The Corner Newsletter, Jan. 25, 2018: Overhaul at the FCC? | Big Medicine vs. Big Pharma | Antitrust & Tech

Greetings from Open Markets. In this issue of The Corner, we discuss an under-reported proposal to shift the balance of power within the Federal Communications Commission, look at how concentrated economic power harms patients and healthcare employers, and explain why antitrust enforcement may come sooner rather than later for tech giants. 

AJIT PAI’S PRO-MONOPOLY OVERHAUL AT THE FCC

At a recent Heritage Foundation event on antitrust, conservative scholar Jeffrey Eisenach lauded a move floated “in the last few weeks” to impose an institutional overhaul at the Federal Communications Commission. He was pointing to a little-noticed order by FCC Chairman Ajit Pai to create a new bureau called the Office of Economics and Analytics. The move would consolidate all economists at the FCC into a single bureau to vet key policy decisions. The full commission will vote on the order January 30th.

The move by Pai is similar to the changes adopted by the Federal Trade Commission and the Antitrust Division of the Department of Justice in the early 1980s to institutionalize the Chicago School’s “consumer welfare” philosophy of antitrust. But the legitimacy of “consumer welfare” is now up for debate. Many within Congress have begun to question the
reliance on the Chicago School’s pro-concentration thinking. And a growing chorus is disputing the ability of consumer welfare theorists to accurately predict the effects of proposed mergers. If the move remains unchallenged, Pai’s order will have two consequences:

• It will narrow the standard that Congress has instructed the FCC to apply. What could that mean in practice? It likely will lead to the FCC giving little—if any—consideration to diversity, equity, and social stability in its reviews. The FCC’s mandate to pursue this broader “public interest” standard has, for the last three decades, insulated the agency from a pro-merger, Chicago-school influence. That may no longer be the case.

• It will place all economists under the control of the Chairman, clearing the way for an ideological purge of economists at the Commission.

We reached out to Gigi Sohn, a former advisor to FCC Chairman Tom Wheeler and now a Distinguished Fellow at the Georgetown Law Institute for Technology Law & Policy, for comment. Here’s what she told us about Pai’s little-noticed, but immensely important, move.

OMI: Why is Ajit Pai establishing an Economics Analysis Division at the FCC? 

Sohn: What he’s ultimately trying to do is weaken, if not entirely eliminate, any consideration of the “public interest convenience and necessity” standard in FCC policymaking that isn’t tied to some sort of economics-based cost-benefit analysis. He gives away that intention by saying “[t]he new Office of Economics and Analytics will at long last put economic analysis at the heart of Commission decision-making.” That is a result that is neither mandated, nor even favored by, the Communications Act of 1934 and its amendments. Indeed, the FCC’s mandate is to look beyond mere economic considerations—for example, at factors like diversity, free speech, consumer protection, and the effect on innovation and competition. Ideologues like Pai have been trying to reduce the
public interest standard to mere economic analysis for decades.

OMI: Why is Pai dissatisfied with how the FCC uses economists now?

Sohn: Probably because they are career economists who he or another politician can’t control. They are spread out in different bureaus around the agency and are not centralized. The FCC already has an Office of Strategic Planning (OSP), for example, that houses a number of the agency’s economists and serves as somewhat of a think tank for the FCC. It is staffed largely with careerists that Pai can’t control, including some who are hostile to what he’s done. Starting the Office of Economics and Analytics allows him to pack it with like-minded Chicago-school types. So here he gets to make a big fuss over a new office (so much for ramping down the bureaucracy—four divisions!) that he gets to build from the ground up.

CAN BIG MEDICINE CONTROL BIG PHARMA?

Four giant health care systems—Intermountain Healthcare, Ascension, SSM Health and Trinity Health—recently announced they are joining forces to create a new generic drug company. Their goal, they said, is to combat the astronomical price increases charged by some incumbent generic drugmakers. “It’s hard to make people better if they don’t have access to the medicines they need,” said Intermountain CEO Marc Harrison. “To add insult to injury, those medicines are being priced in a way that’s nonsensical.”

This is good news, right? Don’t we want some real competition for the big pharma corporations that are jacking up prices, cutting supply, and reducing the quality and reliability of even the most basic of drugs?

Yet it is far from clear that the way to deal with colluding, monopolistic drug makers is to embrace collusion among increasingly monopolistic health care systems.

Consider the case of Intermountain. Its hegemony over both
the practice and finance of medicine in Utah is hard to overstate. About half the state’s population relies on Intermountain’s 22 hospitals and 185 clinics. Moreover, Intermountain also dominates health insurance in Utah, with market shares that include a staggering 90 percent of all HMO policies. Clearly Intermountain knows how to use vertical integration to leverage market power.

Then there is Ascension. If its merger talks with Providence St. Joseph Health come to fruition, Ascension will become the largest hospital chain in the U.S., a $44.8 billion operation controlling 191 hospitals across 27 states. And Trinity Health? After merging with Catholic Health East in 2013, it already controls 93 hospitals in 22 states, making it one of the largest hospital chains in the country.

Can allowing these behemoths to join forces in the production of drugs, in ways that only further their vertical integration across health care sectors, possibly be in the public interest?

For guidance on answering that question, consider what has generally happened when hospital corporations have bought up most of the beds within a region, and then used that power to leverage control over doctors’ practices, clinics, and health insurance companies in the region. Defenders of such deals says such size and integration enables the new giant to deliver care more efficiently, in ways that better serve the public.

But in fact, experience in health care markets across the country shows that any savings that might come from such roll-ups are rarely passed on to consumers. Instead, such monopolistic systems, including those that are nominally non-profit, tend to use their greater market power to reduce service, jack up prices, and inflate executive pay.

So what can we expect if a combine of health care systems manages to produce its own generic drugs at lower cost to themselves? Well, for one thing, let’s not count on patients, employers, and other purchasers of health care—including, of course, taxpayers—to share in the benefit. For another, we should probably assume even more consolidation; imagine for instance what it would be like to start a new hospital or clinic in Utah while up against a system that owns most of the state’s hospital and clinics, and also secured its own private supply of lower cost drugs.

What’s a better answer? Last week, the head of the United States Justice Department’s Antitrust Division, Makan Delrahim, announced that DOJ may join state attorney generals in suing to recover damages from generic drug manufacturers if ongoing investigations show that the price hikes can be traced to collusion.

Meanwhile, the Federal Trade Commission needs to step up efforts to block hospital mergers and break up health care monopolies, and Congress needs to pass legislation that will allow for sensible price regulation in health markets where effective competition no longer exists. A study recently published in Health Affairs found that hospital ownership in 90 percent of metro areas is so concentrated that it exceeds what antitrust regulators have historically regarded as the threshold for when action is needed to avoid inefficiency and collusion.

WHAT WE’VE BEEN UP TO:

• Barry Lynn and Lina Khan were featured in a Bloomberg article that explored the growing skepticism of the consumer welfare standard. The reporter writes that the thinking around competition policy hasn’t adjusted to the soaring rates of concentration across U.S. markets. 

• Open Markets board Chair Zephyr Teachout, advisory board member Tim Wu, and Barry Lynn were cited in an Economist article discussing possible actions antitrust enforcers could take against platform companies Facebook, Google, and Amazon.

• The amicus brief Open Markets submitted in Ohio v. American Express, an upcoming Supreme Court case that could weaken antitrust law, was cited in a Bloomberg article.

Interested in working with us? 

The Open Markets Institute is hiring two policy analysts—one to cover market concentration in specific sectors of the U.S. economy and another to document how market concentration harms the well-being of farmers, ranchers, and food chain workers. 

WHAT’S MISSING FROM THE PICTURE? 

Last week, The Wall Street Journal writer Greg Ip published “The Antitrust Case Against Facebook, Google, and Amazon”. The article was a constructive addition to the conversation around big tech’s power, and included useful history and market data. But the piece also missed the reality of how market power gets abused in the U.S. economy, and overlooked the latest developments in antitrust enforcement.

In his piece, Ip makes two key points. First is that economic power—Google’s 89% dominance in internet search and Amazon’s 75% reach in
e-books—appears to be generally good for consumers. “They are driving down prices and rolling out new and often improved products and services every week,” he writes.

Second, Ip contends that the two corporations are highly innovative, as proven by the amount they invest in research and development, which, he contends, is relatively “far higher than other companies.” Ip does note a dark cloud on the horizon, writing that the tech giants may one day use their power in ways that thwart invention. The harm, he says, will come in the form of products that consumers “never see.”

Ip then concludes that, since the prevailing philosophy of antitrust enforcement in the United States focuses primarily on “consumer welfare,” there is little reason to bring a case against big tech. Better yet, the market itself may already be working on a solution to counter whatever concentrations of power might exist. Yahoo!’s search engine and America Online’s membership, Ip writes, “all saw their dominance recede in the face of disruptive competition.” So too, perhaps, Google’s and Amazon’s.

But Ip’s piece contains a few notable oversights, two of which are especially worth focusing on in more detail.

First, even though U.S. antitrust enforcers have, for the last generation, been largely under the sway of the “consumer welfare” standard, the law itself can still be used to break up concentrations of private power, including those controlled by Google, Amazon, and Facebook.

Indeed, key enforcers already have focused on the ways that concentration might harm suppliers and creators. As Renata Hesse, former Acting Assistant Attorney General of the Antitrust Division said in a September 2016 speech:

What we are concerned with is mergers and other practices that create market power…[T]hat is true at any level of the economy—upstream, downstream, midstream. The antitrust laws protect competition throughout. 

Makan Delrahim, who has since filled Hesse’s post, has similarly emphasized that certain arrangements may be structurally anti-competitive and therefore require a structural fix. Such a preference suggests the DOJ is looking to address core conflicts of interest, rather than secure better outcomes for any one group.

If anything, a greater focus on safeguarding open markets that serve the interests of both buyers and suppliers is likely to increase over the coming months. One of the driving debates, we believe, will center on the future of the reporters and publishers who provide the public with trustworthy sources of news. Google and Facebook together have exploited their roles as essential intermediaries to capture much of the advertising revenue that news publishers—like Ip’s The Journal—have relied on to pay the salaries of reporters and editors. Google and Facebook, for example, account for 73% of all digital advertising in the United States.

In response, media institutions have cut the financial resources accurate and trustworthy reporting requires, sometimes even shutting down completely. Between 2004 and 2014, the number of daily newspapers dropped by a tenth, to 1,331. The result? Fewer and less diverse sources of news—a less robust marketplace of ideas. Today, six media giants control 90% of the media Americans consume.Indeed, this constriction of voice in number and in kind makes it harder to inoculate democracy from extremist content and propaganda. The growing absence of media institutions, caused by Facebook and Google’s market power, is not an “alleged sin,” as Ip puts it, but a largely overlooked factor behind the growth of “fake news”.

Second, Ip’s contention that Google and Amazon are still engaging in “disruptive competition” that is good for society as a whole is hard to defend. Over the last three decades, markets across sectors have become far more concentrated and far less competitive. At the same time, rates of new business formation and productivity growth have fallen to a fraction of the levels achieved between the 1940s and the early 1980s, sapping the net rate of innovation.

Ip’s mistake is relying on the idea of “creative destruction,” a term coined by Austrian economist Joseph Schumpeter in his 1942 book Capitalism, Socialism, and Democracy. Schumpeter wrote that a monopolist, to maintain its power, must engage in constant innovation that is of value to the public. The problem with Schumpeter’s idea is that it is just as untrue today as it was in 1942. As our own reporting at Open Markets has demonstrated, what generated competition in tech during the mid-20th Century was not Schumpeter’s market discipline, but rather, aggressive antitrust enforcement.

ANTI-MONOPOLY RISING:

• The threat that concentrated market power poses to democracy was a much-discussed topic at the World Economic Forum in Davos. WPP CEO Martin Sorrell cited a “techlash” and Salesforce CEO Marc Benioff demanded that the world “wake up to [the] threat from tech giants.” Additionally, UNI Global Union President Philip Jennings spoke on a panel called “Can We Live with Monopolies?”. “Monopoly is back,” he said, “…one of the great fractures that we’re talking about at the World Economic Forum is the fracture [that results] from the inequality of market power.” Jennings’ comment aligns closely
  with a recent Financial Times column warning of a collapse of liberalism in the world. 

• Sen. Cory Booker (D-NJ), Open Markets has learned, is expected to be named to the Senate Judiciary’s Antitrust, Competition Policy, and Consumer Rights Subcommittee. Sen. Booker, who last year raised concerns about market power and stated that
  Google is ripe for an antitrust investigation, will fill the post of former Sen. Al Franken (D-MN). Notably, Sen. Booker also is the former mayor of Newark, NJ, which is in the running for Amazon’s second headquarters, HQ2, and has offered the company $7 billion in tax breaks and subsidies.

• Rep. Keith Ellison (D-MN-05) expressed concern about Amazon’s dominance, questioning the company’s strategy for locating HQ2. “Something is deeply wrong with our economy & democracy,” he tweeted, “when local governments offer up their tax base to a corporation worth over $500 billion.” 

• The nine-person anti-monopoly caucus in the U.S. House of Representatives met for the first time this past Friday. The caucus will, according to one attendee, focus its efforts on renewing competition policy and neutralizing concentrations of private power. 

WHAT WE’RE READING:

• “State Regulators Urged to Investigate CVS Caremark Reimbursement Cuts” (Capitol Forum): An in-depth report on independent pharmacists’ allegations that CVS is engaging in “squeeze and buy” tactics. One example? In the weeks after CVS’s pharmacy benefit manager, Caremark, cut independent pharmacies’ reimbursement rates, CVS sent solicitation letters urging the owners of those very same pharmacies to consider selling to CVS. This conduct could influence whether the Department of
  Justice or Federal Trade Commission decides to challenge the proposed Aetna-CVS merger.

• “Israel Turns the Screws on Tycoons” (Bloomberg Businessweek): Israeli competition enforcers took swift action against telecommunications conglomerate Bezeq—but that’s just the latest action in a six-year campaign against economic concentration in Israel. Could Israel’s example spur more aggressive enforcement in the United States and in Europe?

• “Bigger Companies Once Meant Much Bigger Pay. No More.” (Wall Street Journal): For decades, many have contended that workers could boost their salary by moving to a bigger employer. But according to a recent economics paper, that is less and less the case today. One recent study challenged by this research is an economics paper published last year by Peter Orszag and Jason Furman.

VITAL STAT: 85%

The market share of the top three corporations in the U.S. saline IV bag market, according to data from market-research firm IBISWorld. The availability of the bags has fallen steeply, after
Hurricane Maria disrupted the Puerto Rico-based manufacturing operations of the leading producers. The high concentration of capacity on the island means that other corporations have been unable to fill the void, leading to a severe IV bag shortage. 

WHAT WE’RE WATCHING:

• Easy Money: In its “2018 Global Outlook,” Investment Bank JP Morgan wrote that it was bullish on U.S. equities, citing “strong momentum” from easy monetary policy, strong global growth, and…market power? The report says corporations are more likely to keep tax benefits from the Tax Cuts and Jobs Act of 2017 for themselves, rather than pass them down to employees or to use them to compete against industry rivals. “Pricing power,” the report reads, “should be the primary determinant of how much of this [tax] upside is retained by shareholders vs. competed away and passed down to end-users.” We’re wondering: how long will it take investors to understand that what we’re actually witnessing is—as NYU Stern Professor of Marketing Scott Galloway has suggested—a slow motion collapse of the competitive marketplace.

• Mixed Signals: European Union antitrust enforcers fined chipmaker Qualcomm $1.2 billion this week for entering into an exclusive deal with technology corporation Apple Inc. In addition, the Federal Trade Commission, several months ago, opened a probe into semiconductor corporation Broadcom to investigate if the company’s new terms of contract limit customers’ access to its chips. Will this signal
  that the FTC is also likely to move to block Broadcom’s announced merger with telecommunications company Qualcomm?

• Slow Burn: Italian antitrust authorities are investigating whether technology corporations Apple and Samsung used software updates to slow cell phone performance. Along with investigations into anti-competitive conduct by Germany and France, this probe is another instance of the European Union’s willingness to tackle potential abuses of power by the tech giants.