Merger and acquisition activity in healthcare has increased over recent years, driven largely by challenging operating environments and decreasing reimbursements. At the same time, the federal government is encouraging better coordination of care with more advanced technology — both of which require significant investment — in order to reduce national healthcare costs. For these reasons, many hospitals and health systems have been considering transactions.
Recent uptick in M&A activity has given the Federal Trade Commission more healthcare transactions to review. According to an FTC report in March 2012, the agency has "redoubled its efforts to prevent hospital mergers that may level insufficient local options for inpatient services, challenging three such mergers in federal court in the past year." FTC Chairman Jon Leibowitz has said the agency challenges anticompetitive hospital mergers in order to control healthcare costs.
The "redoubling of efforts" by the FTC is evident in challenges over the past few years. Some healthcare professionals view the FTC's renewed focus as aggressive, and many hospitals and health system officials are confused. Since lowering healthcare costs is a major focus, it makes sense that the FTC would want to verify healthcare mergers and acquisitions are not anticompetitive. However, other arms of the federal government are producing regulations and rules that directly and indirectly encourage coordination and integration to decrease healthcare costs. When one way to achieve higher quality, better efficiency and lower costs is through consolidations and partnerships, it is no surprise that hospital executives are confused.
"Some healthcare professionals may feel that healthcare is regulated in ways different than regular commercial industries and therefore, hospitals and health systems should be treated differently by the FTC," says Brian Browder, partner at Waller Lansden Dortch & Davis law firm. "The FTC has not been persuaded by that argument."
In order to understand whether the FTC's reviews have become more restrictive or if transactions are just more fervently crossing the anticompetitive line, it is important to review some mergers the FTC has challenged since 2010.
OSF Healthcare & Rockford Health System
OSF Healthcare in Peoria, Ill., and Rockford (Ill.) Health System recently canceled merger plans due to the prospect of a two-year legal battle with the FTC. The affiliation, which began in February 2011, planned to merge Rockford Memorial Hospital with OSF's Saint Anthony Medical Center. It would have reduced the number of acute-care hospitals in Rockford from three to two. The two entities argued that the consolidation would improve efficiency and quality of care in line with goals set by the Patient Protection and Affordable Care Act. The FTC challenged the merger in November 2011 claiming it would substantially reduce competition among hospitals and primary care physicians in the Rockford area, leading to higher costs. This April, a U.S. District judge ordered OSF and Rockford Health to suspend the planned merger until the FTC could hold an administrative trial in Washington. Shortly after the ruling, OSF and Rockford Health announced they had canceled the merger rather than pursue a legal battle.
St. Luke's Health & ProMedica Health System
In the summer of 2010, Toledo, Ohio-based ProMedica Health System acquired St. Luke's Hospital in Maumee, Ohio. ProMedica planned to provide capital for St. Luke's to adopt electronic health record adoption to standardize care. In January 2011, the FTC challenged the merger claiming it was anticompetitive since it reduced the number of competing hospitals in the area from four to three and allegedly would contribute to higher prices. Over a year later, on March 22, 2012, the FTC ruled that ProMedica's acquisition of St. Luke's did lessen competition and increased prices for general inpatient hospital services and inpatient obstetric services in the Toledo area. ProMedica has been given six months to divest St. Luke's to an FTC-approved buyer. However, a month after the FTC's final order, officials from ProMedica and St. Luke's decided to file an appeal in the 6th U.S. Circuit Court of Appeals in Cincinnati.
Palmyra Medical Center & Phoebe Putney Health System
The FTC has waged a long court battle to stop the acquisition of Palmyra Medical Center in Albany, Ga., by the Albany Dougherty Hospital Authority, which owns Palmyra's only competitor, Phoebe Putney Health System, also in Albany. The battle began in April 2011 when the FTC filed a formal complaint against the acquisition. In June 2011, the Georgia District Court heard arguments from both sides and a federal judge sided with Palmyra and Phoebe Putney. Later in the month, the FTC filed an appeal, and in July 2011, a preliminary injunction on the deal was granted. However, the court of appeals later ruled on the side of the health systems. The FTC then filed an appeal with the U.S. Supreme Court. The case is still pending. According to the FTC, the $195 million acquisition illegally consolidates the market for acute-care hospital services in a six-county area and raises a strong risk for higher healthcare prices.
The above-mentioned transactions shed some light on the recent debate over the role of FTC in healthcare M&A. Some have called the FTC's reviews aggressive because they have led to challenges such as the three mentioned above. Mr. Browder understands the rationale behind the FTC's argument — with fewer hospitals in one market, price increases could potentially go unchecked. "Without competition, a hospital or system could theoretically set a higher price for a service and patients would have no other option for care but to leave the market," he explains. "Moving forward, the challenge will be in finding ways to address this concern while establishing new coordinated care models, particularly in markets where hospitals are struggling to survive financially."
According to the FTC enforcement policy, many hospitals and acquisitions do not present competitive concerns. The agency does not challenge mergers or acquisitions in which one participating hospital has an average of less than 100 licensed beds and an average daily inpatient census of less than 40 patients. These characteristics must be the same over the three most recent years. The FTC includes these parameters because some acute-care hospitals, like rural hospitals, meet these criteria and are unlikely to achieve the efficiencies that larger hospitals "enjoy" — efficiencies needed to integrate and coordinate care.
Additionally, the FTC states that the following scenarios are transactions which would not be considered anticompetitive: a merger unlikely to increase market power for a participating hospital; a merger that allows a hospital(s) significant cost-savings that would be otherwise unrealized; and a merger that eliminates a hospital likely to fail in its market.
"While there is not anything new about FTC reviews, in the current healthcare landscape the agendas of federal agencies [and departments] are overlapping," says Thomas Jeffry, a partner in the healthcare and life sciences practice groups of Arent Fox, a law firm with emphasis on life sciences, real estate and finance. "While the FTC is curbing monopolies and antitrust behavior, [CMS] is enforcing regulations to improve quality and reduce cost. CMS is advocating higher quality, better efficiency and lower costs while the FTC is saying you should not combine if the resulting structure is anticompetitive," says Mr. Jeffry.
The need to bolster quality care, provide capital to adopt electronic medical records and standardize care through clinical protocols were cited as reasons for the St. Luke's and ProMedica merger — advancements in care and technology that CMS and the federal government support. Similarly, the OSF and Rockford Health officials claimed their planned merger would improve efficiency and quality of care. They even went so far as to cite the Patient Protection and Affordable Care Act as an instigator of the transaction.
Officials from all of the above-mentioned examples did not believe their transactions were anticompetitive. Gary Kaatz, president and CEO of Rockford Health, and Dave Schertz, president and CEO of OSF Saint Anthony Medical Center in Rockford, released a joint statement around the time of the FTC challenge saying they "have no question that the affiliation is competitively appropriate." ProMedica believed the FTC's challenge of its deal went against major themes of healthcare reform. In a statement ProMedica claimed the FTC's antitrust challenge of the merger was "inconsistent with the integration and coordination that healthcare reform both encourages and requires." Lastly, attorneys for the Palmyra and Phoebe Putney transaction, still battling the FTC's challenge, believe they have the right to consolidate Palmyra and Phoebe Putney due to its public ownership, which exempts the transaction from federal antitrust laws.
According to Mr. Jeffry, beyond just following FTC regulations very closely, another way to avoid antitrust and anticompetitive challenges by the FTC may be demonstrating community benefit of the merger or acquisition. The benefit for the community has to go beyond the combined financial strength of the entities. While the combined financial strength may be a given, Mr. Jeffry says that should not be the sole reason for a transaction.
"It is more effective to build the case that each facility involved in the merger could not achieve a new service or a new program without the combination of resources because of the transaction," says Mr. Jeffry. "For example, the need to develop a cancer center for the community which has limited oncology resources makes for a more defensible transaction," says Mr. Jeffry. "Position the merger as, not only would the financial health of the hospital be better, but the hospital will be able to provide better, more cost-effective care to the community through services that are unattainable without a merger."
Since, the FTC is particularly concerned with mergers that result in only one hospital or health system in an area, the most viable solution may be to avoid "bread and butter" mergers that could lessen competition in an area. "If a merger could maintain competitiveness, the FTC may view it more favorably. However, it may be unrealistic to carve out aspects of a merger just keep the two entities competitive," says Mr. Jeffry. "Other than that, hospital executives just need to understand how to structure a joint venture or a merger so that the result is not anticompetitive."
Although it may seem that the FTC has become overly aggressive in its reviews of healthcare transactions, antitrust regulations remain largely unchanged. Instead, any perceived increase in scrutiny is more likely a result of the FTC "redoubling efforts." In order for hospital and health systems to see deals come to fruition, they should closely examine FTC rules and regulations before any sort of transaction to avoid anticompetitive elements and proactively make a case for the deal's community benefits.
Hospitals Confused by FTC's Increased Merger Scrutiny
Law Experts, Healthcare Groups Provide Feedback on Government's Antitrust Guidance
Recent uptick in M&A activity has given the Federal Trade Commission more healthcare transactions to review. According to an FTC report in March 2012, the agency has "redoubled its efforts to prevent hospital mergers that may level insufficient local options for inpatient services, challenging three such mergers in federal court in the past year." FTC Chairman Jon Leibowitz has said the agency challenges anticompetitive hospital mergers in order to control healthcare costs.
The "redoubling of efforts" by the FTC is evident in challenges over the past few years. Some healthcare professionals view the FTC's renewed focus as aggressive, and many hospitals and health system officials are confused. Since lowering healthcare costs is a major focus, it makes sense that the FTC would want to verify healthcare mergers and acquisitions are not anticompetitive. However, other arms of the federal government are producing regulations and rules that directly and indirectly encourage coordination and integration to decrease healthcare costs. When one way to achieve higher quality, better efficiency and lower costs is through consolidations and partnerships, it is no surprise that hospital executives are confused.
"Some healthcare professionals may feel that healthcare is regulated in ways different than regular commercial industries and therefore, hospitals and health systems should be treated differently by the FTC," says Brian Browder, partner at Waller Lansden Dortch & Davis law firm. "The FTC has not been persuaded by that argument."
In order to understand whether the FTC's reviews have become more restrictive or if transactions are just more fervently crossing the anticompetitive line, it is important to review some mergers the FTC has challenged since 2010.
3 Recent FTC Challenges
OSF Healthcare & Rockford Health System
OSF Healthcare in Peoria, Ill., and Rockford (Ill.) Health System recently canceled merger plans due to the prospect of a two-year legal battle with the FTC. The affiliation, which began in February 2011, planned to merge Rockford Memorial Hospital with OSF's Saint Anthony Medical Center. It would have reduced the number of acute-care hospitals in Rockford from three to two. The two entities argued that the consolidation would improve efficiency and quality of care in line with goals set by the Patient Protection and Affordable Care Act. The FTC challenged the merger in November 2011 claiming it would substantially reduce competition among hospitals and primary care physicians in the Rockford area, leading to higher costs. This April, a U.S. District judge ordered OSF and Rockford Health to suspend the planned merger until the FTC could hold an administrative trial in Washington. Shortly after the ruling, OSF and Rockford Health announced they had canceled the merger rather than pursue a legal battle.
St. Luke's Health & ProMedica Health System
In the summer of 2010, Toledo, Ohio-based ProMedica Health System acquired St. Luke's Hospital in Maumee, Ohio. ProMedica planned to provide capital for St. Luke's to adopt electronic health record adoption to standardize care. In January 2011, the FTC challenged the merger claiming it was anticompetitive since it reduced the number of competing hospitals in the area from four to three and allegedly would contribute to higher prices. Over a year later, on March 22, 2012, the FTC ruled that ProMedica's acquisition of St. Luke's did lessen competition and increased prices for general inpatient hospital services and inpatient obstetric services in the Toledo area. ProMedica has been given six months to divest St. Luke's to an FTC-approved buyer. However, a month after the FTC's final order, officials from ProMedica and St. Luke's decided to file an appeal in the 6th U.S. Circuit Court of Appeals in Cincinnati.
Palmyra Medical Center & Phoebe Putney Health System
The FTC has waged a long court battle to stop the acquisition of Palmyra Medical Center in Albany, Ga., by the Albany Dougherty Hospital Authority, which owns Palmyra's only competitor, Phoebe Putney Health System, also in Albany. The battle began in April 2011 when the FTC filed a formal complaint against the acquisition. In June 2011, the Georgia District Court heard arguments from both sides and a federal judge sided with Palmyra and Phoebe Putney. Later in the month, the FTC filed an appeal, and in July 2011, a preliminary injunction on the deal was granted. However, the court of appeals later ruled on the side of the health systems. The FTC then filed an appeal with the U.S. Supreme Court. The case is still pending. According to the FTC, the $195 million acquisition illegally consolidates the market for acute-care hospital services in a six-county area and raises a strong risk for higher healthcare prices.
What is causing the confusion?
The above-mentioned transactions shed some light on the recent debate over the role of FTC in healthcare M&A. Some have called the FTC's reviews aggressive because they have led to challenges such as the three mentioned above. Mr. Browder understands the rationale behind the FTC's argument — with fewer hospitals in one market, price increases could potentially go unchecked. "Without competition, a hospital or system could theoretically set a higher price for a service and patients would have no other option for care but to leave the market," he explains. "Moving forward, the challenge will be in finding ways to address this concern while establishing new coordinated care models, particularly in markets where hospitals are struggling to survive financially."
According to the FTC enforcement policy, many hospitals and acquisitions do not present competitive concerns. The agency does not challenge mergers or acquisitions in which one participating hospital has an average of less than 100 licensed beds and an average daily inpatient census of less than 40 patients. These characteristics must be the same over the three most recent years. The FTC includes these parameters because some acute-care hospitals, like rural hospitals, meet these criteria and are unlikely to achieve the efficiencies that larger hospitals "enjoy" — efficiencies needed to integrate and coordinate care.
Additionally, the FTC states that the following scenarios are transactions which would not be considered anticompetitive: a merger unlikely to increase market power for a participating hospital; a merger that allows a hospital(s) significant cost-savings that would be otherwise unrealized; and a merger that eliminates a hospital likely to fail in its market.
"While there is not anything new about FTC reviews, in the current healthcare landscape the agendas of federal agencies [and departments] are overlapping," says Thomas Jeffry, a partner in the healthcare and life sciences practice groups of Arent Fox, a law firm with emphasis on life sciences, real estate and finance. "While the FTC is curbing monopolies and antitrust behavior, [CMS] is enforcing regulations to improve quality and reduce cost. CMS is advocating higher quality, better efficiency and lower costs while the FTC is saying you should not combine if the resulting structure is anticompetitive," says Mr. Jeffry.
The need to bolster quality care, provide capital to adopt electronic medical records and standardize care through clinical protocols were cited as reasons for the St. Luke's and ProMedica merger — advancements in care and technology that CMS and the federal government support. Similarly, the OSF and Rockford Health officials claimed their planned merger would improve efficiency and quality of care. They even went so far as to cite the Patient Protection and Affordable Care Act as an instigator of the transaction.
Officials from all of the above-mentioned examples did not believe their transactions were anticompetitive. Gary Kaatz, president and CEO of Rockford Health, and Dave Schertz, president and CEO of OSF Saint Anthony Medical Center in Rockford, released a joint statement around the time of the FTC challenge saying they "have no question that the affiliation is competitively appropriate." ProMedica believed the FTC's challenge of its deal went against major themes of healthcare reform. In a statement ProMedica claimed the FTC's antitrust challenge of the merger was "inconsistent with the integration and coordination that healthcare reform both encourages and requires." Lastly, attorneys for the Palmyra and Phoebe Putney transaction, still battling the FTC's challenge, believe they have the right to consolidate Palmyra and Phoebe Putney due to its public ownership, which exempts the transaction from federal antitrust laws.
What can hospitals, health systems do?
According to Mr. Jeffry, beyond just following FTC regulations very closely, another way to avoid antitrust and anticompetitive challenges by the FTC may be demonstrating community benefit of the merger or acquisition. The benefit for the community has to go beyond the combined financial strength of the entities. While the combined financial strength may be a given, Mr. Jeffry says that should not be the sole reason for a transaction.
"It is more effective to build the case that each facility involved in the merger could not achieve a new service or a new program without the combination of resources because of the transaction," says Mr. Jeffry. "For example, the need to develop a cancer center for the community which has limited oncology resources makes for a more defensible transaction," says Mr. Jeffry. "Position the merger as, not only would the financial health of the hospital be better, but the hospital will be able to provide better, more cost-effective care to the community through services that are unattainable without a merger."
Since, the FTC is particularly concerned with mergers that result in only one hospital or health system in an area, the most viable solution may be to avoid "bread and butter" mergers that could lessen competition in an area. "If a merger could maintain competitiveness, the FTC may view it more favorably. However, it may be unrealistic to carve out aspects of a merger just keep the two entities competitive," says Mr. Jeffry. "Other than that, hospital executives just need to understand how to structure a joint venture or a merger so that the result is not anticompetitive."
Although it may seem that the FTC has become overly aggressive in its reviews of healthcare transactions, antitrust regulations remain largely unchanged. Instead, any perceived increase in scrutiny is more likely a result of the FTC "redoubling efforts." In order for hospital and health systems to see deals come to fruition, they should closely examine FTC rules and regulations before any sort of transaction to avoid anticompetitive elements and proactively make a case for the deal's community benefits.
More Articles on Healthcare Transactions & Legal Issues:
6 Legal Topics to Consider Before a Hospital Completes a MergerHospitals Confused by FTC's Increased Merger Scrutiny
Law Experts, Healthcare Groups Provide Feedback on Government's Antitrust Guidance