A new executive order is putting consolidation in healthcare in the spotlight; industry experts share what policy and regulation will mean for provider merger and acquisition activity.
Healthcare mergers and acquisitions have promised to bring lower costs, higher quality, and better access to care. But a new executive order is challenging the rapid pace of consolidation in healthcare, directing policy and regulation to put a chill on deals the administration feels are harmful to patients.
The “Executive Order on Promoting Competition in the American Economy” aims to bolster competition across industries. However, the Biden-Harris Administration specifically called out consolidation in healthcare, with a fact sheet saying the order “[u]nderscores that hospital mergers can be harmful to patients and encourages the Justice Department and FTC to review and revise their merger guidelines to ensure patients are not harmed by such mergers.”
The executive order also provided instructions for other agencies to address consolidation among other healthcare organizations, including pharmaceutical companies and payers, through future policy and regulation.
On first glance, the executive order may seem a little too late for an industry that is already highly consolidated in many areas. One study from 2019 found that nearly three-quarters of metropolitan areas have highly concentrated hospital markets and the rate of hospital mergers and acquisitions has not slowed since then despite a global pandemic.
However, the executive order has some serious implications for healthcare organizations—and not just hospitals and health systems—looking to join forces with others in their market. RevCycleIntelligence spoke with industry experts to learn what healthcare leaders need to know about the executive order and how it will impact consolidation in healthcare moving forward.
WHAT WILL BE DIFFERENT?
Antitrust enforcement should continue to be top of mind for hospital and health system leaders engaging in merger and acquisitions deals. But now more than ever, leaders should know that just because a deal passes the first hurdle does not mean it is out of the woods yet.
“Hospital leaders should be mindful that the agencies can challenge consummated transactions at any time,” says Ken Vorrasi, antitrust litigation partner at Faegre Drinker. “They shouldn’t take solace in the fact that they’ve received front-end Hart-Scott-Rodino clearance. In reviewing past transactions, the agencies—the FTC or state attorney general—could issue subpoenas and ask about price changes, what costs have been cut, what efficiencies have been realized, what quality benefits there are, and try to do an assessment as to whether or not the transaction was pro-competitive for insurers and patients or not.”
The executive order highlights the FTC’s ability to challenge healthcare merger and acquisition deals that were not previously challenged by an administration. Prior to this order, the FTC has also recently revamped its Merger Retrospective Program to expand and formalize retrospective analyses of consummated mergers, including those in healthcare.
But most notably, the FTC has unraveled a healthcare deal successfully in the past. In 2004, the FTC challenges Evanston Northwestern Healthcare Corporation’s acquisition of Highland Park Hospital and eventually ordered a restoration of the competition lost as a result of the acquisition. This type of challenge is rare but could become more common.
“It is fair to say that an action like that one is more realistic and likely today than it was before the executive order and the new antitrust leadership,” Vorrasi stated.
“Healthcare leaders also need to be mindful of the impact and assessing the risk with their transactions that are vertical in nature, whether upstream or downstream, because those transactions have the attention of the agencies as well.”
While much attention has been paid to antitrust review of health system and hospital mergers, healthcare leaders should also not forget about vertical integration.
“We’re going to see more scrutiny in these areas, particularly with the new vertical merger guidelines the FTC and DOJ issued in 2020. That is certainly top of mind to the FTC and the FTC has substantial experience with hospital-physician consolidation and continues to actively study its effects on competition and quality,” Vorrasi said.
Horizontal mergers are also yesterday’s news, further confirms Michael Abrams, co-founder and managing partner at Numerof & Associates. “The biggest issue now is vertical integration,” Abrams said.
The healthcare industry is already so concentrated because of large-scale, horizontal mergers. However, hospitals and corporations now own about half of physician practices in the US, according to a recent analysis published by the Physicians Advocacy Institute.
When assessing whether the acquisition of physicians is beneficial the FTC will want to know, with supporting evidence, that these transactions are truly leading to lower costs, better care quality, and other benefits espoused by healthcare leaders during a deal, Vorrasi stated.
Additionally, the focus will shift to deals involving payers and physician networks and group practices, Abrams predicted.
WILL THE EXECUTIVE ORDER SLOW CONSOLIDATION IN HEALTHCARE?
The executive order on competition has major implications for consolidation in healthcare. But will future policy and regulation be enough to slow the rate of integration among healthcare stakeholders?
Probably not, says Vorrasi. “The order is still recent, but we have not seen any evidence to say it’s going to have a chilling effect—healthcare market activity remains robust. But I think the order has increased awareness of antitrust scrutiny in healthcare among business leaders. That could mean businesses doing a little bit more on the front end to assess antitrust risk and assesses the transaction’s intended benefits versus plowing ahead with a deal in light of the executive order.”
“Most healthcare leaders, especially at larger organizations, are already knowledgeable about antitrust enforcement and the attention healthcare has received in the past. Many have also already been in front of the FTC and state regulators for previous deals, Vorrasi reasoned.
“But it’s a nice reminder to them, particularly those at the very top, at the C-suite level and at the board level,” Vorrasi said. “Organizational leaders have to continue to think about antitrust knowing the administration, the FTC, and state attorney general have healthcare as a top priority.”
Abrams also added that the executive order is not as “scary or earthshaking” as it originally sounded.
“Biden’s order by itself does not impose new requirements on the business community,” Abrams explained. “The success of this White House effort will depend on how quickly and aggressively the government agencies that Biden was really talking to in the executive order formulate and implement his pro competition policies.”
“If you think about formulating or reformulating their guidance, their rules, and then publishing for public comment, enacting those changes, the new administrative rules and putting in place both protocols and standards for them could take anywhere from one to two years,” Abrams added.
WHAT CAN HEALTHCARE LEADERS DO?
Things may be business as usual for some time as the federal government crafts its strategy for implementing the executive order. However, there are some strategies healthcare leaders can execute now to prepare for greater antitrust enforcement down the line.
“The FTC wants to see results, so you have to show what you have been able to achieve in the past,” Vorrasi stated. “You can’t just say benefits will happen–that won’t work.”
Healthcare leaders should be prepared to demonstrate the value a consummated merger or acquisition has created one, two, even four years later, the healthcare lawyer explained. Particularly, healthcare leaders should be able to point to the positive outcomes and benefits, ideally, with supporting evidence, the deal has had for patients and payers.
Diving into value-based reimbursement models is another way healthcare leaders can address the problem with consolidation in healthcare.
“Consolidation is an enabler. It enables healthcare institutions to keep on doing business the way they’ve always done it, on a fee-for-service basis, and to continue to utilize the systems that they’ve optimized to yield the revenue stream that they get from fee-for-service,” Abrams argued.
Shifting from a primarily fee-for-service system to one that pays for value will prepare healthcare organizations for what Abrams considers inevitable—the Walmarts, Amazons, and Apples of the world picking off profitable parts of the healthcare system, leaving hospitals with no choice but to raise prices for inpatient services.
Value-based reimbursement offers providers a predictable source of revenue in this changing healthcare environment.