Transforming Health Care Through Evidence and Collaboration
Transforming Health Care Through Evidence and Collaboration

Federal Antitrust Enforcement in Health Care

David Dranove, PhD, Walter McNerney Distinguished Professor of Health Industry Management & Director of the Health Enterprise Management Program, Kellogg Graduate School of Management, Northwestern University
David Dranove
David Dranove

In previous Expert Voices essays, William Vogt, Austin Frakt and James Robinson discussed consolidation in hospital markets and cited a large and growing literature that finds a direct correlation between consolidation and hospital prices, with at best mixed evidence of improved quality. All three essayists suggested that the Federal Trade Commission must do more to limit anticompetitive consolidations.

In fact, the FTC and the Department of Justice sucessfully challenged numerous hospital mergers through the early 1990s until a string of losses in key court cases in the mid-1990s led them to suspend prospective merger challenges for about a decade while they regrouped. In this essay I describe how academic economists helped to reverse the tide of antitrust litigation losses by developing more precise merger analytic tools that emphasize the importance of negotiating strength between merging providers and payers. I also take a look forward at the new frontier of antitrust enforcement that is evolving with the rise of vertically integrated delivery systems.

A Brief Antitrust Primer

Merger analysis may be retrospective or prospective. In retrospective analyses, economic experts may assess the merger’s impact on prices and other factors after the merger has occurred. The most prominent such case in the hospital arena involved Evanston Northwestern Healthcare (ENH), formed by a 2000 merger between two hospitals in Chicago’s North Shore suburbs. In its 2004 challenge to this merger, the FTC showed that post-merger prices increased more quickly at ENH than at peer hospitals.

Most mergers are challenged before the merger has been consummated. In these prospective cases, economists must forecast merger effects, typically by (1) identifying relevant product and geographic markets in which competition occurs, (2) calculating market shares for all market participants, (3) computing the Herfindahl-Hirschman index (HHI) measuring market concentration, and (4) predicting the change in the HHI expected from the merger.

The horizontal merger guidelines established by the FTC and DOJ include thresholds for the market HHI and the change in HHI that may be used to identify potentially problematic mergers. The courts also may consider other evidence, including the potential for entry by new com-petitors and whether the merger will have pro-competitive benefits (e.g., by improving quality). In practice, courts place considerable weight on the market concentration evidence. Merging hospitals are more likely to prevail if they can convince the court that the market is broad, so that both the pre-merger HHI and the predicted increase in the HHI are small.

The 1990s: What Went Wrong?

During the FTC losing streak, nearly every case turned on the question of geographic market definition. Ironically, it was the FTC’s victory in the 1989 Rockford, Illinois hospital merger case that set the stage for its later losses. Seeking to bring empirical rigor to market definition, the FTC expert used an approach initially proposed by Ken Elzinga and Tom Hogarty to study coal markets.1 The so-called EH methodology begins with a proposed geographic market then uses historical data to determine whether the shares of customers flowing into and out of the area are lower than a predetermined threshold (the low inflow and outflow criteria). As needed, the proposed market is expanded incrementally until the flows of customers crossing the border fall below the threshold. Thus, lower target thresholds yield broader, more encompassing markets. Applied to hospitals, it was reasoned that if many patients have been willing to travel outside of the market then merging hospitals’ ability to raise prices would be checked by an exodus of price-sensitive patients.

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