Editor’s note: This post is part of a Health Affairs Blog Symposium on Health Law stemming from 4th Annual Health Law Year in P/Review conference hosted by the Petrie-Flom Center for Health Law Policy, Biotechnology, and Bioethics at Harvard Law School. Holly Fernandez Lynch wrote an introductory post in January 2016 and you can access a full list of symposium pieces here or by clicking on the “The Health Law Year in P/Review” tag at the bottom of any symposium post. You can also watch a video of the presentation on which this post is based.
It appears that 2016 will follow 2015 as another year of massive consolidation in the health care sector. It therefore follows that 2016 will, also like 2015, be another year in which assorted health care industries receive significant antitrust scrutiny. Against this backdrop, it is timely and revealing to examine the current state and trajectory of antitrust law as it intersects and shapes health care policy.
Health Care Providers
Antitrust Scrutiny Of Hospital Mergers Has A Complex And Checkered History
Beginning in the late 1980s, when hospitals and hospital systems started an intense consolidation trend that continues today, many were challenged by the Federal Trade Commission (FTC) for creating anticompetitive and therefore illegal pricing power. Yet the FTC was unsuccessful in convincing courts that this was a harmful trend, and the Commission earned a costly, long losing streak, suffering defeats in each of six landmark cases between 1994 and 1999 (Note 1). The district courts reasoned that the hospitals’ mergers would provide better and more efficient care, that patients would travel to obtain cheaper care, and in any event, because the hospitals were nonprofit, they would not exercise market power to increase prices.
All these predictions have been proven incorrect. Hospital mergers (including those involving nonprofits) have significantly increased prices, and there has been no evidence of increased efficiencies. In fact, evidence suggests that, because the administration of health insurance both reduces the impact of marginal price increases and limits demand in close substitutes, hospital monopolists are even more costly than “typical” monopolies. One significant development in 2015 is new research which revealed that cost variation in the US is largely determined by hospitals market power. The string of FTC losses and the consequent wave of hospital consolidations can only be described as a collective and massive failure of antitrust policy.
In 2004, the FTC began to turn around its record of defeat. The Commission filed a successful retroactive administrative complaint against Evanston Northwestern Healthcare (ENH) in Chicago, offering proof that the merger did, in fact, lead to costly price increases. By generating a judicial ruling that confirmed in law what had been known in fact for some time, the FTC’s victory was a turning point, and the Commission has thereafter won important hospital merger challenges in Idaho and Ohio. It might be said that the FTC is now at the top of its game, and in the past three months it launched three high profile challenges to hospital mergers: in West Virginia, Pennsylvania, and Chicago. Perhaps the FTC has finally won the rhetorical war, and all health care policymakers—including courts, state attorneys general, and even CMS—recognize the danger of hospital monopolies.
Nonetheless, despite the FTC’s new mojo, provider consolidation continues. One reason is the FTC has limited resources and can only challenge the most egregious cases. For this reason, effective antitrust policy will increasingly depend on active state attorneys general and private plaintiffs. But another reason is that much of the current consolidation craze involves vertical mergers of hospitals with physician practices, rather than the horizontal mergers of hospital competitors that have been at the center of FTC challenges. While horizontal mergers unambiguously lead to greater pricing power and therefore social costs, mergers between hospitals, doctors, and practices theoretically do not increase monopoly power in any particular market and therefore are scrutinized under a different antitrust theory.
The FTC has not yet challenged any vertical merger or acquisition in the health care sector under a theory that the vertical linkage would be anticompetitive, but there is good reason that it should, and good reason to think that it soon will. Even if conventional economics and recent antitrust doctrine suggests that policymakers should be sympathetic to vertical integration, hospital-physician linkages are likely to lead to costly inefficiencies: greater inpatient referrals, inpatient-level billing rates for outpatient procedures, and resistance to the creation of affordable narrow network insurance plans. But the real problem with these vertical linkages is that they take place within markets that have already been consolidated. Even if vertical linkages—formation of so-called Accountable Care Organizations—can theoretically be beneficial, they are more likely to enshrine the power of current hospital monopolists and exacerbate the costly infrastructure that hospital systems have amassed over the past decades.
The coming year will likely offer ample opportunities for the FTC to test a theory challenging a provider vertical merger, as the health care sector is predicted to be one of the most active sectors in mergers. These mergers should attract antitrust scrutiny not just for their size and frequency, but also for their underlying motivations.
According to Bill Baker, who leads KPMG’s Healthcare and Life Sciences Deal Advisory practice, “Health care is facing a great deal of upheaval because of the profound changes influencing finance, regulation, supply chains, and technology, both for their own information systems and the science behind new treatments.” In short, health care providers are scared, and they are joining forces not to create efficiencies but instead to insulate themselves from the coming market uncertainty.
This amounts to a “too big to fail” strategy, and it is the opposite of what antirust should permit. If this consolidation strategy succeeds, not only will provider markets be less competitive, but they will be ever more resistant to urgently needed delivery system reforms to improve quality and reduce the costs of care.
Insurers
Like the provider sector, 2015 was a significant year for insurer consolidation, and 2016 promises to be eventful as well. Of the five nationwide private health insurers, two proposed mergers were announced in 2015: Anthem and Cigna and Aetna and Humana.
From an antitrust perspective, mergers of competing insurers involve more nuanced analysis than mergers of competing hospitals. Insurers offer multiple products—individual insurance, group insurance, Medicare Advantage, etc.—and therefore compete in many non-overlapping product markets; patients do not need to travel to obtain insurance, thus competition boundaries are due to state borders rather than physical localities; entry into new geographic or product markets do not require large fixed investments, thus potential entrants ostensibly can discipline monopolists. Moreover, although the merging parties constitute four of the five major national market players, they also compete with regional Blues plans and typically enjoy small market shares in individual markets.
Both proposed mergers are currently being scrutinized by the Department of Justice, and the interesting story unfolding in 2016 is not just whether they will be approved but how Justice regulators conceptualize competition. On the one hand, regulators will have to scrutinize each individual product and geographic market and whether the mergers create problematic market power. This focused, perhaps myopic approach might suggest that the mergers do not create serious problems, and any particular markets that become overly concentrated can be corrected with specified divestitures. On the other, regulators might approach the mergers more conceptually as a bumper sticker style problem: five-to-four-to-three! Reducing the number of marketplace participants that dramatically could represent an enormous loss of incentives, ingenuity, and market dynamism, regardless of what the small numbers suggest.
In short, the insurance sector is consolidating alongside the provider sector, and the mergers currently under review will offer insights into how antitrust regulators conceive of how insurers compete. If regulators want to stem health insurance consolidation, they might be required to develop innovative theories of competition and antitrust harm.
Pharmaceuticals
Like the provider and insurer sectors, the pharmaceutical industry received several sources of antitrust scrutiny in 2015. Unlike antitrust policy in the provider sector, however, several issues in pharmaceutical competition arising present challenges that do not readily suggest what antitrust policymakers should do.
There are some straightforward examples of antitrust problems coming out of the pharmaceutical industry. Although it took an unnecessarily long time for “pay-to-delay” settlements to be recognized as anticompetitive, the Supreme Court’s ruling that such agreements were subject to antitrust scrutiny has unleased long-overdue enforcement actions. At present there are 18 cases in seven circuits prosecuting “pay-to-delay” agreements, and the law is making it increasingly clear that such arrangements will be redressed under the Sherman Act.
Elsewhere within the pharmaceutical industry, however, new practices are appearing which the FTC hasn’t considered so thoroughly. “Product hopping” (where brand name drugs are discontinued right before generic entry, and are replaced by tweaked follow-on branded drugs) has recently been found to violate antitrust laws in the New York, in a case brought by the New York Attorney General. In that case, Activis delayed a generic version of Namenda by releasing a new capsule to deliver the drug, while withdrawing the existing tablet form. Although it is largely undisputed that Activis’ conduct is costly and problematic, it is not clear that this conduct amounts to an antitrust violation. Product hopping might be better redressed by reforming how patents are issued or how pharmaceuticals are purchased.
Antitrust policymakers have also recently pursued the pharmaceutical sector for charges of price gouging. The FTC has allegedly opened an investigation into the ongoing drama surrounding Turing’s pricing strategy for Daraprim, and the Massachusetts Attorney General announced it has threatened action against Gilead for its pricing of Sovaldi and Harvoni. Like actions against product hopping, these cases might constitute new and useful antitrust measures, or a misuse of antitrust law for problems that are better redressed with other mechanisms. Either way, these developments are sure to be watched closely in the year ahead by antitrust and health care policymakers alike.
Newfound Attention
If antitrust was once a distrusted and unfavored tool in health policy, it now appears to have regained attention. Some of this newfound attention is surely welcomed, and although antitrust actions against hospital mergers and pay-for-delay actions waited too long before receiving vindication, the nation is benefitting now from aggressive enforcement. Yet some of the newfound attention has more ambiguous support. Not all dysfunctional market outcomes are effectively redressed with antitrust enforcement, and not all antitrust actions solve the targeted market dysfunctions.
Still, 2016 will surely follow 2015 as a year in which antitrust law will be on the front lines of health care policy, a year in which antitrust law will confront some of the nation’s biggest challenges health care challenges, and a year in which the narrative arc of antitrust policy will continue to take shape.
Note 1
FTC v. Hospital Board of Directors of Lee County, 38 F.3d 1184 (11th Cir. 1994); In re Adventist Health System/West, 117 F.T.C. 224 (1994) WL 16010985; FTC v. Freeman Hospital, 69 F.3d 260 (8th Cir. 1995); FTC v. Butterworth Health Corp, 946 F.Supp. 1285 (W.D. Mich. 1996); FTC v. Tenet Healthcare Corp., 186 F.3d 1045 (8th Cir. 1999).
Author’s Note
Thanks to Crispin Smith, Harvard Law School Class of 2018, for his exceptional research assistance.
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