Health care joint ventures and competition law - Essay Example

Health Care Joint Ventures and Competition Law One of the major problems in applying antitrust analysis to joint ventures in the health care industry, as in other industries, is the inherent problem of properly defining a joint venture. The classic and most-often cited definition states that a joint venture is an enterprise in which two or more separate firms or entities integrate their operations such that the following conditions are met: (1) the enterprise is under the joint control of parent entities, which are not under related control; (2) each parent makes a substantial contribution to the joint enterprise; (3) the joint enterprise exists as a business entity separate from the parent entities; and (4) the enterprise creates or is intended to create a new capability in terms of providing new productive capacity, new technology, a new product, or entry into a new market.1 The term “joint venture” can be applied to a wide range of collaborative activity. The Department of Justice, in its Guidelines for International Operations, has defined a joint venture as “essentially any collaborative effort among firms, short of a merger, with respect to R&D, production, distribution and/or the marketing of products or services.”2 In the health care industry, agreements between hospitals and physicians to provide certain hospital-based services, such as anesthesiology, radiology, and pathology could be viewed as joint ventures. Such types of arrangements, however, would not seem to give rise to great liability, given the fact that the participants are not necessarily competing with each other to provide services, and, absent an exclusive contract, competitors are rarely foreclosed from the relevant market.3 Other types of joint ventures between hospitals and physicians will normally not raise serious antitrust concerns, particularly if they involve the purchase of a common product to allow further production or services by the joint venturers. This type of an “input” venture is common in most purchasing cooperatives, and raises little risk of antitrust liability.4 Even where competitors in the same product and geographic market are involved, joint purchasing activities will not typically raise concerns of potential collusion among competitors unless the activity in question involves an input that contributes a large share of the output products price. As a result, then-Director of the FTCs Bureau of Competition, Kevin Arquit, advised health care providers that “the prudent antitrust policy in most buying group situations is ‘dont do something, just stand there.”’5 The types of health care joint ventures that have recently received a great deal of increased scrutiny are those involving attempts by hospitals, in conjunction with either physician groups or other health care providers (such as durable medical equipment or home health services), to provide ancillary outpatient services to patients of the hospital. In this type of “vertical” or “downstream” joint venture, the potential economic power of the joint venturers could give rise to exposure to claims of monopoly leveraging, illegal tying arrangements, and group boycotts. The most-publicized case discussing this type of venture is Key Enterprises of Delaware, Inc. v. Venice Hospital.6 The legality of a joint venture is most often questioned when the joint venturers ordinarily compete with one another, such as when joint ventures involve groups of hospitals, nursing homes, physicians, or other health care providers. If the joint venturers set a common price or engage in market allocation as a part of the joint ventures production of a new product or service, the legality of the activity is often unclear. In analyzing health care joint ventures, the primary difficulty is in distinguishing a legitimate joint venture from an illegal cartel. The same type of conduct that can facilitate collusion, such as information sharing, will often facilitate better business planning and lead to lower costs.7 Joint ventures among competitors are therefore evaluated under what has become known as the “ancillary restraints doctrine.” As the Supreme Court has made clear, however, simply labeling something a “joint venture” does not confer any magic immunity from liability under the antitrust laws.8 The two leading Supreme Court cases on the issue of whether joint ventures among competitors can be viewed as “legitimate” are Broadcast Music, Inc. v. Columbia Broadcasting System, Inc.9 and Arizona v. Maricopa County Medical Society.10 While the Court has also addressed the subject of joint ventures in National Collegiate Athletic Association v. Board of Regents11 and Northwest Wholesale Stationers, Inc. v. Pacific Stationery & Printing Co.,12 the latter decisions do not devote much analysis to the framework involved in establishing the joint ventures. Consequently, focus will primarily be upon Broadcast Music, Inc. (BMI) and Maricopa. In BMI, the Court refused to apply the per se rule to an agreement in a joint venture among thousands of music composers to enter into a “blanket” licensing arrangement, by which they delegated pricing for their compositions on a collective basis to two “clearinghouses,” BMI and ASCAP. The Court rejected the view that such a blanket licensing arrangement was “plainly anticompetitive” and lacked any “redeeming virtue.” Relying on Addyston Pipe, the Court majority (only Justice Stevens dissented) noted that simply because two or more potential competitors had literally “fixed a price” the price-fixing agreement was not necessarily per se illegal. The Court analogized the price-fixing agreement in BMI to a situation in which two partners set the price for their goods or services, which may literally constitute “price-fixing,” but would not be a per se violation of the Sherman Act.13 In rejecting per se treatment for the blanket licensing arrangement, the Court stated that such a blanket license was not a “naked restraint of trade with no purpose except stifling of competition” but instead accompanied the “integration of sales, monitoring and enforcement against unauthorized copyright use.”14 The Court observed that the licensing arrangement by ASCAP reduced cost by creating a blanket license that was sold a few times, instead of thousands of times, and that obviated the need for closely monitoring the television networks to see that they did not use more than they paid for.15 Significantly, the Court acknowledged that establishing an aggregate price for the bulk license was a necessary consequence of the integration necessary to achieve those efficiencies. The Court went on to note that because the blanket license was composed of individual compositions, plus the aggregating service, the whole was truly greater than the sum of its parts. 16Thus, the Court recognized that the blanket license was a different product because of its unique characteristics. Specifically, the blanket license allowed the licensee immediate use of covered compositions, without the delay of prior individual negotiations, and provided greater flexibility in the choice of musical material. The Court concluded that to the extent the blanket license was a different product, ASCAP was not really a “joint sales agency offering the individual goods of many sellers, but was a separate seller offering its blanket license, of which the individual compositions are raw material.”17 Significantly, in BMI there was no sharing of risk or pooling of capital by the various composers who licensed their works to ASCAP or BMI. Furthermore, the Court emphasized that the composers were still free to contract independently, and the Court relied on the nonexclusive nature of the licensing arrangement in order to justify not applying the per se rule.18 Three years later, in Arizona v. Maricopa County Medical Society,19 the Court again addressed the issue of applying the per se rule to an agreement within a purported joint venture among competitors that involved pricing. The Supreme Courts four to three decision is still the leading case for analyzing health care joint ventures involving agreements affecting price, particularly on the issue of potential per se unlawful price-fixing by providers.20 To appreciate this close decision, it is important to focus on those characteristics of the medical foundation plans fee setting schedules that the Court held to be per se illegal. The Maricopa Foundation for Medical Care (Maricopa Foundation) represented approximately 70 percent of the physicians in the Phoenix, Arizona, area. The Pima Foundation for Medical Care (Pima Foundation) represented somewhere between 30 and 80 percent of the physicians in its area. The Maricopa and Pima Foundations were formed for the express purpose of “promoting fee for service medicine” and as an alternative to existing health insurance plans. The foundations had three primary activities: (1) to establish a schedule of maximum fees for patients insured under plans, which were approved by the foundations; (2) to review the medical necessity and appropriateness of treatment rendered by physicians; and (3) to draw checks on the insurance company accounts to pay the physicians.21 The foundations worked cooperatively with third-party insurers. Those insurance plans that the foundations approved provided full coverage for treatment by foundation members up to the maximum fee schedule adopted by the foundations. The foundations adopted their maximum fee schedules by a majority vote of their members. Foundation members were not prevented from providing services independently from the foundations, or from charging other fees to patients who were covered by insurance plans unrelated to the foundations. However, none of the participating physicians had any “financial interest” in the operation of the foundations.22 The majority of the Court held that the foundations maximum fee schedules constituted per se illegal price-fixing agreements, and rejected the procompetitive justifications offered by the defendants, reasoning: “The anticompetitive potential inherent in all price-fixing agreements justifies their facial invalidation even if procompetitive justifications are offered for some.”23 The majority reasoned that even if the fee schedules were desirable to obtain advance binding assurance of complete insurance coverage for subscribers, it was “not necessary that the doctors do the price-fixing.”24 Justice Powells dissent (joined by Chief Justice Burger and Justice Rehnquist) took strong exception to the per se categorization of the joint arrangement at issue in Maricopa. He emphasized that: (1) the foundations did not foreclose any competition; (2) physicians were free to participate in other medical insurance plans; (3) insurers were free to participate with nonfoundation physicians; (4) the physicians were only committed to the foundation plans for one year and were free to withdraw thereafter; (5) insurers, which were in the best position to represent the consumers interest and to make an informed judgment on effectively restraining medical costs, had not indicated any opposition to the foundations plans; and (6) at least seven insurers had willingly chosen to contract with the foundations to develop their maximum fee schedules.25 The dissent found little difference between the factual situations in Maricopa and in BMI. Responding strongly to the majoritys view that the foundations had not created any “different product,” Justice Powell argued that the type of product offered by the foundations was “different” in the same sense that the blanket license offered in BMI was different from the individual compositions. He reasoned that the foundations offered a wide range of physician services in a more economical manner than individual physicians could. The maximum fee schedules replaced the weak cost containment incentives used by insurers in reimbursing for the “usual customary and reasonable” (UCR) fees, and therefore created a stronger cost control mechanism for the insurers.26 Ironically, the majority opinion in Maricopa suggested that if the per se rule against price-fixing were not to apply to this type of health care arrangement, those arguments should be better directed to Congress. 27The recent flurry of legislative activity in Congress to exempt certain cooperative activities among health care providers from antitrust liability28 would obviously also exempt any joint pricing decisions. Thus, the recent legislative initiatives would seem to be a realization of Justice Stevens suggestion. With respect to facially “legitimate” joint ventures, issues of integration, efficiencies, and market power will then be determinative in surviving a rule of reason inquiry. No single factor will necessarily be controlling, but the joint venture should reflect some of the traditional indicia of cooperative activities that signal more than a cartel: a. contribution of more than nominal capital; b. potential for risk of loss by investors; c. common marketing/administrative functions independent from the venturers other business activities; d. a procompetitive justification for the joint venture; e.membership criteria which would not prevent the formation of competing entities; and f. a reasonable relationship between the procompetitive goal of the venture and the restriction in question. In this area of antitrust analysis, there is little black letter law, only common sense. Absent some congressional effort to provide clearer guidance, or some statement of enforcement policy that may evolve from joint discussions among the Antitrust Division, the FTC, and the Department of Health and Human Services, the health care industry will have to resign itself to evaluating the antitrust risks of cooperative activities in the same way as any other industry. BIBLIOGRAPHY Advanced Health-Care Servs., Inc. v. Radford Community Hosp., 910 F.2d 139 (4th Cir. 1990) Arquit Remarks (Apr. 2, 1992) David Burda, Mergers Thrive Despite Wailing About Adversity, MODERN HEALTH CARE, Oct. 12, 1992, at 26-32 DEPARTMENT OF HEALTH & HUMAN SERVICES, REPORT OF THE SECRETARYS TASK FORCE ON HOSPITAL MERGERS (Jan. 1993). Jefferson Parish Hosp. Dist. No. 2 v. Hyde, 466 U.S. 2 (1984). Joseph F. Brodley, Joint Ventures and Antitrust Policy, 95 HARV. L. REV.. 1523, 1526 (1982). Kevin J. Arquit, Director of FTC Bureau of Competition, Chicago Bar Assn at 9 (Jan. 17, 1990) Kevin J. Arquit, Director of FTC Bureau of Competition, Remarks to the ABA Antitrust Law M&M Medical Supplies v. Pleasant Valley Hosp., Inc., 981 F.2d 160 (4th Cir. 1992) (en banc). Miles & Philp, Hospitals Caught in the Antitrust Net, 24 DUQ. L. REV. 489, (1985). Northwest Wholesale Stationers, Inc. v. Pacific Stationery & Printing Co., 472 U.S. 284 (1985) Palmer v. BRG of Ga., Inc., 111 S. Ct. 401 (1990) Section Health Care Committee (Apr. 2, 1992) Sherman Act Timken Roller Bearing Co. v. United States, 341 U.S. 593, 598 (1951). U.S. Department of Justice Guidelines on Antitrust and International Operations (1988) 3.4, reprinted in 4 Trade Reg. Rep. (CCH) 13,109.10, at 20,599. United States v. Sealy, Inc., 388 U.S. 350 (1967). United States v. Topco Assocs., 405 U.S. 596 (1972); Webster County Memorial Hosp. v. United Mine Workers, 536 F.2d 419, 420 (D.C. Cir. 1976) Read More