Federal Trade Commission Policy Paper Takes Hard Stance Against Certificates of Public Advantage
Background
Many states have enacted Certificate of Public Advantage (“COPA”) laws which seek to permit hospital mergers that might otherwise have been challenged by the Federal Trade Commission (“FTC”) and found to violate federal antitrust laws.
Pursuant to a typical COPA, the applicable state agency approves a merger notwithstanding the likely anti-competitive effects (often the creation of monopoly power) in exchange for which the merging parties agree to various terms and conditions intended to mitigate harms from a loss of competition. These may include, among others, price controls and rate regulations, cost-caps, margin-caps, mechanisms for sharing cost savings and requirements concerning contracting, including commitments about various contractual provisions between hospitals and commercial health insurers.[1]
Properly structured COPAs shield otherwise anti-competitive mergers from federal antitrust enforcement under the “state action” doctrine.[2]
The discussion of COPAs contained in this article is broken into two parts. This first part discusses the FTC’s recently issued Staff Policy Paper. The second part discusses some COPA-like agreements in Pennsylvania involving federal and state regulatory agencies and health systems seeking to merge as well as a brief discussion concerning COPA rules in neighboring states.
Federal Trade Commission and COPAs
On August 15, the FTC issued a Staff Policy Paper in which it strongly urges states to avoid using COPAs and invites state lawmakers to work collaboratively with competition policy experts to minimize the harmful effects of further hospital consolidation on local patients, employers and hospital employees.
Prior to the issuance of this Policy Paper, the FTC had stated its “concerns” with COPAs, and the issuance of this Policy Paper arises in part from the FTC issuance of a Staff Notice of COPA Assessment in November 2017 in which it requested empirical research and public comments concerning the use of COPA and more recently, in June 2019, the FTC hosting of a public workshop to assess the impact of COPAs on prices, quality, access and innovation for healthcare services.
In the recently issued Policy Paper and based in part on the empirical evidence that it gathered, the FTC vigorously disputes the claimed justifications for COPAs and asserts instead that COPAs (i) have resulted in significant price increases, (ii) have contributed to declines in quality of care thereby exacerbating the problem of hospital consolidation, and (iii) have undermined the efforts of antitrust enforcers to successfully challenge anticompetitive hospital mergers likely to cause such harms.
Disputing Hospitals’ Arguments in Support of COPAs
In the Policy Paper, the FTC goes to great length to dispute the arguments regularly offered by hospitals in favor of mergers subject to COPAs.
Quoting directly from the Policy Paper:
Hospitals seeking COPAs commonly claim their proposed mergers would result in cost savings and efficiencies that would allow for improvements in clinical quality outcomes. Experience and evidence demonstrate, however, that many hospital mergers do not result in significant efficiencies, despite hospital projections that they will.
Hospitals seeking COPAs have cited concerns about low reimbursement rates or future reductions in reimbursement that may occur as a result of declining admissions and healthcare reform efforts. They argue that their proposed mergers would improve their financial condition and enable them to meet such challenges.
In each of the last four hospital mergers, the FTC investigated that received a COPA, and in our experience more broadly, hospitals seeking COPAs have had adequate financial resources to continue operating independently and to maintain quality and access to healthcare services without requiring a merger – contrary to the claims often made by the hospitals. Indeed, if a hospital is truly failing financially and the proposed merger is the only way for it to remain viable, the FTC is unlikely to challenge such a merger and the hospital does not need COPA protection against antitrust enforcement.
Hospitals often claim their proposed mergers would create jobs and ensure local access to healthcare facilities and services. In the FTC’s experience, though, hospitals frequently project cost savings premised on facility consolidation, the elimination of services, and job reductions. Therefore, lawmakers should examine these claims carefully and consider how they align with post-merger plans for integration and operations, as cost savings projections may indicate that a merger would reduce employment and patient access to healthcare services in local communities.
Hospitals frequently argue that proposed mergers should proceed subject to COPAs because they would create a larger combined patient base, allowing them to improve population health efforts. Merging hospitals also claim that increasing their patient base would facilitate cost-saving, value-based payment models with health insurers.
However, population health initiatives can be (and usually are) pursued by the hospitals independently, so mergers are generally not necessary to gain these benefits. And recent empirical research suggests that consolidation among healthcare providers has not facilitated the increased use of value-based payment models. Instead, providers in concentrated markets may be better positioned to resist such initiatives.
Related research suggests that health systems with increased scale are not more likely to engage in or be more successful at value-based contracting. Indeed, the shift to value-based initiatives is already occurring among many hospital systems and insurers nationwide and is mandated by Centers for Medicare & Medicaid Services in some circumstances.
Hospitals also claim their proposed mergers would eliminate unnecessary and duplicative costs associated with competition, sometimes referred to as “wasteful duplication,” allowing them to save money by avoiding capital expenditures. But again, it is unclear whether hospitals are really interested in avoiding unnecessary or duplicative expenditures or simply want to avoid the pressures of competition.
Many hospital mergers do not result in significant cost savings, and some studies have found that hospital competition leads to improved patient health outcomes with more effective resource utilization, as compared to highly concentrated markets with less competition. Competition can incentivize hospitals to invest in facilities, technology, and equipment that improve access and quality.
For example, these types of investments can result in shorter wait times, more convenient service options for physicians and patients, and the continued availability of services when a piece of equipment fails. In this regard, competition is good for patients, not unnecessary or wasteful.
Finally, hospitals argue lawmakers should not be concerned about the negative effects of their proposed merger, because the states can impose various types of regulatory conditions on COPA recipients that would mitigate the harms resulting from consolidation. Common examples include price controls and rate regulation, mechanisms for sharing cost savings and efficiencies with local residents, public reporting of quality metrics, and commitments regarding certain contractual provisions between the hospitals and commercial health insurers.
But such conditions do not replicate the benefits of competition; rather, they distort competition. They are also challenging and costly to implement, requiring considerable supervision, as hospitals subject to COPAs often have strong financial incentives to evade the regulatory conditions, thus undermining their efficacy.
Difficulties in Monitoring Compliance
Separately, the FTC asserts that COPA monitoring and compliance are difficult, requiring significant time and resources. Further, the agency notes that the regulatory oversight and the terms and conditions to which the merging parties have agreed are generally only temporary. Once they terminate, the community is often left with a hospital monopoly that can then exercise its market power without constraint.
Review/Evaluation of Recent Mergers Involving COPAs
At the end of the Policy Paper, the FTC discusses its review/evaluation of four mergers that have been subject to COPAs: Mission Health System (North Carolina); Benefits Health System (Montana); Palmetto Health System (South Carolina); and MaineHealth (Maine), and it identifies several others it is actively monitoring.
- MissionHealth – According to the FTC, based on empirical research on the price effects of the COPA for inpatient hospital services from 1996 to 2008, Mission Health (i) increased its prices by at least 20% more than peer hospitals, (ii) there was an average price increase of 25% through 2015, and (iii) prices increased by another 38% after the COPA was repealed in 2015.
- Benefits Health – According to the FTC, empirical research on the price effects of the COPA for inpatient hospital services from 1992 to 2013 showed that Benefit’s prices closely tracked the prices of peer hospitals in duopoly markets during the COPA period, but then increased by at least 20% following the repeal of the COPA.
- Palmetto Health – Again, according to empirical research on the price effects of the COPA from 1992 to 2008, prices did not increase more than prices at other comparable hospitals. The FTC stated that this may have been due to successful COPA oversight, but it also may have been the result of hospital competition that remained in the area after the merger. Unlike the other COPAs studied that involved mergers to monopolies, Palmetto Health continued to face competition from other hospitals serving the Columbia area,
- MaineHealth – The FTC found that price increases during the COPA at Southern Maine Medical Center, the hospital that was acquired by MaineHealth, did not increase by a statistically significant amount but that they did increase by almost 50% following the expiration of the COPA. Also, according to the FTC, the prices at MaineHealth’s flagship hospital, Maine Medical Center, which was not subject to the price restrictions in the COPA, increased by 38% during the COPA period and by 62% following the expiration of the COPA (for an average of 50% during the entire post-merger period). Furthermore, according to the FTC, Southern Maine’s quality declined across most measures following the expiration of the COPA. According to the FTC, these results highlight the deficiencies of the MaineHealth COPA, which only placed restrictions on Southern Maine’s prices, not those of Maine Medical Center or any other MaineHealth hospital, I.e., that MaineHealth was able to exercise the market power gained in the Southern Maine acquisition (and possibly other acquisitions) through a price increase at the unregulated hospital.
Beyond the evaluation of these specific mergers, FTC staff identifies nine states that have approved hospital mergers pursuant to COPA legislation: North Carolina, South Carolina, Montana, Maine, Minnesota, and most recently, West Virginia, Tennessee, Virginia and Texas. Some of these states (North Carolina, Montana, and Minnesota) have now repealed the underlying legislation so that hospitals in these states are no longer allowed to obtain COPAs. COPA statutes do exist in other states.
The FTC’s Ultimate Conclusion
The weight of the empirical evidence indicates that, in the long run, hospital mergers shielded with COPAs often lead to higher prices and reduced quality from unconstrained provider market power. Despite hospital claims that COPAs will result in lower costs and improved population health outcomes, we are not aware of any proven benefits of COPAs. For these reasons, FTC staff urges state lawmakers to avoid using COPAs to shield otherwise anticompetitive hospital mergers.
[1] In a recent post we discussed the pending lawsuit involving a complaint filed by the City of Brevard, North Carolina against HCA Healthcare/Mission Hospital alleging that HCA/Mission Hospital has engaged in anti-competitive conduct involving the illegal maintenance and enhancement of monopoly power. The complaint recites the fact that for a period of time prior to HCA’s acquisition of Mission, Mission had enjoyed legally operating with monopoly power on account of a COPA put in place by North Carolina when Mission merged with St. Joseph’s Hospital (Mission’s only significant competitor). Under the COPA, Mission was permitted to operate with monopoly power in exchange for agreeing to specified cost-caps, margin-caps and caps on physician employment in addition to requirements concerning accreditation, charity and indigent care, contracting practices, and non-exclusivity and non-discrimination and prohibitions on “most favored nation” provisions.
[2] The FTC has acknowledged that antitrust immunity for conduct by private actors that might otherwise violate the federal antitrust laws attaches under the “state action” doctrine provided there is both a clear articulation of the state’s intent to displace competition in favor of regulation and the state provides active supervision over the regulatory scheme or body.
