President Joe Biden’s pledge to tackle anti-competitive consolidation laid the foundation for tighter oversight of vertical integration in the healthcare industry.
The Biden administration has pledged to halt proposed mergers that would halt competition, in part by increasing FTC and DOJ budgets, adjusting standards for acceptable mergers, banning the use of non-competition clauses, and supporting retrospective analysis of mergers. Unbundling medical conglomerates and curbing proposed anti-competitive vertical mergers will be a key part of the regulatory oversight strategy, according to experts in mergers and acquisitions.
“They’re heading in the right direction,” said Glenn Miller, a health economist at the University of Southern California, noting the FTC’s data collection on the acquisition of physician practices in hospitals. “I don’t know what powers they have. Many of these deals are structured to stay below the Hart-Scott-Rodino threshold, so we’ll probably need new legislation – who knows. ”
The FTC has asked several major insurance companies for data on doctor recruitment for hospitals. It is also revising its vertical merger rules, which are expected to strengthen an area of law enforcement in which regulators have historically had limited success.
Companies like UnitedHealthcare Group have become healthcare conglomerates as they attract more doctors, delve into hospital operations, and monitor more actors across the continuum of care. Insurers, for example, have teamed up with pharmacies and pharmacy benefit managers who have created their own group purchasing organizations. As these conglomerates grow, transparency often diminishes, according to industry observers.
PBM increased their profits by joining insurers and pharmacies. According to financial filings analysis, government reports, research and surveys by the PBM Accountability Project, gross profit from PBM-owned postal and specialty pharmacies rose to $ 10.1 billion in 2019, up 13% from $ 8.9 billion. in 2017.
“This is a reflection of vertical integration,” said Mark Blum, chief executive officer of America’s Agenda.
Some argue that vertical integration can improve quality and lower health care costs by improving economies of scale. Others argue that large integrated healthcare companies can compete against competitors, which can increase costs and reduce quality.
“There is certainly a growing concern about vertical integration,” said Katherine Hempstead, senior policy advisor at the Robert Wood Johnson Foundation, noting the growing interference of health plans in the delivery of care. “You have to look at the disadvantages of a small number of vertically integrated companies and what they do with the competition.”
But it is always more difficult to promote deals after they have been made. M&A experts believe that even if some of the regulations are strengthened, they will still be difficult to enforce.
When the government challenges horizontal mergers, such as when hospitals are merged, it uses standards such as the Herfindahl-Hirschman Index to measure market concentration and assess the effects on competition. But there is no clear methodology applicable to vertical transactions, which means that most mergers are contested on a horizontal basis. It is generally assumed that vertical integration promotes competition.
“(The Herfindahl-Hirschman Index) gives the courts something tangible; there is nothing like it in vertical case law, ”said Catherine Funk, antitrust attorney for Baker Donelson. “I can’t imagine how they will ever be.”
As for the consolidation of hospitals, their volume has decreased over the past two years due to the COVID-19 pandemic.
Hospital transactions were expected to rise in 2021, but quarterly transactions remained slow in the third quarter. Fewer deals were for small and medium-sized hospitals, while multi-billion dollar bids fell through in 2021 due to closer scrutiny by regulators and scale-as-a-solution skepticism.
“We’re not done seeing mergers stop yet,” said Michael Abrams, managing partner for health care consultancy Numerof & Associates. “Marriages continue to be contracted without due diligence under the impression that the increase in size will solve their problems. The fact is that more people will be promoted, realizing that this is not so. “
A dozen or so proposed mergers between relatively healthy nonprofit systems have not closed in the past three years as doctors protested and regulators became increasingly wary of consolidation. M&A consultants point to a number of reasons why deals are falling apart, including cultural differences, the impact of antitrust laws, geographic obstacles, flawed integration plans, strife and power struggles.
But, nevertheless, health system leaders will continue to resort to mergers and acquisitions to try to increase revenues and shield their organizations from competitors, national emergencies and shifts in cost recovery, they said.
“The big consolidation has not really yielded results in terms of cost-effectiveness and has fallen short of its promises in many areas,” said Dr. Harry Greenspan, chief medical officer at Guidehouse, a consulting firm. “When organizations try to consolidate and don’t integrate properly, this warrants further study.”