This essay questions the wisdom of adherence to an indulgent approach to vertical integration in health care. It first critiques the bases for antitrust law's traditional tolerance of vertical integration and describes contemporary economic learning that supports more robust antitrust enforcement. It goes on to dispute arguments urging extra caution in dealing with the health care sector and concludes with several justifications for close scrutiny of vertical health sector mergers.
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References
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G.Orwell, Animal Farm: A Fairy Story (New York: Signet Classics, 2016).
See T.L.Greaney and B.D.Richman, “Delivering and Paying for Healthcare Services: Priorities for Competition in Critical Markets,”American Antitrust Institute White Paper, May2018.
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FTC v. Advocate Health Care Network, 841 F.3d 460 (7th Cir. 2016); FTC v. Penn State Hershey Med. Ctr., 838 F.3d 327 (3d Cir. 2016); ProMedica Health Sys., Inc. v. FTC, 749 F.3d 559, 571 (6th Cir. 2014).
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Saint Alphonsus Medical Center-Nampa & FTC v. St. Luke’s Health System, 778 F.3d 775, 793 (9th Cir. 2015); FTC and North Dakota v. Sanford Health, Case No. 1;17-cv-00133 (D.N.D. Dec. 15, 2017). See also In the Matter of Renown Health, FED. TRADE COMM’N. C-4366 (Dec. 4, 2012) (consent order).
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U.S. v. Anthem, Inc., 855 F. 3d 345 (D.C. Cir. 2017); United States v. Aetna, Inc., 240 F. Supp. 3d 1 (D.D.C. 2017).
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See Greaney and Richman, supra note 3.
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T.L.Greaney, “The Affordable Care Act and Competition Policy: Antidote or Placebo?”Oregon Law Review89, no. 3 (2011): 811-845.
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See L. P.Casalino, “The Medicare Access and CHIP Reauthorization Act and the Corporate Transformation of American Medicine,”Health Affairs36, no. 5 (2017): 865-869.
R.Abelson, “UnitedHealth Group to Buy Outpatient Surgery Chain for $2.3 Billion,”New York Times, Jan. 9, 2017.
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A.W.Mathews, “UnitedHealth to Buy Large Doctor Group for $4.9 Billion,”Wall Street Journal, December6, 2017.
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See R. F.Leibenluft, “Antitrust and Provider Collaborations: Where We’ve Been and What Should Be Done Now,”Journal of Health Politics, Policy & Law40, no. 4 (2015): 847-874.
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See e.g., American Hospital Ass’n, Hospitals: The Changing Landscape is Good for Patients & Health Care, at 1 (2013), available at <https://www.aha.org/system/files/2018-02/12-03-02-landscape.pdf> (last visited November 1, 2018) (“Mergers may be the only recourse, as decades old regulatory barriers can keep hospitals and doctors from working closely together to improve care and reduce costs unless they are under the same ownership umbrella.”); Engelberg Center for Health Care Reform at Brookings, Bending the Curve—Person-Centered Health Care Reform: A Framework for Improving Care and Slowing Health Care Cost Growth, at 8 and 31 (April 2013): [T]he antitrust enforcement framework [should be updated] to place greater emphasis on favoring clinical integration activities that are accompanied by financing reforms that move away from FFS payments and place providers at financial risk for quality gaps and higher costs… Many clinical coordination arrangements or even mergers among high market-share organizations could be considered safer if the merged organizations …implement contracts with payers that place substantial emphasis on reducing overall costs while improving quality and if subsequent performance on these measures improves significantly. We view this as more meaningful evidence on the value of care than analysis that focuses on prices for specific services. See also, M. Noether, “The St. Luke’s-Saltzer Case: Can Antitrust and Health Reform Policies Converge?” CPI Antitrust Chronicle (April. 2014)(discussing efficiency benefits from physician employment); B. Klein, R.G. Crawford, and A.A. Alchian, “Vertical Integration, Appropriable Rents, and the Competitive Contracting Process,” Journal of Law and Economics 21, no. 2 (1978): 297, 298 (in complex integration, “the costs of contracting will generally increase more than the costs of vertical integration.”).
16.
R.A.Berenson, P.B.Ginsburg, J.B.Christianson, and T.Yee, “The Growing Power of Some Providers to Win Steep Increases in Payment from Insurers Suggest Policy Remedies Are Needed,”Health Affairs31, no. 5 (2012): 973-981.
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U.S. v. AT&T, 2017 WL 6329012 (D.D.C 2018).
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United States v. Hammermill Paper Co., 429 F. Supp. 1271 (W.D. Pa. 1977).
19.
The Non-Horizontal Merger Guidelines, issued in 1992 and revised in 1997, have received little attention in the courts and focus on harms from reducing the probability of entry and facilitating collusion; notably, the term “foreclosure” does not appear in the Guidelines. U.S. Department of Justice, Non-Horizontal Merger Guidelines, available at <https://www.justice.gov/atr/non-horizontal-merger-guidelines> (last visited November 1, 2018).
20.
Ford Motor Co. v. United States, 405 U.S. 562 (1972).
21.
The FTC’s first challenge to a physician merger, commenced in 2012, involved the acquisitions by the largest hospital system in the Reno, Nevada area of two cardiology groups — making the system the employer of 88% of the active cardiologists in the market. The FTC entered into a consent order that did not enjoin the merger but rather required the system to release physicians from covenants not to compete. In the Matter of Renown Health, FTC Dkt. No. Docket No. C-4366 (December 4, 2012), available at <www.ftc.gov/enforcement/cases-proceedings/1110101/renown-health-matter> (last visited November 1, 2018).
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Saint Alphonsus Med. Ctr.-Nampa Inc. v. St. Luke’s Health Sys., Ltd., 778 F.3d 775, 791(9th Cir. 2015).
23.
See T. L.Greaney and D.Ross, “Navigating Through the Fog of Vertical Merger Law: A Guide to Counselling Hospital Physician Consolidation,”University of Washington Law Review91, no. 1 (2016): 199-251 at 221-222.
24.
See, J. Baker, supra note 2 (comparing the broad brush antitrust maxim, “vertical good, horizontal bad” to Snowball’s “four legs good, two legs bad” in George Orwell’s Animal Farm).
25.
Herbert Hovenkamp described Robert Bork’s “beguingly simple” account of the competitive effects of vertical mergers as follows: First, if vertical integration created efficiencies, then a vertically integrated firm would have cost advantages over unintegrated rivals. In that case vertical integration would deter unintegrated entry, but it is not antitrust’s purpose to condemn cost savings. Second, if vertical integration did not create any efficiencies, then it would not impede entry by anyone. Firms that wished to enter at one stage alone could contract with firms at the other stage and be just as efficient as the vertically integrated firm. Third, if vertical integration resulted in higher costs, then vertically integrated firms would decline in favor of unintegrated firms. Fourth, in competitively structured markets vertical integration would lead to self-dealing, but that would do no more than force realignment in purchasing and sale patterns. Bork’s observations were built on an extraordinarily narrow conception of entry barriers. He barely mentioned patents or other intellectual property rights. There was no conception that sunk costs plus risk could facilitate entry deterrence. H.Hovenkamp, “Robert Bork and Vertical Integration: Leverage, Foreclosure, and Efficiency,”Antitrust Law Journal79, no. 3 (2014): 983-1001.
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R. H.Bork, The Antitrust Paradox (New York: Basic Books, 1978): at 225.
27.
See, J.Goldsmith, L.R.Burns, A.Sen, and T.Goldmith, Integrated Delivery Network: In Search of Benefit and Market Effects (National Academy of Social Insurance, 2015): at 8; Advocates for a permissive standard governing mergers also assert that alternative arrangements that enable vertical relations such as joint ventures and other contractual commitments are less efficient because of the uncertainties inherent in contracting and transaction costs. See B. Klein, R. G. Crawford, and A. A. Alchian, “Vertical Integration, Appropriable Rents, and the Competitive Contracting Process,” Journal of Law and Economics 21, no. 2 (1978): 297-235 at 298.
28.
T. G.Krattenmaker and S. C.Salop, “Anticompetitive Exclusion: Raising Rivals Costs to Achieve Power Over Price,”Yale Law Journal96, no. 2 (1986): 209-293 at 213.
29.
Professor Salop’s recent work systematically refutes the bases upon which Chicago School’s permissive approach to vertical mergers is based. S. C.Salop, “Invigorating Vertical Merger Enforcement,”Yale Law Journal127, no. 7 (2018): 1962-1964. Other scholars have also criticized the law’s neglect of competitive harms from vertical arrangements. See e.g., J.B.Baker, “Exclusion as a Core Competition Concern,”Antitrust Law Journal78, no. 3 (2013): 527-589.
30.
S. C.Salop and D. P.Culley, “Potential Competitive Effects of Vertical Mergers: A How-To Guide for Practitioners,”December8, 2014, available at <http://scholarship.law.georgetown.edu/cgi/viewcontent.cgi?article=2404&context=facpub> (“Vertical mergers seldom involve firms that have monopolies protected by prohibitive entry barriers. If there is no monopoly, then there is no single monopoly profit.”)
31.
See Salop and Culley, supra note 30 and Salop, “Invigorating Vertical Merger Enforcement” supra note 29.
32.
For example, vertical mergers may facilitate coordination in the hospital market by weakening the disruptive behavior of a nonintegrated hospital, a strategy that could be implemented with targeted input foreclosure or threats of foreclosure. See, Salop and Culley supra note 30 at 25-26.
33.
In 2008 the FTC challenged a ten year, exclusive sublicense for Venofer, a pharmaceutical product produced by Daiichi Sankyo used by dialysis clinics operated by Fresenius Medical Care, which would allow Fresnius to evade Medicare price regulations. In the Matter of Fresenius Medical Care AG & Co. KGaA and Daiichi Sankyo Company, Ltd, No. 081-0146 (F.T.C. Sept. 15, 2008), available at <www.ftc.gov/sites/default/files/documents/cases/2008/09/080915freseniusanal.pdf> (last visited November 1, 2018).
34.
See generally, Greaney and Ross, supra note 23; see also Declaration of Debra Hass-Wilson in St. Alphonsus Med. Center-Nampa et al. v. St. Luke’s Health 2012 WL 9515607 (D.Idaho) (economic analysis of foreclosure effects in hospital acquisition of a primary care physician practice).
35.
Letter from D. Jones, Commissioner, California Department of Insurance to Attorney General Jeff Sessions and Assistant Attorney General Makan Delrahim, U.S. Dep’t of Justice (August 1, 2018); Letter from J. L. Madara, Executive Vice President and CEO, American Medical Association to Assistant Attorney General Makan Delrahim (August 7, 2018); Letter from D. L. Moss, President, American Antitrust Division to Makan Delrahim, Assistant Attorney General, Antitrust Division, U.S. Department of Justice (March 2017), available at <https://www.antitrustinstitute.org/work-product/aai-calls-on-doj-to-block-the-merger-of-cvs-aetna-vertical-integration-will-restructure-important-healthcare-markets-to-the-detriment-of-competition-and-consumers> (last visited December 10, 2018). See also, Statement of T. L. Greaney, California Department of Insurance Hearing on Proposed CVS/Aetna Merger (June 19, 2018).
36.
Id.
37.
Id.
38.
See notes 43-46 infra.
39.
See Madara Letter supra note 35; Greaney Statement supra note 35.
40.
“Cigna/Express Scripts: Coordinated PBM Impact on Health Plan Rivals Tops Potential Vertical Concerns,”The Capitol Forum6, no. 165, April23, 2018.
41.
Salop supra note 29 at 1975-1980.
42.
Id. See also, Greaney and Ross, supra note 23.
43.
American Medical Association, Competition in Health Insurance: A Comprehensive Study of U.S. Markets (2017).
44.
M.Gaynor, “Examining the Impact of Health Care Consolidation,” Statement before the Energy and Commerce Oversight Committee, U.S. House of Representatives, February14, 2018, at 7.
45.
L.Dafny, “Health Insurance Industry Consolidation: What Do We Know From the Past, Is It Relevant in Light of the ACA, and What Should We Ask?” Testimony Before the Subcomm. on Antitrust, Competition Policy, and Consumer Rights of the S. Comm. on the Judiciary, 114 Cong. 5 (2015) available at <http://www.judiciary.senate.gov/imo/media/doc/09-22-15%20Dafny%20Testimony%20Updated.pdf> (last visited November 2, 2018).
46.
Id.
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B. D.Fulton, “Health Insurance Market Concentration in the United States: Trends in the United States and Policy Responses,”Health Affairs36, no. 9 (2017): 1530-1538.
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Id.
49.
C.Stern, “CVS and Walgreens are Completely Dominating U.S. Drugstore Industry,”Business Insider, July29, 2015.
50.
Fulton, supra note 47.
51.
Gaynor, supra note 44 at 6.
52.
Id.; see also Dafny, Health Care Consolidation, supra note 45.
53.
See generally id. at 7-9; See also M.Gaynor and R. J.Town, “The Impact of Hospital Consolidation,” (2012) The Synthesis Project, Policy Brief No. 9, Robert Wood Johnson Foundation (hospitals); see also note 56 infra (physicians).
54.
See Gaynor, supra note 44 at 10-11.
55.
See C. C.Havighurst and B. D.Richman, “The Provider Monopoly Problem in Health Care,”Oregon Law Review89 (2011): 847-883; Greaney supra note 8.
56.
J.Goldsmith, L. R.Burns, A.Sen, and T.Goldsmith, Integrated Delivery Networks: In Search of Benefits and Market Effects, National Academy of Social Insurance (2015)(summarizing literature and analyzing performance of 15 of the largest integrated delivery systems).
57.
See e.g., J. M.McWilliamset al., “Delivery System Integration and Spending and Quality for Medicare Beneficiaries,”JAMA173, no. 15 (2013): 1447-1456.
58.
See Salop, Invigorating Vertical Merger Enforcement, supra note 29 at 1973 (“the same inherent upward pricing pressure occurs for vertical mergers” as for horizontal mergers).
59.
M.Gaynor, “Examining the Impact of Health Care Consolidation,” Statement before the Energy and Commerce Oversight Committee, U.S. House of Representatives, February14, 2018, at 11.
L.C.Baker, M. K.Bundorf, and D. P.Kessler, “Vertical Integration: Hospital Ownership of Physician Practices Is Associated with Higher Prices and Spending,”Health Affairs33, no. 5 (2014): 756-763 at 762; D. Haas-Wilson, “Hospital-Physician Integration: The St. Luke’s Case,” in The Antitrust Revolution: Economics, Competition and Policy (Kwoka ed., forthcoming); J. Robinson and K. Miller, “Total Expenditures per Patient in Hospital-Owned and Physician-Owned Physician Organizations in California,” JAMA 312, no. 16 (2014): 1663-1669(finding hospital-owned physician organizations had 10-20% higher total expenditures/patient than physician-owned organizations); C. Capps, D. Dranove, and C. Ody, “The Effect of Hospital Acquisitions of Physician Practices on Prices and Spending,” Institute for Policy Research, Northwestern University, Working Paper No. WP-15-02, Feb. 2015 (finding that vertical integration was associated with a 13.7% increase in physician prices); and H. T. Neprash et al., “Association of Financial Integration Between Physicians and Hospitals With Commercial Health Care Prices,” JAMA Internal Medicine 175, no. 12 (2015): 1932-1939 (finding that MSAs with increases in physician-hospital integration experienced median price increases of $75). A. Dunn and A.H. Shapiro, “Do Physicians Possess Market Power?” Journal of Law and Economics 57, no. 1 (2014): 159-193. R. Kocher and N. Sahni, “Hospitals’ Race to Employ Physicians — The Logic behind a Money-Losing Proposition,” New England Journal of Medicine 363, no. 19 (2012): 1790-1793.
63.
R.Scheffler, “What Happens When Hospitals Buy Physician Practices in California: Impacts on ACA Premiums and Out-patient Prices,”Health Affairs (forthcoming 2018).
64.
R.A.Berenson, “A Physician’s Perspective on Vertical Integration,”Health Affairs36, no. 9 (2017): 1585-1590 at 1586 (“literature reviews find integration has not improved quality and could even reduce it because of reduced competition”).
65.
L. S.Dafny and T. H.Lee, “The Good Merger”New England Journal of Medicine372, no. 22 (2015): 2077-2079.
S.Desai and J. M.McWilliams, “Consequences of the 340B Drug Pricing Program.”New England Journal of Medicine378, no. 6 (2018): 539-548.
69.
Robert Wood Johnson Foundation, “Health Policy Brief: Site-Neutral Payments,”Health Affairs, July24, 2014, MedPAC, Report to Congress 2014.
70.
See 42 C.F.R. 411.357 (Stark Law exception allowing physician with bona fide employment relationship to make referrals to employer-hospital subject to certain conditions).
71.
U.S. v. Blue Cross and Blue Shield of Michigan, 809 F. Supp. 665 (E.D. Mich. 2011).
72.
See U.S. and North Carolina v. Charlotte-Mecklenburg Hospital Authority, d/b/a Carolinas Healthcare System, March 30, 2017 (Order denying defendant’s motion for judgment on the pleadings).
73.
California v. Sutter Health, CGC-18-565398 (San Francisco County Superior Court) (Mar. 29, 2018).
74.
See R.Feldman and E.Frondorf, Drug Wars: How Big Pharma Raises Prices and Keeps Generics Off the Market (New York, Cambridge University Press, 2017).
75.
See Verizon Communications Inc. v. Law Offices of Curtis V. Trinko, 124 S. ct. 872 (2004); see also, T.L.Greaney, “Coping with Concentration,”Health Affairs36, No.9 (2017): 1564-1571.
76.
J.B.Baker, “Exclusion as a Core Competition Concern,”Antitrust Law Journal78, no. 3 (2013): 527-589.
77.
H.Hovenkamp, “Prophylactic Merger Policy,”University of California Hastings Law Journal (forthcoming 2018).
78.
See Id. (discussing the application of the incipiency test in the case of vertical mergers).
79.
See e.g. Saint Alphonsus Med. Ctr.-Nampa Inc. v. St. Luke’s Health Sys., Ltd., 778 F.3d 775, 791(9th Cir. 2015); U.S. v. Anthem, Inc., 855 F. 3d 345 (D.C. Cir. 2017).
80.
U.S. Department of Justice and Federal Trade Commission, Horizontal Merger Guidelines, (2010) §9.
81.
Animal Farm, supra note 1. (“The creatures outside looked from pig to man, and from man to pig, and from pig to man again; but already it was impossible to say which was which.”)
