The Federal Trade Commission (FTC) continued its relentless focus on combinations in the healthcare industry last month when it filed an administrative complaint challenging a merger of two West Virginia hospitals, In the Matter of Cabell Huntington Hospital (FTC Docket No. 9366). Given the FTC’s recent successes in thwarting other healthcare mergers it saw as anticompetitive, it is not surprising that the agency is taking on this particular fight. What is somewhat surprising, though, is that the FTC is doing so against the wishes of West Virginia’s antitrust enforcer, Attorney General Patrick Morrisey. As a close reading of the complaint reveals, the FTC not only criticizes the hospital merger itself but essentially indicts West Virginia’s regulation of healthcare facilities as inherently anticompetitive. As such, it raises serious questions of comity and federalism, as well as the future of the much-touted federal and state antitrust partnership, which will merit careful consideration as the case progresses.
The merger in question is a proposed acquisition of St. Mary’s Medical Center by Cabell Huntington Hospital. Both facilities are in Huntington, West Virginia, approximately three miles from each other. Cabell and St. Mary’s have a combined market share of over 75 percent of inpatient hospital services in a geographic market consisting of three West Virginia counties and one Ohio county (the so-called four-county Huntington area). In the same geographic area, the two hospitals likewise have a dominant combined market share in outpatient surgical services, according to the FTC.
The FTC’s analysis of the proposed transaction under the U.S. Department of Justice/FTC Horizontal Merger Guidelines is relatively simple and straightforward. The two hospitals have competed energetically with each other for many years on price, quality, and range of services. Making the two hospitals one would, in the agency’s view, destroy both price competition and all forms of non-price competition. The other hospitals in the area – none of which has more than a 5 percent share in the relevant service markets – are incapable of stepping in to restore competition, according to the FTC. Because of high barriers to entry and unfavorable demographics in the Huntington area, no new entrant is likely to build a competing facility within any reasonable time frame, if ever. And any efficiencies claimed for the merger, the FTC argues, are “unsubstantiated” and do not outweigh the harm to competition. Further, the FTC argues that the Herfindahl-Hirschman Index – the FTC’s favored method of quantifying market concentration in the healthcare industry – far exceeds the standard thresholds that justify a presumption that a merger will impermissibly increase the market power of the resulting entity. Thus, the commission (with only four commissioners at present) unanimously concludes, the merger of Cabell and St. Mary’s is presumptively illegal and should be stopped.
Political considerations, however, threaten to complicate the FTC’s tidy microeconomic analysis. In late July, over three months before the FTC filed its administrative complaint, Morrisey announced his office’s approval of the Cabell-St. Mary’s acquisition. That approval was based on the hospitals having entered into agreements with the state that were intended to minimize any anticompetitive effects of the merger, at least for several years. In addition, the state attorney general’s press release made it clear that the state was taking into account considerations beyond pure economic efficiency in one or two service markets. He emphasized that St. Mary’s and Cabell were, respectively, the seventh and 11th largest private employers in the entire state, and the top two employers in Cabell County (of which Huntington is the county seat). It is unclear whether the FTC knew about these agreements in advance.
Elected officials at the local and federal levels have also expressed support for the proposed merger. Local officials have long favored it; in October 2014, the Cabell County Commission voted unanimously to support the merger. After the FTC filed its bombshell complaint in November this year, the U.S. representative for the Huntington area, Republican Evan Jenkins, issued a statement that he was “disappointed” by the FTC’s action. “I worked closely with West Virginia Attorney General Patrick Morrisey to craft a comprehensive agreement to protect consumers, patients, and our hardworking hospital employees,” he said in the statement.
Thus, the agency now finds itself acting at cross-purposes with West Virginia’s highest antitrust official. Though it is certainly not the first antitrust matter in which federal and state authorities have reached different conclusions about the appropriate enforcement action, the FTC’s administrative complaint notably departs from any notion of comity and dispenses with even a superficial showing of respect for, or at least an understanding of, the position taken by state and local authorities. On the contrary, the FTC seems to go out of its way to attack both the agreements that the state attorney general reached with the hospitals and West Virginia’s basic approach to regulating healthcare facilities, while the FTC seemed to sit on the sidelines.
For example, the hospitals agreed that, for seven years after the acquisition, they would abide by price ceilings and impose limits on any increase in their combined operating margins, thus at least temporarily restraining their ability to exploit their combined market power by raising prices dramatically. The hospitals also agreed to release employees from noncompete agreements upon termination of their employment, grant hospital privileges to all qualified physicians regardless of whether they also have privileges at other competing hospitals, and refrain from mounting regulatory challenges to new market entry by most types of healthcare providers. The agreements also featured qualitative commitments by the hospitals, including one to establish a fully integrated medical records system covering both facilities. These types of agreements are not unusual in such matters.
The FTC nevertheless was unimpressed. “For mergers that may substantially lessen competition,” the agency posited, “the Supreme Court, other courts, and the federal antitrust agencies strongly prefer ‘structural’ remedies, such as pre-merger injunctions and post-merger divestitures, to preserve competition rather than ‘conduct’ remedies, which rely on courts or enforcement authorities to police post-merger behavior.” It then used several paragraphs of its administrative complaint to enumerate what it sees as the inadequacies of West Virginia’s negotiated conduct remedies.
First, the FTC argued, the agreements do not altogether eliminate the risk of price increases; instead, they merely place a ceiling on such increases. Second, the agreements “do not preserve quality competition” and “it is likely that any temporary mitigation of price increases … would result in greater non-price harm, as the merged firm exercises its market power to limit quality and service improvements.” Third, harm to price competition would only be deferred for seven years, after which the combined entity would be able to use its market power to raise prices without fear of meaningful competition from other regional hospitals. Finally, in the FTC’s view, the agreed-on conduct remedies would be too “costly” to monitor during that seven-year period (a curious allegation, given that West Virginia was apparently willing to bear that cost).
The FTC aimed further criticism at the certificate-of-need (CON) regulations administered by the state’s healthcare regulator, the West Virginia Health Care Authority. Under West Virginia law, a healthcare provider must obtain a CON from the authority before adding or expanding healthcare services, making capital or equipment expenditures above a certain level, or developing or acquiring new healthcare facilities. The stated purpose of this regulatory regime is to develop healthcare facilities in an “orderly, economical” manner so as to avoid “unnecessary duplication.” Under these rules, for example, Cabell and St. Mary’s are required to obtain a CON before they can complete their merger. (They have not yet obtained one.)
Where West Virginia presumably sees its CON regulations as a means of providing stability in the development of healthcare services within the state, the FTC sees them as state-sanctioned interference with competition. The CON regulations, which exist in many other states, according to the FTC, are a “significant barrier to entry.” Moreover, the CON requirement has, in practice, “repeatedly thwarted the development of competitive healthcare services in the four-county Huntington area.” And, the FTC notes, the healthcare authority has found that there is currently no demand for additional hospital beds in the Huntington area, so “West Virginia is unlikely to approve entry that would duplicate services provided by the [Cabell-St. Mary’s] merged entity.”
Cabell Huntington Hospital, then, presents an interesting spectacle of the FTC, in the single-minded pursuit of its competition mission, brushing aside state government concerns perceived in its own state about both unemployment and potentially destabilizing overcapacity in institutional healthcare facilities. Perhaps the agency has been so emboldened by its February U.S. Supreme Court victory in the North Carolina Board of Dental Examiners v. Federal Trade Commission, 574 U. S. ___ (2015), case – in which the high court held that even a state licensing board is not immune from the FTC’s antitrust enforcement authority under certain conditions – that it perceives no need for any pretense of deference to rival policies embodied in state law or on-the-ground assessments by state officials, to whom the FTC has often deferred in the past. An evidentiary hearing has been set for April 5, 2016, before one of the FTC’s own administrative law judges. If the merger is blocked at that level, the hospitals may appeal to the full commission itself – a tribunal where, as former FTC Commissioner Joshua Wright has pointed out, the FTC wins, more or less, 100 percent of the time. Stay tuned.
Reprinted with permission from the December 7, 2015, issue of The Legal Intelligencer. Copyright 2015. ALM Media Properties, LLC. Further duplication without permission is prohibited. All rights reserved.