FTC, Calif. AG Put Pressure on M&A — and Confuse Providers

by Dan Diamond, California Healthline Contributing Editor
FTC, Calif. AG Put Pressure on M&A — and Confuse Providers

Compete -- or consolidate? Lawmakers can't seem to decide which approach they want hospitals and doctors to follow, and the mixed messages are causing confusion.

Today is the Federal Trade Commission’s birthday, but hospitals aren’t celebrating.

The agency has deepened its pressure on hospital deal-making — scrutinizing dozens of mergers, filing motions to block several acquisitions and even examining whether hospitals’ purchases of physician groups may be anti-competitive.

And federal regulators’ efforts are trickling down to the state level. As reported in California Healthline last week, Golden State’s attorney general has launched her own study of whether hospital-physician consolidation is leading to higher health care costs.

Industry leaders say that the regulators’ timing couldn’t be worse, or more confusing. Even as doctors and hospitals deal with ever-tighter reimbursement concerns, the Affordable Care Act pushes them to align in new structures. The M&A activity is necessary to survive, the American Hospital Association argued in an amicus brief filed to a federal appeals court this week.

Essentially, it comes down to a fundamental question that officials can’t seem to decide how to answer.

Should health care providers compete — or consolidate?

Background on Debate

When “Road to Reform” first looked at provider market power concerns back in 2010, the competition vs. consolidation debate was largely confined to health care academic journals and trade conferences.

And as the debate has heated up, both approaches continue to have their supporters and detractors.

Competition

For years, competition in health care was perceived as a net good.

Doctors opened their own offices, hospitals worked to lure consumers and providers bargained for better rates than their neighbors.

Health officials and legislators in both political parties generally like the idea of doctors and hospitals competing on quality — that Medicare should ultimately reward top performers with higher payments, for example.

But competition in health care is heavily regulated compared to competition within other industries. Many states have Certificate of Need laws that require providers to receive approval for new facilities or even high-end equipment, in hopes of tamping down unnecessary spending.

And federal officials have sometimes squashed emerging competitors, who could have introduced new models to benefit consumers. After years of hospital lobbying, the Affordable Care Act essentially squelched the development of doctor-owned hospitals.

There’s also a school of thought that competition in health care is wasteful. Does every hospital really need a cutting-edge, 64-slice CT scanner? Is the profit motive a destructive force? Are so many stand-alone hospitals and physicians contributing to lack of care coordination?

Consolidation

These questions about competition, and the broader fee-for-service payment structure, have helped drive health care industry’s renewed move toward integration and a slew of new payment reforms. Accountable care organizations, bundled payments, medical homes — pick your model. All are included in the ACA, which incents providers to band together in hopes of providing better and less-expensive care.

But FTC is concerned that the rise in mergers and acquisitions is creating a damaging market environment. According to FTC Chair Jon Leibowitz, some hospital mergers lock up health care markets and lead to higher prices for patients and insurance companies. “If you want to do something about controlling costs in health care, you have to challenge anticompetitive hospital mergers,” Leibowitz has said.

FTC in 2002 reinvigorated its scrutiny of hospital mergers after numerous unsuccessful attempts to block deals. Since then, the agency has challenged several consolidation efforts, including a hospital merger in Toledo, Ohio, and more recently, a Nevada health system’s effort to lock 10 cardiologists into non-compete contracts. Specifically, FTC alleged that the health system gained too much market control of cardiology services in the region after acquiring two area practices.

Golden State’s Role: Staging Ground, Battleground

In some ways, California is ground zero for the competition vs. consolidation debate. That’s partly because the state is home to a number of large, profitable hospital chains — competing up and down the coast, as well as into rural areas — in addition to several well-known integrated delivery systems, like Kaiser Permanente.

But it’s also because the Golden State is where federal anti-trust regulators suffered a major defeat: losing a prominent 1999 effort to block Sutter Health’s acquisition of Summit Medical Center. The loss capped off a string of defeats for FTC and state officials but later fueled regulators’ comeback. When FTC renewed its scrutiny of provider mergers in the 2000s, the agency muscled up by commissioning a study of how the Sutter-Summit merger ultimately affected the market.

That 2008 study found that the merger led to “a substantial price increase” and questioned whether current anti-trust protections were sufficient; FTC has since cited the study to preemptively argue against mergers like the Toledo, Ohio, case.

FTC’s effort was followed in 2010 by a Center for Studying Health System Change study that reviewed a number of provider mergers in the Golden State. Researchers concluded that consolidation ultimately strengthened providers’ negotiating power, resulting in higher premiums and raising questions over whether consolidation really helped the market.

California AG Drills Down on Doctor Acquisitions

While the most attention has focused on hospital mergers, an investigation launched by California Attorney General Kamala Harris represents the latest front of M&A scrutiny: Are hospitals’ acquisitions of physician groups leading to higher health care costs?

Harris’ investigation, which has been under way for several months, reportedly centers on several large hospital systems, like Dignity Health and Scripps Health, and whether they’ve gained enough market power to increase prices in a way that violates antitrust laws.

The California Hospital Association has pushed back, with CHA President Duane Dauner suggesting that the allegations ignore the new “demands … [and] expectations being created by federal and state laws.”

Meanwhile, the investigation raises doubts for hospital leaders pursuing the increasingly common strategy of acquiring physician practices and employing specialists. Hospitals now employ 40% of primary care physicians who see patients at the hospital, a rate that has doubled since 2000, the Wall Street Journal reports.

What’s Next: More Questions and a Key Court Date

So the challenge for providers: How to move forward when officials are sending mixed signals? And what to do with the consolidation that’s already well under way?

According to Irving Levin Associates, U.S. hospitals announced nearly 90 mergers last year — the highest level in more than a decade. And more providers continue to explore partnerships intended to increase efficiency as payers tighten fees.

Some answers may come from the Supreme Court, as a case that may reshape hospital deal-making looms this fall. FTC on Nov. 26 will argue that a Georgia health system — Phoebe Putney — broke antitrust rules in its 2011 purchase of Palmyra Medical Center.

While Phoebe Putney is a public hospital, which means that FTC’s argument focuses on whether state-run organizations can disregard federal antitrust law, the case is the most high-profile effort to prevent hospital mergers and the ruling may set a new precedent on what qualifies as anticompetitive behavior in health care. “Road to Reform” will be watching — and reporting — on the outcome.

Here’s what’s happening around the nation.

Administration Actions

Challenges to Reform

Eye on the Courts

In the States

On the Hill

Rolling Out Reform

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