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Jeffrey W. Brennan (Jeff) has practiced exclusively antitrust law for three decades, including more than 20 years in private practice and nearly 10 years over two tours at the Federal Trade Commission, from 1985 to 1990 as a staff attorney handling mergers and from 2001 to 2006 as assistant director, then associate director, of the Bureau of Competition. His current practice includes merger clearance, antitrust litigation, investigations by the FTC, DOJ and state attorneys general, and counseling on competitor collaborations and many other antitrust compliance issues. Jeff’s clients cover many industries, with the highest number in the health care services and products sector. He is co-chair of the Firm’s Health Antitrust affinity group. Read Jeff Brennan's full bio.

The Department of Justice (DOJ) announced last week that it and the State of North Carolina have reached a settlement with Carolinas Healthcare System / Atrium Health relating to provisions in contracts between the health system and commercial insurers that allegedly restrict payors from “steering” their enrollees to lower-cost hospitals. The settlement comes after two years of civil litigation, and serves as an important reminder to hospital systems and health insurers of DOJ’s continued interest in and enforcement against anti-steering practices.

WHAT HAPPENED:

  • On June 9, 2016, the DOJ and the State of North Carolina filed a complaint in the Western District of North Carolina against the Charlotte-Mecklenburg Hospital Authority, d/b/a Carolinas Healthcare System, now Atrium Health (Atrium).
  • In its complaint, DOJ accused Atrium of “using unlawful contract restrictions that prohibit commercial health insurers in the Charlotte area from offering patients financial benefits to use less-expensive health care services offered by [Atrium’s] competitors.”
  • DOJ alleged that Atrium held approximately a 50 percent share of the relevant market and was the dominant hospital system in the Charlotte area. DOJ defined the relevant product market as the sale of general acute care inpatient hospital services to insurers in the Charlotte area.
  • DOJ alleged that Atrium used market power to negotiate high rates and impose steering restrictions in contracts with insurers that restrict insurers from providing financial incentives to encourage patients to use comparable lower-cost or higher-quality providers. Such financial incentives include health plan designs that charge consumers lower out-of-pocket costs (such as copays and premiums) for using top-tier providers that offer better value, or for subscribing to a narrow network of providers.
  • Atrium also allegedly prevented insurers from offering tiered networks with hospitals that competed with Atrium in the top tiers, and imposed restrictions on insurers’ sharing of value information with consumers about the cost and quality of Atrium’s health care services compared to its competitors. These “steering restrictions” allegedly reduced competition and resulted in harm to consumers, employers, and insurers in the Charlotte area.
  • Atrium allegedly included these steering restrictions in its contracts with the four largest insurers who in turn provide coverage to more than 85 percent of commercially insured residents in the Charlotte area.
  • On March 30, 2017, the court denied Atrium’s motion for judgment on the pleadings, finding that the government met its initial pleading burden. Atrium had argued that the complaint failed to properly allege that the contract provisions actually lessened competition or lacked procompetitive effects.
  • More than a year later, on November 15, 2018, DOJ announced that the State of North Carolina and DOJ had reached a settlement with Atrium, which prohibits Atrium from continuing its practices of using alleged steering restrictions in contracts with commercial health insurers. The proposed settlement also prevents Atrium from “taking actions that would prohibit, prevent, or penalize steering by insurers in the future.” The agreement lists certain prohibitions and permissions for Atrium; for example, that Atrium may not enforce existing alleged anti-steering provisions, and must allow payors to be transparent with consumers about price, cost and quality information. However, Atrium is permitted to enforce other contract provisions that protect against carve outs (where an insurer unilaterally removes a health care service from coverage in a health plan), and may restrict payor steering for any co-branded plan or narrow network in which Atrium is the most prominently-featured provider.

WHAT THIS MEANS:

  • Going forward, both DOJ and the Federal Trade Commission (FTC) are likely to investigate similar contract provisions by health systems susceptible to allegations of market power. The resolution of the Atrium matter comes just one month after Senator Chuck Grassley sent a letter to FTC Chairman Joseph Simons, asking FTC to investigate certain allegedly anticompetitive hospital system managed care contracting practices and to assess how prevalent they are in the marketplace. Senator Grassley’s October 10 letter cited to a recent Wall Street Journal article detailing various provisions said to increase health care costs and restrict patient choice, including anti-steering provisions. The letter cited to the then-pending Atrium case specifically. In the wake of the Grassley letter and the Atrium settlement, hospital systems that have entered into alleged anti-steering provisions with payors may need to expect inquiry from the FTC or DOJ.
  • The Atrium settlement follows the resolution of another DOJ challenge to anti-steering provisions. Earlier this year, in American Express, the Supreme Court rejected DOJ’s challenge to the anti-steering rules that the credit card company imposed on merchants. The cases are distinguishable in part due to the difference in market share of defendants. American Express held 26.4 percent of the credit card market, whereas Atrium allegedly holds 50 percent of the relevant market asserted by DOJ.
  • Many watched the Atrium case as an opportunity for further guidance from the courts on the competitive implications of anti-steering practices, but the settlement means practitioners and industry members must continue to wait for judicial consideration of these types of provisions in the health care industry.
  • The Atrium matter serves as a reminder of the agencies’ interest in alleged anti-steering and other restrictive contracting practices. Now is an opportune time for hospital systems to review their managed care contracting practices for potential antitrust risk under the rule of reason, particularly hospital systems with relatively high shares within concentrated service areas or that have contracting provisions with payors representing a majority of the local patient population that could be characterized as allegedly restrictive.

On April 27, 2018, the United States Senate confirmed President Trump’s five nominees for Commissioners of the Federal Trade Commission (FTC). Three are Republicans: Chairman Joseph Simons, Noah Phillips and Christine Wilson, and two are Democrats: Rohit Chopra and Rebecca Slaughter. The Senate’s vote returns the FTC to a full complement of Commissioners for the first time under the Trump Administration. Of note to participants in the health care sector: the FTC shares civil antitrust law enforcement jurisdiction over the health care industry with the Department of Justice Antitrust Division, but takes the lead when it comes to the health care provider, pharmaceutical and medical device industries. Continue Reading THE LATEST: Health Care Antitrust Enforcement Remains a Top Priority for New FTC Commissioners

With its latest lawsuit to block an acquisition of physicians, the Federal Trade Commission (FTC) confirmed last week that monitoring physician consolidation is a priority. The FTC and North Dakota Attorney General sued to block the proposed acquisition by a health system (Sanford Health) of Mid-Dakota Clinic (MDC), which both serve the areas of Bismarck and Mandan, North Dakota. The deal would allegedly create very high market shares in several physician service markets.

WHAT HAPPENED

  • Sanford Health is a vertically integrated health system, which operates a general acute care hospital in Bismarck and clinics providing primary care and specialty services. Sanford employs approximately 160 physicians who work in Bismarck or Mandan. MDC is a multispecialty medical practice employing 61 physicians who provide services in Bismarck.
  • Concurrent with its sealed federal complaint to preliminarily enjoin the deal, the FTC filed an administrative complaint that alleges that the transaction would create anticompetitive effects in four physician service markets: adult primary care services, pediatric services, Obstetrics and Gynecology (OB/GYN) services, and general surgery services. Sanford and MDC are the area’s two largest providers of each of those services; in general surgery, they are the only providers.
  • The complaint contends that the relevant geographic market is no larger than the four-county Bismarck, ND Metropolitan Statistical Area. The FTC alleges that this area encompasses the locations where, to be marketable to employers, commercial health plan networks must include physicians.
  • The complaint alleges that Sanford and MDC are each other’s closest competitors and that the combination would result in post-transaction market shares of 75 percent for adult primary care services, over 80 percent for pediatric services, over 85 percent for OB/GYN services and 100 percent of general surgery services.
  • The FTC rejects as unsubstantiated and not merger specific the parties’ claims that the transaction would yield significant cost savings and quality improvements. In any event, the FTC alleges that the claimed efficiencies do not outweigh the transaction’s likely competitive harm.

Continue Reading THE LATEST: Federal Trade Commission and State Attorney General Seek to Block a Health System’s Physician Group Acquisition

This week, the Federal Trade Commission filed an administrative complaint against the Louisiana Real Estate Appraisers Board (LREAB). This complaint is the FTC’s first against a state licensing board since it prevailed in the Supreme Court in the decision in NC State Board of Dental Examiners v. FTC in 2015. There, the Court held that immunity from the antitrust laws under the state action doctrine does not apply to a state board that regulates an industry if: 1) a majority of the board members are active participants in the market they are regulating, and 2) the board has not been actively supervised by the state. McDermott reported in detail about the NC Board of Dental Examiners at the time of the decision. The complaint comes on the tail of a settlement agreement between the FTC and a trade organization, the American Guild of Organists, as reported this week.

FTC alleges that the LREAB violated Section 5 of the Federal Trade Commission Act by unreasonably restraining price competition for real estate appraisal services provided to appraisal management companies (AMCs) in Louisiana.

Continue Reading THE LATEST: FTC Files Complaint Against Louisiana Real Estate Appraisers Board

On October 31, 2016, the US Court of Appeals for the Seventh Circuit handed another important victory to the Federal Trade Commission (FTC) and the State of Illinois in a hospital merger case in Chicago, Illinois. This decision follows closely on the heels of the FTC’s victory earlier this year in FTC v. Penn State Hershey before the US Court of Appeals for the Third Circuit and, like that prior case, is a strong endorsement for the FTC’s analytical approach to hospital mergers. Continue Reading Seventh Circuit Hands FTC Another Geographic Market Definition Victory in Chicago Hospital Merger Case

On September 27, 2016, the US Court of Appeals for the Third Circuit handed an important victory to the Federal Trade Commission and the Commonwealth of Pennsylvania in a closely watched hospital merger case. The decision provides clear guidance on the appropriate tests for determining geographic markets in hospital merger cases, while also suggesting that efficiencies claimed in many hospital transactions may face increased scrutiny in future cases.

Read “Third Circuit Blocks Hospital Merger in Key Victory for FTC on Geographic Market Definition”

In the last year, the US antitrust regulators successfully challenged multiple transactions in court and forced companies to abandon several other transactions as a result of threatened enforcement actions. Looking back at the different cases, there are some trends that we see developing in the government’s positioning on mergers, and these should be kept in mind as parties contemplate mergers and acquisitions moving forward.

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On May 9, 2016, the US District Court for the Middle District of Pennsylvania denied the motion by the Federal Trade Commission and Pennsylvania Office of Attorney General for a preliminary injunction to enjoin the merger of Penn State Hershey Medical Center and PinnacleHealth System. The decision ends a string of victories by the FTC in recent health care merger litigation.

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The Federal Trade Commission (FTC) and Pennsylvania Attorney General (AG) have challenged the proposed combination of The Penn State Hershey Medical Center (Hershey) and PinnacleHealth System (Pinnacle) in Harrisburg, Pennsylvania. The FTC complaint alleges that the combination would create a dominant provider, reduce the number of competing health systems in the area from three to two, and result in a 64 percent share of the market for general acute care inpatient hospital services.

Hospitals and health systems pursuing mergers with a competitor should be mindful of the antitrust enforcement climate in health care and incorporate antitrust due diligence into their early transaction planning. Moreover, this case highlights that providers seeking to proactively alleviate the potential anticompetitive effects of a transaction should anticipate continued skepticism by the FTC of claims of procompetitive efficiencies and its dismissal of the merging parties’ newly negotiated, post-closing pricing agreements with payors.

Summary of Administrative Complaint

Parties and Transaction

Hershey is a nonprofit healthcare system headquartered in Hershey, Pennsylvania, about 15 miles west of Harrisburg. The system has two hospitals in the Harrisburg area: the Milton S. Hershey Medical Center, an academic medical center affiliated with the Pennsylvania State University College of Medicine, and the Penn State Hershey Children’s Hospital, the only children’s hospital in the Harrisburg area.  Hershey has 551 licensed beds and employs 804 physicians offering the full range of general acute care services.  In its 2014 fiscal year, Hersey generated $1.4 billion in revenue and discharged approximately 29,000 patients.

Pinnacle is nonprofit healthcare system headquartered in Harrisburg. Pinnacle’s system includes three hospitals in the Harrisburg area: PinnacleHealth Harrisburg Hospital, PinnacleHealth Community General Osteopathic Hospital, and PinnacleHealth West Shore Hospital. The system has 662 licensed beds divided among the three hospitals. In its 2014 fiscal year, Pinnacle generated $850 million in revenue and discharged more than 35,000 patients.

Pursuant to a letter of intent executed in June 2014, the parties would create a new legal entity to become the sole member of both health systems. The parties would have equal representation on the board of directors of the new entity.

Relevant Markets

The FTC complaint alleges that the appropriate scope within which to evaluate the proposed transaction is the market for general acute care (GAC) inpatient hospital services in a four-county area around Harrisburg. This alleged product market encompasses a broad cluster of medical and surgical diagnostic and treatment services that require an overnight in-hospital stay. Although the effect on competition could be analyzed for each affected medical procedure or treatment, the FTC considered the cluster of services as a whole because it considers the services to be “offered to patients under similar competitive conditions, by similar market participants.”

The FTC limited the geographic market to an area which includes Dauphin, Cumberland, Perry and Lebanon Counties. These four counties, according to the FTC, are “the area in which consumers can practicably find alternative providers of [GAC services].” Consequently, hospitals located outside of this area are not meaningful competitors to Hershey and Pinnacle.  The FTC’s theory relies on the fact that patients prefer to seek care relatively close to their home or workplace, especially when seeking emergency hospital services. In support of its alleged geographic market, the complaint asserts: (1) that a large percentage of the patients in the four county area seek GAC services within these four counties; (2) that hospitals located outside the four counties do not draw many patients from within the four county area; and (3) that health plans could not effectively market a network to employers and patients in the Harrisburg area that did not include a hospital in these four counties.

Market Share and Anti-Competitive Effects

According to the FTC’s complaint, the combined entity would be the largest general acute care system in the relevant market with a 64 percent market share. Pinnacle and Hershey currently represent 38 percent and 25 percent of the market, respectively. The FTC alleges that only one other hospital—Holy Spirit Health System with 15 percent of the market—is a meaningful competitor to the merging parties. The FTC explains that while there are two other hospitals in the Harrisburg area, both are community hospitals located outside of Harrisburg that draw relatively small shares (approximately 6 percent and 5 percent) from the overall area. As a result, the FTC characterizes the transaction as a reduction in competitors from three to two, and argues that the merger is presumptively unlawful under the FTC’s Merger Guidelines and the established case law.

The FTC alleges that Pinnacle and Hershey are close substitutes for each other and that both systems compete vigorously for inclusion in commercial health plan networks and for a health plan’s patients. The complaint cites various sources of evidence, including econometric analysis of patient draw data, the parties’ ordinary course documents, testimony and information from health plans. Reduced competition resulting from the proposed merger would have anticompetitive effects on both price and non-price features in the market, according to the FTC. The elimination of close competition between the two hospitals would increase the combined entity’s bargaining leverage with health plans, thereby leading to higher negotiated rates for consumers in either traditional fee-for-service arrangements or new reimbursement models. Health plans would no longer be able to play Pinnacle off of Hershey to obtain lower rates.

Further, with only one meaningful competitor left in the market, the FTC alleges that the combined entity would have less incentive to compete for a health plan’s patients by offering increased quality of care, patient satisfaction, improved facilities, better amenities, state-of-the-art technology and enhanced access. The FTC supported its allegations by referencing Pinnacle’s recent facility enhancements, patient satisfaction and quality of care initiatives aimed at attracting patients from Hershey to Pinnacle.

The lack of competition between Pinnacle and Hershey due to the merger would especially impact price and non-price competition for high-end tertiary and quaternary services that smaller competitors in the market do not provide. As support, the FTC noted that Pinnacle had expanded its service offerings to better compete with Hershey and that both entities had expanded the availability of specialized service lines in new geographic areas to attract patients—the proposed merger would eliminate this competition and the creation of alternative service providers for patients in the market. Additionally, in some key geographic areas, the proposed merger would leave health plans and patients for only one choice for emergent care.

Pricing Agreements

In order to mitigate the potential anticompetitive effects of the transaction, Hershey and Pinnacle negotiated new agreements with payors that appear to have been intended to forestall payor opposition to the transaction and limit the merged system’s ability to leverage any additional bargaining power gained through the transaction, possibly by locking in premerger reimbursement rates for a set period of time.

The FTC complaint cites four reasons why it believes that those new agreements would not prevent competitive harm.  First, the FTC believes these agreements were designed to prevent payors from opposing the merger and, therefore, are better characterized as strong evidence that payors believe the merger would result in anticompetitive harm. Second, the agreements do not address the change in bargaining leverage that would also apply to any new arrangements with payors, including risk-sharing or population health measures.  In the negotiation of any new arrangements, the combined entity would still be capable of leveraging its increased bargaining power to the detriment of the health plans and their members.  Third, these pricing agreements do nothing to preserve the non-price competition between the parties that has benefited patients through improved quality and increased service offerings.  Finally, when these agreements terminate, nothing prevents the combined entity from leveraging its increased bargaining power to raise rates.

Entry & Efficiencies

The FTC complaint alleges that new hospital entry in the Harrisburg area would not be likely, timely or sufficient to offset the transaction’s likely anticompetitive effects. In support, the FTC cites the expense and the length of time needed to construct a new hospital facility, and the fact that the parties were the only ones to construct new hospital facilities in the area in the past decade.

The FTC complaint alleges that the parties’ efficiency claims are not cognizable on the basis that they are overstated, speculative, unverifiable and not merger-specific. Further, the FTC alleges that one of the parties’ efficiency claims—that the transaction will enable the parties to transfer patients at Hershey Medical Center, which is near capacity, to Pinnacle, which has available capacity—would result in competitive harm. The FTC alleges that would force patients to go to a different hospital than the one they chose, and would reduce output, capacity and service since Hershey Medical Center would avoid constructing a new inpatient bed tower to address capacity issues.

Proceedings

The FTC filed an administrative complaint as well as motions for temporary and preliminary injunctions in federal district court. The AG joined the federal district court proceeding. U.S. District Judge John E. Jones III granted the antitrust enforcement agencies’ request for a temporary restraining order.  The motion for a preliminary injunction is pending. The parallel administrative trial is scheduled to commence in May 2016.

Key Implications

The FTC’s challenge of the Hershey/Pinnacle transaction reinforces recent enforcement trends that hospitals and health systems contemplating transactions should consider. First, the FTC is likely to carefully scrutinize, and potentially challenge, a transaction that involves: (1) two nearby hospitals, (2) in the same small to mid-size metropolitan area, (3) who serve as close competitors to each other for both payors and patients, (4) and serve a majority of the commercially-insured patient base.  This result stems from the FTC’s continued reliance on a traditional structural analysis of the market—market definition, market share computation, market concentration calculation—to allege that a transaction that violates the FTC’s 2010 Merger Guidelines is presumptively unlawful.

Second, once a transaction is declared presumptively unlawful, the FTC shifts the burden to the parties to prove offsetting procompetitive benefits.  However, this challenge also demonstrates that proving procompetitive benefits is becoming more difficult for parties in hospital mergers because the FTC continues to discount claimed efficiencies as speculative, overstated and unsubstantiated.  The FTC’s claims are supported by its recent physician practice merger challenge in Nampa, Idaho, as well as its challenges of hospital merger challenges in Toledo, Ohio and Rockford, Illinois.

Third, it is noteworthy that the recently negotiated contracts between the parties with large commercial payors did not insulate the transaction from allegations of anticompetitive harm. The FTC perceives these contracts as evidence that the payors view the transaction as likely to generate anticompetitive harm.  While the FTC may acknowledge that these agreements prevent rates from rising for a particular period of time, it perceives those agreements to be insufficient to counter the increased bargaining leverage of the combined entity that will impact any new agreements with payors and will impact negotiations after the recently negotiated agreements expire.  The FTC’s position on this issue is consistent with its longstanding rejection of conduct-oriented settlements of potentially anticompetitive mergers of healthcare providers.

Fourth, the Hershey/Pinnacle challenge represents a continuation of the FTC’s historical approach to assessing anticompetitive effects in hospital mergers.  The FTC continues to utilize a “two-dimensional” articulation of the competition: first assessing competition among hospitals to be selected as in-network providers for commercial health plans and, second, investigating competition among hospitals in the network on the basis of non-price features to attract patients.

Finally, a critical component of the FTC’s investigation continues to be ordinary course business documents created by the parties describing the competitive landscape.  As in recent cases, the FTC’s complaint in this case cites and quotes from documents created by the parties in support of the allegations that the transaction will reduce competition and harm consumers.

In sum, this most recent FTC enforcement initiative is a reminder that when hospitals and health systems first contemplate a transaction, they should evaluate its competitive implications in light of the FTC’s heightened scrutiny of mergers involving healthcare competitors.

The Federal Trade Commission (FTC) and the Antitrust Division of the U.S. Department of Justice (DOJ) held a public workshop on February 24–25, 2015, to examine recent trends and developments in health care provider organization and payment models, and their potential effects on competition in the provision of health care services. A main message from FTC and DOJ leadership at the workshop is that the agencies evaluate new provider and payment models for their adherence to competition principles, effect on cost of care, access and quality, and avoidance of market power.

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