COMPETITION POLICY IN HEALTH CARE IN AN ERA OF REFORM Max Huffinan1 INTRODUCTION Health care reform recently has been signed into law by President Ob­ ama. The signing concluded a tortuous legislative process involving false starts, recriminations, accusations of stonewalling on one side and "ram­ ming" using "dirty tricks" on the other, threats of filibuster, and fear of electoral response.2 Passage of health care reform legislation is just the be­ ginning. As with all major legislation, there will be many years ofleaming what the new law means in application.3 And the absorption process for the second-order regulatory scheme of antitrust will be even slower.4 We in- 1. Associate Professor and Dean's Fellow, Indiana University School of Law- Indi­ anapolis. For assistance and support in putting on the think-tank discussion and public panel to which this introduction relates, thanks to the Indiana University School of Law- Indian­ apolis, and especially Dean Gary Roberts; the Hall Center for Law and Health and its faculty co-directors Eleanor Kinney and David Orentlicher; staff at the School of Law, including Joanna MacDougall, Liz Allington, Shaun Ingram, Faith Knotts and Lauri Turner; and Heather McCabe and Carsandra Knight from the Hall Center. Thanks to Albert A. Foer, President of the American Antitrust Institute, and to AAI itself for their efforts in hatching this idea, moderating the public panel and bringing together an unparalleled group of experts for our day of meetings. Thanks to John Connor for originally proposing an event co­ sponsored by the IU School of Law- Indianapolis and AAI, and for his help and guidance in seeing it through to fruition. Thanks to Syd Arak, David Balto, Joe Bauer, William Com­ anor, Ted Frech, Tim Greaney, Cliff Johnson, Paul London, Emily Morris, Greg Pemberton, Gayle Reindl, Barak Richman and Chris Sagers for taking time from their schedules and giving so generously of their expertise. Further funding and support was provided by the office of IUPUI Vice-Chancellor Kody Varahramyan and IU Common Share. As usual, while the academics have their fun, the hard work falls to the students. Many thanks to 3L students Brian Bouggy and Julie Mahomed of the IU School of Law - Indianapolis, and to the staff of the school's Health Law Review, for their extraordinary work in making the event and this publication a success. 2. See Ceci Connolly, "61 days from near-defeat to victory," Washington Post, Mar. 23,2010, at Al, A6 (detailing the "twists and turns of President Obama's signature domestic issue" from summer 2009 through passage by partisan. vote on March 21, 20 I 0); Dana Mil­ bank, "The Republicans who stirred the tea," Washington Post, Mar. 22, 2010, at AI, All (describing "one of the ugliest and strangest periods the American legislative process has ever experienced"); cf. Thomas Greaney, "Health Reform, a Class Act," Health Reform Watch Web Log, March 24, 2010, available at http://www.healthreformwatch.com/2010/ 03124/health-reform-a-class-act/ (visited March 28, 2010) (noting "pseudo-journalism" and misinformation about health reform after its passage). 3. That is especially so because many provisions of the reform bill do not take effect for several years. See, e.g., Patient Protection and Affordable Care Act, H.R. 3590 (2018 effective date for tax on Cadillac Health Insurance Plans). 4. As a fundamentally common-law scheme, antitrust develops through court deci­ sions over many years, such that even issues first decided nearly a century ago maintain remarkable currency. See, e.g., Leegin Creative Leather Prods., Inc. v. PSKS, Inc., 551 U.S. 877 (2007), overruling Dr. Miles Med Co. v. John D. Park & Sons Co., 220 U.S. 373 226 INDIANA HEALTH LAW REviEW [Vol. 7:225 troduce here the transcript of a panel discussion, held on December 10, · 2009, which we believe is the first broad (if not comprehensive) analysis of the competition policy implications of health· care· reform. These pages prOvide a road map for correctly analyzing many of the antitrust issues that have arisen in health care previously and are· certain to arise in health care as reformed. Understanding how to analyze these issues could not be.more impor­ tant. As panelist Paul London wrote in 2001, "[r]eal competition in health care would stimulate the American economy."5 London noted the competi­ tion picture raised questions about insurance; providers - doctors and hos­ pitals, technologies and information systems, and regulatory approaches.6 To this end we convened a rare gathering of think-tankers/ academic economists,8 law, business and medical school professors,9 and practition­ ers/0 all with deep expertise in the arenas ofhealth law, antitrust law, and in -many cases, both. Several of our participants came originally from the world of government antitrust enforcement. We gathered for an entire day, initially for several hours in a private think-tank style discussion, and later in a public panel discussion. During both sessions, topic leaders introduced a particular genus of issues on which they previously had submitted written work to the group. The topic leaders then described some possible resolu­ tions· to those issues, and the group engaged in. the discussion. In the after­ noon session, the transcript of which follows, we reprised some of the same discussion, but our public discussion was neatly distilled by the morning's conversation. On December 10, 2009, the health care reform picture was uncertain. As Bert Foer said at our public panel held on that day, ''when we set this up months ago, we didn't know whether there would be a law or not. And you know what? We still don't know - which means between the House and the Senate and a conference committee that may or may not be joined, we don't-know what this law is that we are talking about today."11 The House of Representatives had passed H.R. 3962, the "Affordable Health Care for ( 1911 ). See -also Max Huffman. A Retrospective on Twenty-Five Years of the Foreign Trade A,ntitrust Improvements Act, 44 Hous. L. Rev. 285,289 (2007) (noting antitrust courts' expe­ rience in advancing doctrine through common-law analysis rather than statutory interPreta­ tion''). 5. Paul A. London, The Competition Solution 187 (2001). 6. !d. at 19()..95. 7. Including Bert Foer, president of AAI, and David Balto, Senior Fellow, Center for American Progress. 8. Bill Comanor, UCLA and Ted Frech, UC Santa Barbara. 9. Joe Bauer, Notre Dame Law School; David Orentlicher, IU School of Law- Indi­ anapolis, and adjunct professor, IU School of Medicine; Barak Richman. Duke University School of Law and Fuqua School of Business; Tim Greaney, Saint Louis University School of Law; Christopher Sagers, Cleveland-Marshall College of Law; Emily Morris, IU School of Law- Indianapolis; and Max Huffman, IU School of Law- Indianapolis. 10. Gayle Reindl, Taft, Stettinius & Hollister LLP; Greg Pemberton, Ice Miller LLP; Cliff Johnson, Hall, Render, Killian, Heath & Lyman PC; and Syd Arak. 11. llffra at 236. 2010] COMPETITION POLICY IN HEALTH CARE 227 America Act," a month prior.12 Legislation stalled in the Senate - panelist Joe Bauer noted it was "sailing through the Congress, but ... at glacial speed,"13 and at the time of our meeting, it was unclear whether health care reform would succeed at all, let alone in something resembling what Con­ gress and the White House had been contemplating. Meeting as we did with the reform picture uncertain might have seemed a risky proposition. "It might be that we are wasting our time and that there will be no law."14 But such a concern arose only theoretically. When we originally discussed this project, we knew we might be discussing reform that would not happen this year. We also knew that health care reform of some sort was an eventual certainty, because the then-current sys­ tem was not sustainable in the long run. And we know above all that the competition policy concerns that were the primary subject of our· discus­ sions transcended any particular time or legislative proposal. This introduction introduces the substantive discussion that was tran­ scribed during our afternoon public panel discussion. We divided our dis­ cussions roughly into four topics. First was the idea of health care reform from the perspective of the consumer of health care. Barak Richman served as our topic leader, and presented during both sessions (as did each of the topic chairs) on his analysis of the consumer of health services. Second, Chris Sagers discussed his writing on the health care insurance marketplace, with a particular emphasis on the possibility and implications of a repeal of the McCarran-Ferguson Act, at least as it relates to health care and medical malpractice insurance.15 David Balto discussed his analysis of the antitrust enforcement picture. Finally, Tim Greaney led the discussion about pro­ vider competition. THE THEN-EXTANT REFORM PICTURE Part of the process of discussing competition policy in health care reform necessarily was our developing an understanding of the reform pic­ ture that currently existed and was likely to emerge. David Orentlicher dis­ cussed the reform process, to the extent it was knowable on December 10. An important lesson from that introduction was the low probability that reform would meet the lofty hopes many had set for it. "I guess the inter­ esting thing after hearing all the series of concerns that Barak has laid out nicely is how few of them are being addressed in the healthcare reform pro- 12. H.R. 3962, Nov. 7, 2009. 13. Infra at 263. 14. Infra at 236. 15. Sagers' written analysis is forthcoming in his essay, Much Ado about Probably Very Little: McCarran-Ferguson Repeal in the Pending Health Riform Legislation, 28 Yale L. & Pol'y Rev._ (forthcoming 2010), available at ssm.com/abstract=1546056. 228 INDIANA HEAL Til LAW REVIEW [Vol. 7:225 posals."16 Orentlicher even suggested that one possible impact would be that by forcing new customers into a flawed system, the extent ofits flaws would become untenable, and perhaps in the future, real reform might emerge.17 That half-hearted optimism found support in others' remarks as well. William Comanor expressed disappointment that reform efforts threatened to ''prop up the existing system of prepaid healthcare which is called Health Insurance but which isn't Health Insurance at all."18 Like Orentlicher, Comanor saw some possible benefit in a crisis in care, which might undo the "the rather bizarre way that we finance healthcare through the employ­ ment contract." Showing that approach was a vestige of the post-World War II era, he believed that system was self-destructing.19 And in a ques­ tion-and-answer involving this author, Barak Richman discussed the eco­ nomic impact of the influx of new consumers in the system. To the extent that insuring current uninsureds will increase their use of health care servic­ es, costs may well increase - once again leading to the possibility that reform as we have seen may be unsustainable in the long term. 20 We heard about some of the different possible approaches to opening access to health care. One was the Veteran's Affairs Healthcare System, "the British system brought over to the U.S.... It's not very convenient care, you might have to travel ... to get your care, but you'll get good care:m Another was the "German/Dutch/Massachusetts model. We make sure everybody is insured by requiring them to be insured. "22 In the case of the latter approach, insurance must be available if it is to be required. That entails making insurance available for the asking, including creating a mar­ ketplace "where insurance companies will have to meet certain qualifica­ tions and they can sell their plans . . . . [T]he government has screened and made sure these are plans that provide good quality coverage." The mar­ ketplace "hopefully will generate competition" and the consumer benefits that flow from it.23 The operation of the new insurance marketplace is an area of consi­ derable uncertainty. The so-called insurance "exchange" exists to allow individual purchasers whose employer does not offer insurance· to purchase it on their own. Purchasing on the exchange, in theory, those individuals will not suffer discrimination on the basis of pre-existing oonditions and they will be able to afford insurance because prices will be lower and subsi- 16. Infraat244. 17. Id. 18. Infra at 261. 19. Id. 20. Infra at 271. 21. Infra at 244. 22. Id. 23. Infra at 246. 2010] COMPETffiON POLICY IN HEALTH CARE 229 dies will assist them. 24 The driving features of the proposed reform that Orentlicher discussed included requirements imposed on individuals to become insured or pay a penalty; requirements imposed on employers to offer insurance; require­ ments placed on insurers to make insurance available; and subsidies pro­ vided by the government to decrease the costs of these requirements. 25 Many. variables threatened to undermine complete success in reform, if ad.opted as proposed. Not surprisingly, the most substantial of those was cost. Orentlicher noted the tendency of policy-makers to follow the ap­ proach of "expand[ing] access now, deal[ing] with costs later, but that doesn't always work, because it tends to unravel over time, becomes unaf­ forc;table. That was what happened when Oregon expanded its healthcare, they tried it, it worked for a few years and then, when they ran out of mon­ ey . . . . When the economy turned, they couldn't afford to pay for the ex­ panded access and their level of uninsureds is high as it was when they started. "26 THE CONSUMER . One of the greatest difficulties in antitrust relates to what may be its most basic tenet. Antitrust law exists to protect consumers.27 That proposi­ tion appears to hold in every jurisdiction with an antitrust scheme.28 But what consumer protection means in antitrust remains poorly understood.29 Barak Richman argued the difficulty of defining the consumer protection role of competition policy is all the greater in the health care arena.30 That is not surprising. Health care consumer policy uncomfortably straddles the fence. between pure consumer protection regulation and competition policy. I have recently argued that fence defines the line between enhancing and decreasing consumer choice.31 Requiring consumption of health services, on pain of penalty, is a measure that protects consumers even while under­ mining their freedom of choice. The problem is exacerbated in part because "as we start thinking about consumers, what emerges is a multi-headed, multi-conflicted, multi­ incentivized entity that suffers from a great deal of confusion. '.32 Richman showed how consumers filled at least three capacities. One is th~ "consum-. 24. Infra at 264-266. 25. Infra at 243-246 26. Infra at 248. . . . 27. Max Huffinan, Bridging the Divide? Theories for Integrating Competition Law and Consumer Protection, 6 EW'Opelltl. Competition Journal?,_ (2010). 28. /d. 29. ld. (citing sources). 30. Infra at 238. 31. Huffinan, supra n.25, at I 0-11. 32. Infra at 238. 230 INDIANA HEALTH LAW REVIEW [Vol. 7:225 er as a purchaser of insurance"; a second is "the consumer as the patient"; and the third is "the consumer as the voter."33 These different capacities give rise to an irreconcilable tension: purchasers want cost low; patients want quality high; and voters prefer to limit subsidies. Competition policy becomes very difficult where the consumer's di­ rect interface is with the insurer, and the insurer interfaces (at least in terms of payment) with the provider. A monopoly provider market with a com­ petitive insurer market threatens the circumstance that the consumer's voice with the provider is unable to protect the consumer's interests. Richman noted that theoretical and empirical evidence suggested the possibility that bilateral monopoly was better than diffuse insurers interfacing with concen­ trated providers.34 Competition in insurance presents another concern. It is possible "too many contracts would create information overload."35 Rich­ man also. noted the problem of consumers being informed and given rea­ sonable and understandable decisions. "[W]e're a long way from that." David Balto echoed that sentiment: "In terms of transparency, good luck!" These are problems in "creating some kind of vibrant market for health in­ surance."36 The story is not much better in the provider marketplace, where con­ sumers as patients do their shopping. The best providers - ''the best price quality combination in America has generally been· with these integrated systems like Kaiser or Mayo ... where the insurer and the provider are the same entity"- are in "short supply."37 This reflects a poorly-functioning marketplace for "competition that would encourage consumers as patients to exercise their rights. "38 ANTITRUST IMMUNITY IN THE INSURANCE MARKETPLACE We also undertook a narrower focus on the exemption from federal antitrust regulation enjoyed by insurers under the McCarran-Ferguson Act.39 Repeal or partial repeal of the McCarran-Ferguson Act was intermit­ tently part of the reform picture through 2009; as of our meeting on De- 33. Infra at 239. 34. Infra at 239. 35. Infra at 240. Cf Remarks of Cavendish Elithom, Fourth Antitrust Marathon, 6 European Competition Journal 1, 29 (2010) (noting the understanding of the UK Office of Fair Trading that "excessive choice can lead to less consumer activation in the markets and that is a source of detriment"). 36. Infra at 240; id. at 251 (transcript 21) (Remarks of David Balto); cf Edward J. Janger & Susan Block-Lieb, Consumer Credit and Competition: The Puzzle of Competitive Credit Markets, 6 European Competition Journal 68, 71-72 (2010) (discussing the lemons equilibrium in competition in consumer mortgage lending flowing from lenders' competition on the opacity, rather than quality, of contract terms). 37. Infra at 241. 38. Infra at 242. 39. 15 u.s.c. §§ 1011-15. 2010] COMPETITION POUCY IN HEALTH CARE 231 cember 1 0,. it appeared most .likely repeal would not be part of reform.. In fact, McCarran-Ferguson repeal was not part of the health care bill signed. by President Obama, although a free-standing effort to repeal the law, li­ mited to health insurance (and not medical malpractice insurance)· is pend­ ing in Congress as of this writing.40 McCarran-Ferguson immunity is not specific to health insurance, but the current "repeal effort ... has been.seen all along as part of healthcare reform.'.41 The repeal was discussed only to "apply to carriers in health insurance and medical malpractice insUIWlce," and "it might apply to only some of their conduct. '.42 McCarran-Ferguson immunity came about in 1945, as Joe Bauer noted, in a bill signed by President Roosevelt not long before his death.43 Chris Sagers explained that, at the time of its enactment, immunity. from antitrust was· considered necessary on the basis of the economic .theory of . "destructive competition," applied to capital-intensive industries.44 The exemption can also be justified if one has faith in the ability of states to re­ gulate local industry effectively.45 Experience undermined the story of the states as effective regulators of insurance - ''probably one of the saddest parts of McCarran-Ferguson is that the amount of regulation by the states necessary to enjoy that exemption has been minimal. •.46 During the daytime session, we discussed seemingly overt circumstances of the state insurance commissioner position being a political spoil for campaign donors. The. result is inadequate regulation by the states, and, as Sagers noted, ''there doesn't seem to be much doubt that in health insurance we don't have a competitive marketplace at all.'.47 Whether repeal could be effective is another story. As of our discus­ sion on December 10, repeal efforts tended to be targeted at specific catego­ ries of egregiously anticompetitive conduct - price fixing, bid rigging and market allocation - which arguably are outside the statutory exemption for the "business of insurance," and therefore illegal even under McCarran­ Ferguson.48 Also, repeal would take place in highly concentrated markets, 40. Health Insurance Industry Fair Competition Act, H.R. 4626, lllth Cong., 2d Sess. (Feb. 22, 2010). 41. Infra at 250. 42. Chris Sagers, Much Ado About Probably Pretty Little: McCarran-F.erguson Re­ peal in the Pending Health Reform Legislation, 28 Yale Law & Pol'y Rev._ (forthcoming 2010), draft at 1, available at ssrn.com/abstract=1546056. 43. Infra at 249; id. at 260, 44. Sagers, supra n.42, at;_ (draft at 5). That theory bas been largely debunked since. 1945. See id. at 7; cf. Daniel H. Cole & Peter Z. Grossman. Principles ofLaw and Econom­ ics 306 (2005) (questioning the reality of natural monopoly). 45. Cf. id. at 6 (noting "trends" that ''had already led to rate-and-entty regulation in markets throughout the U.S. economy"). 46. Infra at 263; see also Sagers, supra n.42, at_ (draft at 8-9) (regulation sufficient for McCarran-Ferguson Act purposes ifthere was "some regime of state oversight," even if not fully effective). 47. Infra at 249; id. at 250-251; see Sagers. supra n.42, at 11-12. 48. Infra at 249-252; id. at 261. The pending McCarran-Ferguson repealer legislation 232 INDIANA HEALTH LAW REVIEW [Vol. 7:225 where it seems unlikely competition would immediately take hold. Sagers argued repeal would be a salutary phenomenon in any event. In the long term, competitive conditions might arise, and having repealed the exemp­ tion, even if only narrowly, would help that competition to flourish. Sagers also noted the important signaling value of repeal, which would be "a pretty strong message to the Justice Department or the Federal Trade Commission to actually do something. "49 ENFORCEMENT The discussion of antitrust enforcement was largely pessimistic, al­ though, as David Balto noted, "[c]ompetition·and consumer protection en­ forcement is important, because we want markets to work effectively .... [N]o one has so far disagreed with me on this diverse panel .... "50 In the case of health insurance, Balto and Sagers both noted the high level of con­ centration in the industry, where "[o]ver 400 mergers in the past eight years ... has led to this tremendous degree of concentration."51 With re­ gard to insurance, it is, of course, impossible to uncouple concerns for anti­ competitive behavior from the antitrust exemption for insurance under the McCarran-Ferguson Act. Immunity was therefore an important part of our conversation. 52 In addition to competitive concerns in health insurance, Balto noted the role of consumer protection regulation. Concerns for conflicts of inter­ est arise, because insurers ostensibly representing patient interests have in­ centives to limit care that might be in those patients' best interest. Health insurers may be engaged in fraudulent conduct, but Federal Trade Commis­ sion resources are devoted to "fraudulent advertisers who tell you that if you take this pill, you'll lose 20 pounds over the next week." States lack the resources to enforce either antitrust or consumer protection prohibitions against the insurance industry - "over a third of all states have never brought a single consumer protection action against fraudulent or deceptive activity by health insurance companies and something like 95% of the ac­ tions were brought by just four states.''53 Finally, Balto cited the FTC's "secret weapon" - Section 5 of the FTC Act, which gives that agency an is not so limited. See H.R. 4626 (2010). 49. Infra at 252. 50. Infra at 253. 51. Infra at 254; id. at 249; see also Sagers, supra n.42, at 11-12 (noting 400 mergers "in the past 14 years") (citing, inter alia, Am. Med. Ass'n, Competition in Health Insurance: A Comprehensive Study of U.S. Markets, 2007 Update (2007)). The concentration concern implicates Barak Richman's comments about the possibility that a bilateral monopoly is preferable to a concentrated provider market and a competitive insurance market See supra nn. _-_and accompanying text. 52. See infra nn. _-_and accompanying text; infra at 246-250. 53. Infra at 255. 2010] COMPETITION POUCY IN HEALTH CARE 233 ostensibly broader mandate than the antitrust laws. 54 Gayle Reindl noted, and discussion during our day program supported the point, that the FTC has been quite active in one area of health care anti­ trust, which is that having to do with so-called pay for delay settlements between brand-name and generic pharmaceutical manufacturers.55 Those settlements have the effect of splitting the profits from the monopoly the brand-name manufacturer is able to preserve by paying the generic to delay entry into the market in competition with the brand-name drug. It is the courts, not the FTC, that have held up enforcement in that arena. Reindl's comment makes an important point: even a highly reinvigo­ rated enforcement regime must contend with a judiciary that may be hostile to antitrust enforcement. 56 Tim Greaney noted that case law has not been friendly to a vigorous enforcement agenda against such abuses. 57 Chris Sagers, during a question-and-answer colloquy, went further: "my sense is there has evolved very quietly a case law for healthcare, and particularly for hospitals, that is in a lot of ways special. It's not a statutory exemption, ob­ viously, but it is arguably a judicial one.'.s8 Except for a class of cases that are in reality tort, contract or employment claims by doctors against hospit­ als, 59 other health-care antitrust case law threatens to limit enforcement against anticompetitive conduct by providers. AAI recently has carefully examined the question of antitrust en­ forcement in health care. In Competition in the Unhealthy Health Sector, one chapter in AAI's Transition Report on Competition Policy,60 AAI made recommendations with regard to healthcare intermediaries, pharmaceuticals, providers - including physicians and hospitals, and government involve­ ment - both regulatory and with regard to the government as a market par­ ticipant. The upshot of the AAI recommendations, which was echoed broadly during our meetings on December 10, is the need for "[g]reater re­ sources" to "be devoted to health care antitrust enforcement.'.61 PROVIDER COMPETITION Tim Greaney led the discussion of provider competition with the ob­ servation that among hospitals, doctors and pharmaceutical manufacturers, 54. Infra at 256. 55. Infra at 260. 56. See also infra at 270 (citing Bell Atlantic Corp. v. Twombly, 550 U.S. 544 (2007), and American Needle v. NFL, S. Ct. No. 08-861 (argued Jan. 13, 2010)). 57. Infra at 259. 58. I7!fra at 270. 59. Greaney referred to these cases as "the junk food of antitruSt" and applauded the decisions dismissing many of them. Id. 60. American Antitrust Institute, Transition Report on Competition Policy 317-48 (2008), available at www.antitrustinstitute.org. 61. Id at 321. 234 INDIANA HEALTH LAW REVIEW [Vol. 7:225 "competition does matter . . . . [W]e do have evidence that the competition has lowered cost.',(j2 The corollary point is, of course, the impact of a lack of competition on costs. "[H]ospital mergers ... have raise costs from 5- 40% in the markets in which they have occurred. '.63 But Greaney also noted the tension between concentration and "frag­ mentation.'' In the case of the latter, physicians practice either solo or in small groups, so ''there's very little care coordination." The solution to the latter appears to be vertical integration, whereby physicians, nurses, social workers, alternative care providers and hospitals coordinate care efforts. That kind of bundling can be tremendously good for care, as Barak Rich­ man had noted earlier with regard to the famous success stories of inte­ grated providers Kaiser and Mayo.64 The AAI, in its transition report, echoed Greaney's view of the value of "efficiency-enhancing integration where the result is more cost-effective, higher-quality delivery of care.'.65 In addition to increased concentration, Greaney noted the ability of an "entity with market power [to] exclude others.'.66 Such concerns for abuses of dominance underlay much of the discussion on December 10. Examples of abuses of dominant positions arise in hospital marketplaces. Those may include raising rivals' costs, with the impact of limiting competition. Tying arrangements that leverage market power into other markets may permit hospitals to avoid limits on Medicare reimbursements. And hospitals have incentives to limit competition by physician-controlled specialty hospitals. 67 Finally, concerted activities by providers that do not serve to benefit consumers thiough efficiency-enhancing integration continue to present concerns. "An examination· of cases brought over the last thirty years re­ veals that ... overt cartelizJ:ltion schemes [involving physicians] have not disappeared and in fact may have increased in recent years.'.68 It is thus ne~essary, AAI says, to ensure "sufficient sanctions to deter future wrong­ domg.'.69 * • • * * The foregoing serves only to provide a short summary of the discus­ sion on December 10, 2009. The following pages comprise the transcript of the public panel discussion held that day. 62. Infra at 257. 63. Id. 64. Infra at 241; see supra nn. _-_and accompanying text. 65. Transition Report, supra n.4 7, at 340-41. 66. Infra at 258 .. See generally Jefferson Parish Hosp. v. Hyde, 466 U.S. 2 (1984 ). 67. Transition Report, supra n.60, at 343. 68. Transition Report, supra n. 60, at 340 (citing Thomas t. Greaney, Thirty Years of Solicitude: Antitrust Law and Physician Cartels, 7 Hous. J. Health L. & Pol'y 189 (2007)). 69. Id at 341. 2010] COMPETITION POUCY IN HEALTH CARE 235 HEALTH LAW ROUNDTABLE EVENT -COMPETITION POLICY IN HEALTH CARE IN AN ERA OF REFORM, DECEMBER 10, 2009, INDIANA UNIVERSITY SCHOOL OF LAW- INDIANAPOLIS DEAN GARY ROBERTS: Good afternoon everybody. Welcome. I am Gary Roberts, I am the Dean of the Indiana University School of Law-­ Indianapolis, and I am here today to introduce and welcome you to this tremendous program we have put together. The School of Law and the Hall Center for Law and Health, which is one of the signature centers on campus, has partnered with the American Antitrust Institute, a Washington D.C.-based think-tank. In recent years AAI has been a leader in advocating for more aggressive antitrust enforce­ ment. We are also gratified to have received some financial support for the program from the campus office of Vice Chancellor Kody V arahramyan and also the IUPUI endowment fund. We thank them for their support. Our speakers today are some of the nation's leading experts on the in­ tersection of health policy and antitrust, and they hail from the law facul­ ties, economics faculties, think-tanks, and private law practice. And they spent almost the entire day up to now in a private, closed-door session, brainstorming about different ideas, and I have been told it was a robust and exciting conversation. I want to tum this over to the moderator oftoday's panel, Albert Foer. He is the President of the American Antitrust Institute. Bert's varied career has included private law practice in Washington, DC with Hogan & Hart­ son and Jackson & Campbell; the Federal Senior Executive Service as an Assistant Director and Acting Deputy Director for the Federal Trade Com­ mission's Bureau of Competition. He's been the CEO of a mid-sized chain of retail jewelry stores. He has also been a prolific author, publishing numerous articles and book chap­ ters. He is a graduate of the University of Chicago Law School, did his un­ dergraduate degree at Brandeis, and he also has a masters degree from Washington University. Let me tum this over to Bert. MR. FOER: Thank you Dean Roberts and thank you to the Indiana University School of Law - Indianapolis, and particularly to Max Huffinan, professor at the law school who organized this event. As I think you are going to see -- it took a little bit of guts to put this program together because 236 INDIANA HEALTH LAW REVIEW [Vol. 7:225 it's pretty experimental. The American Antitrust Institute is an 11-year-old think-tank in Wash­ ingtort We do education, research, and advocacy functions. And we some­ times do brainstorming, trying to figure out what the right questions are to be asking about a topic. That's what we did this morning. We spent about four-and-half hours of this group and a few people who are still here and a few people who've already left. We have been talking about healthcare reform. Now, when we set this up months ago, we didn't know whether there would be a law or not. And you know what? We still don't know-- which means between the House and the Senate and a conference committee that may or may not be joined, we don't know what this law is that we are talking about today. It may be that we are wasting our time that there will be no law. _Even if there is no new law at this time, however, there are going to be very sig,.. nificant competition issues that will continue to be relevant and there is no better group than the people sitting here to discuss those issues, to try to pinpoint where the issues are, not necessarily.solve any of them but at least help us identify the key issues that we think you should be looking at. Let me say also that some members of the panel are going to have to catch planes before we finish so don't worry if they are walking out, it does not necessarily mean they disagree strenuously with everything they've heard. If I start at my far right - where he doesn't belong politically - is Bill Comanor from the University of California, Los Angeles, and Santa Barbara. Bill is an economist and a former ChiefEconomist of the Federal Trade Commission. David Balto is a senior fellow at the Center for American Progress, and he was the Policy Director of the Bureau of Competition at the FTC, and the Attorney Advisor to Chairman Robert Pitofsky for a number of years. He is one of the most brilliant and sometimes outspoken experts in the field of competition policy. If we don't get a chance to hear- much from him, it's a loss for everyone here. Chris Sagers is a Professor at Cleveland-Marshall College of .Law where he teaches Antitrust and Administrative Law. Chris is a new member of the AAI Advisory Board. David Balto; by. the way, and Bill Comanor are both members of the Advisory Board, and 'Ioe Bauer from Notre Dame, as well. Joe is: a real ex­ pert in the field of antitrust. He is the author of a major treatise on the sub­ ject, comes to us today from up the road in South Bend. 2010] . COMPETITION POUCY JN HEAL Til CARE 237 Now David Orentlicher is your homegrown twofer - a lawyer and a doctor. He is Professor ofLaw and Co-Director of the Hall Center for Law and Health at·the IU School of Law -Indianapolis, and an adjunct profes­ sor at Indiana University School of Medicine. Terrific background for this discussion. Next is Barak Richman, another and fairly new member of the AAI advisory board. He is Professor of Law and Business Administration at Duke University. He teaches Antitrust and Healthcare Policy. He is the Co­ Editor of the symposium volume of Law and Contemporary Problems with Clark Havighurst which was entitled. "Who Pays? Who Benefits? :Distribu­ tional Issues in Health Care." And then we have Thomas "Tim" Greaney, a member of our Advisory Board. Tim is a Professor at St. LoUis University. He is the Charles A. Meyers Professor of Law and Director of the Center for Health Law Studies at St. Louis University, and the author of one of the nations leading health law casebooks, as well as a treatise and hornbook on health law. Gayle Reindl is local, she is a litigation partner at Taft Stettinius and Hollister LLP, where she does antitrust litigation and some healthcare liti­ gation. And finally we have Paul London. Paul is an economist, a consulting economist and the author of a book called 'The Competition Solution'. Back in the Clinton administration he was the Deputy Under Secretary of Com­ merce for Economics and Statistics. That's your group. What we are going to do is start out with Barak Richman talking from the point of view ofthe consumer. In this healthcare reform, where does the consumer fit into the picture? He will be followed by David Orentlicher who is going to give us an overview of the reform legislation as it stands and as it may be moving along even as we sit here talking. That will be followed by Chris Sagers who will talk about one of the more direct antitrust issues namely the McCarran-Ferguson Act which helps to structure the relationship between the insurance industry and the antitrust laws. Then we'll turn to Tim Greaney. Tim will focus in more on competi­ tion implications over and above the McCarran-Ferguson Act. At that point in time we will have some discussion among the members of the panel and time permitting then we'll invite questions from the audience. PROFESSOR RICHMAN: Thanks Bert and thank you Dean Roberts 238 INDIANA HEALTH LAW REviEW [Vol. 7:225 and thank you to Indiana University. You can tell that I am from one of the right coast here. It's a great pleasure to be here. So it's my job - I guess it's really the job of all the speakers -- to sumniarize the thoughts of a particular segment of the discussion that the AAI organized this morning. The segment of discussion that I am summarizing focused on the question of how healthcare reform and healthcare reform efforts -- and par­ ticularly competition law in healthcare reform - should be approached from the perspective of consumers? The way that we first have to approach this problem is to ask, well, who exactly are the consumers? And as we start thinking about consumers, what emerges is a multi-headed, multi-conflicted, multi-incentivized entity that suffers from a great deal of confusion. One might think we are talking about the consumer who is a potential purchaser of health insurance, but who currently is uninsured either because they cannot purchase health insurance themselves, because it's so expen­ sive, or because they are working for a small business who itself cannot afford health insurance. Alternatively, we might be referring to the consumer who really be­ came notorious and very popular about ten years ago, the consumer who has purchased health insurance, and is now a subscriber to an HMO, but who complains about waits to see doctors, excessive monitoring by insur­ ance bureaucrats, and the mean people on the telephone who deny routine coverage. Are we talking about the consumer that cannot afford health insurance now or are we talking about the consumer who didn't like the inexpensive insurance they had before? Now, of course, this person is the same person and having low-quality insurance but being able to purchase it is the flip side of the same coin as not being able to afford it now. But we don't think of these two consumers as the same person. We think of these two consumers as expressing legiti­ mate consumer-oriented concerns without any hint of irony, without a rec­ ognition that in fact the better health insurance gets the more expensive it's going to be. The nicer they are on the telephone the more comprehensive the benefits are, the more expensive the premiums are and fewer of you will be able to afford it. That fairly obvious observation needs to be (but so far has not been) 2010] COMPETITION POLICY IN HEALTH CARE 239 part of the healthcare reform discussion, and the irony should not be lost on us. When we think about consumer interests, we are necessarily thinking about market trade-offs. So within that lens of consumer trade-offs, and the realistic trade-offs that arise in the marketplace in the provision of any good in a competitive marketplace, we want to think about consumers from three perspectives: the consumer I was talking about a moment ago, the consumer as a purchaser of insurance; the consumer as the patient; and the consumer as the voter. How do we think about all three of these individuals? And how do we think about healthcare reform issues from their perspectives? How can reform advance the interests of these three consumers? Since we all identi­ fy with consumers, we think that if we pursue consumer interests, we will not only be promoting competition but we also will be pursuing good poli­ cy. We think that if we somehow get the consumer what the consumer wants, we will achieve socially desirable outcomes. How do we think about ways to enact reform that would advance the interests of the consumer, because after all, all of us consider ourselves as consumers, all of us identify with consumers, we might identify, well, the consumer that we think is less confusing than the one I just described, but we think that if we pursue consumer interests, we will not only be pursuing competition but we also be pursuing good policy, will have social desirable outcomes, if somehow or another we get the consumer what the consumer wants. Let's begin with the consumer as health insurance purchaser. What in­ terests are there when we think about the consumer as a person of health insurance? Well, certainly we want the consumer to have a variety of choic­ es in the marketplace for health insurance. We think that competition is a good thing, and if the purchasers of insurance have more choices then pro­ viders of health insurance have to compete with each other, and more com­ petition ceteris paribus is a good thing. Accordingly, much of the discussion on Capitol Hill has been really focused on this issue: how do we make sure the purchaser of health insurance has more choices? There are a couple of qualifications to that though. One is, what hap­ pens if you have a highly-concentrated provider market? That is, you have doctors and hospitals that dictate their prices because there are not hospitals or alternative providers down the road that offer competitive alternatives. Actually there is a hospital down the road that used to be able to compete, but those two hospitals have since merged. And there are lots of doctors in town but they all talk with each other and they all come up with price agreements and thus all set the same price. Lack of competition among pro- 240 INDIANA HEALTH LAW REVIEW [Vol. 7:225 vider.s is a very significant problem. So what happens if you have essentially a monopolized provider mar­ ket? Is it then good to have lots of small insurers or do you actually perhaps want one big insurer that could really negotiate price discount from the pro­ viders? The answer is, we don't know. We just don't know what is better. In fact, I think a better way to characterize the literature of economic models and very limited empirical evidence is that it might be better to have a bila­ teral monopoly than to have an upstream monopoly of providers and a competitive insurance market downstream, but we don't know . .So is competition among the health insurers better, ceteris paribus, even without doing anything about the lack of competition among provid­ ers? We don't know the answer to that. Another thing to consider is that these are incredibly complicated. in­ surance products. When you buy insurance you are really signing a very complicated and detailed contract. Those of you in the world of law know that the market for insurance is really a market for contracts. And markets for contracts usually produce enormous complexity, specificity, terms that are difficult to read, and terms that people don't read. So do you want more competition in that market, ceteris paribus, giv­ en the complexity? The answer to that also is we don't know. There might be very good reasons to have some competition, so the market offers more than one contract, but perhaps too many contracts creates information over­ load and consumers just wouldn't make informed decisions or perhaps won't make· any decisions at all. And if we want useful competition, we need to empower consumers who purchase health insurance to make in­ formed decisions. We need to make the options available to them reasona­ ble, understandable, and comparable to each other. But we're a long way from that. When we think about creating some kind of vibrant market for health insurance, these are things we have to think about. We have to think about the consumer that we have. What about the consumer as patient? You would think the consumer as patient would, like a consumer of cars (or like any kind of consumer), want the best mix of price and quality. When we purchase cars, the quality generally increases with price. Generally,. not always,. but generally quality correlates with price, and all of us decide where. along this price quality continuum we want to be. We have 2010] COMPETITION POUCY IN HEAL Til CARE 241 a certain amount of money, we want to get good quality, we decide what to do, but we make these trade-offs, these price quality trade-otis when we purchase things. You would think that the consumer as patient would make those same decisions -- they want good healthcare at a low cost. Well, as a preliminary observation, the best price quality combination in America has generally been with vertically integrated delivery systems like Kaiser and ·Mayo, where the insurer and the provider are either the same entity or are contrac­ tually intimately integrated with each other. We have to figure out why - this is a million dollar question or a $2 trillion question -- why is it that the best delivery system out there is in .such short supply? Why can't we replicate Kaiser and Mayo, which are re­ nowned for providing excellent quality care at below average prices, and let them proliferate in all of America's healthcare markets? ·Why don't market forces yield a deserving winner, like they do for most other products and services markets? · In a market economy that prides itself on competition, it is unaccepta­ ble that the market's superior options are largely denied to the consumer as patient. Thus, we have to think about how we can significantly reorganize the delivery system -- much more so than the insurance system -- to figure out how we can make those choices available to the consumer as patient. What are the reasons market forces are failing so miserably in this market? Perhaps we should ask the very preliminary question, what do consumers-as-patients choose? If you listen to the political rhetoric, you are told that consumers insist on the right to choose their own doctor; they in­ sist they have a right to certain healthcare services; and they :further claim they have a right to exert their freedom· of choice. They accordingly de­ mand these freedoms and services from their insurance companies. One priority you do not routinely hear from patients is the importance of economizing, of trying to save money on healthcare. And there is a rea­ son for that. Most patients, people who have health insurance, do not know how much they are paying for health insurance. Their health premiums are being taken out of their paycheck by their employer, because their employer pays for health insurance and the employee, the employee-as-consumer, doesn't know how much that is. In fact, if you actually ask someone who is making $40,000 a year and say, do you want to spend what amounts to a quarter of your total income on health insurance, clearly most will prefer to economize?· But they are unaware that $10,000 of their annual income is going towards their health 242 INDIANA HEAL Til LAW REVIEW [Vol. 7:225 benefits. So instead you have patients who do not know how much they are paying, and instead only make choices based on quality to the degree they can observe quality. And we have consumers-as-patients saying, I demand to choose my own doctor. I demand to get whatever services I want. I am entitled to these and there is no cost-benefit, there is no cost-quality tradeoff being made. So the decisions that are being presented to the consumers-as-patients are quite dysfunctional. Perhaps it shouldn't be surprising that we and we do not have an effective marketplace for competition that would encourage consumers-as-patients to force competition on the provider market. What about consumers-as-voters? Consumers as voters are exception­ ally good consumers. They are very loud. They make their voices known. Healthcare is a very emotional, very sensitive topic. It mobilizes a lot of political activity. Consumers as voters are very, very good consumers. The only thing is they don't really think about that cost-quality tra­ deoff. For example, about in the current healthcare debate has been over­ whelmingly demanded by consumers? Perhaps there are two kinds of consumers: those to the right and those to the left. In political debate!?, when ·consumers act as voters, we see a bifurcated market. The country un­ fortunately is very much divided in half and the consumers as voters reflect that. What do consumers on the right say? Consumers on the right say, we don't want government in our healthcare at all. Of course, that neglects the role ofMedicare, it neglects the federal role of investing in research, it neg­ lects the role of governmental quality assurance, providing courts to resolve disputes, governments providing training for medical residents, military medicine, and many other public health services. The government is heavily involved with lots of things that consumers to the right like and want to keep. What do consumers on the left say? Consumers on the left also happen to like Medicare. They like the fact that Medicare is so comprehensive, and they like the fact that Medicare does not manage their consumption at alL Medicare lets them take what they want, and co-payments are relatively affordable. Consumers on the left say, this is great! Government organized, government paid-for insurance is perfect. This is what we want, we should expand it. And in fact, one of the compromise proposals is to expand Medi­ care to individuals between 55 and 65. But ofcourse, Medicare is going bankrupt. We. can't afford Medicare and the reason the overhead costs are so low is because it's unmanaged. 2010] COMPETITION POUCY IN HEAL1H CARE 243 That means Medicare invites over-consumption. is vulnerable to fraud, and does not seek opportunities to economize. Even though the consumer loves it, do the consumers realize how expensive it is? One economist in our dis~ cussions said, if you were offered Medicare as an insurance option, you would never take it, because it doesn't direct you to make the right deci­ sions. It's overwhelmingly expensive. We don't know this because really our grandchildren are going to be paying for us. The fact there Medicare exhibits low overhead probably suggests it should have a higher overhead. Tell that to the consumer as the voter. Med­ icare is often the third rail - or the fourth rail, since Social Security is. the third rail- of politics, and the consumer-as-voter approaches this as a rights question, not as a question involving limited resources·in which the current situation is driving the country bankrupt. So for the consumer-as-insurance purchaser, we have to make sure the market works so that consumer is incentivized to make responsible deci­ sions and encourages insurers to provide products that consumers demand. Currently it's not that way. The consumer-as-patient currently isn't afforded the options that a market economy should provide. Instead, the consumer­ as-patient is not exposed to the costs of his or her decisions - and often also cannot observe the quality of his or her decisions - and thus many consum­ er-as-patient decisions are misguided and exacerbate the system's current problems. And the consumer-as-voter is speaking out of ideology and is not speaking out of commonsense practicality. So if we want consumers in­ volved on any of these levels, we cannot heed consumers that are inconsis;. tent, uninformed, or rash. We instead need consumers who think comprehensively, who recognize that, for example, typical voters make de­ mands that hurt typical insurance purchasers, or who recognize that the needs of insurance purchasers are in tension with the demands of patients. A consumer who thinks comprehensively is more likely to act responsibly, instead of driving toward choices that push costs on other people. MR. FOER: Thank you, Barak. That's something I always wanted to say. Thank you, Barak! Now David Orentlicher is going to tell us how the other Barack and his friends on the Hill are going to fix things. PROFESSOR ORENTLICHER: Well, thank you! I guess the inter­ esting thing after hearing all the series of concerns that Barak has laid out nicely is how few of them are being addressed in the healthcare reform pro­ posals. That's really the sad thing about it all. I'm all for healthcare reform, but the way I put it, rather than trying to fix a flawed system--you've heard of the many flaws it has--what we're really trying to do is put more people 244 INDIANA HEALTH LAW REVIEW [Vol. 7:225 into the flawed system and hope that down the road that will create enough voter support for fixing the flawed system. But when you look through the thousands of pages, there is discussion but in terms of real impact on the flaws, there really is not much there. So what are we doing? The goal is to· cover the uninsured. We've got 15% of our population, 47 million--it's probably higher because the data will have­ n't caught up with the recession--in the range of 50 million uninsured. So how do we get there? Some of us have wanted some sort of single system where everybody gets health care, whether it's a Medicare-for-all or getting back to some of the models out there. Barak identified some good ones, but maybe the best model out there is the VA Healthcare System. If you want a low-cost high-quality system-it turns out the British system brought over the U.S. in the form of the VA Healthcare System, is that kind of system. If you are a qualified veteran--not all veterans are eli­ gible--but veterans go to hospitals operated by the U.S. government, doctors employed by the U.S. government and you get high-quality low-cost care. It's not very convenient care--you might have to travel a ways to get your care--but you'll get good care. But it has never been on the table to have VA for everybody or Medi­ care for everybody. But how else do we get everybody into the health care system? What's another important model out there? It's the Ger­ man/Dutch/Massachusetts model. We make sure everybody is insured by requiring them to buy insurance. And this· is kind of an American approach. We believe in individual responsibility. If we think back to the patient as voter, what we find is that patients as voters don't very much like government benefits that are viewed as handouts. In the US, you've got to earn your benefits. You've got to be a "deserving" recipient. I put this in quotes--please don't think that this is my view--I'm caricaturing and not everybody takes this view, but it's a strong sentiment in America that you should be a deserving of your government benefits. So we have good healthcare for seniors who have earned it be­ cause they've worked hard all their lives and they've gotten to a point where their age is overtaking them and they are sick not because they've acted irresponsibly but because that's the nature of aging. They don't have the money to buy .insurance because they are retired, so we cover them. We cover children because how can you hold children responsible for not hav.;. ing healthcare, that's not reasonable. But if you're an able-bodied adult, why don't you out there working? If 2010] COMPETITION POUCY IN HEALTH CARE 245 we give you healthcare insurance, you probably won't work because why would you if you get everything for free. So it's an American approach, and so we're going to require you to buy insurance. If you can afford it, you ought to get it on your own. So there is an in­ dividual mandate to purchase insurance in the House and· Senate bills, with exemptions for the lower-income persons and there will be subsidies for other people. You are working, but may be you are employed in a job that only pays $40,000 or 50,000. Can we really ask you to spend 25% of your income on healthcare insurance? That's not realistic. So there will be subsi­ dies that phase out at $88,000 income; that's what's on the table now. . Well, why would you buy an insurance if you don't have it now--there must be reasons why you haven't bought it--and if it's still very costly, why would you buy it? Well, we'll penalize you if you don't. There are fines that will amount to in the Senate bill about $750 per person and in the House bill, it's a percentage of income. But let's say, you are a single person earn­ ing $60,000. Under the House bill, you would have to pay, about $1000 in penalty. So if you are earning $60,000 and you have to go out and buy insur­ ance and it might cost you $6,000 or $7,000, and the penalty is only a $1000, you still may not buy it. So this is one reason why even with the mandate, we are not going to get to universal health care coverage. There's another way to help cover the uninsured. Who else has some responsibility under the House and Senate bills? Employers. Even though employer-based insurance has problems-as Barak says, we don't really know how much we're spending on health care coverage. Indiana Universi­ ty is kind enough to tell its employees. If we look at our pay stub, it tells us how much of our salary IU is spending. But we never get the money. So we don't feel like it's our money. We feel like it's their money that they are u,sing for us rather than taking it out of our paycheck. But they really are taking it from our pay. Both the House and Senate have kind of employer mandates. Under the House bill, employers either provide ·insurance or they will pay· an 8% payroll tax. So whatever your payroll, multiplied by 8%, which is a pretty good incentive to provide insurance. The Senate doesn't say you have to provide insurance, but if you have at least one employee who gets a government subsidy to buy insurance-­ because you are not providing coverage, so the government has to subsid­ ize--then we are going to charge you $750 an employee. That's the incentive to provide health care insurance. But the House has a stronger incentive 246 lliDMNA~THLAWREVffiW [Vol. 7:225 than the Senate. ·· ·What else?· Insurers. If people have to purchase insurance, insurers have no reason to do actuarial screening and decide whether to offer cover­ age~ If you don't have to buy insurance and if insurers had to provide you coverage, you'd wait until you are sick. Why buy coverage when you are healthy? Many people would say, "I'll wait till I am sick." But that's not fair to insurers. If you have to buy insurance, then we can say to insurers, you have to take all comers. You can't reject somebody, because they have preexisting medical problem. Say they've got diabetes or heart disease. You can't refuse to cover them, you can't charge them a higher premium. That's an important protection for the people who don't have an em­ ployer who provides insurance. Their inability to buy coverage, because of preexisting condition, this will take care of that That's a very important part of the health care legislation. In addition, there will be no more lifetime caps on coverage. Most people have $1 million, $3 million, $5 million dol­ lar cap lifetime. Those caps will be eliminated. Well, where will you get insurance if you now have this burden to buy it? If you don't work at IU or Lilly, and get your insurance, you have to go and buy it. Where will you buy it? The government will set up insurance exchanges, either nationwide under the House bill or state-based under the Senate bill, where insurance companies will have to meet certain qualifica­ tions to sell their plans. Massachusetts has set up a similar kind of program under its mandate to buy insurance. So you can go and shop, and the gov­ ernment has screened and made sure these are plans that provide good qual­ ity coverage. So there will be a marketplace that hopefully will generate competition, and you'll buy your insurance there. What about the very poor people? There are limits on how much we can subsidize health care premiums. Medicaid will be expanded to cover people. In the Senate bill, Medicaid will oover people up to 133% of the federal poverty level. What does that mean? For a single person, it is proba­ bly in the range of $13,000 or $14,000 income. Anybody below that level will be under Medicaid. If you are a family of four, and you earn less than $30,000, you would qualify for Medicaid. Not everybody will be insured-we'll get into the 93, 94, 95% range according to projections. This, then, is the expanding access part. How we are going to pay for this expanded access? It's not going to be free.' Although, it could be in some ways, because we do spend far more than every other country. This is one of the paradoxes. We spend more and get less. All these other countries reach all of their population and spend 2010] COMPETITION POUCY IN HEALTH CARE 247 less -- many of them spend half or less of what we spend. So in some ways we have. the money to cover more people. But there are a lot of inefficiencies that we are not addressing-and that's the problem we are not addressing. Why do we have such high cost? Why aren't there more Kaisers? Why aren't there V A-kind of systems all over the country? Well, we are not addressing that, we are not trying to replicate the low-cost high-quality systems. So it's going to cost us more money to expand access. Now remember President Obama said, he is not going to tax anybody who earns less than $250,000. So if you are not going to tax the average American, where are you going to get your money? The House wants to tax wealthy Americans and that's fair, they probably can afford it. So there is going to. be an income tax surcharge on high-income individuals {ofcourse, nobody is high-income; we are all middle-income). High-income is defined as a single person earning more than half a million or a family more than a million. High earners will have to pay a higher income tax on their incomes above the half-million or million dollar levels-:a 5.4% additional tax. In addition, there'll be a sales tax on medical devices under the House bill. Raising the income tax is controversial, so the Senate is going to just raise the Medicare tax a little bit for high-income persons, and then the Se­ nate is going to tax high-cost healthcare plans. We've got a tax exemption for healthcare insurance that encourages people to purchase too much insur­ ance. And so, if you have a "Cadillac" plan {a gold-plated plan), you'll pay a tax, and that will discourage people from having these excessive, gold­ plated plans. The unions don't like the tax because they've negotiated some of these gold-plated plans for their workers--that's why the ax is controver­ sial. Under the Senate bill, there'll be a tax on elective cosmetic surgery. There also will be new fees on drug companies, device companies and in­ surers, because nobody likes drug companies, device companies and insur­ ers. These businesses are easy to tax--unless their lobbyists object .WQ much. All of this is going to generate a fair amount of money, but. not enough. So where else can we get money? We can cut Medicare spending by $400 billion over ten years. How do we do that? Well, we reduce reim­ bursement rates to health-care providers; doctors get less money, hospitals get less money. Let's remember, Congress periodically says they are going to do that, but every time, they suspend the reimbursement cuts. Now and then, they have reduced reimbursement rates, but will they really sustain $400 billion in cuts? That's a good question. 248 INDIANA HEALTH LAW REVIEW [Vol. 7:225 Medicare Advantage is the private Medicare option. You can go into the traditional Medicare plan in which the government pays the bills, or you can subscribe to a private health plan, and Medicare will pay your premium. 20% of Medicare recipients do that, and it actually costs more than tradi­ tional Medicare. So it's time to cut that back, and that's part of the proposal. In sum, there are several big concerns. You are asking people who earn $60,000 to spend $6600 toward insurance. Can they do that? That's after subsidies. So a lot people aren't going to be covered. Will the subsidies keep up over time. Will Congress really year-after-year vote appropriations for lower-income people for their subsidies? Will Congress stick to the Medicare plan cuts? Will all of this survive the next few years? It's great to expand access, but that's not going to happen until 2013 or 2014. Will Congress maintain this legislation until it kicks in three or four years from now. If we continue to have trillion dollar budget deficits, and we have wars to fund, who knows? And then what about the strategy of expanding access now, deal with the costs later?, It's much easier to expand access--the voters love that--but try to ask them to cut costs. We saw the HMO backlash in the 1990's. HMO's were really good at cutting costs without sacrificing quality. But people didn't like the limits on coverage, even though they were good lim­ its. Even though they weren't being harmed by the limits, they didn't like them. And so, we are not going to try cutting costs right now. We'll expand access and deal with costs later. But that doesn't always work, because it tends to unravel over time and become unaffordable. That was what hap­ pened when Oregon expanded access to healthcare. They tried it, and it worked for a few years until state ran out of money. It worked because they had a boom in the economy. When the economy turned, the state couldn't afford to pay for the expanded access and their level of uninsureds is as high as it was when they started. So who knows. But as President Obama said, sticking with the status quo is even worse. MR. FOER: Thank you, David. Question: How many people out there think they could explain what the McCarran-Ferguson Act is? Just raise your hand Okay, it looks like Chris has his hands full. Go ahead and explain. PROFESSOR SAGERS: I will do my best and I will actually try to keep it brief. I'm very pleased to say first of all that I have Kaiser Perma­ nente Insurance and it rocks. So yahoo! Kaiser! After those two very broad presentations I am going to give a very, 2010] COMPETITION POUCY IN HEAL Til CARE 249 very narrow one. It's one that's directly relevant to the topic that we pro­ posed today and the topic that we talked about during what was really a great session this morning. That topic was: what should be the role of anti­ trust in reforming or improving our healthcare system? The reason that McCarran-Ferguson repeal is relevant is that the busi­ ness of insurance since 1945 has been to a certain extent exempt from anti­ trust. To make a long story short, antitrust is the federal law in the United States that requires that businesses compete with each other and not collude or try to avoid the effects of competition. Well, we have had a federal statute- the McCarran-Ferguson Act-­ for about 60 years that has said antitrust doesn't apply to insurance. Instead, insurance companies are subject to regulation by the state governments. And to some extent the state governments do enforce competition values, although I think most observers believe they recognize them in name only and don't really enforce them. By-and-large there doesn't seem to be much doubt that in health insur­ ance we don't have a competitive marketplace at all. Health insurance mar­ kets are local, and most local markets throughout the United States reflect some degree of concentration, quite a lot of them severely so. Concentra­ tion in this context means that there aren't very many sellers of insurance in a given market. When there aren't very many sellers you likely don't have much competition, which means you don't have much effort to lower prices or reduce costs. Well, efforts to repeal the McCarran-Ferguson Act go back now about 20 years, and once again there is a repeal effort, which has been seen all along as part of healthcare reform. The bills that have been pending this year to repeal the McCarran-Ferguson would apply only to health insurers and to medical malpractice insurers. I guess that superficially makes. a cer­ tain amount of sense, because those are the two insurance markets most re­ levant to the cost ofhealthcare, or so one might think. Apparently for reasons of political expediency more than anything else, this year's bills would repeal the McCarran-Ferguson immunity only as to certain kinds of conduct. In other words, the bills wouldn't say the McCarran-Ferguson Act is hereby repealed as to the business of health and medical malpractice insurance. Instead, it says the immunity is repealed, and I am quoting here, with respect to ''price fixing, bid rigging and market allocation". Those are antitrust terms of art. To make them simple, price fixing is conduct in which two competitors get together and say, okay, we 250 INDIANA HEALTH LAW REVIEW [Vol. 7:225 won't sell our product for less than so and so. Market allocation is the really fairly similar sort of arrangement in which competitors say, okay, you get Toledo; I'll take Cleveland. And as for bid rigging- I don't even know what they were thinking with bid rigging. It's really just a variety of price fixing. Anyway, the state of play right now is that the these were introduced to repeal McCarran were introduced as freestanding bills, but all along it was clear that there would be an effort to make them part of the overall health reform effort. Indeed, the House McCarran-Ferguson repealer was incorporated by Speaker Pelosi by Manager's Amendment in the House healthcare bill, which passed the House in early November. The Senate version of that same bill hasn't yet been included in the Senate health bill. However, Senator Leahy, who sponsored, intends to add it by floor amendment. But it's really much less likely that repeal will be included in the final Senate bill. We've heard a lot about the three moderates in the Senate who have opposed the leadership bill. One of them is Senator Nelson of Ne­ braska. He is formerly a State Insurance Commissioner and an Insurance Executive and he opposes McCarran repeal, and it seems likely that he will manage to keep it out of the ultimate bill. Whatever. hope McCarran repeal ultimately has lies only with the conferees, who might try to include it in a conference bill. So that's the state of play. But the real question that I was asked as part of this conference was, assuming some version of McCarran repeal is adopted, what will be its consequences? In a sense, my answer must beg a $64 question. I think Barak Richman correctly identified it already: conceding that health insurance is not competitive, would it actually make that much dif­ ference merely to expose it to competition? I don't think anybody can really say how much impact competition would have. There is an argument that it wouldn't have that much impact, mainly because insurers can enter a new marketplace only if they can estab­ lish relationships with the existing network of providers in that area, and that's believed to be very difficult at least under current circumstances. So even if the risk of antitrust liability were made much more mea­ ningful, in health insurance it would at least take a while for robust compe­ tition to break out. Now, I personally believe that McCarran simply must be repealed, it has no justification and it does have bad consequences, but for 2010] COMPETITION POLICY lN HEALTH CARE 251 what it's worth even I think that it would be only a necessary, and not a suf­ ficient, solution. Even aside from that uncertainty, predicting the consequences neces­ sarily raises two other questions. First, these bills join medical malpractice and health insurance in the same policy instrument. While that makes a certain superficial sense, the two markets are really quite different. Medical malpractice insurance is a so-called "Property-Casualty" product, which means that it insures people against the risk of liability to third parties. So if a doctor hurt somebody negligently, Medical malpractice insurance will indemnify the doctor. Health insurance is not property-casualty insurance. It's quite differ­ ent. Part of our discussion earlier today concerned the fact that health insur­ ance arguably isn't insurance at all, or at least most health insurance is pretty different. The problem in genuine property-casualty markets is that it's very hard to anticipate how much a company must charge in premiums today to en­ sure solvency when significant losses come down the road. Indeed, all ob­ servers of these markets acknowledge that there is a problem in property­ casualty markets, which goes by the name "insurance cycle" or "underwrit­ ing cycle". Periodically pretty much all the insurers in the market will real­ ize, boy, our premiums are kind of too low right now to ensure our long­ term solvency, so we've got to really, really jack up our rates to make sure we don't go under. That's a recurrent problem. The only point for my purpose is that the existence and the persistent lack of any persuasive explanation for the insurance cycle is a problem in medical malpractice insurance. It's arguably relevant to whether antitrust immunity is needed. Personally, I don't think it's a very good argument, but it's one that's being made. The other problem, which is a significant one and is frankly much too thorny to really dig into in this setting, is that the McCarran repeal bills would not repeal the immunity entirely, even as to health and medical mal­ practice insurers. As I said, the repeal would be limited to specified conduct like price-fixing. So health insurers and medical malpractice insurers would still be immune from antitrust for conduct other than price-fixing or market alloca­ tion, so long as that conduct is also within the remaining vestiges of the McCarran-Ferguson immunity. Now that long sentence, I think, gives some flavor of just how complicated this· problem really is. To know whether conduct would be immune following this repeal, one would first have to ask 252 INDIANA HEALTH LAW REVIEW [Vol. 7:225 whether the conduct price-fixing, bid-rigging or market allocation. If not then the question is whether it would be immune under the existing law of McCarran immunity? That is, is it the "business of insurance," and is it re­ gulated by the states? In other words, it's a really complicated mess. And even within that complicated mess, to make matters worse, the case-law.that exists under the McCarran-Ferguson Act was already messy. Nobody really knows exactly what, for example, is included within the statutory ·term the "business of insurance". Does it cover price-fixing, for example? Sometimes yes, some­ times no. Anyway, to sum up a very complicated problem, even if the repeal bills were adopted they likely will have some sort of limitation to specified conduct like price fixing. The repeal will not apply to some conduct that might be bad. So even if the repeal goes through, insurers might still be able to be to do those bad things. The flip-side of that same coin is, some types of conduct that the re­ peal actually would apply to are in many cases already illegaL The McCar­ ran-Ferguson Act doesn't apply to everything - it shields insurers from antitrust only when they engage in conduct that is "the business of insur­ ance" and it is regulated by state law. So there is sort of a double problem in the repeal that we are likely to get: it won't expose some genuinely bad conduct to antitrust liability. On the other hand, it will make antitrust liabili­ ty available to some conduct that's already illegal and therefore already nominally discouraged by the law. Still, having said all that, I just want to say a couple of things about why even a limited McCarran repeal might still be a good thing. First, there may be important long-term effects. In the future, if mar­ kets become more competitive, then some types of conduct might start to arise that will be open to antitrust liability under this repealer. Second, there is a certain psychological value to repealing McCarran­ Ferguson. Among other things, when Congress says that specified conduct is now illegal, it is a pretty strong message to the Justice Department or the Federal Trade Commission to actually do something. And finally, a very technical point. There is also language in the House health bill that would correct limitations on the power of the Federal Trade Commission,.which I think could be very valuable. Specifically, the Federal Trade Commissionwould be empowered to investigate the insur­ ance industry, including but not limited to antitrust enforcement. but also 2010] COMPETITION POLICY IN HEALTH CARE 253 beyond the antitrustenforcement. That is work the Federal Trade Commis­ sion hasn't been allowed to do for about the last 30 years, and it could be extremely valuable. MR. FOER: Okay, thank you Chris. We are going to change signals a bit at the line of scrimmage here. David Balto's airplane is leaving a little bit late so that gives us an opportunity to insert him into the wide end posi­ tion and send him downfield with - if you take too much time the plane is going to leave. So speak to us. MR. BAL TO: Thanks, Bert. This is really a heady end time for all of us antitrust nerds. We are like the kind of people who are at the dinner par­ ty, just waiting for somebody to ask us aboui competition or consumer pro­ tection and n