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DOI: 10.1177/1073110518821990

The New Health Care Merger Wave: Does the “Vertical, Good” Maxim Apply? Thomas L. Greaney

“Four legs good, two legs bad” (Snowball, Animal Farm)1

“Vertical good, horizontal bad” (Jonathan Baker, adapting Snowball’s maxim to characterize Chi- cago School antitrust principles)2

I. Background: Vertical Integration in Health Care American antitrust enforcement agencies (the Federal Trade Commission, Department of Justice and State Attorneys General) have long devoted an extraordi- nary proportion of their resources to the health care sector. For example, challenges to hospital mergers, physician cartels, and “reverse payments” by pharma- ceutical companies, insurance company mergers, and anticompetitive practices have been featured promi- nently in government litigation, advisories, and policy statements.3 Indeed, it is fair to say that since the early 1980s health care has been and continues to be a top priority of antitrust enforcers under both Republican and Democratic administrations.

In recent years, the Agencies have won a series of important cases challenging horizontal mergers in the hospital,4 physician,5 and insurance6 sectors that have clarified the law and sent a clear message that combinations of competitors in concentrated local markets will face close scrutiny. Reversing a series of losses in litigated hospital merger cases, these decisions established what are likely to be enduring precedents. Among other things, they clarified that provider and insurer markets are highly localized; rejected arguments that market power will be checked by the countervailing power of large or sophisticated buyers; and declined to accept arguments that uncer- tainties arising from rapidly-changing market condi- tions undermine inferences of market power or that consolidation is essential to achieve beneficial integra- tive efficiencies.7

Not surprisingly — given these precedents and seismic shifts in government and commercial pay- ment practices — action has shifted to vertical merg- ers. The combined effect of the Affordable Care Act (ACA), the Medicare Access & CHIP Reauthorization Act (MACRA) and other policy changes has created a strong gravitational pull toward integration.8 For example, the ACA created new incentives for hospitals and physicians to develop innovative organizational structures that can respond to new financing mecha- nisms such as bundled payments and global reim-

Thomas L. Greaney, J.D., is a Visiting Professor at the Uni- versity of California Hastings College of Law, Distinguished Senior Fellow, UCSF/UC Hastings Consortium on Law, Sci- ence and Health Policy, and Professor Emeritus, Saint Louis University School of Law.

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bursements. The “new new things” spreading rapidly around the country such as accountable care organi- zations (ACOs) and patient centered medical homes (PCMH), along with a revival of various forms of joint ventures and alliances, are responses to the legislative impetus to deliver care in a seamless and coordinated manner. MACRA has served to accelerate the move to physician employment by hospitals by providing strong financial incentives under Medicare reimburse- ment for physicians to join APMs — entities delivering integrated care using risk models. Moreover, the com- plexity and cost of creating such integrating organi- zations have driven physicians to accept employment opportunities by corporations, principally hospitals.9

Following suit, some insurers have begun to look to integrate vertically, merging with pharmacies and pharmacy benefit managers and acquiring hospitals,10 surgicenters,11 and physician groups.12 Several of the mergers under review as this article is being written combine formidable competitors in their respective sectors. Cigna, one of the largest health insurers in the country has proposed to acquire Express Scripts, the nation’s largest pharmacy benefit manager. CVS, the largest U.S. drugstore chain and one the second

largest pharmacy benefit manager, has announced an agreement to acquire Aetna, the third biggest health insurer. The largest health insurer, UnitedHealth, which operates the third largest PBM and owns 250 urgent care centers and 200 surgical centers, is set to acquire DaVita Medical group which operates over 300 clinics and urgent care centers and employs over 2000 health care providers.13

The confluence of rapid change in regulation, pay- ment, and delivery modalities has prompted debate about the appropriate course for antitrust enforce- ment in the health care sector. Some have counseled a “watchful waiting” approach that would allow inno- vation and experimentation to proceed free of strict antitrust scrutiny of structures and conduct.14 Indeed, a stronger version of this account argues that the need for significant, system-wide integration should be understood to override traditional antitrust con- cerns.15 While some critiques urge more direct regula- tory controls over dominant players,16 consolidation is

nevertheless often regarded as a prerequisite for inno- vation. Further, antitrust enforcers and courts have long relegated vertical mergers and exclusion issues to a very secondary role and legal doctrine is underdevel- oped. Consequently, antitrust law may offer no buffer against the new health care merger wave.

This essay questions the wisdom of adherence to an indulgent approach to vertical integration in health care. It first critiques the bases for antitrust law’s tra- ditional tolerance of vertical integration and describes contemporary economic learning that supports more robust antitrust enforcement. It goes on to dispute arguments urging extra caution in dealing with the health care sector and concludes with several jus- tifications for close scrutiny of vertical health sector mergers.

II. The Law’s Inattention to Vertical Mergers A. The Legal Vacuum. Antitrust enforcers have shown little interest in oppos- ing vertical mergers and consequently the case law on vertical mergers is dated and sparse. In its challenge the AT&T/Time Warner merger,17 the Department of Justice unsuccessfully litigated its first vertical merger

case in forty years;18 its badly out-of-date Non-Horizontal Merger Guidelines were first issued in 1992;19 and the most recent Supreme Court decision dates back to 1972.20 Likewise the record on vertical mergers in health care is barren. In its first litigated case21 involving a physician merger, Saint Alphonsus Medical Center- Nampa & FTC v. St. Luke’s Health Sys- tem,22 the FTC prevailed in a challenge to

acquisition of a physician group by a hospital system that would have increased the hospital’s existing share of the primary care physician market to approximately 80 percent. Although the factual findings in the case tended to support a finding of vertical foreclosure, the FTC and the district court and Ninth Circuit focused on the merger’s horizontal effects and did not address the vertical theory advanced by a rival hospital.23 As discussed below, the government’s disinclination to challenge vertical mergers is rooted in a laissez- faire ideology that is premised on dubious economic principles.

B. Questioning the “Vertical, Good” 24 Assumption As a general matter, Chicago School analysis finds strong efficiency benefits in vertical arrangements and urges presumptions that favor such linkages. In the case of vertical mergers, it stresses potential efficiencies flowing from improved coordination in pricing, pro- duction, and design that can reduce costs and improve

It is fair to say that since the early 1980s health care has been and continues to be a top priority of antitrust enforcers under both Republican and Democratic administrations.

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product quality. Early Chicago critiques questioned whether competitive harm could ever arise from verti- cal mergers,25 arguing that they merely realigns pur- chase patterns among competing firms and that they cannot enhance monopoly power because there is only a “single monopoly profit” that can be earned, whether or not the monopolist is vertically integrated.26 These assumptions, which have been called into question by contemporary economic analyses, led to the mistaken assumption, reflected in enforcement policy and court decisions, that vertical mergers are invariably efficient and procompetitive.

To be sure, as a general matter vertical integration in health care delivery provides much-needed changes in economic incentives. For example, efficiencies arising out of hospital/physician integration have theoretical appeal given the woefully inefficient arrangements that preceded it. Vertically integrated care delivery holds the promise of improved efficiency through reductions in unnecessary and duplicative care while lowering transaction and administrative costs arising from the use of hierarchical commands rather than contractual arrangements to assure efficient coordi- nation.27 Likewise integration of payment and delivery may redirect incentives away from rewarding volume instead of value. However, the potential for consumer benefits, even if significant, should not be the basis for turning a blind eye to instances of creation, entrench- ment, or abuse of market power.

Economic analyses have become more skeptical of vertical consolidation. Post-Chicago school schol- arship has challenged the conventional wisdom that “virtually all exclusion claims are chimerical”28 and has advanced the claim that under commonly occur- ring conditions exclusionary strategies can profit firms and harm competition.29 This account demon- strates that preconditions underlying Chicago’s cri- tique “rarely hold, and the broad claim that there is a single monopoly profit can obscure how a particular merger may raise real competitive concerns.”30 While vertical mergers do not increase concentration they may enable conduct that limits rivalry at the hori- zontal level. By combining inputs with distribution, for example, a vertical merger can enhance incen- tives for the merged firm to exclude its downstream or upstream rivals, either by raising their costs or cutting off their access to critical resources. Professor Steven Salop’s extensive body of work provides a sound eco- nomic model of foreclosure risks and maps the poten- tial legal framework for applying the so-called “raising rivals’ cost” principles to vertical mergers.31 Besides exclusionary effects, Post-Chicago analyses have iden- tified other potential harms from vertical mergers including reducing potential competition, increasing

coordinated effects,32 enabling evasion of regulation33 and facilitating harmful price discrimination.

C. Examples of Potential Harms Arising From Vertical Mergers in Health Care Markets The new merger wave would reorganize markets in a variety of ways. While it is certainly true that “dis- ruptive” change may spur innovation and invigorate competition, it is important to recognize that some forms of disruption can also enhance or create market power. I sketch below the means by which recent ver- tical mergers might harm consumers.

Hospital Acquisitions of Physician Practices. A core concern with hospital acquisition of physician practices is that they may foreclose rival hospitals and poten- tial entrants into the hospital services market from obtaining a sufficient base of patients because they are deprived of access to physicians to admit, treat, or refer to their facilities. Economic harm may flow from either (1) eliminating competition from non-consolidated rival hospitals in hospital service lines so as to increase the market power of the vertically-integrated hospital or (2) impairing the non-vertically consolidated hos- pitals’ ability to compete resulting from reduction of their outputs, higher average costs, and higher prices.34 Where such strategies enhance the bargaining power of the vertically-integrated hospital vis a vis payers, cognizable consumer harms may arise.

Linkages of Pharmacies, Health Insurers, and PBMs. The proposed merger which of CVS, which has signifi- cant market power in retail pharmacy and PBM ser- vices, with Aetna, a leading health insurer illustrates the risk of foreclosure or raising costs to rival insur- ers. Letters to the Justice Department by the Califor- nia Department of Insurance, the American Medical Association, and the American Antitrust Institute opposing the merger explain risks. First, the merged firm could impose a variety of conditions that would disadvantage rival insurers needing PBM services thereby impairing competition in downstream health insurance markets.35 For example, CVS could develop formularies for rivals that do not include important drugs that are in demand by their subscribers or offer pharmacy networks that do not provide important pharmaceutical distribution options to rival subscrib- ers. Another plausible anticompetitive strategy would be to foreclose or raise costs to rival pharmacies need- ing access to customers insured by Aetna.36 This could be accomplished by cutting off independent pharma- cies’ access to Aetna customers altogether or raising their costs by exercising the bargaining leverage of the CVS PBM in contracting for pharmacy services.37

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PBM/Health Insurance Oligopoly.Vertical mergers may also impair competition when they enhance the ability and incentives to engage in horizontal coordi- nation. As an example, the mergers currently under review — Express Scripts’ announced plans to merge with Cigna and CVS’s acquisition of Aetna — along with UnitedHeathcare’s operation of a PBM would establish an oligopolistic market in health and phar- macy management with three of the nation’s largest health insurers owning the three largest pharmacy benefit management entities.38 Controlling by some estimates over 70% of the PBM market, and with only a very small portion of the market served by entities not integrated with a health insurer, the “Big Three” vertically integrated firms would have common incen- tives to weaken the competitive conditions of rival health insurers.39 For example, as one analysis put it, they could “act on shared incentive to withhold or weaken PBM bids to health plan rivals” that would “raise rivals’ costs or lead to a diversion to sub-scale PBMs with higher costs and lower quality.”40 Given cost advantages arising to their leverage in negotiating with pharmaceutical companies, the Big Three would face little threat from rival PBMs and have strong incentives and capacity to coordinate their strategies to disadvantage rival health insurers.

Applying raising rivals’ cost principles to these cases undoubtedly entails a heavily fact-intensive inquiry. Fact finders need to assess not only whether exclusion is likely to occur but also whether such exclusion will harm competition, and if so, whether merger-specific efficiencies are sufficient to prevent or mitigate the exercise of market power. While legal precedent and agency guidance establishing workable principles and presumptions are lacking, some baseline factors can be identified that should trigger concern about verti- cal mergers. For example, economists identify market structure conditions including market dominance, barriers to entry, scale economies and network effects as important indicia of potential competitive harm.41 Qualitative factors such as economic incentives to use vertical mergers to forestall entry or raise rivals’ costs and regulatory conditions that encourage verti- cal consolidation are also relevant.42 The next section describes aspects of health care markets that may make them vulnerable to adverse effects of vertical mergers.

III. Why Vertical Mergers in Health Care May Harm Competition Antitrust law has long recognized that market condi- tions in the health care sector, while assuredly less than optimal, are nonetheless subject to the same kinds of abuses from anticompetitive mergers and conduct as other sectors of the economy. The following offers sev-

eral reasons why the vertical merger wave in health care should be subject to close scrutiny by antitrust enforcers and courts.

A. Market Conditions and Performance Provider, payer, and health pharmaceutical manage- ment markets exhibit key pre-conditions for harm from vertical mergers: they are highly concentrated, exhibit durable barriers to entry, and have historically performed poorly. The following chart illustrates the degree of concentration in the several sectors which are involved in the new merger wave.

Commercial insurance:

• 69 % of insurance markets highly concentrated.43

• In half of all markets, 2 largest insurers have >70% of the market.44

• The share of the largest four insurers increased from 74 to 83% from 2006 to 2014.45

Pharmacy Benefit Management

• Three largest PBMs control approximately 70% of the na- tional market.46

Physician services

• 65% of MSAs have highly concentrated specialty markets; 39% have concentrated primary care markets.47

• Hospital employment of primary care physicians grew from 28% to 44% between 2006 and 201648

Retail Pharmacies

• The two largest chains control 50-75% of the drug stores in the nation’s 14 largest markets.49

Hospitals

• 90% of inpatient acute care hospital markets are highly concentrated.50

• Many large metropolitan markets, e.g. Boston, Pittsburg, San Francisco are dominated by one or two hospitals.51

In each sector there is evidence that entry barriers are high, as market shares have grown or stabilized at high levels of concentration and entry has been lim- ited or non-existent.52 In addition, numerous studies demonstrate that concentration in health care is asso- ciated with high prices,53 and in some cases reduced quality.54 Moreover, a variety of health market char- acteristics including inelasticity of demand, imper- fect information and imperfect agency relationships make health care markets vulnerable to the exercise of

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market power.55 Such conditions exacerbate the risks of competitive harm resulting from stacking of one dominant firm on another.

B. The Yet-Unproven Record of Vertical Integration Although it is sometimes assumed that cost savings and quality improvements inevitably flow from hier- archical structures, economic evidence is lacking. Analysis of health system organizations suggests that economic integration has historically failed to gener- ate clinical integration that results in either cost sav- ings or improved efficiency.56 For example, studies find no evidence that hospital systems lower costs or that integrated delivery systems perform better than inde- pendent practices.57 This should come as no surprise as economic theory recognizes that upward pricing pressure results from vertical mergers.58 Further, as Martin Gaynor has reminded, “consolidation is not

coordination.”59 Not unlike horizontal mergers, verti- cal mergers are subject to problems associated with culture clashes, inadequate pre-merger information, and challenges inherent in management integration.60

The lesson from hospital-physician consolidation provides a cautionary example of the risks of under- enforcement of vertical mergers. A number of studies suggest that hospital-physician integration, which has grown rapidly in recent years,61 has raised physician costs, hospital prices, and per capita medical spend- ing.62 Moreover, a study of hospital ownership of physi- cian practices in California demonstrates, the impact of higher hospital concentration on premiums becomes larger as vertical concentration increases.63 Finally, while merger proponents usually claim that efficien- cies—cost savings and quality improvements—may offset the harms of increased market power, the expe- rience with physician-hospital consolidation is to the contrary.64 As a Leemore Dafny and Thomas Lee have concluded, “The harsh reality is that it is difficult to find well-documented examples of health care mergers that have generated better outcomes or lower costs.”65

C. Many Health Care Regulations Artificially Encourage Mergers and Inhibit Competition Another reason why vertical mergers in health care merit close scrutiny is the regulatory context in which firms operate. As is widely recognized, a host of regu- lations limit competition in health care. Many of these regulation make it difficult for rivals to enter markets, thereby increasing the likelihood of and rewards for consolidation. For example, certificate of need laws and payment regulations create significant barriers to competition in hospital markets; scope of practice and licensure laws inhibit rivalry in care delivery.66 Incen- tives and ability to engage in foreclosure strategies are greatest where the entry or expansion by rivals is curtailed.

In addition, other health care regulations give providers strong financial incentives to consolidate that are unrelated to improving system efficiency.

For example, some Medicare payment rules (which are often followed by commercial insures), strongly encourage physician employment. For example under “facility-based billing,” hospital-owned prac- tices charge more for outpatient visits and facility fees than independent physician practices, thus creating a strong financial incentive for physician employment by hospitals.67 Likewise Medicare’s 340B program which provides discount outpatient drug pricing for qualifying entities, has led hospitals to increase their employment of physicians in certain specialties.68 Fur- ther, certain payment and fraud and abuse regulations make employment by hospitals more attractive than independent practice or joint ventures. For example, Medicare reimbursement for employed physicians practicing in hospital outpatient departments is often much higher than it is for physicians performing the same services in their own offices as independent prac- titioners.69 Further, the Stark Law and Anti-Kickback statute allow far greater leeway for physicians to refer to the hospitals that employ them than are recognized for joint ventures or other arrangements.70

Antitrust law sometimes finds itself playing catch-up to economic learning. Adherence to the outmoded theories underlying enforcers’ disinclination to challenge vertical mergers can impose significant costs on consumers

and entrench dominant firm for years. With most health care sectors already highly concentrated and competition anemic at best, vertical consolidation

should be closely monitored. And let’s remember, in the end, the four-leg/two leg distinction evaporated in Animal Farm.

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D. Market Dominance Gives Rise to Anticompetitive Conduct Experience demonstrates that the conditions described above offer opportunities and incentives to engage in anticompetitive conduct. The history of antitrust law in the health care sector is littered with examples of hospitals, physician organizations, and insurers that have taken advantage of their dominant market positions, barriers to entry, and the absence of effective regulatory oversight to disadvantage rivals and impair competition. For example, in just the last several years antitrust cases have been brought against: a dominant insurer that lessened competition by requiring hospitals to agree to most favored nations clauses;71 a hospital with market power insisting that payors refrain from using tiering arrangements dis- couraged competitive contracting;72 a large hospital system restraining competition by “all or nothing” contracting for its hospitals, restricting sharing of cost information and other practices;73and patented drug manufacturers conspiring with generic firms to delay competitive entry.74

At the same time, antitrust doctrine is tolerant of extant market power and rarely sanctions dominant firms, especially in cases involving unilateral refus- als to deal with rivals.75 It only condemns monopo- lists that inappropriately obtain or maintain market power, and even in those cases plaintiffs may settle for conduct commitments rather than divestiture of assets. Moreover, cases alleging anticompetitive exclusion have faced high doctrinal hurdles.76 Given the law’s tolerance of extant market power and the propensity of dominant firms to entrench or extend their reach, merger law’s prophylactic remedies are especially important. As Professor Herbert Hoven- kamp has argued, it is appropriate to apply the more demanding standard in merger cases” where a merger is likely to lead to conduct that is both anticompetitive but also is difficult or impossible for antitrust law to reach once the merger has occurred.”77

E. Uncertainty is a Two-Way Street Because merger law is almost universally applied prospectively, cases necessarily involve predictions of future conduct and effects. Although considerable uncertainty attends such inquiries, antitrust prece- dent has made clear that the job of courts is to arrest “a rising tide of concentration” and to do so in its “incipi- ency.” This standard appropriately lowers the bar and should be applied to mergers where there is an appre- ciable danger of unilateral conduct, such as anticom- petitive exclusion resulting from vertical mergers.78

At the same time, justifications for mergers merit close examination and courts in recent cases have

been reluctant to accept efficiency justifications in horizontal merger cases.79 Even where beneficial change is likely to eventually result from vertical link- ages, several subsidiary questions must be addressed before enforcers should consider adopting a go-slow approach. First, how long will it take for promised benefits to be achieved? Horizontal merger analysis provides an important caution regarding applying the “ease of entry” defense. It excuses competition-stifling consolidations only when parties can demonstrate that entry will be “timely.”80 The logic of this require- ment applies to evaluating justifications advanced for postponing antitrust interventions to prevent vertical foreclosure: consumers should not be forced to endure monopolistic pricing if promised, offsetting integra- tive benefits will not be forthcoming in the near future. Second, what assurances exist that the cost-savings will be passed along to consumers? In cases involving significant foreclosure, dominant hospitals acquiring physician practices and insurers enhancing their bar- gaining leverage likely lack incentives to reduce price or to aggressively innovate.

IV. Conclusion Antitrust law sometimes finds itself playing catch-up to economic learning. Adherence to the outmoded the- ories underlying enforcers’ disinclination to challenge vertical mergers can impose significant costs on con- sumers and entrench dominant firm for years. With most health care sectors already highly concentrated and competition anemic at best, vertical consolidation should be closely monitored. And let’s remember, in the end, the four-leg/two leg distinction evaporated in Animal Farm.81

References 1. G. Orwell, Animal Farm: A Fairy Story (New York: Signet

Classics, 2016). 2. J.B. Baker, “Vertical Restraints with Horizontal Consequences:

Competitive Effects of Most Favored-Customer Clauses,” Speech before Business Development Associates, Inc. 1996 Antitrust Confernce, Washington, D.C., Sept. 28, 1995, avail- able at <https://www.ftc.gov/public-statements/1995/09/ver- tical-restraints-horizontal-consequences-competitiveeffects- most> (last visited November 1, 2018).

3. See T.L. Greaney and B.D. Richman, “Delivering and Paying for Healthcare Services: Priorities for Competition in Criti- cal Markets,” American Antitrust Institute White Paper, May 2018.

4. FTC v. Advocate Health Care Network, 841 F.3d 460 (7th Cir. 2016); FTC v. Penn State Hershey Med. Ctr., 838 F.3d 327 (3d Cir. 2016); ProMedica Health Sys., Inc. v. FTC, 749 F.3d 559, 571 (6th Cir. 2014).

5. Saint Alphonsus Medical Center-Nampa & FTC v. St. Luke’s Health System, 778 F.3d 775, 793 (9th Cir. 2015); FTC and North Dakota v. Sanford Health, Case No. 1;17-cv-00133 (D.N.D. Dec. 15, 2017). See also In the Matter of Renown Health, FED. TRADE COMM’N. C-4366 (Dec. 4, 2012) (con- sent order).

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6. U.S. v. Anthem, Inc., 855 F. 3d 345 (D.C. Cir. 2017); United States v. Aetna, Inc., 240 F. Supp. 3d 1 (D.D.C. 2017).

7. See Greaney and Richman, supra note 3. 8. T.L. Greaney, “The Affordable Care Act and Competition

Policy: Antidote or Placebo?” Oregon Law Review 89, no. 3 (2011): 811-845.

9. See L. P. Casalino, “The Medicare Access and CHIP Reautho- rization Act and the Corporate Transformation of American Medicine,” Health Affairs 36, no. 5 (2017): 865-869.

10. See M. Gamble, “The Quiet Takeover: Insurers Buying Phy- sicians and Hospitals,” Beckers Hospital Review (2011), available at <https://www.beckershospitalreview.com/ hospital-management-administration/the-quiet-takeover- insurers-buying-physicians-and-hospitals.html> (last visited November 1, 2018); R. Abelson, “As Health Care Changes, Insurers, Hospitals and Drugstores Team Up,” New York Times, November 26, 2017.

11. R. Abelson, “UnitedHealth Group to Buy Outpatient Surgery Chain for $2.3 Billion,” New York Times, Jan. 9, 2017.

12. R. Abelson, “UnitedHealth Buys Large Doctors Group as Lines Blur in Health Care,” New York Times, December 6, 2017.

13. A.W. Mathews, “UnitedHealth to Buy Large Doctor Group for $4.9 Billion,” Wall Street Journal, December 6, 2017.

14. See R. F. Leibenluft, “Antitrust and Provider Collaborations: Where We’ve Been and What Should Be Done Now,” Journal of Health Politics, Policy & Law 40, no. 4 (2015): 847-874.

15. See e.g., American Hospital Ass’n, Hospitals: The Changing Landscape is Good for Patients & Health Care, at 1 (2013), available at <https://www.aha.org/system/files/2018-02/12- 03-02-landscape.pdf> (last visited November 1, 2018) (“Mergers may be the only recourse, as decades old regulatory barriers can keep hospitals and doctors from working closely together to improve care and reduce costs unless they are under the same ownership umbrella.”); Engelberg Center for Health Care Reform at Brookings, Bending the Curve—Per- son-Centered Health Care Reform: A Framework for Improv- ing Care and Slowing Health Care Cost Growth, at 8 and 31 (April 2013):

[T]he antitrust enforcement framework [should be updated] to place greater emphasis on favoring clinical integration activities that are accompanied by financing reforms that move away from FFS payments and place providers at financial risk for quality gaps and higher costs… Many clinical coordination arrangements or even mergers among high market-share organizations could be considered safer if the merged organizations …implement contracts with payers that place substantial emphasis on reducing overall costs while improving quality and if subsequent performance on these measures improves sig- nificantly. We view this as more meaningful evidence on the value of care than analysis that focuses on prices for specific services.

See also, M. Noether, “The St. Luke’s-Saltzer Case: Can Anti- trust and Health Reform Policies Converge?” CPI Antitrust Chronicle (April. 2014)(discussing efficiency benefits from physician employment); B. Klein, R.G. Crawford, and A.A. Alchian, “Vertical Integration, Appropriable Rents, and the Competitive Contracting Process,” Journal of Law and Eco- nomics 21, no. 2 (1978): 297, 298 (in complex integration, “the costs of contracting will generally increase more than the costs of vertical integration.”).

16. R.A. Berenson, P.B. Ginsburg, J.B. Christianson, and T. Yee, “The Growing Power of Some Providers to Win Steep Increases in Payment from Insurers Suggest Policy Remedies Are Needed,” Health Affairs 31, no. 5 (2012): 973-981.

17. U.S. v. AT&T, 2017 WL 6329012 (D.D.C 2018). 18. United States v. Hammermill Paper Co., 429 F. Supp. 1271

(W.D. Pa. 1977). 19. The Non-Horizontal Merger Guidelines, issued in 1992 and

revised in 1997, have received little attention in the courts and focus on harms from reducing the probability of entry and

facilitating collusion; notably, the term “foreclosure” does not appear in the Guidelines. U.S. Department of Justice, Non- Horizontal Merger Guidelines, available at <https://www. justice.gov/atr/non-horizontal-merger-guidelines> (last vis- ited November 1, 2018).

20. Ford Motor Co. v. United States, 405 U.S. 562 (1972). 21. The FTC’s first challenge to a physician merger, commenced

in 2012, involved the acquisitions by the largest hospital sys- tem in the Reno, Nevada area of two cardiology groups — making the system the employer of 88% of the active cardi- ologists in the market. The FTC entered into a consent order that did not enjoin the merger but rather required the system to release physicians from covenants not to compete. In the Matter of Renown Health, FTC Dkt. No. Docket No. C-4366 (December 4, 2012), available at <www.ftc.gov/enforcement/ cases-proceedings/1110101/renown-health-matter> (last vis- ited November 1, 2018).

22. Saint Alphonsus Med. Ctr.-Nampa Inc. v. St. Luke’s Health Sys., Ltd., 778 F.3d 775, 791(9th Cir. 2015).

23. See T. L. Greaney and D. Ross, “Navigating Through the Fog of Vertical Merger Law: A Guide to Counselling Hospital Phy- sician Consolidation,” University of Washington Law Review 91, no. 1 (2016): 199-251 at 221-222.

24. See, J. Baker, supra note 2 (comparing the broad brush anti- trust maxim, “vertical good, horizontal bad” to Snowball’s “four legs good, two legs bad” in George Orwell’s Animal Farm).

25. Herbert Hovenkamp described Robert Bork’s “beguingly sim- ple” account of the competitive effects of vertical mergers as follows:

First, if vertical integration created efficiencies, then a ver- tically integrated firm would have cost advantages over unintegrated rivals. In that case vertical integration would deter unintegrated entry, but it is not antitrust’s purpose to condemn cost savings. Second, if vertical integration did not create any efficiencies, then it would not impede entry by anyone. Firms that wished to enter at one stage alone could contract with firms at the other stage and be just as efficient as the vertically integrated firm. Third, if vertical integration resulted in higher costs, then vertically inte- grated firms would decline in favor of unintegrated firms. Fourth, in competitively structured markets vertical inte- gration would lead to self-dealing, but that would do no more than force realignment in purchasing and sale pat- terns. Bork’s observations were built on an extraordinarily narrow conception of entry barriers. He barely mentioned patents or other intellectual property rights. There was no conception that sunk costs plus risk could facilitate entry deterrence. H. Hovenkamp, “Robert Bork and Vertical Integration: Leverage, Foreclosure, and Efficiency,” Anti- trust Law Journal 79, no. 3 (2014): 983-1001.

26. R. H. Bork, The Antitrust Paradox (New York: Basic Books, 1978): at 225.

27. See, J. Goldsmith, L.R. Burns, A. Sen, and T. Goldmith, Inte- grated Delivery Network: In Search of Benefit and Market Effects (National Academy of Social Insurance, 2015): at 8; Advocates for a permissive standard governing mergers also assert that alternative arrangements that enable vertical rela- tions such as joint ventures and other contractual commit- ments are less efficient because of the uncertainties inherent in contracting and transaction costs. See B. Klein, R. G. Craw- ford, and A. A. Alchian, “Vertical Integration, Appropriable Rents, and the Competitive Contracting Process,” Journal of Law and Economics 21, no. 2 (1978): 297-235 at 298.

28. T. G. Krattenmaker and S. C. Salop, “Anticompetitive Exclu- sion: Raising Rivals Costs to Achieve Power Over Price,” Yale Law Journal 96, no. 2 (1986): 209-293 at 213.

29. Professor Salop’s recent work systematically refutes the bases upon which Chicago School’s permissive approach to vertical mergers is based. S. C. Salop, “Invigorating Vertical Merger Enforcement,” Yale Law Journal 127, no. 7 (2018): 1962- 1964. Other scholars have also criticized the law’s neglect of

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competitive harms from vertical arrangements. See e.g., J.B. Baker, “Exclusion as a Core Competition Concern,” Antitrust Law Journal 78, no. 3 (2013): 527-589.

30. S. C. Salop and D. P. Culley, “Potential Competitive Effects of Vertical Mergers: A How-To Guide for Practitioners,” Decem- ber 8, 2014, available at <http://scholarship.law.georgetown. edu/cgi/viewcontent.cgi?article=2404&context=facpub> (“Vertical mergers seldom involve firms that have monopolies protected by prohibitive entry barriers. If there is no monop- oly, then there is no single monopoly profit.”)

31. See Salop and Culley, supra note 30 and Salop, “Invigorating Vertical Merger Enforcement” supra note 29.

32. For example, vertical mergers may facilitate coordination in the hospital market by weakening the disruptive behavior of a nonintegrated hospital, a strategy that could be implemented with targeted input foreclosure or threats of foreclosure. See, Salop and Culley supra note 30 at 25-26.

33. In 2008 the FTC challenged a ten year, exclusive sublicense for Venofer, a pharmaceutical product produced by Daiichi Sankyo used by dialysis clinics operated by Fresenius Medi- cal Care, which would allow Fresnius to evade Medicare price regulations. In the Matter of Fresenius Medical Care AG & Co. KGaA and Daiichi Sankyo Company, Ltd, No. 081-0146 (F.T.C. Sept. 15, 2008), available at <www.ftc.gov/sites/ default/files/documents/cases/2008/09/080915freseniusa nal.pdf> (last visited November 1, 2018).

34. See generally, Greaney and Ross, supra note 23; see also Dec- laration of Debra Hass-Wilson in St. Alphonsus Med. Center- Nampa et al. v. St. Luke’s Health 2012 WL 9515607 (D.Idaho) (economic analysis of foreclosure effects in hospital acquisi- tion of a primary care physician practice).

35. Letter from D. Jones, Commissioner, California Depart- ment of Insurance to Attorney General Jeff Sessions and Assistant Attorney General Makan Delrahim, U.S. Dep’t of Justice (August 1, 2018); Letter from J. L. Madara, Execu- tive Vice President and CEO, American Medical Association to Assistant Attorney General Makan Delrahim (August 7, 2018); Letter from D. L. Moss, President, American Anti- trust Division to Makan Delrahim, Assistant Attorney Gen- eral, Antitrust Division, U.S. Department of Justice (March 2017), available at <https://www.antitrustinstitute.org/work- product/aai-calls-on-doj-to-block-the-merger-of-cvs-aetna- vertical-integration-will-restructure-important-healthcare- markets-to-the-detriment-of-competition-and-consumers> (last visited December 10, 2018). See also, Statement of T. L. Greaney, California Department of Insurance Hearing on Proposed CVS/Aetna Merger (June 19, 2018).

36. Id. 37. Id. 38. See notes 43-46 infra. 39. See Madara Letter supra note 35; Greaney Statement supra

note 35. 40. “Cigna/Express Scripts: Coordinated PBM Impact on Health

Plan Rivals Tops Potential Vertical Concerns,” The Capitol Forum 6, no. 165, April 23, 2018.

41. Salop supra note 29 at 1975-1980. 42. Id. See also, Greaney and Ross, supra note 23. 43. American Medical Association, Competition in Health Insur-

ance: A Comprehensive Study of U.S. Markets (2017). 44. M. Gaynor, “Examining the Impact of Health Care Consoli-

dation,” Statement before the Energy and Commerce Over- sight Committee, U.S. House of Representatives, February 14, 2018, at 7.

45. L. Dafny, “Health Insurance Industry Consolidation: What Do We Know From the Past, Is It Relevant in Light of the ACA, and What Should We Ask?” Testimony Before the Subcomm. on Antitrust, Competition Policy, and Consumer Rights of the S. Comm. on the Judiciary, 114 Cong. 5 (2015) available at <http://www.judiciary.senate.gov/imo/media/ doc/09-22-15%20Dafny%20Testimony%20Updated.pdf> (last visited November 2, 2018).

46. Id.

47. B. D. Fulton, “Health Insurance Market Concentration in the United States: Trends in the United States and Policy Responses,” Health Affairs 36, no. 9 (2017): 1530-1538.

48. Id. 49. C. Stern, “CVS and Walgreens are Completely Dominating

U.S. Drugstore Industry,” Business Insider, July 29, 2015. 50. Fulton, supra note 47. 51. Gaynor, supra note 44 at 6. 52. Id.; see also Dafny, Health Care Consolidation, supra note 45. 53. See generally id. at 7-9; See also M. Gaynor and R. J. Town,

“The Impact of Hospital Consolidation,” (2012) The Synthesis Project, Policy Brief No. 9, Robert Wood Johnson Foundation (hospitals); see also note 56 infra (physicians).

54. See Gaynor, supra note 44 at 10-11. 55. See C. C. Havighurst and B. D. Richman, “The Provider

Monopoly Problem in Health Care,” Oregon Law Review 89 (2011): 847-883; Greaney supra note 8.

56. J. Goldsmith, L. R. Burns, A. Sen, and T. Goldsmith, Inte- grated Delivery Networks: In Search of Benefits and Market Effects, National Academy of Social Insurance (2015)(sum- marizing literature and analyzing performance of 15 of the largest integrated delivery systems).

57. See e.g., J. M. McWilliams et al., “Delivery System Integration and Spending and Quality for Medicare Beneficiaries,” JAMA 173, no. 15 (2013): 1447-1456.

58. See Salop, Invigorating Vertical Merger Enforcement, supra note 29 at 1973 (“the same inherent upward pricing pressure occurs for vertical mergers” as for horizontal mergers).

59. M. Gaynor, “Examining the Impact of Health Care Consoli- dation,” Statement before the Energy and Commerce Over- sight Committee, U.S. House of Representatives, February 14, 2018, at 11.

60. See, e.g., J. Stuckey and D. White, “When and When Not to Vertically Integrate,” McKinsey Quarterly, August 1993, available at <https://www.mckinsey.com/business-functions/ strategy-and-corporate-finance/our-insights/when-and- when-not-to-vertically-integrate> (last visited November 2, 2018); Salop, Invigorating Vertical Merger Enforcement, supra note 29.

61. See Gaynor, supra note 59. 62. L.C. Baker, M. K. Bundorf, and D. P. Kessler, “Vertical Inte-

gration: Hospital Ownership of Physician Practices Is Asso- ciated with Higher Prices and Spending,” Health Affairs 33, no. 5 (2014): 756-763 at 762; D. Haas-Wilson, “Hospital- Physician Integration: The St. Luke’s Case,” in The Antitrust Revolution: Economics, Competition and Policy (Kwoka ed., forthcoming); J. Robinson and K. Miller, “Total Expenditures per Patient in Hospital-Owned and Physician-Owned Physi- cian Organizations in California,” JAMA 312, no. 16 (2014): 1663-1669(finding hospital-owned physician organizations had 10-20% higher total expenditures/patient than physi- cian-owned organizations); C. Capps, D. Dranove, and C. Ody, “The Effect of Hospital Acquisitions of Physician Prac- tices on Prices and Spending,” Institute for Policy Research, Northwestern University, Working Paper No. WP-15-02, Feb. 2015 (finding that vertical integration was associated with a 13.7% increase in physician prices); and H. T. Neprash et al., “Association of Financial Integration Between Physicians and Hospitals With Commercial Health Care Prices,” JAMA Internal Medicine 175, no. 12 (2015): 1932-1939 (finding that MSAs with increases in physician-hospital integration expe- rienced median price increases of $75). A. Dunn and A.H. Shapiro, “Do Physicians Possess Market Power?” Journal of Law and Economics 57, no. 1 (2014): 159-193. R. Kocher and N. Sahni, “Hospitals’ Race to Employ Physicians — The Logic behind a Money-Losing Proposition,” New England Journal of Medicine 363, no. 19 (2012): 1790-1793.

63. R. Scheffler, “What Happens When Hospitals Buy Physician Practices in California: Impacts on ACA Premiums and Out- patient Prices,” Health Affairs (forthcoming 2018).

64. R.A. Berenson, “A Physician’s Perspective on Vertical Integra- tion,” Health Affairs 36, no. 9 (2017): 1585-1590 at 1586 (“lit-

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erature reviews find integration has not improved quality and could even reduce it because of reduced competition”).

65. L. S. Dafny and T. H. Lee, “The Good Merger” New England Journal of Medicine 372, no. 22 (2015): 2077-2079.

66. See Greaney and Richman, supra note 3. 67. D. Dranove and C. Ody, “Employed for Higher Pay? How

Medicare Facility Fees Affect Hospital Employment of Phy- sicians,” Kellogg Faculty Publications (2016), available at <http://www.kellogg.northwestern.edu/faculty/publication_ detail.aspx?id=be3b359c-e31a-11e6-9fbb-0050569b3e41> (last visited November 2, 2018).

68. S. Desai and J. M. McWilliams, “Consequences of the 340B Drug Pricing Program.” New England Journal of Medicine 378, no. 6 (2018): 539-548.

69. Robert Wood Johnson Foundation, “Health Policy Brief: Site- Neutral Payments,” Health Affairs, July 24, 2014, MedPAC, Report to Congress 2014.

70. See 42 C.F.R. 411.357 (Stark Law exception allowing physi- cian with bona fide employment relationship to make refer- rals to employer-hospital subject to certain conditions).

71. U.S. v. Blue Cross and Blue Shield of Michigan, 809 F. Supp. 665 (E.D. Mich. 2011).

72. See U.S. and North Carolina v. Charlotte-Mecklenburg Hospi- tal Authority, d/b/a Carolinas Healthcare System, March 30,

2017 (Order denying defendant’s motion for judgment on the pleadings).

73. California v. Sutter Health, CGC-18-565398 (San Francisco County Superior Court) (Mar. 29, 2018).

74. See R. Feldman and E. Frondorf, Drug Wars: How Big Pharma Raises Prices and Keeps Generics Off the Market (New York, Cambridge University Press, 2017).

75. See Verizon Communications Inc. v. Law Offices of Curtis V. Trinko, 124 S. ct. 872 (2004); see also, T.L. Greaney, “Cop- ing with Concentration,” Health Affairs 36, No.9 (2017): 1564-1571.

76. J.B. Baker, “Exclusion as a Core Competition Concern,” Anti- trust Law Journal 78, no. 3 (2013): 527-589.

77. H. Hovenkamp, “Prophylactic Merger Policy,” University of California Hastings Law Journal (forthcoming 2018).

78. See Id. (discussing the application of the incipiency test in the case of vertical mergers).

79. See e.g. Saint Alphonsus Med. Ctr.-Nampa Inc. v. St. Luke’s Health Sys., Ltd., 778 F.3d 775, 791(9th Cir. 2015); U.S. v. Anthem, Inc., 855 F. 3d 345 (D.C. Cir. 2017).

80. U.S. Department of Justice and Federal Trade Commission, Horizontal Merger Guidelines, (2010) §9.

81. Animal Farm, supra note 1. (“The creatures outside looked from pig to man, and from man to pig, and from pig to man again; but already it was impossible to say which was which.”)

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