FTC And Its Hospital Deal Approach

Hospitals are increasingly motivated to merge or to affiliate with other hospitals or hospital systems. Most of these arrangements are competitively benign, so they attract little or no attention from the antitrust authorities. 

To help explain which mergers attract the FTC’s attention, let me briefly describe the basics of how the FTC analyzes hospital mergers.

Firms that propose to merge generally believe the merger will increase their profits. These higher profits can come from eliminating competition or from achieving efficiencies, or both.

In recent years, six mergers involving hospitals have been blocked or reversed by a court following an FTC enforcement action — or have been abandoned in anticipation of such an action. In four of these cases, the would-be acquired firms subsequently found an alternative partner.

Mergers tend to raise prices or reduce quality when the merging firms are close competitors of each other and when non-merging firms are not close competitors of the merging firms. In the case of hospitals, mergers are most likely to have these negative effects when the merging institutions offer similar services, are located near each other, and do not have many nearby competitors. 

The FTC’s merger analysis is fundamentally about balancing the anticompetitive harm against the efficiency benefits. The antitrust authorities’ basic approach to analyzing mergers is laid out in the highly readable Horizontal Merger Guidelines from the FTC and the DOJ.

In recent years, six mergers involving hospitals have been blocked or reversed by a court following an FTC enforcement action — or have been abandoned in anticipation of such an action. In four of these cases, the would-be acquired firms subsequently found an alternative partner. For example, after Prince William Hospital was prevented from joining Inova Health System, it instead joined Novant Health. 

If the efficiencies would likely happen some other way (possibly through an alternative merger), consumers are better off if the merger is blocked and the harm from lost competition is avoided.

At this point, I must pause to introduce a bit of antitrust jargon — merger specificity. This term represents the commonsense idea that efficiencies count as an offsetting benefit for an otherwise problematic merger only to the extent that those efficiencies are specific to that merger, meaning that the efficiencies would not be reasonably achieved in any other way. If the efficiencies would likely happen some other way (possibly through an alternative merger), consumers are better off if the merger is blocked.

Suppose our hypothetical merger involves $100 worth of harm to consumers for every $120 worth of expected efficiencies. It might appear that this merger has a net benefit, but that is not necessarily so. Perhaps only half of those efficiencies are merger-specific, so that each $100 of harm would be offset by only $60 of efficiencies. 

Bottom line: Determining what portion of anticipated merger-related efficiencies are merger-specific can be an important question in evaluating mergers. Any information relevant to this question is valuable, and the recent experience of firms whose mergers were blocked by the FTC provides a good clue.

The fact that these hospitals chose alternative affiliations after the FTC blocked their initially preferred mergers is welcome news for the hospitals and for consumers. 

These affiliations are presumably profitable because they yielded meaningful efficiencies — and the bigger the efficiencies from the alternative affiliations, the smaller the merger-specific efficiencies that were forgone when those mergers were blocked. 

There is no single right answer, given how greatly hospitals’ circumstances vary. But there are surely some wrong answers, and the freedom to affiliate with almost any willing partner offers hospitals the flexibility to identify those wrong answers and avoid them.

The FTC continues to vigorously pursue its hospital-merger enforcement mission. But for any given hospital, only a small number of potential merger partners are of concern.

This means that the FTC’s work will not encumber hospitals’ efforts to find partners with which they can grow and excel, as so many have already done.

David J. Balan is a staff economist with the Federal Trade Commission. A version of this article originally appeared in NEJM Catalyst.