Indiana Law Review


The Lithotripsy Game in North Carolina:
A New Technology Under Regulation and Deregulation*

Clark C. Havighurst**
Robert S. McDonough***

I. The Stakes in the Game—Rewards of a New Technology
Every few years, it seems, an expensive new medical technology tests

the ability of the health care system to assess its efficacy, safety, and

cost-effectiveness and to allocate resources so that patients receive optimal

treatment at reasonable cost. Resembling in this respect earlier diagnostic

imaging technologies, extracorporeal shock wave lithotripsy (ESWL) is

a recent technological breakthrough that has captured the attention of

health planners and policymakers. • This noninvasive procedure, which

employs equipment costing up to $2.7 million per installed unit, is

revolutionizing the treatment of urinary stones.^

ESWL appears to be a highly desirable technology from every stand-
point. Not only does it achieve excellent results with lower complication

*Support for the research reflected in this Article was provided under Grant No.

HS05326 from the National Center for Health Services Research and Health Care Tech-

nology Assessment, U.S. Department of Health and Human Services. The authors are
indebted to the numerous individuals, most of whom are cited herein, who greatly assisted
the authors in forming their impressions of lithotripsy in North Carolina. The interpretations
offered here are of course not necessarily shared by those who assisted the authors or
participated so conscientiously in the policymaking effort.

**WilUam Neal Reynolds Professor of Law, Duke University. A.B., Princeton Univer-
sity, 1955; J.D., Northwestern University, 1958.

***B.A., 1982, B.S., 1982, University of Texas at Austin; J.D. Candidate, Duke
University School of Law, 1987; M.A.P.P.S. Candidate, Duke Institute of Policy Sciences

and Public Affairs, 1988; M.D. Candidate, Duke University School of Medicine, 1988.
'For formal technology assessments of ESWL, see National Center for Health

Services Research & Health Care Technology Assessment, U.S. Dep't of Health &
Human Services, Extracorporeal Shock Wave Lithotripsy (ESWL) Procedures for
the Treatment of Kidney Stones (1985); Office of Technology Assessment, United
States Congress, Effects of Federal Policies on Extracorporeal Shock Wave Lith-
otripsy (1986); Farrell, Percutaneous Ultrasound Procedures for the Treatment of Kidney

Stones, 1986 Int'l J. Tech. Assessment Health Care 152; Health and Public Policy

Committee, American College of Physicians, Lithotripsy, 103 Annals Internal Med. 626

(1985). For other recent descriptions and evaluations, see Mueller, Extracorporeal Shock

Wave Lithotripsy of Ureteral Stones: Clinical Experience and Experimental Findings, 135
J. Urology 831 (1986); Riehle, Extracorporeal Shock Wave Lithotripsy for Upper Urinary
Tract Calculi: One Year's Experience at a Single Center, 255 J. A.M.A. 2043 (1986);
Webb, Extracorporeal Shock Wave Lithotripsy and Percutaneous Renal Surgery, 58 Brit.

J. Urology 1 (1986).
^In ESWL, electrohydraulic shock waves shatter kidney stones into small fragments

so that they can be passed naturally by the patient. Chaussy & Schmiedt, Shock Wave

989



990 INDIANA LAW REVIEW [Vol. 19:989

rates than invasive therapies,^ but even given the high cost of "Hthotrip-
ters," it may cost less per treatment than the surgical procedures it
replaces/ Margaret Heckler, Secretary of Health and Human Services,
called attention to both the medical benefits and the cost savings of ESWL
when she announced the approval of the first lithotripter by the Food
and Drug Administration (FDA) in 1984.^

Although there is virtually no question that ESWL is highly effi-
cacious and extremely safe, it has created significant problems for the
health care system. In particular, early and widespread recognition of the
potential benefits of ESWL put intense and sudden pressure on those pro-
cesses that society has installed to evaluate medical technology and to guide
the health care system's development. State certificate-of-need (CON)^
regulators were put in the position of being able to award very big
prizes to a very few. Entrepreneurial urologists and hospitals, playing
for large stakes, pushed the regulatory system very hard. In cases where
the regulators stood firm, they were in the potentially awkward position

Treatment for Stones in the Upper Urinary Tract, 10 Urologic Clinics N. Am. 743

(1983). Prior to the procedure, the patient is anesthetized to keep him pain-free and

immobilized while shocks are administered. Finlayson & Thomas, Extracorporeal Shock-
Wave Lithotripsy, 101 Annals Internal Med. 387, 388 (1984). The patient is then placed
into a tub of water over a shock-wave generator. A two-axis x-ray system is used to
locate the stone and the shock-wave generator is adjusted so that the shock-waves are

focused on the stone. Approximately 1300 shocks are administered during the average

one-hour procedure.

A lithotripter currently costs approximately $1.7 miUion, not including the costs of
installation, which can add an additional $1 million to the price. American Hosp. Ass'n,

Lithotripters: Noninvasive Devices for the Treatment of Kidney Stones, 6 Hosp. Tech-

nology Series: Guideline Report 15, 19 (1985). But see infra note 15 (stating that several

U.S. companies are exploring the manufacture of lower cost lithotripters).

^Surgical lithotomy has an associated mortahty rate of 0.8 percent, R. Smith & D.
Skinner, Complications of Urologic Surgery and Management 102 (1976), whereas
ESWL has a complication rate of less than one percent with virtually no associated
mortahty, Finlayson & Thomas, supra note 2, at 388.

"•The primary cost saving of ESWL comes from a reduction in the length of hospital
stay. FDA Approves Lithotripter for Kidney Stone Shattering, 253 J. A.M.A. 620 (1985)
[hereinafter FDA Approves Lithotripter]. An uncomplicated surgical lithotomy requires an
average stay of one to three weeks. Castaneda-Zuniga, Nephrostolithotomy: Percutaneous

Techniques for Urinary Calculus Removal, 134 Am. J. Radiology 721, 724 (1982). The

newer technique of percutaneous nephrolithotomy requires four to eight days of hospi-

talization. Id. ESWL patients currently remain in the hospital only three days on average,
and it is anticipated that ESWL will eventually be performed on an outpatient basis. FDA
Approves Lithotripter, supra, at 620-21.

^U.S. Dep't of Health & Human Services, HHS News 2 (Dec. 19, 1984) (statement
by Margaret M. Heckler, Secretary of Health & Human Services).

^Certification of need is a legislatively mandated process whereby health care providers

and institutions must obtain approval from a state agency before making large capital

expenditures or instituting costly new services. See infra notes 12-15 and accompanying
text.



1986] LITHOTRIPSY 991

of giving the winners valuable monopolistic franchises and depriving the

losers of patients and significant income.^ Where the regulatory system
gave way, the possibility of overinvestment in duplicative facilities raised

the specter of excessive costs, overuse of ESWL, and neglect of alternative
therapies when they might be medically indicated.^ Although ESWL is
a striking development in itself, much of its interest for policymakers
lies in the lessons it teaches about the overall health care system and

its ability to allocate resources and accommodate technological change.

ESWL has had a particularly significant impact on urologic practice
in North Carolina. That state lies in the center of the so-called '*stone

belt," an area of the country where urinary stones are particularly

common.^ North Carolina urologists are thus heavily committed to the

treatment of urinary stones, devoting an estimated fifteen to twenty

percent of their professional work to this condition. ^^ Hospitals, too,

obtain significant income from urinary stone patients, and this business

has been widely shared by all hospitals. ESWL thus posed an economic
threat to both urologists and hospitals in North Carolina. If treatment

of stones in the kidney and upper urinary tract were suddenly concentrated

in a small number of lithotripsy centers, the impact on the providers

losing that business would be substantial. The appearance of this new
technology in North Carolina also threatened to accentuate a flow of

patients away from community hospitals into the state's few, but stra-

tegically located, academic medical centers. A major "town/gown" con-
flict thus quickly developed as community urologists sought to keep their

patients out of the academic institutions, which allegedly did not always

return patients to the care of their original doctors.

^See, e.g., Michigan News Briefs, United Press International, Feb. 11, 1986 (reporting
that Michigan Department of Public Health had ordered Michigan's two largest hospitals

not to bill patients for ESWL until they received CON approval); New Kidney Stone
Crushing Technique Studied, United Press International, April 26, 1985 (stating that Virginia

Health Commissioner announced his intent to "guard against unnecessary proliferation"

of lithotripers despite the increasing number of applications for certificates of need for

lithotripters).

^See, e.g., Freifeld, The Rush to Crush, Forbes, March 11, 1985, at 170, 171

(stating that in Chicago, health planners had succumbed to provider pressures in approving

more lithotripters than were necessary).

^See Brown, Living in the Stone Belt Can Be Dangerous to Your Kidneys, Durham
Morning Herald, Jan. 13, 1987, at A9, col. 1. Apparently because of dietary factors,

residents of southeastern states have a higher incidence of calculi of the kidney and ureter

than other U.S. citizens. Id. In 1984, the incidence of kidney stones in North Carolina

was 29.9 per 10,000 population contrasted with the mean incidence among states of 16.4
cases per 10,000 population. Sierakowski, The Frequency of Urolithiasis in Hospital

Discharge Diagnoses in the United States, 15 Investigative Urology 438, 440 (1978).
'"Personal communication with John L. Weinerth, M.D., Associate Professor, Division

of Urology, Duke University (July 1986).



992 INDIANA LA W REVIEW [Vol. 19:989

Although the struggle to capture the North Carolina ESWL market
is interesting in itself as a spectator sport, there are more important

reasons to focus on the North Carolina experience. First, the operation

of the CON system was tested in significant ways, yielding lessons for
students of this form of regulation. Second, the method of paying

urologists for lithotripsy received an unusual degree of attention, high-

lighted by a clash between practicing urologists and Blue Cross and Blue

Shield of North Carolina (NCBCBS) over the proper professional fee.
This controversy yields some lessons about how business is done in a
state that has yet to see many of the vaunted benefits of competition
in health care^' and suggests some serious questions about the role of

Blue Cross and Blue Shield plans in forestalling such competition not

only in North Carolina but in the nation as a whole. Finally, the North

Carolina story has recently culminated, for reasons that will appear, in

the repeal of CON requirements for lithotripters, thus presenting every-
one—but especially NCBCBS—with a future challenge. This Article thus
includes a discussion of what must happen now in the deregulated North
Carolina market (and wherever else deregulation is tried) if the right

number of lithotripters are to be appropriately located and properly

used. Although it is far from clear that North Carolina is ready for

deregulation of a single technology of this kind, the lessons drawn from

the North Carolina experience may suggest to other states the merits of
general deregulation and the urgency of encouraging the competitive

developments that would permit it.

II. The con Game—Winner Take All

State CON laws were intended to contain costs and make the de-
velopment of the health care system more rational by requiring prior

state approval before major capital expenditures could be made and new
health services could be introduced.'^ Because prevention of duplication

^^See infra notes 45-63 and accompanying text.

^^See, e.g., P. Joskow, Controlling Hospital Costs: The Role of Government

Regulation (1981); D. Salkever & T. Bice, Hospital Certificate-of-Need Controls:
Impacts on Investment, Costs, and Use 11-24 (1979); Bovbjerg, Problems and Prospects

for Health Planning: The Importance of Incentives, Standards and Procedures in Certificate

of Need, 1978 Utah L. Rev. 83, 84-90; Havighurst, Regulating Health Facilities and

Services by "Certificate of Need;' 59 Va. L. Rev. 1143, 1155-69 (1973). Like other states.

North Carolina has enacted a CON law, N.C. Gen. Stat. § 131E-175 to 191 (Supp.
1985), pursuant to the National Health Planning Resource and Development Act of 1974,

Pub. L. No. 93-641, 88 Stat. 2225, 2584-645 (codified as amended at 42 U.S.C. § 300k-

n (1982)). An earlier North Carolina CON law was held invalid under the state constitution.
In re Certificate of Need for Aston Park Hosp., Inc., 282 N.C. 542, 193 S.E.2d 729

(1973). Before creating the present statute, the state resisted, unsuccessfully, the subsequent

federal compulsion to enact a CON statute meeting federal specifications. See North
Carohna ex rel. Morrow v. Cahfano, 445 F. Supp. 582 (E.D.N.C. 1977), aff'd mem., 435

U.S. 962 (1978).



1986] LITHOTRIPSY 993

is a key regulatory goal, these laws create a powerful incentive for

providers to put any promising new technology, tried or untried, in place
as quickly as possible; once CON approval is obtained, there is a strong
regulatory barrier to entry by competitors until the market expands

enough to support a second facility without appreciable harm to the
first. Even if the first mover purchases costly first-generation equipment,
it will be protected against competition from a later applicant offering

to provide the same service for less.'^ The convoluted rationale for
protecting inefficient providers from price competition in this way is not
addressed here,^"* but it is notable that one effect of this form of regulation

is to encourage early investment by relieving the proponent of the concern

that his investment will be devalued when more efficient technology
becomes available. This point is of present interest because other lith-

otripsy devices that are now under development are expected to cost
substantially less than the devices currently being installed. ^^

North Carolina providers began jockeying for CON's soon after the
announcement of plans for introducing the lithotripter into the United

States from Europe, where it was first developed. Indeed, an application

to offer ESWL in North Carolina was filed one month before Dornier-

'^C/. C. Havighurst, Deregulating the Health Care Industry 195-202, 214-22,

345-53 (1982) (noting the protectionist tendencies of CON regulation with respect to such
desirable cost-saving innovations as home health care, HMO's, and ambulatory surgical

facilities).

'Vf/. at 277-85 (explaining and criticizing the thinking behind protectionist regulation).

'^In addition to Dornier-System, the manufacturer of the first device approved in

the United States, at least four U.S. companies are exploring the manufacture of litho-

tripters. The first of these to begin clinical testing was Medstone International, Spartanburg,

South Carolina. As of May 1985, Medstone had obtained FDA investigational device
exemptions for five sites. American Urologic Ass'n, Report to the Executive Committee

of the AUA: Ad Hoc Committee to Study the Safety and Clinical Efficacy of the Current
Technology of Percutaneous Lithotripsy and Noninvasive Lithotripsy 20 (May 16, 1985)

[hereinafter Report to the Executive Committee]. The Medstone lithotripter uses a fluid-

filled bag for the acoustic interface; with the Dornier device, the patient is placed in a

tub. The estimated cost of the Medstone lithotripter is about $800,000, about half the

cost of the Dornier device.

Two other firms have conducted in vivo studies in animals. International Biomedics,
Inc., of Issaqua, Washington, uses a laser-driven shock wave generator and water-filled

chest waders for the acoustic interface. Id. Another lithotripter, being developed by Dr.

Fray Marshall and colleagues at the Johns Hopkins Medical Center, also uses a fluid-

filled bag but differs from others in using ultrasound rather than x-rays for imaging. Id.

at 21. The anticipated cost of the Hopkins device is between $250,000 and $500,000. The

SD-3 lithotripter, being developed by Northgate Research, Inc., of Plattsburg, New York,
was only in the in vitro investigational stage in 1985. Id. at 20. The cost of this device,

if perfected, is estimated to be only $250,000.

Because lower cost second-generation devices may become available, hospitals may
be hesitant about purchasing costly first-generation equipment. See The Race for Competing
Lithotripters Heats Up, Hospitals, July 20, 1986, at 30; Lithotripsy: Hospitals Take a

Wait and See Attitude, Hospitals, May 20, 1986, at 75.



994 INDIANA LAW REVIEW [Vol. 19:989

System GmbH, the German manufacturer of the original lithotripter,
filed its initial application for FDA approval of the device on February
22, 1984. This apphcation—by North CaroUna Baptist Hospital in Win-
ston-Salem, which is associated with The Bowman Gray School of
Medicine of Wake Forest University—was approved in June 1984, six
months before the FDA approved the Dornier device.'^ A second ap-
plication—by Carolina Lithotripsy, Ltd., a limited partnership of forty-
two North Carolina urologists—was also filed before the FDA acted.
This Fayetteville-based partnership was organized by Dr. William Jor-

dan, ^^ who had gone to Germany at an early date to learn the procedure
and get a jump on the market when lithotripters finally became mar-
ketable in the United States.'^

The forehandedness of these CON applications was impressive
because FDA approval of a new technology normally takes several years. ^'

However, in this case, the FDA, recognizing the potential benefits
of the lithotripter and its extensive testing and use in West Germany,
acted with extraordinary rapidity,^" approving the device on December 19,

^^See Letter from William Vaughn, Chief, Certificate of Need Section, Division of

Facility Services, N.C. Dep't of Human Resources, to John Lynch, President, North
Carolina Baptist Hospitals (June 29, 1984), Dr. David McCullough, Chairman of the

Division of Urology at Bowman Gray School of Medicine of Wake Forest University,
explained that Bowman Gray urologists decided to pursue CON approval early because
they were aware of the results of ESWL testing in Europe and believed that ESWL's
potential benefits made it the "wave of the future." Personal communication with David

McCullough, M.D. (Jan. 1987).
^^See Carolina Lithotripsy, Ltd., Certificate of Need Application 1-5 (July 12, 1984);

see also Big Lithotripter Venture Helps Out Small NC Hospital, Hospitals, May 20, 1986,
at 76 (discussing the Fayetteville, N.C, partnership of urologists that purchased a lithotripter

to be installed at Highsmith-Rainey Memorial Hospital).

'^Personal communication with William Jordan, M.D. (July 1985).
"Currently, the FDA estimates that the median approval time for devices since 1976

has been approximately 8-1/2 months. Kahan, Premarket Approval Versus Premarket

Notification: Different Routes to the Same Market, 39 Food Drug Cosmetic L.J. 510,
518 (1984). This median is misleading, however, as an indication of the review time for

truly new devices. Approximately 60<7o of the premarket applications (PMAA's) received

by the FDA are not for new devices but for devices regulated under transitional provisions
applicable to devices formerly regulated as new drugs. Id. at 518 n.44 (citing 21 U.S.C.

§ 360j(l)(l) (1982)). The review time for these transitional devices, e.g., sutures and contact

lenses, is generally very short. Id. In addition, many PMAA's are returned to the sponsor
for additional data, and this time is not counted in the FDA's statistics. Id. at 518.

Economist Henry Grabowski, a student of drug and device regulation, believes that truly

new medical devices will be subject to an average approval time approximately equal to

that for new drugs. Personal communication with Henry Grabowski, Professor of Economics,

Duke University (July 1985). The FDA has taken an average of 35 months following the
filing of a new drug application (analogous to a PMAA) to approve new drugs. H.
Grabowski & J. Vernon, The Regulation of Pharmaceuticals: Balancing the Benefits
AND Risks 23 (1983).

^°The FDA approved extracorporeal shock wave lithotripsy for general use less than
one year after the commencement of clinical trials in the United States. This was unusually



1986] LITHOTRIPSY 995

1984.^' Carolina Lithotripsy's CON for a lithotripter, scheduled to be
located in a Fayetteville hospital, was issued one day later. ^^

Applications by other North Carolina providers followed quickly

upon the first CON awards and the FDA action. Stone Institute of the
Carolinas, a Charlotte-based partnership of urologists, applied for a

CON in August 1984, and got its approval in January 1985.^^ North
Carolina Memorial Hospital in Chapel Hill, an adjunct of the medical

school of the University of North Carolina, received CON approval in
May 1985.^"* Unsuccessful appHcants included St. Joseph's Hospital of

rapid action. See supra note 19. One commentator argued, however, that the FDA's
approval of lithotripsy was not fast enough, and that the FDA's delay in approving

lithotripsy caused many kidney stone patients, especially those who were high-risk surgical
candidates, to suffer. Gieringer, The FDA's Bad Medicine, 33 Pol'y Rev. 71, 71 (1985).

One reason for the FDA's relatively speedy approval of ESWL was the extensive
testing of the procedure in Europe before it was introduced in the United States. The

FDA had agreed to base its approval largely on the European data. The FDA's National
Center of Devices and Radiological Health will generally consider foreign data in support

of premarket approval if the studies appear valid and if the rights, safety, and welfare

of the research subjects were not violated. Shapiro, Legal Aspects of Premarket Approval

of Medical Devices, 38 Food Drug Cosmetic L.J. 205, 211 (1983). Although the Center
has not relied solely on foreign data in the past, the FDA has recently proposed to allow
approval of new drugs based solely on foreign chnical data. See 47 Fed. Reg. 46,643

(1982). In an interview, attorney Joseph Onek, who represented Domier-System in the
FDA application process, said that testing centers in the United States were able rapidly
to confirm the results of the extensive testing completed in Europe. Personal communication

with Joseph Onek (July 1985). At the time that FDA began to evaluate the lithotripter,
it had been used in Germany for five years. Gieringer, supra at 71. U.S. testing began

less than one year prior to FDA approval. Nearly 2,000 of the 10,000 or so treatments
worldwide had been performed in the United States. U.S. Dep't of Health & Human
Services, News Release, HHS News 2 (Dec. 19, 1984).

Onek also explained that Dornier was slow in introducing the lithotripter to the U.S.

market. By the time it was introduced, urologists, nephrologists, and others knew about

the lithotripter and its advantages and were anxious to obtain the device. Another factor

that may have led to more rapid approval of lithotripsy was the lower per-patient cost
of the procedure. Onek was of the opinion that although relative cost-effectiveness is not

an explicit criterion for approval, FDA officials were aware of and motivated by the
lower costs associated with lithotripsy.

2'FooD & Drug Admin., U.S. Dep't of Health & Human Services, Summary of
Safety and Effectiveness Data: Dornier Lithotripter, Model HM3 20 (1985).

^^See Letter from Susanne Moulton, Chief, Certificate of Need Section, Division of

Facility Services, N.C. Dep't of Human Resources, to William Jordan, M.D., Partner,
Carohna Lithotripsy, Ltd. (Dec. 20, 1984).

^^See Letter from Jack Brinson, Project Analyst, and Susanne Moulton, Chief,

Certificate of Need Section, Division of FaciUty Services, N.C. Dep't of Human Resources
to Orion Finklea, President, The Stone Institute of the CaroHnas, Inc. (Jan. 28, 1985).

^Letter from Nancy Bres Martin, Project Analyst, and Susanne Moulton, Chief,

Certificate of Need Section, Division of Facility Services, N.C. Dep't of Human Resources
to Jane Rhoe-Jones, Acting Director of Planning, North Carolina Memorial Hospital (May

30, 1985).



996 INDIANA LAW REVIEW [Vol. 19:989

Asheville^^ and Duke University Medical Center in Durham;^^ the CON
applications for both facilities were denied because other facilities were

deemed sufficient to serve patients in their respective service areas.
^"^

A fifth lithotripter slipped into the state through a crack in the
regulatory defenses. A CON application by physician-owned Piedmont
Urinary Stone Center, Inc. (Piedmont), which proposed the installation

of a lithotripter in a Winston-Salem hospital, was reviewed together with

the apphcation of Bowman Gray's North CaroHna Baptist Hospital.
Piedmont's application was denied because only one service was deemed

necessary in the Winston-Salem/Greensboro area and the CON agency
preferred that such a service be associated with an academic institution.^^

Piedmont then proposed, however, to install a lithotripter in an outpatient

facility unconnected with a hospital and successfully applied to the CON
agency for a ruling that the CON statute did not apply to capital
investments in major medical equipment to be installed in physicians'

offices. ^^ Although the legislature quickly moved to close this loophole
by extending CON regulation to lithotripters "regardless of ownership
or location, "^° Piedmont's plans were unaffected, and its lithotripter is

currently operating in Winston-Salem.

As in the comparative hearing pitting the Piedmont physician group
against Bowman Gray's Baptist Hospital, the town/gown conflict was
evident throughout the struggles over the provision of ESWL in North
Carolina. The next two CON's went to physician groups that had filed
their applications well before the other academic institutions. Subse-

^^Letter from Dudley Stallings, Project Analyst, and Susanne Moulton, Chief, Cer-

tificate of Need Section, Division of Facility Services, N.C. Dep't of Human Resources,
to Les Brown, Director of Planning and Development, St. Joseph's Hospital (Aug. 27,

1985).

^^Certificate of Need Section, Division of Facility Services, N.C. Dep't of Human
Resources, Required State Agency Findings, Disapproval of CON for Extracorporeal Shock
Wave Lithotripter, St. Joseph's Hospital 2-3 (Aug. 27, 1985).

"Letter from Nancy Bres Martin, Project Analyst, and Robert Fitzgerald, Assistant

Director, Certificate of Need Section, Division of Facility Services, N.C. Dep't of Human
Resources, to WiUiam Anlyan, M.D., Chancellor of Health Affairs, Duke University

Medical Center (May 30, 1986).

^^See Letter from Everette Jenkins, Assistant Chief, Certificate of Need Section,

Division of Facility Services, N.C. Dep't of Human Resources, to Keith Christian, President,
CV, Inc. (July 17, 1984).

^^See Declaratory Ruling, In re Request for Declaratory Ruling by Piedmont Stone

Center, P.A., Piedmont Stone Joint Venture, and Carolina Medicorp., Inc. (Mar. 28,

1985); Letter from Jack Brinson, Project Analyst, Certificate of Need Section, Division

of Facility Services, N.C. Dep't of Human Resources, to Charles Hauser, Agent, Piedmont
Stone Center (Apr. 9, 1985).

^°The amended statute required that all persons obtain a certificate of need prior

to the acquisition of a lithotripter "regardless of ownership or location." N.C. Gen Stat.

§§ 131E-176(l6)g, 178(a) (Supp. 1985). On the policy implications of regulating capital
equipment in physician offices, see C. Havighurst, supra note 13, at 205-10.



1986] LITHOTRIPSY 997

quently, Memorial Hospital in Chapel Hill succeeded despite its presence

in the same service area as the Fayetteville group, in part because it

asserted educational and research needs. ^' (Duke, ironically, was unable

to make this argument because it already possessed a lithotripter for
research use, which was exempt from the CON requirement, and therefore
sought only authority to offer a clinical service for compensation).^^

Perhaps in an effort to defuse opposition from community urologists,
Memorial and Baptist hospitals made special arrangements whereby the
former could obtain privileges to admit and treat ESWL patients. The
claims of community urologists, asserted in a number of applications

and challenges against the academic centers, included concern for the

convenience of patients, the financial security of community hospitals,
and the increasing dominance of the academic institutions.^^

Although the CON regulators stood firm against exceeding a total
of five lithotripters in the state, certain powerful interests were unhappy

with the outcome of the CON process, which resulted in inconvenience
for citizens in the western part of the state and left one prestigious

institution (Duke) barred from charging for the use of a lithotripter

already in place. Several legislators took up the cause of Duke and St.
Joseph's Hospital in Asheville and explored the possibility of legislation

that would bypass the CON agency. Because North Carolina, unlike
some states, does not allow "special legislation" favoring named private
interests,^^ it was necessary to write the exception in generic terms that

bespoke a plausible legislative objective. In about two days' time, a bill

was written and passed by the House of Representatives defining con-

ditions for exemption that only Duke and St. Joseph's could meet.^^
Shortly thereafter, however, the Senate took a different view, and both

^^See North Carolina Memorial Hospital, Certificate of Need Application, Attachment

3, 5 (Dec. 11, 1985).

^^See Certificate of Need Section, Division of Facility Services, N.C. Dep't of Human
Resources, Required State Agency Findings, Disapproval of Conversion of Research

Lithotripter to Clinical Use, Duke University, 6 (May 30, 1986).

"See, e.g., Letter from Raymond Joyner, Chairman, Dep't of Urology, Durham
County General Hosp., to Susanne G. Moulton, Chief, Certificate of Need Section, Division

of Facility Services, N.C. Dep't of Human Resources (Jan. 31, 1985).
'^5ee N.C. Const, art. II, § 24; cf. Commissioner of Public Health v. Bessick M.

Burke Memorial Hosp., 366 Mass. 734, 323 N.E.2d 309 (1975) (upholding constitutionality

of exemptive legislation applied to CON); D. Altman, R. Greene & H. Sapolsky, Health
Planning and Regulation 28, 53, 186-87, 200-01 (1981) (discussing special legislation

exempting named private interests from CON in Massachusetts).
^^Oliver & Andrews, House OKs Bill to Let Duke Use Kidney-Stone Machine, Durham

Morning Herald, July 2, 1986, at IB, col. 2. Many other states have discovered that
technocratic regulation of the health care industry frequently gives way whenever it becomes

necessary to offend powerful interests that can effectively appeal to political leaders for

assistance. See D. Altman, R. Greene, & H. Sapolsky, supra note 34, at 26-31, 153,
177-87, 202-10, 233-36 (noting ways providers circumvent the certificate of need process).



998 INDIANA LAW REVIEW [Vol. 19:989

houses, in a surprising move, finally decided to repeal altogether the

CON requirement for lithotripters and ESWL services.^^
This sudden deregulatory move by North Carolina has somewhat

startling implications. Many states, no longer bound by federally imposed
requirements to maintain CON laws, have cut back on such regulation. ^^
Although a few states have repealed their CON laws altogether, ^^ most
have maintained controls over large capital investments in hospital-based

facilities, ostensibly on the theory that capital-intensive institutional serv-

ices are least amenable to allocation by market forces. ^^ North Carolina's

deregulation of ESWL, which obviously was not the product of a well-
considered policy judgment, is peculiar in that it preserves the basic

scheme of comprehensive regulation but makes an exception for a tech-

nological development of the kind that most observers would agree is

a prime candidate for regulatory allocation.

The North Carolina experience reveals once again the political di-
mensions and debatable premises of CON regulation. Despite numerous
objective studies of the question, CON regulation has never been shown
to control health care costs. "^ Indeed, substantial evidence suggests that

CON laws were put in place not primarily to control costs but to protect
the most powerful existing institutions against competitors skimming

profitable business^^ and to legitimize rapidly rising costs in the eyes of

^^See Lineberry, Duke Lithotripter Use Gets Senate Approval, Durham Morning
Herald, July 12, 1986, at IC, col. 5. Because North Carolina had not contracted with

the federal government under section 1122 of the Social Security Act, 42 U.S.C. § 1320a-

1 (1982), to perform planning services, leading to possible denial of Medicare reimbursement

of capital costs, this legislative action removed all governmental constraints on the in-

stallation of lithotripters.

"Simpson, Full Circle: The Return of Certificate of Need Regulation of Health

Facilities to State Control, 19 Ind. L. Rev. 1025 (1987).

''Id. at 1061, 1079-81.

^'^See C. Havighurst, supra note 13, at 4-5. In the National Health Planning and

Resources Development Amendments of 1979, Congress identified the provision of "inpatient

health services and other institutional health services" as being particularly subject to the

market failure that it viewed as necessitating CON regulation for new health facilities and
services. Legislative findings accompanying the 1979 amendments stated that "the prevail-

ing methods of paying for health services by public and private health insurers" make com-

petition an unreliable allocative mechanism and singled out institutional services as most

likely to be among those "for which competition does not or will not appropriately allocate

supply." 42 U.S.C. § 300k-2(b)(i)-(2) (1982); see also H.R. Rep. No. 190, 96th Cong., 1st

Sess. 51-54 (1979).

*°See generally C. Havighurst, supra note 13, at 63-74 (summarizing analytical and

descriptive studies of CON's effect on costs); P. Joskow^, supra note 12, at 138-68; Sloan,
The Track Record of Certificate-of-Need Programs (paper presented at the third annual

Health Policy Symposium, "The Role of Health Planning in a Competitive Environment,"

Vanderbilt University, May 15-16, 1986).
"'"In North CaroUna, improvement of the borrowing capacity of the hospitals—by

protecting them from competition—was an explicit purpose" behind the enactment of the
state's first CON law. Havighurst, supra note 12, at 1164 n.77 (citing Durham Morning



1986] LITHOTRIPSY 999

an increasingly concerned public/^ Moreover, some have argued that the

main effect of entry regulation has been to protect payers and providers

from having to alter their traditionally nonadversarial relationships by

embarking, respectively, on prudent buying and competitive selling of

health services/^ North Carolina's deregulation of lithotripsy suggests

that legislative support for CON regulation is weakening and that the
public is running out of patience with a regulatory scheme that protects

estabhshed institutions.

The natural question that arises is what happens next in North

Carohna. Unless the market conditions that were deemed to warrant

CON regulation have changed or can now change readily, there may
be a proliferation of unneeded, overutilized lithotripters. According to

the scenario visualized by advocates of health planning and CON reg-
ulation, the public can expect to pay a high price and receive inappro-

priate, even unnecessary, medical care. Whether this vision will be fulfilled,

however, depends upon those who pay for medical care and their will-
ingness and ability to defend themselves against the predictable higher

costs. Later discussion, following examination of payment issues that

have already arisen in North Carolina, will consider what actions payers

might take in this regard and the actual prospects for their taking them."^

That discussion will also consider whether the scenario may instead fulfill
the predictions of deregulation advocates, who argue that unlimited entry
will trigger prudent purchasing and effective price competition among
providers, creating a market deterrent to replace the barrier that CON
regulation supposedly erected to the creation of technological overca-

pacity.

III. Playing for Money

The active pursuit of CON's for ESWL facilities in North Carolina
indicated that providers, particularly physicians, anticipated that the

Herald, June 25, 1971, at IC, col. 1). See also Payton & Powsner, Regulation through
the Looking Glass: Hospitals, Blue Cross, and Certificate-of-Need, 79 Mich L. Rev. 203,
255-56 (1980).

. ''^Payton & Powsner, supra note 41, at 247-48. This source shows that the main
proponents of CON regulation were not themselves interested in cost containment but
stood to gain if the public could be satisfied that continued cost escalation was justified.

They may even have anticipated the great political difficulty encountered by public regulators

in saying "no" to "needs" asserted by reputable providers. See supra note 35; C. Havighurst,

supra note 13, at 25-52.

''The crucial observation of Payton & Powsner, supra note 41, is that CON laws
perpetuated a financing system that served the interests of the dominant payers and

providers. See also Havighurst, supra note 12, at 1156 ("Viewed in the light of possibilities

for more fundamental changes in the market for insurance and health services, certificate-

of-need laws may appear as conservative measures, designed to preserve the very institutions

which create the problems to which they are addressed.").

*^See infra notes 76-127 and accompanying text.



1000 INDIANA LA W REVIEW [Vol. 19:989

ESWL game would be highly profitable. However, what profits would
be earned and to whom they would accrue would depend upon numerous
factors, beginning with the policies and practices of the various payers

and their ability to bargain for favorable rates of payment. The North
Carolina experience featured a heated controversy over physician fees

for lithotripsy as NCBCBS attempted to take a stand against the urol-
ogists' proposal that they receive an allowance for their services roughly

equal to what they previously received when kidney stones were managed
surgically. As explored further below, both the unusual effort made by
NCBCBS and its failure to affect fees significantly are instructive.

The North Carolina experience with lithotripsy also focused attention

on the economics of patient referrals from community physicians to
ESWL centers. Although questions were raised about the ethical propriety
of fees paid—ostensibly for follow-up services—by some centers to re-
ferring physicians, the discussion below shows that such payments may
not be incompatible with fair play and appropriate outcomes in the

lithotripsy game.

A. The UCR Game—with the Blues' Chips
When ESWL was first undertaken in North CaroUna in 1985, NCBCBS

had to set some limit on the urologists' professional allowance for the
procedure."^^ Hospitals would be reimbursed their costs under the cus-

tomary arrangement, but a limit on reimbursable physician fees had to

be initially established by fiat because there was no "going rate" from

which NCBCBS could derive a "usual, customary, and reasonable"
(UCR) rate. Because no fee was yet either "usual" or "customary,"
NCBCBS turned to its Physician Advisory Committee for guidance on
what would be "reasonable."

Largely on the strength of testimony by David F. Paulson, M.D.,

chief of the Division of Urology at Duke, NCBCBS's advisory committee
determined that a fee in the range of $350 to $450 would be proper. ^^

"Personal communication with William DeMaria, M.D., Medical Director, NCBCBS
(Jan, 1987). See also Medical Advisory Panel of the Health Benefits Management
Division, Blue Cross & Blue Shield, Financl^l Analysis of Extracorporeal Litho-
TRiPTER Services, at .05 - .07 (discussing appropriate professional fee for ESWL). Under

the typical NCBCBS contract, the patient patronizing a "participating" physician is assured
that the physician will accept the plan's payment to him as payment in full (subject to

any deductible or co-payment provided for); the plan's contract with the physician so

provides and also sets a "UCR" limit on what the plan will pay. If the patient patronizes
a "non-participating" doctor, the plan typically does not pay the physician directly but

instead reimburses the patient for bills incurred up to a contractually specified limit (usually

based on the UCR formula). See generally Blue Cross & Blue Shleld Ass'n, Usual,
Customary and Reasonable: An Explanation for Doctors 1-3; Blue Cross and Blue
Shield of North Carolina, Cost Care: A Participating Doctor Payment Plan (1985).

"^Personal communication with William DeMaria, M.D,, Medical Director, NCBCBS
(Jan. 1987).



1986] LITHOTRIPSY 1001

This amount was considerably less than the customary surgical fee of

$1,500 to $2,000 for an uncomplicated nephrolithotomy, which Carolina

Lithotripsy proposed to charge/^ The higher fee would accord with the

general position taken by the ad hoc committee on lithotripsy of the

American Urological Association (AUA)/^ This committee was then
chaired, coincidentally, by another North CaroHnian, William H. Boyce,

M.D., former chairman of the Division of Urology at Wake Forest's
Bowman Gray School of Medicine/^ Obviously, Dr. Paulson had taken
a position very much at odds with the interests of his professional
colleagues in the state. ^^

On the merits of the fee issue, the AUA's view was that the urologist
is required to possess special knowledge and to exercise special skills in

ESWL and that the pre- and post-procedure responsibilities associated
with ESWL are the same as with surgery.^' In the contrary view of Dr.
Paulson, the urologist's role in ESWL is merely to supervise the tech-
nician, a much less demanding and extensive service than a surgical
procedure.^^ Adopting the latter view and recognizing that some additional

charges for services before and after the procedure might also have to

be paid, NCBCBS initially recognized $450 as the limit of its payment
responsibility for the procedure itself. In response, Carolina Lithotripsy

""Tersonal communication with William Jordan, M.D. (July 1985). One urologist noted,
however, that the professional fee for ESWL is only one element of the total charge and
that the relative size of the professional fees among providers may not correspond to the
relative total price for the procedure. Personal communication with David McCullough,

M.D., Chairman of the Division of Urology at Bowman Gray School of Medicine of
Wake Forest University.

"^David McCullough, Chairman of the American Urologic Association Ad Hoc
Committee on ESWL and Chairman of the Division of Urology at Bowman Gray School
of Medicine, explained that the larger fee was also justified by the high cost of training

urologists to perform lithotripsy. Personal communication with David McCullough, M.D.

(Jan. 1987). For example, he estimated that the cost of training five Bowman Gray
urologists to perform lithotripsy, including forgone earnings, was $100,000.

^^American Urologic Association, Summary and Recommendations of the Meet-

ing OF THE Ad Hoc Committee to Study the Safety and Clinical Effectiveness of
THE Current Technology of 1) Percutaneous Lithotripsy, and 2) Non-Invasive Lith-

otripsy 5 (May 9, 1984) [hereinafter AUA Summary and Recommendations]. The Ad
Hoc Committee is currently chaired by North Carolinian David McCullough, M.D., who

is also Chairman of the Division of Urology at Bowman Gray.
'"Paulson stated that colleagues told him of the anger many urologists, particularly

those in North CaroUna, had toward Paulson for his stand on this issue. Personal

communication with David Paulson (Nov, 1986). Paulson beleives that some urologists

may have retaliated, but beUeves they were too "shrewd" to make such retaliatory actions

obvious. Id.

^'See AUA Summary and Recommendations supra note 49 at 5; American Urologic
Ass'n, Ad Hoc Committee to Study the Safety and Clinical Efficacy of the Current
Technology of Percutaneous Lithotripsy and Noninvasive Lithotripsy 14, 16-17 (May

16, 1985).

"Personal communication with WiUiam De Maria, M.D., Medical Director, NCBCBS
(Jan. 1987).



1002 INDIANA LAW REVIEW [Vol. 19:989

declared its intention to bill NCBCBS-insured patients for the balance
of the full fee."

Sadly, NCBCBS could not hope to carry the day for several reasons.
First, like most other Blue Shield plans, NCBCBS was committed in its
contracts with subscribers to pay up to the UCR limit. To NCBCBS,
this meant that, once the procedure had been billed for in a sufficient

number of cases, it would have to step up its allowance to whatever

had become "usual" for the particular provider and "customary" in

the community. Although the plan might still challenge a fee as being

unreasonable, a plan official at one point gave the impression that the

plan did not regard "reasonableness" as an independent check on usual

and customary charges.^"* At another point, this official expressed doubt

that the unreasonableness of the allowance demanded by the urologists
could be established, because other insurers around the nation were

paying it.^^ In making this excuse, however, plan officials still seemed

to assume that reasonableness is to be judged by what others do, not

by objective economic criteria.

A second reason why the NCBCBS effort was unlikely to succeed
was the unhkelihood that price competition by providers during the short

period when the low Hmit on NCBCBS coverage was in effect would
yield price reductions or reliable yardsticks for future payments. Even

if patients, faced with paying the excess over NCBCBS's allowance, had
known enough to seek out a lower-cost provider, no service area had
more than one provider during the crucial period. In addition, providers

would have known that the UCR level would jump dramatically if they
could resist for only a short time the temptation to compete.

Finally, NCBCBS officials were unwilling to force a showdown over
ESWL fees because they feared that such a challenge would induce
urologists across the state to refuse to join NCBCBS's participating-
physician program. ^^ Ironically, NCBCBS's concern over attracting phy-
sicians to this program undercut the program's ostensible cost-contain-

ment objective, which was to be achieved by inducing physicians not

to balance-bill subscribers. In this instance, plan officials' desire to make
the program a success in terms of participation effectively prevented

them from vigorously negotiating with physicians over an important cost

item. Of course, the plan may have sensed accurately that no urologists
(other than perhaps those at Duke, which may have higher costs in

"Personal communication with William Jordan, M.D. (July 1985). This meant that the

physicians associated with Carohna Lithotripsy would not "participate" in NCBCBS and
that their patients would therefore not be protected from "balance billing." See supra

note 45.

^^Personal communication with Clifford Balin, Director of Professional Benefits,

NCBCBS (Nov. 1986).
^'Personal communication with CUfford Balin, Director of Professional Benefits,

NCBCBS (Jan. 1987).
''Id.



1986] LITHOTRIPSY 1003

Other respects) would agree to participate at the lower rate and that

balance billing would not trigger price shopping and effective price

competition in the highly concentrated ESWL market.
Because the NCBCBS effort was doomed from the outset, the gesture

that it made—difficult as it was for the plan officials concerned^^—must
strike an outsider as a pathetic demonstration of how ineffectual Blue
Cross and Blue Shield plans generally are in challenging providers on

economic issues.

The NCBCBS experience with lithotripsy fees also reveals the basic
fallacies of the UCR method of setting reimbursement limits. ^^ Essentially,
the idea behind UCR is not, despite appearances, that market-determined
prices can serve as a yardstick of what a proper allowance might be;

there is in fact no pretense that only market-determined (as opposed to

insurer-reimbursed) fees are considered in setting UCR limits. Instead,
the premise underlying a UCR fee ceiling is simply that the great majority
of physicians, as ethical practitioners exercising professional discretion,

do not charge unreasonable or unconscionable prices and that it is

therefore necessary only to compare a physician's fee with those of his

peers to discover its reasonableness. Only a minute's reflection reveals

how completely this conception of how professional services should be
priced embodies the ideology of organized medicine, with its strong

opposition to any arrangement inviting price competition among phy-
sicians. It is apparent then how NCBCBS, like other Blue Cross and
Blue Shield plans that have followed similar policies, serves the interests

of a medical cartel. ^^ Only an insurer that had been bred specifically

—

as Blue Shield plans were^°—for the purpose of advancing physicians'

"Plan personnel viewed themselves—with some justification—as being courageous in
taking on the urologists and indicated that they would probably not have been able to do as

much as they did had Dr. Paulson, a respected physician, not come forward as an ally. Per-

sonal communication with William DeMaria, M.D., Medical Director, NCBCBS (July 1985).
One plan official stated that the allowance for ESWL was finally set at an amount equal to
NCBCBS's average for an open surgical procedure. Personal communication with Clifford

Balin, Director of Professional Benefits, NCBCBS (Jan. 1987). This allowance was viewed
as an accomplishment because it is 10% to 25% less than urologists' actual stated charges

for lithotripsy. Id. However, this allowance is obviously far in excess of that which NCBCBS
sought.

'^See Crump & Maxwell, Health Care, Cost Containment, and the Antitrust Laws:
A Legal and Economic Analysis of the Pireno Case 56 S. Cal. L. Rev. 913, 915-18
(1983) (description and defense of the UCR method of payment); Roe, The UCR Boon-
doggle: A Death Knell for Private Practice!, 303 New Eng. J. Med. 41 (1981) (stating
that the UCR concept has failed to control escalation of medical costs because it contains
none of the limits appUed to other services covered by insurance).

^^See infra text accompanying notes 100-21.

^See, e.g., Anderson, Health Services in the United States 121-32 (1985) (ex-

plaining that Blue Shield plans were sponsored by state and county medical societies);

Bureau of Competition, FTC, Medical Participation in Control of Blue Shield and

Certain Other Open-Panel Medical Prepayment Plans (Staff Report and Proposed



1004 INDIANA LAW REVIEW [Vol. 19:989

economic interests could maintain that the UCR system is a responsible
way to disburse the public's money to physicians.

The long survival of the UCR method for "controlHng" physician
fees might suggest that consumers approved the ideology supporting the

practice of using nonmarket rather than market mechanisms for procuring

medical services. A closer look, however, reveals that because of ethical
and legal restraints imposed on contract and corporate practice^^ and

the resistance of provider cartels to those payers who sought to buy
provider services on competitive terms,^^ consumers were rarely offered

any alternative. Although recent years have seen the growth of such

alternatives as health maintenance organizations (HMO's) and so-called
preferred-provider organizations (PPO's), traditional payment mecha-

nisms remain dominant in North Carolina." The recent experience with

lithotripsy fees provides an example of the high cost that consumers

bear as a consequence. As discussed below, this experience, which is

far from an isolated instance, demonstrates the burdens that providers

and Blue Cross or Blue Shield plans, acting together, impose on con-

sumers.

B. The Doctors Split Their Winnings

In another expression of its concern about cost containment, NCBCBS
at one point declared its opposition to payments by lithotripsy centers

to physicians merely for referring patients for treatment. ^^ Although these

payments were represented as being fees for follow-up services, NCBCBS
personnel feared that the fees paid to the referring physicians were in

fact unethical fee splitting—that is, rebates or kickbacks paid for procur-

Trade Regulation Rule, April 1979) (describing historical origins of Blue Shield plans as

creatures of state and local medical societies).

^•In American Medical Ass'n v. FTC, 638 F.2d 443 (2d Cir. 1980), affd by an

equally divided Court, 455 U.S. 676 (1982), the court enforced an FTC decision condemning
professional societies' ethical prohibitions on "contract practice"—that is, physicians con-
tracting with lay-controlled intermediaries that might be viewed as retaiUng professional

services to the public. Common-law and statutory restrictions on corporate intermediation

in the doctor/patient relationship have also interfered with the ability of consumers to

employ a sophisticated agent to select health care providers and bargain with them on

consumers' behalf. See, e.g., Att'y Gen. Op. No. 81-1004 (Calif., April 7, 1982); Rosoff,

The "Corporate Practice of Medicine" Doctrine: Has Its Time Passed?, Health Law
Digest, Dec. 1984, at 1 (Supp.).

^^See, e.g., Havighurst, Professional Restraints on Innovation in Health Care Fi-

nancing, 1978 Duke L.J. 303, 306-19.
"5ee infra notes 119-20; see also Conn, Health Maintenance Organizations Arrive

in North Carolina, N. C. Insight, Feb. 1985, at 58, 62 (noting that there were 36,600

enrollees in North Carolina HMO's in January 1985).
^Personal communication with William DeMaria, M.D., Medical Director, NCBCBS

(July 1986).



1986] LITHOTRIPSY 1005

ing the patient's business for the center/^ NCBCBS later accepted
urologists' assurances that appreciable services were indeed being provided

following treatment with ESWL/^ At least one physician receiving such
a fee viewed it as a payment for the referral, however/^ In any event,

the practice has not been discontinued/^

The medical profession has long regarded fee splitting as an unethical
practice, and it has been the object of attention by licensing authorities

and professional associations concerned with professional conduct. ^^ A
primary concern has been that rebates will distort a physician's profes-

sional judgment in referring a patient to a specialist, causing either

referrals for unnecessary care or the selection of a specialist on a basis

other than exclusive concern for the patient's welfare. The issue is more
complex, however, than it first appears, and indeed it is possible that

a referral fee may actually improve the chances that a patient will get
optimal treatment. Without such an inducement to refer the patient, a

primary physician may be tempted to provide a service himself rather
than allow another more qualified or better equipped physician to earn
the fee.^^ In the case of a patient with a kidney stone, for example, a

physician might be induced to exaggerate his doubt about how the case
should be managed and then to resolve such doubt in favor of medical
management or surgery rather than referral for ESWL. As economist
Mark Pauly has observed, prohibitions on fee splitting may leave the

^Tlan personnel had two concerns about payments for follow-up services to a referring

physician for "post-procedure" care. First, they sought assurance that this payment was

not merely a referral fee but was for care actually provided. Second, they wanted to

ensure that patients had full knowledge of these fee arrangements. Personal communication

with CHfford BaUn, Director of Professional Benefits, NCBCBS (Jan. 1987).
^"•Id.

^Tersonal communication with John Weinerth, M.D., Associate Professor of Surgery,

Duke University Medical Center (July 1986).
^*NCBCBS, in paying the physician's charge or reimbursing a patient for a cost

incurred, had no easy way of knowing whether the physician was sphtting the fee with

another physician. NCBCBS did, however, refuse to reimburse the portion of the lithotripsy
professional fee designated for "after care" by the primary urologist unless such care was

actually provided. Personal communication with WiUiam DeMaria, M.D., Medical Direc-

tor, NCBCBS (Aug. 1986).
"See, e.g., American Medical Ass'n, Principles of Medical Ethics § 6.03 (1982);

53 Ops. Cal. Att'y Gen. 117, 118 (1970) (interpreting the California prohibition). The

American College of Surgeons has adopted an interpreting statement explaining that it

considers a form of fee splitting the practice of billing a patient a single fee for lithotripsy

and then distributing a portion of the fee to the referring physician. Regents Issue Statement

on Fees for Lithotripsy, Am. College Surgeons Bull., April 1986, at 21. The College

stated that the charge for services and identity of the provider should be disclosed to the

patient. Id.

^"As the supply of physicians grows and primary physicians become less busy, they

may feel greater pressure to keep patients rather than refer them to specialists. Pauly,
The Ethics and Economics of Kickbacks and Fee Splitting, 10 Bell J. Econ. 344, 348

(1979).



1006 INDIANA LA W REVIEW [Vol. 19:989

patient no less dependent upon the primary physician's ethical ability

to subordinate self-interest in making professional judgments.^^ In ad-

dition, Pauly notes that other forms of reciprocity — cross-referrals and
conferral of other benefits—are practiced and are condoned or at least
ignored by Ucensing and professional authorities. It is not clear that

patients' interests would be adversely affected if fee splitting were per-

mitted and openly practiced. ^^

From the perspective of NCBCBS and other, particularly govern-
mental, third-party payers, fee splitting naturally appears as an instance

of "fraud and abuse. "^^ Assuming, however, that the treatment itself

was needed and of acceptable quality, it is not clear why a payer should
be concerned how the fee that it has agreed to pay is divided among
providers. Although the willingness of the referral specialist to rebate

a portion of his fee is a clear sign that the fee is excessive, there is no

reason to expect that the fee would be reduced if fee splitting were

prohibited. The irony here is that such rebates are a manifestation of
price competition among specialists and proof that competition can yield
substantial benefits to anyone who controls the selection of the specialist

—

something that traditional third-party payers have been reluctant to do.

It is of course understandable why NCBCBS would be embarrassed by
unjustified payments to referring urologists; such payments obviously

come out of the excessive fees that NCBCBS has been unable to resist
paying for the procedure. Nevertheless, efforts by NCBCBS and profes-
sional interests to suppress fee splitting would not serve to lower that

fee or benefit consumers.

Indeed, it appears once again that the consumer's interest may lie
in fostering, not suppressing, fee splitting. Although at first glance it

may not seem to matter to consumers how physicians divide their excessive

^^Id. at 349; see also Schaffer & Holloman, Consultation and Referral Between
Physicians in New Medical Practice Environments, 103 Annals Internal Med. 600, 601
(1985).

^^Tort law and possibly other legal remedies would presumably discourage the worst

abuses. Also, if fee splitting were a known practice, patients would be on their guard,

and some physicians might disclose their practice and share the savings with patients.

Pauly, supra note 70, at 349.

"Indeed, section 1877(b)(1)(A) of the Social Security Act, added by the Medicare-

Medicaid Anti-fraud and Abuse Amendments of 1977, expressly prohibits the receipt of

"kickbacks," "bribes," and "rebates" made "directly or indirectly, overtly or covertly,

in cash or in kind ... in return for referring an individual to a person for the furnishing

or arranging for the furnishing of any item or service for which payment may be made
in whole or in part under this title." 42 U.S.C. § 1395nn (1985) (Medicare). See also id.

§ 1396h(b) (Medicaid). In United States v. Greber, 760 F.2d 68 (3d Cir. 1985), the court

held that this statute was violated if the fee was to induce the physician to use the service,

even if the fee was also intended to compensate the physician for professional services.

See generally Gebhard, Lithotripsy Referral Fees: Medicare Fraud and Abuse?, Am. College

Surgeons Bull., April 1986, at 16.



1986] LITHOTRIPSY 1007

profits, the matter is not so simple. If a primary physician expects a

rebate for referring stone patients for ESWL, he is Hkely to increase
his competitive efforts to attract such patients, offering price and other

inducements that will lower his net return and confer benefits on con-

sumers. Again as Pauly has observed, the medical profession's historic

opposition to fee splitting represents, in some measure, a desire to

suppress price competition among specialists and to remove the desta-
bilizing effects of rebates in markets for primary care.^'' By the same
token, consumers would probably be better off if fee splitting were

acknowledged as a legitimate competitive practice. Indeed, competition

in fee splitting could compensate in some measure for the failure of

NCBCBS and other payers to force ESWL centers to compete for the
opportunity to serve their insureds.

It would be claiming too much to suggest that the problem of
obtaining optimal treatment for stone patients at a competitive price

would disappear if fee splitting were tolerated. Questions would still

exist concerning the incentives and professional integrity of referring

physicians and the ability of patients or insurers to detect and thus deter

physician abuse. Moreover, the high level of concentration in ESWL
markets suggests that competition may not be effective in forcing ESWL
fees down to truly competitive levels. ^^ Finally, some of the competitive
strategies employed by primary physicians to attract stone patients would

undoubtedly involve wasteful nonprice inducements, adopted precisely

because price competition is unavailing when patients are heavily insured.
Despite these reservations, however, the problems uncovered in the ex-

isting system make it highly probable that efficient allocation of resources
is more likely to be approached under open competition than under the

conventional arrangements sponsored by NCBCBS and favored and fos-
tered by organized medicine.

IV. The Coming Show-down—Buying and Selling ESWL
Under the Nevs^ Rules

North Carolina's deregulation of lithotripters prompts speculation

about the outcome of the new hthotripsy game. Many bettors predict

^"Pauly, supra note 70, at 348. For other instances in which prohibitions of rebating

served anticompetitive purposes, see Department of Ins. v. Dade County Consumer Ad-

vocate's Office, 492 So. 2d 1032 (Fla. 1986) (statute prohibiting rebates to consumers by

insurance agents held unconstitutional); Owen, Kickbacks, Specialization, Price Fixing,

and Efficiency in Residential Real Estate Markets, 29 Stan. L. Rev. 931, 949-55 (1977)

(title insurer's rebates to brokers).

^^Given the oligopohstic character of the ESWL market, the amount of the rebate
is likely to become standardized through tacit collusion. See infra text accompanying note

91.



1008 INDIANA LAW REVIEW [Vol. 19:989

that North Carolina citizens will lose, incurring substantially higher costs

without enjoying commensurate benefits. Although a consumer victory

can be imagined, it remains to be seen whether the players fielded by

consumer interests, particularly NCBCBS, will change their strategy and
improve their performance enough to produce an outcome different from

that envisioned by the oddsmakers.

A. Prospects for a Consumer Defeat

If payment systems retain the forms favored by NCBCBS and pro-
viders. North Carolinians face the prospect that they will have to pay

in full the costs of purchasing and maintaining an excessive number of

costly lithotripters. In a normal competitive market, consumers are ben-

efitted, not harmed, by excess producer capacity. As sellers ignore their
"sunk" costs—that is, those investments that cannot be recovered by
withdrawing from the market—competition causes unit prices to fall
below average total cost, giving consumers a bargain until equilibrium

is restored by the withdrawal of some capacity. ^^ Competitive conditions

also deter the creation of inefficient overcapacity because a would-be

investor could not expect to recover his investment in new facilities

unless existing facilities were either inadequate or relatively inefficient.

In health care, unfortunately, because traditional reimbursement mech-

anisms give patients little reason to shop for low prices, it has not been

possible to count on competition to drive prices below average total

cost and to discourage overinvestment. If would-be investors in North

Carolina lithotripters currently believe that existing financing arrange-

ments are not likely to change before they have recovered their capital

outlays,''^ North Carolina consumers do indeed face unjustified higher

costs as a consequence of deregulation.

Higher prices to North Carolinians may also result from other causes.
If payment systems do not threaten now or in the near future to put
competitive or other pressure on high-cost providers, a would-be investor

^^Under competition, prices tend to equal marginal cost, the cost of the last unit

produced. With overcapacity, marginal cost includes no capital costs. On the other hand,
if production is at full capacity, marginal cost includes the cost of the capacity that must

be added to increase production. See generally P. Areeda, Antitrust Analysis t 114-

16 (3d ed. 1981).

^^An issue arises concerning the period over which an investor can recover his

investment. In North CaroUna, ESWL providers have pressed to have NCBCBS reimburse
hospitals for lithotripter depreciation on the basis of a two-year useful life; NCBCBS has
argued for amortization over five years. Personal communication with Clifford Balin,

Director of Professional Benefits, NCBCBS (Aug. 1986). NCBCBS has resolved the
dispute. Id. Obviously, a longer period of payback increases the risk that market conditions,

including insurer practices, will change in ways detrimental to providers and will thus

discourage overinvestment in lithotripters.



1986] LITHOTRIPSY 1009

has no reason to await the availabihty of a lithotripter less costly than

the Dornier device. In addition, consumers cannot expect to enjoy across-

the-board cost savings when lower-cost devices do appear; they would

instead, under prevalent cost-reimbursement formulas, continue to pay

the full depreciation costs of obsolete equipment. ^^ Finally, the absence

of effective price competition would also allow providers who are not
reimbursed strictly on the basis of costs actually incurred—physicians,
in particular—to charge prices well in excess of their costs. It has already
been shown how UCR allowances in North Carolina represent excessive
payments for professional services. The ability of physicians to overcharge

for their role in ESWL reflects the noncompetitive conditions prevalent
in that market. Unfortunately, unless changes occur in payment systems,

ehminating CON-protected monopolies of ESWL may not bring prices
down.

A proliferation of lithotripters might also trigger higher health care
costs in the form of overuse of the devices to treat stone patients who
could be managed satisfactorily at much less expense without resorting
either to the device or to surgery. ^^ Traditional payment systems offer

only weak defenses against such overutilization. One theory supporting
CON regulation was that supply could be curtailed to an extent that

^^The Medicare program's position regarding capital costs is very much in limbo at
the moment, contributing substantially to the uncertainty facing would-be investors in

North Carohna lithotripters. Currently, under Medicare's prospective payment system,

capital costs (depreciation, interest, and return-on-equity for for-profit institutions) are

not included as part of per-case payment rates, but are reimbursed at actual cost. See

E. Power, Extracorporeal Shock Wave Lithotripsy and the Medicare Prospective
Payment System 8, 14 (1985). Because hospitals are assured coverage of the acquisition

costs, hospitals are encouraged to acquire new technologies. Id. at 19.

However, the Reagan Administration has proposed a plan to phase Medicare capital

payments into DRG's over a four-year transition period, beginning with fiscal year 1987

cost reports. Firshein, HHS Capital Plan Arouses Provider Anxieties, Hospitals, June
20, 1986, at 24 [hereinafter HHS Capital Plan]. Payments would be based on hospital-
specific and national rates, with fiscal year 1983 cost reports trended forward. Firshein,

Providers Call '87 PPS Increase 'Unacceptable', Hospitals, July 5, 1986, at 31.
Meanwhile, hospitals and other providers are urging Congress to intervene. Id. Senator

David Durenberger (Rep. -Minn.) has proposed a plan to fold Medicare capital payments

into DRG's over a seven year period. HHS Capital Plan, supra, at 24. In addition, both
the House and Senate have approved a supplemental appropriations bill that includes a
one-year moratorium on inclusion of capital costs. Hospital Shouldn't Wait to Evaluate

Medicare Changes for Fiscal Year 1987, 4 Prospective Payment Survival 108 (1986).
''Even though efficiency considerations may dictate using ESWL in many cases if

overcapacity already exists, new capital investments enabling the provision of ESWL in
identical cases would not necessarily be indicated. This anomaly results because, if the

capacity is not already in place, the marginal cost of additional treatments, which must

be compared to the advantages of ESWL over alternative therapy, includes the cost of
new capacity and is therefore significantly higher than it would be if a lithotripter were

standing idle. See supra note 76.



1010 INDIANA LAW REVIEW [Vol. 19:989

would force health care providers to ration limited resources to their

best uses. Political conditions, however, have usually made it impossible
for CON regulators to challenge medical opinion on appropriate utiU-
zation or to do more than try to prevent the creation of unused capacity. ^^

Although CON regulation has therefore probably done little to contain
the excess demand for services induced by passive insurance plans, ^^ the
lifting of CON restrictions, by removing the occasion for regulatory
determinations of need, may have created some additional risk that
physicians will extend their use of ESWL technology well beyond the
point at which its benefits are at least equal to its cost of roughly $6,000

per procedure. ^^ Lacking the ability to resist paying for all services that

^'^See C. Havighurst, supra note 13, at 36 (reporting an informal survey indicating

that CON regulators see their role only as preventing duplication, not as forcing rationing).
^^See references cited note 40 supra. See also C. Havighurst, supra note 13, at 58-

63 (demonstrating graphically how "inflationary pressures [attributable to passive insurance
plans] may, like a balloon, bulge out at another place even if growth in one direction

is effectively prevented").

^^Indeed, North Carolina urologists have already begun to suggest that the device

is appropriately employed to treat stones that are small enough to pass (with some

discomfort, to be sure) through the urinary tract. E.g., Personal communication with

John Weinerth, M.D., Chief of Urolithiasis Service and Associate Professor of Surgery,

Duke University School of Medicine (July 1986). Elsewhere urologists are finding other

possible uses for lithotripsy, including its use against gallstones. See Sauerbruch, Erag-

mentation of Gallstones by Extracorporeal Shock Waves, 314 Nev^ Eng. J. Med. 818

(1986). The procedure may also be useful against bladder and kidney tumors. See Russo,
High Energy Shock Waves Suppress Tumor Growth in Vitro and in Vivo, 135 J. Urology
626 (1986); Shock Waves Being Used to Bombard Cancer, Durham Morning Herald, Nov.

17, 1986, at IB, col. 1.

The "need" for lithotripsy and indeed for most medical services is difficult to determine

for several reasons. Most observers are much more comfortable in asking simply whether

the service is at all beneficial than in judging whether beneficial treatment is appropriate

by comparing benefits with marginal cost. Moreover, the variability of marginal cost noted

supra notes 76 and 79 reveals that appropriateness may depend on the availability of
unused equipment and not exclusively on medical circumstances. The resolution of the

need question is also complicated by partisanship. In utilization review, providers tend to

be liberal in defining the need for their own services. See generally Havighurst & Blumstein,
Coping with Quality/Cost Tradeoffs in Medical Care: The Role of PSROs, 70 Nw. U.L.
Rev. 6 (1975). In CON review, the "haves" tend to minimize need and the "have-nots"
to exaggerate it.

One Duke physician has stated that the studies used by the North Carolina CON
agency greatly underestimated the need for lithotripsy. Personal communication with John

Weinerth, M.D., Chief of Urolithiasis Service and Associate Professor of Surgery, Duke

University School of Medicine (Aug. 1986). The North Carolina Work Group Report,
prepared by physicians and administrators, estimated that approximately 20% of renal
stone patients would be lithotripsy candidates. See North Carolina Lithotripter Work Group
Report (June 14, 1985). Weinerth argued, however, that recent unpublished reports from

lithotripsy centers throughout the United States indicate that 85% of all renal stone patients
would benefit from lithotripsy. Weinerth explained that certain types of patients that were

previously thought ineligible for lithotripsy, such as pediatric patients, patients with bilateral

stones, and patients with staghorn calculi, may be hthotripsy candidates. However, a study



1986] LITHOTRIPSY 1011

physicians prescribe in good faith, traditional health insurers expose

North Carolina consumers to yet another source of unjustified higher

costs.

B. Available Defenses

If unjustified cost increases of the foregoing kinds are to be averted

in North Carolina, insurers of ESWL must find ways of limiting the
fees and charges they will pay and of ensuring that only justified services

are provided. The defensive strategies available include writing insurance

policies that restrict coverage of the procedure, limit the amount payable
for it, or deny or limit coverage of the ESWL services of particular
providers. ^^ Vigorous implementation of these approaches would be incon-

sistent with the practices of traditional insurers, however, being more like

the choice-Hmiting methods of HMO's, PPO's, and other alternative
financing and delivery mechanisms. Because financing plans of the latter

types enroll only a small fraction of insured North Carolinians,^^ cost

escalation is highly Hkely unless fundamental changes occur in the coverage

enjoyed by the great majority of citizens. The small increases in the overall

cost of traditional health insurance that are attributable to the deregula-

tion of lithotripters are unlikely in themselves to induce a significant shift

to alternative health plans.

Perhaps the easiest cost-containment strategy for controlling over-

utilization of ESWL is a contractual Hmitation of the plan's obligation
to pay for the service in the absence of specified medical indications.

As a practical matter, however, such a contractual condition of coverage
is difficult to administer. For example, enforcement of a provision

denying coverage for the shattering of small stones below two miUimeters^^

at Shands Hospital of the University of Florida estimated that even fewer renal stone

patients would be lithotripsy candidates. See Memorandum from Shands Hospital to All
State Health Planning Agencies (April 17, 1985). Shands Hospital was involved in the

cHnical testing of the lithotripter and thus was among the first to receive the machine.
Weinerth explained that the Shands group may have been overly conservative in their
estimate of the need for lithotripsy because they had no interest in having a large number

of lithotripsy centers enter the market.

"For a general discussion of cost-control strategies available to private financing

programs, see Havighurst & Hackbarth, Private Cost Containment, 300 N. Eng. J. Med.
1298 (1979).

""^See infra note 120.

^^See Drach, Urinary Lithiasis, in Campbell's Urology 1123 (5th ed. 1986) (stating

most urinary stones less than 5 mm will pass spontaneously and patients with small stones
may be treated with pain relief and instructions about recovery of stone). See also Preminger,
The Current Role of Medical Treatment of Nephrolithiasis: The Impact of Improved

Techniques of Stone Removal, 134 J. Urology 6, 6, 9 (1985) (stating that in a study of

103 consecutive stone clinic patients, only 2% of the patients on medical therapy required
an operation for newly formed stones, whereas 58% to 69% required an operation for
new stones before beginning medical treatment; noting that the cost of management is

less than $1,000 per year).



1012 INDIANA LAW REVIEW [Vol. 19:989

would require either that the plan accept the physician's representation

of the stone's size or that x-ray evidence be obtained before the procedure.

Enforcement of an evidentiary requirement by denial of coverage would

be unreasonable, however, unless the patient or the physician knew of

it in advance. Not only are patients unlikely to be aware of such

administrative details, but physicians may also be unaware or may refuse
to cooperate, insisting that the insurer should accept either their rep-

resentations of the facts or their clinical judgments concerning patients'

needs. In a similar situation, Indiana dentists organized a concerted

refusal to provide x-rays to dental insurers for cost-containment purposes.

Although that conspiracy was held to be an antitrust violation,^^ individual

refusals to cooperate with insurers are to be anticipated.^^ Urologists

might well claim that individual cases differ so that medical necessity

cannot be determined without a fuller medical inquiry. Consequently,

given the burdens associated with coverage restrictions and their un-

popularity with patients and providers alike, it appears improbable that

the possibility of saving a few dollars on claims for ESWL will alone
trigger adoption of these strategies by North Carolina insurers.

North Carolina insurers might bring unit prices and utilization under

some control by increasing cost sharing by patients, by tightening limits

on reimbursable fees, or by shifting to fixed-indemnity coverage. Each

of these approaches would be aimed at reducing the insurer's exposure

and increasing the consumer's financial stake in each transaction in the

expectation that he will shop for care with cost considerations more

prominently in mind. Consumers may not be happy, however, to accept
these new responsibilities and increased financial burdens. Moreover,
there is little reason to believe that consumers would be especially effective

shoppers or that conditions conducive to price competition prevail in

the market for ESWL. Although a fixed indemnity payment for ESWL
would seem to be a sensible policy and one that a particular insurer

could rather easily adopt, strategies of this kind have been freely available

to all insurers for a long time but have rarely been employed. It is

«^FTC V. Indiana Fed'n of Dentists, 106 S. Ct. 2009 (1986).

*^A legal issue would arise if a physician billed for a service he had rendered

knowingly without complying with the preconditions of the patient's insurance. Although

precedent is scanty, cf. Eisenberg & Rosoff, Physician Responsibility for the Cost of
Unnecessary Medical Services, 299 N. Eng. J. Med. 76 (1978), such a negligent failure

to meet the patient's needs would seem to open the physician to professional liabiUty for

damages equal to the amount of insurance reimbursement lost. However, even though a

patient might thus successfully resist a suit to collect the physician's bill, an insurer would

undoubtedly find it both awkward to deny the patient's claim and difficult to ensure that

physicians were aware of its requirements and their applicability to particular patients.

Nevertheless, some insurers have required patients to obtain either second opinions on

the need for treatment or the insurer's prior authorization of coverage for such elective

procedures.



1986] LITHOTRIPSY 1013

unlikely that the deregulation of ESWL poses enough of a threat of
cost escalation to prompt significant redesign of coverage along these

lines.

The most practical and effective approach to cost containment in
private health insurance would concentrate not on writing selective cov-

erage of ESWL or shifting costs from the insurer to its insureds, but
on excluding certain providers altogether from eligibility to provide

covered services. This approach, however, would violate the principle

of free choice of provider that is embedded in the standard coverage

offered by NCBCBS and strongly favored by health care providers. Such
exclusion would also violate North Carolina law, which permits insurers

to cover the services of designated "preferred providers" on more fa-

vorable terms but prohibits an insurer from excluding providers com-

pletely from treating insured patients at the insurer's expense. ^^ Thus,

although the abihty to exclude a high-cost or uncooperative provider

altogether from plan coverage might allow an insurer to obtain even

more favorable results. North Carolina insurers wishing to procure ESWL
services for their insureds on favorable terms must employ the PPO
mechanism. ^^

The potential value to consumers of letting the insurer act as a

middleman in procuring hospital and physician services is powerfully

demonstrated by the ESWL situation in North Carolina. If an insurer
could deliver paying patients to a provider by designating it as either

the exclusive or a preferred provider of insured services, the insurer

could bargain for a fair price both from the hospital for use of the

lithotripter and from the physician presiding over the procedure.'" In

addition, the insurer could seek providers' cooperation with its efforts

to control overutilization. Conversely, an insurer, such as NCBCBS, that
feels constrained to cover care at all centers on equal terms lacks the

ability to steer patients away from a high-cost provider and therefore

has no bargaining power.

«8N.C. Gen Stat. §§ 57-16.1, 58-260.5 -.6 (1985).
^^On the PPO concept, see generally P. Lindsey, State Laws and Regulations

Governing Preferred Provider Organizations: Annotated Bibliography on Preferred
Provider Organizations (1986); E. Rolph, State Laws and Regulations Governing
Preferred Provider Organizations (1986); E. Rolph, State Laws and Regulations
Governing Preferred Provider Organizations: Executive Summary (1986).

'"The practice of fee splitting, see supra text accompanying notes 73-75 suggests

that price competition is indeed feasible if a payer is willing to influence insured patients

to select the low-cost provider. NCBCBS claims that it has been able to negotiate with
providers on the machine use fee. Under the plan's provider contracts, the professional

fee is reimbursed at a UCR rate, but the facility fee is negotiated, taking into account
the provider's costs. Personal communication with WilUam DeMaria, M.D., Medical
Director, NCBCBS (Aug. 1986). See supra note 77. Because NCBCBS does nothing to steer
its insureds to lower-priced centers, however, its bargaining power is minimal.



1014 INDIANA LAW REVIEW [Vol. 19:989

Despite the theoretical potential for obtaining competitive terms from
providers through hard bargaining, the small number of providers of
ESWL makes the real-world prospects for effective bargaining proble-
matic. In any oligopolistic industry, the danger exists that each of the

few competitors will realize that any aggressive competitive move that
it might make in search of a short-run advantage would simply cause
its competitors quickly to follow suit, making all of them worse off in

the long run. With this perception of their "interdependence," the
oligopolists are each likely to refrain from competitive moves, producing

essentially the same result as if they had agreed explicitly not to compete. ^^

In addition to creating conditions conducive to tacit collusion, the small

number of competitors in the market also facilitates explicit agreements
in restraint of trade. Even if ESWL providers did not actually fix prices,
they might well agree, tacitly or overtly, to eschew competitive contracting

with insurers. It is highly probable that an insurer seeking a beneficial

contract for ESWL services in a market with few sellers would encounter
substantial resistance to its proposals.

In keeping with the prediction that a concentrated provider market

is unlikely to be competitive. North Carolina HMO's reported before
deregulation that they anticipated no success in obtaining lithotripsy on

special terms for their patients. Deregulation of lithotripsy may have
significantly improved the prospects for competitive bidding, however. ^^

With deregulation, a payer may now shop not only among the five
providers originally in the market, but also among providers who were
previously barred from entry. Indeed, Duke, which already has a lith-

otripter and has signified a willingness to accept a small professional

fee, may be a lower-priced source of treatment. Even if Duke turns out
to be no cheaper overall or inadequately cooperative with insurers'

utilization-control efforts, the possibility remains that an insurer, acting

"On oligopolists' interdependence, see generally 6 P. Areeda, Antitrust Law
1 1428-36 (1986).

^^The CON program previously hindered the efforts of payers to obtain lithotripsy
at competitive prices. Dr. Lawrence Oakes, Medical Director for the Kaiser-Permanente

plan in North Carolina, explained that if there are a number of providers of a medical

service in a given area. Kaiser can award an exclusive contract to the lowest-cost provider.

Personal communication with Lawrence Oakes, M.D. (June 1985). This type of bargaining,

however, is impossible in a monopolistic situation. Dr. Samuel Warburton, Vice President

of the Health America plan in North Carolina, reported that prior to deregulation, he

was unable to negotiate a urologist's fee for lithotripsy that was close to what he believed

to be a competitive price. Personal communication with Samuel Warburton, M.D. (June

1985). Since deregulation, the plan has obtained a more satisfactory price. Warburton

explained that, with prices for ESWL as high as $12,000 per procedure. Health America
has been able to obtain a $4,300 total fee for an uncomplicated renal stone procedure.

Personal communication with Samuel Warburton, M.D. (Oct. 1986). Warburton said he

anticipates that he may be able to bargain for a total fee of $2,500 in 1987. Id.



1986] LITHOTRIPSY 1015

independently or in concert with others, could stimulate the entry of

yet another, lower-cost provider by offering it a long-term contract as

the exclusive or preferred provider of ESWL services to its subscribers.
Armed with the threat to pursue this newly available strategy, an insurer
should find existing providers more willing to bargain for its business.

It is paradoxical but crucial that repeal of CON requirements can generate
pressure for lower prices even if no new entrant actually materializes.^^
Potential competition is frequently more effective than actual competition

in keeping prices down in concentrated markets.
Despite the foregoing theoretical possibilities for effective cost con-

tainment, NCBCBS has so far made no move to change its methods
of purchasing ESWL,^"^ and other insurers, with a smaller overall stake,

are even less likely to take specific steps to control the costs of ESWL
in a deregulated environment. The financing system thus remains, as it

was before deregulation, an invitation to overinvestment in lithotripters.

Because North Carolina payers lack the ability or the will to control

overutilization of ESWL and to buy cheaply in an overstocked market,
North Carolina consumers face the prospect of a costly defeat in the

new phase of the lithotripsy game.

V. Making the Game Competitive

An informal survey following the 1986 deregulation of ESWL by
the North Carolina legislature revealed no provider with plans to install

a Hthotripter in the state other than the seven original aspirants, each

of which was finally successful in negotiating the regulatory/poUtical

path to market entry—four by obtaining CON's, one (Piedmont) by
exploiting a statutory loophole for nonhospital-based equipment, and

two (Duke and St. Joseph's) by getting legislative assistance. ^^ It is a

mistake to conclude, however, because deregulation failed to trigger a burst

of new investment, that market forces are satisfactorily controlling ESWL
costs in North Carolina. Instead, because seven lithotripters appear

themselves to be too many to service the state efficiently, it can be
observed that regulation itself failed to prevent the creation of excess

capacity. "^^ More generally, it can be suggested that CON regulation,

"C/". C. Havighurst, supra note 13, at 234-36 (discussing how allowing HMO's to
build new hospital facilities without a CON stimulates not new hospitals, but greater
willingness of existing institutions to bargain with HMO's).

^''Personal communication with WiUiam DeMaria, M.D., Medical Director, NCBCBS
(Nov. 1986) (stating that NCBCBS was contractually bound in its subscriber contracts to
pay the UCR reimbursement to providers).

^^See supra notes 16-36 and accompanying text.

^^It seems appropriate to count the Duke and St. Joseph's lithotripters as entering
the market under regulation, not deregulation. See supra notes 25-36 and accompanying

text.



1016 INDIANA LAW REVIEW [Vol. 19:989

almost inevitably politicized, provides unreliable protection for consumer

interests whenever the financing system creates a lucrative market op-

portunity for providers. But whatever the final conclusion concerning

regulation's value, ^^ North Carolina's ESWL experience underscores that
the fundamental source of the problem of overspending on health care
is the dominant system of financing services. Under regulation, that
system created powerful incentives for North Carolina providers to ov-

erexpand ESWL and gave rise to pressures that were impossible for the
regulators and the political system to contain or to resist. Following

deregulation, the financing system's chronic inability to take advantage

of what should be a buyer's market for ESWL leaves North CaroUna
providers free to create unneeded, inefficient capacity and to operate it

profitably at the pubhc's expense.

Health care financing in North Carolina is typical of that found in

most other markets for health services. Although there are increasing

reports of major outbreaks of competitive buying and selling of provider

services in many places throughout the nation, traditional financing as
found in North Carolina remains the norm, and truly independent and

competitive systems remain exceptional.^^ Despite the hopeful signs of

effective competition in some markets, the ineffectiveness of the dominant

health insurance mechanisms in controlling the price and cost of all

health services, not just ESWL, has been notable for so long that one
must wonder whether the game being played was or is a fair one^^ and

whether a fundamental change in its rules may be necessary.

A. Is the Game Rigged?— ''Say It Ain't So, Joe!'*

The historical failure of conventional health care financing systems

to defend consumer interests invites attention to the possibility that some

of the players whom the fans have been supporting against providers

^^Deregulation might be safer if prepared for in advance. Recent deregulation in

Arizona and Utah is alleged to have triggered a burst of capital spending. See Arizona

Deregulation Spurs Growth in Medical Facilities, Am. Med. News, September 19, 1986,
at 7 (Arizona is experiencing an "unprecedented growth" in health care facilities as a

result of repeal of CON regulations for hospitals and nursing homes). Although no objective
evaluations of these experiences (by persons other than the displaced planners and regulators

themselves) have been done, there may be some reason for concern. For a full statement
of the case for deregulation and strategies for achieving it, see generally C. Havighurst,

supra note 13.

''See infra notes 119-20.

^A major source of unfairness to consumers has been providers' success in establishing
the rules of competition in the health care sector. See, e.g., Havighurst, supra note 62

(discussing restrictions imposed by providers on insurers' freedom to control costs and

the potential value of antitrust law in eliminating such restrictions). Blue Cross and Blue

Shield plans are also implicated in providers' efforts to make and enforce the rules of
the game. See infra text accompanying notes 104-09.



1986] LITHOTRIPSY 1017

may not have been playing to win. Unthinkable as this hypothesis may
seem, the failure of NCBCBS to defend effectively against providers of
ESWL is not just an isolated collapse attributable to one plan's poor
management and lack of skilled players. Other teams in Blue uniforms

have also consistently failed to strive for a consumer victory, appearing

instead to have joined with providers to rig the outcome. Not only did

the Blues themselves perform badly in the cost-containment field, but,

as the following discussion briefly explains, their policies were instru-

mental in handicapping HMO's and commercial health insurers—other
teams on which consumers might have placed their bets.^^°

The reason why many Blue Cross and Blue Shield plans did not
battle providers successfully for lower costs and prices is, quite simply,

that favoring consumers over providers was usually not in their corporate

interest. Even after Blue plans were no longer controlled by the dominant

hospital and physician organizations that created them, they generally

adhered to a business policy of respecting and even furthering the

economic interests of their original sponsors. '°' Indeed, many Blue plans
appeared to prosper in the ensuing years, not because they offered

consumers good value in insurance products, but because of the close

relationships they maintained with organized providers. '^^ Together with

^°^See generally Havighurst, Explaining the Questionable Cost-Containment Record of
Commercial Health Insurers, in The Political Economy of Health Care (H.E. Freeh
ed., to be published). The machinations of providers and Blue Cross and Blue Shield

plans somewhat excuse the poor cost-containment record of commercial health insurers.

Although numerous factors affect the supply of and demand for insurers' cost-containment

services and although the issue is complex, Blue/provider alliances, many of them informal,
explain why consumer cost concerns have not been effectively transmitted to providers in
the marketplace. Id. For a recent and more positive (and conventional) view of the Blues,

see Greenberg, The Evaluation of Blue Cross in a Competitive Marketplace, Business &
Health, Nov. 1986, at 44.

'°'Although the FTC's efforts largely ended direct physician control over Blue Shield

plans, see Bureau of Competition, supra note 60; FTC, Statement of Enforcement Policy,
46 Fed. Reg. 48,982 (1981), that control was already attenuated by the time the FTC
acted. Blue Cross plans had gradually withdrawn from direct affiliation with state hospital

associations somewhat earlier. It is most unlikely that providers would have released the

Blue plans from their direct control without more compulsion if they had not anticipated

that once independent, the plans, as nonprofit corporations, would continue to pursue

pro-provider policies in their own self-interest. See infra note 102.
'"^Because the Blues, as nonprofit corporations, were more interested in maximizing

their gross revenues and market shares than in maximizing short-run corporate profits,

there was a solid basis for an enduring and mutually advantageous relationship with

providers. Nonprofit firms have somewhat different incentives than for-profit firms. Man-

agers are more interested in increasing their market shares than increasing profits because

the manager's salary and prestige is more closely associated with firm size than with

profitability. Freeh & Ginsburg, Competition Among Health Insurers, in Competition in
The Health Care Sector: Past, Present and Future 175 (W. Greenberg ed. 1974).
In non-profit firms, such as Blue Cross and Blue Shield, the desire for growth is even

stronger because there are no profits to distribute or shareholders to object. Id. at 175,

184.



1018 INDIANA LAW REVIEW [Vol. 19:989

government-conferred tax and other benefits, ^^^ these relationships gave

the Blues a substantial competitive advantage over actual and potential

competitors.

The pattern of Blue/provider relationships over many years and in
many markets was one in which the Blue plan and the dominant or-
ganization of hospitals or physicians each used its own market position
in such a way as to preserve and strengthen the market position of the
other. Mutual accommodation was assured through liaison and committee

structures. Most importantly, the most successful Blue Cross plans gen-
erally enjoyed large discounts from the hospitals, ^°^ and Blue Shield

plans almost universally received comparable concessions from "partic-

ipating" physicians. '°^ Because these concessions were granted by prov-

iders acting in concert rather than extracted by the Blues in competitive

bidding, ^^^ they left providers in a position to function as a cartel vis-

'°^For tax purposes, the IRS long exempted Blue Cross and Blue Shield plans as

social welfare organizations. See I.R.C. § 501(c)(4) (1982). In the Tax Reform Act of

1986, however. Congress eliminated the tax exemption granted to Blue Cross and Blue

Shield plans. See H.R. 3838, 99th Cong., 1st Sess. §1012 (1985). Commercial health

insurers and other proponents of this reform contended that special tax treatment of Blue

Cross and Blue Shield plans is inappropriate because the plans employ business practices

of commercial insurers and are engaged in an inherently commercial activity. General

Accounting Office, Health Insurance: Comparing Blue Cross and Blue Shield Plans

w^iTH Commercial Insurers 8-10 (1986). The Blue Cross and Blue Shield Association

contended that the exemption is warranted because the exemption permits Blue Cross and

Blue Shield plans to cross-subsidize coverage to high-risk individuals and small groups.

Id. at 9.

State law also often confers valuable advantages on Blue plans in the form of

exemptions from premium taxes and special privileges with regard to direct contracting

with providers.

'""Adamache & Sloan, Competition Between Non-Profit and For-Profit Health In-
surers, 2 J. Health Economics 225, 227-29, 240-41 (1983). The mean relative Blue Cross

discount is four percent and ranges as high as 27 percent. Id. at 229. Large discounts

frequently correspond to large market shares.

A commercial insurer unsuccessfully challenged a typical Blue Cross discount in
Travelers Ins. Co. v. Blue Cross, 481 F.2d 80 (3d Cir. 1973). For an analysis of this

case pointing out its relevance to this discussion, see Havighurst, supra note 100.

'°The concessions usually take the form of acceptance of payments under the UCR
formula as payment in full. See supra note 45. See generally Bureau of Competition,

supra note 60 (describing Blue Shield payment arrangements and characterizing them as

price fixing when the plan is under physician control). For a case in which physician

organizations offered similar collective concessions to any payer that obtained the orga-

nizations' approval (presumably by refraining from unfriendly acts), see Arizona v. Mar-

icopa County Medical Soc'y, 457 U.S. 332, 356-57 (1982) (doctors' agreement on maximum
fees held unlawful price fixing under the antitrust laws).

'°*See, e.g.. Travelers Ins. Co. v. Blue Cross, 481 F.2d 80, 84 (3d Cir. 1973) (discounts

"negotiated jointly" by hospital association). Restrictions placed by physician organizations

on individual physicians directly contracting with unapproved insurers were condemned in

American Medical Ass'n v. FTC, 638 F.2d 443 (2d Cir. 1980), affd by equally divided

Court, 455 U.S. 676 (1982); see also Havighurst, supra note 62, at 336-42.



1986] LITHOTRIPSY 1019

a-vis the Blues' competitors. Although most Blue plans could have

obtained larger price concessions by using their buying power to destroy

the provider cartel, doing business with it usually proved more advan-
tageous, yielding the Blues a net cost advantage over their competitors

that was both larger and more permanent than they could have enjoyed
under competition; as long as the cartel was effective, HMO's and
commercial insurers could get no concessions from providers at all.^°^

Consumers were thus unable to obtain coverage from plans that purchased
provider services on truly competitive terms. ^°^ The Blues' greatest com-
mercial successes were therefore gained, not by efficient operation in a

competitive market, but by cultivating provider cartels that inflated the

costs of their competitors.'^^

Organized providers, for their part, were generally glad to cooperate

with and even to subsidize their biggest customer as long as it adhered

to cartel-protective policies and provided insurance coverage in forms

that obviated provider price competition' '° and kept demand for hospital

and physician services artificially high.''' Although providers complained

'"^Until very recently, non-Blue payers were unable to bargain with providers for

price discounts or concessions of any kind. For a full discussion of provider-imposed

restraints, including boycotts of plans that offended providers, see Havighurst, supra note

62, at 336-42. Many commentators are noting the changing character of today's health
care market. See, e.g.. Managed Care: Will It Push Providers Against the Wall?, Hospitals,
Oct. 5, 1986, at 66. The new pressures on providers to grant competitive discounts and

to accept undesired cost controls result from a combination of circumstances, including

antitrust enforcement against provider cartel behavior; state PPO legislation and PPO
development; the increased cost-consciousness and aggressiveness of larger purchasers;

increased competitiveness on the supply side of the market because of surpluses of both

physicians and hospital facilities; government's example as a prudent purchaser of services;

and realization in the private sector that government is not likely, as it threatened to do

throughout the 1970's, to regulate private health care costs. Despite widespread observations

of intensified competition, however, competition's potential has not yet been reahzed in

every market, and indeed has probably not been fully realized anywhere.

'°^The perception that consumers freely chose Blue-style coverage, with free choice

of provider, etc., in preference to other kinds of coverage is mistaken because alternative

types of coverage were seldom offered with price tags reflecting the full cost advantage

obtainable though limitations on choice and competitive purchasing. See infra note 111.

'"Tor recent scholarship focusing specifically on exclusion of rivals by raising their

costs, see Krattenmaker & Salop, Anticompetitive Exclusion: Raising Rivals' Costs to Achieve
Power over Price, 96 Yale L.J. 209 (1986).

""Hospital cost reimbursement, payment of physicians under UCR and similar for-
mulas, limited use of cost sharing, and guaranteed free choice of providers make consumers
largely indifferent to price considerations, thus freeing providers to compete in other, cost-

increasing ways.

'"The Blues have systematically offered broader coverage than other insurers. This

coverage benefits providers by giving broad scope to "moral hazard"—that is, insurance-
induced demand and insensitivity to price. It has been hypothesized that the Blues squander
much of their cost advantage over other carriers by writing coverage in forms most
advantageous to providers. Freeh & Ginsburg, Competition Among Health Insurers, in



1020 INDIANA LAW REVIEW [Vol. 19:989

from time to time about a Blue plan's practices, such complaints were

usually not inconsistent with the existence of powerful Blue/provider

alhances.^^^ Even when a major confrontation occurred between a dom-
inant provider organization and a Blue plan, the triggering event was

usually a minor matter, hardly a sign that the plan had gone over entirely

to the consumer's side.^^^ Indeed, the Blue plan's disputed policy was

usually inspired, not by the plan's own corporate initiative, but by the
irresistible demand of a state insurance commissioner""* or major cus-
tomer."^ For many years, virtually all cost-containment initiatives by
Blue Cross and Blue Shield plans that were not exogenously compelled

were carefully negotiated with the affected provider interests before being

announced as a Blue victory on the consumer's behalf.

The action of NCBCBS in tying its own hands in the fight to get
ESWL services for North Carolina consumers at competitive prices was
therefore not atypical. Most Blue Cross or Blue Shield plans have similarly
maintained payment systems that weaken consumers' incentive to econ-

omize while simultaneously eschewing the role of an aggressive purchasing

agent procuring providers' services for consumers at competitive prices.

Competition in the Health Care Sector: Past, Present, and Future 210, 216-19

(1978). This insurance is overbroad (inefficient) in the sense that few consumers would

buy it if its added costs, instead of being subsidized by providers, were reflected in its

price relative to alternative coverage. The result of inefficient insurance is an overallocation

of societal resources to health care.

"^One should not attach undue significance to complaints about NCBCBS practices
that emanate from provider camps; within any conspiracy in restraint of trade, there are

always differences of opinion, sometimes serious ones, over the best collective strategy.

Thus, complaints and even lawsuits challenging plan practices by individual providers are

to be expected even if the Blue plan is faithfully serving cartel interests. Conceivably,

even such striking cases as Kartell v. Blue Shield, 749 F.2d 922 (1st Cir. 1984) (unsuccessful

challenge to a plan's alleged monopsonistic exploitation of physicians), cert, denied, 105

S. Ct. 2040 (1985), and Ball Memorial Hosp. v. Mutual Hosp. Ins., Inc., 784 F.2d 1325

(7th Cir. 1986) (unsuccessful challenge to a Blue Cross-sponsored PPO as an exercise of
monopsony power against hospitals), may involve only a difference of opinion concerning

the best strategy for pricing provider services under emerging market conditions rather

than the Blue plan's permanent defection from the old alliance. But see sources cited in

note 117 infra.

"'In In re Michigan State Medical Soc'y, 101 F.T.C. 191 (1983), a state medical

society threatened a Blue plan with a statewide physician boycott because the plan attempted

to control the cost of vision and hearing care. The medical society's vigorous and seemingly

disproportionate reaction was prompted, not by the particular initiative itself, but by the

Blue plan's unprecedented departure from the principle of free choice of physician. Id.

at 216-21.

"^In Kartell v. Blue Shield, 749 F.2d 922 (1st Cir. 1984), cert, denied, 105 S. Ct.

2040 (1985), the plan's refusal to allow balance bilhng was in part a function of state

legislation and regulation.

"^In Michigan State Medical Society, the initiative of Michigan Blue Cross and Blue

Shield that was so offensive to physicians was dictated by the auto companies and the

United Auto Workers. 101 F.T.C. at 216-21.



1986] LITHOTRIPSY 1021

Although there have recently been some impressive departures by Blue
plans from such pro-provider practices, ^^^ these defections have almost

always occurred only because other prepayment mechanisms, primarily

HMO's and PPO's, had already breached the defenses of the hospital
and doctor cartels in the particular market. Facing price competition

from efficient purchasers for the first time, the Blues had little choice

but to abandon their old strategy and turn on their old allies. '^^ Despite

these notable breakdowns of Blue/provider collaboration, it is far from

clear that competition is yet so intense and uninhibited in many health
care markets that Blue/provider alliances are no longer effective or worth

worrying about. Although the coming of competition has generated a

great deal of discussion and consternation, its effects are still hard to

detect in anything but anecdotes.''^ Most Blue Cross and Blue Shield

plans have not yet definitively changed sides in the contest between

consumers and providers.

There are few signs that competition has yet made enough headway
in North Carolina markets to force NCBCBS to enter the fray on the
consumer's side. Most NCBCBS contracts still embody free choice of
provider, cost reimbursement for hospitals, UCR fee limits for physician
services, and limited cost sharing, indicating that the plan has yet to

break significantly with its tradition of catering to providers' essential

interests. Although NCBCBS has introduced such innovations as HMO
and PPO arrangements of its own,''^ these mechanisms do not yet face
enough competition from independent health plans to induce them to

bargain with providers as adversaries rather than as allies. '^^ Indeed,

"^See, e.g., Greenberg, supra note 100.

"'5ee supra note 111; infra note 126. The precise inspiration for the Blue initiatives

challenged in Kartell, 749 F.2d 922, and Ball Memorial, 784 F.2d 1325, is difficult to

determine, but it is probable that these were competition-inspired departures from the

Blues' historic policy of cooperating with provider interests. But see supra notes 112 &
114. If so, they should be regarded as exceptions that prove the rule. Why, for example,

did such cases not appear much earlier?
"^See supra note 107.

'"Blue Cross's Personal Care Plan of North Carolina, Inc. (PCP) is an HMO of
the individual practice association variety. In addition, Blue Cross has transferred some

standard HMO contracts to PCP. As of April 1986, PCP had 21,000 enrollees, and it
subsequently added 73,784 state employees. N.C. Dep't of Insurance, Health Main-

tenance Organizations: Status in North Carolina (April 1986 & Supp. July 3, 1986).
Although NCBCBS officials claim that such recent innovations as a preadmission certification
program, PPO and HMO arrangements, the participating physician program, and a program
to encourage ambulatory surgery are evidence of their willingness to challenge providers,

the text gives reasons for disputing this claim.

'^"Enrollment in active alternative health plans in North Carolina totalled 134,791 in

April 1986, with 78,913 state employees added subsequently, for a total of 213,704. Id.

Of these subscribers. Blue Cross's PCP enrolled 94,784. Several of the remaining plans
were sponsored by dominant physician interests. Thus, the only truly independent plans

able and philosophically willing to purchase physician services on a competitive basis were

Health America, Kaiser, and PruCare, which enrolled 43,116, 23,366, and 11,877 sub-
scribers, respectively (out of a state population of 5.9 million). Id.



1022 INDIANA LAW REVIEW [Vol. 19:989

these mechanisms may serve primarily as '* fighting ships," weapons that
allow NCBCBS and their provider alHes to repel or discipline independent
plans that seek to enter the market and to force providers into unwanted

competition.*^' If so, the alliance's newly forged strategic capacity to

slash prices to meet a competitive threat is more an impediment to than

a manifestation of the emergence of effective competition in the state.

Certainly NCBCBS' s inability to control the price and cost of lithotripsy
in North Carolina suggests that the old alliance is still very much intact.

B. Revising the Rules— "On Your Mark, Get Set, Go!*'

If ESWL costs in North Carohna should rise in the aftermath of
the repeal of CON requirements for lithotripters, the natural impulse
will be to blame the legislature for deregulating this new technology.
Nevertheless, because the true source of the problem lies in antiquated,

pro-provider payment mechanisms, it can be argued that the legislature's

greater failure was in deciding to deregulate only lithotripsy. Because

payments for lithotripsy are only a very small percentage of insurers'

overall payments for health care services, the threat of higher costs for

this one service is unlikely to trigger the fundamental changes in financing

arrangements that are needed if costs are to be brought under effective

control by market forces. Across-the-board deregulation, however, would

be such a dramatic change in the rules that all players on the demand
side of the market, particularly NCBCBS and its customers, would have
little choice but to reexamine their game plans. The sudden need of
consumers and major purchasers of health insurance to find better allies

in the cost-containment effort would bring about a competitive rush to

find new defenses against provider overcharging, overspending, and ov-

erinvestment.

The main policy reason why most states are continuing CON reg-
ulation today, after the theoretical argument for it has been largely

disproved, '^^ is their belief that their local health care markets are not

'^'A prepayment plan controlled by dominant provider interests presents the same

hazard to competition that is presented by an informal Blue/provider alUance. On the
antitrust and policy implications of prepayment plans controlled by dominant provider

organizations, see FTC, supra note 101; Havighurst & Hackbarth, Enforcing the Rules
of Free Enterprise in an Imperfect Market: The Case of Individual Practice Associations,

in A New Approach to the Economics of Health Care 377 (M. Olson ed. 198 ). For
evidence of how a financing plan and a provider cartel, operating together, can exclude

or discipline other payers, see Goldberg & Greenberg, The Effect of Physician-Controlled
Health Insurance: United States v. Oregon State Medical Society, 2 J. Health Pol. Pol'y

& L. 48 (1977). Because the same problems could also arise where the Blue/provider
alliance was of the informal variety, Blue Cross's PCP may be more anticompetitive than
procompetitive.

'^^The theory of CON regulation was that payment systems inevitably and inefficiently
distort spending. See references cited supra note 12. Changes in purchasing practices can



1986] LITHOTRIPSY 1023

yet sufficiently competitive to entrust them with the task of allocating

resources and discouraging overinvestment. ^^^ Many states, however, are
moving toward deregulation in small increments by raising the capital

investment thresholds of CON requirements and exempting additional
categories of providers and investments. ^^"^ Although these steps may
seem desirable in the general sense that they get government off providers'

backs, deregulation is more likely to represent a pro-consumer change

in the rules of the game if it is done on a wholesale rather than a
piecemeal basis. '^^ Only then would the legislature's move constitute a
clear message to players who purchase and players who sell obsolete
forms of health insurance that they can expect to be losers in future

competition unless they change their strategies in fundamental ways.

Only if that message is sent, received, and acted upon will consumers

be in a position to hold their own in struggles over the uses of medical
technology, old and new. A totally deregulated market is most likely
to generate the radical rethinking and restructuring that is needed to

force NCBCBS and other Blue Cross and Blue Shield plans finally to
break with their provider allies and to use their bargaining power on

the consumer's behalf. '^^

Because introducing meaningful change in health care financing mech-

anisms seems to be a slow and difficult process requiring the reeducation

of many players and the devising of intricate new strategies, the best
policy option available to North Carolina and other states is probably

to announce the expiration of their CON laws as of some fixed future

offset many of these distortions, however, and those that remain should be regarded as

a cost of having insurance, not as inefficiency. See supra text accompanying notes 83-

94; P. JosKOW, supra note 12, at 21-31.

'^^An alternative justification for CON regulation of hospitals and their competitors
is the alleged necessity to preserve cross-subsidization of indigent care, education, and

research. Curbing competition enables hospitals to overcharge some patients and thereby

to generate revenues to fund these worthy purposes. For arguments against using regulation

for this purpose, see e.g., Havighurst, The Debate Over Health Care Cost-Containment

Regulation: The Issues and the Interests, in Incentives Versus Controls in Health Policy

9 (J. Meyer ed. 1985). The case for controlling nursing home investments is unique to

that industry, because of its heavy involvement with the Medicaid program, and is not

considered here. See C. Havighurst, supra note 13, at 353-63.

^^See Simpson, supra note 37.

^^^See discussion of a "market-forcing" regulatory strategy in C. Havighurst, supra

note 13, at 321-44.

i26Xhere is a degree of irony in unleashing the market power of the Blue plans, which

were created to serve providers and which served their interests so well for so long, against

their original sponsors. See Ball Memorial, 784 F.2d 1325; Kartell, 749 F.2d 922, discussed

supra notes 112 and 117. But there is a potential paradox as well. Where a Blue plan

possesses market power, it might be vulnerable to attack under section 2 of the Sherman

Act because of exclusionary practices of the type noted supra text accompanying notes

100-09. But to raise such a challenge, providers would have to claim that a Blue plan

unlawfully monopoUzed the market by fostering the providers' own cartel.



1024 INDIANA LAW REVIEW [Vol. 19:989

date. The setting of such a sunset date should be done in a way that
clearly warns purchasers and providers of health insurance of the need

to find alternative means of cost containment, while providing them

time to change their allegiances and to consider and install the defenses

they prefer. '^^ Such a legislative move, if accompanied by efforts to free

the local market of legal and other restrictions on innovation, would

materially improve the chances for a consumer victory not only in the

lithotripsy game but also in the larger battle against wasteful health care
spending.

'^^The object would be to avoid problems similar to those allegedly encountered in

Arizona and Utah when CON was repealed. See supra note 97. In particular, the federal
government itself needs more time to change its current approach to reimbursing capital
costs, which still invites excessive investment. See supra note 78.