New vertical merger guidelines won’t stop consolidation, experts say

The Trump administration rolled out new vertical merger guidelines, but experts warn they don’t do enough to prevent anticompetitive mergers and acquisitions in the healthcare industry.

Officials from the Department of Justice and Federal Trade Commission signed off on the long-awaited policy Tuesday. But the final guidance does little to calm the concerns of legal experts, researchers, small providers, consumer advocates and others concerned that vertical mergers harm competition in the healthcare industry. The 14-page document suggests federal regulators will generally view vertical mergers as pro-competitive, even though there’s little proof they improve competition and considerable evidence to the contrary.

“Massive integrated healthcare companies now control nearly all aspects of the healthcare and pharmacy supply chain,” National Community Pharmacists Association CEO B. Douglas Hoey said in a statement. “The new guidelines issued today by the FTC and DOJ don’t do enough to reverse that trend, and we are deeply disappointed.”

The FTC approved the guidelines in a 3-2 vote with Republican commissioners voting for the measure and Democratic commissioners voting against it. FTC Commissioners Rohit Chopra and Rebecca Slaughter argued in their dissenting statements that the guidelines overestimate the benefits of vertical transactions and underestimate the drawbacks.

The two commissioners are especially concerned about large, integrated healthcare companies’ ability to prevent new entrants from emerging or competing in the healthcare marketplace.

“The policy glosses over how these mergers give corporate royalty the power to choke off any potential threat to their throne,” Chopra tweeted.

State and federal regulators often challenge horizontal mergers, such as mergers between hospitals, because they have been viewed historically as anticompetitive. But in recent years, antitrust experts and consumer advocates have grown increasingly concerned about vertical mergers like hospital purchases of physician group practices.

According to the University of California Berkeley’s Petris Center, the percentage of primary care physicians in practices owned by a hospital or health system grew from 29% in 2010 to 48% in 2018. Likewise, the number of specialists employed by hospitals and health systems soared from 24% in 2010 to 45% in 2018.

Industry insiders argue vertical integration can boost quality and lower healthcare costs through improved economies of scale and align the interests of providers, insurers, suppliers, and other players in the healthcare industry.

“We hope that these transactions might improve the quality and reduce the cost of healthcare, perhaps by eliminating inefficiencies and aligning incentives,” Sen. Mike Lee (R-Utah) said during a Senate hearing last fall. “But vertical integration can also easily enable market power to be used in an anticompetitive manner, allowing the merged firm to use its new structure to the disadvantage of others, and in some cases, to the harm of consumers.”

Physicians Foundation CEO Bob Seligson said that vertical mergers could enable large healthcare organizations to marshal the resources necessary to address the social determinants of health and other sizable challenges in healthcare.

But “I can’t tell you an instance where I feel something like this has really been helpful to people,” he said.

Experts say the healthcare sector is particularly vulnerable to competition problems, so federal regulators should create specific guidelines for the industry or provide more detailed general guidelines. The Trump administration has no public plan to do either.

The final guidelines addressed two widespread complaints by further examining the non-price anticompetitive effects of mergers and dropping the quasi-safe harbor based on market share, which would have made it easy for hospitals to engage in so-called “stealth consolidation” by buying up small practices.

But Slaughter and others said the guidelines don’t sufficiently indicate when mergers might call for enhanced scrutiny or enforcement action. The guidelines also leave out essential competition concerns like how vertical transactions could affect buy-side power or help organizations duck regulations. The policy also doesn’t give much thought to how regulators might respond to anticompetitive mergers or evaluate the effectiveness of their response, she said.

I “fear that the guidelines signal that the agencies will view vertical mergers as likely to be pro-competitive and will use the guidelines to justify lack of enforcement against vertical mergers,” Slaughter said in her dissent.

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