The recent 5-0 ruling by the FTC Commissioners in the Evanston Northwestern Healthcare (ENH) antitrust case was a real body blow to those of us who support competition in healthcare. The Commissioners agreed with a federal district judge’s ruling that Evanston and Highland Park Hospitals had achieved excessive market power by forming ENH. But instead of affirming the judge’s order to force ENH to split up, the Commissioners instead ruled that ENH could remain intact provided that the member hospitals set prices independently. The FTC seems to be saying that it is okay for hospitals to dominate a market, so long as they do it with a nod and wink.
You know the history of this case. During the 1990s, the FTC repeatedly tried and failed to block mergers that seemed to be creating local monopolies. Time and again, the courts accepted misplaced theories about the size of healthcare markets, allowing what looked to be obvious monopolies to claim, with a straight face, that they faced ample competition. Do you remember Ted Frech’s paper showing that one of the theories embraced by the courts – the Elzinga-Hogarty (E/H) model – led to the bizarre conclusion that all of California was a single market? Well, the E/H model was wrong. My Antitrust Bulletin paper with Cory Capps, Shane Greenstein, and Mark Satterthwaite described what we called the “silent majority” fallacy with the E/H model and even Ken Elzinga agreed with us. By the early 2000s, the FTC was prepared to present new theories to the courts, theories similar to those we developed in the Antitrust Bulletin paper. The FTC also had supporting evidence that mergers caused higher prices without any predictable efficiencies. Again, I contributed some of the foundation research. The FTC went looking for a good test case and found it right in my backyard.
Evanston Hospital (along with its longtime partner Glenbrook Hospital) is one of the most popular providers on Chicago’s ritzy North Shore. About a decade ago, it merged with another North Shore stalwart, Highland Park Hospital, to form ENH. Unfortunately for ENH, the FTC was hoping to lick its wounds after a decade of futility. The FTC built a dossier of seemingly damning facts against ENH and Ken Elzinga testified as a star witness for the prosecution. The FTC proved to a lower court judge that the North Shore constituted a distinct market. It also presented evidence that the merger was accompanied by substantial price increases. No surprise there – you and I have done a lot of research showing that market power has the same harmful effects in health care as in any other sector. In what seemed like a turning point in healthcare antitrust, the district court judge sided with the FTC and ordered ENH to split up. It was now up to the FTC to enforce the order.
So what do the Commissioners propose? ENH can stay together, provided that Evanston and Highland Park Hospitals set prices independently. It is as if the case had not yet been decided and the FTC offered a “plea bargain” that ENH would find too good to pass up. Not only that, the most likely party to appeal such a decision would seem to be the FTC, had it not been their own decision!
And what a strange decision to make. Supposing that Evanston and Highland Park Hospitals manage to avoid all communication about pricing (a big supposition for sure), the solution is still ridiculous. If Highland Park holds out for high price in negotiations with managed care purchasers and somehow manages to get excluded from managed care networks, its patients will just end up at Evanston Hospital, and vice versa. ENH corporate office surely knows this, and will send word to both hospitals to hold out for high prices. In economics parlance, prices will become “strategic complements.” I have done some back of the envelope simulations using a newer version of my RAND Journal hospital/insurer bargaining model and I think prices could rise even higher than monopoly levels! The FTC would have been better off if they had not gone after ENH in the first place. Surprisingly, ENH is making noises about appealing the FTC remedy. It should take the offer and quit while it is ahead.
Let me try to put a positive spin on this. The FTC proposal resembles the “messenger model” that it currently permits for physician pricing. The fact that the messenger model is acceptable might put the FTC in a bind. The FTC may feel that it can not be tougher on ENH than it is on other merged healthcare providers. On the other hand, this may simply be heavy handed politics. The ENH investigation was the brainchild of former chairman Tim Muris, who was a well-respected academic before taking the helm of the FTC in 2001. Muris left the FTC in 2004 and the Commission is now chaired by Deborah Platt Majoras, a lawyer who seems to be following the Republican tradition of turning a blind eye to monopoly. (Do you remember the Department of Justice “remedy” in the Microsoft case? That was another example where the antitrust enforcers in the field did their job brilliantly, only to have political appointees undermine their efforts.)
About the only argument I have heard that might justify mergers like ENH is that they are necessary to create “countervailing power” against dominant managed care payers. Has competition come to this? Instead of insurers and providers competing by delivering value to consumers, they are instead accumulating market power. If this continues, we may as well give up on free market healthcare altogether. The solution must be vigorous antitrust enforcement on both sides.
This is not to say that all mergers should be blocked. Providers who are genuinely committed to clinical integration can still generate substantial savings through consolidation. At the same time, vertically integrated delivery systems, a failed strategy in the 1990s, could take advantage of modern information technology to truly streamline healthcare delivery. Nor are all insurance mergers anticompetitive. Lots of folks have picked on the Anthem/Wellpoint merger as the poster child for payer market power. But these insurers had very little market overlap and, by merging, have created a national competitor to vie against Aetna, United, and the like.
It goes without saying that you can’t have a competitive healthcare system without competitors. But the recent decision by the FTC Commissioners seems to me to be a retreat from a pro-competitive strategy. All Americans will suffer the consequences.
All the best,
I think we are on the same page on this one. Anyone who supports competition in healthcare has got to be worried, very worried, about the FTC ENH decision. It’s not just bad from the perspective of price competition—as you note it could actually lead to prices above the monopoly level. It could be bad from a quality perspective too. The FTC decision tells the hospitals not to talk about price. But hospitals compete not only on price, but also on quality and the FTC says nothing about talking about quality related issues. It’s not hard to imagine a situation where this could cause serious problems.
It is possible quality competition may occur on general dimensions—e.g. efforts to cut down on prescribing errors for medications. But the literature suggests that very often, competition centers on the availability of services. Under the banner of improving efficiency, what if Evanston and Highland Park decide to segment the market—say let Evanston dominate in heart care and give cancer to Highland Park? This could easily create a “must have” situation for both hospitals, putting managed care plans in the situation of having to contract with both if they want to serve the north shore market.
There could, of course, be accompanying quality gains and cost reductions. (An almost certain claim by the hospitals). But any gains need to be weighed against the potential consumer benefits which would have occurred from head-to-head price/quality competition if the two hospitals hadn’t merged. Further, while it’s possible the merged hospitals might pass along any cost savings, I wouldn’t bet on it.
The FTC could respond to this critique by trying to regulate hospital strategic manipulation of service offerings. But, like the present ban on price discussions, if anything, this has the potential of making a bad situation worse. Just imagine the agency trying to sort out all the minutia of proposals for increased clinical integration. Alternatively, suppose the FTC bans discussion of clinical integration entirely. This would essentially vitiate one of the primary rationales for mergers.
On the issue of “countervailing power,” I think it’s worth elaborating a little more. In no small part, I suspect past court decisions have been influenced by a climate of managed care “backlash.” In an environment in which Managed Care Organizations (MCOs) are the villains everyone loves to hate, it’s easy to confound the interests of consumers and providers, especially since hospitals and doctors often assume the mantel of consumers’ champions. But as your discussion suggests, market power that is good for hospitals can be bad for patients. An interesting twist is the rise of “consumer directed” strategies. By recasting consumers in the role of cost conscious shoppers, this could potentially drive a wedge between the traditional alliances of consumers and providers against MCOs.
On the bottom line, I agree: if you are going to go with a pro-competitive strategy, it’s critical to preserve competition in the marketplace and the FTC’s ENH decision is clearly a step in the wrong direction from this perspective.