We’re starting the end game for healthcare integration. Over the past decade, we have witnessed an explosion in healthcare M&A activity. At this point, most of the smaller, attractive vendor organizations have been acquired by larger players. The current landscape is dominated by larger healthcare-providing entities that are partnering with other large players as they pursue acquisitions.Last year, we saw over $1 billion in deals last six years.
The rest of the players are now looking for partners that can complement their operations, and that won’t provoke resistance from the Department of Justice (DOJ) and the Federal Trade Commission (FTC) — federal agencies with jurisdiction over antitrust matters.
One of the largest mergers before us is Advocate Aurora Health (Aurora) and Atrium Health (Atrium), which plan to merge into one Nonprofit organization with 67 hospitals in six states The system has an estimated revenue of more than $27 billion and employs nearly 150,000 people.
Both Aurora and Atrium appear to have learned from hard experience what antitrust regulators don’t know. This merger, so-called “cross-market,” seems to them to be a safe move. Cross-market consolidation stitches together areas that are often adjacent and non-competing under one management organization.
This continued consolidation leads us to the scenario I predicted more than a decade ago. That is, an oligopoly of Healthcare Provider Organizations (HCPs) that, by their size and geographic reach, controls most of the country’s healthcare services. This is the end game for healthcare integration unless the FTC changes the way it views such mergers.
The lens through which regulators assess potential mergers has focused primarily on the potential for monopoly. That’s why the FTC is most likely to challenge a merger in which both parties control the same market share. The result of this merger is that the combined entity has a majority share in a market with limited competition—an invitation to raise prices for consumers with limited choice. By the same token, mergers in which the merging parties operate in geographically separate, non-overlapping markets are often under the FTC’s radar.
The FTC has never taken legal action to prevent a merger between hospital systems operating in different markets, a so-called cross-market merger. This simple fact explains why Aurora and Atrium have moved forward with such massive deals.
The DOJ Merger Guidelines acknowledge the fact that a merger of buyers—such as among scrap metal buyers—can have an adverse effect comparable to the increase in market power of sellers, known as a monopoly.Yet these agencies seem to ignore the fact that healthcare systems are all sellers and buyers. It is possible to avoid a seller’s monopoly, but it ends up as a buyer’s monopoly.
An integrated healthcare system—even a cross-market system—doesn’t have to raise prices to have anticompetitive effects. They can leverage their scale to leverage purchase volumes to capture discounts and other benefits from payers, national suppliers and labor pools.
National payers who cross state lines and deal with these combined supersystems will face the opportunity to offer discounts and other contractual benefits that would otherwise be passed on to consumers as savings. Instead, these incremental revenues are passed on to the system as bottom-line profits.
Both Aurora and Atrium have faced separate class-action lawsuits in the past, accused of suppressing competition by anticompetitive behaviorThey are accused of forcing commercial employers’ plans to include all or no coverage of their respective facilities and networks; preventing insurers and employers from directing patients to lower-cost/higher-quality options; and suppressing innovative insurance products that could reduce employers’ costs. These practices can happen without significantly raising prices for consumers, but they end up paying more than they should.
Another clue that these deals require different levels of scrutiny comes directly from the rhetoric the companies use to describe the benefits the new combined entity will bring. Their public statements are instructive. The company press release details the number of patients they will serve, how many sites they will operate, job growth, and how much the merger will bring economic benefits to affected communities — but barely mentions the important thing: reducing the cost of care Either improve the quality of care, provide more value to consumers, or create a better patient experience. These issues are not addressed, which says a lot.
The Advocate-Aurora deal marks a decision point for the FTC. These groups successfully exploited a loophole in the FTC’s operational definition of anticompetitive effects, which focused too narrowly on the prices set by sellers. As buyers of the healthcare system, even in cross-market transactions, the monopoly power they are concerned with can benefit from price concessions. Both merging organizations have used this strategy on a smaller scale to achieve their respective values.
So, the question becomes: Is the FTC drawing the line here, or is it opening the door to eventual action for healthcare integration, creating a nationwide provider oligopoly that might even challenge the power of CMS? When do we say enough is enough? If not here, then where?
The FTC needs to take a different perspective and develop ways to stop these mergers. If not, then there is no reason to oppose any cross-market merger. It’s only a matter of time before existing healthcare systems figure out how to make a bigger and bigger puzzle without overlapping or competing markets. On this trajectory, the number of major systems will be reduced to a handful, leaving employers, patients, and consumers with an almost monolithic healthcare system too big to fail and too big to care for.
If the goal is to protect consumers, the FTC needs to revisit its regulatory framework for evaluating health care mergers, because the current approach has failed consumers.
Photo: appleuzr, Getty Images
