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As usual, my remarks today reflect my own views, and are not necessarily those of the Commission or of any Commissioner.

My perspective on this program's theme -- "Medicare reform and the private market in health care" -- is a simple one: the antitrust laws have been a major factor in the development of more efficient health care markets, and in setting the stage for market-based proposals to reform Medicare. Antitrust enforcement has challenged harmful restraints on competition while facilitating the development of efficient methods of health care delivery. As markets for Medicare and private health care services evolve, providers and purchasers are continually seeking to respond to a changing marketplace -- usually in ways that promote competition, but sometimes in ways that impede it, and this is where antitrust enforcement plays a critical role. Our analysis takes into account changes in market conditions, and we are continually working to keep abreast of these changes, including some steps that I will describe today to gather additional information on networks among health care providers.

I will begin with a brief review of how antitrust enforcement has helped open the health care marketplace to the forces of competition; touch on the antitrust issues that have arisen in the debate over Medicare reform; and describe some of the ways in which antitrust takes into account the specific characteristics of particular health care markets. Finally, I will address some issues concerning provider-controlled networks for delivering health care services -- including an examination of whether alternative forms of integration among such networks may offer efficiencies -- on which we are now soliciting more information from a variety of sources, including employers and other payers as well as health care providers.

I do not plan to rekindle the debate on the details of the Medicare legislation that was recently passed by Congress and sent to the President, but it is clear that one goal of the legislation is to make available to Medicare beneficiaries a range of choices among health plans similar to those now enjoyed by people covered by private insurance. In essence, the legislation seeks to use the competitive forces present in private markets to improve the cost-effectiveness of health care services provided to the Medicare population. These competitive changes taking place in the larger market for health care services have come about in part due to the record of antitrust enforcement over the past 20 years. A competition-based system would be impossible, for example, if physicians could not affiliate with, or work for, managed care organizations, or if coercive boycotts against new health care arrangements had been permitted. The elimination of these types of artificial barriers to the development of market alternatives has been a major factor in facilitating innovative and efficient responses to the demands of the marketplace. Cases brought by the Â鶹´«Ã½ Trade Commission, the Department of Justice and others have eliminated ethical restrictions on physician participation in HMOs or other forms of "contract practice," and have stopped other efforts by some health care providers to block innovation in health care financing and delivery and to stifle cost-containment efforts.

It is important to remember that as late as the mid-1970s, for example, ethical standards of the American Medical Association prohibited physicians from engaging in forms of competition that we now consider commonplace. AMA's ethical restrictions prohibited physicians from providing services to patients under a salaried contract with a "lay" hospital or HMO, "underbidding" for a contract or agreeing to accept compensation that was "inadequate" compared to the "usual" fees in the community, or entering into arrangements whereby patients were denied a "reasonable" degree of choice among physicians. Similarly, doctors were prohibited from disseminating truthful information to the public about the price, quality, or other aspects of their services that patients might find important. The Commission successfully challenged these restraints, and subsequent Commission enforcement actions have prohibited other coercive conduct designed to impede the development of HMOs, such as obstructing hospital privileges for HMO physicians and boycotting a hospital that was planning to open an HMO facility.

Throughout its health care enforcement program, the Commission has recognized that there are many legitimate forms of organization and collaboration among health care providers that raise no antitrust concerns, and has made efforts to get the word out to the public and the health care industry that most provider activities raise little or no antitrust concern. At the same time, the Commission has successfully challenged efforts by some groups of providers to obstruct efforts to promote cost-effective delivery of health care services. The Commission has taken action to prevent groups of providers from boycotting insurers to obtain higher fees or to obstruct insurer cost-containment measures, from agreeing with their competitors to demand higher fees, and from blocking the development of innovative alternatives to traditional fee-for-service medicine, such as integrated multispecialty group practices, managed care plans, and hospital-owned primary care clinics. For example, the Commission issued three orders against alleged boycott threats by physicians in the Ft. Lauderdale, Florida, area to prevent local hospitals from affiliating with the Cleveland Clinic, a multispecialty group that prices its services in an innovative way.

It is clear to me that antitrust will remain important in the future, as markets continue to evolve to meet payer demands for quality, accountability, and cost effectiveness in health care services. The central challenge of sound antitrust enforcement in health care markets is to distinguish anticompetitive resistance to market forces from innovative adaptation to those same market forces. While most instances of provider collaboration are legitimate efforts to adapt to changing markets -- many providers are eager to join managed care plans or to compete against them on the merits -- the danger of concerted provider opposition to market forces has not been eliminated. During the past year, for example, the Commission has entered consent orders against groups of physicians charged with conspiring to boycott a government insurance program to increase reimbursement rates; conspiring to prevent a hospital from opening a multi-specialty clinic that would have competed with the doctors, by threatening to stop admitting patients to the hospital if it proceeded with plans to open the clinic; conspiring to fix the fees paid for surgical services at two hospital trauma centers, backed up by an alleged boycott that forced one center to close; and conspiring to delay the entry of third-party payers into the market, while agreeing among themselves on the terms on which they would deal with payers without forming a legitimate joint venture.

Despite increasing acceptance of competition as the best means of enhancing the provision of cost-effective health care services, some questions continue to be raised about the manner in which antitrust law is applied in health care markets. There have been several efforts over the past decade and a half to obtain antitrust exemptions for physicians or other health care providers. Two antitrust measures were considered in connection with the Medicare reform legislation that Congress just adopted. One provision would have created a broad antitrust exemption for medical groups' activities that ostensibly were "designed to promote quality of health care services," while another provision would have exempted certain provider groups contracting with Medicare provider-sponsored organizations ("PSOs") from the per se rule against price-fixing. Both the Commission and the Department of Justice -- as well as officials of the National Association of Attorneys General, the chairman of the President's Council of Economic Advisers, a number of private organizations including various health care groups, the Business Roundtable, the U.S. Chamber of Commerce, the National Association of Manufacturers, and the Antitrust Section of the American Bar Association -- opposed enactment of these provisions.

The FTC/DOJ letters commenting on the provisions pointed out that they would undercut the Medicare reform bill's reliance on competition to provide more cost-effective services to Medicare beneficiaries, and could harm competition outside the Medicare program as well. The provision on medical self-regulatory entities, the letters pointed out, was not necessary to protect legitimate self-regulatory activity, which is already permitted under current antitrust law. Instead, the provision would have protected anticompetitive activities that purport to improve the quality of care, but that in fact permit physician groups to restrain competition and raise health care costs. The other provision would have permitted groups of physicians who were not economically integrated to collectively set fees for services provided through a Medicare PSO, to bargain collectively with the PSO, and to threaten a boycott if the PSO did not accept the providers' terms, without regard to the usual per se rule against price-fixing by competitors. This provision would make it harder to prosecute clearly anticompetitive conduct that did not produce countervailing efficiencies. Moreover, the provision could adversely affect other managed care organizations operating in a market, and not just Medicare PSOs, by dampening competition among the providers for non-PSO business. Physicians who agree on prices to be demanded of PSOs might implicitly agree to adhere to similar demands in dealing with other plans; or the information exchanged or understandings reached in negotiating fees with a PSO may spill over into their dealings with other managed care organizations.

While these provisions were not included in the final legislation that Congress recently passed, I suspect that the debate over these issues has not ended. In any event, I would certainly expect a continued discussion of how antitrust should be applied to particular types of health care arrangements. Antitrust is a discipline that brings legal and economic analysis to bear in particular market contexts, in order to determine the likely competitive implications of the arrangement at issue. Some conduct, such as naked price fixing, is so clearly likely to harm competition without offering offsetting efficiencies that it should be condemned without a resource-intensive market inquiry. Distinguishing between cartel activity and potentially efficient collaboration can be difficult in some situations, and application of those principles in particular markets may change as the markets themselves change. It is not surprising, then, that the antitrust analysis of health care markets has itself evolved over the past two decades.

Because of the pace and magnitude of change in health care markets in recent years, the Commission has made an intensive effort to provide information and guidance to market participants about the types of antitrust issues they are most likely to face as they seek to adapt to changing market conditions. As part of this effort, the Commission and the Department of Justice jointly issued statements of enforcement policy covering nine areas of collaborative activity among health care providers. The policy statements address activities including hospital mergers and joint ventures, joint purchasing arrangements, the sharing and provision of competitive information, and physician and multiprovider networks. The agencies also committed to responding on an expedited basis to requests for advice concerning health care matters, and have issued a large number of staff advisory opinions and business review letters on a variety of topics.

The policy statements establish "antitrust safety zones" for certain kinds of conduct that will not be subject to challenge by the enforcement agencies, except in extraordinary circumstances. The safety zones are intended to define areas that almost always do not raise competitive concerns; they do not, and never were intended to, define or limit the universe of permissible conduct. As the policy statements themselves recognize, conduct that falls outside the safety zones may nonetheless be permissible under the antitrust laws, and each of the statements contains a discussion of how the agencies will analyze conduct that is outside a safety zone. On a number of occasions FTC staff have approved, through our staff advisory opinion process, conduct that is not within one of the safety zones.

How antitrust analysis accommodates real-world market factors is illustrated by the policy statements' treatment of potential collaboration among providers in rural areas. Because of the scarcity of many types of providers in most rural markets, efficient collaboration may require the participation of a proportion of competing providers that would raise serious questions in other geographic markets. Several examples in the policy statements illustrate how antitrust analysis takes account of competitive conditions such as the need for a certain level of provider participation in order for a joint venture to operate efficiently. For example, the discussion of physician network joint ventures indicates that a hypothetical IPA including more than half of the general practitioners and all of the specialists practicing in a rural area would be acceptable under the facts set forth in the example. Similarly, the discussion indicates that a hypothetical joint venture among the only two hospitals in a rural area for the operation of expensive medical equipment, or for the joint operation of a specialized clinical service, would be permissible in the circumstances described.

The area of the policy statements that has generated the most attention -- and by far the largest volume of requests for advice -- concerns physician network joint ventures. In particular, the emphasis in the policy statements on the need for physicians who price their services jointly through the network to share substantial financial risk has been the subject of criticism from some quarters. The AMA, for example, has argued that this standard unnecessarily impedes the development of physician-controlled network plans, and has urged enactment of legislation that would remove or narrow the applicability of this requirement. Let me briefly explain how we look at these issues in the Bureau of Competition, and how our analysis developed.

Under Policy Statement 8, physician networks in which members collectively agree on prices or other significant terms of competition, and jointly market their services, will be analyzed under the more comprehensive analysis of the antitrust rule of reason rather than the per se rule of illegality if the physicians share substantial financial risk or if "the combining of the physicians into a joint venture enables them to offer a new product producing substantial efficiencies." The statement also provides a safety zone for certain physician network joint ventures that share risk and whose membership does not exceed specified percentages of competing physicians. The emphasis on risk sharing is designed to assure that the elimination of price competition among network participants that inevitably results from agreements on common terms is related to functional integration that is likely to produce efficiencies.

Risk-sharing, for purposes of the safety zone for physician networks, includes at least the following:

1. when the venture agrees to provide services to a health benefits plan at a capitated rate; or
2. when the venture creates significant financial incentives for its members as a group to achieve specified cost-containment goals, such as withholding from all members a substantial amount of the compensation due them, with distribution of that amount to the members only if the cost containment goals are met.

In addition, the policy statement says that other forms of economic integration may amount to the sharing of substantial financial risk.

Why is risk-sharing important? Because it gives all participating providers a direct incentive to practice in a cost-effective manner and to assure that other participants in the network do likewise, thereby providing a reasoned basis for distinguishing between cartel activity and potentially efficient collaboration. After all, the tendency of fee-for-service medicine coupled with indemnity insurance to reward volume rather than efficiency of services, and thus to increase health care spending, has contributed significantly to the cost crisis that has in turn triggered the transformation of health care markets we are now witnessing. The vice president and associate general counsel of the AMA has summarized both the problem and the market response:

In a traditional health care relationship, the health plan has no control over expenditures, and the patient and the physician have no incentive to control costs. The physician's focus is solely on healing patients: any treatment the physician orders that is within the realm of acceptable medical practice is a covered expense. The result has been unmanageable increases in health care expenditures.

[Managed care organizations] attempt to reduce costs and maintain quality by focusing on the medical management of patients while constraining provider payments. . . . MCOs motivate physicians to change their practice methods by changing the way in which they are paid.

The Commission's experience in enforcing the antitrust laws in cases involving agreements among groups of otherwise competing providers to bargain jointly with third party payers bears out, in my opinion, the view that such arrangements often can have significant anticompetitive effects. The harm is clearly illustrated by the Commission's case against the Michigan State Medical Society, where the Commission found that members of the society had collectively threatened to withdraw from participation in Michigan Blue Cross/Blue Shield insurance programs if their collective fee demands were not met. More recently, the Commission has investigated, and entered into consent agreements with, a number of other groups of economically unintegrated physicians that negotiated jointly with insurers or agreed to boycott insurers or hospitals in order to force adherence to the doctors' demands on price or other contract terms.

At the same time, we are open to the possibility that joint pricing might be shown to be reasonably ancillary to a provider network that involves integration other than the type of risk-sharing discussed in the policy statements -- a network that falls into what a former FTC official referred to in 1992 as "the grey area that lies between capitation systems and other plans with substantial risk sharing features, on the one hand, and plans involving no significant economic integration, on the other . . . ." The FTC/DOJ policy statements are of necessity general statements with broad applicability, and they are based on our experience gained through scores of investigations, advisory opinions, and discussions with market participants. Yet despite our offer to review specific proposals concerning other types of arrangements, we have received very little information about possible efficiencies or likely competitive effects of plans lying between financially integrated networks, on the one hand, and the unintegrated physician organizations involved in some of the cases brought by the Commission -- which used collective bargaining and boycotts to raise prices or obstruct the development of managed care -- on the other. The requests for advice we have received have, for the most part, involved arrangements that fit within, or came close to, the safety zones described in the policy statements. We have not seen providers -- or, importantly, those who purchase or pay for health care services -- come in and seek advice, in a specific context, based on information showing how other types of arrangements can be efficient.

It should also be pointed out that current antitrust law has not prevented the development of provider-sponsored plans. Although precise figures are difficult to come by, industry statistics indicate that 20% of all PPOs and 15% of all HMOs are provider-owned. A survey conducted by Modern Healthcare showed that in 1994, 9.31 million people were enrolled in provider-owned PPOs. Many other provider-sponsored managed care plans are being developed or planned. In its 1995 Annual Report to Congress, the Physician Payment Review Commission ("PPRC") found no significant problem of antitrust laws impeding the development of provider-sponsored managed care plans. The PPRC report noted press reports indicating that many physician-sponsored networks are in the process of formation; for example, it cited published reports that "three-fourths of state medical societies are either contemplating or are actually in the process of establishing physician-sponsored networks."

As I mentioned earlier, the FTC and the Department of Justice have approved many proposals for the operation of provider-sponsored networks. For example, a recent favorable FTC staff advisory opinion involving a 400-doctor network in Ohio has been applauded as an important step in helping new physician networks enter into managed care arrangements. And the provider-sponsored organizations contemplated by the Medicare reform legislation would not raise price-fixing concerns; as I understand the Medicare bill that Congress passed, these organizations are required to provide all covered services in exchange for a capitation payment -- in other words, to bear risk -- and therefore would be analyzed under the rule of reason.

Nonetheless, some have argued -- particularly in the recent debate over proposed antitrust provisions in the Medicare legislation -- that the policy statements are unduly restrictive, and as a result are chilling the development of procompetitive physician arrangements. As I have noted, we don't see evidence supporting that view. But we would be concerned about any information showing that current interpretations of antitrust law have impeded legitimate collaboration. It is neither our desire nor our function to channel market developments in any particular direction. Our goal is to keep markets open to new competition so that firms may offer, and consumers may choose, whatever health options they prefer. The purpose of the antitrust rule of reason is to weigh efficiencies against the risk of competitive harm, and we are committed to recognizing efficiencies where they exist.

Consequently, because the concerns we hear have not been presented in specific factual contexts, the Commission's staff has begun to gather information about possible new types of arrangements that may offer efficiency benefits to be taken into account in our antitrust analysis. We will look at whether types of integration among participants in health care provider networks, other than capitation and similar risk sharing arrangements, are likely to produce efficiencies that should trigger rule of reason analysis. We will be talking to employers and other payers, to physicians and other health care providers, to others with expertise in these markets, and of course we will continue to coordinate closely with the Department of Justice as we analyze these issues. We are particularly interested in information about the needs of employers who offer self-funded health benefits plans, because it has been argued that they in particular may benefit from the creation of different forms of provider groups.

Specifically, we are seeking information about the needs of buyers, how well these needs are being met by existing types of networks, and the potential benefits and costs of other types of arrangements. Among other things, we are interested in issues such as:

• the types of plans that could meet payers' needs, including types that may be perceived to violate current antitrust standards;
• whether payers desire that a single network offer both risk-bearing and non-riskbearing products;
• the nature and magnitude of efficiencies that may flow from networks that do not share financial risk as that term is used in the policy statements;
• the relationship between any such efficiencies and joint pricing;
• what types of integration other than risk sharing might address issues of efficient utilization as well as price;
• the dangers to competition that may result from various types of joint undertakings by non-riskbearing networks;
• what objective features can be used to distinguish efficiency-enhancing networks from cartels; 
• and what market characteristics may lessen the likelihood that joint pricing by networks could harm consumers.

We welcome input into this process by all interested parties. I encourage you to contact me or our Health Care Division staff between now and the end of February if you have information that may help us assess these issues.

In closing, I want to reemphasize our commitment to providing information and advice to health care market participants, and to ensuring that we apply the proper antitrust analysis to new types of arrangements for financing or delivering health care services. We look forward to assistance from those with a stake in an efficient health care system as we continue to pursue this mission.