FTC's Focus on Healthcare Mergers and Consolidation, 0216 COBJ, 2016, February, Pg. 15
| Author | Richard B. Benenson, Kerry J. LeMonte, J. |
Articles
Antitrust and Consumer Protection Law
FTC's Focus on Healthcare Mergers and Consolidation
Richard B. Benenson, Kerry J. LeMonte, J.
Antitrust and Consumer Protection Law articles are sponsored by the Antitrust and Consumer Protection Subsection of the CBA Business Law Section to provide information about and explain the complexities of antitrust and consumer protection laws.
Coordinating Editors
Katherine M.L. Pratt, Boulder, of Berg Hill Greenleaf & Ruscitti LLP—(303) 402-1600, kmlp@bhgrlaw.com; Todd Seelman, Denver, of Lewis Brisbois Bisgaard &?Smith LLP—(720) 292-2002, todd.seelman@lewisbrisbois.com
About the Authors
Richard B. Benenson is co-chair of Brownstein Hyatt Farber Schreck's Litigation Department, where he defends companies in complex litigation, antitrust, consumer protection, business torts, class actions and securities matters—(303) 223-1203, rbenenson@bhfs.com. Kerry J. LeMonte is an associate in Brownstein's Litigation Department whose commercial litigation practice includes antitrust and healthcare disputes—(303) 223-1244, klemonte@bhfs.com.
As healthcare mergers soar in the wake of the Affordable Care Act, the Federal Trade Commission's recent string of victories in challenging mergers retrospectively, as opposed to prospectively, provides valuable lessons to help potentially avoid federal antitrust scrutiny in other similar transactions.
Antitrust enforcement plays a crucial role in healthcare today. Now more than ever, antitrust regulators are focusing their attention on the healthcare industry. The Affordable Care Act (ACA) encourages many forms of consolidation as a way to achieve more efficient, integrated healthcare systems at lower costs and increased quality. As a result, since the passage of the ACA, the popularity of hospital and other healthcare provider mergers is unprecedented. This has created a target for enforcement actions, which increasingly focus on healthcare provider consolidations.
The Federal Trade Commission (FTC) is the primary and most active antitrust enforcer in the healthcare arena today.1 From 2009 to 2013, over a third of all cases investigated by the FTC were hospital-related.2 At the same time, as more and more providers are merging to achieve the standards and goals of the ACA, the FTC has ramped up its efforts to challenge mergers in the healthcare sector. As FTC Chair Edith Ramirez remarked, "Health care remains a top [agency] priority."3
Picking up from The Colorado Lawyer's December 2015 article on antitrust concerns in Colorado,[4]this article examines the FTC's recent enforcement activities in healthcare mergers and consolidations and the resulting impact on the market and potential mergers in the future. The agency is on a remarkable winning streak of late, focusing on challenging healthcare transactions retrospectively rather than prospectively. In particular, the FTC's successful challenge to St. Luke's Health System's acquisition of Saltzer Medical Group, a group of physicians in Idaho, provides valuable lessons as to how to potentially avoid federal scrutiny before, during, and after any proposed transaction.
The Affordable Care Act and Its Impact on Healthcare
One of the primary goals of the ACA is to provide higher-quality, lower-cost healthcare to more Americans.5 To achieve this goal, the ACA incentivizes healthcare providers to transition from providing fragmented services toward an integrated, value-based approach to healthcare. The law encourages creation of integrated health systems called accountable care organizations (ACOs) networks of healthcare providers that work together to service patientsand the bundling of payments across providers for an episode of care.6 These features of the ACA encourage consolidation among healthcare providers.
The enactment of the ACA resulted in a merger frenzy.7 In 2009 (pre-ACA), there were 52 announced transactions involving 80 hospitals. That number more than doubled in 2012, with 107 announced transactions involving 244 hospitals.8 In 2013, the megamerger arrived, with Community Health Systems (Tennessee) acquiring Health Management Associates (Florida) for $7.6 billion, and Tenet Healthcare Corp. (Dallas) buying Vanguard Health Systems (Tennessee) for $4.3 billion.9 In total, there were 88 transactions involving 283 hospitals in 2013.[10]
More than 50% of hospitals planned to acquire a physician practice in 2013, compared to 44% in 2012, according to a survey from healthcare staffing company Jackson Healthcare.[11] The hospital administrators surveyed said the desire to acquire is not strategic, but rather driven by the need "to build, or maintain, a competitive advantage," likely as a result of the ACA.12
Ninety-five hospital transactions were announced in 2014,[13] and the year brought larger, "more flexible and less traditional" hospital mergers and acquisitions than in previous years.14 Based on the latest analysis, hospital merger and acquisition activity continued at a frenetic pace in 2015.15 As Tom Baldosaro, CFO at South Jersey Healthcare Regional Medical Center in Vineland, New Jersey, put it: "Big is going to be better. Small is not going to survive."16
The Potential Conflict between ACA and Antitrust Laws
Many healthcare providers see a tension between the ACA's goals of economic efficiencies through mergers and acquisitions and traditional antitrust law enforcement. Hospitals often claim the primary reason they acquire other hospitals and physician groups is to coordinate care, which is a primary goal of the ACA. According to hospitals, the law encourages hospitals to reduce costs and improve quality by coordinating care, and the primary way to coordinate care is through mergers and consolidation.17 Hospital executives also claim that mergers benefit consumers by increasing cash flow for struggling providers who can buy new medical equipment and adopt electronic health records.[18] Thus, many hospitals and other providers view mergers as necessary for survival in a post-ACA world.19 Conversely, antitrust laws are viewed as limiting the ability of doctors and hospitals to join forces and collaborate to avoid concentration problems that could potentially harm consumers.20
The FTC sees no conflict. Agency officials have responded to such concerns with numerous statements asserting that there is nothing inconsistent about the ACA and antitrust laws, and that the ACA is not a "free pass" to avoid FTC regulation. As Martin S. Gaynor, director of the FTC's bureau of economics, said: "Enforcing the United States antitrust laws will not conflict with the goals of the Affordable Care Act. The goal of the antitrust laws is entirely consistent with the health law's objective to foster new and innovative forms of health care delivery."21
FTC Commissioner Julie Brill has echoed:
The ACA requires providers to create entities that coordinate the provision of patient care services. The ACA neither requires nor encourages providers to merge or otherwise consolidate. ACOs may be formed through contractual arrangements that are well short of a merger, such as a joint venture.22
According to federal officials, the ACA and antitrust laws share the same goals: to lower costs, increase access to care, and improve quality of care by fostering competition. "You can have collaboration, you can have consolidation, you can have cooperation, and we don't worry if it doesn't harm competition," said Gaynor.23
Antitrust enforcement is viewed by some as a powerful, pro-consumer tool to slow "the march toward conglomeration."24 FTC Bureau of Competition Director Deborah Feinstein said last year that "by preventing anti-competitive mergers, as well as alliances and conduct that thwart competition, antitrust enforcement saves money that consumers, employers and governments would otherwise spend on health care."25
Moreover, growing evidence exists that hospital mergers result in increased prices. "Hospitals that face less competition charge substantially higher prices," said Gaynor, adding that the price increases could be "as high as 40 percent to 50 percent."26 Costs are almost 20% higher for physician groups in multi-hospital systems than physician-owned systems.27 In particular, research shows that hospitals gain bargaining power when they are acquired and become part of a big hospital system that does not have another presence in the local market.28
This has not gone unnoticed by the FTC. FTC officials increasingly view hospitals' improved care and reduced-cost pro-merger arguments with skepticism. "Vague promises and aspirations that an acquisition will reduce costs and improve care are not sufficient," said Julie Brill, a member of the FTC.29 Feinstein has stated that despite public claims of alleged benefits, one goal of hospitals and doctors in a merger is to "get increased leverage" in negotiations with health insurance companies and employers.30 "They say they need better rates so they will have more money to invest in their facilities," Feinstein said. "When you strip that down, it's basically just saying, 'We want a price increase.' Even if the price increase is motivated by a desire to invest more in the business, that's problematic. That incentive to invest may not be there if you don't have competition as a spur to innovation—if you're not worried about losing business to the hospital down the street."31
The Federal Merger Review Process under the Hart-Scott-Rodino Act
Section 7 of the Clayton Act prohibits transactions that may substantially lessen competition or tend to create a monopoly.32 As part of the enforcement of...
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