Federal government can question, reverse mergers

December 1, 2005

In January 2000, three hospitals located in or around Chicago merged to form a single hospital health system. More than four years later, the Federal Trade Commission (FTC) sued to unwind the merger, claiming that it caused substantially higher prices to consumers. On October 20, 2005, an administrative law judge (ALJ) sided with the FTC and ordered the merger unwound.

In January 2000, three hospitals located in or around Chicago merged to form a single hospital health system. More than four years later, the Federal Trade Commission (FTC) sued to unwind the merger, claiming that it caused substantially higher prices to consumers. On October 20, 2005, an administrative law judge (ALJ) sided with the FTC and ordered the merger unwound.

The FTC launched a post-closing investigation of the merger, which culminated in the filing of a complaint in February 2004. The ALJ found that the parties had significant market power for acute-care hospital services in the local market. The ALJ ruled in favor of the FTC and ordered the merger to be reversed. Cited in the ALJ's decision were numerous hospital internal documents containing "smoking gun" statements to the effect that raising prices through eliminating competition was a principal reason for the merger.

During recent years, the FTC and the Department of Justice have been unsuccessful in litigation seeking to block hospital mergers before they close; the two agencies combined were 0-7 in preclosing hospital merger challenges from 1995 to 2002. As a result, the FTC shifted its focus and began evaluating completed hospital mergers for evidence of post-acquisition anticompetitive effects, such as price increases.

Post-closing price increases can attract unwanted government attention. The FTC's expert compared price increases implemented post-merger with price increases implemented by other hospitals in his control group and found that, across all managed care plans, the merged hospitals' price increases exceeded the control groups by 11% to 18%, i.e., if other hospitals raised their prices by 10%, it raised its prices by 21% to 28%. The defendant's expert conceded that post-merger price increases were 9% to 10% higher than price increases by hospitals in his control group. These price increases led to the FTC's lawsuit and ultimately to the ALJ's order requiring an unwinding of the merger.

ANTICOMPETITIVE EFFECTS

In situations where the government has direct evidence of anticompetitive effects, it may get the benefit of relaxed market definition requirements. When the government sues before a hospital merger closes, it typically asks the court to infer probable future anticompetitive effects based on evidence of high market share. Courts often require strict proof of geographic markets in such cases, and the government repeatedly has been unable to make the required showing, thus losing one case after another. In the post-closing context, however, if there is direct evidence of price increases caused by reduced competition, an inference of anticompetitive effects from market share no longer might be required. This, in turn, may relax the government's burden of proof on the relevant market.

It appears that hospital mergers cannot be defended from antitrust attacks on the grounds that the merger is necessary in order to increase bargaining leverage vis-à-vis managed care companies. Officials from the merging hospitals stated that the merger was necessary because large managed care companies were driving down prices. The ALJ rejected this justification, observing that "the antitrust laws afford neither solace nor escape from the rigors of competition induced by managed care."

This column is written for informational purposes only and should not be construed as legal advice.

Barry Senterfitt is a partner in the insurance industry practice of Akin Gump Strauss Hauer & Feld LLP, and is located in the firm's Austin, Texas, office.