Keystone Orthopaedic Specialists, LLC/Orthopaedic Associates of Reading, Ltd.
Keystone involved the 2011 merger of six independent orthopedic group practices in Berks County, Pennsylvania, into Keystone Orthopaedic Specialists, LLC. Prior to the merger, 25 orthopedists practiced in 11 separate physician groups. The merger combined 6 of the practices, with the combined entity employing 19 out of 25, or 76 percent, of the practicing orthopedists in Berks County, which the FTC treated as the relevant geographic market. In 2014, 6 of the 19 orthopedists left Keystone and formed Orthopaedic Associates of Reading, Ltd.
On October 15, 2015—about four years after the original merger was consummated—the FTC filed an administrative complaint challenging the merger under section 7 of the Clayton Act. The FTC said that the combination had given Keystone substantial market power in negotiating contracts with payers, which it had used to raise prices. The harm to competition was not offset by any merger-specific efficiencies, the FTC said. Along with the complaint, the FTC provided a negotiated consent order pursuant to which Keystone and Orthopaedic Associates must obtain FTC approval before merging or before acquiring any other Berks County orthopedics practices or affiliating with any other Berks County orthopedists. Among other provisions, the consent order prohibits Keystone and Orthopaedic Associates from jointly negotiating with payers, except as part of a risk-sharing arrangement or clinically integrated network. In an analysis provided with the proposed consent order, the FTC said it would have pursued structural relief if Orthopaedic Associates had not already left Keystone.
Cabell Huntington Hospital/St. Mary’s Medical Center
In a complaint filed November 5, 2015, the FTC challenged the proposed merger of the two general acute care hospitals located three miles apart in Huntington, West Virginia: Cabell Huntington Hospital and St. Mary’s Medical Center. In evaluating whether the merger was likely to harm competition, the FTC focused on two service markets: general acute care inpatient hospital services and outpatient surgical services. The FTC defined the general acute care inpatient services market as a group of medical and surgical diagnostic services that require an overnight stay and were offered by both hospitals. The FTC estimated that, post-acquisition, the combined entity would hold a 75.4 percent share of the general acute care hospital services market in the four-county region around Huntington that FTC said the hospitals served. The FTC’s complaint alleged that the merger was presumptively illegal under its Horizontal Merger Guidelines because the merger would increase the Herfindahl-Hirschman Index (HHI)—a measure of market concentration—for general acute care hospital services in the relevant market by 2,825.
The FTC also pointed to internal documents from both entities indicating that each entity viewed the other as its principal competitor. The FTC said that the combination would lead to higher prices, without providing any offsetting benefits to consumers. In support of this contention, the complaint referenced statements from payers that the combination would lead to higher costs—because payers would be unable to play Cabell and St. Mary’s off each other to extract price concessions—and cited examples of payers contracting exclusively or threatening to contract exclusively with one hospital or the other. The FTC further averred that high barriers to entry—due to the high costs to build a new hospital and state certificate-of-need laws that would preclude entrants from providing duplicative services—means that new entrants were unlikely to offset harms to competition. The FTC rejected as “conclusory” and not “substantiated” Cabell and St. Mary’s assertion that the merger would improve quality through consolidation and coordination of clinical services.
In response to the FTC’s challenge, the West Virginia legislature passed a law that potentially provided the merger with state-action immunity from federal antitrust laws. See generally F.T.C. v. Phoebe Putney Health Sys., Inc., 133 S. Ct. 1003, 1010–11 (2013) (discussing state-action immunity). After the governor of West Virginia signed the bill into law, the FTC and the hospitals decided to remove the matter from adjudication pending a determination of the impact of the legislation on the FTC’s challenge.
Penn State Hershey Medical Center/PinnacleHealth System
Penn State also involves the proposed merger of two general acute care hospital systems: the Penn State Hershey Medical Center, which operates one hospital in the Harrisburg, Pennsylvania, area, and PinnacleHealth System, which operates three hospitals in the same area. According to the FTC’s complaint, which the agency filed on December 8, 2015, the combined health system would hold 64 percent of the market for general acute care inpatient hospital services in the four counties in and around Harrisburg. The FTC estimated the merger would increase the HHI by 2,000, rendering the combination presumptively unlawful under the agency’s Horizontal Merger Guidelines.
In support of its contention that the merger would harm competition, the FTC emphasized that Penn State and Pinnacle offered “very similar services” and were the “dominant” hospitals in the geographic market with regard to those services. As in Cabell, the complaint points to internal documents from Penn State and Pinnacle as establishing that each entity viewed the other as its principal competitor. Also as in Cabell, the complaint states that payers had expressed concern that the merger would result in higher prices by giving the combined entity greater leverage in negotiations. As it did in Cabell, the FTC rejected the hospitals’ efficiency justifications as “overstated, speculative, unverifiable, not merger-specific or result[ing] from an anticompetitive reduction in output, quality, or services,” emphasizing that “[n]o court ever has found, without being reversed, that efficiencies rescue an otherwise illegal transaction.”
Advocate Healthcare Network/NorthShore University HealthSystem
On December 18, 2015, the FTC lodged a challenge to a proposed transaction between Advocate Health Care and NorthShore University HealthSystem, the two largest general acute care inpatient hospital services providers in the North Shore suburbs of Chicago. Under the transaction, NorthShore’s four North Shore area hospitals and Advocate’s two North Shore area hospitals would be brought under common ownership. The combined health system would hold 55 percent of the market for general acute care inpatient hospital services in the North Shore geographic market defined by the FTC. The merger would increase the HHI in the already concentrated market from 2,094 to 3,517, rendering it presumptively unlawful under the Horizontal Merger Guidelines.
Unlike its complaints in Cabell and Penn State, the FTC’s complaint does not allege that payers had expressed concern to the agency that the merger would lead to increased prices. Rather, the complaint appeals to economic principles—that increased market share would give the combined entity greater negotiating leverage—and anecdotal evidence that an employer had deemed an insurer’s proposed network inadequate when it did not include either Advocate or North Shore. The complaint also emphasizes that the merger would offset the cost savings to beneficiaries associated with insurers’ move to “narrow” networks—which many observers believe is a result of the ACA. Dan Polsky & Janet Weiner, The Robert Wood Johnson Foundation, The Skinny on Narrow Networks in Health Insurance Marketplace Plans (June 2015). As it did in Cabell, the FTC concluded that potential entrants could not offset the harm to competition associated with the proposed merger because state certificate-of-need laws created high barriers to entry. And as in Cabell and Penn State, the FTC rejected Advocate and NorthShore’s efficiency arguments—most significantly, that the transaction would lead to sufficient cost savings to allow the combined entity to participate in low-price, ultra-narrow networks—as “not substantiated.”
Lessons Learned
Several themes emerge from the FTC’s recent spate of challenges to mergers between and among healthcare providers.
- No “Special Treatment” for Healthcare Mergers: Despite widespread anticipation that regulators might treat health sector mergers differently as a result of the ACA by, for example, giving more weight to quality and efficiency arguments, the FTC’s recent enforcement efforts do not suggest that will be the case. In particular, for each of the four mergers, the FTC identified a relevant service and geographic market, calculated the likely change in the HHI, and determined that the transaction was presumptively unlawful under the Horizontal Merger Guidelines
- Keep Payers Happy: In several of the cases, the administration highlighted concerns expressed by payers regarding the potential for a combination to lead to price increases. Accordingly, when shepherding potentially problematic mergers or acquisitions, it is important to ensure that the merging firms gauge payers’ buy-in and work to alleviate any payer concerns.
- Certificate of Need: Mergers between healthcare providers in states with certificate-of-need laws will have a particularly difficult time surviving agency scrutiny because the agency views such laws as creating significant barriers to entry.
- Efficiencies Should Be Supported by More Than Speculation: In each of the three hospital mergers, the merging entities argued that efficiencies would outweigh potential harms to competition. The FTC gave short shrift to each of these arguments due to the hospitals’ failure to “substantiate” efficiency gains. Accordingly, when relying on efficiencies to defend an otherwise problematic transaction, it is essential to present data and evidence showing that anticipated efficiencies will be achieved. Unsupported assertions that a transaction furthers the quality and care coordination goals of the ACA, and the accountable care organization program in particular, are unlikely, standing alone, to resurrect an otherwise problematic transaction.
- Work Does Not Stop at Closing: In St. Luke’s and Keystone, the FTC lodged challenges well after the transactions had been completed. Accordingly, the fact that a transaction has been closed does not mean that the combined entity will be free from antitrust scrutiny. Accordingly, even after a merger has closed, the combined entity should work to maintain payer buy-in and develop evidence that the anticipated efficiencies have borne out.
Keywords: litigation, health law, mergers, Federal Trade Commission, Horizontal Merger Guidelines
Andrew Kasper is an attorney with Robinson, Bradshaw & Hinson, P.A. in Charlotte, North Carolina.