Should Antitrust Enforcement Consider Health Equity When Reviewing Hospital Mergers? – Health Affairs
Antitrust has recently moved to center stage, with calls for more aggressive and expansive antitrust enforcement coming from progressives, and even some conservatives. Much of the attention has been around Big Tech; however, recently appointed Federal Trade Commission (FTC) Chair Lina Khan, as well as her immediate predecessor, Acting FTC Chair Rebecca Slaughter, have also called out health care as particularly in need of aggressive antitrust enforcement. At the same time, the pandemic has highlighted health disparities and increased attention on the impact that the legacy of structural racism has on health outcomes.
This backdrop prompts the question: What role, if any, should health equity play in hospital merger reviews? Health equity is used here to refer to access to high-quality health care services by patients who historically have been underserved. Slaughter, still an FTC commissioner, has publicly contributed her views to this debate, asserting that antitrust enforcement should play an active role in addressing racial inequity.
The answer to this question is not simple. Hospital mergers can greatly affect the quality and availability of health care to underserved communities. But consideration of such issues would be a departure for courts that have restricted antitrust scrutiny to a transaction’s impact on competition. Investigating the likely impact of a transaction on health equity would be a particularly challenging task for the FTC, which takes the lead in hospital merger investigations, given its limited resources and expertise with respect to such issues. Moreover, both the FTC and courts are disinclined to supervise post-merger obligations to assure health equity. On the other hand, reviewing only the impact of hospital mergers on rates charged to commercial health plans (as is generally the agency’s practice today) risks missing what may be a merger’s most important implications.
The response, then, must be nuanced. As will be explained below, antitrust merger law, with its focus on the competitive impact of changes in market structure, is generally ill-suited to consider health equity. These concerns are better addressed through more targeted policies, including payment reform, subsidies, and regulations.
Nevertheless, even under existing law, courts can give greater attention to the effect of a merger on hospital competition with respect to quality and access. Moreover, the FTC can more explicitly take quality and access into account when exercising its discretion in deciding whether to challenge a hospital merger. Finally, to the extent that states believe that antitrust will not adequately address health equity, they can enact legislation to directly address such concerns, including providing for post-merger regulatory oversight.
This Forefront article discusses the current legal standard governing federal antitrust review of hospital mergers and how this standard has been applied by the FTC and the courts. It argues that greater attention should be given to the impact on quality and access competition, especially for patients not covered by commercial insurance. The article then explains how even where merger-related effects on health equity are not tied to competition, they nevertheless should be considered in close calls when the FTC exercises its discretion regarding which mergers it will challenge.
This article also describes how in certain markets, such as rural areas where it is doubtful that competing health systems can operate efficiently, states could oversee hospital mergers to assure not only reasonable prices, but also quality and access. The article concludes by arguing that current antitrust law should not be changed to address health equity issues that do not arise from a change in market structure.
The Current Legal Standard For Hospital Merger Reviews
The FTC on its own cannot block a hospital merger. Rather, its challenge must be considered in federal court, where the agency has the burden of proving that the transaction would substantially lessen competition in a relevant product and geographic market in violation of the Clayton Act. Over the past few decades, courts have held that the effects of a merger, good or bad, must be considered solely through the lens of its impact on competition. For example, courts have been reluctant to credit any alleged benefits from a merger (such as cost reductions) unless they can be seen as enabling the merged firm to compete more effectively by providing lower prices (or higher quality or more innovation).
Hospital Merger Reviews Have Focused On Only A Narrow Slice Of Possible Competitive Effects
While merger reviews under existing antitrust law must focus on the impact of a transaction on competition, the FTC and courts have focused almost entirely on a very narrow range of possible competitive effects: specifically, whether a merger would likely result in higher prices for inpatient general acute care hospital services sold to commercial health plans.
There are several reasons why the FTC focuses on commercial inpatient prices. First, such services stand to bear the brunt of any post-merger price increases; other services are mostly paid for pursuant to government-regulated prices or involve a much broader set of competitors (as is the case with physicians or outpatient facilities). Second, there are rich data for commercial inpatient services that often allow economists to define narrow geographic markets, which generally means that the merging hospitals will have high market shares. Such data also enable economists to model a predicted price effect. Under agency guidelines and antitrust precedent, if a merger results in a substantial increase in concentration in a highly concentrated market, the merger is presumed to be unlawful, and that presumption is difficult to overcome. Given the FTC’s favorable track record using this approach, the agency has little incentive to change its litigation strategy.
To prove that a merger would adversely affect quality or access requires expertise the FTC generally lacks; it also requires data and other evidence that are much less rich and more qualitative than data on commercial inpatient prices, and thus less amenable to economic modeling. In addition, the FTC would need to convince a federal judge to decide a case on new grounds, which would be a risky litigation strategy. For similar reasons, when hospitals defend a merger, they often believe their best defense is to attack the FTC’s geographic market (a strategy that has occasionally been successful) instead of relying on what might be viewed as a novel defense based on quality or access benefits that are hard to quantify.
Quality And Access Concerns Should Receive Greater Attention In Hospital Merger Litigation
But simply because the litigation path based on a commercial price impact is well-trodden and quality and access data are more limited does not justify ignoring the potential impact of hospital mergers on these considerations. Although price is certainly a key factor, quality and access play a role for hospitals in competing to be in-network in so-called “Stage One” hospital competition. And hospitals compete with each other once they are in-network, in “Stage Two” competition, almost entirely on the basis of quality and access. They also compete for patients on the basis of quality and access under traditional Medicare and Medicaid plans, which have government-regulated prices.
It might be reasonable not to separately address a hospital merger’s impact on quality or access for commercially insured patients if the merger’s impact on prices were a good proxy for its impact on quality or access. In other words, if a merger were anticompetitive because it would cause a hospital to lose a close competitor and therefore enable it to raise its prices, that loss in competition might also be expected to decrease the hospital’s incentive to compete on the basis of quality or access. But it is not clear that the impact on commercial health plan rates is a good proxy for what might happen with respect to quality and access for patients who lack commercial health insurance. First, the number of studies that have examined the impact of hospital consolidation on quality are limited and inconclusive. Second, according to an American Hospital Association (AHA) survey, 63 percent and 58 percent of hospitals report losing money on Medicare and Medicaid, respectively; thus, hospitals’ incentive to attract such patients may be different than their incentive to attract commercially insured patients, who typically account for the largest share of their profits. And it is patients lacking commercial insurance who are most affected by health equity considerations.
The FTC in recent years has not entirely ignored the impact of hospital mergers on quality and access, and recent challenges often do allege such effects. But those allegations are confined to such impacts on commercially insured patients and are often given very little attention at trial. Broadening the analysis to focus more on possible non-price effects, especially with respect to government-insured patients, would have several benefits.
First, it would assure a more comprehensive and balanced review of a proposed merger’s impact. According to an AHA survey, private-pay patients make up only 33 percent of the typical hospital’s volume; thus, focusing strictly on commercial patients ignores a large majority of patients.
A second reason for the FTC to address a merger’s impact on the majority of patients who are not covered by commercial health insurance is that, assuming such evidence supports a challenge, this would improve the agency’s chances for success at trial. In some cases, courts have rejected an FTC hospital merger challenge at least in part because they have been skeptical about the overall harmful impact on consumers, even if a merger increased rates to be charged to health plans. The clearest example of this is the FTC’s 1996 challenge to the merger of Butterworth and Blodgett hospitals in Grand Rapids, Michigan; in that case, the court, despite finding that the FTC had met its burden of proving that the merged entity would have market power and was presumptively unlawful, ruled that the presumption was overcome because any detrimental impact on managed care plans paled in comparison to the beneficial impact on consumers in general.
In considering the impact of a merger on quality and access, the potential benefits should be considered along with possible adverse effects. Many hospitals that target the underserved are financially challenged due to their unfavorable payer-mix (that is, a low proportion of patients are covered under more highly paid commercial insurance). They often assert that a merger would enable them to lower costs and continue to provide access to quality care. Antitrust enforcers and the courts are skeptical of arguments that a merger would reduce costs and thereby enhance competition, and they are inclined to treat predictions of improved quality and access with similar skepticism. While such claims certainly should not be accepted at face value, the bar should not be set so high as to be insurmountable.
This recommendation is made with full recognition that it will not be easy to implement. Quality and access are much more difficult to measure than price, and informative data regarding the former variables are also less available. Predicting the impact of a merger on quality and access is inherently speculative. But there also are real limitations to economic models that predict commercial health plan prices for inpatient services. Unless we have much greater confidence in the reliability of those models—and that their results regarding prices are informative about quality and access as well—hospital merger reviews that ignore non-price issues will be incomplete. The solution is not for the FTC to ignore such questions but rather to commit the resources and develop the expertise to better understand and explore them.
Significantly, the FTC and Department of Justice Antitrust Division announced in January 2022 that they were embarking on an extensive review of the Horizontal Merger Guidelines. These guidelines set forth the framework the agencies use for evaluating mergers and are heavily relied upon by the courts in assessing mergers. Among a number of issues on which the agencies are seeking input is whether more weight should be given to the consideration of the non-price effects of mergers.
The FTC Can Consider Health Equity In Deciding What Cases To Bring
In deciding whether to bring a case, the FTC is free, of course, to consider the possible impact of a merger on health equity, even if such an impact cannot easily be tied to a change in competition.
For example, consider the acquisition of a financially struggling hospital that, because of its location and historical mission, serves a high share of patients who are either uninsured or poorly reimbursed. The hospital asserts that while it is not facing immediate failure, its only options are to either substantially reduce the scope of its services (especially to the underinsured) or combine with another hospital that can provide needed financial and other resources. After careful consideration, it has decided to join the only hospital that has pledged to invest substantially in the facility to allow it to continue or expand its services to the most vulnerable patients.
Suppose under this scenario that there is enough of an overlap between the two hospitals that, based on prevailing economic models, the FTC could plausibly allege that the transaction would increase rates to commercial health plans. Notwithstanding the possibility that the FTC may succeed in court, the agency should also assess the possible impact of a successful challenge on health equity. As usual, it should consider the robustness of its economic models and the magnitude of the predicted price increase in calculating the likely harm to consumers. But it also should fully probe the risk that the target hospital would otherwise cut back its services, whether in fact there are no alternative buyers or other strategic solutions for the hospital, and how much confidence should be placed in the acquiring hospital’s commitment to maintain or expand services. In some situations, the agency might conclude that, on balance, the public interest is best served by letting the transaction proceed.
The scenario described in the preceding paragraphs mirrors the circumstances prompting the recent acquisition of Einstein Health by Jefferson Health in Philadelphia, Pennsylvania. Einstein’s main campus in north Philadelphia is a “safety net” hospital where more than 87 percent of the patients are covered by government insurance. Einstein had experienced poor financial health for an extended period, and it believed the only way it could continue to provide care for the underserved population in north Philadelphia was to combine with Jefferson Health. The FTC, however, was unpersuaded, and in 2019 challenged the transaction in federal court.
In early 2020, Judge Gerald J. Pappert handed the FTC its first hospital merger defeat in two decades. Consistent with the usual “playbook” for hospital merger challenges, the litigation focused on geographic market definition, with the court concluding that the FTC had drawn its geographic market boundaries too narrowly. The court’s opinion does not explicitly address the hospitals’ argument regarding the impact of the transaction on Einstein’s mission of caring for the underserved. But it would not be surprising if this contributed to the court’s willingness to give less weight to the views of several health plans that the merger should be blocked because it would increase managed care rates.
Notwithstanding the FTC’s challenge in the Einstein–Jefferson merger, the FTC has declined to pursue challenges in close calls in which parties have made compelling arguments that a transaction would improve quality or access, despite the fact that it would also likely result in some loss of competition. But more transparency should be provided regarding what evidence on quality and access enforcers find persuasive. Such transparency could help guide hospitals in considering their strategic alternatives and how they might best address likely FTC questions during a review.
For example, a key issue may be the weight that should be given to assurances by the acquiring hospital that it will continue or expand the historic quality and access provided by the target hospital. Are there ways that such assurances can be given—whether explicitly enumerated in the merger agreement or through oversight under a consent decree—that the FTC would find particularly persuasive? Greater transparency regarding the extent to which the FTC is willing to consider issues of health equity in assessing hospital mergers also could assure the public and providers that the FTC understands the complex issues facing our health care system. This could lead to more public confidence in a merger review process that considers more than just the impact on prices to commercial health plans.
Conversely, concerns about the potential adverse effects that a hospital merger might have on health equity could prompt the agencies to scrutinize the merger particularly closely and could weigh in a decision whether to challenge the transaction (assuming there are traditional grounds for a challenge).
COPAs And State Consent Decrees
While under current federal antitrust law the FTC must use only a competitive lens in reviewing hospital mergers, the states are not necessarily so limited. States may agree not to challenge a merger if the hospitals agree to a consent decree that assures access to certain services. Where transactions involve nonprofit entities, state legislation may give the attorney general the authority to assure that the charitable mission is continued post-merger. States also may enact specific laws governing hospital consolidation that have a broader focus than just competition.
In addition, states can enact legislation that exempts hospital mergers from antitrust challenges as long as the state legislature clearly articulates its intention to do so and implements ongoing and active state supervision of the merged entity. This approach, involving the grant of a so-called Certificate of Public Advantage (COPA), typically involves oversight over hospital rates but can also be used to require the merged hospitals to maintain access and quality to underserved populations.
COPAs, as well as regulatory consent decrees, have been criticized as dependent on regulatory oversight that can never be an adequate substitute for market forces and competition to assure lower prices, higher quality, and innovation. On the other hand, COPA advocates assert that in some situations a limited population—such as in rural areas—cannot support several competitive systems, and only a merger can facilitate the scale, scope, and financial stability needed to serve vulnerable populations. Proponents of COPAs argue that a properly implemented COPA can provide the necessary oversight to address competitive concerns while also addressing other community health needs.
The FTC has consistently opposed COPAs, which is not surprising given the FTC’s singular focus on assuring competition and its general skepticism of regulation. But some tempering of the FTC’s opposition is warranted. The agency should acknowledge the limitations of a market-based approach in certain situations, and that a wider range of concerns—including health equity—might be best served through smart, targeted regulatory oversight. The FTC is currently undertaking an extended review of states’ experiences with COPAs; hopefully, this will shed light not only on the impact of COPAs on costs and quality, but also on access and health equity.
Should The Legal Standard Be Changed To Allow For Hospital Merger Reviews To Encompass Broader Impact On Health Equity?
As discussed above, current antitrust law can support a challenge to a hospital merger that causes a reduction in quality or access that is rooted in a reduction in competition. But what about a merger that threatens health equity because the acquirer has a different business model or a weaker commitment to caring for the underserved than does the target hospital? Should the law be changed to make health equity an independent basis for an antitrust challenge to a hospital merger, even if such concerns are not tied to reduced competition?
The answer is no because these concerns are fundamentally not rooted in a change in market structure, which provides an analytic framework for considering the impact on economic incentives that drive future conduct. Concerns about an impact on health equity that are not related to competition, but rather from a change in ownership, would require antitrust enforcers, and the courts, to develop wholly new analytical approaches. These would need to be applied to not only the small minority of hospital mergers that involve significant competitive overlaps that are investigated today but to all hospital acquisitions, regardless of whether the merging parties compete with each other. It would also create the anomalous result that a change in ownership would subject the merging parties to a review regarding health equity, but a change in composition of the governing board or management not linked to new ownership—which could have similar implications—would not.
This is not to suggest that there is no need for regulatory oversight when hospital ownership changes or when a hospital significantly changes the nature or scope of its services. But such oversight is better provided by state agencies or the state attorney general’s office (in exercising jurisdiction over nonprofits) or a state health department, assuming such local entities develop the requisite resources and expertise to conduct such reviews.
Summing Up
While competition is the guiding principle for how we organize the economy, there are limits to what competition can accomplish in health care markets, particularly where there are underlying inequities in the resources and opportunities available to certain populations. Accordingly, it should not be surprising that there are limits to what antitrust, which is laser-focused on competition, can do to address health equity. Such concerns are better met more directly, for example, through policy programs to redistribute wealth, subsidize care, or regulate hospitals.
But when the FTC or a court is confronted with a hospital merger, there is some room for considering health equity concerns. In addition to considering a merger’s impact on prices to commercial health plans, consideration also should be given to the possible impact—good or bad—on quality and access to care, including for those not covered by commercial insurance who may be the most vulnerable. Even if data availability and prior precedent continue to make commercial prices the focus of their litigation strategy, enforcers would present more robust and comprehensive litigation challenges if they addressed non-price issues as well. Of course, this would be very challenging and require the FTC to develop additional expertise and resources.
Conversely, it is important for the FTC to keep a broader picture in mind when exercising its discretion. There may be situations where, even though economic models might predict that a merger is likely to have a modest price effect, the “but for” world in which the merger is blocked is likely to adversely affect the underserved. Such situations may be rare, and enforcers should be rigorous in how they evaluate such claims (which may be easy to assert yet hard to substantiate). But providing transparency and guidance regarding how the agency approaches such situations should improve decision making and promote confidence that the FTC is considering all of the complexities of the health care markets in their hospital merger reviews.
Finally, there may be situations—such as in rural areas that are unable to support multiple hospital systems—for which antitrust, with its singular focus on competition, may not be able to assure price, quality, or access. In such cases, ongoing, active and informed regulatory oversight over the merged hospital may be the preferred alternative.
Author’s Note
In his practice, the author represents hospitals, health plans, and other entities in the health care sector, and his law firm similarly represents a wide range of health care entities. Amongst his clients is Einstein Health, which he refers to in this article and which his firm represented in the merger litigation with the FTC. The article also refers to the 1996 FTC case against Butterworth Hospital and Blodgett Hospital—the author supervised the FTC division that brought that litigation. All views expressed in this article are the author’s own and should not be attributed to Hogan Lovells or any of its clients. The author appreciates the helpful comments from Greg Vistnes and Cory Capps on an earlier version of this article, as well as the editing and research assistance of Jill Ottenberg.
