In reviewing mergers of healthcare providers, government antitrust enforcers have historically focused on horizontal mergers between competing providers—in particular, those that result in high market shares in a specific geographic area. In the recent St. Luke's Health case, for example, the FTC alleged that St. Luke's purchase of a competing physician group increased its share of the market for adult primary care physicians to 80% in a suburb of Boise, Idaho.

But what about mergers between healthcare providers that operate in adjoining geographic markets, or between providers in the same geographic market that offer different healthcare services? To what extent will such cross-market mergers attract antitrust scrutiny? Recent comments by top officials at FTC and DOJ suggest that the agencies have growing concerns about cross-market transactions on the grounds that such transactions may give providers greater bargaining power in negotiations with payers.

Concerns over Cross-Market Provider Mergers Voiced at FTC/DOJ Workshop

In a speech at the FTC/DOJ Examining Health Care Competition Workshop on February 24, 2015, FTC Chairwoman Edith Ramirez described increasing agency scrutiny of cross-market mergers between healthcare providers. "We now also hear growing concern that provider consolidation in non-overlapping product or geographic markets may also lead to higher prices," she said. Ramirez gave two examples of transactions that could raise concerns: "Center-city hospitals acquiring smaller hospitals in outlying areas, or vertical acquisitions of physicians groups by hospitals."

The head of DOJ's Antitrust Division, Assistant Attorney General Bill Baer, echoed these comments at the same workshop, noting concerns that non-horizontal mergers between healthcare providers could "result in conglomerates with the market power and bargaining leverage to adversely affect competition."

Although Ramirez emphasized that that government enforcers "need to learn more about competitive impact of these types of transactions," other participants at the workshop described academic work that may be underlying the government's concern. Leemore Dafny, a former Deputy Director for Healthcare and Antitrust in the FTC Bureau of Economics, delivered a presentation on recent research "suggest[ing] cross-market mergers tend to lead to higher hospital prices." Dr. Dafny cited a 2014 paper by Matthew Lewis and Kevin Pflum which found that the acquisition of independent hospitals by out-of-market hospital systems led to price increases of 14 to 18% between 2000 and 2010.

Dr. Dafny said that her own research (which she began when she was at the FTC and is jointly undertaking with economists Kate Ho and Robin Lee) shows that when a hospital system adds an additional hospital in a directly adjacent market, the resulting price increase is between 5 and 10%. On the other hand, Dr. Dafny said no price increase was observed following mergers between non-adjacent hospitals in different states. This result, Dr. Dafny said, "suggests [that] hospitals in different, nearby, markets can constrain one another's pricing because contracting occurs at broader geographic units."

Joe Miller, speaking at the workshop on behalf of America's Health Insurance Plans, said that AHIP's members would agree with this hypothesis. "It sounds like maybe the math and the theory are starting to catch up with AHIP members' intuition that adjacent-market transactions can have anticompetitive effects." But Monica Noether, an economist at Charles River Associates and former FTC economist, described the theory as "in early stages," suggesting that defining the market from the perspective of payers or employers might allow traditional horizontal merger analysis to account for the possible price effects of these transactions.

The causal mechanism for these price increases has yet to be determined and is the subject of ongoing research, said Dr. Dafny. Possible explanations include: errors in market definition; changes in bargaining dynamics as more skilled or risk-neutral negotiators take over negotiating for the acquired hospital; and the so-called common customer effect, which occurs when a single customer or employer purchases a bundle of services offered in different markets by the merged providers. Dr. Dafny cited the example of a family with young children, which might want an insurance product that included coverage at both a high-quality pediatric hospital and an adult hospital. If the two hospitals merged, the hospitals would enjoy an advantage in negotiations with insurance companies, according to Dr. Dafny. "Even if they are not substitutes at the point of service, they could be substitutes for my demand for insurance," she added.

Dr. Dafny conceded that offering an improved bundle of provider services may be more valuable for other reasons: Providers may simply be able to offer higher-quality care after a merger that allows for integrated coverage in adjoining geographies or between complimentary medical specialty areas.

What Providers Need to Know

• The agencies' approach to cross-market mergers is evolving, and parties should not assume that mergers between healthcare providers in different markets will sail through the approval process.
• Antitrust enforcers will listen to payer complaints about the price effects of cross-market mergers. Enforcement may focus on cross-market transactions that give providers some perceived bargaining advantage, such as mergers between providers with directly adjoining geographic service areas.
• Merging parties should consult antitrust counsel with experience in healthcare transactions to assess antitrust risk and, if necessary, to prepare a defense.