Policies To Combat Anticompetitive Practices in Health Care

Policymakers, journalists, and researchers have recently called attention to concerns around the lack of competition in health care markets.¹ Rising rates of consolidation, horizontal and vertical integration, and heightened profit-seeking behavior by nonprofit and for-profit hospitals alike led the Federal Trade Commission (FTC), U.S. Department of Health and Human Services (HHS), and U.S. Department of Justice (DOJ) to issue a public inquiry into health care entities’ anticompetitive behavior in March 2024.² Additionally, in May 2024, the FTC issued a final rule banning one form of anticompetitive behavior—noncompete clauses in employment contracts—across all industries.³ However, a federal district judge in Texas blocked this ban from taking effect in Ryan LLC v. Federal Trade Commission, a recent case challenging the rule.⁴

In service of maximizing profits or revenues, health care payers and providers—including nonprofits—often engage in a variety of business practices that restrict patient choice, artificially inflate costs, and undermine a commitment to health care quality. This issue brief explains anticompetitive contracting and recommends ways in which federal policy could improve competition in health care markets, including through banning the use of restrictive contracting terms, strengthening oversight of mergers and acquisitions, and increasing the FTC’s authority. Fair competition is essential to ensure patients and payers have the information and options necessary to make choices about their medical care, and it would also lower the price of health care.

How anticompetitive contracting works

When a health care provider or a payer—an organization that pays for health services, such as private health insurers or employers who sponsor health plans on behalf of their employees—dominates a market, it has the power to demand contract terms from which it disproportionately benefits. For example, according to one study by leading economists, hospitals with fewer competitors are more likely to negotiate payment terms that benefit them and maximize the financial risk on insurers.⁵ Researchers from Harvard and Princeton explain that when there are high rates of consolidation among both payers and providers, “economic theory would suggest that the dominant insurer and dominant hospital are likely simply splitting the surplus that comes from monopoly pricing.”⁶ Inflated prices can then result in patients paying more through higher premiums and cost sharing.⁷ However, health care markets are rarely simple; with varying amounts of market power on both the provider and payer sides of a contractual relationship, favorable contract terms can become an escalating game, as stacked provisions further restrict market competition.

“Must-have” hospitals are a prime example of an entity positioned to extract favorable contract terms.⁸ When there is one main health system or hospital in an area, insurers must include them in their network to be a viable plan option for patients and purchasers (the employers or plan sponsors in a market that contract with an insurer to provide coverage to their enrolled population). In 2017, more than half (57 percent) of hospital markets had one dominant health system at which the majority of area hospitalizations occurred.⁹ Because these must-have providers know they are essential to a payer’s network, they can demand contract terms that benefit them, sometimes in unfair or anticompetitive ways, and engage in supracompetitive pricing—setting prices above what is sustainable in a competitive market.¹⁰

Furthermore, as the main health care employer in a region, many major health systems include noncompete clauses in their employee contracts. These clauses prevent workers from leaving the health system and taking a role with a similar organization in the region.¹¹ The prevalence of noncompete agreements and their impact on labor market competition prompted the FTC to ban them in worker contracts across industries.

Health care providers and payers often use the following anticompetitive contract clauses:

1. All-or-nothing clauses require that if a payer wants to contract with a particular provider in a health system, the payer must contract with all providers in that health system.¹⁸
2. Anti-tiering clauses restrict a payer from creating or modifying a tiered network, prevent a payer from putting a provider in a nonpreferred network tier, or require a payer to place all providers within a health system or provider entities in the same tier.¹⁹
3. Anti-steering clauses bar a payer from using incentives and tools that encourage patients to use competing providers, even if those competing providers are more efficient or cost effective.²⁰
4. Exclusive contracting clauses bar a payer from including competing providers in their provider network, ensuring that the contracting provider is the only in-network option.²¹
5. Most favored nation clauses require a provider to give a payer the lowest rates of all contracted payers.²²
6. Gag clauses restrict a payer, plan administrator, or provider’s ability to disclose price or quality information in a contract agreement to government entities, patients, or other parties.²³
7. Noncompete clauses prevent an employee from taking a job with a competing provider or starting a new practice within a given distance for a given duration of time.²⁴

As with provider consolidation, payer consolidation is also on the rise, creating a counterforce to consolidated provider market dynamics.²⁵ Although payers are the losing party under anticompetitive contract terms that favor dominant providers, dominant payers may use their market power to demand their own favorable contract terms, namely most favored nation clauses that require providers to give them the best deal among all contracted payers.

Because payer and provider markets are filled with organizations of varying sizes and market influence, contracting is rarely an even playing field. Dominant entities of either type—payer or provider—can extract favorable contract terms at the expense of smaller entities. Ultimately, anticompetitive terms employed by either party can drive prices up, limit consumer choice, and prohibit workers from leaving poor workplace environments.

Implications of anticompetitive contracting

When providers and payers negotiate contracts, each party uses a variety of strategies to enact favorable terms. These negotiations are complex; in some cases, one payer may negotiate contracts for hundreds of different plans it administers across numerous providers. Each party to a contract negotiation has their own interests. (see Figure 1)

As illustrated in Figure 1, the provider’s interests are to:

• Be included in a payer’s network in order to access enrolled members
• Be a preferred provider if a payer uses tiers or other incentives to direct enrollees toward certain providers, or prevent a payer from using tiered networks altogether
• Receive the highest possible payments for services rendered

Payers’ interests, meanwhile, are to:

• Include enough providers in a network to meet network adequacy laws and to be appealing to consumers and plan sponsors
• Include and incentivize the use of cost-effective services and include providers with low prices and high quality in their network to deliver value to plan sponsors and reduce costs
• Include any must-have providers in their network

While the ideal negotiation outcome for both parties is to successfully contract so that providers are in network within a given insurance plan—and often, to keep information about pricing or reimbursement rates private to avoid competitors leveraging it—price is a competing interest. When payers and providers insist on unfair terms, a lack of agreement or a decision to terminate a contract can impede patient access to care.²⁶

Anticompetitive contracting in practice

To contain costs and offer affordable products to plan sponsors such as employers, payers have two contracting options: 1) design a narrow or limited network that excludes high-cost, low-value providers; or 2) incentivize consumers to choose more cost-effective providers within a larger network.²⁷ All-or-nothing contracting, anti-tiering, anti-steering, and exclusive contracting clauses prevent payers from being able to use the latter option, while all-or-nothing and exclusive contracting clauses prevent the former. These clauses do, however, also enable large providers to demand high prices. There is pending litigation that illustrates this issue. In the lawsuit Davis v. HCA Healthcare, plaintiffs who are commercially insured residents of North Carolina allege that HCA Healthcare, now Atrium Health, acquired a nonprofit hospital and used their enhanced market power to demand anti-steering clauses, gag clauses, and all-or-nothing contracting from commercial health insurers.²⁸ As a result, plaintiffs allege that HCA Healthcare charged double the prices of others in the region, which subsequently forced the insured residents to pay more for their health care services. Notably, this case is still being litigated, but it illustrates the potential impact of monopolistic behavior on patients.

When payers, rather than providers, have the contracting leverage, they can use their own forms of anticompetitive contracting terms. For example, most-favored-nation clauses require providers to give a payer the best rate of all contracted payers. If one or very few payers dominate a market, providers may have no choice but to agree to this clause. This type of agreement can also drive up patient costs. In one instance, The Boston Globe reported that an alleged most-favored-nation-like deal that Blue Cross Blue Shield of Massachusetts secured from Partners HealthCare Massachusetts, now Mass General Brigham, resulted in individual insurance premiums increasing by 8.9 percent per year, double the rate of previous increases.²⁹ Apart from driving premiums up, the type of lopsided contracting alleged by The Boston Globe creates a barrier to entry for smaller payers, further stifling competition.³⁰

Anticompetitive contract terms also affect the people who work for providers or payers. For example, when a health system writes a noncompete agreement into an employment contract, a worker is prevented from securing another job within a fixed distance and time period. Such an agreement could prevent that worker from seeking better employment options when facing poor working conditions, low pay, and burnout. These conditions are especially prevalent in the health care industry and have only been intensified by the COVID-19 pandemic. In 2022, nearly half of U.S. health care workers reported feeling burnout, and many reported negative changes to working conditions.³¹ A 2023 survey by voluntary benefits company Purchasing Power showed that 53 percent of surveyed health care workers felt they were not compensated fairly.³²

Noncompete agreements can also have trickle-down impacts on patient access to care. If, for example, a physician chooses to leave their job but is subject to a noncompete agreement, they may have to practice outside of a given geographic region, requiring patients who want to continue their care with that provider to travel far distances to do so.³³ Noncompete agreements are common among for-profit and nonprofit health systems alike. About 45 percent of physicians are subject to noncompete agreements, compared with nearly 20 percent of American workers overall.³⁴ As described in the text box above, the FTC’s ban on noncompete agreements would have applied to for-profit health systems as well as nonprofit health systems that behave like for-profit entities.

Policy recommendations to improve competition

Improve monitoring of mergers and acquisitions

As health care markets become increasingly concentrated, negotiating entities are also increasingly empowered to impose restrictive and disproportionately favorable terms on each other. Limited competition enables dominating entities within those concentrated markets—providers, payers, or both—to demand contract terms that only further restrict competition.

Much evidence demonstrates that both horizontal and vertical mergers can result in higher health care prices.³⁵ For example, some horizontal mergers, in which direct competitors at similar stages of the supply chain consolidate, have resulted in price increases of as much as 54 percent.³⁶ Similarly, vertical consolidation, or mergers of entities at different stages of the supply chain, can result in higher prices.³⁷ One study found that provider charges increased by 14 percent when a physician practice was acquired by a hospital system.³⁸ When provider prices increase, patients often bear the burden in the form of higher premiums and cost sharing.³⁹And anti-steering and anti-tiering contract terms can drive more plan enrollees to these higher-cost providers.⁴⁰

Merging entities face federal reporting requirements, and 39 states have additional review authority over pretransaction mergers, with 31 states having requirements specific to health care entities.⁴¹ The Hart-Scott-Rodino Antitrust Improvements Act of 1976 requires entities to notify the FTC and the DOJ of their plans to merge if the transaction exceeds a specified value; in 2024, only transactions that meet a $119.5 million threshold are required to provide the federal government premerger notifications.⁴² Serial acquisitions can harm patient access and affordability. In 2023, in a move that seemed to acknowledge the problem of potential serial acquisitions, the FTC sued U.S. Anesthesia Partners and Welsh, Carson, Anderson, & Stowe. The FTC alleged that the firms created a single dominant provider by buying up “nearly every large anesthesia practice in Texas,” which empowered them to demand higher prices.⁴³ Notably, this case is still being litigated.⁴⁴ In December 2023, the FTC and the DOJ released updated merger guidelines that enabled the agencies to examine series of smaller mergers and acquisitions.⁴⁵

While the updated guidelines are an important step, Congress should amend the Hart-Scott-Rodino Act to require merging entities to report past related mergers and acquisitions.⁴⁶ This would ensure that the agencies have the data they need to carefully evaluate the cumulative effects of previous transactions, whether or not they have been previously reported. Such data would also allow the agencies to assess the impact of new transactions that may impede competition and accordingly enable providers and payers to extract anticompetitive contract terms.

Ban the use of anticompetitive clauses

Many states have taken action to limit anticompetitive contract terms. As of September 2023, four states—Nevada, Texas, Massachusetts, and Connecticut—had passed laws prohibiting anti-steering clauses, and at least five states had similar legislation pending.⁴⁷ Five states also have laws that restrict exclusive contracting.⁴⁸ Yet in light of increasing health care consolidation and the expansion of provider service areas across state lines, these state regulations are limited in their ability to effectively curb anticompetitive practices.⁴⁹ The reach and dominance of multistate players necessitates more comprehensive federal action.

Currently, there is no federal law that prevents health care entities from engaging in anticompetitive contracting. The FTC’s ban of most noncompete clauses was an attempt at such action. The FTC estimates that this ban, if allowed to go into effect, would lower the cost of physician services by between $74 billion and $194 billion over the next decade.⁵⁰ In light of the Ryan and ATS Tree rulings, Congress should pursue measures that clarify congressional intent on the FTC’s authority to promulgate enforceable rules prohibiting anticompetitive practices such as noncompete agreements. It can do so either through direct funding or language in an appropriations bill supporting the agency’s efforts to promulgate and enforce the noncompete rule, or through resolutions that express and signal Congress’ recognition of the FTC’s existing authority to promulgate the rule.

Congress should also pass legislation that specifically regulates, limits, and potentially outright bans the use of anticompetitive contract terms between providers and payers.⁵¹ It has already taken some action on this front by passing the Consolidated Appropriations Act of 2021, which prohibits health plans and issuers from entering into contracts with health care providers that include gag clauses.⁵² This prohibition went into effect in December 2020, with compliance reporting beginning in December 2023.⁵³ However, the full impact of the prohibition and attestation requirement on health care contracting, particularly on subcontractors such as third-party administrators, is unclear and may necessitate further action from policymakers.⁵⁴ Beyond addressing gag clauses, legislation such as the Bipartisan Primary Care and Health Workforce Act of 2023 and the bipartisan Healthy Competition for Better Care Act of 2023 would prohibit providers from implementing anti-steering contract terms—which prevent plans from offering incentives to encourage patients to use high-value providers—and ban all-or-nothing clauses.⁵⁵

Increase FTC authority over nonprofit health care entities

Nonprofit hospitals are among the nation’s largest and most profitable hospitals.⁵⁶ Some own debt collection agencies, while others have venture capital and private equity arms.⁵⁷ As described in the FTC’s noncompete rule, when nonprofit hospitals behave like for-profit entities—by not using income for charitable purposes and/or by using income and profit to benefit the corporation and its members—they should be subject to the full scope of FTC authority. However, all entities—regardless of non or for-profit status—should be barred from anticompetitive contracting. Congress should amend the FTC Act to close this gap in oversight by passing legislation such as the bipartisan Stop Anticompetitive Healthcare Act of 2023 that would extend the FTC’s authority over anticompetitive conduct to nonprofit hospitals.⁵⁸

Conclusion

Health care markets that lack sufficient competition are ripe environments for providers and payers to extract overly favorable contracting terms. Such terms can impede patient accessaffordability, and quality of care and further perpetuate a concentrated, anticompetitive market. Policymakers must ban the use of anticompetitive contract clauses and clarify and expand the FTC’s authority—including over nonprofit health care providers—to better regulate. They also must take enforcement actions against the full scope of unfair and anticompetitive behaviors and contract terms that health care payers and providers regularly engage in and exploit.