The Efficiencies Defenestration: Are Regulators Throwing Valid Healthcare Efficiencies Out the Window?

• Publication year: 2018
• Author: By Jacob Snow, Ronnie Solomon, Kyle Quackenbush

THE EFFICIENCIES DEFENESTRATION: ARE REGULATORS THROWING VALID HEALTHCARE EFFICIENCIES OUT THE WINDOW?

By Jacob Snow, Ronnie Solomon, Kyle Quackenbush¹

I. INTRODUCTION

Assessing efficiencies is an important part of any regulatory merger review. Efficiencies that are merger-specific and verifiable can, under the Merger Guidelines, save an otherwise anticompetitive merger. The presentation by merging parties of pro-competitive efficiencies is often referred to as an efficiencies "defense."

Healthcare in the United States is changing. Recent years have brought a significant increase in healthcare mergers, and provisions in the Patient Protection and Affordable Care Act ("Affordable Care Act") encourage integration and coordination of healthcare services. In light of these changes, some argue that regulators put too little weight on efficiencies in the healthcare context, and that the high bar set by the Merger Guidelines— requiring that efficiencies be verifiable and merger specific—is an unnecessary hindrance to healthcare mergers that will benefit the public. Does it make sense to continue to hold efficiencies to such a high bar, in the face of technological developments and pressure on healthcare entities to integrate?

This article argues that the Merger Guidelines' (relatively) strict standards should be maintained. Federal regulators have challenged relatively few of the thousands of healthcare combinations announced in recent years. Under the Merger Guidelines, antitrust regulators give careful consideration to efficiency claims, despite lingering uncertainty in the courts about the role of efficiencies under the law. Nor does the Affordable Care Act require that companies pursue a merger or acquisition. There is also much the parties can do to present real efficiencies that are more likely to pass regulatory muster. Finally, state laws that provide antitrust immunity to entities seeking to integrate are not the answer. And there is little support for the notion that these laws are a direct consequence of overly-stringent enforcement by antitrust regulators.

A. The Role of Merger Efficiencies Under the Law is Uncertain

There is lingering uncertainty over whether claimed efficiencies can overcome a merger's anticompetitive effects. For starters, an efficiency defense has no clear statutory basis. Section 7 of the Clayton Act does not mention efficiencies.² Neither does case law provide clear guidance on the application or scope of an efficiency defense. The Supreme Court has never officially recognized an efficiency defense, ³ and instead has "cast doubt on its availability."⁴ And no court has ever held that the claimed economic efficiencies were sufficient to overcome an otherwise unlawful merger.

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Lower courts are split. Several circuit courts have recently cast doubt on whether an efficiencies defense exists and on its scope. ⁵ In St. Luke's, the Ninth Circuit affirmed a district court ruling that plaintiffs' economic efficiencies were not merger-specific and were insufficient to rebut a prima facie case of Section 7 illegality. While the Ninth Circuit decision assumed the availability of an efficiency defense, it also noted its uncertain status: "we remain skeptical about the efficiencies defense in general and about its scope in particular."⁶ More recently, the D.C. Circuit addressed in United States v. Anthem whether an efficiency defense exists. In Anthem, the D.C. Circuit affirmed a lower court finding that the claimed efficiencies of a merger between two large health insurance providers were neither merger-specific nor verifiable.⁷ As in St. Luke's, the court assumed the availability of the defense, but cautioned that "it is not at all clear that [efficiencies] offer a viable legal defense to illegality under Section 7," citing the Supreme Court's "clear holding" in Procter & Gamble.⁸ Moreover, Anthem noted that while some courts recognized efficiencies as a means to rebut a prima facie case, the question of whether efficiencies can serve as an ultimate defense under Section 7 remains unresolved.⁹

Other circuits have recognized the availability of efficiencies, at least to rebut a prima facie case of illegality; but none of those decisions found that the claimed efficiencies actually rebutted the presumption.¹⁰ Courts that have recognized economic efficiencies have limited their scope. In University Health, the Eleventh Circuit noted that efficiencies are "an important consideration in predicting whether the acquisition would substantially lessen competition," but that once a court determines that a merger would substantially lessen competition, "expected economies, however great, will not insulate the merger from a section 7 challenge." ¹¹ Where recognized, the focus of an efficiencies defense is whether they will enhance or heighten competition, rather than lessen it, and whether the prima facie case inaccurately portrays the merger's probable effects on competition.¹²

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B. Whatever Their Status Under the Law, the Merger Guidelines and Antitrust Regulators Recognize Economic Efficiencies

Despite this case law, efficiencies are nonetheless important. Antitrust regulators take efficiency arguments presented by parties seriously in reviewing a merger. The 2010 Horizontal Merger Guidelines ("Merger Guidelines"), issued by the Federal Trade Commission ("FTC") and the Department of Justice ("DOJ"), specifically recognize efficiencies in reviewing mergers. Section 10 of the Merger Guidelines sets out the framework for assessing efficiencies. Under the Merger Guidelines, efficiencies are weighed against anticompetitive effects provided that those efficiencies are cognizable— that is, the claimed efficiencies must be "merger-specific" and "verifiable."¹³ More precisely, federal antitrust regulators will not challenge a merger "if cognizable efficiencies are of a character and magnitude such that the merger is not likely to be anticompetitive."¹⁴ In other words, regulators consider whether cognizable efficiencies are likely to "reverse" potential harm to consumers. While the Merger Guidelines are neither precedential nor binding on courts, they inform regulators' analysis and may serve as a "helpful tool" to courts in merger cases.¹⁵ Thus, efficiencies can and do play an important role in analyzing the anticompetitive effects of a merger at the agency level. A former Director of the FTC's Bureau of Competition has emphasized that the agencies review efficiencies closely, noting that "studying only litigated cases for guidance on efficiencies presents a skewed sample set, given the very high levels of concentration involved in most litigated cases, and lingering doubts by some courts about the legal basis for an 'efficiencies defense.' "¹⁶

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II. ARGUMENT

Market trends and changes in the law should be taken into account by antitrust authorities in reviewing mergers. Today, the law of healthcare is undergoing changes and healthcare providers and insurers likely have opportunities to improve their operations by operating more efficiently and delivering higher quality care to their customers.

These opportunities have been the recent focus of policymakers. President Obama's opening remarks at the White House Health Care Summit on March 5, 2009, focused on "the exploding costs of healthcare in America," and characterized healthcare reform as "no longer just a moral imperative, it's a fiscal imperative."¹⁷ This sentiment echoed concern that the United States healthcare outcomes were worse than international peers while its costs were significantly higher.¹⁸ The ACA's structure was motivated in part by this triad of concerns: coverage, cost, and quality.¹⁹ And the ACA's proposed means of improving healthcare along these dimensions were numerous and ambitious. A five-year review of the ACA called the law "one of the most aggressive efforts in the history of the nation to address the problems of the delivery system."²⁰

Among the primary efforts in that regard were the ACA's provisions directed at moving payment for healthcare services away from volume-based fee-for-service reimbursement and towards linking provider payments to better patient outcomes.²¹ Those provisions include modifications that aim to create additional incentives for providers to reduce both: 1) patients being admitted to the hospital after discharge and 2) the rate of conditions acquired in the hospital during treatment.²² Other provisions in the ACA encourage providers and insurers to form new organizations called Accountable Care Organizations ("ACOs") that enable "integration and coordination of ambulatory, inpatient, and post-acute care services."²³ Some see ACOs as "a bridge from fragmented fee-for-service care to integrated, coordinated delivery systems that resemble the tightly organized Medicare Advantage plans."²⁴ Participants in the healthcare market can be forgiven for interpreting the ACA—as well as market trends more broadly—as pointing to integration and consolidation as the path towards a healthcare system that delivers higher quality care at lower cost to more people.

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A widely read article from The New Yorker in 2009 similarly described the challenge policy-makers seeking healthcare reform face as a choice between fee-for-service medicine, in which doctors care is compensated in proportion to the procedures they perform, and structures in which providers "adopt[] measures to blunt harmful financial incentives" and "[take] collective responsibility for improving the sum total of patient care."²⁵ The article concluded memorably as follows:²⁶

As America struggles to extend healthcare coverage while curbing healthcare costs, we face a decision that is more important than whether we have a public-insurance option, more important than whether we will have a single-payer system in the long run or a mixture of public and private insurance, as we do now. The decision is whether we are going to reward the leaders who are

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