Executive Summary

On November 6, 2015, the FTC challenged the proposed acquisition of St. Mary's Medical Center by Cabell Huntington Hospital in Huntington, West Virginia on the grounds that the proposed acquisition would create a "natural monopoly" and violate the federal antitrust laws. In its complaint, the FTC alleged that the proposed acquisition is likely to substantially lessen competition, lead to increased health care costs and reduced quality of care and that, if allowed to proceed, the resulting entity would enjoy a near monopoly over general acute care inpatient hospital services and outpatient surgical services in the relevant geographic market. According to the complaint, the combined entity would have a post-acquisition market share of 75.4 percent.

In what the FTC characterized as "an attempt to avoid" an antitrust challenge by the FTC, Cabell and St. Mary's entered an Assurance of Voluntary Compliance ("AVC") with the Attorney General of West Virginia to limit for a period of seven years certain conduct of the combined entity, including limiting certain price increases. The FTC's complaint argues these temporary agreements are insufficient to protect consumers stating that the AVC would not restore the competition lost through the Acquisition.

Background

On November 7, 2014, Cabell signed a Definitive Agreement pursuant to which Cabell agreed to become the sole corporate member of St. Mary's (the "Acquisition"). Cabell is a not-for-profit, 303-bed hospital located in Huntington, West Virginia. Additionally, Cabell owns and operates Hoops Family Children's Hospital, co-owns and operates the Edwards Comprehensive Cancer Center and manages Pleasant Valley Hospital, a 201-bed community hospital located 50 miles northeast of Huntington. St. Mary's is a 393-bed Catholic hospital also located in Huntington, approximately 3 miles away from Cabell.

On December 23, 2014, Cabell filed notice of the transaction with the FTC under the Hart-Scott-Rodino Act. Throughout the FTC's investigation, Cabell provided over 340,000 documents, including paper documents, electronic documents, emails and reports.

Agreement with West Virginia Attorney General

On July 31, 2015, West Virginia Attorney General Patrick Morrisey announced his office had reached an agreement with the parties to ensure the Acquisition was consistent with the West Virginia Antitrust Act, the federal Sherman Antitrust Act and all other applicable state and federal laws. As part of the AVC, the hospitals agreed  for a period of seven (later extend to ten) years to certain conditions, including the following: (1) to limit price increases to a benchmark rate established by the West Virginia Health Care Authority; (2) if the operating margins exceed an average of four percent during a three-year period to reduce hospital rates; (3) maintain open medical staffs at both hospitals and release employed providers from non-compete agreements following the termination of their employment; (4) to not oppose the award of any CON by the West Virginia Health Care Authority in the hospitals service area; and (5) not to terminate third party payer contracts that were negotiated prior to the Acquisition.

FTC Challenge

The Acquisition Would Eliminate Price Competition.  Based on the results of a Diversion Analysis, the FTC concluded that Cabell and St. Mary's are each other's closest competitors by a wide margin and that, should either Cabell or St. Mary's no longer be available to patients, approximately 50 percent of their patients would seek general acute care services at the other hospital. This relationship creates an incentive to compete on price that would be eliminated by the proposed Acquisition. Additionally, Cabell and St. Mary's compete for inclusion in health plan networks, and the FTC found that the Acquisition would eliminate health plans' ability to use competition between Cabell and St. Mary's to negotiate better rates.

The Acquisition Would Eliminate Quality and Service Competition.  The FTC found that Cabell and St. Mary compete vigorously on patient service and clinical quality, and that patients benefit substantially from this competition. The FTC argued that, post-Acquisition, Cabell and St. Mary's would no longer be spurred by competition to improve the quality of their services, add service lines, obtain new technologies, recruit new physicians and increase patient safety, comfort and convenience.

Temporary Conduct Remedies Would Not Prevent Competitive Harm Or Replicate Market Competition.  The FTC argued that the AVC would not restore competition that the Acquisition would eliminate.  Instead, according to the FTC, it would only serve to, ineffectively and temporarily, limit the harm from the loss of competition. The limited duration (seven years), lack of protection for health plans seeking to renegotiate their agreements to obtain better terms and inability to preserve competition over patient service and clinical quality were all factors that lead the FTC to challenge the Acquisition despite the prior approval of the Attorney General of West Virginia.

Practical Takeaways

The FTC's challenge to this Acquisition provides some new practical takeaways and reinforces others for those considering a consolidation transaction. The following are points to keep in mind:

  • First and foremost, negotiating terms with a state attorney general or other state authority in order to preempt FTC or DOJ antitrust review will likely be unsuccessful. This case demonstrates that federal antitrust enforcers will challenge a transaction even if an agreement is approved by a state antitrust enforcer.
  • The federal antitrust agencies' rejection of such arrangements is grounded in their strong preference for structural remedies (i.e., divestiture or abandonment) as opposed to conduct remedies (i.e., price caps and growth restrictions).
  • Expect the federal antitrust enforcers to obtain and utilize data to determine via economic modeling whether the parties are each other's closest substitutes.
  • Acquisitions creating large market shares over 50 percent will very likely receive antitrust scrutiny, so plan accordingly.
  • Expect an antitrust investigation to take many months to over a year and require a vast amount of resources.

For a copy of the FTC complaint, click here