Although I teach and write about the healthcare industry and spent eight years as an antitrust economist at the Federal Trade Commission, I was not prepared for a telephone call I received in February 1994 from Blue Cross and Blue Shield United of Wisconsin.
Antitrust attorneys for the insurer wanted to know if I would help them in their suit against the Marshfield (Wis.) Clinic. The case was perhaps as big and far-ranging as any I had seen at the commission or in private litigation.
It was also a difficult decision personally. On the side of Marshfield Clinic was economist Mike Glassman, with whom I worked at the FTC. I had to cancel most of Thanksgiving and a planned winter vacation with my family in order to be present, plus endure the stress of the trial.
I nevertheless accepted the case because it fit into my professorial priorities of research and teaching. It also called into use many of the tools healthcare economists use to determine whether antitrust conditions exist.
I found the case against Marshfield Clinic to be compelling. The clinic had erected high barriers to competition. It had denied staff privileges for St. Joseph's Hospital and three smaller affiliated hospitals to any physician not employed by the clinic, regardless of the merits of the independent physicians who might apply.
St. Joseph's is the largest and most prestigious tertiary-care hospital in the area. Without staff privileges it is difficult for a specialist or even a primary-care physician to practice medicine.
Marshfield Clinic also would not supply cross-coverage to independent physicians, making it extremely difficult for new physicians to locate in the area. New physicians would not feel comfortable leaving their patients when taking a vacation or attending a professional meeting.
It's the economist's job to seek out monopoly power in the same way that an exterminator may look for roaches in someone's home. Economists look at whether a healthcare entity has a large market share of physicians and hospitals. They ask whether these market shares exist for a period of time or are a transitory phenomenon. They then look at the market shares of the next largest firms in the industry to see if they are high enough to challenge or collude with the largest firm's. And they decide how to calculate market shares, either based on number of patients treated or the revenues received from patients.
Healthcare economists also define the product being delivered and how that influences competition. For example, do internists compete with pediatricians? They may be interchangeable for many children. Do teaching hospitals compete with community hospitals? For normal births they may, but for sophisticated brain surgery, they probably don't.
Determining a market can be difficult, and the process is influenced by the product. Patients might only travel a few miles to visit a general practitioner but might travel much longer distances to visit a neurologist.
In this case, I had to look at whether the geographic market might stretch from Marshfield in northwest Wisconsin as far west as Minnesota and as far south as Madison, Wis., and Milwaukee.
There is also an important theoretical issue with which economists must grapple. Sometimes high market shares of physicians or hospitals might indicate superior performance in reducing costs, achieving high quality or implementing new technology. At other times high market shares and monopoly power may be the result of barriers to entry that firms have erected to keep out competitors.
Marshfield's attorneys deposed me for two days prior to the trial on my views of the case. I found out what a war I was in. I casually mentioned on break that I taught a course on managed care at the university, and within an hour afterward I was asked questions about the managed-care market because, in part, I taught such a course.
The jury trial took place in Madison. One might ask how a group of men and women can possibly make a judgment on an antitrust case that involves such sophisticated economics and legal concepts. However, I believe the legal system performs reasonably well. Each side receives a chance to present its case followed by cross-examination. There are incentives, therefore, to present the case in the most understandable way to the jury, with the other side having the same incentives to poke holes in your arguments. I believe that even the most difficult economics terms can be explained to a jury.
I testified for more than six hours. Prior to the testimony, Marshfield attorneys were provided with all of my exhibits on market share, relevant product and geographic markets, and barriers to entry. Since antitrust relies heavily on economics, I felt a considerable amount of tension.
The case was won by Milwaukee-based Blue Cross and Blue Shield, with the jurors finding violations of the federal Sherman Act and the state of Wisconsin antitrust laws. Subsequently, the judge affirmed the jury's verdict but reduced the size of the damage award.
The judge did remove the barriers to entry, which will allow more independent physicians to enter the Marshfield market. The judge's verdict was pro-doctor and pro-hospital as well as pro-consumer, since patients will now have a greater choice of physicians and hospitals as well as greater quality of care at lower cost. Moreover, the verdict did not curtail managed-care plans and physician-hospital organizations from growing as long as they do not break the antitrust laws.
The case was perhaps as big and far-rangingas any I had seen.