[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
----------
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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
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__________
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*
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*The views expressed in this testimony are those of the author
alone and do not necessarily represent those of the American Enterprise
Institute.
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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
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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
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\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
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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
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\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
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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
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\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
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\ix\ Rita Numerof. Massive Healthcare Consolidation in the PPACA
Era, April 13, 2012
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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
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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
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\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
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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.
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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
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\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
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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
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\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
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\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
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\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
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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
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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
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\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
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\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
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\xliii\ Chris van Gorder and Eric Topol. Embracing the Future.
Modern healthcare, May 14, 2012. 24
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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
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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
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