Corporate Consolidation of Healthcare--Revisited

III:1 June 21, 2024

It seems timely to revisit antitrust enforcement and corporate consolidation in view of some recent government activities. At the same time that a judge rebuffed an FTC challenge to an acquisition, the FTC is resurrecting a challenge to Sutter Health in California. Not a new topic, the government's interest seems conflicting. What has given new life to market concentration is acquisition of medical practices, notably by Optum. More on that in a minute.

The Changing Chessboard

Over the years, after focusing on the politics of a deal, I have had to navigate the regulatory barriers to mergers, notably antitrust. Health systems around the country continue to horse trade hospitals to optimize performance in various markets. A recent example is CommonSpirit that completed its acquisition of five hospitals in Utah and more than 25 medical group clinics, including a clinically integrated network, from Steward Health Care.

Such acquisitions generally require Hart-Scott-Rodino filings to gain government approval. At the same time, the strategic chessboard is being constantly reset. Community Health Systems (CHS), faced with daunting debt and disappointed shareholders of a devalued stock, has been trying to divest $1 billion in hospital assets for some time now. The FTC recently challenged the sale of five Carolina Hospitals by CHS to Novant but this challenge was denied by a judge. Yes, antitrust is complicated by federal, state, and local politics. In fact, it is worth noting that a state-action defense is actually one of the most potent antidotes to such challenges. This arises when the state compels a merger or consolidation as being in the public interest. Where this prevails, federal challenges become moot.

Consolidation Pros and Cons

Does consolidation of providers increase cost or decrease quality? This is one of the more popular studies, especially for doctoral students (me included back in 1981). While many studies have occurred, and there will be more, they are almost all flawed in a very fundamental way. The central research question is a comparison of current prices to what they would have been. Obviously, this involves assumptions that become the central argument. If you buy a certain set of assumptions, then the conclusion can be whatever you want. You merely have to state your case and develop your assumptions accordingly (classic confirmation bias?). Proof of outcome awaits the future. What this tends to ignore is the consequences if the merger, sale, or consolidation did not occur. In some cases, one of the providers might otherwise have terminated its operations. Rarely do these studies delve into what might happen otherwise. Closing is not always bad as some consolidations result in more efficient delivery of care where a provider closed as another replaced it. Sad to say, but there are still a number of one-hospital markets with two hospitals in them.

In short, measuring the precise impact of a merger (or lack thereof) is a game that economists love to play (witness the Herfindahl-Hirshman Index of market concentration). While per se violations of antitrust law prevail even where the public interest might be positively served, most of the alleged violations cited by the government in healthcare are not in the per se category. The result is that one is required to determine if the communities served by the five hospitals in the Carolinas, for example, will do better under new ownership. The question then becomes “better” according to whom?

This fundamental business question is simplified to some extent. For the entity that desires to sell the facilities, it has lost interest in continuing its support. For the acquiring firm, it has expressed an interest in supporting these facilities. The parties have agreed on a price. Done deal. What is then left is the business case of how these facilities should operate under new ownership and to what extent the public will benefit.

Consequences Matter

If, instead of a deal, the alternative is that there is no interest from potential buyers, the option could easily be that these facilities close or convert (to ambulatory status). Truth be told, the conversion of these facilities is probably an important alternative to consider with or without a change of ownership. Many if not most small rural hospitals are in the process of realizing a declining average daily census (below 10) is actively signaling a change in their status away from inpatient care to exclusively ambulatory care facilities (possibly with a SNF unit). I suspect this includes some critical access facilities.

Some of these smaller organizations have simply not come to that realization yet. But most will. As a result, changing patient trends is becoming a wedge factor for many local boards and management teams. The brutal facts are that a full-service hospital is extraordinarily expensive to operate and may no longer be feasible given the relatively small size of the market and the changes that have taken place in how hospitals are used today. More than a few CEOs have gone packing in recent years as they have tried to enlighten their local neighbors on the board that things have changed in some fundamental ways--the status quo may no longer be viable. Attempts to develop new revenue streams to help sustain such organizations take capital and expertise that is hard to come by.

Enter Corporate Practice of Medicine Laws

No less than Amazon (One Medical), CVS (Oak Street Health), Walmart (VillageMD), and Dollar General have had their forays into healthcare delivery and come to realize that reimbursement is a factor, and the physician component is not so easy to manage[1]. While demand for retail health (nurse-based) remains strong, this should not be confused with physician practice and telehealth. The management challenges are acknowledged. As consolidation continues, especially with medical practices and private equity firms, corporate practice of medicine laws are being brought out of mothballs in an attempt to prevent excess consolidation on the provider side.

What complicates the picture immensely is the reality that competition is somewhat restricted to markets that are large enough to support multiple players. Antitrust laws, as a practical matter, can only be applied to markets that are large enough to support competition in the first place. Many, if not most, markets in the US are too small to support multiple competitors. This is one of the core reasons why hospitals are increasingly being regulated like a public utility (whether intentional or not). A public utility essentially operates like a franchise for a given geographic area or market segment and rates are determined externally. After all, hospitals have the unsettling curse of being both labor and capital-intensive businesses. Yet, even small rural hospitals seem to be subjected to the same legal restrictions as hospitals in much larger markets. This makes no sense. Until a certain threshold is reached (in population or concentration), many markets are fortunate to have a local provider group and/or a hospital at all. Recruiting providers is a full-time job for the entire management team in most small rural hospitals. Turnover in these facilities can be existential.

Optum is the Game Changer

The game changer to all this is Optum. Optum is one of two subsidiaries of the UnitedHealth Group. The other subsidiary is the largest private insurance company in the US-- UnitedHealthcare. This takes on new meaning when considering the full dimension of this behemoth. Not only is United the largest private health insurer, but Optum is the largest single employer of physicians, now managing an estimated 10% of all practicing physicians in America. Talk about market power!

I have long been an advocate of integrated delivery networks (IDNs) that combine the physician, facilities (including hospitals), and financial (including insurance) components. I have done so in the context of competitive markets. Where markets are too small to support competition is where these IDNs can find themselves exerting some leverage. Even where this is the case, however, there is an important consideration from an economic context in that government entities largely determine what a provider (hospital or physician) can charge and will be paid. As the largest single-payor/consumer of healthcare services, the government now dictates prices. Given that antitrust law is all about prices, is antitrust relevant anymore? IDNs are actively pursuing strategies to keep patients in-network. This represents a solid business case for controlling both costs and quality. Where this is happening, consumers are given the choice to join one or the other network-- there is competition.

Most healthcare is now subject to the third-party payor system where deep discounts are the coin of the realm. Like most universities in the US, the only people who pay full price are foreigners. Any wonder that they seek such patients since domestic patients/students tend to represent deep discounts off retail prices? So much for prices. PS healthcare is subject to inflation just like other components of our economy. Healthcare has always been expensive and reflects inflationary pressures like all other elements of the economy. The difference is that healthcare is effectively paid a fixed price but has little ability to control costs related to the supply chain.

Quality

What about quality? Interesting to note that numerous mergers, especially over the past decade, probably reflect more the cost of quality-focused technology (i.e., electronic health record) than any other factor. Allowing smaller hospitals access to the few hyper-expensive EHRs that they otherwise cannot afford, has been a significant benefit of such mergers. With this new technology, quality has tended to be improved over time. No panacea to be sure. But digitizing health information through access to advanced technology has helped develop and assimilate best practices. The ability to make timely comparisons using predictive analytics has been a game changer and opens the door further to Artificial Intelligence (AI). This has improved delivery outcomes dramatically in some cases. More than the pricing side of things, quality represents a rather clear gain as a result of industry consolidation that has enabled comparative analytics among physicians and hospitals.

The Politics of Healthcare in An Election Year

In an election year, this leaves politics as the next item to discuss. With inflation near the top of the list of electorate concerns, is it any wonder that healthcare becomes a target? Both Senators Wyden (D-OR) and Barry Sanders (D-VT) are actively focusing on consolidation in healthcare. Wyden is the most experienced member of Congress in healthcare and must be taken seriously. However, I hope that some recognition is given to the dynamic nature of demographics and the reality that rural healthcare is in dire straits. It is not an opportune time to be rocking the boat. There can be little doubt that more noise will be made in this area during this unique year.?

Stay Tuned

The turmoil in healthcare has subsided little since the pandemic passed (at least mostly). Recovery to pre-pandemic volumes has not occurred among many if not most providers. Recent downsizing will continue, especially as new alternatives (e.g., retail clinics) are expanded. No doubt some of this is good (e.g., growing telehealth). But one should be cautious about what policy signals are being sent while vulnerable providers are seeking some semblance of stability.

After fighting the regulatory challenges of the FTC successfully, Novant has thrown in the towel and the CHS hospital’s acquisition. Turns out the costs to continue with this transaction, despite the goodwill it might represent for these communities, is simply too high a price to pay. The ironic part of the FTC’s challenge is that it will merely strengthen the competitive position of Atrium (part of Advocate Health, the fifth largest nonprofit system in America), in at least one of the subregions involved, which at the same time is about to open an approved new hospital in the Lake Norman area (Cornelius, NC). Instead of promoting competition by allowing this acquisition by Novant, the FTC has effectively added to the monopoly position of Atrium— the largest health system across the region. This leaves one to wonder what the true motivation was behind the FTC’s original challenges. Could politics have played a role?

Future strategies among providers are elusive at best in this confusing environment. Board members of these organizations must acknowledge the risk involved, given these market conditions. Remaining open to the realization that independence may be fleeting will be important as economic pressures continue. It is also possible that there will be more examples of shifting ownership reflecting the nuances of market dynamics. How government entities respond to this will be interesting to watch. In the end, the FTC challenge has involved $millions in legal fees and executive time, left the CHS hospitals in a bind seeking a buyer with little support from CHS, and done nothing to improve healthcare in the communities served by these facilities. What was the government's interest here?

[1] Walgreens' US health president: Stop conflating retailers' healthcare businesses (beckershospitalreview.com)