The newsletter will be off next week, I’m going on vacation! It’ll be back on the 29th.
On July 9th, President Biden signed the Executive Order on Promoting Competition in the American Economy. The order directed the Federal Trade Commission (FTC) and other agencies to take action on concentrated corporate power. This order is likely to be particularly effective given Congress’s recent confirmation of Lina Khan, a renowned legal antitrust scholar, to the Chair position at the FTC.
(I should note that I previously worked at an advocacy organization focused on concentrated corporate power, I was thrilled to see Chair Khan confirmed, and as always, this newsletter is solely my opinion.)
The order focused on concentrated power across the American economy, including labor, agriculture, tech, and healthcare. Within healthcare, the order narrows in on hospitals, health insurance, prescription drugs, and hearing aids as particular problems.
I’m very excited about this order, and not just because healthcare consolidation is something I spent years writing about. I think it has huge implications in altering the balance of power in the system for the better—towards startups, particularly companies with fresh, innovative ideas that deliver quality care to patients at reasonable costs, companies that have been curbed in growth and adoption because of the largest entities in the healthcare system.
With regards to hospitals, the EO asks the FTC and Department of Justice (DOJ) (which has an antitrust division) to:
Review the merger guidelines for hospitals
Companies that are merging or acquiring one another are currently required to report their merger/acquisition activity to the FTC—but only if certain requirements are met. Because many hospitals are dominant in their local area but not nationally, a lot of hospital M&A activity falls beneath the required threshold and is not reported to the FTC.1
Despite hospitals’ locality, concentrated power can affect care for patients within uncompetitive hospital service areas. If you’re sick, you don’t really have the option to price-shop for care—particularly if there’s only one hospital in your area.
And if that hospital is a system like Sutter Health of California, the subject of a civil lawsuit filed by then-Attorney General of California (and current Secretary of Health and Human Services) Xavier Becerra in 2018, the hospital may severely price gouge. Prior to the suit, Sutter had driven the average cost of inpatient care in Northern California up 70% higher than the cost in southern California.
The implementation of this guidance could take a few different directions. The FTC and DOJ may decide to require all merging/acquiring hospitals, regardless of size, to report M&A activity to the agencies. They may not review all of the cases (the agencies’ staff is probably too limited for that) but just the act of reporting is likely to make large hospital systems think twice before pursuing a deal.
The FTC and DOJ could also update their guidance for what constitutes an acceptable merger or acquisition for hospitals. Right now, a merger has to cross certain thresholds of size and power within the hospitals’ geographic service area before the FTC considers taking action. The threshold is pretty high, and so it’s rare that the FTC/DOJ blocks a hospital transaction.
Support price transparency rules
The EO directed HHS to support existing hospital price transparency rules and to finish implementing the legislation passed in 2020 that bans surprise billing. The rules and the legislation already existed, so this was more a doubling-down on the current trends in federal health policy.
The American Hospital Association has already come out swinging over this EO, complaining that undue attention is being directed at hospitals, when the real concentrated power issue is health insurance. “It’s important to stress that hospital mergers and acquisitions undergo an enormous amount of rigorous scrutiny from the federal antitrust agencies and state attorneys general,” Rick Pollack, the president and CEO of the AHA, said in a statement.
The EO was less strict about health insurance specifically. The EO directed HHS to standardize plans available on the individual marketplace, as a lot of the current plans are difficult, if not impossible, to compare directly (which is, for the health plans, a feature instead of a bug).
It’s possible that the EO was less specific about health insurance because there are other parts of the EO that may apply to how the FTC and DOJ treat insurers. For example, the Fact Sheet for the EO notes that the EO “recognizes that the law allows [the FTC and DOJ] to challenge prior bad mergers that past Administrations did not previously challenge.”
Furthermore, the EO encourages the Attorney General and the Chair of the FTC to “review the horizontal and vertical merger guidelines and consider whether to revise those guidelines.” This innocuous sentence has potentially big ramifications. The current vertical merger guidelines are confusing and vague,2 allowing big companies to vertically integrate, or buy up other parts of their value chain, without much scrutiny. The existing vertical merger guidelines allowed CVS to purchase Aetna, UnitedHealth to purchase Change Healthcare, and Optum to acquire tens of thousands of physicians. Altering these guidelines would mean the era of behemoths acquiring behemoths is over.
The order had four parts regarding prescription drugs:
The order directed the FDA to work with states and tribes to import prescription drugs from Canada
The order directed HHS to increase support for generic drugs and biosimilars
The order directed HHS to issue a “comprehensive plan” to combat high drug prices within 45 days of the president’s signature
The order encourages the FTC to ban pay-for-delay
I don’t really write about the high cost of prescription drugs because it’s so intractable right now. And frankly, I’m less concerned about the manufacturers (although their pricing models are immoral) than the vertically integrated system of insurer-PBM-pharmacy that does very little to discount the cost for the patient, and a lot to diminish access.
In my opinion, the directions in the order on prescription drugs are unlikely to cause significant change on the manufacturer's end. These are all policies we’ve tried before and done incompletely, and maybe this time is different, but I’m skeptical.
That said, I think the more general provisions curbing vertical and horizontal mergers, and reminding the FTC/DOJ of their ability to unwind mergers, have a good shot at lowering drug costs by reining in entities like CVS-Aetna.
Unexpected but not unwelcome, this order directed HHS to consider issuing rules within 120 days for allowing hearing aids to be sold over the counter, lowering their cost and making them more accessible to the millions of Americans with hearing loss.
What this might mean for digital health
Pulling back concentrated power is almost entirely positive for digital health.
I’ve used the phrase “banality of evil” in healthcare frequently, because I think it’s very fitting. So many of the evil outcomes in healthcare—people avoiding care until it’s too late, the price of insulin, price-gouging ambulances—are the result of consolidated, complex systems that build on each other until any semblance of providing care to patients falls aside.
One of the reasons I’m so excited about this executive order, then, is that it will cause some pruning of the existing system. Traditionally, something as simple as a gesture towards increasing antitrust enforcement has been enough to cause the entrenched system to pull back a bit. For example, even though the government lost its antitrust case against Microsoft in the late 1990s, Microsoft subsequently stood down on some of its more aggressive market moves.
And I suspect that, with Chair Khan at the helm, the FTC will be far more willing to take a strong stance against concentrated power than it has in the past. This is awesome for startups, which spend a lot of their time trying to find Trojan horses into markets dominated by one of the big players.
For example, after writing a post about all the pieces a founder would need to start a new specialty pharmacy, I talked to a few people who were interested in the same thing. In every conversation, we would get excited about the possibilities to significantly remake a fundamentally bad patient experience. And then in every conversation, we’d be forced back into talking about how impossible it would be to get contracts with one of the major insurers, given that they all already own specialty pharmacies.
This EO doesn’t cover every area of the healthcare system that needs alteration (which is…every part). But it does take a stance against some of the big corporations that have held healthcare back from modernizing, improving, and innovating. For that matter, it might force bigger entities into looking to innovation instead of M&A activity! Something that stops the next CVS-Aetna merger—or which forces CVS to think twice before it acquires its next Aetna-equivalent—has major, positive ramifications for the most of the healthcare startup ecosystem. In short: I’m excited to see what happens next.
This information shouldn’t be taken as investment advice (obviously), and the opinions expressed are entirely my own, not representative of my employer or anyone else.
And shout-out to https://healthicons.org/ for the icons! It’s such a cool resource for open source icons, highly recommend.
The vertical merger guidelines are currently in flux. The same guidelines were in place from 1984 to 2020, when the FTC and DOJ jointly released new guidelines. These are likely to change; they were implemented prior to the confirmation of Chair Lina Khan to the agency, and she’s expressed interest in making the vertical (and horizontal) merger guidelines more strict.