Health care market consolidation—the horizontal, vertical, and cross-market integration of hospitals, other providers, and insurers—is increasing and contributing to rising health care costs.1 Hospital consolidation has accelerated since 2010, and between 2018 and 2021, there were 310 announced consolidation transactions (partnership, merger, and acquisition) between hospitals and health systems.2 Outside of public programs such as Medicare and Medicaid, the U.S. health care system relies on competition to lower costs, and concentrated hospital, physician, and insurance markets lead to higher prices without commensurate increases in patient quality of care.3
With limitations on hospital antitrust review and enforcement at the federal level, including resource constraints, restrictive court decisions, and narrow federal statutes, state attorneys general play a key role in monitoring and challenging anticompetitive hospital behavior locally.4 Currently, state attorneys general across the country have varying degrees of authority to review or approve health care consolidation transactions, with attorneys general in 15 states having no statutory authority at all.5 As state policymakers seek to address rapidly consolidating health care markets and protect competition, they should equip their attorneys general with full enforcement authority.
This brief explores the methods for and challenges in state-level antitrust enforcement and highlights how legislative action can bolster efforts by state attorneys general to preserve competition in health care and protect patients from higher costs.
Current state of antitrust oversight and enforcement methods
In general, antitrust laws exist to protect consumers by promoting competition, which drives efficiency, improves quality, and lowers prices. These laws are especially important in health care—an industry that every person will utilize at some point in their lives, making them captive consumers. As a result, consolidation of hospital systems, provider practices, and insurance companies drives prices up.6
Mergers can be either horizonal or vertical in nature. Evidence shows that when horizontal mergers occur between hospitals or hospital systems, prices can be expected to increase dramatically, with some markets experiencing as much as a 54 percent increase.7 Similar patterns emerge when physician practices merge, exemplified by the 15 percent to 25 percent price increase that followed the merger of six orthopedic practices in Pennsylvania in 2010.8 Vertical mergers—such as when a hospital system or insurer acquires a physician practice—can also lead to price increases. This can be seen in a national survey of administrative claims data, which revealed a 14 percent increase in provider charges following the provider group’s acquisition by a hospital system.9 These increases in price are passed onto consumers in the form of higher insurance premiums with no clear evidence of higher quality of care.10
The Sherman, Clayton, and Federal Trade Commission (FTC) acts are the cornerstone federal antitrust laws that collectively govern federal and state regulation of competition.11 In addition to these federal laws, most states have parallel statutes that provide for antitrust enforcement within their borders.12 However, antitrust activities often affect multiple states, pitching the issue back to a federal level. To address these instances, Congress passed the Hart-Scott-Rodino Antitrust Improvement (HSR) Act, which requires that notice be sent to the FTC when a transaction exceeds a threshold amount set by regulation.13 Currently the threshold for this notice is $101 million.14 This threshold is particularly problematic for mergers between provider groups or when a hospital system acquires a provider group, as these transactions rarely exceed the monetary threshold for federal reporting.15
The HSR Act also allows state attorneys general to bring antitrust lawsuits on behalf of the residents of their state in federal court.16 Like actions brought by Department of Justice or the FTC, these lawsuits are typically one of two categories: challenges to mergers or challenges to anticompetitive conduct. Challenging mergers is a key tool for preventing further consolidation of markets while challenging anticompetitive conduct is vital to controlling the rise of costs in already concentrated markets.
Challenging anticompetitive health care mergers before they are consummated is important because unwinding these transactions is notoriously difficult once they have been completed due to the current regulatory framework established by the HSR, which favors pre-transaction enforcement.17 While state attorneys general are empowered to enforce federal antitrust laws under the HSR Act, their authority is often more expansive under state law. One advantage that exists for the FTC but not for all state attorneys general is the requirement of prior notice, a requirement that merging entities report their intentions when the transaction exceeds the regulatory threshold.18 Even in states where there is a pre-transaction notice requirement, the attorney general often has a very short window—typically 30 days to 90 days—in which they must choose to act.19 This tight timeline can be problematic because challenging a merger requires providing evidence of the merger’s potential impact on the competitiveness of the market—and this economic analysis can be complicated and resource-intense. An attorney general’s decision to challenge a merger must be based on economic evidence that the merger will adversely affect market competition, and successful challenges require lining up expert analysis and credible witnesses.20 Merger analyses involve defining a geographic market and identifying competitors of the proposed new entity. These two factors are also used to calculate market concentration for the Herfindahl-Hirschman Index (HHI), which is the primary measure of competition used by both state and federal regulators.21 Once a merger is challenged, the parties to the merger will often dispute the geographic region and the competitor’s entities identified by the government as an improperly defined market, which calls into question the validity of the government’s HHI calculation.22
Challenging anticompetitive conduct
Where provider markets are already concentrated, health systems are often able to set contract terms that insurers and third-party administrators must accept in order to build a comprehensive provider network.23 Some of the terms that are most problematic for transparency and competition include: all-or-nothing clauses, which require the insurer to contract with all members of the health system; anti-tiering and anti-steering terms, which health systems use to prevent an insurer from creating a preferential hierarchy among members of the health system or directing their enrollees to competitors; most-favored-nation terms, which guarantee an insurer will get prices at least as favorable as all other insurers; and gag clauses, which prevent the contracting parties from disclosing the terms of the contract.24
Litigation is a tool to block the case-by-case application of these terms, but it is not always the most effective avenue for preventing anticompetitive conduct.25 Even when an attorney general or other enforcing agency brings a successful lawsuit against a health system alleging anticompetitive contracting, that case may take years, as shown by cases against California-based Sutter Health and North Carolina Atrium Health.26 The Sutter case was a consolidation of a 2014 case brought by the United Food and Commercial Workers union and a 2018 case brought the California attorney general, both challenging Sutter’s demands for all-or-nothing; anti-tiering and anti-steering; and gag clauses in contracts with providers.27 This case was eventually resolved in 2021, after seven years of litigation, when the court approved an agreement that required Sutter to pay $575 million in damages and prohibited Sutter from demanding the anticompetitive clauses in future contracts.28 In 2016, by the Department of Justice and the North Carolina attorney general brought a case alleging that Atrium’s use of anti-tiering, anti-steering, and gag clauses was an abuse of market power.29 The Atrium cases settled in 2018, and the court entered injunctions against Atrium’s use of these terms except in very limited circumstances.30 The resolution of these lawsuits is only binding on the single health system they are brough against. Because of the substantial resources antitrust officials must dedicate to litigation, they are often limited to challenging only the most severe violations and are incentivized to settle the cases, which results with no precedent being set by the court to govern future cases.
State legislatures have a menu of options to protect consumers’ access to health care and to empower their attorneys general to combat anticompetitive mergers and conduct in their states. First among these is requiring transacting parties to give notice to the attorney general of the merger and granting the attorney general the authority to review and approve the proposal as well as to continue monitoring after the transaction is concluded. Second, policymakers can strengthen the enforcement capacity of attorneys general by establishing commissions to conduct economic analysis on proposed mergers. Finally—and especially important in concentrated markets—state legislatures should enact statutes prohibiting anticompetitive clauses in health contracts in order to block providers from using outsize market power to demand contract terms from insurers and payers.
Granting state attorneys general statutory notice, review, and post-transaction monitoring authority
Currently, 43 states require advanced notice of at least some health care mergers, 26 of which limit notice to transactions involving a nonprofit entity.31 Only four states (Massachusetts, Connecticut, Oregon, and Washington) require notice of all transactions between health entities, including both hospitals, provider groups, and insurers.32 Beyond notice, 16 states have granted their attorney general or some other state agency review authority over these transactions, directing the reviewing entity to consider factors such as access and affordability of care and antitrust implications.33 By granting their attorneys general approval authority, these states have effectively flipped the burden of proof, placing the onus of the case on the entities seeking the merger. In these 16 states, the government agency tasked with review has authority to approve the merger, disapprove the merger, or approve the merger with conditions designed to protect the public from anticompetitive consequences of the merger.34 Following conditional approval, states may either employ independent monitors or require the newly formed entity to submit regular reports to state agencies in order to ensure compliance with the conditions of approval.35
A prime example of this conditional approval framework is Rhode Island.36 As recently as the 2022 legislative session, the Rhode Island General Assembly has expanded the review authority of the attorney general by permitting them to block mergers that are not in the public interest.37 In Rhode Island, this authority is paralleled by similar powers vested in the state’s secretary of health.38 This bifurcation directs the attorney general to be concerned with the use of charitable assets and consumer protection, while the health secretary is to be concerned with access to health care.39
Rhode Island Attorney General Peter Neronha has invoked his authority under the state’s Hospital Conversions Act both to block mergers and to issue conditions on them. In 2021, Neronha conditionally approved the change of ownership of two Providence area hospitals to Prospect Medical Holdings (PMH).40 Conditions of the approval included maintaining the Rhode Island hospitals at current capacity for a minimum of five years and investing more than $300 million in the viability of the hospitals in addition to a prohibition on reducing services without prior approval of the Rhode Island Department of Health.41 The transaction was also subject to other corporate governance conditions and an extensive monitoring regime for PMH’s financial operation, board composition, and health care operations.42
In 2022, Attorney General Neronha issued a decision denying the merger application of Lifespan and Care New England Health Systems.43 If the merger had been allowed to go through, the resulting entity would have held a near monopoly in the state, including 75 percent of all inpatient acute care beds and 80 percent of all inpatient hospital care.44 While Lifespan and Care New England claimed they proposed conditions that would adequately protect Rhode Island consumers, the attorney general determined there were no conditions that would sufficiently constrain the market power of a combined Lifespan and Care New England health system.45
Facilitate state economic and market analysis capacity
For attorneys general to make informed reviews of the transactions and present credible witnesses in court, states must provide resources for timely market analysis. One avenue to secure proper funding for the review process is requiring transacting parties to bear the cost of expert witnesses that the state may need to engage. Additionally, cost commissions or other agencies with specialization in health care provide the attorney general or other decision-makers with the economic data necessary to analyze the impact the proposed new entity would have on the state’s health care market. Ensuring that a properly funded and appropriately staffed agency exists to conduct merger reviews helps to address the resource constraints attorneys general often face when challenging well-funded litigants.
For example, under state law, Rhode Island requires transacting parties to cover the cost of expert analysis as part of the attorney general’s economic review, and the state health secretary is responsible for conducting a concurrent market impact analysis with a specific focus on the health implications, including affordability and availability of care.46 Another state that has designated a secondary agency to conduct market impact analysis is Oregon.47 In 2021, the Oregon legislature expanded the notice requirements to include both the attorney general and the Oregon Health Authority.48 Under this new law, both the attorney general and the health authority would have powers to approve a proposed transaction between health entities.49 The health authority’s review of transactions, similar to the Rhode Island health secretary’s review, is focused on the cost, quality, access, and equity impacts to the state’s health care market, while antitrust concerns remain the purview of the attorney general. While Rhode Island and Oregon allow the health officials independent approval authority, that is not required for agency review to be effective. California proposed legislation in 2020 that would establish a health policy advisory board responsible for submitting an annual report on the nature of the health care market in the state to the attorney general and—at the request of the attorney general—review merger notices and provide reports on the impact of proposed mergers.50
States looking to design merger approval authority statutes should bear in mind that certain state action can interfere with antitrust regulators ability to bring enforcement lawsuits. Under the state action doctrine, a transacting party may argue that they are immune from federal antitrust laws if their conduct was done in accordance with a “clearly articulated” state policy and done under the “active supervision” of the state.51 While the Supreme Court has reined in interpretation of this doctrine over the past decade in cases such as FTC v. Phoebe Putney Health System and North Carolina Dental Board v. FTC, states should exercise caution in empowering agencies to review and approve mergers.52 The best practice is to grant the attorney general either exclusive or concurrent approval authority over antitrust decisions.
Prohibit anticompetitive contracting practices
With the majority of health care markets in the United States at least moderately concentrated, states are recognizing the need to regulate anticompetitive contract terms employed by health systems or insurers with market power such as most-favored-nation clauses, all-or-nothing clauses, anti-tiering/anti-steering clauses, and gag clauses.53 While some statutes were enacted in the 1990s to address these issues, the bulk of them have been passed in the past 15 to 20 years.54 Statutory prohibition makes these terms void and unenforceable within the state. Massachusetts has enacted laws prohibiting each of these terms.55 Other states prohibit some subset of these terms. For example, Nevada prohibits all-or-nothing as well as anti-tiering and anti-steering clauses.56 The most common term banned is most-favored-nation clauses, which are illegal in 18 states.57
As states considered prohibiting these clauses in insurer-provider contracts, it is worth noting how Employee Retirement Income Security Act limits states’ ability to regulate insurance.58 Drafting the prohibition of these terms as applying to insurers would exclude self-funded employer sponsored plans. Instead, state policymakers should construct bans on certain contracting terms to hospital or provider contracts.
In addition to these terms with insurers, state legislators should also consider the effect noncompete employment contracts have on the health care workforce in their state. The Federal Trade Commission has recently issued a notice of proposed rule-making that would ban noncompete clauses in employment contracts nationwide.59 States should strongly consider following the lead of California, North Dakota, and Oklahoma, which have enacted statutes holding noncompete clauses to be void as a matter of law.60
As health care markets become more concentrated, strong antitrust enforcement becomes increasingly important to reining in rising health care costs. State legislatures can protect consumers by requiring notice of mergers to the attorney general; empowering the attorney general to conduct review of the merger with authority to approve or disapprove the merger; establishing agencies dedicated to producing the economic research necessary to successfully challenge mergers; and prohibiting abusive insurance contracting terms. By equipping antitrust enforcers with the tools and resources needed to successfully challenge anticompetitive activity, legislators can prevent further consolidation of their state’s health market and protect their residents’ access to affordable health care.
The authors thank the academics and state officials who provided thoughtful insight and input that informed this brief.