FTC says Hospital M&A Scrutiny 'Not a New Development'

The director of the FTC's Bureau of Competition says she has seen no evidence that consolidation leads to higher quality.

In the past two months, the Federal Trade Commission has blocked three hospital mergers in West Virginia, Pennsylvania, and Illinois. In each case, the FTC said the proposed mergers would create a dominant provider in the respective market that could potentially raise prices for payers and patients.

Deborah L. Feinstein, director of the FTC's Bureau of Competition, spoke with HealthLeaders Media about the commission's recent actions against these hospital mergers. The following is an edited transcript.

HLM: The FTC has intervened to block three hospital mergers in three states in the past two months. Is this a coincidence owing to the increased number of hospital mergers, or has the FTC enhanced scrutiny of hospital mergers?

Feinstein: We have looked at hospital mergers for decades. This is not a new development. There are more hospital mergers these days than in the past for a number of reasons and that inevitably means that some of them will be challenged. The fact that there were three of them in recent weeks is really a coincidence. There hasn't been any shift in how we think about these or anything like that. It's a constant focus. Some of them raise problems. Many do not, and we happened to challenge these three.

HLM: The three cases in Illinois, West Virginia, and Pennsylvania all appear to be problematic because of geography.

Feinstein: That is always going to be the case. We are concerned about the elimination of competition. The elimination of competition is going to be more problematic when the hospitals are in close proximity to each other and there are few other competing hospitals in the specific geographic territory.

HLM: Does the Affordable Care Act's push for population health and economies of scale create a friction with the FTC's charge to regulate competition?

Feinstein: That is literally the most asked question I get in this job. We don't think there is a conflict between the ACA and the antitrust laws. In fact, the ACA explicitly makes clear that it is not designed to supplant antitrust laws. I would say the ACA encourages collaboration that does not need to be done through consolidation. The narrow networks can be put together by an insurance company from competing suppliers, and there are lots of examples of those. There are hundreds of accountable care organizations. The FTC has not challenged a single ACO because they have been set up in ways that don't violate antitrust laws. We clear dozens of hospital transactions every year because they don't raise competitive concerns. There are a handful that do, and those we are going to bring an action against.

When the parties say "We have to merge to do this," we can come up with examples of providers who are accomplishing the same goals in different ways, without consolidating, without joint negotiations with payers. They do them in collaborations that allow them to compete and collaborate at the same time.

HLM: When reviewing hospital mergers, does the FTC factor in potential quality or value improvements that the consolidated system could provide?

Feinstein: The antitrust laws and the government's merger guidelines allow us to examine whether or not there are those kinds of efficiencies and pro-competitive benefits arising from a transaction. To be credited, however, they have to show three things; merger specific, verifiable, and cognizable.

Merger specific means that it can't be accomplished other than through a merger. A good example of that is in the St. Luke's case in Idaho. The parties argued that the acquisition was going to allow them to do all these amazing things. The judge found that "well, maybe," but they were already doing a number of these things in the community without having to be consolidated. It is not merger specific.

Verifiable means they can show that it is really going to happen, as opposed to speculation, or "five years into the future" or "it might happen."

Cognizable means it is an efficiency that doesn't reduce with less output or lower quality. Often we find that the claims that entities make about why they have to merge—and this is true in the hospital context and elsewhere—simply don't meet that criteria. Sometimes they do and sometimes the efficiencies are such and the competitive effects are such that we don't think we need to challenge it. But again, in a handful of deals we do not think that overall consumers and patients are going to benefit.

HLM: Do you review these mergers with the assumption that consolidation leads to higher pricing?

Feinstein: With each investigation we look at the facts. When the facts show that it is likely to increase concentration substantially in the relevant geographic market we know from empirical studies that in those situations prices will go up. But we go in with an open mind because we don't know what the relevant geographic market is until we examine it. We don't know what the market shares look like. We don't know what the strengths and weaknesses are of other competitors in the market. So, we examine each one case by case. Although there have been dozens of hospital mergers, we issue second requests, which is our more detailed inquiry, on only a small number, and we challenge an even smaller number.

HLM:  How does the FTC feel about joint ventures and other alternatives to mergers and acquisition?

Feinstein: It depends on the structure. A joint venture is typically just a relabeling if they are coming together with existing facilities and negotiating jointly with a provider that raises all of the same types of issues. But there are things that entities can do without consolidating. Everybody in the community can get together and agree on an electronic medical system. Hospitals can share information on things like infection rates to see what it looks like overall in the population.

It might be OK for hospitals in an area to collaborate on certain population health management goals. It depends on if they are continuing to compete independently but collaborate in other areas. That may well be unproblematic. There is a lot of that going on under the ACA, and much of it does not raise antitrust concerns.

HLM: Can hospitals make a valid argument that consolidation will improve quality or provide value?

Feinstein: Antitrust is necessarily forward looking, always making predictions both about the anti- and pro-competitive concerns. Often hospitals will come and say, "Look I bought a hospital two years ago and here is what happened two years after I bought it. Let me show you how I made things better and that is going to happen in this hospital merger." So, you can look at the past to help get an idea of what is likely going to happen in the future.

Secondly, we have numerous empirical studies that show when concentration increases, prices go up. If somebody wants to show me the empirical evidence that acquisitions tend to lead to quality improvements—something that we have not seen—that would be interesting to us. We would have to see if that would apply to the particular facts at issue and whether or not those pro-competitive effects outweigh the anti-competitive concerns we have that consolidation leads to price increases.

HLM: What questions should providers ask themselves to ensure their proposals pass FTC muster?

Feinstein: They have to ask not only "who is my closest competitor?" but "who do I compete with? When I am negotiating with payers and I am giving them a decent price, is it because I am worried about being kicked out of network and this other hospital that I am about to merge with is able to be included in the network? What do my documents say about who I compete with and why I upgraded my labor and delivery wing last year? Is it because I competed with this merging hospital and we wanted patients from them?" All those things are helpful.

Frankly, you're going to have to get experts involved, anti-trust lawyers who've been through this and who know the drill. Early advice is often crucial in any big deal that folks are considering because we have lots and lots of information out there. There are merger guidelines that set forth the mode of analysis. You can look at the previous hospital merger complaints to see what we are concerned about. There is a lot of guidance out there about what may raise competitive concerns and what may not.

HLM: Does the FTC provide help identifying potential problems for hospitals in the M&A vetting process?

Feinstein: We are not in a position to provide advisory opinions. We have to deal with thousands of mergers that are actually signed up and that get filed to us. We are not in a position to do advisory opinions on deals that are still in the consideration phase.

HLM: There seem to be numerous consolidations in just about every industry these days. Why?

Feinstein: That is a question you're going to have to ask an investment banker. I am sure there are a number of forces and I'm not sure what they are. We just deal with what comes before us.