The fact that there has been an increase in mergers and acquisitions among provider organizations is obvious. In 2014 alone, over 750 merger and acquisition transactions took place, totaling $62 billion (see 60 Statistics & Thoughts On Healthcare, Hospital And Physician Practice M&A; U.S. Health Services Mergers & Acquisitions Reach $36.5 Billion In Third-Quarter 2014, Up 5.7% Over 2013; and 88% Of Health Care Executives Plan To Pursue Mergers & Acquisitions During 2014). This period of consolidation includes every sector of health care – with 178 hospitals involved in transactions and behavioral health experiencing more mergers in 2014 than in the previous four years, combined.
Consolidation has been seen by many CEOs as a strategy necessary for long-term survival given the changing environment in health and human services – including more value-based reimbursement, more managed care, and decreased funding specific for safety-net organizations. However, the assumption that provider organization executives can merge without any consideration to market factors has been refuted by recent actions by the Federal Trade Commission (FTC), which has brought high-profile court challenges to health system mergers, including successful challenges to mergers in Georgia, Ohio, and Illinois over the last two years (see F.T.C. Wary Of Mergers By Hospitals). While the federal government seems to be incentivizing consolidation on one hand, it is increasing its scrutiny of mergers on the other. This makes for uncertainty for health and human service executives. But, if you are an executive thinking about a merger, you can improve your strategy by examining how the FTC has handled recent merger challenges.
A recent case in Pennsylvania provides a window into the changing FTC view of provider organization mergers. A federal district court judge handed over a rare denial to the FTC for a preliminary injunction that would have halted the merger of two prominent regional hospital systems (see Memorandum Opinion And Order) – Pinnacle Health and Penn State Hershey Medical Center. In an even rarer move, the FTC responded with an appeal to the denial – the first such appeal in over 20 years (see Judge Delivers FTC Rare Healthcare Loss In Pennsylvania Hospital Case).
Pinnacle Health, a 607-bed, $1 billion non-profit health system based in Harrisburg, Pennsylvania, has been in negotiations to merge with 508-bed, $1.7 billion Penn State Hershey Medical Center, creating a new Pinnacle-branded “mega” health system that FTC officials estimate would capture 64% of the regional market. The health systems based their case for a merger on the marketplace dynamics that have resulted from the Patient Protection and Affordable Care Act (PPACA). They argued that new models of care and risk-based payment arrangements are requiring greater consolidation among health systems in order to achieve economies of scale and efficiencies that are necessary for long-term survival.
Similar mergers have taken place among other provider organizations in the same south-central Pennsylvania region, each resulting in health systems with revenue measured in the billions of dollars. However, the FTC’s argument in this case hinges on the potential market dominance of the new health system which would, in their opinion, reduce competition, providing the health system with the ability to dictate higher prices within the regional health care market. Pennsylvania insurance companies also expressed concerns about their ability to build broad networks in a monopsonistic environment dominated by a single dominant purchaser. Additionally, the FTC argued that less competition could decrease the quality of health care provided.
Federal district judge John Jones III based his denial of the preliminary injunction on the FTC’s failure to demonstrate that it could ultimately win the case. He criticized the FTC for defining too narrowly the four-county regional market where the two health systems operate and concurred with the health systems, stating in his opinion that “our determination reflects the health care world as it is, and not as the FTC wishes it to be. We find it no small irony that the same federal government under which the FTC operates has created a climate that virtually compels institutions to seek alliances such as the hospitals intended here” (see FTC & Commonwealth Of Pennsylvania vs. Penn State Hershey & Pinnacle Health System Memorandum Opinion And Order).
The judge’s opinion allowed for the health systems to merge; however, the FTC and the Commonwealth of Pennsylvania filed their appeal (see Memorandum Of Law In Support Of Plaintiffs’ Motion For Unjunction Pending Appeal). This was followed quickly by a two-week extension of the injunction on the merger (see Judge Puts Pinnacle-Hershey Merger On Ice For Two Weeks). The appeal halts the merger – at least temporarily – until the case can be heard in court.
Central to the FTC’s appeal is that, should the merger be allowed to proceed, nothing would stop the two health systems from being able to share sensitive data and information that would otherwise violate antitrust laws, permanently altering market dynamics within the region. Once the egg is scrambled, the FTC warned, it could not be unscrambled:
An injunction pending appeal is necessary to preserve the status quo, which would otherwise be irreparably altered if the merger occurs while appellate review proceeds. Indeed, courts have recognized that it would be difficult for the FTC to “unscramble the egg,” i.e., unwind a consummated transaction once the merging parties begin to consolidate operations….Moreover, an injunction would prevent immediate irreparable injury to consumers and competition (see Memorandum Of Law In Support Of Plaintiff’s Motion For Injunction Pending Appeal).
This is an interesting development for all provider organizations – in an era when many are asking, “how big do we need to be to develop the infrastructure we need to thrive?”, there is now the added question of, “when is big, too big?” for a given market (see Is $400 Million The Number?)? As models of care continue to evolve, the line between payer and provider is blurred, further complicating standards for competitiveness. Payers are increasing their service capacity just as providers are moving to accountable care models defined by capitation and other risk-based payment models. Given these reforms, FTC oversight should weigh more than just bed capacity in its investigation of mergers, including elements such as payer market concentration.
For more information on developing a merger and acquisition strategy, be sure to join me at The 2016 OPEN MINDS Strategy & Innovation Institute on June 9 for the session, “A Guide to Being Acquired: Why Becoming Part of A Larger Organization May Be The Right Move,” featuring Ben Marsh, Board Member, Monarch & Friends of Club Horizon; Jonathan Evans, MS, CEO, Safe Harbor Behavioral Health & InnovaTel Telepsychiatry; and Jennifer L. Craig, MA, MS, LCPC, SPHR, SHRM-SCP, Chief Operating Officer, Centerstone of Illinois.