LEXIS-NEXIS® Congressional Universe-Document

LEXIS-NEXIS® Congressional

June 22, 1999

SECTION: CAPITOL HILL HEARING TESTIMONY

LENGTH: 9737 words

HEADLINE: TESTIMONY June 22, 1999 BILL JONES HOUSE JUDICIARY NEGOTIATING PROTECTION FOR HEALTH CARE PROVIDERS

BODY:
EXECUTIVE SUMMARY The Antitrust Coalition for Consumer Choice in Health Care ("the Coalition") is a diverse group of employers, health plans, providers, and others involved in the purchase, management, and delivery of health care services. While Coalition members are not traditional legislative allies on some important health care policy issues, they have come together to oppose H.R. 1304 because of the serious threat it poses to health care cost containment, quality, and access. I. H.R. 1304 WOULD DRAMATICALLY INCREASE HEALTH CARE COSTS. Competition has reduced health care costs, improved quality, and expanded access. Reliance on competition in recent years has paid off in dramatically curtailing health care cost increases that once threatened to overwhelm both the public and private sectors. Importantly, these cost savings are not associated with a negative effect on the quality of care. In fact, competition and increased managed care enrollment has led to improvements in quality. For example, managed care enrollees are more likely to receive preventive screening services than those in fee-for- service plans, and care for patients with chronic illnesses is more likely to be coordinated. Competition also has been important in controlling costs and expanding access in the Medicare and Medicaid programs. For example, 6.2 million, or 16.4% of all Medicare beneficiaries, are currently enrolled in a managed care plan. Medicaid relies even more on managed care arrangements to control costs and expand access. In 1998, 16.6 million, or 53.6%, of all Medicaid beneficiaries were enrolled in managed care plans. Antitrust enforcement is needed to protect competition and ensure consumer choice. As early as 1943, the Supreme Court concluded that the American Medical Association ("AMA") had violated the antitrust laws by coercing its members to refuse employment with a group health plan. Since then, federal and state enforcement agencies have challenged numerous efforts by otherwise independent health care providers to use collective action to increase (or resist reductions) in their fees or reimbursement levels, or to restrict competition from non-physician providers. Examples include: Puerto Rico physician boycott to increase reimbursement under a program to provide health care to the indigent. This effort culminated in an eight-day strike in 1996 during which many physicians closed their offices and refused to provide nonemergency services. Joint negotiations and price-fixing by Florida surgeons that raised their average annual revenues by more than $14,000. Boycott of New York State Employees Prescription Plan by retail druggists. The Federal Trade Commission ("FTC") obtained a consent decree against five pharmacy chains for conspiring to refuse to participate in the state's reduced-rate reimbursement initiative, costing the state an estimated $7 million. Conspiracy by a hospital medical staff to reduce competition by denying hospital privileges to certified nurse-midwives. Boycott by the AMA to prevent medical physicians from referring patients to or accepting patients from chiropractors. Conspiracy by anesthesiologists to eliminate competition by certified registered nurse anesthetists. Charles River Associates has estimated that the annual total dollar impact of H.R. 1304 would range from $35-$80 billion in increased expenditures for personal health care services financed by the public and private sectors. II. THE ANTITRUST LAWS allow HEALTH CARE PROFESSIONALS to COLLABORATE IN many WAYS. The FTC and Department of Justice ("DOJ") have issued Health Care Antitrust Guidelines that make it clear that: Providers can express their concerns about patient and quality of care issues. Providers need not fear an antitrust challenge based on communications or discussions concerning quality of care, patient care, or other non-fee issues. And, indeed, the agencies have never brought an enforcement action involving such conduct. Providers can communicate with each other, and to health plans, about health plan contract terms and fee-related issues. Thus, for example, providers seeking higher reimbursement rates may jointly furnish health plans information about their historic costs, charges, or reimbursement amounts. They also can present views about prospective fee-related issues as long as they make independent decisions concerning their participation with health plans. Providers can share information with each other so they can better understand the terms and conditions of health care contracts. Thus, for example, providers can employ an agent who gives them objective information by comparing the reimbursement rates and other terms offered by health plans in their community. Providers also can share information that helps them interpret health plan contracts. Providers also can join together in many ways that enable them to become more efficient and negotiate more favorable terms. These include: Forming larger practice groups that enable physicians to achieve economies of scale and other efficiencies. Collaborating with each other without merging their practices, for example, by forming independent practice associations ("IPAs"). The Health Care Antitrust Guidelines were revised in 1996 to respond to concerns raised by some providers that previous guidelines were too restrictive with respect to the types of ventures that the agencies were willing to approve. The revised guidelines were widely hailed for making it clear that the antitrust laws do not pose an impediment to provider joint ventures that allow providers to negotiate collectively with health plans. III. INSTEAD OF "LEVELING THE PLAYING FIELD," AN ANTITRUST EXEMPTION WILL TIP IT IN FAVOR OF HIGH-COST PROVIDERS. There is no foundation to the core assumption underlying H.R. 1304 that a fundamental change is needed to "level the playing field" so that health care providers will have sufficient leverage to negotiate with health plans. Health plans do not have "monopsony power" over providers. Economists use the term "monopsony" to describe a situation in which a buyer has the market power to depress the prices at which it buys goods or services to a level that is below what would prevail in a competitive market this requires at least a 60%-70% market share. It is unlikely that a health plan in any market has a share that even remotely approaches this level. For example, a review of the 20 largest MSAs showed that, with two exceptions, the share of the largest HMO in each MSA fell below 20% of the area's population, and in many cases below 10%. The average physician earns only a minority of his or her revenue from all managed care contracts combined, and far less from any single health plan. This not surprising given the importance of Medicare, which remains predominantly a fee-for-service payer, to most physicians' practices. The shares of health plans vary dramatically from one area of the country to the next, and can change significantly over time. While there has been consolidation of health plans in some markets, others have been marked by growing competition and new entry. Physicians, hospitals, and other health care providers have started numerous health maintenance organizations ("HMOs"), preferred provider organizations ("PPOs"), and other arrangements. Employers in some areas have explored direct contracting with providers, bypassing health plans altogether. Nationwide, the number of HMOs and PPOs has grown from 566 in 1990 to 651 in 1998. The number of PPOs has grown from 571 in 1990 to 1,035 in 1997. In some markets, health care providers have considerable leverage. In many geographic areas, providers have obtained superior negotiating leverage through growth and acquisitions. Some IPAs and multispecialty groups include hundreds and even thousands of physicians. Much smaller provider groups also can exert considerable negotiating leverage. For example, a health plan may find it virtually essential to contract with a group with only a couple dozen physicians who are all in a single specialty for which there are few substitutes. Physician income has continued to rise under managed care. In general, physician income has continued to rise at a healthy pace, even as managed care arrangements have grown. For example, between 1985 and 1996, median physician net income increased 77% to $166,000. This compares to the average median full-time worker income that increased only 43% to $25,480. Moreover, despite claims that managed care is forcing physicians to accept unreasonably low reimbursement schedules, average HMO reimbursement rates in almost all large markets remain substantially higher than those of Medicare. H.R. 1304 is not needed to balance the McCarran-Ferguson exemption for insurers. This argument is a red herring. The McCarran-Ferguson Act does not exempt from antitrust scrutiny agreements among health plans regarding their contracts with providers, nor does it shield health plan mergers from antitrust review. IV. THE REAL LOSERS UNDER H.R. 1304 WOULD BE THE EMPLOYERS, GOVERNMENT PROGRAMS, AND CONSUMERS ON WHOSE BEHALF HEALTH PLANS PROVIDE CARE. The health plan market is extremely competitive and is constantly evolving to meet the demands of customers. Purchasers of health plans are very price sensitive, and plans that do not pass along savings to their customers (who include employers as well as individuals who typically must share in the cost of premiums and deductibles) will quickly lose market share. As a result of this competitive environment, health plans and have not been a particularly profitable sector of the economy. During the early- to mid-1990s, the median profit margin for HMOs was between 2%-3%, substantially lower than the average Fortune 500 company. This slipped to less than 1% in 1995, and was negative in 1996 and 1997. If health plans are faced with higher costs, they will have no choice but to pass such costs directly on to their customers. In the case of H.R 1304, those affected by cost increases will include private and public employers (who pay the largest share, by far, of health care costs), Medicare and Medicaid (whose managed care plans are specifically targeted by H.R. 1304), and consumers (who would be forced to pay higher premiums and larger deductibles and copayments). In addition, H.R. 1304 would severely affect access to health care coverage. Both employers and government programs, when faced with higher costs, will likely have little choice but to respond by limiting the availability of health care coverage to the working poor and others who cannot afford health care insurance. V. H.R. 1304 HAS LITTLE TO DO WITH THE TRADITIONAL ANTITRUST LABOR EXEMPTION. H.R. 1304 would give health care professionals special treatment available to no other workers. Other workers, if they wish to engage in collective bargaining, must establish that they are subject to the supervision and control of their employers. If health care providers were truly under the supervision and control of health plans, as those criteria are applied to all other workers, then they, too, would be eligible for the existing labor antitrust exemption. But the claim that independent physicians are employees of health plans is difficult to sustain. And that is the reason why they seek passage of H.R. 1304 to obtain a "backdoor" exemption that is unavailable to any other type of worker. H.R. 1304 would give health care professionals the benefits of a labor exemption without any of the NLRA safeguards or oversight that apply to other workers. The National Labor Relations Act ("NLRA") establishes a substantive and procedural framework that governs all aspects of the collective bargaining process between employees and their employers. None of this would apply to negotiations between health care professionals and health plans under H.R. 1304. Moreover, under H.R. 1304, health plans and insurers could not negotiate jointly as a multiemployer group as they could under the NLRA. VI. CONCLUSION Competition is crucial to keeping health care costs under control in the private sector, as well as in the Medicare and Medicaid programs. And it is through such cost-control efforts that broader health care access can be given to lower income families and individuals. Competition also is prompting innovative means of improving and measuring quality. H.R. 1304 would jettison competition among health care providers by allowing them to engage in price-fixing, boycotts, and market allocation agreements that otherwise would be per se illegal under the antitrust laws. It would allow them to collectively seek to raise their fees to plans targeted at the working poor, and to resist efforts that would control costs to such patients. In short, H.R. 1304 would eliminate any meaningful attempt to use competition to control health care costs, improve quality, and expand access. It should be soundly defeated. Written Testimony of THE ANTITRUST COALITION FOR CONSUMER CHOICE IN HEALTH CARE Opposing H.R. 1304 ("Quality Health-Care Coalition Act of 1999") I. INTRODUCTION. The Antitrust Coalition for Consumer Choice in Health Care ("the Coalition") is a diverse group of employers, health plans, providers, and others involved in the purchase, management, and delivery of health care services. Its employer members include the U.S. Chamber of Commerce, the National Association of Manufacturers, and the National Business Coalitions on Health. Health plan members include the American Association of Health Plans, the Health Insurance Association of America, the Blue Cross Blue Shield Association, and a number of individual health plans. Provider groups include the American Nurses Association, the American Association of Nurse Anesthetists, the American College of Nurse Midwives, the American Optometric Association, the Healthcare Leadership Council, and Premier, Inc. Attachment A is a list of members of the Coalition. Members of the Coalition span a very broad spectrum of entities with a keen interest in the nation's health care delivery system. They have diverse views and are not traditional legislative allies on some important health care policy issues. Yet they have come together to form this Coalition to oppose H.R. 1304 because they share common concerns about the serious threat it poses to health care cost containment, quality, and access. II. H.R. 1304 WOULD DRAMATICALLY INCREASE HEALTH CARE COSTS FOR PUBLIC AND PRIVATE PAYERS BY ELIMINATING COMPETITION AMONG HEALTH CARE PROFESSIONALS. H.R. 1304 is a deceptively simple bill. To "level the playing field" between health care professionals and health plans, the bill would grant health care providers in their negotiations with health plans a special exemption to the antitrust laws. This would allow providers to fix prices, boycott plans, and divide markets conduct that would be per se illegal (i.e., illegal on its face) if undertaken by virtually any other competitors in our economy. The bill would be a radical departure from the nation's fundamental approach of using competition and market forces to control health care costs, assure quality, and expand access to health care by lower income families and individuals. Health care markets are in a period of rapid evolution. But it already is apparent that reliance on competition in recent years has paid off in dramatically curtailing health care cost increases that were threatening to overwhelm both the public and private sectors. The far-reaching nature of H.R. 1304 cannot be exaggerated. In a single stroke, it would jettison the use of competition as a force in promoting efficiency in the delivery of medical care. The result would be increased costs and devastating setbacks to efforts to improve quality and expand access to health care by the uninsured.(1) A. Competition has reduced health care costs, improved quality, and expanded access. Historically, a number of factors, including legal and professional barriers, the role of third-party insurance, government regulation, and the nature of prevailing reimbursement systems, insulated much of the health care delivery system from vigorous competition. Lacking few incentives for efficiency, the nation's health care costs skyrocketed, from 7.1% in 1970 to more than 13% of our gross domestic product by the early 1990s. The private sector took the lead in exploring ways in which a more competitive health care system could address cost, quality, and access issues. In response to the needs of employers, health plans developed various "managed care" strategies to create incentives for health care providers to furnish care more efficiently. Some of the first efforts built on earlier models involving prepaid group practices, such as Kaiser Permanente and the Group Health Association, which furnished care through closed panels of staff physicians. More recently, many health plans developed new organizational structures that respond to consumer demand for broader provider panels. Generally, health plans have employed an array of mechanisms to control costs and assure quality, including negotiated fee structures, selective contracting, innovative compensation and reimbursement systems, and expanded utilization review. Employers in many communities also have joined together to share ideas on how to control health care costs, measure the quality of care offered by providers, and expand access for the health care services they buy on behalf of their employees. Managed care arrangements have taken numerous forms, including health maintenance organizations ("HMOs"), preferred provider organizations ("PPOs"), and point-of-service ("POS") plans, and these forms are constantly evolving to meet the needs of employers and their employees.(2) By 1998, they accounted for 86% of all the enrollment in employer-sponsored health insurance, up from 29% in 1988.(3) While the nature of managed care arrangements varies, they all rely on a competitive marketplace for both health care and health plans. Competition in health care creates incentives for health care providers to increase their efficiency, lower their costs, and improve quality. Competition among health plans spurs them on to be innovative and efficient, and assures that the savings they obtain through their arrangements with health care providers will be passed on to consumers -- through lower prices to employers and their employees and customers. A competitive market also creates an opportunity for new or alternative forms of health care to offer additional choices for consumers. For example, nonphysician providers, such as nurse anesthetists, nurse midwives, optometrists and chiropractors, may provide less expensive services or alternative approaches to delivering care. Through their presence, they also create a poweful incentive to physician providers to be more efficient, less costly, and more innovative. Reliance on competition and managed care arrangements has been so widespread because they have been successful in controlling health care costs. Numerous studies have shown that increased levels of managed care are associated with lower average health care costs.(4) Moreover, the efficiencies resulting from increased competition due to managed care also help control the average expenditures for patients in traditional indemnity or fee- for-service plans. For example, in a study of 95 traditional indemnity insurance groups, researchers determined that insurance premiums for indemnity plans increased less rapidly from 1985 to 1992 in markets with greater HMO penetration.(5) This so-called spill-over effect means that an increase in competition, as measured by the increase in managed care penetration, translates directly into more affordable health care for all consumers. The bottom line is that in recent years, as a result of increased reliance on managed care and competition in the marketplace, the nation has been able to curtail dramatically the rate of increase in health care costs borne by employers, consumers, and the government. For example, as Figure1 shows, the annual rate of increase for health insurance premiums, which had been as high as 15% to 20% 10 years ago, has been well below 5% since 1994. Similarly, largely because managed care plans tend to require more limited copayments and smaller deductibles than indemnity insurance, the proportion of national health expenditures paid out-of-pocket by consumers has declined steadily from 23.4% in 1986 to 17% in 1997, as shown by Figure 2 . The overall cost savings impact of competition and managed care on the nation's health care costs is perhaps best reflected in the percentage of gross domestic product ("GDP") accounted for by national health expenditures. As shown in Figure 3, after rising dramatically for 30 years, from 5.1% in 1960 to 13.0% in 1991, this share has remained essentially flat since 1993. This accomplishment is all the more remarkable given increasing costs attributable to new medical technology and the gradual aging of the population. Importantly, these cost savings are not associated with a negative effect on the quality of care. In fact, competition and the increase in managed care enrollment has led to improvements in quality. For example, managed care enrollees are more likely to receive preventive screening services than those in fee-for- service plans, and care for patients with chronic illnesses is more likely to be coordinated. Finally, the vast majority of consumers who are enrolled in managed care plans are generally satisfied with the care they are receiving. This finding applies to Medicare and Medicaid HMO enrollees, patients with chronic health conditions, federal employees, and employees covered by health plans in the private sector. B. Competition also has been important in controlling costs and expanding access in the Medicare and Medicaid programs. By the mid-1990s, the Medicare and Medicaid programs also began to rely heavily on competition and managed care to control costs and expand access. For example, 6.2 million Medicare beneficiaries, or 16.4% of all Medicare beneficiaries, are currently enrolled in a managed care plan. The Congressional Budget Office ("CBO") expects this percentage to increase to 19% of all Medicare beneficiaries by 2002 and 28% by 2007. Medicaid plans rely even more on managed care arrangements to control costs and expand access. In 1998, 16.6 million, or 53.6%, of all Medicaid beneficiaries were enrolled in managed care plans.(11) Studies have shown that, like the private sector, these public programs have benefited from competition and the increased use of managed care. Research conducted at Stanford University, the Urban Institute, and Price Waterhouse have estimated that the Medicare program receives an indirect cost-savings when more Medicare beneficiaries enroll in HMOs. For example, a study by Price Waterhouse found that for every 10% increase in Medicare prepaid HMO enrollment, traditional Medicare program costs in a given county are 2.8%-7.6% lower. State Medicaid programs also have incurred savings from increased managed care enrollment. For example, one study estimated that the state of California, by enrolling Medicaid beneficiaries into managed care plans, achieved savings of $8.6 billion in 1996. New York saved an estimated $3.7 billion, and Massachusetts $2.3 billion. These savings make it possible for states, by relying on managed care approaches, to expand their Medicaid programs to provide access to more of the uninsured. Moreover, the "spillover effect" described above means that the benefits of competition and managed care also can result in savings to those substantial parts of Medicare and Medicaid that are still based on a traditional fee-for-service structure. For example: A 1999 study published in the Journal of the American Medical Association found that an increase in systemwide HMO market share from 10% to 20% is associated with a 2.0% decrease in Medicare Part A fee-for-service expenditures and a 1.5% decrease in Part B fee-for-service expenditures. Another researcher concluded that an expansion in Medicare managed care within a metropolitan statistical area corresponded with a drop in expenditures in overall Medicare costs in that area. The study estimated that a 10% increase in Medicare managed care enrollment lowers Medicare costs per beneficiary by 1.2%.(15) C. Antitrust enforcement is needed to protect competition and ensure consumer choice. Over the years, antitrust enforcement has been crucial in ensuring that health care markets are competitive so that consumers can reap the benefits of competition discussed above and have a wide range of choices of health providers and plans. In fact, as early as 1943, the Supreme Court concluded that the American Medical Association ("AMA") violated the antitrust laws by coercing its members and practicing physicians not to accept employment under a group health membership corporation that paid providers on a risk-sharing prepayment basis. Federal and state enforcement agencies have challenged numerous efforts by otherwise independent health care providers to use collective action to increase (or resist reductions) in their fees or reimbursement levels. Examples include: Puerto Rico physician boycott to increase reimbursement under program to provide health care to the indigent. This effort culminated in an eight-day strike in 1996 during which many physicians closed their offices and refused to provide non- emergency services. The Federal Trade Commission ("FTC") and the Commonwealth of Puerto Rico obtained a consent decree with the doctors in which they agreed to pay $300,000 in restitution and agreed not to engage in future boycotts. Joint negotiations and price-fixing by Florida surgeons that raised their average annual revenues by more than $14,000. Earlier this year, the Department of Justice ("DOJ") entered into a consent decree with 29 surgeons who accounted for 87% of the general and vascular surgeries performed in five Tampa, Florida, hospitals. DOJ alleged that the surgeons engaged in illegal joint negotiations and price-fixing that, by the surgeons' own estimate, resulted in an average annual gain of $14,097 in projected revenues for each surgeon. Boycott by emergency room physicians. In 1994, the FTC obtained a consent decree from a group of trauma surgeons in Florida. The ten surgeons were charged with illegally conspiring to fix fees for their services at two area hospitals. The surgeons refused to deal individually with the hospitals, threatened to cease providing trauma services if their price terms were not met, and to back up that threat, walked out of one trauma center, forcing it to close. Boycott of New York State Employees Prescription Plan by retail druggists. The FTC obtained a consent decree against five pharmacy chains, an executive of one of the chains, a trade association, and other unnamed pharmacy firms in New York for conspiring to refuse to participate in the state's reduced-rate reimbursement initiative. The FTC charged that actions by the defendents cost the state an estimated $7 million. Physicians also have acted collectively to restrict competition from nonphysician providers. Examples include: Conspiracy by a hospital medical staff to reduce competition by denying hospital privileges to certified nurse-midwives. The medical staff at Memorial Medical Center ("MMC"), which represented a majority of the practicing physicians in Savannah Georgia, protested the hospital's credentialing committee's decision to grant hospital privileges to a state certified nurse- midwife. In addition, several obstetricians affiliated with MMC threatened to shift their patient admissions to another hospital based on the vote. The FTC alleged that as a result of these threats, the committee reversed itself and denied hospital privileges to the nurse-midwife without a reasonable basis. The FTC secured a consent order that prohibited the medical staff from restricting or recommending denial of hospital privileges for any certified nurse-midwife without adequate grounds. Boycott by the American Medical Association to prevent medical physicians from referring patients to or accepting patients from chiropractors. The goal in these efforts, which were declared by the Seventh Circuit Court of Appeals to be an unlawful boycott under the antitrust laws, was to deny chiropractors access to hospital diagnostic services and membership on hospital medical staffs, to prevent medical physicians from teaching at chiropractic colleges or engaging in any joint research, and to prevent any cooperation between the two groups in the delivery of health care services. Conspiracy by anesthesiologists to eliminate competition by certified registered nurse anesthetists ("CRNAs"). Despite the fact that nurse anesthetists are clinically qualified to provide certain anesthesia services under the supervision of a physician, M.D. anesthetists have long viewed CRNAs as competitors and have attempted to eliminate this competition through illegal exclusive dealing contracts with hospitals. Strict enforcement of the antitrust laws has been crucial in ensuring that health care providers do not engage in these kinds of anticompetitive actions that can only serve to raise the costs and limit the choices of consumers. But as is discussed in Section III below, the antitrust laws permit a wide range of collaborative activities among health care providers. Thus the actual number of antitrust challenges mounted by the FTC and DOJ has been few (less than half a dozen a year for both agencies combined), and none of these have involved legitimate efforts on the part of providers concerning quality of care issues. Instead, enforcement agency activity is targeted at those cases of egregious provider conduct that most seriously threatens to raise costs and reduce choice. III. THE ANTITRUST LAWS ALLOW HEALTH CARE PROFESSIONALS TO COLLABORATE IN WAYS THAT BENEFIT CONSUMERS. Some physicians have suggested that the antitrust laws make it impossible for them to communicate with each other concerning various aspects of managed care arrangements. This is simply not true. The antitrust laws prohibit agreements among otherwise competing health care providers where their collective action is aimed only at increasing market power, at the expense of consumers. But as described in further detail below, as long as their conduct does not involve agreements on a collective course of action, the antitrust laws allow providers to share information with each other or with health plans and the public. Indeed, such communications often are procompetitive since they can facilitate more informed decision making. The antitrust laws also permit providers to form joint ventures or networks that can negotiate with health plans on their behalf, and in many areas of the country such provider groups have attained considerable size. The FTC and DOJ issued guidelines in 1993, and then revised them in 1994 and again in 1996, aimed specifically at health care providers to help them understand how they can lawfully collaborate under the antitrust laws.(25) This section briefly discusses this guidance and describes how providers throughout the country are collaborating in many different ways without the need for any antitrust exemption. A. The antitrust laws allow providers to express their concerns about patient and quality of care issues. The federal antitrust agencies in Section 4 of their Health Care Antitrust Guidelines specifically addressed joint action by health care providers to furnish information to health plans about non-fee issues. The section begins by noting that t he collective provision of non-fee-related information by competing health care providers to a purchaser i.e., health plan in an effort to influence the terms upon which the purchaser deals with the providers does not necessarily raise antitrust concerns. Generally, providers' collective provision of certain types of information to a purchaser is likely either to raise little risk of anticompetitive effects or to provide procompetitive benefits. The section goes on to establish a "safety zone" for the collective provision by provider groups of medical data or suggested practice parameters involving the mode, quality, or efficiency of treatment. Such conduct will not be challenged absent "extraordinary circumstances." Under this safety zone, for example, the collection of data by the cardiologists in a community concerning the medical necessity of a certain form of treatment, and their joint recommendation to a health plan that it be covered, would not raise antitrust concerns. Thus the agencies are clearly on record that providers need not fear an antitrust challenge based on communications or discussions they may have -- with each other, with health plans, or with the public -- concerning quality of care, patient care, or other non-fee issues. And, indeed, the agencies have never brought an enforcement action involving such conduct. B. The antitrust laws allow providers to communicate with each other, and to health plans, about health plan contract terms and fee-related issues. In a separate section of the Health Care Antitrust Guidelines, the antitrust agencies also have established another "safety zone" for the collective provision of fee-related information, such as historical fees or other aspects of reimbursement. This safety zone applies so long as the data is submitted to a neutral third party, and is disseminated in aggregate (anonymous) form that does not reflect pricing or related information that is less than three months old. Thus, for example, providers seeking higher reimbursement rates may jointly furnish health plans information about their historic costs, charges, or reimbursement amounts. In addition, the agencies note that the collective provision of information or views concerning prospective fee- related matters also will not raise antitrust concerns, as long as providers make independent decisions concerning their participation with health plans. The antitrust laws, and the guidelines that interpret them, also allow providers to share information with each other so they can better understand the terms and conditions of health care contracts and make more well-informed decisions concerning which contracts they wish to sign. Thus, for example, providers can employ an agent who gives them objective information comparing the reimbursement rates and other terms offered by health plans in their community. Providers also can share information that will help them interpret health plan contracts. Many medical societies, including the American Medical Association, furnish their members with detailed information on reviewing health care contracts. They also provide assistance to their members in interpreting and advocating for changes in contract provisions. For example, the AMA's Division of Physician and Patient Advocacy has staff that is "available to consult with and assist state and county societies in representing individual physicians and groups before health plans." Clearly, H.R. 1304 is not needed to enable providers to communicate with each other, or with health plans, about patient care issues raised by managed care contracts. Nor is it needed to allow providers to share information that would allow them to make more informed decisions about contracts, or to express their views or provide information to health plans about contractual terms. The antitrust laws already permit such conduct, because such activities do not restrict competition, and in fact, often help make the market work better. What H.R. 1304 would change is that it would remove the antitrust prohibition against boycotts and price-fixing, thereby allowing providers not just to communicate with each other and plans, but to coerce plans to accept their views. Such conduct does not make the market work better, it displaces it. It substitutes a provider cartel for competition and consumer choice. C. The antitrust laws allow health care providers to join together in many ways that enable them to become more efficient and negotiate more favorable terms. The antitrust laws also recognize that there are numerous ways that health care providers can join together to provide more efficient health care and that also may enable them to negotiate more effectively with health plans. One alternative is to form larger practice groups that enable physicians to achieve economies of scale and other efficiencies, an approach adopted by many physicians in recent years. Thus the number of group practices has grown by 362%, from 4,289 in 1965 to 19,820 in 1996, and about one-third of all non-federal physicians now practice in groups. Moreover, some of these groups are quite large: of those physicians in group practices in 1996, 28.7% were in groups of 100 or more physicians. Physicians who wish to remain in solo or small group practices also can collaborate with each other without merging their practices, for example, by forming independent practice associations ("IPAs"). Indeed, the American Medical Association has observed that such arrangements are likely the reason that the percentage of physicians in group practices has not grown even more in the 1990s, as some had predicted: S everal alternatives to group practices are now widely available. Physicians may choose more loosely-organized structures, like physician organizations or independent practice associations, over the more tightly integrated practice model that the medical groups represent. These other models offer physicians the advantage of practicing independently while being part of a larger organization able to attract managed care contracts. The arrangements to which the AMA is referring allow physicians and other health care providers who remain in independent practice to collaborate by forming network joint ventures through which they can work together to provide health care services more efficiently. The FTC and DOJ have made it absolutely clear that through such arrangements, providers can lawfully negotiate collectively with health plans. Thus, for example, the FTC and DOJ Health Care Antitrust Guidelines devote two separate sections explaining how providers can form physician and multiprovider networks to contract with managed care organizations. These guidelines were revised in 1996 to respond to concerns raised by some providers that previous guidelines were too restrictive with respect to the types of ventures that the agencies were willing to approve. The revised guidelines were widely hailed for making it clear that the antitrust laws do not pose an impediment to provider joint ventures that can offer new alternatives to consumers. D. The antitrust laws only prohibit health care providers from engaging in conduct that will harm consumers. As the preceding discussion has explained, health care providers have tremendous latitude under the antitrust laws to communicate with each other about various aspects of managed care arrangements, and to jointly communicate their views to health plans and the public. Health providers are also free to collaborate with each other to form networks that can jointly contract with plans. And, of course, they are free to contract directly with employers, or to create their own alternatives to health plans. All of these kinds of conduct are lawful under the antitrust laws because they do not restrict, and indeed may expand, the choices available to consumers. The only conduct that the antitrust laws prohibit is conduct by providers -- such as would be possible under H.R. 1304 -- to supplant the market altogether and impose their will on and limit the choices available to consumers. IV. INSTEAD OF "LEVELING THE PLAYING FIELD," AN ANTITRUST EXEMPTION WILL TIP IT IN FAVOR OF HIGH COST PROVIDERS. The preceding sections have described the importance of competition in controlling health care costs and assuring quality and access, and how the antitrust laws do not preclude health care providers from communicating and collaborating in ways that benefit consumers. This section addresses the core assumption underlying H.R. 1304 -- that a fundamental change is needed to "level the playing field" so that health care providers will have sufficient leverage to negotiate with "heavy-handed" health plan bureaucracies. Section IV.A first describes how health care markets are much more diverse, complex, and dynamic than proponents of H.R. 1304 suggest. In many areas of the country, it is providers, not health plans, who occupy a dominant position. And even in areas where there are only a few large health plans, none has the market share that is associated with "monopsony power" (i.e., the power of a buyer to depress prices to a level lower than would be present in a competitive market). Moreover, as Section IV.B explains, H.R. 1304 would not simply shift bargaining power from managed care companies to health care providers. Rather, the real losers if H.R. 1304 passes would be the employers, consumers, and government programs on whose behalf the health plans provide care. Finally, Section IV.C addresses the "red-herring" argument that providers need a new antitrust exemption to balance the limited McCarran-Ferguson exemption that applies to the "business of insurance." A. Health plans do not have "monopsony power" over providers. H.R. 1304 is based on the deceptively simple proposition that a special exemption to the antitrust laws is needed to offset the overwhelming dominance that health plans exert over health care providers. Because of this dominance, it is claimed, providers are faced with "take it or leave it" contracts that they have no choice but to accept. The reality, however, is much more complex. A closer examination shows that not only do health care markets vary tremendously across the country, and are in a state of rapid change, it is unlikely that a health plan in any market has a share that even remotely approaches the market share that is associated with monopsony power. Furthermore, in many markets, health care providers have combined to amass significant leverage of their own. The average physician earns only a minority of his or her revenue from all managed care contracts combined, and far less from any single health plan. To consider whether a health plan has leverage over physicians, the focus of the inquiry must be on the share of the average physician's revenue that is attributable to the plan. Thus, the fact that there may be only a few large HMOs in an area, or that various HMOs have merged, tells us little if HMO revenue accounts for only a small percentage of the typical physician's income. For example, even if a "dominant" health plan accounts for 65% of the HMO-covered lives in an area, that plan will have little leverage if only 15% of all patient revenues is derived from HMO patients. The plan would account for less than 10% of the average physician's income (65% x 15%) -- amounting to an important payer, but hardly one that could unilaterally dictate prices and other terms. And, in fact, as reported in the AMA's most recent survey, managed care, of all varieties, and in the aggregate, accounts for only 48.7% of nonfederal physician revenue. Of this amount, 29.9% is from private managed care, 11.1% from Medicare managed care, and 6.7% from Medicaid managed care. It must be emphasized, moreover, that this figure includes income from HMOs, PPOs and POS arrangements, and covers all health plans combined. Obviously, the revenue share from HMOs would be much less, as would the share from any single plan. That managed care accounts for only a minority of physician revenue is not surprising given the importance of Medicare, which remains predominantly a fee-for- service payer to most physicians' practices. It is unlikely that the share of any single health plan even remotely approaches that of a monopsony in any area of the country. A monopolist is a seller that has sufficient market power to raise prices over that which would prevail in a competitive market. Economists use the term "monopsony" to describe a comparable situation with respect to a buyer who has the market power to depress the prices at which it buys goods or services to a level that is below what would prevail in a competitive market. Generally, courts consider it unlikely that a seller could exercise monopoly power (and conversely a buyer exercise monopsony power) unless it accounts for 60%-70% or more of a relevant market. Unfortunately, data are not available that shows by geographic area the shares of the average physician's revenue accounted for by various health plans. It is virtually impossible, however, that any single plan accounts for 70% or more of the revenues of physicians in even the most highly concentrated market. This is because the average physician derives his or her income from numerous sources, of which private insurance and managed care are only a small portion. Reference already has been made to the fact that managed care accounts for only a minority of nonfederal physician income. The AMA also has compiled data by source of payer. For 1998, only 42.8% of nonfederal physician income was accounted for by private insurance. The balance came from Medicaid (12%), Medicare (28.6%), and patients themselves (12.2%).(38) Given that the private insurance component includes all types of arrangements, such as indemnity, managed care, workers' compensation, auto and disability insurance, and CHAMPUS, and that there are typically numerous competitors offering each type of arrangement, it would appear virtually inconceivable that any single payer in even the most concentrated market could account for a share even remotely approaching monopsony levels. While data by geographic area showing the share of physician revenue accounted for by HMOs is not available, there are data that shows the number of enrollees in HMOs in various market areas. Not surprisingly, the enrollment in any HMO accounts for only a small minority of the population in each area. This is illustrated in Figure 4, which shows for each of the nation's 20 largest MSAs the percentage of enrollees in the largest HMO compared to the MSA population. With two exceptions, this share is below 20%, and in many cases below 10%. Moreover, these shares likely underestimate the amount of revenue from the largest HMO because most (about 84%) Medicare beneficiaries are not enrolled in HMOs, and Medicare beneficiaries typically account for about three times as much health care services as the average population. The shares of health plans vary dramatically from one area of the country to the next, and can change significantly over time. Reports regarding the merger of a number of health plans in recent years shed little light on competitive conditions in any specific area because health plan markets are extremely varied and dynamic. While there has been consolidation of health plans in some markets, others have been marked by growing competition and new entry from health plans from other parts of the country. In some geographic areas, for-profit plans may be prevalent; in others, nonprofit or staff model HMOs are the major competitors. Physicians, hospitals, and other health care providers have started numerous HMOs, PPOs, and other arrangements over the last decade. Employers in some areas have explored direct contracting with providers, bypassing health plans altogether. Nationwide, the number of HMOs and PPOs has grown from 566 in 1990 to 651 in 1998. The number of PPOs has grown from 571 in 1990 to 1,035 in 1997 In short, the health plan market is highly competitive, dynamic, and varied. As discussed above, in even the most highly concentrated areas, the most dominant health plan is not likely to have anything approaching monopsony power. Moreover, even such dominant plans face the threat of competition from numerous directions. And finally, many markets remain very unconcentrated, with no single plan having a significant market share. In some markets, health care providers have considerable leverage. Proponents of H.R. 1304 also ignore the fact that in many geographic areas, providers have obtained superior negotiating leverage through growth and acquisitions. Moreover, such leverage is not difficult to exercise given the loyalty many patients have for their physicians. Patients often are more willing to switch their health plan than a longtime health care provider. Substantial leverage can be exercised by large, as well as relatively small, groups. Some of the former include IPAs and multispecialty groups that include hundreds, and even thousands, of physicians. Examples include: Healthcare Partners Medical Group was started in 1975 as California Primary Physicians by a group of physicians in the emergency room at California Hospital in Los Angeles, California. In 1982, it employed 52 physicians, had 4 offices, and 10,000 pre- paid patients. By 1998, the group employed more than 300 physicians, with another 600 affiliated IPA physicians, had 30 clinic sites, and an enrollment of more than 250,000. Its revenue in 1997 totaled $300 million. Hill Physicians Medical Group was founded in 1982 in Oakland, California. It expanded through mergers with and acquisitions of other IPAs. By 1997, it had 700 primary care physicians, 1,800 specialists, and 325,000 enrollees. Brown & Toland began in 1992 with a 692-physician IPA called "California Pacific Medical Group" in San Francisco, California. In 1997, it had 1,250 physicians tending 172,000 patients.(44) Brown & Toland was the first California IPA to obtain a state license to accept global capitation for all medical services, including hospitalization. Wisconsin Independent Physicians Group was founded in 1984 in Milwaukee, and now has 1,050 physicians. Forty-five thousand Medicaid patients represent one third of its patient base. The Nalle Clinic was established in 1929 in Charlotte, N.C. as a center for specialty referrals. It grew from 56 to 129 physicians during the 1990s. When Prudential terminated its contract with the Nalle Clinic in 1992, the Clinic retained almost all of its Prudential enrollees by encouraging its patients to change plans instead of changing doctors. American Oncology Resources purchased Physician Reliance Network, increasing the size of its organization to more than 700 physicians, including more than 325 oncologists, in 44 cancer treatment centers in 24 states. After the merger, American Oncology Resources will treat approximately 13% of all new cancer cases nationwide and will have annual revenues exceeding $850 million. Depending on the size of the community and the composition of the group, much smaller provider groups can exert considerable negotiating leverage. For example, a health plan may find it virtually essential in many communities to contract with a practice group or IPA that may have only a couple dozen physicians if all of the physicians are in a single specialty for which there are few substitutes. Physician income has continued to rise under managed care. As health care markets have become more competitive during the past 10-15 years, it is not surprising that many health care providers have felt increased pressure to practice more efficiently and price their services more competitively. In general, however, physician income has continued to rise at a healthy pace, even as managed care arrangements have grown. For example, as Figure 5 shows, between 1985 and 1996, median physician net income increased 77% to $166,000. This compares to the average median full-time worker income that increased only 43% to $25,480. During this time, the gap between the income of the average physician and that of the average worker also increased. In 1985, the average physician earned 5.27 times as much as the average American worker. By 1996, the average physician earned 6.51 times as much as the average American worker. Moreover, despite claims that managed care is forcing physicians to accept unreasonably low reimbursement schedules, average HMO reimbursement rates in almost all large markets remain substantially higher than those of Medicare. H.R. 1304 is based on the clearly erroneous assumption that health care markets everywhere are dominated by health plans. The above discussion is not intended to suggest that physicians everywhere have the upper hand when they negotiate with managed care plans. But certainly the opposite assumption, on which the rationale for H.R. 1304 is based, is not true. In some geographic areas, health plans may be particularly strong; but in other areas, physicians may dominate; and in most areas, where there is healthy competition, neither health plans nor physicians will have significant market power. Moreover, within each market, there will be tremendous variation in the negotiating strength across health plans, and across health care providers. In the case of both health plans and providers, this will vary depending on such factors as local reputation, length of time in the community, number of patients (or covered lives), and the nature of the arrangements they are willing to enter. And over time, the relative negotiating strength of both plans and providers will change, largely due to their success or failure in meeting the needs of their customers. Illustrative of these changes is the fact that 15 years ago federal legislation was introduced that would have given insurers certain exemptions from the antitrust laws to allow them to negotiate jointly with health care providers. Ironically, one of the rationales of that bill was that it was needed to combat the market power of providers. The bill was not passed by Congress, and insurers do not have the benefit of such an exemption. But it illustrates the dynamic nature of health care markets, how the perception of who may have the "upper hand" can quickly change over time, and why legislation providing an exemption (no matter how well intended) is shortsighted. Of course, none of this is unique to health care. It is in fact how competition works throughout the rest of the economy. H.R. 1304, however, is based on the clearly erroneous assumption that health plans throughout the country are dominant, and a "one size fits all" solution is needed everywhere to tip the scales in favor of providers. B. In a misguided attempt to "level the playing field," the real losers under H.R. 1304 would be the employers, consumers and government programs on whose behalf health plans provide care. Proponents of H.R. 1304 portray the current health care environment as one in which health care providers are battling health plans, and they suggest that given a choice between the two, consumers would be better off by "tilting the playing field" in favor of providers. This portrayal, however, fundamentally misconstrues the role that health plans play in today's health care system, and the impact that the bill would have on consumers, employers, and government programs. Health plans have evolved to meet the needs of those who purchase health care services on their own behalf or on behalf of others. As observed above, the health plan market is extremely competitive and is constantly evolving to meet the demands of customers. For example, many plans during the past few years have begun offering "point of service" options and broader provider panels in response to customer demand that patients be given access to a wide choice of providers. Purchasers of health plans also are very price-sensitive, and plans that do not pass along savings to their customers (who include employers as well as individuals who typically must share in the cost of premiums and deductibles) will quickly lose market share. Two consequences flow from the competitive nature of the health plan environment. First, health plans have not been a particularly profitable sector of the economy. As Figure5 shows, during the early- to mid-1990s, the median profit margin for HMOs was between 2%-3%, substantially lower than the Fortune 500 median. This slipped to less than 1% in 1995, and was negative in 1996 and 1997. Second, if health plans are faced with higher costs, they will have no choice but to pass such costs directly on to their customers. In the case of H.R. 1304, those affected by cost increases will include the following: Private employers. By far, the biggest purchasers of health care services through health plans are employers. H.R. 1304 would affect both employers who purchase care through HMOs and insurers, as well as employers who are self-insured and cover their employees through arrangements administered by health plans. The higher costs imposed on employers inevitably will be passed on in the form of either reduced benefits to their employees and/or higher prices to their customers. Public employers. Federal, state, and local governments also rely on health plans to provide health care for their employees. Arrangements such as the Federal Employee Health Benefit Plan ("FEHPB") for federal employees and the California Public Employees' Retirement System ("CalPERS") are viewed as models for the way they have used competition among health plans to lower costs and expand choice. Medicare. H.R. 1304 specifically covers Medicare+Choice health plans. Recently, a number of health plans have decided not to offer Medicare+Choice products in various parts of the country because they believe Medicare rates are insufficient in light of the costs of the care they must provide. Additional cost increases due to H.R. 1304 would likely cause the number of plans offering Medicare+Choice options to shrink further. The result would be fewer options for Medicare beneficiaries and/or increases in federal outlays to cover the higher plan costs. Health plans that continue to offer Medicare+Choice arrangements, when faced with higher costs, would also likely need to reduce the scope of their benefit packages. This will directly impact those Medicare beneficiaries who now rely on

LOAD-DATE: June 23, 1999