Indiana Law Review


Indiana Law Review
Volume 28 1 995 Number 4

ARTICLE

The Merits of State Action Immunity to
Promote Hospital Collaboration:

Report of the Hospital Antitrust Task Force
TO THE Indiana State Department of Health

Eleanor D. Kinney*

Lisa Clark Copp**
Marcia Gonzales***

Introduction

In the fail of 1993, the Indiana State Department of Health (ISDH) convened the

Hospital Antitrust Task Force ("Task Force") under the direction of the Center for Law
and Health at Indiana University School ofLaw—Indianapolis to conduct a formal policy
analysis of the impact of federal and state antitrust laws on collaborative efforts among

hospitals and other health care providers. The Task Force was comprised of leading

Indiana experts on health care antitrust law and key state policy makers.'

The Task Force engaged in extensive fact-finding efforts to elicit the views ofvarious

health system constituencies on the merits of a state action exemption for hospital

collaborative efforts under the antitrust laws. These fact-finding activities and the

information they provided are described in this Article. The Task Force then developed

* Professor of Law and Director of the Center for Law and Health, Indiana University School of

Law—Indianapolis.
** Counsel to Chairman, Golden Rule Insurance Co., Indianapolis, Indiana. Formerly of the Center

for Law and Health, Indiana University School of Law—Indianapolis.
*** Associate Attorney, Dickenson & Associates, Indianapolis, Indiana. Formerly of the Center for

Law and Health, Indiana University School of Law—Indianapolis.
1 . Members ofthe Task Force were: Sydney Arak, Esq., Senior Vice President and General Counsel,

Methodist Hospital ofIndiana, Inc.; Ron Dyer, Esq., General Counsel, Indiana State Medical Association; John

Render, Esq., Hall, Render, Killian, Heath & Lyman; Marc Rodwin, J.D., Ph.D., Associate Professor, Indiana
University School ofPublic and Environmental Affairs; Geoffrey Segar, Esq., Ice, Miller, Donadio & Ryan; and
Norman Tabler, Esq., Baker & Daniels. Eleanor D. Kinney, J.D., M.P.H., Professor of Law and Director, the
Center for Law and Health, Indiana University School of Law—Indianapolis, chaired the Task Force and
otherwise directed the project. Professor Kinney was assisted by Lisa Clark Copp, Assistant Director of the

Center for Law and Health, and Marcia Gonzales, Senior Research Associate for the Center for Law and Health,

who were responsible for drafting the following report. Task Force members representing the State of Indiana

were: Attorney General Pam Carter; Myra Selby, Esq., Director of Health Care Policy, Office ofthe Governor;

Nancy Blough, Esq., Deputy Health Commissioner, ISDH; Valita Fredland, Esq., Senior Policy Analyst, ISDH;

and M. Elizabeth Carroll, Esq., Director of the Office of Legal Affairs, ISDH.



1 1 70 INDIANA LAW REVIEW [Vol. 28: 1 169

recommendations on whether and how to proceed with a state action exemption to
promote hospital collaborative activities.

This Article summarizes the deliberations, findings and conclusions of the Task

Force. First, this Article reviews relevant principles of antitrust law affecting hospital

collaborative efforts. Second, this Article sets forth information about similar antitrust

reform measures proposed by the Indiana Commission on State Health Policy, the

President's proposed Health Security Act,"^ other federal legislative proposals before

Congress, as well as proposals adopted in other states and proposals of the American

Hospital Association and the American Medical Association. Third, this Article presents

the Task Force's findings on problems that hospitals and other providers currently face

under the antitrust laws in pursuing collaborative projects, and whether and how these
projects would be facilitated under a legislatively created state action immunity. Finally,

this Article presents the Task Force's conclusions and recommendations.

I. Applicable Principles OF Antitrust Law

A dominant economic policy of the United States is to promote the system of free
competition in the market place. Federal and state antitrust laws, described below,

articulate this economic policy.^ The antitrust laws are designed to protect the economic

system of competition and not individuals or economic entities. The specific way in
which the antitrust laws accomplish this goal is to prohibit private conduct, particularly

joint conduct of competitors, that restrains trade or impedes competition in markets for

goods and services. The theory is that competition generates more goods and services at

lower prices thus empowering the consumer who has choices about goods and services.
This policy prevails unless Congress or a state legislature determines that the free

market is not working to meet consumer needs or other policy goals, and establishes a

regulatory program that intervenes in the market and modifies competition in some

fashion to achieve another policy goal. The central issue that the Task Force deliberated

pertains to whether there is a policy goal besides free competition in the market place that

the state of Indiana ought to promote in the market for in-state hospital services.

Antitrust analysis distinguishes between two types of restraints that are important in

understanding hospital collaboration issues. Horizontal restraints are combinations among

competitors at the same level of production or distribution. Applicable examples of

horizontal restraints in the hospital field include agreements among hospitals to charge the

2. H.R. 3600, Health Security Act, 103d Cong., 1st Sess. (1993).

3. We are indebted to several excellent sources for our discussion of the federal antitrust laws. These

sources include: AMERICAN HOSPITAL ASSOCIATION, HOSPITAL Collaboration: The Need for an

Appropriate Antitrust Policy (1992) [hereinafter Hospital Collaboration]; Barry R. Furrow and

Sandra H. Johnson, The Law of Health Care Organization and Finance (1992); Clark C.

Havighurst, Health Care Law and Policy (1988); Jonathan B. Baker, The Antitrust Analysis ofHospital

Mergers and the Transformation ofthe Hospital Industry, 51 LAW & CONTEMP. Probs. 93 (1988); Frances H.
Miller, Vertical Restraints and Powerful Health Insurers: Exclusionary Conduct Masquerading as Managed

Care?, 51 LAW & CONTEMP. Probs. 195 (1988); and Donald R. Schmidt, Hospital Antitrust Compliance
Programs, in ABA SECTION OF ANTITRUST LAW, ANTITRUST HEALTH CARE: ENFORCEMENT AND ANALYSIS
275 ( 1 992) [hereinafter ANTITRUST HEALTH Care].



1 995] ANTITRUST TASK FORCE 1171

same rates for hospital services or not to develop ancillary services offered by the other.

Further, attempts by various combinations of physicians on the same hospital medical

staff to exclude patients of non-physician health care professionals or to inappropriately

exclude physicians from membership on the medical staff may constitute horizontal
restraints. Vertical restraints involve concerted action between competitors at different

levels ofproduction or distribution, such as between buyers and sellers or manufacturers

and retailers. In the health care field, the combination of hospitals with other types of

health care providers, e.g., physicians, long term care facilities, etc., could constitute

vertical restraints. Generally, horizontal restraints are more offensive under the antitrust

laws than vertical restraints.

At one time, the federal antitrust laws did not regularly apply to the field of health

care because of the operation ofvarious defenses to the antitrust laws outlined below, e.g.,

the learned professions doctrine, the interstate commerce requirement, and the exemption

for the business of insurance. However, in a number of cases since 1975, including

Goldfarb v. Virginia State Bar^ Arizona v. Maricopa County Medical Society' and

Patrick v. Burget,^ the Supreme Court has made clear that the heahh care industry will be

treated the same as any other industry.

A. Antitrust Statutes

1. Federal Antitrust Statutes.—The most important antitrust statute pertaining to
hospital collaboration is section 1 of the Sherman Act, which provides; "Every contract,

combination ... or conspiracy, in restraint of trade or commerce among the several States

... is declared to be illegal."^ This section requires the participation of two or more

entities, which can be persons, corporations, partnerships or associations. Proscribed

activities under the Sherman Act must occur in interstate commerce. The analysis of

Sherman Act section 1 violations is described infra.^ Section 2 of the Sherman Act

prohibits monopolization and attempts to monopolize.^ To prove a section 2 violation of

illegal monopolization requires a demonstration that the offending competitor has

sufficient market power to enable it to preclude competition or control price. To succeed

under section 2, the plaintiff must also establish an actual intent to control the market on

the part of the defendant and that the defendant's expansion is not due to growth or

development resulting from a superior product or business acumen. The Sherman Act can

be enforced in three ways. The first way is civil suits brought by the U.S. Department of

Justice's Antitrust Division (DOJ). The second way is private suits brought by damaged

competitors who can recover treble damages if successful. The Federal Trade

Commission (FTC) also enforces the Sherman Act in the manner described below. The

Sherman Act also imposes criminal liability for especially egregious violations. Private

actions by disappointed competitors, rather than government prosecution, pose a graver

421 U.S. 773 (1975).

457 U.S. 332(1982).

486 U.S. 94(1988).

15U.S.C. § l(Supp. 1994).

See infra subpart I.B.

15U.S.C. §2(Supp. 1994).



1172 INDIANA LAW REVIEW [Vol. 28:1169

threat to hospital collaborators, which is an important factor in assessing potential antitrust

exposure from a hospital collaboration.

Section 3 of the Clayton Act prohibits a seller from dealing with a customer on the

conditions that the customer not deal in goods of a competitor, where the effect of such

a transaction may substantially lessen competition or tend to create a monopoly in any
type of commerce. Exclusive dealing contracts, tying arrangements, requirements

contracts, and other related agreements are covered by this provision. Section 7 of the

Clayton Act prohibits mergers and acquisitions "where in any line ofcommerce ... in any

section of the country, the effect of such acquisition may be substantially to lessen
competition, oi to tend to create a monopoly."'^ Since section 7 applies to "incipient" or

developing violations, demonstrating actual anti-competitive effects may not be necessary.
An acquisition is unlawfiil if the anti-competitive effect is reasonably probable.'' The
Clayton Act is enforced through civil suits for injunctions or damages brought by the

DOJ, FTC enforcement proceedings, and private suits for treble damages. The Clayton
Act does not provide for criminal liability.

The FTC Act prohibits unfair methods of competition and unfair deceptive acts or
practices.'^ Unlike other federal antitrust statutes, the FTC Act is enforced by the FTC,
an administrative agency. Section 5 of the FTC Act has been interpreted to grant the FTC
authority to enforce the Sherman Act and the Clayton Act. Notably, the FTC has
jurisdiction over not-for-profit organizations for purposes of enforcing the merger

provisions of the Clayton Act.

2. State Antitrust Laws.—State enforcement may be based on either state or federal
antitrust laws. All states except Pennsylvania and Vermont have an antitrust statute of

general application.'^ These statutes all contain provisions similar to section 1 of the

Sherman Act, and most have sections similar to section 2 of the Sherman Act. Indiana's

antitrust statute is similar and promotes the same economic policy, /.e., promotion of free

competition in the market. '"^ Specifically, Indiana's antitrust statute tracts the language

of the Sherman Act section 1.'^ Indiana's statute, like that of most other states, is

enforced by the State Attorney General.

B. Antitrust Analysis Under Section I ofthe Sherman Act

In analyzing violations of section 1 of the Sherman Act, courts distinguish between

two types of violations. Per se offenses are agreements that by nature are so plainly anti-

competitive that no elaborate inquiry is needed to establish their illegality. Examples of

per se violations include: price-fixing, division of markets, tying arrangements, and

certain boycotts or refiisals to deal.

Activities that are not within the per se offenses are subject to inquiry under the rule

of reason analysis. The classic articulation of the rule of reason analysis is found in

10. 15U.S.C. § 18(Supp. 1994).

1 1

.

Hospital Corporation ofAmerica, 3 Trade Reg. Rep. (CCH) H 22,301 (FTC Oct. 25, 1985).

12. 15 U.S.C. §45(1988).

13. Ellen S. Cooper, Trends in State Antitrust Enforcement Related to Health Care, in Antitrust

Health Care, supra note 3, at 1 83.

14. IND. Code §24-1-1-1 to 1-6 (1993).

15. Orion's Belt, Inc. v. Kayser-Roth Corp., 433 F. Supp. 301 (S.D. Ind. 1977).



1 995] ANTITRUST TASK FORCE 1 1 73

Justice Brandeis's opinion in Chicago Board ofTrade v. United States, in which he stated

that:

The true test of legahty is whether the restraint imposed is such as merely

regulates and perhaps thereby promotes competition or whether it is such as may
suppress or even destroy competition. To determine that question the court must
ordinarily consider the facts peculiar to the business.'^

The application of the rule of reason requires a balancing of a restraint's pro-

competitive effects against its anti-competitive effects. This analysis focuses on the

challenged restraint's impact on competition and, thus, the relevant factors in a rule of

reason inquiry are those that relate to the competitive consequences of the restraint. They

include: the purpose of the particular arrangement, the market power of the parties, the

availability of a less restrictive alternative, and the arrangement's pro-competitive and

anti-competitive effects. The purpose of the analysis is not to decide whether the policy

of the antitrust laws promoting competition is in the public interest because that decision

is reserved for Congress.'^

An analysis ofmarket power has assumed increasing importance in the resolution of
health care antitrust cases under the rule of reason, and in merger and monopolization

cases. '^ Market power is the ability of the parties to a restraint, acting collectively, to

raise prices or otherwise determine terms of trade in the market. A proper market
definition permits determination ofhow much of the market is supplied by the defendant
and how easily the defendant can manipulate price and output, i.e., exercise market power.
Measurement of market power is technically difficult, requiring consideration of many

issues. Further, the law pertaining to market definition and power has changed

considerably in recent years. A full analysis of market definition and power is beyond the
scope of this article; several other articles provide an excellent discussion of the issues

involved in determining market definition and power. '^ Two antitrust cases involving
Indiana health care providers have been very important in the development of the law on

the definition of markets in health care antitrust cases.^^

16. 246 U.S. 231, 238 (1918).

17. See, e.g., National Soc'y of Professional Eng'rs v. United States, 435 U.S. 679, 689 (1978);

Mardirosian v. American Inst, ofArchitects, 474 F. Supp. 628, 649 (D.C. 1979) (A restraint "cannot be justified

by reference to social goals other than competition.").

18. For excellent discussions of market issues in antitrust analysis, see, e.g., Neil P. Motenko, Market

Definition andMarketPower, in ANTITRUST HEALTH CARE, supra note 3, at 1 39; William Blumenthal, Relevant

Markets in the Health Care Industry, in ABA SECTION OF ANTITRUST Law, Developments in Antitrust

Health Care Law (1990).

19. See. e.g., Jonathan B. Baker, The Antitrust Analysis ofHospital Mergers and the Transformation

ofthe Hospital Industry, 5 1 LAW & CONTEMP. Probs. 93 ( 1 988); Michael Morrisey et al.. Defining Geographic

Marketsfor Hospital Care, 5 1 LAW & CONTEMP. Probs. 1 65 (1988); Motenko, supra note 1 8; Kevin J. Arquit,

Market Power Analysis in Health Care Cases, in ANTITRUST Health Care, supra note 3, at 1 3 1

.

20. See Indiana Fed'n of Dentists v. Federal Trade Comm'n 745 F.2d 1 124 (7th Cir. 1984); Ball

Memorial Hosp., Inc. v. Mutual Hosp. Ins., Inc., 784 F.2d 1325 (7th Cir. 1986).



1 174 INDIANA LAW REVIEW [Vol. 28:1 169

C. Defenses in Antitrust Actions

1. Interstate Commerce.—Congress's power to restrain business activities under the
federal antitrust laws is derived from its authority to regulate interstate commerce. In

Hospital Building Co. v. Trustees ofRex Hospital,^^ the Supreme Court ruled that the

interstate commerce defense did not preclude application of the antitrust laws to actors,

such as hospitals, operating in small geographic areas within one state essentially because

of the economic impact of the actors on the national economy. Consequently, general,

collaborative efforts involving hospitals have the requisite effect on interstate commerce

to come under the antitrust laws.^^

2. Learned Professions Exemption and the Per Se Application.—In Goldfarb v.
Virginia State Bar,^^ the Supreme Court stated that the learned professions are not exempt

from the antitrust laws. Although the courts are reluctant to carve out a definite

exemption for conduct of the learned professions, they have held that in regard to

professional associations the nature and extent of the restraint's anti-competitive effect

was too uncertain to warrant per se treatment.^"* This is not to say that learned professions

are exempt from the per se application. Rather, it is more accurate to state that where

learned professions are involved, the courts are less likely to apply the per se rule. In

Arizona v. Maricopa County Medical Society,^^ the Court stated that conduct that was

traditionally subject to per se condemnation under section 1 of the Sherman Act would

instead be subject to the rule of reason analysis where the conduct was "premised on

public service or ethical norms."^^ As such, the courts have been generally reluctant to

make a per se application to a significant number of health care circumstances.

3. Business of Insurance Defense.—The McCarran-Ferguson Act^^ provides an
exemption from federal antitrust laws for the "business of insurance."^^ To fall within this

exemption, the challenged activity must: (1) constitute the business of insurance; (2) be

regulated under state law; and, (3) not constitute a boycott, coercion, or intimidation. The

exemption will apply only to conduct that specifically involves the spreading and taking

of risk and not cost containment practices of health insurers.^^

21. 425 U.S. 738(1976).

22. Summit Health, Ltd. v. Pinhas, 500 U.S. 322 (1991).

23. 421 U.S. 773 (1975).

24. See, e.g., Arizona v. Maricopa County Medical Soc'y, 457 U.S. 332 (1982); National Soc'y of

Professional Eng'rs v. United States, 435 U.S. 679 (1978); Wilk v. AMA, 895 F.2d 352 (1990).

25. 457 U.S. 332(1982).

26. Id. at 349.

27. 15U.S.C.§§ 1011-1015(1988).

28. 15 U.S.C§ 1012(b) (1988).

29. See, e.g.. Group Life & Health Ins. Co. v. Royal Drug Co., 440 U.S. 205 (1979) (The Court applied

three criteria for determining whether a particular practice is exempt as the "business of insurance": whether

the practice has an effect of spreading or underwriting risk, whether it is an integral part of the policy

relationship between the insurer and the insured, and whether it is limited to the insurance industry.); see also

Union Labor Life Ins. Co. v. Pireno, 458 U.S. 1 19 (1982) (The Court held that the use ofpeer review committees

did not constitute the spreading or underwriting of risk.).



1995] ANTITRUST TASK FORCE 1175

4. Implied Repeal.—Another important defense to the federal antitrust laws is
implied repeal, which arises when Congress has adopted a comprehensive regulatory
scheme that is inconsistent with the antitrust laws. The Supreme Court declined to find

that the federally mandated health planning and Certificate ofNeed program established

by the National Health Planning and Resources Development Act of 1974^° did not

constitute an implied repeal of the federal antitrust laws.^'

D. State Action Immunity

In Parker v. Brown, the Supreme Court articulated the state action exemption under

the federal antitrust laws. This case involved a California program that regulated

production and marketing ofraisins by the state's growers. The state legislature delegated

implementation ofthe program to a commission, which was authorized to adopt programs

to restrict competition among growers and to maintain prices in the distribution of raisins

to packers. The purpose of the statute was to conserve agricultural wealth and prevent

economic waste. The Supreme Court held that the Sherman Act did not apply since the

program derived its authority from the state's legislative command.^^

The two requirements for state action immunity that were pronounced in Parker v.

Brown were more specifically expressed in California Retail Liquor Dealers Association

V. Midcal Aluminum, Inc?^ First, the restraint must be clearly articulated and

affirmatively expressed as state policy, and second, the policy must be actively supervised

by the state itself.

1. Clear Articulation ofState Policy.—In Southern Motor Carriers Rate Conference,
Inc. V. United States,^^ the Supreme Court discussed the first prong of the Midcal test in

determining that the collective rate-making regulatory structure ofthe states involved was

entitled to state action immunity. The Court stated: "A private party acting pursuant to

an anti-competitive regulatory program need not 'point to a specific, detailed legislative

authorization' for its challenged conduct. As long as the State as /a sovereign clearly

intends to displace competition in a particular field with a regulatory structure, the first

prong of the Midcal test is satisfied."^^ If a state's intent to establish an anti-competitive

regulatory program is clear, the state's failure to describe the implementation of its policy

in detail will not subject the program to the restraints of the federal antitrust laws.

2. Active Supervision.—In Federal Trade Commission v. Ticor Insurance Co., the
Supreme Court held that "the purpose of the active supervision inquiry is not to determine

whether the state has met some normative standard, such as efficiency, in its regulatory

practices," but whether the state has exercised sufficient judgment and control.^^ Under

Ticor, the active supervision requirement mandates that the state exercise ultimate control

30. National Health Planning and Resources Development Act of 1974, Pub. L. No. 93-641, 88 Stat.

2225(1975).

3 1

.

National Gerimedical Hosp. & Gerontology Ctr. v. Blue Cross, 452 U.S. 378 ( 1 98 1 ).
32. Parker v. Brown, 317 U.S. 341 (1943).

33. 445 U.S. 97 (1980).

34. 471 U.S. 48 (1985).

35. Id. at 63 (quoting Lafayette v. Louisiana Power & Light Co., 435 U.S. 389, 415 (1978)).
36. FederalTradeComm'nv. Ticor Ins. Co., 504 U.S. 621,622(1992).



1176 INDIANA LAW REVIEW [Vol. 28:1169

over the challenged anti-competitive conduct; the mere presence of some state
involvement or monitoring does not suffice.

In Midcal,^'' the Supreme Court held that no antitrust immunity had been conferred

since the state did not actively supervise the policy. Specifically, the Court found that the

state did not establish prices, review the reasonableness ofprice standards, regulate terms

of fair trade contracts, monitor market conditions nor engage in any pointed reexamination

of the program. As a result, no state action immunity existed. Further, the Court stated:
"It is not enough that . . . anticompetitive conduct is 'prompted' by state action; rather,

anticompetitive activities must be compelled by direction of the State acting as a
"38

sovereign.

In Patrick v. Burget,^^ the Court refused to find active state supervision where the

state agencies lacked the power to review the merits of private peer review decisions or

their compliance with peer review procedures. Thus, the Supreme Court held that the

state action doctrine did not protect Oregon physicians from antitrust liability for their

activities in relation to hospital peer review decision proceedings. Patrick further defined

the parameters of the active supervision prong of the state action immunity test by

requiring that the government have veto power over the specific decisions of private

parties on the substantive merits rather than just the procedural adequacies.

II. Antitrust Developments at the Federal Level

The policy goals of the federal antitrust laws are currently in flux.'*^ Specifically,

some have argued that efficiency should be an important criterion in assessing whether

a merger or other combination conforms to the antitrust laws. This position greatly

influenced antitrust enforcement during the Reagan-Bush administrations. Others have

attacked this emphasis on efficiency and urge that antitrust enforcement promotes more

consumer-oriented goals, such as prevention of anti-competitive conduct. Following the

election of a Democratic administration, policy goals in the enforcement of the antitrust

laws at the federal level may be revised. In any event, the basic tenets of antitrust policy
are unsettled, causing uncertainty about how antitrust principles will be applied to hospital
mergers and other collaborative efforts.

A. Department ofJustice Guidelines on Mergers and Acquisitions

In 1968, the Department of Justice developed Merger Guidelines for the purpose of

evaluating the potentially anti-competitive effects of mergers. Subsequently, the DOJ
issued guidelines in 1982, which were revised in 1984. These Guidelines outline the

present enforcement of the DOJ and the FTC concerning horizontal acquisitions and
mergers subject to section 7 of the Clayton Act, section 1 of the Sherman Act, and section

5 of the FTC Act. The 1984 revision of the 1982 DOJ Guidelines on Mergers and

37. 445 U.S. 97(1980).

38. Id. at 104 (quoting Goldfarb v. Virginia, 421 U.S. 773, 791 (1975)).

39. 486 U.S. 94(1988).

40. Baker, supra note 3, at 1 00-06.



1 995] ANTITRUST TASK FORCE 1177

Acquisitions reflect the policy goal ofefficiency discussed above. The 1992 DOJ merger
guidelines, however, do not reflect major policy shifts."*^

B. Department ofJustice/Federal Trade Commission Safety Zones

for the Health Care Industry

In September 1993, the DOJ and FTC issued a set of antitrust enforcement guidelines
for the health care industry. These guidelines outline six industry-specific "safety

zones.'"*^ If a provider's proposed business venture meets the requirements of one of the

established safety zones, then neither the DOJ nor FTC will challenge the proposed
activity, absent extraordinary circumstances. The six safety zones are as follows:

(1) Mergers between two general acute-care hospitals where one of the hospitals

(1) has an average of fewer than 100 licensed beds over the three most recent

years, and (2) has an average daily inpatient census of fewer than [forty] patients

over the most three recent years;

(2) Any joint venture among hospitals to purchase, operate and market the
services of high-technology or other expensive medical equipment if the joint

venture includes only the number of hospitals whose participation is needed to

support the equipment;

(3) Physicians' collective provision of information that may improve
purchasers' resolution of issues relating to the mode, quality, or efficiency of

treatment;

(4) Participation by competing hospitals in surveys of prices for hospital

services, or surveys of salaries, wages or benefits of hospital personnel ... so

long as certain conditions are satisfied;

(5) Any joint purchasing arrangement among health care providers where two
conditions are present: (1) the purchases account for less than [thirty-five]

percent of the total sales of the purchased product or service in the relevant

market; and (2) the cost ofthe products and services purchased jointly accounts

41

.

U.S. Dep 't. ofJustice Merger Guidelines, 4 Trade Reg. Rep. (CCH) ^13,1 04, at 20,569-20,57

1

(1994).

42. U.S. Dep't of Justice & the Federal Trade Commission, Statements of Antitrust
Enforcement Policy in Healthcare (1993) [hereinafter Statements]. On September 27, 1994, the U.S.

Department of Justice and the Federal Trade Commission issued new statements of Enforcement Policy and

Analytical Principles Relating to Health Care and Antitrust. These statements modified several of the six safety

zones outlined in its 1993 Statement. One important change was a new guideline explaining the analysis that

the FTC and DOJ would use in reviewing hospital joint ventures involving specialized clinical or other

expensive health care service. Other provisions provided greater protection for physicians in negotiating with

other providers and, particularly, payers. See 1994 WL 642477 (F.T.C.); 4 Trade Reg. Rep. (CCH) \ 13,152,
at 20,769-20,798 (1994). For a good review of the 1994 Statements, see Clifton E. Johnson, Revised Federal

Antitrust Enforcement Policy Statements Issuedfor the Health Care Industry, HALL, Render, KlLLlAN, Heath

& Lyman, Developments in Health Law (Oct. 24, 1 994).



1 178 INDIANA LAW REVIEW [Vol. 28:1 169

for less than [twenty] percent of the total revenues from all products or services

sold by each competing participant in the joint purchasing arrangement;

(6) A physician network comprised of [twenty] percent or less ofthe physicians
in each physician specialty with active hospital staff privileges who practice in
the relevant geographic market and share substantial financial risk/^

C President Clinton 's Health Reform Proposal: The Health Security Act
Impact on Antitrust Enforcement

The Clinton health plan asserted that the federal antitrust laws will ensure that the

new health care system remains in a competitive environment. But the plan

acknowledged that the antitrust laws must be clarified to give providers confidence that

their collaborative activities are legal.'*'* The Clinton Health Plan references to antitrust

reform are as follows:

1. Hospital Mergers.—Hospitals smaller than a certain size, as measured, for
example, by number of beds or patient census, require certainty that they will not be

challenged by the federal government if they attempt to merge. Such hospitals often are

sole community providers that do not compete with other hospitals.

The DOJ and the FTC publish guidelines providing safety zones for such mergers and
an expedited business review or advisory opinion procedure through which the parties to

such mergers can obtain timely {i.e., within ninety days) additional assurance that their

merger will not be challenged. Guidelines also would provide the analysis the agencies

use to evaluate mergers among larger hospitals.

2. HospitalJoint Ventures andPurchasing Arrangements.—Hospitals may enter into
joint ventures involving high technology or expensive equipment and ancillary services,

as well as joint purchasing arrangements involving the goods and services they need.

The DOJ and the FTC publish guidelines that provide safety zones for such joint
ventures and arrangements, examples of ventures that would not be challenged by the

agencies and an expedited business review or advisory opinion procedure through which

the parties to joint ventures can obtain timely {i.e., within ninety days) advice and

assurance as to whether ventures that do not fall within the safety zones will be

challenged.

3. Physician Network Joint Ventures.—Physicians and other providers require
additional guidance regarding the application of the antitrust laws to their formation of

provider networks that would negotiate effectively with health plans.

The DOJ and the FTC publish guidelines that provide safety zones for physician
network joint ventures that do not possess market power (below twenty percent) and that

share financial risk, examples of networks that would not be challenged by the agencies,

and an expedited business review or advisory opinion procedure through which the parties

to networks that do not fall within the safety zones can obtain timely {i.e., within ninety

days) advice and assurance as to whether their network will be challenged.

43. Statements, jM/7ra note 42.

44. President Clinton's Health Care Reform Proposal—Preliminary Working Group Draft of September
7, 1993, Appendix A at A-62 - A-64.



1995] ANTITRUST TASK FORCE 1179

Within the safety zones, physicians may bargain collectively with health plans about
payment, coverage, decisions about medical care, and other matters without fear of the

antitrust laws.

4. Provider Collaboration.—During the transition to a new health care system,
physicians and other providers may require some protection to negotiate effectively with
health plans and to form their own plans. To protect physicians from the market power
of third party payers forming health plans, providers are provided a narrow safe harbor

within which to establish and negotiate prices if the providers share financial risk. The

financial risk may not be simply fee discounting. Physicians who provide health services
for the benefit package may combine to establish or negotiate prices for the health
services offered if the providers share risk and if the combined market power of the

providers does not exceed twenty percent. This safe harbor would not apply to the

implicit or explicit threat of a boycott.

5. State Action Immunity,—The DOJ and the FTC publish guidelines that apply the
state action doctrine where a state seeks to grant antitrust immunity to hospitals and other

institutional health providers. If a state establishes a clearly articulated and affirmatively

expressed policy to replace competition with regulation and actively supervises the

arrangements, the hospitals and other institutional providers involved would have

certainty that they will not face enforcement action by the federal government.

6. Provider Fee Schedule Negotiation.—The DOJ and the FTC publish guidelines
that describe under existing law the ability of providers to collectively negotiate fee

schedules with the alliances. Alliances, as established and supervised under state law, are

required under federal law to establish a fee schedule for fee-for-service plans, and

providers, in order to participate in the negotiation process, need certainty that their

actions will not violate the antitrust laws.

7. McCarran-Ferguson.—The current exemption from the antitrust laws enjoyed by
health insurers under the McCarron-Ferguson Act"^^ would be repealed, eliminating the

ability of health plans to collectively determine the rates they charge and other terms of

their relationship with providers.

D. Other Federal Health Care Proposals before the 103rd Congress

that Addressed Antitrust Enforcement

I. Hospital Cooperative Agreement Act.—The Hospital Cooperative Agreement
Act,"*^ introduced by Senator Cohen (R-Me.) would have established a demonstration

program with grants for collaboration among hospitals regarding the provision of

expensive, capital-intensive medical technology or other highly resource-intensive

services. Three of these grants must be used to demonstrate how the collaborative

agreements will be used to increase access or quality in rural areas. The purpose of this

Act was to encourage cooperation among hospitals in order to contain costs and achieve

a more efficient health care delivery system by eliminating unnecessary duplication and

an increase of costly medical or highly technology services or equipment. The Act stated

that it shall not be an antitrust violation for a hospital to enter into and carry out activities

under a cooperative agreement if it meets the Act's specifications. This Act required that

45. See supra notes 27-28 and accompanying text.

46. Hospital Cooperative Agreement Act, S. 493, 103rd Cong., 1st Sess. (1993).



1180 INDIANA LAW REVIEW [Vol. 28:1169

projects be designed to demonstrate a reduction in costs, an increase in access to care, and

improvements in the quality of care.

2. Managed Competition Act of1993.—The Managed Competition Act of 1993/^
introduced by Representative Cooper (D-Tenn.) was targeted at promoting pure managed

competition where greater reliance is placed on the private sector to provide care, reduce

costs and limit government control. The bill contained many health reform features
similar to the President's proposal, e.g., creation of accountable health plans and health

insurance purchasing organizations. The bill required the administration to provide

guidelines regarding the application of antitrust statutes to the accountable health plans

in review by the DOJ. Joint ventures could be created for the purpose of sharing the

provision of health care services that would involve substantial integration or financial

risk-sharing. However, the exchange of information or conduct that is not necessary to

the venture would be excluded. A certificate of public advantage must be obtained
showing that the likely benefits will outweigh the reduction in competition that will result.

This certificate ofpublic advantage would be issued by the DOJ to the approved venture,
which would preclude any exposure to antitrust liability. This certification would be

issued within thirty days of application. An appeals process would be structured in the
event that a denial or revocation of the certificate arises.

3. Access to Affordable Health Care Act.—Title IV of the Access to Affordable
Health Care Act,'*^ also introduced by Senator Cohen, entitled "Cooperative Agreements

Between Hospitals," purported to encourage cooperation between hospitals in order to

contain costs and achieve a more efficient health care delivery system through the

elimination of unnecessary duplication and proliferation of expensive medical or high

technology services or equipment. The United States Attorney General may grant a
waiver of the antitrust laws, to permit two or more hospitals to enter into a voluntary

cooperative agreement under which such hospitals provide for the sharing of medical

technology and services. The administrator of the Agency for Health Care Policy and

Research would evaluate applications for waiver approval within ninety days. Approval

of the waiver would depend on whether cost reduction, quality enhancement,

improvements in cost-effectiveness of high technology services, the avoidance of

duplication and efficient utilization of hospital resources would likely result.

4. Affordable Health Care Now Act ofl993.—l\\Q Affordable Health Care Now Act
of 1993,^^^ introduced by Representative Michel (R-Ill.) would allow health care providers

entering into joint ventures to receive antitrust exemptions. The "Removing Antitrust

Impediments" section describes a system in which the United States Attorney General

would develop guidelines where parties could apply for a limited exemption. The

applications would be reviewed and answered within thirty days. If the application is

denied, the United States Attorney must provide a statement of reasons and must enter

notice in the Federal Register. Information relating to the joint venture must be publicly

47. Managed Competition Act of 1993, H.R. 3222, 103rd Cong., 1st Sess. (1993).

48. Access to Affordable Health Care Act, S. 223, 103rd Cong., 1st Sess. (1993).

49. The Affordable Health Care Now Act of 1993, H.R. 3080, 103rd Cong., 1st Sess. (1993). Seealso

Republicans ' Health Care Bill Includes Antitrust Exemptionsfor Joint Ventures, 65 Antitrust and Trade Reg.

Rep. (BNA) 393 (Sept. 23, 1993).



1995] ANTITRUST TASK FORCE 1181

available unless otherwise necessary to assist with a legal investigation or for a judicial

or administrative proceeding.

The guidelines for implementation would be developed in conjunction with the

Secretary of Health and Human Services and an Interagency Advisory Committee on
Competition, Antitrust Policy, and Health Care. This advisory committee would include

representatives from HHS, the DOJ, the Office ofManagement and Budget and the FTC.
The limited exemption would reduce the actual damages if the conduct resulting in the

antitrust claim was within the scope of the joint venture. This conduct would be subject

to the rule of reason test,^^ taking into account all relevant factors affecting competition,

including effects on competition in properly defined, relevant research, development,

product, process, and service markets.

Additionally, a certificate of public advantage may be issued which would provide
complete exemption to joint ventures. In order to receive a certificate of public

advantage, it must be shown that the benefits of the joint venture are likely to outweigh

the reduction in competition and that the reduction in competition is reasonably necessary

to obtain such benefits. In addition, the application for the full exemption must include

agreements by the parties that the venture will not foreclose competition through contracts

that prevent other health care providers from competing with the venture, and that the

venture will submit an annual report that describes its operation and information regarding

the impact of the venture on health care and competition in health care. A denial for a
certificate can be challenged in a United States District Court.

5. Health Care Antitrust Improvements Act.—The Health Care Antitrust
Improvements Act,^' introduced by Senator Hatch (R-Utah) would allow an exemption

from antitrust laws if the activity falls under a one of the proscribed safe harbors listed in

the Act, an additional safe harbor designated by the United States Attorney General, or

is within the parameters of the specified activities stated in the certificate ofreview issued

by the United States Attorney General. The safe harbors listed under section 5 of the Act

were:

(1) Combinations where each type or specialty provider in question does not

exceed [twenty] percent of the total number of such type of specialty in the

relevant market area;

(2) Activities of medical self-regulatory entities relating to the standard setting

or enforcement activities designed to promote quality of care;

(3) Participation in surveys regarding the price of services, reimbursement levels

or the compensation and benefits of employees and personnel if the survey is

conducted in an unbiased manner by a third party and the information is based

on prior and not current charges or benefits;

(4) Joint ventures for high technology and costly equipment and services if the

number of participants in the venture does not exceed the lowest number

necessary to support the venture;

50. See supra subpart I.B.

51. Health Care Antitrust Improvements Act, S. 1658, 103rd Cong., 1st Sess. (1993). See also the

companion bill introduced in the House by Rep. Archer, H.R. 3486, 103rd Cong., 1st Sess. (1993).



1 182 INDIANA LAW REVIEW [Vol. 28:1 169

(5) Hospital mergers relating to two hospitals if within the three-year period

prior to the merger, at least one hospital had an average of 150 or fewer

operational beds and the average inpatient use was less than [fifty] percent;

(6) Joint purchasing arrangements if the total sales of the product or service is

less than [thirty-five] percent of the relevant market;

(7) Any good faith negotiations necessary to carry out any of the activities
within the safe harbors listed or designated by the U.S. Attorney General or

activities that are the subject of an application for a certificate of review."

In determining whether an additional safe harbor would be established, the United

States Attorney General shall take into account the extent to which the collaborative

activity would result in increased access, quality, cost efficiencies, the ability to provide

services in medically underserved areas and improved utilization ofhealth care resources.

Further, criteria to be considered were whether the activity will improve payment and

service arrangements so as to reduce cost, whether competition will be unduly restricted,

whether comparable efficiencies exist; and, whether the activity will unreasonably

foreclose competition.

E. National Trade Associations Proposals

Both the American Medical Association (AMA) and the American Hospital
Association (AHA) have developed recommendations for health reform that include
references to federal antitrust laws acting as barriers to collaborative activities by

providers.

1. The American Hospital Association.—The AHA has been pursuing antitrust relief
on the federal level. It has also urged hospitals to collaborate with each other, other health

care providers, schools, businesses, and community organizations to improve the quality

of and access to health care, and to reduce rising health care-related costs,^^ However,

many such activities have been inhibited due to the real and perceived barriers of the
federal antitrust laws.

The AHA is currently attempting to further educate providers about the risks of
antitrust enforcement to provider collaboration. The association has issued several

documents addressing these issues recently. But the AHA states that no amount of
educational efforts can resolve the uncertainties that are inherent in the federal antitrust

laws nor change the laws' preference for competition even when such competition results

in a wasteful use of resources.

The AHA's examination of the methods of antitrust analysis is especially mindful of
the unique characteristics of hospital markets. Hospital markets have traditionally

deviated from the competitive paradigm in several important respects. Consumers are

insulated from market prices by third-party insurance and lack of information. Due to the

large amount of government-purchased medical care, for which the government pays on

a set basis, hospitals with market power may be constrained to exercise such power. In
addition, a hospital's mission may limit its ability to exercise market power. Moreover,

52. Health Care Antitrust Improvements Act, S. 1658, 103rd Cong. 1st Sess. (1993).

53. See HOSPITAL COLLABORATION, supra note 3

.



1 995] ANTITRUST TASK FORCE 1 1 83

the AHA recognizes that antitrust poUcy must be sensitive to non-economic priorities in
health care. For example, the operation of market forces may not ensure that the right
hospitals stay open and the right hospitals close. Hospital closures in underserved areas

will complicate already serious problems with access to quality health care.

2. The American Medical Association.—In the spring of 1993, the AMA addressed
the Subcommittee on Antitrust, Monopolies and Business Rights of the Judiciary

Committee of the United States Senate on the subject of antitrust relief for the health care

industry.^"* In its proposal the AMA did not seek an exemption for federal antitrust laws.
Rather, the AMA recommended clarification of federal antitrust laws by statutory
enactment.

Because health system reform will begin dictating the use of new pro-competitive
approaches to the delivery of affordable medical care, the AMA strongly recommended
changes to the current antitrust environment. Under managed competition, substantial

efficiencies must be created, making cooperation among providers and physicians

imperative. Relief from the barriers of federal antitrust laws will permit physicians to

form networks and will provide valuable input into the policy-making activities of

managed care plans.

F. Antitrust Reforms at the State Level

To date, more than a dozen states legislatively exempt health care collaborative

activities from the coverage of the federal antitrust laws in one form or another.^^ The

primary bases for creating a state action exemption from federal and state antitrust laws

in each of these states have been relatively consistent. Various legislatures have

concluded that the competitive model has not been effective in controlling the rising cost

of health care nor the inefficiencies of duplicative facilities and services. Although

technological and scientific advancements in the health care industry have improved the

quality of health care, many persons cannot afford to take advantage of these

improvements. Further, many states have found that the boundaries of existing state and

federal health care statutes have suppressed the ability of health care providers,

specifically hospitals, to acquire and develop new equipment and methodologies in the

delivery of health care services. Therefore, the states have enacted legislation creating

regulatory programs that allow health care providers to cooperate to the extent that the

positive effects—such as the quality, access and delivery of health care services—do not
outweigh the potential adverse effects of reducing competition.

Maine enacted the Hospital Cooperation Act of 1992,^^ which became effective in

April the same year. This law allows hospitals to enter into cooperative agreements with

other state-based hospitals if the potential benefits outweigh the disadvantages that may

54. American Medical Association, Statement to the Subcommittee on Antitrust, Monopolies and

Business Rights, Judiciary Committee, United States Senate (March 23, 1993).

5 5

.

States that have enacted statutes that allow cooperative activity among hospitals include: Colorado,

Florida, Georgia, Idaho, Kansas, Maine, Minnesota, Montana, Nebraska, New York, North Carolina, North

Dakota, Ohio, Oregon, Tennessee, Texas, Washington, and Wisconsin. See General Accounting Office,

Health Care: Federal and State Antitrust Actions Concerning i he Health Care Industry (August

1994).

56. Me. Rev. Stat. Ann. tit. 22, § 1 88 1 - 1 888 (West 1 994).



1184 INDIANA LAW REVIEW [Vol. 28:1169

result from the reduction in competition. The benefits listed include quality, cost

efficiency, avoidance of duplication, improvements in utilization and preservation of

hospital facilities. The disadvantages to be considered include the likely adverse impact

on the ability of managed care entities and payers to negotiate optimal payment and

service arrangements with hospitals or other health providers; the reduction in competition

in the quality, availability and price of health care services; and, the availability of less

restrictive arrangements that can achieve the same or more favorable benefits. Those

seeking to enter into cooperative agreements must demonstrate by clear and convincing

evidence that the likely benefits of the proposed arrangement outweigh the attributable

disadvantages in the reduction of competition. The Act defines a cooperative agreement

among hospitals as the sharing, allocation or referral of patients, personnel, services,
procedures and facilities traditionally offered by hospitals.

Similarly, in Minnesota,^^ the legislature's pronounced purpose behind the enactment

of the "Antitrust Exceptions" statute was to substitute regulation for competition when the

proposed arrangement is likely to result in greater access or quality than would otherwise

occur in the current competitive market. This statute was repealed in 1993.

In Ohio,^^ recent legislation allows hospitals to conduct negotiations involving the

allocation ofhealth care services or equipment to the extent that such negotiations do not

involve price-fixing or predatory pricing, and are designed to achieve one of the following

goals: the reduction of health care costs, improvement of access to health services, or the

improvement of the quality of patient care.

In Washington,^^ legislation was enacted to specifically enhance rural health

development. The legislature pronounced that the primary goal of state health policy was

on the maintenance of the health care service delivery in rural areas. The intent of the

statute is to foster the development of cooperative and collaborative arrangements among

the rural public hospital districts. The legislature further determined that it is not cost-

effective, practical nor desirable to provide quality health care services on a competitive

level in rural areas because of the limited patient volume and geographic isolation.

In Wisconsin,^^ the Health Care Cooperatives Agreement statute is less limiting than

others, as it allows health care providers, not just hospitals, to negotiate and voluntarily

enter into cooperative agreements. The law defines cooperative agreements as the

sharing, allocation or referral of patients, or the sharing or allocation of personnel,

services and medical, diagnostic or laboratory facilities or procedures or other services

customarily provided by health care providers.

III. Developmental Efforts in Indiana Relating to

Modification of Federal Antitrust Law

A. Indiana Commission on State Health Policy

In 1989, the Indiana General Assembly created the Indiana Commission on State

Health Policy,^' which was directed to study Indiana health policy and make

57. Minn. Stat. § 62J.29 ( 1 992).

58. Ohio Rev. Code Ann. § 3727.22 (Baldwin 1995).

59. Wash. Rev. Code §§ 39.34.010-.920 (1995).

60. Wis. Stat. §§ 150.84-.86 (1995).



1 995] ANTITRUST TASK FORCE 1185

recommendations in order to improve the effectiveness of Indiana's health care delivery

system. The Commission issued a report entitled Hoosier Health Reform, which

summarized the findings of the Commission.^^

Among the findings were many references to the much-needed removal of federal
antitrust barriers that prevent Indiana health reform from progressing. The Commission

recommended that the federal govemment create an exemption for hospitals engaging in

certain collaborative relationships from federal antitrust laws under state supervision.

This immunity should be applied to all collaborative activities except those that involve

price-fixing, predatory pricing, or group boycotts. The Commission recommended that

the exemption not be as stringent as the requirements under the state action immunity

doctrine. The Commission concluded that removing federal antitrust barriers would have

many benefits.
Merger and collaboration in the hospital industry were found to be in the public's best

interest due to tremendous duplication of services and facilities that are costly to the

health care system. The Commission referred to a study^^ that found that hospitals in

more than three-fourths of communities nation-wide would be at risk of violating federal

antitrust guidelines if they merged. It also found that a decided trend toward more

stringent enforcement of antitrust legislation exists in the health care field, and many

collaborative arrangements between providers have the potential to trigger an antitrust

challenge under federal guidelines.

Among the benefits the Commission attributed to collaboration between health care
providers were that rural hospitals would be able to merge or form networks with larger

tertiary hospitals or other rural hospitals in their geographic areas. This would eliminate

the duplication of health care technologies and facilities that currently exist and would

provide tremendous cost savings. Hospitals would also be able to establish networks and

systems to provide a continuum of care for patients, with rural hospitals providing basic

acute care, long-term care and ambulatory care, and more specialized needs being

provided by larger hospitals belonging to the network. The Commission found ample

evidence to show that an increased volume of specialized care available in fewer settings

promotes quality of care. Capital markets would be more accessible to smaller hospitals

if those providers were linked with larger hospitals, who are financially stronger. The

Commission cited the capital needs of smaller hospitals to upgrade facilities and shift

missions to provide different types of care such as ambulatory care, long-term care and

other less specialized care.

B. Indiana Legislative Action

Governor Evan Bayh addressed the need for removal of federal antitrust barriers to

the Indiana community of health care providers in his 1993 State of the State address.

Cornerstones ofProgress. Because of the explosion of medical technology, which has

increased the cost of health care, hospitals are competing to have the most up-to-date

equipment. Rural hospitals have difficulty competing with larger more urban hospitals

in two ways: availability ofhigh-tech medical equipment and ability to attract physicians

61. Ind. Pub. L. 327-1989.

62. Indiana Commission on State Health Policy, Hoosier Health Reform (Nov. 1 992).

63. The name of this study was not cited by the Commission.



1 1 86 INDIANA LAW REVIEW [Vol. 28: 1169

willing to accept lower salaries, and longer hours. Affiliation of rural providers with

larger hospitals may increase access to capital, promote recruitment of physicians, and
lower operating costs. Governor Bayh proposed: (1) eliminating antitrust barriers that

prevent effective coordination of services among health providers; (2) establishing criteria

and procedures for two or more hospitals to voluntarily request approval for a cooperative

or collaborative project; and (3) articulating public policy that encourages collaborative

activities to reduce costs, improve access and quality, and reduce duplication.^"^

In the 1993 legislative session, the administration drafted legislation, which, as

originally introduced, would have required the ISDH to adopt rules permitting provider
collaborative efforts—as permitted under federal antitrust laws—^rather than implementing
the doctrine of state action immunity.^^

The Indiana Hospital Association drafted related legislation, H.B. 1800, to create a

limited exemption from the federal antitrust laws for various types of collaborative

activity among independent hospitals.^^ H.B. 1800 would have allowed hospitals to enter

into collaborative agreements if certain conditions were met to ensure the benefits of

provider collaboration outweighed the disadvantages resulting from a reduction in

competition. Such collaboration between providers was encouraged under the measure

if the agreements materially contributed to cost containment, improved access, reduction

in duplicity of services, equipment or facilities, and also promoted efficiency. This

legislative attempt to facilitate provider collaboration was not successful, and a similar

proposal is likely to be introduced and considered in a future legislative session.^^

IV. Deliberations of the Hospital Antitrust Task Force

A. Fact Finding Activities

1. Consultation with Indiana Constituencies.—The Task Force engaged in several
efforts to obtain information from affected Indiana constituencies. The major fact-finding

activities and the information received are listed below:

(1) The results of the Indiana Hospital Association Survey of Hospitals on

Antitrust Problems Faced by Hospitals in Collaborative Efforts;

(2) A presentation by Bain Farris, Chief Executive Officer, St. Vincent
Hospitals and Health Services, and James Dobson, Esq., General Counsel,

Community Hospitals of Indianapolis, on the Collaborative Network between St.

Vincent Hospitals and Health Services and Community Hospitals of Indiana;

64. Governor's State of the State Address, Cornerstones ofProgress (1993).

65. H.B. 1921, 1st Regular Sess., 108th Gen. Assembly (Ind. 1993).

66. H.B. 1800, 1st Reg. Sess., 108th Gen. Assembly (Ind. 1993).

67. In its 1995 session, the General Assembly considered H.B. 1440, which would have authorized

hospital collaboration demonstration projects in four Indiana counties if the resulting probable benefits would

have outweighed the disadvantages. H.B. 1440, 1st Regular Sess., 109th Gen. Assembly (Ind. 1995). The

legislation sought to encourage demonstrations that promoted policy goals such as reduced health care costs,

improved access and quality, and greater health system efficiency.



1 995] ANTITRUST TASK FORCE 1187

(3) Mr. Farris subsequently sent a letter to the Task Force noting that if a state

exemption to federal antitrust laws were more burdensome than the current

system of federal review, health care providers would be better served by

utilizing the existing federal review process. Similarly, he recommended that
any state antitrust exemption be optional, rather than mandatory. He asserted
that a state action exemption would be of greatest benefit to smaller regional

providers, who currently desire to discuss ways in which they can collaborate to
serve the needs of their local community;

(4) Correspondence from Jerry Paine, Secretary/Treasurer, Indiana AFL/CIO,

expressing concern about the vertical integration of health care and cautioning

about a state antitrust exemption. Mr. Paine adeptly described the inherently

conflicting concerns felt by many in labor and industry. Concern exists over
expenses caused by duplicity in equipment and services, yet there is equal

concern over reducing competition among health care providers;

(5) A presentation by Ron Dyer, Esq., General Counsel, Indiana State Medical
Association, regarding physician antitrust concerns. Mr. Dyer subsequently

joined the Task Force.

2. Consultation with Professor Jan^es F. Blumstein.—^The Task Force also consulted
with James F. Blumstein, Professor, Vanderbilt University School of Law, about the

general desirability of state action exemptions to the federal antitrust laws. Professor

Blumstein is a prominent scholar in the field of health care antitrust^^ and has been a

strong advocate of free markets and competition in the health care industry.^^ The Task

Force wanted the perspective of such a scholar to help them more fully explore the

potential downsides ofa state action exemption to the antitrust laws. Professor Blumstein

provided the task force a thoughtful presentation on the state action exemption and was

most helpful to the Task Force in its deliberations.^^

3. Important Findings Reported in National Media.—On average, sixty-five percent
of hospitals nationwide have entered into some type of collaborative arrangement in the

68. His publications include: Uncompensated Hospital Care: Rights and Responsibilities

(James F. Blumstein et al. eds., 1 986); COST, QUALITY AND ACCESS IN Health Care: New Roles for Health

Planning in a Competitive Environment (James F. Blumstein et al. eds., 1988); Symposium, Antitrust and

Health Care, 51:2 LAW& CONTEMP. Probs. (1988) (James F. Blumstein & Frank A. Sloan, symposium eds.);
Organ Transplantation Policy: Issues and Prospects (James F. Blumstein & Frank A. Sloan

eds,, 1989); Redefining Government's Role in Health Care: Is a Dose of Competition What the

Doctor Should Order? (James F. Blumstein & Frank A. Sloan eds., 1981) [hereinafter Redefining
Government's Role].

69. See Symposium, Antitrust and Health Care, supra note 68; REDEFINING Government's Role,

supra note 68.

70. Following his consultation with the Task Force, Professor Blumstein wrote a major article on state

action immunity under the federal antitrust for collaboration among health care providers. See James F.

Blumstein, Health Care Reform and Competing Visions of Medical Care: Antitrust and State Provider

Cooperation Legislation, 79 CORNELL L. REV. 1 459 ( 1 994).



1188 INDIANA LAW REVIEW [Vol. 28:1169

last two years7' Between 1987 and 1991, more than 229 hospital merged in the United

States of which twenty-seven generated federal antitrust investigations resulting in only

five antitrust challenges'^

B. Task Force Findings and Conclusions

1. Problematic Collaborative Activities.—The Task Force had difficulty identifying
specific types of desirable collaborative activity among hospitals and other health care
providers that posed substantial antitrust risks or constrained providers from collaborating

because of fear of antitrust exposure. The Task Force was also impressed that many
collaborative activities between hospitals and other health care providers are already

occurring and are permissible under the antitrust laws.

Specifically, major hospitals in Indianapolis have engaged in a variety of

collaborative efforts without finding the antitrust laws such a formidable barrier as to

preclude negotiations. For example, St. Vincent Hospital and HeaUh Center and

Community Hospitals of Indianapolis established a formal network that functions as much
as possible as a single entity without being an actual merger. In this network, revenues

exceeding expenses, from each medical center, are combined and allocated according to

a formula based on pre-coUaborative equity and profit ratios. St. Vincent and Community

are currently exploring various clinical and administrative areas for potential

consolidation and collaboration.

St. Vincent Hospital and Health Centers and Methodist Hospital of Indiana, Inc. also

collaborated in the formation and operation of a rehabilitation hospital that involved, in

their judgment, virtually no significant exposure under the antitrust laws. Specifically,

the Rehabilitation Hospital of Indiana, Inc. was created as a 50-50 subsidiary of entities

controlled by both Methodist and St. Vincent in 1990, because the parties determined that

a substantial need for additional rehabilitation beds existed in central Indiana. Without

substantial time or expense, the antitrust analysis was performed by Methodist in-house

counsel and by local counsel for St. Vincent and a determination was quickly made that

federal antitrust review of this new venture to collaboratively own and operate a new $20
million rehabilitation facility was not required.

Not all proposed mergers of Indiana hospitals have avoided antitrust problems. In

the fall of 1990, two 300-plus bed, not-for-profit hospitals in Fort Wayne—St. Joseph
Medical Center and Lutheran Hospital of Indiana—announced plans to consolidate in
order to reduce their management teams by approximately twenty percent and eventually

to consolidate their medical staffs.^-' The hospitals declared that the affiliation would

reduce duplicative medical equipment, technology, programs and services in Fort Wayne
and place the hospitals in a better position to serve indigent patients. Expecting review

by the DOJ to be "smooth sailing," the hospitals cancelled their merger plans one year

7 1

.

Hospital Collaboration Delivers Efficient Care, According to Survey, PRNewswire ASSOCIATION,

Inc., Oct. 25, 1993.

72. See David Marx, Jr., State Hospital Cooperation Acts: Are They Sufficient Antitrust Shelterfor

Hospital Collaborations?, 10:9 HealthSpan 3, Oct. 1993.

73. See David Burda, Four Hospital Groups Announce Various Form ofMerger Deals, MODERN

Healthcare, Oct. 22, 1990.



1 995] ANTITRUST TASK FORCE 1189

later in the face of a widening antitrust investigation by the DOJ.^"* Had the merger taken
place it would have given the two hospitals control of fifty-six percent of the private

acute-care hospital beds in Fort Wayne, Indiana, which has a population of 173,000.
The Task Force identified three areas of collaboration in which the antitrust laws pose

a chilling effect.

(1) Mergers and/or coordination of services by providers in small towns: The

safe harbor provisions of the DOJ/FTC Guidelines, as delineated in Statements

of Antitrust Enforcement Policy in Healthcare,^^ do not cover the potential

collaboration of two financially healthy and well-utilized hospitals in a smaller

community. The DOJ/FTC Guidelines are really restricted to small or failing
institutions with low occupancy. Further, the Task Force could not determine

whether it would be desirable to promote mergers of multiple hospitals in

smaller communities or whether pluralism in the provision of services in these

communities might produce added benefits or might promote the operation of

two state-wide networks in a community, thereby assuring residents choices

among providers and other benefits of competition;

(2) Consultation between hospitals and other providers about the desirability of

collaborative efforts: The Task Force discussed several options that would allow

providers to examine whether collaborative activity is in the best public interest,

such as a "time out," which is an exempt period from antitrust exposure allowing

potential collaborators to discuss the benefits of a proposed collaboration that

otherwise constitutes a potential violation of the antitrust laws. For example,

providers forming alliances in order to bid to become Indiana Medicaid managed

care contractors could well have utilized this protection. However, the Task

Force concluded that simply allowing parties to talk under the ostensible

sponsorship of a state agency would probably not be sufficient to meet the

supervised activity requirements of state action required in the Ticor decision.

Allowing such protection to providers that are exploring collaboration without

an extensive state regulatory program currently required for state action

exemptions may be an appropriate reform under federal health reform proposals
or possibly a DOJ/FTC safe harbor protection. The Clinton health care proposal.

The Health Security Act, included such relief in its proposed antitrust reforms;

(3) Estimating savings of combined clinical departments when two hospitals

collaborate in a common network: It is important to recognize that the benefits
to a health care provider of clinical combinations or reduction in the duplicity of

expensive medical equipment are financial savings. Discussions between

providers of savings estimates that would result from collaborations are clearly

constrained by both state and federal antitrust laws.

2. The Required State Regulatory Programfor a State Action Exemption.—As stated
in greater depth above, the Supreme Court recently outlined specific requirements to

74. David Burda, Indiana Hospitals Call OffMerger Following Probe, MODERN HEALTHCARE, July

1,1991.

75. See supra note 42.



1 190 INDIANA LAW REVIEW [Vol. 28:1 169

create a state action exemption from the federal antitrust laws. A state must: (1) clearly
articulate its public policy to be furthered by the exemption; and (2) actively supervise its

review process, which includes allowing the state to review, regulate and deny potential

collaborative arrangements.^^

The Task Force concluded that the legal requirements for a state action exemption,

as set out by Midcal and clarified by Ticor, do not allow Indiana to create the type of

antitrust exemption the Task Force could recommend. The Task Force was concerned

that the regulatory task would be so great and require such extensive economic and legal

expertise that the ISDH or any other state agency, given customary restraints on staff and
resources currently experienced by Indiana State agencies, would not be able to conduct

the type of regulatory program mandated by the Supreme Court's decisions.

3. The State's Interest in Promoting a State Action Program.—The Task Force
concluded that the state has an interest in a rational health care system that assures high

quality health care services to all citizens at a reasonable cost. The question of how the
state would accomplish these goals in a state regulatory program posed a confounding

problem in the Task Force's judgment. These goals, the Task Force recognized, were

quite similar to the goals of the health planning and Certificate of Need (CON)

programs—mandated by Congress in the National Health Planning and Resources
Development Act of 1979.^^ Yet the Task Force unanimously opposed creating a

regulatory scheme like the CON program.
The Task Force specifically considered past experiences with health planning and

CON in Indiana and the nation. The Task Force noted that federally mandated health
planning was not particularly effective in reducing excess capacity or promoting rational

development of health care facilities around the state. Further, federal health planning and

CON agencies did not effectively administer these programs. Finally, the Task Force
agreed, the planning and CON processes simply made disputes between powerful
providers over resources and development into political battles that would otherwise be

fought through economic competition in a non-regulated market.

4. Task Force Observations on the Merits ofa State Action Exemption.—Below are
listed some of the more important points made by Task Force members that influenced

the Task Force's recommendations:

(1) The Task Force observed that the health care system in Indiana and

throughout the United States was in great flux. Hospitals are changing

dramatically, particularly in the way that they provide hospital services.

Hospitals are joining with physicians and other health care providers to form

vertical service delivery networks. National HMOs and other managed care
organizations are penetrating Indiana's market for health care services. At the

federal level. Congress and the Clinton Administration are considering major

legislative proposals for health care reform that would dramatically change the

health care system. Given these and other developments, the Task Force was

unclear as to the nature of Indiana's future health care delivery system;

76. Federal Trade Comm'n v. Ticor Ins. Co., 504 U.S. 62 1 ( 1 992).

77. National Health Planning and Resources Development Act of 1974, Pub. L. No. 93-641, 88 Stat.

2225(1975).



1 995] ANTITRUST TASK FORCE 1191

(2) Market competition does not necessarily influence hospitals in the same way
it influences non-regulated organizations in the business sector. In other words,

regulation by the federal government, states and the Joint Commission on

Accreditation of Healthcare Organizations imposes requirements on hospitals

that preclude hospitals from limiting essential services to communities, and

taking other actions that might make them more competitive in a less regulated
environment;

(3) Indiana should not duplicate on the state level the antitrust analysis presently

conducted on the federal level. Rather, Indiana should act only if there are

clearly identifiable social policy issues on which there is broad consensus, and

the achievement ofwhich would be so significant as to justify conduct that might

otherwise be considered anti-competitive and/or illegal, and that would also

justify the state's establishment of a new review mechanism to determine
whether or not such social policies are, in fact, achieved;

(4) The foremost question in this analysis is whether the market is currently

doing, or has the capacity to do, what the public wants regarding quality, cost

and efficiency. Only if a significant disparity exists between the status quo and

public demands should the government engage in providing additional

regulatory systems that enhance the goals of public policy. This question is

complicated as there are no guidelines concerning what the public wants in

health care. Similarly, the public is unable to assess whether or not the antitrust

laws are a benefit or burden to the public interest;

(5) When H.B. 1800 was introduced in 1993, business was very interested in
encouraging provider collaboration in one form or another.^^ Currently, the

business community appears to be more skeptical about the benefits of

collaboration that might otherwise be proscribed under the antitrust laws.

V. The Merits of a State Action Exemption

The Task Force initially posed three questions to answer in its deliberations. The

answers to these questions are set forth below.

(1) Is a state action exemption to the federal antitrust laws a good idea?

The Task Force was reluctant to recommend a change in the economic rules that

define how health care providers relate to one another, especially in a changing
environment as exists in the health care system presently. The Task Force, however,

recognized that future action regarding the antitrust laws may be appropriate and did not
"close the door" on the concept of state action immunity for Indiana. The Task Force also

concluded that, unless the state could accomplish specific, positive goals for health reform

without an extensive state regulatory program of the type clearly contemplated in Ticor,

the state should not proceed with a state action exemption and associated regulatory

program. In other words, the state should not engage in the same type of antitrust review

78. See supra note 66.



1 192 INDIANA LAW REVIEW [Vol. 28:1 169

that the federal government does without seeking to achieve additional positive goals.

Adoption of a recommendation for creating a state action exemption should not be made

lightly. The state involvement necessary for a state action exemption would require

Indiana to dedicate significant resources for continuing oversight of collaborators. While

several other states have adopted these statutes, they are untested under the guidelines set

out by the Ticor decision. If the process of collaborating under the exemption was

rigorous, potential collaborators would likely choose traditional review of their proposal

by the DOJ and the FTC due to the risk of federal antitrust exposure because of the
untested nature of the exemption.

Another reason for the Task Force's decision to refrain from recommending state

action immunity legislation at this time is that some experts question whether the state

action immunity statutes of other states will actually confer state action immunity when

challenged by either the federal government or, more probably, competitors in private

antitrust actions. ^^ The Task Force thought it desirable to wait and examine how courts
rule on existing state action immunity statutes before proceeding with such a statute in

Indiana. Further, it would be desirable to see how state action immunity statutes in other
states are used by providers and whether the resulting collaborations are, in fact,

beneficial to the health care system.

(2) If so, what activities and persons should be exempted?

The answer to this question is unclear and is one of the major reasons that the Task

Force recommends deferring a recommendation for a state action exemption.

(3) If so, what should the state's regulatory program look like?

Clearly, the Task Force is hesitant to recommend a rigorous regulatory program for

health care providers of the type contemplated by Ticor. The chief concern, which

prevented the Task Force from embracing the adoption of a state action exemption, was

the extensive state regulation that is required by the Supreme Court in Ticor.

In conclusion, the Task Force recommends that Indiana policy-makers consider a

state action immunity statute as one ofmany goals for the health care system, making sure

that it coordinates a state action immunity doctrine with other important health-related

policy goals. For example, other ways to make health care providers more efficient could

include making the state a better purchaser of health care services for the individuals that

it insures. The state is already doing this with its Medicaid managed care program. It

should consider adopting a similar strategy for other groups for whom it provides or
mandates health insurance, e.g., state employees or the beneficiaries of the Indiana

Comprehensive Health Insurance Association. Finally, the market for health care services

is extremely complex and unique. For some services, e.g., expensive, high technology

services for the catastrophically ill, cooperation among providers seems intuitively

desirable. However, for other services provided to the general population, competition

among providers may be desirable as a way to keep costs down and quality of service
high.

79. See supra note 70.



1 995] ANTITRUST TASK FORCE 1 1 93

Postscript

Much has happened in the health care field since the Task Force's deliberations and
the writing of this Article.^'' Congress considered and failed to pass proposals for

federally mandated comprehensive health reform, including President Clinton's health

reform proposal in the Health Security Act.^' Yet the health care industry is going

through enormous change with unprecedented horizontal and vertical mergers and

consolidations of health care providers throughout the United States. These transactions

often raise important antitrust issues that are confounding to those involved. This analysis

ofthe state action exemption in Indiana is one state's effort to look at the appropriateness

of state action immunity from federal antitrust laws for collaborative activities among

hospitals. We hope it is helpftil.

80. We have tried to indicate more recent developments in the footnotes of this article.

81. H.R. 3600, 103d Cong., 1st Sess. (1993).