United States: Healthcare

Introduction

Unlike in other industries rarely in antitrust cross-hairs, healthcare antitrust policy and enforcement continues to be shaped by key political and judicial events. In the past year alone, three courts of appeals and one district court issued key antitrust decisions regarding healthcare mergers. Perhaps more importantly but leading to more uncertainy, the legislative direction of healthcare policy in the United States remains an open question. On 4 May 2017, the United States House of Representatives passed legislation to repeal and replace the Affordable Care Act (ACA).1 The consequences of this repeal are significant in that the ACA placed an emphasis on assuring collaboration and cooperation among providers that some viewed in contrast with antitrust policy's general disinclination for massively scaled enterprises. Action in the Senate, however, has stalled, so whether the ACA will persist is unknown. The result of a repeal of or a replacement to the ACA could have a significant impact upon antitrust enforcement by the Federal Trade Commission (FTC) and Department of Justice (DOJ) and adjudication in the federal courts. Only time will tell. Nevertheless, despite this uncertain backdrop, there remain key lessons from recent judicial activity of which all parties contemplating transactions in the healthcare space must be mindful.

FTC and DOJ activity in healthcare transactions

No one can disagree that the FTC and DOJ are committed to supporting ‘vigorous competition' in healthcare. As they themselves put it:

Price competition generally results in lower prices and, thus, broader access to health care products and services. Non-price competition can promote higher quality and encourage innovation. More concretely, competition can result in new and improved drugs, cheaper generic alternatives to branded drugs, treatments with less pain and fewer side effects, and treatments offered in a manner and location consumers desire […]. Vigorous competition promotes the delivery of high quality, cost-effective health care, and vigorous antitrust enforcement helps protect competition.2

One should certainly expect the FTC and DOJ to stand their ground and proactively promote and enforce antitrust policies designed to foster such ‘vigorous competition.' The recent enforcement activity of both these agencies makes this clear.

FTC

The FTC's activity in two recent cases is illustrative of the kinds of challenges they intend to undertake.

Pennsylvania

On 27 September 2016, the United States Court of Appeals for the Third Circuit issued a ruling in Federal Trade Commission v Penn State Hershey Medical Center3 that reversed the district court's decision to deny the FTC a preliminary injunction.4 Finding error with the district court's formulation and application of the hypothetical monopolist test in determining the relevant geographical market, the Third Circuit enjoined the proposed merger between Penn State Hershey Medical Center and PinnacleHealth System.5

The district court evaluated the relevant geographic market by using a method similar to the Elzinga-Hogarty test, which considers ‘the number of customers who come from outside the proposed market to purchase goods and services from inside of it' and ‘the number of customers who reside inside the market but leave that market to purchase goods and services.'6 This test, however, according to one of its creators, Professor Elzinga, is ‘not an appropriate method to define geographic markets in the hospital sector.'7 The district court originally concluded that the government failed to properly define the relevant geographic market because 43.5 per cent of Hershey Medical Center's patients travel from outside the Harrisburg area - the market in question.8 But the Third Circuit dismissed this reasoning as an example of the silent majority fallacy, which is ‘the false assumption that patients who travel to a distant hospital to obtain care significantly constrain the prices that the closer hospital charges to patients who will not travel to other hospitals.'9 This is because non-price factors such as location and quality of service determine patient decisions and patients who travelled to Hershey Medical Center for the highly complex services they provide would not go to other hospitals in the region instead.10 Further, the Third Circuit criticised the district court for excluding patient outflows from their consideration, which demonstrated that the type of services in question, general acute care (GAC) services, were inherently local.11 Specifically, 91 per cent of Harrisburg residents who receive GAC services receive them in the Harrisburg area.12

In addition to ignoring patient outflows, the district court did not consider the role of insurers in the healthcare market, thereby failing to take the commercial realities of the healthcare market into account, as required by the Supreme Court in Brown Shoe.13 The Third Circuit found that payers were unable to offer a plan in Harrisburg that included neither Hersey Medical Center nor PinnacleHealth System, and to exclude this information from their evaluation of the relevant geographic market under the hypothetical monopoly test was error.14 Finally, the Third Circuit ascribed error to the district court's endorsement of the hospitals' private pricing agreements which contractually froze the existing rate structure for five years with one payer and 10 years with another.15 In addition to precedent that held private contracts are not considered in determining the relevant product market,16 the district court's refusal to evaluate the potential for increased rates after the private pricing agreement expired in five years was an error.17

After articulating the district court's errors, the Third Circuit considered for itself the government's definition of the relevant geographic market. Extensive testimony from two large payers in the Central Pennsylvania area lead the court to conclude that insurers ‘could not successfully market a network to employers without including at least one of the Hospitals,'18 ‘insurers used the separate existence of Pinnacle and Hershey at the bargaining table,'19 ‘patients were willing to pay more to other insurers for health plans that included Hershey or Pinnacle,'20 and payers ‘consider the Harrisburg area a distinct market and do not consider hospitals in other areas, such as York or Lancaster counties, to be suitable alternatives.'21

The proposed merger, which would increase HHI by 2,582 to 5,984 and create a 76 per cent combined share of the Harrisburg market for the hospitals,22 carried a strong presumption of anticompetitive effect which the hospitals were unable to rebut.23 The hospitals proffered efficiencies regarding alleviated capacity constraints and capital savings, but failed to persuade the court because such efficiencies would not be passed on to consumers and would result from an anticompetitive decrease in output.24

Finally, the court found the public interest in effective enforcement of the antitrust laws to outweigh any private or public equities advanced by the hospitals, as any potential benefits from the merger would still materialise if the merger was approved as a result of the FTC's administration proceeding.25

Illinois

A few months after the Third Circuit reversed in Hershey, the Seventh Circuit reversed in FTC v Advocate Health Care Network.26 In a case with facts very analogous to Hershey, the Seventh Circuit employed similar reasoning to reverse and remand the district court's refusal to preliminarily enjoin the proposed merger of NorthShore University HealthSystem and Advocate Health Care Network in the Chicago north suburbs and Chicago area.27

Once again, the relevant geographic market was a central issue. The court offered several distinct aspects of markets for hospital services: patients usually prefer to receive services at nearby hospitals, which limits most geographic markets to only a few hospitals;28 patients' preferences vary but typically include a mix of doctor quality, hospital reputation and location;29 and insurance companies pay most hospital costs, making the geographic market question more about insurers' likely response than patients'.30

Embracing a rationale similar to the Hershey court, the Seventh Circuit held that the district court misunderstood and misapplied the hypothetical monopolist test, specifically because it incorrectly rejected the defendant's expert testimony, improperly ignored evidence about patient preferences, and fell victim to the silent majority fallacy.31 The Seventh Circuit criticised the district court's use of the Elzinga-Hogarty test and emphasised the local nature of patients' hospital preferences, explaining that:

[…] 73 percent of patients living in plaintiffs' [FTC's] proposed market receive hospital care there. Eighty percent of those patients drive less than 20 minutes or 15 miles to their chosen hospital. Ninety-five percent of those patients drive 30 miles or less - the north-to-south length of plaintiffs' proposed market - to reach a hospital.32

Lastly, the Seventh Circuit found that, as in Hershey, ‘an insurer's network must include either Advocate or NorthShore to offer a product marketable to employers.'33 Recognising that insurers would be unable to convince customers to forgo treatment from multiple nearby hospitals in exchange for reduced premiums, the court found that the proposed merger could lead to market power in the relevant geographic market and remanded the matter to the district court for a reconsideration of the motion.34

In both Hershey and Advocate, familiar antitrust considerations drove the courts' decisions to reverse. First, correctly defining the relevant geographic market is a crucial aspect of any antitrust litigation that the government and industry members alike both devote significant time and effort towards articulating. Second, both courts highlighted the inability of insurers' networks to market to employers without at least one of the merging parties in each case. In Hershey and Advocate, each factor cut against the defendants and sealed the FTC's victory in enjoining the mergers.

Antitrust Division of the DOJ

On 24 May 2010, Christine Varney, then Assistant Attorney General in the Antitrust Division of the US DOJ, discussed the healthcare insurance industry, stating:

Vigorous but responsible antitrust enforcement has long been, and will continue to be, crucial to the health care industry. This includes health insurance plans, providers, and others in the industry. The goals of health care reform cannot be achieved if mergers between significant insurers in a particular market substantially reduce competition; nor can those goals be realized if dominant insurers use exclusionary practices to blockade entry or expansion by alternative insurers […]. The Division is committed to vigorously, but responsibly, scrutinizing mergers in the health care industry that appear to present a competitive concern. If we determine that our initial concerns were well founded, we will not hesitate to block the merger or to require the settlement concessions necessary to protect consumers.35

Echoing the FTC and DOJ's joint focus on ‘vigorous antitrust enforcement,' the Antitrust Division reinforced its commitment to competition. Recent federal court decisions favourable to the DOJ illustrate this commitment.

Anthem/Cigna

On 28 April 2017, in United States v Anthem,36 the DC Circuit Court of Appeals considered whether the district court's enjoinment of the merger of Anthem, Inc and Cigna, Inc, the second and third-largest sellers of medical health insurance to large companies in the US, should endure.37 The DOJ characterised the merger, which would combine Cigna, Inc into Anthem, Inc in the 14 states in which Anthem is licensed to operate under the Blue Cross Blue Shield brand, as ‘the largest proposed merger in the history of the health insurance industry, between two of the four national carriers.'38

The issue on appeal was whether the district court committed clear error by failing to properly evaluate Anthem and Cigna's (hereinafter, Anthem) proffered merger efficiencies and benefits to consumers.39 Ultimately, the DC Circuit, in a divided opinion, affirmed the district court's permanent injunction because Anthem failed to overcome the strong presumption of anticompetitive effects in the national accounts market.40

HHI calculations revealed that the proposed merger would increase the market's concentration by a minimum of 537 to 3,000, which exceeded the Horizontal Merger Guidelines' presumptively anticompetitive threshold increase of 200 to 2,500.41 In the face of this anticompetitive presumption, Anthem put forth a cognisable efficiencies defence centred on US$2.4 billion in medical cost savings through rebranding Cigna customers to give them access to Anthem's lower rates, utilising an affiliate clause to offer lower Anthem rates to Cigna customers, and leveraging the merged company's increased bargaining power to obtain lower provider rates.42 The DC Circuit was unpersuaded by Anthem's efficiencies and rejected them as not merger-specific, insufficiently verifiable and non-cognisable under section 7 of the Clayton Act.43 Specifically, the court found that any rebranding efficiencies were available to Cigna customers who chose to switch to Anthem without the merger, the medical savings in question would not materialise until after a significant period of time, and even Cigna itself doubted the likelihood and projections of future cost savings.44

In addition, both the district court and the DC Circuit expressed reservations about Anthem's contention that the high-quality Cigna services would remain intact after the downward pressure on provider prices from the merger;45 as the Horizontal Merger Guidelines provide, if a merger ‘would withdraw a product that a significant number of customers strongly prefer [here, Cigna's high-quality care] to those products that would remain available, this can constitute a harm to customers over and above any effects on the price or quality of any given product.'46 Lastly, even if Anthem's projected cost savings came to fruition without a decrease in quality, the DC Circuit highlighted the district court's analysis of ‘internal Anthem documents that discussed ways to keep those savings for itself,' which indicated the proffered efficiencies would not accrue to consumers to rebut the anticompetitive presumption of the proposed merger.47

Aetna/Humana

The United States District Court for the District of Columbia considered another merger between Aetna, Inc and Humana, Inc - two of the largest health insurance companies in the country - and on 23 January 2017, Judge John D Bates enjoined the proposed merger.48

Seniors (individuals aged 65 or over) are eligible for Medicare, which includes Part A for inpatient hospital services and Part B for doctors' services and outpatient care.49 ‘Original Medicare,' despite its widespread provider enrolment and availability of care, includes deductibles and does not cover outpatient prescription drug costs, leading many seniors to purchase a Medicare Supplement plan from a private insurer.50 Alternatively, seniors can enrol in a Medicare Advantage plan with a private insurer which, like Original Medicare, covers Medicare Parts and B, but also caps out-of-pocket spending at US$6,700 per year.51 Aetna and Humana are both industry leaders in Medicare Advantage plans and their merger would significantly increase market concentration in that area. Therefore, in contrast to the FTC actions discussed above, the parties agreed on the relevant geographic market - here the 364 complaint counties involved in the action against the defendants, but disputed the relevant product market, with the government restricting it to individual Medicare Advantage plans and the defendants including Original Medicare options as well.52

The central question in this case was ‘whether a hypothetical monopolist of all the Medicare Advantage plans in a particular county could profitably impose a small but significant non-transitory increase in price on those plans - or whether substitution by seniors to Original Medicare options would make any attempted price increase unprofitable.'53 After analysing the Original Medicare and Medicare Advantage markets, the court noted that there is a distinct market for Medicare Advantage and, ‘[c]ompetition within that market, between Medicare Advantage plans, is far more intense than competition with the products outside of it, like MedSupp plans.'54 Evidence that Aetna and Humana viewed their competitors as other Medicare Advantage providers, not Original Medicare providers, and that most seniors who leave one of Aetna or Humana's Medicare Advantage plans obtain a different Medicare Advantage Plan, not an Original Medicare plan, bolstered the court's determination.55

Like in Anthem, the HHI for the proposed merger led to a strong anticompetitive presumption, with increases of over 1,000 points to 5,000 or more in the majority of the complaint counties and merger to monopoly in roughly one of every five counties.56 Additionally, merger simulations by the government's econometric expert predicted roughly ‘$500 million per year in combined anticompetitive harm to seniors and taxpayers.'57

The defendants contended that government regulation of Medicare Advantage, entry by new competitors, and defendants' proposed divestiture of part of their Medicare Advantage business to Molina Healthcare, ‘would combine to render any competitive harm unlikely.'58 But the court rejected each defence as insufficient to rebut the merger's anticompetitive presumption.59

The court also evaluated Aetna's decision to withdraw from the ACA exchanges in 2017 and whether it would create anticompetitive effects, concluding that ‘Aetna withdrew from the 17 complaint counties for 2017 at least in part for the purpose of improving its litigation position,'60 the proposed merger would have anticompetitive effects on exchange plans in Florida complaint counties,61 and Aetna's estimated US$2.8 billion in annual efficiencies would be largely retained by the company, not consumers, and therefore fall well short of the ‘extraordinary efficiencies' necessary to rebut the anticompetitive presumption.62

After Judge Bates blocked the merger, Aetna and Humana declined to appeal the decision and accepted the ruling, with Humana receiving a US$1 billion breakup fee from Aetna.63

Conclusion

The antitrust world is constantly evolving, especially as it relates to the healthcare industry. However, amid the back and forth of the prominent cases in the past few years and the debate regarding the ACA's impact upon antitrust, the FTC and DOJ's proactive approach to enforcement remained constant. Whether the ACA survives the ongoing repeal attempt or not, members of the healthcare industry looking to consolidate should expect razor-like focus from the United States' federal enforcement agencies.

*     

The author would like to thank Ethan Green for his assistance with this article.

Notes

  1. See Thomas Kaplan and Robert Pear, ‘House Passes Measure to Repeal and Replace the Affordable Care Act', The New York Times (4 May 2017), www.nytimes.com/2017/05/04/us/politics/health-care-bill-vote.html?_r=0.
  2. See Joint Report by Department of Justice and Federal Trade Commission, Improving Health Care: A Dose of Competition, Executive Summary at 4 (July 2004).
  3. See FTC v Penn State Hershey Med. Ctr., 838 F.3d 327 (3d Cir. 2016).
  4. See id. at 334.
  5. See id. at 339.
  6. See id. at 339-40.
  7. See id. at 340.
  8. See id.
  9. See id. at 341 (quoting Evanston Northwestern, 2007 FTC LEXIS 210, 2007 WL 2286195, at *64) (citing testimony of Professor Elzinga).
  10. See id. at 341.
  11. See id.
  12. See id.
  13. See, United States v. Brown Shoe, Inc., 370 U.S. 294, 336 (1962).
  14. See Hershey, 838 F.3d at 343.
  15. See id.
  16. See Queen City Pizza, Inc. v Domino's Pizza, Inc., 124 F.3d 430, 438-39 (3d Cir. 1997).
  17. See Hershey, 838 F.3d at 344-45. ‘The realities of the healthcare market - in which payors negotiate prices for GAC services and will therefore feel the impact of any price increase - dictate that we consider the payors in our analysis.' (internal citations omitted).
  18. See id. at 345.
  19.  See id.
  20. See id. at 346.
  21. See id.
  22. See id. at 347.
  23. See id. at 352.
  24. See id. at 350-51.
  25. See id. at 353.
  26. FTC v Advocate Health Care Network, 841 F.3d 460 (7th Cir. 2016).
  27. See id. at 465.
  28. See id. at 470.
  29. See id.
  30. See id. at 470-71.
  31. See id. at 473.
  32. See id. at 474.
  33. See id.
  34. See id. at 476.
  35. See Christine A Varney, Antitrust and Healthcare, Antitrust Division of the US Department of Justice, (24 May 2010), www.justice.gov/atr/speech/antitrust-and-healthcare.
  36. United States v Anthem, Inc., 855 F.3d 345 (D.C. Cir. 2017).
  37. See id. at 348, 350.
  38. See id. at 348 (citing Appellees Br. at 1).
  39. See id. at 348-49.
  40. See id. at 349.
  41. See id. at 351.
  42. See id. at 352.
  43. See id.
  44. See id. at 352, 360.
  45. See id. at 360-61.
  46. See id. at 367 (citing Horizontal Merger Guidelines § 6.4).
  47. See id. at 362.
  48. See United States v Aetna, Inc., 2017 U.S. Dist. LEXIS 8490, at *259 (D. D.C. 2017).
  49. See id. at *16.
  50. See id. at *17-18.
  51. See id. at *18-19.
  52. See id. at *38.
  53. See id. at *41.
  54. See id. at *49.
  55. See id. at *52, 59-61. ‘More than 85% of seniors who left one Medicare Advantage Plan switched to another instead of to an Original Medicare option […]. The switching data makes clear that there is a group of seniors with a distinct preference for Medicare Advantage relative to Original Medicare.'
  56. See id. at *101-102.
  57. See id. at *111-112.
  58. See id. at *9.
  59. See id. at *128, 148, 189-90.
  60. See id. at *206.
  61. See id. at *241-42.
  62. See id. at *244-45.
  63. See Anna Wilde Matthews, ‘Aetna, Humana Abandon Merger, Putting Paths to Growth in Doubt', The Wall Street Journal, (14 February 2017), www.wsj.com/articles/aetna-humana-mutually-end-merger-agreement-1487074314.

 

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