[House Hearing, 112 Congress]
[From the U.S. Government Publishing Office]


 
                     HEALTHCARE CONSOLIDATION AND 
                        COMPETITION AFTER PPACA 

=======================================================================

                                HEARING

                               BEFORE THE

                            SUBCOMMITTEE ON
                         INTELLECTUAL PROPERTY,
                     COMPETITION, AND THE INTERNET

                                 OF THE

                       COMMITTEE ON THE JUDICIARY
                        HOUSE OF REPRESENTATIVES

                      ONE HUNDRED TWELFTH CONGRESS

                             SECOND SESSION

                               __________

                              MAY 18, 2012

                               __________

                           Serial No. 112-121

                               __________

         Printed for the use of the Committee on the Judiciary


      Available via the World Wide Web: http://judiciary.house.gov

                               ----------
                         U.S. GOVERNMENT PRINTING OFFICE 

74-262 PDF                       WASHINGTON : 2012 

For sale by the Superintendent of Documents, U.S. Government Printing 
Office Internet: bookstore.gpo.gov Phone: toll free (866) 512-1800; 
DC area (202) 512-1800 Fax: (202) 512-2104 Mail: Stop IDCC, 
Washington, DC 20402-0001 



                       COMMITTEE ON THE JUDICIARY

                      LAMAR SMITH, Texas, Chairman
F. JAMES SENSENBRENNER, Jr.,         JOHN CONYERS, Jr., Michigan
    Wisconsin                        HOWARD L. BERMAN, California
HOWARD COBLE, North Carolina         JERROLD NADLER, New York
ELTON GALLEGLY, California           ROBERT C. ``BOBBY'' SCOTT, 
BOB GOODLATTE, Virginia                  Virginia
DANIEL E. LUNGREN, California        MELVIN L. WATT, North Carolina
STEVE CHABOT, Ohio                   ZOE LOFGREN, California
DARRELL E. ISSA, California          SHEILA JACKSON LEE, Texas
MIKE PENCE, Indiana                  MAXINE WATERS, California
J. RANDY FORBES, Virginia            STEVE COHEN, Tennessee
STEVE KING, Iowa                     HENRY C. ``HANK'' JOHNSON, Jr.,
TRENT FRANKS, Arizona                  Georgia
LOUIE GOHMERT, Texas                 PEDRO R. PIERLUISI, Puerto Rico
JIM JORDAN, Ohio                     MIKE QUIGLEY, Illinois
TED POE, Texas                       JUDY CHU, California
JASON CHAFFETZ, Utah                 TED DEUTCH, Florida
TIM GRIFFIN, Arkansas                LINDA T. SANCHEZ, California
TOM MARINO, Pennsylvania             JARED POLIS, Colorado
TREY GOWDY, South Carolina
DENNIS ROSS, Florida
SANDY ADAMS, Florida
BEN QUAYLE, Arizona
MARK AMODEI, Nevada

           Richard Hertling, Staff Director and Chief Counsel
       Perry Apelbaum, Minority Staff Director and Chief Counsel
                                 ------                                

  Subcommittee on Intellectual Property, Competition, and the Internet

                   BOB GOODLATTE, Virginia, Chairman

                   BEN QUAYLE, Arizona, Vice-Chairman

F. JAMES SENSENBRENNER, Jr.,         MELVIN L. WATT, North Carolina
Wisconsin                            JOHN CONYERS, Jr., Michigan
HOWARD COBLE, North Carolina         HOWARD L. BERMAN, California
STEVE CHABOT, Ohio                   JUDY CHU, California
DARRELL E. ISSA, California          TED DEUTCH, Florida
MIKE PENCE, Indiana                  LINDA T. SANCHEZ, California
JIM JORDAN, Ohio                     JERROLD NADLER, New York
TED POE, Texas                       ZOE LOFGREN, California
JASON CHAFFETZ, Utah                 SHEILA JACKSON LEE, Texas
TIM GRIFFIN, Arkansas                MAXINE WATERS, California
TOM MARINO, Pennsylvania             HENRY C. ``HANK'' JOHNSON, Jr.,
SANDY ADAMS, Florida                   Georgia
MARK AMODEI, Nevada

                     Blaine Merritt, Chief Counsel

                   Stephanie Moore, Minority Counsel



                            C O N T E N T S

                              ----------                              

                              MAY 18, 2012

                                                                   Page

                           OPENING STATEMENTS

Honorable Melvin L. Watt, a Representative in Congress from the 
  State of North Carolina, and Ranking Member, Subcommittee on 
  Intellectual Property, Competition, and the Internet...........     1
Honorable John Conyers, Jr., a Representative in Congress from 
  the State of Michigan, and Ranking Member, Committee on the 
  Judiciary, and Member, Subcommittee on Intellectual Property, 
  Competition, and the Internet..................................     6
Honorable Lamar Smith, a Representative in Congress from the 
  State of Texas, and Chairman, Committee on the Judiciary.......     7

                               WITNESSES

Edmund F. Haislmaier, Senior Research Fellow, Center for Health 
  Policy Studies, The Heritage Foundation
  Oral Testimony.................................................     9
  Prepared Statement.............................................    10
Thomas L. Greaney, Chester A. Myers Professor of Law, Co-
  Director, Center for Health Law Studies, Saint Louis University 
  School of Law
  Oral Testimony.................................................    15
  Prepared Statement.............................................    17
Scott Gottlieb, M.D., Clinical Assistant Professor, New York 
  University, Resident Fellow, American Enterprise Institute
  Oral Testimony.................................................    79
  Prepared Statement.............................................    80

          LETTERS, STATEMENTS, ETC., SUBMITTED FOR THE HEARING

Prepared Statement of the Honorable Melvin L. Watt, a 
  Representative in Congress from the State of North Carolina, 
  and Ranking Member, Subcommittee on Intellectual Property, 
  Competition, and the Internet..................................     3
Prepared Statement of the Honorable Lamar Smith, a Representative 
  in Congress from the State of Texas, and Chairman, Committee on 
  the Judiciary..................................................     5

                                APPENDIX
               Material Submitted for the Hearing Record

Prepared Statement of the Honorable Bob Goodlatte, a 
  Representative in Congress from the State of Virginia, and 
  Chairman, Subcommittee on Intellectual Property, Competition, 
  and the Internet...............................................    89
Prepared Statement of the Honorable John Conyers, Jr., a 
  Representative in Congress from the State of Michigan, and 
  Ranking Member, Committee on the Judiciary, and Member, 
  Subcommittee on Intellectual Property, Competition, and the 
  Internet.......................................................    90
Prepared Statement of the Honorable Howard Coble, a 
  Representative in Congress from the State of North Carolina, 
  and Member, Subcommittee on Intellectual Property, Competition, 
  and the Internet...............................................    91
Material submitted by the Honorable Melvin L. Watt, a 
  Representative in Congress from the State of North Carolina, 
  and Ranking Member, Subcommittee on Intellectual Property, 
  Competition, and the Internet..................................    92
Prepared Statement of The Academy Advisors.......................   199
Prepared Statement of Joel C. White, Executive Director, 
  Coalition for Affordable Health Coverage.......................   202
Prepared Statement of the American Medical Group Association 
  (AMGA).........................................................   208
Prepared Statement of the Association of American Medical 
  Colleges.......................................................   210
Prepared Statement of the American Hospital Association..........   211


          HEALTHCARE CONSOLIDATION AND COMPETITION AFTER PPACA

                              ----------                              


                          FRIDAY, MAY 18, 2012

              House of Representatives,    
         Subcommittee on Intellectual Property,    
                     Competition, and the Internet,
                                Committee on the Judiciary,
                                                    Washington, DC.

    The Subcommittee met, pursuant to call, at 11:15 a.m., in 
room 2141, Rayburn House Office Building, the Honorable Bob 
Goodlatte (Chairman of the Subcommittee) presiding.
    Present: Representatives Goodlatte, Smith, Coble, Adams, 
Watt, Conyers, Chu, and Johnson.
    Staff Present: (Majority) Holt Lackey, Counsel; Olivia Lee, 
Clerk; (Minority) Stephanie Moore, Subcommittee Chief Counsel.
    Mr. Goodlatte. Good morning. The Subcommittee will come to 
order.
    I want to begin by apologizing for being late getting here 
and the votes delaying us even further. But I will dispense 
with my opening statement and incorporate some of those remarks 
perhaps later when we get to the questioning so we can get 
right to the testimony of the witnesses.
    But first I want to recognize the gentleman from North 
Carolina, whose son is getting married this weekend. And our 
full congratulations to him and his family. And it is now my 
pleasure to recognize him for his opening statement.
    Mr. Watt. Thank you, Mr. Chairman.
    And I would dispense with my opening statement, but I am a 
little unhappy with the title to this hearing. It is like the 
newspaper headline. Maybe the content of the hearing itself 
will be about something substantive, but I am a little 
concerned about the title that we put on it. So let me just say 
a few things.
    Consolidation in health care is of utmost importance to me 
and to my constituents, both in the provider and insurance 
markets. In North Carolina, a recent investigation by the News 
and Observer, the Raleigh newspaper, the statewide newspaper, 
and the Charlotte Observer, the second statewide newspaper, 
revealed that hospital consolidation has led to huge profits 
and market dominance for UNC Hospitals, Duke University Health 
System, and, to a lesser extent, Wake Medical Center.
    Hospital prices for patients have soared, while charity 
services have declined or pale in comparison to the hospital 
systems' profit margins. According to these news reports, the 
profits are poured into fancy facilities, generous compensation 
packages for executives, and advanced technology that experts 
say don't always translate into superior health outcomes for 
patients. And reserves in the billions have been set aside for 
future purchases, which, according to the investigation, has 
solidified the market power of these merged entities.
    Another side effect of hospital concentration and 
consolidation is increased bargaining power with insurance 
providers, because the hospitals are so big they are in a 
position to negotiate higher reimbursement rates. In North 
Carolina, Blue Cross has 75 percent of the health insurance 
market. It reports that its cost per hospital admission surged 
by almost 40 percent in 3 years, between 2007 and 2010, but the 
costs are passed on in higher premiums to customers, 
individuals and businesses alike.
    In fact, earlier this month, a prominent attorney filed a 
class action antitrust lawsuit against Blue Cross Blue Shield 
of North Carolina, charging that noncompetition practices among 
its affiliates blocks rival insurers, resulting in accumulation 
of market power which they exert to demand discounts with 
hospitals. The Department of Justice is also reportedly 
investigating whether Blue Cross plans in North Carolina raise 
health insurance premiums by cutting deals with hospitals to 
stifle its competitors from negotiating better rates.
    So, Mr. Chairman, there is much to examine in the area of 
healthcare consolidation and competition, but to link 
examination of these issues to the Affordable Care Act 
threatens to unnecessarily politicize a crisis that is gripping 
our communities across the country. And to do so when a 
decision from the Supreme Court on the constitutionality of the 
healthcare reform law is expected next month seems misguided 
and not befitting to the bipartisanship that has characterized 
this Subcommittee in particular.
    I guess the good news for the Obama administration is that 
even some of those in Congress who oppose the individual 
mandate and hope that it will be invalidated as 
unconstitutional believe that the government's severability 
argument is sound and that the remainder of the law will 
survive.
    The fact of the matter is that hospital consolidation began 
long before the Affordable Care Act. The market muscle of 
insurers, including healthcare insurers, has been made possible 
in part due to the McCarran-Ferguson exemption from antitrust 
laws, which, of course, was in place long before healthcare 
reform. The trend in hospitals merging with other hospitals, 
hospitals acquiring physician practices, physicians banding 
together, and, more recently, plans buying physician practices, 
has been under way for some time and is not unique to North 
Carolina. And, as of 2007, in 21 States, one insurance carrier 
controls more than half of the market.
    The Affordable Care Act, which I supported, will make 
dramatic changes in health insurance and health care to be 
phased in between 2010 and 2018. It is expected to expand 
health insurance to 32 million more Americans. And the medical 
loss ratio, which requires health insurers to spend a specified 
percentage of their premiums on payment for medical services or 
on activities that improve healthcare quality--something which 
apparently some of my colleagues find to be a radical idea--is 
designed to ensure that health insurance premium dollars are 
not consumed by salaries, marketing, and overhead.
    Providing more Americans with better-quality insurance is a 
step in the right direction, and ensuring that health insurance 
premiums serve that purpose rather than making executives rich 
is equally important.
    So, Mr. Chairman, I have a lot more on my chest. I guess to 
expedite getting to the witnesses so that maybe we can talk 
about the consolidation issue, I will put the rest of my 
statement in the record.
    But I just--I am not happy, because we have tried to 
connect a subject here with something that I don't think is 
really related to it. We have a problem. We ought to try to 
solve it, but we ought to try to do it without being partisan 
about this. That is the policy we have followed in this 
Subcommittee in the past, and I hope we will get back to it 
after this hearing.
    With that, Mr. Chairman, I ask unanimous consent to put 
into the record a copy of the State of North Carolina report 
that was generated by the North Carolina director of economic 
research, North Carolina Hospital Association, which reflects 
some of the things that I referenced, and a copy of Professor 
Greaney's article that he cites in his testimony. I ask 
unanimous consent that those two things be put in the record.*
---------------------------------------------------------------------------
    *The material referred to is available in the Appendix.
---------------------------------------------------------------------------
    And I yield back the balance of my time.
    Mr. Goodlatte. Without objection, the gentleman's request 
that the documents cited be put in the record will be granted.
    [The prepared statement of Mr. Watt follows:]
Prepared Statement of the Honorable Melvin L. Watt, a Representative in 
    Congress from the State of North Carolina, and Ranking Member, 
  Subcommittee on Intellectual Property, Competition, and the Internet
    Thank you, Chairman Goodlatte.
    Consolidation in health care is of utmost importance to me and to 
my constituents, both in the provider and insurance markets. In North 
Carolina, a recent investigation by ``The News and Observer'' and ``The 
Charlotte Observer'' revealed that hospital consolidation has led to 
huge profits and market dominance for UNC Hospitals, Duke University 
Health System, and to a lesser extent WakeMed. Hospital prices for 
patients have soared while charity services have declined or pale in 
comparison to the hospital systems profit margins. According to these 
news reports, profits are poured into fancy facilities, generous 
compensation packages for executives, and advanced technology that 
experts say don't always translate into superior health outcomes for 
patients and reserves in the billions have been set-aside for future 
purchases, which according to the investigation, has solidified the 
market power of these merged entities.
    Another side-effect of hospital concentration and consolidation is 
increased bargaining power with insurance providers. Because the 
hospitals are so big, they are in a position to negotiate higher 
reimbursement rates. In North Carolina, Blue Cross has 75% of the 
health insurance market. It reports that it's cost per hospital 
admission surged by almost 40 per cent in a three year period, between 
2007 and 2010. But the costs are passed on in higher premiums to 
customers--individuals and businesses alike.
    In fact, earlier this month prominent attorney David Boies filed a 
class action antitrust lawsuit against Blue Cross and Blue Shield of 
North Carolina charging that the non-competition practice among its 
affiliates blocks rival insurers, resulting in an accumulation of 
market power which they exert to demand discounts with hospitals. The 
Department of Justice is also reportedly investigating whether Blue 
Cross plans in North Carolina raise health insurance premiums by 
cutting deals with hospitals that stifle its competitors from 
negotiating better rates.
    So, Mr. Chairman, there is much to examine in the area of health 
care consolidation and competition. But to link examination of these 
issues to the Affordable Care Act threatens to unnecessarily politicize 
a crisis that is gripping our communities across the country. And to do 
so when a decision from the Supreme Court on the constitutionality of 
the health reform law is expected next month seems misguided and is not 
befitting of the bipartisanship that has characterized this 
Subcommittee. I guess the good news for the Obama Administration is 
that even some of those in Congress who oppose the individual mandate 
and hope that it will be invalidated as constitutional believe that the 
government's severability argument is sound and that the remainder of 
the law will survive.
    The fact of the matter is that hospital consolidation began long 
before the Affordable Care Act. The market muscle of insurers, 
including health care insurers, has been made possible in part due to 
the McCarran-Ferguson exemption from the antitrust laws which, of 
course, was in place long before health care reform. The trend in 
hospitals merging with other hospitals, hospitals acquiring physician 
practices, physicians banding together and more recently, plans buying 
physician practices, has been underway for some time and is not unique 
to North Carolina. And, as of 2007, in 21 states, one insurance carrier 
controls more than half the market.
    The Affordable Care Act, which I supported, will make dramatic 
changes in health insurance and health care to be phased in between 
2010 and 2018. It is expected to expand health insurance to 32 million 
more Americans and the medical loss ratio which requires health 
insurers to spend a specified percentage of their premiums on payment 
for medical services or on activities that improve health care quality 
(which some find a radical idea), is designed to ensure that health 
insurance premium dollars are not consumed by salaries, marketing and 
overhead. Providing more Americans with better quality insurance is a 
step in the right direction and insuring that health insurance premiums 
serve that purpose rather than making executives rich is equally 
important. Critics argue that the MLR will drive insurers out of the 
market, but our antitrust laws protect competition, not competitors.
    Although the reports of hospital consolidation in North Carolina 
are alarming, there are benefits to consolidation in health care 
markets including better integration of care and improved quality and 
accountability. The downside occurs when the consolidated entity 
becomes so large, squeezes out competition, and can dictate 
unjustifiably high rates from insurers. Equally problematic is when 
merged entities become so entrenched they are impossible to undo. Some 
critics maintain that the Accountable Care Organizations authorized by 
the health reform law will lead to greater consolidation. But again, 
despite my concerns about consolidation in my home state, not all 
consolidation is anticompetitive. Health providers are encouraged to 
form Accountable Care Organizations in order to deliver integrated, 
efficient and seamless services to patients. The Accountable Care 
Organizations are intended to eliminate duplication of services and 
coordinate patient care.
    But the enforcement agencies are prepared to provide robust 
examination of Accountable Care Organizations. In October 2011, the FTC 
and DOJ issued a joint ``Statement of Antitrust Enforcement Policy 
Regarding Accountable Care Organizations Participating in the Medicare 
Shared Savings Program.'' The statement acknowledges that ``under 
certain conditions ACOs could reduce competition and harm consumers 
through higher prices or lower quality of care,'' and lays out the 
roadmap the agencies will follow in assessing whether a formed ACO or 
one that seeks guidance pre-establishment is likely to operate 
consistent with antitrust law and policy.
    Mr. Chairman, the legislative process leading to the passage of the 
Affordable Care Act was protracted and often ugly, and certainly did 
not produce a perfect law. And the trends toward consolidation are 
legitimate areas of inquiry. But an examination of whether the 
Affordable Care Act, in its embryonic stages, is driving consolidation 
among health care providers and insurance companies is misleading, 
premature and inconsistent with the bipartisan way in which we have 
sought to operate this Subcommittee.
    I hope that our panel will provide us with meaningful input on a 
problem that has plagued our healthcare system for decades and not be 
misled by the partisan, political headline and title the Republicans 
have chosen to put on this hearing.
    I yield back.
                               __________

    Mr. Goodlatte. And, similarly, the opening statement of the 
Chairman of the full Committee, Chairman Smith, will also be 
made part of the record.
    [The prepared statement of Mr. Smith follows:]
 Prepared Statement of the Honorable Lamar Smith, a Representative in 
   Congress from the State of Texas, and Chairman, Committee on the 
                               Judiciary
    I am proud of the work that the Judiciary Committee has done to 
protect Americans' rights from being threatened by the Obama 
administration's so-called Affordable Care Act.
    This Committee has helped expose the unprecedented and 
unconstitutional individual mandate, which requires every American to 
buy health insurance. This Committee also has worked to protect 
Americans' religious liberty from Obamacare mandates that would violate 
their faith.
    I signed Amicus briefs with the Supreme Court urging them to 
recognize that the Act is unconstitutional and to strike down the 
entire law. And I have joined my Republican colleagues in voting 26 
times to defund all or part of Obamacare.
    Setting the constitutional concerns aside, today's hearing focuses 
on a different sort of problem with Obamacare. The law is not only 
unconstitutional, but it also scrambles the economics of America's 
health care system in a way that reduces competition. And when 
competition is reduced, higher prices, less innovation, and lower 
quality care follows.
    Obamacare is not just bad policy, it is bad economics as well.
    We know that centralized, top-down, government run systems do not 
work as well as competitive markets. In a government run system, 
businesses respond mostly to government mandates. In a free market 
system, businesses respond mostly to the needs and wants of their 
customers.
    But Obamacare places government decision making over free market 
competition.
    Under Obamacare, the government not only tells Americans that they 
have to buy health insurance; it also tells them what that insurance 
must cover.
    Rather than leaving medical professionals free to care for patients 
as they see best, and compete with each other to offer better care, the 
new law buries doctors under a mountain of regulatory paperwork.
    I expect the testimony at today's hearing will demonstrate how the 
Administration's regulatory approach reduces competition and leads to 
higher medical costs and lower quality care.
    The first victim of Obamacare's regulations will be the small, 
independent and innovative insurance companies and health care 
providers.
    The new law already stifles the ability of smaller, more innovative 
insurance companies and medical practices to offer innovative business 
models that might improve on current practices.
    The second victim of Obamacare will be competition as these small 
businesses either go out of business, consolidate into larger 
businesses, or are never started at all.
    The ultimate victim will be the American people who will receive 
higher cost, lower quality care. And to add insult to injury, taxpayers 
are the ones who are forced to foot the bill.
    Competition and innovation benefit patients. Overregulation 
benefits only the largest incumbent companies and the status quo.
    During the debate over Obamacare, Jeffrey Flier, Dean of Harvard 
Medical School, wrote that it:

        ``would undermine any potential for real innovation in 
        insurance and the provision of care. It would do so by 
        overregulating the health-care system in the service of special 
        interests such as insurance companies, hospitals, professional 
        organizations and pharmaceutical companies, rather than the 
        patients who should be our primary concern.''

    Accordingly, Dr. Flier gave the bill ``a failing grade.'' I agree.
    Obamacare violates both the Constitution and common sense. 
Unfortunately, if it is not declared unconstitutional, repealed, or 
modified, the worst is yet to come.
    Ideally, Obamacare would be repealed and replaced with a system 
that promotes competition, innovation and the best interests of the 
American people.
                               __________

    Mr. Goodlatte. Before we turn to the Ranking Member, Mr. 
Conyers, I do want to respond to the gentleman. I think it is 
important that we examine the effects of the general 
competitive state of the healthcare industry as well as the 
competitive effects of a very important new law, which, as you 
know, is controversial, is being reviewed by the Supreme Court, 
but as of now is in the process of being implemented. And we 
should examine the competitive effects of that law on the 
general state of competition in the healthcare industry.
    And I now am pleased to turn to the gentleman from 
Michigan, the Ranking Member of the Judiciary Committee, Mr. 
Conyers.
    Mr. Conyers. Thank you, Chairman Goodlatte.
    I won't be able to get all of this off my chest either, so 
I will just try to make a couple points.
    To begin with, the hearing might be considered premature 
because the forces promoting hospital consolidation have all 
been going on long before the Affordable Care Act that is 
called demeaningly by some ``ObamaCare,'' but I call it 
ObamaCare because it is the first health bill named after a 
President in my memory. It is a little early for this.
    Secondly, the DOJ, the Trade Commission, State attorneys 
general across the country have made attempts to challenge 
hospital and insurance consolidation, which, as Mr. Watt has 
indicated, has been going on for decades. This is not new 
stuff.
    And frequently I think we have to concede--and I am doing a 
further study on it--that the Federal system, the DOJ, has not 
been up on it; they haven't been suing as much as it seems to 
me that they could. And the Federal Court system seems not to 
be pro-consumer, and sometimes they seem to be even 
anticompetitive. Now, I am going to develop that out over the 
fall, and maybe we can come back to this again.
    And then the examination of the State exchanges in the 
Obama health bill, still under court scrutiny, will compete 
with existing insurers. And these exchanges may allow for 
innovators to enter the market, but the fact of the matter is, 
they don't come into effect until 2014. So that is why there is 
going to be a little bit of theory involved in this.
    And I would just close by letting our colleagues know that 
I have reintroduced a bill that ends the huge antitrust 
exemption made in 1945, which was even before I got to the 
Congress, about exempting insurance companies from the 
antitrust provisions. I have done this before in other 
Congresses, and guess what? In 2010, on a recorded vote of 406-
19, my ending the exemption passed.
    And so I would just close by summarizing one of our 
witnesses' assertions, that the Affordable Care Act in fact 
depends on and promotes competition in provider and insurance 
markets and that competitive bargaining between payers and 
providers and a healthy rivalry are good ways to drive prices 
down and keep them at levels that best serve the public.
    So I thank you for allowing these opening comments, sir.
    Mr. Goodlatte. And we thank you for those opening comments.
    Briefly in response, before I turn to the Chairman of the 
Judiciary Committee, who has now arrived, I do want to say 
that, while the main portion, if you will, of the ACA does not 
take effect until 2014, numerous portions of it are already in 
effect, already operating, and they have had already 
identifiable impacts on the healthcare industry. Mergers, for 
example, among healthcare providers have increased by 50 
percent since the passage of the ACA. And we will turn to our 
experts in a moment to hear their views on what may be the 
cause of that.
    But first let's recognize the Chairman of the Committee, 
the gentleman from Texas, Mr. Smith, whose statement is in the 
record but now will be exemplified.
    Mr. Smith. Thank you, Mr. Chairman.
    Mr. Chairman, I am proud of the work that the Judiciary 
Committee has done to protect Americans' rights from being 
threatened by the Obama administration's so-called Affordable 
Care Act. This Committee has helped expose the unprecedented 
and, to me, unconstitutional individual mandate, which requires 
every American to buy health insurance. This Committee also has 
worked to protect Americans' religious liberty from ObamaCare 
mandates that would violate their faith.
    I signed Amicus briefs with the Supreme Court urging them 
to recognize that the Act is unconstitutional and to strike 
down the entire law. And I have joined my Republican colleagues 
in voting 26 times to defund all or part of ObamaCare.
    Setting the constitutional concerns aside, today's hearing 
concentrates on a different sort of problem with ObamaCare. The 
law is not only unconstitutional, but it also scrambles the 
economics of America's healthcare system in a way that reduces 
competition. And when competition is reduced, higher prices, 
less innovation, and lower-quality care inevitably follows.
    ObamaCare is not just bad policy, it is bad economics as 
well. We know that centralized, top-down, government-run 
systems do not work as well as competitive markets. In a 
government-run system, businesses respond mostly to government 
mandates. In a free market system, businesses respond mostly to 
the needs and wants of their customers.
    But ObamaCare places government decision-making above free 
market competition. Under ObamaCare, the government not only 
tells Americans that they have to buy health insurance, it also 
tells them what that insurance must cover. Rather than leaving 
medical professionals free to care for patients as they see 
best and compete with each other to offer better care, the new 
law buries doctors under a mountain of regulatory paperwork.
    I expect the testimony at today's hearing will demonstrate 
how the Administration's regulatory approach reduces 
competition and leads to higher medical costs and lower-quality 
care. The first victim of ObamaCare's regulations will be the 
small, independent, and innovative insurance companies and 
healthcare providers. The new law already stifles the ability 
of smaller, more innovative insurance companies and medical 
practices to offer innovative business models that might 
improve on current practices. The second victim of ObamaCare 
will be competition, as these small businesses either go out of 
business, consolidate into larger businesses, or are never 
started at all. The ultimate victims will be the American 
people, who will receive higher-cost, lower-quality care. And 
to add insult to injury, taxpayers are the ones who are forced 
to foot the bill.
    Competition and innovation benefits patients. 
Overregulation benefits only the largest incumbent companies 
and the status quo.
    During the debate over ObamaCare, Jeffrey Flier, Dean of 
Harvard Medical School, wrote that it, quote, ``would undermine 
any potential for real innovation in insurance and the 
provision of care. It would do so by overregulating the 
healthcare system in the service of special interests, such as 
insurance companies, hospitals, professional organizations, and 
pharmaceutical companies, rather than the patients, who should 
be our primary concern,'' end quote. Accordingly, Dr. Flier 
gave the bill ``a failing grade,'' and I agree.
    ObamaCare violates both the Constitution and common sense. 
Unfortunately, if it is not declared unconstitutional, 
repealed, or modified, the worst is yet to come. Ideally, 
ObamaCare would be replaced with a system that promotes 
competition, innovation, and the best interests of the American 
people.
    Thank you, Mr. Chairman. I yield back.
    Mr. Conyers. Chairman Goodlatte, might I be permitted to--
--
    Mr. Goodlatte. Thank you, Mr. Chairman.
    And the Chair recognizes the gentleman from Michigan.
    Mr. Conyers. Just a 1-minute response to my friend, the 
full Committee Chair, Mr. Smith, who rarely----
    Mr. Goodlatte. Without objection, we will dispense with 
regular order, since I dispensed with it for myself, and give 
the gentleman a minute.
    Mr. Conyers. Your fairness is greatly appreciated.
    All I wanted to do as the author for a number of years of 
the universal single-payer healthcare bill, which I want you to 
know has shaped my attitudes about this subject that we are in, 
I want to just send a memo to our full Committee Chair pointing 
out what I would like to consider inadvertent errors of fact 
that he might want to take note of and maybe even reply back to 
me in writing, as well.
    And I thank the Chair for allowing that intervention.
    Mr. Goodlatte. I thank the gentleman.
    And we now can turn to our very distinguished panel of 
witnesses today. Each witness' written statements will be 
entered into the record in its entirety.
    I ask that each witness summarize their testimony in 5 
minutes or less. To help you stay within that time, there is a 
timing light on your table. When the light switches from green 
to yellow, you will have 1 minute to conclude your testimony. 
When the light turns red, it signals the witness' 5 minutes 
have expired.
    And as is the custom with this Committee, before I 
introduce our witnesses, I would like them to stand and be 
sworn.
    [Witnesses sworn.]
    Mr. Goodlatte. Thank you very much.
    Our first witness is--you are going to have to help me--Mr. 
Haislmaier? Okay. Our first witness is Edmund Haislmaier, who 
is a Senior Research Fellow with The Heritage Foundation Center 
of Health Policy Studies and a member of the Board of Directors 
of the National Center for Public Policy Research. Earlier in 
his career, Mr. Haislmaier was the director of healthcare 
policy for Pfizer, Incorporated.
    Our second witness is Thomas L. Greaney, who is the co-
director of the Center for Health Law Studies and the Chester 
A. Myers Professor of Law at Saint Louis University School of 
Law. He is also an associate professor of hospital and 
healthcare administration at the St. Louis University School of 
Public Health.
    Our third witness is Dr. Scott Gottlieb, who is a clinical 
assistant professor at New York University School of Medicine 
and a resident fellow at the American Enterprise Institute. Dr. 
Gottlieb has served in various capacities at the Food and Drug 
Administration and as a senior policy advisor at the Centers 
for Medicare and Medicaid Services.
    And we will turn first to Mr. Haislmaier.

  TESTIMONY OF EDMUND F. HAISLMAIER, SENIOR RESEARCH FELLOW, 
   CENTER FOR HEALTH POLICY STUDIES, THE HERITAGE FOUNDATION

    Mr. Haislmaier. Thank you, Mr. Chairman and Members of the 
Committee, for inviting me to testify. You have my written 
testimony. I will just in the few minutes briefly summarize 
some of the high points of that.
    You asked me to speak on the subject of health insurance 
markets, as opposed to my colleagues who will be speaking more 
about the provider markets. The area of health insurance is 
where I have spent more of my work.
    Essentially, what I lay out in the testimony is that there 
are indeed a number of provisions in the PPACA that will, in my 
view, lead to reduced competition and some consolidation in the 
insurance market. As noted, some of those have not yet taken 
effect, while some of those have already taken effect.
    Essentially, I can see the market unfolding in a way that 
reduces competition and increases consolidation because of the 
provisions that, first of all, standardize coverage; secondly, 
increase premiums; third, raise barriers to market entry for 
new competitors; and, fourth, encourage industry consolidation.
    I have identified for you in the testimony five specific 
provisions in this legislation that will not only result in 
standardization of coverage--and that was intentional by the 
authors--but will also result, to some degree or another, in 
increased costs.
    The point is simply that when you standardize a product, 
you make it more like a commodity, and you force competition 
away from product differentiation and into simply competing on 
price. And the tendency in that market is to see a 
consolidation in the market into a few large firms. And for 
other policy reasons, I think Congress deliberately chose in 
the PPACA to provide this kind of level of increased 
standardization in this legislation, so it is not that 
surprising that you would see that result.
    My point on cost is simply that, as the costs of the 
standardized package increases, the interest in holding down 
costs by reducing coverage or reducing payments for those 
things that are not required will also increase. And I point 
out that this is, in fact, a dynamic that played out while the 
legislation was being considered, with respect to preventive 
services such as mammography screening.
    So, for a number of reasons, I see that the market will 
become increasingly commoditized. Again, some of that was 
deliberate and intentional. I think it will go beyond the level 
that was intended. But that dynamic has been set in place.
    The other point that I make in here is that the minimum 
loss ratio regulations have a number of effects that could be 
deemed anticompetitive. The first is that they create a barrier 
to market entry for new carriers. It makes it much more 
difficult to finance a new startup health insurer under this, 
and I do not expect to see new ones come into the market as a 
result.
    Secondly, the various standardizations of products and also 
the minimum loss ratio regulation is, in my estimation, going 
to lead to companies for whom they have multiple lines of 
insurance getting out of the health insurance business and 
selling it off. We have already seen some of that occur in the 
market.
    And, finally, that system will favor for-profit insurers at 
the expense of not-for-profit insurers, because for-profit 
insurers can raise the capital to engage in expansion and 
acquisition of rivals, whereas nonprofits won't. And so I would 
envision that that would result in additional reductions in 
competition.
    There are a couple of other provisions also that I see 
having an effect. One is the Multi-State Plan provisions that 
were put in the legislation, which will, again, favor national 
health insurers over regional ones, and the insurer rate review 
provisions.
    In closing, let me point out that what this has 
collectively unleashed is a dynamic that treats health 
insurance like a regulated public utility. And, therefore, an 
insurer really has the choice of do you want to stay in that 
market, in which case you want to become a big insurer so that 
you can resist being pushed around by the regulators, or do you 
want to simply get out of that market. And that is, I think, 
the business decision that insurers will face.
    Two final points. One is that I do not see this 
consolidation really taking effect until after the industry has 
more certainty following the Court's ruling and following the 
elections. Right now, it is being done in bits and pieces, so I 
would not expect to see any big mergers until they have more 
certainty as to what the landscape looks like. So that probably 
wouldn't happen for a year or 2.
    And then, finally, I would simply point out that sometimes 
McCarran-Ferguson is inaccurately described. It is not that 
insurers are exempt from antitrust; it is that the division 
between Federal and State is defined there.
    Thank you, Mr. Chairman. I think my time has expired.
    Mr. Goodlatte. It has. I hate to cut people short, but we 
are facing votes, and we want to give both Professor Greaney 
and Dr. Gottlieb the ability to give their testimony.
    [The prepared statement of Mr. Haislmaier follows:]
  Prepared Statement of Edmund F. Haislmaier, Senior Research Fellow, 
           Center for Health Studies, The Heritage Foundation
    Mr. Chairman and members of the Committee, thank you for inviting 
me to testify on the subject of ``Health Care Consolidation and 
Competition after PPACA.''
    My name is Edmund F. Haislmaier. I am Senior Research Fellow in 
Health Policy at The Heritage Foundation. The views I express in this 
testimony are my own, and should not be construed as representing any 
official position of The Heritage Foundation.
    My testimony today focuses on how I expect competition and 
consolidation to play out in the health insurance sector under the new 
rules and regulations established in the Patient Protection and 
Affordable Care Act (PPACA).
    The PPACA significantly expands, both in scope and in detail, the 
federal regulation of commercial health insurers. A number of its 
provisions are likely, over time, to reduce competition in that sector. 
The reduction in competition will result from provisions in the PPACA 
that standardize coverage, increase premiums, raise barriers to market 
entry, and encourage industry consolidation.
                         standardizing coverage
    The first set of relevant provisions are those that have the effect 
of standardizing health insurance coverage.
    When government imposes regulations that standardize a product, 
producers of the item are, obviously, less able to compete on the basis 
of product differentiation. The product becomes more of a commodity and 
competition among suppliers becomes focused mainly on price. Other 
factors, such as convenience or brand identity, may enable some 
producers to charge marginally higher prices, but even that pricing 
power is fairly limited in a commoditized market.
    At least five provisions of the PPACA will intentionally 
standardize health insurance to varying degrees:

        1.  Section 1302 instructs the Department of Health and Human 
        Services (HHS) to set, and periodically update, an ``essential 
        health benefits package'' of minimum health insurance coverage 
        requirements.

        2.  Section 1302 also limits deductibles for employer plans in 
        the small-group market and limits total enrollee cost-sharing 
        for all health plans to the levels specified in the tax code 
        for qualified High Deductible Health Savings Account plans.

        3.  Section 1201(4) requires all individual and small group 
        health insurance policies to provide coverage for the essential 
        health benefits package.

        4.  Section 1001(5) requires health insurers and employer plans 
        to cover numerous preventive services with no enrollee cost-
        sharing.

        5.  Section 1001(5) prohibits health insurers and employer 
        plans from setting annual or lifetime coverage limits ``on the 
        dollar value of benefits.''

    In a commodity market where competition is focused principally on 
price, firms that are able to reduce their costs through economies of 
scale can generally offer better prices and thus gain market share at 
the expense of their competitors. As a result, markets for commodities 
tend to be dominated by a few, large firms. Those firms achieve their 
dominant size by either under-pricing smaller rivals or acquiring 
competitors. The provisions of the PPACA that standardize and 
commoditize coverage are likely to drive a similar dynamic in the 
health insurance market. Furthermore, because these are new, federal 
standards, the effects will be national in scope. Even carriers that 
have long been dominant in a particular state or region will find it 
harder to maintain their position and keep larger, national players at 
bay.
                       increasing coverage costs
    The above provisions will not only standardize coverage, but in 
many cases will increase coverage costs as well. For example:

          The Administration conducted an economic analysis of 
        the effects of their regulations implementing the PPACA's 
        preventive services coverage requirement. They concluded that, 
        ``The Departments estimate that premiums will increase by 
        approximately 1.5 percent on average for enrollees in non-
        grandfathered plans. This estimate assumes that any changes in 
        insurance benefits will be directly passed on to the consumer 
        in the form of changes in premiums.'' \1\
---------------------------------------------------------------------------
    \1\ Federal Register, Vol. 75, No. 137, July 19, 2010, p. 41738.

          In its regulations implementing the PPACA's provision 
        that prohibits plans imposing annual limits on the dollar value 
        of benefits after 2014, and sets minimum annual limits for 
        prior years, HHS established a waiver process for years before 
        2014, ``if compliance with these interim final regulations 
        would result in a significant decrease in access to benefits or 
        a significant increase in premiums.'' \2\ HHS has granted 
        temporary waivers of the annual limits provision to plans with 
        a total of over 4 million enrollees.\3\ Thus, when the complete 
        prohibition on annual limits takes effect in 2014, at least 4 
        million individuals will be priced out of their current 
        coverage, and it is likely that this provision will increase 
        premiums for millions more.
---------------------------------------------------------------------------
    \2\ Federal Register, Vol. 75, No. 123, June 28, 2010, p. 37191.
    \3\ Total enrollment in plans granted waivers is 4,039,774. Lists 
of those waiver recipients, with enrollment figures, can be found at 
Annual Limits Policy: Protecting Consumers, Maintaining Options, and 
Building a Bridge to 2014, U.S. Department of Health and Human 
Services, at http://cciio.cms.gov/resources/files/
approved_applications_for_waiver.html.

          Congress instructed HHS to define and periodically 
        update an ``essential health benefits package.'' HHS has not 
        yet proposed regulations specifying the initial design of the 
        essential health benefits package and has only issued 
        ``bulletins'' outlining the approaches that it is considering. 
        Given that the statute requires coverage for some categories of 
        benefits not typically included in most current health plans--
        such as ``habilitative'' services--it is likely that the 
---------------------------------------------------------------------------
        eventual package of required benefits will increase premiums.

    The significance of these increased costs is that they generate a 
dynamic for further plan standardization. The more expensive the 
required coverage becomes the more insurers will look to keep premiums 
in check by limiting or cutting benefits that are not required. Indeed, 
State governments have behaved exactly this way in managing their 
Medicaid programs. As the cost to states of paying for mandatory 
Medicaid benefits has increased, states have responded by limiting or 
discontinuing optional Medicaid benefits.
    Similarly, it was fear of this same dynamic occurring that led 
Congress to amend the PPACA provision requiring coverage of preventive 
services so as to overrule the US Preventive Services Task Force's 
recommendation on breast cancer screening. At that time the USPSTF had 
just revised its recommendation on breast cancer screening from 
starting at age 40 to starting at age 50. Breast cancer groups were 
concerned that making coverage mandatory at age 50 would induce plans 
to no longer pay for screening for women between the ages of 40 and 50. 
Congress responded by amending the PPACA to require coverage of breast 
cancer screening using the prior recommendation of age 40.\4\
---------------------------------------------------------------------------
    \4\ New Section 2713(a)(5) of the Public Health Service Act (42 
U.S. Code Sec. 300gg-13(a)(5)) as added by PL 111-148 Sec. 1001(5).
---------------------------------------------------------------------------
    The foregoing example also illustrates another effect of the 
benefit mandates in the PPACA. Over time there is likely to be ever 
more detailed standardization of health insurance coverage as provider 
and patient groups lobby HHS and Congress to expand coverage 
requirements, while insurers and employers, looking to control rising 
plan costs, seek greater regulatory certainty with respect to the 
limits they may impose on required benefits.
    Thus, by giving HHS authority that is both broad and discretionary 
to define what constitutes ``essential benefits,'' Congress set in 
motion a dynamic that will result in increasing standardization of 
health insurance coverage. That increasing standardization shrinks the 
scope for competition among insurers and is likely to result in 
industry consolidation, as the regulated product becomes more of an 
undifferentiated commodity.
                 the ``minimum loss ratio'' regulation
    Another provision of the PPACA that will likely have a major effect 
in reducing insurer competition and driving consolidation within the 
health insurance industry is the so-called ``minimum loss ratio'' (MLR) 
regulation. \5\ This provision established, effective January 1, 2011, 
new federal rules governing how health insurers spend premium dollars. 
These rules are commonly referred to as ``minimum loss ratio'' 
regulations--meaning that they specify the minimum share of premium 
income that an insurer must spend on claims costs and ``activities that 
improve health care quality.''
---------------------------------------------------------------------------
    \5\ New Sec. 2718 of the Public Health Service Act (42 U.S. Code 
Sec. 300gg-18) as added by PL 111-148 Sec. 1001(5) and then amended by 
Sec. 10101(f).
---------------------------------------------------------------------------
    The minimum levels are set in the PPACA at 85 percent for large 
group plans and 80 percent for small group and individual plans. The 
PPACA further stipulates that if an insurer spends less than the 
required minimum in a given year, then the insurer must refund the 
difference to policyholders. Thus, for example, if an insurer is 
required to spend 80 percent of premium income on claims costs for a 
particular product but only spends 75 percent, the insurer is required 
to rebate five percent of the premium collected to policyholders.
                      new barrier to market entry
    One of the effects of the minimum loss ratio regulations is that 
they create a barrier to market entry for new carriers. As with many 
start-up companies, a substantial initial capital investment is 
required to create a new insurer. That investment is needed to fund 
initial marketing and sales efforts to attract paying customers, and to 
build-out the operational and administrative infrastructure for billing 
customers, paying claims, etc. Similar to other new businesses, a new 
insurer initially operates at a loss until it achieves enough 
``scale''--that is, it acquires enough customers--that revenues exceed 
expenses, and it become profitable.
    The MLR regulations effectively constrain the amount, and delay the 
timing, of any excess premium revenues that a start-up health insurer 
could plan to either reinvest in growing its business (say, through 
additional marketing) or repaying its initial investors. Thus, the MLR 
regulations push further into the future a new company's projected 
``break-even'' point, and may also necessitate additional start-up 
capital beyond what was previously projected.
    Of course, it is uncertain whether a particular start-up insurer 
would succeed, even without having to deal with the constraints imposed 
by the MLR regulations. However, what is certain is that imposing the 
new MLR regulations raises the bar for an ``in-process'' start-up, and 
increases the risk and initial capital requirements for an ``in-
planning'' start-up venture.
    In at least one reported case investors decided to terminate an 
``in-process'' start-up health insurer, at least in part, due to the 
effects of the new MLR regulations on its business plan.\6\ What is 
unknowable are how many attempts to create new health insurers that 
were still in the planning stage were simply abandoned once investors 
determined that the added burden of complying with the new minimum loss 
ratio regulations make it too expensive or too risky to go forward.
---------------------------------------------------------------------------
    \6\ Michael Schwartz, ``Startup health insurer shutting,'' Richmond 
BizSense, June 4, 2010, 
at: http://www.richmondbizsense.com/2010/06/04/startup-health-insurer-
shutting and Michael Schwartz, ``With healthcare reform looming, 
nHealth was losing millions,'' Richmond BizSense, June 11, 2010, at: 
http://www.richmondbizsense.com/2010/06/11/with-healthcare-reform-
looming-nhealth-was-losing-millions/.
---------------------------------------------------------------------------
                          market consolidation
    A number of established companies that currently provide health 
insurance can also be expected to exit the market over the next several 
years. The ones most likely to leave are those with multiple lines of 
coverage, for which offering health insurance is just part of their 
larger business. In general, the minimum loss ratio regulations will 
make offering health insurance less profitable while, as previously 
noted, the benefit requirements will also make it more of a commodity 
business. Companies offering multiple lines of insurance will be 
inclined to discontinue, or sell to competitors, their health plans and 
focus instead on the other lines of insurance that they offer--such as 
life, auto, property, or liability coverage--or on non-insurance 
business opportunities.
    The smaller the company, or the smaller the share of a company's 
total business represented by health insurance, the more likely it is 
that the company will exit the post-PPACA health insurance market.
    For example, on September 30, 2010, Principal Financial Group, Inc. 
announced that it was exiting the major medical health insurance market 
and transferring its existing book of business to UnitedHealth 
Group.\7\ Principal will instead focus on its other lines of business, 
which include managing retirement and investment plans, and offering 
life, disability, dental and vision insurance products (none of which 
are subject to the PPACA's new federal insurance regulations).
---------------------------------------------------------------------------
    \7\ Principal Financial Group, ``The Principal Financial Group to 
Exit Medical Insurance Business,'' press release, September 30, 2010, 
at: http://phx.corporate-ir.net/phoenix.zhtml?c=
125598&p=irol-newsArticle&ID=1477633&highlight=.
---------------------------------------------------------------------------
    To be sure, such business decisions are often the product of 
multiple considerations, but the MLR provisions in the PPACA will 
certainly discourage companies with other options from continuing to 
offer health plans.
                      favoring for-profit insurers
    Still another unintended consequence of the minimum loss ratio 
regulations is that they will increase the competitive advantage of 
for-profit insurers over their non-profit rivals. Because the MLR 
requirement constrains the share of premium income that an insurer can 
``retain,'' it limits an insurer's ability to accumulate the capital 
needed to expand, either through increased marketing and sales efforts 
or by purchasing business from other carriers. Non-profit insurers have 
no other source of investment capital beyond whatever excess premium 
income they can accumulate after paying claims costs and administrative 
expenses. However, for-profit insurers can finance their capital needs 
by issuing equity shares. Since the proceeds of a share offering are 
not premium income, the MLR restrictions do not apply.
    Thus, the minimum loss ratio regulation is likely to not only spur 
increased consolidation in the health insurance industry, but to also 
drive that consolidation toward a market dominated by a few, very 
large, for-profit, insurers. It is easy to envision large, for profit 
health insurers applying the same ``roll-up'' strategy of raising 
capital through equity offerings and then using the proceeds to buy 
smaller competitors that has been successfully applied in other 
sectors. Such an outcome is probably not something that the authors of 
the PPACA either intended or envisioned.
                           multi-state plans
    Another provision in the PPACA that favors large, national health 
insurers over smaller or regional ones is the requirement in Section 
1334 that the Office of Personnel Management directly contract with a 
select number of insurers to offer ``multi-state'' plans. Section 1334 
sets a four year schedule for offering multi-state plans in all the 
states, and specifies that multi-state plans are ``deemed to be 
certified by an Exchange'' as qualified plans. That deeming provision 
gives the multi-state plans a guarantee of access to the subsidized 
coverage market, while their competitors have no such guarantee.
                              rate review
    The insurer rate review provisions in Section 1003 of the PPACA 
offer yet another reason for smaller carriers to exit the health 
insurance market and big carriers to get bigger. While Congress did not 
give HHS authority to deny insurer rate increases, HHS has shown that 
it is willing to use its new rate review powers to ``name and shame'' 
insurers if they significantly increase premiums. Secretary Sebelius 
has also threatened to deny uncooperative insurers access to the 
federally subsidized exchange markets that are scheduled to open in 
2014.\8\
---------------------------------------------------------------------------
    \8\ Letter of Health and Human Services Secretary Kathleen Sebelius 
to Karen Ignagni, President and CEO of America's Health Insurance 
Plans, September 9, 2010.
---------------------------------------------------------------------------
    The logical business strategy for surviving in that kind of a 
market is for a carrier to become big enough that it can retain some 
level of pricing power in the face of persistent government attempts to 
impose price regulations. Becoming ``too big'' or ``too important'' to 
fail will be the best strategy for a company seeking to protect itself 
against the threat that government price regulation could make its 
business unprofitable.
                            combined effects
    Collectively, these regulations mean that the PPACA has unleashed a 
market dynamic that will drive toward greater consolidation in the 
health insurance industry, eventually resulting in fewer and larger 
carriers dominating the market--with a consequent reduction in choice 
and competition for consumers. How this new market dynamic will likely 
play out can be seen from past experience in other sectors where 
``consolidators''--such as Staples and Office Depot--built market-
dominating firms through a strategy of raising investment capital and 
then deploying it to acquire small and mid-sized competitors. Indeed, a 
prominent supporter of the PPACA explicitly, and correctly, wrote that 
the legislation ``fundamentally transforms health insurance'' into ``a 
regulated industry . . . that, in its restructured form, will therefore 
take on certain characteristics of a public utility.'' \9\
---------------------------------------------------------------------------
    \9\ Sara Rosenbaum, J.D., A ``Broader Regulatory Scheme''--The 
Constitutionality of Health Care Reform, New England Journal of 
Medicine, 10.1056/NEJMp1010850, October 27, 2010, at NEJM.org.
---------------------------------------------------------------------------
    What was left unsaid is that the characteristics of public utility 
economics are markets dominated by a few large firms, with low rates of 
return and captive customers, in which the firms' pricing power is 
constrained by government regulation, but government's exercise of 
regulatory power is constrained by the need to keep the remaining firms 
profitable to avoid the widespread social and economic dislocation that 
would occur should they be driven out of existence. In essence, this is 
a prescription for achieving market equilibrium through an economic 
``mutually assured destruction'' stand off--with little or no remaining 
consumer choice or product innovation.
    Mr. Chairman, this concludes my prepared testimony. I thank you and 
the rest of the Committee for inviting me to testify before you on this 
issue. I will be happy to answer any questions that you or members of 
the Committee may have.
                               __________

    Mr. Goodlatte. Professor Greaney, welcome. You might want 
to turn that microphone on and pull it close to you.

 TESTIMONY OF THOMAS L. GREANEY, CHESTER A. MYERS PROFESSOR OF 
 LAW, CO-DIRECTOR, CENTER FOR HEALTH LAW STUDIES, SAINT LOUIS 
                    UNIVERSITY SCHOOL OF LAW

    Mr. Greaney. Thank you, Chairman Goodlatte,
    Ranking Member Watt, Committee Ranking Member Conyers. It 
is an honor to be here to address this important subject.
    Issues involving competition, healthcare concentration, and 
antitrust have been the center of my research and teaching for 
the last 24 years. Before that, I had a career at the Justice 
Department, Antitrust Division, working on healthcare 
competition issues.
    Let me summarize my testimony with five key points.
    First of all, the Affordable Care Act depends on and 
promotes competition in provider and payer markets.
    Secondly, hospital market concentration is the product of 
merger waves that have been going on for 20 years. And they 
were sort of fomented by erroneous court decisions, lax 
antitrust enforcement, and they were exacerbated by government 
policies that limited entry and restricted competition.
    The third point is that there is both good consolidation 
and bad consolidation. Problematic consolidation occurs 
principally among horizontal combinations of hospitals forming 
monopolies and getting dominant systems, as well as on the 
insurance side. By contrast, vertical combinations between 
hospitals and physicians can reduce fragmentation and help fix 
the problems of the system and encourage more competition.
    The Affordable Care Act, I believe, encourages the pro-
competitive consolidations. And I think it is erroneous to 
claim that it is somehow responsible for anticompetitive 
consolidations when the consolidations that are going on are 
designed precisely to avoid the competitive benefits of 
competition that the act sponsors.
    Finally, there has been a big resurgence, I think, in 
antitrust enforcement in recent years, and that is all for the 
good. Going forward, I think the FTC and DOJ are committed to 
holding the line on consolidations, and that is the good news. 
That is not to say that consolidation isn't a problem. There is 
concentration out there, and we may reach the point at some 
point where some regulation is needed to deal with dominance, 
because the market may not.
    Just to go through each of those points briefly, I 
mentioned that the Affordable Care Act depends on and promotes 
competition. Many ask, well, why do you need government 
involvement to make healthcare markets more competitive? And 
the answer I point out in my testimony is, there is what I call 
the witch's broth of history: provider dominance, ill-conceived 
payment systems and regulatory policies, and, most importantly, 
market imperfections that make health care different and make 
it sometimes less serving of the consumer interest.
    And we find ourselves with the worst of both worlds. We 
have fragmentation on the one hand. We have doctors operating 
in silos, unconnected to specialists, not communicating and not 
integrating their care. On the other hand, we have 
concentration in pockets of dominant hospitals and some 
dominant physician groups.
    Let me just point out, I summarize this in my testimony, 
but the Affordable Care Act tackles this in various ways. The 
health insurance exchanges are perhaps the most important pro-
competitive instrument that is out there.
    Secondly, don't forget that Medicare payment reform has an 
important effect on competition in private markets. And that 
happens because Medicare delivery reform can promote 
competitive markets. Many of the changes contained in the 
Affordable Care Act contain innovations such as value-based 
purchasing. And remember, private payers often follow the lead 
of Medicare, and I think the organizational changes coming out 
of the Affordable Care Act, particularly with accountable care 
organizations, are going to promote the kind of integration 
that serves competition.
    A couple of points briefly on concentration. It is a 
problem for competition, but it is not just a problem for the 
Affordable Care Act. It is a problem for those who would rely 
on laissez faire proposals, who rely on health savings 
accounts. It is a problem for the Wyden plan that is going to 
rely on competition in Medicare markets.
    There was a merger wave, as Chairman Watt mentioned, but it 
occurred in the mid-1990's, and that is when the great bulk of 
consolidation occurred. It had disastrous results for the 
American public. Prices went up 5 to 40 percent after mergers. 
The Massachusetts attorney general just did a report a year ago 
that summarizes the price increases that flow from market 
dominance.
    There is some good news on the antitrust enforcement side. 
The FTC, DOJ are moving aggressively on hospital mergers and 
market dominance, especially where we see the dominant payers 
confronting the dominant hospitals. That is a big problem. And 
I think there is a glimmer of hope in the potential coming out 
of affordable care organizations that can promote some 
competition, can induce some additional competition.
    That is not to say we have solved the problem. And my 
testimony goes on to discuss some pro-competitive things that 
can be done, including lessening barriers to entry, such as 
certificate-of-need laws, perhaps loosening up the 
opportunities for physician-controlled hospitals.
    Mr. Goodlatte. Thank you, Professor Greaney.
    [The prepared statement of Mr. Greaney follows:]

    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
        
                               ATTACHMENT

[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

                               __________

    Mr. Goodlatte. I hate to cut you off, as well. We are going 
to turn to Dr. Gottlieb.
    To let the Members know, the Ranking Member and I have been 
talking, and we understand that Professor Greaney needs to be 
out of here not too long after 1 o'clock. This vote series is 
going to run for probably at least an hour. So it is our 
intention after Dr. Gottlieb testifies to adjourn the hearing.
    And we will submit lots of questions from any Member who 
wishes to have questions submitted--and I certainly have a lot 
of questions; I am sure the Ranking Member does, as well--to 
all of you to respond in writing. We apologize for the brevity 
of this, but I think it is not going to resurface later this 
afternoon on a day when Members are leaving.
    So, Dr. Gottlieb, welcome.

     TESTIMONY OF SCOTT GOTTLIEB, M.D., CLINICAL ASSISTANT 
   PROFESSOR, NEW YORK UNIVERSITY, RESIDENT FELLOW, AMERICAN 
                      ENTERPRISE INSTITUTE

    Dr. Gottlieb. Thanks, Mr. Chairman.
    Mr. Chairman, Mr. Ranking Member, and Members of the 
Subcommittee, I appreciate the opportunity to testify here 
today.
    By next year, about two-thirds of American physicians will 
be working as salaried employees. This trend was been under way 
for years, as has been noted, but it is accelerating. And 
provisions in the Patient Protection and Affordable Care Act 
are responsible for some of these combinations. The largest 
portion of these newly salaried physicians are being directly 
employed by hospitals or hospital-owned medical practices. 
According to the Medical Group Management Association, almost 
two-thirds of the doctors who signed employment contracts in 
2009 entered into arrangements with hospitals. This includes 
half of all doctors leaving residency training.
    It is not just hospitals; health plans are also looking to 
purchase providers to gain more control over utilization rates, 
and in turn costs, in an environment where they see their 
premiums capped and their utilization fixed by new mandates. 
These trends aren't a consequence of natural market forces. It 
is the result of a deliberate policy set in motion by changes 
in the way health care is being reimbursed, in particular where 
doctors see flat or declining reimbursement levels and 
increasing costs.
    PPACA relies on layers of provisions designed to shift 
financial risk onto providers in a bid to move away from the 
fee-for-service reimbursement model that is blamed for 
excessive and, some argue, inappropriate use of healthcare 
services. By shifting financial risk on to providers, the law 
hastens this sort of consolidation.
    That consolidation is being hailed by many as a needed 
industrialization of the practice of medicine, a way to make 
the delivery of care more efficient and scalable. There is a 
premise that, once doctors become employed by larger groups and 
health systems, it will be easier to put in place measures to 
manage their use of medical services. There is also a perhaps 
excessive faith that consolidated networks will have the 
incentive, capital, and wherewithal to pursue measures that 
lead to better coordination of care.
    These arrangements have many champions, but they also carry 
significant uncertainty. First, there is evidence that, as 
doctors transition into becoming salaried employees of 
hospitals and health systems, their individual productivity 
generally declines. Concerns are also raised about the 
potential for consolidation to raise costs. There is evidence 
that constructs like ACOs can add to costs, as some providers, 
particularly hospitals, gain market power to negotiate higher-
than-competitive rates in the private market. Finally, the 
consolidation is leaving a great deal of uncertainty among 
providers about what is permissible and appropriate. This is 
distorting the business decisions that are being made.
    Historically, innovations in the delivery of health care, 
from the advent of the first HMO to the creation of long-term-
care hospitals and home infusion to skilled nursing facilities, 
arose as the result of startup outfits, often backed by venture 
capital and headed by entrepreneurs who were in search of 
above-market rates of return on invested capital.
    But PPACA contains deliberate provisions aimed at 
regulating returns on invested capital, discouraging different 
forms of entrepreneurship. These provisions are, in many cases, 
the expression of a political philosophy. That philosophy views 
profits earned on the provision of care as money that should 
have been channeled instead to direct patient care. But the 
result is that these entrepreneurs are not pursuing new 
healthcare services ventures. Capital flowing to these 
endeavors has fallen sharply.
    The only way we are going to bend the healthcare cost curve 
is by introducing genuine innovations in how we provide medical 
care--new approaches that lower costs while providing more 
health care for each dollar that we spend. These innovations 
won't appear as a result of the critical mass created through 
carefully orchestrated mergers. These ideas won't be hatched 
inside CMS. Nor are these concepts likely to arise from new 
twists on old concepts like capitation. Instead, genuine 
innovation in the delivery of health care will arise the way it 
always has: from entrepreneurs who raise capital in search of 
profitable new ways to reengineer old systems, appealing to 
consumers by bringing them a better service at a lower price.
    Thank you, Mr. Chairman.
    Mr. Goodlatte. Thank you.
    [The prepared statement of Dr. Gottlieb follows:]
     Prepared Statement of Scott Gottlieb, M.D., Resident Fellow, 
                     American Enterprise Institute*
---------------------------------------------------------------------------
    *The views expressed in this testimony are those of the author 
alone and do not necessarily represent those of the American Enterprise 
Institute.
---------------------------------------------------------------------------
                              introduction
    Chairman Goodlatte, Ranking Member Watt, and Members of the 
Subcommittee, I appreciate the opportunity to testify here today.
    By next year, about two-thirds of American physicians will be 
working as salaried employees of large groups and hospitals. This 
movement has been underway for years. Over the last decade, the number 
of independent physicians was falling by about 2% a year. But these 
trends are now accelerating. Many observers point to provisions in the 
recently enacted Patient Protection and Affordability Act (PPACA) as a 
primary driver. Starting in 2013, the number of independent physicians 
will start declining by 5% a year according to a recent report by 
Accenture Health.i
---------------------------------------------------------------------------
    \i\ Clinical Transformation: Dramatic Changes as Physician 
Employment Grows, Accenture Health, 2011
---------------------------------------------------------------------------
    The largest proportion of these newly salaried physicians are being 
directly employed by hospitals or hospital owned medical 
practices.ii Hospital physician employment rose 32% from 
2000 to roughly 212,000 physicians in 2010. That means that hospitals 
directly employ about a quarter of all U.S. 
physicians.iii,iv
---------------------------------------------------------------------------
    \ii\ Anne Mutti and Jeff Stensland. Provider consolidation and 
prices. Presentation before the Medicare Payment Advisory Committee. 
October 9, 2009
    \iii\ 2012 Edition of the American Hospital Association Statistics
    \iv\ Haydn Bush. Hospital Statistics Chart Rise in Physician 
Employment. Hospital and Health Networks Daily, January 06, 2012
---------------------------------------------------------------------------
    These realities are reflected in multiple surveys. Another report 
found 70% of national hospital and health systems plan to hire more 
physicians in the next three years. Meanwhile, two-thirds of hospitals 
reported that they are seeing more requests from independent physician 
groups seeking direct employment or collaboration with 
hospitals.v This is confirmed by a recent review of the open 
job searches held by one of the country's largest physician-recruiting 
firms. It shows that nearly 50% are for jobs in hospitals, up from 
about 25% five years ago.vi
---------------------------------------------------------------------------
    \v\ Karen M. Cheung. 70% hospitals, health systems plan more 
physician employment. Fierce Healthcare, October 12, 2011
    \vi\ Scott Gottlieb. No, You Can't Keep Your Health Plan. The Wall 
Street Journal, May 18, 2010
---------------------------------------------------------------------------
    According to the Medical Group Management Association, almost two-
thirds of the doctors who signed employment contracts in 2009 entered 
into arrangements with hospitals. This includes half of all doctors' 
leaving residency training.vii Surveys of physicians 
demonstrate that an increasing number of newly minted doctors prefer 
the salaried arrangements to the traditional private practice models. 
Recent survey data also shows that physicians believe the current 
employed trend will continue and be a preferred option for 
them.viii
---------------------------------------------------------------------------
    \vii\ Medical Group Management Association. Physician Placement 
Starting Salary Survey: 2010 Report Based on 2009 Data. June 4, 2010
    \viii\ Survey by McKesson Practice Consulting and Modern Medicine, 
2011
---------------------------------------------------------------------------
    It's not only hospitals that are acquiring doctors. Health plans 
are also dipping their toes in the water, looking to purchase 
healthcare delivery organizations to gain more control over practices, 
utilization rates, and in turn costs. Toward the end of 2011, United 
Health Group purchased Monarch, the largest physician group in Orange 
County California with 2300 members. As another example, Pennsylvania-
based insurer Highmark is teaming up with West Penn Allegheny Health 
System to compete with UPMC, the large, well-known medical center in 
Pittsburgh.ix
---------------------------------------------------------------------------
    \ix\ Rita Numerof. Massive Healthcare Consolidation in the PPACA 
Era, April 13, 2012
---------------------------------------------------------------------------
    Investment bankers who work on mergers and acquisitions in the 
healthcare services industry privately concede that there is a lot of 
activity among health plans looking to acquire physician networks. So 
far, the large health plans have not been able to buy as many assets as 
the hospitals. For their part, the doctors seem to prefer to sell their 
practices to hospitals rather than the health plans.
    These trends aren't a consequence of natural market forces. It's 
the outgrowth of a deliberate industrial policy set in motion by 
changes in the way healthcare is being organized and reimbursed. These 
new arrangements have been hastened by PPACA. The law relies on layers 
of provisions designed to shift financial risk onto providers in a bid 
to move away from the fee-for-service reimbursement model that's blamed 
for excessive, and some argue inappropriate use of healthcare 
services.x PPACA contains deliberate constructs to 
industrialize healthcare by moving physicians into capitated 
arrangements and larger groups where reimbursement, utilization, and 
quality measures can be more tightly controlled. These arrangements 
have many champions, but also carry significant uncertainty.
---------------------------------------------------------------------------
    \x\ Atul Gawande. The Cost Conundrum, What a Texas town can teach 
us about health care. The New Yorker, June 1, 2009
---------------------------------------------------------------------------
    As I will discuss at the close of my testimony, the only sure way 
that we're going to bend the cost curve is by coming up with 
fundamentally new ways to deliver healthcare services that improve 
efficiencies and enable us to get more medical care for each dollar we 
spend. These ideas are going to come forward the same way better ideas 
have always arisen--from start-ups backed by entrepreneurs, supported 
by investment capital, coming together in search of profits. Yet PPACA 
contains provisions that I fear tilt against these kinds of 
innovations. The legislation relies instead on arrangements that could 
serve to entrench existing players.
    Principal among these new arrangements is the creation of 
Accountable Care Organizations (ACOs). This concept envisions that 
providers will consolidate into networks that will, in turn, take 
charge for the medical care of defined populations of patients. An ACO 
will be able to share in some of the savings that they achieve by 
reducing utilization and improving outcomes for the patients assigned 
to it. Along with other forms of capitated payment arrangements (such 
as bundled payments and medical homes) the combined effect of the 
legislation's payment reforms is to shift financial risk to providers. 
In the face of these changes, doctors are choosing to sell their 
medical practices rather than take on added uncertainty.
    Many industry experts are asking whether the current trend to 
employ physicians is sustainable or just a revisiting of what occurred 
in the 1990s, when hospitals were employing physicians in response to 
managed care, growing competition, and pressure to aggregate market 
share. The 1990s mergers were mostly defensive gestures aimed at 
thwarting competition from expanding, for-profit hospital chains.
    This time things may be different, and in many ways the same.
    This time, there may be no turning back from these arrangements. 
Doctors who enter into these new salaried appointments may find 
themselves hard pressed to unwind these relationships, even should the 
terms change and these affiliations no longer appear financially 
attractive or personally rewarding.
    The current consolidation is being hailed in some quarters as a 
needed industrialization of the practice of medicine--a way to make the 
delivery of medical care more efficient and scalable. There is a 
premise that once doctors become employed by larger groups and health 
systems, it will be easier to put in place measures to manage doctors' 
use of medical services in ways that can improve efficiencies and lower 
costs. There's also a perhaps excessive faith that larger, consolidated 
networks of providers will have the incentive, capital, and wherewithal 
to pursue management and technology improvements that lead to better 
coordination of care. There is plenty of reason to be skeptical of 
these assumptions.
            impact of consolidation on clinical productivity
    First, there's evidence that as doctors transition into becoming 
salaried employees of hospitals and health systems, their individual 
productivity (in terms of metrics such as volume and intensity of care 
delivered) generally declines outright, or is unfavorably impacted by 
these arrangements in other, more subtle 
ways.xi,xii,xiii,xiv,xv
---------------------------------------------------------------------------
    \xi\ Lawton Robert Burns and Ralph W. Muller. Hospital-Physician 
Collaboration: Landscape of Economic Integration and Impact on Clinical 
Integration. Milbank Quarterly 2008;86:375-434
    \xii\ Christopher D. Ittnera, David F. Larckerb, Mina Pizzinic. 
Performance-based compensation in member-owned firms: An examination of 
medical group practices, May 2007
    \xiii\ Wolinsky F, Marder W. Spending time with patients, the 
impact of organisational structure on medical practice. Medical Care 
1982; 20(10):1051-9
    \xiv\ I S Kristiansen, K Holtedahl. Effect of the remuneration 
system on the general practitioner's choice between surgery 
consultations and home visits. Journal of Epidemiology and Community 
Health 1993;47:481-484 doi:10.1136/jech.47.6.481 http://jech.bmj.com/
content/47/6/
481.abstract?ijkey=286b3bd9c25afb8bb73203854199b0c2b49d86e0&keytype2=tf_
ipsecsha
    \xv\ Gosden T, Forland F, Kristiansen IS, Sutton M, Leese B, 
Giuffrida A, Sergison M, Pedersen L. Impact of payment method on 
behavior of primary care physicians: a systematic review. Journal of 
Health Service Research Policy 2001 Jan;6(1):44-55
---------------------------------------------------------------------------
    It's important to note that studies that have examined this 
question contain many limitations. This is because of the inherent 
difficulty in studying the impacts of different payment 
systems.xvi It's hard to look at controlled experiments that 
address questions of how doctors respond to different payment systems.
---------------------------------------------------------------------------
    \xvi\ Gosden T, Forland F, Kristiansen IS, Sutton M, Leese B, 
Giuffrida A, Sergison M, Pedersen L. Capitation, salary, fee-for-
service and mixed systems of payment: effects on the behavior of 
primary care physicians. Cochrane Database Systematic Reviews 
2000;(3):CD002215.
---------------------------------------------------------------------------
    It's also true that data shows some offsetting economic impacts to 
these drops in productivity. For example, physicians' use of services 
such as diagnostic tests and procedures also shows corresponding 
decline when doctors move into salaried arrangements. The totality of 
the data suggests, however, that the reduction in costs generated by 
the salaried schemes (typically as a result of the delivery of fewer 
tests and treatments) may be partially, if not completely offset by the 
lower intensity of work (productivity) that physicians achieve under 
these arrangements.xvii
---------------------------------------------------------------------------
    \xvii\ T. Gosden, L. Pedersen and D. Torgerson. How should we pay 
doctors? A systematic review of salary payments and their effect on 
doctor behavior. QJM 1999;92:47-55
---------------------------------------------------------------------------
    While it's generally hard to isolate the impact of payment 
structure on productivity, a number of studies have attempted to assess 
these impacts. In one study researchers used a resident continuity 
clinic to compare prospectively the impact of salary versus fee-for-
service reimbursement on physician practice behavior. This model 
allowed randomization of physicians into salary and fee-for-service 
groups and separation of the effects of reimbursement from patient 
behavior.xviii
---------------------------------------------------------------------------
    \xviii\ Gerald B. Hickson, William A. Altemeier, James M. Perrin. 
Physician Reimbursement by Salary or Fee-for-Service: Effect on 
Physician Practice Behavior in a Randomized Prospective Study. 
Pediatrics 1987;80:344-350
---------------------------------------------------------------------------
    The authors found that physicians reimbursed by fee-for-services 
(FFS) scheduled more visits per patient than salaried physicians (3.69 
visits versus 2.83 visits, P < .01) and saw their patients more often 
(2.70 visits versus 2.21 visits, P < .05) during the 9-month study. 
Fee-for-service physicians also provided better continuity of care than 
salaried physicians by attending a larger percentage of all visits made 
by their patients (86.6% of visits versus 78.3% of visits, P < .05), 
and by encouraging fewer emergency visits per enrolled patient (0.12 
visits versus 0.22 visits, P < .01).xix
---------------------------------------------------------------------------
    \xix\ Gerald B. Hickson, William A. Altemeier, James M. Perrin. 
Physician Reimbursement by Salary or Fee-for-Service: Effect on 
Physician Practice Behavior in a Randomized Prospective Study. 
Pediatrics 1987;80:344-350
---------------------------------------------------------------------------
    Another review article surveyed the available literature examining 
how salaried arrangements impact physician productivity. It drew 
similar conclusions. The article found that salary payment reduces 
activity compared with fee for service. Capitation appeared to have a 
similar but more subdued effect. The authors concluded that ``if cost 
containment is a key policy aim of government then salaried payment 
systems are more likely to achieve this compared with FFS and possibly 
more effective than capitation systems. However, cost containment by 
itself may be inefficient if it results in the provision of sub-optimal 
care.'' xx
---------------------------------------------------------------------------
    \xx\ T. Gosden, L. Pedersen and D. Torgerson. How should we pay 
doctors? A systematic review of salary payments and their effect on 
doctor behavior. QJM 1999;92:47-55
---------------------------------------------------------------------------
    This data raises a fundamental choice: If the goal is reduce 
spending by driving down utilization then the salaried arrangements 
might provide a more direct means of imposing top-down controls. If the 
goal is to reduce costs by increasing productivity then the salaried 
arrangements might thwart these types of outcomes.
              consolidation can drive up healthcare costs
    Concerns have also been raised about the potential for 
consolidation to drive up costs. If constructs such as ACOs end up 
fostering more market concentration among providers, they have they 
could merely shift costs to payors. ``Must-have'' xxi 
hospitals and physician groups can exert considerable market power to 
demand higher rates from insurers. There is plenty of empiric evidence 
demonstrating that these arrangements can add to costs. Studies of 
pricing have shown that some providers, particularly hospitals, can 
gain significant market power to negotiate higher-than-competitive 
prices as they gain this sort of local market share.xxii
---------------------------------------------------------------------------
    \xxi\ These must have groups are generally providers that health 
plans need to include in networks to be attractive to employers and 
consumers in a local market.
    \xxii\ Ginsburg PB. Wide variation in hospital and physician 
payment rates evidence of provider market power. Res Briefs 2010 
Nov;(16):1-11
---------------------------------------------------------------------------
    While a full discussion of these economic issues is beyond the 
scope of my testimony today, we need to carefully consider the 
potential impact from the arrangements that are being encouraged under 
PPACA. It has been observed that exclusive relationships, particularly 
those involving highly sought after or high-quality specialist 
physicians and hospitals, could give a consolidated network such as an 
ACO undue leverage.xxiii Exclusivity may also promote 
increased internal referrals within the network, which could magnify 
the effects of increased market power.xxiv In the past, 
antitrust policy has generally proved ineffective in curbing provider 
strategies that capitalize on gains in market power to win higher 
payments.xxv For these reasons, we should be especially 
mindful of the potential risks of encouraging a rapid evolution toward 
these consolidated relationships.
---------------------------------------------------------------------------
    \xxiii\ Berenson RA, Ginsburg PB, Christianson JB, Yee T. The 
growing power of some providers to win steep payment increases from 
insurers suggests policy remedies may be needed. Health Affairs 2012 
May;31(5):973-81
    \xxiv\ Richard M. Scheffler, Stephen M. Shortell, Gail R. Wilensky. 
Accountable Care Organizations and Antitrust Restructuring the Health 
Care Market. Journal of the American Medical Association 
2012;307(14):1493-1494. doi:10.1001/jama.2012.451. http://
eresources.library.mssm.
edu:11635/article.aspx?doi=10.1001/jama.2012.451
    \xxv\ Berenson RA, Ginsburg PB, Kemper N. Unchecked provider clout 
in California foreshadows challenges to health reform. Health Affairs 
2010 Apr;29(4):699-705
---------------------------------------------------------------------------
    While observers are pointing to other entities that might form ACOs 
(large multispecialty medical groups, venture capital backed services 
companies) the bottom line remains that hospitals are likely to 
dominate the formation of these new arrangements. There are two 
principal reasons. First, the largest avoidable costs are related to 
hospitalizations. Second, in many communities, the hospital is the only 
organized delivery system able to access capital and execute on the 
model.xxvi
---------------------------------------------------------------------------
    \xxvi\ Jeff Goldsmith. Accountable Care Organizations: The Case for 
Flexible Partnerships Between health Plans and Providers. Health 
Affairs, January 2011 vol. 30 no. 1 32-40
---------------------------------------------------------------------------
    The hospitals also have an ulterior motive. It's still unclear if 
ACOs will be profitable, successful enterprises. But for a hospital to 
succeed with the model, it need not succeed in lowering costs. If the 
process of forming an ACO lets a hospital consolidate local providers, 
the hospital will wins even if the ACO fails to succeed.
    Physicians, for their part, are being driven to these arrangements 
by changes in the landscape that sees their practice costs rising, 
their reimbursement falling, while the financial risk they need to bear 
under PPACA increases through more capitated arrangements. Seeing costs 
rise amidst shrinking revenue, doctors are finding the prospect of 
trading in their businesses for a salaried position at a hospital 
attractive.
    The concern that ACOs and other consolidated networks could serve 
to increase healthcare costs have already been raised among a diverse 
group of observers, including employers,xxvii the Federal 
Trade Commission (FTC)xxviii, as well as policymakers. For 
example, it has been suggested that the schemes may exacerbate cost 
shifting to commercially insured patients by ACOs looking to qualify 
for the Medicare cost-reduction bonuses.xxix This cost 
shifting may be enabled by the ACOs new market power. One study showed 
that this is what happened in California as independent practice 
associations flourished there.xxx
---------------------------------------------------------------------------
    \xxvii\ Employers express anti-trust and cost-shifting concerns on 
ACOs. America's Health Insurance Plans Coverage. June 3, 2011. http://
www.ahipcoverage.com/2011/06/03/employers-express-anti-trust-and-cost-
shifting-concerns-on-acos. Accessed October 2012
    \xxviii\ Federal Trade Commission, Department of Justice. Statement 
of antitrust enforcement policy regarding accountable care 
organizations participating in the Medicare shared savings program. 
Federal Register 2011;76(209):67026-67032
    \xxix\ Remarks of J. Thomas Rosch. Accountable Care Organizations: 
What Exactly Are We Getting? Commissioner, Federal Trade Commission, 
before the ABA Section of Antitrust Law Fall Forum, Washington, DC. 
November 17, 2011. http://www.ftc.gov/speeches/rosch/111117fall
forumspeech.pdf
    \xxx\ Robert A Breneson, Paul B. Ginsbur, Nicole Kemper. Unchecked 
provider clout in California foreshadows challenges to health reform. 
Health Affairs 2010;29:699
---------------------------------------------------------------------------
    For their part, some hospitals and other dominant providers in 
local markets have long sought to concentrate their power. They have 
been checked in these efforts by legal uncertainty and anti-trust 
concerns. We need to be careful that the urge toward creation of ACOs 
and other entities capable of bearing risk not be used to provide a 
guise to enable consolidation that is fundamentally unattractive. The 
widespread political appeal of ACOs should not be allowed to influence 
how the FTC and Justice Department interpret their responsibilities in 
these areas.xxxi
---------------------------------------------------------------------------
    \xxxi\ Federal Trade Commission, Department of Justice, Antitrust 
Division. Proposed Statement of Antitrust Enforcement Policy Regarding 
Accountable Care Organizations Participating in the Medicare Shared 
Savings Program. Federal Register Vol. 76, No. 75. Tuesday, April 19, 
2011
---------------------------------------------------------------------------
    Otherwise, we could end up with the worst of both outcomes: 
consolidated providers that reduce efficiencies and raise costs, 
without any offsetting benefits from the (still largely untested) ACO 
model.xxxii In part, the nod toward hospitals to be the 
consolidators and the entities that stand up ACOs should heighten these 
concerns. Hospitals are an industry with some unique attributes, but 
it's been said that nothing about the specifics of the health care 
industry suggests that the unregulated use of market power in this 
industry is socially beneficial.xxxiii
---------------------------------------------------------------------------
    \xxxii\ Remarks of J. Thomas Rosch. Accountable Care Organizations: 
What Exactly Are We Getting? Commissioner, Federal Trade Commission, 
before the ABA Section of Antitrust Law Fall Forum, Washington, DC. 
November 17, 2011. http://www.ftc.gov/speeches/rosch/111117fall
forumspeech.pdf
    \xxxiii\ Gaynor M. Why don't courts treat hospitals like tanks for 
liquefied gases? Some reflections on health care antitrust enforcement. 
Journal of Health, Politics, Policy and the Law 2006 Jun;31(3):497-510
---------------------------------------------------------------------------
         ppaca leaves considerable uncertainty among providers
    Finally, the consolidation is leaving a great deal of uncertainty 
among providers about what is permissible and appropriate and, as a 
business matter, what physicians should be doing. This is distorting 
the kinds of business decisions that get made. Many of the mergers are 
being driven merely out of a desire to gain market share rather than 
pursue efficiencies because providers don't trust that the business 
arrangements will be legally or financially sustainable in the long 
run.
    In part, this uncertainty is heightened by the fact that when it 
comes to concepts like ACOs, that much of these basic ideas have been 
tried before, without success.
    Among the sweeping changes of the Balanced Budget Act (BBA) of 1997 
was a provision enabling providers to contract directly with Medicare 
through the formation of a provider-sponsored organization (PSO). This 
provision was part of a package that created a new Medicare Part C, 
giving beneficiaries the choice to elect to receive benefits through 
the traditional fee-for-service Medicare or through enrollment in a 
``Medicare Choice'' plan that took financial risk, and was eligible to 
offer health insurance or health benefits coverage.
    A PSO was widely defined as a managed care contracting and delivery 
organization that accepted full risk for beneficiary lives. The PSO 
received a fixed monthly payment to provide care for Medicare 
beneficiaries. PSOs could be developed as for-profit or not-for-profit 
entities of which at least 51% must be owned and governed by health 
care providers (physicians, hospitals or allied health 
professionals).xxxiv As a practical matter, these PSOs were 
structured similarly to how the ACOs are being conceptualized. The two 
concepts also aimed at achieving some of the same goals in terms of 
giving providers an incentive to better coordinate care, and to 
introduce other efficiencies and controls to reduce the use of services 
deemed wasteful.xxxv
---------------------------------------------------------------------------
    \xxxiv\ Stephen C. Gleason, Jacque J. Sokolov, and Christine 
Henshaw. Provider Sponsored Organizations: A Golden Opportunity in 
Medicare Managed Care Physicians and other providers will soon have a 
chance to bypass the middleman and compete in managed Medicare. Family 
Practice Management 1998 Mar;5(3):34-45
    \xxxv\ Judith R. Peres. PSOs offering new partnership potential; 
provider service organizations: a possible gateway to 21st-century 
long-term care--Forecast `98. February 1998
---------------------------------------------------------------------------
    Yet the Provider Sponsored Organizations failed badly. The reasons 
that these entities couldn't succeed seem to mirror some potential 
shortcomings in the ACO model. This history only heightens the 
uncertainty in the provider community around not only whether the 
consolidated entities now being created will be legally permissible, 
but also whether they are sustainable and whether the government will 
continue to partner with these new organizations once the current 
fashion fades.
    Most of the PSOs had inadequate resources to finance their risk and 
weak management. They lacked the capacity to introduce cost-saving 
innovations in how they coordinated and delivered care, and manage the 
use of services. A few of these ventures survived, evolved, and went on 
to have success, most failed badly.xxxvi Some of the 
successful ventures include the Geisinger Health System in Pennsylvania 
and Intermountain Health Care in Utah. But most of these PSO ventures 
failed.
---------------------------------------------------------------------------
    \xxxvi\ Jeff Goldsmith. Accountable Care Organizations: The Case 
for Flexible Partnerships Between health Plans and Providers. Health 
Affairs, January 2011 vol. 30 no. 1 32-40
---------------------------------------------------------------------------
    The very changes to the Medicare reimbursement schedule that's 
driving doctors toward consolidation, only serve to underscore how 
uncertain the entire landscape is and, at times, how variable, if not 
predictable, Medicare can be when it comes to entering into business 
relationships with providers and provider-let entities.
    As the Part B reimbursement schedule is dramatically reduced for 
many procedures such as cardiology and radiology, doctors and hospitals 
see an advantage to moving these services under the Part A billing 
scheme, which has remained comparatively intact. The magnitude of the 
cuts to certain Part B procedures is adding to provider concerns that 
they cannot rely on their Medicare-based revenue models.
    The resulting effort to link up with hospitals, and move from the 
Part B to Part A billing scheme, is a temporary arbitrage, to be sure. 
It's another reason why the consolidation that looks attractive now to 
the hospitals may be unwieldy and unsustainable once the Medicare 
payment schedule catches up with these new realities. It's another 
reason why the consolidation that is taking place in the provider 
community may fall far short of its hoped for effects of improving 
efficiencies, driving greater coordination of care, and ultimately 
lowering costs. And it's another reason why there is so much 
uncertainty about the long-term structures.
    For their part, the hospitals are experiencing economic loses as 
they acquire medical practices--another reason providers are engaging 
in these relationships on shaky ground. The losses stem in part because 
reimbursement levels don't leave much room for operating profits. It is 
also a function of the fact that the hospitals have been focused on 
acquiring specialty practices like cardiology and surgical specialties, 
which require the payment of larger, longer-term employment contracts. 
The losses that hospitals experience in acquiring practices are likely 
to exceed the potential gain sharing that they stand to earn under 
PPACA for operating under new shared savings arrangements created by 
PPACA.xxxvii This, of course, begs the question as to 
whether hospitals will merely shift the costs onto payors once they 
gain sufficient local market concentration. There is ample evidence, 
from past experience, to demonstrate this can be precisely what 
happens.xxxviii,xxxix,xl
---------------------------------------------------------------------------
    \xxxvii\ Jeff Goldsmith. Accountable Care Organizations: The Case 
for Flexible Partnerships Between health Plans and Providers. Health 
Affairs, January 2011 vol. 30 no. 1 32-40
    \xxxviii\ Vogt WB, Town R. How has hospital consolidation affected 
the price and quality of hospital services. Princeton (NJ): Robert Wood 
Johnson Foundation; 2006. Research Synthesis Report No. 9
    \xxxix\ Berenson RA, Ginsburg PB, Kemper N. Unchecked provider 
clout in California foreshadows challenges to health reform. Health 
Affairs. 2010;29(4):699-705
    \xl\ Anne Mutti and Jeff Stensland. Provider consolidation and 
prices. Presentation before the Medicare Payment Advisory Committee. 
October 9, 2009
---------------------------------------------------------------------------
    Finally, providers also need to face the prospect that whatever 
relationships they enter into now may be hard to unwind should the 
legal or reimbursement environment change with respect to concepts like 
ACOs and the consolidation taking place today around hospitals. In the 
late 1990s, when physicians sold their practices to practice management 
companies (such as Medpartners and PhyCor) many of these companies 
eventually failed. Once these outfits folded, doctors were able to 
unwind the relationships that they had with these firms and go back to 
the individual practices. Today's current round of consolidation may 
not end as well.
    Hospitals will realize that these relationships are not financially 
sustainable owing to declining hospital reimbursement, an inevitable 
equalization between the Part A and Part B payment schemes, and the 
high cost of owning and managing physicians. Physicians will have a 
hard time going back to their old arrangements. In many cases, they 
simply won't have the capital to regain their prior medical practices.
    A 2011 survey by the American Medical Group Association, looking at 
the operating margins of large, often multi-specialty medical groups, 
would suggest that running a large group of physicians (whether they 
are employed by an independent multi-specialty group or a hospital) 
isn't profitable in today's payment environment. This financial 
analysis only serves to underscore these points, and the reason to be 
uncertain about the new arrangements that are taking shape in today's 
market.
    The cost of practicing medicine continues to rise while 
reimbursement rates remain largely flat, or decline slightly over time. 
As a result, the survey of operating margins of large medical groups 
shows that most groups are operating at a loss. The northeast has some 
of the worst performing groups. According to the survey, groups in this 
region are operating at an average loss of around $10,000 per 
physician.xli
---------------------------------------------------------------------------
    \xli\ American Medical Group Association. 2011 Medical Group 
Compensation and Financial Survey Finds Continued Financial Losses in 
Most Regions, Average Increase in Physician Compensation at 2.4%. 
August 16, 2011
---------------------------------------------------------------------------
    There is a possibility that, through pursuit of policy constructs 
that aim to consolidate providers into larger networks, we end up with 
the worst of both worlds: A Medicare policy failure that drives 
private-sector costs higher.xlii
---------------------------------------------------------------------------
    \xlii\ Jeff Goldsmith. Accountable Care Organizations: The Case for 
Flexible Partnerships Between health Plans and Providers. Health 
Affairs, January 2011 vol. 30 no. 1 32-40
---------------------------------------------------------------------------
         does consolidation leave a role for entrepreneurship?
    In the end, PPACA's most significant challenge to organizational 
change in how providers are structured and services delivered is the 
legislation's relationship to innovation and entrepreneurship in this 
space. In my opinion, the modest rewards offered to accountable care 
organizations, through gain sharing, may not be enough to incentivize 
these groups to make meaningful investments in costly new systems and 
infrastructure that lead to genuine improvements in the coordination of 
care.
    As a result, the entities taking advantage of the opportunity set 
may be those who have other motives. They will be the existing market 
participants who stand to gain through the ability to consolidate 
providers and gain local market power.
    Historically, innovations in the delivery of healthcare--from the 
advent of the first HMO to creation of long term care hospitals and 
home infusion (to name just several)--arose as the result of start-up 
outfits, often backed by venture capital, and headed by entrepreneurs 
who were in search of above market returns on invested capital. Under 
the existing rules, this often meant that new arrangements sought to 
earn profits by moving patients from higher cost settings of care to 
lower cost settings and capturing some of the money they saved the 
system in that process.xliii
---------------------------------------------------------------------------
    \xliii\ Chris van Gorder and Eric Topol. Embracing the Future. 
Modern healthcare, May 14, 2012. 24
---------------------------------------------------------------------------
    But PPACA contains deliberate provisions aimed at regulating 
returns on invested capital; discouraging different forms of 
entrepreneurship. These provisions are, in many cases, the expression 
of a political philosophy that guides a number of provisions in PPACA. 
That philosophy views profits earned on the provision of care as money 
that should have been channeled instead into direct patient care.
    The result is that entrepreneurs are not pursuing new health 
services ventures. Capital flowing to these endeavors has fallen 
sharply. The lack of incentive for entrepreneurs further entrenches 
existing players, meaning that tools that could help better coordinate 
care (for example, healthcare information technology) is only adopted 
through outright subsidies to existing providers, rather than through 
the creation of new approaches to replace an existing way of delivering 
care.
    I work with investors who support entrepreneurs creating some of 
these new ideas. I have also served as a consultant to, and board 
member, of firms working on entrepreneurial healthcare services start-
ups. I worry that PPACA advances a number of provisions that tilt too 
much against these entrepreneurs. The combined effect of these policies 
will serve to potentially freeze out disruptive new models.
    There are other legacy practices that create impediments to 
innovation, entrepreneurship, and genuine change in the delivery of 
healthcare services. For example, existing laws restrict innovative 
ways to provide primary care (PPACA merely restricts how we pay for 
it). We could develop entities that make better use of skilled nurses 
and other non-physicians providers to reach into homes, workplaces and 
communities to provide early care more efficiently and cheaply.
    This would cause ``prevention'' to rise rather than having PPACA 
make ``prevention'' free without addressing the fact that people often 
don't see doctors because it's inconvenient. Such efforts would require 
changes in laws that empower certain providers over others and create 
barriers to more flexible approaches to delivering care. In the past, 
physicians have been resistant to extending more responsibility to non-
physician providers. I expect this resistance to diminish as the 
incentives change under new payment schemes. Under capitated schemes, 
there's more incentive to move patients from costly hospitals and 
offices and (where appropriate) into lower costs settings and 
providers. Under these arrangements, doctors may be keener to share 
increasing responsibilities with other providers.
                               conclusion
    In a well functioning market that creates proper incentives for 
innovation in delivery of healthcare, consumers would have a closer 
relationship to the insurance product that they carry and their 
purchase of routine healthcare. In a well functioning market, the 
insurance product would be portable across employers and states, and 
would enable multi-year contracts, guaranteed-renewable products, and 
other elements similar to the way consumers buy life insurance today.
    Such a market would provide cash vouchers to individuals priced out 
of the system because of their economic or medical circumstances. Under 
the current scheme, where health insurance products are tightly 
regulated, where government agencies and not consumers choose what is 
covered, and where profits are punished, it leaves little room for 
entrepreneurship in how healthcare services are delivered.
    Yet the only way we're going to bend the healthcare cost curve is 
by introducing genuine innovations in how we provide medical care--new 
approaches that lower costs while providing more healthcare for each 
dollar that we spend. These innovations won't arise as a result of the 
critical mass created through carefully orchestrated mergers. These 
ideas won't be incubated inside CMS.
    Nor are these concepts likely to arise from new twists on old 
concepts like capitation and PSOs. Instead, genuine innovation in the 
delivery of healthcare is going to come about the way it always has--
from entrepreneurs who raise capital in search of profitable new ways 
to re-engineer old systems, appealing to consumers by bringing them a 
better service at a more affordable price. PPACA tries to engineer its 
own new constructs, while pursuing provisions that could crowd out 
entrepreneurs from developing their own ideas. We could end up with 
neither.
                               __________

    Mr. Goodlatte. I would like to thank our witnesses again. 
Apologize again for the brevity of this hearing, but we will 
enlarge it in writing and we will submit lots of questions to 
you.
    Without objection, all Members will have 5 legislative days 
to submit to the Chair additional written questions for the 
witnesses, which we will forward and ask the witnesses to 
respond as promptly as they can so that their answers may be 
made a part of the record.
    Without objection, all Members will have 5 legislative days 
to submit any additional materials for inclusion in the record.
    And, with that, I again thank the witnesses, and this 
hearing is adjourned.
    [Whereupon, at 11:55 a.m., the Subcommittee was adjourned.]
                            A P P E N D I X

                              ----------                              


               Material Submitted for the Hearing Record

Prepared Statement of the Honorable Bob Goodlatte, a Representative in 
  Congress from the State of Virginia, and Chairman, Subcommittee on 
          Intellectual Property, Competition, and the Internet
    Good morning, and welcome to this hearing of the Subcommittee on 
Intellectual Property, Competition and the Internet.
    Today's hearing does not examine the competitive effects of a 
specific merger or business practice. Instead, it examines the general 
competitive state of the health care industry, and specifically the 
competitive effects of a law, the Patient Protection and Affordable 
Care Act, commonly known as the ACA or Obamacare.
    The centralized, regulatory approach that the ACA takes to the 
health care market creates deep tension with the free market, 
competition based approach embodied in the antitrust laws. Indeed, I 
believe that the ACA has and will continue to substantially lessen 
competition to the detriment of health care consumers.
    Instead of encouraging businesses to offer innovative and competing 
products and allowing consumers to steer the market, the ACA imposes a 
top-down, one size fits all model throughout the health care industry.
    The ACA prevents health care competitors and consumers from 
entering certain transactions that they should be allowed to enter in a 
competitive market. It also forces them to enter transactions they may 
not have entered in a free market.
    Instead of the choices that a competitive market offers consumers, 
the ACA offers mandates.
    Troubling symptoms are already emerging of the ACA's 
anticompetitive effects.
    Mergers among health care providers have increased by 50 percent 
since passage of the ACA. Small medical practices and clinics have been 
forced to consolidate because they have been unable to remain 
independent while weathering the regulatory costs and burdens of the 
ACA.
    Specific provisions in the ACA encourage consolidation and 
collaboration among larger competing health care providers.
    We know that many health care mergers and integrations are likely 
pro-competitive--each transaction must be judged on its own merits.
    Integrated health care delivery models can be efficient and can 
realize cost savings. Independent health care delivery models can also 
offer great treatment advantages. What we should avoid is government 
policies that distort competition in the market and artificially 
eliminate competition.
    A freer market will invariably choose between models more 
efficiently than the federal government can. Market driven 
consolidation benefits patients more than regulation driven 
consolidation.
    The consternation that the law has caused to both health care 
providers and the federal antitrust enforcement agencies about how to 
treat the ACA's new Accountable Care Organizations highlights the 
tensions between the ACA's purposes and the antitrust laws.
    Another symptom of the ACA's anticompetitive effects can be seen in 
the consolidating and increasingly undifferentiated insurance markets. 
This is a result of the ACA's mandates about what health plans must 
cover and how they may spend their revenues. We are already seeing the 
emergence of a new order in which a shrinking number of health insurers 
offer a highly standardized product at increasing prices.
    That the ACA would force all Americans to buy this product 
highlights how far from a competitive free market the Act would take 
us.
    Antitrust economics are clear. If we raise barriers to entry, 
preclude product differentiation, dictate how competitors spend their 
revenue, mandate an increase in demand, and consolidate the market, we 
are likely to see anticompetitive results.
    The health care market has not been a perfectly competitive market 
even before the ACA. But instead of increasing competition, the ACA 
injects more artificial, government-imposed incentives into this market 
which lead us further away from competition and toward higher costs, 
lower quality care, and less innovation.

                                

Prepared Statement of the Honorable John Conyers, Jr., a Representative 
 in Congress from the State of Michigan, and Ranking Member, Committee 
 on the Judiciary, and Member, Subcommittee on Intellectual Property, 
                     Competition, and the Internet
    Thank you, Chairman Goodlatte, for holding this hearing on health 
care consolidation. It might surprise the Chairman to hear that I agree 
with him: Obamacare raises serious questions about competition in the 
healthcare industry. But not because the law promotes consolidation.
    The real question is whether Obamacare can be implemented in a way 
that will halt consolidation and anti-competitive practices that have 
plagued the healthcare industry for more than 30 years.
    Because the Administration and the States are still in the 
development phases and the major pieces of the law don't come into 
effect until 2014, we have the opportunity now to influence how 
Obamacare can be used to increase competition, quality, and access to 
care.
    To begin with, the forces promoting hospital consolidation, 
allowing for insurance price distortion, and raising the overall cost 
of healthcare costs were in place long before President Obama signed 
the Affordable Care Act into law.
    Some on the other side have suggested that Obamacare has caused 
healthcare consolidation. Besides the fact that the major provisions of 
the law affecting competition, the insurance exchanges and accountable 
care organizations, will not come into effect until 2014, this 
conjecture categorically ignores more than thirty years of recent 
history.
    Hospital mergers have been on the rise for more than 20 years, and, 
unfortunately, the version of Healthcare Reform that became law lacked 
the protections that House Democrats pushed to prevent the anti-
competitive consolidation we are discussing today.
    Increased market concentration, deregulation, blanket antitrust 
exemptions, and scant antitrust enforcement against healthcare 
insurance companies have prevented meaningful competition from taking 
place across the industry for decades.
    Our privatized healthcare system, by its nature, creates an innate 
tension between increasing profits for shareholders on the one hand and 
increasing healthcare access and quality on the other.
    This is precisely why our country needs a single-payer system, the 
implementation of Obamacare presents our country with a unique 
opportunity to turn the tide.
    We will hear from the detractors of healthcare reform that Medical 
Loss Ratios (MLRs) and the standards governing Accountable Care 
Organizations (ACOs) are promoting consolidation. But the fact is that 
the Department of Health and Human Services and Center for Medicare and 
Medicaid Studies are only in the nascent stages of implementing the 
Affordable Care Act. No general conclusions can be drawn because most 
of the regulations are still at the drawing board.
    Second, the Justice Department, the Federal Trade Commission, and 
state Attorneys General from across the country have made attempts to 
challenge hospital and insurance consolidation with very limited 
success for decades.
    Overly broad antitrust exemptions, namely the McCarran-Ferguson Act 
of 1945, and an anti-competition judicial bench have allowed healthcare 
corporations to run roughshod over consumers and care-givers.
    Most of the country's health insurance markets are 
disproportionately dominated by only a handful of powerful players. The 
Justice Department, for example, has finally taken action against Blue 
Cross Blue Shield of Michigan because of its dominance and conduct in 
the state.
    Recent cases at the Justice Department and FTC are promising--
including suits to block hospital mergers in Illinois, Virginia, and 
Georgia by the FTC and cases against insurers and actions by the DOJ 
against insurers in Michigan, Montana, and other states. Our federal 
antitrust enforcement has been on the whole, however, insufficient. 
Most markets are dominated by one or two plans, and the exchanges 
therefore offer an opportunity to encourage insurance companies to 
enter markets.
    The barriers to entry to starting new insurance companies or 
entering new markets are extremely high, and these market 
concentrations have pushed hospitals to claim the need to merge in 
order to effectively negotiate with the major insurance plans.
    Our regulating and enforcement agencies must prevent incumbent, 
dominant insurers from hampering competition through exclusionary or 
collusive conduct as the exchanges and Accountable Care Organizations 
ramp up.
    Third, major opportunities lie with how plans within the state 
exchanges will compete with existing insurers, and whether the 
exchanges will allow for new and innovative players to enter the 
market. I am weary of the early murmurs that regulators might give 
rubber stamps to existing, dominant players to exert undue influence in 
the new markets.
    Simply allowing the entrenched players to continue business as 
usual under the guise of participating in the exchanges will not be 
acceptable.
    The exchanges must promote transparent plans, subject to public 
scrutiny, that focus on the health outcomes of patients instead of 
stock dividends and executive windfalls. Moreover, we need vigorous use 
of the prosecutorial powers by our federal antitrust enforcement 
authorities, the Justice Department and FTC.
    It is for all of these reasons that I re-introduced a McCarran-
Ferguson reform measure this morning that will roll-back the antitrust 
exemptions for health insurers and medical malpractice insurers.
    As all of us on the dias are concerned about competition in health 
care, and because a similar version of this legislation passed during 
the last Congress with more than 400 votes, I would welcome the 
Majority's assistance in bringing this measure to the Floor again.
    The time is ripe to finally change this marketplace with pro-
competition and pro-consumer actions by the federal health and 
antitrust agencies.

                                

 Prepared Statement of the Honorable Howard Coble, a Representative in 
Congress from the State of North Carolina, and Member, Subcommittee on 
          Intellectual Property, Competition, and the Internet
    We have the greatest healthcare delivery system in the world but I 
also think that it is facing some very difficult challenges.
    In particular, how will the Patient Protection and Affordable Care 
Act (PPCA) effect availability and quality, both of which are very 
complicated concepts.
    In our district, consolidation has not driven costs--in fact it has 
helped hold costs down and keep remote points or service up and running 
for many of our rural constituents.
    Mergers and acquisitions have been their life-ring and I am deeply 
concerned that if the PPCA results in limited options for providers to 
merge or pool resources, health care costs will increase and points of 
service will start to disappear.

                                

Material submitted by the Honorable Melvin L. Watt, a Representative in 
    Congress from the State of North Carolina, and Ranking Member, 
  Subcommittee on Intellectual Property, Competition, and the Internet

[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]


                                 
