AHLA's Speaking of Health Law

Transactions: Evolving Landscape of Vertical and Horizontal Integration

May 05, 2020 AHLA Podcasts
AHLA's Speaking of Health Law
Transactions: Evolving Landscape of Vertical and Horizontal Integration
Show Notes Transcript

In this new podcast, Carol Carden, Managing Principal of Valuation Services, PYA, talks with Margaret Davino, Partner, Fox Rothschild, and Latoya Dawkins, Counsel, Amgen, about their session "Evolving Landscapes: Vertical and Horizontal Integration in Post-Acute Care and Hospital Transactions" at AHLA’s virtual Transactions Program, which took place April 20-22, 2020. The podcast discusses whether COVID-19 will result in an increase in transactions or a difference in enforcement, addresses some of the most common primary antitrust concerns, and takes a deeper dive into a few recent cases. Sponsored by PYA.

To learn more about AHLA and the educational resources available to the health law community, visit americanhealthlaw.org.

Speaker 1:

Support for A H L A comes from p y a For nearly 40 years, p y a has helped clients find value in the complex challenges related to mergers and acquisitions, clinical integrations, regulatory compliance, business valuations, and fair market value assessments and tax and assurance. P y A is recognized by Modern Healthcare as one of the nation's top 20 healthcare consulting firms, and by inside public accounting as a top 100 accounting firm. Learn more at p y a pc.com.

Speaker 2:

Hi, I'm Carol Carden, a principal with p y a. I'm joined on the podcast today by Margie Devino and Latoya Dawkins, who presented an excellent and well attended session at the transactions conference titled Evolving Landscapes, vertical and Horizontal Integration in Post-Acute Care and Hospital Transactions. We're gonna delve a bit deeper into some of the topics discussed in the presentation, but first, let me let Margie and Latoya briefly introduce themselves and their organizations.

Speaker 3:

Hi, I'm Margie Davino. I'm a partner at Fox Rothschild invest in New York and the New Jersey offices. Fox Rothschild's a um, almost a thousand person firm with a number of offices through the United States, and we have a large healthcare department with almost a hundred lawyers. And I focus on really a variety of things for my healthcare clients, uh, anywhere which, anywhere from compliance to contracts to transactions. And so we'll be talking about some of those today.

Speaker 4:

Hi, my name is Latoya Dawkins and I am counsel for Amgen I in Thousand Oaks, California. I support the Global Commercial Operations Unit, uh, specifically with a focus on our oncology products, and it's a pleasure to be on the call today with you.

Speaker 2:

Thanks ladies, and thanks for joining me today. Um, as I mentioned earlier, your session was well attended and there was some interesting audience feedback in the chat room on the, on the session, one member posed a question as to whether or not you expect to see an increase in transactions or an increase in antitrust enforcement in our post covid world. Um, this is a question I've heard posed by a lot of people, what, what the transactional environment will look like post covid. So I'm interested to know what your all's thoughts are and maybe Latoya, do you wanna get us started on this topic?

Speaker 3:

This is Margie, if you don't mind. Maybe I'll just start with that. So I think that's a really good question because certainly there's nothing going on right now, or I shouldn't say nothing very close to nothing going on right now in terms of mergers and acquisitions because of all of the uncertainty with regards to Covid. And in fact, actually it's interesting to look at the fact that some people are trying to get out of deals they've made, for example, the purchaser of Victoria's Secret is trying to get out of it saying that sales have substantially decreased. So, but in the healthcare world, I think that really what Covid shows us is that there is really, there are so many haves and have nots and the haves, the large hospital systems that have greater resources and greater reserves are still hurting, but they're able to weather this storm a little bit more than the havenots, which are the smaller hospitals, the rural hospitals, the community hospitals, and still the standalone hospitals who don't have the same types of reserves because everybody has seen such a huge decrease in volume and hospitals make such a substantial component of their money through elective surgery, which has not been going on. And this is even more the case in the doctor world who again, have seen huge decreases in volume. So the question really is, is given the fact that there are many people who, many healthcare providers there who are really hurting with the covid world, are they going to be picked off and assumed by larger players? Um, and are they going to be even more open to that or feel that they have no choice because of covid? And this is not just in healthcare, obviously. And in fact, if you look at the news just from yesterday, Elizabeth Warren and Alexandria Cortez both have, uh, proposed precluding or really prohibiting any mergers for a period of time because they're concerned of exactly that, that it's going to be anti-competitive as the bigger guys try to pick off the small and medium people who are having problems with this. So I think that, um, there certainly are going to be issues in context of people trying to survive and feel as though their only way of surviving is the rule being assumed by a larger organization. I know I actually have a fairly large physician group that was acquired by a healthcare system as of 12 31 20 19, and they are so happy that that occurred when it did, because this way their income is guaranteed by the health system during this whole Covid emergency. Um, but on the other hand, I think that the antitrust agencies are going to really be looking at this. You know, when you look at the failing firm defense, which I think is what we're gonna be hearing, a lot of the failing firm defense requires that the company being in imminent business danger can't successfully reorganize in bankruptcy and made unsuccessful good faith attempts to find alternative purchasers. And I think we may be hearing that a lot in context of is the FTC or the DOJ do challenge mergers that say that they're happening because providers are having problems in terms of being able to successfully go forward, and therefore they need to look at a merger.

Speaker 2:

That's really interesting and, and somewhat unfortunate because if we do have providers who feel like they're failing and yet the mergers are being precluded because antitrust concerns, it kind of seems like it could put some people in the industry in kind of a no man's land.

Speaker 3:

Yeah, really the question is how do we find a middle ground? And I think that the government has tried in terms of putting out as much money as it it has to healthcare providers both through the CARES act, through the P P P loans, which, you know, as everybody knows are forgivable, but those are only for employers of 500 or less. So the, and also are allowing for Medicare advances. So I know that I have a number of clients that initially were concerned that they weren't gonna be able to make it at all E G P doctor's offices and then they got a PPP loan and then they got money under the CARES Act, and they're looking at whether or not they should ask for a Medicare advance. So now they're saying, oh, well, okay, they think they can limp through, and so the question is going to be, but if they're approached by somebody bigger who gives them, you know, some kind of guarantee, how much of a temptation is that going to be and if the antitrust agencies or if our lawmakers preclude that, you know, is that a good or a bad thing? And I don't know that there's a answer that's across the board for everybody.

Speaker 2:

Much like a lot of things with covid right now.<laugh> a lot of, um, murkiness I guess out there, but that's some interesting perspectives. Um, anything else to add in this before we move on to a different topic? So Latoya, during the presentation you challenged the audience with the question as to whether or not vertical or horizontal mergers actually result in reduced cost and improve quality. What's your experience been and do you see one of these to be more likely than the other?

Speaker 4:

Well, you know, there has, there have been some studies out already that have shown, unfortunately the numbers in quality, um, of care being not an indicator, um, that that it is increasing care, uh, and cost and containing costs. Uh, even though there has been, as we talked about, uh, during the, during the session, that there has been increased market concentration through vertical integration. Um, again, studies are showing for now data, uh, that there has been a actually reduction, uh, and performance, uh, across, across many of the different, uh, mergers with a 95, uh, percent confidence level, uh, uh, in, in the quality of care. Although the patient experience, um, may not always correlate with higher quality or clinical, uh, quality, measuring quality according to some of some of the data out there, uh, is based on patient perception of whether it's increasing, uh, the experience, their experience, not as, as, as more consumers are using, um, you know, the physician ratings online and submitting their reviews of their, of their patient experience to to select providers. So it, the question, um, the answer is it's, it's yet to be determined, but certainly there is still, um, some signs pointing towards the fact that it is not, uh, increasing, increasing, uh, quality of care. Um, Margie, do you have anything to add on that?

Speaker 3:

Yes, so I would say that, you know, the argument that's often made in context do you have any kind of merger is that, oh, we're gonna be bigger, so we're going to have increased efficiencies, we're going to be able to look at quality over a larger organization. But Latoya, it's really exactly what you said. And I think that the one real study that has come out is back from 2012, so it's a little old, but it's still, it was done by the Robert Wood Johnson Foundation and its conclusions were one everything we know that consolidation results in higher prices, which is, you know, in obvious and that's why the anti test agencies now are looking at things, you know, two, that physician hospital consolidation has not led to either improved quality or reduced costs and that hospital competition improves quality of care. And so if we're having less hospital competition, then according to this study, you know, that is going to actually decrease quality of care care. I think the one thing that one really can say that mergers do do that are positive is that it's the one way of look of real, well, it's not the one way it, it is one way of being able to truly look at population health because you can look at the health of the population over a bigger swath of people, but there are different ways of doing that as well. You know, EG IPAs or you know, ACOs.

Speaker 2:

Interesting. One of the things I um, appreciated about your all's session was, Margie, you had a great slide in there that have a list of primary antitrust concerns and you touched on some of them in the presentation, but I was wondering as I listened to it, in your experience, were any of those, uh, concerns more common or more problematic than some of the others? Do you bump into some of them a little more often?

Speaker 3:

Yes. So I'm actually, I pulled up my slide for this talk and I'm just gonna read through the list and then we'll talk about the ones that actually I've seen the most. So the list is price fixing, market allocation, anti steering requirements, group boycotts, exclusivity, exchange of competitive information and tying agreements. And all of those have been brought in by the antitrust regulators, but probably the biggest one really is price fixing, which is really the whole issue in terms of competitors negotiating prices together. And that is the biggest concern because you know, the concern is that what do these mergers or acquisitions really do and they increase prices. And by increasing prices, really what you're doing is you're taking a bunch of smaller competitors in the market, whether they're doctor groups, hospitals or both, or you know, other providers in the market, you are making them one, therefore they can speak as one. And that's increasing prices, which if they had talked about prices before merging, that would have been anti-competitive violation of the antitrust law and price fixing and, but certainly some of these others are important as well, you know, so for example, anti steering or anti tiering requirements. One of the allegations in the Sutter Health case was that what Sutter Health did was it went to the managed care companies and said that you need to put all of our hospitals in your top tier with regards to any kind of tiered product and you can't look at our hospitals individually. So that was certainly involved as well. And the same in terms of group boycots. Again, if, if you look at the Sutter Health case, which is probably the most recent case that settled, we'll talk about one of the other cases later, you know, that also was a situation where basically Sutter said to the managed care companies, or at least were alleged to have said to the managed care companies that you can't just deal with similar hospitals, you have to deal with all of our hospitals or we're not gonna deal with you at all. And that could be considered to be a group boycott it under antitrust laws.

Speaker 2:

Yeah, I find the cases to be really interesting and a good way for us to get some insight into how the government thinks about these. And I noticed that you had a number of them listed in the presentation and some of them you talked about in a little bit more detail. Um, I just wondered if, if there were any in that you didn't have time just in the interest of time during the presentation that we might wanna talk about now just to make sure they're on people's radar screen and and being paid attention to.

Speaker 3:

Yeah, well I think that really the primary one truly does go to prices because the primary concern really revolves around the fact that the United States has the most expensive health system in the world and doesn't have better quality to show for that. And currently we spend almost 18% of our GDP on healthcare and that's gone up consistently every year. So when you look at from a governmental interest that to the extent that all of our spending on healthcare crowds out spending on other necessary things, then there really does need to be a focus on costs and therefore that goes down to prices. And so to the extent that we have larger, whether they're providers, larger managed care companies, you know, because the same thing applies on the managed care company side and why the regulators have challenged some of the managed care mergers, that to the extent that we have larger providers and a smaller number of providers, that all that's really doing is increasing prices and really hurting us economically.

Speaker 2:

Interesting. Um, anything else you wanna add in terms of um, any of the cases or transactions that maybe are in process right now that people should be paying attention to?

Speaker 3:

Yes, what I really wanted to talk about was the Albert Einstein case because that's something in process right now that I think is really interesting that we should be looking at. And so, you know, basically this is a case of Jefferson and Einstein being two very large providers of acute general in inpatient to acute care hospital services in the Philadelphia region. And so they actually entered into in September, 2018 a system integration agreement whereby Jefferson would be the sole member of Einstein and the ultimate parent of Einstein. And so they of course had to file a heart Scott Rodino filing and the FTC came in to look at this and is challenging it. And what the FTC is saying is that if these two hospital systems merge, that they're gonna create the largest hospital system in Philadelphia and by far the largest hospital system in Montgomery County, which is adjoining Philadelphia and in the greater Philadelphia region. And the FTC is challenging this. So one of the biggest defenses that the two parties are putting forth is that Einstein's a failing hospital and that if this doesn't go forward, that Einstein may not last anyway and that it's had major, you know, problems in terms of its finances. But there really are a lot of interesting facts. If you look at the FTC administrative complaint, which you can just find on the FTC website in context of if the do merge that the two hospital systems are gonna control at least 60% of the inpatient hospital market in a number of the areas that they're going to control. No 70% of the inpatient rehab market in these areas. And that again, going back to prices that managed care companies are going to have no choice but to deal with this larger entity and to the concern is pay more, you know, and have all of the hospitals in the system. And so this, you know, there's been some delays with regards to this proceeding because of COVID and it, but it's scheduled for an administrative hearing slash trial actually in later on this year. So this will be really an very interesting proceeding to watch as we go forward because it does bring up the failing hospital argument and particularly because of the Hahnemann situation. So Hahnemann is a very old was or was a very old large teaching hospital in Philadelphia that just closed because it failed. Now in that situation, the thought is that a big part of the reason that it failed, it was taken, taken over by private equity and you know, were there increasing debt loads that were placed on it by private equity. And this is actually, Hahnemann is given as an example of how private equity should not be allowed in healthcare. Um, but the question his is Einstein going to bring up as a defense so, well it needs to have this merger because look at what happened to Oman and the same thing would be a concern as to it in terms of failing if this merger doesn't go through. So I think this is something, this transaction is something we should all be watching.

Speaker 2:

Yeah, sounds like it. Um, we'll definitely try to keep that on our radar screen for the rest of the year. I think these thoughts have been a great addition to your all session and I really thank both of you for joining me today for the podcast. Um, this will conclude today's podcast. So everyone have a great day.

Speaker 3:

Thank you. And thank you for your time with us.

Speaker 4:

Thank you. Thank you for inviting us. Thank you.