Affidavit: Healthcare and the Law - Beware of Heightened Healthcare M&A Antitrust Scrutiny

Contributors: Sean S. Zabaneh and Pat Gavin
To learn more about Sean and Pat, click here.

 

Mergers and acquisitions (“M&A”) are obviously important strategic tools for businesses in the healthcare space, and there are good policy reasons why such combinations benefit society. For example, M&A transactions often result in substantially improved quality and access to healthcare in many small and rural communities that would otherwise have minimal options. However, healthcare organizations need to pay particularly close attention to the views of regulators on this subject. Recently, the federal government has applied increased scrutiny to healthcare M&A transactions, and state attorneys general are following. This focus certainly applies to hospitals and health systems, but also other healthcare businesses, including, for example, pharmaceutical companies, pharmacy benefits managers, and other players in the healthcare supply chain. The entire healthcare industry should thus be mindful of these changes even at the very earliest phases of transaction planning.

ANTITRUST M&A REGULATION GENERALLY

For more than a hundred years, federal antitrust laws have prohibited M&A transactions that increase prices, lower the quality of goods and services, and stall innovation by unreasonably impeding healthy competition among competitor firms.1 According to the Federal Trade Commission (“FTC”), the “greatest antitrust concern arises with proposed mergers between direct competitors (horizontal mergers),” which may be especially “likely to create or enhance market power or facilitate its exercise.”2 Combinations that may unlawfully impede competition can be stopped, or even reversed, by the government, including the FTC, Department of Justice (“DOJ”) Antitrust Division, and state attorneys general.3 

RECENT TRENDS IN GOVERNMENT ENFORCEMENT

Increased scrutiny under President Biden. The Biden administration is specifically prioritizing antitrust scrutiny of healthcare mergers. In June 2021, the FTC, led by new FTC Chair Lina Khan, passed a resolution that made procedural changes to the FTC’s investigative priorities, calling for investigations into “healthcare businesses such as pharmaceutical companies, pharmacy benefits managers, and hospitals.”4

In July 2021, President Biden issued the “Executive Order on Promoting Competition in the American Economy” that initiated a broader federal crackdown on healthcare and other M&A activity. The Executive Order argued that consolidation in the healthcare sector had led to increased prices and lower quality of care:

“Americans are paying too much for prescription drugs and healthcare services — far more than the prices paid in other countries.  Hospital consolidation has left many areas, particularly rural communities, with inadequate or more expensive healthcare options. And too often, patent and other laws have been misused to inhibit or delay — for years and even decades — competition from generic drugs and biosimilars, denying Americans access to lower-cost drugs.”5

The Executive Order instructed federal agencies, including the FTC and DOJ, to more strictly enforce the antitrust laws in healthcare. 

Implementation by federal regulators. The agencies have listened. The past year has brought more lawsuits challenging proposed M&A transactions and other, more abstract and long-term policy changes from the government.

Most concretely, federal regulators have increased legal scrutiny of mergers and sued to block them, including the FTC’s recent success in blocking two hospital mergers in New Jersey and Utah. In June 2022, RWJBarnabas Health — a 12-hospital system in New Jersey — halted its acquisition of the smaller St. Peter’s Healthcare System after the FTC sued to block the deal.6 The FTC there alleged the transaction would raise prices and hurt patient care because the parties to the merger were competitors, and their merger would over-concentrate market power.7

The FTC also sued to block HCA Healthcare, a large health system in Utah, from acquiring five hospitals from the Steward Health Care System hospitals in the Wasatch Front region of Utah, and HCA then determined not to proceed.8 There, the FTC alleged that “[a]s the second and fourth largest healthcare systems in the Wasatch Front region of Utah,” “HCA Healthcare and Steward Health Care System help to keep costs down for consumers by competing vigorously with each other,” and the “result is lower prices and more innovative services for patients and their families.”9 The FTC then claimed that if “these companies merge, this competition will be lost, and Steward will no longer be available to patients as a low-cost provider in this region.”10

Most recently, the Wall Street Journal reported that the FTC is investigating U.S. Anesthesia Partners, one of the country’s largest anesthesia providers, in order to examine the company’s rapid growth in the context of alleged market power in the Southwest.11

The FTC has also recently issued broadly applicable policy guidance that would make the antitrust enforcement in healthcare mergers stricter.  For instance, in August 2022, the FTC released a policy paper entitled “FTC Policy Perspectives on Certificates of Public Advantage.”12 Certificate of Public Advantage (“COPA”) laws “attempt to immunize hospital mergers from antitrust laws by replacing competition with state oversight” and generally “facilitate hospital consolidation.”13 The FTC’s policy paper sought to discourage these agreements with state regulators and shows the extent to which the FTC is taking a broad-based, long-term approach to changing healthcare M&A antitrust enforcement.

State-level scrutiny. State regulators have followed suit. In late 2021, a group of 26 state attorneys general supported the FTC’s lawsuit in Federal Trade Commission v. Hackensack Memorial Hospital, arguing that the hospital merger would have reduced competition and led to higher prices and lower quality healthcare.14 The state attorneys general joined the FTC, alleging that the merged system would result in control of three out of the six inpatient general acute care hospitals in Bergen County, New Jersey, and that the “proposed acquisition would eliminate close competition between major New Jersey hospitals that would leave insurers with few alternatives for inpatient general acute care services.15 State attorneys general have also appeared particularly focused on smaller healthcare mergers that may not have been on the federal radar.

KEY TAKEAWAYS FOR HEALTHCARE BUSINESSES

Although the torrid pace of M&A activity that defined the COVID era may be cooling down in light of higher interest rates, such activity in healthcare markets will undoubtedly continue. Here are some key takeaways for healthcare businesses to consider:

  • Early planning and consultation with subject matter experts. From the earliest phases of M&A planning, organizations should work closely with their legal teams early and often to get in front of potentially perceived antitrust risks, including even the theoretical ways in which the merger might increase prices. Front-end planning will often involve the input of subject matter experts, such as economists, if the transaction poses particularly difficult questions. Early planning will reduce or eliminate significant delays and setbacks later in the process. 
  • No merger is too small for antitrust scrutiny. Do not assume your transaction is not significant enough to draw scrutiny. The federal government has demonstrated through its scrutiny of the attempted St. Peters acquisition, that it will pursue even acquisitions of local providers. State regulators may focus even more on smaller mergers in order to fill gaps in federal enforcement.
  • Past mergers are not out of the woods. Even though the federal government’s efforts have focused on new M&A activity, past combinations that have been consummated are also at risk of potential divestiture or reversal.

CONCLUSION

M&A is a crucial tool for businesses in the healthcare sector. With good planning from the early phases of the process, healthcare businesses can avoid or mitigate some of the risks and headaches that might come along with scrutiny from regulators down the line.

Contact Sean at: [email protected]
Contact Pat at: [email protected]

Disclaimer: This article has been prepared and published for informational purposes only and is not offered, nor should be construed, as legal advice.

 

References

  1. 15 U.S.C. § 18 (prohibiting mergers and acquisitions whose effect “may be substantially to lessen competition, or to tend to create a monopoly”).
  2. Federal Trade Commission, Guide to Antitrust Laws: Mergers https://www.ftc.gov/advice-guidance/competition-guidance/guide-antitrust-laws/mergers (last accessed October 3, 2022).
  3. See, e.g., United States Department of Justice, Merger Remedies Manual (September 2020), https://www.justice.gov/atr/page/file/1312416/download (last accessed October 3, 2022).
  4. Federal Trade Commission, FTC Authorizes Investigations in Key Enforcement Priorities (July 1, 2021), https://www.ftc.gov/news-events/news/press-releases/2021/07/ftc-authorizes-investigations-key-enforcement-priorities (last accessed October 3, 2022).
  5. Executive Order on Promoting Competition the American Economy (July 9, 2021), https://www.whitehouse.gov/briefing-room/presidential-actions/2021/07/09/executive-order-on-promoting-competition-in-the-american-economy/ (last accessed October 3, 2022).
  6. Spencer Kent, 2 N.J. health systems call of merger after federal lawsuit, NJ.com (June 15, 2022), https://www.nj.com/healthfit/2022/06/2-nj-health-systems-call-off-merger-after-federal-lawsuit.html (last accessed October 3, 2022); see also Harris Meyer, Biden’s FTC Has Blocked 4 Hospital Mergers and Is Posied to Thwart More Consolidation Attempts (July 18, 2022), https://khn.org/news/article/biden-ftc-block-hospital-mergers-antitrust/ (last accessed October 2, 2022).
  7. Federal Trade Commission, FTC Sues to Block Merger Between New Jersey Healthcare Rivals RWJBarnabas Health and saint Peter’s Healthcare System (June 2, 2022) https://www.ftc.gov/news-events/news/press-releases/2022/06/ftc-sues-block-merger-between-new-jersey-healthcare-rivals-rwjbarnabas-health-saint-peters (last accessed October 3, 2022).
  8. Federal Trade Commission, FTC Sues to Block Merger Between Utah Healthcare Rivals HCA Healthcare and Steward Health Care System (June 2, 2022), https://www.ftc.gov/news-events/news/press-releases/2022/06/ftc-sues-block-merger-between-utah-healthcare-rivals-hca-healthcare-steward-health-care-system (last access October 3, 2022).
  9. Id.
  10. Id.
  11. Dave Michaels, FTC Probes Market Power of One of Country’s Biggest Anesthesia Providers, Wall Street Journal (October 1, 2022), https://www.wsj.com/articles/ftc-probes-market-power-of-one-of-countrys-biggest-anesthesia-providers-11664644401 (last access October 3, 2022).
  12. Federal Trade Commission, FTC Policy Paper Warns About Pitfalls of COPA Agreements for Patien Care and Healthcare Workers (August 15, 2022), https://www.ftc.gov/news-events/news/press-releases/2022/08/ftc-policy-paper-warns-about-pitfalls-copa-agreements-patient-care-healthcare-workers (last access October 3, 2022).
  13. Federal Trade Commission, Key COPA Facts, https://www.ftc.gov/system/files/ftc_gov/pdf/Key_COPA_Facts.pdf (last access October 3, 2022).
  14. See https://www.ftc.gov/system/files/documents/cases/de_91_-_amicus_states_brief.pdf (last accessed October 3, 2022).
  15. Federal Trade Commission, In the Matter of Hackensack Meridian Health, Inc. and Englewood Healthcare Foundation (updated July 6, 2022), https://www.ftc.gov/legal-library/browse/cases-proceedings/2010044-hackensack-meridian-health-inc-englewood-healthcare-foundation-matter (last accessed October 3, 2022).