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Four Takeaways from the FTC’s Healthcare Merger Losses

The Federal Trade Commission has made clear that it considers the regulation of competition in health care markets one of its top priorities, but in recent weeks the FTC has been dealt a string of tough losses in its healthcare merger challenges.  Here, we examine some of the key takeaways from the FTC’s recent defeats in this area.

As we have reported previously, the FTC has faced a series of setbacks in the healthcare arena.  In May, the Middle District of Pennsylvania denied the Commission’s attempt to scuttle the merger of the Penn State Hershey Medical Center and PinnacleHealth Systems.  Earlier this month, the Northern District of Illinois rejected the FTC’s request for a preliminary injunction to block the merger of Chicago-area hospitals Advocate Health Care Network and NorthShore University HealthSystem, finding the Commission had failed to meet its burden of showing a likelihood of success on the merits of their antitrust claims.  And on Wednesday, West Virginia’s Health Care Authority dealt another blow to the FTC by approving Cabell Huntington Hospital’s proposed merger with St. Mary's Medical Center, after the West Virginia legislature passed a new law making hospital mergers exempt from federal antitrust law.

We see several takeaways from these decisions:

Obamacare Is the Elephant in the Room

One looming question is the impact of the Affordable Care Act’s mandates on the Commission’s enforcement authority.  The ACA encouraged healthcare providers to transition away from payment models that focused on patient volume toward a model that emphasizes value to patients (for instance, by tying reimbursements to the achievement of positive patient outcomes).  This new paradigm increases pressure on providers to reduce inefficiencies by providing integrated services to patients—increasing the incentives for healthcare providers to merge.

The FTC has argued that there is no conflict between the ACA’s aims and the FTC’s merger enforcement activities.  The recent decisions call this argument into question.  As the Middle District of Pennsylvania suggested in rejecting the Commission’s challenge to the Penn State Hershey-PinnacleHealth merger, the post-ACA climate “virtually compels institutions to seek alliances” like the merger that the FTC opposed.

In its brief seeking an emergency appeal from the Middle District’s decision, the FTC argued that “[n]othing in the ACA compels anticompetitive consolidation among competing hospitals.”  Regardless of the merits of the Commission’s position, these recent decisions underscore the need for the FTC to persuade courts that its aggressive enforcement action in the healthcare sector makes sense, both practically and legally, in a post-ACA world.

Courts May Be Less Skeptical About Efficiency Arguments than the FTC

The rapidly evolving landscape of healthcare services may offer fertile ground for efficiency arguments by merging parties.  In the past, the FTC has cast a skeptical eye toward efficiency justifications in mergers.  In its published guidance, FTC notes that “[e]fficiencies are difficult to verify and quantify” and “efficiencies projected reasonably and in good faith by the merging firms may not be realized.”

But the reaction of courts in these healthcare merger challenges does not reflect the same degree of skepticism.  In Penn State Hershey-PinnacleHealth, for example, the district court emphasized the “compelling efficiencies argument in support of the merger,” and noted the proposed merger would alleviate capacity constraints and provide other “beneficial effects to the public.”  The Court found these “equitable considerations” to be factors that warranted denying injunctive relief to the FTC.

Market Definition Can Make or Break the Case

While market definition is often a battleground in antitrust litigation, these merger challenges show just how critical the analysis of the relevant geographic market can be in determining the outcome.

The Penn State Hershey-PinnacleHealth decision focused heavily on what the Court perceived to be flaws in the FTC’s proposed market definition.  The Court was not persuaded by the Commission’s proposed market definition, largely based on fact-specific determinations about how consumers in the counties surrounding Harrisburg would react to a merged provider.

The same dynamic played out in Advocate-NorthShore.  In that case, the Commission argued that a combination of the two providers would control 60% of the hospital market in the north Chicago suburbs.  Advocate and NorthShore fiercely objected to that argument, pointing out that the FTC's proposed market definition excluded major players such as Northwestern Memorial Hospital, which has a reputation as a “magnet” healthcare provider in Chicagoland.  The District Court’s opinion rejected the Commission’s proposed geographic market, finding the Commission’s expert had failed to provide economic basis for excluding these other hospitals from the market analysis.  See Amended Memorandum Opinion and Order at 9-13, Fed. Trade Comm’n v. Advocate Health Care Network, No. 1:15-cv-11473 (June 20, 2016), ECF No. 485.  Thus, the fight over market definition continues to be an area of heavy focus in merger litigation.

FTC Is Not Backing Down

Finally, despite the setbacks, the FTC does not appear to be stepping back its aggressive enforcement in the healthcare field.  The Commission sought emergency appeals almost immediately after receiving the adverse rulings in Penn State Hershey-PinnacleHealth and Advocate-NorthShore, and will be taking those cases to the Third and Seventh Circuits, respectively.  The FTC also has 14 days to consider the West Virginia decision to decide whether to take further administrative action.  Thus, the FTC’s aggressive enforcement stance in the healthcare field may continue unabated.