2023 Draft Merger Guidelines: A Conversation with Professor Thomas Greaney
Antitrust Matters provides engaging and timely conversations about competition policy in the digital age. Antitrust has always mattered to consumers and businesses, and to antitrust lawyers and economists, but today it also is in the political and public discourse more than ever. From the prices we pay for food, travel, financial services, payments to the way we interact daily using digital apps and platforms, antitrust touches each and every one of us in ways we may not even realize. Antitrust Matters brings you you perspectives of experts and visionaries in the field who discuss where antitrust law has been, where it is going and why it is so important to our current political discourse.
In this episode of Antitrust Matters, James Kovacs and Jean Kim are joined by Professor Thomas Greaney from UC Law San Francisco to discuss the impact of the 2023 Draft Merger Guidelines on healthcare mergers with a focus on cross-market and vertical acquisitions.
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Episode Transcript and Show Notes:
Welcome to Antitrust Matters, a Constantine Cannon Podcast where we have engaging and timely conversations about competition policy in the digital age. My name is Jeff Shinder, and I’ll be your host. Antitrust has always mattered to consumers and businesses, but today it is also in the public discourse more than ever. From how we get our food on our plates to how we travel, to the way we interact daily using digital apps and platforms, antitrust touches each and every one of us in ways we may not even realize. In Antitrust Matters, we bring you perspectives of experts and visionaries in the field who discuss where antitrust law has been, where it is going, and why it matters today more than ever before.
Welcome to Antitrust Matters, Constantine Cannon Podcast where we have discussions about antitrust policy and its impact on various markets. My name is Jimmy Kovacs, and I’ll be hosting today’s podcast along with my colleague Jean Kim.
As background, Constantine Cannon is doing a number of these podcasts concerning the new draft merger guidelines, and I would highly recommend our listeners listen to the October 3rd, 2023 podcast with Michael Kades, Deputy Assistant Attorney General for the Antitrust Division at the United States Department of Justice, where he discusses in greater detail of the draft merger guidelines along with Jeff Shinder and Wyatt Fore.
Today’s focus is going to be on the intersection of these new draft guidelines with issues in healthcare antitrust. Jean and I are joined today by Professor Tim Greaney, who I’ll introduce in a moment. But as a refresher, I’d like to turn it over to Jean to provide some background information on the new draft merger guidelines. Jean?
Well, first, hello, I’m Jean Kim. And as Jimmy just noted, I’m a partner at Constantine Cannon. Very excited for today’s podcast. There’s been a lot of lively debate amongst the antitrust bar, amongst enforcers about the new draft guidelines. I’ve been happily taking in some of the debate on the sidelines to various presumptions that are attended to the draft guidelines and how they will break on proposed mergers going forward has been the source of a lot of conjecture complaints even.
There’s been a lot of debate about whether or not the draft guidelines as the agencies have represented really hue to old precedent or whether they are in fact tipping the scales and making it easier for enforcers to succeed in challenging mergers. So I hope we can focus on a couple of those presumptions today, especially those that we think will particularly impact the healthcare market.
Thanks, Jean. So our guest today is Professor Tim Greaney. He currently serves as a research professor at the University of California Law in San Francisco. And full disclosure for our listeners, I previously was a faculty fellow for Professor Greaney when he was a Chester A. Myers Professor of Law and director of the Center for Health Law Studies at St. Louis University School of Law.
Professor Greaney, it’s fair to say he knows antitrust law. He served as assistant chief in the Department of Justice in the Antitrust Division. He has written numerous articles and has a great deal of professional experience concerning antitrust in healthcare. So thank you very much, Tim, for joining us today.
So let’s do some table setting for everyone. Under the existing merger guidelines, it’s fair to say that the Federal Trade Commission has been highly successful in blocking numerous hospital mergers, and those include recent victories in merger matters in New Jersey and also those involving the HCA’s attempted acquisition of Steward Health Care Hospitals in Utah.
And so Professor Greaney, given the recent victories by the federal government, and then these victories, just so our audience are aware, they come off of the back of the FTC losing a bunch of cases, doing retrospectives, and changing their approach, but under the existing merger guidelines, the FTC has been very successful. So do you still believe even though that these cases have gone forward, the FTC has been successful, that there is still competitions in the healthcare space that need to be addressed?
Yeah, I do. And along with the colleagues at UC Law SF and at the Petros Center at Berkeley, we filed comments supporting the changes in the merger guidelines. And one of the reasons is that to some extent, antitrust law has not kept up with modern economic thinking and Economics has moved beyond the simplistic Chicago school rules that govern some of the old precedent. So I think it’s a much needed update. And the other reason it’s particularly needed is in the healthcare sector where concentration has really grown significantly.
So despite the victories in litigation that you just mentioned, there is nevertheless rampant concentration. The hospital markets, at least the MSAs, 94% are highly concentrated. Specialty physician markets are also highly concentrated. 78% have highly concentrated markets in specialty physicians. And of course, the insurance market is highly concentrated. So you have a sector that is not only highly concentrated, but the overwhelming economic evidence is that concentration results in higher prices.
Prices are higher across the board in all those sectors I just mentioned. And also, there’s growing evidence. So there’s an excellent article in the Bill Grant Quarterly that dissects what the new learning is about quality and efficiency. And it really spells out… It’s Mark Pauly and Lawton Burns, two of the most respected economists affected economists around. It really spells out that bigness does not improve quality. And that beyond a certain minimal level of scale, quality doesn’t increase significantly.
And in fact, there’s some evidence that it deteriorates. So all that adds up to a problem, and the question is what can be done? I think we’ll talk a little about the potential efficacy of merger guideline revisions, but it certainly is I think an important step forward and much needed.
Professor, you mentioned the concentration that is occurring in the various healthcare sectors. One area of concern appears to be powerful healthcare systems. Can you explain that concept and why enforcers should be concerned?
Yeah, we put together a long mind-numbing law review article in the Hastings Law Journal about cross-market mergers specifically. And I coined the phrase system power. And the idea is that healthcare systems are potentially a good thing. They may spur some innovation, but one problem is that that system power sometimes translates into market power, monopolistic or oligopolistic power. And we can talk in a few minutes about where that’s been manifest.
But clearly the problem is that large systems have the incentive and the ability to extend their market power beyond just the hospital markets in which the FTC has successfully litigated mergers into other areas, specifically across regions, so that they can exercise market power that extends across an entire region. New evidence has come out on that in economics. And the question is how long will it take for the law to catch up with it?
So one point of clarification, professor, that’d be useful for our listeners is you use the term cross-market mergers. Can you provide the definition for our listeners on that point?
Sure. What that really means is sometimes a hospital system will acquire another hospital that’s not in its geographic market. And there’s an old saying that all healthcare competition is local, or at least most of it is, because patients can only travel so far and insurance coverage reaches only a certain limit. So the notion is that in some cases though, the merger goes outside of the geographic market that’s been commonly recognized, the local market, and those mergers have been essentially immune from antitrust scrutiny.
And until recently, the assumption was that there can’t be any harm from those kind of mergers because they’re in a different market, and indeed the system’s entering a new market. So maybe that’s a good thing. Well, it turns out that the mounting economic evidence suggests that the ability to raise price is increased by that cross-market situation. And that indeed, because there are common customers in the adjacent markets or the nearby markets, that there are common insurers that the system can exercise its market power in various ways.
And the most common one and the most talked about one is so-called all or nothing contracting, in which the system says, look, if you want our system, you have to pay the piper for all our hospitals. Not only the must have hospitals, the hospitals you need to compete, but you’re going to have to pay the piper to the insurance company. You’re going to have to pay the piper for all our hospitals, including the ones in which are in competitive markets, which you may not want so much.
We’re going to get a premium on them too. And the poster boy for this effect is the case recently brought by the California Attorney General and the plaintiffs in this Sidibe case, which was very skillfully argued by the Constantine Law Firm in which the claim was this all or nothing contracting, and you guys can speak more knowledgeably about it than I can since you devoted blood, sweat and tears to that case. The all or nothing contracting really was a device by which market power could be extended into adjacent or markets across a region.
And what spurred a lot of this was some evidence coming out of the Petros Center at Berkeley that showed Northern California prices were way higher than Southern California prices. And the notion was that that ability to raise price through market power through this cross-market leverage all or nothing contracting, et cetera, and other devices was critical. So the problem in antitrust has been keeping up the law with the economic evidence. New cases bring new law, but it takes a while to turn that big tanker boat in the ocean to get precedent moving.
So that’s why the merger guidelines have caught a lot of attention, the idea that they can change judicial preferences or judicial views the way evidence is looked at.
So one of the things that you were just mentioning was the Petros Center’s work, which has been instrumental in looking at cross-market mergers. You talk about all or nothing contracting. I believe [crosstalk 00:11:19] research that has been done in this space, including Leemore Dafny? Can you speak to that?
Yeah. The important economic studies that have come out point to higher prices resulting from these cross-market mergers. So you have Leemore Dafny, a very well-known economist at Harvard, found 12% price increases across markets. And these were price increases in the acquiring system. So when you think about it, when the acquiring system can raise prices, you say, well, wait, that’s not because the hospital that was acquired lacked skill or negotiating sophistication, it really suggests that market power was created.
And other studies by Flum and others showed similarly high price increases as well. And there’s additional research that’s going to be forthcoming that hasn’t been published yet. So the idea is that this area, which was effectively a grant of immunity, if you want to call it that, to cross-market mergers, should be looked at a little more carefully. And that theories need to be developed and law these to move forward to stop mergers in these cases. And we could go into this in a minute, but the new merger guidelines have addressed it quite specifically.
Okay. You’ve touched upon this, professor, but it may not be immediately apparent given the complexities of healthcare markets. Shall these merged entities across markets are able to effectively raise prices? Can you get into the mechanisms by which they’re able to raise prices through these types of mergers?
Yes. I mean, the critical notion is that there’s additional leverage created by this, and one economist called it creating holes in the markets that are served by insurance companies. And insurance companies, the economic evidence seems to suggest, that when there’s a hole in the market that they serve, the broader market, that additional leverage in the hands of the health system enables them to raise price, because they know they have customers, they have employees, in some cases, the employer who live across the adjacent market, or they have an insurer who really wants that blanket coverage across the entire region.
And when that hole is created, that creates a problem. Now, in the Sutter case, we saw other mechanisms too by simply making the price so high if you don’t take all of them. That’s another effective way, and we can talk about potential tying as a mechanism for that. So there are different mechanisms that could be used. And of course, the so-called gag orders, the fact that the insurer and the employer really aren’t allowed to speak about the differential and prices.
All those things add up to mechanisms that enable the exercise of market power. So it’s a recurring problem, and the question is when and how can the law develop mechanisms and precedents to address it?
So let’s talk about some of those mechanisms and let’s get into the draft merger guidelines. As we were discussing in the beginning, the hospital merger space where hospitals or providers are operating within the same geographic market. There’s well-trotted ground in terms of the analysis and case law that’s out there. In what way do you view the draft merger guidelines impacting both cross-market mergers that we’re discussing right now and also vertical acquisition?
And for our audience, we think about vertical acquisitions in the provider space as being hospitals acquiring downstream primary care doctors or physicians in general. You could also have acquisitions involving health insurance plans with providers as well. And so it’s a vertical transaction and usually it involves the source of referrals, which are the doctors. And so professor, maybe you can speak about how these draft merger guidelines may impact those types of transactions, which have not been readily reviewed as of recently.
Right. And as I said at the beginning, there are gaps in enforcement and the gaps are now becoming more and more apparent. And the two you mentioned, cross-market and vertical, are things that the guidelines specifically address, and they address some other things that are very important that have also been neglected, so-called potential competition mergers, which have just fallen by the wayside.
I litigated one 100 years ago. But those mergers are important too. But the idea is that these gaps now are… We are now seeing the results of the under enforcement in that area. So to start with the vertical, which you just mentioned, there’s been a gold rush, a feeding frenzy in which hospitals have acquired physician practices, such that enormous sectors of physician practice are now controlled by hospitals owning those practices.
And by the way, as a sidelight, I’ll mention there’s another important development in the case that was just recently filed by the FTC involving private equity, in which private equity firms buy these position practices or affiliated in some very close way with these physician practices, and they do what’s called roll-ups. In other words, they take a few at a time or one at a time, and they usually fly under the radar screen. They’re not even noticed to the FTC and DOJ, and they acquire one after another in a piecemeal fashion.
And once they have that many, they have then the ability to raise price. A case filed in Texas shows that in three major markets, Dallas, Houston and Austin, the price increases were enormous compared to peer markets. The complaint speaks of higher prices in the dozens of millions of dollars million over time in anesthesia practices that were rolled up by private equity. So that’s just one example. In the hospital vertical acquisition area, what the merger guidelines do that’s very important is they propose some guidelines, some thresholds.
Judges are not economic experts and antitrust is often not their favorite cup of tea. So they’re saddled with a complex economic case. And until you have a presumption or precedence that says, here’s a dividing line that you can enforce and that’s understandable both to you and to a common understanding, until you have that, it’s really hard to enforce the law.
So what the guidelines have proposed is to say, when a hospital acquires, for example, when a hospital acquires an entity with more than 50% of the market share, let’s say it acquires a cardiology practice and it has more than 50% of a market share, or let’s say it acquires more than 50% of the primary care physicians, that has the effect that antitrust law calls foreclosure. It really means to other hospitals, it’s going to be pretty hard for you to have a cardiology practice if all the good cardiologists are employed by your rival.
It’s going to be pretty hard for you to get any referrals if they have all of the primary care physicians. So that’s where the presumption could have some real bite is to say, look, rather than have just these vague undefined standards, let’s put in some presumptions. So that’s in the vertical area. In the cross-market area, the very important guideline specifically addresses that in guideline number seven, nerds like me have to quote the exact one, it’s mergers should not entrench or extend a dominant position.
And the idea is, as they put it in the guideline, they say the agencies will evaluate whether a merger involving an already dominant firm may substantially reduce the competitive structure of the industry.So again, this points to the willingness to look closely. The FTC has said this in speeches and other guidelines. It has said, we’re going to look closely at cross-market mergers. We’re going to see whether there is the potential for anticompetitive effects. Now, this is why our law review article is 92 pages.
There’s a lot to do here. There’s a lot of precedent to unpack, to apply and so forth. But the idea is that you could come up with different ways of analyzing it and come up with a sound economic case that would be administer that a court could understand and could administer to this area. And I can mention a few if you want me to go into further detail of ways in which the law could change to apply closer scrutiny to these mergers.
Professor, pivoting a little bit to a different area, I’ve been hearing a lot from my colleagues who engage in merger work and getting deals through the various agency approvals. And what I’ve heard from them is, hey, well, why isn’t the consumer welfare standard enough? And we already have the presumption of anticompetitive effects for horizontal mergers that increased concentration beyond a particular threshold.
Why are these not enough? Particularly in healthcare, wouldn’t the consumer welfare standard be particularly important? So why are those tools that we’ve had to date not enough? Why do we need all these presumptions?
First is what I’ve said already, is the gaps that are there, which are just mergers that are just assumed to be okay, cross-market, vertical. Those just require more sophisticated attention. The professor at Georgetown, Steve Salop, has written endless articles of very sophisticated economic articles demonstrating that vertical mergers can, not always, but can have an anticompetitive effect. So ignoring them is just not defensible in this modern age.
The other point I’d point out about the consumer welfare standard is there’s a black hole that antitrust doesn’t really address too effectively or really try to generally ignore, which is quality, which is what about the effective consumers of enhanced or diminished quality? And that’s something that has been certainly hard to litigate in terms of what is an appropriate measure of quality? Is it just mortality? How do you measure that? That’s one of the obstacles. But a full and effective consumer welfare standard would pay more attention to that.
There has been some very good writing. A professor at Gonzaga has done some really interesting writing on that score. But you’re right, I mean, certainly the idea here is that if you are going to address vertical and you’re going to address cross-market issues, you want to have a standard that makes sense in terms of consumer welfare. Now, some have criticized the guidelines for not focusing exclusively on price. One point that’s sometimes mentioned is price is the load star here.
That’s all we should be concerned about, and that’s it. But it’s unfortunate that some forget that antitrust is really a legal process. It really is a way of sorting out possibilities, probabilities, and so forth. So price is certainly something that sometimes you can measure, sometimes you can predict, but sometimes you have to go with other factors. And concentration is an appropriate one because first of all, that’s what the Clayton Act was all about. It really was about concentration.
Those who believe in original intent have to go back and read the debates in the ’50s when the Clayton Act was amended and back in 1917 when it was enacted. It was really about controlling power in bigness. Now, that’s not enough and we’ve moved on beyond that simple measure, but we do need to look at other things. And innovation is another area where consumer welfare is definitely affected. And again, bigness tends to block innovation because the incentives dry up, the incentives disappear when you control an entire market.
So there are legitimate questions being raised about the guidelines, but I think on the whole, they’re moving in the right direction.
So another question that comes to mind is the impact here on efficiencies. And in healthcare, clinical integration, improvements and quality redundancies, just general improvement of patient care are arguments that are often made concerning both conduct and transactions. And be curious to hear from you, Professor, if there’s anything in the draft merger or guidelines that would tackle those issues and how the enforcers are thinking about those problems or those efficiencies.
To some extent, the guidelines really echo what the existing law is, and the existing case law is pretty demanding on efficiency justifications. Several courts have said efficiencies are easy to claim and hard to establish or prove in insensible way. And the case law has been pretty consistent in saying that efficiencies must be verifiable, not speculative, merger specific, meaning they have to be caused by the merger, not by some other effect that could be achieved otherwise, and they have to be pro-competitive.
They have to be the kinds of things that really enhance competition. So you look at those criteria and there’s, in fact, one court has done the research and said, there’s never been a merger that has been excused exclusively by efficiencies. That’s not to say efficiencies don’t count in litigation. You guys are experts in litigation. And if you say something often enough, the judge is not going to ignore it. So I think it may waft over into other issues when a judge is trying to decide what he or she thinks about the merits of a case.
But it really hasn’t been one that has blocked merger enforcement by itself. But I think the guidelines do appropriately keep the bar high or endorse that area. One other thing let me throw in that’s really important is that several of these other areas we haven’t discussed are really important. One is the so-called problem of serial acquisitions. When an entity buys or acquires a small firm here and there or a small group of physicians here and there and none of those even trigger the Hart-Scott-Rodino review process, they tend to get ignored.
And then suddenly, you wake up one morning and they control 60% of the cardiologists or a big chunk of the physicians are now their employees. So again, the guidelines importantly say we’re going to treat serial acquisitions as a group. We’re going to say what’s happened over the last five years and how does that collectively affect competition? So again, it’s a tricky business because the last one jumping on board maybe the one that gets challenged, but they may try to unwind prior acquisitions too, which itself causes some problems.
But at least the guidelines are pointing to these areas that at least the evidence… Again, these are much evidence-based guidelines. They’re really based on what the economics teaches. They’re trying to bring enforcement in line with that evidence. But again, not to be too pessimistic, takes a while to move that tanker boat as I suggested earlier and it may be a while. On the other side of the coin, I go back to the beginning of time, I was actually at the Justice Department back when Bill Baxter put out his merger guidelines, and they radically reshaped the way courts looked at mergers.
And in fact, I haven’t done an account, but I bet you that the merger guidelines are cited more frequently than Supreme Court cases generally. They’re treated as if they’re law. They’re not law. In any sense, they’re just saying, here’s what we think is important. But there’s a comprehensive systematic look at that problem. And as I said, courts, generalist judges need that. They need something to hang their hats on. They can move the tanker ship eventually, but it may take a while.
So Professor Greaney, that’s a great segue for the last thing that we want to talk about and that’s about how you view future enforcement. You’ve already covered some things that I was going to ask, but I’ll go back to one of them, which is when a merger is part of a series of multiple acquisitions, and I think this speaks to the FTC’s case with the anesthesiology practices in Texas, although that involves private equity and some other issues, one of the things that has been going on for a while it looks like in the healthcare space has been these serial acquisitions or lots of small mergers and acquisitions of providers.
Based on the guidelines, which as you have indicated, these guidelines are just that, they are draft guidelines, but ultimately, courts and litigators clearly rely upon them. And so how do you foresee those kinds of acquisitions? Do you see them being challenged in the future?
Yeah, so it’s been a lot of years since I was an enforcer, but I provide unsolicited advice on this score. I think clearly what they’re going to do is they’re going to look for winnable cases in receptive courts, and those are two big challenges. So, what is a winnable case? Well, if history is a guide, the clearest measure of a winnable case is one in which you have internal documents that our friends who have MBAs have kindly written that give away the farm in terms of litigation. They say, “Well, we’re going to raise price. We’re going to do this. We’re going to do that.”
So that certainly helps a lot. They also want to have a sound economic basis for it. And market definition has just baffled courts for many years and now it’s finally come under control. But for many years, they were using a measure of market definition, the so-called Elzinga-Hogarty Test, that even Elzinga himself testified made no sense in healthcare. He said, “It just doesn’t work here. It was met for coal, and it really is not a good measure.” So more sophisticated methods have been developed over time and it takes a while.
But I’d say certainly that’s part of it. Having a winnable case is a big part. The other part, just to be the legal realist in the room, is that that you have to come before a court that’s receptive. And frankly, there are any number of circuits and you guys as litigators know that are just simply not receptive to antitrust and certainly new ideas in antitrust. So when they bring a case certainly in the cross-market area, I think it will be one that has all the bells and whistles I was describing, because the last thing they want to do is lose their first major challenge.
Now, they have brought one or two cases which reflect on that. There’s one in the pharmaceutical area where the issue was cross product markets. In other words, they would be able to leverage, strengthen one pharmaceutical product to benefit the ones, the sort of must have pharmaceuticals, to get higher reimbursements in their other pharmaceuticals. So they’re clearly looking at that. The commissioners themselves have said they were. So I think they’ll be looking for that perfect case, but they sure want to win that first case when they bring it.
I think we’re running out of time, but I do have one last question, just an answer to those colleagues and friends who do a lot of deal work and from whom I’ve heard the earful about the draft merger guidelines. Do you think that the FTC, I mean, certainly the lower thresholds and some of these presumptions are going to bring many more of these mergers and proposed acquisitions under scrutiny? Do you believe the agencies are equipped to handle the onslaught, the overflow of merger cases that they may have to litigate?
Yeah, that’s a great question. Because again, as a former enforcer, staffing is everything. You have to be able to litigate a case, and that’s why the states are almost impotent in terms of bringing cases. The states just can’t handle a major case. They do it in conjunction with the FTC, but they just don’t have the staffs. There are many states in which they have one lonely person doing antitrust. So staffing is a big issue and allocating your resources is a big issue. So that’ll certainly be a constraint.
And frankly, there is a blowback against everything about big government. You take all of that in Washington. So in terms of funding of the FTC and the things like that, those are other constraints. And the other constraint is what I just talked about, which is they want to fight a winnable case. So I don’t think there’d be going willy-nilly challenging every merger here and there. I think their focus is going to be on winnable cases and creating precedent. So again, as an enforcer, I’d say, show me a case I can win.
Show me one that will create a good lasting precedent and that we can start trotting around in other cases. So I think that’ll be their focus rather than picking on everything in sight. But who knows?There are countervailing pressures all over the place.
Well, hopefully the higher filing fees will aid at least in terms of funding some of this anticipated litigation.
Right. I wanted to say thank you very much, Professor Greaney, and thank you to Jean for participating today. Two notes for the listeners. First, highly recommend reading the comments of the professors of law and economics, economists and health policy researchers on the draft merger guidelines, which included Professor Greaney. Those were submitted on September 18th, 2023.
And secondly, shout out to Professor Greaney, who is also an author. His book is St. Sebastian School of Law. That’s a novel that Professor Greaney has written. So not only is he an expert in antitrust, but he also is an expert in fiction. And so highly recommend his book as well.
It’s a satire about law school teaching, and there are a few topics as easy to satirize as law school teaching. So it was a pleasure. And by the way, having Jimmy succeed so admirably, he carried me on his back for years as my research assistant. And watching him succeed, there was no doubt it was going to happen, but it was a real pleasure to watch him perform in the Sutter case and advance through now a seasoned litigator.
Well, thank you very much for that, Professor. And that’s all the time we have for today, and thank you so much.
My pleasure. Thank you. Take care.
Jeff Shinder (33:57):
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