Antitrust and Unfair Competition Law

Competition: Winter 2017-18, Vol. 27, No. 1

THE EFFICIENCIES DEFENESTRATION: ARE REGULATORS THROWING VALID HEALTHCARE EFFICIENCIES OUT THE WINDOW?

By Jacob Snow, Ronnie Solomon, Kyle Quackenbush1

I. INTRODUCTION

Assessing efficiencies is an important part of any regulatory merger review. Efficiencies that are merger-specific and verifiable can, under the Merger Guidelines, save an otherwise anticompetitive merger. The presentation by merging parties of pro-competitive efficiencies is often referred to as an efficiencies "defense."

Healthcare in the United States is changing. Recent years have brought a significant increase in healthcare mergers, and provisions in the Patient Protection and Affordable Care Act ("Affordable Care Act") encourage integration and coordination of healthcare services. In light of these changes, some argue that regulators put too little weight on efficiencies in the healthcare context, and that the high bar set by the Merger Guidelines— requiring that efficiencies be verifiable and merger specific—is an unnecessary hindrance to healthcare mergers that will benefit the public. Does it make sense to continue to hold efficiencies to such a high bar, in the face of technological developments and pressure on healthcare entities to integrate?

This article argues that the Merger Guidelines’ (relatively) strict standards should be maintained. Federal regulators have challenged relatively few of the thousands of healthcare combinations announced in recent years. Under the Merger Guidelines, antitrust regulators give careful consideration to efficiency claims, despite lingering uncertainty in the courts about the role of efficiencies under the law. Nor does the Affordable Care Act require that companies pursue a merger or acquisition. There is also much the parties can do to present real efficiencies that are more likely to pass regulatory muster. Finally, state laws that provide antitrust immunity to entities seeking to integrate are not the answer. And there is little support for the notion that these laws are a direct consequence of overly-stringent enforcement by antitrust regulators.

A. The Role of Merger Efficiencies Under the Law is Uncertain

There is lingering uncertainty over whether claimed efficiencies can overcome a merger’s anticompetitive effects. For starters, an efficiency defense has no clear statutory basis. Section 7 of the Clayton Act does not mention efficiencies.2 Neither does case law provide clear guidance on the application or scope of an efficiency defense. The Supreme Court has never officially recognized an efficiency defense, 3 and instead has "cast doubt on its availability."4 And no court has ever held that the claimed economic efficiencies were sufficient to overcome an otherwise unlawful merger.

[Page 73]

Lower courts are split. Several circuit courts have recently cast doubt on whether an efficiencies defense exists and on its scope. 5 In St. Luke’s, the Ninth Circuit affirmed a district court ruling that plaintiffs’ economic efficiencies were not merger-specific and were insufficient to rebut a prima facie case of Section 7 illegality. While the Ninth Circuit decision assumed the availability of an efficiency defense, it also noted its uncertain status: "we remain skeptical about the efficiencies defense in general and about its scope in particular."6 More recently, the D.C. Circuit addressed in United States v. Anthem whether an efficiency defense exists. In Anthem, the D.C. Circuit affirmed a lower court finding that the claimed efficiencies of a merger between two large health insurance providers were neither merger-specific nor verifiable.7 As in St. Luke’s, the court assumed the availability of the defense, but cautioned that "it is not at all clear that [efficiencies] offer a viable legal defense to illegality under Section 7," citing the Supreme Court’s "clear holding" in Procter & Gamble.8 Moreover, Anthem noted that while some courts recognized efficiencies as a means to rebut a prima facie case, the question of whether efficiencies can serve as an ultimate defense under Section 7 remains unresolved.9

Other circuits have recognized the availability of efficiencies, at least to rebut a prima facie case of illegality; but none of those decisions found that the claimed efficiencies actually rebutted the presumption.10 Courts that have recognized economic efficiencies have limited their scope. In University Health, the Eleventh Circuit noted that efficiencies are "an important consideration in predicting whether the acquisition would substantially lessen competition," but that once a court determines that a merger would substantially lessen competition, "expected economies, however great, will not insulate the merger from a section 7 challenge." 11 Where recognized, the focus of an efficiencies defense is whether they will enhance or heighten competition, rather than lessen it, and whether the prima facie case inaccurately portrays the merger’s probable effects on competition.12

[Page 74]

B. Whatever Their Status Under the Law, the Merger Guidelines and Antitrust Regulators Recognize Economic Efficiencies

Despite this case law, efficiencies are nonetheless important. Antitrust regulators take efficiency arguments presented by parties seriously in reviewing a merger. The 2010 Horizontal Merger Guidelines ("Merger Guidelines"), issued by the Federal Trade Commission ("FTC") and the Department of Justice ("DOJ"), specifically recognize efficiencies in reviewing mergers. Section 10 of the Merger Guidelines sets out the framework for assessing efficiencies. Under the Merger Guidelines, efficiencies are weighed against anticompetitive effects provided that those efficiencies are cognizable— that is, the claimed efficiencies must be "merger-specific" and "verifiable."13 More precisely, federal antitrust regulators will not challenge a merger "if cognizable efficiencies are of a character and magnitude such that the merger is not likely to be anticompetitive."14 In other words, regulators consider whether cognizable efficiencies are likely to "reverse" potential harm to consumers. While the Merger Guidelines are neither precedential nor binding on courts, they inform regulators’ analysis and may serve as a "helpful tool" to courts in merger cases.15 Thus, efficiencies can and do play an important role in analyzing the anticompetitive effects of a merger at the agency level. A former Director of the FTC’s Bureau of Competition has emphasized that the agencies review efficiencies closely, noting that "studying only litigated cases for guidance on efficiencies presents a skewed sample set, given the very high levels of concentration involved in most litigated cases, and lingering doubts by some courts about the legal basis for an ‘efficiencies defense.’ "16

[Page 75]

II. ARGUMENT

Market trends and changes in the law should be taken into account by antitrust authorities in reviewing mergers. Today, the law of healthcare is undergoing changes and healthcare providers and insurers likely have opportunities to improve their operations by operating more efficiently and delivering higher quality care to their customers.

These opportunities have been the recent focus of policymakers. President Obama’s opening remarks at the White House Health Care Summit on March 5, 2009, focused on "the exploding costs of healthcare in America," and characterized healthcare reform as "no longer just a moral imperative, it’s a fiscal imperative."17 This sentiment echoed concern that the United States healthcare outcomes were worse than international peers while its costs were significantly higher.18 The ACA’s structure was motivated in part by this triad of concerns: coverage, cost, and quality.19 And the ACA’s proposed means of improving healthcare along these dimensions were numerous and ambitious. A five-year review of the ACA called the law "one of the most aggressive efforts in the history of the nation to address the problems of the delivery system."20

Among the primary efforts in that regard were the ACA’s provisions directed at moving payment for healthcare services away from volume-based fee-for-service reimbursement and towards linking provider payments to better patient outcomes.21 Those provisions include modifications that aim to create additional incentives for providers to reduce both: 1) patients being admitted to the hospital after discharge and 2) the rate of conditions acquired in the hospital during treatment.22 Other provisions in the ACA encourage providers and insurers to form new organizations called Accountable Care Organizations ("ACOs") that enable "integration and coordination of ambulatory, inpatient, and post-acute care services."23 Some see ACOs as "a bridge from fragmented fee-for-service care to integrated, coordinated delivery systems that resemble the tightly organized Medicare Advantage plans."24 Participants in the healthcare market can be forgiven for interpreting the ACA—as well as market trends more broadly—as pointing to integration and consolidation as the path towards a healthcare system that delivers higher quality care at lower cost to more people.

[Page 76]

A widely read article from The New Yorker in 2009 similarly described the challenge policy-makers seeking healthcare reform face as a choice between fee-for-service medicine, in which doctors care is compensated in proportion to the procedures they perform, and structures in which providers "adopt[] measures to blunt harmful financial incentives" and "[take] collective responsibility for improving the sum total of patient care."25 The article concluded memorably as follows:26

As America struggles to extend healthcare coverage while curbing healthcare costs, we face a decision that is more important than whether we have a public-insurance option, more important than whether we will have a single-payer system in the long run or a mixture of public and private insurance, as we do now. The decision is whether we are going to reward the leaders who are trying to build a new generation of Mayos and Grand Junctions. If we don’t, McAllen won’t be an outlier. It will be our future.

In the wake ofthe Affordable Care Act’s passage in 2010 and the wave of consolidation that followed, some merging parties have taken on the mantle of "leaders . . . trying to build a new generation of Mayos and Grand Junctions." And the "reward" sought was the close of an investigation into a proposed healthcare merger. Given the importance of healthcare and the potential benefits of improving quality and reducing cost on a large scale, it is a fair question whether these benefits are (or should be) cognizable efficiencies under the Merger Guidelines.

Those guidelines require that efficiencies be verifiable and merger-specific in order to offset the anticompetitive effects of a transaction. These restrictions ensure that purported efficiencies are not used to offset the anticompetitive effects of a transaction unless completing the transaction is likely to achieve the efficiency (the verifiable requirement) and the efficiency is not achievable without the merger (the merger-specificity requirement).

A. The Economic Literature Casts Doubt on Whether Cost and Quality Benefits of Consolidation Are Verifiable

Over the last two decades, there has been significant consolidation in healthcare, including a notable increase in mergers and acquisitions in the wake of—though not necessarily as a result of—the ACA.27 Between 1998-2015, over 1,400 hospital mergers were announced.28 And there has been a significant increase since 2011, with five of the top seven most active years (by announced mergers) occurring in the last five years.29 Many of those mergers involve the purchase of multiple hospitals.30 And the number of hospitals that operate as part of a larger health system has also increased in the last decade, from approximately 2,700 in 2004 to 3,200 in 2014.31

[Page 77]

Consolidation is not necessarily bad for consumers. Mergers between competitors have the potential to benefit consumers by enabling the merged entity to, for example, take advantage of economies of scale and scope and to purchase inputs at lower prices by gaining leverage over suppliers.32 Consumers can also benefit if merging parties lower prices to consumers as a result of these efficiencies.33 The Merger Guidelines balance the potential benefits of an acquisition against the likely competitive harm. But those guidelines also take the practical realities of the legal process into account, where the challenging agency must prove that a transaction is likely to substantially lessen competition.34 An "ephemeral possibility" of anticompetitive effects is not sufficient to establish that a merger is unlawful.35

It is not appropriate, however, to presume that clinical and operational integration in the healthcare field is likely to result in lower costs or better care. Economic research indicates that neither hospital mergers nor the formation of integrated delivery systems reliably produce the efficiency or quality improvements that would be required to justify an otherwise anticompetitive transaction.

1. Mergers Between Competitor Hospitals Generally (Though Not Always) Result in Increased Prices

When hospitals merge, the concern for antitrust regulators is a simple one. Before the merger, competition between the two firms may be effective at restraining prices. But after the merger, a hospital’s customers may have no (or fewer) alternatives, allowing the merged firm to charge higher prices.36

[Page 78]

Economic literature going back to the 1990s indicates that, generally, hospital consolidation results in higher prices. A 2006 synthesis of research on the impact of hospital mergers on price, costs, and quality of care concluded that "hospital consolidation in the 1990s raised prices by at least five percent, and likely by significantly more."37 The same review noted that while the "great weight of the literature shows that hospital consolidation leads to price increases," "a few studies reach the opposite conclusion."38 Studies examining consolidation among hospitals that are geographically close to one another found that "consolidation leads to price increases of 40 percent or more."39 A 2012 update to the 2006 review came to similar conclusions, noting that hospital consolidation generally increases prices and that competition (not consolidation) between hospitals increases quality of care.40

A more recent analysis of hospital mergers undertook a broader assessment of whether cost reductions followed mergers between hospitals in the same and in different markets.41 That study found an average cost reduction between 4 and 7% in the years following the acquisition.42 The overall result indicates that cost reductions are possible (and even likely) when the merging hospitals are not competitors. But in that survey, the results for mergers between hospitals in the same market were not generally statistically significant, and the author cautions against applying the results to in-market acquisitions.43

2. The Potential Benefits of Integrated Healthcare Delivery Systems Are Not Apparent in the Literature

An "integrated delivery system" refers generally to an organization that both serves as a provider of healthcare services and bears some measure of financial risk for the health outcomes of the covered patient population.44 That financial risk can come in many forms, from Accountable Care Organizations, to providers that contract on a capitated basis with health plans, to fully integrated provider systems with premiums as a sole source of income.45 The idea that vertically integrated healthcare delivery systems might have incentives to control costs while increasing quality is not a new one. Advocates of moving healthcare towards an integrated model argue that it improves quality and reduces cost, first, by improving coordination among providers.46 An integrated system, they argue, will be better able to share information between providers through a centralized medical records system.47 A second benefit of integrated care is that financial risk taken by the integrated system will encourage the management of care across healthcare providers.48 Integrated systems, in this way, have the potential to eliminate the incentive to perform unnecessary tests and treatment that is inherent in fee-for-service medicine.49

[Page 79]

A study by the National Academy of Social Insurance (NASI) analyzed a sample of integrated delivery networks (referred to as "IDNs") to understand how those organizations performed compared with non-integrated alternatives.50 That study concluded that "the likelihood that IDNs are producing neither cost nor quality advantages over dispersed networks of caregivers assembled by health plans raises serious policy questions regarding the reliance upon ACOs as a contracting model by Medicare or private insurers."51 But the study also noted that its conclusions were preliminary, and encouraged policy-makers to seek "a more solid evidentiary foundation" before assuming that integrated care generally yields the cost and quality benefits many have hoped for.52 A particular limitation of the NASI study was that its performance assessment was based on publicly available information about the subject integrated systems.53

The empirical work in this area should not be interpreted as an insurmountable barrier to asserted efficiencies. Quite the contrary, some integrated systems achieve impressive results and can serve as an operational model for delivering higher-value care. But regulators should expect merging parties to offer compelling evidence to show that efficiencies are likely based on the particular facts of the merger under review. It is not enough to rely on the possibility of efficiencies resulting from a transaction’s structural characteristics that have a mixed record of practical success.

B. A Response to Fendall and Maas

In a companion article, Kaley Fendall and David Maas levy two criticisms of regulator’s consideration of efficiencies.54 First, they argue, regulator’s assessment of efficiencies should be more transparent, offering merging parties guidance that will allow them to more reliably ascertain the outcome of a particular merger review.55 And second, the authors argue that the burden of demonstrating creditable efficiencies is too high, likely dooming beneficial combinations.56

[Page 80]

With respect to the transparency criticism, it may be true that regulators can improve the guidance to industry, but significant efforts to be transparent have been made in the past. In 2006, the FTC and the DOJ released the Commentary on the Horizontal Merger Guidelines, which offered additional guidance describing how regulators view the review process.57 That commentary also included high-level discussion of how the reviewing agency viewed particular transactions. Assessing the Nucor-Birmingham Steel transaction in 2002, for example, the commentary noted that "the Department concluded that plausible merger-specific reductions in variable costs were significant relative to the worst case scenario of anticompetitive effects from the acquisition, and the Department granted early termination under HSR."58 This kind of analysis appears to be what Kendall and Maas are looking for, and we agree that the FTC and DOJ should consider an updated commentary based on the 2010 Merger Guidelines.

Kendall and Maas’s argument for giving more weight to efficiency claims is, in our view, less persuasive. The authors’ point to integrated value-based care and the application of technology to healthcare as justifications for giving more weight to efficiency claims.59 As we explain above, the trend towards integrated care may be real, but the economic literature indicates that integration does not necessarily yield efficiency gains. For that reason, a case-by-case assessment is necessary, and a case-by-case assessment is what the Merger Guidelines require.

Similarly, recent developments in machine learning and medical technology may well yield efficiency and quality improvements that benefit patients and providers alike.60 But exuberance about the promise of new technologies is no substitute for concrete evidence that a transaction is necessary to achieve particular efficiency gains. If that evidence exists, the Merger Guidelines provide an adequate framework for regulators to consider it. It is neither necessary nor wise for the FTC and DOJ to give more weight, across the board, to efficiency claims when technological developments merely have the potential to transform an industry. If that transformation is coming, consolidation may not be necessary to achieve it.

Kendall and Maas also point to unintended, negative consequences of excessive scrutiny, including state laws providing antitrust immunity to healthcare combinations. These include Certificate of Public Advantage ("COPA") statutes, which permit hospitals and other qualifying entities to merge, affiliate, and conduct other activities that would otherwise be subject to federal antitrust regulation. COPA laws expressly permit these combinations and affiliations, and provide corresponding antitrust immunity, where they further a state’s expressed public policy.

[Page 81]

But Federal antitrust agencies should not apply a lower standard to efficiency claims in response to oft-misguided state laws that may seek to circumvent the antitrust laws. COPA laws may result in negative outcomes for consumers and competition, and such a move would only further harm consumers and competition. Moreover, there is no evidence that such laws are a result of overly strict federal antitrust enforcement and policies.

1. How Can Merging Parties Present Creditable Economic Efficiencies?

In assessing how parties can present successful efficiencies claims, it is first worth considering when efficiency claims are likely to matter. Even where efficiencies are cognizable, they must still outweigh the likely competitive harms. In general, efficiencies will not tip the scale where a merger is highly anticompetitive and is likely to result in significantly lessened competition and consumer harm. "Possible economies cannot be used as a defense to illegality,"61 and efficiencies "almost never justify a merger to monopoly or near-monopoly."62 The Merger Guidelines recognize that the more anticompetitive a merger is likely to be, the greater the cognizable efficiencies and the consumer pass-through there must be.63 This balance makes sense, given that it is competition and consumers, not competitors, which antitrust law aims to protect.

While every case is fact-specific, the following may promote a successful efficiency claim:

First, parties should present honest and realistic efficiency claims while avoiding claims that are aspirational or for which they offer no support.64 Such claims are not likely to be verifiable. Presenting unsubstantiated claims may also affect credibility and cause regulators to cast doubt on other efficiency claims.

Second, merger review most often occurs outside the purview of a court and involves federal agency review. In this context, merging parties must convince a federal agency that claimed efficiencies are creditable. This has some benefit for merging parties. At the agency level, as opposed to in the context of litigation, parties are not faced with a legal standard or rebutting a prima facie case of illegality. It may therefore be easier to convince regulators to accept efficiencies than it would be to persuade a court. Of course, parties must still demonstrate that efficiencies are merger-specific, verifiable, and do not arise from anticompetitive reductions in output.

[Page 82]

Third, parties must present efficiencies that benefit consumers. For instance, merging hospitals often present claims of improved quality of care, avoidance of capital expenditures, job consolidation and operational cost reductions.65 Efficiencies that result in pro-consumer cost savings, quality improvements, and increased product offerings are critically important. By contrast, operational and cost efficiencies that will only increase a company’s profits, and that will not be passed-through to consumers, are less likely to be persuasive.

Fourth, parties should endeavor to present economic efficiencies that are real, achievable, and that have demonstrable support. This includes, for example, where an efficiency is based on ordinary-course business documents, executive testimony, or on a company’s past business experience,66 as opposed to claims that are designed for litigation. Past experience might include a track record of achieving cost savings and consumer pass-through, or successfully achieving quality-of-care improvements in prior acquisitions. Mergers that are efficiency-driven combinations, and where efficiencies are a key part of the deal rather than an afterthought, are more likely to be successful. As two commentators note: "FTC staff place great weight on evidence that executives evaluated likely cost-savings of a merger as part of the deal analysis and did so identifying the sources of cost savings in a concrete, specific way."67

Fifth, parties must be specific regarding the claimed efficiencies. The Merger Guidelines recognize that information is often "uniquely" in the possession of merging firms, and courts have noted the difficulty in predicting future outcomes in merger cases. Parties should therefore provide as much specific information as possible to regulators in assessing claims. A former FTC Bureau Director summarized this point aptly: "[t]he parties must explain more than just the processes and practices that the acquiring hospital system can transfer to an additional hospital; they need to address the specifics of how those processes and practices will benefit patients through improved care."68 And, with respect to some quality efficiencies, there is an argument that "the more specific the efficiency, the less justified is an assumption that it would be realized with an alternative partner."69

Specifics can take the form of detailed plans for achieving efficiencies, independent verification of the claimed efficiencies, and concrete explanations why the efficiency is likely to succeed or otherwise could not happen absent the merger. For instance, if infection control is a quality improvement, a party could offer evidence that it has achieved these types of improvements in prior acquisitions. Where parties plan to incentivize physicians to improve quality, parties should be explicit about what those incentives are. Suppose merging parties identified the formation of an integrated healthcare delivery system ("IDS") as a merger-specific efficiency. This is a laudable goal, but integrated healthcare delivery systems vary widely. To promote it as a successful efficiency, merging parties could present specific information to show that the integration is likely to be achieved and successful. This could include details regarding how integration will be achieved, rewards and incentives systems, coordination and alignment objectives, plans for system monitoring and information sharing technologies, ideas for performance management and outcome measurement, and implementation timelines. 70 And, in the event that the parties do not move forward or are unsuccessful in implementing an IDS, are there any penalties or failures for doing so? Some of these details could come in the form of a study or a report undertaken by the parties.

[Page 83]

Sixth, specifics may not always be feasible. Nor can parties predict the future with certainty. Yet the more investment parties can make in planning to achieve efficiencies in the future, the more specific plans and projections might be.

Parties should also be aware of when courts have rejected claimed efficiencies. While most efficiency claims never make it before a court and litigated cases are a somewhat skewed sample, they nonetheless offer useful guidance as to why specifics are important. In Anthem, the court highlighted Anthem’s uncertain projections, the contingent nature of claimed price reductions, a lack of evidence to show how long it would take to develop an improved insurance product, and "woefully insufficient" evidence regarding why it had not previously succeeded in improving its products and services on its own (i.e., why the claimed efficiencies could only be achieved through a merger). The court also noted Anthem’s failure to show how it would achieve consumer pass-through and the unreliability of its expert projections. In St. Luke’s, the Ninth Circuit similarly refused to credit an integrated healthcare reimbursement system, because the parties merely noted a desire to move in that direction, without offering specifics.

2. COPA Laws, and other State Laws that Provide Antitrust Immunity, are Harmful to Consumers and Competition

COPA statutes are state laws that shield a non-sovereign private actor from state and federal antitrust enforcement. These laws are subject to the state action doctrine and must further: (1) "a clearly articulated and affirmatively expressed [] state policy" that is (2) "actively supervised by the state."71 In exchange for state regulation, COPA laws allow healthcare entities to integrate, merge, affiliate, and engage in other conduct that would otherwise raise antitrust concerns, with the hope that such integration will improve quality or achieve efficiencies. COPA laws are currently on the books in sixteen states.72 Some states, such as New York, have passed COPA laws to promote greater integration and coordination of health services to meet the goals of the Affordable Care Act, believing that consolidation among healthcare providers may otherwise be unachievable under state and federal antitrust laws.73

[Page 84]

COPA laws are often not a good thing. Some anticompetitive healthcare mergers have sought to escape federal scrutiny by petitioning state legislatures for an antitrust exemption. For example, in response to a pending FTC complaint against the consolidation of two hospitals, the West Virginia legislature amended its law to exempt the hospitals from antitrust enforcement.74

Some view the proliferation of state COPA statutes as an unintended, negative consequence of excessive antitrust scrutiny and the high burden by which efficiencies claims are tested. But there is little support for this assertion. As the FTC has stated in response to the passage of COPA laws, COPA regulations are based on a "fundamentally flawed" premise that procompetitive healthcare combinations are otherwise prohibited under the antitrust laws.75 And in recent years, federal antitrust agencies have challenged very few of the thousands of healthcare mergers, joint ventures, and other collaborations.76 When they have, it was only "after [a] rigorous analysis of market conditions showed that the acquisition was likely to substantially lessen competition."77 And since "procompetitive healthcare collaborations already are permissible under the antitrust laws, the main effect of the COPA regulations is to immunize conduct that would not generate efficiencies and therefore would not pass muster under the antitrust laws."78 Nor are COPA statutes a trend in response to healthcare entities buckling under the weight of the antitrust laws and failed efficiencies claims. COPA statutes are not a new phenomenon, as these laws have been around since the 1990s. The number of states with COPA laws has remained relatively stable since then, at just 16.

Moreover, COPA laws require active supervision by the state, in lieu of antitrust enforcement, and can be burdensome for the covered healthcare providers, capping profit margins and the number of doctors that may be employed. This in itself can be burdensome for parties, but also risks harming competition in a market. "Economists have long recognized the difficulties of regulating monopolists and how regulation, no matter how carefully crafted and implemented, can inadvertently create undesirable incentive."79

[Page 85]

COPA statutes overall can be harmful to consumers and competition. COPA laws require active supervision by the states, but consumers may be left at the mercy of lax or inadequate oversight by state enforcement authorities.80 There is also the prospect that covered entities will abuse the system by failing to comply with self-reporting requirements. Moreover, where a state repeals its COPA laws or ends regulation,81 it may be left with monopolist healthcare systems that are no longer subject to supervision, thereby harming consumers. For instance, North Carolina repealed a COPA exemption in 2015 that had allowed two hospitals to merge. This ultimately left North Carolina with a monopolist hospital that increased its prices and threatened to exclude insurance companies from the market.82 In another instance, the Montana Department of Justice granted antitrust immunity using a COPA to a merger that created a healthcare monopoly in Great Falls, Montana.83 Montana eventually rescinded the law and ended regulation. Since then, prices have soared by as much as 38% in three years and no competitor exists in the region.84

For these reasons, even if COPA laws could be viewed as a consequence of antitrust enforcement policies, regulators should not change current practice. Rather, even if state legislatures offer an (ill-advised) path to immunity, regulators should remain committed to their mission of protecting consumers and promoting competition in the marketplace.

[Page 86]

——–

Notes:

1. Jacob Snow is a Technology and Civil Liberties Attorney with the ACLU of Northern California. From 2013—2017, Mr. Snow was a Staff Attorney in the San Francisco office of the Federal Trade Commission, where he focused in part on mergers in the healthcare field. Ronnie Solomon is a Staff Attorney in the San Francisco office of the Federal Trade Commission. Kyle Quackenbush is a third-year law student at the University of Washington. The views expressed in this article are the authors’ alone, and do not represent the views of the Federal Trade Commission or any individual commissioner.

2. Section 7 of the Clayton Act prohibits mergers and acquisitions where the effect "may be to lessen competition, or to tend to create a monopoly." 15 U.S.C. § 18.

3. Because the Supreme Court has not definitively addressed the issue of whether a pro-competitive efficiency can serve as a "defense" to an otherwise anticompetitive merger, there is some argument that the issue is one still open for determination. See FTC v. Penn State Hershey Medical Center, 838 F.3d 327, n. 8 (3rd Cir. 2016) ("Some commentators have argued that, because the efficiencies defense has never been squarely presented to the Supreme Court, the issue has never been definitively decided."). Others have argued that the modern approach to reviewing mergers must consider efficiencies. In U.S. v. Anthem, Judge Kavanaugh argued in a dissenting opinion that the "modern approach" to antitrust law recognizes that courts "must take account of the efficiencies and consumer benefits that would result from this merger. Any suggestion to the contrary is not the law." See United States v. Anthem, 855 F.3d 345, 376—77 (D.C. Cir. 2017). Judge Kavanaugh relied on a line of cases, including U.S. v. General Dynamics, 415 U.S. 486 (1974) and United States v. Baker Hughes, Inc., 908 F.2d 981 (D.C. Cir. 1990). Id.

4. See FTC v. Procter & Gamble, 386 U.S. 568, 580 (1967) ("Congress was aware that some mergers which lessen competition may also result in economies but it struck the balance in favor of protecting competition."); Brown Shoe Co. v. United States, 370 U.S. 294 (1962) (casting doubt on the economic efficiency defense and stating "we cannot fail to recognize Congress’ desire to promote competition through the protection of viable, small, locally owned business.").

5. See Anthem, 855 F.3d 345; FTC v. Penn State Hershey Medical Center, 838 F.3d 327, 348 (3rd Cir. 2016) (declining to recognize efficiency defense and noting: "we have never formally adopted the efficiencies defense . . . we are skeptical that such an efficiencies defense even exists."); Saint Alphonsus Medical Center Nampa, Inc. v. St. Luke’s Health System, LTD., 778 F.3d 775, 790 (9th Cir. 2015) ("we remain skeptical about the efficiencies defense in general and about its scope in particular.").

6. St. Luke’s, 778 F.3d at 790.

7. United States v. Anthem, 855 F.3d at 348—49.

8. Id. at 353 (citing FTC v. Procter & Gamble).

9. Id. at 355 ("In this expedited appeal, prudence counsels that the court should leave for another day whether efficiencies can be an ultimate defense to Section 7 illegality.").

10. See Pro Medica Health Sys, Inc. v. FTC, 749 F.3d 559, 568 (6th Cir. 2014); H.J. Heinz Co., 246 F.3d 708, 716 (D.C. Cir. 2001); FTC v. Tenet Health Care Corp., 186 F.3d 1045 (8th Cir. 1999); FTC v. Univ. Health, Inc., 938 F.2d 1206, 1219-20 & n.27 (11th Cir. 1991).

11. University Health, 938 F.3d 1222, n.29. The Eleventh Circuit in Univ. Health stated "it may further the goals of antitrust law to limit the availability of an efficiency defense."

12. St. Luke’s, 778 F.3d at 790.

13. The standard that applies to efficiencies, well known among the antitrust bar, is that efficiencies are creditable, or cognizable, where they are merger-specific (unlikely to be achieved absent the merger), verifiable (not vague, speculative, or otherwise cannot be verified by reasonable means), and do not arise from anticompetitive reductions in output. See Merger Guidelines, Section 10.

14. Merger Guidelines, Section 10.

15. Anthem, at 349: The Anthem court noted that the Merger Guidelines are a "helpful tool, in view of the many years of thoughtful analysis they represent, for analyzing proposed mergers."

16. FTC v. Sysco: Old-School Antitrust With Modern Economic Tools, Remarks of Deborah L. Feinstein, Director, Bureau of Competition, September 18, 2015 (available at https://www.ftc.gov/public-statements/2015/09/ftc-v-sysco-old-school-antitrust-modern-economic-tools).

17. Transcript of President Obama’s Opening Remarks White House Health Care Summit, March 5, 2009 (https://www.c-span.org/video/transcript/?id=1117).

18. For recent data, see U.S. Health Care from a Global Perspective: Spending, Use of Services, Prices, and Health in 13 Countries, Commonwealth Fund pub. 1819 Vol. 15 ("On several measures of population health, Americans had worse outcomes than their international peers."), available at http://www.commonwealthfund.org/~/media/files/publications/issue-brief/2015/ oct/1819_squires_us_hlt_care_global_perspective_oecd_intl_brief_v3.pdf.

19. The Affordable Care Act at 5 Years, David Blumenthal, M.D., M.P.P., Melinda Abrams, M.S., and Rachel Nuzum, M.P.H., N. Engl. J. Med. 372:25 (June 18, 2015).

20. Id.

21. Id.

22. Id. at 2453.

23. Id. at 2454.

24. Id.

25. The Cost Conundrum, The New Yorker, June 1, 2009 (available at http://www.newyorker. com/ magazine/2009/06/01/the-cost-conundrum) ("The lesson of the high-quality, low-cost communities is that someone has to be accountable for the totality of care. Otherwise, you get a system that has no brakes. You get McAllen.").

26. The Cost Conundrum, The New Yorker, June 1, 2009 (available at http://www.newyorker.com/ magazine/2009/06/01/the-cost-conundrum).

27. American Hospital Association, Trendwatch Chartbook, 2015, Chart 2.9; see also Martin Gaynor, New Health Care Symposium: Consolidation And Competition In US Health Care (available at http:// healthaffairs.org/blog/2016/03/01/new-health-care-symposium-consolidation-and-competition-in-us-health-care/).

28. American Hospital Association, Trendwatch Chartbook, 2015, Chart 2.9.

29. Id.

30. See id. (showing that the number of hospitals acquired per year is larger (often by greater than a factor of 2) than the number of hospital-acquisition deals).

31. American Hospital Association, Trendwatch Chartbook, 2015, Chart 2.4.

32. Effects of hospital mergers and acquisitions on prices, Ranjani A. Krishnana, Hema Krishnan, 56 Journal of Business Research 647-656, 647 (2003).

33. Id.

34. Brown Shoe Co. v. United States, 370 U.S. 294, 323 (1962).

35. United States v. Marine Bancorp., Inc., 418 U.S. 602, 623 (1962).

36. See Do hospital mergers reduce costs?, Matt Schmitt, Journal of Health Economics 52 (2017) 74-94.

37. Wiliam B. Vogt, Ph.D. and Robert Town, Ph.D., How has hospital consolidation affected the price and quality of hospital care?, The Synthesis Project, Robert Wood Johnson Foundation (February 2006) (available at https://www.rwjf.org/en/library/research/2006/02/how-has-hospital-consolidation-affected-the-price-and-quality-of.html).

38. Vogt and Town at 4.

39. Vogt and Town at 4.

40. Martin Gaynor, PhD1 and Robert Town, PhD, The Impact of Hospital Consolidation, The Synthesis Project, Robert Wood Johnson Foundation (available at https://www.rwjf.org/en/library/ research/2012/06/the-impact-of-hospital-consolidation.html)

41. Do hospital mergers reduce costs?, Matt Schmitt, Journal of Health Economics 52 (2017) 74-94.

42. Id.

43. Id. at 84 ("From an antitrust perspective, out-of-market acquisitions—for which cost savings appear to be more prominent—are likely not as relevant as in-market acquisitions.").

44. See Integrated Delivery Networks: In Search of Benefits and Market Effects, Jeff Goldsmith, Lawton R. Burns, Aditi Sen, Trevor Goldsmith (National Academy of Social Insurance, February 2015) (available at https://www.nasi.org/research/2015/integrated-delivery-networks-search-benefits-market-effects).

45. Id. at 5.

46. Id. at 7.

47. Id. at 7 (citing supporting literature).

48. See id. at 8 (citing supporting literature).

49. See id. at 8 (citing supporting literature).

50. See Integrated Delivery Networks: In Search of Benefits and Market Effects at 5.

51. See id. at 29 (emphasis added).

52. Id. at 29.

53. See id. at 1, 29.

54. Kaley Fendall & David Maas, Where Art Thou, Efficiencies? The Uncertain Role of Efficiencies in Merger Review, Competition, Winter 2017-2018, pp. 7-11.

55. Id. at 7-9.

56. Id. at 9-11.

57. Commentary on the Horizontal Merger Guidelines, U.S. Department of Justice and the Federal Trade Commission, March 2006.

58. Id. at 50.

59. Kendall & Maas, p. 9 ("As we are seeing drastic changes in the way healthcare is delivered—more integrated value-based care, the introduction of machine learning and artificial intelligence, the rapid development of new medical technology—it seems that we are in or entering another era when efficiency arguments for provider mergers should be given more credit.").

60. See, e.g., How Big Tech Is Going After Your Healthare, https://www.nytimes.com/2017/12/26/ technology/big-tech-health-care.html?_r=0.

61. St. Luke’s, 778 F.3d 775, 789 (2015).

62. Merger Guidelines, Section 10.

63. Id.

64. In St. Luke’s, for instance, the court did not credit claims that the merger would likely lead to an integrated health delivery system, noting that the parties merely desired to move in that direction. And in Anthem, the court found that the claimed $2.5 billion in cost savings was inflated and unsubstantiated.

65. See Feinstein (2015) for a discussion of how efficiencies are evaluated. (Feinstein, "FTC v. Sysco: Old-School Antitrust With Modern Economic Tools," remarks at GCR Live, New York, NY, September 18, 2015).

66. See Merger Guidelines, Section 10: "Projections of efficiencies may be viewed with skepticism, particularly when generated outside of the usual business planning process. By contrast, efficiency claims substantiated by analogous past experience are those most likely to be credited."

67. Perry & Cunningham, Effective Defenses of Hospital Mergers in Concentrated Markets, Antitrust, Vol. 27, No. 2, Spring 2013.

68. See Feinstein (2015) for a discussion of how efficiencies are evaluated. (Feinstein, "FTC v. Sysco: Old-School Antitrust With Modern Economic Tools," remarks at GCR Live, New York, NY, September 18, 2015).

69. David J. Balan, Merger-Specificity of Quality and Cost Efficiencies in Hospital Merger Cases, Competition Policy International Antitrust Chronicle, July, 2017.

70. See Suter et. al., Ten Key Principles for Successful Health Systems Integration, Healthcare Q. 2009 Oct. 13 (Spec No): 16-23, available at: https://www.ncbi.nlm.nih.gov/pmc/articles/PMC3004930/.

71. California Retail Liquor Dealers Ass’n v. Midcal Aluminum, Inc., 445 U.S. 97, 105 (1980) (summarizing standards for antitrust immunity under the "state action" doctrine).

72. Fla. Stat. § 381.0406-.0465 (rural hospitals only); Idaho Code § 39-4903; Kan. Stat. § 65-6801 to -6809; Me. Rev. Stat. tit. 22, § 1844; Miss. Code § 41-9-307; Mont. Code § 50-4-603; Neb. Rev. Stat. § 71-7701 to -7711; N.Y. Pub. Health Law § 2999-aa to -bb (proposed); Ohio Rev. Code § 3727.21 to .24; Tenn. Code § 68-11-1303; Tex. Health & Safety Code § 314.002; Va. Code § 15.2-5384.1; Wash. Rev. Code § 43.72.300 to 3.10; Wis. Stat. § 150.85; W. Va. Code § 16-29B1 to -29B26; Wyo. Stat. § 35-24-101 to -116 (all statutes current through date of publication).

73. https://www.nysenate.gov/legislation/bills/2011/S2809/amendment/D

74. See Brendan Pierson, FTC drops challenge to West Virginia hospital merger, Reuters (Jul. 7, 2016) available at https://Lnext.westlaw.com/Document/I54268cd0446f11e6b6f98b2c0bdde6ed/View/ FullText.html?transitionType=SearchItem&contextData=(sc.Category); Spencer Weber Waller, How Much of Health Care Antitrust Is Really Antitrust?, 48 Loy. U. Chi. L.J. 643, 660 (2017).

75. FTC Public Comment Re: Certificate of Public Advantage Applications Filed Pursuant to New York Public Health Law, 10 NYCRR Subpart 83-1, FTC, pg. 3, available at: https://www.ftc. gov/system/files/documents/advocacy_documents/ftc-staff-comment-center-health-care-policy-resource-development-office-primary-care-health-systems/150422newyorkhealth.pdf.

76. Id.

77. Id.

78. Id.

79. Gregory S. Vistnes, An Economic Analysis of the Certificate of Public Advantage (COPA) Agreement Between the State of North Carolina and Mission Health, pg. 11 (Feb. 10, 2011).

80. Roger McCredie, The Kingdom of Mission: Private practice vs. Asheville’s imperial healthcare system, The Tribune Papers (April 21, 2013) http://www.thetribunepapers.com/2013/04/21/the-kingdom-of-mission-private-practice-vs-ashevilles-imperial-healthcare-system/.

81. NC Dissolves anti-Monopoly Rules on Mission Health, Citizen Times Newspaper (September 29, 2015), available at: http://www.citizen-times.com/story/news/2015/09/29/nc-dissolves-anti-monopoly-rules-mission-health/73042066/.

82. Patients Caught in the Cross Hairs of Mission Heath, Blue Cross Battle, The Mountaineer (July 12, 2017), available at: http://www.themountaineer.com/news/patients-caught-in-the-cross-hairs-of-mission-health-blue/article_a23d4dcc-6643-11e7-8e2d-3f46aa69bfa4.html.

83. Jimmy Tobias, Costly Care, Missoula Independent (Mar. 26, 2014).

84. Id.

Forgot Password

Enter the email associated with you account. You will then receive a link in your inbox to reset your password.

Personal Information

Select Section(s)

CLA Membership is $99 and includes one section. Additional sections are $99 each.

Payment