The Federal Trade Commission is considering launching a fourth "merger shop" that would investigate and challenge anticompetitive new hospital mergers and, for the first time, previously consummated hospital mergers, Modern Healthcare has learned.
An FTC spokeswoman confirmed that the agency is exploring whether to open a new merger section that would investigate retail and food product company mergers along with hospital mergers. But the FTC's Cathy MacFarlane cautioned that no final decisions have been reached.
"We are thinking about it," MacFarlane said. "Discussions have been held. But nothing concrete has been decided yet and no definitive steps have been taken."
David Balto, a former FTC policy director who is a lawyer with the Washington office of White & Case, called the idea of a hospital merger shop "a sensible and important change."
The FTC's Bureau of Competition staffs three merger shops, each of which oversees mergers in a variety of industries, as well as a separate section that looks at nonmerger-related anticompetitive behavior. The agency also staffs a healthcare shop, which looks both at mergers and nonmerger anticompetitive conduct in the healthcare provider industry. A separate compliance division ensures that companies that have signed agreements with the FTC comply with those provisions. But the healthcare division is overwhelmed with pharmaceutical cases and lacks the resources to tackle hospital mergers.
Sources have said that a fourth merger shop would have a manager responsible for overseeing hospital mergers.
"Too frequently, consummated mergers don't get the attention they deserve," Balto said. "By having a single staff dedicated to focusing on those cases, they're more likely to be prosecuted effectively."
Late last month at the American Bar Association's annual antitrust conference in Washington, FTC Chairman Timothy Muris vowed more aggressive healthcare antitrust enforcement. Muris said the FTC would challenge retrospectively through its administrative process any previously consummated hospital mergers that have not yet integrated, not achieved promised efficiencies or produced anticompetitive effects.
While the U.S. Justice Department must try its cases in federal courts, the FTC can opt either for court trials or to plead its case before administrative law judges and the five FTC commissioners.
"If they staff it (the proposed merger shop) with lawyers experienced in healthcare antitrust, it could be good news for consumers," said William Kopit, a healthcare antitrust attorney with the Washington office of Epstein, Becker & Green. "And trying the cases administratively is a good idea. But why did it take them so long to figure that out?"
The recent activity at the FTC seems to indicate that the historic antitrust clearance agreement reached in March with the Justice Department could affect healthcare providers far more than previously thought, healthcare antitrust lawyers said. The joint agreement allocated antitrust clearance authority for 15 industry sectors between the two agencies and designated the FTC as the primary enforcement agency for merger clearance and most other antitrust issues involving healthcare providers. Since 1948 the agencies had shared jurisdiction across all sectors.
In early January, Charles James, assistant U.S. attorney general for antitrust, announced the elimination of the Justice Department Antitrust Division's 17-lawyer healthcare task force (Jan. 14, p. 14), effectively removing that department from the civil policing of healthcare providers. The Justice Department will continue to maintain jurisdiction over criminal antitrust investigations and over nonmerger antitrust cases involving not-for-profit organizations. The Justice Department was allocated authority over insurance and managed-care company merger clearance.
The joint agreement first was announced in January but was postponed after Sen. Ernest Hollings (D-S.C.) challenged the first major shake-up of federal antitrust enforcement jurisdiction in 55 years. After meeting with Hollings, who said he remains unsatisfied with the deal, the two antitrust regulating agencies announced the agreement March 5. Hollings continues to threaten the funding for both agencies and remains opposed to the agreement. Both agencies defended the agreement, saying it would reduce internal jurisdictional squabbles, cut the response time by agencies for merger reviews and simplify the merger approval process for providers.
But FTC documents obtained by Modern Healthcare show that the FTC has not had a strong track record recently on healthcare antitrust enforcement. After winning several hospital merger cases in the late 1980s and early 1990s, the agency suffered a string of stinging courtroom defeats and hasn't won a case since 1992 or challenged one in years.
FTC spokesman Derick Rill said the agency recognizes a change needs to be made.
"If we were to do this, the goal would be to reallocate more resources to enhance our potential for success," Rill said.
Although in most industry sectors either the Justice Department or the FTC dominated the caseload, in energy and healthcare the two antitrust regulators had split cases almost evenly until the recent agreement. For example, the FTC performed 16 enforcement actions from 1997 to 2002 and participated in 37 substantial investigations of healthcare providers, which includes hospitals, physician groups, healthcare associations and medical equipment manufacturers. During that same period, the Justice Department took 13 enforcement actions and participated in 47 substantial healthcare investigations.
Internal FTC documents obtained by Modern Healthcare confirm that since 1997 the agency has conducted only two substantial investigations and issued two enforcement actions against hospitals, with none coming since 1998. FTC records also show that the agency has taken only seven enforcement actions against physician and other provider groups since 1997, most recently announcing a consent agreement reached April 5 with OB/GYNs in Napa Valley, Calif. (April 15, p. 14).
During that same period the FTC initiated 37 substantial investigations and took 21 enforcement actions against pharmaceutical companies.
Kopit said he was concerned that the FTC is preoccupied with pharmaceutical cases.
"The Justice Department was doing roughly half the federal investigations, and they announced they're out of the game. That eliminates 50% of the resources," he said. "You look at the FTC and see they have done next to zero in provider cases. That tells me that if you want to break antitrust laws, now's a good time, because there's nobody minding the store."
Some health lawyers and provider associations publicly have wondered whether the FTC will be able to monitor a burgeoning healthcare provider industry given its current caseload.
Chicago healthcare antitrust attorney John Cusack of the firm Gardner, Carton & Douglas said the FTC historically has approached healthcare cases more vigorously and possesses expertise the Justice Department lacks.
"But this (caseload) could present a real problem for the FTC," he said. "I'm not convinced the agreement will improve things."
Cusack's colleague at Gardner, Carton & Douglas, Thomas Campbell, said there has been a clear de-emphasis of concern about provider competition issues.
"I think part of it is that federal agencies have deferred to the states and deemed those (provider) issues unworthy," Campbell said. "I'd like to know if this is a sector they've simply abandoned, or if they just aren't finding the meaty cases they want. It's hard to believe there's nothing going on on the provider side that merits attention. I'm aware of markets with suspicious activities and concentrations of high prices. I can't believe we're not seeing more federal activity."
Others remain skeptical. Donald Young, M.D., president of the 300-member Health Insurance Association of America, said that although pharmaceutical pricing is a big healthcare issue deserving regulatory oversight, he believes healthcare providers should not be overlooked.
"We believe they should face antitrust scrutiny as well," Young said. "If consolidating jurisdiction helps to improve overall efficiency, that's fine, as long as it does the job. But the FTC has a continuing need to be vigilant, particularly on the physician side. We think somebody does need to be at the helm watching providers and ensuring that there is free and open competition."
The FTC's MacFarlane denied the agency has abandoned oversight of hospital mergers. She said because the number of hospital mergers has steeply declined since the heyday of the mid-1990s, the agency has reallocated its resources.
Jeffrey Brennan, who heads the health section at the Bureau of Competition, defended its record and said he's confident it can handle the full responsibility for provider mergers. Brennan said the FTC has increased its healthcare staff to 30 lawyers, an increase of 25% over last year, and is seeking more resources.
"I think healthcare antitrust enforcement is in good hands at the FTC," he said, pointing out that Muris once held Brennan's job and actively pursued anticompetitive provider behavior during his stint there in the 1980s.
"We're stepping up and expanding our nonpharmaceutical role, and we have some active cases against doctors and other providers," he said. "I think we have the resources to do the job. We're not short-handed, but we are doing a lot and we are busy."
Toby Singer, a healthcare antitrust lawyer with the Washington office of Jones, Day, Reavis & Pogue, said she believes the FTC simply has changed its enforcement priorities, not surrendered oversight of providers.
"I think they are strapped with a lot of drug cases, and they are a little cautious about merger cases. But they are going full steam ahead actively seeking provider cases in areas of bid-rigging and price-fixing, and we're starting to see some of those. They have not given up in this area," Singer said. "Healthcare is an industry like no other, and if the markets aren't working, the FTC and Tim Muris will step in."