Cross-Market Hospital Mergers: Assessing Likely Harm and Implications for Government Action

Roughly half of all hospital mergers in the United States involve hospitals located far enough apart that, from an antitrust perspective, they would be viewed as competing in separate geographic markets. Such mergers are commonly referred to as “cross-market” mergers. The antitrust agencies, principally the Federal Trade Commission and the Antitrust Division of the Department of Justice, have repeatedly considered whether such mergers are likely to reduce competition but have opted not to challenge them in almost all instances.

The government’s concerns about cross-market mergers, however, are increasing. Over the last decade, a theoretical economic literature developed and identified mechanisms through which cross-market mergers can potentially create incentives to increase price. That theoretical literature was then followed by empirical studies providing at least limited evidence of actual price increases. Finally, with two strands of that literature suggesting that effects were not only possible but that they actually exist, a third strand emerged to consider the legal framework under which cross-market mergers might be challenged. This evolving literature has prompted an increasing number of calls for government action, either in the form of extensive investigations or interventions to block or regulate those mergers. And as discussed in Part VII, to at least some extent the government now appears to be heeding those calls to action.

This article points out that the evidence that cross-market mergers are likely to cause harm is weaker than sometimes suggested by those advocating government action. After noting the growing public concerns about cross-market mergers in Part I, Part II summarizes the two studies most commonly cited as the empirical basis for cross-market concerns and discusses how those studies, while consistent in finding cross-market price effects, differ in their predictions about the conditions making effects more likely. Those two studies also provide, at best, mixed support for two new theories of cross-market harm: for each theory, one of the empirical studies provides largely consistent evidence, but the other study provides evidence that is at least partially at odds with that theory.

Parts III and IV focus on the two theories of harm that have recently been offered to explain the findings of price effects in situations where, based upon traditional analyses, effects would not be expected. Those theories are the “Common Linked Employer” (CLE) theory (often referred to as the “Common Customer” theory) and the “Change in Control” (CiC) theory. As elaborated on in Part IV, the CLE theory rests on the notion that cross-market mergers allow a hospital system to threaten an insurer with more “holes” in its provider network and thus increases the hospital system’s bargaining position. In contrast, the CiC theory predicts higher prices because the new owner has different objectives, including its preferred price, than the previous owner.

Examining these theories against the backdrop of evidence from recent enforcement actions, Part V shows that even accepting the premise that some cross-market mergers do increase price, it is important to understand the cause of those higher prices. Although both theories predict that cross-market mergers can increase price, they differ with respect to when and why such transactions may cause price effects, and thus also with respect to the likelihood of a price effect from any particular cross-market merger. Equally important, these two theories differ with respect to whether any harm is attributable to merger-related impacts on competition and thus subject to the application of traditional antitrust laws.

These findings indicate that while the economic literature can fairly be read as supporting the proposition that cross-market mergers can create a risk of adverse price effects, it provides antitrust enforcers with only limited guidance on whether the risk in any particular situation likely rises above an ephemeral level to an appreciable risk sufficient to warrant government action. Thus, the existing literature provides little guidance on how to distinguish between cross-market mergers likely to cause sufficient harm to warrant government intervention and those mergers that are not.

To help distinguish when a cross-market merger might create more than an ephemeral risk of higher prices, Part VI identifies several conditions that are either necessary for, or increase the risk of, such harm under the CLE or CiC theories. These conditions can be usefully viewed as “gating conditions” that, unless satisfied, make cross-market harm unlikely.

Part VII then assesses whether those conditions were satisfied in several recent government cross-market investigations and interventions. To date, the FTC’s actions regarding cross-market mergers have been limited to investigations that were ultimately closed without further action. Of note, these investigations include at least one where the identified conditions suggest that cross-market harm would be unlikely.

The California attorney general (CAG) has taken more of an interventionist role. In its regulatory capacity, the CAG has conditioned its approval of three cross-market hospital mergers on the imposition of price and conduct regulations. The CAG’s actions have not been limited, however, to general acute care hospitals for which the empirical evidence provides some support for cross-market concerns. In one case, the CAG imposed regulatory conditions to protect against harm from a merger of hospitals providing inpatient psychiatric services. This willingness to extend cross-market concerns beyond the specific area for which there exists a body of supporting empirical evidence emphasizes the importance of examining whether the available evidence regarding cross-market effects and the mechanisms that may drive those effects legitimately extend to other areas of healthcare such as physician services, outpatient services, nursing homes, pharmacy services, or pharmaceuticals. More broadly, this emphasizes the need to carefully evaluate whether, and the specific circumstances under which, cross-market concerns might legitimately extend to cross-market mergers involving non-healthcare services such as music, publishing, cable television, or airlines, where traditional merger analysis might suggest limited price effects absent direct overlap.

The article closes in Part VIII by discussing implications for government policy with respect to cross-market mergers. The article concludes that cross-market concerns warrant further analysis to better understand the most likely mechanisms of harm and the conditions under which the risk of harm rises to an appreciable level. However, until those mechanisms of harm are better understood and intervention can be better targeted to distinguish between cross-market mergers that may be likely to pose an appreciable risk of harm from those that are not, the government should proceed very cautiously before intervening to regulate or block cross-market mergers.

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