Healthcare industry fosters consolidation concerns

When health law professor Tim Greaney was called to testify at a US House of Representatives hearing on the Affordable Care Act’s (ACA) effect on competition in the healthcare market, he wore a pink tie covered in tiny sumo wrestlers.

This was not merely an outré fashion choice for Capitol Hill, where neckwear typically comes only in solids and stripes. The former assistant chief in the US Department of Justice’s Antitrust Division was making a point about what he calls “the sumo wrestler theory”.

It’s a standard defence of healthcare mergers, Greaney told members of the House antitrust subcommittee on 10 September. Proponents of a deal claim the tie-up will increase insurers’ bargaining power to counter the market power of consolidating hospitals and physician practices, or vice versa.

“The concept – and it’s a fallacious one in my view – is that somehow we’re better off when we pit dominant insurers against dominant hospitals. That’s unsupported by the economic evidence, both in theory and in practice,” Greaney said. “Insurers and hospitals find a way to conspire or simply split the spoils of their market power. Sometimes we find out the sumo wrestlers would rather shake hands than compete.”

Consolidation among healthcare providers and insurers appears to be politically unpopular. Over the course of three Congressional hearings in September, Republican politicians blamed Obamacare for the tie-ups, while Democrats insisted that the healthcare reforms promote competition. (Cory Capps, a staff economist at the division before joining Bates White, says there had been periods of intense consolidation before the ACA and, so far, there is “no proof of causality”.) At one point, the Republican chairman of the House antitrust subcommittee squabbled for several minutes with the highest-ranking Democrat about giving a conservative witness time to answer questions.

But neither side of the aisle advocated for more mergers.

The payers

Among a wave of multibillion-dollar mergers across the US economy, in sectors ranging from travel and beer to telecommunications, perhaps none will have a more significant effect on Americans’ lives and budgets than two health insurance deals proposed this year. Aetna has agreed to buy Humana for $37 billion, while Anthem will acquire Cigna for $48 billion – if the Antitrust Division clears the transactions. At the time of writing, both mergers had received second requests for more information.

Nationally, Anthem and Cigna together cover 53 million beneficiaries: Aetna and Humana service 33.5 million US patients and the heretofore largest health insurer, UnitedHealth, has 41.6 million members. In a country of 319 million people – many of whom do not have commercial insurance because they receive government-administered Medicare or Medicaid, or remain uninsured – allowing the proposed mergers would put more than 40% of all Americans in the hands of just three insurance companies. Democratic Senator Richard Blumenthal has repeatedly called on the DOJ to analyse the mergers on a national basis.

Yet every antitrust discussion of the healthcare provision and insurance sectors begins with the claim that healthcare markets are essentially local. The new entry of a hospital in New York does little to increase competition in Washington or Chicago. Health plans negotiate with providers in each geographic market and are regulated on a state-by-state basis. When questioned by Senator Blumenthal, Aetna’s chief executive insisted: “All healthcare is local, just like politics.” This perspective helps the Aetna/Humana and Anthem/Cigna mergers pass a traditional antitrust analysis centred on market share, because the companies claim to have little overlap with their deal partners in each specific product and geographic market.

David Gringer, formerly a division trial attorney before becoming counsel at Wilmer Cutler Pickering Hale and Dorr, says health insurance mergers impose a particularly heavy workload on the DOJ. Local geographic markets require the agency to look at every metropolitan area affected, while the product markets are composed of multiple customer tiers.

Some customers are large employers, with staff devoted full-time to negotiating the best contract possible with insurers; some are smaller employers who buy insurance through a broker; some are individuals also buying through brokers. Now the ACA has added online marketplaces where both small businesses and individuals can shop directly for health insurance plans – roughly broken down as platinum, gold, silver and bronze – based on how much one pays in upfront premiums versus deductible, and the quality of the network and coverage.

At the 22 September Senate antitrust subcommittee hearing on the Aetna/Humana and Anthem/Cigna mergers, Senator Blumenthal quoted a 2010 speech by then assistant attorney general Christine Varney about “strong barriers to entry and expansion in health insurance markets”. She said entry concerns were “particularly significant in light of the enactment of the ACA”, and its creation of the health insurance marketplaces that depend on competitive market incentives. “It is, therefore, imperative that the division prevents mergers or acquisitions that will create, or even increase the size of, dominant health insurance plans, particularly in the small-group and individual markets,” Varney said. She warned that the DOJ generally would view a defence of an insurer merger based on likely entry sceptically, and would “almost never” accept it as justifying an otherwise anticompetitive merger.

The division has been willing to resolve its competition concerns with divestitures in certain cases, such as Aetna’s acquisition of Prudential’s healthcare business in 1999. The DOJ sued to stop the deal, alleging that it would make Aetna the dominant provider of health maintenance organisation service plans in Texas’s two biggest cities and would enable it not only to increase prices for such plans, but also depress physicians’ reimbursement – a monopoly and monopsony theory of the case. Aetna agreed to sell the NYLCare business it had acquired the year before in exchange for the DOJ’s approval of the Prudential deal.

Divestiture buyers must meet strict standards, however. Gringer says the DOJ believes that, for a health insurance plan to be competitive in a local market, the insurer needs access to an affordable provider network that is attractive to employers and employees in that area. To determine whether that access exists, the agency must review contracts that may vary based on the specific health insurance product at issue.

Nor have divestitures always fulfilled hopes of preserving competition. Senator Blumenthal said he was “deeply troubled by the evidence that shows that neither providers nor consumers benefit from these consolidations; in other words, that the Prudential/Aetna experience shows that premiums are not lowered, that consumers do not benefit and that the savings are not passed along
to consumers.”

Academic studies of several mergers have found that while a larger insurer can often negotiate lower prices from hospitals and physicians, thereby cutting its own costs, the lesser degree of competition caused by the merger means premiums paid by consumers do not go down.

Leemore Dafny, who took a one-year leave of absence from Northwestern University for a specially created position as deputy director for healthcare and antitrust in the FTC’s bureau of economics, has written prolifically in this area. She recently published a paper, entitled “More Insurers Lower Premiums”, about initial pricing in the health insurance online marketplaces, which estimated that if all insurers active in a state had participated in all parts of that state’s online marketplace, premiums would have been 11% lower.

Another new paper, by economists Kate Ho and Robin Lee of Columbia University and Harvard University respectively, hypothesised the effect of removing one insurance option from the California state employee benefits plan. They concluded that unless insurers were constrained in their ability to set premiums by regulation or tough negotiation by the employer, the benefit to customers of the possibly cheaper providers’ services was overwhelmed by the premium increase resulting from less competition among insurers.

Aviv Nevo, who served as the division’s deputy assistant attorney general for economic analysis during his leave from Northwestern University, says studies of prior mergers’ effects “at least set the atmospherics of what happened in the past, and that may be our best guide for what may happen in the future.” A would-be merging company either has to say the study was flawed – a tough argument if it has been peer reviewed – or give reasons why its conclusions were true for the past, but are not relevant for the current deal.

The providers

The FTC reviews provider-side deals, which keep the agency’s healthcare shop hopping. On 15 October alone, the agency announced that staff had submitted comments to Tennessee and Virginia about proposed rules for hospital cooperation, and also that the commission had settled charges against two Pennsylvania orthopaedic physician practices for an allegedly anticompetitive merger.

The letters offered the staff’s help in competition analysis to the state departments of health in reviewing any cooperation agreement applications, and repeated the FTC’s mantra that antitrust immunity does not encourage pro-­competitive collaborations.

The settlement resolved the FTC’s claims that the combination of six independent practices into Keystone Orthopaedic Specialists in 2011 had substantially reduced competition. According to the agency’s complaint, Keystone marshalled the market power granted by 76% of all orthopaedists in a county to raise the prices it charged to healthcare payers, without any offsetting merger-specific efficiencies. As in many provider deals, there was no pre-merger notification to the FTC because the value of the deal did not breach pre-merger filing thresholds.

Technically, the commission intervened after the parties had ended the merger anyway: Orthopaedic Associates and its six orthopaedists split away last year to become a major rival, the FTC said. But the agency nonetheless reached a settlement with Keystone and Orthopaedic Associates that necessitates FTC approval for them to remerge, acquire another practice or hire a solo practitioner who had been competing in the county. To ensure they did not benefit from the tie-up’s negotiating power, the providers were also required to allow payers to terminate existing contracts without penalty.

Government reimbursement through Medicaid, which covers low-income families, and Medicare, which covers the elderly and people with disabilities, further complicates the dynamics of provider consolidation. In addition to a cultural shift away from physicians being solo practitioners running small businesses, the government programmes’ higher payment for care given by a hospital or its affiliated doctor, relative to the payment to an unaffiliated physician who provides the same service, has influenced some physicians to merge with healthcare systems.

After a string of losses in its challenges to provider tie-ups in the mid and late 1990s, the FTC engaged in an in-depth retrospective study of these deals. The backwards look produced scholarship indicating that these consummated mergers resulted in higher prices without higher quality, and that courts were accepting what the agency’s economists deemed to be faulty analysis of geographic markets and competitive effects. Armed with this information, the FTC began winning its fights against hospital and doctor mergers, although as in the Pennsylvania orthopaedists case, the consolidation had often not been notified to the antitrust agencies, and the commission sometimes could not unscramble the eggs of a consummated merger even if it won a legal victory.

FTC chairwoman Edith Ramirez recently touted the role that the agency’s administrative process played in its hospital merger enforcement efforts, as she has defended its in-house tribunal from proposed legislation that would remove its authority to hear merger challenges. The American Hospital Association, on the other hand, submitted a statement to the Senate supporting the bill.

The wrestling match

The hospital trade group, along with the American Psychiatric Association, American Medical Association and American Academy of Family Physicians, among others, has sent letters to division chief Bill Baer urging him to block the Anthem/Cigna and Aetna/Humana deals.

The insurers have pushed back. As Greaney predicted with his sumo wrestler theory, a fellow witness at the House hearing, Dan Durham from the industry lobbyist America’s Health Insurance Plans (AHIP), did indeed note studies that conclude rising costs are partly driven by providers’ consolidation.

Beth Leonard, AHIP’s executive vice president of public affairs, argues that insurers’ efforts to obtain “better value for patients is being undercut by years of anticompetitive hospital consolidation that have forced patients to pay higher healthcare costs, increased premiums and limited their healthcare choices.” More than 300 providers have merged since 2010.

Of course, both sides claim to be looking out for patients and consumers. Providers say the cost of their services is directly related to the quality and accessibility of patients’ healthcare. Insurers say they try to keep coverage affordable for consumers.

“We’ve got potentially a real problem with healthcare providers and with health insurers,” says Marty Gaynor, a Carnegie Mellon University professor who served as director of the FTC’s bureau of economics. While the ACA does not promote consolidation, he says, it has created newfound uncertainty in the healthcare industry, and some companies believe they will be safer from the winds of change if they are bigger.

Gaynor says he understands that impulse “but sometimes it’s a pure attempt to enhance negotiating power. I think that’s a lot of the motivation going on here.” Even if a market is not a level playing field between a single dominant healthcare system and several small insurers, Gaynor says the problem of too much power on one side is not fixed by breaking the competition on the other side. Like Greaney, he sees the powerful providers and powerful payers dividing the spoils among themselves.

“There’s cause for concern that we’ll have so much combination in healthcare, we’ll be left with an unwieldy, unresponsive system that is maybe good for those companies, but not good for consumers and the country,” Gaynor says. “Once these things happen, it’s very difficult to undo. Once you’ve had a merger happen, it’s very rare that a remedy involves a breakup. Once competition is gone, it’s gone and it ain’t coming back.”

Originally published 09 November 2017

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