Deja vu in FTC merger challenge?
FTC keeps up interest in healthcare deals
In 1989 and 1990, federal courts ordered two hospitals in Rockford, Ill., to stop merger talks after concluding that the combined organization would threaten competition and gain too much clout at the bargaining table with insurers.
Twenty-two years later, FTC lawyers are making the same arguments, specifically citing the 1989 and 1990 federal court opinions as direct evidence in their decision to challenge another proposed hospital merger in Rockford—the third legal challenge to a hospital acquisition the agency has filed this year.
“The only meaningful difference between the 1989 merger and the (new Rockford) acquisition is the re-shuffling of the parties to the transaction,” FTC attorneys wrote in their administrative complaint to stop the acquisition of 293-bed Rockford Memorial Hospital by OSF Healthcare System, which owns 235-bed OSF St. Anthony Medical Center.
Not so fast, say attorneys and executives for the hospitals, who cite plenty of differences between the circumstances today and 20 years ago. Attorney Jeffrey Brennan of Mcdermott Will & Emery, who is representing Rockford Memorial in the litigation, noted that the new transaction doesn’t simply “shuffle” the parties but rather offers a distinct situation in terms of market power.
The 1989 merger would have been between Rockford Memorial and Swedishamerican Hospital, which at the time were the two largest hospitals in the market. The current acquisition would combine the two smaller players in the market. FTC data says Swedishamerican today controls 36% of the market for acute-care hospital services, while Rockford has 34% and OSF has 30%.
Brennan also noted that economic dynamics of Rockford have shifted to a state that would favor reducing the number of hospitals in Rockford to two. Although the city population has remained flat, the number of people in the wider metropolitan market has declined along with the local manufacturing base, he said.
Finally, Brennan cited the little-noticed fact that Swedishamerican and OSF St. Anthony’s received the FTC’S blessing to merge in 1997, but that deal was never consummated for reasons unrelated to regulatory challenge.
In recent years, the FTC has been challenging hospital mergers at a pace that indicates the agency isn’t letting up on antitrust enforcement despite forces unleashed by the Patient Protection and Affordable Care Act that executives say favor larger, integrated health systems.
On Nov. 18, the FTC notified OSF and Rockford that the commission voted 4-0 to challenge the merger, setting a hearing date of April 17, 2012, before an administrative law judge.
The FTC dropped a request for a temporary restraining order to block sale through Dec. 2 after the hospitals agreed not to consummate the deal before that date, when the U.S. District Court in Rockford is expected to set the schedule for hearings on the FTC’S request for a preliminary injunction.
Although a Nov. 18 joint written statement from OSF and Rockford Memorial said officials were “extremely disappointed” in federal officials’ decision to challenge the merger, they could hardly have been surprised by it.
The federal agency charged with overseeing enforcement of the Clayton Act has filed legal actions to stop or unravel two other hospitalmerger cases this year. Indeed, the FTC’S complaint says that OSF and Rockford retained antitrust lawyers and consultants to prepare reports designed to counter federal litigation.
Jack Rovner, a healthcare attorney with the Health Law Consultancy in Chicago, said the level of antitrust enforcement activity does have an impact on hospital executives’ plans for mergers. “It doesn’t necessarily stop it, but it makes people more careful. You have to take it into account now,” Rovner said, adding that the industry grew more confident in merger activity after the FTC’S decade-and-a-half-long string of defeats in court over hospital mergers that followed the commission’s success in the 1989-90 Rockford challenge.
One distinguishing legal aspect of the present-day Rockford challenge is the FTC’S decision to protest not only alleged market power for inpatient hospital care, but for primarycare physician services as well.
The FTC says in its complaint that the combined hospital would control 64% of the acute-care hospital market, and 37% of all primary-care services in the Rockford area— both of which would make the hospital a “must have” for insurers, lessening the payers’ bargaining power for contract rates.
OSF St. Anthony’s and Rockford Memorial control large physician groups that would be combined, leaving it to compete with the 20% market share of the Swedishamerican physicians group. The remainder of the physician market is composed mainly of independent doctors, whose numbers are declining, the FTC says.
Rovner said this kind of physician-services challenge may become more common as hospitals expand their physician ownership interests. “Once you start acquiring the practices, whether they are specialty or primary care, you get to the point where you are consolidating them to a market power or monopoly position,” he said. “The issue is, are the physician consolidations creating a market power problem?”