US antitrust laws are supposed to protect consumers from sky-high prices and subpar quality. But a loophole in the current rules may be causing sickness and death among people with end-stage kidney failure, suggests Chicago Booth’s Thomas Wollmann.
Under US antitrust law, companies must notify the federal government of their plans to merge or buy other companies—but only in large deals, typically those valued at more than $92 million. Smaller transactions that fall below legal thresholds are exempt from the notification reporting requirement, meaning that many take place under the radar. Wollmann calls this “stealth consolidation” and says it occurs in local services or differentiated manufacturing industries ranging from software to prescription drugs to automotive sales.
These mergers are especially common in the dialysis industry, which provides life-saving care for patients whose kidneys no longer clean their blood. Two decades ago, hundreds of independent dialysis facilities across the country provided treatment. Today, after acquiring nearly all of these locations, two multinational providers—DaVita and Fresenius—and a handful of others dominate the industry.
The dialysis behemoths built their empires through years and years of small deals that largely passed unnoticed by antitrust enforcement agencies. The results, Wollmann reports, are duopolies and even monopolies in local markets, which consist of small geographic areas, since most patients receive treatment three times a week. With treatment prices set by Medicare, which pays for almost all dialysis, the only way for clinics to exercise market power is to lower the quality of care.
“In most industries, increased market share will translate to price increases, but in dialysis, providers don’t have that lever to pull on,” Wollmann says. “What they can do is reduce quality. If you create a monopoly and the price is fixed, quality typically goes down. In the health-care sector, if you have very sick patients, that’s not only going to mean more trips to the hospital, but also, unfortunately, it’s going to mean people die.”
Wollmann gathered and analyzed Medicare and Federal Trade Commission data from 1996 to 2017, then created a structural model to evaluate the effects of the more than 2,000 facility acquisitions that went unreported during that period. He finds that acquisitions of competing dialysis facilities that were exempt from premerger notification were linked to a 3.6 percent increase in hospitalization rates and a 1.8 percent decrease in survival rates.
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In this scenario, he finds that the benefits of stricter reporting requirements—as measured in human life–years saved—are nearly two orders of magnitude higher than the costs associated with increasing antitrust-enforcement resources. By Wollmann’s count, lowering the reporting threshold for mergers and acquisitions would result in $3.6 billion–$4.7 billion in savings, while the costs would be less than $50 million.
If dialysis providers were forced to report all mergers, anticompetitive ones could be blocked or deterred, quality would be maintained, and many lives would be saved, he finds. Assuming that a statistical life year is valued between $100,000 and $150,000, the benefits produced would dwarf prosecution costs, he calculates.
This is partly because enforcement agencies are efficient in that their budgets are a small fraction of the economic activity that they regulate, and because making the rules stricter would deter dialysis companies from attempting mergers and acquisitions in the first place, Wollmann argues.
“Deterrence is a broad concept, but it really has bite in antitrust,” Wollmann says. “There are big costs to organizing a merger, so if you expect the merger to be blocked, you’re not going to attempt it in the first place—that’s the very reason we’ve never seen Coca-Cola and Pepsi try to merge. Since mergers like that aren’t proposed, the government doesn’t have to spend any money blocking them.”
At a time when lawmakers are already considering how best to improve US antitrust laws to take on tech behemoths such as Amazon, Facebook, and Google, Wollmann says he hopes they will also take a closer look at premerger notification thresholds. He suggests a few creative ways to improve them, such as setting specific thresholds for different industries or assigning states to investigate smaller mergers and acquisitions, for example.
Whether small mergers in other sectors are as harmful as they are in the dialysis industry remains an open question. However, Wollmann says, “if these industries remotely resemble the dialysis industry in terms of the effects of stealth consolidation, the issue must be addressed.”
Thomas Wollmann, “How to Get Away with Merger: Stealth Consolidation and Its Effects on US Healthcare,” Working paper, July 2021.
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