FTC Staff Comment to the Hon. John D. Pridnia Concerning Michigan S.B. 301-302 to Remove the Prohibition on Joint Ownership or Operation of a Funeral Establishment and Cemetery

V910021
520-A Atrium Office Plaza
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MARK D. KINDT
Regional Director
UNITED STATES OF AMERICA
FEDERAL TRADE COMMISSION
CLEVELAND REGIONAL OFFICE
COMMISSION AUTHORIZED
December 16, 1991
The Honorable John D. Pridnia
Michigan State Senate
State Capitol
Lansing, Michigan 	48913
Dear Senator Pridnia:
The staff of the Federal Trade Commission is pleased to respond to your letter
requesting comments on Senate Bill Nos. 301 and 302.1 The bills would amend the
Cemetery Regulation Act and Occupational Code, which regulate the licensing and
operation of funeral establishments and cemeteries in Michigan. 	Our response is
limited to those portions of the bills that address joint ownership or operation of a
funeral 	establishment 	and 	a 	cemetery. 	We conclude that 	removing 	Michigan's
prohibition of joint ownership or operation could make possible new business formats
and improvements in efficiency, which might in turn lead to lower prices and better
service to consumers. 	However, some aspects of the bills' regulation of funeral
establishment-cemetery combinations prohibit the offer of bundled goods and services
at 	a 	discount; if 	this 	prohibition 	is 	broader 	than 	necessary 	to 	prevent 	harm 	to
competition, it could prevent the achievement of some of these efficiencies.
1 	These comments are the views of the staff of the Cleveland Regional Office and
the 	Bureau 	of 	Competition 	of 	the 	Federal 	Trade 	Commission. 	They 	are 	not
necessarily the views of the Commission or those of any individual Commissioner.

The Honorable John D. Pridnia
December 17, 1991
Page 2
I. 	INTEREST AND EXPERIENCE OF THE STAFF OF THE FEDERAL TRADE
COMMISSION
The Federal Trade Commission is empowered by statute to prevent unfair
methods of competition and unfair or deceptive acts or practices in or affecting
commerce. 2 Pursuant to this mandate, the Commission encourages competition in the
licensed 	and 	regulated 	professions, including 	those 	in 	the 	funeral 	and 	cemetery
industry, to the maximum extent compatible with other state and federal goals. 	The
staff of the Commission works to identify restrictions that hinder competition and
increase costs without providing countervailing benefits to consumers.
The Commission staff has become familiar with the funeral industry through
its 	work 	on 	a 	consumer 	protection 	rule 	that 	is 	intended 	to 	promote 	increased
competition and consumer choice in the funeral industry by facilitating informed
purchase decisions. 3 In addition, the staff has previously commented on other states'
proposed legislation involving the funeral industry.4 	One of these was a comment to
the 	Illinois 	State 	Senate 	on 	proposed 	legislation 	that 	was 	the 	converse 	of 	the
legislation being considered here. 	The Illinois State Senate had proposed restricting
ownership of funeral homes by unlicensed persons, a category that could include
cemetery owners.s Staff was concerned that such a prohibition, which is similar to
2 	Federal Trade Commission Act, 15 U.S.c. § 41 et seq.
3 	The FTC rule governing Funeral Industry Practices, 16 C.P.R. § 453, became
effective April 30, 1984. 	Among other things, the rule requires funeral providers to
disclose to consumers detailed information about prices.
4 	See commen ts to: PennsyIvania House of Represen ta ti ves Commi ttee on Business
and Commerce, August 29, 1989; Virginia Delegate Franklin P. Hall, February 9, 1989;
Oregon State 	Representative 	Chuck Sides, April 6, 1987; Illinois 	Department of
Registration and Education, May 9, 1986; Kansas State Representative Ginger Barr,
February 14, 1986; Alabama Representative Arthur Payne, January 16, 1986; Illinois
State Senator Judy Baar Topinka, May 31, 1985. 	Commission staff has also testified
generally on regulatory issues in these industries; see Statement to California Assembly
Committee 	on 	Consumer 	Protection, 	Governmental 	Efficiency 	and 	Economic
Development, October 17, 1991
5 	Comment from Timothy 1. Muris, Director of the Bureau of Competition, to
Illinois State Senator Judy Baar Topinka (May 31, 1985).

The Honorable John D. Pridnia
December 17, 1991
Page 3
Michigan's current law, might injure consumers by preventing potential efficiencies
of combination ownership.
II. 	BACKGROUND: REGULATING THE RELATIONSlllPS BETWEEN CEMETERIES
AND FUNERAL ESTABLISHMENTS
Many 	states 	regulate 	or 	license 	the 	ownership 	or 	operation 	of 	funeral
establishments and cemeteries. Reasons that may be advanced for this regulation and
licensing 	include 	concerns 	about 	public 	health 	and 	consumer 	protection. 	Our
comments take no position on the public health issues, but instead address the possible
consequences 	of 	regulations 	that 	might 	unnecessarily 	impair 	efficient 	business
arrangements that otherwise might benefit consumers.
Most 	states 	permit 	combinations 	between 	funeral 	establishments 	and
cemeteries.6 States that restrict combinations do so in several ways. 	Operation of a
funeral home at or adjacent to cemetery premises may be prohibited? 	Another
approach is to bar licensed funeral directors from employment by a cemetery or by
a funeral 	establishment that is controlled by a cemetery.8 	Location or one-way
employment restrictions might still allow some kinds of investments or combinations,
at least in theory, although perhaps not in practice. An approach similar to one often
taken for other licensed professions is to require that owners of funeral establishments
6 	Michigan Cemetery Industry, Cemetery Regulation in Michigan 53 (July 1990)
(unpublished report).
7 	See. e.g., Del. Code Ann. tit. 24. § 3ill (1987 & Supp.1990) (no person with a license
to practice funeral service may operate a funeral establishment within the confines
of or connected with any cemetery); Wis. Stat. Ann. § 44512(6) (1988). See Mich. Compo
Laws § 3391812(2).
8 	See. e.g., Me. Rev. Stat. Ann. tit. 32, § 1451 (1988 & Supp. 1990).

The Honorable John D. Pridnia
December 17, 1991
Page 4
be licensed to practice funeral directing. 9 Such a requirement prevents others from
even investing in funeral establishments.
Michigan's current 	law is among 	the 	most 	restnctive. 	It not 	only 	limits
locations and requires licensing in 	the funeral 	and cemetery industries, but also
absolutely prohibits joint ownership, operation, or management, whether direct or
indirect. 10
In 	other 	licensed 	and 	regulated 	businesses, such 	as 	health 	care, laws and
regulations 	limiting "commercial 	practice" 	have 	been 	supported 	as 	necessary 	to
maintain quality of service and 	protect the professional's independent judgment.
Among other restrictions, these laws commonly prevent licensed professionals from
entering commercial relationships, including employment, with non-licensed persons
or firms. 	But our experience with these restrictions, admittedly in licensed businesses
and professions other than the funeral and cemetery industries, suggests that their
effect is usually to increase prices. That effect on prices should be weighed carefully
against effects, if any, on quality of care or service that the restrictions are thought
to promoteY
9 	See, e.g., Pa. Stat. Ann. tit. 63, § 479 (Purdon 1968 & Supp. 1991) (except for
professional corporations comprised of licensed shareholders with at least one licensed
principal corporate officer, no unlicensed person shall have any interest in the practice
of funeral directing); 49 Pa. Code § 13 (1990) (funeral directors may form professional
corporations but shares of such corporations may only be issued to licensed funeral
directors).
10 	See Mich. Compo Laws § 3391812 (Supp. 1991).
11 	See C. Cox and S. Foster, The Costs and Benefits of Occupational Regulation,
October 1990 (FTC Bureau of Economics staff report). 	This report, a review of
economic studies of licensing, finds that licensing frequently increases prices and
imposes substantial costs, but that many licensing restrictions do not appear to increase
the quality of service. The report recommends careful weighing of likely costs against
prospective benefits. 	Id., p. v.
(continued_)

The Honorable John D. Pridnia
December 17, 1991
Page 5
III. 	EFFECT OF REMOVING THE PROHIBITION ON JOINT OWNERSHIP OR
OPERATION
Michigan Senate Bill No. 302 would remove restrictions on joint ownership or
operation. Michigan law now states that a cemetery owner or operator "shall not" own
or maintain a funeral establishment 12 and prevents a funeral establishment from
locating on cemetery propertyP 	Senate Bill No. 302 would change the words "shall
not" to "may" and would repeal the location prohibition.
Restrictions on the business practices of professionals can reduce competition
by preventing the introduction and development of innovative forms of professional
practice that may be more efficient, provide comparable quality, and offer competitive
alternatives to traditional providers. For example, in a case challenging various ethical
code 	provisions 	that 	the 	American 	Medical 	Association 	(AMA) 	enforced, 	the
Commission found that AMA rules prohibiting physicians from working on a salaried
basis for a hospital or other lay institution and from entering into partnerships or
similar business relationships with non-physicians unreasonably restrained competition,
and, as a result, violated federal antitrust laws.14 The Commission concluded that the
AMA's prohibitions kept physicians from adopting business formats that might have
been more efficient, and that, in particular, these restrictions precluded competition
with organizations not directly and completely under the control of physicians. 	The
H(_continued)
Where consumers are in a relatively poor position to evaluate the product or
service, regulation of some kind can be necessary. 	The Commission's Funeral Rule
addresses the consumer's relative lack of knowledge, and potentially vulnerable state
of mind when these decisions are often made, by requiring disclosures, rather than by
regulating the service directly or controlling who can practice. See Funeral Industry
Practices, 16 C.F.R. § 453.
12 	Mich. Compo Laws § 3391812(1) (Supp. 1991).
13 	I d. § 339.1812(2).
14 	American Medical Association, 94 ET.C. 701 (1979), affd, 638 F2d 443 (2d Cir.
1980), affd memo by an equally divided Court, 455 U.S. 676 (1982).

The Honorable John D. Pridnia
December 17, 1991
Page 6
Commission also found that there were no countervailing procompetitive justifications
for these restrictions. 15
The 	principle 	might 	well 	apply 	to 	the 	funeral 	and 	cemetery 	businesses.
Prohibiting joint ownership could prevent some efficient combinations of business
aspects of the two operations that might result in lower prices to consumers. 	For
example, cemetery and funeral entities might be able to realize administrative and
overhead economies through joint facilities. 	Further savings might be possible in the
areas of transportation and transaction costs. 	Buyers could make decisions about the
burial and funeral service in one location, saving expense and perhaps easing personal
concerns during a 	particularly stressful 	period. 	Admitting 	into the funeral 	and
cemetery industries new business formats that Michigan's law now prohibits could
have a generally positive effect on competition. 	These innovations might afford
consumers a wider selection of services and costs.
Other provisions of Senate Bills Nos. 301 and 302 would regulate the practices
of affiliated cemeteries and funeral establishments.16 The provisions that would
ensure that consumers are p-ot required to deal with the affiliated entity-for example,
to arrange services through the cemetery's affiliated funeral provider-are analogous
to provisions of the Funeral Rule that ensure that consumers are not required to buy
15 	See 	also 	comment 	of 	the 	staff 	of 	the 	Federal 	Trade 	Commission on 	the
American Bar Association's Model Rules of Professional Conduct, March 26, 1991,
addressing issues raised by proposals to allow law firms to provide ancillary, non-legal
services. 	In that comment, the staff pointed out that law firm diversification could
benefit consumers by allowing firms most efficiently to provide a mix of services that
consumers seek, and that rules restricting such services could harm consumers by
restricting consumer choice. 	The comment also analyzed how different proposals
would meet concerns about professional standards and ethical obligations.
16 	Under the proposed bills, a funeral provider or cemetery could not compel a
consumer 	to purchase goods or services from 	its affiliated entity, nor charge a
different 	price 	if 	the 	consumer 	did 	not 	do 	business 	with 	the 	affiliated 	entity;
disclosures to that effect would be required Also prohibited would be "manipulating
the relative prices" of merchandise or services and providing preferences or discounts
based on doing business with affiliated cemeteries and funeral establishments. S.302,
86th Leg., 1991 Sess. (amending Michigan Compiled Laws Section 339.1812(3) and adding
Sections 339.1812(4) and 3391812(5»); S.301, 86th Leg., 1991 Sess. §§ 18A, 18C.

The Honorable John D. Pridnia
December 17, 1991
Page 7
goods or services they do not want, along with those they do. 17 The proposed bills
would, however, also require that prices be the same for all customers, regardless of
whether they do business with an affiliated entity; moreover, when cemetery and
funeral services or merchandise are sold in one transaction, "any benefit, discount, or
other preferential price or treatment" based on dealing with both of the affiliated
entities would be prohibited.1s An effect of these further prohibitions might be to
prevent a combined funeral establishment and cemetery from offering the consumer
the benefit of a bundle of discounted funeral and cemetery goods and services.
The common practice of bundling goods and services for sale at a single price
(usually lower than the total price of the bundle's components if bought separately)
may reflect lower costs and other desirable efficiencies. 	The seller's savings may be
passed on to some extent to the customer. 	And the consumer may also benefit from
simplified, one-stop shopping. 	To prohibit all offerings of discounts for bundled
purchases may result in increased costs and, as a result, harm consumers. Accordingly,
the prohibition's possible costs should be compared to its anticipated benefits. It may
be thought that prohibiting bundling will promote or protect competition. There are
some economic theories that suggest bundling might harm competition if a seller has
market power and also can effectively coerce the buyer to take the entire bundle in
order to get any part of it. 	Federal antitrust laws, such as the prohibition against
"tying", already provide remedies for situations in which harm from 	bundling is
likely.1 9 Applying these antitrust remedies calls for assessment of such factors as
market (or economic) power and the nature and strength of the "tie". 	A blanket
prohibition does not take into account such case-by-case factors, and, c()nsequently,
may discourage efficiencies in situations that present no competition problems.
17 	Compare S. 301, 86th Leg., 1991 Sess. § 18A and S. 302, 86th Leg., 1991 Sess. § 1812(2)-
(3), which provide that a cemetery or funeral establishment "shall not condition" sales
on the purchase of goods or services from an affiliated establishment, and § 453.4(bX1)
of the Commission's Funeral Rule, which provides that it is an unfair or deceptive act
or practice for a funeral provider "to condition the furnishing of any funeral good or
funeral service ... upon the purchase of any other funeral good or funeral service."
18 	S. 301, 86th Leg., 1991 Sess. §§ 18A(2), 18C; S. 302, 86th Leg., 1991 Sess. § 1812(4). 	In
addition, "manipulating" relative prices "to allocate a disproportionate share of the
total price to any of the merchandise or services" would be prohibited. S. 301, § 18C(A~
19 	See Jefferson Parish Hosp. Dist. No.2 v. Hyde, 466 U.S. 2 (1984). 	Michigan's
antitrust law and remedies might also be applied in these situations. See Mich. Compo
La ws § 445.772, § 750.151

The Honorable John D. Pridnia
December 17, 1991
Page 8
IV. 	CONCLUSION
Senate Bills Nos. 301 and 302 propose changes that would tend to increase
competition in the funeral and cemetery industries. 	By allowing joint ownership or
operation, they would remove barriers to new business formats and may promote
efficiencies that ultimately could result in lower prices to consumers. 	The bills'
general prohibition of bundling products and services at discounted prices may, in
some cases, prevent the achievement of some of those efficiencies, if the prohibition
is broader than necessary to prevent harm to competition.
We hope that our comments concerning the competition aspects of combination
ownership or operation of funeral establishments and cemeteries will assist you in
your deliberations on Senate Bills Nos. 301 and 302. 	We appreciate having had the
opportunity to present our views.
Sincerely,
~~
Mark D. Kindt