Rethinking the rules

While the president and his allies in Congress attempt to remake the healthcare landscape, the president’s antitrust enforcers are contemplating the first substantial rewrite of their guidebook on mergers since 1992.

Lawyers and scholars who scrutinize the government’s approach to healthcare mergers will watch closely to see where the Obama administration is headed. “This is a very active new enforcement administration, so they’re looking for things to do and looking for policies to put their mark on,” said Douglas Ross, a partner in the law firm Davis Wright Tremaine. “This is a logical one. These guidelines have been out there for a long time.”

Federal Trade Commission Chairman Jon Leibowitz and Justice Department Assistant Attorney General Christine Varney announced the project last week during a symposium on global antitrust enforcement at Georgetown University Law Center in Washington, saying they want to explore whether the jointly issued guidelines could better reflect how economic theory and the government’s approach to cases have evolved over the past 17 years. Leibowitz quipped that the bulk of the guidelines are “old enough to drive, almost old enough to vote, and probably old enough to drink in all 27 members of the European Union.”

The agencies did not signal that they intend to revisit what they’ve said specifically about healthcare mergers in a set of 1994 statements providing guidance on healthcare antitrust enforcement and in a 2004 report called Improving Health Care: A Dose of Competition.

The merger guidelines set for a possible makeover broadly express the government’s worldview of mergers between market competitors in all industries.

They’re intended to provide businesses some transparency and predictability about when a deal is likely to trigger an investigation or challenge, but Leibowitz said they “clearly exaggerate the degree to which the agencies follow a rigid, step-by-step approach in merger analysis.”

The reality, Leibowitz said according to the text of his speech, is that the enforcers “center our inquiry on one key question: Is the merger under review likely to substantially lessen competition?”

In order to demystify the way the agencies answer that question, they will seek commentary in response to a set of questions to get the ball rolling and then hold a series of workshops in December and January 2010 in Washington, Chicago, New York and San Francisco.

The questions include whether the guidelines should provide a more detailed discussion of whether the merger will lead a business to unilaterally engage in anti-competitive behavior, as opposed to the more traditional analysis of overall market concentration. So-called unilateral-effects theories have driven the FTC’s recent hospital merger cases, said antitrust lawyer Jeff Miles, a principal in Ober, Kaler, Grimes & Shriver.

The agencies also indicate they will address the weight given to direct evidence of anti-competitive effects, such as testimony of customers (in hospital cases, from health plans), documents indicating the merging parties’ plans to raise prices or otherwise behave badly, and actual evidence of anti-competitive results after the deal is done.

“Although the agencies routinely rely heavily on these kinds of evidence to assess competitive effects, the guidelines address their relevance only in passing and only secondarily,” said Varney, who leads the Justice Department’s Antitrust Division, according to her prepared remarks.

Such evidence, incidentally, was heavily emphasized in the FTC’s seminal case against Evanston (Ill.) Northwestern Healthcare (now called NorthShore University HealthSystem), which observers viewed as an attempt by the FTC to refresh its approach and reverse a long losing streak in hospital merger cases.

Last year, the FTC also challenged the proposed acquisition of Prince William Health System, Manassas, Va., by Inova Health System, Falls Church, Va. (May 19, 2008, p. 6).

The two shortly dropped the idea and Prince William was purchased by Novant Health, Winston-Salem, N.C., this year (Aug. 17, p. 6).

The Evanston case, though, was highly unusual because the FTC challenged the system’s acquisition of a third suburban Chicago hospital four years after the deal closed, allowing it to observe and document how things played out.

But the government prefers to block bad mergers from happening in the first place, and offering evidence that predicts the effects of a merger requires economic modeling based on such things as historical conduct in the industry or the lessons of analogous transactions in other geographic areas.

“Those have yet to be tested in court and probably will face sort of rough sledding in persuading a court that that’s really direct evidence that the price is going up,” said Tim Greaney, director of the Center for Health Law Policy at St. Louis University School of Law.

The guidelines are intended principally to “tell the world what the government intends to do in bringing a case,” Greaney noted. “In practice, they shape the law because courts have tended to look to them for at least guidance,” Greaney said. “They’ve been tremendously influential.”

Although the new effort could lead to the first broad overhaul of the guidelines in two decades, a section of the guidelines was revised in 1997, and in 2006 the agencies issued commentary on the document.

The agencies did not offer a timeline on when a decision would be made whether to overhaul the guidelines or how long the revision would take if they decide to do it.

The process is likely to be “slooooow, very slooooow” given the flood of responses the government is about to get to its questions, Miles said. “There are going to be almost as many opinions as there are people.”

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