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Panel IV Summary

Panel II: Bigger and Better? Horizontal Consolidation Within Sectors and Antitrust Enforcement

Emma Roth, November 13, 2015

Moderator: Zack Cooper – Assistant Professor of Public Health and Economics, Yale University

  • Alex Azar – President, Lilly USA, LLC, Eli Lilly and Company
  • Leemore Dafny – Professor of Strategy and the Herman Smith Research Professor in Hospital and Health Services, Kellogg School of Management, Northwestern University
  • Martin Gaynor – E.J. Barone Professor of Economics and Health Policy, Carnegie Mellon University
  • Thomas (Tim) Greaney – Chester A. Myers Professor of Law and Co-Director, Center for Health Law Studies, Saint Louis University School of Law
  • Peter Mucchetti – Chief, Litigation I Section of Antitrust Division, U.S. Department of Justice

In the second panel of the day, “Bigger and Better? Horizontal Consolidation within Sectors and Antitrust Enforcement,” moderator Zack Cooper challenged the panelists to consider whether the rise in horizontal consolidation has benefited or harmed patients, fostered or stymied innovation, and raised or lowered costs.

Alex Azar promised to offer a “real world perspective” on these questions. Azar argued that the ACA and value-based reimbursement have driven provider consolidation. He posited that value-based payment initiatives under the ACA have placed a financial strain on hospitals, leading to margin compression. In response, Azar argues, hospitals have merged at increasingly rapid rates in an effort to reduce overhead expenses. Azar also charted the rise in vertical integration, with a growing percentage of physicians joining hospitals and large healthcare systems – whereas 62 percent of physicians worked in private practice in 2008, only 35 percent did so in 2014. Finally, Azar described the rise in payer integration, with the eight largest payers now representing 80 percent of U.S. lives. Azar closed his talk by urging manufacturers to respond to these changes with costumer-centered solutions.

Leemore Dafny joked that she would “provide the role of dour economist – things are bad, and they’re even worse than you think.” Dafny detailed the steady increase in payer consolidation over time. The four-firm concentration ratio, a measure of the market share of the four largest payers, rose from 65 percent in 2002 to 83 percent in 2015. At the state level, 61 percent of individuals now live in what the FTC considers “highly concentrated” state markets, meaning that future mergers are considered presumptively anticompetitive in those states. Dafny credits a combination of local, regional, and national mergers and acquisitions for producing this landscape. To determine whether bigger really is better, she challenged policymakers to consider three key metrics: impact on costs (supposed “merger efficiencies”), impact on prices, and impact on quality and innovation. While the third metric is the subject of the greatest dispute, Dafny contended that preliminary analysis suggests that consolidation has had a negative effect on innovation.

Tim Greaney grounded his presentation in the fundamental principles of antitrust merger law. Greaney described the legal presumption of illegality based on concentration data in a given antitrust case. Greaney explained how in these cases, judges weigh potential harms of consolidation (such as coordinated pricing, the emergence of oligopolies and monopsonies, and unilateral effects) against various forms of mitigating evidence (such as ease of entry into the market, countervailing power, and regulatory constraints). Greaney described how some parties have claimed an “ACA made me do it” defense, but that this defense has been largely unsuccessful in courts. Finally, Greaney denounced what he labeled the “sumo wrestler fallacy,” the false notion that consumers will be better off with the dominant insurer and provider in the proverbial ring.

Martin Gaynor focused his talk on the provider side, rather than the insurer side, of the healthcare matrix. Gaynor described the potential benefits of consolidation that its advocates espouse, such as coordination of care, decreased fragmentation, reduction of unnecessary duplication, achievements of scale, and better population health. However, Gaynor declared, “The vaunted reputation of integrated delivery systems does not hold up to inspection.” In fact, Gaynor argued that mergers between close competitors can lead to higher prices, lower quality of care, less investment in care coordination, and less innovative marketplaces. Further, Gaynor described how higher health care costs are passed on dollar for dollar from employers to employees, with the least fortunate among us bearing a disproportionate burden of the costs.

Peter J. Mucchetti closed the panel with his unique perspective as a government insider. Mucchetti focused on the key ways in which the ACA does, and does not, alter antitrust enforcement. On the one hand, Mucchetti claimed that the ACA does not change the key legal standard for antitrust enforcement: whether a business transaction will substantially lesson competition. Mucchetti stated that this standard applies to the healthcare industry, just as it applies to all other industries. The driving principle behind this standard is that competition benefits consumers in the form of better quality outcomes and lower prices. In other ways, Mucchetti argued that the ACA has altered antitrust analysis. By way of example, Mucchetti described how the ACA’s introduction of health insurance exchanges has affected the manner in which insurers enter and exit the market. Additionally, Mucchetti detailed how the ACA has precipitated a rise in narrow-network plans. Mucchetti stated that these plans may save consumers money, but they may also diminish consumers’ ability to access medical specialists.

Although the panelists brought a wide range of experiences and perspectives to the table, they mostly arrived at a common conclusion: competitive marketplaces are essential to maintaining low prices and positive health outcomes for consumers.