From Fierce Hospital Impact
May 20th, 2015
In
their effort to slow the pace of hospital consolidations, federal
regulators have taken a new approach that has led to increased success.
The Supreme Court recently declined to review the application of this
new approach, suggesting that it will continue to be employed for the
foreseeable future, with far-reaching consequences for the healthcare
industry.
Since the early 1980s, the Federal Trade Commission (FTC) has
challenged hospital mergers that it believed to be anticompetitive,
often successfully blocking such mergers before they were even
consummated.
In the late 1990s, however, the FTC lost eight straight hospital
merger challenges, either due to the its failure to establish the
relevant market, its inability to convince the courts that the predicted
anticompetitive effects would ever materialize, or due to a perception
that a not-for-profit hospital's conduct is driven only by benign
intentions.
In 2002 the FTC announced a "merger retrospective," examining
consummated hospital mergers to ascertain their actual effects on
competition, after which it emerged with a new approach to merger
enforcement. The commission resolved to challenge completed mergers,
where the effects were demonstrable, rather than seeking to enjoin
mergers before they were completed, and to focus on the bargaining power
of each hospital system in its negotiations with managed care
organizations (MCOs). This new approach placed the FTC on a path to
renewed success, and it opened the doors to additional developments,
including private treble-damage class actions.
Recent challenges
In 2004, the FTC challenged a 2000 merger in the Northern Chicago
suburbs between the two-unit Evanston Northwestern Healthcare and
Highland Park Hospital. There were no other hospitals located within the
triangle formed by the three merging hospitals, although each hospital
was within close driving distance of numerous other hospitals.
An administrative law judge (ALJ) concluded that the merger was
unlawful (noting that Evanston's executives had written of their hope
that the merger would increase their bargaining power with MCOs, and
noting that the post-merger rate increases charged by the merged
hospitals exceeded the rate increases for other hospitals in the area).
The full commission left the merged firm intact, but it ordered separate
negotiating teams to bargain with MCOs, one team for the two original
Evanston hospitals and a separate team for Highland Park. After the
FTC's decision, a U.S. District Court certified what may be the first
private class action in a hospital merger case.
Following its Evanston playbook, the FTC in 2011 filed a complaint challenging the 2010 merger of two of the four hospitals in Lucas County, Ohio:
ProMedica, a multi-hospital system, and St. Luke's, an independent
community hospital. Prior to the merger, ProMedica had the largest share
of the general acute care market (46.8 percent), and St. Luke's had the
smallest share (11.5 percent). Since 2000, every MCO network included
either ProMedica or St. Luke's. The merged system commanded 50 percent
of the relevant product market for the so-called "clusters" of primary
services (such as hernia surgeries and radiology services) and secondary
services (such as hip replacements and bariatric surgery), and 80
percent of the separate "cluster" of obstetrical services (which were
excluded from the classification of
primary services).
The ALJ found that the merger resulted in "a tremendous increase in
concentration in a market that was already highly concentrated"; that
the elimination of competition between ProMedica and St. Luke's would
increase ProMedica's bargaining power with MCOs; that the merged entity
would be particularly dominant in an area of the county with a high
proportion of privately insured patients; and that the merger would thus
allow ProMedica unilaterally to increase its prices above a competitive
level. The ALJ ultimately determined that the merger did not create sufficient efficiencies to offset its anticompetitive effects.
The Supreme Court weights in
After the full commission and the Sixth Circuit Court of Appeals
affirmed the ALJ's decision to unwind the merger, ProMedica sought
Supreme Court review. ProMedica's lawyers challenged the FTC's use of
"cluster" market analysis; emphasized the relative weakness of the
acquired hospital; and challenged the analysis of market effects, which
combined unilateral effects (i.e., the ability to command monopoly
prices) and collaborative effects (the increase in market
concentration). On May 1, 2015, the Supreme Court issued its decision
declining to review the case.
The Supreme Court's ProMedica decision suggests that the FTC will
persist in the new approach to hospital mergers that emerged after its
2002 "merger retrospective." The FTC will target mergers by dominant
hospital systems that increase the merged system's bargaining power in
negotiations with MCOs, even though this increased bargaining power is a
major factor driving the recent consolidation trend. The lack of a
pre-merger challenge will bring little comfort to merging systems,
especially when a post-merger challenge may be more successful. The
specter of private class actions further increases the stakes for those
considering hospital system mergers.
Charles S. Johnson III is a seasoned trial lawyer with Holland
& Knight in Atlanta. Mr. Johnson primarily focuses in the areas of
public policy and complex business disputes. He has extensive experience with antitrust litigation, and he previously served as adjunct professor of antitrust law
at the University of Georgia Law School.
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