[Federal Register: August 22, 2008 (Volume 73, Number 164)]
[Notices]
[Page 49833-49894]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr22au08-131]
[[Page 49833]]
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Part IV
Department of Justice
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Antitrust Division
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United States v. UnitedHealth Group Incorporated; Response to Public
Comments on the Proposed Final Judgment; Notice
[[Page 49834]]
DEPARTMENT OF JUSTICE
Antitrust Division
United States v. UnitedHealth Group Incorporated; Response to
Public Comments on the Proposed Final Judgment
Pursuant to the Antitrust Procedures and Penalties Act, 15 U.S.C.
16(b)-(h), the United States hereby publishes the public comments
received on the proposed Final Judgment in United States v.
UnitedHealth Group Incorporated, Civil Action No. 1:08-cv-322, and the
response to the comments. On February 25, 2008, the United States filed
a Complaint alleging that the merger of UnitedHealth Group Incorporated
(``United'') and Sierra Health Services, Inc. (``Sierra'') violated
Section 7 of the Clayton Act, 15 U.S.C. 18. The proposed Final
Judgment, filed on February 25, 2008, requires the combined company to
divest United's individual Medicare Advantage line of business in the
Las Vegas, Nevada area. Public comment was invited within the statutory
60-day comment period. Copies of the Complaint, proposed Final
Judgment, Competitive Impact Statement, Public Comments, the United
States' Response to the Comments, and other papers are currently
available for inspection in Department of Justice, Antitrust Division,
Antitrust Documents Group, 450 5th Street, NW., Suite 1010, Washington,
DC 20530, telephone: (202) 514-2481 and the Office of the Clerk of the
United States District Court for the District of Columbia, 333
Constitution Avenue, NW., Washington, DC 20001.
Copies of any of these materials may be obtained upon request and
payment of a copying fee.
Patricia A. Brink,
Deputy Director of Operations, Antitrust Division.
In the matter of: United States District Court for the District
of Columbia; United States of America, Plaintiff, v. UnitedHealth
Group Incorporated and Sierra Health Services, Inc., Defendants.
[Case No. 1:08-cv-322-ESH]
Response of Plaintiff United States to Public Comments
Pursuant to the requirements of the Antitrust Procedures and
Penalties Act (``APPA'' or ``Tunney Act''), 15 U.S.C. 16(b)-(h), the
United States hereby files the four public comments that the United
States received concerning the proposed Final Judgment in this case and
the United States' response to those comments. The United States will
move the Court for entry of the proposed Final Judgment after the
comments and this Response have been published in the Federal Register,
pursuant to 15 U.S.C. 16(d).
On February 25, 2008, the United States filed the Complaint in this
matter alleging that the proposed merger of UnitedHealth Group
Incorporated (``United'') and Sierra Health Services, Inc. (``Sierra'')
would violate Section 7 of the Clayton Act, 15 U.S.C. 18.
Simultaneously with the filing of the Complaint, the United States
filed a proposed Final Judgment and a Hold Separate and Asset
Preservation Stipulation and Order (``Stipulation'') signed by the
United States and Defendants consenting to the entry of the proposed
Final Judgment after compliance with the requirements of the Tunney
Act.\1\ Pursuant to those requirements, the United States filed a
Competitive Impact Statement (``CIS'') in this Court on February 25,
2008; published the proposed Final Judgment and CIS in the Federal
Register on March 10, 2008, see 73 FR 12762 (2008); and published
summaries of the terms of the proposed Final Judgment and CIS, together
with directions for the submission of written comments relating to the
proposed Final Judgment, in the Washington Post for seven days
beginning on March 16, 2008 and ending on March 22, 2008, and in the
Las Vegas Review-Journal for seven days beginning on March 8, 2008 and
ending on March 14, 2008. The 60-day period for public comments ended
on May 15, 2008, and the United States received the four comments
described below and attached hereto.
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\1\ The merger closed on February 25, 2008. In keeping with the
United States' standard practice, neither the Stipulation nor the
proposed Final Judgment prohibited closing the merger. See ABA
Section of Antitrust Law, Antitrust Law Developments 406 (6th ed.
2007) (noting that ``[t]he Federal Trade Commission (as well as the
Department of Justice) generally will permit the underlying
transaction to close during the notice and comment period''). Such a
prohibition could interfere with many time-sensitive deals and
prevent or delay the realization of substantial efficiencies.
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I. The United States' Investigation and the Proposed Final Judgment
On March 11, 2007, United and Sierra entered into an agreement,
whereby United agreed to acquire all outstanding shares of Sierra. Over
the next eleven months, the United States Department of Justice (the
``Department'') conducted an extensive, detailed investigation into the
competitive effects of the proposed transaction. As part of this
investigation, the Department obtained substantial documents and
information from the merging parties and issued numerous Civil
Investigative Demands to third parties. In response, the Department
received and considered more than 2.5 million pages of material. The
Department conducted approximately 150 interviews with customers,
hospitals and physician groups, insurance companies, and other
individuals with knowledge of the industry.
After conducting a detailed analysis of the acquisition, the
Department concluded that the combination of United and Sierra likely
would substantially lessen competition in the Las Vegas, Nevada area
(consisting of Clark and Nye Counties, Nevada) in a product market no
broader than the sale of Medicare Advantage health-insurance plans to
senior citizens and other Medicare-eligible individuals. As defined by
federal law, Medicare Advantage plans consist of Medicare Advantage
health maintenance organization plans (``MA-HMO''), Medicare Advantage
preferred provider organization plans (``MA-PPO''), and Medicare
Advantage private fee-for-service plans (``MA-PFFS''). See 42 U.S.C.
1395w-21(a)(2). United and Sierra together would have accounted for
approximately 94 percent of the total enrollment in Medicare Advantage
plans in the Las Vegas area, which accounts for approximately $840
million in annual commerce. United markets and sells its Medicare
Advantage products under the Secure Horizons and AARP brands. Sierra
markets and sells its Medicare Advantage products under the Senior
Dimensions, Sierra Spectrum, Sierra Nevada Spectrum, and Sierra Optima
Select brands.
As more fully explained in the CIS, the Stipulation and proposed
Final Judgment in this case are designed to preserve competition in the
sale of Medicare Advantage health-insurance plans in the Las Vegas area
by requiring United to divest its individual Medicare Advantage line of
business in the Las Vegas area. The Stipulation and proposed Final
Judgment also require United to take several steps to assist the
acquirer in providing prompt and effective competition in the Medicare
Advantage market, including assisting the acquirer to enter into
agreements that will allow members of United's Medicare Advantage plans
to have continued access to substantially all of United's provider
network of physicians, hospitals, ancillary service providers, and
other health care providers on terms no less favorable than United's
existing agreements. United must also provide transition support
services for medical-claims
[[Page 49835]]
processing, appeals and grievances, call-center support, enrollment and
eligibility services, access to form templates, pharmacy services,
disease management, Medicare risk-adjustment services, quality-
assurance services, and such other services as are reasonably necessary
for the acquirer to operate the Divestiture Assets.
On February 25, 2008, United and Humana Health Plan Inc.
(``Humana'') signed an agreement providing for Humana to purchase
United's Las Vegas Medicare Advantage line of business for
approximately $185 million. After receiving approval from the Centers
for Medicare and Medicaid Services (``CMS'') and the Nevada Division of
Insurance, Humana completed the acquisition of United's Las Vegas
Medicare Advantage line of business on May 1, 2008. In the Department's
judgment, the divestiture of United's Las Vegas Medicare Advantage line
of business to Humana, along with the other requirements contained in
the Stipulation and proposed Final Judgment, are sufficient to
eliminate the anticompetitive effects identified in the Complaint.
II. Standard of Judicial Review
Upon the publication of the Comment and this Response, the United
States will have fully complied with the Tunney Act and will move for
entry of the proposed Final Judgment as being ``in the public
interest'' 15 U.S.C. 16(e)(l), as amended.
The Tunney Act states that, in making that determination, the Court
shall consider:
(A) the competitive impact of such judgment, including
termination of alleged violations, provisions for enforcement and
modification, duration of relief sought, anticipated effects of
alternative remedies actually considered, whether its terms are
ambiguous, and any other competitive considerations bearing upon the
adequacy of such judgment that the court deems necessary to a
determination of whether the consent judgment is in the public
interest; and
(B) the impact of entry of such judgment upon competition in the
relevant market or markets, upon the public generally and
individuals alleging specific injury from the violations set forth
in the complaint including consideration of the public benefit, if
any, to be derived from a determination of the issues at trial.
15 U.S.C. 16(e)(1)(A)-(B); see generally United States v. AT&T Inc.,
541 F. Supp. 2d 2, 6 n.3 (D.D.C. 2008) (listing factors that the Court
must consider when making the public-interest determination); United
States v. SBC Commc'ns, Inc., 489 F. Supp. 2d 1, 11 (D.D.C. 2007)
(concluding that the 2004 amendments to the Tunney Act ``effected
minimal changes'' to scope of review under the Tunney Act, leaving
review ``sharply proscribed by precedent and the nature of Tunney Act
proceedings'').\2\
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\2\ The 2004 amendments substituted ``shall'' for ``may'' in
directing relevant factors for courts to consider and amended the
list of factors to focus on competitive considerations and to
address potentially ambiguous judgment terms. Compare 15 U.S.C.
Sec. 16(e) (2004), with 15 U.S.C. Sec. 16(e)(1) (2006).
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As the United States Court of Appeals for the District of Columbia
Circuit has held, under the APPA, a court considers, among other
things, the relationship between the remedy secured and the specific
allegations set forth in the government's complaint, whether the decree
is sufficiently clear, whether enforcement mechanisms are sufficient,
and whether the decree may positively harm third parties. See United
States v. Microsoft Corp., 56 F.3d 1448, 1458-62 (D.C. Cir. 1995). With
respect to the adequacy of the relief secured by the decree, a court
may not ``engage in an unrestricted evaluation of what relief would
best serve the public.'' United States v. BNS, Inc., 858 F.2d 456, 462
(9th Cir. 1988) (citing United States v. Bechtel Corp., 648 F.2d 660,
666 (9th Cir. 1981)); see also Microsoft, 56 F.3d at 1460-62. Courts
have held that:
[t]he balancing of competing social and political interests
affected by a proposed antitrust consent decree must be left, in the
first instance, to the discretion of the Attorney General. The
court's role in protecting the public interest is one of insuring
that the government has not breached its duty to the public in
consenting to the decree. The court is required to determine not
whether a particular decree is the one that will best serve society,
but whether the settlement is ``within the reaches of the public
interest.'' More elaborate requirements might undermine the
effectiveness of antitrust enforcement by consent decree.
Bechtel, 648 F.2d at 666 (emphasis added) (citations omitted). Cf. BNS,
858 F.2d at 464 (holding that the court's ``ultimate authority under
the [APPA] is limited to approving or disapproving the consent
decree''); United States v. Gillette Co., 406 F. Supp. 713, 716 (D.
Mass. 1975) (noting that, in this way, the court is constrained to
``look at the overall picture not hypercritically, nor with a
microscope, but with an artist's reducing glass''). See generally
Microsoft, 56 F.3d at 1461 (discussing whether ``the remedies [obtained
in the decree are] so inconsonant with the allegations charged as to
fall outside of the `reaches of the public interest' '').
The government is entitled to broad discretion to settle with
defendants within the reaches of the public interest. AT&T Inc., 541 F.
Supp. 2d at 6. In making its public-interest determination, a district
court ``must accord deference to the government's predictions about the
efficacy of its remedies, and may not require that the remedies
perfectly match the alleged violations.'' SBC Commc'ns, 489 F. Supp. 2d
at 17; see also Microsoft, 56 F.3d at 1461 (noting the need for courts
to be ``deferential to the government's predictions as to the effect of
the proposed remedies''); United States v. Archer-Daniels-Midland Co.,
272 F. Supp. 2d 1, 6 (D.D.C. 2003) (noting that the court should grant
due respect to the United States' prediction as to the effect of
proposed remedies, its perception of the market structure, and its
views of the nature of the case).
Court approval of a consent decree requires a standard more
flexible and less strict than that appropriate to court adoption of a
litigated decree following a finding of liability. ``[A] proposed
decree must be approved even if it falls short of the remedy the court
would impose on its own, as long as it falls within the range of
acceptability or is `within the reaches of public interest.' '' United
States v. Am. Tel. & Tel. Co., 552 F. Supp. 131, 151 (D.D.C. 1982)
(citations omitted) (quoting United States v. Gillette Co., 406 F.
Supp. 713, 716 (D. Mass. 1975)), aff'd sub nom. Maryland v. United
States, 460 U.S. 1001 (1983); see also United States v. Alcan Aluminum
Ltd., 605 F. Supp. 619, 622 (W.D. Ky. 1985) (approving the consent
decree even though the court would have imposed a greater remedy). To
meet this standard, the United States ``need only provide a factual
basis for concluding that the settlements are reasonably adequate
remedies for the alleged harms.'' SBC Commc'ns, 489 F. Supp. 2d at 17.
Moreover, the Court's role under the APPA is limited to reviewing
the remedy in relationship to the violations that the United States has
alleged in its complaint, rather than to ``construct [its] own
hypothetical case and then evaluate the decree against that case.''
Microsoft, 56 F.3d at 1459. Because the ``court's authority to review
the decree depends entirely on the government's exercising its
prosecutorial discretion by bringing a case in the first place,'' it
follows that ``the court is only authorized to review the decree
itself,'' and not to ``effectively redraft the complaint'' to inquire
into other matters that the United States did not pursue. Id. at 1459-
60. As this Court recently confirmed in SBC Communications,
[[Page 49836]]
courts ``cannot look beyond the complaint in making the public interest
determination unless the complaint is drafted so narrowly as to make a
mockery of judicial power.'' SBC Commc'ns, 489 F. Supp. 2d at 15.
In its 2004 amendments to the Tunney Act, Congress made clear its
intent to preserve the practical benefits of utilizing consent decrees
in antitrust enforcement, adding the unambiguous instruction that
``[n]othing in this section shall be construed to require the court to
conduct an evidentiary hearing or to require the court to permit anyone
to intervene.'' 15 U.S.C. 16(e)(2). The amendments codified what
Congress intended when it passed the Tunney Act in 1974, as Senator
Tunney then explained: ``[t]he court is nowhere compelled to go to
trial or to engage in extended proceedings which might have the effect
of vitiating the benefits of prompt and less costly settlement through
the consent decree process.'' 119 Cong. Rec. 24,598 (1973) (statement
of Senator Tunney). Rather, the procedure for the public-interest
determination is left to the discretion of the court, with the
recognition that the court's ``scope of review remains sharply
proscribed by precedent and the nature of Tunney Act proceedings.'' SBC
Commc'ns, 489 F. Supp. 2d at 11.\3\
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\3\ See United States v. Enova Corp., 107 F. Supp. 2d 10, 17
(D.D.C. 2000) (noting that the ``Tunney Act expressly allows the
court to make its public interest determination on the basis of the
competitive impact statement and response to comments alone'');
United States v. Mid-Am. Dairymen, Inc., 1977-1 Trade Cas. (CCH) ]
61,508, at 71,980 (W.D. Mo. 1977) (``Absent a showing of corrupt
failure of the government to discharge its duty, the Court, in
making its public interest finding, should * * * carefully consider
the explanations of the government in the competitive impact
statement and its responses to comments in order to determine
whether those explanations are reasonable under the
circumstances.''); S. Rep. No. 93-298, 93d Cong., 1st Sess., at 6
(1973) (``Where the public interest can be meaningfully evaluated
simply on the basis of briefs and oral arguments, that is the
approach that should be utilized.'').
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III. Summary of Public Comments and the United States' Response
During the 60-day comment period, the United States received
comments from the Service Employees International Union Local 1107 (the
``SEIU comment''), the American Medical Association, Nevada State
Medical Association, and the Clark County Medical Society
(collectively, the ``AMA comment''), the Honorable Nydia M. Velazquez,
Chairwoman, United States House of Representatives Committee on Small
Business (the ``Velazquez comment''), and the Honorable Chris
Giunchigliani, Commissioner, Board of Commissioners--Clark County,
Nevada (the ``Giunchigliani comment''). Those comments are attached to
this Response.
After reviewing the comments, the United States has determined that
the proposed Final Judgment remains in the public interest. The
commenters raise two main concerns: (A) that the United States should
have alleged and remedied harm to competition in additional product
markets other than the Medicare Advantage market alleged in the United
States' Complaint and (B) that the proposed Final Judgment does not
adequately remedy the harms to competition alleged in the Complaint.
The United States addresses these concerns below.
A. Comments That the United States Should Have Alleged and Remedied
Additional Competitive Concerns
1. Summary of Comments
Each of the commenters argue that the United States should have
alleged and remedied competitive concerns that are not addressed in the
Complaint in this matter. They argue that the United States should have
pursued a case of harm to competition in a commercial health-insurance
market in Clark County, Nevada. (AMA comment at 12; SEIU comment at 4;
Velazquez comment at 3; Giunchigliani comment at 1-2). The commenters
also express concern that the United-Sierra merger will harm
competition in the sale of various types of commercial health
insurance, such as the provision of HMO policies, HMO and PPO policies,
and the provision of commercial insurance to employers with 50 or fewer
employees. (AMA comment at 12; SEIU comment at 4; Velazquez comment at
4; Giunchigliani comment at 1).
The AMA and Velazquez also argue that the United States should have
alleged that the transaction would harm physicians and sought an
appropriate remedy. They maintain that the merged company will control
a sufficient share of the purchases for physicians services in Clark
County such that the merged company will be able to reduce payments to
physicians below competitive levels. (AMA comment at 5; Velazquez
comment at 4). Similarly, the SEIU argues that the merged company will
control a sufficient share of purchases of hospital services such that
the merged company will be able unilaterally to reduce reimbursement
rates to hospitals. (SEIU comment at 4). The SEIU argues that such
lower reimbursement rates to hospitals will result in higher patient-
to-nurse ratios and place patient safety and quality of care in
jeopardy. (SEIU comment at 3-4).
2. The United States' Response
The comments that the United States should have alleged harm to
competition for the sale of various types of health insurance or for
the purchase of physician or hospital services, which are not addressed
in the Complaint, are outside the scope of this APPA proceeding. The
Department's decision to allege a harm in a specific market is based on
a case-by-case analysis that varies depending on the particular
circumstances of each product and geographic market The Department
investigated the transaction's potential competitive effects on each of
the types of health insurance identified by the commentators, and on
the purchase of physician and hospital services, and concluded that it
should not allege harm in these markets. As explained by this Court, in
a Tunney Act proceeding, the district court should not second-guess the
prosecutorial decisions of the Department regarding the nature of the
claims brought in the first instance; ``rather, the court is to compare
the complaint filed by the United States with the proposed consent
decree and determine whether the proposed decree clearly and
effectively addresses the [anticompetitive harms initially
identified.'' United States v. Thomson Corp., 949 F. Supp 907, 913
(D.D.C. 1996); accord, Microsoft, 56 F.3d at 1459 (in APPA proceeding,
``district court is not empowered to review the actions or behavior of
the Department of Justice; the court is only authorized to review the
decree itself''); BNS, 858 F.2d at 462-63 (``the APPA does not
authorize a district court to base its public interest determination on
antitrust concerns in markets other than those alleged in the
government's complaint''). This court has held that ``a district court
is not permitted to ``reach beyond the complaint to evaluate claims
that the government did not make and to inquire as to why they were not
made.' '' SBC Commc'ns, 489 F. Supp. 2d at 14 (quoting Microsoft, 56
F.3d at 1459) (emphasis in original). Nor does the fact that the State
of Nevada obtained terms of settlement different from those obtained by
the United States alter the ordinary Tunney Act standard of review.
The AMA's contention that the 2004 Amendments to the Tunney Act
overruled precedent in this court and require a more extensive review
of the United States' exercise of its prosecutorial judgment conflicts
with this Court's holding in SBC Communications, supra. (AMA
[[Page 49837]]
comment at 4). In SBC Communications, this Court held that ``a close
reading of the law demonstrates that the 2004 amendments effected
minimal changes, and that this Court's scope of review remains sharply
proscribed by precedent and the nature of [APPA] proceedings.'' SBC
Commc'ns, 489 F. Supp. 2d at 11. This Court continued that because
``review [under the 2004 amendments] is focused on the `judgment,' it
again appears that the Court cannot go beyond the scope of the
complaint.'' Id. The 2004 amendments to the APPA, as interpreted and
applied by this Court in SBC Communications, require the Court to
evaluate the effect of the ``judgment upon competition'' in a Medicare
Advantage market in the Las Vegas area. 15 U.S.C.16(e)(1)(b). Because
the United States did not allege that the United's acquisition of
Sierra would cause harm in additional markets, it is not appropriate
for the Court to seek to determine whether the acquisition will cause
anticompetitive harm in such markets.
B. Comment That the Proposed Final Judgment Does Not Adequately Address
the Harms to Competition Alleged in the Complaint
1. Summary of Comment
The AMA states that the remedies in the proposed Final Judgment are
inadequate to maintain competition in the sale of Medicare Advantage
health-insurance plans in the Las Vegas area. (AMA comment at 13). The
AMA argues in its comment that the proposed Final Judgment should
include five additional remedies: (1) A permanent injunction on
United's use of ``most-favored-nations'' clauses in healthcare-provider
contracts; (2) a permanent injunction on United's use of ``all-
products'' clauses in healthcare-provider contracts; (3) a divestiture
of United's commercial health-insurance business in Clark County; (4) a
requirement that United convey the use of certain trademarks to the
acquirer of the Medicare Advantage line of business for at least five
years; and (5) the immediate use of a monitoring trustee to ensure
compliance with the proposed Final Judgment. (AMA comment at 13-15).
2. The United States' Response
The additional remedies proposed by the AMA are not necessary to
ensure that competition will remain in the market alleged in the
Complaint. Rather, the proposed Final Judgment is in the public
interest because it is properly designed to eliminate the
anticompetitive effects alleged in the Complaint. First, the proposed
Final Judgment requires United to divest its entire individual Medicare
Advantage line of business in the Las Vegas area to an acquirer
approved by the United States and on terms acceptable to the United
States. This line of business covers approximately 25,800 individual
Medicare Advantage beneficiaries. As described in Section IV of the
proposed Final Judgment, United is required to divest all tangible and
intangible assets dedicated to the administration, operation, selling,
and marketing of its Medicare Advantage plans to individuals in the Las
Vegas area (``the Divestiture Assets''), including all of United's
rights and obligations under the relevant United contracts with CMS.
Thus, the acquirer will have the benefit of entering the Medicare
Advantage market with United's entire individual Medicare Advantage
line of business.
Second, the Stipulation and Sections IV(A) and (B) of the proposed
Final Judgment required United to divest the Divestiture Assets within
the shortest time period reasonable under the circumstances. A quick
divestiture has the benefits of maintaining competition that would
otherwise be lost in the acquisition and reducing the possibility of
dissipation of the value of the assets while the sale is pending. Per
these requirements, United divested the Divestiture Assets to Humana on
May 1, 2008.
Third, the divestiture eliminates the anticompetitive effects of
the merger by requiring United to divest the Divestiture Assets to an
acquirer that can compete vigorously with the merged United-Sierra. The
United States approved Humana as the acquirer of the Divestiture Assets
because Humana is well positioned to be a strong competitor in the
Medicare Advantage market in the Las Vegas area. Humana is an
established health-insurance competitor with total annual revenue of
$26 billion and a market capitalization of $8.3 billion. Humana is the
second largest provider of Medicare Advantage plans in the nation after
United. The company has 1.27 million Medicare Advantage enrollees
nationwide. In the United States' judgment, Humana has the intent and
capability (including the necessary managerial, operational, technical,
and financial capability) to compete effectively in the sale of
Medicare Advantage products, and the asset purchase agreements between
United and Humana do not give United the ability to interfere with
Humana's ability to compete effectively.
Fourth, the proposed Final Judgment requires Defendants to assist
the acquirer in providing prompt and effective competition in the
Medicare Advantage market and uninterrupted care to subscribers of
United's Medicare Advantage plans by mandating that the Defendants
adhere to the following requirements:
Section IV(F) requires the Defendants to assist the
acquirer to enter into an agreement with HealthCare Partners, LLC
(``HealthCare Partners'') that will allow members of United's Medicare
Advantage plans to have continued access to substantially all of
United's provider network of physicians, hospitals, ancillary service
providers, and other health care providers on terms no less favorable
than United's pre-existing agreement with HealthCare Partners.
Section IV(J) requires that, at the acquirer's option, and
subject to approval by the United States, Defendants provide transition
support services for medical claims processing, appeals and grievances,
call-center support, enrollment and eligibility services, access to
form templates, pharmacy services, disease management, Medicare risk-
adjustment services, quality-assurance services, and such other
transition services that are reasonably necessary for the acquirer to
operate the Divestiture Assets.
Section IV(G) of the proposed Final Judgment prohibits
United, until March 31, 2010, from entering into agreements with
healthcare providers who, prior to the transaction, participated in
United's Medicare Advantage network, but did not participate in
Sierra's.
Sections IV(F) and (G) collectively ensure that Humana,
but not the Defendants, will have access to these healthcare providers,
which places Humana in the same competitive position with respect to
the merged company as United was in with respect to Sierra prior to the
merger of United and Sierra.
Section IV(H) prohibits United from using the AARP brand
for any of its individual Medicare Advantage plans in the Las Vegas
area until March 31, 2009, and from using the SecureHorizons brands for
any individual Medicare Advantage plans in the Las Vegas area until
March 31, 2010. The Department has determined that Section IV(H) will
give Humana sufficient time to establish its own brand in the Las Vegas
area so that it can effectively compete for the provision of Medicare
Advantage plans and reduce beneficiary confusion as to which company
operates the Medicare Advantage plan in which the beneficiary is
enrolled.
In short, the United States has determined that the remedies in the
proposed Final Judgment are sufficient to allow Humana to be an
effective
[[Page 49838]]
competitor and maintain competition in the Las Vegas Medicare Advantage
market. As the United States now explains, the additional remedies that
the AMA suggests are not needed to preserve the public interest.
a. Most-Favored-Nations Clauses
The AMA states that the proposed Final Judgment should permanently
enjoin United from using ``most-favored-nations'' (``MFN'') clauses in
its contracts with healthcare-providers. (AMA comment at 13). As
explained in the affidavit of Professor David Dranove, submitted by the
AMA, an MFN clause would require a healthcare provider to offer United
rates no less favorable than those offered to other insurers. (AMA
comment, Attachment A at 8.) MFNs may be anticompetitive or
procompetitive, depending on the circumstances. Federal Trade Comm'n &
U.S. Dept. of Justice, Improving Health Care: A Dose of Competition
(Jul. 2004), ch. 6, p. 20, available at http://www.usdoj.gov/atr/
public/health_care/204694.htm. MFN clauses may harm competition by,
for example, discouraging healthcare providers from aggressively
discounting to competing insurers who might be seeking to enter or
expand in a market. Id.
It is not necessary to prohibit United from using MFN clauses to
ensure that Humana can compete and maintain the premerger level of
competition in Medicare Advantage plans. Pursuant to Section IV(F) of
the proposed Final Judgment, on February 29, 2008, Humana entered into
an agreement that gives Humana access to United's existing provider
network of physicians, hospitals, ancillary service providers, and
other healthcare providers on comparable terms to those enjoyed by
United at the time of the acquisition. Accordingly, United could not
use MFN clauses to attempt to prevent Humana from competing in the
Medicare Advantage market. Of course, the United States remains free to
challenge arty anticompetitive conduct of United, including MFN
clauses, that the United States determines harm competition.
b. All-products Clauses
The AMA states that the proposed Final Judgment should permanently
enjoin United's use of ``all-products'' clauses in healthcare-provider
contracts. (AMA comment at 13.) An all products clause is a contractual
provision that requires a physician or other healthcare provider to
agree to participate in the networks for every one of a health-
insurance company's products (e.g., commercial health insurance and
Medicare Advantage) as a condition for participating in the network of
any one of that health-insurance company's products.
The AMA does not make clear how a prohibition on United's use of
all-products clauses would help maintain competition in a Medicare
Advantage market. (AMA comment at 13.) The AMA comment refers to the
affidavit of Professor David Dranove, submitted by the AMA, for an
explanation of how all-products clauses can be anticompetitive. (AMA
comment, Attachment A at 8.) Although Professor Dranove states in his
affidavit that the proposed Final Judgment should prohibit all-products
clauses to remedy harm in a market for the purchase of physician
services, the Complaint did not allege or identify competitive harm in
such a market. (Attachment A at 8.) To the extent that the AMA
advocates a prohibition on all-products clauses to remedy harm in a
market for the purchase of physician services, such remedies are
outside the scope of this APPA proceeding as discussed in Section
III.A. of this Response.
c. United's Commercial Health-insurance Business in Clark County
The AMA argues that the proposed Final Judgment should require
United to divest its commercial health-insurance business in the Las
Vegas area in addition to United's Medicare Advantage line of business
because a Medicare Advantage business operating without a commercial
component ``faces a significant risk of failure.'' (AMA comment at 13.)
The AMA asserts that ``[t]here are significant economies of scope and
scale that exist when both commercial and Medicare Advantage businesses
are combined'' Id. The AMA, however, does not identify what these
economies of scope and scale are nor why their absence creates a risk
of failure.
The United States has considered this issue and concluded that
Humana has the resources needed to effectively compete for the
provision of Medicare Advantage plans in the Las Vegas area. Further,
even assuming that there are benefits to providing both commercial and
Medicare Advantage products, Section IV(F) of the proposed Final
Judgment addresses this concern by ensuring that Humana has access to
United's existing healthcare provider network on terms no less
favorable than United's premerger terms. That provision and the other
provisions of the proposed Final Judgment ensure that Humana will have
a cost structure similar to United's premerger cost structure and be an
effective competitor that maintains competition in the Las Vegas
Medicare Advantage market.
d. Use of Certain Trademarks
The AMA argues that the acquirer of the Divestiture Assets should
have use of certain United trademarks (AMA comment at 13-14). Section
IV(H) of the proposed Final Judgment prohibits United from using the
AARP brand for any of its individual Medicare Advantage plans in the
Las Vegas area until March 31, 2009, and from using the SecureHorizons
brands for any individual Medicare Advantage plans in the Las Vegas
area until March 31, 2010. The AMA argues that the United States should
extend these provisions to last at least five years because
``trademarks are of particular importance to continue to secure
customer loyalty.'' (AMA comment at 13-14.)
The AMA, however, does not provide any facts to support its
assertion that a longer prohibition period on United's use of the AARP
and SecurdHorizons brands is necessary to allow Humana to be an
effective competitor and maintain competition in the Las Vegas Medicare
Advantage market. In the United States' judgment based on a review of
the terms for the sale of the Divestiture Assets, its assessment of
Humana's capabilities, and its investigation of the Las Vegas Medicare
Advantage market, the brand prohibitions in the proposed Final Judgment
are reasonable in light of their intended purpose--to give Humana time
to establish its own brand in the Las Vegas area and reduce beneficiary
confusion as to which company operates the plan in which the
beneficiary is enrolled. See SBC Commc'ns, 489 F Supp. 2d at 17 (a
district court ``must accord deference to the government's predictions
about the efficacy of its remedies'').
e. Use of a Monitoring Trustee
The AMA argues that the proposed Final Judgment should require the
immediate use of a monitoring trustee to ensure United's compliance
with the proposed Final Judgment (AMA comment at 15). Section V of the
proposed Final Judgment allows the United States, in its sole
discretion and subject to approval by the Court, to appoint a
monitoring trustee that would have the power to monitor Defendants'
compliance with the terms of the proposed Final Judgment. Section V(H)
of the proposed Final Judgment provides that, if a monitoring trustee
is appointed, it shall serve until United has divested the Divestiture
Assets and any agreements for transition support services have expired.
[[Page 49839]]
In the United States' judgment, the immediate use of a monitoring
trustee is not necessary to ensure United's compliance with the
proposed Final Judgment for at least three reasons. First, United has
already complied with many of the provisions of the proposed Final
Judgment. United has completed the divestiture of the Divestiture
Assets and assisted Humana in entering into an agreement with
HealthCare Partners that gives Humana access to healthcare providers on
terms no less favorable than United's pre-existing agreement with
HealthCare Partners. In addition, Humana and United have entered into a
transition services agreement as contemplated by Section IV(J) of the
Final Judgment. Second, the United States has reviewed the Humana-
United transition services agreement and concluded that the agreement
provides Humana with contractual rights such that a monitoring trustee
is not currently necessary to ensure United's compliance with the terms
of that agreement. Third, should United fail to comply with the terms
of the transition support agreement, the United States remains free to
appoint a monitoring trustee, subject to the Court's approval.
IV. Conclusion
The issues raised in the four public comments were among the many
considered during the United States' extensive and thorough
investigation. The United States has determined that the proposed Final
Judgment as drafted provides an effective and appropriate remedy for
the antitrust violations alleged in the Complaint, and is therefore in
the public interest. The United States will move this Court to enter
the proposed Final Judgment after the comments and this response are
published in the Federal Register.
Dated: July 7, 2008.
Respectfully Submitted,
Peter J. Mucchetti (D.C. Bar 463202), Mitchell H. Glende,
Natalie A. Rosenfelt,
Trial Attorneys, Litigation I Section--Antitrust Division, United
States Department of Justice; 1401 H Street NW, Suite 4000, Washington,
DC 20530,(202) 353-4211, (202) 307-5802 (facsimile).
In the matter of: In the United States District Court for the
District of Columbia; United States of America, Plaintiff, v.
Unitedhealth Group Incorporated and Sierra Health Services, Inc.,
Defendants.
Judge: Ellen S. Huvelle.
Filed: 2/25/2008
[Civil No. I:08-cv-00322]
Tunney Act Comments of SEIU Local 1107 on the Proposed Remedy in United
Health Group Inc.'s Acquisition of Sierra Health Services Inc.
The Service Employees International Union (``SEIU'') Local 1107
provides these comments on the proposed final judgment in United Health
Group Inc.'s (``United Health'') acquisition of Sierra Health Services
Inc. (``Sierra''). As described herein the SEIU believes the proposed
remedy in this matter is inadequate and unlikely to prevent the
substantial anticompetitive effects raised by the merger. As we explain
below, the proposed merger is likely to reduce competition
substantially in numerous markets, including the delivery of healthcare
at hospitals. By creating a dominant health insurer in Clark County.
Nevada, the merger will enable UnitedHealthcare to substantially lower
reimbursements to hospitals. which, as demonstrated below, will
ultimately harm patient care. We believe this provided a substantial
basis for the Antitrust Division, Department of Justice (``DOJ'') to
challenge the merger under Section 7 of the Clayton Act, and contend
that DOJ's decision to enter into the consent decree was in error. We
respectfully request that the proposed consent decree is rejected and
the Department of Justice sue to enjoin the merger.
The SEIU is an organization of more than 1.9 million members united
by the belief in the dignity and worth of workers and the services they
provide. SEIU is the nation's largest union of health care workers
representing over 900,000 caregivers and hospital employees, including
110,000 nurses and 40,000 doctors in public, private, and non-profit
medical institutions. SEIU is dedicated to improving the lives of all
workers and their families. In Nevada, SEIU Local 1107 represents more
than 17,000 registered nurses, health care workers and public employees
dedicated to improving the lives of workers, their families and their
communities. Our members have chosen to dedicate their lives to serving
the public, and provide the first line of health care service to
thousands of patients in hospitals in Nevada. In that role we
experience first hand how health insurance consolidation can harm
consumers by restricting the ability of all health care providers to
provide high quality health care. Ultimately, when health insurers
acquire and exploit their power patients and health care workers
suffer.
The SEIU submits these comments on the Proposed Final Judgment
(``PFJ'') pursuant to the Antitrust Procedures and Penalties Act. 15
U.S.C. 16(b-e) (known as the ``Tunney Act''). The Tunney Act requires
that ``[b]efore entering any consent judgment proposed by the United
States * * *, the court shall determine that the entry of such judgment
is in the public interest., 16 U.S.C. 15(e)(1). In applying this
``public interest'' standard the burden is on the government to
``provide a factual basis for concluding that the settlements are
reasonably adequate remedies for the alleged harms.'' United States v.
SBC, 489 F.Supp.2d 1, 16 (D.D.C. 2007), citing United States v.
Microsoft Corp., 56 F.3rd 1448, 1460-61 D.C.Cir, 1995).
The Court plays a vital role in determining the proposed decree
fulfills the public interest. As Judge Greene observed in approving the
AT&T settlement:
[i]t does not follow * * * that courts must unquestionably
accept a proffered decree as long as it somehow, and however
inadequately, deals with the antitrust and other public policy
problems implicated in the lawsuit. To do so would be to revert to
the ``rubber stamp'' role which was at the crux of the congressional
concerns when the Tunney Act became law.
U.S. v American Telephone and Telegraph, 552 F.Supp. 131, 151
(D.D.C. 1982), aff'd sub nom., Maryland v. U.S., 460 U.S. 1001 (1983).
As detailed below, SE1U believes that the PFJ fails to meet the
public interest standard. This merger will lead to an unprecedented
level of consolidation and will create a dominant health insurer in
Clark County. which is the largest county in Nevada and where Las Vegas
is located. Allowing one health insurance company this kind of market
control will harm the quality of care patients will receive in
hospitals and further weaken the fragile health care system in Clark
County. In particular, the merger will
jeopardize patient safety and quality of care by reducing
payments to hospitals;
jeopardize the health care safety net;
have a particularly adverse effect on rural hospitals;
and, increase the number of uninsured and harm the
delivery of care to the elderly.
I. The Merger Will Result in Dangerously High Nurse to Patient Staffing
Ratios, Placing Patient Safety and Quality of Care in Jeopardy
The impact of the acquisition of Sierra by UnitedHealth on the
quality of care in hospitals will be severe. This merger will lead to
an unprecedented level of concentration, In the Clark County HMO
[[Page 49840]]
market UnitedHealth's market share will increase from 14% to 94%. If
PPOs are included, UnitedHealth's market share increases from 9% to
60%. Even with the divestiture of the United Medicare Advarnage
business as included in the PFJ. UnitedHealth's market share is over
50%. With such a dominant position UnitedHealth will be able to reduce
reimbursement rates to hospitals unilaterally. Simply, hospitals will
be unable to reject a ``take it or leave it'' offer from UnitedHealth.
When hospitals are forced to reduce reimbursement rates, the
delivery of health care suffers. Reduced reimbursement leads to cut
backs in services, less investment in equipment, and lower staffing
levels. While these Comments will focus on the impact on nurses and, in
turn, the impacts on patient care, these concerns are illustrative of
the type of competitive problems that will arise overall from the
reduction of compensation of reimbursement to hospitals.
Reductions in reimbursement force hospitals to reduce their
expenses. Staff is the largest expense for hospitals, and Registered
Nurses (``RNs'') represent hospitals' single largest labor expense. In
Southern Nevada in particular, salaries and benefits represent 48.0% of
total operating expenses,\1\ and RNs comprise 76.9% of the hospital
workforce.\2\ Therefore, if hospitals are forced to accept low
reimbursement rates, they will look to recoup their losses by cutting
costs in the most logical place--their RN staff.\3\ The result can be
dangerously high patient-to-nurse staffing ratios.
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\1\ Hospital Quarterly Reports. Calendar Year 2006 Summary
Financial Report. Table A07 ``Operating Expenses'' and Table A08
``Other Operating Expenses.'' Utilization and Financial Reports.
Center for Health Information Analysis. University of Nevada Las
Vegas. http://www.unlv.edu/Research_Centers/chia/NHQR/Financial/
NHQR_Financial_OutputCY2006%200822.xls (Retrieved on October 15.
2007).
\2\ Hospital Quarterly Reports. Calendar Year 2006 Summary
Utilization Reports. Table F02 ``FTE Hospital Hours'' Utilization
and Financial Reports. Center for Health Information Analysis.
University of Nevada Las Vegas. http://www.unlv.edu/Research_
Centers/chia/NHQR/Utilization/NHQR_Utilization_Output_
CY2006%200702.xls (Retrieved on October 15. 2007).
\3\ Kosel, Keith and Tom Olivo. ``The Business Case for Work
Force Stability.'' VHA Research Series, 2002.
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The detrimental impact of a high patient-to-nurse ratio on patient
safety and quality of care has been amply demonstrated in several
markets by a recent set of academic studies, A comprehensive study
conducted in 2002 and published in the Journal of the American Medical
Association found that the risk of death increases by 7% for every
patient in a nurse's care above a 4:1 patient to nurse ration, and
increases by 16% when that ratio increases to 6:1; the study also
concluded, most significantly, that there is 31% greater risk of dying
in hospitals that force a single nurse to care for eight or more
patients.\4\ Moreover, according to a report by the Joint Commission,
Health Care at the Crossroads: Strategies for Addressing the Evolving
Nurse Crisis, understaffing is a contributing factor in 24% of sentinel
events (unexpected occurrences that result in death or serious
injury).\5\ Indeed, patients in hospitals with fewer intensive care
unit (``ICU'') nurses are more likely to suffer from complications
after surgery and to have a longer length of stay in the hospital than
patients in hospitals with a greater number of ICU nurses. It is also
worth noting that patients are not the only ones who suffer harm to
their health as a result of short-staffing: nurses are two to three
times more likely to have a needle-stick injury in hospitals with low
nurse staffing levels.\6\
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\4\ Aiken. Linda H.; Clarke, Sean P.; Sloane, Douglas M.;
Sochalski, Julie; Silber, Jeffrey H. ``Hospital Nurse Staffing and
Patient Mortality, Nurse Burnout, and Job Dissatisfaction.'' Journal
of the American Medical Association, 10/23/2002, Vol. 288 Issue 16.
\5\ Joint Commission on Accreditation of Health Care
Organizations. ``Health Care at the Crossroads: Strategies for
Addressing the Evolving Nurse Crisis.'' 2003. http://
www.jointcommission.org/NR/rdonlyres/5C138711-ED76-4D6F-909F-
B06E0309F36D/0/health_care_at_the_crossroads.pdf (Retrieved on
3/6/07.)
\6\ Id.
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Studies have also demonstrated that there can be better health care
outcomes with adequate staffing levels. A recent study estimated that
6,700 in-hospital patient deaths could he avoided by increasing nurse
staffing levels. The study further concluded that simply increasing
nurse staffing levels would result in approximately 70,000 fewer
adverse outcomes, including decreases in urinary tract infections,
pneumonia and shock or cardiac arrest.\7\
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\7\ Needleman, Jack, Peter I. Buerhaus, Maureen Stewart, Katya
Zelevinsky and Soeren Mattke. ``Nurse Stafling in Hospitals: Is
there a Business Case for Quality?'' Health Affairs, Vol. 25. No. 1.
January/February 2006.
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Nurses in Nevada are already forced to work with dangerously high
nurse-to-patient ratios. In 2000. Nevada ranked last among the states
in RNs per capita and in per capita health services employment.\8\ In
2005 Nevada ranked 49th among the states in per capita registered
nurses, with only 579 RNs for every 100,000 residents, which is far
below the national average of 799 RNs per 100,000 residents.\9\ The RN-
to-population ratios are higher in the northern part of the state and
lower in Clark County. Although the number of registered nurses in
Nevada has grown steadily, it has not kept pace with the state's
population growth.\10\ The average number of newly-minted RNs over the
last five years has only been 1,264.\11\ However, over the last three
years, Nevada's population increased by 11.4%.\12\
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\8\ U.S. Department of Health and Human Services, Health
Resources and Services Administration, Bureau of Health Professions.
``State Health Workforce Profiles Highlights: Nevada. http://
bhpr.hrsa.gov/healthworkforce/reports/statesummaries/nevada.htm
(Last viewed 12/7/07).
\9\ Kaiser State Health Facts. Nevada. Providers & Service
Users. ``Nevada: Total Registered Nurses as of May 2005.'' http://
www.statehealthfacts.org/profileind.jsp?ind=438&cat=8&rgn=30 (last
viewed 12/7/07).
\10\ Packham, John, Tabor Griswold, Jake Burkey, Chris Lake.
2005 Survey of Licensed Registered Nurses in Nevada. November 2005.
http://www.nvha.net/papers/nursesurvey.pdf Last viewed on 12/8/07.
\11\ Nevada State Board of Nursing Annual Reports for years
ending June 30, 2001--June 30, 2005. Includes new licenses created
by examination and by endorsement.
\12\ U.S. Census Bureau. American Fact Finder. Population
Finder. ``Population for all Counties in Nevada, 2000 to 2006.''
http://factfinder.census.gov/servlet/GCTTable?_bm=y&-geo&_
id=0400US32&_-box_head_nbr=GCT-T1&-ds_name-PEP_2006_EST&_-
lang=en&-format=ST-2&-sse=on (Last viewed 12/7/07).
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Academic studies have shown that, much like the rest of the
country, the epidemic of nurse understaffing in Nevada is due not to a
shortage of registered nurses, but rather a shortage of registered
nurses willing to work under the current conditions in Nevada
hospitals. In 2000, active licenses were held by 12,900 registered
nurses in Nevada but only 10,400 were employed in nursing.\13\ In 2004
and 2005, Valley Hospital in Las Vegas reported that 206 registered
nurses left employment at the hospital (Valley Hospital has
approximately only 540 RNs employed at any given time).\14\ At Desert
Springs Hospital in Las Vegas, 137 registered nurses left employment in
2004 and 2005 (Desert Springs employs approximately only 290 RNs at any
given time).\15\ A case study of RNs in Nevada found that the number
one reason that RN graduates leave their first job is due to patient
care concerns such as unsafe patient ratios, not having
[[Page 49841]]
enough time to spend with patients, and working conditions that are not
conducive to safe patient care.\16\ Job dissatisfaction among hospital
nurses is four times greater than the average for all U.S. workers.
Forty percent of hospital nurses report burnout levels that exceed the
norm for health care workers and 1 in 5 hospital nurses intend to leave
their current jobs within a year. Job stress and dissatisfaction
increase when nurses are taking care of more patients. Each additional
patient over four per nurse is associated with a 23% chance of job
burnout and a 15% chance increase in odds of job dissatisfaction.\17\
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\13\ U.S. Department of Health and Human Services, Health
Resources and Services Administration, Bureau of Health Professions.
``State Health Workforce Profiles Highlights: Nevada.'' http://
bhpr.hrsa.gov/healthworkforce/reports/statesummaries/nevada.htm
(Last viewed 12/7/07).
\14\ Data provided pursuant to collective bargaining information
request.
\15\ Data provided pursuant to collective bargaining information
request.
\16\ Bowles, Cheryl and Lori Candela. ``First Job Experiences of
Recent R.N. Graduates.'' Journal of Nursing Administration. 2005.
\17\ Aiken, Linda H., Sean P. Clarke, Douglas M. Stone, Julie
Sochalski and Jeffrey H. Silber. ``Hospital Nurse Staffing and
Patient Mortality, Nurse Burnout and Job Dissatisfaction.'' Journal
of the American Medical Association, Vol. 288. No. 16, 10/23/2002.
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Nurses also bear the brunt of the predictable results of short-
staffing: every time a nurse goes to work when there are too few nurses
working that shift, she puts her nursing license in jeopardy. Pursuant
to Nevada statute (NAG Sec. 632.895), a registered nurse can be
subject to disciplinary action from the Nevada State Nursing Board if a
patient suffers harm as a consequence of an act or an omission that
could have been reasonably foreseen, up to and including suspending or
revoking a nurse's license.\18\ We have already explained the link
between low nurse staffing levels and adverse patient outcomes
including an increased risk of mortality. Yet another comprehensive
study has found that rates of ``failure to rescue'' deaths increased
when registered nurses were responsible for too many patients.
(``Failure to rescue,'' is the death of a patient from complications
including pneumonia, shock or cardiac arrest, upper gastrointestinal
bleeding, sepsis or deep venous thrombosis.) Given that early
identification of medical problems can decrease the risk of death in
``failure to rescue'' mortalities, inadequate staffing levels further
increases the risk of harm to patients, thereby increasing the risk of
a registered nurse being held responsible and losing his or her
professional license.\19\ In the context of this crisis, further
staffing cuts as a result of this merger will drive even more Nevada
nurses out of the profession.
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\18\ Nevada Administrative Code. Chapter 632. http://
www.leg.state.nv.us/NAC/NAC-632.html.
\19\ Needleman, Jack and Peter Buerhaus, Soeren Mattke, Maureen
Stewart and Katya Zelevinsky, ``Nurse Staffing Levels and the
Quality of Care in Hospitals.'' New England Journal of Medicine,
Vol. 346, No. 22. 5/30/2002.
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These problems will be even more severe in Southern Nevada, where
71.1% \20\ of the hospital market is controlled by for-profit
companies. This concentrated for profit environment is almost unique in
the U.S. A comprehensive review of clinical data from more than 4,000
hospitals in the United States found that for-profit hospitals
consistently have worse outcomes than non-profit hospitals on three
common medical conditions: congestive heart failure, heart attack and
pneumonia.\21\ The difference in quality may be attributed to the
difference in accountability, while publicly-owned and non-profit
hospitals are accountable to the community. for-profit hospitals are
only accountable to their shareholders and, as a result, focus on
strategies that increase profitability rather than strategies to
benefit the community.\22\
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\20\ Quality Care Nevada. ``Hospitals and Health Systems.''
http://www.qualitycarenevada.org/index.asp?Type=B_
BASIC&SEC={7707D6CB-3079-4EF0-A9D6-B81FB8D31E7F{time} .
\21\ Landon, Bruce E.. Sharon-Lise T. Normand, Adam Lessler, A.
James O'Malley, Stephen Schmaltz, Jerod M. Loeb and Barbara McNeil.
``Quality of Care for the Treatment of Acute Medical Conditions in
U.S. Hospitals.'' Arch Intern Med, Vol. 166, Dec 11/25, 2006.
\22\ Physicians for a National Healthcare Program. ``New England
Journal of Medicine Article Says Evidence Against For-Profit
Hospitals Now Conclusive.'' August 1999. http://www.pnhp.org/news/
1999/august/new_england_journal_.php (Last viewed on 12/7/07).
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The result of this concentration of for-profit hospital ownership
is a relatively poor level of healiheare quality in Clark County. A
Medicare Quality Improvement Organization, dedicated to tracking
quality measures in medical settings, routinely ranks Clark County
hospitals in the bottom half of our nation's hospitals in a wide-range
of quality measures. In fact. some Clark County hospitals scored as low
as the 6th and 7th percentile of all U.S. hospitals.\23\
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\23\ Health Insight. http://www.healthinsight.org (Last viewed
on 10/31/07).
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The PFJ approving the United/Sierra merger will exacerbate these
problems and diminish the level of health care quality. The ability of
patients and doctors to determine the appropriate level of care will be
weakened. Nurses that are working with inadequately low staffing levels
will be faced with an additional risk to staffing levels and safe,
quality patient care will be needlessly jeopardized.
II. Sierra Health Services & HCA: A Case Study of Anticompetitive
Impact on Qualily & Access in Nevada
History demonstrates how the dominance of one health insurer in
this market can harm the health care of children and families in our
community. In Las Vegas we have already experienced the impacts of a
health insurance company using its market dominance to increase their
profits. In January 2007, after a contentious and public contract fight
between Sierra Health Services and HCA hospitals in Clark County,
Sierra Health Services terminated its contract with HCA hospitals
because HCA refused to agree to the low reimbursement rates Sierra was
demanding. When the contract was terminated, Sierra's 620,000 members
were no longer able to access services at the three HCA hospitals in
Clark County.
Children have been harmed the most by Sierra's decision. Sunrise
Hospital, which is owned by HCA, specializes in pediatric care.
Children are no longer able to access pediatric neurologists or
pediatric radiologists in Clark County and may have to travel as far as
Los Angeles to receive this level of specialized care. Children with
cancer are no longer eligible to participate in protocol treatments at
Sunrise Hospital. Patients who come to the Emergency Room at Sunrise
Hospital who are covered by Sierra Health Services' products have to be
transferred to a different hospital as soon as they are stabilized,
including women in labor. Patients are sometimes forced to move from
hospital to hospital to access all the care they need. We know of one
patient, for example, who had to go to Sunrise Hospital to have a
pacemaker removed and was then transferred to another hospital to have
a new one inserted due to insurance demands.
After Sierra Health Services dropped HCA, Sierra Health Services
required their enrollees to be directed to other hospitals in Clark
County. Our nurses who work at the other hospitals saw first hand the
impact of having 620,000 consumers suddenly redirected to their
hospitals. A nurse at Valley Hospital reported that their Intensive
Care Units, Emergency Room and Operating Room became overwhelmed with
heart patients and other critically ill patients. Universal Health
Services, the for-profit corporation that owns Valley Hospital, is
already known for short staffing its Registered Nurses, so when
Sierra's decision took effect, Operating Room and Recovery Room RNs and
techs were on call at the hospital for 16-20 hours
[[Page 49842]]
every day. Emergency Room RNs had to take 4 to 8 patients each, and
patients were forced to stay in the Emergency Room for 2-3 days before
they were able to he transferred to a bed in Intensive Care.
Sixteen months have passed since the contract between Sierra Health
Services and HCA hospitals in Clark County was severed, and patients
are still not able to access care at these hospitals. At Sunrise
Hospital, the census and case load continue to be low and patients
continue to be refused treatment. Nurses who work at HCA hospitals have
seen their hours cut and face the threat of layoffs. Many registered
nurses have had to find work at other facilities or have used up all of
their vacation time because there is not enough work for them.
Registered Nurses have had to quit working at Sunrise Hospital because
there have not been enough hours for them to work and they have been
unable to pay their mortgage.
SEIU Local 1107 believes that the HCA example demonstrates the
likely anticompetitive effects from the UnitedHealthcare/Sierra merger.
When an insurance company is in a dominant position, it can demand
dramatically lower reimbursement rates from hospitals. Most hospitals
have few alternatives but to accept a take-it-or-leave-it offer from
dominant health insurer. But even if they reject such an offer, it is
important to recognize that the harm to consumers will not be limited
simply to UnitedHealthcare/Sierra consumers. For those consumers, there
is one less hospital outlet available for them to access care. But for
all consumers the termination of a hospital from an insurer network
imposes significant costs. Ultimately, the increased costs of serving
Sierra patients at other hospitals are spread to all consumers who use
those alternative hospitals as the level of care diminishes.
III. The Merger Will Create a Crisis for the Clark County's Safety Net
Services by Placing Additional Strain on Nevada's Only Public Hospital
The United/Sierra merger will also harm Clark County's health care
safety net by creating a crisis for Nevada's sole public hospital,
University Medical Center (UMC), located in Las Vegas.
University Medical Center has served Southern Nevada for 75 years.
It operates Nevada's only Level 1 Trauma Center, Nevada's only burn
care facility and the only HIV inpatient unit in Southern Nevada. It
also serves as the primary clinical campus for University of Nevada
School of Medicine, Its Primary and Quick Care network provides primary
and urgent care access to more than 300,000 patients each year.\24\
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\24\ Lewin Group. Clark County Final Summary Presentation,''
February 20, 2007, Slide 54.
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UMC treats the vast majority of the uninsured in Clark County and
serves as the community's safety net hospital in Las Vegas. UMC cares
for 44% of all of Clark County's Medicaid patients and 48% of Clark
County's self-pay patients and has provided $280 million in charity
care in the last 5 years. At the same time, UMC cares for less than 11%
of the market for each of the better paying Medicare and commercial
insurance.
UMC's ability to provide essential services is continuously
threatened by its poor payer mix and the financial instability that
that brings. UMC operates near capacity, with an occupancy rate of
84.5%, but its average operating margin for the last four years has
been -3.9% because of its poor payer mix. UMC's expenses have been
increasing at a higher rate than revenue since 2001, and with the rate
of uninsured predicted to increase by 24% by 2021 in Clark County, this
deficit is expected to continue.\25\ In fiscal year 2006 UMC incurred
an operating deficit of approximately $34.3 million and the operating
deficit is projected to reach $60 million in fiscal year 2007.\26\
Given UMC's precarious circumstances, if one insurance company were
permitted to obtain market dominance, any actions that increase the
number of uninsured or underinsured will severely undermine the ability
of UMC to meet its obligations in providing a community safety net for
Nevadans. For example, if as a result of the merger, United-Sierra
dramatically raises premiums and increases the numbers of uninsured and
underinsured individuals (which we discuss further below), this will
only increase the demand on UMC's already over-taxed services.
---------------------------------------------------------------------------
\25\ Lewin Group. Clark County Final Summary Presentation,''
February 20, 2007, slide 5, 7 & 63.
\26\ University Medical Center Public Outreach Summary Report.''
Presented to the Clark County Board of County Commissioners on 9/4/
2007.
---------------------------------------------------------------------------
Yet another way UMC will be harmed if only one insurance company
insures a large percentage of the patients at a single hospital is in
the area of claims resolution. Any difficulties in resolving
outstanding claims will have a significant impact on the ability of the
public hospital to meet its public service obligations. In fact, UMC
has already had precisely this kind of trouble with UnitedHealth.
Modern Healthcare reported that since UnitedHealth took over PacifiCare
in 2005, UMC has had trouble with UnitedHealth's claims payment process
and has had difficulty getting claims resolved.\27\ If this merger is
approved and these problems persist, the effects will be on a much
bigger scale and it will put essential medical services at risk. UMC
cannot afford the financial and operational havoc that unpaid or
unresolved claims could have on their ability to provide services.
---------------------------------------------------------------------------
\27\ Benko, Laura B. ``All Bets are Off: Bigger, Yes, But
Better?'' Modern Healthcare. 3/19/2007.
---------------------------------------------------------------------------
IV. The Merger Will Exacerbate the Condition of Nevada's Most
Vulnerable Populations: the Uninsured and Underinsured, and the Elderly
The acquisition of Sierra Health Services by UnitedHealth will
result in UnitedHealth dominating a faction of the market and
possessing the power to unilaterally set the price for health insurance
premiums. If individuals and/or employers are unable to afford the
premiums, they will have no other health insurance options available to
them and we will see an increased number of uninsured in Las Vegas.
Approximately 18% of Nevadans live without insurance, which is
higher than the national average of 16%. Seventeen percent of children
in Nevada live without health insurance, higher than the national
average of 12%.\28\ The uninsured rate in Clark County grew 31% from
2000-2006 and is expected to grow at least another 24% in the next 15
years.\29\
---------------------------------------------------------------------------
\28\ Kaiser Family Foundation. State Health Facts. ``Health
Coverage & Uninsured.'' http://www.statehelathfacts.org/
profilecat.jsp?rgn=30&cat=3 (Last viewed on 10/30/07).
\29\ Lewin Group. ``Clark County Final Summary Presentation.''
February 20, 2007, slide 37 & 38.
---------------------------------------------------------------------------
When patients do not have insurance they are more likely to delay
seeking treatment and they are more likely to obtain their care in the
emergency room. When we see them in the hospital they are much sicker
than they would have been otherwise. They are more likely to have a
longer length of stay. If their insurance will not cover their care
they need while they are in the hospital they are more likely to have a
delayed recovery and make repeat visits to the hospital.
Living without insurance can have dire consequences. In rural
Nevada, there are a high number of uninsured pregnant women. When
laboring moms come to the hospital with no medical records because they
were unable to afford prenatal visits, a danger is posed to the mother
and the child.
This merger will increase the number of underinsured in Clark
County. If UnitedHealth decides that they will no
[[Page 49843]]
longer provide coverage for certain kinds of care than that decision
will leave more than 808,000 people in Nevada.\30\ approximately 32.4%
of the population,\31\ with a choice of either going without necessary
care or paying for that care out of their own pocket. SEIU Local 1107
members represent a large number of UnitedHealth's potential consumers;
approximately 74.0% of SEIU Local 1107 members currently have Health
Plan of Nevada (Sierra's HMO product) as their only HMO option.
---------------------------------------------------------------------------
\30\ Robison, Jennifer. ``Mergers and Acquisitions: Official OKs
Sierra Health buyout.'' Las Vegas Review Journal. 8/28/2007.
\\ U.S. Census Bureau. Population Finder. Nevada. Population
estimates in 2006: 2,495, 529. http://factfinder.census.gov/servlet/
SAFFPopulation?_event=Search&_name=&_state=04000US32&_
country=&_cityTown=&_zip=&_sse=on&_lang=en&pctxt=fph (Last
viewed on 10/30/07)
---------------------------------------------------------------------------
Increasing the number of uninsured and underinsured will lengthen
emergency room wait times and impact the quality of the care we provide
at our hospitals. Hospitals are mandated by law to provide care to
anyone who asks for medical treatment and, because of this, people use
the ER for everyday medical problems. We are inundated with non-
emergent patients that have no other place to go to receive health
care. The burden takes nurses and doctors away from treating truly
emergent, life-threatening patients and creates emergency room wait
times that can last 6 to 8 hours. If ones insurer provides coverage to
a large percentage of people in the community and that insurer decides
to raise premiums, the number of uninsured or underinsured residents
will increase, and all of the problems associated with that will
increase as well.
Clark County is already in a perilous position of being unable to
provide the appropriate level of care to elderly and disabled
residents. Clark County hospitals are short staffed and do not have
enough nurses to provide necessary care, The County is also suffers
from a shortage of doctors, dentists and almost every other health care
professional.\32\ A Veterans Administration official stated that these
shortages will eventually lead to premature deaths, intense strain on
families and missed diagnosis that will cause patients to suffer.\33\
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\32\ Hidalgo, Jason, 6/17/2007.
\33\ Hidalgo, Jason, 6/17/2007.
---------------------------------------------------------------------------
* * *
We believe that the PFJ thus to address the substantial competitive
concerns raised by UnitedHealth's acquisition of Sierra and should he
rejected by the Court.
Respectfully submitted,
Jane McAlevey, Executive Director,
Service Employees International Union,
Local 1107.
Chris Giunchigliani, Commissioner, Board of County Commissioners,
Clark County Government Center, 500 S Grand Central Pky, Box 551601
Las Vegas, NV 89155-1601, (702) 455-3500 Fax: (702) 383-6041
May 14, 2008.
Joshua H. Soven, Chief, Litigation I Section, U.S. Department of
Justice, Antitrust Division, 1401 H Street, NW, Ste. 400,
Washington, DC 20530
RE: Tunney Act Comments, United States v. UnitedHealth Group, Civil
Case No. 08-0322
Dear Mr. Soven:
As an individual Commissioner of Clark County, I am submitting
these comments to express my serious concerns with the proposed
final judgment entered into by the U.S. Department of Justice
(``DOJ'') with UnitedHealth Group, Inc. and Sierra Health Services,
Inc. over the UnitedHealth/Sierra acquisition. I believe that this
proposed final judgment is inadequate to resolve the very serious
competitive concerns raised by this merger.
UnitedHealth's acquisition of Sierra will create a single health
insurance company that will dominate the Clark County market. By
combining these two companies, a single firm will have over a 50%
share of the commercial health insurance market. This single firm
will have substantial power to dictate the terms and conditions in
which employers, particularly small employers, will be forced to
purchase health insurance. Clark County is a significant distance
from other major metropolitan markets arid the commercial health
insurance market has traditionally been dominated by a small group
of firms.
The DOJ's decree is inadequate because it fails to recognize the
potential competitive harm from the merger on employers who purchase
insurance, and uninsured and underinsured individuals in Clark
County. Clark County is the largest county in Nevada with a
population of 2 million individuals, over 300,000 of which are
uninsured, over 17% of the Clark County population. This merger is
of particular concern for the county, which because it operates the
largest public hospital in Nevada, University Medical Center
(``UMC''). UMC is the safety net healthcare facility for the county.
Uninsured and underinsured individuals use UMC as their primary
source of healthcare services.
This merger, by permitting the creation of a single dominant
health insurer in Clark County will substantially increase the costs
of numerous commercial health insurance products, ultimately harming
the consumers in Clark County.
This, in turn, will increase the number of uninsured
individuals. This impact will be particularly felt by relatively
small employers in Clark County. As the cost of insurance increases
substantially, small employers will be increasingly unable to
provide health insurance to their employees, and in turn this will
further substantially increase the number of uninsured individuals
in the county. Those individuals must rely on UMC for most of their
healthcare services. Thus, the merger will ultimately increase the
cost of healthcare services in Clark County. Moreover, this merger
will diminish the service and quality of health care that patients
receive as more demand is placed on the services of UMC.
The Nevada State Attorney General filed a complaint and a final
judgment simultaneous to the DOJ action. The Attorney General was
able to secure some modest relief to address the concerns of UMC,
including the payment of overdue claims for UMC. Although these
remedies aim to solve some ongoing problems between UnitedHealth and
UMC, they do not provide any long-term relief to protect the
interests of UMC, the uninsured, or Clark County. Now that the
merger is consummated. Clark County is left dealing with an
incredibly powerful health insurance company that can unilaterally
reduce reimbursement, which in turn will significantly diminish the
ability of the county to deliver adequate services to both insured
and uninsured individuals.
I believe that the DOJ's proposed enforcement action should be
rejected, and the Department should re-open its investigation to
secure adequate relief to protect the uninsured individuals in Clark
County and the concerns of the County itself.
Sincerely,
Chris Giunchigliani,
Commissioner.
Congress of the United States
U.S. House of Representatives
Committee of Small Business
2561 Rayburn House Office Building
Washington, DC 20515-0315
May 15, 2008.
VIA E-MAIL
The Honorable Thomas O. Barnett, Assistant Attorney General for
Antitrust, c/o Joshua H. Soven, Chief, Litigation I Section, U.S.
Department of Justice, Antitrust Division, 1401 H Street, N.W.,
Suite 4000, Washington, DC 20530
RE: Tunney Act Comments, United States v. UnitedHealth Group
Incorporated, Civil Case No. 08-0322
Dear Assistant Attorney General Barnett: These comments are
submitted pursuant to the Tunney Act \1\ regarding the Proposed
Final Judgment (PFJ) filed by the U.S. Department of Justice (DOJ)
with the U.S. District Court for the District of Columbia in United
States v. UnitedHealth Group Incorporated, Civil Case No. 08-0322.
---------------------------------------------------------------------------
\1\ 15 U.S.C. Sec. Sec. 16(b)-(h).
---------------------------------------------------------------------------
The Tunney Act requires the Court to determine whether the PFJ
is in the public interest.\2\ In making this determination, the
Court must carefully consider the fact that entry of the PFJ will
profoundly reduce competition in the health care markets of Clark
County and the State of Nevada, and pose significant risks to
consumers, physicians and small businesses. The public
[[Page 49844]]
benefit arising from entry of the PFJ is not readily apparent.
---------------------------------------------------------------------------
\2\ 15 U.S.C. Sec. 16(e).
---------------------------------------------------------------------------
While the Department of Justice (DOJ) took steps to protect
senior citizens by requiring the divestiture of Medicare Advantage
related assets, I am concerned the PFJ does not adequately protect
the rest of the public, including small businesses, healthcare
providers and patients.
On October 25, 2007, the Committee on Small Business held a
hearing entitled Health Insurer Consolidation--The Impact on Small
Business. The Committee heard from witnesses representing small
businesses, the medical community and consumers who expressed
concern regarding the growing trend of consolidation in the health
insurance industiy.
Witnesses made the following comments at the hearing:
``* * * consolidation has left physicians with little leverage
against unfair contract terms that deal with patient care and little
control over their own employees rising health insurance premiums.''
\3\
---------------------------------------------------------------------------
\3\ Statement of Dr. William G. Plested, III, Immediate Past
President. American Medical Assn.
---------------------------------------------------------------------------
``The lack of competition among health insurers absolutely
affects my insurance cost, as well as the quality and scope of
coverage. Our state's [Illinois] non-competitive health care
insurance environment, due to the monopoly of one or two carriers,
places all the leverage in the hands of the insurers. I can't vote
with my feet and dollars if I have no alternatives from which to
select.'' \4\
---------------------------------------------------------------------------
\4\ Statement of Robert Hughes. President of the National
Association for the Self-Employed (quoting a member).
---------------------------------------------------------------------------
``Consolidation of health insurance plans have [sic) created a
profound imbalance that hurts the ability of family physicians to
negotiate contracts. This is harmful to our practices. but also
means that many of our patients cannot find the primary care
physicians who accept their insurance.'' \5\
---------------------------------------------------------------------------
\5\ Statement of Dr. James D. King, President, American Academy
of Physicians.
---------------------------------------------------------------------------
``Health insurance consolidation has in part created a take it
or leave it market for small businesses. Reduced competition through
consolidations both of insurance carriers and health insurance
carrier provider networks has led to increased pricing (and) fewer
choices for small businesses and their employees.'' \6\
---------------------------------------------------------------------------
\6\ Statement of James R. Office, General Counsel, Victory
Wholesale Grocers.
---------------------------------------------------------------------------
The hearing record is included as part of this comment.
Access to health insurance is an area of key concern to small
businesses. The rising cost of health care is regularly cited by
small firms as one of their biggest worries. Small businesses need
to have choices in the health insurance marketplace. In addition,
mergers should not be permitted that enable a health insurer to
reduce compensation to physicians below competitive rates. If the
playing field for health care providers is not level, quality of
care declines and patients ultimately suffer.
The health insurance marketplace has become increasingly
consolidated in recent years. Consolidation has left small
businesses with fewer choices and physicians with diminished
leverage to negotiate with plans. Econometric evidence shows that in
the managed care field, an increase in the number of competitors is
associated with lower health plan costs and premiums; conversely, a
decrease in the number of competitors is associated with higher
health plan costs and premiums.\7\ In the majority of metropolitan
areas, a single insurer now dominates the marketplace. If
individuals and small businesses cannot get coverage through the
dominant insurer in these areas, they may not be able to find
alternatives.
---------------------------------------------------------------------------
\7\ Examining Health Care Mergers in Pennsylvania: Hearing
Before the Senate Judiciary Committee, 110th Congress (April 9,
2007) Statement of Lawton Burns, Professor, Wharton School of
Business.
---------------------------------------------------------------------------
Because mergers of health insurers affect access to health care
and influence the quality of medical services to consumers, they
command great scrutiny.
To maintain competition in the marketplace, the proposed
acquisition of Sierra Health Services, Inc. (``Sierra'') by
UnitedHealth Group Incorporated (``United'') requires the
divestiture of more assets than merely those related to United's
Medicare Advantage business in the Las Vegas area. Sierra is
United's largest rival in the state of Nevada. The level of
concentration posed by this merger is tremendous. A combined United-
Sierra would have a nearly 80 percent share of the commercial HMO
market in Nevada and almost a 94 percent share of the commercial HMO
market in Clark County.
DOJ notes that ``United and Sierra together account for
approximately 94 percent of the total enrollment in Medicare
Advantage plans in the Las Vegas area,'' and that the ``acquisition
is likely to reduce competition substantially in the sale of
Medicare Advantage plans in the Las Vegas area in violation of
Section 7 of the Clayton Act.'' \8\ Similar effects on competition
will likely arise both in the commercial HMO market, which will see
virtually the same levels of concentration as the Medicare Advantage
market, and the market for the purchase of physician services. The
PFJ fails to address this diminishment of competition in these
markets in Las Vegas and the State of Nevada.
---------------------------------------------------------------------------
\8\ 73 Federal Register 12763 (March 10, 2008).
---------------------------------------------------------------------------
It is critical that the Court consider the following factors in
evaluating the PFJ:
The PFJ Could Enhance United's Market Power and Hurt Small Businesses
United will go from having a 12 percent share of the HMO market
in the state of Nevada to an 80 percent share. In Clark County, the
market share will surge from 14 percent to 94 percent. By allowing
the two largest competitors in the state to merge, small businesses
will face severely diminished options in health insurance plans. The
insurance marketplace in Nevada and Clark County is already highly
concentrated--which necessitates an even higher level of scrutiny.
With such a dominant market position, a combined United-Sierra could
attain market power to raise prices to small businesses above
competitive levels. Small businesses will have few alternatives to a
combined United-Sierra and as a consequence, will be stuck with
higher premium costs. If costs rise above competitive levels more
small firms will stop providing coverage to employees, increasing
the number of Nevada's uninsured.
Additionally, it is important to contemplate that existing
barriers to entry in the HMO market are extremely high. It is
unlikely that a combined United-Sierra will face any new competitors
in Nevada in the near future.
The PFJ Could Enhance United's Monopsony Power and Hurt Physicians and
Patients
With such an overwhelming market share, the combined United-
Sierra could reduce compensation for providers to the point where it
is below competitive levels. Lower service, poorer quality and
reduced access to health care could result. Physicians and other
providers may not have sufficient alternatives to allow them to
circumvent the compensation decreases of a combined United-Sierra.
The costs for physicians to switch to other health care insurers are
substantial as physician time is valuable and it can be difficult
for a physician to quickly replace lost patients. With such a
dominant market share and high switching costs, physicians may find
that, when faced with lower reimbursement, they are unable to switch
from a combined United-Sierra to another insurer. If this is the
case, a combined United-Sierra could exercise market power against
health care providers.
I appreciate consideration of the above mentioned issues. I am
concerned that the PFJ does not adequately preserve competition in
the health insurance marketplace for small businesses, physicians
and consumers.
Sincerely,
Nydia M. Vel[aacute]zquez,
Chairwoman.
Full Commi1tee Hearing on Health Insurer Consolidation--The Impact on
Small Business
Committee on Small Business
United States House of Representatives
One Hundred Tenth Congress
First Session
October 25, 2007.
Serial Number 110-55
Printed for the use of the Committee on Small Business
Available via the World Wide Web: http://wwwaccess.gpo.gov/congress/
house
U.S. Government Printing Office
39-376 PDF Washington : 2007
For sale by the Superintendent of Documents, U.S. Government
Printing Office
Internet: bookstore.gpo.gov Phone toll free (866) 512-1800; DC area
(202) 512-1800
Fax: (202) 512-2104 Mail: Stop IDCC, Washington, DC 20402-0001
House Committee on Small Business
Nydia M. Vel[aacute]zquez, New York, Chairwoman
Heath Shuler North Carolina
Charlie Gonzalez, Texas
Rick Larsen, Washington
[[Page 49845]]
Raul Grijalva, Arizona
Michael Michaud, Maine
Melissa Bean, Illinois
Henry Cuellar, Texas
Dan Lipinski, Illinois
Gwen Moore, Wisconsin
Jason Altmire, Pennsylvania
Bruce Braley, Iowa
Yvette Clarke, New York
Brad Ellsworth, Indiana
Hank Johnson, Georgia
Joe Sestak, Pennsylvania
Brian Higgins, New York
Mazie Hirono, Hawaii
Steve Chabot, Ohio, Ranking Member
Roscoe Bartlett, Maryland
Sam Graves, Missouri
Todd Akin, Missouri
Bill Shuster, Pennsylvania
Marilyn Musgrave, Colorado
Steve King, Iowa
Jeff Fortenberry, Nebraska
Lynn Westmoreland, Georgia
Louie Gohmert, Texas
Dean Heller, Nevada
David Davis, Tennessee
Mary Fallin, Oklahoma
Vern Buchanan, Florida
Jim Jordan, Ohio
Michael Day, Majority Staff Director
Adam Minehardt, Deputy Staff Director
Tim Slattery, Chief Counsel
Kevin Fitzpatrick, Minority Staff Director
Standing Subcommittees
Subcommittee on Finance and Tax
Melissa Bean, Illinois, Chairwoman
Raul Grijalva, Arizona
Michael Michaud, Maine
Brad Ellsworth, Indiana
Hank Johnson, Georgia
Joe Sestak, Pennsylvania
Dean Heller, Nevada, Ranking
Bill Shuster, Pennsylvania
Steve King, Iowa
Vern Buchanan, Florida
Jim Jordan, Ohio
Subcommittee on Contracting and Technology
Bruce Braley, Iowa, Chairman
Henry Cuellar, Texas
Gwen Moore, Wisconsin
Yvette Clarke, New York
Joe Sestak, Pennsylvania
David Davis, Tennessee, Ranking
Roscoe Bartlett, Maryland
Sam Graves, Missouri
Todd Akin, Missouri
Mary Fallin, Oklahoma
Subcommittee on Regulations, Health Care and Trade
Charles Gonzalez, Texas, Chairman
Rick Larsen, Washington
Dan Lipinski, Illinois
Melissa Bean, Illinois
Gwen Moore, Wisconsin
Jason Altmire, Pennsylvania
Joe Sestak, Pennsylvania
Lynn Westmoreland, Georgia, Ranking
Bill Shuster, Pennsylvania
Steve King, Iowa
Marilyn Musgrave, Colorado
Mary Fallin, Oklahoma
Vern Buchanan, Florida
Jim Jordan, Ohio
Subcommittee on Urban and Rural Entrepreneurship
Heath Shuler, North Carolina, Chairman
Rick Larsen, Washington
Michael Michaud, Maine
Gwen Moore, Wisconsin
Yvette Clarke, New York
Brad Ellsworth, Indiana
Hank Johnson, Georgia
Jeff Fortenberry, Nebraska, Ranking
Roscoe Bartlett, Maryland
Marilyn Musgrave, Colorado
Dean Heller, Nevada
David Davis, Tennessee
Subcommittee on Investigations and Oversight
Jason Altmire, Pennsylvania, Chairman
Charlie Gonzalez, Texas
Raul Grijalva, Arizona
Louie Gohmert, Texas, Ranking
Lynn Westmoreland, Georgia
Contents
Opening Statements
Vel[aacute]zquez, Hon. Nydia M.
Chabot, Hon. Steve
Witnesses
Plested III, Dr. William G., American Medical Association
Huges, Robert, National Association for the Self-Employed
King, Dr. James D, American Academy of Family Physicians
Office, James R., Victory Wholesale Grocers
Scandlen, Greg, Consumers for Health Care Choices
Appendix
Prepared Statements:
Vel[aacute]zquez, Hon. Nydia M.
Chabot, Hon. Steve
Altmire, Hon. Jason
Plested III, Dr. William G., American Medical Association
Huges, Robert, National Association for the Self-Employed
King, Dr. James D., American Academy of Family Physicians
Office, James R., Victory Wholesale Grocers
Scandlen, Greg, Consumers for Health Care Choices
Statements for the Record:
Consumer Federation of America, Consumers Union and US PIRG
Full Committee Hearing on Health Insurer Consolidation--The Impact on
Small Business
Thursday, October 25, 2007.
U.S. House of Representatives,
Committee on Small Business,
Washington, DC.
The Committee met, pursuant to call, at 9:30 a.m., in Room 2360
Rayburn House Office Building, Hon. Nydia Vel[aacute]zquez
[Chairwoman of the Committee] presiding.
Present: Representatives Vel[aacute]zquez, Gonzalez, Cuellar,
Altmire, Clarke, Ellsworth, Sestak, Higgins, Chabot, Bartlett, and
Fallin.
Opening Statement of Chairwoman Vel[aacute]zquez
Chairwoman Vel[aacute]zquez. Good morning. I call this hearing
to order to address Health Insurer Consolidation--The Impact on
Small Business.
Access to health insurance is an area of concern to small
businesses. The rising costs of health care are regularly cited by
small firms as one of their biggest worries. Small businesses need
to have choices in the health insurance marketplace. It is
imperative that the marketplace is diverse and competition
flourishes.
It is also critical that small medical providers are able to
continue offering services. Physicians and other providers must be
able to operate on a level playing field with health insurers and be
reimbursed at fair rates. If not, quality of care will decline, and
it is the patient who ultimately will suffer.
Consolidation in the health insurance industry is one area of
special concern that has a direct impact on these issues. Because
these mergers affect access to care and influence the quality of
medical services, they command careful scrutiny by regulators.
Unfortunately, the health insurance industry, like a number of other
industries, has seen a general lack of enforcement of antitrust
laws.
Earlier this year, The Wall Street Journal reported that the
Federal Government has nearly stepped out of the antitrust
enforcement business. While some mergers benefit consumers and
increase the competitiveness of U.S. companies, others pose
substantial risks to competition and innovation.
The health insurance marketplace has become increasingly
concentrated in recent years. Consolidation has left small
businesses with fewer choices, and physicians with diminished
leverage to negotiate. In the majority of metropolitan areas, a
single insurer now dominates the marketplace. If individuals and
small businesses cannot get health coverage through the dominant
insurer, they may not be able to find alternatives.
Recent mergers in the health insurance industry have tended to
not generate efficiencies that have lower costs for small businesses
or improved coverage. Premiums for small businesses have continued
to increase without a corresponding increase in benefits. Consumers
are facing increased deductibles, co-payments, and co-insurance,
which have reduced the scope of their coverage.
When operating in highly concentrated markets, physicians often
find they are stuck with take it or leave it contracts. The
Department of Justice has recognized that physicians face special
difficulties in dealing with health insurers--namely, it is very
costly for them to switch from one insurer to another.
Replacing lost business for a physician by attracting new
patients from other sources is very difficult in our current health
care system. Physicians face barriers in attracting potential new
HMO patients, since they are filtered through an HMO plan.
Physicians struggle to maintain the quality of care in the
[[Page 49846]]
face of reduced reimbursement--a large administrative burden.
When physicians are forced to spend less time on each
appointment, ultimately it is the patients that suffer. It is
essential that competition remains vibrant in the health insurance
marketplace. Not surprisingly, studies have found that when
competition declines premium costs generally go up. The rising costs
of health care are leading to greater numbers of uninsured, and less
small businesses and individuals can afford to pay premiums.
Small businesses continue to be burdened by the high cost of
health care. These rising costs of health insurance is one of the
primary reasons the ranks of the 46 million uninsured Americans
continue to grow. Tragically, 18,000 Americans lose their lives each
year because of a lack of health insurance. We need to ensure that
providers are on a level playing field, and small businesses and
individuals have choices when it comes to health care.
I yield now to Ranking Member Chabot for his opening statement.
Opening Statement of Mr. Chabot
Mr. Chabot. Thank you very much, Madam Chairwoman. I want to
apologize for being a couple of minutes late. It was one of those
mornings where just too many things were scheduled and I just
couldn't make it to everything on time. So I apologize.
And I want to thank the Chairwoman for holding this important
hearing on the impact of mergers and increasing concentration in the
health insurance market. This hearing continues this Committee's
examination of the cost of health care on small businesses, both as
purchasers of health care and as providers.
The Supreme Court has stated that ``The unrestrained interaction
of competitive forces will yield the best allocation of our economic
resources, the lowest prices, the highest quality, and the greatest
material progress.'' In short, competitive markets represent the
cornerstone of American progress and the success of our democracy.
Antitrust laws were established to protect these precious values. By
providing a mechanism to ensure that competition is not unreasonably
hindered, the antitrust laws can be seen as further bracing the
competition foundation of this country.
When mergers occur, that may reduce competition. It behooves the
Justice Department or the Federal Trade Commission to closely assess
the value of these mergers. That is particularly crucial in the
context of health care. When the members of this Committee travel
back to their districts, they are put face to face with constituents
and small business owners that struggle every day to cope with the
rising costs of obtaining or providing health care.
If the number of companies that supply health insurance
continues to decrease, basic economics suggest that costs of
obtaining health care coverage will increase. It then becomes vital
to assess the impact of industry consolidation on small business
owners who already have significant difficulty in obtaining health
insurance coverage.
Today, we have witnesses that represent small business
purchasers of health care who will inform the Committee of the
increasing difficulty that they have in obtaining health care
coverage at reasonable costs that are not made any easier as
concentration in the industry increases. In addition to the obvious
effects on purchasers of health care coverage, it is important to
remember that many providers of health care are small businesses.
If concentration increases in the health insurance industry,
then the multitude of providers are faced with the market power of a
very large single purchaser that will be able to dictate prices and
the service rendered. And if the prices do not cover the physician's
costs, physicians will stop seeing patients, thus reducing choice
even more. Of course, in addition to the bulwark of antitrust laws
to protect competition, another avenue is to increase competition in
the provision of health insurers.
This Committee, under the former Chairman, Mr. Talent, took the
lead in promoting competition in the health insurance market by
creating association health plans. The House, on a number of
occasions--I believe six times in a five-year period--passed
association health plan legislation that unfortunately died in the
Senate.
The Chairwoman, Chairwoman Vel[aacute]zquez, should be commended
for her courageous votes in support of association health plans.
Given their potential to reduce costs and increase competition, I
think the Committee seriously needs to investigate the resuscitation
of that concept.
I look forward to a thoughtful discussion from the panel of
witnesses, a very distinguished panel I might add that we have here
today, and their ideas on how to protect and improve competition in
the health insurance markets. And, again, I want to thank the
Chairwoman for holding this important hearing, and I yield back my
time.
Chairwoman Vel[aacute]zquez. Thank you, Mr. Chabot.
And we are going to start with our first witnesses, and let me
just take this opportunity to thank all of you for being here today.
We are going to have a timer in front of you. Green means you go,
and then the red one means five minutes are up. Each one of you will
have five minutes to make your presentation.
Dr. Plested, Dr. William Plested, is our first witness. He
served as the President of the American Medical Association from
June 2006 to June 2007. Dr. Plested is a cardiovascular surgeon and
has been in private practice in Santa Monica, California, for more
than 35 years. The American Medical Association is the nation's
largest physician group and advocates on issues vital to the
nation's health.
Thank you, and welcome.
Statement of Dr. William G. Plested, III, Immediate Past President,
American Medical Association, Brentwood, California
Dr. Plested. Thank you, Madam Chair. My name is Bill Plested. I
am a past president of the American Medical Association and a
cardiac surgeon from Santa Monica, California. I want to thank you
very kindly for inviting me to testify today and for holding a
hearing on this exceedingly important issue--health insurance
consolidation.
Consolidation in the health insurance market is critical to the
AMA, because physicians are both patient advocates and small
business owners. Physicians have primary responsibility for
advocating for their patients, and they also are small business that
want to provide health care insurance for their employees.
Physicians' ability to perform either of these vital functions,
however, has been severely compromised by growing consolidation in
the for-profit health insurance market. This consolidation has left
physicians with little leverage against unfair contract terms that
deal with patient care and little control over their own employees'
rising health insurance premiums.
As you all know, our market performs optimally when consumers
have a choice of competing products and services. Increasingly,
however, choice in the health insurance market has been severely
restricted as health plans have pursued aggressive acquisition
strategies to assume dominant positions.
In the past decade, there have been over 400 mergers. Contrary
to claims of greater efficiency and lower cost, these mergers in
fact have led to higher premiums and decreased patient access to
care. If the current trend continues, we fear it will lead to a
health care system dominated by a few companies that, unlike
physicians, have an obligation to shareholders, not to patients.
Our worst fears may be realized in Nevada where we have urged
the Department of Justice to block the merger of the United Health
Group and Sierra Health Systems. This merger would have a
devastating impact on Nevada's patients and physicians and would
reverberate throughout the health care system as a harbinger of
unrestricted consolidation, would drastically reduce competition,
and severely limit health insurance choice for employers and
individuals in Nevada.
The United-Sierra merger would give United a 94 percent HMO
market--share of the HMO market in Clark County and an 80 percent
share of the HMO market in the entire State of Nevada. Nevada is in
need of more competition, not less. The State currently ranks 47th
in the country for access to care and 45th in access to physicians.
This merger would push Nevada even further down these lists by
exacerbating physician shortages.
Competition is essential to the delivery of high quality health
care services, and this merger would serve only to further
disadvantage an already challenged Nevada health care system.
Consolidation is not benefiting patients. Health insurers are
recording record high profits while patient health insurance
premiums continue to rise. In fact, United and Wellpoint have had
seven--seven years of consecutive double-digit profit growth that
has ranged to 20 to 70 percent year after year.
In addition to compelling results of the AMA's annual
competition study, many areas across the country exhibit
characteristics typical of uncompetitive markets and growing
monopolistic behavior.
[[Page 49847]]
These include significant barriers to entry for new health insurers,
the ability of large entrenched insurers to raise premiums without
losing market share, and the power of dominant insurers to coerce
physicians into accepting unreasonable and unjust contracts.
The AMA believes that the Federal Government must take steps to
address the serious public policy issues raised by unfettered health
insurer consolidation. The current situation in Nevada is emblematic
of the total absence of boundaries and enforcement currently applied
to health plan mergers.
Therefore, we respectfully encourage this Committee to urge the
DOJ to enjoin the merger of United and Sierra. By so doing, the
Committee would be taking a meaningful step on behalf of America's
patients towards correcting the existing inequities in the health
care market.
Thank you.
[The prepared statement of Dr. Plested may be found in the
Appendix on page 27.]
ChairwomanVelazquez. Thank you, Dr. Plested.
Our next witness is Mr. Robert Hughes. He is the President of
the National Association for the Self-Employed. Mr. Hughes has
managed his own accounting practice, Hall & Hughes, in Dallas/Fort
Worth, for the past 20 years. NASE represents hundreds of thousands
of entrepreneurs and microbusinesses and is the largest non-profit,
non-partisan association of its kind in the United States.
Welcome.
Statement of Robert Hughes, President, National Association for the
Self-Employed
Mr. Hughes. Thank you very much. It is our pleasure to be here
this morning, and thank you, Ms. Chairwoman, for the invitation. As
a representative of over 250,000 microbusinesses across the country,
the NASE is committed to addressing the issue of affordable health
coverage. I am here to tell you that health care costs and coverage
premiums are adversely affecting microbusiness and impairing their
ability to grow, compete, and succeed.
In addition to the high cost of health coverage, it has a
serious personal impact on business owners and their employees.
Oftentimes, the small business will sacrifice saving for retirement,
putting money aside for their children's education, and addressing
other personal needs to redirect funds to health coverage in order
to stay insured. Of course, the worst result of mounting premiums is
dropping coverage all together, which puts their business, their
employees, their family, and themselves at risk when they face even
a minor medical event.
In a 2005 survey, the NASE found that the majority of
microbusiness owners, those businesses with 10 or less employees, do
not have for themselves, nor do they offer, health insurance to
their employees. Most alarming is the rate at which premiums for
microbusinesses have been increasing. In a similar health study
conducted in 2002, microbusinesses indicated the median premium
increase for the year before was a little over 11 percent.
In 2005, microbusiness owners were experiencing a median premium
increase of over 17 percent. Premium costs are the single most
important factor that determines whether a business owner will
insure himself and provide coverage for employees. Thus, the key
question here today is if the increasing number of mergers among
health insurers is playing a role in premium increases.
The self-employed and microbusinesses purchase health insurance
in either the small group market or the individual market. The small
group market is much more restrictive and regulated, which reduces,
in our opinion, competition and availability. The NASE believes that
minimization of insurance carriers due to consolidation, compounded
with a concern of high risk in the small group segment, and
excessive state regulation leave small business with minimal options
to set up small group health plan, and is a factor contributing to
high premiums in insurance markets.
A 2005 GAO report highlighted that the median market share of
the largest carrier in the small group market was 43 percent, up 10
percent from just three years earlier. The five largest carriers in
the small group market, when combined, represented three-quarters or
more of the market in 26 of the 34 states that participated in the
GAO study. The dominance of a few carriers in the small group market
was also supported by studies from the AMA and leading health
insurance experts.
How, then, is this lack of competition affecting insurance
premiums? Well, let me give you a quote from one of our members, a
freelance writer from Geneva, Illinois. ``The lack of competition
among health insurers absolutely affects my insurance cost, as well
as the quality and scope of coverage I can barely afford. Our
state's non-competitive health care insurance environment, due to
the monopoly of one or two carriers, places all of the leverage in
the hands of the insurers. I can't vote with my feet and dollars if
I have no alternatives from which to select.''
David, along with other microbusiness owners, will tell you that
competition plays a central role in improving quality, spurring
innovation, and keeping prices down. Research has indicated that
health plans have increased premiums consistently above the rate of
growth in costs. Cumulative, the premium increases for the last six
years have exceeded 87 percent, which is more than three times the
overall increase and medical inflation of 28 percent.
Why have insurance companies increased rates at these paces? I
guess the simple answer is: they can. I believe that the current
state regulatory climate plays an even more critical role in keeping
costs high and impairing competition. State mandates are an issue.
Some believe that state mandates increase insurance premiums by as
much as 20 percent or even more.
Microbusiness owners have long been a proponent of market-based
solutions for dealing with our health care system. However,
competition without competitors will not deliver the desired
incentive for health care improvement. The NASE urges Congress to
address the disparities in individual and group markets. There are
over 20 million non-employer firms in America. Certainly, they have
access to, and choice of, health care coverage at a very limited
basis, and that issue should be addressed.
Increasing insurer competition for the strong economic market
segment, addressing state insurance regulation and mandates, and
creating equitable federal tax treatment for these non-employer
firms, are key to increasing access to affordable health coverage.
[The prepared statement of Mr. Hughes may be found in the
Appendix on page 39.]
Chairwoman Velazquez. Thank you, Mr. Hughes.
Our next witness is Dr. James D. King. He is the President of
the American Academy of Family Physicians. Dr. King is in private
practice in the rural community of Selmer, Tennessee. He serves as
the Medical Director of Chester County Health Care Services. The
American Academy of Family Physicians is one of the largest national
medical organizations with more than 94,000 members in 50 states,
the District of Columbia, Puerto Rico, the Virgin Islands, and Guam.
Welcome.
Statement of Dr. James D. King, President, American Academy of Family
Physicians, Selmer, Tennessee
Dr. King. Thank you. On behalf of the Academy, I appreciate the
concern about the effect of consolidated health plans on family
physicians. We are members of the small business community, and also
are professionals concerned about the effective delivery of health
care to our patients.
Consolidation of health insurance plans have created a profound
imbalance that hurts the ability of family physicians to negotiate
contracts. This is harmful to our practices, but also means that
many of our patients cannot find the primary care physicians who
accept their insurance.
According to the industry analysis, between 1992 and 2006 the
number of health insurance companies dropped from 95 to 7. The
American Medical Association reports that 280 U.S. markets, at least
one-third of the covered lives, are members of a single largest
insurer in that market. In the U.S., only two insurance companies
cover one-third of all insured Americans.
This market concentration gives health plans huge power to
determine the coverage and payment terms. Let me give you a snapshot
of how this affects the individual member. Nearly two-thirds of the
patients of a solo family physician in Colorado are insured by one
commercial payer. This situation occurred because of a merger. When
this doctor made the case for a payment increase to keep pace with
inflation, he was told by the insurance company, ``As a solo
physician, you are the weakest economic unit and must take what we
decide to give.''
That single statement bluntly and accurately describes our
problem. As the economic heavyweights, health plans have no
incentive to agree to physician requests. When a doctor doesn't
agree to the terms of the contract, the plan just removes the
[[Page 49848]]
practice from the network. This means that patients essentially are
denied access to their physicians.
In most cases, family doctors stick to their patients and sign
untenable contracts. These contracts can affect many aspects of the
practice. They dictate treatment decisions, require the use of
special labs, require peer-to-peer requests for prior
authorizations, demand completion of multiple-page forms, and delay
payment while requiring responses to endless questions.
Many insurance contracts even allow the health plan to change
the terms at any time without notifying the physician simply by
posting new information on their web site. These business practices
may increase the profit--may increase the profits of the insurance
company, but they create enormous burdens for our small and solo
practices and may hurt patient care.
As a result, more primary care physicians are driven to work in
other settings, such as emergency rooms, in cash only practices.
Some leave medical practice all together. Worst of all, payment
rates and other contract terms are unrelated to quality of care.
Let me give you another quick story. A family physician who had
been honored several times as the best physician in Arizona, who had
more than 100 physicians as his patients, and who received the
highest possible rating from his health plans for quality and
efficiency, is taking more than $100,000 out of his savings each
year just to keep his practice afloat. Despite his good work, he has
been unable to negotiate higher payment rates with insurers.
Speaking more broadly, insurance plans consolidate threaten--
consolidation threatens the potential for quality improvement in
U.S. health care. For example, family medicine and other primary
care specialties are advocating for the patient-centered medical
home for all Americans. This medical home would be a practice that
has been transformed to offer comprehensive, continuous, and
coordinated care to our patients.
Experience with health systems based on primary care in other
industrialized nations have demonstrated the exceptional value of a
medical home in terms of quality and cost effectiveness. However,
the success of the medical home depends on a long-term relationship
between the physician and the patient. This relationship can be
threatened, even destroyed, if insurance companies dictate the terms
of the medical practice and limit our patients' freedom of choice.
The AAFP recommends changing antitrust laws so that physicians
can be true market participants. The current statutes were
established years ago during a very different competitive
environment. Under these outmoded laws, physicians are barred from
discussing the financial aspects of their practice with any entity
unrelated to their practice. In contrast, insurance companies use
market share and shared economic strength to carry out near
monopolistic behavior.
AAFP commends the Committee for highlighting the significant
problems resulting from health insurance consolidation. Family
physicians, many of whom provide health care in small and solo
practices in rural and other under served areas, feel the effect of
the insurance consolidation as they attempt to negotiate in an
environment that is stacked against them.
Again, I want to thank you for this opportunity to provide this
testimony, and I look forward to answering your questions.
[The prepared statement of Dr. King may be found in the Appendix
on page 44.]
Chairwoman Velazquez. Thank you, Dr. King.
And now the Chair recognizes Dr. Chabot for the purpose of
introducing our next witness.
Mr. Chabot. Thank you very much, Madam Chair. I would like to
introduce Mr. Office. He is the Vice President and General Counsel
for Victory Wholesale Group, which is headquartered in Springfield,
Ohio. Mr. Office is currently sponsorship chair and a board member
of the Southwest Ohio Chapter of Association of Corporate Counsel.
Victory is a national wholesale distributor of grocery, health
and beauty, and pharmaceutical products, and we are very pleased to
have a fellow buckeye here this morning. And we welcome you and are
looking forward to hearing from you, Mr. Office.
Thank you.
Statement of James R. Office, General Counsel, Victory Wholesale
Grocers, Springboro, Ohio
Mr. Office. Thank you, Madam Chairwoman, Representative Chabot,
and members of this Committee, for inviting us to discuss this
important issue.
Victory Wholesale Group appreciates the opportunity to submit
these comments to the Committee. The rising and out-of-control
increases in health costs is a very important subject to us and
every other small business across America. Health insurance
consolidations are a large contributor to the increased health
costs. One of Victory's largest expenses is for the health care
coverage that it provides its employees.
Let me first tell you a little something about Victory. Some of
you may know something about Victory through our involvement in and
grants over the many years to the Congressional Hunger Foundation.
Victory is a group of family-owned separate companies. The first was
established in 1979. Our businesses include a wholesale grocery
distributor, a food marketing company, a public warehouse business,
a contract packaging business, a pharmaceutical wholesale
distributor, a promotional items distributor.
Victory has a small number of employees and businesses in over
22 states, including Ohio, New York, Florida, California, Nevada,
and the Commonwealth of Puerto Rico. Health insurance is the
cornerstone of benefits that Victory provides its employees. Victory
has tried different health care plan models, including fully
insured, self-insured, PPOs, and HMOs, with the objective to reduce
our health insurance care costs, or to control their increases.
Victory, having employees around the country, has not been able
to find a single affordable health care plan that covers our
separate businesses and employees on a national basis with health
care provider networks that can compete with the regional health
care providers.
In Victory's experience, insurance consolidation has led to the
decreased competition and higher prices in the market. Let me
elaborate. First, we have found that controlling health care costs
is nearly impossible. The health care industry is both fragmented
and concentrated. It is loaded with administrative costs, it is
inefficient, it is not measured. Accounting for quality and for
value just simply doesn't exist.
Next, we have found that the deepest discounts and best coverage
networks are offered on a regional basis. We have found that the
markets where we have employees are dominated by a few large
insurance carriers. Carriers with a smaller market share in these
regions generally have weak hospital and doctor networks, or smaller
discounts. Plans with fewer hospitals and doctors to choose from are
simply not very popular with employees, and, therefore, employers.
We have found that many of the markets where we have employees
have several dominant affiliate health care provider networks or
groups. These are groups of one or more hospitals and physicians
that have combined into an affiliation or network, and they rent
these networks to insurance companies and employers.
A few dominant health care provider networks in a region can and
do use their enhanced market clout to resist negotiating discounts
with insurance carriers and employers. We have found that the
dominant insurance carriers in the region generally price health
care plans for small businesses through what I would describe as
experience rating, i.e. healthy groups get fairly high prices, and
unhealthy groups get very high prices.
Insurance carriers have an uncanny way of learning the health of
a group, even if they don't insure your group. We have found that a
single serious or major health event within a group will virtually
eliminate competitive bids and result in much higher than average
cost increases as well as dictated structural changes in your
benefits to the group's plan at renewal.
We have found that faced with the increasing health care costs,
employers and employees are faced with very few choices. I would
call it a menu of the lesser of evils. These options include: 1)
increasing the amount of premium that each employee pays each month;
2) increasing the co-payments or deductibles; 3) imposing changes on
unhealthy lifestyles, like charging smokers or obese people more
premiums; 4) incorporating higher deductibles and lower benefits
into the plan design, and sometimes using like a health savings
account or health reimbursement accounts, which in the end is just a
cut in benefits, reducing or modifying or eliminating benefits, and
providing financial incentives or disincentives to use the modified
benefits.
And lastly, an option that I find is becoming a lot more common
today, which is small businesses are just eliminating offering
employer-provided health insurance. Historically, small businesses
make up the
[[Page 49849]]
backbone of our nation's employers. Collectively, small businesses
employ the largest number of people in the United States. Yet
because each company is small, we have almost no market clout to
help bring changes to our health care system.
Health insurance consolidation has in part created a take it or
leave it market for small businesses. Reduced competition through
consolidations both of insurance carriers and health insurance
carrier provider networks has led to increased pricing, fewer
choices for small businesses and their employees.
[The prepared statement of Mr. Office may be found in the
Appendix on page 49.]
Chairwoman Velazquez. Mr. Office, your time is up, and they just
called for a vote. So I would like to move to the next witness. And
for that purpose, I recognize Mr. Bartlett.
Mr. Bartlett. Thank you very much. Mr. Scandlen wasn't in his
chair when the Committee began, I suspect for the same reason I
wasn't in my chair. I think we both probably came down 270 this
morning. I left two hours and 15 minutes before the Committee,
because I really wanted to be here on time. But, unfortunately, this
was my second longest commute in 15 years of commuting that 50 miles
from Frederick, Maryland, down to the Hill. So thank you very much
for braving the traffic and being here this morning.
Greg Scandlen is from Hagerstown, Maryland. He is the founder of
Consumers for Health Care Choices, a non-partisan, non-profit
membership organization aimed at empowering consumers in the health
care system. He is considered one of the nation's experts on health
care financing, insurance regulation, and employee benefits.
He testifies frequently before Congress and appears on such
television shows as The O'Reilly Factor, NBC Nightly News, and CNN.
He has published many papers on topics such as health care costs,
insurance reform, employee benefits, individual insurance programs,
HSAs, HRAs, and every aspect of consumer-driven health care. Mr.
Scandlen was the president of the Health Benefits Group and the
founder and executive director of the Council for Affordable Health
Insurance. He also spent 12 years in the Blue Cross/Blue Shield
system, most recently as the director of state research at the
national association.
Thank you very much for joining us today.
Statement of Greg Scandlen, President, Consumers for Health Care
Choices
Mr. Scandlen. Thank you, Mr. Congressman. Thank you, Madam
Chairman, and members of the Committee. I was going to ask you, Mr.
Bartlett, for a note excusing my tardiness, but you have made that
unnecessary. Thank you very much. I do apologize for being late,
though.
I know you have a vote pending, so I will be very quick. I just
want to share a couple of thoughts with you. One is that
concentration of--in this market is not an accident, and it is not
an inherent part of the small group market. When I was with the Blue
Cross/Blue Shield Association, I was--one of my responsibilities was
working with the National Association of Insurance Commissioners on
their small group reform proposals back in the late 1980s.
And I can tell you, at the time the Commissioners and their
staff made it very clear that these reforms would do nothing to
lower cost, nothing to increase access. Their purpose was to
stabilize the market, and that was their language.
And what they meant by that was they thought there was too much
competition in the small group market. It was confusing for
employers, and they would prefer it if there were only three or four
competitors in every market. That would be easier to understand,
and, frankly, probably easier for the regulators to regulate, with a
smaller number of companies.
So I think the situation we have today is the direct consequence
of regulatory interference with the market. Many of those
regulations were well intentioned, but I think they all add to cost
and complexity in this market, and many, many smaller companies
decided they simply could not afford to comply with the various
state and changing from year to year regulations that they had to
follow. So they simply got out of the business.
Many of them were life insurance companies, and they sold off
their health books to larger carriers that were--that are better
able to afford the compliance costs associated with all of these
regulations. And what we have today, and as the other witnesses have
mentioned, we have coverage that is overpriced, inefficient,
unaccountable, inconvenient, and incomprehensible to the consumer.
We need--these are, I believe, the characteristics of a non-
competitive market. There is insufficient competition. If you don't
like what--if you don't like what one company offers, it really
doesn't matter because everybody else is offering the exact same
thing at the exact same price.
This market is sorely needing innovation and efficiency. The
insurance industry is notoriously inefficient. And back in the 19th
century when it comes to technology and computer support, larger is
not better, larger results in monopolization and a lack of
innovation. And there have been some proposals that have come before
the Congress that I think would help here.
One is the interstate purchase of coverage. So if I am living in
Maryland, and there is a better product available in Pennsylvania, I
would like to be able to purchase that product, and I don't see why
I can't. Another possibility would be an alternative federal
charter, so insurance companies could become like banks. They could
decide whether they would like to be regulated by the states or by
the Federal Government.
And if they choose the states, they are confined to doing
business in the state that is regulating them. If they choose a
federal charter, they can operate nationally, and Mr. Office and
other multistate's smaller employers would be able to purchase the
same product for all of their employees.
So I think solutions are there, but I think decisive action is
needed, because this market is collapsing.
Thank you very much.
[The prepared statement of Mr. Scandlen may be found in the
Appendix on page 56.1
Chairwoman Vel[aacute]zquez. Thank you very much.
The Committee stands in recess and will resume right after the
vote.
[Recess.]
Chairwoman Vel[aacute]zquez. Gentlemen, the Committee is called
back to order. I know the Ranking Member is on his way here.
I would like to address my first question to Dr. Plested. We all
agree that it is critical that physicians are in a position to be
advocates for their patients. I understand that some physicians are
concerned that important decisions relating to care of patients has
been taken away from them by burdensome rules imposed by insurers.
My question is, Dr. Plested, have these rules gotten more
onerous as the insurance industry has consolidated? And how do these
policies affect the doctor-patient relationship? Is the quality of
care impacted?
Dr. Plested. Thank you, Madam Chair, and the answer to the
question is unequivocally yes, quality of care is affected. The
basis for patient care throughout history has been based on what we
call the patient-physician relationship. And both of those partners
in that relationship have the same interest, and that is the health
of the patient. Regardless of how you change that, if you put anyone
in between that, whether that be an insurer or an employer, if
anyone else gets in between those two parties in that relationship,
their interest is different.
With an insurer, the CEO of every insurance company's primary
interest is his shareholders, not the patient. So that it can just--
it just follows by reason that any time we dilute that basic
fundamental relationship it is not in the interest of patients. And
when the insurer can bludgeon the physician with paperwork, with
unnecessary rules and regulations and unilateral--contracts that can
be unilaterally amended, all these things that you have heard in the
testimony today, that directly affects the care that those patients
can get.
Chairwoman Vel[aacute]zquez. Have you conducted any survey among
doctors regarding that doctor-patient relationship as a result of
consolidation?
Dr. Plested. Specifically related to consolidation, I don't know
that we have, but we have all kinds of data about what has happened
to the relationship, and consolidation is an integral part of that.
And it has all been detrimental.
Chairwoman Vel[aacute]zquez. Thank you, Dr. Plested.
Dr. King, the difficulty physicians have faced with the
insurance industry is in large part based upon the size of the
companies and the market share they command. Some insurance
companies have grown so large that physicians have found it
difficult to negotiate a contract with favorable terms. What has
been the experience of your members? Are they being forced to accept
take it or leave it contracts?
Dr. King. The short answer is yes. I practice in a small town in
Selmer, Tennessee, west Tennessee in a rural area. And so we only
have one or two major industries to begin with, and when we only
have one insurance product they have as much as 30, 40, 50 percent
of the patient base for us to take care of.
And I have been taking care of these patients for 20 years, and
all of a sudden I
[[Page 49850]]
am dealing with an insurance company that has offered a contract
that I know is inappropriate, that is going to interfere with the
quality of care that I need to provide. And it is tough for me even
to consider making a living and supply jobs for my employees. I am a
small business, too. I have got--we have seven physicians, we have
39 employees that we need to supply their health care, we need to
provide them with pay.
So I am a small business, but I am also providing the health
care. And if I choose to eliminate 20 percent of the patients I have
been taking care of I don't think too many businesses can do that.
And we are seeing that every day, that they are having to either
accept a contract that is not acceptable, that we know we can't make
it work, or give up 30 percent of the patients we have been caring
for over years.
Chairwoman Vel[aacute]zquez. Thank you.
Mr. Hughes, the cost of the same health benefits are likely to
be higher for a small firm than for a large firm. How does this make
for an unleveled playing field for your members when it comes to
negotiating health insurance plans? And with increased concentration
in the industry, do you expect this disparity to grow?
Mr. Hughes. The micro-employer is in a very difficult position,
because they are facing regulation that places them into the small
group market. So even though we may have a very small employer group
of only one or two people, they are thrown into the group market
that is accordingly rated based on that group experience.
What we are seeing is a significant premium rate increases as a
result of that. The small group simply doesn't have a chance to
compete the way the larger group does in the marketplace.
Chairwoman Vel[aacute]zquez. What can be done to remedy this
disparity?
Mr. Hughes. Well, one of the factors involves federal taxation.
It is clear that taxes affect social behavior, and it is also clear
that in the Tax Code today all businesses receive an exemption for
the payment of income taxes and payroll taxes on premiums that they
provide for their employees for health insurance coverage.
The exception to that rule is for the sole proprietor, the self-
employed individual. That particular individual does not receive a
payroll tax deduction for these health insurance premiums, and
accordingly must pay then 15 percent of payroll taxes on those
premiums. The effect is that if the tax law were amended to be
equitable to all business owners, self-employed proprietors could
then reduce their premium costs by 15 percent across the board.
Chairwoman Vel[aacute]zquez. Thank you, Mr. Hughes.
Mr. Office, you mentioned that insurance companies may entice
employers by offering low coverage rates to new groups, and then
dramatically increase premiums or change benefits on renewals. You
mentioned that this behavior often chases competition out of the
market, thus allowing the insurer to later increase prices. What
have your experiences been with such enticement rates, and what can
your business do to respond to dramatically increased renewal
premiums when you only have one or two other insurers to choose
from?
Mr. Office. If you have any suggestions, I am open.
[Laughter.]
That is the thousand-pound gorilla that we face. You will get an
insurance carrier that will come into the market. And to buy market
share they will offer discounts, and most small businesses look at
price. That is a critical factor. And once they have done that, you
are moving--your numbers stay the same.
In any community, you have a certain number of people that are
insured, and you are just moving them from this bucket to this
bucket, and so this area over here loses those people and they push
out of the marketplace. Once that is done, then they do increase the
premiums. Or if, structurally, they say, ``Well, we will keep your
premium the same, but here is the policy you are going to have next
year,'' it is going to have fourth-tier pharmaceutical or it is
going to have higher co-pays and deductibles, or ``we are not going
to cover, you know, these procedures,'' or whatever.
But as a small business, you react to what they present to you.
You don't really--and you don't have a market to go look for to say,
``Well, what About an alternative?'' So any questions are welcome.
Chairwoman Vel[aacute]zquez. Sure. Mr. Scandlen--and I will
recognize Mr. Bartlett--I heard when you spoke about the direct
consequences of state regulations that it really encourages
concentration. And I know how frustrating it is. You said that one
of the avenues could be interstate purchase of health insurance or
federal charter.
But even without going into that, what role or how do you assess
the Department of Justice role, or lack of oversight, regarding
antitrust laws when it comes to consolidation?
Mr. Scandlen. I think there is an important role for antitrust
enforcement here. Clearly, when there are only two or three players,
when they actually merge together, that is a concern. But I, quite
frankly, think that is--that is something for the--it is not a
universal solution, because if there is a company that would like to
sell its business to another company, because the first company
simply is not profitable, then antitrust enforcement there strikes
me as inappropriate.
So I guess I am reluctantly embracing antitrust in selected
cases. And, for instance, in the United-Sierra merger in Nevada, my
organization was quite concerned about that and communicated with
the Department of Justice encouraging them to reject that merger,
because here were two very strong viable companies that consumers we
couldn't see would derive any benefit from--from the merger. And if
consumers are not benefiting from it, then I think it--and could
actually be disadvantaged by it, then I think it is a problem. But I
don't see it as the number one solution to this issue.
Chairwoman Vel[aacute]zquez. Thank you.
Now I recognize Mr. Chabot.
Mr. Chabot. Thank you, Madam Chair.
Dr. Plested, I will start with you if I can. You noted that
investigating consolidation regulators have tended to focus on
physicians rather than on health insurers. Could you expand upon
that a little bit? Why do you think that is so, and what should be
done about that?
Dr. Plested. Well, I certainly can't testify to the motivation
of the DOJ, but I can testify to what has happened, and it would
appear that the doctor--an individual doctor is much less able to
withstand an assault from the DOJ. And it makes their rate of caring
actions that they succeed on exceedingly high, because it--an
individual physician just can't withstand this.
A huge insurer certainly can, and I think the point that the
Chairman just raised is exceedingly important. What can we do, or
what can this Committee do? And the answer to that is it is time to
draw a line in the sand and say, ``This is going to stop.'' The
answers are complex, as everybody has said, and they aren't going to
be solved in this testimony or this action. But to put down a marker
and say this Committee from--to the DOJ, we have got to make it
crystal clear that this is going to stop, and get this merger
enjoined, would be the necessary first step that could be made.
Mr. Chabot. Thank you, Doctor.
Mr. Hughes, if I could turn to you next. In your written
testimony, you urged Congress to address the inequitable tax
treatment of health insurance for individuals purchasing coverage on
their own. I really couldn't agree more with you on that, and, in
fact, today I am reintroducing a bill that I have introduced in
previous Congresses. Unfortunately, we haven't gotten it passed into
law yet, but we are going to continue working.
It is called the Health Insurance Affordability Act, and it is
legislation that would provide a tax deduction for gross income--or,
excuse me, from gross income for the health insurance costs of an
individual taxpayer, the taxpayer's spouse, and dependents as well.
In other words, you know, large corporations obviously can fully
deduct the health care costs for their employees, but an individual
basically pays for their premiums and doesn't get to claim those for
the most part. And a lot of small businesses also aren't able to do
so, at least to 100 percent.
Could you explain how a deduction like that would help
individuals in small firms?
Mr. Hughes. Well, again, going out in the individual market, as
you indicate, those health insurance premiums are paid with aftertax
dollars, meaning that their purchasing power has been eroded
significantly. And if there is a way, a mechanism that would allow
for the deduction of health insurance premiums across the board,
whether employee or business or small business owner, then my sense
is that it is going to have the impact of bringing more people into
the marketplace, creating a marketplace that has in effect lower
ultimate cost of premiums, and theoretically that should increase
competition, because more insurers should go after that market
niche. So we wholeheartedly support that type of legislation.
Mr. Chabot. Thank you very much.
Dr. King, in your written testimony you state that ``As a result
of concentration of
[[Page 49851]]
insurers, many family practice physicians in small or solo practices
have little leverage in negotiations with health plans.'' Could you
discuss that briefly, and what effect that ultimately has?
Dr. King. I will be glad to. In fact, I can give you an example
of my own practice. As I stated earlier, I practice in a small town
in west Tennessee. We have a large employer there, and they changed
insurances for cost, as mentioned earlier. There was no physician in
my county in the network that insurance product provided. And they
not only didn't come at us with a contract we wouldn't accept, they
didn't offer us one at all.
Under their arrangement, all they had to do was have a doctor
within 45 miles of the plant that signed up. Then, they met all the
requirements they felt like they needed to do. And they wouldn't
even sit down and talk to us.
And my patients had a choice to make that year. They came and
saw me and we tried to work out a way that they could pay me for
their services and we didn't bill their insurance, or they drove 45
miles. So they were doing back and forth for an entire year until
they finally changed that plan. They chose not to make any changes
at all.
So not only do they come at us and we can't negotiate, and this
was every physician in the county, that, you know, they have enough,
but for--with our family physicians, most of us are solo
practitioners or small groups, anywhere from one doctor to maybe
four or five. We have absolutely no leverage.
Mr. Chabot. Thank you very much, Doctor.
Mr. Office, you mentioned that your companies maintain multiple
health insurance plans to foster competition, and to help reduce
costs. How much of an impact does this make on your overall health
insurance costs?
Mr. Office. I would be happy to share some numbers with you,
which I came prepared to. But we range--for example, single only
coverage in one geographic location where I understand there is some
competition, and I am not involved in the buying there, but they are
paying $177 a month per employee. And in the area that I work in, we
are paying $570 a month. So there is a $400 difference. For family
coverage, the difference is $450 versus $1,400. So you can see that
there could be significant differences.
Now, because of the regionalization I can't go to, say, New York
or Puerto Rico where I might get a lower rate and buy a plan for,
you know, south--you know, southern Ohio where we have most-you
know, a large group of people, or Florida. We just can't get that,
because we end up with networks. We are not going to buy a plan and
pay a premium and then get a network where there is no doctors in
that area. Our employees will--there will be a mutiny.
[Laughter.]
Mr. Chabot. Okay. Thank you.
Mr. Office. So, you know, if you are going to pay the premium,
you have to have hospitals and doctors in that network. And you
don't want to make people have to change those choices. So there can
be a big difference.
Mr. Chabot. One of our colleagues, John Shadegg from Arizona,
has introduced a plan over the years relative to health insurance
that would allow people to go across state lines and would undo some
of the difficulties there are with various states having different
requirements and regulations and keeping companies out that aren't
necessarily in a particular state. So it is something that we
probably ought to look at.
Finally, Mr. Scandlen, in your written testimony you discuss the
need for innovation in the types of health insurance coverage that
are offered, such as health savings accounts, for example. Howwould
small businesses benefit from greater innovation? And is there
anything that you would suggest this Committee or Congress do in
that area to be of assistance?
Mr. Scandlen. I am not sure how you could encourage innovation
other than just encouraging competition. I mean, I think it is the
same thing. And there are some very, very interesting things out
there. One of the things I mentioned in the testimony was the
special needs plans under Medicare, and that is sort of an
experiment that--that I think so far is having very good results,
very interesting results.
These are insurance companies that focus on the needs of the
chronically ill, and one of the reasons they are able to do that is
because they receive--Medicare pays out risk-based premiums, so they
are receiving premiums that enable them to service that special
population.
Mr. Chabot, if I could very quickly also, in terms of the--your
tax deduction for individuals, I think that is a marvelous idea, and
I think it is worth remembering that up until 1983 individuals could
deduct their health insurance premiums as part of the medical
expense deduction, as long as, in 1983, it didn't exceed three
percent of their AGI.
That was raised to 5.5 percent, and then in '87 raised to 7.5
percent. and we have seen, as that has eroded, the individual market
has just gone in the tank, because that tax advantage has been
withheld from people that buy individual coverage.
Mr. Chabot. Thank you very much.
I yield back, Madam Chair.
ChairwomanVel[aacute]zquez. Thank you.
Mr. Gonzalez.
Mr. Gonzalez. Thank you very much, Madam Chairwoman. The issue
of availability and affordability--and it transcends big business,
small business, every American situated one way or another. The
interesting thing, I think the government has a tremendous stake in
making sure there is robust competition, because the future does
hold more government involvement in assisting individuals, small
business, families, in acquiring health insurance.
So availability and affordability looms large, whether it is the
President's tax proposal, whether it is what Mr. Chabot was talking
about, associated health plans, subsidizing premiums and such. All
that is for naught if we don't have a healthy insurance industry
that will provide choice, which will drive down cost, obviously. At
least that is what I have used as the big picture.
Some of the things that we have covered here, though, I am
wondering if it really does in any way assist in achieving that
final goal of availability and affordability. I will say that I
think our first witness alluded to--I guess it is the United
acquisition of Sierra. Is that right? And maybe that should be a
marker. Maybe we ought to pay a lot of attention to that, and put
everybody on notice. And I think that point is well taken.
One thing that Dr. King pointed out--and I am thinking all short
of that--is, how do we get all of the different participants fully
empowered?
Chairwoman Vel[aacute]zquez. Will the gentleman suspend? Mr.
Gonzalez. Yes.
Chairwoman Vel[aacute]zquez. I just would like to ask unanimous
consent, and the Ranking Member agreed with me, for every member to
have the opportunity to ask one question. This is going to be
quite--a very disruptive session today. Right now on the floor they
are going to be calling procedural votes.
So in light of that, I will give the opportunity for everyone to
ask one question, since I know that some of the members of the panel
have flights to catch.
Mr. Gonz[aacute]lez. I will be real brief, then. I will just ask
Dr. King, you pointed out that maybe empowering physicians to
negotiate, where presently they are prohibited by law--that was my
understanding of your testimony--if you could just kind of elaborate
a little bit on that, and how you see that would be beneficial to
the big question of availability and affordability.
Dr. King. Well, in allowing us to be able to negotiate, or at
least talk to each other, you know, about the different insurance
products, about the contracts that we are being offered to make sure
that we can compare, we talk doctor talk, we don't talk lawyer talk.
And we need to have the ability to share information and share
problems and concerns as we look at the contracts, so that we can
make decisions that is the best interest for our patients.
And then, if we can negotiate that, I can see how, you know--you
know, I don't know about the--you know, the consolidation of all of
the insurance companies and all, but I see how the health care of my
patients can improve, and we can arrive at a better plan that we
take away the barriers that I try to help take care of my patients
with that, so that physicians won't desert. We don't have enough
primary care physicians out there. They are going into different
arrangements. They are going into ERs, they are going into urgent
cars, which is not where we want our patients, and they are going
into markets that don't include insurance.
So we have--just to get the physicians out in the rural areas
and taking care of patients like we need to, they have got to be
able to negotiate and make it work.
Mr. Gonz[aacute]lez. Thank you. I yield back.
Chairwoman Vel[aacute]zquez. Thank you. Mr. Bartlett.
Mr. Bartlett. Thank you very much. You know, we don't really
have much of a health care system in our country. We have a really
good sick care system. It is the best in the world, and I would hope
that we might move a little more toward a health care system, so
maybe we wouldn't need such a big sick care system.
One of the problems in rising health care costs is the fact that
health care--I am using
[[Page 49852]]
that word euphemistically--health care is about the only thing that
most people shop for in our country and never ask the price. So they
are not a careful shopper.
And one of the things that I wanted to personally do, so that I
could become a careful shopper--and these were in the days before
health savings accounts, which really makes a person a careful
shopper, and I am a big fan of those. But absent that, when I
retired 20-couple years ago, I wanted to find a catastrophic policy
with a $5,000 deductible. See, I think that these little nickel and
dime things just wear you out and enormously increase the cost of
health care.
I can pay the first $5,000. That might be a little painful, but
what I can't pay is that second half million. And I think that many
of the policies drop. You have a cap at about a half million. I
couldn't find a catastrophic policy with a $5,000 deductible. That
ought to be a pretty cheap policy, shouldn't it? And wouldn't it
make people a really careful shopper? And why don't you--why doesn't
the industry offer that kind of a policy?
Mr. Scandlen. I think they are available now. And if I am not
mistaken, the AMA has offered a $10,000 deductible policy to its
members for a long time. So I think if you were shopping today, Mr.
Bartlett, you would be able to find that.
Mr. Bartlett. Madam Chair, I would like you to encourage our
people here who provide our options for health care to include that
as one of the options.
Chairwoman Vel[aacute]zquez. Definitely.
Mr. Bartlett. Thank you very much.
Chairwoman Vel[aacute]zquez. Ms. Clarke.
Ms. Clarke. I want to thank our Chairwoman and our Ranking
Member. This is probably one of the most critical issues facing
Americans today. As small businesses, as health care providers, as
consumers, we are all in a quandary and involved in the same
meltdown together.
There are so many questions that I would like to ask, but I want
to get an understanding of some of what is happening out there to
physicians' claims. I want to ask for anyone on the panel--I have
heard that health insurers have employed coercive tactics, such as
re-pricing of physician claims, which results in non-contracted
physicians receiving less than contracted physicians for the same
service. What is re-pricing exactly, and what other manipulative
practices have health insurers used to undermine a physician's
bargaining power? Dr. Plested?
Dr. Plested. Re-pricing is a very interesting phenomenon. It is
complex, but there have been contracts let by entities that do not
provide any care. They just round up a large number of contracted
doctors who will accept a price, and there are literally hundreds of
these contracted groups. There are now entities called re-pricers
that take every physician and match that physician by computers with
every contract that they have signed for every service that they
provide.
And so that when you get a bill from your insurance company that
has six things on it, that may be a sign by a re-pricer to six or
seven different contracts, so that he gets the lowest one. It is
complex, but it is a very Machiavellian type of system.
There are also the things that the insurers can do that have
been mentioned that they can unilaterally amend a contract. They can
change the amount that they agreed to pay you. They can unilaterally
put in screens. They have computerized screens that will reduce the
amount that they pay for things that it doesn't pay the physician to
charge--to try to challenge each of these. There are a multitude of
monopolistic behaviors that are allowed by this.
Chairwoman Vel[aacute]zquez. Thank you. And I want to take this
opportunity to thank all the witnesses. And I am sorry we do not
have more time to spend with you, but I am very, very happy that we
really had an opportunity to have this dialogue on an issue that is
so important, not only for small businesses and small practitioners,
but also for consumers in America.
The Small Business Committee will call on federal antitrust
regulators to play a more active role in ensuring that health
insurance markets remain competitive, and, to that effect, I will
ask the Ranking Member to join with me in sending a letter to the
Department of Justice. I will also--I already discussed with
Chairman Conyers on the House floor, when we went to vote, asking
him to do a joint hearing between Judiciary and Small Business to
examine specific mergers that may be pending.
I know, Mr. Scandlen, that you said that this is just one aspect
of a bigger picture, but we have to make sure that there is proper
oversight and examination before these mergers can proceed.
With that, I thank all the witnesses for your participation. I
ask unanimous consent that members have five legislative days to
enter statements and supporting materials into the record, and this
Committee is adjourned.
[Whereupon, at 11:45 a.m., the Committee was adjourned.]
Statement of the Honorable Nydia M. Vel[aacute]zquez, Chairwoman,United
States House of Representatives, Committee on Small BusinessFull
Committee Hearing: ``Health Insurer Consolidation--The Impact on Small
Business''
October 25, 2007.
I call this hearing to order to address ``Health Insurer
Consolidation--The Impact on Small Business.''
Access to health insurance is an area of concern to small
businesses. The rising costs of health care are regularly cited by
small firms as one of their biggest worries. Small businesses need
to have choices in the health insurance marketplace. It is
imperative that the marketplace is diverse and competition
flourishes.
It is also critical that small medical providers are able to
continue offering services. Physicians and other providers must be
able to operate on a level playing field with health insurers and be
reimbursed at fair rates. If not, quality of care will decline and
it is the patients who ultimately will suffer.
Consolidation in the health insurance industry is one area of
special concern that has a direct impact on these issues. Because
these mergers affect access to care and influence the quality of
medical services, they command careful scrutiny by regulators.
Unfortunately, the health insurance industry, like a number of
other industries, has seen a general lack of enforcement of
antitrust laws. Earlier this year, the Wall Street Journal reported
that ``the federal government has nearly stepped out of the
antitrust enforcement business.''
While some mergers benefit consumers and increase the
competitiveness of U.S. companies, others pose substantial risks to
competition and innovation.
The health insurance marketplace has become increasingly
concentrated in recent years. Consolidation has left small
businesses with fewer choices and physicians with diminished
leverage to negotiate with plans. In the majority of metropolitan
areas, a single insurer now dominates the marketplace. If
individuals and small businesses cannot get coverage through the
dominant insurer, they may not be able to find alternatives.
Recent mergers in the health insurance industry have tended to
not generate efficiencies that have lowered costs for small
businesses or improved coverage. Premiums for small businesses have
continued to increase without a corresponding increase in benefits.
Consumers are facing increased deductibles, co-payments and co-
insurance which have reduced the scope of their coverage.
When operating in highly concentrated markets, physicians often
find they are stuck with take it or leave it contracts. The
Department of Justice has recognized that physicians face special
difficulties in dealing with health insurers--namely, it is very
costly for them to switch from one insurer to another.
Replacing lost business for a physician by attracting new
patients from other sources is very difficult in our current health
care system. Physicians face barriers in attracting potential new
HMO patients since they are filtered through an HMO plan.
Physicians struggle to maintain the quality of care in the face
of reduced reimbursements and large administrative burdens. When
physicians are forced to spend less time on each appointment,
ultimately, it is patients that suffer.
It is essential that competition remains vibrant in the health
insurance marketplace. Not surprisingly, studies have found that
when competition declines, premium costs generally go up. The rising
costs of healthcare are leading to greater numbers of uninsured as
fewer small businesses and individuals can afford to pay premiums.
Small businesses continue to be burdened by the high costs of
health care. The rising cost of health insurance is one of the
primary reasons the ranks of the 46 million uninsured Americans
continue to grow. Tragically 18,000 Americans lose their lives each
year because of a lack of health insurance.
We need to ensure that providers are on a level playing field,
and small businesses and individuals have choices when it comes to
healthcare.
I yield to Ranking Member Chabot for his opening statement.
Opening Statement
Hearing Name: Health Insurer Consolidation--The Impact on Small
Business
Committee: Full Committee
[[Page 49853]]
Date: 10/25/2007
Opening Statement of Ranking Member Chabot
``I would like to thank the Chairwoman for holding this
important hearing on the impact of mergers and increasing
concentration in the health insurance market. This hearing continues
this Committee's examination of the cost of health care on small
businesses--both as purchasers of health care and as providers.
``The Supreme Court has stated that `that the unrestrained
interaction of competitive forces will yield the best allocation of
our economic resources, the lowest prices, the highest quality, and
the greatest material progress* * *' In short, competitive markets
represent the cornerstones of American progress and the success of
our democracy.
``The antitrust laws were established to protect these precious
values. By providing a mechanism to ensure that competition is not
unreasonably hindered, the antitrust laws can be seen as further
bracing the competitive foundation of this country.
``When mergers occur that may reduce competition, it behooves
the Justice Department or the Federal Trade Commission to closely
assess the value of those mergers. That is particularly crucial in
the context of health care.
``When the members of this Committee travel back to their
districts, they are put face-to-face with constituents and small
business owners that struggle every day to cope with the rising
costs of obtaining or providing health care. If the number of
companies that supply health insurance continues to decrease, basic
economics suggests that costs of obtaining health care coverage will
increase. It then becomes vital to assess the impact of industry
consolidation on small business owners who already have significant
difficulty in obtaining health care coverage. Today, we have
witnesses that represent small business purchasers of health care
who will inform the Committee of the increasing difficulty that they
have in obtaining health care coverage at reasonable costs that are
not made any easier as concentration in the industry increases.
``In addition to the obvious effects on purchasers of health
care coverage, it is important to remember that many providers of
health care are small businesses. If concentration increases in the
health insurance industry, then the multitude of providers are faced
with the market power of a very large single purchaser that will be
able to dictate prices and the service rendered. And if the prices
do not cover, for example, costs associated with obtaining
malpractice insurance, providers will opt of accepting coverage from
consumers reducing choice even more.
``Of course, in addition to the bulwark of the antitrust laws to
protect competition, another avenue is to increase competition in
the provision of health insurance. This Committee under the former
Chairman, Mr. Talent, took the lead in promoting competition in the
health insurance market by creating association health plans. The
House on a number of occasions passed association health plan
legislation that then died in the Senate. The Chairwoman should be
commended for her courageous votes in support of association health
plans. Given their potential to reduce costs and increase
competition, I think the Committee seriously needs to investigate
the resuscitation of that concept.
``I look forward to a thoughtful discussion from the panel of
witnesses and their ideas on how to protect and improve competition
in the health insurance markets.
``With that, I yield back.''
Statement of the Honorable Jason Altmire House Committee on Small
Business Hearing``Health Insurer Consolidation--The Impact on Small
Business''
October 25, 2007.
Thank you, Chairwoman Velazquez, for calling today's hearing to
examine the impact health insurer consolidation will have on small
business. Consolidation of health insurers has been on the rise in
recent years. leaving fewer health care provider choices for small
businesses. This committee consistently hears that cost is the
number one factor when determining if a small business will offer
health care coverage. As more and more health care providers merge,
they are able to exert more bargaining power, leaving small
businesses with limited options.
In my home state of Pennsylvania, the state's two largest health
insurers, Highmark Inc. and Independence Blue Cross, announced a
plan to combine the two organizations. The state is currently going
through the review process and while the US. Department of Justice
reviewed the terms of the consolidation and determined that it
raises no antitrust or other anti-competitive issues under federal
law, I am concerned that this consolidation may limit competition
and drive up health insurance prices for small businesses, If the
merger goes through, it is estimated that the new organization will
control at least 53 percent of the state's health insurance market,
If health insurer mergers continue to follow the trend of
resulting in fewer options and higher costs, more small businesses
will face barriers to health care. Now and in the future as mergers
are considered, it is important to ensure that choices in the health
insurance marketplace remain so access to health care is not
compromised.
Madam Chair, thank you again for holding this important hearing
today. I yield back the balance of my time.
Statement of the American Medical Association to the Committee on Small
Business, United States House of Representatives
Re: Health Insurer Consolidation--The Impact on Small Business
Presented by William G. Plested III, MD
October 25, 2007.
Division of Legislative Counsel
202-789-7426
The American Medical Association (AMA) appreciates the
opportunity to present testimony to the Committee on Small Business
on health insurer consolidation and its impact on small business. We
commend Chairwoman Vel[aacute]zquez, Ranking Member Chabot, and
Members of the Committee for your leadership in recognizing that the
dramatic and ongoing consolidation of the health plan industry has
severely diminished, if not eliminated, competition among the
insurance companies to the detriment of patients and their treating
physicians.
Consolidation in the health insurance market is critical to the
AMA because our members are both patient advocates and small
business owners. In an environment where health insurers have
increasing control over patient care and decreasing accountability,
physicians have primary responsibility for advocating that their
patients receive the appropriate medical care covered by their
health insurance. Their ability to do so, however, has been severely
compromised where dominant insurers force them to adhere to
contracts that create significant obstacles to providing the best
possible patient care. Physicians are also vulnerable to dominant
health insurer practices as small business owners. The majority of
physician practices are small businesses that are attempting to
provide health insurance coverage to their employees in the face of
substantial health insurance premiums. The growing consolidation in
the health care market and the extreme imbalance that has resulted
has meant that physicians have little leverage in either of their
roles as health care advocates or purchasers of insurance.
A market performs optimally when consumers have a choice of
competing products and services. Increasingly, however, choice in
the health care market has been severely restricted due to rampant
health insurer consolidation. Large health plans have pursued
aggressive acquisition strategies to assume dominant positions in
various markets across the country. In fact, a few health insurers
now overshadow the majority of health care markets. In the past
decade alone there have been over 400 mergers.\1\ These mergers have
led to higher premiums and increasing problems with patient access
to care. If the current trend continues, it will inevitably lead to
a health care system dominated by a few publicly traded companies
that operate in the interest of shareholders rather than patients.
---------------------------------------------------------------------------
\1\ Irving Levin Associates, The Healthcare Acquisition Report,
2001-2006 Editions.
---------------------------------------------------------------------------
Our worst fears may be realized in Nevada where we have urged
the U.S. Department of Justice (DOJ) to block the merger of
UnitedHealth Group (United) and Sierra Health Systems (Sierra).
Should this merger be consummated, it will have a devastating impact
on Nevada's patients and physicians and will reverberate throughout
the health care system as a harbinger of future unrestricted
consolidation. The AMA's Competition Study, Competition in Health
Insurance: A Comprehensive Study of U.S. Markets, as well as the
presence of several characteristics typical of uncompetitive
markets, further supports the notion that competition has been and
will continue to be severely undermined in Nevada and nationwide.
We believe that the federal government must take steps to
correct the current
[[Page 49854]]
imbalance in the market and address the deceptive, noncompetitive
conduct of large, dominant health insurers. The boundaries of
acceptable consolidation in the health insurance market must be
reexamined and enforced so that current threats to the health care
system are blocked and future harmful consolidation is deterred.
Thus, we encourage the House Small Business Committee to urge the
DOJ to take steps to enjoin the merger of United and Sierra in
Nevada. By doing so, the Committee would be taking a meaningful step
towards correcting the existing inequities in the health care
market.
United-Sierra Merger
We believe that a vital component to assuring a competitive
marketplace is antitrust enforcement against anticompetitive mergers
and exclusionary conduct. Over the past several years, however, the
DOJ has not brought any cases against anticompetitive conduct by
health insurers and has challenged only two mergers since 1999,
requiring onJy moderate restructuring.\2\ Currently, the AMA is
urging the DOJ to prevent the United-Sierra merger, which will
create an exceptional level of concentration in Nevada, particularly
in Clark County, resulting in higher prices, less service, and lower
quality of care.
---------------------------------------------------------------------------
\2\ See United States v. UnitedHealth Group Inc., Case No.
1:05CV02436 (D.D.C. Dec. 20, 2005), available at http://
www.usdoj.gov/atr/cases/f213800/213815.htm; United States v. Aetna,
Revised Competitive Impact Statement, Civil Action 3-99CV1398-H
(N.D.Tex, 1999), available at http://www.usdoj.gov/atr/cases/f2600/
2648.htm.
---------------------------------------------------------------------------
The United-Sierra merger will drastically reduce competition for
the provision of health insurance to employers and individuals in
Nevada. The market share for Sierra and United combined in Nevada is
48 percent, while in Clark County the combined United-Sierra market
share is 60 percent.\3\ For Health Maintenance Organization (HMO)
based insurance, should the merger proceed, United will have an 80
percent market share of all HMOs in Nevada and a 94 percent market
share of the HMO market in Clark County.\4\ According to the
Herfindahl-Hirschman Index (HHI), the typical measure of market
concentration, the Nevada and Clark County markets would be
significantly above the threshold for being considered ``highly
concentrated.'' \5\ Indeed, the level of concentration would be
unprecedented. Where, as here, a merger produces an entity that is
so disproportionately larger than any of its competitors, there is a
considerably increased likelihood that the entity will be able to
raise prices, decrease compensation, and reduce quality without fear
of meaningful competitive market responses.
---------------------------------------------------------------------------
\3\ Nevada State Health Division
\4\ Id.
\5\ Merger Guidelines S. 1.51.
---------------------------------------------------------------------------
Nevada is in need of more competition, not less. It cannot
afford a merger that will further restrict patient access to care.
Nevada currently ranks 47th in the country for access to care, 51st
in quality of care, last for immunization coverage for children
under 3, 49th in access to nurses, 44th for women's mortality rates,
and 45th in access to physicians--approximately 25 percent below the
nationwide median, with one of the lowest physician-to-population
ratios in the country.\6\ The United-Sierra merger would push Nevada
even further down the access to quality medical care list by
exacerbating physician and staffing shortages through decreased
compensation and increased use of unreasonable contracts.
Competition is essential to the delivery of high quality health care
services. Its absence in the face of this merger will serve only to
further disadvantage the already challenged Nevada health system.\7\
---------------------------------------------------------------------------
\6\ Nevada Strategic Health Care Plan, Report of the Legislative
Committee on Health Care, Nevada Revised Statute 439B.200, February
2007; http://system.nevada.edu/Chancellor/University/index.htm;
http://www.commonwealthfund.org/statescorecard/statescorecard_
show.htm?doc_id=495871; http://hrc.nwlc.org/.
\7\ United claims that efficiencies produced by the merger will
outweigh anticompetitive harms. As a general matter, however,
efficiencies from health insurance mergers have not been passed on
to patients. This is evidenced by the United PacifiCare merger,
which has not resulted in lower premiums or better services for
subscribers.
---------------------------------------------------------------------------
Competition in the Health Insurance Market
As noted above, the competitive health care market has been
steadily eroding. Health insurers have become significantly more
concentrated and have used their power to the disadvantage of
patients and physicians. As mentioned above, over the past 10 years
there have been over 400 mergers involving health insurers and
managed care organizations.\8\ In 2000, the two largest health
insurers, Aetna and UnitedHealth Group (United), had a total
combined membership of 32 million people. Due to aggressive merger
activity since 2000, including United's acquisition of California-
based PacifiCare Health Systems, Inc., and John Deere Health Plan in
2005, United's membership alone has grown to 33 million. Similarly,
WellPoint, Inc. (Wellpoint), the company born of the merger of
Anthem, Inc. (originally Blue Cross Blue Shield of Indiana), and
WellPoint Health Networks, Inc. (originally Blue Cross of
California), now owns Blue Cross plans in 14 states. In 2005,
WellPoint acquired the last remaining Blue Cross Blue Shield plan,
the New York-based WellChoice. Consequently, WellPoint now covers
approximately 34 million Americans.\9\ Together, WellPoint and
United control 36 percent of the U.S. commercial health insurance
market.
---------------------------------------------------------------------------
\8\ Irving Lewvin Associates, supra.
\9\ WellPoint Health Networks and Anthem, Inc., merged in 2004
The merged entity, WellPoint, Inc., is nearly double the size of
either entity.
---------------------------------------------------------------------------
AMA Competition Study
The effects of consolidation are particularly striking at the
local and regional levels, illustrated by the AMA's Competition
Study, Competition in Health Insurance: A Comprehensive Study of
U.S. Markets.\10\ Every year for the past six years, the AMA has
conducted the most in-depth study of commercial health insurance
markets in the country. The study analyzes the most current and
credible data available on health insurer market share for 313
Metropolitan Statistical Areas (MSA5) and 44 states.\11\
---------------------------------------------------------------------------
\10\ The AMA focused on state and MSA markets because health
care delivery is local, and health insurers focus their business and
marketing practices on local markets.
\11\ Significantly, state-level data is often misleading because
in many states health insurers do not compete on a state-wide basis.
---------------------------------------------------------------------------
In addition to its exhaustive geographic reach, the study
analyzed the product market in three ways--considering only HMO
products; considering only Preferred Provider Organization (PPO)
products; and considering HMO and PPO products combined. For each,
the study calculated the HHI,\12\ which measures the competitiveness
of a market overall,\13\ and, applying the 1997 Federal Trade
Commission/Department of Justice Horizontal Merger Guidelines
(Merger Guidelines), classified them as ``not concentrated,''
``concentrated,'' or ``highly concentrated.''\14\ The results form
the most extensive and accurate portrayal of the health insurance
market to date. And they confirm that in the majority of health care
markets competition has been severely undermined.
---------------------------------------------------------------------------
\12\ The HHl is the sum of the squared market shares of each
firm in the market. The more competitive the health insurance
market, the lower the HHI, The less competitive the health insurance
market, the higher the HHI. The largest value the HHI can take is
10,000 when there is a single insurer in the market. As the number
of firms in the market increases, however, the HHI decreases. For
instance, if a market has four firms, each with a 25 percent share,
the HHI would be 10,000 divided by 4, which equals 2500. The HHI
would continue to decrease with additional firms in the market.
\13\ The HHI is not a measure specific to any one firm, although
it is a function of each firm's market share, The DOJ uses the HHI
when evaluating the impact of a merger or acquisition on the
competitiveness of a market.
\14\ Markets with an HHI of less than 1000 are classified as
``not concentrated.'' The DOJ and FTC will generally not restrict
merger activities in these markets. Markets with an HHI between 1000
and 1800 are classified as ``concentrated.'' Under the Merger
Guidelines, a merger in one of these markets that raises the HHI by
more than 100 points may raise significant competitive concerns.
Markets with an HHI above 1800 are classified as ``highly
concentrated.'' A merger in a ``highly concentrated'' market that
raises the HHI by more than 50 points may raise significant
competitive concerns, and a merger that raises the HHI more than 100
points is presumed to be anti-competitive.
---------------------------------------------------------------------------
With regard to market concentration (HHI), the study found the
following:
In the combined HMO/PPO product market, 96 percent
(299) of the MSAs are highly concentrated.
In the HMO product market, 99 percent (309) of the MSAs
are highly concentrated.
In the PPO product market, 100 percent (313) of the
MSAs are highly concentrated.
With regard to market share,\15\ the study found the following
for each product market:
[[Page 49855]]
For the combined HMO/PPO product market:
---------------------------------------------------------------------------
\15\ The AMA measures market share of health insurers by
enrollment. The combined HMO/PPO market share of an insurer is the
sum of that insurer's HMO and PPO enrollment, divided by the total
HMO and PPO enrollment in the market, multiplied by 100. HMO market
share is that HMO's enrollment, divided by total HMO enrollment in
the market, multiplied by 100. Similarly, a PPPO's market share is
that PPO's enrollment, divided by total PPO enrollment in the
market, multiplied by 100.
---------------------------------------------------------------------------
In 96 percent (299) of the MSAs, at least one health
insurer has a market share of 30 percent or greater.
In 64 percent (200) of the MSAs, at least one health
insurer has a market share of 50 percent or greater.
In 24 percent (74) of the MSAs, at least one health
insurer has a market share of 70 percent or greater.
In 5 percent (15) of the MSAs, at least one health
insurer has a market share of 90 percent or greater.
For the HMO product market:
In 98 percent (306) of the MSAs, at least one health
insurer has a market share of 30 percent or greater.
In 64 percent (201) of the MSAs, at least one health
insurer has a market share of 50 percent or greater.
In 37 percent (117) of the MSAs, at least one health
insurer has market share of 70 percent or greater.
In 16 percent (49) of the MSAs, at least one health
insurer has a market share of 90 percent or greater.
For the PPO product market:
In 97 percent (304) of the MSAs, at least one health
insurer has a market share of 30 percent or greater.
In 76 percent (238) of the MSAs, at least one health
insurer has a market share of 50 percent or greater.
In 36 percent (112) of the MSAs, at least one health
insurer has a market share of 70 percent or greater.
In 9 percent (28) of the MSAs, at least one health
insurer has a market share of 90 percent or greater.
This study establishes, unequivocally, that competition has been
undermined in hundreds of markets across the country. Sadly, the
ultimate consumers of health care--patients--are not the ones
benefiting from the consolidation. To the contrary, patient premiums
have risen dramatically without any expansion of benefits, while
many health insurers have posted record profits.
Market Characteristics Indicating Absence of Meaningful Competition
In addition to high market share and market concentration, many
health care systems across the country exhibit characteristics
typical of uncompetitive markets and growing monopoly and monopsony
power. There are significant barriers to entry for new health
insurers in these markets. Large, entrenched health insurers are
able to raise premiums without losing market share. And dominant
health insurers are able to coerce physicians into accepting
unreasonable contracts.
Barriers to Entry Into the Market
Barriers to entry are relevant when determining whether a high
market share threatens competition in a specific market. Where entry
is easy, even a high market share may not necessarily translate into
market power, as attempts to increase price will likely be countered
by entry of a new competitor. On the other hand, where entry is
difficult, a dominant player is able to sustain profitability amid
significant price increases without fear of competition.
Most markets across the country currently display substantial
barriers to entry. Start-up health insurers must meet costly state
statutory and regulatory requirements, including strict and
substantial capitalization requirements. To do this, they must have
sufficient business to permit the spreading of risk, which is
difficult, if not impossible, in markets with dominant health
insurers. Indeed, it would take several years and millions of
dollars for a new entrant to develop name and product recognition
with purchasers to convince them to disrupt their current
relationships with the dominant health insurers. The DOJ underscored
the significant obstacles associated with entering certain health
insurance markets in United States v. Aetna, when it noted, ``[n]ew
entry for an HMO or HMO/POS plan in Houston or Dallas typically
takes two to three years, and costs approximately $50,000,000.\16\
Such market conditions represent insurmountable barriers for new
entrants.
---------------------------------------------------------------------------
\16\ United States v. Aetna. Revised Competitive Impact
Statement, Civil Action 3-99CV1398-H (N.D.Tex, 1999), available at
http://www.usdoj.gov/atr/cases/f2600/2648.htm.
---------------------------------------------------------------------------
Premium Increases
The ability of dominant health insurers to raise premiums and
remain profitable is another sign of excessive market power. This
practice harms small businesses, exacerbates access to care
problems, and contributes to the alarming numbers of uninsured. When
premiums rise, many employers stop providing coverage, reduce the
scope of benefits provided, and/or ask employees to pay a higher
share of the overall premium. In some cases, small businesses must
choose between growth and the provision of health insurance. Even
when employers continue to offer health plans, increases in
premiums, deductibles, and co-payments lead many workers to forego
their employer-sponsored health insurance. In fact, according to a
survey by the Agency for Healthcare Research and Quality, employee
health plan participation at large companies declined from 87.7
percent to 81 percent between 1996 and 2004.\17\ This declining
coverage puts an enormous strain on the health care system and leads
to otherwise avoidable expenditures for emergency care and other
medical services.
---------------------------------------------------------------------------
\17\ Fuhrmans, Wall Street Journal, 8-25-06.
---------------------------------------------------------------------------
The past several years have been marked by increasing health
plan premiums and profits. In 2007, premiums for family coverage
increased by 6.1 percent.\18\ In 2006, premiums increased by 7.7
percent and in 2005 premiums rose by 9.2 percent \19\--in all years
outpacing overall inflation by 3.5 to a full 5.7 percent.\20\
Cumulatively, the premium increases during the last six years have
exceeded 87 percent, with no end in sight. This is more than three
times the overall increase in medical inflation (28 percent) and
more than five times the increase in overall inflation (17 percent)
during the same period.\21\ This has directly led to an increase in
the number of uninsured, which currently exceeds 47 million, or one
in seven Americans. Notably, these increased premiums have not led
to corresponding increases in medical benefits.
---------------------------------------------------------------------------
\18\ Employer Health Benefits, 2007 Annual Survey, The Kaiser
Family Foundation and Health Research and Education Trust.
\19\ Strunk, et al, ``Tracking Health Care Costs,'' Health
Affairs (Sept. 26, 2001), W45.
\20\ Jon Gabel, et al, ``Job-Based Health Insurance in 2001:
Inflation Hits Double Digits, Managed Care Retreats,'' Health
Affairs (Sept/Oct. 2001), at 180.
\21\ Kaiser/HRET: Employer Health Benefits Survey, 2005 Annual
Survey.
---------------------------------------------------------------------------
Health insurers seek to deflect attention from their huge
profits by falsely asserting that physician payments are driving
recent premium increases. Such claims are baseless. While premium
levels have risen by double-digit amounts, physician revenues have
fallen. The median real income of all U.S. physicians remained flat
during the 1990s and has since decreased.\22\ The average net income
for primary care physicians, after adjusting for inflation, declined
10 percent from 1995 to 2003, and the net income for medical
specialists slipped two percent.\23\ In contrast, recent reports on
health insurer profits show that the profit margins of the major
national firms have experienced double-digit growth since 2001. In
fact, United and WellPoint have had seven years of consecutive
double-digit profit growth that has ranged from 20 to 70 percent
year-over-year. Thus, it is shareholders and health insurance
executives, not physicians, who are profiting within an
anticompetitive market at patients' expense.
---------------------------------------------------------------------------
\22\ Physician Income: A Decade of Change, Carol K. Kane, PhD,
Horst Loeblich, Physician Socioeconomic Statistics (2003 Edition),
American Medical Association.
\23\ Losing Ground: Physician Income, 1995-2005, Ha T. Tu, Paul
B. Ginsburg, Center for Studying Health Systems Change Tracking
Report No. 15 (June 2006).
---------------------------------------------------------------------------
Physician Bargaining Power
Growing market domination of health insurers is undermining the
patient-physician relationship and eviscerating the physician's role
as patient advocate. Physicians have little-to-no bargaining power
when negotiating with dominant health insurers over contracts that
touch on virtually every aspect of the patient-physician
relationship. This is particularly troublesome given physicians'
critical role as patient advocates in an environment where health
insurers have increasing control and limited accountability
regarding decisions that affect patient treatment and care.
Many health insurer contracts are essentially ``contracts of
adhesion.'' Contracts of adhesion are standardized contracts that
are submitted to the weaker party on a take-it or leave-it basis and
do not provide for negotiation. Many contracts of adhesion contain
onerous or unfair terms. In the health insurer context, these terms
may include provisions that define ``medically necessary care'' in a
manner that allows the health plan to overrule the physician's
medical judgment and require the lowest cost care, which may not be
the most optimal for the patient. They also frequently require
compliance with undefined ``utilization management'' or ``quality
assurance'' programs that often are
[[Page 49856]]
nothing more than thinly disguised cost-cutting programs that
penalize physicians for providing care that they deem necessary.
In addition to interfering with the treatment of America's
patients, many health insurer contracts make material terms,
including payment, wholly illusory. They often refer to a ``fee
schedule'' that can be revised unilaterally by the health insurer
and is not provided with the contract. In fact, many contracts allow
the health insurer to change any term of the contract unilaterally.
In addition, these contracts frequently contain such unreasonable
provisions as ``most favored payer'' clauses and ``all products''
clauses.
``Most favored payer'' clauses require physicians to bill the
dominant health insurer at a level equal to the lowest amount the
physician charges any other health insurer in the region. This
permits the dominant health insurer to guarantee that it will have
the lowest input costs in the market, while creating yet another
barrier to entry. ``All products clauses'' require physicians to
participate in all products offered by a health insurer as a
condition of participation in any one product. This often includes
the health insurer reserving the right to introduce new plans and
designate a physician's participation in those plans. Given the
rapid development of new products and plans, the inability of
physicians to select which products and plans they want to
participate in makes it difficult for physicians to manage their
practices effectively.
Despite the improper restrictions and potential dangers these
terms pose, physicians typically have no choice but to accept them.
Any alleged ``choice'' is illusive given that choosing to leave the
network often means terminating patient relationships and
drastically reducing or losing one's practice. Physicians simply
cannot walk away from contracts that constitute a high percentage of
their patient base because they cannot readily replace that lost
business. \24\ In addition, physicians are limited in their ability
to encourage patients to switch plans, as patients can only switch
employer-sponsored plans once a year during open enrollment, and
even then they have limited options and could incur considerable
out-of-pocket costs.\25\
---------------------------------------------------------------------------
\24\ The DOJ, in its 1999 challenge of the Aetna/Prudential
merger recognized that there are substantial barriers to physicians
expeditiously replacing lost revenue by changing health plans. It
also noted that this imposes a permanent loss of revenue. United
States v. Aetna, Revised Competitive Impact Statement, Civil Action
3-99CV1398-H (N.D. Tex, 1999), available at: http://www.usdog.gov/
atr/cases/f2600/2648.htm. The DOJ reiterated this position in its
challenge to the UnitedHealth Group/PacifiCare merger. See United
States v. UnitedHealth Group Inc., Case No. 1:05CV02436 (D.D.C. Dec.
20, 2005), available at http://www.usdoj.gov/atr/cases/f213800/
213815.htm.
\25\ See id.
---------------------------------------------------------------------------
Health insurers have even employed tactics to coerce non-
contracted physicians who have managed to preserve some level of
bargaining power, into signing contracts. For example, a number of
large health insurers are refusing to honor valid assignments of
benefits executed by a patient who receives care from a non-
contracted physician. This means that health insurers, rather than
pay the non-contracted physician directly, pay the patient for the
services provided. Similarly, many health insurers engage in the
practice of ``repricing'' of physician claims (including proprietary
claims edits and the use of rental network PPOs \26\), which results
in non-contracted physicians receiving less than contracted
physicians for the same service.\27\ These and other manipulative
practices are clearly designed to undermine any residual bargaining
power a physician practice might have, and further depress physician
payments.
---------------------------------------------------------------------------
\26\ A ``rental network PPO'' exists to market a physician's
contractually discounted rate primarily to third-party payers, such
as insurance brokers, third-party administrators, local or regional
PPOs, or self-insured employers. Rental network PPOs may also rent
their networks and associated discounts to entities such as
``network brokers'' or ``repricers'' whose sole purpose is finding
and applying the lowest discounted rates, often without physician
authorization.
\27\ ``Repricing'' practices and rental networks also deprive
contracting physicians of the benefits of their contracts when they
result in payment below the contracted fee schedule, These tactics
make it difficult for physicians to administer their practices and
undercuts efforts to make the health care system more transparent.
---------------------------------------------------------------------------
Monopsony Power
In a substantial number of markets across the country, dominant
health insurers have the potential to exercise monopsony power over
physicians to the detriment of consumers. Monopsony power is the
ability of a small number of buyers to lower the price paid for a
good or service below the price that would prevail in a competitive
market. When buyers exercise monopsony power in the labor market,
they exploit workers in the sense of decreasing fees below their
true market value. Monopsony power also has an adverse impact on the
economic well being of consumers as it results in a reduced quantity
of the firms' products available for purchase.
In the health insurance industry, health insurers are both
sellers (of insurance to consumers) and buyers (of, for example,
hospital and physician services). As buyers of physician services,
health insurers are acting as monopsonists--lowering the prices they
pay to a point at which physicians are forced to forego investments
in new technology, reduce staff and services, and even leave the
market, all of which inevitably lead to increased waiting times and
reduced access to care. Moreover, because health plans have posted
considerable profits without decreasing premiums, the benefits of
their ability, as a buyer of services, to lower the prices they pay
suppliers (physicians), have not been passed on to consumers.
In fact, the DOJ has recognized that a health plan's power over
physicians to depress reimbursement rates can be harmful to
patients--the ultimate consumers of health care. Such was the basis
for the DOJ's decision in 2005, requiring United to direst some of
its business in Boulder, CO as a condition of approving its merger
with PacifiCarc.\28\ Specifically, the DOJ noted that because
physicians cannot replace ``lost business'' quickly, the point at
which physicians are locked-into a managed care contract is
significantly lower than for other businesses.\29\ In the United-
PacifiCare merger, the DOJ found that where the merged company would
control 30 percent of physician revenues, the plan could exercise
monopsony power over physicians in a manner that would lead to a
``reduction in the quantity or quality of physician services
provided to patients.'' \30\
---------------------------------------------------------------------------
\28\ See United States v UnitedHealth Group Inc., Case No. I
:05CV02436 (D.D.C. Dec. 20, 2005), available at http://
www.usdoi.gov/atr/cases/f213800/213815.htm.
\29\ See id.
\30\ Ibid.
---------------------------------------------------------------------------
Health insurers with monopsony power can use the economic
benefits of reduced reimbursement in medical care to protect and
extend their monopoly position and increase barriers to entry into
the market. Thus, rather than producing ``efficiencies,'' increasing
monopsony power in health care markets across the country causes a
number of distortions in the market that harms patients by reducing
access to care.
Antitrust Law and Policy Restrictions on Physicians
Ironically, rather than focus on the health insurance industry,
which, as noted above, has boasted record profits and increased
premiums corresponding to recent waves of consolidation, regulators
have focused on physicians, the least consolidated segment of the
health insurance industry. This is confounding given the current
health insurer environment. Since April 2002, the FTC has brought at
least 25 cases against physician groups based upon contracting
arrangements with health insurers.\31\ All but one of the groups
chose to settle with the FTC rather than engage in a protracted,
financially devastating legal battle.\32\ These actions have had a
chilling effect on physician practices,
---------------------------------------------------------------------------
\31\ See FTC website at http;//www.ftc.gov/os/actions.shtm.
\32\ At the same time, the FTC has been extremely restrictive
regarding the ability of physicians to jointly negotiate with
insurers, approving only three arrangements. See http://
www.brownandtotand.com/publish/en/about/news_room/ftc_
information-Par-0005-DownloadFile.tmp/4.5FTCNotice.pdf(Brown and
Toland); http://www.ftc.gov/bc/adops/070618medsouth.pdf (MedSouth);
http://www.ftc.gov/os/closings/staff/070921finalgripamcd.pdf
(Greater Rochester Independent Practice Association).
---------------------------------------------------------------------------
Due to the significant burdens and responsibilities associated
with ``financial integration,'' the only other option currently
available to physicians is so-called ``clinical integration,'' as
described by the DOJ/FTC in their 1996 Statements of Antitrust
Enforcement Policy in the health Care Area. The agencies, however,
have provided little guidance on what exactly constitutes clinical
integration, other than to make clear that meeting the standard
requires several years of development and millions of dollars of
infrastructure investment; an option that is simply not feasible for
the vast majority of physicians who are not part of a large group
[[Page 49857]]
practice, hi fact, the few endeavors that have been approved have
been limited to large practices consisting of hundreds of
physicians.
Given the increasing power and size of health insurers and the
corresponding decrease in physician bargaining power, the policy
landscape that has resulted in aggressive antitrust enforcement
actions against physicians should be reexamined. Physician joint
contracting can make it possible to obtain ready access to a panel
of physicians offering broad geographic and specialty coverage. In
addition, non-exclusive physician networks pose no threat to
competition. Physicians can independently consider contracts
presented from outside the network. Likewise, health insurers that
cannot reach a ``package deal'' with a physician network can
contract directly with its physicians or approach a competing
network. Rather than restraining trade, the physicians will have
created an additional option for purchasers--a pro-competitive
result. Thus, the AMA believes that less restrictive approaches to
physician joint contracting will have pro-competitive benefits such
as greater flexibility, more innovation, and ultimately a better
health care system.
Conclusion
It is time for the federal government to address the serious
public policy issues raised by the unfettered consolidation of
health insurance markets. The current situation in Nevada is
emblematic of the total absence of boundaries and enforcement
applied to health plan mergers. The AMA's Competition Study and the
presence of market characteristics that typify dominant market
power, further prove that competition has already been undermined in
markets across the country. This has real, lasting negative
consequences for the delivery of health care in this country. Thus,
we strongly urge the House Small Business Committee to lay the
groundwork for reversing this dangerous trend toward a marketplace
controlled by a few health insurance behemoths by encouraging the
DOJ to enjoin the United-Sierra merger.
Testimony of Robert Hughes, President, The National Association for the
Self-EmployedHouse Committee on Small Business ``Health Insurer
Consolidation--The Impact on Small Business''
October 25, 2007.
As the representative of over 250,000 micro-businesses across
the country, the National Association for the Self-Employed (NASE)
is committed to addressing the issue of affordable health coverage,
which is the number one concern of our members and all small
businesses in our nation. I am hear to tell you that rising health
care costs are significantly hurting micro-business and impairing
their ability to grow. compete and succeed. in addition, the high
Cost of health coverage has serious personal consequences on
business owners and employees. Often times our members will
sacrifice saving for retirement, putting money aside for their
children's education, and addressing other personal needs to
redirect funds to health care Costs in order to stay insured. Of
course, the worst result of mounting premiums is dropping coverage
all together which puts their business, their family and themselves
at risk should they face a medical crisis.
The number of Americans living without health coverage rose in
2006 to 47 million, an increase of almost 16 percent over the
previous year. in a 2005 survey, the National Association for the
Self-Employed (NASE) found that a majority of micro-business owners,
those businesses with ten or less employees, do not have for
themselves nor offer a health insurance plan to their employees. The
smallest companies are most impacted, with only 14% of companies
that grossed less than $50,000 annually having health insurance
compared to 70% among those grossing more than $500,000 yearly. Most
alarming is the rate at which premiums for micro-businesses have
been increasing. In a similar health survey conducted by the NASE in
2002, micro-businesses indicated the median premium increase from
the year before was a little over 11%. However, in 2005 micro-
business owners were experiencing a median premium increase of over
17%, a substantial escalation.
Premium costs are the single most important factor that
determines whether a business owner will insure himself and provide
coverage for his/her employees. Most importantly, if a micro-
business owner cannot afford insurance for himself and family, he/
she will not likely provide health benefits to employees. The issue
of choice or lack there of in earner options plays a role in terms
of it's affect on price. Thus, the key question here today is if
increasing consolidation amongst health insurers are playing a role
in premium increases.
First, I would like to highlight that the self-employed and
micro-businesses purchase health insurance in two markets: the small
group market and the individual market. The definition of a small
group is determined by each state, though most define it as one with
50 or fewer employees. Firms in this size range looking to offer
access to health insurance for their employees will look to the
small group market for insurance options. However, of those
currently insured, the majority of self-employed and micro-
businesses have purchased individual health coverage. While micro-
businesses surveyed by the NASE indicate that they believe it is an
employer's responsibility to assist their employees with health
coverage, the high cost to both the business and the employee in
terms of cost sharing are the most significant barriers impeding
business owners from providing employees with coverage. Micro-
businesses may assist their employees with their health care costs
by setting up a Health Reimbursement Arrangement (HRA), contributing
to an HSA or increasing their take home salary to help employees pay
for individual insurance but a large percentage are not setting up
an employer-based small group health plan.
The health insurance options and number of carriers differ in
the individual and small group market. Most states have a suitable
number of insurance carriers with an array of coverage options
within the individual market. The small group market is much more
restrictive in terms of competition and availability. The NASE
believes that minimization of insurance carriers due to
consolidation compounded with the concern of high risk in this small
group segment and excessive state regulation leaves small businesses
with minimal options to setup a small group health plan and is a
factor contributing to high premiums in insurance markets.
A 2005 GAO report highlighted that the median market share of
the largest carrier in the small group market was 43%, up 10% from
2002. The five largest carriers in the small group market, when
combined represented three-quarters or more of the market in 26 of
co the 34 states that participated in the GAO study compared to only
19 of 34 states in 2002. Blue Cross and Blue Shield is by far the
giant in this sector, growing to 44% market share in all
participating states. To support the GAO findings, we see similar
depictions of lack of competition from a 2006 AMA study on the
nation's health insurance markets which found that 95 percent of
markets had a single insurer with a market share of 30 percent or
greater and 56% of markets had a single insurer with a market share
of 50 percent or greater.
From the data we see a notable dominance of a few carriers in
the small group market. Thus, the next question that begs an answer
is how this lack of competition is affecting premiums. Any micro-
business owner will tell you that competition plays a central role
in improving quality, spurring innovation and keeping prices down,
Thus, the NASE feels the lack of competition may be a vital element
in high premium costs in the small group sector. James C. Robinson,
PhD, a professor of health economics at the University of
California, Berkeley, School of Public Health, in an article for
Health Affairs revealed that between 2000 and 2003 health plans
raised premiums consistently above the rate of growth in costs. For
investors in private insurance companies, returns were tremendous
and Robinson states, ``the non-profit Blue Cross and Blue Shield
plans enjoyed financial results equal to or better than those of
their for-profit counterparts.'' (Health Affairs, Volume 23, Number
6) According to previous AMA testimony, in 2005 premiums for
employment-based insurance policies increased by 9.2 percent--
outpacing overall inflation by a full 5.7 percent. Cumulatively, the
premium increases during the last six years have exceeded 87
percent, which is more than three times the overall increase in
medical inflation (28 percent) and more than five times the increase
in overall inflation (17 percent) during the same period. (AMA
Testimony to Senate Judiciary Committee, 2006) Hence, we see that
premiums have consistently increased in the face of minimal
competition.
However, the NASE feels that the state regulatory climate plays
an even more critical role in keeping costs high and impairing
competition. State mandates on coverage in all markets increase the
cost of basic health coverage between from a little less than 20% to
more than 50% depending on the state. The Council for Affordable
Health Insurance
[[Page 49858]]
has identified that there are currently over 1,600 mandates in our
health care system. While mandates can make health insurance more
comprehensive, they also make it more expensive by requiring
insurers to pay for certain health services that consumers
previously funded out of their own pockets. It is likely that
insurers will push that added mandate cost into premium rates. The
cost that excessive mandates add to health coverage can mean the
difference between a micro-business owner just purchasing coverage
for himself or also providing it to his employees. Additionally, the
regulatory and statutory conditions in states have created barriers
that make it difficult for new carriers and new products to expand
into markets. Without new carriers or competing insurance products,
price will remain high when one insurance carrier dominates a
market.
Micro-business owners have long been a proponent of market-based
solutions for dealing with our health care system. However,
``competition without competitors will not deliver the desired
incentives for health care improvement.'' (Health Affairs, Volume
23, Number 6) We must increase competition in the small group market
to encourage lower premium costs which will spur micro-businesses to
seek to expand coverage to their employees. We must address
excessive state mandates and restrictive climates hurting
innovation. Additionally the NASE urges Congress to address the
disparities in the individual market since the majority of self-
employed business owners are purchasing individual health insurance.
Currently there are over 20 million non employer firms, in which the
owner must seek health coverage on the individual market. Thus,
addressing the inequitable tax treatment of health insurance for
those purchasing coverage on their own will also be a key step
forward to increasing access to health coverage.
The self-employed and micro-business community continues to be
the backbone of our nation's economy, therefore the NASE urges you
to take immediate action to alleviate the massive health cost burden
laid at their feet in order to ensure their survival and that of our
nation's economy.
Statement of the American Academy of Family Physicians
Submitted to the Committee on Small Business Concerning the Impact
of Health Insurance Consolidation on Small Business
Presented By James D. King, MD, FAAFP, President
October 25, 2007.
Thank you, Chairwoman Velazguez and Rep. Chabot. and the members
of the Small Business Committee for the opportunity to participate
in this hearing today. On behalf of the 93,800 members of the
American Academy of Family Physicians, we applaud your deep concern
for how the consolidation of health insurance plans affects family
physicians as members of the small business community, as
professionals and as small employers concerned about the effective
delivery of health care.
As described by the American Medical Association, the merging
and consolidation of health insurance plans has created a profound
imbalance adversely affecting the ability of physicians to negotiate
contracts with insurers to the detriment of physician practices.
This, in turn, has led to the inability of many of our patients to
locate a primary care physician who can accept their insurance and
still maintain financial viability.
The trend toward consolidation is persistent. The industry
analysts of investment bank Shattuck Hammond reported that between
1992 and 2006, the number of competitor consolidations resulted In
95 different payers shrinking to merely seven. According to the AMAs
2005 report on Competition in Health Insurance, in 280 U.S. markets,
30 percent or more of HMO and PPO lives are covered by the single
largest insurer in that market. Looking at the U.S. as a whole, only
two insurers cover a third of all commercially insured lives. This
market concentration gives these health plans excessive power in
determining the conditions of coverage, payment and practice.
Effects on Family Physicians
How does this consolidation affect family physicians? Let me
give you just two examples. In the Dallas/Fort Worth area, a 3-
physician group practice has a payer mix consisting of principally
three payers: 30 percent United Healthcare, 28 percent Blue Cross
and 18 percent Aetna. A solo physician practice in Colorado has 60
percent of the patients his practice insured by one commercial
payer, a situation that occurred as a result of a merger.
As a result of similar concentrations of payers, many family
physicians in small or solo practices have little leverage in their
negotiations with the health plans. As the physician in Colorado
noted when he attempted to make the case for a payment increase that
at least would cover inflation, he was told by the representative of
a large insurance company, As a solo physician, you are the weakest
economic unit and must take what we decide to give.'' Another family
physician noted that because small and solo practices cannot compare
financial data before they sign a contract, they find out afterwards
that their payment rates are substantially less than those of larger
groups that can negotiate better terms.
Further, health plans have no incentive to accede to any of a
physician's requests when the plan has the unilateral ability to
remove the physician from the network for not agreeing to the terms
of the contract and effectively denying that physician's patients
access to the practice. Physicians in this situation have little
choice but to sign whatever contract is offered by the health plans.
Many practices find it financially impossible to sacrifice a
significant part of their patient base to take a stand against
untenable contract provisions.
Declining Payment Rates and Terms of Agreement
The health plans use this negotiating power created by this
pattern of consolidation to dictate smaller payments and onerous
terms. In California, the mergers of PacitiCare Health Systems with
United Healthcare and WellPoint Health Networks/Blue Cross of
California with Anthem, Inc. have produced fee cuts of as much as 20
to 30 percent. According to a California Medical Association survey
of 500 state medical practices, 20 percent of 1,500 affiliated
physicians had terminated a Blue Cross contract or planned to do so.
By forcing practices to accept these cuts or lose their patients,
health plans are making it more difficult for patients to secure the
health care they need.
It is not only payment rates that cannot be negotiated, but the
terms of the agreement cannot be challenged. Health plans affect
every segment of the practice of medicine and compel treatment
decisions; for example, by requiring practices to use specific labs;
by determining which tests may be performed in the office; by
demanding the completion of multiple-page forms that reduce the
amount of time a physician has available for treating patients; and
by delaying payments by requiring responses to seemingly endless
trails of questions.
These requirements may enhance the profits of the insurer but
they create significant burdens for practices and patients. For
example, a family physician in practice outside a metropolitan area
in Ohio contracts with a health insurer who changed its national
laboratory arrangement that originally included two companies down
to a single, exclusive laboratory arrangement. This change caused
the insurer's enrollees to drive to the local hospital for lab
services rather than walk across the hail from the physician's
office to a duly qualified reference lab. If the physician had
referred the patients to the non-participating lab across the halt,
he or she could have faced fines by the payer.
Increased Un-Reimbursed Administrative Responsibilities
The insurance plans that have a large segment of the patient
population also pass back to the physician practice many of their
administrative responsibilities. According to a family medicine
office manager, each radiology notification and authorization
request now takes an average of up to ten minutes to perform with a
physician peer-to-peer request adding another 10 minutes. Another
physician in Arizona reported that these authorizations can often
take at least 40 minutes per procedure to receive approval from the
insurance plan. These administrative activities are not reimbursed
by the health plan and so they have no incentive to become more
efficient. The physician, in turn, is required to comply with time-
consuming health plan requirements that riot only are unpaid but are
increasing in a period of declining overall reimbursement.
Unilateral Contract Changes
Many contracts allow the health plan to unilaterally change the
contract terms at any time, without notifying the physician, simply
by posting the amended terms on the insurer's web site. Some
contracts specifically forbid the physician from disclosing
information about the fees that the
[[Page 49859]]
insurer pays to the physician, making it impossible for these
physicians to inform patients about their out-of-pocket
responsibility for deductible amounts under their policy. Few
contracts provide physicians with payment terms spelling out how the
fee schedule Will be calculated The result is more primary care
physicians are driven into other care settings, such as Emergency
Rooms or cash-only practices, or they leave health care altogether
due to these negative contract conditions, excessive administrative
requirements and downward pressure on their already slim margins.
Effect on Students and Residents
These contract imbalances concern not just the physician in
practice now who is struggling to keep her business open but also
the student who is looking at career options and deciding whether
primary care offers a stable future. The number of medical students
choosing family medicine and primary care has been declining for
several years. Medical student debt averages over $200,000 upon
graduation and the potential earnings has a strong effect on the
student's choice of specialty. Patients' access to primary care will
ultimately be reduced as more medical students choose nonprimary
care residencies because of the financial uncertainty and
instability of the current situation.
Effect on Small Business Community
It is important to note that the result of health plan mergers
and consolidation is not the achievement of economies of scale that
might be expected. Such economies would produce lower consumer
premiums, which would make it possible for more small businesses,
including small medical practices, to afford to offer health
insurance to their employees. Instead, consolidation produces larger
insurance companies wielding the kind of power and influence that
leaves physicians helpless and frustrated. As a result, small
businesses are not offered more affordable prices for their
employees' health plans but rather fewer choices of physicians who
will accept the plans that are offered.
Effect on Patients
The payment rates that the health plans dictate are unrelated to
the quality of care that the physician provides to their patients. A
family physician in Arizona notes that he has been honored several
times as the best physician in the state and has over 100 other
physicians among his patients. He receives the highest rating
possible from his health plans for both quality and efficiency.
Nevertheless, he is taking more than $100,000 out of his savings
each year to stay in practice because he is unable to negotiate
higher payment rates with the insurance companies. This situation is
not only unfortunate, but it is also clearly unsustainable, If he is
forced to close his practice, his patients will have lost that long-
standing source of high-quality treatment, care coordination and
preventive services in which they have place their faith and trust
and upon which they have retied and depended. This is a sad
statement of how we as a nation have allowed our health care
priorities to be contaminated
Effect on Quality
Finally, the most serious effect of this rapid consolidation is
to undermine the great potential for efficiency and quality
improvement offered by what we are calling the patient-centered
medical home. As proposed by family medicine, internal medicine,
pediatrics and the osteopathic primary care physicians, the medical
home is the practice that has been transformed to offer
comprehensive, continuous, coordinated care. Experience with health
systems based on primary care that exist in other industrialized
nations amply demonstrates the value of a medical home. These
practices provide guidance, assistance and responsiveness to
patients navigating an increasingly complex health care system. But
the patient-centered medical home depends on a long-term
relationship between the physician and the patient, which is
threatened and possibly destroyed if an insurance company dictates
the terms of practice of medicine and preempts the patient's freedom
of choice.
Conclusion
The AAFP recommends changes in existing anti-trust laws that
will provide physicians with tools thai allow them to be true market
participants. The current anti-trust laws were established during a
very different competitive environment. Under these outmoded laws,
physicians are barred from discussing the financial aspects of their
practice with any entity unrelated to their practice, yet it is
ciear that insurance companies ``price to the mean'' which is how
the natural competitive forces are supposed to work and is what
creates a dynamic market. Small and solo practice primary care
physicians are excluded from that very basic business condition
while market share and shear economic strength foster these near
monopolistic insurer behaviors.
Again, AAFP commends the committee for highlighting the issues
resulting from health insurance consolidation. Family physicians,
many of whom provide health care in small and solo practices in
rural and other underserved areas, feel the effects of insurance
consotidation by trying to negotiate in a very disadvantageous
environment. The Academy would like to work with all stakeholders to
ensure a path to an improved health care system that puts the
patient first and supports the sustainability of a practice that
delivers high quality primary care; toward a system that places an
emphasis on personalized, coordinated, primary care and that enables
such patient-centered practices to fairly compete. One step in this
direction would be to enact common sense changes that would
modernize anti-trust laws to better support small business medical
practices and to enable them to negotiate contracts with insurers
from a position of equality.
Thank you for the opportunity to provide this testimony and I
look forward to answering your questions.
Statement of James R. Office, Vice President and General CounselVictory
Wholesale Group Springboro, OH
On Health Insurance Consolidation--The Impact on Small Business
Before the Committee on Small Business, U.S. House of
Representatives, United States Congress
October 25, 2007.
Victory Wholesale Group (``Victory'') appreciates the
opportunity to submit these comments. The rising and out-of-control
increase in health costs, which are largely due to consolidations in
the health care industry, is a very important subject to us and
every other small business across America. One of Victory's largest
expenses is for the health care coverage it provides to all its
employees, who are called associates.
About Victory Wholesale Group
Victory is a group of family owned, separate companies; the
first established in 1979. Our businesses include: a wholesale
distributor of dry grocery, health and beauty care and general
merchandise, with 83 employees in Ohio, 24 in Florida, 6 in Nevada,
10 in California and 17 people in 13 other states; a food marketing
company with 6 people in Connecticut and 24 employees in 12 other
states; a public warehousing business with 104 employees in two Ohio
locations; a contract packaging business with 17 Ohio employees; an
interstate trucking company with 4 Florida, 27 Ohio and 9 employees
in 5 other states; a pharmaceutical wholesale distributor with 100
employees in Puerto Rico; a fundraising gift distributor with 16 New
York employees and a promotional item distributor with 5 Ohio
employees.
Victory's Health Insurance Benefits
Health insurance is the largest and most costly benefit that
each of Victory's companies provides its associates. Insurance
type's range from self-insured health plans, governed under ERISA,
to fully insured health plans provided by large regional health
insurers. Our companies maintain multiple health care programs, to
help reduce costs and foster competition among providers, because of
the widely dispersed locations of our business operations and the
regional nature of health insurance providers and their support
networks.
Why Victory Maintains Different Health Plans and Victory's Experience
Because Victory has employees and operations across the country,
we've been unable to find a single, affordable health care plan that
will cover all our separate businesses and associates. Over the
years Victory has tried different types of health plans including:
self-insured and fully-insured, including PPO's and HMO's. Our
objective is to provide a valuable and quality health benefit that
allows associates as much free choice in selecting health care
providers as reasonably possible while also controlling costs for
everyone.
It has been Victory's experience, that if a health plan has one,
or more, participants with a serious or major health condition its
competitive choices and alternatives disappear, and its premiums are
increased.
[[Page 49860]]
Also we have found that the deepest and best discounts are
offered through regional providers and networks of preferred
providers that have hospitals, doctors and other health care service
providers, that combine into a single entity to provide health plans
with agreed pricing or discounts in exchange for the health plan
steering its employees to the network. Networks are either regional
with large numbers of local doctors and hospitals as members, or
national with more limited numbers of doctors and hospitals, or that
offer smaller discounts.
We find that controlling health care costs is nearly impossible;
that the health care industry is both fragmented, yet concentrated.
It's loaded with administrative costs, it's inefficient, it's not
measured or accountable for quality or value. In the present system
the best way to control costs is to have only young, healthy
employees.
Consolidation and affiliation of hospital and physician groups
standardizes patient medical information and makes it available and
easily accessible to all affiliated providers that may treat the
patient; but on the negative side, it creates a concentrated front
to impose increases on health insurers or to resist providing
discounts.
We find that insurance carriers' quotes end up largely
``experience rating'' our group's claims experience. That means they
take our actual costs, add the insurance company's overhead and
their desired profit and that is the premium we are quoted. We can't
find plans that cover all our locations with any meaningful
provider's networks or discounts. Thus we are forced to shop on a
local basis from a limited number of carriers for separate groups
with small numbers of employees.
Further, we found that in most of the regions in which we sought
quotes there were only one or two dominant insurers that essentially
controlled each local market. And to make matters worse, those
regions also were dominated by one or two major hospital and
physicians affiliated groups.
Additionally, we found that some carriers, through pricing,
force small businesses to take a pre-set benefit or networks. We
have found that changing networks can be very disruptive to
employees and their families (and company administration). Changing
a network might require a participant to find new doctors and go to
hospitals that they are unfamiliar with. In designing our benefits
we try to the extent possible to minimize disruptions to our
associates' choice of providers.
We were faced with increasing cost, less choice, multiple plans
and a whole bunch of administrative problems managing the programs.
Today's health care system is largely a pass though of all costs to
employers and individual participants/insureds.
We have learned that sometimes an insurance carrier will ``buy
market share'' by offering low prices to new groups and then
dramatically increase premiums or change the benefits on renewals.
When an insurer ``buys a market'' through price discounts, it often
chases competition out of the market thus allowing the insurer to
later increase prices without opposition.
As most small businesses can attest, in a year following any
significant claim(s), it becomes virtually impossible to switch
providers or to receive competitive quotes at renewal. Even with
competition, in the regions where we have operations, we find they
are dominated by only two large carriers; thus limiting our choices
because both carriers were expensive, only one was more so.
Consolidation in Southwest Ohio
We have a large number of associates in Southwest Ohio
(Cincinnati and Dayton, areas). Once there were a number of
independent physician practices and independent hospitals. Over the
past 15 years, through several consolidations, we found that
Dayton's five primary hospitals became essentially two through
affiliations (excluding Children's Medical Center).
For more than a year recently, one major hospital in Dayton (and
the physicians who maintained privileges only at that hospital)
refused to accept the pricing the larger of only two regional health
insurers was demanding. So, the two entities parted ways. Our
associates living in the neighborhoods surrounding that hospital
were forced to find new doctors and use new hospitals on the other
side of town. Our choices and those of other small businesses during
that year were further reduced because the other big regional health
insurer did not cover a major portion of the geographic region in
which our employees lived. As employers, we faced the additional
disruption that employees go through when they were forced to use
new doctors and hospitals outside their own neighborhoods.
In Cincinnati a similar thing happened. 13 Hospitals became 3
through affiliations (excluding Children's). In both regions
physician practices were purchased, consolidated and affiliated with
one of the large hospital affiliated groups and now they are large
enough to stand up to the insurers in the area and resist pricing
pressures.
Throughout Southwest Ohio, the few large hospital and affiliated
physician groups have been successful at increasing their prices by
threatening to again ``kick out'' one or both of the only two very
large regional health insurance companies that wanted discounts or
reduced increases. This was at the expense of the employees of small
businesses in the entire area that have been forced to pay the
higher rates. Small businesses lack the necessary clout to use
against either the medical providers or insurers.
The message remains the same, small businesses' choices are
reduced and prices are increased without any meaningful competition.
The market today for small business health insurance is essentially
``take it or leave it.''
Don't Underestimate the Impact of Discriminatory Underwriting in the
Small Business Market
Another phenomenon that we now face is that our insurance
carriers engage in discriminatory pricing and/or coverages. In years
when our associates and their families were generally healthy our
premiums rose consistent with reported national average increases.
However, in recent years we've had some associates with serious
health problems. In the case of our fully insured plans, our
premiums have increased well beyond the national averages and we
have been unable to get competitive insurers to quote the group.
(Examples of serious health problems include: organ transplants,
heart problems, cancer, stroke, aneurysms, premature childbirth and
conditions that can be treated with very expensive drugs such as MS
(Victory has seen pharmaceuticals costing as much as $20,000 per
month).
In our self-insured health plans, our excess insurers would
simply delete the ill participant from our group (it's called
``lasering out'' a patient or condition). For example, the premium
for our excess insurance would still increase. In addition, the
carrier would tell Victory that we would have to cover the first
$50,000 or $75,000 of a particular individual's health costs. Again,
while we might get quotes from excess carriers, we found that they
all generally behave the same as it relates to individuals facing
serious health problems. I would describe this concept as insurance
companies only wanting to insure healthy groups.
One of Victory's smaller businesses has a number of older
associates with many of the ailments that go along with age and they
are paying a higher premium than any of our other groups. This
particular business employs fewer than 20 associates and it is stuck
with our incumbent regional carrier. Whenever we can get quotes from
carriers willing to quote this group, they are always higher, or
exclude afflicted associates or they adjust the benefits to include
unreasonable limitations on benefits--such as a 40% co-payment on
non-formulary brand name drugs without any cap. If an associate has
MS and their medications costs $5,000 month, 40% would be $2,000 a
month. That cost is simply not affordable so the treatment is
discontinued or less effective treatments are used.
We have found that even former associates electing coverage
under COBRA can and do have an impact on health insurance costs if
the individual has a serious health condition. Former associates who
have existing medical problems often find they have no choice but to
continue with coverage under COBRA because they are unable to obtain
affordable health insurance elsewhere. Consolidation in the industry
has compounded the problem, by reducing the number of available
insurers to whom an individual can even apply for coverage.
Another unexplained phenomenon is that if a group is turned down
or priced by one carrier at a premium, it seems like every other
carrier in the region somehow learns of this which makes it more
difficult to find alternatives.
Victory has also seen a number of conflicts in the industry that
are generally hidden from its insureds. For example one of our PPO
networks receives undisclosed payments from the doctors and
hospitals that are subscribers. When we inquired as to why they
received these payments, and whether these payments were passed
though to Victory by way of discounts, we were unable to get an
answer. It was strongly suggested by
[[Page 49861]]
our broker not to push the issue. Are these payments made to keep
the network from demanding deeper discounts? What about hospital and
treatment centers that are owned by physicians. Why are these
arrangements hidden? In the end they can stifle competition, cost
and choice.
Victory's experience is that the health insurance industry
covertly or otherwise discriminates against small business and
individuals that have significant health problems. Small businesses
have no market power or advocate for the wrongful conduct, so large
and powerful regional health insurance and hospital/physician
affiliates stand to lose nothing by engaging in this conduct.
How do small businesses control health care costs today?
Unfortunately this proves to be an exercise of the lesser of a
number of evils, few that the small business can control. Each year
at our annual health insurance renewals, we get a quote from our
broker that first shows the price of keeping the same health
benefits for the upcoming year. From an employer standpoint this is
the least disruptive to the employees and their families (and
business administration). Unfortunately, in our experience, this
usually includes a cost increase. So our broker then offers a series
of options to either keep the cost the same as the previous year or
reduce the increase in cost for the upcoming year. These options
include:
Increasing the amount of premium that each associate
pays;
Increasing co-payments and/or deductibles;
Impose charges on unhealthy lifestyles, such as smoking
or obesity premiums;
Reduce and/or eliminate benefits;
Modifying benefits and provide financial incentives (or
disincentives as the case may be) to use modified benefits \1\;
---------------------------------------------------------------------------
\1\ For example, last week in our annual health insurance
renewal, our broker suggested that we encourage our associates to
have elective surgical procedures performed overseas. We were
advised that even paying for travel for two, treatment and recovery
at what was described as Four Seasons like heath care facilities
that cater to westerners; we would save tens of thousands on
elective surgical procedures. We were informed, for example, that a
single knee replacement that costs approximately $30,000 in the
Midwest would cost under $5,000 inclusive of travel for two in
Singapore. Victory is not ready to mandate its associates travel
thousands of miles and away from their families and loved ones to
obtain health care, however it is difficult not to seriously
consider the potential savings.
---------------------------------------------------------------------------
Be very selective in hiring employees--i.e. hire only
healthy employees \2\;
---------------------------------------------------------------------------
\2\ Victory doesn't engage in, support or condone this practice;
however, we understand that the practice is not uncommon.
---------------------------------------------------------------------------
Incorporate a Health Savings Account or Health
Reimbursement Account into the plan design (higher deductible and
lower benefits); and/or
Eliminate offering employer provided health insurance.
Conclusion
Historically small businesses make up the backbone of our
nation's employers. Collectively small businesses employ the largest
number of people in the U.S. Yet, because each company is small, we
have almost no market clout to help bring changes into the health
care system. For improvements we must depend on you in the Congress.
Reduced competition in health care at the insurer level or the
provider level has increased the costs of health care to Victory and
its employee-associates as well as those of other small businesses.
Solutions must include some meaningful competition. Pooling and
sharing of risks without selective health screening, will advance
competitive pricing. Keeping a multiple payer and provider system
gives greater flexibility to experiment and discover ways to improve
our health care system, A single payor or socialized plan will put
all of our nation's eggs in one basket, which certainly disfavors
innovation and experimentation. On paper our present system should
work, but because of inefficiencies and gaming, it doesn't.
Victory appreciates the Committee on Small Business review of
this important issue and the opportunity to present its views on the
topic. We thank you for the invitation to present our views. We hope
that the Committee and U.S. Congress will take our comments along
with the comments from fellow panel members and others, seriously
and not make this just another political battle without substantive
change. Small business and the tens of millions of their employees,
and your constituents will suffer.
The problems are complex and involve a large number of
interested parties; political pressure will be exerted by the well-
funded. Let's work toward a solution and show the world that we can
not only put humans on the moon, but we have the intelligence and
creativity to fix a broken, expensive and complex system of
delivering health care.
Testimony of Greg Scandlen, President, Consumers for Health Care
Choices
``Health Insurer Consolidation: The Impact on Small Business''
Committee on Small Business, United States House of Representatives
October 25, 2007.
Madam Chairman, and Members of the Committee,
Thank you for the opportunity to share some thoughts with you
today about the problems created by excess concentration in the
health insurance market.
I am Greg Scandlen. I am the founder and president of Consumers
for Health Care Choices, a national, non-profit and non-partisan
membership organization with members in 44 states. I have been in
health policy since 1979 when I was hired by Blue Cross Blue Shield
of Maine to rewrite their contracts in plain language. I spent 12
years in the Blue Cross Blue Shield system, including 8 years with
the national association where I was responsible for state
government relations, including being liaison with the National
Association of Insurance Commissioners, National Governors'
Association, National Conference of State Legislatures, and other
organizations of state officials.
I left the Blues in 1991 to organize a trade association of
smaller insurance companies, the Council for Affordable Health
Insurance. I ran that organization for five years and left to become
a consultant and a researcher for several national think tanks.
I applaud this committee for its long-standing interest in the
health insurance market, especially for small employers. For many
years surveys have shown there is no greater issue weighing on the
minds of small business owners, but now we are seeing that the issue
has gone from being a worry of business owners to a crisis in health
policy as fewer employers are able to offer coverage at all. The
latest Kaiser Family Foundation survey (available at http://
www.kff.org/insurance/7672/index.cfm) found that the percentage of
the smallest employers (with 3-9 employees) offering any coverage
has dropped from 57% in 2000 to 45% today.
This fall-off of enrollment is usually attributed simply to
rising costs, but I think it is deeper than that. I think both
employers and employees look at the health insurance market and find
products and services that are over-priced, inefficient,
unaccountable, inconvenient, and incomprehensible. They simply do
not find value here and they don't see many available alternatives.
This indifference to customer needs and preferences is
characteristic of non-competitive markets. Vendors see little need
to innovate, cut costs, improve services, or simplify processes
because everyone else is offering the exact same product at the
exact same price. Customers are stuck.
The Consequences of Excessive Regulation
This non-competitive market is not an accident of history and it
is not inherent in health insurance. I was closely involved in the
small group reform efforts of the NationalAssociation of Insurance
Commissioners (NAIC) in the late 1980s. I knew the commissioners and
the staff of the committees that developed the NAIC's model laws and
regulations quite well, and they were very explicit about their
intentions. They said at the time the reforms they were proposing
would do nothing to lower costs or increase access. All they wanted
to do was ``stabilize the market.'' In their view, the small group
market was suffering from an excess of competition that was
confusing to purchasers. They thought it would be better if there
were only three or four competing companies in each state.
They have been wildly successful. In my state of Maryland there
are now just two companies controlling 90% of the small group
market. Options are few and prices are high. Individual coverage is
a far better deal in Maryland, and in most other states, than small
group coverage. That is part of the reason small employers are
dropping group coverage--they and their employees can get a better
deal with individual insurance.
The regulations imposed on the small group market included some
that were later made industry-wide by Congress when it enacted
HIPAA. but also a host of other regulations that discouraged
participation in this market--rating restrictions, underwriting
restrictions, minimum participation and employer contribution
requirements, bans on list billing, standardized benefit designs,
requirements on provider participation,
[[Page 49862]]
claims approval and claims review requirements, capitalization and
reserve requirements, investment restrictions, minimum loss-ratio
standards, market conduct requirements, and of course, state-
mandated benefits.
All of these regulations, however well-intentioned, add to the
cost of coverage. Moreover, many carriers found it expensive and
difficult to comply with all the varying requirements of many
different states, especially as the requirements changed from year
to year. As a consequence, many carriers decided to get out of the
health business and sold off their blocks of business to larger
carriers who could afford the compliance costs. This is the primary
cause of concentration in this market.
Is Concentration a Good Thing?
Now, some people will argue that this concentration is a good
thing, but these arguments are based on a poor understanding of
insurance markets. Let me explain.
Risk Pooling
People often argue that the purpose of insurance is to pool
risks, so the bigger the carrier, the better. Too much competition,
they say. ``segments the market'' and loses the benefit of the
pooling mechanism.
Risk pooling is indeed an essential function of insurance, but
all of the benefits of pooling are achieved with a relatively small
number of people. The optimal size of a risk pool is frequently
debated among actuaries and depends on a host of factors (See, for
instance, www.sonoma-county.org/health/ph/mmc/pdf/models.pdf), but
most of the beneficial effects of pooling can be achieved with as
few as 25,000 covered lives. It is simply not the case that bigger
pools are better.
Economies of Scale
Similarly, people argue that bigger is better to achieve
economies of scale. Fixed costs can be spread across a larger
population, lowering the cost to each individual.
Again, the argument is valid--as far as it goes. But at a
certain point there will also be dis-economies of scale and
managerial inefficiency. Where that point is, is open to debate. The
graphic below is taken from Risk Pooling in Health Care Financing:
The Implications for Health System Performance, by Peter C. Smith
and Sophie N. Witter, both of the Centre for Health Economics at the
University of York, York, UK, and published by the World Bank in
2004 (available at http://extsearch.worldbank.org/servlet/
SiteSearchServlet?q=risk%20pooling).
It illustrates two things:
1. The advantage of risk pooling levels off at a certain number
of covered lives;
2. There are substantial dis-economies of scale beyond a certain
number.
QuickTimeTM and a TIFF (LZW) decompressor are needed
to see this picture.
Adverse Selection
Finally, people will argue that having a wide selection of
health coverage choices invites ``adverse selection,'' that is,
people of like-risks will segment themselves into different health
plans, with the healthiest going into one with minimal benefits and
the sickest going into the one with the richest benefits. They say
it would be fairer to allow only rich benefits so that the healthy
will subsidize the preferences of the ill.
Certainly selection happens but it can be manageable, as we have
seen with FEHBP. Plus, the flip side of adverse selection is moral
hazard. If it is true that high-risk people will select the richest
benefit programs, it is also true that low-risk people who are
placed into rich benefits programs will use more health care
services than they otherwise would, raising the costs of coverage
for all. In either case, the presence of insurance distorts normal
consumer behavior. ``Fairness'' is not served by forcing people to
purchase benefits they have no use for, and that is one of the
reasons so many small employers are not buying coverage at all.
Innovation Needed
These criticisms all assume that there is a single type of
health insurance coverage that is most suitable for all people, but
as Clark Havighurst and his colleagues at the Duke Law School have
found, the type of comprehensive coverage that is most common today
is aimed at the well-educated elite and is in fact subsidized by
lower-income working people who derive little value from the
coverage. In a recent special edition of Law and Contemporary
Problems, (available at http://www. law.duke.edu/journals/
journaltoc?journal=lcp&toc=lcptoc69autumn2006.htm). Mr. Havighurst
says, ``lower-income insureds get less out of their employer's
health plans than their higher-income coworkers despite paying the
same premiums.'' He argues that over-regulation prohibits the
offering of more modest benefit packages that would have greater
appeal to the same lower-income workers who have little ability to
influence the regulators. He adds that the current system ``greatly
amplifies price-gouging opportunities for health care firms with
monopoly power.''
One exception to this situation has been the introduction of
Health Savings Accounts (1-ISAs), a very modest innovation that
appeals to some segments of the market that did not find value in
comprehensive coverage. By some measures, between 30 percent and 40
percent of the non-group and small group purchasers of HSAs were
previously uninsured (see, for example, HSAs and Account-Based
Plans: An Overview of Preliminary Research, 6/28/2006, available at
http://www.ahipresearch.org/), suggesting that they did not find
value in the comprehensive plans that used to be the only option.
But HSAs are only one small example of the potential for
innovation in the benefits market. Another can be found within the
Medicare program. Medicare's Special Needs Plans (SPNs) have had
very promising success in designing benefits specifically for
subsets of beneficiaries, such as people with chronic conditions.
(See, for example, Managed Healthcare Executive, ``Medicare
Advantage Plans establish SNPs to provide care to dual eligibles,
high-risk patients,'' http://mhe.adv100.com/mhe/article/
articleDetail.jsp?id=322943). This is a major departure from
conventional practice where health plans typically try to avoid
high-risk people with costly conditions. These Special Needs Plans
welcome them and design benefits for them that will lower the cost
of their care.
Another potential innovation was designed by a recently deceased
member of my organization, James Pendleton, MD. The ``Pendleton
Plan'' (available at http://www.chcchoices.org/articles.html) is
aimed at costly hospital inpatient care. It is like a Schedule of
Allowances benefit structure based on average hospital costs in an
area, but it also includes graduated co-payments or rebates if the
patient chooses a facility that is more or less expensive than the
average. This plan has not yet been brought to market, but several
insurers are interested in it and may try it out on a demonstration
basis.
I am familiar with several other entrepreneurs who are working
on unique benefit designs and trying to raise the capital to turn
these ideas into reality. But they are discovering very significant
barriers to entry in the small group market imposed by the
regulatory system. They are likely to focus instead on the large
group market that has relatively few regulatory barriers at this
time.
Creating a More Competitive Market for Small Group Coverage
There is a lot that has to be done to restore competition in
health insurance. Anti-trust enforcement is one aspect, and my
organization was concerned enough about the recent United/Sierra
merger in Nevada to ask the Department of Justice to reject the
merger. In our letter to the Attorney General (March 26, 2007) we
wrote:
We have no opinion about the companies themselves. Whether they
are good or bad or something in between is irrelevant to us. The
question to us is solely whether this merger increases or decreases
competition and consumer choice. This is the same standard we would
apply to any other merger proposal, between hospitals, between
pharmaceutical manufacturers, or any other aspect of the health care
system.
Consumers need more choices, not fewer. There is already far too
much concentration in the hands of a few giant players in health
care. Greater concentration means less competition and that is bad
for consumers.
Indeed, concentration is rife throughout the health care system
with mergers of not only insurers, but hospitals and pharmaceutical
companies as well.
The health plans will argue they need to become more
concentrated to deal with the rising concentration of these other
actors. But hospitals argue they need to merge to deal with the
rising concentration of the carriers. It is a spiral that is quickly
leading to near-monopolization throughout health care, to the
detriment of individual consumers.
Anti-trust action can forestall the most egregious of these
mergers, but anti-trust does not create new competitors or encourage
innovation if the artificial barriers to entry are high and the
regulatory environment unfavorable, Indeed, anti-trust cannot
prevent a company from going out of business in an unprofitable
climate.
We also do not expect many states to relax their regulatory
burdens. Some have, but it is
[[Page 49863]]
unusual for legislatures to admit errors and repeal laws. Plus, most
of these regulations have constituencies that will tight to retain
them. These constituents often include the remaining health plans
that enjoy their near-monopoly position and do not want to encourage
new competitors.
That leaves only two courses of action for Congress.
1. Allow the interstate purchase of health insurance. States
would continue to regulate their domestic carriers, but buyers would
be able to purchase coverage from any licensed carrier in the United
States. Congressman John Shadegg sponsored legislation (H.R. 2355)
in the last Congress to do just this. Small business owners would be
able to purchase coverage according to, not only the reputation and
integrity of the insurance company, but also the set of regulations
that apply to it.
2. Create an alternative federal charter that carriers could
choose to operate within. This would be like the current banking
system where banks can choose to be state chartered or federally
chartered. A state chartered insurance company would be confined to
operating within that state, but a federally chartered company could
operate anywhere within the United States.
In either case, Congress would restore the intent of the
interstate Commerce Clause of the Constitution, which vested the
regulation of interstate commerce solely in Congress. Congress ceded
its authonty to the states in 1946 when it enacted the McCarran-
Ferguson Act, but there is no reason Congress cannot reclaim some or
all of that authority, as it did when it enacted ERISA in 1974.
Conclusion
The small group market for health insurance has become
dysfunctional over the past twenty years. Excessive regulations,
though well-intentioned, have resulted in oligopoly conditions that
have led to higher prices, poorer services, and very few choices.
Consumer choice is meaningful only when there is a wide variety
of products, services, and vendors from which to choose. We
desperately need vigorous competition throughout the health care
system to restore market discipline and encourage innovation.
Congressional remedies are limited, but are needed because the
states have failed to get the job done.
Statement of Consumer Federation of America, Consumers Union, and US
PIRG
To the Committee on Small Business, United States House of
Representatives, Regarding Health Insurer Consolidation
October 25, 2007.
Consumer Federation of America, Consumers Union, and US PIRG
(``consumer groups'') appreciate the opportunity to present our
views to the Committee on Small Business on health insurer
consolidation. We commend the Committee for holding this hearing and
for its efforts in identifying ongoing conduct that may harm the
competitive marketplace. This hearing puts a spotlight on issues
critical to consumers and small businesses throughout the United
States. An unabated flood of health insurance mergers has led to
highly concentrated markets, higher premiums, and lower
reimbursement. Skyrocketing premiums have put insurance out of reach
for millions of consumers and the number of uninsured Americans has
increased to critical levels: over 89 million or one out of three
Americans under age 65.\1\ As consumers have suffered from egregious
deceptive and anticompetitive conduct by insurance companies, those
companies have recorded record profits. The problems presented could
not be more stark or have a more severe impact on consumers.
In the past decade there have been over 400 health insurer
mergers and in only two cases has the Department of Justice brought
any enforcement action. The Justice Department has not brought any
cases challenging anticompetitive conduct by health insurers, even
though numerous private plaintiffs and State Attorneys Generals have
challenged this type of conduct. In effect, the insurance companies
have gained a newly found ``antitrust immunity.''
The consequences of lax enforcement for consumers are clear. The
American Medical Association reports that 95% of insurance markets
in the United States are now highly concentrated and the number of
insurers has fallen by just under 20% since 2000. These mergers have
not led to benefits for consumers: instead premiums have
skyrocketed, increasing over 87 percent over the past six years.
Patient care has been compromised by the over-aggressive efforts of
supposed managed care, and the number of uninsured Americans has
reached record levels.
A vital component to assuring the competitive marketplace is
protecting the ability of consumers to choose between alternatives.
Antitrust enforcement against anticompetitive mergers and
exclusionary conduct is essential to a competitive marketplace. This
unprecedented level of concentration and the lack of antitrust
enforcement pose serious policy and health care concerns. As Vermont
Senator Patrick Leahy observed in Hearings before the Senate
Judiciary Committee last year on health insurance consolidation:
\1\ See Wrong Direction: One out of Three Americans are
Uninsured (Families USA 2007).
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a concentrated market does reduce competition and puts control
in the hands of only a few powerful players. Consumers--in this case
patients--are ultimately the ones who suffer from this
concentration. As consumers of health care services, we suffer in
the form of higher prices and fewer choices.\2\
---------------------------------------------------------------------------
\2\ Statement of Senator Patrick Leahy, Hearing on ``Examining
Competition in Group Health Care'' U.S. Senate Committee on the
Judiciary (Sept. 6, 2006).
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Congress is currently grappling with the severe problems of the
uninsured. The number who have been uninsured for some period in any
two year period has increased by over 17 million since 2001 and now
amounts to over 89 million Americans. The reason is simple: the cost
of health insurance has outstripped the pocketbooks of both
consumers and small businesses.\3\ Premiums for both job-based and
individual health insurance have risen rapidly over the past seven
years and have increased by double-digit amounts annually since
2001. Moreover, these rising premiums have far outstripped increases
in worker earnings. Between 2000 and 2006, premiums for job-based
health insurance increased by 73.8 percent, while median worker
earnings rose by only 11.6 percent.
---------------------------------------------------------------------------
\3\ Families USA study at fn 1.
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There is a direct relationship between the insurance
consolidation and the anticompetitive conduct engaged in by health
insurers, and the increasing problem of the uninsured in the United
States. Increased concentration and a lack of enforcement has led to
skyrocketing premiums, higher deductibles and higher co-pays. The
most severe problems occur simply when employers or employees can no
longer afford insurance. Increasingly employers have been forced to
scale down insurance or drop insurance altogether. Thus, the number
of uninsured individuals has hit a record level. The lack of
enforcement has created an environment where the insurance companies
act as if they are immune from antitrust scrutiny. This must be
reversed.
As a first step, some of us have recommended that the Antitrust
Division of the Department of Justice carefully scrutinize United
Healthcare's acquisition of Sierra Health, which, if approved, will
lead to a virtual monopoly in various health insurance markets in
Las Vegas. We have attached a statement of the Consumer Federation
of America before the Nevada Commissioner of Insurance on the United
Healthcare/Sierra Health merger, which articulates the types of
problems posed by increasing consolidation in the health insurance
industry.
Again, we welcome the attention of the Committee to this
important issue.
Testimony of David Balto, on Behalf of the American Antitrust Institute
and Consumer Federation of America
Before the Nevada Commissioner of Insurance on the United Health
Group Proposed Acquisition of Sierra Health Services \1\
\1\ I have practiced antitrust law for over 20 years, primarily
in the federal antitrust enforcement agencies: the Antitrust
Division of the Department of Justice and the Federal Trade
Commission. At the FTC, I was attorney advisor to Chairman Robert
Pitofsky and directed the Policy shop of the Bureau of Competition.
Maria Patente, Washington College of Law (Class of 2008), provided
extensive assistance in the preparation and research of the
testimony.
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(July 27, 2007)
I. Introduction
The American Antitrust Institute (``AAI'') and Consumer
Federation of America, (``consumer groups'') appreciate this
opportunity to testify before the Commissioner of Insurance on
United Health Group's (``United'') proposed acquisition of Sierra
Health Services, Inc. (``Sierra'').\2\ As
[[Page 49864]]
detailed in our testimony based on our preliminary review we
strongly believe that this acquisition will harm all Nevada health
insurance consumers, particularly those in Clark County, through
higher prices, less service, and lower quality of care. The level of
concentration posed by this merger is simply unprecedented: it is
far greater than in any merger approved by the Antitrust Division of
the U.S. Department of Justice (``DOJ'') and would give United clear
monopoly power in Clark County.
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\2\ The American Antitrust Institute is an independent
Washington-based non-profit education, research, and advocacy
organization. Its mission is to increase the role of competition,
assure that competition works in the interests of consumers, and
challenge abuses of concentrated economic power in the American and
world economy. For more information, please see
www.antitrustinstitute.org. This testimony has been approved by the
AAI Board of Directors. A list of contributors of $1,000 or more is
available on request. The Consumer Federation of America (``CFA'')
is the nation's largest consumer-advocacy group, composed of over
280 state and local affiliates representing consumer, senior
citizen, low income, labor, farm, public power and cooperative
organizations, with more than 50 million individual members. CFA
represents consumer interests before federal and state regulatory
and legislative agencies and participates in court proceedings. CFA
has been particularly active on antitrust issues affecting health
care.
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In evaluating this merger under NRS 692C.210(1) the Commissioner
of Insurance must consider several factors including: (1) whether
``the effect of the acquisition would be substantially to lessen
competition in insurance in Nevada or tend to create a monopoly''
and (2) whether if approved the ``[a]cquisition would likely be
harmful or prejudicial to the members of the public who purchase
insurance.'' As we explain below, both of these factors counsel for
denial of the application. The merger creates a dominant insurer,
particularly in Clark County, with the ability to raise premiums,
reduce service and quality and reduce compensation to providers. It
will clearly harm purchasers of insurance who will pay more for
service that provides lower quality care.
This unprecedented level of concentration raises important
policy and health care concerns relevant to the factors evaluated in
these Hearings. As Vermont Senator Patrick Leahy observed in
Hearings before the Senate Judiciary Committee last year on health
insurance consolidation:
a concentrated market does reduce competition and puts control in
the hands of only a few powerful players. Consumers--in this case
patients--are ultimately the ones who suffer from this
concentration. As consumers of health care services, we suffer in
the form of higher prices and fewer choices.\3\
\3\ Statement of Senator Patrick Leahy, Hearing on ``Examining
Competition in Group Health Care,'' U.S. Senate Committee on the
Judiciary (Sept. 6, 2006).
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Creating a dominant insurance provider should be a profound
concern in Nevada, a state plagued with shortages of nurses, doctors
and other health care professionals.
This testimony, which is based solely on public information,
provides our preliminary views that this merger would
``substantially lessen competition in insurance in Nevada or tend to
create monopoly'' and ``would likely be harmful or prejudicial to
the members of the public who purchase insurance.'' This paper also
addresses the United-Sierra merger in the context of the numerous
competitive imperfections and market failures unique to the HMO and
health insurance industry and with respect to the specific
challenges facing Nevada's health care due to a serious shortage of
doctors and nurses.
II. Summary
The consumer groups urge the Commissioner to focus on the
following issues:
Will the United-Sierra merger reduce competition for
the provision of health insurance to employers and individuals
seeking health coverage in Nevada?Yes. Sierra is the largest HMO
provider in Nevada and United is the only significant rival. The
United-Sierra merger in Nevada would give United an 80% market share
of all HMOs in Nevada and a 94% market share of the HMO market in
Clark County. Although its market share is smaller than Sierra's,
United has the potential for significant growth in Nevada since its
acquisition of PacifiCare in 2005. Moreover, the next largest HMO
rival in Clark County has only a 2% market share. The merger would
adversely affect a wide range of buyers including small employers,
governmental and union purchasers.
Will the United-Sierra merger reduce competition for
the provision of services in the Medicare Advantage program? Yes.
Medicare is increasingly turning to a managed care model.
Increasingly Medicare beneficiaries are signing up for the Medicare
Advantage program which provides health care services to
beneficiaries in a managed care model. The only current bidders for
Medicare advantage in Nevada are United and Sierra. United is the
largest Medicare Advantage program in the U.S. The merger would
create a monopoly in the provision of services for Medicare
Advantage program resulting in a lower level of care and higher
prices.\4\
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\4\ A large number of the consumer complaints filed with the
Commissioner about this merger raise concerns over the loss of
competition in the Medicare Advantage market. Many of these
complaints are from elderly beneficiaries who are particularly
vulnerable to anticompetitive conduct. Over 30% of Nevada Medicare
beneficiaries subscribe to Medicare Advantage, one of the highest
enrollments of any state.
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Could the United-Sierra merger increase the threat of
monopsony power and reduce access to medical care and the quality of
medical care in Nevada? Yes. There is currently a significant and
chronic shortage of health care providers including physicians and
nurses in Nevada, an understaffed region where health professionals
are forced to work overtime, double-shifts, weekends, and holidays.
This merger will exacerbate those problems for health care providers
dependent upon the merged firm. A combined United-Sierra can reduce
compensation resulting in a diminution of service and quality of
care. In the past the DOJ has brought enforcement actions because of
concerns over monopsony power where the market share exceeded 30%, a
level clearly exceeded by this acquisition. This merger may lead to
a significant reduction in reimbursement for health care providers,
leading to lower service and quality of care.
Will other insurance companies readily enter the market
(or expand) and fully restore the competition lost from the merger?
No. In some cases it may be unnecessary to challenge a merger if
other firms can readily enter a market to a sufficient degree to
avert the anticompetitive effects of the merger. That is clearly not
the case for this market. As the DOJ has recognized in other cases,
barriers to entry in the HMO market are extremely high due to the
extensive physician networks, technology networks, and specialized
medical infrastructure that are essential to the industry. Moreover,
Nevada already faces a serious shortage of both doctors and nurses,
and attracting a sufficient number of personnel would pose a high
barrier for a new entity interested in providing HMO plans in
Nevada. There has been little historical entry into the Nevada HMO
market, in spite of the growth of population. Moreover, with a
dominant United-Sierra, it is highly unlikely a new entrant would
undertake the risk of new entry.
Do the efficiencies from the United-Sierra merger
outweigh the anticompetitive harms? No. The parties have not
proposed significant efficiencies from this consolidation. If there
were any efficiencies they probably could be achieved through
internal growth, considering the rapid population growth in Nevada.
Moreover, efficiencies should only be included in the competition
calculus if they will result in lower prices or better service to
consumers. As a general matter, efficiencies from health insurance
mergers have not been passed on to consumers. Health insurance
mergers have generally led to increased subscriber premiums without
expansion of medical benefits. There is little evidence if any that
any efficiencies achieved in the United-PacifiCare merger have
resulted in lower premiums or better service for United or former
PacifiCare subscribers. Since the combined United-Sierra would have
a dominant market share post-merger it is highly unlikely any
savings would be passed on to consumers.
Would a divestiture or other structural relief be
sufficient to alleviate the competitive problems raised by the
merger? No. The parties have not suggested that they would be
willing to divest assets to solve the competitive concerns raised by
the merger. Even if they did the Commissioner should be extremely
skeptical of any proposed relief. In the past the DOJ has attempted
to resolve competitive concerns over some mergers by requiring the
divestiture of a certain number of contractual arrangements in order
to spur new entry. These divestitures have been insufficient to cure
the competitive problems posed by those mergers. A divestiture is
even less likely to resolve the competitive concerns in this merger
where the merged firm will clearly be the dominant insurer in the
market.
Would consumers be better off if the Commissioner
rejected the merger? Yes. The ultimate antitrust question in
evaluating
[[Page 49865]]
any merger is what would happen ``but for'' this merger? What would
happen to the merging parties, consumers, and providers? The answer
in this case seems rather transparent. United and Sierra are both
successful, financially sound, capable companies that would continue
to grow and thrive. Through its acquisition of PacifiCare, United
established an important beachhead in Nevada. But for this merger,
United would continue to expand in Nevada and challenge Sierra's
strong position in the market. That competition between United and
Sierra would lead to lower premiums, greater innovation and better
service. There is simply no reason why United can not achieve most
of the benefits of this acquisition through internal growth.
The remainder of the testimony is set forward as follows. First,
we make some observations about special considerations for health
insurer mergers and suggest why regulators and enforcers can not
rely on the theoretical assumptions of a competitive market. Then we
focus on past enforcement actions and the principles of antitrust
enforcement. We then explain how the merger will reduce competition
in both the provision of certain health insurance products (impact
on buyers) and health care providers (impact on sellers). Finally,
we explain why other factors such as ease of entry or efficiencies
will not prevent the anticompetitive effects of the merger.
III. Antitrust Merger Standards and Past Antitrust Enforcement Actions
The U.S. antitrust laws, like the Nevada insurance statute,
provide that a merger may be illegal if it may ``tend substantially
to lessen competition or to tend to create a monopoly.'' \5\ The
concern under the merger laws is that a merger may tend to reduce
competition and lead to higher prices, lower service, less quality,
or less innovation. Concerns over a reduction in quality, central to
the delivery of health care services, is an important element of
competition.\6\ As the Supreme Court has observed, competition
protects ``all elements of a bargain--quality, service, safety, and
durability--and not just the immediate cost.'' \7\
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\5\ Clayton Act. 15 U.S.C. Sec. 18. There is no case law
evaluating the competitive legality of mergers under NRS
692C.210(I), however the language of the statute is identical to the
Clayton Act. Thus, it is appropriate to apply the standards of
federal antitrust law. The Nevada antitrust statute is similar to
the Clayton Act. It prohibits mergers that will ``result in the
monopolization of trade or commerce * * * or would further any
attempt to monopolize trade or commerce'' or ``substantially lessen
competition or be in restraint of trade'' NRS 598A.060(l(f).
\6\ Section 7 prohibits anticompetitive reductions in quality
because it equivalent to an increase in price--consumers pay the
same (or greater) price for less. Community Publishers. Inc. v.
Donrey Corp., 892 F. Supp. 1146, 1153 n.8 (W.D. Ark. 1995), aff'd
sub nom. Community Publishers, Inc. v. DR Partners, 139 F.3d 1180
(8th Cir. 1998); Merger Guidelines, Sec. 0.1 (``Sellers with market
power also may lessen competition on dimensions other than price,
such as product quality, service, or innovation.''); id. Sec. 1.11.
\7\ Nat'l Soc'y of Prof Eng'rs v. United States, 435 U.S.
679,695 (1978).
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In order to determine the likely competitive effects of a merger
the case law and the Merger Guidelines established by the Department
of Justice and the Federal Trade Commission set forth a multi-step
process.\8\ The process begins by defining the ``line of commerce''
or relevant product market and the ``section of the country'' or
relevant geographic market. A relevant market can include any group
of products or services. Once a relevant market is defined, the
level of concentration and market share is calculated to determine
the likely competitive effects of the merger. In cases where there
is an undue level of concentration in the relevant market (generally
a market share over 30%) there is a prima facie case of illegality
and a presumption of unlawfulness.\9\ If there is a presumption of
unlawfulness then the burden shifts to the defendants to rebut the
prima facie case and demonstrate that other market characteristics
make the presumption of anticompetitive effects implausible. Two
types of evidence are prominent in merger cases--if the defendants
can offer evidence that entry is relatively easy, that may dispel
the notion that the merger will lead to significant anticompetitive
effects. Finally, if a merger will lead to substantial efficiencies,
these may counteract those anticompetilive effects.
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\8\ U.S. Dept of Justice and Federal Trade Comm'n, Horizontal
Merger Guidelines (1997) (hereinafter ``Merger Guidelines''), The
Nevada statute provides that in determining whether to approve a
merger the Commissioner of Insurance ``shall consider the standards
set forth in the Horizontal Merger Guidelines * * * NRS 692C.256(2).
\9\ Concentration in merger cases is expressed in terms of
market shares and a measure known as the Herfindahl Hirschman Index
(``HHI''). The HHI is calculated by adding together the squares of
the market share of individual competitors in the market. In a
market with a single seller, the HHI is 10,000. The FTC/DOJ Merger
Guidelines provide that an HHI below 1000 corresponds to an
``unconcentrated'' market; an HHI between 1000 and 1800 corresponds
to a ``moderately concentrated'' market, and a HHI above 1800
corresponds to a ``highly concentrated'' market. The HHI is a
screening tool used to assess whether a proposed merger will lead to
anticompetitive consequences. Under the Guidelines different
presumptions apply, depending on the extent of post-merger market
concentration and the increase in HHI that will result from the
merger. The greatest competitive concerns are raised where the post-
merger HHI exceeds 1800. In such as case, it s ``presumed that
mergers producing an increase in the HHI of more than 100 points are
likely to create or enhance market power or facilitate its
exercise,'' Merger Guidelines, Sec. 1.51.
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The two most instructive antitrust cases involving health
insurance mergers are the DOJ's challenges to Aetna's 1999
acquisition of Prudential and United's 2006 acquisition of
PacifiCare. Both of these mergers were resolved with divestitures to
facilitate the entry of a new competitor to remedy the competitive
concerns. Each case focused both on the harm to purchasers of HMO
and other insurance services from the exercise of monopoly power and
the harm to healthcare providers from the exercise of monopsony
power.\10\ In both the United-PacifiCare and the Aetna-Prudential
mergers, the DOJ identified highly concentrated markets that were
substantially likely to suffer harm to competition as a result of
these mergers.
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\10\ Health insurers play dual roles as sellers of insurance
services and buyers of health care services. In its first role, the
health insurer's ``output'' consists of health benefit packages, and
the output prices are paid for by customers in the form of
subscriber premiums. In the role as the seller of health benefits, a
dominant health insurer in a concentrated market could potentially
act as a ``monopolist'' charging an above market price for health
benefits. In its second role, the health insurer acts as a buyer,
and the inputs consist of physician and other medical services. The
insurer's input prices are the compensation it pays in the form of
physician fees and fees for medical services. In this role, the
health insurer may act as a ``monopsonist,'' reducing the level of
services or quality of care by reducing compensation to providers.
Health insurers are both buyers of medical services and sellers of
insurance (to consumers), so insurance mergers can raise both
monopsony and monopoly concerns.
---------------------------------------------------------------------------
In 1999, the DOJ and the State of Texas settled charges that the
merger between Aetna and Prudential in the State of Texas would harm
competition. The DOJ focused on relevant markets of HMO products and
physician services. Aetna and Prudential were head to head
competitors in the HMO markets in Houston and Dallas. The proposed
merger would have increased Aetna's market share from 44% to 63% in
Houston and 26% to 42% in Dallas.\11\
---------------------------------------------------------------------------
\11\ These market shares are substantially smaller than the
market shares which would result from the United-Sierra merger in
the HMO markets of Nevada and Clark County (80% in Nevada and 94% in
Clark County).
---------------------------------------------------------------------------
Moreover, the merger raised monopsony concerns by giving the
merged firm the potential to unduly suppress physician reimbursement
rates in Houston and Dallas, resulting in a reduction of quantity or
degradation of quality of medical services in the areas.\12\ The
operative question from DOJ's perspective was could health care
providers defeat an effort by the merged firm to reduce provider
compensation by a significant amount, e.g., 5%. The question was
answered in the negative for several reasons: physicians have
limited ability to encourage patients to switch health plans, and
physicians' time (unlike other commodities) cannot be stored, which
means that physicians incur irrecoverable losses when patients are
lost but not replaced. To exacerbate matters, contracts with
physicians were negotiated on an individual basis, and were
therefore susceptible to price discrimination by powerful buyers.
Thus, DOJ concluded that Aetna had sufficient power to impose
adverse contract terms on physicians, especially decreased physician
reimbursement rates, which would ``likely lead to a reduction in
quantity or degradation in the quality of physicians' services.''
\13\
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\12\ United States v. Aetna, Revised Competitive Impact
Statement, Civil Action 3-99CV1398-H.
\13\ Id.
---------------------------------------------------------------------------
To resolve these competitive concerns the DOJ ordered Aetna to
divest its entire interest in NYLCare-Gulf Coast and NYLCare-
Southwest, its Houston and Dallas commercial HMO business. This
consisted of 260,000 covered lives in Houston and 167,000 covered
lives in Dallas.
[[Page 49866]]
In 2006, the DOJ investigated the merger between United and
PacifiCare and focused on potential competitive concerns in relevant
markets for commercial health insurance for small group employers in
Tucson, Arizona and physician services in both Tucson and Boulder,
Colorado.\14\ Small group employers are employers with 2-50
employees. The merger would have combined the second and third
largest providers of commercial health insurance in Tucson and
increased United's market share from 16% to 33%.
---------------------------------------------------------------------------
\14\ United States v. UnitedHealth Group Inc., Case No.
1:05CV02436 (D.D.C. Dec. 20, 2005), available at http://
www.usdoj.gov/atr/cases/f213800/213815.htm.
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The merger also raised concerns over the potential harm to
competition in the purchase of physician services in both Tucson and
Boulder. The DOJ explained that by combining United and PacifiCare
``the acquisition will give United the ability to unduly depress
physician reimbursement rates in Tucson and Boulder, likely leading
to a reduction in quantity or degradation in the quality of
physician services.'' \15\ In other words the DOJ found that a
health plan's power over physicians to depress reimbursement rates
can be harmful to patients--the ultimate consumers of health care.
The market shares involved were relatively modest: in excess of 35%
in Tucson and in excess of 30% in Boulder ``for a substantial number
of physicians in those areas.''
---------------------------------------------------------------------------
\15\ United States v. UnitedHealth Group, Competition Impact
Statement at 8, available at http://www.usdoj.gov/atr/cases/f215000/
215034.htm.
---------------------------------------------------------------------------
In response to the potential harm to competition, the DOJ
required United to divest contracts covering at least 54,517 members
residing in Tucson, Arizona to yield a post-merger market share
equal to its pre-merger market share. Furthermore, the DOJ required
United to divest 6,066 members covered under its contract with the
University of Colorado. This divesture constituted nearly half of
PacifiCare's total commercial membership in Boulder.
The antitrust laws protect not only consumers but any group of
buyers, potentially including a governmental buyer. Buyers of health
insurance services have varying needs and ability to secure
competitive rates. An example of this is a case filed by the City of
New York challenging the merger between Group Health Incorporated
(``GHI'') and the Health Insurance Plan of Greater New York
(``HIP'') in the fall of 2006.\16\ There are numerous health
insurance competitors, including HMOs and PPOs in the New York City
market, but for the low cost product required by the City and
affiliated entities the only rivals were GHI and HIP. The case
alleged that the merger of GHI and HIP would create a monopoly in
the New York metropolitan area market for low cost health insurance
purchased by the City of New York and its employee unions together
with the city's employees and retirees as well as 35 other employers
with ties to the city and their employees and retirees such as the
Housing Authority, the Metropolitan Museum of Art and universities
(all of which participate in the New York City health benefits
program). The case alleges that city employees and retirees and
those individuals who participate in the health benefits program
would be faced with increased costs for insurance and reduced
service if the merger were consummated. Litigation in the case is
ongoing, but it suggests the broad range of markets that can be
adversely affected by a merger.
---------------------------------------------------------------------------
\16\ City of New York v. Group Health Inc., et al., (S.D.N.Y.
2006).
---------------------------------------------------------------------------
IV. Special Information Concerns for Health Insurance Mergers
In determining the competitive effect of a merger the crucial
issue is the impact on the consumer, the ultimate beneficiary of the
insurance system. The questions to be examined include will
consumers have to pay more for insurance in higher premiums or
deductibles, will they suffer from poorer service such as longer
waiting times or deterred services, and will they suffer from lower
quality of care? Since consumers can not vote on a merger,\17\ how
does the Commissioner, antitrust enforcer, or the courts evaluate
the impact of a merger on consumers? Insurance companies, employers,
unions and buyers of insurance (``plan sponsors''), and health care
providers will all have views of the impact of the merger on
consumers. The views of the insurance companies can not be
determinative, since they have an obligation to their stockholders
to maximize profits.
---------------------------------------------------------------------------
\17\ Fortunately, the Commissioner has decided to hold an
extensive series of hearings on the merger and provided a
significant opportunity for public comment. The majority of the
public comments filed by consumers to date oppose the merger.
---------------------------------------------------------------------------
The views of plan sponsors are relevant, but their failure to
object to a merger may not be of significant evidentiary value. Plan
sponsors represent the interests of their subscribers and thus may
be concerned with the exercise of monopoly power leading to higher
premiums. However, as antitrust authorities have recognized in many
merger investigations, buyers of services may be very reluctant to
complain about a merger for a variety of factors. They may simply
pass on higher post-merger prices to the ultimate customer. In the
health insurance area, although plan sponsors may be concerned about
the cost of health insurance they may be less sensitive to the
reduction in quality or service that may result from a merger.
Finally, a customer may fear retribution postmerger.\18\ This may
particularly be the case in Nevada where the acquired firm will
remain as the largest insurer even if the merger is denied. Thus,
the fact that plan sponsors do not complain, or actually support a
merger, should not be determinative of a merger's likely competitive
effect.\19\
---------------------------------------------------------------------------
\18\ There are a wide variety of reasons why customer support of
a merger may not be particularly probative. See Ken Heyer,
Predicting the Competitive Effects of Merger by Listening to Buyers,
74 Antitrust L.L. 87 (2007); Joseph Farrell, Listening to Interested
Parties in Antitrust Investigations: Competitors, Customers,
Complementors, and Relativity, Antitrust, Spring 2004 at 64
(explaining why customers may support an otherwise anticompetitive
merger).
\19\ In several cases courts have enjoined mergers even where
customers testified in support of the merger. See FTC v. H.J. Heinz
Co., 246 F.3d 708 (D.C. Cir. 2001) (customers strongly supported
merger); United States v. United Tote, 768 F. Supp. 1064, 1084-85
(D.Del. 1991) (enjoining merger despite testimony of ``numerous
buyers'' that the merger would be procompetitive in creating a
stronger rival to a dominant firm); United States v. Ivaco, 704 F.
Supp. 1409, 1428 (W.D. Mich. 1989) (all testifying customers
supported merger); FTC v. Imo Indus., 1992-2 Trade Cas. (CCH) Sec.
69,943, at 68,559 (D.D.C. 1989).
---------------------------------------------------------------------------
On the other hand healthcare providers may be a far more
superior representative of the consumer interest and their concerns
deserve careful attention. Physicians and other healthcare providers
directly experience the diminution of service and quality when so-
called cost containment efforts go too far. Physicians serve as
advocates for the patient, especially in the often adversarial
setting of managed care. Since health care providers experience
first hand the impact of reductions in service they are more
sensitive to the potential exercise of market power by health
insurance. It is important to recognize in evaluating the concerns
raised by providers that they are not just complaining about
decreased compensation. Rather the issues raised by health care
providers are central to concerns over quality of care: reduced
services, greater waiting times, unacceptably short hospital stays,
postponed or unperformed medical treatments, suboptimal alternative
medical treatments, laboratory tests not performed, and other output
restrictions on health services.
IV. Competitive Analysis of the United-Sierra Merger
Health Insurer Concentration: Harm To Buyers
The concentration of the health insurance industry has increased
nationally due to a tremendous number of mergers and acquisitions
and numerous smaller insurers exiting the industry.\20\ Over the
past 10 years there have been over 400 health insurer mergers.
United has acquired several firms including California-based
PacifiCare Health Systems, Inc., Oxford Health Plans, and John Deere
Health Plan, increasing its membership to 32 million. Similarly,
WellPoint, Inc. now owns Blue Cross plans in 14 states. Together,
WellPoint and United control over 33 percent of the U.S. commercial
health insurance market.
---------------------------------------------------------------------------
\20\ Victoria Colliver, ``Insurer's Mergers Limiting Options:
Health Care Choices Are Narrowing Says Study by AMA,'' San Francisco
Chronicle, April 18, 2006 (last viewed 7/8/07) http://sfgate.com/
cgi-bin.article.cgi?file=/chronicle/archive/2006/04/18/
BUGUQIAH161.DTL&type=business
---------------------------------------------------------------------------
This increase in concentration has not benefited consumers.
Studies indicate that health insurance premiums have increased at a
rate more than twice the rate of inflation or the rate of increases
in worker's earnings. Average annual premium increases have ranged
from 8.2% to 13.9% since 2000,\21\
[[Page 49867]]
Moreover, since 2000, the number of employers offering health
coverage benefits has decreased by nearly 10%. Studies indicated
that medical benefits have not expanded despite premium increases.
In contrast, health insurer profits have increased by 246% in the
aggregate over the past decade.\22\
---------------------------------------------------------------------------
\21\ Kaiser Family Foundation and Health Research and
Educational Trust, Employer Health Benefits: 2006 Summary of
Findings, 2006 (last viewed 7/8/2007) http://www.kff.org/insurance/
7527/upload/7528.pdf
\22\ Laura Benko, ``Monopoly Concerns: AMA asks Antitrust
Regulators to Restore Balance,'' Modern Physician, June 1, 2006.
---------------------------------------------------------------------------
Consumers in highly concentrated health insurance markets are
most vulnerable to insurance premium increases without comparable
benefit increases, mirroring data of escalating health costs on the
national level. One study found that more than 95% of Metropolitan
Statistical Areas (MSAs) had at least one insurer in the combined
HMO/PPO market with a market share greater than 30% and more than
56% of MSAs had at east one insurer with market share greater than
50%.\23\ In concentrated MSAs such as these, there is a much greater
likelihood that one firm, or a small group of firms, could
successfully exercise market power and profitably increase prices or
decrease compensation leading to less quality or service. As one
prominent health care professor has observed in testimony before the
U.S. Senate Judiciary Committee:
\23\ Edward Langston, ``Statement of the American Medical
Association to the Senate Committee on the Judiciary United States
Senate: Examining Competition in Group Health Care,'' Sept. 6, 2006
(last viewed 7/8/07) http://www.ama-assn.org/amal/pub/upload/mm/399/
antitrust090606.pdf.
---------------------------------------------------------------------------
What is so important about the sheer number of competitors?
Econometric evidence shows that in the managed care field, an
increase in the number of competitors is associated with lower
health plan costs and premiums; conversely, a decrease in the number
of competitors is associated with increases in plan costs and
premiums. The evidence also shows that the sheer number of
competitors exerts a stronger influence on these outcomes than does
the penetration level achieved by plans in the market.\24\
---------------------------------------------------------------------------
\24\ Testimony of Professor Lawton R. Burns re the Highmark/
Independence Blue Cross Merger, before the Senate Judiciary
Committee (April 7, 2007).
As we discuss below, the health insurance markets in the state
of Nevada, especially Clark County are highly concentrated, and the
merger of Sierra with United is likely to substantially harm
competition and consumers.
Harm to Competition in Nevada From the United-Sierra Merger
Correctly defining an economically meaningful market is
essential for ensuring that consumers of that market do not become
subject to market power due to increases in market concentration and
decreases in competition as a result of a merger. The key question
in this merger as in other mergers is the definition of the relevant
product market. The courts have held that a relevant product market
``must be drawn narrowly to exclude any other product to which,
within reasonable variation and price, only a limited number of
buyers will turn.'' Times-Picayune Pub. Co. v. United States, 345
U.S. 594, 612 n.31 (1953). Market definition focuses on demand
substitution facts, and whether or not consumers would or could turn
to a different product or geographic location in response to a
``small but significant non-transitory increase in price.'' \25\
Typically, the antitrust agencies and the courts have implemented
this test by seeking to identify the smallest group of products over
which prices could be profitably increased by a ``small but
significant'' amount (normally 5 percent) for a substantial period
of time (normally one year).\26\
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\25\ According to the Merger Guidelines,``[a] market is defined
as a product or group of products and a geographic area in which it
is produced or sold such that a hypothetical profit-maximizing firm,
not subject to price regulation, that was the only present and
future seller of those products in that area would likely impose at
least a `small but significant nontransitory' increase in price,
assuming the terms of sale of all other products are held
constant.'' Merger Guidelines Sec. 1.0.
\26\ FTC v. Staples, 970 F. Supp. at 1076 n.8; Merger
Guidelines Sec. 1.11, at 5-6.
---------------------------------------------------------------------------
In health insurance mergers the DOJ has reached different,
although not inconsistent. conclusions as to the relevant product
market, For example, in the Aetna-Prudential merger DOJ concluded
that the relevant product markets were the sale of health
maintenance organization (``HMO'') and HMO-based point of service
(``HMO-POS'') health plans. The DOJ noted that HMO and HMO-POS
products differ from PPO or other indemnity products in term of
benefit design cost and other factors. HMOs provide superior
preventative care benefits, place limits on treatment options and
generally require the use of a primary care physician
``gatekeeper.'' PPO plans are not structured in that fashion and do
not emphasize preventative care. HMOs were perceived as being better
devices to control costs and configure benefits. In addition, both
the insurers and buyers of insurance services perceived PPOs and
HMOs as being separate products. Thus, the DOJ concluded that the
elasticity of demand for HMO's and HMO-POS plans are sufficiently
low that a small but significant price increase for these plans
would be profitable because consumers would not shift to PPO and
other indemnity plans to make the increase unprofitable.
In United/PacifiCare, the DOJ defined a relevant product market
as the sale of commercial health insurance to small group employers.
This market consisted of employers with 2-50 employees. These
employers were particularly susceptible to potential anticompetitive
conduct because they lacked a sufficient employee population to
self-insure and they lacked the multiple locations necessary to
reduce risk through geographic diversity. In addition the manner in
which commercial health insurance was sold also distinguished the
small and large group markets. Large employers were more likely than
smaller employers to be able to successfully engage extensive
negotiations with United and PacifiCare.
We believe that both an HMO and small employer market may be
adversely affected by the United-Sierra merger.\27\ Surveys
demonstrate that consumer do not perceive HMOs and PPOs as
substitute products and consumers believe that they differ in terms
of benefit design, cost, and general approaches to treatment.\28\
PPOs tend to provide more flexibility in selection of physicians and
specialists and tend to be more expensive. In contrast, HMOs focus
more on preventative medicine but limit treatment options and
require referrals from a ``gate keeper'' for many procedures.
Consumers with special health needs and those relying more on strong
relationships with their physicians would generally not he satisfied
if forced to subscribe to an HMO with restrictions on personal
choices. ``A small but significant price increase in the premiums
for HMOs and HMO-POS plans would not cause a sufficient number of
customers to shift to other health insurance products to make such a
price increase unprofitable.'' \29\
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\27\ Defining the market in terms of a single product is
appropriate since the Nevada statute provides that the Commissioner
can deny a merger application if she ``determines that an
acquisition may substantially lessen competition in any line of
insurance in this state or tends to create a monopoly.'' NRS
692.258(1).
\28\ See United States v. Aetna, Revised Complaint Impact
Statement, Civil Action 3-99CV1398-H (N.D. Tex, 1999).
\29\ Id.
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Moreover, small employers are less likely to have significant
alternatives in response to a price increase by the merged firm.
Small employers are unable to self-insure and have little power to
negotiate better rates.
The relevant geographic market seems to be a fairly
straightforward matter since health care services are primarily
local. From the perspective of the buyers of insurance services,
employers want insurance where the employees work and live. Thus in
Aetna/Prudential, the DOJ concluded ``the relevant geographic market
in which HMO and HMO-POS plans compete are thus generally no larger
than the local areas within which HMO * * * enrollees demand access
to providers. * * * As a result, commercial and government health
insurers--the primary purchasers of physician services--seek to have
their provider network's physicians whose offices are convenient to
where their enrollees work or live.''
In this merger the likely geographic markets are Clark County,
Nevada, and the larger geographic market of the State of Nevada.
Consumers faced with an increase in prices for HMOs are unlikely to
travel a long distance away from homes or places of business to in
order to escape price increases and purchase HMO services at a lower
price. Generally, consumers are reluctant to travel lengthy
distances when they are sick. Moreover, virtually all managed care
companies provide networks in localities where employees live and
work, and they compete with the other local networks.\30\ Thus, we
believe the proper relevant markets are the provision of HMO
services in Clark County and Nevada.\31\
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\30\ Id.
\31\ As to the market for the sale of health insurance products
to small employers we have no reason to believe the concentration
measures differ significantly from the HMO market.
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[[Page 49868]]
Concentration and Competitive Effects
Once the market is defined antitrust authorities and the courts
calculate market shares and concentration levels (using the
Herfindahl-Hirschman index (HHI)). This merger will lead to an
unprecedented level of concentration. In the Clark County HMO market
United's market share will increase from 14 to 94%. If PPOs are
included, United's market share increases from 9% to 60%. Regardless
of how the product market is defined United is clearly a dominant
firm, far larger than the post merger market shares of the combined
Aetna/Prudential or United/PacifiCare in those markets where DOJ
brought enforcement actions. Even in a Nevada HM0 market, the market
share increases from 12% to 80% and in a Nevada HMO-PPO market
United's market share increases from 7% to 48%. Simply put, post-
merger United will be a dominant firm no matter how the market is
defined.
Measuring concentration using the HHI leads to similar results.
The Merger Guidelines define a market with an HHI over 1800 as
``highly concentrated'' and an increase over 100 is ``likely to
create or enhance market power or facilitate its exercise.'' The
post-merger HHI for HMOs in the state of Nevada is 4,871 and the
post-merger increase in HHI is 1,625. The HM0 market in Clark County
is even more concentrated, with a post-merger HHI of 8,884 and a
post-merger increase in HHI of 2,235. These exorbitantly high HHIs
support the presumption that a merger between the two largest HMOs
in the highly concentrated Nevada HMO market would likely create or
enhance market power or facilitate its exercise. The market share
data obtained form the Nevada State Health Division is provided
below, (Figure 1).
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\32\ Data provided from the Nevada State Health Division.
[GRAPHIC] [TIFF OMITTED] TN22AU08.000
The Nevada and Clark County markets are highly concentrated, no
matter how defined. The parties may suggest that this is of little
import because the increase in concentration is not substantial
because United currently has a relatively modest market share. Such
an argument is inconsistent with the facts and the law. United is
the largest health insurer in the United States and the second
largest rival in the market, with the ability and incentive to
expand competition. As to the law as the Supreme Court has
acknowledged, ``if concentration is already great, the importance of
preventing even slight increases in concentration is correspondingly
great.'' \33\
---------------------------------------------------------------------------
\33\ United States v. General Dynamics Corp., 415 U.S. 486, 497
(1974).
---------------------------------------------------------------------------
As important, the combined United-Sierra will be substantially
larger than its next closest rival. In the Nevada HMO market it will
be over 10 times larger (80% to 7% for the second largest firm) and
in the Clark County market it will be over 30 times larger (94% to
3%). The courts have recognized that smaller rivals are far less
likely to constrain the conduct of a dominant firm post-merger, and
have enjoined mergers with far smaller disparities in market share.
United States v. Phillipsburg Nat'l Bank, 399 U.S. 350, 367 (1970)
(merged firm three times the size of next largest rival): FTC v.
PPG, 798 F.2d 1500, 1502-03 (D.C. Cir. 1986) (two and one-half times
as large). Where a merger produces a firm that is significantly
larger than its closest competitors, it increases the likelihood
that the firm will be able to raise prices, decrease compensation,
and reduce quality without fear that the small sellers will be able
to take away enough business to defeat the price increase. See
United States v. Rockford Mem. Corp., 898 F.2d 1278. 1283-84 (7th
Cir.) (Posner, J.), cert. denied, 498 U.S. 920 (1990); H. Hovenkamp,
Federal Antitrust Policy Sec. 12.4c (1993) (``markets may often
have small niches or pockets where new firms can carve out a tiny
position for themselves without having much of an effect on
competitive conditions in the market as a whole'').
Combined PPO and HMO Markets
Using a definition of the health insurance product market as the
combination of HMOs and PPOs, the health insurance market in Nevada
is highly concentrated, and the United-Sierra merger would
substantially increase the likelihood of competitive harm.
The market share for Sierra and United combined in Nevada is
48%, while in Clark County the combined United-Sierra market share
is 60%. The post-merger HHI for the Nevada and Clark County markets
are 3372 and 5244. respectively. The increase in the HHI market
resulting from the United-Sierra merger is 555 for the state of
Nevada and 921 for Clark County. Data of market shares from the
Nevada State Health Division for the HMO and PPO markets is provided
in Figure 2.
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\34\ Data from the Nevada State Health Division.
\35\ The market share for WellPoint in Clark County is
overstated because in the absence of data by territory, all
WellPoint customers were allocated to Clark County.
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[[Page 49869]]
[GRAPHIC] [TIFF OMITTED] TN22AU08.001
Conclusion on the Impact of the United-Sierra Merger on Consumers
As the U.S. Supreme Court has held where a merger results in a
significant increase in concentration and produces a firm that
controls an undue percentage of the market, the combination is so
inherently likely to lessen competition substantially that it ``must
be enjoined in the absence of evidence clearly showing that the
merger is not likely to have such anticompetitive effects.'' United
States v. Philadelphia Nat'l Bank, 374 U.S. 321, 363 (1963). The
United-Sierra merger clearly raises extraordinary and unprecedented
levels of concentration which raise serious concerns about this
merger. Nevada is in need of greater competition, not less. Further
consolidation among the limited health plan providers in Nevada
poses a substantial threat of harming customers, increasing the
costs of health care, and decreasing access to quality health care
and the quality of health. This merger clearly ``would likely be
harmful or prejudicial to the members of the public who purchase
insurance'' and thus should be denied.
V. Health Insurance Concentration: Harm to Health Care
Professionals and Quality of Care
The nature of the health care industry facilitates the potential
for a dominant health coverage or insurance firm to exercise market
power (or monopsony) over individuals selling health care services
within a geographic region. Because medical services can be neither
stored nor exported. health care professionals generally must sell
their services to buyers (insurance firms and their customers) in a
relatively small geographic market. Refusing the terms of the
dominant buyer, physicians may suffer an irrevocable loss of
revenue. Consequently, a physician's ability to terminate a
relationship with an insurance coverage plan depends on her ability
to make up lost business by switching to an alternative insurance
coverage plan. Where those alternatives are lacking a physician may
be forced to reduce the level of service in response to a decrease
in compensation.
Not all insurance providers are equal from the perspective of a
health care provider. A smaller insurance company with fewer covered
lives may not be an attractive alternative. Health care providers
who depend on an insurance program for all or most of their income
are at a substantial disadvantage when there are not competing
programs available; when they switch programs, they tend to lose the
patients who have that particular coverage. It makes little sense
for a provider to switch to an insurer who has a substantially
smaller market share because there won't be enough patients to
sustain the practice. Thus, it is critical for insurance regulators
to maintain a competitive market in which health care providers have
significant competitive alternatives.
In the Aetna/Prudential and United/PacifiCare mergers, the DOJ
raised monopsony concerns in markets for purchasing physicians
services where the market shares were far less substantial than they
are in Clark County. For example, in United/PacifiCare the DOJ
alleged that the combined firm would account for an excess of 35% in
Tucson and over 30% in Boulder.
In addition, it is important to recognize that it may be
appropriate to prevent a firm from securing monopsony power even if
it faces a competitive downstream market. In other words there may
be antitrust concerns if a health insurer can lower compensation to
providers even if it can not raise prices to consumers. For example,
in United/PacifiCare the Division required a divestiture based on
monopsony concerns in Boulder even though United/PacifiCare would
not necessarily have had market power in the sale of health
insurance. The reason is straightforward--the reduction in
compensation would lead to diminished service and quality of care,
which harms consumers even though the direct prices paid by
subscribers do not increase.\36\
---------------------------------------------------------------------------
\36\ See Marius Schwartz, Buyer Power Concerns and Aetna-
Prudential Merger, Address Before the the Annual Health Care
Antitrust Forum at Northwestern University School of Law 4-6
(October 20. 1999) (noting that anticompetitive effects can occur
even if the conduct does not adversely affect the ultimate consumers
who purchase the end-product), available at http/www.usdoj.gov/atr/
public/speeches/3924.wpd.
---------------------------------------------------------------------------
Underlying the monopsony analysis in these cases is the premise
that physicians who have a large share of reimbursements from the
merged firm lack alternatives in response to a reduction in
compensation. As alleged in Aetna, they cannot retain or timely
replace a sufficient portion of those payments if the physicians
stop participating in the plans. Moreover, it is difficult to
convince patients to switch to different plans.\37\ Consequently.
according to the Division these physicians would not be in a
position to reject a ``take it or leave it'' contract offer and
could be forced to accept low reimbursement rates from a merged
entity, likely leading to a reduction in quantity or degradation in
quality of physician services.
---------------------------------------------------------------------------
\37\ As alleged in the United complaint, physicians encouraging
patients to change plans ``is particularly difficult for patients
employed by companies that sponsor only one plan because the patient
would need to persuade the employer to sponsor an additional plan
with the desired physician in the plans's network'' or the patient
would have to use the physician on an out-of-network basis at a
higher cost. Complaint at paragraph 37.
---------------------------------------------------------------------------
The merging parties may suggest that there is some safe harbor
for mergers leading to a market share below 35%. As the DOJ
enforcement action in Boulder demonstrates, that is not the case.
The unique nature of health care provider services explains why
monopsony concerns are raised at lower levels of concentration than
may be appropriate in other industries. If a health care provider's
output is suppressed by a reduction in compensation, then it is a
lost sale that cannot be recovered later. Physician services can not
be stored for later sale. As the DOJ observed in United/PacifiCare:
``A physician's ability to terminate a relationship with a
commercial health insurer depends on his or her ability to replace
the amount of business lost from the termination, and the time it
would take to do so. Failing to replace lost business expeditiously
is costly.'' \38\ The DOJ observed that there are limited outlets
for physician services: ``There are no purchasers to whom physicians
can sell their services other than individual patients or the
commercial and governmental health insurers that purchase physician
services on behalf of their patients.'' \39\ As a former DOJ
official observed ``these factors explain why the Department
concluded that shares below 35 percent, in the particular markets at
issue, sufficed to allege competitive harm.'' \40\
---------------------------------------------------------------------------
\38\ Complaint at paragraph 36.
\39\ Complaint at paragraph 33.
\40\ Mark Botti, Remarks before the ABA Antitrust Section,
``Observations on and from the Antitrust Division's Buyer-Side
Cases: How Can ``Lower'' Prices Violate the Antitrust Laws.'' He
also noted that: ``Physicians have a limited ability to maintain the
business of patients enrolled in a health plan once the physician
terminates. Physicians could retain patients by encouraging them to
switch to another health plan in which the physician participates.
This is particularly difficult for patients employed by companies
that sponsor only one plan because the patient would need to
persuade the employer to sponsor an additional plan with the desired
physician in the plan's network. Alternatively, the patient may
remain in the plan, visiting the physician on an out-of-network
basis. The patient would be faced with the prospect of higher out-
of-pocket costs, either in the form of increased co-payments for use
of an out-of-network physician, or by absorbing the full cost of the
physician care.'' Complaint at paragraph 37.
---------------------------------------------------------------------------
[[Page 49870]]
Again the proponents of health insurance mergers may suggest
that regulators should take a benign view about the creation of
monopsony power because health insurers are ``buyers'' acting in the
interest of reducing prices. As we suggested earlier, this view is
mistaken. Health insurers are not true fiduciaries for insurance
subscribers. Plan sponsors may have a limited concern over the
product based on the cost of the insurance, and not the quality of
care. Furthermore, health coverage plans operate in the interest of
a group, not in the best interest of individual patients.
Consequently, insurance firms can increase profits by reducing the
level of service and denying medical procedures that physicians
would normally perform based on professional judgment. In the
absence of competition among insurers, patients are more likely to
pay for these procedures out-of pocket or forego them entirely.
Ultimately, the creation of monopsony power from a merger can
adversely impact both the quantity and quality of health care.
Finally, the evidence from mergers throughout the U.S. strongly
suggests that the creation of buyer power from health insurance
consolidation has not benefited competition or consumers. Although
compensation to providers has been reduced, health insurance
premiums have continued to increase rapidly. Moreover, evidence from
other mergers suggests that insurers do not pass savings on from
these mergers on to consumers. Rather, insurance premiums increase
along with insurance company profits.
Monopsony in the Health Care Markets of Nevada
United's acquisition of Sierra would give it unique control over
the physicians serving the HMO and HMO-PPO markets in Clark County
and the State of Nevada. The merger will combine the two largest
HMOs with an 84% market share in Nevada and a 90% market share in
Clark County, dramatically higher than the concentration in any
merger approved by the DOJ. In light of these high market shares, a
physician faced with unfair contract terms could not credibly
threaten to leave the combined United-Sierra health plan, except by
departing Clark County.
The parties have suggested the markets for physician
reimbursement are far less concentrated. At the earlier hearing they
suggested the merged firm would account for only 17% of physician
reimbursement in the state and 21% in Clark County. We do not know
the basis for the claimed reimbursement percentages. One should take
United's estimates of market shares with a large grain of salt. In
United/PacifiCare their lawyers suggested the parties' total share
of physicians' reimbursements likely were substantially below the
35% threshold, but those estimates were rejected by DOJ. As one of
their advocates said ``indeed the parties' calculated their total
shares of physician reimbursements in the Tucson and Boulder MSAs
were substantially lower than the shares asserted in the
complaint.'' \41\ The estimates of the proponents in the Aetna/
Prudential merger were also rejected by the DOJ.\42\
---------------------------------------------------------------------------
\41\ Fiona Schaeffer et al., ``Diagnosing Monopsony and other
issues in Health Care Mergers: An overview of the United/PacifiCare
Investigation,'' Antitrust Health Care Chronicle (2006).
\42\ The estimates of the level of physician reimbursement by
the proponents of the Aetna/Prudential merger were also rejected by
the DOJ, The proponents suggested that the total amount of physician
revenues affected by the merger were far less than thirty percent
according to public available data. According to the proponents, the
merged firm would have accounted for about 20% of total physician
revenues in Houston and about 25% of total physician revenues in the
Dallas Fort Worth area after the transaction. In addition, there
were 14 HMOs in the Houston area and 12 HMOs in Dallas. See Robert
E. Bloch et al. ``A New and Uncertain Future for Managed Care
Mergers: An Antitrust Analysis of the Aetna/Prudential Merger.'' Yet
the DOJ required an enforcement action to address monopsony concerns
in spite of these alleged low shares of reimbursement.
---------------------------------------------------------------------------
Monopsony power exercised by HMOs and health insurance plans,
like high medical malpractice insurance premiums, has the potential
to drive health care professionals out of geographic regions and
even into other professions. The Nevada health care market currently
faces one of the largest shortages of doctors and nurses in the
country.\43\ It ranks 49th of the 50 states in physician coverage.
Shortages of health care professionals can become a vicious cycle
admonishing others against entering the profession. Doctor shortages
increase with shortages of nurses and increases in insurance
costs.'' \44\ Nationally, it has become less attractive to become a
physician because of the enormous cost associated with medical
education, long years of schooling and residencies, and increased
difficulty in earning a living.\45\ Recently, Nevada has implemented
programs to attract doctors from Mexico and train doctors in Mexico
at the Universidad Autonoma de Guadelajara.\46\
---------------------------------------------------------------------------
\43\ See Lawrence Mower, ``Help Sought South of the Border,''
Las Vegas Review Journal, Jan. 22, 2007; see also Lenita Powers,
``Big Day at Lawlor,'' Reno Gazette, Dec. 9, 2006 (expressing that
nurses in Nevada are in a desperately short supply, especially OR
nurses).
\44\ See Lawrence Mower, ``Help Sought South of the Border,''
Las Vegas Review Journal, Jan. 22, 2007.
\45\ Lawrence Mower, ``Help Sought South of the Border,'' Las
Vegas Review Journal, Jan. 22, 2007.
\46\ Id.
---------------------------------------------------------------------------
Similar problems exist in nursing. Understaffed nursing
departments require nurses to work overtime, work more holiday
shifts, and undertake more responsibilities. These conditions
exacerbate protracted work-related stress and decrease the
attractiveness of working as a nurse in Nevada. Moreover, reduced
flexibility for time-off and patient dissatisfaction resulting from
overworked nurses is generally associated with lower levels of job
satisfaction and higher turnover rates.\47\
---------------------------------------------------------------------------
\47\ See Jennifer Kettle, Factors Affecting Job Satisfaction in
the Registered Nurse, Journal of Undergraduate Nursing Scholarship,
Fall 2002 (last viewed July 9, 2007) http://
www.juns.nursing.arizona.edu/articles/Fall%202002/Kettle.htm.
---------------------------------------------------------------------------
Conclusion on the Impact on Health Care Professionals and Quality
of Care
The United-Sierra merger poses a substantial threat to
competition leading to reduced compensation for health care
professionals who may be forced to reduce service and quality of
care. This reduced quality of care ``would likely be harmful or
prejudicial to the members of the public who purchase insurance.''
Further consolidation in the HMO and health coverage markets in
Nevada may have detrimental short-term and long-term effects by
exacerbating the crisis of the health professional shortage.
Competition is essential to the delivery of high quality health care
services. The United-Sierra merger will further distort the already
concentrated and inefficient Nevada health care market.
Barriers to Entry Are High
As noted earlier, entry can be a factor in the analysis of a
merger that may reverse the presumption of anticompetitive effects.
The courts have required that ``entry into the market will likely
avert the anticompetitive effects from the acquisition.'' FTC v.
Staples, 970 F. Supp. 1066, 1086 (D.D.C. 1997). Entry must be
``timely, likely insufficient in its magnitude. character and scope
to deter or counteract the competitive effects'' of a proposed
acquisition. Merger Guidelines Sec. 3.0.
The barriers to entry in the HMO and health insurance markets in
Nevada and Clark County are very high. There has been relatively
little recent entry into either Clark County or Nevada. The fact
that United, the largest health insurer in the U.S., chose to enter
into Nevada through two acquisitions--PacifiCare and Sierra--
suggests the significant difficulty of de novo entry in these
markets.
Generally, entry into health insurance markets is difficult. The
health care industry does not fit the traditional model of perfect
competition as expounded by the Chicago School.\48\ For example,
there is a high degree of ``lock-in'' because plan sponsors cannot
disrupt the medical treatment of countless employee/patients. New
entrants are vulnerable to the high switching costs that
characterize the health insurance industry. Many consumers have no
choice for health coverage plans and must accept the plan provided
by an employer. Other consumers can only switch during an ``open
enrollment'' season. Doctors cannot easily switch their patients to
a different health plan and, in the
[[Page 49871]]
absence of a large number of patients enrolled in a plan, a doctor
may find that additional claim processing costs exceed the benefits
of carrying an additional health coverage provider. Similarly,
doctors may be reluctant to switch plans because earnings lost in
pursuit of new patients and alternate third-party payers may lead to
exorbitant losses.\49\
---------------------------------------------------------------------------
\48\ See Thomas Greaney, Chicago's Procrustean Bed: Applying
Antitrust Law in Health Care, 71 Antitrust L.J. 857 n. 1 (2004)
(``Perfectly competitive markets demonstrate the following four
characteristics: (1) Perfect product homogeneity (2) large numbers
of buyers and sellers (3) perfect knowledge of market conditions by
all market participants and (4) complete mobility of all product
resources.'')
\49\ Moreover, most employee/patients are limited to the
physicians within the plan sponsors contract.
---------------------------------------------------------------------------
Developing an HMO from scratch requires extensive expenditure on
recruiting and maintaining health professionals, developing computer
information systems and data banks, and high expenditures on
overhead and clinical facilities. De novo entry is very challenging
since new entrants must develop a reputation and product recognition
with purchasers to convince them to disrupt their current
relationships with the dominant health insurers.\50\ As a recent
DOJ/FTC report on health care competition reported, there has been
relatively little de novo entry by national health insurers.\51\
---------------------------------------------------------------------------
\50\ At the FTC/DOJ Health Care hearings, a former Missouri
Commissioner of Insurance suggested that new entrants ``face a Catch
22--they need a large provider network to attract customers, but
they also need a large number of customers to obtain sufficient
price discounts from providers to be competitive with the
incumbents.'' In addition, he observed that there is a first mover,
or early mover, advantage in the HMO industry, possibly resulting in
later entrants having a worse risk pool from which to recruit
members. He also observed reputation may inhibit entry. See
Improving Health Care: A Dose of Competition, A Report by the
Federal Trade Commission and the Department of Justice, Chapter 6 at
10 (July 2004), available at http://www.usdoj.gov/atr/public/
health_care/204694/chapter6.htm#3.
\51\ Id. at 11 (citing testimony that the only successful entry
of national plans has been by purchasing hospital-owned local health
plans).
---------------------------------------------------------------------------
Not surprisingly the DOJ has recognized the substantial barriers
to entry and expansion in health insurance markets. In the Aetna/
Prudential merger, the DOJ found substantial entry barriers.
Certainly Dallas and Houston were attractive markets for health
insurers. Both markets had a substantial number of alternative
health insurers capable of expansion. And there were numerous
competitors in other Texas markets that were capable of entering
into these markets. Yet the DOJ found substantial entry barriers and
that entry could take two to three years and cost up to $50
million.\52\ In particular it found that it was ``unlikely that a
company that currently provides PPO or indemnity health insurance in
either Dallas or Houston would shift its resources to provide an HMO
or HMO-POS plan'' in either market.\53\
---------------------------------------------------------------------------
\52\ In light of the health professional shortage in Nevada,
these values could be understated.
\53\ Complaint at paragraph 23.
---------------------------------------------------------------------------
Entry barriers are even more substantial in Nevada and Clark
County. The shortage of health care professionals in Nevada
increases barriers to entry because new entrants are unlikely to be
able to contract with an adequate number of health professionals to
attract new plan sponsors and enrollees. Moreover, when a dominant
HMO maintains a high market share, other health providers may
perceive or experience higher rates of adverse selection, moral
hazard, and general vulnerability to tactics by a dominant HMO to
raise rival's costs.\54\ Experience indicates that new HMOs have not
historically entered highly concentrated markets after a merger
occurs.
---------------------------------------------------------------------------
\54\ See Roger Noll, Buyer Power and Antitrust: ``Buyer Power''
and Economic Policy, 72 Antitrust L.J. 589, 2005.
---------------------------------------------------------------------------
The parties may also suggest that some of the smaller HMOs and
health insurance providers in Nevada may be able to expand post-
merger to prevent any anticompetitive effects. This is extremely
unlikely because the fringe firms are currently so extremely small
and far smaller than a combined United-Sierra. In cases with an even
far smaller size disparity between the merged and fringe firms
courts have declined to find that small players might suddenly
expand to constrain a price increase by leading firms. United States
v. Philadelphia Nat'l Bank, 374 U.S. 321, 367 (1963); United States
v. Rockford Mem. Corp., 898 F.2d 1278, 1283-84 (7th Cir. 1990)
(``three firms having 90 percent of the market can raise prices with
relatively little fear that the fringe of competitors will be able
to defeat the attempt by expanding their own output to serve
customers of the three large firms'').
The small firm expansion claim was rejected by the DOJ in Aetna/
Prudential, a case with far smaller post-merger market shares and a
far greater number of fringe firms:
Due not only to these costs and difficulties, but also to
advantages that Aetna and Prudential hold over their existing
competitors--including nationally recognized quality accreditation,
product array, provider network and national scope and reputation--
existing HMO and HMO-POS competitors in Dallas or Houston are
unlikely to be able to expand or reposition themselves sufficiently
to restrain anticompetitive conduct by Aetna in either of these
geographic markets.\55\
---------------------------------------------------------------------------
\55\ Complaint at paragraph 24. In Aetna, the post-merger market
shares were 44% and 62% and there were between 10-12 smaller
competitors capable of expansion. In this case, the post-merger
market share is greater than 90% and there are a handful of smaller
competitors.
---------------------------------------------------------------------------
History demonstrates that one can not rely on new entry in Clark
County. Few competitors from the rest of Nevada have been able to
successfully enter Clark County. Attempting to enter into a market
dominated by a single firm is a daunting task. There may be several
obstacles to expansion including cost disadvantages, efficiencies of
scale and scope and reputational barriers. In other mergers, the
courts have found these types of impediments to be significant
barriers to entry and expansion. For example, in the FTC's
successful challenge to mergers of drug wholesalers the court noted:
``[t]he sheer economies of scale and scale and strength of
reputation that the Defendants already have over these wholesalers
serve as barriers to competitors as they attempt to grow in size.''
\56\ We believe similar obstacles exist for potential entrants in
these markets.
---------------------------------------------------------------------------
\56\ FTC v. Cardinal Health, Inc., 12 F. Supp. 34, 57 (D.D.C.
1998); see United States v. Rockford Memorial Hosp., 898 F.2d 1278.
l283-84 (7th Cir. 1990) (``the fact [that fringe firms] are so small
suggests that they would incur sharply rising costs in trying almost
to double their output . . . it is this prospect which keeps them
small'').
---------------------------------------------------------------------------
Relying on promises of entry and expansion may be a risky path
for competition and consumers. In recent FTC/DOJ health care
hearings, a former Missouri Commissioner of Insurance discussed
several HMO mergers that his office approved based on the parties'
arguments that entry was easy, that there were no capacity
constraints on existing competitors (there were at least ten HMO
competitors), and that any of the 320 insurers in the state could
easily enter the HMO market. Unfortunately, those predictions were
mistaken and there has been no entry in the St. Louis HMO market
since the mid-1990s.\57\ This experience, should make any regulator
cautious about relying on predictions of new entry.
---------------------------------------------------------------------------
\57\ Testimony of Jay Angoff, former Missouri Commissioner of
Insurance, before the FTC/DOJ Healthcare Hearings, April 23, 2003 at
40-45, discussed at Improving Health Care: A Dose of Competition, A
Report by the Federal Trade Commission and the Department of
Justice, Chapter 6 at 10 (July 2004), available at http://
www.usdoj.gov/atr/public/health_care/204694/chapter6.htm#3.
---------------------------------------------------------------------------
Efficiencies of the United-Sierra Merger Are Minimal
The parties have not suggested that there are significant
efficiencies that may result from the merger. Under the Nevada
statute, the Commissioner can consider efficiencies that either
``create[] substantial economies of scale or economies in the use of
resources that may not be created in any other manner'' or
``substantially increase[] the availability of insurance.'' \58\ In
either case, the public benefit of either of these efficiencies must
exceed the loss of competition. This standard simply can not be met
in this case where the merger creates a dominant firm.
---------------------------------------------------------------------------
\58\ NRS 692C.256(3).
---------------------------------------------------------------------------
As a matter of U.S. merger law, efficiencies can justify an
otherwise anticompetitive merger in very limited circumstances.
Those efficiencies which are considered under the antitrust laws are
solely those efficiencies which lead to improvements for consumers
in terms of lower prices, greater innovation or greater service and
quality. Moreover, an efficiency must be merger specific--that is it
can not be achieved in any less anticompetitive fashion. When a cost
savings does not result in those benefits to consumers it is not
properly considered.
The record on recent health insurance mergers does not suggest
that these mergers have led to substantial benefits to consumers in
lower prices, better quality of care or service. Despite the
occurrence of hundreds of health insurance mergers that have
occurred in the past decade, subscriber premiums have continued to
rise at twice the rate of inflation and physician fees.\59\ Health
benefits have not expanded with subscriber premiums.\60\
Consequently, the efficiencies
[[Page 49872]]
in health insurance mergers deserve careful scrutiny and a heavy
dose of skepticism.\61\
---------------------------------------------------------------------------
\59\ Laura Benko, ``Monopoly Concerns: AMA Asks Antitrust
Regulators to Restore Balance,'' Modern Physician, June 1, 2006.
\60\ Best Wire, ``Study Says Competition in Health Markets
Waning,'' Best Wire Apr. 19, 2006.
\61\ See Laura Benko, ``Bigger Yes, But Better?'' Modern Health
Care, March 19, 2007.
---------------------------------------------------------------------------
The actual record on efficiencies from health insurance mergers
is spotty at best. As Professor Lawton Burns has observed in
Congressional testimony:
[T)he recent historical experience with mergers of managed care
plans and other types of enterprises does not reveal any long-term
efficiencies.
[E]ven in the presence of [efforts to achieve cost-savings] and
defined post-integration strategies, scale economies and merger
efficiencies are difficult to achieve. The econometric literature
shows that scale economies in HMO health plans are reached at
roughly 100,000 enrollees. * * * Moreover, the provision of health
insurance (e.g., front-office and back-office functions) is a labor-
intensive rather than capital-intensive industry. As a result, there
are minimal economies to reap as scale increases. * * * Finally,
there is little econometric evidence for economies of scope in these
health plans--e.g,. serving both the commercial and Medicare
populations. Serving these different patient populations requires
different types of infrastructure. Hence, few efficiencies may be
reaped from serving large and diverse client populations. Indeed,
really large firms may suffer from diseconomies of scale.\62\
---------------------------------------------------------------------------
\62\ Testimony of Professor Lawton R. Burns re. the Highmark/
lndependence Blue Cross Merger, before the Senate Judiciary
Committee (April 7, 2007).
---------------------------------------------------------------------------
United's actual record in achieving efficiencies is a mixed one
at best. Bigger is not necessarily better and a national platform is
not better than a local one. To provide just one example, United
completely disrupted efficient working relationships between
University Medical Center and PacifiCare by replacing the local
insurer's claims processing with a more bureaucratic national
one.\63\ This disruption in working operations increased the number
of unpaid claims and created other problems with provider services.
One need look no further than United's track record for inadequate
claims processing over the past five years.
---------------------------------------------------------------------------
\63\ See Laura Benko, ``Bigger Yes, But Better?'' Modern Health
Care, March 19, 2007.
---------------------------------------------------------------------------
The Nebraska Department of Insurance, which imposed a
fine of $650,000, the largest ever, on United Health for
inadequately handling complaints, grievance, and appeals.
In March 2006, the Arizona Department of Insurance
fined United $364,750 for violating State law by denying services
and claims, delaying payment to providers and failing to keep proper
records.
In December 2005, the Texas Department of Insurance
fined United $4 million for failing to pay promptly, lacking
accurate claim data reports and not maintaining adequate complaint
logs. They also had to pay restitution to physicians.\64\
---------------------------------------------------------------------------
\64\ Marshall Allen, ``Insurer Comes Here With a Trail of Fines
From Other States,'' Las Vegas Sun, June 20, 2007.
---------------------------------------------------------------------------
State imposed fines are an inadequate remedy for poor services
to patients and doctors. First, the actual payer of these fines is
the consumer, because United can pass these fines on to consumers in
the form of higher premiums and co-payments. Second, fines pose no
solace to patients that may suffer the persistent hounding from
creditors as a result of unpaid insurance claims. Further
consolidation will only enhance the likelihood of shoddy claims
service since consumers will have few rivals to turn to in response
to poor quality of service.
United may suggest the merger is procompetitive because it will
lead to improved cost containment initiatives. Of course, Sierra may
adopt those measures without a merger. In addition, although efforts
to contain costs are rooted in legitimate needs, the actual
implementation of cost containment efforts can produce negative
consequences for the quality of health care provided to consumers.
However, most cost containment efforts center on decreasing
utilization. Moreover, in concentrated markets, the likelihood of
administered pricing and agreements not to reimburse for a procedure
is more likely. Ultimately, the insurer's gross margin increases by
reducing access to care and the quality of care for consumers.
The burden should be on the merging parties to demonstrate that
the efficiencies they put forward are not speculative, that they
exceed the likely anticompetitive effects on consumers and suppliers
of services, and that the benefits will be passed on in the form of
lower premiums and better quality, rather than larger profits for
shareholders. It is highly unlikely that burden can be met in this
case.
Recommendations
The United-Sierra merger poses a serious threat to competition
in the provision of insurance and health care services in Nevada,
especially Clark County. This merger requires heightened scrutiny
given the currently high concentration of the health coverage
providers in the Nevada market and the current shortage of health
care professionals in the State. The merger should be denied because
it ``would * * * substantially * * * lessen competition in insurance
in Nevada or tend to create and monopoly,'' through the creation of
a dominant health insurance provider particularly in Clark County.
Moreover, it will lead to a reduction in the level and quahty of
service thus harming and prejudicing ``the members of the public who
purchase insurance.'' Enhancement of Nevada's health care requires
increased levels of competitton and greater market efficiency, which
cannot be achieved through a merger between two of the States
largest health insurance providers. The likelihood of competitive
harms from the United-Sierra merger is substantial, and the
procompetitive benefits de minimus. Pursuant to NRS 692C.258(l), we
urge the Commissioner to deny the merger application.
In the matter of: In the United States District Court for the
District of Columbia, United States of America, Plaintiff, v.
UnitedHealth Group Incorporated and Sierra Health Services, Inc.;
Defendants.
[Civil No. 1:08-cv-00322] Judge: Ellen S. Huvelle. Filed: 2/25/
2008.
Comments of the American Medical Association, Nevada State Medical
Association and The Clark County Medical Society on the Proposed
Consent Order
On February 25, 2008 the Antitrust Division of the Department of
Justice filed a complaint and proposed final judgment (``PFJ'') with
this Court regarding the acquisition of Sierra Health Services by
UnitedHealth Group. Although this acquisition creates a dominant
health insurer and permanently transforms the health insurance
market for Clark County, Nevada, the DOJ identified a very limited
set of competitive concerns in the Medicare Advantage market and
proposed a remedy limited to that market.
The American Medical Association, Nevada State Medical
Association and the Clark County Medical Society file these comments
pursuant to the Antitrust Procedures and Penalties Act, 15 U.S.C.
16(b-e) (known as the ``Tunny Act'') because the DOJ's complaint and
PFJ are seriously inadequate to remedy the competitive concerns
arising from this transaction. This merger results in United
dominating the commercial health insurance market with over a 56%
market share. In spite of the substantial level of concentration
resulting from this merger, the DOJ chose to challenge the impact of
the merger on a single duplicative product, Medicare Advantage. The
Justice Department's enforcement action is inadequate in several
respects.
It fails to secure relief in the market for the
purchase of physician services;
It fails to secure relief in the commercial insurance
market; and
It fails to prevent United from using contractual
provisions such as most favored nations and all products clauses
that may diminish the likelihood that the remedy will fully restore
competition. The relief is also inadequate to fully restore
competition in the Medicare Advantage market.
Finally, we explain why United's history of regulatory violations
should raise significant concerns about relying on its promises to
comply with the PFJ.
The DOJ decision not to challenge this acquisition is
inconsistent with critical healthcare concerns. As documented in
recent Congressional hearings before the Senate Judiciary Committee
and the House Small Business Committee there is a tremendous trend
of health insurance consolidation, which has led to higher premiums
and a greater number of uninsured.\1\ The proposed merger faced
almost unprecedented opposition from community groups, public
interest groups, healthcare alliances, physicians, nurses.
employers. and state legislators.\2\
---------------------------------------------------------------------------
\1\ See testimony from: Examining Competition in Group Health
Care, Hearing before the Senate Judiciary Committee, 109th Cong.
(Sept. 6, 2006), and Health Insurer Consolidation--The impact on
Small Business, Hearing before the House Small Business Committee,
110th Cong. (Oct. 25, 2007).
\2\ For example, see Jennifer Robison, MERGERS AND ACQUISITIONS:
Buyout sessions conclude. Las Vegas Rev. J. (July 28, 2007). Twenty-
four organizations and individuals ranging from doctors and nurses
to business owners, spoke out in opposition to the merger at the
Nevada Dept. of Ins. hearings held July 2007. In addition, there was
strong opposition to the merger by consumer groups including
Consumers Federation of American and the American Antitrust
Institute. See testimony of David A. Balto before the Nevada
Commissioner of Insurance on the UnitedHealth Group proposed
acquisition of Sierra Health Services, Inc. (July 27, 2007)
(appended herein as Attachment C).
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[[Page 49873]]
As described herein. the DOJ enforcement action is insufficient
to address the critical healthcare and competitive concerns in the
market highlighted by the widespread opposition. In spite of the
particularly fragile Nevada health care delivery system, DOJ applied
an even more lax standard than used in previous mergers and
permitted an unprecedented level of concentration clearly in
violation of the law and the Merger Guidelines. Ultimately, the
Nevada Attorney General had to step in and file a separate case in
federal court with 61-page consent order to address some, but not
all, of the concerns ignored by the DOJ.\3\ The PFJ should be
rejected and this matter should be reopened to fully address the
competitive concerns raised by this merger.
---------------------------------------------------------------------------
\3\ State of Nevada v. UnitedHealth Group Inc. and Sierra Health
Services, Inc., Case No. 2:08-cv-00233 (D. NV 2008).
---------------------------------------------------------------------------
I. The Interests of the Parties
These comments are submitted on behalf of the American Medical
Association, a non-profit professional association of approximately
240,000 physicians, residents, and medical students; the Nevada
State Medical Association, and the Clark County Medical Society. The
Medical Associations represent the interests of 1,458 doctors in the
State of Nevada, and in particular 846 doctors in Clark County.
These physicians will be competitively injured from the merger. The
merger will result in a dominant health insurance company with the
unilateral ability to reduce the level of compensation to physicians
and in turn reduce the level of service and quality of treatment
that those physicians can provide to patients. In addition, those
physicians purchase insurance for themselves and their employees and
will have to pay more for insurance because of this merger.
II. Procedural Background
In March 2007 United announced its proposed purchase of Sierra
for $2.6 billion. In May, the DOJ issued a ``second request'' under
the federal Hart-Scott-Rodino AntitrustImprovements Act of 1976,
seeking more information. The state of Nevada conducted a
simultaneous investigation.\4\
On February 25, 2008, after an 11-month investigation. the DOJ
and Nevada Attorney General's office filed simultaneous, but
separate enforcement actions. The DOJ action claimed that the merger
would pose significant competitive problems in the Medicare
Advantage health insurance market in Las Vegas, Nevada because the
merged firm would control 94% of the market. The DOJ alleged this
would result in higher prices, fewer choices, and a reduction in the
quality of plans purchased by seniors in this area. These concerns
were partially addressed within the PFJ which merely requires the
divestiture of United's Medicare Advantage business.
Simultaneously, the state of Nevada filed a complaint and decree
in federal court in Las Vegas, Nevada. The 61-page Nevada consent
order also compelled the divestiture of United's Medicare Advantage
business; but went far beyond the DOJ action and addressed
competitive concerns involving physicians, Clark County, the
University Medical Center and the delivery of healthcare to
underserved populations. For example, on physician-related concerns,
the Nevada decree enjoins the merging parties from enforcing all
products and most favored nations clauses in their contracts for a
period of two years, prohibits the merging parties from entering
into exclusive contracts with physicians for a period of two years,
and creates a Physicians Council for the purpose of addressing the
relations between United and physicians, among other relief.
III. The Tunney Act Standards
The Tunney Act requires that ``[b]efore entering any consent
judgment proposed by the United States * * *, the court shall
determine that the entry of such judgment is in the public
interest.'', 16 U.S.C. Sec. 15(e)(1). In applying this ``public
interest'' standard the burden is on the government to ``provide a
factual basis for concluding that the settlements are reasonably
adequate remedies for the alleged harms.'' United States v. SBC, 489
F.Supp. 2d 1, 16, (D.D.C. 2007), citing United States v. Microsoft
Corp., 56 F.3d 1448, 1460-61 (D.C. Cir. 1995).
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\4\ The Nevada Division of Insurance conducted hearings and
approved the merger in August 2007 based on an agreement that United
would maintain staffing levels in its local home office, would not
pass on acquisition costs to subscribers, and other provisions.
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The 2004 Congressional amendments to this Act specifically
overruled District of Columbia Circuit Court of Appeals and District
Court precedent that was deemed overly deferential to Antitrust
Division consent decrees.\5\ In response to those decisions,
Congress reemphasized its intention that courts reviewing consent
decrees ``make an independent, objective, and active determination
without deference to the DOJ.'' \6\ Courts are to provide an
``independent safeguard'' against ``inadequate settlements''.\7\
Specifically, the Act was amended to compel reviewing courts to
consider both ``ambiguity'' in the terms of the proposed remedy, as
well as the ``impact'' of the proposed settlements on ``competitors
in the relevant market or markets.'' \8\ Moreover, the 2004
amendments were adopted to highlight that Congress expected an
independent judiciary to oversee proposed settlements to ensure that
the needs of the consumer were met.
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\5\ In this matter, the DOJ may claim that the court's review is
limited to reviewing the remedy in relationship to the violations
that the United States has alleged in its complaint, and does not
authorize the court to go beyond the scope of the complaint. See FR
73, No. 47, at 12774 (March 10, 2008). We believe that view is
inconsistent with the legislative history of the 2004 Amendments to
the Tunney Act. Congress amended the Tunney Act in 2004 to overrule
District of Columbia Circuit Court of Appeals and District Court
precedent that was overly deferential to Antitrust Division consent
decrees. The amendments to the Tunney Act compel the reviewing court
to consider, inter alia, the ``impact'' of the entry of judgment on
``competition in the relevant market.'' See Pub. L. 108-327, Sec.
221(b)(2) rewriting 15 U.S.C. Sec. 16(e).
No suggestion is made in the statute or legislative history that
the courts should defer to either the Government's identification of
injury or the Government's proposed remedy to that injury. On the
contrary, as one of the authors of the legislation noted, the
reviewing court is to achieve an ``independent, objective, and
active determination without deference to the DOJ.'' See 150 Cong.
Rec., S. 3617 (April 2, 2004) (Statement of Sen. Kohl).
For criticism of the overly deferential standard see Darren Bush
and John J. Flynn, The Misuse and Abuse of the Tunney Act: The
Adverse Consequences of the ``Microsoft Fallacies'', 34 Loy. U. Chi.
L.J. 749 (2002-2003).
\6\ See 150 Cong. Rec., S 3617 (April 2,2004) (Statement of Sen.
Kohl).
\7\ Id.
\8\ Id.
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We submit the DOJ has an extra burden to justify the limited
relief in this case for two important reasons. First, the DOJ
decision not to bring an enforcement action challenging the
anticompetitive effects of the merger in the physician services or
commercial insurance markets described herein is inconsistent with
past enforcement actions such as United/PacifiCare\9\ and Aetna/
Prudential,\10\ in which it required a enforcement policy on health
insurance mergers it bears an obligation to disclose the reasons for
those changes, so that the court can determine whether entry of the
PFJ is in the public interest.
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\9\ United States v. UnitedHealth Group, Inc., Case No.
1:05CV02436 (D.D.C. Dec. 20, 2005) (complaint) [hereafter United/
PacifiCare Complaint], available at www.usdoij.gov/atr/cases/
f213800/213815.htm.
\10\ United States v. Aetna, Inc., Case No. 3:99CV1398-H (N.D.
Tex. June 21, 1999) (complaint) [hereinafter Aetna Complaint],
available at www.usdoj.gov/atr/cases/f2500/2501.pdf.
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Second, the action taken by the DOJ is inconsistent with the
State of Nevada's separate suit challenging the merger in federal
court in Nevada. In that action, the Nevada Attorney General secured
relief to address some of the substantial concerns raised by the
medical associations, consumer groups, Clark County, and public
interest groups. The Department's failure to address these concerns
in its enforcement action requires heightened scrutiny by this
court.
As described herein, the Department's apparent abandonment of
its prior enforcement policies and failure to address the concerns
recognized by the State of Nevada is especially unfortunate given
the national shortage of physicians and the medical market distress
that is particularly acute in Nevada.\11\ All of these concerns
demand the attention of this court.
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\11\ See Section IX herein.
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IV. No Relief in the Market for the Purchase of Physician Services
The DOJ erred in failing to secure relief in the market for the
purchase of physician services, even though the merger will
significantly increase the level of concentration in that market.
The merger will increase United's overall market share in the sale
of commercial insurance products to
[[Page 49874]]
56%. By combining two of the three largest buyers of physician
services in Clark County, the merger poses a significant threat of
reducing physicians' compensation and leading to an overall decrease
of the level of service provided to patients.
The DOJ has brought enforcement actions on potential concerns
over the decrease in competition in the past at market share levels
similar or less significant than in this matter. In Aetna/Prudential
it required a divestiture where the commercial insurance market
shares would increase from 44% to 63% in Houston \12\ and 26% to 42%
in Dallas \13\. In United/Pacificare it required a divestiture where
the commercial insurance market shares increased from 16% to 33% in
Tucson \14\ and to over 30% in Boulder, Colorado.\15\ These
enforcement actions were brought even though the defendants alleged
much lower market shares in the purchase of physician services
markets.
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\12\ Aetna Complaint at paragraph 22.
\13\ Id.
\14\ United/PacifiCare Complaint at 27.
\15\ Id. at paragraph 41.
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The nature of the health care industry facilitates the potential
for a dominant health insurer to exercise monopsony power over
physicians selling health care services within a geographic region.
Because medical services can be neither stored nor exported, health
care professionals have limited options for selling their services
to buyers (insurance firms and their customers). If the physicians
were to refuse the terms of the dominant buyer, they would likely
suffer an irrevocable loss of revenue. Consequently, a physician's
ability to terminate a relationship with an insurance coverage plan
depends on that physician's ability to make up lost business by
switching to an alternative insurance coverage plan. Where, as in
the instant case, those alternatives are lacking, a physician may be
forced to reduce the level of service in response to a decrease in
compensation. Moreover, it is difficult to convince patients to
switch to different plans.\16\ Consequently, according to the DOJ in
past enforcement actions, these physicians would not be in a
position to reject a ``take it or leave it'' contract offer and
could be forced to accept low reimbursement rates from a merged
entity, likely leading to a reduction in quantity or degradation in
quality of physician services.
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\16\ As alleged in the United/PacifiCare complaint, physicians
encouraging patients to change plans ``is particularly difficult for
patients employed by companies that sponsor only one plan because
the patient would need to persuade the employer to sponsor an
additional plan with the desired physician in the plan's network''
or the patient would have to use the physician on an out-of-network
basis at a higher cost. Complaint at paragraph 37.
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Moreover, the size of the insurer impacts the ability of a
physician to leave or credibly threaten to leave a plan. Not all
health insurers are equal from the perspective of a physician. To
terminate participation in a health insurer, a physician must make
up the lost revenue. Smaller plans will offer fewer prospective
patients. It makes little sense for a physician to switch to a plan
which has a substantially smaller market share because there will
not be enough patients to sustain the physician practice. Thus, it
is critical for antitrust enforcers to maintain a competitive market
in which physicians have adequate competitive alternatives.\17\
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\17\ In most cases, like this one, a firm with monopsony power
will also have market power in the downstream market--the sale of
commercial insurance so that lower input prices do not lead to lower
consumer output prices. See Peter J. Hammer and William M. Sage,
Monopsony as an Agency and Regulatory Problem in Health Care, 71
Antitrust L.J. 949, 967 (2004). But even if that was not the case,
there may be antitrust concerns if a health insurer can lower
compensation to physicians even if it can not raise prices to
patients. For example, in United/PacifiCare the DOI required a
divestiture based on monopsony concerns in Boulder even though
United/PacifiCare would not necessarily have had market power in the
sale of health insurance. The reason is straightforward--the
reduction in compensation would lead to diminished service and
quality of care, which harms consumers even though the direct prices
paid by subscribers do not increase. See Gregory J. Werden,
Monopsony and the Sherman Act: Consumer Welfare in a New Light. 74
Antitrust L.J. 707 (2007) (explaining reasons to challenge monopsony
power even where there is no immediate impact on consumers). Marius
Schwartz, Buyer Power Concerns and the Aetna-Prudential Merger,
Address Before the 5th Annual Health Care Antitrust Forum at
Northwestern University School of Law 4-6 (October 20, 1999) (noting
that anticompetitive effects can occur even if the conduct does not
adversely affect the ultimate consumers who purchase the end-
product), available at http://www.usdoj.gov/atr/public/speeches/
3924.wpd.
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These concerns are documented by the affidavit of Professor
David Dranove, the Walter McNerney Distinguished Professor of Health
Industry Management at the Kellogg School of Management at
Northwestern University.\18\ Professor Dranove investigated the
impact of the United/Sierra merger on the purchase of physician
services. Based on the physician survey, consisting of supervising
interviews with physicians and his knowledge of healthcare markets,
he concludes there is a relevant market for the purchase of
physician services in Clark County, Nevada. He further concludes
that the merger will pose a substantial risk of harm in that market,
and will adversely affect both physicians and consumers.
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\18\ See Dranove Aff. (May 13, 2008), appended herein as
Attachment A.
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Professor Dranove posits that perhaps one reason that the DOJ
did not seek to remedy potential anticompetitive effects in the
market for the purchase of physician services is that the DOJ
mistakenly underestimated the monopsony power created by the merger
by including Medicare and Medicaid in the relevant market.
Physicians can not increase their revenue from Medicare and Medicaid
in response to a decrease in commercial medical insurer
compensation. Enrollment in these programs is limited to the elderly
and disabled and there are only a fixed number of these patients.
Moreover, Medicaid pays physicians significantly less than
commercial insurance payers. Professor Dranove concludes: ``Medicare
and Medicaid do not represent viable alternatives for physicians who
face lower fees from a monopsonist insurer. Because Medicare and
Medicaid are large purchasers of physician services, excluding them
from market share calculations will profoundly change inferences
about market shares and monopsony power.\19\ Medicare and Medicaid
should therefore be excluded when computing shares in the market for
the purchase of physician services.
---------------------------------------------------------------------------
\19\ Id. at 4.
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Although the market share information in the market for the
purchase of physician services is not publicly available there are
proxies that can be used. The shares of the commercial market
present a useful proxy of the share in the physician market.
Professor Dranove has determined that the market shares in Sierra
and United in the Las Vegas metropolitan area (which closely
approximates Clark County) were 38% and 18% respectively. The
combined market share is 56%. Professor Dranove concludes that this
combined share, as well as the increase in share, raises substantial
concerns about monopsony power that the DOJ does not appear to have
addressed.\20\ United/Sierra's combined market share in the
commercial market suggests they have a substantial market share in
the physician payment market. These market shares are clearly
sufficient to raise concerns over the exercise of monopsony
power.\21\
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\20\ Id. at 4.
\21\ For example, in United/PacifiCare the DOJ alleged that the
combined firm would account for an excess of 35% of physician
reimbursement in Tucson and over 30% in Boulder. Yet in both of
these actions DOJ required a divestiture in order to resolve
concerns about the potential exercise of monopsony power. In
addition, as a former DOJ official explains, the unique nature of
health care physician services explains why monopsony concerns are
raised at lower levels of concentration than may be appropriate in
other industries. Mark Botti, Remarks before the ABA Antitrust
Section, ``Observations on and from the Antitrust Division's Buyer-
Side Cases: How Can ``Lower'' Prices Violate the Antitrust Laws,''
(April 18, 2007).
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Professor Dranove's affidavit and the results of the physician
survey demonstrate the potential anticompetitive effects of the
merger on the delivery of physician services. As he observes, some
physicians would have to cut back on the level of service. Other
physicians would consider moving from the market. Other physicians
might be forced to see fewer patients. Professor Dranove summarizes
the potential harm to consumers:
Part and parcel with a reduction in the compensation of
physicians will be a reduction in the number of physicians who
participate in the monopsonist's network. (This is the natural
consequence of a monopsonist moving down its upward sloping supply
curve.)\22\ The patients who previously utilized the services of
physicians who are no longer in the network must now either (a)
select another, less preferred physician within the network, or (b)
see their prior physician out-of-network and consequently pay higher
out-of-network fees. Either way, these patients are worse off than
before the exercise of monopsony power.
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\22\ When supply is upward sloping, a seller with monopsony
power profits by reducing the wages it pays, relative to the
competitive wage. By doing so, fewer suppliers offer their goods and
services, so that the monopsonist ends up reducing the quantity of
output it produces.
---------------------------------------------------------------------------
Even the patients of physicians who remain in the United/Sierra
network may be
[[Page 49875]]
worse off, because the reduction in the fees paid to these
physicians may cause them to reduce the quantity and/or quality of
services they provide* * *
If physicians reduce their office hours, this is likely to
affect access for all of their patients. (Physicians who contract
with a monopsonist could not normally limit their availability to
the monopsonist's patients only.) Similarly, if a physician cuts
back on staff and/or equipment, or invests less in continuing
education, all patients would surfer. Of course if the physician
exits the market altogether, all patients suffer.\23\
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\23\ Dranove Aff. at 6-7
The DOJ's failure to oppose the merger suggests that it takes a
benign view about the creation of monopsony power. Perhaps the DOJ,
like proponents of health insurer mergers, is now taking the view that
health insurers are ``buyers'' acting in the interest of reducing
prices. As we suggested earlier, this view fails to come to grips with
the monopsony issue in any meaningful way and fails to address the
reality that patients are the ultimate consumers.\24\ As a general
proposition, monopsony power does decrease economic welfare.
Monopsonists drive down their buying price by purchasing fewer
products. Because there is less product purchased, there is, in turn,
less product sold.\25\ Thus, the reduced input costs of monopsonist
medical insurers will not necessarily result in lower premiums to
patients and hence elevated levels of consumer welfare. This fact was
emphasized by R. Hewitt Pate, the Assistant Attorney General of the
Antitrust Division, in a 2003 statement before the Senate Judiciary
Committee:
---------------------------------------------------------------------------
\24\ Francis H. Miller, Vertical Restraints and Powerful Health
Insurers: Exclusionary Conduct Masquerading as Managed Care?, 51 Law
& Contemp. Probs. 195, 222 (1998).
\25\ 2A Phillip E. Areeda & Herbert Hovenkamp, Antitrust Law
Sec. 575, at 363-64 (2002).
A casual observer might believe that if a merger lowers the
price the merged firm pays for its inputs, consumers will
necessarily benefit. The logic seems to be that because the input
purchaser is paying less, the input purchaser's customers should
expect to pay less also. But that is not necessarily the case. Input
prices can fall for two entirely different reasons, one of which
arises from a true economic efficiency that will tend to result in
lower prices for final consumers. The other, in contrast, represents
an efficiency-reducing exercise of market power that will reduce
economic welfare, lower price for suppliers, and may well result in
higher prices charged to final consumers.\26\
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\26\ R. Hewitt Pate, Asst. Att'y Gen., Antitrust Div., U.S.
Dept. of Justice, Statement Before the Senate Committee on the
Judiciary Concerning Antitrust Enforcement in the Agricultural
Marketplace, at 4 (Oct. 20, 2003), available at http://
www.usdoj.gov/atr/public/testimony/201430.pdf.
Moreover, University of Pennsylvania Health Economics Professor
Mark Pauly has demonstrated that health insurers with monopsony power
may profit from pushing provider prices ``too low'' so that consumers
do not receive an adequate level of service and quality.\27\ Also,
because health insurer monopsonists typically are also monopolists,
lower input prices do not lead to lower consumer output prices.\28\
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\27\ Mark V. Pauly, Competition in Health Insurance Markets, 51
Law & Contemp. Probs. 237 (1998).
\28\ Peter J. Hammer and William M. Sage, Monopsony as an Agency
and Regulatory Problem in Health Care, 71 antitrust L.J. 949 (2004).
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In any event, health insurers are not true fiduciaries for
insurance subscribers. Plan sponsors may have a limited concern over
the product based on the cost of the insurance, and not the quality of
care. Furthermore, health coverage plans operate in the interest of a
group, not in the best interest of individual patients. Consequently,
health insurers can increase profits by reducing the level of service
and denying medical procedures that physicians would normally perform
based on professional judgment. In the absence of competition among
insurers, patients are more likely to pay for these procedures out-of-
pocket or forego them entirely. Ultimately, the creation of monopsony
power from a merger can adversely impact both the quantity and quality
of health care.
Finally, the evidence from mergers throughout the U.S. strongly
suggests that the creation of buyer power from health insurance
consolidation has not benefited competition or consumers.\29\ Although
compensation to providers has been reduced, health insurance premiums
have continued to increase rapidly. Moreover, evidence from other
mergers suggests that insurers do not pass savings on from these
mergers on to consumers. Rather, insurance premiums increase along with
insurance company profits. As Professor Lawton Burns has observed in
Congressional testimony:
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\29\ See testimony from: Examining Competition in Group Health
Care, Hearing before the Senate Judiciary Committee, 109th Cong.
(Sept. 6, 2006), and Health Insurer Consolidation--The Impact on
Small Business, Hearing before the House Small Business Committee,
110th Cong. (Oct. 25, 2007).
[T]he recent historical experience with mergers of managed care
plans and other types of enterprises does not reveal any long-term
efficiencies.
[E]ven in the presence of [efforts to achieve cost-savings] and
defined post-integration strategies, scale economies and merger
efficiencies are difficult to achieve. The econometric literature
shows that scale economies in HMO health plans are reached at
roughly 100,000 enrollees. * * * Moreover, the provision of health
insurance (e.g., front-office and back-office functions) is a labor-
intensive rather than capital-intensive industry. As a result, there
are minimal economies to reap as scale increases. * * * Finally,
there is little econometric evidence for economies of scope in these
health plans--e.g., serving both the commercial and Medicare
populations. Serving these different patient populations require
different types of infrastructure. Hence, few efficiencies may be
reaped from serving large and diverse client populations. Indeed,
really large firms may suffer from diseconomies of scale.\30\
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\30\ Testimony of Professor Lawton R. Burns re. the Highmark/
Independence Blue Cross Merger, before the Senate Judiciary
Committee (April 7, 2007).
Concerns about the merger's impact in the physician market were
recognized by the Nevada Attorney General in the companion enforcement
action brought in federal court in Nevada. The Nevada Attorney General,
although filing a similar complaint, secured some relief to address
physician reimbursement issues. The Department's failure to address
these concerns demonstrates the inadequacy of its enforcement action.
In sum, the merger poses significant risks of harm in the market
for the purchase of physician services and will lead to a diminution of
the quality of healthcare in Clark County's underserved healthcare
market. The DOJ should have secured relief that would have prevented
this harm in the physician services market. In any case, the DOJ should
provide an extensive statement on its reasons not to bring an
enforcement action in this market, including whether the relevant
market includes governmental payors.\31\
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\31\ Providing clarity on the reasons not to bring an
enforcement action in these markets is consistent with the
Division's policy on ``Issuance of Public Statements Upon Closing of
Investigations,'' available athttp://
www.usdoj,goviatripublicimidelines/201888.htm (factors that will
lead to the issuance of a closing statement include ``whether the
matter has received substantial publicity [and] the value to the
public in receiving information regarding the reasons for non-
enforcement (including public trust in the Department's enforcement,
and the value of the analysis for other enforcers, businesses and
consumers)''). DOJ has issued closing statements in other health
insurance mergers. See DOJ Press Release No. 04-497 (statement
closing investigation of UnitedHealth's acquisition of Oxford Health
Plans), available at http://www.usdoj.gov/atr/public/press_
release/2004/204674.htm.
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V. The DOJ Has Arbitrarily Departed From its Past Antitrust Enforcement
Policies
As discussed earlier, the DOJ has brought enforcement actions
against insurance mergers which threatened harm to the market for the
purchase of physician services. In these cases, the DOJ adopted the
position that antitrust should be concerned with monopsony
[[Page 49876]]
mergers harming suppliers without the necessity for evidence of harm to
downstream consumers.
Accordingly in challenging Aetna's 1999 acquisition of Prudential
and United's 2006 acquisition of PacifiCare, the DOJ addressed the harm
to health care providers from the exercise of monopsony power. Both of
these mergers were resolved with divestitures to facilitate the entry
of new competitors to remedy the competitive concerns. In the Aetna/
Prudential matter, the proposed merger would have increased Aetna's
market share from 26% to 42% in Dallas, giving the merged entity a
smaller share than would result from the merger here. Nevertheless, the
DOJ concluded that the merger raised monopsony concerns by giving the
merged firm the potential to unduly suppress physician reimbursement
rates, resulting in a reduction of quantity or degradation of quality
of medical services. The operative question from DOJ's perspective was
could health care providers defeat an effort by the merged firm to
reduce provider compensation by a significant amount, e.g. 5%. The
question was answered in the negative for the same reasons explained by
Professor Dranove in the instant case: physicians have limited ability
to encourage patients to switch health plans, and physicians' time
(unlike other commodities) cannot be stored, which means that
physicians incur irrecoverable losses when patients are lost but not
replaced. To exacerbate matters, contracts with physicians were
negotiated on an individual basis, and were therefore susceptible to
price discrimination by powerful buyers. Thus, DOJ concluded that Aetna
had sufficient power to impose adverse contract terms on physicians,
especially decreased physician reimbursement rates, which would
``likely lead to reduction in quantity or degradation in the quality of
physicians' services.\32\ As a remedy, the DOJ ordered Aetna to divest
the business that would have given the merged entity monopsony power.
---------------------------------------------------------------------------
\32\ Aetna Complaint at paragraph 33.
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VI. The DOJ's Reversal in Its Enforcement Stance Comes Under
Particularly Adverse Circumstances in Nevada
Merger analysis always focuses on the unique circumstances in every
market. The Nevada healthcare market is particularly vulnerable,
because of longstanding shortages of healthcare providers. Here are the
simple facts:
Nevada ranks 47th for access to care (based on the number
of adults that should have visited a doctor but did not because of
costs, and the number of uninsured);
Nevada ranks 45th in access to physicians--approximately
25 percent below the nationwide median and has one of the lowest
physician to population ratios;\33\
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\33\ Nationally, there is a substantial and increasing shortage
of physicians. See e.g. Health Resources and Services Administration
(HRSA) Physician Supply and Demand: Projections to 2020. (Oct 2006)
Projecting a shortfall of approximately 55,000 physicians in 2020)
Merritt, J., J. Hawkins, et al. Will the Last Physician in America
Please Turn Off The Lights? A Look at America's Looming Doctor
Shortage. Irving, TX. Practice Support Resources, Inc. (2004)
(Predicting a shortage of 90,000 to 200,000 physicians and that
average wait times for medical specialties is likely to increase
dramatically behond the current range of two to five weeks. This
problem is far worse in Nevada.
---------------------------------------------------------------------------
Nevada ranks 51st in the country in quality of care (based
on the number of adults receiving recommended screenings, diabetics
receiving preventive care, Medicare patients that get enough time with
a doctor);
Nevada is last for immunization coverage for children
under age 3--a fundamental role of primary care;
Not surprisingly, based on the foregoing data, Nevada is
41st for mortality rates.
Assuming that Clark County's performance measures are similar to
the rest of the state, allowing this merger into monopsony will for the
reasons explained earlier, lead to a further reduction in quantity and
degradation of quality of physician services. Thus, DOJ's refusal to
adhere to its previous enforcement stance in cases of health insurer
mergers into monopsony demand the attention of this court.
Turning to the market for the sale of commercial insurance where
the parties control over 50% of the market in Clark County, Nevada, the
record of health insurance coverage has been deplorable. Nevada has
nearly half a million residents without health care coverage, almost 25
percent of the State. A high uninsured population not only presents
health problems for those without coverage. When the uninsured do
receive medical care, the costs are often shifted to the insured
population; 2005 estimates indicate that health care treatment for
uninsured persons in Nevada cost $397 million, $314 million of which
was covered by higher premiums for those with insurance.\34\ These
factors too strongly suggest that the Court should be particularly
judicious in evaluating the adequacy of the PFJ.
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\34\ Paying a Premium: The Added Cost of Care for the Uninsured.
Families USA (June 2005). Available at http://www.familiesusa.org/
assets/pdfs/Paying_a_Premium_rev_July_1373le.pdf.
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VII. No Relief in the Market for the Sale of Commercial Insurance
We believe that the DOJ also erred by not securing relief in the
market for the sale of commercial insurance. Sierra and United were
respectively the first and third largest sellers of commercial
insurance products (including both .HMO and PPO products). The merger
led to a combined share in the commercial insurance market of 56%. If
the market was limited to HMO products, where United and Sierra were
the two largest rivals the combined market share was 90%. In similar
cases, the DOJ has required divestiture to resolve competitive
concerns.
For example in United/PacifiCare, the DOJ defined a relevant
product market as the sale of commercial health insurance to small
group employers. This market consisted of employers with 2-50
employees. These employers were particularly susceptible to potential
anticompetitive conduct because they lacked a sufficient employee
population to self-insure and they lacked the multiple locations
necessary to reduce risk through geographic diversity. In addition, the
manner in which commercial health insurance was sold also distinguished
the small and large group markets. Large employers were more likely
than smaller employers to be able to successfully engage in extensive
negotiations with United and PacifiCare.
We believe that both an HMO and small employer market may be
adversely affected by the United-Sierra merger. Surveys demonstrate
that consumers do not perceive HMOs and PPOs as substitute products,
and consumers believe that they differ in terms of benefit, design,
cost, and general approaches to treatment.\35\ PPOs tend to provide
more flexibility in selection of physicians and specialists and tend to
be more expensive. In contrast, HMOs focus more on preventative
medicine but limit treatment options and require referrals from a
``gatekeeper'' for many procedures. Moreover, small employers are less
likely to have significant alternatives in response to a price increase
by the merged firm. Small employers are unable to self-insure and have
little power to negotiate better rates.
---------------------------------------------------------------------------
\35\ See United States v. Aetna, Civil Action 3-99CV1398-H
(N.D.Tex, 1999) (Revised Complaint Impact Statement).
---------------------------------------------------------------------------
Again, as in the physician services market, the PFJ should be
reopened to
[[Page 49877]]
secure relief in the commercial insurance market. In the alternative,
the DOJ should issue a comprehensive statement of its reasons not to
seek enforcement in this market.
VIII. Inadequacy of Remedies
Finally, the proposed remedies in the PFJ are inadequate in several
respects. First, the restrictions that a dominant firm can impose on
physicians are often critical to the acquirer of divested assets to
effectively compete in the market. In this case, there are a variety of
provisions that United can use that will deter the ability of the
acquirer of the divested Medicare Advantage business to restore
competition. For example, if Humana (the acquirer of United's Medicare
Advantage business) were to attempt to attract greater physician
coverage through attractive reimbursement rates, United could impose
``most favored nations'' provisions, which would prevent doctors from
giving a more attractive rate to Humana. Similarly, United could
utilize ``all products clauses'' which would require physicians to
participate in United's Medicare Advantage program as a condition for
participating in United's commercial program.\36\ Professor Dranove
explains how both of these provisions can be used in anti-competitive
fashion.\37\ The PFJ should have prevented the use of these
provisions.\38\
---------------------------------------------------------------------------
\36\ All products clauses were prohibited in the consent order
in United/Pacificare. See United States v. UnitedHealth Group Inc.,
Case No. 05CV0436 (D.D.C. 2005) (Competitive Impact Statement at
sec. III).
\37\ Dranove Aff. at 8.
\38\ There may be a suggestion that the relief in the Nevada
consent decree may be sufficient to address these concerns. We do
not agree with that view. The Nevada decree only prohibits these
provisions for a short time--2 years. That period is inconsistent
with the DOJ remedy in United/PacifiCare, which banned these
provisions for the life of the Judgment.
---------------------------------------------------------------------------
Second, the DOJ requires solely the divestiture of the Medicare
Advantage business rather than all of United's health insurance
business in Clark County. This piecemeal approach faces a significant
risk of failure. There is no evidence that a Medicare Advantage
business can operate solely on its own without a commercial component.
There are significant economies of scope and scale that exist when both
commercial and Medicare Advantage businesses are combined. Moreover,
the failure to divest an entire ongoing business is inconsistent with
the DOJ's Merger Remedy Guidelines.\39\
---------------------------------------------------------------------------
\39\ See Antitrust Division Policy Guide to Merger Remedies,
U.S. Dept. of Justice, Antitrust Division at sec. III, C., (Oct.
2004).
---------------------------------------------------------------------------
The remedy is inadequate in several other respects. First, the DOJ
recognizes the critical aspect of trademarks in being able to secure
and keep an ongoing business. To elderly consumers the names ``United''
or ``Sierra'' are nowhere near as important or prominent as ``Secure
Horizons,'' ``AARP'' or ``Senior Dimensions.'' In situations like this
where trademarks are of particular importance to continue to secure
customer loyalty, the antitrust agencies often prevent the merged party
from using the trademark for a period of time. However, in this case
the Justice Department imposed that obligation for only an extremely
short period of time. Essentially within one to two years United can
again reuse the Senior Dimensions (after March 31, 2010) or AARP (after
March 31, 2009) trademark and lure customers to United's product.
We believe the remedy should be strengthened in the following
fashion. First, the PFJ should require the divestiture of all of
United's business and not just the Medicare Advantage business. Second,
if the divestiture is limited to the Medicare Advantage business, the
trademarks should be conveyed for at least five years. Third, United's
use of all products clauses and most favored nations provisions should
be permanently enjoined.
IX. United's Prior Acts of Broken Promises
In evaluating whether the remedies in the PFJ are adequate, it is
critical to recognize United's past record of continual disregard of
its regulatory obligations. No other health insurance company has been
the subject of as many serious enforcement actions involving the
violation of consumer protection and insurance regulations. This record
of continual regulatory abuse raises a serious likelihood that United
will fail to comply with any regulatory order. United has a long track
record of disregarding its regulatory obligations and patient
protection laws.\40\
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\40\ See American Medical Association letter to Nevada
Commissioner of Insurance, Alice A. Molasky-Arman (June 5, 2007)
concerning the history of United in failing to comply with state
regulations (appended herein as Attachment B).
---------------------------------------------------------------------------
In February 2008, California regulators imposed a potential penalty
of $1.3 billion in fines against United for violating the law more than
130,000 times \41\ after acquiring PacifiCare. Upon reviewing 1.1
million claims, the investigation found that after United acquired
PacifiCare in 2005, United failed to pay claims in a timely manner and
had over a 10% overall error rate in processing claims. United
wrongfully denied claims for covered medical care, with regulators
finding that 30% of reviewed HMO claims were denied incorrectly and 55%
of certain claims were incorrectly denied as duplicate submissions when
they were not in fact duplicate submissions. Regulators found that 29%
of reviewed provider disputes were handled incorrectly, and that
documents including medical records, had been lost by United. In
addition, United lacked sufficient staffing to process claims in a
timely manner and had failed to provide accurate lists of in-network
providers to consumers. Finally, regulators in California found that
United lacked efficient procedures to handle provider disputes.
---------------------------------------------------------------------------
\41\ Girion, Lisa, Health Plan Faces Fines of $1.33 Billion, Los
Angeles Times, January 29, 2008.
---------------------------------------------------------------------------
Earlier this year, the New York Attorney General announced an
investigation of United and other insurance companies for possible
fraud. The New York Attorney General believes the insurance companies,
including United, have used corrupted data from United-owned firm
Ingenix to set unfair and unjustifiably low reimbursement rates for out
of network physicians, resulting in higher out-of-pocket costs for
consumers.\42\
---------------------------------------------------------------------------
\42\ Cuomo expands probe of health insurers. Modern Healthcare
Daily Dose. March 6, 2008.
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In a landmark enforcement action in September 2007, Insurance
Commissioners in 36 states assessed a $20 million fine against United
Health for ongoing failures in processing claims and responding to
consumer complaints.\43\ This settlement establishes numerous claims
processing payment requirements and makes provisions for substantial
regulatory relief and additional fines during its term which does not
expire until December 31, 2010.
---------------------------------------------------------------------------
\43\ Allen, Marshal. 36 States Join to Fine UnitedHealth, Las
Vegas Sun, September 13, 2007.
---------------------------------------------------------------------------
Finally, other states have brought similar enforcement actions
against United. In December 2006, the Nebraska Department of Insurance
imposed its largest fine ever when it fined United $650,000 for failing
to handle complaints, grievances and appeals in a timely fashion. In
March 2006, the Arizona Department of Insurance fined United $364,750
(the largest fine in its history) for violating state law by denying
services and claims, delaying payment to providers, and failing to keep
proper records. In December 2005, the Texas Department of Insurance
fined United $4 million for failing to pay claims promptly, lacking
accurate claim data reports and not maintaining adequate complaint
logs.
[[Page 49878]]
We believe that these violations raise serious concerns about
United's likely compliance with the provisions of the PFJ and highlight
the need to strengthen the PFJ provisions. We suggest that the PFJ be
modified to immediately impose the use of a monitor trustee to ensure
compliance with the order.
X. Conclusion
After an 11-month investigation of a merger posing an unprecedented
level of concentration in perhaps the most vulnerable healthcare market
in the United States, the DOJ chose a modest remedy on a single line of
business. That remedy is inadequate to resolve the concerns in the
Medicare Advantage market and is inconsistent with the DOJ's Merger
Remedy Guidelines. But more important, the FJ fails to address the
significant loss of competition in both the purchase of physician
services and sale of commercial insurance markets. Although the State
of Nevada attempted to supplement the modest DOJ action, both actions
permit a merger that poses a significant threat of causing substantial
harm to consumers.
Thus, we believe the PFJ should be rejected. If the court, however,
accepts the FJ, we strongly urge it to treat the PFJ as an interim
remedy and expressly leave open the possibility of supplementing the
PFJ with additional remedies to address these competitive concerns.\44\
\44\ See remarks of former Federal Trade Commission Chairman
Robert Pitofsky, A Slightly Different Approach to Antitrust
Enforcement before the Antitrust Section of the American Bar
Association, Chicago Illinois (Aug. 7, 1995). Available at http://
www.ftc.gov/speeches/pitofsky/pitaba.shtm.
---------------------------------------------------------------------------
Dated: May 15 2008.
Respectfully Submitted,
David A. Balto,
Attorney at Law,
2600 Virginia Ave., NW.,
Suite 1111,
Washington, DC 20037.
Attachment A
In the matter of: United States of America, Plaintiff v.
UnitedHealth Group Incorporated and Sierra Health Services, Inc.;
Defendants.
[Civil No. 1:08-cv-00322]
Judge: Ellen S. Huvelle.
Filed: 2/25/2008.
Affidavit of Professor David Dranove
I. Qualifications
I am the Walter McNerney Distinguished Professor of Health Industry
Management at the Kellogg School of Management, as well as the Director
of the Center for Health Industry Market Economics and the Director of
Health at Kellogg. I have studied health care competition for over 20
years and have published numerous books and peer reviewed papers on the
topic. My vita is attached.
I have also studied the Nevada health care market place, paying
particular attention to physician markets in Clark County. This
includes examining secondary data and supervising a physician survey. I
am submitting this affidavit because I am concerned about the potential
anticompetitive impact of the merger of UnitedHealth Group and Sierra
Health Services, particularly the impact on the market for physician
services.
II. Background \1\
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\1\ The American Medical Association paid for the time I spent
researching the Nevada market and preparing this affidavit.
---------------------------------------------------------------------------
The proposed merger between UnitedHealth Group and Sierra Health
Services would create the largest private health insurer in Nevada. The
Antitrust Division of the U.S. Department of Justice (DOJ) has reviewed
this merger and filed a Complaint, Competitive Impact Statement, and
Proposed Consent Order that narrowly focus on conduct and a remedy in
the output market for Medicare Managed Care insurance. Specifically,
UnitedHealth will be required to divest its Medicare Managed Care
offerings as a condition for DoJ approval.
I have extensively researched health care competition, including
competition among insurers. I have also studied the Nevada healthcare
marketplace, including conducting interviews and a survey of Nevada
physicians that I describe below. In my opinion, the DoJ focus on the
Medicare Managed Care market is too narrow. In particular, the proposed
remedy is inadequate because it fails to address the potential for the
United/Sierra merger to create monopsony power in the market for the
purchase of physician services.\2\ It also does not address the
potential for a dominant insurer to limit competition by such
arrangements such as most favored nation contracts and bundling of
contracts.
---------------------------------------------------------------------------
\2\ Merger analysis focuses on the potential exercise of market
power. ``Monopsony power'' is the power to decrease prices paid to
producers or service providers who have little opportunity to sell
other than to the monopsonist.
---------------------------------------------------------------------------
In the remainder of this affidavit, I explain why I believe the
United/Sierra merger raises concerns about monopsony power in the
market for purchasing physician services and also why it poses a
substantial threat of anticompetitive behavior in output markets. With
regards to the issue of monopsony in particular, I am concerned that
the DOJ did not apply the proper economic analysis. I discuss monopsony
in detail in sections III-VI of this affidavit. Section VII presents a
shorter discussion of other issues. My main conclusion is that the
United/Sierra merger may pose a substantial risk of harm in the market
for the purchase of physician services that would adversely affect both
healthcare providers and consumers, and that this risk was apparently
underestimated by the DOJ.
III. Theory of Monopsony Power
Market Definition
In order to determine whether a merger poses a risk of the exercise
of market power, or in this case, monopsony power it is essential to
first define the market in which competition takes place. Markets are
defined in both product and geographic dimensions. Competition between
United and Sierra takes place in both input and output markets; I am
focusing on input markets.
Market definition requires defining both a product market and
geographic market. I will first consider the product market. Insurers
purchase many inputs, including physician services. There are no
adequate substitutes for physician services, due both to training and
licensing laws. Moreover physicians are confined to supplying services
within their training and licensures and cannot do something else in
response to a decrease in compensation. Thus, the purchase of physician
services represents a relevant product market.\3\
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\3\ There may well be even smaller markets within the physician
services market, such as markets for specific specialties.
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I believe that a relevant geographic market consists of an area no
larger than the Las Vegas metropolitan area, which can be approximated
by Clark County. This is a relevant geographic market from an input
market perspective because physicians have limited alternatives in
responding to a decrease in compensation. Physicians could not, for
example travel to Los Angeles for additional business.\4\ At the same
time, insurers offering provider networks to Las Vegas area employers
and employees could not expect to do
[[Page 49879]]
business if their networks excluded Clark County providers. Thus, I
believe it is indisputable that physician services in Clark County
comprise a relevant market for antitrust analysis.
---------------------------------------------------------------------------
\4\ Moreover, from the output market perspective the market is
limited to Clark County. Insurers must market their provider
networks to employers, who in turn make the network available to
their employees. Most firms draw their workers from local areas,
such as metropolitan areas. For example, it would be impractical for
a Las Vegas casino to offer its employees a physician network that
relied on physicians outside of Clark County.
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It Is Appropriate To Exclude Medicare and Medicaid
Competitive concerns arise whenever a firm, through merger,
eliminates an important rival and gains the ability to influence
prices. This is why market share calculations are so important to
assessing mergers.
A critical issue in determining the likely effect of a medical
insurer merger on the market for physician services may be whether to
center the analysis on the commercial market share affected by the
merger and to exclude Medicare and Medicaid, which are typically two of
the largest purchasers in any medical market. The DoJ does not discuss
potential monopsony power in the input market that I have defined,
perhaps because it included Medicare and Medicaid beneficiaries in its
calculation of buyer side market shares, and as a result the market
shares of United and Sierra were not large enough to rise to the level
of monopsony. But careful consideration suggests that the market for
measuring monopsony power does not include Medicare and Medicaid.
A useful place to start thinking about this problem is to consider
the more familiar problem of defining output markets. Suppose there are
four firms--A, B, C, and D--equally dividing an output market. Suppose
that firm A raises price by, say, $2 per unit. In the absence of
collusive behavior, this effort is likely to fail, because consumers
who are unhappy about the price increase will purchase the product from
B, C, or D. This helps explain why antitrust analysts are rarely
concerned about the potential exploitation of market power when there
are many sellers in a market.
Now consider the same market with the same four sellers, only this
time B, C, and D are capacity constrained. If A raises its prices, its
consumers would either accept the increase or do without the product.
They would not be able to take their business elsewhere. This gives
seller A effective monopoly power over its customers. Thus, it is the
ability of consumers to redirect their business away from a high price
seller, and not the number of sellers per se, that limits a seller's
ability to increase its prices.
The same intuition applies to monopsony. Suppose there are four
purchasers of an input, again labeled A, B, C, and D. If purchaser A
attempts to reduce the wage it pays for the input by $2 per unit,
suppliers of the input would offer their services to purchasers B, C,
and D. Thus, A's effort will fail. But if purchasers B, C, and D are
constrained in the amount of labor inputs they can use in production,
then sellers will not be able to redirect their output to these
purchasers.\5\ This gives purchaser A effective monopsony power over
its suppliers.
---------------------------------------------------------------------------
\5\ Workers might offer their services to B. C, and D, but if
these firms accept, they would have to lay off other workers, who in
turn would face the same tradeoff as the new hires--work for A or
stop working.
---------------------------------------------------------------------------
With this intuition in hand, consider the market for physician
services. Physicians who agree to participate in the network of insurer
A accept a discounted fee from A in exchange for an expectation of
higher volume. Physicians who do not agree to participate may still
treat insurer A's enrollees as ``out of network'' patients, often
requiring those patients to pay higher fees.
Suppose A reduces physician fees. As noted by the DoJ in their
complaint against the merger between United and PacifiCare,\6\ the
ability of A to sustain this fee reduction ``depends on the physician's
ability to terminate (or credibly threaten to terminate) the
relationship. A physician's ability to terminate a relationship with a
commercial health insurer depends on his or her ability to replace the
amount of business lost from the termination (emphasis added), and the
time it would take to do so. Failing to replace lost business
expeditiously is costly.'' \7\
---------------------------------------------------------------------------
\6\ United States v. UnitedHealth Group Inc., Case No.
1:05CV02436 (D.D.C. Dec. 20, 2005), available at http://
www.usdoj.gov/atr/cases/f213800/213815.htm.
\7\ Complaint at Paragraph 36.
---------------------------------------------------------------------------
In determining the potential exercise of monopsony power, I assume
the DoJ considered the options available to physicians. Physicians
might refuse to contract with A. Insurer A's patients would then have
to go out-of-network or seek a different insurer who has kept a broad
network. (This is analogous to the case where the would-be monopsonist
lowers its wages, and suppliers offer their services elsewhere.)
Physicians might be proactive, joining rival networks and encouraging
patients (and their employers) to switch plans. As a result, insurer A
might end up with fewer enrollees. In this way, the presence of rival
purchasers is essential if physicians are to have a ``credible''
ability to terminate their relationship with insurer A.
Physicians cannot increase volume or revenue by persuading their
patients to sign up for Medicare, however, because enrollment in these
programs is limited to the elderly and disabled.\8\ Nor can physicians
collectively treat more Medicare patients, because there are a limited
number of patients and there is no means to increase the volume of
patients. Thus, insurer A cannot lose physician business to Medicare;
Medicare's business is fixed. Thus, from the perspective of physicians,
the Medicare population is fixed. An analogous argument applies to
Medicaid.
---------------------------------------------------------------------------
\8\ The exception is Medicare managed care, as recognized by the
DoJ consent order.
---------------------------------------------------------------------------
Even if physicians could collectively increase their Medicare and
Medicaid workloads, this would not be an attractive alternative because
Medicare, and, especially Medicaid, typically pay significantly lower
rates than do private insurers. Medicaid rates are so much lower than
most private insurer rates that few physicians would consider dropping
insurer A in favor of Medicaid business even if insurer A lowered its
rates appreciably.
The above argument demonstrates that when defining a relevant
market for contracting for physician services, and computing market
shares in that market, it is appropriate to exclude Medicare and
Medicaid. Medicare and Medicaid do not represent viable alternatives
for physicians who face lower fees from a monopsonist insurer. Because
Medicare and Medicaid are large purchasers of physician services,
excluding them from market share calculations will profoundly change
inferences about market shares and monopsony power.
IV. Evidence on Monopsony Power
Physician Survey and Interviews
In my investigation I conducted physician telephone interviews in
which I asked them about the competitive environment and how they might
respond to the United/Sierra merger. Based on these interviews, I
developed and oversaw a survey of physicians in Clark County. We sent
surveys via e-mail, fax, and mail to the administrators of all 122
medical group practices identified in Clark County using the Universe
File of the Medical Group Practice Association and to a random sample
of 333 office-based physicians in the County, drawn from the American
Medical Association Masterfile and oversampling primary care physicians
and obstetrician-gynecologists. Twenty-four medical group
administrators responded (for a response rate of 22.9% after adjustment
for invalid and duplicate records). Seventy-three physicians responded
(for an adjusted response rate of 27.5%). Additional details of the
survey are
[[Page 49880]]
included as an appendix to this affidavit.\9\
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\9\ The survey had several limitations. Due to the desire to
maximize responses, the survey was kept deliberately short. This
limited our ability to tailor survey questions to address specific
economic issues. Despite the brevity of the survey, the response
rate was too low to reach definitive conclusions. Even so, the
findings were sufficiently suggestive that, in my opinion, the DoJ.
should have investigated these issues more thoroughly.
---------------------------------------------------------------------------
Survey Findings Pertaining to Monopsony Power
A purchaser has monopsony power if it faces ``upward sloping
supply.'' That is, the firm is able to reduce the price it pays for
inputs without driving all of its input suppliers to other purchasers.
One way to assess the potential presence of monopsony power is to
determine whether suppliers have viable alternatives in the event they
could not sell to the potential monopsonist. If a purchaser had
monopsony power, then suppliers would respond in a variety of ways;
some would sell to other purchasers, some would do nothing different,
and some might even shut down operations. It is this range of
responses--the varying degrees of leverage that a purchaser possesses
over its suppliers--that characterizes upward sloping supply.
During my telephone interviews, I asked physicians how they would
respond to the Sierra/United merger and a potential reduction in
payments. Physicians offered a range of responses including closing
their practice to doing nothing. To assess this issue more
systematically, the survey included the following question: ``What, if
anything, would your practice do if United and Sierra merged and you
did not continue to have a contract with the merged health plan?''
Here are excerpts from a sampling of responses:
I'll go to California
Close practice
Leave town
I would consider relocating to another state or join the VA
This would hurt the practice tremendously. Actually I don't know
what I'll do.
Nothing at present
Get on other contracts that will pay higher rates
Continue to service other health plans
Make do with remaining plans
We would be out-of-network provider and try to increase the other
plans available
'Discourage patients from getting United/Sierra health insurance
The range of responses confirms what my telephone interviews had
suggested, namely that some physicians have a viable alternative to
United/Sierra but that many others would be harmed by losing the
United/Sierra contract. This suggests that United/Sierra would have
varying degrees of leverage over physicians, which is consistent with
the ability to exercise monopsony power.
These data suggest that the United/Sierra merger may be creating
substantial monopsony power within Clark County. It was incumbent upon
the DoJ to explore this issue more thoroughly. Their complaint and the
proposed order suggest that they failed to do so.
Market Concentration
In determining the competitive effects of any acquisition, it is
often important to measure the level of concentration in the market.
Unfortunately there is no significant public information available to
compute market shares in the market for the purchase of physician
services by commercial health insurers. One useful proxy would be the
output shares of commercial health insurers. While the Bureau of Health
Planning and Statistics of the Nevada State Health Division Department
of Health and Human Services (henceforth, the ``Bureau'') collects data
on HMO enrollments by plan and county, its data on PPO enrollments is
incomplete.
The consulting firm Interstudy offers an alternative source of
information about HMO and PPO market shares through their Managed
Market MSA Surveyor and Managed Market State Surveyor databases. The
American Medical Association has used these data to produce a report
entitled ``Competition in Health Insurance: A Comprehensive Study of
U.S. Markets.'' Based on the 2007 update of this report, I determined
that the market shares for Sierra and United in the Las Vegas
metropolitan area (which closely approximates Clark County) were 38%
and 18% respectively. The combined market share is 56%. This combined
share, as well as the increase in share, raise substantial concerns
about monopsony power that the DoJ does not appear to have addressed.
V. Monopsony Power Can Harm Healthcare Consumers
Monopsony power can harm healthcare consumers in several ways. Part
and parcel with a reduction in the compensation of physicians will be a
reduction in the number of physicians who participate in the
monopsonist's network. (This is the natural consequence of a
monopsonist moving down its upward sloping supply curve.) \10\ The
patients who previously utilized the services of physicians who are no
longer in the network must now either (a) select another, less
preferred physician within the network, or (b) see their prior
physician out-of-network and consequently pay higher out-of-network
fees. Either way, these patients are worse off than before the exercise
of monopsony power.
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\10\ When supply is upward sloping, a seller with monopsony
power profits by reducing the wages it pays, relative to the
competitive wage. By doing so, fewer suppliers offer their goods and
services, so that the monopsonist ends up reducing the quantity of
output it produces.
---------------------------------------------------------------------------
Even the patients of physicians who remain in the United/Sierra
network may be worse off, because the reduction in the fees paid to
these physicians may cause them to reduce the quantity and/or quality
of services they provide. Physicians who receive lower fees will be
forced to do more with less. This may result in longer waiting times as
physicians are forced to reduce staffing. Economics teaches that
physicians are to be expected to reduce their output; again, this is a
standard prediction associated with upward sloping supply. Another
standard result from economic theory is that sellers who experience
lower price-cost margins will have less incentive to maintain
quality.\11\ There is substantial evidence that this occurs in
medicine.\12\
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\11\ See Spence, M. ``Monopoly, Quality, and Regulation'' Bell
Journal of Economics 6(2), 1975 and Dranove, D. and M.
Satterthwaite, ``Monopolistic Competition When Price and Quality Are
Imperfectly Observable'' RAND Journal of Economics, 23(4), 1992.'
\12\ Dranove, D. The Economic Evolution of American Healthcare
Princeton University Press, 2000, reviews this evidence.
---------------------------------------------------------------------------
Responses to the aforementioned survey question ``What, if
anything, would your practice do if United and Sierra merged and you
did not continue to have a contract with the merged health plan?''
confirm these concerns about patient welfare. As mentioned previously,
some physicians might close their practices. Here are some additional
responses:
Downsize practice
See a lot less patients
All patients would have to be self-pay under merged health plan
Lay off staff and reduce number of physicians on staff
I would consider having a cash only office,
Several telephone interviews offered similar responses. All of
these responses would have harmful repercussions for patients.
VI. Why Competition in the Output Market Would Not Discipline United/
Sierra
A firm might not exercise its monopsony power if doing so harms its
consumers who, as a result, turn to
[[Page 49881]]
alternatives in the output market. In other words, output market
competition might discipline the would-be monopsonist. The nature of
the provision of medical services works against such market discipline.
Suppose that physicians in the United/Sierra network are forced to cut
back services in response to fee cutbacks. One might think that this
would devalue the United/Sierra products, leaving it at a disadvantage
relative to the competition. In other words, if physician services are
``public goods,'' whose quality applies to all of their patients, then
the harmful effects of reduced monopsonist fees are felt by all
patients and the monopsonist suffers no competitive harm.
There is a public good element in many physician decisions. If
physicians reduce their office hours, this is likely to affect access
for all of their patients. (Physicians who contract with a monopsonist
could not normally limit their availability to the monopsonist's
patients only.) Similarly, if a physician cuts back on staff and/or
equipment, or invests less in continuing education, all patients would
suffer. Of course, if the physician exits the market altogether, all
patients suffer. If quality is a public good, as I conjecture, then the
monopsonist can internalize all the benefits of fee reductions while
the harm is felt by patients enrolled by all insurers. Thus, market
forces do not necessarily discipline the monopsonist whose aggressive
pricing causes quality to suffer.
Concluding Comments About Quality
Unfortunately, the DoJ complaint and consent order are silent on
the issue of quality. In both the qualitative interviews and the survey
conducted under my supervision, I learned about some of the ways that
fee cutbacks could harm quality. Some of the alternatives physicians
mentioned included exiting the market, curtailing their hours, spending
less time with patients, and cutting back on staffing. In light of
these responses, there should have been greater analysis of the
potential impact of the United/Sierra merger on the quality of
physician.
VII. Contractual Provisions That Raise Competitive Concerns
The purpose of merger enforcement is to prevent the creation of
market power or its exercise. In some cases, in order to prevent
competitive harm from a proposed merger the antitrust agencies and the
courts may impose some type of injunctive relief. In this case, I
believe the DoJ should have sought to prohibit two types of
arrangements: most favored nation provisions and all products clauses.
Most Favored Nation Provisions
In my experience, many large insurers exploit their size by
demanding and receiving most favored nation status from providers. A
most favored nation provision requires the provider to offer the
dominant insurer the most favorable rate it offers to any other
insurer. Both theory and empirical evidence suggest that most favored
nation status harms consumers by discouraging providers from
aggressively discounting to other insurers.\13\ Most favored nation
provisions may prevent other insurers from entering or expanding in the
market through these favorable discounting arrangements. The DoJ
complaint and the proposed consent order are silent on this issue. The
DoJ should have required the combined United/Sierra to foreswear MFN as
a condition for approving the deal.
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\13\ For example, see Scott Morton, F. ``The Strategic Response
by Pharmaceutical Firms to the Medicaid Most-Favored-Customer
Rules'' RAND Journal of Economics, 28(2), 1997 for an exposition of
the theory and evidence from pharmaceutical pricing. The theory is
broadly applicable to other markets including physician services.
---------------------------------------------------------------------------
Bundling and All Products Clauses
It is also my experience that large insurers often require
providers to abide by ``all products clauses'' whereby a provider who
wishes to be a preferred provider for one of the insurer's products
must agree to contract for all of that insurer's products. I am
particularly concerned about the ability of a large insurer to bundle
products in different markets. In particular, I believe that the
combined United/Sierra will have monopsony power in the market for
securing physician services for privately insured patients. It may now
use that market power to bundle together contracting in the Medicare
Advantage and private insurance markets. Such bundling would not offer
any obvious promise of efficiencies and should be viewed with
skepticism by anyone promoting market efficiency.
It is not obvious from the DoJ complaint and consent order whether
these issues were investigated or how they were resolved. The DoJ
should have explored these issues and if they believed there was
potential for such bundling, the combined United/Sierra should have
been required to allow physicians to contract separately for private
insurance and the Medicare Advantage program.
May 13, 2008.
David Dranove,
Walter McNerney Distinguished Professor of Health Industry
Management,
Northwest University.
Appendix: Survey Methods
Setup Procedures
All documents were verified by project client. Documents included
the cover letter and survey instrument with a version each for the
medical group sample and one for the physician practice sample.
All materials included the logos and respective signatures from:
AMA, the county medical society, and the state medical society of
Nevada.
The project client provided the sample database of medical groups
and physician practices, including the name and phone number of a
contact.
PRS provide the fax number and address for mailings in the phone
calls, as appropriate.
Mailing Procedures Medical Group Sample
On February 12, 2008 Population Research Systems (PRS) mailed the
survey to the medical groups, with a cover letter and business-reply
envelope, to the 122 medical group administrators in the Clark County,
NV medical group file. The outgoing envelope was addressed to the name
of the person or the administrator, when available, otherwise the term
``Practice Administrator'' was included, for example: Ms. Jean Smith or
Practice Administrator, Desert Medical Group, 1234 Pine Hill Drive, Las
Vegas, 11111.
About 9-10 days after the initial mailing, PRS faxed another survey
and cover letter, to all non-respondents from among the 122 group
administrators.
Another 5 days later, the sample with non-responders, invalid or
missing fax numbers was returned to the project client, who conducted a
round of reminder phone calls and updated all invalid fax numbers.
Contacted medical groups who requested another fax received one from
PRS within 24 hours of that information being provided by the project
client. PRS also sent another fax to all invalid and missing fax
numbers.
About 6 days after the reminder call, PRS sent another round of
faxes to all non-responders.
Another 10 days later, PRS initiated another round of faxes to all
non-responders, followed immediately by a second round of reminder
calls conducted by the telephone staff of PRS. PRS attempted every
record until a respondent or answering machine was reached, and PRS
telephone interviewers left scripted messages on answering machines
(see below).
[[Page 49882]]
Telephone Reminder Script
Hi, my name is ------, and I am calling on behalf of the AMA.
Yesterday, we sent you a fax with a very brief survey about the United/
Sierra merger in Clark County, and we are very interested in your
opinion. Please take a few minutes to complete the survey and fax it
back to the number shown on the cover letter. We will keep your
responses confidential.
If Not Received Fax:
Can you confirm your fax number for me so we can send you another
fax? ----------
We appreciate your participation. Thank you.
Response Rate
This effort resulted in a total of 24 completed surveys, out of a
sample of 102 records. Of those 102 records, 7 records were invalid
(group did not exist, was closed, wrong address/name) and 101 records
were duplicates within the sample, resulting in 86 valid records. Out
of those 86 valid records, 24 completes constitute a corrected response
rate of 28.2%.
[GRAPHIC] [TIFF OMITTED] TN22AU08.002
Count of IDsStatus Total Complete 24 Invalid record 7No response 61
Datereord JQJ Grand Total 1021Mailing Procedures Individual Physician
Sample
On February 12, 2008 PRS e-mailed the cover letter and survey
embedded in the body of the e-mail message to 353 physicians identified
by the project client. PRS inserted the medical society logos into the
email itself, as well as the signatures, similar to the Medical Group
survey.
About 3 days after the initial e-mail, PRS faxed a reminder survey
to all physicians who had not responded at that point. The cover letter
for the fax was slightly different from the e-mail cover letter to
reflect the change of modus.
Approximately 8 days later, the sample with non-responders, invalid
or missing fax numbers was returned to the project client, who
conducted a round of reminder phone calls and updated all invalid fax
numbers. Contacted medical groups who requested another fax received
one from PRS within 24 hours of that information being provided by the
project client. PRS also sent another fax to all invalid and missing
fax numbers.
About 7 days after the reminder call, PRS sent another round of
faxes to all non-responders.
Another 6 days later, PRS initiated another round of faxes to all
non-responders, followed immediately by a second round of reminder
calls conducted by the telephone staff of PRS. PRS attempted every
record until a respondent or answering machine was reached, and PRS
telephone interviewers left scripted messages on answering machines
(see script above).
During this process, PRS noted that 13 records of the original
sample were duplicates (duplicate e-mail, address and fax number, and
those records were replaced with another 13 records, resulting in a
final total of 353 records.
Response Rate
This effort resulted in a total of 73 completed surveys, out of a
sample of 353 records. Of those 353 records, 55 records were invalid
(group did not exist, was closed, wrong address/name) and 13 records
were duplicates within the sample, resulting in 285 valid records. Out
of those 285 valid records, 73 completes constitute a corrected
response rate of 25.6%.
[GRAPHIC] [TIFF OMITTED] TN22AU08.003
Attachment B
June 5, 2007.
Honorable Alice A. Molasky-Arman
Nevada Commissioner of Insurance
Division of Insurance-Legal Section
788 Fairview Drive, Suite 300
Carson City, NV 89701-5491
Re: UnitedHealth Group Acquisition of Sierra Health Systems
Dear Commissioner Molasky-Arman:
The AMA is writing to express its strong opposition to the proposed
acquisition of Sierra Health Systems (Sierra) by UnitedHealth Group
(United). The AMA has urged the United States Department of Justice to
block the merger because of the impact in Nevada. The impact in the
state of Nevada is unlike the impact in any market of any previous
health insurer merger. Our testimony will focus on the anti-competitive
effect this merger will have on Nevada insurance markets, a negative
effect that will be compounded by questionable business practices
engaged in by United in other markets. We also strongly support the
position of the Nevada State Medical Association.
It is clear that United's goal in pursuing this merger is to
dominate the Nevada insurance market, in particular Las Vegas. The
numbers are truly staggering, as shown in the attached chart. For the
past five years, the AMA has conducted the most in-depth study of
commercial health insurance markets (by actual reported enrollment) in
the country. This study, Competition in Health Insurance: A
Comprehensive Study of U.S. Markets, is based on the most current and
credible data available and includes both HMO and PPO products. The AMA
is in the process of finalizing our most recent edition, based on 2004
data. The findings for Nevada strongly suggest that this merger
undermines competition in Nevada and in Las Vegas especially.
The AMA analysis of InterStudy and HealthLeaders data shows the
following:
At the state level, in the combined HMO/PPO market, United
would have a market share of 43% after the merger, compared to its
current market share of 14%. In the HMO market, United would have a 78%
market share after the merger, compared to its current 11 % market
share.
In the Las Vegas-Paradise metropolitan statistical area (MSA), in
the combined HMO/PPO market, United would have a market share of 56%
after the merger, compared to its current market share of 18%. United
would have a market share of 95% after the merger, compared to its
current market share of 13% in the HMO market.
These market shares should be considered in the context of the
financial aspects of United's operations. At a time when premiums
continue to escalate, United is posting high profit margins. Since
2002, United has posted year-end earning increases of between 27% and
53%. For 2006 its net earnings increased 27%. United has also awarded
its senior executives mind-boggling compensation packages over this
same time period. United is currently in the midst of several ongoing
investigations and shareholder lawsuits over illegally backdating
senior executives' stock options to increase their already extravagant
compensation.
The Threat of Market Dominance
The AMA has long been concerned that ongoing consolidation of
health insurance markets will ultimately lead to a market dominated by
one or two health insurers that places profits over patients. The
ascendancy of a dominant health insurer jeopardizes patient care in two
important ways. First, without competition to help ensure that patient
and employer choice counterbalance profit motives, the for-profit
health
[[Page 49883]]
insurer's drive to maximize profits will inevitably compel it to place
profits over patients.
Second, physicians have a professional, legal, and ethical
responsibility to advocate on their patient's behalf. In the presence
of health plan dominance the physician's role as patient advocate
becomes even more critical. However, that role is being systematically
undermined as dominate insurers are able to impose take-it or leave-it
contracts that include provision that directly impact patient care,
such the determination of what is ``medically necessary care.'' A
physician who engages in aggressive patient advocacy risks exclusion
from the dominant health plan's network and faces the realistic
possibility that his/her practice will no longer be financially viable.
In the presence of these dynamics, only state oversight and
intervention can prevent deterioration of the patient-physician
relationship, foster physician advocacy, and make patient choice a
reality.
United's Failure to Comply With State Regulations
United's conduct shows a dismissive attitude towards its state
regulatory obligations. It has been fined by a number of states for
failing to comply with state law since 2001. Moreover, in some of those
states, United has been fined more than once for the same conduct.
United has the unenviable position of having had the largest fines ever
levied against a health insurer in several states.
Specific examples include:
Arizona: In March 2006, the Arizona DOI fined United for the second
time for violations of a number of state laws. These include state
prompt payment laws, and state laws on member's rights to appeal
denials of care. United was fined $364,750, the largest fine in
Arizona's history. This was the second fine levied against United for
similar violations. The first was in 2003. In the 2006 case, the
director of the Arizona DOI stated that, ``I will not tolerate knowing
violations of consent orders.''
Nebraska: In December 2006, the Nebraska DOI filed a
complaint which stated that United violated 18 state laws over 800
times. United delayed decisions, made incorrect decisions about
coverage, and had an inadequate network of emergency services in rural
areas. A settlement was reached in May 2007. It includes a $650,000
fine, the largest ever levied by the Nebraska DOI. The settlement also
requires United to meet customer service standards and to give United's
Nebraska staff the final decision on claims and grievances. This was
the second time United has been fined for similar state law violations.
The 2005 investigation resulted in United paying a $72,500 fine.
New York: In 2006, the New York State Health Department
took the unusual step of banning United from enrolling any new
customers in its HMO plan because United continued to repeatedly defy
state regulations. These include wrongly denying payment to providers
and filing incomplete and inaccurate reports with the state. A state
official noted that, ``we've had several years of findings, United
doing corrective action plans, but then we go out again, and we have
the same findings.''
Rhode Island: In April 2007, UnitedHealthcare of New
England was fined $67,500 for violating a state law intended to protect
health-insurance coverage for small-business employees. United failed
to provide documentation showing that it had complied with the law. In
addition, according to documents released by the Health Insurance
Commissioner's office, United overcharged members who were in poor
health.
Texas: Between 2001 and 2005, the Texas Department of
insurance (TDI) has fined United three times for violating Texas prompt
pay laws. The most recent fine, issued in December 2005, included a
finding that United failed to report accurate and complete provider
claims data for over 2 years. The 2005 fine totaled $4 million and
United also agreed to pay restitution to physicians.
Missouri: In Schoedingerg vs. United, a Missouri physician
sued United for failing to comply with the state prompt payment law. In
its finding of facts, the court found that the plaintiff had proven
that United did not pay his claims within the time period set by
Missouri law. Specifically, the 2006 opinion found that ``United's
claims processing system was flawed in many ways, including denying,
reducing and improperly processing claims on a regular basis. And
despite innumerable requests, United was unwilling to remedy the
underlying errors in its systems. United was consistently delinquent in
paying claims.''
Ongoing State Investigations of United's Business Conduct
In the past several months, two states have announced
investigations into United's business practices and whether they comply
with state law. These investigations are specified below.
California: The California Department of Insurance and the
California Department of Managed Health Care (CDMHC) have announced an
investigation into a range of United business practices. According to
the California Medical Association (CMA), there is a liaison process
between CMA and United. While United is generally responsive to the
individual physician complaints, it is not responsive to fixing the
underlying issues. This causes the objectionable practices to continue
which must be battled one physician and one claim at a time. The
regulators indicated that their objective is to bring United into
compliance with state laws for the benefit of California patients.
[cir] Note: in May 2007, the CDMIIC found that United subsidiary
PacifiCare engaged in ``dishonest and unfair'' conduct when it failed
to disclose its planned termination of a provider network during open
enrollment. The CDMHC ordered PacifiCare to continue to authorize and
allow access to the network through November 2007.
New Jersey: In April 2007, the New Jersey Department of
Banking and Insurance ordered United to justify a lab referral protocol
that has outraged physicians across the country. This policy, which was
the outgrowth of a 10-year exclusive contract with Lab Corp, provides
that if physicians refer to an out-of-network lab, they can be fined or
dropped from the network. This is the first instance of a health plan
threatening financial penalties for out-of-network referrals. The DOBI
ordered United to ``appear and show cause why it should not be required
to pay restitution or take other remedial measures.'' This is in
regards to the effects of its proposed sanctions on physicians.
The AMA believes that United's conduct reflects a philosophy that
it is more cost-effective to violate state law and possibly pay a fine
than to assure compliance with laws designed to protect both patients
and physicians. The AMA's first concern is that this unprecedented
merger will create monopoly conditions in Nevada to the detriment of
Nevada citizens. That being said, given the magnitude of this merger in
Nevada and United's track record in other states, if this merger is
allowed to go forward, it is incumbent on the Nevada Department of
insurance to assure that United is held accountable for compliance with
state laws.
If the AMA can be of further assistance, please do not hesitate to
contact me. The AMA appreciates the opportunity to comment on this
matter.
Sincerely,
[[Page 49884]]
Michael D. Maves, MD, MBA.
Attachment
cc: Larry Matheis, Executive Director, Nevada State Medical
Association.
Attachment C
Testimony of David Balto On Behalf of the American Antitrust Institute
and Consumer Federation of America Before the Nevada Commissioner of
Insurance on the United Health Group Proposed Acquisition of Sierra
Health Services \1\ (July 27, 2007)
---------------------------------------------------------------------------
\1\ I have practiced antitrust law for over 20 years, primarily
in the federal antitrust enforcement agencies: the Antitrust
Division of the Department of Justice and the Federal Trade
Commission. At the FTC, I was attorney advisor to Chairman Robert
Pitofsky and directed the Policy shop of the Bureau of Competition.
Maria Patente, Washington College of Law (Class of 2008), provided
extensive assistance in the preparation and research of the
testimony.
---------------------------------------------------------------------------
I. Introduction
The American Antitrust Institute (``AAI'') and Consumer Federation
of America, (``consumer groups'') appreciate this opportunity to
testify before the Commissioner of Insurance on United Health Group's
(``United'') proposed acquisition of Sierra HealthServices, Inc.
(``Sierra'').\2\ As detailed in our testimony based on our preliminary
review, we strongly believe that this acquisition will harm all Nevada
health insurance consumers, particularly those in Clark County, through
higher prices, less service, and lower quality. The level of
concentration posed by this merger is simply unprecedented: it is
greater than in any merger approved by the Antitrust Division of the
U.S. Department of Justice (``DOJ'') and would give United clear
monopoly power in Clark County.
---------------------------------------------------------------------------
\2\ The American Antitrust Institute is an independent
Washington-based non-profit education, research, and advocacy
organization. Its mission is to increase the role of competition,
assure that competition works in the interests of consumers, and
challenge abuses of concentrated economic power in the American and
world economy. For more information, please see
www.antitrustinstitute.org. This working paper has been approved by
the AAI Board of Directors. A list of contributors of $1,000 or more
is available on request. The Consumer Federation of America
(``CFA'') is the nation's largest consumer-advocacy group, composed
of over 280 state and local affiliates representing consumer, senior
citizen, low income, labor, farm, public power and cooperative
organizations, with more than 50 million individual members. CFA
represents consumer interests before federal and state regulatory
and legislative agencies and participates in court proceedings. CFA
has been particularly active on antitrust issues affecting health
care.
---------------------------------------------------------------------------
In evaluating this merger under NRS 692C.210(1) the Commissioner of
Insurance must consider several factors including: (1) whether ``the
effect of the acquisition would be substantially to lessen competition
in insurance in Nevada or tend to create a monopoly'' and (2) whether
if approved the ``[a]cquisition would likely be harmful or prejudicial
to the members of the public who purchase insurance.'' As we explain
below, both of these factors counsel for denial of the application
because the merger creates a dominant insurer, particularly in Clark
County, with the ability to raise premiums, reduce service and quality
and reduce compensation to providers. It will clearly harm purchasers
of insurance who will pay more for service that provides lower quality
care.
This unprecedented level of concentration raises important policy
and health care concerns relevant to the factors evaluated in these
Hearings. As Vermont Senator Patrick Leahy observed in Hearings before
the Senate Judiciary Committee last year on health insurance
consolidation:
a concentrated market does reduce competition and puts control in
the hands of only a few powerful players. Consumers--in this case
patients--are ultimately the ones who suffer from this concentration.
As consumers of health care services, we suffer in the form of higher
prices and fewer choices.\3\
---------------------------------------------------------------------------
\3\ Statement of Senator Patrick Leahy, Hearing on ``Examining
Competition in Group Health Care'' U.S. Senate Committee on the
Judiciary (Sept. 6, 2006).
Creating a dominant insurance provider should be a profound concern
in Nevada, a state plagued with shortages of nurses, doctors and other
health care professionals.
This testimony, which is based solely on public information,
provides our preliminary views that this merger would ``substantially
to lessen competition in insurance in Nevada or tend to create and
monopoly'' and ``would likely be harmful or prejudicial to the members
of the public who purchase insurance.'' This paper also addresses the
United-Sierra merger in the context of the numerous competitive
imperfections and market failures unique to the HMO and health
insurance industry and with respect to the specific challenges facing
Nevada's health care due to a serious shortage of doctors and nurses.
II. Summary
The consumer groups urge the Commissioner to focus on the following
issues:
Will the United-Sierra merger reduce competition for the
provision of health insurance to employers and individuals seeking
health coverage in Nevada? Yes, Sierra is the largest HMO provider in
Nevada and United is the only significant rival. The United-Sierra
merger in Nevada would give United a 80% market share of all HMOs in
Nevada and a 94% market share of the HMO market in Clark County.
Although its market share is smaller than Sierra's, United has the
potential for significant growth in Nevada since its acquisition of
PacifiCare in 2005. Moreover, the next largest HMO rival in Clark
County has only a 2% market share. The merger would adversely affect a
wide range of buyers including small employers, governmental and union
purchasers.
Will the United-Sierra merger reduce competition for the
provision of services in the Medicare Advantage program? Yes. Medicare
is increasingly turning to a managed care model. Increasingly Medicare
beneficiaries are signing up for the Medicare Advantage program which
provides health care services to beneficiaries in a managed care model.
The only current bidders for Medicare advantage in Nevada are United
and Sierra. United is the largest Medicare Advantage program in the
U.S. The merger would create a monopoly in the provision of services
for Medicare Advantage program resulting in a lower level of care and
prices.\4\
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\4\ A large number of the consumer complaints filed with the
Commissioner about this merger raise concerns over the loss of
competition in the Medicare Advantage market. Many of these
complaints are from elderly beneficiaries who are particularly
vulnerable to anticompetitive conduct. Over 30% of Nevada Medicare
beneficiaries subscribe to Medicare Advantage, one of the highest
enrollments of any state.
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Could the United-Sierra merger increase the threat of
monopsony power and reduce access to medical care and the quality of
medical care in Nevada? Yes, there is currently a significant and
chronic shortage of health care providers including physicians and
nurses in Nevada, an understaffed region where health professionals are
forced to work overtime, double-shifts, weekends, and holidays. This
merger will exacerbate those problems for health care providers
dependent upon the merged firm. A combined United-Sierra can reduce
compensation resulting in a diminution of service and quality of care.
In the past the DOJ has brought enforcement actions because of concerns
over monopsony power where the market share exceeded 30%, a level
clearly exceeded by this acquisition. This merger may lead to a
significant reduction in reimbursement for health care providers,
leaning to lower service and quality of care.
Will other insurance companies readily enter the market
(or expand) and fully restore the competition lost
[[Page 49885]]
from the merger? No. In some cases it may be unnecessary to challenge a
merger if other firms can readily enter a market to a sufficient degree
to avert the anticompetitive effects of the merger. That is clearly not
the case for this market. As the DOJ has recognized in other cases,
barriers to entry in the HMO market are extremely high due to the
extensive physician networks, technology networks, and specialized
medical infrastructure that are essential to the industry. Moreover,
Nevada already faces a serious shortage of both doctors and nurses, and
attracting a sufficient number of personnel would pose a high barrier
for a new entity interested in providing HMO plans in Nevada. There has
been little historical entry into the Nevada HMO market, in spite of
the growth of population. Moreover, with a dominant United-Sierra, it
is highly unlikely a new entrant would undertake the risk of new entry.
Do the efficiencies from the United-Sierra outweigh the
anticompetitive harms? No. The parties have not proposed significant
efficiencies from this consolidation. If there were any efficiencies
they probably could be achieved through internal growth, considering
the rapid population growth in Nevada. Moreover, efficiencies should
only be included in the competition calculus if they will result in
lower prices or better service to consumers. As a general matter,
efficiencies from health coverage mergers have not been passed on to
consumers. Health insurance mergers have generally led to increased
subscriber premiums without expansion of medical benefits. There is
little evidence if any that any efficiencies achieved in the United-
PacifiCare merger have resulted in lower premiums or better service for
United or former PacifiCare subscribers. Since the combined United-
Sierra would have a dominant market share post-merger it is highly
unlikely any savings would be passed on to consumers.
Would a divestiture or other structural relief be
sufficient to alleviate the competitive problems raised by the merger?
No. The parties have not suggested that they would be willing to divest
assets to solve the competitive concerns raised by the merger. Even if
they did the Commissioner should be extremely skeptical of any proposed
relief. In the past the DOJ has attempted to resolve competitive
concerns over some mergers by requiring the divestiture of a certain
number of contractual arrangements in order to spur new entry. These
divestitures have been insufficient to cure the competitive problems
posed by those mergers. A divestiture is even less likely to resolve
the competitive concerns in this merger where the merged firm will
clearly be the dominant insurer in the market.
Would consumers be better off if the Commissioner rejected
the merger? Yes. The antitrust question in evaluating any merger is
what would happen ``but for'' this merger? What would happen to the
merging parties, consumers, and providers? The answer in this case
seems rather transparent. United and Sierra are both successful,
financially sound, capable companies that would continue to grow and
thrive. Through its acquisition of PacifiCare, United established an
important beachhead in Nevada. But for this merger, United would
continue to expand in Nevada and challenge Sierra's strong position in
the market. That competition between United and Sierra would lead to
lower premiums, greater innovation and better service. There is simply
no reason why United can not achieve most of the benefits of this
acquisition through internal growth.
The remainder of the testimony is set forward as follows. First, we
make some observations about special considerations for health insurer
mergers and suggest why regulators and enforcers can not rely on the
theoretical assumptions of a competitive market. Then we focus on past
enforcement actions and the principles of antitrust enforcement. We
then explain how the merger will reduce competition in both the
provision of certain health insurance products (impact on buyers) and
health care providers (impact on sellers). Finally, we explain why
other factors such as ease of entry or efficiencies will not prevent
the anticompetitive effects of the merger.
III. Antitrust Merger Standards and Past Antitrust Enforcement Actions
The U.S. antitrust laws, like the Nevada insurance statute, provide
that a merger may be illegal if it may ``tend substantially to lessen
competition or to tend to create a monopoly.'' \5\ The concern under
the merger laws is that a merger may tend to reduce competition and
lead to higher prices, lower service, less quality, or less innovation.
Concerns over a reduction in quality, central to the delivery of health
care services, is an important element of competition.\6\ As the
Supreme Court has observed, competition protects ``all elements of a
bargain--quality, service, safety, and durability--and not just the
immediate cost.'' \7\
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\5\ Clayton Act, 15 U.S.C. Sec. 18. There is no case law
evaluating the competitive legality of mergers under NRS
692C.210(1), however the language of the statute is identical to the
Clayton Act. Thus, it is appropriate to apply the standards of
federal antitrust law. The Nevada antitrust statute is similar to
the Clayton Act. It prohibits mergers that will ``result in the
monopolization of trade or commerce * * * or would further any
attempt to monopolize trade or commerce'' or ``substantially lessen
competition or be in restraint of trade.'' NRS 598A.060(1)(f).
\6\ Section 7 prohibits anticompetitive reductions in quality
because it is equivalent to an increase in price--consumers pay the
same (or greater) price for less. Community Publishers, Inc. v.
Donrey Corp., 892 F. Supp. 1146, 1153 n.8 (W.D. Ark. 1995), aff'd
sub nom. Community Publishers, Inc. v. DR Partners, 139 F.3d 1180
(8th Cir. 1998); Merger Guidelines, Sec. 0.1 (``Sellers with market
power also may lessen competition on dimensions other than price,
such as product quality, service, or innovation.''); id. Sec. 1.11.
\7\ Nat'l Soc'y of Prof. Eng'rs v. United States, 435 U.S. 679,
695 (1978).
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In order to determine the likely competitive effects of a merger
the case law and the Merger Guidelines established by the Department of
Justice and the Federal Trade Commission set forth a multi-step
process.\8\ The process begins by defining the ``line of commerce'' or
relevant product market and the ``section of the country'' or relevant
geographic market. A relevant market can include any group of products
or services. Once a relevant market is defined, the level of
concentration and market share is calculated to determine the likely
competitive effects of the merger. In cases where there is an undue
level of concentration in the relevant market (generally a market share
over 30%) there is a prima facie case of illegality and a presumption
of unlawfulness.\9\ If there is a presumption of unlawfulness then the
burden shifts to the defendants to rebut the prima facie case and
[[Page 49886]]
demonstrate that other market characteristics make the presumption of
anticompetitive effects implausible. Two types of evidence are
prominent in merger cases--if the defendants can offer evidence that
entry is relatively easy, that may dispel the notion that the merger
will lead to significant anticompetitive effects. Finally, if a merger
will lead to substantial efficiencies, these may counteract those
anticompetitive effects.
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\8\ U.S. Dep't of Justice and Federal Trade Comm'n, Horizontal
Merger Guidelines (1997) (hereinafter ``Merger Guidelines''). The
Nevada statute provides that in determining whether to approve a
merger the Commissioner of Insurance ``shall consider the standards
set forth in the Horizontal Merger Guidelines * * *'' NRS
692C.256(2).
\9\ Concentration in merger cases is expressed in terms of
market shares and a measure known as the Herfindahl Hirschman Index
(``HHI''). The HHI is calculated by adding together the squares of
the market share of individual competitors in the market. In a
market with a single seller, the HHI is 10,000. The FTC/DOJ Merger
Guidelines provide that an HHI below 1000 corresponds to an
``unconcentrated'' market; an HHI between 1000 and 1800 corresponds
to a ``moderately concentrated'' market, and an HHI above 1800
corresponds to a ``highly concentrated'' market. The HHI is a
screening tool used to assess whether a proposed merger will lead to
anticompetitive consequences. Under the Guidelines different
presumptions apply, depending on the extent of post-merger market
concentration and the increase in HHI that will result from the
merger. The greatest competitive concerns are raised where the post-
merger HHI exceeds 1800. In such cases, it is ``presumed that
mergers producing an increase in the HHI of more than 100 points are
likely to create or enhance market power or facilitate its
exercise.'' Merger Guidelines, Sec. 1.51.
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The two most instructive antitrust cases involving health insurance
mergers are the DOJ's challenges to Aetna's 1999 acquisition of
Prudential and United's 2006 acquisition of PacifiCare. Both of these
mergers were resolved with divestitures to facilitate the entry of a
new competitor to remedy the competitive concerns. Each case focused
both on the harm to purchasers of HMO and other insurance services from
the exercise of monopoly power and the harm to healthcare providers
from the exercise of monopsony power.\10\ In both the United-PacifiCare
and the Aetna-Prudential mergers, the DOJ identified highly
concentrated markets that were substantially likely to suffer harm to
competition as a result of these mergers.
---------------------------------------------------------------------------
\10\ Health insurers play dual roles as sellers of insurance
services and buyers of health care services. In its first role, the
health insurer's ``output'' consists of health benefit packages, and
the output prices are paid for by customers in the form of
subscriber premiums. In the role as the seller of health benefits, a
dominant health insurer in a concentrated market could potentially
act as a ``monopolist'' charging an above market price for health
benefits. In its second role, the health insurer acts as a buyer,
and the input consists of physician and other medical services. The
insurer's input prices are the compensation it pays in the form of
physician fees and fees for medical services. In this role, the
health insurer may act as a ``monopsonist,'' reducing the level of
services or quality of care by reducing compensation to providers.
Health insurers are both buyers of medical services and sellers of
insurance (to consumers), so insurance mergers can raise both
monopsony and monopoly concerns.
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In 1999, the DOJ and the State of Texas settled charges that the
merger between Aetna and Prudential in the State of Texas would harm
competition. The DOJ focused on relevant markets of HMO products and
physician services. Aetna and Prudential were head to head competitors
in the HMO markets in Houston and Dallas. The proposed merger would
have increased Aetna's market share from 44% to 63% in Houston and 26%
to 42% in Dallas.\11\
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\11\ These market shares are substantially smaller than the
market shareswhich would result from the United-Sierra merger in the
HMO markets of Nevada and Clark County (80% in Nevada and 94% in
Clark County).
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Moreover, the merger raised monopsony concerns by giving the merged
firm the potential to unduly suppress physician reimbursement rates in
Houston and Dallas, resulting in a reduction of quantity or degradation
of quality of medical services in the areas.\12\ The operative question
from DOJ's perspective was could health care providers defeat an effort
by the merged firm to reduce provider compensation by a significant
amount, e.g., 5%. The question was answered in the negative for several
reasons: physicians have limited ability to encourage patients to
switch health plans, and physicians' time (unlike other commodities)
cannot be stored, which means that physicians incur irrecoverable
losses when patients are lost but not replaced. To exacerbate matters,
contracts with physicians were negotiated on an individual basis, and
were therefore susceptible to price discrimination by powerful buyers.
Thus, DOJ concluded that Aetna had sufficient power to impose adverse
contract terms on physicians, especially decreased physician
reimbursement rates, which would ``likely lead to a reduction in
quantity or degradation in the quality of physicians' services.'' \13\
---------------------------------------------------------------------------
\12\ United States v. Aetna,, Revised Competitive Impact
Statement, Civil Action 3-99CV1398-H.
\13\ Id.
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To resolve these competitive concerns the DOJ ordered Aetna to
divest its entire interest in NYLCare-Gulf Coast and NYLCare-Southwest,
its Houston and Dallas commercial HMO business. This consisted of
260,000 covered lives in Houston and 167,000 covered lives in Dallas.
In 2006, the DOJ investigated the merger between United and
PacifiCare and focused on potential competitive concerns in relevant
markets for commercial health insurance for small group employers in
Tucson, Arizona and physician services in both Tucson and Boulder,
Colorado.\14\ Small group employers are employers with 2-50 employees.
The merger would have combined the second and third largest providers
of commercial health insurance in Tucson and increased United's market
share from 16% to 33%.
---------------------------------------------------------------------------
\14\ United States v. UnitedHealth Group Inc., Case No.
1:05CV02436 (D.C.C. Dec. 20, 2005), available at http://
www.usdoj.gov/atr/cases/f213800/213815.htm.
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The merger also raised concerns over the potential harm to
competition in the purchase of physician services in both Tucson and
Boulder. The DOJ explained that by combining United and PacifiCare
``the acquisition will give United the ability to unduly depress
physician reimbursement rates in Tucson and Boulder, likely leading to
a reduction in quantity or degradation in the quality of physician
services.'' \15\ In other words the DOJ found that a health plan's
power over physicians to depress reimbursement rates can be harmful to
patients--the ultimate consumers of health care. The market shares
involved were relatively modest: in excess of 35% in Tucson and in
excess of 30% in Boulder ``for a substantial number of physicians in
those areas.''
---------------------------------------------------------------------------
\15\ United States v. UnitedHealth Group, Competition Impact
Statement at 8, available at http://www.usdoj.gov/atr/cases/f215000/
215034.htm.
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In response to the potential harm to competition, the DOJ required
United to divest contracts covering at least 54,517 members residing in
Tucson, Arizona to yield a post-merger market share equal to its pre-
merger market share. Furthermore, the DOJ required United to divest
6,066 members covered under its contract with the University of
Colorado. This divesture constituted nearly half of PacifiCare's total
commercial membership in Boulder.
The antitrust laws protect not only consumers but any group of
buyers, potentially including a governmental buyer. Buyers of health
insurance services have varying needs and ability to secure competitive
rates. An example of this is a case filed by the City of New York
challenging the merger between Group Health Incorporated (``GHI '') and
the Health Insurance Plan of greater New York (``HIP'') in the fall of
2006.\16\ There are numerous health insurance competitors, including
HMOs and PPOs in the New York City market, but for the low cost product
required by the City and affiliated entities the only rivals were GHI
and HIP. The case alleged that the merger of GHI and HIP would create a
monopoly in the New York metropolitan area market for low cost health
insurance purchased by the City of New York and its employee unions
together with the city's employees and retirees as well as 35 other
employers with ties to the city and their employees and retirees such
as the Housing Authority, the Metropolitan Museum of Art and
universities (all of which participate in the New York City health
benefits program). The case alleges that city employees and retirees
and those individuals who participate in the health benefits program
would be faced with increased costs for insurance and reduced service
if the merger were consummated. Litigation in the case is ongoing, but
it suggests the broad range of markets that can be adversely affected
by a merger.
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\16\ City of New York v. Group Health Inc., et al., (S.D.N.Y.
2006).
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[[Page 49887]]
IV. Special Information Concerns for Health Insurance Mergers
In determining the competitive effect of a merger the crucial issue
is the impact on the consumer, the ultimate beneficiary of the
insurance system. The questions to be examined include will consumers
have to pay more for insurance in higher premiums or deductibles, will
they suffer from poorer service such as longer waiting times or
deterred services, and will they suffer from lower quality of care?
Since consumers can not vote on a merger,\17\ how does the
Commissioner, antitrust enforcer, or the courts evaluate the impact of
a merger on consumers?
---------------------------------------------------------------------------
\17\ Fortunately, the Commissioner has decided to hold an
extensive series of hearings on the merger and provided a
significant opportunity for public comment. The majority of the
public comments filed by consumers to date oppose the merger.
---------------------------------------------------------------------------
Insurance companies, employers, unions and buyers of insurance
(``plan sponsors''), and health care providers will all have views of
the impact of the merger on consumers. The views of the insurance
companies can not be determinative, since they have an obligation to
their stockholders to maximize profits.
The views of plan sponsors are relevant, but their failure to
object to a merger may not be of significant evidentiary value. Plan
sponsors represent the interests of their subscribers and thus may be
concerned with the exercise of monopoly power leading to higher
premiums. However, as antitrust authorities have recognized in many
merger investigations, buyers of services may be very reluctant to
complain about a merger for a variety of factors. They may simply pass
on higher post-merger prices to the ultimate customer. In the health
insurance area, although plan sponsors may be concerned about the cost
of health insurance they may be less sensitive to the reduction in
quality or service that may result from a merger. Finally, a customer
may fear retribution post-merger.\18\ This may particularly be the case
in Nevada where the acquired firm will remain as the largest insurer
even if the merger is denied. Thus, the fact that plan sponsors do not
complain, or actually support a merger, should not be determinative of
a merger's likely competitive effect.\19\
---------------------------------------------------------------------------
\18\ There are a wide variety of reasons why customer support of
a merger may not be particularly probative. See Ken Heyer,
Predicting the Competitive Effects of Merger by Listening to Buyers,
74 Antitrust L.L. 87 (2007); Joseph Farrell, Listening to Interested
Parties in Antitrust Investigations: Competitors, Customers,
Complementors, and Relativity, Antitrust. Spring 2004 at 64
(explaining why customers may support an otherwise anticompetitive
merger).
\19\ See FTC v. H.J. Heinz Co., 246 F.3d 708 (D.C. Cir. 2001)
(customers strongly supported merger); United States v. United Tote,
768 F. Stupp. 1064, 1084-85 (D.Del. 1991) (enjoining merger despite
testimony of ``numerous buyers'' that the merger would be
procompetitive in creating a stronger rival to a dominant firm);
United States v. Ivaco, 704 F. Supp. 1409, 1428 (W.D. Mich.
1989)(all testifying customers supported merger); FTC v. Imo Indus.,
1992-2 Trade Cas. (CCH) ] 69,943, at 68,559 (D.D.C. 1989).
---------------------------------------------------------------------------
On the other hand healthcare providers may be a far more superior
representative of the consumer interest and their concerns deserve
careful attention. Physicians and other healthcare providers directly
experience the diminution of service and quality when so-called cost
containment efforts go too far. Physicians serve as advocates for the
patient, especially in the often adversarial setting of managed care.
Since healthcare providers experience first hand the impact of
reductions in service they are more sensitive to the potential exercise
of market power by health insurance. It is important to recognize in
evaluating the concerns raised by providers that they are not just
complaining about decreased compensation. Rather the issues raised by
healthcare providers are central to concerns over quality of care:
reduced services, greater waiting times, unacceptably short hospital
stays, postponed or unperformed medical treatments, suboptimal
alternative medical treatments, laboratory tests not performed, and
other output restrictions on health services.
IV. Competitive Analysis of the United-Sierra Merger
Health Insurer Concentration: Harm to Buyers
The concentration of the health insurance industry has increased
nationally due to a tremendous number of mergers and acquisitions and
numerous smaller insurers exiting the industry.\20\ Over the past 10
years there have been over 400 health insurer's mergers. United has
acquired several firms including California-based PacifiCare Health
Systems, Inc., Oxford Health Plans, and John Deere Health Plan,
increasing its membership to 32 million. Similarly, WellPoint, Inc. now
owns Blue Cross plans in 14 states. Together, WellPoint and United
control over 33 percent of the U.S. commercial health insurance market.
---------------------------------------------------------------------------
\20\ Victoria Colliver, ``Insurer's Mergers Limiting Options:
Health Care Choices Are Narrowing Says Study by AMA,'' San Francisco
Chronicle, April 18, 2006 (last viewed 7/8/07) http://sfgate.com/
cgi-bin/article.cgi?file=/chronicle/archive/2006/04/18/
BUGUQIAH161.DTL&type=business.
---------------------------------------------------------------------------
This increase in concentration has not benefited consumers. Studies
indicate that health insurance premiums have increased at a rate more
than twice the rate of inflation or the rate of increases in workers'
earnings. Average annual premium increases have ranged from 8.2% to
13.9% since 2001.\21\ Moreover, since 2000, the number of employers
offering health coverage benefits has decreased by nearly 10%. Studies
indicated that medical benefits have not expanded despite premium
increases. In contrast, health insurer profits have increased by 246%
in the aggregate over the past decade.\22\
---------------------------------------------------------------------------
\21\ Kaiser Family Foundation and Health Research and
Educational Trust, Employer Health Benefits: 2006 Summary of
Findings, 2006 (last viewed 7/8/2007) http://www.kff.org/insurance/
7527/upload/7528.pdf.
\22\ Laura Benko, ``Monopoly Concerns: AMA Asks Antitrust
Regulators to Restore Balance,'' Modern Physician, June 1, 2006.
---------------------------------------------------------------------------
Consumers in highly concentrated health insurance markets are most
vulnerable to insurance premium increases without comparable benefit
increases, mirroring data of escalating health costs on the national
level. One study found that more than 95% of Metropolitan Statistical
Areas (MSAs) had at least one insurer in the combined HMO/PPO market
with a market share greater than 30% and more than 56% of MSAs had at
least one insurer with market share greater than 50%.\23\ In
concentrated MSAs such as these, there is a much greater likelihood
that one firm, or a small group of firms, could successfully exercise
market power and profitably increase prices or decrease compensation
leading to less quality or service. As one prominent healthcare
professor has observed in testimony before the U.S. Senate Judiciary
Committee:
---------------------------------------------------------------------------
\23\ Edward Langston, ``Statement of the American Medical
Association to the Senate Committee on the Judiciary United States
Senate: Examining Competition in Group Health Care,'' Sept. 6, 2006
(last viewed 7/8/07) http://www.ama-assn.org/ama1/pub/upload/mm/399/
antitrust090606.pdf.
---------------------------------------------------------------------------
What is so important about the sheer number of competitors?
Econometric evidence shows that in the managed care field, an increase
in the number of competitors is associated with lower health plan costs
and premiums; conversely, a decrease in the number of competitors is
associated with increases in plan costs and premiums. The evidence also
shows that the sheer number of competitors exerts a stronger influence
on these outcomes than does the penetration level achieved by plans in
the market.\24\
---------------------------------------------------------------------------
\24\ Testimony of Professor Lawton R. Burns re. the Highmark/
Independence Blue Cross Merger, before the Senate Judiciary
Committee (April 7, 2007).
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[[Page 49888]]
As we discuss below, the health insurance markets in the state of
Nevada, especially Clark County, are highly concentrated, and the
merger of Sierra with United is likely to substantially harm
competition and consumers.
Harm to Competition in Nevada From the United-Sierra Merger
Correctly defining an economically meaningful market is essential
for ensuring that consumers of that market do not become subject to
market power due to increases in market concentration and decreases in
competition as a result of a merger. The key question in this merger as
in other mergers is the definition of the relevant product market. The
courts have held that a relevant product market ``must be drawn
narrowly to exclude any other product to which, within reasonable
variations and price, only a limited number of buyers will turn.''
Times-Picayune Pub. Co v. United States, 345 U.S. 594, 612 n.31 (1953).
Market definition focuses on demand substitution facts, and whether or
not consumers would or could turn to a different product or geographic
location in response to a ``small but significant non-transitory
increase in price.'' \25\ Typically, the antitrust agencies and the
courts have implemented this test by seeking to identify the smallest
group of products over which prices could be profitably increased by a
``small but significant'' amount (normally 5 percent) for a substantial
period of time (normally one year).\26\
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\25\ According to the Merger Guidelines, ``[a] market is defined
as a product or group of products and a geographic area in which it
is produced or sold such that a hypothetical profit-maximizing firm,
not subject to price regulation, that was the only present and
future seller of those products in that area would likely impose at
least a `small but significant nontransitory' increase in price,
assuming the terms of sale of all other products are held
constant.'' Merger Guidelines Sec. 1.0.
\26\ FTC v. Staples, 970 F. Supp. at 1076 n.8; Merger Guidelines
Sec. 1.11, at 5-6.
---------------------------------------------------------------------------
In health insurance mergers the DOJ has reached different, although
not inconsistent, conclusions as to the relevant product market. For
example, in the Aetna-Prudential merger DOJ concluded that the relevant
product markets were the sale of health maintenance organization
(``HMO'') and HMO-based point of service (``HMO-POS'') health plans.
The DOJ noted that HMO and HMO-POS products differ from PPO or other
indemnity products in term of benefit design cost and other factors.
HMOs provide superior preventative care benefits, place limits on
treatment options and generally require the use of a primary care
physician ``gatekeeper.'' PPO plans are not structured in that fashion
and do not emphasize preventative care. HMOs were perceived as being
better devices to control costs and configure benefits. In addition,
both the insurers and buyers of insurance services perceived PPOs and
HMOs as being separate products. Thus. the DOJ concluded that the
elasticity of demand for HMOs and HMO-POS plans are sufficiently low
that a small but significant price increase for these plans would be
profitable because consumers would not shift to PPO and other indemnity
plans to make the increase unprofitable.
In United/PacifiCare, the DOJ defined a relevant product market as
the sale of commercial health insurance to small group employers. This
market consisted of employers with 2-50 employees. These employers were
particularly susceptible to potential anticompetitive conduct because
they lacked a sufficient employee population to self-insure and they
lacked the multiple locations necessary to reduce risk through
geographic diversity. In addition the manner in which commercial health
insurance was sold also distinguished the small and large group
markets. Large employers were more likely than smaller employers to be
able to successfully engage extensive negotiations with United and
PacifiCare.
We believe that both an HMO and small employer market may be
adversely affected by the United-Sierra merge.\27\ Surveys demonstrate
that consumers do not perceive HMOs and PPOs as substitute products and
consumers believe that they differ in terms of benefit design, cost,
and general approaches to treatment.\28\ PPOs tend to provide more
flexibility in selection of physicians and specialists and tend to be
more expensive. In contrast, HMOs focus more on preventative medicine
but limit treatment options and require referrals from a ``gatekeeper''
for many procedures. Consumers with special health needs and those
relying more on strong relationships with their physicians would
generally not be satisfied if forced to subscribe to an HMO with
restrictions on personal choices. ``A small but significant price
increase in the premiums for HMOs and HMO-POS plans would not cause a
sufficient number of customers to shift to other health insurance
products to make such a price increase unprofitable.''\29\
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\27\ Defining the market in terms of a single product is
appropriate since the Nevada statute provides that the Commissioner
can deny a merger application if she ``determines that an
acquisition may substantially lessen competition in any line of
insurance in this state or tends to create a monopoly.'' NRS
692.258(1).
\28\ See United States v. Aetna Revised Complaint Impact
Statement, Civil Action 3-99CV1398-H (N.D.Tex, 1999).
\29\ Id.
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Moreover, small employers are less likely to have significant
alternatives in response to a price increase by the merged firm. Small
employers are unable to self-insure and have little power to negotiate
better rates.
The relevant geographic market seems to be a fairly straightforward
matter since health care services are primarily local. From the
perspective of the buyers of insurance services, employers want
insurance where the employees work and live. Thus in Aetna/Prudential,
the DOJ concluded ``the relevant geographic market in which HMO and
HMO-POS plans compete are thus generally no larger than the local areas
within which HMO * * * enrollees demand access to providers. * * * As a
result, commercial and government health insurers--the primary
purchasers of physician services--seek to have their provider network's
physicians whose offices are convenient to where their enrollees work
or live.''
In this merger the likely geographic markets are Clark County,
Nevada and the larger geographic market of the State of Nevada.
Consumers faced with an increase in prices for HMOs are unlikely to
travel a long distance away from homes or places of business in order
to escape price increases and purchase HMO services at a lower price.
Generally, consumers are reluctant to travel lengthy distances when
they are sick. Moreover, virtually all managed care companies provide
networks in localities where employees live and work, and they compete
with the other local networks.\30\ Thus, we believe the proper relevant
markets are the provision of HMO services in Clark County and
Nevada.\31\
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\30\ Id.
\31\ As to the market for the sale of health insurance products
to small employers we have no reason to believe the concentration
measures differ significantly from the HMO market.
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Concentration and Competitive Effects
Once the market is defined antitrust authorities and the courts
calculate market shares and concentration levels (using the Herfindahl-
Hirschman Index (HHI)). This merger will lead to an unprecedented level
of concentration. In the Clark County HMO market United's market share
will increase from 14 to 94%. If PPOs are included, United's market
share increases from 9% to 60%. Regardless of how the product market is
[[Page 49889]]
defined United is clearly a dominant firm, far larger than the post-
merger market shares of the combined Aetna/Prudential or United/
PacifiCare in those markets where DOJ brought enforcement actions. Even
in a Nevada HMO market, the market share increases from 12% to 80% and
in a Nevada HMO-PPO market United's market share increases from 7% to
48%. Simply put, post-merger United will be a dominant firm no matter
how the market is defined.
Measuring concentration using the HHI leads to similar results. The
Merger Guidelines define a market with an HHI over 1800 as ``highly
concentrated'' and an increase over 100 is ``likely to create or
enhance market power or facilitate its exercise.'' The post-merger HHI
for HMOs in the state of Nevada is 4,871 and the post-merger increase
in HHI is 1,625. The HMO market in Clark County is even more
concentrated, with a post-merger HHI of 8,884 and a post-merger
increase in HHI of 2,235. These exorbitantly high HHIs support the
presumption that a merger between the two largest HMOs in the highly
concentrated Nevada HMO market would likely create or enhance market
power or facilitate its exercise. The market share data obtained form
the Nevada State Health Division is provided below. (Figure 1).
---------------------------------------------------------------------------
\32\ Data provided from the Nevada State Health Division.
[GRAPHIC] [TIFF OMITTED] TN22AU08.004
The Nevada and Clark County markets are highly concentrated, no
matter how defined. The parties may suggest that this is of little
import because the increase in concentration is not substantial because
United currently has a relatively modest market share. Such an argument
is inconsistent with the facts and the law. United is the largest
health insurer in the United States and the second largest rival in the
market, with the ability and incentive to expand competition. As to the
law as the Supreme Court has acknowledged, ``if concentration is
already great, the importance of preventing even slight increases in
concentration is correspondingly great.'' \33\
---------------------------------------------------------------------------
\33\ United States v. General Dynamics Corp., 415 U.S. 486, 497
(1974).
---------------------------------------------------------------------------
As important, the combined United-Sierra will be substantially
larger than its next closest rival, In the Nevada HMO market it will be
over 10 times larger (80% to 7% for the second largest firm) and in the
Clark County market it will be over 30 times larger (94% to 3%). The
courts have recognized that smaller rivals are far less likely to
constrain the conduct of a dominant firm post-merger, and have enjoined
mergers with far smaller disparities in market share. United States v.
Phillipsburg Nat'l Bank, 399 U.S. 350, 367 (1970) (merged firm three
times the size of next largest rival); FTC v. PPG, 798 F.2d 1500, 1502-
03 (D.C. Cir. 1986) (two and one-half times as large). Where a merger
produces a firm that is significantly larger than its closest
competitors, it increases the likelihood that the firm will be able to
raise prices, decrease compensation, and reduce quality without fear
that the small sellers will be able to take away enough business to
defeat the price increase. See United States v. Rockford Mem. Corp.,
898 F.2d 1278, 1283-84 (7th Cir.) (Posner, J.), cert. denied, 498 U.S.
920 (1990); H. Hovenkamp, Federal Antitrust Policy Sec. 12.4c (1993)
(``markets may often have small niches or pockets where new firms can
carve out a tiny position for themselves without having much of an
effect on competitive conditions in the market as a whole'').
Combined PPO and HMO Markets
Using a definition of the health insurance product market as the
combination of HMOs and PPOs, the health insurance market in Nevada is
highly concentrated, and the United-Sierra merger would substantially
increase the likelihood of competitive harm.
The market share for Sierra and United combined in Nevada is 48%,
while in Clark County the combined United-Sierra market share is 60%.
The post-merger HHI for the Nevada and Clark County markets are 3372
and 5244, respectively, The increase in the HHI market resulting from
the United-Sierra merger is 555 for the State of Nevada and 921 for
Clark County. Data of market shares from the Nevada State Health
Division for the HMO and PPO markets is provided in Figure 2.
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\34\ Data from the Nevada State Health Division.
\35\ The market share for WellPoint in Clark County is
overstated because in the absence of data by territory, all
WellPoint customers were allocated to Clark County.
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[[Page 49890]]
[GRAPHIC] [TIFF OMITTED] TN22AU08.005
Conclusion on the Impact of the United-Sierra Merger on Consumers
As the U.S. Supreme Court has held where a merger results in a
significant increase in concentration and produces a firm that controls
an undue percentage of the market, the combination is so inherently
likely to lessen competition substantially that it ``must be enjoined
in the absence of evidence clearly showing that the merger is not
likely to have such anticompetitive effects.'' United States v.
Philadelphia Nat'l Bank, 374 U.S. 321, 363 (1963), The United-Sierra
merger clearly raises extraordinary and unprecedented levels of
concentration which raise serious concerns about this merger. Nevada is
in need of greater competition, not less. Further consolidation among
the limited health plan providers in Nevada poses a substantial threat
of harming customers, increasing the costs of health care, and
decreasing access to quality health care and the quality of health.
This merger clearly ``would likely be harmful or prejudicial to the
members of the public who purchase insurance'' and thus should be
denied.
V. Health Insurer Concentration: Harm to Sellers and Quality of Care
The nature of the health care industry facilitates the potential
for a dominant health coverage or insurance firm to exercise market
power (or monopsony) over individuals selling health care services
within a geographic region. Because medical services can be neither
stored nor exported, health care professionals generally must sell
their services to buyers (insurance firms and their customers) in a
relatively small geographic market. Refusing the terms of the dominant
buyer, physicians may suffer an irrevocable loss of revenue,
Consequently, a physician's ability to terminate a relationship with an
insurance coverage plan depends on her ability to make up lost business
by switching to an alternative insurance coverage plan. Where those
alternatives are lacking a physician may be forced to reduce the level
of service in response to a decrease in compensation.
Not all insurance providers are equal from the perspective of a
health care provider. A smaller insurance company with fewer covered
lives may not he an attractive alternative. Health care providers who
depend on an insurance program for all or most of their income are at a
substantial disadvantage when there are not competing programs
available; when they switch programs, they tend to lose the patients
who have that particular coverage, It makes little sense for a provider
to switch to an insurer who has a substantially smaller market share
because there won't be enough patients to sustain the practice. Thus,
it is critical for insurance regulators to maintain a competitive
market in which health care providers have significant competitive
alternatives.
In the Aetna/Prudential and United/PacifiCare mergers, the DOJ
raised monopsony concerns in markets for purchasing physicians'
services where the market shares were far less substantial than they
are in Clark County. For example, in United/PacifiCare the DOJ alleged
that the combined firm would account for an excess of 35% in Tucson and
over 30% in Boulder.
In addition, it is important to recognize that it may be
appropriate to prevent a firm from securing monopsony power even if it
faces a competitive downstream market. In other words there may be
antitrust concerns if a health insurer can lower compensation to
providers even if it can not raise prices to consumers. For example, in
United/PacifiCare the Division required a divestiture based on
monopsony concerns in Boulder even though United/PacifiCare would not
necessarily have had market power in the sale of health insurance. The
reason is straightforward--the reduction in compensation would lead to
diminished service and quality of care, which harms consumers even
though the direct prices paid by subscribers do not increase.\36\
---------------------------------------------------------------------------
\36\ See Marius Schwartz, Buyer Power Concerns andthe Aetna-
Prudential Merger, Address Before the 5thAnnual Health Care
Antitrust Forum at Northwestern University School of Law 4-6
(October 20, 1999) (noting that anticompetitive effects can occur
even if the conduct does not adversely affect the ultimate consumers
who purchase the end-product), available at http://www.usdoj.gov/
atr/public/speeches/3924.wpd.
---------------------------------------------------------------------------
Underlying the monopsony analysis in these cases is the premise
that physicians who have a large share of reimbursements from the
merged firm lack alternatives in response to a reduction in
compensation. As alleged in Aetna, they cannot retain or timely replace
a sufficient portion of those payments if the physicians stop
participating in the plans. Moreover, it is difficult to convince
patients to switch to different plans.\37\ Consequently, according to
the Division these physicians would not be in a position to reject a
``take it or leave it'' contract offer and could be forced to accept
low reimbursement rates from a merged entity, likely leading to a
reduction in quantity or degradation in quality of physician services.
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\37\ As alleged in the United complaint, physicians encouraging
patients to change plans ``is particularly difficult for patients
employed by companies that sponsor only one plan because the patient
would need to persuade the em