Antitrust Developments and Enforcement Activities of the Obama Administration

March 21, 2010

Conventional wisdom holds that federal agency antitrust enforcement will increase under a Democratic administration, in contrast to somewhat more relaxed enforcement under a Republican administration.  With a Democratic administration now in place, the question becomes to what degree, and in what areas and in what ways, will antitrust enforcement increase?  And what enforcement activities have we observed so far?  Before he was elected, then-Senator Barack Obama issued a statement in response to questions by the American Antitrust Institute (“AAI”) providing some idea of the new direction of antitrust enforcement.  In that statement, Mr. Obama confirmed that he will reinvigorate antitrust enforcement and identified some of his antitrust priorities.  Healthcare was identified as a “key” industry and focus of enforcement.  Since then, President Obama’s selections to head the Department of Justice’s Antitrust Division (“DOJ”), Christine Varney, and the Federal Trade Commission (“FTC”), Jon Leibowitz, have made several statements reinforcing President Obama’s earlier statement.  Finally, both DOJ and the FTC have taken affirmative steps this year giving tangible meaning to these statements.

A. Administration Statements Concerning the Direction of Antitrust Enforcement

In his statement to the AAI, then-Senator Obama expressed his view that the Bush administration had perhaps the “weakest record of antitrust enforcement of any administration in the last half century,” going on to note that, between 2001 and 2006, the FTC and DOJ challenged only 33 mergers per year on average, in contrast with more than 70 challenges per year from 1996 to 2000.  He also commented that, under President Bush, DOJ did not bring a single monopolization case.  According to Mr. Obama, there have been adverse consequences of this reduced enforcement in the health care arena, where he noted that health insurance markets have become highly concentrated with 20 percent fewer health plans and higher premiums.

As a result, he stated that he would step up agency review of mergers and “take effective action to stop or restructure those mergers that are likely to harm consumer welfare.”  Mr. Obama also stated that his administration would reinvigorate the enforcement of antitrust laws against health care entities with monopoly power, and particularly against health insurance and pharmaceutical companies to ensure they are not abusing their monopoly power through unjustified price increases.

Finally, Mr. Obama was perhaps most specific concerning his enforcement priorities in the pharmaceutical area.  He stated that his administration would ensure that the antitrust laws “effectively prevent anticompetitive agreements that artificially retard the entry of generic pharmaceuticals onto the market.”  Since then, FTC Chairman Leibowitz stated that the new administration “recognize[s] that this is a real problem.”  He added that the FTC will take a two-pronged approach to stop these “pay-for-delay” settlements:  (1) challenging the agreements in court; and (2) supporting legislation prohibiting such agreements.   These types of agreements had been challenged by the FTC even under the prior administration, but without DOJ support; however, this area now promises to be one of increased government activity by both the FTC and DOJ and of increased cooperation between the agencies.

Additional insight regarding President Obama’s enforcement priorities can be derived from Assistant Attorney General Varney’s statements.  In two sets of remarks delivered on May 11 and 12, 2009, she outlined the DOJ’s enforcement agenda in more detail.  She too stated that the healthcare area would be a priority, and added that the DOJ would “contribute our experience and expertise to [the healthcare] reform efforts.”  She also made clear that vigorous antitrust enforcement is even more important during “times of economic distress,” noting that it was a mistake during the Great Depression to relax antitrust enforcement and then later attempt to rectify the problems that created.  She explained that inadequate antitrust oversight, among other factors, contributed to the then-current economic conditions and markets have not “self-policed” or “self-corrected.”  As a result, “these extreme conditions require a recalibration of economic and legal analysis and theories, and a clearer plan for action,” and Varney added that “passive monitoring of market participants is not an option.”  She hoped to encourage more small companies to bring complaints about anticompetitive behavior by their larger rivals to the DOJ.  Finally, as discussed in more detail below, she specifically stated that the DOJ would change direction from its policy under the prior administration and increase enforcement against dominant firms engaging in predatory conduct.[1]

B. More Challenges To Health Plan, Hospital, Pharmaceutical, and Physician Group Mergers

Consistent with President Obama’s and Ms. Varney’s statements, it seems likely that the agencies will step-up merger enforcement under Section 7 of the Clayton Act (which prohibits mergers that may substantially lessen competition) not only in health plan markets, but also with respect to hospitals, pharmaceutical manufacturer, and possibly even physician-practices in the upcoming years.[2]  For health plans and hospitals, as well as physicians, considering a potential merger with, or acquisition of, a competitor, this means paying closer attention to resulting market shares and concentration, as well as ensuring there are real prospective efficiencies that are merger-specific.  For physicians, this means ensuring that the merger results in an actual integration of practices and not merely in a sham arrangement simply designed to increase bargaining leverage.

Ms. Varney indicated during her confirmation testimony that DOJ may conduct retrospective reviews of recently-consummated mergers.  The FTC began retrospectively reviewing a number of hospital mergers during the prior administration, and in February 2009, it released two more retrospective studies of the post-merger price effects of hospital mergers.  One study looked at the New Hanover-Cape Fear transaction in North Carolina, and the other reviewed two hospital mergers on Chicago’s North Shore.  These studies revealed mixed results, reporting some evidence of post-merger price increases, but also indicating that some customers paid the same or lower prices.[3]

In the finance and banking sector, the government recently has allowed, indeed brokered, acquisitions of financially-distressed firms considered “too big to fail” that under different circumstances would have received close scrutiny by the antitrust agencies.  It is unlikely that the agencies under President Obama will adopt the same view in the healthcare arena.   As noted above, AAG Varney stated that the DOJ would “continue to push forward” merger investigations, specifically noting that “vigorous antitrust enforcement must play a significant role in the Government’s response to economic crises to ensure that markets remain competitive.[4]  The chief of DOJ’s healthcare enforcement section elaborated that the DOJ intended to carefully scrutinize hospital and health plan mergers and that there would be “considerable value” to litigating a hospital merger case in federal court to bring greater clarity to governing legal standards.

Significant examples of a more aggressive approach to merger enforcement include:

DOJ/FTC Review of U.S. Horizontal Merger Guidelines

On September 22, 2009, the Department of Justice (DOJ) and the Federal Trade Commission (FTC) announced that they would hold joint public workshops to obtain comments and explore possible revisions to the Horizontal Merger Guidelines (“Guidelines”), which outline the antitrust agencies’ merger enforcement framework.[5]  The Guidelines, which were last significantly revised in 1992, play a critical role in shaping analysis and outcomes in merger decisions both at the agencies and in the courts.

In announcing the project, Assistant Attorney General Varney stated: In light of legal and economic developments that have occurred since the last major revision of the guidelines, it is an appropriate time for the antitrust agencies to conduct a review of the guidelines to determine whether any revisions should be made . . . . Having guidelines that offer more clarity and better reflect agency practice provides for enhanced transparency and gives businesses greater certainty when making merger decisions, resulting in a more competitive marketplace that benefits consumers.

And, FTC Chairman Jon Leibowitz identified several key topics that will be considered: [T]he agencies’ use of direct evidence of anticompetitive effects as an indication that the merger may harm consumers, whether we should clarify how the agencies use the hypothetical monopolist test to define markets, whether we should update the description of how the agencies use concentration statistics like HHIs to understand the impact of a merger on the market, and whether we should add remedies to the guidelines as the EU has done.[6]

The first workshop, which will be open to the public, will be held in Washington, DC, on December 3, 2009.  Subsequent workshops will be held in Chicago, New York City, and San Francisco, with a final workshop in Washington, DC.

FTC Retrospective Review and Settlement with Carilion Clinic to Divest Virginia Outpatient Clinics

On August 6, 2009, Carilion Clinic and the Federal Trade Commission (FTC) settled their administrative litigation initiated by the FTC’s July 24, 2009, administrative complaint alleging that the Carilion Clinic’s 2008 acquisition of the Center for Advance Imaging (“CAI”) and Center for Surgical Excellence (“CSE”) eliminated competition in the markets for: (1) advanced outpatient imaging services sold to private payors, including commercial health plans; and (2) outpatient surgical services.[7]

In its complaint, the FTC sought divestiture of CAI and CSE, divestiture of before- or after-acquired physician practices that were the sources of referral support to CAI or participating CSE surgeons; a prohibition against any future transactions between CAI-CSE and Carilion, except as may be approved by the Commission; prior notice of all Carilion transactions; and periodic compliance reports.

In a joint motion to withdraw the matter from adjudication, Carilion and the FTC announced that they had reached a proposed consent agreement.  The proposed consent agreement contemplates “a remedy that completely restores the competition that was alleged to have been eliminated by the acquisition.” The proposed order stated that Carilion has offered to promptly divest all of the acquired assets—CAI and CSE—to a FTC-approved buyer.

This was the first challenge to an acquisition of outpatient centers since the FTC’s 1994 consent order in connection with Columbia/HCA’s acquisition of Medical Care America, pursuant to which Columbia/HCA was required to divest a surgery center in Alaska. This case may signal increased government interest in the outpatient services area, and it is another example of a retrospective review and challenge by the FTC of an already-consummated merger.

FTC Settlement of the Pfizer-Wyeth Merger Investigation

On October 14, 2009, the FTC announced a settlement resolving its wide-ranging investigation of Pfizer Inc.’s proposed $68 billion acquisition of Wyeth.  The settlement required significant divestitures to preserve competition in multiple U.S. markets for animal pharmaceuticals and vaccines. The FTC concluded that the transaction does not raise anticompetitive concerns in any human health product markets and issued a closing statement in relation to its findings in the human pharmaceutical area.[8]

Conflicting Reports on Payor Competition

The U.S. Government Accountability Office (“GAO”) has released a report on July 31, 2009, regarding research on the effects of consolidation in the private health insurance industry, which undercuts the view expressed by Administration officials that increased concentration from health plan mergers has resulted in anticompetitive effects that harm consumers.[9]  The GAO reported that the studies revealed that consolidation:

  • Did not cause significant or sustained increases in premiums;
  • Did not affect physicians’ rates, but did lower hospital rates;
  • Might have decreased the utilization of inpatient services;
  • Might have increased the utilization of primary- and specialty-care services;
  • Caused inconclusive effects on the quality of care;
  • Might have produced cost-savings effects for insurers and hospitals; and
  • Did not increase the profits of the insurers appreciably.

The GAO based its report on a review of forty-one peer-reviewed, independent studies; however, the studies focused on state or national-level geographic regions and almost entirely on the HMO markets. Accordingly, few conclusions can be drawn about any specific antitrust markets or types of health insurance company consolidation from the GAO report, because the studies did not necessarily look at geographic areas and types of health insurance products that would be viewed as relevant markets by the FTC or DOJ.

Conversely, other, provider-sponsored studies suggest that health plans have “near-monopolies” in some states.[10]  Two recent studies, conducted by Health Care for America NOW! (“HCAN”) and the American Hospital Association (“AHA”), conclude that many states — most of them ones in which a Blues plan is the market leader — lack competition in the health insurance market, thereby allowing health plans to raise premiums as they see fit. However, two multistate Blues plan operators contend that premium increases are driven primarily by medical costs. And at least one state insurance commissioner asserts that one reason the Blues plan in her state is the leader is that it is the only plan that has a truly statewide network.  The studies were sent to Assistant Attorney General Varney with a request that she review industry mergers and consolidation for anticompetitive effects.

C. Renewed Emphasis on Dominant Firm Exclusionary Conduct (Monopolization)

In addition to more scrutiny of mergers that may increase market power, monopolization cases under Section 2 of the Sherman Act (which prohibits unilateral exclusionary or predatory conduct by firms that have monopoly power) likely will take on increased importance as a way to enforce the antitrust laws against already dominant  entities.[11]  Section 2 enforcement has been virtually nonexistent under the Bush administration, which issued a report advocating standards under Section 2 (the “Section 2 Report”) that would have diminished the likelihood of agency enforcement or, for that matter, private litigation under that statute.  President Obama stated that this will change under the new administration.

In fact, one of Ms. Varney’s first actions was to withdraw the Section 2 Report, stating that it “no longer represents the policy of the Department of Justice with regard to antitrust enforcement under Section 2 of the Sherman Act.  The Report and its conclusions should not be used as guidance by courts, antitrust practitioners, and the business community.”[12]  Varney made clear that “vigorous antitrust enforcement action under Section 2 of the Sherman Act” will be part of the DOJ’s response to current market conditions, and, in her view, “the greatest weakness of the Section 2 Report is that it raises many hurdles to Government antitrust enforcement.”  Ms. Varney concluded that the DOJ will “go back to the basics” and evaluate single-firm conduct against “tried and true standards” from leading Section 2 cases and successful DOJ challenges “that set forth clear limitations on how monopoly firms are permitted to behave.”[13]

Reinvigorated enforcement under Section 2 of single-firm conduct under the new administration means that hospitals, health plans, physicians or other healthcare entities with monopoly power (i.e., a market share approaching or exceeding 65%) will need to exercise caution in “dictating” exclusivity and other contract terms in negotiations with other entities.  (Of course, even absent monopoly power, agreements with another party that unreasonably restrain competition may separately violate Section 1 of the Sherman Act.)[14]   Entities with substantial market power should also carefully consider the ramifications from engaging in any unilateral conduct that may exclude, or limit, competitors and allow the entity to obtain, or maintain, its monopoly power.  Since there are many hospitals, health plans and physician practice groups that arguably have monopoly power in defined geographic markets, increased federal agency enforcement under Section 2 will be a potential concern for many healthcare entities throughout the United States.  DOJ’s chief healthcare enforcer stated that his section also would focus on health plans using “monopsony” – i.e., buying – power against providers to reduce competition.

Because of the prior administration’s interpretation of Section 2 and resulting tepid enforcement of that statute – DOJ did not file a single Section 2 case during the prior eight years, there are few such cases in the pipeline (agency litigation begins as an investigation and generally takes years to develop).  As a result, the agencies will be more receptive to complaints concerning predatory conduct by dominant firms, and more active in pursuing them.

D. Increased Scrutiny of Hospital Responses to Staff Physician-Owned Facilities and Other Provider-Payor Exclusionary Arrangements

Consistent with several previous competition advocacy statements opposing conduct by general acute-care hospitals to exclude or limit competition by physician-owned facilities (such as single-specialty hospitals, ambulatory surgery centers, and other similar freestanding facilities that compete with services historically provided only by established full-service hospitals), it seems likely the federal agencies will take a more aggressive position and formally investigate, or even challenge, specific instances of such conduct by general hospitals under Section 2, Section 1, or both.  FTC Commissioner Rosch recently stated that the FTC may look more closely at this issue as an enforcement priority.[15]  He noted that physician-owned facilities “raise a host of ethical and fiduciary duty concerns that complicate the competition issues,” but general hospitals’ responses that reduce the competitiveness of the physician-owned facilities may, where implemented through collective action, amount to illegal group boycotts or per se illegal price fixing.  He raised the possibility of the FTC using Section 5 of the FTC Act (which prohibits unfair methods of competition) to challenge such conduct and “identify what is acceptable behavior and what is not.”[16]

Additionally, the Section of Antitrust Law of the American Bar Association recommended the agencies scrutinize this issue, noting that this is a complex area where guidance from the agencies would help shape the application of antitrust laws to this issue.[17]  In particular, general acute-care hospitals that may possess monopoly, or substantial market, power should carefully evaluate any conduct, such as “economic” or “conflict-of-interest credentialing,” or exclusive contracting with health plans, initiated to respond to competition by physician-owned facilities.  One significant element of this evaluation should include considering the general hospital’s rationale or justifications for engaging in these types of conduct.

In addition, AAG Varney stated that the DOJ under her leadership would pursue vertical theories, and these theories would apply to such provider-payor exclusive contracting.  Similarly, the chief of DOJ’s healthcare enforcement section specifically stated that the DOJ would carefully scrutinize agreements between large health plans and large providers that are used to maintain their respective market dominance by impeding entry or expansion by competitors (which would include not only physician-owned facilities, but also rival hospitals and health plans).

E. Continued Emphasis on Physician and Other Provider Cartel Activity

During the Bush administration, the FTC actively prosecuted physicians and other health care providers for engaging in price-fixing and other cartel activities that allegedly restrained competition and drove up health care costs, and it is likely that antitrust enforcement against provider-contracting networks that engage in collective negotiations but are not financially or clinically integrated will remain a priority.  Provider organizations that engage in integrative activities, such as implementing processes to collaboratively improve quality and invest in information technology, though, should find favor with the Obama administration.

Examples of recent enforcement activity and guidance concerning physician organizations include:

FTC Price-Fixing Claims Against Alta Bates Medical Group

On July 10, 2009, the Federal Trade Commission (FTC) approved a final consent order settling charges that Alta Bates Medical Group (“ABMG”), a 600-physician independent practice association in the San Francisco Bay area, fixed prices charged to healthcare insurers and engaged in an unlawful concerted refusal to deal with one payor, Kaiser Permanente Insurance Corporation (Kaiser).[18]  The Alta Bates’ order is the latest example that physician groups that negotiate fee-for-service contracts on behalf of their member physicians without having demonstrated adequate clinical or financial integration will continue to face strict FTC scrutiny.

First, according to the FTC’s complaint, ABMG entered into agreements with its member physicians to fix prices regarding their physicians’ fee-for-service contracts by operating an unlawful “messenger model.” Lawful messenger models do not involve collective negotiation or coordination among physicians on proposed contract terms.  In this case, however, the FTC alleged that ABMG decided what rates and other contract terms to use in communications with preferred provider organizations (PPO) and orchestrated collective negotiations for fee-for-service contracts by failing to submit unfavorable payor proposals to physicians, suggesting terms that would be acceptable to its members without obtaining such information first from the physicians and cautioning its members from dealing with payors on an individual basis.

Second, the FTC alleged that ABMG engaged in an unlawful concerted refusal to deal when it notified Kaiser that ABMG physicians would not provide services to certain Kaiser health plan members.  Even though ABMG’s refusal to deal was unsuccessful, the FTC alleged that the sole purpose of this conduct was to impede competition in the provision of physician services in and around Berkeley and Oakland, CA.

The FTC maintained that ABMG’s price-fixing and collective refusal to deal were not reasonably related to any efficiency-enhancing integration among ABMG physicians. According to the FTC, ABMG physicians had not clinically or financially integrated their practices to create efficiencies sufficient to justify their collective activities.

The FTC’s consent order prohibits ABMG from negotiating and entering into agreements on behalf of its member physicians on a fee-for-service basis. The order also requires ABMG to notify the FTC within sixty days after any agreement by ABMG to act as an agent or messenger on behalf of any physician or medical group. Payors that contracted with ABMG on a fee-for-service basis after 2001 will be able to terminate their contracts without penalty. (The FTC did not challenge and the consent order does not address ABMG’s activities concerning capitated payment contracts.)

The Alta Bates settlement is the latest in an almost ten-year string of agency enforcement actions against physician groups who lack sufficient clinical or financial integration to justify joint contracting activities. Also this past year, the FTC obtained a settlement with AllCare IPA (AllCare) and Boulder Valley Independent Practice Association (Boulder Valley) regarding similar allegations that AllCare and Boulder Valley had conspired to fix prices for its members’ fee-for-service contracts.

North Texas Specialty Physicians (“NTSP”) v. FTC

In February 2009, the Supreme Court denied NTSP’s request to review a Fifth Circuit’s decision that upheld the FTC’s finding that a physician group’s non-risk contracting activities constituted price-fixing. The FTC rejected NTSP’s argument that it operated as a “single entity” and concluded that NTSP violated the antitrust laws by, among other things, conducting polls among its members regarding prices the physicians would charge on a fee-for-service basis, distributing the average figures to the physicians, and using those figures to establish a “minimum” price that NTSP physicians would accept. The court upheld the FTC’s substantive findings.

The ABMG consent order and the FTC’s recent victory in NTSP demonstrate that physician groups that are neither clinically nor financially integrated run a serious risk of antitrust scrutiny for collectively negotiating non-risk contract terms with health insurers.

FTC’s TriState Clinical Integration Advisory Opinion

The FTC issued an advisory opinion on April 13, 2009, stating that it would not challenge a plan by TriState Health Partners Inc. (“TriState”), a PHO in Hagerstown, MD, seeking to jointly negotiate with health plans and self-insured employers pursuant to a clinical integration program.[19]  The TriState letter is the first advisory opinion discussing a clinical integration program with active hospital participation.

TriState proposed to integrate and coordinate the provision of medical care services to its patients as well as with the Washington County Hospital, and to improve quality and reduce the costs of care in the process. Under the program, physicians: will be subject to an array of performance requirements including adherence to clinical practice guidelines being developed by TriState members; must make financial and personal contributions of time and effort toward the program’s success, such as working on committees and helping to monitor their peers’ performance; will be required to use other providers within the network when making referrals; and will share a web-based health information technology system (including electronic medical records) that TriState claims will “facilitate the exchange of patients’ treatment and medical management information.” TriState’s program will be nonexclusive, thereby allowing purchasers and payors to contract directly with TriState’s individual members if they so choose or to have access to the services of Washington County Hospital without being obligated to participate in TriState’s program.

The FTC concluded that the “integration among the participating physicians in the program . . . appears to have the potential to result in significant efficiencies, both in terms of cost and quality, in the delivery of medical services to patients covered under payer contracts for the program.” The FTC’s advisory opinion also stated that TriState’s joint negotiation of contracts with payors on behalf of its physician members appears to be “subordinate and reasonably related to TriState’s members’ . . . integration through the proposed program, and appears reasonably necessary to achieve the potential efficiencies of that program.” Finally, the FTC concluded that it was unlikely that TriState would be able to attain, increase, or exercise market power for itself or its participants as a result of implementing the proposed program.

The TriState advisory opinion is the third favorable advisory opinion issued by the FTC to a clinical integration program. The previous opinions came in 2007 when the FTC approved a plan by the Greater Rochester Independent Physicians’ Association in Rochester, NY, and in 2002 when the staff issued its advisory opinion approving MedSouth’s proposal to clinically integrate a group of competing physicians in the Denver area. The FTC staff revisited the MedSouth arrangement in 2007 and confirmed its favorable opinion.  The TriState opinion is noteworthy because its tone is generally is more positive than the preceding opinions, the letter concludes that the investment of sweat capital is equally, if not more, important than investment of monetary capital, and the FTC once again acknowledges that health care providers are in the best position to identify best practices and determine means of controlling costs while delivering high quality care.

F. More Consistent Opposition to Competition-Reducing Conduct in the Pharmaceutical Area

In contrast to the previous administration, where the DOJ actually opposed the FTC’s attempt to obtain U.S. Supreme Court review of the agreements between brand-name and generic pharmaceutical manufacturers to delay entry of generic drugs, the DOJ under AAG Varney has expressly stated that it will now join the FTC in opposing these “pay to delay” agreements.  Recent agency and legislative actions include:

DOJ Brief: In re Ciproflaxin Hydrochloride Antitrust Litigation 

The DOJ has changed course to formally align itself with the Federal Trade Commission in opposition to reverse payment settlements in the pharmaceutical industry. On July 6, 2009, the DOJ filed a brief with the Second Circuit (at the court’s invitation) in In re Ciproflaxin Hydrochloride Antitrust Litigation which marks the DOJ’s first formal opposition to reverse payment settlements, i.e., settlements of patent disputes in which the brand drug-maker makes a “reverse” or “exclusion” payment to the would-be generic competitor to delay its entry into the relevant drug market.[20] This represents a significant departure from the DOJ of the Bush era, which took a stance contrary to the FTC’s before the U.S. Supreme Court, even criticizing its sister agency’s “high degree of suspicion of any reverse payment settlement.”

House Energy and Commerce Committee Exclusion Payment Bill 

In addition to court challenges, the FTC and DOJ support legislative efforts to outlaw these agreements.  As an amendment to the House of Representatives healthcare reform bill, H.R. 3200, “America’s Affordable Health Choices Act,” the House Energy and Commerce Committee passed the “Protecting Consumer Access to Generic Drugs Act,” H.R. 1706, a bill that makes “exclusion payments” in pharmaceutical settlements per se unlawful under the antitrust laws.[21]

The Hatch-Waxman Act, which governs the procedure for approving generic drugs, requires any company seeking to market a new generic drug to file an application with the Food and Drug Administration (“FDA”).  In recent years, generic application filers have settled claims by patent holders that their generic drug infringes patents by agreeing to delay market entry in exchange for a payment from the brand drug manufacturer to the generic drug company. In other cases, the generic filer and patent holder agree to launch an authorized generic in exchange for “reverse” royalty payments.

As currently drafted, the amendment prohibits direct or indirect payments to a generic filer for agreeing to limit, forgo research, development, manufacturing, marketing, or sales of any generic drug that is to be manufactured under the FDA application process. The bill includes an exception to allow generic filers and patent holders to settle such litigation for an appropriate amount based on the value of the right to market the generic and waiver of the infringement claim. The bill empowers the FTC to bring enforcement actions under Section Five of the FTC Act.

On July 31, 2009, FTC Chairman Leibowitz stated that if passed, the bill would end “sweetheart deals between brand and generic pharmaceutical companies” that delay generic entry. Chairman Leibowitz estimated that this provision will save consumers $3.5 billion per year and “advance the cause of affordable healthcare for all Americans.” Both as FTC chairman and previously as a commissioner, Chairman Leibowitz has been a vocal opponent of reverse payment patent settlements, noting that the FTC “has made stopping these deals a top priority.”[22]

FTC Interim Report on “Authorized Generic” Drugs

As another part of its efforts in the pharmaceutical area, the FTC issued “Authorized Generics: An Interim Report” on June 24, 2009, based on a study of the short-term and long-term effects of “authorized generics” on competition in the prescription drug marketplace. An authorized generic exists when a pharmaceutical manufacturer sells a drug under both a brand-name and generic label. The FTC conducted the study in response to requests from Congress. This issue is relevant both to current legislative debates about “reverse payment settlements” and health care reform.

The FTC Interim Report examined the short-term effects of authorized generics during an initial period of generic competition. It has become increasingly common for brand-name drug makers to begin marketing authorized generics at the same time the independent generic firm is beginning its 180-day marketing exclusivity period, leading to questions about the effects of authorized generics on pharmaceutical competition.

The Interim Report concludes that such brand-generic agreements to delay introducing both independent generics and authorized generics can harm consumers in two ways. First, generic drugs, and the accompanying price discounts, would not be available to consumers as soon as otherwise would have been the case. Because generic drugs are often priced substantially below the price of branded drugs, overall prescription drug costs could be significantly increased by even a few additional months during which only the brand drug is available. Second, consumers would lose the benefit of price discounts from authorized generic competition during the 180-day marketing exclusivity period, because the brand has agreed not to compete against the generic drug during that time.

G. Legislative Competition Advocacy in the Healthcare Area

DOJ Antitrust Division Assistant AG Testimony on the Repeal of Antitrust Exemptions for Health Insurers

On October 8 and 14, 2009, the House Judiciary Committee’s Courts and Competition Policy Subcommittee and the Senate Judiciary Committee, respectively, conducted hearings on proposed legislation eliminating the health insurance industry’s exemption from the federal antitrust laws under the McCarran-Ferguson Act of 1945. The proposed legislation, entitled the Health Insurance Industry Antitrust Enforcement Act of 2009, would specifically prohibit price-fixing, bid-rigging and market allocation in the health insurance industry.

Assistant Attorney General Varney testified at the October 14, 2009 Senate Judiciary Committee hearing.  Varney stated that the Department of Justice (DOJ) is generally opposed to exemptions from the antitrust laws. She noted that the “alleged need” for any exemption should be considered in light of the flexibility of the antitrust laws to recognize when procompetitive behavior that otherwise would violate the antitrust laws enhances competition. According to Varney, “the crucial importance [of the antitrust laws] to the economy strongly argue[s] against antitrust exemptions that are not clearly and convincingly justified.”  Varney specifically testified that the justifications for the McCarran-Ferguson that existed in 1945 likely “are no longer valid today,” because the state action defense which was undeveloped at the time of passage of McCarran-Ferguson, has since achieved clarity in the courts, and the application of the antitrust laws to potentially procompetitive activity has become more sophisticated since the passage of the McCarran-Ferguson Act.

Varney concluded by saying that DOJ generally supports the idea of repealing antitrust exemptions, but took no position as to whether Congress should address the issue. She noted that, “the Department supports efforts to bring more competition to the health insurance marketplace that lower costs, expand choice, and improve quality for families, businesses, and government. As you know, the Administration has been working with the Congress to enact health care reform that lowers costs and offers affordable coverage to all Americans.”

[23] In his weekly address on October 17, 2009, President Obama expressed support for Congress’ review of the antitrust exemption, but did not directly endorse the proposed legislation.

The U.S. House of Representatives Subcommittee on Courts and Competition Policy held similar hearings on October 8, 2009, on an identical bill in the House of Representatives, H.R. 3596, sponsored by Representative John Conyers, Jr. (D-MI).  On October 21, the House Judiciary Committee voted 20-9 to approve legislation aimed at repealing the antitrust exemption for health insurers. The Committee endorsed a middle-of-the-road approach by including safe harbors that permit joint action for data pooling and actuarial calculations.   An October 23, 2009 Congressional Budget Office Cost Estimate stated that the cost of this bill would not be significant because the DOJ stated “it would apply to a small number of offenders,” which recognizes that health plan mergers and health plan-provider network contracting – the source of most antitrust disputes – already are not protected by the exemption.  Accordingly, its repeal will have little impact on agency enforcement.

[1]  See Christine Varney, Vigorous Antitrust Enforcement In This Challenging Era, Remarks prepared for the Center for American Progress (May 11, 2009), available at http://www.usdoj.gov/atr/public/speeches/245711.htm.

[2]  Section 7 of the Clayton Act states:  “No person  . . . engaged in any activity affecting commerce shall acquire, directly or indirectly, the . . . stock . . . and no person . . . shall acquire . . . the assets of another person . . ., where in any line of commerce . . . in any section of the country, the effect of such acquisition may be substantially to lessen competition, or to tend  to create a monopoly.”  15 U.S.C. § 18 (emphasis added).  In sum, Section 7 prohibits mergers and all other forms of acquisition that may have significant anticompetitive effects.  In addition, the merger need not actually lessen competition.  There only need be a “reasonable probability” that it will substantially lessen competition.  See generally Brown Shoe Co.  v. United States, 370 U.S. 294, 323 (1962) (noting that Congress used the term “may” “to indicate that its concern was with probabilities, not certainties”); United States v. Dairy Farmers of Am., Inc., 426 F.3d 850 (6th Cir. 2005).  Although private plaintiffs may challenge mergers, almost all cases are enforcement actions brought by the Antitrust Division or FTC.  And the vast majority of cases are brought prior to consummation as preliminary-injunction actions to block the merger, e.g., FTC v. Whole Foods Mkt., Inc., 548 F.3d 1028 (D.C. Cir. 2008), but the agencies recently have also retrospectively reviewed and challenged consummated mergers, e.g., Evanston Nw. Healthcare Corp., 2007-2 Trade Cas. (CCH) ¶ 75,814 (FTC 2007) (merger consummated in 2000, challenged by the FTC in 2004, and final order issued in 2008).

[3]  Available at http://www.ftc.gov/be/econwork.shtm.

[4]  See Varney, Vigorous Antitrust Enforcement In This Challenging Era, available at http://www.usdoj.gov/atr/public/speeches/245711.htm.

[5]   http://www.ftc.gov/opa/2009/09/mgr.shtm

[6] http://www.healthlawyers.org/Members/PracticeGroups/Antitrust/emailalerts/Documents/Leibowitz.pdf

[7]   http://www.ftc.gov/os/adjpro/d9338/index.shtm

[8]   See FTC’s press release with a link to the Commission’s Statement and consent decree papers, available at:  http://www.ftc.gov/opa/2009/10/pfizer.shtm

[9] www.healthlawyers.org/Members/PracticeGroups/PPMC/emailalerts/Documents/

GAOPayorCompetitionReport.pdf

[10]  See The AIS Report on Blue Cross and Blue Shield Plans,  http://www.aishealth.com/Products/NewsBLU.html

[11]  Section 2 states: “Every person who shall monopolize, attempt to monopolize, or combine or conspire with any other person or persons, to monopolize any part of the trade or commerce among the several States . . . shall be deemed guilty of a felony . . . .”  15 U.S.C. § 2 (emphasis added).  Accordingly, Section 2 encompasses three violations: (1) monopolization, (2) attempted monopolization, (3) and conspiracies to monopolize.  Monopolization and attempted monopolization require no agreement as Section 1 violations do; instead, unilateral conduct by a single-firm can violate Section 2.  E.g., Spectrum Sports, Inc. v. McQuillan, 506 U.S. 447, 454 (1993).  Generally, monopolization and attempted monopolization violations apply to the exclusionary conduct of a firm that already has substantial market power.  See Eastman Kodak Co. v. Image Technical Servs., Inc., 504 U.S. 451, 488 (1992).

[12]  See Varney, Vigorous Antitrust Enforcement In This Challenging Era, available at http://www.usdoj.gov/atr/public/speeches/245711.htm.

[13] Id. (citing Lorain Journal v. United States, 342 U.S. 143 (1951); Aspen Skiing Co. v. Aspen Highland Skiing Corp, 472 U.S. 585 (1985); United States v. Dentsply International, Inc., 399 F.3d 181 (3d Cir. 2005); United States v. Microsoft, 253 F.3d 34 (D.C. Cir. 2001) (en banc); Conwood Co. v. United States Tobacco Co., 290 F.3d 768 (6th Cir. 2002)).

[14]  Section 1 states that “Every contract, combination . . ., or conspiracy, in restraint of trade or commerce among the several States . . . is . . . illegal.”  15 U.S.C. § 1.  Thus it prohibits every (1) agreement that (2) unreasonably restrains competition.  See generally Golden Bridge Tech., Inc. v. Motorola, Inc., 547 F.3d 368 (5th Cir. 2008).  In order to violate Section 1, the challenged conduct must result from an agreement or concerted action.  Unilateral action (i.e., action by a single party) may violate Section 2 but never violates Section 1.  See, e.g., Bell Atl. Corp. v. Twombly, 550 U.S. 544 (2007); Fisher v. City of Berkeley, 475 U.S. 260 (1986); AT&T Corp. v. JMC Telecom, LLC, 470 F.3d 525, 530-31 (3d Cir. 2006).  Most agreements raising antitrust issues are either “horizontal” (i.e., among competitors) or “vertical” (i.e., between firms at different levels in the chain of production or distribution, i.e., providers and payors).  Firms are “competitors” if they sell or buy in the same relevant market.  Horizontal agreements raise much more antitrust risk than vertical agreements, which more often have procompetitive effects.  An agreement “unreasonably restrains competition” when it has “substantial” or “significant” anticompetitive effects that outweigh any procompetitive effects when balanced under the Rule of Reason.  See, e.g., United States v. Arnold, Schwinn & Co., 388 U.S. 365 (1967).

[15]   Remarks by J. Thomas Rosch before  the ABA Health Law Section, 6th Annual Washington Healthcare Summit (November 17, 2008).

[16]Section 5 of the Federal Trade Commission Act, 15 U.S.C. § 45 (enacted 1914), prohibits “unfair methods of competition” – i.e., the same conduct as other antitrust laws, plus conduct that the Federal Trade Commission determines violates the “spirit” of the antitrust laws.  Section 5 is enforced only by the Federal Trade Commission; there is no private right of action, and it provides only for civil injunctive relief.

[17]  ABA Section of Antitrust Law, 2008 Transition Report on the Current State of Federal Antitrust and Consumer Protection Enforcement.

[18]  http://www.ftc.gov/os/caselist/0510260/index.shtm

[19] http://www.healthlawyers.org/Members/PracticeGroups/Antitrust/emailalerts/Documents/0420FTCPressRelease.PDF

[20]   http://www.usdoj.gov/atr/cases/f247700/247708.htm

[21]  http://www.house.gov/apps/list/press/il01_rush/pr_090731.shtml

[22]  http://www.ftc.gov/opa/2009/07/pay4delay.shtm

[23]   See AAG Varney’s statement as well as the statements of other witnesses and a webcast of the hearings, available at http://judiciary.senate.gov/hearings/hearing.cfm?id=4111

[24] “Observations and Lessons from the FTC’s Evanston Northwestern Healthcare Hospital-Merger Decision”

[25] “General Hospitals’ Responses to Specialty Facilities: Competition or Exclusion?”

[26] Ober|Kaler’s antitrust practice group also includes: John J. Miles, (202)326-5008, jjmiles@ober.com, www.ober.com/resume/miles.html; E. John Steren, (202)326-5017, ejsteren@ober.com, www.ober.com/resume/steren.html; and Christi J. Braun, (202)326-5046, cjbraun@ober.com, www.ober.com/resume/braun.html

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