Preserving competition among hometown hospitals

In cities and towns throughout the U.S., hospitals are a key part of the health care delivery system. Every day, Americans seek care from their local hospital at significant and vulnerable times, from the birth of a baby to treatment for a serious illness. The FTC works to promote competition in health care markets, including hospital services, because vigorous competition promotes the delivery of high-quality, cost-effective health care.

For a long time, the FTC has been concerned about consolidation among hospitals that would leave patients with few competitive options for vital services. The FTC filed its first complaint challenging a hospital merger in 1981, and for several years, the FTC and Department of Justice were able to prevent hospital mergers that were likely to lead to higher prices or reduced quality of care. But then we hit a losing streak:  from 1994 through 2000, the federal antitrust enforcers lost all six hospital merger cases they litigated. 

This prompted the FTC to reassess its approach. In 2002, the FTC announced the Hospital Merger Retrospective Project, a joint Bureau of Competition/Bureau of Economics initiative to review past hospital mergers to see if any had led to higher prices. This project produced three important insights that have shaped the FTC’s current approach to hospital merger enforcement.

  1. Methods used by the courts to define geographic markets in past hospital merger challenges could lead to markets that are overly broad.  (Goodbye formalistic application of Elzinga-Hogarty’s patient inflow/patient outflow test.)
  2. Non-profit hospitals respond to competitive forces much like for-profit hospitals and typically do not abstain from exercising market power gained from a merger.
  3. Hospital markets are complex and require specifically designed analytic tools such as hospital merger simulation to help assess whether a merger will increase the merged hospital’s leverage with health plans and result in higher prices.

This new learning led the FTC to challenge one of the consummated hospital mergers it studied, Evanston Northwestern Healthcare’s acquisition of Highland Park Hospital. On an extensive trial record, the FTC concluded that the merger resulted in significantly higher prices charged to health insurers, which in turn resulted in higher costs for employers and patients. Since Evanston, the Commission has litigated three additional hospital mergers, and has either filed an administrative complaint or prepared to file a complaint in three others only to have the parties abandon their plans.

All this leads us to the news of the day:  the Commission recently accepted a proposed consent agreement to resolve concerns stemming from the proposed merger of two nationwide hospital systems, Community Health Systems and Health Management Associates. The proposed settlement would require CHS to sell two HMA hospitals—the Riverview Regional Medical Center in Gadsden, Alabama, and the Carolina Pines Regional Medical Center in Hartsville, South Carolina—to Commission-approved buyers.

Why is the CHS/HMA proposed consent order newsworthy? Two reasons. First, this is the first time since 1997 that the Commission has entered into a consent agreement to settle charges that a general acute care hospital merger was anticompetitive. Largely, there have been so few negotiated consent orders in hospital merger cases because most hospital mergers involve the acquisition of a single facility. Unlike other problematic mergers where the Commission’s antitrust concerns can be resolved by divesting some of the assets being acquired and permitting the rest of the deal to go forward, a merger that involves the acquisition of a single hospital facility cannot be resolved by divesting part of the hospital. The CHS/HMA merger, however, involved the acquisition of many facilities in many geographic areas. Commission staff identified only two local areas where the acquisition was likely to significantly reduce competition. In other words, the breadth of the two parties’ hospital holdings here presented an opportunity for the Commission and the parties to agree to divestitures to resolve the limited competitive concerns without seeking a court-ordered injunction to block the entire transaction. 

Second, although the Commission alleged a likely reduction in competition only for general acute care hospital services, the proposed divestitures include all services and operations that are affiliated with the hospitals to be divested, including outpatient facilities. Each divested hospital was integrated with these other facilities and operations before the transaction. The required divestitures provide the Commission-approved buyer with all it needs to compete immediately and effectively in each market, with the same scope of operations as HMA offered before the transaction. A partial divestiture that separated assets that are currently operated together would raise questions about the viability of the new operation and would give the Commission-approved buyer less than all the assets previously used to provide care and compete in the local market.

What isn’t new is that the Commission used the same competition analysis it has used in every hospital merger since Evanston, focusing on those local markets in which both CHS and HMA operate hospitals and compete. In Gadsden and Hartsville, as elsewhere throughout the country, patients strongly prefer to receive basic hospital care as close to home as possible and stay within the area where they live or work. For this reason above all, we will continue to work to preserve competition among hometown hospitals.

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