The Federal Trade Commission and the DOJ Antitrust Division recently announced that they would be reviewing, and likely revising, the Horizontal Merger Guidelines – the guidelines used by the agencies when assessing whether a proposed transaction may have adverse impacts on competition. (The announcement, issued on January 18, is available here). In announcing the change, FTC Chairwoman Khan explained that the agencies must “ensure that the Merger Guidelines accurately reflect the realities of the modern economy,” and that “to accurately detect and analyze potentially illegal transactions in the modern economy,” changes to the Guidelines are required.
The Horizontal Merger Guidelines, which were issued jointly by the FTC and DOJ in 2010, set forth the analytical techniques, practices and enforcement policy that the FTC and DOJ utilize when considering the potential competitive implications of a proposed merger. While the Guidelines do not have the force of law, they are frequently relied upon by the courts when ruling upon merger challenges, and thus have a significant influence on the development of merger law. And, because the Guidelines have not kept up with current thinking about the competitive effects of mergers (at least in the view of Chairwoman Khan and Assistant Attorney General Kanter), they have, on occasion, hampered the FTC and DOJ’s efforts to challenge mergers in the courts, particularly in circumstances where the legal theories advanced in those cases were not set forth in the Guidelines. For this reason, the decision by the FTC and DOJ to revise the Guidelines to embrace “the realities of the modern economy” is not very surprising, and is perhaps overdue.
While the principal impetus for changing to the Guidelines is generally understood to be, at least in part, to assist regulators’ ability to assess mergers in the tech industry, any changes to the Guidelines will likely also have significant impacts in other industries as well, including healthcare. And, in an interview with the media on January 19, Chairwoman Khan expressly acknowledged that this is by design, stating that the reasons for modifying the Guidelines go “beyond tech.” While any changes to the Guidelines will take months to implement, beginning with a 60-day period during which comments on proposed changes will be accepted from the public, the high likelihood that material changes to the Guidelines are coming later this year should make any healthcare entity considering a potential transaction in 2022, and beyond, take notice – and plan accordingly.
Among the anticipated potential changes to the Guidelines, Chairwoman Khan expressly noted the importance of considering the possible impact of a merger on labor markets, and issue on which the current Guidelines is silent. Thus, it is not surprising that this a subject upon which public comment has been expressly requested. Other potential changes to the Guidelines are likely to include modifications to how markets are defined (an important factor in merger analysis) and the role of new entry in assessing market conditions (often a very important issue in tech mergers). Chairwoman Khan and AAG Kanter also suggested that consideration should be given as to whether the analytical models for analyzing horizontal mergers and vertical mergers should remain materially different, given the increasingly blurry line between how entities operate in a market. This is a particularly significant issue in healthcare, as recent years has seen an increase in providers beginning to offer health insurance products, and insurers venturing into provider services as well. As such, determining whether a proposed transaction is a “horizontal” or “vertical” transaction (or a combination of both), and how that should influence the way in which a merger is analyzed, is likely to be another issue given careful consideration as new guidelines are developed – particularly given the FTC’s withdrawal of the current Vertical Merger Guidelines earlier this year.
While all of these potential changes could be important in healthcare merger analysis, the inclusion of labor market impacts in any new guidelines could most significantly impact how hospital mergers are assessed going forward. In the past, the ability of merging hospitals to consolidate clinical units operating at less than full capacity has been viewed as an efficiency-generating result that has been viewed favorably by regulators (at least under the existing Guidelines). However, with a greater focus on the impact on labor markets, whether this will still be viewed favorably – particularly if it leads to staffing reductions – remains to be seen. In fact, Chairwoman Khan specifically question whether these types of efficiencies should continue to be credited by the agencies, stating “When a merger is expected to generate cost savings through layoffs or reduction in capacity, should the Guidelines treat this elimination of jobs or capacity as cognizable ‘efficiencies?’” (Statement of Chairwoman Lina Khan, available here).
Finally, it is important to note that even before any changes to the Guidelines are implemented, regulators have already begun to modify their approach when examining mergers to include some of these potential new issues. For example, regulators at both the federal and state levels have increasingly begun to add information about labor markets to their “Second Requests,” Civil Investigative Demands, and subpoenas to merging parties. This is likely to become an even more common occurrence going forward (particularly if any new Guidelines expressly adopt labor markets as an area of focus). For this reason, any party currently contemplating a healthcare transaction would be well-advised to consider these labor market issues, as well as the other new issues identified by the FTC and DOJ, when assessing the potential antitrust risks of a deal, and to articulate the pro-competitive rationales and potential transaction-related efficiencies in their planning documents to be best-positioned to respond to any potential regulator interest about their deal.