Addressing the Red Queen Problem: a Proposal for Pursuing Antitrust Challenges to Cross-Market Mergers in Health Care Systems

• Author: Emilio E. Varanini
• Position: Member of the California Bar
• Pages: 509-526

ADDRESSING THE RED QUEEN PROBLEM:

A PROPOSAL FOR PURSUING ANTITRUST

CHALLENGES TO CROSS-MARKET MERGERS

IN HEALTH CARE SYSTEMS

E

MILIO

E. V

ARANINI

*

Health care costs for medical services, which are borne by both employers

and patients, have steadily increased.

1

These increases concern employers and

stakeholders of all stripes.

2

Some commentators have attributed at least part of

the increase in health care costs to the growth of health care provider sys-

tems.

3

These are defined as entities that consist of two or more hospitals

* Emilio E. Varanini, a member of the California Bar, was the Co-Chair of the Health Care

Working Group of the National Association of Attorneys General, Antitrust Task Force, until

2018 and is now the Co-Chair of the PBM Insurer Committee of the National Association of

Attorneys General, Antitrust Task Force. He served as lead counsel for the State in California ex

rel. Becerra v. Sutter Health, No. CGC18565398 (Cal. Super. Ct. Mar. 29, 2018), a case in which

the State of California challenged the alleged anticompetitive practices of a health care system.

He is now Supervising Deputy Attorney General of the antitrust unit of the Healthcare Rights

and Access Section of the California Office of the Attorney General. This article reflects only his

views and not those of the California Office of the Attorney General, other state attorneys gen-

eral, the National Association of Attorneys General, or any other organization.

1

See, e.g., H

EALTH

C

ARE

C

OST

I

NST

., 2017 H

EALTH

C

ARE

C

OST AND

U

TILIZATION

R

EPORT

1

(2019), www.healthcostinstitute.org/images/easyblog_articles/276/HCCI-2017-Health-Care-

Cost-and-Utilization-Report-02.12.19.pdf.

2

See, e.g., S

TEVEN

B

RILL

, A

MERICA

’

S

B

ITTER

P

ILL

: M

ONEY

, P

OLITICS

, B

ACKROOM

D

EALS

,

AND THE

F

IGHT

T

O

F

IX

O

UR

B

ROKEN

H

EALTHCARE

S

YSTEM

427–29, 438–42 (2015); A

VIK

R

OY

,

M

ANHATTAN

I

NST

.

FOR

P

OL

’

Y

R

ES

., T

RANSCENDING

O

BAMACARE

: A P

ATIENT

-C

ENTERED

P

LAN

FOR

N

EAR

-U

NIVERSAL

C

OVERAGE AND

P

ERMANENT

F

ISCAL

S

OLVENCY

8, 49–51, 53–54 (2014),

media4.manhattan-institute.org/pdf/mpr_17.pdf; Elizabeth Mitchell, President & CEO, Pac. Bus.

Grp. on Health, Testimony for the S. Comm. on Health, Education, Labor & Pensions: Lowering

Healthcare Costs: Creating Functional Markets and Purchasing Value for Patients 1–3, 6 (June

18, 2019), www.help.senate.gov/imo/media/doc/MItchell15.pdf.

3

See Glenn A. Melnick & Katya Fonkych, Hospital Prices Increase in California, Especially

Among Hospitals in the Largest Multi-hospital Systems, INQUIRY: J. H

EALTH

C

ARE

O

RG

., P

RO-

VISION

& F

INANCING

, June 2016, at 1, 1–7; James C. Robinson & Kelly Miller, Total Expendi-

tures per Patient in Hospital-Owned and Physician-Owned Physician Organizations in

California, 312 JAMA 1663 (2014); see also Glenn A. Melnick et al., The California Competi-

tive Model: How Has It Fared, and What’s Next?, 37 H

EALTH

A

FF

. 1417 (2018) (reaffirming the

509

510

A

NTITRUST

L

AW

J

OURNAL

[Vol. 83

owned, leased, sponsored, or contract-managed by a central organization.

4

These systems can also involve affiliations with physician groups

5

and may

span multiple counties or even states.

6

The fact that multicounty health care provider systems have raised prices

leads to the question of how systems have been able to leverage their growth

to increase prices. Is it because of horizontal acquisitions? Is it because of

vertical affiliations? Or are there other factors involved as well? Recent schol-

arship suggests that other factors may be involved in addition to horizontal

acquisitions or vertical affiliations. For example, a study published in 2018

that found a relationship between the growth of multicounty health care sys-

tems and increases in the prices for medical services suggests the existence of

one additional factor—namely, cross-market mergers that involve providers

who are not direct competitors.

7

A recently published review by Federal Trade Commission economists

Keith Brand and Ted Rosenbaum on economic studies of cross-market health

care mergers—which can be defined as health care mergers of providers who

are located more than 30–45 minutes apart from each other in apparently non-

overlapping markets

8

—sheds important light on the exact relationship be-

tween cross-market mergers and price increases. Brand and Rosenbaum reach

three conclusions. First, cross-market mergers have systematically led to in-

creases in prices.

9

Second, some of the observed price increases from cross-

authors’ 2016 findings of substantial price increases from the growth of multicounty health care

systems).

4

“A multihospital system is two or more hospitals owned, leased, sponsored, or contract-

managed by a central organization. Single, freestanding hospitals may be categorized as a system

by bringing into membership three or more, and at least 25 percent, of their owned or leased non-

hospital preacute or postacute health care organizations. System affiliation does not preclude

network participation.” A

M

. H

OSP

. A

SS

’

N

, Fast Facts on U.S. Hospitals, www.aha.org/statistics/

fast-facts-us-hospitals.

5

More specifically, a multihospital system can involve system affiliations with physician

groups and other providers, such as ambulatory surgery centers or specialty services, such as

radiology. See, e.g., Alanna Moriarty, Are Independent Physician Groups Viable in the Long

Run?, T

HE

D

EFINITIVE

B

LOG

:D

EFINITIVE

H

EALTHCARE

(Oct. 2, 2017), www.definitivehc.com/

news/are-independent-physician-groups-viable-in-the-long-run.

6

See, e.g., Gregory S. Vistnes & Yianis Sarafidis, Cross-Market Hospital Mergers: A Holis-

tic Approach, 79 A

NTITRUST

L.J. 253, 255–57, 260–63 (2013).

7

Melnick et al., supra note 3, at 1422.

8

See Keith Brand & Ted Rosenbaum, A Review of the Economic Literature on Cross-Market

Mergers, 82 A

NTITRUST

L.J. 533, 535–36, 545 (2019). Brand and Rosenbaum’s review covers

studies by Leemore Dafny, Kate Ho, and Robin Lee, and Matthew Lewis and Kevin Pflum, as

well as an analysis of cross-market mergers by Greg S. Vistnes and Yianis Sarafidis. Id. at 533

n.1 (citing and discussing Leemore Dafny et al., The Price Effects of Cross-Market Hospital

Mergers, 50 RAND J. E

CON

. 286 (2019); Matthew S. Lewis & Kevin E. Pflum, Hospital Systems

and Bargaining Power: Evidence from Out-of-Market Acquisitions, 48 RAND J. E

CON

. 579

(2017); and Vistnes & Sarafidis, supra note 6).

9

Brand & Rosenbaum, supra note 8, at 534–35, 538–41.