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Market Matters: How Major Hospital Mergers Have Avoided Antitrust Issues

The summer of 2013 was an eventful season for the for-profit hospital market. First, Dallas-based Tenet Healthcare Corp. agreed to buy Nashville, Tenn.-based Vanguard Health Systems in June in a transaction valued at $4.3 billion. Less than two months later, Franklin-Tenn.-based Community Health Systems gave the industry another mega-merger announcement when it revealed its planned acquisition of Naples, Fla.-based Health Management Associates in a deal valued at $7.6 billion.

News of the mammoth mergers has spurred concern about potential price hikes for consumers as a few powerful players take over more and more of the hospital market. In July, Moody's Investors Service released a report declaring the Tenet-Vanguard deal bad news for nonprofit hospitals, particularly small standalone ones. The merger will strengthen Tenet's market power, possibly driving further consolidation, according to Moody's.

That could be even more bad news for payers. A study last year from the Robert Wood Johnson Foundation found last year that hospitals merging in already consolidated markets can send prices soaring by more than 20 percent.

Major mergers, major antitrust concerns
Hospitals and health systems looking to join forces have to worry about objections from more than economists and health insurers concerned about skyrocketing prices. The Federal Trade Commission has expressed its intent to keep a close eye on hospital mergers, especially in recent years as consolidation activity has increased under growing pressure to cut costs and improve quality of care.

At the 2013 National Policy Forum of America's Health Insurance Plans in March 2013, FTC Commissioner Maureen Ohlhausen emphasized the importance of preventing the possibly harmful effects of increases in provider market power. However, Ms. Ohlhausen also noted the potentially positive side of consolidation, noting the benefits — such as improved quality of care and lower costs — that can result from providers working together rationally. Furthermore, she described the FTC's approach to intervening in healthcare markets as cautious, especially given the continuing implementation of the Patient Protection and Affordable Act, which calls for increased clinical integration.

Despite its considerable scope and effect on market power, the Tenet-Vanguard deal has avoided butting heads with the FTC. The commission recently granted early termination of mandated waiting period under the Hart-Scott-Rodino Act, which outlines the federal premerger notification program, according to a D Healthcare Daily report.

Although the CHS-HMA deal has yet to receive the green light from the FTC, healthcare legal experts say it's unlikely to run into any antitrust roadblocks. These experts say mega-mergers don't necessarily mean big problems with the FTC. Whether or not a merger raises red flags with the enforcement agency depends on various factors such as market overlap and the intent behind the transaction.

"The question is 'What's the nature of the market?,'" says Lee Simowitz, JD, partner with Baker & Hostetler in Washington, D.C. "The first line of defense against an antitrust investigation is what the market looks like."

CHS-HMA: FTC challenge unlikely
Once the CHS acquisition of HMA is completed, CHS will be the largest for-profit hospital operator in the U.S. by number of facilities, owning 206 acute-care hospitals across 29 states. The deal is expected to close in the first quarter of 2014, although it must undergo FTC scrutiny first, and at least 70 percent of HMA shareholders must vote to approve the merger.

Under the merger agreement, CHS will pay HMA $3.9 billion in cash and stock. CHS will also assume $3.7 billion of HMA's debt and has valued HMA's stock at $13.78 per share.

CHS currently owns, operates or leases more than 135 hospitals in 29 states, while HMA has a portfolio of 71 hospitals in 15 states. CHS and HMA both operate hospitals for the most part in rural or smaller regions, and their lack of localized overlap means the merger likely won't raise any alarms with the FTC, says George Paul, JD, partner at White & Case in Washington, D.C.

The FTC will probably review the proposed merger on a highly localized level to determine how likely the two hospital operators are tocreate a monopoly, Mr. Paul says. Under that method of scrutiny, it seems like HMA and CHS won't run into any problems because of their lack of local overlap. For example, although they both have hospitals in Tennessee, those facilities aren't close enough to each other to dominate the market, Mr. Paul says.

"No one's going to go from Knoxville to Memphis to go to the hospital," he says. "They're complimentary rather than having an overlap."

Melesa Freerks, JD, associate at McGuireWoods in Chicago, agrees the companies' hospital locations in smaller, rural areas means their consolidation poses little threat of being an anticompetitive force.

"A lot of the CHS and HMA hospitals are sole providers," she says. "They're not necessarily competing with anyone else."

Tenet-Vanguard: Venturing into new markets
After Tenet completes its acquisition of Vanguard, it will own 79 hospitals, possibly 82 if Vanguard successfully assumes ownership of three hospitals in Connecticut. It will also operate 157 ambulatory surgery centers and outpatient centers. Tenet will enter new markets such as Chicago, Detroit, San Antonio, Phoenix and New England. The company will additionally gain health plans associated with Vanguard.

Tenet currently owns hospitals in 10 states, while Vanguard has a presence in five states. They both operate facilities in Texas but do not overlap on a state level otherwise. Because the merger mostly involves Tenet expanding into new and bigger markets which have plenty of competitors, it's not surprising the FTC didn't challenge the transaction, Ms. Freerks says.

"A lot of it goes back to just how the FTC defines a market," she says. "They seem to focus on a very local level."

The FTC, PPACA and antitrust enforcement

Given the significant changes currently happening within the healthcare industry, the FTC will likely have to adjust its approach toward antitrust enforcement, Ms. Freerks of McGuireWoods says. Coverage expansion under the PPACA will soon bring millions more insured patients to the market, and access to care could become an issue if the FTC's approach is too strict. Ms. Freerks says the regulators could potentially drive companies into bankruptcy if they are prevented from merging with other hospitals and health systems, an action that is often taken to cope with reimbursement reductions, new quality requirements and other economic pressures.

"They're going to have to be lax in certain areas to allow these mergers to happen to make sure there are enough companies," she says.

HMA, CHS, Tenet and Vanguard are far from the only hospital operators looking to join forces with others. Hospital merger and acquisition activity has surged in recent years due to various factors, with more than 300 estimated hospital mergers since 2007, according to the FTC. In the second quarter of 2013 alone, 15 hospital mergers and acquisitions were announced, according to a report from Irving Levin Associates.

Mr. Paul of White & Case agrees the FTC must take the dramatically shifting healthcare landscape into account when calibrating its enforcement efforts. As healthcare reform progresses, hospitals will see more Medicaid beneficiaries while simultaneously coping with Medicare payments shifting from fee-for-service to pay-for-performance, changes that will significantly change the way hospitals interact with patients and payers alike, he says.

"The Affordable Care Act poses some real challenges for the FTC," he says. "It fundamentally changes the competitive landscape. What most everybody agrees is that the law is leading hospitals and most others in the healthcare industry to consolidate and integrate. If the FTC fails to take that into account and understand the increased pressures on hospitals, it's going to be overly aggressive."

However, the potential effects of the PPACA alone are unlikely to sway the FTC, Mr. Simowitz of Baker & Hostetler says.

"You don't get very far with the FTC just by invoking the ACA and saying, 'You've got to look at this differently,'" he says. "What you're going to hear from the FTC staff is, 'Fine, we hear you. What other arguments do you have?' The FTC is going to look at the markets as it finds them and will take into account market changes."

Furthermore, it's difficult to predict how the reform law will actually affect the hospital industry. "If it results in reduced reimbursement rates, it may put more hospitals — especially smaller hospitals — under economic pressure," Mr. Simowitz says. "On the other hand, if the ACA increases the number of insured patients on the market, it could make hospitals economically stronger."

Avoiding an FTC faceoff: What hospitals need to know
Hospitals and health systems that want to carry out mergers but are wary of the FTC can adopt various strategies to mitigate antitrust concerns, says Mr. Simowitz of Baker & Hostetler. First of all, if the deal involves head-to-head competitors, the companies should get an antitrust lawyer and potentially an economist involved early on. Before moving forward, Mr. Simowitz says hospitals should analyze market conditions as shares, as well as gauge how health plans will react to the transaction.

However, he says a good reason behind the acquisition is the most crucial factor. Improving quality of care is a persuasive motivator, for example.

"Often what's most important is the rationale for a transaction that is there from the beginning, even before an antitrust lawyer or economist gets involved," Mr. Simowitz says. "The FTC places most importance on ordinary course documents created by business people even before they started thinking about antitrust."

Ms. Freerks also says analyzing the market is crucial to predicting and avoiding antitrust issues. "If you're not even in the same market, there shouldn't be an issue, which is what Vanguard and Tenet came into," she says. "However if you're looking at the neighbor next door, the concern is how you might leverage yourself to drive up prices by cutting out the competition."

If the merger raises concerns about price hikes, hospitals can mitigate those worries by involving payers from the beginning of the transaction process and discussing price negotiations, she says. Hospitals and health systems can also meet with managed care companies to get input on how the merging entities can collaborate to provide better services for lower costs costs to alleviate the concern the merger will lead to increased prices.

Conclusion: The future hospital-FTC dynamic
The PPACA still poses many unknowns for hospitals, and the pressure to rein in out-of-control healthcare costs while simultaneously providing higher quality care isn't going away anytime soon. The economic fate of hospitals and the state of the industry depends on providers and antitrust law enforcers coming together to reach an understanding, Mr. Paul of White & Case says. Healthcare providers will have to help the FTC see why consolidation must take place as a necessary way to reduce costs, he says.

"What companies are going to have to do is really work with the FTC so the FTC will adjust the current thinking it has," he says. "It's going to have to take into account what the competitive marketplace is going to look like over the next two years."

More Articles on Hospital Mergers:
5 Benefits of Hospital Antitrust Settlements
FTC Official Addresses Physician-Hospital Mergers, ACO Policies
9 Things to Know About the CHS-HMA Merger 

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