to
absorb 	excessive operating costs 	rather 	than pass 	them on 	to 	the
federal 	government. 	Medicare 	has 	also 	started moving 	in 	the 	same
direction with 	respect 	to 	excessive capital 	costs, 	which may 	by
the 	21st 	century also 	be 	denied Medicare 	reimbursement. 	This
strategy provides 	powerful 	incentives 	for 	hospitals 	to 	reexamine
their operations 	and take 	the 	sometimes 	painful 	steps 	needed 	to
eliminate 	inefficiencies. 	But 	those 	incentives 	would 	be
undermined 	if 	high-cost 	hospitals 	could 	freely 	"cost-shift" 	onto
private 	payers 	the 	excessive 	costs 	Medicare 	refuses 	to 	pay 	for,
without 	competition 	from 	hospitals 	with 	lower 	costs 	and 	more
reasonable 	prices. 	It 	has 	been 	our 	experience 	that 	the 	presence
of 	lower-priced competitors 	to 	whom 	consumers 	can 	turn
26 	Some 	economic 	studies 	also 	indicate 	that 	managed 	care 	can
substantially 	constrain 	hospital 	prices 	or costs, 	at 	least 	when
managed 	care health 	plans 	can 	choose 	among a 	wide 	range 	of
hospitals 	available 	to 	their 	beneficiaries. 	See, 	~., 	Glenn A.
Melnick 	et 	al., 	The 	Effects 	of 	Market 	Structure 	and 	Bargaining
Position 	on Hospital 	Prices, 	11 	J. 	Health 	Econ. 	217 	(1992); 	J.
Robinson, 	HMO Market 	Penetration 	and 	Hospital 	Cost 	Inflation 	in
California, 	J. 	Am. 	Med. 	Ass'n 	(November 	20, 	1991); 	J. 	Zwanziger 	and
G. 	Melnick, 	The 	Effects 	of 	Hospital 	Competition 	and 	the 	Medicare
PPS 	~rogram 	on 	Hos~ital Cost 	aehavior 	in 	California, 	7 	J. 	Health
Econ. 	301 	(1988).

The 	Honorable 	David Huey
Page 	8
significantly 	helps 	motivate 	inefficient 	hospitals 	to 	confront
and overcome 	their. 	inefficiencies 	and 	contain 	their 	costs.
Some 	in 	the 	hOEpital 	indust~y and 	elsewhere 	apparently
believe 	that 	antitrust 	enforcement 	effort 	impedes 	rather 	than
promotes 	the 	provision of 	economical, 	high-quality 	hospital 	care,
because 	it blocks 	or discourages 	efficient mergers 	and 	joint
ventures 	among 	hospitals. 	Indeed, 	it 	is 	said 	that 	the
Commission's 	focus 	on preserving competitive 	hospital 	markets 	is
at 	odds 	with other 	policies 	being 	implemented by HHS 	that
encourage 	hospitals 	to 	become more 	efficient.
But 	sound 	antitrust 	policy does 	not 	conflict 	with 	health
care 	cost 	containment 	efforts. 	HHS 	seeks 	to 	promote 	low-cost,
high-quality hospital 	care. 	So does 	the 	COMmission, 	in 	its
health 	care 	antitrust enforcement 	program.
The 	Commission and the 	Justice 	Department 	have 	jointly
issued merger 	guidelines 	which set 	forth 	the 	analytical 	framework
the 	agencies 	use 	in determining whether 	a 	merger 	is 	likely 	to
lessen competition. 27 Those Guidelines 	emphasize 	the 	need 	to
look beyond market 	concentration to 	determine 	whether 	a
particular merger 	is 	inconsistent 	with 	the 	federal 	antitrust
laws' 	objective 	of 	preserving 	competition and 	thereby 	promoting
low-priced, 	high-quality goods 	and 	services 	for 	the 	consumer. 	In
any 	industry, 	it 	is 	necessary to 	look 	at 	a 	broad 	range 	of market
characteristics 	to 	determine 	whether 	the 	increase 	in
concentration and the 	elimination 	of 	a 	competitor through 	a
merger would 	likely 	threaten consumer 	interests.~ 	These 	other
factors 	~nclude efficiencies 	and 	other 	consumer benefits 	that 	the
merger mi(~:"'t make 	possible. 29 	Th~ 	Commission 	accordingly 	is
27 	Department 	of 	Justice 	and 	Federal 	Trade Commission,
Horizontal Merger Guidelines 	(April 	2, 	1992).
28 Is1.
29 	Claims 	of 	efficiencies 	will 	only be 	considered 	if 	they 	are
realistic 	and 	supported by 	the 	evidence. 	Notably, 	in 	three 	of 	the
four 	hospital 	merger 	cases 	decided 	after 	litigation 	in which
potential 	efficiencies 	were 	a 	significant 	issue, 	the 	hospitals'
arguments 	on 	that 	issue 	were 	rejected 	as 	factually 	unpersuasive.
~ 	FTC v. 	University Health, 	Int., 	938 	F.2d 	1206, 	1223-24 	(11th
Cir. 	1991); 	United 	States 	v. 	Rockford Memorial 	Corp., 	i17 	F. 	Supp.
1251, 	1287-91 	(N.D. 	Ill. 	1989), 	aff'd, 	898 	F.2d 	1278 	(7th Cir.),
cert. 	denied, 	III 	S.Ct. 	295 	(1990); 	American 	Medical 	Int'l, 	104
F.T.C. 	1, 	148-155, 	218-20 	(1984). 	However, 	the 	Commission 	has
weighed 	potential 	efficiencies 	in 	reaching 	its 	decision 	not 	to
challenge 	certain 	hospital 	transactions.

The Honorable 	David Huey
Page 	9
careful 	to make 	sure 	that 	its 	enforcement 	actions 	in 	hospital
markets 	in 	fact 	serve 	consumer 	interests.
The 	federal 	agencies' 	enforcement 	record 	reflects 	their
recognition 	that most 	mergers 	and 	joint ventures, 	in 	the 	hospital
industry as 	in 	any 	other, 	are 	likely 	to 	help 	(or 	at 	least 	not
harm) 	consumers. 	Out 	of 	approximately 	50-100 	hospital 	mergers
and 	similar transactions 	ea~h year 	(including 	leases, 	management
contracts, 	and 	other 	non-purchase, 	non-merger 	transactions
consolidating the 	operations 	of 	previously 	independent
hospitals), 	on average only a 	handful 	are 	investigated by 	either
the 	Commission or 	the 	Justice 	Department. 	And 	less 	tha~ once 	a
year 	has 	the 	Commission 	actually challenged a 	hospital 	merger 	as
anticompetitive. 	Moreover, 	neither 	the 	Commission nor 	the
Justice 	Department 	has 	ever challenged any of 	the 	numerous 	joint
ventures 	among 	hospitals. 	Indeed, 	when 	they 	have challenged
proposed mergers, 	the 	agencies 	have 	i~entified joint v~ntures-
for 	example, 	an 	existing magnetic 	resonance 	imaging 	("MRI")
service 	shared between two 	hospitals 	in Augusta, 	Georgia, 	where
the 	Commission challenged a 	proposed 	hospital 	merger 30 --as
desirable 	alternatives 	for 	hospitals 	to 	achieve 	efficiencies 	to
improve 	specific 	services 	without 	sacrificing 	the 	larger benefits
of 	price 	and 	quality competition by merging 	their 	entire
operations. 31 Conse'JUently, 	the vast majority of 	the more 	than
five 	thousand 	hospitals 	in 	the 	United 	States 	are 	able 	to 	go 	about
their 	business 	and pursue whatever cost-containment measures 	they
find 	necessary without 	any 	intervention 	from 	the 	antitrust
enforcement 	agencies.
The Commission not 	only has 	limited 	its 	enforcement 	actions
to 	hospital 	mergers 	that 	could 	have 	been 	genuinely harmful, 	but
also 	has 	made 	considerable 	efforts 	to 	publicize 	and 	clarify 	its
enforcement 	policies 	in 	that 	area 	so 	as 	not 	to 	discourage 	legal,
30 FTC v. 	University Health. 	Inc., 	1991-1 	Trade 	Cases 	(CCH)
!! 	69,400, 	69,444 	(S.D. 	Ga.), 	rev'd, 	938 	F.2d 	1206 	(11th 	Cir.
1991).
31 	See 	Reading 	Hospital, 	55 	Fed. 	Reg. 	3264, 	3266, 	15290 	(1990)
(consent 	order) 	(Commission determined 	that 	voluntary 	separation 	of
merged 	hospitals 	was 	sufficient 	to 	restore 	them 	as 	independent
competitors, 	even 	though 	both 	hospitals 	continued 	to 	participate 	in
a 	hospital-sponsored 	health 	plan 	joint venture, 	and 	to 	share
laundry, 	laboratory 	and 	biomedic~l equipment 	repair 	services). 	In
addition, 	the 	consent 	order 	to 	settle 	the 	administrative
proceedings 	in 	University 	Health,.'Inc., 	FTC 	Docket No. 	9246, 	57
Fed. 	Reg. 	29,084, 	44,748 	(1992) 	exempts 	a 	wide 	range 	of 	support
service 	joint ventures 	between 	hospitals 	from 	the 	order's
provisions 	for 	Commission 	oversigt.t 	of 	respondents' 	future 	hospital
mergers 	and 	joint 	ventures.

The 	Honorable 	David Huey
Page 	10
beneficial 	transactions~ 	The 	court 	and Commission 	decisions 	in
litigated hospital 'merger 	cases 	explain 	in 	great 	detail 	how 	to
apply 	antitrust 	principles 	to 	such 	transactions. 	These 	decisions
are 	amply 	supplemented by 	formal 	statements, 	such 	as 	the 	1992
Merger Guidelines 	issued 	by the 	Department 	of 	Justice 	and 	the
Federal 	Trade Commission, 	and 	also 	by well 	over 	a 	dozen 	speeches
by senior 	agency officials 	discussing 	hospital 	mergers 	and 	joint
ventures,32 	as 	well 	as 	the 	hospital 	industry's 	own efforts 	to
educate 	itself 	on how 	the 	antitrust 	laws 	apply 	to 	mergers 	and
joint ventures. 33 And 	the 	Commission's 	staff 	is 	readily
available 	for 	informal 	consultation 	to provide 	additional
clarification and 	assistance 	to 	hospital 	officials 	thinking about
a 	merger or 	joint venture. 	All 	of 	these 	resources 	are 	available
to 	help 	hospital 	executives 	ensure 	that 	their 	proposed mergers
and 	joint ventures 	comply with 	the 	antitrust 	laws, 	and dispel 	any
unwarranted 	fears 	to 	the 	contrary.
Antitrust 	enforcement 	has 	played 	an 	important 	role 	in
facilitating 	reforms 	in 	the 	health care 	sector 	and 	the 	hospital
industry 	in particular, 	by 	removing 	obstacles 	to 	the 	use 	of
innovations 	such as 	managed care 	to 	take 	advantage 	of 	competition
to 	contain costs 	and 	overcome 	some 	of 	the 	inefficiencies 	of
health care markets. 	It 	continues 	to 	have 	a 	useful 	role 	in
improving the 	performance 	of 	the 	hospital 	industry 	as 	it 	is 	now
structured, 	and 	also 	in 	leaving the 	door 	open 	to 	further 	reforms
of 	the 	health care 	sys~em that 	would 	rely even more 	heavily on
competition as 	a 	cost-containment 	strategy.
IV. 	Effects 	of 	Senate Bills 	2295 	and 	2426.
We 	believe 	that 	antitrust 	enforcement 	action 	has 	not
prevented cooperative 	agreements 	among hospitals 	or 	other 	health
care 	institutions 	that 	would 	have 	been beneficial 	to
consumers. 34 To 	the 	extent 	that 	the 	proposed 	legislation 	would
32 See, 	~., 	Speech 	by 	Janet 	Steiger, 	Chairman, 	FTC, 	to 	the
National 	Health Lawyers 	Association 	(February 	19, 	1993).
33 	See, 	~., 	American Hospital 	Ass'n, 	Hospital 	Mergers: 	An
Executive's 	Guide 	through 	the 	Antitrust 	Thicket 	(Sept. 	1989).
34 We 	know 	of 	no 	antitrust 	~ctions brought 	by private 	parties
against 	cooperative 	agreements 	of. the 	kind 	contemplated by 	these
two 	bills. 	In 	theory, 	the 	risk 	of 	facing 	the 	costs 	of 	antitrust
litigation or enforcement 	could discourage 	even 	some 	joint
arrangements 	that would 	not 	be 	found 	illegal. 	In practice, 	though,
the 	threat 	of 	government 	or 	privdte 	antitrust 	action 	has 	not, 	to
(continued •.. )

The 	Honorable 	David Huey
Page 	11
merely 	authorize 	the 	kinds 	of 	agreements 	that 	would 	not 	have 	been
subject 	to 	antitrust 	challenge 	anyway, 	the 	legislation 	would 	have
no 	adverse 	effect 	on competition. 	However, 	the 	provisions 	of
these 	bills 	could 	be 	interpreted 	to 	encourage 	or 	permit
agreements 	that 	are more 	explicitly 	anticompetitive 	in 	intention
and effect 	than 	those 	contemplated 	before. 3 The 	chief 	source
of 	concern would 	be 	agreements 	to 	allocate 	responsibilities 	that
did 	not 	reflect 	efficiency-enhancing 	integration 	and 	coordination
of 	capacities, 	but 	instead 	amounted 	to 	agreements 	to 	divide
markets 	and 	refrain 	from 	competition. 	Such division 	and
allocation of 	markets 	can be 	just 	as 	harmful 	to 	consumers 	as
explicit 	price-fixing.
We 	recognize 	that 	policy 	concerns 	other 	than 	those
considered 	in competition law 	enforcement may 	be 	important 	here.
Some 	of 	the 	considerations 	that 	the 	bills 	list 	as 	possible
benefits 	to 	be weighed 	against 	the 	disadvantages 	of 	reducing
competition may 	indeed be 	such different 	and 	indePendent
considerations. 	Many of 	them, 	though, 	describe 	the 	kinds 	of
issues 	that 	the 	Commission considers 	in 	its 	competition
enforcement 	decisions. 	For 	example, 	two 	factors, 	increased 	cost
efficiency and 	improved 	use 	of 	resources, 	could 	include 	the 	kinds
of 	considerations 	of 	true 	efficiencies 	that 	the Commission
usually considers 	in 	antitrust 	analysis.'6 	Others 	may be
34( .•• continued)
our knowledge, 	discouraged beneficial 	cooperative 	arrangements.
Reports 	in trade 	journals 	suggest 	that 	the 	threat 	of 	antitrust
action 	has 	not 	chilled collaborations. 	See, 	~., 	D. 	Burda,
Mergers 	thrive 	despite 	wailing about 	adversity, 	Modern 	Healthcare
(October 	12, 	1992).
3S One 	kind of 	agreement 	among 	hospitals 	that 	was 	actually
found 	to 	violate 	the 	antitrust 	laws 	would not 	have 	been 	protected
from 	liability 	by either 	of 	these 	bills. 	~ 	United 	States 	v.
North 	Dakota Hospital 	Ass'n, 	640 	F.Supp. 	1028 	(D.N.D., 	1986). 	The
hospitals 	agreed 	not 	to 	negotiate 	contracts 	with 	the 	Indian Health
Service 	that 	contained certain kinds 	of 	discount 	terms. 	This
agreement 	did 	not 	involve 	any 	collaboration 	to 	offer 	services 	or
combine 	operations 	to 	improve 	efficiency. 	The 	court 	found 	that
this 	agreement 	violated 	the 	Sherman Act.
36 	For examples 	of 	consideration of 	such 	efficiencies 	in
particular hospital 	mergers, 	see·.the 	cases 	cited 	in 	n. 	29, 	supra.
See 	generally 	Massachusetts 	Board of 	Registration 	in 	Optometry, 	110
F.T.C. 	549 	(1988), 	for 	a 	discussion 	of 	how 	the 	Commission 	considers
factors 	such 	as 	these 	in 	deciding 	other 	kinds 	of 	antitrust 	cases.
These 	factors 	would 	not 	be 	considered 	in 	a 	case 	of 	pure 	price
fixing 	among 	competitors, 	but 	would 	be 	important 	in 	a 	case
involving 	a 	joint venture 	or 	other 	combination.

The 	Honorable 	David Huey
Page 	12
ambiguous. 	"Preservation or facilities" 	and 	"avoidance 	of
duplication", 	although perhaps 	intended 	to 	include 	similar 	issues
of 	efficiency, 	might 	include 	less 	clearly desirable 	results 	as
well. 	Preservation of 	facilities 	may 	not 	be 	beneficial 	if 	the
facilities 	are 	uneconomic 	or 	inefficient. 	Thus, 	in 	some
circumstances 	eliminating 	redundant, 	underused 	facilities 	can
improve 	the 	efficiency of 	operating 	those 	that 	remain. 	But 	the
goal 	of 	avoiding duplication, 	to 	improve 	efficiency, 	may
contradict 	the 	goal 	of 	preserving 	facilities. 37 Moreover, 	care
may 	be 	needed 	to 	ensure 	that 	"avoiding duplication" 	does 	not
become 	simply 	"avoiding competition" 	-- 	that 	is, 	the 	"avoiding
duplication" 	goal 	might 	be 	interpreted, 	paradoxically, 	to 	suggest
that 	a 	reduction 	in competition 	should be 	counted 	as 	a 	benefit,
to 	be weighed 	against 	itself 	as 	a 	cost.
Because an 	informed 	assessment 	would conclude 	that 	antitrust
risks 	are 	not 	inhibiting 	desirable 	cooperative 	agreements, 	and
because permitting the health 	care 	industry to 	become 	accustomed
to 	agreements 	to 	eliminate 	competition could harm consumers'
interests 	without producing clear countervailing benefits, 	we
recommend caution in proceeding with 	programs 	such as 	these 	bills
propose. 	The 	process 	of 	negotiation 	among competitors 	could 	lead
to 	anticompetitive 	understandings 	and market 	behavior 	even where
no 	agreement 	is 	ever 	requested 	and 	no 	certificate 	is 	granted.
And once 	certificates 	are 	granted, 	it will 	be more 	difficult 	to
ensure 	that 	the 	agreements 	are 	implemented 	in ways 	that 	maintain
the 	balance 	that 	justified their 	issuance.
~he law 	sets 	two 	requirements 	for 	state 	action 	to 	remove 	the
risk 	of 	federal 	antitrust 	liability 	for 	private 	actions 	such 	as
these 	cooperative 	agreements 	among 	health 	care 	providers. 	First,
the 	actions 	must 	be 	taken 	pursuant 	to 	a 	clearly 	articulated 	state
policy 	to 	displace 	competitioni 	and 	second, 	the 	state 	must
actively 	supervise 	the 	policy. 8 	The 	"active 	supervision"
37 	Economic 	theory has 	suggested 	some 	specific, 	unusual
circumstances, 	such 	as 	conditions 	of 	unsustainable 	naturai
monopoly, 	in which 	agreements 	or 	regulations 	preventing the 	entry
of 	n~w capacity might 	prevent 	inefficiencies. 	See 	J. 	C. 	Panzer 	and
R. 	D. 	Willig, 	Free 	Entry 	and 	the 	Sustainability of 	Natural
Monopoly, 	8 	Bell 	J. 	of 	Econ. 	1 	(1977); 	see 	generally 	R. 	R.
Braeutigam, 	Optimal 	Policies 	for 	Natural 	Monopolies, 	in R.
Schmalensee 	and R. 	D. 	Willig, 	eds., 	2 	Handbook of 	Industrial
Organization 1289 	(1989). 	In 	such 	circumstances, 	theory 	would
support the 	claim that 	preventing 	duplication would 	be 	consistent
with promoting efficiency. 	But 	it 	has 	not 	been established whether
these 	circumstances 	apply 	in 	health 	care 	or 	hospital 	markets.
38 ~ California 	Retail 	Liquor 	Dealers 	Aaa'n v. 	Hidcal
Aluminum« 	Inc., 	445 	U.S. 	97 	(1980).

The 	Honorable 	David 	Huey
Pfge 	13
requirement 	means 	that 	supervision must 	extend 	to 	specifics 	of
implementation. 39 	The 	Supreme Court 	has 	said 	that 	the 	purpose
of 	the 	requirement 	is 	to 	ensure 	that 	the 	state 	has 	determined 	the
specific 	details 	of 	a 	scheme 	that 	supplants 	competitionz 	thd 	loere
potential 	for 	a 	state 	supervisory 	action 	is 	not 	enough. 0
Applying 	this 	requirement 	to 	health care, 	it 	has 	been 	held 	that
an 	authorizing cert~ficate would 	not 	confer antitrust 	immunity,
in 	the 	absence 	of 	post-certificate monitoring 	of 	the 	parties'
conduct 	to 	ensure 	that 	it 	was 	consistent 	with 	the 	state's
policies. 41 	Both 	of 	these 	bills 	would 	require 	that 	applications
for 	certificates 	be 	reviewed 	and 	specifically 	approved 	before 	the
certificates 	would be 	issued, 	but 	neither 	calls 	for 	subsequent
scrutiny of 	the 	parties' 	actual 	operation, 	except 	by 	providing
generally 	for 	the 	possibility of 	reexamination 	and 	revocation. 42
More 	particularized 	scrutiny of 	actual 	conduct 	under 	these
agreements 	may 	not 	only be 	desirable 	to 	ensure 	that 	they 	continue
to 	serve 	their 	intended 	purposes, 	but 	migh~ also bt 	necessary 	to
accomplish the 	apparent 	goal 	of 	conferring 	antitrust 	immunity.
One 	additional 	way 	to 	reduce 	the 	risk 	that 	anticompetitive
agreements 	would 	become 	institutionalized would be 	to 	issue
certificates only 	for 	defined, 	limited terms. 	The burden would
then clearly be 	on 	the 	parties, 	not 	the 	attorney general 	or 	the
39 	P.T.C. 	v. 	Ticor Title 	Insurance 	Co., 	112 	S. 	Ct. 	2169 	(1992).
40 Ticor, 	supra 	n. 	39 	at 	2177 	(the 	state 	must 	have 	exercised
independent 	judgment 	and 	control 	"so 	that 	the 	details 	of 	the 	rates
or prices 	have 	been 	established 	as 	a 	product 	of 	deliberate 	state
intervention, 	not 	simply by agreement 	among 	private 	parties"),
2179.
41 	See 	P.I.A. 	Asheville. 	Inc. 	v. 	North 	Carolina, 	740 	F.2d 	274,
278 	(4th 	Cir. 	1984), 	cert. 	denied, 	471 	S. 	Ct 	1003 	(1985) 	(CON
approval 	for 	hospital 	acquisition did 	not 	immunize 	from 	antitrust
challenge; 	there 	WQ~ 	no 	active 	supervision 	of 	post-certificate
conduct, 	and 	the 	federal 	program 	that 	the 	CON 	process 	implemented
did 	~ot displace 	the 	antitrust 	laws).
42 	S.B. 	2295 	authorizes 	actions 	by 	the 	attorney 	general 	to
revoke 	certificates, 	but 	does 	not 	specify 	whether 	the 	attorney
general 	or 	the 	certificate 	holders 	have 	the 	burden of 	proof 	in 	an
ensuing chal~enge to 	the 	revocat~on. 	S.B. 	2295, 	§5(2). 	And
although 	S.B. 	2426 	contains 	detailed 	provisions 	about 	challenges 	by
the 	attorney 	general, 	the 	section 	that 	provides 	for 	the 	department
of 	health 	to 	"initiate proceedings 	to 	terminate" 	a 	certificate 	(on
finding 	that 	the 	benefits 	no 	longer 	outweigh 	the 	disadvantages)
establishes 	no 	standardz 	or 	procedures 	for 	its 	decision 	in 	those
proceedings. 	S.B. 	2426, 	SlD.

~.
The 	Honorable 	David Huey
Page 	14
department 	of 	health, 	to 	demonstrate 	that 	the 	benefits 	continue
to 	outweigh 	the 	disadvantages~
v. 	Conclusion.
In summary, 	we 	believe 	that 	competition 	has 	been 	an
important 	factor 	in bringing about 	beneficial 	changes 	in how
health care 	services 	are 	delivered 	to 	consumers. 	Experience 	does
not 	demonstrate 	that 	~unity from 	antitrust 	liability 	is
necessary to 	permit 	hospitals 	or other 	institutional 	providers 	to
undertake cooperative 	arrangements 	to 	improve 	the 	quality of 	care
they provide 	and make 	their operations 	more 	efficient. 	Thus, 	we
recommend that, 	if measures 	such 	as 	these 	bills 	are 	nonetheless
considered 	desirable 	for 	other policy reasons, 	measures 	be
included 	to make 	it 	easier, 	rather 	than more 	difficult, 	to
terminate 	"agreements" 	whose 	net 	effect 	is 	detrimental 	to
consumers' 	interests. 	We 	hope 	these 	comments 	are 	of 	assistance.
~
\
Michael 	o. 	Wise
Acting 	Director