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More deals, more scrutiny

Posted: November 24, 2012 - 12:01 am ET

Hospitals and physicians are scurrying to find partners at a dizzying rate, and federal antitrust regulators are in no way assuming the deals represent only a benevolent drive toward integration under healthcare reform.

The threat of a Federal Trade Commission lawsuit last week prompted Reading (Pa.) Health System to abandon its plans to buy the Surgical Institute of Reading in neighboring Wyomissing, making it the latest casualty in an era of heightened antitrust scrutiny.

The two parties terminated their deal after the FTC said it was preparing to go to court to block the takeover, which the government argued would raise prices and lower quality.

Reading Health System, which has one 711-bed hospital, in a statement strongly denied that its deal would reduce competition, but added that it was making the “prudent decision to move on,” rather than spend years battling the agency in court.

The Surgical Institute could not be reached for comment.

As the number of healthcare provider deals has increased, so too has the scrutiny from regulators. And while the vast majority of deals are still moving ahead, a number of high-profile challenges have caused providers to take notice.

In April, OSF HealthCare, Peoria, Ill., and Rockford (Ill.) Health System canceled their merger as they stared down the possibility of a lengthy legal fight with the government. The FTC also reached a settlement in August with Renown Health, Reno, Nev., which compelled the system to suspend its noncompete agreements until at least six physicians in two acquired practices have joined competitors. In Ohio, ProMedica's appeal of an FTC ruling against its acquisition of a hospital in Maumee, Ohio, is pending before the 6th U.S. Circuit Court of Appeals.

Analysts have pegged the Patient Protection and Affordable Care Act as driving up the number of deals among hospitals and physicians groups, but in its administrative complaint, the FTC held up the reform law as a reason why the Reading deal would be anti-competitive.

The complaint argued that the law limits potential competitors from replicating the Surgical Institute's model by blocking physician-owned hospitals from being built or expanded.

Michael Blass, an attorney at law firm Arent Fox who focuses on mergers and acquisitions, noted that while healthcare reform has encouraged collaboration among providers, it has also created potential minefields for acquirers.

In particular, he pointed to an October 2011 joint policy statement from the U.S. Justice Department and the FTC that revised the antitrust “safety zones” to include certain accountable care organizations while also detailing how ACOs could raise red flags. “It certainly seems to highlight the dichotomy right now,” Blass said.

Kenneth Field, an antitrust attorney at Jones Day who previously worked at the FTC, said the Reading case provides more “evidence that this division is going to be particularly aggressive” in its review of healthcare deals.

That scrutiny has even extended to smaller transactions, including deals that might have reasonably been expected to fall under the FTC's “safety zones” that cover certain mergers involving small, established acute-care hospitals, particularly in rural markets. The purchase price for the 10-bed Surgical Institute was $43 million, according to financial statements filed to bondholders. “It's natural to think the safety zones would be large enough to cover the physician-owned hospitals,” Field said.

Yet in its complaint, the FTC argued that after the specialty surgical hospital opened in 2007, Reading Health System “did not take this new competitive threat lying down,” but instead offered to lower its rates and “aggressively” took steps to improve its quality.

The complaint added that the deal would have given Reading from 49% to 71% of the market in four relevant service areas: orthopedic, general and ear, nose and throat surgical lines for outpatients, as well as inpatient orthopedic surgical lines.

The focus on outpatient procedures was unusual, Field said, adding that the case suggests that the FTC is “not retreating ground, but actually expanding focus on outpatient services.”

Outpatient care is generally cheaper to provide because it requires less overhead—so concerns are raised when a higher-cost care provider, such as a traditional acute-care hospital, takes out a lower-cost competitor, said Dale Grimes, who leads the antitrust practice at law firm Bass, Berry & Sims.

In its complaint, the FTC also said health plans believe the deal would add to the system's “already immense bargaining leverage.” A health system's relationships with payers can be particularly important in the FTC's analysis of a deal, Grimes said. “The payers are very effective when they go to the FTC.”

Moreover, deals that involve specialists tend to invite more scrutiny than those involving primary-care doctors because there are fewer providers, Grimes said. The complaint notes that 212-bed St. Joseph Medical Center, the only other general acute-care hospital in Reading, has had trouble recruiting specialists in the four relevant service lines.

Yet Arthur Lerner, a healthcare attorney at Crowell & Moring, said the FTC hasn't yet challenged a case that directly pitted the goals of healthcare reform against the need to maintain a pro-competitive marketplace.

“So far, the commission hasn't brought a case where they had to grapple with a well-thought-out argument that this was part of accountable care,” he said. “It is fair to say that health reform and the environment around health reform are encouraging a lot of health providers to say, 'I don't want to be alone.' The former would make the market more pro-competitive, the latter, not necessarily.”

Grimes agreed that the deals under scrutiny have been fairly clear-cut cases, where the parties would stand to gain an overwhelming share of the market, noting, “It's not like they're on the margin.”

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