The Federal Trade Commission is issuing a strong warning about a pair of proposed hospital sales in Texas, arguing they could lead to higher costs, lower quality and diminished access to services for local residents.
That's about all the antitrust regulator can do when it comes to these proposed deals, as Texas lawmakers passed a state law last year that grants such transactions immunity from a federal challenge. Still, in its analysis, the FTC suggested that if not for Texas' new Certificate of Public Advantage law, it would have sued to stop the deals.
"These concentration numbers approach monopoly levels and far exceed the thresholds that would create a presumption of illegality under the Merger Guidelines and the relevant case law," the agency wrote, referring to its own framework for assessing mergers.
The FTC sent its analysis to the Texas Health and Human Services Commission, the agency responsible for approving the two applications under the state's COPA law. If HHSC gives the green light, Hendrick Health System and Shannon Health System would become the only acute-care hospital operators in two Texas cities: Abilene and San Angelo.
"It's a free pass, essentially, from federal antitrust scrutiny," said Tim Greaney, a professor at UC Hastings Law School who has studied COPAs.
The HHSC is reviewing the FTC's submission and will make a final decision once it receives a recommendation from the Texas Attorney General's office, a spokeswoman said.
Hendrick plans to buy 231-bed Abilene Regional Medical Center from for-profit Community Health Systems. Hendrick currently runs the only other acute-care hospital in Abilene, a city of roughly 123,000 people. As part of that deal, Hendrick would also buy CHS' 188-bed Brownwood Regional Medical Center in Brownwood, about 80 miles southeast of Abilene.
Shannon plans to 171-bed San Angelo Community Medical Center in San Angelo from CHS. Shannon currently runs the only other acute-care hospital in San Angelo, a West Texas city of about 100,000 people.
The FTC's analysis focused mostly on the Hendrick deal's effects on the Abilene market, but the agency said the same concerns apply to the Shannon deal.
The two hospitals in Abilene are 11 miles apart, and the FTC said that eliminating the competition between them would "substantially increase" the merged system's ability to exercise its market power, enabling it to demand higher prices from insurers, which would lead to higher healthcare costs for employers and patients. The agency noted that in Abilene and San Angelo, both hospitals are close substitutes from the perspective of patients and insurers.
The FTC used a common measure of post-merger market concentration, the Herfindahl-Hirschman Index, to assess both deals. It found the Hendrick deal would result in a post-merger HHI score of 7,266, an increase of 3,391. Mergers resulting in HHI scores above 2,500 and increases of more than 200 points are considered anticompetitive.
The agency calculated the Shannon deal would result in an HHI score of 4,171, an increase of 1,467.
"The HHI change is pretty dramatic in both of them," said Bill Horton, a partner with Jones Walker and co-chair of its healthcare industry team.
The agency also found the regions covered by both deals have highly concentrated labor markets, inferring that both proposed deals would harm registered nurses.
The FTC noted that because Hendrick would no longer risk losing patients to its rival hospital in Abilene, it would have no incentive to maintain or improve quality, access to services or technology. Thus, the agency said quality would likely decline under the deal, which could adversely affect patient outcomes like mortality and readmissions.
The agency said Hendrick's claims about quality benefits from the merger are "unsubstantiated." Additionally, the FTC noted that Hendrick's COPA application does not contain objective quality benchmarks to measure its performance, and no enforcement mechanism if it fails to achieve its promises.
The COPA law also allows HHSC to enforce price controls using rate review. The FTC, however, wrote that it doubts that would mitigate the harm resulting from the transaction.
"It is difficult, if not impossible, to foresee all of the ways that the rate review process could fall short of its intended purpose, be circumvented, or result in unintended consequences," the FTC wrote.
The FTC also noted that Hendrick has made no commitment to keep open or maintain current service levels at hospitals and other facilities, and it would likely need to consolidate to achieve projected costs savings.
While the FTC doesn't have grounds to sue, its analysis can still be useful in strengthening the regulatory conditions the Texas HHSC places on the COPAs, said Erin Fuse Brown, an associate professor in Georgia State University's College of Law. It's important that state regulators add conditions on price, keeping service lines and other potential adverse effects, she said.
"Based on the FTC's concerns, I would be wary of approving it as-is," Fuse Brown said.
Texas' COPA law allows merged entities to terminate the COPA by giving HHSC 30 days' notice. The FTC emphasized that once the hospital assets are combined, Hendrick could opt to no longer comply with the regulation. The agency also noted the difficulty of "unscrambling the eggs" after a merger is complete and hospitals and service lines were already consolidated, staffing and physicians cut or reorganized, contracts with insurers renegotiated and IT systems integrated.
Greaney said his reading of that is that the merger itself would not be unwound—which is virtually impossible to do after the fact—just the regulatory requirements on the merged systems, which appears to be a "huge loophole."
"That's stunning," he said. "Why would you want to keep the COPA in place a year from now if you can just rid yourself of the requirements?"
Hendrick CEO Brad Holland said in a statement that the FTC's comments are not surprising, given the agency's consistent opposition to COPAs. He noted that state lawmakers' intent in passing the COPA legislation was clear: COPAs provide the best path to preserving healthcare.
"We have faith in the HHSC's expertise to provide ongoing oversight and look forward to demonstrating improved quality, access and cost benefits for our patients," Holland said.
Both Holland and the CEO of Shannon Health System, Shane Plymell, donated money last year to the state representative who carried the bill that became the COPA law. Both CEOs also spoke in support of the measure at a hearing.
In his own statement, Plymell said the FTC's comments don't change Shannon's enthusiasm for ensuring West Texans have access to high-quality healthcare for generations.
It's common with state COPA laws for health systems with lots of political power to get the law passed with a particular merger in mind, Fuse Brown said. Then there is a huge amount of pressure on the state health departments and attorneys general to approve the deals, she said.
"These are very powerful institutions," Fuse Brown said. "They're some of the biggest employers in the region. They're the economic engines in the region."
In its own statement, Franklin, Tenn.-based CHS echoed Holland's comment, that Texas lawmakers determined COPAs are the best way to meet the healthcare needs of certain low-population counties. The company said it will continue to cooperate with the FTC, the Texas Attorney General and the Texas HHSC.