America is struggling to find solutions to rising health care costs. The current administration’s efforts to curb health care costs largely rely on giving incentives to providers to supply efficient, coordinated care. As a result, providers are consolidating. Such consolidation often enhances efficiencies and quality of care. However, in certain circumstances, provider consolidation also increases provider market power and reduces consumer welfare.
The Affordable Care Act and the Federal Trade Commission/Department of Justice guidelines for accountable care organizations encourage provider integration to maximize cost savings and improve the quality of care provided—admirable ends to promote. Numerous states have followed, passing legislation promoting coordinated care and consolidation. See, e.g., N.Y. Pub. Health Law § 2999-aa. Unfortunately, the coordination of competing providers also raises antitrust risks. Antitrust enforcers will therefore screen provider consolidations to see whether they will likely achieve cost savings and improve patient care, or mask an attempt to acquire market power over insurance companies and competing providers.
This article discusses two forms of "provider consolidation": the consolidation of one hospital system with another hospital system, and the consolidation of a hospital system with a physician practice. It also addresses (1) market participants that are potentially affected by anti-competitive provider consolidations; (2) recent public antitrust enforcement actions challenging health care combinations; and (3) the availability and likelihood of a private antitrust challenge to a proposed combination.
Provider combinations can offer substantial benefits to patients by, for example, reducing utilization of unnecessary or duplicative services. Assuming a competitive insurance market, insurers can pass on the savings to patients in the form of lower premiums. Moreover, increased consolidation between providers—specifically across medical disciplines—may result in enhanced medical outcomes. However, three market participants are at risk of experiencing anti-competitive outcomes.
First, provider consolidations can harm patients. Consolidation threatens patients that have high-deductible insurance plans with higher co-pays, as the amount the patient must pay for a service at a hospital-affiliated provider can be many times greater than the amount the patient must pay for the same service at an independent provider, while still remaining below the deductible.
Second, provider consolidations can harm commercial insurance companies. This risk is less apparent to consumers, but equally troubling. Insurance companies and health care providers negotiate reimbursement rates for services rendered. While independent providers are generally "price-takers," large health care systems are an exception because they have greater negotiating power: If a large hospital system refuses to participate in an insurance network due to its low reimbursement, insurance subscribers will likely contract with another insurance company that includes the "must-have" hospital. Hence, as a provider’s footprint grows, so too does its bargaining power over insurance companies, thereby permitting it to extract higher reimbursement rates. Although some of these higher rates may be passed on to consumers in the form of higher premiums, it is doubtful that all of them will.
Third, anti-competitive provider consolidations threaten competing providers. Provider consolidation can foreclose a competing provider’s referral base, as an acquired practice may lose its incentive to refer patients outside of the acquiring group. This is the subject of current antitrust litigation. In Saint Alphonsus Medical Center – Nampa, Inc. v. St. Luke’s Health System Ltd., No. 1:12-CV-560-BLW (D. Idaho December 20, 2012), a medical center, St. Alphonsus, sued a competing health system, St. Luke’s, to try to block St. Luke’s proposed acquisition of an independent physician group, Saltzer. St. Alphonsus claimed that the proposed acquisition would give St. Luke’s a dominant market share that would allow St. Luke’s to block referrals to St. Alphonsus. St. Alphonsus also claimed that St. Luke’s will pressure Saltzer’s physicians to steer their patients away from St. Alphonsus to St. Luke’s. Although the court denied St. Alphonsus’ request for a preliminary injunction, it appeared receptive to St. Alphonsus’ theory. The FTC and Idaho’s attorney general have since sued St. Luke’s as well.
Due to the antitrust risks, public and private antitrust enforcers will continue to review provider consolidations and bring litigation when necessary. Although most provider combinations will pass antitrust muster, enforcers will seek to cut the pro-competitive wheat from the anticompetitive chaff.
Recent government enforcement
Under the Obama administration, the Antitrust Division and the FTC have been active in the health care industry. For example, the FTC brought an action to block the proposed acquisition of Palmyra Park Hospital by Phoebe Putney Health Systems Inc, a case in which the U.S. Supreme Court sided with the FTC and limited the state-action immunity doctrine. The FTC also ordered ProMedica Health system to divest St. Luke’s Hospital in Ohio, a case currently before the U.S. Court of Appeals for the Sixth Circuit. And after the FTC filed a complaint alleging that the proposed acquisition of Rockford Health System by rival OSF Healthcare System would reduce competition, the parties to the proposed acquisition abandoned the transaction. Aside from litigation, the FTC continues to offer guidance to providers seeking to coordinate or consolidate. See, e.g., Letter from Markus H. Meier to Michael E. Joseph (February 13, 2013). Meanwhile, DOJ brought antitrust litigation against the United Regional Health Care System and sued Blue Cross Blue Shield of Michigan.
But public enforcement is not a panacea. For one thing, certain smaller consolidations are not reported to the government prior to closing under the Hart-Scott-Rodino Act. For another, provider integration in the form of accountable care organization agreements is subject to a separate ACO enforcement policy, which some antitrust scholars have argued is less scrutinizing than traditional antitrust standards.
On a more basic level, public resources are limited. The FTC and DOJ cannot adequately patrol every activity that may constitute anti-competitive conduct. The recent closing of a number of the Antitrust Division’s field offices highlights the resource strain.
Availability of private enforcement
Alongside public efforts, private antitrust enforcement guards against anti-competitive provider consolidations. Indeed, the law promotes private antitrust enforcement by awarding prevailing plaintiffs treble damages and reimbursement of attorney fees and costs. The Supreme Court stated that the Clayton Act is designed to "bring to bear the pressure of ‘private attorneys general’ on a serious national problem for which public prosecutorial resources are deemed inadequate." Agency Holding Corp. v. Malley-Duff & Assocs., Inc., 483 U.S. 143, 151 (1987).
Several health care market participants would have standing to sue under the antitrust laws. Insurance companies are legally empowered to block an anti-competitive provider consolidation via litigation. To do so, an insurance company would need to make a compelling case that the merger of providers will result in market power and increased prices (i.e., higher reimbursement rates paid by insurance companies). However, the availability of an insurance company passing on medical costs to subscribers via higher premiums may blunt incentives to sue.
Competing providers also have standing to block a provider consolidation if they are harmed. However, competitors face unique challenges when they bring antitrust litigation. The antitrust laws protect competition, not competitors. A competing provider must establish foreclosure of a referral base, increased prices, reduced output and/or decreased quality. The resolution of the Saint Alphonsus case may clarify the viability of such actions.
Finally, patients might also consider bringing an antitrust action; however, such an action would confront significant hurdles. For one thing, antitrust actions are expensive. It is unlikely that a patient—or even a group of patients—would fund litigation unless it was brought as a class action, in which case the patient class representatives need to show that they represent a suitable class.
Additionally, litigation by patients may be of limited value. Patients alleging an antitrust violation will likely try to establish an increase in direct co-pay or self-pay prices. In these cases, damages are likely to be modest compared to litigation costs.
Finally, patients will likely face significant legal challenges as indirect purchasers. In the case of patients claiming antitrust harm due to increases in premiums, the patients will likely confront Illinois Brick issues, namely that indirect purchasers cannot recover damages on a pass-on theory of antitrust harm. See Illinois Brick Co. v. Illinois, 431 U.S. 720 (1977). However, there are numerous exceptions to Illinois Brick, and many states that have passed "repealer statutes."
Provider consolidations can achieve pro-competitive efficiencies. However, antitrust enforcers—public and private—will remain vigilant to protect consumers and other market participants from heath care transactions that will cause economic harm. Providers considering consolidation should make sure that the combination does not offend antitrust precepts and that it will result in efficiencies and increase patient outcomes.
Matthew L. Cantor is a partner, and Daniel J. Vitelli is an associate, in the New York office of Constantine Cannon. They concentrate their practices on antitrust and health care matters.