Hospitals and Physician Services

• Pages: 277-306

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CHAPTER VII

HOSPITALS AND PHYSICIAN SERVICES

A. Introduction

This chapter provides an overview of how antitrust markets are

defined in hospitals and physician services. Chapter VIII will discuss

market definition in two other important health care areas:

pharmaceuticals and medical devices.

A critical question that must be considered when determining the

scope of relevant product and geographic markets in hospitals and

physician services is “who is the consumer?” In most industries, the

answer to this question is obvious: the consumer is the person who

purchases and consumes the good or service. In health care markets,

where a number of participants play roles in the purchase decision, the

answer is less clear.

For example, the health care product or service is often selected by

(or at least with the help of) a physician. Many purchase decisions also

may be influenced by managed care organizations. Finally, the choice of

health insurance available to a consumer may be limited by an employer.

In particular, employers select plans, which in turn may affect the

purchase decision.

This chapter describes how market participants may influence the

purchase decision. It then discusses how relevant markets have been

defined in hospitals and physician services.1

1. As explai ned more fully below, the economic principles outlined in the

2010 Merger Guidelines are commonly employed when defining relevant

markets in the health care industry. U.S. DEP’T OF JUSTICE & FED. TRADE

COMM’N, HORIZONTAL MERGER GUIDELINES § 4.1 (2010), reprinted in 4

Trade Reg. Rep. (CCH) ¶ 13,100, a vailable a t

http://www.justice.gov/atr/public/guidelines/hmg-2010.html [hereinafter

2010 MERGER GUIDELINES]. See Chapter I for a general discussion of

market definition under the 2010 Merger Guidelines.

278 Market Definition in Antitrust

B. Hospital Industry

1. Specific Issues in Market Definition

Market definition in hospital services often focuses on the patient as

the consumer. Ultimately, the patient chooses the hospital, although both

physicians and health insurers influence patients’ choices. More

information is becoming available to patients, making their choices a

more significant factor in market definition. In addition, financial

incentives are increasing for patients to be more active in healthcare

decisions, such as through consumer-directed health plans.

Nonetheless, in recent litigation the Federal Trade Commission

(FTC) has specifically identified third-party payors as the critical

purchasers of health care services, because those entities pay for most or

all of the hospital services consumed by patients. Payors have significant

ability to influence the choice of hospital, though they do not always

exercise it. Most often, they influence choice of provider by limiting the

providers included in their networks. Payors may also influence

patients’ choices through financial incentives, such as differential co-

pays and deductibles or by segregating providers into tiers corresponding

to different out-of-pocket payments for patients. Financial incentives

also are commonly incorporated into benefit designs for self-insured

employers.

Traditional market analysis of the behavior of health care providers

recognizes that government third-party payors, specifically Medicare,

Medicaid, and Tricare, behave differently from commercial payors.

These government payors do not negotiate fees in their traditional plans.

Therefore, their purchases often are excluded from the market definition

exercise. However, a rapidly growing segment of the government-

insured business is being handled by managed care plans in which some

fee negotiation exists.

As in other antitrust contexts, market definition is typically

considered a necessary first step in competition analyses for hospital

services. The Eighth Circuit has stated that “[t]he determination of the

relevant market is a ‘necessary predicate’ to a finding of a Clayton Act

violation.”2 Yet the 2010 revision of the Merger Guidelines has shifted

focus away from the primacy of market definition, stating that “[t]he

Agencies’ analysis need not start with market definition” and that

2. FTC v. Freeman Hosp., 69 F.3d 260, 268 (8th Cir. 1995).