By Conor Gallagher
Between 1993 and 2011 the Department of Justice Antitrust Division issued a trio of policy statements (two during the Clinton administration and one under Obama) regarding the sharing of information in the healthcare industry. These rules provided wiggle room around the Sherman Antitrust Act, which “sets forth the basic antitrust prohibition against contracts, combinations, and conspiracies in restraint of trade or commerce.”
And it wasn’t just in healthcare. The rules were interpreted to apply to all industries. To say it has been a disaster would be an understatement. Companies increasingly turned to data firms offering software that “exchanges information” at lightning speed with competitors in order to keep wages low and prices high – effectively creating national cartels.
Here are just two recent examples:
- Real estate investment behemoths are allegedly using third-party software algorithms to essentially act as one national landlord cartel that coordinates pricing (i.e., keeping your rent sky high). The real estate rental giants and the information-sharing company that connects them all are facing a series of lawsuits, and the DOJ is also investigating the companies accused of colluding to keep apartments vacant and rents elevated. The increased use of such information sharing has coincided with astronomical rent growth and increases in the number of homeless Americans and deaths of the homeless.
- Last year the DOJ fined a group of major poultry producers $84.8 million over a long-running conspiracy to exchange information about wages and benefits for poultry processing plant workers and collaborate with their competitors on compensation decisions in violation of the Sherman Act. The DOJ also ordered an end to the exchange of compensation information, banned the data firm (and its president) from information-sharing in any industry, and prohibited deceptive conduct towards chicken growers that lowers their compensation. Neither the poultry groups nor the data consulting firm admitted liability.
The good news is that the DOJ is finally admitting that these loopholes were a mistake and has closed them. Here is the Feb. 3 statement from the DOJ:
After careful review and consideration, the division has determined that the withdrawal of the three statements is the best course of action for promoting competition and transparency. Over the past three decades since this guidance was first released, the healthcare landscape has changed significantly. As a result, the statements are overly permissive on certain subjects, such as information sharing, and no longer serve their intended purposes of providing encompassing guidance to the public on relevant healthcare competition issues in today’s environment. Withdrawal therefore best serves the interest of transparency with respect to the Antitrust Division’s enforcement policy in healthcare markets. Recent enforcement actions and competition advocacy in healthcare provide guidance to the public, and a case-by-case enforcement approach will allow the Division to better evaluate mergers and conduct in healthcare markets that may harm competition.
The effect could be swift as businesses try to avoid antitrust suits. From ArentFox Schiff LLP, a national law and lobbying firm:
The withdrawal of the safety zone and increased scrutiny of information exchanges signal that broader enforcement against information sharing is coming. Companies should consult with their antitrust counsel to re-evaluate their current information-sharing practices.
The rules were based on junk economics and were big gifts to big business from the Clintons. In 1993, first lady Hillary Rodham Clinton and other officials announced steps to make healthcare more “available” and “affordable” to all Americans.
The policy statements provided for antitrust “safety zones” which created circumstances under which the DOJ and the FTC would not challenge the following:
- Hospital mergers;
- Hospital joint ventures involving high-technology or other expensive medical equipment;
- Physicians’ provision of information to purchasers of health care services;
- Hospital participation in exchanges of price and cost information;
- Joint purchasing arrangements among health care providers;
- Physician network joint ventures.
The rules were further liberated in 1996 and then again in 2011 under Obama’s Affordable Care Act and its Accountable Care Organizations provision.
While all of these rules allowed for more concentration, which is well known, the “exchange of price and cost” provision also made it so even in non concentrated industries, businesses could still wield monopoly pricing power by exchanging information with “competitors” through middlemen. Here was the loophole, according to the DOJ’s now-withdrawn enforcement policy:
Accordingly, in order to qualify for this safety zone, the collection of information to be provided to purchasers must satisfy the following conditions:
(1) the collection is managed by a third party (e.g., a purchaser, government agency, health care consultant, academic institution, or trade association);
(2) although current fee-related information may be provide to purchasers, any information that is shared among or is available to the competing providers furnishing the data must be more than three months old; and
(3) for any information that is available to the providers furnishing data, there are at least five providers reporting data upon which each disseminated statistic is based, no individual provider’s data may represent more than 25 percent on a weighted basis of that statistic, and any information disseminated must be sufficiently aggregated such that it would not allow recipients to identify the prices charged by any individual provider.
For the consumer this means that whether you’re going to the grocery store or the doctor or paying rent, it’s always like a trip around a consolidated monopoly board. One need look no further than the series of lawsuits and DOJ investigation against real estate rental giants and the middleman company RealPage, which (allegedly) supplied software allowing landlords across the country to collude on rental prices.
How it’s supposed to work, or used to anyways, is that when occupancy dropped, rents would also drop so that properties would be full. Companies would compete for more “heads in beds” through lower rental prices and typically aim for occupancy rates around 97-98 percent. But the RealPage software allows property owners to keep prices high even during periods of high vacancy. The software required users (landlords) to maintain pricing at levels its algorithm set, which often meant higher vacancy, but landlords found that they were still making more money.
Just look at some of the real estate goliaths named in the lawsuits who were using RealPage software to keep rents artificially high:
- Greystar: The nation’s largest property management firm with nearly 794,000 multifamily units and student beds under management. In December, it was nominated for six(!) 2022 Private Equity Real Estate Awards.
- Trammell Crow Company, headquartered in Dallas, is a subsidiary of CBRE Group, the world’s largest commercial real estate services and investment firm.
- Lincoln Property Co. Manages or leases over 403 million square feet across the US.
- FPI Management. Currently manages just over 155,000 units in 18 states.
- Avenue5 manages $22 billion in multifamily and single-family assets nationwide.
- Equity Residential, the 5th largest owner of apartments in the United States, primarily in Southern California, San Francisco, Washington, D.C., New York City, Boston, Seattle, Denver, Atlanta, Dallas/Ft. Worth, and Austin.
- Mid-America Apartment Communities, which as of June 30, 2022, owns or has ownership interest in 101,229 homes in 16 states throughout the Southeast, Southwest, and Mid-Atlantic regions.
- Essex Property Trust (62,000 units). This fully integrated real estate investment trust (REIT) acquires, develops, redevelops, and manages multifamily apartment communities located in supply-constrained markets on the west coast.
- Thrive Community Management (18,700 units in Washington and Oregon). Adorably refers to employees as “thrivers.”
- AvalonBay Communities, Inc. As of September 30, 2022, the Company owned or held a direct or indirect ownership interest in 293 apartment communities containing 88,405 apartment homes in 12 states and DC.
- Cushman & Wakefield, with a portfolio of 172,000 units.
- Security Properties portfolio reflects interests in 113 assets encompassing nearly 22,354 multifamily housing units.
No wonder Moody’s declares that the “US is now rent-burdened nationwide for the first time.” More:
The national average rent-to-income (RTI) reached 30% for the first time in our 20+ years of tracking history, up 1.5% from year-ago or 0.2% from Q3, keeping the growth rate constant throughout the second half of last year.
Rising mortgage rates caused many households to be priced out from home buying and would-be buyers to remain renters. Apartment demand surged as a result and drove rates sky high. As the disparity between rent growth and income growth widens, American’s wallets feel financial distress as wage growth trails rent growth.
Rents continue to help drive inflation with Tuesday’s Labor Department report showing that Americans continued to be burdened by higher costs for rental housing. From Reuters:
The consumer price index increased 0.5% last month after gaining 0.1% in December, the Labor Department said on Tuesday. A 0.7% rise in the cost of shelter, which mostly reflected rents, accounted for nearly half of the monthly increase in the CPI.
In a Feb. 2 speech announcing the withdrawal, Principal Deputy Attorney General Doha Mekki explained that the development of technological tools such as data aggregation, machine learning, and pricing algorithms have increased the competitive value of historic information. In other words, it’s now (and has been for a number of years) way too easy for companies to use these safety zones to fix wages and prices.
It’s an open question as to how much this algorithmic price-fixing software could be contributing to inflation, but as the Kansas City Fed noted in January, “markups could account for more than half of 2021 inflation.”
Mekki admitted as much on Feb. 2 at an antitrust conference in Miami:
An overly formalistic approach to information exchange risks permitting – or even endorsing – frameworks that may lead to higher prices, suppressed wages, or stifled innovation. A softening of competition through tacit coordination, facilitated by information sharing, distorts free market competition in the process.
Notwithstanding the serious risks that are associated with unlawful information exchanges, some of the Division’s older guidance documents set out so-called “safety zones” for information exchanges – i.e. circumstances under which the Division would exercise its prosecutorial discretion not to challenge companies that exchanged competitively-sensitive information. The safety zones were written at a time when information was shared in manila envelopes and through fax machines. Today, data is shared, analyzed, and used in ways that would be unrecognizable decades ago. We must account for these changes as we consider how best to enforce the antitrust laws.
The DOJ withdrawal of these rules is a major change from the lax attitude for the past 30 years. There are still unanswered questions, but the shift is clear. From ArentFox Schiff LLP, a national law and lobbying firm:
The withdrawal of the policy statements forecasts greater DOJ scrutiny of information sharing; however, it is still clear that not all information sharing is illegal. Both the Supreme Court and the DOJ have recognized that, in many instances, competitors need to share information to achieve legitimate pro-competitive goals. However, exchanges of information could violate the Sherman Act, which prohibits a “contract, combination…or conspiracy” that unreasonably restrains trade, if they allow competing sellers to collude or tacitly coordinate in an anti-competitive manner, such as by coordinating prices. Generally, courts will balance these two competing concerns. The Supreme Court has protected information exchanges where the data was publicly available, was historic rather than current or forward-looking, and/or was aggregated to make the information anonymous. It has also emphasized that certain exchanges of current price information and information exchanges in concentrated markets may receive greater scrutiny.
The DOJ has not stated whether it plans to replace the policy guidance. In addition, when assessing information exchanges, it is important to remember that there has been a clear trend toward increased review of information sharing. For example, the DOJ recently fined three poultry producers $84.8 million over allegations that they improperly shared employee wage and benefit information. Companies should expect increased scrutiny in the future.
So much for the romantic notion that the sharing of information would lead to better care and reduced costs. According to the DOJ, this was the stated reason for the Clintons unveiling the “safety zones”:
The policy statements will help alleviate uncertainty within the health care industry making it easier for mergers and joint ventures to take place, resulting in lower health care costs.
How’d that work out?
Well, it took thirty years, but the DOJ has finally admitted this specific scheme started under the Clintons was a massive mistake, and it marks another sign that business as usual might be changing at the FTC and DOJ.
5. Changing a broad policy regime doesn’t happen in one moment. There are thousands of switches to flip, and it requires a relentlessness and willingness to address each one. That’s what we’re seeing in how Biden is addressing corporate power. An almost unnoticed shift.
— Matt Stoller (@matthewstoller) February 7, 2023