Recently, the Federal Trade Commission (“FTC”) faced major losses in challenging hospital mergers. However, it is clear that the FTC is not backing down, especially given its tendency to conclude that proposed efficiencies do not outweigh the chance of lessening competition.
In July of this year, the FTC abandoned a challenge to the proposed merger of St. Mary’s Medical Center and Cabell Huntington Hospital in West Virginia after state authorities had changed West Virginia law and approved the merger despite the FTC’s objections. This year as well, the FTC failed to enjoin the Penn State Hershey Medical Center and PinnacleHealth System (“Pennsylvania Hospital Merger”) and the Advocate Health Care and NorthShore University Health System (“Illinois Hospital Merger”) under a relevant geographic market theory in the federal district courts. However, the FTC promptly appealed to the United States Courts of Appeals for the Third and Seventh Circuits, respectively.
Against many predictions to the contrary, the FTC prevailed when, on September 27, 2016, the Third Circuit reversed the District Court’s decision in the Pennsylvania Hospital Merger, concluding that the lower court erred when it disagreed with the FTC on the choice and use of the proper test to define the relevant geographic market. The Third Circuit concluded that the hypothetical monopolist test should determine the relevant geographic market, and that using patient flow data to show a relevant market is “particularly unhelpful in hospital merger cases.” This means that using data showing why one patient travels to a farther hospital for services does not have a constraining effect on the price charged by the nearby hospital that the patient does not choose. Additionally, the Third Circuit expressed extreme skepticism about using an efficiencies defense. While it recognized that other courts and the government’s Merger Guidelines themselves consider efficiencies in their antitrust analyses, it made clear that “efficiencies are not the same as equities” needed to successfully overcome a Clayton Act Section 7 claim in considering whether an injunction is warranted.
The Third Circuit’s logic may have emboldened the FTC, which on September 30, 2016, formally urged Virginia state authorities to reject the proposed merger of Mountain States Health Alliance and Wellmont Health System, two large regional health systems, claiming that the merger would lessen competition and reduce the quality, availability, and price of health care services in the area. The FTC is alleging, that if the merger were consummated, the new entity would control 71% of the geographic market for inpatient hospital services in the area that both systems serve, and proposed efficiencies (e.g., greater clinical service offerings, reductions in labor expenses, and reductions in purchasing) are not extraordinary enough to outweigh the anticompetitive harms created. While Virginia does not require FTC consent to approve the merger, the FTC’s evaluation under the Merger Guidelines carries weight because its process is similar to Virginia’s antitrust review.
Going forward, potential merger partners in the health care space should recognize that the FTC has been energized in its opposition to consolidation and should be attentive to the careful definition of geographic markets with an eye towards the hypothetical monopolist test. As stakeholders begin crafting acquisition strategies to take advantage of the Affordable Care Act’s consolidation opportunities, they should recognize that the enforcement components of the government such as the FTC are in apparent contradiction with the policy arm of the administration and that the FTC won’t back down from its challenges to mergers.