Hospital mergers present unique competitive concerns for a variety of reasons, including the range of complex services offered and increasing pressure from managed care plans. Further, hospital mergers do not fit comfortably within the Horizontal Merger Guidelines, an internal set of guidelines set forth by the Department of Justice, Antitrust Division and the Federal Trade Commission which govern the extent to which these agencies will investigate and challenge potential mergers based on anti-competitive concerns. This uncomfortable fit is particularly true with regard to market definition. As with any merger analysis, the ultimate question is whether the merger is likely to create or enhance market power sufficient to raise and maintain prices above competitive levels. What is unique about hospital mergers is how the Federal Trade Commission (“FTC”) ultimately arrives at that answer.
Competitive Market Definition: The competitive market is comprised of both the product and geographic markets. The relevant product market consists of all the goods and/or services that buyers view as close substitutes to the merging parties’ goods and/or services. With regard to hospitals, the core services and specialties provided at the given hospitals often define the overall competitive market. Further, the product market is often closely tied to the geographic market, which is the area of effected competition in which the merging parties operate and to which customers can practicably turn for goods or services in the event of a merger. When hospitals merge, whether a patient would be able to find those core services and specialties at other hospitals or healthcare providers within a reasonable geographic area becomes a key inquiry. For example – a renowned oncology hospital may not compete with the neighboring general acute care hospital located five miles down the road simply because the two attract different patients and service different medical needs. Under the market analysis, the FTC likely would not view these hospitals as competitors, and therefore, not likely substitutes in the event of a price increase.
External Factors: Hospitals, and health care markets generally, face significant pressure from external factors other than mere patient preferences. Employer and managed health care plans often determine the price options that patients face by negotiating prices and providing patient incentives to use certain service providers. However, merging parties often underscore the amount of influence these managed care providers have on their prices, and emphasize other factors such as prestige, talent, and specialized services as more relevant to their pricing. As a result of this dichotomy, the FTC will often couple their patient-focused analysis with an analysis of how health care plan providers would respond to price increases.
Market Concentration: Regulatory agencies typically calculate market concentration using the Herfindahl-Hirschman Index (HHI). It is calculated by squaring the market share of each firm competing in the market and then summing the resulting numbers. Mergers that increase the HHI by more than 100 points in already concentrated markets presumptively raise antitrust concerns under the Horizontal Merger Guidelines. Outside the hospital context, concentration is determined by the number of firms in the market and their specific market shares. When analyzing hospital mergers and acquisitions, the market share is determined by the number of licensed beds a particular hospital has in the properly defined competitive market. Again, what services and specialties a merging hospital offers will often dictate how many licensed beds the FTC will count in its market concentration calculation. For example – if Hospital A has 115 beds for general acute care and there are 1,600 total beds in the defined general acute care market, then Hospital A would have 7% market share. If the merging hospitals provide only general acute care, and there is a hospital in the relevant geographic market that provides only psychiatric services, the psychiatric hospital’s beds will not be counted in the concentration calculation.
Entry: Typically, the FTC will consider whether, in the face of a price increase, a new firm would enter or reposition itself in the market to counteract or deter likely anticompetitive effects as a result of the proposed merger. With hospitals, however, timely entry is rare and unlikely for a variety of reasons. First, the cost to open a new hospital is exorbitant. Second, the endeavor is highly regulated, with strict state and federal licensing and certificate-of-need restrictions. Third, the complex infrastructure of a hospital makes construction an arduous process. Because of these reasons, any possible entry likely will not be timely enough for antitrust consideration.
Efficiencies: Finally, the FTC will consider the likelihood that efficiencies will offset anticompetitive harm as a result of the merger. This analysis is especially important and difficult in the hospital context. Because there is significant excess capacity in the hospital industry as a result of rapid growth and change, there exists great efficiency potential. Common efficiency arguments include lower operating costs, more innovative services and procedures, and consolidation of talent and facilities. However, if a merger lessens competition, the remaining hospitals may not be as incentivized to realize the kinds of efficiencies that translate into cost-savings passed along to the ultimate consumers – the patients.
What these considerations show is how unique and complex the hospital market is compared to your common commodity market, and thus how particularly challenging the analysis of a hospital merger can be.
