June 23, 2022
W. Todd Miller
Introduction
The Federal Trade Commission (FTC) has been remarkably busy of late, and its primary enforcement focus in the antitrust arena appears to be healthcare. In recent moves that suggest an increasingly progressive agenda, the FTC has announced challenges to two separate mergers of healthcare systems and a long-anticipated examination of, and a policy statement about, the role of pharmacy benefit managers (PBMs) in the pharmaceutical supply chain.
Meanwhile, healthcare matters at the US Department of Justice (DOJ) have been outwardly quiet since its somewhat surprising twin losses of the criminal cases charging healthcare companies with wage fixing and non-solicitation agreements (for further details please see “Department of Justice set back by acquittals in labor antitrust cases“). Yet, the DOJ does have a case from earlier in 2022 against the country’s largest health insurer’s acquisition of a software and electronic data interchange provider to competing insurance companies.
What this demonstrates quite vividly is the priority that the Biden administration is giving to antitrust enforcement in healthcare, one of the largest sectors of the US economy and a major factor in governmental spending.
FTC’s PBM study and policy statement
The role of PBMs in the pharmaceutical supply chain has become increasing controversial, in large part because of the notoriety of certain pricing practices in which they engage, including the issuance of rebates by the pharmaceutical manufacturers to the PBMs that are not reflected in prices paid by consumers. While this and other concerns about PBMs have been raised for some time, the FTC has now taken formal action to investigate the role of PBMs and their pricing practices since a 2004-2005 study. Without waiting for the information gleaned from that investigation, the FTC quickly followed the investigation’s announcement with a policy statement about PBM practices.
After failing to get a majority of commissioners to agree to commence a formal inquiry in February 2022 (on a 2-2 tie since Commissioner Bedoya had not yet been confirmed), the FTC did seek public comment on the effect that PBMs were having on “drug affordability and access”. But with a 3-2 majority in place at the Commission and an opportunity to respond to the criticisms that the Republican commissioners had raised in February 2022, a unanimous FTC authorized the issuance of formal process to six different companies. These companies are required to respond within 90 days with information about, among other things, their methods to steer patients to PMB-owned pharmacies, the impact of rebates from drug manufacturers and the use of specialty drug lists. Just days after announcing the formal inquiry, the FTC issued a policy statement that set out how PBM practices could violate the antitrust laws. (The policy statement will be explored in further depth in an upcoming article.)
FTC’s healthcare system challenges
Earlier in June 2022, the FTC filed suit to block two separate mergers of healthcare systems. The FTC filed both a complaint for a temporary restraining order and a preliminary injunction in federal court, and an administrative complaint to prevent RWJBarnabas Health from acquiring Saint Peter’s Healthcare System. On the same day, the FTC filed in federal court and in an administrative proceeding to prevent HCA Healthcare and Steward Health Care System from merging. While the timing of the dual challenges is highly unusual, the apparent theories of competitive harm in each case appear to be fairly standard.
RWJBarnabas/Saint Peter’s
The challenge to RWJ’s acquisition of Saint Peter’s centers on the allegation that the transaction would lessen competition for inpatient general acute care services, the traditional market for the analysis of hospital mergers. The FTC alleges that because RWJ and Saint Peter’s operate hospitals less than a mile away from each other in the New Brunswick, New Jersey, area, their combination would give them over 50% of the market, which the FTC defined as the county in which New Brunswick is located. The FTC further noted that there were no other general acute care hospitals in New Brunswick making the proposed combination of RWJ/Saint Peter’s more likely to demand higher reimbursements from insurers. In light of the FTC’s challenge, RWJ has abandoned its proposed merger.
HCA/Steward
The proposed combination of HCA and Steward allegedly would combine the second and fourth largest healthcare systems in the Wasatch Front region of Utah, which is the most populous area of Utah, and includes the cities of Salt Lake City, Provo and Ogden. The relevant service market is the “adult inpatient general acute care”. In terms of the geographic markets alleged by the FTC as relevant for antitrust analysis, they are broken down into three parts of the Wasatch Front region (north, central and south).
HCA is alleged to own six hospitals in that region, while Steward owns five. In the northern and southern markets, the FTC alleges that the merger would reduce the competitors from three to two; while in the central market, it would be four to three. The FTC also alleges that Steward is a low-cost provider and the combination would give HCA more bargaining power and allow it to receive even higher reimbursement rates than it currently receives.
Moreover, three of Steward’s hospitals trace their lineage to a divestiture by HCA in 1995 to avoid an antitrust challenge to HCA’s then-acquisition of Healthtrust, Inc. In the meantime, HCA had opened two new hospitals in the region. HCA and Steward have also abandoned this transaction in light of the FTC’s actions.
Other FTC healthcare activities
These are not the only matters in the healthcare market that the US enforcement agencies are pursuing. The FTC had been aggressively pursuing other hospital mergers, including Hackensack/Englewood in New Jersey and Lifespan/CNE in Rhode Island. Both of these transactions were abandoned. In a recent pharmaceutical action, the FTC obtained a consent decree requiring the selling party to retain (and transfer to another one of its subsidiaries) assets relating to a particular injectable drug for which the acquiring party had a product in its development pipeline. It has also completed its administrative litigation involving Illumina’s proposed acquisition of Grail (for further details please see “Expect more of the same: FTC’s novel challenge to Illumina’s acquisition of Grail“) and is awaiting a decision from the administrative law judge.
Moreover, enforcement efforts have not been limited to human healthcare – the FTC recently obtained a consent decree requiring the divesture of certain veterinary clinics and prior approval for future acquisitions by JAB Consumer Partners, a Luxembourg-based private equity firm that already owned two company that operate chains of veterinary clinics. JAB had agreed to acquire SAGE Veterinary Partners, which had clinics that competed with JAB clinics in Texas and California.
DOJ’s merger challenge
Earlier this year, the DOJ sued to prevent UnitedHealth Group from acquiring Change Healthcare. United owns the largest health insurer in the United States along with other entities, such as a pharmacy benefit manager and a healthcare technology business (OptumInsight). Change is the largest electronic data interchange clearinghouse, providing services that allow the transmittal of claim and payment information to and claims review by insurers. While United’s OptumInsight business competes with Change (and hence the merger is a horizontal merger between competitors), the predominant competitive concerns with the transaction are vertical. According to the DOJ’s complaint, Change works with “nearly all” of United’s major health insurance competitors. Should United be permitted to acquire Change, United would be able to access its health insurer competitors’ competitively sensitive information relating to insurance claims, their plan and payment rules, and their competitive innovations. Trial is currently scheduled for August 2022 in the district court in Washington, DC.
Comment
The FTC’s recent healthcare merger cases appear to be very traditional, particularly in the context of recent hospital merger challenges. There is neither use of the concept of “cross market” effects(1) nor focus on labor or other markets that have been traditionally glossed over in the merger review process (for further details please see FTC and DOJ announce plans for merger guidelines overhaul and seek public input). Rather, for the two hospital cases, the FTC proposed a “general acute care” product market – the cluster market that has been traditionally used in hospital mergers. For the geographic market, the analysis focuses on patient movements. And for competitive effects, the focus is on the loss of choice for consumers and the ability of the merging entities to obtain higher reimbursements from payors (which can be the focus of cross market effects). The FTC’s challenge to the HCA transaction does mention how competition for physicians can impact competition for patients, but this is not quite the same thing as alleging that the merger would be anticompetitive because of the impact on labor markets.
The DOJ’s case against United also appears to be a traditional vertical case, as the potential acquired party is the supplier to United’s downstream competitors and would give United the chance to spy on and blunt competitive efforts by those competitors. Even the FTC’s veterinary case, which purports to send a warning shot to private equity acquisitions, is a very traditional horizontal merger challenge – the private equity company controlled veterinary chains that directly competed with the company to be acquired.
While the FTC’s recent hospital challenges do not appear particularly noteworthy apart from the fact that they proceeded on the same day, they and the other healthcare cases reflect an important focus by the US enforcement agencies on healthcare markets. This is not likely to change as healthcare consumes about 19% of US gross domestic product, substantially higher than any other comparable developed country. (And this figure undoubtedly does not include animal healthcare.)
Thus, the main lessons from the recent merger cases are also traditional: for example, in the hospital arena, payors matter. Patient movements alone cannot be looked to define markets or potential competitive harm. This is a lesson that the FTC undoubtedly learned from its prior cases, including its important win in the Penn-Hershey case (where the court of appeals reversed the lower court’s denial of the preliminary injunction sought by the FTC) and its subsequent loss in the Thomas Jefferson University case.(2)
On the other hand, the PBM formal inquiry and policy statement might prove to be bellwethers for further activities that are more in line with the progressive agenda. Until now, the FTC was hindered by the lack of a clear Democratic majority. Since Commissioner Bedoya was sworn in on 16 May 2022, however, there is now a 3-2 Democratic majority allowing potentially more aggressive enforcement actions and theories.
Endnotes
(1) Perhaps somewhat oversimplified, “cross market effects” relate to the impact that a merger of two hospitals (or other providers) could have on payors where the hospitals are not direct competitors but are in close enough proximity to each other that their combination increases their bargaining leverage with payors. Such an effect is most likely to occur where there are employers with geographically dispersed employees.
(2) FTC v Penn State Hershey Med Ctr, 838 F 3d 327 (3d Cir 2016) and FTC v Thomas Jefferson Univ, 505 F Supp 3d 522 (E D Pa 2020) (denying motion for preliminary injunction on grounds, among others, that FTC’s proposed product and geographic markets were not supported by the evidence because the proposed markets focused more on patients, not the insurers who will bear the immediate impact of any price increases).
This content was originally published on June 23, 2022, via the International Law Office (ILO) newsletter. It can be found here: FTC Intensifies Healthcare Activism
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