The current U.S. healthcare climate seems to produce a significant announcement each week of a hospital merger or acquisition. In fact, more than 100 provider mergers are anticipated for 2016. Amidst all of this M&A activity, the Federal Trade Commission (FTC) has been issuing and winning antitrust challenges for many of the larger provider M&As. Until recently, the FTC has been undefeated in all of the cases that it has challenged.
However, in June the FTC lost a preliminary injunction in Illinois in which it opposed the planned merger of NorthShore and Advocate health systems. This raises the possibility that the courts will allow the merger of two major Chicagoland hospital systems worth $7 billion in combined revenue. Are the tides turning? Are we seeing the emergence of a mega-provider healthcare system?
As this case was developing earlier this year (see my previous blog), few would have predicted the legal battle that’s emerging. At the center of the Chicago dispute and another similar case in Pennsylvania is the legal definition of local healthcare boundaries. Here’s how it breaks down:
- The FTC argued that the NorthShore/Advocate merger in Chicago would be anti-competitive because the newly formed organization would control 60% of acute inpatient care.
- The hospital systems argued that the FTC’s boundary definition was too small. Using a bigger “local healthcare market” (LHM) definition with additional patients and provider systems, the hospitals countered that the merger would only have a 28% market share.
The basic legal questions at stake are: “How do you define a local healthcare market? What is the local ecosystem in which patients consume the majority of their healthcare?”
And though the FTC might eventually prevail in this case, it’s clear that providers are enacting billion-dollar strategies so that they can completely control local healthcare markets through mergers and acquisitions, partnerships with other provider systems, and by employing local physicians. Their long-term strategy is to control their cost base by managing treatment more holistically and consistently—that is, by having doctors behave in a planned and managed fashion. In addition to managing care, larger provider systems will have more power when dealing with payers, suppliers and patients, allowing them to negotiate lower costs and higher reimbursement rates.
This trend of provider mergers clearly indicates that manufactures need to develop a B-to-B mindset to customize and communicate the value that they deliver. Just as market access became an essential component of the pharmaceutical industry’s commercial strategy in the 1990s, the formation of mega-provider systems in markets like Chicago will require manufacturers to transform their commercial models. This includes identifying the influence of organized customers within an LHM, such as how many provider systems there are, which one has more power, how they manage their pharmacy, and how payers are executing strategies at a local level.