applies. Antitrust and Competition in Health Care

ANTITRUSTANDCOMPETITIONINHEALTHCAREMARKETS*ChapterpreparedfortheHandbookofHealthEconomicsAnthonyJ.CulyerandJosephP.Newhouse,Editors,Amsterdam:North-Holland.MartinGaynorH.JohnHeinzIIISchoolofPolicyandManagementCarnegieMellonUniversityPittsburgh,PA15213-3890Tel.:[phone]Fax:[phone]e-mail:[e-mail]:~mgaynorWilliamB.VogtH.JohnHeinzIIISchoolofPolicyandManagementCarnegieMellonUniversityPittsburgh,PA15213-3890Tel.:[phone]Fax:[phone]e-mail:[e-mail]1stDraft:June29,19982ndDraft:December17,19983rdDraft:April4,1999ThisVersion:April30,1999______________________________*WegratefullyacknowledgesupportfromtheRobertWoodJohnsonFoundationandfromtheNationalBureauofEconomicResearch.WewishtoacknowledgeDeborahHaas-Wilsonformanyextensiveconversationsanddiscussionsthatwereinstrumentalinhelpingtoframemuchofthematerialinthischapter.ThanksalsogotoBobBerenson,BobBloch,DavidDranove,WinandEmons,RogerFeldman,TedFrech,MarkPauly,JoeNewhouse,TomPhilipson,CarolPropper,BillSage,MarkSatterthwaite,MikeScherer,andDennisYao.Theusualcaveatapplies.AntitrustandCompetitioninHealthCareMarketsMartinGaynorandWilliamB.VogtABSTRACTInthischapterwereviewissuesrelatingtoantitrustandcompetitioninhealthcaremarkets.Thechapterbeginswithabriefreviewofantitrustlegislation.Wethendiscusswhetherandhowhealthcareisdifferentfromotherindustriesinwaysthatmightaffecttheoptimalityofcompetition.Thechapterthenfocusesonthemainareasinwhichantitrusthasbeenappliedtohealthcare:hospitalmergers,monopsony,andforeclosure.Ineachofthesesectionswereviewtherelevantantitrustcases,discusstheissuesthathaveariseninthosecases,andthenreviewtherelevanteconomicsliteratureandsuggestsomenewmethodsforanalyzingtheseissues.JELCodes:I11,L40,L44,L12,L13,L31,D2111.IntroductionTheU.S.healthcaresystemisorganizedaroundmarkets.1Therehas,however,beenongoingconcernaboutthefunctioningofthesemarkets,somuchsothatsomehavedespairedofthesemarketsworkingatall.Thepolicyresponsetothisconcernhasbeendisjointed.Healthcaremarketsaresubjecttomanyregulationsandinterventions.Someofthesepolicieshaveattemptedtosubstituteregulationforcompetition,regulatingentryandinvestment(certificateofneedlaws,healthplanning)orprice(all-payerregulation).Atthesametime,healthcaremarketshavebeensubjecttoantitrustenforcement.Recentyearshaveseenashiftawayfromregulatorypoliciesandtowardcompetition.Antitrustpolicytowardshealthcaremarketshasbecomemuchmorevigoroussincetheearly1970s.Antitrustisintendedtoensuretheefficientfunctioningofthesemarkets.Asaconsequence,competitionandantitrustpolicyhavebecomeprominentissuesinU.S.healthpolicy.Economicresearchisvitaltoaddressingissuesofcompetitionandantitrustinhealthcare.Thisincludesissuesofmarketdefinitionanddetectinganti-competitiveconduct.Inruleofreasoncases,wherebenefitsareweighedagainstcosts,itincludesmeasuringthelossofconsumerwelfareresultingfromaparticularpracticeagainstanygainsinconsumerwelfareresultingfromit.Inthischapterweconsiderresearchissuesintheanalysisofcompetitionandtheapplicationofantitrusttohealthcaremarkets.2Weoutlineourviewsontheanalyticalissuesandreviewtherelevantliteraturesbothfromhealtheconomicsandindustrialorganizationandantitrustgenerally.Ourfocusismainlyonhospitalsandinteractionsbetweenhospitalsandinsurers.Thisisdue,inpart,towheretherehasbeenantitrustactivity.Physicianmarketshavebeenforthemostpartveryunconcentrated,andassuchhavenotlentthemselvestothekindsofanti-competitiveconducttheantitrustlawsprohibit.3Althoughissuesofcompetitionandantitrustinpharmaceuticalmarketsarefascinatingandimportant,theydifferinsomefundamentalwaysfrommarketsforhealthcareservices,andassuch,weexcludethemfromthischapter.4Inwhatfollowswefirstprovidesomebackgroundonantitrustandhealthcare.Wethendiscussdistinctivefeaturesofthehealthcareindustry,thenproceedtohorizontalandverticalissuesinantitrust.Finally,wepresentasetofrecommendationsforfutureresearch.2.BackgroundThemajorantitruststatutesoftheUnitedStatesaretheShermanAct(1890),theClaytonAct(1914),andtheFederalTradeCommissionAct(1914).5TheShermanActprohibitsattemptstorestraintradeandattemptstomonopolize.Sections2and3oftheClaytonActprohibitpricediscrimination,tying,orexclusivedealingthatsubstantiallylessencompetitionorcreateamonopoly.Section7prohibitsmergersorothercombinationsthatcouldreasonablybeexpectedtoreducecompetitionorcreateamonopoly.TheFederalTradeCommissionActcreatedtheFederalTradeCommissionandprohibitsunfairmethodsofcompetitionwhichaffectinterstatecommerce.AnimportantlawdirectlyrelevanttohealthcareistheMcCarran-FergusonAct2(1948),whichexemptsthebusinessofinsurancefromtheantitrustlawsifregulatedbythestate(exceptingactionssuchasboycott,intimidation,orcoercion).Antitrustissuesinhealthcarehaveonlybeenanissuewheremarketsarereliedupontoalargedegreetodeterminepricesandquantities(andothercharacteristics)ofhealthcareservices.ThusantitrustenforcementhasbeenrelevantonlyintheUnitedStatesforthemostpart,sincemostothercountrieshavereliedmainlyonthepublicsectorforpriceorquantitydetermination.6Activeapp