President Joe Biden's pledge to crack down on anticompetitive consolidation has set the stage for stricter oversight of vertical integration across the healthcare industry.
The Biden administration has vowed to stop proposed mergers that would stunt competition, in part, by increasing the Federal Trade Commission's and the Justice Department's budgets, adjusting the standards for permissible mergers, barring the use of non-compete clauses and bolstering retrospective merger analyses. Breaking up the healthcare conglomerates and limiting proposed anticompetitive vertical mergers will be a key part of regulators' oversight strategy, merger and acquisition experts said.
"They are moving in the right direction," said Glenn Melnick, a health economist at the University of Southern California, noting the FTC's data gathering regarding hospital acquisitions of physician practices. "What I don't know is what authority they have. A lot of these deals are structured to stay below the Hart-Scott-Rodino threshold, so we are likely going to need new legislation—who knows there."
The FTC has asked several of the major insurers for data on hospital acquisition of physicians. It is also reworking its vertical merger guidelines, which are expected to bolster an enforcement area where regulators have historically had limited success.
Companies, like UnitedHealthcare Group, have turned into healthcare conglomerates as they acquire more physicians, delve into hospital operations and control more entities across the continuum of care. Insurers, for instance, have merged with pharmacies and pharmacy benefit managers, which have been forming their own group purchasing organizations. As these conglomerates grow, transparency often wanes, industry observers said.
PBMs have increased their profit as they join insurers and pharmacies. Gross profit from PBM-owned mail order and specialty pharmacies grew to $10.1 billion in 2019, up 13% from $8.9 billion in 2017, according to PBM Accountability Project's analysis of financial records, government reports, studies and surveys.
"That's a reflection of vertical integration," said Mark Blum, executive director of America's Agenda.
Some argue that vertical integration can boost quality and lower healthcare costs through improved economies of scale. Others claim that large, integrated healthcare companies can stave off competitors, which can increase costs and lower quality.
"There certainly is increasing concern about vertical integration," said Katherine Hempstead, a senior policy adviser at the Robert Wood Johnson Foundation, noting the increasing incursion of health plans into the provision of care. "You have to look at the downsides of having a small number of vertically integrated companies and what the does to competition."
But it is always harder to unwind deals after they have been completed. Even if some of the regulatory guidelines are bolstered, it will still be a hard area to enforce, M&A experts 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.
"(The Herfindahl-Hirschman Index) gives the courts something tangible to grasp onto; vertical case law doesn't have anything like that," said Katherine Funk, an antitrust attorney at Baker Donelson. "I can't imagine how they ever will."
When it comes to hospital consolidation, volume has slowed over the past two years amidst the COVID-19 pandemic.
Hospital transaction volume was expected to pick up in 2021, but quarterly deals remained slow through the third quarter. Fewer deals involved small-and mid-sized hospitals while multibillion-dollar proposals collapsed in 2021 amid more regulatory scrutiny and "scale-as-a-solution" skepticism.
"We're not done seeing mergers unwind," said Michael Abrams, managing partner of healthcare consultancy of Numerof & Associates. "Marriages are still being made without proper due diligence under the impression that getting bigger solves their problems. The fact is that more will unwind under the realization that isn't so."
Around a dozen proposed mergers between relatively healthy not-for-profit systems haven't closed over the past three years as doctors have protested and regulators have become increasingly wary of consolidation. Merger and acquisition advisors point to a range of reasons why deals fall apart, including cultural differences, antitrust implications, geographical hurdles, half-baked integration plans, infighting and power struggles.
But still, health system executives will continue to turn to mergers and acquisitions to try to boost revenues and insulate their organizations from competitors, national emergencies and reimbursement shifts, they said.
"A lot consolidation hasn't really born out born out the cost efficiencies and lived up to its promise in many areas," said Dr. Harry Greenspun, chief medical officer of the consultancy Guidehouse. "When organizations fumble their way into consolidation and don't properly integrate, it opens up further scrutiny."