AHA: Hospital Mergers Monopoly Test Neglects Healthcare Trends

August 10, 2016 - The American Hospital Association (AHA) recently urged the US Court of Appeals to reject the Federal Trade Commission’s (FTC) new approach to assessing whether or not hospital mergers will create a marketplace monopoly.

In a friend-of-the-court brief defending a federal court’s decision to deny the FTC’s request to block a hospital merger in Illinois, the AHA stated that the FTC’s “hypothetical monopolist test” limits the types of evidence used to accurately assess a hospital’s geographic market. The test fails to account for the rise in outpatient facilities that broadens a hospital’s market and how hospitals negotiate prices for all services at once.

“The Government’s proposal would sharply limit the types of relevant evidence that district courts may consider in defining geographic markets, requiring them to ignore commercial realities,” wrote the AHA. “Such a result would be inconsistent with decades of antitrust jurisprudence requiring courts to examine all relevant market factors.”

FTC developed the monopoly test to evaluate hospital mergers based on the proposition that patients prefer to go to local hospitals that are close to where they live, the views of a select group of testifying insurance companies, and a diversion analysis that reported excludes competing facilities.

AHA reported that the FTC’s new approach does not reflect current market realities and narrows the geographic limits of the monopoly test. It also goes against rulings from other merger cases, which set a precedent against developing a formula for determining a geographic market because there many factors involved in determining an organization’s influence in an area.

The brief stated that the reasoning behind the hypothetical monopolist test is “inconsistent with decades of case law and the Government’s own guidelines for using the hypothetical monopolist test, which require careful consideration of how healthcare markets actually work.”

By endorsing the test, FTC is calling on the court system to ignore the changing healthcare market, including an increase in outpatient facilities and services, AHA asserted.

Hospitals have experienced a significant increase in outpatient visits since 2003. A recent study from PwC's Health Research Institute showed that outpatient visits rose by 12 percent, while inpatient visits decreased by 20 percent. Payment reform legislation and value-based care goals have shifted how and where patients receive treatment.

Hospitals have increasingly opened outpatient facilities in the past five years in response to the healthcare market trend and the new care settings have widened the hospital’s geographic reach. The rise in outpatient facilities has influenced the use of inpatient services since the outpatient settings acts as a front door for the healthcare organization.

Patients no longer rely on distance in deciding where to receive treatment, AHA stated. By using outpatient services, some patients may continue to visit the hospital or healthcare system for further care, including inpatient services.

“The district court correctly found that the growth of outpatient services has substantially widened the geographic reach of hospitals and hospital systems, and thus the number of hospitals likely to have a price-constraining effect on the parties for inpatient services,” AHA wrote.

The passage of the Affordable Care Act and the transition to value-based care have also influenced where patients receive care. The Affordable Care Act has made patients more cost-conscious since many individuals enrolled in high-deductible insurance plans. Patients are willing to travel further to be treated at more affordable and high-quality hospitals.

Hospitals that engage in value-based care models have also implemented more robust population health management and managed care programs. To address value-based care goals, many hospitals and healthcare systems consolidated to support the programs or opened more outpatient facilities.

“For hospitals and hospital systems, developing a network of outpatient and ambulatory care facilities and alternatives is an essential part of building the infrastructure necessary to support population health and better manage care in this changing environment,” stated AHA.

The FTC’s hypothetical monopolist test cannot be accurate because it neglects to assess how outpatient facilities have impacted inpatient services and a hospital’s geographic reach, the brief explained.

Additionally, AHA reported that the FTC’s approach to evaluating hospital mergers does not reflect how payers and hospitals determine costs of services.

“The Government’s test implicitly embodies an ‘a la carte’ world in which hospital prices are negotiated on a hospital-by-hospital basis,” AHA stated. “But that is not how hospitals and insurers negotiate prices in the real world.”

“Today the norm is for payers and hospitals to negotiate a single contract with a hospital system for both inpatient and outpatient services, often across a wide range of geographic areas.”

Final prices for hospital services are generally a trade-off involving multiple facilities over a wide area, potentially including locations outside of the FTC’s narrow geographic limits in its test, reported AHA.

AHA stated that hospital mergers should be evaluated by the government using real market trends and evidence, especially since mergers can significantly increase patient access to care and reduce healthcare costs.

“Within the rapidly changing healthcare sector, hospital mergers can offer significant pro-competitive benefits by allowing hospitals to increase access, provide cost savings, and deliver more integrated and innovative care to communities,” wrote AHA.

“As a result, the AHA and its members have a strong interest in ensuring that the standards used to evaluate such mergers under Section 7 of the Clayton Act, 15 U.S.C. § 18, comport with market realities.”

Dig Deeper:

• Hospital M&A Driving Variation in Healthcare Costs by Site

• What is Value-Based Care, What It Means for Providers?