Working with distressed businesses always presents a wide array of challenges. Solving a distressed company’s problems, or your problems with it, rarely is limited to a single legal discipline, set of laws or state or federal policy. When a distressed enterprise is involved, all kinds of interests and policies can and do clash.
Although they may not hold a monopoly, distressed healthcare businesses are fertile ground for policy clashes. This short piece identifies one such potential clash among antitrust, healthcare and bankruptcy laws when a distressed health care provider seeks to solve its problems through a sale, merger or other combination. As you will see, maximizing creditor recoveries, often the single most important factor in a bankruptcy, might be eclipsed where a proposed transaction fails antitrust concerns.
Some Facts: Initially, though, here are a few facts to keep in mind.
- 2015 saw more than its fair share of healthcare transactions. Through August 2015, there were 71 hospital transactions, which, on an annualized basis, may exceed the peak of hospital deals reached in 1999. (“Health Care Providers, Insurers Supersize,” Wall Street Journal, September 21, 2015.)
- Hospital operating margins have risen from less than 6% in 2013 to at or above 7% projected for 2015. (Various sources, including the Wall Street Journal, Irving Levin Associates and Truven Health Action OI). Inpatient admissions also have increased. Indeed earlier this week, CMS defended $220 million in hospital cuts based on increased inpatient admissions. (“CMS Doubles Down on $220M Hospital Pay Cut,” Law360, November 30, 2015). The ability to sustain this level of improved performance, however, is suspect. (“Not-for-Profit Healthcare Outlook Stabilizes; Cash Flow Buffers Long-Term Pressures,” Moody’s Investors Service, August 26, 2015 (“Investments in population health will pressure margins.” “Recent inpatient volume growth is due to several factors . . . [h]owever, it is unlikely that recent levels of very strong growth can be maintained . . . .”); “Hospitals and Prescription Drugs Leading Health Spending Acceleration,” Altarum Institute, April 10, 2015 (“Spending in February 2015, year over year, increased in all major categories.”))
The Healthcare Law: Among other things, the Affordable Care Act (“ACA”) contains provisions seeking to encourage the creation of Accountable Care Organizations (“ACOs”). Many thought that the introduction of ACOs would fuel consolidations among healthcare providers as ACOs sought to control more and more of the reimbursement dollars from payors. (“Antitrust Implications of the Affordable Care Act,” Journal of Health & Life Science Law, Volume 6, Number 2, 2013). In fact, hospital acquisitions increased by nearly 50% in the year after the ACA was enacted. (“Health Care Providers, Insurers Supersize,” Wall Street Journal, September 21, 2015.) It is important to note, however, that the ACA specifically provides that it does not override the antitrust laws.
Antitrust Law: Federal law prohibits combinations that may “substantially” lessen competition. This prohibition applies to all businesses, including healthcare businesses, regardless of size, although self-submission of a transaction for antitrust review is subject to size and type requirements beyond the scope of this post.
For a number of years, antitrust challenges to healthcare transactions were tepid. In part, court decisions that held, particularly in the non-profit context, that healthcare mergers almost cannot result in increased consumer prices and thus did not substantially lessen competition seem to have contributed to this lack of scrutiny.
In recent years, this reluctance has abated. The Department of Justice has concluded that consumer prices indeed can rise after healthcare providers (even nonprofit ones) combine. The recently affirmed decision in St. Alphonus Medical Center – Nampa Inc. et al. v. St. Luke’s Health System, Ltd. et al., 778 F. 3d 775 (9th Cir. 2015), demonstrates the updated competitive effect analysis undertaken by DOJ and accepted by the Court to stop an acquisition of a physician group by a health system on anticompetitive grounds.
Antitrust limitations generally are not impacted by the poor financial condition of the transaction parties. The “Failing Firm Defense,” however, permits anticompetitive combinations where the target’s assets are likely to exit the market unless a deal is consummated. The Failing Firm Defense is tested by the inability of the enterprise to:
- Meet its near-term financial obligations;
- Successfully reorganize under chapter 11 of the Bankruptcy Code; and
- Secure a less anticompetitive alternative after a good faith effort to find one.
In short, the Failing Firm Defense requires a target that is going to fail; it does not apply to a firm that is just “flailing.”
The Bankruptcy Law: In overly simplistic terms, bankruptcy advances the goals of (a) maximizing the value available for distribution to stakeholders and (b) distributing that value ratably to stakeholders based on the priority of their claims and interests. For this reason, asset sales in bankruptcy cases generally are subjected to an auction process, intended to produce competitive bidding and secure the highest price for the assets being sold.
The Conundrum: Each of these laws is supposed to implement sound, but different, policy goals: efficient, high-quality and cost-effective healthcare delivery; competition to keep consumer prices down; and the best return possible for stakeholders when an enterprise reorganizes. Although the ACA encourages combinations to achieve its goals, the antitrust laws limit the extent to which healthcare enterprises can combine. And even in bankruptcy where maximizing recoveries to lessen the losses to be sustained by stakeholders is paramount, the antitrust laws theoretically prohibit a sale to the highest bidder if a sale to a lower bidder would have less anticompetitive effect.
Whether this is the best way to prioritize these policies—antitrust above all else—is for others to decide. But the clear implication of the antitrust law is that the transaction that might produce the greatest return to stakeholders may not be the transaction that gets approved, even in a bankruptcy.
Acknowledgments: The inspiration for this article came from a panel I recently moderated on this topic for the American Bar Association. I would like to thank the panelists. Both the panelists and the materials they prepared for that presentation informed substantially the substance of this piece. If you would like to see those materials, they are available on the American Bar Association, Business Bankruptcy Committee website.