Timely Use of Antitrust Counsel in Hospital Merger Cases
By Aimee E. DeFilippo and Toby G. Singer, Jones Day
“An ounce of prevention is worth a pound of cure.” This is an apt saying in the health care world, but it applies equally well these days in the world of health care antitrust. Given the incentives for collaboration and consolidation built into the Affordable Care Act, hospital providers may mistakenly believe that hospital mergers occurring pursuant to health care reform will receive less scrutiny from antitrust regulators. As a result, hospital executives contemplating a merger or acquisition may choose not to engage antitrust counsel at all, or may do so only after costly (but potentially preventable) problems have arisen.
An illustrative case is the hospital client whose first contact with antitrust counsel occurs after the client has received notice that its merger is being investigated by the Federal Trade Commission. FTC investigations are never welcome news for any client, but they can be particularly devastating for an ill-prepared client. First, it stands to reason in this scenario that hospital executives did not expect their transaction would receive heightened antitrust scrutiny, and thus they are unaware of the risks and costs involved at this stage. These executives may be quite dismayed to learn that FTC investigations can cost several million dollars and take many months to complete. These investigations also create substantial burden and disruption on those business executives tasked with helping attorneys answer numerous data requests and interrogatories about the relevant market, competitors, entry, efficiencies of the transaction, and other topics. And, of course, the delays caused by a prolonged antitrust investigation necessarily delay realization of any synergies and cost savings anticipated to result from the transaction itself, because parties to a merger remain competitors until closing and therefore must refrain from integrating their operations or making joint business decisions.
Antitrust practitioners, too, are at a significant disadvantage when their first client contact comes at this late stage. Even if antitrust counsel already has some familiarity with the parties and/or the geography, he or she will need to invest significant time and resources to understand the facts at issue and to formulate the antitrust defense. The following represent the five key questions antitrust counsel will ask as they begin this process:
- Why are the parties pursuing this transaction? Is the acquired hospital financially failing? If yes, the parties will need to conduct a robust analysis of the financial circumstances of the failing hospital and to present this data to the FTC. Antitrust counsel also will need to understand whether the failing hospital has made unsuccessful good-faith efforts to elicit reasonable alternative offers that would keep its assets in the relevant market and pose less of a threat to competition.
- Are the merging hospitals particularly close substitutes? What competitive alternatives exist to the merging hospitals? Would a health plan product be viable if it did not include either of the merging hospitals? Antitrust counsel will quickly hire economists to conduct an extensive data analysis of the contours of a relevant market for hospital services and the closeness of substitution between the merging hospitals. Antitrust counsel likely will also direct economists in an assessment of physician overlaps and outpatient facilities implicated by the transaction.
- How do managed care organizations (MCOs) view the transaction? This is perhaps the most critical question. Although MCOs are not the actual “consumers” of hospital services, their views are an important component of the FTC’s case and are central to assessing whether the proposed hospital merger will result in harm to price and nonprice competition. Antitrust counsel will assess the nature of managed care contracting at issue in the region, try to identify issues important to the MCOs, and help the parties explain the benefits of the transaction to the MCOs.
- How do other key stakeholders view the transaction? What categories of stakeholders—employers, government officials, community leaders, physicians—support or oppose the transaction? Have the parties begun to develop a message to communicate the reasons for and benefits of the transaction? Antitrust counsel should work with the hospitals’ communications teams to develop the message and to lay groundwork to request support from stakeholders or reduce the likelihood of their opposition. The views of the state attorney general also are important because the attorney general’s public concern for a proposed hospital merger will almost certainly increase the risk that the FTC will challenge the transaction. Generally, if community support for the transaction is strong, the attorney general is more likely to have a positive reaction.
- What efficiencies do the parties project will result from the transaction? Have the parties documented how the transaction will make the combined entity more competitive and lead to improved services and lower costs? Have the parties developed concrete, specific plans for implementing these efficiencies? While the FTC is skeptical of most claimed efficiencies, efficiency projections created in the ordinary course of business—along with detailed plans for how the parties will realize these efficiencies post-merger— can be compelling evidence in support of the transaction, as is evidence that the acquiring hospital has realized similar efficiencies from prior hospital acquisitions.
Antitrust enforcers have been clear that they see no tension between the antitrust laws and the objectives of the Affordable Care Act, and thus will closely scrutinize hospitals mergers in an effort to preserve competition and help contain health care costs. In testimony before Congress, FTC Chairwoman Edith Ramirez has noted that “[t]he antitrust laws are very much compatible with the objectives of the [ACA,] which are to raise the quality of health care, lower costs, and increase choices for consumers…. Vigorous competition helps the aim and objectives of the [ACA].” The vast majority of proposed hospital mergers do not raise antitrust concerns. But hospital administrators and health care attorneys should expect that, in areas where there is limited hospital competition, a proposed merger will be thoroughly investigated by the FTC. Timely use of antitrust counsel can help avoid surprises and, in some cases, can avert the massive costs of a government investigation through preparation and effective presentation of fact-based evidence regarding the competitive implications and potential benefits resulting from the proposed transaction.
Aimee DeFilippo is an associate in Jones Day‘s Washington office. Her practice focuses on antitrust counseling, litigation, and agency practice for clients in a variety of industries, with a focus on health care and pharmaceuticals. She has experience representing clients on a number of antitrust issues, including mergers and acquisitions, joint ventures, and federal and state government investigations.
Toby G. Singer is a partner in Jones Day’s Washington office, specializing in mergers and other antitrust matters in the health care industry. She has handled numerous federal and state government investigations and has defended clients in both government and private antitrust litigation. She is on the Board of Directors of the American Health Lawyers Association.
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