The Fund supports networks of state health policy decision makers to help identify, inspire, and inform policy leaders.
The Milbank Memorial Fund supports two state leadership programs for legislative and executive branch state government officials committed to improving population health.
The Fund identifies and shares policy ideas and analysis to advance state health leadership, strong primary care, healthy aging, and sustainable health care costs.
Keep up with news and updates from the Milbank Memorial Fund. And read the latest blogs from our thought leaders, including Fund President Christopher F. Koller.
The Fund publishes The Milbank Quarterly, as well as reports, issues briefs, and case studies on topics important to health policy leaders.
The Milbank Memorial Fund is is a foundation that works to improve population health and health equity.
July 20, 2021
Richard M. Scheffler
May 24, 2023
Nov 28, 2022
Aug 23, 2022
Back to The Milbank Quarterly Opinion
On May 19, 2021, Senator Amy Klobuchar (D-MN), chair of the US Senate Subcommittee on Competition Policy, Antitrust, and Consumer Rights, held a hearing on hospital consolidation and its impact on hospital prices. Expert testimony indicated that prices have increased. Other members of Congress emphasized the misaligned incentives between private equity’s goal of profits and the societal focus on patient care. Against the backdrop of rapid hospital consolidation over the last decade, virtually all studies demonstrate increased prices with no measurable improvement in quality, according to Professor Martin Gaynor. Most hospital markets meet the FTC/DOJ guidelines definition of being highly concentrated and, as a result, are not likely to exhibit competitive levels of prices, quality, or innovation.
Yet, the COVID-19 pandemic is shaping the financial outlooks of large and small hospital systems in a manner that is expected to further fuel this consolidation trend. As reported in May 2020, 20 large hospital systems had received more than $5 billion in federal grants while sitting on more than $100 billion in cash. At the request of Xavier Becerra, the current Secretary of Health and Human Services and California Attorney General at the time, the Petris Center at the University of California, Berkeley conducted a study of provider relief payments to hospitals in California. Findings revealed that, in addition to the vast majority of the funds going to hospital systems with large reserves, the clear exercise of market power by hospitals in raising prices also resulted in higher relief payments. In short, the more consolidated the market, the greater the relief payments received by the hospital (see pg. 13).
Not only did the largest hospitals with the highest reserves receive most of the COVID-19 relief payments, but the pandemic also created financial crises for small providers and placed enormous stress on small and independent medical practices, which is expected to fuel a wave of retirements, sell-offs, and bankruptcies. Between July 2020 and January 2021, there was a 3.1% increase in the rate at which hospitals employ physicians, meaning that hospitals began hoovering up physicians even faster since the start of the COVID-19 pandemic. Whether by sale to a large hospital system or closure due to financial distress, it is expected that, going forward, patients and employers will have fewer options for health care outside of large hospital systems.
At that May 19 Senate hearing, Senator Richard Blumenthal (D-CT) read from our white paper on private equity, Soaring Private Equity Investment in the Healthcare Sector: Consolidation Accelerated, Competition Undermined, and Patients at Risk, which had been released the previous day. He noted that private equity spending in health care had tripled to $750 million between 2010 and 2020, and expressed great concern over the explosion of private equity investment in health care and its likely impact on consolidation. Furthermore, he pointed out that the structure of the private equity “deal” had shifted the debt of the loans financing the purchases to the acquired health care providers themselves.
“This structure has far-reaching, dramatic, profound consequences for our health care system,” he concluded. “Large hospital chains under private equity management have been forced to sell off and close hospitals to meet their debt burden.”
Later on in the hearing, Senator Josh Hawley (R-MO) voiced his own concern about what private equity might mean for health care, making this a bipartisan issue.
“I’m concerned about the possibility that private equity and their intervention here is actually helping drive consolidation in a way that is unhealthy for this industry, and that is particularly harmful for rural communities like many that make up my state,” Senator Hawley remarked.
That concern is well-founded. Coming out of the COVID-19 pandemic, private equity funds are sitting on enormous stores of “dry powder,” money they have amassed from investors and are required to spend or return within the next several years. Widespread expectations are that much of that dry powder will be deployed in health care.
As detailed in our report, and as Professor Gaynor noted at the Senate hearing, when private equity operates in industries that are already concentrated and suffering from a lack of competition, it tends to operate as an “anti-maverick.” Whereas a maverick company infuses competition in such industries through bold moves designed to shake up the status quo, an anti-maverick is adept at capitalizing on concentration and exploiting the lack of competition to profit at the expense of consumers and patients. Agencies consider “maverick” behavior in merger analysis under the FTC/DOJ guidelines, so why don’t they also consider the “anti-maverick” behavior of private equity companies?
Targeted concern and scrutiny from Congress and regulators on this issue is imperative because private equity funds are skilled at evading existing regulations designed to check harmful conduct. The best tool regulators and enforcers have to prevent excessive concentration in markets is the Hart-Scott-Rodino (HSR) Act. HSR requires companies to report mergers and acquisitions to the Federal Trade Commission (FTC). Reported mergers and acquisitions cannot be consummated unless and until the FTC or the Antitrust Division at the Department of Justice (DOJ) examines the deal and determines that it will not harm competition. In recent years, the agencies have blocked several hospital acquisitions through the HSR process and have unsuccessfully sought to block others.
As detailed in our recent report, however, private equity funds target deal amounts that fall just below the threshold for HSR reporting and pre-approval. Through a “buy-and-build” approach, private equity funds buy a hospital or hospital chain and then use a series of small acquisitions of competitors and ancillary service providers, each falling below the HSR reporting thresholds, to build the original acquisition target into a powerful market player. As a result, most private equity acquisitions in health care are never reviewed by antitrust regulators and are not assessed by the FTC and DOJ for their impact on competition.
Moreover, these private equity acquisitions are often vertical in nature (a hospital “producer” buying a provider or ancillary services “supplier”) or involve cross-market mergers (for example, a hospital in one local market buying another hospital a few towns away). As Professor Leemore Dafny has pointed out, the antitrust agencies historically have not moved to block such deals, despite substantial evidence that suggests both types of transactions can lead to significant increases in prices without commensurate benefits.
This method for building market power has particularly damaging effects in health care because most health care markets are local. Private equity funds can thus acquire considerable market power in local markets without any transactions large enough to trigger HSR reporting or antitrust enforcement.
The local nature of health care markets also means that, when private equity funds gut local hospital systems or health care providers, the patients in the affected region have few good options. The failure of a local hospital or a group of specialists in a region can leave patients without care or force them to travel long distances from where they live and work to get care.
President Biden’s recently issued Executive Order on Promoting Competition in the American Economy underscores that hospital mergers, particularly in rural areas, can be harmful to patients and urges the FTC and DOJ to review their merger guidelines to guard against such harms. We applaud this initiative and implore the agencies to look not just narrowly at hospital mergers, but more broadly at the multiplicity of deal structures and combinations—including those promoted by private equity–that are fueling high prices and other competition issues in health care.
Private equity–driven hospital and health care provider consolidation not only impacts markets, but also impacts lives. While the immediate crisis of the COVID-19 pandemic is beginning to abate, the threat of pandemic-driven hospital and provider concentration funded by private equity looms. Enforcers and regulators must be on guard and must closely scrutinize these transactions. Immediate action is needed to update guidance and regulations to account for threats to competition and, thus, to patients, from the coming wave of private equity–driven consolidation in health care.
Acknowledgment: We would like to thank Jamie Godwin for his input and Crystal Haryanto for her research and editing. Both are staff at the Petris Center, University of California, Berkeley.
Richard M. Scheffler is a Distinguished Professor of Health Economics and Public Policy at the Graduate School of Public Health and the Goldman School of Public Policy at the University of California, Berkeley. Dr. Scheffler is the director of The Nicholas C. Petris Center on Health Care Markets and Consumer Welfare as well as the director of the Global Center for Health Economics and Policy Research. He has been a visiting professor at the London School of Economics, Charles University in Prague, the University of Pompeu Fabra in Barcelona, and at Carlos III University of Madrid. He has been a visiting scholar at the World Bank, the Rockefeller Foundation in Bellagio, and the Institute of Medicine at the National Academy of Sciences and a consultant for the World Bank, the WHO, and the OECD. Dr. Scheffler has been a Fulbright Scholar at Pontifica Universidad Catolica de Chile in Santiago, Chile, and at Charles University, Prague, Czech Republic. He also served as the president of the International Health Economists Association 4th Congress in 2004. In 2018, Dr. Scheffler was awarded the Berkeley Citation, among the highest honors the campus bestows on its community, presented on behalf of the Chancellor to individuals whose contributions to UC Berkeley go beyond the call of duty and whose achievements exceed the standards of excellence in their fields. In 2019, Dr. Scheffler was appointed by Governor Gavin Newson to the Healthy California for All Commission, charged with developing a plan to guide California toward a unified health care system.
Laura Alexander is the Vice President of Policy at the American Antitrust Institute (AAI), where she researches, writes, and advocates on antitrust issues. Laura also contributes regularly to AAI’s top-ranked antitrust podcast, Ruled by Reason. Prior to joining AAI, Laura spent a decade in private practice, litigating pathbreaking antitrust cases in healthcare and other industries. In addition to her work for AAI, Laura is a Global Research Fellow at the Georgetown University Law Center.
Get the Latest from the Milbank Memorial Fund
An endowed operating foundation that engages in nonpartisan analysis, collaboration, and communication, with an emphasis on state health policy.