On Wednesday, the U.S. Court of Appeals for the 6th Circuit issued a major decision within the hospital sector, as it backed the Federal Trade Commission and ordered Toledo, Ohio-based ProMedica to unwind its acquisition of St. Luke's Hospital in Maumee, Ohio.
Here are five things to know about the decision.
1. The background. ProMedica and St. Luke's completed their merger, effective Sept. 1, 2010. At the time, the nonprofit ProMedica had $1.6 billion in annual revenue, while the nonprofit, independent St. Luke's had about $156 million in revenue.
2. The FTC challenge. About five months after the ProMedica-St. Luke's merger was finalized, the FTC challenged it, arguing the deal would reduce competition and allow ProMedica to raise healthcare prices. Including St. Luke's, ProMedica would own four acute-care hospitals in Lucas County. The FTC said the addition of St. Luke's gave ProMedica 60 percent market share for general acute-care services and more than 80 percent market share for inpatient obstetrical services. An administrative law judge upheld the FTC's decision, and ProMedica had six months to divest St. Luke's to an FTC-approved buyer. However, ProMedica appealed to the 6th Circuit.
3. Mergers involving distressed hospitals. In February 2010, as St. Luke's and ProMedica were conducting due diligence on their deal, Moody's Investors Service downgraded St. Luke's credit rating. St. Luke's had a -9.8 percent operating margin, and it previously suffered three straight years of what Moody's called "large operating losses." Although the primary issue of the merger revolved around increased prices and anticompetitive behavior, St. Luke's was facing steep financial hurdles in its pursuit of a partner. Courts have traditionally been somewhat flexible in allowing mergers involving insolvent and struggling hospitals, but they ultimately sided with the FTC in this case.
4. The FTC is increasingly getting involved in, and winning, hospital merger challenges. Antitrust enforcement has become a hot issue during the past few years. For example, most recently, the FTC ruled Boise, Idaho-based St. Luke's Health System violated antitrust law with its 2012 acquisition of Saltzer Medical Group in Nampa, Idaho. In February 2013, the Supreme Court sided with the FTC on the case of Phoebe Putney Health System in Albany, Ga., and Palmyra Medical Center, also in Albany. The FTC does not get involved in many hospital merger cases overall, but when it does, it likely prevails. This could be a sign the local strategic mergers in smaller communities will face a tougher road to gain approval, especially in cases where they substantially raise market power.
5. Future hospital mergers may continue to face pressure. According to Kaufman Hall, there were 98 total hospital and health system transactions in 2013, a relatively active number but down compared with previous years. Volume is likely to stay steady going forward, and FTC challenges are likely to follow suit. Last month, FTC Chairwoman Edith Ramirez said healthcare competition is a "top priority" for the agency, as the government continues to ensure healthcare markets are not dominated by a single provider.
More Articles on Hospital Mergers and the FTC:
FTC Chairwoman Edith Ramirez: Healthcare Competition is a Top Priority
FTC: CHS Must Sell 2 Hospitals to Complete HMA Deal
FTC Revises Hart-Scott-Rodino Premerger Filing Requirements