Rafi Mohammed

Dear FTC: Are You Sure This Remedy is Going to Lower Prices?

Posted on September 13th, 2007 (0 Comments)

I have the greatest respect for the Federal Trade Commission (FTC). In fact I had an offer to work for them many years ago. That said, a recent decision by the FTC has me scratching my head...

One key area that the FTC focuses on is enforcing antitrust laws by challenging company mergers that result in higher prices, lower quality, or fewer good and services. The concern is if two companies that were once ferocious rivals merge together, prices will increase because the merged firm has market power (i.e., fewer choices for consumers = higher prices). Such is the case when the FTC investigated Evanston Northwestern Healthcare’s (ENH) acquisition of Highland Park Hospital (Highland).

In 2000, ENH (which already owned 2 hospitals – Evanston and Glenbrook) acquired a third hospital, Highland. Four years later, the FTC investigated whether the merger would substantially lessen competition. The FTC’s concern was that the combination of 3 local hospitals would create market power over HMO’s that were negotiating contracts with hospitals…resulting in higher prices. In 2005, an administrative law judge ruled in favor of the FTC and ordered ENH to sell Highland in 180 days. ENH appealed the decision to the Commissioners of the FTC.

After reviewing the appeal, the Commissioners agreed the merger was anticompetitive. The record, the Commission found “shows that senior officials at Evanston and Highland anticipated that the merger would give them greater leverage to raise prices, that the merged firm did in fact raise its prices immediately and substantially after completion of the transaction and that the same senior officials attributed the price increases in part to increased bargaining leverage produced by the merger.”

Here’s where it gets interesting. While the Commission agreed the merger violated antitrust laws, they didn’t rule that the merger had to be undone. Instead, the Commission ruled the hospitals could stay merged under one corporate entity. However, ENH was to establish separate negotiating teams – one for the Evanston & Glenbrook hospitals and another for Highland. This allowed managed care organizations (MCOs) to negotiate separately with these two hospital entities (as opposed to one entity). The Commissioners felt this would “reinject” competition between the hospitals for the business of MCOs. One reason for this decision, as opposed to divestiture, was the length of time that had elapsed between the merger and the Commission’s decision. While true, the minute these companies merged, they knew divestiture for antitrust reasons was a possibility.

Hmmmm. Suppose you and your competitor are slogging it out for customers, with price being a key weapon (e.g., the Coke vs. Pepsi battle). But now, you and your “competitor” are owned by the same corporation (i.e., have the same bosses and shareholders). Additionally, there’s a stipulation that when you and your new sister division competitor pursue business, you each have to negotiate independently. Would your prices be as rock bottom as they were when you were rivals fighting for the deal?

So…do you think the FTC’s remedy is really going to lower prices?

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