While regulators are expected to clamp down on hospital-led acquisitions of physician practices, the Federal Trade Commission's reworking of the vertical merger guidelines isn't expected to thwart proposed transactions, antitrust experts said.
The Federal Trade Commission scrapped the 2020 vertical merger guidelines last month after several of its commissioners and policy experts criticized them as too permissive. The move was expected as the agency shifted to a Democratic majority.
The FTC and Justice Department jointly replaced the regulatory framework in June 2020, marking the first update since 1984. The withdrawal indicates that the commission will take a tougher stance on vertical mergers—combining two or more companies operating at different levels of the supply chain, like hospitals buying physician practices—similar to President Joe Biden's pledge. The DOJ has maintained the 2020 guidelines, which could result in different enforcement strategies depending on which agency challenges a proposed transaction.
"Things will get stricter when it comes to vertical mergers," said Pahl Zinn, an antitrust lawyer at Dickinson Wright. "The real concern from a practitioner standpoint is that the FTC withdrawing the guidelines leaves a lot of ambiguity."
Whether or not the FTC enforces stricter guidelines, they aren't the law, said Katherine Funk, an antitrust attorney at Baker Donelson.
"If you are making a vertical merger case in court, you don't have the bright-line rules like you do in horizontal mergers—it's much more nuanced and reliant on economic evidence," she said. "I think the agency is going to have the same problem it has had in respect to past vertical transactions."
Case law on vertical integration is not progressing, which is frustrating antitrust lawyers and economists, said Alicia Batts, a partner at Faegre Drinker Biddle & Reath who specializes in antitrust matters.
"I think most people think that the system needs some minor tweaking. The question is how much," she said.
When the government challenges a horizontal merger, like when hospitals combine, it uses standards like the Herfindahl-Hirschman Index to gauge market concentration and estimate the competitive consequences. But there isn't clear-cut methodology that applies to vertical transactions, which means that most mergers are challenged on a horizontal basis. Generally, vertical integration is assumed to be pro-competitive, although that consensus may be shifting.
"(The Herfindahl-Hirschman Index) gives the courts something tangible to grasp onto; vertical case law doesn't have anything like that," Funk said. "I can't imagine how they ever will."
On July 1, the FTC expanded Section 5 of the FTC Act, which authorizes the commission to investigate and challenge "unfair methods of competition affecting commerce," although that provision is more vague than the Sherman and Clayton acts.
"There has been a debate around Section 5 for some time now. There has definitely been a component of the bar (association) that believes the FTC and DOJ should have the same standards and enforce the same laws," Batts said. "The more progressive part of the bar would like the FTC to be more aggressive in bringing cases."
Some argue that vertical integration can boost quality and lower healthcare costs through improved economies of scale. Executives bet that the upfront expense associated with upgrading information technology, providing compensation packages and adding office space may pay off in the form of a better-aligned physician network that boosts referrals, reduces duplicative care and minimizes variation.
Others claim that large, integrated healthcare companies can stave off competitors, which can increase costs and lower quality. Companies could block access to products from the downstream merger partner and share sensitive business information about competitors.
Physician practices purchased by hospitals can garner higher payment rates from payers and patients, both from the facility fees and the leverage in negotiating insurer rates. Consolidating physician practices reduces competition, which could lower quality. Prices jump 14.1% after hospitals acquire physicians, a 2018 study published in the Journal of Economics found, citing other research showing that acquired physicians were more likely to refer patients to higher-priced hospital settings.
"Perhaps the FTC was concerned that courts might rely on elements of the vertical merger guidelines that recognized the potential for procompetitive benefits to clear transactions that it believes would produce harm," said Gorav Jindal, a partner and antitrust attorney at Akin Gump Strauss Hauer & Feld.
The FTC and DOJ may be considering replacing both sets of guidelines with a consolidated version, he added.
Health systems, insurers, private equity firms, large physician groups and growing for-profit primary-care practices are making their best pitch to lure physicians and their referral networks.
Almost seven in 10 U.S. physicians are now employed by hospitals or corporations like private equity firms and health insurers, a recent report from Avalere Health found. Even as the Biden administration aims to make lopsided markets more competitive, in part, by increasing the FTC's and the DOJ's budgets, vertical transactions aren't expected to slow.
In 2017, Santa Barbara, Calif.-based healthcare providers Cottage Health and Sansum Clinic called off their proposed merger after trying to win over regulators for about four years.
Cottage, which operates the only hospitals in south Santa Barbara County and the Santa Ynez Valley, tried to merge with Sansum and its 23 ambulatory clinics. But industry overseers were concerned that the merger would increase the clout of the providers in an already concentrated market and inflate prices.
The FTC sued to block a merger between St Luke's Health System and Saltzer Medical Group in Idaho, claiming the merger would have left the combined provider with about 60% market share of primary care physicians in Nampa, Idaho's second largest city. But that deal was tried on a horizontal basis.
Still, many transactions don't fall under the FTC's or DOJ's purview. Health systems often acquire small practices, which don't trigger a review. Economists and policy experts have asked Congress to tweak the threshold for a regulatory review to curb healthcare monopolies. Meanwhile, the regulatory agencies are gathering more claims data from insurers on hospital acquisitions of physicians.
"Perhaps certain presumptions with respect to market definition or market share will apply to make it easier to challenge smaller vertical transactions," said Jean Kim, an antitrust lawyer and partner at Constantine Cannon, adding that there may be more specific guidance on how to assess foreclosure and whether a hospital system can block referrals from its employed physicians to competitor hospitals. "There likely will be more focus on the non-price effects of a vertical merger, including the impact on quality, consumer access and choice and innovation."
The agencies will likely start identifying patterns of merger and acquisition activity, rather than looking at deals in isolation, Funk said.
"I think agencies will start looking at whether there have been a series of acquisitions and what the effect of those serial acquisitions might be," she said.
Outside of the hospital sector, lawyers are keeping an eye on the Illumina's acquisition of Grail. In March, the FTC sued to block Illumina, which detects cancer through DNA sequencing, from acquiring Grail, which develops biopsy tests for related cancer diagnostics. The deal would slow the progress in the diagnostics sector, the complaint alleged.
UnitedHealth Group's Optum is also on antitrust attorney's radar as the healthcare conglomerate looks to acquire revenue cycle management and data analytics company Change Healthcare. Hospitals and pharmacists are urging the regulators to block the deal that would allegedly create an anticompetitive corporate behemoth.