When the FTC Looks Back: Implications of Retrospective Reviews of Hospital Mergers

The Federal Trade Commission is focused on retrospective antitrust reviews, as of late.

The FTC typically prefers to investigate or challenge transactions before they are consummated. It's difficult to unscramble eggs, as many lawyers say.

But in 2012, former Commissioner J. Thomas Rosch said "consummated merger investigations have in recent years become an increasingly important part of the FTC's caseload." Hospitals haven't been exempt from this attention, as evidenced by the commission's challenges to Reno, Nev.-based Renown Health (2011), Toledo, Ohio-based ProMedica (2012), Albany, Ga.-based Phoebe Putney Health System (2012) and Boise, Idaho-based St. Luke's Health System (2013).

Retrospective reviews often place extra burdens on hospitals, as they have to undergo months of an investigation and, if challenged, face the potential outcome of divestiture. This compounds the frustration many healthcare providers have expressed with the schism between the FTC's goals and that of the Patient Protection and Affordable Care Act.

The law encourages hospitals to collaborate to reduce healthcare costs and improve quality, efficiency and care coordination. The FTC, however, has challenged not only hospital-hospital transactions, but hospitals' acquisitions of physicians — something hospitals argue they must do to survive.  

The FTC and retrospective antitrust reviews
The Hart-Scott-Rodino Act of 1976 established the federal premerger notification program, which defines which transactions are reportable or not. The HSR threshold, which is indexed to inflation, currently sits at about $71 million. Parties pursuing transactions that meet or exceed that value are required to report the deal, but nothing prevents parties from informing the FTC and seeking an advisory opinion regarding a potential transaction that may cost less than $71 million, either.

Parties that have proposed a reportable transaction are required to wait a specific period of time while the FTC reviews the deal. This gives the agency time to request additional information or documentation, if needed. If the FTC finds the merger or acquisition is likely to substantially lessen competition, it can then challenge it before it has been consummated.

But in 2002, the FTC announced its Hospital Merger Retrospectives Project, under which it would study consummated hospital mergers to develop a better understanding of their effects and potentially bring enforcement actions against completed deals. Two years later, the agency issued an administrative complaint challenging Evanston (Ill.) Northwestern Healthcare Corp.'s 2000 acquisition of Highland Park (Ill.) Hospital — a frequently cited case among healthcare lawyers.

The administrative law judge found the transaction substantially reduced competition for acute-care inpatient hospital services. The ALJ ordered divestiture, and the hospitals appealed to the full commission. On appeal, the commission rejected divestiture in favor of a conduct remedy — separate teams to negotiate contracts with health plans.

Some lawyers are wondering whether a second hospital merger retrospective is on the horizon. Jonathan Lewis, JD, and Lee Simowitz, JD, partners with Baker & Hostetler in Washington, D.C., say FTC Chairwoman Edith Ramirez sees much to be gained by more closely examining hospital transactions that have a "significant vertical element" — her quote. She said this would include integration among physicians of different specialties that results from hospital acquisitions of physician practices.

Mr. Lewis, Mr. Simowitz and R. Dale Grimes, JD, head of the antitrust practice at Bass Berry & Sims in Nashville, Tenn., expect the FTC's current desire for retrospective reviews to continue and possibly carry over to other types of provider consolidation, as Commissioner Ramirez alluded to. The FTC has had a string of successes, technically beginning with the Evanston case. "It's been winning in court, as well as being able to convince parties that it was going to win and causing the parties to either voluntarily make divestitures, commitments about pricing or abandon the deal," says Mr. Grimes.

Recent and current antitrust cases, such as that involving St. Luke's in Idaho, might well influence whether the FTC will turn its retrospective focus from hospital-hospital deals to hospital-physician deals to build more experience in to win such challenges, say Mr. Lee and Mr. Simowitz.  

The pros and cons of retrospective reviews
For the FTC, one of the most substantial drawbacks of a retrospective review is the difficulty of fully restoring competition after a merger takes place. This complication became evident in the FTC's 2013 settlement with Phoebe Putney Health System, as an example.

Certificate of need laws in Georgia complicated the likelihood of a successful divestiture. If Phoebe Putney sold back Palmyra Park Hospital, it would trigger a CON review. "Unfortunately, Albany is deemed 'over-bedded' by Georgia's strict need assessment criteria," the FTC found, making it unlikely that any possible buyer after divestiture would obtain the necessary CON approval to operate Palmyra Park as an independent hospital.  

Instead, a conduct remedy was put into place. Phoebe Putney and the Hospital Authority of Albany Dougherty County in Georgia — the parties that had acquired Palmyra Park — are required to give the FTC advanced notice of future transactions involving other healthcare providers. The parties are also barred from opposing potential competitors' certificate of need applications for acute-care hospitals in a six-county area.  

Despite the complexity of restoring competition, there are still some benefits for the government when challenging a completed transaction. In these cases, time is often on the government's side, as agencies can point to facts or evidence of problems resulting from a merger. "At that point, when [the FTC] gets to it, there has either been a complaint made or there is evidence of anticompetitive behavior developing," says Mr. Grimes.

The Clayton Act allows a merger to be halted if it will tend to harm competition. That's the standard for a premerger challenge, and it's also the standard in a retrospective challenge. The difference is, for the latter, the FTC might have actual facts. "There's often evidence of an increase in pricing or market power with insurers, to say, 'There's actual anticompetitive harm here,'" says Mr. Grimes.

The role of insurers
The FTC has refined its approach to litigating horizontal hospital merger challenges by not only focusing on how a deal can affect patients, but how it affects the direct payer of hospital services. When a health plan is putting together a product to sell to employers, what providers can they include to build a network? How does a hospital transaction affect health plans trying negotiate with merged providers? These types of questions are highly relevant.

"What [the FTC] established after the Hospital Merger Retrospective is there is two stages of competition in healthcare," says Mr. Lewis, with Baker & Hostetler. "One is at the more patient or consumer level, where consumers are more concerned about the quality of care and access. And the other is the negotiation between providers and health plans, which is really price- and coverage-based."

Although clinical integration lends hospitals and physicians some protection, payers are prepared to alert the FTC if they feel merged providers are using their increased market power to leverage higher rates without integrating to a meaningful level that warrants those rate increases. Competing physicians or providers that do not integrated in a meaningful way but negotiate as a single group with health plans can be charged with price-fixing.

"The health plans are not shy," says Mr. Lewis. "There is a long history of plans going to the FTC to say, 'Hey, this large group of physicians is refusing to contract with us because they want higher rates. But they're not integrated and they're not sharing risk.'"

When this occurs, the FTC might launch an investigation and resolve the matter with a consent order, in which the physicians would agree that they were not clinically integrated, or sharing risk, and they would not negotiate with payers in that fashion anymore going forward.

Non-reportability does not grant immunity
Reportability is not synonymous with immunity. The $71 million mark — distinguishing reportable and nonreportable transactions — doesn't make for a reliable rule of thumb. "Reportability is merely a function of size," says Mr. Simowitz with Baker & Hostetler. "There's no screen for, 'Is this likely to be a troublesome transaction?'"

Mr. Simowitz says the vast majority of transactions that are reportable under the HSR Act "raise no issue" and are not investigated. There have been plenty of those types of transactions in healthcare as of late, as 2013 saw several large for-profit hospital operators and nonprofit systems merge.

Most deals, however, fall below the $71 million mark. And even though they aren't the most expensive deals, geography or market conditions can still make these transactions problematic from the FTC's standpoint.

"What healthcare parties need to keep in mind is not, 'Oh, we're below $71 million so we have less to worry about,' but that these [reviews] are happening more and more," says Mr. Grimes. "Even if deals are significantly below $71 million, [providers] could be considered to have market power in their particular locale or specialty."

Some of the recent FTC challenges, such those involving St. Luke's in Idaho and Renown in Nevada, are centered on a relatively modest number of physicians compared to some other markets. For instance, the FTC argued that Renown's employment of about 30 cardiologists left it controlling 88 percent of the cardiologists in the Reno area.  

Mr. Grimes said providers must think like the FTC. "Good antitrust counsel will help them think about the types of alleged markets that could be asserted by the government, and how they need to anticipate that and create a deal that will have more protection from it."

More Articles on the FTC in Healthcare:

5 FTC Challenges to Hospital Mergers: Key Concepts for Today's Antitrust Environment
Market Matters: How Major Hospital Mergers Have Avoided Antitrust Issues
FTC Official Addresses Physician-Hospital Mergers, ACO Policies


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