CAN HMOs WIELD MARKET POWER? ASSESSING ANTITRUST LIABILITY IN THE IMPERFECT MARKET FOR HEALTH CARE FINANCING
MARK L. GLASSMAN
INTRODUCTION
Health Maintenance Organizations (HMO)1 and their predecessors have long been quiet fixtures in the market for health care services.2 In the past quarter-century, however, HMOs have proliferated rapidly,3 largely in response to the failure of traditional health care financing models to contain costs, foster accountability, and ensure access to a rational system of care.4 Critics of the health care industry attribute these failures to an imperfect market for health services that places too little emphasis on price competition, gives consumers too little information on which to judge quality, and raises the cost of changing health plans to a prohibitive level for many individuals.5 HMOs emerged in the early 1970s as a form of health care financing capable of correcting many of the failures in the market for health care services.6 Congress enacted the Health Maintenance Organization Act of 19737 in an effort to make HMOs more widely available,8 and HMOs have since become a cornerstone in the burgeoning managed care sector of the health care industry.9
The rapid growth of the HMO market, ironically, has both underscored the success of HMOs as an economically efficient form of health care financing and raised the specter of anticompetitive market forces that may inflate health care costs.10 There is now a growing debate over whether HMOs will bring the health care market closer to optimum efficiency,11 or whether and at what point their tendency to concentrate health care resources will threaten market efficiencies.12 Nowhere is this debate more audible than in the growing field of health care antitrust law.13
At the core of this new antitrust debate is an increasing tension among the competing interests involved in managed care. Consumers, including employers, private individuals and government, demand economically feasible health coverage that affords them access to primary care and preventive medicine.14 Insurers have responded to this demand by structuring managed care arrangements15 that restrict the consumer's choice of provider while offering patients a more comprehensive set of health benefits.16 These arrangements enable insurers to negotiate lower rates with a limited number of providers17 in return for an assurance of higher patient volume.18 Providers, seeing their patients enroll in managed care plans in increasing numbers, feel an economic imperative to contract with as many managed care arrangements as possible.19 The result: an increasingly competitive, and litigious, health care marketplace.20
Not surprisingly, the number of antitrust cases involving HMOs has risen in the last twenty-five years as HMOs have become popular alternatives among consumers and profitable ventures for providers and insurers.21 The increase in the number of cases appears to correspond with the rise in HMO enrollment.22 These cases generally fall into four categories. The first category consists of monopoly actions, including those brought by: (1) one HMO against another for foreclosure of the market;23 (2) HMOs against large insurers;24 or (3) health care providers against large insurers for adopting cost-containment strategies involving some elements of managed care.25 The second category includes actions for tying arrangements brought by: (1) a small HMO against a larger HMO;26 or (2) physicians against hospitals.27 The third category encompasses actions for group boycotts brought by: (1) doctors against hospitals for exclusion from medical staff;28 (2) hospitals against insurers for exclusion from a payment plan;29 or (3) HMOs and other payors against providers for attempting to inhibit the entry of managed care into the market.30 The fourth category comprises actions for market division or price-fixing by an HMO, preferred provider organization (APPO), or insurer.31 Although some of these cases do not directly involve HMOs as parties, many have resulted from the increased concentration HMOs have brought to the health care financing market.32
These actions, with few exceptions,33 have in common a single threshold requirement: a defendant will not be found liable for antitrust offenses unless it is shown to possess market power.34 Market power is defined as the ability of a firm (or a group of firms, acting jointly) to raise price above the competitive level without losing so many sales so rapidly that the price increase is unprofitable and must be rescinded.35 Such power can be assessed only after a Market has been appropriately designated.36 The ability to define the relevant product market37 and determine market power within that market,38 therefore, is crucial to virtually all antitrust actions in the health care field.
Courts, to date, have held that HMOs operate within the health care financing market, which includes traditional indemnity insurance,39 PPOs,40 and other forms of payment for health care.41 HMOs hold a comparatively low market share when viewed as a component of this broadly defined market and are therefore deemed to have low market power.42 The process of defining a relevant product market and assessing market power, however, is especially problematic in fields exhibiting major innovations and rapidly changing products.43 Health care financing has experienced precisely these kinds of changes over the past quarter-century.44 This market evolution, coupled with recent Supreme Court precedent for assessing antitrust liability in sophisticated but imperfect markets, threatens to increase the ease with which HMOs can obtain market power, thereby exposing HMOs to an increased risk of antitrust liability.
Part I of this Comment describes the statutory basis for antitrust offenses and the traditional methods for measuring market power and defining product markets. Part II examines how the Supreme Court's decisions in Eastman Kodak Co. v. Image Technical Services, Inc.45 and Jefferson Parish Hospital District No. 2 v. Hyde46 raise the threat of antitrust liability for HMOs by lowering the threshold for finding market power in product markets exhibiting imperfections similar to those in the health care financing market. Part III examines how the lower courts have assessed HMO antitrust liability and applied principles of market definition and market power. Part IV discusses how imperfections in the health care financing market could enable small firms to exert market power under the Kodak analysis, thereby increasing the risk of antitrust liability for HMOs. Part IV further analyzes how these market imperfections, coupled with current trends in HMO enrollment and provider contracting, could reduce elasticity of supply and demand for HMOs, causing the HMO market to diverge from the health care financing market under traditional principles of market definition.
Part V recommends two legal principles, which, if adopted by courts, would reduce the ability of HMOs to obtain market power illegally and would reduce the threat that antitrust enforcement will undo the efficiencies HMOs have introduced to the health care financing marketplace. First, courts should combine the Kodak analysis, focusing on market imperfections that reduce elasticity of demand, with that of Jefferson Parish, focusing on elasticity of supply. Under such a hybrid analysis, antitrust liability can attach only where a firm: (1) exploits market imperfections; (2) exhibits the ability to raise prices above the competitive level; and (3) impedes entry of new competitors into the market. Second, in defining markets and assessing market power, courts should adhere to a fact-based, rather than assumption-based, analysis. Such a fact-based analysis emphasizes inquiry into market realities over judicial assumptions about markets.
Part V also recommends a series of economic solutions to remedy market imperfections and lessen the possibility that unwarranted findings of market power will lead to HMO antitrust liability. These recommendations include: (1) lowering switching costs, or the cost to consumers of changing health plans, through passage of legislation to eliminate pre-existing condition exclusions; (2) preserving supply elasticity through adoption of public policies that decrease adverse selection by HMOs; and (3) preserving demand elasticity by increasing the availability of comparative information about competing health plans through employer policies requiring uniform benefits. Finally, Part V recommends a series of actions to be taken by HMOs in order to avoid liability under antitrust laws.
I. BACKGROUND
A. Statutory Basis for Antitrust Offenses
Federal antitrust law has developed primarily around two substantive statutes: the Sherman Antitrust Act47 and the Clayton Antitrust Act.48 The Sherman Act identifies and prohibits two basic categories of anticompetitive conduct: that of a single firm, proscribed by section 2 of the Sherman Act,49 and that of a combination of firms, proscribed by section 1.50 A firm found liable for anticompetitive conduct under the Sherman Act is guilty of a felony.51 The Clayton Act supplements the broad language of the Sherman Act by making four enumerated practices illegal,52 although not criminal.53 The Clayton Act additionally supplies a private right of action under which any individual alleging antitrust injury can sue for anticompetitive conduct prohibited by either the Sherman or Clayton Act.54 The Department of Justice (ADOJ) is charged with public enforcement of the Sherman Act,55 while both DOJ and the Federal Trade Commission (AFTC) are charged with public enforcement of the Clayton Act.56 In addition, the FTC is authorized to bring actions for violation of the Sherman Act by virtue of its authority under the Federal Trade Commission Act.57
B. Judicial Construction of Antitrust Laws
The nebulous words of the antitrust statutes reflect the ambivalence of Congress and the courts toward resolving the inherent tensions between incentive, efficiency, and competition in the free market.58 Through the Act's open-ended provisions,59 Congress granted the courts broad discretion to interpret antitrust laws and develop the principles for their enforcement.60 This wide berth has allowed courts, over nearly a century, to develop manifold tests to determine whether liability will attach under the Acts for various types of behavior.61 Moreover, judicial construction has led to the establishment of different standards for reviewing potentially anticompetitive behavior.62
1. Monopolization and attempted monopolization: section 2 offenses
Section 2 of the Sherman Act prohibits the monopolization of trade.63 Courts apply a two-pronged test to determine whether a defendant has violated this section of the Sherman Act. The test asks first whether a defendant has Market power in the relevant product market.64 Courts traditionally have used market share as a proxy for market power65 in evaluating this prerequisite to a section 2 offense.66 The second element of a section 2 offense is anticompetitive conduct.67 The purpose of this requirement is to guard against The willful acquisition of . . . power as distinguished from growth or development as a consequence of superior product, business acumen, or historic accident.68 A firm satisfies this element when it acquires monopoly power through unlawful means or wields such power to prevent or impede competition.69 A monopolist who innocently obtains market power is liable, therefore, only if it uses the power to restrain competition;70 a monopolist who does not exercise market power in an anticompetitive fashion is liable only if it obtained such power through anticompetitive means.71
Section 2 also prohibits attempted monopolization. This offense includes three elements:72 (1) specific intent to control prices or destroy competition within a particular area of commerce; (2) predatory or anticompetitive conduct aimed at accomplishing the unlawful purpose; and (3) a dangerous probability of success.73 The first element of the offense, specific intent, need not be proved through direct evidence, but can be shown through proof of a per se offense under section 1.74 The second element, anticompetitive conduct, requires only a showing of some illegal or predatory activity.75 The third element can be proved either through direct evidence of market power76 or by inference from proof of specific intent.77 Because a dangerous probability of success can be demonstrated merely by satisfying the first or second element of the offense, independent proof of the third element is not always essential to establishing attempted monopolization.78
2. Combinations or contracts in restraint of trade: section 1 offenses
All contracts or combinations restrain trade to some degree.79 Courts, therefore, have interpreted section 1 to prohibit only unreasonable restraints of trade.80 To determine what constitutes an Unreasonable restraint of trade, courts have developed three tests: (1) the rule of reason;81 (2) the quick look formulation;82 and (3) the per se test.83 Courts scrutinize potentially anticompetitive activities under one of these three tests depending on how great a threat to competition the activity poses.84 A defendant must possess market power before antitrust liability will attach under section 1 according to all but the per se test.85 Courts evaluating antitrust liability under section 1 traditionally have employed the same market share proxy used in section 2 to determine whether a defendant possesses market power.86
C. Recent Application of Antitrust Law to HMOs
Courts and regulators to date generally have viewed HMO markets as transitional, allowing them to develop free from close antitrust scrutiny.87 This is at least partly due to the fact that competition on a large scale among health plans is a new feature in health care markets.88 In recent years, competition has led to massive growth and consolidation by HMOs in order to maximize economies of scale and resources available to customers.89 Both the FTC and DOJ have acknowledged the dramatic changes in the health care market.90 In response, they have published joint guidelines to help those involved with managed care steer clear of antitrust liability.91 Enforcement under these guidelines, however, has been relatively relaxed.92 As the health care market matures, this permissive attitude may eventually yield to a more aggressive approach by enforcers,93 as well as successful challenges to HMO behavior under antitrust laws.94
II. LOWERING THE LEGAL THRESHOLD FOR ANTITRUST LIABILITY
A. Lowering the Threshold for Market Power
1. Eastman Kodak Co. v. Image Technical Services, Inc.
The U.S. Supreme Court departed from the previously clear standard of using market share as the proxy for market power in Eastman Kodak Co. v. Image Technical Services, Inc.95 In so doing, it lowered the threshold for finding that small firms possess market power.96
The Court in Kodak affirmed the denial of a motion for summary judgment by the defendant, Eastman Kodak Company,97 holding that Kodak could be liable for antitrust violations despite the fact that Kodak possessed only a two to twenty-three percent share in the photocopying equipment market.98 Prior to Kodak, the Supreme Court had never attributed market power to a firm with less than a fifty percent market share.99 In turning away from the market share proxy, the Court disregarded precedent dating back to at least 1945.100
The Court's purpose in employing a new test for market power was to gain the ability to review potentially anticompetitive behavior by small firms in markets where rational economic explanations, while perhaps intuitively appealing, may not accurately explain the behavior of the [market].101 Under the market share proxy, small firms escaped review for violations of antitrust law because they failed to satisfy the threshold requirement of market power. The Court in Kodak acknowledged that, in markets made imperfect by certain economic factors, even small firms could possess market power, adopting anticompetitive policies102 or raising prices above competitive levels.103
The plaintiffs in Kodak were independent service organizations (AISO) that repaired and maintained Kodak photocopying equipment.104 Kodak also serviced its own copiers, providing eighty to ninety-five percent of the maintenance for its machines.105 Kodak provided these services through annual contracts or on a per-call basis after the initial warranty on its equipment expired.106 It did not offer a complete package of equipment and maintenance with the initial sale of its equipment, including lifetime parts and service for a single price.107
The ISOs provided parts and services to owners of Kodak equipment through arrangements similar to those offered by Kodak but at substantially lower prices.108 ISOs obtained Kodak parts in several ways, including: (1) purchasing them directly from Kodak; (2) purchasing them from independent original-equipment manufacturers (AOEM) who made parts to order for Kodak; (3) reconditioning parts stripped from old Kodak machines; and (4) using parts purchased from Kodak by customers.109 In response to the competitive threat from the ISOs, Kodak implemented several policies designed to inhibit ISOs from selling their services to owners of Kodak machines.110 These policies included selling replacement parts only to owners of Kodak equipment who subscribed to Kodak service arrangements111 and forging agreements with OEMs to prevent them from selling Kodak-compatible parts to anyone but Kodak.112
The ISOs brought suit against Kodak, alleging that its policies violated sections 1 and 2 of the Sherman Act.113 Specifically, an ISO customer seeking to buy replacement parts for a Kodak machine could do so only if it purchased unwanted repair and maintenance services from Kodak.114 The ISOs alleged that, under section 1, these policies tied the sale of Kodak services to the sale of Kodak parts.115 Under section 2, the ISOs alleged that Kodak had attempted to monopolize the sale of service for Kodak machines by implementing its parts and service policies as part of a scheme of willful acquisition or maintenance of monopoly power.116
In finding that Kodak could possess power in the after market for parts and services despite its low market share in the photocopier market, the Court placed great emphasis on the existence of two imperfections in the market for photocopiers: information deficiencies and high switching costs.117 The Court, evaluating the availability of information, noted that Kodak's method of pricing service and parts separately from the initial sale of its machines prevented prospective purchasers from obtaining an accurate estimate of the lifecycle cost of a Kodak photocopier.118 Although consumers could accurately assess the cost of the initial purchase of a Kodak machine, information on the cost of servicing the machine over its lifetime was difficult[if not] impossible to acquire at the time of purchase.119 As a result, Kodak could charge subcompetitive prices for equipment, while recapturing the difference by charging supra-competitive prices later as the sole supplier of parts and service.120
In addition, the Court found that high switching costs contributed to Kodak's ability to exercise market power.121 It noted that The heavy initial outlay for Kodak equipment made the cost of switching to a competing product Avery high for Kodak customers.122 The Court observed that consumers who already have purchased the equipment, and are thus `locked in,' will tolerate some level of service-price increases before changing equipment brands.123 Under this scenario, Kodak could charge competitive prices in the equipment market but charge supracompetitive prices for parts and service.124 Due to a lack of information about the high lifecycle cost of owning a Kodak machine, consumers might purchase the Kodak product. By the time they realized the high price of servicing the copier, it would be too late to change brands because the consumers would be locked in to the purchase by the heavy initial outlay necessary to purchase a new machine.
The Court's ruling meant that Kodak could be held liable for antitrust violations due to the existence of market imperfections it did not create.125 The availability of interbrand comparative information about lifecycle prices was not within Kodak's control. Although it could have endeavored to provide lifecycle pricing information for its own products, it could not provide such information for its competitors' products. Likewise, the existence of high switching costs was not under Kodak's control; the high initial purchase cost of photocopying equipment was a reflection of the sophistication and expense of manufacturing such equipment, not of Kodak's anticompetitive behavior in the service market. Furthermore, the initial sale of equipment took place in a competitive interbrand market, which tends to hold prices down.126
By introducing a new multi-factored analysis, the Court in Kodak moved away from the traditional antitrust analysis, which looked primarily at the behavior of very large firms in an ostensibly healthy market. It moved instead toward an antitrust policy that gives equal consideration to the behavior of relatively small firms operating in a pernicious market structure in which the concentration of power saps the salubrious influence of competition.127 This new approach could have far-reaching ramifications for HMOs, which currently account for only a small share of the health care financing market.128
2. Jefferson Parish Hospital District No. 2 v. Hyde
The Supreme Court, in Jefferson Parish Hospital District No. 2 v. Hyde,129 upheld a Fifth Circuit ruling that certain imperfections in the health care market could give rise to market power in at least an abstract sense130 when a defendant's thirty percent market share was insufficient to give rise to market power under the traditional analysis.131 The imperfections at issue in Jefferson Parish included a lack of consumer incentive to compare costs among hospitals132 and a lack of adequate information with which to compare quality among hospitals.133 The Court ultimately concluded that, although these imperfections reduced price competition,134 their presence alone was insufficient to support a finding of antitrust violation.135 It suggested, however, that if these imperfections were accompanied by restraints on consumers' choices of health care providers, antitrust liability could attach.136
The plaintiff in Jefferson Parish was an anesthesiologist who applied for staff privileges at East Jefferson Hospital in Jefferson Parish, Louisiana.137 After being approved initially, the anesthesiologist was denied privileges by the Hospital Board because the hospital had signed an exclusive contract with another anesthesiologist.138 The plaintiff sued under section 1 of the Sherman Act, alleging that East Jefferson had implemented an illegal tying arrangement by which patients needing surgery at the hospital were forced to purchase anesthesiology services from the exclusive contractor.139
The Court first found that, although the exclusive contract was a tying arrangement,140 it could be illegal only if it forced patients to purchase anesthesiology services they did not need.141 The plaintiff alleged that the contract forced consumers to make such unwanted purchases.142 He further asserted that the hospital's thirty percent market share indicated that patients preferred East Jefferson to others, and that the lack of consumer incentive to compare cost and quality among hospitals enabled East Jefferson to charge supracompetitive prices.143 The Court ultimately concluded that the tying arrangement was not illegal because patients were free to go to twenty other hospitals operating in the region, and empirical evidence indicated that they frequently did so.144 Thus, although the Court in Jefferson Parish acknowledged that market imperfections could give rise to market power, the imperfections present in the case were not of a magnitude sufficient to render rational economic explanations incapable of accurately explain[ing] the behavior of . . . markets, as was the case in Kodak.145
The Court in Jefferson Parish also made an important distinction in its analysis of East Jefferson's behavior. It acknowledged that in the field of health care, a potential monopolist often can be regarded as either a seller or buyer of health services.146 As a seller of health care services, the relevant inquiry would be into conduct by an alleged monopolist that results in a reduction in the ability of competing sellers to enter the market.147 Such conduct reduces elasticity of supply.148 As a buyer, the inquiry would be into conduct that reduces the number of buyers available for similar services.149 The lower courts have employed this dual analysis in cases involving allegedly anticompetitive behavior by HMOs.150 Kodak and Jefferson Parish thus identify three imperfections that now could give rise to liability in the absence of substantial market share:151 (1) information deficiencies;152 (2) high costs for consumers to switch from one product to another;153 and (3) financing arrangements that reduce price competition, if accompanied by restrictions on consumers' choice of products.154 The health care market incorporates each of these imperfections to some degree.155 Under Kodak, HMOs may be deemed to possess market power if they are perceived to benefit from these imperfections. Further, HMOs may be found to possess market power under Jefferson Parish if certain market trends continue to reduce consumer options in the health care financing market.156
B. Potential Divergence of HMO and Health Care Financing Markets
To date, courts have included HMOs in a broad product market defined to encompass all Health care financing products, including traditional indemnity (or fee-for-service) insurance and PPOs.157 This definition is based primarily on two factors. First, courts consider consumer perception that HMOs and other forms of health care financing are interchangeable.158 Such interchangeability reflects the cross-elasticity of demand between HMOs and other forms of health care financing.159 Second, courts consider the relative ease with which providers of one form of health financing can modify production to offer another in response to an increase in prices by a producer of similar goods.160 This test for ease of entry into the market reflects elasticity of supply.161 Applying these principles, courts have found that consumers view HMOs as interchangeable with other forms of health care financing, and that there are low entry barriers for new competitors.162 Having thus defined the market broadly, courts apply the market share proxy to test for market power. As a component of the Health care financing market, HMOs typically do not hold a sufficient market share to be deemed to possess market power under the traditional analysis.163
The potential impact of Kodak and Jefferson Parish on market definition in HMO cases is that courts, in defining relevant product markets, may no longer place primary emphasis on market share and product interchangeability.164 They may look instead at the ability of HMOs to exert control over their segment of the health care financing market as a result of market imperfections. While courts traditionally have looked at a firm's ability to exert control over a segment of the market as a secondary component of market definition, they have done so only after finding high market share.165 A court, finding that market imperfections enable an HMO to exert control over its segment of the health care financing market, could conclude under Kodak that HMOs comprise a separate product market.
Changing conditions in the health care financing market, moreover, could lead courts to perceive a separation of the markets for HMOs and other forms of coverage even under traditional methods of market definition. Rapidly increasing HMO enrollment, coupled with adverse selection and coverage exclusions for pre-existing conditions, could render HMOs and other forms of health care financing non-interchangeable.166 Disparities in reimbursement, patient volume, and patient type may cause physicians to align with either HMOs or fee-for-service plans.167 These factors, coupled with the use of exclusivity contracts and the trend toward physician ownership of HMOs, may reduce the supply of physicians available to join newly forming or expanding HMOs.168 If both demand and supply for HMOs become sufficiently inelastic, courts could begin to view the HMO market as separate from the health care financing market. Each individual HMO would hold substantially higher market share in a product market consisting of only HMOs. In such a divided market, courts could find that HMOs have market power even under the traditional market share proxy.169
III. LOWER COURT ASSESSMENT OF HMO ANTITRUST LIABILITY
The First, Seventh, and Tenth Circuits have ruled on antitrust claims against an HMO or large insurer. In defining the HMO market, the First and Seventh Circuits have relied on traditional concepts of product interchangeability to find that HMOs are a component of the health care financing market.170 In assessing market power, the First, Seventh, and Tenth Circuits have employed the traditional method of measuring elasticity of supply and demand to arrive at differing conclusions about the market power of insurer-defendants.171
None of the circuits, however, has taken into account the possibility raised in Kodak and Jefferson Parish that market imperfections could divide the health care financing and HMO markets or confer market power on a defendant who appears to lack such power under traditional analysis.172 Both the First and Seventh Circuits acknowledged at least the possibility that HMOs could comprise a discrete product market in some circumstances.173 Although the Supreme Court recently denied certiorari to the Seventh Circuit in Blue Cross and Blue Shield United of Wisconsin v. Marshfield Clinic,174 the questions of how to properly define the HMO market and how to assess market power are likely to be the subject of considerable antitrust litigation in the future.175 As HMOs continue to consolidate,176 courts may find the principles of Kodak and Jefferson Parish more appealing in defining the HMO market and evaluating power within that market.
A. Lower Court Definition of the HMO Market
1. Blue Cross and Blue Shield United of Wisconsin v. Marshfield Clinic
In Marshfield, the Seventh Circuit held that a doctor-owned clinic and its subsidiary HMO, Security, which enrolled nearly ninety percent of all HMO subscribers in the region, did not foreclose the market to new competitors in violation of section 2 of the Sherman Act.177 The court's holding was based, in large part, on its broad definition of the HMO market to include all forms of health care financing.178 As a component of this broadly-defined market, Security held less than fifty percent market share, an amount too small to raise an inference of market power.179 The court's definition of the market relied primarily on two conclusions:180 (1) consumers of health care financing view HMOs as interchangeable with PPO plans and traditional indemnity insurance;181 and (2) barriers to entry by new HMOs are low.182 There are several weaknesses in the court's reasoning in Marshfield that make its conclusions susceptible to a contrary interpretation under the Kodak and Jefferson Parish analysis.
First, although the Marshfield Clinic employed all of the physicians in Marshfield and several other towns,183 the court in Marshfield reasoned that these physicians nevertheless would be willing to serve other HMOs because they were not under exclusive contract to Security and many of them already participated in PPOs.184 The mere absence of an exclusive contract, however, does not mean that a physician is willing to provide services to an HMO entering the market in response to a price increase by an existing HMO. Many of Security's physician members held an ownership interest in the HMO.185 These physicians had an economic incentive not to join competing HMOs because the success of other HMOs might threaten that of Security.186 Thus, elasticity of supply might have been low despite the absence of exclusive contracts because physicians voluntarily refused to contract with newly forming HMOs out of economic self-interest.
Second, the mere perception of product interchangeability does not enable consumers to seek alternative coverage in response to a price increase by an HMO. Market imperfections, such as the practice by insurers of excluding coverage of pre-existing conditions, can prevent consumers from seeking alternative coverage despite the perception that products are similar.187 Such practices can raise consumer Switching costs by forcing consumers with pre-existing conditions to either accept prices above the competitive level or forego coverage altogether.188 High switching costs thus decrease elasticity of demand by reducing or eliminating consumer ability to seek alternative coverage in response to a price increase.
Finally, the court held that monopoly power could not be inferred from Security's high prices or high rate of return relative to its competitors because the service it offered was heterogeneous.189 Product heterogeneity, however, can be a poor explanation for price differences between a monopoly product and substitutes offered by other firms.190 Courts have held that in a monopoly situation, a firm with market power can make its product appear interchangeable with substitutes that are functionally inferior, but more expensive, simply by raising prices to the level of the more expensive product.191
The court's reasoning in Marshfield involved the same kind of economic formalism the Supreme Court rejected in Kodak192 and eschewed in Jefferson Parish.193 The court held that the mere presence of some factors which make supply and demand elastic in theory, such as the apparent availability of physicians and consumer perception of product interchangeability, precluded the possibility that market imperfections rendered supply and demand inelastic in fact.194 This weakness in the court's reasoning raises the possibility that courts applying the principles of Kodak and Jefferson Parish could conclude, under facts similar to those in Marshfield, that HMOs constitute a discrete product market.
2. U.S. Healthcare, Inc. v. Healthsource, Inc.
In U.S. Healthcare, Inc. v. Healthsource, Inc.,195 the First Circuit was faced with a suit alleging violations of sections 1 and 2 of the Sherman Act brought by an HMO wishing to enter a market against a dominant HMO already operating in that market.196 The defendant, Healthsource, was the only non-staff-model HMO operating in New Hampshire and had enrolled approximately five percent of the population of the state.197 Many contracted physicians were stockholders in the company,198 and eighty-seven percent of them signed exclusive contracts under which they agreed not to serve any other HMO.199 The plaintiff, U.S. Healthcare, was one of the nation's largest HMOs, with more than one million enrollees but no operations in New Hampshire.200
The court, reviewing U.S. Healthcare's claims under the rule of reason,201 concentrated on the question of market definition.202 It began by asking whether Healthsource should be viewed as a potential monopolist in the sale of health care services to consumers or in the purchase of health care services from physicians.203 The court concluded that Healthsource was most appropriately viewed as a seller of services because the potential anticompetitive effect of the exclusivity clause was to foreclose the market to HMOs by eliminating the supply of doctors whose services competing HMOs could sell to consumers.204 Next, the court inquired as to the nature of the product market in which Healthsource operated and, deferring to the trial court ruling, concluded that the market was health care financing.205 Employing the traditional market share proxy, the court held that Healthsource possessed too small a market share to have market power.206 It found, therefore, that Healthsource was not liable under either section 1 or 2 of the Sherman Act.207
The trial court based its broad definition of the HMO market on reasoning similar to that later used by the Seventh Circuit in Marshfield, namely, that HMOs are interchangeable with other forms of health care financing.208 While the First Circuit affirmed this interpretation, it acknowledged the possibility that the HMO market could be separated from that of other forms of health care financing.209 First, the court observed that the HMO market could diverge from the health care financing market if HMOs could raise and sustain prices above the competitive level long enough to enjoy monopoly profits.210 The ability to charge supracompetitive prices without losing customers to other forms of health care financing would indicate inelastic demand.211
Second, the court held that market separation could occur if a sufficient number of physicians signed exclusive contracts requiring lengthy advance notice before termination.212 Such contracts could render supply inelastic by eliminating so much of the available supply of physicians that the ability of competitors to enlist panel doctors to serve new HMOs would be severely limited or foreclosed.213 Finally, the court acknowledged it was a legitimate contention that HMO services and pricing differ enough from other forms of health care financing to support the conclusion that HMOs comprise a separate product market.214 Thus, while the court used the traditional method of market definition to find that HMOs are a component of the health care financing market, it acknowledged the possibility that HMOs could comprise a discrete product market under an alternative analysis.
B. Market Power Determinations in Cases Involving HMO or Insurer
The circuits have seen a number of cases during the past decade brought by HMOs or providers against large insurers.215 These suits involve allegations that a large insurer is attempting to monopolize the market for health care financing in violation of section 2 of the Sherman Act. The following cases illustrate how the circuits have applied different analyses to determine whether defendants possessed market power and, if so, whether they illegally exercised that market power.
The Tenth Circuit found market share to be more important than ease of entry as a determinant of market power. In Reazin v. Blue Cross & Blue Shield of Kansas, Inc.,216 the court upheld a jury verdict finding violations of sections 1 and 2 of the Sherman Act by a large insurer.217 The defendant insurer had terminated the contract of a hospital that recently had been acquired by a competitor and reduced reimbursement for other hospitals doing business with its competitors.218 All hospitals and approximately ninety percent of the physicians in the relevant geographic area were under contract with the defendant at the time;219 approximately sixty percent of those insured in the state were insured by the defendant.220 Examining the insurer as a buyer of health care services, the court held that despite the existence of more than 200 insurers in the state, the defendant possessed market power.221 It concluded that another entrant remotely approached [the defendant's] domination of the market and this was evidence that barriers existed to the entry of new competitors.222
A similar situation yielded markedly different results in the Seventh Circuit. In Ball Memorial Hospital, Inc. v. Mutual Hospital Insurance, Inc.,223 the plaintiffs were eighty acute-care hospitals in Indiana seeking to block implementation of a PPO by Blue Cross, an insurer with twenty-seven percent of the patients in the market.224 The plaintiffs alleged that the defendant insurer's attempt to limit hospital reimbursement under its PPO plan violated sections 1 and 2 of the Sherman Act.225 In determining whether the defendant possessed market power, the court placed greatest emphasis on the absence of barriers to entry (or high elasticity of supply) that was evidenced by the presence of nearly 500 health care insurers in Indiana.226 It found that market share was not a relevant determinant of market power when better measures were available.227 The court held that Ease of entry and the absence of barriers was a better measure of market power and that under these criteria, the defendant insurer did not possess market power.228
Finally, the First Circuit ruled that a large insurer did not violate section 2 of the Sherman Act by adopting cost containment measures in an attempt to curb the loss of patients to an HMO. In Ocean State Physicians Health Plan, Inc. v. Blue Cross & Blue Shield of Rhode Island, Inc.,229 the plaintiff was a private, upstart HMO that offered more coverage at lower premiums than the defendant, Blue Cross.230 One way it was able to do this was by negotiating to pay physicians approximately twenty percent less than they received from Blue Cross.231 In response, Blue Cross implemented a Aprudent buyer program under which it paid physicians no more than they accepted from other payors.232 As a result, more than one quarter of Ocean State's physicians resigned, apparently to avoid a reduction in Blue Cross reimbursement.233 The court held that, although Blue Cross had market power,234 the prudent buyer program was not an illegal exercise of that power because it was instituted to promote competition and was not exclusionary or predatory.235 The court thus held that a monopoly is not prohibited, under the rule of reason, from engaging in honest competition, even if that competition has the effect of harming its competitors.236
IV. ECONOMIC FACTORS RAISING ANTITRUST LIABILITY FOR HMOS
To date, courts have defined the HMO product market to include all forms of health care financing.237 HMOs typically possess low market share as a component of this broadly defined market.238 Under traditional antitrust analysis, therefore, courts have been reluctant to find that HMOs possess market power.239 However, emerging economic factors, or Market imperfections, in the health care financing market,240 coupled with the more modern Supreme Court precedent of Kodak and Jefferson Parish, could lead courts to find that HMOs possess market power despite their small share of the market.241
These economic factors could also prompt courts to conclude that HMOs comprise a market separate from that of other forms of health care financing.242 In a market thus divided, each individual HMO would hold substantially higher market share because the diluting effect of other forms of health care financing would be lost.243 The divergence of markets, therefore, would increase HMO market power under either traditional244 or modern antitrust principles.245
A. Market Imperfections Increasing HMO Market Power
Under traditional economic analysis, use of the Market share proxy meant that courts were unlikely to find that small firms possessed market power.246 This analysis, however, relied on basic assumptions about the effects of a firm's size on elasticity of supply247 and demand.248 The modern analysis of Kodak and Jefferson Parish takes a less formalistic approach,249 recognizing that even small firms can wield power in markets where imperfections artificially suppress supply and demand.250 Such market imperfections, includ-ing high costs for consumers to switch from one product to another, information deficiencies, and financing arrangements that reduce price competition, exist today in the health care financing market.251
1. Increased switching costs
Consumers in the health care financing market commonly experience high switching costs when a medical condition, which is covered under their current health plan, is excluded from coverage under a subsequent plan because it is considered a pre--existing condition.252 Pre-existing condition exclusions raise the cost and risk of switching from one health plan to another because consumers who change plans must pay the costs for future treatment related to the pre-existing condition out of their own pockets.253 These individuals frequently are charged higher premiums even though coverage of the condition is excluded under the new plan.254 High switching costs in the health care financing market make the cost of changing health plans prohibitive for many individuals; frequently they are so high that consumers refuse to change jobs for fear of also having to change health plans.255
The plight of consumers who develop a pre-existing condition while covered by a health care plan is similar to that of the consumers in Kodak who made a large, but seemingly reasonable, initial expenditure to purchase Kodak equipment.256 Consumers with pre-existing conditions cannot switch to substitute health plans in response to a price increase without incurring disproportionately high costs.257 Pre-existing condition limitations thus are a market imperfection that increases switching costs and artificially reduces elasticity of demand.258 The Court in Kodak held that such an imperfection could confer market power on firms that hold low market share.259
2. Information deficiencies
The lack of comparative information about health plans and the widely disparate coverage policies offered by such plans are two major barriers to price competition in the health care financing market.260 Most insurers offer arcane coverage provisions that are difficult for consumers to understand.261 Quality measures are all but nonexistent, impeding consumer ability to compare the value of plans per dollar charged.262 Consumers frequently are unaware that their health plan excludes coverage of pre-existing conditions or that they can be dropped from the plan if they become ill.263 Just as in Kodak, this absence of uniformity among products, and the inability to predict the Lifecycle cost of obtaining health coverage under various plans, impedes consumers' ability to make direct price, coverage, and quality comparisons.
3. Payment policies that reduce price competition
Employer payment policies and federal tax laws decrease consumer price consciousness in the health care financing market. Employer payment of full premiums for their employees' health coverage reduces employee price consciousness in selecting a health plan.264 Under such arrangements, employers pay the full premium for health coverage regardless of price.265 HMOs thus gain few customers by cutting prices and lose few customers by raising prices,266 making demand inelastic.267 Similar policies, such as those requiring employees to make the same premium contribution regardless of the type of plan they choose, can have the same effect.268
The current tax code also understates price competition among health plans.269 Section 125 of the Internal Revenue Code270 allows employers to pay the cost of health premiums in pre-tax dollars.271 The pre-tax payment artificially increases the amount of money available to purchase health insurance and reduces the amount of any apparent differences in premiums.272 Thus, an HMO that cuts its price by a certain amount gains only a fraction of the customers it would normally gain with such a price cut.273 Conversely, an HMO that raises its price loses only a fraction of the customers it would normally lose.274
4. Limitation on consumer choice of providers
A second market imperfection, which raises HMO liability under the Jefferson Parish analysis, is the tendency of employers to limit the number of HMOs offered in their benefit plans.275 Such limitations reduce price competition among HMOs by allowing the contracting HMO to raise prices to the level of competing fee-for-service plans without losing customers.276 This scenario provides an apt example of the cellophane fallacy, wherein imperfect competition makes poor substitutes appear interchangeable.277 It is worth noting, however, that the practice of offering a limited number of HMOs to employees does not completely eliminate price competition because employers offering an HMO as a coverage option will often compare rates among competing HMOs before initially signing up a single contractor.
The Court in Jefferson Parish held that small firms could possess power in markets made imperfect by payment policies that reduce price consciousness and restrict consumer choice of provider.278 Employee benefit policies, combined with federal tax laws, have introduced such imperfections to the health care financing market. HMOs operating in these markets, therefore, could be held liable for antitrust offenses under the Jefferson Parish analysis.
B. Economic Factors Creating the Potential for a Discrete HMO Market
Market definition relies heavily on principles of elasticity of supply and demand.279 Certain trends accompanying the flood of enrollment in HMOs in recent years,280 coupled with market imperfections, could substantially decrease elasticity of supply and demand, causing the HMO and health care financing markets to diverge for purposes of antitrust analysis.281 Specifically, the trend toward adverse selection could create a bifurcated market in which HMOs are the only affordable health care financing product for younger and healthier individuals, while fee-for-service plans present the only viable coverage option for older and sicker individuals.282 Coverage exclusions for pre-existing conditions already have brought about substantial consumer lock-in.283 Finally, the use by HMOs of exclusive provider contracts could prevent the entry of new competitors into the market.284 If both supply and demand become inelastic, courts could conclude that HMOs operate in a market separate from other forms of health care financing.285
1. Adverse selection
HMOs have exhibited a tendency to enroll healthier patients, while sicker patients remain in fee-for-service plans.286 This phenomenon, known as adverse selection,287 could substantially reduce elasticity of HMO supply if allowed to continue over an extended period. Presently, new entrants to the HMO market enjoy relatively low structural entry barriers.288 New HMOs are able to attract new enrollees from fee-for-service plans easily.289 With continuing mass-enrollment in managed care,290 however, adverse selection could create a structural dichotomy in the health care financing market, whereby a predominant number of healthy patients enroll in HMOs and sicker patients remain in fee-for-service plans.291 Adverse selection could eliminate a large portion of the pool of potential new HMO enrollees by making unavailable, or undesirable, those enrolled in fee-for-service plans.292
2. HMO use of exclusive provider contracts
Physicians who treat the more complex illnesses encountered by fee-for-service patients may be reluctant to enter HMO panels because of HMO pressure to practice a more conservative style of medicine, with higher patient volume and lower per-capita reimbursement.293 The use of exclusive provider contracts could further decrease elasticity of HMO supply by making unavailable physicians who otherwise would be willing to contract with newly forming HMOs.294 If such physicians are unavailable, competitors will be unable to form new HMOs in response to supracompetitive pricing by existing HMOs. Exclusivity clauses restricting mobility among physicians who treat HMO patients, therefore, could take on heightened significance in the new antitrust analysis.295 Similarly, a preponderance of physician-panelists who hold an ownership interest in their respective HMOs296 could restrict market entry because the economic self-interest of doctor-owners will cause them to refuse to serve other HMOs.297
3. Exclusion of coverage for pre-existing conditions
Although exclusions of coverage for pre-existing conditions are prevalent among most forms of health care financing,298 HMOs generally do not exclude coverage of such conditions.299 Consequently, individuals covered by HMOs who develop pre-existing conditions can seek coverage from competing HMOs, but their ability to switch from HMOs to alternative forms of health care financing is severely limited.300 While individuals covered by fee-for-service or PPO plans are able to switch to HMOs, the more restrictive benefit policies of HMOs may make them poor substitutes for these other forms of health care financing.301 Such non-interchangeability among HMOs and other forms of insurance (or low cross-elasticity of demand) could induce courts to conclude that HMOs constitute a product market separate from health care financing.302
C. Consequences
Relevant factors in determining the existence of market power today include: (1) elasticity of supply,303 reflected by the ability of firms to shift production to offer a product similar to that of a competitor in response to a price increase;304 (2) elasticity of demand,305 reflected by consumer tendency to purchase substitute products in response to a price increase;306 and (3) the existence of market imperfections.307 Market share, while still relevant, is no longer the proxy for market power under the modern analysis;308 rather, it is merely a probative indicator of elasticity of demand and supply.309
The health care financing market exhibits each of the imperfections that portend liability under Kodak and Jefferson Parish. It has information deficiencies, financing arrangements that reduce price competition, and high costs for consumers to switch from one product to another.310 Courts employing the new antitrust analysis, therefore, could hold HMOs liable for antitrust offenses either as small firms operating in the imperfect market for health care financing or as large firms operating in a discrete HMO market.
V. RECOMMENDATIONS
A. Legal Principles to More Accurately Assess Market Power and Define Markets
1. Combine the Kodak and Jefferson Parish tests
Courts should combine the Kodak test, focusing on market imperfections that reduce elasticity of demand, with that of Jefferson Parish, focusing on elasticity of supply. Antitrust liability can attach under such a combined test only where a small firm: (1) exploits market imperfections; (2) exhibits the ability to raise prices above the competitive level without losing customers to an existing competitor; and (3) impedes the entry of new competitors into the market. Adoption of such a rule serves three purposes.
First, it creates a competitive market for comparative product information. By acknowledging the competitive significance of information deficiencies, the rule gives insurers the incentive to provide accurate information about the prices and terms of their own products. Further, it allows insurers to police their competitors by encouraging consumers to compare information about their own product with information provided by a competing firm. As a result, it could even create a new submarket for comparative information about insurance products.
Second, the rule appropriately contains antitrust liability. It acknowledges that failure to provide product information can be considered an anticompetitive act only if the information deficiency reduces price competition and hinders the entry of new competitors into the market. Moreover, the rule recognizes that sellers are best suited to provide consumers with information about the prices and terms of their own products. The rule would not impose liability on small firms that lawfully attain power in an imperfect market because they failed to provide comparative information about their competitors. Instead, small firms would be liable only if they exploited information deficiencies in order to charge supracompetitive prices and exclude competitors.
Third, the rule is administrable without a re-engineering of traditional antitrust principles. It holds small firms liable for antitrust offenses only when they: (1) obtain market power by virtue of a market imperfection; (2) exercise market power through an anticompetitive act; and (3) cause antitrust injury through unfair prices or terms, or by foreclosing entry of new competitors. The preservation of traditional antitrust principles will afford firms greater certainty in assessing their antitrust exposure.
2. Adhere to a fact-based, rather than assumption-based, analysis for finding market power and defining markets
Courts and enforcers should employ a fact-based, rather than assumption-based, analysis to define product markets and measure market power in the health care field.311 Such an analysis will cut short the unhealthy legacy of Marshfield and maintain prevailing Supreme Court precedent, which emphasizes factual inquiry into Market realities above assumptions or formalistic distinctions about markets.312 The court in Marshfield departed from the norm of relying on juries to find legal meaning in the complex web of factual evidence presented in antitrust cases.313 It resorted instead to declarations based more on intuitive analysis than factual determinations in overturning a jury verdict and placing HMOs squarely in the health care financing market.314
The paradox of the court's approach in Marshfield is that much of the economic analysis employed in antitrust law relies on consumers' perceptions about product interchangeability and availability. The court in Marshfield, however, discounted the jury's ability to accurately interpret factual evidence on product interchangeability and availability to find the existence of a discrete HMO market and then assess market power.315 In essence, the court held that the perceptions and behavior of consumers in the marketplace can be dispositive of a firm's market power and the boundaries of its relevant product market. However, the judgment of these same consumers sitting as jurors is not competent to discern antitrust liability.
The consequences of assuming without significant factual inquiry that the HMO market cannot be separated from that of other forms of health care financing are threefold: (1) it permits large-scale consolidation of HMOs;316 (2) it impedes efforts to foster competition by protecting the creation of new HMOs;317 and (3) it supplants a particularized analysis by the factfinder of competition in specific markets with what the court considers to be well known about markets generally.318
By preserving a fact-based antitrust analysis, courts can ensure that the salubrious effects of competition are felt in the rapidly developing health care market. Such an analysis, by refusing to define the market unnecessarily broadly, will foster competition among HMOs, not just between HMOs and other forms of health care financing. A fact-based, rather than assumption-based, analysis recognizes that anticompetitive behavior by one HMO directed against another HMO does not lose its legal significance solely because HMOs frequently function alongside other insurance products in the health care financing marketplace. Intra-HMO competition, in turn, will advance the economic goals of managed care by promoting a rational system of health care in which consumers, providers, and payors negotiate over price, benefits, and quality.
B. Economic Solutions to Prevent HMO Acquisition of Market Power
1. Lower switching costs by eliminating coverage exclusions and limiting premium increases based on pre-existing conditions
The Heath Insurance Portability and Accountability Act, enacted during the 104th Congress, prohibits insurers from excluding coverage for pre-existing conditions.319 When it takes effect July 1, 1997,320 the Act will help eliminate the high switching costs that currently prevent many individuals from obtaining new health coverage after an illness or change of jobs. It will preserve competition among HMOs by allowing consumers to obtain new coverage in response to an unfavorable pricing or coverage policy. In addition, it will preserve the existence of a broader Health care financing market in which HMOs, which do not exclude coverage of pre-existing conditions, compete with other forms of health care financing.
The Act, however, will solve only half the problem of increased switching costs associated with pre-existing conditions. Although it forbids outright refusal to cover individuals with pre-existing conditions, the Act fails to address the problem that arises when health plans charge these individuals a premium so exorbitant that they effectively are excluded from coverage. For these individuals, the cost of changing health plans will remain prohibitive. Congress, therefore, should monitor the behavior of health plans following implementation of the Act and take additional action if necessary.
2. Increase supply elasticity by decreasing adverse selection
Government should adopt reasonable fair marketing standards for those in higher risk categories, such as the poor and the elderly. This will attenuate the effects of adverse selection by preventing HMOs from avoiding enrollment of individuals they consider likely to be above-average utilizers of health care resources. Government, however, should not force affirmative action on HMOs to enroll these higher-risk groups. Adverse selection is, to some degree, the result of rational decisions by consumers that their medical needs will be better served in a fee-for-service plan than an HMO. Affirmative action for high-risk groups might provide irrational incentives for sicker individuals to enroll in HMOs, which would be less suited to provide for their medical needs. Fair marketing standards will ensure that the decision rests with consumers about which type of plan best suits their health care financing needs.
3.Increase demand elasticity by fostering price competition
a. Increase availability of information
The existence of widely disparate coverage policies among health care financing products is a major barrier to price competition. This disparity suppresses price competition by impeding consumers' ability to make direct price, coverage, and quality comparisons. Large employers can correct this imperfection by offering employees several health coverage choices and requiring insurance companies to offer uniform benefit packages.321 Such uniformity will enable employees to make apples to apples comparisons on the price of alternative health coverage plans. State governments can empower consumers on a broader scale through the passage of laws requiring health plans to provide uniform information to consumers or employers.322 State governments already have succeeded in empowering small employers to provide their employees with multiple coverage options by enacting legislation to authorize the formation of purchasing cooperatives.323
b. Require employee cost sharing
Employee cost sharing is the most effective means of restoring price competition to the health care financing market and preserving elasticity of demand. Employees are more likely to make rational, market-based decisions if they share in the cost of the health coverage they choose. There are two ways employers can implement cost sharing. First, and most effectively, employers can pay a fixed premium amount for the employee.324 The employee then would be responsible for paying the difference between this amount and the price of the health plan he or she chooses.325 Such a policy would foster a high degree of price consciousness because employees are responsible for the full difference in plan cost.326 The second way employers can implement cost sharing is through payment of a fixed percentage of employees' health care premiums.327 Under such a policy, employees would be responsible for only a percentage of the difference in the premium cost of the health plan they choose.328 While this approach has the advantage of fairness to employees who would benefit from a fee-for-service plan, it fosters a lower level of price consciousness among employees than payment of a fixed premium amount.
c. Amend tax laws
Federal tax policy should foster health plan price competition by encouraging employers to pay a fixed premium amount for employees while making the employee responsible for the remaining amount.329 The tax code should allow employers to pay a fixed amount of health insurance premiums with pre-tax dollars.330 This amount could be set at the regional average cost of a health plan minus ten percent. Such a policy would set a target pricing level at the average health plan cost. Consumers would pay 100 percent of the cost difference for plans priced above the average health plan cost, and would save 100 percent of the cost difference for plans priced below average. Such a policy would reduce fluctuations in the price of health plans and encourage plans to compete on price until they reach the point of lowest marginal return.331 Allowing employers to pay up to 90 percent of the actual cost of employee health insurance premiums provides a second, slightly less effective solution.332
C. Actions HMOs Can Take to Avoid Antitrust Liability
HMOs can reduce their antitrust exposure by undertaking some of the measures described above voluntarily, as well as by implementing additional measures to preserve elasticity of supply and demand in the health care financing market. Specifically, HMOs can:
! Limit the use of exclusive contracts and limit the notice required of health care providers to terminate such contracts. This will help ensure that HMO supply remains elastic by preserving an adequate pool of providers willing to contract with newly forming HMOs.
! Provide information about price, benefits, and coverage limitations to employers and employees who subscribe to HMO plans. This will help reduce the substantial cost of obtaining comparative information about health plans. It will increase price sensitivity among consumers and prevent costly Lock ins due to coverage exclusions that are not easily understood by consumers at the time of enrollment.
! Implement fair marketing procedures to ensure that enrollees represent diverse risk groups rather than only low-risk groups. This will help prevent an artificial division of HMO and fee-for-service product markets, whereby HMOs would offer inadequate coverage for sicker individuals while fee-for-service plans would be prohibitively expensive for healthier individuals.
CONCLUSION
To date, courts have defined the HMO market broadly to include all health care financing products. In most of these markets, one or two firms hold the dominant share of HMO enrollees, although these enrollees account for only a small portion of the total insured population. Dominant HMOs have been protected from liability under traditional antitrust analysis by the Market share proxy, the notion that a firm cannot wield market power unless it also holds a substantial market share.
The Supreme Court, however, announced a new antitrust analysis in Kodak and Jefferson Parish that attributes market power to small firms operating in markets where certain imperfections suppress competition. The health care financing market exhibits such imperfections, including information deficiencies, high consumer switching costs, and financing arrangements that reduce price competition. HMOs, therefore, may be held liable for antitrust offenses under the new analysis despite possessing low market share.
Market imperfections, coupled with increasing HMO enrollment, threaten to suppress elasticity of supply and demand for HMOs, while reducing consumers' ability to choose health plans and providers. Courts, observing such economic inflexibility, may recognize a division of the HMO and health care financing markets. In a market comprised only of other HMOs, each individual HMO will hold a substantially higher market share. A division of markets, therefore, will confer market power on many HMOs even under the traditional market share proxy.
Increased antitrust liability for HMOs can have both positive and negative consequences. Appropriately applied, it can ensure that the principles of competition and efficiency on which HMOs are founded remain intact. Unwarranted antitrust liability, however, can diminish the benefits HMOs have brought to health care financing, including lower prices and improved access to primary care. Courts, government, and HMOs, therefore, should take specific steps to preserve elasticity of supply and demand for HMOs, protect consumer choice, and ensure that antitrust liability is apportioned appropriately.
|
1 HMOs are a form of prepaid health plan in which the enrollee pays a fixed premium to the plan and, in return, receives all the health services he or she requires during the period of enrollment. See U.S. Healthcare, Inc. v. Healthsource, Inc., 986 F.2d 589, 591 (1st Cir. 1993). These services are delivered by the plan's panel or network of health providers. HMOs control their financial risk by managing care in several ways, some of which include: (1) selective provider contracting the plan negotiates lower payment rates with health providers who, in turn, become members of the plan's panel and receive higher patient volume; (2) utilization review the plan carefully scrutinizes bills, refusing to pay for unnecessary services and negotiating lower rates for questionable services; (3) case management the plan ensures that each enrollee receives services in the most appropriate but least expensive setting; and (4) wellness programs the plan promotes primary care, under the assumption that this will reduce the subsequent need for costly treatments to cure conditions that could have been avoided. See id.; see also Blue Cross & Blue Shield United of Wis. v. Marshfield Clinic, 65 F.3d 1406, 1409 (7th Cir. 1995) (describing method by which HMOs price and deliver medical services), cert. denied, 116 S. Ct. 1288 (1996).
2 At the turn of the century, at least two common forms of third-party payment for medicine bore striking similarity to modern HMOs. The first form is contract practice, in which corporations employed physicians to meet the medical needs of employees. See JAMES G. BURROW, ORGANIZED MEDICINE IN THE PROGRESSIVE ERA 119-20 (1977); JOHN S. HALLER, JR., AMERICAN MEDICINE IN TRANSITION, 1840-1910, at 245-47 (1981). The second form is corporate practice, in which for-profit corporations employing physicians marketed medical services to the public. See PAUL STARR, THE SOCIAL TRANSFORMATION OF AMERICAN MEDICINE 204 (1982). In addition to being structured similarly to modern HMOs, these arrangements frequently employed cost-control mechanisms similar to those employed by HMOs, including second opinions before surgery, review of hospital length of stay, and refusal to pay for services deemed unnecessary. See id. at 205.
3 See HEALTH INSURANCE ASSOCIATION OF AMERICA, SOURCE BOOK OF HEALTH INSURANCE DATA 19-20 (1991) [hereinafter HIAA SOURCE BOOK] ([HMO] enrollment increased from less than two million in the early 1970s to almost 34 million by June 1990. (citing 1990 Study by The InterStudy Edge)). A subsequent study by The InterStudy Competitive Edge (the group changed its name) reports total HMO enrollment of more than 42 million as of July 1993. See THE INTERSTUDY COMPETITIVE EDGE, 3 BIANNUAL REPORT OF THE MANAGED HEALTH CARE INDUSTRY no. 2, 1 (1994) [hereinafter 1994 INTERSTUDY REPORT]. By January 1, 1995, 562 HMOs served more than 46 million enrollees. See THE INTERSTUDY COMPETITIVE EDGE, 5.2 HMO INDUSTRY REPORT 1 (Nov. 1995) [hereinafter 1995 INTERSTUDY REPORT].
4 See Alain C. Enthoven, The History and Principles of Managed Competition, HEALTH AFF., Supp. 1993, at 25 (describing shortcomings of traditional health insurance, characterized by fee-for-service reimbursement, numerous solo practitioners, unlimited choice of provider, and remote third party payment).
5 See id. at 40 (describing existing health care system as an extremely wasteful and inefficient system that has been bathed in cost-increasing incentives for over fifty years); see also Jonathan E. Fielding & Thomas Rice, Can Managed Competition Solve the Problems of Market Failure?, HEALTH AFF., Supp. 1993, at 225 (concluding that increased, though not absolute, competition has potential to foster system-wide efficiency in health care market).
6 See Paul M. Ellwood et al., Health Maintenance Strategy, 9 MED. CARE 291, 291 (1971) (noting that health policy advocates called for wider utilization of HMOs as solution to growing problems of health care cost and access); Enthoven, supra note 4, at 27-28 (stating that in 1973, efforts of many health policy advocates paid off when Congress adopted Health Maintenance Organization Act of 1973).
7 42 U.S.C. '' 300e to 300e-17 (1994).
8 The Health Maintenance Organization Act of 1973 requires that all employers of 25 or more employees include HMO enrollment as an option in any employer-sponsored health benefit plan. See id. ' 300e-9. In addition, The Act places minimum coverage and operating requirements on HMOs. See id. '' 300e to 300e-1.
9 See PROSPECTIVE PAYMENT ASSESSMENT COMM'N, MEDICARE AND THE AMERICAN HEALTH CARE SYSTEM: REPORT TO THE CONGRESS 23 (1995) (stating that in 1988, 73% of individuals insured by private health insurance had traditional indemnity coverage, and 27% were covered by HMOs and other forms of managed care). By 1993, indemnity insurance accounted for only 33% of the private health insurance market, with HMOs and other forms of managed care claiming 65% of the market. See id. Hybrid plans, such as Point of service plans, which combine gatekeeper or network functions of HMOs with partial coverage of out-of-network services, accounted for the remaining portion of the market. See id. This trend was largely a response to demands by employers and employees to curb soaring health insurance premiums. See id.
10 See Robert E. Bloch & Donald M. Falk, Antitrust, Competition and Health Care Reform, 13 HEALTH AFF., Spring (I) 1994, at 206, 207-08 (observing that bringing large groups of consumers and providers together under managed care will introduce substantial market efficiencies, but will pose equally substantial antitrust risks). Two potential anticompetitive consequences of managed care include: (1) alliances of health care providers will have substantial market power, see id. at 209; and (2) large health plans will have the potential to foreclose competition from rivals, see id. at 212.
11 Although there are many definitions of optimum efficiency, common ideas embodied in most definitions include: (1) numerous sellers and consumers; (2) homogenous products and services; (3) readily available information about quality and price; (4) ease of entry into the market for sellers; (5) consumer ability to change among like products or services; and (6) low transaction costs, or externalities. See Michael S. Jacobs, Market Power Through Imperfect Information: The Staggering Implications of Eastman Kodak Co. v. Image Technical Services and a Modest Proposal for Limiting Them, 52 MD. L. REV. 336, 345 (1993) (citing HERBERT HOVENKAMP, ECONOMICS AND FEDERAL ANTITRUST LAW 1-2 (1985); GEORGE J. STIGLER, THE THEORY OF PRICE 87 (3d ed. 1966)); Fielding & Rice, supra note 5, at 216-17 (citing J.M. HENDERSON & R.E. QUANDT, MICROECONOMIC THEORY: A MATHEMATICAL APPROACH (1971)).
12 See Rick Loomis, Will Giant HMOs Help Health Care?, L.A. TIMES, Apr. 10, 1995, at D1 (questioning whether pending HMO merger resulting in 4.4 million members, $5.4 billion in revenues, and gains for executives of more than 10,000% on company shares will work to detriment or benefit of consumers, competition, and cost).
13 See MARK A. HALL & IRA MARK ELLMAN, HEALTH CARE LAW AND ETHICS 186 (1990) (noting that, until 1980s, antitrust suits rarely were seen in health care industry). Antitrust litigation now is among the most rapidly growing areas of health care law. See id.
14 See Jon Christianson, Can HMOs Contain Workers' Compensation Medical Care Costs?, in REVIEW, REGULATE OR REFORM? WHAT WORKS TO CONTROL WORKERS' COMPENSATION MEDICAL COSTS 146, 153-54 (Workers' Compensation Res. Inst., Thomas W. Granneman ed., 1994) (noting that from 1988 to 1993, HMO premiums increased at average annual rate of two percent to five percent less than premiums for traditional indemnity insurance or PPO plans despite offering richer benefits, less consumer cost sharing, and no pre-existing condition exclusions). Although some studies suggest HMOs will effect only a temporary reduction in health care inflation, others have shown HMO premium increases as much as 40% below those of standard indemnity plans. See id.; see also Barbara Sande Dimmitt, Managed Care Has Become the Dominant Mode of Health Care Delivery in the United States, and Providers Must Deliver Not Only on Price, But Also on Value, Quality, and Performance, BUS. & HEALTH, Jan. 1995, at 24 (noting that consumer demand continues to force health care industry to restructure itself to meet imperatives of managed care); cf. Health Maintenance Organization Act of 1973, Pub. L. No. 93-222, 87 Stat. 914 (1973) (codified as amended at 42 U.S.C. '' 300e to 300e-17 (1994)) (requiring employers of 25 or more employees to offer HMO coverage option to employees).
15 HMOs can be divided into five categories depending on the kind of arrangements under which they contract with providers. See Christianson, supra note 14, at 148. These arrangements include: (1) the staff model HMO, which delivers care through physicians who are employees of the HMO; (2) the group model, which contracts with a single multispecialty group of providers to deliver services; (3) the network model, which contracts with multiple groups of physicians, as well as individual physicians; (4) the independent practice association, or AIPA, which contracts directly with individual physicians or physician associations; and (5) the mixed model, which contains elements of the other models. See id.
16 See id. at 149. The three strategies HMOs use to reduce costs include: (1) reducing health care utilization by enrollees relative to usage by enrollees in fee-for-service plans; (2) negotiating with contracting providers to pay less for services than fee-for-service plans would pay; and (3) enrolling relatively healthy people who have need for fewer services. Id.
17 HMOs negotiate with diversely structured groups of health providers over price and terms of membership on HMO panels. See U.S. DEPARTMENT OF JUSTICE & FEDERAL TRADE COMMISSION, 1996 STATEMENTS OF ANTITRUST ENFORCEMENT POLICY IN HEALTH CARE, 4 Trade Reg. Rep. (CCH) & 13,153, at 20,826-35 [hereinafter DOJ & FTC, ENFORCEMENT POLICY]. These groups are divided into two basic categories for purposes of antitrust review: (1) those involving horizontal agreements between or among competitors; and (2) those involving vertical agreements between or among parties that are not competitors. See id. at 20,828. Each type of group has a different competitive impact and is viewed by enforcers under varying levels of scrutiny. See id.
18 See U.S. Healthcare, Inc. v. Healthsource, Inc., 986 F.2d 589, 591 (1st Cir. 1993) (stating that HMOs negotiate lower payment rates with health providers who, in turn, become members of plan's panel and receive higher patient volume).
19 See David R. Olmos & Michael A. Hiltzik, Doctors' Authority, Pay Dwindle Under HMOs, L.A. TIMES, Aug. 29, 1995, at A1 (describing extreme pressure on doctors to join managed care networks to maintain needed patient base, and loss of autonomy once in network).
20 See infra notes 21-22 and accompanying text (comparing rise in HMO-related antitrust litigation to rise in nationwide HMO enrollment).
21 A LEXIS search of federal cases reveals that HMOs were involved in 50 cases brought to trial in federal courts involving antitrust claims under the Sherman or Clayton Acts from January 1, 1970 to January 1, 1994. For the 30-month period from January 1, 1994 to July 1, 1996, the search revealed 12 cases, or a six-year average of approximately 50 cases. The search was performed in five six-year increments and yielded the following results: January 1, 1970 to January 1, 1976 No cases January 1, 1976 to January 1, 1982 9 cases January 1, 1982 to January 1, 1988 13 cases (a 45% increase) January 1, 1988 to January 1, 1994 28 cases (a 115% increase) January 1, 1994 to July 1, 1996 50 cases (six-year average) (an 80% increase). Search of LEXIS, Genfed Library, Courts File (search criteria: antitrust and (health maintenance organization or HMO) and (Sherman or Clayton)).
22 Enrollment in HMOs and other types of managed care as a percentage of overall private insurance coverage increased from approximately 27% in 1988 to 65% in 1993. See PROSPECTIVE PAYMENT ASSESSMENT COMM'N, supra note 9, at 23. Overall enrollment in managed care increased 2200% between 1970 and 1995. See supra note 3 (citing studies plotting HMO enrollment from early 1970s to January 1995). HMO enrollment increased at an annual rate of 9.2% from January 1, 1994, to January 1, 1995. See 1995 INTERSTUDY REPORT, supra note 3, at 1.
23 See Blue Cross & Blue Shield United of Wis. v. Marshfield Clinic, 65 F.3d 1406, 1411-13 (7th Cir. 1995) (finding HMO not liable for monopolization because of lack of market power within relevant product market), cert. denied, 116 S. Ct. 1288 (1996); U.S. Healthcare, 986 F.2d at 597-99 (finding that HMO lacked sufficient market power within relevant product market to form monopoly).
24 See Ocean State Physicians Health Plan, Inc. v. Blue Cross & Blue Shield of R.I., 883 F.2d 1101, 1109-11 (1st Cir. 1989) (holding insurer not liable in suit brought by HMO under Sherman Act ' 2 for setting maximum insurance reimbursement at no greater than payment by competing HMO).
25 See Ball Mem'l Hosp., Inc. v. Mutual Hosp. Ins., Inc., 784 F.2d 1325, 1335-36 (7th Cir. 1986) (holding that formation of preferred provider organization (APPO) by large insurer did not violate Sherman Act ' 2 in suit brought by hospital because, inter alia, ease of entry for competing HMOs prevented attainment of market power); Kartell v. Blue Shield of Mass., Inc., 749 F.2d 922, 927, 933 (1st Cir. 1984) (stating that despite market power, insurer's prohibition of balance billing by participating physicians does not violate Sherman Act ' 2 unless payments fall so low as to constitute predatory pricing).
26 See Brokerage Concepts, Inc. v. U.S. Healthcare, Inc., No. 95-1698, 1996 U.S. Dist. LEXIS 6480, at *16-22 (E.D. Pa. May 13, 1996) (denying motion for summary judgment by defendant HMO, U.S. Healthcare, and holding that plaintiff HMO, Brokerage Concepts, presented legally sufficient evidentiary basis for a reasonable jury to find that U.S. Healthcare implemented tying arrangement to obtain enrollees).
27 See Jefferson Parish Hosp. Dist. No. 2 v. Hyde, 466 U.S. 2, 31-32 (1984) (holding hospital not liable for tying arrangement in violation of Sherman Act '' 1 and 2 after hospital awarded exclusive contract for anesthesiology services to group practice). A tying arrangement occurs when a supplier uses market power over one product to attain power or to otherwise manipulate competition over another product. See id. at 12-13 (citing Fortner Enters. v. United States Steel Corp., 394 U.S. 495, 512-14 (1969) (White, J., dissenting)). Such an arrangement exists when the practice in question link[s] two distinct markets for products that were distinguishable in the eyes of buyers. Id. at 19 (citing Times-Picayune Publishing Co. v. United States, 345 U.S. 594, 600 (1953)).
28 See Weiss v. York Hosp., 745 F.2d 786, 815 (3d Cir. 1984) (holding physician members of hospital medical staff liable for Sherman Act ' 1 group boycott after they denied peer medical staff privileges at hospital, but finding medical staff incapable of conspiring with hospital). But see Bolt v. Halifax Hosp. Med. Ctr., 851 F.2d 1273, 1280 (11th Cir. 1988) (holding that hospital and medical staff are legally capable of conspiring in Sherman Act ' 1 violation). Although the courts in Weiss and Bolt based their analyses primarily on Sherman Act section 1, group boycotts also are prohibited by section 3 of the Clayton Act. See 15 U.S.C. ' 14 (1994).
29 See Reazin v. Blue Cross & Blue Shield of Kan., Inc., 899 F.2d 951, 965-66 (10th Cir. 1990) (finding insurer liable for horizontal group boycott in violation of Sherman Act ' 1 under rule of reason when it threatened to terminate contract of hospital recently acquired by competitor and lowered reimbursement of other providers doing business with competitor). But see U.S. Healthcare, Inc. v. Healthsource, Inc., 986 F.2d 589, 592-93 (1st Cir. 1993) (finding HMO not liable for horizontal group boycott under per se analysis when it offered higher reimbursement to physicians for agreeing not to provide services to any other HMOs).
30 See FTC v. Indiana Fed'n of Dentists, 476 U.S. 447, 458-66 (1986) (holding that group of dentists violated Sherman Act ' 1 when it concertedly refused to provide x-rays to insurers). The Court in Indiana Federation of Dentists struggled with the question of whether the case fit into the group boycott pigeonhole, id. at 458, or whether it was a price-fixing case. See id. at 459-61. The Court, however, was interested more in avoiding application of a strict per se test than in finding a perfect label for the case. See id. at 458-59. Ultimately, the Court found that it was not a matter of any great difficulty to apply a rule of reason balancing test to the facts of the case. Id. at 459. The Court thereby engaged in an early application of what now is known as the quick look test for determining violations of Sherman Act section 1. See U.S. Healthcare, 986 F.2d at 594 (citing Indiana Fed'n of Dentists as early example of quick look formulation). Another line of cases involves suits brought by the FTC against the American Medical Association (AAMA) for its attempts to suppress the growth of HMOs and against other health care financing arrangements that restrict choice of provider or promote fee discounts. See BARRY R. FURROW ET AL., HEALTH LAW: CASES, MATERIALS AND PROBLEMS 868-69 (2d ed. 1991); see also AMA v. United States, 317 U.S. 519, 526 (1943) (holding that AMA violated Sherman Act ' 3, which applies Sherman Act ' 1 to District of Columbia, when it prevented physicians from accepting employment with or consulting for staff-model HMO); AMA v. FTC, 638 F.2d 443, 450 (2d Cir. 1980) (holding AMA liable for violation of ' 5 of Federal Trade Commission Act, 15 U.S.C. ' 45(a)(1) (1994), when it adopted ethical guidelines discouraging participation in managed care arrangements), aff'd by an equally divided court, 455 U.S. 676 (1982).
31 See Arizona v. Maricopa County Med. Soc'y, 457 U.S. 332, 342-57 (1982) (holding doctor-initiated PPO liable for per se offense of price fixing under Sherman Act ' 1, after physician members of PPO comprising 70% of all those practicing in county, set maximum reimbursement rates); Blue Cross & Blue Shield United of Wis. v. Marshfield Clinic, 65 F.3d 1406, 1415-16 (7th Cir. 1995) (finding HMO liable for per se offense of market division and price fixing in violation of Sherman Act ' 1), cert. denied, 116 S. Ct. 1288 (1996); cf. DOJ & FTC, ENFORCEMENT POLICY, supra note 17, at 20,826 (announcing antitrust enforcement policies relating to collaborative efforts among providers).
32 See Coffey v. Healthtrust, Inc., 955 F.2d 1388, 1392-93 (10th Cir. 1992) (holding that there was no group boycott in violation of ' 1 of Sherman Act when partnership of radiologists was excluded from exclusive contract to provide services for hospital). Exclusion of the partnership followed closely on the heels of the partnership's expansion of services to include services formerly available only to inpatients at the Healthtrust-owned hospital. See id. at 1390. The reason for the partnership's expansion of services was to attract HMO and PPO clients. See id.
33 Price fixing and market division generally are held to be illegal per se under Sherman Act section 1. See United States v. Socony-Vacuum Oil Co., 310 U.S. 150, 218 (1940). This rule obviates the need for a plaintiff to show that a defendant possessed market power and eliminates defenses based on reasonableness. See id. at 218. Courts, however, frequently engage in a balancing inquiry to determine whether a certain action can be properly characterized as price fixing. See HALL & ELLMAN, supra note 13, at 212-13 (describing weaknesses of Maricopa County holding). The Court in Maricopa County held a price fixing agreement to be illegal as a matter of law when prices charged by a physician group were set by members of the group. See id. On remand, however, the district court held that the arrangement was no longer a price-fixing agreement worthy of per se prohibition when consumers were placed on the price-setting committee. See id.
34 See Jefferson Parish Hosp. Dist. No. 2 v. Hyde, 466 U.S. 2, 26, 29 (1984) (requiring showing of market power for per se liability to attach under Clayton Act ' 3 for tying arrangement, and finding insufficient evidence of market power); Reazin, 899 F.2d at 965-66 (applying rule of reason and market power assessment to find insurer liable for horizontal group boycott in violation of Sherman Act ' 1 when insurer terminated contract of hospital recently acquired by competitor and discouraged other health service providers from doing business with competing insurers as condition of reimbursement); Ocean State Physicians Health Plan, Inc. v. Blue Cross & Blue Shield of R.I., 883 F.2d 1101, 1109-11 (1st Cir. 1989) (holding insurer not liable in suit brought by HMO under Sherman Act ' 2 for setting maximum insurance reimbursement at no greater than payment by competing HMO, despite existence of market power); Ball Mem'l Hosp., Inc. v. Mutual Hosp. Ins., Inc. 784 F.2d 1325, 1330, 1334-35 (7th Cir. 1986) (requiring market power for violation of Sherman Act ' 2, but finding that defendant lacked market power in medical insurance when market share was 27% of patients in Indiana); Kartell v. Blue Shield of Mass., 749 F.2d 922, 924 (1st Cir. 1984) (finding no violation by insurer of Sherman Act ' 2 for setting maximum reimbursement amount, despite 74% market share). But see Marshfield, 65 F.3d at 1415-16 (finding HMO liable for market division and price fixing in violation of Sherman Act ' 1 under per se analysis, without market power analysis).
35 William M. Landes & Richard A. Posner, Market Power in Antitrust Cases, 94 HARV. L. REV. 937, 937 (1981).
36 See Robert Pitofsky, New Definitions of Relevant Market and the Assault on Antitrust, 90 COLUM. L. REV. 1805, 1806-07 (1990) (asserting that definition of relevant product market is crucial to antitrust analysis because determination of liability rests on whether firm has power to raise price above competitive levels without losing customers to competitors operating in same market).
37 See Landes & Posner, supra note 35, at 938 (stating that first step in proving market power is defining relevant product and geographic market).
38 See FURROW ET AL., supra note 30, at 787-88 ("The concept of market power is critical to most [Sherman Act] Section 1 and all Section 2 claims.).
39 Traditional indemnity health insurance differs substantially from managed care. Indemnity plans reimburse (or indemnify) the patient for money spent to receive covered health care services up to a specified dollar threshold. See HIAA SOURCE BOOK, supra note 3, at 1-2. Coverage under traditional indemnity plans typically extends to accidents and illnesses; preventive health care is not emphasized. See id. at 2 (describing coverage under early indemnity plans as extending to common accidents and illnesses and later expanding to include extended illnesses or long hospital stays, but not including preventive health care).
40 The PPO is a form of managed care that combines elements of HMO and traditional indemnity coverage. See HIAA SOURCE BOOK, supra note 3, at 20. It offers more flexibility than an HMO by giving consumers greater freedom to choose providers, while achieving some savings by directing patients to a network of providers. See id. Under a PPO arrangement, an insurer contracts with a panel of providers who provide medical services and agree to be paid according to a negotiated rate. See id. Enrollees typically are allowed to receive care from providers who are not members of the network; however, there is a financial penalty associated with such care. See id. PPOs frequently do not exercise the same level of control over health care utilization as HMOs. See AMERICAN MANAGED CARE REVIEW ASSOCIATION, 1994-1995 MANAGED HEALTH CARE OVERVIEW 6 (1995).
41 See generally Blue Cross & Blue Shield United of Wis. v. Marshfield Clinic, 65 F.3d 1406, 1411 (7th Cir. 1995) (overturning jury verdict and stating that [w]e thus do not believe that a reasonable jury . . . could find that HMOs constitute a separate market from other health care financing products), cert. denied, 116 S. Ct. 1288 (1996); U.S. Healthcare, Inc. v. Healthsource, Inc., 986 F.2d 589, 599 (1st Cir. 1993) (upholding lower court ruling that Health care financing is the product market); Ball Mem'l Hosp., Inc. v. Mutual Hosp. Ins. Co., 784 F.2d 1325, 1329 (7th Cir. 1986) (considering HMOs to be method of Health care financing and stating that the HMO Is both a method of joining physicians in a firm . . . and financing their service by selling memberships for stated monthly prices). But see Brokerage Concepts, Inc. v. U.S. Healthcare, Inc., No. 95-1698, 1996 U.S. Dist. LEXIS 6480, at *18-*19 (E.D. Pa. May 14, 1996) (holding that relevant product market includes all members of single HMO with prescription drug benefits (citing Eastman Kodak Co. v. Image Technical Servs., Inc., 504 U.S. 451, 482 (1992))).
42 See U.S. Healthcare, 986 F.2d at 599 ([P]lainly, Healthsource has no monopoly or anything close to it, given the number of other providers in New Hampshire, such as insurers, staff HMOs, Blue Cross/Blue Shield and individual doctors.); cf. Marshfield, 65 F.3d at 1409 (stating that defendant HMO did not monopolize HMO services because HMOs are not a market).
43 See Joseph Gregory Sidak, Debunking Predatory Innovation, 83 COLUM. L. REV. 1121, 1121-22 (1983) (contending that legal rule governing antitrust liability in innovative industries is inherently difficult to articulate because it must balance public policies encouraging competition and innovation with those discouraging monopolistic behavior).
44 See supra notes 1-20 and accompanying text (explaining rise of HMOs as alternative health care financing product over past 25 years and describing innovative techniques employed by HMOs to effect change in price and quality of health care).
45 504 U.S. 451 (1992).
46 466 U.S. 2 (1984).
47 15 U.S.C. '' 1-7 (1994). Although the Act has been amended repeatedly since its adoption, its two primary provisions, sections 1 and 2, remain substantially intact. Compare 26 Stat. 209 (1890) (providing original language of Sherman Act), with 15 U.S.C. '' 1-2 (providing current language of Sherman Act).
48 15 U.S.C. '' 12-27.
49 See id. ' 2. Specifically, section 2 states: Every person who shall monopolize, or attempt to monopolize, or combine or conspire with any other person or persons, to monopolize any part of the trade or commerce among the several States, or with foreign nations, shall be deemed guilty of a felony . . . . Id.
50 See id. ' 1. Specifically, section 1 states: Every contract, combination in the form of trust or otherwise, or conspiracy, in restraint of trade or commerce among the several States, or with foreign nations, is declared to be illegal. Every person who shall make any contract or engage in any combination or conspiracy hereby declared to be illegal shall be deemed guilty of a felony . . . . Id.
51 See id. (making combined activities of individual firms in restraint of trade a felony); id. ' 2 (making monopolization of trade a felony).
52 See id. '' 13-19. Enumerated practices made illegal by the Clayton Act are: (1) price discrimination, see id. ' 13(a); (2) tying and exclusive dealing contracts, see id. ' 14; (3) acquisition of competitors, see id. ' 18; and (4) sharing of board members among competing firms, see id. ' 19.
53 See ERNEST GELLHORN & WILLIAM E. KOVACIC, ANTITRUST LAW AND ECONOMICS 29 (4th ed. 1994).
54 See 15 U.S.C. ' 15 ([A]ny person who shall be injured in his business or property by reason of anything forbidden in the antitrust laws may sue therefor . . . .).
55 See id. ' 4 (charging U.S. Attorney General with responsibility for enforcement of provisions of Sherman Act).
56 See GELLHORN & KOVACIC, supra note 53, at 29.
57 15 U.S.C. '' 41-58. Section 5 of the FTC Act, declares unlawful unfair methods of competition in or affecting commerce, and unfair or deceptive acts or practices in or affecting commerce. 15 U.S.C. ' 45. The Court conferred jurisdiction on the FTC to enforce the Sherman Act by holding that Unfair methods of competition include violations of the Sherman Act. See FTC v. Cement Inst., 333 U.S. 683 (1948).
58 See United States v. Aluminum Co. of Am., 148 F.2d 416 (2d Cir. 1945) (evaluating monopoly action brought against ALCOA under Sherman Act). Judge Learned Hand observed: Many people believe that possession of unchallenged economic power deadens initiative, discourages thrift and depresses energy; that immunity from competition is a narcotic, and rivalry is a stimulant, to industrial progress; that the spur of constant stress is necessary to counteract an inevitable disposition to let well enough alone. Id. at 427. Judge Hand acknowledged conversely that [a] single producer may be the survivor out of a group of active competitors, merely by virtue of his superior skill, foresight and industry. . . . [Such a] successful competitor, having been urged to compete, must not be turned upon when he wins. Id. at 430.
59 Chief Justice Hughes wrote for the Court that [a]s a charter of freedom, the [Sherman] Act has a generality and adaptability comparable to that found to be desirable in constitutional provisions. Appalachian Coals, Inc. v. United States, 288 U.S. 344, 359-60 (1933).
60 See United States v. E.I. du Pont de Nemours & Co., 351 U.S. 377, 386 (1956) (noting that judicial construction of antitrust legislation generally has been left unchanged by Congress).
61 See U.S. Healthcare, Inc. v. Healthsource, Inc., 986 F.2d 589, 593 (noting that plaintiff can prevail under same facts in antitrust action by establishing claim under any one of several rubrics).
62 See du Pont, 351 U.S. at 386-87 (declaring that there is no inconsistency between Court's standard requiring examination of particular circumstances and judicial theory making some agreements and practices invalid per se).
63 See 15 U.S.C. ' 2 (1994) (making monopolization of trade a felony).
64 See Eastman Kodak Co. v. Image Technical Servs., 504 U.S. 451, 481 (1992) (enumerating prerequisites to ' 2 violation).
65 The market share proxy is the traditional test employed by courts to determine whether a defendant has market power. See Jacobs, supra note 11, at 342 & n.26 (noting that market share has been used as proxy for market power since Judge Learned Hand's seminal decision in United States v. Aluminum Co. of Am., 148 F.2d 416 (2d Cir. 1945)). Under the test, a court considers the percent of market share a defendant holds. See id. at 424. If the defendant holds a dominant share of the product market, the court likely will find that it has market power; if the defendant holds an insubstantial share of the market, the court likely will hold that it does not have market power. See id.
66 See HERBERT HOVENKAMP, ECONOMICS AND FEDERAL ANTITRUST LAW ' 6.5, at 168 n.2 (student ed. 1985). Compare Ball Mem'l Hosp., Inc. v. Mutual Hosp. Ins., Inc. 784 F.2d 1325, 1335 (7th Cir. 1986) (affirming lower court's finding that defendant lacked market power in medical insurance when market share was 27% of patients in Indiana, new firms could enter market easily, existing firms could expand sales quickly, and there were no barriers to entry), with Reazin v. Blue Cross & Blue Shield of Kan., Inc., 899 F.2d 951, 969-70 (10th Cir. 1990) (finding defendant had market power in medical insurance, because barrier to entry by competitors was evidenced by 62% market share of patients in Kansas).
67 See Kodak, 504 U.S. at 482-83 (describing second element of ' 2 claim as willful acquisition or maintenance of monopoly power).
68 United States v. Grinnell Corp., 384 U.S. 563, 570-71, 576 (1966) (holding firm liable for ' 2 offense when it acquired 87% of nation's centralized home protection service market through market allocation, discriminatory pricing designed to eliminate competition, and acquisition of competitors).
69 See Berkey Photo, Inc. v. Eastman Kodak, Inc., 603 F.2d 263, 274 (2d Cir. 1979) (recounting elements of ' 2 offense in claim against Kodak for monopolization of film, color print paper, and camera markets (citing Grinnell, 384 U.S. at 570-71)); see also California Computer Prods. v. IBM, 613 F.2d 727, 735 (9th Cir. 1979) (holding that there are three elements to ' 2 antitrust claim: (1) possession of monopoly power; (2) willful acquisition or maintenance of power; and (3) causally related antitrust injury).
70 See Berkey Photo, 603 F.2d at 272.
71 See id. at 272-74.
72 See California Computer Prods., 613 F.2d at 736 (recounting elements of attempted monopolization in claim against IBM for redesigning its computer products to make them incompatible with peripherals manufactured by competitors (citing Times-Picayune Publishing Co. v. United States, 345 U.S. 594, 626 (1953)).
73 The court in California Computer Prods. added a fourth element, causal antitrust injury, to the analysis. See California Computer Prods., 613 F.2d at 736. This element, however, is not relevant to the subject of this Comment and therefore is not discussed.
74 See id. at 737 (holding direct evidence Not always necessary when claim is based on Sherman Act ' 1 violation).
75 See id. (noting that predatory or anticompetitive conduct element encompasses more than violations of ' 1).
76 See id.
77 See id.
78 See id.
79 See FURROW ET AL., supra note 30, at 786 (observing that all contracts between buyers and sellers limit availability of goods to other buyers).
80 See id.
81 The rule of reason is applied by courts in evaluating most group boycotts and tying arrangements alleged under section 1. See U.S. Healthcare, Inc. v. Healthsource, Inc., 986 F.2d 589, 593 & n.2 (1st Cir. 1993) (noting that tying typically is scrutinized under rule of reason, and that group boycotts are viewed under rule of reason unless they involve secondary boycotts). This test balances the efficiencies of concentration against the anticompetitive effects of a contract or combination. See HALL & ELLMAN, supra note 13, at 192-93 (citing Board of Trade of Chicago v. United States, 246 U.S. 231, 238-41 (1918)). Justice Brandeis first articulated the rule of reason in his oft-quoted passage in Board of Trade of Chicago: The true test of legality is whether the restraint imposed is such as merely regulates and perhaps promotes competition or whether it is such as may suppress or even destroy competition. To determine that question the court must ordinarily consider the facts peculiar to the business . . . ; its condition before and after the restraint was imposed; the nature of the restraint and its effect, actual or probable. Id. at 238. The rule of reason today remains substantially the same, applying a multifactored analysis to alleged antitrust offenses. See FURROW ET AL., supra note 30, at 786 (noting that courts conduct broader examination of competitive factors under rule of reason and citing Board of Trade of Chicago as classic articulation of test).
82 The quick look test is a relatively recent formulation under which courts consider procompetitive justifications for allegedly anticompetitive behavior before deciding whether to apply the per se label. See FURROW ET AL., supra note 30, at 787. Similarly, courts occasionally use the quick look justification to curtail proceedings under the Rule of reason after finding convincing proof that a specific behavior unreasonably restrains trade and is devoid of any legitimate justification. See FTC v. Indiana Fed'n of Dentists, 476 U.S. 447 (1986) (holding that concerted refusal by dentists to provide insurer with x-rays for purpose of reviewing effectiveness of treatment was so clearly without quality of care or business benefit as to warrant finding of liability without reaching question of market definition or market power); see also U.S. Healthcare, 986 F.2d at 593 n.2 (interpreting Kodak as possible example of application of quasi per se or quick look test to tying arrangement).
83 The per se label is reserved for behavior so likely to have an anticompetitive effect that no exploration of its justification is warranted. See FURROW ET AL., supra note 30, at 786. Today, the only behaviors that qualify for per se illegality are: (1) price or output fixing agreements, see U.S. Healthcare, 986 F.2d at 593 & n.2 (noting that price or output fixing agreements are per se illegal, but that group boycotts can be viewed as per se illegal only if they involve secondary boycotts); (2) market division, see Blue Cross & Blue Shield United of Wis. v. Marshfield Clinic, 65 F.3d 1406, 1416-17 (7th Cir. 1995) (upholding jury verdict finding defendant liable for market division), cert. denied, 116 S. Ct. 1288 (1996); and (3) horizontal, secondary group boycotts, see U.S. Healthcare, 986 F.2d at 593 (noting that per se approach is applied properly to horizontal arrangements between providers of health care if they involve secondary boycotts). A secondary boycott occurs when competitors refuse to do business with a third party, such as a distributor or supplier, if it serves another competitor whom they seek to harm. See Fashion Originators' Guild of Am., Inc. v. FTC, 312 U.S. 457, 461-62 (1941) (describing arrangement whereby competing designers of clothing agreed not to sell to manufacturers or retailers who dealt with producers of design occupies). The rule of reason, however, is applied appropriately to vertical arrangements among apparent competitors operating at different levels of production. See Klor's, Inc. v. Broadway-Hale Stores, Inc., 359 U.S. 207, 212 (1959) (distinguishing boycott from situations in which there is exclusive dealership arrangement or refusal of single trader to deal with another).
84 See FURROW ET AL., supra note 30, at 786. Activities proscribed by section 1 include group boycotts, tying arrangements, price fixing, and market division. See U.S. Healthcare, 986 F.2d at 593 & n.2 (evaluating appropriateness of applying rule of reason, quick look, and per se test to determine whether various activities violate Sherman Act ' 1).
85 See FURROW ET AL., supra note 30, at 787 (stating that market power is crucial to most claims under Sherman Act ' 1).
86 See id. (stating that market power is essential to all claims under Sherman Act ' 2 and that courts traditionally use market share as proxy for market power).
87 See DOJ & FTC, ENFORCEMENT POLICY, supra note 17, at 20,799 (explaining that joint enforcement guidelines were introduced to guide health care providers through time of tremendous change, and to prevent any chilling effect the problem of uncertainty . . . [might have on] activities that could lower health care costs); Holman W. Jenkins, Jr., Business World: In Pursuit of Price-Fixing, WALL ST. J., Apr. 9, 1996, at A19 (in the medical business . . . trustbusters seem to favor a world in which mighty buyers are posed against small, cloutless sellers.).
88 See Enthoven, supra note 4, at 45-46 (describing resurgent popularity in 1992 of managed competition or Avalue for money competitionCas means to lower health care costs).
89 See Ron Winslow & Leslie Scism, Aetna Agrees to Acquire U.S. Healthcare; Pact for $8.9 Billion in Cash and Stock Will Create Leader in Managed Care, WALL ST. J., Apr. 2, 1996, at A2 (reporting that acquisition will result in creation of managed health care company serving 23 million people).
90 See DOJ & FTC, ENFORCEMENT POLICY, supra note 17, at 20,799 (observing that Health care markets have continued to evolve in response to consumer demand and competition in the marketplace).
91 See id. Although the DOJ & FTC guidelines do not directly address the activities of HMOs, Statement 9 of the Enforcement Policy establishes analytical Principles Relating to Multipr |