The number of hospitals involved in mergers has increased 62% since 2009. Because of the costs of providing quality health care and additional regulations from the Affordable Care Act (ACA), stand-alone hospitals have been incentivized to merge with larger hospital systems to cut costs and increase profitability. “Notwithstanding these merger-rich conditions, the Federal Trade Commission (FTC) and the U.S. Department of Justice’s Antitrust Division remain vigilant in challenging alleged anticompetitive hospital mergers,” said William Roach, Jr. in a recent article in AHLA Connections. (Roach, “The Weakened Competitor Justification: How Weak is Weak Enough,” AHLA Connections, July 2012)
Merging hospitals have to address the antitrust laws that seek to insure competitive markets. These laws prohibit mergers and acquisitions where their effects may be substantially to lessen competition, and the agencies listed above evaluate whether a merger is anticompetitive. Recently, these agencies have denied or unraveled several hospital/system mergers when they determined that those mergers were anti-competitive.
Merging parties have used the “weakened competitor” justification to rebut the presumption of an illegal merger. The weakened competitor justification essentially says that if the merging parties can prove that the acquired firm’s current market shares overstate its future competitive significance due to its weak financial condition, the merger will stand.
However, a health system in Ohio recently used the weakened competitor justification as its central argument when the FTC challenged its acquisition of a nearby hospital. The administrative law judge, as well as FTC commissioners ultimately denied the justification. An FTC commissioner noted in an address to the George Mason Law Review’s Symposium in 2011 that to invoke the weakened competitor justification with success, “Parties need to explain the present evidence that their financial difficulties are serious and durable, will adversely affect their long-term competitiveness, and can only be resolved by the proposed merger. The weakened firm defense tends to be more effective when it is presented in conjunction with other credible reasons to believe that a transaction will not substantially lessen competition, rather than as the sole, or principal, defense to a transaction.” (Remarks of J. Thomas Rosch, Commissioner, Federal Trade Commission)
The Ohio case, Mr. Roach noted, leaves open the question of how weak a hospital must be to successfully invoke the defense. He added, “the weakened competitor justification, while not appropriate in every merger challenge, does have its place in certain hospital mergers, especially given changes in the payment environment and current economic conditions.” (Roach, “The Weakened Competitor Justification: How Weak is Weak Enough,” AHLA Connections, July 2012)
In the iProtean course Mergers & Acquisitions as a Strategic Option, Monte Dube, Esq., Dan Grauman, Kit Kamholz and Michael Irwin discuss the strategic implications of mergers.
Monte Dube, Esq., Proskauer
Today there are many fewer independent hospitals than there were even a decade ago. It is increasingly difficult for independent hospitals to have the scale and the expertise to create the efficiencies that are increasingly needed in a health reform environment. As a result, more and more independent hospitals are considering the potential benefits of aligning with larger organizations . . .
Assume your organization is in a growth mode, what would be the benefit of adding one or more hospitals to your health system? Well, there are potentially many. Number one, you can spread your costs across more organizations by bringing another organization in. You can have greater purchasing power from group purchasing organizations as a larger organization. You may have increasing leverage with third party payers in terms of your contract negotiations. It may enhance your geographic diversity. Hopefully it will increase your quality because you will take best practices both from your organization and from the others and apply the best of both worlds to the new larger, enhanced organization . . .
Daniel Grauman, DGA Partners
You need to be viable. You need to be able to run a financially viable organization. You must have access to capital, and you have to make a judgment. None of us have a crystal ball. You do the best you can and you have to make a judgment about whether your hospital can remain independent. Once you determine that, and let’s say you decide that we really can’t go it alone and we need to be part of something, you have to figure out exactly why. What is the rationale?
The pundits suggest that in the future scenario with the advent of the health reform law, accountable care organizations and the movement towards taking responsibility for managing the health of populations as opposed to the current volume-based fee-for-service model, that you need to be bigger. You need to have a stronger financial underpinning to assume risk and to be able to afford the infrastructure, the information technology, the more advanced care management systems, the integration initiatives with your physicians, all of which take money, capital, resource and depth and a stronger bench to be able to survive in this kind of environment. Is this what we need to be viable? And then you can launch the process of determining the details of perhaps who would be your best partners and how you might partner with them . . .
Monte Dube, Esq., Proskauer
Hospital and health system mergers and consolidations are complicated. They’re complicated at multiple levels: financially, legally, clinically. But typically there are answers to all of those questions. What it often comes down to in my experience is whether the fit is right, the cultural alignment. That requires a lot of work, typically board to board, board chairman to board chairman, to make sure that what you are creating is something that will be right for your organizations once you’ve merged.
For more details and up-to-date information on mergers & acquisitions, consider attending the iProtean Symposium where Monte Dube and Dan Grauman will speak/conduct workshops on this topic.
Look for a new iProtean advanced course, Affiliations & Partnerships, later this year.
For a complete list of iProtean courses, click here.
iProtean Symposium & Workshop
Mark the Date!! October 10 – 12, 2012 at The Lodge at Torrey Pines, La Jolla, CA. Faculty: Barry Bader, Monte Dube, Esq., Lisa Goldstein, Dan Grauman, Marian Jennings and Brian Wong, M.D. For more information, click here.
For more information about iProtean, click here.