Some Reflections on Health Care Antitrust Enforcement

Why Don’t Courts Treat Hospitals Like Tanks for Liquefied Gases? Some Reflections on Health Care Antitrust Enforcement Martin Gaynor Carnegie Mellon University

Abstract In this article, I use the Federal Trade Commission and the Department

of Justice 2004 report Improving Health Care: A Dose of Competition as an occasion to comment on two specific issues that have arisen in health care antitrust: the recent string of losses by the enforcement agencies in hospital merger cases and an antitrust exemption for physicians to bargain collectively with health insurers. One of the more salient facts about health care antitrust enforcement is the notable recent lack of success of the enforcement agencies in hospital merger cases. This may be due to judges and juries holding views of hospital markets as being different from markets for other goods and services. My conclusion is that hospitals are an industry with unique attributes, but nothing about the specifics of the health care industry suggests that the unregulated use of market power in this industry is socially beneficial. As a consequence, the antitrust laws should be enforced here as in any other industry. Countervailing power is an issue that has come to the fore in health care antitrust. Physicians have explicitly asked for legislative exemption from the antitrust laws in order to bargain collectively with insurance companies, as a means of counteracting insurers’ monopsony power. It is not clear that health insurers possess significant monopsony power. Even if they do, bestowing monopoly power on physicians will not necessarily improve matters. Active antitrust enforcement in insurance markets is the correct response, not blanket exemptions for providers.

I am grateful to Mark Schlesinger and two anonymous referees for comments and suggestions that substantially improved this essay. I thank Bill Vogt for sharing the information displayed in table 1 and for helpful comments. Thanks are due to Sujoy Chakravarty and Asako Shimazaki for providing help on the measures of hospital and insurance market concentration, and to Liz Fowler for editorial assistance. None of the above individuals are responsible for the views contained in this article. The views are mine alone. Journal of Health Politics, Policy and Law, Vol. 31, No. 3, June 2006 DOI 10.1215/03616878-2005-003 © 2006 by Duke University Press

498 Journal of Health Politics, Policy and Law

The Federal Trade Commission and the Department of Justice report Improving Health Care: A Dose of Competition (FTC/DOJ 2004) does two things. First, it makes very clear the strong commitment of the federal antitrust enforcement agencies to competition in health care. Second, it clarifies a number of details concerning enforcement. In what follows, I comment on two specific issues that have arisen in health care antitrust. My purpose is to use the FTC/DOJ report as an occasion to discuss some issues central to antitrust enforcement in health care, although this list is far from exhaustive. I first discuss the issue of the reception of antitrust prosecution in health care by judges and juries. I then discuss the issue of market power in health insurance and whether antitrust exemptions to create countervailing power are likely to be beneficial. Both of these are issues that have been relevant in health care antitrust and remain important. Is Health Care Like Storage Tanks for Liquefied Gases?

One of the more salient facts about health care antitrust enforcement is the notable recent lack of success of the enforcement agencies in hospital merger cases.1 During the second half of the 1990s, a dramatic wave of hospital consolidation swept the United States.2 Table 1 provides statistics on concentration in hospital markets at five-year intervals over the period 1985 – 2000.3 The table shows that the Herfindahl-Hirschmann Index (HHI) 4 for U.S. hospitals has been steadily increasing over time. In particular, the median HHI increased from 3,028 in 1985 to 3,995 in 2000. This is an increase of almost 1,000 points on a very large base. An HHI of 3,300 indicates a very concentrated market — for example, a market with 1. I use storage tanks for liquefied gases as an example of a conventional product for which competition and antitrust enforcement are commonly accepted as beneficial. A recent court decision found the merger of a firm in this market with its closest competitor to be illegal (In the Matter of Chicago Bridge & Iron Company N.V., Chicago Bridge & Iron Company, and Pitt-Des Moines, Inc., Docket No. 9300, Office of Administrative Law Judges, Federal Trade Commission). 2. One source puts the total number of hospital mergers from 1994 to 2000 at over nine hundred deals (Jaklevic 2002; www.levinassociates.com) on a base of approximately 6,100 hospitals. Further, many local markets, including quite a few large cities such as Boston, Minneapolis, Pittsburgh, and San Francisco, have come to be dominated by three or fewer large hospital systems. 3. These data are for metropolitan statistical areas (MSAs) only. This represents the vast majority of the population and hospitals in the United States. N 4. The HHI is defined as the sum of firms’ squared market shares, HHI= i=1 Σ si2, where si is firm i’s market share, and N is the number of firms. The HHI increases as the number of firms decreases or asymmetry of market shares increases. It has a maximum of 10,000 for a monopoly and has a minimum at 10,000/N, where the market is divided equally between N firms.

Gaynor ■ Antitrust Enforcement 499

Table 1 Hospital Market Concentration, 1985 – 2000 Year 1985 1990 1995 2000

Median HHIa

Changeb

3,028 — 3,112 84 3,353 241 3,995 642

Mean HHI

Change

3,483 — 3,665 182 3,991 326 4,391 400

Source: American Hospital Association a Herfindahl-Hirschmann Index b Total change over the previous five years

three equally sized firms will have an HHI close to this value (3,333). The FTC and DOJ consider markets with an HHI above 1,800 as highly concentrated.5 For highly concentrated markets such as these, the enforcement agencies consider any increase in the HHI of 100 points or more as presumptively anticompetitive (FTC/DOJ 1992). The increase in median concentration from 1985 to 2000 is far greater than that threshold. Hospital markets have been an active area of antitrust enforcement. Since 1984, the federal antitrust authorities have brought twelve lawsuits seeking to block hospital mergers. However, they have won only one of the seven cases brought since 1993.6 This lack of success is all the more notable for its contrast with the broad consensus of economists about the anticompetitive impacts of hospital mergers (for example, see Dranove and Satterthwaite 2000; Gaynor and Vogt 2000, 2003; Capps, Dranove, and Satterthwaite 2003). The reasons court opinions give for these decisions vary. They include market definition and hospitals’ not-for-profit status. However, I contend that, although these specifics matter, they are subsidiary to the larger question of how judges and juries view hospitals, and whether that conforms to the antitrust view of the world. It is a matter of settled law that hospitals are subject to the antitrust 5. Markets with an HHI below 1,000 are considered unconcentrated, and those with an HHI between 1,000 and 1,800 are designated as moderately concentrated (FTC/DOJ 1992). In practice, concentration levels higher than the cutoffs in the guidelines are often tolerated (see FTC 2004b). 6. The lone success for the enforcment agencies is the recent decision in favor of the FTC in the suit they brought against the consummated merger between Evanston and Glenbrook Hospitals with Highland Park Hospital (In the Matter of Evanston Northwestern Healthcare Corporation, Docket No. 9315 (Initial Decision), Office of Adminstrative Law Judges, Federal Trade Commission). Earlier, the FTC initially won in FTC v. Tenet Healthcare (1998 U.S. Dist. LEXIS 11849), but the ruling was reversed on appeal.


statutes.7 The question of whether hospitals are different enough from other industries that the antitrust statutes should not apply to them has been raised many times and clearly answered in the negative.8 Antitrust law is sufficiently general and flexible that it can be applied effectively to hospitals, as it is to a wide variety of other markets. The antitrust view is that, although hospital markets have distinctive characteristics, these characteristics do not imply that the law should apply to hospitals any less than firms in any other market. While there is no debate about the applicability of antitrust law to the hospital industry, court decisions do not reflect a consensus on how the law should be applied. The not-for-profit status of hospitals, in particular, has figured very prominently in some recent decisions (FTC v. Butterworth Health Corporation and Blodgett Memorial Medical Center, 946 F. Supp. 1285 [1996]; U.S. v. Long Island Jewish Medical Center, 2 Trade Cases ¶ 71,960 [1997]). In these cases, the courts explicitly evaluated the likelihood of anticompetitive behavior by merging hospitals differently because of their not-for-profit ownership. The courts felt that not-for-profit firms were subject to different motivations than for-profit firms and unlikely to exploit market power if given the opportunity.9 I believe that the notion that competition benefits consumers, and that the enforcement of the antitrust laws promotes this social good, is generally not controversial among the public at large (including judges). Most people accept that competition is good when the industry is paper boxes, cement, or storage tanks for liquefied gases. I do not believe, however, that the public is so accepting of the antitrust view of the world when it comes to hospital care. Most hospitals in the United States are not-for-profit firms. They are often referred to as community hospitals, and many of them have the term community hospital 7. See United States v. Rockford Memorial Corp. 898 F.2d 1278, 1280 (7th Cir. 1990); Hospital Corp. of Am. v. FTC 807 F.2d 1381, 1386 (7th Cir. 1986); FTC v. University Health, Inc. 938 F.2d 1206, 1209 (11th Cir. 1991). Further, there is no antitrust exemption for not-for-profit firms (e.g., National Collegiate Athletic Ass’n. v. Board of Regents, 468 U.S. 85, 100 n. 22 [1984]; Hospital Corp. of America v. FTC, 807 F.2d 1381, 1390 – 1391 [7th Cir. 1986]). 8. This same issue periodically arises in other industries, most recently with regard to intellectual property (see Pitofsky 2001; Posner 2001). My thanks to a referee for pointing this out. 9. U.S. v. Brown University, et al., 5 F.3d 658 (3d Cir. 1993) is a prominent case in a different industry (higher education) in which the appropriate evaluation of antitrust claims against notfor-profit firms was a key issue. Massachusetts Institute of Technology and a number of other universities were accused of colluding over financial aid. A lower court rejected the notion that the universities’ not-for-profit status should play a role in evaluating the claims, but was reversed on appeal. The appeals court ascribed differing motives to not-for-profit firms in evaluating the price-fixing allegations.


in their name. Medicine is referred to as one of the caring professions. People (often) have a personal, caring relationship with their health care providers that they do not with a supermarket or a gasoline station. Some evidence from public surveys indicates that Americans favor choice and competition in health care (for a review, see Schlesinger 2004). Americans are also concerned, however, that hospitals will engage in abusive practices, such as discharging sick patients if their insurance runs out or charging for services patients don’t really need, but they see not-for-profit hospitals as much less likely to engage in such practices (Schlesinger, Mitchell, and Gray 2004). Surveys also indicate public concerns over equity in health care and a desire for government involvement (Schlesinger 2004). As a consequence, hospitals have a public image that is quite different from that of most other industries subject to antitrust enforcement. The public may feel less confident about the ability of health care markets to deliver what the public wants than it does about markets for other goods and services. These public perceptions will likely shape the presumptions of judges and juries and affect their evaluation of evidence given at trial. This makes merger prosecution particularly difficult for the enforcement agencies. The evidence that a proposed merger will be anticompetitive is necessarily uncertain. Since the merger has not occurred, one must try to assess the likely impact. In hospital merger cases, this has involved alleging that after a merger the merged hospitals will most likely raise prices as a result of their increased market power. In the case of retrospective evaluation of a consummated merger, it may seem simple enough in principle to establish whether prices were actually increased after the merger. Although that is true, the merged entity may claim that the profits due to increased prices are in effect “spent” on increased quality or charity or some other factor of benefit to the community, so even challenges of consummated mergers may not be as simple as they might first appear.10 Judges or juries will have to weigh evidence on price increases and effects on quality, or other factors. Judges or juries who think of hospitals as community organizations with a caring, humanitarian mission may discount arguments about anticompetitive merger effects, particularly if they do not specifically account for the hospitals’ not-for-profit status. Further, there may well be a general presumption that health care markets don’t work or that competition is not beneficial in health care. 10. In the Matter of Evanston Northwestern Healthcare Corporation, Docket No. 9315 (Initial Decision), Office of Administrative Law Judges, Federal Trade Commission.


I suspect that it is this sort of view that is largely responsible for the recent string of failures in federal hospital merger litigation.11 If I am correct, then an important part of the prosecution of such cases is making convincing arguments about both the desirability of competition in health care markets in general and the exercise of market power by not-for-profit hospitals specifically. What might be the nature of such an argument? I think that a minimal argument is that unregulated monopoly power is bad. Regardless of whether markets are the socially ideal way to finance and deliver health care, they are what we have at present. Given this institutional setting, monopoly is bad. Consumers need to be protected from the exercise of monopoly power by health care institutions, just like in other industries. This is not to say that health care is just like other industries in its details — it is not — but monopoly harms health care consumers just like it harms the consumers of conventional products. The essence of this argument is that whether one thinks that competition delivers optimality in health care or not, monopoly is worse.12 As a consequence, antitrust enforcement is critical to avoid the bad outcomes that accompany unregulated monopoly power.13 It is also worth pointing out that, although health care has some distinctive features (differentiated product, uncertainty, information asymmetries, entry and exit barriers, etc.), these are features that are present in many other industries as well (for an extensive discussion of the idiosyncratic features of health care and how they affect health care markets, see Gaynor and Vogt 2000). The fact that they are present in health care in a unique combination and degree does not bestow special antitrust status on health care. Antitrust focuses on the unique aspects of each industry as they are relevant to assessing competition. There is likely, however, a concern for equity in health care that is not present in many other industries (although certainly in some — for example, food, housing, and education). 11. Of course, this does not explain the successes. The enforcement agencies won three of the four cases they brought between 1984 and 1989. There is, however, some evidence that the public view of not-for-profits relative to for-profits was less favorable in the mid-1980s than it was in the mid-1990s (see Schlesinger, Mitchell, and Gray 2004: 182). 12. Some have made the argument that higher prices due to monopoly power can improve welfare in health care. Insurance leads to excess consumption by lowering the out-of-pocket cost to consumers of obtaining care. One might therefore logically think that higher prices would counteract this effect. That is not correct. Lower health care prices always make it possible to write an insurance policy that makes consumers better off; thus higher health care prices are never good for consumers (see Gaynor, Haas-Wilson, and Vogt 2000). 13. Direct regulation is an alternative, although that does not seem to be a likely direction for policy at present.


Although equity is not the province of antitrust, this may color public perceptions of how well markets perform in health care and, as such, may need to be addressed as part of the argument against monopoly. It is important to note that monopoly power leading to bad outcomes is not merely a theoretical notion. Extensive and convincing evidence indicates that monopoly power by hospitals leads to higher prices.14 There is also some evidence that monopoly power leads to lower-quality hospital care, although this is not as settled as the effects on price (for a survey, see Gaynor 2004). One must also understand the incidence of higher health care prices. Higher prices are like a tax on workers. How so? Higher prices by health care providers with monopoly power increase insurers’ costs. Those costs are then passed on to purchasers — mainly employers. The evidence is that employers pass increases in health insurance premiums on to workers in the form of lower wages or reduced or eliminated coverage.15 Thus, if hospitals raise their prices because of market power, those higher prices are not paid for by insurers or by employers, but by workers. Even if a not-for-profit firm with market power spends all its monopoly profits on a socially laudable goal — say, care for poor children — this comes with the usual deadweight loss due to monopoly. Further, the hospital is not in reality acting like Robin Hood. The profits that pay for care for poor kids are not coming from the rich, but from workers at firms that provide health insurance. As a result of the exercise of monopoly power, those workers will now be earning lower wages, have reduced health insurance benefits (including the possibility of no insurance), or both. Poor workers are those most likely to be marginal and lose their health insurance. They are also those hardest hit by wage reductions. For-profit firms are not allowed to defend themselves against antitrust violations by presenting evidence that their monopoly profits are spent on good deeds. We do not allow grocery stores to collude on the condition that they spend their monopoly profits by giving away food to the poor. There seems no logical reason why not-for-profit firms should be treated any differently.16 14. See, for example, Dranove and Satterthwaite (2000); Gaynor and Vogt (2000, 2003); Capps, Dranove, and Satterthwaite (2003). 15. See Goldman, Sood, and Leibowitz (2005) and Baicker and Chandra (2005) for recent evidence. Goldman, Sood, and Leibowitz find that about two-thirds of health insurance premium increases are paid for by lower wages and the remaining third by reduced benefits. Baicker and Chandra find that a one dollar increase in health insurance premiums reduces wages by one dollar. 16. Carlton, Bamberger, and Epstein (1995) argue that attaining social goals can be a defense for collusion by not-for-profits, but only if the collusion does not restrict output or increase prices.


A response to this argument might be that firms in health care markets are not constituted in the same way as firms in most other markets. In particular, health care firms are organized in ways that restrain the incentive to exploit market power at the expense of consumers. Most hospitals are organized as not-for-profit firms, presumably reducing the ability to benefit from the exercise of market power. The relevant question, however, is not whether hospitals are organized differently than firms in other industries, but whether these differences will cause hospitals not to exploit monopoly power when given the opportunity. Consider a not-for-profit firm. Economic models of these firms’ behavior are varied, but they basically consist of the firm maximizing a utility function subject to a constraint that profits be nonnegative (see Lakdawalla and Philipson 1998; Gaynor and Vogt 2000). The arguments of the utility function can be quantity, quality, charity care, or other factors. Regardless of the things that the firm cares about, it can obtain more of them when its profits are higher. This means that a not-for-profit firm has a direct incentive to exploit market power.17 What about the evidence? There is ample empirical evidence from econometric research that hospitals exercise monopoly power. The bulk of the research evidence (and the most recent evidence) is that not-for-profit hospitals do not behave differently from for-profits in regard to exercising market power (Gaynor and Vogt 2000, 2003).18 Further, this is one of the most active areas of antitrust enforcement (see FTC 2004a). My conclusion is that the federal antitrust enforcement agencies have to make the case for antitrust enforcement in health care. To do this, it is not necessary to make the case that competition is socially optimal in health care. All that is necessary is to make the case that monopoly power is worse than the alternative. This is a relatively weak criterion to be met to justify the use of antitrust in health care. Since it is relatively weak, it does not require an assessment of the virtues of the market versus government and can thus be broadly supported. I believe that this case does need to be made, and convincingly, if the antitrust authorities want to reverse the contemporary trend of losses in court.

17. See Philipson and Posner (2000) for an extensive discussion of the application of antitrust to not-for-profit firms. Philipson and Posner point out that the consumer harm caused by the exercise of monopoly power is actually higher if the firm is not-for-profit. 18. For exceptions, however, see Lynk (1995); Lynk and Neumann (1999).


Is Countervailing Power a Good Idea?

Countervailing power is an issue that has come to the fore in health care antitrust. Managed care organizations have negotiated aggressively with physicians to obtain price reductions. Physicians have contended that this ability to negotiate aggressively is due to health plans’ market power as buyers (that is, monopsony power). Physicians have explicitly asked for legislative exemption from the antitrust laws in order to bargain collectively with insurance companies. The justification is to increase their bargaining ability with insurers over reimbursements and over the provision of appropriate care for patients.19 The reason such an exemption is necessary is that such collective bargaining amounts to price fixing, which is per se illegal.20 There are, however, some circumstances in which the courts have allowed collusive agreements to be judged under a rule-of-reason standard. The American Society of Composers, Authors, and Publishers (ASCAP) and Broadcast Music, Inc. (BMI) are collectives to which music composers belong. They license the performance rights to songs composed by their members. The Supreme Court ruled that price fixing by ASCAP and BMI was not per se illegal (Broadcast Music, Inc. v. Columbia Broadcasting System, Inc., 441 U.S. 1 [1979]) because it found that joint pricing was necessary for a valuable product to be sold and to realize scale economies.21 Toyota and General Motors (GM) were allowed to collaborate to set the price for an automobile that they produced as a joint venture. Here the collaboration on pricing was necessary for the joint venture to occur. These exceptions to the per se rule occur (and they are rare) when courts are persuaded that the restraint on trade is “reasonably necessary” to achieve significant social benefits. This also seems like a reasonable framework for thinking about the advisability of a legislative exemption. One might ask whether there is reason to think that there may be bene fits to society from independent physician practices being granted an antitrust exemption and, if so, whether those benefits are of sufficient magnitude to justify such an exemption. Part of the argument for an antitrust exemption is that insurers have grown so large that they exercise monopsony power, and physicians 19. See, for example, Darrah (2003). 20. Industry exemptions from antitrust are rare. Collective bargaining by labor unions is exempted from the antitrust laws, but subject to specific regulations. Professional baseball is exempt due to a 1922 decision by the Supreme Court. 21. The case was remanded to the court of appeals, which found that the arrangements did not violate antitrust law.


Table 2 Insurance Market Concentration, 2001 – 2003 Year 2001 2002 2003

Median HHIa

Changeb

2,768 — 2,479 –289 3,154 675

Mean HHI

Change

3,196 — 3,026 –170 3,593 567

Source: InterStudy Publications, Atlantic Information Services (AIS), Inc., as published in American Medical Association (2002, 2003, 2004) a Herfindahl-Hirschmann Index b Change from the previous year

need to be able to bargain collectively to exercise countervailing power. Decreased physician reimbursements are no reason for antitrust concern, per se. Insurers can engage in hard bargaining with physicians that can make subscribers better off through reduced premiums. If insurers possess monopsony power, however, then they may push reimbursements so low that physicians supply less than the socially optimal quantity or quality of services. Collective bargaining to increase reimbursements can benefit patients by restoring physician reimbursements to levels that support optimal quantity or quality. Physicians may also be able to bargain directly with insurers over care for their patients, although it is not clear that the only, or best, way to achieve this is via an antitrust exemption for collective bargaining over reimbursements. Table 2 displays information on concentration in the health insurance market for the years 2001 – 2003. This information should be interpreted with some caution. The data are for health maintenance organization (HMO) and preferred provider organization (PPO) plans only and are measured at the state level. To the extent that non-HMO or PPO insurers are important in some markets,22 or that the appropriate geographic market is different than a state, these numbers may not accurately measure health insurance market concentration. The values of the HHIs paint a consistent picture. By these measures, health insurance markets in the United States appear to be highly concentrated, although not as concentrated as hospital markets. It appears as though insurance markets became more concentrated between 2001 and 2003.23 22. It is important to note that these data do not include self-insured plans. Further, the ability of employers to switch to self-insurance is like a threat of entry, thus possibly making some markets more competitive than their concentration levels might seem to indicate. 23. I should again urge caution in interpreting these numbers. As noted in the report (FTC/ DOJ 2004, chap. 6.B), there is significant disagreement about the extent of competition in health insurance markets.


However, concentration in the output market does not necessarily indicate concentration in the input market. For example, a local market for groceries may be monopolized by a supermarket firm. That does not mean, however, that the supermarket has market power as a buyer (monopsony power) in the local labor market. There may be many other buyers of labor so that the labor market is competitive. This is also relevant with regard to health insurance. Private health insurers are not the only buyers of physician services. Medicare is a very large buyer, probably the largest buyer in many markets. Other buyers include Medicaid, other public programs, workers’ compensation plans, self-insured plans, and the like. Thus, even if the market for selling private health insurance is concentrated, that does not necessarily translate into concentration, let alone market power, for health insurers as buyers of physician services. The upshot is that it is not at all clear that private health insurers systematically possess monopsony power as buyers in markets for physician services.24 Even if health insurers do possess monopsony power in some markets for physician services, allowing physicians to acquire monopoly power in an attempt to counteract insurers’ market power is a bad idea. Why is this the case? The best response to market power on one side of a market is to remove it. If health insurers possess market power as buyers of physician services in some markets, then the enforcement agencies should prosecute them.25, 26 This is clearly the best solution if, and where, monopsony power by health insurers exists. However, suppose there is market power on one side of the market, and that cannot be altered. Is it socially beneficial to allow increased market power on the other side of the market? The answer is no, in general. There are some situations in which allowing bilateral market power improves matters and some situations in which it makes things worse.27 24. Medicare is the single largest buyer of physician services. It most likely has monopsony power, although it is not clear whether it uses it. 25. Of course, it is not illegal simply to possess market power. However, it is unlikely that there would be many cases where health insurers would possess monopsony power without having violated antitrust law. I should also point out that insurers are not exempt from antitrust enforcement. The McCarran-Ferguson Act allows insurers to engage in certain collective activities to produce insurance more efficiently, for example, by sharing actuarial information. That exemption does not extend to pricing or other anticompetitive activities. 26. The enforcement agencies did prosecute the Aetna-Prudential merger, forcing divestiture in the Dallas and Houston markets. 27. It can make things better if the countervailing power allows the possibility of reaching a cooperative bargaining outcome. It can make things worse, however, if the only way for the cartel to exercise market power is by restricting quantity.


Let us recall the circumstances in which courts have been willing to relax per se illegality for joint pricing. It must be demonstrated that there are substantial efficiencies and they can best be obtained via joint pricing. This is essentially the case for a legislative exemption as well. It makes sense only if allowing that the joint conduct will improve things for society as a whole, and the joint conduct is the best way to achieve this improved state of affairs. As I have already indicated, it is far from obvious that there is a monopsony problem and, even if there is, that increasing physicians’ market power is the right way to deal with it. Last, the historical record doesn’t indicate that trusting physicians to use market power in their patients’ interest is warranted. There is a long history of attempts by physicians to exercise market power for economic self-interest. Physician practices and organized medicine have a history of multiple antitrust convictions and consent decrees dating back to the 1940s. Under these circumstances, a blanket antitrust exemption for physicians to acquire market power is ill advised. Conclusions

Antitrust enforcement in health care has been subject to enormous challenges in the past decade. The 2004 report by the Federal Trade Commission and the Department of Justice is a response to those challenges. In this piece, I reviewed some of the key issues confronting antitrust enforcement in health care. My basic conclusion is that health care is both unlike and like a generic conventional market, such as storage tanks for liquefied gases. Health care is an industry with its unique attributes. In this sense, it differs substantially from storage tanks for liquefied gases. However, nothing about the specifics of the health care industry suggests that the unregulated use of market power in this industry is socially beneficial. As a consequence, the antitrust laws should be enforced here as in the market for liquefied-gas storage tanks and any other industry. The research literature supports the antitrust presumption that monopoly power harms consumers in the health care market. Research also indicates that not-for-profit hospitals will exercise market power to the detriment of consumers. As a consequence, a heavy burden of proof should be on those who want to make contentions to the contrary. Although a great deal of fuss has been made over insurer monopsony power, it is not clear that this is a significant issue. Even if it is, active enforcement in insurance markets is the correct response, not blanket exemptions for providers.


By issuing their recent report, the FTC and the DOJ have renewed their commitment to combat monopoly power judiciously in health care. This is as it should be. Pains, however, have to be taken to make the case to judges and juries on this point. This is an important task. Monopoly power in health care and health insurance markets is a critical issue for health policy.

References American Medical Association (AMA). 2002. Competition in Health Insurance: A Comprehensive Study of U.S. Markets. 2nd ed. Chicago: AMA. ———. 2003. Competition in Health Insurance: A Comprehensive Study of U.S. Markets. 3rd ed. Chicago: AMA. ———. 2004. Competition in Health Insurance: A Comprehensive Study of U.S. Markets. 4th ed. Chicago: AMA. Baicker, K., and A. Chandra. 2005. The Labor Market Effects of Rising Health Insurance Premiums. National Bureau of Economic Research Working Paper No. 11160. Cambridge, MA: NBER. Capps, C., D. Dranove, and M. Satterthwaite. 2003. Competition and Market Power in Option Demand Markets. RAND Journal of Economics 34: 737 – 763. Carlton, D. W., G. E. Bamberger, and R. J. Epstein. 1995. Antitrust and Higher Education: Was There a Conspiracy to Restrict Financial Aid? RAND Journal of Economics 26: 131 – 147. Darrah, J. M. 2003. Statement to the Federal Trade Commission and Department of Justice Hearing on Health Care Competition Law and Policy, Re: Perspectives on Competition Policy and the Health Care Marketplace. Chicago: American Medical Association. Dranove, D. D., and M. A. Satterthwaite. 2000. The Industrial Organization of Health Care Markets. In Handbook of Health Economics, ed. A. Culyer and J. Newhouse, 1094 – 1139. New York: Elsevier Science. Federal Trade Commission (FTC). 2004a. FTC Antitrust Actions in Health Care Services and Products. Washington, DC: FTC. ———. 2004b. Horizontal Merger Investigation Data, Fiscal Years 1996 – 2 003. Revised August 31. Washington, DC: FTC. Federal Trade Commission/Department of Justice (FTC/DOJ). 1992. Horizontal Merger Guidelines. Issued April 2, 1992; revised April 8, 1997. Washington, DC: FTC/DOJ. ———. 2004. Improving Health Care: A Dose of Competition. Washington, DC: FTC/DOJ. www.usdoj.gov/atr/public/health_care/204694.htm#toc. Gaynor, M. 2004. Competition and Quality in Health Care Markets: What Do We Know? What Don’t We Know? Économie Publique 15(2): 3 – 40.


Gaynor, M., D. Haas-Wilson, and W. B. Vogt. 2000. Are Invisible Hands Good Hands? Moral Hazard, Competition, and the Second Best in Health Care Markets. Journal of Political Economy 108: 992 – 1005. Gaynor, M., and W. B. Vogt. 2000. Antitrust and Competition in Health Care Markets. In Handbook of Health Economics, ed. A. Culyer and J. Newhouse, 1405 – 1487. New York: Elsevier Science. ———. 2003. Competition among Hospitals. RAND Journal of Economics 34: 764 – 785. Goldman, D., N. Sood, and A. Leibowitz. 2005. Wage and Benefit Changes in Response to Rising Health Insurance Costs. National Bureau of Economic Research Working Paper No. 11063. Cambridge, MA: NBER. Jaklevic, M. 2002. Tired Trend. Modern Healthcare 32(26): 10. Lakdawalla, D., and T. Philipson. 1998. Nonprofit Production and Competition. National Bureau of Economic Research Working Paper No. 6377. Cambridge, MA: NBER. Lynk, W. 1995. Nonprofit Hospital Mergers and the Exercise of Market Power. Journal of Law and Economics 38: 437 – 461. Lynk, W., and L. Neumann. 1999. Price and Profit. Journal of Health Economics 18: 99 – 105. Philipson, T., and R. Posner. 2000. Anti-trust Policy for the Non-profit Sector. National Bureau of Economic Research Working Paper No. 8126. Cambridge, MA: NBER. Pitofsky, R. 2001. Challenges of the New Economy: Issues at the Intersection of Antitrust and Intellectual Property. Antitrust Law Journal 68: 913 – 924. Posner, R. 2001. Antitrust in the New Economy. Antitrust Law Journal 68: 925 – 944. Schlesinger, M. 2004. Reprivatizing the Public Household? Medical Care in the Context of American Public Values. Journal of Health Politics, Policy and Law 29: 969 – 1004. Schlesinger, M., S. Mitchell, and B. Gray. 2004. Public Expectations of Nonprofit and For-Profit Ownership in American Medicine: Clarifications and Implications. Health Affairs 23: 181 – 191.