Antitrust Enforcement Policy for Cross-Market Health Care Mergers: Legal Theories, Limiting Principles, and Practical Considerations

• Date: 01 June 2020

ANTITRUST ENFORCEMENT POLICY FOR CROSS-

MARKET HEALTH CARE MERGERS: LEGAL

THEORIES, LIMITING PRINCIPLES, AND

PRACTICAL CONSIDERATIONS

M

ICHAEL

J. P

ERRY

M

ATTHEW

B. A

DLER

*

Consolidation in the health care industry has long been a focus of federal

and state antitrust enforcement, with the Federal Trade Commission, the De-

partment of Justice, and numerous state attorneys general all devoting consid-

erable resources to investigating mergers, acquisitions, and other transactions

involving the health care delivery system. In the past five years alone, federal

and state enforcers have challenged numerous transactions involving hospi-

tals, physician groups, and other health care providers. This scrutiny has ex-

tended to deals of all sizes, from multi-billion-dollar health system mergers to

transactions involving medical groups as small as a few dozen physicians.

Despite this vigorous enforcement, some commentators have lamented that

the agencies have focused almost exclusively on horizontal transactions that

combine direct competitors in close geographic proximity, citing recent eco-

nomic research suggesting that mergers between health care providers in dif-

ferent geographic markets—i.e., mergers across multiple markets or “cross-

market” mergers— may lead to higher prices.

1

In this article, we assess the potential explanations for the observed price

effect of cross-market health care mergers and analyze the potential economic

* Mr. Perry is a member of the California and Washington, D.C. Bars. Mr. Adler is a member

of the Maryland and Washington, D.C. Bars.

1

See, e.g., Keith Brand & Ted Rosenbaum, A Review of The Economic Literature on Cross-

Market Health Care Mergers, 82 A

NTITRUST

L.J. 533 (2018); Leemore Dafny et al., The Price

Effects of Cross-Market Mergers: Theory and Evidence from the Hospital Industry, 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); Matt

Schmitt, Multimarket Contact in the Hospital Industry, A

M

. E

CON

. J.: E

CON

. P

OL

’

Y

, Aug. 2018,

at 361; Gregory S. Vistnes & Yianis Sarafidis, Cross-Market Hospital Mergers: A Holistic Ap-

proach, 79 A

NTITRUST

L.J. 253 (2013).

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484

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[Vol. 83

and legal theories under which such mergers might be challenged under the

antitrust laws. We begin by outlining the basic legal principles and policy

guidelines that should guide all antitrust merger enforcement. Next, we trace

the evolution of antitrust merger enforcement in the health care industry and

summarize the salient competitive dynamics of health care competition. We

then review the economic research on cross-market mergers and examine the

potential economic explanations for why cross-market mergers may lead to

higher prices. With this foundation, we then evaluate the potential antitrust

legal theories under which cross-market health care mergers might be investi-

gated and challenged. Finally, we conclude by providing recommendations

for how antitrust enforcement policy should address the potential competitive

effects of cross-market health care mergers and other health care consolida-

tion issues.

Given the recent economic research finding that cross-market transactions

appear to lead to higher prices and the intense policy focus on health care

costs, we would not be surprised if federal or state antitrust enforcers began

examining health care transactions for potential cross-market effects. We offer

two core recommendations for any such initiative. First, antitrust investiga-

tions of cross-market impacts should remain rooted in basic antitrust princi-

ples and focused on preserving competition rather than dictating preferred

market outcomes. Second, as in other contexts in which relatively novel eco-

nomic theories are applied to specific real-world settings, antitrust enforcers

should strive to provide transparency on the theories under investigation and,

to the greatest extent possible, issue guidance on the circumstances under

which cross-market transactions will be investigated or challenged. In turn,

antitrust practitioners should be aware that a broader range of health care

transactions may receive antitrust scrutiny and be prepared to address poten-

tial cross-market theories of harm.

I. FOUNDATIONAL ANTITRUST ENFORCEMENT PRINCIPLES

Before turning to the specific context of cross-market health care mergers,

we begin by outlining two foundational principles that should guide antitrust

merger enforcement policy in any industry setting. These basic principles, em-

bodied both in the agencies’ own merger guidelines and modern merger case

law, provide the lens through which we evaluate the potential application of

antitrust law and economics to cross-market health care mergers.

First, and most fundamentally, antitrust merger enforcement should focus

on harm to competition rather than protecting individual competitors, preserv-

ing particular forms of corporate structure, or aiming to achieve particular

market outcomes. By its language, Section 7 of the Clayton Act prohibits

mergers and acquisitions where the effect “may be substantially to lessen