Editor’s note: This post is part of a Health Affairs Blog symposium stemming from “The New Health Care Industry: Integration, Consolidation, Competition in the Wake of the Affordable Care Act,” a conference held recently at Yale Law School’s Solomon Center for Health Law and Policy. Links to all posts in the symposium will be added to Abbe Gluck’s introductory post as they appear, and you can access a full list of symposium pieces here or by clicking on the “Yale Health Care Industry Symposium” tag at the bottom of any symposium post.
Market power is pervasive in the health care sector. Most hospitals and insurers, and many physician specialties, compete in highly concentrated markets as defined by the guidelines of the federal antitrust enforcement agencies and standards recognized by the federal courts. Moreover there is abundant evidence that market concentration translates into higher prices. Economic studies of hospital mergers in such markets show price increases over 20 per cent.
Other empirical work reveals that insurance market concentration is associated with higher premiums and that mergers have resulted in significant price hikes. Although the evidence is less robust, studies of physician pricing also indicate that fees are higher where specialty groups face little competition.
In recent years providers and insurers have undertaken even more highly concentrative mergers — ones vastly exceeding concentration levels that government guidelines and judicial precedent have long condemned as anticompetitive. In a one month period at the end of last year, the Federal Trade Commission (FTC) and state attorneys general challenged hospital mergers in North Shore Chicago, Hershey, Pennsylvania, and Huntington, West Virginia. The combined market shares of the merging hospitals in these cases were in excess of 50, 64, and 75 percent respectively, according to the government’s complaints.
The two proposed mergers bringing together four of the “Big Five” national competitors in the health insurance industry, Aetna/Humana and Anthem/Cigna, would create problematic overlaps in hundreds of commercial, self-insured, and Medicare Advantage markets, according to studies by the American Medical Association and the American Hospital Association. The FTC also successfully challenged two physician mergers, one that would combine the practices of 15 of the 16 cardiologists in Reno, Nevada, and another that would have united approximately 80 percent of the primary care physicians in Nampa, Idaho as employees of a single hospital.
Given formidable legal barriers to mergers of this magnitude, some may find it surprising that they have been attempted at all. However, because rapid consolidation has reduced the number of available partners and no legal penalties attach to unsuccessful mergers, parties seem increasingly willing to roll the dice. Consequently, lawyers representing them have had to scramble to find justifications that might appeal to courts and prosecutors. Two such defenses have surfaced that rely on the special circumstances involved in health care markets. Although both may have some intuitive appeal, neither can withstand close scrutiny under well-established legal standards.
The Sumo Wrestler Theory
One argument commonly advanced—notably by both hospitals and insurance companies seeking to provide an economic rationale for mergers in their sectors—is that each side will exert countervailing power against the other. Insurance companies posit that their mergers will enable them to counter the pricing power of dominant “must-have” hospitals and large specialty physician practices. Hospitals likewise claim that concentrative horizontal mergers are needed to “level the playing field” against dominant insurers that unreasonably lower reimbursement and constrain consumer choice.
This argument, which I have called the “Sumo Wrestler theory,” assumes that the interaction of these opposing forces will produce a blend of lower insurance premiums for employers and individuals and high-quality care from provider networks. Although intuitively appealing, experience teaches that consumers are unlikely to reap benefits from empowering providers or insurers. Likewise, legal precedent suggests that claims of countervailing power must meet stringent standards unlikely to be present in provider-payer bargaining.
To be sure, there is substantial evidence that a large share of health care cost increases is caused by dominant providers charging high prices. Moreover, some studies show that large insurers have been able to negotiate bigger discounts from hospitals. However, there are a number of reasons to be skeptical of the idea that consolidated insurers will uniformly bargain down prices with providers or that those prices will be passed along in lower premiums.
As a matter of economic theory, under “bilateral” monopoly output falls below competitive levels and consumers are worse off than they would be with competitive structures in both markets. Moreover studies show that even where the dominant payer succeeds in bargaining successfully with providers, it has little incentive to pass along the savings to its policyholders. Finally, even though a powerful insurer may obtain a discount from hospitals, smaller insurers are unlikely to gain comparable prices, thus weakening competition at the insurance level. Accordingly, antitrust law has been skeptical about applying a “power buyer” defense to mergers.
Moreover, whether accomplished by coercion or sharing the fruits of monopoly rents, there have been many instances in which insurers and hospitals have conspired to disadvantage their rivals. As an example, the Antitrust Division challenged the use by Blue Cross Blue Shield of Michigan, the dominant insurer in the state, of most-favored nation (MFN) clauses, which guaranteed Blue Cross the most favorable insurance rates while forcing providers to raise rates on all other insurers in the state. And in the notorious “handshake that made history” reported by The Boston Globe, a dominant insurer and dominant hospital system agreed to an arrangement in which the insurer would give the health system higher levels of reimbursement, in exchange for the health system’s promise that it would demand the same rate increases from everyone else.
In another notable case, Highmark, the dominant insurer in the Pittsburgh area, reached an agreement with the area’s largest health system that protected the insurer against competition while damaging the system’s lone hospital rival. In sum, experience suggests that a showdown between the Sumo Wrestlers may well result in a handshake rather than an honest competition.
‘The Government Made Me Do It’ Defense
A second frequently voiced line of defense to mergers that appear likely to lead to dominance by provider and insurers is that the incentives for integration found in the Affordable Care Act (ACA) and recent Medicare payment reforms justify significant consolidation. To be sure, the ACA gives providers incentives to link together through mergers and joint ventures to receive bundled payments and profit from shared savings that flow from providing care more efficiently. However, as antitrust enforcers have pointed out, the law depends on market competition; hence mergers creating or entrenching market power are anathema to the underlying purposes of system reform.
Accordingly, courts have not accepted an “ACA made me do it defense”– the claim that anticompetitive mergers could be justified on the grounds that health reform causes consolidation. As the author of the leading treatise on antitrust law and the health care industry has written,
Nothing in the ACA…suggests that firms integrate or coordinate in ways that generate market power, whether through total or partial integration…In enacting the ACA, Congress envisioned programs that would stem or decrease the cost of health care and increase its quality. Difficult to see is how permitting provider mergers or other forms of integration that result in market power furthers the congressional goal of lower health-care costs.
Indeed, it should be clear that anticompetitive mergers, joint ventures, and cartels are at bottom efforts to avoid the very pro-competitive policies the ACA puts in place.
Antitrust law offers no remedy for the harms visited on consumers by firms once they acquire market power unless they abuse those powers. However, Congress empowered enforcers to prevent the growth of monopolies and oligopolies by enacting the forward-looking merger controls of the Clayton Act. This law, as the Supreme Court has recognized, deals with “probabilities, not certainties” and was designed to address concentration at its incipiency. Antitrust enforcers should not be swayed by arguments that the invisible hand of countervailing power mitigates harm or that reforms designed to improve competitive incentives somehow justify mergers that enhance market power.