Hospital Consolidations: Facing Competing Pressures to Merge and Remain Independent
The past 18 months have been a busy time for the staffers investigating hospital mergers at the Federal Trade Commission (FTC). In December 2011, the U.S. Court of Appeals for the 11th Circuit affirmed a district court's denial of an FTC preliminary injunction motion, from which the FTC and Solicitor General in March 2012 filed a petition seeking review by the U.S. Supreme Court (the "Phoebe Transaction"). Also in March, the FTC ruled that the 2010 acquisition of control over a rival health system in the Toledo, Ohio, area would have anticompetitive effects and ordered divestiture; the parties reportedly plan to appeal (the "ProMedica Transaction"). In April 2012, the U.S. District Court for the Northern District of Illinois granted the FTC's request for a preliminary injunction against two hospital systems in Rockford, Illinois, prompting the parties to abandon their proposed transaction (the "OSF/Rockford Transaction").
At issue in each of these challenges was the anticipated consolidation in inpatient general acute care services sold to commercial health plans and their customers, which the FTC is concerned will result in increased healthcare costs and reduced of quality and range of choices for local consumers. The hospitals have argued that their consolidation is just what President Obama has ordered under the nation's new health care law, while the FTC has expressed concern that consolidation in some smaller markets could lead to higher prices and harm consumers.
The federal antitrust agencies, at times joined by the states, have a long history of challenging hospital mergers. After a hiatus in the early 2000s, the FTC has reinvigorated hospital enforcement, obtaining a consent order against an Illinois hospital system, and convincing a Virginia hospital system to abandon its plans to acquire a competitor, while allowing a failing Texas hospital to be acquired by the only available purchaser.
With hospital mergers at an all time high, it appears from these developments that antitrust investigations are also likely to increase. However, that is not to say that all hospital mergers are in jeopardy. In 1996, the Department of Justice (DOJ) and FTC issued joint guidance on health care merger enforcement ("Hospital Guidance") that sets forth an antitrust safety zone for smaller, established hospitals providing general acute care services. The Hospital Guidance recognizes that smaller, and in particular rural, hospitals may need to merge with other hospitals in order to achieve certain cost-saving efficiencies. Outside of the Hospital Guidance's safety zone, hospital mergers are analyzed using the analytical framework of the agencies' Merger Guidelines, with a focus on balancing the likelihood of the exercise of market power with the likelihood of cost savings to be passed on to consumers.
Similarly, the DOJ and FTC joint statement addressing antitrust issues relating to Accountable Care Organizations (ACOs, "ACO Guidance") was intended to ensure that health care providers have the antitrust clarity and guidance needed to form pro-competitive ACOs. The ACO Guidance provides an antitrust safety zone for ACOs that are eligible to participate in the Affordable Care Act's Medicare Shared Savings Program of a 30 percent "combined share" of the "common service" provided by physicians and facilities, with hospitals and ambulatory surgical centers required to be non-exclusive to the ACO to fall within the safety zone, regardless of the primary service area share. The ACO Guidance also highlights conduct that is relatively more likely to raise competitive concerns, including the sharing of competitively sensitive information and certain activities that require extensive fact finding to confirm its anti- or pro- competitive effect.
While all of this guidance is helpful, a recent Government Accounting Office analysis of how antitrust guidance affects the ability of health care providers to collaborate to improve health care quality concluded that various stakeholders (health care providers, insurance plans, antitrust enforcers and other experts in antitrust law) differ widely on a number of aspects of such guidance, including whether the agencies should permit greater use of exclusive collaborative arrangements and the scope of the various antitrust safety zones. Given the factual specificity required to analyze multi-faceted hospital mergers, it seems safe to say that outside of the safety zones much remains to be debated and hospital merger investigations are not going to diminish any time soon.
The Phoebe Transaction
On April 26, 2011, the FTC filed a complaint in federal court challenging Phoebe Putney's acquisition of Palmyra, thereby seeking to block the proposed combination of the only two hospitals in Albany, Georgia. According to the FTC, the merged entity would control 100 percent of the licensed general acute care hospital beds in Dougherty County; even under an expanded geographic market that would represent a market share of approximately 86 percent. Accordingly, the transaction allegedly would "greatly enhance Phoebe Putney's bargaining position in negotiations with health plans, giving it the unfettered ability to raise reimbursements rates," which are then passed on to the health plans' customers - local employers and their employees, who are members of the health plans.
On June 27, 2011, the district court dismissed the FTC's complaint on the ground that the defendants' actions were attributed to the Hospital Authority of Albany-Dougherty County ("Authority"), which, as a state actor, is immune from antitrust liability. Because the Authority's allegedly anticompetitive activities were legally "authorized by the state pursuant to state policy to displace competition with regulation or monopoly public service," the defendants did not need to argue that the transaction would be pro-competitive or within any of the antitrust safety zones. In December 2011, the Eleventh Circuit upheld the District Court's decision, and on March 23, 2012, the FTC requested that the U.S. Supreme Court grant certiorari to review the state action ruling.
The ProMedica Transaction
In January 2011, the FTC, along with the Ohio Attorney General, challenged ProMedica Health System's August 2010 acquisition of control over St. Luke's Hospital through a Joinder Agreement, concerned that it would result in higher healthcare costs that would be passed on to employers and employees, and reduced quality and breadth of health care services available to residents in the Toledo area (which is located in Lucas County, Ohio). The FTC claimed that the transaction would give ProMedica enhanced bargaining clout and the ability to obtain higher rates for services at St. Luke's and at its other Lucas County hospitals. According to the commission, the transaction would reduce the number of competitors in general acute-care inpatient hospital services in Lucas County from four to three, with a combined market share of close to 60 percent, and would also reduce the number of competitors in inpatient obstetrical services in Lucas County from three to two, with a combined market share of more than 80 percent. On March 29, 2011, the district court granted FTC's motion for a preliminary injunction and required the hospitals to maintain St. Luke's as an independent competitor pending completion of the FTC's investigation.
After a full administrative trial, on December 5, 2011, the Administrative Law Judge (ALJ) issued an Initial Decision, finding that the transaction reduced the number of competitors in the market for general acute-care inpatient hospital services from four to three and would increase ProMedica's bargaining power with commercial health plans, leading to higher reimbursement rates that would be passed on to the plans' customers (local employers and their employees). While the ALJ did not agree with the FTC's definition of inpatient obstetrical services as a separate relevant product market, on the basis of the expected harm to consumers in the general acute-care inpatient hospital services market, he ordered that ProMedica divest St. Luke's to an FTC-approved buyer within 180 days after the final order.
On March 22, 2012, the FTC upheld most of the ALJ's Initial Decision, ruling that ProMedica's acquisition of St. Luke's was likely to substantially lessen competition and increase prices for general acute-care inpatient hospital services, as well as for inpatient obstetric services sold to commercial health plans in Lucas County. The FTC's Opinion defines the relevant market somewhat differently than the ALJ, but the FTC noted that "the outcome of this case is the same whether or not [inpatient obstetrical] services are included in the [general acute-care] inpatient hospital services market… As the ALJ found, regardless of which market definition is used, market shares and concentration levels exceed the thresholds for presumptive illegality provided in the 2010 Horizontal Merger Guidelines and the case law. Respondent does not dispute this." 
The FTC rejected all of ProMedica's arguments that the commercial health plans' countervailing bargaining power, lack of competitive effects evidence post-transaction, likely repositioning by competitors, and St. Luke's questionable financial viability justified upholding the acquisition. Thus, the FTC ordered ProMedica to divest St. Luke's. The parties reportedly are planning to appeal the decision to the Sixth Circuit.
The OSF/Rockland Transaction
On November 18, 2011 the FTC challenged OSF Healthcare System's proposed acquisition of Rockford Health System, claiming that the transaction would substantially reduce competition for critical health care services in Rockford, Illinois, thereby increasing total health care costs and reducing the quality of care and range of health care choices for employers and residents. It was alleged that the combined entities would control 64 percent of the general acute-care inpatient hospital services in the Rockford area and, together with one other competitor, SwedishAmerican, would control 99.5 percent of that market. In addition, the FTC claimed that the combined entities would only face competition from two other primary care physician groups in the Rockford area, and post-transaction, the OSF/Rockford Health System would control over 37 percent of the primary care physician services in the Rockford area and, combined with SwedishAmerican, would control 58 percent of the market.
The FTC's complaint alleged that the combined entities would have a greater ability to raise rates, which would be passed on to consumers either directly or through higher insurance premiums, co-pays, and other out-of-pocket health care expenses. The FTC was also concerned that the two remaining hospitals would have increased incentives and ability to engage in anticompetitive coordinated behavior, and to eliminate beneficial non-price competition that had been happening between the two hospital systems. In February 2012, the court held an evidentiary hearing on the FTC's motion, in which each side was permitted to present four witnesses.
On April 5, 2012, while noting that the FTC's likelihood of success on its alleged "primary care physician services" market was "distinctly lower" than its claim involving the "general acute-care services" market due to lower concentration levels and lower barriers to entry, the district court nevertheless granted the FTC's request for a preliminary injunction, pending a full administrative trial on the merits. The court discounted the defendants' argument that the merger would not allow them to raise prices to supra-competitive levels, which arguments were based on the contentions that SwedishAmerican was a strong competitor and that large health plans could effectively negotiate against the combined entity. The court also declined to find as sufficient the defendants' offer of a stipulation of how the combined entities would deal post-transaction with commercial health plans. Shortly thereafter the parties decided to abandon the proposed transaction.
Consolidation in the health care industry is a hot topic these days, with the government urging providers to come up with ways to deliver services more effectively and challenging them to avoid combinations that have the potential to raise prices or diminish service. Antitrust concerns are a growing area of focus in deciding if, and with whom, to partner in the industry. Given the FTC's recent actions, there is no reason to expect that antitrust scrutiny into these combinations will lessen. In fact, the opposite is probably true. Certainly, providers of general acute-care services that fall outside of the various antitrust safety zones, residing instead in moderately- or highly- concentrated markets as set forth in the 2010 Merger Guidelines, need to factor an FTC challenge into their timing if they plan to combine.
Significantly, if the Supreme Court grants certiorari to the FTC on the Phoebe transaction, it will be the first merger case accepted by the highest court in decades. Although it is not clear that the case would create new antitrust law in the merger field, depending on the breadth of the court's decision, the implications for hospital mergers could be critical.
 FTC v. Phoebe Putney Health Sys., Inc., 1:11-cv-00058-WLS (M.D. GA 2011)
 FTC v. ProMedica Health Sys., Inc., 3:11-cv-00047-DAK (N.D. OH 2011)
 FTC v. OSF Healthcare Sys. and Rockford Health Sys., 3:11-cv-50344 (N.D. IL 2012)
 The ProMedica challenge also involved inpatient obstetric services.
 In the Matter of Evanston Northwestern Healthcare Corp. & ENH Medical Group, Inc., FTC Docket No. 9315.
 In the Matter of Inova Health Sys. Found. & Prince William Health Sys., Inc., FTC Docket No. 9326.
 Scott & White Healthcare/King's Daughters Hosp., FTC File No. 091 0084.
 "Last year, a 10-year high of 86 hospital deals were announced - valued at roughly $7.94 billion."http://www.beckershospitalreview.com/hospital-transactions-and-valuation/hospitals-confused-by-ftcs-increased-merger-scrutiny.html. See also "Hospital mergers, acquisitions expected to maintain quick pace" http://www.ama-assn.org/amednews/2012/04/02/bisa0402.htm.
 Available at http://www.ftc.gov/opa/2011/10/aco.shtm.
 "Stakeholders' Perspectives Differed on the Adequacy of Guidance for Collaboration among Health Care Providers," available at http://www.gao.gov/products/GAO-12-291R.
 Phoebe, Complaint at 5.
 Id. at 6.
 Phoebe, Order (M.D. GA 2011) at 32.
 Phoebe, Order (11Cir. 2011).
 Phoebe, Petition for Writ of Cert.
 The acquisition of control was not subject to the reporting and waiting period requirements of the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended.
 ProMedica, Complaint at 16.
 ProMedica, Complaint at 15.
 ProMedica, Complaint at 4.
 ProMedica, Order (N.D. OH 2011)
 In the Matter of ProMedica Health Sys., Inc., FTC Docket No. 9346, Initial Decision.
 ProMedica, Opinion of the Commission.
 Id. at 26.
 OSF/Rockland Complaint at 1.
 Id. at 2.
 Id. at 2-3.
 OSF/Rockland Order (N.D. IL 2012).
 Id. at 21-25.
 Id. at 26-27.