OPPONENT TESTIMONY OF WILLIAM M. TODD
ON HB 325

January 29, 2002

INTRODUCTION

Mr. Chairman and Members of the House Insurance Committee. My name is William M. Todd and I am a partner in the law firm of Squire, Sanders & Dempsey L.L.P. For over 25 years I have concentrated my law practice on the representation of physicians, hospitals, insurers and various managed care companies, and their relationships with each other and Ohio’s business community.

At various times during my legal career, I have served as: (i) legal counsel for the Ohio State Medical Association; (ii) President of the Society of Ohio Hospital Attorneys; and, (iii) currently as general counsel for the Ohio Chamber of Commerce. In those varied capacities, I have had the opportunity to be involved in virtually every major legislative initiative involving Ohio’s health care system for the last two decades.

Today, I am appearing before you on behalf of the Coalition for Quality Health Care (the “Coalition”), a broad-based group of employers, providers, insurers and managed care organizations. The complete membership of the Coalition is set forth in an attachment to my written testimony.

Before proceeding to the specifics of my testimony, I believe that it is extremely important for the Members of the Insurance Committee to know that we are not addressing new issues. In fact, these topics have been addressed many, many times before, creating a vast body of statutes and case law governing these issues.

One specific example is the decision of the United States Supreme Court in American Medical Association v. United States, 317 U.S. 519, 63 S. Ct. 510, 87 L.Ed. 434, upholding the criminal conviction of AMA and several of its components for violation of the federal antitrust laws.
In reaching its conclusion, the Supreme Court noted:

In truth, petitioners (AMA, et al.) represented physicians who desired that they and all others should practice independently on a fee for service basis where whatever arrangement for payment each had was a matter that lay between him and his patient in each individual case of service or treatment. 317 U.S. at 332.

The issues are obviously exactly the same today as they were nearly 60 years ago. Today, as then, the antitrust laws protect consumers from the illegal activities of individuals, groups and entities that seek to bend our economy to favor their economic interests.

PART ONE – THE FEDERAL ANTITRUST LAWS

I. The Federal Antitrust Statutes
The Sherman Act, the Clayton Act, the Robinson-Patman Act and the Federal Trade Commission Act form the basis of the federal antitrust scheme. Although our focus will be on the Sherman Act, it is helpful to review the operative provisions of each act.

A. Sherman Act, Section 1.
Section 1 of the Sherman Act (15 U.S.C. §1) expressly prohibits every “contract, combination or conspiracy in restraint of trade.” Although the language of the Act indicates a ban on all such restraints of trade, the express provisions of the Section 1 have been modified by judicial interpretations.

1. The language of Section 1 was first softened by the Supreme Court in United States v. Joint Traffic Association, 171 U.S. 505, 19 S. Ct. 25, 43 L.Ed. 259 (1898). and Addyston Pipe and Steel Co. v. United States. 175 U.S. 211, 20 S. Ct. 96. 44 L.Ed. 136 (1899). These two decisions revealed that the word “every” in Section 1 really meant only naked restraints on trade and not “ancillary” restraints. In other words, the Court interpreted Section 1 as permitting the restraint of trade as long as it was secondary to a legitimate business purpose.

2. By 1911, the Supreme Court had further refined the interpretation of Section 1 to indicate that it only prohibited “unreasonable” restraints on trade. Standard Oil Co. v. United States, 221 U.S. 1, 31 S. Ct. 502. 55 L.Ed. 619 (1911).

3. In Chicago Board of Trade v. United States, 246 U.S. 231. 38 5. Ct. 242. 62 L.Ed. 683 (1918). the Supreme Court first described the “rule of reason” by which reasonableness of a restraint of trade could be measured.

Every agreement concerning trade, every regulation of trade, restrains. To bind, to restrain, is of their very essence. The true test of legality is whether the restraint imposed is such as merely regulates and perhaps thereby promote competition or whether it is such as may suppress of even destroy competition. To determine that question the court must ordinarily consider the facts peculiar to the business to which the restraint is applied; its condition before and after the restraint was imposed; the nature of the restraint and its effect, actual or probable. The history of the restraint, the evil believed to exist, the reason for adopting the particular remedy, the purpose or end sought to be attained, are all relevant facts. 246 U.S. at 238 (per Justice Brandeis).

4. Finally, in United States v. Trenton Potteries. 273 U.S. 392. 47 S. Ct. 377. 71 L.Ed 700 (1927), the Supreme Court gave us the last of the great defining concepts of Section 1 of the Sherman Act. i.e., that certain types of restraints are inherently unreasonable, and therefore, there is no need to prove anticompetitive intent or effect. These offenses, known as the per se violations, include: price fixing, horizontal division of markets, certain types of group boycotts and tying arrangements.

B. Sherman Act, Section 2.
Section 2 of the Sherman Act (15 U.S.C. §2) prohibits monopolization attempts to monopolize and conspiracies to monopolize. In short, Section 2 prohibits any deliberate effort to acquire or maintain monopoly power, or an attempt to secure such power in the relevant market. The significant limitation on the breadth of Section 2 is that market power that results from a superior product or service, business acumen or historic mischance should not be illegal. United States v. Grinnell Corp, 384 U.S. 563, 86 S. Ct. 1698, 16 L. Ed. 2d 778 (1966).

C. Clayton Act, Section 3.
Section 3 of the Clayton Act prohibits exclusive dealing arrangements, tying sales, and requirement contracts involving the sale of commodities if the effect is to substantially lessen competition. (15 U.S.C. §14).

D. Clayton Act, Section 7.
Section 7 of the Clayton Act prohibits mergers where the merger may substantially lessen competition or tend to create a monopoly (15 U.S.C. §18).

E. Robinson-Patman Act.
In general the Robinson-Patman Act makes it unlawful for a seller to discriminate in price in the sale of commodities of like grade and quality where the effect of the discrimination may be to injure, destroy or prevent competition. It also prohibits certain brokerage payments and discriminatory promotional and advertising allowances. Finally, it prohibits a buyer from knowingly inducing a price discrimination. (15 U.S.C. §13).

F. Federal Trade Commission Act.
The Federal Trade Commission Act (15 U.S.C. §45) prohibits both “unfair methods of competition” and “unfair or deceptive acts or practices.” These phrases have been interpreted to encompass all Sherman and Clayton Act violations; any restraints of trade which violates the spirit of those laws; false or misleading advertisements and representations; and any practices that are “unfair” to consumers. FTC v. Brown Shoe Co., 384 U.S. 316, 86 St. Ct. 1501, 16 L.Ed. 2d 587 (1966); FTC v. Sperry & Hutchison Co., 405 U.S. 233, 92 S. Ct. 898, 31 L.Ed. 2d 170 (1972).

II. The Per Se Offenses
As noted above, the Supreme Court has long recognized that certain types of restraints of trade are per se violations of Section 1 of the Sherman Act. In light of the fact that the per se violations constitute the greatest areas of concern, it is worthwhile to spend a little time with these old friends. In doing so; we should bear in mind the following formulation of a per se violation:

The costs of judging business practices under the rule of reason . . . have been reduced by the recognition of per se rules. Once experience with a particular kind of restraint enables the Court to predict with confidence that the rule of reason will condemn it, it has applied a conclusive presumption that the restraint is unreasonable. Arizona v. Maricopa County Medical Society. 457 U.S. 332, 343-344, 102 S. Ct. 2466. 73 L.Ed. 2d 48 (1982).

A. Price Fixing
This per se offense was clearly defined by the Supreme Court in United States v. Socony-Vacuum Oil Co., 310 U.S. 150. 60 S. Ct. 811, 84 1. Ed. 1129 (1940), as follows:

Under the Sherman Act a combination formed for the purpose and with the effect of raising, depressing, fixing, pegging, or stabilizing the price of a commodity, is illegal per se. 310 U.S. at 223.

Under the case law, it is clear that horizontal price fixing is a per se offense. E.g., Broadcast Music, Inc. v. Columbia Broadcasting System, Inc., 441 U.S. 1, 99 5. Ct 1551, 60 L.Ed. 2d 1 (1979); Matsushita Electric Industry Company, Ltd. v. Zenith Radio Corp., 475 U.S. 574, 106 S. Ct. 1348, 89 L.Ed. 2d 538 (1986). Moreover, it remains equally clear that vertical price fixing is a per se offense. Monsanto Co. v. Spray-Rite Service Corp., 465 U.S. 752, 104 S. Ct. 1462, 79 L.Ed. 2d 755 (1984).

B. Group Boycotts
Although in recent years the Supreme Court has expressed certain misgivings about the rigid application of a per se approach in the group boycott area, the concept retains vitality. Northwest Wholesale Stationers. Inc. v. Pacific Stationery and Printing Co., 472 U.S. 284. 105 S. Ct. 2613, 86 L.Ed. 2d 202 (1985). The Northwest decision has been viewed as a justification for the use of a rule of reason analysis for group boycotts that are incidental to a bona fide integration or other efficiency-enhancing arrangement. But see, Superior Court Trial Lawyers Association v. FTC, 493 U.S. 411, 110 S. Ct. 768, 107 L.Ed. 2d 851 (1990).

C. Tying Arrangements
Tying arrangements can be violations of both the Clayton Act and the Sherman Act. The difference between these two provisions is the Clayton Act applies only to the sale of commodities and not services. Northern Pacific Railway Co. v. United States, 356 U.S. 1, 78 S. Ct. 514, 2 L.Ed 2d 545 (1958). However, the standards to be applied under the Sherman Act and Clayton Act are virtually identical.

One of the most recent expressions of the per se nature of a tying arrangements was the Supreme Court decision in a health care case. Jefferson Parish Hospital District No. 2 v. Hyde, 466 U.S. 2, 104 S. Ct. 1551, 80 L.Ed 2d 2 (1984). A tying arrangement exists when a party will sell one product, the “tying” product, only if the buyer purchases a second product, the “tied” product. In Jefferson Parish the Court rejected a “quality of care” defense raised by the defendants. Moreover, despite a marked concern about the impact of a per se rule, the Court did not abandon the per se rule in this area.

D. Monopolization
Most commentators would agree that there is no per se rule against monopolization as defined in Section 2 of the Sherman Act. However, they would also agree that when firms with substantial market power collude to exclude others that there would be little need to engage in an extensive review of the anticompetitive effect or a detailed examination of the conspirators’ motives. See e.g., Aspen Skiing Co. v. Aspen Highlands Skiing Corp., 472 U.S. 585, 105 5. Ct. 2847. 86 L.Ed. 2d 467 (1985).

Ill. Defenses and Immunities from Antitrust

A. State Action Immunity
The state action immunity is based upon the idea that the Sherman Act was not intended to regulate the conduct of state governments. Accordingly, only individuals and not state governments can be scrutinized under the Sherman Act’s provisions. This immunity has been extended to protect private conduct when it is undertaken pursuant to a clearly articulated state policy to displace competition with regulation, and when the anticompetitive aspects of the conduct are actively supervised by the state.

1. The California Raisin Case
The state action immunity was created by the Supreme Court in Parker v. Brown, 317 U.S. 341, 63 S. Ct. 307, 87 L.Ed 315 (1943). That case involved a suit originally brought against the California Secretary of Agriculture arising out of a raisin price and marketing program created by the state legislature.

Although the program was created under state law and enforced by state criminal proceedings. the process could only be instituted by a raisin producer who would request that a price protection program be established for the product in question. Thereafter, prices were established by the state regulatory panel subject to approval of the producers.

The Supreme Court concluded that the Secretary of Agriculture was acting as a state official, and, therefore. the conduct in question was that of the state, and not subject to the antitrust laws. Nevertheless. the Supreme Court warned that:

. . a state does not give immunity to those who violate the Sherman Act by authorizing them to violate it or by declaring that their action is lawful and we have no question of the state or its municipality becoming a participant in a private agreement or combination by others for restraint of trade. 371 U.S. at 351.

2. The Lawyer Case
The state action immunity exemption was first applied to the professions in 1975. Goldfarb v. Virginia State Bar, 421 U.S. 773, 95 S. Ct. 2004, 44 L.Ed. 572 (1975). In that case, plaintiff claimed that the state and county bar associations had engaged in illegal price fixing by setting voluntary minimum fee schedules. It is critical to note that the County Bar schedule was voluntary and the State Bar decision to discipline violators was also voluntary.

The Supreme Court quickly disposed of 85 years of fundamental doctrine that the professions were exempt from the antitrust laws. The Court then addressed the state action defense raised by defendants, stating as follows:

The threshold inquiry in determining if an anticompetitive activity is state action of the type the Sherman Act was not meant to proscribe is whether the activity is required by the state acting as sovereign....

It is not enough that the anticompetitive conduct is prompted by state action: rather, anticompetitive activities must be compelled by direction of the state acting as sovereign. 421 U.S. at 790.

Accordingly, the fact that the state authorizes and encourages an activity, is not sufficient to provide state action immunity.

3. The Midcal Aluminum Case
The current standard of analysis for determining whether state action immunity to antitrust is present was articulated by the Supreme Court in 1980. California Retail Liquor Dealers Assn. v. Midcal Aluminum. Inc., 445 U.S. 97, 100 S. Ct. 937, 63 L.Ed. 2d 233 (1980). In Midcal, the Supreme Court established a two-part test to determine when a state law or regulatory policy can be the basis of antitrust immunity. That test requires that the state (i) has articulated a clear and affirmative policy to allow the anticompetitive conduct, and (ii) provides active supervision of anticompetitive conduct undertaken by private actors.

4. The Patrick Case
In Patrick v. Burgett. 486 U.S. 94. 108 S. Ct. 1658, 100 L.Ed. 2d 83 (1988), the Supreme Court had the opportunity to apply the Midcal test to the health care field. In Patrick, the Supreme Court was faced a private treble damage action brought by a physician who claimed that he had been forced from a hospital medical staff by a conspiracy of peers and the hospital. In particular. Dr. Patrick claimed that the defendants had subverted the hospital peer review process to remove him as a competitor at the Astoria Clinic.

The Ninth Circuit Court of Appeals had held that the Oregon policy on peer review of physicians had met the requirements of the Midcal test, and therefore, the state action defense applied. In reaching this conclusion, the Ninth Circuit noted that the Oregon plan was monitored by the State Department of Health and that the hospital peer review was mandatory. In addition, the Ninth Circuit pointed out that adverse decisions could be appealed to the state courts.
The Supreme Court reversed the Ninth Circuit decision, holding that the “active state supervision” prong of the Midcal test had not been met by the Oregon plan. The Supreme Court stated:

The active supervision requirement stems from the recognition that where a private party is engaging in the anticompetitive activity, there is a real danger that he is acting to further his own interests, rather than the governmental interests of the State . . . The requirement is designed to ensure that the state-action doctrine will shelter only the particular anticompetitive acts of private parties that, in the judgment of the State, actually further state regulatory policies. To accomplish this purpose, the active supervision requirement mandates that the State exercise ultimate control over the challenged conduct . . . The mere presence of some state involvement or monitoring does not suffice . . . The active supervision prong of the Midcal test requires that state officials have and exercise power to review particular anticompetitive acts of private parties and disapprove those that fail to accord with state policy. Absent such a program of supervision, there is no realistic assurance that a private party’s anticompetitive conduct promotes state policy, rather than merely the panty’s individual interests. 486 U.S. at 100-101 (emphasis added).

5. The Ticor Title Case
This decision that the state must exercise “ultimate control over the challenged conduct” was strengthened by the Supreme Court in F.T.C. v. Ticor Title Insurance Co., 504 U.S. 621, 112 S. Ct. 2169, 119 L.Ed. 2d 410 (1992). In Ticor Title, the FTC had filed an administrative complaint claiming that respondent title insurance companies were engaging in horizontal price fixing in setting fees for title searches and examinations in violation of Section 5(a)(1) of the Federal Trade Commission Act.

The Administrative Law Judge held that the rates were fixed in four states, but that in Wisconsin and Montana the respondents conduct was entitled to state action immunity. On review, the FTC agreed that the first part of the Midcal test had been met, but that the states had not conducted adequate supervision to warrant immunity.

The Court of Appeals reversed the FTC. holding that, in light of a state regulatory program that was staffed. funded and empowered by law, the active supervision requirement was met. The Supreme Court reversed the Court of Appeals.

The Supreme Court began its analysis by summarizing the findings of the AU. The major common fact was that in each state under review, the title insurance rates were set under a “negative option” system. In other words, the title insurance companies were permitted to file and use rates subject to later state review. The AU found that the rate filings in each state were “subject to minimal scrutiny by state regulators.”

The Supreme Court applied the analytical framework adopted in Midcal, citing liberally from the Patrick case. The Court mentioned, but did not address definitively, the issue as to whether the state action immunity should be applied to cases arising under the FTC Act.
The Court rejected the argument that principles of federalism required a broad interpretation of the state action immunity, stating:

Federalism serves to assign political responsibility, not to obscure it. Neither federalism nor political responsibility is well served by a rule that essential national policies are displaced by state regulations intended to achieve more limited ends. For States which do choose to displace the free market with regulation, our insistence on real compliance with both parts of the Midcal test will serve to make clear that the State is responsible for the price fixing it has sanctioned and undertaken to control.

The Supreme Court also expressly rejected the Court of Appeals’ reliance on a formulation of active state supervision that simply looked to whether an adequately funded and staffed regulatory agency existed. The Court stated that “mere potential” for regulation is not an adequate substitute for a decision by the State.

B. McCARRAN-FERGUSON ACT
The McCarran-Ferguson Act (15 U.S.C. §1012(b)) confers antitrust immunity over the “business insurance” to the extent that it is regulated by state law. Although the McCarran-Ferguson Act is not relevant in discussing these issues, it is significant to note that the Act is extremely limited in scope.

In fact, the McCarran-Ferguson Act generally does not apply to relationships between insurers and health care providers. It typically only applies in the area of insurers’ relationships with each other. Furthermore, as we know from the foregoing discussion of the FTC v. Ticor Title Insurance Co., supra, McCarran-Ferguson does not necessarily apply to core issues in the “business of insurance,” such as rate-setting, unless the state is actively regulating the conduct.

C. OHIO’S COOPERATIVE AGREEMENT STATUTES

1. In 1991, Ohio enacted R.C. §§3727.21 to 3721.23 to enable health care providers to work cooperatively to achieve certain laudable goals in the delivery of health care services to Ohioans. Specifically, the statutes stated that they were enacted to take advantage of the “State Action” immunity defense to permit health care providers to conduct joint discussions and enter into cooperative agreements, provided that, the results were to:

(i) reduce healthcare costs
(ii) Improve access to healthcare; and/or
(iii) improve the quality of healthcare.

2. The discussions and agreements were to be jointly supervised by the Attorney General and the Director of Health.

3. The statutes have never been used. In fact, the regulations promulgated to implement the statutes “sunsetted” several years ago.

4. Although there were various reasons the procedure was not used, it is clear that there was no need for the process.

PART TWO - ANTITRUST AND JOINT VENTURES

The basic antitrust principles outlined in Part One of this analysis are the foundation upon which the analytical framework for examining health care business arrangements has been erected. In this part of the Memorandum we will look at the application of the principles to business arrangements commonly encountered in joint ventures. From an analytical standpoint, provider networks are a sub-species of joint ventures. Accordingly, the discussion is equally applicable to those entities.

I. Health Care Joint Ventures
In order to keep pace with the rapid changes in the health care delivery system, hospitals and health care providers have developed a broad variety of business arrangements that enable them to work together. These arrangements have varied from outright mergers or consolidations to informal agreements or understandings.

Our focus will be on the forms of business arrangements that involve partial, but not complete, economic integration. These arrangements include; contracts, joint ventures, partnerships, cooperatives, and miscellaneous combinations. For simplicity sake, we will refer to these various business arrangements as joint ventures.

A. Formation of the Joint Venture
In general, both the formation and operation of a joint venture require antitrust analysis. The formation of a joint venture is subject to Section 7 of the Clayton Act as an acquisition. United States v. Penn-Olin Chem. Co., 378 U.S. 158 84 S. Ct. 1710, 12 L.Ed. 2d 775 (1964). It is also subject to review under Sections 1 and 2 of the Sherman Act. For example, if the venturers are competitors and form the venture to produce a service both already provide, then the venture will be analyzed under Section 7 of the Clayton Act as a horizontal merger.

1. If the venture is organized to produce a service that only one of the venturers currently provides, then it might be analyzed as a non-horizontal potential competition merger. E.g. Yamaha Motor Co. v. FTC, 657 F.2d 971 (8th Cir.), cert denied. 456 U.S. 915 (1982). In this situation the issue is whether the market is already highly concentrated; and, if so, whether one or more of the joint venturers would have entered the market reducing concentration.

2. If none of the joint venturers previously provided the joint venture service, the critical issue is whether the individual venturers would have provided the service on a competitive basis. E.g. United States v. FCC, 652 F.2d 72 (D.C. Cir. 1980). In general, if the service would not have been provided in the absence of the venture, it results in little antitrust risk.

On the hand, if the joint venture includes too many potential competitors it presents a significant antitrust risk. This analysis relates directly to overall market share, generally under 30 percent is not substantial. SCFC ILC, Inc. v. Visa USA, Inc., 36 F. 3d 985 (10th Cir. 1994).

4. Analysis of the formation of the joint venture requires a rule of reason approach. The relevant market must be defined, market shares computed, entry barriers assessed, and the probable effects on competition assessed. Also important is the purpose for formation of the joint venture.

5. If the real purpose of the joint venture is to provide a service that would otherwise not be available or achieve efficiencies of scale or scope it will not present an antitrust problem. On the other hand, if the purpose of the joint venture is to preclude competition or serve as a vehicle for collusion, the venture will raise significant antitrust risks.

6. Finally, the joint venturers internal operating agreements must be carefully crafted. It is important to note that the actions of a joint venture, even it implemented by a new corporation, is treated as concerted actions by the joint venturers under Section 1 of the Sherman Act. Lg. NCAA v. Board of Regents, 468 U.S. 85 104 S. Ct. 2948, 82 L.Ed. 2d 70 (1984).

B. The Standard of Review
The Supreme Court has repeatedly stated that bona fide joint ventures are to be analyzed for antitrust purposes according to the “rule of reason” standard. NCAA v. Board of Regents, 468 U.S. 85. 104 S. Ct. 2948. 82 L.Ed. 2d 70 (1984); Broadcast Music, Inc. v. CBS. 441 U.S. 1. 99 S. Ct. 1551, 60 L.Ed. 2d 1 (1979), United States v. Penn-OIin Chemical Co., 378 U.S. 158, 84 S. Ct. 1710, 12 L.Ed. 2d 775 (1964).

1. As in all “rule of reason” cases, the relevant inquiry is whether the joint venture’s restraint on competition will promote or suppress competition in the relevant geographic and product markets. E.g. Nat’l Society of Professional Engineers v. United States, 435 U.S. 679, 98 S. Ct. 1355, 55 L.Ed. 2d 637 (1978).

2. Usually the analysis is applied to joint ventures with market power directed at consumers by sellers, but the analysis has been applied to groups of buyers directing market power at suppliers. E.g., Northwest Wholesale Stationers, Inc. v. Pacific Stationery & Printing Co., 472 U.S. 284, 105 S. Ct. 2613, 86 L.Ed.2d 202 (1985); Mandeville Island Farms. v. American Crystal Sugar Co., 334 U.S. 219, 68 S. Ct. 996, 93 L.Ed. 1328 (1948).

C. Bona Fide Joint Ventures
The critical factor in determining whether a joint venture is “bona fide” is whether integrative efficiencies are present. If they are not present, the arrangement is much more likely to be considered a “naked restraint” and subject to per se scrutiny.

1. The Supreme Court has identified two common areas of integrative efficiency, if either is present the joint venture is more likely to be treated as bona fide: (i) whether there is a pooling of the participants’ resources and a sharing of the risk of the joint venture; and (ii) whether the venture will lead to the creation of a new product or service. NCAA v. Board of Regents, 468 U.S. 85. 104 S. Ct. 2948, 82 L.Ed. 2d 70 (1984); Arizona v. Maricopa County Medical Society, 457 U.S. 332. 102 S. Ct. 2466. 73 L.Ed. 2d 48 (1982); Broadcast Music Inc. v. CBS, 441 U.S. 1, 99 S. Ct. 1551, 60 L.Ed. 2d 1 (1979).

2. In addition, lower courts have found other types of integrative efficiencies that make a joint venture bona fide, such as integrated services or activities that enhance productive capacities. E.g., Rothery Storage Van Co. v. Atlas Van Lines. Inc., 792 F.2d 210 (D.C. Cir. 1986) (opinion by Bork. J., joined by Ginsburg, J. and Wald, J.).

3. In Rothery, the Court succinctly states the test in this area as follows:
. . a naked horizontal restraint, one that does not accompany a contract integration, can have no purpose other than restricting output and raising prices, so is illegal per se; an ancillary horizontal restraint, one that is part of an integration of the economic activities of the parties and appears capable of enhancing the group’s efficiency, is to be judged according to its purpose and effect. 792 F.2d at 229.

4. Where integrative efficiencies are not found, a joint venture may be categorized as a cartel and subject to per se scrutiny. E.g., Chicago Professional Snorts Ltd. Partnership v. National Basketball Assoc., 961 F.2d 667 (7th Cir), cert denied, 121 L.Ed. 334 (1992) (holding that the NBA functioned as a cartel in the sale of television rights to its games).

D. Rule of Reason
Assuming the joint venture has been found to be bona fide, the inquiry shifts to application of a “rule of reason” analysis. Generally speaking, even though there are obvious structural differences between a joint venture and a merger, the federal enforcement authorities have used the U.S. Department of Justice & Federal Trade Commission Horizontal Merger Guidelines (hereinafter “Merger Guidelines”), reprinted in 4 Trade Reg. Rep. (CCH) ¶13, 104 (April 2, 1992), to analyze the impact of a joint venture.

1. According to the Merger Guidelines, the first step in the analysis is the determination of the “properly defined and measured” product and geographic markets. Essentially, the relevant market is the “set of all service providers to whom consumers can practically turn, at little cost, if faced with a price increase.

2. After determining the relevant markets the next step is to evaluate the joint venture’s impact on competition by measuring relative market shares. Objectively, the measurement is made through application of the Herfindahl-Hirschman Index (hereinafter “HHI”) of market concentration. The HHI measure adds the squares of the market shares of all market participants.

a. For example, in a market with 5 participants with respective market shares of 10%, 20%, 30%, 20% and 30% the HHI is 2700 (102 + 202 + 302 + 202 + 302 = 2700).

b. In a pure monopoly the HHI is 10,000.

c. The market concentration is divided into three categories: (i) unconcentrated (HHI below 1000); (ii) moderately concentrated (HHI between 1000 and 1800); and (iii) highly concentrated (HHI above 1800).

3. The Merger Guidelines emphasize that the HHI measurement is just a tool to be used in connection with the analysis and is not an inflexible measure.

4. If the market concentration suggests that a particular joint venture may have an anticompetitive effect, the analysis proceeds to a determination of ease of entry into the market after the joint venture begins operations. If entry is so easy that an anticompetitive effect will be hard to sustain, it is likely that the joint venture will be acceptable.

5. The final step in the analysis is to determine, assuming a potential anticompetitive impact by permitting the joint venture, whether there are market efficiencies that will be achieved through the joint venture that justify the proposed arrangement.

6. A related, important consideration in the Merger Guidelines that is important to note is that the rules are different if a “failing firm” is part of the combination.

II. The Impact of the Statements of Antitrust Enforcement Policy
On August 28, 1996 the Federal Trade Commission (hereinafter “FTC”) and the Department of Justice (hereinafter “DOJ”) jointly issued revised “Statements of Antitrust Enforcement Policy in the Health Care Area” (hereinafter “Guidelines”). The Guidelines create “safety zones” for nine types of conduct in the health care area.

We will only address the “safety zones” that are at the core of antitrust review of joint ventures.

A. High Technology Joint Ventures:

1. One significant change from earlier versions of the Guidelines is that the new Guidelines for high technology joint ventures apply to joint ventures involving existing, as well as new, technology or equipment. Hospital “high technology” joint ventures qualify for the Guidelines’ safety zone if they include only a sufficient number of hospitals necessary to “support” the equipment. A hospital or group of hospitals will be considered able to support equipment or technology if it can “recover the costs of owning, operating, and marketing the equipment over its useful life.”

2. For example, “the safety zone would apply in a situation in which one hospital had already purchased the health care equipment, but was not recovering its investment costs and sought a joint venture with one or more hospitals in order to recover the costs of the equipment.

3. The Guidelines indicate that joint ventures falling outside this safety zone will be evaluated under the traditional rule of reason antitrust analysis. Under the rule of reason, the reviewing agency generally seeks to determine whether the conduct at issue could be anticompetitive.

4. Under this flexible analysis, the agency will first seek to determine whether the conduct could substantially reduce competition in the relevant market; if this inquiry is answered in the negative, the transaction is proclaimed legal. If it is answered in the affirmative, the agency then inquires whether the conduct would produce procompetitive efficiencies that would outweigh the anticompetitive effects. The reviewing agency will also examine whether the venture includes collateral agreements or conditions not necessary to achieve the venture’s legitimate purpose that could unreasonably restrict competition.

B. Joint Ventures Involving Clinical and Other Services:

1. Noting that neither of them has ever challenged an integrated joint venture to provide specialized clinical or other expensive health care services, the DOJ and FTC state generally that most of these joint ventures do not create antitrust problems.

2. The major area of concern is collateral restraints on price (and other significant competitive terms) and any “spill-over” effects on pricing in other relevant markets.

3. Because neither the DOJ nor FTC believes it has acquired sufficient expertise in evaluating these transactions to articulate more meaningful guidance, the Guidelines do not set forth a safety zone. Rather, the Guidelines state that the antitrust agencies will analyze these joint ventures under the rule of reason test as discussed above.

C. Physician Network Joint Ventures:

1. The antitrust agencies define a physician network joint venture as “a physician-controlled venture in which the member physicians collectively agree on prices or other significant terms of competition and jointly market their services.” The Guidelines set forth separate antitrust safety zones for “exclusive” and “non-exclusive” physician network joint ventures.

2. “Exclusive” physician network joint ventures are covered by the safety zone if they include 20 percent or less of the physicians in each specialty with active hospital privileges who practice in the relevant geographic market and who share substantial financial risk. In cases where the relevant market has fewer than five physicians in any one specialty, the “exclusive” network safety zone permits the network to include one physician from that specialty even though it would violate the 20 percent ceiling. This physician’s participation in the network, however, must be on a non-exclusive basis.

3. The safety zone for “non-exclusive” physician network joint ventures provides antitrust protection for those networks comprising less than 30 percent of the physicians in each specialty with active hospital staff privileges who practice in the relevant geographic market and who share substantial financial risk. In relevant markets with less than four physicians in a particular specialty, an otherwise qualifying non-exclusive network joint venture may include one of the physicians from that specialty and still be covered by the safety zone.

4. The Guidelines emphasize that the antitrust agencies will determine whether a physician network joint venture is exclusive or non-exclusive based on the nature of its and its members’ activities and not simply by the terms of the contractual relationship. It cautions participants “to be sure that the network is non-exclusive in fact and not just in name” and lists several criteria that may indicate the presence of a non-exclusive joint venture, including:

a. The existence in the market of viable competing networks or plans with adequate provider participation;

b. The existence of network providers who participate in other networks, contract individually with health benefits plans, or have a willingness and incentive to do so;

c. The existence of providers in the network who earn substantial revenue outside the network;

d. The absence of any indications of significant departicipation from other networks in the market; and

e. The absence of any indications of coordination among the providers in the network regarding price or other competitively significant terms of participation in other networks or plans.

5. Although the Guidelines indicate that the antitrust agencies will consider other forms of economic integration to satisfy the safety zones’ “substantial financial risk” requirement, they give two examples where substantial financial risks are shared by the physician network joint venture members:

a. when the venture agrees to provide services to a health benefits plan at a “capitated” rate; or

b. when the venture creates significant financial incentives f or its members as a group to achieve specified cost-containment goals, such as withholding from all members a substantial amount of the compensation due to them, with distribution of that amount to the members only if the cost-containment goals are met.

6. Network joint ventures falling outside the antitrust safety zones will be analyzed under the rule of reason as long as the participating physicians share substantial financial risk or if the combining of the physicians into a joint venture enables them to offer a new product producing substantial efficiencies. In conducting this analysis, the two big areas of competitive concern are whether a physician network joint venture could (1) raise prices for physician services above competitive levels or (2) prevent the formation of other physician network joint ventures that could compete with it.

D. Analytical Principles Relating to Multiprovider Networks

1. The Guidelines define multiprovider networks as “ventures among providers that jointly market their services to health benefits plans and other purchasers” (e.g., PHOs between hospitals and providers). These ventures “may or may not contract to provide services to subscribers at jointly-determined prices, or commit to utilization review or other limits on the provision of unnecessary care.”

2. Because multiprovider networks are a relatively new phenomenon in the health care industry, and because the antitrust agencies do not believe they possess sufficient experience in evaluating the networks to issue a formal enforcement policy, the Guidelines instead discuss the analytical principles the agencies apply in evaluating these networks under the antitrust laws.

3. The objective of this analysis is to evaluate a particular multiprovider network’s likely effect on competition. The Guidelines recognize that multiprovider networks can affect a broad range of separate markets (hospital, medical, insurance, and provider network markets), and that the competitive effects of a multiprovider network on each affected market must be reviewed. The Guidelines articulate multi-part analyses based largely on traditional antitrust doctrine.

4. When confronted with multiprovider network conduct, the agencies will determine, based on the type of conduct at issue and the network’s level of integration, whether the activity should be judged under the rule of reason analysis or held per se illegal.

5. In instances where the joint venture’s conduct is of the kind traditionally treated as per se unlawful, such as joint pricing or the division of customers or markets, the agencies will examine the level of integration present in the network. If the network is found to be sufficiently integrated, most likely through substantial financial risk-sharing, the agencies will evaluate the competitive effects of the conduct under the rule of reason. In cases where this kind of traditionally unlawful activity is undertaken by networks not sufficiently integrated, it will be condemned by the agencies as per se unlawful.

PART THREE – CONCLUSIONS

As the foregoing discussion has demonstrated, the antitrust laws are extraordinarily complex. However, they are not easily brushed aside because they protect the core principles of our free market system.

Although the State of Ohio could have an impact on the federal antitrust laws in this area, it will be neither easy, nor cheap, to accomplish any worthwhile results. Moreover, before the comprehensive body of antitrust law is discarded, it is necessary to consider:

(i) what would be the actual cost of active state supervision; and,
(ii) is the legislation necessary.

I. The Costs of Active Supervision
Clearly, there would be enormous financial cost associated with creating a Department of Provider Regulation that would actively supervise the contracting process at issue. Moreover, it would require an intrusion of government into the smallest details of the contracting process to ensure that the State of Ohio had supplanted competition with regulation.

The supervisory framework proposed in H.B. 325 would not be adequate to meet the clear requirements of the State Action immunity defense. It would require a regulatory scheme much more closely resembling the Ohio Department of Insurance.

I do not believe that any of us want an Ohio agency setting the rates for injections, physician office visits, or hospital stays.

II. The Legislation is Unnecessary
The proposed legislation rests upon a faulty premise – that it is not possible for physicians and other health care providers to collectively negotiate with employers, insurers and other payors. The fact is that, provided that the foregoing comprehensive legal rules are complied with, providers can and do collectively negotiate over price and other contract terms with third party payors.

For example, in Central Ohio alone, there are a number of physician networks and multiprovider networks that regularly contract with third party payors. At least one group, that we counsel on a regular basis includes over 1,000 physicians and seven hospitals.

It is simply not true to say that the antitrust laws preclude this activity. However, the antitrust laws do provide a system of checks and balances that ensure that neither side is overly favored in the negotiation process.

It is simply not necessary for the State of Ohio to become involved in this process and, in effect “reinvent the wheel.” There is a grave danger that Ohio’s efforts would simply make the entire area more complicated rather than provide any significant help to the proponents of this legislation. More importantly, there is absolutely no evidence that this legislation will provide any benefit to the people of Ohio as consumers of health care services.

In short, for the foregoing reasons, we respectfully suggest that this piece of legislation not receive favorable consideration from the Ohio General Assembly.