Hospital Mergers and Economic Efficiency

Consolidation via merger both from hospital-to-hospital mergers and from hospital acquisitions of physician groups is changing the competitive landscape of the provision of health care delivery in the United States. This Article undertakes a legal and economic examination of a recent Ninth Circuit case examining the hospital acquisition of a physician group. This Article explores the Saint Alphonsus Medical Center-Nampa Inc. v. St. Luke’s Health System, Ltd. (St. Luke’s) decision—proposing a type of analysis that the district court and Ninth Circuit should have undertaken and that we hope future courts undertake when analyzing mergers in the health care sector. First, the Article addresses the question of how best to frame the acquisition of a physician group by a hospital—is the merger horizontal, vertical, or potentially both? In undertaking this analysis the Article examines the broader issue of the treatment of Accountable Care Organizations (ACOs) in antitrust law. ACOs are short of full integration and as such, a potential contractual alternative for hospitals and physician groups to an acquisition. A hospital acquisition of a physician practice also has implications for how to view competitive effects in the context of ACOs. Indeed, in St. Luke’s the Ninth Circuit suggests that integration short of full merger was a possible alternative. Second, the Article examines the justification for integration as a way to address countervailing power in health care, the reduction of transaction costs, and potential cost and quality efficiencies. Third, the Article applies the economics of these issues to merger case law generally and specifically to the St. Luke’s decision. Ultimately, the Article finds the economic analysis of the Ninth Circuit lacking. Finally, the Article offers policy implications of the decision and concludes with some suggestions to improve health care antitrust analysis in practice for litigated cases to make such analysis better follow economic principles. INTRODUCTION .................................................................................... 2 I. HOSPITAL ACQUISITIONS OF PHYSICIAN GROUPS: HORIZONTAL, VERTICAL, OR BOTH? ....................................... 6 A. Vertical Merger Law ................................................................ 7 B. Implications of Vertical Merger Analysis on ACOs .............. 11 1. Vertical Integration Short of Mergers .......................... 11 2. ACO Policy Statement ................................................. 13 a. ACO Policy Statement Background ...................... 13 b. Antitrust Analysis of the ACO Policy Statement ............................................................... 14 i. Research into ACOs Is Inconclusive ............... 16 * Professor of Economics, University of Florida. ** Associate Professor of Public Policy, University of North Carolina-Chapel Hill. *** Professor of Law, University of Florida Levin College of Law. We want to thank Josh Soven for his comments. 04 Blair Durrance Sokol.docx (Do Not Delete) 3/27/2016 2:56 PM 2 WASHINGTON LAW REVIEW [Vol. 91:1 ii. Policy Implications .......................................... 17 C. Recent Enforcement Trends ................................................... 18 D. Role of Transaction Cost Economics in Health Care Integration .............................................................................. 18 1. Basics of Transaction Cost Economics ........................ 19 a. Search Costs ........................................................... 20 b. Negotiation ............................................................. 20 c. Reduced Flexibility ................................................ 21 2. Health Care and Transaction Cost Economics ............. 22 a. Reducing Health Care Costs via Integration .......... 23 b. Better Aligning Incentives ..................................... 23 c. Economies of Scale and Scope .............................. 25 d. Managerial Diseconomies ...................................... 26 II. FORECLOSURE ............................................................................. 28 A. Foreclosure Claim .................................................................. 28 B. Economic Rationale ............................................................... 28 III. THE ECONOMICS OF THE HORIZONTAL CASE ..................... 30 A. Countervailing Power in Health Care .................................... 30 1. The Economics of Countervailing Power ..................... 31 B. Role of Efficiencies ................................................................ 34 C. Economics of Efficiency-Enhancing Mergers ....................... 39 1. Cost-Based Efficiencies................................................ 39 2. Efficiency-Enhancing Joint Ventures and Mergers Among Sellers .............................................................. 40 3. Welfare Effects of Quality............................................ 44 IV. THE LAW OF THE HORIZONTAL CASE ................................... 49 A. Judicial History of Antitrust Mergers in Health Care— Overview ................................................................................ 50 B. Case Law Treatment of Merger Efficiencies ......................... 52 C. Hospital Merger Efficiencies—An Assessment of the Cases ...................................................................................... 59 D. Efficiencies in St. Luke’s ........................................................ 63 V. POLICY IMPLICATIONS AND CONCLUSION .......................... 65