HealthTrek
August 2016
Antitrust and Anticompetitive
Implications of Health Care
Consolidation
By: Kenneth E. White, J.D.
National Managed Care Practice Leader, Willis Towers Watson
If we will not endure a king as a political power,
we should not endure a king over the production,
transportation and sale of any of the necessities of life.
Sen. John Sherman
Approximately 1300 mergers in the health care industry were
announced in 2014, worth a combined $390 billion. The numbers for
2015 were similar and included hospitals, physician groups, health
plans, drug manufacturers and retail pharmacy. The numbers for
2016 are down significantly but there have been several hundred
mergers of significant value closed or announced this year,
primarily in the hospital, physician, pharmacy and vendor industry
sectors.1 This trend has been growing over the last few decades
but accelerated after the passage of the Affordable Care Act (ACA).
Prior to 1993, challenges by pucblic agencies and private plaintiffs
were rare but often successful. From 1993 until 2007, the Federal
Trade Commission (FTC) and the Department of Justice (DOJ) ran
up some impressive numbers for failed challenges. Most successful
challenges were based on private plaintiff lawsuits. Since 2008, the
frequency of challenges by the public agencies has been increasing
as have the efforts to merge or collaborate in the health care industry;
public challenges and private plaintiff lawsuits are also enjoying
renewed success.
The Sherman Antitrust Act, passed in 1890(15 U.S.C. §§ 1-7) is short,
has never been directly amended and has been a major force in
shaping the landscape of business in the U.S. This legislation provides
that “Every contract, combination in the form of trust or otherwise,
or conspiracy, in restraint of trade or commerce among the several
States, or with foreign nations, is declared to be illegal.” The
legislation also states that “Every person who shall monopolize, or
attempt to monopolize, or combine or conspire with any other person
or persons, to monopolize any part of the trade or commerce among
the several States, or with foreign nations, shall be deemed guilty
of a felony.” The federal government was the primary enforcement
mechanism for these prohibitions.
The Clayton Act, passed by Congress in 1914 (15 U.S.C. § 12-27),
extended the right to sue to “any person who shall be injured in his
business or property by reason of anything forbidden in the antitrust
laws.” This included the states. The Clayton Act provides more
detailed provisions to prohibit mergers that would be anticompetitive,
exempted unions’ anticompetitive price discrimination, collusion,
price fixing and exclusive dealing practices. The law also expanded
the standing to sue to individuals, business entities and states.
Section 7 of the Clayton Act indicates that acquisitions where the
intended effect “may be substantially to lessen competition, or to tend
to create a monopoly” are prohibited and this applies to any industry
or activity affecting commerce in any area of the country.
The Federal Trade Commission Act (15 U.S.C. §§ 41-58, as amended)
prohibits “unfair methods of competition” and “unfair or deceptive
acts or practices.” The Act provides the FTC with powers to
* enforce the Sherman and Clayton antitrust provisions and to act as
a consumer protection agency, with powers to prohibit practices
not dealt with in the antitrust laws. The Robinson-Patman Act of
1936 (15 U.S.C. § 13 et seq.) amended the Clayton Act to ban certain
discriminatory prices, services and allowances in dealings between
merchants. The Hart-Scott-Rodino Antitrust Improvements Act of
1976 (15 U.S.C. § 18a) also amended the Clayton Act and granted
the attorney general of each state broad new powers to represent
state residents in federal antitrust lawsuits. The FTC’s Bureau of
Competition, working in tandem with the Bureau of Economics,
enforces the antitrust laws for the benefit of consumers. The
Antitrust Division of the Department of Justice is also charged with
enforcement.
to as state antitrust and unfair and deceptive trade practices (UDTP)
acts. For instance, the Florida Antitrust Act tracks the Sherman Act’s
prohibitions and applies them to trade or commerce in Florida. The
Florida law allows treble damages and costs, including attorneys’
fees, and equitable relief to individuals, businesses and the Florida
attorney general. In addition, Florida has an UDTPA that includes
some of the provisions of the Clayton Act and is intended to protect
the people, businesses and the state from those who engage in unfair
methods of competition, or unconscionable, deceptive or unfair
acts or practices in the conduct of any trade or commerce. The law
provides for equitable relief and compensatory damages as well as
fees and costs.
The McCarran-Ferguson Act of 1945 (15 U.S.C. §§ 1011-15) vested
regulatory authority over the insurance industry in the states. The
federal reach of the Sherman Act, the Clayton Act, and the Federal
Trade Commission Act is applicable to the “business of insurance”
only to the extent where: (1) such business is not regulated by state
law [§ 1012], or (2) there are insurer or acts of “boycott, coercion, or
intimidation”.
This has not stopped private, state and federal efforts to challenge
combinations and activities of health insurers and managed care
companies as has been in the national, insurance and legal media
of late. See, IN RE: BLUE CROSS BLUE SHIELD ANTITRUST
LITIGATION, (MDL No. 2406), Master File No. 2:13-CV-20000-RDP,
USDC, ND AL; USA, et al v. Aetna, Inc. and Humana, Inc., 1:16-cv-01494,
USDC D DDC; USA, et al v. Anthem, Inc. and Cigna Corp., 1:16-cv01493, USDC DDC. If the challenge is not to a proposed merger,
these same plaintiffs may seek to prohibit certain activities by existing
companies that are anticompetitive. Federal and state agencies have
recently sued Carolinas HealthCare System in the USDC in Charlotte
alleging that the hospital company used its greater than 50% market
share to require steering restrictions in its contracts with managed
care organizations. USA v. The Charlotte-Mecklenburg Hospital
Authority, 3:16-cv-00311, USDC WDNC. This lawsuit is similar to the
litigation related to the most favored nation clauses that Blue Cross
Blue Shield of Michigan included in its contracts with providers. USA
v. Blue Cross Blue Shield of Michigan. 809 F. Supp. 2d 665 (E.D. Mich.
2011).
A number of states have passed similar legislation prohibiting anticompetitive practices, including state “antitrust” legislation or unfair
and deceptive trade practices acts. Texas, California, Florida, New
York, Connecticut and many other states have laws similar to the
federal antitrust statutes as well as additional legislation that goes
beyond the limitations of the federal laws. Most have a law that tracks
the Sherman and parts of the Clayton Act and another that tracks
parts of the Clayton Act and the FTC Act. These are often referred
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Anticompetitive behavior and the impact of monopolies and mergers
are evaluated along product and geographic boundaries or markets
as well as the type of arrangement and activity in order to determine
if the actions are, in fact, anticompetitive. This analysis includes
defining the proper “market” to be evaluated (often a contentious
process), which can include multiple markets, concentrations, market
share, bargaining power, product lines or specialties, etc. Defenses to
claims and challenges include that the entities involved are non-profit,
that the merger or behavior is necessary to prevent failure, that the
actions and collaborations create efficiencies, create competition,
increase access or choice or lower costs. Claimed obstacles to
discriminatory pricing or price fixing and regulatory imprimatur are
also advanced as defenses. Price and non-price competition and
potential, as well as actual results are evaluated. The political rhetoric
and stated goals of the ACA mirror many of these defenses though
few of them have actually been realized, not even the increase in
access or quality — and not the decrease in cost.
Many feel that the ACA is actually driving the consolidation and
having a negative impact on competition. Richman, Barak D.,
Concentration in Health Care Markets: Chronic Problems and Better
Solutions (June 1, 2012). American Enterprise Institute, June 2012.
Available at SSRN: http://ssrn.com/abstract=2163749. A recent
study conducted by USC, author Glenn A. Melnick, PhD, Blue Cross
of California professor of health care finance and director of the
Center for Health Policy and Management at USC, estimates the cost
for care at California hospitals increased 76% over the last decade
and that costs at large health systems increased by a larger margin.
The study, published June 9 in INQUIRY: The Journal of Health Care
Organization, Provision, and Financing, used claims data from Blue
Shield of California to calculate payments (actual prices versus billed
charges) to hospitals, focusing on hospitals in the largest multihospital systems. It found that Blue Shield’s average payment for
patient admission increased 113% at Sutter Health and Dignity Health
facilities from 2004 to 2013 while payments per admission at all other
hospitals increased 70%. The study author indicated the findings
were not limited to California. There have been any number of studies
that have concluded that consolidations in the provider sector of
health care increase costs. Commins, J., Another Study Links Hospital
Mergers to Higher Prices, HealthLeaders Media, March 28, 2016. This
sentiment has also been expressed in many defensive briefs related
to post ACA merger challenges. Strom, Roy, ‘Obamacare-Made-MeDo-It’ Defense to Hospital Mergers Gains Foothold, The National Law
Journal, May 17, 2016.
It is important for all businesses, especially managed care companies,
to understand the laws against anticompetitive and unfair trade
practices and activities at the federal and state level and, to the extent
possible, protect against the expenses of regulatory investigations
at the federal and state levels and the costs associated with civil
litigation filed by the federal government, states, competitors,
members/beneficiaries and network and non-network providers.
The consolidation in the industry has been unprecedented in the
last 20 years and antitrust and similar lawsuits and investigations
are being brought by the Antitrust Division of the Department of
Justice, the Federal Trade Commission, state attorneys general and
private plaintiffs at an increasing rate, as well. These claims implicate
D&O coverage, E&O coverage, stand-alone regulatory coverage
as well as ERM programs and the decision making process behind
business decisions leading to the use of prohibited anti-competitive
practices, mergers and acquisitions. This drive towards consolidation
and potentially anti-competitive behavior is being fostered by
multiple factors, including economics and finance, normal business
cycles and the pressures and predilections of the ACA and the
mass regulations promulgated under the ACA. Christopher Pope
wrote on behalf of the Heritage Foundation in August 2014 (“How
the Affordable Care Act Fuels Health Care Market Consolidation”)
that “the growth of monopoly power among health care providers
3 Health Trek August 2016
bears much responsibility for driving up the cost of health care
over recent years. By mandating that general hospitals provide
uncompensated care, state and federal legislators have given them
cause to insist on regulations and discriminatory subsidies to protect
them from cheaper competitors. Instead of freeing these markets
to allow the provision of care by the most efficient organizations,
the ACA endorses these anti-competitive arrangements. It extends
the premium paid for treatment in general hospitals, employs the
purchasing power of the Medicare program to encourage the
consolidation of medical practices, and reforms insurance law to
eliminate many of the margins for competition between carriers.”
Barak Richman, a professor of Law and Business at Duke University,
in an American Enterprise Institute project, Concentration in Health
Care Markets: Chronic Problems and Better Solutions, stated:
“Health care providers with market power enjoy substantially more
pricing freedom than monopolists in other markets, for a reason not
generally recognized: U.S.-style health insurance. Consequently,
monopolies in health care cause undesirable redistribution of
wealth and inefficient allocation of resources, both of which burden
consumers at levels beyond those of other monopolists.” Dr. Richman
stated that the pressure to consolidate in the provider industry was
multiplied by the ACA and its regulations; in effect, creating barriers
to competition, the opposite of its stated intention. Richman wrote
that the ACA does little to address the monopoly problem and may
even worsen it and that the highly regulated and heavily subsidized
system has triggered a mad scramble in the health industry (insurers,
pharmaceutical manufacturers, physician practice groups, device
makers, hospitals) to grab a larger market.
The Medical Loss Ratio requires managed care organizations
(MCOs) to adopt different efforts to reduce costs, as they have lost
some of the ability to withstand medical cost inflation. The required
essential health benefits under the ACA and the elimination of
individual underwriting with guarantee issue leads to a reduction in
innovation and investments. Comprehensive subsidized coverage
results in increased — not decreased — costs by increasing
the enticements of price fixing, monopolistic pricing and other
anticompetitive behaviors. This can be seen in the fact that medical
inflation is still three times the general inflation and that the U.S., as a
society, pays far more for similar health care services than do people
in other countries.
The state and federal supervised health insurance exchanges, the
expansion of Medicaid and the significant expense and regulatory
compliance burden under the ACA and state MCO and insurance
regulation make the situation worse by limiting the ability of new
providers to enter the market. Well-established MCOs and providers
are the preferred choices of regulators and those utilizing narrow
networks and value-based contracting, including CMS and state
Medicaid agencies. In this environment, MCOs gain more by merging
or acquiring smaller plans to improve their bargaining position against
the regulators and exchanges, the providers and the consumers.
Dr. Richman, when testifying before the U.S. House Judiciary
Committee on the ACA, consolidation and antitrust enforcement,
indicated that the DOJ and FTC must be very aggressive in enforcing
the existing antitrust and trade practices laws against providers,
Pharma, suppliers AND payers. Dr. Barak Richman, The Patient
Protection and Affordable Care Act, Consolidation and the Consequent
Impact in Competition in Healthcare, House Judiciary Committee,
Subcommittee on Regulatory Reform, Commercial and Antitrust Law,
Sept. 19, 2013.
Similar concerns regarding the impact and destabilization of the
provider industry were expressed by Lisa Maiuro, Ph.D., in her
paper for the California Healthcare Foundation, June 2015: Antitrust
Principles and Integrated Health Care: Implications for Consumers and
Health Care Organizations.
The ongoing consolidation should be and is being met with an
increasing amount of government and private litigation aimed at
preventing the consolidation of the industry. On the MCO side, there
are currently the big six companies: United Health Group, Aetna,
Anthem, Cigna, Humana and the not-for-profit Blues plans (included
here as a joint enterprise). The mergers of Aetna and Humana and
of Anthem and Cigna are being reviewed at this time by the FTC,
the DOJ and a number of state attorneys general. The DOJ and a
number of states have recently filed suit challenging these mergers
based on Sherman Act violations and harm to competition in local,
regional and national markets across multiple product lines. The
Centene acquisition of Health Net faced stiff opposition from multiple
agencies, especially the State of California, but was finally approved
with modifications. That merger recently closed. A provider class
and member class have sued all Blues plans and the Blue Cross
Blue Shield Association in federal court alleging a number of causes
of action based on federal and state antitrust and anti-competitive
behavior laws. Aetna has sued Blue Cross Blue Shield of Michigan for
anticompetitive behavior including most favored nation clauses. The
Ingenix and UCR litigation mass and class actions included alleged
violations of federal and state anticompetitive behavior legislation.
There have been many challenges to provider consolidations,
with that related to the acquisition of Saltzer Medical Group by St.
Luke’s Health System in Idaho having received the most notice.
However, until recently, there have been few challenges to payer side
consolidations and acquisitions.
The challenges, both public and private, to the anticompetitive
behavior of payers has been based on business strategies and
actions under the Clayton Act and the FTC Act (or similar state laws),
not for monopolistic tendencies or M&A activity under the Sherman
4 Health Trek August 2016
Act. Total health care spending in the U.S. is close to $4 trillion. CMS
spends $100 million every hour of every day of the year and more
than $800 billion was paid in premiums for health benefits in 2014
(and probably closer to $900 billion in 2015). However, the largest
25 health plans (as parent companies) account for the vast majority
of the premium dollars. There are fewer than 400 health plans of
any size nationwide, many with limited geographic scope, product
lines and membership. Further consolidation in the payer sector
would seem to be high on the priority list for enforcement, but that
has not yet proven to be the case in the past. While MCOs have been
challenged in the past related to their business practices, they have
not been pressed to any significant degree on M&A activity. A review
of the DOJ antitrust case filings bears this out. https://www.justice.
gov/atr/antitrust-case-filings-alpha. During Bill Baer’s (Asst. AG,
Antitrust Div) recent testimony before the Senate Subcommittee
on Antitrust and Competition, there was little or no mention of
enforcement in the health care industry. Baer, March 9, 2016,
Oversight of the Enforcement of the Antitrust Laws, Antitrust Sub.
Comm., Senate Judiciary Comm.
In defense of challenges that do come, MCOs/payers will point to
the same defenses as noted above when challenged and add that
the industry is highly regulated at the federal and state levels, that the
concepts of markets is very complex on the payer side, that there is
an ease of entry not seen with providers and large pharma companies
(something that may not be true), that the ACA regulations and
exchanges require consolidation to achieve economies of scale and
reduced premiums, and that the Medical Loss Ratio is a buffer for
price-based concerns. The FTC, per Debbie Feinstein in an interview
with Health Leaders Media December 29, 2015, admitted that
challenges of payer side actions have been limited and centered on
unfair and deceptive trade practices. She noted that the FTC does
examine alleged efficiencies and pro-competition benefits but that
those alleged benefits of the actions/consolidation, must be actual —
not anticipated — and must be related to actions/merger in question
and there cannot be another way of achieving the same goal.
These pro-competition defenses are questioned at all levels
because, as has been reported, few if any quality improvements have
been tied to consolidation and collaboration efforts and prices have
actually increased in areas where consolidation has occurred. The
National Bureau of Economic Research reported that, where there
had been significant consolidation in the provider sector, costs had
increased by 15%. Yet the NBER also has reported that consolidation
in the MCO industry — the payers — has contributed very little to the
increasing costs of health care coverage. Dafny and Duggan, Paying a
Premium on Your Premium? Consolidation in the U.S. Health Insurance
Industry, NBER Working Paper No. 15434. Medical cost inflation is
still increasing several times faster than the rest of the economy and
most report ongoing and in some locations significant increases in
health benefit plan premiums, even with cost shifting to the consumer.
Others note that some consolidation is occurring “naturally” with the
failures of co-ops and ACOs, decisions of health systems or private
equity firms to sell or close hospitals and health plans, the loss of the
majority of so-called open networks, the withdrawal from the ACA
exchanges by United Health Group and other factors. While health
coverage premiums are, indeed, rising and rising significantly (as are
cost shifting measures to the consumer), the consolidation in the
provider industry is credited with increasing costs of care while the
consolidation in the payer sector is not substantially contributing to
the cost of coverage.
Assistant Attorney General Bill Baer also spoke to The New Health
Care Industry Conference: Integration, Consolidation, Competition in
the Wake of the Affordable Care Act at Yale University in Washington,
D.C., on November 13, 2015. He restated the position of the DOJ
Antitrust Division’s position with regard to their efforts and intent to
maintain competition in the health care industry and compliance with
the federal antitrust laws. Mr. Baer said:
“Competition is central to the provision of affordable quality health
care in the U.S. It promotes innovation and helps deliver the best
health outcomes for the lowest prices. Consumers benefit when
they have meaningful choices among insurers and hospitals,
physicians and therapists, prescription drugs and medical devices.
… While the ACA promotes collaboration and integration, it does
not and was not meant to give anyone a free pass from the antitrust
laws. Indeed, the very harms that result from the exercise of market
power – higher prices, fewer competitors, reduced innovation –
are contrary to the law’s goals. Antitrust enforcement in health
care should aim to prevent or remedy the acquisition and abuse
of market power, just as it does in other industries. We don’t pick
winners and losers. Our job is to block mergers that threaten
to reduce competition; our job is to challenge competitors who
want to conspire rather than compete; and our task is to ensure
that companies do not raise barriers that deny competitors the
opportunity to enter new markets or expand their existing market
presence.”
The FTC and the DOJ have reiterated on numerous occasions
their intent to review and challenge insurer, hospital, and physician
mergers that threaten to reduce competition substantially. In the
last 10 years, the DOJ has either blocked or required substantial
divestitures in seven MCO mergers. Granted, this is not a large
percentage, but the efforts are intensifying. The DOJ and the FTC
have sued to stop the purchase of physician groups, anticompetitive
pricing of medical services, hospital mergers and the integration of
hospital and physician services. Merger enforcement has become
the primary focus of the agencies as they interact with the health care
industry.
However, this phenomenon of driven consolidation has been evident
for many years. Martin Gaynor and Deborah Hass-Wilson of the
National Bureau of Economic Research noted in 1998 that “The
health care industry is being transformed. Large firms are merging
and acquiring other firms. Alliances and contractual relations
between players in this market are shifting rapidly. Within the next
few years, many markets are predicted to be dominated by a few
large firms. Antitrust enforcement authorities like the Department
of Justice and the Federal Trade Commission, as well as courts and
legislators at both the federal and state levels, are struggling with
the implications of these changes for the nature and consequences
of competition in health care markets.” Martin Gaynor, Deborah
Haas-Wilson, Change, Consolidation, and Competition in Health
Care Markets, NBER Working Paper No. 6701, August 1998. This
consolidation has been blamed on business cycles, the HMO
revolution, the lack of transparency or enforcement efforts but
regardless of the reason for the consolidation, it is clear that we are
still struggling with the effects of the consolidation and enforcement
of the relevant anti-competition laws.
Debbie Feinstein, Director of the Bureau of Competition of the
FTC, spoke to the American Health Lawyers Association in
September 2014 and noted the increased efforts to review, mold
and, if necessary, challenge mergers under the Sherman Act, the
Clayton Act and its own enforcement rights under the FTC Act,
so called Section 5 actions. Ms. Feinstein said, “The vast majority
of the Commission’s enforcement actions are brought under the
substantive standards of the Sherman and Clayton Acts. Where
5 Health Trek August 2016
health care collaborations undertaken with DOH’s approval and
supervision under Certificate of Public Advantage regulations. Similar
efforts to extend waivers to collaborating groups offered by Alabama
and other states may cause similar problems. The state action
immunity concept was recently clarified in favor of the FTC in the
matter of North Carolina State Board of Dental Examiners v. FTC, 135
S. Ct. 1101 (2015) and FTC v. Phoebe Putney Health System, Inc., 133 S.
Ct. 1013 (2013). Some of these concepts are involved in the Conway
and Galactic Funk Multi-district litigation in Birmingham, Alabama
(MDL 2406), aka In Re: Blue Cross Blue Shield Antitrust Litigation
in which several large putative classes have sued the Blues plans.
The FTC and DOJ have not joined in that litigation. These can all be
located on the FTC and DOJ web sites.
FTC/DOJ ACO Working Group available at: www.ftc.gov/tipsadvice/competition-guidance/industry-guidance/health-care/
accountable-care-organizations.
the Commission has invoked its standalone Section 5 authority,
it has done so only after concluding that the conduct in question
was likely to harm competition and consumers, and only after
taking into account any efficiency justifications.” Examples of those
arrangements include invitations to collude that did not result
in an agreement on price or other competitive terms, improper
information sharing between two competitors, and anticompetitive
violations of FRAND (fair, reasonable and non-discriminatory)
commitments by owners of standard essential patents. Ms. Feinstein
also acknowledged that the FTC is more concerned with horizontal
consolidation that vertical. She noted that the private plaintiffs in
the St. Luke’s matter challenged the transaction under a vertical
theory, the FTC’s challenge was based strictly on a horizontal
theory. “Antitrust challenges by the federal antitrust agencies based
on vertical theories of harm are rare. That said, a vertical provider
transaction could raise concerns, for example, if a hospital acquired
so many physicians in a particular specialty that a competing hospital
would be unable to provide that service because it lacks access to
the needed physicians.” Both the FTC and the DOJ have extensive
policy statements related to their strategic goals (primarily related to
pharmacy, hospitals and physicians) and have published guidance
related to review, voluntary review and potential arguments and
defenses related to support for any given merger or acquisition. This
includes joint ventures and ACOs.
The agencies have also expressed concern over so-called “stategranted antitrust waivers” and “state action immunity” and those are
looked at with a jaundiced eye. In April 2015, the FTC advised the New
York State Department of Health (DOH) that it had “strong concerns”
over state regulations offering to provide antitrust immunity to certain
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Fed. Trade Comm’n & Dep’t of Justice, Statement of Antitrust
Enforcement Policy Regarding Accountable Care Organizations
Participating in the Medicare Shared Savings Program, 76 Fed.
Reg. 67026 (Oct. 28, 2011).
U.S. Dep’t. of Justice & Fed. Trade Comm’n, Statements of
Enforcement Policy in Health Care (1996), available at: www.
ftc.gov/sites/default/files/attachments/competition-policyguidance/statements_of_antitrust_enforcement_policy_in_
health_care_august_1996.pdf.
Fed. Trade Commission and Dep’t of Justice, Improving Health
Care: A Dose of Competition (2004), available at: www.ftc.gov/
reports/healthcare/040723healthcarerpt.pdf.
U.S. Dep’t of Justice & Fed. Trade Comm’n, Antitrust
Guidelines for Collaborations among Competitors (2000),
available at: www.ftc.gov/system/files/documents/public_
statements/300481/000407ftcdojguidelines.pdf.
Materials related to the Commission’s competition health
care work are compiled online at: www.ftc.gov/tips-advice/
competition-guidance/industry-guidance/health-care.
The FTC enforcement activities have been bolstered by a number
of “wins” in the recent past including the St. Luke’s Health System
and ProMedica Health System matters. Both the St. Luke’s and
ProMedica decisions endorsed the Commission’s analytical
approach to assessing the likelihood that a transaction involving
health care providers will cause competitive harm. In ProMedica
the FTC alleged that the merger would have given ProMedica, the
largest hospital system in Toledo, Ohio, over half of the market for
acute care hospital services and over 80% of the market for inpatient
OB services. In St. Luke’s, the FTC argued that the combination
of primary care physician practices would be anticompetitive by
shutting out market entrants in both the provider and payer sectors.
Both St. Luke’s and ProMedica argued that the efficiencies created
by the mergers would benefit consumers and competition; the courts
found that the potential for anticompetitive behavior and outcomes
outweighed any anticipated benefits.
The FTC also recently moved to block the proposed merger of
Advocate Health Care Network and NorthShore University Health
System in Chicago; Cabell Huntington Hospital’s acquisition of
St. Mary’s Medical Center in the Huntington, West Virginia; and,
Penn State Hershey Medical Center’s merger with Pinnacle Health
System in the Harrisburg, Pennsylvania area. A ready guide to the
type mergers the FTC may challenge can be found at: https://www.
ftc.gov/tips-advice/competition-guidance/guide-antitrust-laws/
mergers/competitive-effects . However, the FTC has suffered several
setbacks in these efforts. The trial court in both the Advocate/
Northshore merger and the Hershey/Pinnacle merger ruled that
the consolidations should go forward. The FTC also withdrew its
challenge to the consolidation of the hospital systems in West
Virginia. The court losses were based on a determination that the
FTC did not meet its burden related to the final outcome in order
to be granted a preliminary injunction. See, https://www.foley.
com/judge-allows-advocate-northshore-merger-to-proceed-ftcmay-appeal-06-15-2016/. The withdrawal of the challenge to the
West Virginia merger was based on the passage of a new state
law authorizing the consolidation. It should be noted here that the
process used by the FTC to challenge these consolidations (and
anticompetitive behavior) is an administrative complaint challenging
the activity under review and a civil action in federal court seeking
a preliminary injunction. If the injunction is not issued, the FTC can
continue its efforts to challenge the activity administratively and can,
as it has on the Illinois and Pennsylvania cases, appealed the trial
court decision to the U.S. Court of Appeals. The DOJ, on the other
hand, challenges consolidations by seeking a permanent injunction in
the U.S. District Court, foregoing any effort at a preliminary injunction
or an administrative proceeding.
Types of activities prohibited by the antitrust laws include unlawful
vertical and horizontal arrangements. Some arrangements are per se
illegal and those include collective refusals to deal or group boycott,
joint ventures used to unlawfully exclude other market participants,
market division agreements (such as those at issue in the Conway
litigation involving the Blue Cross Plans), price fixing between
competitors, and tying agreements related to various products
that restrains trade. Vertical relationships between businesses and
customers can also be illegal, including certain exclusive dealings
7 Health Trek August 2016
relationships, bid rigging, price discrimination (such as the MFN
clauses previously used), and vertical price fixing arrangements.
The general concept that “monopolies” are illegal is incorrect. Only
monopolies in restraint of trade are illegal (interstate — federal,
intrastate-state). The same is true of mergers and acquisitions; only
those in restraint of trade or which are per se illegal will be challenged.
Antitrust law generally has historically favored vertical integration
(presumed it is beneficial). Vertical integration generally allows better
integration of products and services, eliminates economic frictions
that impede useful communication and coordination and lead to
higher pricing, facilitates differentiation from other competitors and
enhances innovation and performance of the market. Nonetheless,
significant issues can arise from vertical integration of companies,
services and products, including that the flow of competitively
sensitive information can facilitate other anticompetitive conduct,
bias/unfair competition and the abuse of preexisting market power.
Tying and price fixing are also concerns as is the possible improper
use of monopolistic pricing and market limitations. The FTC and the
DOJ are also concerned with so-called ringleader of health plans/
hospital orchestration of boycotts. This includes such network
configuration clauses as:
ƒƒ
The Heartland Spine & Specialty Hospital matter, where Heartland
sued multiple health plans and major hospital systems in the
Midwest alleging that the large hospital systems inserted “network
configuration” clauses into their network contracts, which called
for rate hikes or renegotiation if a health plan added a physicianowned hospital to its network.
ƒƒ
The Stealth/Memorial Hermann litigation, where the owners of
Town & Country Hospital sued Memorial Hermann in Houston
alleging orchestration of a group boycott among health plans. It
was alleged that Memorial Hermann threatened to pull business or
raise prices to health plans that did business with Town & Country
Hospital.
The FTC and DOJ have recently had before them the mega-mergers
of Aetna/Humana, Anthem/Cigna and a significant but smaller
consolidation between Centene and Health Net. The Centene/
Health Net merger was allowed to proceed with some consolidations.
The DOJ has challenged in court both the Anthem/Cigna merger
and the Aetna/Humana mergers and those matters are not likely
to be decided, except by settlement or the termination of the M&A
effort, prior to the end of the 1st quarter of 2017 at the earliest and
longer if an appeal is taken. The FTC and DOJ have been far more
focused in the last 10 years on provider-side behavior and mergers
but are not being forced to review consolidation in the managed
care arena as well. State attorneys general are looking into these
and other payer side mergers and collaborations. Competitors and
provider organizations, such as the American Medical Association,
American Hospital Association (among many national and state
provider organizations), have all sought to halt or significantly impact
the mergers saying the consolidation that has occurred in the last
10-15 years has limited competition and given the payers far too
much power, and in certain locations, almost a monopoly, which
will be anticompetitive, harm the industry and consumers. While
the merging parties believe their consolidation is well within the
parameters of federal and state statutes and regulations governing
the mergers, it is generally accepted that some concessions will be
required by the federal and state agencies in order to obtain approval.
If those cannot be achieved or agreed upon, challenges will probably
be initiated. Even if the FTC and DOJ approve of the deals as is or
after concessions, the state attorneys general may still challenge
the mergers. Even if the deals close, private individuals, trade or
professional groups, providers and consumers can and likely will sue,
alleging violations of federal and state law.
Cross acquisition, where health plans are buying health systems
or provider groups/health systems are buying health plans, is also
a trend to watch. Other than companies that have always been
“duals,” such as Kaiser Permanente, Geisinger and Partners Health
— these arrangements have had various histories. Humana first
owned, then divested its hospital division, then employed and then
spun off its physicians and now has recently reentered that market.
Anthem has purchased a physician group as has Blue Cross Blue
Shield of Florida. Highmark purchased Allegheny Health Network.
SSMH purchased Dean Health Plan. Each of these acquisitions were
approved if reviewed at all. That does not mean that subsequent
challenges by public or private plaintiffs will not be forthcoming. Blue
Cross Blue Shield of Montana had a very rocky road in acquiring New
West Health Services. Other similar moves were either abandoned
or prevented. UPMC created its own health plan as did UAB and
other large health systems with different financial results. Aetna has
partnered with a number of health systems, such as Inova Health
System in Virginia, to accomplish some of the same goals without a
direct merger or acquisition. Anthem’s Vivity is another example. All
of these collaborations, joint ventures, mergers or organic business
strategies are at risk of a claim under the antitrust laws.
The cost to any company/companies seeking review (required
or voluntary) of a proposed merger, the cost of the approval
process, and any investigation or public or private challenge to
any merger or of any alleged improper or anticompetitive behavior
can be astronomical. The MFN litigation in Michigan, the Ingenix
investigations in New York and MDL litigation in Florida, the UCR
litigation in New Jersey and the MDL involving the Blues plans in
Alabama have cost the defendants hundreds of millions of dollars in
defense costs alone. This is before any cost of a settlement or relief
granted, or the internal human capital expenses are calculated. The
St. Luke’s litigation cost St. Luke’s approximately $20 million without
contemplating the costs associated with the divestiture of the
Saltzer Medical Group. Given the parties have not yet worked out the
divestiture, those costs continue to mount. While nothing can replace
great decisions at the executive and board level when it comes
to business activities, strategies and consolidation/acquisitions,
a strong ERM program and the purchase of insurance coverage
and/or the use of a well-funded captive may lessen the blow of any
government investigation, public or private challenge or litigation.
All companies, of whatever size, regardless of what sector they
operate in, are possible targets of public or private claims. Pittsburghbased UPMC has recently tentatively agreed to pay $12.5 million
to settle an antitrust lawsuit that was filed more than five years ago
by Cole’s Wexford Hotel, an employer/customer of Highmark. The
lawsuit alleged a conspiracy between UPMC and Highmark (two
competing companies that do not appear to like one another much)
which allowed their for-profit subsidiaries to overcharge customers
for premiums by keeping competing insurers out of the local market.
Although the vast majority of all mergers are either not reviewed, or
are reviewed and approved with few if any concessions required
by the federal and state agencies, 93% of all large mergers were
challenged by shareholders in the last few years — up from 44%
in 2007. In addition, consumer, provider/supplier lawsuits account
for the majority of the lawsuits filed against consolidation and
anticompetitive behavior.
A strong ERM plan and culture, a well-staffed and knowledgeable
compliance department and proper D&O, E&O and stand-alone
regulatory coverage should be part of the arsenal of every health
care company to preserve assets when it comes to antitrust and
8 Health Trek August 2016
anticompetitive behavior claims. While a detailed discussion of
enterprise risk management (ERM) is beyond the scope of this paper,
it is an important piece of the defense to costly claims under federal
and state legislation, regulations and private challenges to business
actions and consolidation. Identifying risk and, where possible,
ameliorating that risk before a claim is made is certainly helpful. The
same is true of an ongoing corporate risk management strategy.
D&O coverage for claims arising out of antitrust and trade practices
is limited in terms of those who are covered. However, coverage
under standard D&O policies in general does not adequately cover
health care entities. This is especially true of specific risks, such as
antitrust and trade practice claims not usually covered by standard
D&O policy forms. This is also true of E&O policies. Health care
entities, especially health systems, hospital companies, managed
care organizations and hybrid MCOs are so diverse in their activities,
business model, format and strategies, standard policy forms are of
limited use. Ensuring that medical services, managed care activities,
wrongful act and other definitions are expanded to include business
activities that may be implicated in an antitrust or trade practices
claim is a necessity. This is not just for federal “antitrust” laws but also
similar regulations, the FTC Act and all similar state laws.
Definitions of loss, claim and statements of coverage must include
antitrust and trade practices challenges by government investigation
at the federal and state level (and foreign if applicable), and the
potential costs of such investigations including punitive damages,
multiplier damages, fines and penalties should be insisted upon. While
coverage for actual divestiture and restitution is unlikely, coverage
for defense costs, civil damages unrelated to divestiture/restitution
must be included for civil actions by federal and state agencies and
such private plaintiffs as competitors, consumers and providers. One
must also pay attention to any “other insurance” clauses, “insured vs
insured” exclusion and the wording of any conduct exclusion. Making
sure that D&O and E&O coverage dovetails properly with little overlap
or gaps is important. Proper definitions of government investigation,
how those are commenced, and regulatory action are essential.
Most MCO E&O carriers, domestic and off-shore, are well-versed in
these coverages and will offer them, though some have limitations or
co-insurance requirements. This trend, however, is waning. Several
carriers recently have refused to extend coverage for antitrust/
anticompetitive behavior in their E&O policies, have insisted on cost
shifting to the insured or have requested different limits or retentions.
This is especially true with the Blue Plans. The definitions, limits and
exclusions each offer do have differences. Depending on the entity,
business model and recent business strategy matter. Blues plans
now have issues with this coverage because of the ongoing Conway/
MDL 2406 litigation. I am not sure this is a proper underwriting
decision because this lawsuit is likely to resolve the issue on a large
9 Health Trek August 2016
scale as to the Blues plans for the foreseeable future. Large hospital
and integrated health systems may have more exposure, but the
frequency of the risk seems evenly spread and, with competitor and
state attorneys general claims, the midsize and smaller systems
seem to be a bigger target.
There are a few stand-alone regulatory policies which, like network
security and privacy policies, do provide more coverage with
expanded coverages than what is typically achievable in a D&O or
E&O policy. However, these policies are expensive, are sometime
held back from health care risks or offered for claims such as
compliance, FCA and TCPA claims, or provide coverage that the
typical care company may not need. The services of a broker who is
an expert in health care entities, markets and coverage, as well as the
analytics to determine what limits and retentions are best to achieve
your goals is recommended.
Most standard professional liability insurance policies contain
an exclusion that, though referred to as the antitrust exclusion,
precludes coverage for true antitrust claims and a much broader
array of claims than those alleging violation of the antitrust laws.
Many also do not cover state UDTPA claims. A 2012 decision by the
United States Circuit Court of Appeals, First Circuit, Saint Consulting
Group, Inc. v Endurance American Specialty Insurance Company, Inc.,
interpreting an errors and omissions insurance policy and applying
Massachusetts law, found that the policy’s antitrust exclusion
precluded coverage for a variety of different claims against the
insured, including anticompetitive behavior that was not improper
under the Sherman Act, which was the only law referenced by name
in the exclusion. Many E&O and D&O policies also include antitrust
exclusions.
No matter the cause, the health care industry is consolidating in all
sectors and includes M&A activity, organic growth, joint ventures,
innovation and collaborations. It is driven by the normal business
cycle, the ACA, federal and state regulation and — to some degree,
the lack of intense agency enforcement. The FTC, DOJ, state
attorneys general and private plaintiffs seem to be increasing their
enforcement activity through government investigations, M&A
challenges and civil litigation, though most government activity is
aimed at the hospital, physician and pharmacy sectors. The claims
related to antitrust and trade practices are varied, complex and very
expensive to defend. As a result, all health care entities must establish
a strong ERM and corporate risk management program, seek out and
obtain proper D&O, E&O and, if necessary, stand-alone coverage.
However, this coverage cannot be standard off-the-shelf policy
forms. The policies must be tailored to the entity and manuscripted or
endorsed to ensure that the entity has the coverage needed for these
varied claims, at all levels, and for all damages and losses that may
arise. This, to ensure proper coverage and limits, requires an expert.
Willis Towers Watson has expertise in consulting and brokerage
services designed to provide any health care company with solutions
for asset protection related to antitrust and anticompetitive behavior
risk. Our experts can consult on, evaluate and provide analysis and
solutions when contemplating an acquisition, organic growth, or
business strategies. We have significant ERM and risk management
strengths and the expertise to assist with the analysis of and merging
of different insurance programs and captives, as well as the thought
leadership and analytics to design, tailor and obtain the necessary
insurance coverage for the merged company, joint venture or
collaboration. Willis Towers Watson also has expertise in claim
assessments and negotiations to ensure proper coverage for those
claims. Obtaining expert advice, the necessary coverage and proper
limits is a necessity for any entity in the health care industry to protect
itself from the expenses, fines, penalties, defense costs and other
losses from claims related to the federal and state antitrust laws.
1 Gooch, Kelly; 6 Forecasts for Healthcare M&A in 2016, Beckers Hospital Review, Feb 24, 2016
http://www.beckershospitalreview.com/hospital-transactions-and-valuation/6-forecasts-for-healthcare-m-a-in-2016.html
The observations, comments and suggestions we have made in this
report are advisory and are not intended nor should they be taken as
medical/legal advice. Please contact your own medical/legal adviser
for an analysis of your specific facts and circumstances.
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