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Antitrust Law Journal

Volume 82, Issue 2

Taking Stock of the Efficiencies Defense: Lessons from Recent Health Care Merger Reviews and Challenges

Norman Armstrong Jr and Subramaniam Ramanarayanan

Summary

  • Provides an overview of the merger guidelines recognition of the role that efficiencies play in the analysis of competitive effects. 
  • Provides practical considerations for incorporating efficiencies into merger analysis before the agencies and the courts. 
  • Reviews cases showing skepticism of the efficiency defense. 
  • Examines the standards employed by courts in assessing efficiency claims in recent healthcare merger challenges.
Taking Stock of the Efficiencies Defense: Lessons from Recent Health Care Merger Reviews and Challenges
Dmytro Aksonov via Getty Images

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The U.S. health care industry continues to consolidate as health care providers and payors explore mergers and other contractual arrangements to address uncertainties created by changes in technology, regulations, and reimbursement methodologies. The federal antitrust enforcement agencies have been active in policing mergers in health care and have not shied away from challenging transactions they felt posed threats to competition. Many of these challenges have culminated in litigation, and the resulting opinions from trial and appellate courts have contributed to the debate over which analytical approaches should be used to determine relevant antitrust markets and to assess competitive effects. These opinions have also shed light on the standards that courts and antitrust agencies use to assess efficiency claims. While the antitrust agencies maintain that they give efficiency claims due consideration when evaluating proposed transactions, the courts have been somewhat more dismissive of these claims.

This article examines the current state of the efficiencies defense in health care mergers by reviewing the discussion of efficiency claims by agencies and courts in recent provider and insurer merger challenges.

I. Incorporating Efficiences into Merger Analysis at the Agencies: Conceptual Underpinnings

Economists have long recognized that mergers may lead to efficiency gains, which may negate or mitigate any anticompetitive effects to which the mergers might otherwise give rise. That is, efficiency gains might not only enhance a merged firm’s ability to compete effectively, but also, to the extent they are passed on, benefit consumers in the form of lower prices or improved quality. Recognizing this dynamic, the Merger Guidelines acknowledge the role that efficiencies play in the analysis of competitive effects, and describe the evidentiary standards that merging parties must satisfy for the agencies to credit their claimed efficiencies.

In particular, the Guidelines emphasize that the agencies will credit efficiencies claimed by merging parties (i.e., deem them “cognizable”) only if the parties are able to demonstrate their ability to realize those efficiencies (i.e., the claimed efficiencies are “verifiable”) and, even if so, only if the efficiencies are unlikely to be realized absent the proposed merger (i.e., are “mergerspecific”). The merging parties bear the burden of demonstrating that any claimed efficiencies satisfy these criteria. If the parties carry their burden, the Agency reviewing the merger will assess whether the likely magnitude of the claimed efficiencies is sufficient to offset any anticompetitive harm posed by the merger. As the Guidelines explain, the efficiency must be sufficient to result in no predictable post-merger price increase, thereby making “passthrough” effects the focus of the analysis.

The Guidelines provide additional direction on when efficiency assessments are likely to move the needle in merger investigations. Notably, the Guidelines make it clear that where structural changes resulting from the merger are likely to lead to substantial harmful competitive effects, the magnitude of the cognizable efficiencies claimed by the parties must be “extraordinarily great” for the agencies not to deem the merger anticompetitive. As a corollary, efficiencies are most likely to matter in merger review when the “likely adverse competitive effects, absent the efficiencies, are not great.”

The agencies apply the criteria of merger-specificity and verifiability when assessing efficiency claims in health care transactions. In hospital mergers, potential cognizable efficiencies may take the form of cost reductions or quality improvements. For example, a merger between two hospitals (or hospital systems) could lead to cost reductions by helping the merging parties to avoid capital expenditures or to consolidate service lines, thereby eliminating cost inefficiencies associated with underutilization. In assessing such claims against the merger-specificity criterion, the agencies focus their inquiry not just on whether the hospitals could have realized these cost or quality benefits by continuing to operate as independent firms (e.g., by using consultants), but also on whether there are alternative transactions that could facilitate the realization of these efficiencies but that do not pose the same threat of competitive harm. These alternative transactions could include affiliations short of a merger (e.g., joint ventures), or to the extent there are viable candidates, mergers with other hospitals or hospital systems with which the focal hospital has less competitive overlap. In addition to being merger-specific, efficiency claims must also be verifiable—that is, there should be sufficient grounds to believe that the merging parties will indeed realize the claimed efficiencies and that the parties have taken steps to identify the source of these efficiencies and have incorporated the claimed efficiencies into their assessments of the proposed merger.

Efficiency claims pertaining to quality improvements are subject to the same level and type of scrutiny. For example, hospitals might claim that their merger will improve patient outcomes (in certain service lines or overall) by helping them consolidate patient volumes in procedures with an established volume-outcome relationship, or by allowing them to share best practices. In such cases, the merging parties would need to establish that the difference between the pre-merger and post-merger volumes is sufficiently high to generate material improvements in quality, and this projected quality improvement would then have to be compared with the improvement that could be achieved absent the merger.

II. Incorporating Efficiences into Merger Analysis at the Agencies: Practical Considerations

Consistent with their traditional close adherence to the principles outlined in the Guidelines, the antitrust agencies have repeatedly affirmed their commitment to assessing efficiency evidence as part of their merger investigations. In various public statements, agency officials from both the FTC and the DOJ have affirmed each agency’s commitment to appropriately accounting for any benefits that a merger might help realize. In a speech delivered when she was Director of the FTC Bureau of Competition, Deborah Feinstein noted that the FTC “routinely consider[s] efficiency arguments, especially with respect to quality improvement claims” and that “the FTC does decide not to pursue cases based on [its] assessment of these claims” during the investigation phase. Senior leadership at the DOJ has expressed similar sentiments, recognizing that mergers can “lead to cost savings and improved quality of care” and that, in its review of transactions, the DOJ will “credit legitimate efficiencies that will benefit consumers of health care services.”

Of course, the agencies’ commitment to incorporating efficiencies into their analyses does not guarantee their ready acceptance of any efficiencies claimed by merging parties. As the quotations cited above make clear, the agencies will only consider efficiencies that they deem legitimate under the rigorous standards that the Guidelines set forth. Given the confidential nature of agency investigations, and the lack of closing statements in cases where the agencies did not pursue a challenge, it is difficult to discern whether, and to what extent, efficiencies (let alone specific efficiency arguments) may have factored into an Agency’s decision to close any given investigation.

Public statements made by Agency officials do provide a window into what types of evidence the agencies might find convincing in substantiating efficiency claims. For example, in assessing claims pertaining to quality improvements, the agencies look at the “comparative quality of the [merging] hospitals to determine whether there is a meaningful difference in quality between the merging parties that the merger would allow the parties to bridge. Any claims pertaining to transfer of best practices must “address the specifics of how those processes and practices will benefit patients through improved care.” Finally, evidence of quality improvements or cost reductions realized from past transactions can help make a credible case that a proposed transaction will generate similar efficiencies. However, when an Agency has made public statements regarding its evaluation of claimed efficiencies, it has typically done so in the context of a merger litigation, that is, a situation where the Agency has already determined the following: that a merger is likely to have an adverse impact on competition; that any claimed efficiencies are not cognizable; and that, even if they were, they would be insufficient to offset the harm. As a result, these public statements from the agencies almost always convey a strong sense of skepticism when it comes to evaluating efficiency claims.

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