Continued Spotlight on Cross-Market Hospital Mergers

Mergers between competitor hospitals in the same geographic market have been routinely scrutinized and often challenged by the Federal Trade Commission (“FTC”) and the U.S. Department of Justice (“DOJ”). Cross-market mergers (including acquisitions and consolidations) of health care systems that do not directly compete against one another have not to date been challenged by the federal agencies because they are considered not to be in the same product or geographic market. Nevertheless, they have received increased attention among health care economists and lawyers and as of late have received the increased interest of the enforcement agencies.[1]

Recently Published Study

Most recently, a research article published in the November 2022 issue of Health Affairs titled “The Rise of Cross-Market Hospital Systems and their Market Power in the US” presents the results of a detailed cross-market study. Analyzing hospital systems data using the American Hospital Association Annual Survey Database and defining hospital geographic markets for this purpose as commuting zones that link workers to places of employment, the authors[2] report:

  • The share of community hospitals in the United States that were part of hospital systems increased from 10% in 1970 to 67% in 2019, resulting in 3,436 hospitals within 368 systems in 2019.
  • Of these systems, 216 (59%) owned hospitals in multiple commuting zones, in part because 55% of the 1,500 hospitals targeted for a merger or acquisition between 2010 and 2019 were located in a different commuting zone than the acquirer.
  • The share of systems that were cross-market systems increased from 53% in 2009 to 59% in 2019, with most of the increase being in state systems, whose share increased from 22% to 29 % of systems.
  • Based on market-power differences among hospitals in systems, the number of systems in urban commuting zones that could potentially exert enhanced cross-market power increased from 37 systems in 2009 to 57 systems in 2019, an increase of 54%.

The authors conclude that this increase in cross-market hospital systems warrants concern and scrutiny because of the potential anticompetitive impact of hospital systems exerting market power across markets in negotiations with common customers.

The Basic Legal Theory

A principal legal theory advanced regarding the anti-competitive impact of cross-market mergers concerns the possibility of illegal tying arrangements post-merger. In the context of a cross-market merger of health systems, the possibility of tying arises when the newly merged system in negotiating with purchasers (e.g., insurers and self-funded employer plans) insists on an “all-or-nothing” contractual arrangement — either include all of the hospitals in the merged system or none at all. Differently stated, where following a cross-market merger, a health care system in one geographic market requires purchasers to contract with the system’s hospitals in another geographic market also serviced by that purchaser (the “tied hospitals”), and where the system has hospitals (the “tying hospitals”) who are “must-have” hospitals in order for the purchaser to successfully market a product, the purchaser may be forced to pay supra-competitive prices. Tying enables the system to extract higher prices from purchasers because otherwise there may be “holes” in the networks being marketed, which in turn will put the purchasers at a competitive disadvantage as they compete with other purchasers in the markets.

A related basis for the possibility of anticompetitive pricing following a cross-market merger derives simply from the presence of common customers/common insurers. In basic terms, the theory here is that, even without tying, where a merger brings together two hospitals in different geographic markets and where the merged hospitals then negotiate with a common customer (e.g., an employer) or a common insurer, the loss of both hospitals from the network is greater than the sum of the losses of each hospital independently in the absence of the merger.[3] [4]

Prior Studies

Prior to the recently published study, others have reached similar conclusions.

For example, Dafny, Ho and Lee writing in the April 2019 issue of the Rand Journal of Economics, “The Price Effects of Cross-Market Mergers: Theory and Evidence from the Hospital Industry,” consider the effect of mergers between firms whose products are not viewed as direct substitutes for the same good or service but are bundled by a common intermediary. Focusing on hospital mergers across distinct geographic markets, they conclude that these combinations can reduce competition among merging hospitals for inclusion in insurers’ networks, leading to higher prices (or lower-quality care).

Using data on hospital mergers from 1996-2012, they found that cross-market, within-state hospital mergers yield price increases of 7%-10% for acquiring hospitals while out-of-state acquisitions do not yield significant increases.

They summarized their findings:

“This study provides theoretical and empirical analyses of the price effects of cross-market mergers of upstream suppliers to intermediaries who bundle and sell their services. Our model emphasizes the ways in which cross-market mergers differ from within-market mergers, setting aside commonalities shared across both merger types—such as changes in bargaining skill, managerial practices, service mix, and costs. The theory demonstrates that price changes (both positive and negative) may arise when the merging parties negotiate with a common buyer, and customers of that buyer value both parties (i.e., their demand for the bundle is influenced by the inclusion of the parties).”

Likewise, Lewis and Pflum in a 2017 article in the Rand Journal of Economics (48, issue 3, 579-610) found that prices at hospitals acquired by out-of-market systems increased 17% more than unacquired, stand-alone hospitals, while another study focusing on mergers that increased multi-market contact between two hospitals systems found price increases of 6%.[5]

Prior to these studies, economists Gregory Vistnes & Yianis Sarafidis had written that health plans were “expressing serious concerns that large provider systems encompassing multiple (but generally adjoining or nearby) geographic markets are reducing the ability of health plans to negotiate favorable rates” and that “[p]erhaps the most commonly heard variant of this concern is that, even though a health plan may be able to continue marketing its plan to employers when they have one or two important “holes” in their provider network, at some point a plan may have so many holes in its network that employers will be unwilling to offer that plan to their employees.[6]

Difficulties in Applying Current Antitrust Laws to Cross-Market Mergers

Section 7 of the FTC Act prohibits mergers or acquisitions whose effect “may be substantially to lessen competition, or to tend to create a monopoly.” It would at best be difficult for the FTC to assert that a cross-market merger violates Section 7 since the parties to a cross-market merger are not competitors. Similarly the pre-merger absence of competition between parties to a cross-market merger would seem to prevent a cross-market merger from being a violation of Section 1 of the Sherman Act which prohibits contracts and/or combinations in restraint of trade. Similarly, it would be difficult to argue that following a cross-market merger, pricing changes should be considered monopolization or attempts to monopolize within the meaning of Section 2.[7]

Regulatory Challenges to Date/Upcoming Regulatory Activity

With only a single notable exception, the antitrust regulatory agencies have not acted with respect to cross-market mergers.

The exception involves the California Attorney General’s intervention in the cross-market affiliation of Cedars-Sinai Health System and Huntington Memorial Hospital. In that instance, before permitting the affiliation to be completed, the Attorney General sought to impose conditions on the affiliation relating to cross-market competitive concerns. Based on its review of the health systems’ market power and pricing patterns, the Attorney General sought to prohibit their use of “all-or-nothing” clauses that would require payers to contract with both systems, as well as anti-tiering and anti-steering clauses whose effect would be to make it more difficult for insurers to steer patients away from the merged system. The Attorney General also sought to impose limits on the amount of annual price increases. The systems sued to block these proposed restrictions and the case was ultimately settled.

Pursuant to the settlement, the merging hospitals, agreed among other things, to:

  1. a 10-year prohibition on (a) “all-or-nothing” clauses, (b) penalizing a payer for contracting with individual hospitals in the merged system by conditioning the participation, pricing or contract terms relating to one system hospital on the participation, pricing or contract terms relating to other hospitals in the system, and (c) interfering with payer efforts to create “narrow networks” that might not include some or all of the system’s hospitals;
  2. restrictions on pricing for five years; and
  3.  the appointment by the Attorney General of a monitor to oversee the parties’ compliance with the terms of the settlement.

While not an enforcement action, but nevertheless of note, prior to the California matter, the U.S. Department of Justice (“DOJ”) in April 2002 issued a Business Review Letter to the Michigan Hospital Group (“MHG”) in response to its request for a statement of the DOJ’s then present enforcement intentions regarding MHG’s proposal to operate as a Michigan nonprofit corporation to negotiate contracts on behalf of its members with insurance companies, employers and managed care plans for the provision of primary care hospital services. MHG’s members were seven small, geographically-dispersed community hospitals in Michigan.

The DOJ concluded that, provided MHG operated as represented in its letter request, it was not likely to produce anticompetitive effects. Among the representations made by MHG was that its operations would be conducted on a non-exclusive basis.

Notably, in issuing its letter, the DOJ explicitly stated that in reaching its conclusion, it considered the views of health plans serving the lower peninsula of Michigan. While those plans recognized that MHG’s hospital members serve distinctly different local geographic areas and thus are not substitutes to provide hospital services for those areas, a small number of plan representatives expressed concern that the MHG hospitals might be able to increase their bargaining leverage with health plans by refusing to contract except through MHG. Given that MHG represented that it would conduct contracting on a non-exclusive basis, the DOJ did not have to formally address the issue of bargaining leverage in the context of exclusive contracting, and it noted that “whether the hospitals’ bargaining leverage could in fact be expanded by negotiating exclusively through MHG is by no means clear and to make that determination would require additional investigation and analysis.”

Most recently, the FTC has expressed a clear interest in increased scrutiny of cross-market transactions. In September 2021, Holly Vedova, the Director of the FTC’s Bureau of Competition, announced that in light of the recent surge in merger filings, the Bureau of Competition is instituting new process reforms to “best use its limited resources.”

She explained that the FTC is seeking to make the agency’s merger reviews more comprehensive and analytically rigorous. Cognizant of how what she termed an “unduly narrow approach to merger review” may have created blind spots and enabled unlawful consolidation, she announced that the FTC is examining a set of factors that may help it determine whether a proposed transaction would violate the antitrust laws. This will involve providing heightened scrutiny to a broader range of relevant market realities so as to better identify and challenge deals that will illegally harm competition. Toward this end, the FTC’s second requests may factor in additional facets of market competition that may be impacted. Importantly, she explained that these factors may include the cross-market effects of a transaction.

Flaws in the Analysis/Conclusions Set Forth in the Studies

With respect to the underlying analyses presented in studies such as those described above, which purport to show empirically the price impacts of cross-market mergers and their harm to competition, other health care economists have suggested flaws in those analyses.

By way of example, David Argue and Lona Fowdur of Economists Inc. in a paper entitled “An Examination of New Theories on Price Effects of Cross-Market Hospital Mergers,” present a number of possible flaws in the studies and literature pointing to the anti-competitive effects of cross-market mergers.

Focusing in particular on the study prepared by Danny, Ho and Lee (“DH&L”) discussed above, they discuss what they see as serious issues regarding both DH&L’s model and their empirical analysis.

The first issue concerns whether DH&L’s geographic market is too restrictively defined. DH&L essentially treat hospitals that are more than a 30-minute drive from each other as being in separate geographic markets but Argue and Fowdur point out that such a standard is not consistent with the manner in which healthcare mergers are typically defined, i.e., the boundary of the area to which patients would be willing to travel for services in the event of a small but significant non-transitory price increase (“SSNIP”).

As Argue and Fowdur explain, under the geographic market approach laid out in the FTC and DOJ Merger Guidelines, if all hospitals in area A increase their prices and enough commuters switch from using hospitals in area A to hospitals in area B, the hospitals in both areas combined rather than those in area A alone would constitute a properly defined geographic market. If so, the cross-market effects that DH&L ascribe to the presence of common customers, may be attributable to geographic markets that are too narrowly defined. With narrowly defined geographic areas, the “markets” that DH&L consider to be adjacent could actually be part of a single and broader geographic market and the pricing effects that DH&L attribute to cross-market effects may be due to within-market effects.

A second issue raised by Argue and Fowdur involves the absence of considering the means by which health plans could avoid attempted cross-market price increases. More specifically, they observe that the increased value of a cross-market merged system is a necessary element for DH&L to reach their conclusions, but the incremental value can be driven by efficiencies that benefit customers. Multi-hospital systems bring value to employers or insurers because they reduce transaction costs and possibly increase quality over what could be offered by their hospitals individually. Transaction costs related to negotiating contracts, monitoring consistency of service and administering claims are reduced through centralization. Likewise, quality can be improved by standardizing and monitoring clinical processes in a manner that cannot be done as readily across individual hospitals. This increase in value does not create harm to competition, and if these types of efficiencies are more likely to be present and of value to a common customer when the hospitals are located in adjacent areas, a pricing differential may arise between adjacent and non-adjacent transactions.

A third issue discussed by Argue and Fowdur relates to the fact that, following a cross-market merger, DH&L’s theory does not address the fact that health plans may be able to substitute hospitals in local geographic markets prior to a cross-market merger. The cross-market theory does not require any individual hospital to possess market power in its local hospital market prior to the merger in order for a cross-market merger to create market power. As they write: “if a health plan could replace the individual hospitals in its network for each market in the pre-merger world, it stands to reason that it could replace the merged hospitals in each market just as readily. In that context, the merged hospitals could not acquire market power due to cross-market effects. If the merged entity creates efficiencies that are beneficial to the payor, it would be more costly to replace the merged entity than to replace each individual hospital, but that would not lead to antitrust harm.”

Argue and Fowdur also point to the fact that DH&L’s analysis in considering post-merger pricing does not take into account price changes that may arise from and reflect capital investments and quality improvements at the acquired hospitals. Additionally, DH&L’s analysis does not account for the fact that differential pricing at newly acquired hospitals may involve the increased bargaining skill attributable to system-wide sharing of the cost of a more expensive and skillful contract negotiating team or by pooling information from a larger set of contract negotiations, i.e., changes in pricing that arise due to system membership and are not driven by increases in market power.

Finally, Argue and Fowdur point out that the price estimation conducted by DH&L relies on assumptions that may affect the validity of their data, namely that they do not analyze actual negotiated transaction prices between health plans and hospital systems. Rather, they approximate prices based on total revenue, exclusive of Medicare payments but not omitting Medicaid revenue, with multiple adjustments to make the observations consistent. It is not clear how this approximation affects their results.


Given all of the above, parties contemplating a merger that might be considered a cross-market merger should:

  • Seek to define the relevant market(s) applying traditionally accepted geographic market determinants, i.e., does the merger involve systems in adjoining or otherwise geographically distinct markets or are the two systems more properly considered in the same market for purposes of applying the standard tests, e.g., is the merger in the proposed geographic likely to result in a SSNIP and what is the market concentration pre-merger and post-merger?

  • If there are two separate markets, what share of the market does each of the merging parties presently have?

  • Are there common insurers and/or common employers who maintain plans for employees in each of the markets?

  • If there are separate markets, are there other hospitals in each of those markets who compete with the system hospitals involved in the proposed merger such that employers and/or insurers who purchase services in one or both of those markets can effectively choose not to contract with the merging parties?

  • What do the current payer agreements provide with respect to services in each market, including provisions that might be considered “all-or-nothing,” tying or steering provisions (obviously making sure that confidentiality is maintained)?

  • Are there material capital investments, operating efficiencies and/or quality enhancements that will benefit the common customers and the communities serviced by the merging parties, which could not be accomplished but for the merger?

In light of the growing number of cross-market mergers within the health care industry and the studies concerning their economic impact, and given the open questions concerning whether existing antitrust laws can or should apply to them and given the most recently expressed interest of the FTC in examining cross-market questions, cross-market mergers will undoubtedly receive increased attention in the period ahead, and this will in turn spawn increasing controversy.


[1] At the state level, the California Attorney General has challenged a cross-market merger involving hospitals as more fully discussed below.

[2] Brent D. Fulton, Daniel R. Arnold, Jaime S. King, Alexandra D. Montague, Thomas L. Greaney, and Richard M. Scheffler.

[3] Also, health care economists have posited that when two hospital systems compete and therefore have contact with each other in multiple markets, this contact can potentially lead to the firms competing less aggressively in a particular market to maintain the status quo in other markets (i.e., mutual forbearance). See, Fulton, Arnold, King, Montague, Greaney and Scheffler, “The Rise of Cross-Market Hospital Systems And Their Market Power In The US”, Health Affairs (November 2022).

[4] As discussed below, there are arguments as to why notwithstanding these theories there in fact should be no antitrust violation applying current federal law.

[5] Schmitt, “Multimarket Contact in the Hospital Industry” 10 Am. Econ. J.: Econ. Pol’y 361-377 (2018).

[6] Vistnes & Sarafidis, Cross-Market Hospital Mergers: A Holistic Approach (79 Antitrust L.J. 253 (2013). See also, King and Fuse Brown “The Anti-Competitive Potential of Cross-Market Mergers in Health Care” Saint Louis University Journal of Health Law & Policy, Vol 11, Issue 1 (2017); King, Montague, Arnold and Greaney, “Antitrust’s Healthcare Conundrum: Cross-Market Mergers and the Rise of System Power” (February 10, 2022) May 2023 Forthcoming, UC Hastings Research Paper Forthcoming, Available at SSRN: or

[7] But see, King, Montague, Arnold and Greaney, “Antitrust’s Healthcare Conundrum: Cross-Market Mergers and the Rise of System Power” supra, arguing that existing antitrust laws can be applied to cross-market mergers.