Healthcare companies eyeing vertical integration have new guidelines to consider

Ingrid Stiver Senior Manager, Health Research Institute, PwC US July 30, 2020

The Department of Justice (DOJ) and the Federal Trade Commission (FTC) published vertical merger guidelines in late June, replacing the DOJ’s 1984 merger guidelines. The new guidelines describe how the agencies analyze vertical mergers, those that combine assets from different stages of the same supply chain.

Such mergers could include health insurers acquiring pharmacy benefit managers or hospitals acquiring physician practices and ambulatory care centers. 

The new guidelines clarify how the agencies evaluate anti-competitive behavior, including conditions under which a vertical merger would not require an extensive investigation. For example, the DOJ may consider whether the merger disadvantages rival manufacturers or creates anti-competitive incentives.

They also underscore the importance of efficiencies created by mergers. For example, the guidelines acknowledge that by consolidating multiple parts of the supply chain, vertical mergers can also eliminate multiple markups, known as double marginalization, resulting in a single, overall lower markup or margin. This, in turn, could allow savings to be passed along to consumers. 

The new guidelines aim to improve clarity and transparency around how the agencies evaluate vertical mergers’ effects on competition and potential for antitrust violations. Citing a substantial evolution in policy and new economic understandings gleaned from three decades of enforcement actions, the agencies acknowledged that the enforcement approach to possible antitrust violations resulting from mergers outlined in the 1984 guidelines is outdated. The new guidelines are the agencies’ first dedicated solely to vertical mergers. 

The American Antitrust Institute said the guidelines fall short of what is necessary to protect competition. Two out of five FTC commissioners dissented from the new guidelines, expressing skepticism about whether vertically integrated companies will pass savings from the elimination of multiple markups along to consumers. They also said the guidelines were incomplete, failing to sufficiently address the ways vertical transactions could suppress new entry into a market or otherwise present barriers to entry, such as by reducing the availability of necessary financing to compete effectively.

HRI impact analysis

In the midst of the COVID-19 pandemic, deals by payers, providers, and pharmaceutical and life sciences companies declined in the first half of 2020. Yet the potential for consolidation remains high in certain areas, such as the behavioral care and medical device subsectors, in the second half of 2020. 

Providers and payers may look to vertical integration as a means of weathering the financial fallout from the pandemic and will now have new guidelines to consider when doing so. Vertical integration could be a lifeline for providers facing revenue shortfalls and a liquidity crisis as non-urgent care is deferred during the pandemic.

Payers flush with cash because of deferral of care and low utilization could turn to vertical integration with providers as a means of investing that cash in a manner that helps struggling providers in the short term while positioning payers to improve the quality of and reduce the cost of care in the long term.

Vertical integration in healthcare has gained traction in recent years as healthcare companies look to reduce costs along the supply chain by owning more of it. Some providers have staked their business model on being an integrator of care across channels. 

In its comments on the proposed vertical merger guidelines, professors of economics, public policy and law from US universities expressed concern that the healthcare industry is particularly susceptible to anticompetitive effects of vertical mergers, including impacts on quality, customer choice, entry and innovation.

Price may also be a concern. HRI previously found that provider megamergers (typically involving horizontal integration) as well as physician consolidation and employment (typically involving vertical integration) lead to higher prices, at least in the short term.

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Trine K. Tsouderos

HRI Regulatory Center Leader, PwC US

Tel: +1 (312) 241 3824

Ingrid Stiver

Senior Manager, Health Research Institute, PwC US

Erin McCallister

Senior Manager, Health Research Institute, PwC US

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