Legal View: Health care horizontal merger guidelines are changing

By Barry Rosen

The Daily Record Newswire

Recent federal guidance should remind health care organizations to evaluate the antitrust laws carefully when considering a merger with an actual or potential competitor.

The federal Clayton Act prohibits firms from merging with competitors (that is, merging horizontally) when the effect of such merger may be to lessen competition substantially or to tend to create a monopoly, even when neither of the merging firms actually intends to create a monopoly or otherwise exploit market power.

This past August, the Federal Trade Commission and the U.S. Department of Justice issued guidelines clarifying how the agencies will interpret and enforce the Clayton Act and other federal antitrust laws with respect to horizontal mergers, revising guidelines issued in 1992 and 1997.

These changes are particularly important because courts generally adopt the guidelines' substantive standards when interpreting the broad and unspecific language of federal antitrust law. Courts have even used the guidelines to reject federal enforcement actions.

The old guidelines

Traditionally, the guidelines relied heavily on objective mathematical models to determine whether a horizontal merger would violate antitrust law.

The key question was always whether, in theory, the merger would so concentrate market shares that the merged firm in the relevant market could increase the price of the firm's relevant product by approximately 5 percent without losing profits to consumer substitution.

The guidelines attempted to answer the component parts of that question: How broadly should the firms' geographic and product markets be defined? What percentage of consumers would theoretically leave the market if prices rose? What metric should be used to determine how concentrated a market must become to raise antitrust concerns?

The new guidelines

While those objective models still have a significant role, the guidelines now make clear that the essence of the antitrust law of horizontal mergers is preventing consumer harm from anti-competitive behavior in the marketplace.

No particular metric or threshold will bar the FTC or DOJ from pursuing enforcement actions. The guidelines now place greater emphasis on so-called "soft factors" that rely more on qualitative judgments rather than quantitative modeling.

Non-price impacts

First, the new guidelines emphasize non-price impacts on consumers, such as lower service quality or decreased variety.

The shift away from price especially concerns health care providers because typically, large third-party payers fix prices for health care services across a range of providers. Thus, provider mergers rarely cause obvious price increases.

Health care mergers, however, can impact the variety of providers and services that consumers may access. Mergers may decrease access to particular treatments or technologies as well.

Some mergers may subtly increase overall health care costs, not by increasing reimbursement rates, but by shuttering health care facilities that receive low reimbursement rates to direct patient flow to facilities that receive higher rates of reimbursement.

Market concentration

Second, market definition and market concentration metrics are no longer hard thresholds for federal enforcement actions. However, this is a two-edged sword.

The new guidelines indicate a higher tolerance for concentration than the old guidelines. However, the lack of concentration in a market traditionally served as a roadblock to enforcement actions, which may no longer be the case.

Market segmentation

Third, the guidelines now make clear that the federal government will use antitrust law to protect certain consumer segments in the market that may be adversely impacted by a merger, even if the average consumer would not be hurt.

Physicians consolidating to take advantage of patient-centered medical home programs should be wary of how they articulate the benefits of that model for high-risk, high-use patients. Would the benefits be increased patient compliance with treatment and less frequent acute episodes? Or, would the benefits be decreased use of services, more provider control of patient flow and narrowed treatment options for persons needing costly acute or specialized services?

Subtle collusion

Fourth, the new guidelines emphasize that the federal government will take a hard look at increased coordination between competitors in the wake of a merger, even if the competitors justify the coordination on patient welfare grounds.

In the government's view, easy coordination between providers increases the probability that providers may subtly collude to disadvantage consumers in non-obvious ways.

Internal estimates

Finally, the new guidelines call for the federal government to scrutinize the merging parties' own, real-time estimates of the market impact of the merger in addition to using mathematical models. Health care organizations should be cautious in how they portray the impact of a proposed merger even internally, because the FTC or DOJ may later seek organizations' internal documents.

Conclusion

Despite the new guidelines, the FTC's recent enforcement actions have continued to emphasize traditional market definition and concentration metrics.

Nevertheless, it can be expected that the federal government will be using more qualitative and subtle factors to evaluate a horizontal merger under the new guidelines, and, therefore, the risk of an investigation will increase.

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Barry F. Rosen is the chairman and CEO of the law firm of Gordon, Feinblatt, Rothman, Hoffberger & Hollander, LLC, and he can be reached at 410-576-4224 or brosen@gfrlaw.com. Jonathan E. Montgomery is an associate in Gordon, Feinblatt's Business and Health Care Practice Groups, and he can be reached at 410-576-4088 or jmontgomery@gfrlaw.com.

Published: Thu, Jul 21, 2011