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Top Ten 2022: Provider M&A Faces New Antitrust Headwinds

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Based on AHLA’s annual Health Law Connections article, this special series brings together thought leaders from across the health law field to discuss the top ten issues of 2022. In the second episode, Michael Ramey, Principal, PYA, speaks with Lisl Dunlop, Partner, Axinn, about the shifting dynamics in federal antitrust enforcement under the Biden Administration. They discuss new factors that the government is considering related to enforcement, the dynamics between federal and state enforcement efforts, the potential for increased review of prior consummated transactions, and the consequences of a “Whole-of-Government Competition Policy” approach. Sponsored by PYA.

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Speaker 1:

A H L a is pleased to present the special series, highlighting the top 10 health law issues of 2022, where we bring together thought leaders from across the health law field to discuss the major trends and developments of the year support for a H a. And this series is provided by PPY, which helps clients find value in the complex challenges related to mergers and acquisitions, clinical integrations, regulatory compliance, business value, and fair market value assessments and tax and assurance for more information, visit pya, pc.com.

Speaker 2:

Welcome, and thank you for attending. Today's a L a podcast. Um, my name is Michael Ram. I am a principal with pya leading our transaction advisory services. I'm joined today by Liesel dun, who is a partner with axon based in New York city. Liesel has more than 25 years of experience in antitrust and competitive issues, guiding clients through antitrust related aspects of mergers and acquisitions, joint ventures, and other combinations. Uh, she also represents clients in antit agency investigations, uh, including a period of major corporations and complex litigations. Uh, Lisa, thanks for joining us today.

Speaker 3:

Thanks Mike. Glad to be here.

Speaker 2:

Great. Well, um, our discussion today is based upon a recent article that you wrote for a H L a, uh, titled to provider M and a faces new antitrust headwinds. And within that you noted, uh, amongst other things, the shifting dynamics in federal antitrust enforcement. So I know we've got a lot of individuals who are listening that may have a varied level of understanding of just, uh, antitrust environment. Um, so if you could maybe start by level setting just a little bit and advise on kind of what some of those key pillars, uh, on which the FTC has historically based their enforcement actions and how those may be changing, uh, under new leadership and political direction.

Speaker 3:

Sure. So what we're talking about here is review of transactions, be they hospital mergers, um, health insurer, mergers, uh, provider practice, mergers, or vertical mergers that involve various, uh, of those constituencies, um, that are going to be reviewed under section seven of the Clayton act, we, which is the provision that prohibits anticompetitive mergers. Um, those kinds of transactions are reviewed by the FTC or the department of justice antitrust division. Um, for the most part today, we'll be talking about the FTC that's where the hospital and provider transactions generally for, to be, um, reviewed. And so traditionally, um, these deals have been reviewed under the horizontal merger guidelines. The most recent iteration of that was in, uh, 2010. And from about 2004, I think you can kind of the historic or the, the, the modern approach to the review of these transactions, um, based, and since then, the FTC has brought a lot of merger challenges, um, many in court, and it has been, um, pretty successful over that period of time. Um, basically the agencies or the FTC will look at, uh, inpatient general acute care services. When they're talking about hospitals, um, that's a cluster market of, you know, a range of services that most general acute care hospitals offer. Um, in some cases you will kind of drill down into particular specialties or particular types of services, uh, where there might be concerns about an narrower scope of, of services. And then the agency will also look at the geographic market that's in issue. And, and there's often a lot of dispute about what the scope of the geographic market is. Um, the FTC focuses on it from a payer perspective, not so much, uh, patient flows, although where the patients go is, is certainly relevant to, um, the, the network that a payer needs to develop. Um, and then the FTC, once it's defined its market will, um, look at what the market shares in that market are. And applying the Hershman Dale index will, will come up with, with the series of measures of concentration and what the transaction actually does to concentration to determine whether or not it's, uh, presumptively, um, harmful, uh, to competition, um, a case in which there is that presumption. Um, the, there will have to be quite a lot of strong arguments into before the FTC would be convinced that there wouldn't be a problem. And when there is a problem, they will, um, indicate to the parties that they're going to challenge at which point the parties could, um, just, uh, stop the transaction, abandon the transaction, or, um, the FTC will actually bring a challenging. And, and as I mentioned, they they've done that, um, quite significantly over the years. Um, and when, when, when the FTC is arguing about competitive effects and considering competitive effects throughout this analysis, the focus has typically been on price effects. So the effects on, um, pay, um, in terms of the prices that they're paying for, for these services, um, with some discussion about quality, um, usually in response, the, the parties will, um, bring forward things like, uh, improved quality, um, and, uh, you know, bringing, uh, common electronic medical records and those type of factors. Um, but fundamentally, um, the concern will be about pricing pass. So that that's the existing framework, um, in terms of how, how it might change going for would, um, you know, I don't think in the near term that basic framework is going to change. Uh, so substantially we're gonna continue to be concerned about concentration and certainly in the statements coming outta the Biden administration, the directive to the FTC has been, you know, challenged, um, mergers that lead to high concent concentration. And if anything, um, the, the concerns that we're hearing is that in the past, um, too many concentrative transactions have been allowed to go through. Um, certainly we've seen a lot of challenges, but there are probably a body of transactions that don't, um, hit the presumptions, um, that are in this kind of midrange, but are still, uh, concentrating markets. And so you may see more enforcement at the lower ends of those concentration levels, um, not just the three to twos or merger to monopoly type situations. Um, and then the other, um, major change that, that I think we're, we're all already seeing is on the scope of the investigation. Um, the range of competitive harms, the, the types of theories that the agency might be pursuing. And, uh, we've already seen the FTC withdraw its vertical merger guidelines and, uh, talking about as well with the DOJ, reviewing Andreas, assessing the horizontal merger guidelines, um, with, with the view to potentially expanding, um, the scope of investigations that might raise concerns. Um, you know, there there's been a discussion, um, by the FTC chair in particular about a, a, a broader and more holistic approach to, um, antitrust enforcement, not just in the mergers area, but, but generally across, um, their, their work in, uh, investigating, um, misuse of market power or anti-competitive agreements or, or those types of, uh, of actions. And so you'll, you'll get, um, more consideration effect is outside necessarily these strict, uh, price effects.

Speaker 2:

That's, that's interesting, you've mentioned considerations outside the price effects and, you know, uh, and, and some of the other more commonplace, uh, analyses, would you maybe expand just a little bit upon kind of what are those factors that are outside the typical guidelines that everyone is used to, to referencing in the past that, that are now being considered?

Speaker 3:

So I think, um, this is a, a movement that we've been seeing for the last maybe five years or so, um, maybe longer actually that, that there has been a big critique of the current, um, paradigm of antitrust enforcement, which focuses on impact, uh, on consumer welfare, this economic concept of consumer welfare. And so over the last five to 10 years, you've had a lot of common TAs, um, criticizing the agency's reliance on, um, looking at price effects and, you know, defining markets and in strictly economic terms and not taking into account, uh, broader concerns with maybe social concerns impacts on workers, you impacts on small business, um, and, and things that, that might not normally have been considered at the core of antitrust review. Um, and the way that this, this is playing out in particular right now is a huge amount of focus on labor markets. So, whereas before you would've gone into the agency, and really the focus was on payers and provider dynamics, and, you know, what kind of a network a payer needed, what the payers actually said about the transaction, what we're facing in addition to that is a lot of questions about workers, um, nurses, doctors, nurse practitioners, other kind of home and, and facilities based health workers, what is going to happen to those workers in the transaction. And that opens up a whole lot of, um, investigation of what, what is the current, um, landscape for healthcare workers in this particular region? What are the alternative, um, sources of employment for these people? Um, what are barriers to them moving around in terms of, um, certifications, maybe we're dealing with a cross border area where there might be different state, uh, certifications and licensing, um, is this, uh, an, an industry and an area of the country, um, where non-compete might prevent people or other employment contract restrictions might prevent people from freely moving, um, around and, um, you know, that does raise, um, a lot, a lot of, uh, questions about when, when you're doing a transaction, you know, occasionally redone impacts on, on, on your bottom line in terms of your labor cost are gonna be one of the factors that, um, lead to, um, improved efficiencies of the combined organization. So you've got this kind of, um, push pull of, you know, concern about impact on workers on the one hand and yet, um, pro-competitive benefits of the transaction in terms of lowering cost, um, on the other, um, I, I think right now the, the healthcare labor market is so tight. Um, it, it's, uh, gonna be interesting to see if, uh, it is possible to, uh, prove and have adverse impact on, um, some of these categories of healthcare workers, but, uh, that, that is one area that, uh, that we're, we're very interested in seeing how it pans out. Um, the J and I think John canter, um, had a recent, um, program that the agencies ran on labor market impacts in transactions. Generally, not just healthcare did say that, you know, labor markets are like any other markets. Um, you know, that merging parties might be on the other side of the market from what we're used to, but the, the same competition, uh, analysis, um, considerations come into come into play. And so, um, we, we can expect to see over the next month, uh, probably some transactions being challenged, um, on that basis, maybe not solely on that basis, but I, I, I think we can expect to start seeing those kind of claims coming through in the challenges, um, couple of a couple of other areas that, you know, that I think that that's a major thing I'm seeing, but, um, you know, quality's always been a really important aspect of, um, efficiencies, claims benefits impact on quality. I think we're gonna see a lot more focus on that. Um, and there could be some, some new kind of ideas that are a little outside the realm of, you know, economic impacts. So, um, you know, social impacts, um, impacts on, um, particular socio disadvantaged populations. Things like that may make it a little bit more plain.

Speaker 2:

That sounds like, uh, the defense, um, is going to be a lot more subjective than objective, uh, on these, whenever you're taking it out of economic and market share parameters into questions of impacts on the labor market, um, the, the quality of care that's being to be, uh, resulting from the combination of, do you agree with that?

Speaker 3:

I, I do. And, and at the same time, that's a big challenge for both sides because qualitative impacts are very, very hard to assess, um, particularly predictive predictively. And, and that's what you're doing when you're looking at a, at a transaction that is about to happen. Um, hopefully that you, you, you are crystal ball gazing a little bit. Um, you are, you are postulating that we can deliver on certain, um, uh, certain of those kind of more qualitative squishy kind of, um, areas. And it it's the, the, the proof that you're going to have to bring to the table, um, is, is going to be important. And how do you develop that proof? How do you actually, um, set out a plan and criteria and things in a way that that is going to be persuasive and, uh, actionable

Speaker 2:

Great. Um, switching gears just a little bit, going back to some of your pre your prior comments, you mentioned, um, the increased enforcement by the F the, uh, particularly on hospital transactions. Now we've witnessed in prior administrations, that there has, uh, been a history of, I'll say, um, differing opinions between maybe the, the federal and the state at the federal and the state level, um, on whether or not transac actions should move forward. And we've even seen, uh, transactions consummated under things like certificate of public advantage or cos, um, in various different states, um, given this recent pronouncement, how do you think this increased federal enforcement effort is going to impact those dynamics between the F and state attorney generals or whoever has the, the regulatory oversight for these transactions at the state level?

Speaker 3:

Now that's an interesting question, um, you know, to, to what extent that dynamic is going to change. Um, I think, you know, those examples that, that you mentioned on copers and so separate state settlements, I mean, I think that's reflective of the really broader role of, uh, state government in healthcare delivery. Um, you know, the FTC is really only looking at these transactions from a competition standpoint and, you know, price competition and, and quality of competition to a lesser extent, the state AGS officers and, and other state departments, um, are looking at a, a much broader range of considerations. So they they'll have their people who are focused on competition policy, who are looking at the same things that the FTC is looking at. And, and often, you know, in close collaboration with the FTC and, and working and stuck with them, but you'll also have, you know, various, uh, other constituencies there you'll have charities bureaus you'll have, um, when you're dealing with pay emerges, you'll have departments of insurance, insurance, commissioners, um, you'll have departments of health, of course. Um, and so, you know, the, the state government as a broader range of, uh, concerns than just the competitive aspect of the transaction, as, as it applies to, um, commercial payers, you know, they're going to be interested in, um, the impact on, uh, the public pay side of the equation. They're going to be concerned about, uh, sustainable ability, um, about continuing services to, um, rural areas or, um, socially socioeconomically disadvantaged groups who, who may be reliant on a particular, um, um, facility and, and also more generally in improving various criteria of public health. Um, I think in the, uh, valid, uh, transaction, well, not mountain states, you know, that was a big concern, um, that the various kind of indicia of public health in, in the region that that system served, um, were, you know, critically low in some, in some instances. And so a major, um, reason for permitting that transaction to proceed under a Copa. My certificate of public advantage was to allow, um, new programs and, um, you know, coordinated programs to improve health in that region. And those are the kinds of considerations you've seen given play in, for example, the Pennsylvania AGS, um, settlement with Jefferson Einstein recently, um, initially the FTC and the Pennsylvania ag office brought a challenge to the transaction. That was one of the rare instances that the FTC was not successful, um, and they were planning to appeal. Uh, but in the meantime, the, um, the state attorney general did a settlement with the parties and expressly to allow, um, Northern Philadelphia, um, healthcare market to be improved by that transaction. Um, and most of these settlements contain fairly detailed provisions around, um, pricing, giving pricing protection, um, as well as, um, detailed provisions around meeting, uh, various, uh, milestones and, uh, you know, thresholds over time about, you know, achieving the efficiencies that are predicted and claimed, um, will result from the merger. And we see this, we saw the same thing up in Massachusetts with the eye lady. So, you know, it, it's, it's a complicated dynamic. The FTC has traditionally been very hostile to those, um, you know, types of actions by the states, um, in Wilmont mountain state, the FTC, um, participated in the Copa process, submitted, made a lot of submissions about the adverse impact on competition and why permitting the transaction to go ahead would be a bad idea. Um, ultimately they weren't successful. And, um, you know, so it, it's hard to understand how that is going to change. Will the agency suddenly become more accepting and cognizant of the social benefits of transaction to the, um, uh, you know, and, and look at that instead of, or, or allow those considerations to counter the price effects of a transaction. Um, I'm, I'm not sure that that's how it's gonna come out.

Speaker 2:

Okay. Yeah. A lot of unknowns at this point, I'm sure. Um, another unknown that you mentioned, um, in your article had to do with the notification that prior consummated transactions still may be subject to for the review. Um, have you seen any indications thus far as to maybe what type of characteristics might invoke that type of a review, or how far back that might go for those, especially who are participating, who maybe, uh, a part of a, a transaction that recent, um, recently consummated, uh, any, any words of wisdom there as to, um, who, who needs to be on the lookout?

Speaker 3:

So, you know, the FTC has always been able to challenge a consummated merger, um, and you know, a lot of healthcare transactions actually for below the threshold for a hearts Scott radio notification, um, that that's the, the law that gives the FTC the ability to look at a transaction and stock a transaction before it's happened. Um, so a lot of deals that don't get reported, don't have that, uh, statutory but of close, and they'll go ahead and close. And it's only after they've been consummated that the FTC will find out about it usually because, um, there's been some impact on the market prices have gone up quite dramatically, and there'll be a complaint, um, to the FTC and they'll start investigating. And you, I mean, Evanston Northwestern, um, was an example of that. Um, and then, uh, St Luke St. Luke salt was another example of that. And after the challenge, um, there's some settlement, so in St. Luke's, um, they were required to, to spin off the, um, the, um, position practice that had been acquired. So you you've, you've always had that. Um, I think the, the difference right now is when you did a heart Scott Redina notification, and you got cleared either in a, you know, initial 30 to 60 day period from, you know, an initial investigation, or you might have gone through a second request, you know, you were safe, um, of theoretically of course the agency could come back to you. Um, but usually after a hot Scott rid process, um, your transaction was, you know, you, you had a fair degree of confidence that your transaction was okay. And I think what we've been seeing out of the FTC, um, presumably due to workload it's, cause there have been a tremendous number of transactions filed, um, over, over the last year with, with, you know, filing numbers far exceeding what had been going on before, um, is that you'd, you'd make a filing, um, you'd have an initial investigation, which you would normally have expected to result in no action. Um, and at the end of the waiting period, as that waiting period is expiring the agency doesn't issue a second request, which is where they would normally go if they had concerns. Um, but instead sent a letter saying, we're gonna keep looking at this. And, um, if you wanna close, you know, you you're allowed to close because there's no heart Scott Rodino act, um, problem, but you do so at your own risk. Um, and you bear the risk if we keep investigating and subsequently find that this is a deal. Um, so when those letters started coming out, everyone was pretty concerned and, you know, what does this mean? And should we really not close our deal? Um, and you know, it was incredibly disruptive. Um, I think now that we've seen a fair number of them, um, you know, people are closing through them, but there, it does leave you with this, uh, discomfort that, um, you know, you could get an investigation down the line and, uh, you know, that, that your deal could be reopened. So, you know, my concern here really, I don't think that much has changed on, on the, on the smaller below the radar kind of deals. I mean, they're always gonna be there and, um, you know, the risks are in how the transaction actually plays out when it's closed. Um, I think the, the change that we're seeing here is in the deals that are actually reported and, um, what my might happen even after you clear HSR and close your transaction.

Speaker 2:

That's helpful, Lisa, thank thank you. Um, Lisa, one more question that I have for you, and, and again, going back to your article, you mentioned that, um, not only our health systems in focus, but also physician practices, other ambulatory services. Um, now what we we've talked about so far, everything has been under the purview of the FTC. Um, we're also seeing a lot of payers who are involved in acquisition, specifically of physician practices, other ambulatory service. My understanding is that that invokes then, you know, department of justice. So, uh, you mentioned the, you know, Abu quotes here, whole of government competition policy as something that came out. Um, so do you see maybe the, um, FTC and other agencies kind of coming together to, to evaluate some more of these, these transactions that, uh, may have been bifurcated, uh, previously?

Speaker 3:

So, um, you know, on the payer provider kind of, um, merger, you know, we, we, we we've always had those and, um, I think a big change there is that they were reviewed under, well, the, the vertical merger guidelines were only brought in last year, but the guidelines basically reflected agency practice up to that point. Um, and going forward, those guidelines have been, uh, rescinded. So, you know, there are questions around, um, what, what are the criteria that the FTC or DOJ are using to look at vertical transactions of provider, um, payer combination, or, um, maybe ancillary services acquisition that aren't strictly horizontal overlaps. Um, and, and before, um, earlier last year, um, we did see the FTC announcing a retrospective review of past, um, provider, um, physician transactions and ancillary services transactions. So, you know, I think that they're gearing up to do more work in that area. The, the whole of government approach is a little bit different though. Um, that that was a directive that every government, um, department look at its scope of, of responsibilities and see to what extent competition policy needs to be taken into account. And whether there are ways in which different government departments, not just the FTC and DOJ can promote competition, um, through their own policies. And I think in the healthcare area, the main, um, you know, institution there is, is going to be CMS. And are there things that CMS can do through its policies to influence competition, um, in healthcare markets, you know, you may see more collaboration between CMS and FTC D OJ in terms of, um, trying to achieve more competition in the healthcare system, particularly through, through Medicare obviously, and, and Medicare advantage, um, and the Medicaid program. Um, so I, I think that that could raise a, a number of really interesting areas for, um, study and investigation don't know how it's actually gonna play out in a transaction review.

Speaker 2:

Well, these will really appreciate your time today. Uh, thank you for sharing your insights and thank you for the article. There's a, obviously a lot developing here, um, and I'm sure there's gonna be continued focus, uh, over the year as the, uh, enforcement continues to evolve. And we understand it a little bit more, so thank and, uh, thanks for those attending.

Speaker 1:

Thank you for listening. If you enjoy this episode, be sure to subscribe to a H L a speaking of health law, wherever you get your podcasts to learn more about ALA and the educational resources available to the health law community, visit American health law.org.

Speaker 4:

Okay.