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Verdict from the Classroom: 'The ruling ignored the economics ...'

By Dr. David C. Pate, News and Community
June 16, 2014

Last week, St. Luke’s Health System filed an appeal with the 9th U.S. Circuit Court of Appeals. The outcome of this case is very important to health systems across the country that, like St, Luke’s, are trying to transform health care and address the needs of patients, payers, and the public for better health, better care, and lower costs. 

Specifically, this case will determine whether people who live in small and mid-sized communities like ours will be able to have the same opportunity for accountable care as those who live in large urban and metropolitan areas. Since the district court issued its opinion early this year, the decision has garnered national attention and debate. St. Luke’s has received a great deal of encouragement and support from our own communities and from colleagues across the country. 

Soon after the opinion was released, I read an insightful opinion piece in the Idaho Statesman by Dr. Peter Crabb, an economics professor at Northwest Nazarene University. My blog editor, Roya Camp, had the opportunity to interview Dr. Crabb. It seems timely to share his thoughts now that the appeal is pending.

Bad law, misinterpretation of economic principles, and wrong parties.

That’s pretty much the lesson Northwest Nazarene University Professor of Finance and Economics Peter Crabb, Ph.D., drew from the lawsuits and trial involving St. Luke’s.

While activity in the courts continues as St. Luke’s pursues an appeal, NNU business and economics students are likely to spend time conducting their own analyses of what the legal action is about.

Several NNU students already are tackling aspects of the sea change health care is undergoing in America. The legal activity, which has made Idaho Ground Zero in the national debate about how best to construct healthcare delivery going forward, gives scholars on the campus in Canyon County – essentially at the epicenter of the national debate – a ringside seat to what’s going on, and how regulatory agencies are acting and reacting.  

 “This is a case study,” Crabb said, observing that the local legal activity is likely to become the stuff of discussion in NNU microeconomics and managerial economics courses. “This is a national case study, and I think it will gather a lot of attention. We teach the Clayton Act. This will come up.”

In January, U.S. District Judge B. Lynn Winmill issued his ruling following a four-week trial, finding in favor of plaintiffs the Federal Trade Commission and the Idaho Attorney General’s Office and ordering that the affiliation of St. Luke’s and Saltzer Medical Group be unwound. St. Luke’s filed its appeal of the ruling Thursday with the 9th U.S. Circuit Court of Appeals.

Crabb has been a vocal critic of how the action has unfolded. In a Feb. 19 guest column in the Idaho Statesman titled, “Why St. Luke’s is right and the law is wrong,” he noted that St. Luke’s has been trying to lower healthcare spending and improve outcomes for patients but that “the power of the state was used to end this experiment.”

“Let the experiment continue,” he concluded.

NNU’s business and economics students spend time examining the Sherman Antitrust Act and the hundred-year-old Clayton Act, which were the basis for the recent court ruling.

As he did in his guest column, Crabb notes that the antitrust laws, established to protect competition in business and industry, are having the opposite effect.  

“There are two key issues here,” he said. “From an economic standpoint, this is a bad law.” And in the case, “There is a misrepresentation or a misunderstanding of the actual economics of this market.”

There are strong parallels for Crabb between the local legal action and court activity concerning Microsoft through the early 1990s, when Microsoft was the subject of allegations that it had abused monopoly power in the desktop operating systems market. That period and context were the last in which the federal government and the courts were as active as they are being now in the area of anti-trust law and regulation, Crabb believes.

And, as with those tech companies that stood in opposition to Microsoft at the time, enforcement of the law in the healthcare field may come back to haunt those who invoked it initially, he said. Competitors who cite the law in court action are often in a position of defending themselves against accusations of violations of that same law later on, Crabb observed.

The interpretation of the law in the St. Luke’s case is problematic for several reasons, according to Crabb.

“When I read the specific order, I believe that there’s some kind of a misrepresentation of this market,” he said.

If anything, evidence seems to point to a consolidation of insurance industry market power, rather than healthcare provider market or pricing power, he said.

“It’s a lack of competition in the health insurance market,” Crabb said. “It doesn’t reason well with me. From an economic standpoint, the evidence is of a lack of competition or market power on the part of the insurance company, not on the part of the provider.”

Crabb finds problems with other assumptions in the ruling as well. For example, the findings in support of the ruling note that Americans spend more on health care than is spent in the 10 next-biggest-spending countries combined, but it may not be all bad that health care is more expensive than elsewhere in the world, he believes, and it’s wrong to make a sweeping generalization that it is. Users of health services might appreciate the level of care that comes with a hospital setting, for example.

“We may choose to spend more,” he said. In the United States, “We do a lot of elective stuff, but we do it for culture reasons and because we have the money, because we can.

“It’s actually evidence of a positive. We have the choice to spend more. And economically, that might actually be what consumers want. Why? I could have this procedure done by my doctor in his office or I could have it at the hospital, but it might be that I want the assurance of safety, or the technology, or the expertise that a hospital might have,” Crabb continued. “And the consumer might be willing to pay the higher rate for a lot of reasons. This is not evidence of less competition.”

And just because the St. Luke’s/Saltzer relationship included many physicians did not mean residents couldn’t go to dozens of other, non-St. Luke’s, non-Saltzer physicians in the area. Defining Nampa as the market, as the court chose to do, Crabb said, defies logic, noting that people now come to Nampa from Melba, the Jordan Valley in Oregon, and elsewhere for care. Market definition was also problematic in the earlier Microsoft legal activity, he observed.

“You’re still going to have that choice,” Crabb said. “It gets the economics wrong for a number of reasons. And Nampa is the wrong definition of the market. The market is much bigger. And it’s true for Saltzer as well. I can go to hundreds of other doctors.”

Crabb doesn’t understand how it is that the court could say St. Luke’s would have a disproportionate power to negotiate insurance rates with the Saltzer relationship, and wonders how it might ever be that St. Luke’s could negotiate higher reimbursement rates from Medicaid and Medicare, federal programs that pay for health care for large specified populations.

 “It’s a misunderstanding, a misrepresentation, of who holds the market power,” Crabb said. “It’s on the insurance side, not on the delivery side.”

 “The ruling ignored the economics of the issue,” Crabb concluded. “It doesn’t use evidence of low competition in the way an economist would define it. It doesn’t talk about the economics behind those actions. The intention of the act was to promote competition … The unintended consequence is that it prevents what it’s intended to do.”

About The Author

David C. Pate, M.D., J.D., is president and CEO of St. Luke's Health System, based in Boise, Idaho. Dr. Pate joined the System in 2009. He received his medical degree from Baylor College of Medicine in Houston and his law degree from the University of Houston Law Center.