Understanding Recent Developments in Hospital Merger Enforcement

09 May 2012 Publication
Author(s): Alan D. Rutenberg David W. Simon Benjamin R. Dryden

Legal News Alert: Antitrust

At last week’s Antitrust in Health Care conference sponsored by the American Health Lawyers Association and the American Bar Association, the heads of both federal antitrust enforcement agencies, the Federal Trade Commission and the Antitrust Division of the Department of Justice, delivered remarks making clear that fighting anticompetitive effects in health care markets remains a top priority and that they will continue to pursue health care mergers that they believe threaten competition.

The remarks follow several weeks of significant action on the FTC’s hospital merger enforcement docket, with two preliminary injunctions being granted in favor of the FTC and one recent loss being set up for potential review by the United States Supreme Court. After significant disappointments in the 1990s and 2000s, the FTC has pursued with renewed vigor enforcement actions to block or undo hospital mergers, with that effort appearing to bear fruit. The agency’s success coincides with a measurable uptick in the number of hospital mergers, which reached a 10-year high in 20111, ostensibly spurred by the Patient Protection and Affordable Care Act (PPACA).

Current developments in hospital merger enforcement provide important clues about how the FTC will analyze future transactions and when they will challenge consummated transactions. Because the trend of consolidation is expected to continue2, understanding the FTC’s approach is critical for decision-makers in this area. These matters also put focus on the tension between the Obama administration’s antitrust enforcement priorities and its desire to spur collaboration through health care reform and the PPACA. In addition, they also demonstrate how the 2010 revised Horizontal Merger Guidelines may be shaping the FTC’s approach.

OSF Healthcare System and Rockford Health System: Merger Successfully Preliminarily Enjoined

On April 5, 2012, the FTC successfully moved the United States District Court for the Northern District of Illinois for a preliminary injunction stopping OSF Healthcare System (OSF) and Rockford Health System (RHS; collectively, Defendants) from merging.3 Days after the court issued its decision, Defendants abandoned the transaction.

OSF operates several acute care hospitals in Rockford, Illinois. RHS is a not-for-profit health care system that owns and operates Rockford Memorial Hospital (RMH) in Rockford, Illinois. The only other hospital in the Rockford area is SwedishAmerican Hospital, making the transaction a three-to-two merger. Relevant product market was not a point of contention, with parties agreeing that the relevant market was “general acute care inpatient services (GAC) sold to commercial health plans.” The court noted that the FTC also argued that primary care physician services (PCP) is another relevant product market, but that the FTC only needed to meet its burden with respect to one proposed market in order to obtain an injunction. Parties also did not dispute that the relevant geographic market was “the area encompassing a 30-minute drive-time radius from Rockford.”

As to the two prongs of its prima facie case, the FTC prevailed in showing that the proposed merger would result in “a firm controlling an undue percentage share of the relevant market,” positing that the merged entity would have 64.2 percent of the GAC market and a nearly 60-percent share of the PCP market. The FTC also satisfied the requirement that the resulting concentration in the relevant market would substantially increase. In that case, the HHI would jump by more than 1,000 points to be well within the highly concentrated zone, increasing the likelihood of coordinated effects.

Defendants’ rebuttal arguments were that (1) SwedishAmerican hospital had the ability to remain a robust competitor; and (2) that a proposed stipulation between the Defendants to refrain from certain contracting practices eliminated future anticompetitive behavior. The court rejected the first argument, holding that the existence of one strong competitor does not eliminate the risk of future harm, and that although payors were “sophisticated” customers, they could not necessarily refuse to deal with the merged entity in the face of a future price increase, given that consumers in Rockford strongly prefer health plans that offer services from at least two of the three Rockford hospitals. Second, the court rejected the notion that Defendants’ proposed stipulation precluded anticompetitive harm, noting that it did not “specifically preclude price increases or otherwise limit the ability of OSF Northern Region to exercise its market power in order to achieve higher prices.”

Defendants also were unable to effectively counter the FTC’s assertion that coordinated effects were likely to arise in such a concentrated market, with the court noting that Defendants had not presented evidence of “structural market barriers to collusion” to defeat the “ordinary presumption of collusion” in such an environment. Defendants also argued that the merger would generate significant efficiencies, including savings based on the consolidation of clinical operations, one-time capital avoidance savings, and improved quality of care. Ultimately, the court concluded that these did not constitute “extraordinary efficiencies” sufficient to rebut the FTC’s case. Capping off the opinion, the court deemed the injunction in the public interest.

Takeaways From This Decision

The FTC remains tough on efficiencies arguments, with the bar set high for demonstrating that they should carry the day in the face of other circumstances pointing to potential anticompetitive effects.

It can be important for conduct stipulations, to be considered by the FTC, to directly address pricing and other core competitive aspects of post-merger behavior.

Rebuttal arguments concerning coordinated effects should cite to specific barriers to the presumed collusion in a highly concentrated market to increase the successfulness of those arguments.

ProMedica: Merger Successfully Undone

Also in spring 2012, the FTC successfully blocked the consummation of a 2010 merger of Toledo, Ohio hospitals ProMedica Health System and St. Luke’s Hospital, finding that the transaction would “substantially lessen competition” in the Toledo area.4 The hospitals had argued that the merger would help prepare the entities for health reform by advancing collaboration for the sake of capturing cost savings. Although the transaction closed in 2010, the parties have been subject to a hold separate agreement. As part of the latest decision, the FTC ordered ProMedica to sell St. Luke’s to a third party within 180 days, although ProMedica has indicated that it intends to appeal the decision to the Sixth Circuit Court of Appeals.

In arriving at its decision, the FTC looked at evidence gathered during an extended administrative trial, including internal documents and testimony from dozens of expert and fact witnesses. It concluded that the transaction would significantly increase ProMedica’s bargaining leverage with payors, resulting in higher prices for payors and consumers in Lucas County, Ohio. The FTC identified one relevant market for GAC inpatient services and a separate relevant market for inpatient obstetrical services, a decision that Commissioner Rosch characterized in his concurrence as unprecedented. In response, the majority cited to a decision in which a difference in the providers was deemed to justify a separate relevant market. Because the merging parties did not compete in the tertiary services area, those services were excluded from the GAC relevant market. ProMedica argued that they should be included, which would have broadened the relevant geographic market due to the distance that patients will travel for such services, and thereby draw more hospitals into the competitive analysis.

The FTC found “substantial evidence of market structure” supporting a presumption that the transaction would lessen competition and raise prices through unilateral effects, a conclusion supported by information in ProMedica’s own documents. The FTC found that, prior to the merger, “ProMedica had by far the highest prices for general acute-care inpatient services” in the Toledo area and that, by contrast, St. Luke’s were among the lowest. Looking to the post-merger period, in which the number of competitors for general inpatient services would be reduced from four to three, the FTC found that the merged entity would control 58 percent of the market for GAC inpatient services in the relevant geographic area. For inpatient obstetrical services, the merged entity would enjoy an 80.5-percent share. According to the FTC’s expert, this increased concentration could result in as high as a 38-percent price increase at both hospitals.

Witnesses testifying on behalf of managed care organizations predicted that, in the event of such a price increase, they would not be able to merely cut ProMedica and St. Luke’s out of their network offerings and still be able to effectively sell insurance products in the Toledo area. Although ProMedica challenged this testimony as “speculative” and not supported by studies, the FTC said the testimony was properly considered because it was “detailed” as opposed to “rote” and because there was nothing in the record that affirmatively disproved their predictions. In addition, ProMedica challenged the notion that in a diversion/substitution analysis, St. Luke’s services should be considered a close substitute for ProMedica’s vis a vis the preferences of a particular group of patients, rather than looking at substitutes from the perspective of MCOs. The FTC rejected this argument, finding that the MCOs’ decisions on which providers to include in a network are patient-preference driven, and that the percentage of patients that preferred St. Luke’s to other alternatives was sufficiently significant.

To rebut the FTC’s prima facia case, ProMedica also argued a variation of the “failing firm” defense, claiming that St. Luke’s was a “weakened competitor” and therefore should not be analyzed as a viable independent market participant. The FTC did not accept this argument, noting that St. Luke’s was on the upswing at the time of the transaction, and that ProMedica could not meet the “extremely heavy burden” set forth by the courts for using the failing firm defense to rebut the government’s case. Similarly, the FTC rejected the rebuttal argument that ProMedica’s competitors could reposition themselves to compete with the merged entity, finding that ProMedica had not met the burden of showing that this repositioning would happen as a matter of “reasonable probability to certainty.”

Takeaways From This Decision

As also reflected in the OSF decision, the FTC remains skeptical of rebuttal arguments based on the theoretical behavior of payors and competitors in the post-merger market. Any argument based on refusals to deal or repositioning should be backed up by evidence that such conduct is likely to occur in order to maximize the impact of those arguments.

As foreshadowed in the 2010 Merger Guidelines, the FTC will consider relevant markets determined by customer type and, as reflected in the ProMedica decision, based on the identity of providers. This may portend a trend of the FTC alleging relatively narrower relevant markets.

Rebuttal arguments concerning coordinated effects should cite to specific barriers to the presumed collusion in a highly concentrated market to increase the successfulness of those arguments.

The enforcers’ focus on unilateral effects, as reflected in the 2010 Horizontal Merger Guidelines, is reflected in this decision.

Although the FTC has expressed its willingness to work with health care providers to capture the benefits of collaboration in the post-PPACA world, traditional competitive concerns still guide the FTC’s enforcement decisions.

Putney Health: Supreme Court Challenge Set

On March 23, the FTC, via the Office of the Solicitor General, filed a petition for certiorari for Supreme Court review of the Eleventh Circuit Court of Appeals’ decision in FTC v. Phoebe Putney Health Systems, Inc. That decision affirmed a lower court ruling that an alleged two-to-one hospital merger in Georgia was immune from FTC challenge under the so-called state action doctrine. Specifically, the FTC sought review of the appellate court’s decision that immunity applies to anticompetitive actions of municipalities and other political subdivisions when the state generally authorizes the challenged action via legislation and when anti-competitive conduct is a foreseeable result of the legislation.

The Phoebe Putney case concerns a metropolitan area in Georgia with two main hospitals: Memorial Hospital, owned by the Phoebe Putney Health System, with 75 percent of the relevant market; and Palmyra Park Hospital, the next strongest competitor to Memorial, with 11 percent. In December 2010, Phoebe Putney sought to merge with Palmyra Park via the county hospital authority (the Authority). As structured by Phoebe Putney, the transaction contemplated that the Authority would be the nominal acquirer of Palmyra Park, although the Authority did not actually participate in negotiating the terms of the sale, did not finance the sale, and does not have a means of overseeing either hospital’s operation. In April 2011, the FTC sought a preliminary injunction in the U.S. District Court for the Middle District of Georgia to block the transaction, arguing that the merger would substantially lessen competition and tend to create a monopoly, resulting in higher prices as well as diminished quality of care. Rather than contest the substance of the FTC’s argument, Phoebe Putney moved to dismiss, based on the theory that the state-action doctrine immunized its actions because the Authority had approved the transaction and was in fact the entity that would acquire Palmyra Park.

In June 2011, the district court granted the motion5 after analyzing the nature of the powers conferred by the Georgia’s Hospital Authorities Law, which allows for “a public body corporate and politic” for each city and county (or some combination of the two) to meet the public health needs of their respective communities. One of these powers is to acquire and lease out hospitals and other property, which must be within the geographic community to be served by the Authority. Phoebe Putney argued that “the anticompetitive effect of the Authority’s acquisition is reasonably foreseeable by the Georgia state legislature, given the express acquisition powers broadly conferred by the Georgia legislature to hospital authorities.” In December 2011, the Eleventh Circuit court of appeals affirmed that decision.6

Not satisfied with the Eleventh Circuit’s ruling, the FTC via the Office of the Solicitor General filed a Petition for a Writ of Certiorari with the United States Supreme Court. The FTC’s Cert Petition presents two issues to the court:

Whether the Georgia legislature, by vesting the local government entity with general corporate powers to acquire and lease out hospitals and other property, has “clearly articulated and affirmatively expressed” a “state policy to displace competition” in the market for hospital services.

Whether such a state policy, even if clearly articulated, would be sufficient to validate the anticompetitive conduct in this case, given that the local government entity neither actively participated in negotiating the terms of the hospital sale nor has any practical means of overseeing the hospital’s operation.

In the petition, the Solicitor General characterizes the Eleventh Circuit’s decision as out of line with at least four other circuit courts of appeal, and urges the Supreme Court “to correct a line of decisions that erroneously places a large segment of commerce outside the reach of federal competition law.” The petition is not currently set for conference and will likely be considered next Term.

Takeaways From This Decision

The FTC is walking the walk with respect to hospital merger enforcement, continuing to dedicate significant resources to this part of its mandate.

If the FTC prevails, assuming the Supreme Court decides to hear this case, it would be a significant win for the enforcement agencies.

1 Morgan Stanley, Irving Levin Associates.

2 Moody’s Investor Services.

3 FTC v. OSF Healthcare Sys. & Rockford Health Sys., No. 11 C 50344, 2012 U.S. Dist. LEXIS 48069 (N.D. Ill. Apr. 5, 2012).

4 Opinion of the Commission, In the Matter of ProMedica Health System, Inc., FTC Docket No. 9346 (March 28, 2012), available at http://www.ftc.gov/os/adjpro/d9346/index.shtm.

5 See Opinion, FTC v. Phoebe Putney Health Sys., Civ. No. 10-58 (M.D. Ga.), available at http://ftc.gov/os/caselist/1110067/110627phoebeputneyorder.pdf.

6 See Opinion, FTC v. Phoebe Putney Health Sys., App. 11-12906 available at http://ftc.gov/os/caselist/1110067/111214phoebeputneyorder.pdf.

Legal News Alert is part of our ongoing commitment to providing up-to-the-minute information about pressing concerns or industry issues affecting our clients and colleagues. If you have any questions about this Alert or would like to discuss the topic further, please contact your Foley attorney or the following:

Alan D. Rutenberg
Chair, Antitrust Practice
Washington, D.C.

David W. Simon
Milwaukee, Wisconsin

Holden Brooks
Senior Counsel
Milwaukee, Wisconsin

Benjamin R. Dryden
Washington, D.C.

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