In this post, I want to focus on the key role economic analysis plays in the Federal Trade Commission (FTC)’s health care enforcement program. I use this lens to look first at how the FTC has become more successful in challenging hospital mergers, and then to rebut the notion that the Affordable Care Act is somehow a “free pass” for health care industry consolidation.
After the federal antitrust agencies successfully challenged a number of hospital mergers in the 1980s and early 1990s, we suffered a string of court losses in the mid- and late-1990s, even in cases involving highly concentrated hospital markets. In 2002, the FTC decided to take a step back and examine the reasons for our losses, and whether our analysis of hospital markets was correct.
We engaged in an in-depth retrospective study, used our authority to collect data from hospitals and insurance companies, and held workshops along with DOJ. (See here, here, here, and here.) Cory Capps of Bates and White, and other economists contributed significantly to our understanding as well. This intense period of reflection led to several important papers demonstrating that the consummated mergers stemming from the hospital merger challenges we lost—including those involving non-profits—resulted in anticompetitive effects, particularly increased prices. We also determined that our losses were due in part to the courts’ acceptance of faulty economic analysis of geographic and competitive effects. (See here, here, and here.)
Our intense retrospective paid off, as it helped us develop a better economic and legal enforcement framework specifically tailored to the unique competitive dynamics of hospital mergers. Using bargaining and “willingness-to-pay” modeling, our new framework more accurately reflects the ways in which hospitals compete. Under this model, if a merger among providers that are close substitutes increases the merged provider’s leverage with health plans because of inadequate alternatives, the provider gains the ability to obtain supra-competitive pricing. Using this improved enforcement framework beginning with our Evanston case, we now have an impressive string of victories under our belt, including most recently in the Sixth Circuit, where the court upheld our challenge to the merger between ProMedica and St. Luke’s in the Toledo, Ohio area.
ProMedica is the first case in 15 years – and the first case since we developed our new enforcement framework – in which a US Court of Appeals has reviewed a Commission’s decision to block a hospital merger. As many of you know, the Sixth Circuit’s decision in ProMedica was an overwhelming victory for the Commission on all counts.
There are a number of important aspects to the Sixth Circuit’s decision. Let me mention two of the most notable ones from an economic perspective.
First, the court relied on evidence showing a strong correlation between ProMedica’s market share and prices in this market. The court found that before the merger, ProMedica’s share of the market was 46.8 percent, followed by the next largest competitor, Mercy, with 28.7 percent, then University of Toledo Medical Center with 13 percent, and finally the smallest, St. Luke’s, with 11.5 percent. The court found that ProMedica’s prices were on average 32 percent higher than Mercy’s, 51 percent higher than UTMC’s, and 74 percent higher than St. Luke’s. Thus, the higher the market share, the higher the prices.
The court further determined that the higher prices were not explained by higher quality of services or underlying costs, but rather were the result of ProMedica’s greater bargaining leverage with health insurance plans. In this respect the court adopted the Commission’s use of bargaining modeling and “willingness-to-pay” theory. Using that analysis, the court agreed with the Commission that post-merger, ProMedica would have much greatly enhanced bargaining leverage, because health plans simply could not offer a competitive product without including either ProMedica or St. Luke’s in their hospital network.
Second, the court recognized the appropriate role of presumptions in merger analysis as articulated in the 2010 Horizontal Merger Guidelines. The court said it was correct for the Commission to apply a presumption of illegality to a merger in which there was a strong correlation between market share and price, and where the merger would create further concentration in an already highly concentrated market.
I am proud to have authored the Commission’s decision in ProMedica. And I give enormous credit to former FTC Chairman Tim Muris and Mike Vita from our Bureau of Economics, who recognized fifteen years ago that our hospital merger work had hit an iceberg, and worked very hard to right our health care enforcement ship. The ProMedica decision demonstrates that, because of the foresight and groundbreaking work of our predecessors, my fellow Commissioners and I can set a clearer path for our hospital merger enforcement work.
Some believe we may be facing a similar challenge today to our work analyzing physician acquisitions and other forms of provider consolidation in light of the policies articulated under the Patient Protection and Affordable Care Act (ACA), arguing that the ACA and antitrust enforcement are at cross purposes. I do not believe that is the case, because the FTC’s work and the ACA share the common goals of promoting high quality and cost-effective health care. Let me turn to the relationship between the ACA and antitrust law, and how this issue was addressed in one of our other recent health care enforcement cases.
The Affordable Care Act and Competition Enforcement
Health care in the U.S. is provided by entities operating in markets, and the ACA does nothing to change that. Free market competition is built into the U.S. health care system’s DNA today, just as it was 50 years ago.
Most hospitals and doctors are private actors, and roughly 50 percent of health care spending is paid for through commercial insurance. While the other roughly 50 percent of health care spending is publicly financed through Medicare and Medicaid, much of the health care received by beneficiaries of those programs is provided by private hospitals and physicians that operate in markets.
The ACA is structured to operate within those underlying competitive markets. With respect to health care financing, the ACA provides for the creation of state-based health insurance marketplaces. The “exchanges” offer individuals and small employers a range of competing health insurance products that might otherwise be unavailable or unaffordable. This expansion of access enables consumers to be more responsive to the cost and quality of provider networks. The exchanges also encourage greater competition in local insurance markets, driving premiums down for consumers.
With respect to health care delivery, the ACA’s Medicare Shared Savings Program encourages groups of providers to form Accountable Care Organizations (ACOs) to work together to coordinate care for Medicare fee-for-service beneficiaries. An ACO participating in the Medicare Shared Savings Plan may share in savings they create if the ACO meets certain criteria set out by the Secretary of HHS, including quality performance standards.
Thus, both the ACA’s health care financing provisions and its Medicare Shared Savings Program depend in large part on well-functioning competitive markets in order to provide the intended benefits to consumers. The ACA does not replace the market-based nature of the industry. While it is true that Medicare and Medicaid rates may be set by one payer, the underlying health care providers are still competing in their own health care markets on important non-price factors, such as quality and access. Many of those same providers compete in the private-payer commercial market as well. The ACA aids in this process by incentivizing providers to be creative in health care delivery, providing higher quality, lower cost care, but importantly it doesn’t mandate a particular structure.
Antitrust enforcement—including preventing firms from accumulating undue market power through mergers and acquisitions—is therefore just as crucial now as it was before the ACA in ensuring that our health care markets in the U.S. work well. There is a wealth of empirical evidence of the harmful effects of high concentration among health care providers. Numerous studies have found that the existence of excess provider market power results in higher prices, lower quality, and less innovation. A study published in the American Journal of Managed Care in March of last year found that from 2008 to 2010, inpatient hospital prices increased 8.2 percent per year, with wide variation in price levels. Data show that increasing provider consolidation is one contributor to rising hospital prices.
Implementation of the ACA and other health care policy changes has coincided with a wave of mergers among hospitals, physicians, and other health care providers. Some providers have pointed to the ACO program as a justification for potentially problematic mergers, complaining that the federal government is “speaking out of both sides of its mouth,” with the Medicare program encouraging providers to come together and create organizations that will enable greater collaboration, while the antitrust agencies challenge them.
These contentions are creative, but misguided. First, the ACA neither requires nor encourages providers to merge or otherwise consolidate, but rather encourages providers to create entities that coordinate the provision of patient care services. In fact, ACOs may be formed through contractual arrangements that are well short of a merger, such as a joint venture.
Second, neither the ACA statute nor the implementing regulations express a preference for consolidation among competing entities. The ACO final program rule stipulates that CMS will rely on the antitrust agencies to use “their existing enforcement processes for evaluating concerns raised about an ACO’s formation or conduct and [to file] antitrust complaints when appropriate.” Importantly, CMS can exclude from the Shared Savings Program any ACO that violates the antitrust laws, and CMS has promised to “coordinate closely with the Antitrust Agencies throughout the application process and the operation of the Shared Savings Program to ensure that the implementation of the program does not have a detrimental impact upon competition.”
Third, far from being a barrier to procompetitive collaboration envisioned in the ACA, antitrust aligns naturally with the goals of ACOs. By serving as a watchdog against firms accumulating undue market power and engaging in anticompetitive conduct, antitrust promotes market behavior that creates efficiencies and benefits consumers.
Antitrust law permits providers to engage in a wide array of legitimate collaborative activities, including ACO arrangements, as well as many mergers and consolidations, so long as the conduct is not likely to harm consumer welfare through higher cost or lowered quality. This is not a new concept for antitrust regulators — we embraced it as far back as 1996. With regard to aggregation of market power—whether through mergers or otherwise—antitrust law uses a scalpel, not a sledgehammer, and carefully analyzes each case to bar only those that on balance threaten to harm consumers.
Now we have a new court decision squarely supporting the view that the ACA and competition law are not in conflict, but aligned. A federal district judge in Idaho upheld our challenge of the acquisition of the Saltzer physician group by the hospital St. Luke’s. (St. Luke’s has appealed the decision to the Ninth Circuit.) The parties argued that the merger was justified by the ACA, but the court believed the evidence showed otherwise.
The case began in March 2013, when we filed a joint complaint with the Idaho Attorney General challenging St. Luke’s Health System’s acquisition of Saltzer Medical Group. The complaint alleged that the merger between Idaho’s largest health care system and the state’s largest independent, multi-specialty physician practice would be anticompetitive, creating a dominant single provider of adult primary care physicians in the Nampa, Idaho area, with nearly 80 percent of the market. Although the transaction in some respects was vertical—a large hospital system acquiring a physician group—it was also a horizontal merger, consolidating a large majority of physicians and physician groups in what was already the largest health care system in Idaho. Our complaint focused on the horizontal aspect of the case.
After a full trial, in January of this year, the federal district court held that the acquisition violated Section 7 of the Clayton Act and the Idaho Competition Act, and ordered St. Luke’s to fully divest itself of Saltzer’s physicians and assets.
St. Luke’s argued that the acquisition was needed in order for it to lower costs and improve health care quality, citing the ACA. The Commission carefully investigated each of St. Luke’s claims, keeping in mind the goals of the ACA as well as the importance of competition to its proper function, and found that St. Luke’s—with its 500-plus employed physicians and integrated health care system—already had the ability to achieve significant cost savings and quality improvements without acquiring Saltzer. The district court agreed. St. Luke’s was not able to prove that further consolidation would allow it to achieve significant additional cost savings and quality improvements — the evidence just wasn’t there.
While the district court applauded St. Luke’s for its efforts to improve the delivery of health care and credited St. Luke’s with at least intending that the acquisition would improve patient outcomes, the court found that St. Luke’s had other ways to achieve the same goals that would not run afoul of the antitrust laws (See page 3).  Importantly, the court found that physicians are committed to improving the quality of health care and lowering costs regardless of whether they are employed or independent (see page 32), and that the committed team—not any specific organizational structure—is the key to integrated medicine.
St. Luke’s documents did not help it on this point – one internal St. Luke’s document, authored by a St. Luke’s board member, stated that “Employing physicians is not achieving better cost, it’s achieving better profit,” (See page 62). Moreover, St. Luke’s Vice President of Payer Relations, who previously worked for Advocate Health, a Chicago-based health care physician group well known for its high-quality care, testified that Advocate Health provided independent physicians significant financial benefits if they met specific quality metrics; it was not necessary for Advocate Health to employ physicians to improve health care quality (See page 67).
The economic evidence also belied St. Luke’s arguments. St. Luke’s argued that its past acquisitions led to lower cost health care. The FTC’s economic expert, Professor David Dranove, evaluated this claim, and found no supporting evidence. Professor Dranove compared costs to patients of St. Luke’s acquired primary care physicians with those of primary care physicians who were not acquired by St. Luke’s, and found either no significant spending changes, or an actual increase in total spending (See page 63). Professor Dranove found that, if anything, the evidence suggested that the acquisition of Saltzer was more likely to result in cost increases.
The Commission’s case was bolstered by the fact that there was evidence showing that St. Luke’s had already successfully used its market power to increase reimbursements a few years earlier, through enhanced negotiating leverage after acquiring physician groups in a different region in Idaho. In Magic Valley, St. Luke’s amassed a large percentage of the area’s primary care physicians and was able to successfully exercise market power. (See page 18.)
In sum, the St. Luke’s/Saltzer decision demonstrates that the ACA is not a free pass. Although the ACA encourages integration of health care delivery, there are many mechanisms for achieving this goal. While the FTC doesn’t challenge the vast majority of health care provider acquisitions, we will step in to challenge acquisitions that give a firm market power that creates a serious risk of competitive harm to consumers. The ACA and antitrust enforcement are aligned in the need to achieve this goal.
 See, e.g., FTC v. University Health, Inc., 938 F.2d 1206 (11th Cir. 1991); United States v. Rockford Mem’l, 717 F.Supp. 1251, aff’d, 898 F.2d 1278 (7th Cir. 1990).
 Hosp. Bd. of Directors of Lee County, 38 F.3d 1184 (11th Cir. 1994); FTC v. Freeman Hospital, 69 F.3d 260 (8th Cir. 1995); FTC v. Butterworth Health Corp., 946 F. Supp. 1285 (W.D. Mich. 1996), aff’d mem., 121 F.3d 708 (6th Cir. 1997); United States v. Mercy Health Servs., 902 F. Supp. 968 (N.D. Iowa 1995), vacated as moot, 107 F.3d 632 (8th Cir. 1997); United States v. Long Island Jewish Medical Center, 983 F. Supp. 121 (E.D.N.Y. 1997); FTC v. Tenet Healthcare Corp., 186 F.3d 1045 (8th Cir. 1999). See also State of California v. Sutter Health System, 84 F. Supp. 2d 1057 (N.D. Cal. 2000), aff’d, 217 F.3d 846 (9th Cir. 2000), amended by, 130 F. Supp. 2d 1137 (N.D. Cal. 2001).
 The “willingness-to-pay” model is based on the real life negotiation strategies between hospitals and private insurers, where rates are determined by each party’s bargaining leverage. A hospital provider’s bargaining leverage depends on the value that it brings to the managed care organizations’s (MCO) network. For example, the hospital’s value could be based on the hospital’s location, or its reputation for quality. The more desirable a hospital is to an MCO’s enrollees, the higher the price the MCO is willing to pay to include a hospital in its network. In turn, an MCO’s bargaining leverage depends on the number of patients it can offer a hospital provider, and importantly, its ability to “walk-away” and assemble a network without the hospital using alternative hospitals in the geographic market that are acceptable substitutes.
 Affordable Care Act, supra note 19, at 395 (Section 3022). ACOs have also formed outside the context of the Medicare Shared Savings Program to bring similar care coordination efforts to commercially-insured patients. See David Muhlestein, Continued Growth of Public and Private Accountable Care Organizations (Feb. 19, 2013), available at (noting that while there are more than 250 Medicare Shared Savings Program ACOs, there are a total of 428 ACOs in 49 states, including private sector, non-Medicare ACOs).
 As CMS stated in its final rules: “we do not believe that mergers and acquisitions by ACO providers and suppliers are the only way for an entity to become an ACO. The statute permits ACO participants that form an ACO to use a variety of collaborative organizational structures, including collaborations short of merger. . . . We reject the proposition that an entity under single control, that is an entity formed through a merger, would be more likely to achieve the three-part aim [of the Shared Savings Program].”
 For a more detailed discussion of the antitrust analysis of such arrangements, see, e.g., Letter from Markus H. Meier, Assistant Director, Health Care Division, Bureau of Competition to Michael E. Joseph, Esq., McAfee & Taft (Feb. 13, 2013) (concerning Norman PHO); Letter from Markus H. Meier, Assistant Director, Health Care Division, Bureau of Competition to Christi J. Braun, Esq., Ober, Kaler, Grimes & Shriver (Apr. 13, 2009) (concerning TriState Health Partners, Inc.); Letter from Markus H. Meier, Assistant Director, Health Care Division, Bureau of Competition to John J. Miles, Esq., Ober, Kaler, Grimes & Shriver (June 18, 2007) (concerning Follow-Up to 2002 MedSouth, Inc. Staff Advisory Opinion); Letter from Markus H. Meier, Assistant Director, Bureau of Competition to Christi J. Braun, Esq., and John J. Miles, Esq., Ober, Kaler, Grimes & Shriver (Sept. 17, 2007) (concerning Greater Rochester Independent Practice Association, Inc.).
 FTC trial counsel referred to St. Luke’s argument as the “health care reform” defense, or the “give the monopoly a chance” defense, quoting from defense counsel’s brief: “Indeed, the procompetitiveness of the Saltzer transaction is underscored by the fact that it accords with, and carries out, the federal policy, reflected in the [ACA], of encouraging large, clinically-integrated physician-hospital networks designed to reduce the overall cost of health care through the precise methods that will be implemented as a consequence of this transaction.” Presentation, Federal Trade Commission, Opening Statement: Federal Trade Commission & State of Idaho v. St. Luke’s Health System, Ltd. & Saltzer Medical Group, P.A. 73 (Sept. 23, 2013).
 The court found that St. Luke’s efficiency claims were not merger specific, citing the 2010 Horizontal Merger Guidelines and F.T.C. v. H.J. Heinz Co., 246 F.3d 708, 722 (D.C. Cir. 2001). (See pages 38, 46.) St. Luke’s argued that broadening the use of its health information technology would improve quality and create efficiencies. But the evidence wasn’t there. St. Luke’s was in the process of developing an “Affiliate” electronic medical records program to its own “Epic” program that would allow independent physicians to access Epic, thus the court held that the merger was not necessary in order for St. Luke’s to achieve efficiencies associated with sharing medical records. (See pages 37-38). Moreover, the evidence showed that St. Luke’s was years away from having Epic installed at all of its facilities. The Commission also presented evidence that Idaho has a Health Data Exchange that facilitates interaction between medical records across the entire state. (See page 69.)
 For example, from 2002 to 2012, the FTC challenged just six hospital mergers out of 970 total hospital merger and acquisition deals, less than one percent of the total transactions. See “Hospital Merger and Acquisition Trends, 2002-2012,” in presentation by Greg Koonsman, Analyzing the Health System Market, VMG Health 24 (Oct. 2013).