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> Document 617 : INS 99-14 : Hearing Decision
STATE OF MAINE
NOW COMES Intervenor, MHA, Inc. (MHA), through its undersigned counsel, and submits this Prefiled Testimony of David Cluchey, Associate Dean and Professor of Law at the University of Maine School of Law, consistent with the terms of the Superintendent’s Procedural Order of November 4, 2000.
Q: For the record, please identify yourself and your current employment. A: My name is David Cluchey. I am the Associate Dean and Professor of Law at the University of Maine Law School. Q: Could you provide us with a CV? A: Yes. Q: We will attach this as Cluchey Exhibit No. 1. Q: Please provide background regarding your experience in antitrust law and economic regulation. A: Back in the 1970s, I was an Assistant Attorney General in the Maine Attorney General’s Office and actively prosecuted antitrust cases. The primary focus of my work from 1976-1978 was antitrust enforcement. In 1978 I taught antitrust at the University of Maine Law School as an adjunct lecturer. In 1979 I became a full time faculty member there and I have since taught antitrust another 15 or so times. In the mid-1980s, I developed and began to teach a course entitled "Economic Regulation of Business". I have taught that course perhaps 8 to 10 times at the University of Maine Law School. I have some background in health care regulation. I served on the Health Facilities Cost Review Board for four years and was Chair of the Board from 1981 to 1983. I served on the Maine Health Care Finance Commission from 1983 to 1985. Q: Could you briefly describe the functions of those two regulatory bodies? A: Yes. The Health Facilities Cost Review Board was a state board that oversaw a voluntary effort on the part of hospitals to establish revenue limits, or budgets, with a focus on slowing the increase in the rates charged by those hospitals. The Maine Health Care Finance Commission was a Maine state board that oversaw a mandatory program that regulated the revenue that hospitals could receive from patients and insurers. Q: Are you familiar with the term "most favored nation clause", and if so, can you describe your understanding of it? A: Yes. "Most favored nation clause" is actually a term that comes from trade law. It refers to a clause typically inserted into a bilateral trade agreement under which one nation promises to another nation that they will give to that nation the most favorable treatment, in terms of tariffs and other restrictions on trade, that they give to any other nation. Most favored nation treatment is a fundamental principle of the General Agreement on Tariffs and Trade (the GATT). All members of the GATT extend most favored nation treatment to all other member nations. In the antitrust context, most favored nation clauses are sometimes inserted in contracts between buyers and sellers where – I suppose most typically – a buyer of a product insists that this clause be inserted into the contract so that the buyer will get the lowest possible price for the good. In other words, the buyer must be treated by the seller at least as favorably as any other buyer in terms of the price the seller charges for the good. One of the early antitrust cases involving most favored nation clauses is the Ethylcase, also known as E.I. DuPont De Nemours & Co., v. FTC. This case was decided by the Federal Trade Commission in 1983 and then reversed by the Second Circuit in 1984. I have been teaching that case in my antitrust course since it was decided by the Second Circuit in 1984. The case involved the use of most favored nation clauses by the producers of gasoline additives. The FTC challenged those most favored nation clauses, asserting that they were a facilitating device used to stabilize the price for the gasoline additives. They were a facilitating device in the sense that any seller would be notified of a lower price being charged by another seller, because the buyer would make demand under the most favored nation clauses for the lower price. Hence, the FTC regarded the MFN clauses as facilitating mechanisms to stabilize price at a certain level and prevent price competition. In the Ethyl case, the Second Circuit did not accept the FTC’s position on MFN clauses. I have been familiar with most favored nation clauses in the antitrust context for perhaps the last 15 years or so. Q: Is it fair to say there has been an evolution of enforcement actions taken against these MFN clauses on the part of Federal authorities, and correspondingly an evolution of court decisions? A: Yes. Most favored nation clauses have been increasingly attacked by the Justice Department over the course of the 1990s. The Justice Department has filed a number of suits – most of which have been resolved with Consent Decrees – where the party who had insisted upon the most favored nation clauses agrees in the Consent Decree not to enforce the clause, and not to insist upon them in future contracts. The more current concern about the anti-competitive effects of most favored nation clauses focuses on the problem of discouraging discounts. Once a most favored nation clause has been inserted into a contract, the seller who extends a discount to another buyer will have to extent that same discount to the purchaser who insisted upon the most favored nation clause. As a result, this gives a disincentive to the seller to discount his product once a most favored nation clause is in a contract. That is particularly true when the contract is with a major purchaser of services or goods, because, of course, the larger the purchaser is, the more the impact will be of extending the discount to all of the purchases made by that buyer. Q: Have there been enforcement actions in cases arising in the context of health insurer relationships? A: Yes. In fact, the health care area seems to have been an area focused upon by the Justice Department. There have been several dental cases filed, and I believe also several health care cases. Q: Can we talk about the Ocean State case and your understanding of what was at issue there? The citation to that case is Ocean State Physicians Health Plan v. Blue Cross & Blue Shield of Rhode Island, 883 F.2d 1101 (1st Cir. 1989). A: Yes. As I understand the Ocean State case, Ocean State was a new entry into the health insurance market in Rhode Island. BCBS had a very substantial market share in Rhode Island in the health insurance industry. Initially, Ocean State was very effective in competing with BCBS and was able to obtain a number of subscribers from BCBS. BCBS responded with several different strategies. One of those strategies was the insistence on most favored nation treatment by Rhode Island physicians in an effort to prevent those physicians providers from giving discounts to Ocean State or any other new entry that would price services below the price that BCBS was paying for those services. This "Prudent Buyer" policy had a rather dramatic effect on Ocean State. As I understand it, a significant number of the physician providers ceased being participating providers with Ocean State, and as a result, Ocean State could no longer present a comprehensive health care program to potential subscribers and this had a negative effect on their ability to do business in Rhode Island. Ocean State sued, alleging that the use of these most favored nation approach was anti-competitive. The theory of the case was monopolization– that is, to say BCBS had monopoly power in the health insurance market. I understand that their share was something over 70% of that market. Among other things, by imposing this most favored nation policy on physicians, BCBS had effectively excluded competition, with Ocean State being an example of an excluded competitor. I know that the First Circuit decided against Ocean State on the most favored nation issue. Nonetheless, I would respectfully disagree with the First Circuit. In fact, in that case, it appears that the most favored nation policy was used effectively as an exclusionary device by a player with monopoly power in the market. I’m not saying that Blue Cross should not have been permitted to negotiate hard with physicians on price after they discovered those physicians were giving discounts to Ocean State. But, by allowing Blue Cross to use the most favored nation approach, the court endorsed a policy that brought an end to discounting in the market, even short-term discounts which would facilitate entry into the market by a new small competitor like Ocean State. Q: Have there been subsequent cases in New England or elsewhere of which you are aware that have reached a different result as far as the Court’s ruling or through agreement of the parties? A: There have been. In 1996 the Justice Department sued Delta Dental of Rhode Island. Again, part of the complaint had to do with Delta Dental’s use of most favored nation clauses. That case was settled by Consent Decree, with Delta Dental agreeing not to enforce their most favored nation clause. I know of other cases, nationwide. In 1998, the Justice Department sued Medical Mutual of Ohio, alleging a violation of Section 1 of the Sherman Act, by the use of most favored nation clauses. That case, too, was settled by a Consent Decree under which Medical Mutual agreed not to enforce their most favored nation clauses. In each of these cases, the Justice Department has alleged that the use of these clauses would have an anti-competitive impact. Q: Professor Cluchey, for the record, to what type of conduct does Section 1 of the Sherman Act relate and regulate? A: Section 1 of the Sherman Act prohibits contracts, combinations or conspiracies in restraint of trade. The contract in question would be the contract between the provider of medical services and the HMO or the insurance company – the purchaser of medical services. Q: You have indicated the Justice Department views these MFN contracts to be anti-competitive. Could you summarize your understanding of what anti-competitive effects they can cause? A: Yes. First, there is the anti-competitive effect that I believe I have already mentioned, and that is the disincentive that the most favored nation clauses creates to discount services. Essentially, if a large purchaser of services from a provider insists upon a most favored nation clause, the provider discounts those services below the price it has agreed upon with the large purchaser at its peril. Upon discounting those services, the provider would then have to extend that discount to the large purchaser of services, and that might, in turn, have a dramatic impact on its total revenue. So, in that sense, providers have a disincentive to discount below the price that has been negotiated by the large purchaser who has insisted upon a most favored nation clause. Beyond that disincentive to discount, we have the potential problem of raising rival’s costs. In certain circumstances, a most favored nation clause might be insisted upon in a situation where a provider is already discounting to competitors of the purchaser who insists upon the clause. Presumably, having agreed to the most favored nation clause, the provider would then have to raise the price that it charges to these competitors to whom it has been providing lower prices to at least the level of the price that has been negotiated with the purchaser who insists upon the most favored nation clause. Beyond these two effects, there are several other potential effects, which I would consider to be anti-competitive. In particular, in the health care area there is the possibility that a purchaser of services may have an interest in purchasing specialty services from a provider. That provider, in turn, may have excess capacity in specialty areas. To the extent that the provider has agreed to an across-the-board most favored nation clause in its contract with a larger purchaser of services, it may not be in a position to sell that excess capacity that it has in specialty services at a discount, to a competitor who simply wants to buy a piece of what the provider has to offer. Q: Could you give an example of a specialty service? An MRI, cardiac catheterization or … A: Well, you know, any piece of expensive equipment that the hospital has had to buy that it is not fully utilizing, where it has some excess capacity. An MRI, I would think, is a very good example of that. The hospital would have a very real interest in selling the excess capacity of its MRI for anything above the marginal cost of operating an MRI. Anything beyond the marginal cost would be a contribution to fixed costs, which will be in the hospital’s benefit. It would cover their actual out-of-pocket costs of providing the service and be able to pay part of the cost of the expensive piece of equipment. So, a hospital would have an economic incentive to sell that excess capacity at a lower price. With a most favored nation clause, it would presumably not be able to do that without violating the clause and having to extend any discount that it gives on that service to the large purchaser who has insisted upon the most favored nation clause. That, in turn, would discourage the hospital from selling that excess capacity, because that discount may well lower its total revenue to a greater degree than the increased revenue it gets from selling the excess capacity to, presumably, a smaller purchaser of services. There was another example that I would like to give about anti-competitive effect, if I could. The other example I am thinking of is a situation where a purchaser would come to a provider of services and look to purchase those services on a different basis – maybe a more innovative or creative basis, than has traditionally been the way in which services are purchased. The provider who has entered into a most favored nation clause as part of a contract with a large purchaser of services will have to be very careful in that situation to ensure that by adopting this new methodology or new approach to selling services that it does not run the risk that the price that it is getting for those services can be characterized as less than the price that it is charging the large purchaser with a most favored nation clause. It would seem to me that the existence of a most favored nation clause may have a dampening effect on a provider’s willingness to consider other ways of selling its services, for fear that it will find itself in violation of the most favored nation clause and have to extend a discount across the board to a large purchaser of services. I think there might be some chilling effect on innovation in the methodology of buying and selling hospital services by the existence of these clauses. Q: Can you compare and contrast how the market factors would work in the absence of an most favored nation clause versus with an most favored nation clause in terms of a timeframe for price change or adjustment? A: Well, typically, the antitrust laws seek to encourage price discounting - with the idea, hopefully, that over time prices will be driven down as close to marginal cost as possible, and thereby increase consumer welfare by enabling consumers to buy those services as inexpensively as possible. In the context of the health care market, one could imagine a situation where a hospital has entered into a contract with a large insurance company or a company that has a large share of the market, has the opportunity to sell smaller quantities of services to a competitor, but only has that opportunity if it chooses to discount those services below the price it is charging the larger purchaser. The hospital chooses to extend that discount because it has excess capacity and it is in its economic self-interest to do that. It now has more revenue coming into the hospital because it is still pricing those services, even though discounted, above marginal cost. The large insurance company discovers that the hospital is selling certain services at a lower price, and the next time that that insurance company negotiates with the hospital it insists on that price or an even lower price for the services. That process, continuing over time with price cuts, and response by other purchasers to price cuts and insisting upon having those price cuts given to them in a new contract is precisely the kind of process that the antitrust laws would like to encourage – thereby gradually ratcheting the price of the service down to something approaching marginal cost. The reason the Justice Department is opposing most favored nation clauses and is concerned about them, is because they see those most favored nation clauses as stopping that process and establishing a floor on prices, below which a provider is afraid to go, because of the effect of having to extend any discount to the large purchaser of services. Q: Professor, assume that a number of Maine Hospitals are classified as "sole community providers" under the regulations governing federal health care programs Assume further that with that status comes a recognition that they may have some dominance of the hospital service market in their service area. How do you respond to the contention that the most favored nation clause is a reasonable response on the part of the carrier, to dealing with a provider that has that kind of local dominance. A: I would respond by suggesting that the MFN is likely to stop any discounting by the sole community provider. It is going to stop decreases in price in that situation because the sole community provider will have no real incentive to offer discounts to other purchasers of its services, if it has to extend it across the board. Since it is not facing any competition, it can refuse to extend those discounts, even though it may have a situation where it has excess capacity. I think the fact that it is a sole community provider may render the effect more anti-competitive than in a situation where other competitors at least have some options in terms of purchasing services at discounts from another party. Q: Based on that, your comments thus far have focused on the potential for discounting and lowering prices, and also the motivation of those with some dominance on the carrier side seeking to exclude other carriers. Is it a fair summary of your testimony that MFN clauses would definitely discourage price competition, and if so, does that conclusion extend to their use by all potential competitors? A: It seems to me that in a market where the party insisting upon a most favored nation clause has a significant market share, and by significant I would say 30%-40%, that there is a high likelihood that the use of MFN clauses in that situation could have an anti-competitive effect. I would be less concerned about their use if we were talking about a relatively small purchaser of services. Again, however, in a health care market situation where the purchaser insisting upon the most favored nation clause has a significant market share, it seems to me that it is most likely there will be an anti-competitive effect, rather than a pro-competitive effect generated by the use of the clauses. Q: Do you have information or an understanding regarding the Maine health insurance market and the relative shares various carriers have? A: My understanding is that BCBS in recent times has insured about 40% or almost 40% of the Maine population. My understanding is that last year Blue Cross provided health insurance to 47% of the Maine market. My understanding is that some of this insurance is provided through an HMO and some is not. In terms of HMO market shares, the last figures I saw were for September of last year and indicated that Blue Cross was second in terms of market share behind Healthsource, and had something in the range of 25%-30% of the HMO market in Maine. Again, I don’t have precise figures on that, but that is my rough understanding of the situation. I have also seen other figures maintained by the Maine Bureau of Insurance that looked at premiums paid in 1998 for non-governmental health insurance. These figures showed Blue Cross having a market share of 47%. Q: I show you a table that we will mark Cluchey Exhibit 2, and represent to you that this is a compilation of data from the website of the Bureau of Insurance. Is this the table that you based your HMO figures on? A: Yes. This is the information that I have seen regarding HMO market shares. Q: The MHA asks that this table be made part of the record on this basis. I also show you a table we have marked as Cluchey Exhibit 3 and represent to you that this is Exhibit B from the Annual Report of the BOI Consumer Health Division for the year 1999 and sets forth market share percentages for Maine Health Insurers. Is this the source of your understanding that for 1998, Blue Cross had a 47% market share for health insurance in Maine? A: Yes it is. Q: The MHA asks that Cluchey Exhibit 3 be made a part of the record as well. As you have prepared for this testimony, have you reviewed any particular sources of information or examples of enforcement that you find to be particularly meaningful? A: I reviewed a complaint filed by the Department of Justice against Medical Mutual of Ohio in the fall of 1998. That complaint sets forth an anti-competitive scenario that really illustrates well the anti-competitive dangers of most favored nation clauses. Medical Mutual had approximately 36% of the commercial health insurance market in the Cleveland area, and they provided between 25% and 30% of the commercial revenues to Cleveland area hospitals. They had insisted upon most favored nation clauses in their contracts with those hospitals and they had very aggressively enforced these clauses. Among other things, a number of hospitals had been required to pay very substantial penalties to Medical Mutual for violation of the most favored nation clauses. Those penalties were in the hundreds of thousands of dollars. In that complaint, the Justice Department alleged a variety of anti-competitive effects from these most favored nation clauses. They included setting a floor under prices in the market and essentially ending any discounting of services by providers, because of the existence of the most favored nation clauses; they raised the concern about raising rival’s costs; they expressed concern about stifling innovation in payment methodologies because of the effects of the most favored nation clause and the hospital’s inability to predict when an innovation in payment methodology might result in the hospital according a lower price to a competitor of medical mutual and in turn generate a substantial penalty under the most favored nation clauses in their contracts with Medical Mutual. In essence, in the Cleveland area, the Justice Department identified a range of anti-competitive effects resulting from the use of most favored nation clauses and it seems to me that filing the suit in that case was entirely appropriate, and in fact, it was resolved with a Consent Decree when Medical Mutual agreed not to enforce their most favored nation clauses. In terms of the Maine situation, it strikes me that the Superintendent of Insurance should be concerned about just such a scenario appearing in Maine from the use of most favored nation clauses. Q: I show you now a document labeled Cluchey Exhibit No. 4 and ask you to identify it. A: This is the complaint filed by the Department of Justice in a case involving Medical Mutual of Ohio in September of 1998. Q: Professor Cluchey, how would you respond to the argument that traditional antitrust enforcement is a sufficient deterrent to misuse of MFN clauses, and hence there is no need for the Superintendent to impose a prospective limitation merely because BSBSME is changing hands? A: I don’t see why we need to take the risk that significant competitive harm will occur when this matter can be dealt with now by the Superintendent of Insurance. Further, antitrust enforcement agencies have limited resources. Currently, there are a number of segments of the economy where dynamic change is occurring, e.g., the information industries, telecommunications, computers, software. The federal enforcement agencies have more than enough to keep them busy at the moment. I presume that is also the situation at the Maine A.G.’s office. Maine represents a small market. I suspect that given their other duties and limited resources, enforcement agencies would be able to take action on the use of most favored nation clauses in the Maine health care market only after an extensive record of actual anti-competitive effects from the use of those clauses had been established. Because the Maine Superintendent is required to evaluate anti-competitive effects in this proceeding, he can and should take action now to preclude the use of MFN clauses in health maintenance contracts. Q: Does this conclude your prefiled testimony? A: Yes. I would be happy to respond to any questions. Respectfully submitted,
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: sparker@themha.org P.O. Box 9546
JPD\G:\MHA\2000\ANTHEM\TestimonyCluchey0327.doc (March 27, 2000 3:50 PM) Cluchey Exhibit No. 1 Curriculum Vitae of David Cluchey
This document will be hand delivered to the Superintendent of Insurance and to Judith Chamberlain, and a copy will be mailed to all other parties.
Cluchey Exhibit No. 2
Cluchey Exhibit No. 3 Two Page Excerpt from Copies of this document will be hand delivered to Superintendent Iuppa and Judith Chamberlain, and mailed to all other parties.
Cluchey Exhibit No. 4 Department of Justice Complaint
CERTIFICATE OF SERVICE The undersigned hereby certifies that on March 28, 2000 a copy of PREFILED TESTIMONY OF DAVID CLUCHEY 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. PIERCE ATWOOD Portland, Maine 04101 (207) 791-1100 (Anthem Insurance Companies, Inc ) Robert S. Frank, Esq. HARVEY & FRANK Two City Center, Fourth Floor P.O. Box 126 Portland, Maine 04101 (207) 775-1300 e-mail: frank@harveyfrank.com (Blue Cross/Blue Shield of Maine) Judith Chamberlain, Esq. State of Maine Department of the Attorney General 286 Water Street Augusta, Maine 04333-0006 e-mail: judy.chamberlain@state.me.us (Bureau of Insurance) William H. Laubenstein, Esq. State of Maine Department of the Attorney General 286 Water Street Augusta, Maine 04333-0006 e-mail: bill.laubenstein@state.me.us (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 e-mail: jditre@mainecahc.org (Consumers for Affordable Health Care Foundation/Coalition) Michele M. Garvin, Esq. Ropes & Gray One International Place Boston, Massachusetts 02110-2624 e-mail: Mgarvin@Ropesgray.com (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 e-mail: Rgoldma1@maine.rr.com (Maine Council of Senior Citizens) Bonnie Post Executive Director of the Maine Ambulatory Care Coalition P.O. Box 390 Manchester, Maine 04351 e-mail: bdpmacc@mint.net (Sacopee Valley Health Center, Regional Medical Center at Lubec, Eastport Health Care, Inc., and the Maine Ambulatory Care Coalition) John Dieffenbacher-Krall Executive Director Maine People’s Alliance 192 State Street Portland, Maine 04101 e-mail: MPA@gwi.net Gordon H. Smith, Esq. Maine Medical Association 30 Association Drive P.O. Box 190 Manchester, Maine 04351 e-mail: gsmith@ctel.net (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. General Counsel 465 Congress Street, Suite 600 Portland, Maine 04101-3537 e-mail: quigld@mail.mmc.org (Maine Medical Center) Sandra L. Parker, Esq. Attorney for MHA, Inc. 150 Capitol Street Augusta, Maine 04330 e-mail: sparker@themha.org (MHA, Inc.) Kellie P. Miller, M.S. Executive Director Maine Osteopathic Association 693 Western Avenue Manchester, Maine 04351 e-mail: meosteo@mint.net (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 (207) 791-3000
JPD\G:\MHA\2000\ANTHEM\TestimonyCluchey0327.doc (March 27, 2000 3:50 PM) Last Updated: August 22, 2012 |
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