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By Liz Crampton
Rapid consolidation in the hospital industry could put pressure on the Federal Trade Commission to adopt new theories of competition in health care.
A number of high-profile hospital and health care deals have been announced in recent weeks that will require agency stamps-of-approval. The FTC traditionally investigates mergers of hospitals and doctors’ practices, while the Justice Department probes mergers of insurance companies.
The pending hospital mergers are big, combining health systems across multiple states with limited geographic overlap. The tie-up between Dignity Health and Catholic Health Initiatives would span 28 states. This type of merger raises the question of whether the FTC should expand its analysis of the impact on consumers.
Some economists have long been calling on the FTC look at large-scale hospital combinations under the so-called cross-market theory, which argues that one big hospital provider reduces competition for insurers as they set up their networks. The insurers can’t walk away from a network agreement that costs them if they don’t have an alternative provider.
So far the FTC has found success challenging health care mergers of local rivals by zeroing in on narrow markets where hospitals compete. But the FTC should also probe big hospital deals with little overlap, said Marni Jameson, executive director of the Association of Independent Physicians, a group that works with the FTC on health care issues.
By “polka dotting” themselves around the country, she said, “what the hospitals are doing is outsmarting the system.”
These deals might not violate the narrowest interpretation of antitrust law because they don’t involve one provider buying up closely located rivals, Jameson said.
The FTC may need “widen some of their latitude” in enforcement to go after these deals, she told Bloomberg Law. Either that or the law needs to change.
The FTC has already departed from its typical pattern of challenging hospital mergers in narrow overlapping markets by suing stop the merger of a large hospital system with a physicians’ group in North Dakota. Sanford Health, headquartered in Sioux Falls, S.D., operates more than 40 hospitals in nine states. Sanford wants to buy Mid Dakota, a physicians group in Bismarck, N.D.
A North Dakota federal judge last week temporarily blocked the transaction at the request of the FTC so that the administrative case can proceed to trial Jan. 17. The FTC is trying to stop the transaction on grounds it would reduce competition for a number of health care services in North Dakota. The providers have appealed the judge’s decision granting the injunction to the U.S. Court of Appeals for the Eighth Circuit.
The FTC trial will take place amid a swell of provider consolidation. Last week, two mergers of giant health care systems were announced, and a rumored third would create the largest nonprofit system in the country.
Dignity Health and Catholic Health Initatives said Dec. 7 they’d agreed to combine into a Catholic health system spanning 28 states with 139 hospitals. In the Midwest, Chicago’s Advocate Health Care and Wisconsin-area Aurora Health Care said Dec. 4 that the Illinois and Wisconsin-based systems would combine, forming the 10th-largest nonprofit system.
Executives in both hospital deals say the transactions are needed to reshape how health care is delivered, expand access to services and capitalize on efficiencies, like more investment in innovation.
It’s not just hospital mergers. CVS Corp. wants to buy insurer Aetna Inc., and UnitedHealth Group Inc., the biggest U.S. health insurer, will acquire doctors group DaVita Medical Group. Antitrust practitioners are bracing for regulators’ questions about how those merged entities might exercise inappropriate leverage over various health services.
The theory that combinations of hospitals across markets can reduce competition and lead to higher prices is relatively new, but its authors are well respected. The leader promoting the theory is Harvard Business School economist Leemory Dafny, a co-author of the pioneering paper with two other economists.
“Competition among insurers for inclusion in employers’ plan menus provides the large hospital system with greater bargaining leverage than individual hospitals to negotiate higher prices, even if no two hospitals in the system operate in overlapping service markets,” the paper says. Dafny wasn’t available for comment.
Dafny’s theory has detractors, but the government already poses similar arguments in narrower hospital mergers. The FTC has long argued that consolidation among health care providers disadvantages insurance companies in negotiations over reimbursement rates. In turn, insurers pass those costs on to members.
But it could be a risky argument in court. “I won’t predict what the FTC will do with the theory, but I don’t believe a court would be receptive to the theory until there is a great deal more empirical research, peer reviewed articles, and — most importantly — a logical explanation of why a merger in separate markets would increase market power in one or both of those markets,” Doug Ross, a health care attorney at Davis Wright Tremaine, told Bloomberg Law.
“There are many good questions about this theory and no good answers yet,” he added.
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