Hospitals have been merging with greater frequency due to the challenging economics of healthcare. Most of these hospital transactions, as they are undisputedly pro-competitive, pass antitrust review by the Federal Trade Commission. Despite this and in light of our national commitment to control healthcare spending, the FTC has undoubtedly become a more aggressive antitrust enforcer during the Obama Administration.
Accordingly, to ensure that FTC reviews are completed in a more speedy and less intrusive manner and to stem off any potential FTC lawsuits aimed at stopping a hospital merger from closing, merging hospitals need to consider the arguments that they will pose to potential FTC queries concerning the competitive impacts of the deal. To be adequately prepared, the parties should consider these merger defenses even before the announcement of their deal. And these defenses should be particularly considered if the merger-in-question will result in an entity that wields a large market share in any given medical specialty in the relevant service area. This article identifies a number of antitrust defenses that hospitals seeking to merge should consider.
It is important to note that, should FTC staff conclude that close scrutiny of a transaction is merited, they will not be dissuaded from recommending a court challenge to the merger unless the merging parties provide evidence supporting their position. They will need to show proof demonstrating that the deal will not result in anticompetitive impact or, conversely, that it will have pro-competitive results, such as the creation of substantial quality measurement and/or utilization management programs. If the FTC thereafter seeks to enjoin the transaction in court, it is unlikely that the merging defendants will prevail without such an evidentiary showing, particularly as the merging parties bear the burden of proof on many merger defenses. In other words, empty promises by the merging parties about not raising price post-merger or engaging in future, vague efforts to control costs and increase patient access to care — untethered to facts — will not be enough.
Defense 1: There will be substantial competition in the relevant markets post-merger
Hospital mergers that substantially increase concentration in any medical specialty in any geographic service area will likely cause enforcers to presume that the merger will lead to anticompetitive impact. In this paradigm, enforcers presume that such a merger will enable the combined entity to raise reimbursement rates provided by commercial health insurers in exchange for services rendered to their members.
There are, however, several ways to rebut this presumption. First, the presumption can be rebutted if evidence demonstrates that, post-merger, health plans will have viable options to contract with other substantial hospital systems, should the combined entity attempt to raise price. In other words, the merging parties can rebut a presumption of anticompetitive impact by demonstrating that there are other hospital competitors that, post-merger, will constrain the prices that will be charged to health insurers by the merged entity. To make this showing, the merged entities and their economist consultants need to review (1) the appropriate "area of effective competition," also known as the "relevant geographic market," (2) the actual and potential services provided by competitors, and (3) the share of particular medical services provided (or to be provided) by the merged entity's competitors in the relevant area.
Note that the FTC and merging parties may diverge on their views of the boundaries of the relevant geographic market and which hospitals are competitors therein. The merging parties should therefore be prepared to prove their view of the market by submitting economic evidence supporting their view to the FTC and, if necessary, a court. They can do this by demonstrating, for example, that insurers have the ability to steer substantial amounts of their members to nearby competitors for service.
Second, a presumption of a merger's anticompetitive impact can sometimes be rebutted by the so-called "defense against giants." As part of this defense, the merging providers would show that the commercial insurers with whom they deal are dominant and that, in light of same, it is unlikely that the merged entity will have the economic power, post-merger, to force insurers to pay more. This defense will be most plausible in areas where the commercial insurance market contains only a few, strong players (i.e., is substantially concentrated).
Defense 2: The merger will lead to substantial pro-competitive and pro-patient impacts
Even mergers that result in substantial market concentration can evade FTC challenge if the merging parties show that they will be accompanied by mechanisms that will achieve efficiencies (e.g., control cost and enhance patient care). Indeed, the drafters of the Patient Protection Affordable Care Act envisioned that provider consolidation would be a means for achieving these efficiencies. While the PPACA does not immunize providers from antitrust scrutiny and the FTC will not afford merging hospitals a "free pass" because of the law, the FTC will consider the policy rationale for the PPACA when reviewing hospital deals.
Arguments related to an efficiencies defense are best supported by evidence that merging hospitals have created systems to track and control future medical utilization. Such systems can assist in controlling overall cost, even if a per procedure price increase occurred post-merger, by reducing unnecessary medical procedures and/or treatment that had been previously prescribed. Appointment of a utilization management committee that has adopted quality criteria and UM guidelines for various specialties, a willingness to share UM data with stakeholders on a regular basis, implementing review programs to decrease readmissions, emphasizing preventative care through tangible acts and communications to patients, and using electronic medical records to enhance medical accuracy and track medical outcomes are factors that should all be considered by merging parties that seek to establish an efficiencies defense.
Defense 3: The merger should occur because one of the merging hospitals is a failing or weakened competitor
Merging parties can also attempt to defend a merger by showing that one of the merging parties will not be able to effectively compete without it. In order for a court to accept such a defense after the FTC has initiated a court challenge, the bar is high: the parties must prove that the financially-troubled hospital is going out of business with "no reasonable prospect of reorganization." Accordingly, few challenged mergers have succeeded on this "failing firm" defense in court.
However, enforcers have sometimes been convinced not to sue over a deal even where a merging party is not "failing" (i.e., it will likely exit the market immediately), but rather is weakened. Under this "weakened firm" defense, the party shows economic data that proves that exit will occur in a few years, notwithstanding that the business is currently profitable. For example, long distance provider, MCI, which was making billions in profits, successfully made this argument when it convinced the Department of Justice Antitrust Division not to challenge its deal with Verizon. Such a "flailing" or "weakened" firm argument is best supported by evidence showing that a large capital infusion will be necessary (e.g., to acquire superior medical equipment) in order to make the weakened firm an effective competitor without the merger.
Defense 4: The transaction is immune from antitrust prosecution
Certain hospital mergers may be immune from federal antitrust prosecution under state law. New York law, for example, seemingly offers such state action immunity to particular hospital deals. Those who pose such a defense should be wary, however: the Supreme Court, in the last term, indicated (in a hospital merger case) that it views the state action immunity doctrine narrowly. The Court reaffirmed that such immunity can ably be offered by state statute that "clearly articulates" and "affirmatively express[es]" a state preference to displace the reach of antitrust law with a regulatory regime. Consequently, hospitals making state action immunity defenses must show that the state statute in question clearly identifies this legislative preference and that the hospital's actions, post-merger, will be actively supervised by a state regulator.
Hospitals considering merging should consider these defenses, particularly if their service area will be substantially concentrated (e.g., leaving only three hospital competitors) as a result of the merger. This is especially true when one considers that many, if not most, hospital mergers require that pre-merger notification be afforded to the FTC — a notification that requires the merging parties to provide the FTC with certain internally created documents regarding the parties vision for the merger and their thoughts on its competitive impact. To the extent that these documents emphasize how the parties intend to enhance competition by the merger, the more likely it is that the FTC will clear the closing of the proposed deal.
Matthew L. Cantor is a partner at Constantine Cannon LLP specializing in antitrust and healthcare matters.
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