Marshfield Clinic, Physician Networks,

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1 Marshfield Clinic, Physician Networks, and the Exercise of Monopoly Power Warren Greenberg Objective. Antitrust enforcement can improve the performance of large, vertically integrated physician-hospital organizations (PHOs). Objective: To examine the recent court decisions in the Blue Cross and Blue Shield United of Wisconsin v. Marshfield Clinic antitrust case to understand better the benefits and costs of vertical integration in healthcare. Summary and Conclusions. Vertical integration in the Marshfield Clinic may have had the benefits of reducing transactions and uncertainty costs while improving the coordination between ambulatory and inpatient visits, but at the cost of Marshfield Clinic's monopolizing of physician services and foreclosing of HMO entry in northwest Wisconsin. The denial of hospital staff privileges to non-marshfield Clinic physicians combined with certificate-of-need regulations impeded physician entry and solidified Marshfield Clinic's monopoly position. Enforcement efforts of recent antitrust guidelines by the U.S. Department ofjustice and the Federal Trade Commission will need to address carefully the benefits and costs of vertically integrated systems. Key Words. Vertical integration, monopoly power, transactions costs, physicianhospital organizations (PHOs), antitrust, multiprovider networks, barriers-to-entry, market foreclosure In one of the largest antitrust cases brought in the healthcare industry, Blue Cross and Blue Shield United ofwisconsin and CompCare Health Services Insurance Corporation v. Marshfield Clinic and Security Health Plan of Wisconsin, Inc. (883 F. Supp.1247 (W.D. Wisc.1995), the U.S. District Court ruled against the Marshfield Clinic, the fifth largest group ofphysicians in the United States and a large, vertically integrated, physician-hospital-health plan organization, for monopolizing physician services and foreclosing HMO entry in northwest Wisconsin.I Although the District Court's opinion was mostly overturned by the U.S. Court of Appeals, the dominance of Marshfield Clinic physicians in certain geographic areas and in certain specialties, and the benefits and costs of the vertically integrated market structure of the Marshfield Clinic, were not fully addressed by the courts. Furthermore, much of the previous 1461

2 1462 HSR: Health Services Research 33:5 (December 1998, Part II) analysis of Marshfield has focused on the validity of the HMO market definition in the foreclosure aspect of the case (see Glassman 1996). Unfortunately, that focus obscures the two more basic issues raised by the Marshfield litigation-consolidation and barriers to entry in the market for physician services-which are likely to have much greater and more direct implications for consumer welfare. Using Marshfield Clinic as an example, this article attempts to show areas of physician concentration and barriers-to-entry, as well as physicianhospital connections and vertical integration, that need to be examined by private firms and public officials in order to assess the competitive consequences of these combinations. After a brief review of the Sherman Antitrust Act, under which this case was brought, this article provides an economic analysis of Marshfield Clinic and its potential to exercise monopoly power at horizontal and vertical levels. It will also suggest alternative explanations for Marshfield Clinic's behavior. Within this framework, the article will critically explore the opinion of the U.S. Court of Appeals in this case, suggesting how complex many of the concepts in the industrial organization of healthcare can be. Second, it will examine some of the costs and benefits of horizontal and vertically integrated systems. Finally, the article suggests the importance of control of hospital staff privileges and the presence of other barriers-toentry, as well as the benefits and costs of multiprovider networks that must be considered in examining the effect on competition of horizontal and vertical physician organizations. THE SHERMAN ACT The aim of the nation's antitrust laws is to increase competition within industries. The first and most important antitrust law is the Sherman Act of Both sections of the Act are relevant. Section 1 states that conspiracies in restraint of trade are illegal. Conspiracies may take the form, for example, of fixing prices or of dividing markets with competitors. Section 2 prohibits attempts to monopolize by, for example, foreclosing the entry of potential competitors or engaging in anticompetitive conduct. Address correspondence to Warren Greenberg, Ph.D., Professor of Health Economics, George Washington University, st Street N.W, Bldg. 1T, Washington, DC This article, submitted to Health Services Research on February 18, 1997, was revised and accepted for publication on March 16, 1998.

3 BLUE CROSS AND BLUE SHIELD OF WISCONSIN V. MARSHFIELD, 883 F. SUPP.1247 (W.D. WISCONSIN, 1995) Physician Networks and Monopoly In 1994, Blue Cross and Blue Shield of Wisconsin, a private for-profit firm, and its HMO, CompCare, brought suit against the asserted monopoly power of the Marshfield Clinic in allocating markets, in fixing prices, in blocking health maintenance organization entry, and in monopolizing the physician services market, for allegedly violating Section One and Section Two of the Sherman Act. (Although the U.S. Department of Justice (DOJ) and the Federal Trade Commission (FTC) have primary federal jurisdiction in antitrust matters, currently more than 90 percent of all antitrust cases have been brought by nongovernmental private plaintiffs who believe that they have been harmed by anticompetitive behavior) (Greenberg ). A decision favorable to Blue Cross and Blue Shield of Wisconsin would theoretically reduce the monopoly power of the Marshfield Clinic, 1463 make HMO entry easier, and lower prices of physician services for all third parties and managed care firms. In addition to nearly $50 million in damages, Blue Cross and Blue Shield also asked the Courts for injunctive relief such as divestiture of Security Health Plan, Marshfield Clinic's HMO; for Marshfield Clinic to negotiate in good faith with CompCare; and for the termination of Marshfield Clinic's anticompetitive conduct [Blue Cross and Blue Shield of Wisconsin, Trial BriefRegarding Availability ofinjunctive Relief, November 30, 1994]. In December 1994, the U.S. District Court affirmed the jury decision that the Marshfield Clinic had violated Sections One and Two of the Sherman Act by (1) monopolizing the market for physician services, refusing to deal with the Blue Cross and Blue Shield HMO, CompCare; and by (2) restraining trade by segmenting the market with North Central Health Protection Plan, a nearby HMO. Total damages assessed to the Marshfield Clinic for its refusal to deal with CompCare were calculated to be $5.1 million. Damages of higher Marshfield Clinic physician fees due to high concentration and barriers-toentry were $595,000. Since violations of the Sherman Act are subject to treble damages, total damages of $17.1 million were ordered to be paid by the Marshfield Clinic to Blue Cross and Blue Shield of Wisconsin. Richard A. Posner, chiefjudge of the U.S. Court of Appeals of the 7th Circuit, in October 1995, however, reversed a large portion of the District Court decision, leaving intact the Section One violation that Security and North Central divided the HMO market between them.

4 1464 HSR: Health Services Research 33:5 (December 1998, Part II) The Marshfield Clinic as a Horizontal and Vertically Integrated Network As both a horizontal and vertically integrated firm, the Marshfield Clinic includes both 300 specialist physicians located mostly in Marshfield, Wisconsin, a small rural community of approximately 20,000 people, and approximately 100 primary care physicians and pediatricians located in 23 clinics scattered throughout northwest Wisconsin.2 The Marshfield Clinic had annual revenues greater than $200 million in the early 1990s. Marshfield Clinic physicians are paid on a salary basis. Primary care and pediatric physicians are expected to refer to specialists in Marshfield. As a vertically integrated firm the Marshfield Clinic and its physicians also own Security Health Plan (SHP), an individual practice association (IPA) health maintenance organization covering 70,000 enrollees. The Security Health Plan utilizes Marshfield Clinic physicians and holds contracts with 300 independent physician affiliates, paid on a capitated basis, who treat patients associated with Security Health Plan. Physician affiliates are required by contract to refer all of their SHP patients to Marshfield for specialized care. In addition, the Marshfield Clinic is affiliated with, and located at the site of the 524-bed St.Joseph's Hospital, the largest tertiary care hospital in the northwest region of Wisconsin. StJoseph's Hospital performs a broad range of sophisticated medical services including neonatal intensive care services, pediatric cardiac surgery, and neurosurgery. Although St. Joseph's is a nonprofit hospital owned and operated by the Sisters of the Sorrowful Mother and not owned by Marshfield Clinic, physicians employed or affiliated with the Marshfield Clinic are the only physicians who have been granted full staff privileges. Only Marshfield Clinic physicians comprise St. Joseph's medical committees. These committees, among other responsibilities, approve or disapprove staff privileges at the Hospital. Marshfield Clinic specialty care, primary care, and pediatric physicians must also refer all of their patients to the St.Joseph's Hospital.3 Thus, while legally separate, the Marshfield Clinic and St. Joseph's have a strong, mutually dependent relationship. One can consider the final output of the Marshfield Clinic as physician, hospital, or HMO services to patients, with physician or hospital inputs linked together in a continuous intra-firm, seller-purchaser relationship. Additional Hospitals in the Relevant Market Physicians who are not members of the Marshfield Clinic can gain staff privileges at three central and northern hospitals that were calculated to be in the relevant market: Wausau Hospital in Wausau (46 miles from Marshfield,

5 Physician Networks and Monopoly beds); Luther Hospital in Eau Claire (80 miles from Marshfield, 208 beds); and Sacred Heart Hospital in Eau Claire (309 beds). (See map, Figure 1). Each of these hospitals, however, is far less sophisticated in areas such as cardiac, cancer, and neonatology care. Thus, physicians in these specialties, who are not employed or affiliated with Marshfield, would find it difficult to compete with the Marshfield Clinic. Physicians in the Relevant Market The Marshfield Clinic physicians may be divided into three components in order to help define the product market. The first component consists of primary care physicians employed by Marshfield who practice medicine in Figure 1: Wisconsin Marshfeld Clinic, Clinic Sites, and Hospitals in Northwest Ashland *0 WISCONSIN Mercer_ r ~~~~~ParkFalls A A iocu ( *~~~~~~~~~~ Phillips Rice Lake A A Ladysmith Rhinelander Bruce (, *~~~ Cornell< Chippewa Falls Saley olby Wausau Eau ClaireHGreenwoodA StratfordA AMoie A Loyal * AH Durand Marshfield * Stephens Point Wisconsin Rapids * A Clinic Sites used in the analysis * Clinic Sites not used in the analysis H Hospital Miles Wausau Hospital is located in Wausau: Sacred Heart Hospital and Luther Hospital are located in Eau Claire: St Joseph's Hospital is located in Marshfield.

6 1466 HSR: Health Services Research 33:5 (December 1998, Part II) the 23 clinics. The second component consists of pediatric physicians who may also practice in the 23 clinics. The cross-elasticity of demand between primary care and pediatric services appears to be low enough to classify them into two distinct markets. Cross-elasticity of demand may be defined here as the percentage change in the quantity of services provided by primary care physicians in response to a percentage change in fees by pediatricians. Although children might be taken to see primary care physicians (internists or family physicians) when fees of pediatricians are increased, adults would not see a pediatrician regardless of their fees relative to the fees of primary care physicians. The third component is made up of the specialist physicians such as surgeons, oncologists, and cardiologists, who would appear to have a low cross-elasticity of demand with primary care and pediatric physicians. Moreover, specialist physicians practice within their own product markets and do not compete with each other. How might one measure any potential market power of each of the three Marshfield Clinic physician groups? Following the traditional literature of industrial organization economics, one may examine the market shares of Marshfield Clinic physicians in defined relevant geographic areas since the potential of market power can be assessed only in particular geographic areas. Again, one ideally would like to use a cross-elasticity of demand measure to observe the extent that patients will travel to visit physicians when there are relative changes in physician fees. One might also want to observe the cross-elasticity of supply of physicians when there are relative changes in price. Data are usually not available, however, to compute relative changes in quantity demanded and supplied as well as relative changes in prices. Approximations must be made using relative flows in and out of a hypothetical market area (the Elzinga-Hogarty (E-H) test) (Elzinga and Hogarty 1973) or an approximate area where individuals would appear to travel for physician care. The geographic markets are computed for primary care and pediatric services by including the area within a 30-mile radius of each of the 23 clinics within the northwest region of the state. Given the potential for stormy weather in northwest Wisconsin, it was believed that most people would not travel more than 30 miles for pediatric or primary care unless there were large changes in relative price (see also Gamick et al. 1987). If 25 percent or fewer of the people went outside of the 30-mile area for care, and 25 percent or fewer of the people who received care in the 30-mile area were from outside the area, the 30-mile radius around the clinic would be considered the relevant geographic market. If the 30-mile test did not pass this 25 percent mark, increments of ten miles were iteratively

7 Physician Networks and Monopoly 1467 added to the radius until the market delineation tests were satisfied using E-H criteria. Of the 23 clinics of the Marshfield Clinic, 13 satellite clinics and their relevant geographic markets were identified. Ten of the 23 clinics were excluded from the analysis because they were specialty clinics, clinics that had been recently closed, or clinics for which insufficient data were available for the small number of primary care and pediatric physicians (see map, Figure 1). Primary Care Physician Services Using the "number of patient events," or the number of times that patients saw physicians during the year, for each of the three years examined, , the Marshfield Clinic market share for primary care services was greater than 60 percent in 9 of the 13 satellite clinics. For pediatric services, the market shares of the Marshfield Clinic were greater than 60 percent in 8 of 13 satellite clinics. Specialty Care Physician Services For specialty services, the geographic market includes the Marshfield Clinic as well as the Marshfield Clinic satellite clinics that act as referral points to the main Marshfield Clinic specialty physicians at St. Joseph's Hospital. It was from these referral points in northwest Wisconsin that Marshfield Clinic and St. Joseph's Hospital would receive many of their patients. This is also the market to which the Marshfield Clinic refers in its promotional brochures and other internal planning documents. Moreover, this northwest Wisconsin geographic market was able to satisfy the 25 percent test for specialty care physician services because fewer than 25 percent of the individuals received specialty care from outside the area and fewer than 25 percent of those who received specialty care came from outside the region. Specialty care physician product markets were defined in terms of services delivered in approximately 300 separate diagnosis-related groups (DRGs). More than 100 of the existing DRGs, such as "allergic reactions for ages older than seventeen" (DRG 447) or "foot procedures" (DRG 225) were not included as separate specialty product markets since they were "catch-all" DRGs or DRGs too broadly defined. The Marshfield Clinic had specialist market shares greater than 60 percent (in terms of number of procedures or number of surgeries) for the combined years for 14 DRGs, including cardiac valve surgery, coronary artery bypass surgery, pelvic evisceration, and chemotherapy.

8 1468 HSR: Health Services Research 33:5 (December 1998, Part II) Moving from DRG hospital groupings to the markets of specialty care physician services is tenuous. It is important to note, however, that these markets for specialty physicians were not contradicted by cross-examination or defense testimony in the District Court trial. Moreover, the small number of specialty services that appear to be monopolized confirms that St.Joseph's was performing the most sophisticated surgery with its cardiac and cancer specialists, while the other hospitals and St.Joseph's specialists were reasonably competitive on other hospital procedures. Although the District Court found high concentration ratios in 14 of 494 DRGs,Judge Posner dismissed even the high concentration ratio of the 14 DRGs by suggesting, without evidence, that high cross-elasticity of supply among specialized physicians may exist in some DRGs [Posner opinion, p. 8]. For primary, pediatric, and specialty care physicians, the greater than 60 percent market share of the Marshfield Clinic exceeded the DOJ and FTC guidelines for physician services by a wide margin. [The antitrust agencies generally use the Hirschman-Herfindahl Index (HHI) for market concentration guidance (see Department ofjustice and Federal Trade Commission 1992, 28-29). The HHI is the sum of the squares of the individual firms in the marketplace, and an HHI above 1,800 in a market is considered "highly concentrated." Thus, a single firm with a market share of more than 60 percent (an HHI of at least 3,600) would be considered to be highly concentrated]. A single firm with a greater than 60 percent market share would also exceed the threshold at which most industrial organization economists would term a "concentrated market." Concentrated markets, however, might also imply that a firm or group of firms has grown relative to its competitors because of its superior services or products. No evidence was presented in the District Court trial to suggest that this might be the case. However, the use of both employed Marshfield Clinic physicians and physician affiliates (who depend on referrals from Security HMO) as part of the Marshfield Clinic market share can be controversial [p. 7]. Blue Cross and Blue Shield included affiliates in its calculations of Marshfield Clinic's market share because the affiliates' ties to Marshfield made them vulnerable to Marshfield Clinic's interest. In contrast, one might argue that since affiliates were still allowed to price and compete as they wished without regard to the Marshfield Clinic, they ought not be included in Marshfield Clinic's market share. Concentrated markets, however, must be coupled with barriers-to-entry to confer inferences of monopoly power. Substantial barriers-to-entry were found in Marshfield.

9 Physician Networks and Monopoly 1469 Barriers-to-Entry: Structural Barriers-to-entry are costs imposed on potential entrants by government or by existing firms that increase the difficulty for new firms to enter the market. St. Joseph's Hospital, the largest hospital in the relevant geographic market, is also the area's largest referral center and, as such, is the only hospital in the region that performs a broad range of sophisticated medical services. Hospital staff privileges may act as a barrier-to-entry to non-marshfield Clinic physicians. Only Marshfield Clinic physicians have had full staff privileges at St. Joseph's Hospital. St. Joseph's Hospital retains only Marshfield Clinic-employed physicians on its credentialing committee, which exerts control over staff privileges and other planning and policy decisions of the Hospital. Thus, both non-marshfield Clinic specialists and primary care physicians are excluded from St. Joseph's Hospital, although staff privileges for some specialists and primary care physicians appear to be available at Wausau, Sacred Heart Hospital-Eau Claire, and Luther. Posner dismisses hospital privileges as an entry barrier, however, declaring that "hospitals are not public utilities, required to grant staff privileges to anyone with a medical license" [Posner opinion, p. 12]. It is true that a hospital or its medical staff committees, might, for its image or for quality control, want to retain and control its own mix of physicians. This may be pro-competitive. Yet, when St.Joseph's Hospital excluded only non-marshfield Clinic physicians in Marshfield, there were no other hospitals in the relevant market where some of the sophisticated specialists could practice. Security HMO and its connection to the Marshfield Clinic may act as another barrier. Marshfield Clinic Security affiliates must refer to Marshfield Clinic specialists, which makes it difficult for other specialists to enter the market. Evidence exists in the District Court trial that affiliates also preferentially referred non-security patients to Marshfield Clinic specialists as well. It is possible that these referrals might reflect a belief that Marshfield Clinic physicians are better physicians or a reluctance of the affiliates to upset the Marshfield Clinic. Marshfield Clinic affiliates who do not refer patients to the Marshfield Clinic or St. Joseph's Hospital may risk possible termination from affiliation with Security Health Plan and its 70,000 member patients. In addition, of course, all Marshfield Clinic physicians who practice in the satellite clinics must refer their patients to the Marshfield Clinic or to St.Joseph's Hospital for tertiary and other specialized care. Another important barrier-to-entry is the State of Wisconsin Capital Expenditure Review (CER) program, equivalent to many certificate-of-need

10 1470 HSR: Health Services Research 33:5 (December 1998, Part II) (CON) programs that have been used in many states. Under the CER program, capital expenditures by hospitals or new hospital entrants that exceed $1.0 million must be approved by Wisconsin's Cost Containment Commission. CER programs can act as a barrier-to-entry because it becomes difficult to justify such expenditures, for an entering hospital or for an existing hospital, when already existing hospitals are providing certain medical procedures or services. In the past, existing hospitals have used CON regulations to limit the entry of new hospitals or the expansion of existing hospitals. Thus, new physician entrants would be unable to compete against St.Joseph's with staff privileges in new or expanded tertiary care hospitals. In addition, with CONlike barriers-to-entry, the potential entry or expansion of new hospitals was negligible. Barriers-to-Entry: Conduct Marshfield Clinic physicians would not provide cross-coverage of patients for non-marshfield Clinic physicians. Thus, physicians who must be absent for a professional meeting or vacation must seek to arrange coverage, if possible, from the widely scattered independent physicians; this necessity can act as an annoyance or a real administrative burden for the non-marshfield Clinic physician. Marshfield's dominance in many areas will make this difficult. Posner, however, does not accept Marshfield's refusal to cross-cover for independent physicians as a barrier-to-entry [Posner opinion, p. 12]. Indeed, Posner uses backward reasoning to suggest that Marshfield's reputation will suffer if Marshfield physicians treat the patients of independent physicians [Posner opinion, p. 12]. Perhaps Posner meant to state that Marshfield patients would be less satisfied if an independent physician had to cross-cover for a Marshfield physician. The Marshfield Clinic also enforced a non-compete clause with physicians who were formerly employed by Marshfield. Such physicians could not practice within 30 miles of Marshfield for three years after termination from the Clinic, resulting in less competition to the Marshfield Clinic. Physicians, however, could practice in outlying areas near the smaller clinics if they desired. Marshfield's non-compete clause is not addressed in the Posner opinion. In discussing Marshfield Clinic's behavior in paying affiliate physicians, Posner finds Marshfield's policy to be sound in not paying physician affiliates any more than what other patients or third parties are charged [Posner opinion, pp ]. As a "most favored nation" bargaining tool, it is difficult to disagree with Posner's view that this type of behavior is what "... the

11 Physician Networks and Monopoly 1471 antitrust laws seek to encourage." [Posner opinion, p. 16] (Goldberg and Greenberg 1995). That is, Marshfield is attempting to pay the lowest price possible for physician input, which may make its clinic more attractive to managed care plans concerned about the price of their premiums. It was also asserted by Blue Cross and Blue Shield that the Marshfield Clinic physicians did not negotiate in good faith with the Blue Cross and Blue Shield-affiliated HMO, CompCare, which had desired to enter the northwest Wisconsin market. Blue Cross and Blue Shield maintained that if it could not use Marshfield Clinic physicians on its panel of physicians, access to St.Joseph's Hospital would be impossible. Finally, it was alleged that the Marshfield Clinic and its Security Health Plan agreed to divide the northwest Wisconsin market with the 37,000- member North Central Health Protection Plan, an HMO based in the middle of the state. Neither HMO would enter, advertise, or otherwise compete in the region of the other HMO, a violation of the "conspiracy in restraint of trade" provision of Section One of the Sherman Act. A "division of markets" agreement can have more deleterious effects than simply fixing prices, however. Oftentimes firms may agree to fix prices but will still discount from list prices or compete on quality or access. A "division of markets" agreement means that firms cannot compete on any basis. In many respects, therefore, division of markets incurs a greater efficiency loss than price fixing. Posner seems to be on solid ground in finding the division ofmarkets between SelectCare and North Central HMO to be a violation of the Sherman Act. BENEFITS AND COSTS OF VERTICALLY INTEGRATED NETWORKS IN HEALTHCARE Since the benefits and costs of high horizontal concentration levels have been debated at length elsewhere (Scherer and Ross 1990), this section will briefly examine a less studied area, vertical integration in healthcare. In Marshfield Clinic the clinic physicians, by aligning with St.Joseph's Hospital, might be able to guarantee a steadier stream of patients to the hospital. The Marshfield Clinic primary care physicians might also be more comfortable with a predictable level of high-quality physicians on the staff of St.Joseph's Hospital. Specialists who referred back to primary care physicians would also be assured of a certain level of quality. Hospitals have generally granted staff privileges to physicians in order to create incentives for physicians to admit to the hospital granting the privileges. Vertical integration,

12 1472 HSR: Health Services Research 33:5 (December 1998, Part II) however, would be a more formal way to cement these ties because physicians generally have staff privileges at more than one hospital. In addition, physician-hospital organizations may achieve some efficiencies with a steadier stream of referrals, which can help achieve economies of scale for hospitals as well as for physicians. Costs may also be saved and quality improved by better coordination of ambulatory and in-patient visits. Furthermore, the risks that might be incurred from higher than expected utilization in risk-based contracts with managed care plans may be jointly shared between physicians and hospitals. Moreover, Shortell finds advantages in clinical integration such as enabling budgeting policies and practices to be coordinated for various services (Shortell et al. 1994). The Marshfield Clinic's relationship with its Security HMO may also result in some transactions cost economies for both parties. Contracting with managed care plans potentially would achieve higher hospital occupancy rates and an increase in physician members of the PHO. In general, integration can help protect against potential monopolization or monopsonization practices by hospitals, physicians, or HMOs. Potential of Vertical Integration to Reduce Transactions Costs Williamson has suggested that the most important benefit of vertical integration might be the potential to reduce transactions costs between buyer and seller or between manufacturer and distributor (Williamson 1979; see also Fenton and Harris 1994). A managed care organization that periodically negotiates with different independent physicians on the number of hours of work, the methods and types of utilization review, and the incentives for cost containment might save substantial transactions and administrative costs for both the managed care plan and physicians when a vertical relationship exists. A single integrated network, such as in Marshfield, however, may curtail the entry of managed care plans and other physicians by limiting hospital staff privileges to its own physicians or by those physicians' refusal to deal with other managed care plans. It may raise the costs of entry for rivals (see "Illegal Price-Fixing..." 1995, where physicians refused to deal with any but the existing managed care plan; Salop and Scheffman 1983; Salop 1993). Monopoly power exercised by a hospital in a physician-hospital organization (such as in Marshfield) is possible, and this can lead to further exclusion of competitors for physician services. Physician services may be thought of as input into hospital services in order to produce health services output. Under vertical integration, primary care physicians might be required to refer all of their patients to a particular hospital, and as a quid pro quo, the hospital might refer patients back to these primary care physicians to receive follow-up care.

13 Physician Networks and Monopoly 1473 One can ask further, however: What barriers are confronted by existing hospitals in performing more complex specialties or by new hospitals entering the market? In Marshfield, certificate-of-need legislation hampered entry. But if there are no such barriers, or if a natural monopoly is not in place (of which there is no evidence here), hospitals, in competition with one another, may be able to limit staff privileges without fear of the antitrust authorities. As we have seen, there are benefits and costs to integrated networks. The trade-off between the gains of greater efficiency, lower costs, and better quality will have to be weighed against the costs of market power, such as higher prices, by the courts. Most economists are unconcerned about vertical integration unless it leads to market power. If markets were competitive, substantial efficiencies would be attached to such integration, with each integrated system attempting to have lower costs and higher quality than the other. The welfare of the healthcare consumer would improve. The costs of vertical integration arise when one or even a few firms monopolize one of the integrated links of the market. In Marshfield the District Court found that market power exists while the Court of Appeals believed that Marshfield, for the most part, operates in an efficient manner. Efficient actions, however, may not be immune from the pursuit of market power. Recent Antitrust Guidelines in Physician and Multiprovider Networks In August 1996 the U.S. Department ofjustice (DOJ) and the Federal Trade Commission (FIC) issued their combined guidelines, Statements ofantitrust Enforcement Policy in Health Care. Their guidelines addressed physician joint ventures or networks as well as multiprovider networks similar to the combination of the Marshfield Clinic, St.Joseph's Hospital, and Security Health Plan. The Statements define the legality of physician networks based on "rule of reason" criteria rather than defining them per se as illegal price-fixing networks (barring substantial risk taking or efficiencies), which was the case in the prior DOJ and FTC guidelines (1994, p. 71). The "rule of reason" in these new Statements requires the antitrust authorities to take into account "... significant efficiencies that benefit consumers" (1996, pp ) as well as the structure of the physician services market in a defined geographic area (1994, p. 71). The task of the antitrust agencies is to balance the potential inefficiencies of a single, fixed price among competing physicians against the potential for competition and efficiencies from a physician-controlled managed care plan in the marketplace.

14 1474 HSR: Health Services Research 33:5 (December 1998, Part II) Costs ofphysician Networks Since physicians may be independent competitors, any agreement to join together as a physician network means fewer competitors in the marketplace. But it is possible that there may be economies of scale to physician practices. For example, Pope and Burge (1992) find in their review that physicians who practice in groups achieve more economies-by, for example, sharing the fixed costs of office space and equipment-than do physicians who practice on a solo basis. They also suggest that economies may result from the bulk purchase of medical supplies and pharmaceuticals, or from greater specialization as physicians assign more tasks to allied health professionals. Advantages ofphysician Networks It may also be possible that the physician group is so small relative to the remainder of the market, and barriers-to-entry so low, that the physician group poses little threat to competition. It may also be possible that physicians working together may improve the quality of care. There may even be some advantages, such as a reduction in transactions costs, to physician networks in selling their services directly to employer groups. For example, the Mayo Clinic provides health services directly to the Deere Company in Iowa and Illinois and to IBM in Minnesota ("Doctors, on Offensive,...." 1995). The entry of the Mayo Clinic yields an additional competitor in the marketplace. Thus, a rule of reason test to balance new entry and possible efficiencies against the possibility of monopoly power is necessary. Moreover, the rule of reason test should recognize that some physicians would be independent competitors if they were not combined in a group. The Statements (1996) urge that multiprovider or physician-hospital networks also be treated on a rule of reason basis. The competitive impact of multiprovider networks will depend on the efficiencies generated relative to their potential to exclude competitors (pp ). As we have seen, rules of reason for vertical integration may be appropriate since many vertical integration arrangements can be efficient and can promote competition while others may promote monopoly power. SUMMARY With the growth of physician-hospital organizations and the desire of physicians to form their own networks, more attention will need to be paid to the concentration and the potential for anticompetitive behavior and efficiency

15 Physician Networks and Monopoly 1475 in vertically integrated market structures and physician-controlled health plans. Although the U.S. Court of Appeals dismissed control of hospital staff privileges as a source of monopoly power in Marshfield, the control of staff privileges, along with other impediments to competition, must be balanced against the costs and benefits of vertical integration as a whole. The Marshfield Clinic case and the physician network guidelines do illustrate, however, the complexity of setting antitrust policy in this area. Sound antitrust policy might treat vertical integration in a benign manner as long as one segment of healthcare services does not have monopoly power and patients can choose among vertically integrated and non-vertically integrated firms. New empirical work is needed, however, to help calculate the benefits and costs of vertical integration as well as the variety of physician networks. ACKNOWLEDGMENTS I would like to thank Hal Luft and two anonymous referees for their insightful and helpful comments. NOTES 1. The author was expert economics witness for the Blue Cross and Blue Shield United of Wisconsin in this litigation. 2. The Marshfield Clinic identifies family, general practice, and internal medicine physicians as primary care physicians. 3. In a Marshfield Clinic physician recruiting brochure that was being circulated in 1990, the following quotation may reflect the clinic's relationship with St.Joseph's Hospital: "This quality of hospital care pleases the Marshfield Clinic doctor, who, with his or her colleagues, virtually is the St. Joseph's Hospital medical staff." [The Marshfield Clinic: For the One in Four, p. 19, undated, from Report of Warren Greenberg to U.S. District Court, Western District of Wisconsin, 26 September 1994, pp. 4-5]. REFERENCES "Doctors, on Offensive, Form HMO's," New York Times (7 March 1995): D-1, D-7. Elzinga, K. G., and T. F. Hogarty "The Problem of Geographic Market Delineation in Antimerger Suits." The Antitrust Bulletin 18, no. 1 (spring): Fenton, K. M., and B. C. Harris "Vertical Integration and Antitrust in Health Care Markets." The Antitrust Bulletin 39, no. 2 (summer):

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