Now that healthcare providers have received billions in federal aid to offset their COVID-19 losses, some business groups, regulators and lawmakers want to ensure the money doesn't fuel a wave of predatory consolidation.
Their concern is that some of the $175 billion in grants Congress set up to keep healthcare providers afloat at the height of the pandemic could unintentionally help large, well-resourced companies buy up smaller ones that were weakened by the crisis.
"There's this dynamic of great motivation to acquire and heightened scrutiny in terms of resistance to opportunistic acquisitions," Jay Gerzog, a corporate partner with Sheppard Mullin and member of its national healthcare team, said during a May webinar.
Some have proposed halting mergers and acquisitions during and after the pandemic. The Pacific Business Group on Health, a consortium of 41 private employers and public purchasers that together spend $100 billion annually providing healthcare to 15 million people, has asked Congress to make healthcare providers pledge not to engage in M&A for 12 months as a condition of receiving aid from the Coronavirus Aid, Relief, and Economic Security Act.
"We can't let healthcare industry consolidation accelerate during this crisis because of the actions of a handful of corporate executive leaders who are taking advantage of this opportunity to gain market power so they can raise prices subsequently," said Bill Kramer, the PBGH's executive director of health policy.
Meanwhile, California's attorney general is asking the Legislature to expand his purview over healthcare mergers to include for-profit companies. The proposed measure would require health systems, private equity groups and hedge funds to get consent from Xavier Becerra's office before moving forward. That's currently only required for healthcare facilities owned by not-for-profit corporations.
There's been a fair amount of debate over how aggressively the Federal Trade Commission and Department of Justice will police proposed healthcare M&A during and after the pandemic.
For its part, the FTC pledged in March to stay the course with respect to its investigational standards. The agency said it will continue to order more in-depth information on potential transactions, also known as second requests, when its competitive concerns aren't resolved during the initial waiting period under the Hart-Scott-Rodino Act, the law that outlines federal agencies' pre-merger review process.
"This practice reflects the bureau's broader policy that its scrutiny of anticompetitive transactions and practices will not be relaxed, notwithstanding the difficult circumstances caused by the coronavirus pandemic," FTC's Bureau of Competition said in a release.
One thing's for sure: The money the federal government pumped into the system adds a new wrinkle of complexity to potential M&A deals. Grants distributed through the CARES Act were attached to specific tax identification numbers, and they must stay with those entities, said Rick Zall, a partner at Proskauer and chair of its healthcare industry practice. That means transactions will have to be carefully crafted so that the corporate structure of entities that received CARES Act funding isn't disturbed in the process, Zall said. Money received under the federal law will have to be carefully accounted for, and expenses and revenue affected by COVID-19 documented.
"They want to make sure that there isn't trading going on here in funding," he said.
In some cases, parties might find that a collaboration on certain service lines might make more sense than a full-on merger. Or transactions could be structured with earn-outs based on reopening, Zall said.
If parties were considering a deal but the seller is now operating at 75% of its pre-COVID capacity, the purchase price may need to come down.
Everyone understands they're under a microscope right now, so companies are approaching deals with caution, said Steven Sunshine, a partner with Skadden and head of its global antitrust and competition group. In some cases, that means they're pursuing other types of partnerships to stay under the radar.
"Let's make sure if we do a deal, that it makes sense," he said. "Part of that caution could be: Instead of full acquisition, let's do a collaboration, because they typically have fewer antitrust consequences."
There's been particular buzz around whether more healthcare companies will try to leverage the failing firm defense to get their deals greenlighted now that COVID-19 has pummeled their finances. That's where a company argues it would have to declare bankruptcy or fold if the deal didn't happen in hopes that regulators will approve the transaction despite anticompetitive concerns.
U.S. antitrust agencies have argued that defense rarely succeeds, according to an analysis by the law firm O'Melveny. The firm said litigants have asserted iterations of that defense roughly 50 times since 1930 and have succeeded, at least in part, just 18 times.
The current line from the federal government seems to be that it's not changing its stance on the failing firm defense. FTC Commissioner Rebecca Kelly Slaughter, for example, said during an April American Bar Association webinar that her agency had seen an uptick in the use of that defense before COVID-19 hit and had not found the arguments "particularly persuasive." Slaughter said she expects more parties will use that defense going forward.
Other legal experts predict COVID-19 could make the defense more viable, simply because more firms are actually failing. The law firm Sheppard Mullin estimates up to 25% of U.S. hospitals could file bankruptcy, close or sell within the next 24 months.
Sunshine is skeptical, especially given federal regulators have essentially indicated they're not buying it.
"My suspicion is there are going to be a few cases where that's true, but it's not going to be that many and it's not going to provide a broad defense," he said.
Gerzog predicted on the May 19 webinar that state antitrust regulators will prove helpful in warding off their aggressive federal counterparts because of their heightened sensitivity to the need to keep hospitals open and jobs secured.
"There's a possibility that state regulators will support a transaction where the federal regulators would not," he said.
Kevin Hahm, a partner in Hunton Andrews Kurth's antitrust group and former assistant director of the FTC's Mergers IV division, said he thinks the FTC will apply the same scrutiny it has in the past with respect to healthcare mergers regardless of the pandemic.
"I think the only thing that might change is deal activity," he said. "If there are more deals to review because of the financial strain I was talking about earlier, that would be a reason why investigations go up or challenges go up."
