Testimony

Reviving Competition in Health Care Markets

David Balto Speaks to the FTC on Section 5 of the FTC Act

David Balto testifies to the Federal Trade Commission on Section 5 of the FTC Act as a competition law.

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I think we all should take a moment and applaud the efforts of the FTC to examine the full range of its statutory powers. Too often in the past the FTC has perceived itself as the younger sister of the antitrust division of the Department of Justice, measuring its success and activities based on the enforcement agenda and approach of the antitrust division. There have been times when the FTC has focused its efforts, like the Antitrust Division on federal court litigation, and in doing so, the FTC has failed to perceive and fully utilize its unique range of statutory and adjudicative powers. To its credit the current commission has revitalized the administrative litigation process, which under its new proposed litigation rules offers the potential of the commission becoming the “Times Square” of antitrust litigation in the future. Determining the scope of the commission’s jurisdictional powers is equally as important. That is why the commission’s self-examination of its powers under Section 5 is vital to effective federal antitrust enforcement.

Moreover, the nature of competition in the general economy increasingly demands that the FTC, like other enforcement agencies, fully utilize its enforcement powers. Section 5 of the FTC Act, which declares illegal “unfair methods of competition” and “unfair acts and practices” is critically important. To give just one example, Section 5 can be used to attack facilitating practices in oligopolistic industries, which cannot be challenged under the Sherman Act. Unfortunately, because of relatively lax merger enforcement a far greater number of markets have become oligopolistic, significantly increasing the opportunities for firms to engage in forms of tacit collusion to raise prices. Not surprisingly, numerous markets have shown consistently increasing prices. The fact that the Justice Department has brought a record number of explicit collusion cases suggests that the problems of collusion are becoming ever more pervasive. And facilitating practices offer a convenient venue to achieve the same goals, where firms want to avoid those severe criminal penalties.

Unfortunately, since the early 1990s, the FTC has used Section 5 in a relatively modest fashion. The recent N-Data case is an important exception, but other than that the remainder of the actions are invitation to collude cases. Thus, this reexamination of the powers of Section 5 is vital to addressing the increasing problems in oligopolistic markets.

Today I will not focus on the oligopoly issue. Unlike the other speakers today, who will focus on some of the more difficult legal and policy issues concerning the scope of Section 5, I want to dwell on the use of Section 5 in a particular industry: health care intermediaries (i.e., health insurers, group purchasing organizations, and pharmacy benefit managers). I am focusing on this area for two reasons. First, enforcement efforts in this area offer the greatest potential benefits to consumers, because of the importance of health care intermediaries and the size of commerce involved. Health care, after all, accounts for one out of every seven dollars of the nation’s budget. A single enforcement action in this area may offer substantial benefits to consumers in lower costs and greater choice.

Second, there appears to be a unique disconnect between the level of the federal antitrust enforcement and state antitrust and consumer protection enforcement. Anyone examining the federal antitrust report card involving health care intermediaries might reach the conclusion that these organizations are perfect antitrust citizens. The antitrust enforcement agencies have brought no enforcement cases against any health care intermediaries in the past eight years. Yet, anyone looking at the list of both private and state actions against these intermediaries would reach the exact opposite conclusion. For example, in the past several years:

  • Each of the major pharmacy benefit managers has been sued by groups of states and the Department of Justice for fraudulent and deceptive actions that have harmed consumers and taxpayers funding federal programs. These cases were settled with penalties that exceeded $300 million. Numerous multistate investigations against PBMs continue. Moreover, there have been numerous private suits filed against PBMs for anticompetitive, deceptive, and fraudulent conduct.
  • In the medical device industry there have been several antitrust suits filed against dominant medical device manufacturers for engaging in a variety of anticompetitive activity. Many of these cases involve the use of kickbacks paid by the medical device companies to group purchasing organizations. The Senate Judiciary Committee has held a series of four hearings surrounding kickbacks and other forms of anticompetitive conduct.
  • State enforcement officials, including state insurance and consumer protection enforcement officials, have brought several cases against health insurance companies for a wide variety of anticompetitive and deceptive actions. In one recent case, the insurance commissioner in California imposed fines of up to $1 billion against United Healthcare, the country’s largest insurance company. Also, industry-wide private cases have been brought challenging conduct that undermines insurance markets.

What does this disconnect mean? Is it that one set of enforcers or another are misguided? Is it that state and federal laws are inconsistent? Is it that nonproblematic conduct is mistakenly challenged by state enforcers and private parties?

I do not think any of those propositions are true. But I believe that federal enforcement can play a vital role in improving competition in these markets. The FTC should use Section 5 to challenge a variety of unfair methods of competition which undermine and threaten the integrity and competitiveness of the health care intermediary system. In assessing the federal health care enforcement program, the American Antitrust Institute observed in its transition team report that “[t]he priorities of the health care enforcement agenda need to be realigned with a greater focus on health insurers, PBMs, GPOs, and hospitals.” That focus should include a renewed attention to the use of Section 5 to attack practices in this area.

The problem of the failure to use Section 5 to address unfair competitive conduct in health care markets was highlighted for me when I spoke at the Fifth Annual Seoul International Competition Forum earlier last month. Of course, since this was a Southeast Asia conference, we all held our breath when the representative of the Chinese antimonopoly authority spoke because we wanted to learn about how one of the world’s largest economies was implementing its new antimonopoly law. Where had the Chinese focused their new enforcement power? They were using it on commercial bribery that undermined health care markets. The speaker noted that:

It is found that the medical treatment, medicine and healthcare product selling are prone to commercial bribery. Some producers and retailers, including large multinational medical medicine manufacturers have acquired, through commercial bribery, unfair transaction opportunities and sought unreasonable super-profits, which naturally results in the price hike of medicines in healthcare products, and consequently, influences peoples’ fundamental demand for seeing doctor and healthcare, causing severe side effects in the society. Thus, [the competition authority] considers the investigation and handling of commercial bribery cases in medicine, healthcare industry as top priority.

The Korean competition enforcer raised similar concerns. Their major enforcement action is a case that the Korean FTC brought against 10 large pharmaceutical companies in which it imposed a fine of 20 billion won for kickbacks including “providing undue private benefits to doctors and medical institutions, such as supporting their overseas travel expenses.” The Korean FTC concluded that “the provision of undue private benefits ultimately incurs consumer damage by hampering fair competition among pharmaceutical companies and offering a cause to raise drug prices.”

Indeed, even FTC Commissioner J. Thomas Rosch noted that Section 5 might be an appropriate tool to use when looking at efforts that specialty hospitals engage in to cherry-pick the most attractive patients while leaving the more expensive charity-type patients for more traditional hospitals. He observed that many of the disputes surrounding specialty hospitals are over issues of fairness, and arguably are not straightforward antitrust violations; but those types of violations fit within his own view of a potential Section 5 case.

Of course, I know what you are thinking—are these conventional antitrust cases (at least the way we in the United States think of conventional antitrust cases)? Whether they are is a debate for another day. But what I think is illuminating is that competition authorities around the world have decided that it is important for the protection of consumers and the integrity of the market to challenge this type of conduct that might not be a typical antitrust violation, but still threatens to undermine the competitive process.

It is useful to remind us of the commission’s broad powers under Section 5 as elaborated in FTC v. Sperry & Hutchinson. Justice Byron White, speaking for a unanimous Court, posed and answered two straightforward questions:

The question [of the reach of Section 5] is a double one: first, does Section 5 empower the Commission to define and proscribe an unfair competitive practice, even though the practice does not infringe either the letter or the spirit of the antitrust laws. Second, does Section 5 empower the Commission to proscribe practices as unfair or deceptive in their effect upon consumers regardless of their nature or quality as competition? We think the statute, its legislative history and prior cases compel an affirmative answer to both questions.

Legislative and judicial authorities alike convince us that the Federal Trade Commission does not arrogate excessive power to itself if, in measuring a practice against the elusive, considers public values beyond simply those enshrined in the letter or encompassed in the spirit of the antitrust laws.

Read the full testimony (pdf)

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