Health Reform Collides with Antitrust

(Part 1 in a series of observations)

We are at the dawn of a second great era of provider consolidation. This era is being fueled by, among other forces, a capital crunch, increasing payor consolidation, electronic health care record demands for capital and expertise as well as by anticipation of the integration demands of accountable care organizations, bundling and other forms of Medicare payment "reform."

The consolidation instinct will, however, have to been reconciled with antitrust enforcement. This reconciliation becomes necessary as it is widely reported, and our practice experience confirms, that the federal antitrust enforcement agencies are more active in health care than they have been in over a decade. Partly explanative, one former acting Bureau Director of the Bureau of Competition recently noted that in terms of staffing, currently the FTC "[has] a bit of excessive capacity that's looking for work."

Many of the hospital consolidations to be reviewed by the agencies will occur in markets that traditional antitrust analysis calls concentrated. Thus, they are candidates for a close look by the agencies. Moreover, payors will, in many of these cases, tell the enforcement agencies that the new hospital system parent will seek, and be able to obtain, higher reimbursement for the acquired hospital's services after the transaction. Thus, the prima facie conditions for an antitrust challenge will be in place in dozens of transactions over the next several years.

How then, should the executives and trustees considering such transactions proceed? Traditional disputation as to market definition is not likely to win the day — indeed the FTC and DOJ seem to be pushing economic theories that rely on effects for market definition rather than the traditional analysis. Likewise, traditional efficiencies analysis — looking to operating efficiencies realizable as a result of the transaction—will, in only a few instances, be a sufficient defense. In other words, capital and operating costs avoided may not be demonstrably commensurate with the forecasted impact of the price increase.

Hospital consolidation must then have additional justifications. Health reform supplies a number of themes for new efficiency claims. There will be vigorous debates as to the whether they are "merger specific" (attainable without the merger). The facts and circumstances will also influence their quantification. That said, it is clear that we cannot stop the analysis when conventional market concentration analysis yields high concentration numbers. Health care markets are too complex to stop the analysis there and health care reform tells us that there are other efficiency and quality factors that go into the calculation of consumer impact.