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The States Can Put the Brakes on Hospital Mergers

In July, a proposed $13 billion mega-merger between Sanford Health, the largest rural health system in the county, and Fairview Health Services, one of the largest systems in Minnesota’s Twin Cities metro, was called off. Abandonment of the merger came after concerted opposition from farmers, healthcare workers, and medical students, emboldened by passage of state legislation that creates much stronger oversight of healthcare mergers. The new law addresses several of the challenges the Federal Trade Commission (FTC) has encountered while trying to block hospital mergers and demonstrates the important role states can play in policing monopoly power. 

Hospital consolidation has been rapid and relentless over the past two decades, with over 1,800 hospital mergers since 1998 leaving the United States with around 6,000 hospitals instead of 8,000. This consolidation has raised healthcare costs, reduced access to care, and lowered wages for healthcare workers. Although nearly half of all FTC merger challenges between 2000 and 2018 involved the healthcare industry, that effort still only amounted to challenging around one percent of hospital mergers.

While the FTC has made efforts to protect competition among hospitals and health systems over the years, it has faced key obstacles, including (1) limits on pre-merger notification, (2) a self-imposed limit to focus exclusively on challenging mergers of hospitals within a single geographic region, and (3) exemptions in the FTC’s antitrust authority over nonprofits. 

Parties to small healthcare mergers don’t have to notify the FTC before merging due to the limits on pre-merger notification under the Hart-Scott-Rodino Act. Thus, the FTC is unaware of many smaller healthcare mergers, and the agency is left trying to unwind those mergers after the fact.

The FTC’s election to refrain from challenging ”cross-market mergers,” which involve hospitals operating in different geographic markets, has enabled such systems to become the predominant health system nationwide. This hands-off approach occurs despite mounting evidence that cross-market mergers give health systems even more power to raise prices. A study in the RAND Journal of Economics found that hospitals acquired by out-of-market systems increased prices by about 17 percent more than unacquired, stand-alone hospitals; these mergers were also found to drive up prices at nearby rivals. 

While the FTC has broad authority to challenge hospital mergers, the agency’s authority to prevent anticompetitive conduct is more limited. The FTC Act gives the agency the authority to prohibit “unfair methods of competition” and “unfair or deceptive acts or practices” but that authority does not extend to nonprofits, which account for 48.5 percent of hospitals nationwide. This has meant that antitrust cases like the one against Atrium Health in 2016 for entering into contracts with insurers that contained anti-steering and anti-tiering clauses, have been brought by the DOJ.

Minnesota Serves as a Testing Ground

Minnesota is no stranger to the hospital consolidation that has visited the rest of the country. Over two decades ago, 67 percent of Minnesota’s hospitals were independent, but because of a wave of consolidation that has bolstered the largest health systems, only 28 percent of Minnesota’s hospitals remain independent. Just six health systems control 66 of Minnesota’s 125 hospitals, compared to 51 a decade prior. Just three health systems (Fairview, The Mayo Clinic, Allina Health System) receive nearly half of all hospital operating revenue in Minnesota. Amidst this consolidation, Minnesota has lost ten hospitals since 2010 and seen per capita spending for hospital care rise from six percent below the national average in 1997 to over eight percent above the national average in 2021, according to Personal Consumption Expenditures data from the Bureau of Economic Analysis. 

The Sanford-Fairview hospital merger would have doubled-down on these trends. The combination would have given Sanford control of a fifth of Minnesota’s hospitals, with a geographic footprint spanning across several corners of the state. The merger also would have established the largest operator of primary care clinics. In addition to the sheer size of the merger, Fairview’s control of the University of Minnesota Medical Center, which is home to the teaching hospital that trains 70 percent of Minnesota’s doctors, generated labor concerns and provided an opening for passage of tougher regulations on healthcare transactions. 

The initial legislative activity around the Sanford-Fairview merger leveraged the work by Attorney General (AG) Keith Ellison when the transaction was first announced. Ellison’s office held four community meetings across the state to gather input from Minnesotans on the deal, and legislators followed with their own informational hearings. Initial legislative concerns specifically related to granting an out-of-state entity control over a teaching hospital. Because of the work of Ellison’s office alongside organizations like the Minnesota Farmers Union (the author’s employer), the Minnesota Nurses Association, and SEIU-Healthcare Minnesota, legislative discussions turned more broadly to fixing the lack of safeguards Minnesota law provided against healthcare consolidation.

Sanford and Fairview initially failed to provide information Ellison’s office needed to properly investigate the merger, which left Ellison publicly pleading with the systems to delay their initial timeline. While the entities agreed to do so, the delay created uncertainty over whether Ellison’s office would be able to conduct a proper review before the transaction was finalized. 

The law that passed makes three critical changes that help address the obstacles the FTC has run into. First, the law created a robust pre-merger notification regime that will give the Minnesota AG access to a broader set of information than the FTC currently receives under the HSR Act. This requirement is also much broader than the minimal notice requirements that previously existed in state law, and should help avoid a repeat of a key issue during Ellison’s review of the merger. Healthcare entities will now be required to provide specific information to the AG’s Office at the outset. The law also makes the failure to provide this information a reason for blocking a proposed transaction. Health systems will be required to provide geographic information, details on any existing relationships between the merging systems, terms of the transaction, any plans for the new system to reduce workforce or eliminate services as a result of the transaction, any analysis completed by experts or consultants used to facilitate and evaluate the transaction, financial statements, and any federal filings pertaining to the merger including information filed pursuant to the Hart-Scott-Rodino Act. 

Second, the new law requires that health systems provide a financial and economic analysis of the proposed transaction, as well as an impact analysis of the merger’s effects on local communities and local labor. This broad set of information in some ways resembles the changes that the FTC recently proposed to HSR filings. These first two requirements apply to any transaction that involves a healthcare entity that has average annual revenues of $80 million or more or will result in the creation of an entity with annual revenues of $80 million or more. This is a lower revenue threshold than contained in the HSR Act.

Third, the new law establishes a public interest standard for evaluating healthcare transactions. The law spells out a wide range of factors the AG can consider when determining whether a proposed transaction is in the public’s interest. These broad factors include a transaction’s potential impact on the wages, working conditions or collective bargaining agreements for healthcare workers, the impact on public health, access to care in affected communities, access to care for underserved populations, the quality of medical education, workforce training or research, access to health services, insurance or workers, costs for patients and broader healthcare costs trends.  

This broad public interest standard helps ensure that the narrowness of current antitrust law and its mountains of bad case law, do not restrict Minnesota’s ability to address the harms of hospital monopolies. Instead of having to fight with courts over technical definitions of healthcare markets, the AG can point to the many harms flowing from consolidation, regardless of whether the transaction is a cross-market merger. In addition to the public interest standard, the law explicitly prohibits any transaction that would substantially lessen competition or tend to create a monopoly or monopsony.

The New Law Soon Will Be Put to Practice

While Sanford-Fairview will no longer provide a potential test case of the new law, two mergers in northern Minnesota were proposed just last month. As policymakers were told throughout the legislative session, Sanford-Fairview was far from the last healthcare merger with which Minnesota would need to grapple. One proposal would combine Minnesota-based Essentia Health with Wisconsin-based Marshfield Clinics Health System into a four-state system stretching across northern North Dakota, Michigan, Minnesota, and Wisconsin. The other proposed merger would fold the small two-hospital St. Luke’s Duluth system into the 17-hospital Wisconsin-based Aspirus Healthcare.  

Whether in healthcare or elsewhere in the economy, mergers are not inevitable, nor are they beyond the capacity of state governments to address. With Congressional gridlock and legislative capture posing a challenge to any federal antitrust reforms, states are a necessary battleground for anti-monopolists. Minnesota’s battle with Sanford and Fairview can serve as an instructive model for the rest of the country. Mobilizing state legislators and state AGs to pass bold antitrust reforms and challenge corporate power not only creates a laboratory for these reforms, but also serves an important part of dealing with monopolists in a world where federal enforcers face significant resource and legal constraints. 

Justin Stofferahn is Antimonopoly Director for the Minnesota Farmers Union.

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