As hospital and physician consolidation continues, state Attorneys General (AG) have not abdicated the merger enforcement arena to the Federal Trade Commission (FTC) or the United States Department of Justice (DOJ) (collectively the federal agencies). State AGs often investigate provider mergers in conjunction with the FTC or DOJ, and in some instances have taken the lead or conducted their own investigations and even initiated their own enforcement actions independently of the federal agencies. Merger providers should be aware of the different political and policy incentives, tools, and legal remedies available to, and utilized by, state AGs, as illustrated by the following cases.

Massachusetts Attorney General Consent Order Permits Partners Healthcare to Acquire Hospitals and Physicians with Conditions

Partners HealthCare (Partners) agreed to a proposed consent order in a Massachusetts state court on May 19, 2014, and an amended proposed order on September 25, 2014, with the Massachusetts Attorney General (MAG), allowing Partners to acquire South Shore Hospital and Hallmark Health Systems, after Partners agreed to cap future prices and limit its expansion for up to 10 years. A hearing is scheduled for November 11, 2014, at which the state court will consider whether or not to enter the consent order, a decision in part based on input by other state agencies, payer and provider groups, academics and other health care policy advocates during a protracted and time-extended public comment period. Founded in 1994 by Brigham and Women’s Hospital and Massachusetts General Hospital, Partners is a not-for-profit, integrated health care system that includes community and specialty hospitals, a managed care organization, a physician network, community health centers, home care and other health-related entities.

The consent order, which also allows Partners to acquire South Shore physicians’ group Harbor Medical Associates, resolved an antitrust investigation by the MAG and the DOJ into Partners’ contracting practices and its proposed acquisition of South Shore and Hallmark hospitals. The investigation was, in part, motivated by the Massachusetts’ Health Policy Commission’s (HPC) February release of several reports, which the HPC referred to the MAG, concluding that Partners’ acquisitions of South Shore and Hallmark would increase health care spending, likely reduce market competition and result in increased premiums for employers and consumers. The HPC, an independent state agency, was formed in 2012 through Massachusetts’ landmark health care cost-containment law, to advance the state’s goal of bringing health care spending growth in line with growth in the state’s overall economy.

After considering a lawsuit to block Partners’ acquisition, the MAG instead decided the consent order providing conduct relief ultimately presented a better opportunity to control health costs across Partners’ entire network and increase competition in the state’s health care market. The DOJ was not a party to the Massachusetts consent order, and did not pursue its own settlement (or issue any press release explaining why not). “Suing Partners would potentially block further expansion of its network, but would also maintain the status quo in the market,” MAG Martha Coakley said in a statement. “We believe this agreement will do much more. It fundamentally reduces the negotiating power of Partners for the next 10 years to better control health costs for families and businesses, and help level the playing field in the market.”

Specifically, the consent order prohibits Partners from raising costs across its network more than the general rate of inflation in Massachusetts through 2020, which over the last several years has averaged between 1 and 2 percent. The price restriction covers all of Partners’ providers, including hospitals, outpatient facilities, physicians, health care professionals and all other services billed by the network. In any year that Partners does not comply with the cost caps, it will be forced to refund the amounts charged or received. An additional price restriction requires South Shore to freeze individual rates at a rate of general inflation for six-and-a-half years.

Also, commercial payors will be allowed to contract separately with different components of Partners’ organization, which according to the MAG, is an effort to reduce the network’s bargaining power in the market. The commercial payors will also be able to negotiate with academic medical centers as one component group, and with community hospitals as another, for 10 years. South Shore and Hallmark may remain separate components for seven years, then will become part of the community hospital group.

Additionally, the order seeks to slow Partners’ potential growth, by capping the number of community physicians in its network for five years. Partners will also be barred for 10 years from negotiating commercial insurance contracts on behalf of physicians who are not employed by Partners, unless they are members of the network’s physician hospital organizations. Finally, Partners is barred for seven years from acquiring any hospitals in eastern Massachusetts—defined as Worcester County and areas further east—without approval by the MAG’s office. An exception was made from this requirement, however, for Partners’ affiliate Emerson Hospital.

The consent order contains provisions providing for an independent monitor to oversee these complex restrictions on Partners’ future activities. Typically, state AGs are more amenable to this type of relief and oversight; however, the DOJ recently imposed a monitor to oversee the relief imposed in a beer-industry merger.

Pennsylvania Attorney General Consent Order Resolves Geisinger Acquisition of Lewistown Hospital and Physicians

On October 25, 2013, the Pennsylvania AG (PAG) filed a complaint seeking to enjoin Geisinger Health System Foundation (GHSF, or Geisinger) from acquiring Lewistown Health Care Foundation (LHF). Pennsylvania v. Geisinger Health System Foundation, No.1:13-CV-02647-YK, complaint filed (M.D. Pa., Oct. 25, 2013). GHSF is the parent corporation of Geisinger Medical Center, Geisinger Clinic, and Geisinger Health Plan. LHF is the parent corporation of Lewistown Hospital and a related physicians group. The PAG’s complaint alleged that the acquisition would reduce competition in the provision of primary care physician services and primary and secondary inpatient acute hospital services in two Pennsylvania counties. The complaint alleged that post-acquisition, GHSF would control almost seventy percent of all primary care physicians and seventy-four percent of hospital discharges in those counties. Furthermore, the complaint alleged that consumers prefer locally provided primary care physician services and that hospitals outside the two counties provided negligible competition to Lewistown Hospital for the provision of primary and secondary inpatient acute care services. According to the PAG’s complaint, GHSF would be able to negotiate higher rates with health plans for Lewistown Hospital as part of a large regional health system including multiple hospitals and control over physicians, ultimately resulting in higher health care costs to consumers. Finally, the complaint alleged that market entry was unlikely, and would be insufficient to compete with the post-transaction entity in both the primary care physician services and primary and secondary acute care markets.

Three days after filing the complaint, on October 28, 2013, the PAG and Geisinger entered into a consent order approving the acquisition, but imposing restrictions on the combined health system. Consent Decree, Pennsylvania v. Geisinger Health System Foundation, No.1:13-cv-02647-YK, (M.D. Pa., Oct. 28, 2013). This is the third consent order between the PAG and GHSF. The PAG previously entered into consent decrees with GHSF over its acquisition of Shamokin Area Community Hospital in 2011 and Bloomsburg Hospital in 2012. Specifically, the order first required GHSF to operate Lewistown Hospital as an acute care hospital for at least eight years. Second, the order placed a number of restrictions on GHSF’s contracting with payors: health plan contracts for Lewistown Hospital and its employed physician group must be maintained for the remainder of their terms; future contracts with payors must be negotiated in good faith within a range paid to similar hospitals and physicians; and if the parties reach an impasse after 60 days of good-faith negotiations, the health plan may resort to a third-party review process described in the order. The order also provided that an independent consultant will review and validate the methodology that GHSF proposes to use for contract negotiations. GHSF also was barred from prohibiting health plans from offering “tiered products,” in which health plans offer products to consumers with different tiers of providers based on cost and/or quality in order to enable consumers to choose their health care services based on the cost and quality of the provider.

Third, the order contains pricing restrictions, including a prohibition on “arbitrarily” raising prices for hospital and physician services. It also prohibits the parties from entering into agreements that would require most-favored-nation clauses benefitting Lewistown Hospital or any health plan. Fourth, the order contains provisions aimed at preserving competition in the physician services market; most significantly, LHF’s acquired physicians will be allowed to leave GHSF’s employ with no restrictions (such as non-compete provisions) on their ability to continue to practice in the market for two years after the transaction.

Finally, the order contains typical provisions requiring GHSF and LHF to reimburse the PAG $50,000 for the cost of its investigation and the order. In addition, in the event the PAG prevails in any action or proceeding brought to enforce the order, the parties must pay for all costs and expenses, including attorney’s fees.

New York Attorney General Consent Order Allows Utica Hospitals to Merge, with Conditions

On December 11, 2013, the New York Attorney General (NYAG) and two Utica, New York, hospitals, Faxton-St. Luke’s Healthcare (FSL) and St. Elizabeth Medical Center (SEMC), agreed to a consent order allowing a merger combining the hospitals to proceed as long as the merged entity satisfied certain conditions. FSL is a nonprofit corporation that operates two general acute care hospitals in Utica, New York, with a total of 370 beds in those facilities. SEMC is a Catholic nonprofit general acute care hospital with 201 beds in Utica. The hospitals are the only general acute care hospitals in the city of Utica.

On June 15, 2012, the State of New York awarded the two hospitals over $7 million in grants pursuant to New York’s Health Care Efficiency and Affordability Law (HEAL). N.Y. Pub. Health Law § 2818 (McKinney 2014). HEAL grants are allocated through the New York Department of Health and the Dormitory Authority of the State of New York. They are intended to fund projects that improve bed capacity in the health care system and primary and community-based care, and reduce over-reliance on inpatient care in hospitals and nursing homes. The state conditioned the HEAL grants on FSL and SEMC reaching an agreement to affiliate. On December 6, 2012, the hospitals agreed to combine their operations and form Mohawk Valley Health System (MVH). In January 2013, the NYAG launched an investigation into the proposed merger that resulted in the consent order.

In announcing the settlement and consent order, the NYAG stated that it considered both hospitals’ ability to independently survive absent the merger, in light of the current economic environment and their recent financial difficulties. According to the NYAG, the hospitals’ financial difficulties stemmed from a shift in the hospitals’ patient mix away from commercially insured patients toward Medicaid and uninsured patients, and reductions in Medicare and Medicaid reimbursements. The NYAG noted that the hospitals served many indigent patients, including an unusually large number of refugees. The hospitals argued that only through the merger could they achieve significant cost and operational efficiencies necessary to survive and to continue providing general acute care services to patients in Utica. The NYAG agreed that the merger was necessary for the hospitals to survive.

The NYAG also found that the merger’s potential effect on competition was limited because the merging hospitals faced competition from hospitals in nearby cities, and the merging hospitals competed in only a limited number of services. The NYAG explained that SEMC and FSL were each licensed to provide a number of services that the other hospital was not licensed to provide.

Nevertheless, the NYAG identified certain competitive concerns that were addressed by provisions in the consent order. Specifically, the NYAG expressed concern that MVH would gain leverage as a “must have” hospital when negotiating reimbursement rates with health plans, ultimately resulting in health plans passing on these costs to patients in the form of higher premium rates or deductibles. To address this concern, the consent order established a five-year “rate protection period” that gives health plans and other payors the right to continue their current relationship with MVH at their current rates (subject to annual increases not to exceed historic levels) if they believe MVH is negotiating in bad faith. The order also provided that if MVH fails to reach an agreement with a health plan at any time during the rate protection period, MVH must offer the health plan an opportunity to enter into separate contracts with its FSL and SEMC facilities, at the rates contained in that facility’s contract with the health plan at the time of the settlement agreement (again, subject to certain annual increases not to exceed historic levels).

The consent order also included several prohibitions on exclusionary conduct. MVH may not require health plans to enter into a contract for all services offered at a facility, when negotiating reimbursement contracts separately for FSL or SEMC facilities, and may not include a most-favored nation (MFN) clause in favor of its hospitals in any agreement with a health plan. Also, MVH may not require independent physicians to work exclusively at their facilities.

In addition, because the merger involved the combination of a secular hospital (FSL) and a Catholic hospital (SEMC), the consent order contained provisions to ensure that FSL continue to offer certain reproductive health services. Finally, the order also imposed reporting obligations on MVH regarding its plans and progress in implementing the efficiencies of the transaction.

Lessons for Merger Providers

These cases illustrate a number of observations and considerations for merging parties. First, state AGs may be more amenable to resolving competitive concerns regarding a merger through a negotiated consent decree, and/or be more reluctant to fully litigate a merger challenge. As discussed in “FTC’s Success in St. Luke’s Challenge Shows Litigation Risks to Merging Hospitals and Physicians” (Health Law Alert 2014: Issue 9), an important factor that may affect whether and in what form a hospital-physician transaction survives agency scrutiny is whether the parties litigate or settle the agency challenge through a negotiated consent order.

Merging hospitals and physicians should carefully weigh whether to litigate an AG’s challenge to resolution and risk having the entire transaction blocked, or instead take steps to proactively resolve the merger investigation earlier on more certain, cost-effective, and potentially favorable terms through a negotiated consent order, given many state AGs’ apparently greater willingness to do so. Interestingly, in the Partners Healthcare consent order, even the AG determined that a consent order was a better mechanism than litigation to ultimately reduce health care costs, although several parties submitting public comments have disagreed, and the court is currently evaluating those comments to determine whether to enter the consent decree.

Certainly state AGs are much more amenable to imposing “conduct” relief, which generally involves ongoing restrictions or requirements controlling the merged entities’ activities or conduct, requiring regulatory oversight (sometimes including a court-appointed independent monitor) during the term of the consent order (typically from five to ten years). Almost uniformly, on the other hand, the FTC and DOJ prefer “structural” relief, such as divestiture, which addresses the competitive concerns essentially by changing the form or structure of the transaction (typically at the time the merger is consummated or shortly thereafter) with no or few ongoing provisions. Usually, as demonstrated by the cases discussed above, state AGs’ conduct relief involves some combination of restrictions on the merged entity’s pricing to payors (e.g., caps), and prohibitions on exclusionary conduct or contract provisions (e.g., MFNs) with payors, all with the stated purpose of controlling the merged entity’s ability to exercise any market or bargaining power achieved through the merger. In addition, some state AG consent orders impose “hybrid” relief, which contains elements of both structural and conduct relief. For example, the Pennsylvania AG’s Geisinger consent order imposed a form of partial divestiture by allowing the acquired physicians a defined time period to leave GHSF’s employ to compete in the market, but the order also contained conduct relief in the form of price controls and multiple restrictions on the manner in which GHSF can contract with payors. Significantly, conduct relief ultimately can be more onerous than structural relief such as partial divestiture, thus merging parties should carefully evaluate such terms when negotiating a consent order with a state AG.

In addition, state AGs generally are more likely to be influenced and guided by local or statewide political or policy concerns. Both the Partners and Utica investigations and consent decrees reflect the role of other state health agencies, that shape health care policy, in the respective AG’s antitrust analysis. In Partners, the Massachusetts HPC’s reports both instigated the initial MAG investigation and later criticized the relief obtained by the MAG in the proposed consent decree, prompting the MAG to modify its proposed settlement. The NYAG in Utica allowed the merger to proceed, finding that the merger’s effects on competition were likely limited, the parties were experiencing severe financial difficulties, and the transaction advanced a specific policy goal of the state articulated by another agency. Also, individual state certificate of need (CON) and certificate of public advantage (COPA) laws, and resulting assertions by the merging parties that the transaction is immunized by the state action doctrine, can be more influential in a state AG’s evaluation of a merger than in the federal agency’s analysis, as discussed in “State Action Doctrine Tested by Supreme Court for Second Time in Two Years” (Health Law Alert 2014: Issue 22) and “More Turns in the FTC’s Antitrust Enforcement Action Against Phoebe Putney Hospital, Inc.” (Health Law Alert 2014: Issue 22).

Finally, most state AGs can seek relief in addition to divestiture and regulatory restrictions on the merged entity’s conduct, such as civil penalties and attorneys fees for its investigation costs (both of which can be sizeable). And most state AGs can initiate enforcement actions under both federal and state antitrust laws, which usually, but not always, impose similar standards, and can file such actions in either federal or state court (which, in turn, may be more susceptible to being influenced and guided by local or state politics or policies). For example, the state court in Partners is currently considering voluminous public comments from local, state and national advocates both supporting and opposing the proposed consent decree.

In sum, merging providers should not ignore the potential of state AG enforcement and should consider engaging their state AG early in the merger process. While state AGs most often defer to the federal agencies’ lead in merger investigations, in some circumstances state AGs may conduct their own independent investigations and obtain their own consent decrees, and AG investigations and resolutions may even influence a federal agency’s evaluation of a merger. In those circumstances, the factors described above may come into play and merging providers should plan accordingly.