I am not a lawyer, and I don’t play one on the internet. I have a passing familiarity with anti-trust law from work (Mayhew Insurance is too small of a fish for it to impact us directly but some of the regional players have anti-trust concerns when there is a round of mergers and acquisitions). I’ve become much more interested in anti-trust since I’ve started writing here.
So I have a question for the lawyers and policy experts.
I understand that the Federal Trade Commission presume anti-competitive effects in mergers when the HHI index in a concentrated market goes up by 200 points or more, and their hackles are raised when the HHI increases by 100 to 199 points. This occurs when the projected increased concentration comes from the acquisition of one incumbent by another incumbent.
This makes sense. It is a reactive intervention by the FTC to prevent an undesirable situation from getting worse. The usual arrangement will be either a lawsuit to prevent an acquisition or an agreement by the new, larger company to either modify its behaviors or spin off a bunch of assets to restore the status quo in a re-arranged manner. In 2009, my region had several large bank failures. One of the big surviving regional banks was the white knight to buy the assets of a Top-5 before going kabloiee regional banks. In order to close the deal, the big surviving regional bank was required to sell off 25% of the combined entity’s branches to a bank that entered the region for the first time. The objective was to make sure every neighborhood that had at least two bank branches before the merger still had two bank branches.
My question is can the FTC legally be pro-active. If there is a concentrated market and a major player announces plans to build significant new capacity in that market over and above that which would be supported by utilization and population trends, can the FTC do anything.
Superficially it looks like the market is getting more competition but when viewed from a regional point of view, ownership of the major elements of production is even more concentrated. Can the FTC do anything or is it stuck in a situation to wait for negative effects to occur?
Baud
If it’s new construction rather than acquisition, then generally the only way to prevent it is if you can prove it’ll lead to monopolization. HHIs are usually relevant only for mergers.
satby
@Baud: Whoa. Soon to be President-Elect Baud has serious policy chops.
Patricia Kayden
I would answer yes to your question about whether the FTC can act proactively before negatve consequences take place.
http://www.antitrustupdateblog.com/blog/doj-ftc-monitoring-post-affordable-care-act-aca-antitrust-compliance/?utm_source=Mondaq&utm_medium=syndication&utm_campaign=View-Original
Richard Mayhew
@Baud: @Patricia Kayden: thank you both. The follow-up is it seems the post facto standard is fairly clear while a preemptive standard is fuzzy… Does it rely on intent? Or if there is a long paper trail of legit business reasons for the decision that just coincidentally leads to consolidation, the entity is in the clear?
BillinGlendaleCA
IANAL(though I did work as a paralegal in antitrust litigation), but competitors could also sue for violations of Sherman(3x judgements).
Punchy
Anti-trust? No, trust your uncle.
Dork
I saw Richard’s name on this post and figured “HHI” stood for a Halfback Hottie Index, and FTC was Forced To Cuddle, a necessary fallback option when one discovers the midfielder is only 17…
Baud
@Richard Mayhew:
As a practical matter, it’s difficult to see a situation in which the government stops new construction under the antitrust laws. Health care economics is complicated enough that I won’t say it impossible. But a company is allowed to compete and even to drive others out of the business by investment in new facilities.
Now if the new facility involves new contracts with providers, then the FTC may have more ability to say something about those contracts if they have an anticompetitive effect.
Tripod
A state’s regulatory environement can be sticky about new hospital builds, or whatever, depending on the state.
Here, they don’t give as much a fuck about competition, more so cachement areas and bed counts, and what’s the healthcare utility to the communities served?
Driving healthcare providers to some “ideal” marketshare may very well be irrelevant to the health of the communities served.
Richard Mayhew
@Tripod: Agreed, there are a lot of real world confounding factors and the base question of “optimal” market mix is a damn good one. I just had a couple of e-mails over the weekend about an odd case that is getting me to scratch my head in the hope that my ignorance can be portrayed as profound and deep thinking.
Baud
@Richard Mayhew:
That’s the hope of every Juicer.
rumpole
Although there is joint enforcement responsibility for the anti-trust laws, DOJ has exclusive jurisdiction over certain industries. One of those industries is banking; the FTC can’t play there. (DOJ also has criminal enforcement power, which the FTC does not).
japa21
Based upon some instances I know about, I question whether they can do something in the circumstances you describe.
A few years ago, Aurora, the largest hospital system in SE WI announced plans to build a new hospital in an area already being served. There was no real need. The state had to approve of it and went ahead and did so, basically on the premise of “let the market decide”.
Now, if it had been a merger situation, I think the FTC would have stepped in, like they did in a couple cases in Illinois.
OzarkHillbilly
@Baud: Not me.
NJDave
At the state level, there are sometimes “Certificate of Need” requirements specifically put in place to discourage over building. See http://www.ncsl.org/research/health/con-certificate-of-need-state-laws.aspx
Richard Mayhew
@NJDave: The example in question does not have a CoN requirement
Tripod
@japa21:
My understanding is that the industry focuses on bed counts because hospital break even is at very high occupancy rate. Allowing the medical regulatory environment to morph into a market fight at Galt’s Gulch doesn’t create innovation or efficiencies, it just creates duplicate facilities that can’t cover their operating costs.
The Other Chuck
Aren’t healthcare providers still specifically exempted from antitrust laws?
J R in WV
@Richard Mayhew: We do have a Cert of Need policy in W Va, until our new Republican overlords get around to destroying that, too. So far they are concentrating on not requiring any permit for concealed carry, right to work (for less, without a union) and – lessee, there was something else…
Oh yes, requiring religions to persecute those different from the standard church-goer! Like LGBT folks, or Demoncrats, or tree-hugger enviros… Well mostly those satanic LGBT people. Can’t be forced to bake a cake!! Or serve coffee!! Can’t tell how it will affect reproductive health care, maybe they just haven’t got around to that yet.
FSM I hate those muthur-fuckers. Maybe, just Maybe, the upcoming election will turn them around. It took a guy elected turning over to the Republican side to make it happen last year, So we aren’t hard red yet, just reddish purple.
Anonymous At Work
FTC is unlikely to proactively prevent deconcentrated a concentrated market, even if it goes above capacity/need in the area. That falls on state regulatory agencies, some of which can be dicks, some of which are rubber stamps, ymmv.
FTC would step in, if the major entity was announcing new construction which could be viewed as building over-capacity for the purposes, stated or implied, of forcing competitors out of the local market. That’s on shaky grounds and would likely result in an agreement between the major player and the FTC in order to avoid a lawsuit.
randy khan
To elaborate a little bit on what others are saying, in general the HHI screen is applied to acquisitions on a prospective basis, while other antitrust (DoJ or FTC) authority is used on a retroactive basis. It’s also worth noting that antitrust law does not address monopolies generally. As a general proposition, there is no law against having a monopoly; the law is against taking actions in restraint of trade to create or maintain a monopoly. If you compete fairly and knock out all of your competitors, that’s perfectly fine. (It’s also rarer than a hen’s tooth, but the law doesn’t concern itself with such trifles.)
dy
I am an antitrust lawyer and I play one on the internet on a boring Monday:
To make this easier to think through, let’s call it a factory instead of banking branches (it’s hard to know what market was at issue with retail banking – mortgage origination? Commercial loans? Checking accounts?). Anyway, call it a factory that makes widgets, and that factory is about to expand significantly. So taking your example, let’s say a market with 5 firms with 20% share is about to become a market with 5 firms where one firm has a 40% share, two firms are at 10%, and two firms are at 20%. There HHI has increased from 2000 to 3000 (Google HHI if you don’t know what it is). DOJ/FTC would see that as a concentrated market. Would the DOJ/FTC seek an injunction to stop it?
Almost certainly no. The only viable theory is that expansion was attempted monopolization under Section 2 of the Sherman Act. An attempted monopolization claim requires a plaintiff to show (1) anticompetitive conduct, (2) specific intent to monopolize, and (3) dangerous probability of achieving monopoly power in a relevant market. Although injunctions are available to stop any violation of the antitrust laws, in practice DOJ/FTC only seek injunctions to stop mergers or specific forms of conduct like anticompetitive licensing schemes. Mergers also have a far lower standard to be stopped: any merger that threatens to “substantially lessen” competition in a relevant market can be enjoined.
Here, the major hurdle is proving any anticompetitive conduct at all. Did the increase in one firm’s market share via building more capacity increased prices, reduced output, reduce quality, or reduced innovation? That is what “anticompetitive” means to antitrust.
The conduct here was an increase in output, which made one firm a better competitor such that it took share away from others. That is the opposite of what a monopolist does — reduces output so as to raise price/lower quality/etc.
The only way expansion of capacity could be deemed anticompetitive is if was part of a scheme to raise prices/reduce quality etc in the future – in other words, it was part of a predatory pricing scheme. Expanding the factory might enable a competitor to produce so much that it can supply the whole market and price at such a low price that all other competitors go out of business. But predatory pricing looks nearly identical to actual competition — firms offering consumers the lowest price they can – and that is the very goal of the antitrust laws.
Given that problem, courts erected a high standard for predatory pricing: a claim requires proof that the competitor is pricing “below cost” and that there is a “dangerous probability of recoupment” of the competitor’s “investment” in predation once it has succeeded in driving out all competitors. Although I disagree with the Supreme Court that predatory pricing is as rare as a unicorn, it is difficult to imagine how it could work in a sector like retail banking where barriers to entry are relatively low. You’d have an extremely hard time proving that an expansion of output was not procompetitive, but in fact part of a larger anticompetitive scheme that is difficult to imagine succeeding. Even if you did do that, a court is not likely to enter an injunction to prohibit expansion when it could just condemn the pricing scheme (e.g., an injunction to price above cost). We worry about monopolists closing factories so as to raise prices – not opening them.
So, tl:dr — an increase in capacity is not anticompetitive absent extraordinary situations like predatory pricing that are unlikely to occur and impossible to prove. So the agencies would never try to stop a mere business expansion.
Richard Mayhew
@dy: THANK YOU!
Nevermoor
@dy:
Agree completely. The general principle is that even monopolies can be had via honest competition (no one tried to break up Apple when it dominated the smartphone market).
Predatory pricing, tying agreements, or other bad conduct will get you in hot water fast if you have market control, but just earning that control is fair.
dy
@Richard Mayhew: No problem…always fun to think through antitrust hypotheticals. I enjoy your posts a lot as I do a fair amount of healthcare antitrust, and its very interesting and helpful to hear your perspective for how insurers price to consumers and to providers. Keep it coming.
randy khan
@Nevermoor:
The interesting thing about Apple is that it’s never had dominant share in the smartphone market. I’m not sure it’s ever been above 30% in units sold, in fact. But it has had a dominant share of the profits in that market for a very long time. (As of the end of 3Q 2015, Apple had 94% of the profit, Samsung had 11% of the profit, and everybody else collectively had negative profit). But antitrust analysis does not really look at who’s making money, except to the extent that a dominant player tries to price below cost to kill off competition.
Raven Onthill
Basically, we’re scrod, or some other fish.
Wikipedia, that fount of information and misinformation, says there is specific case law and legislation which covers anti-trust in insurance. See: https://en.wikipedia.org/wiki/McCarran%E2%80%93Ferguson_Act. What the subsequent history was, I do not know. I note, however, that operating insurance across state lines was not considered “interstate commerce” that could be regulated by the federal government regardless of egregious abuses, according to the very dubious reasoning of United States v. South-Eastern Underwriters Association.
Then as now there was a heavy bias in favor of corporations on the Supreme Court.
Anonymous At Work
@dy: Don’t mention Matsushita; nothing good comes from or came from that case. That being said, the Alcoa case is basis for this sort of situation. Even if it’s no longer good law, Hand’s decision shows how hard it is to evaluate expanding capacity by a monopolistic firm or a firm in a concentrated industry/area.