[House Hearing, 110 Congress]
[From the U.S. Government Publishing Office]
SMALL BUSINESS COMPETITION POLICY:
ARE MARKETS OPEN FOR ENTREPRENEURS?
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COMMITTEE ON SMALL BUSINESS
UNITED STATES
HOUSE OF REPRESENTATIVES
ONE HUNDRED TENTH CONGRESS
SECOND SESSION
__________
HEARING HELD
SEPTEMBER 25, 2008
__________
[GRAPHIC] [TIFF OMITTED] TONGRESS.#13
Small Business Committee Document Number 110-115
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HOUSE COMMITTEE ON SMALL BUSINESS
NYDIA M. VELAZQUEZ, New York, Chairwoman
HEATH SHULER, North Carolina STEVE CHABOT, Ohio, Ranking Member
CHARLES GONZALEZ, Texas ROSCOE BARTLETT, Maryland
RICK LARSEN, Washington SAM GRAVES, Missouri
RAUL GRIJALVA, Arizona TODD AKIN, Missouri
MICHAEL MICHAUD, Maine BILL SHUSTER, Pennsylvania
MELISSA BEAN, Illinois MARILYN MUSGRAVE, Colorado
HENRY CUELLAR, Texas STEVE KING, Iowa
DAN LIPINSKI, Illinois JEFF FORTENBERRY, Nebraska
GWEN MOORE, Wisconsin LYNN WESTMORELAND, Georgia
JASON ALTMIRE, Pennsylvania LOUIE GOHMERT, Texas
BRUCE BRALEY, Iowa DAVID DAVIS, Tennessee
YVETTE CLARKE, New York MARY FALLIN, Oklahoma
BRAD ELLSWORTH, Indiana VERN BUCHANAN, Florida
HANK JOHNSON, Georgia
JOE SESTAK, Pennsylvania
BRIAN HIGGINS, New York
MAZIE HIRONO, Hawaii
Michael Day, Majority Staff Director
Tim Slattery, Chief Counsel
Kevin Fitzpatrick, Minority Staff Director
______
STANDING SUBCOMMITTEES
Subcommittee on Finance and Tax
MELISSA BEAN, Illinois, Chairwoman
RAUL GRIJALVA, Arizona VERN BUCHANAN, Florida, Ranking
MICHAEL MICHAUD, Maine BILL SHUSTER, Pennsylvania
BRAD ELLSWORTH, Indiana STEVE KING, Iowa
HANK JOHNSON, Georgia
JOE SESTAK, Pennsylvania
______
Subcommittee on Contracting and Technology
BRUCE BRALEY, IOWA, Chairman
HENRY CUELLAR, Texas DAVID DAVIS, Tennessee, Ranking
GWEN MOORE, Wisconsin ROSCOE BARTLETT, Maryland
YVETTE CLARKE, New York SAM GRAVES, Missouri
JOE SESTAK, Pennsylvania TODD AKIN, Missouri
MARY FALLIN, Oklahoma
.........................................................
(ii)
?
Subcommittee on Regulations, Health Care and Trade
CHARLES GONZALEZ, Texas, Chairman
RICK LARSEN, Washington LYNN WESTMORELAND, Georgia,
DAN LIPINSKI, Illinois Ranking
MELISSA BEAN, Illinois BILL SHUSTER, Pennsylvania
GWEN MOORE, Wisconsin STEVE KING, Iowa
JASON ALTMIRE, Pennsylvania MARILYN MUSGRAVE, Colorado
JOE SESTAK, Pennsylvania MARY FALLIN, Oklahoma
VERN BUCHANAN, Florida
______
Subcommittee on Rural and Urban Entrepreneurship
HEATH SHULER, North Carolina, Chairman
RICK LARSEN, Washington JEFF FORTENBERRY, Nebraska,
MICHAEL MICHAUD, Maine Ranking
GWEN MOORE, Wisconsin ROSCOE BARTLETT, Maryland
YVETTE CLARKE, New York MARILYN MUSGRAVE, Colorado
BRAD ELLSWORTH, Indiana DAVID DAVIS, Tennessee
HANK JOHNSON, Georgia
______
Subcommittee on Investigations and Oversight
JASON ALTMIRE, PENNSYLVANIA, Chairman
CHARLES GONZALEZ, Texas MARY FALLIN, Oklahoma, Ranking
RAUL GRIJALVA, Arizona LYNN WESTMORELAND, Georgia
(iii)
?
C O N T E N T S
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OPENING STATEMENTS
Page
Velazquez, Hon. Nydia M.......................................... 1
Chabot, Hon. Steve............................................... 2
WITNESSES
Kovacic, Hon. Willam E., Chairman, Federal Trade Commission...... 3
Hazel, Dr. William, Jr. MD, Secretary of the Board of Trustees,
American Medical Association................................... 19
Rubin, Dr. Jonathan, Partner, Patton Boggs, LLP., on behalf of
the American Antitrust Institute............................... 21
Hilal, Mr. Said, President, Applied Medical Resources Corp.,
Rancho Santa Margarita, CA, on behalf of the Medical Devices
Manufacturers Association...................................... 23
Lowe, Mr. Aaron, Vice President, Automotive Aftermarket Industry
Association.................................................... 24
MacLoed, Mr. William, Partner, Kelley Drye & Warren, LLP......... 27
APPENDIX
PREPARED STATEMENTS:
Velazquez, Hon. Nydia M.......................................... 43
Chabot, Hon. Steve............................................... 45
Kovacic, Hon. Willam E., Chairman, Federal Trade Commission...... 46
Hazel, Dr. William, Jr. MD, Secretary of the Board of Trustees,
American Medical Association................................... 70
Rubin, Dr. Jonathan, Partner, Patton Boggs, LLP., on behalf of
the American Antitrust Institute............................... 82
Hilal, Mr. Said, President, Applied Medical Resources Corp.,
Rancho Santa Margarita, CA, on behalf of the Medical Devices
Manufacturers Association...................................... 90
Lowe, Mr. Aaron, Vice President, Automotive Aftermarket Industry
Association.................................................... 99
MacLoed, Mr. William, Partner, Kelley Drye & Warren, LLP......... 106
STATEMENTS FOR THE RECORD:
Kolter, Mr. Bill, Vice President, Biomet, Inc., Warsaw, IN....... 113
Balto, Mr. David, Senior Fellow, Center for American Progress and
the Consumer Federation of America............................. 116
(v)
SMALL BUSINESS COMPETITION POLICY:
ARE MARKETS OPEN FOR ENTREPRENEURS?
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Thursday, September 25, 2008
U.S. House of Representatives,
Committee on Small Business,
Washington, DC.
The Committee met, pursuant to call, at 10:00 a.m., in Room
1539, Rayburn House Office Building, Hon. Nydia M. Velazquez
[Chair of the Committee] Presiding.
Present: Representatives Velazquez, Altmire, Cuellar,
Hirano, Clarke, Chabot, Shuster, and Westmoreland.
Chairwoman Velazquez. Good morning.
I call this hearing of the House Small Business Committee
to order. Competition is the crux of our economy. It not only
drives innovation and development, but it also spurs invention.
After all, you don't often see new products originating in
unchallenged industries. Rather they come from diverse sectors
that promote a wide range of options. In a free market economy,
it is crucial that all businesses, large and small, have a
level playing field. The FTC is charged with making sure that
happens. With this in mind, it is important for the commission
to be engaged and prevent industries from isolating themselves.
A lack of competition does not benefit the economy and it
certainly does not benefit the taxpayer.
In recognizing this fact the FTC already has a number of
antitrust provisions in place. The commission's Bureau of
Competition for example uses both administrative and judicial
means for enforcing regulations. In this morning's hearing we
will discuss the FTC's efforts to promote competition and its
role in spurring small business development.
Competition is a powerful catalyst for financial growth.
This is particularly true for America's entrepreneurs who
thrive in an open economy. Competition is the key that allows
small businesses to unlock new markets and expand existing
industries. It lowers prices and raises the bar for quality,
largely because it forces other companies to step up to the
plate and elevate their standards. At the end of the day an
entrenched business has little incentive to offer competitive
values. Small firms, on the other hand, have every motivation
to do so.
On top of lowering consumer costs, competition also
promotes invention. Startups have historically led the lion's
share of industry innovation. From the tech boom of the mid-
1990s to the green energy revolution of today, entrepreneurs
are the business world's best innovators. They are always
looking to meet emerging needs and offer fresher, better
choices. In order to remain competitive, big brands are then
forced to either innovate on their own or otherwise increase
the values. Either way, consumers enjoy more choices.
Competition does more than level the playing field. It
stimulates the economy. This is particularly true for America's
small businesses whose survival depends on access to an open
marketplace. If monopolies are permitted to dominate entire
industries, then they have little incentive to innovate or
contribute to economic expansion. That is why it is so
important that competition be protected for entrepreneurs.
Without the opportunities that it affords, these small firms
will not be able to do what they do best, drive innovation,
create jobs and spur financial growth.
I would like to take this opportunity to thank today's
witnesses in advance for their testimony, and I look forward to
hearing their thoughts on this issue.
With that, I yield to Ranking Member Chabot for his opening
statement.
[The statement of Chairwoman Velazquez is included in the
appendix at page 43.]
Mr. Chabot. Thank you, Madam Chairman. And thank you for
holding this important hearing examining the antitrust laws in
the United States.
I might note that I had the honor to be the ranking member
of the antitrust task force of the Judiciary Committee for much
of the past Congress, and so it is an area that I have a
significant amount of interest in; I would like to say some
expertise, but definitely an interest, and so I do appreciate
having this hearing.
Enforcement of the antitrust laws play a key role in
maintaining open competition, an environment in which small
businesses thrive because of their attention to customer
service and nimbleness in making business decisions. The
Committee has a longstanding and long interest in examining the
competitiveness of markets and the impact of the Sherman
Antitrust Act and Federal Trade Commission Act on small
business. However, the Committee has not examined these matters
in nearly two decades. And in light of the report issued last
year by the Antitrust Modernization Commission, it seems timely
for the Committee to turn its attention to aspects of market
competition that fall within the confines of the antitrust
laws. So I commend the chairwoman for doing that.
The Supreme Court has stated that, quote, the unrestrained
interaction of competitive forces will yield the best
allocation of our economic resources; the lowest prices, the
highest quality and the greatest material progress, unquote. In
short, competitive free markets represent the cornerstones of
American progress and the success of our democracy. The
antitrust laws were established to protect these precious
values.
By providing a mechanism to ensure that competition is not
unreasonably hindered, the antitrust laws can be seen as
further bracing the competitive foundation of this country. The
Antitrust Modernization Commission was created by Congress to
examine whether laws written more than 100 years ago were
appropriate and continue to be for the modern economy. The
commission's conclusion that the antitrust laws are basically
sound is one I fully support.
That being said does not eliminate the possibility for
improvements, either in the actual legislative language of the
laws or more rational enforcement of the existing laws. An
issue that may not have raised competitive concerns 20 years
ago might be one for the agencies charged with antitrust
enforcement to reexamine. For example, the joint guidelines
issued by the Department of Justice and the Federal Trade
Commission on health care have not been evaluated in nearly 20
years. If this Committee can examine changes in the health care
market and the impact of mergers on industry concentration,
then it may make sense for the antitrust enforcement agencies
to reassess their guidelines on antitrust enforcement. As with
the Antitrust Modernization Commission, they may find that
these guidelines are sound, but periodic review certainly may
be warranted.
Of course, such reevaluations need not result in any
modifications to any antitrust law enforcement by the Federal
Trade Commission or the Department of Justice. However, good
management suggests that standards developed by the government
should be reevaluated on a periodic basis; otherwise, it is
conceivable that government enforcement of the antitrust laws
may not serve their purpose of ensuring competition given the
changes in market conditions. I look forward to the thoughtful
discussion from the witnesses and their ideas on how to ensure
that small businesses will face a free competitive market.
And I again thank you Madam Chairwoman for holding this
hearing, and I yield back.
[The statement of Ranking Member Chabot is included in the
appendix at page 45.]
Chairwoman Velazquez. Thank you.
And it is my pleasure to welcome the Honorable William
Kovacic. The Honorable William Kovacic was designated Chairman
to the Federal Trade Commission on March 30, 2008. Prior to
this appointment, he was a commissioner with the FTC. The
Federal Trade Commission is the only Federal agency with both
consumer protection and competition jurisdiction in broad
sectors of our economy.
Welcome.
STATEMENT OF THE HONORABLE WILLIAM E. KOVACIC, CHAIRMAN,
FEDERAL TRADE COMMISSION
Mr. Kovacic. Thank you, Madam Chairwoman, Ranking Member
Chabot, Congressman Westmoreland and Members of the Committee.
I am very grateful for the opportunity to be here today to
discuss the FTC's role in addressing competition policy, small
business, and new entrepreneurship. I have submitted a
statement on behalf of the Commission for the record, and what
I have to say today represents my own views, not necessarily
those of my colleagues.
I completely share the Chairwoman's view about the
importance of new business development and the role that new
entrepreneurship has played in providing a uniquely powerful
source of vitality and rejuvenation for our economy. And I
believe it would be fair to say that if my colleagues were here
with me today they would agree with that sentiment completely.
What I would like to do is to highlight three ways in which
I think our agency today and in the future will be seeking to
preserve what Mancur Olson, the economist who served for so
many years at the University of Maryland, in talking about new
business development described as an enabling environment for
new entrepreneurship. The first thing that we try to do is to
challenge private restrictions upon behavior under the
antitrust laws that tends to do two things: We challenge
behavior that tends to raise the costs of key inputs on which
small businesses and large businesses rely, inputs that have a
uniquely significant role in the growth and development of
small businesses. Examples include the work that we do in the
professions to ensure that professional services are priced at
relatively low rates and feature innovative means of delivery
so that small and large businesses alike are able to achieve
cost reductions.
The second form of conduct we attack is behavior that
unreasonably restricts access to the market. Where private
actors and incumbent firms band together, for example, to deny
opportunities for innovative new firms to gain access to the
market, a number of our cases have challenged that behavior.
Our current program which involves real estate is but one
example of areas where we have sought to ensure the innovative
new models of providing important services get a test in the
marketplace on the merits.
The second area that is a key area of our concern involves
what I would call research and advocacy. Because Congress
entrusted us not simply with enforcement authority but saw our
role to be very much that of providing research, being a
convenor of events, we take this role very seriously in
providing advice to other public institutions, to challenge and
force a rethink of restrictions on entry into the market that
we regard to be unnecessary to achieve legitimate policy goals
and that unduly restrict access to the market. That has been a
major focus of our work involving Internet sales of wine and
other products.
An increasing focus of our work is to inform policy
development. That is to focus on emerging trends and, where
necessary, to engage in a probing reassessment of what we have
done. That was the ranking member's comment about the
importance of always reevaluating the wisdom of what we have
done. And for myself, given the work that I have done in the
area of development economics in other countries around the
world, an increasing concern for me is why poverty persists in
areas of severe economic disadvantage and where it might be
possible for our programs to focus more carefully on artificial
impediments to the market in parts of our country in which we
see persistent, difficult, and often unsuccessful efforts by
entrepreneurs to enter the market. I am not suggesting we will
find precise and always successful solutions to that, but I
think the general questions of economic disadvantage and new
business development tend to be extremely important concerns to
me. I will use the resources as well as I can of our agency to
promote efforts to explore that. The last is to provide
guidance and information to entrepreneurships. To provide
guidance, we prepare a number of materials for small businesses
that might not be able to afford the elegant services of a
fairly costly law firm by which people, in relatively plain and
simple terms--and I would like to present these for your record
as an illustration of what we do--can understand what the
mandates of the law are and, through consumer protection
measures such as the franchise rule, to ensure that new
businesses contemplating entry into the market have a better
informed judgment of what lies ahead for them.
This is a snapshot of our program. I welcome the
opportunity to address your comments and questions. And I hope
this is the first of a number of occasions in which we can
carry on a conversation about this important area of concern.
Thank you, Madam Chairman.
[The statement of Mr. Kovacic is included in the appendix
at page 70.]
Chairwoman Velazquez. Thank you, Mr. Chairman.
I hear you, hear you talk about agreeing with us regarding
the importance of promoting new business through business
development. I would like to hear from you with more
specificity, from your perspective, how does the presence of
small firms in the marketplace benefit consumers? And in
particular, what steps has the FTC taken to actively work with
the small business community on competition issues besides
showing me the guidance that is going to be made part of the
record?
Mr. Kovacic. I would say one of the most important
benefits, though not the only one, is the one that you
highlighted in your comments before. And that is the importance
of innovation, the significance of having the new idea, the new
form of organization come into the marketplace. In many
instances, it is the small entrepreneur, it is the individual
perhaps working in a large organization who has the idea about
how to enter. So I would underscore that as being perhaps the
most important single benefit to consumers.
A large number of our programs seek to make sure that there
are not artificial obstacles placed in the way of these
individuals. And we do work through a fairly broad program of
consultation with a variety of groups outside our walls.
Academics who study these circumstances, trade associations
before whom we appear regularly to discuss our programs, and to
learn from the convening of workshops and programs - these are
all measures by which we seek to make sure that we understand
what is taking place in these communities and can make
effective policies to address these concerns.
Chairwoman Velazquez. Enforcement of our Nation's antitrust
laws is critical to maintaining a level playing field and, of
course, keeping markets open for small businesses. What kind of
anticompetitive conduct do you see as posing the biggest threat
to small firms, and how is the FTC working to counter these
threats to entrepreneurs?
Mr. Kovacic. I would say the single threat that strikes me
as most important, though not the only, is where you have
incumbent providers of a service seeing a threat by a new
service provider who in particular threatens to topple the
existing structure of things by doing something new and
innovative, where the incumbent providers either ban together
on their own to take measures to keep that person out, or they
go to public institutions that have the power of law through
regulation or statute to keep these individuals out. We bring a
number of cases that challenge the private restrictions, we use
our advocacy program to approach public institutions and say
that is harmful.
But I would say at the same time, we have a similar concern
about the capacity of a single dominant enterprise to do the
same thing acting on its own. I put first in the hierarchy the
collective effort to exclude. I would add to that instances in
which a single firm, either using private means or again going
to public authorities and saying keep the threat off my back,
both of those are important to us.
Chairwoman Velazquez. I understand you are going to be
holding a series of hearings to mark the 100th anniversary of
your agency. Are you planning to hold any hearings with the
small business sector?
Mr. Kovacic. In a number of instances, I expect
representatives of small business groups or individuals who
started small and became large to address issues associated
with the development of small business. I expect that will be a
perspective. And we will be seeking it not only with the
community at home but overseas, too, to tap experiences that
foreign jurisdictions have had in trying to promote an enabling
environment for their firms, too.
Chairwoman Velazquez. Why is it so difficult just to design
one hearing to listen to small business issues as they relate
to antitrust laws?
Mr. Kovacic. I found that since we are having perhaps a
total of over a dozen individual events - and I am glad to
discuss more with you and the Committee about whether the
structure of these programs might be reconsidered - I find it
useful to have them as part of a larger mix of organizations to
say, let me tell you how my own situation is similar to or
different from the others. I welcome the opportunity to speak
with you, your colleagues and your staff about considering
whether this assumption is a sound one.
Chairwoman Velazquez. I welcome that.
The Justice Department recently issued a report on single
firm conduct. While the FTC and the DOJ held nearly 20 joint
hearings, the FTC refused to sign the report. The FTC's dissent
stated the policies in the report placed the interest of
monopolies ahead of consumers and downplaying the risk of
under-enforcement. How do the commission's views differ from
DOJ on monopoly policy?
Mr. Kovacic. I had my own statement in response, but I will
try to say what I think my colleagues might agree with to put
my finger on one thing. My sense is that the modern path of our
jurisprudence, especially Supreme Court jurisprudence over the
past 30 years, has been one of giving dominant enterprises
progressively greater freedom to make business choices as they
wish; and that the zone of exposure that they face for
exclusionary conduct has been shrinking progressively over
time. For myself, I don't see dominant enterprises today with
being faced with particularly severe risks to their behavior
over time. And with respect not only to dominant firms but
other areas of our jurisprudence, I think the Supreme Court's
efforts in particular to respond to what they think are
infirmities in private rights of action are starting to
encumber public enforcement authorities, too.
Chairwoman Velazquez. So that explains why you didn't
sign--
Mr. Kovacic. That goes to the heart of my own views. And I
suspect my colleagues wouldn't disagree with me, in fairly
direct terms, you have seen as well, their own more specific
concerns about the Justice Department report.
Chairwoman Velazquez. Last year, we held a hearing on
health care antitrust laws in this Committee, and there has
been a concern among small businesses regarding the lack of
enforcement of antitrust laws by the FTC and the DOJ. While
consolidations are up, the rate of merger challenges ranks
among the lowest in modern history. Why have antitrust
enforcement activities plummeted during this administration,
and what are the consequences for entrepreneurs and consumers?
Mr. Kovacic. I hear that comment a lot, but it doesn't
remind me at all of the agency I work for. I think a careful
examination, and I will speak for my own agency, with respect
to merger policy in particular, enforcement has been every bit
as robust as it was in the decade before. And I would be happy
to review with you in more detail what I think the numbers
show. But I would even go farther to say that, when you look at
a number of measures that we have pursued in the Federal
Courts, if anything, we have been trying to extend the zone in
which we look at individual transactions at greater detail. So
it doesn't really capture the agency that I am talking about,
and I think that it is not just my intuition. Again, I would be
delighted to have a conversation with you and the Committee
about this.
Chairwoman Velazquez. I guess that, in 2007, The Wall
Street Journal disagreed totally with you when it said that the
Federal Government has nearly stepped out of the antitrust
enforcement business leaving companies to mate as they wish.
Isn't it true that consolidation is up?
Mr. Kovacic. I don't know that members of the Committee
would agree with me completely, but I would ask you to accept
the possibility that there are times when journalists lapse and
perhaps don't always get it exactly right.
Chairwoman Velazquez. Okay. Answer my question, is
consolidation up or not?
Mr. Kovacic. No, no, I think not - and not above levels in
the areas that we are looking at that prevailed in the decade
before. Now, we can have a larger conversation about whether--
Chairwoman Velazquez. Okay. So let me ask you, in the area
of health care insurers is consolidation up or not?
Mr. Kovacic. I know there have been a number of
transactions but I don't see the ultimate level of
consolidation to be at a range that would not have been
permitted in the previous decade too. Now, I think it is a
valid point for discussion about whether things are at the
right level.
Chairwoman Velazquez. You are telling me that consolidation
with insurers is not up in this country.
Mr. Kovacic. I am saying the level of consolidation is up.
Chairwoman Velazquez. What is the level of consolidation?
Can you be more specific?
Mr. Kovacic. The health insurer sector is not one that we
oversee when it comes to mergers and acquisitions. I don't have
the specific data on trends available there. But this is
something that I would be glad to discuss in more length. The
Department of Justice has been the agency that has looked at
health care consolidation. But my impression from a distance is
that they are using well accepted standards to examine
transactions. I think a useful focal point for discussion would
be to look. And we would be glad to engage in that discussion
about specific areas or types of transactions that perhaps
ought not to have been allowed. That is a valid point for
consideration.
Chairwoman Velazquez. Last October, the Committee held a
hearing on how the market power of insurers is harming the
ability of physicians to care for patients. As chairman, what
are your plans to examine this issue?
Mr. Kovacic. We have been having a number of workshops that
deal with efforts of individual physicians to provide care.
This is an issue that I expect will continue to be a focal
point for our own research and for these public deliberations.
So I expect that it is an issue that will remain high on our
agenda.
Chairwoman Velazquez. And you examine this by conducting
workshops?
Mr. Kovacic. We conduct workshops. It is an argument that
is often raised in our enforcement efforts with regard to what
we believe to be impermissible forms of collaboration among
physicians.
Chairwoman Velazquez. So let me ask you, can you explain to
us why in the past 7 years have all nonmerger enforcement
actions involved health care providers with virtually no
enforcement involvement involving health insurers?
Mr. Kovacic. For ourselves, the insurance portfolio itself
is one that has been the province of the Department of Justice.
That is in the rough distribution of authority that we have
over matters, that--
Chairwoman Velazquez. Isn't it true that the administration
has focused more on antitrust enforcement activities on
physicians but not on insurers?
Mr. Kovacic. With our area of authority, our focal points
have been physicians and hospitals.
Chairwoman Velazquez. I will come back in the second round.
And I will recognize Mr. Chabot.
Mr. Chabot. Thank you.
Chairman Kovacic, just a couple of questions. Are there
procedural changes that you would recommend or that you think
that we should consider that they be made in the antitrust laws
that would increase competition in the marketplace, and if so,
what type of things do you think that we should consider?
Mr. Kovacic. One thing that I would take a careful look at,
Congressman, is the full spectrum of exemptions that now affect
commercial activity in our country. I think, for myself, and it
is a fairly familiar list, I think that one of the suggestions
of the AMC report was that exemptions that be a significant
focus of attention. I think that would be useful. I also think
it would be very helpful for Congress to consider eliminating
specific curbs on our authority to act. We have recommended,
for example, that the common carrier exemption be reconsidered.
There are limitations in our legislation that curb our capacity
to do certain types of studies involving insurance unless we
have approval first from the Congress. So two focal points I
would mention: one, exemptions generally; and second, I think
specific limitations on our own authority to act.
Mr. Chabot. The FTC, as you mentioned, generally doesn't
support legislation concerning the granting of exemptions from
the antitrust laws. Would you consider such exemption
appropriate in a market in which either the purchaser or the
seller already has an exemption from antitrust laws?
Mr. Kovacic. Generally speaking, no. We would certainly
examine and consider specific arguments, as well as the context
in which they are offered, but we would generally not. And as I
suggested before, in the spirit of the AMC report, we would
like to go back and reexamine in many instances the sensibility
of the exemptions that already exist.
Mr. Chabot. Let me ask you about kind of a specific example
here. And you can answer it to the degree that you feel is
appropriate. Is the bowl, the College Bowl Championship Series
in college football, in your opinion, does it constitute a
contractor conspiracy to restrain trade since certain
universities have contracts with certain bowl sponsors that
exclude other institutions of higher education from
participation?
Mr. Kovacic. Owing to a very important limit on our
jurisdiction, Congressman, that is not one that I have looked
at a great deal. If you were to take away to a large extent the
not-for-profit exemption that excludes our consideration of
these issues, I would like for us to be in the position to know
more about this and give you a fuller answer. And, in my own
view, not-for-profit institutions are educational institutions
but they are also large entertainment providers. The extent to
which the not-for-profit exclusion keeps us from looking at
that sector of the economy, I think, is unwise. That is the
carve-out from our jurisdiction that I would applaud Congress
reconsidering.
Mr. Chabot. And another somewhat specific example is the
auto manufacturers and the fact that they don't provide
independent auto repair shops with key computer codes and other
pertinent repair information. Would that be considered a
reasonable restraint of trade or could you comment on that
area?
Mr. Kovacic. Yes, Congressman. I think the general trend in
doctrine since the early 1990s has been one of giving original
equipment manufacturers a greater measure of control over how
the distribution of know-how takes place downstream with
respect to their own retail outlets and to independents as
well. It seemed in the early 1990s that our Supreme Court was
giving a fairly broad charter for competition law to take a
look more closely at these arrangements. The lower courts since
then have backed off some of those suggestions. I would say
that it is comparatively difficult to establish under existing
doctrine a cause of action for those types of restrictions. I
would say, as my predecessor mentioned I think 2 years ago in a
hearing, we think there is a great deal of promise at a minimum
to use the process of voluntary industry cooperation in
negotiations that have taken place before to see if there might
be a sensible result achieved between the original equipment
manufacturers and the independent repair shops.
Mr. Chabot. Thank you.
And then, finally, related to the McCarran-Ferguson Act,
could you comment on the imbalance in bargaining position
relative to physicians in hospitals and their inability to
negotiate contracts with health insurers? And the Chairwoman,
to her credit, has been very focused on trying to do what we
can in this Committee to improve affordable, accessible health
care to small business folks. And that is one of the things, in
traveling around my district, is one of the things I hear over
and over again. One of the greatest challenges of small
business folks is providing affordable health care for their
employees. So could you discuss physicians in hospitals and
their ability or inability to negotiate when it comes to the
health care company?
Mr. Kovacic. I know this has been a contentious point. It
is one we look at in great detail, whether we are looking at
hospital mergers or collaborations involving physicians. Our
sense in many instances is that physician groups in hospitals
in fact have strong countervailing power when they deal with
insurance companies. My larger plea is to put us in a position
to be able to address these phenomena more competitively. I am
not fond at all and I speak for myself, of the McCarran-
Ferguson exemption. I think that is very much worth a rethink
by this body. Again, -you find in our statute a limitation
imposed in the early 1980s that curbs our ability to do
research and studies concerning the business of insurance
without a fairly elaborate process of approvals, I think it
would be time to put us in a position to examine and rethink
some of the positions I have been suggesting to you. It would
be helpful if that were disbanded.
Mr. Chabot. Thank you very much.
Madam Chair, I yield back my time.
Chairwoman Velazquez. Ms. Hirono.
Ms. Hirono. None at this time.
Chairwoman Velazquez. Mr. Westmoreland.
Mr. Westmoreland. Thank you, Madam Chair.
Mr. Chairman, where does intellectual property rights come
into play when you are trying to weigh competition, where does
that come in?
Mr. Kovacic. Increasingly the perspective of the
competition agencies, certainly going back to the mid-1990s,
has been to treat intellectual property as a valuable form of
property right on a plane with other forms of valuable
property; that is, to regard the property in ideas as being an
extremely important asset, just as we could point to other
forms of physical property. There has been a trend to regard
those property rights as being extremely important and to take
a great deal of care to see in what respects the specific
character of property in ideas dictates any variation or
adjustment in the way in which we enforce the laws. T000his has
been a matter of pressing concern for both of the competition
agencies, certainly going back a long period of time, but
intensely since the mid-1990s when the agencies revised their
antitrust IP guidelines.
Mr. Westmoreland. I have got an iPod, and it quit working,
and so I took it to where I bought it. And they told me that I
would have to take it back to Apple to get it looked at, that
they didn't have the ability to do it, that only an Apple store
could do it. Would you think that when Apple sells an iPod,
that they need to give you a manual of how you could repair it
yourself, or is that some type of antitrust something that I
have got to go back--there is only one place I can take it? Is
that an antitrust--if I have a complaint with you, can I call
you and tell you that I can only get my iPod--
Mr. Kovacic. My phone is 202-326--(laughing) I think it
depends from our point of view on at least two things: One is,
with respect to that device, do you have other choices in the
marketplace? That is, let's assume there are a number of them,
and they chose a policy that irritated and frustrated you. I
suspect your reaction and mine might be the next time I was
thinking of buying things, I am not going to buy this device
from them. In fact, I remember that producer's name, I am not
going to buy anything from them because they made my purchasing
experience worse.
A second thing we would look at carefully is, why the
limitation? One argument that would depend on a more careful
factual evaluation, is assumptions we might make about the care
with which individuals who would be able to do the repairs. If
one could make a good argument that it took a highly
specialized type of individual with a good deal of training to
do that right, we might think that there is a greater basis for
restricting who could do that, because if it doesn't work after
the repair, you are going to look at the name on the device and
you will probably remember that rather than that it was Bill's
Repair Shop that did the work on it. That is the kind of issue
that we would spend a great deal of time looking at in careful
detail.
Mr. Westmoreland. The aftermarket, which the ranking member
mentioned, as far as automobile repairs, you mentioned an
independent industry group, I guess, that handles some of the
complaints that would come from an automotive repair shop or
whatever as far as getting some of these codes or whatever for
repair. Do you know from that group how many complaints have
been filed in a year, and the total number of repairs done to
automobiles once they leave that showroom floor, and what
percentage is done by who?
Mr. Kovacic. I don't know those numbers, Congressman.
I know that, indirectly, one thing we track very carefully
is how many complaints come our way. And certainly over the
past 12 months, with respect to end users, the consumers you
were referring to before in your other example, we have not
received complaints of this type. Occasionally we get them. I
am not acquainted with what the experience within the dispute
resolution process itself has been. Certainly if the Committee,
you or other researchers, have data on that, that we ought to
be focusing on, I would welcome the chance to do that.
Mr. Westmoreland. Would you be surprised if I told you that
of 500 million post-warranty service orders are done each year,
75 percent of those are done by independent repair services; 25
percent by new car dealers? And I think that there was less
than 100 complaints last year that was filed with the National
Automotive Service Task Force. That doesn't seem like a large
number when you think of those repairs. Do you think that you
have any trained staff enough? Because I understand in some of
the hearings they had last year, I didn't attend any of the
hearings, but my understanding was they wanted your agency to
be involved in this, do you think that you have got the staff,
the trained personnel to investigate, respond, compile, update
these stats and statistics and innovations that are in the
automobile industry every year?
Mr. Kovacic. One of the reasons that we have found it
helpful to explore the sorts of alternative dispute resolution
in the industry, voluntary industry cooperation mechanisms that
you described before, is that it is a way to see if we can get
good solutions that doesn't involve that kind of commitment of
resources. I would add that there have been a number of areas
in which Congress has asked us at different times by statute to
take on demanding new challenges. We have a pretty good history
of responding to those challenges with resources that Congress
has generously provided us. So I wouldn't say immediately that
it would be an easy thing for us to do. I think some of these
other paths are certainly worthy of further exploration. But
were the choice to be made to ask us to do it, it has been a
highly adaptable and successful process by which we have taken
on major challenges.
Chairwoman Velazquez. Would the gentleman yield for a
second?
Mr. Westmoreland. Yes.
Chairwoman Velazquez. I hear you when you talk to us about
listening and voluntary agreement and workshops. He is asking
you about complaints that have been raised. Can you talk to us
about any specific action taken on behalf of small businesses
regarding enforcement of antitrust laws?
Mr. Kovacic. Many of our cases involving real estate,
professional services, restrictions on the use of the Internet,
has--
Chairwoman Velazquez. And specifically on the issue that he
raised.
Mr. Kovacic. On the issue of auto repair, no, we haven't.
We have done investigations.
Chairwoman Velazquez. And?
Mr. Kovacic. We haven't brought any cases. We do look at
the complaints carefully. As I mentioned before, the existing
legal framework on which an antitrust complaint would be
premised imposes some extremely demanding standards, in my
view, about bringing cases. But we have taken complaints that
have come to us, Madam, with the greatest care.
Chairwoman Velazquez. I yield back.
Mr. Westmoreland. And I thank the Chairwoman for bringing
that up because I think it is important to know that you have
looked at some of these cases. And I am assuming you are saying
that they haven't risen to the level of where you feel like
there has been any action needed or necessary from the FTC?
Mr. Kovacic. That is correct.
Mr. Westmoreland. Madam Chairman, I will yield back the
balance of my time and thank you.
Chairwoman Velazquez. Mr. Altmire.
Mr. Altmire. Thank you, Madam Chair.
Mr. Chairman, thank you for being here.
Mr. Kovacic. Thanks for the chance to do this.
Mr. Altmire. Of course. I wanted to focus on antitrust law
and get your opinion on something more than anything else.
There was a recent Justice Department paper that said, and I
quote, the fundamental reason we favor competition over
monopoly is that competition tends to drive markets to a more
efficient use of scarce resources. So I was wondering, in your
opinion, given the scope of this Committee, how does
participation of smaller firms in the market increase economic
efficiency?
Mr. Kovacic. I think the economy and the jurisdiction that
provides an environment in which the best ideas get a test in
the market is the jurisdiction that is going to be more
prosperous than others. Quite often, the good idea, whether it
is about a product, about how to deliver an existing product,
how to organize a particular form of business entity, those
ideas often come from new entrepreneurs, so that the
competition of new entrepreneurs in a number of different
settings is a tremendous spur to economic progress. Antitrust
enforcement and a collection of policies that I would call
competition policy have a tremendous contribution to make. This
Committee's work is part of that.
Mr. Altmire. In your opinion, do you see any correlation or
anything you want to add about what we are dealing with as a
Congress with a larger financial market and where smaller firms
would fit into that?
Mr. Kovacic. Financial services is an area where Congress
decades ago decided that, with the most limited exceptions, the
FTC does not participate. That is one of the major carve-outs
from our jurisdiction. There are some areas where we act. With
respect to the larger phenomena that this body has been
focusing on in recent days and the upheaval in that sector,
those are institutions, for the most part, that are beyond the
scope of our examination.
Mr. Altmire. Thank you.
I have no further questions Madam Chair.
Chairwoman Velazquez. Mr. Shuster.
Mr. Shuster. Thank you, Madam Chair.
And thank you for being here today. And sorry I didn't hear
your testimony earlier and didn't hear some of the earlier
questions, so if I ask any that are redundant, please let me
know.
But my colleague from Georgia mentioned intellectual
property rights, and in full disclosure, I should say I am a
former automobile dealer, so I know firsthand the situation
here. And my question deals with, what are the rights of, when
you are viewing these cases, on investment in not only the auto
manufacturer investing huge sums of capital to develop these
products and parts but the auto dealer, who is also investing
thousands and millions of dollars in some cases on repair
facilities, and that they should have that competitive
advantage in my view. If I am spending the money, I am the one
who has to sign a deal with the auto manufacturer to carry
their product line, what weight is given to that and how am I
protected to make sure my investment is protected when you come
into a situation?
Mr. Kovacic. Something that you have certainly observed
from your previous life in that sector is that the automobile
sector in North America, I think we might say, is pretty
competitive.
Mr. Shuster. Extremely.
Mr. Kovacic. During my childhood growing up in southeastern
Michigan, there were four companies you talked about; three big
ones, American Motors on the fringe and a couple of quaint
things called Volkswagen Beetles driving around. That is not
the industry we see today, is it? Notice how many choices for
original equipment consumers have. A basic assumption we would
make as a starting point is that those manufacturers have every
possible incentive to get things right with respect to the
design of the distribution system. And generally speaking,
providing incentives for them to invest in improving that
distribution system is an important value to be recognized.
At the same time, if I were to go back to my home at George
Washington University where if I weren't doing this I would be
teaching contracts in the first semester, I don't doubt that
there are instances in which you see disagreements between the
manufacturer and the dealer about that relationship over time.
Perhaps you had some of those yourself.
Mr. Shuster. Every day.
Mr. Kovacic. Every day. And generally, in our country, with
respect to those kinds of disagreements, that has largely been
the province of contract law. It is not that the disappointed
dealers invariably are marching into courtrooms to wage battles
over time. There can be instances in which the manufacturer or
perhaps a dealer can behalf opportunistically to exploit
certain investments that are made. But contract law has
generally been the province where we examine that. I think
because our courts and our Supreme Court has been concerned
about those incentives to invest, they have tended to impose
fairly demanding requirements on antitrust plaintiffs,
including us, who would want to upset or challenge activity and
behavior that is taking place in the course of that
relationship.
Mr. Shuster. The notion that it is anticompetitive out
there because the dealers or the manufacturers aren't giving
out that information to me is a ruse I believe because, as my
colleague stated, of the 500 million repairs, 70 to 80 percent
of them are done by independent shops. Also, within, I am sure
within 45 minutes of where we sit today, you can get any car
that you--a Toyota, a Ford, a Chrysler--you can get it repaired
by several, multiple dealerships around the area, so the
competition is robust. Firsthand, there were 45 Chrysler
dealers within 45 minutes of my store.
Mr. Kovacic. Congratulations (laughing).
Mr. Shuster. So the idea that there is not competition,
would you agree with that? I mean, there is robust competition
between automobile dealers.
Mr. Kovacic. I believe there is. And I wouldn't denigrate
the role that independents have. Sometimes independents, and I
suspect it was your experience, too, sometimes they see a
better way to do this. And we would be interested and we do
examine and take seriously the examination of why they would
not receive access. And there are instances in which we would
be doubting of that. But generally speaking if we compare the
automobile sector that we know today to the automobile sector
of, well, my childhood, it has been a dramatic transformation
in the direction of better choices for consumers.
Mr. Shuster. And I think you make an excellent point.
Before I was in the automobile business I worked with Good Year
Tire and Rubber Company and spent time in their real time
operations, which are independent operators. And many times you
do find that they can find a better way or more efficient way
to repair an automobile. So I have seen it from both sides, and
I just--this legislation that I think we are talking about is,
just seems to me it is not necessary because there is robust
competition, there is information provided to the independent
garages, and it is maybe not perfect information flow, but it
gets out there. So I appreciate your time today. Thank you. And
I yield back.
Chairwoman Velazquez. Ms. Hirono.
Ms. Hirono. Thank you Madam Chair.
Mr. Chairman I don't know if you have had a chance to read
the statement of the American Medical Association.
Mr. Kovacic. I have, Madam.
Ms. Hirono. You have.
Mr. Kovacic. Yes.
Ms. Hirono. So their concern is, in these challenging
times, where mainly small practices, solo practices, are trying
to figure out ways to keep going, the scrutiny on physician
collaboration through network arrangements, their statement
indicates that the FTC has put a very high bar on these kinds
of arrangements to the point where most physicians are not able
to avail themselves of these kinds of arrangements. Would you
like to comment on that?
Mr. Kovacic. Yes, Madam. I would disagree. We can debate
what the high bar is. I think we have applied sensible
standards. And I think to a degree that I would disagree with
the very thoughtful people who put that statement together. I
would disagree with their characterization of how carefully we
have been reviewing and considering arguments about what kinds
of integration of activity promote desirable marketplace
consumer ends. We think we have been very attentive to
arguments based on efficiencies, based on what the antitrust
laws consider to be procompetitive justifications to arguments
that would justify different types of collaboration.
But let's suppose I am wrong, and I don't think I am. We
have also been engaged in a fairly intensive effort in recent
years to reexamine those assumptions. We have had two workshops
that deal directly with this issue within the past 12 months.
We are engaged in continuing conversations with the AMA. So
while I think there is enormous flexibility and sensitivity in
our system to the assessment of these kinds of arguments, we
are always inclined to reassess and to continue a discussion
with not simply the industry but with other interested groups
to make sure we have got things right. And I look forward to
continuing that discussion with the AMA, with other service
providers and with others who are experts in following
developments in the sector.
Chairwoman Velazquez. Will the gentlelady yield for a
second?
Ms. Hirono. Yes.
Chairwoman Velazquez. I would welcome your refreshing
position about reconsidering, because in the past, people have
said that they were not wrong and there were a lot of people
who asked us to vote for the war based on weapons of mass
destruction. Well, they were wrong. Maybe you are wrong. So I
would like for you later on before you leave that you identify
the member of your staff who will stay here to listen to the
second panel.
Mr. Kovacic. I would say there will be several of my
colleagues who will be here to hear the second panel. I would
offer one thing that I ask the Committee to think about; it is
rare in the areas in which we enforce the responsibilities that
you have given to us, that the people we sue, and in the
mergers we seek to challenge, it is very rare for the parties
in those transactions to say, "my goodness, the FTC was right."
They almost invariably say we are wrong. If the suggestion by
any industry group or group of parties that we are wrong was
ever taken to be a certifying mark of the correctness of their
position, we would be out of business.
Chairwoman Velazquez. Well, given the track record in terms
of enforcement and the number of cases, that is an open
question.
Mr. Kovacic. I don't think for this agency it is, Madam. I
say whether you are looking at numbers of cases, whether you
are looking at outcomes, having watched my agency for the past
three decades, I stack it up happily against any other.
Chairwoman Velazquez. I yield back.
Ms. Hirono. Thank you, Madam Chair.
I would like to continue. With regard to the physician
collaboration of these kinds of arrangements, is FTC scrutiny
based on Section 5 of the FTC Act or of Section 7 of the
Clayton Act?
Mr. Kovacic. We enforce both, Congresswoman.
Ms. Hirono. With regard to these collaborations? Because
Section 7 has to do with mergers and acquisitions.
Mr. Kovacic. The framework in Section 7 also picks up
contractual arrangements, what might be called joint ventures,
that fall short of an actual combination of ownership. So we
use both instruments. I would say the tendency over time has
been for the analytical techniques used in both areas to
converge so that, in many ways with slight variations, we are
asking the same basic questions about likely competitive harm,
market power, and procompetitive justifications.
Ms. Hirono. So those are the three major issues that you
are concerned with with these physician collaborations, because
clearly they can't be engaging in any kind of a price fixing
activity, is that correct?
Mr. Kovacic. Generally speaking, there is a breathtakingly
serious prohibition against efforts by direct rivals to set
prices.
Ms. Hirono. Yes, that is per se.
Mr. Kovacic. Yes. But there are qualifications to that. And
our antitrust jurisprudence and our policy have recognized
them; we recognize them. There are instances in which
restrictions which, if they were standing on their own with
nothing else, might very well put you in front of a Grand Jury
and send you to prison can be justified, and we take those
justification arguments very seriously.
Ms. Hirono. Well, having just read through the AMA
testimony, it is a little difficult for me to understand how it
is that a group of physicians who have to compete on the basis
of price and other ways, that somehow these kinds of
arrangements would not pass scrutiny. It is sort of hard for me
to understand.
Mr. Kovacic. But might we agree that if any group of
service providers do nothing else but say, "let's raise our
rates," without anything else we would be very suspicious of
those arrangements. So the real issue is, is there something
else going on beyond just the decision to raise rates? That is
really the issue about which we have a disagreement with the
AMA, but it is also precisely the focal point of the continuing
discussion that we look forward to having with them.
Ms. Hirono. I think with the concern that we have that the
high cost of health care, that any reassessment on your part as
to how you are going to enforce these kinds of arrangements I
think is a welcome statement.
Mr. Kovacic. I do pledge us to engage in that discussion,
which I would say has been a characteristic of our practice for
decades.
I would reiterate that, at the moment, yes, to the dismay
of the AMA's statement, we think that we have things set in the
right place, but we are neither arrogant nor stubborn to think
that there is not always room to continue the discussion and
reevaluate. When facts and knowledge change, so do we.
Ms. Hirono. Thank you.
I yield back, Madam Chair.
Chairwoman Velazquez. Ms. Clarke.
Ms. Clarke. Thank you very much, Madam Chair and Ranking
Member Chabot; and thank you, Mr. Chairman, for your insights
today.
I wanted to sort of turn to some of the current financial
crisis and its impact on minority and female-owned
disadvantaged businesses and whether the Commission is
monitoring what impact this is having on that sector of our
economy in terms of its capacity to compete, whether you would
share some of your insights with us.
Mr. Kovacic. Congresswoman, a limiting condition for us
with respect to most of the service providers that have been
the focal point of the upheaval in recent weeks and months is
that these institutions are beyond our jurisdiction. Congress
decided in roughly a century ago and in subsequent legislation
that our jurisdiction did not include the financial services
sector. There are limited exceptions to that. So this is
basically a sector we do not study, being faithful to the
limitations in our statute.
Ms. Clarke. I think maybe my question was misunderstood.
Mr. Kovacic. I am sorry.
Ms. Clarke. I understand there are jurisdictional issues,
but, within your purview, there are going to be businesses that
are going to be impacted by this. And I wanted to know whether
the Commission has begun to take a look at that. Because,
ultimately, everyone outside of the financial sector is going
to have to readjust for competition, given the credit crunch.
And these are also the major employers of so many Americans. So
while we are up here rushing to the rescue, I am assuming
everyone else is looking at what the ramifications are for
their particular domain.
Mr. Kovacic. Let me give you one I expect will be
significant for us in exercising our authority to look at
mergers, at questions of dominance, at questions of agreements.
A major source of strength in our economy historically has been
the strength of its capital markets. It is the capacity of
individuals to raise funds by issuing stock, by getting loans
and issuing debt. We make major decisions in individual cases
depending upon how readily we think new firms can enter the
market or how existing entrepreneurs and organizations can
expand.
To the extent that the turmoil and recent experience may
adjust or dictate an adjustment in those assumptions about how
capital markets operate, that is certain to affect the way in
which we evaluate the significance of an individual merger and
the possibility that new firms will be able to come into the
market and challenge them. So I see that as being a fairly
powerful implication.
Ms. Clarke. Mr. Chairman, the concern is who ends up at the
end of day at the table able to participate in those
activities, which is why I turn to the most vulnerable sector
of our small business environment, which is that of women-
owned, minority owned disadvantaged businesses.
It would be helpful to make sure that, as you look at
particularly joint ventures and globalization, where these
companies have always been disadvantaged, that we take a look
at what the impact is going to be or what we project what the
impact will be so that we can look at the other vehicles we
have through our purview to be of support to them in this time
of financial instability.
I was wondering whether your Commission would be in fact
highlighting or looking at that and sort of cautioning or
sending out a warning so that we can react as quickly as
possible.
Mr. Kovacic. Congresswoman, this traditionally has not been
part, this specific set of issues, especially the range of
concerns about which individuals are able to participate in the
market and to what extent are historically excluded groups able
to get access to the market has not been part of the
traditional antitrust analysis. For myself, I find this issue
to be a compelling one, and the question of how historically
disadvantaged groups do get access to the market and
participate is one that interests me intensely.
I have in mind us doing some things that will look at these
issues and especially the extent to which existing policies or
programs impede the ability of people unnecessarily to get to
the market. It is an issue that I would welcome discussing
beyond the scope of this hearing. I would welcome the
opportunity to discuss with you and your colleagues and with
your staff perhaps more specifically how my own interest in
making this a topic of research might coincide with some of
your own concerns. I would be quite willing to do that on my
own with you or with colleagues of yours who would like to
explore this more fully.
Ms. Clarke. Thank you very much.
I yield back, Madam Chair.
Chairwoman Velazquez. Mr. Chabot.
Chairman, thank you so very much for being here this
morning; and if you at least for the record name one of your
staff persons who will be remaining in the room.
Mr. Kovacic. Yes, I would be happy to. Would you allow me
to glance back at them to make sure that the person I name will
willingly nod and say yes.
Do we have a volunteer?
Ah, we have three: Kim Vandecar, who is with our Office of
Congressional Relations and I think well-known to this office.
We have David Narrow, who is from our health care group, Bureau
of Competition. We have Neil Averitt from our Policy and
Evaluation Office in the Bureau of Competition.
That is an awesome contingent. Not only will they report
faithfully on what you have to say, they will offer their own
thoughtful interpretation, too. We will be in good hands.
Chairwoman Velazquez. Thank you, and the gentleman is
excused.
Mr. Kovacic. Thank you, Madam.
Chairwoman Velazquez. I ask the second panel to please come
forward.
Gentleman, welcome.
WITNESS PANEL II: WILLIAM HAZEL, JR., M.D., JONATHAN RUBIN,
SAID HILAL, AARON LOWE, and WILLIAM MacLEOD
Chairwoman Velazquez. It is my pleasure to welcome Dr.
William Hazel, Jr. Dr. Hazel is a member of the Board of
Trustees of the American Medical Association. Dr. Hazel is an
orthopedic surgeon in private practice from Northern Virginia.
He is here to testify on behalf of AMA, which is an
organization that advocates on issues vital to the Nation's
health; and it is the United States' largest physicians group.
Chairwoman Velazquez. Welcome. You will have 5 minutes.
STATEMENT OF WILLIAM HAZEL, JR., M.D., SECRETARY, BOARD OF
TRUSTEES, AMERICAN MEDICAL ASSOCIATION
Dr. Hazel. Good morning, Madam Chair, Ranking Member
Chabot, members of the Small Business Committee and staff.
I am Dr. Bill Hazel. I am an orthopedic surgeon in practice
over in Fairfax, Virginia, and a member of the board of the
AMA; and I appreciate having the opportunity to testify this
morning on small business competition policy.
The health care marketplace has changed dramatically over
the past decade. Frankly, the FTC guidelines have not kept
pace. Current antitrust policies are barriers that slow
physician collaboration and hinder our ability to participate
in a full spectrum of health care initiatives. They have also
perpetuated an imbalance in the market so that health insurers
are able to force physicians to accept contracts that often
impede optimal patient care.
The health care antitrust environment has evolved in three
significant ways.
Number one, current FTC policy discourages physician
clinical integration efforts. The FTC guidelines and advisory
opinions to date require a level of financial investment that
is impractical for physicians in solo and small group
practices, in other words, about 75 percent of the physicians
in the country.
Number two, widespread health plan consolidation has eroded
the market and severely limited our ability to advocate for
ourselves and our patients. In the last decade, there have been
400 insurer mergers. Only three were challenged by the DOJ,
only three of 400; and these mergers have benefited no one but
executives and shareholders. And the proof is that premiums
across the country have increased, out-of-pocket patient
expenses have gone up, and physician payment has declined.
The third issue is that professional market and regulatory
developments are encouraging physicians to collaborate, to
collaborate on the purchase and use of health information
technology and quality improvement initiatives.
Allowing a more flexible approach to physician joint
contracting would address these market changes and, in fact,
would be pro-competitive. Allowing physicians to jointly
contract would increase competition in the insurance market.
Creating physician panels is time consuming, and it is
expensive. It can be a barrier to entry for new insurers
through physician joint contracting new payers to gain access
to panels of physicians with wide geographic and specialty
distribution. When the physicians themselves undertake the
initial task of the network formation, payers may substantially
reduce their costs of entry and expansion.
Joint contracting would also lead to more equitable,
better-informed contracts. Most physician practices simply
don't have the resources to analyze payers' contracts. By
pooling resources we can spread the costs associated with
analyzing these contracts and negotiate for improved contracts
for our patients.
Finally, joint contracting would allow physicians to create
networks that would facilitate collaboration on health
information technology and programs designed to monitor patient
care and quality improvement that folks such as you are
encouraging us to do even now.
Acquiring, implementing, sustaining information technology
requires extensive financial investments by physicians, but the
Congressional Budget Office has documented that health insurers
are the entities that benefit from cost savings associated with
these systems. Allowing physicians to negotiate jointly with
payers would help us reallocate these cost savings
appropriately and pay for the services.
Similarly, many physicians lack the ability to participate
in quality improvement initiatives. By teaming up in networks,
small and solo practices can gain the scale necessary for care
coordination and appropriate data aggregation that allows us to
implement these initiatives.
Now current antitrust policy is clearly out of step with
the changing health care marketplace. This led to overly
aggressive enforcement against physicians in certain cases,
limited opportunities for physicians to collaborate in other
cases, and it has permitted unfettered, unfettered health
insurer consolidation.
The FTC must update these policies. As the chairman
indicated, we are currently discussing with the FTC the
guidelines on physician joint contracting, which we believe
should allow small practices to collaborate on health
information technology and health care quality improvement
initiatives. Furthermore, the DOJ must challenge health insurer
mergers more aggressively. These steps would restore balance to
the health care market and ensure an innovative and efficient
health care system.
Thank you, Madam Chair and members.
Chairwoman Velazquez. Thank you, Dr. Hazel.
[The statement of Dr. Hazel is included in the appendix at
page 70.]
Chairwoman Velazquez. Our next witness is Dr. Jonathan
Rubin. Dr. Rubin is a partner at the law firm Patton Boggs. Dr.
Rubin concentrates in antitrust litigation and counseling. He
is here to testify on behalf of the American Antitrust
Institute. The AAI is an advocacy organization that seeks to
increase the role of competition and assure that competition
works and challenges abuses of concentrated economic power.
Welcome.
STATEMENT OF JONATHAN RUBIN, PARTNER, PATTON BOGGS LLP, ON
BEHALF OF THE AMERICAN ANTITRUST INSTITUTE
Mr. Rubin. Thank you, Chairwoman, Ranking Member Chabot and
members of the Committee.
I am Jonathan Rubin. I am an antitrust lawyer with the firm
of Patton Boggs here in Washington, D.C., and one of about a
hundred members of the Advisory Board of the nonprofit
organization, the American Antitrust Institute. The AAI's Web
site is www.antitrustinstitute.org. I appreciate the
opportunity to testify today.
My task is fairly limited. It is to present the major
recommendations that appear in the upcoming report, entitled
The Next Antitrust Agenda: The American Antitrust Institute's
Transition Report on Competition Policy to the 44th President.
The report will be published in October and will be provided to
the Committee.
My remarks today reflect solely the position of AAI and not
that of Patton Boggs or any of its clients.
The antitrust laws are among America's greatest
contributions to the field of political economy. The AAI
strongly believes that government ought to promote competition
in free markets and that the Nation's antitrust laws can and do
precisely that if they are aggressively and creatively
employed.
Believing in competitive free markets is one thing however,
but the facts on the ground may be very different.
Two opposing forces constantly pull on the economy. On the
one side is the urge by the government to control the private
sector through regulation, and on the other side is a strong
belief that free markets and laissez faire policies foster
efficient economic growth and protect the private sector from
counterproductive governmental control.
Neither path provides a complete policy prescription.
Over-regulation protects inefficient competitors and
operates as a drag on the economy, and complete laissez-faire
risks a lawless jungle operating without regard for justice.
Antitrust occupies the middle ground between these polar
possibilities and frequently offers nuanced instruments with
which to steer markets back to an even keel when market
failures occur. It is in this middle ground that opportunities
for small businesses are often created--or destroyed.
This inherent need for balance in antitrust is reflected in
the positions advocated in the AAI Transition Report, the most
important recommendations of which are itemized in my written
testimony. I will use my remaining time instead to characterize
where we are and where we need to go in the view of AAI.
As a general matter, the AAI applauds and encourages
deregulation in industries in which ill-advised and overly
intrusive regulatory structures are less efficient than an
unregulated market. In the view of the AAI Transition Report,
however, current antitrust policy worries too much about
intervening incorrectly, risking false positives, and not
enough about failing to intervene when necessary, risking false
negatives. Antitrust is about predicting market outcomes, and
predictions will sometimes be proven incorrect. AAI sees no
reason to suppose a priori that false positives are inherently
more injurious to an efficient economy than are false
negatives.
Current antitrust doctrine is also unabashed in its disdain
for the capabilities of agencies, courts and lay juries to
resolve antitrust disputes correctly, and expansive in its
estimation of the costs of administering the resolution of such
disputes. AAI believes that this lack of confidence in courts
and juries is not justified. Limiting access to the courthouse
often disadvantages private antitrust plaintiffs, who are
frequently small and medium sized businesses.
The AAI also believes that viewing single-firm issues
exclusively through the lens of neoclassical price theory and
assessing competitive injury solely in terms of its effect on
price or quantity imposes artificial limitations on the scope
of the antitrust enterprise. Consumer choice, variety,
diversity, quality, convenience and innovation, these are all
also legitimate values worthy of protection in the defense of
competition by the operation of the antitrust laws.
In short, current antitrust policy leads to an overly
noninterventionist standard of contact that the AAI rejects.
As a case-by-case form of regulation charged not with
promoting competition but with eliminating impediments to it,
antitrust exerts an influence on business conduct even where no
action is taken. And the mere threat of antitrust liability
deters anti-competitive conduct.
No matter which party will control Congress or who the
President will be, the AAI's advice to the next administration
is the same:
Antitrust analysis should be brought more in line with a
broader body of modern economic knowledge and made better
equipped to deal with the realities of modern markets; more
resources and personnel should be devoted to the skillful
deployment of antitrust enforcement as a policy instrument to
maintain competitive markets; and the institutions, substantive
rules and procedures of antitrust should be rejuvenated,
particularly as they pertain to the treatment of single-firm
conduct.
I thank the Committee for your attention and would be
pleased to answer any questions you may have.
Chairwoman Velazquez. Thank you, Dr. Rubin.
[The statement of Mr. Rubin is included in the appendix at
page 82.]
Chairwoman Velazquez. Our next witness is Mr. Said Hilal.
He is the President of the Applied Medical Resources
Corporation in Rancho Santa Margarita, California. Applied
Medical is a company dedicated to meeting the innovative needs
of progressive surgeons and clinicians. He is here to testify
on behalf of the Medical Device Manufacturers Association.
Since 1992, MDMA provides education and advocacy assistance to
innovative and entrepreneurial medical technology companies.
Welcome.
STATEMENT OF SAID HILAL, PRESIDENT, APPLIED MEDICAL RESOURCES
CORPORATION, RANCHO SANTA MARGARITA, CALIFORNIA, ON BEHALF OF
THE MEDICAL DEVICE MANUFACTURERS ASSOCIATION
Mr. Hilal. Thank you, Madam Chairwoman.
Madam Chairwoman, Ranking Member Chabot and members of the
Committee, I address this Committee on behalf of Applied
Medical and the nearly 200 members of the Medical Device
Manufacturers Association, as well as the countless other
smaller medical device companies in this Nation who face
significant challenges accessing the hospital market.
Innovation in the medical device arena is fueled by small
companies working with clinicians, scientists and engineers to
enhance the quality of care. Applied develops and sells devices
for progressive, minimally invasive surgery.
Back in 1988, we set out to create a company that can
improve both healthcare and the financial outcomes of new
modalities; and we did. In the process, we invented and
innovated many procedures and many devices that achieved these
end targets. But clinicians do not have access to the best and
most cost-effective innovation, mainly because of the anti-
competitive practices of dominant suppliers and certain
hospital group purchasing organizations, or GPOs.
Now, originally, GPOs were established to help small
hospitals aggregate their purchasing power by combining them
together, by banding together; and, instead, they have become
the marketing arm of dominant suppliers and failed to achieve
the intended goal of lower cost.
This is because back in 1986 Congress created a safe harbor
from the Medicare anti-kick back statute and permitted
suppliers to fund the GPOs. Until that time, GPOs functioned
more like cooperatives funded by their own members. But once
the GPOs began to rely on key suppliers, on giant suppliers for
funding, they lost the ability to independently review products
and, in many situations, GPOs contracted with the suppliers who
paid the most fees, fees that are actually percentages of the
total contract price. So the question, would a GPO go with a
$20 million price or discounted price of say $10 million when
they are collecting 5 percent on either? Or are we creating a
conflict here?
Giant suppliers very quickly picked up on this and
manipulated this situation to lock out smaller suppliers. We at
Applied have had the good fortune to be able to fight back. We
had the staying power. It cost us dearly, and it took 10 years
to break into the market, before the market even opened up a
little bit for us to get into it. But for every Applied there
are countless small medical technology companies that continue
to be totally foreclosed.
To start restoring competition in the healthcare industry,
it is imperative that Congress repeal the GPO safe harbor and
move GPOs back to the hospital-funded model independent of the
large suppliers. According to Harvard's competition expert
Michael Porter, there is no valid reason for buying groups to
accept financing or any payment from suppliers.
Speaking of those dominant suppliers, while ending the
supplier kickbacks to GPOs would actually provide a better
competitive landscape, it is but the starting step. Small
companies in health care face monopolies and duopolies that
engage directly in anti-competitive activities, including
predatory pricing and bundling of related and unrelated
products.
We have repeatedly suffered from the predatory market
powers of giant companies, regardless of their respective
market share in the contested arena. But Applied and hundreds
of companies like Applied have suffered the most from the total
absence of oversight and enforcement in certain areas. And in
the face of the latest predatory approaches by large monopolies
and duopolies, our antitrust laws have been watered down or
shelved, while the new practices and tactics have taken hold.
At a time when the Department of Justice and the Federal
Trade Commission should be taking a more proactive oversight
role, the recent DOJ report takes the wrong direction and
creates additional safe harbors, not less, for the monopolies
at the expense of competition, consumers and innovation. This
is not the direction the U.S. Government should be taking.
Progressive European and Australian agencies are way ahead of
us in these areas, and they are dealing with violators firmly.
We can and must do better.
In conclusion, these practices by dominant suppliers and
some GPOs individually and collectively damage open competition
and increase the cost of health care. By repealing the GPO's
safe harbor and providing proper oversight and enforcement over
maintaining monopolies and large lock-step duopolies, I believe
we can benefit patients, hospitals, customers, healthcare and
providers.
Thank you very much.
Chairwoman Velazquez. Thank you, Mr. Hilal.
[The statement of Mr. Hilal is included in the appendix at
page 90.]
Chairwoman Velazquez. Our next witness is Mr. Aaron Lowe.
He is the Vice President of Government affairs for the
Automotive Aftermarket Industry Association.
The motor vehicle aftermarket is a significant sector of
the U.S. Economy, employing approximately 4.5 million people.
The AAIA represents more than 100,000 repair shops, part stores
and distribution outlets.
Welcome.
STATEMENT OF AARON LOWE, VICE PRESIDENT, GOVERNMENT AFFAIRS,
AUTOMOTIVE AFTERMARKET INDUSTRY ASSOCIATION
Mr. Lowe. Thank you, Madam Chair; and thank you, members of
the Committee. I am pleased to present this testimony on this
very important issue.
As you said, our industry represents the independent
aftermarket. It is everything that happens to a car once it
leaves a new car showroom.
Since the invention of the vehicle, the U.S. has had the
most competitive vehicle aftermarket in the world, as has
already been stated in this hearing. Americans currently have a
wide array of choices in vehicle repair, whether it is going
back to the dealer or to the thousands of independent repair
shops that are in every community in this Nation. This
competition has kept car owners and not the vehicle
manufacturers in the driver's seat when it comes to making
choices regarding vehicle repair destinations.
While we are proud of our service to the American motoring
public, we are extremely concerned that the dynamics are
changing and that our independent shops are being placed at a
competitive disadvantage. This change has nothing to do with
the efforts that our independents are investing in servicing
the public, but rather the attempts, whether intentional or
not, by manufacturers to use technology to obtain a competitive
advantage for their dealer network, an advantage that dealers
have been unable to gain through customer service or price.
Left unchecked, we will soon see the car companies controlling
decisions as to where cars are repaired and not by the person
who has spent their hard-earned money to purchase that vehicle.
The U.S. Congress foresaw the role that technology would
play in the repair market back in the late '80s when the Clean
Air Act was being debated. Back then, the Act required that on-
board diagnostic computers be put on every car to monitor the
emission systems and to alert the car owner to an emissions
defect. While it was anticipated these OBD systems would ensure
that cars would operate more effectively in use regarding
pollution, they were also concerned that car companies would
use this technology to keep the independent aftermarket out by
making access to these computers proprietary and forcing the
independent service provider out of the market.
Therefore, provisions were added in the 1990 Act that would
require on-board computers be accessible without the need for
proprietary tools and that any information needed to repair the
emission system be made available to the independent
aftermarket. While this provision did permit car companies to
retain trade secrets, the legislation specified that no
information may be withheld if that information was provided
either directly or indirectly to the new car dealer.
However, the gains made by the Act have been tempered in
the last several years by the fact that the computers that are
now being installed in vehicles that go well beyond emissions,
monitoring and controlling nearly every function of the vehicle
from safety to entertainment. Further, new technologies are
coming quickly down the pike that could provide the vehicle
manufacturers with even more competitive advantage when it
comes to repairing a customer's vehicle.
It is with this in mind that AAIA and the Coalition for
Auto Repair Equality and a number of consumer groups are
strongly supporting passage of the Motor Vehicle Owners Right
to Repair Act. Introduced by Edolphus Towns, right to repair
ensures that all information and tools provided to the new car
dealer by the car company are also made available to the
independent aftermarket. The information would not be free but
would be provided at, hopefully, a fair and reasonable price.
This bill would not prohibit new technology but rather,
similar to the Clean Air Act, ensure that the use of technology
on vehicles would not act to the detriment of competition in
the aftermarket and, in the end, the consumer.
Car companies have strongly opposed passage of right to
repair based on two contentions: one, that all the information
is already available and, two, that this is a veiled approach
by the independent aftermarket to obtain the trade secrets of
the car companies.
AAIA and CARE do not dispute the fact that the car
companies have done a better job in making information tools
available to our industry. However, much of this progress does
not come due to their willingness to ensure competition for
customers but, instead, EPA service information rules and
political pressure that has been brought on them by
consideration of this right to repair legislation.
Should Congress ultimately decide not to enact right to
repair legislation, we have little doubt that car companies
will be under extensive commercial pressure to cut our industry
out of access to information.
Why are we concerned? Car companies and dealer franchises
are now making significantly more money on their parts and
service industry part of the market. According to NADA, even
though dealership parts and service department sales comprise
11.8 percent of a typical dealer's total sales, it contributes
48 percent of the total operating profit. New car sales make up
60 percent of total sales, but only contribute 35 percent to
total profit. Absent legislation, the need by car companies and
their dealers to maximize profits from parts and service will
override, in the long run, any current cooperation we may be
receiving.
As to the allegations that our industry is looking for
access to trade secrets, one only needs to look at the
composition of our industry to understand why this is not true.
Many of the companies who have produced parts for our industry
and the vehicle aftermarket are the same companies that supply
car companies with the original equipment parts. In other
words, the part in the aftermarket box may be the same as the
part in the original equipment box, just the label is
different. And, oh, yeah, the cost may be considerably less.
Further, maybe most importantly, the bill provides
significant protections for the car company trade secrets, only
requiring them to make available to the aftermarket, the same
information they make available to the dealer network. This is
similar to the Clean Air Act provisions protecting car company
trade secrets.
It is important to note that since the promulgation of the
Clean Air Act 1990 amendments, there has never been
intellectual property dispute regarding an EPA requirements for
emissions-related information or tools.
Madam Chairwoman and members of the Committee, America's
car owners are already being hit with much higher fuel costs
which are making it more difficult to use their vehicle for
even the most basic necessities. Should the competitive market
disappear, car owners will find the cost of car ownership
shooting up even further. After all, they bought the car. They
should be able to obtain the repairs where they would like to
get them accomplished, whether it is themselves or an
independent shop or a dealer.
Thank you again for the opportunity to present this
testimony, and I am open to respond to any questions that you
may have.
Chairwoman Velazquez. Thank you, Mr. Lowe.
[The statement of Mr. Lowe is included in the appendix at
page 99.]
Chairwoman Velazquez. Our next witness is Mr. William
MacLeod. He is a partner at the law firm of Kelly Drye &
Warren. His practice focuses on competition law, trade
regulation, advertising privacy and security. He is also co-
Chair of the Antitrust Practice Group.
Prior to that, he held positions such as Director of the
Bureau of Consumer Protection at the FTC and advisor to the
Assistant Attorney General Antitrust Division in the U.S.
Department of Justice.
Welcome, sir.
STATEMENT OF WILLIAM MacLEOD, PARTNER, KELLY DRYE & WARREN LLP
Mr. MacLeod. Thank you very much, Madam Chairman.
I am William MacLeod, and in addition to the experience you
described I would also note that I represent many thousands of
small businesses both directly and through their trade
associations, but I am here today on my own. I am not speaking
on behalf of them, which gives me the rare privilege of being
able to say what I think on the basis of my experience, both
inside and outside the Federal Trade Commission.
And, Madam Chairwoman, I commend you for calling this
hearing today. I believe this is a most important subject for
all of the constituents and the stakeholders around the FTC to
remember and reassess on a regular basis. And that is, does the
FTC have the power it needs and does the FTC have the
wherewithal to exercise that power?
In the gist of my testimony on the first point, I believe
that it is almost beyond dispute now that the FTC has probably
the most powerful weapon that the government has given any
authority to protect competition and consumers; and that is
Section 5 of the Federal Trade Commission Act. This section is
so broad and gives the Commission the kind of power to address
almost any perceived anti-competitive problem, as well as any
perceived consumer protection problem the agency might assess.
I believe that for the Federal Trade Commission it is in
fact often ironically a detriment, a disadvantage when the
Commission is given a specific authority to address some narrow
character or some narrow aspects of the jurisdiction. And the
reason why is because this broad power of the FTC Act that
allows the Commission to basically assess whether the costs of
some practice it sees in the marketplace outweigh the benefits.
If the Commission stops using that power and starts enforcing
narrow and specific grants of authority, that broad problem
will begin to atrophy. I can give you some examples shortly.
I also made a point in my testimony that I think the most
important limitation the Federal Trade Commission faces is the
limitation of resources, and this limitation of resources is
something that we faced when I was there. And, of course, it is
something that any government agency is always going to face
because our government has limited resources.
I would add to that today, on the basis of the testimony
that you have already heard, my concurrence with many of the
comments that the other significant constraint the Commission
faces is the constraint of exemptions and exclusions from its
jurisdiction.
I myself on behalf of small businesses have occasionally
gone to the Commission and asked the Commission to look into
this particular anti-competitive activity or that anti-
competitive activity only to be told by the Commission staff
they were concerned this activity came too close to an
exemption that had been written into the law or an exclusion
from the exclusion jurisdiction.
I think that it is almost always a benefit to an industry
and to a sector, even if it is regulated by some other
particular agency of jurisdiction, for the Commission to have
the ability to shine the light of its unfairness authority and
its unfair methods of competition authority on the practices
that may be going on in that sector.
On another point that is related to the restraints that the
Commission faces on its budget, when I was a Director of the
Bureau of Consumer Protection, we were occasionally tasked with
the assignment of writing rules and regulations to implement
various statutory mandates that the Commission received. I
believe the Commission, if anything, is writing more rules and
more regulations today; and to an enforcer of the consumer
protection and competition laws, what that tells the Commission
is that the cops that would otherwise be on the beat are going
to be back at their desks and they are going to be deciding how
to address comments and how to draft rules and how to respond
to rulemaking proposals.
I would commend the Committee for calling the attention of
the Commission to those areas that need attention and telling
the Commission to get its cops out on the beat and start
bringing the cases. I can tell you from my experience at the
Commission and I can tell from you my experience since I have
left the Commission that there are a number of senior and a
number of energetic junior and a number of policymaking
officials in between who are ready, willing and able to hear
the complaint of a small business, of a medium-sized business,
of an entrepreneur, of an innovator who is facing a barrier to
compete. Those businesses will receive a very warm welcome at
the FTC, and I believe they will also receive very warm
welcomes if they are given the opportunity to reach outside the
narrow scope of what the FTC may do.
Finally, I think that it is a very easy proxy for what the
FTC should be doing to ask the FTC again, again and again, are
you raising or are you lowering the barriers for small
businesses and for entrepreneurs to compete and to enter into
businesses? If your law enforcement action lowers barriers, you
are likely helping competition. If you are raising barriers,
and sometimes unfortunate FTC enforcement has raised barriers,
but if you are lowering barriers you are almost certainly
helping competition.
Madam Chairwoman, members of the Committee, that concludes
my prepared testimony, I would be glad to answer any questions
that you might have. Thank you very much.
Chairwoman Velazquez. Thank you, Mr. MacLeod.
[The statement of Mr. MacLeod is included in the appendix
at page 106.]
Chairwoman Velazquez. Thank you all for your testimony. It
was very enlightening.
I hope that the staff from the Commission is paying close
attention because, apparently, we have two set of witnesses
here, one from the Commission and the witnesses that are on the
ground dealing with the lack of enforcement and a level playing
field.
Dr. Hazel, you spoke in your testimony that the health care
marketplace has changed dramatically in the last 10 years; and
it was exactly in 1996 when the DOJ-FTC statement of health
care antitrust policy was last updated. As a physician, how
have you seen the medical marketplace change in the past 12
years? And how should enforcement policies of the DOJ and FTC
be updated to reflect those changes?
Dr. Hazel. Boy, how do you begin with a question like that?
We have changed in so many ways, but I think pertinent to
this Committee a couple of things has happened, as pointed out
in the testimony. Number one is that the insurers have grown
larger, and they have consolidated. And you can begin to see
evidence in places such as New Jersey where some of that
happens. Premiums actually go up, instead of down; and there is
evidence out there. I can present the Committee with evidence
about the market consolidation.
We have seen the physicians have gone from being in a
fairly strong position over the years to a fairly weak position
in terms of negotiating on behalf of patients and making
medical decisions and appealing concerns and complaints through
processes. So we need the ability to have contractual
discussions with plans.
But, even more, if you look at what I believe we all think
now and recognize are the issues of health care costs, we need
to look at how health information technology can help us as a
tool. We need to look at the quality improvement initiatives,
and those take a critical mass of physicians to actually be
effective. Could you imagine being the first one to buy a fax
machine? Somebody was, but without others involved in it, it
wasn't particularly useful. So in order to do that and to make
it effective, we have to have the ability for physicians to
organize together and deal with insurers around the issues of
health information technology and quality improvement.
Chairwoman Velazquez. Mr. MacLeod, I know you mentioned
that you deal with small businesses, but can you comment about
the statement made by Dr. Hazel that there has been 400 mergers
and only three antitrust cases have been brought up. How does
that compare to the previous Commission?
Mr. MacLeod. Well, the mergers, as I believe the chairman
of the Commission mentioned, in the insurance industry are
monitored by the Antitrust Division. However, I have seen some
of the material that the American Medical Association has
provided the Commission, and some of the concentration numbers
that the AMA has pointed out are numbers that would be giving
the antitrust authorities some cause for further concern and
consideration.
A very important point to make, and this actually is part
of my entry barrier test, I believe the American Medical
Association makes a very good point when it notes that the
antitrust enforcement against physicians should take into
account the fact that if a few positions or a group of
physicians gets together to accomplish some objective
efficiently and it not creating any barrier to entry to other
physicians, that should not raise serious antitrust concerns.
There is a very good opportunity I think here for a little
balancing of the playing field when it comes to looking at the
physician combinations.
Under the antitrust laws, it is sometimes forgotten in the
drive always to find a lower price for a service or a lower
price for a good, the antitrust laws protect the sellers into a
marketplace as well as the buyers from a marketplace. And the
same economic implications, the same inefficiencies and the
same distortions occur if prices are suppressed to a level
where we see sellers leaving a marketplace or sellers simply
refusing or finding it impossible economically to provide their
services.
That is a very important part of what I heard from the
American Medical Association, and I think that is a very
worthwhile aspect for the antitrust agencies to consider.
Chairwoman Velazquez. I am interested to hear from you what
do you make of about the fact that FTC refused to sign the
Justice Department's recent report on monopoly policy? So it is
a clear indication that there is a split between the agencies.
As a former bureau director at the FTC, have you ever seen this
kind of disagreement before? And will this lead to an
inconsistent antitrust enforcement policy between the agencies?
Mr. MacLeod. That an a very ironic and timely question,
Madam Chairwoman. Because when I started at the Federal Trade
Commission, something very similar happened back in 1982 when
the Antitrust Division first issued its merger guidelines and
the guidelines were issued before the Federal Trade Commission
had the chance to work out every potential disagreement that it
might have over the substance of the guidelines. In the end,
the agencies both were able to converge their enforcement
policies and philosophies, and I expect we will something of
the same thing here.
I don't expect to see different enforcement policies coming
out of the agencies with respect to single firm conduct.
However, it is pretty clear that over the last few years there
has been more activity at the Federal Trade Commission with
respect to non-merger and non-price-fixing behavior than there
has been at the Department of Justice, and I think the FTC is
still the primary source for that kind of adjustment.
Chairwoman Velazquez. Thank you.
I will come back in a second round, so let me recognize Mr.
Westmoreland.
Mr. Westmoreland. I thank the Chairlady.
Mr. Lowe, you represent the Automotive Aftermarket Industry
Association. Do you also represent CARE?
Mr. Lowe. I am testifying on their behalf this time. I
don't represent them as a paid lobbyist or anything.
Mr. Westmoreland. But you are testifying on their behalf.
Do you know if the Automotive Aftermarket Industry Association
or CARE has ever ran any advocacy ads against any member of
this Committee and maybe somebody that is here today?
Mr. Lowe. AAIA's has never done that. I could not speak for
any other group.
Mr. Westmoreland. You could not speak for any other group.
We are under oath today, right?
Chairwoman Velazquez. No.
Mr. Westmoreland. Okay.
How many people are on your Board of Directors?
Mr. Lowe. I think we have 30, 35. I think it is a fairly
large board.
Mr. Westmoreland. How many of those are in the automotive
repair business, are repairers?
Mr. Lowe. On the board? We have one representative that is
a repair shop owner, and then we have a separate division that
just represents repair shops.
Mr. Westmoreland. How many Board of Directors?
Mr. Lowe. Just one.
Mr. Westmoreland. Just one out of thirty-five?
Mr. Lowe. We have distributors, manufacturers, reps. We
have all different aspects of the industry. We are very
vertically integrated.
Mr. Westmoreland. But this is called right to repair bill
that you are interested in and you only have one repairer on
the board of 35; is that correct?
Mr. Lowe. Right, but they also represent a division that
has repair shops.
Mr. Westmoreland. I know. I am just talking about your
Board of Directors.
How many independent repairers have ever been chairman of
your board?
Mr. Lowe. I don't believe in--we have been--I don't
remember having one.
Mr. Westmoreland. Do you know of any that you can recall?
Mr. Lowe. I said I didn't--I don't think we have had one.
Mr. Westmoreland. Let me ask you this. Do you use any
third-party information providers? Or do you know if that one
repairer has ever brought it up at a board meeting that they
use any third-party information providers?
Mr. Lowe. I couldn't tell you if that has come up at a
board meeting. I am sure that most repair shops use third-party
information providers.
Mr. Westmoreland. Have you ever heard of any problems of
them getting information from any of these third-party
providers?
Mr. Lowe. Yes, not from that board member but other repairs
shops.
Mr. Westmoreland. So other people have complained about
being able to getting information from the third party?
Mr. Lowe. Yeah, they said the information might be missing,
and they have faxed them and found that that information was
not available from the OE so it couldn't be provided to them.
Mr. Westmoreland. Do you know if any of your members of
your organization actually own the third providers, the third-
party information providers?
Mr. Lowe. On our Board of Directors?
Mr. Westmoreland. No, anybody that belongs to your group.
Mr. Lowe. Our membership? Yeah, I think that, definitely,
we have memberships from all aspects of the industry.
Mr. Westmoreland. How about AutoZone?
Mr. Lowe. Yes, they are a member of ours.
Mr. Westmoreland. They own Alldata?
Mr. Lowe. Correct.
Mr. Westmoreland. How about NAPA Auto Parts?
Mr. Lowe. Yes, they are a member of ours.
Mr. Westmoreland. Do they own any part of any of these
third parties?
Mr. Lowe. I am sorry. I can't remember.
Mr. Westmoreland. They do.
Mr. Lowe. Okay.
Mr. Westmoreland. They do.
Let me ask you this, have they ever told you that any of
these cannot obtain information to repair vehicles?
Mr. Lowe. They said the independent third parties have all
run into problems obtaining information at one time or the
other.
Mr. Westmoreland. Well, do you realize that these
aftermarket providers, these information providers tell
repairers that they can get them the information that they need
to repair the vehicles?
Mr. Lowe. In a lot of cases they do. They provide a very
cost-effective way for repair shops to get information. If they
were to rely on simply purchasing information from the OEs, it
would be way over their price level to try to compete. So,
yeah, they do provide a very cost-effective solution for most
independent repair shops.
Mr. Westmoreland. For most?
Mr. Lowe. A large--almost all of them, yeah.
Mr. Westmoreland. But if I understand correctly, there was
a third-party group set up to handle something where they
couldn't get this information and out of the 500 million
repairs, only 100 people complained to that group. Do you think
that number is correct?
Mr. Lowe. It is hard to know what the exact number is. I
would say it is probably fairly low mainly because the source
of information, the National Automotive Task Force, which is I
guess what you are referring to, is made up or comprised of
manufacturers. And what they do is they take information
requests from an independent. They then funnel the request to
the proper OE. It is up to the car company to respond to that
independent repair shop.
Then, once they respond, which can take weeks or months, it
could include the information or it could be, well, we are not
going to provide that information.
The problem is an independent repair shop with the car in a
bay doesn't have weeks or months, it has hours to try to repair
that car. So I think what has happened is that there is a
credibility issue with NASTF and they don't have time to spend
to make that complaint to NASTF. I need to make sure the
information is available now.
I think NASTF, as long as there are mandatory requirements
to have information, can serve a role of discussing these
issues. But, without that, NASTF just is an information
clearinghouse, but it doesn't resolve the issue of right to
repair. It is a step in the right direction, but it doesn't
resolve the issue.
Mr. Westmoreland. But out of the 500 million repairs done,
100 complaints have gone to that group. Do you know how many of
those have not been satisfied?
Mr. Lowe. Well, the way they count it, as I understand it,
is that a resolution is an answer but not necessarily the
answer that resolves the issue. We have sent complaints to
NASTF, and it took weeks before they even acknowledged they
even got them. And then they sent it back to us saying they
weren't provided in the proper format, and they had to be
reformatted.
This is not the answer. These are companies, small
businesses that operate in a very tight time frame. If you
bring your car in to get it repaired, you want it back the next
day. You don't want to wait to have it repaired.
Mr. Westmoreland. No, I understand. I completely understand
that, but I had that iPod that I haven't gotten repaired yet.
Mr. Lowe. If you find a place to get iPods repaired, let me
know.
Mr. Westmoreland. I will, brother.
Now, let me ask you this. I asked my staff to look into
this because I think this is important and it is something I
looked into, although I don't serve on the Energy and Commerce
Committee. One of the organizations that you are testifying for
here today ran ads against me, and I was hoping that you knew
about it, because I was going to get some clarification on some
of them. You do represent the parts distributor; is that
correct?
Mr. Lowe. Yes, that is correct.
Mr. Westmoreland. Has any part distributor filed a
complaint with an NASTF about not being able to get any
information that you are aware of?
Mr. Lowe. Not that I am aware of. But I don't see every
complaint, so I couldn't tell you.
Mr. Westmoreland. Has it been something brought up at the
board meetings? Is there a big problem that you all have had?
Mr. Lowe. Parts manufacturing is not the issue. The issue
is at the service end. The parts distributors are concerned
with making sure that they have a customer left at the end of
the day.
Mr. Westmoreland. From what I have read of your proposal,
or at least the bill, you want the purchaser to make a decision
at the point of sale as to who is going to repair his car. Have
you read the bill?
Mr. Lowe. Yes.
Mr. Westmoreland. Is that an accurate statement?
Mr. Lowe. At the point of sale of the car?
Mr. Westmoreland. Yes.
Mr. Lowe. No, that is not our intention. Our intention is
when the car owner is on the road and he has had it for a
while--I mean, for warranty repairs he or she will go back to
the dealer. After that point, we want the car owner just to
have a choice of where to go to have it repaired.
Mr. Westmoreland. I understand. But if this computer is
supposed to be speaking between the owner of the car and the
dealer, I am assuming, who sold them the car, if he says you
need a brake job, you need to call your repair agent at so-and-
so, he's got to know where to get that information to that
person; is that not correct?
Mr. Lowe. Are you talking then about telematic systems; is
that correct?
Mr. Westmoreland. That was in your testimony.
Mr. Lowe. Oh, okay, I am sorry. What I am referring to is
the telematic systems. And, yeah, I guess at that point
somewhere down the line we would like the car owner to make
that decision, but we would like them to have the decision of
where that information goes and not have the manufacturer
determine that.
Chairwoman Velazquez. Time has expired.
Mr. Westmoreland. Thank you, Madam Chair.
Chairwoman Velazquez. Ms. Hirono.
Ms. Hirono. Thank you, Madam Chair.
Mr. MacLeod, I agree with you that Section 5 of the FTC is
a very, very broad mandate that the FTC can use. So in your
testimony you indicated that, as we are concentrating on
helping the small businesses, that one area that the FTC should
really look at is focusing on barriers to entry for small
businesses. And I think--I'll get back to you--but, Mr. Rubin,
is that what you were referring to when you said that the AAI
report and its emphasis on looking at vertical relationships
and the impact that vertical relationships can pose to barriers
to entry? Are you kind of on the same page of looking at
barriers to entry as a way that we can--the FTC enforcement can
really help small businesses? Are you talking about the same
things here?
Mr. Rubin. With the caveat that I don't think there is any
particular concentration on which portion of the antitrust laws
ought to be employed.
The main thrust of the idea is that vertical relationships
as a problem for entry, as an anti-competitive problem, have
pretty much fallen by the wayside. Whether it is Section 5,
Section 2, even Section 1 has traditionally been used in
vertical problems. I don't think that matters much. The
important thing is that vertical relationships deserve, in the
view of the AAI report, to be revitalized as a subject.
Ms. Hirono. And vertical relationships--to look at vertical
relationships, that is within the purview of the FTC Act, is it
not?
Mr. Rubin. Certainly.
Ms. Hirono. So with regard to small businesses both of you
would agree that the enforcement by the FTC should focus on
those kinds of relationships, vertical relationships as a
barrier to entry? Mr. MacLeod?
Mr. MacLeod. Yes, I think that a good way from a
competitive standpoint to look at vertical relationships is to
ask the question whether a vertical relationship begins to
foreclose small businesses and entrants into a market from
access to the channels of distribution. And if it does, the
antitrust laws are very well-equipped to take care of those.
The antitrust laws are less likely, obviously, to look at a
vertical relationship between a small seller and a small buyer.
There does need to be some sort of market effect of these
things. But, beyond that, the antitrust laws and especially the
Federal Trade Commission Act are well-equipped to investigate
and prosecute areas where the competition is being harmed.
Ms. Hirono. Is resale price maintenance per se a violation
of the FTC laws?
Mr. MacLeod. It is not a per se violation of the FTC laws.
And, indeed, the Federal Trade Commission Act doesn't typically
apply the pro se rule. That is typically considered under the
Sherman Act.
But just last month the Supreme court--a little bit longer
ago now--in the last term the Supreme Court had decided to
return resale price maintenance to a rule of reason approach,
and that means that for future prosecutions and for a practical
matter this is what the agencies have been doing for years. The
agencies will look to see whether or not the resale price
maintenance involved is on balance benefiting or harming
competition.
And the answer I think you can think of in very simple
terms. If I were to start a small business tomorrow baking
cookies and I had a couple of distributors to sell those
cookies on the mall, there would not be a real issue to be
concerned about if I were asking my distributors to charge a
dollar a cookie. It is a very different issue if one is
comprising virtually an entire market and is fixing for that
entire market the price their retailers would charge.
Ms. Hirono. So based on the competitive strength of whoever
is imposing the resale price maintenance--basically, it would
be, I guess, the supplier--would you agree that it should be
pro se--once that determination is made, that resale price
maintenance should be per se a violation? Would both you agree
with that?
Mr. MacLeod. No, I think at that point we are out of the
realm of per se and we are asking ourselves, if there was a
market effect, would we condemn the practice? And I think the
answer there is very easily reached under the rule of reason.
So the pro se rule, there are areas where the courts have
adopted, modified pro se rules, and they very seldom enhance
the antitrust analysis. It is much easier to say something is
either always wrong or something will be wrong when we can
identify there is a competitive harm done from it.
Ms. Hirono. I think I am getting a little too esoteric
here. We are talking about FTC enforcement, and I would like to
ask the two of you, with regard to the current FTC enforcement
that supports small businesses and lowers barriers to entry, do
you think the kinds of actions that they have been taking over,
say, the last 10 years promote, help small businesses because
they are looking at barriers to entry?
Mr. Rubin. If I may respond, Congresswoman, the key event
with respect to resale price maintenance is the Supreme Court
decision in Leegin of a couple months ago wherein the Court
ruled that the correct analysis for resale price maintenance
was under the rule of reason, rather than per se unlawful as it
had been theretofore.
The problem as the AAI sees it in their report is that this
is an open-ended analysis and requires more structure. They
advocate that there should be a presumption that resale price
maintenance is inherently suspect. And if there is a mechanism
to reign in the otherwise open-ended analysis of the rule of
reason we believe that would be more helpful in ameliorating
resale price maintenance.
Ms. Hirono. I appreciate that discussion. Actually, my
question was whether the current FTC enforcement addresses what
you were talking about, Mr. MacLeod, barriers to entry. Because
we're here to try to support and help small businesses. So is
that the kind of enforcement that the FTC is engaging in the
entire realm of enforcement that they can engage in? Are they
placing enough emphasis on stopping barriers to entry and
thereby helping small businesses?
Mr. MacLeod. I would like to see more, and I think the
Federal Trade Commission itself has said that it would like to
do more as well. It has set very ambitious goals for itself in
bringing these kinds of cases. They have a brand new director
in charge of the Bureau of Competition branch that investigates
these cases, and I think we can expect to see from the FTC some
more activity in this regard.
It is very hard--I also make this point in my statement--
for us sitting on the outside to know exactly in any individual
case whether the FTC got it right or got it wrong. The last
case the FTC brought in the non-merger area, at least the last
significant controversial one, the commissioners themselves
disagreed. So it is sometimes difficult to know whether or not
the FTC is following the rule to go where the harm is worse and
try to address that harm, but that is exactly where I think
they are trying to head.
Chairwoman Velazquez. Time has expired.
Mr. Shuster.
Mr. Shuster. Thank you, Madam Chair.
My first question to Mr. Rubin and Mr. MacLeod, the FTC
operates under laws that, some of them, are 100 years old or
maybe older. Is there a need for an update in these laws?
Because society has changed. Technology has changed. Mr. Rubin,
I am afraid you are going to give me a dissertation on it, but
are there needs to update the rules and regulations the FTC
operates under?
Mr. Rubin. I didn't realize my reputation was quite that
bad.
Mr. Shuster. You had a doctor in front of there, so I
figured there was a Ph.D. Behind it.
Mr. Rubin. The AAI report and I would point out that the
Antitrust Modernization Commission report as well does not see
any need for textual revision of any major sort to the
antitrust laws. It is a judicially implemented body of law.
Because markets change, because conduct changes, the world
changes very fast, this is an appropriate use in the view of
the AAI.
Mr. MacLeod. Let me see if I can make that shorter, no.
Mr. Shuster. I appreciate that.
The other question, Mr. MacLeod, you said, and I think this
is accurate, that when Congress puts narrowly defining laws,
laws that are very narrow, that is something you believe
diminishes the FTC's ability, is that accurate?
Mr. MacLeod. I think so. When the Commission has a strength
that it stops using and instead becomes an agency looking at a
narrow mandate, that strength begins to atrophy.
Mr. Shuster. Mr. Rubin?
Mr. Rubin. Yes, I concur with that statement.
Mr. Shuster. I don't know how familiar you are with the
right to repair law, but is that a law narrowly defining the
issue for the FTC?
Mr. Rubin. I don't believe that the AAI report specifically
addresses that proposal. I believe that the AAI as an
organization does support the right to repair bill as it
stands. As far as whether that is narrow enough, I am not sure
I can give an opinion on that.
Mr. Shuster. Mr. MacLeod.
Mr. MacLeod. Well, I am not familiar with that law, but the
question I would have about the law is whether it really would
give the Commission more power to address anti-competitive or
unfair acts and practices than the FTC Act already gives the
Commission.
Mr. Shuster. Mr. Lowe, you say there is a problem out
there, but the facts don't seem to bear that out. I am looking
at reports that the National Automotive Service Task Force in
2006 received 32 service information requests; in the year
2005, 48; in 2006 of those 32, 31 were resolved. And we are
talking about 500 million automotive service repair events.
That doesn't seem to me that that is a big problem.
As a former automobile dealer, it was frequent that my
service manager would call the auto manufacturer up and say,
hey, we need to get some information here. There is always
information problems. But that to me seems minuscule. And yet
you are proposing legislation you say is going to correct the
problem that really don't seem to exist to me. Can you expound
upon that?
Mr. Lowe. Well, I think the discussion I had with
Congressman Westmoreland kind of highlights the problem in that
I really don't see that NASTF has an accurate measure of the
repair problem out there that we are seeing when we talk to our
members in the field.
I think, you know, this is what we see happening right now
in the industry. Our industry, when they run into a problem
repairing the car, they don't want to tell their customer they
can't fix that car. They either find some way, either a friend
at the dealership or they have a relationship with the
dealership over the table or under the table, but they find a
way to repair that car.
Our members are problem solvers. They are not people who
like to whine. That is my job. They like to make sure they get
that car repaired without the customer knowing. Because once
that customer loses trust in that repair shop, they are going
to start going to the dealer, and that is a big, big concern to
every individual small shop. These guys they have been building
these shops and they are family owned shops. They might be in
it for generations. They are running into more and more
roadblocks. They are still in there and fighting, but we are
concerned it is going to be in the long term a losing battle.
So we do see a problem, but we only see the problem growing in
the future.
Mr. Shuster. I guess that is my problem with what you are
saying. You say that folks--and I know, many, many service
repair operators and owners and have the greatest respect for
them. This is not about me being against them. It is me being
against what I think you are trying to say to us. I hear you
are whining, but it is not coming from the automotive repair
people. Because, in fact, you have very few members on your
board or association who actually repair cars or automobiles.
The Automotive Service Association is really the
institution or association that represents the thousands and
thousands of people who actually fix cars in this country and
are opposed to your legislation. So I do hear whining, and I
think it is coming from the big part manufacturers, the NAPAs
and the AutoZones.
And so, again, I think I know where you are coming from
here. In fact, you--
Chairwoman Velazquez. Time has expired.
Mr. Lowe. Can I respond to his statement?
Chairwoman Velazquez. The time has expired.
Ranking Member Chabot.
Mr. Chabot. Thank you, Madam Chair.
I will limit my time to 5 minutes. I will let the gentleman
continue, if he'd like to.
Mr. Shuster. I'd appreciate that.
AutoZone--and, again, I have to tell you I know NAPA
distributors and have great regard for them, but I don't hear
them requesting this. They haven't requested this to me in this
legislation.
But you have AutoZone which owns AllData repair, which is a
service that you talked about with Mr. Westmoreland. And you
have an ad here. First it says the number one OEM source of
information--online repair information, and you have an
automotive garage, a guy by the name of Jeff Cosand: I couldn't
get by without AllData. I have used it for over 10 years, and
it is rare that I can't find what I need on OEM information--
that I need. OEM information is the gold standard. That's
especially true for wiring designs.
I mean, you have AutoZone out there saying, we are
advertising. We have a system that we can provide you, the
small repair people, with all the information you need. It is
rare. It is successful.
So, again, knowing many, many people in the repair business
and someone who has owned a dealership and worked in automotive
repair, most technicians don't want to mess with wire
schematics. Because it is time consuming. It is not profitable.
They would rather put brakes on. They'd rather put a muffler
on. They would rather do those kinds of jobs that they can turn
quick and be more efficient in their timing.
So, again, it is pretty clear to me that you are not
representing the repair industry. You are representing the
manufacturers and the distributors of automotive parts.
So, again, the facts don't bear it out. The industry that I
know that repairs them, they don't support it. So, again, I
think this is not a very good piece of legislation. And there
is tremendous competition out there for this business. So I
just don't think the facts bear out your position on this.
Mr. Chabot. Reclaiming my time, and I will allow you to
answer.
Mr. Lowe. Sir, the Automotive Service Association certainly
represents some repair shops. I think out of hundreds of
thousands of repair shops around the country they do represent
12,000. Six thousand of those are body shops, and so half of
those are mechanical shops. Our membership is around 20,000
repair shops. Most of the State groups, repair associations, a
great many of them support right to repair. In fact, I think
the Automotive Service Association is the only group that
doesn't support right to repair.
I would say that some of our members do repair, do brakes
and mufflers, as you say. But a lot of them do very
sophisticated repairs and are very interested in getting repair
information, of course, so I am not sure I agree with your
characterization of our industry.
Mr. Chabot. Thank you.
Dr. Hazel, I know there has been for quite some time
criticism of the antitrust laws relative to how it has impacted
physicians and their inability to join together and negotiate
so that you arguably don't have the clout to negotiate with the
health care insurance companies, et cetera. Would you like to
comment on that or elaborate in any way?
Dr. Hazel. Yes, sir, I would, as the representative of the
human aftermarket industry here. I am glad that we have
broadened this conversation again.
Actually, sir, we are not here to talk about a change in
the law. We are here to talk about a change in the guidelines,
in the enforcement policy. And what we are looking for is a
situation where there is clarity for physicians in how these
rules are going to be enforced, when you see what happens when
the rules are not clear as to what is okay and what is not.
There have been two approval levels. Let's look at two
groups that have gone to the FTC to get approval for
collaboration. One is GRIPA in Rochester, New York. These are
large organizations that took lots of money and a long time to
go through their approval process, and that is not likely to
happen most places. And where there is doubt on the part of
physicians we are going to opt generally. And what you have
seen, the reason there are so few of these, is we don't want
the government in whatever capacity coming into the offices. We
are worried about that.
So what we are looking for is FTC to work with us to
clarify the guidelines so that we can collaborate in getting
health information technology and you do quality improvement,
but we are not looking at this point for a change in the law.
Mr. Chabot. Thank you.
Madam Chair, I yield back.
Chairwoman Velazquez. Mr. Hilal, for more than 20 years now
group purchasing organizations have been exempt from the anti-
kickback statute of the Social Security Act. How does the
special legal status of GPOs make it difficult for
entrepreneurs to compete for business from hospitals? And I
will ask that Mr. MacLeod or Dr. Rubin, if you have any
comments regarding the same question.
Mr. Hilal. Thank you. It has distorted the purchasing
process. Any company that has kickbacks in its decision making
is going to miss on choosing the best product at the best
price. This is why anti-kickback laws were there, and this is
why they are especially needed in health care.
So by carving this out, by introducing a third factor,
which is how much commission is the third party going to make
on the way of that decision, and if that commission is based on
the volume or the size of the contract, then you can see the
distortions that can come in.
The example I gave in my introductory comment was $20
million or $10 million, 5 percent on one or the other can
distort some opinions and some decisions. And in so doing, if
we go back to the large manufacturers and large suppliers, they
usually have the higher market share and wider product
offering. So if we are here to see how that impacts
entrepreneurs and their companies, there is no doubt that they
will be crowded out. They have been crowded out, and they
continue to be.
Chairwoman Velazquez. Mr. MacLeod.
Mr. MacLeod. Yes, I think the antitrust concern is
potentially related, but it is, of course, different as well.
Under the antitrust laws, if a particular health care
organization, whether it is a hospital or some other entity,
chooses to buy one device or one drug over another drug, even
if it is a bad decision or a mistake, there is not much the
antitrust laws have to say about that.
What raises concerns about GPOs, of course, is that large
numbers potentially reaching a significant share of a market
would make the same mistake; and we have seen many reports of
that kind of decision thereby preventing the ability of a new
manufacturer of a device or a company offering a new therapy or
a new drug or a new service to be foreclosed from an entire
market.
I actually represented a physician in a case in which--it
wasn't a GPO, but it was the same kind of situation--where the
physician believed that there was a combination among the
hospitals and physicians in an entire area that prevented him
from providing his radiology services.
It becomes a serious antitrust problem when the market
begins to close down to someone who has a better mousetrap to
offer, with apologies to the marvelous devices and other
services that the health care industry provides.
Chairwoman Velazquez. So do you think there is a basis for
FTC to look into it?
Mr. MacLeod. Oh, I would think that if there is a free road
for the FTC to look into this area that the Commission, both
from the commissioners down to the staff, would be delighted to
do so. Of course, I don't speak for them, but I can tell you
when I was there I would have loved to have had my hands on
this.
Chairwoman Velazquez. Dr. Rubin.
Mr. Rubin. I don't think I have that much to add to what
Mr. MacLeod said, other that when the government is involved in
large purchasing decisions we don't need a competition agency
necessarily to consider competition issues. I think that is the
point that the AAI report makes, that competition is an
American policy, and it deserves to be considered by everyone.
Chairwoman Velazquez. Mr. MacLeod, I understand that you
have experience in international antitrust policies. I would
like to get your perspective regarding which antitrust
regulatory regimes around the world do you think are the most
effective to keeping markets open to entrepreneurs and what can
we learn from them?
Mr. MacLeod. I think the most effective one is still right
here in the United States, Madam Chairwoman; and I think that
it has done a remarkable service around the world. As Chairman
Kovacic testified, he himself has been one of the ambassadors
of the United States in explaining antitrust laws to emerging
economies, as well as to more mature market economies. And that
the provisions that we have under the Sherman Act, the Federal
Trade Commission Act and our other antitrust laws are the same
sorts of provisions that other countries can adopt very
beneficially for their own market economies.
Mr. Hilal. My comment on this from the trenches, please.
Three years ago, venture capital went on notice, put us all
on notice they are no longer going to invest in entrepreneurial
start-up companies, if they can no longer get these companies
to the marketplace. So, yes, we are the bastion of free
markets. We are the bastions of entrepreneurship. But let's not
bruise something that is really working for this Nation. We
lead the world in medical device and innovation, but we are
stifling it.
Chairwoman Velazquez. Dr. Hazel, you know we are in the
midst of a Presidential election; and health care is one area
where both candidates are offering their vision to reform
health care. But a particular area is IT. Everyone talks about
how IT has the great potential to improve the quality of care
for patients, as well as reduce costs. However, the adoption of
health IT requires a degree of cooperation among the provider
community. Are FTC policies discouraging physicians from
getting together to cooperate on health IT?
Dr. Hazel. Yes, ma'am. The answer to your question is, I
believe, yes.
Chairwoman Velazquez. How is that?
Dr. Hazel. Clearly, we think that health information
technology has a lot of promise, as mentioned earlier, as a
tool for looking at outcomes, improving efficiencies and so
forth. The issues that we face--I both have been president of a
practice that has 35 physicians in Northern Virginia and also
chair a regional health information organization in Northern
Virginia, so I am one of the believers.
The issue is really one of partly expense and the savings
that accrue from the things that we are trying to do and trying
to promote. For instance, in your Medicare budget, you have a
3-year payment of 2 percent for e-prescribing in an effort to
reduce medical errors. You have to have systems that work to do
that. You have to have it on the physicians side and on the
pharmacy's side and so forth. So the point being is they take
some investment. They have to be maintained, updated, operated.
And the savings accrue to payers. In the case of Medicare,
theoretically, it is to the government. And what we don't have
is an equivalent.
You were kind enough to put a 2 percent kick in the
Medicare payments for you prescribing for 3 years. We don't
have a similar thing in the private sector side. So as we use
some of the savings to afford the technology, we have to work
with payers to do that.
Does that answer your question?
Chairwoman Velazquez. Yes.
Mr. Chabot, do you have any other questions?
Mr. Chabot. No further questions.
Chairwoman Velazquez. I want to thank all of you. This has
really been a very interesting hearing. I was pleased to see
Mr. Westmoreland. I guess that I have to bring another witness
that has done any kind of political campaign intervention to
get them to come here.
But, in any case, this antitrust issue is very important
for this Committee, especially at a time when we see how the
economy is struggling. And in this case we are all asking that,
based on the law, that the agencies do what is right to make
sure that we all have a level playing field specifically for
small businesses that are the drivers of our economy and that
are creating the jobs that we need to get this economy growing
again.
With that, I ask unanimous consent that members will have 5
days to submit a statement and supporting materials for the
record.
Without objection, so ordered.
This hearing is now adjourned. Thank you.
[Whereupon, at 12:27 p.m., the Committee was adjourned.]
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