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There is always a temptation for antitrust agencies and plaintiffs to center a case around so-called “hot” documents — typically company documents with a snippet or sound-bites extracted, some times out of context. Some practitioners argue that “[h]ot document can be crucial to the outcome of any antitrust matter.” Although “hot” documents can help catch the interest of the public, a busy judge or an unsophisticated jury, they often can lead to misleading results. But more times than not, antitrust cases are resolved on economics and what John Adams called “hard facts,” not snippets from emails or other corporate documents. Antitrust case books are littered with cases that initially looked promising based on some supposed hot documents, but ultimately failed because the foundations of a sound antitrust case were missing.

As discussed below this is especially true for a recent case brought by the FTC, FTC v. St. Luke’s, currently pending before the Ninth Circuit Court of Appeals, in which the FTC at each pleading stage has consistently relied on “hot” documents to make its case.

The crafting and prosecution of civil antitrust cases by federal regulators is a delicate balancing act. Regulators must adhere to well-defined principles of antitrust enforcement, and on the other hand appeal to the interests of a busy judge. The simple way of doing this is using snippets of documents to attempt to show the defendants knew they were violating the law.

After all, if federal regulators merely had to properly define geographic and relevant product markets, show a coherent model of anticompetitive harm, and demonstrate that any anticipated harm would outweigh any procompetitive benefits, where is the fun in that? The reality is that antitrust cases typically rely on economic analysis, not snippets of hot documents. Antitrust regulators routinely include internal company documents in their cases to supplement the dry mechanical nature of antitrust analysis. However, in isolation, these documents can create competitive concerns when they simply do not exist.

With this in mind, it is vital that antitrust regulators do not build an entire case around what seem to be inflammatory documents. Quotes from executives, internal memoranda about competitors, and customer presentations are the icing on the cake after a proper antitrust analysis. As the International Center for Law and Economics’ Geoff Manne once explained,

[t]he problem is that these documents are easily misunderstood, and thus, while the economic significance of such documents is often quite limited, their persuasive value is quite substantial.

Herein lies the problem illustrated by the Federal Trade Commission’s use of provocative documents in its suit against the vertical acquisition of Saltzer Medical Group, an independent physician group comprised of 41 doctors, by St. Luke’s Health System. The FTC seeks to stop the acquisition involving these two Idaho based health care providers, a $16 million transaction, and a number comparatively small to other health care mergers investigated by the antitrust agencies. The transaction would give St. Luke’s a total of 24 primary care physicians operating in and around Nampa, Idaho.

In St. Luke’s the FTC used “hot” documents in each stage of its pleadings, from its complaint through its merits brief on appeal. Some of the statements pulled from executives’ emails, notes and memoranda seem inflammatory suggesting St. Luke’s intended to increase prices and to control market share all in order to further its strength relative to payer contracting. These statements however have little grounding in the reality of health care competition.

The reliance by the FTC on these so-called hot documents is problematic for several reasons. First, the selective quoting of internal documents paints the intention of the merger solely to increase profit for St. Luke’s at the expense of payers, when the reality is that the merger is premised on the integration of health care services and the move from the traditional fee-for-service model to a patient-centric model. St Luke’s intention of incorporating primary care into its system is in-line with the goals of the Affordable Care Act to promote over all well-being through integration. The District Court in this case recognized that the purpose of the merger was “primarily to improve patient outcomes.” And, in fact, underserved and uninsured patients are already benefitting from the transaction.

Second, the selective quoting suggested a narrow geographic market, and therefore an artificially high level of concentration in Nampa, Idaho. The suggestion contradicts reality, that nearly one-third of Nampa residents seek primary care physician services outside of Nampa. The geographic market advanced by the FTC is not a proper market, regardless of whether selected documents appear to support it. Without a properly defined geographic market, it is impossible to determine market share and therefore prove a violation of the Clayton Antitrust Act.

The DOJ Antitrust Division and the FTC have acknowledged that markets can not properly be defined solely on spicy documents. Writing in their 2006 commentary on the Horizontal Merger Guidelines, the agencies noted that

[t]he Agencies are careful, however, not to assume that a ‘market’ identified for business purposes is the same as a relevant market defined in the context of a merger analysis. … It is unremarkable that ‘markets’ in common business usage do not always coincide with ‘markets’ in an antitrust context, inasmuch as the terms are used for different purposes.

Third, even if St. Luke’s had the intention of increasing prices, just because one wants to do something such as raise prices above a competitive level or scale back research and development expenses — even if it genuinely believes it is able — does not mean that it can. Merger analysis is not a question of mens rea (or subjective intent). Rather, the analysis must show that such behavior will be likely as a result of diminished competition. Regulators must not look at evidence of this subjective intent and then conclude that the behavior must be possible and that a merger is therefore likely to substantially lessen competition. This would be the tail wagging the dog. Instead, regulators must first determine whether, as a matter of economic principle, a merger is likely to have a particular effect. Then, once the analytical tests have been run, documents can support these theories. But without sound support for the underlying theories, documents (however condemning) cannot bring the case across the goal line.

Certainly, documents suggesting intent to raise prices should bring an antitrust plaintiff across the goal line? Not so, as Seventh Circuit Judge Frank Easterbrook has explained:

Almost all evidence bearing on “intent” tends to show both greed and desire to succeed and glee at a rival’s predicament. … [B]ut drive to succeed lies at the core of a rivalrous economy. Firms need not like their competitors; they need not cheer them on to success; a desire to extinguish one’s rivals is entirely consistent with, often is the motive behind competition.

As Harvard Law Professor Phil Areeda observed, relying on documents describing intent is inherently risky because

(1) the businessperson often uses a colorful and combative vocabulary far removed from the lawyer’s linguistic niceties, and (2) juries and judges may fail to distinguish a lawful competitive intent from a predatory state of mind. (7 Phillip E. Areeda & Herbert Hovenkamp, Antitrust Law § 1506 (2d ed. 2003).)

So-called “hot” documents may help guide merger analysis, but served up as a main course make a paltry meal. Merger cases rise or fall on hard facts and economics, and next week we will see if the Ninth Circuit recognizes this as both St. Luke’s and the FTC argue their cases.

In my just published Heritage Foundation Legal Memorandum, I argue that the U.S. Federal Trade Commission (FTC) should substantially scale back its overly aggressive “advertising substantiation” program, which disincentivizes firms from providing the public with valuable information about the products they sell.  As I explain:

“The . . . [FTC] has a long history of vigorously combating false and deceptive advertising under its statutory authorities, but recent efforts by the FTC to impose excessive ‘advertising substantiation’ requirements on companies go far beyond what is needed to combat false advertising. Such actions threaten to discourage companies from providing useful information that consumers value and that improves the workings of the marketplace. They also are in tension with constitutional protection for commercial speech. The FTC should reform its advertising substantiation policy and allow businesses greater flexibility to tailor their advertising practices, which would further the interests of both consumers and businesses. It should also decline to seek ‘disgorgement’ of allegedly ‘ill-gotten gains’ in cases involving advertising substantiation.”

In particular, I recommend that the FTC issue a revised policy statement explaining that it will seek to restrict commercial speech to the minimum extent possible, consistent with fraud prevention, and will not require onerous clinical studies to substantiate non-fraudulent advertising claims.  I also urge that the FTC clarify that it will only seek equitable remedies (including injunctions and financial exactions) in court for cases of clear fraud.

In my just-published article in The Antitrust Source, I argue that the law and economics literature on patents and error cost analysis demonstrate that the recent focus by U.S. (and foreign) antitrust enforcers on single-firm patent abuses is misplaced, and may reduce incentives to innovate.  I recommend that antitrust enforcers focus instead on restrictions among competing technologies, which are the primary concern of the 1995 U.S. DOJ-FTC Antitrust-IP Guidelines.  I conclude:

“Patent-antitrust enforcement should “stick to its knitting” and focus on transactions that lessen competition among rival technologies or on wrongful actions (not competition on the merits) designed to artificially inflate the market value of a patent beyond its legitimate scope. New antitrust enforcement initiatives that seek to limit returns within the legitimate scope of the patentare unwise. Even if they appeared to restrain licensing fees in the short term, economic theory and evidence suggests that such “creative antitrust enforcement” would undermine incentives to invest in patenting, thereby weakening the patent system and tending to slow innovation and economic growth. Nations seeking to spur their economies would be well advised to avoid such antitrust adventurism.”

Section 5 of the Federal Trade Commission Act proclaims that “[u]nfair methods of competition . . . are hereby declared unlawful.” The FTC has exclusive authority to enforce that provision and uses it to prosecute Sherman Act violations. The Commission also uses the provision to prosecute conduct that doesn’t violate the Sherman Act but is, in the Commission’s view, an “unfair method of competition.”

That’s somewhat troubling, for “unfairness” is largely in the eye of the beholder. One FTC Commissioner recently defined an unfair method of competition as an action that is “‘collusive, coercive, predatory, restrictive, or deceitful,’ or otherwise oppressive, [where the actor lacks] a justification grounded in its legitimate, independent self-interest.” Some years ago, a commissioner observed that a “standalone” Section 5 action (i.e., one not premised on conduct that would violate the Sherman Act) could be used to police “social and environmental harms produced as unwelcome by-products of the marketplace: resource depletion, energy waste, environmental contamination, worker alienation, the psychological and social consequences of producer-stimulated demands.” While it’s unlikely that any FTC Commissioner would go that far today, the fact remains that those subject to Section 5 really don’t know what it forbids.  And that situation flies in the face of the Rule of Law, which at a minimum requires that those in danger of state punishment know in advance what they’re not allowed to do.

In light of this fundamental Rule of Law problem (not to mention the detrimental chilling effect vague competition rules create), many within the antitrust community have called for the FTC to provide guidance on the scope of its “unfair methods of competition” authority. Most notably, two members of the five-member FTC—Commissioners Maureen Ohlhausen and Josh Wright—have publicly called for the Commission to promulgate guidelines. So have former FTC Chairman Bill Kovacic, a number of leading practitioners, and a great many antitrust scholars.

Unfortunately, FTC Chairwoman Edith Ramirez has opposed the promulgation of Section 5 guidelines. She says she instead “favor[s] the common law approach, which has been a mainstay of American antitrust policy since the turn of the twentieth century.” Chairwoman Ramirez observes that the common law method has managed to distill workable liability rules from broad prohibitions in the primary antitrust statutes. Section 1 of the Sherman Act, for example, provides that “[e]very contract, combination … or conspiracy, in restraint of trade … is declared to be illegal.” Section 2 prohibits actions to “monopolize, or attempt to monopolize … any part of … trade.” Clayton Act Section 7 forbids any merger whose effect “may be substantially to lessen competition, or tend to create a monopoly.” Just as the common law transformed these vague provisions into fairly clear liability rules, the Chairwoman says, it can be used to provide adequate guidance on Section 5.

The problem is, there is no Section 5 common law. As Commissioner Wright and his attorney-advisor Jan Rybnicek explain in a new paper, development of a common law—which concededly may be preferable to a prescriptive statutory approach, given its flexibility, ability to evolve with new learning, and sensitivity to time- and place-specific factors—requires certain conditions that do not exist in the Section 5 context.

The common law develops and evolves in a salutary direction because (1) large numbers of litigants do their best to persuade adjudicators of the superiority of their position; (2) the closest cases—those requiring the adjudicator to make fine distinctions—get appealed and reported; (3) the adjudicators publish opinions that set forth all relevant facts, the arguments of the parties, and why one side prevailed over the other; (4) commentators criticize published opinions that are unsound or rely on welfare-reducing rules; (5) adjudicators typically follow past precedents, tweaking (or occasionally overruling) them when they have been undermined; and (6) future parties rely on past decisions when planning their affairs.

Section 5 “adjudication,” such as it is, doesn’t look anything like this. Because the Commission has exclusive authority to bring standalone Section 5 actions, it alone picks the disputes that could form the basis of any common law. It then acts as both prosecutor and judge in the administrative action that follows. Not surprisingly, defendants, who cannot know the contours of a prohibition that will change with the composition of the Commission and who face an inherently biased tribunal, usually settle quickly. After all, they are, in Commissioner Wright’s words, both “shooting at a moving target and have the chips stacked against them.” As a result, we end up with very few disputes, and even those are not vigorously litigated.

Moreover, because nearly all standalone Section 5 actions result in settlements, we almost never end up with a reasoned opinion from an adjudicator explaining why she did or did not find liability on the facts at hand and why she rejected the losing side’s arguments. These sorts of opinions are absolutely crucial for the development of the common law. Chairwoman Ramirez says litigants can glean principles from other administrative documents like complaints and consent agreements, but those documents can’t substitute for a reasoned opinion that parses arguments and says which work, which don’t, and why. On top of all this, the FTC doesn’t even treat its own enforcement decisions as precedent! How on earth could the Commission’s body of enforcement decisions guide decision-making when each could well be a one-off?

I’m a huge fan of the common law. It generally accommodates the Hayekian “knowledge problem” far better than inflexible, top-down statutes. But it requires both inputs—lots of vigorously litigated disputes—and outputs—reasoned opinions that are recognized as presumptively binding. In the Section 5 context, we’re short on both. It’s time for guidelines.

A century ago Congress enacted the Clayton Act, which prohibits acquisitions that may substantially lessen competition. For years, the antitrust enforcement Agencies looked at only one part of the ledger – the potential for price increases. Agencies didn’t take into account the potential efficiencies in cost savings, better products, services, and innovation. One of the major reforms of the Clinton Administration was to fully incorporate efficiencies in merger analysis, helping to develop sound enforcement standards for the 21st Century.

But the current approach of the Federal Trade Commission (“FTC”), especially in hospital mergers, appears to be taking a major step backwards by failing to fully consider efficiencies and arguing for legal thresholds inconsistent with sound competition policy. The FTC’s approach used primarily in hospital mergers seems uniquely misguided since there is a tremendous need for smart hospital consolidation to help bend the cost curve and improve healthcare delivery.

The FTC’s backwards analysis of efficiencies is juxtaposed in two recent hospital-physician alliances.

As I discussed in my last post, no one would doubt the need for greater integration between hospitals and physicians – the debate during the enactment of the Affordable Care Act (“ACA”) detailed how the current siloed approach to healthcare is the worst of all worlds, leading to escalating costs and inferior care. In FTC v. St. Luke’s Health System, Ltd., the FTC challenged Boise-based St. Luke’s acquisition of a physician practice in neighboring Nampa, Idaho.

In the case, St. Luke’s presented a compelling case for efficiencies.

As noted by the St. Luke’s court, one of the leading factors in rising healthcare costs is the use of the ineffective fee-for-service system. In their attempt to control costs and abandon fee-for-service payment, the merging parties effectively demonstrated to the court that the combined entity would offer a high level of coordinated and patient-centered care. Therefore, along with integrating electronic records and increasing access for under-privileged patients, the merged entity can also successfully manage population health and offer risk-based payment initiatives to all employed physicians. Indeed, the transaction consummated several months ago has already shown significant cost savings and consumer benefits especially for underserved patients. The court recognized

[t]he Acquisition was intended by St. Luke’s and Saltzer primarily to improve patient outcomes. The Court believes that it would have that effect if left intact.

(Appellants’ Reply Brief at 22, FTC v. St. Luke’s Health Sys., No 14-35173 (9th Cir. Sept. 2, 2014).)

But the court gave no weight to the efficiencies primarily because the FTC set forward the wrong legal roadmap.

Under the FTC’s current roadmap for efficiencies, the FTC may prove antitrust harm via predication and presumption while defendants are required to decisively prove countervailing procompetitive efficiencies. Such asymmetric burdens of proof greatly favor the FTC and eliminate a court’s ability to properly analyze the procompetitive nature of efficiencies against the supposed antitrust harm.

Moreover, the FTC basically claims that any efficiencies can only be considered “merger-specific” if the parties are able to demonstrate there are no less anticompetitive means to achieve them. It is not enough that they result directly from the merger.

In the case of St. Luke’s, the court determined the defendants’ efficiencies would “improve the quality of medical care” in Nampa, Idaho, but were not merger-specific. The court relied on the FTC’s experts to find that efficiencies such as “elimination of fee-for-service reimbursement” and the movement “to risk-based reimbursement” were not merger-specific, because other entities had potentially achieved similar efficiencies within different provider “structures.” The FTC and their experts did not indicate the success of these other models nor dispute that St. Luke’s would achieve their stated efficiencies. Instead, the mere possibility of potential, alternative structures was enough to overcome merger efficiencies purposed to “move the focus of health care back to the patient.” (The case is currently on appeal and hopefully the Ninth Circuit can correct the lower court’s error).

In contrast to the St. Luke’s case is the recent FTC advisory letter to the Norman Physician Hospital Organization (“Norman PHO”). The Norman PHO proposed a competitive collaboration serving to integrate care between the Norman Physician Association’s 280 physicians and Norman Regional Health System, the largest health system in Norman, Oklahoma. In its analysis of the Norman PHO, the FTC found that the groups could not “quantify… the likely overall efficiency benefits of its proposed program” nor “provide direct evidence of actual efficiencies or competitive effects.” Furthermore, such an arrangement had the potential to “exercise market power.” Nonetheless, the FTC permitted the collaboration. Its decision was instead decided on the basis of Norman PHO’s non-exclusive physician contracting provisions.

It seems difficult if not impossible to reconcile the FTC’s approaches in Boise and Norman. In Norman the FTC relied on only theoretical efficiencies to permit an alliance with significant market power. The FTC was more than willing to accept Norman PHO’s “potential to… generate significant efficiencies.” Such an even-handed approach concerning efficiencies was not applied in analyzing efficiencies in St. Luke’s merger.

The starting point for understanding the FTC’s misguided analysis of efficiencies in St. Luke’s and other merger cases stems from the 2010 Horizontal Merger Guidelines (“Guidelines”).

A recent dissent by FTC Commissioner Joshua Wright outlines the problem – there are asymmetric burdens placed on the plaintiff and defendant. Using the Guidelines, FTC’s merger analysis

embraces probabilistic prediction, estimation, presumption, and simulation of anticompetitive effects on the one hand but requires efficiencies to be proven on the other.

Relying on the structural presumption established in United States v. Philadelphia Nat’l Bank, the FTC need only illustrate that a merger will substantially lessen competition, typically demonstrated through a showing of undue concentration in a relevant market, not actual anticompetitive effects. If this low burden is met, the burden is then shifted to the defendants to rebut the presumption of competitive harm.

As part of their defense, defendants must then prove that any proposed efficiencies are cognizable, meaning “merger-specific,” and have been “verified and do not arise from anticompetitive reductions in output or service.” Furthermore, merging parties must demonstrate “by reasonable means the likelihood and magnitude of each asserted efficiency, how and when each would be achieved…, how each would enhance the merged firm’s ability and incentive to compete, and why each would be merger-specific.”

As stated in a recent speech by FTC Commissioner Joshua Wright,

the critical lesson of the modern economic approach to mergers is that post-merger changes in pricing incentives and competitive effects are what matter.

The FTC’s merger policy “has long been dominated by a focus on only one side of the ledger—anticompetitive effects.” In other words the defendants must demonstrate efficiencies with certainty, while the government can condemn a merger based on a prediction. This asymmetric enforcement policy favors the FTC while requiring defendants meet stringent, unyielding standards.

As the ICLE amicus brief in St. Luke’s discusses, not satisfied with the asymmetric advantage, the plaintiffs in St. Luke’s attempt to “guild the lily” by claiming that efficiencies can only be considered in cases where there is a presumption of competitive harm, perhaps based solely on “first order” evidence, such as increased market shares. Of course, nothing in the law, Guidelines, or sound competition policy limits the defense in that fashion.

The court should consider efficiencies regardless of the level of economic harm. The question is whether the efficiencies will outweigh that harm. As Geoff recently pointed out:

There is no economic basis for demanding more proof of claimed efficiencies than of claimed anticompetitive harms. And the Guidelines since 1997 were (ostensibly) drafted in part precisely to ensure that efficiencies were appropriately considered by the agencies (and the courts) in their enforcement decisions.

With presumptions that strongly benefit the FTC, it is clear that efficiencies are often overlooked or ignored. From 1997-2007, FTC’s Bureau of Competition staff deliberated on a total of 342 efficiencies claims. Of the 342 efficiency claims, only 29 were accepted by FTC staff whereas 109 were rejected and 204 received “no decision.” The most common concerns among FTC staff were that stated efficiencies were not verifiable or were not merger specific.

Both “concerns” come directly from the Guidelines requiring plaintiffs provide significant and oftentimes impossible foresight and information to overcome evidentiary burdens. As former FTC Chairman Tim Muris observed

too often, the [FTC] found no cognizable efficiencies when anticompetitive effects were determined to be likely and seemed to recognize efficiency only when no adverse effects were predicted.

Thus, in situations in which the FTC believes the dominant issue is market concentration, plaintiffs’ attempts to demonstrate procompetitive reasoning are outright dismissed.

The FTC’s efficiency arguments are also not grounded in legal precedent. Courts have recognized that asymmetric burdens are inconsistent with the intent of the Act. As then D.C. Circuit Judge Clarence Thomas observed,

[i]mposing a heavy burden of production on a defendant would be particularly anomalous where … it is easy to establish a prima facie case.

Courts have recognized that efficiencies can be “speculative” or be “based on a prediction backed by sound business judgment.” And in Sherman Act cases the law places the burden on the plaintiff to demonstrate that there are less restrictive alternatives to a potentially illegal restraint – unlike the requirement applied by the FTC that the defendant prove there are no less restrictive alternatives to a merger to achieve efficiencies.

The FTC and the courts should deem worthy efficiencies wherein there is a reasonable likelihood that procompetitive effects will take place post-merger. Furthermore, the courts should not look at efficiencies inside a vacuum. In healthcare, policies and laws, such as the effects of the ACA, must be taken into account. The ACA promotes coordination among providers and incentivizes entities that can move away from fee-for-service payment. In the past, courts relying on the role of health policy in merger analysis have found that efficiencies leading to integrated medicine and “better medical care” are relevant.

In St. Luke’s the court observed that “the existing law seemed to hinder innovation and resist creative solutions” and that “flexibility and experimentation” are “two virtues that are not emphasized in the antitrust law.” Undoubtedly, the current approach to efficiencies makes it near impossible for providers to demonstrate efficiencies.

As Commissioner Wright has observed, these asymmetric evidentiary burdens

do not make economic sense and are inconsistent with a merger policy designed to promote consumer welfare.

In the context of St. Luke’s and other healthcare provider mergers, appropriate efficiency analysis is a keystone of determining a merger’s total effects. Dismissal of efficiencies on the basis of a rigid, incorrect legal procedural structure is not aligned with current economic thinking or a sound approach to incorporate competition analysis into the drive for healthcare reform. It is time for the FTC to set efficiency analysis in the right direction.

There is a consensus in America that we need to control health care costs and improve the delivery of health care. After a long debate on health care reform and careful scrutiny of health care markets, there seems to be agreement that the unintegrated, “siloed approach” to health care is inefficient, costly, and contrary to the goal of improving care. But some antitrust enforcers — most notably the FTC — are standing in the way.

Enlightened health care providers are responding to this consensus by entering into transactions that will lead to greater clinical and financial integration, facilitating a movement from volume-based to value-based delivery of care. Any many aspects of the Affordable Care Act encourage this path to integration. Yet when the market seeks to address these critical concerns about our health care system, the FTC and some state Attorneys General take positions diametrically opposed to sound national health care policy as adopted by Congress and implemented by the Department of Health and Human Services.

To be sure, not all state antitrust enforcers stand in the way of health care reform. For example, many states including New York, Pennsylvania and Massachusetts, seem to be willing to permit hospital mergers even in concentrated markets with an agreement for continued regulation. At the same time, however, the FTC has been aggressively challenging integration, taking the stance that hospital mergers will raise prices by giving those hospitals greater leverage in negotiations.

The distance between HHS and the FTC in DC is about 6 blocks, but in healthcare policy they seem to be are miles apart.

The FTC’s skepticism about integration is an old story. As I have discussed previously, during the last decade the agency challenged more than 30 physician collaborations even though those cases lacked any evidence that the collaborations led to higher prices. And, when physicians asked for advice on collaborations, it took the Commission on average more than 436 days to respond to those requests (about as long as it took Congress to debate and enact the Affordable Care Act).

The FTC is on a recent winning streak in challenging hospital mergers. But those were primarily simple cases with direct competition between hospitals in the same market with very high levels of concentration. The courts did not struggle long in these cases, because the competitive harm appeared straightforward.

Far more controversial is when a hospital acquires a physician practice. This type of vertical integration seems precisely what the advocates for health care reform are crying out for. The lack of integration between physicians and hospitals is a core to the problems in health care delivery. But the antitrust law is entirely solicitous of these types of vertical mergers. There has not been a vertical merger successfully challenged in the courts since 1980 – the days of reruns of the TV show Dr. Kildare. And even the supposedly pro-enforcement Obama Administration has not gone to court to challenge a vertical merger, and the Obama FTC has not even secured a merger consent under a vertical theory.

The case in which the FTC has decided to “bet the house” is its challenge to St. Luke’s Health System’s acquisition of Saltzer Medical Group in Nampa, Idaho.

St. Luke’s operates the largest hospital in Boise, and Saltzer is the largest physician practice in Nampa, roughly 20-miles away. But rather than recognizing that this was a vertical affiliation designed to integrate care and to promote a transition to a system in which the provider takes the risk of overutilization, the FTC characterized the transaction as purely horizontal – no different from the merger of two hospitals. In that manner, the FTC sought to paint concentration levels it designed to assure victory.

But back to the reasons why integration is essential. It is undisputed that provider integration is the key to improving American health care. Americans pay substantially more than any other industrialized nation for health care services, 17.2 percent of gross domestic product. Furthermore, these higher costs are not associated with better overall care or greater access for patients. As noted during the debate on the Affordable Care Act, the American health care system’s higher costs and lower quality and access are mostly associated with the usage of a fee-for-service system that pays for each individual medical service, and the “siloed approach” to medicine in which providers work autonomously and do not coordinate to improve patient outcomes.

In order to lower health care costs and improve care, many providers have sought to transform health care into a value-based, patient-centered approach. To institute such a health care initiative, medical staff, physicians, and hospitals must clinically integrate and align their financial incentives. Integrated providers utilize financial risk, share electronic records and data, and implement quality measures in order to provide the best patient care.

The most effective means of ensuring full-scale integration is through a tight affiliation, most often achieved through a merger. Unlike contractual arrangements that are costly, time-sensitive, and complicated by an outdated health care regulatory structure, integrated affiliations ensure that entities can effectively combine and promote structural change throughout the newly formed organization.

For nearly five weeks of trial in Boise St. Luke’s and the FTC fought these conflicting visions of integration and health care policy. Ultimately, the court decided the supposed Nampa primary care physician market posited by the FTC would become far more concentrated, and the merger would substantially lessen competition for “Adult Primary Care Services” by raising prices in Nampa. As such, the district court ordered an immediate divestiture.

Rarely, however, has an antitrust court expressed such anguish at its decision. The district court readily “applauded [St. Luke’s] for its efforts to improve the delivery of healthcare.” It acknowledged the positive impact the merger would have on health care within the region. The court further noted that Saltzer had attempted to coordinate with other providers via loose affiliations but had failed to reap any benefits. Due to Saltzer’s lack of integration, Saltzer physicians had limited “the number of Medicaid or uninsured patients they could accept.”

According to the district court, the combination of St. Luke’s and Saltzer would “improve the quality of medical care.” Along with utilizing the same electronic medical records system and giving the Saltzer physicians access to sophisticated quality metrics designed to improve their practices, the parties would improve care by abandoning fee-for-service payment for all employed physicians and institute population health management reimbursing the physicians via risk-based payment initiatives.

As noted by the district court, these stated efficiencies would improve patient outcomes “if left intact.” Along with improving coordination and quality of care, the merger, as noted by an amicus brief submitted by the International Center for Law & Economics and the Medicaid Defense Fund to the Ninth Circuit, has also already expanded access to Medicaid and uninsured patients by ensuring previously constrained Saltzer physicians can offer services to the most needy.

The court ultimately was not persuaded by the demonstrated procompetitive benefits. Instead, the district court relied on the FTC’s misguided arguments and determined that the stated efficiencies were not “merger-specific,” because such efficiencies could potentially be achieved via other organizational structures. The district court did not analyze the potential success of substitute structures in achieving the stated efficiencies; instead, it relied on the mere existence of alternative provider structures. As a result, as ICLE and the Medicaid Defense Fund point out:

By placing the ultimate burden of proving efficiencies on the Appellants and applying a narrow, impractical view of merger specificity, the court has wrongfully denied application of known procompetitive efficiencies. In fact, under the court’s ruling, it will be nearly impossible for merging parties to disprove all alternatives when the burden is on the merging party to oppose untested, theoretical less restrictive structural alternatives.

Notably, the district court’s divestiture order has been stayed by the Ninth Circuit. The appeal on the merits is expected to be heard some time this autumn. Along with reviewing the relevant geographic market and usage of divestiture as a remedy, the Ninth Circuit will also analyze the lower court’s analysis of the merger’s procompetitive efficiencies. For now, the stay order is a limited victory for underserved patients and the merging defendants. While such a ruling is not determinative of the Ninth Circuit’s decision on the merits, it does demonstrate that the merging parties have at least a reasonable possibility of success.

As one might imagine, the Ninth Circuit decision is of great importance to the antitrust and health care reform community. If the district court’s ruling is upheld, it could provide a deterrent to health care providers from further integrating via mergers, a precedent antithetical to the very goals of health care reform. However, if the Ninth Circuit finds the merger does not substantially lessen competition, then precompetitive vertical integration is less likely to be derailed by misapplication of the antitrust laws. The importance and impact of such a decision on American patients cannot be understated.

An important new paper was recently posted to SSRN by Commissioner Joshua Wright and Joanna Tsai.  It addresses a very hot topic in the innovation industries: the role of patented innovation in standard setting organizations (SSO), what are known as standard essential patents (SEP), and whether the nature of the contractual commitment that adheres to a SEP — specifically, a licensing commitment known by another acronym, FRAND (Fair, Reasonable and Non-Discriminatory) — represents a breakdown in private ordering in the efficient commercialization of new technology.  This is an important contribution to the growing literature on patented innovation and SSOs, if only due to the heightened interest in these issues by the FTC and the Antitrust Division at the DOJ.

http://ssrn.com/abstract=2467939.

“Standard Setting, Intellectual Property Rights, and the Role of Antitrust in Regulating Incomplete Contracts”

JOANNA TSAI, Government of the United States of America – Federal Trade Commission
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JOSHUA D. WRIGHT, Federal Trade Commission, George Mason University School of Law
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A large and growing number of regulators and academics, while recognizing the benefits of standardization, view skeptically the role standard setting organizations (SSOs) play in facilitating standardization and commercialization of intellectual property rights (IPRs). Competition agencies and commentators suggest specific changes to current SSO IPR policies to reduce incompleteness and favor an expanded role for antitrust law in deterring patent holdup. These criticisms and policy proposals are based upon the premise that the incompleteness of SSO contracts is inefficient and the result of market failure rather than an efficient outcome reflecting the costs and benefits of adding greater specificity to SSO contracts and emerging from a competitive contracting environment. We explore conceptually and empirically that presumption. We also document and analyze changes to eleven SSO IPR policies over time. We find that SSOs and their IPR policies appear to be responsive to changes in perceived patent holdup risks and other factors. We find the SSOs’ responses to these changes are varied across SSOs, and that contractual incompleteness and ambiguity for certain terms persist both across SSOs and over time, despite many revisions and improvements to IPR policies. We interpret this evidence as consistent with a competitive contracting process. We conclude by exploring the implications of these findings for identifying the appropriate role of antitrust law in governing ex post opportunism in the SSO setting.

Anyone interested in antitrust enforcement policy (and what TOTM reader isn’t?) should read FTC Commissioner Josh Wright’s interview in the latest issue of The Antitrust Source.  The extensive (22 page!) interview covers a number of topics and demonstrates the positive influence Commissioner Wright is having on antitrust enforcement and competition policy in general.

Commissioner Wright’s consistent concern with minimizing error costs will come as no surprise to TOTM regulars.  Here are a few related themes emphasized in the interview:

A commitment to evidence-based antitrust.

Asked about his prior writings on the superiority of “evidence-based” antitrust analysis, Commissioner Wright explains the concept as follows:

The central idea is to wherever possible shift away from casual empiricism and intuitions as the basis for decision-making and instead commit seriously to the decision-theoretic framework applied to minimize the costs of erroneous enforcement and policy decisions and powered by the best available theory and evidence.

This means, of course, that discrete enforcement decisions – should we bring a challenge or not? – should be based on the best available empirical evidence about the effects of the practice or transaction at issue. But it also encompasses a commitment to design institutions and structure liability rules on the basis of the best available evidence concerning a practice’s tendency to occasion procompetitive or anticompetitive effects. As Wright explains:

Evidence-based antitrust encompasses a commitment to using the best available economic theory and empirical evidence to make [a discrete enforcement] decision; but it also stands for a much broader commitment to structuring antitrust enforcement and policy decision-making. For example, evidence-based antitrust is a commitment that would require an enforcement agency seeking to design its policy with respect to a particular set of business arrangements – loyalty discounts, for example – to rely upon the existing theory and empirical evidence in calibrating that policy.

Of course, if the FTC is committed to evidence-based antitrust policy, then it will utilize its institutional advantages to enhance the empirical record on practices whose effects are unclear. Thus, Commissioner Wright lauds the FTC’s study of – rather than preemptive action against – patent assertion entities, calling it “precisely the type of activity that the FTC is well-suited to do.”

A commitment to evidence-based antitrust also means that the agency shouldn’t get ahead of itself in restricting conduct with known consumer benefits and only theoretical (i.e., not empirically established) harms. Accordingly, Commissioner Wright says he “divorced [him]self from a number of recommendations” in the FTC’s recent data broker report:

For the majority of these other recommendations [beyond basic disclosure requirements], I simply do not think that we have any evidence that the benefits from Congress adopting those recommendations would exceed the costs. … I would need to have some confidence based on evidence, especially about an area where evidence is scarce. I’m not comfortable relying on my priors about these activities, especially when confronted by something new that could be beneficial. … The danger would be that we recommend actions that either chill some of the beneficial activity the data brokers engage in or just impose compliance costs that we all recognize get passed on to consumers.

Similarly, Commissioner Wright has opposed “fencing-in” relief in consent decrees absent evidence that the practice being restricted threatens more harm than good. As an example, he points to the consent decree in the Graco case, which we discussed here:

Graco employed exclusive dealing contracts, but we did not allege that the exclusive dealing contracts violated the antitrust laws or Section 5. However, as fencing-in relief for the consummated merger, the consent included prohibitions on exclusive dealing and loyalty discounts despite there being no evidence that the firm had employed either of those tactics to anticompetitive ends. When an FTC settlement bans a form of discounting as standard injunctive relief in a merger case without convincing evidence that the discounts themselves were a competitive problem, it raises significant concerns.

A commitment to clear enforcement principles.

At several points throughout the interview, Commissioner Wright emphasizes the value of articulating clear principles that can guide business planners’ behavior. But he’s not calling for a bunch of ex ante liability rules. The old per se rule against minimum resale price maintenance, for example, was clear – and bad! Embracing overly broad liability rules for the sake of clarity is inconsistent with the evidence-based, decision-theoretic approach Commissioner Wright prefers. The clarity he is advocating, then, is clarity on broad principles that will govern enforcement decisions.  He thus reiterates his call for a formal policy statement defining the Commission’s authority to prosecute unfair methods of competition under Section 5 of the FTC Act.  (TOTM hosted a blog symposium on that topic last summer.)  Wright also suggests that the Commission should “synthesize and offer high-level principles that would provide additional guidance” on how the Commission will use its Section 5 authority to address data security matters.

Extension, not extraction, should be the touchstone for Section 2 liability.

When asked about his prior criticism of FTC actions based on alleged violations of licensing commitments to standards development organizations (e.g., N-Data), Commissioner Wright emphasized that there should be no Section 2 liability in such cases, or similar cases involving alleged patent hold-up, absent an extension of monopoly power. In other words, it is not enough to show that the alleged bad act resulted in higher prices; it must also have led to the creation, maintenance, or enhancement of monopoly power.  Wright explains:

The logic is relatively straightforward. The antitrust laws do not apply to all increases of price. The Sherman Act is not a price regulation statute. The antitrust laws govern the competitive process. The Supreme Court said in Trinko that a lawful monopolist is allowed to charge the monopoly price. In NYNEX, the Supreme Court held that even if that monopolist raises its price through bad conduct, so long as that bad conduct does not harm the competitive process, it does not violate the antitrust laws. The bad conduct may violate other laws. It may be a fraud problem, it might violate regulatory rules, it may violate all sorts of other areas of law. In the patent context, it might give rise to doctrines like equitable estoppel. But it is not an antitrust problem; antitrust cannot be the hammer for each and every one of the nails that implicate price changes.

In my view, the appropriate way to deal with patent holdup cases is to require what we require for all Section 2 cases. We do not need special antitrust rules for patent holdup; much less for patent assertion entities. The rule is simply that the plaintiff must demonstrate that the conduct results in the acquisition of market power, not merely the ability to extract existing monopoly rents. … That distinction between extracting lawfully acquired and existing monopoly rents and acquiring by unlawful conduct additional monopoly power is one that has run through Section 2 jurisprudence for quite some time.

In light of these remarks (which remind me of this excellent piece by Dennis Carlton and Ken Heyer), it is not surprising that Commissioner Wright also hopes and believes that the Roberts Court will overrule Jefferson Parish’s quasi-per se rule against tying. As Einer Elhauge has observed, that rule might make sense if the mere extraction of monopoly profits (via metering price discrimination or Loew’s-type bundling) was an “anticompetitive” effect of tying.  If, however, anticompetitive harm requires extension of monopoly power, as Wright contends, then a tie-in cannot be anticompetitive unless it results in substantial foreclosure of the tied product market, a necessary prerequisite for a tie-in to enhance market power in the tied or tying markets.  That means tying should not be evaluated under the quasi-per se rule but should instead be subject to a rule of reason similar to that governing exclusive dealing (i.e., some sort of “qualitative foreclosure” approach).  (I explain this point in great detail here.)

Optimal does not mean perfect.

Commissioner Wright makes this point in response to a question about whether the government should encourage “standards development organizations to provide greater clarity to their intellectual property policies to reduce the likelihood of holdup or other concerns.”  While Wright acknowledges that “more complete, more precise contracts” could limit the problem of patent holdup, he observes that there is a cost to greater precision and completeness and that the parties to these contracts already have an incentive to put the optimal amount of effort into minimizing the cost of holdup. He explains:

[M]inimizing the probability of holdup does not mean that it is zero. Holdup can happen. It will happen. It will be observed in the wild from time to time, and there is again an important question about whether antitrust has any role to play there. My answer to that question is yes in the case of deception that results in market power. Otherwise, we ought to leave the governance of what amount to contracts between SSO and their members to contract law and in some cases to patent doctrines like equitable estoppel that can be helpful in governing holdup.

…[I]t is quite an odd thing for an agency to be going out and giving advice to sophisticated parties on how to design their contracts. Perhaps I would be more comfortable if there were convincing and systematic evidence that the contracts were the result of market failure. But there is not such evidence.

Consumer welfare is the touchstone.

When asked whether “there [are] circumstances where non-competition concerns, such as privacy, should play a role in merger analysis,” Commissioner Wright is unwavering:

No. I think that there is a great danger when we allow competition law to be unmoored from its relatively narrow focus upon consumer welfare. It is the connection between the law and consumer welfare that allows antitrust to harness the power of economic theory and empirical methodologies. All of the gains that antitrust law and policy as a body have earned over the past fifty or sixty years have been from becoming more closely tethered to industrial organization economics, more closely integrating economic thought in the law, and in agency discretion and decision-making. I think that the tight link between the consumer welfare standard and antitrust law is what has allowed such remarkable improvements in what effectively amounts to a body of common law.

Calls to incorporate non-economic concerns into antitrust analysis, I think, threaten to undo some, if not all, of that progress. Antitrust law and enforcement in the United States has some experience with trying to incorporate various non-economic concerns, including the welfare of small dealers and worthy men and so forth. The results of the experiment were not good for consumers and did not generate sound antitrust policy. It is widely understood and recognized why that is the case.

***

Those are just some highlights. There’s lots more in the interview—in particular, some good stuff on the role of efficiencies in FTC investigations, the diverging standards for the FTC and DOJ to obtain injunctions against unconsummated mergers, and the proper way to analyze reverse payment settlements.  Do read the whole thing.  If you’re like me, it may make you feel a little more affinity for Mitch McConnell.

A study released today by the Heritage Foundation (authored by Christopher M. Pope) succinctly describes the inherently anticompetitive nature of Obamacare, which will tend to inflate prices, not reduce costs:

“The growth of monopoly power among health care providers bears much responsibility for driving up the cost of health care over recent years. By mandating that general hospitals provide uncompensated care, state and federal legislators have given them cause to insist on regulations and discriminatory subsidies to protect them from cheaper competitors. Instead of freeing these markets to allow the provision of care by the most efficient organizations, the Affordable Care Act endorses these anti-competitive arrangements. It extends the premium paid for treatment in general hospitals, employs the purchasing power of the Medicare program to encourage the consolidation of medical practices, and reforms insurance law to eliminate many of the margins for competition between carriers. Institutions sheltered from competition tend to accumulate unnecessary costs over time. In the absence of pro-competitive reforms, higher spending under Obamacare is likely to only further inflate prices faced by those seeking affordable care.”

In short, as the study demonstrates, “[t]he shackling of competition is an essential feature of Obamacare, not a bug.” Accordingly, Obamacare’s enactors (Congress) and implementers (especially HHS) could benefit from a dose of competition advocacy aimed at reforming this welfare-destructive regulatory system. The study highlights particular worthwhile reforms:

“■Refuse to prop up monopoly power. Government regulation and spending should not shield dominant providers from competitors. Monopolies are irresponsive to the needs of patients and payers. They are an unreliable method of subsidizing care that tends to both lower quality and inflate costs.

■Repeal certificate-of-need laws. Legislative constraints on the construction of additional medical capacity should be repealed. Innovative providers should be allowed to expand or establish new facilities that challenge incumbents with lower prices and better quality.

■Subsidize patients, not providers. Public policies should be provider-neutral. Payments should reimburse providers for providing care, period. In particular, publicly funded programs should not operate payment systems designed to keep certain providers in business regardless of the quality, volume, or cost of the treatments they provide. If some individuals are unable to pay for their care, policymakers should subsidize such needy individuals directly.

■Allow patients to shop around. Wherever possible governments and employers should put patients in control of the funds expended on their care, and permit them to keep any savings they obtain from seeking out more efficient providers.

■Repeal Obamacare and its mandates. Forcing individuals to purchase standardized health insurance establishes a captive market, making it easier for providers, insurers, and regulators to degrade services and inflate costs with impunity. Repealing Obamacare and its purchase mandates is essential to creating a market in which suppliers have the flexibility to respond to consumer demands for better value for their money.”

Perhaps the Federal Trade Commission, which has a substantial interest in promoting procompetitive health care policies, might consider holding a workshop exploring the merits of these reform proposals, as part of its ongoing initiatives in the health care area. (Commendably, and consistent with one of the Heritage study’s key recommendations, the FTC already has advocated in favor of the repeal of certificate-of-need laws.)

The Federal Trade Commission’s recent enforcement actions against Amazon and Apple raise important questions about the FTC’s consumer protection practices, especially its use of economics. How does the Commission weigh the costs and benefits of its enforcement decisions? How does the agency employ economic analysis in digital consumer protection cases generally?

Join the International Center for Law and Economics and TechFreedom on Thursday, July 31 at the Woolly Mammoth Theatre Company for a lunch and panel discussion on these important issues, featuring FTC Commissioner Joshua Wright, Director of the FTC’s Bureau of Economics Martin Gaynor, and several former FTC officials. RSVP here.

Commissioner Wright will present a keynote address discussing his dissent in Apple and his approach to applying economics in consumer protection cases generally.

Geoffrey Manne, Executive Director of ICLE, will briefly discuss his recent paper on the role of economics in the FTC’s consumer protection enforcement. Berin Szoka, TechFreedom President, will moderate a panel discussion featuring:

  • Martin Gaynor, Director, FTC Bureau of Economics
  • David Balto, Fmr. Deputy Assistant Director for Policy & Coordination, FTC Bureau of Competition
  • Howard Beales, Fmr. Director, FTC Bureau of Consumer Protection
  • James Cooper, Fmr. Acting Director & Fmr. Deputy Director, FTC Office of Policy Planning
  • Pauline Ippolito, Fmr. Acting Director & Fmr. Deputy Director, FTC Bureau of Economics

Background

The FTC recently issued a complaint and consent order against Apple, alleging its in-app purchasing design doesn’t meet the Commission’s standards of fairness. The action and resulting settlement drew a forceful dissent from Commissioner Wright, and sparked a discussion among the Commissioners about balancing economic harms and benefits in Section 5 unfairness jurisprudence. More recently, the FTC brought a similar action against Amazon, which is now pending in federal district court because Amazon refused to settle.

Event Info

The “FTC: Technology and Reform” project brings together a unique collection of experts on the law, economics, and technology of competition and consumer protection to consider challenges facing the FTC in general, and especially regarding its regulation of technology. The Project’s initial report, released in December 2013, identified critical questions facing the agency, Congress, and the courts about the FTC’s future, and proposed a framework for addressing them.

The event will be live streamed here beginning at 12:15pm. Join the conversation on Twitter with the #FTCReform hashtag.

When:

Thursday, July 31
11:45 am – 12:15 pm — Lunch and registration
12:15 pm – 2:00 pm — Keynote address, paper presentation & panel discussion

Where:

Woolly Mammoth Theatre Company – Rehearsal Hall
641 D St NW
Washington, DC 20004

Questions? – Email mail@techfreedom.orgRSVP here.

See ICLE’s and TechFreedom’s other work on FTC reform, including:

  • Geoffrey Manne’s Congressional testimony on the the FTC@100
  • Op-ed by Berin Szoka and Geoffrey Manne, “The Second Century of the Federal Trade Commission”
  • Two posts by Geoffrey Manne on the FTC’s Amazon Complaint, here and here.

About The International Center for Law and Economics:

The International Center for Law and Economics is a non-profit, non-partisan research center aimed at fostering rigorous policy analysis and evidence-based regulation.

About TechFreedom:

TechFreedom is a non-profit, non-partisan technology policy think tank. We work to chart a path forward for policymakers towards a bright future where technology enhances freedom, and freedom enhances technology.