Mergers and Joint Ventures: More Transactions and More Antitrust Enforcement

1
Mergers and Joint Ventures More Transactions and
More Antitrust Enforcement

• Michael CowieHowrey LLPStephen KiessUniversity
  Health Systems of Eastern CarolinaMatthew J.
  ReillyFederal Trade CommissionDouglas
  RossDavis Wright Tremaine LLP

2
Overview

• Introductions
• FTC participation
• The views in this presentation do not
  necessarily represent the views of the
  FTC or any individual Commissioner

3
Overview

• The federal agencies what are they saying and
  doing about hospital mergers
• Non-reportable and consummated transactions what
  are the risks, how to manage them
• Times are tough the failing firm defense
• Options short of merger
• State enforcement the use of certificate of
  public advantage laws and regulatory consent
  orders

4
Overview

• The federal agencies what are they saying and
  doing about hospital mergers
• Non-reportable and consummated transactions what
  are the risks, how to manage them
• Times are tough the failing firm defense
• Options short of merger
• State enforcement the use of certificate of
  public advantage laws and regulatory consent
  orders

5
Merger Enforcement at the FTC

• Investigate proposed transactions
• Challenge those likely to be anticompetitive
• Most mergers will not harm competition, may
  produce significant efficiencies
• Demonstration that improvements in quality of
  care are a likely outcome of the merger given
  substantial weight

6
Merger Enforcement Background

• Success in 1980s in administrative litigation
  (Part III)

• American Medical International (1984)
• HCA (1985) affirmed by 7th Circuit

7
Merger Enforcement Background

• U.S. v. Rockford (N.D. Ill. 1989), affd (7th
  Cir.)
• FTC v. University Health (11th Cir. 1991)
• Nonprofit hospitals subject to antitrust laws

• Success in federal court (preliminary injunction)

8
Merger Enforcement Background

• String of losses from mid-1990s through 2001

• Mainly because of judicial acceptance of large
  geographic markets

9
Merger Enforcement Background

• 2002 Chairman Muris
• Merger litigation task force
• Retrospective study of consummated mergers
• Evanston consummated merger
• Complaint filed in 2004
• Evidence of post-merger behavior available

10
Merger Enforcement Background

• 2004 DOJ/FTC Health Care Report
• Nonprofit vs. for-profit
• Merger Guidelines
• analysis
• Types of evidence in merger cases

11
Recent Developments

• Inova/Prince William
• Pre-consummation in both federal court and
  administrative litigation
• System purchase of independent hospital
• Parties abandoned transaction
• First successful challenge of a hospital merger
  in federal court in 15 years

12
Recent Developments

• Evanston/Highland Park
• Post-consummation challenge
• Evidence of significant price increases
• Efficiencies did not outweigh harm

13
Recent Developments

• Carilion Clinic/Odyssey Centers
• Post-consummation challenge
• Dominant hospital system purchased strong
  independent outpatient centers
• Evidence of price and quality competition
• First litigation challenge to a merger between a
  hospital and outpatient provider resulted in a
  complete unwinding of the transaction

14
Relevant Product Market

• General acute care inpatient hospital services
  for commercially insured patients
• Cluster market
• Widely recognized by courts
• Outpatient/tertiary?

15
Relevant Geographic Market

• Defining the correct (or defensible) parameters
  of geographic market
• Historical area of weakness for the agencies
• Testimony/documents from health plans, parties,
  other hospitals, and employers
• Inflow/Outflow analysis (not Elzinga-Hogarty)
• Econometric work?

16
Relevant Geographic Market

• Steering of patients expands market?
• Does steering strengthen the competitive effects
  story by disciplining must-haves?
• Direct evidence of competitive effects to back
  into geographic market

17
Theories of Competitive Harm

• Traditional Unilateral Effects
• A-side and B-side close competitors in large
  surrounding area
• Next best substitutes based on draw data?
• Merger will strengthen combined hospitals
  bargaining strength against health plans
• Can one hospital constrain a must-have?
• Disagreement points
• Non-price competition

18
Competitive Effects Evidence

• B-side significantly lower in price
• One-Contract Pricing (Admission of Price
  Increase)??
• Must be tied to unilateral effects story
• Health Plans
• Third-Party Hospitals
• Expert Testimony
• Documents of Parties and other market participants

19
Story of Competitive Harm

• Why does competition matter?
• Does a price increase by nonprofit hospitals
  really matter?
• Populist story to deal with sentiment in
  Butterworth

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Other Challenging Issues

• State or local government
• Community reaction to the merger?
• Key to the populist message
• Nonprofit Issue (Butterworth)
• Other nonprofit hospitals
• Lack of board involvement in health plan
  contracts
• Negative option no documents you got too much
• Financial incentives for contract negotiators
• Behavior that demonstrates profit-maximizing

21
Quality of Care Claims

• Acquired hospital will obtain acquiring
  hospitals expertise
• A-side is better than B-side
• Due to superior knowledge and/or practices
• After the merger, this will rub off on A-side
• A-side would invest substantially at B-side
• Money would not be invested without the merger
• Money will be spent on things that will improve
  quality (e.g., bed tower with private rooms,
  state-of-the-art cath labs)

22
Other Possible Efficiencies

• Merger will save a failing or flailing hospital
• New services
• Better amenities
• Cost savings/avoidance of duplicative spending

23
Overview

• The federal agencies what are they saying and
  doing about hospital mergers
• Non-reportable and consummated transactions what
  are the risks, how to manage them
• Times are tough the failing firm defense
• Options short of merger
• State enforcement the use of certificate of
  public advantage laws and regulatory consent
  orders

24
Consummated Merger Challenges

• 2001-2008 total 16 challenges
• Many more investigated

25
Internal Communications

• Avoid
• Merger will build negotiating strength with
  payers
• Highland Park management

26
Internal Communications

• Avoid
• strengthen negotiation capability with managed
  care companies through merged entities
• Evanston management

27
External Communications

• Difficult issue what to say, how much to say,
  and when?
• Communications with payers and employers
• Local media and trade press
• Key impact of communications on largest customers

28
Post-Merger Pricing

• Avoid
• Evanston/Highland Park raised prices to payers
  from 15-20 to 190
• FTC Complaint
• The direct effects evidence of the ENH merger
  demonstrates that ENH achieved substantial price
  increases as a result of the merger
• ALJ Decision

29
Remedies

• Divestiture or sale of business unit (typically
  unit acquired)
• Restoring and selling a business unit
• Conduct remedies (disfavored)

30
Overview

• The federal agencies what are they saying and
  doing about hospital mergers?
• Non-reportable and consummated transactions what
  are the risks, how to manage them?
• Times are tough the failing firm defense
• Options short of merger
• State enforcement the use of certificate of
  public advantage laws and regulatory consent
  orders

31
Failing Firm

• True failing firm defense or a General Dynamics
  (flailing firm) argument?
• Success on failing firm you win
• Success on General Dynamics not necessarily game
  winner but antitrust concerns may be diminished

32
Failing . . . Flailing

• Asserted frequently to the FTC
• 75 of all hospital mergers
• Successful in a handful of hospital
  investigations in the last few years

33
Failing Firm Two Prongs

• Acquired firm was so depleted and the prospect of
  rehabilitation so remote that it faced the grave
  probability of a business failure
• The acquiring firm was the only available
  purchaser
• Burden on merging parties

34
Flailing Firm/Weakened Competitor

• Hospitals financial weakness or declining
  position may reduce competitive concerns
• General Dynamics past or current strength as a
  competitor is not good predictor of future
• Beware of inverse General Dynamics

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Factors to Evaluate Failing/Flailing Firm

• Ordinary course documents
• Financial data
• Efforts to sell the hospital
• Use of consultant
• Net was thrown wide and deep
• Reasonable time
• Same opportunity offered to all

36
Overview

• The federal agencies what are they saying and
  doing about hospital mergers?
• Non-reportable and consummated transactions what
  are the risks, how to manage them?
• Times are tough the failing firm defense
• Options short of merger
• State enforcement the use of certificate of
  public advantage laws and regulatory consent
  orders

37
Options Short of Merger

• Joint Ventures
• Management Agreements

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Options Short of Merger

• Joint ventures
• Almost merger (Morton Plant/Meese)
• Hospital-hospital JVs
• Specialty service (e.g., cardio, ortho)
• Joint purchasing
• Physician-hospital JVs
• ASCs
• Diagnostic imaging
• MOBs

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Options Short of Merger

• Almost merger JV
• Morton Plant/Meese (Pinellas County, FL)
• Combine some clinical services
• Administrative cost savings
• Separate managed care contracting
• Separate strategic planning
• Subsequent DOJ investigation and abandonment

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Options Short of Merger

• Hospital-hospital JV
• Clinical (cardio, ortho, air ambulance, lab)
• Section 7 analysis
• Other regulatory issues re referrals (Stark and
  kickback)
• Joint purchasing
• Safety zones
• Memorial St. Joseph/Candler Business Review
• Billing and collection

41
Options Short of Merger

• Physician-hospital JVs
• Examples ASCs, diagnostic imaging, MOBs
• Potential or actual competition analysis
• Spill-over collusion
• Other regulatory concerns

42
Options Short of Merger

• Management agreement with competitor
• Sherman Act issues
• Competition policy
• Firewalls and duplication of personnel for
• Managed care contracting (all)
• Strategic planning (most)
• Human resources (some)
• Marketing (some)
• Determine existence of competitive overlap
• No de minimis exception

43
Overview

• The federal agencies what are they saying and
  doing about hospital mergers
• Non-reportable and consummated transactions what
  are the risks, how to manage them
• Times are tough the failing firm defense
• Options short of merger
• State enforcement the use of certificate of
  public advantage laws and regulatory consent
  orders

44
State Enforcement

• Certificate of Public Advantage (COPA)
• Basis state action doctrine
• Policy to displace competition
• Active state supervision
• Examples
• Asheville, NC (1995)
• Great Falls, MT (1996)

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State Enforcement

• Regulatory consent orders
• Common in the 1980s-1990s
• MA, MN, PA, WA
• Typical terms
• Rates
• Payor contracting
• Physician relations

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Questions
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References

• Hospital merger cases
• In re American Medical International, 104 FTC 1
  (1984)
• In re Hospital Corporation of America, 106 F.T.C.
  361 (1985), affd, 807 F.2d 1381 (7th Cir. 1986)
• United States v. Carilion Health Systems, 707 F.
  Supp. 840 (W.D. Va. 1989), affd, 892 F.2d 1042
  (4th Cir.)
• United States v. Rockford Memorial, 898 F.2d 1278
  (7th Cir. 1990)
• FTC v. University Health, Inc., 1991-1 Trade
  Cases 69,400 (S.D. Ga.) and 1991-1 Trade Cases
  69,444 (S.D. Ga.), rev'd, 938 F.2d 1206 (11th
  Cir. 1991)
• FTC v. Butterworth Health Corp., 946 F. Supp.
  1285 (W.D. Mich. 1996), affd, 1997-2 Trade Cas.
  71,863 (6th Cir. 1997)

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References

• Hospital merger cases (cont.)
• FTC v. Freeman Hospital, 1995-1 Trade Cas.
  71,037 (W.D. Mo.), aff'd, 69 F.3d 260 (8th Cir.
  1995)
• United States v. Mercy Health Services, 902 F.
  Supp. 968 (N.D. Iowa 1995), vacated, 107 F.2d 632
  (8th Cir. 1997)
• United States v. Long Island Jewish Medical
  Center, 983 F. Supp. 121 (E.D.N.Y. 1997)
• FTC v. Tenet Healthcare Corp., 186 F.3d 1045 (8th
  Cir. 1999)
• In the Matter of Evanston Northwestern Healthcare
  Corporation and ENH Medical Group, Inc., FTC
  Docket No. 9315(2007) (available at
  www.ftc.gov/os/adjpro/d9315/index.shtm)
• In the Matter of Inova Health System Foundation
  and Prince William Health System, Inc., FTC
  Docket No. 9326 (2008) (available at
  http//www.ftc.gov/os/adjpro/d9326/index.shtm)

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References

• Government Guidelines and Reports
• Statements of Enforcement Policy in Health Care
  (FTC and Department of Justice, 1996) (available
  at www.ftc.gov/bc/healthcare/industryguide/policy/
  index.htm)
• Improving Health Care A Dose of Competition (FTC
  and Department of Justice, 2004) (available at
  www.ftc.gov/reports/healthcare/040723healthcarerpt
  .pdf)
• Horizontal Merger Guidelines (FTC and Department
  of Justice, 1999) (available at
  www.ftc.gov/bc/docs/horizmer.shtm)
• Antitrust Guidelines for Collaborations Among
  Competitors (FTC and Department of Justice, 2000)
  (available at www.ftc.gov/os/2000/04/ftcdojguideli
  nes.pdf)

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References

• Other
• U.S. v. General Dynamics Corp., 415 U.S. 486
  (1974)
• U.S. and State of Florida v. Morton Plant Health
  System, Inc and Trustees of Mease Hospital, Inc.,
  No. 94-748-CIV-T-23E (M.D. Fla. 1994) (available
  together with subsequent enforcement action at
  www.justice.gov/atr/cases/morton.htm)
• Operating Partnership of Memorial Mission Medical
  Center and St. Josephs Hospital (North Carolina,
  1995)
• In the matter of the application for a
  certificate of public advantage by the Columbus
  Hospital and Montana Deaconess Medical Center,
  Great Falls, Montana (Montana Department of
  Justice, 1996)
• In the Matter of Carilion Clinic, FTC Docket No.
  9338 (2009) (available at www.ftc.gov/os/adjpro/d9
  338/index.shtm)
• St. Josephs/Candler Business Review Letter
  (2009) (available at www.justice.gov/atr/public/bu
  sreview/249766.htm)

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