In the 1990s the federal government suffered a series of defeats when it tried to block anticompetitive hospital mergers. Many of these deals resulted in modest efficiencies, higher prices and weaker service. The antitrust enforcement agencies ought to re-examine these deals and challenge those in which consumers have been harmed. In doing so, the agencies will help clarify the law on healthcare and hospital merger competition.
The course of hospital merger antitrust enforcement during the past 15 years has been quite striking. During the early 1990s, when the antitrust enforcement agencies could barely win a merger case, they inevitably prevailed in hospital merger challenges. The courts followed the agencies' road map that these were concentrated markets in which the acquisition of a hospital would lead to a significant threat of higher prices. Of course, because most hospital markets are concentrated, any merger would have been a violation.
That trend was reversed in the late 1990s, when the government lost six consecutive merger challenges. Faced with uniquely one-sided case law, neither the Federal Trade Commission nor the U.S. Justice Department has challenged a hospital merger in the past four years. As the government has disappeared, hospital mergers have increased, leading to numerous markets dominated by a single hospital and higher prices. Consumers have turned to private antitrust litigation to combat higher prices and alleged anticompetitive practices by dominant hospitals. Now the question arises as to how hospital merger enforcement should be revitalized.
Consider why these cases were lost. First, there were strong practical reasons for the mergers; the courts recognized the need for hospitals to consolidate in a time of increased cost controls and tremendous overcapacity.
Second, the courts held that the government defined the relevant market too narrowly, failing to recognize the full range of options available to consumers. Typically this involved the question of geographical markets, and the courts held that consumers might travel greater distances in response to a price increase, but the evidence supporting this supposition is scant.
Third, in cases where the merging hospitals were not-for-profit, the courts believed the hospitals were less likely to increase prices post-merger. Yet one FTC study found significant post-merger price increases in a California community where the merged hospitals were not-for-profit.
In other cases the courts relied on claims of potential cost savings from consolidation. But as in many industries, hospital efficiencies are far easier to claim than achieve. Some recent studies have found that hospital merger efficiency claims have fallen short. This is particularly true when powerful physician groups may oppose consolidation of practice areas.
Finally, in one case-the merger in Grand Rapids, Mich., of the two largest hospitals there-the court relied on a promise to cap prices. Such promises made by other kinds of companies universally have been rejected by the courts.
What has been the result of the lack of antitrust enforcement? In many communities, consumers and managed care face monopoly hospitals. And unlike many mergers where consolidation has led to a certain degree of integration, often the merged hospitals remain basically unintegrated and the merger exists mainly on paper. These paper mergers, however, still leave a single organization when it comes to getting higher prices for services.
The FTC has a unique tool to re-evaluate and challenge consummated hospital mergers: It can seek to reverse a consummated merger through administrative litigation before an FTC administrative law judge. Indeed the FTC has brought three recent cases in other industries challenging consummated mergers.
Fortunately, the FTC and the Justice Department recently decided to cede all healthcare antitrust enforcement to the FTC (March 4, p. 14). This means that all hospital merger enforcement will be the responsibility of the FTC with its unique power to challenge consummated mergers.
Federal court merger litigation is prospective, requiring courts to make difficult predictions of the likely effect of a merger. Moreover, federal judges have many greater priorities than resolving a merger case. But bringing a case through administrative litigation may avoid the pitfalls of federal court litigation.
A challenge to a consummated merger allows the FTC to examine the impact of the merger. Administrative litigation permits a more penetrating inquiry into the issues on which the government's challenges have foundered, including whether not-for-profit status will protect against price increases, the impact of the merger on prices and quality of care, and whether any cost savings have been passed on to consumers. Just as importantly, the FTC can examine what alternatives consumers have in response to a price increase.
Analyses of some consummated mergers suggest that these mergers will continue to be a problem for both antitrust regulators and the courts. The fact that many of these mergers have led to significant price increases and litigation suggests that neither a lax merger policy nor efforts at regulating price increases are an adequate substitute for competition. The FTC should challenge consummated mergers to revive competition, clarify the law and economics of hospital competition, and offer a sound platform for hospital merger enforcement.