A comprehensive and growing body of evidence demonstrates that health care consolidation leads to higher health care costs with little to no increase in quality. Federal antitrust enforcers have historically focused on horizontal mergers, or mergers involving two hospitals in the same geographic area, but health care consolidation increasingly occurs through transactions that evade antitrust scrutiny. In particular, physician practice acquisitions by hospitals, health plans, or private equity investors are typically too small to be reported to federal antitrust agencies under the Hart-Scott-Rodino Act. Moreover, despite evidence showing that vertical mergers of physicians or clinics with health systems or cross-market mergers of hospitals also raise prices and threaten access to services, federal antitrust authorities have been hesitant to challenge these types of transactions.

While the Biden administration has signaled strong support for increased competition policy, most of these non-horizontal mergers escape review by federal antitrust enforcers. Thus, states have an important role filling the gap in reviewing and overseeing these forms of stealth health care consolidation. The National Academy for State Health Policy (NASHP)’s Model Act for State Oversight of Proposed Health Care Mergers helps states fill this gap.

NASHP’s model act grants state attorneys general and state health officials with overarching authority on cost, like a health cost commission, the authority to review, place conditions upon, and block potentially harmful consolidation of health care providers in their state. The model requires any health care provider to obtain approval from the attorney general or state health cost commission before completing a transaction that would transfer control of or a material amount of assets to another party. It creates a comprehensive review process for transactions with the potential to reduce access, increase costs, or that are otherwise not in the public interest. The model addresses gaps in federal antitrust enforcement because it would require state review of health care transactions at values below the Hart-Scott-Rodino Act threshold and apply to all types of consolidation, including horizontal, vertical, or cross-market.

Importance of a Comprehensive, Administrative Review Process

Under states’ existing laws, attorneys general can file a lawsuit alleging a merger violates state or federal antitrust laws. To block a merger, a state attorney general must expend significant time and resources to convince a court that the merger will “substantially lessen competition,” but, state attorneys general cannot challenge proposed mergers unless they are aware of them.  Additionally, the resources needed for a trial mean that attorneys general can typically only challenge the largest, most problematic mergers.

The NASHP model creates an administrative notice, review, and approval process over a broad range of significant health care transactions, including mergers, acquisitions, or contractual affiliations that result in a change of control. It authorizes a state attorney general to block or place conditions on problematic transactions without going to court. Establishing an administrative process is important because it allows state officials to be more effective at overseeing cumulative, smaller transactions that may amass market power over time.

In addition, state officials can more easily impose conditions on a transaction through an administrative review rather than through an antitrust settlement, which requires the attorney general and merging parties to negotiate an agreement and for the court to approve the settlement in a consent decree. Thus, an administrative transaction review process can be more efficient than antitrust enforcement, and the cost of the review can be paid for through fees charged to the parties of the transaction.

Some states already have an administrative process to review transactions involving health care providers. For example, the Office of Health Strategy in Connecticut must approve mergers involving hospitals and physician group practices. Massachusetts requires that any provider organization changing its ownership or governance must report to the Health Policy Commission (HPC) for review before completing the transaction. While the HPC lacks the authority to block or condition a merger, it is empowered to conduct a cost and market impact review (CMIR) and refers that report to the attorney general when it finds that a transaction should be blocked. The Oregon legislature recently passed a law that gives the Oregon Health Authority the ability to review and block many mergers of health care providers that have the potential to negatively impact access to health care in the state. Best practices from these states and others are included in the NASHP model act.

Key Considerations for Provider Merger Oversight Laws

NASHP’s model law is organized into seven sections to allow state policymakers to tailor oversight of transactions to state-specific priorities including cost, access, and equity. Each section allows policymakers to shape oversight specifically to their state with consideration of the following key questions:

Which hospitals or providers are covered?

NASHP’s model applies to any “health care entity,” including any person or institution licensed by the state to provide health care services, that undergoes a “material change transaction,” including traditional mergers and acquisitions in addition to joint ventures and private equity roll-ups. It also covers any other transactions that may increase providers’ bargaining leverage in negotiations with insurers.

State policymakers may choose to narrow the definitions to decrease the number of transactions covered by this model, but a more robust alternative would be to create a streamlined process through administrative regulation to automate the procedures for approving these transactions. For example, states may use regulations to “deem approved” any transaction in which the resulting merged entity employs less than six physicians. Requiring all providers to give notice to the attorney general means that state officials will at least be aware of and able to track ongoing consolidation.

As described in section two of the model, health care entities must provide written notice to the attorney general and any state health care cost commission in advance of a proposed transaction. The model act requires the attorney general to disclose some information about the proposed transaction publicly.

What does the state’s review process entail?

The model act authorizes the attorney general to conduct a preliminary review and approve transactions that do not pose competitive concerns or are unlikely to negatively impact other state priorities like access or equity. When approving a transaction, the attorney general has the authority to impose conditions on providers, such as maintaining access to emergency services. This type of flexibility allows states to quickly review and approve transactions that are unlikely to impact a state’s health care market.

Based on the attorney general’s preliminary review, a transaction may go through the two components of the comprehensive review process – a public hearing and a cost and market impact review (CMIR). The model includes a non-exclusive list of criteria that specify when a transaction needs a comprehensive review and grants the attorney general the authority to require any transaction to undergo a comprehensive review, even if the transaction does not meet criteria specified in statute. The CMIR requirements in the model are adapted from the factors considered by the Massachusetts Health Policy Commission and can be refined by lawmakers based on state priorities.

For smaller transactions, policymakers may adopt regulations for a shortened or streamlined CMIR to review transactions with small competitive concerns in a timely manner. This streamlined CMIR allows states to track consecutive acquisitions of small provider groups that on their own may present little competitive concern, and allows the attorney general to intervene when the result of these cumulative transactions may harm competition, such as when a private equity firm uses a “roll-up” strategy to buy multiple, smaller practices.

The results of the CMIR are reported to the attorney general, who may use the CMIR report in the determination of whether to approve or impose conditions upon the transaction.

How is the review process funded?

Importantly, the model allows the attorney general and, where applicable, a state cost commission to charge the transacting parties for the cost of the review, regardless of whether a state agency or consultant performs it.

What approval authority does the attorney general possess?

After the review processes, the attorney general has the authority to approve or disapprove of any proposed transaction and the authority to impose conditions on any transaction. The model provides a list of non-exhaustive factors that the attorney general can use in making his or her determination, including whether the transaction is in the public interest.[1]  These factors include the findings of the CMIR (such as the transaction’s anticipated impact on costs, access, or equity), as well as factors related to antitrust concerns, anticompetitive effects, and broader concerns related to the public interest that fall within the attorney general’s scope of authority.

What kind of enforcement or post-approval monitoring is necessary?

The model act authorizes the attorney general to monitor the effect of the transaction on market conditions and for compliance with any imposed conditions. The attorney general is authorized to contract with consultants to monitor compliance and charge the transacting parties for this oversight. It also requires the transacting parties to submit reports one, two, and five years after the completion of the transaction to demonstrate the effect of the transaction on the parties’ costs and cost growth trends. Importantly, the model does not place time limits on the length of post-transaction oversight. If a merger has competitive concerns and is likely to increases costs, policymakers should consider imposing price caps or inflationary price caps for decades as the competitive harms may last as long as the merged entity maintains market power.

Conclusion

The harms of health care consolidation are well-known, yet merger activity continues to increase and the pandemic may be driving additional consolidation. While the federal government is increasing attention on promoting competition, state policymakers need additional tools to oversee transactions that may harm competition and the public interest. NASHP’s model act provides comprehensive oversight through an administrative process to allow the attorney general to review proposed transactions. This additional authority should reduce harmful mergers and help state officials safeguard health care markets.

[1] The authority in this section is adapted from Cal. Corp. Code §§ 5917 & 5923, but that California law only applies to transactions involving a non-profit health care facility. The model act includes factors related to cost, access, and competition.