FTC Asserts Authority Amid Wave of Hospital Mergers

Mergers and acquisitions have spiked recently in the health sector, a trend that has been growing since the passage of the Affordable Care Act, and with those mergers has come an increased focus on the Federal Trade Commission’s oversight of the industry.

In a speech earlier this month in Washington, FTC commissioner Julie Brill struck a combative tone, saying that her agency would respond to the glut of M&A activity. She argued that while the Affordable Care Act was designed to incentivize collaboration between hospitals and providers, the FTC wouldn’t stand by and let industry giants use the law as a “free pass” for purchasing outsized influence.

“Antitrust enforcement – including preventing firms from accumulating undue market power through mergers and acquisitions – is…just as crucial now as it was before the ACA in ensuring that our health care markets in the U.S. work well,” Brill said.

“Although the ACA encourages integration of health care delivery, there are many mechanisms for achieving this goal,” she added. “While the FTC doesn’t challenge the vast majority of health care provider acquisitions, we will step in to challenge acquisitions that give a firm market power. The ACA and antitrust enforcement are aligned in the need to achieve this goal.”

But not everyone agrees that the healthcare law and antitrust laws can be so neatly reconciled.

Obamacare tries to change how hospitals are paid by rewarding healthier outcomes, rather than paying for every test or service completed by a provider through the fee-for-service model. Hospitals have responded by seeking to cut unnecessary procedures in an attempt to streamline patient care, and by providing services aimed at keeping patients healthy and limiting repeat visits.

This is a costly undertaking, and consolidation, which allows hospitals to cut costs by leveraging economies of scale, to eliminate redundancies through standardization, to streamline communication, and to gain leverage with suppliers and insurers, is one path hospitals are considering as they navigate this new landscape.

In addition, the health law encourages collaboration and integration through Accountable Care Organizations (ACOs) and other arrangements that, while not specifically designed to promote mergers and acquisitions, foster the kind of analyses and critical thinking that might lead an executive down that path.

Some have said that this pits the behaviors incentivized in the Affordable Care Act against those regulated by the FTC. David Balto, whose firm practices antitrust law in Washington, argues that consolidation is the best way for hospitals to lower prices and produce better outcomes. In an interview with Morning Consult, he accused the FTC of “dictating market outcomes” by challenging proposed mergers.

“There has been a strident effort by the FTC to suggest that there’s not an inconsistency between their policies and the effort by hospitals to reduce costs and improve results that comes from consolidation,” he said. “But they’re just plain wrong. The generally acknowledged goals of the health law are to find better ways to integrate so we can improve results and bend the cost curve, and we know how to do that – greater integration helps control healthcare costs and manage outcomes better. But that hasn’t convinced the FTC because they’re naturally suspicious of integration.”

That’s the argument Boise, Idaho-based St. Luke’s Health System made when the FTC challenged its acquisition of the Saltzer Medical Group, the largest independent physician group in the state, located about 30 miles outside of Boise in Nampa. St. Luke’s already serviced 15 percent of primary care patients in Nampa, which when combined with Saltzer’s 60 percent, would have given the new entity a 75 percent market share.

St. Luke’s argued the merger would produce lower costs for consumers, and that the FTC challenge was evidence of the inherent conflict between the health law and antitrust laws. However, the FTC successfully argued that the new company would have created a monopoly, leaving patients with few credible alternatives if St. Luke’s chose to raise prices. St. Luke’s has appealed the court’s ruling, which the FTC has trumpeted as an important victory that legitimizes their enforcement strategy.

In her June speech, Brill dismissed the notion that the FTC’s mandate and the healthcare law are incompatible.

“Far from being a barrier to pro-competitive collaboration envisioned in the ACA, antitrust aligns naturally with the goals of ACOs,” she said. “By serving as a watchdog against firms accumulating undue market power and engaging in anticompetitive conduct, antitrust promotes market behavior that creates efficiencies and benefits consumers. Antitrust law permits providers to engage in a wide array of legitimate collaborative activities, including ACO arrangements, as well as many mergers and consolidations, so long as the conduct is not likely to harm consumer welfare through higher cost or lowered quality.”

Brill also argued that there is nothing in the ACA that requires or encourages providers to merge or consolidate, but rather, that the law “encourages providers to create entities that coordinate the provision of patient care services.”

That’s a nuanced but important distinction.

“It’s an open question as to whether coordination of healthcare means consolidation of market power,” said Stuart Guterman, a vice president at the Commonwealth Fund. “You don’t have to have hospitals buying physicians to have them coordinate their care, you can have arrangements where they talk more openly to each other.”

Brill pointed to ACOs and joint ventures as potential options for hospitals outside of M&A. But regardless, the FTC says it challenges only a small percentage of hospital mergers as it is.

“Just because there are some hospitals that want to get together doesn’t mean it’s anticompetitive or that the FTC will challenge them,” an agency spokesperson told Morning Consult. “We go after those ones we think are anticompetitive and will raise prices.”

The data seems to support this claim.

In 2013, there were 98 hospital and health system mergers or acquisitions announced, according to data from Kaufman Hall. That’s a 51 percent spike over 2010. That activity has continued in 2014, highlighted by three Detroit-area systems announcing a merger this month that will create a nearly $4 billion nonprofit organization.

A spokesperson for the FTC noted that while the agency has challenged more cases in recent years, there hasn’t been the requisite spike in legal action that one might expect considering the increased M&A activity. The agency presently has only three open cases pertaining to hospitals and providers.

And even if the FTC wanted to go after more cases, the agency likely doesn’t have the financial resources to support such an initiative. In 2006, an agency report said the FTC’s Bureau of Economics had 70 PhD-level economists on staff for investigations and litigation support. Despite the merger boom, the FTC hasn’t grown much in those eight years – a spokesperson said they are only up to about 80 in 2014.

That means the FTC has to be smarter with its challenges, and this is where the agency is striking a confident tone.

“The tide has turned in our favor and we’re winning more hospital challenges, or hospitals have abandoned their challenges, which is also a win,” a spokesperson said.

The agency believes it has locked on to the formula for what constitutes a regional market and what percentage market share a provider can obtain before it will flex its pricing power against consumers. The FTC points to the Evanston Northwestern Hospital case settled in 2008, which it litigated retroactively. Because the merger already went through, the new entity was allowed to exist, but it’s a case study the agency has used as a model for its recent efforts.

Balto countered that the FTC’s transgressions don’t solely relate to the volume of cases it’s prosecuting, but extends to the uncertainty its actions create in the market at a time when collaboration is vital.

According to Guterman, it’s all part of a debate provoked by the growing pains from the transition to the new healthcare economy.

“[The FTC] view their job as making sure they protect the consumer, which is the bottom line, but they also recognize there are big changes in the healthcare sector, so they need to change how they view this,” he said. “They’re aware of the fact that the environment in which they work is changing and they’re looking for ways to figure out how they need to focus their efforts and do their job in a way that recognizes those changes.”

Morning Consult