Aw

Issue Brief

CHCF

 

DECEMBER 2021

by Katherine L. Gudiksen,
Amy Y. Gu, and Jaime S. King

Markets or Monopolies? Considerations for
Addressing Health Care Consolidation in California

ver the past three decades, markets for health
C) insurers and providers have gone through

waves of consolidation.' As of 2018, 95% of
metropolitan areas in the United States had highly
concentrated hospital markets.? Markets for health
insurers are also highly concentrated - between 2006
and 2014, the combined market share of the top four
insurers climbed from 74% to 83%.? The coronavirus
pandemic appears to be fueling another round of
consolidation - especially acquisition of providers by
private equity firms.* While past consolidation typically
resulted from mergers and acquisitions, consolidation
now also occurs through other types of transactions
including joint ventures, strategic alliances, affiliations,
and other agreements between companies.° Because
itis clearly increasing throughout market segments and
across the state, it is important to understand different
forms of health care consolidation, common measure-
ments of market concentration, the evidence on the
effects of past consolidation, the current sources and
types of regulatory oversight in California, and poten-
tial considerations for future policymaking.

Types of Consolidation:
Definitions and Measures

Horizontal Concentration

Horizontal concentration refers to how many direct
competitors are in a market and how much market
share each competitor has. A market can become
horizontally concentrated through mergers and acqui-
sitions (e.g., if two hospitals in a market merge) or if
companies gain substantial market share through
expansion or by outcompeting their rivals. One com-
monly used measure of market concentration is the
Herfindahl-Hirschman Index (HHI). When calculating

an HHI, the market share of each firm in the relevant
market is squared and the squares are summed. For
example, if there are three hospitals in a market, each
with 20%, 30%, and 50% market shares, the HHI for that
hospital market is 3,800 (or 20? + 30? + 507). HHI mea-
surements range from 0 (an infinite number of firms)
to 10,000 (a monopoly). Antitrust enforcers consider a
market with an HHI of less than 1,500 as a competitive
marketplace, one with an HHI between 1,500 to 2,500
as moderately concentrated, and one with an HHI of
greater than 2,500 as highly concentrated. Researchers
from the Petris Center at the University of California,
Berkeley calculated that the average HHI level for
counties in California in 2018 exceeded the "highly
concentrated" threshold for hospitals (average HHI
= 5,695), specialists (4,191), and insurers (3,121), and
was "moderately concentrated" for primary care phy-
sicians (1,540).¢ Furthermore, if they removed counties
with populations over 500,000 from the analysis, the
average hospital HHI in California was over 7,000,"
demonstrating that hospital markets in most California
counties are approaching monopoly levels of concen-
tration, especially in rural areas. Other studies show
that these trends are not limited to California.'

Hospital markets in most California
counties are approaching monopoly levels
of concentration, especially in rural areas.

Vertical Concentration

Vertical consolidation occurs when firms at different
levels of the supply chain merge. In health care, ver-
tical consolidation often refers to hospitals acquiring
physician practices or clinics, but vertical consolidation
also applies to insurers purchasing physician practices
or pharmacy benefit managers. To measure vertical
consolidation, researchers typically report the per-
centage of companies in the market owned by a firm
higher up in the supply chain (e.g., the percentage
of physicians or clinics owned by a hospital or health
system). Unlike HHI levels in horizontal merger guide-
lines, antitrust enforcers have not issued thresholds for
percentage ownership that warrant increased scrutiny
of vertical mergers. Nonetheless, the percentage of
ownership measures demonstrate that physicians in
California are increasingly vertically consolidated - as
of 2018, 52% of specialists and 42% of primary care
physicians in California were in practices owned by a
health system.' Another study reported similar find-
ings nationwide." Of note, this vertical consolidation
has increased dramatically over the past decade. For
example, researchers found that the percentage of
specialists in California that were in practices affiliated
with a health system increased from 25% in 2010 to
52% in 2018 - an increase of 108%."

Physicians in California are increasingly
vertically consolidated - as of 2018, 52%
of specialists and 42% of primary care
physicians in California were in practices
owned by a health system.

Cross-Market Concentration

Cross-market consolidation occurs when two com-
panies that operate in different geographic markets
merge. For example, a cross-market merger occurs
when a hospital in one city merges with a hospital in
another city. While there is no widely accepted meth-
odology for measuring the extent of cross-market
consolidation - like HHI for horizontal consolida-
tion - researchers have used "willingness-to-pay"
calculations and "common customers" to try to esti-
mate the impact of a particular cross-market merger.'

Impacts of Consolidation
on Consumers

When assessing the potential impacts of a health care
merger,'? it is important to ask whether the patient or
the public will benefit. For instance, will the merger
result in decreased administrative costs that result in
lower prices for consumers? Will the merger allow
investment in technologies that increase quality or
efficiency of care that patients receive? Or will the
merger reduce competition and allow companies to
raise prices or decrease quality without losing market
share?

Unfortunately, a large and growing body of evidence
demonstrates that mergers of health care companies
have consistently resulted in increased prices for health
care services with little to no improvement in quality.

Effects of Horizontal Mergers

A diverse set of research studies clearly demonstrate
that hospital prices increase following a horizontal
merger with another hospital in the same market and
that those price increases happen for both nonprofit
and for-profit hospitals.'* The demonstrated price
increases can be quite large, ranging from 20% to 40%
post-merger. In 2020, the Medicare Payment Advisory
Commission (MedPAC) reviewed the published
research on hospital consolidation and concluded that
the "preponderance of evidence suggests that hos-
pital consolidation leads to higher prices."'® While
there are fewer studies about horizontal concentration
of physician practices, studies found that physicians
in consolidated markets are paid higher prices for
their services'* and that prices increased 10% to 20%
following a merger of two specialty practices in the
same market."" Importantly, the effects of these higher
prices are not limited to the patients at these hospi-
tals because insurers pass on these increased prices
to all enrollees and their employers through increased
premiums." Furthermore, workers bear the burden
of these increased premiums as employers depress
wages to pay more for health insurance coverage."

 

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When analyzing mergers of insurers, the effect is a bit
more complex because insurers with market power
may be able to negotiate lower prices from provid-
ers, but that market power may also enable them to
retain higher profits without passing those savings to
employers or individuals through lower premiums."°
For example, one study looking at the impact of health
plan concentration on hospital prices found that hos-
pital prices in the most concentrated health insurer
markets were approximately 12% lower than in more
competitive health plan markets.?" Other studies,
however, documented that lower provider prices only
translate into lower premiums if the insurance market
is sufficiently competitive," as insurers who do not
face competitive pressure may not have the incentive
to pass any savings on to consumers."? Nonetheless,
the medical loss ratio requirements in the Affordable
Care Act (ACA) essentially cap profits of all commer-
cial insurance plans." Furthermore, because insurers
with market power may be able to demand rates that
are below competitive prices, providers may respond
by reducing services or quality or exiting the market
entirely. Accordingly, the effect of insurance mergers
on costs for consumers depends on whether the newly
merged insurer can negotiate lower rates, whether
regulations or market forces require the insurer to
pass on any savings generated from decreased pro-
vider prices, and whether those rates negatively affect
providers in the area.

Horizontal consolidation affects more than prices.
Antitrust theory and empirical research both reveal the
mixed to negative impact that horizontal consolida-
tion can have on health care quality and the negative
impact it can have on the labor market for health care
workers. A report sponsored by the American Hospital
Association found that mergers increased the stan-
dardization of clinical protocols, increased investments
and access to medical staff at acquired hospitals, and
improved outcomes from complex services because
of an increase in volume at the acquiring hospital."
The bulk of the research evidence, however, finds that
these efficiencies are not consistently borne out and
that quality suffers in highly concentrated markets,
and multiple studies find higher patient mortality for

some conditions." Beyond impacts on prices and
quality, evidence suggests that consolidation can also
decrease wage growth for hospital employees. Prager
and Schmitt found that among the mergers resulting
in the highest increases in concentration, wage growth
for nurses and pharmacists was about two-thirds of
what it would have been without the merger.""

Effects of Vertical Mergers

A number of studies find increased prices and little
improvement in quality following vertical mergers."
For example, Capps, Dranove, and Ody found that
physician prices increased, on average, by 14% for
medical groups acquired by hospital systems."? Further,
researchers found that in California, an increase in the
share of physicians in practices owned by a hospi-
tal was associated with an increase in premiums for
private plans sold on Covered California, the state's
marketplace.°°

A number of studies find increased prices
and little improvement in quality following
vertical mergers.

Proponents of vertical mergers have frequently claimed
that the merger will help improve continuity of care,
reduce duplicative care, or increase quality.2' A few
studies have found improvements in specific areas, like
increased number of patients getting cancer screen-
ing and increased care utilization, while other studies
found no statistically significant effects on mortality or
patient satisfaction.*? More recent studies have found
that physicians change their referral and prescribing
patterns after they are acquired by a hospital in ways
that lead to wasteful spending. For example, Young
and colleagues found that the odds of a patient receiv-
ing an inappropriate MRI referral increased by more
than 20% after a physician transitioned from inde-
pendent practice to hospital employment.* Overall,
studies on quality improvements following a vertical
merger remain ambiguous.

 

Markets or Monopolies? Considerations for Addressing Health Care Consolidation in California 3
Effects of Cross-Market Mergers

While the effects of cross-market mergers are less
studied than those of horizontal and vertical mergers,
economic researchers have found that cross-mar-
ket mergers can have a significant impact on prices
charged by health systems.*6 For example, a growing
body of research demonstrates a 7% to 17% increase
in prices for hospitals purchased by out-of-market
systems,*" a 7% to 9% increase in prices at the acquir-
ing hospital after merging with a hospital in a different
market in the same state,?2= and an 8% increase in
prices at nonmerging nearby hospitals that shadow
the price increases at the newly merged facility.*

Current Regulatory Oversight
of Consolidation in California

Currently, three agencies in California - the
Department of Insurance (CDI), the Department of
Managed Health Care (DMHC), and the Office of
the Attorney General - have the authority to review
some mergers involving health care entities. CDI] must
approve any mergers involving domestic insurers,
DMHC must approve mergers involving health care
service plans, and the attorney general (AG) must
approve most mergers of nonprofit hospitals. In addi-
tion, the AG can challenge any merger under antitrust
laws that would "substantially lessen competition" or
"tend to create a monopoly.""°

Review of Transactions Involving

Insurers or Health Care Service Plans
by CDI and DMHC

CDI and DMHC both have the authority to review
and block some mergers involving carriers or insur-
ers through an administrative process.*' For mergers
involving a California domestic insurer'? or a com-
mercially domiciled insurer,8 which are subject to
examination by CDI, parties must obtain written
consent or approval of the insurance commissioner
before entering into any transaction that transfers sub-
stantially all of the business to a new entity" or that
changes control of the insurer.*® CDI may approve,
approve with conditions, or reject the merger. In
reviewing a merger, CDI analyzes whether the

transaction may "substantially lessen competition" or
"create a monopoly."" Additionally, CDI may consider
other factors including financial solvency, fair and rea-
sonable terms, and adverse effects on policyholders'
interests."

Similarly, mergers involving health care service plans
regulated by DMHC must be approved by the director
of DMHC.* If the transaction is a "major transaction
or agreement" - one that affects a significant num-
ber of enrollees, transfers "a material amount of
assets," or adversely affects the "stability of the health
care delivery system'4?7 - DMHC must hold a public
meeting,©° and if a material amount of the assets will
be transferred, DMHC must also prepare a statement
describing the transaction and make it publicly avail-
able before the public meeting.®' The director then
reviews the merger and may approve, conditionally
approve, or reject the merger. The standards for reject-
ing a merger mirror federal antitrust law, and DMHC is
authorized to block any transaction that would "sub-
stantially lessen competition in health care service plan
products or create a monopoly in this state, including,
but not limited to, health coverage products for a spe-
cific line of business."°

The Department of Managed Health Care
regulates only the plans operating in
California (not any parent corporations),
and the Department of Insurance does
not have the authority to oversee

a proposed merger that may affect
California residents but does not involve
an insurer residing in the state.

CDI and DMHC currently have the authority to over-
see mergers involving domestic insurers and health
plans regulated by the state. Importantly though,
DMHC and CDI cannot block mergers of insurers
outside of the state. DMHC regulates only the plans
operating in California (not any parent corporations),
and CDI does not have the authority to oversee a

 

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proposed merger that may affect California residents
but does not involve an insurer residing in the state
(e.g., when an insurer sells plans in California but does
not meet the definition of a commercially domiciled
insurance company).*? Nonetheless, the administra-
tive processes at DMHC and CDI allow the agencies
to oppose or condition mergers not easily challenged
through litigation under antitrust laws.

The Attorney General Can Sue
to Block Any Anticompetitive
Transactions

The California AG, on the other hand, can file a law-
suit under state or federal antitrust laws to block any
merger or acquisition when the "effect of such acquisi-
tion may be substantially to lessen competition, or to
tend to create a monopoly." The AG's office can file
the lawsuit under its law enforcement capacity either
on its own behalf as a purchaser of health services or as
parens patriae on behalf of the interests of the citizens
of California.5> The AG has authority to sue to block
mergers that involve insurers, health care service plans,
and health care providers, even if another agency has
approved the merger.*® Blocking a merger through
litigation, however, requires significant resources, may
be time-consuming, and has uncertainty associated
with judicial decisionmaking. Furthermore, because
bringing a case is extremely resource-intensive and
time-consuming, the AG is likely to oppose only the
largest mergers under antitrust laws.

Limitations of using the courts to mitigate the harm-
ful impacts of consolidation are apparent in the cases
against Sutter Health in Northern California. In 1999,
the AG filed a lawsuit alleging that the merger of
Sutter Health's Alta Bates Medical Center with Summit
Medical Center would have anticompetitive effects
and, therefore, violated the federal Clayton Act.°"
The judge, however, denied the AG's request for
an injunction, saying health plans could "discipline"
hospitals by steering patients to lower-cost health
providers, and if anticompetitive price increases did
occur because of the merger, patients could choose
to join Kaiser.® Over a decade later, a retrospective
study by the Federal Trade Commission, which helped
to revise the economic tools, found that Summit's

price increases after the merger were among the
largest of any comparable hospital in California.*? In
2014, a health benefit trust filed a class action lawsuit
against Sutter Health alleging that the market power
Sutter Health gained through this merger coupled
with anticompetitive contract terms led to exces-
sive price increases in Northern California.© In 2018,
the California AG joined the lawsuit.6' The case was
finally resolved in 2021, when the court approved a
settlement that contained $575 million in damages
and injunctive relief to stop Sutter Health from using
specific contracting practices. This case illustrates the
harm that can result when antitrust law fails to prevent
potentially harmful mergers. Subsequent antitrust
lawsuits to curb abuses of market power created by a
merger can take years to resolve and, even after reso-
lution, the parties not involved in the lawsuit will not
typically receive restitution.

The AG Can Block Transactions of
Nonprofit Health Facilities Using an
Administrative Review

California's AG currently has the authority to block
transactions that transfer a "material amount of the
assets" of a nonprofit health facility without going to
court. California law defines a health facility as any
place or building that "is operated for the diagnosis,
care, prevention, and treatment of human illness . . .
to which . . . persons are admitted for a 24-hour stay
or longer," and includes acute care hospitals, skilled
nursing facilities, psychiatric hospitals, and specialized
maternity hospitals. It does not include physician prac-
tices or outpatient clinics. Before 2000, this authority
only applied to a conversion of a nonprofit health facil-
ity (i.e., the purchase of a nonprofit health facility by a
for-profit entity). Following the AG's loss in the Sutter-
Summit merger challenge (where both Sutter and
Summit were nonprofit health systems), the California
legislature amended the law to include mergers and
acquisitions of nonprofit health facilities, irrespective
of the tax status of the purchaser." Currently, any non-
profit corporation that operates or controls a health
care facility must provide written notice to, and obtain
approval from, the AG before completing any transac-
tion that sells or transfers a "material amount of the
assets" or control of the operations of the nonprofit

 

Markets or Monopolies? Considerations for Addressing Health Care Consolidation in California 5
corporation.® In reviewing the transaction, the AG may
consider any factors the AG deems relevant, including
whether the transaction is in the public interest."

This administrative process has significant benefits
relative to antitrust lawsuits, including that it is less
resource-intensive than a trial and allows more timely
review of proposed mergers. In one of the first chal-
lenges to a cross-market merger, the AG issued
a conditional approval of the affiliation between
Cedars-Sinai Health System and Huntington Memorial
Hospital, two nonprofit hospital systems in Southern
California, that included a price cap on the newly
affiliated entities and a requirement to maintain sepa-
rate teams when negotiating prices with payers. The
hospitals filed a lawsuit challenging that conditional
approval, alleging that the AG acted in an arbitrary
and capricious manner and overstepped the AG's
administrative authority.6" Before the scheduled trial
date, the merging parties and the AG came to a set-
tlement that imposes modified price caps, prohibits
the bundling or tying of hospital contracts, and grants
insurers the option to request a negotiation firewall.

This case demonstrates that the AG can use nonprofit
merger review authority to block or to apply conditions
to potentially anticompetitive mergers. The major limi-
tation of this authority is that it applies only to mergers
involving nonprofit health care facilities, as defined in
the statute. To oppose a merger involving a physician
practice, an outpatient clinic, for-profit health systems,
or an insurer, the AG must face the uncertainty of a
lawsuit and expend the time, effort, and resources
required for a trial.

Opportunities for Additional
Oversight of Health Care
Transactions in California

While nonprofit health care facilities must notify and
get approval from the AG before a sale or transfer of
their assets, the AG must rely on news reports and
other sources to track consolidation of other health
care entities, including for-profit hospitals and physi-
cian practices. The AG may be unaware of transactions
that do not involve a nonprofit health care facility, and

therefore may be unable to challenge them until after
their completion. Furthermore, even ifthe AG becomes
aware of these transactions before they happen, the
AG has no authority to impose a waiting period before
consummation of the proposed merger to allow the
office to review the transaction. While the AG can use
antitrust law to challenge any merger, even after it is
completed, these legal proceedings may take years,
and unwinding the merger ("unscrambling the egg")
is very likely to be ineffective and difficult, so antitrust
enforcers almost never attempt it in health care."

To increase scrutiny of provider mergers in California,
policymakers could require all health care provid-
ers (not just nonprofit ones) to provide written notice
to, and obtain the written consent of, the AG before
entering into any transaction that transfers a material
amount of their assets or changes control or gover-
nance of the provider. This notification and approval
authority could mirror that currently required for non-
profit health care facilities. Additionally, to expedite
review of smaller transactions unlikely to impact com-
petitive factors, policymakers could create a tiered
review process."° In Oregon, health entities with rev-
enues over a given threshold must obtain approval
from the Oregon Health Authority before merging,
including transactions involving a private equity firm."
California could adopt a similar approach by establish-
ing a new agency to review health care mergers or to
expand the authority of the AG to approve, condition-
ally approve, or block al! mergers involving health care
providers.'

To increase scrutiny of provider mergers in
California, policymakers could require all
health care providers (not just nonprofit
ones) to provide written notice to,

and obtain the written consent of, the
attorney general before entering into

any transaction that transfers a material
amount of their assets or changes control
or governance of the provider.

 

California Health Care Foundation

www.chcf.org 6
Importantly, granting the AG or another state agency
an increased authority to review and block all health
care mergers through an administrative process
does not address the market power gained through
decades of consolidation in California. Consequently,
policymakers may choose to consider how to regulate
conduct and the harms that may result from previ-
ously consummated mergers. For example, while CDI
and DMHC have the authority to block or condition
mergers of domestic insurers and health care service
plans, respectively, policymakers could also consider
expanding the authority of these regulatory agen-
cies to include "affordability standards" when they
review health plans for sale in California. Currently,
DMHC and CDI can review rate changes in the indi-
vidual and group markets, but neither department has
the authority to deny rate increases." Policymakers
could consider granting DMHC and CDI additional
authority to reject rates or rate increases they deem
"unaffordable.""* In addition, policymakers could con-
sider prohibiting specific contractual terms likely to
be anticompetitive (e.g. all-or-nothing or anti-tiering
clauses)."° And finally, policymakers could consider
directly regulating prices or price increases for high-
cost providers. Several states are implementing this
policy approach, and the California legislature has
explored it in recent years.'6 While increased oversight
of future mergers is critical, increased administra-
tive review alone is unlikely to restore competition
to health care markets at a level sufficient to restrain
prices and increase quality.

While the Department of Insurance

and the Department of Managed

Health Care have the authority to

block or condition mergers of domestic
insurers and health care service plans,
respectively, policymakers could also
consider expanding the authority of
these regulatory agencies to include
"affordability standards" when they
review health plans for sale in California.

Conclusion

California's health care provider and insurer markets
are highly concentrated, and empirical research has
consistently shown that health care consolidation
drives increases in health care prices and insurance
premiums without commensurate improvements in
health care quality. Because health care provider and
insurer markets in most regions of California are already
highly concentrated, policymakers and state officials
could consider additional scrutiny and interventions
to promote competition and mitigate consolidations
most harmful consumer impacts.

 

Markets or Monopolies? Considerations for Addressing Health Care Consolidation in California 7
About the Authors

Katherine L. Gudiksen, PhD, MS, is a senior health pol-
icy researcher at The Source on Healthcare Price and
Competition, a project of the University of California
Hastings College of the Law. She studies the effects of
consolidation and the options that state policymakers
have to address it, including state public option pro-
grams, laws to restrict specific contracting practices,
and ways to limit excessive provider rates.

Amy Y. Gu, JD, is the managing editor of The Source
on Healthcare Price and Competition. Her work
focuses on litigation and enforcement actions by state
and federal agencies in the provider market. She also
conducts research and analysis of state health care
legislation for the Database of State Laws Impacting
Healthcare Cost and Quality.

Jaime S. King, JD, PhD, is the John and Marylyn
Mayo Chair in Health Law and a professor of law at
the University of Auckland Law School; senior affili-
ate scholar of the UCSF/UC Hastings Consortium on
Science, Law, and Health Policy; and executive editor
of The Source for Healthcare Price and Competition.
King's research analyzes the role of legal, economic,
political, societal, and market forces in shaping domes-
tic health care systems.

The Source on Healthcare Price and Competition pro-
vides up-to-date and easily accessible research and
analysis on health care price and competition in the
US.

About the Foundation

The California Health Care Foundation is dedicated to
advancing meaningful, measurable improvements in
the way the health care delivery system provides care
to the people of California, particularly those with low
incomes and those whose needs are not well served
by the status quo. We work to ensure that people have
access to the care they need, when they need it, at a
price they can afford.

CHCF informs policymakers and industry leaders,
invests in ideas and innovations, and connects with
changemakers to create a more responsive, patient-
centered health care system.

Endnotes

1.

10.

11.
12.

13.

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(Dec. 1, 2018): 913-17; and Thomas L. Greaney, "The New
Health Care Merger Wave: Does the 'Vertical, Good' Maxim
Apply?," Journal of Law, Medicine & Ethics 46, no. 4 (Dec. 1,
2018): 918-26.

. Jaime S. King et al., Preventing Anticompetitive Healthcare

Consolidation: Lessons from Five States, Source on Healthcare
Price and Competition and The Petris Center, June 15, 2020.

. Leemore S. Dafny, Evaluating the Impact of Health

Insurance Industry Consolidation: Learning from Experience,
Commonwealth Fund, November 20, 2015.

. Richard M. Scheffler and Laura Alexander, "Consolidation of

Hospitals During the COVID-19 Pandemic: Government Bailouts
and Private Equity," Milbank Quarterly Opinion, July 20, 2021.

. Partnerships, Mergers, and Acquisitions Can Provide Benefits to

Certain Hospitals and Communities, Amer. Hospital Assn. (AHA),
October 2021.

. Richard M. Scheffler, Daniel R. Arnold, and Brent D. Fulton, The

Sky's the Limit: Health Care Prices and Market Consolidation
in California, California Health Care Foundation (CHCF),
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. Richard M. Scheffler, Daniel R. Arnold, and Christopher M.

Whaley, "Consolidation Trends in California's Health Care
System: Impacts on ACA Premiums and Outpatient Visit Prices,"
Health Affairs 37, no. 9 (Sept. 2018): 1409-16.

. King et al., Preventing Anticompetitive Consolidation; and Brent

D. Fulton, "Health Care Market Concentration Trends in the
United States: Evidence and Policy Responses," Health Affairs
36, no. 9 (Sept. 2017): 1530-38.

. Scheffler, Arnold, and Whaley, "Consolidation Trends."

Michael F. Furukawa et al., "Consolidation of Providers into
Hospital Systems Increased Substantially, 2016-18,"
Health Affairs 39, no. 8 (Aug. 2020): 1321-25.

Scheffler, Arnold, and Fulton, "The Sky's the Limit."

Gregory S. Vistnes, "Competitive Effects Analysis of the
Proposed Cedars-Sinai Health System / Huntington Memorial
Hospital Affiliation," in Proposed Change in Centro! and
Governance of Huntington Hospital (PDA), California Office of the
Attorney General, December 4, 2020, 24-26, 28.

The word "merger" is used in this section because most

of the literature studying the effects of consolidation evaluate
mergers and acquisitions rather than joint ventures or strategic
alliances. More research is needed to assess whether the impacts
of contractual agreements, like joint ventures, strategic alliances,
and affiliations, mirror those of transactions with a formal change
in control like mergers and acquisitions.

 

California Health Care Foundation

www.chcf.org 8
14.

15.

16.

17.

18.

19.

20.

21.

22.
23.

24,

How Health Care Consolidation Is Contributing to

Higher Prices and Spending, and Reforms That Could Bolster
Antitrust Enforcement and Preserve and Promote Competition
in Health Care Markets, Before the U.S. House Committee

on the Judiciary Subcommittee on Antitrust, Commercial

and Administrative Law (PDF), 117th Cong. (Apr. 29, 2021)
(testimony of Leemore Dafny, Bruce V. Rauner Professor of
Business Administration, Harvard Business School, Harvard
Kennedy School}; Martin Gaynor and Robert J. Town, The Impact
of Hospital Consolidation - Update, Robert Wood Johnson
Foundation, June 2012; Gautam Gowrisankaran, Aviv Nevo, and
Robert Town, "Mergers When Prices Are Negotiated: Evidence
from the Hospital Industry," Amer. Economic Review 105, no. 1
(Jan. 2015): 172-203; Deborah Haas-Wilson and Christopher
Garmon, "Hospital Mergers and Competitive Effects: Two
Retrospective Analyses," Intl. Journal of the Economics of
Business 18, no. 1 (Feb. 2011): 17-32; Cory Capps and David
Dranove, "Hospital Consolidation and Negotiated PPO Prices,"
Health Affairs 23, no. 2 (March 2004): 175-81; and Steven Tenn,
"The Price Effects of Hospital Mergers: A Case Study of the
Sutter-Summit Transaction," Intl. Journal of the Economics of
Business 18, no. 1 (Feb. 1, 2011): 65-82.

March 2020 Report to the Congress: Medicare Payment
Policy, MedPAC, March 13, 2020.

Abe Dunn and Adam Hale Shapiro, "Do Physicians

Possess Market Power?," Journal of Law and Economics 57,
no. 1 (Feb. 2014): 159-93; and Thomas Koch, Brett Wendling,
and Nathan E. Wilson, "Physician Market Structure, Patient
Outcomes, and Spending: An Examination of Medicare
Beneficiaries," Health Services Research 53, no. 5 (Oct. 2018):
3549-68.

Thomas Koch and Shawn W. Ulrick, "Price Effects of a
Merger: Evidence from a Physicians' Market," Economic Inquiry
59, no. 2 (Apr. 2021): 790-802.

Andrew S. Boozary et al., "The Association Between
Hospital Concentration and Insurance Premiums in ACA
Marketplaces," Health Affairs 38, no. 4 (Apr. 2019): 668-74.

Daniel Amold and Christopher M. Whaley, "Who Pays for
Health Care Costs? The Effects of Health Care Prices on Wages,"
RAND, July 2020.

Erin E. Trish and Bradley J. Herring, "How Do Health

Insurer Market Concentration and Bargaining Power with
Hospitals Affect Health Insurance Premiums?," Journal of Health
Economics 42 (July 2015): 104-14.

Glenn A. Melnick, Yu-Chu Shen, and Vivian Yaling Wu, "The
Increased Concentration of Health Plan Markets Can Benefit
Consumers Through Lower Hospital Prices," Health Affairs 30,
no. 9 Sept. 2011): 1728-33.

Trish and Herring, "How Do Market Concentration?"

Richard M. Scheffler and Daniel R. Arnold, "Insurer Market
Power Lowers Prices in Numerous Concentrated Provider
Markets," Health Affairs 36, no. 9 (Sept. 2017): 1539-46.

42 U.S.C. § 300gg-18.

25.

26.

27.

28.

29.

30.
31.

32.

33.

34.
35.

Monica Noether and Sean May, Hospital Merger Benefits:
Views from Hospital Leaders and Econometric Analysis, AHA,
January 2017.

Antitrust Applied: Hospital Consolidation Concerns and
Solutions: Statement Before the Committee on the Judiciary
Subcommittee on Competition Policy, Antitrust, and Consumer
Rights, U.S. Senate (PDR, 117th Cong. (May 19, 2021) (statement
of Martin Gaynor, E.J. Barone University Professor of Economics
and Public Policy, Heinz College, Carnegie Mellon University);
Nicholas Bloom et al., "The Impact of Competition on
Management Quality: Evidence from Public Hospitals," Review
of Economic Studies 82, no. 2 (Apr. 2015): 457-89; Zack Cooper
et al., "Does Hospital Competition Save Lives? Evidence from
the English NHS Patient Choice Reforms," Economic Journal
(London) 121, no. 554 (August 201 1): F228-60; Martin Gaynor,
Rodrigo Moreno-Serra, and Carol Propper, "Death by Market
Power: Reform, Competition, and Patient Outcomes in the
National Health Service," Amer. Economic Journal: Economic
Policy 5, no. 4 (Nov. 2013): 134-66; Nancy D. Beaulieu et

al., "Changes in Quality of Care After Hospital Mergers and
Acquisitions," New England Journal of Medicine 382, no. 1

(Jan. 2, 2020): 51-59; and Tamara B. Hayford, "The Impact of
Hospital Mergers on Treatment Intensity and Health Outcomes,"
Health Services Research 47, no. 3 Pt 1 June 2012): 1008-29.

Elena Prager and Matt Schmitt, "Employer Consolidation

and Wages: Evidence from Hospitals," Amer. Economic Review
111, no. 2 (Feb. 2021): 397-427; and Brigid Sweeney, "When an
Industry Consolidates, What Happens to Wages?," Northwestern
Univ., April 4, 2019.

Thomas G. Koch, Brett W. Wendling, and Nathan E, Wilson,
"How Vertical Integration Affects the Quantity and Cost of Care
for Medicare Beneficiaries," Journal of Health Economics 52
(March 2017): 19-32.

Cory Capps, David Dranove, and Christopher Ody, "The
Effect of Hospital Acquisitions of Physician Practices on Prices
and Spending," Journal of Health Economics 59 (May 2018):
139-52.

Scheffler, Arnold, and Fulton, "The Sky's the Limit."

Jeff Goldsmith et al., Integrated Delivery Networks: In
Search of Benefits and Market Effects, National Academy of
Social Insurance, February 2015.

Rachel M. Machta et al., "A Systematic Review of Vertical
Integration and Quality of Care, Efficiency, and Patient-Centered
Outcomes," Health Care Management Review 44, no. 2

(June 2019): 159-73.

Christopher M. Whaley et al., "Higher Medicare Spending

on Imaging and Lab Services After Primary Care Physician Group
Vertical Integration," Health Affairs 40, no. 5 (May 2021): 702-9;
and Gary J. Young et al., "Hospital Employment of Physicians

in Massachusetts Is Associated with Inappropriate Diagnostic
Imaging," Health Affairs 40, no. 5 (May 2021): 710-18.

Young et al., "Hospital Employment."

Machta et al., "Systematic Review" and Partnerships,
Mergers, and Acquisitions, AHA.

 

Markets or Monopolies? Considerations for Addressing Health Care Consolidation in California
36,

37,

38.

39.
40.
41.

42.

43.
44,
45.
46.
47.
48.
49.
50.
51.
52.
53.

54.
55.
56,

Matthew S. Lewis and Kevin E. Pflum, "Diagnosing Hospital
System Bargaining Power in Managed Care Networks," Amer.
Economic Journal: Economic Policy 7, no. 1 (Feb. 2015): 243-74;
Leemore Dafny, Kate Ho, and Robin S. Lee, "The Price Effects of
Cross-Market Mergers: Theory and Evidence from the Hospital
Industry," RAND Journal of Economics 50, no. 2 (Summer

2019): 286-325; and Matt Schmitt, "Multimarket Contact in the
Hospital Industry," Amer. Economic Journal: Economic Policy 10,
no. 3 (Aug. 2018): 361-87.

Lewis and Pflum, "Diagnosing Hospital System Bargaining
Power"; and Dafny, Ho, and Lee, "Price Effects."

Dafny, Ho, and Lee, "Price Effects"; and Schmitt,
"Multimarket Contact."

Lewis and Pflum, "Diagnosing Bargaining Power."
15 U.S.C. § 18a.

2020 Annual Report (PDR), Dept. of Managed Health Care
(DMHC), June 2021, 11. In California, two departments share
oversight of health insurance plans. DMHC regulates all HMOs,
all Medicaid managed care plans, and most PPO plans. DMHC
regulates plans covering 95% of California residents enrolled in
state-regulated commercial health plans. CDI regulates some
PPO plans and other insurance products like indemnity plans
that cover the remaining 5% of California residents with state-
regulated commercial health plans.

Cal. Ins. Code § 739(c) defines domestic insurer as "any...
health insurer... organized in this state."

Cal.

Ins. Code § 1215.2(d).
Ins. Code § 101 1(c).
Ins. Code § 1215.2(d).

Cal.

Cal.

Cal.

Ins. Code § 1215.2(d).
Cal.

Ins. Code § 1215.2(d).
Cal.

Health & Safety Code § 1399.65(a)(1).
Cal.

Health & Safety Code § 1399.65(g).

Cal. Health & Safety Code § 1399.65(c).

Cal. Health & Safety Code § 1399.65(d).

Cal.

Health & Safety Code § 1399.65(b).

Dave Jones {insurance commissioner, State of California)

to Jeff Sessions (US attorney general) and Makan Delrahim (asst.
attorney general, Antitrust Div.), "Proposed Merger of CVS
Health Corporation and Aetna, Inc." (DR, August 1, 2018. Jones
writes, "My department does not have direct approval authority
over this proposed acquisition because the transaction does

not involve a California domestic or commercially domiciled
insurance company."

15 U.S.C. § 18a.
Hawaii v. Standard Oil Co. of Cal., 405 U.S. 251, 258 (1972).

The review by the AG under antitrust law is separate and
distinct from the review conducted at CDI and DMHC.

57.
58.
59.
60.

61.

62.
63.
64.
65.

66.

67.

68.

69.
70.

71.
72.
73.
74,

75.

76.

California v. Sutter Health Sys., 130 F. Supp. 2d 1109.
California v. Sutter Health Sys., 130 F. Supp. 2d 1109.
Tenn, "Case Study."

Complaint, UFCW & Employers Benefit Trust, et al. v. Sutter
Health, et al., No. CGC 14-538451 (Cal. Super. Ct. S.F. City and
Cnty. 2019).

Complaint, People of the State of California ex rel Xaviar
Becerra v. Sutter Health, No. CGC 18-565398 (Cal. Super. Ct.
S.F. City and Cnty. 2019).

A.B. 254, 1999-2000, Reg. Sess. (Cal. 1999).
Cal. Corp. Code § 5915; and Cal. Corp. Code § 5920.
Cal. Corp. Code § 5917; and Cal. Corp. Code § 5923.

California Dept. of Justice, "Attorney General Becerra
Conditionally Approves Affiliation Agreement Between Cedars-
Sinai and Huntington Memorial Hospital," press release,
December 10, 2020.

Amy Y. Gu, "Cedars-Sinai/Huntington Cross-Market
Affiliation Settle with Revised Competitive Impact Conditions,"
The Source Blog, August 16, 2021.

Complaint, Pasadena Hospital Ass'n., Ltd. and Cedars-Sinai
Health Sys. v. Cal. Dep't of Justice, No. 21STCP00978
(Cal. Super. Ct. July 19, 2021).

Joint Stipulation and Order to Vacate Trial, Pasadena
Hospital Ass'n., Ltd. and Cedars-Sinai Health Sys. v. Cal. Dept
of Justice, No. 21STCP00978 (Cal. Super. Ct. July 19, 2021).

"Mergers," Federal Trade Commission.

Samuel M. Chang et al., Examining the Authority of
California's Attorney General in Health Care Mergers, CHCF,
April 2020.

H.B. 2362, 2021 Reg. Sess. (Or. 2021).
Chang et al., Examining the Authority.
Cal Health & Safety Code § 1385.03.

230 R.I. Code Reg. 20-30-4.10. In Rhode Island, affordability
standards allow the health insurance commissioner to review
proposed increases in insurance premium rates and reject plans
in which the insurer-hospital negotiated rate increases exceed
the US Consumer Price Index (CPI-Urban).

A.B. 1132, 2021-22 Leg., Reg. Sess. (Cal. 2021) (as

introduced on Feb. 12, 2021). An early version of A.B. 1132
(2021) included bans on specific contracting practices in health
care contracts, including anti-tiering, anti-steering, and all-or-
nothing clauses.

Glenn Melnick and Susan Maerki, Commissioning Change:
How Four States Use Advisory Boards to Contain Health
Spending, CHCF, January 2020; and A.B. 3087, 2017-18,
Reg. Sess. (Cal. 2018).

 

California Health Care Foundation

www.chcf.org 10