5 Key Ways to Minimize Hospital Transaction Antitrust Risks
During a recent webinar, McGuireWoods partner Howard Feller, JD, and associate Holly Carnell, JD, discussed the antitrust implications of hospital mergers and joint ventures.
Hospital and health system consolidation has been on the rise lately. The industry's merger and acquisition activity increased by almost 20 percent in the third quarter of 2013 compared with the same quarter a year ago, with 267 deals announced in the past three months, according to Irving Levin Associates.
In line with this increased merger and acquisition activity, the Federal Trade Commission and the U.S. Department of Justice have expressed their intent to keep a close eye on hospital transactions and have actively pursued enforcement actions in the healthcare industry.
In the midst of this climate, it's important for hospitals and health systems to be aware of antitrust concerns and take steps to minimize them, according to Holly Carnell, JD, an associate at law firm McGuireWoods.
"It's really important that hospital leaders proceed with caution, especially with regards to sharing information with competitors during the transaction process," she said.
During a Dec. 11 webinar, Ms. Carnell and McGuireWoods partner Howard Feller, JD, discussed the antitrust implications of hospital mergers and joint ventures and tactics for reducing risk.
1. Be able to show pro-competitive efficiencies for joint ventures. In the case of a joint venture (under which the parties involved don't end up forming a single entity and neither has majority ownership and control), antitrust concerns generally won't arise if the two participants aren't competitors. However, if they are competitors, they should ensure they comply with antitrust conspiracy laws, Mr. Feller said.
"First, the government agencies are always going to ask, 'Why are you doing this transaction?'" he said. "There needs to be a legitimate business rationale for the joint venture."
The deal should produce beneficial, pro-competitive efficiencies. Typically, Mr. Feller said these fall into the category of providing new services that didn't exist previously, reducing costs, being more proficient in providing services and improving quality of care.
"They have to be something that's verifiable," he said. "Hopefully you can, in a quantitative sense, substantiate these efficiencies."
In order to justify the transaction, participants also need to show joining forces is the only way they can achieve these efficiencies.
2. Be aware of the market share and pricing impact of mergers. As far as mergers (where the parties involved integrate and form one entity) are concerned, Mr. Feller said the main consideration for federal regulators is whether prices are likely to increase because of the transaction.
"The agencies will look at a number of factors," he said. "They look at the concentration in a marketplace. How many significant competitors are there in a particular geographic area? What is the market share of those hospitals, and what's going to be market share of the merging entity?"
The definition of service or geographic markets is a "very important" component of that analysis, he said. Looking at the broader hospital service market, the merger might not seem problematic. However, the regulators could find issues if they look at the transaction from a narrow service market standpoint.
Concerning market share, Mr. Feller said there's no "bright line" test for what will attract antitrust scrutiny. However, he estimated a merger will likely get attention from regulators if the resulting entity holds 35 percent of market share or more.
3. Reduce the sensitivity of information exchanged during the due diligence period. A hospital or health system carrying out a deal with a competitor must be vigilant concerning what information it shares with the other party during the due diligence and pre-closing process, according to Mr. Feller. He said the government seeks to prevent collusion at a later point in time.
"It might increase the likelihood that the parties could collude in some fashion even if they don't do their transaction," he said.
Organizations involved in a transaction must remember they are still competitors until the day of closing and must continue to operate independently, he said. If they integrate before the closing date, federal officials could sue them for colluding.
Competitively sensitive information such as current and future fee charges, reimbursement rates from payers and business and strategic plans should not be shared. A good rule of thumb for hospitals and health systems is to ask whether they would share the information in question if they weren't involved in a possible deal with the other party, he said.
It's possible to desensitize information by aggregating, redacting or limiting its competitive usefulness.
"For example, instead of sharing payment rates per procedure, you would share information on total revenues received from a particular payer," Mr. Feller said.
4. Limit access to sensitive information. If the organizations involved want competitively sensitive information to be evaluated as part of the transaction process, they can also "set up firewalls" and allow only certain, screened people to view the information, according to Mr. Feller. These individuals should commit to a confidentiality agreement.
For instance, he said hospitals and health systems could hire third parties, such as a consultant, to evaluate competitively sensitive information and convey their conclusions to the transaction participants without disclosing details.
Overall, healthcare organizations should generally "limit information to what is necessary to evaluate the transaction," he said.
5. Ensure documents evaluating the transaction can stand up to scrutiny. Additionally, organizations involved in a merger or joint venture must realize regulators could scrutinize any documents related to the evaluation process. Therefore, the documents should be free of overstatements, speculation and ambiguous statements, according to Mr. Feller.
Furthermore, he recommended any documents that evaluate a potential transaction should be prepared in draft form and reviewed by an attorney before they're distributed to anyone else.
"These documents can become a real problem if there's ever an investigation," he said.
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