Anticompetitiveness is rampant in health care

Last fall, a federal court began hearing the case of United States v. Google LLC, in which the Department of Justice and a group of states allege that Google has smothered and eliminated its competition in part through illegal acquisitions, preventing the use of competing products.

The outcome of the case will undoubtedly have a major impact on business practices across Big Tech. But there’s another industry in which the same allegations being made against Google and other Big Tech companies also applies that far fewer people are aware of: health care.

Anticompetitive behavior in health care has been happening for decades in the United States to the detriment of consumers. Here’s the common playbook: A health care system or hospital chain buys another facility (i.e., another hospital or a group of providers) with the rationale that once they have more control of these resources, they can share their fixed costs; this increased operational efficiency will then be passed down to patients through lower prices and increased quality.

Except it seems that rarely if ever happens. Even almost 20 years ago, researchers showed that, across the country, hospital consolidation raised prices. In fact, a 2015 study found that when the hospitals that merged were geographically close to each other, prices increased by a whopping 40% to 50%. The same study also found that these mergers had ripple effects, showing how neighboring hospitals would also increase their prices to match the new market price. As for the impact on the quality of care, mergers also did not improve that. Rather,

many studies have shown the practice often results in a lower quality of care.

In the United States, more than 80% of our hospitals are privately owned. This means that they act just like any other economic entity — if they can squelch the competition, they will. Even government and nonprofit hospitals have been shown not to be aligned with their charity care obligations despite their tax designation status.

But in recent years, the drive for profits has intensified — driven largely by the increasing involvement of private equity, which invests more than $200 billion per year in health care and over the past 10 years has bought over 8,000 hospitals and other health care firms. The addition of these investors, who seek to quickly maximize their returns above all else, is also leading to new business practices that, while not technically illegal, are definitely making health care worse.

For example, Prospect Medical, a company backed by private equity investment, shuttered the maternity ward, I.C.U. and E.R. of a Pennsylvania hospital as well as several other hospitals it owns across the country in no small part due to a $1.12 billion dollar loan the company took out in order to pay itself and its private equity shareholders a $457 million dividend. In order to pay back the loan, Prospect Medical then sold off the land and buildings of hospitals it owns to a real estate investment trust, which it now leases the hospitals back from — costing the hospitals millions of dollars in rent.

The federal government understands these practices are a problem. The Federal Trade Commission has already sued several hospital mergers based on anticompetitive behavior for what are called “vertical mergers” that consolidate suppliers all along a supply chain (e.g., a hospital, a physician’s practice, a lab facility, an imaging facility) as well as for “horizontal mergers,” where a hospital acquires practices that provide overlapping services and therefore reduce competition. And last month, two U.S. senators launched a bipartisan investigation into private equity firms’ involvement in health care. But with anticompetitive practices flushed with private equity money rampant throughout the system, there are currently few too resources to pursue so many cases at once.

So what can done? First, our current legal and regulatory mechanisms need stronger teeth. The primary tools for state and federal entities to regulate the industry — namely, antitrust and anti-kickback laws — are woefully outdated. Given how rapidly the health care landscape is changing, current laws are not able to keep up with how the industry is being financed and delivered. Congress can also empower federal regulatory agencies such as the Federal Trade Commission, Securities and Exchange Commission, and U.S. Department of Justice to prevent the kind of profiteering that private equity is currently engaging in at the expense of our health care system.

For their part, states can also play a role by passing and updating laws that require reporting of potential mergers of health care entities before they happen, since reversing these mergers is nearly impossible. States can also prohibit anticompetitive contracts between insurers and providers. In California, existing law requires the Department of Managed Health Care or the Attorney General to review most health care transactions, and new assembly bills including AB 1092 and AB 1091, if passed, would expand oversight authority and further empower these entities to safeguard against anticompetitive practices.

The good news is that there has been an increase in the enforcement of antitrust law in health care from federal entities such as the FTC, but it’s not enough.

We expect the government to ensure a level playing field in the market economy. As it works to do so in technology, we should expect no less in health care.

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