Yesterday the Senate Judiciary Committee's Subcommittee on Antitrust, Competition Policy, and Consumer Rights held its first hearing on vertical consolidation in the healthcare industry, and its effects on competition and consumers. Vertical integration is the combination in one company of two or more stages of production normally operated by separate companies, such as when a health insurance company is combined with a pharmacy benefit manager (PBM), or a hospital acquires physician practices.
In a short hour and a half hearing, Senators questioned five experts on why so many companies were merging, what the likely impact would be, and how to preserve competition and consumers. This was a welcome step toward a more comprehensive look at vertical integration.
Senator Mike Lee (R-UT) chaired the meeting and said that "over the past several years we've seen a bunch of megamergers but also many smaller mergers, like hospitals acquiring doctors...These mergers are changing healthcare." He emphasized that vertical integration could possible help patients but it also could enable market power to be used in an anticompetitive manner, hurting competition and consumers. Lee told the audience and witnesses that in the next month, the Committee would hold an antitrust hearing on the Federal Trade Commission and the Department of Justice.
Senator Amy Klobuchar (D-MN) was an active questioner and focused on how consolidation and mergers were causing higher healthcare costs. Healthcare spending now makes up one-sixth of our economy, she said, and drug costs are far too high. Good healthcare involves hospitals and healthcare systems and physicians. Increased consolidation can account for higher costs. The Open Markets Institute, an antitrust think tank, has identified hospital consolidation as a major reason for rising healthcare costs. Not just horizontal mergers are a problem, but vertical deals, which have typically received less attention. Hospitals are buying physician practices, insurance companies combining with PBMs. These transactions could benefit people, but given high concentration, many people are concerned that companies could use higher market to extract higher profits, reduce patient choice, and increase prices.
Klobuchar also noted that "there has been little significant vertical merger enforcement, because the courts have embraced outdated assumptions about their efficiency. There are calls for agencies to issue new merger guidelines." She has two proposals that would help with these reforms.
The witnesses testifying were: Professor Craig Garthwaite of the Kellogg School of Management, Northwestern University
Professor Thomas Greaney, College of the Law, UC Hastings
Mr. Cory Capps, Partner, Bates White Economic Consulting
Dr. Fiona M. Scott Morton, Ph.D., Theodore Nierenberg Professor of Economics, Yale School of Management
Their testimonies were enlightening and sometimes technical. Professor Greaney said that "I’ve spent many years in antitrust and healthcare. Our healthcare system depends on competitively structured markets and concentration has proven to be a leading or the leading reason for high costs. Antitrust regulators have adopted a laissez faire attitude to vertical mergers. Vertical mergers do not necessarily impair competition, but they aren’t always benign, and efficiencies may not be passed on to consumers. State and federal authorities should take action to stop anticompetitive deals." He pointed out that the Department of Justice, the Federal Trade Commission, and State Attorneys General have had considerable success in stopping anticompetitive horizontal mergers, and the same efforts should be applied to vertical mergers.
During the question and answer session, Senator Richard Blumenthal (D-CT) asked the witnesses their opinion of the CVS-Aetna merger. A couple of the witnesses endorsed the deal, but Professor Greaney said that at last week's hearing two of the witnesses presented powerful arguments for why the merger would harm competition and consumers, and he found them very persuasive.
While this subcommittee hearing was a promising start, it was only a start. Antitrust authorities and legislators should commit to careful scrutiny of vertical mergers to ensure that they benefit consumers, and they should not hold back from challenging them if the mergers are harmful.