In 2015, we already have seen a great deal of activity in healthcare transactions that is attracting antitrust scrutiny, with mixed results. Among the winners have been Cabell and St. Mary's, which received state clearance for their acquisition on July 31, 2015, and Phoebe Putney's acquisition of Palmyra, which survived four years of merger litigation with the Federal Trade Commission (FTC). Losers include St. Luke's which lost its appeal from an injunction against its acquisition of Salzer Medical Group; Promedica, which failed in a bid to have the Supreme Court review an FTC challenge to its 2010 acquisition of St. Luke's; and Partners HealthCare, whose deal to acquire South Shore Hospital and Hallmark Health Systems in Massachusetts was knocked back by a Superior Court judge in January 2015.
On the current regulatory agenda, perhaps the biggest news in healthcare M&A are the pending transactions between Anthem and Cigna and Humana and Aetna. What are the top messages to be drawn from the merger successes and failures of 2015 to date? And what do these messages predict for the treatment of upcoming deals?
1. The Affordable Care Act (ACA) Is Not a Shield for Anticompetitive Transactions.
It is well understood that the Affordable Care Act seeks to achieve synergies and scale in the healthcare system. In an apparent response to the enactment of the ACA, hospitals started merging with competitors at unprecedented rates. In 2009 (pre-ACA), there were 52 announced transactions involving 80 hospitals. That number had more than doubled by 2012, with 107 announced transactions involving 244 hospitals, and the numbers have continued to rise.1 Over the same period, federal antitrust authorities and state attorneys general have stepped up their efforts to challenge anticompetitive mergers in the healthcare sector.
This has led many providers to feel conflicted between their desire to meet the ACA's goals of economic efficiencies through mergers and consolidations, and concern that antitrust regulators are being unduly harsh. The FTC, which reviews most of the hospital transactions at the federal level, has responded to such concerns with numerous statements asserting that the ACA and the antitrust laws are not inconsistent, and that the ACA is not a "free pass" to avoid FTC regulation. The FTC and other regulators have demonstrated that they will continue to apply antitrust principles to prevent healthcare firms from accumulating undue market power through mergers and acquisitions, and will not accept the ACA's encouragement of efficiencies as a defense.
2. Efficiencies Are Subject to a High Burden of Proof.
The 9th Circuit decision in the St. Luke's/Salzer case was a major wake-up call for proponents of broad concepts of procompetitive effects through efficiencies. The court effectively rejected any benefit of the transaction that did not directly address the potential for anticompetitive harm. In that case, the justifications of a need for scale to implement novel, risk-based patient management and contracting, as well as the implementation of consistent electronic medical information systems, were rejected for having no relevance to the question of whether prices paid by insurers would increase post-merger.
The court's skepticism was not without precedent. It drives home to merging parties, however, the importance of efficiencies in the regulatory review phase and brings into sharper focus the need for persuasive, well-developed evidence of efficiencies at that stage. Since St. Luke's, numerous FTC staff and commentators have emphasized the rigor and attention paid to efficiencies claims in the agency review, the types of claims that will be credited, and the need for persuasive evidence at that stage. If a deal depends on gaining efficiencies—as so many ACA-inspired transactions do—the time to make that case is before the FTC and Department of Justice (DOJ).
3. Traditional Merger Analysis Still Carries the Day in Court.
The tools that antitrust regulators use to evaluate hospital and other healthcare mergers are well established and understood. There is a significant amount of precedent in agency complaints and consent decrees, as well as recent court decisions. Hospital markets are defined by patient draw areas based on discharge data. Overlapping services are analyzed and compared. Herfindahl-Hirschman index screens are applied to each product and geographic market, and the impact on negotiating leverage against commercial payers remains a key question. Transactions that result in aggregation of market power through high combined shares and could be expected to lead to increased reimbursement rates are presumptively suspect. Such principles can also be applied to aggregation of market power on the payer side, with concern over artificially reduced reimbursement rates.
Although the agencies' revised Horizontal Merger Guidelines outline an iterative and evidence-based approach, the cases that reach court rely on traditional market definition principles and competitive effects analyses, and these factors have usually proven persuasive. A good indicator of the likelihood of success in any deal is still traditional market and concentration analysis. Although FTC and DOJ economists also use newer and more intricate tests for merger analysis and screening in the investigation phase, once a decision is made to challenge a deal in court, the case will be framed in a more traditional manner.
4. State Review Is as Important as Federal Review.
Healthcare markets are typically local or state-wide geographic markets, and the cost and access to healthcare is a key political issue in most states. State antitrust enforcers are highly motivated and well-placed to investigate and respond to transactions having a direct impact on their citizens.
In most hospital reviews, federal and state regulators seek confidentiality waivers enabling them to discuss information obtained through their respective investigations and coordinate on theory and prosecution of anticompetitive mergers. Several states also have implemented state-based instrumentalities, such as Massachusetts' Health Policy Commission, to conduct in-depth research and aid state regulators in antitrust reviews. State regulators other than Attorneys General also may be important in healthcare mergers. For example, State Departments of Health may be required to approve hospital transactions, and State Insurance Commissioners will review health insurance mergers.
The results of state involvement in the merger review process are often helpful to merging parties. In the Cabell Huntington/St. Mary's transaction, for example, the West Virginia Attorney General approved the merger subject to limitations on rates, achievement of efficiency goals, and the preservation of St. Mary's as an independent institution. Although the FTC's review of the transaction is ongoing, in the past the FTC has recognized states' interest in crafting solutions that serve local needs, even if they might not meet the FTC's standards for merger remedies (typically requiring divestitures). A similar dynamic can be observed in the Partners agreement with the Massachusetts Attorney General, where the Department of Justice was the reviewing federal antitrust agency and took no independent action. Working closely with state agencies is key to any close deal.
5. State Laws Can Limit Effective Federal Antitrust Enforcement.
The Phoebe Putney/Palmyra transaction showed how state Certificate of Need laws can prevent federal enforcement actions. In that case, the FTC was unable to achieve its desired relief of divestiture of Palmyra to a third party due to the impact of Georgia's CON laws, which would have effectively prevented the transfer of Palmyra's beds to the third party.2 State attempts to invoke the "state action" doctrine to shield transactions and other conduct from antitrust scrutiny have been less successful.3 It is conceivable, however, that a transaction involving state-owned institutions will benefit from the protection. Finally, several states have enacted other healthcare regulation granting antitrust immunity for actions undertaken under certain state programs. The New York Certificate of Public Advantage (COPA) program is one example.4
The FTC has upped its advocacy efforts against such state attempts to circumvent and shelter state-based healthcare collaborations from scrutiny under the federal antitrust laws, as seen through its letters to New York,5 Oregon,6 and Connecticut.7 Following the Phoebe Putney experience, the FTC is unlikely to fall foul of CON issues in the future so long as it can hold assets separate until adjudication. However, there may yet be other shoals of state regulation that could cause federal efforts seeking strict relief to founder.
With what some in the media have dubbed "merger mania" underway, the spate of healthcare consolidations is expected to continue. For instance, some experts are predicting that 20% of the nation's hospitals will seek to merge in the next five to seven years, driven by increasing pressures to lower costs, increase efficiency and improve quality. Hospitals say that mergers allow them to focus more resources on care, technology and patient services. But those arguments are not necessarily outweighing anti-trust issues. Clearly, for example, St. Luke's argument of improved efficiencies did not trump anticompetitive concerns.
As both payers and providers look to join together—within and across segments—the success of their deals will depend on heeding the lessons learned from those who have gone before them. Those organizations considering mergers or acquisitions would be wise to study the arguments of this year's winners—and losers—to craft their strategies effectively and ensure there is clear, persuasive proof of the market benefits.