Interview with Fiona Scott Morton, DAAG for Economic Analysis at the DOJ

Transcription

1 C O V E R S T O R I E S Antitrust, Vol. 26, No. 2, Spring by the American Bar Association. Reproduced with permission. All rights reserved. This information or any portion thereof may not be copied or disseminated in any form or by any means or stored in an electronic database or retrieval system without the express written consent of the American Bar Association. Interview with Fiona Scott Morton, DAAG for Economic Analysis at the DOJ Editor s Note: In this interview with ANTITRU S T, Dr. Fiona M. Scott Morton discusses her views on competition in health care markets, contracts that reference rivals, and how the 2010 Horizontal Merger Guidelines have influenced merger analysis at the Department of Justice. Dr. Scott Morton is the Deputy Assistant Attorney General for Economic Analysis at the U.S. Department of Justice Antitrust Division. She is the first woman to hold this position. Dr. Scott Morton is on leave from the Yale School of Management, where she is a Professor of Economics and an expert in competitive strategy. Her academic research focuses on empirical studies of competition among firms in such areas as pricing, entry, and product differentiation. She has written extensively on the economics of health care, including the pharmaceutical industry, Medicare, and Medicaid. Fiona Scott Morton was interviewed on January 18, 2012, by ANTITRU S T Associate Editor Elizabeth M. Bailey. Dr. Bailey is the Executive Director of the Energy Institute at the University of California Berkeley s Haas School of Business. ANTITRUST: You joined the Department of Justice as the Deputy Assistant Attorney General (DAAG) for Economic Analysis in May What are your responsibilities in this role? S C O T T M O R T O N : I was coming from an academic setting as is usual for the Economics Deputy. I am on leave from my position as Professor of Economics at the Yale School of Management. What is interesting about a transition like this one is that you are moving from an environment where you are really not supervising many people possibly a research assistant or a secretary and engaging entirely in research and teaching, to a very different environment where the questions are policy questions and there is an entire staff of professionals to help carry out the mission. And of course another major difference relative to academia is that I have to wear a suit every day! Although the environments are very different in many ways, they share an important similarity: the importance of quality economic analysis. Let me describe the components of the job. Perhaps the most different one for me is that I manage about fifty PhD economists in addition to other staff. The DOJ economists have their own internal management structure, which works efficiently and effectively. But, as the DAAG, I am also responsible for some personnel issues, performance reviews, training, and the like. That part of the job has been really fun because the Division economists are excellent in terms of their abilities and their experience, and also are very pleasant and friendly. I have found the environment to be an excellent working environment and very productive. A second important piece of my job is evaluating the steady flow of mergers coming through DOJ. I supervise the economic work involved in analyzing the potential benefits and harm from those mergers, and any policy issues that might arise. Mergers, of course, have a timetable under the law: thirty days to decide whether a second request is needed, and then thirty days to evaluate the additional information. So, there is a brisk pace to that work. I have to coordinate with the economic staff to learn what approach they are taking with each case, what the preliminary findings look like, and whether they need additional resources, or direction, conversation, etc. We also bring non-merger cases under Sections 1 and 2 of the Sherman Act. For those, as in non-merger cases, I help identify, analyze, and interpret the economic evidence for the Front Office management team. And obviously, the economics of that anticompetitive behavior is certainly critical to whether we think that consumers are being harmed and whether we should bring a case. So that is a second area where I supervise economic analysis. And then the third area of economic policy work is what we call competition advocacy. This work is economic analysis undertaken when, for example, another agency is writing a regulation or encounters a problem and would like to get advice from the Justice Department. Or perhaps where we at DOJ encounter a policy issue and would like to provide some advice to another agency or part of the government. In these situations there is typically not a case on our part. But because we have considerable expertise in competition poli- 1 4 A N T I T R U S T

2 cy, and because often we may see the competitive effects of other agencies regulations, we can provide helpful advice to other areas of government. I will give you a couple more examples of additional specific activities that I undertake. I help identify both internal and external expert witnesses for cases approaching litigation and supervise our relationship with those experts. As cases approach litigation (e.g., AT&T) or are in litigation (e.g., HRB/TaxACT), I coordinate the various players on the expert s team, plan strategy, and supervise development of the evidence for testimony. I play a public role in providing outreach to academic and industry economists concerning the division s policy and action through speeches and conference panels, etc. That activity is an important link to other economists who work in these areas. So, in short, the DAAG for Economic Analysis is really in charge of making sure that high quality economic analysis underpins all the enforcement and policy activities of the Division, and, where necessary, translating the issues or the problems into concrete steps for the economist team to take. Of course, the staff economists and the managers are very experienced. I weigh in to help figure out what type of evidence would be most useful, or what kind of analysis would be the best to undertake, or what strategy should we take in trying to prove our argument. Making those sorts of decisions is what I do in order to make sure that the economic analysis is as good as possible and is contributing as much as possible to the mission of the Division. ANTITRUST: Would you tell us a little bit more about how the Economic Analysis Group (EAG) is organized? S C O T T M O R T O N : There are research assistants, usually undergraduates who recently have received their degree, who work for us for up to four years, and a few financial analysts. And there are more than fifty PhD economists. The management hierarchy consists of the DAAG for Economics, the Director of EAG (who acts sort of like a Chief of Staff), three Chiefs, and three Assistant Chiefs, That makes seven career PhD economists who serve in a managerial capacity within EAG. Each case is supervised by a manager, either a Chief or an Assistant Chief. And that person organizes and makes sure the matters are staffed, looks at memos before the memos go to me or to anybody else, and generally kind of trouble shoots the matter. And these are people who have worked in EAG for a number of years and who have management expertise. They do most of the work in terms of the day-to-day running of these cases. The Director of Economics also plays a role in Front Office meetings, and handling some internal personnel issues. In addition, he or she does more institutional international outreach, such as serving as a delegate to, for example, a long-running OECD project having to do with competition policy. ANTITRUST: I m glad you mentioned interactions with the international economics community. Please describe the interaction you have with international economists. SCOTT MORTON: In the past, there has been a lot of interaction with international antitrust enforcement agencies. A lot of it was centered around training and outreach because we have a really great economics staff at DOJ who can do that work. Additionally, DOJ integrates economics into antitrust enforcement in a fundamental and useful way. So I think a lot of competition authorities in other countries are eager to learn what they can from us, and we learn from them. Unfortunately, because of the budget climate, almost no travel is permitted in the Antitrust Division. But EAG economists have traveled to provide training, when paid for by the host agency. ANTITRUST: Have you done any consulting work before coming to DOJ, and, if so, do you find that consulting work to be helpful or informative in your position? SCOTT MORTON: Yes, I did do some expert witness work before coming to DOJ. It was definitely helpful as an introduction to many of the legal issues I deal with on a daily basis here. And one of the nice things about having served as an expert witness is that you understand the process a little bit better things like the role of the expert economist, how logistics tend to work, special vocabulary, the stages an expert report may go through, what happens at a deposition, and so on. My past consulting work has been very useful in helping me manage the external experts that we have used at DOJ. An interesting difference which I really appreciate about being in government is the amazing quality of the cases we bring. In my role, I get to be more involved in the decisionmaking process and in formulating how the economics of the case is presented in the first instance. This different perspective is fun because instead of coming in after a complaint has already been filed, I am helping with the strategy from the beginning. For this reason, I find working on a case the DOJ is litigating is more enjoyable relative to an ordinary private lawsuit. We engage in a lot more pre-complaint discovery than most private parties do, and we have more vested in determining the right answer before we file than is typical in private litigation. ANTITRUST: Do you have any priorities or objectives that you would like to accomplish during your time at the DOJ? SCOTT MORTON: One of my areas of interest is antitrust in the health care sector. I think this is a very important area because we spend close to 20 percent of GDP on health care, and costs continue to increase. One way you could imagine getting those costs to fall is if there was more competition in health care, and maybe that additional competition would S P R I N G

3 C O V E R S T O R I E S One of my areas of interest is antitrust in the health care sector. I think this is a ver y impor tant area because we spend close to 20 percent of GDP on health care, and costs continue to increase. restrain price increases, would encourage firms to operate more efficiently, and would help the country get this problem under control. The reason that competition has been difficult to stimulate in many health care markets is that competition doesn t happen in the traditional way. In health care markets, you don t usually get budget-constrained consumers going out to purchase the good, comparing quality and price across different firms. Instead, in health care, the patient is the consumer, and the patient traditionally pays a small fixed amount at the point of service because the patient is insured. And people must be insured because health care expenditures are infrequent but large, and the way you afford them over your lifetime is to pay smoothly over time with insurance. But if the consumer pays very little at the point of service then she is not really shopping in the traditional sense because the full price of the service is not known, nor is she paying it. Likewise, the quality of the service is often not known to the consumer either, because she has shopped for only one knee operation and not hundreds, and lacks the expertise to assess the quality of doctors and hospitals. So, a firm with a lower price and higher quality cannot attract consumers for knee operations the way it can for lunches or computers. What can a competition authority do about that? Some competition is generated by payors, and by that I mean the insurance company, or the HMO which does know about outcomes of knee surgery and can compare one physician to another in terms of quality and price. However, payor markets are quite concentrated in many areas, and arguably we could use more competitive vigor in this area. The Division has a number of recent cases in the health insurance industry that we can point to as part of our work to try to make sure these markets function competitively. For example, in the Blue Cross Blue Shield of Michigan case which I am not participating in the DOJ is suing to stop the use of MFN clauses by the allegedly dominant health insurer. An MFN clause requires that the seller charge other buyers at least as much as it charges the buyer with the MFN. One issue in insurance markets is that an entrant might wish to build a narrow network and contract with only one hospital. For example, the entrant might offer all its business to that hospital in exchange for a lower price. However, if a dominant insurer has MFN protection, then the hospital cannot contract with the entrant unless it also lowers price to the dominant insurer, which it is unlikely to do. United Regional Hospital of Wichita Falls is another example of a case where a contract provision restricted entry. The dominant hospital charged insurers a premium if the insurer also included in its network the smaller hospital in the coutry. This created an incentive for insurers to not buy from the small hospital, and prevented that hospital from expanding into profitable services to challenge the dominant hospital. Contract terms such as these have been shown to raise prices and restrict entry in many situations, which is why the Divi - sion is challenging them. We also had an insurance settlement in Montana recently where Blue Cross Blue Shield of Montana tried to purchase the business of a competitor. The competitor was a consortium of six hospitals that was selling health insurance and serving as their own providers. The combination would have significantly increased concentration in the state. DOJ intervened and ensured that the business was sold to a new entrant that could provide robust competition for Blue Cross. Of course we are also one of the agencies charged with reviewing Accountable Care Organizations (ACOs) to make sure that they are procompetitive rather than anticompetitive. Thus, as this form of provider organization becomes more common due to the new health care law, DOJ will ensure that competition in the marketplace remains strong. So there are a number of things that we at the Justice Department have done and are doing. Also, I am involved in some other issues in health care, both on the competition advocacy side, and in work that I cannot talk about publicly, because I think this is an important area for us to focus on. ANTITRUST: DOJ has been very active in health care matters recently, and you talked about a number of those matters. How has your academic research helped to inform your thinking on the health care matters that you are working on while at DOJ? SCOTT MORTON: I have looked at MFN clauses in my research in the context of the pharmaceutical industry. In 1991 Congress established an MFN clause for the Medicaid program; the provision essentially required Medicaid to get the lowest price of any private buyer in the country for branded products. And what I show in that research is that rule raised prices for branded pharmaceuticals on average in the private sector. I also showed why this would be the expected response, and why it would be stronger for some drugs than others. Another area that s interesting in pharmaceuticals is the stimulation of price competition for brands on the part of generics, and also on the part of buyers that run a formulary. I have addressed both of these issues in my research. A formulary is a way to explicitly organize competition among branded products. The insurer running the formulary says to itself, I really just need one cholesterol drug out of these four 1 6 A N T I T R U S T

4 branded options because they are very similar to one another. Which of the four manufacturers is going to offer me the best price? And if I get a good price from one of them, then I m going to make that the default drug for all the people who have my insurance. In this way the insurer stimulates much more vigorous price competition. This is because the insurer is informed about quality and total price and can bargain on behalf of a large group to move demand to the provider that offers the best contract. By contrast, your average patient has no idea that there are four cholesterol drugs and that he could take any of them, and additionally he cannot bargain with the manufacturer because his demand is too small. So these strands of research are relevant to my work today. A N T I T R U S T : You mentioned ACOs accountable care organizations when you were discussing health care priorities earlier. Would you describe the competitive issues that might arise with ACOs and give us any thoughts you have on how practitioners can guide their clients in this area. Is there a bright line? SCOTT MORTON: The main issue is that we want these organizations to provide consumers better care because they have two features. The first is a financial incentive to stop the patients from being readmitted, having complications, or in general incurring health costs that could be prevented with coordination and communication. The financial incentive will help lower those kinds of wasteful expenditures. Secondly, we want clinical integration that improves quality. For example, the primary care physician and the hospital physician share the electronic medical record of the patient, so care is coordinated. Or, the hospital physician and the rehab center discuss the patient s needs in a scheduled way and both can see the other s notes so that they can together determine whether the patient should be sent home, return to the hospital, or stay in rehab those kinds of issues. So how do you get these two features? These various providers need to be working together. And when you look at this through the lens of competition policy, it is clear that these providers are all participants in the health care market, and there will be situations where they are competitors with each other as well as situations where they are complements. The Accountable Care Organization regulations highlight that the antitrust laws still apply to these organizations; the Justice Department and the Federal Trade Commission will be sharing oversight to evaluate ACOs and make sure that they are not being used as a way for parties that are really price competitors to join together and gain market power. ANTITRUST: You have given several talks on contracts that reference rivals. Would you describe what you mean by contracts that reference rivals (CRR) and the competitive issues that can arise with CRR? SCOTT MORTON: Contracts that reference rivals are just what they sound like contract provisions that require some information about what my competitor is doing, that I would not necessarily always know. Let me list some examples: Exclusive contracts: these are discounts available only if the buyer has not made any purchases from another seller. In order to determine the net price the buyer will pay, the seller needs to know about the buyer s purchases from its rivals. A good example is the United Regional Hospital case I referenced earlier. What raises concerns about that contract is that the price that United Regional offers to the insurance company depends on who else the insurance company buys from. So there is an explicit kind of tie between what the rival is doing and United Regional s price. Market share discounts are another type of CRR. In this case we are talking about a discount for purchasing a specific share of my needs from one seller. For example, suppose I get a substantial discount if I buy 90 percent of my requirements from one seller. Again, in order to calculate price, the seller must know how much I bought from all its rivals. That s competitively sensitive information that they would not necessarily learn in an ordinary contract. A type of CRR I have already discussed is the price protection guarantee, or MFN. Again, the troubling aspect of this contract type is that the transaction price depends on another price that between the buyer and the seller s rival that is arguably competitively sensitive information. So here you are passing information among rivals in a way that can be anticompetitive. Non-discrimination clauses of the sorts that the Justice Department went after in Visa and MasterCard successfully are also contracts that reference rivals. Non-discrimination means that if a merchant treats somebody else s card in a particular way offers a discount of 1 percent for example the merchant must treat my card the same way. Thus, any special program or price competition that a merchant and a card might want to devise cannot be used in a market with cards featuring non-discrimination clauses. The critical feature of CRRs is their impact on competition. The economics literature demonstrates that these contract terms can be shown to be anticompetitive in certain settings both dominant firm settings and fragmented markets. CRRs generally can create two types of harm. One, they can lead to equilibrium prices being higher because they soften price competition and secondly, they can prevent entry. The intuition for why CRRs prevent entry is laid out in my discussions of United Regional and the Michigan BCBS earlier. Another nice place to look for a description of the harms from MFNs is a DOJ case from 1996 called Delta Dental of Rhode Island. In this case the MFN prevented the entrant from distinguishing itself on price. The MFN essentially made all prices symmetric because the incumbent insurer had the right to pay the dentist the least he was accepting from any other insurer. In that setting, a new entrant cannot use price as a way to enter a market, which makes entry S P R I N G

5 C O V E R S T O R I E S more difficult than it otherwise would be. The intuition for the impact of market share discounts on entry and competition is illustrated in the recent FTC settlement with Intel. ANTITRUST: For antitrust practitioners counseling clients who may be thinking about using a contract with the types of terms you are describing, how do they go about figuring out in practice when these contractual terms are likely to have an adverse effect on competition? SCOTT MORTON: The first thing to do is perform a quick test to see if you ve got a contract that references rivals. The question to ask is, do the terms of the transaction between this buyer and this seller depend on specifics from a different buyer-seller relationship involving one or the same parties? If you do, you ve got a contract that references rivals, and particularly if one of the parties is a dominant firm, you want to think further about whether the contract term is anticompetitive. One additional step that makes sense to me is to ask, what is the business purpose of this contract term? Is it making the relationship or production more efficient? In the instance where there is a procompetitive purpose to the practice, a further question is, is it possible to write this contract without referencing rivals so that it would still achieve that legitimate business purpose? If that is possible, then in my opinion it makes sense to rewrite such a contract; it is low cost to the firm which is still achieving its efficiency goals and it reduces the risk that any party might think the firm is engaging in an anticompetitive action. If the contract can t be rewritten to achieve the efficiencies, then the practitioner at least has learned what his defense is should someone challenge the purpose of the CRR term. And obviously, if there is no legitimate business purpose and the contract term is designed to be anticompetitive, then my advice would be to eliminate it. ANTITRUST: Let s talk about horizontal mergers. A revised set of Horizontal Merger Guidelines came out in How well do you think the new Guidelines are doing in providing a framework for antitrust analysis? SCOTT MORTON: I think they do a great job. The rewrite was launched by then Assistant Attorney General Varney and the FTC, under the supervision of Carl Shapiro, my predecessor, and Joe Farrell, the head of the Bureau of Economics at the FTC, and with feedback from many others. What s really nice about these most recent Guidelines is that they were designed to more accurately track what the Department of Justice does so that outside parties could understand the kinds of analyses that we do when looking at a merger. And I think they do a really nice job of walking through the various issues from market definition, to competitive effects, to thinking about price, quality, innovation, etc, to issues of entry and efficiency. All those really important steps in evaluating horizontal merger are in there and are laid out clearly. And I think it s a great resource for practitioners, and for judges, and for other agencies around the world and economists in general. ANTITRUST: Do you think the new Guidelines have changed economic practice within EAG in any particular area? SCOTT MORTON: No, I don t think so. Their purpose was to be more clear and articulate what the agency was doing already. The issue with economics and analyzing any particular case is that every case is different. Every case has a different market structure, a different cost structure how big are fixed costs relative to variable costs, how important is brand and reputation? How long does it take to enter? What are the informational requirements? Can anybody compete, or does it require a certain level of information that s rare, or skill, or training? Does it need complimentary assets? Do you need to already have distribution or manufacturing, or research? And so the issues that are most important in terms of preserving competition in markets vary from case to case. And that s why you need a document that s as detailed as the Horizontal Merger Guidelines. ANTITRUST: The DOJ has had two very high-profile wins in 2011: the H&R Block/TaxAct litigation and AT&T abandoning its proposed acquisition of T-Mobile. Do you have any thoughts on whether the new Guidelines informed those investigations? SCOTT MORTON: I think in both cases the Horizontal Merg - er Guidelines were extremely consistent with what we did. If you look at the H &R Block decision, the judge quotes from the Horizontal Merger Guidelines quite a number of times in that decision as she explains how the evidence that we put forward was exactly what the Horizontal Merger Guidelines say one should be looking for when analyzing whether something is pro- or anticompetitive. In the AT&T case, I think one of the interesting things that you saw in the press after we sued was that law professors looked at the Horizontal Merger Guidelines and said, essentially, this seems like a good case for DOJ to bring. The market shares are high. They re well exceeding the thresholds in the Horizontal Merger Guidelines where the agencies say we re going to be concerned. And many antitrust experts concluded that it was not surprising that DOJ sued to block the transaction because the transaction clearly violated the standards in the HMGs. So I think the Horizontal Merger Guidelines were very helpful there and Division actions were very consistent with its own policies. ANTITRUST: Do you have any perspective or view that you don t always need to do a traditional market definition exercise? 1 8 A N T I T R U S T

6 SCOTT MORTON: The anticompetitive effects have to occur somewhere. And so, the market in which you are concerned the anticompetitive effect will occur is going to be relevant, and therefore market definition is going to come up as an issue. But at the end of the day, what you really care about is the competitive effect on consumers. And to the extent that you need to figure out what market you re talking about to get that answer, the market definition becomes important. But it s not important as an end in itself. ANTITRUST: Are there any particular empirical analyses that you find useful to consider when you are evaluating the competitive effects of a proposed merger? SCOTT MORTON: As I said, each case is different. So, one can t really say this is my favorite empirical analysis because it may or may not be useful for the next case. I think with the kind of work that you re doing in a merger, you re trying to predict the future which is difficult. What I often look for in empirical work is robustness and consistency. I like to see broadly the same results reflected in different types of empirical work and tests. ANTITRUST: It seems to me that competitive concerns related to vertical integration have been coming up recently in more of a high-tech context, such as technology-related transactions and Internet-related transactions, than it has in the past. Do you see a need for a fresh look at the economics of vertical integration? SCOTT MORTON: I think that the models that we have are sufficient. One of the interesting things about the Internet is that when it first came along, a lot of people said, we need an entirely new model of economics to handle this new technology. And that proved to be incorrect. Economic models are actually pretty good at taking any kind of cost structure and delivering some interesting insights. And I think that remains true in the vertical integration context whether you re talking about a traditional manufacturer-dealer vertical relationship, or whether you re talking about a vertical relationship in some technological environment. I think we have the tools we need. ANTITRUST: How do you feel about being the first woman DAAG for Economic Analysis? SCOTT MORTON: It is a great privilege to fill that role. In a way it is not surprising, as there are many more female academic economists today than in past decades, so at some point there would be a woman in this role. Nonetheless, it is very special to me to be the first. ANTITRUST: Thank you very much for talking with ANTI - TRUST. We really appreciate your time with us today. S P R I N G