On April 24, 2012, the Federal Trade Commission, the nation’s principal gatekeeper for health care mergers, published an innocuous-seeming notice granting a request for “early termination” of its review of a $108 million health care acquisition. Newport Medical Instruments, a small developer of cheap, portable ventilators, was being acquired by Covidien, a much larger American company headquartered in Ireland for tax purposes. Covidien makes, among other things, larger and more expensive ventilators.
The government’s review was relatively brief. One of the lawyers involved, a former F.T.C. staff member, has noted that he successfully steered the merger through the F.T.C. “without second request” — without extensive review.
We now know that approving that merger without conditions had severe costs. It would cripple what had been a prescient federal program, begun in 2007, to build an emergency stockpile of up to 40,000 portable ventilators with the eventual help of Newport Medical Instruments. But Covidien terminated the project, apparently in large part because it was insufficiently profitable.
That cancellation set back the federal ventilator program by at least seven years. In fact, 13 years later, in the midst of the coronavirus crisis, and despite a new contract with another company, not a single ventilator has been delivered.
It is easy to criticize the F.T.C. for missing the dangers to public health in the Newport merger. But it’s a mistake to see the episode as an isolated blown call or a case of insufficient diligence. The United States’ approach to mergers and consolidation is broken, and nowhere is this more clear than when it comes to health care. As it stands, the F.T.C.’s power to review mergers takes little account of what makes health care different from other industries. And tragically, the Newport merger is only one in a long line of disasters.
The Federal Trade Commission is staffed by skilled lawyers and economists who try their best, within their authority, to stop the worst abuses. (I’m biased: I was at the F.T.C. from 2011 to 2013.) But the agency’s own rules treat the market for ventilators as little different than the market for, say, bowling balls. The scope of review is too narrow for the concerns that arise when it comes to potentially lifesaving goods like ventilators, pharmaceuticals and hospitals. In fact, in the Newport case, even if the lawyers had suspected Covidien’s motives, there was probably little under existing law that they could have done.
The problem is systemic. Consider that over the past decade, the F.T.C. has found itself largely unable to stop another abuse: the transfer, by large pharmaceutical companies, of individual drug brands to tiny companies that subsequently raise the prices of the drugs by factors of thousands. (The F.T.C. has the power to review transfers retrospectively and undo them.)
Perhaps the most notorious example was the sale of Daraprim, a drug used to treat a life-threatening parasitic infection, from Impax Laboratories to Turing Pharmaceuticals. Turing raised the price of Daraprim from $13.50 to nearly $750.
And Turing isn’t even the worst offender. For $100,000, a company named Questcor bought from Aventis the rights to a $40 treatment for infantile spasms. Questcor jacked up the price from $40 to an astonishing $28,000. (A company that bought Questcor in 2014, Mallinckrodt, jacked it up even more, to $39,000.)
In most markets, such exploitative tactics are difficult to sustain, because customers would revolt. But health care markets are different. For many drugs or treatments, there are no realistic substitutes. And the markets are further complicated by insurance and government involvement — and ultimately, by the fact that we care about human health in ways that are hard to quantify.
Perhaps the greatest failure, in terms of harm done, has been the F.T.C.’s inability over the past two decades to stop hospital consolidation, despite growing evidence of negative effects. In theory a hospital merger might produce welcome efficiencies, but in practice too many hospital mergers tend to yield higher prices and lower quality of care (measured by morbidity), not to mention bed shortages. After a bad hospital merger, patients pay more and die more.
To its credit, the F.T.C. has tried hard in this area, litigating aggressively to stop the most outrageous hospital mergers. Yet it has faced setbacks in the courts.
Very few observers who are not on the industry’s payroll find it easy to defend what has happened over the past decade when it comes to health care mergers. Action is overdue. The F.T.C. might, as Commissioners Rohit Chopra and Rebecca Slaughter have urged, dig deeper into its own authority and begin writing special rules for the worst abuses. Congress, which is considering the first major antitrust overhaul since 1914, might create special scrutiny for health care transactions, sensitive to their broader effects.
What’s certain is that we can do better. In an alternative universe, the F.T.C. lawyers scrutinizing the Newport deal, equipped with greater authority and resources, might have flagged the acquisition as suspicious, consulted the Department of Health and Human Services and made the deal contingent on full performance of the federal contract for ventilators. And now, instead of squabbling for supplies, we might be facing the coronavirus crisis with a stockpile of new ventilators — grateful for the foresight of the federal government and the vigilance of the F.T.C.
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