Hospital mergers: Bigger is not necessarily better (particularly in cross-market deals)

St. Louis’ largest health system, BJC HealthCare, plans to merge with Kansas City’s second-largest, Saint Luke’s Health System, uniting more than 28 hospitals on both sides of Missouri by the end of this year.

The merger, which would span markets 250 miles apart and include facilities in neighboring Kansas and Illinois, is just one of the latest in a quickly consolidating hospital industry. Cross-market deals accounted for more than half of all hospital mergers and acquisitions during the last decade, according to a paper from experts on antitrust law. Today, nearly 60% of health systems operate multiple hospitals in different geographic markets.

Not only are such deals more common, they can increase costs for patients. Merged hospitals in the same state but in different markets raised prices as much as 10% compared with other hospitals, researchers found after analyzing past deals. A separate study found stand-alone hospitals raised prices 17% after they were acquired by a hospital company in another market.

But for some 50 years, federal regulators have not stepped in to prevent hospitals from merging with systems in other markets, according to antitrust law experts. Without federal intervention, states that have seen such megamergers, such as Michigan and California, are often left to wrestle with the complex question of how to respond, given the likelihood of higher prices for their residents.

The Federal Trade Commission and the Justice Department are reviewing public comments on draft merger guidelines designed to crack down on mergers in multiple sectors, including health care. It’s not yet clear if or how cross-market hospital mergers within a state could be affected. Still, the draft says consolidation should not “entrench or extend a dominant position” by extending into “new markets.”

But such cross-market mergers aren’t quite a textbook case of a monopoly. When hospitals have bought up local rivals, knocking out their competition, federal regulators have intervened to block these traditional mergers to protect patients from the resulting loss of competition. In recent years, they helped stop proposed mergers in New Jersey, Utah, and Rhode Island. The thinking is that without local competition, prices increase and the quality of care decreases.

It’s harder to prove how cross-market mergers, like the one planned in Missouri, reduce competition if the hospitals do not operate within a single market, said Chris Garmon, an assistant professor at the University of Missouri-Kansas City, who researches hospital mergers. Regulators would have to prove the mergers don’t just raise prices but also run afoul of the law by suppressing competition.

Related: New FTC, DOJ guidelines could hinder health care mergers

“That’s why we haven’t seen a cross-market merger challenge yet. It’s because it’s hard to tell the story of why this would be a problem,” he said.

The Federal Trade Commission did not answer questions from KFF Health News on its broader strategy around such deals or the BJC-Saint Luke’s merger. Whether an investigation is underway is not public information, said Mitchell Katz, an agency spokesperson.

After the FTC didn’t stop cross-market hospital mergers in California and Michigan, those states landed poles apart in handling the deals. California won concessions after challenging a deal, while Michigan did not intervene.

The FTC did closely examine the 2020 deal in Michigan between Spectrum Health, based in Grand Rapids, and the Detroit area’s Beaumont Health. Still, it ultimately didn’t oppose the marriage that created the state’s largest hospital chain, Corewell Health, with 22 hospitals in regions more than 150 miles apart.

The lack of intervention frustrated some, including Bret Jackson, CEO of the Economic Alliance for Michigan, a nonprofit that helps employers wrangle health costs. Spectrum was already the more expensive operator, said Jackson. He worries Beaumont prices will rise to match Spectrum’s once the insurance contracts with the individual hospital systems expire.

“They’re not going to want to take a pay cut,” Jackson said of Spectrum. “We’re really concerned about it.”

Jackson said that he was already fed up with rising hospital prices and that so are the automotive companies and laborers he represents. Health costs consume about 10% of a typical U.S. family’s income.

Ellen Bristol, a Corewell Health spokesperson, did not address KFF Health News’ questions about patient costs but said that the collaboration is improving quality statewide and creating efficiencies that help the company navigate economic headwinds.

Even though regulators did not step in, FTC staffers and Michigan’s Department of the Attorney General volleyed emails back and forth for months, according to communications obtained by KFF Health News through a public records request from the state.

The FTC asked the attorney general’s office to connect its staffers to employers and state officials, plus provide information and data on the health care landscape in the state, the emails show. The FTC interviewed executives from BorgWarner, an automotive supplier, and CMS Energy, a utility company.

Jackson said he, too, was interviewed by the FTC, which he said was less interested in his thoughts on the deal than in Michigan’s market dynamics.

It’s hard to glean much from the FTC’s assessment of the merger because many of the emails the state supplied to KFF Health News are redacted. But they do illustrate what information and which people the FTC consulted to reach a decision.

The emails also suggest state officials were made aware of the FTC’s findings. On the evening of Jan. 13, 2022, an assistant AG sent a lengthy email to Michigan Attorney General Dana Nessel about the FTC’s review of possible antitrust implications, according to the subject line. In the version provided to KFF Health News, though, the entire email — except for the greeting and the signature — was blacked out.

The next day, other emails show, hospital officials began discussing final language with the AG’s office for a press release announcing the deal would soon close.

Michigan did not move to block the deal or investigate further. Danny Wimmer, a spokesperson for Nessel, a Democrat, said the deal fell outside the authority of her office, further frustrating Jackson, of the Economic Alliance for Michigan.

“We need to give state regulators the tools to at least assess mergers in the health care system,” Jackson said.

Nessel’s position is not the attitude taken in all states. A 2020 merger agreement in California between Huntington Hospital in Pasadena and Cedars-Sinai Health System, with its flagship hospital in Los Angeles, attracted the attention of then-state Attorney General Xavier Becerra, who imposed conditions, such as price caps to protect consumers.

Becerra, a Democrat who is now Health and Human Services secretary, had argued the cross-market merger would lead to higher prices.

Employers relied on having both Cedars-Sinai and Huntington Hospital in their networks to ensure adequate access to all employees scattered across the massive Los Angeles region — with a population larger than that of most states — which California officials said has several distinct markets serving patients. If the two were to combine, employers would have to accept price hikes to maintain access to both entities, according to an analysis the AG’s office commissioned. Health systems can “threaten to create important holes in a health plan’s provider network,” the analysis said, by refusing to include all hospitals, giving the system greater leverage to extract higher prices from the health plan.

Cedars-Sinai and Huntington sued the AG over the conditions imposed on the merger.

Ultimately, the parties settled on revised conditions, which included a 10-year ban on all-or-nothing contracting with insurers and a cap on price increases for five years.

The settlement allowed Cedars-Sinai to expand access while reflecting a shared goal of “keeping health care affordable,” said Duke Helfand, a spokesperson for Cedars-Sinai. Still, it was considered a win for antitrust enforcers, with implications that could reverberate across the country, some health economists said.

In Missouri, the key question is whether state officials will intervene. Attorney General Andrew Bailey, a Republican, is reviewing the merger, which requires his office’s approval before it can close, said Madeline Sieren, a spokesperson for the AG.

Neither BJC nor Saint Luke’s answered questions from KFF Health News about potential price increases or plans to improve quality. The hospitals have estimated the merged system will generate annual revenue topping $10 billion.

The Missouri systems ought to explain how this merger will benefit patients by lowering costs and improving quality, Garmon said.

“Whether they actually do them or not depends on whether they actually have the incentive to do them,” Garmon said.

KFF Health News is a national newsroom that produces in-depth journalism about health issues and is one of the core operating programs at KFF—an independent source of health policy research, polling, and journalism. Learn more about KFF.