Small Transactions Drive Healthcare Mergers and Acquisitions

September 07, 2017 - About one-half of the growth of medical groups that originally employed over 100 physicians between 2007 and 2013 involved healthcare mergers and acquisitions with groups of ten or fewer physicians, a recent Health Affairs study showed.

Another one-third of the growth reported in 1,117 studied markets stemmed from hiring new physicians without a merger or acquisition.

The data showed that small, numerous transactions drove recent healthcare merger and acquisition activity, rather than a small number of large transactions. The acquisitions of medical groups with 11 or more physicians only represented 15 percent of group growth.

Researchers described recent healthcare merger and acquisition trends as “whale eats krill” versus “shark eats shark.”

The study’s finding could spell trouble for antitrust agencies, such as the Department of Justice (DoJ) and the Federal Trade Commission (FTC), researchers stated.

“Our study confirmed that the trends in physician practice concentration are occurring but also documents that there is little these agencies can do about them,” they wrote. “This is because the formation of most large physician groups resulted from piecemeal acquisitions of small group practices and the hiring of new physicians, rather than from mergers or acquisitions involving independent large group practices (we use the word acquisition to include both mergers and acquisitions).”

The FTC and DoJ challenge proposed healthcare mergers and acquisitions that could lead to anticompetitive behavior, resulting in higher costs for patients.

Under the jointly published Horizontal Merger Guidelines, the agencies use the Herfindahl-Hirschman Index (HHI) to determine if potential mergers would decrease competition in a defined area. Mergers that show both an HHI greater than 2,500 and a change in HHI of over 200 demonstrate anticompetitive behavior, whereas an initial HHI of less than 1,000 and a change in HHS of less than 100 are “unlikely to have adverse competitive effects.”

The antitrust agencies attempt to block mergers with high HHI and change in HHI scores, but both lack the resources to go after every proposed merger and they can only challenge transactions of which they know. Healthcare organizations only need to disclose their proposed deals to the agencies if the transaction values $78.2 million or more.

Small, numerous transactions may not appear on their radar because the transaction valuations are significantly lower than the threshold. Antitrust agencies also may not challenge the growth of healthcare organizations because a significant portion of their increase came from new hires, which does not fall under the jurisdiction of the agencies.

As a result, the trend toward small, piecemeal healthcare mergers and acquisitions did not exhibit anticompetitive behavior according to traditional antitrust guidelines. Of the 245 markets identified as highly concentrated in 2013, only 28 percent experienced a transaction that would have been presumed anticompetitive.

Researchers added that healthcare organizations probably would not have notified antitrust agencies of these transactions because of the $78.2 million threshold. While valuation data was not available, a recent transaction thwarted by antitrust agencies showed that a “valuation of that magnitude could require a group size of a hundred primary care physicians or fifty specialists.”

The healthcare merger and acquisition activities during the study, however, rarely involved large provider organizations. Fewer than 10 percent of the presumptively anticompetitive acquisitions included even ten physicians.

The current avenues antitrust agencies use to identify and block mergers and acquisitions that could increase prices may not be appropriate to address the levels of market concentration, the study continued. Of the 1,117 markets studied, 22 percent were highly concentrated in 2013 and another 21 percent were moderately concentrated.

One physician group also tended to hold the greatest market share in highly concentrated areas. About 68 percent of the highly concentrated markets had a single group with a market share exceeding 50 percent.

“If these large groups maintained their shares, then these markets would remain highly concentrated regardless of the shares of the smaller groups,” the study stated.

The FTC and DoJ can improve healthcare merger and acquisition tests and slow the growth of physician groups in highly concentrated markets by lowering the valuation threshold, researchers suggested.

Antitrust agencies should also develop more liberal guidelines for going after market shares. The agencies have already suggested that accountable care organizations (ACOs) with less than 30 percent market share in common service lines are entering an “antitrust safety zone.” Federal officials should establish a similar guideline for physician groups that identifies market shares between 30 and 50 percent as safety zones.