As we have just passed the half-way point of 2022, many health systems are thinking about acquisitions they would like to complete before the end of the calendar year. In addition to the necessary due diligence, contracting considerations and licensure and regulatory issues, acquiring and selling parties would be well-served to put antitrust considerations high on the analysis agenda, in an effort to be prepared for potential scrutiny by the Federal Trade Commission (FTC), U.S. Department of Justice (DOJ) and/or a State Attorney General.
What You Need to Know:
- Antitrust is an important component of health care mergers and acquisitions
- DOJ, FTC and/or State Attorneys General can delay or derail a proposed transaction; the Biden administration has clearly stepped up federal enforcement efforts in the health care world
- Three examples half-way through 2022 of hospital mergers that collapsed almost immediately after FTC raised objections
While the pressure on health systems to achieve economies of scale and increase revenue streams and profitability continues to be the focus of C-suite attention, the potential resulting health care market consolidation across urban, suburban and rural geographies is receiving increasing focus by all antitrust enforcement agencies. The natural tension between those perspectives must be understood and dealt with to give deals a chance to survive.
This has been made clear three times already this year in Utah, New Jersey and Rhode Island, where significant health care system mergers have been abandoned on average within about 14 days after the FTC filed a challenging lawsuit. Those outcomes, coupled with the quite obvious wave of very aggressive enforcement via the FTC’s willingness to litigate, needs to be in the forefront of not only health care systems’ executive management but also in the provider markets. The combining parties saw the deals as a means towards their desired ends, but the FTC saw the same deals as a means toward anticompetitive harms.
These three planned hospital system mergers that were scuttled are part of a continuing pattern of stepped-up FTC engagement and enforcement activity in the health care sector. See also, for example: Aveanna Healthcare and Maxim Healthcare Services (private duty nursing services, abandoned in January 2020) and Methodist LeBonheur Healthcare and Tenet Healthcare (abandoning the former’s acquisition of two Memphis-area hospitals from the latter, December 2020).
- Suit Filed: February 17, 2022
- Abandonment Date: March 2, 2022
- Suit Filed: June 2, 2022
- Abandonment Date: June 14, 2022
- Suit Filed: June 2, 2022
- Abandonment Date: June 16, 2022
What are the key take-aways from these aborted hospital ‘marriages’? When the FTC sees undue concentration in the relevant market and ultimate harm to consumers and patients in those markets, it will speak up as the parties ready themselves for the altar.
Health care provider executives in health systems and large physician groups must engage in a delicate balancing act: the desire to ‘grow’ weighed against the resulting market concentration and the incipient tendency of the “deal” to create a monopoly.
The proposed Rhode Island merger cited above involved the two largest health care providers in the State. It was relatively easy to anticipate a vigorous challenge there, again on the fundamental premise that the combination, in the words of the FTC, would create “a dominant entity that would have led to higher prices and lower quality of care for Rhode Islanders.”
Similarly, in the proposed New Jersey hospital merger, the FTC made a fairly simple observation: “A hospital is less than one mile away from another hospital…there is overwhelming evidence that this acquisition would be bad for patients, because the parties would no longer have to compete to provide the lowest prices and the best quality and service.”
The same premise existed in the proposed Utah merger. FTC Bureau of Competition Director Holly Vedova said: “This transaction …(like the one abandoned two days ago in New Jersey)…should never have been proposed in the first place.”(emphasis supplied)
Director Vedova added, clearly ringing the real warning bell in no uncertain terms:
This should be a lesson learned to hospital systems all over the country and their counsel (emphasis supplied): the FTC will not hesitate to take action in enforcing the antitrust laws to protect healthcare consumers who are faced with unlawful hospital consolidation. Had this transaction been allowed to proceed…(given the market concentration achieved it would have resulted)…in higher prices, less innovation, and lower quality care for patients. I am glad that patients and health care providers will not have to endure any more uncertainty while waiting for courts to rule on the FTC’s legal challenges.
Each of these three aborted mergers are indicative of more aggressive FTC enforcement and additional emphasis (and a reminder for all health care executives) of the fundamental antitrust concerns.
Six years ago, in 2016, when two health systems in central Pennsylvania announced a merger, the FTC noted at the time:
“The parties decision to abandon this transaction preserves hospital competition in the Harrisburg area….[H]ad it been consummated, the merger would have likely led to lower quality and higher cost health care, at the expense of Harrisburg residents and their employers.”
While the substantive rhetoric sounds the same, there is a difference between the aborted mergers in 2016 versus 2022: the 2016 case was litigated over a six-month period and only abandoned after the parties lost in the Third Circuit Court of Appeals. In 2022, the three transactions proposed were abandoned almost immediately — within approximately two weeks of the FTC filing suit, ostensibly saving at least tens of thousands of dollars in litigation and related consulting expenses.
While DOJ will also take on a case, it can only go to court, such that the FTC will more likely continue to be the ultimate arbiter for proposed hospital mergers given that its dual litigation pressure points — administrative before the agency or in court. Health care executives are wise to have their counsel explain the procedural and substantive nuances of dealing with the FTC versus the DOJ.
In addition to agency focus, private parties are keeping a close eye on health care transaction: in late June, a federal judge in Illinois dismissed a claim by an ambulatory surgery center challenging a hospital’s acquisition of another hospital. The plaintiff ASC alleged the hospital merger would result in fewer outpatient surgery referrals to the ASC. The judge noted that prospective harm does not establish injury in fact and that, by contrast, federal antitrust regulators do not need to allege harm to intervene in a matter. While the federal judge in that suit has permitted the plaintiff to amend its allegations, the court very clearly also both pointed out that the FTC and DOJ would be the better plaintiffs “especially as the current administration takes a heavier hand against hospital mergers that increase healthcare proceeds for consumers: and at the same time criticized the private plaintiff before it for taking “matters into its own hands to enforce federal law…enforcement is better left to the agencies responsible for doing so…”.
Prospective health care provider ‘buyers’ and ‘sellers’ should keep antitrust considerations in the forefront when considering a transaction and conduct a market analysis in advance of the pending consolidation. It is obviously important to put the deal terms and documents together carefully and properly. It is equally important to focus on the potential FTC, DOJ and State Attorney General challenges to ensure that the union is consummated at the altar.
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Michael A. Finio, Esquire is Counsel in the Firm’s Transactional Department, focused on, supervising and handling the representation of clients across all industry sectors in antitrust enforcement and investigative matters involving the FTC, DOJ and state attorneys general both involving merger and acquisition activities and general competition-related inquiries, and otherwise advising Firm clients on the impact of antitrust law on their business operations. Michael can be reached at (717) 238-7671 or at Mike.Finio@saul.com.
Bruce D. Armon, Esquire is chair of Saul Ewing’s health law practice and has successfully completed multiple hospital acquisitions and large provider entity sales. Bruce can be reached at (215) 972-7985 or at Bruce.Armon@saul.com.