Part II: Provider Collaborations, Market Power, Efficiency Claims, and Failing Firm Defenses

On June 19, 2014, Deborah Feinstein, the current Director of the Federal Trade Commission’s Bureau of Competition, addressed the Fifth National Accountable Care Organization Summit in Washington, D.C. Her speech, entitled “Antitrust Enforcement in Health Care: Proscription, Not Prescription, advised that “there is no tension between rigorous antitrust enforcement and bona fide efforts to coordinate care, so long as those efforts do not result in the accumulation of market power.” 

Ms. Feinstein’s central message is that there are good collaborations and bad collaborations. Good collaborations benefit consumers by increasing quality and lowering prices. ACO’s, discussed in Part I, are examples of good collaborations. Bad collaborations reduce competition and produce higher prices with no offsetting consumer benefit. The ProMedica merger that was successfully challenged by the FTC is an example of a bad collaboration. ProMedica Health System v. FTC, 749 F.3d 559 (6th Cir. 2014). Ms. Feinstein in her speech provided useful “guidance” regarding why the FTC decides to challenge certain provider collaborations and how it evaluates the two most common defenses offered to justify such collaborations: increased efficiency and economic necessity. 

Provider Collaborations and Market Power 

The term “market power” in antitrust analysis means the ability to raise prices and/or exclude competition in a defined area for a particular product or service. A recent study cited by Ms. Feinstein in her speech shows that healthcare prices increase as hospital markets become more concentrated. (Martin Gaynor, Competition Policy in Health Care Markets: Navigating the Enforcement and Policy Maze, 33 Health Aff. 1088 (June 2014). The study supports the FTC’s central premise that competition in health care markets is critically important for controlling prices, promoting innovation, and increasing quality. A key factor for determining whether a proposed collaboration will be challenged by the FTC, therefore, is the degree to which the transaction will reduce competition and cause market concentration. The FTC’s history of challenging such transactions indicates that the degree of concentration must be significant. 

According to Ms. Feinstein, from 2002 through 2012 the FTC challenged less than 1% of all proposed hospital transactions. Not surprisingly, the FTC’s most recent successful legal actions challenged mergers in markets with a small number of providers that directly competed to provide services. Those providers included hospitals (ProMedica) as well as physician practices (St. Luke’s Health System/Saltzer Medical Group). The effect of those collaborations, confirmed in at least one instance by the parties’ own e-mail messages, would have been a significant increase in prices without any increase in the quality or number of offered services. Where providers are not engaged in head-to-head competition, or where reasonable alternatives to the merging providers continue to be available, FTC challenges to collaborative arrangements are rare. 

Increased Efficiency Claims 

Proponents of provider collaborations often assert that the proposed combination is justified because it will increase efficiencies, consolidate operations, avoid duplication, and lower costs. While these are all desirable objectives, such assertions must satisfy three criteria set forth in the FTC’s Horizontal Merger Guidelines in order to be effective:

  1. The claimed efficiencies could not be accomplished without the proposed merger; 
  2. The claimed efficiencies are definite rather than speculative; and 
  3. The claimed efficiencies do not involve significant reductions in service. 

In evaluating assertions of increased efficiency, the FTC will consider the comparative quality of the merging hospitals, the results of any prior merger activity by the acquiring hospital, and any explanations provided by the parties of how the proposed consolidation will improve patient care. While acknowledging the difficulty of balancing the benefits of prospective quality improvements against possible price increases, Ms. Feinstein stated that the FTC to date has never had to make that judgment. That is because the claimed quality improvements in each case were more speculative than the prospect of future price increases. 

The Failing Firm Defense 

A final justification for a proposed merger is that the acquired hospital needs financial support that will be provided by the acquiring hospital. The acquiring hospital in the ProMedica case, for example, presented a “flailing firm” defense. The target hospital’s financial condition did not indicate that it was in danger of failing, but that it needed the financial assistance of the acquiring hospital in order to be truly competitive. The Sixth Circuit described this argument as the “hail Mary pass of presumptively doomed mergers.” Elements of the “failing” firm defense are set forth in the Horizontal Merger Guidelines as follows: 

  1. Inability to meet financial obligations as they come due; 
  2. Inability to reorganize successfully in bankruptcy; and 
  3. Lack of any alternative merger partners who pose less of a threat to competition. 

Although severe financial problems that do not meet all of these criteria may be viewed by the FTC as grounds for not challenging a proposed merger, Ms. Feinstein explains that mere revenue decreases or the need for capital improvement funds will not be sufficient. 

Bottom Line 

The Affordable Care Act promotes innovative thinking and cooperative effort as means to achieve higher quality health care at lower costs. The antitrust laws, which are designed to protect competition, are sometimes seen as a barrier to such activities. Ms. Feinstein reminds us that vigorous antitrust enforcement not only is consistent with the goals of achieving higher quality health care at lower cost, but also is an effective mechanism for separating the good collaborations from the bad ones.