The support from Arnold Ventures LLC, which hasn’t been previously reported, shows how scrutiny of dominant hospital systems is escalating following an extended period of industry consolidation. Research from federal agencies and academics in recent years suggested hospital prices increased after acquisitions with no improvement to the quality of medical care, prompting concerns from some policy makers and employers that not enough was being done to stop what they say are anticompetitive hospital mergers.

The Biden administration named hospitals as one business where consolidation harmed consumers and asked the Justice Department and Federal Trade Commission to review and possibly revise their merger guidelines for all industries. That order followed a new rule imposed by the Trump administration requiring hospitals to make their prices public for the first time. Those disclosures showed wildly different prices for the same service across different hospitals—and even the same hospital. Hospitals say regional consolidation can improve coordination of medical care with doctors, reduce costs and boost investment in formerly independent facilities.

The financing from Arnold Ventures is supporting the work of Fairmark Partners LLP, the law firm behind the lawsuits. Fairmark secured its funding from the philanthropy after filing its first lawsuit, one of the founders said. The firm’s founders say the backing is key to a targeted effort to reshape hospital markets through the courts, and that it received money from other philanthropies it declined to identify.

“I don’t think there’s really any enforcement failure that’s had a larger negative economic impact for consumers than the failure to enforce antitrust laws against hospitals,” said Fairmark’s Brennan Bilberry, who expects the firm to file more lawsuits elsewhere in the U.S.

An Arnold Ventures spokesman declined to say how much it is spending on the cases. He said it won’t profit from any lawsuit victories. A spokesman didn’t make Mr. Arnold available to comment.

“Supporting employers and workers suing hospitals for price gouging and anticompetitive contracting is one way to overcome the imbalance of power in the market,” said Erica Socker, vice president of health care for Arnold Ventures.

After Enron

This isn’t the first such campaign for Mr. Arnold, 48, who has spent the last decade at the philanthropy he founded. He made his fortune as an energy trader at Enron Corp., before walking away from that company’s 2001 collapse with a seven-figure bonus and no accusations of wrongdoing. He later started his own hedge fund.

He and his wife have used their philanthropic organization to award more than $2.5 billion to address a broad range of issues to date, from criminal justice reform to gun control. Their efforts to study and solve the funding deficits of public retirement systems across the U.S. drew the ire of employee unions worried about losing their guaranteed lifetime benefits. He has made political donations to both Democrats and Republicans, according to Federal Election Commission records.

Healthcare has long been a focus for the Arnolds, as well. Since 2010, Arnold Ventures has awarded more than $358 million toward research and initiatives targeting that industry, including efforts to shape state healthcare policies and shake up markets. Until now the campaign that attracted the most attention focused on pharmaceutical markets, with awards to investigate drug quality, innovation and high drug prices. Mr. Arnold in March took to

Twitter

to announce his philanthropy would back manufacturing of low-priced diabetes medication by a nonprofit drugmaker.

“We will break the insulin oligopoly by bringing $30 insulin to market,” he wrote.

Drugmakers criticized his efforts and said their pricing helped fund research and new drug development.

Arnold Ventures also funded multiple grants to study hospital consolidation, according to its website and research papers. lt was approached by Fairmark for financial help in 2021.

The law firm had just filed a lawsuit in state court in North Carolina against national hospital chain

HCA Healthcare Inc.

The plaintiffs were consumers in the state who paid premiums for commercial insurance.

Some law firms turn to hedge funds or other investors for financing in antitrust lawsuits that can be complex and costly. The cases sometimes last for years and run up tens of millions of dollars in expenses. Lawyers often don’t get paid unless they win.

The North Carolina lawsuit alleged HCA’s 2019 acquisition of a six-hospital system in the western part of the state, including the dominant hospital in Asheville, N.C., gave the chain leverage to raise prices across its hospital markets inside and outside North Carolina. It also alleged HCA’s hospital in Marion, N.C., charged four times the state average for a common medical scan due to the chain’s market power and anticompetitive negotiating tactics.

HCA has asked a judge to throw out the case, defending its contracts and arguing the lawsuit lacks evidence the company harmed consumers. An HCA spokesman declined to comment on the lawsuit, but said the North Carolina hospitals are committed to the health and well-being of their patients.

North Carolina Attorney General

Josh Stein,

who isn’t involved in the lawsuit, has urged the judge in a court filing to let the lawsuit continue. “We don’t have the ability to bring every single antitrust case that may be worthy,” Mr. Stein said in an interview. “I want the evidence to be developed so I can evaluate it for myself.”

Consolidating control

HCA wasn’t the only giant healthcare provider to consolidate its control over certain markets in recent decades. Since 2010, there have been 979 deals among hospitals, according to research firm Irving Levin Associates. By 2016, 90% of the nation’s metropolitan hospital markets were highly concentrated, researchers reported in the journal Health Affairs in 2017.

Many facilities are no longer locally owned community institutions. Rather, they belong to vast networks spanning cities, counties and even states. Many also own doctor practices and clinics.

Under existing guidelines, antitrust enforcers have repeatedly blocked deals that would merge two hospitals competing in the same community for local business. Much of the sector’s recent dealmaking, however, has brought together hospitals separated by greater distances—by counties, for example—under one owner. These sprawling combinations have gone unchallenged by federal enforcers.

There is evidence such consolidation can lead to higher prices, according to a study published in 2019 in the Rand Journal of Economics. Hospital prices rose 7% to 9% after mergers between hospitals within the same state but not in the same community, according to the study.

Hospital systems with facilities that dominate one or more local markets gain power to raise prices across all their markets—even where there is competition—by insisting on terms with insurance companies to include every market or none, economists say. Such terms are known as all-or-nothing. Insurers, which negotiate prices on behalf of consumers, can’t balk because they need multiple hospital markets to be included under health plans sold to employers with workers scattered across wide areas.

Industry executives say these large regional health systems have given hospitals a chance to hold their own in contract negotiations with ever more powerful health insurers.

To curb hospital price increases, some employers hit by rising healthcare costs have called for stronger antitrust enforcement to prevent anticompetitive mergers. So have nearly two dozen state attorneys general, both Republicans and Democrats.

The Trump administration’s 2020 rule requiring hospitals to make their prices public intensified scrutiny of the sector. Last July, the Biden administration singled out hospital combinations in an executive order seeking to promote competition across many industries, and urged federal antitrust agencies to rethink their scrutiny of mergers.

The Justice Department and Federal Trade Commission are now reviewing their antitrust guidelines for industries, including hospitals. The American Hospital Association sent a letter to the agencies saying major changes were unnecessary, saying the guidelines were generally robust and dramatic changes would reduce confidence in the guidance. The guidelines are widely considered influential by attorneys, judges and companies contemplating transactions.

Filling a gap

Fairmark, the law firm handling the private cases against hospitals, hopes to gather evidence that government enforcers later may find convincing enough to act on, according to co-founder Jamie Crooks.

“It’s very hard for a regulator to commit to a five-year, open-ended, millions-of-dollars fight before you know the answer,” he said. “That’s one gap we’re trying to fill.”

Fairmark’s Mr. Crooks, 35, and Mr. Bilberry, 36, met in college at Harvard University and reunited after working in the worlds of law and politics. Mr. Crooks was a corporate defense lawyer who once served as a clerk for

Anthony Kennedy,

a Supreme Court justice appointed by President

Ronald Reagan,

a Republican. Mr. Bilberry was a political and communications strategist who worked for the Democratic Congressional Campaign Committee and served as communication director for

Terry McAuliffe

during the Democrat’s 2013 campaign for Virginia governor.

Their first joint effort was the 2018 launch of a firm called Elk Hills Research that helps investment companies monitor their portfolios for risks of corruption or environmental crimes. In 2020 they began analyzing hospital markets across the U.S. and using pricing data to identify potentially anticompetitive hospital systems, Mr. Bilberry said. They founded Fairmark in April 2021.

They weren’t the first to pursue hospital consolidation in the courts. Consumers who paid private insurance premiums also made antitrust claims in lawsuits brought in 2012 and 2014 against California health system Sutter Health. The hospital system settled one lawsuit in 2019 for $575 million. It agreed to stop using all-or-nothing terms. Sutter didn’t admit wrongdoing. It won the second suit at trial earlier this year. Lawyers who brought the case say they will appeal.

Fairmark’s second case, filed in February of this year, targeted Hartford Healthcare Corp., in Connecticut. John Brown of Sherman, Conn., who buys his own insurance, and others in the state in households paying private insurance premiums alleged they paid more than they should have because Hartford used all-or-nothing terms and its dominance of the market to illegally raise prices, according to a lawsuit filed in state court.

The price for the most critical emergency room visits at the Hartford Hospital, for example, were nearly $3,000 more than its competitor’s, the lawsuit said. Hartford Healthcare said it would fight the allegations, which it called “without merit.” Mr. Brown declined to comment.

Then last month Fairmark filed its third lawsuit on behalf of Uriel Pharmacy, of East Troy, Wis. The target was Advocate

Aurora

Health, which owns 27 hospitals across Wisconsin and neighboring Illinois. Uriel Pharmacy declined to comment through its attorney, Mr. Bilberry.

In Milwaukee, Advocate Aurora’s hospital prices for some critical hospital services are 15% to 105% higher than competitors, the lawsuit alleges. A health insurer also cannot switch business to one of Advocate Aurora’s rivals without losing access to all the system’s hospitals under its all-or-nothing terms, according to the lawsuit.

Advocate Aurora, with hospitals across Wisconsin and Illinois, said the lawsuit was baseless, and the system has worked to improve patient safety and quality and limit cost increases.

“We’re proud of our partnerships that deliver affordable healthcare coverage to millions of people across Wisconsin and Illinois,” a spokesman said.

—Chad Day contributed to this article.

Write to Melanie Evans at Melanie.Evans@wsj.com