FTC Seeks to Block Hospital “Mergers” in New Jersey and Utah

Just eight weeks after Hackensack Meridian Health System and Englewood Healthcare Foundation notified the Federal Trade Commission (“FTC”) that they were calling off their proposed merger following the Third Circuit Court of Appeals upholding the issuance of a preliminary objection sought by the FTC to stop the merger, the FTC recently issued administrative complaints to block two other hospital transactions – one in New Jersey and the other in Utah.

In both cases, the FTC concluded that the proposed transactions constituted an unfair method of competition in violation of Section 5 of the FTC Act, and, if consummated, may substantially lessen competition in the relevant markets in violation of Section 7 of the Clayton Act.

These complaints, again, provide a useful roadmap as to how the FTC is currently analyzing hospital mergers and again demonstrate the FTC’s continuing interest in challenging mergers in what it considers to be concentrated markets.

The New Jersey Transaction

The proposed transaction in New Jersey involves RWJ Barnabas Health (“RWJ”) and Saint Peter’s Healthcare System (“Saint Peter’s”).

RWJ is one of the largest healthcare systems in New Jersey and is seeking to acquire Saint Peter’s. Saint Peter’s operates an independent hospital located in Middlesex County. RWJ’s flagship general acute care hospital, RWJ University Hospital New Brunswick (“RWJ-NB”), and Saint Peter’s are located less than one mile apart in New Brunswick, New Jersey.

According to the FTC:

  • The acquisition would enhance RWJ’s dominant position in Middlesex County because post-merger, RWJ would control approximately 50% of the relevant market for inpatient general acute care services sold to commercial insurers and their members in Middlesex County (which the FTC is treating as the relevant product and geographic markets);
  • If completed, only two other competitors would operate hospitals in Middlesex County: Hackensack Meridian Health and Penn Medicine Princeton Medical Center, both of which would have significantly smaller market shares than the merged RWJ-Saint Peter’s; and
  • the acquisition would eliminate substantial head-to-head competition between Saint Peter’s and RWJ-NB.

In treating Middlesex County as the relevant geographic market, the FTC asserts that:

  • Middlesex County is an area that is economically significant to commercial insurers.
  • Because patients typically prefer to have access to inpatient general acute care services close to where they live, an insurer would be unable to sell a health plan successfully in Middlesex County that did not include in its network any Middlesex County general acute care
  • Middlesex County is the main area of competition between RWJ and Saint Peter’
  • Insurers could not meet geographic access regulatory requirements for marketing commercial plans in Middlesex County if those insurers did not include any Middlesex County hospitals as in-network hospitals in their commercial insurance plans.

The FTC then seeks to validate its conclusion by applying the typically-applied “hypothetical monopolist” test, and the FTC concludes that a hypothetical monopolist of all inpatient general acute care services sold to commercial insurers and their members in Middlesex County could profitably impose a small but significant and non-transitory increase in price (“SSNIP”) of those services.

With respect to the question of market concentration following the acquisition, the FTC measures market concentration by applying the Herfindahl–Hirschman Index (“HHI”)  and concludes that the acquisition will increase HHI levels in the relevant market in an amount sufficient to result in a highly concentrated market, and is therefore presumed likely to create or enhance market power and is presumptively unlawful under Section 7 of the Clayton Act.

With respect to the question of substitutability, the FTC asserts that if Saint Peter’s becomes unavailable to patients, a significant number of those patients would seek care at an RWJ hospital and likewise, if RWJ-NB was to become unavailable, a significant portion of RWJ-NB’s patients would seek care at Saint Peter’s leaving insurers with fewer, less attractive alternatives as the only other general acute care hospitals in Middlesex County (the Penn-Princeton and Hackensack hospitals) are sufficiently distant as to make them essentially ineffective substitutes for insurers.

Finally, in concluding that the acquisition will violate the relevant provisions of the FTC Act and the Clayton Act, the FTC asserts that there are no countervailing factors inasmuch as, according to the FTC: (i) there are substantial barriers to entry in the market on account of New Jersey’s certificate of need law and on the high cost of construction of new facilities, and (ii) the parties have not substantiated merger-specific, verifiable, and cognizable efficiencies that likely would be sufficient to reverse the acquisition’s potential to harm customers in the market for inpatient General acute care services.

The Utah Transaction

The proposed transaction in Utah involves HCA Healthcare (“HCA”)  acquiring the Utah-based assets of Steward Health Care System (“Steward”).

The focus of the FTC’s complaint is on competition among general acute care hospitals along Utah’s Wasatch Front, a region in north central Utah which includes the Salt Lake City and Provo-Orem metropolitan areas.

Both HCA and Steward are large multi-hospital systems and according to the FTC, two of only four large healthcare systems along the Wasatch Front. HCA is the second largest provider of inpatient general acute care hospital services along the Wasatch Front. HCA operates eight inpatient general acute care hospitals in Utah. Six of those hospitals are located in what the FTC defines as the relevant geographic markets.

Steward is the fourth largest provider of inpatient general acute care hospital services along the Wasatch Front. Steward operates five hospitals in Utah, all of which are located in the relevant geographic markets.

According to the FTC, HCA’s and Steward’s geographic footprints significantly overlap with each of Steward’s five Utah hospitals within an approximately twelve-mile drive of an HCA hospital.

In reaching its conclusion that the acquisition if completed would violate Section 5 of the FTC Act and Section 7 of the Clayton Act, the FTC begins by again defining the relevant product market as adult general acute care services sold to commercial insurers. It then identifies three separate geographic markets comprising four counties in the overall region for purposes of evaluating the proposed transaction’s likely effects on competition — a Northern Market, a Central Market and a Southern Market

Again applying the “hypothetical monopolist” test the FTC concludes that a hypothetical monopolist could impose a SSNIP on commercial insurers in each of the three markets and could do the same even if the focus was on the four counties comprising the three markets as a single geographic market.

As for market concentration in the relevant geographic markets, the FTC again utilizes the HHI and concludes that the proposed transaction substantially increases market concentration and is presumed likely to create or enhance market power and is thus presumptively illegal.

To buttress its position the FTC asserts that the three markets are already highly concentrated. In the Northern and Southern Markets, the proposed transaction will reduce the number of healthcare systems offering inpatient general acute care hospital services from three to two, and in the Central Market from four to three.

According to the FTC, evidence of direct competition between HCA and Steward for inclusion in commercial insurers’ health plans corroborates the market concentration evidence and further demonstrates the likely anticompetitive effects of the proposed transaction.

According to the FTC, HCA demands and receives significantly higher reimbursement rates than Steward because it currently has substantial bargaining leverage during negotiations. By contrast, according to the FTC, Steward offers low-cost healthcare services and innovative contract terms and benefit designs. The FTC asserts that the proposed transaction will eliminate Steward as a low-cost provider and will result in HCA having greater bargaining leverage, which will allow it to command even higher reimbursement rates which commercial insurers would pass on at least a portion of to employers and health plan members.

According to the FTC, internal documents of the parties, including emails, further evidence the fact that the parties view each other as significant competitors and routinely track each other’s market shares, quality, and other competitive metrics. This close head-to-head competition between HCA and Steward incentivizes them to keep prices lower, and constantly enhance quality of care, access to care, technology, patient experience, and service offerings.

Finally, in asserting that the acquisition will violate the law, the FTC again asserts that there is an absence of countervailing factors that would justify the transaction. According to the FTC, given the substantial entry barriers (cost/timing), it is unlikely that any new competitor would emerge and the parties have not substantiated merger-specific, verifiable, and cognizable efficiencies that likely would be sufficient to reverse the proposed transaction’s potential to harm customers.

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