FTC Emerges as Another Obstacle to Health Reform Law

by Dan Diamond, California Healthline Contributing Editor

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Many assessments of the Affordable Care Act's long-term viability have focused on Congress' ability to weaken or repeal the law, especially if Democrats lose both chambers in 2012. Others are looking ahead to the Supreme Court's potential impact on the individual mandate's constitutionality.

But another Washington, D.C. player -- the Federal Trade Commission -- is already creating problems for the Obama administration.

True to its name, the Affordable Care Act tries out a number of new ideas to make health care less expensive. As one tactic, the law provides incentives for the creation of accountable care organizations to care for dedicated populations of Medicare beneficiaries.

However, the White House and FTC don't see eye to eye on ACOs' antitrust implications. The White House -- and by extension, the Department of Justice -- has viewed ACOs through the lens of consumer benefit. Meanwhile, the FTC spots a risk that ACOs could help already strong health care providers further fix prices.

The divide has fueled a highly unusual public split -- with one official complaining to the Wall Street Journal that DOJ and FTC resorted to coin flips to solve some jurisdiction issues -- and sparked grumbling that the White House has taken an inconsistent approach to antritrust.

It's also led to hesitation among providers, with some hospitals suggesting they will balk at ACO participation until the antitrust rules are clarified.

History of Integration

To understand the FTC's current approach to health care, it's helpful to revisit the industry's evolution and regulatory efforts along the way.

Health care merger and acquisition activity may hit record levels in 2011, but the integration wave first crested in the 1990s. Like a Seussian "Butter Battle," payers and providers have been locked in a decades-long cycle to grow ever larger and marshal negotiating leverage.

On the payer side, a series of mega-mergers has built UnitedHealthcare into the nation's largest insurer, while WellPoint now insures about one in nine Americans. Meanwhile, hospitals responded to the managed care boom, and its pressure on their prices, by bulking up too. A recent study commissioned by America's Health Insurance Plans found that 80% of hospital markets were "highly concentrated" as of 2009.

Given their scope, health insurers' deal-making has tended to attract considerable scrutiny. Between its public prosecution and private investigation, the DOJ has suggested that "health insurer conduct has been among the highest enforcement priorities." Several major acquisitions in recent decades, like United's potential merger with Sierra Health Services, were ultimately scuttled because of antitrust scrutiny.

Yet regulators long proved unable -- or unwilling -- to stop many of the hospital mergers.

After losing six straight hospital merger challenges between 1993 and 1998 -- often on grounds that the market was defined too broadly -- neither the FTC nor DOJ brought another court case against a prospective hospital merger until 2008. California also lost a prominent 2001 effort to block Sutter Health's acquisition of Summit Medical Center.

However, regulators' fortunes changed after the FTC won two challenges in 2008 against Illinois' Evanston Northwestern Hospital and Virginia's Inova Health System after adopting a new strategy: use retrospective data to show how hospital mergers ultimately led to higher prices.

A resurgent FTC is now taking on a range of mergers from coast to coast. The agency is reviewing at least 12 cases involving collaboration between competing physician groups or hospitals.

New Approach May Clash With Reform Imperatives

However, federal prosecution is ramping up even as federal law encourages more providers to team up.

According to law firm Epstein Becker Green, 50% to 60% of hospitals and physicians are considering new mergers, consolidations or joint ventures, partly because of incentives in the ACA or other recent federal reforms. For example, some wealthy hospitals are able to subsidize electronic health records purchases for affiliated physician groups under the 2009 stimulus law.

These partnerships can be contagious. A recent report from the Center for Studying Health System Change notes that physicians in markets with high hospital concentration face more pressure "to align closely with one hospital system or another."

Many organizations say that their M&A activity is intended to align quality goals or create cost efficiencies that will let them succeed under lower reimbursement -- a message straight out of the ACA's mission. But do these partnerships actually boost care and cut spending?

The FTC increasingly doesn't think so. Such deals "have the potential to generate cost savings and quality benefits," one senior official told the New York Times' Robert Pear, but can end up harming consumers by further concentrating hospital markets.

For example, the agency is battling Ohio-based ProMedica's potential acquisition of nearby St. Luke's on grounds that it enhances the system's already dominant position in the Toledo market. According to ProMedica, the merger would coordinate care and lead to better clinical protocols. The FTC says that the deal is essentially intended to win higher reimbursement rates from private payers.

Some independent economists concur with the FTC's approach. Austin Frakt of The Incidental Economist blog has warned that hospital consolidation has increased "health care costs by tens of billions per year and, in general, not delivering higher quality."

Moving Forward

The sector's consolidation -- and the ACA's impact -- is sure to remain a major issue in coming months. A total of $73.7 billion was spent on 243 mergers and acquisitions in the health care industry in the second quarter of 2011, putting M&A "on track to break all previous records" in the market, according to a recent report from Irving Levin Associates.

On Friday, the House Ways & Means Subcommittee on Health will look at how consolidation is affecting health industry prices, with particular attention to health reform's role. Given that Chair Wally Herger (R-Calif.) has been a prominent advocate of overturning the ACA, it's likely to be a critical review.

Meanwhile, ACOs are slated to come online in January, and while FTC and DOJ have issued proposed antitrust guidance, they haven't hammered out a shared policy or who will ultimately prosecute violators.

Here's what else is making news around the nation.

Rolling Out Reform

  • On Aug. 23, HHS Regional Director Marguerite Salazar told lawmakers in Montana that the agency is designing a new partnership model that would give states another chance to run their own health insurance exchanges if they are facing difficulties establishing one or have decided not to set one up. Salazar said the partnership model could be implemented without the need for federal authorization. Officials will discuss details of the plan at a meeting next month with state agency heads in Washington, D.C. (Goudas, AP/San Francisco Chronicle, 8/23).
  • The Congressional Budget Office in its latest budget and economic outlook projections reported that implementation of the Community Living Assistance Services and Supports Act -- a long-term care insurance program created by the federal health reform law -- likely will be delayed for one year. Although the program originally was slated to start collecting premiums in 2012, CBO said that "based on the pace of implementation actions thus far," it does not expect the program to begin until 2013. As recently as March, CBO was estimating a 2012 start (Baker, "Healthwatch," The Hill, 8/24).

Studying the Effects of Reform

  • While the medical-loss ratio rule under the overhaul is beginning to reduce consumer spending, it also could result in fewer plans from which to choose, according to a new Government Accountability Office report. For the report, GAO interviewed insurers and regulators about the early effects of the provision and found that some plans are decreasing premiums or leaving their rates unchanged to comply with the MLR rule. Three insurers told GAO that they will lower premiums next year or increase them by a smaller amount than they would have without the rule. GAO also found the changes in premiums are in conjunction with cuts to brokers' premiums (Baker, "Healthwatch," The Hill, 8/29).

Inside the Industry

  • The Obama administration and states last week began requiring health insurers to justify proposed premium rate increases of more than 10%. Under the new directive, which was mandated by the federal health reform law, insurers have to submit a seven-page form to federal regulators justifying the increase. However, the directive does not give regulators power to block insurers from raising premiums. Instead, federal officials said they hope that disclosing the increases on HHS' website will serve as a deterrent against large premium increases (Adamy, Wall Street Journal, 8/30).
  • On Aug. 23, America's Health Insurance Plans and the National Federation of Independent Business announced a partnership to lobby members of Congress to repeal a provision in the federal health reform law that will raise taxes on insurance policies by $8 billion in 2014. The groups say the tax contradicts the reform law's goal to make health care more affordable (Baker, "Healthwatch," The Hill, 8/23).
  • The American Hospital Association, the Healthcare Financial Management Association and VHA last week sent a letter urging the Internal Revenue Service to make new reporting rules optional for fiscal year 2011. Earlier this year, IRS released proposed criteria for not-for-profit hospitals' community needs assessments under the federal health reform law, which requires tax-exempt hospitals to conduct an assessment every three years beginning in 2012 (Selvam, Modern Healthcare, 8/25).

In Public Opinion

  • Just 58% of U.S. residents who are expected to gain health insurance coverage through the reform law understand that they will have access to financial aid to obtain insurance, down from 72% who knew about the benefit at this time last year, according to the Kaiser Family Foundation's latest monthly tracking poll (Baker, "Healthwatch," The Hill, 8/29). The new poll also found that uninsured individuals now generally know less about the benefits of the health reform law than a similar poll found in 2010 (Reeve, National Journal, 8/29). Drew Altman, president and CEO of the foundation, explained in an accompanying column that most people likely will realize the benefits once the reform law becomes tangible for them, probably two years after the law's coverage expansion takes full effect in 2014 (Haberkorn, Politico, 8/29).

In the States

  • States are more successful than the federal government at enrolling U.S. residents in Pre-Existing Condition Insurance Plans under the federal health reform law, a recent Government Accountability Office report indicates. According to the report, the 27 states that operate their own pools had enrolled 15,781 individuals by the end of April, compared with 5,673 enrollees in the federally operated pool for the 23 other states and the District of Columbia. HHS said it has improved its enrollment efforts since the program launched in June 2010, as well as expanded eligibility, increased outreach efforts, lower premiums and incentives for agents and brokers who enroll people should help with enrollment rates (Pecquet, "Healthwatch," The Hill, 8/26).

Challenges to Reform

  • The continued legal and state battles against the federal health reform law could be detrimental to the law's overall success. More than half of states have filed or joined lawsuits challenging the law's constitutionality, and at least 13 states have passed laws trying to exempt their residents from many of its major provisions. A number of states also have returned or rejected federal funding for some of the provisions, while other states have amended their constitutions to outlaw the individual mandate. Some opponents of the law believe that the states' actions could significantly affect the overhaul's implementation (Cunningham, Washington Times, 8/25).

On the Campaign Trail

  • While all three GOP presidential candidates who are current or former governors have promised to repeal the federal health reform law and are particularly critical of the individual mandate, their actions as governors reflect different opinions on health policy. For instance, former Massachusetts Gov. Mitt Romney continues to try to distance himself from the 2006 health reform law he enacted while governor of Massachusetts that established an individual mandate. In 2008, under former Gov. Jon Huntsman, Utah enacted a plan that relied on an exchange and an individual mandate, which Huntsman has defended as necessary (Sack, New York Times, 9/3). Texas Gov. Rick Perry has said one of his goals is to repeal the "misguided, unconstitutional and unsustainable government takeover of our health care," CQ Weekly reports. About 26% of Texas residents were uninsured between 2008 and 2009, a proportion greater than that of any other state (Kenen, CQ Weekly, 9/5).

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