April 9, 2012

Consolidation in the hospital sector has proceeded at a rapid pace in the last few years.  Hospitals, like anesthesiologists and other health care professionals and organizations, are seeking the advantages of combined size to secure their future in a marketplace undergoing a revolution with an unknown outcome.  Oral argument before the Supreme Court on the constitutionality of the Affordable Care Act, discussed in our Alert of April 2nd, did nothing to mitigate the uncertainty.

The Federal Trade Commission (FTC) scored a significant victory last week when a federal District Court judge in Rockford, Illinois halted the acquisition of Rockford Health System by a competitor, OSF Healthcare System, until the FTC can conclude an administrative review of the deal (including all appeals, which means a delay of at least a year even if the hospitals ultimately prevail).

According to the FTC, the acquisition would violate antitrust law by reducing competition in two distinct “product” markets in the Rockford area:  (1) general acute care inpatient services and (2) primary care physician services.  The FTC contended that the deal would give the combined entity control over 64% of the local market for general inpatient services and over 37% of the market for primary care services and would leave just one competitor, Swedish American Hospital, in both service lines.  Together with Swedish American, the combined entity would control almost 60% of local primary care services.

The FTC also argued that the deal as proposed would increase the incentives and ability for the two hospitals to collude in anticompetitive behavior such as coordinating managed care contracting strategies, sharing confidential information and holding off on competitive initiatives.

Taking opposite views, the FTC contended that non-price competition would be eliminated between the parties to the transaction, reducing the quality, convenience and breadth of services available to Rockford residents, while the hospitals claimed that their consolidation would increase efficiency and improve operational and clinical effectiveness.

The case came before the District Court on the FTC’s motion for a preliminary injunction, which is an order that preserves the status quo pending some event such as the resolution of a related proceeding.  In granting a motion for a preliminary injunction, a judge decides only that the requesting party has demonstrated a likelihood of success on the merits and that more harm will come from denying than from granting the injunction.   Thus the Rockford court has not decided whether either the FTC or the hospitals have proven their contentions.

The FTC has been increasingly hostile to reductions in competition, which is assumed when there are reductions in the numbers of competitors.  Its 2010 Horizontal Merger Guidelines tightened up the applicable definitions and principles.

There is a certain tension between the FTC and the Department of Justice, on the one hand, and the Department of Health and Human Services, on the other:  the capital costs of restructuring the delivery of healthcare services, including the installation of more and more health information technology, dictate larger entities, but the antitrust model prefers many small competitors.  Another instance of this tension was last year’s antitrust guidance for Accountable Care Organizations.

In March, the Federal Trade Commissioners voted 4-0 to uphold an administrative law judge’s decision ordering ProMedica Health System of Toledo, Ohio, to divest St. Luke’s Hospital in nearby Maumee.  ProMedica is a non-profit healthcare system that operates three hospitals (excluding St. Luke’s) in Lucas County, Ohio and also provides healthcare services in other parts of Ohio and in Michigan.  St. Luke’s in southwest Toledo is also a non-profit, widely recognized as a high-quality, low-cost hospital.  ProMedica, according to the FTC, is equally widely recognized as having the highest rates in the county.

ProMedica acquired control of St. Luke’s in August 2010, under a “hold separate” agreement structured to preserve St. Luke’s as an independent competitor while the FTC investigated the deal.  If St. Luke’s were to be integrated into ProMedica, the combined system would have a market share of almost 60% in general acute-care inpatient services, while reducing the number of competitors in Lucas County from four to three.  It would have a market share of more than 80% in inpatient obstetrical services.

The FTC ruled the merger between ProMedica and St. Luke's presumptively illegal.  It did not accept ProMedica's argument that St. Luke's was a weakened competitor, and it found that “substantial evidence buttresses the presumption that the Joinder will substantially lessen competition, leading to a significant increase in ProMedica's bargaining leverage with insurers and an increase in prices&mdash both at St. Luke's and at ProMedica's legacy hospitals.”   It ordered ProMedica to divest St. Luke’s to an approved buyer within 180 days. 

ProMedica has 60 days to appeal the FTC decision to the appropriate federal Court of Appeals, which it has stated that it will do.

Finally, also in late March, the FTC filed a petition to have the U.S. Supreme Court review a decision by the 11th U.S. Circuit Court of Appeals in Atlanta to allow the $198 million acquisition of Palmyra Medical Center, an HCA facility in Albany, Georgia by the public hospital authority that owns the other hospital in town, Phoebe Putney Health System.    The Court of Appeals had affirmed the decision of the District Court dismissing the FTC’s lawsuit seeking to block the acquisition.  The rationale for the two lower courts’ decisions was the “state action doctrine,” which provides an exception to the antitrust laws for anticompetitive conduct if it is an act of government.   The combined entity would have a greater than 80% share of the geographic market for general inpatient services – and Phoebe Putney did not contest the fact that the effective merger would tend to create a monopoly, relying solely and successfully on the state action doctrine,  The Court of Appeals agreed with the FTC that the joint operation of the two hospitals would substantially lessen competition or create a monopoly and would have ordered the transaction halted if state action were not involved.

The pattern of the FTC seeking to suspend hospital acquisitions and mergers that would result in a combined market share greater than 50%-60% while it performs a full review of the transactions’ implications for competition is clear.  In the Rockford case, a federal District Court agreed with the FTC and granted a preliminary injunction that may end up derailing the deal altogether.  Several commentators (Robert Pear in the New York Times; healthcare antitrust expert Professor Thomas L. Greavey at St. Louis University; Washington DC healthcare antitrust expert Jeff Miles, Esq.) have noted that ProMedica and Rockford could slow the consolidation of hospitals around the country, since hospitals will be “scrutinized extremely closely if [they] undertake a merger with a close competitor.”

When hospitals merge, frequently one anesthesiology group loses its contract and its employees need to find new positions.  A brake on the race between hospitals to acquire their competitors will at a minimum give anesthesiologists more time to secure their own future.   One way in which many groups are trying to secure their future, of course, is gaining market share through mergers with other groups. They need to be aware that they may themselves become the focus of FTC interest – and that the quality improvements and efficiencies of greater size may not shield them against injunctions.  Anesthesiologists should consider obtaining the advice of experienced antitrust counsel as soon as they identify other groups with whom they might merge if the resulting market share would be significant and the reduction in the number of competing groups would drop by one-third or more.

With best wishes,

Tony Mira
President and CEO