Do Health Care Mergers Allow Payers to Bargain Down Prices Demanded by Large Providers?

Health care competition may have already been on everyone’s radar as the Federal Trade Commission (FTC) and the Antitrust Division of the US Department of Justice (DOJ) held a public workshop back in February 2015 to discuss the issue, but the month of July really kicked things into high gear.

First, Centene Corporation announced plans to buy Health Net, Inc for $6.8 billion. The very next day, Aetna announced intentions to acquire Humana for $37 billion, potentially combining the third- and fourth-largest insurers by revenue. Later that month, Anthem, Inc announced plans of acquiring Cigna for an estimated $53 billion. If the deal goes through, the company would join UnitedHealth Group atop the industry.

“Particularly in the managed care plan space, I don’t think we’ve seen that many mergers of that scale in such a short time frame,” said
Dionne Lomax, a member at Mintz Levin who specializes in antitrust and trade regulation with particular expertise in the health care sector. 

Year-End Uptick

These mammoth mergers aren’t the only deals garnering attention, however. Lomax pointed out that in the final months of 2015 alone the FTC challenged several potential deals, filing complaints to block hospital transactions in Harrisburg, PA; Huntington WV; and the North Shore area of Chicago. They also challenged a consummated merger between orthopedic practices in Berks County, PA.

“They’ve always been fairly vigilant about challenging provider transactions,” she said, “but it seemed to have a bit of an uptick at the end of last year.” Although providers have indicated an intention to reduce costs and increase certain efficiencies, Lomax added, the FTC wants to ensure that these transactions do not result in an increase in market power that will harm consumers. 

“The evaluation of these is always the tradeoff between the benefits and the costs,” noted Laurence Baker, chief of the Division of Health Services Research at the Stanford School of Medicine, professor in Stanford’s Department of Health Research and Policy, and a fellow at the Stanford Center for Health Policy/Center for Primary Care and Outcomes Research, “so while we hope that sometimes mergers could create benefits for patients—higher quality of care, for example—I think people also worry that the market power that comes with them will enable providers to raise prices that they charge to private insurance companies, for example.”

“It’s mainly a market power and pricing story,” he added, and while it’s a story that’s drawn interest and attention from federal authorities, such as the DOJ and FTC, there are a variety of stakeholders and interested parties paying attention to these marketplace trends. 

Beyond Regulatory Agencies 

The House Judiciary Subcommittee on Regulatory Reform, Commercial and Antitrust Law is a prime example of this scrutiny extending beyond just the DOJ and FTC as the Committee has held a series of congressional hearings exploring competition within the US health care market. 

Tim Greaney, Chester A. Myers professor of law and co-director of the Center for Health Law Studies at Saint Louis University School of Law, testified before this Committee on September 10, 2015, and more recently co-authored a letter along with The American Antitrust Institute (AAI) to express concerns about the proposed mergers between Aetna and Humana as well as Anthem and Cigna.

“The big picture, I think, is that competition both at the provider and at the insurer level is critical for the Affordable Care Act (ACA) since despite all the political rhetoric, the ACA really depends on competition to drive efficiency and cost containment,” he said. 

While some have claimed that health reform is
responsible for anticompetitive consolidation, Greaney has argued that the ACA improves the conditions necessary for competition to both take hold and thrive. Competition in the provider and insurance markets must be maintained, however, in order for the ACA to provide the intended consumer benefits, and the ACA relies on competitive bargaining between payers and providers in addition to rivalry within each sector to drive price and quality to levels that best serve the public.

“If the Aetna-Humana and Anthem-Cigna mergers were consummated,” he stated, “it would reduce the field of formidable potential entrants into exchange markets from the ‘Big 5’ to the ‘Remaining 3.’ The likely effects of this consolidation would be to undermine the cost containment effects of competition in exchange markets. Consolidation that would pare the insurance sector down to less than a handful of players is likely to chill the enthusiasm for venturing into a neighbor’s market or engaging in risky innovation.” 

The mergers have the real potential to undermine the effectiveness of the ACA by diminishing the possibility for further de-concentration through new entry, he added, with potential adverse effects for consumers in terms of both the cost and quality of health care.

Sumo Wrestler Theory Fallacy

Greaney explained that one argument likely to be put forth by the insurance companies is that these big mergers would allow payers to more effectively counter the power of dominant hospitals and
specialty physician practices and bargain down the prices demanded by large providers. The assumption of this “Sumo Wrestler Theory,” as Greaney calls it, is that payers would then pass these savings along to customers, leaving the consumer better off with two sumo wrestlers duking it out as opposed to a fragmented insurance market.”

From Greaney’s standpoint, this mode of thought is mistaken in several ways, and there should be skepticism when it comes to applying a power buyer defense to mergers. “There is economic evidence that larger insurers demand better prices from hospitals, but there’s also economic evidence that they don’t pass it along to consumers,” he said.

One case in point, he noted, was the Antitrust Division’s challenge of Blue Cross Blue Shield of Michigan—the dominant insurer in the state—and its use of most favored nation (MFN) clauses, which “guaranteed Blue Cross the most favorable insurance rates while forcing providers to raise rates on all other insurers in the state.” Experience, he suggested, points to a scenario where a showdown between sumo wrestlers can likely result in a handshake as opposed to an honest wrestling match. 

PBM Congressional Hearing

On November 17, 2015, another hearing was set to determine if the pharmacy benefit manager (PBM) industry is appropriately competitive and whether additional oversight is necessary. The witness panel included two PBM industry representatives, an independent pharmacy owner, and an antitrust attorney who represents the interests of independent pharmacies.

Amy Bricker, vice president of retail contracting & strategy at Express Scripts and Natalie Pons, senior vice president and assistant general counsel at CVS Health each focused on their PBM’s ability to utilize scale in order to keep prescription drug costs down for patients and their clients, stressing that they rely on independent pharmacies to participate in their networks. 

Bradley Arthur, owner of Black Rock Pharmacy and president of the National Community Pharmacists Association, on the other hand, honed in on the scale of the PBMs compared to his independent pharmacy, voicing frustrations that have been noted by community pharmacists for some time. 

David Balto, antitrust attorney with the Law Offices of David Balto, highlighted market trends, such as rising profit margins, in order to suggest that the PBM marketplace is broken and is in need of regulation in order to require added transparency. He pointed out that the FTC has stopped investigating PBM mergers and that no current federal laws or regulations directly govern PBM corporations. 

Continued Antitrust Scrutiny Expected

“I think there’s an important development that hasn’t been widely reported,” said Greaney, “which is that a number of state insurance commissions are going to look and are looking closely at these mergers.” Their mandate is a broader one than just competition and could include requiring divestitures, for example, or conduct relief that freezes rate increases or imposes bans on reducing coverage levels.

While Greaney is confident that the DOJ and FTC will continue to scrutinize mergers closely, noting that it has been the practice under both Democratic and Republican administrations, he also pointed out that the vast majority of mergers taking place year in and year out are not competitively harmful and are not scrutinized by these agencies. 

Given the number of recent mergers and the continued talk of consolidation possibilities, Baker agreed that continued attention from the regulatory authorities and other interested parties is likely. “There are so many different dimensions,” he said. Physician practices are getting bigger. Hospital organizations are getting bigger. And hospitals buying physician practices are part of the story as well. 

“It’s a little hard to predict where the whole industry will go, but I think it’s pretty safe to imagine that the folks in Washington are going to stay interested in what’s going on,” Baker added, “and it will be an interesting couple of years to see how this all plays out.”