Harvard Business School professor Leemore Dafny lays out potential reforms to assist agencies in halting anticompetitive acquisitions and practices, and to preserve and promote competition in health care markets.

Editor’s note: The following is based on testimony given before the US House Subcommittee on Antitrust, Commercial, and Administrative Law on April 29.

During the Covid pandemic, health care organizations have struggled with financial challenges created by declining revenues and exacerbated by higher costs associated with safety measures and workforce absences. The experience of “going it alone” has amplified the desire of some independent providers to consolidate with others. Larger organizations point to success stories in which patients, personnel, and supplies were moved across facilities to meet local needs. And communities are inclined to be sympathetic to hospitals’ demands, as we all appreciate the extraordinary efforts made by health care professionals and organizations during the crisis.

Some argue that addressing the financial instability provoked by the pandemic, in particular by allowing financially weaker entities to be acquired by organizations with more robust balance sheets, should trump concerns about market consolidation. This argument is not compelling. There has been no permanent shift in the health care ecosystem that would imply a change in the dynamics associated with health care consolidation. If anything, the pandemic has exposed some of the harm linked to consolidation. Providers compensated on a fee-for-service basis have struggled financially, spurring a government bailout. Research has shown that dominant hospitals have successfully resisted the shift away from fee-for-service reimbursement and toward risk-sharing models; had more shifted in this direction prior to the pandemic, hospitals would be on stronger financial footing today. 

The pandemic has also exposed the limited degree of competition in the insurance sector. As medical expenses have declined, insurers’ earnings have soared. In a competitive market, insurers would try to retain fully-insured customers by refunding premium payments for much of 2020 and reducing premiums for 2021. However, there is scant evidence of refunds beyond the minima required by statute. When patients/employers have few rival insurers to turn to, any market imperative for insurers to share medical cost savings with customers is limited. 

Going forward, there is growing concern that the pandemic is accelerating hospital consolidation and hastening the movement of physicians into employment with hospitals, insurers, and private equity-owned groups. Paired with greater exit by financially-strapped health care providers, this is a recipe for even higher prices. 

The possibility of a different type of “long haul” effect of Covid—higher prices due to consolidation—is substantial enough that some stakeholders have called for a merger moratorium. In May 2020, a group representing large employers, whose members include Boeing, Salesforce, Tesla, and Walmart, asked Congress for a yearlong ban on mergers and acquisitions among hospitals and physician groups that received government money to cope with the effects of the Covid-19 pandemic.

“Some argue that addressing the financial instability provoked by the pandemic, in particular by allowing financially weaker entities to be acquired by organizations with more robust balance sheets, should trump concerns about market consolidation. This argument is not compelling.”

Health Care Markets a Decade After the ACA

Over the past decade, health care markets have increased substantially in size. Per-capita health care spending in 2019 stood at $11,582, yielding a national total of $3.8 trillion, as compared to $8,383 in 2010, or a national total of $2.6 trillion. At the same time, many sub-sectors of health care have become substantially consolidated. There were nearly 1,600 hospital and hospital system mergers over the 20 years from 1997 to 2017, involving thousands of hospitals. This merger and acquisition activity has increased the absolute size and geographic footprint of hospital and health care delivery systems—and with it, their market power and political heft. Merger and acquisition activity in physician markets has also increased, and the share of physicians employed in practices wholly or partly owned by hospitals has increased from below 20 percent in the mid-2000s, to 30 percent in 2012 and 50 percent in 2018. Commercial health insurance markets have grown increasingly consolidated as well. By 2019, more than 74 percent of metropolitan areas were “highly concentrated” as defined in the Federal Trade Commission (FTC)/ Department of Justice (DOJ) Horizontal Merger Guidelines.

Current State of Enforcement

Antitrust enforcement vis-a-vis horizontal transactions among health care providers or payers is active, although enforcers do not have sufficient resources to be as active as needed. In the past few years, the DOJ, together with state plaintiffs, successfully blocked two proposed mega-mergers of large health insurers. In the past decade, the FTC and DOJ have successfully challenged over a dozen hospital mergers and a number of mergers among other health care providers, including matters settled with consent decrees requiring divestitures to preserve competition and matters the parties abandoned in the face of agency opposition. 

However, as Commissioner Rebecca Slaughter, the current acting FTC chair has noted, these efforts have “faced resistance, with two of these recent victories only coming after district court setbacks.” Blocking a horizontal merger, even when it appears to be an “open and shut” case to a layperson, requires extraordinary resources, including large investigation and litigation teams, as well as economic and other subject matter experts who must analyze the transaction, lay out the case for blocking the merger, and rebut arguments advanced by Defendants’ attorneys and experts. 

To pick a recent example, consider the proposed merger of two hospital systems in the Memphis area, which the FTC filed to block in November 2020. Based on the FTC’s complaint, the merger would have reduced the number of competing systems from four to three and created a system with over a 50 percent market share. In the face of litigation, the parties abandoned the deal—consistent with this being a straightforward case. Although the FTC prevailed without a trial, it took nearly a year from the merger announcement to the abandonment. Over that period, the FTC likely devoted thousands of staff hours to the investigation and lawsuit and expended substantial taxpayer resources on expert witnesses. 

The higher the payoff from the merger for the merging parties—and the payoff in the case of an increase in market power can be substantial—the greater the incentive for defendants to invest extraordinary resources to fight a merger challenge. Even if there is only a middling (and in some cases, small) chance of getting a merger through, it may well be in the parties’ interest to see if they can prevail, absorbing the agencies’ (i.e., DOJ and FTC’s) scarce resources in that attempt and preventing them from devoting those resources to investigate other transactions or anticompetitive practices. 

The substantial resources required to challenge transactions, paired with stagnating enforcement budgets, may explain why authorities have elected not to challenge some horizontal transactions they would likely have challenged in previous eras. Using data on a wide range of industries, antitrust scholar John Kwoka documents that enforcers rarely raise concerns about changes in market structure that used to draw scrutiny—that is, mergers that yield five or more market participants. 

“The substantial resources required to challenge transactions, paired with stagnating enforcement budgets, may explain why authorities have elected not to challenge some horizontal transactions they would likely have challenged in previous eras.”

Because pre-merger reporting to the federal agencies is only required for transactions exceeding minimum dollar thresholds (currently $92 million), the agencies have limited visibility into smaller acquisitions, as well as some larger combinations not involving asset exchanges. Even if the agencies become aware of so-called “non-reportable” transactions, the parties may legally merge before an agency has reviewed the transaction. Unwinding consummated transactions parties is notoriously difficult, reducing the odds of a resolution that restores competition. A recent study found that an amendment to the HSR Act in 2000, which raised the effective asset threshold for reporting from $10 million to $50 million, resulted in a large increase in mergers of rivals in that range, relative to mergers among rivals in the always-exempt range ($50 million). Importantly, the number of federal investigations into transactions in the newly-exempt range fell from around 150 per year to nearly zero. Clearly, reporting thresholds matter for competition, and in health care, where many transactions are small, many are escaping detection and investigation.

Both federal and state enforcement agencies have largely steered clear of challenging nonhorizontal transactions in health care. However, there is substantial evidence that at least two common forms of non-horizontal integration among health care providers—hospital acquisitions of physician groups and cross-market mergers—can lead to significant increases in prices without commensurate benefits and, therefore, raise health care spending without any clear improvements for patients.

In the following section, I suggest reforms that can assist the agencies in identifying and challenging anticompetitive acquisitions and practices.

Reforms to Bolster Antitrust Enforcement and Preserve and Promote Competition in Health Care Markets

1. Strengthen the federal enforcement agencies’ ability to identify and review potentially problematic transactions and conduct in health care. 

● Require more health care transactions to be reported. Implement additional filing requirements, specifically lowering the asset value threshold and adding revenue thresholds to cover smaller facility and provider consolidation and transactions involving low- or no-asset transfers; and require filers to provide information that can facilitate the screening process, such as the distance and driving time between the closest establishments of the merging parties.

● Increase the budgets of enforcement agencies. The volume of transactions the agencies must review has increased dramatically even as funding has declined in real terms. The agencies require these resources to develop expertise in a range of new and changing sectors, to litigate and establish new precedents that protect competition, and to advocate for pro-competitive policies. Investing in our enforcement agencies will help to prevent anticompetitive practices and consolidation and yield a return for years to come. 

● Remove two unnecessary limitations on the authority of the FTC. The first precludes the FTC from investigating anticompetitive conduct by nonprofit organizations, and the second precludes the FTC from studying the business of insurance absent explicit Congressional authorization. These restrictions have no merit. The former results in an arbitrary and likely inefficient allocation or transfer of cases across the agencies, and the latter impedes the FTC’s efforts in a sector where the lines between provision of care and insurance are increasingly blurred. 

2. Request that the agencies issue revised Health Care Statements (or “Health Care Guidelines”). 

● Issued in 1996, the Statements of Antitrust Enforcement Policy in Health Care describe how the DOJ and FTC evaluate—or once evaluated—certain types of mergers, joint ventures, and contracting practices among health care entities. The health care landscape has changed considerably since 1996, and the guidelines should be updated and expanded to include discussions of recent types of transactions that have been shown to harm consumers, such as “cross-market” mergers of providers in adjacent geographic markets. The revised Statements should be renamed as “Health Care Guidelines,” in keeping with agency practice when issuing significant documents setting forth the agencies’ approach to assessing mergers.  They should also describe concerns about the contracting clauses imposed by dominant health care systems, including but not limited to “all or nothing” requirements and anti-steering/tiering provisions. Ideally, the Guidelines would span the life sciences as well, and would include discussion of a  range of pharmaceutical practices that weaken competition. The revised Guidelines would provide an opportunity for the DOJ and FTC to set forth their interpretation of antitrust statutes, provide valuable guidance to the health care industry, and potentially deter anticompetitive conduct and mergers that would otherwise be costly and time-consuming for the authorities to challenge even if they are highly likely to prevail.

3. Amend and strengthen the antitrust statutes. 

● Per Clayton Act Section 7, the agencies must demonstrate a transaction “substantially” lessens competition or “tends to create a monopoly” in order to block a merger. Replacing “substantially” with “meaningfully” or “materially” could reduce the burden of merger challenges, and expand the scope of such challenges. For example, with such a change authorities may be able to address the problem of smaller acquisitions, such as serial acquisitions of physician practices by hospital systems, that may not have substantial effects individually but, collectively, lead to the same outcomes as a large merger. 

● Implement a legal framework—whether by amending the Clayton Act, amending Section 2 of the Sherman Act, or interpreting the agency’s unfair methods of competition authority — to explicitly prohibit health care mergers that enable greater exploitation of existing market power and are likely to result in harm to consumers. Such a reform would discourage transactions that yield price increases without commensurate benefits to consumers, such as when a dominant hospital system buys a suburban hospital and instantly raises its price, or when a new acquirer (such as a private equity firm) implements surprise billing to the detriment of patients.

● Ease the agencies’ legal burden for challenging certain combinations by requiring the merging parties to demonstrate their transaction is not anticompetitive. This “burden shifting” should be limited, but particularly for the largest transactions, and for those with especially high potential to prove anticompetitive, such a shift would help to deter anticompetitive mergers and conserve scarce agency resources. 

4. Create a federal database to track health care ownership and spending, both private and public. 

● This database could form the basis for regularly scheduled reports by HHS or the enforcement agencies, and could inform public hearings on industry consolidation and its effects. It would also allow the agencies to more quickly and efficiently distinguish innocuous and potentially concerning provider transactions, which will be particularly useful if, as I recommend above, the reporting thresholds for such transactions are lowered. At a minimum, the data should be available to public agencies for use in analysis and investigations; ideally, it would be available to researchers for analysis as well, subject to all the necessary privacy and confidentiality protections.

Although the current health care system is rapidly evolving, there is no reason to believe that consolidation in our health care sectors is likely to be less harmful going forward than it has been, on average, in the past. Indeed, as the share of the population that is publicly insured increases, and as commercial insurers increasingly administer health plans for the publicly insured, there is considerable risk that market power exercised vis-a-vis the privately insured population through higher prices will become apparent for the publicly insured as well. And consolidation-fueled price increases are not linked to improvements in patient outcomes or satisfaction. Congress should provide funding and pass needed legislation to support and promote competition in health care markets. It is precisely during this time of change in the health care system that the risks of consolidation are highest and the rewards of vigilance will be greatest.

Author’s note: I thank Dr. Cory Capps of Bates White Economic Consulting, Dr. Zack Cooper of Yale University, and Dr. Tom Lee of Press Ganey and Harvard Medical School for their valuable comments.