Welcome to our “Big Thoughts/Quick Reads” Antitrust Blog. This will be an irregular series. Some posts will be triggered by current issues. Some posts will be triggered by long-settled issues that we think need to be unsettled and reconsidered. All will be issues interesting to us, and we hope to you as well. We welcome your thoughts and look forward to generating interesting conversations.

The new coronavirus is a heat-seeking missile headed straight for our health care system. The virus threatens to infect a segment of our population so large that an influx of patients will overwhelm the relatively few open beds that hospitals have to treat the seriously ill. Estimates vary, but it is possible that hospitals will run out of available beds in the coming weeks, and certainly well before summer arrives. How did we get ourselves into this dire situation, and what role did the antitrust laws play in that process? More pointedly, should we change the way the Federal Trade Commission (FTC) evaluates hospital consolidation to ensure our health care system is more prepared to withstand a shock like COVID-19?

The number of hospital beds in the United States has decreased dramatically over the past 45 years, even as the population has increased over 50 percent. Since 1975, the number of hospitals has decreased 13 percent and the number of hospital beds has decreased 37 percent. Most of this decrease came prior to 2000 as our health care system moved to a managed care model. The traditional fee-for-service model posited a relatively simple transaction in which a patient (or an insurance company) paid a doctor for medical care. Under the managed care model, health maintenance organizations (HMOs) determined the fixed amount doctors and hospitals would be paid for particular services. Managed care was designed to eliminate waste and encourage preventive care.

As HMOs forced down health care spending, hospitals suddenly had to reduce their costs to remain financially viable. Their natural response was to consolidate into large hospital systems that created economies of scale, which allowed them to reduce cost by, among other things, negotiating deeper discounts from suppliers. The new hospital systems also brought new analytical models to the industry, which increased efficiency in the provision of care, increased outpatient service, and reduced the need for overnight stays.

Large reductions in hospital beds followed. Between 1980 and 2000, hospitals across the country decreased their inventory of beds by a whopping 28 percent. Improving hospital balance sheets was reason enough to encourage consolidation, but there were other good reasons for the FTC to approve hospital mergers. Large capital investments were needed to pay for the innovations in medical technologies, treatments, and pharmaceuticals that increased the efficiency of care and decreased the need for overnight hospital stays.

Yet these new economics had, by the turn of the century, exposed the hospital industry to the threat of shocks, and COVID-19 is the latest threat to our health care system. Again, estimates vary, but it appears that hospitals have fewer than 500,000 beds available, a number that everyone agrees is far too low to accommodate the likely volume of seriously ill patients. The situation is so extreme that governors and mayors across the country are shutting down large segments of the economy to slow the progress of the virus and thereby reduce the number of patients who need a hospital bed.

So, while there are good arguments that the FTC reasonably concluded that a lenient approach to reviewing hospital mergers created procompetitive efficiencies, it is equally clear that the review did not account for the negative consequences consolidation would have on our health care system. The problem, of course, is that the FTC is not competent to consider those larger public policy issues. Rather, other entities in the executive branch, such as the Food and Drug Administration and the Department of Health and Human Services, routinely consider those policy issues. Perhaps it is time for us to consider enlarging the scope of the FTC’s review of hospital mergers to include the input of experts who can anticipate the likely effect of consolidation on the ability of our health care system to respond to sudden shocks that threaten the quality of patient care.

What would that expanded review look like? We will explore that issue later this week.