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Tuesday, May 20, 2014

Guest Blogger Professor Tim Greaney - The Affordable Care Act, Antitrust and Competition Policy

GreaneyTimThe ABA/AHLA program on Antitrust in Health Care this week included extensive analyses of recent challenges to provider mergers and other aspects of concentration and market power.  Douglas Ross (Davis Wright Tremaine), Roxane Busey (Baker & McKenzie), and I  presented a “Year in Review” analysis of significant case law and regulatory developments affecting competition in the health care sector (including a Jaryndyce v. Jaryndyce award to the case that seems to keep popping up in every annual program we do: this year’s winner by acclamation was the West Penn/UPMC/Highmark saga).  Several items that may be of particular interest:

Dan Kessler discussed his empirical study, published in this month’s issue of Health Affairs, concerning the price and spending effects of hospital-physician integration.  The key finding of the paper is that increases in the market share of hospitals that own physician practices leads to higher prices and spending. As discussed in my last post, antitrust authorities are paying closer attention to hospital acquisitions of physician practices, something they have ignored in the past. However, the FTC’s recent successful challenge to such an acquisition did not take on the important issue of the vertical aspects of the consolidation at issue.   Another finding (though far less robust) by Kessler and his co-authors indicated that increases in market share of hospitals that had joint ventures with physicians (such as PHOs) have lower rates of admission, a result that supports the potential efficacy of ACOs.

How will exchanges affect competition?  Some 23 states have seen co-ops enter their markets through the exchanges and there is some evidence that the exchange may facilitate new entry. Recall that during the run up to the ACA many called for adding a public option insurance plan to each health care exchange.  The argument was that the individual insurance markets around the country were so concentrated throughout the country that consumers would not benefit from competitive markets in the exchanges. Congress chose not to add the public plans presumably on the assumption that the incentives of serving millions of new customers would incentive new entry. How has that worked out?  A recent Kaiser Family Foundation study provided interesting results.  It found significantly increased competition in two big states that organized their own exchanges.  In New York, the Herfindahl Index (the measure commonly used to assess concentration in antitrust cases) for the individual insurance market declined from 1641 to 1197.  In California, the HHI declined from 3052 to 2418.  Interestingly, both states have adopted an “active purchaser” approach to their exchanges; that is, the exchanges negotiate up front with plans before they are allowed to sell their products on the exchange. Less encouraging was the result in some other states.   Connecticut’s individual insurance market has less competition in its exchanges than it had prior to the ACA. Further some rural states or parts thereof have only one insurer participating in their exchanges.

FTC Chairwoman Edith Ramirez and a number of other government representatives at the conference repeatedly made the point that there is nothing incompatible between the Affordable Care Act, which many see as requiring more consolidation to achieve cost savings, and the antitrust laws, which historically have been used to attack consolidation that lessens competition. Last year, this issue was the subject of hearings before the House Judiciary Committee, some of whose members seemed to fault health reform for prompting the merger wave among providers. (Along with others, I made the point to the Committee that the ACA is founded on, and seeks to improve, competition in health care markets, that overinclusive consolidations are attempts to thwart the ends of health reform, and therefore mergers are properly subject to close scrutiny by the antitrust agencies.) Notably, a so-called “Health Reform Defense” to mergers (i.e., “the ACA made me do it”) has had no traction in antitrust cases; indeed, the district court in the St. Luke’s case found the benefits of integrated care could not outweigh evidence of increased market power and likely price increases. Chair Ramirez also made it clear that in close cases the agency regards mergers as a less desirable form of consolidation than contractual combinations such as joint ventures and ACOs because of the permanence and difficulty of unwinding the former.  

There was also much discussion of the Sixth Circuit’s recent decision in ProMedica v. FTC, a challenge to the acquisition by the largest hospital in Toledo of the fourth largest hospital in that market.   The government, which had endured a 7-case losing streak in hospital merger cases, now finds itself on a winning streak. The case in notable in several respects. The Sixth Circuit’s decision gave little credence or credit to the acquired hospital’s weak financial position, calling the “flailing firm” defense “the Hail Mary pass of presumptively doomed mergers.” It also paid a lot of attention to the bargaining dynamics between MCOs and hospitals, emphasizing the importance of preserving the “walk away” power of managed care organizations, i.e. the ability of an MCO to assemble a hospital network without the dominant provider.  Concluding that the acquired hospital was an important part of that dynamic and thus put a limit on the larger hospital’s pricing, the court found the merger violated the antitrust standard under a “unilateral effects” theory.  

Especially heartening to the FTC may be the subtext to the decisions coming out of the courts in recent years.  Unlike some previous cases in which courts revealed an underlying skepticism about the benefits of managed care that seemed to color their analyses, these cases are applying antitrust principles in a straightforward way, perhaps recognizing that health reform does not alter the rules applicable to market participants.

- Professor Tim Greaney

 

 

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