"Thank you for the opportunity to appear before you today. It is truly an honor and pleasure to share my views on this important topic. As you can see from my bio, I've spent most of my career toiling in the vineyards of healthcare antitrust.
"By way of introduction, I am currently Visiting Professor of Law at the
Summary of Testimony
"As this subcommittee knows well, antitrust law is under scrutiny today. A number of academic and policy experts have suggested that less-than-robust government enforcement together with constricting and antiquated legal precedents have turned us into a nation of oligopolies. And it is especially appropriate that this subcommittee take a close look at the consolidation trends in health care because mergers have contributed significantly to the high cost of care in this country.
"In addition to this statement, I am attaching an articles that contains my analysis of vertical merger activity in various health care sectors. Let me quickly summarize four key takeaways: - Our health care system depends on competitively-structured markets to provide high quality and innovation at affordable prices.
* Despite the commendable success of government antitrust enforcers in challenging mergers to near-monopoly in provider and insurance markets, they have maintained a laissez-faire approach to vertical mergers that threaten competition. Foregoing challenges to acquisitions of physician practices by dominant hospitals and to consolidations of PBMs, health insurers, and pharmacies has given an "all clear" signal on health care vertical mergers.
* While most vertical mergers do not impair competition, it should not be assumed that all are benign, that significant efficiencies will always be realized, or that cost savings will be passed along to consumers.
* Antitrust enforcers, health care regulators, and state and federal legislatures should take action with regard to vertical mergers in health care, e.g. evaluate and explain conditions conducive to lessening competition, bring cases that establish workable judicial precedents, and adjust regulatory incentives that artificially spur consolidation.
The Importance of Stopping Anticompetitive Vertical Mergers in Health Care
"The article I submitted begins with a quote from George Orwell's novel
"And I compare that to the
"However, contemporary economic analyses have sharply questioned the basis for a laissez-faire approach to vertical combinations. They have debunked many of the underlying assumptions that have misled the development of the law. And contemporary scholarship explains the circumstances giving rise to consumer harm. For example, by combining needed inputs or complements with distribution, a vertical merger can enhance incentives for the merged firm to exclude its downstream or upstream rivals, either by raising their costs or cutting off their access to critical resources. Professor
"A similar litigation vacuum may be occurring with respect to vertical mergers. Economic evidence suggests that antitrust enforcers' benign neglect of vertical mergers between hospitals and physicians has resulted in excessive pricing of physician services. A significant body of research demonstrates that when hospitals in concentrated markets acquire physician practices, they raise the prices their employed physicians charge, exercising their market power and taking advantage of regulations that improperly reward consolidation.
"Not only have commercial insurers paid more as a result of vertical mergers, but so has Medicare: it pays both a physician fee and hospital facility fee when a physician becomes part of a hospital outpatient department whereas it would pay only a physician fee if the service had been provided in an outpatient physician office. And let's not forget the effect all this has on consumers who face high co-pays and deductibles: not only unaffordable prices, but for many foregoing needed health care.
"As the title of this hearing suggests, the country is now entering a phase of consolidation of powerful middlemen. The merger of CVS and
* The risk that as a "must have" pharmacy in many local markets it could cut off or raise rival insurers' or PDP plans' costs
* As a "must have" PBM services supplier or part of a tight oligopoly, the risk that it can likewise cut off or raise rival insurer or PDP plans' costs
* That there will be significant "customer foreclosure" in local markets, as rivals will lose access to
* That there will be enhanced incentives for the three dominant, vertically consolidated PBM/insurance entities to act in lock-step fashion on price and administrative arrangements
"Former FDA Commissioner Gottlieb summarized the middleman risks well:
"The top three PBMs control more than two-thirds of the market; the top three wholesalers more than 80%; and the top five pharmacies more than 50%. Market concentration may prevent optimal competition. And so the saving may not always be passed along to employers or consumers.
"Too often, we see situations where consolidated firms -- the PBMs, the distributors, and the drug stores -- team up with payors. They use their individual market power to effectively split some of the monopoly rents with large manufacturers and other intermediaries rather than passing on the saving garnered from competition to patients and employers.
Efficiencies in Vertical Mergers: Pervasive but Over-Hyped
"The notion that vertical mergers are almost always procompetitive owing to their unique propensity to improve coordination and achieve other cost savings underlies the disinclination to closely examine most mergers.
"While there are unquestionably important benefits that flow from vertical mergers, it is a mistake to assume they always occur and to shape policy and enforcement priorities on such assumptions. First, as economist
"Second, benefits attributable to mergers are sometimes also achievable by contracting.
"Joint ventures among vertically situated market participants are common in health care and because they are not permanent and pose less competitive risk. Accordingly, antitrust merger law appropriately insists that claimed efficiencies be "merger-specific." That standard should apply to investigations of vertical mergers.
Concentration Begets Anticompetitive Conduct
"Experience demonstrates that concentration coupled with entry barriers and some of the unique aspects of health care markets offer opportunities and incentives to engage in anticompetitive conduct. The history of antitrust law in the health care sector is littered with examples of hospitals, physician organizations, and insurers that have taken advantage of their dominant market positions, barriers to entry, and the absence of effective regulatory oversight to disadvantage rivals and impair competition. For example, in the last several years antitrust cases have been brought against: a dominant insurer that lessened competition by requiring hospitals to agree to most favored nations clauses; a hospital with market power insisting that payors refrain from using tiering arrangements discouraged competitive contracting; a large hospital system restraining competition by "all or nothing" contracting for its hospitals, restricting sharing of cost information and other practices; and patented drug manufacturers conspiring with generic firms to delay competitive entry.
"At the same time, antitrust doctrine is tolerant of extant market power and rarely sanctions dominant firms, especially in cases involving unilateral refusals to deal with rivals. It only condemns monopolists that inappropriately obtain or maintain market power, and even in those cases plaintiffs may settle for conduct commitments rather than divestiture of assets. Moreover, cases alleging anticompetitive exclusion have faced high doctrinal hurdles. Given the law's tolerance of extant market power and the propensity of dominant firms to entrench or extend their reach, merger law's prophylactic remedies are especially important. As Professor
Concentration Begets Regulation
"Concentration also begets regulation. State attorneys general have allowed anticompetitive mergers to go forward on the condition that the merged hospital agree to price caps and other regulatory restrictions. A number of states have adopted "Certificate of Public Advantage laws" that also give approval to mergers and other consolidations subject to a public agency regulating their rates and other commitments. Under antitrust law's state action defense, these "COPA" laws immunize mergers from federal antitrust challenge and the
Fixes that Fail: Behavioral Remedies in Vertical Merger Cases
"The quintessential remedy in merger cases is structural relief: enjoining a merger or ordering divestiture of assets that raise competitive concerns. However in the over 20 vertical mergers challenged and settled by consent decree by the
"Guidance concerning vertical merger law is sorely needed. While AAG Delrahim's announcement that DoJ is working on developing new non-horizontal merger guidelines is encouraging, it takes considerable time for guidelines or policy statements to diffuse and gain acceptance by courts and attorneys. The merger process is opaque: outsiders can gain only limited information about settled cases from complaints or competitive impact statements.
"Hence, mandated fuller closing statements, and perhaps requiring post-merger reviews of outcomes should be considered to increase the flow of information.
"But more than information is needed. Litigation in appropriate cases, especially in important markets like health care where vertical integration is spreading rapidly, would speed adoption of contemporary economic analyses. Relatedly, undertaking retrospective analyses of consummated mergers could supply useful information for courts, enforcers, and market participants to guide future actions. Notably
"Finally there is the view that merger law has strayed far from the original intent of the law. The legislative history suggests that in strengthening the Clayton Act in 1950
"Although beyond the scope of this hearing, in closing I would like to mention that a broad range of regulatory and statutory measures might be adopted to improve competition in health care markets. Proposed agendas authored by Greaney & Richman,
"Thank you for your attention and I look forward to your questions."