In a prior post, we reported on the issuance by the U.S. Department of Justice and the Federal Trade Commission (the “Agencies”) of a draft update to their merger guidelines (the “Proposed Guidelines”) intended to describe and guide the Agencies’ review of mergers and acquisitions to determine compliance with federal antitrust laws. The Proposed Guidelines would replace the merger guidelines issued by the Agencies in 2010.
According to the Agencies, the goal of the update is “to better reflect how the Agencies determine a merger’s effect on competition in the modern economy and evaluate proposed mergers under the law.”
While the Proposed Guidelines reflect in many respects how the Agencies have recently been applying the antitrust laws to mergers, they markedly differ from the existing guidelines in important respects and, in some instances, certain aspects of them have already been the subject of litigation, including cases in which the Agencies have recently lost.
In the Proposed Guidelines, the Agencies set forth 13 specific guidelines to be used when determining whether a merger is unlawfully anticompetitive. In our prior post, we summarized those guidelines. What follows is additional detail as to how some of them are likely to be applied by the Agencies, especially as they are likely to impact mergers involving health care systems.
Mergers Should Not Significantly Increase Concentration in Highly Concentrated Markets
Regarding this proposed guideline, the Agencies will examine whether a merger between competitors would significantly increase concentration and result in a highly concentrated market. If so, the Agencies will presume that the merger may substantially lessen competition based on market structure alone.
In applying this guideline in highly concentrated markets, a merger that eliminates even a relatively small competitor creates an undue risk that the merger may substantially lessen competition. As a result, even a relatively small increase in concentration in a relevant market can provide a basis to presume that a merger is likely to substantially lessen competition.
The Agencies generally measure concentration levels using the Herfindahl-Hirschman Index (“HHI”). The HHI is defined as the sum of the squares of the market shares. It is small when there are many small firms and grows larger as the market becomes more concentrated, reaching 10,000 in a market with a single firm.
Under this proposed guideline, markets with a post-merger HHI greater than 1,800 are considered highly concentrated. A merger causes undue concentration and triggers a structural presumption that the merger may substantially lessen competition or tend to create a monopoly when it would result in a highly concentrated market and produce an increase in the HHI of more than 100 points.
This is significantly different from the application of the HHI tests under the 2010 merger guidelines and will result in many more hospital mergers being considered presumptively illegal.
Under the 2010 guidelines, a highly concentrated market was one with a post-merger HHI above 2,500 and, if there was an increase in the HHI of more than 200 points following the merger, the merger would be presumed to be likely to enhance market power.
Under the Proposed Guidelines, the Agencies may also examine the market share of the merged firm. A merger that significantly increases concentration (change in HHI of greater than 100) and creates a firm with a share over 30% presents an impermissible threat of undue concentration regardless of the overall level of market concentration before the merger. Again, this will result in more hospital mergers being subject to heightened scrutiny and challenge.
Mergers Should Not Eliminate Substantial Competition Between Firms
As proposed in this guideline, if evidence demonstrates substantial competition between the merging firms prior to the merger, the Agencies can determine that the merger may substantially lessen competition regardless of market concentration.
According to the Agencies, focusing on the competition between the merging parties can reveal that a merger between competitors may substantially lessen competition even where market shares are difficult to measure or where market shares understate the competitive significance of the merging parties to one another.
The Agencies may analyze the extent of competition between the merging firms by examining evidence relating to strategic deliberations or decisions in the parties’ regular course of business. For example, in some markets, the firms may monitor each other’s pricing, marketing campaigns, facility locations, improvements, services/products, capacity, output and/or innovation plans. This can provide evidence of competition between the merging firms.
In applying this guideline in connection with health care system mergers, patients’ willingness to switch between different systems is obviously an important part of the competitive process. In this context, systems are closer competitors the more that patients are willing to switch between them.
Mergers Should Not Increase the Risk of Coordination
In this proposed guideline, the Agencies determine a merger may substantially lessen competition when it meaningfully increases the risk of coordination among the remaining firms in a relevant market or makes existing coordination more stable or effective.
According to the Agencies, firms can coordinate across any or all dimensions of competition, such as price, features, patients (in the case of health care system mergers), wages, benefits or geography. Coordination among rivals lessens competition whether it occurs explicitly — through collusive agreements between competitors not to compete or to compete less — or tacitly, through observation and response to rivals.
In assessing whether there is an increased risk of coordination between and among competitors, the Agencies focus on several primary and secondary factors. These include, among others:
- Primary Factors
The Agencies presume that post-merger market conditions are susceptible to coordinated interaction if any of the following three primary factors are present.
- Highly Concentrated Market. By reducing the number of firms in a market, a merger increases the risk of coordination. The fewer the number of competitively meaningful rivals prior to the merger, the greater the likelihood that merging two competitors will facilitate coordination. Markets that are highly concentrated after a merger that significantly increases concentration are presumptively susceptible to coordination.
- Prior Actual or Attempted Attempts to Coordinate. Evidence that firms representing a substantial share in the relevant market appear to have previously engaged in express or tacit coordination to lessen competition is highly informative as to the market’s susceptibility to coordination.
- Elimination of a Maverick. A maverick is a firm with a disruptive presence in a market. The presence of a maverick reduces the risk of coordination so long as the maverick retains the disruptive incentives that drive its behavior. A merger that eliminates a maverick or significantly changes its incentives increases the susceptibility to coordination.
The secondary factors include, among others:
- Market Concentration. Even in markets that are not highly concentrated, coordination becomes more likely as concentration increases. The more concentrated a market with an HHI above 1,000, the more likely the Agencies are to conclude that the market structure suggests susceptibility to coordination.
- Market Transparency. A market is more susceptible to coordination if a firm’s behavior can be promptly and easily observed by its rivals.
- Competitive Responses. A market is more susceptible to coordination if a firm’s prospective competitive reward from attracting customers (patients in the case of health care systems) away from its rivals will be significantly diminished by likely responses of those rivals.
Mergers Should Not Eliminate a Potential Entrant in a Concentrated Market
Under this proposed guideline, mergers can substantially lessen competition by eliminating a potential entrant. For example, a merger of two health care systems can eliminate the possibility that entry or expansion by one or both systems would have resulted in new or increased competition in the market in the future. A merger can also eliminate current competitive pressure exerted on other market participants by the mere perception that one of the firms might enter.
To determine whether an acquisition that eliminates a potential entrant into a concentrated market may substantially lessen competition, the Agencies examine (1) whether one or both of the merging firms had a reasonable probability of entering the relevant market other than through an anticompetitive merger, and (2) whether such entry offered a substantial likelihood of ultimately producing deconcentration of the market or other significant pro-competitive effects.
Mergers Should Not Entrench or Extend a Dominant Position
Regarding this proposed guideline, in a market that is already concentrated, merger enforcement seeks to preserve the possibility of eventual deconcentration. Accordingly, the Agencies evaluate whether a merger involving an already dominant firm may substantially reduce the competitive structure of the industry.
The Agencies also evaluate whether the merger may extend that dominant position into new markets, thereby substantially lessening competition in those markets. In the case of a merger of two health care systems where one is dominant in a geographic market, the test might involve determining whether the merger could extend the dominant system’s position into an adjacent market.
To evaluate this concern, the Agencies consider whether (i) one of the merged firms already has a dominant position, and (ii) the merger may entrench or extend that position. The Agencies assess the magnitude of the lessening of competition that may arise from entrenching a dominant position based on the degree of dominance already held and the extent to which it would be entrenched by a merger.
The greater the dominance already held, the lower the degree of entrenchment that gives rise to a substantial lessening of competition. When one merging firm has or is approaching monopoly power, any acquisition that might preserve its dominant position may tend to create a monopoly in violation antitrust laws.
To identify whether one of the merging firms already has a dominant position, the Agencies look to whether:
- there is direct evidence that one or both merging firms has the power to raise price, reduce quality, or otherwise impose or obtain terms that they could not obtain but for that dominance, and/or
- one of the merging firms possesses at least a 30% market share.
Mergers Should Not Further a Trend Toward Concentration
Per this proposed guideline, the effect of a merger may be to substantially lessen competition or tend to create a monopoly if it contributes to a trend toward concentration.
If concentration has been recently increasing, the Agencies examine whether the merger would further that trend toward concentration. According to the Agencies, the Clayton Act was designed to arrest mergers at a time when the trend to a lessening of competition in a line of commerce is still in its incipiency. If concentration has been recently increasing, the Agencies examine whether the merger would further that trend toward concentration.
According to this proposed guideline, the Agencies look for two factors that together indicate a merger would further a trend toward concentration sufficiently that it may substantially lessen competition.
- First, the Agencies consider whether the merger would occur in a market or industry sector where there is a significant tendency toward concentration. That trend can be established, for example, by market structure, as a steadily increasing HHI exceeds 1,000 and rises toward 1,800.
- Second, the Agencies examine whether the merger would increase the existing level of concentration or the pace of that trend. That may be established by a significant increase in concentration, such as a change in HHI greater than 200, or it may be established by other facts showing the merger would increase the pace of concentration.
This too would impact hospital mergers where there have been multiple small mergers in the market but where those mergers have not increased the HHI above the threshold for triggering a substantive presumption that any of the mergers may have substantially lessened competition or tended to create a monopoly.
When a Merger is Part of a Series of Multiple Acquisitions, the Agencies May Examine the Whole Series
Under this proposed guideline, a firm that engages in an anticompetitive pattern or strategy of multiple small acquisitions in the same or related business lines may be acting illegally even if no single acquisition on its own would risk substantially lessening competition or tending to create a monopoly.
The Agencies may examine a pattern or strategy of growth through acquisition by examining both the firm’s history and current or future strategic incentives. Historical evidence focuses on the actual acquisition practices (consummated or not) of the firm, both in the markets at issue and in other markets, to reveal any overall strategic approach to serial acquisitions. Evidence of the firm’s current incentives includes documents and testimony reflecting its plans and strategic incentives both for the individual acquisition, and for its position in the industry more broadly.
The application of this guideline is similar to the above guideline concerning a trend in the market generally. Here, if a health care system undertakes a series of small acquisitions that themselves do not result in a substantial lessening of competition they may still be acting illegally.
When a Merger Involves Competing Buyers, the Agencies Examine Whether it May Substantially Lessen Competition for Workers or Other Sellers
Regarding this proposed guideline, a merger between competing buyers may harm sellers just as a merger between competing sellers may harm buyers.
The same general concerns as in other markets apply to labor markets where employers are the buyers of labor and workers are the sellers. The Agencies will consider whether workers face a risk that the merger may substantially lessen competition for their labor. Where a merger between employers may substantially lessen competition for workers, that reduction in labor market competition may lower wages or slow wage growth, worsen benefits or working conditions, or result in other degradations of workplace quality.
Mergers Should Not Otherwise Substantially Lessen Competition or Tend to Create a Monopoly
The final proposed guideline is a catch-all. The Agencies explain that, while the other 12 guidelines address common scenarios that they use to assess the risk that a merger may substantially lessen competition or tend to create a monopoly, they are not exhaustive.
The Agencies point out that in the past they have encountered mergers that lessen competition through mechanisms not covered in the other 12 guidelines and that there is a wide range of evidence that can show a merger may lessen competition or tend to create a monopoly.
FYI: The Proposed Guidelines also include a section discussing rebuttal evidence that may show that no substantial lessening of competition is threatened by a merger along with appendices describing evidentiary and analytical tools the Agencies often use.
The rebuttal evidence includes evidence relating to the involvement of a failing firm, evidence that a reduction in competition resulting from a merger will induce entry into the relevant market thereby preventing the merger from substantially lessening competition and evidence as to pro-competitive efficiencies that will result from the merger.
The appendices discuss sources of evidence commonly relied on by the Agencies, describe tools sometimes used to evaluate competition among firms, discuss additional details regarding the process for defining relevant markets, and explain how the Agencies typically calculate market shares and concentration metrics.
The rebutting factors and the appendices will be discussed in a subsequent post.
 The Guidelines not discussed here are Guideline 5 concerning mergers that create a firm that controls products or services that its rivals may use to compete, Guideline 6 concerning vertical mergers, Guideline 10 concerning mergers involving multi-sided platforms, and Guideline 12 concerning acquisitions involving partial ownership or minority interests as they are generally less likely to impact health care system mergers.
 Concentration reflects the number and relative size of firms competing to offer a product or service to a group of customers. According to the Agencies, concentration is “high” when the market only has a few significant competitors.