[Federal Register Volume 73, Number 164 (Friday, August 22, 2008)]
[Notices]
[Pages 49834-49894]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E8-17366]



[[Page 49833]]

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Part IV





Department of Justice





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Antitrust Division



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 United States v. UnitedHealth Group Incorporated; Response to Public 
Comments on the Proposed Final Judgment; Notice

  Federal Register / Vol. 73, No. 164 / Friday, August 22, 2008 / 
Notices  

[[Page 49834]]



DEPARTMENT OF JUSTICE

Antitrust Division


United States v. UnitedHealth Group Incorporated; Response to 
Public Comments on the Proposed Final Judgment

    Pursuant to the Antitrust Procedures and Penalties Act, 15 U.S.C. 
16(b)-(h), the United States hereby publishes the public comments 
received on the proposed Final Judgment in United States v. 
UnitedHealth Group Incorporated, Civil Action No. 1:08-cv-322, and the 
response to the comments. On February 25, 2008, the United States filed 
a Complaint alleging that the merger of UnitedHealth Group Incorporated 
(``United'') and Sierra Health Services, Inc. (``Sierra'') violated 
Section 7 of the Clayton Act, 15 U.S.C. 18. The proposed Final 
Judgment, filed on February 25, 2008, requires the combined company to 
divest United's individual Medicare Advantage line of business in the 
Las Vegas, Nevada area. Public comment was invited within the statutory 
60-day comment period. Copies of the Complaint, proposed Final 
Judgment, Competitive Impact Statement, Public Comments, the United 
States' Response to the Comments, and other papers are currently 
available for inspection in Department of Justice, Antitrust Division, 
Antitrust Documents Group, 450 5th Street, NW., Suite 1010, Washington, 
DC 20530, telephone: (202) 514-2481 and the Office of the Clerk of the 
United States District Court for the District of Columbia, 333 
Constitution Avenue, NW., Washington, DC 20001.
    Copies of any of these materials may be obtained upon request and 
payment of a copying fee.

Patricia A. Brink,
Deputy Director of Operations, Antitrust Division.

    In the matter of: United States District Court for the District 
of Columbia; United States of America, Plaintiff, v. UnitedHealth 
Group Incorporated and Sierra Health Services, Inc., Defendants.

[Case No. 1:08-cv-322-ESH]

Response of Plaintiff United States to Public Comments

    Pursuant to the requirements of the Antitrust Procedures and 
Penalties Act (``APPA'' or ``Tunney Act''), 15 U.S.C. 16(b)-(h), the 
United States hereby files the four public comments that the United 
States received concerning the proposed Final Judgment in this case and 
the United States' response to those comments. The United States will 
move the Court for entry of the proposed Final Judgment after the 
comments and this Response have been published in the Federal Register, 
pursuant to 15 U.S.C. 16(d).
    On February 25, 2008, the United States filed the Complaint in this 
matter alleging that the proposed merger of UnitedHealth Group 
Incorporated (``United'') and Sierra Health Services, Inc. (``Sierra'') 
would violate Section 7 of the Clayton Act, 15 U.S.C. 18. 
Simultaneously with the filing of the Complaint, the United States 
filed a proposed Final Judgment and a Hold Separate and Asset 
Preservation Stipulation and Order (``Stipulation'') signed by the 
United States and Defendants consenting to the entry of the proposed 
Final Judgment after compliance with the requirements of the Tunney 
Act.\1\ Pursuant to those requirements, the United States filed a 
Competitive Impact Statement (``CIS'') in this Court on February 25, 
2008; published the proposed Final Judgment and CIS in the Federal 
Register on March 10, 2008, see 73 FR 12762 (2008); and published 
summaries of the terms of the proposed Final Judgment and CIS, together 
with directions for the submission of written comments relating to the 
proposed Final Judgment, in the Washington Post for seven days 
beginning on March 16, 2008 and ending on March 22, 2008, and in the 
Las Vegas Review-Journal for seven days beginning on March 8, 2008 and 
ending on March 14, 2008. The 60-day period for public comments ended 
on May 15, 2008, and the United States received the four comments 
described below and attached hereto.
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    \1\ The merger closed on February 25, 2008. In keeping with the 
United States' standard practice, neither the Stipulation nor the 
proposed Final Judgment prohibited closing the merger. See ABA 
Section of Antitrust Law, Antitrust Law Developments 406 (6th ed. 
2007) (noting that ``[t]he Federal Trade Commission (as well as the 
Department of Justice) generally will permit the underlying 
transaction to close during the notice and comment period''). Such a 
prohibition could interfere with many time-sensitive deals and 
prevent or delay the realization of substantial efficiencies.
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I. The United States' Investigation and the Proposed Final Judgment

    On March 11, 2007, United and Sierra entered into an agreement, 
whereby United agreed to acquire all outstanding shares of Sierra. Over 
the next eleven months, the United States Department of Justice (the 
``Department'') conducted an extensive, detailed investigation into the 
competitive effects of the proposed transaction. As part of this 
investigation, the Department obtained substantial documents and 
information from the merging parties and issued numerous Civil 
Investigative Demands to third parties. In response, the Department 
received and considered more than 2.5 million pages of material. The 
Department conducted approximately 150 interviews with customers, 
hospitals and physician groups, insurance companies, and other 
individuals with knowledge of the industry.
    After conducting a detailed analysis of the acquisition, the 
Department concluded that the combination of United and Sierra likely 
would substantially lessen competition in the Las Vegas, Nevada area 
(consisting of Clark and Nye Counties, Nevada) in a product market no 
broader than the sale of Medicare Advantage health-insurance plans to 
senior citizens and other Medicare-eligible individuals. As defined by 
federal law, Medicare Advantage plans consist of Medicare Advantage 
health maintenance organization plans (``MA-HMO''), Medicare Advantage 
preferred provider organization plans (``MA-PPO''), and Medicare 
Advantage private fee-for-service plans (``MA-PFFS''). See 42 U.S.C. 
1395w-21(a)(2). United and Sierra together would have accounted for 
approximately 94 percent of the total enrollment in Medicare Advantage 
plans in the Las Vegas area, which accounts for approximately $840 
million in annual commerce. United markets and sells its Medicare 
Advantage products under the Secure Horizons and AARP brands. Sierra 
markets and sells its Medicare Advantage products under the Senior 
Dimensions, Sierra Spectrum, Sierra Nevada Spectrum, and Sierra Optima 
Select brands.
    As more fully explained in the CIS, the Stipulation and proposed 
Final Judgment in this case are designed to preserve competition in the 
sale of Medicare Advantage health-insurance plans in the Las Vegas area 
by requiring United to divest its individual Medicare Advantage line of 
business in the Las Vegas area. The Stipulation and proposed Final 
Judgment also require United to take several steps to assist the 
acquirer in providing prompt and effective competition in the Medicare 
Advantage market, including assisting the acquirer to enter into 
agreements that will allow members of United's Medicare Advantage plans 
to have continued access to substantially all of United's provider 
network of physicians, hospitals, ancillary service providers, and 
other health care providers on terms no less favorable than United's 
existing agreements. United must also provide transition support 
services for medical-claims

[[Page 49835]]

processing, appeals and grievances, call-center support, enrollment and 
eligibility services, access to form templates, pharmacy services, 
disease management, Medicare risk-adjustment services, quality-
assurance services, and such other services as are reasonably necessary 
for the acquirer to operate the Divestiture Assets.
    On February 25, 2008, United and Humana Health Plan Inc. 
(``Humana'') signed an agreement providing for Humana to purchase 
United's Las Vegas Medicare Advantage line of business for 
approximately $185 million. After receiving approval from the Centers 
for Medicare and Medicaid Services (``CMS'') and the Nevada Division of 
Insurance, Humana completed the acquisition of United's Las Vegas 
Medicare Advantage line of business on May 1, 2008. In the Department's 
judgment, the divestiture of United's Las Vegas Medicare Advantage line 
of business to Humana, along with the other requirements contained in 
the Stipulation and proposed Final Judgment, are sufficient to 
eliminate the anticompetitive effects identified in the Complaint.

II. Standard of Judicial Review

    Upon the publication of the Comment and this Response, the United 
States will have fully complied with the Tunney Act and will move for 
entry of the proposed Final Judgment as being ``in the public 
interest'' 15 U.S.C. 16(e)(l), as amended.
    The Tunney Act states that, in making that determination, the Court 
shall consider:

    (A) the competitive impact of such judgment, including 
termination of alleged violations, provisions for enforcement and 
modification, duration of relief sought, anticipated effects of 
alternative remedies actually considered, whether its terms are 
ambiguous, and any other competitive considerations bearing upon the 
adequacy of such judgment that the court deems necessary to a 
determination of whether the consent judgment is in the public 
interest; and

    (B) the impact of entry of such judgment upon competition in the 
relevant market or markets, upon the public generally and 
individuals alleging specific injury from the violations set forth 
in the complaint including consideration of the public benefit, if 
any, to be derived from a determination of the issues at trial.

15 U.S.C. 16(e)(1)(A)-(B); see generally United States v. AT&T Inc., 
541 F. Supp. 2d 2, 6 n.3 (D.D.C. 2008) (listing factors that the Court 
must consider when making the public-interest determination); United 
States v. SBC Commc'ns, Inc., 489 F. Supp. 2d 1, 11 (D.D.C. 2007) 
(concluding that the 2004 amendments to the Tunney Act ``effected 
minimal changes'' to scope of review under the Tunney Act, leaving 
review ``sharply proscribed by precedent and the nature of Tunney Act 
proceedings'').\2\
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    \2\ The 2004 amendments substituted ``shall'' for ``may'' in 
directing relevant factors for courts to consider and amended the 
list of factors to focus on competitive considerations and to 
address potentially ambiguous judgment terms. Compare 15 U.S.C. 
Sec.  16(e) (2004), with 15 U.S.C. Sec.  16(e)(1) (2006).
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    As the United States Court of Appeals for the District of Columbia 
Circuit has held, under the APPA, a court considers, among other 
things, the relationship between the remedy secured and the specific 
allegations set forth in the government's complaint, whether the decree 
is sufficiently clear, whether enforcement mechanisms are sufficient, 
and whether the decree may positively harm third parties. See United 
States v. Microsoft Corp., 56 F.3d 1448, 1458-62 (D.C. Cir. 1995). With 
respect to the adequacy of the relief secured by the decree, a court 
may not ``engage in an unrestricted evaluation of what relief would 
best serve the public.'' United States v. BNS, Inc., 858 F.2d 456, 462 
(9th Cir. 1988) (citing United States v. Bechtel Corp., 648 F.2d 660, 
666 (9th Cir. 1981)); see also Microsoft, 56 F.3d at 1460-62. Courts 
have held that:

    [t]he balancing of competing social and political interests 
affected by a proposed antitrust consent decree must be left, in the 
first instance, to the discretion of the Attorney General. The 
court's role in protecting the public interest is one of insuring 
that the government has not breached its duty to the public in 
consenting to the decree. The court is required to determine not 
whether a particular decree is the one that will best serve society, 
but whether the settlement is ``within the reaches of the public 
interest.'' More elaborate requirements might undermine the 
effectiveness of antitrust enforcement by consent decree.
Bechtel, 648 F.2d at 666 (emphasis added) (citations omitted). Cf. BNS, 
858 F.2d at 464 (holding that the court's ``ultimate authority under 
the [APPA] is limited to approving or disapproving the consent 
decree''); United States v. Gillette Co., 406 F. Supp. 713, 716 (D. 
Mass. 1975) (noting that, in this way, the court is constrained to 
``look at the overall picture not hypercritically, nor with a 
microscope, but with an artist's reducing glass''). See generally 
Microsoft, 56 F.3d at 1461 (discussing whether ``the remedies [obtained 
in the decree are] so inconsonant with the allegations charged as to 
fall outside of the `reaches of the public interest' '').
    The government is entitled to broad discretion to settle with 
defendants within the reaches of the public interest. AT&T Inc., 541 F. 
Supp. 2d at 6. In making its public-interest determination, a district 
court ``must accord deference to the government's predictions about the 
efficacy of its remedies, and may not require that the remedies 
perfectly match the alleged violations.'' SBC Commc'ns, 489 F. Supp. 2d 
at 17; see also Microsoft, 56 F.3d at 1461 (noting the need for courts 
to be ``deferential to the government's predictions as to the effect of 
the proposed remedies''); United States v. Archer-Daniels-Midland Co., 
272 F. Supp. 2d 1, 6 (D.D.C. 2003) (noting that the court should grant 
due respect to the United States' prediction as to the effect of 
proposed remedies, its perception of the market structure, and its 
views of the nature of the case).
    Court approval of a consent decree requires a standard more 
flexible and less strict than that appropriate to court adoption of a 
litigated decree following a finding of liability. ``[A] proposed 
decree must be approved even if it falls short of the remedy the court 
would impose on its own, as long as it falls within the range of 
acceptability or is `within the reaches of public interest.' '' United 
States v. Am. Tel. & Tel. Co., 552 F. Supp. 131, 151 (D.D.C. 1982) 
(citations omitted) (quoting United States v. Gillette Co., 406 F. 
Supp. 713, 716 (D. Mass. 1975)), aff'd sub nom. Maryland v. United 
States, 460 U.S. 1001 (1983); see also United States v. Alcan Aluminum 
Ltd., 605 F. Supp. 619, 622 (W.D. Ky. 1985) (approving the consent 
decree even though the court would have imposed a greater remedy). To 
meet this standard, the United States ``need only provide a factual 
basis for concluding that the settlements are reasonably adequate 
remedies for the alleged harms.'' SBC Commc'ns, 489 F. Supp. 2d at 17.
    Moreover, the Court's role under the APPA is limited to reviewing 
the remedy in relationship to the violations that the United States has 
alleged in its complaint, rather than to ``construct [its] own 
hypothetical case and then evaluate the decree against that case.'' 
Microsoft, 56 F.3d at 1459. Because the ``court's authority to review 
the decree depends entirely on the government's exercising its 
prosecutorial discretion by bringing a case in the first place,'' it 
follows that ``the court is only authorized to review the decree 
itself,'' and not to ``effectively redraft the complaint'' to inquire 
into other matters that the United States did not pursue. Id. at 1459-
60. As this Court recently confirmed in SBC Communications,

[[Page 49836]]

courts ``cannot look beyond the complaint in making the public interest 
determination unless the complaint is drafted so narrowly as to make a 
mockery of judicial power.'' SBC Commc'ns, 489 F. Supp. 2d at 15.
    In its 2004 amendments to the Tunney Act, Congress made clear its 
intent to preserve the practical benefits of utilizing consent decrees 
in antitrust enforcement, adding the unambiguous instruction that 
``[n]othing in this section shall be construed to require the court to 
conduct an evidentiary hearing or to require the court to permit anyone 
to intervene.'' 15 U.S.C. 16(e)(2). The amendments codified what 
Congress intended when it passed the Tunney Act in 1974, as Senator 
Tunney then explained: ``[t]he court is nowhere compelled to go to 
trial or to engage in extended proceedings which might have the effect 
of vitiating the benefits of prompt and less costly settlement through 
the consent decree process.'' 119 Cong. Rec. 24,598 (1973) (statement 
of Senator Tunney). Rather, the procedure for the public-interest 
determination is left to the discretion of the court, with the 
recognition that the court's ``scope of review remains sharply 
proscribed by precedent and the nature of Tunney Act proceedings.'' SBC 
Commc'ns, 489 F. Supp. 2d at 11.\3\
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    \3\ See United States v. Enova Corp., 107 F. Supp. 2d 10, 17 
(D.D.C. 2000) (noting that the ``Tunney Act expressly allows the 
court to make its public interest determination on the basis of the 
competitive impact statement and response to comments alone''); 
United States v. Mid-Am. Dairymen, Inc., 1977-1 Trade Cas. (CCH) ] 
61,508, at 71,980 (W.D. Mo. 1977) (``Absent a showing of corrupt 
failure of the government to discharge its duty, the Court, in 
making its public interest finding, should * * * carefully consider 
the explanations of the government in the competitive impact 
statement and its responses to comments in order to determine 
whether those explanations are reasonable under the 
circumstances.''); S. Rep. No. 93-298, 93d Cong., 1st Sess., at 6 
(1973) (``Where the public interest can be meaningfully evaluated 
simply on the basis of briefs and oral arguments, that is the 
approach that should be utilized.'').
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III. Summary of Public Comments and the United States' Response

    During the 60-day comment period, the United States received 
comments from the Service Employees International Union Local 1107 (the 
``SEIU comment''), the American Medical Association, Nevada State 
Medical Association, and the Clark County Medical Society 
(collectively, the ``AMA comment''), the Honorable Nydia M. Velazquez, 
Chairwoman, United States House of Representatives Committee on Small 
Business (the ``Velazquez comment''), and the Honorable Chris 
Giunchigliani, Commissioner, Board of Commissioners--Clark County, 
Nevada (the ``Giunchigliani comment''). Those comments are attached to 
this Response.
    After reviewing the comments, the United States has determined that 
the proposed Final Judgment remains in the public interest. The 
commenters raise two main concerns: (A) that the United States should 
have alleged and remedied harm to competition in additional product 
markets other than the Medicare Advantage market alleged in the United 
States' Complaint and (B) that the proposed Final Judgment does not 
adequately remedy the harms to competition alleged in the Complaint. 
The United States addresses these concerns below.

A. Comments That the United States Should Have Alleged and Remedied 
Additional Competitive Concerns

1. Summary of Comments
    Each of the commenters argue that the United States should have 
alleged and remedied competitive concerns that are not addressed in the 
Complaint in this matter. They argue that the United States should have 
pursued a case of harm to competition in a commercial health-insurance 
market in Clark County, Nevada. (AMA comment at 12; SEIU comment at 4; 
Velazquez comment at 3; Giunchigliani comment at 1-2). The commenters 
also express concern that the United-Sierra merger will harm 
competition in the sale of various types of commercial health 
insurance, such as the provision of HMO policies, HMO and PPO policies, 
and the provision of commercial insurance to employers with 50 or fewer 
employees. (AMA comment at 12; SEIU comment at 4; Velazquez comment at 
4; Giunchigliani comment at 1).
    The AMA and Velazquez also argue that the United States should have 
alleged that the transaction would harm physicians and sought an 
appropriate remedy. They maintain that the merged company will control 
a sufficient share of the purchases for physicians services in Clark 
County such that the merged company will be able to reduce payments to 
physicians below competitive levels. (AMA comment at 5; Velazquez 
comment at 4). Similarly, the SEIU argues that the merged company will 
control a sufficient share of purchases of hospital services such that 
the merged company will be able unilaterally to reduce reimbursement 
rates to hospitals. (SEIU comment at 4). The SEIU argues that such 
lower reimbursement rates to hospitals will result in higher patient-
to-nurse ratios and place patient safety and quality of care in 
jeopardy. (SEIU comment at 3-4).
2. The United States' Response
    The comments that the United States should have alleged harm to 
competition for the sale of various types of health insurance or for 
the purchase of physician or hospital services, which are not addressed 
in the Complaint, are outside the scope of this APPA proceeding. The 
Department's decision to allege a harm in a specific market is based on 
a case-by-case analysis that varies depending on the particular 
circumstances of each product and geographic market The Department 
investigated the transaction's potential competitive effects on each of 
the types of health insurance identified by the commentators, and on 
the purchase of physician and hospital services, and concluded that it 
should not allege harm in these markets. As explained by this Court, in 
a Tunney Act proceeding, the district court should not second-guess the 
prosecutorial decisions of the Department regarding the nature of the 
claims brought in the first instance; ``rather, the court is to compare 
the complaint filed by the United States with the proposed consent 
decree and determine whether the proposed decree clearly and 
effectively addresses the [anticompetitive harms initially 
identified.'' United States v. Thomson Corp., 949 F. Supp 907, 913 
(D.D.C. 1996); accord, Microsoft, 56 F.3d at 1459 (in APPA proceeding, 
``district court is not empowered to review the actions or behavior of 
the Department of Justice; the court is only authorized to review the 
decree itself''); BNS, 858 F.2d at 462-63 (``the APPA does not 
authorize a district court to base its public interest determination on 
antitrust concerns in markets other than those alleged in the 
government's complaint''). This court has held that ``a district court 
is not permitted to ``reach beyond the complaint to evaluate claims 
that the government did not make and to inquire as to why they were not 
made.' '' SBC Commc'ns, 489 F. Supp. 2d at 14 (quoting Microsoft, 56 
F.3d at 1459) (emphasis in original). Nor does the fact that the State 
of Nevada obtained terms of settlement different from those obtained by 
the United States alter the ordinary Tunney Act standard of review.
    The AMA's contention that the 2004 Amendments to the Tunney Act 
overruled precedent in this court and require a more extensive review 
of the United States' exercise of its prosecutorial judgment conflicts 
with this Court's holding in SBC Communications, supra. (AMA

[[Page 49837]]

comment at 4). In SBC Communications, this Court held that ``a close 
reading of the law demonstrates that the 2004 amendments effected 
minimal changes, and that this Court's scope of review remains sharply 
proscribed by precedent and the nature of [APPA] proceedings.'' SBC 
Commc'ns, 489 F. Supp. 2d at 11. This Court continued that because 
``review [under the 2004 amendments] is focused on the `judgment,' it 
again appears that the Court cannot go beyond the scope of the 
complaint.'' Id. The 2004 amendments to the APPA, as interpreted and 
applied by this Court in SBC Communications, require the Court to 
evaluate the effect of the ``judgment upon competition'' in a Medicare 
Advantage market in the Las Vegas area. 15 U.S.C.16(e)(1)(b). Because 
the United States did not allege that the United's acquisition of 
Sierra would cause harm in additional markets, it is not appropriate 
for the Court to seek to determine whether the acquisition will cause 
anticompetitive harm in such markets.

B. Comment That the Proposed Final Judgment Does Not Adequately Address 
the Harms to Competition Alleged in the Complaint

1. Summary of Comment
    The AMA states that the remedies in the proposed Final Judgment are 
inadequate to maintain competition in the sale of Medicare Advantage 
health-insurance plans in the Las Vegas area. (AMA comment at 13). The 
AMA argues in its comment that the proposed Final Judgment should 
include five additional remedies: (1) A permanent injunction on 
United's use of ``most-favored-nations'' clauses in healthcare-provider 
contracts; (2) a permanent injunction on United's use of ``all-
products'' clauses in healthcare-provider contracts; (3) a divestiture 
of United's commercial health-insurance business in Clark County; (4) a 
requirement that United convey the use of certain trademarks to the 
acquirer of the Medicare Advantage line of business for at least five 
years; and (5) the immediate use of a monitoring trustee to ensure 
compliance with the proposed Final Judgment. (AMA comment at 13-15).
2. The United States' Response
    The additional remedies proposed by the AMA are not necessary to 
ensure that competition will remain in the market alleged in the 
Complaint. Rather, the proposed Final Judgment is in the public 
interest because it is properly designed to eliminate the 
anticompetitive effects alleged in the Complaint. First, the proposed 
Final Judgment requires United to divest its entire individual Medicare 
Advantage line of business in the Las Vegas area to an acquirer 
approved by the United States and on terms acceptable to the United 
States. This line of business covers approximately 25,800 individual 
Medicare Advantage beneficiaries. As described in Section IV of the 
proposed Final Judgment, United is required to divest all tangible and 
intangible assets dedicated to the administration, operation, selling, 
and marketing of its Medicare Advantage plans to individuals in the Las 
Vegas area (``the Divestiture Assets''), including all of United's 
rights and obligations under the relevant United contracts with CMS. 
Thus, the acquirer will have the benefit of entering the Medicare 
Advantage market with United's entire individual Medicare Advantage 
line of business.
    Second, the Stipulation and Sections IV(A) and (B) of the proposed 
Final Judgment required United to divest the Divestiture Assets within 
the shortest time period reasonable under the circumstances. A quick 
divestiture has the benefits of maintaining competition that would 
otherwise be lost in the acquisition and reducing the possibility of 
dissipation of the value of the assets while the sale is pending. Per 
these requirements, United divested the Divestiture Assets to Humana on 
May 1, 2008.
    Third, the divestiture eliminates the anticompetitive effects of 
the merger by requiring United to divest the Divestiture Assets to an 
acquirer that can compete vigorously with the merged United-Sierra. The 
United States approved Humana as the acquirer of the Divestiture Assets 
because Humana is well positioned to be a strong competitor in the 
Medicare Advantage market in the Las Vegas area. Humana is an 
established health-insurance competitor with total annual revenue of 
$26 billion and a market capitalization of $8.3 billion. Humana is the 
second largest provider of Medicare Advantage plans in the nation after 
United. The company has 1.27 million Medicare Advantage enrollees 
nationwide. In the United States' judgment, Humana has the intent and 
capability (including the necessary managerial, operational, technical, 
and financial capability) to compete effectively in the sale of 
Medicare Advantage products, and the asset purchase agreements between 
United and Humana do not give United the ability to interfere with 
Humana's ability to compete effectively.
    Fourth, the proposed Final Judgment requires Defendants to assist 
the acquirer in providing prompt and effective competition in the 
Medicare Advantage market and uninterrupted care to subscribers of 
United's Medicare Advantage plans by mandating that the Defendants 
adhere to the following requirements:
     Section IV(F) requires the Defendants to assist the 
acquirer to enter into an agreement with HealthCare Partners, LLC 
(``HealthCare Partners'') that will allow members of United's Medicare 
Advantage plans to have continued access to substantially all of 
United's provider network of physicians, hospitals, ancillary service 
providers, and other health care providers on terms no less favorable 
than United's pre-existing agreement with HealthCare Partners.
     Section IV(J) requires that, at the acquirer's option, and 
subject to approval by the United States, Defendants provide transition 
support services for medical claims processing, appeals and grievances, 
call-center support, enrollment and eligibility services, access to 
form templates, pharmacy services, disease management, Medicare risk-
adjustment services, quality-assurance services, and such other 
transition services that are reasonably necessary for the acquirer to 
operate the Divestiture Assets.
     Section IV(G) of the proposed Final Judgment prohibits 
United, until March 31, 2010, from entering into agreements with 
healthcare providers who, prior to the transaction, participated in 
United's Medicare Advantage network, but did not participate in 
Sierra's.
     Sections IV(F) and (G) collectively ensure that Humana, 
but not the Defendants, will have access to these healthcare providers, 
which places Humana in the same competitive position with respect to 
the merged company as United was in with respect to Sierra prior to the 
merger of United and Sierra.
     Section IV(H) prohibits United from using the AARP brand 
for any of its individual Medicare Advantage plans in the Las Vegas 
area until March 31, 2009, and from using the SecureHorizons brands for 
any individual Medicare Advantage plans in the Las Vegas area until 
March 31, 2010. The Department has determined that Section IV(H) will 
give Humana sufficient time to establish its own brand in the Las Vegas 
area so that it can effectively compete for the provision of Medicare 
Advantage plans and reduce beneficiary confusion as to which company 
operates the Medicare Advantage plan in which the beneficiary is 
enrolled.
    In short, the United States has determined that the remedies in the 
proposed Final Judgment are sufficient to allow Humana to be an 
effective

[[Page 49838]]

competitor and maintain competition in the Las Vegas Medicare Advantage 
market. As the United States now explains, the additional remedies that 
the AMA suggests are not needed to preserve the public interest.
a. Most-Favored-Nations Clauses
    The AMA states that the proposed Final Judgment should permanently 
enjoin United from using ``most-favored-nations'' (``MFN'') clauses in 
its contracts with healthcare-providers. (AMA comment at 13). As 
explained in the affidavit of Professor David Dranove, submitted by the 
AMA, an MFN clause would require a healthcare provider to offer United 
rates no less favorable than those offered to other insurers. (AMA 
comment, Attachment A at 8.) MFNs may be anticompetitive or 
procompetitive, depending on the circumstances. Federal Trade Comm'n & 
U.S. Dept. of Justice, Improving Health Care: A Dose of Competition 
(Jul. 2004), ch. 6, p. 20, available at http://www.usdoj.gov/atr/
public/health_care/204694.htm. MFN clauses may harm competition by, 
for example, discouraging healthcare providers from aggressively 
discounting to competing insurers who might be seeking to enter or 
expand in a market. Id.
    It is not necessary to prohibit United from using MFN clauses to 
ensure that Humana can compete and maintain the premerger level of 
competition in Medicare Advantage plans. Pursuant to Section IV(F) of 
the proposed Final Judgment, on February 29, 2008, Humana entered into 
an agreement that gives Humana access to United's existing provider 
network of physicians, hospitals, ancillary service providers, and 
other healthcare providers on comparable terms to those enjoyed by 
United at the time of the acquisition. Accordingly, United could not 
use MFN clauses to attempt to prevent Humana from competing in the 
Medicare Advantage market. Of course, the United States remains free to 
challenge arty anticompetitive conduct of United, including MFN 
clauses, that the United States determines harm competition.
b. All-products Clauses
    The AMA states that the proposed Final Judgment should permanently 
enjoin United's use of ``all-products'' clauses in healthcare-provider 
contracts. (AMA comment at 13.) An all products clause is a contractual 
provision that requires a physician or other healthcare provider to 
agree to participate in the networks for every one of a health-
insurance company's products (e.g., commercial health insurance and 
Medicare Advantage) as a condition for participating in the network of 
any one of that health-insurance company's products.
    The AMA does not make clear how a prohibition on United's use of 
all-products clauses would help maintain competition in a Medicare 
Advantage market. (AMA comment at 13.) The AMA comment refers to the 
affidavit of Professor David Dranove, submitted by the AMA, for an 
explanation of how all-products clauses can be anticompetitive. (AMA 
comment, Attachment A at 8.) Although Professor Dranove states in his 
affidavit that the proposed Final Judgment should prohibit all-products 
clauses to remedy harm in a market for the purchase of physician 
services, the Complaint did not allege or identify competitive harm in 
such a market. (Attachment A at 8.) To the extent that the AMA 
advocates a prohibition on all-products clauses to remedy harm in a 
market for the purchase of physician services, such remedies are 
outside the scope of this APPA proceeding as discussed in Section 
III.A. of this Response.
c. United's Commercial Health-insurance Business in Clark County
    The AMA argues that the proposed Final Judgment should require 
United to divest its commercial health-insurance business in the Las 
Vegas area in addition to United's Medicare Advantage line of business 
because a Medicare Advantage business operating without a commercial 
component ``faces a significant risk of failure.'' (AMA comment at 13.) 
The AMA asserts that ``[t]here are significant economies of scope and 
scale that exist when both commercial and Medicare Advantage businesses 
are combined'' Id. The AMA, however, does not identify what these 
economies of scope and scale are nor why their absence creates a risk 
of failure.
    The United States has considered this issue and concluded that 
Humana has the resources needed to effectively compete for the 
provision of Medicare Advantage plans in the Las Vegas area. Further, 
even assuming that there are benefits to providing both commercial and 
Medicare Advantage products, Section IV(F) of the proposed Final 
Judgment addresses this concern by ensuring that Humana has access to 
United's existing healthcare provider network on terms no less 
favorable than United's premerger terms. That provision and the other 
provisions of the proposed Final Judgment ensure that Humana will have 
a cost structure similar to United's premerger cost structure and be an 
effective competitor that maintains competition in the Las Vegas 
Medicare Advantage market.
d. Use of Certain Trademarks
    The AMA argues that the acquirer of the Divestiture Assets should 
have use of certain United trademarks (AMA comment at 13-14). Section 
IV(H) of the proposed Final Judgment prohibits United from using the 
AARP brand for any of its individual Medicare Advantage plans in the 
Las Vegas area until March 31, 2009, and from using the SecureHorizons 
brands for any individual Medicare Advantage plans in the Las Vegas 
area until March 31, 2010. The AMA argues that the United States should 
extend these provisions to last at least five years because 
``trademarks are of particular importance to continue to secure 
customer loyalty.'' (AMA comment at 13-14.)
    The AMA, however, does not provide any facts to support its 
assertion that a longer prohibition period on United's use of the AARP 
and SecurdHorizons brands is necessary to allow Humana to be an 
effective competitor and maintain competition in the Las Vegas Medicare 
Advantage market. In the United States' judgment based on a review of 
the terms for the sale of the Divestiture Assets, its assessment of 
Humana's capabilities, and its investigation of the Las Vegas Medicare 
Advantage market, the brand prohibitions in the proposed Final Judgment 
are reasonable in light of their intended purpose--to give Humana time 
to establish its own brand in the Las Vegas area and reduce beneficiary 
confusion as to which company operates the plan in which the 
beneficiary is enrolled. See SBC Commc'ns, 489 F Supp. 2d at 17 (a 
district court ``must accord deference to the government's predictions 
about the efficacy of its remedies'').
e. Use of a Monitoring Trustee
    The AMA argues that the proposed Final Judgment should require the 
immediate use of a monitoring trustee to ensure United's compliance 
with the proposed Final Judgment (AMA comment at 15). Section V of the 
proposed Final Judgment allows the United States, in its sole 
discretion and subject to approval by the Court, to appoint a 
monitoring trustee that would have the power to monitor Defendants' 
compliance with the terms of the proposed Final Judgment. Section V(H) 
of the proposed Final Judgment provides that, if a monitoring trustee 
is appointed, it shall serve until United has divested the Divestiture 
Assets and any agreements for transition support services have expired.

[[Page 49839]]

    In the United States' judgment, the immediate use of a monitoring 
trustee is not necessary to ensure United's compliance with the 
proposed Final Judgment for at least three reasons. First, United has 
already complied with many of the provisions of the proposed Final 
Judgment. United has completed the divestiture of the Divestiture 
Assets and assisted Humana in entering into an agreement with 
HealthCare Partners that gives Humana access to healthcare providers on 
terms no less favorable than United's pre-existing agreement with 
HealthCare Partners. In addition, Humana and United have entered into a 
transition services agreement as contemplated by Section IV(J) of the 
Final Judgment. Second, the United States has reviewed the Humana-
United transition services agreement and concluded that the agreement 
provides Humana with contractual rights such that a monitoring trustee 
is not currently necessary to ensure United's compliance with the terms 
of that agreement. Third, should United fail to comply with the terms 
of the transition support agreement, the United States remains free to 
appoint a monitoring trustee, subject to the Court's approval.

IV. Conclusion

    The issues raised in the four public comments were among the many 
considered during the United States' extensive and thorough 
investigation. The United States has determined that the proposed Final 
Judgment as drafted provides an effective and appropriate remedy for 
the antitrust violations alleged in the Complaint, and is therefore in 
the public interest. The United States will move this Court to enter 
the proposed Final Judgment after the comments and this response are 
published in the Federal Register.

    Dated: July 7, 2008.

    Respectfully Submitted,
Peter J. Mucchetti (D.C. Bar  463202), Mitchell H. Glende,
Natalie A. Rosenfelt,

Trial Attorneys, Litigation I Section--Antitrust Division, United 
States Department of Justice; 1401 H Street NW, Suite 4000, Washington, 
DC 20530,(202) 353-4211, (202) 307-5802 (facsimile).
    In the matter of: In the United States District Court for the 
District of Columbia; United States of America, Plaintiff, v. 
Unitedhealth Group Incorporated and Sierra Health Services, Inc., 
Defendants.
    Judge: Ellen S. Huvelle.
    Filed: 2/25/2008
    [Civil No. I:08-cv-00322]

Tunney Act Comments of SEIU Local 1107 on the Proposed Remedy in United 
Health Group Inc.'s Acquisition of Sierra Health Services Inc.

    The Service Employees International Union (``SEIU'') Local 1107 
provides these comments on the proposed final judgment in United Health 
Group Inc.'s (``United Health'') acquisition of Sierra Health Services 
Inc. (``Sierra''). As described herein the SEIU believes the proposed 
remedy in this matter is inadequate and unlikely to prevent the 
substantial anticompetitive effects raised by the merger. As we explain 
below, the proposed merger is likely to reduce competition 
substantially in numerous markets, including the delivery of healthcare 
at hospitals. By creating a dominant health insurer in Clark County. 
Nevada, the merger will enable UnitedHealthcare to substantially lower 
reimbursements to hospitals. which, as demonstrated below, will 
ultimately harm patient care. We believe this provided a substantial 
basis for the Antitrust Division, Department of Justice (``DOJ'') to 
challenge the merger under Section 7 of the Clayton Act, and contend 
that DOJ's decision to enter into the consent decree was in error. We 
respectfully request that the proposed consent decree is rejected and 
the Department of Justice sue to enjoin the merger.
    The SEIU is an organization of more than 1.9 million members united 
by the belief in the dignity and worth of workers and the services they 
provide. SEIU is the nation's largest union of health care workers 
representing over 900,000 caregivers and hospital employees, including 
110,000 nurses and 40,000 doctors in public, private, and non-profit 
medical institutions. SEIU is dedicated to improving the lives of all 
workers and their families. In Nevada, SEIU Local 1107 represents more 
than 17,000 registered nurses, health care workers and public employees 
dedicated to improving the lives of workers, their families and their 
communities. Our members have chosen to dedicate their lives to serving 
the public, and provide the first line of health care service to 
thousands of patients in hospitals in Nevada. In that role we 
experience first hand how health insurance consolidation can harm 
consumers by restricting the ability of all health care providers to 
provide high quality health care. Ultimately, when health insurers 
acquire and exploit their power patients and health care workers 
suffer.
    The SEIU submits these comments on the Proposed Final Judgment 
(``PFJ'') pursuant to the Antitrust Procedures and Penalties Act. 15 
U.S.C. 16(b-e) (known as the ``Tunney Act''). The Tunney Act requires 
that ``[b]efore entering any consent judgment proposed by the United 
States * * *, the court shall determine that the entry of such judgment 
is in the public interest., 16 U.S.C. 15(e)(1). In applying this 
``public interest'' standard the burden is on the government to 
``provide a factual basis for concluding that the settlements are 
reasonably adequate remedies for the alleged harms.'' United States v. 
SBC, 489 F.Supp.2d 1, 16 (D.D.C. 2007), citing United States v. 
Microsoft Corp., 56 F.3rd 1448, 1460-61 D.C.Cir, 1995).
    The Court plays a vital role in determining the proposed decree 
fulfills the public interest. As Judge Greene observed in approving the 
AT&T settlement:

    [i]t does not follow * * * that courts must unquestionably 
accept a proffered decree as long as it somehow, and however 
inadequately, deals with the antitrust and other public policy 
problems implicated in the lawsuit. To do so would be to revert to 
the ``rubber stamp'' role which was at the crux of the congressional 
concerns when the Tunney Act became law.

    U.S. v American Telephone and Telegraph, 552 F.Supp. 131, 151 
(D.D.C. 1982), aff'd sub nom., Maryland v. U.S., 460 U.S. 1001 (1983).
    As detailed below, SE1U believes that the PFJ fails to meet the 
public interest standard. This merger will lead to an unprecedented 
level of consolidation and will create a dominant health insurer in 
Clark County. which is the largest county in Nevada and where Las Vegas 
is located. Allowing one health insurance company this kind of market 
control will harm the quality of care patients will receive in 
hospitals and further weaken the fragile health care system in Clark 
County. In particular, the merger will
     jeopardize patient safety and quality of care by reducing 
payments to hospitals;
     jeopardize the health care safety net;
     have a particularly adverse effect on rural hospitals;
     and, increase the number of uninsured and harm the 
delivery of care to the elderly.

I. The Merger Will Result in Dangerously High Nurse to Patient Staffing 
Ratios, Placing Patient Safety and Quality of Care in Jeopardy

    The impact of the acquisition of Sierra by UnitedHealth on the 
quality of care in hospitals will be severe. This merger will lead to 
an unprecedented level of concentration, In the Clark County HMO

[[Page 49840]]

market UnitedHealth's market share will increase from 14% to 94%. If 
PPOs are included, UnitedHealth's market share increases from 9% to 
60%. Even with the divestiture of the United Medicare Advarnage 
business as included in the PFJ. UnitedHealth's market share is over 
50%. With such a dominant position UnitedHealth will be able to reduce 
reimbursement rates to hospitals unilaterally. Simply, hospitals will 
be unable to reject a ``take it or leave it'' offer from UnitedHealth.
    When hospitals are forced to reduce reimbursement rates, the 
delivery of health care suffers. Reduced reimbursement leads to cut 
backs in services, less investment in equipment, and lower staffing 
levels. While these Comments will focus on the impact on nurses and, in 
turn, the impacts on patient care, these concerns are illustrative of 
the type of competitive problems that will arise overall from the 
reduction of compensation of reimbursement to hospitals.
    Reductions in reimbursement force hospitals to reduce their 
expenses. Staff is the largest expense for hospitals, and Registered 
Nurses (``RNs'') represent hospitals' single largest labor expense. In 
Southern Nevada in particular, salaries and benefits represent 48.0% of 
total operating expenses,\1\ and RNs comprise 76.9% of the hospital 
workforce.\2\ Therefore, if hospitals are forced to accept low 
reimbursement rates, they will look to recoup their losses by cutting 
costs in the most logical place--their RN staff.\3\ The result can be 
dangerously high patient-to-nurse staffing ratios.
---------------------------------------------------------------------------

    \1\ Hospital Quarterly Reports. Calendar Year 2006 Summary 
Financial Report. Table A07 ``Operating Expenses'' and Table A08 
``Other Operating Expenses.'' Utilization and Financial Reports. 
Center for Health Information Analysis. University of Nevada Las 
Vegas. http://www.unlv.edu/Research_Centers/chia/NHQR/Financial/NHQR_Financial_OutputCY2006%200822.xls (Retrieved on October 15. 
2007).
    \2\ Hospital Quarterly Reports. Calendar Year 2006 Summary 
Utilization Reports. Table F02 ``FTE Hospital Hours'' Utilization 
and Financial Reports. Center for Health Information Analysis. 
University of Nevada Las Vegas. http://www.unlv.edu/Research_Centers/chia/NHQR/Utilization/NHQR_Utilization_Output_CY2006%200702.xls (Retrieved on October 15. 2007).
    \3\ Kosel, Keith and Tom Olivo. ``The Business Case for Work 
Force Stability.'' VHA Research Series, 2002.
---------------------------------------------------------------------------

    The detrimental impact of a high patient-to-nurse ratio on patient 
safety and quality of care has been amply demonstrated in several 
markets by a recent set of academic studies, A comprehensive study 
conducted in 2002 and published in the Journal of the American Medical 
Association found that the risk of death increases by 7% for every 
patient in a nurse's care above a 4:1 patient to nurse ration, and 
increases by 16% when that ratio increases to 6:1; the study also 
concluded, most significantly, that there is 31% greater risk of dying 
in hospitals that force a single nurse to care for eight or more 
patients.\4\ Moreover, according to a report by the Joint Commission, 
Health Care at the Crossroads: Strategies for Addressing the Evolving 
Nurse Crisis, understaffing is a contributing factor in 24% of sentinel 
events (unexpected occurrences that result in death or serious 
injury).\5\ Indeed, patients in hospitals with fewer intensive care 
unit (``ICU'') nurses are more likely to suffer from complications 
after surgery and to have a longer length of stay in the hospital than 
patients in hospitals with a greater number of ICU nurses. It is also 
worth noting that patients are not the only ones who suffer harm to 
their health as a result of short-staffing: nurses are two to three 
times more likely to have a needle-stick injury in hospitals with low 
nurse staffing levels.\6\
---------------------------------------------------------------------------

    \4\ Aiken. Linda H.; Clarke, Sean P.; Sloane, Douglas M.; 
Sochalski, Julie; Silber, Jeffrey H. ``Hospital Nurse Staffing and 
Patient Mortality, Nurse Burnout, and Job Dissatisfaction.'' Journal 
of the American Medical Association, 10/23/2002, Vol. 288 Issue 16.
    \5\ Joint Commission on Accreditation of Health Care 
Organizations. ``Health Care at the Crossroads: Strategies for 
Addressing the Evolving Nurse Crisis.'' 2003. http://www.jointcommission.org/NR/rdonlyres/5C138711-ED76-4D6F-909F-B06E0309F36D/0/health_care_at_the_crossroads.pdf (Retrieved on 
3/6/07.)
    \6\ Id.
---------------------------------------------------------------------------

    Studies have also demonstrated that there can be better health care 
outcomes with adequate staffing levels. A recent study estimated that 
6,700 in-hospital patient deaths could he avoided by increasing nurse 
staffing levels. The study further concluded that simply increasing 
nurse staffing levels would result in approximately 70,000 fewer 
adverse outcomes, including decreases in urinary tract infections, 
pneumonia and shock or cardiac arrest.\7\
---------------------------------------------------------------------------

    \7\ Needleman, Jack, Peter I. Buerhaus, Maureen Stewart, Katya 
Zelevinsky and Soeren Mattke. ``Nurse Stafling in Hospitals: Is 
there a Business Case for Quality?'' Health Affairs, Vol. 25. No. 1. 
January/February 2006.
---------------------------------------------------------------------------

    Nurses in Nevada are already forced to work with dangerously high 
nurse-to-patient ratios. In 2000. Nevada ranked last among the states 
in RNs per capita and in per capita health services employment.\8\ In 
2005 Nevada ranked 49th among the states in per capita registered 
nurses, with only 579 RNs for every 100,000 residents, which is far 
below the national average of 799 RNs per 100,000 residents.\9\ The RN-
to-population ratios are higher in the northern part of the state and 
lower in Clark County. Although the number of registered nurses in 
Nevada has grown steadily, it has not kept pace with the state's 
population growth.\10\ The average number of newly-minted RNs over the 
last five years has only been 1,264.\11\ However, over the last three 
years, Nevada's population increased by 11.4%.\12\
---------------------------------------------------------------------------

    \8\ U.S. Department of Health and Human Services, Health 
Resources and Services Administration, Bureau of Health Professions. 
``State Health Workforce Profiles Highlights: Nevada. http://bhpr.hrsa.gov/healthworkforce/reports/statesummaries/nevada.htm 
(Last viewed 12/7/07).
    \9\ Kaiser State Health Facts. Nevada. Providers & Service 
Users. ``Nevada: Total Registered Nurses as of May 2005.'' http://www.statehealthfacts.org/profileind.jsp?ind=438&cat=8&rgn=30 (last 
viewed 12/7/07).
    \10\ Packham, John, Tabor Griswold, Jake Burkey, Chris Lake. 
2005 Survey of Licensed Registered Nurses in Nevada. November 2005. 
http://www.nvha.net/papers/nursesurvey.pdf Last viewed on 12/8/07.
    \11\ Nevada State Board of Nursing Annual Reports for years 
ending June 30, 2001--June 30, 2005. Includes new licenses created 
by examination and by endorsement.
    \12\ U.S. Census Bureau. American Fact Finder. Population 
Finder. ``Population for all Counties in Nevada, 2000 to 2006.'' 
http://factfinder.census.gov/servlet/GCTTable?_bm=y&-geo&_id=0400US32&-_box_head_nbr=GCT-T1&-ds_name-PEP_2006_EST&-_lang=en&-format=ST-2&-sse=on (Last viewed 12/7/07).
---------------------------------------------------------------------------

    Academic studies have shown that, much like the rest of the 
country, the epidemic of nurse understaffing in Nevada is due not to a 
shortage of registered nurses, but rather a shortage of registered 
nurses willing to work under the current conditions in Nevada 
hospitals. In 2000, active licenses were held by 12,900 registered 
nurses in Nevada but only 10,400 were employed in nursing.\13\ In 2004 
and 2005, Valley Hospital in Las Vegas reported that 206 registered 
nurses left employment at the hospital (Valley Hospital has 
approximately only 540 RNs employed at any given time).\14\ At Desert 
Springs Hospital in Las Vegas, 137 registered nurses left employment in 
2004 and 2005 (Desert Springs employs approximately only 290 RNs at any 
given time).\15\ A case study of RNs in Nevada found that the number 
one reason that RN graduates leave their first job is due to patient 
care concerns such as unsafe patient ratios, not having

[[Page 49841]]

enough time to spend with patients, and working conditions that are not 
conducive to safe patient care.\16\ Job dissatisfaction among hospital 
nurses is four times greater than the average for all U.S. workers. 
Forty percent of hospital nurses report burnout levels that exceed the 
norm for health care workers and 1 in 5 hospital nurses intend to leave 
their current jobs within a year. Job stress and dissatisfaction 
increase when nurses are taking care of more patients. Each additional 
patient over four per nurse is associated with a 23% chance of job 
burnout and a 15% chance increase in odds of job dissatisfaction.\17\
---------------------------------------------------------------------------

    \13\ U.S. Department of Health and Human Services, Health 
Resources and Services Administration, Bureau of Health Professions. 
``State Health Workforce Profiles Highlights: Nevada.'' http://bhpr.hrsa.gov/healthworkforce/reports/statesummaries/nevada.htm 
(Last viewed 12/7/07).
    \14\ Data provided pursuant to collective bargaining information 
request.
    \15\ Data provided pursuant to collective bargaining information 
request.
    \16\ Bowles, Cheryl and Lori Candela. ``First Job Experiences of 
Recent R.N. Graduates.'' Journal of Nursing Administration. 2005.
    \17\ Aiken, Linda H., Sean P. Clarke, Douglas M. Stone, Julie 
Sochalski and Jeffrey H. Silber. ``Hospital Nurse Staffing and 
Patient Mortality, Nurse Burnout and Job Dissatisfaction.'' Journal 
of the American Medical Association, Vol. 288. No. 16, 10/23/2002.
---------------------------------------------------------------------------

    Nurses also bear the brunt of the predictable results of short-
staffing: every time a nurse goes to work when there are too few nurses 
working that shift, she puts her nursing license in jeopardy. Pursuant 
to Nevada statute (NAG Sec.  632.895), a registered nurse can be 
subject to disciplinary action from the Nevada State Nursing Board if a 
patient suffers harm as a consequence of an act or an omission that 
could have been reasonably foreseen, up to and including suspending or 
revoking a nurse's license.\18\ We have already explained the link 
between low nurse staffing levels and adverse patient outcomes 
including an increased risk of mortality. Yet another comprehensive 
study has found that rates of ``failure to rescue'' deaths increased 
when registered nurses were responsible for too many patients. 
(``Failure to rescue,'' is the death of a patient from complications 
including pneumonia, shock or cardiac arrest, upper gastrointestinal 
bleeding, sepsis or deep venous thrombosis.) Given that early 
identification of medical problems can decrease the risk of death in 
``failure to rescue'' mortalities, inadequate staffing levels further 
increases the risk of harm to patients, thereby increasing the risk of 
a registered nurse being held responsible and losing his or her 
professional license.\19\ In the context of this crisis, further 
staffing cuts as a result of this merger will drive even more Nevada 
nurses out of the profession.
---------------------------------------------------------------------------

    \18\ Nevada Administrative Code. Chapter 632. http://www.leg.state.nv.us/NAC/NAC-632.html.
    \19\ Needleman, Jack and Peter Buerhaus, Soeren Mattke, Maureen 
Stewart and Katya Zelevinsky, ``Nurse Staffing Levels and the 
Quality of Care in Hospitals.'' New England Journal of Medicine, 
Vol. 346, No. 22. 5/30/2002.
---------------------------------------------------------------------------

    These problems will be even more severe in Southern Nevada, where 
71.1% \20\ of the hospital market is controlled by for-profit 
companies. This concentrated for profit environment is almost unique in 
the U.S. A comprehensive review of clinical data from more than 4,000 
hospitals in the United States found that for-profit hospitals 
consistently have worse outcomes than non-profit hospitals on three 
common medical conditions: congestive heart failure, heart attack and 
pneumonia.\21\ The difference in quality may be attributed to the 
difference in accountability, while publicly-owned and non-profit 
hospitals are accountable to the community. for-profit hospitals are 
only accountable to their shareholders and, as a result, focus on 
strategies that increase profitability rather than strategies to 
benefit the community.\22\
---------------------------------------------------------------------------

    \20\ Quality Care Nevada. ``Hospitals and Health Systems.'' 
http://www.qualitycarenevada.org/index.asp?Type=B_BASIC&SEC={7707D6CB-3079-4EF0-A9D6-B81FB8D31E7F{time} .
    \21\ Landon, Bruce E.. Sharon-Lise T. Normand, Adam Lessler, A. 
James O'Malley, Stephen Schmaltz, Jerod M. Loeb and Barbara McNeil. 
``Quality of Care for the Treatment of Acute Medical Conditions in 
U.S. Hospitals.'' Arch Intern Med, Vol. 166, Dec 11/25, 2006.
    \22\ Physicians for a National Healthcare Program. ``New England 
Journal of Medicine Article Says Evidence Against For-Profit 
Hospitals Now Conclusive.'' August 1999. http://www.pnhp.org/news/1999/august/new_england_journal_.php (Last viewed on 12/7/07).
---------------------------------------------------------------------------

    The result of this concentration of for-profit hospital ownership 
is a relatively poor level of healiheare quality in Clark County. A 
Medicare Quality Improvement Organization, dedicated to tracking 
quality measures in medical settings, routinely ranks Clark County 
hospitals in the bottom half of our nation's hospitals in a wide-range 
of quality measures. In fact. some Clark County hospitals scored as low 
as the 6th and 7th percentile of all U.S. hospitals.\23\
---------------------------------------------------------------------------

    \23\ Health Insight. http://www.healthinsight.org (Last viewed 
on 10/31/07).
---------------------------------------------------------------------------

    The PFJ approving the United/Sierra merger will exacerbate these 
problems and diminish the level of health care quality. The ability of 
patients and doctors to determine the appropriate level of care will be 
weakened. Nurses that are working with inadequately low staffing levels 
will be faced with an additional risk to staffing levels and safe, 
quality patient care will be needlessly jeopardized.

II. Sierra Health Services & HCA: A Case Study of Anticompetitive 
Impact on Qualily & Access in Nevada

    History demonstrates how the dominance of one health insurer in 
this market can harm the health care of children and families in our 
community. In Las Vegas we have already experienced the impacts of a 
health insurance company using its market dominance to increase their 
profits. In January 2007, after a contentious and public contract fight 
between Sierra Health Services and HCA hospitals in Clark County, 
Sierra Health Services terminated its contract with HCA hospitals 
because HCA refused to agree to the low reimbursement rates Sierra was 
demanding. When the contract was terminated, Sierra's 620,000 members 
were no longer able to access services at the three HCA hospitals in 
Clark County.
    Children have been harmed the most by Sierra's decision. Sunrise 
Hospital, which is owned by HCA, specializes in pediatric care. 
Children are no longer able to access pediatric neurologists or 
pediatric radiologists in Clark County and may have to travel as far as 
Los Angeles to receive this level of specialized care. Children with 
cancer are no longer eligible to participate in protocol treatments at 
Sunrise Hospital. Patients who come to the Emergency Room at Sunrise 
Hospital who are covered by Sierra Health Services' products have to be 
transferred to a different hospital as soon as they are stabilized, 
including women in labor. Patients are sometimes forced to move from 
hospital to hospital to access all the care they need. We know of one 
patient, for example, who had to go to Sunrise Hospital to have a 
pacemaker removed and was then transferred to another hospital to have 
a new one inserted due to insurance demands.
    After Sierra Health Services dropped HCA, Sierra Health Services 
required their enrollees to be directed to other hospitals in Clark 
County. Our nurses who work at the other hospitals saw first hand the 
impact of having 620,000 consumers suddenly redirected to their 
hospitals. A nurse at Valley Hospital reported that their Intensive 
Care Units, Emergency Room and Operating Room became overwhelmed with 
heart patients and other critically ill patients. Universal Health 
Services, the for-profit corporation that owns Valley Hospital, is 
already known for short staffing its Registered Nurses, so when 
Sierra's decision took effect, Operating Room and Recovery Room RNs and 
techs were on call at the hospital for 16-20 hours

[[Page 49842]]

every day. Emergency Room RNs had to take 4 to 8 patients each, and 
patients were forced to stay in the Emergency Room for 2-3 days before 
they were able to he transferred to a bed in Intensive Care.
    Sixteen months have passed since the contract between Sierra Health 
Services and HCA hospitals in Clark County was severed, and patients 
are still not able to access care at these hospitals. At Sunrise 
Hospital, the census and case load continue to be low and patients 
continue to be refused treatment. Nurses who work at HCA hospitals have 
seen their hours cut and face the threat of layoffs. Many registered 
nurses have had to find work at other facilities or have used up all of 
their vacation time because there is not enough work for them. 
Registered Nurses have had to quit working at Sunrise Hospital because 
there have not been enough hours for them to work and they have been 
unable to pay their mortgage.
    SEIU Local 1107 believes that the HCA example demonstrates the 
likely anticompetitive effects from the UnitedHealthcare/Sierra merger. 
When an insurance company is in a dominant position, it can demand 
dramatically lower reimbursement rates from hospitals. Most hospitals 
have few alternatives but to accept a take-it-or-leave-it offer from 
dominant health insurer. But even if they reject such an offer, it is 
important to recognize that the harm to consumers will not be limited 
simply to UnitedHealthcare/Sierra consumers. For those consumers, there 
is one less hospital outlet available for them to access care. But for 
all consumers the termination of a hospital from an insurer network 
imposes significant costs. Ultimately, the increased costs of serving 
Sierra patients at other hospitals are spread to all consumers who use 
those alternative hospitals as the level of care diminishes.

III. The Merger Will Create a Crisis for the Clark County's Safety Net 
Services by Placing Additional Strain on Nevada's Only Public Hospital

    The United/Sierra merger will also harm Clark County's health care 
safety net by creating a crisis for Nevada's sole public hospital, 
University Medical Center (UMC), located in Las Vegas.
    University Medical Center has served Southern Nevada for 75 years. 
It operates Nevada's only Level 1 Trauma Center, Nevada's only burn 
care facility and the only HIV inpatient unit in Southern Nevada. It 
also serves as the primary clinical campus for University of Nevada 
School of Medicine, Its Primary and Quick Care network provides primary 
and urgent care access to more than 300,000 patients each year.\24\
---------------------------------------------------------------------------

    \24\ Lewin Group. Clark County Final Summary Presentation,'' 
February 20, 2007, Slide 54.
---------------------------------------------------------------------------

    UMC treats the vast majority of the uninsured in Clark County and 
serves as the community's safety net hospital in Las Vegas. UMC cares 
for 44% of all of Clark County's Medicaid patients and 48% of Clark 
County's self-pay patients and has provided $280 million in charity 
care in the last 5 years. At the same time, UMC cares for less than 11% 
of the market for each of the better paying Medicare and commercial 
insurance.
    UMC's ability to provide essential services is continuously 
threatened by its poor payer mix and the financial instability that 
that brings. UMC operates near capacity, with an occupancy rate of 
84.5%, but its average operating margin for the last four years has 
been -3.9% because of its poor payer mix. UMC's expenses have been 
increasing at a higher rate than revenue since 2001, and with the rate 
of uninsured predicted to increase by 24% by 2021 in Clark County, this 
deficit is expected to continue.\25\ In fiscal year 2006 UMC incurred 
an operating deficit of approximately $34.3 million and the operating 
deficit is projected to reach $60 million in fiscal year 2007.\26\ 
Given UMC's precarious circumstances, if one insurance company were 
permitted to obtain market dominance, any actions that increase the 
number of uninsured or underinsured will severely undermine the ability 
of UMC to meet its obligations in providing a community safety net for 
Nevadans. For example, if as a result of the merger, United-Sierra 
dramatically raises premiums and increases the numbers of uninsured and 
underinsured individuals (which we discuss further below), this will 
only increase the demand on UMC's already over-taxed services.
---------------------------------------------------------------------------

    \25\ Lewin Group. Clark County Final Summary Presentation,'' 
February 20, 2007, slide 5, 7 & 63.
    \26\ University Medical Center Public Outreach Summary Report.'' 
Presented to the Clark County Board of County Commissioners on 9/4/
2007.
---------------------------------------------------------------------------

    Yet another way UMC will be harmed if only one insurance company 
insures a large percentage of the patients at a single hospital is in 
the area of claims resolution. Any difficulties in resolving 
outstanding claims will have a significant impact on the ability of the 
public hospital to meet its public service obligations. In fact, UMC 
has already had precisely this kind of trouble with UnitedHealth. 
Modern Healthcare reported that since UnitedHealth took over PacifiCare 
in 2005, UMC has had trouble with UnitedHealth's claims payment process 
and has had difficulty getting claims resolved.\27\ If this merger is 
approved and these problems persist, the effects will be on a much 
bigger scale and it will put essential medical services at risk. UMC 
cannot afford the financial and operational havoc that unpaid or 
unresolved claims could have on their ability to provide services.
---------------------------------------------------------------------------

    \27\ Benko, Laura B. ``All Bets are Off: Bigger, Yes, But 
Better?'' Modern Healthcare. 3/19/2007.
---------------------------------------------------------------------------

IV. The Merger Will Exacerbate the Condition of Nevada's Most 
Vulnerable Populations: the Uninsured and Underinsured, and the Elderly

    The acquisition of Sierra Health Services by UnitedHealth will 
result in UnitedHealth dominating a faction of the market and 
possessing the power to unilaterally set the price for health insurance 
premiums. If individuals and/or employers are unable to afford the 
premiums, they will have no other health insurance options available to 
them and we will see an increased number of uninsured in Las Vegas.
    Approximately 18% of Nevadans live without insurance, which is 
higher than the national average of 16%. Seventeen percent of children 
in Nevada live without health insurance, higher than the national 
average of 12%.\28\ The uninsured rate in Clark County grew 31% from 
2000-2006 and is expected to grow at least another 24% in the next 15 
years.\29\
---------------------------------------------------------------------------

    \28\ Kaiser Family Foundation. State Health Facts. ``Health 
Coverage & Uninsured.'' http://www.statehelathfacts.org/profilecat.jsp?rgn=30&cat=3 (Last viewed on 10/30/07).
    \29\ Lewin Group. ``Clark County Final Summary Presentation.'' 
February 20, 2007, slide 37 & 38.
---------------------------------------------------------------------------

    When patients do not have insurance they are more likely to delay 
seeking treatment and they are more likely to obtain their care in the 
emergency room. When we see them in the hospital they are much sicker 
than they would have been otherwise. They are more likely to have a 
longer length of stay. If their insurance will not cover their care 
they need while they are in the hospital they are more likely to have a 
delayed recovery and make repeat visits to the hospital.
    Living without insurance can have dire consequences. In rural 
Nevada, there are a high number of uninsured pregnant women. When 
laboring moms come to the hospital with no medical records because they 
were unable to afford prenatal visits, a danger is posed to the mother 
and the child.
    This merger will increase the number of underinsured in Clark 
County. If UnitedHealth decides that they will no

[[Page 49843]]

longer provide coverage for certain kinds of care than that decision 
will leave more than 808,000 people in Nevada.\30\ approximately 32.4% 
of the population,\31\ with a choice of either going without necessary 
care or paying for that care out of their own pocket. SEIU Local 1107 
members represent a large number of UnitedHealth's potential consumers; 
approximately 74.0% of SEIU Local 1107 members currently have Health 
Plan of Nevada (Sierra's HMO product) as their only HMO option.
---------------------------------------------------------------------------

    \30\ Robison, Jennifer. ``Mergers and Acquisitions: Official OKs 
Sierra Health buyout.'' Las Vegas Review Journal. 8/28/2007.
    \\ U.S. Census Bureau. Population Finder. Nevada. Population 
estimates in 2006: 2,495, 529. http://factfinder.census.gov/servlet/SAFFPopulation?_event=Search&_name=&_state=04000US32&_country=&_cityTown=&_zip=&_sse=on&_lang=en&pctxt=fph (Last 
viewed on 10/30/07)
---------------------------------------------------------------------------

    Increasing the number of uninsured and underinsured will lengthen 
emergency room wait times and impact the quality of the care we provide 
at our hospitals. Hospitals are mandated by law to provide care to 
anyone who asks for medical treatment and, because of this, people use 
the ER for everyday medical problems. We are inundated with non-
emergent patients that have no other place to go to receive health 
care. The burden takes nurses and doctors away from treating truly 
emergent, life-threatening patients and creates emergency room wait 
times that can last 6 to 8 hours. If ones insurer provides coverage to 
a large percentage of people in the community and that insurer decides 
to raise premiums, the number of uninsured or underinsured residents 
will increase, and all of the problems associated with that will 
increase as well.
    Clark County is already in a perilous position of being unable to 
provide the appropriate level of care to elderly and disabled 
residents. Clark County hospitals are short staffed and do not have 
enough nurses to provide necessary care, The County is also suffers 
from a shortage of doctors, dentists and almost every other health care 
professional.\32\ A Veterans Administration official stated that these 
shortages will eventually lead to premature deaths, intense strain on 
families and missed diagnosis that will cause patients to suffer.\33\
---------------------------------------------------------------------------

    \32\ Hidalgo, Jason, 6/17/2007.
    \33\ Hidalgo, Jason, 6/17/2007.

---------------------------------------------------------------------------
* * *

    We believe that the PFJ thus to address the substantial competitive 
concerns raised by UnitedHealth's acquisition of Sierra and should he 
rejected by the Court.

 Respectfully submitted,

Jane McAlevey, Executive Director,
Service Employees International Union,
Local 1107.
Chris Giunchigliani, Commissioner, Board of County Commissioners, 
Clark County Government Center, 500 S Grand Central Pky, Box 551601 
Las Vegas, NV 89155-1601, (702) 455-3500 Fax: (702) 383-6041
May 14, 2008.
Joshua H. Soven, Chief, Litigation I Section, U.S. Department of 
Justice, Antitrust Division, 1401 H Street, NW, Ste. 400, 
Washington, DC 20530
RE: Tunney Act Comments, United States v. UnitedHealth Group, Civil 
Case No. 08-0322
    Dear Mr. Soven:
    As an individual Commissioner of Clark County, I am submitting 
these comments to express my serious concerns with the proposed 
final judgment entered into by the U.S. Department of Justice 
(``DOJ'') with UnitedHealth Group, Inc. and Sierra Health Services, 
Inc. over the UnitedHealth/Sierra acquisition. I believe that this 
proposed final judgment is inadequate to resolve the very serious 
competitive concerns raised by this merger.
    UnitedHealth's acquisition of Sierra will create a single health 
insurance company that will dominate the Clark County market. By 
combining these two companies, a single firm will have over a 50% 
share of the commercial health insurance market. This single firm 
will have substantial power to dictate the terms and conditions in 
which employers, particularly small employers, will be forced to 
purchase health insurance. Clark County is a significant distance 
from other major metropolitan markets arid the commercial health 
insurance market has traditionally been dominated by a small group 
of firms.
    The DOJ's decree is inadequate because it fails to recognize the 
potential competitive harm from the merger on employers who purchase 
insurance, and uninsured and underinsured individuals in Clark 
County. Clark County is the largest county in Nevada with a 
population of 2 million individuals, over 300,000 of which are 
uninsured, over 17% of the Clark County population. This merger is 
of particular concern for the county, which because it operates the 
largest public hospital in Nevada, University Medical Center 
(``UMC''). UMC is the safety net healthcare facility for the county. 
Uninsured and underinsured individuals use UMC as their primary 
source of healthcare services.
    This merger, by permitting the creation of a single dominant 
health insurer in Clark County will substantially increase the costs 
of numerous commercial health insurance products, ultimately harming 
the consumers in Clark County.
    This, in turn, will increase the number of uninsured 
individuals. This impact will be particularly felt by relatively 
small employers in Clark County. As the cost of insurance increases 
substantially, small employers will be increasingly unable to 
provide health insurance to their employees, and in turn this will 
further substantially increase the number of uninsured individuals 
in the county. Those individuals must rely on UMC for most of their 
healthcare services. Thus, the merger will ultimately increase the 
cost of healthcare services in Clark County. Moreover, this merger 
will diminish the service and quality of health care that patients 
receive as more demand is placed on the services of UMC.
    The Nevada State Attorney General filed a complaint and a final 
judgment simultaneous to the DOJ action. The Attorney General was 
able to secure some modest relief to address the concerns of UMC, 
including the payment of overdue claims for UMC. Although these 
remedies aim to solve some ongoing problems between UnitedHealth and 
UMC, they do not provide any long-term relief to protect the 
interests of UMC, the uninsured, or Clark County. Now that the 
merger is consummated. Clark County is left dealing with an 
incredibly powerful health insurance company that can unilaterally 
reduce reimbursement, which in turn will significantly diminish the 
ability of the county to deliver adequate services to both insured 
and uninsured individuals.
    I believe that the DOJ's proposed enforcement action should be 
rejected, and the Department should re-open its investigation to 
secure adequate relief to protect the uninsured individuals in Clark 
County and the concerns of the County itself.
 Sincerely,

Chris Giunchigliani,
Commissioner.

Congress of the United States

U.S. House of Representatives

Committee of Small Business

2561 Rayburn House Office Building

Washington, DC 20515-0315

May 15, 2008.
VIA E-MAIL
The Honorable Thomas O. Barnett, Assistant Attorney General for 
Antitrust, c/o Joshua H. Soven, Chief, Litigation I Section, U.S. 
Department of Justice, Antitrust Division, 1401 H Street, N.W., 
Suite 4000, Washington, DC 20530

RE: Tunney Act Comments, United States v. UnitedHealth Group 
Incorporated, Civil Case No. 08-0322

    Dear Assistant Attorney General Barnett: These comments are 
submitted pursuant to the Tunney Act \1\ regarding the Proposed 
Final Judgment (PFJ) filed by the U.S. Department of Justice (DOJ) 
with the U.S. District Court for the District of Columbia in United 
States v. UnitedHealth Group Incorporated, Civil Case No. 08-0322.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. Sec. Sec.  16(b)-(h).
---------------------------------------------------------------------------

    The Tunney Act requires the Court to determine whether the PFJ 
is in the public interest.\2\ In making this determination, the 
Court must carefully consider the fact that entry of the PFJ will 
profoundly reduce competition in the health care markets of Clark 
County and the State of Nevada, and pose significant risks to 
consumers, physicians and small businesses. The public

[[Page 49844]]

benefit arising from entry of the PFJ is not readily apparent.
---------------------------------------------------------------------------

    \2\ 15 U.S.C. Sec.  16(e).
---------------------------------------------------------------------------

    While the Department of Justice (DOJ) took steps to protect 
senior citizens by requiring the divestiture of Medicare Advantage 
related assets, I am concerned the PFJ does not adequately protect 
the rest of the public, including small businesses, healthcare 
providers and patients.
    On October 25, 2007, the Committee on Small Business held a 
hearing entitled Health Insurer Consolidation--The Impact on Small 
Business. The Committee heard from witnesses representing small 
businesses, the medical community and consumers who expressed 
concern regarding the growing trend of consolidation in the health 
insurance industiy.
    Witnesses made the following comments at the hearing:
    ``* * * consolidation has left physicians with little leverage 
against unfair contract terms that deal with patient care and little 
control over their own employees rising health insurance premiums.'' 
\3\
---------------------------------------------------------------------------

    \3\ Statement of Dr. William G. Plested, III, Immediate Past 
President. American Medical Assn.
---------------------------------------------------------------------------

    ``The lack of competition among health insurers absolutely 
affects my insurance cost, as well as the quality and scope of 
coverage. Our state's [Illinois] non-competitive health care 
insurance environment, due to the monopoly of one or two carriers, 
places all the leverage in the hands of the insurers. I can't vote 
with my feet and dollars if I have no alternatives from which to 
select.'' \4\
---------------------------------------------------------------------------

    \4\ Statement of Robert Hughes. President of the National 
Association for the Self-Employed (quoting a member).
---------------------------------------------------------------------------

    ``Consolidation of health insurance plans have [sic) created a 
profound imbalance that hurts the ability of family physicians to 
negotiate contracts. This is harmful to our practices. but also 
means that many of our patients cannot find the primary care 
physicians who accept their insurance.'' \5\
---------------------------------------------------------------------------

    \5\ Statement of Dr. James D. King, President, American Academy 
of Physicians.
---------------------------------------------------------------------------

    ``Health insurance consolidation has in part created a take it 
or leave it market for small businesses. Reduced competition through 
consolidations both of insurance carriers and health insurance 
carrier provider networks has led to increased pricing (and) fewer 
choices for small businesses and their employees.'' \6\
---------------------------------------------------------------------------

    \6\ Statement of James R. Office, General Counsel, Victory 
Wholesale Grocers.
---------------------------------------------------------------------------

    The hearing record is included as part of this comment.
    Access to health insurance is an area of key concern to small 
businesses. The rising cost of health care is regularly cited by 
small firms as one of their biggest worries. Small businesses need 
to have choices in the health insurance marketplace. In addition, 
mergers should not be permitted that enable a health insurer to 
reduce compensation to physicians below competitive rates. If the 
playing field for health care providers is not level, quality of 
care declines and patients ultimately suffer.
    The health insurance marketplace has become increasingly 
consolidated in recent years. Consolidation has left small 
businesses with fewer choices and physicians with diminished 
leverage to negotiate with plans. Econometric evidence shows that in 
the managed care field, an increase in the number of competitors is 
associated with lower health plan costs and premiums; conversely, a 
decrease in the number of competitors is associated with higher 
health plan costs and premiums.\7\ In the majority of metropolitan 
areas, a single insurer now dominates the marketplace. If 
individuals and small businesses cannot get coverage through the 
dominant insurer in these areas, they may not be able to find 
alternatives.
---------------------------------------------------------------------------

    \7\ Examining Health Care Mergers in Pennsylvania: Hearing 
Before the Senate Judiciary Committee, 110th Congress (April 9, 
2007) Statement of Lawton Burns, Professor, Wharton School of 
Business.
---------------------------------------------------------------------------

    Because mergers of health insurers affect access to health care 
and influence the quality of medical services to consumers, they 
command great scrutiny.
    To maintain competition in the marketplace, the proposed 
acquisition of Sierra Health Services, Inc. (``Sierra'') by 
UnitedHealth Group Incorporated (``United'') requires the 
divestiture of more assets than merely those related to United's 
Medicare Advantage business in the Las Vegas area. Sierra is 
United's largest rival in the state of Nevada. The level of 
concentration posed by this merger is tremendous. A combined United-
Sierra would have a nearly 80 percent share of the commercial HMO 
market in Nevada and almost a 94 percent share of the commercial HMO 
market in Clark County.
    DOJ notes that ``United and Sierra together account for 
approximately 94 percent of the total enrollment in Medicare 
Advantage plans in the Las Vegas area,'' and that the ``acquisition 
is likely to reduce competition substantially in the sale of 
Medicare Advantage plans in the Las Vegas area in violation of 
Section 7 of the Clayton Act.'' \8\ Similar effects on competition 
will likely arise both in the commercial HMO market, which will see 
virtually the same levels of concentration as the Medicare Advantage 
market, and the market for the purchase of physician services. The 
PFJ fails to address this diminishment of competition in these 
markets in Las Vegas and the State of Nevada.
---------------------------------------------------------------------------

    \8\ 73 Federal Register 12763 (March 10, 2008).
---------------------------------------------------------------------------

    It is critical that the Court consider the following factors in 
evaluating the PFJ:

The PFJ Could Enhance United's Market Power and Hurt Small Businesses

    United will go from having a 12 percent share of the HMO market 
in the state of Nevada to an 80 percent share. In Clark County, the 
market share will surge from 14 percent to 94 percent. By allowing 
the two largest competitors in the state to merge, small businesses 
will face severely diminished options in health insurance plans. The 
insurance marketplace in Nevada and Clark County is already highly 
concentrated--which necessitates an even higher level of scrutiny. 
With such a dominant market position, a combined United-Sierra could 
attain market power to raise prices to small businesses above 
competitive levels. Small businesses will have few alternatives to a 
combined United-Sierra and as a consequence, will be stuck with 
higher premium costs. If costs rise above competitive levels more 
small firms will stop providing coverage to employees, increasing 
the number of Nevada's uninsured.
    Additionally, it is important to contemplate that existing 
barriers to entry in the HMO market are extremely high. It is 
unlikely that a combined United-Sierra will face any new competitors 
in Nevada in the near future.

The PFJ Could Enhance United's Monopsony Power and Hurt Physicians and 
Patients

    With such an overwhelming market share, the combined United-
Sierra could reduce compensation for providers to the point where it 
is below competitive levels. Lower service, poorer quality and 
reduced access to health care could result. Physicians and other 
providers may not have sufficient alternatives to allow them to 
circumvent the compensation decreases of a combined United-Sierra. 
The costs for physicians to switch to other health care insurers are 
substantial as physician time is valuable and it can be difficult 
for a physician to quickly replace lost patients. With such a 
dominant market share and high switching costs, physicians may find 
that, when faced with lower reimbursement, they are unable to switch 
from a combined United-Sierra to another insurer. If this is the 
case, a combined United-Sierra could exercise market power against 
health care providers.
    I appreciate consideration of the above mentioned issues. I am 
concerned that the PFJ does not adequately preserve competition in 
the health insurance marketplace for small businesses, physicians 
and consumers.
 Sincerely,

Nydia M. Vel[aacute]zquez,
Chairwoman.

Full Commi1tee Hearing on Health Insurer Consolidation--The Impact on 
Small Business

Committee on Small Business

United States House of Representatives

One Hundred Tenth Congress

First Session

October 25, 2007.

Serial Number 110-55

Printed for the use of the Committee on Small Business
Available via the World Wide Web: http://wwwaccess.gpo.gov/congress/house
U.S. Government Printing Office
39-376 PDF Washington : 2007
For sale by the Superintendent of Documents, U.S. Government 
Printing Office
Internet: bookstore.gpo.gov Phone toll free (866) 512-1800; DC area 
(202) 512-1800
Fax: (202) 512-2104 Mail: Stop IDCC, Washington, DC 20402-0001

House Committee on Small Business

Nydia M. Vel[aacute]zquez, New York, Chairwoman

Heath Shuler North Carolina
Charlie Gonzalez, Texas
Rick Larsen, Washington

[[Page 49845]]

Raul Grijalva, Arizona
Michael Michaud, Maine
Melissa Bean, Illinois
Henry Cuellar, Texas
Dan Lipinski, Illinois
Gwen Moore, Wisconsin
Jason Altmire, Pennsylvania
Bruce Braley, Iowa
Yvette Clarke, New York
Brad Ellsworth, Indiana
Hank Johnson, Georgia
Joe Sestak, Pennsylvania
Brian Higgins, New York
Mazie Hirono, Hawaii
Steve Chabot, Ohio, Ranking Member
Roscoe Bartlett, Maryland
Sam Graves, Missouri
Todd Akin, Missouri
Bill Shuster, Pennsylvania
Marilyn Musgrave, Colorado
Steve King, Iowa
Jeff Fortenberry, Nebraska
Lynn Westmoreland, Georgia
Louie Gohmert, Texas
Dean Heller, Nevada
David Davis, Tennessee
Mary Fallin, Oklahoma
Vern Buchanan, Florida
Jim Jordan, Ohio

Michael Day, Majority Staff Director

Adam Minehardt, Deputy Staff Director

Tim Slattery, Chief Counsel

Kevin Fitzpatrick, Minority Staff Director

Standing Subcommittees

Subcommittee on Finance and Tax

Melissa Bean, Illinois, Chairwoman

Raul Grijalva, Arizona
Michael Michaud, Maine
Brad Ellsworth, Indiana
Hank Johnson, Georgia
Joe Sestak, Pennsylvania
Dean Heller, Nevada, Ranking
Bill Shuster, Pennsylvania
Steve King, Iowa
Vern Buchanan, Florida
Jim Jordan, Ohio

Subcommittee on Contracting and Technology

Bruce Braley, Iowa, Chairman

Henry Cuellar, Texas
Gwen Moore, Wisconsin
Yvette Clarke, New York
Joe Sestak, Pennsylvania
David Davis, Tennessee, Ranking
Roscoe Bartlett, Maryland
Sam Graves, Missouri
Todd Akin, Missouri
Mary Fallin, Oklahoma

Subcommittee on Regulations, Health Care and Trade

Charles Gonzalez, Texas, Chairman

Rick Larsen, Washington
Dan Lipinski, Illinois
Melissa Bean, Illinois
Gwen Moore, Wisconsin
Jason Altmire, Pennsylvania
Joe Sestak, Pennsylvania
Lynn Westmoreland, Georgia, Ranking
Bill Shuster, Pennsylvania
Steve King, Iowa
Marilyn Musgrave, Colorado
Mary Fallin, Oklahoma
Vern Buchanan, Florida
Jim Jordan, Ohio

Subcommittee on Urban and Rural Entrepreneurship

Heath Shuler, North Carolina, Chairman

Rick Larsen, Washington
Michael Michaud, Maine
Gwen Moore, Wisconsin
Yvette Clarke, New York
Brad Ellsworth, Indiana
Hank Johnson, Georgia
Jeff Fortenberry, Nebraska, Ranking
Roscoe Bartlett, Maryland
Marilyn Musgrave, Colorado
Dean Heller, Nevada
David Davis, Tennessee

Subcommittee on Investigations and Oversight

Jason Altmire, Pennsylvania, Chairman

Charlie Gonzalez, Texas
Raul Grijalva, Arizona
Louie Gohmert, Texas, Ranking
Lynn Westmoreland, Georgia

Contents

Opening Statements

Vel[aacute]zquez, Hon. Nydia M.
Chabot, Hon. Steve

Witnesses

Plested III, Dr. William G., American Medical Association
Huges, Robert, National Association for the Self-Employed
King, Dr. James D, American Academy of Family Physicians
Office, James R., Victory Wholesale Grocers
Scandlen, Greg, Consumers for Health Care Choices

Appendix

Prepared Statements:
Vel[aacute]zquez, Hon. Nydia M.
Chabot, Hon. Steve
Altmire, Hon. Jason
Plested III, Dr. William G., American Medical Association
Huges, Robert, National Association for the Self-Employed
King, Dr. James D., American Academy of Family Physicians
Office, James R., Victory Wholesale Grocers
Scandlen, Greg, Consumers for Health Care Choices
Statements for the Record:
Consumer Federation of America, Consumers Union and US PIRG

Full Committee Hearing on Health Insurer Consolidation--The Impact on 
Small Business

Thursday, October 25, 2007.
U.S. House of Representatives,
Committee on Small Business,
Washington, DC.
    The Committee met, pursuant to call, at 9:30 a.m., in Room 2360 
Rayburn House Office Building, Hon. Nydia Vel[aacute]zquez 
[Chairwoman of the Committee] presiding.
    Present: Representatives Vel[aacute]zquez, Gonzalez, Cuellar, 
Altmire, Clarke, Ellsworth, Sestak, Higgins, Chabot, Bartlett, and 
Fallin.

Opening Statement of Chairwoman Vel[aacute]zquez

    Chairwoman Vel[aacute]zquez. Good morning. I call this hearing 
to order to address Health Insurer Consolidation--The Impact on 
Small Business.
    Access to health insurance is an area of concern to small 
businesses. The rising costs of health care are regularly cited by 
small firms as one of their biggest worries. Small businesses need 
to have choices in the health insurance marketplace. It is 
imperative that the marketplace is diverse and competition 
flourishes.
    It is also critical that small medical providers are able to 
continue offering services. Physicians and other providers must be 
able to operate on a level playing field with health insurers and be 
reimbursed at fair rates. If not, quality of care will decline, and 
it is the patient who ultimately will suffer.
    Consolidation in the health insurance industry is one area of 
special concern that has a direct impact on these issues. Because 
these mergers affect access to care and influence the quality of 
medical services, they command careful scrutiny by regulators. 
Unfortunately, the health insurance industry, like a number of other 
industries, has seen a general lack of enforcement of antitrust 
laws.
    Earlier this year, The Wall Street Journal reported that the 
Federal Government has nearly stepped out of the antitrust 
enforcement business. While some mergers benefit consumers and 
increase the competitiveness of U.S. companies, others pose 
substantial risks to competition and innovation.
    The health insurance marketplace has become increasingly 
concentrated in recent years. Consolidation has left small 
businesses with fewer choices, and physicians with diminished 
leverage to negotiate. In the majority of metropolitan areas, a 
single insurer now dominates the marketplace. If individuals and 
small businesses cannot get health coverage through the dominant 
insurer, they may not be able to find alternatives.
    Recent mergers in the health insurance industry have tended to 
not generate efficiencies that have lower costs for small businesses 
or improved coverage. Premiums for small businesses have continued 
to increase without a corresponding increase in benefits. Consumers 
are facing increased deductibles, co-payments, and co-insurance, 
which have reduced the scope of their coverage.
    When operating in highly concentrated markets, physicians often 
find they are stuck with take it or leave it contracts. The 
Department of Justice has recognized that physicians face special 
difficulties in dealing with health insurers--namely, it is very 
costly for them to switch from one insurer to another.
    Replacing lost business for a physician by attracting new 
patients from other sources is very difficult in our current health 
care system. Physicians face barriers in attracting potential new 
HMO patients, since they are filtered through an HMO plan. 
Physicians struggle to maintain the quality of care in the

[[Page 49846]]

face of reduced reimbursement--a large administrative burden.
    When physicians are forced to spend less time on each 
appointment, ultimately it is the patients that suffer. It is 
essential that competition remains vibrant in the health insurance 
marketplace. Not surprisingly, studies have found that when 
competition declines premium costs generally go up. The rising costs 
of health care are leading to greater numbers of uninsured, and less 
small businesses and individuals can afford to pay premiums.
    Small businesses continue to be burdened by the high cost of 
health care. These rising costs of health insurance is one of the 
primary reasons the ranks of the 46 million uninsured Americans 
continue to grow. Tragically, 18,000 Americans lose their lives each 
year because of a lack of health insurance. We need to ensure that 
providers are on a level playing field, and small businesses and 
individuals have choices when it comes to health care.
    I yield now to Ranking Member Chabot for his opening statement.

Opening Statement of Mr. Chabot

    Mr. Chabot. Thank you very much, Madam Chairwoman. I want to 
apologize for being a couple of minutes late. It was one of those 
mornings where just too many things were scheduled and I just 
couldn't make it to everything on time. So I apologize.
    And I want to thank the Chairwoman for holding this important 
hearing on the impact of mergers and increasing concentration in the 
health insurance market. This hearing continues this Committee's 
examination of the cost of health care on small businesses, both as 
purchasers of health care and as providers.
    The Supreme Court has stated that ``The unrestrained interaction 
of competitive forces will yield the best allocation of our economic 
resources, the lowest prices, the highest quality, and the greatest 
material progress.'' In short, competitive markets represent the 
cornerstone of American progress and the success of our democracy. 
Antitrust laws were established to protect these precious values. By 
providing a mechanism to ensure that competition is not unreasonably 
hindered, the antitrust laws can be seen as further bracing the 
competition foundation of this country.
    When mergers occur, that may reduce competition. It behooves the 
Justice Department or the Federal Trade Commission to closely assess 
the value of these mergers. That is particularly crucial in the 
context of health care. When the members of this Committee travel 
back to their districts, they are put face to face with constituents 
and small business owners that struggle every day to cope with the 
rising costs of obtaining or providing health care.
    If the number of companies that supply health insurance 
continues to decrease, basic economics suggest that costs of 
obtaining health care coverage will increase. It then becomes vital 
to assess the impact of industry consolidation on small business 
owners who already have significant difficulty in obtaining health 
insurance coverage.
    Today, we have witnesses that represent small business 
purchasers of health care who will inform the Committee of the 
increasing difficulty that they have in obtaining health care 
coverage at reasonable costs that are not made any easier as 
concentration in the industry increases. In addition to the obvious 
effects on purchasers of health care coverage, it is important to 
remember that many providers of health care are small businesses.
    If concentration increases in the health insurance industry, 
then the multitude of providers are faced with the market power of a 
very large single purchaser that will be able to dictate prices and 
the service rendered. And if the prices do not cover the physician's 
costs, physicians will stop seeing patients, thus reducing choice 
even more. Of course, in addition to the bulwark of antitrust laws 
to protect competition, another avenue is to increase competition in 
the provision of health insurers.
    This Committee, under the former Chairman, Mr. Talent, took the 
lead in promoting competition in the health insurance market by 
creating association health plans. The House, on a number of 
occasions--I believe six times in a five-year period--passed 
association health plan legislation that unfortunately died in the 
Senate.
    The Chairwoman, Chairwoman Vel[aacute]zquez, should be commended 
for her courageous votes in support of association health plans. 
Given their potential to reduce costs and increase competition, I 
think the Committee seriously needs to investigate the resuscitation 
of that concept.
    I look forward to a thoughtful discussion from the panel of 
witnesses, a very distinguished panel I might add that we have here 
today, and their ideas on how to protect and improve competition in 
the health insurance markets. And, again, I want to thank the 
Chairwoman for holding this important hearing, and I yield back my 
time.
    Chairwoman Vel[aacute]zquez. Thank you, Mr. Chabot.
    And we are going to start with our first witnesses, and let me 
just take this opportunity to thank all of you for being here today. 
We are going to have a timer in front of you. Green means you go, 
and then the red one means five minutes are up. Each one of you will 
have five minutes to make your presentation.
    Dr. Plested, Dr. William Plested, is our first witness. He 
served as the President of the American Medical Association from 
June 2006 to June 2007. Dr. Plested is a cardiovascular surgeon and 
has been in private practice in Santa Monica, California, for more 
than 35 years. The American Medical Association is the nation's 
largest physician group and advocates on issues vital to the 
nation's health.
    Thank you, and welcome.

Statement of Dr. William G. Plested, III, Immediate Past President, 
American Medical Association, Brentwood, California

    Dr. Plested. Thank you, Madam Chair. My name is Bill Plested. I 
am a past president of the American Medical Association and a 
cardiac surgeon from Santa Monica, California. I want to thank you 
very kindly for inviting me to testify today and for holding a 
hearing on this exceedingly important issue--health insurance 
consolidation.
    Consolidation in the health insurance market is critical to the 
AMA, because physicians are both patient advocates and small 
business owners. Physicians have primary responsibility for 
advocating for their patients, and they also are small business that 
want to provide health care insurance for their employees.
    Physicians' ability to perform either of these vital functions, 
however, has been severely compromised by growing consolidation in 
the for-profit health insurance market. This consolidation has left 
physicians with little leverage against unfair contract terms that 
deal with patient care and little control over their own employees' 
rising health insurance premiums.
    As you all know, our market performs optimally when consumers 
have a choice of competing products and services. Increasingly, 
however, choice in the health insurance market has been severely 
restricted as health plans have pursued aggressive acquisition 
strategies to assume dominant positions.
    In the past decade, there have been over 400 mergers. Contrary 
to claims of greater efficiency and lower cost, these mergers in 
fact have led to higher premiums and decreased patient access to 
care. If the current trend continues, we fear it will lead to a 
health care system dominated by a few companies that, unlike 
physicians, have an obligation to shareholders, not to patients.
    Our worst fears may be realized in Nevada where we have urged 
the Department of Justice to block the merger of the United Health 
Group and Sierra Health Systems. This merger would have a 
devastating impact on Nevada's patients and physicians and would 
reverberate throughout the health care system as a harbinger of 
unrestricted consolidation, would drastically reduce competition, 
and severely limit health insurance choice for employers and 
individuals in Nevada.
    The United-Sierra merger would give United a 94 percent HMO 
market--share of the HMO market in Clark County and an 80 percent 
share of the HMO market in the entire State of Nevada. Nevada is in 
need of more competition, not less. The State currently ranks 47th 
in the country for access to care and 45th in access to physicians. 
This merger would push Nevada even further down these lists by 
exacerbating physician shortages.
    Competition is essential to the delivery of high quality health 
care services, and this merger would serve only to further 
disadvantage an already challenged Nevada health care system. 
Consolidation is not benefiting patients. Health insurers are 
recording record high profits while patient health insurance 
premiums continue to rise. In fact, United and Wellpoint have had 
seven--seven years of consecutive double-digit profit growth that 
has ranged to 20 to 70 percent year after year.
    In addition to compelling results of the AMA's annual 
competition study, many areas across the country exhibit 
characteristics typical of uncompetitive markets and growing 
monopolistic behavior.

[[Page 49847]]

These include significant barriers to entry for new health insurers, 
the ability of large entrenched insurers to raise premiums without 
losing market share, and the power of dominant insurers to coerce 
physicians into accepting unreasonable and unjust contracts.
    The AMA believes that the Federal Government must take steps to 
address the serious public policy issues raised by unfettered health 
insurer consolidation. The current situation in Nevada is emblematic 
of the total absence of boundaries and enforcement currently applied 
to health plan mergers.
    Therefore, we respectfully encourage this Committee to urge the 
DOJ to enjoin the merger of United and Sierra. By so doing, the 
Committee would be taking a meaningful step on behalf of America's 
patients towards correcting the existing inequities in the health 
care market.
    Thank you.
    [The prepared statement of Dr. Plested may be found in the 
Appendix on page 27.]
    ChairwomanVelazquez. Thank you, Dr. Plested.
    Our next witness is Mr. Robert Hughes. He is the President of 
the National Association for the Self-Employed. Mr. Hughes has 
managed his own accounting practice, Hall & Hughes, in Dallas/Fort 
Worth, for the past 20 years. NASE represents hundreds of thousands 
of entrepreneurs and microbusinesses and is the largest non-profit, 
non-partisan association of its kind in the United States.
    Welcome.

Statement of Robert Hughes, President, National Association for the 
Self-Employed

    Mr. Hughes. Thank you very much. It is our pleasure to be here 
this morning, and thank you, Ms. Chairwoman, for the invitation. As 
a representative of over 250,000 microbusinesses across the country, 
the NASE is committed to addressing the issue of affordable health 
coverage. I am here to tell you that health care costs and coverage 
premiums are adversely affecting microbusiness and impairing their 
ability to grow, compete, and succeed.
    In addition to the high cost of health coverage, it has a 
serious personal impact on business owners and their employees. 
Oftentimes, the small business will sacrifice saving for retirement, 
putting money aside for their children's education, and addressing 
other personal needs to redirect funds to health coverage in order 
to stay insured. Of course, the worst result of mounting premiums is 
dropping coverage all together, which puts their business, their 
employees, their family, and themselves at risk when they face even 
a minor medical event.
    In a 2005 survey, the NASE found that the majority of 
microbusiness owners, those businesses with 10 or less employees, do 
not have for themselves, nor do they offer, health insurance to 
their employees. Most alarming is the rate at which premiums for 
microbusinesses have been increasing. In a similar health study 
conducted in 2002, microbusinesses indicated the median premium 
increase for the year before was a little over 11 percent.
    In 2005, microbusiness owners were experiencing a median premium 
increase of over 17 percent. Premium costs are the single most 
important factor that determines whether a business owner will 
insure himself and provide coverage for employees. Thus, the key 
question here today is if the increasing number of mergers among 
health insurers is playing a role in premium increases.
    The self-employed and microbusinesses purchase health insurance 
in either the small group market or the individual market. The small 
group market is much more restrictive and regulated, which reduces, 
in our opinion, competition and availability. The NASE believes that 
minimization of insurance carriers due to consolidation, compounded 
with a concern of high risk in the small group segment, and 
excessive state regulation leave small business with minimal options 
to set up small group health plan, and is a factor contributing to 
high premiums in insurance markets.
    A 2005 GAO report highlighted that the median market share of 
the largest carrier in the small group market was 43 percent, up 10 
percent from just three years earlier. The five largest carriers in 
the small group market, when combined, represented three-quarters or 
more of the market in 26 of the 34 states that participated in the 
GAO study. The dominance of a few carriers in the small group market 
was also supported by studies from the AMA and leading health 
insurance experts.
    How, then, is this lack of competition affecting insurance 
premiums? Well, let me give you a quote from one of our members, a 
freelance writer from Geneva, Illinois. ``The lack of competition 
among health insurers absolutely affects my insurance cost, as well 
as the quality and scope of coverage I can barely afford. Our 
state's non-competitive health care insurance environment, due to 
the monopoly of one or two carriers, places all of the leverage in 
the hands of the insurers. I can't vote with my feet and dollars if 
I have no alternatives from which to select.''
    David, along with other microbusiness owners, will tell you that 
competition plays a central role in improving quality, spurring 
innovation, and keeping prices down. Research has indicated that 
health plans have increased premiums consistently above the rate of 
growth in costs. Cumulative, the premium increases for the last six 
years have exceeded 87 percent, which is more than three times the 
overall increase and medical inflation of 28 percent.
    Why have insurance companies increased rates at these paces? I 
guess the simple answer is: they can. I believe that the current 
state regulatory climate plays an even more critical role in keeping 
costs high and impairing competition. State mandates are an issue. 
Some believe that state mandates increase insurance premiums by as 
much as 20 percent or even more.
    Microbusiness owners have long been a proponent of market-based 
solutions for dealing with our health care system. However, 
competition without competitors will not deliver the desired 
incentive for health care improvement. The NASE urges Congress to 
address the disparities in individual and group markets. There are 
over 20 million non-employer firms in America. Certainly, they have 
access to, and choice of, health care coverage at a very limited 
basis, and that issue should be addressed.
    Increasing insurer competition for the strong economic market 
segment, addressing state insurance regulation and mandates, and 
creating equitable federal tax treatment for these non-employer 
firms, are key to increasing access to affordable health coverage.
    [The prepared statement of Mr. Hughes may be found in the 
Appendix on page 39.]
    Chairwoman Velazquez. Thank you, Mr. Hughes.
    Our next witness is Dr. James D. King. He is the President of 
the American Academy of Family Physicians. Dr. King is in private 
practice in the rural community of Selmer, Tennessee. He serves as 
the Medical Director of Chester County Health Care Services. The 
American Academy of Family Physicians is one of the largest national 
medical organizations with more than 94,000 members in 50 states, 
the District of Columbia, Puerto Rico, the Virgin Islands, and Guam.
    Welcome.

Statement of Dr. James D. King, President, American Academy of Family 
Physicians, Selmer, Tennessee

    Dr. King. Thank you. On behalf of the Academy, I appreciate the 
concern about the effect of consolidated health plans on family 
physicians. We are members of the small business community, and also 
are professionals concerned about the effective delivery of health 
care to our patients.
    Consolidation of health insurance plans have created a profound 
imbalance that hurts the ability of family physicians to negotiate 
contracts. This is harmful to our practices, but also means that 
many of our patients cannot find the primary care physicians who 
accept their insurance.
    According to the industry analysis, between 1992 and 2006 the 
number of health insurance companies dropped from 95 to 7. The 
American Medical Association reports that 280 U.S. markets, at least 
one-third of the covered lives, are members of a single largest 
insurer in that market. In the U.S., only two insurance companies 
cover one-third of all insured Americans.
    This market concentration gives health plans huge power to 
determine the coverage and payment terms. Let me give you a snapshot 
of how this affects the individual member. Nearly two-thirds of the 
patients of a solo family physician in Colorado are insured by one 
commercial payer. This situation occurred because of a merger. When 
this doctor made the case for a payment increase to keep pace with 
inflation, he was told by the insurance company, ``As a solo 
physician, you are the weakest economic unit and must take what we 
decide to give.''
    That single statement bluntly and accurately describes our 
problem. As the economic heavyweights, health plans have no 
incentive to agree to physician requests. When a doctor doesn't 
agree to the terms of the contract, the plan just removes the

[[Page 49848]]

practice from the network. This means that patients essentially are 
denied access to their physicians.
    In most cases, family doctors stick to their patients and sign 
untenable contracts. These contracts can affect many aspects of the 
practice. They dictate treatment decisions, require the use of 
special labs, require peer-to-peer requests for prior 
authorizations, demand completion of multiple-page forms, and delay 
payment while requiring responses to endless questions.
    Many insurance contracts even allow the health plan to change 
the terms at any time without notifying the physician simply by 
posting new information on their web site. These business practices 
may increase the profit--may increase the profits of the insurance 
company, but they create enormous burdens for our small and solo 
practices and may hurt patient care.
    As a result, more primary care physicians are driven to work in 
other settings, such as emergency rooms, in cash only practices. 
Some leave medical practice all together. Worst of all, payment 
rates and other contract terms are unrelated to quality of care.
    Let me give you another quick story. A family physician who had 
been honored several times as the best physician in Arizona, who had 
more than 100 physicians as his patients, and who received the 
highest possible rating from his health plans for quality and 
efficiency, is taking more than $100,000 out of his savings each 
year just to keep his practice afloat. Despite his good work, he has 
been unable to negotiate higher payment rates with insurers.
    Speaking more broadly, insurance plans consolidate threaten--
consolidation threatens the potential for quality improvement in 
U.S. health care. For example, family medicine and other primary 
care specialties are advocating for the patient-centered medical 
home for all Americans. This medical home would be a practice that 
has been transformed to offer comprehensive, continuous, and 
coordinated care to our patients.
    Experience with health systems based on primary care in other 
industrialized nations have demonstrated the exceptional value of a 
medical home in terms of quality and cost effectiveness. However, 
the success of the medical home depends on a long-term relationship 
between the physician and the patient. This relationship can be 
threatened, even destroyed, if insurance companies dictate the terms 
of the medical practice and limit our patients' freedom of choice.
    The AAFP recommends changing antitrust laws so that physicians 
can be true market participants. The current statutes were 
established years ago during a very different competitive 
environment. Under these outmoded laws, physicians are barred from 
discussing the financial aspects of their practice with any entity 
unrelated to their practice. In contrast, insurance companies use 
market share and shared economic strength to carry out near 
monopolistic behavior.
    AAFP commends the Committee for highlighting the significant 
problems resulting from health insurance consolidation. Family 
physicians, many of whom provide health care in small and solo 
practices in rural and other under served areas, feel the effect of 
the insurance consolidation as they attempt to negotiate in an 
environment that is stacked against them.
    Again, I want to thank you for this opportunity to provide this 
testimony, and I look forward to answering your questions.
    [The prepared statement of Dr. King may be found in the Appendix 
on page 44.]
    Chairwoman Velazquez. Thank you, Dr. King.
    And now the Chair recognizes Dr. Chabot for the purpose of 
introducing our next witness.
    Mr. Chabot. Thank you very much, Madam Chair. I would like to 
introduce Mr. Office. He is the Vice President and General Counsel 
for Victory Wholesale Group, which is headquartered in Springfield, 
Ohio. Mr. Office is currently sponsorship chair and a board member 
of the Southwest Ohio Chapter of Association of Corporate Counsel.
    Victory is a national wholesale distributor of grocery, health 
and beauty, and pharmaceutical products, and we are very pleased to 
have a fellow buckeye here this morning. And we welcome you and are 
looking forward to hearing from you, Mr. Office.
    Thank you.

Statement of James R. Office, General Counsel, Victory Wholesale 
Grocers, Springboro, Ohio

    Mr. Office. Thank you, Madam Chairwoman, Representative Chabot, 
and members of this Committee, for inviting us to discuss this 
important issue.
    Victory Wholesale Group appreciates the opportunity to submit 
these comments to the Committee. The rising and out-of-control 
increases in health costs is a very important subject to us and 
every other small business across America. Health insurance 
consolidations are a large contributor to the increased health 
costs. One of Victory's largest expenses is for the health care 
coverage that it provides its employees.
    Let me first tell you a little something about Victory. Some of 
you may know something about Victory through our involvement in and 
grants over the many years to the Congressional Hunger Foundation. 
Victory is a group of family-owned separate companies. The first was 
established in 1979. Our businesses include a wholesale grocery 
distributor, a food marketing company, a public warehouse business, 
a contract packaging business, a pharmaceutical wholesale 
distributor, a promotional items distributor.
    Victory has a small number of employees and businesses in over 
22 states, including Ohio, New York, Florida, California, Nevada, 
and the Commonwealth of Puerto Rico. Health insurance is the 
cornerstone of benefits that Victory provides its employees. Victory 
has tried different health care plan models, including fully 
insured, self-insured, PPOs, and HMOs, with the objective to reduce 
our health insurance care costs, or to control their increases.
    Victory, having employees around the country, has not been able 
to find a single affordable health care plan that covers our 
separate businesses and employees on a national basis with health 
care provider networks that can compete with the regional health 
care providers.
    In Victory's experience, insurance consolidation has led to the 
decreased competition and higher prices in the market. Let me 
elaborate. First, we have found that controlling health care costs 
is nearly impossible. The health care industry is both fragmented 
and concentrated. It is loaded with administrative costs, it is 
inefficient, it is not measured. Accounting for quality and for 
value just simply doesn't exist.
    Next, we have found that the deepest discounts and best coverage 
networks are offered on a regional basis. We have found that the 
markets where we have employees are dominated by a few large 
insurance carriers. Carriers with a smaller market share in these 
regions generally have weak hospital and doctor networks, or smaller 
discounts. Plans with fewer hospitals and doctors to choose from are 
simply not very popular with employees, and, therefore, employers.
    We have found that many of the markets where we have employees 
have several dominant affiliate health care provider networks or 
groups. These are groups of one or more hospitals and physicians 
that have combined into an affiliation or network, and they rent 
these networks to insurance companies and employers.
    A few dominant health care provider networks in a region can and 
do use their enhanced market clout to resist negotiating discounts 
with insurance carriers and employers. We have found that the 
dominant insurance carriers in the region generally price health 
care plans for small businesses through what I would describe as 
experience rating, i.e. healthy groups get fairly high prices, and 
unhealthy groups get very high prices.
    Insurance carriers have an uncanny way of learning the health of 
a group, even if they don't insure your group. We have found that a 
single serious or major health event within a group will virtually 
eliminate competitive bids and result in much higher than average 
cost increases as well as dictated structural changes in your 
benefits to the group's plan at renewal.
    We have found that faced with the increasing health care costs, 
employers and employees are faced with very few choices. I would 
call it a menu of the lesser of evils. These options include: 1) 
increasing the amount of premium that each employee pays each month; 
2) increasing the co-payments or deductibles; 3) imposing changes on 
unhealthy lifestyles, like charging smokers or obese people more 
premiums; 4) incorporating higher deductibles and lower benefits 
into the plan design, and sometimes using like a health savings 
account or health reimbursement accounts, which in the end is just a 
cut in benefits, reducing or modifying or eliminating benefits, and 
providing financial incentives or disincentives to use the modified 
benefits.
    And lastly, an option that I find is becoming a lot more common 
today, which is small businesses are just eliminating offering 
employer-provided health insurance. Historically, small businesses 
make up the

[[Page 49849]]

backbone of our nation's employers. Collectively, small businesses 
employ the largest number of people in the United States. Yet 
because each company is small, we have almost no market clout to 
help bring changes to our health care system.
    Health insurance consolidation has in part created a take it or 
leave it market for small businesses. Reduced competition through 
consolidations both of insurance carriers and health insurance 
carrier provider networks has led to increased pricing, fewer 
choices for small businesses and their employees.
    [The prepared statement of Mr. Office may be found in the 
Appendix on page 49.]
    Chairwoman Velazquez. Mr. Office, your time is up, and they just 
called for a vote. So I would like to move to the next witness. And 
for that purpose, I recognize Mr. Bartlett.
    Mr. Bartlett. Thank you very much. Mr. Scandlen wasn't in his 
chair when the Committee began, I suspect for the same reason I 
wasn't in my chair. I think we both probably came down 270 this 
morning. I left two hours and 15 minutes before the Committee, 
because I really wanted to be here on time. But, unfortunately, this 
was my second longest commute in 15 years of commuting that 50 miles 
from Frederick, Maryland, down to the Hill. So thank you very much 
for braving the traffic and being here this morning.
    Greg Scandlen is from Hagerstown, Maryland. He is the founder of 
Consumers for Health Care Choices, a non-partisan, non-profit 
membership organization aimed at empowering consumers in the health 
care system. He is considered one of the nation's experts on health 
care financing, insurance regulation, and employee benefits.
    He testifies frequently before Congress and appears on such 
television shows as The O'Reilly Factor, NBC Nightly News, and CNN. 
He has published many papers on topics such as health care costs, 
insurance reform, employee benefits, individual insurance programs, 
HSAs, HRAs, and every aspect of consumer-driven health care. Mr. 
Scandlen was the president of the Health Benefits Group and the 
founder and executive director of the Council for Affordable Health 
Insurance. He also spent 12 years in the Blue Cross/Blue Shield 
system, most recently as the director of state research at the 
national association.
    Thank you very much for joining us today.

Statement of Greg Scandlen, President, Consumers for Health Care 
Choices

    Mr. Scandlen. Thank you, Mr. Congressman. Thank you, Madam 
Chairman, and members of the Committee. I was going to ask you, Mr. 
Bartlett, for a note excusing my tardiness, but you have made that 
unnecessary. Thank you very much. I do apologize for being late, 
though.
    I know you have a vote pending, so I will be very quick. I just 
want to share a couple of thoughts with you. One is that 
concentration of--in this market is not an accident, and it is not 
an inherent part of the small group market. When I was with the Blue 
Cross/Blue Shield Association, I was--one of my responsibilities was 
working with the National Association of Insurance Commissioners on 
their small group reform proposals back in the late 1980s.
    And I can tell you, at the time the Commissioners and their 
staff made it very clear that these reforms would do nothing to 
lower cost, nothing to increase access. Their purpose was to 
stabilize the market, and that was their language.
    And what they meant by that was they thought there was too much 
competition in the small group market. It was confusing for 
employers, and they would prefer it if there were only three or four 
competitors in every market. That would be easier to understand, 
and, frankly, probably easier for the regulators to regulate, with a 
smaller number of companies.
    So I think the situation we have today is the direct consequence 
of regulatory interference with the market. Many of those 
regulations were well intentioned, but I think they all add to cost 
and complexity in this market, and many, many smaller companies 
decided they simply could not afford to comply with the various 
state and changing from year to year regulations that they had to 
follow. So they simply got out of the business.
    Many of them were life insurance companies, and they sold off 
their health books to larger carriers that were--that are better 
able to afford the compliance costs associated with all of these 
regulations. And what we have today, and as the other witnesses have 
mentioned, we have coverage that is overpriced, inefficient, 
unaccountable, inconvenient, and incomprehensible to the consumer.
    We need--these are, I believe, the characteristics of a non-
competitive market. There is insufficient competition. If you don't 
like what--if you don't like what one company offers, it really 
doesn't matter because everybody else is offering the exact same 
thing at the exact same price.
    This market is sorely needing innovation and efficiency. The 
insurance industry is notoriously inefficient. And back in the 19th 
century when it comes to technology and computer support, larger is 
not better, larger results in monopolization and a lack of 
innovation. And there have been some proposals that have come before 
the Congress that I think would help here.
    One is the interstate purchase of coverage. So if I am living in 
Maryland, and there is a better product available in Pennsylvania, I 
would like to be able to purchase that product, and I don't see why 
I can't. Another possibility would be an alternative federal 
charter, so insurance companies could become like banks. They could 
decide whether they would like to be regulated by the states or by 
the Federal Government.
    And if they choose the states, they are confined to doing 
business in the state that is regulating them. If they choose a 
federal charter, they can operate nationally, and Mr. Office and 
other multistate's smaller employers would be able to purchase the 
same product for all of their employees.
    So I think solutions are there, but I think decisive action is 
needed, because this market is collapsing.
    Thank you very much.
    [The prepared statement of Mr. Scandlen may be found in the 
Appendix on page 56.1
    Chairwoman Vel[aacute]zquez. Thank you very much.
    The Committee stands in recess and will resume right after the 
vote.
    [Recess.]
    Chairwoman Vel[aacute]zquez. Gentlemen, the Committee is called 
back to order. I know the Ranking Member is on his way here.
    I would like to address my first question to Dr. Plested. We all 
agree that it is critical that physicians are in a position to be 
advocates for their patients. I understand that some physicians are 
concerned that important decisions relating to care of patients has 
been taken away from them by burdensome rules imposed by insurers.
    My question is, Dr. Plested, have these rules gotten more 
onerous as the insurance industry has consolidated? And how do these 
policies affect the doctor-patient relationship? Is the quality of 
care impacted?
    Dr. Plested. Thank you, Madam Chair, and the answer to the 
question is unequivocally yes, quality of care is affected. The 
basis for patient care throughout history has been based on what we 
call the patient-physician relationship. And both of those partners 
in that relationship have the same interest, and that is the health 
of the patient. Regardless of how you change that, if you put anyone 
in between that, whether that be an insurer or an employer, if 
anyone else gets in between those two parties in that relationship, 
their interest is different.
    With an insurer, the CEO of every insurance company's primary 
interest is his shareholders, not the patient. So that it can just--
it just follows by reason that any time we dilute that basic 
fundamental relationship it is not in the interest of patients. And 
when the insurer can bludgeon the physician with paperwork, with 
unnecessary rules and regulations and unilateral--contracts that can 
be unilaterally amended, all these things that you have heard in the 
testimony today, that directly affects the care that those patients 
can get.
    Chairwoman Vel[aacute]zquez. Have you conducted any survey among 
doctors regarding that doctor-patient relationship as a result of 
consolidation?
    Dr. Plested. Specifically related to consolidation, I don't know 
that we have, but we have all kinds of data about what has happened 
to the relationship, and consolidation is an integral part of that. 
And it has all been detrimental.
    Chairwoman Vel[aacute]zquez. Thank you, Dr. Plested.
    Dr. King, the difficulty physicians have faced with the 
insurance industry is in large part based upon the size of the 
companies and the market share they command. Some insurance 
companies have grown so large that physicians have found it 
difficult to negotiate a contract with favorable terms. What has 
been the experience of your members? Are they being forced to accept 
take it or leave it contracts?
    Dr. King. The short answer is yes. I practice in a small town in 
Selmer, Tennessee, west Tennessee in a rural area. And so we only 
have one or two major industries to begin with, and when we only 
have one insurance product they have as much as 30, 40, 50 percent 
of the patient base for us to take care of.
    And I have been taking care of these patients for 20 years, and 
all of a sudden I

[[Page 49850]]

am dealing with an insurance company that has offered a contract 
that I know is inappropriate, that is going to interfere with the 
quality of care that I need to provide. And it is tough for me even 
to consider making a living and supply jobs for my employees. I am a 
small business, too. I have got--we have seven physicians, we have 
39 employees that we need to supply their health care, we need to 
provide them with pay.
    So I am a small business, but I am also providing the health 
care. And if I choose to eliminate 20 percent of the patients I have 
been taking care of I don't think too many businesses can do that. 
And we are seeing that every day, that they are having to either 
accept a contract that is not acceptable, that we know we can't make 
it work, or give up 30 percent of the patients we have been caring 
for over years.
    Chairwoman Vel[aacute]zquez. Thank you.
    Mr. Hughes, the cost of the same health benefits are likely to 
be higher for a small firm than for a large firm. How does this make 
for an unleveled playing field for your members when it comes to 
negotiating health insurance plans? And with increased concentration 
in the industry, do you expect this disparity to grow?
    Mr. Hughes. The micro-employer is in a very difficult position, 
because they are facing regulation that places them into the small 
group market. So even though we may have a very small employer group 
of only one or two people, they are thrown into the group market 
that is accordingly rated based on that group experience.
    What we are seeing is a significant premium rate increases as a 
result of that. The small group simply doesn't have a chance to 
compete the way the larger group does in the marketplace.
    Chairwoman Vel[aacute]zquez. What can be done to remedy this 
disparity?
    Mr. Hughes. Well, one of the factors involves federal taxation. 
It is clear that taxes affect social behavior, and it is also clear 
that in the Tax Code today all businesses receive an exemption for 
the payment of income taxes and payroll taxes on premiums that they 
provide for their employees for health insurance coverage.
    The exception to that rule is for the sole proprietor, the self-
employed individual. That particular individual does not receive a 
payroll tax deduction for these health insurance premiums, and 
accordingly must pay then 15 percent of payroll taxes on those 
premiums. The effect is that if the tax law were amended to be 
equitable to all business owners, self-employed proprietors could 
then reduce their premium costs by 15 percent across the board.
    Chairwoman Vel[aacute]zquez. Thank you, Mr. Hughes.
    Mr. Office, you mentioned that insurance companies may entice 
employers by offering low coverage rates to new groups, and then 
dramatically increase premiums or change benefits on renewals. You 
mentioned that this behavior often chases competition out of the 
market, thus allowing the insurer to later increase prices. What 
have your experiences been with such enticement rates, and what can 
your business do to respond to dramatically increased renewal 
premiums when you only have one or two other insurers to choose 
from?
    Mr. Office. If you have any suggestions, I am open.
    [Laughter.]
    That is the thousand-pound gorilla that we face. You will get an 
insurance carrier that will come into the market. And to buy market 
share they will offer discounts, and most small businesses look at 
price. That is a critical factor. And once they have done that, you 
are moving--your numbers stay the same.
    In any community, you have a certain number of people that are 
insured, and you are just moving them from this bucket to this 
bucket, and so this area over here loses those people and they push 
out of the marketplace. Once that is done, then they do increase the 
premiums. Or if, structurally, they say, ``Well, we will keep your 
premium the same, but here is the policy you are going to have next 
year,'' it is going to have fourth-tier pharmaceutical or it is 
going to have higher co-pays and deductibles, or ``we are not going 
to cover, you know, these procedures,'' or whatever.
    But as a small business, you react to what they present to you. 
You don't really--and you don't have a market to go look for to say, 
``Well, what About an alternative?'' So any questions are welcome.
    Chairwoman Vel[aacute]zquez. Sure. Mr. Scandlen--and I will 
recognize Mr. Bartlett--I heard when you spoke about the direct 
consequences of state regulations that it really encourages 
concentration. And I know how frustrating it is. You said that one 
of the avenues could be interstate purchase of health insurance or 
federal charter.
    But even without going into that, what role or how do you assess 
the Department of Justice role, or lack of oversight, regarding 
antitrust laws when it comes to consolidation?
    Mr. Scandlen. I think there is an important role for antitrust 
enforcement here. Clearly, when there are only two or three players, 
when they actually merge together, that is a concern. But I, quite 
frankly, think that is--that is something for the--it is not a 
universal solution, because if there is a company that would like to 
sell its business to another company, because the first company 
simply is not profitable, then antitrust enforcement there strikes 
me as inappropriate.
    So I guess I am reluctantly embracing antitrust in selected 
cases. And, for instance, in the United-Sierra merger in Nevada, my 
organization was quite concerned about that and communicated with 
the Department of Justice encouraging them to reject that merger, 
because here were two very strong viable companies that consumers we 
couldn't see would derive any benefit from--from the merger. And if 
consumers are not benefiting from it, then I think it--and could 
actually be disadvantaged by it, then I think it is a problem. But I 
don't see it as the number one solution to this issue.
    Chairwoman Vel[aacute]zquez. Thank you.
    Now I recognize Mr. Chabot.
    Mr. Chabot. Thank you, Madam Chair.
    Dr. Plested, I will start with you if I can. You noted that 
investigating consolidation regulators have tended to focus on 
physicians rather than on health insurers. Could you expand upon 
that a little bit? Why do you think that is so, and what should be 
done about that?
    Dr. Plested. Well, I certainly can't testify to the motivation 
of the DOJ, but I can testify to what has happened, and it would 
appear that the doctor--an individual doctor is much less able to 
withstand an assault from the DOJ. And it makes their rate of caring 
actions that they succeed on exceedingly high, because it--an 
individual physician just can't withstand this.
    A huge insurer certainly can, and I think the point that the 
Chairman just raised is exceedingly important. What can we do, or 
what can this Committee do? And the answer to that is it is time to 
draw a line in the sand and say, ``This is going to stop.'' The 
answers are complex, as everybody has said, and they aren't going to 
be solved in this testimony or this action. But to put down a marker 
and say this Committee from--to the DOJ, we have got to make it 
crystal clear that this is going to stop, and get this merger 
enjoined, would be the necessary first step that could be made.
    Mr. Chabot. Thank you, Doctor.
    Mr. Hughes, if I could turn to you next. In your written 
testimony, you urged Congress to address the inequitable tax 
treatment of health insurance for individuals purchasing coverage on 
their own. I really couldn't agree more with you on that, and, in 
fact, today I am reintroducing a bill that I have introduced in 
previous Congresses. Unfortunately, we haven't gotten it passed into 
law yet, but we are going to continue working.
    It is called the Health Insurance Affordability Act, and it is 
legislation that would provide a tax deduction for gross income--or, 
excuse me, from gross income for the health insurance costs of an 
individual taxpayer, the taxpayer's spouse, and dependents as well. 
In other words, you know, large corporations obviously can fully 
deduct the health care costs for their employees, but an individual 
basically pays for their premiums and doesn't get to claim those for 
the most part. And a lot of small businesses also aren't able to do 
so, at least to 100 percent.
    Could you explain how a deduction like that would help 
individuals in small firms?
    Mr. Hughes. Well, again, going out in the individual market, as 
you indicate, those health insurance premiums are paid with aftertax 
dollars, meaning that their purchasing power has been eroded 
significantly. And if there is a way, a mechanism that would allow 
for the deduction of health insurance premiums across the board, 
whether employee or business or small business owner, then my sense 
is that it is going to have the impact of bringing more people into 
the marketplace, creating a marketplace that has in effect lower 
ultimate cost of premiums, and theoretically that should increase 
competition, because more insurers should go after that market 
niche. So we wholeheartedly support that type of legislation.
    Mr. Chabot. Thank you very much.
    Dr. King, in your written testimony you state that ``As a result 
of concentration of

[[Page 49851]]

insurers, many family practice physicians in small or solo practices 
have little leverage in negotiations with health plans.'' Could you 
discuss that briefly, and what effect that ultimately has?
    Dr. King. I will be glad to. In fact, I can give you an example 
of my own practice. As I stated earlier, I practice in a small town 
in west Tennessee. We have a large employer there, and they changed 
insurances for cost, as mentioned earlier. There was no physician in 
my county in the network that insurance product provided. And they 
not only didn't come at us with a contract we wouldn't accept, they 
didn't offer us one at all.
    Under their arrangement, all they had to do was have a doctor 
within 45 miles of the plant that signed up. Then, they met all the 
requirements they felt like they needed to do. And they wouldn't 
even sit down and talk to us.
    And my patients had a choice to make that year. They came and 
saw me and we tried to work out a way that they could pay me for 
their services and we didn't bill their insurance, or they drove 45 
miles. So they were doing back and forth for an entire year until 
they finally changed that plan. They chose not to make any changes 
at all.
    So not only do they come at us and we can't negotiate, and this 
was every physician in the county, that, you know, they have enough, 
but for--with our family physicians, most of us are solo 
practitioners or small groups, anywhere from one doctor to maybe 
four or five. We have absolutely no leverage.
    Mr. Chabot. Thank you very much, Doctor.
    Mr. Office, you mentioned that your companies maintain multiple 
health insurance plans to foster competition, and to help reduce 
costs. How much of an impact does this make on your overall health 
insurance costs?
    Mr. Office. I would be happy to share some numbers with you, 
which I came prepared to. But we range--for example, single only 
coverage in one geographic location where I understand there is some 
competition, and I am not involved in the buying there, but they are 
paying $177 a month per employee. And in the area that I work in, we 
are paying $570 a month. So there is a $400 difference. For family 
coverage, the difference is $450 versus $1,400. So you can see that 
there could be significant differences.
    Now, because of the regionalization I can't go to, say, New York 
or Puerto Rico where I might get a lower rate and buy a plan for, 
you know, south--you know, southern Ohio where we have most-you 
know, a large group of people, or Florida. We just can't get that, 
because we end up with networks. We are not going to buy a plan and 
pay a premium and then get a network where there is no doctors in 
that area. Our employees will--there will be a mutiny.
    [Laughter.]
    Mr. Chabot. Okay. Thank you.
    Mr. Office. So, you know, if you are going to pay the premium, 
you have to have hospitals and doctors in that network. And you 
don't want to make people have to change those choices. So there can 
be a big difference.
    Mr. Chabot. One of our colleagues, John Shadegg from Arizona, 
has introduced a plan over the years relative to health insurance 
that would allow people to go across state lines and would undo some 
of the difficulties there are with various states having different 
requirements and regulations and keeping companies out that aren't 
necessarily in a particular state. So it is something that we 
probably ought to look at.
    Finally, Mr. Scandlen, in your written testimony you discuss the 
need for innovation in the types of health insurance coverage that 
are offered, such as health savings accounts, for example. Howwould 
small businesses benefit from greater innovation? And is there 
anything that you would suggest this Committee or Congress do in 
that area to be of assistance?
    Mr. Scandlen. I am not sure how you could encourage innovation 
other than just encouraging competition. I mean, I think it is the 
same thing. And there are some very, very interesting things out 
there. One of the things I mentioned in the testimony was the 
special needs plans under Medicare, and that is sort of an 
experiment that--that I think so far is having very good results, 
very interesting results.
    These are insurance companies that focus on the needs of the 
chronically ill, and one of the reasons they are able to do that is 
because they receive--Medicare pays out risk-based premiums, so they 
are receiving premiums that enable them to service that special 
population.
    Mr. Chabot, if I could very quickly also, in terms of the--your 
tax deduction for individuals, I think that is a marvelous idea, and 
I think it is worth remembering that up until 1983 individuals could 
deduct their health insurance premiums as part of the medical 
expense deduction, as long as, in 1983, it didn't exceed three 
percent of their AGI.
    That was raised to 5.5 percent, and then in '87 raised to 7.5 
percent. and we have seen, as that has eroded, the individual market 
has just gone in the tank, because that tax advantage has been 
withheld from people that buy individual coverage.
    Mr. Chabot. Thank you very much.
    I yield back, Madam Chair.
    ChairwomanVel[aacute]zquez. Thank you.
    Mr. Gonzalez.
    Mr. Gonzalez. Thank you very much, Madam Chairwoman. The issue 
of availability and affordability--and it transcends big business, 
small business, every American situated one way or another. The 
interesting thing, I think the government has a tremendous stake in 
making sure there is robust competition, because the future does 
hold more government involvement in assisting individuals, small 
business, families, in acquiring health insurance.
    So availability and affordability looms large, whether it is the 
President's tax proposal, whether it is what Mr. Chabot was talking 
about, associated health plans, subsidizing premiums and such. All 
that is for naught if we don't have a healthy insurance industry 
that will provide choice, which will drive down cost, obviously. At 
least that is what I have used as the big picture.
    Some of the things that we have covered here, though, I am 
wondering if it really does in any way assist in achieving that 
final goal of availability and affordability. I will say that I 
think our first witness alluded to--I guess it is the United 
acquisition of Sierra. Is that right? And maybe that should be a 
marker. Maybe we ought to pay a lot of attention to that, and put 
everybody on notice. And I think that point is well taken.
    One thing that Dr. King pointed out--and I am thinking all short 
of that--is, how do we get all of the different participants fully 
empowered?
    Chairwoman Vel[aacute]zquez. Will the gentleman suspend? Mr. 
Gonzalez. Yes.
    Chairwoman Vel[aacute]zquez. I just would like to ask unanimous 
consent, and the Ranking Member agreed with me, for every member to 
have the opportunity to ask one question. This is going to be 
quite--a very disruptive session today. Right now on the floor they 
are going to be calling procedural votes.
    So in light of that, I will give the opportunity for everyone to 
ask one question, since I know that some of the members of the panel 
have flights to catch.
    Mr. Gonz[aacute]lez. I will be real brief, then. I will just ask 
Dr. King, you pointed out that maybe empowering physicians to 
negotiate, where presently they are prohibited by law--that was my 
understanding of your testimony--if you could just kind of elaborate 
a little bit on that, and how you see that would be beneficial to 
the big question of availability and affordability.
    Dr. King. Well, in allowing us to be able to negotiate, or at 
least talk to each other, you know, about the different insurance 
products, about the contracts that we are being offered to make sure 
that we can compare, we talk doctor talk, we don't talk lawyer talk. 
And we need to have the ability to share information and share 
problems and concerns as we look at the contracts, so that we can 
make decisions that is the best interest for our patients.
    And then, if we can negotiate that, I can see how, you know--you 
know, I don't know about the--you know, the consolidation of all of 
the insurance companies and all, but I see how the health care of my 
patients can improve, and we can arrive at a better plan that we 
take away the barriers that I try to help take care of my patients 
with that, so that physicians won't desert. We don't have enough 
primary care physicians out there. They are going into different 
arrangements. They are going into ERs, they are going into urgent 
cars, which is not where we want our patients, and they are going 
into markets that don't include insurance.
    So we have--just to get the physicians out in the rural areas 
and taking care of patients like we need to, they have got to be 
able to negotiate and make it work.
    Mr. Gonz[aacute]lez. Thank you. I yield back.
    Chairwoman Vel[aacute]zquez. Thank you. Mr. Bartlett.
    Mr. Bartlett. Thank you very much. You know, we don't really 
have much of a health care system in our country. We have a really 
good sick care system. It is the best in the world, and I would hope 
that we might move a little more toward a health care system, so 
maybe we wouldn't need such a big sick care system.
    One of the problems in rising health care costs is the fact that 
health care--I am using

[[Page 49852]]

that word euphemistically--health care is about the only thing that 
most people shop for in our country and never ask the price. So they 
are not a careful shopper.
    And one of the things that I wanted to personally do, so that I 
could become a careful shopper--and these were in the days before 
health savings accounts, which really makes a person a careful 
shopper, and I am a big fan of those. But absent that, when I 
retired 20-couple years ago, I wanted to find a catastrophic policy 
with a $5,000 deductible. See, I think that these little nickel and 
dime things just wear you out and enormously increase the cost of 
health care.
    I can pay the first $5,000. That might be a little painful, but 
what I can't pay is that second half million. And I think that many 
of the policies drop. You have a cap at about a half million. I 
couldn't find a catastrophic policy with a $5,000 deductible. That 
ought to be a pretty cheap policy, shouldn't it? And wouldn't it 
make people a really careful shopper? And why don't you--why doesn't 
the industry offer that kind of a policy?
    Mr. Scandlen. I think they are available now. And if I am not 
mistaken, the AMA has offered a $10,000 deductible policy to its 
members for a long time. So I think if you were shopping today, Mr. 
Bartlett, you would be able to find that.
    Mr. Bartlett. Madam Chair, I would like you to encourage our 
people here who provide our options for health care to include that 
as one of the options.
    Chairwoman Vel[aacute]zquez. Definitely.
    Mr. Bartlett. Thank you very much.
    Chairwoman Vel[aacute]zquez. Ms. Clarke.
    Ms. Clarke. I want to thank our Chairwoman and our Ranking 
Member. This is probably one of the most critical issues facing 
Americans today. As small businesses, as health care providers, as 
consumers, we are all in a quandary and involved in the same 
meltdown together.
    There are so many questions that I would like to ask, but I want 
to get an understanding of some of what is happening out there to 
physicians' claims. I want to ask for anyone on the panel--I have 
heard that health insurers have employed coercive tactics, such as 
re-pricing of physician claims, which results in non-contracted 
physicians receiving less than contracted physicians for the same 
service. What is re-pricing exactly, and what other manipulative 
practices have health insurers used to undermine a physician's 
bargaining power? Dr. Plested?
    Dr. Plested. Re-pricing is a very interesting phenomenon. It is 
complex, but there have been contracts let by entities that do not 
provide any care. They just round up a large number of contracted 
doctors who will accept a price, and there are literally hundreds of 
these contracted groups. There are now entities called re-pricers 
that take every physician and match that physician by computers with 
every contract that they have signed for every service that they 
provide.
    And so that when you get a bill from your insurance company that 
has six things on it, that may be a sign by a re-pricer to six or 
seven different contracts, so that he gets the lowest one. It is 
complex, but it is a very Machiavellian type of system.
    There are also the things that the insurers can do that have 
been mentioned that they can unilaterally amend a contract. They can 
change the amount that they agreed to pay you. They can unilaterally 
put in screens. They have computerized screens that will reduce the 
amount that they pay for things that it doesn't pay the physician to 
charge--to try to challenge each of these. There are a multitude of 
monopolistic behaviors that are allowed by this.
    Chairwoman Vel[aacute]zquez. Thank you. And I want to take this 
opportunity to thank all the witnesses. And I am sorry we do not 
have more time to spend with you, but I am very, very happy that we 
really had an opportunity to have this dialogue on an issue that is 
so important, not only for small businesses and small practitioners, 
but also for consumers in America.
    The Small Business Committee will call on federal antitrust 
regulators to play a more active role in ensuring that health 
insurance markets remain competitive, and, to that effect, I will 
ask the Ranking Member to join with me in sending a letter to the 
Department of Justice. I will also--I already discussed with 
Chairman Conyers on the House floor, when we went to vote, asking 
him to do a joint hearing between Judiciary and Small Business to 
examine specific mergers that may be pending.
    I know, Mr. Scandlen, that you said that this is just one aspect 
of a bigger picture, but we have to make sure that there is proper 
oversight and examination before these mergers can proceed.
    With that, I thank all the witnesses for your participation. I 
ask unanimous consent that members have five legislative days to 
enter statements and supporting materials into the record, and this 
Committee is adjourned.
    [Whereupon, at 11:45 a.m., the Committee was adjourned.]

Statement of the Honorable Nydia M. Vel[aacute]zquez, Chairwoman,United 
States House of Representatives, Committee on Small BusinessFull 
Committee Hearing: ``Health Insurer Consolidation--The Impact on Small 
Business''

October 25, 2007.
    I call this hearing to order to address ``Health Insurer 
Consolidation--The Impact on Small Business.''
    Access to health insurance is an area of concern to small 
businesses. The rising costs of health care are regularly cited by 
small firms as one of their biggest worries. Small businesses need 
to have choices in the health insurance marketplace. It is 
imperative that the marketplace is diverse and competition 
flourishes.
    It is also critical that small medical providers are able to 
continue offering services. Physicians and other providers must be 
able to operate on a level playing field with health insurers and be 
reimbursed at fair rates. If not, quality of care will decline and 
it is the patients who ultimately will suffer.
    Consolidation in the health insurance industry is one area of 
special concern that has a direct impact on these issues. Because 
these mergers affect access to care and influence the quality of 
medical services, they command careful scrutiny by regulators.
    Unfortunately, the health insurance industry, like a number of 
other industries, has seen a general lack of enforcement of 
antitrust laws. Earlier this year, the Wall Street Journal reported 
that ``the federal government has nearly stepped out of the 
antitrust enforcement business.''
    While some mergers benefit consumers and increase the 
competitiveness of U.S. companies, others pose substantial risks to 
competition and innovation.
    The health insurance marketplace has become increasingly 
concentrated in recent years. Consolidation has left small 
businesses with fewer choices and physicians with diminished 
leverage to negotiate with plans. In the majority of metropolitan 
areas, a single insurer now dominates the marketplace. If 
individuals and small businesses cannot get coverage through the 
dominant insurer, they may not be able to find alternatives.
    Recent mergers in the health insurance industry have tended to 
not generate efficiencies that have lowered costs for small 
businesses or improved coverage. Premiums for small businesses have 
continued to increase without a corresponding increase in benefits. 
Consumers are facing increased deductibles, co-payments and co-
insurance which have reduced the scope of their coverage.
    When operating in highly concentrated markets, physicians often 
find they are stuck with take it or leave it contracts. The 
Department of Justice has recognized that physicians face special 
difficulties in dealing with health insurers--namely, it is very 
costly for them to switch from one insurer to another.
    Replacing lost business for a physician by attracting new 
patients from other sources is very difficult in our current health 
care system. Physicians face barriers in attracting potential new 
HMO patients since they are filtered through an HMO plan.
    Physicians struggle to maintain the quality of care in the face 
of reduced reimbursements and large administrative burdens. When 
physicians are forced to spend less time on each appointment, 
ultimately, it is patients that suffer.
    It is essential that competition remains vibrant in the health 
insurance marketplace. Not surprisingly, studies have found that 
when competition declines, premium costs generally go up. The rising 
costs of healthcare are leading to greater numbers of uninsured as 
fewer small businesses and individuals can afford to pay premiums.
    Small businesses continue to be burdened by the high costs of 
health care. The rising cost of health insurance is one of the 
primary reasons the ranks of the 46 million uninsured Americans 
continue to grow. Tragically 18,000 Americans lose their lives each 
year because of a lack of health insurance.
    We need to ensure that providers are on a level playing field, 
and small businesses and individuals have choices when it comes to 
healthcare.
    I yield to Ranking Member Chabot for his opening statement.

Opening Statement

Hearing Name: Health Insurer Consolidation--The Impact on Small 
Business
Committee: Full Committee

[[Page 49853]]

Date: 10/25/2007

Opening Statement of Ranking Member Chabot

    ``I would like to thank the Chairwoman for holding this 
important hearing on the impact of mergers and increasing 
concentration in the health insurance market. This hearing continues 
this Committee's examination of the cost of health care on small 
businesses--both as purchasers of health care and as providers.
    ``The Supreme Court has stated that `that the unrestrained 
interaction of competitive forces will yield the best allocation of 
our economic resources, the lowest prices, the highest quality, and 
the greatest material progress* * *' In short, competitive markets 
represent the cornerstones of American progress and the success of 
our democracy.
    ``The antitrust laws were established to protect these precious 
values. By providing a mechanism to ensure that competition is not 
unreasonably hindered, the antitrust laws can be seen as further 
bracing the competitive foundation of this country.
    ``When mergers occur that may reduce competition, it behooves 
the Justice Department or the Federal Trade Commission to closely 
assess the value of those mergers. That is particularly crucial in 
the context of health care.
    ``When the members of this Committee travel back to their 
districts, they are put face-to-face with constituents and small 
business owners that struggle every day to cope with the rising 
costs of obtaining or providing health care. If the number of 
companies that supply health insurance continues to decrease, basic 
economics suggests that costs of obtaining health care coverage will 
increase. It then becomes vital to assess the impact of industry 
consolidation on small business owners who already have significant 
difficulty in obtaining health care coverage. Today, we have 
witnesses that represent small business purchasers of health care 
who will inform the Committee of the increasing difficulty that they 
have in obtaining health care coverage at reasonable costs that are 
not made any easier as concentration in the industry increases.
    ``In addition to the obvious effects on purchasers of health 
care coverage, it is important to remember that many providers of 
health care are small businesses. If concentration increases in the 
health insurance industry, then the multitude of providers are faced 
with the market power of a very large single purchaser that will be 
able to dictate prices and the service rendered. And if the prices 
do not cover, for example, costs associated with obtaining 
malpractice insurance, providers will opt of accepting coverage from 
consumers reducing choice even more.
    ``Of course, in addition to the bulwark of the antitrust laws to 
protect competition, another avenue is to increase competition in 
the provision of health insurance. This Committee under the former 
Chairman, Mr. Talent, took the lead in promoting competition in the 
health insurance market by creating association health plans. The 
House on a number of occasions passed association health plan 
legislation that then died in the Senate. The Chairwoman should be 
commended for her courageous votes in support of association health 
plans. Given their potential to reduce costs and increase 
competition, I think the Committee seriously needs to investigate 
the resuscitation of that concept.
    ``I look forward to a thoughtful discussion from the panel of 
witnesses and their ideas on how to protect and improve competition 
in the health insurance markets.
    ``With that, I yield back.''

Statement of the Honorable Jason Altmire House Committee on Small 
Business Hearing``Health Insurer Consolidation--The Impact on Small 
Business''

October 25, 2007.
    Thank you, Chairwoman Velazquez, for calling today's hearing to 
examine the impact health insurer consolidation will have on small 
business. Consolidation of health insurers has been on the rise in 
recent years. leaving fewer health care provider choices for small 
businesses. This committee consistently hears that cost is the 
number one factor when determining if a small business will offer 
health care coverage. As more and more health care providers merge, 
they are able to exert more bargaining power, leaving small 
businesses with limited options.
    In my home state of Pennsylvania, the state's two largest health 
insurers, Highmark Inc. and Independence Blue Cross, announced a 
plan to combine the two organizations. The state is currently going 
through the review process and while the US. Department of Justice 
reviewed the terms of the consolidation and determined that it 
raises no antitrust or other anti-competitive issues under federal 
law, I am concerned that this consolidation may limit competition 
and drive up health insurance prices for small businesses, If the 
merger goes through, it is estimated that the new organization will 
control at least 53 percent of the state's health insurance market,
    If health insurer mergers continue to follow the trend of 
resulting in fewer options and higher costs, more small businesses 
will face barriers to health care. Now and in the future as mergers 
are considered, it is important to ensure that choices in the health 
insurance marketplace remain so access to health care is not 
compromised.
    Madam Chair, thank you again for holding this important hearing 
today. I yield back the balance of my time.

Statement of the American Medical Association to the Committee on Small 
Business, United States House of Representatives

Re: Health Insurer Consolidation--The Impact on Small Business
Presented by William G. Plested III, MD
October 25, 2007.
Division of Legislative Counsel
202-789-7426
    The American Medical Association (AMA) appreciates the 
opportunity to present testimony to the Committee on Small Business 
on health insurer consolidation and its impact on small business. We 
commend Chairwoman Vel[aacute]zquez, Ranking Member Chabot, and 
Members of the Committee for your leadership in recognizing that the 
dramatic and ongoing consolidation of the health plan industry has 
severely diminished, if not eliminated, competition among the 
insurance companies to the detriment of patients and their treating 
physicians.
    Consolidation in the health insurance market is critical to the 
AMA because our members are both patient advocates and small 
business owners. In an environment where health insurers have 
increasing control over patient care and decreasing accountability, 
physicians have primary responsibility for advocating that their 
patients receive the appropriate medical care covered by their 
health insurance. Their ability to do so, however, has been severely 
compromised where dominant insurers force them to adhere to 
contracts that create significant obstacles to providing the best 
possible patient care. Physicians are also vulnerable to dominant 
health insurer practices as small business owners. The majority of 
physician practices are small businesses that are attempting to 
provide health insurance coverage to their employees in the face of 
substantial health insurance premiums. The growing consolidation in 
the health care market and the extreme imbalance that has resulted 
has meant that physicians have little leverage in either of their 
roles as health care advocates or purchasers of insurance.
    A market performs optimally when consumers have a choice of 
competing products and services. Increasingly, however, choice in 
the health care market has been severely restricted due to rampant 
health insurer consolidation. Large health plans have pursued 
aggressive acquisition strategies to assume dominant positions in 
various markets across the country. In fact, a few health insurers 
now overshadow the majority of health care markets. In the past 
decade alone there have been over 400 mergers.\1\ These mergers have 
led to higher premiums and increasing problems with patient access 
to care. If the current trend continues, it will inevitably lead to 
a health care system dominated by a few publicly traded companies 
that operate in the interest of shareholders rather than patients.
---------------------------------------------------------------------------

    \1\ Irving Levin Associates, The Healthcare Acquisition Report, 
2001-2006 Editions.
---------------------------------------------------------------------------

    Our worst fears may be realized in Nevada where we have urged 
the U.S. Department of Justice (DOJ) to block the merger of 
UnitedHealth Group (United) and Sierra Health Systems (Sierra). 
Should this merger be consummated, it will have a devastating impact 
on Nevada's patients and physicians and will reverberate throughout 
the health care system as a harbinger of future unrestricted 
consolidation. The AMA's Competition Study, Competition in Health 
Insurance: A Comprehensive Study of U.S. Markets, as well as the 
presence of several characteristics typical of uncompetitive 
markets, further supports the notion that competition has been and 
will continue to be severely undermined in Nevada and nationwide.
    We believe that the federal government must take steps to 
correct the current

[[Page 49854]]

imbalance in the market and address the deceptive, noncompetitive 
conduct of large, dominant health insurers. The boundaries of 
acceptable consolidation in the health insurance market must be 
reexamined and enforced so that current threats to the health care 
system are blocked and future harmful consolidation is deterred. 
Thus, we encourage the House Small Business Committee to urge the 
DOJ to take steps to enjoin the merger of United and Sierra in 
Nevada. By doing so, the Committee would be taking a meaningful step 
towards correcting the existing inequities in the health care 
market.

United-Sierra Merger

    We believe that a vital component to assuring a competitive 
marketplace is antitrust enforcement against anticompetitive mergers 
and exclusionary conduct. Over the past several years, however, the 
DOJ has not brought any cases against anticompetitive conduct by 
health insurers and has challenged only two mergers since 1999, 
requiring onJy moderate restructuring.\2\ Currently, the AMA is 
urging the DOJ to prevent the United-Sierra merger, which will 
create an exceptional level of concentration in Nevada, particularly 
in Clark County, resulting in higher prices, less service, and lower 
quality of care.
---------------------------------------------------------------------------

    \2\ See United States v. UnitedHealth Group Inc., Case No. 
1:05CV02436 (D.D.C. Dec. 20, 2005), available at http://www.usdoj.gov/atr/cases/f213800/213815.htm; United States v. Aetna, 
Revised Competitive Impact Statement, Civil Action 3-99CV1398-H 
(N.D.Tex, 1999), available at http://www.usdoj.gov/atr/cases/f2600/
2648.htm.
---------------------------------------------------------------------------

    The United-Sierra merger will drastically reduce competition for 
the provision of health insurance to employers and individuals in 
Nevada. The market share for Sierra and United combined in Nevada is 
48 percent, while in Clark County the combined United-Sierra market 
share is 60 percent.\3\ For Health Maintenance Organization (HMO) 
based insurance, should the merger proceed, United will have an 80 
percent market share of all HMOs in Nevada and a 94 percent market 
share of the HMO market in Clark County.\4\ According to the 
Herfindahl-Hirschman Index (HHI), the typical measure of market 
concentration, the Nevada and Clark County markets would be 
significantly above the threshold for being considered ``highly 
concentrated.'' \5\ Indeed, the level of concentration would be 
unprecedented. Where, as here, a merger produces an entity that is 
so disproportionately larger than any of its competitors, there is a 
considerably increased likelihood that the entity will be able to 
raise prices, decrease compensation, and reduce quality without fear 
of meaningful competitive market responses.
---------------------------------------------------------------------------

    \3\ Nevada State Health Division
    \4\ Id.
    \5\ Merger Guidelines S. 1.51.
---------------------------------------------------------------------------

    Nevada is in need of more competition, not less. It cannot 
afford a merger that will further restrict patient access to care. 
Nevada currently ranks 47th in the country for access to care, 51st 
in quality of care, last for immunization coverage for children 
under 3, 49th in access to nurses, 44th for women's mortality rates, 
and 45th in access to physicians--approximately 25 percent below the 
nationwide median, with one of the lowest physician-to-population 
ratios in the country.\6\ The United-Sierra merger would push Nevada 
even further down the access to quality medical care list by 
exacerbating physician and staffing shortages through decreased 
compensation and increased use of unreasonable contracts. 
Competition is essential to the delivery of high quality health care 
services. Its absence in the face of this merger will serve only to 
further disadvantage the already challenged Nevada health system.\7\
---------------------------------------------------------------------------

    \6\ Nevada Strategic Health Care Plan, Report of the Legislative 
Committee on Health Care, Nevada Revised Statute 439B.200, February 
2007; http://system.nevada.edu/Chancellor/University/index.htm; 
http://www.commonwealthfund.org/statescorecard/statescorecard_show.htm?doc_id=495871; http://hrc.nwlc.org/.
    \7\ United claims that efficiencies produced by the merger will 
outweigh anticompetitive harms. As a general matter, however, 
efficiencies from health insurance mergers have not been passed on 
to patients. This is evidenced by the United PacifiCare merger, 
which has not resulted in lower premiums or better services for 
subscribers.
---------------------------------------------------------------------------

Competition in the Health Insurance Market

    As noted above, the competitive health care market has been 
steadily eroding. Health insurers have become significantly more 
concentrated and have used their power to the disadvantage of 
patients and physicians. As mentioned above, over the past 10 years 
there have been over 400 mergers involving health insurers and 
managed care organizations.\8\ In 2000, the two largest health 
insurers, Aetna and UnitedHealth Group (United), had a total 
combined membership of 32 million people. Due to aggressive merger 
activity since 2000, including United's acquisition of California-
based PacifiCare Health Systems, Inc., and John Deere Health Plan in 
2005, United's membership alone has grown to 33 million. Similarly, 
WellPoint, Inc. (Wellpoint), the company born of the merger of 
Anthem, Inc. (originally Blue Cross Blue Shield of Indiana), and 
WellPoint Health Networks, Inc. (originally Blue Cross of 
California), now owns Blue Cross plans in 14 states. In 2005, 
WellPoint acquired the last remaining Blue Cross Blue Shield plan, 
the New York-based WellChoice. Consequently, WellPoint now covers 
approximately 34 million Americans.\9\ Together, WellPoint and 
United control 36 percent of the U.S. commercial health insurance 
market.
---------------------------------------------------------------------------

    \8\ Irving Lewvin Associates, supra.
    \9\ WellPoint Health Networks and Anthem, Inc., merged in 2004 
The merged entity, WellPoint, Inc., is nearly double the size of 
either entity.
---------------------------------------------------------------------------

AMA Competition Study

    The effects of consolidation are particularly striking at the 
local and regional levels, illustrated by the AMA's Competition 
Study, Competition in Health Insurance: A Comprehensive Study of 
U.S. Markets.\10\ Every year for the past six years, the AMA has 
conducted the most in-depth study of commercial health insurance 
markets in the country. The study analyzes the most current and 
credible data available on health insurer market share for 313 
Metropolitan Statistical Areas (MSA5) and 44 states.\11\
---------------------------------------------------------------------------

    \10\ The AMA focused on state and MSA markets because health 
care delivery is local, and health insurers focus their business and 
marketing practices on local markets.
    \11\ Significantly, state-level data is often misleading because 
in many states health insurers do not compete on a state-wide basis.
---------------------------------------------------------------------------

    In addition to its exhaustive geographic reach, the study 
analyzed the product market in three ways--considering only HMO 
products; considering only Preferred Provider Organization (PPO) 
products; and considering HMO and PPO products combined. For each, 
the study calculated the HHI,\12\ which measures the competitiveness 
of a market overall,\13\ and, applying the 1997 Federal Trade 
Commission/Department of Justice Horizontal Merger Guidelines 
(Merger Guidelines), classified them as ``not concentrated,'' 
``concentrated,'' or ``highly concentrated.''\14\ The results form 
the most extensive and accurate portrayal of the health insurance 
market to date. And they confirm that in the majority of health care 
markets competition has been severely undermined.
---------------------------------------------------------------------------

    \12\ The HHl is the sum of the squared market shares of each 
firm in the market. The more competitive the health insurance 
market, the lower the HHI, The less competitive the health insurance 
market, the higher the HHI. The largest value the HHI can take is 
10,000 when there is a single insurer in the market. As the number 
of firms in the market increases, however, the HHI decreases. For 
instance, if a market has four firms, each with a 25 percent share, 
the HHI would be 10,000 divided by 4, which equals 2500. The HHI 
would continue to decrease with additional firms in the market.
    \13\ The HHI is not a measure specific to any one firm, although 
it is a function of each firm's market share, The DOJ uses the HHI 
when evaluating the impact of a merger or acquisition on the 
competitiveness of a market.
    \14\ Markets with an HHI of less than 1000 are classified as 
``not concentrated.'' The DOJ and FTC will generally not restrict 
merger activities in these markets. Markets with an HHI between 1000 
and 1800 are classified as ``concentrated.'' Under the Merger 
Guidelines, a merger in one of these markets that raises the HHI by 
more than 100 points may raise significant competitive concerns. 
Markets with an HHI above 1800 are classified as ``highly 
concentrated.'' A merger in a ``highly concentrated'' market that 
raises the HHI by more than 50 points may raise significant 
competitive concerns, and a merger that raises the HHI more than 100 
points is presumed to be anti-competitive.
---------------------------------------------------------------------------

    With regard to market concentration (HHI), the study found the 
following:
     In the combined HMO/PPO product market, 96 percent 
(299) of the MSAs are highly concentrated.
     In the HMO product market, 99 percent (309) of the MSAs 
are highly concentrated.
     In the PPO product market, 100 percent (313) of the 
MSAs are highly concentrated.
    With regard to market share,\15\ the study found the following 
for each product market:

[[Page 49855]]

    For the combined HMO/PPO product market:
---------------------------------------------------------------------------

    \15\ The AMA measures market share of health insurers by 
enrollment. The combined HMO/PPO market share of an insurer is the 
sum of that insurer's HMO and PPO enrollment, divided by the total 
HMO and PPO enrollment in the market, multiplied by 100. HMO market 
share is that HMO's enrollment, divided by total HMO enrollment in 
the market, multiplied by 100. Similarly, a PPPO's market share is 
that PPO's enrollment, divided by total PPO enrollment in the 
market, multiplied by 100.
---------------------------------------------------------------------------

     In 96 percent (299) of the MSAs, at least one health 
insurer has a market share of 30 percent or greater.
     In 64 percent (200) of the MSAs, at least one health 
insurer has a market share of 50 percent or greater.
     In 24 percent (74) of the MSAs, at least one health 
insurer has a market share of 70 percent or greater.
     In 5 percent (15) of the MSAs, at least one health 
insurer has a market share of 90 percent or greater.
    For the HMO product market:
     In 98 percent (306) of the MSAs, at least one health 
insurer has a market share of 30 percent or greater.
     In 64 percent (201) of the MSAs, at least one health 
insurer has a market share of 50 percent or greater.
     In 37 percent (117) of the MSAs, at least one health 
insurer has market share of 70 percent or greater.
     In 16 percent (49) of the MSAs, at least one health 
insurer has a market share of 90 percent or greater.
    For the PPO product market:
     In 97 percent (304) of the MSAs, at least one health 
insurer has a market share of 30 percent or greater.
     In 76 percent (238) of the MSAs, at least one health 
insurer has a market share of 50 percent or greater.
     In 36 percent (112) of the MSAs, at least one health 
insurer has a market share of 70 percent or greater.
     In 9 percent (28) of the MSAs, at least one health 
insurer has a market share of 90 percent or greater.
    This study establishes, unequivocally, that competition has been 
undermined in hundreds of markets across the country. Sadly, the 
ultimate consumers of health care--patients--are not the ones 
benefiting from the consolidation. To the contrary, patient premiums 
have risen dramatically without any expansion of benefits, while 
many health insurers have posted record profits.

Market Characteristics Indicating Absence of Meaningful Competition

    In addition to high market share and market concentration, many 
health care systems across the country exhibit characteristics 
typical of uncompetitive markets and growing monopoly and monopsony 
power. There are significant barriers to entry for new health 
insurers in these markets. Large, entrenched health insurers are 
able to raise premiums without losing market share. And dominant 
health insurers are able to coerce physicians into accepting 
unreasonable contracts.

Barriers to Entry Into the Market

    Barriers to entry are relevant when determining whether a high 
market share threatens competition in a specific market. Where entry 
is easy, even a high market share may not necessarily translate into 
market power, as attempts to increase price will likely be countered 
by entry of a new competitor. On the other hand, where entry is 
difficult, a dominant player is able to sustain profitability amid 
significant price increases without fear of competition.
    Most markets across the country currently display substantial 
barriers to entry. Start-up health insurers must meet costly state 
statutory and regulatory requirements, including strict and 
substantial capitalization requirements. To do this, they must have 
sufficient business to permit the spreading of risk, which is 
difficult, if not impossible, in markets with dominant health 
insurers. Indeed, it would take several years and millions of 
dollars for a new entrant to develop name and product recognition 
with purchasers to convince them to disrupt their current 
relationships with the dominant health insurers. The DOJ underscored 
the significant obstacles associated with entering certain health 
insurance markets in United States v. Aetna, when it noted, ``[n]ew 
entry for an HMO or HMO/POS plan in Houston or Dallas typically 
takes two to three years, and costs approximately $50,000,000.\16\ 
Such market conditions represent insurmountable barriers for new 
entrants.
---------------------------------------------------------------------------

    \16\ United States v. Aetna. Revised Competitive Impact 
Statement, Civil Action 3-99CV1398-H (N.D.Tex, 1999), available at 
http://www.usdoj.gov/atr/cases/f2600/2648.htm.
---------------------------------------------------------------------------

Premium Increases

    The ability of dominant health insurers to raise premiums and 
remain profitable is another sign of excessive market power. This 
practice harms small businesses, exacerbates access to care 
problems, and contributes to the alarming numbers of uninsured. When 
premiums rise, many employers stop providing coverage, reduce the 
scope of benefits provided, and/or ask employees to pay a higher 
share of the overall premium. In some cases, small businesses must 
choose between growth and the provision of health insurance. Even 
when employers continue to offer health plans, increases in 
premiums, deductibles, and co-payments lead many workers to forego 
their employer-sponsored health insurance. In fact, according to a 
survey by the Agency for Healthcare Research and Quality, employee 
health plan participation at large companies declined from 87.7 
percent to 81 percent between 1996 and 2004.\17\ This declining 
coverage puts an enormous strain on the health care system and leads 
to otherwise avoidable expenditures for emergency care and other 
medical services.
---------------------------------------------------------------------------

    \17\ Fuhrmans, Wall Street Journal, 8-25-06.
---------------------------------------------------------------------------

    The past several years have been marked by increasing health 
plan premiums and profits. In 2007, premiums for family coverage 
increased by 6.1 percent.\18\ In 2006, premiums increased by 7.7 
percent and in 2005 premiums rose by 9.2 percent \19\--in all years 
outpacing overall inflation by 3.5 to a full 5.7 percent.\20\ 
Cumulatively, the premium increases during the last six years have 
exceeded 87 percent, with no end in sight. This is more than three 
times the overall increase in medical inflation (28 percent) and 
more than five times the increase in overall inflation (17 percent) 
during the same period.\21\ This has directly led to an increase in 
the number of uninsured, which currently exceeds 47 million, or one 
in seven Americans. Notably, these increased premiums have not led 
to corresponding increases in medical benefits.
---------------------------------------------------------------------------

    \18\ Employer Health Benefits, 2007 Annual Survey, The Kaiser 
Family Foundation and Health Research and Education Trust.
    \19\ Strunk, et al, ``Tracking Health Care Costs,'' Health 
Affairs (Sept. 26, 2001), W45.
    \20\ Jon Gabel, et al, ``Job-Based Health Insurance in 2001: 
Inflation Hits Double Digits, Managed Care Retreats,'' Health 
Affairs (Sept/Oct. 2001), at 180.
    \21\ Kaiser/HRET: Employer Health Benefits Survey, 2005 Annual 
Survey.
---------------------------------------------------------------------------

    Health insurers seek to deflect attention from their huge 
profits by falsely asserting that physician payments are driving 
recent premium increases. Such claims are baseless. While premium 
levels have risen by double-digit amounts, physician revenues have 
fallen. The median real income of all U.S. physicians remained flat 
during the 1990s and has since decreased.\22\ The average net income 
for primary care physicians, after adjusting for inflation, declined 
10 percent from 1995 to 2003, and the net income for medical 
specialists slipped two percent.\23\ In contrast, recent reports on 
health insurer profits show that the profit margins of the major 
national firms have experienced double-digit growth since 2001. In 
fact, United and WellPoint have had seven years of consecutive 
double-digit profit growth that has ranged from 20 to 70 percent 
year-over-year. Thus, it is shareholders and health insurance 
executives, not physicians, who are profiting within an 
anticompetitive market at patients' expense.
---------------------------------------------------------------------------

    \22\ Physician Income: A Decade of Change, Carol K. Kane, PhD, 
Horst Loeblich, Physician Socioeconomic Statistics (2003 Edition), 
American Medical Association.
    \23\ Losing Ground: Physician Income, 1995-2005, Ha T. Tu, Paul 
B. Ginsburg, Center for Studying Health Systems Change Tracking 
Report No. 15 (June 2006).
---------------------------------------------------------------------------

Physician Bargaining Power

    Growing market domination of health insurers is undermining the 
patient-physician relationship and eviscerating the physician's role 
as patient advocate. Physicians have little-to-no bargaining power 
when negotiating with dominant health insurers over contracts that 
touch on virtually every aspect of the patient-physician 
relationship. This is particularly troublesome given physicians' 
critical role as patient advocates in an environment where health 
insurers have increasing control and limited accountability 
regarding decisions that affect patient treatment and care.
    Many health insurer contracts are essentially ``contracts of 
adhesion.'' Contracts of adhesion are standardized contracts that 
are submitted to the weaker party on a take-it or leave-it basis and 
do not provide for negotiation. Many contracts of adhesion contain 
onerous or unfair terms. In the health insurer context, these terms 
may include provisions that define ``medically necessary care'' in a 
manner that allows the health plan to overrule the physician's 
medical judgment and require the lowest cost care, which may not be 
the most optimal for the patient. They also frequently require 
compliance with undefined ``utilization management'' or ``quality 
assurance'' programs that often are

[[Page 49856]]

nothing more than thinly disguised cost-cutting programs that 
penalize physicians for providing care that they deem necessary.
    In addition to interfering with the treatment of America's 
patients, many health insurer contracts make material terms, 
including payment, wholly illusory. They often refer to a ``fee 
schedule'' that can be revised unilaterally by the health insurer 
and is not provided with the contract. In fact, many contracts allow 
the health insurer to change any term of the contract unilaterally. 
In addition, these contracts frequently contain such unreasonable 
provisions as ``most favored payer'' clauses and ``all products'' 
clauses.
    ``Most favored payer'' clauses require physicians to bill the 
dominant health insurer at a level equal to the lowest amount the 
physician charges any other health insurer in the region. This 
permits the dominant health insurer to guarantee that it will have 
the lowest input costs in the market, while creating yet another 
barrier to entry. ``All products clauses'' require physicians to 
participate in all products offered by a health insurer as a 
condition of participation in any one product. This often includes 
the health insurer reserving the right to introduce new plans and 
designate a physician's participation in those plans. Given the 
rapid development of new products and plans, the inability of 
physicians to select which products and plans they want to 
participate in makes it difficult for physicians to manage their 
practices effectively.
    Despite the improper restrictions and potential dangers these 
terms pose, physicians typically have no choice but to accept them. 
Any alleged ``choice'' is illusive given that choosing to leave the 
network often means terminating patient relationships and 
drastically reducing or losing one's practice. Physicians simply 
cannot walk away from contracts that constitute a high percentage of 
their patient base because they cannot readily replace that lost 
business. \24\ In addition, physicians are limited in their ability 
to encourage patients to switch plans, as patients can only switch 
employer-sponsored plans once a year during open enrollment, and 
even then they have limited options and could incur considerable 
out-of-pocket costs.\25\
---------------------------------------------------------------------------

    \24\ The DOJ, in its 1999 challenge of the Aetna/Prudential 
merger recognized that there are substantial barriers to physicians 
expeditiously replacing lost revenue by changing health plans. It 
also noted that this imposes a permanent loss of revenue. United 
States v. Aetna, Revised Competitive Impact Statement, Civil Action 
3-99CV1398-H (N.D. Tex, 1999), available at: http://www.usdog.gov/atr/cases/f2600/2648.htm. The DOJ reiterated this position in its 
challenge to the UnitedHealth Group/PacifiCare merger. See United 
States v. UnitedHealth Group Inc., Case No. 1:05CV02436 (D.D.C. Dec. 
20, 2005), available at http://www.usdoj.gov/atr/cases/f213800/
213815.htm.
    \25\ See id.
---------------------------------------------------------------------------

    Health insurers have even employed tactics to coerce non-
contracted physicians who have managed to preserve some level of 
bargaining power, into signing contracts. For example, a number of 
large health insurers are refusing to honor valid assignments of 
benefits executed by a patient who receives care from a non-
contracted physician. This means that health insurers, rather than 
pay the non-contracted physician directly, pay the patient for the 
services provided. Similarly, many health insurers engage in the 
practice of ``repricing'' of physician claims (including proprietary 
claims edits and the use of rental network PPOs \26\), which results 
in non-contracted physicians receiving less than contracted 
physicians for the same service.\27\ These and other manipulative 
practices are clearly designed to undermine any residual bargaining 
power a physician practice might have, and further depress physician 
payments.
---------------------------------------------------------------------------

    \26\ A ``rental network PPO'' exists to market a physician's 
contractually discounted rate primarily to third-party payers, such 
as insurance brokers, third-party administrators, local or regional 
PPOs, or self-insured employers. Rental network PPOs may also rent 
their networks and associated discounts to entities such as 
``network brokers'' or ``repricers'' whose sole purpose is finding 
and applying the lowest discounted rates, often without physician 
authorization.
    \27\ ``Repricing'' practices and rental networks also deprive 
contracting physicians of the benefits of their contracts when they 
result in payment below the contracted fee schedule, These tactics 
make it difficult for physicians to administer their practices and 
undercuts efforts to make the health care system more transparent.
---------------------------------------------------------------------------

Monopsony Power

    In a substantial number of markets across the country, dominant 
health insurers have the potential to exercise monopsony power over 
physicians to the detriment of consumers. Monopsony power is the 
ability of a small number of buyers to lower the price paid for a 
good or service below the price that would prevail in a competitive 
market. When buyers exercise monopsony power in the labor market, 
they exploit workers in the sense of decreasing fees below their 
true market value. Monopsony power also has an adverse impact on the 
economic well being of consumers as it results in a reduced quantity 
of the firms' products available for purchase.
    In the health insurance industry, health insurers are both 
sellers (of insurance to consumers) and buyers (of, for example, 
hospital and physician services). As buyers of physician services, 
health insurers are acting as monopsonists--lowering the prices they 
pay to a point at which physicians are forced to forego investments 
in new technology, reduce staff and services, and even leave the 
market, all of which inevitably lead to increased waiting times and 
reduced access to care. Moreover, because health plans have posted 
considerable profits without decreasing premiums, the benefits of 
their ability, as a buyer of services, to lower the prices they pay 
suppliers (physicians), have not been passed on to consumers.
    In fact, the DOJ has recognized that a health plan's power over 
physicians to depress reimbursement rates can be harmful to 
patients--the ultimate consumers of health care. Such was the basis 
for the DOJ's decision in 2005, requiring United to direst some of 
its business in Boulder, CO as a condition of approving its merger 
with PacifiCarc.\28\ Specifically, the DOJ noted that because 
physicians cannot replace ``lost business'' quickly, the point at 
which physicians are locked-into a managed care contract is 
significantly lower than for other businesses.\29\ In the United-
PacifiCare merger, the DOJ found that where the merged company would 
control 30 percent of physician revenues, the plan could exercise 
monopsony power over physicians in a manner that would lead to a 
``reduction in the quantity or quality of physician services 
provided to patients.'' \30\
---------------------------------------------------------------------------

    \28\ See United States v UnitedHealth Group Inc., Case No. I 
:05CV02436 (D.D.C. Dec. 20, 2005), available at http://www.usdoi.gov/atr/cases/f213800/213815.htm.
    \29\ See id.
    \30\ Ibid.
---------------------------------------------------------------------------

    Health insurers with monopsony power can use the economic 
benefits of reduced reimbursement in medical care to protect and 
extend their monopoly position and increase barriers to entry into 
the market. Thus, rather than producing ``efficiencies,'' increasing 
monopsony power in health care markets across the country causes a 
number of distortions in the market that harms patients by reducing 
access to care.

Antitrust Law and Policy Restrictions on Physicians

    Ironically, rather than focus on the health insurance industry, 
which, as noted above, has boasted record profits and increased 
premiums corresponding to recent waves of consolidation, regulators 
have focused on physicians, the least consolidated segment of the 
health insurance industry. This is confounding given the current 
health insurer environment. Since April 2002, the FTC has brought at 
least 25 cases against physician groups based upon contracting 
arrangements with health insurers.\31\ All but one of the groups 
chose to settle with the FTC rather than engage in a protracted, 
financially devastating legal battle.\32\ These actions have had a 
chilling effect on physician practices,
---------------------------------------------------------------------------

    \31\ See FTC website at http;//www.ftc.gov/os/actions.shtm.
    \32\ At the same time, the FTC has been extremely restrictive 
regarding the ability of physicians to jointly negotiate with 
insurers, approving only three arrangements. See http://www.brownandtotand.com/publish/en/about/news_room/ftc_ 
information-Par-0005-DownloadFile.tmp/4.5FTCNotice.pdf(Brown and 
Toland); http://www.ftc.gov/bc/adops/070618medsouth.pdf (MedSouth); 
http://www.ftc.gov/os/closings/staff/070921finalgripamcd.pdf 
(Greater Rochester Independent Practice Association).
---------------------------------------------------------------------------

    Due to the significant burdens and responsibilities associated 
with ``financial integration,'' the only other option currently 
available to physicians is so-called ``clinical integration,'' as 
described by the DOJ/FTC in their 1996 Statements of Antitrust 
Enforcement Policy in the health Care Area. The agencies, however, 
have provided little guidance on what exactly constitutes clinical 
integration, other than to make clear that meeting the standard 
requires several years of development and millions of dollars of 
infrastructure investment; an option that is simply not feasible for 
the vast majority of physicians who are not part of a large group

[[Page 49857]]

practice, hi fact, the few endeavors that have been approved have 
been limited to large practices consisting of hundreds of 
physicians.
    Given the increasing power and size of health insurers and the 
corresponding decrease in physician bargaining power, the policy 
landscape that has resulted in aggressive antitrust enforcement 
actions against physicians should be reexamined. Physician joint 
contracting can make it possible to obtain ready access to a panel 
of physicians offering broad geographic and specialty coverage. In 
addition, non-exclusive physician networks pose no threat to 
competition. Physicians can independently consider contracts 
presented from outside the network. Likewise, health insurers that 
cannot reach a ``package deal'' with a physician network can 
contract directly with its physicians or approach a competing 
network. Rather than restraining trade, the physicians will have 
created an additional option for purchasers--a pro-competitive 
result. Thus, the AMA believes that less restrictive approaches to 
physician joint contracting will have pro-competitive benefits such 
as greater flexibility, more innovation, and ultimately a better 
health care system.

Conclusion

    It is time for the federal government to address the serious 
public policy issues raised by the unfettered consolidation of 
health insurance markets. The current situation in Nevada is 
emblematic of the total absence of boundaries and enforcement 
applied to health plan mergers. The AMA's Competition Study and the 
presence of market characteristics that typify dominant market 
power, further prove that competition has already been undermined in 
markets across the country. This has real, lasting negative 
consequences for the delivery of health care in this country. Thus, 
we strongly urge the House Small Business Committee to lay the 
groundwork for reversing this dangerous trend toward a marketplace 
controlled by a few health insurance behemoths by encouraging the 
DOJ to enjoin the United-Sierra merger.

Testimony of Robert Hughes, President, The National Association for the 
Self-EmployedHouse Committee on Small Business ``Health Insurer 
Consolidation--The Impact on Small Business''

October 25, 2007.
    As the representative of over 250,000 micro-businesses across 
the country, the National Association for the Self-Employed (NASE) 
is committed to addressing the issue of affordable health coverage, 
which is the number one concern of our members and all small 
businesses in our nation. I am hear to tell you that rising health 
care costs are significantly hurting micro-business and impairing 
their ability to grow. compete and succeed. in addition, the high 
Cost of health coverage has serious personal consequences on 
business owners and employees. Often times our members will 
sacrifice saving for retirement, putting money aside for their 
children's education, and addressing other personal needs to 
redirect funds to health care Costs in order to stay insured. Of 
course, the worst result of mounting premiums is dropping coverage 
all together which puts their business, their family and themselves 
at risk should they face a medical crisis.
    The number of Americans living without health coverage rose in 
2006 to 47 million, an increase of almost 16 percent over the 
previous year. in a 2005 survey, the National Association for the 
Self-Employed (NASE) found that a majority of micro-business owners, 
those businesses with ten or less employees, do not have for 
themselves nor offer a health insurance plan to their employees. The 
smallest companies are most impacted, with only 14% of companies 
that grossed less than $50,000 annually having health insurance 
compared to 70% among those grossing more than $500,000 yearly. Most 
alarming is the rate at which premiums for micro-businesses have 
been increasing. In a similar health survey conducted by the NASE in 
2002, micro-businesses indicated the median premium increase from 
the year before was a little over 11%. However, in 2005 micro-
business owners were experiencing a median premium increase of over 
17%, a substantial escalation.
    Premium costs are the single most important factor that 
determines whether a business owner will insure himself and provide 
coverage for his/her employees. Most importantly, if a micro-
business owner cannot afford insurance for himself and family, he/
she will not likely provide health benefits to employees. The issue 
of choice or lack there of in earner options plays a role in terms 
of it's affect on price. Thus, the key question here today is if 
increasing consolidation amongst health insurers are playing a role 
in premium increases.
    First, I would like to highlight that the self-employed and 
micro-businesses purchase health insurance in two markets: the small 
group market and the individual market. The definition of a small 
group is determined by each state, though most define it as one with 
50 or fewer employees. Firms in this size range looking to offer 
access to health insurance for their employees will look to the 
small group market for insurance options. However, of those 
currently insured, the majority of self-employed and micro-
businesses have purchased individual health coverage. While micro-
businesses surveyed by the NASE indicate that they believe it is an 
employer's responsibility to assist their employees with health 
coverage, the high cost to both the business and the employee in 
terms of cost sharing are the most significant barriers impeding 
business owners from providing employees with coverage. Micro-
businesses may assist their employees with their health care costs 
by setting up a Health Reimbursement Arrangement (HRA), contributing 
to an HSA or increasing their take home salary to help employees pay 
for individual insurance but a large percentage are not setting up 
an employer-based small group health plan.
    The health insurance options and number of carriers differ in 
the individual and small group market. Most states have a suitable 
number of insurance carriers with an array of coverage options 
within the individual market. The small group market is much more 
restrictive in terms of competition and availability. The NASE 
believes that minimization of insurance carriers due to 
consolidation compounded with the concern of high risk in this small 
group segment and excessive state regulation leaves small businesses 
with minimal options to setup a small group health plan and is a 
factor contributing to high premiums in insurance markets.
    A 2005 GAO report highlighted that the median market share of 
the largest carrier in the small group market was 43%, up 10% from 
2002. The five largest carriers in the small group market, when 
combined represented three-quarters or more of the market in 26 of 
co the 34 states that participated in the GAO study compared to only 
19 of 34 states in 2002. Blue Cross and Blue Shield is by far the 
giant in this sector, growing to 44% market share in all 
participating states. To support the GAO findings, we see similar 
depictions of lack of competition from a 2006 AMA study on the 
nation's health insurance markets which found that 95 percent of 
markets had a single insurer with a market share of 30 percent or 
greater and 56% of markets had a single insurer with a market share 
of 50 percent or greater.
    From the data we see a notable dominance of a few carriers in 
the small group market. Thus, the next question that begs an answer 
is how this lack of competition is affecting premiums. Any micro-
business owner will tell you that competition plays a central role 
in improving quality, spurring innovation and keeping prices down, 
Thus, the NASE feels the lack of competition may be a vital element 
in high premium costs in the small group sector. James C. Robinson, 
PhD, a professor of health economics at the University of 
California, Berkeley, School of Public Health, in an article for 
Health Affairs revealed that between 2000 and 2003 health plans 
raised premiums consistently above the rate of growth in costs. For 
investors in private insurance companies, returns were tremendous 
and Robinson states, ``the non-profit Blue Cross and Blue Shield 
plans enjoyed financial results equal to or better than those of 
their for-profit counterparts.'' (Health Affairs, Volume 23, Number 
6) According to previous AMA testimony, in 2005 premiums for 
employment-based insurance policies increased by 9.2 percent--
outpacing overall inflation by a full 5.7 percent. Cumulatively, the 
premium increases during the last six years have exceeded 87 
percent, which is more than three times the overall increase in 
medical inflation (28 percent) and more than five times the increase 
in overall inflation (17 percent) during the same period. (AMA 
Testimony to Senate Judiciary Committee, 2006) Hence, we see that 
premiums have consistently increased in the face of minimal 
competition.
    However, the NASE feels that the state regulatory climate plays 
an even more critical role in keeping costs high and impairing 
competition. State mandates on coverage in all markets increase the 
cost of basic health coverage between from a little less than 20% to 
more than 50% depending on the state. The Council for Affordable 
Health Insurance

[[Page 49858]]

has identified that there are currently over 1,600 mandates in our 
health care system. While mandates can make health insurance more 
comprehensive, they also make it more expensive by requiring 
insurers to pay for certain health services that consumers 
previously funded out of their own pockets. It is likely that 
insurers will push that added mandate cost into premium rates. The 
cost that excessive mandates add to health coverage can mean the 
difference between a micro-business owner just purchasing coverage 
for himself or also providing it to his employees. Additionally, the 
regulatory and statutory conditions in states have created barriers 
that make it difficult for new carriers and new products to expand 
into markets. Without new carriers or competing insurance products, 
price will remain high when one insurance carrier dominates a 
market.
    Micro-business owners have long been a proponent of market-based 
solutions for dealing with our health care system. However, 
``competition without competitors will not deliver the desired 
incentives for health care improvement.'' (Health Affairs, Volume 
23, Number 6) We must increase competition in the small group market 
to encourage lower premium costs which will spur micro-businesses to 
seek to expand coverage to their employees. We must address 
excessive state mandates and restrictive climates hurting 
innovation. Additionally the NASE urges Congress to address the 
disparities in the individual market since the majority of self-
employed business owners are purchasing individual health insurance. 
Currently there are over 20 million non employer firms, in which the 
owner must seek health coverage on the individual market. Thus, 
addressing the inequitable tax treatment of health insurance for 
those purchasing coverage on their own will also be a key step 
forward to increasing access to health coverage.
    The self-employed and micro-business community continues to be 
the backbone of our nation's economy, therefore the NASE urges you 
to take immediate action to alleviate the massive health cost burden 
laid at their feet in order to ensure their survival and that of our 
nation's economy.

Statement of the American Academy of Family Physicians

Submitted to the Committee on Small Business Concerning the Impact 
of Health Insurance Consolidation on Small Business
Presented By James D. King, MD, FAAFP, President
October 25, 2007.
    Thank you, Chairwoman Velazguez and Rep. Chabot. and the members 
of the Small Business Committee for the opportunity to participate 
in this hearing today. On behalf of the 93,800 members of the 
American Academy of Family Physicians, we applaud your deep concern 
for how the consolidation of health insurance plans affects family 
physicians as members of the small business community, as 
professionals and as small employers concerned about the effective 
delivery of health care.
    As described by the American Medical Association, the merging 
and consolidation of health insurance plans has created a profound 
imbalance adversely affecting the ability of physicians to negotiate 
contracts with insurers to the detriment of physician practices. 
This, in turn, has led to the inability of many of our patients to 
locate a primary care physician who can accept their insurance and 
still maintain financial viability.
    The trend toward consolidation is persistent. The industry 
analysts of investment bank Shattuck Hammond reported that between 
1992 and 2006, the number of competitor consolidations resulted In 
95 different payers shrinking to merely seven. According to the AMAs 
2005 report on Competition in Health Insurance, in 280 U.S. markets, 
30 percent or more of HMO and PPO lives are covered by the single 
largest insurer in that market. Looking at the U.S. as a whole, only 
two insurers cover a third of all commercially insured lives. This 
market concentration gives these health plans excessive power in 
determining the conditions of coverage, payment and practice.

Effects on Family Physicians

    How does this consolidation affect family physicians? Let me 
give you just two examples. In the Dallas/Fort Worth area, a 3-
physician group practice has a payer mix consisting of principally 
three payers: 30 percent United Healthcare, 28 percent Blue Cross 
and 18 percent Aetna. A solo physician practice in Colorado has 60 
percent of the patients his practice insured by one commercial 
payer, a situation that occurred as a result of a merger.
    As a result of similar concentrations of payers, many family 
physicians in small or solo practices have little leverage in their 
negotiations with the health plans. As the physician in Colorado 
noted when he attempted to make the case for a payment increase that 
at least would cover inflation, he was told by the representative of 
a large insurance company, As a solo physician, you are the weakest 
economic unit and must take what we decide to give.'' Another family 
physician noted that because small and solo practices cannot compare 
financial data before they sign a contract, they find out afterwards 
that their payment rates are substantially less than those of larger 
groups that can negotiate better terms.
    Further, health plans have no incentive to accede to any of a 
physician's requests when the plan has the unilateral ability to 
remove the physician from the network for not agreeing to the terms 
of the contract and effectively denying that physician's patients 
access to the practice. Physicians in this situation have little 
choice but to sign whatever contract is offered by the health plans. 
Many practices find it financially impossible to sacrifice a 
significant part of their patient base to take a stand against 
untenable contract provisions.

Declining Payment Rates and Terms of Agreement

    The health plans use this negotiating power created by this 
pattern of consolidation to dictate smaller payments and onerous 
terms. In California, the mergers of PacitiCare Health Systems with 
United Healthcare and WellPoint Health Networks/Blue Cross of 
California with Anthem, Inc. have produced fee cuts of as much as 20 
to 30 percent. According to a California Medical Association survey 
of 500 state medical practices, 20 percent of 1,500 affiliated 
physicians had terminated a Blue Cross contract or planned to do so. 
By forcing practices to accept these cuts or lose their patients, 
health plans are making it more difficult for patients to secure the 
health care they need.
    It is not only payment rates that cannot be negotiated, but the 
terms of the agreement cannot be challenged. Health plans affect 
every segment of the practice of medicine and compel treatment 
decisions; for example, by requiring practices to use specific labs; 
by determining which tests may be performed in the office; by 
demanding the completion of multiple-page forms that reduce the 
amount of time a physician has available for treating patients; and 
by delaying payments by requiring responses to seemingly endless 
trails of questions.
    These requirements may enhance the profits of the insurer but 
they create significant burdens for practices and patients. For 
example, a family physician in practice outside a metropolitan area 
in Ohio contracts with a health insurer who changed its national 
laboratory arrangement that originally included two companies down 
to a single, exclusive laboratory arrangement. This change caused 
the insurer's enrollees to drive to the local hospital for lab 
services rather than walk across the hail from the physician's 
office to a duly qualified reference lab. If the physician had 
referred the patients to the non-participating lab across the halt, 
he or she could have faced fines by the payer.

Increased Un-Reimbursed Administrative Responsibilities

    The insurance plans that have a large segment of the patient 
population also pass back to the physician practice many of their 
administrative responsibilities. According to a family medicine 
office manager, each radiology notification and authorization 
request now takes an average of up to ten minutes to perform with a 
physician peer-to-peer request adding another 10 minutes. Another 
physician in Arizona reported that these authorizations can often 
take at least 40 minutes per procedure to receive approval from the 
insurance plan. These administrative activities are not reimbursed 
by the health plan and so they have no incentive to become more 
efficient. The physician, in turn, is required to comply with time-
consuming health plan requirements that riot only are unpaid but are 
increasing in a period of declining overall reimbursement.

Unilateral Contract Changes

    Many contracts allow the health plan to unilaterally change the 
contract terms at any time, without notifying the physician, simply 
by posting the amended terms on the insurer's web site. Some 
contracts specifically forbid the physician from disclosing 
information about the fees that the

[[Page 49859]]

insurer pays to the physician, making it impossible for these 
physicians to inform patients about their out-of-pocket 
responsibility for deductible amounts under their policy. Few 
contracts provide physicians with payment terms spelling out how the 
fee schedule Will be calculated The result is more primary care 
physicians are driven into other care settings, such as Emergency 
Rooms or cash-only practices, or they leave health care altogether 
due to these negative contract conditions, excessive administrative 
requirements and downward pressure on their already slim margins.

Effect on Students and Residents

    These contract imbalances concern not just the physician in 
practice now who is struggling to keep her business open but also 
the student who is looking at career options and deciding whether 
primary care offers a stable future. The number of medical students 
choosing family medicine and primary care has been declining for 
several years. Medical student debt averages over $200,000 upon 
graduation and the potential earnings has a strong effect on the 
student's choice of specialty. Patients' access to primary care will 
ultimately be reduced as more medical students choose nonprimary 
care residencies because of the financial uncertainty and 
instability of the current situation.

Effect on Small Business Community

    It is important to note that the result of health plan mergers 
and consolidation is not the achievement of economies of scale that 
might be expected. Such economies would produce lower consumer 
premiums, which would make it possible for more small businesses, 
including small medical practices, to afford to offer health 
insurance to their employees. Instead, consolidation produces larger 
insurance companies wielding the kind of power and influence that 
leaves physicians helpless and frustrated. As a result, small 
businesses are not offered more affordable prices for their 
employees' health plans but rather fewer choices of physicians who 
will accept the plans that are offered.

Effect on Patients

    The payment rates that the health plans dictate are unrelated to 
the quality of care that the physician provides to their patients. A 
family physician in Arizona notes that he has been honored several 
times as the best physician in the state and has over 100 other 
physicians among his patients. He receives the highest rating 
possible from his health plans for both quality and efficiency. 
Nevertheless, he is taking more than $100,000 out of his savings 
each year to stay in practice because he is unable to negotiate 
higher payment rates with the insurance companies. This situation is 
not only unfortunate, but it is also clearly unsustainable, If he is 
forced to close his practice, his patients will have lost that long-
standing source of high-quality treatment, care coordination and 
preventive services in which they have place their faith and trust 
and upon which they have retied and depended. This is a sad 
statement of how we as a nation have allowed our health care 
priorities to be contaminated

Effect on Quality

    Finally, the most serious effect of this rapid consolidation is 
to undermine the great potential for efficiency and quality 
improvement offered by what we are calling the patient-centered 
medical home. As proposed by family medicine, internal medicine, 
pediatrics and the osteopathic primary care physicians, the medical 
home is the practice that has been transformed to offer 
comprehensive, continuous, coordinated care. Experience with health 
systems based on primary care that exist in other industrialized 
nations amply demonstrates the value of a medical home. These 
practices provide guidance, assistance and responsiveness to 
patients navigating an increasingly complex health care system. But 
the patient-centered medical home depends on a long-term 
relationship between the physician and the patient, which is 
threatened and possibly destroyed if an insurance company dictates 
the terms of practice of medicine and preempts the patient's freedom 
of choice.

Conclusion

    The AAFP recommends changes in existing anti-trust laws that 
will provide physicians with tools thai allow them to be true market 
participants. The current anti-trust laws were established during a 
very different competitive environment. Under these outmoded laws, 
physicians are barred from discussing the financial aspects of their 
practice with any entity unrelated to their practice, yet it is 
ciear that insurance companies ``price to the mean'' which is how 
the natural competitive forces are supposed to work and is what 
creates a dynamic market. Small and solo practice primary care 
physicians are excluded from that very basic business condition 
while market share and shear economic strength foster these near 
monopolistic insurer behaviors.
    Again, AAFP commends the committee for highlighting the issues 
resulting from health insurance consolidation. Family physicians, 
many of whom provide health care in small and solo practices in 
rural and other underserved areas, feel the effects of insurance 
consotidation by trying to negotiate in a very disadvantageous 
environment. The Academy would like to work with all stakeholders to 
ensure a path to an improved health care system that puts the 
patient first and supports the sustainability of a practice that 
delivers high quality primary care; toward a system that places an 
emphasis on personalized, coordinated, primary care and that enables 
such patient-centered practices to fairly compete. One step in this 
direction would be to enact common sense changes that would 
modernize anti-trust laws to better support small business medical 
practices and to enable them to negotiate contracts with insurers 
from a position of equality.
    Thank you for the opportunity to provide this testimony and I 
look forward to answering your questions.

Statement of James R. Office, Vice President and General CounselVictory 
Wholesale Group Springboro, OH

On Health Insurance Consolidation--The Impact on Small Business
Before the Committee on Small Business, U.S. House of 
Representatives, United States Congress
October 25, 2007.
    Victory Wholesale Group (``Victory'') appreciates the 
opportunity to submit these comments. The rising and out-of-control 
increase in health costs, which are largely due to consolidations in 
the health care industry, is a very important subject to us and 
every other small business across America. One of Victory's largest 
expenses is for the health care coverage it provides to all its 
employees, who are called associates.

About Victory Wholesale Group

    Victory is a group of family owned, separate companies; the 
first established in 1979. Our businesses include: a wholesale 
distributor of dry grocery, health and beauty care and general 
merchandise, with 83 employees in Ohio, 24 in Florida, 6 in Nevada, 
10 in California and 17 people in 13 other states; a food marketing 
company with 6 people in Connecticut and 24 employees in 12 other 
states; a public warehousing business with 104 employees in two Ohio 
locations; a contract packaging business with 17 Ohio employees; an 
interstate trucking company with 4 Florida, 27 Ohio and 9 employees 
in 5 other states; a pharmaceutical wholesale distributor with 100 
employees in Puerto Rico; a fundraising gift distributor with 16 New 
York employees and a promotional item distributor with 5 Ohio 
employees.

Victory's Health Insurance Benefits

    Health insurance is the largest and most costly benefit that 
each of Victory's companies provides its associates. Insurance 
type's range from self-insured health plans, governed under ERISA, 
to fully insured health plans provided by large regional health 
insurers. Our companies maintain multiple health care programs, to 
help reduce costs and foster competition among providers, because of 
the widely dispersed locations of our business operations and the 
regional nature of health insurance providers and their support 
networks.

Why Victory Maintains Different Health Plans and Victory's Experience

    Because Victory has employees and operations across the country, 
we've been unable to find a single, affordable health care plan that 
will cover all our separate businesses and associates. Over the 
years Victory has tried different types of health plans including: 
self-insured and fully-insured, including PPO's and HMO's. Our 
objective is to provide a valuable and quality health benefit that 
allows associates as much free choice in selecting health care 
providers as reasonably possible while also controlling costs for 
everyone.
    It has been Victory's experience, that if a health plan has one, 
or more, participants with a serious or major health condition its 
competitive choices and alternatives disappear, and its premiums are 
increased.

[[Page 49860]]

    Also we have found that the deepest and best discounts are 
offered through regional providers and networks of preferred 
providers that have hospitals, doctors and other health care service 
providers, that combine into a single entity to provide health plans 
with agreed pricing or discounts in exchange for the health plan 
steering its employees to the network. Networks are either regional 
with large numbers of local doctors and hospitals as members, or 
national with more limited numbers of doctors and hospitals, or that 
offer smaller discounts.
    We find that controlling health care costs is nearly impossible; 
that the health care industry is both fragmented, yet concentrated. 
It's loaded with administrative costs, it's inefficient, it's not 
measured or accountable for quality or value. In the present system 
the best way to control costs is to have only young, healthy 
employees.
    Consolidation and affiliation of hospital and physician groups 
standardizes patient medical information and makes it available and 
easily accessible to all affiliated providers that may treat the 
patient; but on the negative side, it creates a concentrated front 
to impose increases on health insurers or to resist providing 
discounts.
    We find that insurance carriers' quotes end up largely 
``experience rating'' our group's claims experience. That means they 
take our actual costs, add the insurance company's overhead and 
their desired profit and that is the premium we are quoted. We can't 
find plans that cover all our locations with any meaningful 
provider's networks or discounts. Thus we are forced to shop on a 
local basis from a limited number of carriers for separate groups 
with small numbers of employees.
    Further, we found that in most of the regions in which we sought 
quotes there were only one or two dominant insurers that essentially 
controlled each local market. And to make matters worse, those 
regions also were dominated by one or two major hospital and 
physicians affiliated groups.
    Additionally, we found that some carriers, through pricing, 
force small businesses to take a pre-set benefit or networks. We 
have found that changing networks can be very disruptive to 
employees and their families (and company administration). Changing 
a network might require a participant to find new doctors and go to 
hospitals that they are unfamiliar with. In designing our benefits 
we try to the extent possible to minimize disruptions to our 
associates' choice of providers.
    We were faced with increasing cost, less choice, multiple plans 
and a whole bunch of administrative problems managing the programs. 
Today's health care system is largely a pass though of all costs to 
employers and individual participants/insureds.
    We have learned that sometimes an insurance carrier will ``buy 
market share'' by offering low prices to new groups and then 
dramatically increase premiums or change the benefits on renewals. 
When an insurer ``buys a market'' through price discounts, it often 
chases competition out of the market thus allowing the insurer to 
later increase prices without opposition.
    As most small businesses can attest, in a year following any 
significant claim(s), it becomes virtually impossible to switch 
providers or to receive competitive quotes at renewal. Even with 
competition, in the regions where we have operations, we find they 
are dominated by only two large carriers; thus limiting our choices 
because both carriers were expensive, only one was more so.

Consolidation in Southwest Ohio

    We have a large number of associates in Southwest Ohio 
(Cincinnati and Dayton, areas). Once there were a number of 
independent physician practices and independent hospitals. Over the 
past 15 years, through several consolidations, we found that 
Dayton's five primary hospitals became essentially two through 
affiliations (excluding Children's Medical Center).
    For more than a year recently, one major hospital in Dayton (and 
the physicians who maintained privileges only at that hospital) 
refused to accept the pricing the larger of only two regional health 
insurers was demanding. So, the two entities parted ways. Our 
associates living in the neighborhoods surrounding that hospital 
were forced to find new doctors and use new hospitals on the other 
side of town. Our choices and those of other small businesses during 
that year were further reduced because the other big regional health 
insurer did not cover a major portion of the geographic region in 
which our employees lived. As employers, we faced the additional 
disruption that employees go through when they were forced to use 
new doctors and hospitals outside their own neighborhoods.
    In Cincinnati a similar thing happened. 13 Hospitals became 3 
through affiliations (excluding Children's). In both regions 
physician practices were purchased, consolidated and affiliated with 
one of the large hospital affiliated groups and now they are large 
enough to stand up to the insurers in the area and resist pricing 
pressures.
    Throughout Southwest Ohio, the few large hospital and affiliated 
physician groups have been successful at increasing their prices by 
threatening to again ``kick out'' one or both of the only two very 
large regional health insurance companies that wanted discounts or 
reduced increases. This was at the expense of the employees of small 
businesses in the entire area that have been forced to pay the 
higher rates. Small businesses lack the necessary clout to use 
against either the medical providers or insurers.
    The message remains the same, small businesses' choices are 
reduced and prices are increased without any meaningful competition. 
The market today for small business health insurance is essentially 
``take it or leave it.''

Don't Underestimate the Impact of Discriminatory Underwriting in the 
Small Business Market

    Another phenomenon that we now face is that our insurance 
carriers engage in discriminatory pricing and/or coverages. In years 
when our associates and their families were generally healthy our 
premiums rose consistent with reported national average increases. 
However, in recent years we've had some associates with serious 
health problems. In the case of our fully insured plans, our 
premiums have increased well beyond the national averages and we 
have been unable to get competitive insurers to quote the group. 
(Examples of serious health problems include: organ transplants, 
heart problems, cancer, stroke, aneurysms, premature childbirth and 
conditions that can be treated with very expensive drugs such as MS 
(Victory has seen pharmaceuticals costing as much as $20,000 per 
month).
    In our self-insured health plans, our excess insurers would 
simply delete the ill participant from our group (it's called 
``lasering out'' a patient or condition). For example, the premium 
for our excess insurance would still increase. In addition, the 
carrier would tell Victory that we would have to cover the first 
$50,000 or $75,000 of a particular individual's health costs. Again, 
while we might get quotes from excess carriers, we found that they 
all generally behave the same as it relates to individuals facing 
serious health problems. I would describe this concept as insurance 
companies only wanting to insure healthy groups.
    One of Victory's smaller businesses has a number of older 
associates with many of the ailments that go along with age and they 
are paying a higher premium than any of our other groups. This 
particular business employs fewer than 20 associates and it is stuck 
with our incumbent regional carrier. Whenever we can get quotes from 
carriers willing to quote this group, they are always higher, or 
exclude afflicted associates or they adjust the benefits to include 
unreasonable limitations on benefits--such as a 40% co-payment on 
non-formulary brand name drugs without any cap. If an associate has 
MS and their medications costs $5,000 month, 40% would be $2,000 a 
month. That cost is simply not affordable so the treatment is 
discontinued or less effective treatments are used.
    We have found that even former associates electing coverage 
under COBRA can and do have an impact on health insurance costs if 
the individual has a serious health condition. Former associates who 
have existing medical problems often find they have no choice but to 
continue with coverage under COBRA because they are unable to obtain 
affordable health insurance elsewhere. Consolidation in the industry 
has compounded the problem, by reducing the number of available 
insurers to whom an individual can even apply for coverage.
    Another unexplained phenomenon is that if a group is turned down 
or priced by one carrier at a premium, it seems like every other 
carrier in the region somehow learns of this which makes it more 
difficult to find alternatives.
    Victory has also seen a number of conflicts in the industry that 
are generally hidden from its insureds. For example one of our PPO 
networks receives undisclosed payments from the doctors and 
hospitals that are subscribers. When we inquired as to why they 
received these payments, and whether these payments were passed 
though to Victory by way of discounts, we were unable to get an 
answer. It was strongly suggested by

[[Page 49861]]

our broker not to push the issue. Are these payments made to keep 
the network from demanding deeper discounts? What about hospital and 
treatment centers that are owned by physicians. Why are these 
arrangements hidden? In the end they can stifle competition, cost 
and choice.
    Victory's experience is that the health insurance industry 
covertly or otherwise discriminates against small business and 
individuals that have significant health problems. Small businesses 
have no market power or advocate for the wrongful conduct, so large 
and powerful regional health insurance and hospital/physician 
affiliates stand to lose nothing by engaging in this conduct.

How do small businesses control health care costs today?

    Unfortunately this proves to be an exercise of the lesser of a 
number of evils, few that the small business can control. Each year 
at our annual health insurance renewals, we get a quote from our 
broker that first shows the price of keeping the same health 
benefits for the upcoming year. From an employer standpoint this is 
the least disruptive to the employees and their families (and 
business administration). Unfortunately, in our experience, this 
usually includes a cost increase. So our broker then offers a series 
of options to either keep the cost the same as the previous year or 
reduce the increase in cost for the upcoming year. These options 
include:
     Increasing the amount of premium that each associate 
pays;
     Increasing co-payments and/or deductibles;
     Impose charges on unhealthy lifestyles, such as smoking 
or obesity premiums;
     Reduce and/or eliminate benefits;
     Modifying benefits and provide financial incentives (or 
disincentives as the case may be) to use modified benefits \1\;
---------------------------------------------------------------------------

    \1\ For example, last week in our annual health insurance 
renewal, our broker suggested that we encourage our associates to 
have elective surgical procedures performed overseas. We were 
advised that even paying for travel for two, treatment and recovery 
at what was described as Four Seasons like heath care facilities 
that cater to westerners; we would save tens of thousands on 
elective surgical procedures. We were informed, for example, that a 
single knee replacement that costs approximately $30,000 in the 
Midwest would cost under $5,000 inclusive of travel for two in 
Singapore. Victory is not ready to mandate its associates travel 
thousands of miles and away from their families and loved ones to 
obtain health care, however it is difficult not to seriously 
consider the potential savings.
---------------------------------------------------------------------------

     Be very selective in hiring employees--i.e. hire only 
healthy employees \2\;
---------------------------------------------------------------------------

    \2\ Victory doesn't engage in, support or condone this practice; 
however, we understand that the practice is not uncommon.
---------------------------------------------------------------------------

     Incorporate a Health Savings Account or Health 
Reimbursement Account into the plan design (higher deductible and 
lower benefits); and/or
     Eliminate offering employer provided health insurance.

Conclusion

    Historically small businesses make up the backbone of our 
nation's employers. Collectively small businesses employ the largest 
number of people in the U.S. Yet, because each company is small, we 
have almost no market clout to help bring changes into the health 
care system. For improvements we must depend on you in the Congress.
    Reduced competition in health care at the insurer level or the 
provider level has increased the costs of health care to Victory and 
its employee-associates as well as those of other small businesses. 
Solutions must include some meaningful competition. Pooling and 
sharing of risks without selective health screening, will advance 
competitive pricing. Keeping a multiple payer and provider system 
gives greater flexibility to experiment and discover ways to improve 
our health care system, A single payor or socialized plan will put 
all of our nation's eggs in one basket, which certainly disfavors 
innovation and experimentation. On paper our present system should 
work, but because of inefficiencies and gaming, it doesn't.
    Victory appreciates the Committee on Small Business review of 
this important issue and the opportunity to present its views on the 
topic. We thank you for the invitation to present our views. We hope 
that the Committee and U.S. Congress will take our comments along 
with the comments from fellow panel members and others, seriously 
and not make this just another political battle without substantive 
change. Small business and the tens of millions of their employees, 
and your constituents will suffer.
    The problems are complex and involve a large number of 
interested parties; political pressure will be exerted by the well-
funded. Let's work toward a solution and show the world that we can 
not only put humans on the moon, but we have the intelligence and 
creativity to fix a broken, expensive and complex system of 
delivering health care.

Testimony of Greg Scandlen, President, Consumers for Health Care 
Choices

``Health Insurer Consolidation: The Impact on Small Business''
Committee on Small Business, United States House of Representatives
October 25, 2007.
    Madam Chairman, and Members of the Committee,
    Thank you for the opportunity to share some thoughts with you 
today about the problems created by excess concentration in the 
health insurance market.
    I am Greg Scandlen. I am the founder and president of Consumers 
for Health Care Choices, a national, non-profit and non-partisan 
membership organization with members in 44 states. I have been in 
health policy since 1979 when I was hired by Blue Cross Blue Shield 
of Maine to rewrite their contracts in plain language. I spent 12 
years in the Blue Cross Blue Shield system, including 8 years with 
the national association where I was responsible for state 
government relations, including being liaison with the National 
Association of Insurance Commissioners, National Governors' 
Association, National Conference of State Legislatures, and other 
organizations of state officials.
    I left the Blues in 1991 to organize a trade association of 
smaller insurance companies, the Council for Affordable Health 
Insurance. I ran that organization for five years and left to become 
a consultant and a researcher for several national think tanks.
    I applaud this committee for its long-standing interest in the 
health insurance market, especially for small employers. For many 
years surveys have shown there is no greater issue weighing on the 
minds of small business owners, but now we are seeing that the issue 
has gone from being a worry of business owners to a crisis in health 
policy as fewer employers are able to offer coverage at all. The 
latest Kaiser Family Foundation survey (available at http://www.kff.org/insurance/7672/index.cfm) found that the percentage of 
the smallest employers (with 3-9 employees) offering any coverage 
has dropped from 57% in 2000 to 45% today.
    This fall-off of enrollment is usually attributed simply to 
rising costs, but I think it is deeper than that. I think both 
employers and employees look at the health insurance market and find 
products and services that are over-priced, inefficient, 
unaccountable, inconvenient, and incomprehensible. They simply do 
not find value here and they don't see many available alternatives.
    This indifference to customer needs and preferences is 
characteristic of non-competitive markets. Vendors see little need 
to innovate, cut costs, improve services, or simplify processes 
because everyone else is offering the exact same product at the 
exact same price. Customers are stuck.

The Consequences of Excessive Regulation

    This non-competitive market is not an accident of history and it 
is not inherent in health insurance. I was closely involved in the 
small group reform efforts of the NationalAssociation of Insurance 
Commissioners (NAIC) in the late 1980s. I knew the commissioners and 
the staff of the committees that developed the NAIC's model laws and 
regulations quite well, and they were very explicit about their 
intentions. They said at the time the reforms they were proposing 
would do nothing to lower costs or increase access. All they wanted 
to do was ``stabilize the market.'' In their view, the small group 
market was suffering from an excess of competition that was 
confusing to purchasers. They thought it would be better if there 
were only three or four competing companies in each state.
    They have been wildly successful. In my state of Maryland there 
are now just two companies controlling 90% of the small group 
market. Options are few and prices are high. Individual coverage is 
a far better deal in Maryland, and in most other states, than small 
group coverage. That is part of the reason small employers are 
dropping group coverage--they and their employees can get a better 
deal with individual insurance.
    The regulations imposed on the small group market included some 
that were later made industry-wide by Congress when it enacted 
HIPAA. but also a host of other regulations that discouraged 
participation in this market--rating restrictions, underwriting 
restrictions, minimum participation and employer contribution 
requirements, bans on list billing, standardized benefit designs, 
requirements on provider participation,

[[Page 49862]]

claims approval and claims review requirements, capitalization and 
reserve requirements, investment restrictions, minimum loss-ratio 
standards, market conduct requirements, and of course, state-
mandated benefits.
    All of these regulations, however well-intentioned, add to the 
cost of coverage. Moreover, many carriers found it expensive and 
difficult to comply with all the varying requirements of many 
different states, especially as the requirements changed from year 
to year. As a consequence, many carriers decided to get out of the 
health business and sold off their blocks of business to larger 
carriers who could afford the compliance costs. This is the primary 
cause of concentration in this market.

Is Concentration a Good Thing?

    Now, some people will argue that this concentration is a good 
thing, but these arguments are based on a poor understanding of 
insurance markets. Let me explain.

Risk Pooling

    People often argue that the purpose of insurance is to pool 
risks, so the bigger the carrier, the better. Too much competition, 
they say. ``segments the market'' and loses the benefit of the 
pooling mechanism.
    Risk pooling is indeed an essential function of insurance, but 
all of the benefits of pooling are achieved with a relatively small 
number of people. The optimal size of a risk pool is frequently 
debated among actuaries and depends on a host of factors (See, for 
instance, www.sonoma-county.org/health/ph/mmc/pdf/models.pdf), but 
most of the beneficial effects of pooling can be achieved with as 
few as 25,000 covered lives. It is simply not the case that bigger 
pools are better.

Economies of Scale

    Similarly, people argue that bigger is better to achieve 
economies of scale. Fixed costs can be spread across a larger 
population, lowering the cost to each individual.
    Again, the argument is valid--as far as it goes. But at a 
certain point there will also be dis-economies of scale and 
managerial inefficiency. Where that point is, is open to debate. The 
graphic below is taken from Risk Pooling in Health Care Financing: 
The Implications for Health System Performance, by Peter C. Smith 
and Sophie N. Witter, both of the Centre for Health Economics at the 
University of York, York, UK, and published by the World Bank in 
2004 (available at http://extsearch.worldbank.org/servlet/SiteSearchServlet?q=risk%20pooling).
    It illustrates two things:
    1. The advantage of risk pooling levels off at a certain number 
of covered lives;
    2. There are substantial dis-economies of scale beyond a certain 
number.
    QuickTimeTM and a TIFF (LZW) decompressor are needed 
to see this picture.

Adverse Selection

    Finally, people will argue that having a wide selection of 
health coverage choices invites ``adverse selection,'' that is, 
people of like-risks will segment themselves into different health 
plans, with the healthiest going into one with minimal benefits and 
the sickest going into the one with the richest benefits. They say 
it would be fairer to allow only rich benefits so that the healthy 
will subsidize the preferences of the ill.
    Certainly selection happens but it can be manageable, as we have 
seen with FEHBP. Plus, the flip side of adverse selection is moral 
hazard. If it is true that high-risk people will select the richest 
benefit programs, it is also true that low-risk people who are 
placed into rich benefits programs will use more health care 
services than they otherwise would, raising the costs of coverage 
for all. In either case, the presence of insurance distorts normal 
consumer behavior. ``Fairness'' is not served by forcing people to 
purchase benefits they have no use for, and that is one of the 
reasons so many small employers are not buying coverage at all.

Innovation Needed

    These criticisms all assume that there is a single type of 
health insurance coverage that is most suitable for all people, but 
as Clark Havighurst and his colleagues at the Duke Law School have 
found, the type of comprehensive coverage that is most common today 
is aimed at the well-educated elite and is in fact subsidized by 
lower-income working people who derive little value from the 
coverage. In a recent special edition of Law and Contemporary 
Problems, (available at http://www. law.duke.edu/journals/journaltoc?journal=lcp&toc=lcptoc69autumn2006.htm). Mr. Havighurst 
says, ``lower-income insureds get less out of their employer's 
health plans than their higher-income coworkers despite paying the 
same premiums.'' He argues that over-regulation prohibits the 
offering of more modest benefit packages that would have greater 
appeal to the same lower-income workers who have little ability to 
influence the regulators. He adds that the current system ``greatly 
amplifies price-gouging opportunities for health care firms with 
monopoly power.''
    One exception to this situation has been the introduction of 
Health Savings Accounts (1-ISAs), a very modest innovation that 
appeals to some segments of the market that did not find value in 
comprehensive coverage. By some measures, between 30 percent and 40 
percent of the non-group and small group purchasers of HSAs were 
previously uninsured (see, for example, HSAs and Account-Based 
Plans: An Overview of Preliminary Research, 6/28/2006, available at 
http://www.ahipresearch.org/), suggesting that they did not find 
value in the comprehensive plans that used to be the only option.
    But HSAs are only one small example of the potential for 
innovation in the benefits market. Another can be found within the 
Medicare program. Medicare's Special Needs Plans (SPNs) have had 
very promising success in designing benefits specifically for 
subsets of beneficiaries, such as people with chronic conditions. 
(See, for example, Managed Healthcare Executive, ``Medicare 
Advantage Plans establish SNPs to provide care to dual eligibles, 
high-risk patients,'' http://mhe.adv100.com/mhe/article/articleDetail.jsp?id=322943). This is a major departure from 
conventional practice where health plans typically try to avoid 
high-risk people with costly conditions. These Special Needs Plans 
welcome them and design benefits for them that will lower the cost 
of their care.
    Another potential innovation was designed by a recently deceased 
member of my organization, James Pendleton, MD. The ``Pendleton 
Plan'' (available at http://www.chcchoices.org/articles.html) is 
aimed at costly hospital inpatient care. It is like a Schedule of 
Allowances benefit structure based on average hospital costs in an 
area, but it also includes graduated co-payments or rebates if the 
patient chooses a facility that is more or less expensive than the 
average. This plan has not yet been brought to market, but several 
insurers are interested in it and may try it out on a demonstration 
basis.
    I am familiar with several other entrepreneurs who are working 
on unique benefit designs and trying to raise the capital to turn 
these ideas into reality. But they are discovering very significant 
barriers to entry in the small group market imposed by the 
regulatory system. They are likely to focus instead on the large 
group market that has relatively few regulatory barriers at this 
time.

Creating a More Competitive Market for Small Group Coverage

    There is a lot that has to be done to restore competition in 
health insurance. Anti-trust enforcement is one aspect, and my 
organization was concerned enough about the recent United/Sierra 
merger in Nevada to ask the Department of Justice to reject the 
merger. In our letter to the Attorney General (March 26, 2007) we 
wrote:

    We have no opinion about the companies themselves. Whether they 
are good or bad or something in between is irrelevant to us. The 
question to us is solely whether this merger increases or decreases 
competition and consumer choice. This is the same standard we would 
apply to any other merger proposal, between hospitals, between 
pharmaceutical manufacturers, or any other aspect of the health care 
system.
    Consumers need more choices, not fewer. There is already far too 
much concentration in the hands of a few giant players in health 
care. Greater concentration means less competition and that is bad 
for consumers.

    Indeed, concentration is rife throughout the health care system 
with mergers of not only insurers, but hospitals and pharmaceutical 
companies as well.
    The health plans will argue they need to become more 
concentrated to deal with the rising concentration of these other 
actors. But hospitals argue they need to merge to deal with the 
rising concentration of the carriers. It is a spiral that is quickly 
leading to near-monopolization throughout health care, to the 
detriment of individual consumers.
    Anti-trust action can forestall the most egregious of these 
mergers, but anti-trust does not create new competitors or encourage 
innovation if the artificial barriers to entry are high and the 
regulatory environment unfavorable, Indeed, anti-trust cannot 
prevent a company from going out of business in an unprofitable 
climate.
    We also do not expect many states to relax their regulatory 
burdens. Some have, but it is

[[Page 49863]]

unusual for legislatures to admit errors and repeal laws. Plus, most 
of these regulations have constituencies that will tight to retain 
them. These constituents often include the remaining health plans 
that enjoy their near-monopoly position and do not want to encourage 
new competitors.
    That leaves only two courses of action for Congress.
    1. Allow the interstate purchase of health insurance. States 
would continue to regulate their domestic carriers, but buyers would 
be able to purchase coverage from any licensed carrier in the United 
States. Congressman John Shadegg sponsored legislation (H.R. 2355) 
in the last Congress to do just this. Small business owners would be 
able to purchase coverage according to, not only the reputation and 
integrity of the insurance company, but also the set of regulations 
that apply to it.
    2. Create an alternative federal charter that carriers could 
choose to operate within. This would be like the current banking 
system where banks can choose to be state chartered or federally 
chartered. A state chartered insurance company would be confined to 
operating within that state, but a federally chartered company could 
operate anywhere within the United States.
    In either case, Congress would restore the intent of the 
interstate Commerce Clause of the Constitution, which vested the 
regulation of interstate commerce solely in Congress. Congress ceded 
its authonty to the states in 1946 when it enacted the McCarran-
Ferguson Act, but there is no reason Congress cannot reclaim some or 
all of that authority, as it did when it enacted ERISA in 1974.

Conclusion

    The small group market for health insurance has become 
dysfunctional over the past twenty years. Excessive regulations, 
though well-intentioned, have resulted in oligopoly conditions that 
have led to higher prices, poorer services, and very few choices.
    Consumer choice is meaningful only when there is a wide variety 
of products, services, and vendors from which to choose. We 
desperately need vigorous competition throughout the health care 
system to restore market discipline and encourage innovation.
    Congressional remedies are limited, but are needed because the 
states have failed to get the job done.

Statement of Consumer Federation of America, Consumers Union, and US 
PIRG

To the Committee on Small Business, United States House of 
Representatives, Regarding Health Insurer Consolidation
October 25, 2007.
    Consumer Federation of America, Consumers Union, and US PIRG 
(``consumer groups'') appreciate the opportunity to present our 
views to the Committee on Small Business on health insurer 
consolidation. We commend the Committee for holding this hearing and 
for its efforts in identifying ongoing conduct that may harm the 
competitive marketplace. This hearing puts a spotlight on issues 
critical to consumers and small businesses throughout the United 
States. An unabated flood of health insurance mergers has led to 
highly concentrated markets, higher premiums, and lower 
reimbursement. Skyrocketing premiums have put insurance out of reach 
for millions of consumers and the number of uninsured Americans has 
increased to critical levels: over 89 million or one out of three 
Americans under age 65.\1\ As consumers have suffered from egregious 
deceptive and anticompetitive conduct by insurance companies, those 
companies have recorded record profits. The problems presented could 
not be more stark or have a more severe impact on consumers.
    In the past decade there have been over 400 health insurer 
mergers and in only two cases has the Department of Justice brought 
any enforcement action. The Justice Department has not brought any 
cases challenging anticompetitive conduct by health insurers, even 
though numerous private plaintiffs and State Attorneys Generals have 
challenged this type of conduct. In effect, the insurance companies 
have gained a newly found ``antitrust immunity.''
    The consequences of lax enforcement for consumers are clear. The 
American Medical Association reports that 95% of insurance markets 
in the United States are now highly concentrated and the number of 
insurers has fallen by just under 20% since 2000. These mergers have 
not led to benefits for consumers: instead premiums have 
skyrocketed, increasing over 87 percent over the past six years. 
Patient care has been compromised by the over-aggressive efforts of 
supposed managed care, and the number of uninsured Americans has 
reached record levels.
    A vital component to assuring the competitive marketplace is 
protecting the ability of consumers to choose between alternatives. 
Antitrust enforcement against anticompetitive mergers and 
exclusionary conduct is essential to a competitive marketplace. This 
unprecedented level of concentration and the lack of antitrust 
enforcement pose serious policy and health care concerns. As Vermont 
Senator Patrick Leahy observed in Hearings before the Senate 
Judiciary Committee last year on health insurance consolidation:

    \1\ See Wrong Direction: One out of Three Americans are 
Uninsured (Families USA 2007).
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     a concentrated market does reduce competition and puts control 
in the hands of only a few powerful players. Consumers--in this case 
patients--are ultimately the ones who suffer from this 
concentration. As consumers of health care services, we suffer in 
the form of higher prices and fewer choices.\2\
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    \2\ Statement of Senator Patrick Leahy, Hearing on ``Examining 
Competition in Group Health Care'' U.S. Senate Committee on the 
Judiciary (Sept. 6, 2006).
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    Congress is currently grappling with the severe problems of the 
uninsured. The number who have been uninsured for some period in any 
two year period has increased by over 17 million since 2001 and now 
amounts to over 89 million Americans. The reason is simple: the cost 
of health insurance has outstripped the pocketbooks of both 
consumers and small businesses.\3\ Premiums for both job-based and 
individual health insurance have risen rapidly over the past seven 
years and have increased by double-digit amounts annually since 
2001. Moreover, these rising premiums have far outstripped increases 
in worker earnings. Between 2000 and 2006, premiums for job-based 
health insurance increased by 73.8 percent, while median worker 
earnings rose by only 11.6 percent.
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    \3\ Families USA study at fn 1.
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    There is a direct relationship between the insurance 
consolidation and the anticompetitive conduct engaged in by health 
insurers, and the increasing problem of the uninsured in the United 
States. Increased concentration and a lack of enforcement has led to 
skyrocketing premiums, higher deductibles and higher co-pays. The 
most severe problems occur simply when employers or employees can no 
longer afford insurance. Increasingly employers have been forced to 
scale down insurance or drop insurance altogether. Thus, the number 
of uninsured individuals has hit a record level. The lack of 
enforcement has created an environment where the insurance companies 
act as if they are immune from antitrust scrutiny. This must be 
reversed.
    As a first step, some of us have recommended that the Antitrust 
Division of the Department of Justice carefully scrutinize United 
Healthcare's acquisition of Sierra Health, which, if approved, will 
lead to a virtual monopoly in various health insurance markets in 
Las Vegas. We have attached a statement of the Consumer Federation 
of America before the Nevada Commissioner of Insurance on the United 
Healthcare/Sierra Health merger, which articulates the types of 
problems posed by increasing consolidation in the health insurance 
industry.
    Again, we welcome the attention of the Committee to this 
important issue.

Testimony of David Balto, on Behalf of the American Antitrust Institute 
and Consumer Federation of America

Before the Nevada Commissioner of Insurance on the United Health 
Group Proposed Acquisition of Sierra Health Services \1\

    \1\ I have practiced antitrust law for over 20 years, primarily 
in the federal antitrust enforcement agencies: the Antitrust 
Division of the Department of Justice and the Federal Trade 
Commission. At the FTC, I was attorney advisor to Chairman Robert 
Pitofsky and directed the Policy shop of the Bureau of Competition. 
Maria Patente, Washington College of Law (Class of 2008), provided 
extensive assistance in the preparation and research of the 
testimony.
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(July 27, 2007)

I. Introduction

    The American Antitrust Institute (``AAI'') and Consumer 
Federation of America, (``consumer groups'') appreciate this 
opportunity to testify before the Commissioner of Insurance on 
United Health Group's (``United'') proposed acquisition of Sierra 
Health Services, Inc. (``Sierra'').\2\ As

[[Page 49864]]

detailed in our testimony based on our preliminary review we 
strongly believe that this acquisition will harm all Nevada health 
insurance consumers, particularly those in Clark County, through 
higher prices, less service, and lower quality of care. The level of 
concentration posed by this merger is simply unprecedented: it is 
far greater than in any merger approved by the Antitrust Division of 
the U.S. Department of Justice (``DOJ'') and would give United clear 
monopoly power in Clark County.
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    \2\ The American Antitrust Institute is an independent 
Washington-based non-profit education, research, and advocacy 
organization. Its mission is to increase the role of competition, 
assure that competition works in the interests of consumers, and 
challenge abuses of concentrated economic power in the American and 
world economy. For more information, please see 
www.antitrustinstitute.org. This testimony has been approved by the 
AAI Board of Directors. A list of contributors of $1,000 or more is 
available on request. The Consumer Federation of America (``CFA'') 
is the nation's largest consumer-advocacy group, composed of over 
280 state and local affiliates representing consumer, senior 
citizen, low income, labor, farm, public power and cooperative 
organizations, with more than 50 million individual members. CFA 
represents consumer interests before federal and state regulatory 
and legislative agencies and participates in court proceedings. CFA 
has been particularly active on antitrust issues affecting health 
care.
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    In evaluating this merger under NRS 692C.210(1) the Commissioner 
of Insurance must consider several factors including: (1) whether 
``the effect of the acquisition would be substantially to lessen 
competition in insurance in Nevada or tend to create a monopoly'' 
and (2) whether if approved the ``[a]cquisition would likely be 
harmful or prejudicial to the members of the public who purchase 
insurance.'' As we explain below, both of these factors counsel for 
denial of the application. The merger creates a dominant insurer, 
particularly in Clark County, with the ability to raise premiums, 
reduce service and quality and reduce compensation to providers. It 
will clearly harm purchasers of insurance who will pay more for 
service that provides lower quality care.
    This unprecedented level of concentration raises important 
policy and health care concerns relevant to the factors evaluated in 
these Hearings. As Vermont Senator Patrick Leahy observed in 
Hearings before the Senate Judiciary Committee last year on health 
insurance consolidation:

a concentrated market does reduce competition and puts control in 
the hands of only a few powerful players. Consumers--in this case 
patients--are ultimately the ones who suffer from this 
concentration. As consumers of health care services, we suffer in 
the form of higher prices and fewer choices.\3\

    \3\ Statement of Senator Patrick Leahy, Hearing on ``Examining 
Competition in Group Health Care,'' U.S. Senate Committee on the 
Judiciary (Sept. 6, 2006).
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    Creating a dominant insurance provider should be a profound 
concern in Nevada, a state plagued with shortages of nurses, doctors 
and other health care professionals.
    This testimony, which is based solely on public information, 
provides our preliminary views that this merger would 
``substantially lessen competition in insurance in Nevada or tend to 
create monopoly'' and ``would likely be harmful or prejudicial to 
the members of the public who purchase insurance.'' This paper also 
addresses the United-Sierra merger in the context of the numerous 
competitive imperfections and market failures unique to the HMO and 
health insurance industry and with respect to the specific 
challenges facing Nevada's health care due to a serious shortage of 
doctors and nurses.

II. Summary

    The consumer groups urge the Commissioner to focus on the 
following issues:
     Will the United-Sierra merger reduce competition for 
the provision of health insurance to employers and individuals 
seeking health coverage in Nevada?Yes. Sierra is the largest HMO 
provider in Nevada and United is the only significant rival. The 
United-Sierra merger in Nevada would give United an 80% market share 
of all HMOs in Nevada and a 94% market share of the HMO market in 
Clark County. Although its market share is smaller than Sierra's, 
United has the potential for significant growth in Nevada since its 
acquisition of PacifiCare in 2005. Moreover, the next largest HMO 
rival in Clark County has only a 2% market share. The merger would 
adversely affect a wide range of buyers including small employers, 
governmental and union purchasers.
     Will the United-Sierra merger reduce competition for 
the provision of services in the Medicare Advantage program? Yes. 
Medicare is increasingly turning to a managed care model. 
Increasingly Medicare beneficiaries are signing up for the Medicare 
Advantage program which provides health care services to 
beneficiaries in a managed care model. The only current bidders for 
Medicare advantage in Nevada are United and Sierra. United is the 
largest Medicare Advantage program in the U.S. The merger would 
create a monopoly in the provision of services for Medicare 
Advantage program resulting in a lower level of care and higher 
prices.\4\
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    \4\ A large number of the consumer complaints filed with the 
Commissioner about this merger raise concerns over the loss of 
competition in the Medicare Advantage market. Many of these 
complaints are from elderly beneficiaries who are particularly 
vulnerable to anticompetitive conduct. Over 30% of Nevada Medicare 
beneficiaries subscribe to Medicare Advantage, one of the highest 
enrollments of any state.
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     Could the United-Sierra merger increase the threat of 
monopsony power and reduce access to medical care and the quality of 
medical care in Nevada? Yes. There is currently a significant and 
chronic shortage of health care providers including physicians and 
nurses in Nevada, an understaffed region where health professionals 
are forced to work overtime, double-shifts, weekends, and holidays. 
This merger will exacerbate those problems for health care providers 
dependent upon the merged firm. A combined United-Sierra can reduce 
compensation resulting in a diminution of service and quality of 
care. In the past the DOJ has brought enforcement actions because of 
concerns over monopsony power where the market share exceeded 30%, a 
level clearly exceeded by this acquisition. This merger may lead to 
a significant reduction in reimbursement for health care providers, 
leading to lower service and quality of care.
     Will other insurance companies readily enter the market 
(or expand) and fully restore the competition lost from the merger? 
No. In some cases it may be unnecessary to challenge a merger if 
other firms can readily enter a market to a sufficient degree to 
avert the anticompetitive effects of the merger. That is clearly not 
the case for this market. As the DOJ has recognized in other cases, 
barriers to entry in the HMO market are extremely high due to the 
extensive physician networks, technology networks, and specialized 
medical infrastructure that are essential to the industry. Moreover, 
Nevada already faces a serious shortage of both doctors and nurses, 
and attracting a sufficient number of personnel would pose a high 
barrier for a new entity interested in providing HMO plans in 
Nevada. There has been little historical entry into the Nevada HMO 
market, in spite of the growth of population. Moreover, with a 
dominant United-Sierra, it is highly unlikely a new entrant would 
undertake the risk of new entry.
     Do the efficiencies from the United-Sierra merger 
outweigh the anticompetitive harms? No. The parties have not 
proposed significant efficiencies from this consolidation. If there 
were any efficiencies they probably could be achieved through 
internal growth, considering the rapid population growth in Nevada. 
Moreover, efficiencies should only be included in the competition 
calculus if they will result in lower prices or better service to 
consumers. As a general matter, efficiencies from health insurance 
mergers have not been passed on to consumers. Health insurance 
mergers have generally led to increased subscriber premiums without 
expansion of medical benefits. There is little evidence if any that 
any efficiencies achieved in the United-PacifiCare merger have 
resulted in lower premiums or better service for United or former 
PacifiCare subscribers. Since the combined United-Sierra would have 
a dominant market share post-merger it is highly unlikely any 
savings would be passed on to consumers.
     Would a divestiture or other structural relief be 
sufficient to alleviate the competitive problems raised by the 
merger? No. The parties have not suggested that they would be 
willing to divest assets to solve the competitive concerns raised by 
the merger. Even if they did the Commissioner should be extremely 
skeptical of any proposed relief. In the past the DOJ has attempted 
to resolve competitive concerns over some mergers by requiring the 
divestiture of a certain number of contractual arrangements in order 
to spur new entry. These divestitures have been insufficient to cure 
the competitive problems posed by those mergers. A divestiture is 
even less likely to resolve the competitive concerns in this merger 
where the merged firm will clearly be the dominant insurer in the 
market.
     Would consumers be better off if the Commissioner 
rejected the merger? Yes. The ultimate antitrust question in 
evaluating

[[Page 49865]]

any merger is what would happen ``but for'' this merger? What would 
happen to the merging parties, consumers, and providers? The answer 
in this case seems rather transparent. United and Sierra are both 
successful, financially sound, capable companies that would continue 
to grow and thrive. Through its acquisition of PacifiCare, United 
established an important beachhead in Nevada. But for this merger, 
United would continue to expand in Nevada and challenge Sierra's 
strong position in the market. That competition between United and 
Sierra would lead to lower premiums, greater innovation and better 
service. There is simply no reason why United can not achieve most 
of the benefits of this acquisition through internal growth.
    The remainder of the testimony is set forward as follows. First, 
we make some observations about special considerations for health 
insurer mergers and suggest why regulators and enforcers can not 
rely on the theoretical assumptions of a competitive market. Then we 
focus on past enforcement actions and the principles of antitrust 
enforcement. We then explain how the merger will reduce competition 
in both the provision of certain health insurance products (impact 
on buyers) and health care providers (impact on sellers). Finally, 
we explain why other factors such as ease of entry or efficiencies 
will not prevent the anticompetitive effects of the merger.

III. Antitrust Merger Standards and Past Antitrust Enforcement Actions

    The U.S. antitrust laws, like the Nevada insurance statute, 
provide that a merger may be illegal if it may ``tend substantially 
to lessen competition or to tend to create a monopoly.'' \5\ The 
concern under the merger laws is that a merger may tend to reduce 
competition and lead to higher prices, lower service, less quality, 
or less innovation. Concerns over a reduction in quality, central to 
the delivery of health care services, is an important element of 
competition.\6\ As the Supreme Court has observed, competition 
protects ``all elements of a bargain--quality, service, safety, and 
durability--and not just the immediate cost.'' \7\
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    \5\ Clayton Act. 15 U.S.C. Sec.  18. There is no case law 
evaluating the competitive legality of mergers under NRS 
692C.210(I), however the language of the statute is identical to the 
Clayton Act. Thus, it is appropriate to apply the standards of 
federal antitrust law. The Nevada antitrust statute is similar to 
the Clayton Act. It prohibits mergers that will ``result in the 
monopolization of trade or commerce * * * or would further any 
attempt to monopolize trade or commerce'' or ``substantially lessen 
competition or be in restraint of trade'' NRS 598A.060(l(f).
    \6\ Section 7 prohibits anticompetitive reductions in quality 
because it equivalent to an increase in price--consumers pay the 
same (or greater) price for less. Community Publishers. Inc. v. 
Donrey Corp., 892 F. Supp. 1146, 1153 n.8 (W.D. Ark. 1995), aff'd 
sub nom. Community Publishers, Inc. v. DR Partners, 139 F.3d 1180 
(8th Cir. 1998); Merger Guidelines, Sec.  0.1 (``Sellers with market 
power also may lessen competition on dimensions other than price, 
such as product quality, service, or innovation.''); id. Sec.  1.11.
    \7\ Nat'l Soc'y of Prof Eng'rs v. United States, 435 U.S. 
679,695 (1978).
---------------------------------------------------------------------------

    In order to determine the likely competitive effects of a merger 
the case law and the Merger Guidelines established by the Department 
of Justice and the Federal Trade Commission set forth a multi-step 
process.\8\ The process begins by defining the ``line of commerce'' 
or relevant product market and the ``section of the country'' or 
relevant geographic market. A relevant market can include any group 
of products or services. Once a relevant market is defined, the 
level of concentration and market share is calculated to determine 
the likely competitive effects of the merger. In cases where there 
is an undue level of concentration in the relevant market (generally 
a market share over 30%) there is a prima facie case of illegality 
and a presumption of unlawfulness.\9\ If there is a presumption of 
unlawfulness then the burden shifts to the defendants to rebut the 
prima facie case and demonstrate that other market characteristics 
make the presumption of anticompetitive effects implausible. Two 
types of evidence are prominent in merger cases--if the defendants 
can offer evidence that entry is relatively easy, that may dispel 
the notion that the merger will lead to significant anticompetitive 
effects. Finally, if a merger will lead to substantial efficiencies, 
these may counteract those anticompetilive effects.
---------------------------------------------------------------------------

    \8\ U.S. Dept of Justice and Federal Trade Comm'n, Horizontal 
Merger Guidelines (1997) (hereinafter ``Merger Guidelines''), The 
Nevada statute provides that in determining whether to approve a 
merger the Commissioner of Insurance ``shall consider the standards 
set forth in the Horizontal Merger Guidelines * * * NRS 692C.256(2).
    \9\ Concentration in merger cases is expressed in terms of 
market shares and a measure known as the Herfindahl Hirschman Index 
(``HHI''). The HHI is calculated by adding together the squares of 
the market share of individual competitors in the market. In a 
market with a single seller, the HHI is 10,000. The FTC/DOJ Merger 
Guidelines provide that an HHI below 1000 corresponds to an 
``unconcentrated'' market; an HHI between 1000 and 1800 corresponds 
to a ``moderately concentrated'' market, and a HHI above 1800 
corresponds to a ``highly concentrated'' market. The HHI is a 
screening tool used to assess whether a proposed merger will lead to 
anticompetitive consequences. Under the Guidelines different 
presumptions apply, depending on the extent of post-merger market 
concentration and the increase in HHI that will result from the 
merger. The greatest competitive concerns are raised where the post-
merger HHI exceeds 1800. In such as case, it s ``presumed that 
mergers producing an increase in the HHI of more than 100 points are 
likely to create or enhance market power or facilitate its 
exercise,'' Merger Guidelines, Sec.  1.51.
---------------------------------------------------------------------------

    The two most instructive antitrust cases involving health 
insurance mergers are the DOJ's challenges to Aetna's 1999 
acquisition of Prudential and United's 2006 acquisition of 
PacifiCare. Both of these mergers were resolved with divestitures to 
facilitate the entry of a new competitor to remedy the competitive 
concerns. Each case focused both on the harm to purchasers of HMO 
and other insurance services from the exercise of monopoly power and 
the harm to healthcare providers from the exercise of monopsony 
power.\10\ In both the United-PacifiCare and the Aetna-Prudential 
mergers, the DOJ identified highly concentrated markets that were 
substantially likely to suffer harm to competition as a result of 
these mergers.
---------------------------------------------------------------------------

    \10\ Health insurers play dual roles as sellers of insurance 
services and buyers of health care services. In its first role, the 
health insurer's ``output'' consists of health benefit packages, and 
the output prices are paid for by customers in the form of 
subscriber premiums. In the role as the seller of health benefits, a 
dominant health insurer in a concentrated market could potentially 
act as a ``monopolist'' charging an above market price for health 
benefits. In its second role, the health insurer acts as a buyer, 
and the inputs consist of physician and other medical services. The 
insurer's input prices are the compensation it pays in the form of 
physician fees and fees for medical services. In this role, the 
health insurer may act as a ``monopsonist,'' reducing the level of 
services or quality of care by reducing compensation to providers. 
Health insurers are both buyers of medical services and sellers of 
insurance (to consumers), so insurance mergers can raise both 
monopsony and monopoly concerns.
---------------------------------------------------------------------------

    In 1999, the DOJ and the State of Texas settled charges that the 
merger between Aetna and Prudential in the State of Texas would harm 
competition. The DOJ focused on relevant markets of HMO products and 
physician services. Aetna and Prudential were head to head 
competitors in the HMO markets in Houston and Dallas. The proposed 
merger would have increased Aetna's market share from 44% to 63% in 
Houston and 26% to 42% in Dallas.\11\
---------------------------------------------------------------------------

    \11\ These market shares are substantially smaller than the 
market shares which would result from the United-Sierra merger in 
the HMO markets of Nevada and Clark County (80% in Nevada and 94% in 
Clark County).
---------------------------------------------------------------------------

    Moreover, the merger raised monopsony concerns by giving the 
merged firm the potential to unduly suppress physician reimbursement 
rates in Houston and Dallas, resulting in a reduction of quantity or 
degradation of quality of medical services in the areas.\12\ The 
operative question from DOJ's perspective was could health care 
providers defeat an effort by the merged firm to reduce provider 
compensation by a significant amount, e.g., 5%. The question was 
answered in the negative for several reasons: physicians have 
limited ability to encourage patients to switch health plans, and 
physicians' time (unlike other commodities) cannot be stored, which 
means that physicians incur irrecoverable losses when patients are 
lost but not replaced. To exacerbate matters, contracts with 
physicians were negotiated on an individual basis, and were 
therefore susceptible to price discrimination by powerful buyers. 
Thus, DOJ concluded that Aetna had sufficient power to impose 
adverse contract terms on physicians, especially decreased physician 
reimbursement rates, which would ``likely lead to a reduction in 
quantity or degradation in the quality of physicians' services.'' 
\13\
---------------------------------------------------------------------------

    \12\ United States v. Aetna, Revised Competitive Impact 
Statement, Civil Action 3-99CV1398-H.
    \13\ Id.
---------------------------------------------------------------------------

    To resolve these competitive concerns the DOJ ordered Aetna to 
divest its entire interest in NYLCare-Gulf Coast and NYLCare-
Southwest, its Houston and Dallas commercial HMO business. This 
consisted of 260,000 covered lives in Houston and 167,000 covered 
lives in Dallas.

[[Page 49866]]

    In 2006, the DOJ investigated the merger between United and 
PacifiCare and focused on potential competitive concerns in relevant 
markets for commercial health insurance for small group employers in 
Tucson, Arizona and physician services in both Tucson and Boulder, 
Colorado.\14\ Small group employers are employers with 2-50 
employees. The merger would have combined the second and third 
largest providers of commercial health insurance in Tucson and 
increased United's market share from 16% to 33%.
---------------------------------------------------------------------------

    \14\ United States v. UnitedHealth Group Inc., Case No. 
1:05CV02436 (D.D.C. Dec. 20, 2005), available at http://www.usdoj.gov/atr/cases/f213800/213815.htm.
---------------------------------------------------------------------------

    The merger also raised concerns over the potential harm to 
competition in the purchase of physician services in both Tucson and 
Boulder. The DOJ explained that by combining United and PacifiCare 
``the acquisition will give United the ability to unduly depress 
physician reimbursement rates in Tucson and Boulder, likely leading 
to a reduction in quantity or degradation in the quality of 
physician services.'' \15\ In other words the DOJ found that a 
health plan's power over physicians to depress reimbursement rates 
can be harmful to patients--the ultimate consumers of health care. 
The market shares involved were relatively modest: in excess of 35% 
in Tucson and in excess of 30% in Boulder ``for a substantial number 
of physicians in those areas.''
---------------------------------------------------------------------------

    \15\ United States v. UnitedHealth Group, Competition Impact 
Statement at 8, available at http://www.usdoj.gov/atr/cases/f215000/
215034.htm.
---------------------------------------------------------------------------

    In response to the potential harm to competition, the DOJ 
required United to divest contracts covering at least 54,517 members 
residing in Tucson, Arizona to yield a post-merger market share 
equal to its pre-merger market share. Furthermore, the DOJ required 
United to divest 6,066 members covered under its contract with the 
University of Colorado. This divesture constituted nearly half of 
PacifiCare's total commercial membership in Boulder.
    The antitrust laws protect not only consumers but any group of 
buyers, potentially including a governmental buyer. Buyers of health 
insurance services have varying needs and ability to secure 
competitive rates. An example of this is a case filed by the City of 
New York challenging the merger between Group Health Incorporated 
(``GHI'') and the Health Insurance Plan of Greater New York 
(``HIP'') in the fall of 2006.\16\ There are numerous health 
insurance competitors, including HMOs and PPOs in the New York City 
market, but for the low cost product required by the City and 
affiliated entities the only rivals were GHI and HIP. The case 
alleged that the merger of GHI and HIP would create a monopoly in 
the New York metropolitan area market for low cost health insurance 
purchased by the City of New York and its employee unions together 
with the city's employees and retirees as well as 35 other employers 
with ties to the city and their employees and retirees such as the 
Housing Authority, the Metropolitan Museum of Art and universities 
(all of which participate in the New York City health benefits 
program). The case alleges that city employees and retirees and 
those individuals who participate in the health benefits program 
would be faced with increased costs for insurance and reduced 
service if the merger were consummated. Litigation in the case is 
ongoing, but it suggests the broad range of markets that can be 
adversely affected by a merger.
---------------------------------------------------------------------------

    \16\ City of New York v. Group Health Inc., et al., (S.D.N.Y. 
2006).
---------------------------------------------------------------------------

IV. Special Information Concerns for Health Insurance Mergers

    In determining the competitive effect of a merger the crucial 
issue is the impact on the consumer, the ultimate beneficiary of the 
insurance system. The questions to be examined include will 
consumers have to pay more for insurance in higher premiums or 
deductibles, will they suffer from poorer service such as longer 
waiting times or deterred services, and will they suffer from lower 
quality of care? Since consumers can not vote on a merger,\17\ how 
does the Commissioner, antitrust enforcer, or the courts evaluate 
the impact of a merger on consumers? Insurance companies, employers, 
unions and buyers of insurance (``plan sponsors''), and health care 
providers will all have views of the impact of the merger on 
consumers. The views of the insurance companies can not be 
determinative, since they have an obligation to their stockholders 
to maximize profits.
---------------------------------------------------------------------------

    \17\ Fortunately, the Commissioner has decided to hold an 
extensive series of hearings on the merger and provided a 
significant opportunity for public comment. The majority of the 
public comments filed by consumers to date oppose the merger.
---------------------------------------------------------------------------

    The views of plan sponsors are relevant, but their failure to 
object to a merger may not be of significant evidentiary value. Plan 
sponsors represent the interests of their subscribers and thus may 
be concerned with the exercise of monopoly power leading to higher 
premiums. However, as antitrust authorities have recognized in many 
merger investigations, buyers of services may be very reluctant to 
complain about a merger for a variety of factors. They may simply 
pass on higher post-merger prices to the ultimate customer. In the 
health insurance area, although plan sponsors may be concerned about 
the cost of health insurance they may be less sensitive to the 
reduction in quality or service that may result from a merger. 
Finally, a customer may fear retribution postmerger.\18\ This may 
particularly be the case in Nevada where the acquired firm will 
remain as the largest insurer even if the merger is denied. Thus, 
the fact that plan sponsors do not complain, or actually support a 
merger, should not be determinative of a merger's likely competitive 
effect.\19\
---------------------------------------------------------------------------

    \18\ There are a wide variety of reasons why customer support of 
a merger may not be particularly probative. See Ken Heyer, 
Predicting the Competitive Effects of Merger by Listening to Buyers, 
74 Antitrust L.L. 87 (2007); Joseph Farrell, Listening to Interested 
Parties in Antitrust Investigations: Competitors, Customers, 
Complementors, and Relativity, Antitrust, Spring 2004 at 64 
(explaining why customers may support an otherwise anticompetitive 
merger).
    \19\ In several cases courts have enjoined mergers even where 
customers testified in support of the merger. See FTC v. H.J. Heinz 
Co., 246 F.3d 708 (D.C. Cir. 2001) (customers strongly supported 
merger); United States v. United Tote, 768 F. Supp. 1064, 1084-85 
(D.Del. 1991) (enjoining merger despite testimony of ``numerous 
buyers'' that the merger would be procompetitive in creating a 
stronger rival to a dominant firm); United States v. Ivaco, 704 F. 
Supp. 1409, 1428 (W.D. Mich. 1989) (all testifying customers 
supported merger); FTC v. Imo Indus., 1992-2 Trade Cas. (CCH) Sec.  
69,943, at 68,559 (D.D.C. 1989).
---------------------------------------------------------------------------

    On the other hand healthcare providers may be a far more 
superior representative of the consumer interest and their concerns 
deserve careful attention. Physicians and other healthcare providers 
directly experience the diminution of service and quality when so-
called cost containment efforts go too far. Physicians serve as 
advocates for the patient, especially in the often adversarial 
setting of managed care. Since health care providers experience 
first hand the impact of reductions in service they are more 
sensitive to the potential exercise of market power by health 
insurance. It is important to recognize in evaluating the concerns 
raised by providers that they are not just complaining about 
decreased compensation. Rather the issues raised by health care 
providers are central to concerns over quality of care: reduced 
services, greater waiting times, unacceptably short hospital stays, 
postponed or unperformed medical treatments, suboptimal alternative 
medical treatments, laboratory tests not performed, and other output 
restrictions on health services.

IV. Competitive Analysis of the United-Sierra Merger

Health Insurer Concentration: Harm To Buyers

    The concentration of the health insurance industry has increased 
nationally due to a tremendous number of mergers and acquisitions 
and numerous smaller insurers exiting the industry.\20\ Over the 
past 10 years there have been over 400 health insurer mergers. 
United has acquired several firms including California-based 
PacifiCare Health Systems, Inc., Oxford Health Plans, and John Deere 
Health Plan, increasing its membership to 32 million. Similarly, 
WellPoint, Inc. now owns Blue Cross plans in 14 states. Together, 
WellPoint and United control over 33 percent of the U.S. commercial 
health insurance market.
---------------------------------------------------------------------------

    \20\ Victoria Colliver, ``Insurer's Mergers Limiting Options: 
Health Care Choices Are Narrowing Says Study by AMA,'' San Francisco 
Chronicle, April 18, 2006 (last viewed 7/8/07) http://sfgate.com/cgi-bin.article.cgi?file=/chronicle/archive/2006/04/18/BUGUQIAH161.DTL&type=business
---------------------------------------------------------------------------

    This increase in concentration has not benefited consumers. 
Studies indicate that health insurance premiums have increased at a 
rate more than twice the rate of inflation or the rate of increases 
in worker's earnings. Average annual premium increases have ranged 
from 8.2% to 13.9% since 2000,\21\

[[Page 49867]]

Moreover, since 2000, the number of employers offering health 
coverage benefits has decreased by nearly 10%. Studies indicated 
that medical benefits have not expanded despite premium increases. 
In contrast, health insurer profits have increased by 246% in the 
aggregate over the past decade.\22\
---------------------------------------------------------------------------

    \21\ Kaiser Family Foundation and Health Research and 
Educational Trust, Employer Health Benefits: 2006 Summary of 
Findings, 2006 (last viewed 7/8/2007) http://www.kff.org/insurance/7527/upload/7528.pdf
    \22\ Laura Benko, ``Monopoly Concerns: AMA asks Antitrust 
Regulators to Restore Balance,'' Modern Physician, June 1, 2006.
---------------------------------------------------------------------------

    Consumers in highly concentrated health insurance markets are 
most vulnerable to insurance premium increases without comparable 
benefit increases, mirroring data of escalating health costs on the 
national level. One study found that more than 95% of Metropolitan 
Statistical Areas (MSAs) had at least one insurer in the combined 
HMO/PPO market with a market share greater than 30% and more than 
56% of MSAs had at east one insurer with market share greater than 
50%.\23\ In concentrated MSAs such as these, there is a much greater 
likelihood that one firm, or a small group of firms, could 
successfully exercise market power and profitably increase prices or 
decrease compensation leading to less quality or service. As one 
prominent health care professor has observed in testimony before the 
U.S. Senate Judiciary Committee:

    \23\ Edward Langston, ``Statement of the American Medical 
Association to the Senate Committee on the Judiciary United States 
Senate: Examining Competition in Group Health Care,'' Sept. 6, 2006 
(last viewed 7/8/07) http://www.ama-assn.org/amal/pub/upload/mm/399/antitrust090606.pdf.
---------------------------------------------------------------------------

    What is so important about the sheer number of competitors? 
Econometric evidence shows that in the managed care field, an 
increase in the number of competitors is associated with lower 
health plan costs and premiums; conversely, a decrease in the number 
of competitors is associated with increases in plan costs and 
premiums. The evidence also shows that the sheer number of 
competitors exerts a stronger influence on these outcomes than does 
the penetration level achieved by plans in the market.\24\
---------------------------------------------------------------------------

    \24\ Testimony of Professor Lawton R. Burns re the Highmark/
Independence Blue Cross Merger, before the Senate Judiciary 
Committee (April 7, 2007).

    As we discuss below, the health insurance markets in the state 
of Nevada, especially Clark County are highly concentrated, and the 
merger of Sierra with United is likely to substantially harm 
competition and consumers.

Harm to Competition in Nevada From the United-Sierra Merger

    Correctly defining an economically meaningful market is 
essential for ensuring that consumers of that market do not become 
subject to market power due to increases in market concentration and 
decreases in competition as a result of a merger. The key question 
in this merger as in other mergers is the definition of the relevant 
product market. The courts have held that a relevant product market 
``must be drawn narrowly to exclude any other product to which, 
within reasonable variation and price, only a limited number of 
buyers will turn.'' Times-Picayune Pub. Co. v. United States, 345 
U.S. 594, 612 n.31 (1953). Market definition focuses on demand 
substitution facts, and whether or not consumers would or could turn 
to a different product or geographic location in response to a 
``small but significant non-transitory increase in price.'' \25\ 
Typically, the antitrust agencies and the courts have implemented 
this test by seeking to identify the smallest group of products over 
which prices could be profitably increased by a ``small but 
significant'' amount (normally 5 percent) for a substantial period 
of time (normally one year).\26\
---------------------------------------------------------------------------

    \25\ According to the Merger Guidelines,``[a] market is defined 
as a product or group of products and a geographic area in which it 
is produced or sold such that a hypothetical profit-maximizing firm, 
not subject to price regulation, that was the only present and 
future seller of those products in that area would likely impose at 
least a `small but significant nontransitory' increase in price, 
assuming the terms of sale of all other products are held 
constant.'' Merger Guidelines Sec.  1.0.
    \26\ FTC v.  Staples, 970 F. Supp. at 1076 n.8; Merger 
Guidelines Sec.  1.11, at 5-6.
---------------------------------------------------------------------------

    In health insurance mergers the DOJ has reached different, 
although not inconsistent. conclusions as to the relevant product 
market, For example, in the Aetna-Prudential merger DOJ concluded 
that the relevant product markets were the sale of health 
maintenance organization (``HMO'') and HMO-based point of service 
(``HMO-POS'') health plans. The DOJ noted that HMO and HMO-POS 
products differ from PPO or other indemnity products in term of 
benefit design cost and other factors. HMOs provide superior 
preventative care benefits, place limits on treatment options and 
generally require the use of a primary care physician 
``gatekeeper.'' PPO plans are not structured in that fashion and do 
not emphasize preventative care. HMOs were perceived as being better 
devices to control costs and configure benefits. In addition, both 
the insurers and buyers of insurance services perceived PPOs and 
HMOs as being separate products. Thus, the DOJ concluded that the 
elasticity of demand for HMO's and HMO-POS plans are sufficiently 
low that a small but significant price increase for these plans 
would be profitable because consumers would not shift to PPO and 
other indemnity plans to make the increase unprofitable.
    In United/PacifiCare, the DOJ defined a relevant product market 
as the sale of commercial health insurance to small group employers. 
This market consisted of employers with 2-50 employees. These 
employers were particularly susceptible to potential anticompetitive 
conduct because they lacked a sufficient employee population to 
self-insure and they lacked the multiple locations necessary to 
reduce risk through geographic diversity. In addition the manner in 
which commercial health insurance was sold also distinguished the 
small and large group markets. Large employers were more likely than 
smaller employers to be able to successfully engage extensive 
negotiations with United and PacifiCare.
    We believe that both an HMO and small employer market may be 
adversely affected by the United-Sierra merger.\27\ Surveys 
demonstrate that consumer do not perceive HMOs and PPOs as 
substitute products and consumers believe that they differ in terms 
of benefit design, cost, and general approaches to treatment.\28\ 
PPOs tend to provide more flexibility in selection of physicians and 
specialists and tend to be more expensive. In contrast, HMOs focus 
more on preventative medicine but limit treatment options and 
require referrals from a ``gate keeper'' for many procedures. 
Consumers with special health needs and those relying more on strong 
relationships with their physicians would generally not he satisfied 
if forced to subscribe to an HMO with restrictions on personal 
choices. ``A small but significant price increase in the premiums 
for HMOs and HMO-POS plans would not cause a sufficient number of 
customers to shift to other health insurance products to make such a 
price increase unprofitable.'' \29\
---------------------------------------------------------------------------

    \27\ Defining the market in terms of a single product is 
appropriate since the Nevada statute provides that the Commissioner 
can deny a merger application if she ``determines that an 
acquisition may substantially lessen competition in any line of 
insurance in this state or tends to create a monopoly.'' NRS 
692.258(1).
    \28\ See United States v. Aetna, Revised Complaint Impact 
Statement, Civil Action 3-99CV1398-H (N.D. Tex, 1999).
    \29\ Id.
---------------------------------------------------------------------------

    Moreover, small employers are less likely to have significant 
alternatives in response to a price increase by the merged firm. 
Small employers are unable to self-insure and have little power to 
negotiate better rates.
    The relevant geographic market seems to be a fairly 
straightforward matter since health care services are primarily 
local. From the perspective of the buyers of insurance services, 
employers want insurance where the employees work and live. Thus in 
Aetna/Prudential, the DOJ concluded ``the relevant geographic market 
in which HMO and HMO-POS plans compete are thus generally no larger 
than the local areas within which HMO * * * enrollees demand access 
to providers. * * * As a result, commercial and government health 
insurers--the primary purchasers of physician services--seek to have 
their provider network's physicians whose offices are convenient to 
where their enrollees work or live.''
    In this merger the likely geographic markets are Clark County, 
Nevada, and the larger geographic market of the State of Nevada. 
Consumers faced with an increase in prices for HMOs are unlikely to 
travel a long distance away from homes or places of business to in 
order to escape price increases and purchase HMO services at a lower 
price. Generally, consumers are reluctant to travel lengthy 
distances when they are sick. Moreover, virtually all managed care 
companies provide networks in localities where employees live and 
work, and they compete with the other local networks.\30\ Thus, we 
believe the proper relevant markets are the provision of HMO 
services in Clark County and Nevada.\31\
---------------------------------------------------------------------------

    \30\ Id.
    \31\ As to the market for the sale of health insurance products 
to small employers we have no reason to believe the concentration 
measures differ significantly from the HMO market.

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[[Page 49868]]

Concentration and Competitive Effects

    Once the market is defined antitrust authorities and the courts 
calculate market shares and concentration levels (using the 
Herfindahl-Hirschman index (HHI)). This merger will lead to an 
unprecedented level of concentration. In the Clark County HMO market 
United's market share will increase from 14 to 94%. If PPOs are 
included, United's market share increases from 9% to 60%. Regardless 
of how the product market is defined United is clearly a dominant 
firm, far larger than the post merger market shares of the combined 
Aetna/Prudential or United/PacifiCare in those markets where DOJ 
brought enforcement actions. Even in a Nevada HM0 market, the market 
share increases from 12% to 80% and in a Nevada HMO-PPO market 
United's market share increases from 7% to 48%. Simply put, post-
merger United will be a dominant firm no matter how the market is 
defined.
    Measuring concentration using the HHI leads to similar results. 
The Merger Guidelines define a market with an HHI over 1800 as 
``highly concentrated'' and an increase over 100 is ``likely to 
create or enhance market power or facilitate its exercise.'' The 
post-merger HHI for HMOs in the state of Nevada is 4,871 and the 
post-merger increase in HHI is 1,625. The HM0 market in Clark County 
is even more concentrated, with a post-merger HHI of 8,884 and a 
post-merger increase in HHI of 2,235. These exorbitantly high HHIs 
support the presumption that a merger between the two largest HMOs 
in the highly concentrated Nevada HMO market would likely create or 
enhance market power or facilitate its exercise. The market share 
data obtained form the Nevada State Health Division is provided 
below, (Figure 1).
---------------------------------------------------------------------------

    \32\ Data provided from the Nevada State Health Division.
    [GRAPHIC] [TIFF OMITTED] TN22AU08.000
    
    The Nevada and Clark County markets are highly concentrated, no 
matter how defined. The parties may suggest that this is of little 
import because the increase in concentration is not substantial 
because United currently has a relatively modest market share. Such 
an argument is inconsistent with the facts and the law. United is 
the largest health insurer in the United States and the second 
largest rival in the market, with the ability and incentive to 
expand competition. As to the law as the Supreme Court has 
acknowledged, ``if concentration is already great, the importance of 
preventing even slight increases in concentration is correspondingly 
great.'' \33\
---------------------------------------------------------------------------

    \33\ United States v. General Dynamics Corp., 415 U.S. 486, 497 
(1974).
---------------------------------------------------------------------------

    As important, the combined United-Sierra will be substantially 
larger than its next closest rival. In the Nevada HMO market it will 
be over 10 times larger (80% to 7% for the second largest firm) and 
in the Clark County market it will be over 30 times larger (94% to 
3%). The courts have recognized that smaller rivals are far less 
likely to constrain the conduct of a dominant firm post-merger, and 
have enjoined mergers with far smaller disparities in market share. 
United States v. Phillipsburg Nat'l Bank, 399 U.S. 350, 367 (1970) 
(merged firm three times the size of next largest rival): FTC v. 
PPG, 798 F.2d 1500, 1502-03 (D.C. Cir. 1986) (two and one-half times 
as large). Where a merger produces a firm that is significantly 
larger than its closest competitors, it increases the likelihood 
that the firm will be able to raise prices, decrease compensation, 
and reduce quality without fear that the small sellers will be able 
to take away enough business to defeat the price increase. See 
United States v. Rockford Mem. Corp., 898 F.2d 1278. 1283-84 (7th 
Cir.) (Posner, J.), cert. denied, 498 U.S. 920 (1990); H. Hovenkamp, 
Federal Antitrust Policy Sec.  12.4c (1993) (``markets may often 
have small niches or pockets where new firms can carve out a tiny 
position for themselves without having much of an effect on 
competitive conditions in the market as a whole'').

Combined PPO and HMO Markets

    Using a definition of the health insurance product market as the 
combination of HMOs and PPOs, the health insurance market in Nevada 
is highly concentrated, and the United-Sierra merger would 
substantially increase the likelihood of competitive harm.
    The market share for Sierra and United combined in Nevada is 
48%, while in Clark County the combined United-Sierra market share 
is 60%. The post-merger HHI for the Nevada and Clark County markets 
are 3372 and 5244. respectively. The increase in the HHI market 
resulting from the United-Sierra merger is 555 for the state of 
Nevada and 921 for Clark County. Data of market shares from the 
Nevada State Health Division for the HMO and PPO markets is provided 
in Figure 2.
---------------------------------------------------------------------------

    \34\ Data from the Nevada State Health Division.
    \35\ The market share for WellPoint in Clark County is 
overstated because in the absence of data by territory, all 
WellPoint customers were allocated to Clark County.

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[[Page 49869]]

[GRAPHIC] [TIFF OMITTED] TN22AU08.001

Conclusion on the Impact of the United-Sierra Merger on Consumers

    As the U.S. Supreme Court has held where a merger results in a 
significant increase in concentration and produces a firm that 
controls an undue percentage of the market, the combination is so 
inherently likely to lessen competition substantially that it ``must 
be enjoined in the absence of evidence clearly showing that the 
merger is not likely to have such anticompetitive effects.'' United 
States v. Philadelphia Nat'l Bank, 374 U.S. 321, 363 (1963). The 
United-Sierra merger clearly raises extraordinary and unprecedented 
levels of concentration which raise serious concerns about this 
merger. Nevada is in need of greater competition, not less. Further 
consolidation among the limited health plan providers in Nevada 
poses a substantial threat of harming customers, increasing the 
costs of health care, and decreasing access to quality health care 
and the quality of health. This merger clearly ``would likely be 
harmful or prejudicial to the members of the public who purchase 
insurance'' and thus should be denied.

V. Health Insurance Concentration: Harm to Health Care 
Professionals and Quality of Care

    The nature of the health care industry facilitates the potential 
for a dominant health coverage or insurance firm to exercise market 
power (or monopsony) over individuals selling health care services 
within a geographic region. Because medical services can be neither 
stored nor exported. health care professionals generally must sell 
their services to buyers (insurance firms and their customers) in a 
relatively small geographic market. Refusing the terms of the 
dominant buyer, physicians may suffer an irrevocable loss of 
revenue. Consequently, a physician's ability to terminate a 
relationship with an insurance coverage plan depends on her ability 
to make up lost business by switching to an alternative insurance 
coverage plan. Where those alternatives are lacking a physician may 
be forced to reduce the level of service in response to a decrease 
in compensation.
    Not all insurance providers are equal from the perspective of a 
health care provider. A smaller insurance company with fewer covered 
lives may not be an attractive alternative. Health care providers 
who depend on an insurance program for all or most of their income 
are at a substantial disadvantage when there are not competing 
programs available; when they switch programs, they tend to lose the 
patients who have that particular coverage. It makes little sense 
for a provider to switch to an insurer who has a substantially 
smaller market share because there won't be enough patients to 
sustain the practice. Thus, it is critical for insurance regulators 
to maintain a competitive market in which health care providers have 
significant competitive alternatives.
    In the Aetna/Prudential and United/PacifiCare mergers, the DOJ 
raised monopsony concerns in markets for purchasing physicians 
services where the market shares were far less substantial than they 
are in Clark County. For example, in United/PacifiCare the DOJ 
alleged that the combined firm would account for an excess of 35% in 
Tucson and over 30% in Boulder.
    In addition, it is important to recognize that it may be 
appropriate to prevent a firm from securing monopsony power even if 
it faces a competitive downstream market. In other words there may 
be antitrust concerns if a health insurer can lower compensation to 
providers even if it can not raise prices to consumers. For example, 
in United/PacifiCare the Division required a divestiture based on 
monopsony concerns in Boulder even though United/PacifiCare would 
not necessarily have had market power in the sale of health 
insurance. The reason is straightforward--the reduction in 
compensation would lead to diminished service and quality of care, 
which harms consumers even though the direct prices paid by 
subscribers do not increase.\36\
---------------------------------------------------------------------------

    \36\ See Marius Schwartz, Buyer Power Concerns and Aetna-
Prudential Merger, Address Before the the Annual Health Care 
Antitrust Forum at Northwestern University School of Law 4-6 
(October 20. 1999) (noting that anticompetitive effects can occur 
even if the conduct does not adversely affect the ultimate consumers 
who purchase the end-product), available at http/www.usdoj.gov/atr/
public/speeches/3924.wpd.
---------------------------------------------------------------------------

    Underlying the monopsony analysis in these cases is the premise 
that physicians who have a large share of reimbursements from the 
merged firm lack alternatives in response to a reduction in 
compensation. As alleged in Aetna, they cannot retain or timely 
replace a sufficient portion of those payments if the physicians 
stop participating in the plans. Moreover, it is difficult to 
convince patients to switch to different plans.\37\ Consequently. 
according to the Division these physicians would not be in a 
position to reject a ``take it or leave it'' contract offer and 
could be forced to accept low reimbursement rates from a merged 
entity, likely leading to a reduction in quantity or degradation in 
quality of physician services.
---------------------------------------------------------------------------

    \37\ As alleged in the United complaint, physicians encouraging 
patients to change plans ``is particularly difficult for patients 
employed by companies that sponsor only one plan because the patient 
would need to persuade the employer to sponsor an additional plan 
with the desired physician in the plans's network'' or the patient 
would have to use the physician on an out-of-network basis at a 
higher cost. Complaint at paragraph 37.
---------------------------------------------------------------------------

    The merging parties may suggest that there is some safe harbor 
for mergers leading to a market share below 35%. As the DOJ 
enforcement action in Boulder demonstrates, that is not the case. 
The unique nature of health care provider services explains why 
monopsony concerns are raised at lower levels of concentration than 
may be appropriate in other industries. If a health care provider's 
output is suppressed by a reduction in compensation, then it is a 
lost sale that cannot be recovered later. Physician services can not 
be stored for later sale. As the DOJ observed in United/PacifiCare: 
``A physician's ability to terminate a relationship with a 
commercial health insurer depends on his or her ability to replace 
the amount of business lost from the termination, and the time it 
would take to do so. Failing to replace lost business expeditiously 
is costly.'' \38\ The DOJ observed that there are limited outlets 
for physician services: ``There are no purchasers to whom physicians 
can sell their services other than individual patients or the 
commercial and governmental health insurers that purchase physician 
services on behalf of their patients.'' \39\ As a former DOJ 
official observed ``these factors explain why the Department 
concluded that shares below 35 percent, in the particular markets at 
issue, sufficed to allege competitive harm.'' \40\
---------------------------------------------------------------------------

    \38\ Complaint at paragraph 36.
    \39\ Complaint at paragraph 33.
    \40\ Mark Botti, Remarks before the ABA Antitrust Section, 
``Observations on and from the Antitrust Division's Buyer-Side 
Cases: How Can ``Lower'' Prices Violate the Antitrust Laws.'' He 
also noted that: ``Physicians have a limited ability to maintain the 
business of patients enrolled in a health plan once the physician 
terminates. Physicians could retain patients by encouraging them to 
switch to another health plan in which the physician participates. 
This is particularly difficult for patients employed by companies 
that sponsor only one plan because the patient would need to 
persuade the employer to sponsor an additional plan with the desired 
physician in the plan's network. Alternatively, the patient may 
remain in the plan, visiting the physician on an out-of-network 
basis. The patient would be faced with the prospect of higher out-
of-pocket costs, either in the form of increased co-payments for use 
of an out-of-network physician, or by absorbing the full cost of the 
physician care.'' Complaint at paragraph 37.

---------------------------------------------------------------------------

[[Page 49870]]

    Again the proponents of health insurance mergers may suggest 
that regulators should take a benign view about the creation of 
monopsony power because health insurers are ``buyers'' acting in the 
interest of reducing prices. As we suggested earlier, this view is 
mistaken. Health insurers are not true fiduciaries for insurance 
subscribers. Plan sponsors may have a limited concern over the 
product based on the cost of the insurance, and not the quality of 
care. Furthermore, health coverage plans operate in the interest of 
a group, not in the best interest of individual patients. 
Consequently, insurance firms can increase profits by reducing the 
level of service and denying medical procedures that physicians 
would normally perform based on professional judgment. In the 
absence of competition among insurers, patients are more likely to 
pay for these procedures out-of pocket or forego them entirely. 
Ultimately, the creation of monopsony power from a merger can 
adversely impact both the quantity and quality of health care.
    Finally, the evidence from mergers throughout the U.S. strongly 
suggests that the creation of buyer power from health insurance 
consolidation has not benefited competition or consumers. Although 
compensation to providers has been reduced, health insurance 
premiums have continued to increase rapidly. Moreover, evidence from 
other mergers suggests that insurers do not pass savings on from 
these mergers on to consumers. Rather, insurance premiums increase 
along with insurance company profits.

Monopsony in the Health Care Markets of Nevada

    United's acquisition of Sierra would give it unique control over 
the physicians serving the HMO and HMO-PPO markets in Clark County 
and the State of Nevada. The merger will combine the two largest 
HMOs with an 84% market share in Nevada and a 90% market share in 
Clark County, dramatically higher than the concentration in any 
merger approved by the DOJ. In light of these high market shares, a 
physician faced with unfair contract terms could not credibly 
threaten to leave the combined United-Sierra health plan, except by 
departing Clark County.
    The parties have suggested the markets for physician 
reimbursement are far less concentrated. At the earlier hearing they 
suggested the merged firm would account for only 17% of physician 
reimbursement in the state and 21% in Clark County. We do not know 
the basis for the claimed reimbursement percentages. One should take 
United's estimates of market shares with a large grain of salt. In 
United/PacifiCare their lawyers suggested the parties' total share 
of physicians' reimbursements likely were substantially below the 
35% threshold, but those estimates were rejected by DOJ. As one of 
their advocates said ``indeed the parties' calculated their total 
shares of physician reimbursements in the Tucson and Boulder MSAs 
were substantially lower than the shares asserted in the 
complaint.'' \41\ The estimates of the proponents in the Aetna/
Prudential merger were also rejected by the DOJ.\42\
---------------------------------------------------------------------------

    \41\ Fiona Schaeffer et al., ``Diagnosing Monopsony and other 
issues in Health Care Mergers: An overview of the United/PacifiCare 
Investigation,'' Antitrust Health Care Chronicle (2006).
    \42\ The estimates of the level of physician reimbursement by 
the proponents of the Aetna/Prudential merger were also rejected by 
the DOJ, The proponents suggested that the total amount of physician 
revenues affected by the merger were far less than thirty percent 
according to public available data. According to the proponents, the 
merged firm would have accounted for about 20% of total physician 
revenues in Houston and about 25% of total physician revenues in the 
Dallas Fort Worth area after the transaction. In addition, there 
were 14 HMOs in the Houston area and 12 HMOs in Dallas. See Robert 
E. Bloch et al. ``A New and Uncertain Future for Managed Care 
Mergers: An Antitrust Analysis of the Aetna/Prudential Merger.'' Yet 
the DOJ required an enforcement action to address monopsony concerns 
in spite of these alleged low shares of reimbursement.
---------------------------------------------------------------------------

    Monopsony power exercised by HMOs and health insurance plans, 
like high medical malpractice insurance premiums, has the potential 
to drive health care professionals out of geographic regions and 
even into other professions. The Nevada health care market currently 
faces one of the largest shortages of doctors and nurses in the 
country.\43\ It ranks 49th of the 50 states in physician coverage. 
Shortages of health care professionals can become a vicious cycle 
admonishing others against entering the profession. Doctor shortages 
increase with shortages of nurses and increases in insurance 
costs.'' \44\ Nationally, it has become less attractive to become a 
physician because of the enormous cost associated with medical 
education, long years of schooling and residencies, and increased 
difficulty in earning a living.\45\ Recently, Nevada has implemented 
programs to attract doctors from Mexico and train doctors in Mexico 
at the Universidad Autonoma de Guadelajara.\46\
---------------------------------------------------------------------------

    \43\ See Lawrence Mower, ``Help Sought South of the Border,'' 
Las Vegas Review Journal, Jan. 22, 2007; see also Lenita Powers, 
``Big Day at Lawlor,'' Reno Gazette, Dec. 9, 2006 (expressing that 
nurses in Nevada are in a desperately short supply, especially OR 
nurses).
    \44\ See Lawrence Mower, ``Help Sought South of the Border,'' 
Las Vegas Review Journal, Jan. 22, 2007.
    \45\ Lawrence Mower, ``Help Sought South of the Border,'' Las 
Vegas Review Journal, Jan. 22, 2007.
    \46\ Id.
---------------------------------------------------------------------------

    Similar problems exist in nursing. Understaffed nursing 
departments require nurses to work overtime, work more holiday 
shifts, and undertake more responsibilities. These conditions 
exacerbate protracted work-related stress and decrease the 
attractiveness of working as a nurse in Nevada. Moreover, reduced 
flexibility for time-off and patient dissatisfaction resulting from 
overworked nurses is generally associated with lower levels of job 
satisfaction and higher turnover rates.\47\
---------------------------------------------------------------------------

    \47\ See Jennifer Kettle, Factors Affecting Job Satisfaction in 
the Registered Nurse, Journal of Undergraduate Nursing Scholarship, 
Fall 2002 (last viewed July 9, 2007) http://www.juns.nursing.arizona.edu/articles/Fall%202002/Kettle.htm.
---------------------------------------------------------------------------

Conclusion on the Impact on Health Care Professionals and Quality 
of Care

    The United-Sierra merger poses a substantial threat to 
competition leading to reduced compensation for health care 
professionals who may be forced to reduce service and quality of 
care. This reduced quality of care ``would likely be harmful or 
prejudicial to the members of the public who purchase insurance.'' 
Further consolidation in the HMO and health coverage markets in 
Nevada may have detrimental short-term and long-term effects by 
exacerbating the crisis of the health professional shortage. 
Competition is essential to the delivery of high quality health care 
services. The United-Sierra merger will further distort the already 
concentrated and inefficient Nevada health care market.

Barriers to Entry Are High

    As noted earlier, entry can be a factor in the analysis of a 
merger that may reverse the presumption of anticompetitive effects. 
The courts have required that ``entry into the market will likely 
avert the anticompetitive effects from the acquisition.'' FTC v. 
Staples, 970 F. Supp. 1066, 1086 (D.D.C. 1997). Entry must be 
``timely, likely insufficient in its magnitude. character and scope 
to deter or counteract the competitive effects'' of a proposed 
acquisition. Merger Guidelines Sec.  3.0.
    The barriers to entry in the HMO and health insurance markets in 
Nevada and Clark County are very high. There has been relatively 
little recent entry into either Clark County or Nevada. The fact 
that United, the largest health insurer in the U.S., chose to enter 
into Nevada through two acquisitions--PacifiCare and Sierra--
suggests the significant difficulty of de novo entry in these 
markets.
    Generally, entry into health insurance markets is difficult. The 
health care industry does not fit the traditional model of perfect 
competition as expounded by the Chicago School.\48\ For example, 
there is a high degree of ``lock-in'' because plan sponsors cannot 
disrupt the medical treatment of countless employee/patients. New 
entrants are vulnerable to the high switching costs that 
characterize the health insurance industry. Many consumers have no 
choice for health coverage plans and must accept the plan provided 
by an employer. Other consumers can only switch during an ``open 
enrollment'' season. Doctors cannot easily switch their patients to 
a different health plan and, in the

[[Page 49871]]

absence of a large number of patients enrolled in a plan, a doctor 
may find that additional claim processing costs exceed the benefits 
of carrying an additional health coverage provider. Similarly, 
doctors may be reluctant to switch plans because earnings lost in 
pursuit of new patients and alternate third-party payers may lead to 
exorbitant losses.\49\
---------------------------------------------------------------------------

    \48\ See Thomas Greaney, Chicago's Procrustean Bed: Applying 
Antitrust Law in Health Care, 71 Antitrust L.J. 857 n. 1 (2004) 
(``Perfectly competitive markets demonstrate the following four 
characteristics: (1) Perfect product homogeneity (2) large numbers 
of buyers and sellers (3) perfect knowledge of market conditions by 
all market participants and (4) complete mobility of all product 
resources.'')
    \49\ Moreover, most employee/patients are limited to the 
physicians within the plan sponsors contract.
---------------------------------------------------------------------------

    Developing an HMO from scratch requires extensive expenditure on 
recruiting and maintaining health professionals, developing computer 
information systems and data banks, and high expenditures on 
overhead and clinical facilities. De novo entry is very challenging 
since new entrants must develop a reputation and product recognition 
with purchasers to convince them to disrupt their current 
relationships with the dominant health insurers.\50\ As a recent 
DOJ/FTC report on health care competition reported, there has been 
relatively little de novo entry by national health insurers.\51\
---------------------------------------------------------------------------

    \50\ At the FTC/DOJ Health Care hearings, a former Missouri 
Commissioner of Insurance suggested that new entrants ``face a Catch 
22--they need a large provider network to attract customers, but 
they also need a large number of customers to obtain sufficient 
price discounts from providers to be competitive with the 
incumbents.'' In addition, he observed that there is a first mover, 
or early mover, advantage in the HMO industry, possibly resulting in 
later entrants having a worse risk pool from which to recruit 
members. He also observed reputation may inhibit entry. See 
Improving Health Care: A Dose of Competition, A Report by the 
Federal Trade Commission and the Department of Justice, Chapter 6 at 
10 (July 2004), available at http://www.usdoj.gov/atr/public/
health_care/204694/chapter6.htm#3.
    \51\ Id. at 11 (citing testimony that the only successful entry 
of national plans has been by purchasing hospital-owned local health 
plans).
---------------------------------------------------------------------------

    Not surprisingly the DOJ has recognized the substantial barriers 
to entry and expansion in health insurance markets. In the Aetna/
Prudential merger, the DOJ found substantial entry barriers. 
Certainly Dallas and Houston were attractive markets for health 
insurers. Both markets had a substantial number of alternative 
health insurers capable of expansion. And there were numerous 
competitors in other Texas markets that were capable of entering 
into these markets. Yet the DOJ found substantial entry barriers and 
that entry could take two to three years and cost up to $50 
million.\52\ In particular it found that it was ``unlikely that a 
company that currently provides PPO or indemnity health insurance in 
either Dallas or Houston would shift its resources to provide an HMO 
or HMO-POS plan'' in either market.\53\
---------------------------------------------------------------------------

    \52\ In light of the health professional shortage in Nevada, 
these values could be understated.
    \53\ Complaint at paragraph 23.
---------------------------------------------------------------------------

    Entry barriers are even more substantial in Nevada and Clark 
County. The shortage of health care professionals in Nevada 
increases barriers to entry because new entrants are unlikely to be 
able to contract with an adequate number of health professionals to 
attract new plan sponsors and enrollees. Moreover, when a dominant 
HMO maintains a high market share, other health providers may 
perceive or experience higher rates of adverse selection, moral 
hazard, and general vulnerability to tactics by a dominant HMO to 
raise rival's costs.\54\ Experience indicates that new HMOs have not 
historically entered highly concentrated markets after a merger 
occurs.
---------------------------------------------------------------------------

    \54\ See Roger Noll, Buyer Power and Antitrust: ``Buyer Power'' 
and Economic Policy, 72 Antitrust L.J. 589, 2005.
---------------------------------------------------------------------------

    The parties may also suggest that some of the smaller HMOs and 
health insurance providers in Nevada may be able to expand post-
merger to prevent any anticompetitive effects. This is extremely 
unlikely because the fringe firms are currently so extremely small 
and far smaller than a combined United-Sierra. In cases with an even 
far smaller size disparity between the merged and fringe firms 
courts have declined to find that small players might suddenly 
expand to constrain a price increase by leading firms. United States 
v. Philadelphia Nat'l Bank, 374 U.S. 321, 367 (1963); United States 
v. Rockford Mem. Corp., 898 F.2d 1278, 1283-84 (7th Cir. 1990) 
(``three firms having 90 percent of the market can raise prices with 
relatively little fear that the fringe of competitors will be able 
to defeat the attempt by expanding their own output to serve 
customers of the three large firms'').
    The small firm expansion claim was rejected by the DOJ in Aetna/
Prudential, a case with far smaller post-merger market shares and a 
far greater number of fringe firms:

    Due not only to these costs and difficulties, but also to 
advantages that Aetna and Prudential hold over their existing 
competitors--including nationally recognized quality accreditation, 
product array, provider network and national scope and reputation--
existing HMO and HMO-POS competitors in Dallas or Houston are 
unlikely to be able to expand or reposition themselves sufficiently 
to restrain anticompetitive conduct by Aetna in either of these 
geographic markets.\55\
---------------------------------------------------------------------------

    \55\ Complaint at paragraph 24. In Aetna, the post-merger market 
shares were 44% and 62% and there were between 10-12 smaller 
competitors capable of expansion. In this case, the post-merger 
market share is greater than 90% and there are a handful of smaller 
competitors.
---------------------------------------------------------------------------

    History demonstrates that one can not rely on new entry in Clark 
County. Few competitors from the rest of Nevada have been able to 
successfully enter Clark County. Attempting to enter into a market 
dominated by a single firm is a daunting task. There may be several 
obstacles to expansion including cost disadvantages, efficiencies of 
scale and scope and reputational barriers. In other mergers, the 
courts have found these types of impediments to be significant 
barriers to entry and expansion. For example, in the FTC's 
successful challenge to mergers of drug wholesalers the court noted: 
``[t]he sheer economies of scale and scale and strength of 
reputation that the Defendants already have over these wholesalers 
serve as barriers to competitors as they attempt to grow in size.'' 
\56\ We believe similar obstacles exist for potential entrants in 
these markets.
---------------------------------------------------------------------------

    \56\ FTC v. Cardinal Health, Inc., 12 F. Supp. 34, 57 (D.D.C. 
1998); see United States v. Rockford Memorial Hosp., 898 F.2d 1278. 
l283-84 (7th Cir. 1990) (``the fact [that fringe firms] are so small 
suggests that they would incur sharply rising costs in trying almost 
to double their output . . . it is this prospect which keeps them 
small'').
---------------------------------------------------------------------------

    Relying on promises of entry and expansion may be a risky path 
for competition and consumers. In recent FTC/DOJ health care 
hearings, a former Missouri Commissioner of Insurance discussed 
several HMO mergers that his office approved based on the parties' 
arguments that entry was easy, that there were no capacity 
constraints on existing competitors (there were at least ten HMO 
competitors), and that any of the 320 insurers in the state could 
easily enter the HMO market. Unfortunately, those predictions were 
mistaken and there has been no entry in the St. Louis HMO market 
since the mid-1990s.\57\ This experience, should make any regulator 
cautious about relying on predictions of new entry.
---------------------------------------------------------------------------

    \57\ Testimony of Jay Angoff, former Missouri Commissioner of 
Insurance, before the FTC/DOJ Healthcare Hearings, April 23, 2003 at 
40-45, discussed at Improving Health Care: A Dose of Competition, A 
Report by the Federal Trade Commission and the Department of 
Justice, Chapter 6 at 10 (July 2004), available at  http://www.usdoj.gov/atr/public/health_care/204694/chapter6.htm#3.
---------------------------------------------------------------------------

Efficiencies of the United-Sierra Merger Are Minimal

    The parties have not suggested that there are significant 
efficiencies that may result from the merger. Under the Nevada 
statute, the Commissioner can consider efficiencies that either 
``create[] substantial economies of scale or economies in the use of 
resources that may not be created in any other manner'' or 
``substantially increase[] the availability of insurance.'' \58\ In 
either case, the public benefit of either of these efficiencies must 
exceed the loss of competition. This standard simply can not be met 
in this case where the merger creates a dominant firm.
---------------------------------------------------------------------------

    \58\ NRS 692C.256(3).
---------------------------------------------------------------------------

    As a matter of U.S. merger law, efficiencies can justify an 
otherwise anticompetitive merger in very limited circumstances. 
Those efficiencies which are considered under the antitrust laws are 
solely those efficiencies which lead to improvements for consumers 
in terms of lower prices, greater innovation or greater service and 
quality. Moreover, an efficiency must be merger specific--that is it 
can not be achieved in any less anticompetitive fashion. When a cost 
savings does not result in those benefits to consumers it is not 
properly considered.
    The record on recent health insurance mergers does not suggest 
that these mergers have led to substantial benefits to consumers in 
lower prices, better quality of care or service. Despite the 
occurrence of hundreds of health insurance mergers that have 
occurred in the past decade, subscriber premiums have continued to 
rise at twice the rate of inflation and physician fees.\59\ Health 
benefits have not expanded with subscriber premiums.\60\ 
Consequently, the efficiencies

[[Page 49872]]

in health insurance mergers deserve careful scrutiny and a heavy 
dose of skepticism.\61\
---------------------------------------------------------------------------

    \59\ Laura Benko, ``Monopoly Concerns: AMA Asks Antitrust 
Regulators to Restore Balance,'' Modern Physician, June 1, 2006.
    \60\ Best Wire, ``Study Says Competition in Health Markets 
Waning,'' Best Wire Apr. 19, 2006.
    \61\ See Laura Benko, ``Bigger Yes, But Better?'' Modern Health 
Care, March 19, 2007.
---------------------------------------------------------------------------

    The actual record on efficiencies from health insurance mergers 
is spotty at best. As Professor Lawton Burns has observed in 
Congressional testimony:

    [T)he recent historical experience with mergers of managed care 
plans and other types of enterprises does not reveal any long-term 
efficiencies.

    [E]ven in the presence of [efforts to achieve cost-savings] and 
defined post-integration strategies, scale economies and merger 
efficiencies are difficult to achieve. The econometric literature 
shows that scale economies in HMO health plans are reached at 
roughly 100,000 enrollees. * * * Moreover, the provision of health 
insurance (e.g., front-office and back-office functions) is a labor-
intensive rather than capital-intensive industry. As a result, there 
are minimal economies to reap as scale increases. * * * Finally, 
there is little econometric evidence for economies of scope in these 
health plans--e.g,. serving both the commercial and Medicare 
populations. Serving these different patient populations requires 
different types of infrastructure. Hence, few efficiencies may be 
reaped from serving large and diverse client populations. Indeed, 
really large firms may suffer from diseconomies of scale.\62\
---------------------------------------------------------------------------

    \62\ Testimony of Professor Lawton R. Burns re. the Highmark/
lndependence Blue Cross Merger, before the Senate Judiciary 
Committee (April 7, 2007).
---------------------------------------------------------------------------

    United's actual record in achieving efficiencies is a mixed one 
at best. Bigger is not necessarily better and a national platform is 
not better than a local one. To provide just one example, United 
completely disrupted efficient working relationships between 
University Medical Center and PacifiCare by replacing the local 
insurer's claims processing with a more bureaucratic national 
one.\63\ This disruption in working operations increased the number 
of unpaid claims and created other problems with provider services. 
One need look no further than United's track record for inadequate 
claims processing over the past five years.
---------------------------------------------------------------------------

    \63\ See Laura Benko, ``Bigger Yes, But Better?'' Modern Health 
Care, March 19, 2007.
---------------------------------------------------------------------------

     The Nebraska Department of Insurance, which imposed a 
fine of $650,000, the largest ever, on United Health for 
inadequately handling complaints, grievance, and appeals.
     In March 2006, the Arizona Department of Insurance 
fined United $364,750 for violating State law by denying services 
and claims, delaying payment to providers and failing to keep proper 
records.
     In December 2005, the Texas Department of Insurance 
fined United $4 million for failing to pay promptly, lacking 
accurate claim data reports and not maintaining adequate complaint 
logs. They also had to pay restitution to physicians.\64\
---------------------------------------------------------------------------

    \64\ Marshall Allen, ``Insurer Comes Here With a Trail of Fines 
From Other States,'' Las Vegas Sun, June 20, 2007.
---------------------------------------------------------------------------

    State imposed fines are an inadequate remedy for poor services 
to patients and doctors. First, the actual payer of these fines is 
the consumer, because United can pass these fines on to consumers in 
the form of higher premiums and co-payments. Second, fines pose no 
solace to patients that may suffer the persistent hounding from 
creditors as a result of unpaid insurance claims. Further 
consolidation will only enhance the likelihood of shoddy claims 
service since consumers will have few rivals to turn to in response 
to poor quality of service.
    United may suggest the merger is procompetitive because it will 
lead to improved cost containment initiatives. Of course, Sierra may 
adopt those measures without a merger. In addition, although efforts 
to contain costs are rooted in legitimate needs, the actual 
implementation of cost containment efforts can produce negative 
consequences for the quality of health care provided to consumers. 
However, most cost containment efforts center on decreasing 
utilization. Moreover, in concentrated markets, the likelihood of 
administered pricing and agreements not to reimburse for a procedure 
is more likely. Ultimately, the insurer's gross margin increases by 
reducing access to care and the quality of care for consumers.
    The burden should be on the merging parties to demonstrate that 
the efficiencies they put forward are not speculative, that they 
exceed the likely anticompetitive effects on consumers and suppliers 
of services, and that the benefits will be passed on in the form of 
lower premiums and better quality, rather than larger profits for 
shareholders. It is highly unlikely that burden can be met in this 
case.

Recommendations

    The United-Sierra merger poses a serious threat to competition 
in the provision of insurance and health care services in Nevada, 
especially Clark County. This merger requires heightened scrutiny 
given the currently high concentration of the health coverage 
providers in the Nevada market and the current shortage of health 
care professionals in the State. The merger should be denied because 
it ``would * * * substantially * * * lessen competition in insurance 
in Nevada or tend to create and monopoly,'' through the creation of 
a dominant health insurance provider particularly in Clark County. 
Moreover, it will lead to a reduction in the level and quahty of 
service thus harming and prejudicing ``the members of the public who 
purchase insurance.'' Enhancement of Nevada's health care requires 
increased levels of competitton and greater market efficiency, which 
cannot be achieved through a merger between two of the States 
largest health insurance providers. The likelihood of competitive 
harms from the United-Sierra merger is substantial, and the 
procompetitive benefits de minimus. Pursuant to NRS 692C.258(l), we 
urge the Commissioner to deny the merger application.
    In the matter of: In the United States District Court for the 
District of Columbia, United States of America, Plaintiff, v. 
UnitedHealth Group Incorporated and Sierra Health Services, Inc.; 
Defendants.
    [Civil No. 1:08-cv-00322] Judge: Ellen S. Huvelle. Filed: 2/25/
2008.

Comments of the American Medical Association, Nevada State Medical 
Association and The Clark County Medical Society on the Proposed 
Consent Order

    On February 25, 2008 the Antitrust Division of the Department of 
Justice filed a complaint and proposed final judgment (``PFJ'') with 
this Court regarding the acquisition of Sierra Health Services by 
UnitedHealth Group. Although this acquisition creates a dominant 
health insurer and permanently transforms the health insurance 
market for Clark County, Nevada, the DOJ identified a very limited 
set of competitive concerns in the Medicare Advantage market and 
proposed a remedy limited to that market.
    The American Medical Association, Nevada State Medical 
Association and the Clark County Medical Society file these comments 
pursuant to the Antitrust Procedures and Penalties Act, 15 U.S.C. 
16(b-e) (known as the ``Tunny Act'') because the DOJ's complaint and 
PFJ are seriously inadequate to remedy the competitive concerns 
arising from this transaction. This merger results in United 
dominating the commercial health insurance market with over a 56% 
market share. In spite of the substantial level of concentration 
resulting from this merger, the DOJ chose to challenge the impact of 
the merger on a single duplicative product, Medicare Advantage. The 
Justice Department's enforcement action is inadequate in several 
respects.
     It fails to secure relief in the market for the 
purchase of physician services;
     It fails to secure relief in the commercial insurance 
market; and
     It fails to prevent United from using contractual 
provisions such as most favored nations and all products clauses 
that may diminish the likelihood that the remedy will fully restore 
competition. The relief is also inadequate to fully restore 
competition in the Medicare Advantage market.
Finally, we explain why United's history of regulatory violations 
should raise significant concerns about relying on its promises to 
comply with the PFJ.
    The DOJ decision not to challenge this acquisition is 
inconsistent with critical healthcare concerns. As documented in 
recent Congressional hearings before the Senate Judiciary Committee 
and the House Small Business Committee there is a tremendous trend 
of health insurance consolidation, which has led to higher premiums 
and a greater number of uninsured.\1\ The proposed merger faced 
almost unprecedented opposition from community groups, public 
interest groups, healthcare alliances, physicians, nurses. 
employers. and state legislators.\2\
---------------------------------------------------------------------------

    \1\ See testimony from: Examining Competition in Group Health 
Care, Hearing before the Senate Judiciary Committee, 109th Cong. 
(Sept. 6, 2006), and Health Insurer Consolidation--The impact on 
Small Business, Hearing before the House Small Business Committee, 
110th Cong. (Oct. 25, 2007).
    \2\ For example, see Jennifer Robison, MERGERS AND ACQUISITIONS: 
Buyout sessions conclude. Las Vegas Rev. J. (July 28, 2007). Twenty-
four organizations and individuals ranging from doctors and nurses 
to business owners, spoke out in opposition to the merger at the 
Nevada Dept. of Ins. hearings held July 2007. In addition, there was 
strong opposition to the merger by consumer groups including 
Consumers Federation of American and the American Antitrust 
Institute. See testimony of David A. Balto before the Nevada 
Commissioner of Insurance on the UnitedHealth Group proposed 
acquisition of Sierra Health Services, Inc. (July 27, 2007) 
(appended herein as Attachment C).

---------------------------------------------------------------------------

[[Page 49873]]

    As described herein. the DOJ enforcement action is insufficient 
to address the critical healthcare and competitive concerns in the 
market highlighted by the widespread opposition. In spite of the 
particularly fragile Nevada health care delivery system, DOJ applied 
an even more lax standard than used in previous mergers and 
permitted an unprecedented level of concentration clearly in 
violation of the law and the Merger Guidelines. Ultimately, the 
Nevada Attorney General had to step in and file a separate case in 
federal court with 61-page consent order to address some, but not 
all, of the concerns ignored by the DOJ.\3\ The PFJ should be 
rejected and this matter should be reopened to fully address the 
competitive concerns raised by this merger.
---------------------------------------------------------------------------

    \3\ State of Nevada v. UnitedHealth Group Inc. and Sierra Health 
Services, Inc., Case No. 2:08-cv-00233 (D. NV 2008).
---------------------------------------------------------------------------

I. The Interests of the Parties

    These comments are submitted on behalf of the American Medical 
Association, a non-profit professional association of approximately 
240,000 physicians, residents, and medical students; the Nevada 
State Medical Association, and the Clark County Medical Society. The 
Medical Associations represent the interests of 1,458 doctors in the 
State of Nevada, and in particular 846 doctors in Clark County. 
These physicians will be competitively injured from the merger. The 
merger will result in a dominant health insurance company with the 
unilateral ability to reduce the level of compensation to physicians 
and in turn reduce the level of service and quality of treatment 
that those physicians can provide to patients. In addition, those 
physicians purchase insurance for themselves and their employees and 
will have to pay more for insurance because of this merger.

II. Procedural Background

    In March 2007 United announced its proposed purchase of Sierra 
for $2.6 billion. In May, the DOJ issued a ``second request'' under 
the federal Hart-Scott-Rodino AntitrustImprovements Act of 1976, 
seeking more information. The state of Nevada conducted a 
simultaneous investigation.\4\
    On February 25, 2008, after an 11-month investigation. the DOJ 
and Nevada Attorney General's office filed simultaneous, but 
separate enforcement actions. The DOJ action claimed that the merger 
would pose significant competitive problems in the Medicare 
Advantage health insurance market in Las Vegas, Nevada because the 
merged firm would control 94% of the market. The DOJ alleged this 
would result in higher prices, fewer choices, and a reduction in the 
quality of plans purchased by seniors in this area. These concerns 
were partially addressed within the PFJ which merely requires the 
divestiture of United's Medicare Advantage business.
    Simultaneously, the state of Nevada filed a complaint and decree 
in federal court in Las Vegas, Nevada. The 61-page Nevada consent 
order also compelled the divestiture of United's Medicare Advantage 
business; but went far beyond the DOJ action and addressed 
competitive concerns involving physicians, Clark County, the 
University Medical Center and the delivery of healthcare to 
underserved populations. For example, on physician-related concerns, 
the Nevada decree enjoins the merging parties from enforcing all 
products and most favored nations clauses in their contracts for a 
period of two years, prohibits the merging parties from entering 
into exclusive contracts with physicians for a period of two years, 
and creates a Physicians Council for the purpose of addressing the 
relations between United and physicians, among other relief.

III. The Tunney Act Standards

    The Tunney Act requires that ``[b]efore entering any consent 
judgment proposed by the United States * * *, the court shall 
determine that the entry of such judgment is in the public 
interest.'', 16 U.S.C. Sec.  15(e)(1). In applying this ``public 
interest'' standard the burden is on the government to ``provide a 
factual basis for concluding that the settlements are reasonably 
adequate remedies for the alleged harms.'' United States v. SBC, 489 
F.Supp. 2d 1, 16, (D.D.C. 2007), citing United States v. Microsoft 
Corp., 56 F.3d 1448, 1460-61 (D.C. Cir. 1995).
---------------------------------------------------------------------------

    \4\ The Nevada Division of Insurance conducted hearings and 
approved the merger in August 2007 based on an agreement that United 
would maintain staffing levels in its local home office, would not 
pass on acquisition costs to subscribers, and other provisions.
---------------------------------------------------------------------------

    The 2004 Congressional amendments to this Act specifically 
overruled District of Columbia Circuit Court of Appeals and District 
Court precedent that was deemed overly deferential to Antitrust 
Division consent decrees.\5\ In response to those decisions, 
Congress reemphasized its intention that courts reviewing consent 
decrees ``make an independent, objective, and active determination 
without deference to the DOJ.'' \6\ Courts are to provide an 
``independent safeguard'' against ``inadequate settlements''.\7\ 
Specifically, the Act was amended to compel reviewing courts to 
consider both ``ambiguity'' in the terms of the proposed remedy, as 
well as the ``impact'' of the proposed settlements on ``competitors 
in the relevant market or markets.'' \8\ Moreover, the 2004 
amendments were adopted to highlight that Congress expected an 
independent judiciary to oversee proposed settlements to ensure that 
the needs of the consumer were met.
---------------------------------------------------------------------------

    \5\ In this matter, the DOJ may claim that the court's review is 
limited to reviewing the remedy in relationship to the violations 
that the United States has alleged in its complaint, and does not 
authorize the court to go beyond the scope of the complaint. See FR 
73, No. 47, at 12774 (March 10, 2008). We believe that view is 
inconsistent with the legislative history of the 2004 Amendments to 
the Tunney Act. Congress amended the Tunney Act in 2004 to overrule 
District of Columbia Circuit Court of Appeals and District Court 
precedent that was overly deferential to Antitrust Division consent 
decrees. The amendments to the Tunney Act compel the reviewing court 
to consider, inter alia, the ``impact'' of the entry of judgment on 
``competition in the relevant market.'' See Pub. L. 108-327, Sec.  
221(b)(2) rewriting 15 U.S.C. Sec.  16(e).
    No suggestion is made in the statute or legislative history that 
the courts should defer to either the Government's identification of 
injury or the Government's proposed remedy to that injury. On the 
contrary, as one of the authors of the legislation noted, the 
reviewing court is to achieve an ``independent, objective, and 
active determination without deference to the DOJ.'' See 150 Cong. 
Rec., S. 3617 (April 2, 2004) (Statement of Sen. Kohl).
    For criticism of the overly deferential standard see Darren Bush 
and John J. Flynn, The Misuse and Abuse of the Tunney Act: The 
Adverse Consequences of the ``Microsoft Fallacies'', 34 Loy. U. Chi. 
L.J. 749 (2002-2003).
    \6\ See 150 Cong. Rec., S 3617 (April 2,2004) (Statement of Sen. 
Kohl).
    \7\ Id.
    \8\ Id.
---------------------------------------------------------------------------

    We submit the DOJ has an extra burden to justify the limited 
relief in this case for two important reasons. First, the DOJ 
decision not to bring an enforcement action challenging the 
anticompetitive effects of the merger in the physician services or 
commercial insurance markets described herein is inconsistent with 
past enforcement actions such as United/PacifiCare\9\ and Aetna/
Prudential,\10\ in which it required a enforcement policy on health 
insurance mergers it bears an obligation to disclose the reasons for 
those changes, so that the court can determine whether entry of the 
PFJ is in the public interest.
---------------------------------------------------------------------------

    \9\ United States v. UnitedHealth Group, Inc., Case No. 
1:05CV02436 (D.D.C. Dec. 20, 2005) (complaint) [hereafter United/
PacifiCare Complaint], available at www.usdoij.gov/atr/cases/f213800/213815.htm.
    \10\ United States v. Aetna, Inc., Case No. 3:99CV1398-H (N.D. 
Tex. June 21, 1999) (complaint) [hereinafter Aetna Complaint], 
available at www.usdoj.gov/atr/cases/f2500/2501.pdf.
---------------------------------------------------------------------------

    Second, the action taken by the DOJ is inconsistent with the 
State of Nevada's separate suit challenging the merger in federal 
court in Nevada. In that action, the Nevada Attorney General secured 
relief to address some of the substantial concerns raised by the 
medical associations, consumer groups, Clark County, and public 
interest groups. The Department's failure to address these concerns 
in its enforcement action requires heightened scrutiny by this 
court.
    As described herein, the Department's apparent abandonment of 
its prior enforcement policies and failure to address the concerns 
recognized by the State of Nevada is especially unfortunate given 
the national shortage of physicians and the medical market distress 
that is particularly acute in Nevada.\11\ All of these concerns 
demand the attention of this court.
---------------------------------------------------------------------------

    \11\ See Section IX herein.
---------------------------------------------------------------------------

IV. No Relief in the Market for the Purchase of Physician Services

    The DOJ erred in failing to secure relief in the market for the 
purchase of physician services, even though the merger will 
significantly increase the level of concentration in that market. 
The merger will increase United's overall market share in the sale 
of commercial insurance products to

[[Page 49874]]

56%. By combining two of the three largest buyers of physician 
services in Clark County, the merger poses a significant threat of 
reducing physicians' compensation and leading to an overall decrease 
of the level of service provided to patients.
    The DOJ has brought enforcement actions on potential concerns 
over the decrease in competition in the past at market share levels 
similar or less significant than in this matter. In Aetna/Prudential 
it required a divestiture where the commercial insurance market 
shares would increase from 44% to 63% in Houston \12\ and 26% to 42% 
in Dallas \13\. In United/Pacificare it required a divestiture where 
the commercial insurance market shares increased from 16% to 33% in 
Tucson \14\ and to over 30% in Boulder, Colorado.\15\ These 
enforcement actions were brought even though the defendants alleged 
much lower market shares in the purchase of physician services 
markets.
---------------------------------------------------------------------------

    \12\ Aetna Complaint at paragraph 22.
    \13\ Id.
    \14\ United/PacifiCare Complaint at 27.
    \15\ Id. at paragraph 41.
---------------------------------------------------------------------------

    The nature of the health care industry facilitates the potential 
for a dominant health insurer to exercise monopsony power over 
physicians selling health care services within a geographic region. 
Because medical services can be neither stored nor exported, health 
care professionals have limited options for selling their services 
to buyers (insurance firms and their customers). If the physicians 
were to refuse the terms of the dominant buyer, they would likely 
suffer an irrevocable loss of revenue. Consequently, a physician's 
ability to terminate a relationship with an insurance coverage plan 
depends on that physician's ability to make up lost business by 
switching to an alternative insurance coverage plan. Where, as in 
the instant case, those alternatives are lacking, a physician may be 
forced to reduce the level of service in response to a decrease in 
compensation. Moreover, it is difficult to convince patients to 
switch to different plans.\16\ Consequently, according to the DOJ in 
past enforcement actions, these physicians would not be in a 
position to reject a ``take it or leave it'' contract offer and 
could be forced to accept low reimbursement rates from a merged 
entity, likely leading to a reduction in quantity or degradation in 
quality of physician services.
---------------------------------------------------------------------------

    \16\ As alleged in the United/PacifiCare complaint, physicians 
encouraging patients to change plans ``is particularly difficult for 
patients employed by companies that sponsor only one plan because 
the patient would need to persuade the employer to sponsor an 
additional plan with the desired physician in the plan's network'' 
or the patient would have to use the physician on an out-of-network 
basis at a higher cost. Complaint at paragraph 37.
---------------------------------------------------------------------------

    Moreover, the size of the insurer impacts the ability of a 
physician to leave or credibly threaten to leave a plan. Not all 
health insurers are equal from the perspective of a physician. To 
terminate participation in a health insurer, a physician must make 
up the lost revenue. Smaller plans will offer fewer prospective 
patients. It makes little sense for a physician to switch to a plan 
which has a substantially smaller market share because there will 
not be enough patients to sustain the physician practice. Thus, it 
is critical for antitrust enforcers to maintain a competitive market 
in which physicians have adequate competitive alternatives.\17\
---------------------------------------------------------------------------

    \17\ In most cases, like this one, a firm with monopsony power 
will also have market power in the downstream market--the sale of 
commercial insurance so that lower input prices do not lead to lower 
consumer output prices. See Peter J. Hammer and William M. Sage, 
Monopsony as an Agency and Regulatory Problem in Health Care, 71 
Antitrust L.J. 949, 967 (2004). But even if that was not the case, 
there may be antitrust concerns if a health insurer can lower 
compensation to physicians even if it can not raise prices to 
patients. For example, in United/PacifiCare the DOI required a 
divestiture based on monopsony concerns in Boulder even though 
United/PacifiCare would not necessarily have had market power in the 
sale of health insurance. The reason is straightforward--the 
reduction in compensation would lead to diminished service and 
quality of care, which harms consumers even though the direct prices 
paid by subscribers do not increase. See Gregory J. Werden, 
Monopsony and the Sherman Act: Consumer Welfare in a New Light. 74 
Antitrust L.J. 707 (2007) (explaining reasons to challenge monopsony 
power even where there is no immediate impact on consumers). Marius 
Schwartz, Buyer Power Concerns and the Aetna-Prudential Merger, 
Address Before the 5th Annual Health Care Antitrust Forum at 
Northwestern University School of Law 4-6 (October 20, 1999) (noting 
that anticompetitive effects can occur even if the conduct does not 
adversely affect the ultimate consumers who purchase the end-
product), available at http://www.usdoj.gov/atr/public/speeches/
3924.wpd.
---------------------------------------------------------------------------

    These concerns are documented by the affidavit of Professor 
David Dranove, the Walter McNerney Distinguished Professor of Health 
Industry Management at the Kellogg School of Management at 
Northwestern University.\18\ Professor Dranove investigated the 
impact of the United/Sierra merger on the purchase of physician 
services. Based on the physician survey, consisting of supervising 
interviews with physicians and his knowledge of healthcare markets, 
he concludes there is a relevant market for the purchase of 
physician services in Clark County, Nevada. He further concludes 
that the merger will pose a substantial risk of harm in that market, 
and will adversely affect both physicians and consumers.
---------------------------------------------------------------------------

    \18\ See Dranove Aff. (May 13, 2008), appended herein as 
Attachment A.
---------------------------------------------------------------------------

    Professor Dranove posits that perhaps one reason that the DOJ 
did not seek to remedy potential anticompetitive effects in the 
market for the purchase of physician services is that the DOJ 
mistakenly underestimated the monopsony power created by the merger 
by including Medicare and Medicaid in the relevant market. 
Physicians can not increase their revenue from Medicare and Medicaid 
in response to a decrease in commercial medical insurer 
compensation. Enrollment in these programs is limited to the elderly 
and disabled and there are only a fixed number of these patients. 
Moreover, Medicaid pays physicians significantly less than 
commercial insurance payers. Professor Dranove concludes: ``Medicare 
and Medicaid do not represent viable alternatives for physicians who 
face lower fees from a monopsonist insurer. Because Medicare and 
Medicaid are large purchasers of physician services, excluding them 
from market share calculations will profoundly change inferences 
about market shares and monopsony power.\19\ Medicare and Medicaid 
should therefore be excluded when computing shares in the market for 
the purchase of physician services.
---------------------------------------------------------------------------

    \19\ Id. at 4.
---------------------------------------------------------------------------

    Although the market share information in the market for the 
purchase of physician services is not publicly available there are 
proxies that can be used. The shares of the commercial market 
present a useful proxy of the share in the physician market. 
Professor Dranove has determined that the market shares in Sierra 
and United in the Las Vegas metropolitan area (which closely 
approximates Clark County) were 38% and 18% respectively. The 
combined market share is 56%. Professor Dranove concludes that this 
combined share, as well as the increase in share, raises substantial 
concerns about monopsony power that the DOJ does not appear to have 
addressed.\20\ United/Sierra's combined market share in the 
commercial market suggests they have a substantial market share in 
the physician payment market. These market shares are clearly 
sufficient to raise concerns over the exercise of monopsony 
power.\21\
---------------------------------------------------------------------------

    \20\ Id. at 4.
    \21\ For example, in United/PacifiCare the DOJ alleged that the 
combined firm would account for an excess of 35% of physician 
reimbursement in Tucson and over 30% in Boulder. Yet in both of 
these actions DOJ required a divestiture in order to resolve 
concerns about the potential exercise of monopsony power. In 
addition, as a former DOJ official explains, the unique nature of 
health care physician services explains why monopsony concerns are 
raised at lower levels of concentration than may be appropriate in 
other industries. Mark Botti, Remarks before the ABA Antitrust 
Section, ``Observations on and from the Antitrust Division's Buyer-
Side Cases: How Can ``Lower'' Prices Violate the Antitrust Laws,'' 
(April 18, 2007).
---------------------------------------------------------------------------

    Professor Dranove's affidavit and the results of the physician 
survey demonstrate the potential anticompetitive effects of the 
merger on the delivery of physician services. As he observes, some 
physicians would have to cut back on the level of service. Other 
physicians would consider moving from the market. Other physicians 
might be forced to see fewer patients. Professor Dranove summarizes 
the potential harm to consumers:

    Part and parcel with a reduction in the compensation of 
physicians will be a reduction in the number of physicians who 
participate in the monopsonist's network. (This is the natural 
consequence of a monopsonist moving down its upward sloping supply 
curve.)\22\ The patients who previously utilized the services of 
physicians who are no longer in the network must now either (a) 
select another, less preferred physician within the network, or (b) 
see their prior physician out-of-network and consequently pay higher 
out-of-network fees. Either way, these patients are worse off than 
before the exercise of monopsony power.
---------------------------------------------------------------------------

    \22\ When supply is upward sloping, a seller with monopsony 
power profits by reducing the wages it pays, relative to the 
competitive wage. By doing so, fewer suppliers offer their goods and 
services, so that the monopsonist ends up reducing the quantity of 
output it produces.
---------------------------------------------------------------------------

    Even the patients of physicians who remain in the United/Sierra 
network may be

[[Page 49875]]

worse off, because the reduction in the fees paid to these 
physicians may cause them to reduce the quantity and/or quality of 
services they provide* * *
    If physicians reduce their office hours, this is likely to 
affect access for all of their patients. (Physicians who contract 
with a monopsonist could not normally limit their availability to 
the monopsonist's patients only.) Similarly, if a physician cuts 
back on staff and/or equipment, or invests less in continuing 
education, all patients would surfer. Of course if the physician 
exits the market altogether, all patients suffer.\23\
---------------------------------------------------------------------------

    \23\ Dranove Aff. at 6-7

    The DOJ's failure to oppose the merger suggests that it takes a 
benign view about the creation of monopsony power. Perhaps the DOJ, 
like proponents of health insurer mergers, is now taking the view that 
health insurers are ``buyers'' acting in the interest of reducing 
prices. As we suggested earlier, this view fails to come to grips with 
the monopsony issue in any meaningful way and fails to address the 
reality that patients are the ultimate consumers.\24\ As a general 
proposition, monopsony power does decrease economic welfare. 
Monopsonists drive down their buying price by purchasing fewer 
products. Because there is less product purchased, there is, in turn, 
less product sold.\25\ Thus, the reduced input costs of monopsonist 
medical insurers will not necessarily result in lower premiums to 
patients and hence elevated levels of consumer welfare. This fact was 
emphasized by R. Hewitt Pate, the Assistant Attorney General of the 
Antitrust Division, in a 2003 statement before the Senate Judiciary 
Committee:
---------------------------------------------------------------------------

    \24\ Francis H. Miller, Vertical Restraints and Powerful Health 
Insurers: Exclusionary Conduct Masquerading as Managed Care?, 51 Law 
& Contemp. Probs. 195, 222 (1998).
    \25\ 2A Phillip E. Areeda & Herbert Hovenkamp, Antitrust Law 
Sec.  575, at 363-64 (2002).

    A casual observer might believe that if a merger lowers the 
price the merged firm pays for its inputs, consumers will 
necessarily benefit. The logic seems to be that because the input 
purchaser is paying less, the input purchaser's customers should 
expect to pay less also. But that is not necessarily the case. Input 
prices can fall for two entirely different reasons, one of which 
arises from a true economic efficiency that will tend to result in 
lower prices for final consumers. The other, in contrast, represents 
an efficiency-reducing exercise of market power that will reduce 
economic welfare, lower price for suppliers, and may well result in 
higher prices charged to final consumers.\26\
---------------------------------------------------------------------------

    \26\ R. Hewitt Pate, Asst. Att'y Gen., Antitrust Div., U.S. 
Dept. of Justice, Statement Before the Senate Committee on the 
Judiciary Concerning Antitrust Enforcement in the Agricultural 
Marketplace, at 4 (Oct. 20, 2003), available at http://www.usdoj.gov/atr/public/testimony/201430.pdf.

    Moreover, University of Pennsylvania Health Economics Professor 
Mark Pauly has demonstrated that health insurers with monopsony power 
may profit from pushing provider prices ``too low'' so that consumers 
do not receive an adequate level of service and quality.\27\ Also, 
because health insurer monopsonists typically are also monopolists, 
lower input prices do not lead to lower consumer output prices.\28\
---------------------------------------------------------------------------

    \27\ Mark V. Pauly, Competition in Health Insurance Markets, 51 
Law & Contemp. Probs. 237 (1998).
    \28\ Peter J. Hammer and William M. Sage, Monopsony as an Agency 
and Regulatory Problem in Health Care, 71 antitrust L.J. 949 (2004).
---------------------------------------------------------------------------

    In any event, health insurers are not true fiduciaries for 
insurance subscribers. Plan sponsors may have a limited concern over 
the product based on the cost of the insurance, and not the quality of 
care. Furthermore, health coverage plans operate in the interest of a 
group, not in the best interest of individual patients. Consequently, 
health insurers can increase profits by reducing the level of service 
and denying medical procedures that physicians would normally perform 
based on professional judgment. In the absence of competition among 
insurers, patients are more likely to pay for these procedures out-of-
pocket or forego them entirely. Ultimately, the creation of monopsony 
power from a merger can adversely impact both the quantity and quality 
of health care.
    Finally, the evidence from mergers throughout the U.S. strongly 
suggests that the creation of buyer power from health insurance 
consolidation has not benefited competition or consumers.\29\ Although 
compensation to providers has been reduced, health insurance premiums 
have continued to increase rapidly. Moreover, evidence from other 
mergers suggests that insurers do not pass savings on from these 
mergers on to consumers. Rather, insurance premiums increase along with 
insurance company profits. As Professor Lawton Burns has observed in 
Congressional testimony:
---------------------------------------------------------------------------

    \29\ See testimony from: Examining Competition in Group Health 
Care, Hearing before the Senate Judiciary Committee, 109th Cong. 
(Sept. 6, 2006), and Health Insurer Consolidation--The Impact on 
Small Business, Hearing before the House Small Business Committee, 
110th Cong. (Oct. 25, 2007).

    [T]he recent historical experience with mergers of managed care 
plans and other types of enterprises does not reveal any long-term 
efficiencies.
    [E]ven in the presence of [efforts to achieve cost-savings] and 
defined post-integration strategies, scale economies and merger 
efficiencies are difficult to achieve. The econometric literature 
shows that scale economies in HMO health plans are reached at 
roughly 100,000 enrollees. * * * Moreover, the provision of health 
insurance (e.g., front-office and back-office functions) is a labor-
intensive rather than capital-intensive industry. As a result, there 
are minimal economies to reap as scale increases. * * * Finally, 
there is little econometric evidence for economies of scope in these 
health plans--e.g., serving both the commercial and Medicare 
populations. Serving these different patient populations require 
different types of infrastructure. Hence, few efficiencies may be 
reaped from serving large and diverse client populations. Indeed, 
really large firms may suffer from diseconomies of scale.\30\
---------------------------------------------------------------------------

    \30\ Testimony of Professor Lawton R. Burns re. the Highmark/
Independence Blue Cross Merger, before the Senate Judiciary 
Committee (April 7, 2007).

    Concerns about the merger's impact in the physician market were 
recognized by the Nevada Attorney General in the companion enforcement 
action brought in federal court in Nevada. The Nevada Attorney General, 
although filing a similar complaint, secured some relief to address 
physician reimbursement issues. The Department's failure to address 
these concerns demonstrates the inadequacy of its enforcement action.
    In sum, the merger poses significant risks of harm in the market 
for the purchase of physician services and will lead to a diminution of 
the quality of healthcare in Clark County's underserved healthcare 
market. The DOJ should have secured relief that would have prevented 
this harm in the physician services market. In any case, the DOJ should 
provide an extensive statement on its reasons not to bring an 
enforcement action in this market, including whether the relevant 
market includes governmental payors.\31\
---------------------------------------------------------------------------

    \31\ Providing clarity on the reasons not to bring an 
enforcement action in these markets is consistent with the 
Division's policy on ``Issuance of Public Statements Upon Closing of 
Investigations,'' available athttp://www.usdoj,goviatripublicimidelines/201888.htm (factors that will 
lead to the issuance of a closing statement include ``whether the 
matter has received substantial publicity [and] the value to the 
public in receiving information regarding the reasons for non-
enforcement (including public trust in the Department's enforcement, 
and the value of the analysis for other enforcers, businesses and 
consumers)''). DOJ has issued closing statements in other health 
insurance mergers. See DOJ Press Release No. 04-497 (statement 
closing investigation of UnitedHealth's acquisition of Oxford Health 
Plans), available at http://www.usdoj.gov/atr/public/press_ 
release/2004/204674.htm.
---------------------------------------------------------------------------

V. The DOJ Has Arbitrarily Departed From its Past Antitrust Enforcement 
Policies

    As discussed earlier, the DOJ has brought enforcement actions 
against insurance mergers which threatened harm to the market for the 
purchase of physician services. In these cases, the DOJ adopted the 
position that antitrust should be concerned with monopsony

[[Page 49876]]

mergers harming suppliers without the necessity for evidence of harm to 
downstream consumers.
    Accordingly in challenging Aetna's 1999 acquisition of Prudential 
and United's 2006 acquisition of PacifiCare, the DOJ addressed the harm 
to health care providers from the exercise of monopsony power. Both of 
these mergers were resolved with divestitures to facilitate the entry 
of new competitors to remedy the competitive concerns. In the Aetna/
Prudential matter, the proposed merger would have increased Aetna's 
market share from 26% to 42% in Dallas, giving the merged entity a 
smaller share than would result from the merger here. Nevertheless, the 
DOJ concluded that the merger raised monopsony concerns by giving the 
merged firm the potential to unduly suppress physician reimbursement 
rates, resulting in a reduction of quantity or degradation of quality 
of medical services. The operative question from DOJ's perspective was 
could health care providers defeat an effort by the merged firm to 
reduce provider compensation by a significant amount, e.g. 5%. The 
question was answered in the negative for the same reasons explained by 
Professor Dranove in the instant case: physicians have limited ability 
to encourage patients to switch health plans, and physicians' time 
(unlike other commodities) cannot be stored, which means that 
physicians incur irrecoverable losses when patients are lost but not 
replaced. To exacerbate matters, contracts with physicians were 
negotiated on an individual basis, and were therefore susceptible to 
price discrimination by powerful buyers. Thus, DOJ concluded that Aetna 
had sufficient power to impose adverse contract terms on physicians, 
especially decreased physician reimbursement rates, which would 
``likely lead to reduction in quantity or degradation in the quality of 
physicians' services.\32\ As a remedy, the DOJ ordered Aetna to divest 
the business that would have given the merged entity monopsony power.
---------------------------------------------------------------------------

    \32\ Aetna Complaint at paragraph 33.
---------------------------------------------------------------------------

VI. The DOJ's Reversal in Its Enforcement Stance Comes Under 
Particularly Adverse Circumstances in Nevada

    Merger analysis always focuses on the unique circumstances in every 
market. The Nevada healthcare market is particularly vulnerable, 
because of longstanding shortages of healthcare providers. Here are the 
simple facts:
     Nevada ranks 47th for access to care (based on the number 
of adults that should have visited a doctor but did not because of 
costs, and the number of uninsured);
     Nevada ranks 45th in access to physicians--approximately 
25 percent below the nationwide median and has one of the lowest 
physician to population ratios;\33\
---------------------------------------------------------------------------

    \33\ Nationally, there is a substantial and increasing shortage 
of physicians. See e.g. Health Resources and Services Administration 
(HRSA) Physician Supply and Demand: Projections to 2020. (Oct 2006) 
Projecting a shortfall of approximately 55,000 physicians in 2020) 
Merritt, J., J. Hawkins, et al. Will the Last Physician in America 
Please Turn Off The Lights? A Look at America's Looming Doctor 
Shortage. Irving, TX. Practice Support Resources, Inc. (2004) 
(Predicting a shortage of 90,000 to 200,000 physicians and that 
average wait times for medical specialties is likely to increase 
dramatically behond the current range of two to five weeks. This 
problem is far worse in Nevada.
---------------------------------------------------------------------------

     Nevada ranks 51st in the country in quality of care (based 
on the number of adults receiving recommended screenings, diabetics 
receiving preventive care, Medicare patients that get enough time with 
a doctor);
     Nevada is last for immunization coverage for children 
under age 3--a fundamental role of primary care;
     Not surprisingly, based on the foregoing data, Nevada is 
41st for mortality rates.
    Assuming that Clark County's performance measures are similar to 
the rest of the state, allowing this merger into monopsony will for the 
reasons explained earlier, lead to a further reduction in quantity and 
degradation of quality of physician services. Thus, DOJ's refusal to 
adhere to its previous enforcement stance in cases of health insurer 
mergers into monopsony demand the attention of this court.
    Turning to the market for the sale of commercial insurance where 
the parties control over 50% of the market in Clark County, Nevada, the 
record of health insurance coverage has been deplorable. Nevada has 
nearly half a million residents without health care coverage, almost 25 
percent of the State. A high uninsured population not only presents 
health problems for those without coverage. When the uninsured do 
receive medical care, the costs are often shifted to the insured 
population; 2005 estimates indicate that health care treatment for 
uninsured persons in Nevada cost $397 million, $314 million of which 
was covered by higher premiums for those with insurance.\34\ These 
factors too strongly suggest that the Court should be particularly 
judicious in evaluating the adequacy of the PFJ.
---------------------------------------------------------------------------

    \34\ Paying a Premium: The Added Cost of Care for the Uninsured. 
Families USA (June 2005). Available at http://www.familiesusa.org/assets/pdfs/Paying_a_Premium_rev_July_1373le.pdf.
---------------------------------------------------------------------------

VII. No Relief in the Market for the Sale of Commercial Insurance

    We believe that the DOJ also erred by not securing relief in the 
market for the sale of commercial insurance. Sierra and United were 
respectively the first and third largest sellers of commercial 
insurance products (including both .HMO and PPO products). The merger 
led to a combined share in the commercial insurance market of 56%. If 
the market was limited to HMO products, where United and Sierra were 
the two largest rivals the combined market share was 90%. In similar 
cases, the DOJ has required divestiture to resolve competitive 
concerns.
    For example in United/PacifiCare, the DOJ defined a relevant 
product market as the sale of commercial health insurance to small 
group employers. This market consisted of employers with 2-50 
employees. These employers were particularly susceptible to potential 
anticompetitive conduct because they lacked a sufficient employee 
population to self-insure and they lacked the multiple locations 
necessary to reduce risk through geographic diversity. In addition, the 
manner in which commercial health insurance was sold also distinguished 
the small and large group markets. Large employers were more likely 
than smaller employers to be able to successfully engage in extensive 
negotiations with United and PacifiCare.
    We believe that both an HMO and small employer market may be 
adversely affected by the United-Sierra merger. Surveys demonstrate 
that consumers do not perceive HMOs and PPOs as substitute products, 
and consumers believe that they differ in terms of benefit, design, 
cost, and general approaches to treatment.\35\ PPOs tend to provide 
more flexibility in selection of physicians and specialists and tend to 
be more expensive. In contrast, HMOs focus more on preventative 
medicine but limit treatment options and require referrals from a 
``gatekeeper'' for many procedures. Moreover, small employers are less 
likely to have significant alternatives in response to a price increase 
by the merged firm. Small employers are unable to self-insure and have 
little power to negotiate better rates.
---------------------------------------------------------------------------

    \35\ See United States v. Aetna, Civil Action 3-99CV1398-H 
(N.D.Tex, 1999) (Revised Complaint Impact Statement).
---------------------------------------------------------------------------

    Again, as in the physician services market, the PFJ should be 
reopened to

[[Page 49877]]

secure relief in the commercial insurance market. In the alternative, 
the DOJ should issue a comprehensive statement of its reasons not to 
seek enforcement in this market.

VIII. Inadequacy of Remedies

    Finally, the proposed remedies in the PFJ are inadequate in several 
respects. First, the restrictions that a dominant firm can impose on 
physicians are often critical to the acquirer of divested assets to 
effectively compete in the market. In this case, there are a variety of 
provisions that United can use that will deter the ability of the 
acquirer of the divested Medicare Advantage business to restore 
competition. For example, if Humana (the acquirer of United's Medicare 
Advantage business) were to attempt to attract greater physician 
coverage through attractive reimbursement rates, United could impose 
``most favored nations'' provisions, which would prevent doctors from 
giving a more attractive rate to Humana. Similarly, United could 
utilize ``all products clauses'' which would require physicians to 
participate in United's Medicare Advantage program as a condition for 
participating in United's commercial program.\36\ Professor Dranove 
explains how both of these provisions can be used in anti-competitive 
fashion.\37\ The PFJ should have prevented the use of these 
provisions.\38\
---------------------------------------------------------------------------

    \36\ All products clauses were prohibited in the consent order 
in United/Pacificare. See United States v. UnitedHealth Group Inc., 
Case No. 05CV0436 (D.D.C. 2005) (Competitive Impact Statement at 
sec. III).
    \37\ Dranove Aff. at 8.
    \38\ There may be a suggestion that the relief in the Nevada 
consent decree may be sufficient to address these concerns. We do 
not agree with that view. The Nevada decree only prohibits these 
provisions for a short time--2 years. That period is inconsistent 
with the DOJ remedy in United/PacifiCare, which banned these 
provisions for the life of the Judgment.
---------------------------------------------------------------------------

    Second, the DOJ requires solely the divestiture of the Medicare 
Advantage business rather than all of United's health insurance 
business in Clark County. This piecemeal approach faces a significant 
risk of failure. There is no evidence that a Medicare Advantage 
business can operate solely on its own without a commercial component. 
There are significant economies of scope and scale that exist when both 
commercial and Medicare Advantage businesses are combined. Moreover, 
the failure to divest an entire ongoing business is inconsistent with 
the DOJ's Merger Remedy Guidelines.\39\
---------------------------------------------------------------------------

    \39\ See Antitrust Division Policy Guide to Merger Remedies, 
U.S. Dept. of Justice, Antitrust Division at sec. III, C., (Oct. 
2004).
---------------------------------------------------------------------------

    The remedy is inadequate in several other respects. First, the DOJ 
recognizes the critical aspect of trademarks in being able to secure 
and keep an ongoing business. To elderly consumers the names ``United'' 
or ``Sierra'' are nowhere near as important or prominent as ``Secure 
Horizons,'' ``AARP'' or ``Senior Dimensions.'' In situations like this 
where trademarks are of particular importance to continue to secure 
customer loyalty, the antitrust agencies often prevent the merged party 
from using the trademark for a period of time. However, in this case 
the Justice Department imposed that obligation for only an extremely 
short period of time. Essentially within one to two years United can 
again reuse the Senior Dimensions (after March 31, 2010) or AARP (after 
March 31, 2009) trademark and lure customers to United's product.
    We believe the remedy should be strengthened in the following 
fashion. First, the PFJ should require the divestiture of all of 
United's business and not just the Medicare Advantage business. Second, 
if the divestiture is limited to the Medicare Advantage business, the 
trademarks should be conveyed for at least five years. Third, United's 
use of all products clauses and most favored nations provisions should 
be permanently enjoined.

IX. United's Prior Acts of Broken Promises

    In evaluating whether the remedies in the PFJ are adequate, it is 
critical to recognize United's past record of continual disregard of 
its regulatory obligations. No other health insurance company has been 
the subject of as many serious enforcement actions involving the 
violation of consumer protection and insurance regulations. This record 
of continual regulatory abuse raises a serious likelihood that United 
will fail to comply with any regulatory order. United has a long track 
record of disregarding its regulatory obligations and patient 
protection laws.\40\
---------------------------------------------------------------------------

    \40\ See American Medical Association letter to Nevada 
Commissioner of Insurance, Alice A. Molasky-Arman (June 5, 2007) 
concerning the history of United in failing to comply with state 
regulations (appended herein as Attachment B).
---------------------------------------------------------------------------

    In February 2008, California regulators imposed a potential penalty 
of $1.3 billion in fines against United for violating the law more than 
130,000 times \41\ after acquiring PacifiCare. Upon reviewing 1.1 
million claims, the investigation found that after United acquired 
PacifiCare in 2005, United failed to pay claims in a timely manner and 
had over a 10% overall error rate in processing claims. United 
wrongfully denied claims for covered medical care, with regulators 
finding that 30% of reviewed HMO claims were denied incorrectly and 55% 
of certain claims were incorrectly denied as duplicate submissions when 
they were not in fact duplicate submissions. Regulators found that 29% 
of reviewed provider disputes were handled incorrectly, and that 
documents including medical records, had been lost by United. In 
addition, United lacked sufficient staffing to process claims in a 
timely manner and had failed to provide accurate lists of in-network 
providers to consumers. Finally, regulators in California found that 
United lacked efficient procedures to handle provider disputes.
---------------------------------------------------------------------------

    \41\ Girion, Lisa, Health Plan Faces Fines of $1.33 Billion, Los 
Angeles Times, January 29, 2008.
---------------------------------------------------------------------------

    Earlier this year, the New York Attorney General announced an 
investigation of United and other insurance companies for possible 
fraud. The New York Attorney General believes the insurance companies, 
including United, have used corrupted data from United-owned firm 
Ingenix to set unfair and unjustifiably low reimbursement rates for out 
of network physicians, resulting in higher out-of-pocket costs for 
consumers.\42\
---------------------------------------------------------------------------

    \42\ Cuomo expands probe of health insurers. Modern Healthcare 
Daily Dose. March 6, 2008.
---------------------------------------------------------------------------

    In a landmark enforcement action in September 2007, Insurance 
Commissioners in 36 states assessed a $20 million fine against United 
Health for ongoing failures in processing claims and responding to 
consumer complaints.\43\ This settlement establishes numerous claims 
processing payment requirements and makes provisions for substantial 
regulatory relief and additional fines during its term which does not 
expire until December 31, 2010.
---------------------------------------------------------------------------

    \43\ Allen, Marshal. 36 States Join to Fine UnitedHealth, Las 
Vegas Sun, September 13, 2007.
---------------------------------------------------------------------------

    Finally, other states have brought similar enforcement actions 
against United. In December 2006, the Nebraska Department of Insurance 
imposed its largest fine ever when it fined United $650,000 for failing 
to handle complaints, grievances and appeals in a timely fashion. In 
March 2006, the Arizona Department of Insurance fined United $364,750 
(the largest fine in its history) for violating state law by denying 
services and claims, delaying payment to providers, and failing to keep 
proper records. In December 2005, the Texas Department of Insurance 
fined United $4 million for failing to pay claims promptly, lacking 
accurate claim data reports and not maintaining adequate complaint 
logs.

[[Page 49878]]

    We believe that these violations raise serious concerns about 
United's likely compliance with the provisions of the PFJ and highlight 
the need to strengthen the PFJ provisions. We suggest that the PFJ be 
modified to immediately impose the use of a monitor trustee to ensure 
compliance with the order.

X. Conclusion

    After an 11-month investigation of a merger posing an unprecedented 
level of concentration in perhaps the most vulnerable healthcare market 
in the United States, the DOJ chose a modest remedy on a single line of 
business. That remedy is inadequate to resolve the concerns in the 
Medicare Advantage market and is inconsistent with the DOJ's Merger 
Remedy Guidelines. But more important, the FJ fails to address the 
significant loss of competition in both the purchase of physician 
services and sale of commercial insurance markets. Although the State 
of Nevada attempted to supplement the modest DOJ action, both actions 
permit a merger that poses a significant threat of causing substantial 
harm to consumers.
    Thus, we believe the PFJ should be rejected. If the court, however, 
accepts the FJ, we strongly urge it to treat the PFJ as an interim 
remedy and expressly leave open the possibility of supplementing the 
PFJ with additional remedies to address these competitive concerns.\44\

    \44\ See remarks of former Federal Trade Commission Chairman 
Robert Pitofsky, A Slightly Different Approach to Antitrust 
Enforcement before the Antitrust Section of the American Bar 
Association, Chicago Illinois (Aug. 7, 1995). Available at http://www.ftc.gov/speeches/pitofsky/pitaba.shtm.
---------------------------------------------------------------------------

    Dated: May 15 2008.

Respectfully Submitted,
David A. Balto,
Attorney at Law,
2600 Virginia Ave., NW.,
Suite 1111,
Washington, DC 20037.

Attachment A

    In the matter of: United States of America, Plaintiff v. 
UnitedHealth Group Incorporated and Sierra Health Services, Inc.; 
Defendants.

[Civil No. 1:08-cv-00322]

Judge: Ellen S. Huvelle.

Filed: 2/25/2008.

Affidavit of Professor David Dranove

I. Qualifications

    I am the Walter McNerney Distinguished Professor of Health Industry 
Management at the Kellogg School of Management, as well as the Director 
of the Center for Health Industry Market Economics and the Director of 
Health at Kellogg. I have studied health care competition for over 20 
years and have published numerous books and peer reviewed papers on the 
topic. My vita is attached.
    I have also studied the Nevada health care market place, paying 
particular attention to physician markets in Clark County. This 
includes examining secondary data and supervising a physician survey. I 
am submitting this affidavit because I am concerned about the potential 
anticompetitive impact of the merger of UnitedHealth Group and Sierra 
Health Services, particularly the impact on the market for physician 
services.

II. Background \1\
---------------------------------------------------------------------------

    \1\ The American Medical Association paid for the time I spent 
researching the Nevada market and preparing this affidavit.
---------------------------------------------------------------------------

    The proposed merger between UnitedHealth Group and Sierra Health 
Services would create the largest private health insurer in Nevada. The 
Antitrust Division of the U.S. Department of Justice (DOJ) has reviewed 
this merger and filed a Complaint, Competitive Impact Statement, and 
Proposed Consent Order that narrowly focus on conduct and a remedy in 
the output market for Medicare Managed Care insurance. Specifically, 
UnitedHealth will be required to divest its Medicare Managed Care 
offerings as a condition for DoJ approval.
    I have extensively researched health care competition, including 
competition among insurers. I have also studied the Nevada healthcare 
marketplace, including conducting interviews and a survey of Nevada 
physicians that I describe below. In my opinion, the DoJ focus on the 
Medicare Managed Care market is too narrow. In particular, the proposed 
remedy is inadequate because it fails to address the potential for the 
United/Sierra merger to create monopsony power in the market for the 
purchase of physician services.\2\ It also does not address the 
potential for a dominant insurer to limit competition by such 
arrangements such as most favored nation contracts and bundling of 
contracts.
---------------------------------------------------------------------------

    \2\ Merger analysis focuses on the potential exercise of market 
power. ``Monopsony power'' is the power to decrease prices paid to 
producers or service providers who have little opportunity to sell 
other than to the monopsonist.
---------------------------------------------------------------------------

    In the remainder of this affidavit, I explain why I believe the 
United/Sierra merger raises concerns about monopsony power in the 
market for purchasing physician services and also why it poses a 
substantial threat of anticompetitive behavior in output markets. With 
regards to the issue of monopsony in particular, I am concerned that 
the DOJ did not apply the proper economic analysis. I discuss monopsony 
in detail in sections III-VI of this affidavit. Section VII presents a 
shorter discussion of other issues. My main conclusion is that the 
United/Sierra merger may pose a substantial risk of harm in the market 
for the purchase of physician services that would adversely affect both 
healthcare providers and consumers, and that this risk was apparently 
underestimated by the DOJ.

III. Theory of Monopsony Power

Market Definition

    In order to determine whether a merger poses a risk of the exercise 
of market power, or in this case, monopsony power it is essential to 
first define the market in which competition takes place. Markets are 
defined in both product and geographic dimensions. Competition between 
United and Sierra takes place in both input and output markets; I am 
focusing on input markets.
    Market definition requires defining both a product market and 
geographic market. I will first consider the product market. Insurers 
purchase many inputs, including physician services. There are no 
adequate substitutes for physician services, due both to training and 
licensing laws. Moreover physicians are confined to supplying services 
within their training and licensures and cannot do something else in 
response to a decrease in compensation. Thus, the purchase of physician 
services represents a relevant product market.\3\
---------------------------------------------------------------------------

    \3\ There may well be even smaller markets within the physician 
services market, such as markets for specific specialties.
---------------------------------------------------------------------------

    I believe that a relevant geographic market consists of an area no 
larger than the Las Vegas metropolitan area, which can be approximated 
by Clark County. This is a relevant geographic market from an input 
market perspective because physicians have limited alternatives in 
responding to a decrease in compensation. Physicians could not, for 
example travel to Los Angeles for additional business.\4\ At the same 
time, insurers offering provider networks to Las Vegas area employers 
and employees could not expect to do

[[Page 49879]]

business if their networks excluded Clark County providers. Thus, I 
believe it is indisputable that physician services in Clark County 
comprise a relevant market for antitrust analysis.
---------------------------------------------------------------------------

    \4\ Moreover, from the output market perspective the market is 
limited to Clark County. Insurers must market their provider 
networks to employers, who in turn make the network available to 
their employees. Most firms draw their workers from local areas, 
such as metropolitan areas. For example, it would be impractical for 
a Las Vegas casino to offer its employees a physician network that 
relied on physicians outside of Clark County.
---------------------------------------------------------------------------

It Is Appropriate To Exclude Medicare and Medicaid

    Competitive concerns arise whenever a firm, through merger, 
eliminates an important rival and gains the ability to influence 
prices. This is why market share calculations are so important to 
assessing mergers.
    A critical issue in determining the likely effect of a medical 
insurer merger on the market for physician services may be whether to 
center the analysis on the commercial market share affected by the 
merger and to exclude Medicare and Medicaid, which are typically two of 
the largest purchasers in any medical market. The DoJ does not discuss 
potential monopsony power in the input market that I have defined, 
perhaps because it included Medicare and Medicaid beneficiaries in its 
calculation of buyer side market shares, and as a result the market 
shares of United and Sierra were not large enough to rise to the level 
of monopsony. But careful consideration suggests that the market for 
measuring monopsony power does not include Medicare and Medicaid.
    A useful place to start thinking about this problem is to consider 
the more familiar problem of defining output markets. Suppose there are 
four firms--A, B, C, and D--equally dividing an output market. Suppose 
that firm A raises price by, say, $2 per unit. In the absence of 
collusive behavior, this effort is likely to fail, because consumers 
who are unhappy about the price increase will purchase the product from 
B, C, or D. This helps explain why antitrust analysts are rarely 
concerned about the potential exploitation of market power when there 
are many sellers in a market.
    Now consider the same market with the same four sellers, only this 
time B, C, and D are capacity constrained. If A raises its prices, its 
consumers would either accept the increase or do without the product. 
They would not be able to take their business elsewhere. This gives 
seller A effective monopoly power over its customers. Thus, it is the 
ability of consumers to redirect their business away from a high price 
seller, and not the number of sellers per se, that limits a seller's 
ability to increase its prices.
    The same intuition applies to monopsony. Suppose there are four 
purchasers of an input, again labeled A, B, C, and D. If purchaser A 
attempts to reduce the wage it pays for the input by $2 per unit, 
suppliers of the input would offer their services to purchasers B, C, 
and D. Thus, A's effort will fail. But if purchasers B, C, and D are 
constrained in the amount of labor inputs they can use in production, 
then sellers will not be able to redirect their output to these 
purchasers.\5\ This gives purchaser A effective monopsony power over 
its suppliers.
---------------------------------------------------------------------------

    \5\ Workers might offer their services to B. C, and D, but if 
these firms accept, they would have to lay off other workers, who in 
turn would face the same tradeoff as the new hires--work for A or 
stop working.
---------------------------------------------------------------------------

    With this intuition in hand, consider the market for physician 
services. Physicians who agree to participate in the network of insurer 
A accept a discounted fee from A in exchange for an expectation of 
higher volume. Physicians who do not agree to participate may still 
treat insurer A's enrollees as ``out of network'' patients, often 
requiring those patients to pay higher fees.
    Suppose A reduces physician fees. As noted by the DoJ in their 
complaint against the merger between United and PacifiCare,\6\ the 
ability of A to sustain this fee reduction ``depends on the physician's 
ability to terminate (or credibly threaten to terminate) the 
relationship. A physician's ability to terminate a relationship with a 
commercial health insurer depends on his or her ability to replace the 
amount of business lost from the termination (emphasis added), and the 
time it would take to do so. Failing to replace lost business 
expeditiously is costly.'' \7\
---------------------------------------------------------------------------

    \6\ United States v. UnitedHealth Group Inc., Case No. 
1:05CV02436 (D.D.C. Dec. 20, 2005), available at http://www.usdoj.gov/atr/cases/f213800/213815.htm.
    \7\ Complaint at Paragraph 36.
---------------------------------------------------------------------------

    In determining the potential exercise of monopsony power, I assume 
the DoJ considered the options available to physicians. Physicians 
might refuse to contract with A. Insurer A's patients would then have 
to go out-of-network or seek a different insurer who has kept a broad 
network. (This is analogous to the case where the would-be monopsonist 
lowers its wages, and suppliers offer their services elsewhere.) 
Physicians might be proactive, joining rival networks and encouraging 
patients (and their employers) to switch plans. As a result, insurer A 
might end up with fewer enrollees. In this way, the presence of rival 
purchasers is essential if physicians are to have a ``credible'' 
ability to terminate their relationship with insurer A.
    Physicians cannot increase volume or revenue by persuading their 
patients to sign up for Medicare, however, because enrollment in these 
programs is limited to the elderly and disabled.\8\ Nor can physicians 
collectively treat more Medicare patients, because there are a limited 
number of patients and there is no means to increase the volume of 
patients. Thus, insurer A cannot lose physician business to Medicare; 
Medicare's business is fixed. Thus, from the perspective of physicians, 
the Medicare population is fixed. An analogous argument applies to 
Medicaid.
---------------------------------------------------------------------------

    \8\ The exception is Medicare managed care, as recognized by the 
DoJ consent order.
---------------------------------------------------------------------------

    Even if physicians could collectively increase their Medicare and 
Medicaid workloads, this would not be an attractive alternative because 
Medicare, and, especially Medicaid, typically pay significantly lower 
rates than do private insurers. Medicaid rates are so much lower than 
most private insurer rates that few physicians would consider dropping 
insurer A in favor of Medicaid business even if insurer A lowered its 
rates appreciably.
    The above argument demonstrates that when defining a relevant 
market for contracting for physician services, and computing market 
shares in that market, it is appropriate to exclude Medicare and 
Medicaid. Medicare and Medicaid do not represent viable alternatives 
for physicians who face lower fees from a monopsonist insurer. Because 
Medicare and Medicaid are large purchasers of physician services, 
excluding them from market share calculations will profoundly change 
inferences about market shares and monopsony power.

IV. Evidence on Monopsony Power

Physician Survey and Interviews

    In my investigation I conducted physician telephone interviews in 
which I asked them about the competitive environment and how they might 
respond to the United/Sierra merger. Based on these interviews, I 
developed and oversaw a survey of physicians in Clark County. We sent 
surveys via e-mail, fax, and mail to the administrators of all 122 
medical group practices identified in Clark County using the Universe 
File of the Medical Group Practice Association and to a random sample 
of 333 office-based physicians in the County, drawn from the American 
Medical Association Masterfile and oversampling primary care physicians 
and obstetrician-gynecologists. Twenty-four medical group 
administrators responded (for a response rate of 22.9% after adjustment 
for invalid and duplicate records). Seventy-three physicians responded 
(for an adjusted response rate of 27.5%). Additional details of the 
survey are

[[Page 49880]]

included as an appendix to this affidavit.\9\
---------------------------------------------------------------------------

    \9\ The survey had several limitations. Due to the desire to 
maximize responses, the survey was kept deliberately short. This 
limited our ability to tailor survey questions to address specific 
economic issues. Despite the brevity of the survey, the response 
rate was too low to reach definitive conclusions. Even so, the 
findings were sufficiently suggestive that, in my opinion, the DoJ. 
should have investigated these issues more thoroughly.
---------------------------------------------------------------------------

Survey Findings Pertaining to Monopsony Power

    A purchaser has monopsony power if it faces ``upward sloping 
supply.'' That is, the firm is able to reduce the price it pays for 
inputs without driving all of its input suppliers to other purchasers. 
One way to assess the potential presence of monopsony power is to 
determine whether suppliers have viable alternatives in the event they 
could not sell to the potential monopsonist. If a purchaser had 
monopsony power, then suppliers would respond in a variety of ways; 
some would sell to other purchasers, some would do nothing different, 
and some might even shut down operations. It is this range of 
responses--the varying degrees of leverage that a purchaser possesses 
over its suppliers--that characterizes upward sloping supply.
    During my telephone interviews, I asked physicians how they would 
respond to the Sierra/United merger and a potential reduction in 
payments. Physicians offered a range of responses including closing 
their practice to doing nothing. To assess this issue more 
systematically, the survey included the following question: ``What, if 
anything, would your practice do if United and Sierra merged and you 
did not continue to have a contract with the merged health plan?''
    Here are excerpts from a sampling of responses:

I'll go to California
Close practice
Leave town
I would consider relocating to another state or join the VA
This would hurt the practice tremendously. Actually I don't know 
what I'll do.
Nothing at present
Get on other contracts that will pay higher rates
Continue to service other health plans
Make do with remaining plans
We would be out-of-network provider and try to increase the other 
plans available
'Discourage patients from getting United/Sierra health insurance

    The range of responses confirms what my telephone interviews had 
suggested, namely that some physicians have a viable alternative to 
United/Sierra but that many others would be harmed by losing the 
United/Sierra contract. This suggests that United/Sierra would have 
varying degrees of leverage over physicians, which is consistent with 
the ability to exercise monopsony power.
    These data suggest that the United/Sierra merger may be creating 
substantial monopsony power within Clark County. It was incumbent upon 
the DoJ to explore this issue more thoroughly. Their complaint and the 
proposed order suggest that they failed to do so.

Market Concentration

     In determining the competitive effects of any acquisition, it is 
often important to measure the level of concentration in the market. 
Unfortunately there is no significant public information available to 
compute market shares in the market for the purchase of physician 
services by commercial health insurers. One useful proxy would be the 
output shares of commercial health insurers. While the Bureau of Health 
Planning and Statistics of the Nevada State Health Division Department 
of Health and Human Services (henceforth, the ``Bureau'') collects data 
on HMO enrollments by plan and county, its data on PPO enrollments is 
incomplete.
    The consulting firm Interstudy offers an alternative source of 
information about HMO and PPO market shares through their Managed 
Market MSA Surveyor and Managed Market State Surveyor databases. The 
American Medical Association has used these data to produce a report 
entitled ``Competition in Health Insurance: A Comprehensive Study of 
U.S. Markets.'' Based on the 2007 update of this report, I determined 
that the market shares for Sierra and United in the Las Vegas 
metropolitan area (which closely approximates Clark County) were 38% 
and 18% respectively. The combined market share is 56%. This combined 
share, as well as the increase in share, raise substantial concerns 
about monopsony power that the DoJ does not appear to have addressed.

V. Monopsony Power Can Harm Healthcare Consumers

    Monopsony power can harm healthcare consumers in several ways. Part 
and parcel with a reduction in the compensation of physicians will be a 
reduction in the number of physicians who participate in the 
monopsonist's network. (This is the natural consequence of a 
monopsonist moving down its upward sloping supply curve.) \10\ The 
patients who previously utilized the services of physicians who are no 
longer in the network must now either (a) select another, less 
preferred physician within the network, or (b) see their prior 
physician out-of-network and consequently pay higher out-of-network 
fees. Either way, these patients are worse off than before the exercise 
of monopsony power.
---------------------------------------------------------------------------

    \10\ When supply is upward sloping, a seller with monopsony 
power profits by reducing the wages it pays, relative to the 
competitive wage. By doing so, fewer suppliers offer their goods and 
services, so that the monopsonist ends up reducing the quantity of 
output it produces.
---------------------------------------------------------------------------

    Even the patients of physicians who remain in the United/Sierra 
network may be worse off, because the reduction in the fees paid to 
these physicians may cause them to reduce the quantity and/or quality 
of services they provide. Physicians who receive lower fees will be 
forced to do more with less. This may result in longer waiting times as 
physicians are forced to reduce staffing. Economics teaches that 
physicians are to be expected to reduce their output; again, this is a 
standard prediction associated with upward sloping supply. Another 
standard result from economic theory is that sellers who experience 
lower price-cost margins will have less incentive to maintain 
quality.\11\ There is substantial evidence that this occurs in 
medicine.\12\
---------------------------------------------------------------------------

    \11\ See Spence, M. ``Monopoly, Quality, and Regulation'' Bell 
Journal of Economics 6(2), 1975 and Dranove, D. and M. 
Satterthwaite, ``Monopolistic Competition When Price and Quality Are 
Imperfectly Observable'' RAND Journal of Economics, 23(4), 1992.'
    \12\ Dranove, D. The Economic Evolution of American Healthcare 
Princeton University Press, 2000, reviews this evidence.
---------------------------------------------------------------------------

    Responses to the aforementioned survey question ``What, if 
anything, would your practice do if United and Sierra merged and you 
did not continue to have a contract with the merged health plan?'' 
confirm these concerns about patient welfare. As mentioned previously, 
some physicians might close their practices. Here are some additional 
responses:

Downsize practice
See a lot less patients
All patients would have to be self-pay under merged health plan
Lay off staff and reduce number of physicians on staff
I would consider having a cash only office,

    Several telephone interviews offered similar responses. All of 
these responses would have harmful repercussions for patients.

VI. Why Competition in the Output Market Would Not Discipline United/
Sierra

    A firm might not exercise its monopsony power if doing so harms its 
consumers who, as a result, turn to

[[Page 49881]]

alternatives in the output market. In other words, output market 
competition might discipline the would-be monopsonist. The nature of 
the provision of medical services works against such market discipline. 
Suppose that physicians in the United/Sierra network are forced to cut 
back services in response to fee cutbacks. One might think that this 
would devalue the United/Sierra products, leaving it at a disadvantage 
relative to the competition. In other words, if physician services are 
``public goods,'' whose quality applies to all of their patients, then 
the harmful effects of reduced monopsonist fees are felt by all 
patients and the monopsonist suffers no competitive harm.
    There is a public good element in many physician decisions. If 
physicians reduce their office hours, this is likely to affect access 
for all of their patients. (Physicians who contract with a monopsonist 
could not normally limit their availability to the monopsonist's 
patients only.) Similarly, if a physician cuts back on staff and/or 
equipment, or invests less in continuing education, all patients would 
suffer. Of course, if the physician exits the market altogether, all 
patients suffer. If quality is a public good, as I conjecture, then the 
monopsonist can internalize all the benefits of fee reductions while 
the harm is felt by patients enrolled by all insurers. Thus, market 
forces do not necessarily discipline the monopsonist whose aggressive 
pricing causes quality to suffer.

Concluding Comments About Quality

    Unfortunately, the DoJ complaint and consent order are silent on 
the issue of quality. In both the qualitative interviews and the survey 
conducted under my supervision, I learned about some of the ways that 
fee cutbacks could harm quality. Some of the alternatives physicians 
mentioned included exiting the market, curtailing their hours, spending 
less time with patients, and cutting back on staffing. In light of 
these responses, there should have been greater analysis of the 
potential impact of the United/Sierra merger on the quality of 
physician.

VII. Contractual Provisions That Raise Competitive Concerns

    The purpose of merger enforcement is to prevent the creation of 
market power or its exercise. In some cases, in order to prevent 
competitive harm from a proposed merger the antitrust agencies and the 
courts may impose some type of injunctive relief. In this case, I 
believe the DoJ should have sought to prohibit two types of 
arrangements: most favored nation provisions and all products clauses.

Most Favored Nation Provisions

    In my experience, many large insurers exploit their size by 
demanding and receiving most favored nation status from providers. A 
most favored nation provision requires the provider to offer the 
dominant insurer the most favorable rate it offers to any other 
insurer. Both theory and empirical evidence suggest that most favored 
nation status harms consumers by discouraging providers from 
aggressively discounting to other insurers.\13\ Most favored nation 
provisions may prevent other insurers from entering or expanding in the 
market through these favorable discounting arrangements. The DoJ 
complaint and the proposed consent order are silent on this issue. The 
DoJ should have required the combined United/Sierra to foreswear MFN as 
a condition for approving the deal.
---------------------------------------------------------------------------

    \13\ For example, see Scott Morton, F. ``The Strategic Response 
by Pharmaceutical Firms to the Medicaid Most-Favored-Customer 
Rules'' RAND Journal of Economics, 28(2), 1997 for an exposition of 
the theory and evidence from pharmaceutical pricing. The theory is 
broadly applicable to other markets including physician services.
---------------------------------------------------------------------------

Bundling and All Products Clauses

    It is also my experience that large insurers often require 
providers to abide by ``all products clauses'' whereby a provider who 
wishes to be a preferred provider for one of the insurer's products 
must agree to contract for all of that insurer's products. I am 
particularly concerned about the ability of a large insurer to bundle 
products in different markets. In particular, I believe that the 
combined United/Sierra will have monopsony power in the market for 
securing physician services for privately insured patients. It may now 
use that market power to bundle together contracting in the Medicare 
Advantage and private insurance markets. Such bundling would not offer 
any obvious promise of efficiencies and should be viewed with 
skepticism by anyone promoting market efficiency.
    It is not obvious from the DoJ complaint and consent order whether 
these issues were investigated or how they were resolved. The DoJ 
should have explored these issues and if they believed there was 
potential for such bundling, the combined United/Sierra should have 
been required to allow physicians to contract separately for private 
insurance and the Medicare Advantage program.
May 13, 2008.
David Dranove,
Walter McNerney Distinguished Professor of Health Industry 
Management,
Northwest University.

Appendix: Survey Methods

Setup Procedures

    All documents were verified by project client. Documents included 
the cover letter and survey instrument with a version each for the 
medical group sample and one for the physician practice sample.
    All materials included the logos and respective signatures from: 
AMA, the county medical society, and the state medical society of 
Nevada.
    The project client provided the sample database of medical groups 
and physician practices, including the name and phone number of a 
contact.
    PRS provide the fax number and address for mailings in the phone 
calls, as appropriate.

Mailing Procedures Medical Group Sample

    On February 12, 2008 Population Research Systems (PRS) mailed the 
survey to the medical groups, with a cover letter and business-reply 
envelope, to the 122 medical group administrators in the Clark County, 
NV medical group file. The outgoing envelope was addressed to the name 
of the person or the administrator, when available, otherwise the term 
``Practice Administrator'' was included, for example: Ms. Jean Smith or 
Practice Administrator, Desert Medical Group, 1234 Pine Hill Drive, Las 
Vegas, 11111.
    About 9-10 days after the initial mailing, PRS faxed another survey 
and cover letter, to all non-respondents from among the 122 group 
administrators.
    Another 5 days later, the sample with non-responders, invalid or 
missing fax numbers was returned to the project client, who conducted a 
round of reminder phone calls and updated all invalid fax numbers. 
Contacted medical groups who requested another fax received one from 
PRS within 24 hours of that information being provided by the project 
client. PRS also sent another fax to all invalid and missing fax 
numbers.
    About 6 days after the reminder call, PRS sent another round of 
faxes to all non-responders.
    Another 10 days later, PRS initiated another round of faxes to all 
non-responders, followed immediately by a second round of reminder 
calls conducted by the telephone staff of PRS. PRS attempted every 
record until a respondent or answering machine was reached, and PRS 
telephone interviewers left scripted messages on answering machines 
(see below).

[[Page 49882]]

Telephone Reminder Script

    Hi, my name is ------, and I am calling on behalf of the AMA. 
Yesterday, we sent you a fax with a very brief survey about the United/
Sierra merger in Clark County, and we are very interested in your 
opinion. Please take a few minutes to complete the survey and fax it 
back to the number shown on the cover letter. We will keep your 
responses confidential.
    If Not Received Fax:
    Can you confirm your fax number for me so we can send you another 
fax? ----------
    We appreciate your participation. Thank you.

Response Rate

    This effort resulted in a total of 24 completed surveys, out of a 
sample of 102 records. Of those 102 records, 7 records were invalid 
(group did not exist, was closed, wrong address/name) and 101 records 
were duplicates within the sample, resulting in 86 valid records. Out 
of those 86 valid records, 24 completes constitute a corrected response 
rate of 28.2%.
[GRAPHIC] [TIFF OMITTED] TN22AU08.002

Count of IDsStatus Total Complete 24 Invalid record 7No response 61 
Datereord JQJ Grand Total 1021Mailing Procedures Individual Physician 
Sample

    On February 12, 2008 PRS e-mailed the cover letter and survey 
embedded in the body of the e-mail message to 353 physicians identified 
by the project client. PRS inserted the medical society logos into the 
email itself, as well as the signatures, similar to the Medical Group 
survey.
    About 3 days after the initial e-mail, PRS faxed a reminder survey 
to all physicians who had not responded at that point. The cover letter 
for the fax was slightly different from the e-mail cover letter to 
reflect the change of modus.
    Approximately 8 days later, the sample with non-responders, invalid 
or missing fax numbers was returned to the project client, who 
conducted a round of reminder phone calls and updated all invalid fax 
numbers. Contacted medical groups who requested another fax received 
one from PRS within 24 hours of that information being provided by the 
project client. PRS also sent another fax to all invalid and missing 
fax numbers.
    About 7 days after the reminder call, PRS sent another round of 
faxes to all non-responders.
    Another 6 days later, PRS initiated another round of faxes to all 
non-responders, followed immediately by a second round of reminder 
calls conducted by the telephone staff of PRS. PRS attempted every 
record until a respondent or answering machine was reached, and PRS 
telephone interviewers left scripted messages on answering machines 
(see script above).
    During this process, PRS noted that 13 records of the original 
sample were duplicates (duplicate e-mail, address and fax number, and 
those records were replaced with another 13 records, resulting in a 
final total of 353 records.

Response Rate

    This effort resulted in a total of 73 completed surveys, out of a 
sample of 353 records. Of those 353 records, 55 records were invalid 
(group did not exist, was closed, wrong address/name) and 13 records 
were duplicates within the sample, resulting in 285 valid records. Out 
of those 285 valid records, 73 completes constitute a corrected 
response rate of 25.6%.
[GRAPHIC] [TIFF OMITTED] TN22AU08.003

Attachment B

June 5, 2007.
Honorable Alice A. Molasky-Arman
    Nevada Commissioner of Insurance
     Division of Insurance-Legal Section
    788 Fairview Drive, Suite 300
    Carson City, NV 89701-5491
Re: UnitedHealth Group Acquisition of Sierra Health Systems
Dear Commissioner Molasky-Arman:
    The AMA is writing to express its strong opposition to the proposed 
acquisition of Sierra Health Systems (Sierra) by UnitedHealth Group 
(United). The AMA has urged the United States Department of Justice to 
block the merger because of the impact in Nevada. The impact in the 
state of Nevada is unlike the impact in any market of any previous 
health insurer merger. Our testimony will focus on the anti-competitive 
effect this merger will have on Nevada insurance markets, a negative 
effect that will be compounded by questionable business practices 
engaged in by United in other markets. We also strongly support the 
position of the Nevada State Medical Association.
    It is clear that United's goal in pursuing this merger is to 
dominate the Nevada insurance market, in particular Las Vegas. The 
numbers are truly staggering, as shown in the attached chart. For the 
past five years, the AMA has conducted the most in-depth study of 
commercial health insurance markets (by actual reported enrollment) in 
the country. This study, Competition in Health Insurance: A 
Comprehensive Study of U.S. Markets, is based on the most current and 
credible data available and includes both HMO and PPO products. The AMA 
is in the process of finalizing our most recent edition, based on 2004 
data. The findings for Nevada strongly suggest that this merger 
undermines competition in Nevada and in Las Vegas especially.
    The AMA analysis of InterStudy and HealthLeaders data shows the 
following:
     At the state level, in the combined HMO/PPO market, United 
would have a market share of 43% after the merger, compared to its 
current market share of 14%. In the HMO market, United would have a 78% 
market share after the merger, compared to its current 11 % market 
share.
    In the Las Vegas-Paradise metropolitan statistical area (MSA), in 
the combined HMO/PPO market, United would have a market share of 56% 
after the merger, compared to its current market share of 18%. United 
would have a market share of 95% after the merger, compared to its 
current market share of 13% in the HMO market.
    These market shares should be considered in the context of the 
financial aspects of United's operations. At a time when premiums 
continue to escalate, United is posting high profit margins. Since 
2002, United has posted year-end earning increases of between 27% and 
53%. For 2006 its net earnings increased 27%. United has also awarded 
its senior executives mind-boggling compensation packages over this 
same time period. United is currently in the midst of several ongoing 
investigations and shareholder lawsuits over illegally backdating 
senior executives' stock options to increase their already extravagant 
compensation.

 The Threat of Market Dominance

    The AMA has long been concerned that ongoing consolidation of 
health insurance markets will ultimately lead to a market dominated by 
one or two health insurers that places profits over patients. The 
ascendancy of a dominant health insurer jeopardizes patient care in two 
important ways. First, without competition to help ensure that patient 
and employer choice counterbalance profit motives, the for-profit 
health

[[Page 49883]]

insurer's drive to maximize profits will inevitably compel it to place 
profits over patients.
    Second, physicians have a professional, legal, and ethical 
responsibility to advocate on their patient's behalf. In the presence 
of health plan dominance the physician's role as patient advocate 
becomes even more critical. However, that role is being systematically 
undermined as dominate insurers are able to impose take-it or leave-it 
contracts that include provision that directly impact patient care, 
such the determination of what is ``medically necessary care.'' A 
physician who engages in aggressive patient advocacy risks exclusion 
from the dominant health plan's network and faces the realistic 
possibility that his/her practice will no longer be financially viable. 
In the presence of these dynamics, only state oversight and 
intervention can prevent deterioration of the patient-physician 
relationship, foster physician advocacy, and make patient choice a 
reality.

 United's Failure to Comply With State Regulations

    United's conduct shows a dismissive attitude towards its state 
regulatory obligations. It has been fined by a number of states for 
failing to comply with state law since 2001. Moreover, in some of those 
states, United has been fined more than once for the same conduct. 
United has the unenviable position of having had the largest fines ever 
levied against a health insurer in several states.
Specific examples include:
    Arizona: In March 2006, the Arizona DOI fined United for the second 
time for violations of a number of state laws. These include state 
prompt payment laws, and state laws on member's rights to appeal 
denials of care. United was fined $364,750, the largest fine in 
Arizona's history. This was the second fine levied against United for 
similar violations. The first was in 2003. In the 2006 case, the 
director of the Arizona DOI stated that, ``I will not tolerate knowing 
violations of consent orders.''
     Nebraska: In December 2006, the Nebraska DOI filed a 
complaint which stated that United violated 18 state laws over 800 
times. United delayed decisions, made incorrect decisions about 
coverage, and had an inadequate network of emergency services in rural 
areas. A settlement was reached in May 2007. It includes a $650,000 
fine, the largest ever levied by the Nebraska DOI. The settlement also 
requires United to meet customer service standards and to give United's 
Nebraska staff the final decision on claims and grievances. This was 
the second time United has been fined for similar state law violations. 
The 2005 investigation resulted in United paying a $72,500 fine.
     New York: In 2006, the New York State Health Department 
took the unusual step of banning United from enrolling any new 
customers in its HMO plan because United continued to repeatedly defy 
state regulations. These include wrongly denying payment to providers 
and filing incomplete and inaccurate reports with the state. A state 
official noted that, ``we've had several years of findings, United 
doing corrective action plans, but then we go out again, and we have 
the same findings.''
     Rhode Island: In April 2007, UnitedHealthcare of New 
England was fined $67,500 for violating a state law intended to protect 
health-insurance coverage for small-business employees. United failed 
to provide documentation showing that it had complied with the law. In 
addition, according to documents released by the Health Insurance 
Commissioner's office, United overcharged members who were in poor 
health.
     Texas: Between 2001 and 2005, the Texas Department of 
insurance (TDI) has fined United three times for violating Texas prompt 
pay laws. The most recent fine, issued in December 2005, included a 
finding that United failed to report accurate and complete provider 
claims data for over 2 years. The 2005 fine totaled $4 million and 
United also agreed to pay restitution to physicians.
     Missouri: In Schoedingerg vs. United, a Missouri physician 
sued United for failing to comply with the state prompt payment law. In 
its finding of facts, the court found that the plaintiff had proven 
that United did not pay his claims within the time period set by 
Missouri law. Specifically, the 2006 opinion found that ``United's 
claims processing system was flawed in many ways, including denying, 
reducing and improperly processing claims on a regular basis. And 
despite innumerable requests, United was unwilling to remedy the 
underlying errors in its systems. United was consistently delinquent in 
paying claims.''

 Ongoing State Investigations of United's Business Conduct

    In the past several months, two states have announced 
investigations into United's business practices and whether they comply 
with state law. These investigations are specified below.
     California: The California Department of Insurance and the 
California Department of Managed Health Care (CDMHC) have announced an 
investigation into a range of United business practices. According to 
the California Medical Association (CMA), there is a liaison process 
between CMA and United. While United is generally responsive to the 
individual physician complaints, it is not responsive to fixing the 
underlying issues. This causes the objectionable practices to continue 
which must be battled one physician and one claim at a time. The 
regulators indicated that their objective is to bring United into 
compliance with state laws for the benefit of California patients.

    [cir] Note: in May 2007, the CDMIIC found that United subsidiary 
PacifiCare engaged in ``dishonest and unfair'' conduct when it failed 
to disclose its planned termination of a provider network during open 
enrollment. The CDMHC ordered PacifiCare to continue to authorize and 
allow access to the network through November 2007.

     New Jersey: In April 2007, the New Jersey Department of 
Banking and Insurance ordered United to justify a lab referral protocol 
that has outraged physicians across the country. This policy, which was 
the outgrowth of a 10-year exclusive contract with Lab Corp, provides 
that if physicians refer to an out-of-network lab, they can be fined or 
dropped from the network. This is the first instance of a health plan 
threatening financial penalties for out-of-network referrals. The DOBI 
ordered United to ``appear and show cause why it should not be required 
to pay restitution or take other remedial measures.'' This is in 
regards to the effects of its proposed sanctions on physicians.
    The AMA believes that United's conduct reflects a philosophy that 
it is more cost-effective to violate state law and possibly pay a fine 
than to assure compliance with laws designed to protect both patients 
and physicians. The AMA's first concern is that this unprecedented 
merger will create monopoly conditions in Nevada to the detriment of 
Nevada citizens. That being said, given the magnitude of this merger in 
Nevada and United's track record in other states, if this merger is 
allowed to go forward, it is incumbent on the Nevada Department of 
insurance to assure that United is held accountable for compliance with 
state laws.
    If the AMA can be of further assistance, please do not hesitate to 
contact me. The AMA appreciates the opportunity to comment on this 
matter.
    Sincerely,


[[Page 49884]]


Michael D. Maves, MD, MBA.
Attachment
cc: Larry Matheis, Executive Director, Nevada State Medical 
Association.

Attachment C

Testimony of David Balto On Behalf of the American Antitrust Institute 
and Consumer Federation of America Before the Nevada Commissioner of 
Insurance on the United Health Group Proposed Acquisition of Sierra 
Health Services \1\ (July 27, 2007)
---------------------------------------------------------------------------

    \1\ I have practiced antitrust law for over 20 years, primarily 
in the federal antitrust enforcement agencies: the Antitrust 
Division of the Department of Justice and the Federal Trade 
Commission. At the FTC, I was attorney advisor to Chairman Robert 
Pitofsky and directed the Policy shop of the Bureau of Competition. 
Maria Patente, Washington College of Law (Class of 2008), provided 
extensive assistance in the preparation and research of the 
testimony.
---------------------------------------------------------------------------

I. Introduction

    The American Antitrust Institute (``AAI'') and Consumer Federation 
of America, (``consumer groups'') appreciate this opportunity to 
testify before the Commissioner of Insurance on United Health Group's 
(``United'') proposed acquisition of Sierra HealthServices, Inc. 
(``Sierra'').\2\ As detailed in our testimony based on our preliminary 
review, we strongly believe that this acquisition will harm all Nevada 
health insurance consumers, particularly those in Clark County, through 
higher prices, less service, and lower quality. The level of 
concentration posed by this merger is simply unprecedented: it is 
greater than in any merger approved by the Antitrust Division of the 
U.S. Department of Justice (``DOJ'') and would give United clear 
monopoly power in Clark County.
---------------------------------------------------------------------------

    \2\ The American Antitrust Institute is an independent 
Washington-based non-profit education, research, and advocacy 
organization. Its mission is to increase the role of competition, 
assure that competition works in the interests of consumers, and 
challenge abuses of concentrated economic power in the American and 
world economy. For more information, please see 
www.antitrustinstitute.org. This working paper has been approved by 
the AAI Board of Directors. A list of contributors of $1,000 or more 
is available on request. The Consumer Federation of America 
(``CFA'') is the nation's largest consumer-advocacy group, composed 
of over 280 state and local affiliates representing consumer, senior 
citizen, low income, labor, farm, public power and cooperative 
organizations, with more than 50 million individual members. CFA 
represents consumer interests before federal and state regulatory 
and legislative agencies and participates in court proceedings. CFA 
has been particularly active on antitrust issues affecting health 
care.
---------------------------------------------------------------------------

    In evaluating this merger under NRS 692C.210(1) the Commissioner of 
Insurance must consider several factors including: (1) whether ``the 
effect of the acquisition would be substantially to lessen competition 
in insurance in Nevada or tend to create a monopoly'' and (2) whether 
if approved the ``[a]cquisition would likely be harmful or prejudicial 
to the members of the public who purchase insurance.'' As we explain 
below, both of these factors counsel for denial of the application 
because the merger creates a dominant insurer, particularly in Clark 
County, with the ability to raise premiums, reduce service and quality 
and reduce compensation to providers. It will clearly harm purchasers 
of insurance who will pay more for service that provides lower quality 
care.
    This unprecedented level of concentration raises important policy 
and health care concerns relevant to the factors evaluated in these 
Hearings. As Vermont Senator Patrick Leahy observed in Hearings before 
the Senate Judiciary Committee last year on health insurance 
consolidation:

    a concentrated market does reduce competition and puts control in 
the hands of only a few powerful players. Consumers--in this case 
patients--are ultimately the ones who suffer from this concentration. 
As consumers of health care services, we suffer in the form of higher 
prices and fewer choices.\3\
---------------------------------------------------------------------------

    \3\ Statement of Senator Patrick Leahy, Hearing on ``Examining 
Competition in Group Health Care'' U.S. Senate Committee on the 
Judiciary (Sept. 6, 2006).

    Creating a dominant insurance provider should be a profound concern 
in Nevada, a state plagued with shortages of nurses, doctors and other 
health care professionals.
    This testimony, which is based solely on public information, 
provides our preliminary views that this merger would ``substantially 
to lessen competition in insurance in Nevada or tend to create and 
monopoly'' and ``would likely be harmful or prejudicial to the members 
of the public who purchase insurance.'' This paper also addresses the 
United-Sierra merger in the context of the numerous competitive 
imperfections and market failures unique to the HMO and health 
insurance industry and with respect to the specific challenges facing 
Nevada's health care due to a serious shortage of doctors and nurses.

II. Summary

    The consumer groups urge the Commissioner to focus on the following 
issues:
     Will the United-Sierra merger reduce competition for the 
provision of health insurance to employers and individuals seeking 
health coverage in Nevada? Yes, Sierra is the largest HMO provider in 
Nevada and United is the only significant rival. The United-Sierra 
merger in Nevada would give United a 80% market share of all HMOs in 
Nevada and a 94% market share of the HMO market in Clark County. 
Although its market share is smaller than Sierra's, United has the 
potential for significant growth in Nevada since its acquisition of 
PacifiCare in 2005. Moreover, the next largest HMO rival in Clark 
County has only a 2% market share. The merger would adversely affect a 
wide range of buyers including small employers, governmental and union 
purchasers.
     Will the United-Sierra merger reduce competition for the 
provision of services in the Medicare Advantage program? Yes. Medicare 
is increasingly turning to a managed care model. Increasingly Medicare 
beneficiaries are signing up for the Medicare Advantage program which 
provides health care services to beneficiaries in a managed care model. 
The only current bidders for Medicare advantage in Nevada are United 
and Sierra. United is the largest Medicare Advantage program in the 
U.S. The merger would create a monopoly in the provision of services 
for Medicare Advantage program resulting in a lower level of care and 
prices.\4\
---------------------------------------------------------------------------

    \4\ A large number of the consumer complaints filed with the 
Commissioner about this merger raise concerns over the loss of 
competition in the Medicare Advantage market. Many of these 
complaints are from elderly beneficiaries who are particularly 
vulnerable to anticompetitive conduct. Over 30% of Nevada Medicare 
beneficiaries subscribe to Medicare Advantage, one of the highest 
enrollments of any state.
---------------------------------------------------------------------------

     Could the United-Sierra merger increase the threat of 
monopsony power and reduce access to medical care and the quality of 
medical care in Nevada? Yes, there is currently a significant and 
chronic shortage of health care providers including physicians and 
nurses in Nevada, an understaffed region where health professionals are 
forced to work overtime, double-shifts, weekends, and holidays. This 
merger will exacerbate those problems for health care providers 
dependent upon the merged firm. A combined United-Sierra can reduce 
compensation resulting in a diminution of service and quality of care. 
In the past the DOJ has brought enforcement actions because of concerns 
over monopsony power where the market share exceeded 30%, a level 
clearly exceeded by this acquisition. This merger may lead to a 
significant reduction in reimbursement for health care providers, 
leaning to lower service and quality of care.
     Will other insurance companies readily enter the market 
(or expand) and fully restore the competition lost

[[Page 49885]]

from the merger? No. In some cases it may be unnecessary to challenge a 
merger if other firms can readily enter a market to a sufficient degree 
to avert the anticompetitive effects of the merger. That is clearly not 
the case for this market. As the DOJ has recognized in other cases, 
barriers to entry in the HMO market are extremely high due to the 
extensive physician networks, technology networks, and specialized 
medical infrastructure that are essential to the industry. Moreover, 
Nevada already faces a serious shortage of both doctors and nurses, and 
attracting a sufficient number of personnel would pose a high barrier 
for a new entity interested in providing HMO plans in Nevada. There has 
been little historical entry into the Nevada HMO market, in spite of 
the growth of population. Moreover, with a dominant United-Sierra, it 
is highly unlikely a new entrant would undertake the risk of new entry.
     Do the efficiencies from the United-Sierra outweigh the 
anticompetitive harms? No. The parties have not proposed significant 
efficiencies from this consolidation. If there were any efficiencies 
they probably could be achieved through internal growth, considering 
the rapid population growth in Nevada. Moreover, efficiencies should 
only be included in the competition calculus if they will result in 
lower prices or better service to consumers. As a general matter, 
efficiencies from health coverage mergers have not been passed on to 
consumers. Health insurance mergers have generally led to increased 
subscriber premiums without expansion of medical benefits. There is 
little evidence if any that any efficiencies achieved in the United-
PacifiCare merger have resulted in lower premiums or better service for 
United or former PacifiCare subscribers. Since the combined United-
Sierra would have a dominant market share post-merger it is highly 
unlikely any savings would be passed on to consumers.
     Would a divestiture or other structural relief be 
sufficient to alleviate the competitive problems raised by the merger? 
No. The parties have not suggested that they would be willing to divest 
assets to solve the competitive concerns raised by the merger. Even if 
they did the Commissioner should be extremely skeptical of any proposed 
relief. In the past the DOJ has attempted to resolve competitive 
concerns over some mergers by requiring the divestiture of a certain 
number of contractual arrangements in order to spur new entry. These 
divestitures have been insufficient to cure the competitive problems 
posed by those mergers. A divestiture is even less likely to resolve 
the competitive concerns in this merger where the merged firm will 
clearly be the dominant insurer in the market.
     Would consumers be better off if the Commissioner rejected 
the merger? Yes. The antitrust question in evaluating any merger is 
what would happen ``but for'' this merger? What would happen to the 
merging parties, consumers, and providers? The answer in this case 
seems rather transparent. United and Sierra are both successful, 
financially sound, capable companies that would continue to grow and 
thrive. Through its acquisition of PacifiCare, United established an 
important beachhead in Nevada. But for this merger, United would 
continue to expand in Nevada and challenge Sierra's strong position in 
the market. That competition between United and Sierra would lead to 
lower premiums, greater innovation and better service. There is simply 
no reason why United can not achieve most of the benefits of this 
acquisition through internal growth.
    The remainder of the testimony is set forward as follows. First, we 
make some observations about special considerations for health insurer 
mergers and suggest why regulators and enforcers can not rely on the 
theoretical assumptions of a competitive market. Then we focus on past 
enforcement actions and the principles of antitrust enforcement. We 
then explain how the merger will reduce competition in both the 
provision of certain health insurance products (impact on buyers) and 
health care providers (impact on sellers). Finally, we explain why 
other factors such as ease of entry or efficiencies will not prevent 
the anticompetitive effects of the merger.

III. Antitrust Merger Standards and Past Antitrust Enforcement Actions

    The U.S. antitrust laws, like the Nevada insurance statute, provide 
that a merger may be illegal if it may ``tend substantially to lessen 
competition or to tend to create a monopoly.'' \5\ The concern under 
the merger laws is that a merger may tend to reduce competition and 
lead to higher prices, lower service, less quality, or less innovation. 
Concerns over a reduction in quality, central to the delivery of health 
care services, is an important element of competition.\6\ As the 
Supreme Court has observed, competition protects ``all elements of a 
bargain--quality, service, safety, and durability--and not just the 
immediate cost.'' \7\
---------------------------------------------------------------------------

    \5\ Clayton Act, 15 U.S.C. Sec.  18. There is no case law 
evaluating the competitive legality of mergers under NRS 
692C.210(1), however the language of the statute is identical to the 
Clayton Act. Thus, it is appropriate to apply the standards of 
federal antitrust law. The Nevada antitrust statute is similar to 
the Clayton Act. It prohibits mergers that will ``result in the 
monopolization of trade or commerce * * * or would further any 
attempt to monopolize trade or commerce'' or ``substantially lessen 
competition or be in restraint of trade.'' NRS 598A.060(1)(f).
    \6\ Section 7 prohibits anticompetitive reductions in quality 
because it is equivalent to an increase in price--consumers pay the 
same (or greater) price for less. Community Publishers, Inc. v. 
Donrey Corp., 892 F. Supp. 1146, 1153 n.8 (W.D. Ark. 1995), aff'd 
sub nom. Community Publishers, Inc. v. DR Partners, 139 F.3d 1180 
(8th Cir. 1998); Merger Guidelines, Sec.  0.1 (``Sellers with market 
power also may lessen competition on dimensions other than price, 
such as product quality, service, or innovation.''); id. Sec.  1.11.
    \7\ Nat'l Soc'y of Prof. Eng'rs v. United States, 435 U.S. 679, 
695 (1978).
---------------------------------------------------------------------------

    In order to determine the likely competitive effects of a merger 
the case law and the Merger Guidelines established by the Department of 
Justice and the Federal Trade Commission set forth a multi-step 
process.\8\ The process begins by defining the ``line of commerce'' or 
relevant product market and the ``section of the country'' or relevant 
geographic market. A relevant market can include any group of products 
or services. Once a relevant market is defined, the level of 
concentration and market share is calculated to determine the likely 
competitive effects of the merger. In cases where there is an undue 
level of concentration in the relevant market (generally a market share 
over 30%) there is a prima facie case of illegality and a presumption 
of unlawfulness.\9\ If there is a presumption of unlawfulness then the 
burden shifts to the defendants to rebut the prima facie case and

[[Page 49886]]

demonstrate that other market characteristics make the presumption of 
anticompetitive effects implausible. Two types of evidence are 
prominent in merger cases--if the defendants can offer evidence that 
entry is relatively easy, that may dispel the notion that the merger 
will lead to significant anticompetitive effects. Finally, if a merger 
will lead to substantial efficiencies, these may counteract those 
anticompetitive effects.
---------------------------------------------------------------------------

    \8\ U.S. Dep't of Justice and Federal Trade Comm'n, Horizontal 
Merger Guidelines (1997) (hereinafter ``Merger Guidelines''). The 
Nevada statute provides that in determining whether to approve a 
merger the Commissioner of Insurance ``shall consider the standards 
set forth in the Horizontal Merger Guidelines * * *'' NRS 
692C.256(2).
    \9\ Concentration in merger cases is expressed in terms of 
market shares and a measure known as the Herfindahl Hirschman Index 
(``HHI''). The HHI is calculated by adding together the squares of 
the market share of individual competitors in the market. In a 
market with a single seller, the HHI is 10,000. The FTC/DOJ Merger 
Guidelines provide that an HHI below 1000 corresponds to an 
``unconcentrated'' market; an HHI between 1000 and 1800 corresponds 
to a ``moderately concentrated'' market, and an HHI above 1800 
corresponds to a ``highly concentrated'' market. The HHI is a 
screening tool used to assess whether a proposed merger will lead to 
anticompetitive consequences. Under the Guidelines different 
presumptions apply, depending on the extent of post-merger market 
concentration and the increase in HHI that will result from the 
merger. The greatest competitive concerns are raised where the post-
merger HHI exceeds 1800. In such cases, it is ``presumed that 
mergers producing an increase in the HHI of more than 100 points are 
likely to create or enhance market power or facilitate its 
exercise.'' Merger Guidelines, Sec.  1.51.
---------------------------------------------------------------------------

    The two most instructive antitrust cases involving health insurance 
mergers are the DOJ's challenges to Aetna's 1999 acquisition of 
Prudential and United's 2006 acquisition of PacifiCare. Both of these 
mergers were resolved with divestitures to facilitate the entry of a 
new competitor to remedy the competitive concerns. Each case focused 
both on the harm to purchasers of HMO and other insurance services from 
the exercise of monopoly power and the harm to healthcare providers 
from the exercise of monopsony power.\10\ In both the United-PacifiCare 
and the Aetna-Prudential mergers, the DOJ identified highly 
concentrated markets that were substantially likely to suffer harm to 
competition as a result of these mergers.
---------------------------------------------------------------------------

    \10\ Health insurers play dual roles as sellers of insurance 
services and buyers of health care services. In its first role, the 
health insurer's ``output'' consists of health benefit packages, and 
the output prices are paid for by customers in the form of 
subscriber premiums. In the role as the seller of health benefits, a 
dominant health insurer in a concentrated market could potentially 
act as a ``monopolist'' charging an above market price for health 
benefits. In its second role, the health insurer acts as a buyer, 
and the input consists of physician and other medical services. The 
insurer's input prices are the compensation it pays in the form of 
physician fees and fees for medical services. In this role, the 
health insurer may act as a ``monopsonist,'' reducing the level of 
services or quality of care by reducing compensation to providers. 
Health insurers are both buyers of medical services and sellers of 
insurance (to consumers), so insurance mergers can raise both 
monopsony and monopoly concerns.
---------------------------------------------------------------------------

    In 1999, the DOJ and the State of Texas settled charges that the 
merger between Aetna and Prudential in the State of Texas would harm 
competition. The DOJ focused on relevant markets of HMO products and 
physician services. Aetna and Prudential were head to head competitors 
in the HMO markets in Houston and Dallas. The proposed merger would 
have increased Aetna's market share from 44% to 63% in Houston and 26% 
to 42% in Dallas.\11\
---------------------------------------------------------------------------

    \11\ These market shares are substantially smaller than the 
market shareswhich would result from the United-Sierra merger in the 
HMO markets of Nevada and Clark County (80% in Nevada and 94% in 
Clark County).
---------------------------------------------------------------------------

    Moreover, the merger raised monopsony concerns by giving the merged 
firm the potential to unduly suppress physician reimbursement rates in 
Houston and Dallas, resulting in a reduction of quantity or degradation 
of quality of medical services in the areas.\12\ The operative question 
from DOJ's perspective was could health care providers defeat an effort 
by the merged firm to reduce provider compensation by a significant 
amount, e.g., 5%. The question was answered in the negative for several 
reasons: physicians have limited ability to encourage patients to 
switch health plans, and physicians' time (unlike other commodities) 
cannot be stored, which means that physicians incur irrecoverable 
losses when patients are lost but not replaced. To exacerbate matters, 
contracts with physicians were negotiated on an individual basis, and 
were therefore susceptible to price discrimination by powerful buyers. 
Thus, DOJ concluded that Aetna had sufficient power to impose adverse 
contract terms on physicians, especially decreased physician 
reimbursement rates, which would ``likely lead to a reduction in 
quantity or degradation in the quality of physicians' services.'' \13\
---------------------------------------------------------------------------

    \12\ United States v. Aetna,, Revised Competitive Impact 
Statement, Civil Action 3-99CV1398-H.
    \13\ Id.
---------------------------------------------------------------------------

    To resolve these competitive concerns the DOJ ordered Aetna to 
divest its entire interest in NYLCare-Gulf Coast and NYLCare-Southwest, 
its Houston and Dallas commercial HMO business. This consisted of 
260,000 covered lives in Houston and 167,000 covered lives in Dallas.
    In 2006, the DOJ investigated the merger between United and 
PacifiCare and focused on potential competitive concerns in relevant 
markets for commercial health insurance for small group employers in 
Tucson, Arizona and physician services in both Tucson and Boulder, 
Colorado.\14\ Small group employers are employers with 2-50 employees. 
The merger would have combined the second and third largest providers 
of commercial health insurance in Tucson and increased United's market 
share from 16% to 33%.
---------------------------------------------------------------------------

    \14\ United States v. UnitedHealth Group Inc., Case No. 
1:05CV02436 (D.C.C. Dec. 20, 2005), available at http://www.usdoj.gov/atr/cases/f213800/213815.htm.
---------------------------------------------------------------------------

    The merger also raised concerns over the potential harm to 
competition in the purchase of physician services in both Tucson and 
Boulder. The DOJ explained that by combining United and PacifiCare 
``the acquisition will give United the ability to unduly depress 
physician reimbursement rates in Tucson and Boulder, likely leading to 
a reduction in quantity or degradation in the quality of physician 
services.'' \15\ In other words the DOJ found that a health plan's 
power over physicians to depress reimbursement rates can be harmful to 
patients--the ultimate consumers of health care. The market shares 
involved were relatively modest: in excess of 35% in Tucson and in 
excess of 30% in Boulder ``for a substantial number of physicians in 
those areas.''
---------------------------------------------------------------------------

    \15\ United States v. UnitedHealth Group, Competition Impact 
Statement at 8, available at http://www.usdoj.gov/atr/cases/f215000/
215034.htm.
---------------------------------------------------------------------------

    In response to the potential harm to competition, the DOJ required 
United to divest contracts covering at least 54,517 members residing in 
Tucson, Arizona to yield a post-merger market share equal to its pre-
merger market share. Furthermore, the DOJ required United to divest 
6,066 members covered under its contract with the University of 
Colorado. This divesture constituted nearly half of PacifiCare's total 
commercial membership in Boulder.
    The antitrust laws protect not only consumers but any group of 
buyers, potentially including a governmental buyer. Buyers of health 
insurance services have varying needs and ability to secure competitive 
rates. An example of this is a case filed by the City of New York 
challenging the merger between Group Health Incorporated (``GHI '') and 
the Health Insurance Plan of greater New York (``HIP'') in the fall of 
2006.\16\ There are numerous health insurance competitors, including 
HMOs and PPOs in the New York City market, but for the low cost product 
required by the City and affiliated entities the only rivals were GHI 
and HIP. The case alleged that the merger of GHI and HIP would create a 
monopoly in the New York metropolitan area market for low cost health 
insurance purchased by the City of New York and its employee unions 
together with the city's employees and retirees as well as 35 other 
employers with ties to the city and their employees and retirees such 
as the Housing Authority, the Metropolitan Museum of Art and 
universities (all of which participate in the New York City health 
benefits program). The case alleges that city employees and retirees 
and those individuals who participate in the health benefits program 
would be faced with increased costs for insurance and reduced service 
if the merger were consummated. Litigation in the case is ongoing, but 
it suggests the broad range of markets that can be adversely affected 
by a merger.
---------------------------------------------------------------------------

    \16\ City of New York v. Group Health Inc., et al., (S.D.N.Y. 
2006).

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[[Page 49887]]

IV. Special Information Concerns for Health Insurance Mergers

    In determining the competitive effect of a merger the crucial issue 
is the impact on the consumer, the ultimate beneficiary of the 
insurance system. The questions to be examined include will consumers 
have to pay more for insurance in higher premiums or deductibles, will 
they suffer from poorer service such as longer waiting times or 
deterred services, and will they suffer from lower quality of care? 
Since consumers can not vote on a merger,\17\ how does the 
Commissioner, antitrust enforcer, or the courts evaluate the impact of 
a merger on consumers?
---------------------------------------------------------------------------

    \17\ Fortunately, the Commissioner has decided to hold an 
extensive series of hearings on the merger and provided a 
significant opportunity for public comment. The majority of the 
public comments filed by consumers to date oppose the merger.
---------------------------------------------------------------------------

    Insurance companies, employers, unions and buyers of insurance 
(``plan sponsors''), and health care providers will all have views of 
the impact of the merger on consumers. The views of the insurance 
companies can not be determinative, since they have an obligation to 
their stockholders to maximize profits.
    The views of plan sponsors are relevant, but their failure to 
object to a merger may not be of significant evidentiary value. Plan 
sponsors represent the interests of their subscribers and thus may be 
concerned with the exercise of monopoly power leading to higher 
premiums. However, as antitrust authorities have recognized in many 
merger investigations, buyers of services may be very reluctant to 
complain about a merger for a variety of factors. They may simply pass 
on higher post-merger prices to the ultimate customer. In the health 
insurance area, although plan sponsors may be concerned about the cost 
of health insurance they may be less sensitive to the reduction in 
quality or service that may result from a merger. Finally, a customer 
may fear retribution post-merger.\18\ This may particularly be the case 
in Nevada where the acquired firm will remain as the largest insurer 
even if the merger is denied. Thus, the fact that plan sponsors do not 
complain, or actually support a merger, should not be determinative of 
a merger's likely competitive effect.\19\
---------------------------------------------------------------------------

    \18\ There are a wide variety of reasons why customer support of 
a merger may not be particularly probative. See Ken Heyer, 
Predicting the Competitive Effects of Merger by Listening to Buyers, 
74 Antitrust L.L. 87 (2007); Joseph Farrell, Listening to Interested 
Parties in Antitrust Investigations: Competitors, Customers, 
Complementors, and Relativity, Antitrust. Spring 2004 at 64 
(explaining why customers may support an otherwise anticompetitive 
merger).
    \19\ See FTC v. H.J. Heinz Co., 246 F.3d 708 (D.C. Cir. 2001) 
(customers strongly supported merger); United States v. United Tote, 
768 F. Stupp. 1064, 1084-85 (D.Del. 1991) (enjoining merger despite 
testimony of ``numerous buyers'' that the merger would be 
procompetitive in creating a stronger rival to a dominant firm); 
United States v. Ivaco, 704 F. Supp. 1409, 1428 (W.D. Mich. 
1989)(all testifying customers supported merger); FTC v. Imo Indus., 
1992-2 Trade Cas. (CCH) ] 69,943, at 68,559 (D.D.C. 1989).
---------------------------------------------------------------------------

    On the other hand healthcare providers may be a far more superior 
representative of the consumer interest and their concerns deserve 
careful attention. Physicians and other healthcare providers directly 
experience the diminution of service and quality when so-called cost 
containment efforts go too far. Physicians serve as advocates for the 
patient, especially in the often adversarial setting of managed care. 
Since healthcare providers experience first hand the impact of 
reductions in service they are more sensitive to the potential exercise 
of market power by health insurance. It is important to recognize in 
evaluating the concerns raised by providers that they are not just 
complaining about decreased compensation. Rather the issues raised by 
healthcare providers are central to concerns over quality of care: 
reduced services, greater waiting times, unacceptably short hospital 
stays, postponed or unperformed medical treatments, suboptimal 
alternative medical treatments, laboratory tests not performed, and 
other output restrictions on health services.

IV. Competitive Analysis of the United-Sierra Merger

Health Insurer Concentration: Harm to Buyers

    The concentration of the health insurance industry has increased 
nationally due to a tremendous number of mergers and acquisitions and 
numerous smaller insurers exiting the industry.\20\ Over the past 10 
years there have been over 400 health insurer's mergers. United has 
acquired several firms including California-based PacifiCare Health 
Systems, Inc., Oxford Health Plans, and John Deere Health Plan, 
increasing its membership to 32 million. Similarly, WellPoint, Inc. now 
owns Blue Cross plans in 14 states. Together, WellPoint and United 
control over 33 percent of the U.S. commercial health insurance market.
---------------------------------------------------------------------------

    \20\ Victoria Colliver, ``Insurer's Mergers Limiting Options: 
Health Care Choices Are Narrowing Says Study by AMA,'' San Francisco 
Chronicle, April 18, 2006 (last viewed 7/8/07) http://sfgate.com/cgi-bin/article.cgi?file=/chronicle/archive/2006/04/18/BUGUQIAH161.DTL&type=business.
---------------------------------------------------------------------------

    This increase in concentration has not benefited consumers. Studies 
indicate that health insurance premiums have increased at a rate more 
than twice the rate of inflation or the rate of increases in workers' 
earnings. Average annual premium increases have ranged from 8.2% to 
13.9% since 2001.\21\ Moreover, since 2000, the number of employers 
offering health coverage benefits has decreased by nearly 10%. Studies 
indicated that medical benefits have not expanded despite premium 
increases. In contrast, health insurer profits have increased by 246% 
in the aggregate over the past decade.\22\
---------------------------------------------------------------------------

    \21\ Kaiser Family Foundation and Health Research and 
Educational Trust, Employer Health Benefits: 2006 Summary of 
Findings, 2006 (last viewed 7/8/2007) http://www.kff.org/insurance/7527/upload/7528.pdf.
    \22\ Laura Benko, ``Monopoly Concerns: AMA Asks Antitrust 
Regulators to Restore Balance,'' Modern Physician, June 1, 2006.
---------------------------------------------------------------------------

    Consumers in highly concentrated health insurance markets are most 
vulnerable to insurance premium increases without comparable benefit 
increases, mirroring data of escalating health costs on the national 
level. One study found that more than 95% of Metropolitan Statistical 
Areas (MSAs) had at least one insurer in the combined HMO/PPO market 
with a market share greater than 30% and more than 56% of MSAs had at 
least one insurer with market share greater than 50%.\23\ In 
concentrated MSAs such as these, there is a much greater likelihood 
that one firm, or a small group of firms, could successfully exercise 
market power and profitably increase prices or decrease compensation 
leading to less quality or service. As one prominent healthcare 
professor has observed in testimony before the U.S. Senate Judiciary 
Committee:
---------------------------------------------------------------------------

    \23\ Edward Langston, ``Statement of the American Medical 
Association to the Senate Committee on the Judiciary United States 
Senate: Examining Competition in Group Health Care,'' Sept. 6, 2006 
(last viewed 7/8/07) http://www.ama-assn.org/ama1/pub/upload/mm/399/antitrust090606.pdf.
---------------------------------------------------------------------------

    What is so important about the sheer number of competitors? 
Econometric evidence shows that in the managed care field, an increase 
in the number of competitors is associated with lower health plan costs 
and premiums; conversely, a decrease in the number of competitors is 
associated with increases in plan costs and premiums. The evidence also 
shows that the sheer number of competitors exerts a stronger influence 
on these outcomes than does the penetration level achieved by plans in 
the market.\24\
---------------------------------------------------------------------------

    \24\ Testimony of Professor Lawton R. Burns re. the Highmark/
Independence Blue Cross Merger, before the Senate Judiciary 
Committee (April 7, 2007).

---------------------------------------------------------------------------

[[Page 49888]]

    As we discuss below, the health insurance markets in the state of 
Nevada, especially Clark County, are highly concentrated, and the 
merger of Sierra with United is likely to substantially harm 
competition and consumers.

Harm to Competition in Nevada From the United-Sierra Merger

    Correctly defining an economically meaningful market is essential 
for ensuring that consumers of that market do not become subject to 
market power due to increases in market concentration and decreases in 
competition as a result of a merger. The key question in this merger as 
in other mergers is the definition of the relevant product market. The 
courts have held that a relevant product market ``must be drawn 
narrowly to exclude any other product to which, within reasonable 
variations and price, only a limited number of buyers will turn.'' 
Times-Picayune Pub. Co v. United States, 345 U.S. 594, 612 n.31 (1953). 
Market definition focuses on demand substitution facts, and whether or 
not consumers would or could turn to a different product or geographic 
location in response to a ``small but significant non-transitory 
increase in price.'' \25\ Typically, the antitrust agencies and the 
courts have implemented this test by seeking to identify the smallest 
group of products over which prices could be profitably increased by a 
``small but significant'' amount (normally 5 percent) for a substantial 
period of time (normally one year).\26\
---------------------------------------------------------------------------

    \25\ According to the Merger Guidelines, ``[a] market is defined 
as a product or group of products and a geographic area in which it 
is produced or sold such that a hypothetical profit-maximizing firm, 
not subject to price regulation, that was the only present and 
future seller of those products in that area would likely impose at 
least a `small but significant nontransitory' increase in price, 
assuming the terms of sale of all other products are held 
constant.'' Merger Guidelines Sec.  1.0.
    \26\ FTC v. Staples, 970 F. Supp. at 1076 n.8; Merger Guidelines 
Sec.  1.11, at 5-6.
---------------------------------------------------------------------------

    In health insurance mergers the DOJ has reached different, although 
not inconsistent, conclusions as to the relevant product market. For 
example, in the Aetna-Prudential merger DOJ concluded that the relevant 
product markets were the sale of health maintenance organization 
(``HMO'') and HMO-based point of service (``HMO-POS'') health plans. 
The DOJ noted that HMO and HMO-POS products differ from PPO or other 
indemnity products in term of benefit design cost and other factors. 
HMOs provide superior preventative care benefits, place limits on 
treatment options and generally require the use of a primary care 
physician ``gatekeeper.'' PPO plans are not structured in that fashion 
and do not emphasize preventative care. HMOs were perceived as being 
better devices to control costs and configure benefits. In addition, 
both the insurers and buyers of insurance services perceived PPOs and 
HMOs as being separate products. Thus. the DOJ concluded that the 
elasticity of demand for HMOs and HMO-POS plans are sufficiently low 
that a small but significant price increase for these plans would be 
profitable because consumers would not shift to PPO and other indemnity 
plans to make the increase unprofitable.
    In United/PacifiCare, the DOJ defined a relevant product market as 
the sale of commercial health insurance to small group employers. This 
market consisted of employers with 2-50 employees. These employers were 
particularly susceptible to potential anticompetitive conduct because 
they lacked a sufficient employee population to self-insure and they 
lacked the multiple locations necessary to reduce risk through 
geographic diversity. In addition the manner in which commercial health 
insurance was sold also distinguished the small and large group 
markets. Large employers were more likely than smaller employers to be 
able to successfully engage extensive negotiations with United and 
PacifiCare.
    We believe that both an HMO and small employer market may be 
adversely affected by the United-Sierra merge.\27\ Surveys demonstrate 
that consumers do not perceive HMOs and PPOs as substitute products and 
consumers believe that they differ in terms of benefit design, cost, 
and general approaches to treatment.\28\ PPOs tend to provide more 
flexibility in selection of physicians and specialists and tend to be 
more expensive. In contrast, HMOs focus more on preventative medicine 
but limit treatment options and require referrals from a ``gatekeeper'' 
for many procedures. Consumers with special health needs and those 
relying more on strong relationships with their physicians would 
generally not be satisfied if forced to subscribe to an HMO with 
restrictions on personal choices. ``A small but significant price 
increase in the premiums for HMOs and HMO-POS plans would not cause a 
sufficient number of customers to shift to other health insurance 
products to make such a price increase unprofitable.''\29\
---------------------------------------------------------------------------

    \27\ Defining the market in terms of a single product is 
appropriate since the Nevada statute provides that the Commissioner 
can deny a merger application if she ``determines that an 
acquisition may substantially lessen competition in any line of 
insurance in this state or tends to create a monopoly.'' NRS 
692.258(1).
    \28\ See United States v. Aetna Revised Complaint Impact 
Statement, Civil Action 3-99CV1398-H (N.D.Tex, 1999).
    \29\ Id.
---------------------------------------------------------------------------

    Moreover, small employers are less likely to have significant 
alternatives in response to a price increase by the merged firm. Small 
employers are unable to self-insure and have little power to negotiate 
better rates.
    The relevant geographic market seems to be a fairly straightforward 
matter since health care services are primarily local. From the 
perspective of the buyers of insurance services, employers want 
insurance where the employees work and live. Thus in Aetna/Prudential, 
the DOJ concluded ``the relevant geographic market in which HMO and 
HMO-POS plans compete are thus generally no larger than the local areas 
within which HMO * * * enrollees demand access to providers. * * * As a 
result, commercial and government health insurers--the primary 
purchasers of physician services--seek to have their provider network's 
physicians whose offices are convenient to where their enrollees work 
or live.''
    In this merger the likely geographic markets are Clark County, 
Nevada and the larger geographic market of the State of Nevada. 
Consumers faced with an increase in prices for HMOs are unlikely to 
travel a long distance away from homes or places of business in order 
to escape price increases and purchase HMO services at a lower price. 
Generally, consumers are reluctant to travel lengthy distances when 
they are sick. Moreover, virtually all managed care companies provide 
networks in localities where employees live and work, and they compete 
with the other local networks.\30\ Thus, we believe the proper relevant 
markets are the provision of HMO services in Clark County and 
Nevada.\31\
---------------------------------------------------------------------------

    \30\ Id.
    \31\ As to the market for the sale of health insurance products 
to small employers we have no reason to believe the concentration 
measures differ significantly from the HMO market.
---------------------------------------------------------------------------

Concentration and Competitive Effects

    Once the market is defined antitrust authorities and the courts 
calculate market shares and concentration levels (using the Herfindahl-
Hirschman Index (HHI)). This merger will lead to an unprecedented level 
of concentration. In the Clark County HMO market United's market share 
will increase from 14 to 94%. If PPOs are included, United's market 
share increases from 9% to 60%. Regardless of how the product market is

[[Page 49889]]

defined United is clearly a dominant firm, far larger than the post-
merger market shares of the combined Aetna/Prudential or United/
PacifiCare in those markets where DOJ brought enforcement actions. Even 
in a Nevada HMO market, the market share increases from 12% to 80% and 
in a Nevada HMO-PPO market United's market share increases from 7% to 
48%. Simply put, post-merger United will be a dominant firm no matter 
how the market is defined.
    Measuring concentration using the HHI leads to similar results. The 
Merger Guidelines define a market with an HHI over 1800 as ``highly 
concentrated'' and an increase over 100 is ``likely to create or 
enhance market power or facilitate its exercise.'' The post-merger HHI 
for HMOs in the state of Nevada is 4,871 and the post-merger increase 
in HHI is 1,625. The HMO market in Clark County is even more 
concentrated, with a post-merger HHI of 8,884 and a post-merger 
increase in HHI of 2,235. These exorbitantly high HHIs support the 
presumption that a merger between the two largest HMOs in the highly 
concentrated Nevada HMO market would likely create or enhance market 
power or facilitate its exercise. The market share data obtained form 
the Nevada State Health Division is provided below. (Figure 1).
---------------------------------------------------------------------------

    \32\ Data provided from the Nevada State Health Division.
    [GRAPHIC] [TIFF OMITTED] TN22AU08.004
    
    The Nevada and Clark County markets are highly concentrated, no 
matter how defined. The parties may suggest that this is of little 
import because the increase in concentration is not substantial because 
United currently has a relatively modest market share. Such an argument 
is inconsistent with the facts and the law. United is the largest 
health insurer in the United States and the second largest rival in the 
market, with the ability and incentive to expand competition. As to the 
law as the Supreme Court has acknowledged, ``if concentration is 
already great, the importance of preventing even slight increases in 
concentration is correspondingly great.'' \33\
---------------------------------------------------------------------------

    \33\ United States v. General Dynamics Corp., 415 U.S. 486, 497 
(1974).
---------------------------------------------------------------------------

    As important, the combined United-Sierra will be substantially 
larger than its next closest rival, In the Nevada HMO market it will be 
over 10 times larger (80% to 7% for the second largest firm) and in the 
Clark County market it will be over 30 times larger (94% to 3%). The 
courts have recognized that smaller rivals are far less likely to 
constrain the conduct of a dominant firm post-merger, and have enjoined 
mergers with far smaller disparities in market share. United States v. 
Phillipsburg Nat'l Bank, 399 U.S. 350, 367 (1970) (merged firm three 
times the size of next largest rival); FTC v. PPG, 798 F.2d 1500, 1502-
03 (D.C. Cir. 1986) (two and one-half times as large). Where a merger 
produces a firm that is significantly larger than its closest 
competitors, it increases the likelihood that the firm will be able to 
raise prices, decrease compensation, and reduce quality without fear 
that the small sellers will be able to take away enough business to 
defeat the price increase. See United States v. Rockford Mem. Corp., 
898 F.2d 1278, 1283-84 (7th Cir.) (Posner, J.), cert. denied, 498 U.S. 
920 (1990); H. Hovenkamp, Federal Antitrust Policy Sec.  12.4c (1993) 
(``markets may often have small niches or pockets where new firms can 
carve out a tiny position for themselves without having much of an 
effect on competitive conditions in the market as a whole'').

Combined PPO and HMO Markets

    Using a definition of the health insurance product market as the 
combination of HMOs and PPOs, the health insurance market in Nevada is 
highly concentrated, and the United-Sierra merger would substantially 
increase the likelihood of competitive harm.
    The market share for Sierra and United combined in Nevada is 48%, 
while in Clark County the combined United-Sierra market share is 60%. 
The post-merger HHI for the Nevada and Clark County markets are 3372 
and 5244, respectively, The increase in the HHI market resulting from 
the United-Sierra merger is 555 for the State of Nevada and 921 for 
Clark County. Data of market shares from the Nevada State Health 
Division for the HMO and PPO markets is provided in Figure 2.
---------------------------------------------------------------------------

    \34\ Data from the Nevada State Health Division.
    \35\ The market share for WellPoint in Clark County is 
overstated because in the absence of data by territory, all 
WellPoint customers were allocated to Clark County.

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[[Page 49890]]

[GRAPHIC] [TIFF OMITTED] TN22AU08.005

Conclusion on the Impact of the United-Sierra Merger on Consumers

    As the U.S. Supreme Court has held where a merger results in a 
significant increase in concentration and produces a firm that controls 
an undue percentage of the market, the combination is so inherently 
likely to lessen competition substantially that it ``must be enjoined 
in the absence of evidence clearly showing that the merger is not 
likely to have such anticompetitive effects.'' United States v. 
Philadelphia Nat'l Bank, 374 U.S. 321, 363 (1963), The United-Sierra 
merger clearly raises extraordinary and unprecedented levels of 
concentration which raise serious concerns about this merger. Nevada is 
in need of greater competition, not less. Further consolidation among 
the limited health plan providers in Nevada poses a substantial threat 
of harming customers, increasing the costs of health care, and 
decreasing access to quality health care and the quality of health. 
This merger clearly ``would likely be harmful or prejudicial to the 
members of the public who purchase insurance'' and thus should be 
denied.

V. Health Insurer Concentration: Harm to Sellers and Quality of Care

    The nature of the health care industry facilitates the potential 
for a dominant health coverage or insurance firm to exercise market 
power (or monopsony) over individuals selling health care services 
within a geographic region. Because medical services can be neither 
stored nor exported, health care professionals generally must sell 
their services to buyers (insurance firms and their customers) in a 
relatively small geographic market. Refusing the terms of the dominant 
buyer, physicians may suffer an irrevocable loss of revenue, 
Consequently, a physician's ability to terminate a relationship with an 
insurance coverage plan depends on her ability to make up lost business 
by switching to an alternative insurance coverage plan. Where those 
alternatives are lacking a physician may be forced to reduce the level 
of service in response to a decrease in compensation.
    Not all insurance providers are equal from the perspective of a 
health care provider. A smaller insurance company with fewer covered 
lives may not he an attractive alternative. Health care providers who 
depend on an insurance program for all or most of their income are at a 
substantial disadvantage when there are not competing programs 
available; when they switch programs, they tend to lose the patients 
who have that particular coverage, It makes little sense for a provider 
to switch to an insurer who has a substantially smaller market share 
because there won't be enough patients to sustain the practice. Thus, 
it is critical for insurance regulators to maintain a competitive 
market in which health care providers have significant competitive 
alternatives.
    In the Aetna/Prudential and United/PacifiCare mergers, the DOJ 
raised monopsony concerns in markets for purchasing physicians' 
services where the market shares were far less substantial than they 
are in Clark County. For example, in United/PacifiCare the DOJ alleged 
that the combined firm would account for an excess of 35% in Tucson and 
over 30% in Boulder.
    In addition, it is important to recognize that it may be 
appropriate to prevent a firm from securing monopsony power even if it 
faces a competitive downstream market. In other words there may be 
antitrust concerns if a health insurer can lower compensation to 
providers even if it can not raise prices to consumers. For example, in 
United/PacifiCare the Division required a divestiture based on 
monopsony concerns in Boulder even though United/PacifiCare would not 
necessarily have had market power in the sale of health insurance. The 
reason is straightforward--the reduction in compensation would lead to 
diminished service and quality of care, which harms consumers even 
though the direct prices paid by subscribers do not increase.\36\
---------------------------------------------------------------------------

    \36\ See Marius Schwartz, Buyer Power Concerns andthe Aetna-
Prudential Merger, Address Before the 5thAnnual Health Care 
Antitrust Forum at Northwestern University School of Law 4-6 
(October 20, 1999) (noting that anticompetitive effects can occur 
even if the conduct does not adversely affect the ultimate consumers 
who purchase the end-product), available at http://www.usdoj.gov/
atr/public/speeches/3924.wpd.
---------------------------------------------------------------------------

    Underlying the monopsony analysis in these cases is the premise 
that physicians who have a large share of reimbursements from the 
merged firm lack alternatives in response to a reduction in 
compensation. As alleged in Aetna, they cannot retain or timely replace 
a sufficient portion of those payments if the physicians stop 
participating in the plans. Moreover, it is difficult to convince 
patients to switch to different plans.\37\ Consequently, according to 
the Division these physicians would not be in a position to reject a 
``take it or leave it'' contract offer and could be forced to accept 
low reimbursement rates from a merged entity, likely leading to a 
reduction in quantity or degradation in quality of physician services.
---------------------------------------------------------------------------

    \37\ As alleged in the United complaint, physicians encouraging 
patients to change plans ``is particularly difficult for patients 
employed by companies that sponsor only one plan because the patient 
would need to persuade the employer to sponsor an additional plan 
with the desired physician in the plans's network'' or the patient 
would have to use the physician on an out-of-network basis at a 
higher cost. Complaint at paragraph 37.
---------------------------------------------------------------------------

    The merging parties may suggest that there is some safe harbor for 
mergers leading to a market share below 35%. As the DOJ enforcement 
action in Boulder demonstrates that is not the case. The unique nature 
of health care provider services explains why monopsony concerns are 
raised at lower levels of concentration than may be appropriate in 
other industries. If a health care provider's output is suppressed by a 
reduction in compensation, then it is a lost sale that

[[Page 49891]]

cannot be recovered later. Physician services can not be stored for 
later sale. As the DOJ observed in United/PacifiCare: ``A physician's 
ability to terminate a relationship with a commercial health insurer 
depends on his or her ability to replace the amount of business lost 
from the termination, and the time it would take to do so. Failing to 
replace lost business expeditiously is costly.'' \38\ The DOJ observed 
that there are limited outlets for physician services: ``There are no 
purchasers to whom physicians can sell their services other than 
individual patients or the commercial and governmental health insurers 
that purchase physician services on behalf of their patients.'' \39\ As 
a former DOJ official observed ``these factors explain why the 
Department concluded that shares below 35 percent, in the particular 
markets at issue, sufficed to allege competitive harm.'' \40\
---------------------------------------------------------------------------

    \38\ Complaint, at paragraph 36.
    \39\ Complaint, at paragraph 33.
    \40\ Mark Botti, Remarks before the ABA Antitrust Section, 
``Observations on and from the Antitrust Division's Buyer-Side 
Cases: How Can ``Lower'' Prices Violate the Antitrust Laws.'' He 
also noted that: ``Physicians have a limited ability to maintain the 
business of patients enrolled in a health plan once the physician 
terminates. Physicians could retain patients by encouraging them to 
switch to another health plan in which the physician participates. 
This is particularly difficult for patients employed by companies 
that sponsor only one plan because the patient would need to 
persuade the employer to sponsor an additional plan with the desired 
physician in the plan's network. Alternatively, the patient may 
remain in the plan, visiting the physician on an out-of-network 
basis. The patient would be faced with the prospect of higher out-
of-pocket costs, either in the form of increased co-payments for use 
of an out-of-network physician, or by absorbing the full cost of the 
physician care.'' Complaint at paragraph 37.
---------------------------------------------------------------------------

    Again the proponents of health insurance mergers may suggest that 
regulators should take a benign view about the creation of monopsony 
power because health insurers are ``buyers'' acting in the interest of 
reducing prices. As we suggested earlier this view is mistaken. Health 
insurers are not true fiduciaries for insurance subscribers. Plan 
sponsors may have a limited concern over the product based on the cost 
of the insurance, and not the quality of care. Furthermore, health 
coverage plans operate in the interest of a group, not in the best 
interest of individual patients. Consequently, insurance firms can 
increase profits by reducing the level of service and denying medical 
procedures that physicians would normally perform based on professional 
judgment. In the absence of competition among insurers, patients are 
more likely to pay for these procedures out-of-pocket or forego them 
entirely. Ultimately, the creation of monopsony power from a merger can 
adversely impact both the quantity and quality of health care.
    Finally, the evidence from mergers throughout the U.S. strongly 
suggests that the creation of buyer power from health insurance 
consolidation has not benefited competition or consumers. Although 
compensation to providers has been reduced health insurance premiums 
have continued to increase rapidly. Moreover, evidence from other 
mergers suggests that insurers dot not pass savings on from these 
mergers to consumers. Rather, insurance premiums increase along with 
insurance company profits.

Monopsony in the Health Care Markets of Nevada

    United's acquisition of Sierra would give it unique control over 
the physicians serving the HMO and HMO-PPO markets in Clark County and 
the State of Nevada. The merger will combine the two largest HMOs with 
an 84% market share in Nevada and a 90% market share in Clark County, 
dramatically higher than the concentration in any merger approved by 
the DOJ. In light of these high market shares, a physician faced with 
unfair contract terms could not credibly threaten to leave the combined 
United-Sierra health plan, except by departing Clark County.
    The parties have suggested the markets for physician reimbursement 
are far less concentrated. At the earlier hearing they suggested the 
merged firm would account for only 17% of physician reimbursement in 
the state and 21% in Clark County. We do not know the basis for the 
claimed reimbursement percentages. One should take United's estimates 
of market shares with a large grain of salt. In United/PacifiCare their 
lawyers suggested the parties' total share of physicians' reimbursement 
likely were substantially below the 35% threshold, but those estimates 
were rejected by DOJ. As one of their advocates said ``indeed the 
parties calculated their total shares of physician reimbursements in 
the Tucson and Boulder MSAs were substantially lower than the shares 
asserted in the complaint.'' \41\ The estimates of the proponents in 
the Aetna/Prudential merger were also rejected by the DOJ.\42\
---------------------------------------------------------------------------

    \41\ Fiona Schaeffer et al., ``Diagnosing Monopsony and other 
issues in Health Care Mergers: an overview of United/PacifiCare 
Investigation,'' Antitrust Health Care Chronicle (2006).
    \42\ The estimates of the level of physician reimbursement by 
the proponents of the Aetna/Prudential merger were also rejected by 
the DOJ. The proponents suggested that the total amount of physician 
revenues affected by the merger were far less than thirty percent 
according to public available data. According to the proponents the 
merged firm would have accounted for about 20% of total physician 
revenues in Houston and about 25% of total physician revenues in the 
Dallas-Fort Worth area after the transaction. In addition, there 
were 14 HMOs in the Houston area and 12 HMOs in Dallas. See Robert 
E. Bloch et al. ``A New and Uncertain Future for Managed Care 
Mergers: An Antitrust Analysis of the Aetna/Prudential Merger.'' Yet 
the DOJ required an enforcement action to address monopsony concerns 
in spite of these alleged low shares of reimbursement.
---------------------------------------------------------------------------

    Monopsony power exercised by HMOs and health insurance plans, like 
high medical malpractice insurance premiums, has the potential to drive 
health care professionals out of geographic regions and even into other 
professions. The Nevada health care market currently faces one of the 
largest shortages of doctors and nurses in the country.\43\ It ranks 
49th of the 50 states in physician coverage. Shortages of health care 
professionals can become a vicious cycle admonishing others against 
entering the profession. Doctor shortages increase with shortages of 
nurses and increases in insurance costs.\44\ Nationally, it has become 
less attractive to become a physician because of the enormous cost 
associated with medical education, long years of schooling and 
residencies, and increased difficulty in earning a living.\45\ 
Recently, Nevada has implemented programs to attract doctors from 
Mexico and train doctors in Mexico at the Universidad Autonoma de 
Guadelajara.\46\
---------------------------------------------------------------------------

    \43\ See Lawrence Mower, ``Help Sought South of the Border,`` 
Las Vegas Review Journal, Jan. 22, 2007; see also Lenita Powers, 
``Big Day at Lawlor,'' Reno Gazette, Dec. 9, 2006 (expressing that 
nurses in Nevadaare in a desperately short supply, especially OR 
nurses).
    \44\ See Lawrence Mower, ``Help Sought South of the Border,'' 
Las Vegas Review Journal, Jan. 22, 2007.
    \45\ Lawrence Mower, ``Help Sought South of the Border,'' Las 
Vegas Review Journal, Jan. 22, 2007.
    \46\ Id.
---------------------------------------------------------------------------

    Similar problems exist in nursing. Understaffed nursing departments 
require nurses to work overtime, work more holiday shifts, and 
undertake more responsibilities. These conditions exacerbate protracted 
work-related stress and decrease the attractiveness of working as a 
nurse in Nevada. Moreover, reduced flexibility for time off and patient 
dissatisfaction resulting from overworked nurses is generally 
associated with lower levels of job satisfaction and higher turnover 
rates.\47\
---------------------------------------------------------------------------

    \47\ See Jennifer Kettle, Factors Affecting Job Satisfaction in 
the Registered Nurse, Journal of Undergraduate Nursing Scholarship, 
Fall 2002 (last viewed July 9, 2007) http://www.juns.nursing.arizona.edu/articles/Fall%202002/Kettle.htm.

---------------------------------------------------------------------------

[[Page 49892]]

VI. Conclusion on the Impact of the United-Sierra Merger on Health Care 
Professionals and Quality of Care

    The United-Sierra merger poses a substantial threat to competition 
leading to reduced compensation for health care professionals who may 
be forced to reduce service and quality of care. This reduced quality 
of care ``would likely be harmful or prejudicial to the members of the 
public who purchase insurance.'' Further consolidation in the HMO and 
health coverage markets in Nevada may have detrimental short-term and 
long-term effects by exacerbating the crisis of the health professional 
shortage. Competition is essential to the delivery of high quality 
health care services. The United-Sierra merger will further distort the 
already concentrated and inefficient Nevada health care market.

Barriers to Entry Are High

    As noted earlier, entry can be a factor in the analysis of a merger 
that may reverse the presumption of anticompetitive effects. The courts 
have required that ``entry into the market will likely avert the 
anticompetitive effects from the acquisition.'' FTC v. Staples, 970 F. 
Supp. 1066, 1086 (D.D.C, 1997). Entry must be ``timely, likely 
insufficient in its magnitude, character and scope to deter or 
counteract the competitive effects'' of a proposed acquisition. Merger 
Guidelines Sec.  3.0.
    The barriers to entry in the HMO and health insurance markets in 
Nevada and Clark County are very high. There has been relatively little 
recent entry into either Clark County or Nevada. The fact that United, 
the largest health insurer in the U.S., chose to enter into Nevada 
through two acquisitions --PacifiCare and Sierra--suggests the 
significant difficulty of de novo entry in these markets.
    Generally, entry into health insurance markets is difficult. The 
health care industry does not fit the traditional model of perfect 
competition as expounded by the Chicago School.\48\ For example there 
is a high degree of ``lock-in'' because plan sponsors cannot disrupt 
the medical treatment of countless employee/patients. New entrants are 
vulnerable to the high switching costs that characterize the health 
insurance industry. Many consumers have no choice for health coverage 
plans and must accept the plan provided by an employer. Other consumers 
can only switch during an ``open enrollment'' season. Doctors cannot 
easily switch their patients to a different health plan and, in the 
absence of a large number of patients enrolled in a plan, a doctor may 
find that additional claim processing costs exceed the benefits of 
carrying an additional health coverage provider. Similarly, doctors may 
be reluctant to switch plans because earnings lost in pursuit of new 
patients and alternate third-party payers may lead to exorbitant 
losses.\49\
---------------------------------------------------------------------------

    \48\ See Thomas Greaney, Chicago's Procrustean Bed; Applying 
Antitrust Law in Health Care, 71 Antitrust L.J. 857 nl (2004) 
(''Perfectly competitive markets demonstrate the following four 
characteristics: (1) Perfect product homogeneity (2) large numbers 
of buyers and sellers (3) perfect knowledge of market conditions by 
all market participants and (4) complete mobility of all product 
resources.'')
    \49\ Moreover, most employee/patients are limited to the 
physicians within the plan sponsors contract.
---------------------------------------------------------------------------

    Developing an HMO from scratch requires extensive expenditure on 
recruiting and maintaining health professionals, developing computer 
information systems and data banks, and high expenditures on overhead 
and clinical facilities. De novo entry is very challenging since new 
entrants must develop a reputation and product recognition with 
purchasers to convince them to disrupt their current relationships with 
the dominant health insurers.\50\ As a recent DOJ/FTC report on health 
care competition reported, there has been relatively little de novo 
entry by national health insurers.\51\
---------------------------------------------------------------------------

    \50\ At the FTC/DOJ Health Care hearings, a former Missouri 
Commissioner of Insurance suggested that new entrants ``face a Catch 
22--they need a large provider network to attract customers, but 
they also need a large number of customers to obtain sufficient 
price discounts from providers to be competitive with the 
incumbents.'' In addition, he observed that there is a first mover, 
or early mover, advantage in the HMO industry, possibly resulting in 
later entrants having a worse risk pool from which to recruit 
members. He also observed reputation may inhibit entry. See 
Improving Health Care: A Dose of Competition, A Report by the 
Federal Trade Commission and the Department of Justice, Chapter 6 at 
10 (July 2004), available at http://www.usdoj.gov/atr/public/
health_care/204694/chapter6.htm#3.
    \51\ Id. at 11 (citing testimony that the only successful entry 
of national plans has been by purchasing hospital-owned local health 
plans).
---------------------------------------------------------------------------

    Not surprisingly the DOJ has recognized the substantial barriers to 
entry and expansion in health insurance markets. In the Aetna/
Prudential merger, the DOJ found substantial entry barriers. Certainly 
Dallas and Houston were attractive markets for health insurers. Both 
markets had a substantial number of alternative health insurers capable 
of expansion. And there were numerous competitors in other Texas 
markets that were capable of entering into these markets. Yet the DOJ 
found substantial entry barriers and that entry could take two to three 
years and cost up to $50 million.\52\ In particular it found that it 
was ``unlikely that a company that currently provides PPO or indemnity 
health insurance in either Dallas or Houston would shift its resources 
to provide an HMO or HMO-POS plan'' in either market.\53\
---------------------------------------------------------------------------

    \52\ In light of the health professional shortage in Nevada, 
these values could be understated.
    \53\ Complaint at paragraph 23.
---------------------------------------------------------------------------

    Entry barriers are even more substantial in Nevada and Clark 
County. The shortage of health care professionals in Nevada increases 
barriers to entry because new entrants are unlikely to be able to 
contract with an adequate number of health professionals to attract new 
plan sponsors and enrollees. Moreover, when a dominant HMO maintains a 
high market share, other health providers may perceive or experience 
higher rates of adverse selection, moral hazard, and general 
vulnerability to tactics by a dominant HMO to raise rival's cost.\54\ 
Experience indicates that new HMOs have not historically entered highly 
concentrated markets after a merger occurs.
---------------------------------------------------------------------------

    \54\ See Roger Noll, Buyer Power and Antitrust: ``Buyer Power'' 
and Economic Policy, 72 Antitrust L.J. 589, 2005.
---------------------------------------------------------------------------

    The parties may also suggest that some of the smaller HMOs and 
health insurance providers in Nevada may be able to expand post-merger 
to prevent any anticompetitive effects. This is extremely unlikely 
because the fringe firms are currently so extremely small and far 
smaller than a combined United-Sierra. In cases with an even far 
smaller size disparity between the merged and fringe firms courts have 
declined to find that small players might suddenly expand to constrain 
a price increase by leading firms. United States v. Philadelphia Nat'l 
Bank, 374 U.S., 321, 367 (1963); United States v. Rockford Mem. Corp., 
898F.2d. 1278, 1283-84 (7th Cir. 1990) (''three firms having 90 percent 
of the market can raise prices with relatively little fear that the 
fringe of competitors will be able to defeat the attempt by expanding 
their own output to serve customers of the three large firms'').
    The small firm expansion claim was rejected by the DOJ in Aetna/
Prudential, a case with far smaller post-merger market shares and a far 
greater number of fringe firms:

    Due not only to these costs and difficulties, but also to 
advantages that Aetna and Prudential hold over their existing 
competitors--including nationally recognized quality accreditation, 
product array, provider network and national scope and reputation--
existing HMO and HMO-POS competitors in Dallas or Houston are unlikely 
to be able to expand or reposition themselves sufficiently to

[[Page 49893]]

restrain anticompetitive conduct by Aetna in either of these geographic 
markets.\55\
---------------------------------------------------------------------------

    \55\ Complaint at paragraph 24. In Aetna, thepost-merger market 
shares were 44% and 62% and there were between 10-12 smaller 
competitors capable of expansion. In this case, the post-merger 
market share is greater than 90% and there are a handful of smaller 
competitors.

    History demonstrates that one can not rely on new entry in Clark 
County. Few competitors from the rest of Nevada have been able to 
successfully enter Clark County. Attempting to enter into a market 
dominated by a single firm is a daunting task. There may be several 
obstacles to expansion including cost disadvantages, efficiencies of 
scale and scope and reputational barriers. In other mergers, the courts 
have found these types of impediments to be significant barriers to 
entry and expansion. For example, in the FTC's successful challenge to 
mergers of drug wholesalers the court noted: ``[t]he sheer economies of 
scale and scale and strength of reputation that the Defendants already 
have over these wholesalers serve as barriers to competitors as they 
attempt to grow in size.'' \56\We believe similar obstacles exist for 
potential entrants in these markets.
---------------------------------------------------------------------------

    \56\ FTC v. Cardinal Health, Inc., 12 F. Supp. 34, 57 (D.D.C. 
1998); see United States v. Rockford Memorial Hosp., 898 F.2d 1278, 
1283-84 (7th Cir. 1990) (``the fact [that fringe firms] are so small 
suggests that they would incur sharply rising costs in trying almost 
to double their output * * * it is this prospect which keeps them 
small'').
---------------------------------------------------------------------------

    Relying on promises of entry and expansion may be a risky path for 
competition and consumers. In recent FTC/DOJ health care hearings, a 
former Missouri Commissioner of Insurance discussed several HMO mergers 
that his office approved based on the parties' arguments that entry was 
easy, that there were no capacity constraints on existing competitors 
(there were at least ten HMO competitors), and that any of the 320 
insurers in the state could easily enter the HMO market. Unfortunately, 
those predictions were mistaken and there has been no entry in the St. 
Louis HMO market since the mid-1990s.\57\ This experience should make 
any regulator cautious about relying on predictions of new entry.
---------------------------------------------------------------------------

    \57\ Testimony of Jay Angoff, former Missouri Commissioner of 
Insurance, before the FTC/DOJ Healthcare Hearings, April 23, 2003 at 
40-45, discussed at Improving Health Care: A Dose of Competition. A 
Report by the Federal Trade Commission and the Department of 
Justice, Chapter 6 at 10 (July 2004), available at http://www.usdoj.gov/atr/public/health_care/204694/chapter6.htm#3.
---------------------------------------------------------------------------

 Efficiencies of the United-Sierra Merger Are Minimal

    The parties have not suggested that there are significant 
efficiencies that may result from the merger. Under the Nevada statute, 
the Commissioner can consider efficiencies that either ``create[ ] 
substantial economies of scale or economies in the use of resources 
that may not be created in any other manner'' or ``substantially 
increase[ ] the availability of insurance.'' \58\ In either case, the 
public benefit of either of these efficiencies must exceed the loss of 
competition. This standard simply can not be met in this case where the 
merger creates a dominant firm.
---------------------------------------------------------------------------

    \58\ NRS 692C.256(3).
---------------------------------------------------------------------------

    As a matter of U.S. merger law, efficiencies can justify an 
otherwise anticompetitive merger in very limited circumstances. Those 
efficiencies which are considered under the antitrust laws are solely 
those efficiencies which lead to improvements for consumers in terms of 
lower prices, greater innovation or greater service and quality. 
Moreover, an efficiency must be merger specific--that is it can not be 
achieved in any less anticompetitive fashion. When a cost savings does 
not result in those benefits to consumers it is not properly 
considered.
    The record on recent health insurance mergers does not suggest that 
these mergers have led to substantial benefits to consumers in lower 
prices, better quality of care or service. Despite the occurrence of 
hundreds of health insurance mergers that have occurred in the past 
decade, subscriber premiums have continued to rise at twice the rate of 
inflation and physician fees.\59\ Health benefits have not expanded 
with subscriber premiums.\60\ Consequently, the efficiencies in health 
insurance mergers deserve careful scrutiny and a heavy dose of 
skepticism.\61\
---------------------------------------------------------------------------

    \59\ Laura Benko, ``Monopoly Concerns: AMA Asks Antitrust 
Regulators to Restore Balance,'' Modern Physician, June 1, 2006.
    \60\ Best Wire, ``Study Says Competition in Health Markets 
Waning,'' Best Wire Apr. 19, 2006.
    \61\ See Laura Benko, ``Bigger Yes, But Better?'' Modern Health 
Care, March 19, 2007.
---------------------------------------------------------------------------

    The actual record on efficiencies from health insurance mergers is 
spotty at best. As Professor Lawton Burns has observed in Congressional 
testimony:

    [T]he recent historical experience with mergers of managed care 
plans and other types of enterprises does not reveal any long-term 
efficiencies.
    [E]ven in the presence of [efforts to achieve cost-savings] and 
defined post-integration strategies, scale economies and merger 
efficiencies are difficult to achieve. The econometric literature shows 
that scale economies in HMO health plans are reached at roughly 100,000 
enrollees. * * * Moreover, the provision of health insurance (e.g., 
front-office and back-office functions) is a labor-intensive rather 
than capital-intensive industry. As a result, there are minimal 
economies to reap as scale increases. * * * Finally, there is little 
econometric evidence for economies of scope in these health plans--
e.g., serving both the commercial and Medicare populations. Serving 
these different patient populations requires different types of 
infrastructure. Hence, few efficiencies may be reaped from serving 
large and diverse client populations. Indeed, really large firms may 
suffer from diseconomies of scale.\62\
---------------------------------------------------------------------------

    \62\ Testimony of Professor Lawton R. Burns re. the Highmark/
Independence Blue Cross Merger, before the Senate Judiciary 
Committee (April 7, 2007).

    United's actual record in achieving efficiencies is a mixed one at 
best. Bigger is not necessarily better and a national platform is not 
better than a local one. To provide just one example, United completely 
disrupted efficient working relationships between University Medical 
Center and PacifiCare by replacing the local insurer's claims 
processing with a more bureaucratic national one.\63\ This disruption 
in working operations increased the number of unpaid claims and created 
other problems with provider services. One need look no further than 
United's track record for inadequate claims processing over the past 
five years.
---------------------------------------------------------------------------

    \63\ See Laura Benko, ``Bigger Yes, But Better?'' Modern Health 
Care, March 19, 2007.
---------------------------------------------------------------------------

     The Nebraska Department of Insurance, which imposed a fine 
of $650,000, the largest ever, on United Health for inadequately 
handling complaints, grievance, and appeals.
     In March 2006, the Arizona Department of Insurance fined 
United $364,750 for violating state law by denying services and claims, 
delaying payment to providers and failing to keep proper records.
     In December 2005, the Texas Department of Insurance fined 
United $4 million for failing to pay promptly, lacking accurate claim 
data reports and not maintaining adequate complaint logs. The insurance 
giant also had to pay restitution to physicians.\64\
---------------------------------------------------------------------------

    \64\ Marshall Allan, ``Insurer Comes Here With a Trail of Fines 
From Other States,'' Las Vegas Sun, June 20, 2007.
---------------------------------------------------------------------------

    State imposed fines are an inadequate remedy for poor services to 
patients and doctors. First, the actual payer of these fines is the 
consumer, because United

[[Page 49894]]

can pass these fines off to consumers in the form of higher premiums 
and co-payments. Second, fines pose no solace to patients that may 
suffer the persistent hounding from creditors as a result of unpaid 
insurance claims. Further consolidation will only enhance the 
likelihood of shoddy claims service since consumers will have few 
rivals to turn to in response to poor quality of service.
    United may suggest the merger is procompetitive because it will 
lead to improved cost containment initiatives. Of course, Sierra may 
adopt those measures without a merger. In addition, although efforts to 
contain costs are rooted in legitimate needs, the actual implementation 
of cost containment efforts can produce negative consequences for the 
quality of health care provided to consumers. However, most cost 
containment efforts center on decreasing utilization. Moreover, in 
concentrated markets, the likelihood of administered pricing and 
agreements not to reimburse for a procedure is more likely. Ultimately, 
the insurer's gross margin increases by reducing access to care and the 
quality of care for consumers.
    The burden should be on the merging parties to demonstrate that the 
efficiencies they put forward are not speculative, that they exceed the 
likely anticompetitive effects on consumers and suppliers of services, 
and that the benefits will be passed on in the form of lower premiums 
and better quality, rather than larger profits for shareholders. It is 
highly unlikely that burden can be met in this case.

 Recommendations

    The United-Sierra merger poses a serious threat to competition in 
the provision of insurance and health care services in Nevada, 
especially Clark County. This merger requires heightened scrutiny given 
the currently high concentration of the health coverage providers in 
the Nevada market and the current shortage of health care professionals 
in the State. The merger should be denied because it ``would * * * 
substantially lessen competition in insurance in Nevada or tend to 
create a monopoly,'' through the creation of a dominant health 
insurance provider particularly in Clark County. Moreover, it will lead 
to a reduction in the level and quality of service thus harming and 
prejudicing ``the members of the public who purchase insurance.'' 
Enhancement of Nevada's health care requires increased levels of 
competition and greater market efficiency, which cannot be achieved 
through a merger between two of the State's largest health insurance 
providers. The likelihood of competitive harms from the United-Sierra 
merger is substantial, and the procompetitive benefits de minimus. 
Pursuant to NRS 692C.258(1), we urge the Commissioner to deny the 
merger application.
[FR Doc. E8-17366 Filed 8-21-08; 8:45 am]
BILLING CODE 4410-11-M