Hospital Mergers Under Increased FTC Scrutiny – What’s the Prognosis?

“According to Chairman Jon Leibowitz, the FTC will continue to scrutinize hospital mergers that could limit patient choice… Based on Chairman Leibowitz’s comments, aggressive and resource-intensive challenges to hospital mergers … are likely to continue.” (Healthcare Tops the Agenda of U.S. Antitrust Enforcers by Morgan Lewis)

Hospital mergers are on the rise, and the Federal Trade Commission is taking notice.

That means increased regulatory scrutiny and, in some cases, FTC efforts to block mergers altogether.

The agency ruled last month that ProMedica Health System had to divest itself of the recently acquired St. Luke’s Hospital in Maumee, Ohio. And in early April, a US District Court granted the FTC’s request to temporarily block the proposed acquisition by OSF Healthcare Systems of Rockford Health Systems, leading the two hospitals to abandon the transaction completely.

What specifically is the FTC trying to stop? Five clues from the ProMedica / St. Luke’s and OSF / Rockford actions:

1. Monopolistic market shares:

“… the FTC announced its intent to challenge the $156 million acquisition [of St. Luke’s by ProMedica], which, according to the FTC, gave ProMedica control of nearly 60% of the market for general acute-care inpatient hospital services and over 80% of the market for obstetrical services.” (Federal Trade Commission Upholds Challenge to ProMedica’s Acquisition of St. Luke’s by King & Spalding)

2. Potential for collusion amongst remaining competitors:

“The FTC argued that the increased concentration from the deal was likely to raise prices as a result of coordinated effects after the merger, showing that there was a history of collusion in the market. Under a coordinated effects theory, a merger might be anticompetitive if it allows all the firms in the market to raise prices.” (FTC Wins Preliminary Injunction, Stopping Second Hospital Merger in a Week by Venable LLP)

3. Unrealistic claims of cost efficiencies:

“The defendants attempted to rebut the FTC’s prima facie case by asserting that the proposed merger would result in substantial efficiencies, including annual, recurring cost savings based on clinical integration and one time capital avoidance savings, and improve quality of care… [T]he Court found that the defendants’ claims that the proposed merger would improve quality of care and provide vital nonprice benefits to the Rockford community were non-merger specific, and thus could not overcome the FTC’s case. The key strand here is that the parties had made no commitments to actually execute on these possible efficiencies.” (Rockford Returns — Part II: Court Grants FTC’s Preliminary Injunction Against Hospital Merger to Preserve Status Quo for Preliminary Hearing by Mintz Levin)

4. Inaccurate portrayals of competitive effects of merger:

“ProMedica also argued that St. Luke’s was a financially weak and limited competitor so that the deal did not cause significant harm to competition. Both the ALJ and the Commission rejected this argument. The weakened competitor or ‘flailing firm’ defense is raised frequently in the current economic climate, and so it is important to understand the FTC’s view of it. In assessing this evidence, the FTC noted that ProMedica needed to meet ‘an extremely heavy burden’ to show that St. Luke’s was so weak that its combining with ProMedica was not of concern. (FTC Continues Active Enforcement with Decision to Block Hospital Merger in Toledo, Ohio by Venable LLP)

5. Lack of payer support:

“In the ProMedica case, payers appeared to universally oppose the transaction. For example, one testified that ‘what little leverage we had in negotiations with [ProMedica] has all but disappeared, and [ProMedica’s] ability to demand higher rates… has increased even further.’ Other area payers said much the same. Payers testified that that they expected ProMedica to increase St. Luke’s rates to the much higher levels of the ProMedica hospitals. (Some Practical Lessons from the ProMedica Hospital Merger Decision by Ober|Kaler)

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