- Post-Acquisition Review of Hospital Mergers: How To Minimize Risks
- February 8, 2004 | Author: Christopher J. Huber
- Law Firm: Pepper Hamilton LLP - Philadelphia Office
One of the federal agencies responsible for antitrust enforcement and merger review, the Federal Trade Commission (FTC), recently has emphasized investigating and challenging mergers after they have been consummated and after any pre-merger clearances have been given. Before 2001, federal challenge of completed mergers was rare, although not without precedent. In August 2001, however, FTC Chairman Timothy Muris announced a change in focus, stating that "[w]e are quite prepared to go after consummated mergers . . . ."
Hospital mergers may be particularly susceptible to post-merger review by the FTC. First, the Antitrust Division of the Department of Justice has disbanded its health care task force, leaving health care antitrust enforcement almost entirely to the FTC, which is more aggressive in post-merger reviews. Second, Muris has said that health care antitrust enforcement is one of his top priorities. In late 2002, he said that the FTC "has devoted significant resources to maintaining competition in health care markets, an area of significant importance to the economy. In the last year, we have increased resources devoted to health care by 50 percent. We already have brought several cases; more can be expected."
Perhaps most importantly, the FTC and the Antitrust Division challenged a considerable number of hospital mergers before consummation, but beginning in the late 1990s, lost most of those challenges (while at the same time winning the majority of the other merger cases they brought). Indeed, in 1994 "of all mergers, joint ventures, and other transactions that are large enough to be reported in advance to the antitrust enforcement agencies, hospital transactions are two to three times more likely to be investigated." Fredric J. Entin, Jeffrey M. Teske & Tracey L. Fletcher, "Hospital Collaboration: The Need for an Appropriate Antitrust Policy," 29 Wake Forest L. Rev. 107, 116 (Spring 1994). In the wake of these losses, hospital mergers continued, but the agencies significantly scaled back their enforcement efforts and most were not challenged. As a result, in many cities, hospital services have consolidated and created one or two large hospitals or hospital groups, potentially leading to market power and the possibility of consumer harm.
In challenging a merger, the agencies must demonstrate that the proposed merger would tend to create a monopoly or lead to a substantial lessening of competition in a relevant market. Because the challenges to hospital mergers occurred before the mergers were consummated, however, the agencies did not necessarily have the facts to support their theories of competitive harm. For example, courts rejected the market definition offered by the agencies, instead finding that the market for hospital services was larger than the agencies believed and that patients would be willing to travel up to 100 miles for care. Also, the courts frequently accepted the hospitals' claims of efficiencies that theoretically would be gained from the proposed merger.
A post-merger investigation and challenge, on the other hand, would allow the FTC to develop a factual record based on what actually happened after the merger. For instance, data could show that patients did not switch hospitals and travel 100 miles to an alternate, as predicted by the Mercy Health court. Or, the agency could demonstrate that the efficiencies claimed before the court ultimately were not realized by the merging hospitals.
The Butterworth Health case is a prime example of this second issue. According to a review conducted three years after the merger, the efficiencies actually realized by the merging hospitals were less than half that claimed by the hospitals. Such information allows the FTC to argue more persuasively that a merger was anticompetitive, and make it less likely that a court would recognize efficiencies or other defenses by the hospitals without actual proof.
What Can You Do To Minimize Your Risks?
Approach price increases carefully. Price increases alone are not antitrust violations, but when price increases follow a merger, they raise questions about whether the increase occurred because of the merger. If the FTC concludes that a price increase is directly related to the merger, it is much more likely to start an investigation or at least increase scrutiny of the hospital's actions.
Engage your customers. Be extremely vigilant in your dealings with benefit plans and insurers. Complaints from a merged firm's customers are a major catalyst in initiating FTC investigations. After completing a merger, closely monitor any dealings with benefit plans and insurers to ensure that complaints do not increase sharply, and to ensure that the type of complaint does not change dramatically. If you begin to see dramatic changes in the number or types of complaints, review changes made since the merger to determine if they are causing the variation. In addition, ask the largest benefit plans or insurers you deal with about any specific concerns you could address. This should decrease the chance that they would complain to the FTC and spark an investigation. Even if a complaint is not the catalyst for an investigation, speaking with customers before an investigation and addressing their concerns can help shorten any investigation. One of the first steps the FTC likely would take in an investigation is to contact these benefit plans or insurers to see how they view the merger and your service. If you already have addressed any concerns, it is much more likely that customers will provide the government with positive statements in support of the merger and your services, reducing the chance of a full-fledged investigation.
Review the efficiencies provided by the merger. Another issue to consider, before an investigation is initiated, is whether the efficiencies you predicted from your merger have actually occurred. You should review the documents you created before the merger that justified it internally and to any agency that reviewed the merger. If you have produced the efficiencies you predicted, you are in much better shape than if not. If, as may be likely, you have not experienced the efficiencies you projected, evaluate whether the efficiencies are still achievable. It may turn out, after the merger has been completed, that not all the project efficiencies were realistic. While this is not ideal, you may have achieved other efficiencies that you did not predict. Cataloging these efficiencies would provide the FTC with a quick presentation of the benefits of the merger if it did initiate an investigation.
Make sure your documents accurately reflect the benefits of the merger. Review your post-merger documents to determine what they say about the merger and your subsequent activities. Ideally, the documents should reflect the efficiencies gained by the transaction and should not link the merger with anticompetitive conduct, such as increased prices or reduced levels of service.
Be prepared to quickly address any concerns raised by the government. If an investigation is initiated, you will want to move to address the FTC's concerns quickly. The agency frequently will accept an early presentation by companies under investigation that demonstrates why the investigation is baseless. By taking the steps outlined above, you will be in a much better position to make such a presentation quickly, with accurate data and support from the benefit plans or insurers you deal with. If done properly, such a presentation may shorten any subsequent investigation or at least narrow the scope of any such investigation, reducing the costs and risks.
Consult with legal counsel. Every merger is different -- be sure to consult your antitrust counsel for specific advice and recommendations for your company.