Higher Prices, Reduced Access, Lower Quality Care: HHS, FTC, DOJ Report Harshly Criticizes Provider Consolidation and Private Ownership

In March 2024, the Federal Trade Commission (FTC), the Department of Justice (DOJ) and the Department of Health and Human Services (HHS) (collectively, Agencies) issued a request for information (RFI) seeking public comment on transactions undertaken by health systems, private payers, private equity funds and other alternative asset managers that involve health care providers, facilities or ancillary products or services.

The RFI also requested information on transactions that are not required to be reported to the DOJ or FTC for antitrust review under the Hart-Scott-Rodino Antitrust Improvements Act. (See our March 11, 2024 article for more information.)

According to the Agencies, the purpose of the cross-government inquiry was to enable them to understand how these transactions may increase consolidation and compromise patient health, quality of care and affordability, while also threatening worker safety, satisfaction and wages, and to inform potential actions the Agencies could take to improve health care competition.

Subsequently, more than 2,000 comments were received, including comments from patients, physicians, health systems, insurers, industry associations, labor unions and academic researchers.[1]

Last Wednesday, Jan. 15, HHS, in consultation with the FTC and DOJ, issued a report.

The Report describes:

  • The consolidation that has been occurring in hospital, physician and insurer markets
  • The Agencies’ findings and conclusions (principally based on research studies they cite) with respect to the price effects of consolidation, the impact on wages and on employee health benefits and the extent to which consolidation enables operational efficiencies and more coordinated care
  • The Agencies’ views with respect to the impact of private equity investments

The Report then discusses the comments the Agencies received in response to the RFI.[2]

Consolidation in Hospital, Physician and Insurer Markets

The Report provides that:

  • Over the last 30 years, the health care industry has experienced a dramatic and continuous trend of consolidation
    • Consolidation has been most pronounced in the hospital sector
    • In 1990, 65% of Metropolitan Statistical Areas (MSAs) were considered highly concentrated for hospital services[3]
    • By 2006, the share had increased to 77%, and by 2016, it was 90%
    • Consolidation trends have continued. A study of 183 MSAs found that between 2017 and 2021, hospital system concentration rose in nearly 70% of MSAs and prices rose in 98%
    • Physician and insurance markets also consolidated significantly during this same period
    • By 2016, 65% of MSAs in the country had highly concentrated specialist physician markets, 39% had highly concentrated primary care physician markets and 57% had highly concentrated insurance markets
    • As of 2024, about 75% of health insurance markets were considered highly concentrated
    • Multi-hospital systems, including tax-exempt nonprofit systems, owned 58% of hospital beds in 2000 and 81% in 2020
    • As a result of consolidation, patients in nearly half of all MSAs had only one or two hospital systems providing inpatient care
    • Both hospitals and insurers have been acquiring independent physician practices. Between 2012 and 2022 the share of physicians who work in independent practices dropped by 13 percentage points from 60% to 47%
    • As of 2022, around half of all physicians were employed by larger health systems

Price Effects of Consolidation

According to the Agencies:

  • Empirical research “unambiguously” shows that hospital system-led acquisitions and mergers are associated with higher prices for services charged to insurers and patients
    • Following an acquisition of a hospital by another hospital or in concentrated hospital markets, some studies find that prices increase between 6% and 65% for the merged entity and increase significantly for neighboring hospitals as well
    • Similar price increases occur when hospitals acquire physicians, with the prices for physician services increasing 14% on average after acquisition
    • Hospital acquisitions of physician practices have led to higher Medicare spending and increases in the total cost of care, due to site-of-care shifts and increased volume of services from within-system referrals

Impact on Wages and Employee Benefits

Again, according to the Agencies:

  • Research shows that consolidation reduces wage growth for health care workers
    • Nominal wages for skilled workers are 4% lower in the four years following a hospital merger and 7% lower for nursing and pharmacy workers
    • Insurer market concentration adversely effects both patients and providers. One study found that large group premiums for employer-sponsored family coverage rose 48% over an eight-year period and consolidation in average markets accounted for seven percentage points of this increase

Operational Efficiencies and Quality of Care

As to efficiencies and quality of care, the Report provides:

  • While health systems claim that consolidation enables operational efficiencies and more coordinated care, research on consolidation and quality suggests the opposite
    • Several studies show no improvement in quality with consolidation and some studies show negative impacts

Influx of Private Equity and Other Private Investors

With respect to private equity, the Report provides that health care businesses purchased by private equity firms increased from 352 in 2010 to 937 in 2020, representing $806 billion, and that private equity-backed companies now own more than 30% of physicians in approximately one quarter of MSAs across the country and control over half of physicians in about 13% of MSAs.

As to the Agencies’ views regarding private equity, the Report provides:

  • Private equity firms are generally not long-term stakeholders but instead are short-term investors. Most of the capital that they deploy is not their own, which encourages risk-taking
    • An emerging body of literature shows that private equity acquisitions lead to higher prices for insurers and patients in their pursuit of profits. Hospitals acquired by private equity firms increase prices by 7 to 16% and profit by 27%, and private equity-acquired physician practices increase prices 4 to 20%
    • Evidence suggests that private equity-backed firms disproportionately engage in up-coding, providing unnecessary services, exaggerating population health risks and ordering more high margin tests and procedures
    • Through “roll-up” acquisitions, private equity firms contribute to consolidation and harm consumers by enhancing monopoly power and increasing prices
    • Private equity firms often dramatically reduce the operational costs of the newly acquired entity. While reducing costs and increasing efficiency are “admirable” if done thoughtfully, evidence suggests that private equity firms pursue cost cutting too quickly, leading to patient safety issues and reductions in quality
    • Private equity investors generally finance their acquisitions with debt for which the acquired company’s assets and cash flows serve as collateral. While private equity firms typically target more financially sustainable companies, the practice of loading them up with debt is risky and has had negative consequences
    • In 2023, at least 21% of health care companies that filed for bankruptcy were private equity-owned, and most of the distressed health care companies at risk of bankruptcy in 2024 are private equity-owned

Summary of the Comments Received

According to the Agencies, while there was a diversity of comments received in response to the RFI, certain themes emerged that represent the most commonly held viewpoints. The Report describes them as follows:

Theme 1: Provider consolidation leads to higher prices and less access for patients

Many patients expressed frustration that following the acquisition of their preferred physician practice or facility, they were unable to afford the care they previously enjoyed. Many also mentioned difficulties in making appointments and seeing the physicians they had seen for years.

Patients reported that ownership changes had reduced the responsiveness of health care to local market needs and had driven rural hospitals to close.

Nearly 200 comments reported patients being unable to access the care they needed (particularly in underserved communities) when care models changed as a result of a private equity acquisition or other merger.

Theme 2: M&A in health care services, especially in private equity-backed transactions, results in process changes and quality reductions

Over 400 respondents expressed concern over the quality of care following all types of transactions, whether led by a hospital system, an insurer or a private equity-backed entity.

Following acquisition by a larger health system, physicians reported that they were given instructions “to practice medicine based on cost and revenue,” and that some employers started tracking individual productivity using relative value units (RVUs), even requiring minimum RVUs in order to stay employed full-time.

Patients and physicians raised concerns about forced changes in referral patterns following acquisitions.

Patients complained of losing access to preferred clinicians due to referral restrictions, while physicians were worried about the impact on quality of patient care as they were put under contractual obligations to keep referrals within their system.

Private equity entities were described as having an excessive focus on generating rapid financial returns and thus lowering costs by reducing quality of care. Several commentors also cited lower quality following acquisitions due to cost cutting and efficiency initiatives.

Many commentators criticized private equity firms for pursuing aggressive staffing cuts and hiring inadequately credentialed staff.

The American College of Emergency Physicians shared results from a questionnaire of its members: 53% of respondents indicated that their medical decision-making autonomy was curtailed following the merger or acquisition of their practice and that there was now “pressure to take shortcuts [and] give inappropriate and potentially harmful care” to meet profit-driven metrics.

Theme 3: Physicians who work at private equity firms reported mixed reviews

A common type of deal referenced involves an independent physician selling his/her entire practice or a portion of it to a private equity firm and being paid some upfront amount in exchange for a portion of the practice’s equity, being retained as an employee of the private equity-controlled practice and receiving additional payouts over time depending upon, among other things, the practice’s performance and the ultimate sales price to the next buyer.

This arrangement created mixed results for participating physicians. Some physician-owners had positive experiences, while some reported feeling misled and disillusioned.

Providers also reported lower pay following an acquisition.

Theme 4: There is widespread desire for transparency on private equity-led transactions

Many commentors offered critiques on how private equity firms operate with a lack of transparency. According to commentors, private equity-led transactions are often suddenly announced without advanced warning, accompanied by little if any information and led by unfamiliar people in unfamiliar entities pursuing unfamiliar business strategies.

Commentors of all types, including patients, physicians, hospital CEOs, state regulators and advocacy organizations, expressed a desire for greater transparency and more data on which health care organizations were fully or partially owned by private equity.

Patients expressed a desire to know more about their providers, and many expressed the particular desire to know whether and when their primary provider was purchased, owned or operated by a private equity entity. They expressed discomfort with how little information is available about the management and ownership of providers and demanded better transparency so as to hold organizations accountable for their actions.

Advocates spoke of the need to know about who owns health care entities, the nature of those ownership arrangements and the financial practices that underlie private equity acquisitions.

In addition to data transparency, several commentors recommended lowering reporting thresholds for health care transactions under the Hart-Scott-Rodino Act and requiring review from the FTC, DOJ, HHS and other state regulators.

Theme 5: People are dissatisfied with private health insurers, especially vertically integrated insurers

Many commentors expressed frustration with private health insurance. Patients shared numerous stories of being denied access to care without adequate explanations.

Physicians offered similar frustrations of not being able to help their patients get the best care for them.

Many providers expressed concern for the mechanisms employed by large integrated insurers to direct clinical decision making and to encourage that care is provided by their affiliated entities.

Commentors expressed concern at the sheer size of the large, multifaceted private health insurance entities. They fear they are sufficiently large that they shift health care markets away from prioritizing patient care toward maximizing profits alone.

Conclusions

The Report concludes that based on both “overwhelming research” and the perspectives of the RFI respondents, the consolidation of health care providers, whether involving hospitals, physicians or other corporate entities, has led to higher prices, reduced access and lower quality care.

Further, according to the Agencies, it is clear from the commentors that the Agencies’ past actions have not sufficiently addressed the harms inflicted by anticompetitive activity in the health care sector, and more effective and vigorous antitrust enforcement is necessary to stop or reverse the trend of consolidation.

According to the Agencies, an equally important finding from the RFI is the volume of comments and criticisms that target transactions “engineered by private equity firms.”

Based on those comments and what the Agencies cite as a growing body of research, the Report concludes that private investment in health care services, instead of leading to increased output, reduced prices and improved quality, leads to the opposite. Accordingly, the harmful effects of private investment in the health care delivery system deserves ongoing scrutiny and greater research.

The Report finally states:

“The results from this RFI indicate plainly that the American public is dissatisfied with ongoing trends in the health care sector. Health care consolidation can negatively impact patients’ and health workers’ safety, quality and cost of care. Private equity ownership in health care appears to present new and unique risks related to and apart from consolidation. HHS, DOJ and FTC must continue to monitor and address these issues, welcome partnerships with states and Congress to prevent harm from further consolidation and collaborate with public and private partners in identifying effective remedies.”


Note: The Report was prepared and issued prior to the new administration taking office and new leadership taking charge of the Agencies. This of course raises the question whether the new administration will embrace the Report and its conclusions.

Based on recent statements made by incoming FTC Commissioner Andrew Ferguson and by Commissioner Melissa Holyoak, it seems likely that the reconstituted FTC (and the DOJ and HHS) will maintain the focus on consolidation, but on a case-by-case basis, considering whether particular transactions including those involving private equity, violate existing antitrust laws, and will not embrace some of the sweeping statements in the Report.

By way of example, in concurring with the FTC’s recent settlement agreement with the private equity firm Welsh Carson, a case involving Welsh Carson’s ownership interest in U.S. Anesthesia Partners, and U.S. Anesthesia Partners’ acquisition of anesthesia practices in Texas, Commissioner Ferguson wrote:

“I concur in today’s Commission action because it is a routine law-enforcement matter embodying a traditional approach to competition law. A reader might reach a different conclusion given the agency’s rhetoric in connection with the public announcement of this settlement. The press release and the Chair’s statement both suggest that this case is extraordinary because it involves “private equity” and “serial acquisitions,” and hint at antipathy toward private equity. I write to pierce through this breathless rhetoric to make clear that this case is an ordinary application of the most elementary antitrust principles. That Welsh Carson is a private equity firm is irrelevant; the antitrust analysis would be the same if Welsh Carson were, for example, an individual or institutional investor.”

Commissioner Holyoak joined in the concurrence.

Similarly, in dissenting to the issuance of the FTC’s rule banning noncompetes because in her view the FTC lacks legal authority to issue a legislative rule such as that rule (a dissent in which Commissioner Ferguson joined), Commissioner Holyoak stated that her dissent should not be interpreted to mean that she endorses all noncompete agreements.

“To the contrary, I would support the Commission’s prosecution of anti-competitive non-compete agreements, where the facts and law support such enforcement. That is why I am particularly disappointed that the Commission dedicated the Commission’s limited resources to a broad rulemaking that exceeds congressional authorization and will likely not survive legal challenge. Those resources would be better used to identify and prosecute — including in collaboration with States’ attorneys general — anticompetitive non-compete agreements using broadly accepted theories of antitrust harm.”


[1] The Report states that all comments were qualitatively reviewed and categorized by subject matter, relevant source of law and other pertinent variables. An interagency team reviewed both the tabulations and underlying comments, the results of which informed the Report.

[2] The Report also includes case studies involving the impact of private equity firms.

[3] Concentration was defined using the Herfindahl-Hirschman Index (HHI) measures according to the DOJ and FTC 2010 Horizontal Guidelines updated in 2023.

Print

Close