By Dr. Robert Betz, Ph.D.
The tension between the government’s imperative to improve quality and reduce costs vs. the FTC’s goal of preserving competition
For the last half century, the federal government has created a dynamic economic and social tension in health policy between monopolistic and competitive structures of production. While many policies champion free and fair competition as necessary to drive down consumer prices, there are some sectors of healthcare that cannot sustain a certain level of competitive behavior due to the high costs of entry and maintenance of presence. From a business perspective, healthcare in the United States is an example of a sector that has relatively higher administrative, data-management, and technology costs. In many cases, healthcare cost reductions and quality improvements can be enhanced by integration and consolidation.
In President Obama’s Affordable Care Act (ACA), policymakers recognized the increasing costs of healthcare for providers and the need for integration of various practice types. Yet the specifics of what kind of balance must be struck between the monopolistic and competitive aspects of healthcare remain unclear. Fortunately, recent battles between the Federal Trade Commission (FTC) and the Department of Justice (DOJ), who advocate for competitive practices, and various large healthcare providers shed some light on how a healthcare organizations can consolidate, merge, and integrate, without fouling the monopoly laws. Until policymakers adjust the relevant laws, this tension will cause uncertainty about the federal government’s schizophrenic attitude toward healthcare consolidation, which can lead to lower costs and improved quality.
Background on the tensions
While consolidations, mergers, and acquisitions have increased since the ACA, “This is not a new problem” insists leading healthcare attorney David Hyman, of LAWFIRM, in Tulsa, Okla. “For years under managed cares there has been pressure under healthcare to consolidate and merge practices into groups that will provide a better economic return for a world where payments are going down,” Hyman says.
The reason for the consolidation has been two-fold: insurance companies have been restricting payments for services, and the costs of maintaining a physician practice — or even a small hospital – has skyrocketed. This dynamic leads many health policy professionals to observe that due to costs, physicians today are being driven by policy toward the hospitals, and, some believe, toward an employment status.
The price tag of new technology and electronic health records (EHRs) has rapidly increased costs, at least for the short-term. In response, physicians and hospitals are desperate to save money. Consolidation is certainly a viable alternative for many. “Physicians increasingly don’t want to fight the battle of handling reimbursement, insurance, electronic system, the maintenance of the business side of practice,” Hyman says.
Even on a higher level, future Medicare/Medicaid cuts, and cuts from private insurance, are causing increased distress among hospitals and management of health systems. Dr. David Pate, president and CEO of Boise, Idaho-based St Luke’s Health System noted “All the healthcare providers are bracing because we know that the cuts are coming… Consolidation is a natural response to threatened cuts.”
The FTC’s anti-trust body of jurisprudence
The roots of this conflict between the FTC and ACA start far back, in two antitrust laws: The Sherman Antitrust Act and the Clayton Antitrust Act. Specifically, Section 7 of the Clayton Act and Section 1 of the Sherman Act, along with Section 5 of the Federal Trade Commission Act, impacts the legality of various mergers and acquisitions in the United States. These laws prohibit merging if the merger substantially lessens competition or creates a monopoly. These laws also take into account “the size of the transactions and the size of the parties.” These two factors, combined with the Horizontal Merger Guideline of 2010 and the “Statements of Enforcement Policy and Analytical Principles Related to Health Care and Antitrust,” give healthcare organizations and lawyers some helpful context for evaluating consolidation efforts.
But some note that the statements perhaps create additional confusions. According to a December 2012 article in Modern Healthcare by Joe Carlson “The FTC is operating from law that was passed over many years to address a set of issues, and healthcare reform is working with a different set of laws,” he said. “And the two have not had the time or energy to collaborate about how the two sets of laws need to be symbiotic.”
The ACA’s cost-cutting measures
The ACA incentivizes participants in the healthcare industry to decrease costs, increase quality, and collaborate. These incentives have lead many to argue that the ACA should change the way in which the FTC and DOJ have evaluated merger challenges. However, many agencies have rejected that argument. According to former FTC Chairman Jon Leibowitz, “there is nothing in the Affordable Care Act that suggests that hospitals need to merge to become ACOs (Accountable Care Organizations), and CMS (Centers for Medicare and Medicaid Services) has made that clear in its regulation. We will continue to analyze hospital mergers under our merger guidelines.”
Yet many use the ACA to reinforce two types of defenses in a merger challenge: the efficiencies defense and the failing company and weakened competitor defenses. The guidelines specify that efficiencies must be merger-specific or can only be accomplished by the merger. In this way, the FTC and DOJ have allowed mergers when these mergers deliver better outcomes for society. The ACA incentives are additional ways that hospitals and providers can point to their efficiencies. Additionally, courts have realized that if the only alternative to a merger is for one of the firms to exit the market, the merger has been allowed. Occasionally, courts have ruled that if one of the firms is not a significant competitor, the result of the merger is minimal and can be allowed. The ACA plays a role in strengthening these defenses as ACA requirements “contribute to increased financial difficulties that are hard for standalone or smaller hospitals to overcome; those hospitals therefore, may seek a partner with greater resources.”
Tension in action
Since the Affordable Care Act, the DOJ and the FTC have been filing cases against mergers that have broken the FTC and the DOJ’s anti-trust laws. The healthcare provider defense often looks like the type described above: the ACA raised costs of operating necessitating consolidation and the ACA laid out ways in which consolidation is meant as a way of cutting costs and improving care for society. So far, courts seem to be deciding for the FTC and the DOJ, or the healthcare providers simply stop the mergers from going through once they realize that they are under review.
Nevertheless, on the horizon is a case that many in healthcare are watching carefully. Promedica Health System was ordered to divest an Ohio hospital. Promedica contested this action, and currently the case is waiting for a decision from the 6th U.S. Circuit Court of Appeals in Cincinnati. The American Hospital Association and America’s Health Insurance Plans filed amicus curiae, “friend of the court” briefs for Promedica. There is some belief that this case will eventually find its way to the Supreme Court.
Congress and the FTC stir
There has already been movement with the courts. But Congress and the FTC are acting also to reconcile the two laws and to delineate the meaning of the ACA. Congressman Jim McDermott (D-WA) has called upon the FTC to issue better guidance on antitrust issues in the ACA. The FTC also has released an informative paper on reconciling antitrust laws for ACOs. In October 2011, the FTC and DOJ issued their final Statement of Antitrust Enforcement Policy Regarding Accountable Care Organizations Participating in the Medicare Shared Savings Program. The policy statement was a direct response to ACA provisions authorizing physicians, hospitals and other healthcare providers to form ACOs to manage and coordinate care for Medicare beneficiaries for purposes of the ACA’s Medicare Shared Savings Program. It also was intended to apply to ACOs created for the Medicare program that will contract with commercial insurers. The policy statement is seen as a change in thinking by the agencies moving from a prior enforcement policy to one that provides additional leeway for providers to collaborate to achieve the goals of cost efficiency and greater quality.
Future solutions
Healthcare providers currently understand the need for some consolidations. The goals of the ACA clearly call for the reduction of costs, while at the same time improving the quality of care. Providers are also painfully aware of the prospect of reduced public and private reimbursement. In this emerging reality, antitrust enforcement continues to be seen by the FTC as one of its most important tools to ensure competition. From the provider perspective, this is still a painful and nebulous area to tread.
The ACO policy statement will help, along with other guidance regarding enforcement policy. It does seem that the FTC is retooling its enforcement in an effort to take the country’s new healthcare goals, along with other industry realities, into account. At the same time, it is safe to assume, the FTC will continue to aggressively test proposed transactions they determine are anticompetitive.
The tension between healthcare consolidation and antitrust laws will not be easy to resolve. How to fix the problem of increasing costs and the need for competition in health care is a bigger problem than just one of legal interpretation. Some other options for compromise between the ACA and the antitrust laws have been proposed by Harvard Health Care Law Professor, David Cutler and Yale Professor, Fiona Scott Morton. In their paper, “Hospitals, Market Share, and Consolidation”, they offer two solutions which are being tested now: “bundled payments, and price controls/price or spending targets.” They argue that bundled payments changes “incentives for health systems that strongly encourage cost savings, not just the provision of profitable interventions.” Price/spending targets is an altered version of price controls, although instead of capping prices for services, an overall expenditure target is set. Pilots of these price spending target programs are being utilized in both Oregon and Massachusetts. According to Cutler and Morton: “Until a permanent solution is reached, a tug of war with managed care and the ACA and FTC” will continue.
Note: The author wishes to specifically thank Rachel Miklaszewski, 2014 Graduate, Columbian College of Arts and Sciences of the George Washington University, for her research contributions to this article.
Robert Betz, Ph.D., is President of Robert Betz Associates, Inc. (RBA), a federal health policy consulting firm located in the Washington, D.C. area. Additionally, Dr. Betz is an adjunct professor teaching at The George Washington University where he specializes in political science and health policy. For more information about RBA, visit www.robertbetz.com.
- Fox, Thomas; Loepere, Carol, Metro, Joseph “Health Care Financial Transactions Manual” 2013-2 Edition. p.1220
- p.1221
- Carlson, Joe “Pulled In Two Directions” Modern Health. http://www.modernhealthcare.com/article/20121215/MAGAZINE/312159986
- Singer, Toby “Antitrust Implications of the Affordable Care Act” Journal of Health and Life Science Law. http://archive.healthlawyers.org/google/health_law_archive/jhl/vol.6no.2/Antitrust%20Implications%20of%20the%20Affordable%20Care%20Act%20%5BJournal%20of%20Health%20and%20Life%20Sciences%20Law,%20February,%202013%5D.pdf
- “ACA, antitrust laws aren’t in conflict, FTC director says” Modern Healthcare http://www.modernhealthcare.com/article/20140218/BLOG/302189996
- 76 Fed. Reg. 67,026 (Oct. 28. 2011), available at http://www.ftc.gov/os/fedreg/2011/10/111020aco.pdf. As of January 2013, 153 organizations had been approved by CMS for the Shared Savings Program, and approximately 2.4 million beneficiaries will receive care from providers in ACOs. Mark Mattioli, “The Year of the ACO and Trends for the Future,” Law360 (Jan. 18, 2013).
- ACA, 124 Stat. 325, § 2706, 42 U.S.C. § 1396a. Under the Shared Savings Program, participating providers meeting certain requirements defined by the Centers for Medicare and Medicaid Services (CMS) may qualify to share savings they create under the Medicare program.