United States: FTC Policy Paper Supports Agency's Long-Held Position In Opposition To COPAs

The Federal Trade Commission's ("FTC") competition mission extends beyond enforcing the antitrust laws. It has the authority to study competition law and policy questions, issue reports, and advise state, local, and foreign governments on the social benefits of private market competition. In this advisory capacity, the FTC has often weighed in when state governments consider proposals to limit competition among health care providers. In particular, some states have Certificates of Public Advantage (also known as "COPAs") laws, a state-specific regulatory regime designed to replace competition with regulatory oversight. The state laws granting hospital monopolies shield the hospitals from federal antitrust litigation because of the judicially created state action doctrine. This doctrine holds that anticompetitive activity is outside of the reach of federal antitrust law if a state clearly articulates a policy to replace competition with regulation and actively supervises the resulting monopoly to ensure it is fulfilling the state regulatory purpose.

Earlier this week, the FTC issued a policy paper highlighting what it views as the pitfalls of using COPAs in an effort to convince state regulators not to use them. Typically, the state COPA regulations require merging parties to demonstrate that the likely benefits of their proposed transaction outweigh the likely disadvantages from the loss of competition. According to the FTC's paper, however, COPAs usually result in a single hospital monopoly and are often detrimental to patient costs, patient care, and health care worker wages. The FTC advocates against the use of COPAs to shield what it views as otherwise illegal hospital mergers and urges state lawmakers to avoid enacting them and to repeal existing ones. The paper is the culmination of a policy project the FTC announced in 2017 to assess the impact of COPAs on prices, quality, access, and innovation for health care services. The project included a review of past COPAs, a public workshop highlighting practical experiences with COPAs, and an ongoing study of recently approved COPAs.

The FTC paper summarizes research showing that several hospital mergers subject to COPAs resulted in higher prices, reduced quality of care, and slow wage growth for certain health care workers, despite regulatory commitments designed to reduce anticompetitive effects. According to the paper, hospitals seek COPAs when their proposed merger would otherwise violate antitrust laws. The COPA laws are enacted to replace competition among health care providers with regulatory oversight by state agencies. States often impose price controls, rate regulations, and other terms and conditions on the COPA recipients in an effort to mitigate harms from the loss of competition, but according to the FTC, such mitigation does not work.

Hospital arguments in favor of mergers subject to COPAs are flawed, according to the FTC paper. Hospitals commonly claim that proposed mergers will result in cost savings and efficiencies that will allow for clinical quality improvements. However, the paper argues that hospital mergers do not result in significant efficiencies. Improving financial conditions to better manage low reimbursement rates resulting from health care reform is also cited by hospitals seeking COPAs. But the paper argues that the hospitals seeking COPAs have adequate financial resources to operate independently. Hospitals also claim the proposed mergers will create jobs and ensure local access to health care. The paper argues, however, that those justifications are inconsistent with the hospitals' cost-saving projections that are premised on facility consolidation, elimination of services, and job reductions.

The FTC paper indicates that 10 COPA certificates have been issued; seven of those cases involved mergers between the only two general acute care hospitals serving a local region. COPA statutes have been enacted and utilized in nine states — Minnesota, North Carolina, Montana, South Caroline, Maine, West Virginia, Tennessee, Virginia, and Texas. Indiana passed a COPA law in 2021 that has yet to be utilized; two hospitals in upstate New York recently indicated that they would seek a COPA for their proposed merger.

The FTC paper examines several case studies regarding grants of COPA certificates to support its position in opposition to the use of COPAs.

• Mission Health System (North Carolina – 1995). Memorial Mission Hospital and St. Joseph's Hospital, the only two general acute care hospitals in Asheville, North Carolina, entered into a collaboration in 1995 under the state's COPA law. In 1998, the hospitals then merged with approval from the state subject to certain conditions on margin, cost, physician employment caps, and quality and contracting commitments. The COPA was repealed in 2016. Empirical research shows that from 1996 to 2008, Mission Health increased prices by at least 20% more than peer hospitals. Another study found that the average price increased 25% through 2015 and another 38% after the COPA was repealed.
• Benefis Health System (Montana - 1996). Benefis Health System was formed in 1996 pursuant to a COPA that allowed the only two general acute care hospitals in Great Falls, Montana — Columbus Hospital and Montana Deaconess Medical Center — to merge. The COPA included conditions on revenue caps, quality commitments, and other cost-saving commitments. In 2007, the state legislature passed a bill that terminated the COPA. Empirical research shows that Benefis's prices closely tracked prices of peer hospitals in duopoly markets during the COPA period, but then increased at least 20% after the termination of the COPA.
• Palmetto Health System (South Carolina – 1997). Baptist Healthcare System and Richland Memorial Hospital, two general acute care hospitals in Columbia, South Carolina, merged pursuant to a COPA to form Palmetto. During the initial five-year period of the COPA, Palmetto was subject to rate and revenue controls and commitments to achieve cost savings and to provide a portion of its revenues to fund public health initiatives and community outreach programs. Empirical research shows that Palmetto's prices did not increase more than comparable hospitals when subject to the COPA conditions. (The paper notes that this may have been a result of the conditions or because hospital competition remained in the market.)
• MaineHealth (Maine – 2009). In 2009, pursuant to a COPA, MaineHealth Acquired Southern Maine Medical Center — a hospital located 20 miles from MaineHealth's flagship hospital in Portland, Maine. The combination resulted in a dominant share of patient discharges in Southern Maine's service area. The COPA required MaineHealth to limit Southern Maine's operating profit margin, reduce expenses, and expand access and maintain quality, but did not impose any conditions on the other MaineHealth hospitals. The COPA expired in 2015. Empirical research shows that during the COPA period, Southern Maine's price increases compared to peers were not statistically significant. However, after the COPA expired, Southern Maine's prices increased by almost 50%, and quality declined. And prices at MaineHealth's flagship hospital, which was not subject to COPA terms, increased 38% during the COPA period and 62% after.
• Ballad Health System (Tennessee/Virginia – 2018). Mountain States Health Alliance and Wellmont Health System, competitors across state lines, merged to form Ballad under COPAs from both Tennessee and Virginia. Both COPAs imposed price caps, quality of care commitments, and a prohibition on certain contractual provisions. Modifications have been made to some of the terms, and there are concerns about a particular modification that allows Ballad the ability to oppose certificate of need applications by other providers seeking to enter the market. The FTC announced in 2019 that it would study the effects of the COPA on price, quality, access, and innovation.
• Cabell Huntington Hospital (West Virginia – 2018). Cabell Huntington Hospital and St. Mary's Medical Center, both located in Huntington, West Virginia, merged in 2018 after receiving COPA approval. The conditions included annual reporting, regulatory rate review, the prohibition of certain contracting practices, quality of care and population health commitments, and the maintenance of St. Mary's as a free-standing general acute care hospital for a minimum of seven years. The COPA is set to expire in 2024. The FTC announced that it would also study the effects of this COPA on price, quality, access, and innovation.
• Hendrick Health System/Shannon Health System (Texas – 2020).Hendrick Health System and Shannon Health System both received COPA approvals for their respective mergers. The COPA conditions include regulatory rate review and reporting requirements. The FTC has stated that it will continue to monitor the effects of the COPAs.

The paper concludes that COPAs rarely work as promised. In particular, because COPAs exacerbate the widespread problem of hospital consolidation, they reduce hospital employee wage growth, compliance with the COPA conditions is difficult to monitor, they are susceptible to regulatory evasion, and they are temporary.

The vote to issue the staff report was 5 – 0, highlighting the continued, multi-decade consensus among federal antitrust enforcers that health care provider consolidation is a significant priority. A lot of the news out of the FTC in the past year has focused on divisions among the commissioners on policy priorities, but health care remains an area of agreement — especially when it comes to hospital mergers.