Federal regulators subtly changed the final merger guidelines this week as the agencies outlined their plan to limit consolidation in all industries, including healthcare.
The updated guidelines from the Federal Trade Commission and Justice Department could have a wide-ranging impact on many types of deals, including cross-market health system mergers and acquisitions of physician practices by hospitals and insurers.
Related: Proposed merger guidelines may limit cross-market hospital deals
It will likely take time to see how the guidelines, which are not legally binding, will be interpreted by the courts. The agencies held four public forums and considered some 30,000 comments since releasing the draft guidelines in July. Horizontal and vertical merger guidelines were last updated in 2010 and 2020, respectively.
“The agencies have been promising us more aggressive, less deferential standards, and these guidelines deliver,” said Jeane Thomas, a partner at the law firm Crowell & Moring who focuses on antitrust policy.
Here's what to know about the revised merger guidelines.
How did the FTC and DOJ tweak the draft merger guidelines?
- Agencies changed the syntax of the guidelines from "Mergers should not..." to "Mergers can violate the law when..." The FTC and DOJ watered down some language to potentially show that not all transactions are presumed illegal, antitrust experts said.
- The draft guideline said, "Vertical mergers should not create market structures that foreclose competition," which noted that market shares of 50% indicate a merger may substantially lessen competition. The final guideline says, "Mergers can violate the law when they create a firm that may limit access to products or services that Its rivals use to compete." Regulators also moved the note about the presumption of companies with 50% market share to the footnotes.
- The agencies removed a line from the draft guidelines stating that if one of the merging parties has at least a 30% market share, it has a dominant position. A similar idea in the final guidelines was moved to the footnotes: "Without attempting to specify the smallest market share which would still be considered to threaten undue concentration, we are clear that 30% presents that threat.”
- The draft language in the first guideline was changed from: "In highly concentrated markets, a merger that eliminates even a relatively small competitor creates undue risk that the merger may substantially lessen competition. As a result, even a relatively small increase in concentration in a relevant market can provide a basis to presume that a merger is likely to substantially lessen competition." The final language reads: "In highly concentrated markets, a merger that eliminates a significant competitor creates significant risk that the merger may substantially lessen competition or tend to create a monopoly. As a result, a significant increase in concentration in a highly concentrated market can indicate that a merger may substantially lessen competition, depriving the public of the benefits of competition."
While the final guidelines maintained the agencies' aggressive oversight approach, the changes reflect feedback from comments and industry experts that some of the wording was too broad, said Alexis Gilman, a partner at Crowell & Moring who focuses on antitrust issues.
"Those were some of the more aggressive elements to the draft that weren’t as well grounded in law and economics as some other portions that were put forward," he said. "It is still a more aggressive approach than many parties contemplating mergers would like."
How could the merger guidelines affect healthcare deals?
The guidelines are designed to broaden the scope of regulators' review of mergers and acquisitions. For instance, the guidelines expand oversight to proposed merger and acquisitions’ impact on the labor market, companies’ consolidation history, mergers that limit competitors’ access to products and services and whether companies use mergers to "bundle" or "tie" the sale of two products.
The bundling provision could have implications for cross-market health system mergers, an increasingly common occurrence that has generally avoided antitrust scrutiny, health economists said at an October forum regarding the draft guidelines. Research has shown that hospitals in separate service areas may be able to negotiate higher rates with insurers due to a common customer base—often large employers demanding insurance coverage for their employees in different regions.
In addition, the guidelines may affect health systems that aim to acquire physician groups, said Nathan Ray, a partner at West Monroe who leads the consultancy's healthcare mergers and acquisitions practice. It would’ve been helpful if the agencies listed specific examples of potentially anticompetitive transactions, he said.
“As far as payers and vertical integration, this is where some examples would benefit,” Ray said. “Economic reasoning is great, but the translation to what went wrong [in completed transactions] and what [types of deals] they are trying to stop is lacking.”
The first guideline involving market concentration will likely have the biggest impact on potential hospital transactions, Gilman said.
Antitrust agencies and economists use the Herfindahl-Hirschman Index to measure market concentration and estimate the competitive consequences of a deal. Under prior guidelines, the FTC might scrutinize transactions that would lead to an index increase of between 100 and 200 in highly concentrated markets, or one with an index of at least 2,500. The final guidelines broaden the scope of the agencies' review, lowering the threshold to an increase of at least 100 in a highly concentrated market, defined as a market with an index of at least 1,800.
“Clients are thinking earlier, longer and harder about antitrust risk, baking in a longer potential timeline, more scrutiny and risk in deals being cleared,” Gilman said. “For deals that are in the new threshold of what is now called highly concentrated markets, those are the deals that are likely to cause a lot more second thoughts.”
