Although the challenging and dynamic environment facing many
hospitals and the requirements of the Affordable Care Act might
suggest that the Federal Trade Commission ("FTC") will
displace or rethink traditional antitrust analysis for hospital
mergers, the FTC recently made clear that any hospital merger
resulting in high market shares faces a steep uphill climb to win
FTC approval.
During the same week that the constitutionality of the Affordable
Care Act was being argued before the Supreme Court, the FTC, on
March 28, 2012, announced its decision to block ProMedica Health
System acquisition of St. Luke's Hospital
("ProMedica" and "St. Luke's"). To view the
decision, please click here.
The ProMedica decision continues the agency's active
enforcement in the hospital area. In March 2012, the Solicitor
General, at the request of the FTC, filed a petition for certiorari
in the Phoebe Putney case, seeking to have the Supreme
Court consider whether the State Action Defense protects, from
antitrust scrutiny, an otherwise anti-competitive acquisition by a
government-owned hospital, where the hospital is leased to and
operated by a private entity. To view Phoebe Putney,
please click here. In addition, the agency obtained a
preliminary injunction blocking a hospital acquisition in Rockford,
Illinois pending an administrative trial. To view an FTC statement
on this ruling, please click here.
Background
In May 2010, ProMedica and St. Luke's entered into an
agreement whereby St. Luke's became part of the ProMedica
System. Internal St. Luke's documents made clear that one of
the reasons for the affiliation was to improve the rates that St.
Luke's was able to negotiate with Managed Care Organizations
("MCOs").
In July 2010, the FTC began an investigation of the transaction. In
August 2010, the parties entered into a "hold separate"
agreement that allowed the deal to close but prevented ProMedica
from renegotiating health-plan contracts or raising the rates it
charged to health plans. In January 2011, the FTC issued an
administrative complaint against ProMedica challenging the
acquisition, and the FTC also filed suit in the U.S. District Court
for Northern District of Ohio seeking a temporary restraining order
and preliminary injunction to maintain the parties hold separate
agreement, which was set to expire. In March 2011, the court
entered a preliminary injunction ordering the parties to maintain
the hold separate agreement pending the outcome of the FTC's
administrative litigation.
In its Complaint, the FTC alleged that the acquisition would result
in ProMedica controlling 60 percent of a market for general acute
care inpatient hospital services and 80 percent of a market for
inpatient OB/GYN services in the Lucas County, Ohio area. The FTC
alleged that these high market shares rendered the acquisition
presumptively illegal under Section 7 of the Clayton Act and that
the acquisition was likely to substantially reduce price and
quality competition between St. Luke's and ProMedica.
The FTC conducted the administrative litigation under its revised
Part 3 rules, which were updated in 2009 to expedite the resolution
of merger challenges. This was the first case litigated to a
conclusion under those revised rules. The FTC's Administrative
Law Judge ("ALJ") held an evidentiary hearing beginning
in May 2011, and issued his Initial Decision concluding that the
deal violated Section 7 of the Clayton Act in December 2011.
The Litigation and the FTC's Decision
Although the FTC and ProMedica quibbled on the edges regarding
proper market definition, ProMedica's principal defenses
focused on rebutting the presumption of competitive harm that
allegedly flows from its high post-deal market share. The FTC
ultimately rejected those arguments. At the evidentiary hearing,
ProMedica argued that the efficiencies and pro-competitive benefits
resulting from the transaction outweighed any anti-competitive
harm. The ALJ found the efficiencies evidence insufficient, and
ProMedica did not raise that issue on appeal. 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. The FTC
held that ProMedica would have to show that: (1) St. Luke's was
so weak that its market share would likely soon reduce to a level
that combining with ProMedica would not be a concern; and (2) the
weakness could not be resolved by other means. In its decision, the
FTC acknowledged that due to declining reimbursements from
government payers and relatively poor rates with commercial payers,
St. Luke's combined reimbursements did not cover its costs for
providing care. Nevertheless, the FTC found that the evidence
showed that St. Luke's condition had been improving with new
management and that its market share was improving. In addition,
the FTC found that ProMedica had not shown that it was the only
option available to improving St. Luke's, and the FTC pointed
to the possibility of St. Luke's improving its rate structure
without joining ProMedica or an out-of-area entity affiliating with
St. Luke's.
The FTC also rejected ProMedica's argument that testimony from
MCOs that the acquisition would lead to higher prices was
unreliable. Citing Oracle and Arch Coal,
ProMedica argued that this testimony was not supported by any
market studies or other objective support. The FTC disagreed, and
distinguished the testimony before it from that criticized in
Oracle and Arch Coal, finding the testimony was
not speculative but rather based on real world examples of prior
competition and pricing behavior by St. Luke's and ProMedica.
To view Oracle, please click here. To view Arch Coal, please
see 329 F. Supp. 2d 109 (D.D.C. 2004), appeal dismissed per curiam,
No. 04-5291, 2004 WL 2066879 (D.C. Cir. Sept. 15, 2004).
The FTC and ProMedica also differed on the ability of MCOs to
constrain ProMedica's pricing post-affiliation. While noting
that MCOs do have some leverage in their negotiations with
hospitals, the FTC found that MCOs would not be able to build a
commercially viable network of hospitals without ProMedica after
the acquisition, giving ProMedica the leverage to raise prices.
Similarly, the FTC noted that ProMedica's arguments that MCOs
could steer patients away from ProMedica to discipline any effort
by ProMedica to raise prices was undercut by evidence that steering
was ineffective and that ProMedica's contracts prohibited MCOs
from such steering.
Remedy
To remedy the violation, the FTC ordered ProMedica to divest St. Luke's either to a new purchaser or to a newly constituted St. Luke's. In doing so, the FTC rejected ProMedica's argument that the proper remedy, if a violation was found, was to require St. Luke's to create a separate and discrete negotiating team for reimbursement negotiations with MCOs, but to otherwise let ProMedica and St. Luke's affiliate and integrate. The Commission previously adopted this type of conduct remedy in its challenge to Evanston Northwestern Healthcare Corporation's acquisition of Highland Park Hospital. To view materials related to Evanston, please click here. In urging this remedy, ProMedica argued that, absent an affiliation, St. Luke's would be unable to meet the requirements of the Affordable Care Act and the dynamic healthcare marketplace. The FTC, however, found that prior to the affiliation St. Luke's had enjoyed a reputation as a high-quality, low-cost provider, which put St. Luke's in the right position to prosper under the Affordable Care Act.
What Does it Mean
Despite the Affordable Care Act's influence upon an uptick in hospital mergers, the FTC is not signaling any leeway regarding traditional merger requirements. Hospitals seeking to engage in mergers and acquisitions, particularly those between close competitors, should continue to retain experienced counsel.
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