5 FTC Challenges to Hospital Mergers: Key Concepts for Today's Antitrust Environment
In May 2012, the FTC announced the redoubling of its efforts to prevent hospital mergers that may leave patients with insufficient local options. The mission had a double-aim to uphold antitrust law and, consequentially, reign in healthcare costs. Former FTC Chair Jon Leibowitz told the Wall Street Journal, "If you want to do something about controlling costs in healthcare, you have to challenge anticompetitive hospital mergers."
Tension between the healthcare industry and FTC has grown since the passage of the healthcare reform law. The Patient Protection and Affordable Care Act encourages hospitals to partner to reduce healthcare costs and improve quality, efficiency and care coordination. The FTC, however, does not appear to be incorporating these industry pressures into its analyses or adjusting antitrust scrutiny for healthcare providers. As a result, many hospitals and health systems feel as though they face two entirely different regulatory messages from the government.
Mr. Leibowitz stepped down from his role and Edith Ramirez was named FTC chair in March. This change in leadership is unlikely to alter the FTC's scrutiny of hospitals' market share and potential price-fixing, however. "I don't think the change from Mr. Leibowitz to Ms. Ramirez will make a huge difference," says Steve Cernak, JD, of counsel at Schiff Hardin in Ann Arbor, Mich., and co-chair of the U.S. Chamber of Commerce's antitrust council. "What might make a difference is Joshua Wright joining the commission and replacing Tom Rosch." Mr. Cernak said Mr. Wright, who was sworn in as FTC commissioner in January, has been much more critical of some FTC actions in the past.
"I think the FTC will continue to apply basic antitrust principles in the healthcare industry and those principles will allow collaboration where it makes sense for consumers, with reduced prices, reduced costs and increased quality," he says. "Healthcare providers won't be able to say, 'We're collaborating like [the Patient Protection and Affordable Care Act] says we should.'" Instead, the pressure will fall on providers to explain how their proposed mergers and acquisitions will benefit consumers.
Lee Simowitz, JD, partner with Baker & Hostetler in Washington, D.C., concurs: "The FTC won't stand in the way of many kinds of integration, but it will continue to be quite aggressive if [it finds] hospital mergers or, less commonly, acquisition of physician practices that produce market power [the FTC] thinks it needs to do something about. Healthcare will stay on its radar."
Here are five recent FTC actions pertaining to hospital-driven transactions — including hospital-hospital mergers, hospitals' acquisitions of physician practices and hospitals' acquisitions of specialty hospitals — along with legal analysis and commentary from attorneys.
1. FTC v. Phoebe PutneyThe FTC v. Phoebe Putney Health System is one of the more complicated antitrust cases in healthcare, as it involves a long trail from the lower courts all the way to the Supreme Court, where justices sided with the FTC this February.
At the crux of this case was whether hospital mergers and acquisitions could be executed despite FTC scrutiny if the state legislature gave local government entities power to acquire hospitals despite antitrust concerns. This exception to antitrust laws is known as the "state action doctrine."
The FTC filed suit in April 2011 to block Albany, Ga.-based Phoebe Putney's acquisition — through an arranged lease with the Hospital Authority of Albany-Dougherty County — of Palmyra Medical Center, later known as Phoebe North, also in Albany. The Hospital Authority of Albany-Dougherty County maintains ownership, oversight responsibility and fiduciary supervision of the assets of Phoebe Putney. Palmyra's previous operator was for-profit hospital operator Hospital Corporation of America.
In June, U.S. District Court Judge Louis Sands ruled that the Hospital Authority was immune from attempts by the FTC to block the transaction. The FTC appealed that ruling, contending that the Hospital Authority approved the $195 million deal without considering possible antitrust issues, particularly that the acquisition could result in a monopoly and increased prices.
In December 2011, the Atlanta-based U.S. Court of Appeals for the Eleventh Circuit approved the $195 million merger, ruling against the FTC's antitrust concerns. The appeals court based its decision on the state action immunity doctrine, ruling that a 1941 Georgia law that allows hospital authorities to acquire hospitals by purchase, lease or other means met the antitrust exemption. The appeals court ruled that this law gave Phoebe Putney the power to acquire Palmyra. It also said anticompetitive effects were anticipated when the 1941 Hospital Authorities Law was enacted.
In March 2012, the FTC filed an appeal with the Supreme Court. In its arguments, the FTC claimed the transaction would create a monopoly in the region, raising prices for healthcare services while reducing competition. The FTC also probed whether the state had met the requirements of the state action doctrine and "clearly articulated and affirmatively expressed" a "state policy to displace competition" in the hospital market. This notion of clear articulation is referred to as the "clear-articulation test" by the Supreme Court. If the state had met this test, the agency still questioned whether such a policy is sufficient enough to validate the allegedly anticompetitive conduct.
In its Supreme Court brief, Phoebe Putney said the hospital authority's decision to address a long-standing capacity constraint by buying an existing private hospital in the area "plainly falls within the range of decisions that the Georgia legislature expected local authorities to make," and that the decision was an act of state.
Justice Sonia Sotomayor delivered the court's opinion in February. The court sided with the FTC, ruling that "because Georgia's grant of general corporate powers to hospital authorities does not include permission to use those powers anticompetitively, we hold that the clear-articulation test is not satisfied and state-action immunity does not apply." The clear-articulation test refers to an assessment of whether the state clearly articulated and affirmatively expressed permission for hospital authorities to make acquisitions that would substantially lessen competition.
Many attorneys and legal experts have said the Phoebe Putney case was a noteworthy win for the FTC. Jonathon Lewis, JD, partner with Baker & Hostetler in Washington, D.C., said the case has great importance, Even though FTC v. Phoebe Putney was based on a narrow and focused state action doctrine. Broader lessons can be drawn from the Supreme Court decision.
One of those lessons is how broadly state action doctrines apply to hospital authorities that want to engage in transactions, or how much said doctrines protect hospitals from FTC scrutiny. "How much is required for the state action doctrine to apply to these transactions? That's important for any hospital," says Mr. Lewis. "They reviewed the Georgia statute under the lens of a state action doctrine, and found it did not apply to this particular transaction."
Mr. Cernak says he thinks the Supreme Court must have seen this as a fairly easy case. "It was a unanimous opinion [that] came out fairly quickly. It must have been one that didn't generate much discussion among the court. [The justices] were pretty skeptical of the arguments made by the hospitals, Justice Sonia Sotomayor was one leading the skepticism," he says.
Angelo Russo, JD, partner with McGuireWoods in Chicago, said the Phoebe Putney case shows the Supreme Court has clearly tightened the standards for state action immunity. "Before this decision, state statutes and regulatory programs that generally authorized activities, such as joint ventures and other competitor collaborations, may have supported the application of such immunity. Now, an entity claiming to act under state authority should be prepared to demonstrate that the state foresaw and implicitly endorsed the anticompetitive effects resulting from the entity's actions," he says.
2. ProMedica Health System v. FTCIn March 2012, the FTC required Toledo, Ohio-based, 11-hospital ProMedica Health System to divest St. Luke's Hospital in Maumee, Ohio, citing anticompetitive effects of the systems' merger, which was completed in August 2010.
In a 4-0 decision, the FTC ruled that non-profit ProMedica's acquisition of St. Luke's is likely to substantially lessen competition and increase prices for general inpatient services and inpatient obstetric services in the Toledo area. St. Luke's, also a non-profit, was formerly an independent hospital. The FTC gave ProMedica six months to divest St. Luke's to an FTC-approved buyer.
The FTC's decision upheld an initial decision made be Administrative Law Judge D. Michael Chappell in December 2011 after 30 days of testimony. Judge Chappell found ProMedica's acquisition of St. Luke's reduced the number of competing hospitals in Lucas County from four to three. He also said the acquisition would increase ProMedica's bargaining power with commercial health plans, and the cost of higher reimbursement rates would then be passed on to customers of the plans.
ProMedica filed an appeal of the FTC's decision with the U.S. Sixth Circuit Court of Appeals. A system attorney said ProMedica had concerns that the FTC did not fully analyze how the system's partnership with St. Luke's would benefit patients and the community. In its court brief, ProMedica says it is not asserting "simply that the FTC reached the wrong results, but also that the FTC asked the wrong questions" in its review of potential anticompetitive effects. The health system claimed the FTC was focused on an increase in prices but failed to ask whether prices will rise to anticompetitive levels, which is a necessary showing for a Clayton Act violation.
At the time this article went to print, the ProMedica case was still making its way through the appeals court, but Mr. Cernak says that during initial arguments and questions posed, the Sixth Circuit Court seemed "pretty skeptical" of the defenses offered by ProMedica.
The panel asked about ProMedica-St. Luke's high market share in obstetrics, and said that seemed too problematic for the hospitals. But hospital attorneys and FTC disagreed on whether that market share gave ProMedica-St. Luke's actual pricing power over the broader variety of hospital services the entity offers.
Questions about St. Luke's financial status also arose. Previosuly, ProMedica has argued that St. Luke's faced severe financial problems, despite attempts from its management to turn it around. ProMedica said three-year turnaround efforts beginning in 2008 did increase revenues and patient volumes, but also generated larger corresponding costs, ultimately failing to improve the hospital's financial situation. It said St. Luke's "financial bleeding" continued all the way up to 2010 prior to its partnership.
But Mr. Cernak said there has already been a dispute as to whether St. Luke's was, in fact, failing. "The 'failing company' defense is a very narrow exception to the merger laws," says Mr. Cernak. The "failing company" argument is a judicially created defense for merger or acquisitions that may otherwise be unlawful. It holds that a deal may proceed if the entity being acquired is subject to imminent bankruptcy or liquidation, and the acquiring entity is the only prospective purchaser of said "failing" company.
Part of this dispute over St. Luke's status as a "failing company" is driven by its pricing negotiation abilities. Mr. Cernak says that, in initial arguments, the two lawyers disagreed on what the evidence said about price negotiations. "The hospital attorney said Toledo-based Mercy [Health Partners] hospitals were the real competitors, while the FTC said there was plenty of testimony that St. Luke's presence helped get better prices for managed care organizations."
Mr. Russo said the ProMedica case reiterates the FTC's concern with the rising costs of healthcare and its belief that competition plays a vital role in ensuring healthcare services are affordable. "Indeed, the agency's recent aggressive stance demonstrates that it is challenging hospital mergers in what it considers to be concentrated markets to ensure that consolidation does not contribute to increasing healthcare costs," says Mr. Russo. "The message to hospitals is that they should be prepared to support the rationale of a proposed transaction with strong evidence that the transaction is pro-competitive."
So far, Mr. Cernak sees nothing unusual in the Sixth Circuit Court's initial questioning, but sensed a stronger argument from the FTC. "It is always tough to try to predict the result just from the questioning but if forced to choose, I think the FTC should be feeling better about the argument right now."
3. FTC v. Renown HealthThe FTC and Nevada Attorney General's Office launched an inquiry into Reno, Nev.-based Renown Health in March 2011 to examine the four-hospital system's partnerships with cardiovascular groups in northern Nevada. Before late 2010, the system had no employment relationships with cardiologists. Rather, most all cardiologists in the Reno area practiced in two medical groups: Sierra Nevada Cardiology Associates and Reno Heart Physicians.
Renown agreed to acquire SNCA, a 15-cardiologist practice, in late 2010. It hired 16 more cardiologists in March 2011 when it acquired RHP. Renown's contracts with the newly hired cardiologists also included non-compete provisions that essentially barred them from joining medical practices that competed with Renown. As a result of both the practice acquisitions and the non-compete contract clauses, the FTC filed a complaint, claiming Renown controlled 88 percent of the cardiology market in the Reno area.
In August, the FTC proposed a settlement to remedy the allegedly anticompetitive effects of the acquisitions. Renown agreed to temporarily suspend non-compete clauses in the cardiologists' contracts for 30 days, allowing them to seek other employment opportunities, including those with other hospitals in the area. Up to 10 cardiologists would be permitted to join competing groups during this initial 30-day period.
The FTC would then open another 30-day "release period," during which other cardiologists could leave Renown if they met certain requirements, such as the intention to practice in Reno for at least one year. The FTC said that if fewer than six cardiologists decided to leave during the release period, Renown would be required to continue its suspension of the non-compete provisions until at least six cardiologists accepted job offers with competing practices in the Reno area.
In December, the FTC approved a final order that released 10 cardiologists from non-compete agreements with Renown. A hospital spokesperson said eight left to practice at other area hospitals, while two others planned to pursue private practice. The departing physicians would maintain their Renown privileges.
Mr. Cernak said geography is one of the most remarkable aspects of this case. "The FTC is in Washington, D.C., looking at non-compete provisions in Nevada," says Mr. Cernak. "That shows you the FTC is really paying attention to healthcare. Just because you're a long ways from Washington, D.C., doesn't mean you're out of the FTC's view."
Mr. Cernak also said 88 percent market share is exceptionally high and was a likely trigger for FTC involvement. "If it were under 50 percent, it might not have raised [the same] concerns," he says. Also, Renown's location also made a difference in this case. Mr. Cernak says that since "there's not as many cardiologists in Reno, it makes it more likely you'll see a percentage like 80."
When asked if Renown's acquisitions and cardiologist employment seemed exceptionally bold, given the alleged 88 percent market share, Mr. Cernak pointed to one of the key differences between healthcare providers and the FTC. "In many ways, healthcare professionals see themselves as doing what's best for patients. The FTC just doesn't understand that. They say, 'No, you're competitors, too, just like grocery stores and car companies. You still need to compete.'"
R. Dale Grimes, JD, head of the antitrust practice at Bass Berry and Sims in Nashville, Tenn., said the FTC's challenge was likely spurred by complaints by payors and health plans in the local market that feared increased reimbursement rates. He also said this case suggests the need for parties to realize that market share of the combined group will matter to the FTC.
"Parties will need to consider multiple possible market definitions in order to assess antitrust risk exposure," says Mr. Grimes. "If the risk seems too high, they may need to consider using a physician-hospital organization or some other model that is less restrictive than an outright merger. The alignment can be based on clinical integration and be non-exclusive in payor contracting to reduce the antitrust risk of an outright merger," he says.
4. FTC v. Reading (Pa.) Health SystemIn May 2011, Reading Health agreed to acquire the Surgical Institute of Reading, a for-profit, physician-owned, 15-bed specialty hospital in Wyomissing, Pa. Reading Health is a non-profit system that includes 970 physicians. But in November 2012, the FTC authorized an action to block the proposed transaction.
Taking action roughly six months later after Reading and SIR's initial May agreement, the FTC claimed the pending transaction would "substantially reduce" competition in the area, specifically in four markets: inpatient orthopedic and surgical spine services, outpatient orthopedic and spine services, outpatient ENT surgical services and outpatient general surgical services.
For each of those markets, the FTC claimed Reading Health's acquisition of SIR would result in combined market shares ranging from 49 to 71 percent. Based on this reasoning, the FTC and Pennsylvania Attorney General Linda Kelly asked a federal court for an injunction to bar the deal.
Upon learning of the FTC's opposition to the deal in November 2012, the system terminated its acquisition plans. Reading Health officials said they disagreed with the FTC and state attorney general, but decided the long-term costs of a legal battle with the government were not justified.
The FTC dismissed the administrative complaint against Reading Health without prejudice in early December 2012, citing Reading Health's additional commitment to provide 30-days notice to FTC staff before consummating any transaction with SIR.
The FTC's challenge to Reading Health's pending acquisition, and the system's consequential abandonement of those plans, is somewhat par for the course when it comes to FTC challenges. Mr. Cernak says it is not unusual for parties to take a "run at it" and convince the FTC there is no cause for a regulatory challenge to their pending deal. If the FTC proceeds to challenge the transaction, "[many parties say,] 'Well, we took a good run, but we don't want to spend any more time or effort [on this]," says Mr. Cernak.
Instead, Mr. Cernak says the FTC's challenge to Reading Health shows the agency continues to pay attention to all aspects of healthcare, from hospitals acquiring 15-bed hospitals to hospitals' physician practice acquisitions to 'pay for delay' deals between brand-name pharmaceutical companies and generic drugmakers.
5. FTC v. St. Luke's Health System in Boise, IdahoBoise, Idaho-based St. Luke's Health System acquired Saltzer Medical Group, also in Boise, effective Dec. 31, 2012. St. Luke's is a non-profit, six-hospital system. Saltzer Medical Group included approximately 44 physicians, making it one of the largest and oldest independent multispecialty medical groups in the state. Under the deal, St. Luke's assumed the power to negotiate health plan contracts on Saltzer's behalf, and to establish rates and charges for services provided by Saltzer physicians.
In March, the FTC and Idaho Attorney General Lawrence Wasden filed an antitrust complaint to block St. Luke's Health System's acquisition. The action came after the FTC and Idaho AG investigated St. Luke's practice acquisitions, including plans for the Saltzer acquisiiton, for more than a year.
Despite the federal investigation, St. Luke's proceeded with its acquisition of Saltzer. It also faced a lawsuit from two of its competitors: Saint Alphonsus Health System and Treasure Valley Hospital, both in Boise. Those competitors claimed St. Luke's acquisition of Saltzer would leave the combined entity with control of more than two-thirds of primary care physicians in the area. Now that the FTC and Idaho AG have joined the lawsuit, the district court recently moved the trial date from July to September 2013.
In its complaint, the FTC claimed the transaction left the combined entity with nearly 60 percent market share of primary care physicians in Nampa, Idaho, which is the state's second-largest city. The FTC and Idaho AG also allege that the newly combined entity will give St. Luke's greater bargaining leverage with healthcare plans, with higher prices for services eventually passed on to local employers and their employees. The FTC's vote to join the Idaho AG in filing the antitrust complaint was 4-0.
This action was the FTC's most recent at the time this article went to print, and the FTC and Idaho attorney general's complaint was still under seal. The background of this case, however, involves some interesting twists and turns worthy of discussion.
Mr. Lewis and Mr. Simowitz from Baker & Hostetler say the FTC's involvement in this case is interesting for many reasons, one of them being that local, private parties had already sued St. Luke's over the Saltzer acquisition. "The existence of the private lawsuit by local competitors means a lot more is in the public record [in this case] than you'd usually see before the FTC jumps in," says Mr. Simowitz.
Two other things are worth noting, one being that St. Luke's was able to proceed with its acquisition while facing a lawsuit from its competitors and an FTC investigation. The other is that the FTC acted roughly three months after the deal closed. Generally, merger law is prospective, barring deals that may lead to anticompetitive effects. The FTC has traditionally seen "unscrambling of the eggs," or challenging completed mergers, as difficult.
The Hart-Scott-Rodino Antitrust Improvements Act requires companies to file with and receive approval from the FTC before they merge, but transactions that fall below a certain threshold are deemed non-reportable. That threshold is currently set at a transaction value of approximately $71 million, although it is subject to changes with annual inflation.
Although St. Luke's acquisition was non-reportable, the FTC's interest in provider-provider transactions in today's heightened regulatory climate suggests providers may want to exercise traditional pre-merger precautions for all transactions, even if non-reportable under the HSR Act.
Mr. Simowitz says numerous, though far from all transactions, meet the $71 million threshold and are subject to HSR requirements. In those cases, the FTC or the Justice Department can sue to prevent the transaction before it is closes. "But when it is non-reportable, they often have to do it retrospectively. HSR clearance doesn't prevent [the agencies] from going back and challenging a transaction after its closed. That's rarer, but its not terribly uncommon for the FTC to seek divestuture [of a] a transaction that's non-reportable."
Mr. Lewis said it remains unclear how, or if, St. Luke's completion of the deal will benefit it from a litigation standpoint, or how a potential divesture would be implemented. He says that, St. Luke's has represented to the court that the transaction documents contain mechanisms by which the medical group could be reconstituted as a standalone entity if divestiture is eventually required.
"If the FTC and Idaho AG convince the district court to unwind [the deal] under the antitrust laws, how difficult or easy it would be for St. Luke's to put [the practice] back together and support [the practice] going forward is yet to be seen. But they've represented to the court that they can and will do it," says Mr. Lewis.
Another looming outcome of the case? How, or if, the outcome of the FTC complaint will affect the private lawsuit against St. Luke's filed by Saint Alphonsus Health System and Treasure Valley Hospital. "Whether the FTC's separate and more recent lawsuit will influence the outcome of the private suit remains to be seen," says Mr. Grimes.
The FTC has demonstrated a broad interest in healthcare activity. The deals highlighted in this article include hospital and health system acquisitions of specialty hospitals, acute-care hospitals, primary care physician groups, financially troubled hospitals and specialists. Even deals that don't meet the HSR threshold — a $71 million transaction value — have been aggressively pursued by the FTC. As hospitals continue to acquire more providers to align their strategy with tenets of the PPACA, FTC involvement in these transactions is likely to grow, even after deals have been consummated. Ultimately, providers will face a growing need to demonstrated and explain how their acquisitions or mergers are procompetitive and will benefit consumers.
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