SOURCE: Center for American Progress

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Mr. Chairman, members of the taskforce, I am pleased to be here to talk about the U.K. experience with regulatory performance.

There are two points I should note at the outset. First, while I have expertise on how government can reform regulation, I am inexpert on the U.S. regulatory context and debate. My work in Washington has intentionally had a different focus, and so others who have expertise in the U.S. context should determine the extent to which the experience of the United Kingdom is relevant here. Second, these are my personal views and are not necessarily those of my colleagues at the Center for American Progress.

The United Kingdom has had a policy framework on regulatory reform in place for 25 years, and over those years, there has been a considerable evolution of the policy. In this testimony I focus on the period from 2005 to 2009, when I was the chief executive of the Better Regulation Executive. As such, I was the lead official in the British government responsible for regulatory reform.

The context in the United Kingdom was similar to that in many European nations and did not suffer from the polarization around the issue of regulation that you appear to have in this country. There was broad consensus that regulation played an essential role in providing protections for our citizens and quality of life. No one argued that we did not need regulations to protect workers, or consumers, or provide clean air and water, and there was even agreement that regulation was needed to tackle emerging challenges such as climate change. And yet British business often claimed that there was too much regulation, and in many cases regulatory oversight felt like mere bureaucracy. As a result, they called on government to reduce the burden.

Meanwhile, as technology, science, and cultural norms developed, groups such as environmentalists, consumer groups, and trade unions reasoned that new regulations were needed to provide better protection against risks to society. Politicians found themselves caught between these two forces—both of which they wanted to satisfy.

In 2005 the British government launched a new initiative to reform regulation. Developed jointly by then-Prime Minister Tony Blair and Chancellor of the Exchequer Gordon Brown, this initiative tried to look at the issue in a new manner. The starting point was a belief that it was possible to build a system of “better regulation.” The idea was that instead of government allowing itself to be caught between those who wanted more regulation and those who wanted less regulation, government’s role was to find ways to simultaneously maximize regulatory protection while minimizing unnecessary regulatory burden. For example, if a regulatory agency could focus inspection resources on those businesses that posed the greatest risk, it might be able to reduce the overall cost to business and improve regulatory outcomes. Effective regulation could also improve respect for rules among the regulated and positively change the perception of government among businesses. There are five key takeaways from the British experience.

First, many who work in government know that “what gets measured gets done.” But even though British politicians had made numerous statements in the past that they were committed to reducing the regulatory burden, they had never instigated a process of measuring regulatory costs. In 2005 the U.K. government promised that as part of the Better Regulation agenda, it would reduce the annual administrative costs of regulation by £3.5 billion (around $5.5 billion) within five years. Britain’s gross domestic product is about seven times smaller than the United States, so that’s equivalent to around $40 billion. This target covered costs such as form filling, inspections, providing information, and recordkeeping, but not the direct costs of providing protections such as purchasing safety equipment for workers.

To achieve this objective, each agency had to make a contribution to the overall goal, which led each one to look hard at the regulations they were currently administering, and to find ways to make them easier for business. Technology helped enormously because at many agencies, the main way to save money was to replace paper forms with electronic systems. Not only did this save business money but it also helped agencies as it was much easier to process data collected electronically. In total there were more than 300 different measures taken across around 20 agencies. Every year each agency published a progress report setting out how much they had saved business. Independent panels including business representatives validated the claimed savings.

One important effect was that government agencies faced real incentives to look at existing regulations and how they could be improved. That was a new experience for many government officials; in the past, the main focus of attention was on new regulatory approaches. As political debate was largely focused on whether and how to respond to calls for new regulations to deliver protections, that was where the energy of government employees was also focused. By insisting that each regulatory agency also look for ways to improve the way existing regulation worked, we were able to ensure that agencies also put significant energy in finding ways to streamline existing regulations.

This initiative, focused on existing regulation, complemented measures that were focused on new regulatory proposals. For proposed regulations it remained important to carry out impact assessment to establish costs and benefits of regulatory proposals. Like the United States, the United Kingdom had in place systems and processes to consider the benefits and costs of proposed regulations (which also covered legislation). This was an important foundation for the reforms that we carried out.

Second, regulation needs to be sensitive to the needs of small businesses. To achieve that, government officials need to understand the perspective of small firms. Small businesses told government they believed in what most regulations were trying to achieve. They did not want to harm their workers, or their consumers. But they struggled to work out what the law actually required them to do.

Many hired consultants to help them but these consultants sometimes made money by exaggerating the requirements. Some businesses did nothing and hoped they would not be caught out. It was striking how poor government guidance was—long, complex documents written in legal rather than plain English, and covered in disclaimers. Few officials in the agencies even knew how difficult it was to make sense of their own guidance or how hard it was to find documents on their own websites. So the government issued a code of practice on what good guidance looked like and regulators worked to make their guidance and websites accessible and useful for small businesses.

Third, regulators need to be accountable as well. Regulators spent considerable time checking that business was complying with laws to protect the environment or safeguard worker safety. But no one ever spent time checking to see whether the regulators were doing all they could to minimize burdens while maintaining consumer, labor, and other protections. So the government set out eight principles of modern regulation (such as “no inspection should take place without a reason”) and then reviewed officials against these principles. Review teams often included senior staff from other regulators along with independent experts. They published reports describing how each regulator was performing and set out recommendations for further improvement.

Fourth, government needs to better solicit input from business and citizens on where to focus its energy when seeking to improve existing regulation. Business, for example, complained about delays and inconsistencies in the United Kingdom’s land-use planning system (approvals that needed to be sought before new construction projects could commence) and international surveys demonstrated that was a weakness by international standards. So the government conducted a major review working with business and local government to see what improvements could be made to the process.

Similarly, business and trade unions were unhappy that a law that had been intended to reduce the number of employment disputes that went to court had had the opposite effect. So government agencies worked with them to come up with a better way forward. In each case government was clear that protecting the public was essential but if there was a more effective and less frustrating way to do so, it should be adopted.

Lastly, the U.K. experience showed that government needs a strong institution charged with improving regulation. What we were trying to do in Britain was an enormous change of focus across dozens of regulatory bodies—and that’s far fewer bodies than you have here. To succeed, we needed a strong group of people in government charged with driving all this reform forward. So we built an agency with a clear mission to maintain protections for the public while minimizing unnecessary costs of existing and new regulations. We looked far and wide for the best people (at one point, there were a dozen nationalities working in the Better Regulation Executive office) and fostered a culture of constant improvement. We were always looking for ways to improve our strategy to achieve our goals and constantly sought the advice of business, consumer groups, trade unions, regulators, the legislature, and colleagues in other countries.

The U.K. initiatives over this period were effective. The target to reduce administrative burdens by £3.5 billion was met. And there was a noticeable improvement in the perception of regulation. By 2010, 47 percent of businesses said that understanding what they needed to do to comply with regulations was straightforward—10 percent higher than in 2007. The Organisation for Economic Co-operation and Development reported in 2010 that progress in Britain was “groundbreaking by international standards.”

The new government that took office in Britain last year has built on the reforms instituted by the last administration as you have heard earlier from Graham Turnock and Johannes Wolff. Measurement is at the heart of the “one in, one out” regime. The new government is also redoubling efforts to listen to the views of the public and businesses when deciding which existing regulations to review. And there is a special focus on ensuring that regulations are sensitive to the needs of small business.

In concluding, I want to underline that international comparisons in this area are difficult. Not only is the institutional context different—the United Kingdom has a parliamentary system of government, and as a member of the European Union much of our legislation comes from Brussels. But we also have a very different regulatory culture with broad, bipartisan acceptance of the importance of regulation in safeguarding the public at large. One example of that is on climate change, where business and politicians largely agree that government needs to take decisive action. I will leave it to others to determine the extent to which, if at all, the U.K. experience is valuable in American context.

Jitinder Kohli is a Senior Fellow at American Progress.

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SOURCE: Center for American Progress

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Chairman Herger, Ranking Member Stark, and other members of the committee, I appreciate the opportunity to come before you today and testify about health care industry consolidation—a subject of significant concern. As a former antitrust enforcement official who has litigated a number of cases challenging anticompetitive conduct and proposed mergers in the health care industry as well as a private practice attorney who has represented insurance companies, hospitals, pharmacies, and other health care providers in merger investigations, I have learned firsthand of the harm of excessive concentration in health care markets. Highly concentrated health care markets, especially health insurance markets, can result in escalating health care costs for the average consumer, a higher number of uninsured Americans, an epidemic of deceptive and fraudulent conduct, and supracompetitive profits. My time at the antitrust enforcement agencies has also showed me that we need to draw a clear distinction between problematic consolidations on the one hand, and the efficient integration of our health system on the other. For antitrust enforcement to serve as a tool for and not an obstacle to improving our health care system, we must understand this distinction and realign enforcement priorities to focus on the forms of market consolidation that pose harm to the ultimate consumers.

Three realities that both policy makers and antitrust enforcers need to embrace include:

• Health insurance markets are broken—more than 90 percent of all metropolitan health insurance markets are highly concentrated. The health care debate and countless congressional hearings have documented how this extreme concentration results in higher prices, millions of uninsured consumers, and a pattern of egregious conduct by health insurers. Greater focus needs to be directed towards consolidation in health insurance markets.
• Aggregation is distinct from integration—if there is a competitive problem in health care markets, it is due to aggregations of market power, such as in health insurance, and not because of integration among physicians. Rather than the problem, integration is an important solution for improving quality and cost in the fee-for-service health care system. So as not to thwart the much-needed reform of our health care system, antitrust resources should be directed toward concerns of market power by health insurers, hospitals, and specialized physician groups. A lesson to be learned from the Affordable Care Act is that facilitating integration can be used as an effective mechanism to combat the excessive costs and poor health care outcomes often resulting from the lack of coordination among health care providers.
• Health care markets are distinct and enforcers need to appropriately adapt the antitrust models used to evaluate them. The price-centric antitrust framework is rather inapt in health care markets, where price is often an insufficient mechanism for fully understanding the impact of a given market structure or business practice. Moreover, the prevailing perception that insurers are the central customer in health care markets creates a framework for evaluating the health care system that ignores the ultimate impact on consumers. Antitrust enforcers need to amend their approach to health care markets to focus on the impact on the ultimate consumer and not just the payment intermediary.

These realities directly undermine the underpinnings of the current antitrust paradigm in health care. That paradigm assumes that health care intermediaries, such as health insurers or pharmacy benefit managers, also known as PBMs, are an appropriate proxy for the consumer in health care markets. The paradigm assumes that consumers will be better off if health insurers can use their power to drive down reimbursement rates relentlessly. It suggests that it is necessary to harbor deep suspicion over collaboration by doctors. Antitrust agencies appear to prefer a system of autonomous providers, who are fundamentally powerless to deal with insurance companies.  

Let’s just deal with one of these notions: the belief that the market will perform better with powerful insurers and autonomous and unintegrated providers, especially doctors. If your main concern is the bottom line for health insurers, this notion may theoretically sound appealing. But this paradigm presents two significant problems for health care and consumers. First, doctors acting autonomously are unable to effectively coordinate care—the “silo” problem that leads to more costly and less efficient care and delivers poorer health outcomes. The health care debate clearly demonstrated that a lack of integration led to more costly and lower-quality care. Second, autonomous providers are too weak to bargain with insurance companies, leading to increasingly reduced reimbursement and assembly line health care. Insurance companies may benefit from lower reimbursement, but consumers suffer through more expensive and lower quality care.

In fact, consumers and public welfare as a whole may be better off if providers, especially doctors and pharmacies, can band together to have some level of countervailing power to deal with powerful insurers. Former Congressman Tom Campbell (R-CA), in a series of thoughtful law review articles, has demonstrated that permitting sellers of services or goods to merge may improve welfare when dealing with powerful buyers. You may recall that a decade ago he called for legislation to grant doctors the ability to collectively negotiate with insurers.

More concretely, countervailing power for doctors and pharmacies may benefit consumers. These providers are often the most effective advocates for patients when insurance companies cross the line and engage in abusive and deceptive conduct. Doctors can use their negotiating power to prevent insurers from implementing “physician gag” clauses, which prevent physicians from informing consumers about insurance options. Doctors can use their power to challenge deceptive conduct that harms both consumers and providers. Take the Ingenix case as an example—where United Healthcare’s subsidiary deflated usual and customary rates, harming millions of consumers. It was associations of doctors, including the American Medical Association, which led the charge in exposing these practices, leading to a landmark remedy and over $350 million in damages to date.

What about the idea that the insurer or the PBM is the consumer? Insurers and PBMs do attempt to control costs for employers and other purchasers of health plans. While these entities may attempt to control cost, they are also for-profit entities with an overriding incentive to maximize profits. When there are battles between health care providers and insurers, the agencies almost always weigh in on the side of the insurers. But insurers are not the consumers. The endless list of competition and consumer protection cases against insurers and PBMs show that health insurers and PBMs frequently act to harm consumers. The primary goal of these for-profit insurers and PBMs is to serve their shareholders and their profit margins, not consumers. They are not the representatives of consumer interest.

This was recognized in a decision last fall by the Third Circuit in a case challenging anticompetitive conduct against Highmark, the dominant insurer in Pittsburgh. Highmark attempted to justify alleged anticompetitive conduct that reduced reimbursement to a hospital, arguing that it did not pose antitrust problems because it enabled Highmark to set low insurance premiums and thus benefitted consumers. The Third Circuit rejected that claim:

[E]ven if it were true that paying West Penn depressed rates enabled Highmark to offer lower premiums, it is far from clear that this would have benefitted consumers, because the premium reductions would have been achieved only by taking action that tends to diminish the quality and availability of hospital services.

The court went on to explain that the purpose of the antitrust laws is to ensure a competitive marketplace and that a reduction in competition is not permitted simply because it may appear to lead to lower prices. This can be a profound observation in health care where quality of care is a central concern.

It is time for our antitrust enforcers and policy makers to recognize the lessons from health care reform and adapt the antitrust paradigm. As I have documented in a Center for American Progress study, the history of health care antitrust enforcement in the past administration is characterized by largely misplaced enforcement priorities. Although health insurance markets are plagued by anticompetitive and abusive conduct, there were no competition or consumer protection enforcement actions against health insurers. At the same time, almost all of the Federal Trade Commission health care enforcement actions were against efforts by physicians to collectively negotiate. Physician collaboration has been living as a suspect class and represents the only area where antitrust agencies apply the “per se” label and condemn endeavors without analysis of anticompetitive effects. (The “per se” rule is the legal guillotine of the antitrust laws. Under the per se rule, the government need not demonstrate the conduct has harmed competition or consumers.)  The FTC brought 31 cases; all settled, probably because of the high cost of a government investigation. There was little evidence in the complaints filed by the government that these groups actually secured higher prices or that consumers were harmed. In fact, in none of the cases did consumers file any antitrust suits seeking damages for the alleged illegal conduct. (There was only one case filed by an insurer and it lost.) This disproportionate focus on physician groups was supported by no evidence that higher physician costs were a significant force in escalating health care expenditures.

My testimony today highlights how those enforcement priorities have changed and what else needs to be done to address competitive problems in health care markets. It begins with observations about health insurance concentration, certainly the most chronic and severe competitive problem in the market. The testimony describes increased prudent antitrust enforcement aimed at addressing the problems of both increased consolidation and anticompetitive practices. It then focuses on problems in concentration among health care providers, primarily hospitals, and addresses renewed enforcement efforts. It addresses how the Affordable Care Act offers the potential to significantly spur health care competition and closes with several recommendations to strengthen health care antitrust enforcement.

This hearing focuses on concentration in the health care industry and it is important to recognize that antitrust law is an important but limited tool for fighting concentration. Antitrust enforcement rarely, if ever, can be used to “deconcentrate” a market. Rather, antitrust enforcement can simply prevent further concentration through merger enforcement under the Clayton Act, and can prevent actors in an already concentrated industry from acting anticompetitively through enforcement of the Sherman Act. Thus, antitrust is a limited weapon against the harms of market concentration.

Adapting the antitrust paradigm: Focusing on health insurance consolidation

Concerns over health care consolidation should focus on the need to prevent increases in concentration by health insurers. Insufficient focus on this area in the past has given way to a very poorly functioning health insurance market. Few markets are as concentrated, opaque, and conducive to deceptive and anticompetitive conduct. Congress has recognized time and again that these markets lack sufficient competition and transparency, so I will not detail the mountain of evidence pointing to their ineffective function, but I would like to highlight why the lack of competition and effective transparency in health insurance markets is so problematic.

There are three necessary components of a functioning market: choice, transparency, and a lack of conflicts of interest. Consumers need meaningful alternatives to force competitors to vie for their loyalty by offering lower prices and better services. Transparency is necessary for consumers to evaluate products carefully, to make informed choices, and to secure the full range of services they desire. Only where these three elements are present can we expect free market forces to lead to the best products, with the greatest services at the lowest cost. Where these factors are absent, consumers suffer from higher prices, less service, and less choice.

Any reasonable assessment would conclude that adequate choice and transparency are clearly lacking from today’s health insurance markets. Study after study has found that health insurance markets are overly consolidated: a recent report by Health Care for America Now found that in 39 states, two firms control at least 50 percent of the market and in nine states, a single firm controls at least 75 percent of the market. A 2009 AMA study found that almost 99 percent of all markets are highly concentrated. Industry advocates claim that many markets have several competitors. But the reality is these small players are not a competitive constraint on the dominant firms, but just follow the lead of the larger firms’ price increases.

In the last session Congress heard from scores of consumers about the harms from this dysfunctional market. The number of uninsured patients has skyrocketed: more than 47 million Americans are uninsured, and according to Consumer Reports, as many as 70 million more have insurance that doesn’t really protect them. In the past six years alone, health insurance premiums have increased by more than 87 percent, rising four times faster than the average American’s wages. Health care costs are a substantial cause of three-in-five personal bankruptcies. At the same time, from 2000 to 2007, the 10 largest publicly traded health insurance companies increased their annual profits 428 percent, from $2.4 billion to $12.9 billion.

Empirical economic studies have also documented the harm from health insurance concentration. A recent study documented how concentration in various Texas markets led to higher premiums of about 7 percent. The study also concludes what most of us know as the truth: the increase in concentration has led to lower premiums paid to health care providers, and has also contributed to the substitution of nurses for doctors in many markets. Thus, we are seeing concentration negatively impact the economics of the health care industry, as well as the quality of care received by the American consumer.

The Express Scripts-Medco merger

The pharmacy benefit manager, or PBM, market is another example of a highly concentrated intermediary market. I have testified in the past about how this market does not behave competitively and remains the only unregulated segment of today’s health care market. Just three players—Medco Health Solutions, Express Scripts, and CVS Caremark—dominate this market. These three big PBMs have engaged in deceptive, fraudulent, and egregious conduct and limited market competition—in the past six years the three major PBMs have settled five major cases brought by state attorneys general, resulting in over $370 million in penalties and fines.

The recently proposed acquisition of Medco by Express Scripts, which is under investigation by the FTC, threatens competition and will lead to significantly reduced competition and higher costs for individual consumers, employers, and Federal programs such as TRICARE and Medicare Part D. The merger will further aggregate this market and create a dominant PBM with approximately 155 million covered lives and over 50 percent of the large employer market. To put that number in context, a combined Express Scripts-Medco will cover 70 million more lives than the next largest PBM. This merger will significantly limit competition among pharmacy benefit managers and poses harm to consumers, plans, employers, unions, and pharmacies.

A particular concern is for the millions of consumers who depend on specialty drugs to treat their chronic, incurable and potentially life-threatening illnesses. Through vertically integrated models, Express Scripts and Medco also own the two largest specialty pharmacy businesses. This deal would give the joint company over a 50 percent share of the specialty pharmacy market and further restrict pharmacy competition, which today is based on quality service, clinical support for patients/caregivers and other nondrug, nonprice features. Specialty pharmacies provide treatments for our nation’s most vulnerable patient populations suffering from complex conditions such as hemophilia, Crohn’s Disease, hepatitis C, infertility, HIV/AIDS, and many forms of cancer. The specialty treatments for these conditions are generally very expensive, costing an average $1,867 per drug, and often require special handling and control, complex administration, and intensive and consistent patient monitoring. The services provided by specialty pharmacies support the most cost-effective use of these expensive treatments and help to keep these patients healthy and out of hospitals and emergency rooms. This merger threatens these important services provided by specialty pharmacies as well as creates challenges for new, innovative specialty drugs to enter the market. Further consolidation of these markets would significantly harm pharmacies as well as the vulnerable patients that rely on their services, and would hamper any efforts to contain pharmaceutical costs. The FTC should block this merger to protect competition in the PBM and specialty pharmacy markets.

This committee should be particularly concerned about the impact of the merger on government health care programs such as Medicare Part D, the FEHBP, and Tricare, for example. These federal programs are heavily dependent on the big three PBMs, and competition among the PBMs is crucial to controlling government drug expenditures. The merger will significantly reduce competition for these government programs and threaten to increase the government’s expenditures in providing drug benefits for employees and retirees. Moreover, it will limit access to high quality, specialty pharmacy services for millions of consumers nationwide.

Recent revitalization in health care antitrust enforcement

The Bush administration failed to challenge any mergers or anticompetitive conduct by health insurers during the entirety of its tenure, but under President Obama we have seen a revitalization of health insurance antitrust enforcement.

Enforcement actions against health insurers

The record on past enforcement in health insurer mergers was stark. In the past administration there was a tsunami of mergers, leading to further concentration in the industry. There were no competition or consumer-protection enforcement actions against health insurers in the last administration, despite the fact that anticompetitive and abusive conduct plagued some health insurance markets. There were more than 400 mergers and the DOJ required the restructuring of just two of those mergers.

The tide changed in 2010, when the Department of Justice presented the first government challenge to a merger of health insurers when Blue Cross Blue Shield of Michigan agreed to acquire competitor Physicians Health Plan of Mid-Michigan. The department determined that this acquisition would result in BCBS controlling nearly 90 percent of the market for commercial Michigan health insurers. It further concluded that this acquisition would result “in higher prices, fewer choices, and a reduction in the quality of commercial health insurance plans purchased by Lansing area residents and their employers.” As a result of this concentration and likely anticompetitive results, the DOJ announced its intention to enjoin the merger. Facing this announcement, the parties agreed to abandon their deal, leaving intact competition between the two insurers. This was the first time the DOJ threatened to go to court to block a merger and their willingness to litigate made a difference.

Equally pernicious can be practices by dominant insurers that limit the other insurers’ ability to enter or expand in the market. One such practice is a Most Favored Nation clause (MFN), which requires the seller of a service to provide the best price to a buyer. Generally these can be procompetitive, but when used by a dominant insurer they can forestall entry. An MFN requires a hospital to provide an insurer its best price, and can prevent other health insurers from entering into the market. These provisions escalated prices and increased entry barriers in the commercial insurance market. The DOJ sued Blue Cross of Michigan for its aggressive use of MFNs. According to the complaint, Blue Cross used MFN provisions or similar clauses in its contracts with at least 70 of Michigan’s 131 general, acute-care hospitals, including many major hospitals in the state. The complaint alleges that the MFNs require a hospital either to charge Blue Cross no more than it charges Blue Cross’s competitors, or to charge the competitors more than it charges Blue Cross, in some cases between 30 percent and 40 percent. In addition, the complaint alleges that Blue Cross threatened to cut payments to 45 rural Michigan hospitals by up to 16 percent if they refused to agree to the MFN provisions.

The effects of these agreements are numerous, including: raised prices for commercial health insurance, restricted competition among health insurer providers, restricted choice by Michigan-area hospitals, and, ultimately, less hospital services available to consumers. Blue Cross lost on its motion to dismiss the case just last month, as the court concluded that the government sufficiently alleged plausible markets, anticompetitive effects, and a legal theory of harm. The DOJ, assisted by several state attorneys general, has ongoing investigations of MFNs by dominant insurers in several states.

Enforcement actions against health care providers

Much of the focus of today’s hearing is on concerns about market power by health care providers—both hospitals and doctors. Although it is easy to generalize concerns, or focus on colorful anecdotes, these concerns should be put in perspective.

• Both the FTC and DOJ devote considerable resources to health care and investigate dozens of provider mergers, joint ventures, and other alliances each year.
• As to doctors—there have been no enforcement actions brought against mergers by physician groups or exclusionary practices by physician groups. As I discussed before, antitrust enforcement in the health care industry prior to the Obama administration focused almost entirely on doctors and on the narrow issue of whether these physician groups were sufficiently integrated to jointly negotiate. None of the cases against doctors demonstrated—or even attempted to demonstrate—market power. There has never been a case challenging a physician group merger. In fact, the last case brought that alleged exclusionary conduct by a group of physicians was in 1994. This does not mean this area is free from competitive problems, but to date, physician group mergers have not appeared to violate the law.
• As to hospitals—there has been significant consolidation. But much of this consolidation is justifiable and can be procompetitive. No one can dispute there has been significant overcapacity in hospitals and a tremendous need for consolidation. Moreover, scores of hospitals are in a weakened financial state and consolidation is necessary to keep the hospitals operating, serving the community, and preserving jobs. Finally, hospital merger consolidation can lead to improved services and increased quality of care. Not surprisingly, even under the renewed enforcement in the Obama Administration, the FTC has only challenged three hospital mergers.

Ultimately there must be a prudent balance that recognizes the potential efficiencies of consolidation in a measured fashion and weighs those efficiencies against potential anticompetitive effects.

Enforcement actions against hospitals

Emblematic of this measured approach is the Federal Trade Commission’s lawsuit to enjoin the merger of ProMedica and St. Luke’s Hospital, the first and third largest hospitals in Toledo, Ohio. The FTC alleged that the merger will increase concentration and raise prices in acute-care inpatient services and inpatient obstetrical services. However, the complaint also focused on the loss of quality competition, alleging that competition between the two hospitals had “spurred both parties to increase quality of care” and that these elements would be lost after the acquisition. The focus on both price and quality competition show that the FTC recognizes the need to evaluate both price and quality competition. The matter is still pending before an FTC administrative law judge.

Similarly, in 2009, the FTC ordered the Carilion Clinic of Roanoke, VA, to separate from two recently-acquired, competing, outpatient imaging and surgical clinics. Carilion is the dominant hospital system in the market and these outpatient clinics would have posed a significant threat to its dominance in outpatient imaging and surgical services, leading to higher premiums, and the risk of reduced coverage for these needed services. The FTC’s willingness to undo an already consummated merger is further demonstration of the administration’s commitment to combating concentration in the industry.

Like with health insurers, the Obama administration has ramped up enforcement against anticompetitive conduct by hospitals. Again, antitrust cannot undo concentration but it can prevent practices that create barriers to competition that would threaten that dominance. In United Regional , the Department brought a Section 2 case against a Wichita, Texas hospital system that allegedly holds 90 percent market share in the market for inpatient hospital services, and 65 percent market share in the market for outpatient surgical services sold to commercial insurers. This was the first case brought by the DOJ or the FTC against anticompetitive conduct by a provider alleged to have significant market power in more than 17 years. This market power means that United Regional is a “must have” hospital for commercial insurers in the Wichita, Texas region.

The complaint alleged that United Regional willfully maintained its monopoly power by employing anticompetitive exclusionary contracts with health insurers. The contracts were relatively simple: health insurers are penalized as much as 27 percent if they contract with competing hospitals. The contracts defined competitors through geographical limitations, but they all encompassed the primary competing facilities. The DOJ alleged that the monopoly-maintaining contracts had the anticompetitive results of delaying and preventing the expansion of competitors, limiting competition over price, and reduced quality for health care services. The DOJ ultimately entered into a consent decree with United Regional that prohibits the hospital from entering into contracts that improperly inhibit commercial health insurers from contracting with United Regional’s competitors.

The Affordable Care Act and opportunities for increased competition

The health care reform debate challenged the underpinnings of the antitrust paradigm in health care that has generally characterized the past decade. As I discussed earlier, that paradigm was deeply skeptical of integration by health care providers, particularly of efforts by physicians to collaborate. Last year’s health care debate scrutinized this model, however, and shed light on the opposing conception that increased provider integration could actually lead to more efficient, higher-quality care. Insufficient integration, the debate clearly demonstrated, contributes to the “silo” problem between the various levels of health care delivery and is a central impediment of containing health care costs and improving quality.  

The Affordable Care Act offers a number of tools to increase competition in health care markets. Let me highlight a few. First, in 2014, for example, competition among insurance companies will be spurred as insurers will compete for business on a level and transparent playing field in health insurance exchanges. Second, as Secretary of Health and Human Services Kathleen Sebelius has recently stated publicly, the new cooperatives created under the ACA will also help make health insurance markets more competitive. The provisions of the Affordable Care Act aimed at better educating consumers of their options in health insurance further promote competition amongst health insurers. The Consumer Assistance Program of the Center for Consumer Information and Insurance Oversight, for example, is charged with providing the necessary resources for educating consumers about health care decisions and will surely foster greater competition among health insurers by creating better-informed consumers. Finally, the ACA promotes the development of Accountable Care Organizations, or ACOs, which should spur greater, more integrated and efficient competition.

Under the new health law, physicians, hospitals, and other health care providers are encouraged to reduce cost by, among other things forming ACOs. While ACOs involve collaboration among competitors, which has frequently raised antitrust concerns, skepticism of integration provider groups is misguided. Though, as I have mentioned, the agencies appear to have dedicated the vast majority of enforcement resources to the question of integration of physician-negotiating groups, the most difficult issue the agencies must grapple with in the formation of these ACOs is market power, not integration.

What should be the response of enforcers to the concerns of provider market power in the context of ACOs?

First, to the extent the concern is over ACO competition, it is critical that the agencies broaden the standards for integration in evaluating proposed ACOs. If hospitals dominate some markets, it is even more important that the agencies provide a clear path for physician-sponsored ACOs to be formed. The agencies should permit ACOs to qualify based on clinical integration, not just financial integration. The current integration antitrust standards may create obstacles to physician-sponsored ACOs and that would reduce competitive alternatives in ACO markets.

Second, the FTC should focus its enforcement resources on market power by hospitals and specialized physician groups. The FTC has done an admirable job in reviving hospital-merger enforcement in the past several years. Recent cases, such as the Toledo hospital merger and the Carilion Clinic case, have demonstrated the importance of antitrust enforcement in preventing the creation or the improper presentation of market power.

The agencies clearly need to focus greater attention in those situations where physicians may possess market power. The DOJ and the FTC have generally overlooked this area—the most recent enforcement action against a group of physicians for exercising market power was 1994. In that case, the FTC challenged joint ventures by two groups of pulmonologists that harmed the home oxygen-equipment market by bringing together more than 60 percent of the pulmonologists who could make referrals for this equipment. This type of referral power by large groups of specialists can raise prices for many procedures. It is interesting to observe that the case was brought under Section 5 of the Federal Trade Commission Act, which declares illegal “unfair methods of competition.” The agencies should use their full range of powers, including the FTC’s unique authority under Section 5.

Antitrust enforcement is an important solution but a limited one. The DOJ and the FTC have limited resources. In addition, antitrust enforcement does not break up monopolies or oligopolies that have been legally acquired, nor does it restrict much of their exercise of market power. While traditional antitrust enforcement should absolutely remain part of the solution, we must also look to legislative fixes and innovative market reforms like ACOs to address the potential exercise of market power. There are several examples worth considering.

Massachusetts passed a law in August 2010 aimed at controlling health care costs. The law requires the Division of Health Care Finance and Policy, or DHCFP, to encourage payers and providers to adopt bundled payment arrangements rather than fee-for-service arrangements. The goal is to implement pilot bundled-payment programs in 2011. The law extends DHCFP’s ability to require providers to submit standardized data about their costs and payments. It requires insurers to file all new rate increases with the commissioner of insurance, and the commissioner is directed to disapprove such increases if they are “excessive, inadequate, or unreasonable in relation to the benefits charged.” Perhaps most importantly, it requires that provider networks with 5,000 or more enrollees offer limited-network or tiered-network plans. The base premium for this plan must be at least 12 percent lower than that of the carrier’s “most actuarially similar” plan that does not include such a network. There are also some specific provisions in the law that ensure that the tiered or limited networks will engender cost savings. Taken together, these provisions may make some real impact on containing price increases.

Paul Ginsburg also offers a number of suggestions for decreasing costs as part of his study. He breaks the suggestions down into two categories: a market approach and a regulatory approach. In the market approach, the goal is to provide mechanisms that encourage individuals to obtain lower cost services. The vertical integration of the ACO model provides consumers with an understandable comprehensive cost of care that will then be easier to compare with other provider options. In the regulatory approach, the government may establish a common payment method across public and private payers and set a ceiling on the amount that providers can charge insurers. For example, in Maryland, all-payer rate setting is used for hospitals.

All of these recommendations on potential regulation pose complex issues. It is important to recognize that the ultimate goal of the Affordable Care Act is improved access to improved health care delivery. In assessing the roles of ACOs and potential regulation, there are important tradeoffs to be made.

Recommendations

Ultimately, concerns with health care industry consolidation need to be focused on strong consumer protection and the balanced antitrust enforcement paradigm I have described. Below are some recommendations for building a solid structure for competition and consumer protection enforcement that is supportive of efforts at reform, while protecting competition in health care markets.

• Increase coordination among government health and antitrust agencies. A vast majority of health care expenditures are in government programs and maintaining competition in these programs is vital for controlling costs. The DOJ and the FTC need to work with HHS and CMS to ensure that taxpayers are receiving the full benefits of the most efficient, lowest cost services.
• The Obama administration must marshal its competition and consumer protection enforcement resources to focus on anticompetitive, egregious, and deceptive conduct by insurers. The structure of the health insurance market is broken and the evidence strongly suggests a pervasive pattern of deceptive and egregious practices. Health insurance markets are extremely concentrated, and the complexity of insurance products and opaque nature of their practices make these markets a fertile medium for anticompetitive and deceptive conduct.
•  Reinvigorate enforcement against anticompetitive conduct by health insurers and providers. The FTC should scrutinize anticompetitive conduct and use its powers under Section 5 of the FTC Act. Section 5 of the FTC Act can attack practices which are not technical violations of the traditional antitrust laws, the Sherman and Clayton Acts. Thus the FTC can use the power under Section 5 to address practices that may not be technical violations of the federal antitrust laws, but still may be harmful to consumers. As I have testified elsewhere, the FTC should begin to use that power under Section 5 to attack a wide range of anticompetitive and egregious practices by health insurers and PBMs.
• Conduct a retrospective study of health insurer mergers. I and the American Hospital Association have suggested elsewhere that one approach to this issue would be for the FTC or the DOJ to conduct a study of consummated health insurer mergers. One of the significant accomplishments of the Bush administration was a retrospective study of consummated hospital mergers by the Federal Trade Commission. This study led to an important enforcement action in Evanston, IL, which helped to clarify the legal standards and economic analytical tools for addressing health insurance mergers. A similar study of consummated health insurance mergers would help to clarify the appropriate legal standards for health insurance mergers and identify mergers that have harmed competition.
• Recognize that the insurer does not represent the consumer. Although insurers do help control cost, they are not the consumer. The consumer is the individual who ultimately receives benefits from the plan. It is becoming increasingly clear that insurers do not act in the interest of the ultimate beneficiary. They are not the proxy for the consumer interest, but rather exploit the lack of competition, transparency, and the opportunity for deception to maximize profits.
• Clarify the jurisdiction of the FTC to bring enforcement actions against health insurers. Some may suggest that the FTC lacks jurisdiction over health insurance. I urge Congress to ask the FTC to clarify their position on this issue. Is the claim of no jurisdiction the law or simply an urban legend? As I understand it, there is a limitation in Section 6 of the FTC Act that prevents the FTC from performing studies of the insurance industry without seeking prior Congressional approval. This provision does not prevent the FTC from bringing either competition or consumer protection enforcement actions. There may be arguments that the McCarran-Ferguson Act limits jurisdiction, but that exemption is limited to rate-making activity. In addition, some people might argue that the FTC’s ability to attack anticompetitive conduct by nonprofit insurance companies might be limited under the FTC Act. The solution to this problem is simple, straightforward and critical. If the FTC lacks jurisdiction in any respect to bring meaningful competition and consumer protection enforcement actions against health insurers, Congress must act immediately to provide that jurisdiction. There is no reason why health insurance should be immunized from the Federal Trade Commission Act.
• Congress should repeal the McCarran-Ferguson Act, which exempts insurers from the full range of federal antitrust laws. Eliminating the exemption will make it clear that the Justice Department can bring antitrust cases and the Federal Trade Commission can bring consumer protection cases against health insurers. Repeal of this exemption would improve competition and is necessary for the type of substantial antitrust enforcement that is long overdue in health insurance markets.

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David Balto is a Senior Fellow at the Center for American Progress

SOURCE: Center for American Progress

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Over two years ago, the United States and the global economy faced the worst economic crisis since the Great Depression. The crisis was rooted in years of unconstrained excess on Wall Street, and prolonged complacency in Washington and in major financial capitals around the world. The crisis made painfully clear what we should have always known–that finance cannot be left to regulate itself; that consumer markets permitted to profit on the basis of tricks and traps rather than to compete on the basis of price and quality will, ultimately, put us all at risk; that financial markets function best where there are clear rules, transparency and accountability; and that markets break down, sometimes catastrophically, where there are not.

For many years, a core strength of the U.S. financial system had been a regulatory structure that sought a careful balance between incentives for innovation and competition, on the one hand, and protections from abuse and excessive risk-taking, on the other. When that balance was properly struck, the U.S. financial system worked at its best. The American financial system often surpassed other major developed economies in innovation and productivity growth. It was generally good at directing investment towards the companies and industries where the returns would be the highest. Its regulatory checks and balances helped create a remarkably long period of relative economic stability which, in turn, gave rise to extraordinary national wealth. And it did so while providing investors and consumers with strong protections. It endured crises and recessions, including the costly bank and thrift failures of the late 1980s and early 1990s; these, however, did not threaten the foundations of the financial system.

Over time those great strengths were undermined. The careful mix of protections we created eventually eroded with the development of new products and markets for which those protections had not been designed. And our regulatory system found itself outgrown and outmaneuvered by the institutions and markets it was responsible for regulating and constraining.

In particular, the growth of the “shadow banking” system permitted financial institutions to engage in maturity transformation with too little transparency, capital, or oversight. The years leading up to the recent crisis saw the significant growth of large, short-funded, and substantially interconnected financial firms. Huge amounts of risk moved outside the more regulated parts of the banking system to where it was easier to increase leverage. Legal loopholes and regulatory gaps allowed large parts of the financial industry to operate without oversight, transparency, or restraint. Entities performing the same market functions as banks escaped meaningful regulation on the basis of their corporate form, and banks could move activities off balance sheet and outside the reach of more stringent regulation. Derivatives were traded in the shadows with insufficient capital to back the trades. “Repo” markets became riskier as collateral shifted from Treasuries to poorer quality asset-backed securities. The lack of transparency in securitization hid the growing wedge in incentives facing different players in the system and failed to require sufficient responsibility or risk retention from those who made loans, or packaged them into complex instruments to be sold to investors. Synthetic products multiplied risks in the securitization system. The financial sector, under the guise of innovation, piled ill-considered risk upon risk.

As the shadow banking system grew, our system failed to require real transparency, sufficient capital or meaningful oversight. Rapid growth in key markets hid misaligned incentives and underlying risk. Financial innovation often outpaced the capacity of managers, regulators and markets to understand new risks and adjust. Throughout our system we had increasingly inadequate capital buffers – as both market participants and regulators failed to account for new risks appropriately. Short-term rewards in new financial products and rapidly growing markets overwhelmed or blinded private sector gatekeepers, and swamped those parts of the system that were supposed to mitigate risk. Consumer and investor protections were weakened and households took on risks that they often did not fully understand and could ill-afford.

Rising home and other asset prices had helped to feed the financial system’s rapid growth, and to hide declining underwriting standards and other underlying problems in the origination and securitization of mortgage loans. When home prices began to flatten, and then to decline, fault lines were revealed. The asset implosion in housing led to cascades throughout the financial system, and then to contagion from weaker firms to stronger ones. Failures in the shadow banking system fed failures in the more regulated parts of the banking system. And then, in the fall of 2008, credit markets froze. The over-reliance on short-term financing, opaque markets and excessive-risk taking that had been the source of significant profit on Wall Street and in financial capitals globally, fanned a panic that nearly collapsed the global financial system.

The major U.S. investment banks merged, failed, or sought a life-line from the Federal Reserve as newly converted bank holding companies. The federal government injected capital into major commercial banks shaken in the aftermath of the collapse of Lehman Brothers. The FDIC put in place guarantees across the entire banking system. The Federal Reserve pumped liquidity into the financial system to halt further economic collapse. A dangerous run on money market mutual funds was halted by guarantee and liquidity programs set up by Treasury and the Federal Reserve. Congress enacted a major stimulus plan to keep the economy from cratering.

Yet stabilizing the financial sector did not address the failures that led to the crisis. Further action was necessary to restore discipline to our financial markets, adequate protections to consumers and investors, and the market’s long-term ability to generate economic growth for future generations of Americans. The test of whether a financial system works is whether it does a reasonable job of channeling savings to finance future innovation and growth. The test is whether it protects consumers and investors. And the test is also whether it can do so while supporting, not harming, the economy. In the lead up to 2008, our system failed that test.

Ending too big to fail through enhanced supervision, higher capital levels, and market reforms

That is why comprehensive reform was essential. One year ago, President Obama signed into law the Dodd-Frank Act—the most sweeping reform of financial regulation since the New Deal. The act provides for supervision of major firms based on what they do, rather than their corporate form. Shadow banking—through large, interconnected financial firms, OTC derivatives, “repo” funding markets, hedge funds, and securitization—is brought into the regulatory daylight. The largest financial firms will be required to build up their capital and liquidity buffers, constrain their relative size, and place restrictions on the riskiest financial activities. The act comprehensively regulates derivatives markets with new rules for exchange trading, central clearing, transparency, anti-abuse provisions, and capital and margin requirements. The act provides for data collection and transparency so that in no corner of the financial markets can risk build unnoticed. The act creates an essential mechanism for the government to orderly liquidate failing financial firms without putting taxpayers at risk. The act creates a new Consumer Financial Protection Bureau and provides for consumer and investor protections. In sum, the act provides a strong foundation on which the U.S. must now carefully build a more stable and balanced regulatory system–a system that protects consumers and investors, that rewards innovation and that is able to adapt and evolve with changes in financial markets.

Before Dodd-Frank, if an entity were a bank, then it had tougher regulation, more stringent capital requirements, and more robust supervision. But if an entity were an investment bank engaged in the same activities, then it was able to abide by different rules. For example, when U.S. investment banks needed to find a “consolidated holding company regulator” in order to meet European Union standards for doing business in Europe, the Securities and Exchange Commission set up a "voluntary" Consolidated Supervised Entity program with little oversight. The SEC was not established as a prudential regulator, did not have clear regulatory oversight for investment bank holding companies, and had little experience and few trained examiners. Moreover, the leverage requirement that served as a backstop for capital requirements on banks was not applied to these investment banks. In effect, the system allowed large financial institutions to choose the regulator that would offer the least restrictive supervision.

The Federal Reserve did not have any authority to set and enforce capital requirements on the major institutions that operated businesses outside of bank holding companies. That meant it had no supervision over investment banks, diversified financial institutions like AIG or the nonbank financial companies competing with banks in the mortgage, consumer credit and business lending markets. The Office of Thrift Supervision viewed its role as supervising thrifts, not their holding companies (such as AIG). And regulators permitted banks and thrifts themselves to engage in risky mortgage lending, stepping in with guidance only when it was too late.

Today, Dodd-Frank has provided authority for clear, strong and consolidated supervision and regulation by the Federal Reserve of any financial firm–regardless of legal form–whose failure could pose a threat to financial stability. We will have a single point of accountability for tougher and more consistent supervision of the largest and most interconnected financial firms. All bank holding companies will be supervised by the Fed, and the largest ones will be subject to heightened standards. The Office of Thrift Supervision has been abolished, and all Savings & Loan Holding Companies will be supervised by the Fed. Non-bank financial institutions designated by the Financial Stability Oversight Council will also be Fed-supervised. The voluntary investment bank holding company regime has ended.

Dodd-Frank provides for more stringent prudential standards for these major bank and nonbank firms. The Fed is charged with putting in place stronger requirements for capital and liquidity. Annual stress tests will be conducted on these firms. There are enhanced rules on affiliate transactions, lending limits, and counterparty credit exposures. The Fed is required to use macro-prudential supervision, which takes into account not only the risks within the institution, but the risks that the institution poses to the financial system as a whole. Major firms will be subject to a concentration limit that generally prohibits a financial company from engaging in mergers or acquisitions that would result in the firm’s liabilities—including wholesale funding and off-balance sheet exposures—exceeding 10 percent of the liabilities of financial companies as a whole. These enhanced prudential measures for major financial firms are likely to reduce risk in the financial system and reduce any “too big to fail” distortions.

Before Dodd-Frank, no regulator or supervisor had the legal authority or responsibility to look across the full sweep of the financial system and take action when there was a threat. Our financial markets have suffered for the lack of an effective system for monitoring and responding to systemic risks or threats to financial stability as they arise. Today the Financial Stability Oversight Council (FSOC) is accountable to identify threats to financial stability and to address them. The FSOC will have access to information across the financial services marketplace. A new Office of Financial Research is empowered to collect data from any financial firm, and to develop and enforce standardization for data collection.

Before Dodd-Frank, the OTC derivatives market–with a notional amount of $700 trillion at its peak–grew up in the shadows, with little oversight. Enormous risks built up in these markets – without effective constraints or any robust monitoring by regulators. Credit derivatives, which were supposed to diffuse risk, instead concentrated it. Synthetic securitization with embedded derivatives magnified failures in the real securitization market. Major financial firms used derivatives to increase their credit exposure to each other, rather than decrease it. We should never again face a situation – such as AIG’s $2 trillion derivatives portfolio – where the potential failure of a virtually unregulated, capital deficient major player in the derivatives market can impose devastating risks on the entire system. The opacity of this market meant that the government and market participants did not have enough information about the location of risk exposures in the system or the extent of the mutual interconnections among large firms. So, when the crisis began, regulators, financial firms, and investors had an insufficient understanding of the degree to which trouble at one firm spelled trouble for another. This lack of information magnified contagion as the crisis intensified, causing a damaging wave of margin increases, deleveraging, and credit market breakdowns. Lack of transparency, insufficient supervision, and inadequate capital left our financial system vulnerable to concentrations of risk, and to abuse.

Today, regulators are putting in place the tools to comprehensively regulate the OTC derivatives market for the first time. The act provides for regulation and transparency for transactions in this market. It provides for strong prudential, capital, and business conduct regulation of all dealers and other major participants in the derivatives markets. And it provides for regulatory and enforcement tools to go after manipulation, fraud, and other abuses in these markets.

The act requires all standardized derivatives to be centrally cleared, which will substantially reduce the build-up of bilateral counterparty credit risk between major financial firms. Central clearing parties would be subject to strong prudential supervision. Such derivatives would be traded on exchanges or alternative swap execution facilities, which would improve pre- and post- trade price transparency. Exchange trading will help to improve price competition as well as to improve safety and soundness in the derivatives system, as market participants and regulators will have full access to current prices in the event of system disruptions. Even non-centrally cleared OTC derivatives would be reported to a trade repository, making the market far more transparent. The act provides for prudential regulation of all OTC dealers and all other major players in the OTC markets, so that adequate capital, business conduct rules, and prudential supervision will apply to all market participants. The act provides for robust capital and initial margin requirements for derivative transactions that are not centrally cleared, providing a strong incentive to use central clearing and a bigger buffer should problems arise in the OTC markets.

At the same time as the act reforms derivatives markets, it provides a new framework for regulation of financial market utilities and critical payment, clearing, and settlement activities, including not only those in the derivatives markets but also the wholesale funding “repo” markets that are critical to the shadow banking system. In the lead up to the financial crisis, major financial firms became increasingly funded not by traditional bank deposits, or even longer-term funding in the commercial markets, but rather by overnight funding in the repo markets. And these markets became increasingly concentrated in only two major clearing banks. As the market became more concentrated, it also became riskier because counterparties came to accept not only Treasury securities as collateral, but also highly rated asset-backed securities. And these securities, in turn, became riskier, as credit rating agencies became increasingly willing to label as safe assets that were lower quality—including pools of securities backed only by poorly underwritten subprime and Alt-A mortgages. When the financial crisis hit, the repo markets froze, causing a massive contraction in available credit.

The Dodd-Frank Act fundamentally reforms the wholesale funding markets by providing strong authority for the Federal Reserve to regulate financial market utilities and critical payment, clearing, and settlement activities; to set new rules for capital, collateral and margin requirements; and to establish uniform prudential standards across the market. These reforms are coupled with basic changes to liquidity requirements for major financial firms under the Basel III rules, liquidity concentration limits under the act, and reforms to the deposit insurance system that will encompass all depository liabilities. These reforms will have the effect of taxing short- term liabilities and forcing firms to internalize more of the costs of this funding system. At the same time, SEC changes to regulations of money market mutual funds under Rule 2a-7 will mean that such funds have stronger liquidity positions.

The act also fundamentally transforms regulation of the last major element of the shadow banking system—securitization. The act requires deep transparency into the structure of securitizations, including information about the assets and originators. Securitization sponsors must generally retain risk in the securitizations they sponsor, so that incentives are better aligned among participants in the system. Capital rules will better account for actual risk. Parallel changes in accounting rules will now bring the most common forms of securitizations onto the balance sheet. Credit rating agencies will be subject to comprehensive oversight by the SEC, including policing of ratings shopping and conflicts of interest; ratings themselves will be more transparent—including key information on rating methodology, compliance with methodology, underlying qualitative and quantitative data, due diligence, and other protections.

Before Dodd-Frank, consumer protection regulation was fragmented over seven federal regulators, most of which chose to focus their energies in areas other than protecting consumers. Regulators lacked mission focus, market-wide coverage, and consolidated authority. Nonbanks could avoid federal supervision. Banks could choose the least restrictive consumer approach among several different banking agencies. Federal regulators preempted state consumer protections laws without adequately replacing these important safeguards. Fragmentation of rule writing, supervision and enforcement led to finger-pointing in place of effective action.

Today, the Consumer Financial Protection Bureau has market-wide coverage. The Bureau will focus on more effective regulation and supervision. The CFPB will set high and uniform standards across the market. It will focus on improving financial literacy for all Americans. And it will help to end profits based on misleading sales pitches and hidden traps; rather, banks and nonbanks can compete vigorously for consumers on the basis of price and quality.

Ending too big to fail through the orderly liquidation authority

Before Dodd-Frank, the government did not have the authority to unwind large, highly leveraged, and substantially interconnected financial firms that failed – such as Bear Stearns, Lehman Brothers, and AIG – without disrupting the broader financial system. Firms benefited from the perception that they were "too-big-to-fail"– a presumption that they would receive government assistance in the event of failure. Such a presumption reduced market discipline and encouraged excessive risk-taking by firms. It provided an artificial incentive for large firms to grow even larger. It created an unlevel playing field with smaller firms. And when the financial crisis hit, it left the government with the untenable choice between taxpayer-funded bailouts and financial collapse.

Today, major financial firms will now be subject to heightened prudential standards, including higher capital and liquidity requirements, stress tests, and “living wills.” Major financial firms will be required by these standards to internalize the costs that they impose on the system, which will give them incentives to shrink and reduce their complexity, leverage, and interconnections. And should such a firm fail, there will be a bigger capital buffer to absorb losses.

These measures will help to reduce risks in and among the largest financial institutions. In the event that such an institution fails, these actions will minimize the risk that any individual firm’s failure will pose a danger to the stability of the financial system. Thus, bankruptcy proceedings will remain the dominant option for handling the failure of a non-bank financial institution.

The crisis, however, showed that the U.S. government simply did not have the tools to respond effectively when the failure of one or more major financial institution threatened financial stability. As Lehman’s collapse showed quite starkly, there are times when the existing options under the Bankruptcy Code are simply not adequate to deal with the insolvency of large, complex and interconnected financial institutions in times of severe crisis.

That is why the Dodd-Frank Act permits the government, in limited circumstances, to resolve the largest and most interconnected financial companies outside of the traditional bankruptcy regime and consistent with the approach long taken for bank failures. This is the final step in addressing the problem of moral hazard. To make sure that we have the capacity – as we do now for banks and thrifts – to break apart or unwind major non-bank financial firms in an orderly fashion that limits collateral damage to the system. Under the orderly liquidation authority, the FDIC is provided with the tools to wind down a major financial firm on the brink of failure. Shareholders and other providers of regulatory capital to the firm will be forced to absorb any losses. Management of the firm culpable for its losses will be terminated. Critical assets and liabilities of the firm can be transferred to a bridge institution, while any remainder is left in the receivership estate. Any required funding for liquidity can be obtained through Treasury borrowing that is automatically repaid from the assets of the failed firm, or, if necessary, from an ex post assessment on the largest financial firms. In that manner, the resolution authority allows the government to impose losses on shareholders and creditors without exposing the system to a sudden, disorderly failure that puts the financial sector as a whole at risk.

The objectives of the resolution regime differ from those of the Bankruptcy Code. The purpose of the Bankruptcy Code is to reorganize or liquidate a failing firm "for the benefit of its creditors". The resolution authority is structured to manage the failure of a financial firm in a manner that protects taxpayers and the broader economy and promotes stability in the financial system. This purpose is explicitly different than the purposes of the Bankruptcy Code, but that is why the act is narrowly tailored to situations in which there are exceptional threats to financial stability.

The Dodd-Frank approach is modeled on the long standing regime for bank failure. There are significant and tested safeguards in the act modeled on the bank failure law to protect creditor rights. In addition, creditors in the resolution process are protected by the same system of judicial review that has existed for the FDIC (and its predecessors) for its receivership and conservatorship authorities for more than 75 years. The act seeks to respect the Bankruptcy Code’s fundamental principles of fairness and equity among similarly situated stakeholders.

As is the case under the Bankruptcy Code’s best-interests test and under the model in place for bank resolution, in the limited circumstances where the act permits deviation from those principles, the act expressly guarantees that stakeholders will be made no worse off by a regulator’s use of resolution authority than would be the case in a liquidation under Chapter 7 of the Bankruptcy Code. The act also maintains the right of an affected company to seek judicial review following the appointment of a receiver or conservator and a claimant’s right to challenge a regulator’s disallowance of its claim.

As with any new authority, the first and most central questions are: how would this work? How would it be different than what is possible today? What would happen if the U.S. government were once again faced with situations like those of September 2008?

Major financial institutions would have prepared a "living will" embodying a liquidation strategy and, in most cases, a supervisory recovery plan to map out contingencies for how the firm would respond to avoid failure during a period of severe financial distress or instability. Such firms would have larger capital buffers in the event of economic stress, and stringent conditions imposed on the use of "hot" money funding, including liquidity requirements over one month and one year time frames. Regulators would have the authority to supervise the firm for system- wide risks and to impose tough prudential measures. As a firm faced capital or liquidity problems, regulators would order early remediation. But we need to have some humility about the future and our ability to predict and prevent every systemic failure of a major financial firm.

In a severe crisis, if one or more major financial firms fail, and prudential measures, remedial action, and capital buffers prove inadequate, special resolution should be available. The Dodd- Frank Act builds in important safeguards for the use of such authority, including by requiring concurrence of the Treasury Secretary, two-thirds of the Board of the Federal Reserve, and two- thirds of the Board of the FDIC (or the Securities and Exchange Commission in the case of a broker-dealer). If the financial firm’s board does not consent, prompt judicial review is required.

A receivership under this authority would have three essential elements that would improve execution and outcomes relative to the tools that were available in the fall of 2008: First, the FDIC could swiftly replace the board and senior management with new managers. Second, a temporary stay of counterparty termination and netting rights, during which the FDIC could transfer qualified financial contracts to a third party or bridge institution without counterparty consent or court approval. Third, the ability to set up a bridge bank with secured financing from the FDIC to fund liquidity and capital needs, in order to mitigate the "knock on" effects of any firm’s failure; to fund its operations, pending its sale or winding down; and to preserve the business franchise, and protect viable assets of stronger subsidiaries pending their sale. This would have the potential to end the firm – wind it down – without contributing to system-wide failure.

In sum, the nation would no longer have to make the untenable choice between taxpayer bailouts and market chaos. Instead, the Dodd-Frank reforms provide the FDIC with the authority to wind down any firm whose failure would pose substantial risks to our financial system, in a way that will protect the economy while ensuring that the failed firm, and if necessary other large financial firms – not taxpayers – bear any costs.

To be sure, the creation of a domestic resolution authority is not enough. Large financial institutions operate globally. Resolution of a major firm will require international cooperation among regulators participating in existing supervisory colleges which monitor the largest financial firms.. That is why it is so critical that other nations develop and implement special resolution regimes with similar tools and authorities, which is the essential first step to being able to resolve such global firms.

Ending too big to fail through international reforms

While the United States is implementing the Dodd-Frank Act, it is critical that global reforms proceed as well. In particular, the United States should continue to press for progress on raising the quality and quantity of capital; reducing the moral hazard of systemically important financial institutions; and imposing new rules for capital, margin, exchange trading, central clearing, transparency and oversight of the OTC derivatives market.

Much progress has been made through the Basel Committee on Banking Supervision to raise global capital standards. In Basel III, minimum capital ratios are set at a level that will represent a significant increase in firms’ requirements. These new requirements include the creation of a capital conservation buffer above the minimums, which if breached will restrict firms’ ability to pay dividends or buy back stock. Such restrictions will help shore up a firm’s capital base before it reaches a point of no return. Basel is now at work on how to implement a capital surcharge for the largest, most interconnected financial firms. The Basel Committee is also examining how to use new contingent capital instruments—in which debt transforms into equity under specified circumstances—to force firms to internalize the costs of their own failure.

Not only is Basel raising the ratios, but just as importantly, it is also raising the quality of capital that underlie them. The new capital requirements will focus on common equity, excluding other liabilities that did not act as a buffer to absorb losses in the crisis. There will be strict limits in the capital calculation on counting minority interests, as well as on the aggregate contribution of investments in other financial institutions, mortgage servicing rights and deferred tax assets.

Moreover, Basel is increasing the capital required for banks’ riskiest activities, such as trading positions and counterparty credit exposures. Capital calculations for trading exposures will be based on stressed market conditions, and the charges for securitization exposures will be increased substantially. In both derivatives and secured lending transactions, firms will be subject to a capital charge for deterioration in the credit worthiness of counterparties. For the first time, Basel III will also be introducing a new, internationally applied, leverage ratio requirement that includes firms’ off balance sheet commitments and exposures.

Furthermore, Basel III will be instituting explicit quantitative liquidity requirements for the first time, to ensure that financial firms are better prepared for liquidity strains. Under the new rules, firms will have to hold enough highly liquid assets to meet potential net cash outflows over a 30 day stress scenario. Basel will also require a minimum amount of stable funding over a one year time period, relative to a firm’s assets, commitments and obligations. These liquidity requirements will be crucial in helping to mitigate severe strains like those that we saw on the financial sector at the time of the collapse of Bear Stearns and Lehman Brothers during 2008.

In addition, countries must implement the resolution recommendations agreed by G-20 Leaders, which are a necessary prerequisite for effective cross-border resolution of systemically important financial institutions. While many in Europe are focused on using contingent capital as a means to improve resolution, these efforts are not enough. Contingent capital will not be sufficient on its own to permit the resolution of a major financial firm without wide-scale harm to the markets, and must not be used as an excuse to avoid legislating strong resolution regimes internationally.

Both our financial system and this crisis have been global in scope. So solutions have been and must continue to be global. The U.S. has not waited for the international community to act before building a new foundation in the Dodd-Frank Act, and there must not be an international race to the bottom on regulatory standards.

Conclusion

The United States had an urgent obligation to fix the failures that threatened our financial system and helped trigger the worst global economic crisis since the Great Depression, and a recession that has cost American families and American businesses so dearly. The Dodd-Frank Act puts in place the key reforms that were necessary to end the perception of “too big to fail,” and to establish a firm foundation for financial stability and economic growth in the decades ahead.

Michael S. Barr is a Senior Fellow at the Center for American Progress and a professor of law at the University of Michigan Law School.

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SOURCE: AP/Larry W. Smith

The Koch Inc. headquarters is shown in Wichita, Kansas.

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Any attempt to understand the modern conservative movement will eventually lead to billionaire brothers Charles and David Koch. Using their vast wealth and connections, the Koch brothers are key players in bankrolling right-wing political action groups, think tanks, and individual politicians, using this array of political power to advance their ideological agenda of limited government and less regulation. Chances are they are part of any recent right-wing attack you have seen lately.

The Koch brothers, leaders of a vast family oil-and-gas conglomerate, use this political network to pursue their right-wing agenda at nearly every level of government. Whether they are contributing millions in campaign contributions, spending millions on lobbying, or investing millions in right-wing think tank and advocacy groups, the Koch brothers’ influence is pervasive.

Charles and David Koch would prefer to keep their influence behind the scenes but recent reporting by the Center for American Progress Action Fund’s Think Progress and a variety of media and advocacy organizations shed light on the enormous breadth and reach of their network. This report will showcase the players involved in the Koch network, where they operate, and the vast amounts of money involved. The report also exposes the Koch right-wing ideological agenda that often protects their business interests at the expense of everyone else.

But cutting to the chase, here is a brief summary of the report’s findings:

• The Koch brothers, whose wealth, when combined, is the fourth highest in the nation, run one of the largest private companies in the country. Koch Industries is involved in industries ranging from oil and gas, refining and chemicals, minerals, fertilizers, forestry, consumer products, polymers and fibers, and ranching. They have operations in 45 states.
• The Koch brothers use their considerable wealth to bankroll the right wing, including the Tea Party. This serves the purpose of furthering not only their right-wing ideology but also their bottom line. Koch Industries has a lot to gain from gutting government oversight and electing candidates who oppose government regulation, especially in the oil-and-gas industry.
• Chances are the Koch brothers are part of any recent right-wing attack as of late as they have fought health reform, Wall Street reform, collective bargaining rights, and efforts to curb climate change, to name just a few.
• We have identified at least $85 million the Koch brothers have given to at least 85 right-wing think tanks and advocacy groups over the past decade and a half.
• Their main advocacy group, Americans for Prosperity, has chapters in 32 states and spent $45 million in the last election, predominantly to help elect Republicans.
• The Kochs donated directly to 62 of the 87 members of the House GOP freshman class.
• The Koch brothers are active at the state level, spending $5.2 million on candidates and ballot measures in 34 states since 2003. They donated directly to 13 governors that won election last year.
• The Kochs are not going away. In fact, they have already pledged to raise $88 million for the 2012 election and have started scheduling events for potential Republican presidential candidates.

As this report will demonstrate, the Koch brothers’ network works hard to advance a right-wing ideological agenda that helps their businesses reap more profits at the expense of our environment, our economy, and the American middle class. Understanding how they operate is the first step in countering their efforts to reshape our nation’s laws to benefit the wealthy even more than they do today.

Tony Carrk is Policy Director of the CAP Action War Room.

Read the full report (pdf)

Download the introduction and summary (pdf)

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At the top of his remarks, Kerry addressed the tragedy this weekend in Tucson and the discussion that’s ensued about the state of our political discourse.

The full text of his speech, as prepared, is below:

Someone might ask why, with our country mourning, we are here this morning continuing to talk about the business of the country. But the truth is that is what Gabrielle Giffords was doing—talking about the business of the country. And the truth is, talking about the business of our country is more urgent than ever.

John and I considered postponing this speech, which had been planned for some time. But serious times call for serious discussions. And after some reflection, both of us felt that not only should this speech not be postponed, but that, in fact, it was imperative to give it.

So obviously, as we gather here this morning, last weekend’s unspeakable tragedy is at the forefront of all of our minds. Our thoughts are with Congresswoman Giffords and the families of all the victims. We pray for her full recovery, even as a nation mourns the loss of innocent life in such a senseless act.

All of us struggle to understand this horrific event. There is much we still don’t know about what happened and why. But here’s what we do know without any question: On Saturday, a public servant went to meet with her constituents in the best tradition of our democracy, and while out, just doing her job, Congresswoman Giffords was shot down. Today she’s fighting for her life, and six people lost their lives in this senseless assault not just on them, but, in its calculated planning for assassination, an assault on our democracy itself.

Eerily, I heard this weekend’s news while in Sudan, representing our country in our collective effort to help a people who have endured unspeakable violence and who are trying to make a fresh start through their democracy. Yet as I stood beside those Africans who have lost loved ones in pursuit of the democratic values we Americans so proudly export to the world, there was an unavoidable clash with the events unfolding in Tucson—a dramatic underscoring of the work that must be done to revitalize our own democracy here at home.

Many observers have already reduced this tragedy to simple questions of whether overheated rhetoric is to blame, or one partisan group or another. And surely today many pundits and politicians are measuring their words a little more carefully and thinking a little more about what they’re saying. But in the weeks and months ahead, the real issue we need to confront isn’t just what role divisive political rhetoric may have played on Saturday—but it’s the violence divisive, overly simplistic dialogue does to our democracy every day.

In the wake of this weekend’s tragedy, Speaker Boehner was right to suspend the House’s usual business; the question now is whether we’re all going to suspend and then end business as usual in the U.S. Capitol. Because even before this event shook us out of our partisan routine, it should have been clear that on bedrock questions of civility and consensus—discourse and democracy—the whole endeavor of building a politics of national purpose—the big question wasn’t whose rhetoric was right or wrong, but whether our political conversation was worthy of the confidence and trust of the American people.

Millions of Americans know we can do better than we’ve done these last bitter years—because our history has proven it time and again.

When the Soviets sent the first satellite in history into orbit half a century ago, leaders from both parties rose with a sense of common purpose and resolved that never again would the United States fall behind anyone, anywhere. President Kennedy summoned our nation to reach the great and audacious goal "before [the] decade is out, of landing a man on the moon and returning him safely to earth."

There were no partisan divisions that blocked the way. With daring and unflagging determination we moved immediately to unprecedented levels of investment in science and technology, engineering, and R&D—and only 12 years after Sputnik, two Americans humbly took mankind’s first steps on the moon.

Back then—just as today—our leaders, Democrat and Republican, had deep disagreements on many issues, but back then, they shared an even deeper commitment to stand together for the strength and success of our country. For them, at that turning point, politics stopped not just at the ocean’s edge, but at the edge of the atmosphere. For them, American Exceptionalism wasn’t just a slogan; they knew that America is exceptional not because we say we are, but because we do exceptional things.

As I first said last month, we as a people face another Sputnik moment today. And the great question is whether we will meet this moment as Americans did so boldly five decades ago. The decisions we make—or fail to make—in this decade on new energy sources, on education, infrastructure, technology, and research, all of which are going to produce the jobs of the future, and our decisions on deficits and entitlements will without doubt determine whether the United States will continue to lead the world—or be left to follow in the wake of others, on the way to decline, less prosperous in our own land and less secure in the world.

Some will question how in the world this could be possible—America less prosperous? America on the decline? They forget that exceptionalism for America has never been an automatic fact—a birthright on autopilot—but an inheritance of opportunity to be renewed and revitalized by each generation.

So, let me share some facts with you. Right now, other developed and developing countries are making far-reaching choices to reshape their economies and move forward in a new and very different global era. But instead of us responding as Americans have in the past, the frustrating reality is that our American political system is increasingly paralyzed and Balkanized into a patchwork of narrow interests that have driven the larger “national good” far from the national dialogue altogether. Increasingly, overheated ideology and partisan infighting leave us less able to address or even comprehend the decisive nature and scale of the challenges that will decide our whole future.

The fact is, our strength at home determines our strength in the world. And other countries are constantly taking our measure, sizing us up, watching our politics, measuring our gridlock.

On issue after issue, enduring consensus has been frayed or shredded by lust for power cloaked in partisan games. Health care’s individual mandate? Guess what—it started as a Republican idea—a pro-business idea—because rising insurance costs leave big holes in profits. Cap and trade? Guess again—another Republican idea based on market principles and, with bipartisanship, successfully implemented by President George Herbert Walker Bush, now denounced as ideological heresy. And energy independence? For 40 years, every president since Richard Nixon has recognized that foreign oil imports are America’s Achilles heel. But whenever we’ve had a chance to act, we’ve been blocked by entrenched influence and the siren call of short-term interest instead of achieving long-term success.

Even as we were clawing our way to the ratification of START Treaty last month, I noted that far more ambitious treaties had previously been ratified by votes of 90 or 95 to zero. I joked that in this Senate, in this hyperpartisan Washington, 67 might be the new 95. I’m proud that in the end we sent a signal to the world that in American foreign policy, however uphill the slog and improbable the victory, partisan politics can still stop at the water’s edge. But the fact remains that it was closer than it ever should have been.

All of this underscores the current danger to our country in ways that go far beyond that single debate and highlight a host of other issues that demand and deserve common resolve, not constant suspicion and division. If treaties ratified almost unanimously yesterday get just 71 votes today, what’s the forecast for other decisive endeavors that once would have commanded 79 votes in the Senate? We can’t afford for the old 79 to become the new 49, dooming our national will to unbreakable gridlock. Because in the 21st century where choices and consequences come at us so much faster than ever before, the price of Senate inaction isn’t just that we will stand still; it isn’t just that America will fall behind; it’s that we will stay behind as we cede the best possibilities of this young century to others who are more disciplined.

Just think about an issue as simple and fundamental as building and investing in America—an issue that was once so clearly bipartisan. The Republican Mayor of New York City Fiorello LaGuardia famously said: “There’s no Republican or Democratic way to clean the streets.” Well, for decades there was no Democratic or Republican way to build roads and bridges and airports. The building of America was every American’s job. This wasn’t narrow pork; it was a national priority. But today, we’re still living off and wearing out the infrastructure put in place by Republicans and Democrats together, starting with President Eisenhower’s interstate highway system. We didn’t build it; our parents and grandparents did. Now partisan paralysis has kept us from renewing that inheritance even as it decays from neglect. And the question is: What are we building for our children and our future generations?

Reliable, modern infrastructure isn’t a luxury. It’s the lifeblood of our economy—the key to connecting our markets, moving products and people, generating and sustaining millions of jobs for American workers, to not wasting hundreds of thousands of hours and millions of gallons of gas on clogged highways.

In the face of global competition, our growth and exports are directly tied to the modernity of our infrastructure. As we invest too little and our competitors invest more and more, the harder and harder it will be to catch up—and the more and more attractive those countries will be for future investments.

In 2009 China spent an estimated $350 billion on infrastructure—9 percent of its GDP. Europe’s infrastructure bank financed $350 billion in projects across the continent from 2005 to 2009, modernizing seaports, expanding airports and high-speed rail lines, and reconfiguring city centers. Brazil invested more than $240 billion in infrastructure in the past three years alone, with an additional $340 billion planned over the next three years.

And what about us? Well, we know that Americans have always been builders. We built a transcontinental railroad. We built an interstate highway system. We built the rockets that let us explore the farthest edge of the solar system and beyond. But as a result of our political gridlock and attention to the short term, that’s not what we’re doing today.

For too long we’ve underbuilt and underinvested, and too much of what we have done has been uninformed by any long-term strategic plan. In 2008 it was estimated that we had to make an annual investment of $250 billion for the next 50 years to legitimately meet our transportation needs. Right now, we aren’t even close to that. Right now, we are as many miles away from it as we ought to be building to get there.

Other countries are doing what we ought to do. They’re racing ahead because they created infrastructure banks to build a new future, but we’ve yet to build a new consensus for our own national infrastructure bank to make Americans the world’s builders again—and to keep our country the leader in the new world economy.

Imagine the possibilities that would come from this endeavor—financing projects from high-speed rail to air and sea ports, all with the expectation of being repaid, lending directly to economically viable initiatives of both national and regional significance, without political influence, run in an open and transparent manner by experienced professionals with meaningful congressional oversight. That is an indispensable strategy for prosperity and a legitimate vision that Americans could embrace. And if we offer America the leadership it deserves, it ought to be an undoubted opportunity and necessity for bipartisanship.

It’s not just infrastructure where we must rebuild our sense of great national purpose: Virtually every measure shows that we’re falling behind. Today the United States is ranked 10th in global competitiveness among the G-20 countries. America is now 12th worldwide in the percentage of 25-to-34-year-olds with a college degree, trailing, among others, Russia, New Zealand, South Korea, and Israel. This year investors have pulled $74 billion out of domestic stock funds and put $42 billion into foreign stock funds. High-profile multinational companies including Applied Materials and IBM are already opening major R&D centers in China. And as we look to the Googles of the future, it is increasingly possible that they will be founded by students from Tianjin University, rather than MIT or Stanford.

We need to face up these new challenges—not just as individuals or separate interests, but as a nation with a national purpose. The world of the next generation will change too rapidly for political parties to focus too narrowly on the next election. And the 21st century can be another American century—but only if we restore a larger sense of responsibility and replace the clattering cacophony of the perpetual campaign with a wider discussion of what is best for our country. For the last months we’ve watched the news and read the campaign literature and heard a lot the sound bites. We’ve heard politicians say they won’t become a part of Washington. That say they’re for small government, lower taxes, and more freedom. But what do they really mean?

Do they want a government too limited to have invented the Internet, now a vital part of our commerce and communications? A government too small to give America’s auto industry and all its workers a second chance to fight for their survival? Taxes too low to invest in the research that creates jobs and industries and fills the Treasury with the revenue that educates our children, cures disease, and defends our country? We have to get past slogans and sound bites, reason together, and talk in real terms about how America can do its best.

If we are going to balance the budget and create jobs, we can’t pretend that we can do it by just eliminating earmarks and government waste. We have to look at the plain facts of how we did it before, and by the way, you don’t have to look far. In the early 1990s, our economy was faltering because deficits and debt were freezing capital. We had to send a signal to the market that we were capable of being fiscally responsible. We did just that and as result we saw the longest economic expansion in history, created more than 22 million jobs, and generated unprecedented wealth in America, with every income bracket rising. But we did it by making tough choices. The Clinton economic plan committed the country to a path of discipline that helped unleash the productive potential of the American people. We invested in the workforce, in research, in development. We helped new industries. Then, working with Republicans, we came up with a budget framework that put our nation on track to be debt free by 2012 for the first time since Andrew Jackson’s administration.

How we got off track is a story that doesn’t require retelling. But the truth of how we generated the 1990s economic boom does need to be told. We didn’t just cut our way to a balanced budget; we grew our way there.

And nothing played a more important role than the fact that we developed a $1 trillion technology market with 1 billion users. Today we’re staring another economic opportunity of extraordinary proportions right in the face—and so far we’re doing precious little about it. The current energy economy is a $6 trillion market with 4 billion users (and the possibility of growing to 9 billion in the next 30 years) and the fastest growing segment of that is green energy—projected at $2.3 trillion in 2020. Yet, as of today, without different policy decisions by us, most of this investment will be in Asia and not the United States. Two years ago, China accounted for just 5 percent of the world’s solar panel production. Now it boasts the world’s largest solar panel manufacturing industry, exporting about 95 percent of its production to countries including the United States. We invented the technology but China is reaping the rewards.

China’s government is poised to outspend the United States 3-to-1 on public clean energy projects over the next several years. They have installed 36 percent of the global market share in wind energy in 2009 and surpassed the United States as the fastest growing market. Deutsche Bank’s Kevin Parker, who manages $7 billion in climate change-related investments, calls the United States “asleep at the wheel on climate change … [and] on the industrial revolution taking place in the energy industry." Because of political uncertainty and inaction in this country, he’s now focusing Deutsche Bank’s “green” investment dollars more and more on opportunities in China and Western Europe, where governments provide a more positive environment. Today only $45 million of the $7 billion green investments fund that Deutsche Bank manages is from the United States. Simply put, because we are asleep, the investments are going elsewhere.

Now is the moment for America to reach for the brass energy ring—to go for the moon here on earth by building our new energy future—and, in doing so, create millions of steady, higher-paying jobs at every level of the economy. Make no mistake: Jobs that produce energy in America are jobs that stay in America. The amount of work to be done here is just stunning. It is the work of many lifetimes. And it must begin now. This shouldn’t be a partisan issue, but instead of coming together to meet the defining test of a new energy economy and our future, we’re now leaving a political season in which too many candidates promised not to work with the other party. And this in the wake of a Senate session that started for Republicans with a PowerPoint presentation pronouncing, and I quote, "the purpose of the majority is to pass their agenda, the purpose of the minority is to become the majority."

It’s no secret that I’m a convinced Democrat. And I know it’s better to be in the majority than in the minority. And I don’t want anyone to come to the Senate, check their beliefs at the door, and "go Washington." Neither did the Founding Fathers. And certainly no one’s elected to the Senate promising to join an exclusive club—or to forget where they came from. But the truth is some of the most fiercely independent, plain-talking, direct, and determined partisans I’ve ever known in the Senate have also been the ones who tackled the toughest issues, finding common ground with people they disagreed with on damn near everything else.

Daniel Patrick Moynihan was a New York liberal. Alan Simpson was a Wyoming conservative. But they could sit down and talk and debate and disagree about deficits, debts, and entitlements and somehow, someway, they could shape a way forward. And they did it in a way that enlisted liberals like Bill Bradley, moderates like Jack Heinz, and conservatives like John Danforth because they knew that certain issues were just too important to be lost in partisan squabbling.

And you couldn’t find three more proudly partisan and ideologically distinct politicians than Ronald Reagan, Tip O’Neill, and Bob Dole. But they found a way to put politics aside and save Social Security for a generation rather than saving it for misuse as a cudgel in the next campaign. They didn’t capitulate; they compromised. And, speaking of backroom deals, they agreed not to let either party demagogue the issue against the incumbents who cast the tough votes to pass the bill. Now, if you’ve got to have a backroom deal, that’s the kind to have.

Folks, you won’t find a Republican today who would dare criticize Ronald Reagan. Last week, when the candidates for chairman of the Republican National Committee had their debate, Grover Norquist asked each of them to name their favorite Republican other than Ronald Reagan. He said he had to add that caveat so everyone didn’t give the same answer. But we’d all be better off if some of these Republicans remembered that Ronald Reagan worked across the aisle to solve big problems. And we’d all be better off if Grover Norquist thought of that Ronald Reagan before he announced that "bipartisanship is just another word for date rape."

That’s the difference today. Ideology isn’t new to the American political arena and ideology isn’t unhealthy. The biggest breakthroughs in American politics have been brokered not by a mushy middle or by splitting the difference but by people who had a pretty healthy sense of ideology. Ted Kennedy and Orrin Hatch were a powerful team precisely because they didn’t agree on that much and they spent a lot of time fighting each other—and so the Senate leaned in and listened on those occasions when somehow this ultimate odd couple found things they were willing to fight for together.

Sometimes, as John Kennedy once said, “party asks too much.” Sometimes, party leaders also ask too much, especially if they exploit the rules of the U.S. Senate for the sole purpose of denying a president a second term. But that is what we have witnessed the last two years; Republicans nearly unanimous in opposition to almost every proposal by the president and almost every proposal by Democratic colleagues. The extraordinary measure of a filibuster has become an ordinary expedient. Today it’s possible for 41 senators representing only about one-tenth of the American population to bring the Senate to a standstill.

Certainly, I believe the filibuster has its rightful place. I used it to stop drilling for oil in the Arctic Wildlife Refuge because I believed that was in our national interest—and 60 or more senators should be required to speak up on such an irrevocable decision. But we have reached the point where the filibuster is being invoked by the minority not necessarily because of a difference over policy, but as a political tool to undermine the presidency.

Consider this: In the entire 19th century, including the struggle against slavery, fewer than two dozen filibusters were mounted. Between 1933 and the coming of World War II, it was attempted only twice. During the Eisenhower administration, twice. During John Kennedy’s presidency, four times—and then eight during Lyndon Johnson’s push for civil rights and voting rights bills. By the time Jimmy Carter and Ronald Reagan occupied the White House, there were about 20 filibusters a year.

But in the 110th Congress of 2007-08, there were a record 112 cloture votes. And in the 111th Congress, there were 136, one of which even delayed a vote to authorize funding for the Army, Navy, Air Force, and Marine Corps during a time of war. That’s not how the Founders intended the Senate to work—and that’s not how our country can afford the Senate not to work.

Chris Dodd said it best in his farewell address just a few weeks ago—a speech the Republican Leader called one of the most important in the history of the chamber. Chris sounded a warning: “What will determine whether this institution works or not, what has always determined whether we will fulfill the Framers’ highest hopes or justify the cynics’ worst fears, is not the Senate rules, the calendar, or the media. It is whether each of the one hundred Senators can work together.”

That was a speech that needed to be heard. But the question now isn’t whether it was heard; it’s whether we really listened to it. Because when it comes to the economy, our country really does need 100 senators who face the facts and find a way to work not just on their side, but side by side.

No one runs for the Senate arguing that the United States should have one-fifth of its foreign debt held by China. No winning candidate has ever suggested that the United States should trail Poland in education. Or that Germany should invent the next Google or develop the cutting-edge new clean energy industries. No one has ever gone into a debate pledging that Indian workers should hold the jobs of the future, not American workers.

There’s a bipartisan consensus just waiting to lift our country and our future if senators are willing to sit down and forge it and make it real. If we’re willing to stop talking past each other, to stop substituting sound bites for substance. If we’re willing finally to pull ourselves out of an ideological cement of our own mixing.

We will no doubt continue to be frustrated and angry from time to time, but I believe that more often than not, we can rise to the common ground of great national purpose. Surely we can agree and act to realize the goal set by the president who called his fellow citizens to meet that earlier Sputnik moment—an America "that is not first if, not first but, but first period."

So, in this time of crisis and mourning, in this time of challenge and opportunity, we need to commit to reaching across the aisle, as colleagues did before us, to unite to do the exceptional things that will keep America exceptional for generations to come.

For more on this event see the event page.

SOURCE: AP/Haraz N. Ghanbari

Assistant Attorney General Christine Varney brings a keen perception about the important role of antitrust enforcement as a bulwark to a competitive marketplace.

Download the full testimony (pdf)

Chairman Johnson, Ranking Member Coble and other members of the committee, I am David Balto, a Senior Fellow at the Center for American Progress, where my work focuses on antitrust enforcement, intellectual property, and health care. I am the former policy director of the Federal Trade Commission and have practiced antitrust law for over a quarter of a century. I am pleased to submit this testimony for today’s important hearing on oversight of our antitrust enforcement agencies.

We have reached a critical juncture in antitrust enforcement. Increasingly, the markets consumers depend upon the most—health care, consumer goods, telecommunications and airlines, just to name a few—are becoming more concentrated. The bulwarks of the competitive marketplace, choice and aggressive rivalry, have been diminished and many of these markets are plagued by deceptive conduct. Moreover, our typical reliance on an entirely “free market” unshackled from any form of regulation has been shattered by recent economic events. Increasingly, we recognize the need for more intensive and thoughtful regulation as it is evident that the mantra, that deregulation or “regulation lite” is the best result is a recipe for consumer harm, not consumer welfare.

Fortunately, President Barack Obama selected exceptional leaders for both the antitrust division of the Department of Justice and the Federal Trade Commission. Both Assistant Attorney General Christine Varney and FTC Chairman Jon Leibowitz bring a keen perception about the important role of antitrust enforcement as a bulwark to a competitive marketplace. Both are strong leaders who know how to make the most of the limited resources of their agencies, and both are supported by talented career lawyers and economists who are dedicated to the mission of protecting consumers.

My testimony today provides observations on four important areas.

• The role of regulation and the need for antitrust enforcers to support and strengthen regulation. For instance, this has been demonstrated by an innovative collaboration between DOJ and USDA addressing chronic competitive problems in agriculture markets. This innovative collaboration should be applied to other markets, especially health care.
• The need for a realignment of enforcement priorities to support health care reform. In particular, the need for far greater enforcement against health insurers and greater acceptance of collaboration by health care providers.
• The need for the enforcement agencies to use their full range of powers, especially when investigating and challenging conduct by dominant firms.
• The need for Congress to enact new legislation to eliminate some of the most harmful anticompetitive practices. These include manipulation of the exclusivity period in pharmaceutical patent settlements, declare resale price maintenance per se illegal, and eliminate the antitrust exemption for health insurance.

The role of regulation and antitrust

For years, antitrust enforcers strongly believed that the only good regulation was a dead regulation. In fact, the antitrust enforcement agencies played a critical role in efforts to deregulate numerous markets. As we have recognized in the past two years, some of those efforts to deregulate may have been overgenerous in their faith in the working of the market. As FTC Commissioner Tom Rosch observed “if not dead [the Chicago School] is on life support…. [M]arkets are not perfect; imperfect markets do not always correct themselves; and business people do not always behave rationally.” To give just one example, the failure of effective financial service regulation has led to the chronic fraud and deception that Congress addressed in their financial service reform bills. The newly enacted Consumer Financial Protection Act allows regulators the access and authority needed to monitor financial products and protect consumers from being preyed upon by unscrupulous financial entities.

It is important for the antitrust enforcement agencies to learn to work more effectively with both federal and state regulators to help find solutions to competitive and consumer protection problems. Perhaps the most important observation by any antitrust enforcer in the past several years has been the comments of AAG Varney that, in many cases, a competition problem may not necessarily have an antitrust enforcement solution. Antitrust enforcement may have limited tools to adequately challenge ongoing anticompetitive conduct. Moreover, in many cases, a regulatory solution may be a more effective way of dealing with competitive problems in the market than a narrow antitrust enforcement action. Thus, antitrust enforcers must work to strengthen regulation so that it fully protects consumers.

Nowhere is the observation about the importance of antitrust enforcers and regulators working together more important than in agriculture markets. As I documented in my testimony before this Committee last year, there are chronic competitive problems in agricultural markets—particularly dairy, beef, and poultry—where increasingly consumers pay more while farmers receive less. These problems have grown only worse in the past year, especially in dairy, where countless farmers increasingly face the prospects of closing their farms that have been in their families in decades.

Make no mistake about it, the demise of competitive agricultural markets costs consumers dearly in higher food prices and less choice. Food processing markets are increasingly dominated by a small handful of firms with the power threaten the viability of producers in many markets.

Fortunately, the Obama administration has recognized the need for a comprehensive approach to this problem. As many members of this Committee know, in the past year the USDA and Antitrust Division of the Department of Justice have begun a series of hearings to learn about problems in agricultural markets. The agencies have scheduled five hearings throughout the United States and the results to date are promising. Both Attorney General Holder and Secretary Vilsack attended the first two hearings and heard from dozens of farmers about the egregious and harmful practices in various agricultural markets. Over 500 farmers attended each of these hearings.

The importance of the innovative nature of the hearings and the coordinated approach of the USDA and DOJ cannot be understated. Typically, enforcement officials wait for problems to come across their desks in Washington and do not act proactively to seek out concerns. And too often agencies respond to problems with, “That’s not my job, it is someone else’s jurisdiction.” The problems in agriculture markets are so severe that we cannot afford bureaucratic finger pointing. The coordination between DOJ and USDA will hopefully lead to comprehensive approach in both strengthening USDA regulations and bring enforcement actions to correct the chronic problems in the market. The DOJ can play a critical role in providing assistance to USDA in strengthening its regulatory powers. This model of cooperation hopefully will serve as a model in the future collaborative approaches by antitrust enforcement agencies and regulators to strengthen regulation and antitrust enforcement.

There are at least two other areas in which enforcement of the antitrust enforcement agencies can work with regulators to improve competition in regulated markets.

• Reform of the antikickback provisions in healthcare. There are chronic competitive problems in medical device markets because dominant medical device manufacturers pay kickbacks to group purchasing organizations to give them exclusive or near exclusive arrangements. These kickbacks reinforce the dominant positions of these firms and exclude more innovative, lower-cost alternatives produced by smaller competitors. Although the industry has promised to “self-regulate” those efforts have had minimal effect on the exclusionary conduct of dominant firms that have found ways to work around the so-called regulations. The Federal Trade Commission should investigate these practices and challenge them where appropriate. The FTC should also work with the appropriate regulators to try to eliminate the safe harbor for these kickback payments.
• Addressing fundamental problems in the market for pharmacy benefit managers (PBMs). The conduct of pharmacy benefit managers raises substantial competition and consumer protection concerns. The three largest PBMs have paid over $370 million in penalties and fines for consumer protection violations in the past five years. Consumer groups, unions, community pharmacists and health care plans have called for greater transparency in PBM operations. As part of the healthcare reform legislation, Congress enacted basic transparency requirements for PBMs that provide services to health care plans in the public exchanges. Unfortunately, in the past the Federal Trade Commission has aggressively lobbied against PBM regulation. It is time for the FTC to reconsider those views and work together with both state and federal regulators on improving both state and federal PBM regulation.

Health care enforcement priorities must be realigned

If one fact is clear from over a year of healthcare debate, it is that health insurance markets are broken. Members of Congress heard testimony from dozens of individuals who described how they were harmed by egregious, deceptive, and anticompetitive conduct by dominant by health insurance companies. Congress also heard from scores of employers who testified that they were unable to provide basic health insurance for the employees because of escalating premiums and other forms of anticompetitive conduct. Congress appropriately enacted significant reforms that hopefully will begin to restore greater protections for consumers. The Department of Health and Human Services has established a new agency, the Office of Consumer Information and Insurance Oversight, to implement these reforms, help create health insurance exchanges, and regulate health insurers. It should be a central priority for both the Federal Trade Commission and the Antitrust Division to work with the new federal regulators to make these reforms as effective as possible.

Unfortunately, the antitrust agencies are not as well-positioned as they should be to fully assist the new federal regulators in beginning to reign in health insurers. First, in the prior administration there were no enforcement actions against anticompetitive or deceptive practices by health insurers. In addition, the administration permitted a tremendous number of health insurance mergers to occur with relatively few challenges. As I have described in prior testimony, this is largely because of misplaced enforcement priorities in which almost all of the enforcement actions were brought against doctors. In addition, there are jurisdictional obstacles. Because of the McCarran-Ferguson Act, the FTC believes that it does not have jurisdiction to challenge health insurance consumer protection violations.

The problem of misdirected priorities is unfortunate. The agencies pride themselves on setting priorities that bring the greatest benefit to consumers. In the past administration over 30 cases were brought against doctors for alleged price fixing. Did the consumer benefit from these enforcement actions? Only one of them resulted in a private antitrust suit seeking damages — and the insurance company plaintiff lost. Over 40 percent were in rural markets that suffer from chronic shortages of providers. Almost all the cases are settled since provider groups can rarely afford a battle of a protracted antitrust suit. The settlements rarely allege consumers had to pay more; rather to the extent they allege harm, it is that the physicians sought higher reimbursement from insurers. The fact that a powerful insurer may not be able to secure lower reimbursement from physicians does not mean consumers suffer; rather, any lower reimbursement may have simply ended up in higher profits for insurers or reductions in reimbursement may have led to worse health care.

Are these physician negotiation groups a significant competitive problem? Congress exhaustively examined problems in health care markets for over a year. There was no mention of these alleged physician negotiation groups. Nor does the academic literature on rising health care costs identify these entities as a significant cause of rising health care expenditures. The results of the Congressional health care examination are clear—the problem is in a lack of competition and deceptive conduct in health insurance markets and that is where the agencies’ resources must be focused.

Recently, the DOJ has started to set a better balance in enforcement priorities and pay some much-needed attention to broken health insurance markets. At a recent meeting of the American Bar Association, AAG Varney described the results of a study they conducted on barriers to entry in health insurance markets in which the DOJ found that these barriers are indeed significant, and as a result, the antitrust enforcers must take action to protect existing competition and choice in health insurance markets. The DOJ took such an action when it threatened to challenge the merger of two Michigan health insurers, Blue Cross Blue Shield of Michigan and Physicians Health Plan of Mid-Michigan this past March. The merger would have created an insurance behemoth with about 90 percent of the market in Lansing. Because of the DOJ’s threat, the companies called off their merger, maintaining some level of competition in that market.

Besides misdirected enforcement priorities, the enforcement agencies have taken an extremely limited approach to permitting collaboration by health care providers. The most recent statement of guidance on permissible collaboration is the agencies’ joint Statements of Antitrust Enforcement Policy in Health Care, last revised in 1996, over fourteen years ago. Obviously the healthcare market has changed dramatically during this period. Moreover, under these Guidelines, the agencies have taken an extremely limited approach to permissible collaborations by health care providers. For instance: 

• During the Bush Administration, they approved only four provider collaboration groups, compared to over 25 in the Clinton Administration. 
• The costs of securing a business review letter to permit collaboration have grown exponentially. The cost of securing a business review letter now exceeds well over $100,000, clearly out of reach for any group except a very large group of providers, and can take over a year to obtain.
• Because of the elaborate standards necessary to satisfy the enforcement agencies, these groups must increasingly involve large numbers of physicians. Most of the approved entities involve well over 100 physicians. Ironically, the standards applied by the agencies are effectively forcing physicians to form groups that are so large that they basically acquire market power; precisely the problem the antitrust laws want to avoid.
• Even when these groups can overcome the severe and costly gauntlet required to get necessary approval, insurance companies often refuse to deal with these groups.

There is a simple fact that is becoming increasingly clear. Insurance companies are often not interested in the efforts of health care providers to improve health care quality. Instead, they simply want to secure the services of health care providers at the lowest possible cost. The ultimate result is health care providers are forced to do more with less and consumers suffer the result of assembly line health care.

Senators Kohl, Leahy, Feinstein, Whitehouse and Specter recognized the need to revise these Guidelines in a letter to AAG Varney and Chairman Leibowitz this past November. They wrote, “The Statements are now 15 years old and while their success in providing clear and concise guidance is a testimonial to both antitrust agencies and an excellent model of agency collaboration, an updated version including a broad and clear statement of enforcement policy is needed. Similar to the early 1990s when the agencies issued the Statements, we are in another time of ‘fundamental and far-reaching change’ in the health care field. Clear and user-friendly guidance would reduce barriers to coordination and innovation ultimately leading to cost efficiencies in the health care delivery system.”

The challenge of allowing providers to collaborate under the existing health care Guidelines is significant. We should be clear about the cost of the antitrust enforcers’ overly narrow approach to permitting health care collaboration. Doctors are prevented from providing a full range of services to improve health care quality and lead to better health care results. Ultimately, consumers suffer when physician reimbursement is reduced and consumers are relegated to assembly line health care.

This issue is particularly critical because an essential part of health care reform is the formation of accountable care organizations; systems which provide incentives for the various providers delivering a patient’s care to cut costs by coordinating care, focusing on prevention, or otherwise improving quality of care. ACOs can arguably raise some of the same concerns of permissible integration under the health care guidelines. Conceivably, the agencies may impose very strict requirements, or may see physician cartels lurking behind these arrangements. Indeed, at a recent ABA conference, representatives of both the FTC and DOJ cautioned that ACO-like collaboration would only be permissible for CMS-sanctioned programs, leaving open the significant risk that the same ACO-like collaboration would be deemed illegal if applied to commercial insurance contracting. This approach would make it difficult for ACOs to be formed. Ironically, with respect to those ACOs that are formed, the agencies’ approach might permit for-profit commercial insurers to free ride on the benefits derived through clinical integration. It should be a top priority of the enforcement agencies to promptly provide guidance to permit the significant formation of ACOs.

There is a recent, hopefully positive sign that the antitrust enforcers are beginning to recognize the need to take a new approach to physician collaboration. Last month, FTC Chairman Leibowitz in a speech to the AMA announced that the agencies would hold a series of workshops this fall on competition policy, payment reform, and the new models for delivering high-quality, cost-effective health care. We hope that the agencies deliver on this promise with a significant revision of the Guidelines. Workshops alone are not sufficient—earlier workshops in 2003 and 2008 did not lead to any revision of the Guidelines; hopefully this time will be different.

Using the agencies’ full range of powers against exclusionary conduct by dominant firms

As I suggested earlier, antitrust enforcement is facing unique challenges because of the significant changes in the economy. One of the most critical problems is the fact that there are an increasing number of dominant firms in significant markets. Sometimes the fact that a firm has a dominant share is simply the sign of appropriate success, but when a dominant firm uses various types of exclusionary conduct consumers suffer from the lack of competition.

Last year when I submitted testimony to the Senate Judiciary Committee for the confirmation hearing for Assistant Attorney General Varney, I recommended that the antitrust division rescind the report of dominant firm conduct issued during the Bush Administration. Soon after taking office, AAG Varney did precisely that, bringing alignment between the FTC and the DOJ on the issue of dominant firm conduct.

In a program at the Center for American Progress where AAG Varney spoke last spring, we highlighted the increasingly limited scope of Section 2 of the Sherman Act, and the question of whether it is adequate to police dominant firm conduct. As many commentators have noted, recent Supreme Court decisions have severely restricted the scope of Section 2.

In the most important monopolization case brought in the past year, the FTC case against Intel, the FTC has challenged alleged anticompetitive conduct not only under Section 2, but also Section 5 of the FTC Act which declares illegal “unfair methods of competition” and “unfair acts or practices.” Some people have criticized this use of Section 5, but those criticisms are misplaced.

The FTC case against Intel is a traditional Section 2 case that highlights exclusionary conduct by a firm that has had a market share between 80 and 98% for over a decade. The practices at issue in the FTC litigation have been condemned by the Japan Fair Trade Commission in March 2005, by the Korean Fair Trade Commission in June 2008 and by the European Commission in May 2009. In the U.S. Advanced Micro Devices, Inc., Intel’s sole significant rival, sued Intel for a broad range of exclusionary practices in 2005 and settled those charges for over $1 billion.

Intel has had its day in court in proceedings before the EC, KFTC and JFTC — and lost. Each of those tribunals found that Intel engaged in two distinct anticompetitive practices: Intel promised discounts or rebates to computer manufacturers so long as they purchased microprocessors exclusively from Intel, and Intel paid computer manufacturers to cancel or delay the launches of product lines that included AMD-based central processing units (CPUs).

There are two important reasons why the FTC action is necessary. First, although the AMD settlement resolved AMD’s concerns, it did not fully protect the interests of consumers. Second, the FTC complaint includes another set of concerns not challenged in the earlier enforcement actions. The FTC complaint challenges exclusionary conduct in the emerging and critically important graphic processing unit (“GPU”) market. The complaint alleges that Intel has sought to thwart competition from GPU manufacturers, because “these products have lessened the need for CPUs, and therefore pose a threat to Intel’s monopoly power.” In order to diminish the potential competitive threat from GPU manufacturers, according to the complaint Intel engaged in deception, degraded connections between GPUs and CPUs, and unlawfully bundled Intel’s GPUs with its CPUs, resulting in “below-cost pricing of relevant products.” This set of concerns is sufficient alone for enforcement.

The FTC’s use of Section 5 is wholly appropriate. Moreover, the Intel case is a model of the type of enforcement action antitrust authorities should pursue because it focuses on protecting dynamic competition. It is critical that enforcement agencies use all of their powers to challenge conduct that deters competition especially engaged in by dominant firms.

One particular area where the FTC’s Section 5 powers can be critical is health care. As I documented in testimony before the FTC, Section 5 can be used to attack competitively harmful conduct by healthcare intermediaries such as group purchasing arrangements. Well conceived enforcement actions involving GPOs would eliminate artificial barriers to competition, help reduce healthcare costs, and lead to safer and more innovative products.

The problem of dominant firm conduct can be prevented in the first instance through aggressive merger enforcement. Unfortunately, the DOJ did not seize the first opportunity to strengthen merger enforcement when it failed to challenge the Ticketmaster LiveNation merger that combined the largest ticketing firm with the largest concert promoter. Over 50 Congressmen wrote to AAG Varney expressing very significant competitive concerns with the merger. Rather than challenging the merger, the DOJ entered into a complex consent decree that attempts to create a new rival through a divestiture to AEG Group.

The DOJ attempts to address possible anticompetitive conduct by the merged firm through provisions of the proposed consent order that seek to prevent various forms of retribution, bundling, and anticompetitive information sharing. Many people have filed Tunney Act comments questioning whether the consent order provisions are sufficient to protect rivals in the market including independent concert promoters. One positive sign is that there is evidence that the DOJ staff is reaching out to market participants in an effort to make the order as effective as possible.

The DOJ must continue to be tremendously vigilant because the merged firm has tremendous power and a history of attempting to stifle new forms of competition. One particular area of concern for competition enforcers is the secondary market, which provides consumers with a vast number of opportunities to attend events that they may not otherwise be able to attend. Last year when the CEO of Ticketmaster appeared before the Senate Judiciary Committee he stated, "I don’t believe there should be a secondary [tickets] market at all.” Ticketmaster would like to eliminate the secondary market for tickets through vertical integration and closed loop paperless ticket distribution schemes. The DOJ should be skeptical of any effort by Ticketmaster to stifle other forms of ticketing competition.

The need for antitrust legislation

In no period in recent history has legislation to reform the antitrust laws been as critical to restoring effective antitrust enforcement. There are three pieces of legislation that have passed this Committee and are supported by major consumer groups. It should be a major priority for the House and for the Congress as a whole to have this legislation enacted.

• Pharmaceutical patent settlements. This House has demonstrated its leadership in addressing the pharmaceutical patent settlement problem by passing legislation, which would amend the antitrust laws to clarify the standards for litigating challenges of these settlements. As the FTC has noted, these settlements will cost consumers over $3.5 billion a year over the next decade. However, as many of the leading consumer groups have made clear, legislation amending the antitrust laws is a necessary but not sufficient approach to addressing the patent settlement problem. In essence, the pay for-delay problem occurs because of manipulation of the Hatch-Waxman exclusivity provision, and the most effective means of attacking that problem is amending that provision. Fortunately, Congressman Hastings has sponsored H.R. 3777, which would reform the exclusivity provision so that a later patent challenger that successfully challenges the patent could share the exclusivity period. A coalition of consumer groups, including Families USA, Consumers Union, U.S. PIRG and Consumer Federation of America, wrote to Congressional leadership earlier this year that “Expanding the exclusivity period is vitally important, since it removes the barrier to entry that has protected collusive settlements between brands and first-filing generics.” 
• Resale price maintenance. The Supreme Court’s 2006 decision in Leegin Creative Leather Products v. PSKS abandoned the rule that resale price maintenance — the practice of a manufacturer dictating resale prices to its distributors — was per se illegal. The results have been increased obstacles for discounters — especially Internet-based discounters — to aggressively compete and significantly higher prices for consumers. Fortunately, this Committee has passed H.R. 3190, which would reinstate the role of per se illegality. Major consumer groups, including the National Consumers League, the American Antitrust Institute, Consumers Union, U.S. PIRG and the Consumer Federation of America, support this legislation and have called upon Speaker Pelosi to make its passage a major priority.
• Repeal of the McCarran-Ferguson antitrust exemption for health insurers. The antitrust exemption for health insurers under the McCarran-Ferguson Act has simply outweighed its usefulness. Appropriately, the House has enacted legislation to repeal this exemption.

Conclusion

The antitrust enforcement agencies face unprecedented challenges in their enforcement missions because of the significant recent changes in this economy. Fortunately, President Obama has selected thoughtful leaders for these agencies and with the continued attention of your Committee the agencies will be more than capable of facing these challenges.

 Download the full testimony (pdf)

David Balto is a Senior Fellow at American Progress focusing on competition policy, intellectual property law, and health care.

Chairman Kohl, Ranking Member Hatch and other members of the Committee, I am David Balto, a Senior Fellow at the Center for American Progress where my work focuses on antitrust enforcement, intellectual property and health care. I am the former policy director of the Federal Trade Commission and have practiced antitrust law for over a quarter of a century. I am pleased to submit this testimony for today’s important hearing on oversight of our antitrust enforcement agencies.

We have reached a critical juncture in antitrust enforcement. Increasingly, the markets consumers depend upon the most—health care, consumer goods, telecommunications and airlines, just to name a few—are becoming more concentrated. The bulwarks of the competitive marketplace, choice and aggressive rivalry, have been diminished and many of these markets are plagued by deceptive conduct. Moreover, our typical reliance on an entirely “free market” unshackled from any form of regulation have been shattered by recent economic events. Increasingly, we recognize the need for more intensive and thoughtful regulation, as it is evident that the mantra, that deregulation or “regulation lite” is the best result is a recipe for consumer harm, not consumer welfare.

Fortunately, President Obama selected exceptional leaders for both the antitrust division of the Department of Justice and the Federal Trade Commission. Both Assistant Attorney General Christine Varney and FTC Chairman Jon Leibowitz bring a keen perception about the important role of antitrust enforcement as a bulwark to a competitive marketplace. Both are strong leaders who know how to make the most of the limited resources of their agencies and both are supported by talented career lawyers and economists who are dedicated to the mission of protecting consumers.

My testimony today provides observations on four important areas.

• The role of regulation and the need for antitrust enforcers to support and strengthen regulation. This has been demonstrated by an innovative collaboration between DOJ and USDA addressing chronic competitive problems in agriculture markets.
• The need for a realignment of enforcement priorities in health care to support health care reform. In particular, the need for far greater enforcement against health insurers and greater acceptance of collaboration by health care providers.
• The need for the enforcement agencies to use their full range of powers especially when investigating and challenging conduct by dominant firms.

The need for Congress to enact new legislation to eliminate manipulation of the exclusivity period in pharmaceutical patent settlements, declare resale price maintenance per se illegal, and eliminate the antitrust exemption for health insurance.

Download the full testimony (pdf)

SOURCE: AP/Pat Sullivan

The BP headquarters and site of their command center are shown on May 13, 2010 in Houston, TX. Well before the explosion on the Deepwater Horizon oil drilling rig, BP had a long history of lawbreaking that should have warned the federal government to refrain from entering into risky deals with the company.

Current regulations require that the federal government only do business with responsible businesses, but as the BP oil catastrophe illustrates, existing policies and procedures are woefully inadequate. As a result, BP PLC, which has a long record of breaking environmental, safety, fraud, and antitrust laws, was allowed to sign new lease agreements and get billions of dollars in new contracts. This puts workers, the environment, and taxpayers in harm’s way.

The “high-road” contracting proposal supported by the Center for American Progress Action Fund would ensure that the government has the power and information it needs to avoid doing business with irresponsible companies in order to prevent tragedies like the BP oil gusher from happening again.

Well before the explosion on the Deepwater Horizon oil drilling rig in the Gulf of Mexico, BP had a long history of lawbreaking that should have warned the federal government to refrain from entering into risky deals with the company. A complete record of BP’s violations is available at the Project on Government Oversight’s Federal Contractor Misconduct Database, but here are just a few examples:

• A 2005 explosion at a BP refinery in Texas City, Texas killed 15 workers. BP’s negligence and continuing failure to remedy safety violations at its refinery resulted in it receiving the two largest total penalties in the history of the Occupational Safety and Health Administration ($87 million in 2009 and $21 million in 2005). BP also agreed to plead guilty to a one-count felony violation of the Clean Air Act, requiring the company to pay a criminal fine of $50 million and serve three years of probation.

• A hole in BP’s Prudhoe Bay pipeline caused the largest ever oil spill on Alaska’s North Slope—200,000 gallons—in 2006, resulting in the temporary disruption of oil supplies to the United States. Investigators found that BP ignored warnings about corrosion in its pipelines and cut back on precautionary measures to save money. BP agreed to plead guilty to a violation of the Clean Water Act and paid $20 million in criminal fines, community service payments, and criminal restitution. Four years earlier, BP paid $150,000 in fines and penalties to Alaska’s Department of Environmental Conservation for delays in installing leak detection systems for the Prudhoe Bay crude oil transmission lines.

• BP agreed to defer prosecution in 2007 for a one-count criminal information, which charged the company with conspiring to violate the Commodity Exchange Act and to commit mail fraud and wire fraud after traders for the company conspired to manipulate and corner the market for one type of propane. BP paid $303 million as part of the agreement, including $100 million in criminal penalties.

Despite its failures to comply with the law, BP has continued to receive lucrative government leases and contracts. Since fiscal year 2008—after the Texas City refinery deaths, the Prudhoe Bay spill, and BP’s settlement (on October 25, 2007) for mail and wire fraud charges—the company received the Deepwater Horizon lease and $4.3 billion in new government contracts. The company extracted $16 billion worth of oil and gas from its U.S. facilities in 2009 alone.

The current process for ensuring that the government only does business with responsible companies has been a failure for several reasons. Debarment—the process by which the government bans irresponsible firms from doing business with it—is rarely used, is too slow a process, and occurs after the fact. And responsibility review—the government’s tool to pre-screen every company’s legal record on a case-by-case basis before it does business with it—is weak and inadequate. An enhanced responsibility review based on thorough information and rigorous analysis—as called for in the high-road contracting proposal—would address the key failings of the current process and help avoid incidents like the BP oil catastrophe along the Gulf Coast.

Why won’t debarment solve the problem?

While debarment is an important tool, the suspension and debarment process is seriously flawed. BP received the Deepwater Horizon lease in 2008 despite being subject to a limited form of debarment: After being convicted for a violation of the Clean Water Act for the Prudhoe Bay, Alaska oil spill, BP faced a “statutory debarment” that affected only the location where this violation occurred but not any of BP’s other locations. BP settled a statutory debarment case in 2000 and received another statutory debarment in 2009 for the Texas City refinery explosion.

The government is currently considering a discretionary debarment of BP, which could impose a much wider ban on transactions with the company. But the discretionary debarment process has proven ineffective because the government is reluctant to suspend or debar companies, especially large companies like BP. The federal government has considered a discretionary debarment for BP at several points over the years, but according to the former Environmental Protection Agency debarment attorney who ran the BP Prudhoe Bay case, “the Defense Department’s extreme need for BP” influenced the EPA to try to negotiate a compromise rather than seek discretionary debarment. Indeed, the same type of problem haunts other efforts at discretionary debarment:

• Only a handful of large contractors have been suspended since the 1990s: General Electric (for a period of five days); now defunct companies Worldcom, Enron, and Arthur Anderson; Boeing (which received multiple waivers to receive new contracts during its suspension); and IBM (for a period of eight days in 2008), according to the Project on Government Oversight.
• Debarment officials may only impose debarment to “protect the Government’s interest,” not as a punishment. In weighing the risks of future business with companies such as BP against the value of future business with the megacontractor, officials will consider whether “the medicine is worse than the disease,” says Robert Meunier, former chair of the President’s Interagency Committee on Debarment and Suspension.
• According to Robert Burton, former deputy administrator of the Office of Federal Procurement Policy during the Bush administration, “It is not hard to block a debarment if an argument exists that it would harm the government, especially on national security grounds.”

Even if the government actually goes through with debarment, the process is quite slow and BP could still continue to do business with the government. One agency review found that it takes 300 days to reach a suspension decision and more than 400 days to decide a debarment case on average, even though agency guidelines set a 45-day deadline for making such determinations. Moreover, debarred companies may continue to receive federal contracts and offshore leases if the agency head determines that there is a “compelling reason” to do so.

Fixing the suspension and debarment process would help prevent the government from continuing to do business with companies that persistently violate the law. But the hurdles to effectively using the process are so high that additional tools, such as enhanced responsibility screening, are needed.

What is wrong with the existing responsibility review?

Officials at individual government agencies are supposed to evaluate every company’s responsibility record before awarding contracts or conducting other types of transactions. Contracting rules require federal agencies to restrict contracting to responsible companies that “have a satisfactory record of integrity and business ethics.” And the Minerals Management Service or MMS regulations require offshore oil leases to be awarded only to qualified bidders that have an acceptable “operating performance.”

Yet inadequate information and guidance on how to determine responsibility hampers contracting officers and other agency officials’ ability to implement these rules. As a result, rather than a thorough pre-screening, the responsibility process is more of a check-the-box exercise that allows serious and repeat lawbreakers to continue receiving contracts and leases. Consider these facts:

• The guidelines for determining whether a company bidding for a federal contract has “a satisfactory record of integrity and business ethics,” are unclear. While President Bill Clinton’s “contractor responsibility rule” would have clarified that companies should be prevented from receiving contracts for “repeated, pervasive, or significant violations of the law,” the rule was never implemented. As one of his first acts as president, George W. Bush put the rule on hold and then revoked it 11 months later. Yet even if clearer guidelines existed, the current responsibility process would still be deeply flawed.
• Similarly, the MMS requirement that leases be awarded only to qualified bidders that have an acceptable “operating performance” lacks clear standards. In determining if a company’s operating performance is unacceptable, MMS is supposed to consider accidents, pollution events and environmental damages, incidents of noncompliance, civil penalties, failure to adhere to lease obligations, and any other relevant factors. But the regulations contain no guidance on how to evaluate these factors. According to MMS, only one company in recent history has been disqualified from bidding on an offshore oil lease.
• The availability of information to perform the responsibility review is improving—thanks to a new contractor responsibility database—but the database excludes key information such as violations of labor and employment law and information on recipients’ private sector compliance history. Instead, the new database only includes the legal violations committed by a company while working on federal contracts or grants. This means that contracting officers may miss more than half the story about a company’s record of compliance.
• While information is important, it needs to be properly analyzed in order to be used effectively. Although contracting officers are required to review the records contained in the new database before making responsibility decisions, the process will not provide meaningful analysis of legal violations. Without sufficient analysis of past legal violations, contracting officers will be forced to undertake the difficult and inefficient process of sifting through millions of legal records and making decisions about whether past violations are enough to find a contractor not responsible.

How would the high-road contracting proposal’s enhanced responsibility review prevent future accidents?

The high-road contracting proposal would provide for a strong responsibility review and pre-screen companies based on their overall regulatory record, including the company’s compliance with workplace, environmental, and tax laws. By making legal compliance information and guidance available to contracting officials whenever award of a contract or lease is under consideration, all companies will be required to demonstrate they are fit to do business with the government—not just the tiny number who are presently singled out for debarment and suspension proceedings. This system would weed out bad actors and help prevent accidents like the Deepwater Horizon tragedy. Note that the high-road proposal not only helps set a floor, but also contains a second prong that attempts to raise standards by providing incentives.

Similar state and local policies demonstrate that strong responsibility policies deliver more reliable and higher-quality goods and services for government, allow responsible companies to compete on a fair playing field, and minimize the hidden costs to taxpayers that result when employers violate the law.Specifically, the high-road proposal would create better tools to help contracting officers and agency officials that make responsibility determinations by:

• Clarifying the standards for evaluating whether bidders demonstrate a satisfactory responsibility record
• Strengthening the contractor responsibility database by including records of all legal violations—including labor and employment law violations—and make it accessible to officials considering nonprocurement transactions
• Requiring that the appropriate government agency supply guidance to government procurement officials on how to interpret a company’s legal record
• Increasing public access to responsibility information

BP’s gushing oil catastrophe in the Gulf of Mexico is proof positive that our nation needs to enact the high-road contracting proposal and get the program up and running as soon as possible. Our current federal contracting process leaves the government blindfolded when it comes to selecting responsible contractors. We simply cannot risk another breakdown of the federal contracting system.

David Madland is Director of the American Worker Project at the Center for American Progress. Karla Walter is a senior policy analyst at the Center. Go to the American Worker Project at the Center for American Progress Action Fund to read more about these policy recommendations and analysis.

SOURCE: AP/Darron Cummings

Guests enter WellPoint, Inc. headquarters in a Indianapolis.

Download this memo (pdf)

Recent premium changes in the individual market from WellPoint Inc. subsidiaries by state

The recent news that WellPoint’s Anthem Blue Cross health insurance company in California wanted to increase premiums for individual policyholders as much as 39 percent is further evidence the current health system is not sustainable. And a survey by the Center for American Progress Action Fund found that California isn’t the only state where WellPoint is hiking individual premium rates by double-digit percentages. In fact, double-digit hikes have been implemented or are pending in at least 11 other states among the 14 where WellPoint’s Blue Cross Blue Shield companies are active: California, Colorado, Connecticut, Georgia, Indiana, Maine, Nevada, New Hampshire, New York, Virginia, and Wisconsin.

In Maine, where WellPoint-owned Anthem Blue Cross and Blue Shield is by far the largest insurer, the company is seeking to raise individual rates an average of 23 percent this year. This comes after five consecutive years of double-digit premium increases by the company on these policies.

In Indiana, Anthem Blue Cross Blue Shield is increasing rates an average of 21 percent this year, hitting some individuals with hikes of up to 50 percent. In Colorado, the big WellPoint-owned insurer is boosting individual premiums by an average of 19.9 percent this year.

And Connecticut state insurance regulators allowed Anthem Blue Cross Blue Shield to impose a 20 percent hike last year after the WellPoint-owned insurer sought permission to hike rates on individual policies by 22 percent to 32 percent.

There are also signs that WellPoint has substantially increased rates on “small group” policies, which cover small businesses with up to 50 employees. Data wasn’t immediately available in many states, but in New York WellPoint is increasing premiums on small group policies by up to 28.6 percent this year. Small group policies in New Hampshire went up 17 percent in 2009.

The company now called WellPoint grew rapidly starting in the late 1990s and has become the nation’s largest health insurer in terms of the total number of people covered under both individual and group policies. Anthem Inc. bought WellPoint Health Networks in 2004 and adopted “WellPoint” as its corporate name. WellPoint ranks 32nd on the 2009 Fortune 500 list of the largest U.S. companies. It grew by acquiring a string of big, nonprofit Blue Cross Blue Shield companies, which it turned into a profit-making business. WellPoint reported a $4.7 billion profit for 2009, nearly double that in 2008, although most of the 2009 increase came from the $2.2 billion sale of a unit that managed drug coverage benefits.

Action at the state level

Insurance regulators and governors in a handful of states where WellPoint has a significant presence are beginning to speak out against big rate hikes by WellPoint and other insurers.

WellPoint’s Anthem Blue Cross Blue Shield in Ohio had to reduce rates by 44.2 percent on its individual open enrollment coverage, according to the Ohio Insurance Department, because of a law that went into effect on January 1, 2010. Open enrollment is a guaranteed issue coverage sold in the individual market that insurers must offer to people with pre-existing medical conditions, and is different from coverage sold to most individuals. Some nonopen enrollment coverage decreased by 8 percent.

Indiana lawmakers have introduced a bill requiring insurers to disclose information on rate increases, including a breakdown of how much premium dollars are spent on administration costs versus paid out in benefits.Connecticut lawmakers are also looking at legislation that reviews premium rate increases.

State officials in at least two other states—New York and Georgia—are pressing their legislatures to repeal 1990s laws that deregulated health insurance premiums. Insurance department officials in those two states said in interviews that their efforts are in response to what they view as a pattern of “excessive” premium increases.

In response to a concerted push by the health insurance industry, many states agreed in the 1990s to deregulate premiums and give up authority for state insurance departments to review and approve rate hikes in advance. At least 22 states now allow rate hikes to go into effect without any prior review by regulators.

Most of these states have adopted a “file and use” regime, in which insurers are free to make rate changes after merely filing notice with the states. Regulators in these states can require premium refunds to policyholders after rate hikes have gone into effect, and actual experience shows excessive profit margins for the insurers. Yet a 2009 report from the New York State Insurance Department said that many insurers falsify or fudge data to hide such profits.

The need for reform

The rate hikes in California have resulted in an array of criticism from lawmakers. President Barack Obama called the planned California hikes “jaw dropping” in his February 20 weekly radio address, and he called in his health care proposal unveiled on February 22 for a newly created federal Health Insurance Rate Authority to regulate rates. This new body would have the power to overrule “unreasonable and unjustified” premium increases. This proposal is similar to legislation introduced by Sen. Dianne Feinstein (D-CA).And the House bill includes provisions requiring insurance companies to disclose the justifications of their rate increases.

Reps. Henry Waxman (D-CA) and Bart Stupak (D-MI) have called a hearing on February 24 in the House Oversight and Investigations subcommittee to look into the California rate hikes. In the wake of criticism, Anthem announced on February 13 that it will delay putting the hikes into effect until at least May 1.

Some health reform advocates and insurance regulators contend that many of the recent big increases have been imposed just to boost insurers’ profits. They say that companies can manipulate reported numbers to make it seem that profits on individual plans are smaller than they actually are. One method involves inflating actuarial estimates of the costs of medical care that policyholders already have incurred, but for which they haven’t yet filed claims. These estimates of so-called “incurred but not reported” claims are included in the companies’ calculations profit margins on policies.

Recent earnings reports show that the health insurance industry has been doing well overall despite the downturn in the economy. The nation’s five largest health insurers increased their profits by 56 percent in 2009 to $12.2 billion.

WellPoint has said that the California rate hikes are necessary to stave off losses. WellPoint claimed in a public statement on February 13 that enrollment by healthy individuals in the state was dropping because of the weak economy. “We are experiencing a higher proportion of healthy individuals choosing not to enroll, leaving an insured pool that utilizes significantly more services,” the statement explained.

But Reps. Waxman and Stupak questioned WellPoint’s veracity. In a letter to WellPoint, the lawmakers said last week that data the company provided to the National Association of Insurance Commissioners showed that individual enrollment in Anthem Blue Cross in California hadn’t dropped, but actually increased by more than 7 percent in 2009.

WellPoint has denied that its planned hikes are unreasonable and says the controversy is overblown. “The rate increases being reported in the media relate only to the individual insurance market, which represents less than 10 percent of California members,” the company said in a public statement. And in response to questions from Health and Human Services Secretary Kathleen Sebelius, Brian Sassi, head of WellPoint’s Consumer Business Unit, said in a letter that the requested California rate hike is justified because “Anthem’s profit margin in California is in-line with and below that of many of our competitors, including our two large not-for-profit competitors.”

America’s Health Insurance Plans, the health insurance lobbying organization, blamed recent premium increases on rising medical costs. AHIP President Karen Ignagni said, “Health insurance premiums are increasing in the individual market because of soaring medical costs and because younger and healthier people are dropping their coverage due to the economy.”

Conclusion

WellPoint’s double-digit premium rate increases in the individual market are further evidence that health reform is needed. Reform is crucial for those in the individual market since premium rates are less stable and it is more difficult for some to purchase coverage. Insurance companies are still allowed to drop coverage when a person gets sick and to deny coverage based on a pre-existing condition. The health reform bills currently before Congress take steps to rein in insurance company abuses, make them more transparent and hold them accountable, and make health coverage more affordable to those who need it most.

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*Previously, this sentence read, "Average individual rates are expected to decline 40 percent in 2010 due to a new state law that went into effect in 2010.

SOURCE: AP/Winslow Townson

Legislation is needed to address the increasing problem of the ownership of pharmacy benefit managers, PBMs, by pharmacy chains. These relationships, like that between CVS and Caremark,  lead to less competition, greater fraud and deception, and harm to health plans, employers and unions, and consumers.

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Chairman Buehrer, Vice Chair Faber and Ranking Member Schiavoni, thank you for the opportunity to testify today in support of Senator Patton’s bill, Senate Bill 154. My testimony today documents the tremendous need for legislation to address the increasing problem of the ownership of pharmacy benefit managers, PBMs, by pharmacy chains and the need for regulation to stop these relationships which lead to less competition, greater fraud and deception, and harm to health plans, employers and unions, and consumers.

I am a Senior Fellow at the Center for American Progress Action Fund and have practiced antitrust law for over 25 years, both in the government and in private practice. Prior to entering private practice, I was at the Federal Trade Commission as the policy director of the Office of Policy and Evaluation for the Bureau of Competition of the Federal Trade Commission and attorney advisor to Chairman Robert Pitofsky. At the FTC, I helped direct the first antitrust cases against pharmacy benefit managers, PBMs.  I have counseled health plans, PBMs, pharmacies, and consumers on PBM competition and consumer protection issues. My comments are based on those decades of enforcement and real world experience.

S.B. 154 is an innovative and important piece of legislation. The business of pharmacy benefit managers is enormously complex: PBMs play a central role in financial transactions involving plan sponsors, drug manufacturers, and pharmacies. For this system to work effectively PBMs must be independent—what plans are fundamentally purchasing is the services of an “honest broker” trying to seek the lowest prices and best services from pharmaceutical manufacturers and pharmacies. When the PBM is owned by the entity it is supposed to bargain with there is an inherent conflict of interest, which can lead to fraud, deception, anticompetitive conduct, and higher prices. That is why, when pharmaceutical manufacturers obtained PBMs in the 1990’s, the FTC acted to eliminate those conflicts of interest. Then it challenged the acquisition of PCS by Lilly and Medco by Merck, because of the concern that having a manufacturer own a PBM would be giving the “fox the keys to the hen house door”—and would lead to higher prices for consumers.

In recent years, the major PBMs—including those with a clear conflict of interest in their cross-ownership with pharmacies—have engaged in a variety of anticompetitive and anticonsumer practices. S.B. 154 appropriately addresses these practices, and I urge the committee to enact it.

PBMs: An anticompetitive market

Although PBMs offer a great deal of promise in terms of the potential to control pharmaceutical costs, there is a pattern of conflicts of interest, self-dealing, and anticompetitive conduct, all of which ultimately means that Ohio consumers pay far more for drugs than necessary. The dominant PBMs (Merck, Caremark, and Express Scripts) have been plagued with opaque business practices, limited market competition, and widespread allegations of fraud. The facts are clear: while PBMs may well prove a necessary expedient in lowering the cost of healthcare, measures must be taken to ensure that they operate as they are supposed to.

I have a simple and vital message for this committee: there is a tremendous need for reform in the PBM market. The fundamental elements for a competitive market are transparency, choice, and a lack of conflicts of interest. This is especially true when dealing with health care intermediaries such as PBMs and health insurers where information may be difficult to access, there are agency relationships, and securing adequate information may be difficult.

Why are choice, transparency, and a lack of conflicts of interest important? It should seem obvious. Consumers need meaningful alternatives to force competitors to vie for their loyalty by offering lower prices and better services. Transparency is necessary for consumers to evaluate products carefully, to make informed choices, and to secure the full range of services they desire.

When dealing with intermediaries, it is particularly critical that there are no conflicts of interest. An intermediary such as a health insurer or PBM is fundamentally acting as a fiduciary to the plan it serves. In the PBM market, the service a PBM provides is that of being an “honest broker” bargaining to secure the lowest price for drugs and drug dispensing services. When a PBM has a relationship with either a drug company or a pharmacy chain, or has its own pharmacy dispensing operations, it is effectively serving two masters.

Only where these three elements—choice, transparency, and lack of conflicts of interest—are present can we expect free market forces to lead to the best products, with the greatest services at the lowest cost. Where these factors are absent, consumers suffer from higher prices, less service, and less choice.

Unfortunately, in all three respects, PBM markets do not function as effectively as they could. Few markets are as concentrated, opaque and complex, and subject to rampant anticompetitive and deceptive conduct as PBM markets. Regulation is necessary to ensure that PBMs cannot exploit consumers, health plans, employers and the state.

Increasing conflicts of interest

Today the committee will hear testimony of the problematic conduct CVS has engaged in after acquiring Caremark. This combination of the largest pharmacy chain with the largest PBM poses significant competitive concerns.

CVS’s ownership of Caremark distorts Caremark’s incentive and ability to be an honest broker. There is a clear conflict of interest and an ability to manipulate the relationship to harm CVS’s rivals (other pharmacies) and consumers. Moreover, controlling health care costs is dependent on a PBM seeking the lowest costs from all entities it deals with. Caremark, because it is a CVS subsidiary, is unlikely to demand the lowest costs from its parent when negotiating for the cost of drug dispensing. Nor is it likely to aggressively audit its parent. I will discuss these problems further throughout my testimony.

Ongoing fraudulent and deceptive conduct

No other segment of the health care market has such an egregious record of consumer protection violations as the PBM market. Between 2004 and 2008, the three major PBMs have been the subject of six major federal or multidistrict cases over allegations of fraud; misrepresentation to plan sponsors, patients, and providers; unjust enrichment through secret kickback schemes; and failure to meet ethical and safety standards. These cases listed below, resulted in over $371.9 million in damages to states, plans, and patients so far.

• United States v. Merck & Co., Inc., et.al—$184.1 million in damages for government fraud, secret rebates, drug switching, and failure to meet state quality of care standards.
• United States v. AdvancePCS (now part of CVS/Caremark)—$137.5 million in damages for kickbacks, submission of false claims, and other rebate issues.
• United States v. Caremark, Inc.—pending suit alleging submission of reverse false claims to government-funded programs.
• State Attorneys General v. Caremark, Inc.—$41 million in damages for deceptive trade practices, drug switching, and repacking.
• State Attorneys General v. Express Scripts—$9.5 million for drug switching and illegally retaining rebates and spread profits and discounts from plans.

Caremark and its predecessor, AdvancePCS, paid nearly half of these damages.

The state of Ohio played a key role in uncovering problematic conduct by PBMs back in 2003, when the state sued Medco, one of the “Big Three” PBMs, for a number of fraudulent practices. The state alleged that Medco overcharged the State Teachers Retirement System tens of millions of dollars for dispensing fees, improperly dispensed drugs, and steered patients, pharmacists and physicians to choose higher-cost drugs rather than seeking the least expensive drug for the plan. In 2005, after trial, Medco was found liable and paid $7.8 million in damages. Here, we have a clear example of how, without transparency, PBMS can take advantage of the system at an enormous cost to plan sponsors and consumers. By passing S.B. 154, the state of Ohio could continue to protect consumers by preventing a host of anticompetitive and deceptive practices.

The PBM-pharmacy model hurts consumers and plan sponsors

A PBM pursues various goals: to reduce costs for plan sponsors; to ensure that plan members are satisfied with their pharmacy benefit; and to earn profits, something which should be a function of how well it performs the first two tasks. Unlike other major PBMs, a PBM that is owned by a pharmacy chain, like CVS Caremark, has another priority that’s entirely at odds with the services it provides to plan sponsors and plan members, and one that fundamentally disrupts the ability of a PBM to act as an honest broker.

CVS Caremark is the largest PBM owned by a pharmacy, and when the two entities merged in 2007, there was widespread concern that the company would exploit its relationships with consumers to drive market share, leading to increased prices and diminished quality. Many of these concerns have materialized in the company’s practices, which have aroused outcry from consumer groups and pharmacists, leading the FTC to open a formal investigation of the company.

CVS Caremark, as a PBM-pharmacy, is concerned first and foremost with getting customers into its retail pharmacies. This is why CVS Caremark has instituted the “Maintenance Choice” program, which requires many plans’ members to use a CVS retail or mail-order pharmacy for a drug after its second fill. The term “choice” is an interesting one—CVS is giving the consumers who have chosen their pharmacy because it offers the best combination of service and price the so-called “choice” of having to move their prescriptions to CVS. It does not sound like much of a choice to me, and that’s why scores of consumers and public interest groups have been complaining about Maintenance Choice to the FTC and Congress.

CVS has also used various incentive programs to entice or force other plans’ members to use CVS pharmacies. I have learned from consumers and pharmacists around the country that CVS Caremark is more concerned with getting potential customers into their pharmacies than ensuring the patient has access to their drugs when they are needed. For example, when plans require patients to use a restricted network or mail order, patients might need the occasional emergency refill at their local pharmacy. Pharmacists have told me that CVS Caremark is less likely to allow emergency refills, even if it means the patient needs to drive 50 miles to the nearest CVS in order to obtain their drugs in time.

This certainly does not demonstrate a concern with patient safety and health. For the many patients across the country who are required to use a CVS pharmacy, where they are highly unlikely to get the personalized care that a community pharmacist or a pharmacy with which they have a long-term relationship offers, this disregard for patient care is stark.

Over the course of the past year, my office has been working with pharmacy groups and consumer groups that have raised concerns about the anticompetitive and deceptive conduct of CVS Caremark. Some of the problematic practices reported include:

• Using aggressive marketing tactics to steer patients to CVS pharmacies.
• Cutting off patients’ access to affordable drugs to force them to use a CVS pharmacy, even if it means the patient must wait for a mail order delivery or drive a long distance.
• Charging patients and plan sponsors more for prescription drugs when the patient uses a CVS pharmacy.
• Taking advantage of access to independent pharmacies’ claims data in order to target their customers and steer them to CVS pharmacies.

While individual consumers are the direct targets of CVS Caremark’s deceptive practices, plan sponsors, including public and private entities, have also found that CVS Caremark does not have their best interest in mind. Cutting plan sponsors’ costs certainly conflicts with CVS Caremark’s intent to earn the highest profits through its own pharmacy operations. Typically, PBMs and pharmacies negotiate for the reimbursement rate the plan sponsor will ultimately pay for individual drug fills. This reimbursement rate is based upon the enormously complex nationwide system of drug pricing. Plan sponsors expect their PBM to play hardball with each retail or mail order pharmacy in their members’ network to seek low reimbursement rates. CVS Caremark, however, has no reason to bargain with itself for lower reimbursement rates when it would benefit from higher reimbursements, which are paid for entirely by the plan sponsor.

When dealing with any other PBM, a sophisticated plan sponsor with audit rights can determine whether or not the PBM is “playing the spread.” With CVS Caremark, however, there’s no need to “play the spread” since the PBM and pharmacy are one and the same. Not only is there no need to “play the spread,” but there’s also no way for a plan sponsor to know what CVS Caremark’s real costs are. This makes it much more difficult for a plan sponsor to decide whether or not they are getting a good deal by doing business with CVS Caremark.

Eliminating a crucial check on the system

Competition and choice are crucial for a market to work effectively. Currently consumers in Ohio make a choice in how they value pharmacy services. Some choose community pharmacies, others who value one-stop shopping choose their local supermarkets, and others choose chains. This choice is important because competitors have to respond to this choice by improving services and lowering prices. One important aspect of pharmacy services is the service pharmacists provide in assisting consumers in dealing with insurance companies and PBMs. In fact the pharmacist, because of this assistance is effectively the face of the pharmacy benefit. From the countless conversations I have had with pharmacists, one thing is clear: PBMs are enormously complex, and patients typically seek help from their pharmacist to navigate their pharmacy benefit. The majority of consumers never directly interact with their PBM or insurance company, and pharmacists are their only connection to the vast array or rules and agreements that determine their prescription drug benefit. For these consumers, pharmacists act as an advocate, providing information on what limitations the PBM may be imposing on the patient, the co-pay the PBM has determined the patient will pay, et cetera. When a particular policy is problematic for the patient, the pharmacist will often work through it with the patient, providing explanation and even advocating on behalf of the patient with the PBM—going far beyond the tasks for which the pharmacist is paid.

In effect, pharmacists provide a necessary check on the complex system of PBMs. That is another reason why this legislation is so necessary.

Conclusion

PBMs can play an important role in controlling health care costs, but this depends on a competitive market supported by choice, transparency, and a lack of conflict of interest. Where these are absent, legislation is appropriate to protect the market and competition. Preventing these conflicts of interest arising from pharmacy chain ownership of PBMs is important to protect plans and consumers.

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SOURCE: AP/Amy Sancetta

Patty Porter works the front counter of the tiny Hall of Fame Cafe, in downtown Wheeling, West Virginia. She and her husband, a receiving manager at Kmart, count themselves among the Americans who lack adequate health insurance coverage. David Balto believes the mission of the Federal Trade Commission and the DOJ's Antitrust Division is vital to protecting consumers and health insurance competition.

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Chairman Johnson, Ranking Member Coble and other members of the Subcommittee, I appreciate the opportunity to come before you today and testify about health insurance competition and consumer protection enforcement. As a former antitrust enforcement official I strongly believe the mission of the Federal Trade Commission and Antitrust Division of the Department of Justice is vital to protecting consumers and competition. However in the past administration the priorities of those enforcement agencies were not effectively aligned with the critical priorities in the health care market, with the result that there is substantial anticompetitive and fraudulent activity in the health insurance market that raises prices and costs for consumers and the American taxpayer.

Today’s hearing is on “H.R. 3596, the ‘Health Insurance Industry Antitrust Enforcement Act of 2009’” which will amend the McCarran-Ferguson Act to provide that certain anticompetitive conduct by health insurers and medical malpractice insurers is not immune under the act. That is a good first step to reforming health insurance markets. But the ability for health care reform to succeed depends upon all aspects of health care markets to function effectively, and by any measure, the health insurance market is broken–with supracompetitive profits, escalating numbers of uninsured, an epidemic of deceptive and fraudulent conduct, and rapidly escalating costs. Today, 47 million Americans are uninsured, while those who are insured have seen their premiums rise over 120 percent in the past decade. Meanwhile, 10 of the largest health insurers saw their profits balloon from $2.4 billion in 2000 to $13 billion in 2007. There have been dozens of state enforcement actions securing potentially over $1 billion  in fines and penalties. As I describe in my testimony, for health care reform to work we need greater congressional oversight and investigation of health insurers, comprehensive regulatory reform, and a realignment of priorities at the DOJ and FTC.

Former Justice Brandeis said that sunlight is the best disinfectant and Congress deserves substantial credit for the attention it has given to the competitive and consumer protection problems in health insurance markets. Members on either side of the aisle may disagree about the scope of health care reform, but I would hope there is little dispute that recent congressional hearings have uncovered a disturbing pattern of egregious, deceptive, fraudulent and anticompetitive conduct in health insurance markets. That conduct must be stopped.

Last month, the Domestic Policy Subcommittee of the House Oversight and Government Reform Committee held an important hearing titled “Between You and Your Doctor: The Private Health Insurance Bureaucracy.” In this hearing, consumers came forward and courageously told their stories about the egregious practices health insurers regularly engage in to avoid paying for health care and to ensure excessively high profits.

• Mark Gendernalik of West Hills, California, described how his health insurer created obstacles to his efforts to get his three-month-old daughter proper treatment for infantile spasms: “Consumers should not have to endure this kind of life-and-health threatening hassle. I hope Congress will find better ways to ensure that insurers deliver on the care they promise. The stress of constantly having to hold the HMO and their agents to their agreed upon obligations has relegated me to the role of my daughter’s care manager, and all too often robbed me of my role as Sidney’s loving daddy.”
• Errin C. Ackley of Red Lodge, Montana described her battle against Blue Cross Blue Shield of Montana to secure care for her father who was dying of Chronic Lymphocytic Leukemia. BCBSMT claimed that a transplant was still “investigational,” and it took four months of letter writing, phone calls, and presentations of scientific data on the efficacy of the procedure, and legal work to convince the insurer to cover the procedure. After four months’ delay, her father received the transplant but passed away just a few months later. Erinn testified, “Would there have been a different end to my dad’s story if he had been given approval for the first transplant request in April 2006? …We don’t know. What we do know is that his chance for survival most assuredly did not increase because . . . Blue Cross Blue Shield of Montana built the bureaucratic roadblocks that changed the course of my father’s treatment and made him wait four months for his potentially life-saving bone marrow transplant.”
• Wendell Potter, a former insurance executive, revealed the most basic motivation for these practices, one that will not necessarily disappear with the regulations of health care reform. Potter testified, “To win the favor of powerful [investment] analysts, for-profit insurers must prove that… the portion of the premium going to medical costs is falling… To help meet Wall Street’s relentless profit expectations, insurers routinely dump policyholders who are less profitable or who get sick.” This practice, known as “purging,” allows insurers to avoid paying for health care for those who need it most, and instead collect premiums with the explicit intention of avoiding paying for care.

Health insurance companies mounted every obstacle possible to Mark’s daughter’s treatment and to Erinn’s father’s bone marrow transplant. As Wendell Potter documented their incentives are to satisfy Wall Street, to deny care, and to maximize profits. Even Judge Richard Posner has observed that the “incentive [of some insurers] is to keep you healthy if it can but if you get very sick, and are unlikely to recover to a healthy state involving few medical expenses, to let you die as quickly and cheaply as possible.”

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SOURCE: AP/Paul Sakuma

The Google Books project is a remarkable transforming achievement that has tremendous potential to democratize information and knowledge.

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Mr. Chairman, Ranking Member Smith, and other members of the Committee, I am David Balto, a Senior Fellow at the Center for American Progress Action Fund. I appreciate the privilege of testifying before you today on Competition and Commerce in Digital Books which focuses largely on the Google Books project and the proposed settlement of litigation between Google and authors and publishers. As many of you know, I had a long career as a trial attorney in the Antitrust Division of the Justice Department and as the policy director of the Federal Trade Commission, and I frequently represent consumer and public interest groups in antitrust and intellectual property matters and testimony before Congress. Based on my extensive review of the proposed settlement and the filings in the litigation, I strongly believe that the settlement in the Google Books project litigation does not pose significant competitive concerns and should be approved.

I have two simple points to my testimony. The Google Books project is a remarkable transforming achievement that we should all recognize has tremendous potential to democratize information and knowledge. I do not think anyone can dispute that. Second, the competitive concerns raised about specific narrow provisions of the settlement are not a basis to reject the settlement.

One of the greatest achievements in the last several years is the Google Books project, which scanned millions of books, many of which were available in only a handful of the most preeminent research libraries. This project led to class action litigation brought by publishers and authors charging a violation of copyright laws. To resolve the litigation, the protagonists entered into a settlement, which created a Book Rights Registry to make sure authors are appropriately compensated for their works. This settlement is currently under review by a federal district court.

The tremendous benefits from the Google Books project

The Internet is a great device for creating new markets, democratizing knowledge, and increasing competition. Google Books takes full advantage of this opportunity to expand the world’s access to knowledge. Anyone can simply go on the web and, through Google Books, reach an almost endless array of information on nearly any topic. At the start of the 20th century, Andrew Carnegie spent an enormous sum to build the first truly public libraries in this country—before then, our libraries were for the most part only available to the educated and affluent. Google has taken on tremendous risk and expense to perform a comparable service, one that creates a virtual library of unprecedented proportions to millions of people, regardless of location, economic status, or resources. Thanks to the Google Books project, any individual anywhere in the United States will have access to an unprecedented corpus of information.

Under the settlement, Google Books will put out-of-print, expensive, or otherwise rare and hard-to-come-by texts online at reasonable prices. Libraries across the country will give people free access to Google Books: Google has pledged to give all public and university libraries across the country free, full-text, online viewing of millions of books at designated computers. Low-income, isolated, and underserved communities will have access to books that would have previously required enormous effort to track down. Lateef Mtima, a law professor at Howard University School of Law, has said that the settlement, by giving broad access to books and research materials to low-income communities, will “bridge the digital divide.” Google’s efforts will have the effect of expanding the body of knowledge readily available to the public, and make it even more accessible to people with disabilities and low-income or isolated populations.

It is not surprising that numerous public interest organizations and consumer rights advocacy groups have come out in favor of the settlement, including:

• United States Students Association
• American Association of People with Disabilities
• League of United Latin American Citizens
• Leadership Conference on Civil Rights
• National Federation of the Blind

Just to give one example of the remarkable consumer benefits, just consider the world of people with visual impairments—approximately 15-30 million in the United States alone. Google has committed to providing access to these users so that they “have a substantially similar user experience as users without print disabilities.” Google’s commitment to making all books available to people with visual impairments through screen enlargement, screen reader, and Braille display technologies will completely transform the educational experience for the blind and visually impaired in this country and, indeed, around the world. The National Federation of the Blind, the nation’s leading advocate for access to information by the blind, has stated that the settlement will have “a profound and positive impact on the ability of blind people to access the printed word.”

The settlement will also provide researchers with the ability to analyze books and language in ways that were previously impossible. They will, for example, be able to search the entire digital library corpus to compare language and cultural development, and to track literary developments across countries. The potential to unlock knowledge is seemingly unlimited. Not surprisingly, universities around the country have overwhelmingly acknowledged these benefits. According to Michael Keller, Stanford University’s librarian and publisher of the Stanford University Press, “[t]he settlement promises to change profoundly the level of access that may be afforded to the printed cultural record, so much of which is presently available to those who are able to visit one of the world’s great libraries.”

As a public interest attorney, I represent many who often cannot afford to purchase books and who do not live near Harvard or Stanford or other research libraries. For all of these people, and millions more, the settlement will unleash greater access to a tremendous amount of information. The public benefit of the settlement is, to me, unmistakable.

Imagine if you are an energetic and inquisitive student at the Wayne State University, or at a community college in Alaska, and you are doing research on an obscure medieval text. Currently, you might have to travel to one of the great research libraries in Cambridge or Stanford to conduct research. Now, the corpus of many of the major research libraries will be only a click away on your computer.

The Google Books project is a tremendous achievement. The scope of that achievement and its potential to open access and information for millions of consumers should be considered as the committee and the courts consider the limited competitive issues raised by the settlement.

Competitive concerns of the settlement are unfounded

A tremendous amount of ink and paper has been spent raising the specter that the Google Books settlement will be harmful to consumers. In fact, some of the witnesses testifying today have claimed that Google will become a “cartel ringmaster” and coordinate a cartel of publishers and authors, a “monopolist” and charge excessive prices to consumers for digital books, and a “monopsonist” and decrease compensation to authors, thus resulting in the reduction of output of books. As I explain in a moment, none of these labels are supported by real world facts.

As I explain in my testimony it is easy, but misleading, to confuse popularity with market power (i.e., the ability to harm consumers by raising price). Google may have popular products, but it has not harmed consumers. To paraphrase Senator Lloyd Bentsen in the Bentsen-Quayle vice-presidential debate in 1988: “I know monopolists, I have sued monopolists, and Google is no monopolist.”

My experience of over 15 years as an antitrust enforcer taught me to be cautious about substituting labels for real antitrust analysis. Antitrust labels may be attractive to the press or in a public debate, but they are not a substitute for analysis. As Justice Byron White cautioned in the Broadcast Music case thirty years ago, “easy labels do not always supply ready answers” to the question of whether conduct is illegal under the antitrust laws. Anyone looking at the unique issues in the settlement should be guided by that cautionary instruction. Rather than relying on easy labels, the critical question in analyzing whether conduct is anticompetitive is what is the incentive and ability for a firm to engage in the alleged anticompetitive conduct?

To answer that question we need look no further than Google’s conduct in the numerous markets it currently participates in. Certainly, Google is large, innovative, and remarkably popular in search. But one should not confuse size and popularity with market power. Google does not charge consumers for the use of its very popular search product. That is because it lacks the incentive to charge for its use—its product is valuable to advertisers because of the numbers of users of the product. It also lacks the ability to charge because of the numerous free search alternatives also in the market. When it comes to allegations of anticompetitive conduct concerning Google search, the proof is in the pudding: Google lacks the incentive and ability to harm consumers.

So let’s return to the claims of the critics of the settlement. Does Google, through the Book Rights Registry, have the incentive and ability to act as a “cartel ringmaster” directing thousands of authors or publishers in some sort of cartel waltz and facilitating a price increase? No. Over 95 percent of Google’s revenue is through the sale of search advertising. It has no incentive to artificially increase book prices since that will undermine its advertising revenue. The amount of revenue Google would earn from trying to form or facilitate a publisher or author cartel is inconsequential compared to the advertising revenue they would lose. “Cartel ringmaster” is a job Google would never apply for.

The critics of the settlement create the specter of harm by conflating Google and the Book Rights Registry as if they were one entity. They are not. The board of the registry will be appointed by authors and publishers. The registry will be charged with getting the most money for authors, whereas Google will be interested in books being as inexpensive as possible, because it wants to increase usage of its site and search tools, so it can make money the way it usually makes money: advertising. Rather than be in a collusive relationship, Google and the registry are more likely to be in an adversarial relationship.

Would Google act as a “monopolist” and drive up the costs of digital publications offered through the registry? Again, acting in this fashion would be contrary to its economic incentives. Moreover, since there are many other sources for the most valuable and popular books, it seems unlikely this effort to charge supracompetitive prices would be anticompetitive.

Those who suggest that Google can act as a “monopolist” also misunderstand how books will be priced. Critics point to the fact that some books will be priced through an algorithm. The settlement provides only an offer to sell rightsholders’ books at certain prices, however, and authors may reject this offer. This is no different than a situation in which a distributor offers multiple suppliers the chance to sell through the distributor at a given price, and sellers can reject or accept the offer. Further, I believe that 80 percent of digital books will initially be priced under $10. Over time, the algorithmic pricing must be designed to mimic a perfectly competitive market. Moreover, authors have the choice to opt-out of these “pricing bins” and determine their own price. The result of this is that if Google sought to set monopoly prices, each author would have an incentive to undercut the market price in order to make additional sales.

And of course, all of these books will have to compete with: (1) public domain books which are free and downloadable from the site, and (2) the fact that every public and university library in the country will be able to have a free public access service terminal. So any monopoly rents that Google might try to secure will be undercut by the fact that you can get the same thing for free at your local public library.

For the same reason that magazines practically beg you to subscribe, offering a fraction of the newsstand price, Google is more likely to pursue a model of broad access rather than price gouging for its subscription product, because that increases the advertising base. And even if Google misunderstood this, it is nevertheless obligated under the settlement to price the subscription to ensure “the realization of broad access to the Books by the public, including institutions of higher education.”

Finally, there is the claim that Google will act as a “monopsonist.” A monopsonist is a firm that has market power in purchasing and may use that power to drive down compensation for a service provider resulting in a reduction in output. I have testified before Congress on behalf of farmers, nurses, doctors, and other healthcare workers about monopsony concerns, and there are very serious monopsony concerns in their markets. Monopsony concerns can arise where a service or good provider has limited outlets to sell its service or good. The Book Rights Registry is just one of dozens of means for authors or publishers to reach the market. If the prices are set too low, authors and publishers have numerous alternatives. The claims that Google would have the incentive or ability to become a monopsonist are simply fanciful.

The settlement enhances the potential for entry

The remaining competitive concerns are actually very narrow. There are two questions. First, does Google’s access to “orphan works” limit the ability of alternative digital libraries to arise and compete against Google? Second, does a most favored nation provision restrict entry?

Both of these questions focus on entry barriers, and it is essential to get the entry barrier question right. The question is not whether it is hard to enter the digital books arena—it obviously is not easy. The operative question is whether the settlement increases entry barriers for the market. And to that, the answer is unequivocally no. As a group of 30 of the most preeminent antitrust law professors has observed, the “settlement overcomes barriers to entry for Google, without raising them for any rival because every right the settlement gives to Google to digitize, display, or sell books is expressly non-exclusive.” Thus, any right secured by Google can be shared with any existing or potential rival of the Google Books project.

Actually, the settlement makes it easier for others to follow in Google’s footsteps in trying to enter the digital library arena. The settlement offers the potential to increase output and choice by expanding reducing legal and logistical barriers to similar digital books projects.

First, by expanding the public domain and resolving the uncertainty of rights of millions of books, the settlement will decrease entry barriers. Many books that have already been scanned by Google actually belong in the public domain; however, their status is currently unclear. In order to determine the copyright status of books under the settlement, Google is using records that have been scanned, compiled, corrected, and disseminated by Carnegie Mellon, Project Gutenberg, the Distributed Proofreaders, and Google itself. In addition to expanding the public domain in this way, the settlement also creates a procedure for publishers and authors to determine who should own digital rights, and it is expected that this will result in the clarification of these rights for thousands of publications. All of these efforts significantly expand access and facilitate entry. One study projects that the settlement should identify and resolve rights issues for at least 80 percent of rightsholders.

Second, the settlement will also facilitate entry in another way: through its creation of the Book Rights Registry, an independent, nonprofit organization. The registry will significantly enhance the ability of subsequent entities to pursue book digitization initiatives.

Third, the registry will represent the interests of authors and publishers and locate rightsholders who have been separated from their works. With rightsholders’ permission, it will be able to license millions of books, among them the most commercially valuable works covered by the settlement, to third parties, including Google competitors, on terms that might disfavor or disadvantage Google. Licenses will be provided on a nonexclusive basis, which means that authors and publishers will have the ability to negotiate with the registry or separately with other digital book providers. The ability to negotiate with other entities makes it unlikely that the registry could impose unreasonable license fees or otherwise restrict the availability of electronic books.

Finally, any institution with a license will be able to share the works in the project with other entities, including potential entrants into the digital books arena.

Access to orphan works

Much of the remaining competitive concerns surround Google’s supposed exclusive access to orphan works. Orphan works are books that “retain their copyright but for which the rightsholders are unknown or cannot be found.” The concern is that Google’s so-called control over these works will limit the ability of other other book scanning projects to be successful. These claims are overstated.

This provision affects a small number of books

First, there are a relatively limited number of orphan works. According to a careful economic study, orphan works probably make up less than 9 percent of the works at issue. Other estimates suggest there may be as few as 1.4 million works, of which Google may have scanned around 580,000. Further, this number should decrease over time as the efforts of the Book Rights Registry to reach out to authors and publishers allow them to clarify the copyright status of a number of the books in questions.

It is hard to see how this small set of orphan works would be some kind of bottleneck to limit market entry. Moreover, these works may be “orphaned” for a reason—they may have gone out of print because other works were superior.

As soon as an author or publisher clarifies their rights to an orphan book, that book ceases to be an orphan. The rights holder can then contract directly with potential users, such as libraries, and Google will not enjoy any special advantages at this stage, either.

The settlement does not grant Google exclusive access to orphan books

Second, the settlement only provides Google with nonexclusive access to orphan books. The settlement does not give Google any advantages over second entrants for books which still have orphan status, and Google’s current efforts in fact lower the barriers for second entrants. Any company that chooses to begin scanning orphan books will face fewer obstacles than Google has confronted. Critics claim that other firms would be unlikely to attempt a similar class action suit to obtain their own default licensing rights to orphan books. This is not necessarily the case. By increasing the size of the public domain, clarifying uncertain rights, and addressing innumerable complex legal issues, Google Books simultaneously provides a map and blazes trails through previously unchartered territories that others will be able to use for their own explorations.

The settlement creates value for orphan works

Finally, it is important to recognize that the value of orphan works is currently zero—there is no demand for them. If they already had value, they would be in print or otherwise available to consumers. The Google Books Settlement creates economic value for these books by creating a means for consumers to access them and exercise demand for them.

The combined effect of the settlement’s rights clarification efforts and financial incentives will be to clarify the copyright status of many works. As a result, the number of orphan works will be substantially reduced. The settlement enhances the ability of companies other than Google to provide digital access to books including orphan works.

The so-called most favored nation clause

A careful analysis of the most favored nation provision also shows that it is unlikely to increase entry barriers or harm competition in any other fashion. The “most favored nation,” or MFN, provision of the settlement is extremely limited. It prevents the registry from offering a more favorable deal to other entities and the provision lasts for only ten years. I have written extensively and testified about the competitive implications of MFNs. These clauses can promote consumer welfare by permitting first movers to recoup their investments in innovation. Conversely, MFNs can impede entry and adversely impact competition. The MFN clause in the settlement falls into the former category.

The so-called “MFN” clause is narrow

The MFN provision is probably the most misunderstood provision of the agreement. This provision will have a limited effect on the marketplace. Nothing prevents the registry from striking better deals with Google competitors. Specifically, the registry can pursue better deals with Google’s competitors for all in-print works, which represent the vast majority of today’s book sales. Google competitors could also wait to see what the top-selling books are and strike deals only with respect to those books. Competitors could surely function in this way, like radio stations that seem to succeed despite playing only the top 30 songs over and over again. Section 3.8(a) pertains only to unclaimed works, that is, truly orphaned works, which no one comes forward to claim. It also only operates if the registry is later authorized to license unclaimed works that fall within the scope of the settlement. The Book Rights Registry does not have this authority, and it may never receive this authority within the ten years that Section 3.8(a) operates. Thus, even Professor Picker’s paper appears to concede that when the settlement first goes into effect, this provision will have no effect whatsoever.

Clearly, the parties recognized that they were negotiating in an environment where Congress was very likely to legislate—orphan works. In fact, Google continues to advocate for orphan works legislation. This provision ensures that if legislation, or perhaps some future class action settlement, provides the registry authority that it does not have now that Google will receive equal treatment (not preferred treatment) under the new regime. If that never happens, then this provision will have little relevance. This point has been lost on many of the provision’s critics.

This is therefore a provision that will have no impact when the settlement goes into effect, and may never have any impact, and even if it does have an impact, it will only affect books which no one has claimed—books that have the least expected economic value.

The so-called MFN clause has efficiency justifications

Setting aside how narrow this provision is, it is worth noting that non-discrimination provisions are not uncommon. They are often used to protect the investment of first-movers who anticipate that their efforts will reduce the costs for second-movers, who can then strike more advantageous deals by free-riding off the investment of the first-mover. In fact, copyright law itself serves the same purpose: it protects the economic investment of the first mover—the author—who might not write if everyone could then free-ride off his investment. That is an undesirable outcome for all involved, including consumers. Google has invested $34.5 million in helping to create the registry, and millions more in legal fees, and thus, has a legitimate economic interest in protecting the value of that investment from free-riding.

Conclusion

As Judge Learned Hand instructed over half a century ago, the antitrust laws are not intended to punish “superior skill, insight, and industry.” When Google announced this project five years ago, book scanning technology was in its relative infancy and cost-prohibitive. At its own risk, Google developed its own scanning technology, negotiated numerous agreements with libraries, and navigated the uncertainty surrounding complex copyright issues. Its ability to do all of these things led to a virtual library that offers an unprecedented level of access to millions of consumers. The purpose of the antitrust laws is to open access and opportunities and that is precisely what the Book Rights Registry and the settlement does. Innovation should not be confused with monopoly power. The Google Books settlement is in the public interest and should be approved.

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SOURCE: AP/Lisa Poole

A customer approaches a CVS pharmacy in Saugus, MA, on February 18, 2009. CVS/Caremark is one of the three largest Pharmacy Benefit Managers, which is considered the only segment of the health insurance market that is unregulated by the Federal Trade Commission. 

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Chairman Pryor, Ranking Member Wicker and other members of the committee, I appreciate the opportunity to come before you today and testify about health care competition and consumer protection enforcement. As a former antitrust enforcement official, I strongly believe the mission of the Federal Trade Commission and Antitrust Division of the Department of Justice is vital to protecting consumers and competition. However, in the past administration, the priorities of those enforcement agencies were not effectively aligned with the critical priorities in the health care market, with the result that there is substantial anticompetitive and fraudulent activity that raises prices and costs for consumers and the American taxpayer, especially conduct by certain health care intermediaries—Health Insurers, Pharmacy Benefit Managers, or PBMs, and Group Purchasing Organizations, or GPOs.

This committee, like the rest of Congress, has been devoting considerable resources to health care reform. This committee, under the leadership of Chairman Rockefeller, has led the way in making the public aware of the deceptive and fraudulent conduct of health insurers, particularly by shining a spotlight on the egregious activity of Ingenix, the United HealthCare subsidiary which has harmed thousands of patients and doctors by distorting the usual and customary rates of those health care providers. Thanks to the efforts of New York Attorney General Cuomo this fraudulent scheme activity is being reformed.

The problem of regulatory neglect

I have a simple and vital message for this committee: The Ingenix example is only the tip of the iceberg. The fundamental elements for a competitive market are transparency and choice and in both respects, health insurance markets are clearly broken. Few markets are as concentrated, opaque and complex, and subject to rampant anticompetitive and deceptive conduct. As the health care debate progresses, many advocate for limited reform of the health insurance system. Their belief is that it is a fundamentally sound market and with a little dose of additional regulatory oversight, all the ills of the market will be cured. They could not be more mistaken.

The Ingenix example is important for other efforts at managing health care costs—PBMs and GPOs. Some suggest these entities serve an important function in controlling health care costs. But like the Ingenix example, they often are subject to deceptive conduct and conflicts of interest and can be used to forestall competition, rather than promote it. Again because of a lack of choice and transparency—and the existence of conflicts of interest—these intermediaries have failed to fulfill their mission and foster competition and choice.

The FTC has accomplished tremendous things with its enforcement actions in the health care sector over the past 50 years, from opening up the practice of medicine to innovative forms of practice, to challenging conduct that has impeded entry of generic drugs. In a recent paper for the Center for American Progress, I detailed the positive results of the efforts of the FTC in expanding access to affordable generic drugs. By taking action against the deceptive strategies, which allow drug companies to artificially extend the life of their patent-protected drugs, the FTC has given consumers wider choice in the drugs available to them. Consumers save billions of dollars annually because of these efforts.

Unfortunately, the same attention has not been given to health insurers, PBMs, and GPOs. As I describe in my testimony, much of the reason for the lack of competition and transparency, and the existence of conflicts of interest, is the failure of federal antitrust and consumer protection enforcement in the health insurance industry. During the Bush administration, there were no enforcement actions against health insurers’ anticompetitive, deceptive or fraudulent conduct. None. There was tremendous consolidation in the market, and the Justice Department simply required minor restructuring of two mergers. There were no cases against anticompetitive conduct by health insurers. There were no federal consumer protection enforcement actions. A similar record of regulatory neglect exists for PBMs and GPOs.

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SOURCE: Center for American Progress

David Balto, Senior Fellow at the Center for American Progress Action Fund

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Introduction

I welcome the opportunity to submit this testimony for the confirmation hearing of Christine Anne Varney as the Assistant Attorney General of the Antitrust Division of the Department of Justice.[1] Ms. Varney is eminently qualified to become the chief antitrust enforcer in the Department of Justice. Her experience as a Commissioner at the Federal Trade Commission and a private practitioner with a sophisticated antitrust practice gives her the breadth of experience necessary to lead the talented and committed public servants in the Antitrust Division. I am confident that Ms. Varney will receive the strong approval of this committee.

I am providing this testimony so the committee recognizes the significant challenges that the next Assistant Attorney General and the Antitrust Division face. Antitrust enforcement is the cornerstone to a competitive marketplace and when that enforcement is docile or misdirected consumers will suffer. Unfortunately, during the past administration the Antitrust Division embraced a minimalist course, largely trying to reduce the scope of enforcement and the use of antitrust in private litigation. This minimalist approach was based in significant part on the “Chicago School” theory that antitrust enforcement more often makes mistakes and markets almost always lead to the best result. When there are abuses by firms that use market power to exclude competition, Chicago School proponents argue, the market will self-correct because market power is temporary and entry barriers are minimal.

Even if this belief had some theoretical support, recent changes in the economy have severely undermined its proscriptive value. This belief in the near-perfect market was severely shattered by the economic downturn. The assumptions that markets are self correcting and regulation is inferior have fallen to the wayside. As Republican FTC Commissioner Tom Rosch said in a recent speech “if not dead [the Chicago School] is on life support…. [M]arkets are not perfect; imperfect markets do not always correct themselves; and business people do not always behave rationally.”

The facts of the minimalist approach to enforcement need to be clear. Over the past eight years, the division brought no enforcement actions against dominant firms; it went more than five years without bringing a merger challenge in federal court; it adopted an amicus program that sought almost exclusively to narrow the scope of antitrust law; and it adopted an unnecessarily adversarial attitude toward other enforcement officials, especially its sister antitrust agency, the FTC. [2] The results in many markets are not surprising. A lack of merger enforcement has led to oligopolistic market structures which foster coordination, higher prices, and diminished services. Moreover, the lack of merger enforcement has created many entities that are “too big to fail” and thus, candidates for government bailout. A lack of dominant firm enforcement has led to less innovation and economic growth. The general lack of enforcement may lead business to believe the cop has left the beat, perhaps leading to greater efforts at coordination and price fixing as well as predatory conduct.

That has to change. The economic downturn makes competition enforcement even more vital as consumers have suffered from higher prices, lower output, and fewer services in increasingly concentrated markets. Lax antitrust enforcement has weakened the economy as markets have become more concentrated, leading to higher prices and less service.

What are the key challenges for the new head of the Antitrust Division?

Create a progressive Antitrust Enforcement Program tailored to the economic downturn

Some may suggest that antitrust enforcement should be minimized because of the economic downturn. Those people believe that competition is a burden too great to bear when the market is suffering. They could not be more wrong. Antitrust enforcement is even more vital when markets are shrinking, prices are rising, and market opportunities are falling. History tells an invaluable lesson. In the aftermath of the depression, the Temporary National Economic Committee, or TNEC, found that the lack of antitrust enforcement in the 1930s harmed the economic recovery as business concentration and monopoly behavior constricted production and pegged prices too high; the result was diminished investment, production, employment, and income that had prolonged the Depression and triggered the 1937 and 1938 recession.

So where should the renewed focus on enforcement be placed?

First, cartel enforcement will be even more important as the economic downturn drives some firms to seek the easy life by arranging treaties with their rivals. Second, firms may attempt to use the difficult economic times as a justification to consolidate with competitors in ways that would not have been imaginable under a more robust economy. This threatens to create entities with excessive market power that far outlasts the recession. Third, the temptation for dominant firms to gain market share by unlawfully excluding competitors may be greatest when they view it as a shortcut to preserving shareholders’ profit expectations in tough times.

Moreover, one key to reversing the economic downturn is increased competition. As the TNEC report found, antitrust enforcement can play a vital role in removing market barriers and permitting new firms to enter markets, thereby increasing job opportunities and leading to economic growth.

Reverse the constriction of the antitrust laws

During the past administration, the Antitrust Division was a cheerleader for the belief that antitrust law would do more harm than good and should be exercised sparingly if at all. In its amicus program, the past administration always argued on behalf of defendants (with one exception). It aggressively attacked the role of private antitrust enforcement. Moreover, before the Supreme Court it declined to support the efforts of its sister agency, the Federal Trade Commission, to attack problematic pharmaceutical patent settlements. In some cases the Supreme Court took an even more minimalist approach than that suggested by the Antitrust Division.

The result? Antitrust law has been severely weakened as a device to protect the market from anticompetitive conduct.

The Antitrust Division should work actively to reverse the past constriction of the law. There are three tools to remedy this problem.

First, the Antitrust Division can begin to reverse this constricted review of the law through its own enforcement actions. For example, early in the past administration, the Republican leadership eliminated the division’s civil task force. Established during the Clinton administration, the task force established a record of litigation admired throughout the Justice Department. The division brought major civil enforcement cases against Microsoft, American Airlines, Visa, MasterCard, and numerous other prominent companies. These cases eliminated exclusionary practices that harmed competition and millions of consumers. The division should reestablish the Civil Task Force and make civil enforcement a major priority.

Second, the division should actively seek opportunities, through its amicus program, to clarify the law in a fashion that expands the ability of private parties to augment public enforcement and protect competition through antitrust litigation. The government has limited enforcement resources and private antitrust litigation is important to identify and attack anticompetitive conduct. The division should actively participate in lower courts providing guidance on issues in which the courts are inconsistent or the law is unclear. Examples include issues such as antitrust injury, the standards for motions to dismiss under Twombly, proof of conspiracy, structuring the rule of reason analysis, market definition, class certification, and demonstrating a violation with proof of actual anticompetitive effects. And, in those cases in which the division supports defendants, it should do so in a way that articulates a balanced statement of what the law should be, keeping open the potential for the development of the law to promote competition.

Finally, where the courts have gone too far in narrowing the antitrust law, the division should work with Congress to reverse that trend. There is no better example than the Supreme Court’s decision two years ago in Leegin Creative Leather Products v. PSKS, which abandoned the rule that resale price maintenance was per se illegal. The results have been increased obstacles for discounters—especially Internet-based discounters—to aggressively compete. Fortunately, Senator Herb Kohl (D-WI) has introduced legislation to reverse Leegin, and the new Administration should actively support that legislation.

Abandon the Justice Department’s dominant firm report

The culmination of the Bush administration’s antitrust non-enforcement was the issuance of a report on dominant firm conduct last year, which attempted to provide de facto rules of per se legality for dominant firms. The effort to address the concerns of dominant firm conduct promisingly began with the FTC and DOJ agreeing to a series of joint hearings. But rather than arriving at a consensus with its sister agency, the DOJ chose to go it alone and issue its own report at the close of the administration.

The report articulates alleged rules that would basically permit exclusionary conduct by monopolists unless the small firm can demonstrate that the anticompetitive effects are “disproportionately” greater than the procompetitive potential of the exclusionary conduct. The report articulates an extremely narrow view of the law, one in which dominant firm cases would be brought rarely if ever and would almost never succeed. As Jon Jacobson, a former commissioner of the Antitrust Modernization Commission observed:

Monopoly power can cause great harm to the national economy through higher prices, lower output, reduced choice, and stunted innovation. The premise underlying the disproportionality test is that monopoly is not really harmful. That premise is unsupported and, in any event, contrary to the fundamental purposes underlying Section 2.

Fortunately, three FTC commissioners including a Republican and current Chairman Jon Leibowitz issued an 11-page statement resoundingly rejecting the report. The commissioners identified two “overarching concerns” with the report. First, “the U.S. Supreme Court has declared that the welfare of consumers is the primary goal of the antitrust laws. However, the Department’s Report is chiefly concerned with firms that enjoy monopoly or near monopoly power, and prescribes a legal regime that places these firms’ interests ahead of the interests of consumers. At almost every turn, the Department would place a thumb on the scales in favor of firms with monopoly or near-monopoly power and against other equally significant stakeholders.” Second, the commissioners observe that the report “seriously overstates the level of legal, economic, and academic consensus regarding Section 2.” In addition, the commissioners noted that they were “concerned that voices representing the interests of consumers were not adequately heard,” and that the report relied too heavily on economic theory in the consideration of applying antitrust law.[3] Thus, the commissioners caution that the DOJ’s approach if “adopted by the courts, would be a blueprint for radically weakened enforcement of Section 2 of the Sherman Act.”

As an antitrust practitioner who was invited to testify before the hearings, I found the report a bit stunning. Certainly there are areas of antitrust enforcement that need reform, and markets that are not behaving entirely competitively. But the area of dominant firm conduct is not one of them. There is barely any evidence that uncertainty in antitrust law has dampened the ability of dominant firms to compete aggressively. Not only are the standards inconsistent with the law and sound antitrust and economic policy, but these rules would give monopolists free rein to crush new or existing rivals.

The first action of the Clinton administration’s Antitrust Division was to abandon the Reagan administration’s vertical restraint guidelines. Now, the Obama Antitrust Division should abandon the Bush administration’s dominant firm report.

Restore the ability to litigate mergers

During the past administration, the division went to court in far fewer mergers cases, it won only once, and it failed to ascend the courthouse steps for more than five years. Since the division and the FTC typically would litigate three or four merger cases a year, the lack of merger litigation was truly remarkable. Merger litigation is critical for consumers. To give just one example: If the Clinton administration had failed to block the Staples/Office Depot merger, millions of consumers would have paid higher prices for the past 12 years.

The problem with a lack of litigation, of course, is that it weakens the ability to litigate and secure meaningful relief in merger enforcement matters. Moreover, failing to litigate makes each potential case seem ever more daunting. (Fortunately at the close of the Bush administration the division went to court in two merger cases).

This timidity in merger litigation must be reversed. The division, like every other part of the Justice Department, prides itself as being the best litigators in Washington, but without the experience it is difficult to effectively litigate.

And there are certainly areas where litigation may be warranted. As presidential candidate Obama observed, enforcement in health insurance was particularly lax, permitting almost all markets to become highly concentrated, leading to higher prices. In telecom, the division permitted massive consolidation as the baby bells have devoured almost all of their siblings. The division never challenged a merger based on the loss of potential competition. Similarly, the division failed to challenge any vertical merger. Vertical arrangements such as those raised in the Ticketmaster-Live Nation merger should receive considerable attention from the Division.

Besides litigation, the division, along with the FTC, needs to both ramp up enforcement and provide guidance in areas left underenforced in the prior Administration. Although the agencies conducted hearings on horizontal mergers, they overlooked many areas of merger enforcement including potential competition, vertical mergers, and mergers raising buyer power concerns. The guidelines addressing potential competition and vertical mergers were last revised in 1984 and are clearly out of date. These guidelines need to be revised to recognize the potential anticompetitive concerns in all three of these areas.

Restore the balance in health care antitrust enforcement

Health care is a major priority for the government enforcement agencies accounting for a greater portion of enforcement resources than any other industry. Health care antitrust enforcement can play a productive role in the efforts to control healthcare costs and enhance innovation in these markets. Central to sound health care antitrust enforcement is establishing a balance among these important principles: (1) enforcement should focus on the sectors of the health care system with the greatest impact on consumers; (2) both monopoly and monopsony power can harm consumers; and (3) enforcement must be balanced with clear guidelines and advice to permit procompetitive conduct.

Yet there are serious concerns about how the agencies’ health care enforcement resources are utilized. In assessing the federal health care antitrust enforcement program, the American Antitrust Institute observed in its transition team report that “[t]he priorities of the health care enforcement agenda need to be realigned to areas with the greatest impact on consumers. Unlike in prior administrations, there is a significant imbalance in enforcement priorities between anticompetitive activity by health insurance companies and healthcare providers. In the seven years of the Bush administration, all non-merger enforcement actions have involved health care providers, with no enforcement involving health insurers.”[4]

Enforcement in the past administration focused almost entirely on doctors and ignored the problems posed by health care intermediaries, such as health insurers, Group Purchasing Organizations, or GPOs, and Pharmacy Benefit Managers, or PBMs. All of the 31 Bush administration enforcement actions against anticompetitive conduct were brought against physicians. There is little evidence that these actions produced significant competitive benefits. Almost 40 percent of these cases were brought in rural markets, exacerbating the existing challenge of retaining and attracting qualified professionals to those underserved areas.[5] Even the Antitrust Section of the American Bar Association has counseled that the area of enforcement against physicians “is a controversial and relatively murky area.”

One might suggest that the significant number of enforcement actions might be evidence of a significant competitive problem. Relying on the number of enforcement actions would be very misleading. Only one of the over 31 cases was litigated. Provider groups rarely have the resources to battle with the government agencies and may find signing a consent a far less costly solution than trying to seek vindication, even if they have not violated the law. And in none of the 31 cases have insurance companies sued for treble damages, suggesting that the insurance companies did not believe they were injured or that the injury was not substantial enough to seek damages. Moreover, there is no evidence of whether the actions enabled health insurers to secure lower rates from providers, or if these lower rates resulted in lower premiums for consumers.

At the same time the Antitrust Division brought no meaningful enforcement actions against anticompetitive or fraudulent conduct by intermediaries, including insurers, GPOs, and PBMs. Much of this lack of enforcement was picked up by state enforcement officials who brought several cases securing significant penalties. The structural problems in these markets became even more severe because of a lack of merger enforcement. As a candidate, President Obama singled out health insurance mergers as a major culprit in undercutting efforts to address increasing healthcare costs. He specifically criticized the Justice Department for taking a lax attitude toward health insurance mergers:

The consequences of lax [antitrust] enforcement for consumers are clear. Take health care, for example. There have been over 400 health care mergers in the last 10 years. The American Medical Association reports that 95 percent of insurance markets in the United States are now highly concentrated and the number of insurers has fallen by just under 20 percent since 2000. These changes were supposed to make the industry more efficient, but instead premiums have skyrocketed, increasing over 87 percent over the past six years.

This merger wave hurt small businesses, consumers and healthcare providers. Practically every metropolitan health insurance market is now highly concentrated. A similar trend occurred for PBMs in which three PBMs dominate the market. What has been the result? Near record profits for health insurers and PBMs. And as health insurers have used their market clout to reduce reimbursement for healthcare providers, those providers have increasingly been forced into offering assembly-line health care.

This concentration has led to higher prices, more anticonsumer insurance provisions, greater payment delays, less coverage and poorer service. Increasingly, consumers have appropriately rebelled at the actions of insurers that restrict coverage, manipulate claims processing systems, and find other ways of either refusing to pay or delaying payments. Efforts to regulate health insurers are left to the states, as there is no federal approach to assuring both choice and transparency in these markets.

We do not know about the reasons for the imbalance in enforcement priorities. One reason may be an assumption that the interests of health insurers are coincident with those of consumers. Such a view would be misguided especially when dealing with for-profit insurers that are responsible to their shareholders. Lower rates from providers may simply be pocketed as higher profits, especially where health insurers have market power. And the evidence is indisputable that almost all metropolitan health insurance markets are highly concentrated. Moreover, health insurers are not true fiduciaries for insurance subscribers. Plan sponsors may have a limited concern focusing on the cost of the insurance, and not the quality of care. Consequently, health insurers can increase profits by reducing the level of service and denying medical procedures that physicians would normally perform based on professional judgment. Providers are critical as advocates for the patient, and play a central role in advocating for patient care. Health insurers also prohibit providers from advising patients about medically necessary procedures that may be covered under other plans through physician “gag” clauses. That is why there have been countless consumer protection actions taken against health insurers. If competition among insurers diminishes, patients are more likely to pay for these procedures out-of-pocket or forego them entirely.

Vital to the functioning of health care markets is the ability of providers to collaborate. The key guidance in this area is joint FTC-DOJ Statements of Antitrust Enforcement Policy in Health Care, which were issued in 1996. The guidelines are clearly out of date. When the 1996 guidelines were issued, then-FTC Commissioner Varney wrote, “[t]he health care marketplace is undergoing rapid change, and it is primarily through an open dialogue with all involved in the health care industry that the Agencies can continue to provide appropriate and relevant antitrust guidance.” Yet that dialogue and the willingness to respond to a rapidly changing marketplace was lost in the past administration, which seemed to believe the best investment of the taxpayers’ enforcement resources was in pursuing a single minded prosecution of health care providers.

Aside from the failure to revise the guidelines, the agencies became even more restrictive in granting approval to physician collaborations, approving only three collaborations in the past eight years—substantially less than in the Clinton administration. In order to meet the agencies’ standards for sufficient integration, groups often have to form increasingly large entities of several hundred physicians. That narrow approach dampens procompetitive collaboration and innovation.

How can the imbalance in health care enforcement be corrected?

First, the DOJ with the FTC should revise the 1996 guidelines after a meaningful dialogue with healthcare providers. There is significant room to provide more opportunities for health care providers to collaborate, and the guidelines need revision in order to facilitate greater forms of collaboration. They can start by allowing efforts to collaborate to improve health’s information technology.

Second, there should be a renewed attention to potentially anticompetitive actions by insurers and other intermediaries such as PBMs. There are various practices by insurers such as most favored nation’s provisions, all products clauses, and silent networks that deter competition leading to higher prices for consumers. Similarly, PBMs have been engaging in various activities such as exclusivity provisions that have led to higher drug prices. Enforcement should focus on the types of conduct which, if challenged, can have the most significant impact on improving competition.

Third, enforcement against healthcare providers should focus on those instances of clearly egregious conduct with a significant impact on consumers. Case selection should be based on evidence of an adverse effect on competition and consumers. That is not to suggest that illegal activity should be given a free pass; instead, there should be a focus on those matters with a clear impact on competition.

Finally, the lack of health insurance merger enforcement must be reversed. At the beginning of the Bush administration, antitrust enforcers faced a similar situation with a failure to successfully challenge hospital mergers. In response the FTC conducted a retrospective study of several consummated hospital mergers to both identify mergers that had led to anticompetitive effects and “to update [the FTC’s] prior assumptions about the consequences of particular transactions and the nature of competitive forces in health care.” Based on the retrospective, the FTC successfully challenged one consummated merger and more importantly revised and strengthened the approach to litigating these cases. The DOJ should follow the FTC’s example and conduct a thorough study of consummated health insurance mergers.

Strengthening enforcement in agriculture markets

Perhaps in no other market has the lack of enforcement impacted producers as severely as in agriculture markets. Increasingly, the lack of merger enforcement means that farmers and other agricultural producers pay more for inputs—such as grain, feed and fertilizer—and receive less when they sell their goods to processors. Food prices may be increasing but economic evidence suggests that today’s farmers are not benefitting from those higher prices.

Moreover, agricultural processing markets are a fertile territory for deceptive and exclusionary practices. Often agricultural processors are vertically integrated and their ability to control supply permits them to manipulate the price for food products. In addition, the conduct in processing markets is opaque, providing the opportunity for processors to engage in deceptive or unfair practices.

Not surprisingly, in no other area have there been as many congressional hearings in the past 12 years on competition issues as in agriculture. There is a significant disconnect between the expectations of Congress and farmers and enforcement. As Professor Peter Carstensen noted in testimony on the JBS-National merger that attempted to combined two of the largest beef processors: “there are serious problems of market failure in agriculture directly related to the high and increasing levels of concentration in the industries buying from and supplying farmers and ranchers.”

The lack of merger enforcement is critical. With the exception of last year’s JBS/National merger, the DOJ has not challenged any agricultural processing mergers in 10 years. In the past 12 years, there has been no enforcement against anticompetitive practices and no criminal enforcement actions in the agricultural industry. Moreover, in a recent dairy merger, the division did not require a consent decree, but rather allowed the parties to create a private agreement. There is evidence today that those parties have violated this agreement, which could have serious implications for small dairy producers in the future.

How can the lack of enforcement be reversed?

First, the DOJ should convene a task force on competition issues that should include representatives of the Department of Agriculture, and the FTC to provide a broad assessment of competitive problems in agriculture markets. This task force should take evidence and hold hearings on the current state of competition in agriculture markets. A key priority of the task force should be to determine if the agencies have the statutory powers under the antitrust laws, the Agricultural Marketing Agreement Act—the source of USDA’s milk market regulatory authority— and the Packers and Stockyards Act to challenge effectively the full range of competitively harmful practices. These practices include price manipulation in commodity markets affecting transaction prices (for instance, the price of the very small quantity of cheese sold on the Chicago Mercantile Exchange directly controls the price of all milk purchases in the United States), refusals to deal on equal terms with all willing sellers, use of exclusive buying arrangements to foreclose market access, and tacit—or perhaps even express—collusion to allocate markets among buyers.

Second, the DOJ should conduct a retrospective study of consummated agricultural mergers. In particular, the DOJ should monitor recent mergers approved in the past administration such as Monsanto-Delta Pine and JBS-Smithfield to determine if the mergers resulted in higher prices or other anticompetitive effects.

Third, the DOJ should take a stricter approach to mergers in agricultural input markets and mergers that may lead to the exercise of buyer power in processing markets. This includes developing and using market definitions appropriate to buyer-side market analysis.

Fourth, the DOJ should take a much more proactive, investigative role in examining the exclusionary and exploitive conduct of the major buyers of agricultural commodities especially in dairy, livestock, and poultry. In doing so it should take account of the fact that buyer power exists at lower market shares and in geographically more circumscribed markets. Hence, buyer power in agriculture may present more pervasive risks of anticompetitive conduct.

Returning enforcement in telecom markets

In the telecommunications sector, consumers and competitors have fallen into a black hole between antitrust and regulation. On the one hand, antitrust authorities have allowed a long series of mergers that resulted in the effective resurrection of the Ma Bell monopoly on a regional basis. At the same time the FCC’s implementation of the Telecommunications Act of 1996 has failed to open the local market to effective competition. On the other hand, the courts have said that the existence of regulation precludes claims of anticompetitive conduct. While the DOJ cannot address the failure of regulation to prevent exclusionary conduct by the dominant telecommunications companies, it can address the anticompetitive results of the past eight years.

The DOJ has relied on theories of intermodal competition to allow incumbent local exchange carriers to acquire contiguous dominant local carriers and well as large, head-to-head competitors. Moreover, the DOJ created a theory of a “dynamic duopoly” that suggests that two competitors are sufficient for competition in any telecom market. Unfortunately, intermodal competition has proven to be far less effective than head-to-head competition in disciplining market power. The DOJ has also failed to recognize the potential harmful effects of vertical market power in an industry with strong complementarities in product markets.

The economic theory that allowed these mergers to occur must be abandoned to avoid further harm in this and other sectors. Moreover, recognizing the failure of this lax merger policy and admitting the dramatic increase in market power that has resulted from these mergers will enable the antitrust authorities to begin to take action against anticompetitive and anti-consumer practices under different sections of the antitrust laws. Thus, a return to traditional values and models in the merger space is a key pillar on which broader reform and reinvigoration of antitrust enforcement should be based.

At the same time, the Supreme Court has weakened the potential for antitrust enforcement through decisions like “Trinko”that eliminate antitrust litigation as a solution because of the existence of a regulatory structure. Unfortunately, these decisions fail to understand how lax regulation has become. The DOJ should work with Congress to overturn those decisions.

The problem of mergers leading to excessive concentration and antitrust exemptions afforded to industries that were formerly regulated is not limited to the communications sector and should be addressed in other sectors. One particularly egregious example is in the rail sector, where blatantly anticompetitive conditions called paper barriers have been imposed on short lines when they were spun off from major national railroads. Indeed, the railroad industry is one of the most extreme examples of the creation of market power through mergers without any protection for consumers. There are only two dominant railroads in the east and two in the west, which impose “non-compete” clauses on short lines created by spin-offs and refuse to compete on price, yet they are exempt from the antitrust laws. This committee recently came out in support of eliminating the antitrust exemption in the railroad industry with the approval of S. 146, the Railroad Antitrust Enforcement Act, and that statutory change deserves careful evaluation by Congress.

Legislative reform to strengthen antitrust enforcement

The antitrust laws have stood the test of time as general statutes to protect competition. Yet at times it is necessary to reform the law, so that it can better fulfill the congressional intent to protect competition. Any observer of recent Supreme Court decisions, which have narrowed the law in 15 consecutive decisions in favor of defendants, must be concerned over the future of antitrust enforcement. As the American Antitrust Institute, the leading advocacy group for antitrust enforcement, noted after last month’s linkLinedecision:

“…this decision highlights the need for Congress to resuscitate the antitrust laws, which have been left for dead in the Supreme Court. Otherwise, the new administration’s plans to reinvigorate antitrust enforcement may well be stymied by a hostile Supreme Court.”[6]

This committee should carefully evaluate the impact of these recent decisions on the antitrust laws. It is worth recalling the guidance of the late Justice Thurgood Marshall that the:

“…antitrust laws in general, and the Sherman Act in particular, are the Magna Carta of free enterprise. They are as important to the preservation of economic freedom and our free-enterprise system as the Bill of Rights is to the protection of our fundamental personal freedoms. And the freedom guaranteed each and every business, no matter how small, is the freedom to compete— to assert with vigor, imagination, devotion, and ingenuity whatever economic muscle it can muster.”

It is difficult to reconcile these recent decisions of the Court with Justice Marshall’s vision. This committee should consider the impact of the recent Supreme Court decisions on the future for antitrust enforcement, competition, and consumers. As discussed earlier, this evaluation should begin by considering the need for legislation to reverse the Court’s decision in Leegin Creative Leather Products.

This committee should also consider two more basic reforms that will strengthen antitrust enforcement. First, in 2004, Congress reformed the Tunney Act procedures with the hope and expectation that those reforms would give courts greater ability to evaluate whether a proposed final judgment is in the public interest. Pub. L. 108-237, § 221(b)(1) (2004). As the statute provided, “[I]t would misconstrue the meaning and congressional intent in enacting the Tunney Act to limit the discretion of district courts to review antitrust consent judgments solely to determining whether entry of those consent judgments would make a ‘mockery of the judicial function.’”Pub. L. 108-237, § 221(a)(1)(B). Yet in several Tunney Act proceedings the Antitrust Division argued that the courts’ review was limited to whether the proposed remedy fulfilled the competitive issues raised in the complaint. The position of the division was that courts cannot go beyond the scope of the complaint, and the courts have adopted the restricted view that their review is limited to the “mockery of the judicial function” standard. Congress should amend the Tunney Act to clearly provide for a court to have the complete power to review whether a proposed decree is in the public interest.

Second, Congress needs to extend a provision reducing treble damage liability for those firms participating in the division’s immunity program. The Division’s immunity program is the most effective tool in its criminal enforcement program. In 2004, Congress created an additional incentive for firms to disclose illegal price fixing and participate in the division’s Corporate Leniency Policy by limiting any civil damages recovery from a corporate amnesty applicant to “actual damages sustained . . . attributable to the commerce done by the applicant in the goods or services affected by the violation.” Pub. L. No. 108-237, § 213, 118 Stat. 661, 666-67 (2004). This provision increases the incentives of firms to disclose illegal conduct. Unfortunately, this provision will sunset on June 23, 2009, five years after its passage, unless Congress renews it. See id. § 211(a). Congress should act to renew the damage provision for those firms that participate in the immunity program.

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Endnotes

[1]I am a Senior Fellow at the Center for American Progress Action Fund. This testimony is submitted on my behalf and on behalf of the Consumer Federation of America. CFA is the nation’s largest consumer advocacy group, composed of over 280 state and local affiliates representing consumer, senior citizen, low- income, labor, farm, public power, and cooperative organizations, with more than 50 million individual members.

[2] Antitrust Division officials were openly critical of the FTC’s patent settlement and standard setting enforcement efforts. As a former government official, I believe these statements were unprecedented and improperly weakened the FTC’s enforcement efforts.

[3] I note that no small businesses or representatives of consumer organizations were invited to testify at the hearings.

[4] The complete report is available online at http://www.antitrustinstitute.org/Archives/transitionreport.ashx

[5] See letter from Beth Landon, President, National Rural Health Association to the Honorable Patrick Leahy and the Honorable Arlen Specter (March 4, 2009)(urging the need for a balanced enforcement agenda in rural health care issues).

[6] “AAI issues Statement on Supreme Court’s linkLine Decision,” Feb. 27, 2009, available at www.antitrustinstitute.org/Archives/transitionreport.ashx.

SOURCE: AP

Ticketmaster Ticket

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Introduction

Mr. Chairman, Ranking Member Hatch, and other distinguished members of the Senate Judiciary Committee, I want to thank you for giving me the opportunity today to speak about the severe competitive problems that may arise from Ticketmaster’s proposed acquisition of Live Nation.1 As detailed in my testimony, this merger of dominant firms raises serious competitive concerns and could potentially lead to significantly higher prices for the hundreds of thousands of consumers who purchase tickets every day. Moreover, by creating a monopolist in the promotion and ticket purchase markets, rivals in the concert promotion market and competition from secondary ticket services will be severely diminished. The Antitrust Division of the Justice Department should thoroughly investigate this merger and challenge it if it raises a significant threat to reduced competition.

I make the following points in my testimony:

• Ticketmaster holds a monopoly in the ticket sales market. It has faced no significant competition in that market until Live Nation’s recent entry. Ticketmaster’s control of the primary market alone warrants enjoining the merger
• The proposed merger raises serious vertical concerns. By combining a ticketing monopolist with a dominant firm in marquee concert promotion, the merged firm will be able to foreclose competition in both markets, leading to less choice and higher prices
• The proposed merger poses a significant threat to independent concert promotion
• The proposed merger will diminish competition from secondary ticket services which offer the potential for greater rivalry in the ticketing market
• The DOJ should go beyond this merger and investigate anticompetitive conduct in the ticketing market. Similarly, the Federal Trade Commission should investigate deceptive conduct by Ticketmaster. Ticketmaster’s monopoly power is preserved through a series of exclusionary arrangements that diminish the potential for rivals to arise and challenge the monopoly. In the 1990s those charged with antitrust enforcement failed to challenge Ticketmaster’s conduct based on theoretical arguments that consumers were protected by ease of entry into the market or that exclusive arrangements were procompetitive. Because of that inaction, consumers have paid dearly in excessive prices for ticketing services. History has demonstrated that those theoretical arguments that the market would prevent consumer harm have been proven wrong, and consumers have paid dearly in excessive prices for ticketing services. Further competition and consumer protection enforcement action are necessary to prevent the substantial ongoing harm in this market, and this committee should call on both the DOJ and Federal Trade Commission to act.

My testimony today is based on my experience of over a quarter century as an antitrust practitioner—the majority of which was spent as a trial attorney in the Antitrust Division of the Department of Justice—and in several senior management positions, including policy director at the Federal Trade Commission. I have litigated numerous merger cases both for the government and for private parties. I regularly practice before both the agencies, and frequently represent consumer groups raising concerns about mergers under investigation by the Antitrust Division or the FTC.

Today I am here with a simple message for this committee. Although the parties may assert various efficiencies for this merger, this proposal raises very serious competitive concerns. Ticketmaster has perfected and preserved its monopoly power, not by creating better products and services for consumers, but through exclusionary arrangements to exclude its rivals. Now, faced with a significant rival, Live Nation, with the potential to undermine its monopoly—which it cannot drive from the market through exclusionary tactics—it is trying to buy its rival out of the market. It is a cornerstone principle of the antitrust laws that a dominant firm cannot use acquisitions, such as this one, to preserve its monopoly power.

Background

Ticketmaster Entertainment consists of Ticketmaster and Front Line Management Group. Ticketmaster operates in 20 global markets, providing ticket sales, ticket resale services, marketing, and distribution through www.ticketmaster.com, one of the largest e-commerce sites on the Internet; approximately 6,700 retail outlets; and 19 worldwide call centers. In 2007, the company sold more than 141 million tickets valued at over $8.3 billion on behalf of its clients. Ticketmaster controls the sales of tickets for over 80 percent of the venues in the United States. In 2008, Ticketmaster strengthened its hold on the ticket distribution market by acquiring Paciolan, a ticketing solutions service for over 190 North American clients from college athletics to arenas and museums. Ticketmaster also offers resale ticket services through its online subsidiary, TicketExchange, as well as through its acquisition of TicketsNow in 2008. Moreover, last year Ticketmaster entered into the entertainment promotion business by acquiring a controlling interest in the Front Line Management Group. Front Line is the world’s leading artist management company, with nearly 200 clients and more than 80 executive managers. Front Line represents a wide range of major artists, including the Eagles, Jimmy Buffett, Neil Diamond, Van Halen, Fleetwood Mac, Christina Aguilera, Stevie Nicks, Aerosmith, Steely Dan, Chicago, Journey, and Guns N’ Roses.

Live Nation is the world’s largest live music company: It is the world’s number one concert promoter. In 2007, over 64 million fans, including over 45 million live music fans, attended approximately 28,000 events managed by Live Nation in 18 countries. Globally, it owns, operates, has booking rights for and/or has an equity interest in more than 155 venues, including House of Blues music venues and prestigious locations such as The Fillmore in San Francisco, Nikon at Jones Beach Theater in New York, and London’s Wembley Arena. In addition, Live Nation owns multiyear comprehensive rights deals covering the tours of Madonna, Jay-Z, U2, Nickelback, and Shakira. In 2007, Live Nation acquired or secured and ownership interest in three artist merchandising companies, two concert promotion companies, two companies that own and run a number of venues, and a company that connects fans to artists via fan clubs and fan-club ticketing. In 2008, Live Nation ended a long-term contract to sell its concert tickets through Ticketmaster, and launched its own ticketing service for its venues in January 2009. At this time, Live Nation entered into an agreement with SMG, one of the world’s largest venue management companies and Ticketmaster’s largest client, to provide exclusive ticketing services for SMG’s venues. This deal threatened to siphon off at least 15 percent of Ticketmaster’s revenue and set the two companies up for a head-to-head fight to win ticketing contracts.

If Ticketmaster is permitted to merge with Live Nation a single firm will: (1) sell most of the concert tickets in this country through its contracts with venues (11,000 venue clients across 20 countries); (2) manage a significant number of the marquee performers in the world or control their tours (e.g., Madonna, U2, Jay Z, Shakira, Nickelback, Eagles, Christina Aguilera, Aerosmith, Jimmy Buffett, Guns ‘n Roses, Steely Dan, and more than 200 others); (3) own most of the amphitheatres in the United States and own more “club” venues (including 11 House of Blues venues) as well as controlling, through owning/leasing, a large amount of other clubs and theatres; (4) own two of the major resellers of tickets: and (5) own various sources of competitively sensitive data. As described below, this will give the merged firm the incentive and ability to raise rivals costs and foreclose competition in many segments of the concert promotion and ticket marketplace.

Competitive effects: Horizontal effects in ticket sales distribution

The most straightforward competitive effects are in the market for initial ticket distribution for large venues. This market has been dominated by Ticketmaster ever since its acquisition of Ticketron in the early 1990s. Up until the recent entry of Live Nation there were only two competitors in this market, Ticketmaster and Tickets.com. Some industry observers estimate that Ticketmaster holds 80 percent of the market for concerts in large major venues. The only significant rival, Tickets.com, focuses on sports events and provides ticketing services for 14 baseball teams and 2 hockey teams; Ticketmaster provides the ticketing service for nearly all the rest of the major professional sports teams.

Let’s be straightforward about one transparent fact: Ticketmaster is a monopolist and exercises that power to exploit consumers. It has a substantial market share by any meaningful measure. Moreover, it has regularly increased prices. This is not a situation where a monopolist is accused of reducing prices in a predatory fashion, or a market where price increases are justified by cost increases. Millions of consumers pay what seem like fairly astronomical surcharges to receive the very simple task of having a ticket dispensed. Although Ticketmaster labels their fees “convenience” and “service” fees, consumers pay a very high price for a basic level of convenience and service. As The Boston Globe observed in a recent editorial “Ticket to Gouge,” due to Ticketmaster’s charges the price of a “$50 seat can rise by 20 percent and that does not include the extra $2.50 per order if the customers want to print out tickets on their home computer.”

Today consumers can purchase almost anything electronically. When consumers purchase an airline ticket, railroad ticket, movie ticket, or other goods there are few if any surcharges. Only in the market for entertainment tickets where Ticketmaster controls the bottleneck are there surcharges. Often these surcharges can exceed 20 percent of the value of the ticket, especially when Ticketmaster adds on additional charges for unused services.

The key to rivalry in the ticket service market is access to both venues and events. Concert promoters control access to the major concert events. Thus, to succeed in the ticket market, a rival needs access to both venues and concert promoters. Ticketmaster now controls the vast majority of entertainment venues through long-term exclusivity arrangements (typically of duration of between three to five years). Ticketmaster also controls over 80 percent of the concert venues in these exclusivity arrangements.

The recent entry of Live Nation into ticketing posed a very substantial threat of unsettling Ticketmaster’s monopoly hold on the market. Because it is the largest concert promoter and owns over 140 venues (including several marquee venues), it was in a unique position to succeed in attacking Ticketmaster’s dominance. In 2008, Live Nation terminated its previous arrangement with Ticketmaster, under which Ticketmaster sold tickets for Live Nation concerts. Live Nation’s entry threatened to siphon off a significant portion of Ticketmaster’s revenue. Industry analysts suggested that Live Nation would control the ticketing of over 22 million tickets this year. With the beachhead established with its venue and artist base, Live Nation would have been able to engage in substantial head-to-head competition with Ticketmaster leading to lower prices and better services.

Eliminating a nascent competitor by acquisition raises the most serious antitrust concerns. As Justice Potter Stewart observed over a quarter of a century ago:

The central message of the Sherman Act is that a business entity must find new customers and higher profits through internal expansion — that is, by competing successfully rather than by arranging treaties with its competitors.2

One can assume that Ticketmaster will contend that it is no monopolist. It will suggest the market consists of all sources of tickets including the venues themselves (or the sports teams) and dozens of firms that resell tickets. It will suggest that in this market of “all ticket sales” it has a paltry market share, certainly nothing that would make it a dominant firm. This committee, the courts, and the antitrust enforcers should be highly skeptical of such arguments, because they are a diversion from the ultimate question of whether Ticketmaster is a monopolist. Market definition is not the ultimate inquiry; rather, it is a tool for determining competitive effect. In essence the purpose of defining a market is an indirect process of determining whether a firm has market power. Where there is “direct evidence” of a firm’s ability to exercise market power, e.g., by raising prices, without losing business to make the price increase unprofitable, a complex determination of the relevant market is unnecessary.3  In this case, Ticketmaster’s ability to consistently raise prices demonstrates that it possesses market power.

In the market definition inquiry the critical question is whether alternative products or services constrain the ability of the merged firm to raise prices. The fact that venues may sell tickets directly at the box office or tickets are sold through resellers does not necessarily mean these other sources of tickets are in the relevant product market. The key question is whether the alternatives can constrain price increases or reductions in service. Neither of these alternatives is likely to constrain prices. Ticketmaster limits the ability of many venues to sell tickets directly to consumers. And ticket resellers have a limited ability to constrain Ticketmaster’s fees because resellers only have the ability to sell tickets obtained from Ticketmaster at the value which Ticketmaster retails them for. Not surprisingly, neither sales by venues or resellers have constrained Ticketmaster’s ability to raise prices in the past. As explained infra, they will be even less likely to offer a restraint on Ticketmaster’s prices if Ticketmaster acquires Live Nation.

Moreover, what Ticketmaster offers is different from other sources of tickets. Ticketmaster offers primary ticket sales through its website, call centers and throughout thousands of retail locations, as well as offering secondary resale services. Ticketmaster is the only U.S. company to have implemented a paperless ticketing system, in which consumers can simply print a receipt containing a bar code scanned for access into the venue. Ticketmaster, further, has an unmatched capability to handle a significant amount of sales volumes and ticket trafficking at a time, allowing them to sell more tickets at a much faster rate than any competitor.

The fact that there are other sources of ticket sales does not mean they are necessarily included in the relevant market. Let me compare this to the Staples-Office Depot merger, which the FTC successfully enjoined over a decade ago.4 The FTC focused on a market of office supplies sold in office supply superstores. When the FTC announced the challenge to the merger, the parties and most commentators objected; observing that everything that could be purchased in a Staples or Office Depot could be purchased in another type of store or by mail order. In fact, less than 6 percent of all office supplies were purchased at a Staples or Office Depot.Thus, the parties strenuously argued that an office supply superstore market was far too narrow. But they did not prevail.

In enjoining the merger, the Court observed “that it is difficult to overcome the first blush or initial gut reaction of many people to the definition of the relevant product market as the sale of consumable office supplies through office supply superstores. The products in question are undeniably the same no matter who sells them, and no one denies that many different types of retailers sell these products.” But the court explained that “the mere fact that a firm may be termed a competitor in the overall marketplace does not necessarily require that it be included in the relevant product market for antitrust purposes.” The Court then observed that the sale of consumable office supplies by office superstores was a relevant antitrust market, based on several factors including industry recognition of an office superstore category, evidence that pricing was far different at these office superstores, and that the stores had distinct formats and customers.

In this case there are numerous practical indicia that demonstrate a market for primary ticket sales for large venues. Ticketmaster offers distribution through a variety of services including online, retail sales outlets, call centers, and box offices. Venues demand this wide variety of services and are unwilling to sacrifice primary ticket distribution for other services.

Competitive effects: Foreclosure in concert promotion and ticket sales distribution

Mergers are not only anticompetitive because they eliminate competition between direct competitors. They may also be anticompetitive when they combine firms that are not direct competitors but are aligned in the distribution system or vertical mergers. A vertical merger involves firms that operate at different but complementary levels in the chain of production and/or distribution. The defining characteristic of a vertical merger is that the product or service produced by one firm can be used as an input to the product or service produced by the other firm. Common examples include a merger between a manufacturer and a distributor, or a merger between two manufacturers, one of which produces an end product and the other a component of that end product. In this case the two vertical segments are concert promotion and ticketing services.

It may be easy to forget that vertical mergers can be illegal –during the Bush administration, the federal antitrust enforcers challenged only a single merger because of vertical anticompetitive effects—which placed vertical mergers into a world of per se legality. This approach to potentially anticompetitive acquisitions was unlike prior administrations that took a prudent balanced approach to vertical merger enforcement. The Ticketmaster-Live Nation merger is the time to reverse this laissez-faire approach to vertical mergers.

Vertical merger policy is set out in the 1984 Merger Guidelines, which describe several theories of possible competitive harm from a vertical merger. Broadly, there are three areas of concern identified in the 1984 Merger Guidelines, the case law, and academic commentary. First, vertical integration will raise entry barriers

or foreclose non-integrated firms from a market in which the merged firm would operate. Second, vertical integration may raise competitors’ costs in an anticompetitive manner or reduce the incentives of either the merged firm or its rivals to compete. Finally, a monopolist in one market may acquire a rival in a complementary good market to raise entry barriers in the primary market (a “monopoly maintenance” theory).

The barrier-to-entry and foreclosure concerns are essentially two sides of the same coin. If the newly integrated firm forecloses unintegrated rivals from raw materials on the upstream side or a market on the downstream side, the rivals will have to integrate themselves or perish, and new entrants will have to enter at both market levels in order to succeed. As former FTC Chairman Bob Pitofsky has explained, “[i]f . . . ‘two level’ entry is more risky, more difficult, or more time-consuming than entry into the entrant’s primary market alone, a merger that increases vertical integration could create more barriers to entry.” 5

The potential reduction of incentives can also arise from access to competitively sensitive information. Because of its position at two levels of the market, the newly vertically-integrated firm may relate to a rival both as a horizontal competitor and as a customer or supplier. In its position as customer or supplier, the merged firm may gain access to competitively sensitive information concerning its horizontal competitors. When a firm gains competitively sensitive information by participating in vertically related markets, it may be able to compete less aggressively. If, for example, through its participation in an upstream market, the merged firm gains access to competitively sensitive information, which enables it to reduce its uncertainty about a competitor’s bids in a downstream market, and the merged firm may be able to bid less aggressively in the downstream market. This concern extends to situations in which the competitor gains access to information about costs or technology with which it could estimate its rival’s likely bid and adjust its own bid accordingly.

Furthermore, integration may dampen the ability and incentives of the non-integrated firm to compete. If the integrated competitor gets access to a non-integrated competitor’s costs or technical information, that competitor’s incentives to innovate or engage in research and development may be reduced. Commentators have observed that where a firm knows that its competitors can “free-ride” on its innovations, the incentive to innovate may be seriously dampened. Similarly, if the non-integrated firm believes that it faces exclusion or discrimination from the integrated firm, it may choose to withdraw from the market or compete less aggressively.

An informative precedent from a decade ago was the FTC’s challenge to the Time Warner-Turner merger. One of the most important aspects of the transaction was the degree to which it increased vertical integration in the cable television market. Prior to the acquisition, Time Warner and TCI, the two largest cable systems in the United States, had some relatively significant cable programming holdings. But this acquisition dramatically increased those holdings by putting several significant cable networks under Time Warner’s control. Thus, the FTC challenged the merger because the merged firm would have the power to: (1) foreclose unaffiliated programming from their cable systems to protect their programming assets; and (2) disadvantage competing cable distribution systems, by denying programming, or providing programming only at discriminatory—in other words, disadvantageous—prices. For example, post-merger Time Warner would have had the incentive and ability to foreclose alternative cable networks from its distribution systems in order to give its own programming a competitive advantage.

The Time Warner-Turner merger offers an interesting analogy to the Ticketmaster-Live Nation merger. Producers in the upstream market—cable programming in the case of Time Warner and concert promotion in the case of Ticketmaster—faced an increasing threat of foreclosure because of the merger. Prior to the merger, Time Warner lacked the incentive and ability to engage in such foreclosure—the merger would have facilitated this strategy. The same is true for Ticketmaster, with an even greater potential for harm because Ticketmaster’s downstream market power—an 80 percent market share—is far higher than Time Warner’s (about 44 percent).

The proposed Ticketmaster-Live Nation merger raises significant vertical concerns, each one of which will lead to higher prices and less service for consumers:

• Diminish competition in primary ticket distribution.By acquiring Live Nation, Ticketmaster will cut off the air supply for any future rival to challenge its monopoly in the ticket distribution market. The merged firm will control hundreds of venues, including the key venues and many of the crucial marquee artists that produce the most lucrative tours. Without access to these venues or artists, potential entry will become even less likely. With entry barriers strengthened, Ticketmaster will further exploit its monopoly power and raise prices.
• Diminish competition in independent concert promotion.Although Live Nation is the largest concert promoter there are numerous smaller rivals in the market. Many of these firms are particularly innovative in sponsoring a wide variety of entertainment, offering consumers greater choice and enabling artistic creativity. By controlling the dominant form of ticketing, Ticketmaster will be able to dampen rivalry in concert promotion. Ticketmaster will be able to force venues and artists to use Live Nation as a condition of using its ticketing services. Because Ticketmaster is the only game in town, it will be increasingly difficult for independent producers to provide rivalry in the market. These are very similar to the concerns of independent programmers that led to the FTC challenge of the Time Warner-Turner merger.
• Reduce competition among ticket resellers. Ticket resellers, sometimes known as the secondary market, provide a valuable service to consumers by providing convenient access to a significant number of tickets. By controlling Live Nation, Ticketmaster will further diminish the access of ticket resellers to alternative sources of tickets, limiting the ability of consumers to secure tickets to the most highly sought concerts and events.

Let me focus on the last issue— the impact on ticket resellers. Everyone is familiar with the incident involving the Bruce Springsteen concert, in which tickets almost instantaneously appeared to have been diverted from Ticketmaster to TicketsNow, their higher priced ticket reselling site. Ticketmaster claims this was an inadvertent mistake. However, both consumers and Bruce Springsteen, who believed that tickets were available at face value, may have been defrauded by Ticketmaster’s actions. Before its acquisition of TicketsNow, Ticketmaster lacked the incentive or ability to artificially inflate ticket prices by diverting tickets to the resale market. If it acquires Live Nation it will have an even greater ability to manipulate the market in this fashion and harm both resellers and consumers. If this merger is permitted, the “Springsteen scheme” may become a regular part of Ticketmaster’s anticompetitive playbook.

That leaves us with the question of whether the merger is procompetitive and the efficiencies from that consolidation exceed any potential anticompetitive effects. The legal standard for the efficiencies defense is straightforward. Ticketmaster must demonstrate that efficiencies are: (1) merger-specific; (2) cognizable and verifiable; and (3) sufficient in magnitude to reverse the anticompetitive effects of the merger. Merger specific means they must be “likely to be accomplished with the proposed merger and unlikely to be accomplished in absence of either the proposed merger or another means having comparable anticompetitive effect,” Merger Guidelines § 4. The claimed efficiencies cannot be efficiencies that could “be achieved by either company alone,” FTC v. Heinz, 246 F.3d 708, 722 (D.C. Cir 2001). Moreover, because “information relating to the efficiencies is uniquely in the possession of the merging firms, the merging firms carry the burden of proof on efficiencies. Merger Guidelines § 4.

It is important to note that “efficiency” under the antitrust laws has a particular meaning: Only efficiencies that lead to lower prices or improved services— that benefit consumers—count as efficiencies under the antitrust laws. The mere fact that a merger will lead to a more profitable company is not a reason to approve a potentially anticompetitive merger.

Ticketmaster has proclaimed that the Live Nation acquisition will benefit consumers by creating a new entity positioned to address the challenges of serving fans better at the point of the initial ticket sale with more options and better access. Ticketmaster claims the merger will enable more innovative and dynamic promotion arrangements that provide more choice and a more fan-friendly purchasing experience. Economic theory suggests that vertical integration can be procompetitive by uniting complementary products and services. It is Ticketmaster’s burden to demonstrate these benefits will overcome any potential anticompetitive effects.

But economic theory is inadequate as a basis to recognize these efficiencies. One must look at the past history of Ticketmaster’s acquisitions. There is little evidence that those acquisitions benefitted consumers through lower prices. The claims of improved services in this merger are similar to the claims Ticketmaster it made when it acquired TicketsNow. Have consumers benefited from lower prices or better service? The jury is still out, but there is evidence of market manipulation, such as the alleged Springsteen incident. The lesson is simple—vertical integration in the hands of Ticketmaster can be a tool to stifle competition and deceive consumers.6 The promises of a benevolent monopolist are a poor substitute for competition.

Future antitrust and consumer protection enforcement is necessary to protect consumers

This committee should make it clear that investigating this merger is only the start of the enforcers’ job in making sure competition works in the ticket market. For too long, consumers have paid excessive charges for basic services enabled by Ticketmaster’s exclusionary and deceptive conduct. Blocking this merger will only prevent a competitively unhealthy market from becoming terminally ill. Further enforcement is necessary to restore competition. Here are three important suggestions:

• The FTC’s Bureau of Consumer Protection should investigate the Springsteen incident to determine whether Ticketmaster has violated Section 5 of the FTC Act. Section 5 gives the FTC broad powers to attack unfair or deceptive practices that may harm consumers. Ticketmaster’s actions, whether intentional or inadvertent, which resulted in the mass diversion of Springsteen tickets to the higher priced TicketsNow site deceived consumers—or Mr. Springsteen—or were simply unfair acts perpetrated on a vulnerable set of consumers.
• The Antitrust Division should review past acquisitions of Ticketmaster to determine if they were anticompetitive.The Springsteen incident suggests that some of the past vertical acquisitions, such as the TicketsNow acquisition, may not be as benign as Ticketmaster may have suggested. Where there is evidence that these acquisitions have diminished competition or facilitated deceptive conduct, the Department of Justice should seek a remedy, including divestiture to stop the competitive harm.
• The Antitrust Division should review Ticketmaster’s exclusionary conduct including long term contracts with venues to determine whether they are anticompetitive.A decade ago the DOJ chose not to challenge a wide variety of exclusionary conduct by Ticketmaster based on theoretical arguments that entry was easy or that consumers benefited from exclusivity arrangements. History has proven that it was a mistake. Moreover, both the case law and economic theory have matured sufficiently to recognize in a far more sophisticated fashion how these practices can harm competition. The DOJ should reopen its investigation of these practices to determine how to restore competition to the ticket marketplace.

Download this testimony (pdf)

Endnotes

1. I am testifying today as a Senior Fellow at the Center for American Progress Action Fund. I am also testifying on behalf of the Consumer Federation of America, or CFA. CFA is the nation’s largest consumer advocacy group, composed of over 280 state and local affiliates representing consumer, senior citizen, low-income, labor, farm, public power, and cooperative organizations, with more than 50 million individual members. I do not represent any parties affected by the proposed merger.

2. United States v. Citizens & S. Nat’l Bank, 422 U.S. 86, 116 (1975).

3. PepsiCo, Inc. v. Coca-Cola Co., 315 F.3d 101, 107 (2d Cir. 2002) (per curiam) (holding that "a relevant market definition is not a necessary component of a monopolization claim" where there is direct evidence of competitive effects); Re/Max Int’l, Inc. v. Realty One, Inc., 173 F.3d 995, 1016 (6th Cir. 1999).

4. FTC v. Staples, Inc., 970 F. Supp. 1066 (D.D.C. 1997).

5. Robert Pitofsky, Vertical Restraints and Vertical Aspects of Mergers–A U.S. Perspective, Prepared Remarks Before the Fordham Corporate Law Institute (Oct. 16-17, 1997), available in http://ww.ftc.gov/speeches/pitofsky/fordham7.htm.

6. Concerns of vertical foreclosure in the ticket distribution and concert promotion markets are prevalent. This is a fertile medium to use market power to try to foreclose competition. See Jamsports and Entertainment L.L.C. v. Paradama Productions, Inc., 2003 U.S. Dist. LEXIS 6100 (N.D. Ill. 2003)(defendant communications company used its market dominance to foreclose plaintiff entertainment company from utilizing certain event venues); IN RE: LIVE CONCERT ANTITRUST LITIGATION, 247 F.R.D. 98 (C.D. Cal. 2007)(Clear Channel foreclosed competition in the radio and concert promotion markets by leveraging its market power in the radio market to increase its market power in the concert promotion market); Nobody In Particular Presents, Inc. v. Clear Channel, 311 F. Supp. 2d 1048 (D. Col, 2004)(defendant entertainment company used its market power in the rock-format radio market to leverage its dominance and foreclose competition in the promotion of artists’ live concerts).

“At a time when American people are being asked to come to the rescue of financial services all over the country […] how can we say ‘we know that [credit card] practices are unfair, but you must wait a year to fix them?’” asked Representative Carolyn Maloney (D-NY) at a Center for American Progress Action Fund event Wednesday morning.

At the event, CAPAF Executive Vice President Sarah Wartell presented a new report by Tim Westrich, “Putting Credit Card Debt on Notice,” which she said “offers technological solutions to help customers better manage their debt in the face of increasingly volatile market conditions.” Wartell said that by using technology such as text messaging—or a similarly rapid electronic method—a credit card issuer could provide consumers with helpful information at the moment he or she needs it most. The message, according to Westrich’s report, could provide clear information—including both the event, such as the due date, and the consequence for missing it—a late fee and an increase to the penalty rate.

Wartell said that this new method of giving better information should be done in addition to, not as a substitute for, efforts by Rep. Maloney to eliminate the worse problems in the credit card market through legislation. “In conjunction with legislation, these technologies could help stem abuses in the credit card industry,” said Maloney.

In December of last year, the Federal Reserve Board finalized regulations that mandated a number of reforms in the credit card industry. These reforms, however, are not slated to take effect until July 2010. Rep. Maloney has introduced a bill—the Credit Cardholders’ Bill of Rights Act—that moves up the starting date for many of these protections to three months after the bill is signed. These protections include preventing credit card companies from retroactively increasing interest rates on existing balances, giving 45 days’ notice of all interest rate changes, and ending several other billing practices that make it harder for cardholders to pay down their credit card debt.

While there was a broad consensus on the need for action, the panelists disagreed as to what form it should take. John Carey, chief administrative officer and executive vice president of Citi Cards, said that last year’s Federal Reserve regulatory action was sufficient, as it provided for both far-reaching consumer protection and flexibility if changes needed to be made in the future. Legislation, he noted, “would only make the rules more difficult to change if they do not work out.”

Responding to Carey’s assertion that customers only needed to be warned so many times, Travis Plunkett, legislative director for the Consumer Federation of America, said that it was the responsibility of lenders—credit card or otherwise—to provide their consumers with as much information as possible to guarantee that they have the tools available to be financially successful.

Beth Kobliner, author of Get a Financial Life: Personal Finance in Your Twenties and Thirties, said that nudging consumers to make smart decisions would be especially beneficial to young Americans. “Among 20- to 30-year-olds, surveys show that finances are a primary concern,” Kobliner said. She added that, on average, current 20- to 30-year-olds earn 10 percent less, adjusted for inflation, than members of their parents’ generation. They also spend almost 25 percent of their monthly income paying only the minimum payment on credit card debt. If this continues, Kobliner warned, “the financial debt that this age group will incur will be unthinkable.”

Education, early and often, is the key to guaranteeing that young adults sustain good financial practices. Action from both the credit card companies and Congress is necessary to “immediately fix the problems of the credit card industry,” said Plunkett.

More details about this event:

Avoiding the Hazards of Credit Card Debt

SOURCE: AP

Bush at a Small Business Administration Conference

On Friday, December 11, 2008, the Small Business Administration released a statement (“SBA Responds to CAPAF’s Analysis”) containing several refutations to the Center for American Progress article I authored, titled “Small Business Administration: Supporting America’s Engines of Growth.” Items topping their list: the budget cuts to SBA under President George W. Bush, staff reductions, and the Microloan Program. All of their refutations are not based on fact.

SBA budget under Bush

The SBA under President Bush did indeed undergo a budget reduction of over 40 percent. This is supported by the president’s own budget report, which discloses an almost 30-percentreduction (see OMB’s fiscal year 2009 mid-session review here). Furthermore, under the advisement of the Congressional Budget Office, when inflation is factored in, this amounts to a 40-percent reduction.

Staff reductions under Bush: 26 percent

An increase of 30 percent in “salaries and operations” expenditures, as noted by the SBA, does not tell the whole story. Along with a reduction of about 40 percent in budget dollars, there was a 26-percent reduction in staff. In particular, the offices of Lender Oversight and Contracting were shortchanged. They were not adequately staffed to provide proper oversight and enforcement.

Furthermore, under President Bush, the SBA fell from first place in 2001 to last place among 30 agencies surveyed in the biannual Government Accountability Office report measuring employee morale.

The elimination of the Microloan Program

The Bush administration since 2005 has in fact zeroed out the Microloan Program, which provides small loans to new start-up small businesses or newly established small businesses. It has only survived with the consistent support of Congress overriding the president’s budget. And while it is true that the Microloan Program may be more expensive than other lending programs, especially with regard to technical assistance, its successful outcomes have been widely substantiated. And “support” requires more than lip service. The Bush-run SBA cannot claim to support something in which they are unwilling to devote resources.

Fred P Hochberg, former deputy and acting administrator of the Small Business Administration and dean of the Milano School for Management and Urban Policy at the New School. He was also a co-lead of the Obama-Biden Transition Team as Agency Review for the Small Business Administration. To read his chapter on the SBA in Change for America please go to the Center for American Progress Action Fund website.

• We are in this mess today because of the deregulatory policies and negligent leadership of President George W. Bush, his financial regulatory officials, and congressional conservatives such as Phil Gramm.

• First, Bush and conservatives in Congress encouraged the explosion of risky new financial products, and blocked them from common-sense oversight and regulation.

• Second, they turned a blind eye to dire warnings that risky lending practices were spiraling out of control.

• Their failure to act allowed Wall Street CEOs to recklessly gamble with other people’s money.

• Now, the bubble has popped and the markets have crashed, and conservatives are desperately casting about for someone else to blame for the consequences of their failed policies.

• Their efforts to pass the buck are an insult to our intelligence. Conservatives controlled the White House and Congress while this crisis grew out of control. This is their legacy of failed policies—it is time for them to own it and learn from it by looking at progressive solutions.

Here Is the Truth About How We Got Here

Beginning in 2000, free-market ideologues led by President Bush, Phil Gramm, and Alan Greenspan encouraged the explosion of risky new financial products and blocked the products from regulation.

• Under their watch, there was an explosion in subprime mortgage lending accompanied by exponential growth in new financial derivatives such as credit-default swaps that encouraged banks and lenders to take huge risks and gamble on products that no one really understood.

• People knew these products were extremely risky. Five years ago, Warren Buffett called derivatives “financial weapons of mass destruction, carrying dangers that, while now latent, are potentially lethal.”1

• But Alan Greenspan and conservatives in Congress, led by Phil Gramm, encouraged the development of these risky new products, and blocked them from regulation. Greenspan said, “it seems superfluous” to regulate derivatives, and Gramm quietly slipped his Commodities Futures Modernization Act into a must-pass budget bill in 2000 to ensure the highly risky derivatives market would not be regulated.

As the housing bubble grew out of this risky marketplace, progressives tried to institute common-sense regulation, but were blocked by conservatives in Congress.

• Predatory lending exploded as commercial and investment banks competed fiercely to originate more and more home mortgages by dropping their lending standards lower and lower. The more mortgages originated, the more could be bundled together as mortgage-backed securities—bonds consisting of mortgages or pools of mortgages that are sliced and diced in different ways and then sold as bonds to institutional investors around the world.

• The development and sale of these mortgage-backed securities was turbocharged by the completely unregulated credit-default swaps market, which was expressly enabled by Gramm’s Commodity Futures Modernization Act. The credit-default swaps market acted as a kind of insurance on mortgage-backed securities and collaterized debt obligations, another type of bond that included slices of mortgages and other types of debt comingled with credit-default swaps. These swaps gave these risky new bonds a blue-chip patina even though they actually were very risky securities.

• Progressives in Congress consistently tried to institute common-sense regulation to discourage banks from engaging in some of the risky lending practices that led to the current crisis. One such amendment was offered in 1999, 2001, and 2005, and defeated by conservatives each time.

As risky lending exploded, the Bush administration and conservatives in Congress ignored and enabled Wall Street’s reckless behavior.

• All this time, the Bush administration and conservatives in Congress turned a blind eye to warnings that predatory lending was getting out of control, and that the markets of new financial products such as credit-default swaps and collaterized debt obligations were getting too hot, too risky, and too big.

• Under conservative leadership, the Securities and Exchange Commission turned a blind eye as the credit-default swaps market ballooned under its nose, going from essentially zero in 2000 to $17 trillion in 2005 to over $60 trillion in 2007.2

• In fact, in 2004, the SEC actively abetted greater risk-taking on the part of the big Wall Street investment banks by allowing them to more than triple their so-called “leverage ratio” to 40-to-1 debt-to-equity levels, up from 12-to-1 levels. This change enabled these firms to indulge in the highly irresponsible borrowing practices that led all five of them this year to either go bankrupt, sell themselves to a bigger bank holding company, or convert themselves into a bank holding company to avoid collapse.3

• There were plenty of warnings about the housing bubble as well.

• The current chair of the Federal Deposit Insurance Corporation, Sheila C. Bair—who today is at the forefront of cleaning up the subprime mess—realized back in 2001, when she was a senior official at the U.S. Treasury Department, that lending practices were amiss in the mortgage markets. She tried to persuade mortgage lenders to adopt a best-practice code of conduct to no avail.4

• Community activists in neighborhoods where predatory lending was most evident warned the Federal Reserve repeatedly about the rising threat of abusive subprime loans, but Greenspan declined to act.5 At the beginning of the decade, subprime mortgages accounted for only 6 percent of total residential mortgage originations. By 2006, subprime mortgages accounted for 25 percent of mortgage originations.6

• Greenspan and other Bush administration regulators even refused to listen to repeated prescient warnings between 2000 and 2005 from Federal Reserve Board governor Edward Gramlich, who warned his colleagues about mounting problems in the mortgage markets.

• Worse still, other federal regulatory agencies supported abusive subprime lending by pre-empting state laws protecting borrowers from lending abuses, as the Office of the Comptroller of the Currency did in 2003.7

While the Bush administration and congressional conservatives ignored the warnings, Wall Street CEOs gambled with other people’s money.

• In a few short years, this toxic combination of risky new products and no regulation transformed the financial market from a place that traded in known quantities like stocks and bonds into a market where exotic new products that no one really understood were being traded at breakneck speed.

Now the bubble has burst, the stock market is crashing, credit markets are frozen, and conservatives are looking for someone to blame.

• For the past decade, the Bush administration and conservatives in Congress aided and abetted wild risk-taking on Wall Street while CEOs raked in huge profits. Now that the bubble has burst and the market has come crashing down, they are desperately trying to divert attention away from the fact that this crises is the result of the failures of their policies.

• Charles Krauthammer and other conservative commentators are desperately trying to pin the blame on a 30-year-old law, the Community Reinvestment Act, which was weakened significantly by the Bush administration before the housing bubble started inflating.

Conservatives’ desperate attempts to pass the buck are an insult to our intelligence. This is their legacy of failed policies and leadership. It’s time for them to own it.

Endnotes

1. BBC News, “Buffett Warns on Investment ‘Time Bomb,’” March 4, 2003, available at http://news.bbc.co.uk/2/hi/business/2817995.stm

2. International Swaps and Derivatives Association, 2005 and 2007 year-end surveys. Available at http://www.isda.org/press/press031506.html and http://www.isda.org/press/.

3. Stephen Labaton, “U.S. regulators 2004 rule let banks pile up new debt,” International Herald Tribune, October 3, 2008, available at http://www.iht.com/articles/2008/10/03/business/sec.php.

4. Edmund L. Andrews, “Feds Shrugged as Subprime Crisis Spread,” The New York Times, December 18, 1007, available at http://www.nytimes.com/2007/12/18/business/18subprime.html.

5. Ibid.

6. The Federal Reserve Bank of San Francisco, “The Subprime Mortgage Market: National and Twelfth District Developments” (2007), available at http://www.frbsf.org/publications/federalreserve/annual/2007/subprime.pdf.

7. Jonathan Fuerbringer, “Some Exemptions Are Proposed on Predatory Lending Laws,” The New York Times, August 1, 2003, available at http://query.nytimes.com/gst/fullpage.html?res=9904E2DA153EF932A3575BC0A9659C8B63.

SOURCE: screenshot

When Treasury Secretary Henry Paulson called congressional leaders early last week to ask for $700 billion in public funds to buy distressed loans and securitized loans from the nation’s failing financial institutions, he was told that such a package could pass only with bipartisan support. Members of Congress from both parties who faced tight reelection fights could not be relied on for support. The leadership on both sides of the aisle would have to join hands and jump off the cliff together. Each party in each of the two houses would have to provide roughly half the votes needed for passage. Paulson, White House negotiators, and the bipartisan, bicameral leadership of Congress agreed and sat down to piece together a package that no one liked but everyone recognized was necessary.

For the first time since the weeks following the September 11 terrorist attacks, the Bush administration and Congress began to work together in a constructive and bipartisan spirit. But by Thursday it was apparent that the same radical faction within the House Republican Conference that has derailed responsible policy for nearly two decades was at work again—even though the proposal at stake was being put forward by their own president and supported by their party’s presidential nominee.

When Speaker Nancy Pelosi insisted on bringing the House back into session on Thursday morning last week after a meeting of the Republican Conference had extended well beyond its scheduled time period, she was warned by Republican leadership staff that if she did so the Republican leaders who would return would not be those she had been working with all week.

As I pointed out in a column posted on Friday, an organization within the House Republican Conference used by former Rep. Tom DeLay in his rise to leadership, the Republican Study Committee, has been threatening for some time to dump Minority Leader John Boehner (R-OH) for being too moderate. In their mind, the “bailout package” presented a perfect opportunity to make their move. Boehner did the only thing he could do under the circumstances and reversed field.

That created the first crisis in the effort to get a recovery package to the president’s desk before the scheduled adjournment. Senior White House officials were deployed to smooth the waters and bring the errant renegades back into line. Potential Boehner adversary Congressman Eric Cantor (R-VA) was brought more directly into the negotiations. Minority Whip Roy Blunt of Missouri, another likely candidate against Boehner, was put directly in charge. A hair-brained scheme by Rep. Paul Ryan (R-WI) to force financial institutions to pay more insurance on their deposits—payments that the federal government would be likely to have to lend money to the institutions in order for them to make the payments—was incorporated into the bill. President George W. Bush agreed to address the country and underscore the importance of the package to the country.

Working through the weekend, Democratic and Republican leaders in both the House and Senate signaled to the White House that they had a deal. Senate Majority Leader Harry Reid (D-NV) and his counterpart Sen. Mitch McConnell (R-KY), who himself is facing a tough reelection battle in his home state, both indicated that they had more than enough votes to pass the measure in the Senate. House Democrats said they were certain that they could muster more than 100 votes, and Blunt, the chief Republican vote counter in the House, indicated that he had 100 votes. All parties left the table with optimism that the grueling effort to construct a package that met the needs of the financial system and the political parameters required for passage were finished.

Later Sunday evening, Blunt, who was not only the lead negotiator for House Republicans but also their top vote counter, called the office of Democratic Whip Jim Clyburn (D-SC) to report that Republican support stood at 90 votes. The following morning, however, Blunt approached Clyburn on the floor to report that Republican strength might be as low as 80. The House leadership contacted Secretary Paulson to say that despite the agreement that Republicans were to provide a proportionate share of the votes, they were working the Democratic Caucus to see if they could find Democrats to make up the difference for the Republican defections. The outcome at that point, however, was uncertain.

Paulson said they should proceed with the bill. He obviously recognized that an announcement that there were insufficient votes to move the package, and that the vote had to be delayed, would shake the already uneasy markets. The decision was made to move forward. A loss would be little worse than a delay in terms of market sentiment, but it would at least provide the White House, the public, and the business community with a list of the problem members before the proposal was reconsidered later in the week.

Blunt would contact the Democratic Leadership yet another time after consideration of the bill had begun, to report that his whip total added to only 65. The problem facing the Republican leadership was apparent shortly after the debate began. The leader of the revolt against his party’s president, Treasury secretary, presidential nominee, and leadership in both Houses of Congress was Jeb Hensarling (R-TX), the chair of the Republican Study Committee. He told the House of Representatives:

"…The Paulson plan should never have been our only option…I fear that under this plan, ultimately the Federal Government will become the guarantor of last resort and…that does put us on the slippery slope to socialism. If you lose your ability to fail, soon you will lose your ability to succeed."

Hensarling was joined by Republican Study Committee member Thaddeus McCotter (R-MI), who told the House:

"It has always been the temptation in a crisis especially to sacrifice liberty for short-term promises of prosperity, and it was no mistake that during the 1917 Bolshevik Revolution the slogan was ‘peace, land and bread.’ Today you are being asked to choose between bread and freedom. I suggest that the people on Main Street have said that they prefer their freedom, and I am with them."

Blunt’s final vote count had been almost on the money. When all time had expired he had 66 Republican green lights on the big tally board on the wall behind the House Press Gallery against 133 red lights posted by Republicans who had denied the united pleas of their normally fractured leadership. The Democrats put up 140 votes. Had any of Blunt’s earlier vote counts proven correct, or if the promises made by House Repubican leaders during the bargaining sessions proven correct, the unexpectedly strong Democratic vote would have been more than enough to pass the measure. It was about 30 more votes than had been promised.

At the request of the Republican leadership, the chair refrained from gaveling the roll call to an end and left the tally board open after all time had expired. President Bush was on an open line in the House Republican Cloak Room talking to any of the defectors who would listen. The White House needed to switch 12 votes but in the end no votes were changed. By the end of the day the Dow Jones Industrial Average had lost 777 points, or more than 7 percent of its value. Other indexes were down by larger amounts and the total loss in the capitalization of American business was $1.2 trillion—70 percent more that the price of the legislation that had just been defeated.

The radical elements within the Republican Conference who had sent their leadership back to the bargaining table to negotiate policy concessions that neither the Bush administration nor congressional Democrats or even Senate Republicans thought were sensible walked away from the concessions they had won and the clear need for timely action to prevent a potential meltdown of the nation’s banking system.

So where do these shenanigans leave the country and the world financial system? One option is to make further concessions to Democrats, who recognize the need for intervention but think the current package is not balanced enough in terms of addressing the needs of ordinary Americans. That would result in some Republican defections, but attract possibly enough Democratic support to offset Republican losses and the 12 additional votes required to send the measure to the Senate.

A better solution, however, is to keep the plan bipartisan. The American business community has been the mainstay of Republican Party finances for generations. Little effort was expended by that community before the House vote, largely because business leaders thought it impossible that such a large portion of those with whom they had been allied for so many years could act with such total disregard for the consequences to the economy. That assessment is changing. Following the floor vote the U.S. Chamber of Commerce sent members of Congress a letter stating the following:

"Today’s failure to approve legislation addressing the financial crisis has resulted in uncertainty and turmoil that have dramatically affected the markets, and lowered equity prices, eroding individual savings and destroying billions of dollars of household wealth.

Make no mistake: when the aftermath of Congressional inaction becomes clear, Americans will not tolerate those who stood by and let the calamity happen. If, on the other hand, Congress supports a plan to successfully restore the financial system and preserve the flow of credit to the economy, the American people will recognize that act of courage.

The Chamber urges Congress to immediately pass financial rescue legislation. The Chamber will score votes on, or in relation to, this issue in our annual How They Voted scorecard."

Nearly all of America’s corporations recognize the enormous risk posed to the U.S. economy and the global economy as a result of the reckless actions of those who have represented themselves over the years as stalwart allies of business. They have a responsibility to resolve this situation and assure the White House and leaders in Congress that the votes will be there when Congress reconvenes later this week.

Scott Lilly is a Senior Fellow at the Center for American Progress Action Fund.

I am pleased to submit this written testimony on behalf of the Center for American Progress Action Fund and the Consumer Federation of America about the impact of antitrust enforcement on small businesses and entrepreneurs.

As I suggest in my testimony, over the past several years antitrust enforcement has gone on a misguided detour in failing to fully recognize the concerns of small businesses and entrepreneurs. When dealing with antitrust issues concerning small businesses and entrepreneurs, the antitrust enforcers always bring out the shop-worn bromide from Justice Brennan, that “antitrust laws protect competition, and not competitors.” That certainly is true, but in doing so, the antitrust agencies have become increasingly insensitive to the legitimate competitive concerns of small businesses, placing these businesses into a “disfavored class” for antitrust enforcement. This is a serious error, not only for these small businesses, but also for the American economy generally and for consumers.

My testimony today is based on over a quarter century as an antitrust practitioner, the majority of which was spent as an enforcer in the Antitrust Division of the Department of Justice, and in several senior management positions, including Policy Director at the Federal Trade Commission (“FTC”). I regularly practice before both the agencies, and frequently appear on behalf of small businesses and associations of small businesses, including pharmacies, healthcare providers, medical device manufacturers, truck stops, supermarkets, farmers, and others.

I want to make it clear at the outset that I am not criticizing the dedicated staff attorneys of the FTC, or the Antitrust Division of the Department of Justice, or even the individuals who set the enforcement agenda. For periods of time in the past, antitrust enforcement was somewhat misguided, and in some respects, attempted to protect competitors rather than competition. For example, in the 1960s the FTC brought countless Robinson-Patman enforcement actions, which may ultimately have led to higher prices for consumers. Perhaps one might have envisioned at that point that small businesses were sort of a “protected class” receiving undue recognition by antitrust enforcers. Those policies were clearly reversed during the 1980s with more sensible antitrust enforcement.

Unfortunately, the pendulum of antitrust enforcement has swung too far, with antitrust enforcers being increasingly unresponsive to the concerns raised by small businesses. In some respects as described in my testimony small business has become a “disfavored class.” That is why the Committee’s hearing on this issue is so crucial. By failing to recognize the legitimate concerns of small businesses and entrepreneurs, antitrust enforcement fails to live up to its mission to protect competitive markets and to protect consumers.

The problem identified in today’s hearing was illuminated in an extremely thoughtful article by Professor Warren Grimes “The Sherman Act’s Unintended Bias Against Lilliputians: Small Players’ Collective Action as a Counter To Relational Market Power.” Professor Grimes observes that:

There is a systemic bias against small players in modern markets. Large power players are ubiquitous. Because power checks power, big firms are relatively comfortable in dealing with fellow giants. Small players, in contrast, usually lack countervailing leverage and are likely targets of strategic behavior by power players. Antitrust law and policy has contributed to this bias. [A]ntitrust is relatively intolerant of collective action that would allow small players to achieve countervailing power. Doctrinal developments over the past three decades have exacerbated the problem by limiting small players access to antitrust remedies for power abuses. Well-intentioned but overreaching screening rules now limit the small player’s ability to establish claims such as predatory pricing or an unlawful tie-in, even when the conduct produces unambiguously anticompetitive effects.

So who falls into this class of Lilliputians that are victimized by this Sherman Act bias? Among the disfavored are professionals (such as doctors or lawyers) who practice individually or in small groups and must do business with power buyers of their services; small businesses (such as independent pharmacies or bookstore owners) that confront power buyers or sellers; small franchisees that have ongoing dealings with a powerful franchisor; small farmers or ranchers that sell their output to power buyers; and any independent contractor that sells services to a power buyer (such as a taxicab or truck owner that sells his services to a large taxicab or trucking firm).

The purpose of my testimony today is to begin to outline a progressive vision of how to reverse this unintended bias against small business in the interpretation and enforcement of the antitrust laws.

The unintended bias against small business in antitrust enforcement costs both competition and consumers.  Too often the antitrust laws and enforcement agencies fail to recognize the critical role of small businesses in providing competition and increased choices for consumers.  Our parents could dream that we would have every opportunity to create our own businesses and bring new competition to the market.  If we are going to be able to pass these dreams on to our children and grandchildren, it is absolutely imperative that small businesses and their concerns receive fair treatment in the antitrust agencies and the courts.  The antitrust bias against small business must be reversed.

Read the full testimony (pdf)