How FTC’s New Merger Retrospective Program Will Impact Healthcare

September 24, 2020 - The Federal Trade Commission’s (FTC’s) Bureau of Economics recently unveiled a revamped Merger Retrospective Program that will expand and formalize the Bureau’s retrospective research efforts, including those focused on healthcare mergers.

For over 35 years, the Bureau has engaged in retrospective analyses of consummated mergers to determine whether a deal has impacted competition in one or more of the markets affected by the merger and whether the FTC’s threshold for bringing enforcement action in a merger case was too permissive. In other words, did the agency allow too many potentially harmful mergers to go through?

The analyses have also helped the agency to assess its analytical tools, such as the pricing pressure index and merger simulation model, which have been employed to predict the effects of a proposed merger.

“Merger retrospectives are a powerful way of engaging in critical self-examination to see if our antitrust enforcement is working correctly,” FTC Chairman Joseph Simons said in the announcement. “The goal of this initiative is to encourage economists both inside and outside the agency to carry out more retrospective studies to test our analytical tools and strengthen our enforcement efforts.”

Under the revamped program, the Bureau aims to expand the industries studied and address antitrust questions that have gone previously unexplored.

READ MORE: How Hospital Merger and Acquisition Activity is Changing Healthcare

The Bureau also intends, through the expanded program, to more fully explain lessons from enforcement actions and communicate in a more open and transparent manner to the broader community.

Some of the initiatives coming up under the program will include an annual report on lessons learned from recent retrospective studies, an evaluation of the tools that have been used to screen and evaluative competitive effective of mergers, and the development of a website dedicated to research on the retrospectives, which will include a  bibliography of retrospective studies.

These retrospectives have been particularly useful in healthcare, the FTC notes, where proposed mergers are common. For example, a series of retrospective studies conducted by the agency’s Hospital Merger Litigation Task Force in the early 2000s have informed the screening of horizontal hospital mergers.

Chairman Simons previously said, “(t)hese retrospective studies were critical in subsequent hospital merger challenges,” potentially including  13 federal injunctions in hospital cases between 2008 and 2018, the agency added.

The studies have also contributed to the use of new screening methods, including the willingness to pay and upward pricing pressure indices methods.

READ MORE: Hospital Merger and Acquisition Activity Withstands COVID-19 Slump

The FTC is currently gathering information to perform retrospective studies of two healthcare mergers that were allowed to proceed under state regulatory authority even though there were antitrust concerns.

In both cases, the organizations – Mountain States Health Alliance and Wellmont Health System, which were the two largest hospital systems in the border area of Northeast Tennessee and Southwest Virginia, and Cabell Huntington Hospital and St. Mary’s Medical Center, the only two hospitals in Huntington, West Virginia – were allowed to proceed under Certificates of Public Advantage (COPA).

COPAs give states the power to assess healthcare mergers versus the federal government through the FTC.

While COPA deals in healthcare are relatively rarely, according to William W. Horton, a partner at Jones Walker and co-chair of the law firm’s Healthcare Industry Team, the retrospective studies are another way the FTC is expressing their dislike of the state regulations.

“It would be reasonable to expect to see the use of retrospective review to essentially provide a second bite at the apple at those kinds of transactions since the FTC didn't, in its view, get its first bite at the apple,” Horton recently told RevCycleIntelligence.

READ MORE: 5 Hospital Merger and Acquisition Moves Kicking Off 2020

But the recent revitalization of the FTC’s Merger Retrospective Program may also signal the FTC’s growing interest in assessing the competitive impacts of other deals in healthcare, such as a merger between physician practices or an acquisition of a practice by a hospital.

The transactions are oftentimes not large enough to warrant a Hart Scott Rodino filing, which notifies the federal government of large mergers and acquisitions being a formal filing of the proposed deal. However, evidence has shown that even these smaller deals in healthcare could increase lead to anticompetitive practices.

“That is an area that I've heard people from the FTC talk about in the past about being concerned with and so you would think that is an area that they might well pick up in their expanded retrospective review program,” Horton stated.

Despite a potential increase in scrutiny and even a global pandemic, healthcare M&A activity appears to be holding steady. In fact, Horton has observed a “good bit of activity and interest” in private equity-backed deals, especially among medical specialties.

Deals put on hold because of COVID-19 are also likely to come back to the front burner eventually, the healthcare lawyer predicted.

“Hospitals that are not market leaders, at least in their larger metropolitan area market, are always vulnerable to being bought by larger competitors for all the normal reasons that usually consolidation transactions have – efficiencies, economies of scale, and as the FTC points out, the desire to be in a better bargaining position with managed care payers in the market,” Horton said.

Scrutiny of healthcare industry consolidation deals is also unlikely to ease up even if a new administration takes over after the upcoming election.

“It's an area where the FTC has been convinced For a long time that the unusual economic dynamics make it a market that is particularly vulnerable to anticompetitive abuses so it would be a surprise if they didn't focus a fair amount of energy in any sort of review project on healthcare,” Horton concluded.