Source: United States Attorneys General 13
Remarks as Prepared for Delivery
Thank you for that kind introduction. It’s a pleasure to be here today.
In general, my father was an even-keeled businessman who rarely overreacted. One summer, for example, he and my mom were on vacation. I was working at the family auto parts store. During the week, one of his competitors, Sieg Auto Parts, stole Beeline Frame and Axle. Now, Beeline was not any customer, it was an important and stalwart customer. By the end of the week, his employees were convinced that Kades Motor Parts was doomed. If we could lose Beeline to rival Sieg, what customer could we keep? I was in near hysterics when my parents arrived home on Sunday night. I immediately told my father of the catastrophe. He calmly said thank you, asked me to help carry in the luggage and wanted to know how I was doing.
How was I doing? I thought Dad, don’t you understand, you’re going belly up. We’ll probably lose the house, and I’m never going to college. I don’t know exactly what transpired the next day. I was driving around Rock County wondering how long I would be delivering parts to Wisconsin Power and Light, Budweiser, Chevrolet or Thorson Shell.
That night, I asked my father what happened with Beeline. It took him a moment to remember what I was talking about. “I offered Beeline a better deal. They’re back with us, and I also won two of Sieg’s customers.” And, that was that. No crisis, no stress, all in a day’s work. And by the way, that was competition.
One problem he could never solve, however, was the cost of health care. Every year, when it came time to renew his health plan for his employees, he was frustrated and even distraught. He thought there was plenty of blame to go around. Doctors and hospitals charged too much and provided unnecessary services; insurance companies were raising deductibles, premiums and other costs to pad their bottom lines; and politicians would not reform the system.
Why did my father care so much about the cost of health care? He fundamentally believed health care was a right. If the government would not provide it, he would, at least for his employees. He knew the easy way out — cut benefits or get rid of health insurance altogether. That’s what his competitors did. He resisted those impulses. He always found a way to provide health insurance, but it was a yearly, stress-inducing crisis.
When did this crisis start? Not during the debate over the Affordable Care Act (he was retired), not during the Clinton era (the ritual was well-ensconced in our family), not in the 1980s. The yearly ritual stretched back to the 1970s.
- Competition: Villain, Victim or Hero?
Throughout that time, competition has played many roles in health policy debate. Is it a villain, a victim or hero?
Villain. Why might competition be the villain? Here’s one example. In the 1970s, the medical world went through an arms race. Hospitals and providers bought expensive new equipment, so competitors had to do the same. That was competition. But it drove up costs for everyone. To stop the arms race, states passed certificate of need laws. While these laws differ in their details, they require state approval to build a hospital or a clinic or even to add new service. Rather than lowering costs, they have entrenched local monopolies by preventing competition.
Victim. In this story, health care markets perform poorly because they are atomized. Patients need integrated care that focuses on healing the patient. Doctors need to communicate better, and best practices take too long to spread through the system. The solution, in this story, is to integrate care. If that goal requires consolidation, then less competition is the price we have to pay to unlock the benefits promised by integration.
Hero. Here is a final story. In the debate over health care, some fervently believe in some form of socialized medicine, perhaps like the United Kingdom (UK). Even in the UK, however, the National Health Service has looked for ways to introduce competition to control costs. Those at the other end of the spectrum put their faith in the market. You know what no one has ever said, however: private companies should decide how and when health care is delivered. No one is in favor of private-socialized medicine.
Competition is the hero in this story because only competition can prevent the rise of dominant firms that will control the delivery of health care in the United States.
Finding the right role for competition has eluded policy makers for decades. Let’s take a step back and identify the challenges.
- The Fractured Consumer
Fragmentation is a common word in health care policy debates to describe various challenges, but I wanted to focus on how the consumer decision is fractured.
Let me start with an easier example: buying soda. If I go to the store, I could choose Coke or Pepsi, or I could save money and see if the store brand is good enough for my tastes. I make the decision, I pay the money, I drink the soda and I determine if the price was worth it to me. Markets work best when the person paying and making the decision internalizes the risks and the rewards.
Compare that to health care: you are sick and go to the doctor.
- The doctor decides what treatment is appropriate but generally has little insight into its cost to you. That depends on your health plan.
- Your employer decides what plans are available to you.
- You may pay the co-pay directly, but the cost of care affects your premiums, which you and your employer share.
- The insurer pays the cost based on the particular provisions on the particular plan you choose.
- If the patient needs medication, a Pharmacy Benefit Management (PBM) might be involved.
While we might theorize that the combination of decision-makers roughly approximate how a unified consumer would operate, each player has their own incentives. If any one of those decision makers obtains market power, the fragile system will collapse. For example, insurers are supposed to control costs and increase competitive pressures on providers. But if an insurer has market power, they are likely to increase costs to employers, reduce compensation to health care providers, and lower the quality of care for patients.
The worst part is, if market power exists at multiple levels, addressing it at one level will not solve the problem. Last year, at this conference, my colleague Andy Forman explained, “Companies in the ecosystem do not appear to dispute there are competitive problems in the industry — rather they appear to be focusing on blaming each other for the competitive ills.”[1] And they may all be right.
- Health Care Reform Intended to Align Incentives
The history of health care reform efforts could, arguably, be understood as trying to align those incentives. This dynamic is directly related to the fragmented consumer. Health care providers are likely to prioritize providing care. Insurers are likely to prioritize controlling costs. What we want, however, is balancing the benefits and the cost. That calculation is impossible to perform if the decision maker receives the benefits but does not bear the costs.
In today’s parlance, the buzz words are integration and value-based care. However, the ideas do not seem all that different from Health Maintenance Organizations (HMOs) in the 1990s or Accountable Care Organizations that were the promoted as part of the Affordable Care Act.
The principles of reform have remained remarkably consistent.
- Insurers trade volume for lower prices.
- Pay providers for performance not services. That makes sense, right? We’re not trying to maximize the number of surgeries or X-rays, we care about how health care, for example, lowers infant mortality or improves and extends the lives people live.
- The Affordable Care Act uses the medical loss ratio to force insurers to spend a certain amount of premiums on actual medical care. It penalizes administrative bloat and forces insurers to focus on improving care.
- Integration: Siren Song?
In its best form, integration attempts to bridge that gap. The industry is turning to consolidation to achieve integration. Insurers purchase provider practices and pharmacy benefit managers. Instead of standalone hospitals, we have hospital systems the employ the doctors and dictate care. CVS owns both health care providers and Aetna.
On the one hand, this integration should better internalize the cost and benefits of health care and addresses a key problem that has plagued the health care industry. On the other hand, integration sounds eerily like the ending of George Orwell’s Animal Farm, where the animals look from the humans to the pigs and can’t tell the difference. As Assistant Attorney General Jonathan Kanter explained recently, health care companies are becoming platforms and can control the interaction between patients and providers, among providers and between providers and pharmacies.[2]
First, this current iteration of integration may not succeed. The once rosy future for HMOs or Accountable Care Organizations (ACOs) withered on the vine. If it fails, all we may be left with is dominant market actors earning monopoly or monopsony profits and little, if any, improvement in health care.
Even if integration does pay off, without competition, patients who receive the care, and their employers (and potentially the U.S. government), will not benefit if it means pervasive market power. The point here is not that competition is the silver bullet, but without competition, health care reforms are likely to fail.
- Competition as Hero
Regardless of your policy views, competition has to be the hero. That is no small task. Effective antitrust requires understanding how health care markets work, how the regulatory overlay affects parties’ incentives and where the competitive process is vulnerable. In other words, if we take as a given that integration is the goal of health care reform, where would we expect consolidation to be dangerous.
Multi-Level Entry. A danger with platforms occurs when they increase the difficulty of entry. If a company has market power in one level of the health care ecosystem, entry may already be difficult in that market. But if a company can acquire companies across the health care ecosystem, it can further shield itself from competition by forcing a competitor to enter at multiple levels. We see health care companies vertically integrating into a health care stack. Multi-level entry can create a moat protecting market power.
Monopsony Power. As health care companies consolidate and blur the lines between insurers and providers, employees, independent practices, or hospitals may suffer. The monopsonist uses less labor than a competitive market would support, whether by lowering pay, reducing the quality of the job or limiting the services they can provide (maybe through prior authorization). Monopsony power in these markets is likely to directly harm patients. Before anyone misinterprets that statement, I am not saying the inappropriate acquisition or use of monopsony power is a problem only if it harms downstream consumers.
Conflicts Of Interest. With the development of health care platforms and stacks, conflicts of interest become more likely. Firms with dominant positions choose their own health care stack and exclude independent rivals.
Regulatory Gamesmanship. One of the reasons that health care companies expand could be to circumvent regulation. The Affordable Care Act requires insurers to spend at least 80-85% of patient premiums on medical care. If the insurer acquires provider groups, the money it pays the provider group is a cost for the purposes of the medical loss ratio (MLR). The insurer is simply charging itself a higher price, however. The higher price, as an accounting matter, turns its profit into a cost. The insurer may be able to spend less on care than the MLR requires.
- Protecting Health care Competition
Turning now to competition and antitrust: since I’m standing here at the end of an administration rather than the beginning, you get to hear me tell you a little about what we’ve done. I am not going to talk about our health care case in litigation. I am going to reflect on how the Biden Administration’s antitrust enforcement agenda has developed tools to address the threats I have just discussed.
First, both the Antitrust Division and the Federal Trade Commission have made it a priority to address harms to suppliers, including workers — monopsony power. We successfully blocked Penguin’s attempt to acquire Simon & Schuster based on potential to harm certain authors. In United States v. Cargill, we obtained a consent decree based on allegations that sharing compensation information suppressed compensation for poultry plant workers. In United States v. Koch, we again obtained a consent decree addressing penalties Koch had imposed on chicken growers that wanted to switch to alternative buyers. Those enforcement actions and others have established that labor concerns matter in antitrust law.
Second, the new Merger Guidelines, which have already been cited approvingly in nine cases, remind the world that Section 7 covers mergers that may substantially lessen competition, not just horizontal mergers that meet certain Herfindahl-Hirschman Index thresholds or only a very narrow sliver of vertical mergers. Instead, the guidelines ask whether mergers enhance or entrench market power in any way.
Third, our Section 2 cases challenging conduct by dominant platforms raise many of the concerns that I have discussed regarding health care.
For too long, competition has been a villain that undermines health care markets or a victim that needed to be sacrificed for the greater good. Unless we understand that competition is part of the solution, the same frustration that plagued my father as a small businessman will continue to plague the country.
This is likely my last speech as a Biden Administration Official. It has been the honor of a lifetime to serve the United States. In this public forum, I want to thank the career staff at the division. Our critics and supporters vigorously argue whether our approach was right or wrong, or whether it was revolutionary or evolution. As I reflect on my time, I think they are missing the point. We currently have eight civil cases in litigation, and they are significant. We have successfully brought criminal monopolization cases. Multiple sections have been in litigation almost continually since before I arrived.
Over the last four years, the Antitrust Division has shown its capacity is far greater than anyone thought. And that occurred only because we (in leadership) made unreasonable requests, and, more importantly, the career staff answered the call. Their talent, diligence and dedication made the division’s accomplishments possible. They deserve far more credit than any of us in the Front Office. Underpaid and resource strapped, they take on the biggest cases with the most well-funded opponents and continually outperform their opponents. We all owe them a debt of gratitude.