Skip Maine state header navigation
Skip All Navigation
|Home | Contact Us | Careers | Calendar|
Maine.gov > PFR Home > Insurance Regulation> Administrative & Enforcement Actions > Document 616 : INS 99-14 : Hearing Decision
STATE OF MAINE
NOW COMES Intervenor, MHA, Inc. (MHA), through its undersigned counsel, and submits this Prefiled Testimony of James W. Meehan, Jr., Professor, Colby College, consistent with the terms of the Superintendents Procedural Order of November 4, 2000.
Q: Please identify yourself and your employment.
A: My name is James W. Meehan, Jr., I am currently the Herbert E. Wadsworth Professor at Colby College.
Q: Please describe your education and training in your present field. Do you have a CV?
A: Prior to coming to Colby I was Assistant to the Director of the Bureau of Economics for the Federal Trade Commission. I taught at Northeastern University in Boston and I was a staff economist at the Antitrust Division of the Federal Trade Commission. Attached as Meehan Exhibit 1 is my CV.
I received my BA degree in 1962 from St. Vincent College in Latrobe, PA, and my Ph.D. from Boston College in 1967. My area of specialization at Boston College was industrial organization and antitrust policy.
The courses I teach here at Colby are industrial organization and antitrust policy, a course in regulatory economics, and a senior seminar in economics of organizations, in addition to intermediate microeconomics.
Q: Could you describe some examples of other cases or areas in which you have provided expert or specialized consultation or testimony?
A: Yes. I have actually never formally testified in a pending case. I have testified before Legislative Committees both here in the State of Maine and in Washington. In Maine, I testified on drug regulations and earlier on, on some other regulatory matters. I have done some work for the Attorney Generals Office in Maine as a consultant on a couple of matters; I do some work for a consulting firm in Boston on antitrust matters basically helping them formulate their arguments and formulating the kind of information they are going to need, and that kind of thing.
When I worked at the Federal Trade Commission, of course, I helped prepare Congressional Testimony basically for the director in most cases, and I did testify.
When I was with the Federal Trade Commissioners office, I was an economic advisor to one of the Commissioners, Commissioner Mary Gardiner Jones. Again, I helped her when she was deciding cases and things like that, to write up economic info, etc.
Q: Are you familiar with the term "most favored nation" in the context of contractual arrangements among various entities? If so, could you describe your understanding of the term.
A: Yes. I am familiar with the term "most favored nation clause" or "most favored customer clauses". My understanding of them is they constitute an agreement between a buyer and a seller, where the seller agrees to offer the buyer a price, and if the seller offers a better price to another customer, the seller is obligated under that clause to offer the same price to the buyer they had the "most favored nation" contract with.
Q: If you could, go into some of the issues these "most favored nation" clauses raise from the standpoint of competitive issues, or economic theory.
A: Sure. The traditional arguments are that the most favored nation clauses, under certain circumstances, can have anti-competitive effects, and under other circumstances they can potentially have pro-competitive effects.
Let me start with the pro-competitive effects. The standard argument in favor of "most favored nation" clauses as improving efficiency, occurs in a case where lets say a coal company and an electric utility company sign a long-term contract for the purchase of coal. The electric utility company has to make certain investments in plant and equipment to handle the coal of the coal supplier, because coal varies in quality in terms of sulfur content, BTU content, ash content, and things like that. The utility has to design the plant so that it can utilize the coal supplied to it by the coal company most efficiently. Frequently, these contracts are long-term (20-30 years sometimes). In contracts like that, the parties obviously become locked in partly because of these investments. Since the contract is a long-term contract, the parties want to have some way to adjust price over time to the market.
There are several ways they can do this. They can index the current base price to various cost changes. But, one alternative that is not available to them is the spot-market prices. On the east coast, there is lots of coal sold on the spot-market, but the coal is quite different from the coal sold in the mid-west, so they cant really use that as a good indicator of what the market price should be.
Well, in these cases, they will sometimes put in a "most favored nation" clause as a way of testing the market over time, because the price indexes sometimes are crude devices for tracking market prices, and demand and supply conditions change, regulations change, and sometimes these price indices get out of whack in terms of what the market would be. But, if you have a most favored nation clause, the buyer can go to the seller and say "look, under todays conditions, you are selling that same coal to someone else at a lower price, and therefore, our index is not truly reflecting that price. This is a good test of the market. You should be able to offer that price for me". That is a way to introduce a market test for what the price will be in the future, when market conditions change and these price indexes dont reflect the market price. In these circumstances, you can argue that the MFN is an efficient way of getting a market test for the price. These are usually situations where one party or the other makes investments that lock them into a transaction with the other party, where the investments are long-lived and they want this relationship to exist. At the same time, they want to be paying prices for their coal that reflect market prices, and this is a wonderful way to track the market price. In this case, I think most economists would agree the MFN is not anti-competitive and probably efficiency enhancing.
The potential anti-competitive effects. The standard argument that MFN clauses can have anti-competitive effects are the ones that are very similar to those pressed by the FTC in the Ethyl case. You have an oligopolistic industry where you have, lets say 3 sellers, and they reach a tacit agreement among themselves, which may not violate the antitrust laws because it is a tacit agreement on price. What they are worried about is that one or the other party to that agreement will cut price to get additional customers; particularly, large customers. As a result, the market then softens, competition breaks out between them and prices tend to be driven down. Well, sometimes these companies introduce and this is the allegation in the Ethyl case, (again, it could be independently, without any formal evidence of collusion) they could independently adopt a most favored nation clause, which says, in effect, to the customers: "If I cut price to any customer, I will offer that same price to all of my customers".
The argument the Federal Trade Commission made in the Ethyl case, and again I think most economists would agree with this, is that this has the potential of being anti-competitive because you could rigidify prices. If I have the incentive to try and cut price to get some additional customers, and if I have to offer that price to all of my customers, it makes that price cut more costly to me. The advantage I get if I selectively cut price is I pick up some extra customers, and as long as I have customers who are paying a price greater than the cost of servicing them, I get some extra revenues. However, if I have to offer that price cut to everyone, I lose some of those revenues I was getting from some of my other customers. So, it makes that price cut more costly to me.
If all three of these firms adopted the MFN policy, then it could reduce their incentives to engage in price-cutting to get more customers or more favorable customers this would be what the Federal Trade Commission called a "facilitating device". It is a device that reduces the incentives of any one of these firms to cut price, to get business away from their rivals. In those cases, if it is an oligopolistic industry, and if all of the major players in that industry adopt this practice, I think a good case can be made that this tends to solidify prices at the oligopoly level, or above-competitive level, and reduces the incentive for a competition.
That is the standard argument for the MFN clauses having anti-competitive effects.
Q: So, Professor, you have highlighted one argument for the anti-competitive effect of MFN clauses being reduction or elimination of an incentive to discount because any discount will have to be passed on to all customers. What effect, if any, would a MFN clause have on entry of new competitors to a particular market?
A: Well, I think that case is a little bit different. This gets us into the kinds of cases that are involved in the insurance market here. In some of the papers I have been reading, I can see a slightly different argument being made for these cases. Let me articulate the argument, and then we can get into potential effects.
Lets take the hospital market and the health insurance market. I want to stress that I have not engaged in any extended review of these markets. Suppose we stick with the hospitals as a provider of medical service. My understanding these days, with hospital affiliations and mergers taking place, is that these hospitals have some market power in the regions in which they operate it may not necessarily be monopoly power, but all I am saying is that their demand curves are not perfectly elastic as we assume they are perfectly competitive industries, and they can push price up to some extent without losing all of their customers. So, it may not be pure monopoly, but they do have some pricing discretion.
In these markets, the hospitals may have an agreement with an insurance provider to offer their services at a negotiated rate. Then, another potential customer comes along and they see that they can attract this customer at a lower rate and it is profitable for them to do so. As long as they are getting a price for their services that covers the incremental cost of serving the new customer, they will get enough revenues to cover the cost of servicing that additional customer or insurance provider, and maybe even a little extra. Now that price may be lower than the price they are charging other providers in a network.
Now, why would they do that? In some cases it may be because they have excess capacity and it may be that another customer comes along and it would pay them to service this insurance companys customers at a lower rate because that would fill the excess capacity. As long as they are covering the extra cost of providing that capacity to this new provider, it is profitable for them to do it, and they would be willing to do it.
On the other hand, if they had to offer that price to all of their potential customers, then they might not do it. Again, that may tend to rigidify price at the higher level and they wouldnt be discounting to other customers to fill that excess capacity.
Now, in terms of entry, it could be that this new insurance provider is coming into the market and serving a particular niche in the market, and searches out hospitals or providers of medical care, and finds one that has excess capacity, and says "look, Im not going to be a big customer, but I can provide you with some extra business that will help you utilize your capacity more efficiently, but I need a price discount to do it. I am not a big insurance provider, I only have a small group of customers, and we are providing a particular kind of service". If the hospital says, "gee, I would like to do business with you, but I have to offer that same price to all of my insurance providers which is not going to make it profitable for me to do it." The hospital makes a decision on whether the incremental revenues it is going to get from the new customers is going to cover the incremental costs of servicing them with that excess capacity that the hospital has. If the hospital had to offer that same discount to all customers, then the incremental revenues that it is going to get will be less because it is going to lose some revenues from its existing customers. So, it may not be profitable for the hospital to do that and that may foreclose that new insurer from coming into the market because it cant get access to these kinds of medical services at the price it seeks.
Q: So, we have at least a couple of factors you have identified. One being the incentive, or lack of incentive, to the hospital to offer the lower price to the new insurer or new group that has a smaller volume than the insurer with the MFN clause. Is that one of the factors?
A: Yes. It could be an existing insurer or it could be a new insurer.
Q: And, the second factor is the incentive, or likely incentive for new insurers to come in or not come into the market, so both of those are pro-competitive factors as they are known in economic jargon?
A: Yes. To demonstrate these factors, let me switch industries. For instance, in the drug industry, drug companies invest a lot of money up-front in research and development, so they have these fixed costs. Also, a lot of drugs are not successful. So, its almost like a natural monopoly. We have these large fixed costs invested up-front, very few of these drugs are successful, the marginal cost of making pills is virtually zero. Now, obviously, a drug company, before it makes any investments, is going to want to recover those costs, plus get at least a normal profit on that investment, and enough of a profit to compensate it for the risk given the fact that a lot of drugs dont get marketed.
Okay, so lets say the drug company negotiates with an insurance provider to provide the insurer with drugs and they negotiate a rate for supplying them with drugs. Then another customer comes along it could be in insurance provider, a HMO, a large drug chain and says "wed like to direct our customers to your drugs, but we would like to negotiate a price with you." As long as their price covers the incremental cost of producing those drugs, plus a little extra to help pay off those fixed costs, it is profitable for them to do this. But, that price may be lower than the price they are charging someone else. Again, you can call that price discrimination, but here, if they had to charge the same price to everyone else (especially if there is that lower price) they wouldnt be able to cover those up-front costs.
So, a firm that has market power and large fixed costs that are sunk may find it profitable to price discriminate and it may be efficient for it to price discriminate. From a consumers point of view, there are more drugs being sold, the price of the incremental drugs being sold is sold closer to the marginal cost of production and it may be pro-competitive or efficient to do that.
However, if you had to charge everyone the same price, especially if it was a lower price, you couldnt do it because it couldnt cover all of those up-front sunk costs.
So, price discrimination actually can be desirable from a consumers point of view, in the case where you have a monopoly, especially in the case of a natural monopoly.
The hospital market has some characteristics of a natural monopoly because some of the services they provide, like diagnostic tests, require equipment and heavy up-front investment costs and the hospitals want to cover those costs. If they have excess capacity with that equipment, and someone comes along and says "I can offer you a few extra customers and I can cover the incremental costs, the cost of the nurses and the diagnosticians to run those machines, and the electricity and so forth that is used, plus I can give you a little bit extra", it is profitable for the hospitals to do it because they can use that extra business to spread some of those fixed costs.
But, they couldnt cut price like that to all of their customers, because at those low prices they may not be earning enough revenues to cover all of those up-front costs plus the out-of-pocket (variable) costs that they would incur. So, in that case, you could argue that the ability to cut price may be something desirable, and if the most favored nation clause can reduce the incentives for the hospital or drug company or somebody like to that to cut price to get the additional business, then the most favored nation clause may inhibit selective price cutting that would be efficient.
Q: Let us assume, too, that as you have suggested, we are dealing in a fair number of hospitals around the State that have been recognized as "sole community providers" and the federal government has recognized them as such, as being the only hospital within their particular service area. MHA witnesses will testify that among 39 hospitals, we have 13 that have been so designated. Let us assume also that these institutions are at less than full occupancy year-in and year-out. Am I correct in concluding that those are just the kind of entities you have suggested may benefit from the ability to price discriminate?
A: Sure. Yes.
Q: And, these hospitals may be significantly injured if they were forced into a most favored nation situation.
A: Sure. If the most favored nation clause reduced their incentives to cut price to get these new customers, or to get more of these smaller insurance providers, it means that they wont be able to fully utilize that capacity. As long as you can utilize it at a price that is greater than the incremental cost of supplying it to a new group of customers, it is efficient to do so. Reducing their incentives to do that, or reducing their ability to do that, inhibits their ability to utilize their excess capacity and to be efficient.
Q: Does an economists definition of "efficient" mean to derive those revenues and provide those services these hospitals are capable of deriving or providing if they are given the opportunity to do so on a cost-effective basis?
A: That is right. I can think of another case, as well. This is a little different. Suppose that a hospital negotiates a contract with an insurance company to provide their services for a certain rates and then another insurance company comes along and negotiates with the hospital. The second insurers might say, "I would like to negotiate a lower rate than you are charging the other insurance company because I am going to help you utilize the excess capacity you have, or I am going to offer you something else, in lieu of the higher rates e.g., I can provide a steady flow of patients to even out your patient flow, or I can compensate you more quickly for patient services, etc.". In this case, the service mix offered to the first insurer at the higher rates is different from the services offered to the second insurer at the lower rates. The discounts offered to the second insurer may not be price discrimination, it may simply reflect the "extras" the second insurer is providing i.e., it is a way of compensating the second insurer for those extra services.
Q: The kind of extras you are referencing could well be applicable in a number of instances facing hospitals. Examples could involve a local employer who may be self-insured, who may be able to work with its employees on Workers Compensation cases or scheduling elective surgery or filling some of that down time you referred to earlier in terms of excess capacity.
A: Thats it, yes. Or, peak load kind of thing. "We can manage this so it occurs when you are not at your peak periods, and so forth, and you let us know when you have that excess capacity available and we can get our patients in." Again, I dont know enough about the hospital market to know precisely what these are, but there may be things like that.
"In lieu of that, or quid pro quo for that, I would like to have a discount."
Okay, now I suppose of the original insurer comes back and says "Look, I have got a most favored nation clause. You are giving the other insurer discounts over what I am getting I want this discount". The hospital says "well, no. It is not really the same product. They are doing these extra things for me and the discounts are really paying them for that. Basically, I am offering them a different kind of service because they are providing me these customers during off-peak periods", or however that works.
Administratively, it may be a nightmare to prove that the services the hospital is providing the two insurance companies are different, and therefore, the lower rate charged to the second insurance company is cost justified. So, I suspect what happens in a lot of cases is that hospital will say to the second insurance company, "Yes, the extra benefits you are offering me warrant a lower rate than I am charging the other insurance company, but I dont want to get into that because it is going to be costly for me to prove that the lower rate I am offering you is cost justified, and I am probably going to have to offer the lower rates to my existing customers." In other words, because it is costly to prove that the lower rates to the new insurance company are justified, the hospital does not offer them.
In this case, the MFN is inefficient because it prevents competitors from entering the market and offering the hospitals a new mix of patients and other services. Absent the MFN, the hospital would accept the offer of the second insurance company, but if it has to litigate its contracts with existing insurance companies to prove that the discounts offered to the second insurance company, it may not accept the offer. Consumers are denied an efficient mix of services.
Again, that is another example of where the MFN could inhibit competition.
Q: The factors you have identified Professor. Would you have any comments as to how the factors you have identified might relate to Blue Cross? We dont have current aggregate data on market shares. We do have self-proclaimed data from Blue Cross to the effect that they are insuring 40% of the people in Maine, and we have some other numbers, but maybe for current purposes, without getting into the hard numbers but within the 30-40% range, do the factors you have identified cut one way or the other?
A: Yes. Again, I am not an expert on the field, and I have looked at some of the data you have given me and I have some questions about how one defines the market. But, lets assume that the Blue Cross market shares are in the neighborhood of 30-40%. That is a significant number. I guess the relevant number from the hospitals point of view, when they are making this decision, is okay, if I offer a discount to a new insurer, or a new customer, and as long as I am getting revenues over and above the incremental cost of supplying them, it is worthwhile for me to do it. Now, the question is if I have to live under this most favored nation clause and I have to offer those same discounts to a customer who is providing me with 40% of my business, then a 10% discount over and above what they are currently getting may involve a significant reduction in my revenues and not make this offer profitable for me, because whatever extra revenue I pick up from this new customer (probably a small customer) over my cost, is going to be wiped out by the loss of 10% of my revenues for 30-40% of my business. 30-40% would be a fairly significant part of my business for purposes of this analysis.
Now, you would have to figure out how much extra revenue you are getting from the new customer and how much the discount would be to your old customer, and what those lost revenues would be, versus the gain in revenues, to figure out whether it would completely wipe it out or not. I would assume that 30-40% is a fairly significant number and if you had to offer any kind of a discount of any magnitude to a customer like that, that would be a fairly significant negative impact on the revenues.
If you have a market with the characteristics of a natural monopoly (i.e., an industry that makes a substantial investment up-front in costs that are fixed and has a very low incremental cost of producing the product, like the drug markets that I mentioned before), the monopolist will want to be able to set prices to cover all of its costs, both fixed and incremental cost, plus a normal return on its investment.
Q: For some services through the State Certificate of Need process, we have all of those elements in a State inspired and sanctioned natural monopoly, where decisions are made not to have more than we need of MRI machines, and various other machines or technologies. Professor, could you comment from a supply-demand, economic standpoint, and provide a laymans summary of the observations you have about the issues we have been discussing? What is the overall impact of MFN clauses in terms of efficiency in the healthcare market for provision of services?
A: I can comment generally. Let me address an MRI service. This is fairly expensive equipment and the hospital has to make a significant investment up-front, so there is a lot of fixed cost involved. In order to service this market efficiently you have to have a certain quantity of business. So, the more you can utilize this equipment, the more you can spread those fixed costs over a larger number of patients and lower your per-unit cost. Now, if one insurer comes in and signs a contract with you, and they provide you with say, a couple of hundred patients a month, you would want to charge them a price that would cover the average cost of servicing them that is the per unit cost per patient, of servicing them, which would include the cost of the technicians that run the machine, the electricity, all of the variable costs, plus a per-unit charge for the fixed cost and a return on the investment.
Now, another customer group comes to you and says "Im small, but I can provide you with some extra patients. You have some excess capacity there. Now I cant pay you the same price that the first insurer is paying you it is just not economically feasible for me to do it. But, I certainly can pay you the cost of all of those technicians, the electricity, and the extra costs that are necessary to have my group of patients use the machine, plus Im going to give you something extra to cover some of those fixed costs but nowhere near as much as the higher price you are charging the other insurer. I cant afford the higher price."
Will it be profitable for the hospital to do that? Of course it is profitable for the hospital to take on those extra customers at that lower price as long as that customer group is paying the full incremental cost of servicing them, plus some extra. That extra is gravy for the hospital because it can go to pay off some of those fixed costs.
That is efficient from societys point of view, because the extra customers are paying the price that covers the full extra cost of servicing them.
Now, the first group of customers, that initial insurer who is providing the initial group of patients, if they were to get the same price, there may not be enough revenues generated by both the customer groups at these lower prices to cover the full cost of servicing that total customer base, including the share of the fixed costs that occurred because of the up-front investments.
The first customer really has no complaint, as long as the patients in its group are not paying a price greater than the price of servicing them alone. From an economists point of view this is called the "stand alone and incremental cost test". As long as the incremental customer pays the full incremental cost of serving them, and the first group doesnt pay a price higher than the stand alone cost (the cost of servicing them alone), there is no cross-subsidization going on here, and it is efficient to do that.
Natural monopolies utilize this kind of pricing to expand the utilization of their capacity and it is efficient for them to do so.
Q: Thank you for the summary.
A: Let me ask you a question. In the case of BCBS how long of a contract do they have with the hospitals?
Q: Typically, its 2 or 3 years, and some have automatic renewal features. The standard Hospital Services Agreement used by BCBSME also has a "termination without cause" provision permitting either party to terminate the agreement by providing a 90-day notice.
A: The reason I am asking is because I am trying to determine if there may be an efficiency argument for the MFN. If the contracts between the hospital and Blue Cross/Blue Shield are long-term contracts (e.g. 10 years), a case may be made that the MFN clauses are an efficient way for the parties to the contract to adjust price to changing market conditions. The services being exchanged are not like commodities that can be purchased off the shelf and cost indices may only be a crude method of adjusting prices to changes in the market demand and supply. In these cases, the MFN may be a way to periodically adjust the price to the market changes. If, for example, a hospital were to negotiate lower rates with another insurance provider in the fifth year of a contract with BCBS, it may indicate that the market rates for the hospital s services have fallen and the MFN provides BCBS with a mechanism for getting the new market rate. In this case, involving a long-term contract, the MFN is an efficient way for BCBS to get information about market rates and to take advantage of them.
When contracts are relatively short-term (1) that efficiency argument isnt quite as clear, and (2) if they have the right to go back and bargain every year, then in some sense, they dont need the most favored nation clause. Why cant they go back and bargain for lower rates?
If the hospital can offer those lower rates to everyone and still cover the full cost of the providing the service, then BCBS should get the lower rates and they should have the bargaining leverage to do that. If they are providing 30-40% of the hospitals customers, they can say "look, we deserve these lower rates too". If the hospital doesnt have this kind of situation, those lower prices could in fact cover the cost of the hospital, they would be in the position of facing the loss of BCBS business if they didnt do it, and they would do it.
If the contracts can be renegotiated frequently enough, I think BCBS will have enough market protection to get favorable rates if they can be offered to everyone. If the hospital cant, then the hospital would have to resist that.
You have the same thing with drugs. You have the State of Maine saying you can buy drugs cheaper in Canada than you can buy them in the U.S. Well, sure, the drug companies are selling in Canada as long as they are covering the full incremental cost of doing it. Canada is regulating those prices, but if the drug companies had to charge everyone these lower prices, they wouldnt be covering their R&D costs, they wouldnt be doing the research and development, and they wouldnt be developing new drugs.
Now again, I dont know enough about drug company profits to know that for a fact. Maybe they can charge the same price to everyone and still earn enough revenues to cover all of those R&D costs, but maybe they cant. It is the same situation here.
If I were sitting as a public policymaker, I would look at the potential pro-competitive and anti-competitive effects that are associated with the use of MFN clauses in the contracts between the health insurance companies and the hospitals. If MFN clauses are not permitted, you prevent the potential anti-competitive effects that are associated with them, but you run the risk of also eliminating the pro-competitive (efficiency enhancing) effects of MFN clauses. On the other hand, if you allow the most favored nation clauses to remain in the contract, you retain the pro-competitive effects, but you run the risk of allowing the anti-competitive effects to take effect. The issue is: which risks are greater? The decision is one of balancing the risks.
If the contracts in this market are short-term, and if the markets have the characteristics where price-discrimination is efficient (or price differences reflect cost differences), I believe the risk of permitting the MFN to remain in the contracts are greater than the risk of prohibiting (or limiting) them. That is, the risk of losing the flexibility in pricing for hospital services is greater than the risk of using most favored nation clauses to adjust the rates to market levels.
Q: So it is your view the balance would be that there is greater injury to the efficiency of the market by permitting these contracts than by prohibiting them?
A: There is greater risk of injury if you dont prohibit these kinds of contracts, and the risk of efficiency if you do prohibit them isnt that great if the hospital and health insurer can renegotiate their contracts every year anyway, or every two years.
Q: Are there other economic reasons to be concerned about MFN contracts?
A: I am thinking out loud again a bit, but there is another argument. Sort of a hard versus soft competition argument.
Think about a market that is highly concentrated. There is only 3 or 4 insurers who are buyers of medical coverage from hospitals. This is sort of an oligopoly whether or not they are tacitly agreeing to prices. I dont know for sure whether they are agreeing on price, but if I am one of these buyers, when I bargain, there are transaction costs to me in bargaining. Of course, I want to bargain to some extent as hard as I can because I can get lower costs and I can offer my potential customers lower rates and that gives me a leg up in the marketplace.
But, if I have a most favored nation clause it may reduce my incentives to bargain hard, especially if all of the other insurance companies have these most favored nation clauses in their contracts too. It may reduce my incentive to bargain hard because I dont incur these transaction costs and I get a price, and if somebody else comes along and gets a lower price, it is revealed in the marketplace and I get the advantage of it anyway.
So, if we all have this reduced incentive to bargain hard, it may lead to soft competition and so as a result, prices dont get bargained down as hard as they could, and that is potentially another argument that you can make in support of limiting or prohibiting MFN clauses.
I think, for purposes of this particular argument, it is critical that you have an oligopolistic situation because if there is a large number of competitors, there is always going to be somebody out there who will have the incentive to get the best price possible, to get business away from their rivals, and that would then force them all to bargain hard if they are going to be able to help their customers.
When there are a few firms in the industry and if they all adopt this sort of soft competition approach, and they are all protected by the fact that they have a most favored nation clause so that if one gets a lower price, they all get it, no one will have an advantage by bargaining hard to get lower prices. That is, no one has the incentive bargain hard for lower prices. Why should I do the hard bargaining and get the lower price, and you free ride off of me because you have a most favored nation clause? I have no incentive to do that. So, we all bargain softly and that means higher prices.
Q: Is it a fair summary of your comments that if a health insurer has sufficient market power, it is probably going to get a pretty good price anyway, but the further use of an MFN clause makes sure that their competitor cant get a better price and that this factor may have some anti-competitive negatives?
A: Yes. If there are four of us in the market and we all have these most favored nation clauses, it reduces our incentives to bargain as hard as possible. Obviously, we want to bargain to some extent to get lower rates, but it weakens that incentive to push for that extra little margin to get a leg up on our rivals, because we dont need that leg up on our rivals as long as we are all being charged the same price. In this case you have a bilateral monopoly situation where both are getting a share of the market and are not bargaining hard over those extra few bucks.
Q: Looking at this soft competition factor, can it have a variety of elements aside from the pure premium price to employers for insurance or what insurers pay for the service? Could this soft competition impact the other economic elements of benefit to the hospitals such as payment policies or claims handling or whatever? Could there be soft competition on these elements as well?
A: Yes. In fact, I think if I understand you correctly and this gets back to my original argument, that these firms may bargain for lower prices for the services they buy from the hospitals by offering other kinds of services for those discounts. Managing claims or utilizing excess capacity during off peak periods, or whatever it is, is incentive for firms to do that. On the other hand, if when they bargain hard to do that and get those kind of things, the fruits of their bargaining have to be passed on to their competitors, they get no advantage from it, so there incentives to do it are weakened.
Q: Have you addressed the key economic issues involved in MFN contractual practices and related issues? What overall guidance do you have for Superintendent Iuppa?
A: I think we have covered most of them. I suppose there is always somebody who can come along and construct an argument that I havent thought of one way or the other, but I think we have covered most of the basics. If I were sitting there from a public policy point of view, I would want to look at the pros and cons of these practices and ask what are the risks if I say that insurance companies cant use these practices? What are my potential losses here? On the other hand, if I allow them to use MFNs, what are the potential risks involved? What I have tried to do is to highlight what I think are potential efficiency justifications for these clauses as well as the potential anti-competitive effects that could occur if they are used.
I dont know enough about the health insurance market to say with 100% certainty that these potential anti-competitive effects are going to be more serious than the potential efficiency enhancing effects. It is my view, however, that these potential efficiency enhancing effects are only likely to occur in cases where buyers and sellers have made transaction specific investments that lock each other into each other over long periods of time, such as the 20-30 year coal contracts I referred to earlier. Unless that situation exists, and because these health insurance contracts can be renegotiated fairly frequently, it strikes me that the risk of losing that potential efficiency is not going to be very high.
On the other hand, it is my view that these potential anti-competitive effects are likely to occur from MFN clauses in health care-related industries where you have these substantial up-front equipment costs, so that you have natural monopoly conditions. In these markets, where price discrimination can be efficiency enhancing, MFN contracts can rigidify that and inhibit competition, then the risks of deleting MFN clauses arent as great, and therefore it makes public policy sense to prohibit or limit these clauses in contracts for health-care related services.
That is the way I view it.
Q: Does this conclude your prefiled testimony?
A: Yes. I would be happy to respond to any questions.
DATED: March 28, 2000
Sandra L. Parker, Esq. Esq. John P. Doyle, Jr., Esq.
Attorney for MHA, Inc. Attorney for MHA, Inc
MHA, Inc. PRETI, FLAHERTY, BELIVEAU,
150 Capitol Street PACHIOS & HALEY, LLC
Augusta, Maine 04330 One City Center
e-mail: firstname.lastname@example.org P.O. Box 9546
Portland, Maine 04112-9546
JPD\G:\MHA\2000\ANTHEM\TestimonyofMeehan0327.doc (March 27, 2000 3:56 PM)
Meehan Exhibit No. 1
Name: James W. Meehan, Jr. Marital Status: Married
Home Address: 12 Cherry Hill Drive
Waterville, ME 04901 Telephone: (207) 872-8926
Fax: (207) 872-3263
Business Address: Department of Economics
Miller Library 241
Waterville, ME 04901 Telephone: (207) 872-3136
Date of Birth: March 4, 1941
Education: Institution Major Degrees
St. Vincent College Economics B.A. 1962
Boston College Economics Ph.D. 1967
Fields of Industrial Organization
Concentration: Antitrust Policy
The Economics of Organizations
Positions Held: Herbert E. Wadsworth Professor Colby College, September 1991-
Professor, Department of Economics Colby College, September 1982-1991
Chairperson, Social Science Division olby College, 1981-1984
Chair, Department of Economics Colby College, 1982-1985
Director, Public Policy Program, Colby College, 1985-1987
Associate Professor, Department of Economics Colby College,
Assistant Professor, Department of Economics Colby College, September 1973 - June 1977
Assistant to the Director, Bureau of Economics Federal Trade Commission, June 1, 1971-August 1973
Economic Advisor to Commissioner Jones Federal Trade Commission, August 1970-June 1, 1971
Assistant Professor, Northeastern University
September 1967 - June 1972
Economist, Antitrust Division Department of Justice, September 1966 - July 1967
Economics and Antitrust Policy, ed. by Robert J. Larner and James W. Meehan, Jr.,
Quorum Books, New York, 1989.
"Empirical Evidence on Vertical Foreclosure," Economic Inquiry, Vol. 32, April, 1994 (co-author Eric Rosengren).
"Business Failures in New England," New England Economic Review, November/December, 1993 (co-authors Eric Rosengren and Joseph Peek).
"The Costs of Organization," Journal of Law, Economics, and Organizations, Vol. 7, Spring 1991 (co-authors Scott E. Masten and Edward A. Snyder).
"Vertical Integration in the U.S. Auto Industry: A Note on the Influence of Transaction
Specific Assets," Journal of Economic Behavior and Organization, Vol. 12, 1989 (co-authors, Scott E. Master and Edward A. Snyder).
"Structural School, Its Critics, Its Progeny: An Assessment," published in Economics and
Antitrust Policy, ed. by Robert J. Larner and James W. Meehan, Jr., Quorum Books, New York, 1989 (co-author, Robert J. Larner).
Berkey Photo, Inc. v. Eastman Kodak Co.: A Search for an Explanation of Kodak's
Dominance of the Amateur Photographic Equipment Industry," Research in Law and Economics, Vol. 5, 1983.
"Which Rule of Reason Ought to Apply to Vertical Restrictions on Competition?"
in The Antitrust Bulletin, Summer 1981 (co-author, R. J. Larner).
"Market Structure and Excess Capacity: A Look at Theory and Some Evidence," Review
of Economics and Statistics, February 1979 (co-authors, G. A. Ramsay and
H. Michael Mann).
"Rules vs. Discretion: An Evaluation of Merger Guidelines in Light of the New Evidence on Economies of Scale," Antitrust Bulletin, Winter 1978.
"Policy Planning for Antitrust Activities and Future Prospects," published in The Antitrust Dilemma, ed. by J. A. Dalton and Sanford Leven, Lexington Books, D. C. Heath, 1974 (co-author, H. Michael Mann).
"Structural Antitrust Cases: The Benefit-Cost Underpinnings," George Washington Law Review, Summer 1974 (co-author, H. Michael Mann).
"Advertising and Concentration: A Comment," The Southern Economic Journal, January 1973 (co-authors, H. Michael Mann and J.A. Henning).
"The Critical Level of Concentration: An Empirical Analysis," The Journal of Industrial Economics, July 1973 (co-author, Thomas Duchesneau).
"Vertical Foreclosure in the Cement Industry: A Comment," Journal of Law and Economics, October 1972.
"Advertising and Concentration: New Data and an Old Problem," The Antitrust Bulletin, Spring 1971 (co-author, H. Michael Mann).
"Joint Venture Entry in Perspective," The Antitrust Bulletin, (Winter 1970).
"Concentration and Profitability: An Examination of a Recent Study," The Antitrust Bulletin, Summer 1969, (co-author, H. Michael Mann).
"Statistical Testing in Industrial Economics: A Reply on Measurement Error and Sampling Procedure," (co-authors, H. Michael Mann and J. A. Henning).
Symposium on Advertising and Concentration: Journal of Industrial Economics, November 1969.
"Testing Hypotheses in Industrial Economics: A Reply," (co-authors, H. Michael Mann and J. A. Henning).
"Advertising and Concentration: An Empirical Investigation," Journal of Industrial Economics, November 1967, (co-authors, H. Michael Mann and J.A. Henning).
Papers Presented to Conferences and Workshops:
"Empirical Evidence on the Effects of Vertical Mergers," (Co-author, Eric Rosengren).
Presented at the Southern Economic Association meetings in San Antonio,
"Berkey Photo, Inc. v. Eastman Kodak Co.: A Search for an Explanation of Kodak's Dominance of the Amateur Photographic Equipment Industry." Paper presented at the Western Economics Association Meetings in San Francisco, July 4, 1981. This paper was also presented at the Industrial Organization Workshop at the Federal Trade Commission, Summer 1981.
(co-author Robert J. Larner). Paper presented at The Eastern Economic Association Meetings in Boston, May 11, 1979.
"Antitrust and Oligopoly: The Case for Preventive Policy," presented at The Western Economic Association Meetings in San Francisco, June 24, 1976.
"Antitrust Policy and Allocative Efficiency: Incompatible?" (co-author, H. Michael Mann). Presented at a Conference on Problems of Regulations and Public Utilities, Amos Tuck School of Business Administration at Dartmouth College, August 26-30, 1973.
"Policy Planning Antitrust Activities: Present Status and Future Prospects," (co-author,
H. Michael Mann). Presented at a conference on Industrial Organization Policy Planning in Antitrust, Southern Illinois University at Edwardsville, April 26-27, 1973.
Visiting Professor, University of Maine Law School, Spring '95.
Consultant to Pharmaceutical Research and Manusfacturers Association of America.
Consultant on a Private Antitrust Cases.
Consultant to the State of Maine's Attorney General's Office, Consumer Fraud and Antitrust Division. Consultant on antitrust cases Summer 1977, Winter 1979, Summer 1988, Summer 1989, and Fall 1989.
Expert Witness in a Private Antitrust Case, 1986. Case settled before trial.
Consultant to the Federal Trade Commission, Bureau of Economics. Authored a study entitled, "Vertical Integration in the U.S. and Japanese Automobile Industry." Summer 1984.
Consultant to Central Investment Company (CIC) of Cincinnati, Ohio, March 1980. Co-authored (with R. Leone and D. Garvin) a report entitled, "The Coca-Cola Decision and the Refillable Container." This report was submitted to the House Subcommittee on Antitrust and Monopoly on behalf of CIC.
"Antitrust Law and Economic Theory" and "The Economics of Monopolization." Two lectures presented at a Conference on Antitrust Law, Continuing Legal Education Conferences, University of Maine Law School, May 1980. I also participated in a panel discussion on "The Use of an Economist in Investigation and Litigation on an Antitrust Case."
Consultant to the Federal Trade Commission, Bureau of Consumer Protection. Prepared written testimony for the Commission's hearings on a proposed FTC rule "Advertising for Over-the-Counter Drugs," June 1977.
Commentator on a paper entitled, "Energy Industries Structure," delivered at a conference
on Energy Research Needs at Columbia, Maryland, June 1973.
Participant at a conference on "The Problems of Regulation and Public Utilities," sponsored by American Telephone and Telegraph, Dartmouth College, August 20-24, 1972.
Participant at a conference on "The Economics of Regulated Communications Industry in the Age of Innovation," sponsored by New England Telephone Company, Melvin Village, NH, June 17-19, 1970.
Before the Joint Standing Committee on Human Resources, Legislature, State of Maine, May 5, 1995. "Testimony in Support of LD584, An Act to Promote Competition and Managed Care Cost Savings in the Pharmaceutical Market."
Before the House Commerce Committee, State House of Representatives, Augusta, Maine,
April 1979. Subject: "Deregulation of the Trucking Industry in Maine."
Prepared written testimony for the Federal Trade Commission on a Proposed Trade Regulation Rule on the Advertising of Over-the-Counter Drugs, June 1977. Subject: "The Advertising of Over-the-Counter Drugs: A Critique of Professors Backman and Peltzman" (co-author, H.M. Mann).
Prepared written testimony for the Federal Trade Commission on a Proposed Trade Regulation Rule on Advertising of Ophthalmic Goods and Services, Fall 1976. Subject: "The Economic Effects of Advertising on Prescription Eye-Glasses."
Refereed Manuscripts for the following:
Journal of Institutional and Theoretical Economics
Journal of Industrial Economics
Journal of Economics and Business
Industrial Organization Review
Research in Law and Economics
Review of Industrial Organization
Federal Trade Commission, Bureau of Economics
Quarterly Review of Economics and Business
International Economic Journal
Richard A. Posner, Antitrust Law: An Economic Perspective, Industrial Organization Review, 1977.
JPD\G:\MHA\2000\ANTHEM\TestimonyofMeehan0327.doc (March 27, 2000 3:56 PM)
CERTIFICATE OF SERVICE
The undersigned hereby certifies that on March 28, 2000 a copy of PREFILED TESTIMONY OF JAMES W. MEEHAN, JR., was served via hand delivery, overnight mail or electronic mail on each of the persons listed below.
Jeffrey M. White, Esq.
Catherine R. Connors, Esq.
Portland, Maine 04101
(Anthem Insurance Companies, Inc )
Robert S. Frank, Esq.
HARVEY & FRANK
Two City Center, Fourth Floor
P.O. Box 126
Portland, Maine 04101
(Blue Cross/Blue Shield of Maine)
Judith Chamberlain, Esq.
State of Maine
Department of the Attorney General
286 Water Street
Augusta, Maine 04333-0006
(Bureau of Insurance)
William H. Laubenstein, Esq.
State of Maine
Department of the Attorney General
286 Water Street
Augusta, Maine 04333-0006
(Office of the Attorney General)
Joseph P. Ditre, Esq.
Consumer Health Law Program
One Weston Court, Level One
P.O. Box 2490
Augusta, Maine 04338-2490
(Consumers for Affordable Health Care Foundation/Coalition)
Michele M. Garvin, Esq.
Ropes & Gray
One International Place
Boston, Massachusetts 02110-2624
(Central Maine Healthcare Corporation; Central Maine Partners Health Plan)
Robert I. Goldman
Maine Council of Senior Citizens
27 Bowery Beach Road
Cape Elizabeth, Maine 04107
(Maine Council of Senior Citizens)
Executive Director of the Maine Ambulatory Care Coalition
P.O. Box 390
Manchester, Maine 04351
(Sacopee Valley Health Center, Regional Medical Center at Lubec, Eastport Health Care, Inc., and the Maine Ambulatory Care Coalition)
Maine Peoples Alliance
192 State Street
Portland, Maine 04101
Gordon H. Smith, Esq.
Maine Medical Association
30 Association Drive
P.O. Box 190
Manchester, Maine 04351
(Thomas D. Hayward, M.D.,
Maroulla S. Gleaton, M.D.,
And the Maine Medical Association)
Michel Lafond, Esq.
Sulloway & Hollis
P.O. Box 1256
Concord, New Hampshire 03302-1256
(co-counsel for Maine Medical Association)
Donald E. Quigley, Esq.
465 Congress Street, Suite 600
Portland, Maine 04101-3537
(Maine Medical Center)
Sandra L. Parker, Esq.
Attorney for MHA, Inc.
150 Capitol Street
Augusta, Maine 04330
Kellie P. Miller, M.S.
Maine Osteopathic Association
693 Western Avenue
Manchester, Maine 04351
(Maine Osteopathic Association)
DATED: March 28, 2000
John P. Doyle, Jr., Esq.
Attorney for MHA, Inc.
PRETI, FLAHERTY, BELIVEAU, PACHIOS & HALEY, LLC
One City Center
P.O. Box 9546
Portland, Maine 04112-9546
JPD\G:\MHA\2000\ANTHEM\TestimonyofMeehan0327.doc (March 27, 2000 3:56 PM)
Last Updated: January 21, 2014
|Copyright © 2006 All rights reserved.|