Pulled in two directions

The healthcare reform law encourages providers to create larger organizations that can coordinate care in pursuit of greater quality and efficiency. Yet the Federal Trade Commission is pursuing traditional antitrust enforcement, cracking down on mergers and acquisitions that lead to excessive concentration in individual markets.

The result, FTC lawyers say, is the creation of larger systems in some markets that threaten to deliver higher prices to patients.

The collision of old-world antitrust enforcement and new ideas like accountable care, bundled payments, value-based purchasing and patient-centered medical homes has ratcheted up the uncertainty over healthcare deals.

The conflict between government antitrust officials and hospital executives pursuing deals they say are in pursuit of the goals of the Patient Protection and Affordable Care Act was unavoidable. There is some evidence to suggest provider mergers have led to higher prices in some markets. So every deal—even if it is in pursuit of creating a more efficient organizational structure—was bound to come under intense scrutiny given the bottom line goal of holding rising healthcare costs in check.

The state of affairs has left CEOs such as Jim Miller at Renown Health in Reno, Nev., frustrated. “The FTC is operating from law that was passed over many years to address a set of issues, and healthcare reform is working with a different set of laws,” he said. “And the two have not had the time or energy to collaborate about how the two sets of laws need to be symbiotic.”

Miller's comment followed a decision by the FTC to file a complaint—which was formally settled Dec. 4—that alleged Renown had gained an illegal monopoly over heart-care services in and around Reno after it agreed to buy two physician practices that asked to be acquired. The complaint was settled through an unusual settlement that freed 10 doctors from noncompete contracts as a way to re-establish local competition.

Though federal regulators in the FTC and the U.S. Justice Department have long had an aggressive posture toward healthcare deals, rarely have they been so effective. The merger wave of the 1990s saw a string of sobering legal defeats for the government, but in the past decade the FTC has secured three victories in hospital-merger cases and is now defending its most significant hospital-merger case in a decade at the 6th U.S. Circuit Court of Appeals in Cincinnati.

Since the reform law was enacted, the FTC has opened intensive investigations of at least seven healthcare-provider acquisitions, filing legal challenges against five in Georgia, Illinois, Nevada, Ohio and Pennsylvania.

And the CEO of Renown was by no means alone in expressing frustration about such cases.

In interviews with Modern Healthcare during the past year, ProMedica President and CEO Randy Oostra offered a similar view about an FTC challenge to his Toledo, Ohio-based system's hospital-acquisition deal in northwestern Ohio. St. Luke's Health System President and CEO Dr. David Pate voiced exasperation over an FTC probe into the Boise, Idaho-based system's plans to buy a nearby large doctor practice. And Providence Health Care Eastern Washington Chief Executive Mike Wilson echoed the sentiment after an FTC investigation caused his system to buy only one of the two Spokane, Wash., cardiology practices it had planned to acquire in 2010.

The FTC even attracted accusations of contradicting the reform law from advocates for physician-owned hospitals. They say the reform law's prohibition on Medicare funding for doc-owned hospitals that expand after March 2010 will eventually put them out of business, even though the trade commissioners concluded that such a hospital in Reading, Pa., was benefitting consumers by encouraging competition.

Advocates of the reform law's strict limits on physician hospitals, including the American Hospital Association, argue that the provision limits physician hospitals' ability to poach profitable services without providing important money-losers, such as emergency care. Executives at physician-owned hospitals disagree—and they say the FTC now seems to be taking their side.

“It does send a bit of a mixed message,” said Paul Kerens, the incoming president of Physician Hospitals of America and senior executive officer of the Kansas City Orthopaedic Institute, Leawood, Kan.

“You've got the legislative branch passing legislation that could eventually put our members out of business. Yet you've got the FTC and Mr. Feinstein saying that the physician-owned hospital (in Reading) is a good thing and that it fostered competition.”

In an interview last week, FTC Competition Bureau Director Richard Feinstein said he clearly understands the goals of healthcare reform—improving access to and quality of care while containing costs. But he puts little credence in complaints by healthcare executives of dissonance among federal authorities on the best ways to meet those goals. “The bottom line is, I don't see fundamental tension between the goals of promoting efficiency and the goals of promoting competition,” he said.

Feinstein noted that very few mergers are ever contested, and each decision to challenge is driven by the facts of each particular case, not a black-and-white rule book that can be applied uniformly to all situations. “There are many circumstances where integration and collaboration and even consolidation can be pro-competitive,” he said. “But it depends on the circumstances in the market.”

A study published in Health Affairs seemed to empirically support that contention.

Writing in the June 2011 issue, University of California at Berkeley professor James Robinson reported the results of an examination of seven medical procedures on 30,500 patients in the nation's 306 distinct healthcare markets, finding that prices seemed to rise more readily in less-competitive markets.

All hospitals face the potential of lost profits on Medicare patients, but they respond to the challenge differently. Robinson found that market-dominant hospitals demand higher rates from private insurers by threatening to withdraw their patients from managed-care networks, while smaller hospitals more often find ways to cut overall costs to make up for Medicare losses.

“It generally is more desirable, from a hospital management perspective, to increase revenues than to reduce costs, because the former merely alienates insurers, but the latter alienates employees, physicians and potential patients,” Robinson wrote. “Hospitals in competitive markets will be less able than those in concentrated markets to raise prices and hence must either reduce costs or suffer erosion in their profitability.”

In other words, Robinson's results suggest that hospitals in competitive markets are more apt to make improvements in efficiency cheered on by reformers, while less competition allows providers to shift costs to private payers rather than face the tall challenge of redesigning care.

Of course, not all sides even agree that healthcare reform truly induces corporate consolidation. The most commonly cited example of the law's role in consolidation is its support for accountable care organizations. Made up of groups of healthcare providers, ACOs receive financial rewards for working together to meet quality targets and reducing the overall healthcare costs for a specific population of Medicare patients.

In an unusual move, the Justice Department and the FTC jointly developed antitrust enforcement guidance for ACOs in the Medicare Shared Savings program, defining some types of collaborative conduct that could still be illegal. The agencies also created a voluntary review process for proposed ACOs, though FTC officials said last week that they have received only a “limited” number of such requests and have issued no responses yet.

The law also supports patient-centered medical homes, a concept of collaborative physician care that relies heavily on costly electronic patient records. It mandates the establishment of pilot programs for bundled payments, which pay uniform rates for “episodes of care” rather than padding profits through individual line items in a bill. And it mandates financial penalties for lower quality care through value-based purchasing, which demands sophisticated information technology to track.

However, none of those provisions requires providers to get bigger or merge. ACOs can be formed through contracts among competitors, and hospitals and physician practices with solid management and financing can buy the technology and implement the practices to meet quality goals independently.

Dr. Donald Berwick—the former acting CMS administrator and co-author of the health reform paradigm known as the “Triple Aim,” whose concepts are incorporated in the reform law—disputed the notion that healthcare reform must lead to bigger corporations.

“The theme is cooperation. Yes, there is a ton of stuff in the Affordable Care Act that encourages better coordination of care for individuals,” Berwick said. But, he added, “cooperation is not the same as total financial integration.”

Another well-known healthcare thinker who supported the reform law, Massachusetts Institute of Technology economics professor Jonathan Gruber, disagreed with Berwick on the question of whether the Affordable Care Act encourages consolidation of providers.

“I think it probably does, in the sense that the idea of the law is to move toward more integrated care and more bundled care, and that happens more naturally in consolidated entities,” said Gruber, who is also director of the National Bureau of Economic Research's Health Care Program.

But the federal inducements toward corporate consolidations extend beyond the reform law. For example, the anti-kickback statute and the Stark law create huge potential legal risks for hospitals working with nonemployed physicians. And antitrust laws prohibit independent providers from negotiating jointly with payers unless they can credibly argue the arrangement falls within a “safety zone” for clinical integration.

And then there's federal payment policy. Pate, who is a lawyer and a physician in addition to being president and CEO of Idaho's largest nongovernment employer, St. Luke's Health System, said Congress' ever-looming threat to cut physicians' and hospitals' Medicare rates also drives mergers.

“All the healthcare providers are bracing because we know that the cuts are coming,” Pate said, mentioning the debates over the Medicare sustainable growth-rate formula for physicians and the threat of a 2% across-the-board cut in Medicare rates under the Budget Control Act of 2011. “If that's the case, and you want to weather that storm, what you do is you achieve size that allows you to leverage your cost. … Consolidation is a natural response to threatened cuts.”

Pate lamented that providers cannot ever know with total certainty whether any given transaction will be challenged by the government. “You can't know ahead of time whether something is or is not OK,” he said. “There are certain extremes where you can know if something is extreme or perfectly OK, but there is a wide range of possibilities in between.”