Obama's Healthcare Trust Busting

Market consolidation leads to lower quality products, less innovation and increasing prices, so active enforcement must be a top priority in the next presidential administration.

By SHARE
FE_121019_bluecross.jpg
The exterior of a Blue Cross Blue Shield of Michigan office building is shown in Detroit, Thursday, June 22, 2006. About 350 health care workers will be off until Monday as crews flush out the water system at the downtown building after one employee was diagnosed with Legionnaires' disease, a spokeswoman said Thursday.

David Balto is an antitrust attorney in Washington, D.C. Mr. Balto has over 20 years of experience as an antitrust attorney in the private sector, the Antitrust Division of the Department of Justice, and the Federal Trade Commission, where he was the policy director of the Bureau of Competition and attorney adviser to Chairman Robert Pitofsky.

As I discussed last week, antitrust enforcement is one of the federal government's critical responsibilities. When that enforcement is docile or misdirected, consumers will suffer paying higher prices and having less choice. Few areas of enforcement are as important as action by the Federal Trade Commission and the Department of Justice's Antitrust Division to block anticompetitive mergers, which can lead to substantial competitive harm. Too much consolidation and loss of competition inevitably leads to lower quality products, less innovation, and increasing prices, all of which is bad news for consumers. Moreover, a merger is forever; once it is consummated, it is extremely difficult to break up an anticompetitive merger.

An illustrative example of the importance of smart, proactive merger enforcement is the Federal Trade Commission's challenge to the Staples-Office Depot merger in 1996. These were two of the three office supply superstores, but the challenge faced a mountain of criticism, because only 6 percent of office supplies were purchased at superstores at that time. But the FTC demonstrated the unique aspects of superstore distribution, and ultimately convinced a conservative, Reagan-appointed judge to enjoin the merger on the basis of the competitive harm it would cause. Now over 16 years later, the wisdom of this challenge is crystal clear. The two office giants fight tooth and nail for customers and it's clear that consumers would have been paying higher prices for the last decade and a half if the FTC hadn't stepped in.

[See a collection of political cartoons on the economy.]

As with many of the activities of the federal agencies, a new president can mean a world of change in both attitude and action. With the arrival of the George W. Bush administration in 2001, merger enforcement, like many of the Antitrust Division's activities, became less vigorous. After a 2004 defeat in the challenge to the Oracle/Peoplesoft merger, the Antitrust Division became extraordinarily timid and did not walk into court again until the waning moments of the Bush administration.

A prime example of the enforcement attitude of the administration was its failure to oppose anticompetitive mergers in the health insurance industry. The Department of Justice permitted several hundred merger deals in insurance markets during President George W. Bush's two terms, challenging none and requiring modest restructuring in only two cases. This was problematic because in many states only a few companies compete in the insurance market, therefore this amount of consolidation undoubtedly led to higher premiums and costs for consumers, without an increase in quality. Indeed, the fact that insurance premiums continued to rapidly increase through this period suggests that the companies simply pocketed any efficiencies rather than lowering premiums or creating other consumer benefits.

[See a collection of political cartoons on healthcare.]

The failure to litigate was telling. Typically the antitrust enforcers file at least a handful of cases each year. The five years during the Bush administration the DOJ went through without litigating was one of the longest litigation droughts in history. The problem with a lack of litigation, of course, is that it weakens the ability to litigate in the future and secure meaningful relief in merger enforcement matters. Moreover, failing to litigate makes each potential case seem ever more daunting. Indeed, the DOJ prevailed in only one merger law suit over President Bush's entire term. The ability to litigate successfully is crucial to successful merger enforcement, although as is clear, this was simply not a high priority at the time. 

As a candidate for president, Barack Obama highlighted the Bush administration's lack of effective merger enforcement, particularly in the health insurance industry, in a speech to the American Antitrust Institute. "There have been over 400 healthcare mergers in the last 10 years," he noted. "The American Medical Association reports that 95 percent of insurance markets in the United States are now highly concentrated and the number of insurers has fallen by just under 20 percent since 2000. These changes were supposed to make the industry more efficient, but instead premiums have skyrocketed, increasing over 87 percent over the past six years. As president, I will direct my administration to reinvigorate antitrust enforcement."

The president and the DOJ and FTC delivered on that promise. The administration has restored balance to enforcement actions in the healthcare sector, efficiently allocating both the FTC's and DOJ's scarce resources to once again make the promotion of competition and the protection of consumers top priorities.

[Read the U.S. News Debate: Does the Supreme Court's Healthcare Ruling Help Obama?]

This has been particularly true in the health insurance industry, where President Obama's enforcement agencies have taken several high-profile actions over the past few years. In March 2010, DOJ forced Blue Cross Blue Shield of Michigan to abandon its plans to purchase a small competitor in the state after the Antitrust Division notified the companies that it would file a lawsuit to block the merger. In a similar case in Montana, the Division prevented New West, a group of Montana hospitals that also own the state's second largest insurance plan, from transitioning their hospitals from their own insurance to Blue Cross Blue Shield of Montana, the state's largest insurer, without divesting the majority of New West's commercial health insurance business to a third party. The original agreement would have effectively removed New West's health plan as a competitor in the small Montana health insurance market, increasing consolidation and raising costs for consumers. Instead, the Obama Justice Department stepped in and took action to protect Montanans by making the entrance of a new health plan into the state a requirement of the deal.

The FTC has also been active in opposing anticompetitive healthcare mergers, particularly against potentially problematic hospital mergers. The FTC and states had extraordinary difficulties challenging hospital mergers; in the 1990s it and state attorneys generals lost seven straight cases. Antitrust cops wondered if that trend ever could be reversed. But it has. At the beginning of this year, for example, the FTC went to court and secured a hold separate order preventing ProMedica Health Systems, based in Toledo, Ohio, from fully consummating its acquisition of a rival hospital in the city, on the basis that it would substantially harm competition and raise the already high prices for acute inpatient care. (The commission has now issued a decision declaring the acquisition illegal which is now on appeal to the Sixth Circuit). The FTC also secured an injunction effectively forcing Illinois healthcare network OSF to drop its bid to purchase competitor Rockford Health System.

[Check out our editorial cartoons on President Obama.]

These steps taken by the Justice Department and the FTC demonstrate the Obama administration's commitment to stopping dangerous consolidation in healthcare markets, and send a strong signal that further consolidation in concentrated markets will not be allowed without scrutiny. These actions also have a significant impact on healthcare reform and controlling healthcare costs. While the FTC's actions preventing hospital mergers are crucial to controlling healthcare costs, the increased competition that will result from the full implementation of the Affordable Care Act will also do a great deal to slow the growth of premiums and keep healthcare markets active, competitive, and strong. The agencies have also had merger enforcement victories in multiple industries outside of healthcare. One of the most prominent was the Justice Department's successful opposition to H&R Block's acquisition of TaxAct, which would have stifled competition and innovation in the burgeoning do-it-yourself tax preparation software market. The case marked the first time the Antitrust Division had successfully challenged a merger in court since 2004. The division has also successfully opposed deals that would have increased consolidation in the already concentrated banking, energy, and media sectors by threatening litigation. Unlike the Bush agencies, for whom litigation was a low priority and such statements weren't credible, the Obama administration is serious when it threatens to take anticompetitive mergers to court, marking one of the most crucial differences between the two administrations.

[Read the U.S. News debate: Does the J.P. Morgan Loss Prove the Need for Tougher Bank Regulations?]

In other cases the DOJ has challenged vertical mergers in high tech and media markets, requiring restructuring of the transactions to preserve the opportunities of new innovative forms of competition to arise. For example, in Comcast-NBC, the DOJ imposed conditions for new forms of program delivery to fully compete, preserving the potential for consumers to "cut the cable" and secure programming outside of cable.  This was no minor achievement, since the Bush administration DOJ had essentially abandoned vertical merger enforcement. 

After nearly a decade of modest enforcement, the Obama administration has moved aggressively in the right direction on merger enforcement and consumer protection. Reinvigorating antitrust enforcement is certainly an ongoing project, but the great strides that have already been made, particularly in increasing the desire and ability of the agencies to litigate, have made a real and impactful difference for consumers in the health insurance market and others. Particularly as we continue to recover from the Great Recession, active merger enforcement must remain a top priority of the Justice Department and the FTC in the next presidential term and beyond.

  • Read Chad Stone: Closing Tax Loopholes to Reduce the Deficit Is Tough But Necessary
  • Read John Allison: Lift the Regulatory Burden on Small Businesses
  • Check out U.S. News Weekly: an insider's guide to politics and policy.