The evolution of federal courts' healthcare antitrust analysis: does the PPACA spell the end to hospital mergers?

Author:Groebe, Collin Z.
Position:Patient Protection and Affordable Care Act
 
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INTRODUCTION

Since the 1990s, the trend for hospitals in the United States has been to combine resources and merge into larger systems. (1) In 2013, for example, Community Health Systems of Tennessee and Health Management Associates of Florida combined in a $7.6 billion deal. (2) Over 300 hospital acquisitions have occurred between 2007 and 2012, and many, like the merger between Tennessee and Florida hospitals, have been single hospitals forming new systems. (3) Newly formed hospital systems have largely been successful in defending against antitrust challenges. (4) For example, in the late 1990s, the Federal Trade Commission ("FTC") suffered six straight losses in healthcare antitrust cases it filed in federal courts. (5) These cases showed that the FTC struggled to define the relevant markets (6) and judges were reluctant to enforce antitrust principles to nonprofit hospitals. (7) Indeed, courts deferred to merging hospitals in the belief that hospitals achieving economies of scale were in the best interests of the public because, "[i]n the real world, hospitals are in the business of saving lives" and would not abuse market power. (8)

Arguably, these unsuccessful antitrust challenges have given hospitals "a green light to consolidation." (9) The FTC admits that court decisions in this area have led enforcers to stay away from hospital mergers. (10) One problem for the FTC is that courts have struggled to apply antitrust law to the healthcare sector. (11) Making matters worse, it is widely acknowledged that courts analyzing hospital mergers have failed to apply sound economic principles in defining relevant markets. (12)

Regardless of the reasons for consolidation, it has been harmful to the general public. (13) Studies show that hospital market concentration in the 1990s caused inpatient prices to rise at least five percent and more than forty percent when the merging hospitals were in competition with each other. (14) Another study performed in Massachusetts found that pricing for health services was positively correlated with provider market power and uncorrelated with "differences in quality, complexity of services, or other factors the health care market should reward." (15) This means that the higher the market concentration, the higher the cost for the consumer--exactly what antitrust law seeks to avoid. (16)

Recently, however, judges' favorable perspective toward nonprofit hospital mergers has shifted. For example, in 2012, two hospital chains in Illinois were blocked from merging after the FTC challenged the deal. (17) The FTC argued that the combination of the two hospitals would "have anticompetitive effects." (18) The problem for the FTC was that the two hospitals had no agreement in place to maintain current hospital charges for patients. (19) Without that agreement, there was no guarantee that the newly formed system would not increase patient prices. (20) Outside the courts, scholars have become more critical of hospital mergers as well. Similar to the FTC's argument above, they reason that providers are concentrating to enable them to charge higher prices for patients. (21) Making matters worse, it has been suggested that healthcare providers enjoy more freedom in pricing than other monopolies such as the diamond industry and public utilities. (22) One reason for this relaxed approach by federal courts is that hospitals have a redistributive component that provides care to indigent patients. (23)

This Note acknowledges the harm of hospital concentration and will focus on recent governmental efforts to block hospital mergers. Specifically, Part I will explain the structure of hospital antitrust claims. Part II will provide an analysis of recent case law and identify trends in FTC antitrust enforcement. This Part will describe why federal judges shifted their favorable approach to hospital consolidation. Finally, this Note argues that the Patient Protection and Affordable Care Act ("PPACA"), (24) combined with new government regulation, will work to ameliorate the monopoly problem in the health care sector. (25)

  1. OVERVIEW OF ANTITRUST PRINCIPLES

    1. The Clayton Act

      The economic rationale of antitrust law is that, in a freely operating competitive market, consumers are given the widest variety of choices at the lowest prices. (26) The Clayton Act is the statute that governs antitrust merger claims and seeks to eradicate anticompetitive transactions. (27) Specifically, Section 7 of the Clayton Act prohibits acquisitions "where in any line of commerce or in any activity affecting commerce ... the effect of such acquisition may be substantially to lessen competition, or to tend to create a monopoly." (28) Section 7 is designed to protect against "the substantial lessening of competition from the acquisition by one corporation of the whole or any part of the stock of a competing corporation." (29) Thus, antitrust laws seek to remove barriers to healthy and vibrant competition such as an agreement between two firms to raise prices or two firms merging solely to gain market power. (30) Without Section 7, two firms can increase their market power by merging and thereby increase prices for patients.

      Once a merger challenge is brought, the court determines the likely anticompetitive effects in the market. (31) To determine whether there is a reasonable probability of a reduction in competition, the courts have focused on whether the transaction has the "potential for creating, enhancing, or facilitating the exercise of market power--the ability of one or more firms to raise prices above competitive levels for a significant period of time." (32) The court's analysis takes two steps. First, the court defines the relevant market that the merger is likely to affect. (33) Second, the court determines whether the merged entity would have a significant market power in the defined market. (34) For a plaintiff to establish a prima facie case under the Clayton Act, he or she must demonstrate that an entity would control "an undue percentage share of the relevant market, and would result in a significant increase in the concentration of power in that market." (35) The defendants may rebut this prima facie showing by producing evidence that the merger will not create anticompetitive effects. (36) For example, this can be done by showing the merger will create significant efficiencies that would benefit consumers. (37) The court then weighs the competing views and decides whether to block the merger. (38)

    2. Defining the Relevant Market and Determining if a Merged Entity Has Significant Market Power

      Importantly, the court must define the relevant market that the proposed transaction might impact. (39) Courts have determined that "[a] 'relevant market' consists of two components: a product market, and a geographic market." (40) The product market is determined by "the cross-elasticity of demand between the product itself and substitutes for it." (41) In other words, the product market is defined by the responsiveness of the demand for a good to a change in the price of another good. (42) For example, suppose a grocery store sells 2% milk and whole milk. If the store decides to raise the price of 2% milk, the demand for whole milk might increase because consumers will purchase the substitute. The ability for consumers to substitute goods limits the stores' ability to increase prices. The harder it is for the store to increase the price of milk, the higher the cross-elasticity of demand will be. Thus, the product market (whole milk and 2% milk in the above example) is determined by the range of products that would limit the merged entity's ability to raise prices. (43)

      The geographic market is defined by the existence of competitors who are close enough to provide similar products. (44) The ultimate question is whether consumers can practically turn to alternatives. (45) Defining the geographic market is highly fact intensive and can often be determinative of the court's outcome. (46) For example, assume there are two grocery stores in a town that sell milk and one grocery store that is forty miles away that also sells milk. If the two grocery stores in town attempted to merge, a court could define the relevant market as the two stores in town, which would destroy the market for milk in that geographic market. Alternatively, a court could instead decide to include the store that is forty miles away because consumers might travel to that store if prices were too high. Thus, if the geographic market were limited to the two local grocery stores, then the anticompetitive effect of those stores merging would be very high. But if the market included all three grocery stores, then the anticompetitive effect of the two grocery stores merging would be very small. The same problem is prevalent in the hospital merger setting, and how the relevant market is defined typically determines the outcome of the case. (47)

      Defining the relevant market in the health care setting can be especially problematic (48) The Clayton Act prohibits any merger having an anticompetitive effect "in any line of commerce ... in any section of the country," (49) and forbids any merger that would likely cause a competitive harm in the market for any services that hospitals provide. (50) Proving the likely competitive harm in a market can be challenging because different hospital service lines draw patients from different distances. (51) For example, in United States v. Long Island Jewish Medical Center, (52) the court struggled to define the competitive influences of nearby hospitals. (53) The court noted that hospitals offering specialty services, especially teaching and research hospitals, might draw patients from a very broad geographic area. (54) Because patients are drawn from all over the state for these specialty services such as chronic conditions of cancer, identifying the geographic area is difficult. (55) By contrast, emergency...

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