Preferred provider plans: Avoiding problems of horizontal price-fixing

AuthorPeter M. Kazon,L. Barry Costilo
Published date01 June 1984
Date01 June 1984
DOIhttp://doi.org/10.1177/0003603X8402900207
Subject MatterArticle
The Antitrust Bulletin/Summer
1984
Preferred provider plans: avoiding
problems
of
horizontal price-fixing
BY L.
BARRY
COSTILO*
and
PETER
M. KAZON**
403
Competition in health care is rapidly increasing due to a number
of
factors. The rapid growth in health care costs' has led the
states, the federal government, private third-party payors, and
other group purchasers to pursue initiatives that rely more on
market forces to contain costs. For example, the state of Califor-
nia has switched from a cost-based reimbursement system for its
Medi-Cal program to one based on competitive price negotiations
for hospital services.2In 1983, California public health officials
Attorney, Bureau
of
Competition, Federal Trade Commission.
••
Formerly
with
the
Bureau
of
Competition,
Federal Trade
Com-
mission; currently an Associate with
O'Connor
&
Hannan,
Washington,
D.C.
AUTHORS' NOTE: The views expressed in this article are the authors'
own and are not necessarily those
of
the Federal
Trade
Commission,
any individual commissioner, or the Bureau
of
Competition. The
authors wish to acknowledge the valuable assistance they have received
from
Walter
T. Winslow, Arthur N.
Lerner,
and David M. Narrow
of
the Bureau
of
Competition.
IIn 1982, health care expenditures were an estimated $322.4
billion, an
amount
equal to 10.5 percent
of
the
gross national
product
(GNP)
and
an increase
of
12.5 percent over 1981 expenditures. By
contrast,
in 1970 health expenditures were $74.7 billion, an
amount
equal to 7.5 percent
of
the
GNP. Gibson, Waldo &Levit, National
Health Expenditures, 1982, 5
HEALTH
CARE
FINANCING
REV.
1, 4 (Fall
1983).
2
CAL.
WELF.
&
INST.
CODE
§14,081 (Deering Supp. 1983). See
Johnson,
Price Competition Will Be Legacy
of
California's Medi-Cal
'Czar',
MODERN
HEALTHCARE,
Sept. 1982, at 52.
©1984by Federal Legal Publications, Inc.
404 The antitrust bulletin
reported that the state would save approximately $160 million in
1983 under this program and predicted that savings in 1984 might
exceed $400 million.' Other states are also considering innovative
approaches.' At the federal level, the government has recently
introduced a prospective payment system for Medicare that is
designed to introduce cost-reduction incentives into health care
delivery. 5The government has also granted waivers from its
regulations so that states may experiment with competitive
models for health benefit programs that involve federal funds."
In the private sector, health maintenance organizations
(HMOs), preferred provider organizations (PPOs), self-financed
employer health plans and business coalitions are trying to
contain costs by a variety of means, most notably by seeking
discounts in exchange for assurances that subscribers will use
particular providers who have agreed to participate.' Because
of
N.Y.
Times, Nov. 20, 1983, at 30, col. 1.
4Arizona, for example, has also enacted a competitive bidding
system for its Medicaid program. See Washington Post, Oct. 26, 1981,
at 8, col. 7.
For
a discussion of the variety of approaches considered by
the states, see Demkovich, States May Be Gaining in the Battle to Curb
Medicaid Spending Growth,
NATIONAL
JOURNAL,
Sept. 18, 1982, at 1584.
"California officials claim their phones are ringing
off
the hook
with calls from other states interested in how the California contracting
program works and whether it can be transferred to other states."
Ewell, California's Contracting System 'Toughens Up' State's Hospi-
tals,
MODERN
HEALTHCARE,
Mar. 1984, at 133.
This new system reimburses hospitals at a predetermined rate for
each discharge, depending on which diagnosis-related group (DRG) a
patient's condition falls into. Social Security Amends. of 1983, Pub. L.
No. 98-21, §601, 97 Stat. 65, 149 (1983) (to be codified at 42 U.S.C.
§1395ww). In describing the new system, the Department
of
Health and
Human Services noted that one of the benefits of the plan is "restruc-
turing the economic incentives facing the health care system to establish
market-like forces." 48 Fed. Reg. 39,752, 39,807 (1983).
6See Demkovich, supra note 4.
7See, e.g., Wall Street Journal, Nov. 22, 1983, at 1, col. 1;
Gibbons, Doctors Hope Cut-Rate 'Preferred Provider' Organizations

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