The problem of occupational boards dominated by market participants

|The Volokh Conspiracy |

On Friday, I wrote about an amicus brief, for me and 54 other antitrust and competition policy scholars, that I wrote in Teladoc v. Texas Medical Board, a Fifth Circuit case involving the antitrust state-action immunity doctrine. (What I didn't mention last time was that one of the 55 was co-blogger David Hyman.)

For a summary of the argument, see Friday's post. As I wrote on Friday, the Texas Medical Board wants to regulate telehealth providers; one such provider, Teladoc, sued the Board under federal antitrust law, arguing that the rule the Board promulgated was anticompetitive; and the Board claimed that it was immune from federal antitrust law as a state agency. Agencies composed of market participants need to be actively supervised by the state if they want to get immunity; so the question here is whether state-court administrative-law judicial review counts as "active supervision" within the meaning of the doctrine.

Today, I'll reproduce Part I of the brief, "The Problem of Occupational Boards Dominated by Market Participants". This gives the basic policy problem of market-participant-dominated boards and describes how federal antitrust law responds to the problem.

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A. Market-Participant-Dominated Boards Have Anticompetitive Effects

In recent decades, States have created many new licensing boards, often dominated by participants in the very markets that the boards regulate. Predictably, self-dealing and anticompetitive behavior run rampant: "[F]inancially interested parties cannot be trusted to restrain trade in ways that further the public interest." Einer Richard Elhauge, The Scope of Antitrust Process, 104 Harv. L. Rev. 667, 696 (1991). Occupational licensing has been abused by incumbent market participants to exclude rivals and raise prices, through overly restrictive licensing requirements or aggressive and unjustified enforcement actions or delicensing proceedings. See generally Aaron Edlin & Rebecca Haw, Cartels by Another Name: Should Licensed Occupations Face Antitrust Scrutiny?, 162 U. Pa. L. Rev. 1093 (2014); Alexander Volokh, The New Private-Regulation Skepticism: Due Process, Non-Delegation, and Antitrust Challenges, 37 Harv. J.L. & Pub. Pol'y 931 (2014).

"The most generally held view on the economics of occupational licensing is that it restricts the supply of labor to the occupation and thereby drives up the price of labor as well as of services rendered." Morris M. Kleiner, Occupational Licensing, J. Econ. Persp., Fall 2000, at 189, 192. Licensing achieves this effect through several mechanisms, including: (1) establishing entry barriers, for instance requiring applicants to take certain courses and pass exams, or not recognizing out-of-state licenses, (2) restricting competition, such as by advertising bans, or (3) adopting expansive definitions of the profession they regulate, so as to acquire jurisdiction over-and ultimately oust-low-cost competitors that had previously been operating "at the fringes of their profession." Edlin & Haw, supra, at 1112.

These effects-restricted supply and increased price-do not imply that licensing necessarily violates antitrust law. But these effects exist; and when the licensing regime is administered by self-interested market participants, there is an increased probability that these price increases are not justified by improved quality and that the restrictions are on balance anticompetitive.

B. Health-Care Markets Are No Exception

The anticompetitive effects of licensing boards-price increases without necessary quality improvements-also extend to health-care markets.

First, occupational licensing restricts practitioners' business strategies. "In many states, dentists cannot legally employ more than two hygienists each," a restriction that artificially limits how many patients dentists may serve. "And in some states, nurse practitioners must be supervised by a physician, even though studies show that nurse practitioners and physicians provide equivalent quality of care where their practices overlap." See id. at 1107-08 (footnotes omitted).

Second, licensing increases prices-in health-care markets as elsewhere. This has been documented in areas from dentistry to optometry. See id. at 1113-14. Thus, some consumers-especially poor ones-use fewer medical services than they otherwise would.

And third, quality improvements are not assured. Various studies have failed to find a positive effect of licensing on quality. The FTC has long played a leading role in pointing out the inefficiency of much licensing, including in health care. See, e.g., id. at 1112 n.101, 1116-18; Ronald S. Bond et al., Staff Report on Effects of Restrictions on Advertising and Commercial Practice in the Professions: The Case of Optometry 25 (FTC, Bur. of Econ., 1980).

C. The Need for Strong Antitrust Scrutiny of Market-Participant-Dominated Boards

Antitrust review is appropriate for curbing the excesses of occupational licensing because licensing has a similar effect to traditional cartel activity. In the private sector, courts have used the Sherman Act to condemn combinations of competitors using written tests to erect entry barriers, imposing advertising restrictions, and predicating membership in a trade association on having a "favorable business reputation." Edlin & Haw, supra, at 1132-33. But regulatory boards use these same techniques to suppress competition through licensing.

Making matters worse, licensing schemes are particularly durable. When private firms collude, they have to act secretly to avoid antitrust penalties; they have to deal with lone holdout firms who refuse to agree to the collusive scheme; they have to police whether their co-conspirators are abiding by the agreement and (again secretly) threaten credible penalties for non-compliers. Ultimately, cartels often fail to emerge, or break down, because the gains to cheating are high or because new firms enter-to the consumer's benefit. By contrast, licensing boards face few of these problems. By convincing the government to centralize decision-making in a regulatory board (which they dominate), competitors can impose an agreement on dissenting firms, prevent cheating by legal sanctions, and use licensing to control entry. Id. at 1133.

It has thus long been recognized that state boards are subject to antitrust law. See Goldfarb v. Va. State Bar, 421 U.S. 773, 791 (1975) ("The fact that the State Bar is a state agency for some limited purposes does not create an antitrust shield that allows it to foster anticompetitive practices for the benefit of its members."). And while such bodies may benefit from the immunity recognized in Parker v. Brown, 317 U.S. 341 (1943), the Supreme Court has stressed that this immunity is interpreted narrowly. "[S]tate-action immunity is disfavored, much as are repeals by implication." Ticor, 504 U.S. at 636 (citing City of Lafayette v. La. Power & Light Co., 435 U.S. 389, 398-99 (1978)); see also N.C. Dental, 135 S. Ct. at 1110.

Moreover, N.C. Dental makes clear that boards dominated by market participants are particularly suspect. For these, the Supreme Court insists on both prongs of the Midcal test: not only (1) that the anticompetitive policies be clearly authorized by state law, but also (2) that the boards be actively supervised.

The active-supervision requirement is a necessary and independent requirement. "State agencies controlled by active market participants, who possess singularly strong private interests, pose the very risk of self-dealing Midcal's supervision requirement was created to address. This conclusion does not question the good faith of state officers but rather is an assessment of the structural risk of market participants' confusing their own interests with the State's policy goals." N.C. Dental, 135 S. Ct. at 1114 (citing 1A Phillip E. Areeda & Herbert Hovenkamp, Antitrust Law: An Analysis of Antitrust Principles and Their Application ¶ 227, at 226 (4th ed. 2013); Patrick v. Burget, 486 U.S. 94, 100-01 (1988)).

And just as the anticompetitive effects of licensing boards apply generally, so, too, does antitrust scrutiny apply generally. There is no general health-care, professional-standards, or safety exception to antitrust law. See Goldfarb, 421 U.S. at 787 ("In arguing that learned professions are not 'trade or commerce' the County Bar seeks a total exclusion from antitrust regulation. . . . We cannot find support for the proposition that Congress intended any such sweeping exclusion. The nature of an occupation, standing alone, does not provide sanctuary from the Sherman Act, nor is the public-service aspect of professional practice controlling in determining whether § 1 includes professions." (citations omitted)); Nat'l Soc. of Prof'l Eng'rs v. United States, 435 U.S. 679, 695 (1978) ("The fact that engineers are often involved in large-scale projects significantly affecting the public safety does not alter our analysis. Exceptions to the Sherman Act for potentially dangerous goods and services would be tantamount to a repeal of the statute."); Va. Acad. of Clinical Psychologists v. Blue Shield of Va., 624 F.2d 476, 485 (4th Cir. 1980) ("[I]t is not the function of a group of professionals to decide that competition is not beneficial in their line of work[;] we are not inclined to condone anticompetitive conduct upon an incantation of 'good medical practice.'").

D. The Question Is Whether Disinterested State Officials Have Actually Approved the Agency's Specific Conduct

A state Legislature's willingness to authorize regulation leaves a host of judgment calls that the Legislature has not made about a particular topic like telehealth-such as what are the safety benefits of in-person consultation, and whether any quality and safety gains justify the increased prices. Those judgment calls are instead made by the Board, whose market participation makes it financially interested in exaggerating safety concerns and in perversely weighing increased prices as a positive rather than a negative. Thus-even if a Legislature clearly authorizes displacement of competition-if there is no active supervision, there is no assurance that disinterested officials endorsed the restraint at issue.

In Town of Hallie v. City of Eau Claire, 471 U.S. 34 (1985), the Supreme Court explained that a municipality, to obtain immunity, did not need to satisfy the active-supervision prong of Midcal, but could rely solely on the first prong-its clear authorization in state law. But this was because "there is little or no danger that [municipal officials are] involved in a private price-fixing arrangement"-unlike private parties who may be "acting to further [their] own interests, rather than the governmental interests of the State." Id. at 47.

But as N.C. Dental made clear, boards dominated by market participants are different: The presence of self-interest requires active supervision to guarantee that the specific "interstitial policies made by the entity claiming immunity" be "review[ed] and approve[d]" by the State. 135 S. Ct. at 1112; see also id. at 1111 ("Parker immunity requires that the anticompetitive conduct of nonsovereign actors, especially those authorized by the State to regulate their own profession, result from procedures that suffice to make it the State's own." (citing Goldfarb, 421 U.S. at 790; 1A Areeda & Hovenkamp, supra, ¶ 226, at 180)); Ticor, 504 U.S. at 635; Patrick, 486 U.S. at 100-01.

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I'll continue with the doctrinal analysis of the brief in tomorrow's post.