Look-back merger reviews flawed

I was a member of the Federal Trade Commission in 2000 when the agency launched a well-publicized retrospective study of Evanston (Ill.) Northwestern Healthcare's acquisition of Highland Park (Ill.) Hospital. The consensus view of commissioners was that the results did not justify the large investment of public and private resources consumed in the process. Retrospective study of merger law enforcement has a number of limitations in any industry. Issues in healthcare are particularly difficult and still make the practice problematic 13 years later.

First, the sample of transactions selected for study is not random. The FTC will not know about merger proposals that died because of advice based on then-existing guidelines or precedents. No post-merger record is available to examine deals abandoned early in the government review process. It is not prudent to make judgments about the adequacy of existing methods on the basis of a biased sample.

Agency retrospectives present several problems. The first task in any backward look is to decide on a relevant product and geographic market, and then determine whether a seller has increased or decreased prices to buyers in the market (or changed the quality of its offerings in ways that can be quantified). The healthcare sector is a lot more complicated because it is three-sided, with providers as sellers, intermediary payers who are both buyers and sellers, and the individuals who are the customers of both.

Moreover, there is a vast array of medical services offered. It is very difficult to put a price on any changes in the quality of these services, and the relevant geographic markets can vary widely, depending on the services that are sought. (A rational consumer might go to the nearest emergency room for fast treatment of cuts or sprains, but travel a long distance for major surgery.) Which market is more relevant?

Such issues are hard to resolve in a static environment, but the competitive landscape for hospitals is evolving rapidly and continuously, with even greater changes ahead. Revenue for hospitals is declining, and payer reimbursements are increasingly based on quality measures that require hospitals, physicians and other health professionals to have aligned incentives in order to avoid large and recurring payment penalties. Mergers and acquisitions can be an efficient way to secure this alignment, and avoid other issues raised by looser joint ventures. These complexities exist in the current environment, and there is no reason to believe that looming legislative changes will reduce them.

It does not make sense to incur substantial public and private costs to take a backward look at merger-law decisions made in competitive environments and very different from those that prevail today and will prevail in the future.