Antitrust scrutiny of large technology companies may be in the headlines, but what some have dubbed "Big Med" is being eyed by the Biden Administration and federal agencies for heightened antitrust enforcement. Hospitals, physician groups, and health plans already accustomed to an active antitrust enforcement climate may need to prepare for even choppier regulatory waters ahead as a new President and new leadership at the Federal Trade Commission (FTC) and Department of Justice (DOJ) turn their focus on healthcare provider markets.
In the first of a series of articles, we look at the latest developments in competition policy and enforcement in provider markets, before turning to their impact on dealmaking during a time of rapid change and consolidation in the healthcare industry.
Pro-Enforcement Era for Healthcare Antitrust
President Biden's appointment of Lina Khan, a progressive reformer and supporter of aggressive enforcement of the antitrust laws, as the swing vote and Chair of the FTC was the first major harbinger of the changes to come. At that point, the federal antitrust agencies had already stopped granting "early termination" of merger reviews.1 Without the discretionary practice, non-problematic deals have had to wait the full 30 days of an initial review period following their filing with the government, resulting in some delay.
But the first sign that the new FTC, under Chair Khan, would have its eyes on healthcare providers in particular came at an open meeting of the Commissioners held last month. At that meeting, a 3-2 majority voted to single out healthcare—including hospitals and other providers—among several other industries as "enforcement priorities" that would be subject to resolutions authorizing sweeping compulsory process probes.2 The resolutions were described as removing "red tape bureaucracy" during a "massive merger boom," with both proposed and consummated transactions as potential targets.
Next came the Biden Administration's Executive Order on Promoting Competition in the American Economy, which singled out healthcare markets impacted by "hospital consolidation" for heightened antitrust scrutiny.3 The Executive Order identifies lowering prices and improving quality and access to care, in particular in rural communities, as requiring more vigorous enforcement of federal antitrust laws. It directs the FTC and DOJ to "review and revise their merger guidelines," which influence how agency staff conduct merger investigations. Judges also rely on the guidelines to help them assess the legality of mergers.
Finally, at the most recent open meeting of the FTC, a majority of Commissioners voted to rescind a 1995 Policy Statement that had limited the use of "prior approval" requirements in merger consent decrees. These decrees are settlements that the agency sometimes reaches with merging parties as conditions for not opposing their deal in court.4 Prior approval provisions require giving the FTC advance notice (before closing the transaction) of certain future deals and can even require the parties when presenting future deals to prove to the agency that they are not anti-competitive. The latter in effect flips the burden of proof, which normally lies with the government to challenge a deal, to the merging parties.
Active Enforcement Against Healthcare Provider Mergers
None of the recent actions of the Biden Administration or FTC are significantly out of step with the recent trend of vigorous merger enforcement against healthcare providers.
The healthcare industry has grown accustomed in the last decade to close scrutiny and frequent challenges to hospital and physician practice deals. A 2019 report from the FTC detailed at least nine hospital mergers and six physician group acquisitions that the agency challenged going back to 2008.5 Since then, it has challenged at least three more hospital deals, in addition to launching a merger retrospective study earlier this year to analyze the market effects of physician group and hospital consolidation.6
But even with this recent history of active enforcement, there does seem to be some acceleration in the trendline. Following last summer's blockbuster "Big Tech" hearings, Congress held another round of less-publicized, though still significant, hearings that focused on healthcare markets. At two separate hearings in the Senate and House of Representatives, lawmakers elicited testimony seeking to show that hospital and physician practice acquisitions are driving up healthcare costs, failing to improve quality of care, and lowering employee wages.7 Participants called for more aggressive enforcement of merger laws.
What an Executive Branch on Antitrust High Alert Means for Healthcare Provider Dealmaking
With so much interest from the Oval Office, federal enforcers, and Congress, healthcare providers—hospitals, physician groups, and integrated health systems—should anticipate heightened scrutiny of mergers and acquisitions.
At this time, with broader antitrust reforms still in draft bill form, nothing has changed about which types of deals will need to be reported to federal authorities. But companies should expect more frequent review of "non-reportable" transactions, which are deals falling under the thresholds that require pre-merger notification to the federal government.8 Formal integrations in healthcare can often be non-reportable. Non-reported deals have always been subject to investigations by federal authorities, but the recent directives of the Biden Administration and policy shifts at the FTC suggest that the agency will be more proactive in scoping out such deals for review.
The FTC's recent posturing also suggests that parties should expect additional scrutiny of consummated deals. That could include, for example, non-reportable transactions that have closed. But it also may involve fresh looks at mergers previously reported to the government that did not result in any action being taken. It is important to keep in mind that the FTC and DOJ never "approve" a merger. Although their decision not to take action against a merger upon reviewing it is a very strong indicator that they never will, they reserve the right to challenge it as unlawful in the future.
The typical forward-looking merger review seeks to predict the future competitive effects of a merger that has not yet occurred. By contrast, a retrospective investigation of a consummated deal looks back at everything that has happened post-merger to determine if it has, in fact, harmed competition. For example, post-closing pricing changes can be attributed to the merger, as can quality improvements or cost efficiencies. Therefore, in a climate of more active enforcement against consummated deals, merging companies should be more mindful of what their post-closing integration activities could mean for a future investigation of the deal.
The recent directives from the Biden Administration and policy shifts at the FTC also indicate that merging parties should be prepared to tackle a wider spectrum of theories of competitive harm when interfacing with the agency. For example, agency staff reviewing a hospital merger might need to more fully vet its potential impact on workers in labor markets, such as nurses or physicians, arising from the consolidation of employers in the market. Enforcers will also likely look more closely than they have in the past at vertical theories of harm involving "exclusionary conduct." This might include concerns, for example, about whether a health system buying a rival hospital faces increased incentives to cause its integrated insurance plan to lock out a rival provider from its network. Another concern might be that a hospital buying a group of physicians causes rival hospitals to lose access to specialists.
All of this would, of course, come on top of the extensive analysis already being done in these cases to determine whether the elimination of horizontal competition between merging providers might harm insurers and their members by creating fewer market alternatives. Therefore, more consideration of novel theories of competitive harm will only add to the burden and complexity that companies already face in assessing the risk that the government might challenge the deal and what remedies it might require as a condition for permitting the deal to close.
A wider competitive effects analysis will also likely lead to longer and more detailed government review of deals. Under the FTC's new policy, early termination is now essentially out of the question. At the same time, the agency appears poised to more frequently go beyond the 30-day window for its initial review that the merger statute provides for. Traditionally, at the 30-day mark, it has relied on asking parties to "pull-and-refile" their merger filing to restart the clock. But with a recent announcement, it appears the FTC may instead send a "pre-consummation warning letter" to the merging parties telling them that a review is ongoing and that they consummate the deal at their own risk.9 This could leave merging parties in a state of indefinite limbo if they are not willing to take the risk of closing on a deal that could later be challenged.
As for deals where the agency's concerns persist beyond the initial review period, parties should expect to receive an expansive "Second Request" for more information to trigger a detailed probe. Agency staff is likely to face pressure to ensure they capture all potentially relevant evidence, including anything needed to support the broader set of possible legal theories. Expansive Second Requests could also be used by overburdened agency staff as a tool to buy themselves more time to investigate.10 Merging parties will need to account for these potential delays and hurdles in the regulatory clearance process in their deal negotiations, in particular in how they allocate the risks associated with a prolonged review and potential challenge from the government.
Finally, the agency's recent policy shifts also mean that parties might now expect to see the FTC request a "prior approval" requirement as a condition (among others in the consent decree) for allowing a challengeable transaction to go through. This would mean having to give advance notice to the government of future transactions in related markets, including ones that would otherwise be non-reportable under the merger laws.
The main effect of a prior approval requirement, especially if it also contains a provision that flips the government's burden onto the merging parties in future filings, is that hospitals or health systems in an expansion mode cannot look at antitrust risk in isolation. In looking at whether to do a deal today, they will need to consider the regulatory risk posed to future deals (some of which may have more significant strategic importance) that could be subjected to a prior approval requirement.
Rough Roads Ahead
Any way one looks at it, a tougher legal climate awaits healthcare providers. If Congress updates the merger guidelines,11 that could make things even more difficult. Providers looking to navigate these challenges will need to have a sophisticated understanding of the new substantive and procedural risks they face with a more active White House and FTC. That will include assessing deal risk, negotiating around it, and then interfacing with federal authorities to maximize the chances for getting their deal through the regulatory process.
Be sure to come back for our next installment in this series, which will look at information sharing and competitor collusion in healthcare markets and how recent policy shifts at the DOJ could trigger criminal liability for providers caught unaware in their interactions with rivals.
7 https://www.judiciary.senate.gov/meetings/antitrust-applied-hospital-consolidation-concerns-and-solutions; https://judiciary.house.gov/calendar/eventsingle.aspx?EventID=4528
8 The Hart-Scott-Rodino (HSR) Act sets out the federal pre-notification merger review regime.
10 Proposed bills in Congress would increase both FTC and DOJ funding.
11 The FTC and DOJ recently announced their intention to review and consider revision of the guidelines. https://www.justice.gov/opa/pr/statement-acting-assistant-attorney-general-richard-powers-antitrust-division-and-ftc-chair