October 20, 2011

The Honorable Lamar Smith Chairman Committee on the Judiciary U.S. House of Representatives Washington, D.C. 20515 The Honorable John Conyers, Jr. Ranking Member Committee on the Judiciary U.S. House of Representatives Washington, D.C. 20515

Re:

H.R. 1409, H.R. 1839, and H.R. 1946: Antitrust Exemptions to Legalize Collusion Among Health Care Providers

Dear Chairman Smith and Ranking Member Conyers: I write on behalf of the Section of Antitrust Law of the American Bar Association (the Antitrust Section or Section) to present the Sections views on three recent bills. Each would address concerns in the health-care sector through legalized cartelsthey would permit health-care providers to negotiate collectively with insurers and group health plans. They are the Quality Health Care Coalition Act of 2011, H.R. 1409, the Preserving Our Hometown Independent Pharmacies Act of 2011, H.R. 1946, and the Community Pharmacy Fairness Act of 2011, H.R. 1839. The views expressed here are those of the Section of Antitrust Law and have been approved by the Sections governing Council. They have not been approved by the American Bar Association House of Delegates or Board of Governors, and accordingly, should not be construed as representing the position of the American Bar Association. The Section believes that any decision to allow an exemption or immunity from the antitrust laws should be made reluctantly and only after thorough consideration of each particular situation. The inquiry with respect to exemptions and immunities should focus narrowly on the fundamental principles and objectives of antitrust law, namely promoting competition and consumer welfare. Exemptions and immunities should be recognized as decisions to sacrifice competition and consumer welfare, and should

accordingly be authorized only when some countervailing valuesuch as free speech or national securitysignificantly outweighs the general presumption in favor of competitive markets. The Antitrust Section frequently has noted its opposition to industry-specific exemptions and immunities from the antitrust laws based on claims that such protection is necessary given unique market conditions, believing that the antitrust laws are sufficiently flexible to account for particular market circumstances. The Sections general opposition to exemptions and immunities was endorsed by the 2007 report of the Congressionally-mandated Antitrust Modernization Commission (AMC). The AMC concluded that statutory immunities from the antitrust laws should be disfavored and that [t]hey should be granted rarely, and only where, and for so long as . . . is necessary to satisfy a specific societal goal that trumps the benefit of a free market to consumers and the U.S. economy in general. 1 The Section recommends that exemption and immunity decisions by Congress be based on four basic principles. First, Congress should grant antitrust exemptions and immunities rarely and only after rigorous consideration of the impact of the proposed exemption or immunity on consumer welfare. Second, Congress should only grant those exemptions and immunities that are drafted narrowly, so that competition is reduced only to the minimum extent necessary to achieve the intended goal. Third, Congress should enact antitrust exemptions and immunities only when the proposed exemption or immunity achieves a Congressional goal that significantly outweighs the aims of the antitrust laws in a particular situation. Finally, the Section proposes that no exemption or immunity should be granted or renewed unless it contains a sunset provision. These bills fail to meet the Sections principles, and they will be ineffective and harmful. They reflect an alarming trend at the federal and state levels: they are part of a (so far largely unsuccessful) movement for legislation to address health care market problems through further anticompetitive measures, despite vigorous opposition by the federal enforcement agencies,2 the Section, 3 and others. They will not meaningfully improve the health care sector, and will only increase prices and impede service for consumers. The Section opposes these bills and respectfully urges Congress to reject them.

ANTITRUST MODERNIZATION COMMN, REPORT AND RECOMMENDATIONS 350, Recommendation 57 (2007) (hereinafter AMC REPORT). 2 See, e.g., Letter from Susan S. DeSanti, Dir., Office of Policy Planning, FTC, et al. to Sen. Eric D. Coleman, Conn. Gen. Ass., et al. (June 8, 2011), available at www.ftc.gov/os/2011/06/110608chc.pdf; Letter from Susan S. DeSanti, Dir., Office of Policy Planning, FTC, et al. to Rep. Elliott Naishtat, Tex. H.R. (May 18, 2011), available at www.ftc.gov/os/2011/05/1105texashealthcare.pdf. 3 See Section of Antitrust Law, ABA, Report on The Quality Health-Care Coalition Act of 1999 (Dec. 17, 1999), available at http://www.americanbar.org/content/dam/aba/administrative/antitrust_law/report_campbell99. authcheckdam.pdf.

I. The Bills In effect, each of H.R. 1409, H.R. 1946, and H.R. 1839 (collectively, the Health Bills) would allow competing health-care providers to join together to agree on price and service terms. Their stated purpose is to increase the providers bargaining power vis--vis issuers and group health plans: Currently, the insurance industry, including health care insurance companies, is immune from federal antitrust laws under the McCarran Ferguson Act. In contrast, health care providers can presently be prohibited from collectively negotiating against insurance companies. Accordingly, the playing field is terribly unbalanced. 4 The three bills differ in some of their details, but their goals and their general approaches are the same. The Quality Health Care Coalition Act (QHCCA) would create a new exemption from the federal antitrust laws 5 for collective negotiation with payors. 6 The operative provision of the QHCCA, section 2(a), states in full: Any health care professionals who are engaged in negotiations with a health plan regarding the terms of any contract under which the professionals provide health care items or services for which benefits are provided under such plan shall, in connection with such negotiations, be exempt from the Federal antitrust laws. The QHCCA contains a limitationit creates no new right to participate in any collective cessation of service to patients not already permitted by existing law. 7 Unless health-care providers are already allowed to do so, in other words, they could not collectively refuse to treat patients if an insurance issuer or group health plan refuses to agree to a contract term proposed by the providers. Regardless, the bill would still totally and permanently exempt from the antitrust laws conduct that the

157 CONG. REC. E661 (daily ed. Apr. 7, 2011) (statement of Ranking Member Conyers in support of the Quality Health Care Coalition Act). The McCarranFerguson Act is codified at 15 U.S.C. 1011-1015. 5 There is an apparent conflict between the QHCCAs definition of antitrust laws in 3(1) which expressly includes state antitrust lawsand the exemption provided for in 2(a)which refers to Federal antitrust laws. (Emphasis added.) It is unclear why antitrust laws is defined to include state law, because the only substantive provision of the bill is the exemption from federal antitrust laws in 2(a). 6 The exemption would apply to health-care providers negotiations with either a state-regulated health-insurance issuer or an ERISA-regulated group health plan. See id. 3(9) (defining health plan as a group health plan or a health insurance issuer that is offering health insurance coverage); id. 3(2) (defining group health plan as an employee welfare benefit plan to the extent that the plan provides medical care . . . to employees or their dependents . . . directly or through insurance, reimbursement, or otherwise); id. 3(7) (defining health insurance issuer as an insurance company, insurance service, or insurance organization . . . that is licensed to engage in the business of insurance in a State and that is subject to State law regulating insurance). 7 Id. at 2(b)(1).

U.S. Supreme Court considers so dangerous that it remains per se illegal. See Arizona v. Maricopa County Medical Society, 457 U.S. 332 (1982). The two pharmacy billsH.R. 1839 and H.R. 1946are largely identical. They would reach the same practical result as the QHCCA, though they do so by more or less explicitly invoking the so-called labor exemption from antitrust, a rule that permits collective bargaining by employees. Both bills permit smaller pharmacies 8 to negotiate collectively with insurers and group health plans, and in effect to enjoy the same broad immunity from antitrust 9 that unions enjoy when they negotiate with employers. Only two meaningful differences distinguish the two pharmacy bills. First, the version of 2(a) contained in H.R. 1839 explicitly invokes the National Labor Relations Act, presumably to avoid what might otherwise be judicial confusion under H.R. 1946 (which invokes the labor exemption rather vaguely, by referring only to employee status). Second, H.R. 1839 would legalize provider cartels even as to some federal insurance programs (specifically, Medicare Parts C and D). 10 Both bills contain some limitations, including a limit of the exemption to collaboratives with 25% or less of the pharmacy licenses outstanding in a relevant region, 11 and a five-year sunset provision. 12 They also both limit the exemption so that no collaborative group could engage in additional anticompetitive activity beyond the expected conduct, i.e., price-fixing by independent pharmacies, boycotts of non-participating pharmacies, market allocations, or monopolization. 13 The QHCCA contains no similar substantive limitations. II. The Health Bills Are Not Justified and Congress Should Reject Them A. All Exemptions From Antitrust Are Disfavored, Across the Political Spectrum If there is consensus in antitrust about any one issue, it is that exemptions, immunities, and other limitations on its scope are rarely justified. Every one of the many official, blue-ribbon antitrust study panels set up during the past several decadeswhether set up by Republican or Democratic administrations or by

Both bills protect only independent pharmacies, defined to include only those with market shares of less than 10% of a specified local market and less than 1% in the United States. H.R. 1839, 2(i)(3); H.R. 1946, 2(i)(3). 9 Strictly speaking, the pharmacy bills contain an ambiguity similar to that in the QHCCAthey both define the antitrust laws to include federal and state law, but by only invoking the federal labor exemption they invite at least some ambiguity as to whether and to what extent state laws would still apply. Presumably, however, these bills would be construed to preempt state laws to the same extent that federal labor law preempts state laws that would frustrate collective bargaining by traditional unions. 10 H.R. 1839, 2(h); compare H.R. 1946 2(h)(7). 11 H.R. 1839, 2(f); H.R. 1946, 2(f). 12 H.R. 1839, 2(j); H.R. 1946 2(j). 13 H.R. 1839, 2(e); H.R. 1946, 2(e).

Congresshave called for their repeal or restriction. 14 The enforcement agencies have agreed, whether under control of either party, 15 and the strong trend overseas has been to repeal antitrust limitations and expand the scope of antitrust. 16 The courts also agree. Even when Congress provides explicit exemptions, the courts read them narrowly. 17 The Section is aware of no studies or analyses considering the impact of these Health Bills on consumer welfare. B. The Health Bills Are Substantively Flawed: The Only Problem Identified Is Itself the Result of an Antitrust Exemption, and Legalized Collusion as a Solution Only Introduces Bilateral Monopoly Complications The Health Bills are said to be needed because the McCarran-Ferguson Act tips the scales in favor of insurers. 18 But for two major reasons, this justification is unavailing. First, attempting to level negotiating leverage does not justify further intrusion into the competitive process. Exemptions from the antitrust laws should not be enacted for the purported goal of promoting competition and consumer welfare; the existing antitrust laws are flexible enough to protect those values. Here, for example, antitrust law already allows health-care providers to collaborate in ways that are procompetitive and that benefit consumers. 19 Competing providers may even enter into

See ANTITRUST MODERNIZATION COMMN, supra note 1, at 338; 1 NATL COMMN FOR THE REVIEW OF ANTITRUST LAW AND PROCEDURES, REPORT TO THE PRESIDENT AND THE ATTORNEY GENERAL 177-316 (1979); REPORT OF THE TASK FORCE ON PRODUCTIVITY AND COMPETITION, reprinted at 115 CONG. REC. 15933, 15934, 15937 (June 16, 1969); REPORT OF THE WHITE HOUSE TASK FORCE ON ANTITRUST POLICY, reprinted at 115 CONG. REC. 13890, 13897 (May 27, 1969); ATTORNEY GENERALS COMMITTEE TO STUDY THE ANTITRUST LAWS, REPORT 269 (1955). 15 Compare Statement of Christine A. Varney, Asst. Atty. Gen., Before the Committee on the Judicial, U.S. Senate, Concerning Prohibiting Price Fixing and Other Anticompetitive Conduct in the Health Insurance Industry, (Oct. 14, 2009), available at http://www.justice.gov/atr/public/ testimony/250917.htm (urging repeal of antitrust immunity for health insurance), with Statement of Charles A. James, Asst. Atty. Gen., Before the Committee on the Judiciary of the U.S. House of Representatives, Concerning H.R. 1253, The Free Market Antitrust Immunity Reform Act of 2001 (June 5, 2002), available at http://www.justice.gov/atr/public/ testimony/11244.htm (urging repeal of immunity for ocean shipping). 16 See, e.g., Commission Regulation (EU) No. 267/2010, 2010 O.J. (83) 1 (narrowing the European Commissions antitrust exemption for collaborations among insurance companies); Council Regulation (EC) No. 246/2009, 2009 O.J. (79) 1 (repealing European Commissions exemption for cartels among ocean shipping firms). 17 See Union Lab. Life Ins. Co. v. Pireno, 458 U.S. 119, 126 (1982) (our precedents consistently hold that exemptions from the antitrust laws must be construed narrowly). Group Life & Health Ins. Co. v. Royal Drug Co., 440 U.S. 205, 231 (1979) (It is well settled that exemptions from the antitrust laws are to be narrowly construed.). 18 See 157 CONG. REC. E661 (daily ed. Apr. 7, 2011) (statement of Ranking Member Conyers); see also Letter from Michael D. Maves, Exec. Vice Pres. & CEO, Am. Med. Assn, to the Honorable John Conyers, Jr., U.S. House of Rep. (Apr. 19, 2011), available at www.ama-assn.org. 19 See DOJ & FTC, Statements of Antitrust Enforcement Policy in Health Care (Aug. 1996), available at www.justice.gov/atr/public/guidelines/0000.htm; see also DOJ & FTC, Proposed Statement of Antitrust Enforcement Policy Regarding accountable Care Organizations Participating in the Medicare Shared Savings Program, 76 Fed. Reg. 21894 (Apr. 19, 2011); FTC, Prepared Statement of the

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what amount to joint price agreements, so long as they are reasonably necessary to create efficiencies. 20 In many circumstances the Health Bills would undercut what antitrust already allows, as they would encourage competing providers to collude without regard to whether it would achieve any new efficiencies, improved patient care, or any other benefits. Second, price-fixing among providers is known to harm consumers. The evidence is that provider cartels lead to higher reimbursement rates and higher insurance premiums for consumers. 21 This result is just as likely in those markets in which payor market power is a genuine problem, as in markets in which payors lack market power: legalized collusion can introduce bilateral monopoly. Where a market is dominated on each side by a powerful seller and a powerful purchaser, there is little incentive to reduce prices for consumers. Rather, the seller and purchaser can simply divide between them whatever surplus can be extracted from consumers through their combined market power. 22 C. The Antitrust Exemptions in the Health Bills Are Not Narrowly Tailored Aside from their likely ineffectiveness and consumer harm, each of these bills is substantially overbroad. The QHCCA would have a particularly egregious effect. It grants an antitrust exemption to all corporate and individual health-care providers, regardless of their size or market share. It would also apply to every health-care market in the countryeven those markets that are operating competitively and efficiently. And because the QHCCA has no sunset provision, its exemption would continue indefinitely. Further, the Act is not tailored to permit only those collective negotiations that would be pro-competitive. It exempts virtually all collective negotiation; subject to narrow exceptions, it would authorize joint boycotts, price fixing, and other nakedly anticompetitive conduct. The pharmacy bills, while containing some limits discussed above, are likewise substantially overbroad. Importantly, none of the three Health Bill exemptions depends at all on whether the payor in question holds market power.
Federal Trade Commission on Antitrust Enforcement in the Health Care Industry 11 (Dec. 1, 2010), available at www.ftc.gov/opa/2010/12/antitrusthc.shtm. 20 See All Care Nursing Serv. v. High Tech Staffing Serv., 135 F.3d 740 (11th Cir. 1998) (rejecting antitrust claims challenging joint bidding and contracting program to facilitate hiring of temporary nurses by twelve competing hospitals); Levine v. Cent. Fla. Med. Affiliates, 72 F.3d 1538 (11th Cir. 1996). 21 See, e.g., FTC, Press Release, FTC Settlement Order Bars Texas Doctors Group from Joint Price Negotiations (May 10, 2011), available at www.ftc.gov/opa/2011/05/southwest.shtm; FTC, OVERVIEW OF FTC ANTITRUST ACTIONS IN HEALTH CARE SERVS. & PRODS. 21 (Mar. 2011), available at www.ftc.gov/bc/healthcare/antitrust/hcupdate.pdf (describing, among other things, an action against Minnesota Rural Health Cooperative in which competing hospitals, physicians, and pharmacies . . . agreed to fix prices and collectively negotiate contractsincluding price termswith third party payers, which resulted in the extraction of higher payments and other favorable price-related terms from payers). 22 See ROGER D. BLAIR & JEFFREY L. HARRISON, MONOPSONY IN LAW AND ECONOMICS 123-41 (2011).

Finally, while the Health Bills aim to empower providers who must negotiate with McCarran-protected insurers, they would exempt those providers in all cases, regardless of whether or not the opposing payors are exempt from the antitrust laws under McCarran-Ferguson. In quite a number of situations covered by the Health Bills, the payor might not actually be covered by McCarran-Ferguson. This might be because the services being contracted for are not within the business of insurance, as required by McCarran-Ferguson, 23 or because the payor is not an entity that can enjoy McCarran immunity. 24 * * *

The Health Bills fail to meet the Sections proposed standards for granting a new exemption or immunity from the federal antitrust laws, and the Section therefore opposes them. The Health Bills cite, and the Section is aware of, no studies or analyses that would reflect rigorous consideration of the impact of the proposed exemption or immunity on consumer welfare. The lack of analysis leads to the inevitable conclusion that the Health Bills will not achieve a Congressional goal that significantly outweighs the aims of the antitrust laws. Further, as described above, the Health Bills are not drafted narrowly so that competition would be reduced only to the minimum extent necessary to achieve the intended goal. And finally, the QHCCA contains no sunset, meaning that its exemption likely would be with us forever. The Section therefore opposes the Health Bills. The Section greatly appreciates your consideration of these comments.

Sincerely,

Richard M. Steuer Chair, Section of Antitrust Law Cc: Members of the House Judiciary Committee

See Group Life & Health Ins. Co. v. Royal Drug Co., 440 U.S. 205, 215-17 (1979) (holding that a health-insurance companys contract for pharmacy services was not the business of insurance and thus was not McCarran-protected). 24 For example, the bills provide immunity for joint negotiations with group health plans in addition to other payors. But some group health plans will qualify as self-funded employee benefit plans under the ERISA statute, and therefore they will be exempt from most state regulation. The McCarran-Ferguson Act applies only to conduct that is regulated by state law. And so, while the law is as yet unclear, negotiations with these plans could be held to enjoy no antitrust immunity under McCarran-Ferguson. In that case, the bills would immunize providers negotiating with group health plans that themselves cannot collude.

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