Thoughts from Ken Kaufman

The State of Play in Healthcare Antitrust Enforcement

2 minute
Regulation collage

Some policies related to healthcare, however important, do not affect the basic strategy, stability, and viability of hospitals and health systems. Others do, in a highly significant way. That is certainly the case with U.S. antitrust policy as it relates to hospital and health system mergers and partnerships.

What, then, is the basic antitrust state of play that healthcare executives need to deal with as they lay out the futures of their organizations?

A Case in Point

An excellent example is the recent case of Novant Health.

A few weeks ago, a federal district court’s decision declining to grant the Federal Trade Commission’s (FTC’s) request for an injunction blocking Novant Health’s proposed acquisition of two hospitals in the northern Charlotte suburbs from Community Health System put the transaction back on track. However, shortly after the district court decision, a divided three-judge panel on the U.S. Court of Appeals for the Fourth Circuit granted the FTC’s request for the injunction on appeal.

The injunction meant that the transaction would undergo an administrative and appellate judicial process that would likely stretch out over more than two years. As the judge who dissented from the Court of Appeals ruling stated, “I am not sure any financially hard-pressed healthcare facility would have that amount of time.” He was right. Novant cancelled the deal shortly after the Court of Appeals made its decision.

The district court had found that there was unlikely to be an additional health system willing to acquire the two CHS hospitals, meaning that both will probably close in the near future.

The injunction highlights that mergers may be blocked even when there is clear evidence that the transaction is in the public interest. In the Novant case, the district court—backed by testimony from area health plans—found that there was unlikely to be a major competitive impact from the transaction, and that any impact on the rates Novant would be able to negotiate with the health plans would be minimal. The transaction also would have been likely to enhance—not diminish—competition between the two major health system players in the Charlotte market.

No one argues with the idea that we need antitrust enforcement. We are a capitalistic society that believes in the value of competition. At the same time, healthcare is not like any other business. Lives are at stake, and a decision that affects whether a hospital is able to thrive, or simply survive, has real meaning for individuals and communities.

Characteristics of Current Antitrust Enforcement

Given the Novant decision and similar ones in recent years, healthcare executives need to recognize several characteristics of current antitrust enforcement as they consider mergers and partnerships.

Antitrust enforcement currently does not prioritize the financial stability of hospitals and health systems.

When we look at hospitals and health systems today, it’s hard to argue that things are going well. Approximately 40% of hospitals have not yet recovered from the devasting impact of costs surging above revenues in 2022 and are still operating with negative margins. Credit rating downgrades outpaced upgrades by a 3-to-1 margin in 2023. Twenty-eight percent of hospital M&A transactions announced in 2023 involved a financially distressed hospital or health system. These are all signs of an industry in need of a recalibration, and there is no indication that antitrust regulatory actions are helping that process along.

Organizations that are struggling financially may be foreclosed from seeking a partner that could restore their financial stability.

The Novant/CHS case involved a situation that is more and more common across the country today. CHS invited four different health systems to submit bids to acquire its hospitals in the northern Charlotte suburbs; only one hospital submitted a bid, and that deal has now been cancelled because of the time and costs that would be involved in going through the regulatory and appellate processes that might finally allow the deal to close.

The regulatory agencies continue to focus on the market share for inpatient care—a market that is getting smaller as more procedures move to a much more competitive outpatient environment. Further, most of the larger national and regional competitors in outpatient care have little to no interest in entering the market for inpatient care.

Regulatory agencies focus on commercial insurance rates rather than community and patient benefits.

More than 65% of a typical hospital’s patient volume is paid by Medicare or Medicaid. These payments are set by the government and are not negotiable. Post-merger commercial price increases may often reflect the fact that an acquired hospital was being paid below the going local market rate. In the Novant/CHS case, for example, the district court noted that the CHS hospitals had little leverage with health plans and had to accept lower prices to be included in the health plans’ networks. Post-merger pricing may also reflect new services, expanded offerings, or other measures that are taken to improve the acquired hospital’s popularity with consumers.

Two Conflicting Realities

Antitrust enforcement plays a crucial part in the ability of hospitals and health systems to meet the legitimate demands of the American public. Many of our hospitals and health systems are struggling and being put in a position of increasing competitive disadvantage. Without a suitable partner, they may be unable to stabilize financially and unable to pursue their mission to meet their communities’ healthcare needs.

Hospital and health systems are faced with two hard and conflicting realities. The first reality is that partnerships will continue to be a necessary and critical part of healthcare strategy, particularly as financial performance and patient access continue to be pervasive and ongoing problems for hospitals. The second reality is that antitrust enforcement will continue to create strong barriers to these same partnerships that are necessary for both provider stability and overall community well-being.

Hospitals are caught between these two unrelenting realities. Macroeconomic conditions are driving the hospital industry toward a natural post-Covid market consolidation, while at the same time an unforgiving regulatory system generally will not allow this financially and clinically driven market consolidation to go forward. It is an unhappy set of circumstances to say the least.

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