Health Care Merger Analysis in the Era of Payment Reform

• Publication year: 2015
• Author: By Kenneth W. Field and Douglas E. Litvack

HEALTH CARE MERGER ANALYSIS IN THE ERA OF PAYMENT REFORM1

By Kenneth W. Field and Douglas E. Litvack

Health care providers, from the most acclaimed academic medical centers to independent primary care practitioners, have continued their blistering pace of consolidation and mergers in an effort to meet the demands of health care reform. It is through these mergers and affiliations that providers hope to generate the significant efficiencies required to survive as the world moves toward value and risk based reimbursement. But the provider mergers that stand to generate the largest efficiencies—those that involve proximately located providers who can optimize their delivery platforms—often raise the greatest antitrust concern because existing antitrust models suggest they may eliminate important localized competition.

As a result, the Federal Trade Commission ("FTC") has made health care merger antitrust enforcement a priority. In the past several years, the FTC has investigated hundreds of provider mergers and in each case it has applied largely the same analytic framework. And that framework, described in more detail below, has been validated by several federal district courts in the FTC's recent successfully litigated challenges to hospital and other provider mergers. As the healthcare industry evolves, however, it is natural to ask if the FTC's approach to analyzing provider mergers must change along with it.

Health plans and government payors are in the process of changing the manner in which providers are paid for services. The goal is to transition provider compensation to forms of value-based pay, which reward providers for the quality of the care delivered, not just the volume of care. While providers generally believe this fundamental shift away from fee-for service reimbursement will render the FTC's analytic framework irrelevant, the FTC is unlikely to change its ways. In fact, for the reasons explained below, the FTC's existing analytic tools are likely to continue to drive health care merger enforcement policy even as payment reforms takes hold. There is at least one type of transaction, however, where those very tools may actually help providers obtain antitrust clearance for their prospective mergers.

HEALTHCARE PROVIDER MERGER ANALYSIS FRAMEWORK

The FTC and Department of Justice ("DOJ") (collectively, "Agencies") have overlapping jurisdiction to review transactions under the antitrust laws.² In the healthcare industry, the FTC typically reviews provider transactions and the DOJ reviews insurance transactions. Nevertheless, the Agencies review transactions using the same analytical guidelines—the Horizontal Merger Guidelines.³ These guidelines specifically set forth the factors the Agencies consider when investigating a transaction.

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During a merger investigation, the Agencies focus on whether the transaction may substantially lessen competition, either by giving the combined entity market power to profitably increase its reimbursement rates or reducing the incentives to provide high quality care. To answer this question, the Agencies apply the Horizontal Merger Guidelines to the underlying transaction, which instruct them to:

• Define relevant product and geographic markets to analyze the transaction's competitive impact;
• Assess the market concentration for each relevant market;
• Review the likely competitive effects for each relevant market; and
• Determine whether mitigating factors, such as entry or efficiencies, would offset concerns about competitive harm.⁴

Typically, the majority of the Agencies' time and energy is spent understanding whether the transaction likely will produce competitive harm—e.g., higher prices or lower quality services. In most transactions, this inquiry goes well beyond looking at market shares. Indeed, agency staff gather and review a variety of evidence, including documents, data, and testimony, from the parties and other industry participants.⁵ If this evidence suggests that a transaction eliminates important head-to-head competition between the two merging parties or an important barrier to coordination among the remaining firms, then the reviewing Agency may conclude that it violates the antitrust laws.⁶

In healthcare provider transactions, the FTC's competitive effects inquiry has focused on whether the transaction gives the combined entity the ability to obtain higher reimbursement rates during negotiations with managed care organizations (i.e., health plans).⁷ To analyze the competitive impact of these provider transactions, the FTC has adopted the "Two-Stage Competition Model."⁸ In its first stage, providers compete to be selected as in-network providers by health plans through bilateral negotiations with the plans.⁹ The key terms that a provider and health plan negotiate are the reimbursement rates that the health plan will pay the provider when the health plan's members obtain care from the provider.¹⁰ A health plan's bargaining leverage over providers is a function of the number of alternative providers available among whom the health plan could form a substitute provider network for its members.¹¹ A transaction that significantly reduces the number of meaningful alternatives a health plan can turn to thereby increasing the merged entity's ability and leverage to negotiate higher reimbursement rates after the transaction.¹²

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In the second stage, providers seek to attract patients enrolled in the plans by offering better services, amenities, convenience and quality of care than other in-network providers.¹³ Because patients are largely insensitive to price (and face similar out-of-pocket payment for all in-network providers), the second stage of competition focuses primarily on non-price dimensions.¹⁴ Most recently, the Ninth Circuit in St. Alphonsus Medical Center—Nampa, Inc. v. St. Luke's Health System confirmed the model's legitimacy, stating that the "two-stage model is the accepted model."¹⁵

SHIFT IN HEALTHCARE PROVIDER PAYMENT METHODOLOGY

According to healthcare experts, the United States healthcare system is in need of reform.¹⁶ Despite having the highest healthcare costs of any country in the world, the United States has a lower quality of care than other advanced countries.¹⁷ It is widely believed that this fact is a by-product of the unique manner in which healthcare providers are paid for their services in the United States.¹⁸ Today, providers are predominantly compensated on a fee for service ("FFS") basis, meaning a provider is paid whenever it provides a service to a patient.¹⁹ Under FFS payment, the amount of payment a provider receives for treating a patient increases as it performs more services. Importantly, a provider receives no financial reward for keeping a patient healthy. As such, the FFS payment model incentivizes volume of care rather than quality.²⁰ This perverse incentive structure may explain why Americans pay the highest healthcare costs, but experience only average outcomes.²¹

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Recognizing the flaws of FFS payment, healthcare stakeholders have started a sea change in the healthcare payment system. Ignited by the Patient Protection and Affordable Care Act of 2010²², the industry participants (e.g., hospitals, physicians, and insurers) are transitioning from FFS compensation to forms of value-based compensation and "risk sharing."²³ In risk sharing arrangements, providers and payers each have incentives to keep patients healthy and limit total health care costs.²⁴ Risk and value based models expose the providers to potential loss or windfall, depending on care outcomes.²⁵

There are three broad types of risk-based payments. The first type is gain-sharing payments. Here, the providers are paid on a fee-for-service basis, but receive a bonus payment if the expected cost of care is greater than the actual cost of care.²⁶ While the providers do not forfeit payments (i.e., take on risk) if the actual treatment costs exceed the expected treatment cost, they do receive a bonus payment for providing higher-quality care below its expected cost.²⁷ This payment model is thought of as a stepping stone for providers to take on downside risk.²⁸ For example, NYU Langone Medical Center in New York City recently transitioned an experimental gain-sharing program into a broader integrated care arrangement with Cigna by compensating more services with gain-sharing arrangements.²⁹

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Another type of risk-based payment is the partial-risk payment model. Under this...