Consistent with the Biden Administration’s whole-of-government approach to address perceived consolidation in a variety of industries, including in the healthcare industry, the Federal Trade Commission (FTC) and U.S. Department of Justice (DOJ) Antitrust Division (collectively, the Agencies) are continuing to make good on their promise to increase scrutiny of mergers and acquisitions through newly proposed HSR rules and revised merger guidelines.
The draft Merger Guidelines were published on July 19, 2023, by the Agencies just weeks after the FTC issued newly proposed rules under the Hart-Scott-Rodino Antitrust Improvements Act of 1976 (HSR). The Merger Guidelines represent a significant departure from the 2010 Horizontal and Vertical Merger Guidelines, and the proposed HSR rules represent the first time the HSR process has been substantively updated in over 40 years.
If implemented in their current form, both will have the effect of making the merger review process lengthier, more complicated, and more burdensome for virtually all companies, including those operating in the healthcare industry. The Agencies are seeking comments on the Merger Guidelines through September 18, 2023, and the FTC is currently accepting comments on the Proposed HSR Rules, extending the comment period until September 27, 2023.
In addition, the FTC followed DOJ’s lead and voted in July to rescind the Statements of Antitrust Enforcement Policy in Health Care and the Statement of Enforcement Policy Regarding Accountable Care Organizations (ACOs) Participating in the Medicare Shared Savings Program. The withdrawal of these healthcare-related statements by DOJ and the FTC leaves those in the healthcare industry without guidance regarding price and cost information sharing, joint purchasing, and other types of collaborations (including ACOs), and signals heightened scrutiny by the FTC and DOJ of healthcare industry collaborations and information sharing practices.
Agencies Reduce Market Concentration Thresholds, Cast Wide Net for Vertical Transactions, and Push to Examine Labor Market Effects
Despite having a mixed track record regarding litigated merger challenges and investigations in the healthcare industry, the Agencies’ draft Merger Guidelines double down on their aggressive stance toward growth and expansion through healthcare-related mergers and acquisitions. The Merger Guidelines outline the roadmap the Agencies use to evaluate whether a proposed transaction violates Section 7 of the Clayton Act. Section 7 prohibits transactions that “may substantially lessen competition or tend to create a monopoly” in a relevant geographic and service/product line market (15 U.S.C. § 18).
For those in the healthcare industry, some key takeaways from the Agencies’ draft Merger Guidelines include:
- Market Concentration Thresholds. The Agencies propose to decrease the market concentration thresholds used to evaluate whether a transaction presumptively violates antitrust law (measured using the Herfindahl-Hirschman Index) to pre-2010 levels. Alternatively, the Agencies state that an entity or organization with over 30% market share in a relevant service line presents an “impermissible threat of undue concentration regardless of the overall market concentration,” when they are considering a potential merger or acquisition.
- Cluster Markets. The Agencies continue to view cluster markets as an appropriate service line market definition in healthcare provider transactions. For example, a cluster service line definition in a hospital acquisition is inpatient general acute care hospital services.
- Vertical Transactions. The Merger Guidelines have expanded the definition of what constitutes a vertical merger increasing the likelihood that many different types of vertical transactions may be investigated, including those that result in access to rivals’ competitively sensitive data and information. Access to rivals’ competitively sensitive information was the crux of DOJ’s unsuccessful challenge to UnitedHealth Group’s acquisition of Change Healthcare. In particular, Guidelines 5, 6, and 7 (among others) could impact healthcare providers that are looking to partner with or acquire a payor, healthcare technology, medical device, pharmaceutical company, or other company that provides non-clinical healthcare-related services not offered by the healthcare provider. It could also affect providers looking to merge with another system located in a different region.
The Agencies state that vertical mergers or acquisitions will not be allowed to substantially lessen competition by giving a company control over a product, service, or customers that its competitors use to compete or by raising a rival’s costs of, excluding or limiting a rival’s access to a related product/service, and provide a structural presumption of harm if the foreclosure share is above 50 percent. The “foreclosure share” is the share of the related market that is controlled by the merged firm, such that it could foreclose rival’s access to the related product or service on competitive terms.
- Labor Market Scrutiny. DOJ and FTC continue their push to review mergers’ effects on workers, including physicians, nurses, and other medical professionals. In practice, the Agencies are requesting labor market information as part of recent merger investigations. While labor market effects in a merger challenge have not (yet) been litigated, FTC Chair Khan and Commissioner Slaughter issued a statement that they would have supported an allegation of harm to a relevant labor market in the complaint filed to block the merger of Rhode Island’s Lifespan Corporation and Care New England Health System. The Proposed HSR Rules will require submission of labor market data as part of any HSR filing, and Guideline 11 outlines the Agencies’ analysis of potential labor market effects.
- Private Equity Rollups. The Merger Guidelines allow the Agencies to investigate a series of smaller deals made by a company or organization, as well as minority investments. This is consistent with the Agencies’ recent statements that they have concerns with “roll-up transactions” and similar acquisition strategies commonly used by investors
Proposed HSR Rules Are More Expansive and Burdensome
Representing the first salvo to companies considering growth strategies, on June 27, 2023, the FTC announced the proposed HSR rules that represent the first major overhaul of the HSR premerger notification requirements in more than 40 years. Given that the proposed rules require more information from merging parties, it is expected that this will result in lengthier HSR reviews and increase the number of formal investigations opened by the Agencies.
The FTC’s Proposed HSR Rules mirror some of the newly announced Merger Guidelines and will require HSR filers to submit additional or new information as follows:
- Areas of actual or potential competition, vertical supply relationships, and strategic rationale for the transaction
- Detailed information about the post-transaction structure, the parties’ organization, including more information about minority interest holders
- Disclosure of both parties’ acquisitions going back 10 years where there is horizontal overlap
- More expansive disclosure of HSR Item 4(c) and 4(d) documents, including those of supervising deal team leaders and drafts
- Disclosure of labor market data
What Do the New Rules and Guidelines Mean For You?
The bottom line for those in the healthcare industry considering growth and expansion strategies is that the Proposed HSR Rules and the Agencies’ more complex and expansive Merger Guidelines will increase deal timelines, the merging parties’ burden, and overall uncertainty and potential antitrust risk as to the outcome. While they are not yet in place, the Agencies have, in practice, been investigating many of the issues presented in the Merger Guidelines such as labor market effects, vertical concerns, and cross-market theories of harm. Given that the Agencies are already putting the Merger Guidelines into practice, healthcare industry participants should carefully consider issues like risk shifting provisions, clearance strategy, the appetite for litigation, possible remedies, and settlement options at the beginning of a proposed transaction.
Many thanks to Husch Blackwell summer associates Elizabeth Spaeth and Winston Bribach for their assistance in preparing this post.
 A federal district court judge allowed UnitedHealth Group’s acquisition of Change Healthcare to proceed blocking DOJ’s attempt to challenge the proposed transaction on the grounds that it would allow UnitedHealth Group access to other payors’ competitively sensitive information. See https://www.justice.gov/atr/case/us-et-al-v-unitedhealth-group-inc-and-change-healthcare-inc. In a separate transaction, it has been reported that UnitedHealth Group’s acquisition of home health provider LHC closed earlier this year after a lengthy investigation by the FTC.