As hospitals look to buy or merge with competitors, looking for strength in size in these dicey times, federal antitrust authorities have rewritten their guidebook intended to describe when they'll attempt to block or unwind a deal deemed bad for consumers.
Tweaking merger guidelines
Feds get flexible under proposed changes
The guidelines proposed last week, which revamp ones issued 18 years ago, place a much greater emphasis on what evidence will be considered to analyze the way the deal will affect prices, as well as other potential downsides for consumers, such as diminished access and innovation. The guidelines are subject to public comment through May 20.
The proposed revision, though, does not signal an abrupt change in antitrust policing of horizontal mergers, which are deals involving competitors. Rather, the exercise is an attempt to bring them in line with the way the U.S. Justice Department and Federal Trade Commission actually do things, reflecting nearly two decades in evolution of economic and legal thinking.
As FTC Chairman Jon Leibowitz put it in a news release, the guidance is intended to “help make the process more transparent to American businesses and courts.” While they don't carry any legal weight, they're generally understood to influence judges, and the text of proposed guidelines suggests they “may assist the courts in developing an appropriate framework for interpreting and applying the antitrust laws” to horizontal mergers.
“It's all about the prices,” said David Marx, an antitrust lawyer with law firm McDermott Will & Emery. “These guidelines will impose a much greater burden on parties to transactions to produce more information, more data, including all sorts of price and cost data, in a very disaggregated form—certainly as detailed as on a product-line basis—so the government can do the kind of analysis it says are relevant,” Marx said.
In the realm of hospital mergers, the proposed guidelines strongly evoke a case that was seminal for the industry: the FTC's challenge of Evanston (Ill.) Northwestern Healthcare's acquisition of a third hospital in 2000 (Evanston Northwestern is now NorthShore University HealthSystem). The FTC filed an administrative challenge four years after the deal was done and based the case largely on direct evidence that the addition of Highland Park (Ill.) Hospital allowed the system to raise prices.
The 1992 guidelines begin with and dedicate the most ink to defining geographic and product markets and the calculation of market shares and concentration in those markets that might lead to bad outcomes for consumers.
In contrast, the proposed 34-page rewrite begins with a new section dedicated to what types of evidence the agencies might consider in order to assess or predict a deal's adverse effects. First up is what actually happened in cases in which the merger under the lens is already a done deal. That was the scenario with Evanston Northwestern, in which the FTC had the benefit of watching prices rise.
Previously, the government had suffered a string of losses attempting to persuade federal judges to block hospital mergers, in part because hospitals successfully argued they competed in broad geographic and product markets.
In the Evanston Northwestern case—which was resolved in the administrative process and never reached the courts—the FTC's lawyers argued that the observed price increases themselves defined the markets as inpatient hospital services sold to managed-care plans in a tightly drawn area of Chicago's northern suburbs. They further argued that the evidence that the deal caused higher prices was so convincing that defining the markets was unnecessary, a notion that was declared moot in the commission's opinion finding against the system.
The proposed guidelines echo those concepts, asserting that “evidence of competitive effects can inform market definition,” and that “some of the analytical tools used by the agencies to assess competitive effects do not rely on market definition.”
More often, though, the government attempts to prevent rather than break up mergers, in large part because it can be unworkable to wind back the clock. Evanston Northwestern was allowed to keep Highland Park Hospital, though the system was required to allow health plans to negotiate separately for Highland Park's services
In lieu of observed effects, according to the proposed guidelines, the agencies will study what they call “natural experiments” in order to predict how things will shake out. For example, they'll look at other mergers in similar markets or compare how prices vary if the merging organizations compete in some areas but not others.
Another type of evidence discussed is whether a merger would eliminate a “maverick” rival. The notion is reminiscent of the FTC case against Carilion Clinic, Roanoke, Va. (Aug. 3, 2009, p. 17). The government contended that the seven-hospital system scooped up an imaging center that had shaken things up by offering patients and physicians faster turnaround, lower prices and more flexible hours, along with a nascent surgery center that allegedly threatened to undercut Carilion for outpatient procedures. The system disputed the conclusions but agreed to sell both centers to resolve the matter.
James Rill, a former assistant attorney general in the Justice Department's Antitrust Division who worked on the 1992 guidelines, said the revisions don't represent a dramatic departure.
The changes acknowledge the considerable flexibility the agencies already exercise without necessarily strengthening the government's hand, said Rill, now a partner in the law firm Howrey. “I don't think it materially enhances their likelihood of success.”
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