Site icon Truth on the Market

Carl Shapiro on BCBS and the New Merger Guidelines

?Carl Shapiro’s (DOJ) speech at the ABA Fall Forum contains (at least) two interesting tidbits worth highlighting for TOTM readers.  The first is a discussion of the DOJ’s case against Blue Cross Blue Shield, which as discussed here, turns on an economic analysis of the use of most-favored nations clauses in contractual arrangements with hospitals:

On October 18th of this year, the Division and the Michigan Attorney General filed a civil antitrust lawsuit against Blue Cross Blue Shield of Michigan (“Blue Cross”).8  These MFNs come in two general forms. Blue Cross has existing agreements with 22 hospitals that require the hospital to charge some or all other commercial insurers The complaint alleges that provisions of Blue Cross’s agreements with hospitals raise hospital prices, prevent other insurers from entering the marketplace, and discourage hospital discounts. The challenged provisions are known as most-favored nation (MFN) clauses. The MFNs at issue here are contractual clauses between Blue Cross and hospitals that limit the discounts these hospitals can offer to Blue Cross’s competitors.

These MFNs come in two general forms. Blue Cross has existing agreements with 22 hospitals that require the hospital to charge some or all other commercial insurers more than the hospital charges Blue Cross, typically by a specified percentage differential. These are “MFN-plus” agreements.   In addition, Blue Cross has entered into agreements containing MFNs with more than 40 small, community hospitals, which typically are the only hospitals in their communities, requiring the hospitals to charge other commercial health insurers at least as much as they charge Blue Cross. These are “equal-to MFN” agreements.  Blue Cross has also entered into equal-to MFNs with some larger hospitals.

We evaluated Blue Cross’s MFN agreements under the rule of reason. We concluded that Blue Cross raised its own costs in order to disadvantage its rivals:

Blue Cross has sought and obtained MFNs in many hospital contracts in exchange for increases in the prices it pays for the hospitals’ services. In these instances, Blue Cross has purchased protection from competition by causing hospitals to raise the minimum prices they can charge to Blue Cross’ competitors, but in doing so has also increased its own costs. Blue Cross has not sought or used MFNs to lower its own cost of obtaining hospital services.9  Blue Cross’s use of MFNs in Michigan has been widespread. Blue Cross has used MFNs or similar clauses in its contracts with at least 70 of Michigan’s 131 general acute care hospitals, including many major hospitals in the state. Our complaint alleges that Blue Cross’s MFNs have likely increased prices for health insurance sold by Blue Cross and its competitors and prices for hospital services paid by insureds and self-insured employers.

Not a ton there other than repeating what is in the Complaint, but worth reading for those interested in the case.

A second part of the speech worth highlighting is Shapiro’s discussion of the Horizontal Merger Guidelines (HT: Steve Salop).  The Guidelines are new, and have been criticized for sacrificing actual firm guidance provided to business firms for increased elaboration on the variety of methods used by the agencies.  Thus, guidance on existing ambiguities is a good thing.  There appears to be some of that in the Shapiro speech where he discussed the New Guidelines Section 6.1, which reads:

If the value of diverted sales is proportionately small, significant unilateral price effects are unlikely. For this purpose, the value of diverted sales is measured in proportion to the lost revenues attributable to the reduction in unit sales resulting from the price increase. Those lost revenues equal the reduction in the number of units sold of that product multiplied by that product’s price.

There has been some debate over what constitutes a sufficiently small value of diverted sales to render unilateral price effects unlikely.  Shapiro offers the following clarification:

The 2010 Guidelines state that unilateral price effects for differentiated products are unlikely if the GUPPI is small. Since 1982, under the Guidelines a “small but significant increase in price” has usually corresponded to a 5% increase in price. Current Division practice is to treat the value of diverted sales as proportionately small if it is no more than 5% of the lost revenues.  Put differently, unilateral price effects for a given product are unlikely if the gross upward pricing pressure index for that product is less than 5%.

This is useful information.   As of now, Shapiro is outpointing his Berkeley Economics colleague at the Federal Trade Commission in policy speeches — though I’m sure practitioners would be interested in hearing what the Commission has to say about these and similar issues.

There is at least one place where Shapiro overstates this case.  Perhaps the major critique of the new Guidelines has been the reduction in emphasis on market definition in favor of competitive effects.   While I’ve noted elsewhere that concerns with losing cases are sufficient to prevent the agencies from litigating a case without market definition in hand, many have voiced serious concerns about the agencies’ apparent willingness to bring cases without defining a market, or doing so as an afterthought.  To his credit, Shapiro takes on this concern directly:

One concern I have heard is that the revised Guidelines fail to place sufficient weight on market definition. I believe this concern is not well-founded. For starters, the revised Guidelines devote nearly 12 pages to product and geographic market definition, in comparison with just five pages in the 1992 Guidelines. More importantly, Section 4 of the Guidelines begins:

When the Agencies identify a potential competitive concern with a horizontal merger, market definition plays two roles. First, market definition helps specify the line of commerce and section of the country in which the competitive concern arises. In any merger enforcement action, the Agencies will normally identify one or more relevant markets in which the merger may substantially lessen competition. Second, market definition allows the Agencies to identify market participants and measure market shares and market concentration.

The Division recognizes the necessity of defining a relevant market as part of any merger challenge we bring. Criticism of the revised Guidelines suggesting otherwise is off the mark. It is true that we often do not start our merger investigations with market definition. However, that is no surprise to experienced practitioners, and that point was made quite explicitly in the 2006 Commentary of the Horizontal Merger Guidelines.

To call concerns that the agencies have reduced the weight placed on market definition overstated “not well-founded” seems a bit unfair.  I don’t think counting pages in the various versions of the Guidelines to value the “weightiness” of the consideration due to market definition offers much in the way of useful information.  Value of information and page count need not be correlated, and as any grader of first year law school exams can tell you, are often negatively correlated.  While I generally do not believe the agencies will, in fact, bring cases or try to bring cases without defining markets, lets consider the basis upon which those concerns are grounded.  Consider the following section in the new Guidelines discussing the role of market definition:

In any merger enforcement action, the Agencies will normally identify one or more relevant markets in which the merger may substantially lessen competition. Second, market definition allows the Agencies to identify market participants and measure market shares and market concentration. See Section 5. The measurement of market shares and market concentration is not an end in itself, but is useful to the extent it illuminates the merger’s likely competitive effects.

The Agencies’ analysis need not start with market definition. Some of the analytical tools used by the Agencies to assess competitive effects do not rely on market definition, although evaluation of competitive alternatives available to customers is always necessary at some point in the analysis.

First, the Guidelines note that the agencies will “normally identify one or more relevant markets” — not always.  Second, the Guidelines tell us that the measurement of shares and concentration that follow from market definition (which I agree should be deemphasized) are “not an end in itself” and only “useful to the extent it illuminates the merger’s likely competitive effects.”  It is nice to see Shapiro refer to the market definition task as a “necessity.”  But the Guidelines don’t say so.  And the response that the agencies might not start with market definition is irrelevant to the criticism.  A key question arises: if the Agencies considered market definition a “necessity,” why not say so?  Why not write: “market definition is required by Section 7 of the Clayton Act and the agencies will, at some point in the analysis, define a market”?  Those who criticize the agencies for failure to make the necessity of market definition crystal clear, after the public comment period revealed this was an issue for many practitioners, draw inferences from that failure that the agencies have some reason not to commit to market definition in all cases.  Will the agencies actually do so?  I don’t know.  But I would certainly not describe the concern as “not well founded.”  That said, as I’ve written, my view is that the much larger problem is the agencies’ failure to commit to not bringing cases where so-called “out-of-market” efficiencies outweigh “in-market” anticompetitive effects — a situation I believe will be much more common on the Guidelines’ new approach.

Regardless of my disagreement with this particular portion of Shapiro’s speech — these sorts of speeches are a service to the antitrust bar and complement the guidance provided by the Guidelines, and are to be commended.

Exit mobile version