Deja vu in FTC merger chal­lenge?

FTC keeps up in­ter­est in health­care deals

Modern Healthcare - - FRONT PAGE - Joe Carl­son

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?”

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