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Virginia’s Certificate of Need Laws May Stay, Fourth Circuit Says

On January 21, the U.S. Court of Appeals for the Fourth Circuit upheld Virginia’s Certificate of Need (CON) laws, ruling that the scheme does not illegally discriminate against out-of-state health care providers. See Colon Health Ctrs. v. Hazel, No. 14-2283 (4th Cir. Jan. 21, 2015).

In Virginia, and the 35 other states with CON laws, health care facilities are required to obtain government approval before establishing or expanding certain medical facilities and undertaking major medical expenditures. CON laws require applicants to show sufficient public need for the expenditure in question and thereby attempt to reduce healthcare costs by preventing excess capacity and unnecessary duplication of services and equipment.

The plaintiff-appellants in the case were two out-of-state outpatient providers that sought to open facilities to provide medical imaging services in Virginia. Their request for a CON for new CT scanners and MRI machines was denied. The plaintiff-appellants subsequently challenged the laws as putting an undue burden on interstate commerce in violation of the dormant commerce clause. The Fourth Circuit affirmed the district court’s ruling that the CON requirement neither discriminated against nor placed an undue burden on interstate commerce because both in-state and out-of-state providers were required to abide by the CON requirement.

Previously, in October 2015, the Federal Trade Commission (FTC) and U.S. Department of Justice’s Antitrust Division (DOJ) issued a joint statement urging Virginia to consider changes to its CON laws. Both agencies argued that CON requirements create significant competitive concerns by suppressing supply and misallocating resources. Moreover, FTC and DOJ said the requirements have not been shown to lower costs or improve the quality of care for consumers. The agencies said that CON requirements can hinder “the efficient functioning of health care markets” by allowing an existing provider to file challenges to prevent or delay competition from a rival. Additionally, they may enable anticompetitive agreements among providers to pursue CON approval for separate services. The Fourth Circuit’s recent opinion may lessen the likelihood that the FTC or DOJ would separately challenge Virginia’s CON laws, but the agencies are likely to remain active in speaking out against CON requirements in Virginia and elsewhere.




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FTC and Pennsylvania Attorney General Challenge Health System Combination

The Federal Trade Commission (FTC) and Pennsylvania Attorney General (AG) have challenged the proposed combination of The Penn State Hershey Medical Center (Hershey) and PinnacleHealth System (Pinnacle) in Harrisburg, Pennsylvania. The FTC complaint alleges that the combination would create a dominant provider, reduce the number of competing health systems in the area from three to two, and result in a 64 percent share of the market for general acute care inpatient hospital services.

Hospitals and health systems pursuing mergers with a competitor should be mindful of the antitrust enforcement climate in health care and incorporate antitrust due diligence into their early transaction planning. Moreover, this case highlights that providers seeking to proactively alleviate the potential anticompetitive effects of a transaction should anticipate continued skepticism by the FTC of claims of procompetitive efficiencies and its dismissal of the merging parties’ newly negotiated, post-closing pricing agreements with payors.

Summary of Administrative Complaint

Parties and Transaction

Hershey is a nonprofit healthcare system headquartered in Hershey, Pennsylvania, about 15 miles west of Harrisburg. The system has two hospitals in the Harrisburg area: the Milton S. Hershey Medical Center, an academic medical center affiliated with the Pennsylvania State University College of Medicine, and the Penn State Hershey Children’s Hospital, the only children’s hospital in the Harrisburg area.  Hershey has 551 licensed beds and employs 804 physicians offering the full range of general acute care services.  In its 2014 fiscal year, Hersey generated $1.4 billion in revenue and discharged approximately 29,000 patients.

Pinnacle is nonprofit healthcare system headquartered in Harrisburg. Pinnacle’s system includes three hospitals in the Harrisburg area: PinnacleHealth Harrisburg Hospital, PinnacleHealth Community General Osteopathic Hospital, and PinnacleHealth West Shore Hospital. The system has 662 licensed beds divided among the three hospitals. In its 2014 fiscal year, Pinnacle generated $850 million in revenue and discharged more than 35,000 patients.

Pursuant to a letter of intent executed in June 2014, the parties would create a new legal entity to become the sole member of both health systems. The parties would have equal representation on the board of directors of the new entity.

Relevant Markets

The FTC complaint alleges that the appropriate scope within which to evaluate the proposed transaction is the market for general acute care (GAC) inpatient hospital services in a four-county area around Harrisburg. This alleged product market encompasses a broad cluster of medical and surgical diagnostic and treatment services that require an overnight in-hospital stay. Although the effect on competition could be analyzed for each affected medical procedure or treatment, the FTC considered the cluster of services as a whole because it considers the services to be “offered to patients under similar competitive conditions, by similar market participants.”

The FTC limited the geographic market to an area which includes Dauphin, Cumberland, Perry and Lebanon Counties. These four counties, according to the FTC, are “the area in which consumers can practicably find alternative providers of [GAC services].” Consequently, hospitals located outside of this area [...]

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FTC Comments Discourage Legislation Purporting to Grant Antitrust Immunity for Health Care Providers

In late September, the Federal Trade Commission (FTC) submitted comments to the Virginia and Tennessee Departments of Health regarding each state’s proposed rules concerning hospital cooperation agreements. These proposed rules permit two or more hospitals to consolidate by merger or other combination of assets if, in the departments of health’s view, the benefits of the cooperative agreement outweigh any disadvantages caused by a reduction in competition. While the main purpose of the comments was to offer FTC assistance in the states’ evaluation of such agreements, the FTC re-iterated its position that “legislation purporting to grant antitrust immunity is un-necessary to encourage procompetitive collaborations among health care providers.” In fact, according to the FTC, such legislation is more likely to harm consumers.

The FTC believes the “antitrust laws are consistent with the laudable public policy goals of improving quality, reducing costs, and improving patient access for health care services.” With that position in mind, the FTC’s letters to the Virginia and Tennessee Departments of Health suggest that antitrust regulators should be focused on prohibiting agreements among providers that could harm competition rather than encouraging the creation of new agreements.  Specifically, the FTC stressed that “efforts to shield such conduct from antitrust enforcement are likely to harm [state] health care consumers, no matter how rigorous or well-intentioned the regulatory scheme may be.”

Under the proposed rules, the states must weigh the benefits resulting from the cooperation agreements against any potential disadvantages likely to result from a reduction in competition.  Both states’ rules specifically outline factors to be considered during the process. Potential benefits of cooperation agreements as noted in the FTC comments include the following:

  • Enhancement in quality of care and population health status
  • Preservation of hospital facilities to ensure access to care
  • Gains in cost-efficiency of hospital services provided
  • Improvements in utilization of hospital resources and equipment
  • Avoidance of duplication of hospital resources
  • Increases in access to hospital services for medically underserved populations
  • Participation in the state Medicaid program
  • Reductions in the total cost of care

Dis-advantages of such agreements that the states propose to consider include the following:

  • The adverse impact on the ability of payers to negotiate reasonable payment and service arrangements with providers
  • A reduction in competition among providers
  • An adverse impact on patients in the quality, availability and price of health care services
  • The availability of alternative arrangements that are less restrictive to competition and achieve the same benefits or a more favorable balance of benefits over dis-advantages

While these factors align with those that the FTC considers when reviewing a potential provider transaction, state authorities and the FTC differ on whether it is sound policy to encourage cooperation agreements among providers. The state legislators seek to allow cooperation agreements to move forward without fear of potential antitrust enforcement. Conversely, the FTC thinks legislation protecting provider cooperation agreements is un-necessary to encourage procompetitive collaborations and potentially harmful to the extent it shields anticompetitive collaborations from antitrust enforcement. In any event, providers entering such [...]

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FTC Settles Allegations of HSR Act Violation by Activist Investment Fund

The Federal Trade Commission (FTC) announced a settlement on August 24, 2015, with Third Point Funds for failing to file a notification under the Hart-Scott-Rodino Antitrust Improvements Act (HSR Act) in connection with the acquisition of shares in Yahoo! Inc. (Yahoo) in 2011. Third Point Funds initially did not file and observe the HSR waiting period because it believed its acquisitions were exempt under the so-called “investment-only” exemption. The settlement provides insight into how the FTC interprets the investment-only exemption, and an important reminder that the HSR Act is a procedural statute for which the lack of competitive effect has no bearing on how the FTC chooses to enforce violations of its reporting requirements.

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Has Antitrust Enforcement Been ‘Reinvigorated’ Under Obama?

In the 2008 presidential election campaign, then-candidate Barack Obama promised to “reinvigorate” antitrust enforcement. Over the last few years, several observers have concluded that the Obama administration’s antitrust record is not substantially different from that of his predecessor. Conventional wisdom suggests that antitrust enforcement is non-partisan. Some key statistics bear out this conclusion, but a comparative review of the data in Hart-Scott-Rodino (HSR) Annual Reports published jointly by the Federal Trade Commission (FTC) and the U.S. Department of Justice (DOJ), including the recently issued fiscal year 2014 report, reveals some significant differences in antitrust enforcement during the Obama administration.

Analyzing the first six years of each administration reveals some superficial differences, but also significant continuity. Between 2001 and 2006, the agencies received a total of 9080 HSR filings; in 2009–2014 they received only 7530 filings. The total number of filings reviewed by the agencies also declined in absolute terms in the Obama years (Bush: 1537; Obama: 1251). Yet the percentage of filings reviewed has been remarkably consistent at slightly less than 17 percent of filings received in each period (Bush: 16.9 percent; Obama: 16.6 percent). The same consistency applies to Second Requests issued. The agencies actually issued a higher number of Second Requests in the first six years of the Bush administration compared to the same period in the Obama administration (Bush: 284; Obama 275). Given the lower number of filings in 2009–2014, the number of Second Requests as a percentage of all filings reviewed was higher in the Obama years, but only slightly (Bush: 3.1 percent; Obama: 3.7 percent).

If the analysis stopped there, we might conclude that antitrust review and enforcement has changed little during the Obama years. But data for the individual agencies reveals a different picture. In the Bush years, the FTC issued 142 Second Requests compared to 134 during the Obama years. Once again, given the different volume of transactions, this difference in absolute numbers results in no meaningful change in the Second Requests issued as a percentage of the transactions reviewed (Bush: 15.3 percent; Obama: 15.4 percent). For the DOJ, however, the numbers reveal a different story. Although the DOJ issued an almost equal number of second requests in each administration (Bush: 142; Obama: 141), as a percentage of all transactions reviewed by the DOJ, this steady rate results in a significant increase in the total as a percentage of the transactions reviewed; 23.4 percent during the Bush administration, compared to 37.1 during the Obama administration.

The number of enforcement actions pursued by each agency also reveals significant differences. The FTC launched nine more actions under Obama than it did under Bush (Bush: 113; Obama: 124). These totals translate to a modest two percent increase when measured as a percentage of the transactions reviewed by the agency (Bush: 12.1 percent; Obama: 14.2 percent). At the DOJ, the total number of enforcement actions also increased, from 86 under Bush to 101 under Obama. Given the different number of transactions reviewed, however, this change almost doubled [...]

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FTC Releases Section 5 Guidelines

On Thursday, August 13, 2015, the Federal Trade Commission (FTC) released a Statement of Enforcement Principles Regarding “Unfair Methods of Competition” Under Section 5 of the FTC Act. The statement was passed by a 4–1 vote, with Commissioner Ohlhausen voting against the statement. This is the first time the Commission has issued formal guidelines regarding its Section 5 authority. The guidelines were released after growing calls from Republican commissioners and congressmen to clarify the reach of the Commission’s enforcement power under Section 5.

The Commission set out the following three principles that the FTC will adhere to when challenging unfair methods of competition on the basis of Section 5 alone:

  • the Commission will be guided by the public policy underlying the antitrust laws, namely the promotion of consumer welfare;
  • the Commission will evaluate the act or practice under a framework similar to the rule of reason, that is, an act or practice challenged by the Commission must cause, or be likely to cause, harm to competition or the competitive process, taking into account any associated cognizable efficiencies and business justifications; and
  • the Commission is less likely to challenge an act or practice as an unfair method of competition on a stand-alone basis if enforcement of the Sherman or Clayton Act is sufficient to address the competitive harm arising from the act or practice.

Commissioner Ohlhausen’s dissenting statement criticized the content of the guidance as “seriously lacking” and noted that “what substance the statement does offer ultimately provides more questions than answers, undermining its value as guidance.” Ohlhausen went on to condemn the lack of public comment and discussion that went into the preparation of the policy statement. Finally, she warned that the FTC staff would be “embolden[ed] . . . to explore the limits of [unfair methods of competition] in conduct and merger investigations” and that the guidance would “ultimately lead to more, not less, uncertainty and burdens for the business community.”

The policy statement notes that its purpose “is to provide the Commission’s view on how it approaches the use of its statutory authority.” Chairwoman Ramirez stated in her prepared remarks that “[t]he statement formally aligns Section 5 with the Sherman and Clayton Acts” and “does not signal any change of course.”

 

 




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Four FTC Commissioners Reject Wright’s Call for GUPPI Safe Harbor

Four members of the Federal Trade Commission (FTC) issued a statement on July 13, 2015, disputing claims by a fellow commissioner that the 2010 Horizontal Merger Guidelines include a “safe harbor” that is available in unilateral effects merger investigations. Commissioner Joshua Wright’s comments about the potential safe harbor arose in the context of the Commission’s investigation into Dollar Tree’s proposed acquisition of Family Dollar Stores, Inc. The FTC has accepted a proposed settlement to resolve the alleged anticompetitive effects of that transaction.

The dispute involves a Gross Upward Pricing Pressure Index (GUPPI) analysis. The GUPPI analysis permits the federal antitrust enforcement agencies to assess whether a merger involving differentiated products is likely to result in unilateral anticompetitive effects. Such effects can arise where the merged entity can profit from diverted sales. The GUPPI measures the value of diverted sales that would be gained by the second firm measured in proportion to the revenues that would be lost by the first firm.

The 2010 Horizontal Merger Guidelines anticipate the use of such an analysis in certain cases. Indeed, according to the guidelines, “[i]f the value of diverted sales is proportionately small, significant unilateral price effects are unlikely.” Commissioner Joshua Wright pointed to this language, and statements by one of the principal drafters of the 2010 Guidelines, to argue that the Department of Justice had already publicly announced a safe harbor where the GUPPI is less than five percent. Commissioner Wright argued that there was a strong legal, economic and policy case in favor of such a safe harbor, and urged the FTC to “adopt a GUPPI-based safe harbor in unilateral effects investigations where the data are available.”

Wright’s fellow commissioners firmly disagreed that any safe harbor has previously been identified, or that such a safe harbor is appropriate. In their statement, Chairman Ramirez and Commissioners Brill, Ohlhausen and McSweeney explained that the GUPPI analysis serves “as a useful initial screen to flag those markets where the transaction might likely harm competition and those where it might pose little or no risk to competition.” They emphasized that the GUPPI analysis is “only a starting point” in a merger investigation. The commissioners further claimed that Commissioner Wright’s remarks ignored “the reality that merger analysis is inherently fact-specific” and that “[t]the manner in which GUPPI analysis is used will vary depending on the factual circumstances, the available data, and the other evidence gathered during an investigation.” The commissioners concluded that “accumulated experience and economic learning” do not provide an adequate basis for recognizing a GUPPI safe harbor. The Commission will continue to “use GUPPIs flexibly and as merely one tool of analysis in the Commission’s assessment of unilateral anticompetitive effects.”




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FTC Comment: Minnesota Law Requiring Public Disclosure of Health Care Contract Data Increases Risk of Anticompetitive Behavior

On June 29, 2015, the Federal Trade Commission (FTC) responded to a request for comment from two Minnesota state legislators concerning recently enacted amendments to the Minnesota Government Data Practices Act (MGDPA). Under the amendments, the MGDPA would be expanded to cover all data collected by health maintenance organizations, health plans, and other health services vendors that contract with the state to provide health care services to Minnesota residents. In practice, this means that the confidential terms and conditions of health plans’ contracts with health care providers could be subject to public disclosure.

While they commended the “laudable goals” of the MGDPA, the FTC ultimately concluded that the amendments could lead to the disclosure of competitively sensitive information and, therefore, increase the likelihood of anticompetitive behavior. Specifically, there were two major concerns raised in the FTC comment.

First, the amendments likely would lead to the exchange of fees, discounts and other pricing terms among providers, which would increase the likelihood of provider collusion. The comment notes that in markets with a relatively small number of competitors and where those competitors have the ability to accurately monitor each other’s transactions, there is increased risk of collusion.

The second concern is that the exchange of information among providers could impede the ability of health plans to selectively contract among providers. In a typical selective contracting environment “where health care providers do not know each other’s prices, providers are more likely to bid aggressively—offering lower prices—to ensure they are not excluded from selective networks.” If providers know the prices, rebates, and discount arrangements offered by their competitors, they possess a new tool in negotiations with health plans and are less likely to bid aggressively.

The FTC argued that a balance is needed between providing consumers with the information they need to make informed decisions concerning their health care and allowing competitors to share information that could facilitate anticompetitive behavior. The FTC encouraged the Minnesota legislature to consider the types of information that would be the most helpful for consumers in selecting their service, such as actual or predicted out-of-pocket expenses, co-pays, and quality comparisons of plans and providers. However, they urged caution in mandating public disclosure of health plan contract details and fee schedules.

While the FTC’s comment was addressed to legislators, it highlights the kinds of information exchanges that the antitrust regulators believe can lead to anticompetitive behavior in the health care industry. In that sense it builds on the joint FTC and U.S. Department of Justice Statements of Enforcement Policy in Health Care, originally published in 1996. Providers should avoid exchange of any information concerning their fees, discounts and other pricing arrangements with their competitors.

To see the full letter from the FTC, please click here.




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Top Antitrust Enforcers Respond to Congressional Questioning

Federal Trade Commission (FTC) Chairwoman Edith Ramirez and Assistant Attorney General William Baer testified before the House Committee on the Judiciary’s Subcommittee on Regulatory Reform, Commercial and Antitrust Law on May 15, 2015. The oversight hearing provided an opportunity for the heads of the U.S. antitrust enforcement agencies to survey their agencies’ priorities and recent achievements. The two agency heads also faced congressional questions on a variety of topics ranging from proposed reforms to the FTC’s merger review process to the alleged unfair targeting of foreign firms by Chinese antitrust authorities.

In her prepared testimony, Chairwoman Ramirez reviewed her agency’s recent activity, emphasizing especially recent U.S. Supreme Court and appellate court victories. She reiterated the agency’s strategic focus on core areas of concern, including health care, where the agency continues to review health care provider and pharmaceutical industry mergers carefully. Ramirez also stressed the agency’s continued attention to combating efforts to stifle generic drug competition. Other key focus areas include consumer products and services, technology and energy markets.

For the U.S. Department of Justice’s (DOJ’s) Antitrust Division, Assistant Attorney General Baer’s prepared remarks focused on the division’s criminal cartel enforcement activity, including the expansive London Interbank Offered Rates  and auto parts investigations. Baer also highlighted the Division’s civil enforcement activity, noting for example that three major mergers had recently been abandoned in the face of concerns raised by the division.

Chairwoman Ramirez faced questioning from the subcommittee about its merger review process. Asked about a recent rule change, Ramirez downplayed the significance of the change and stated that it was meant merely to clarify the agency’s position in situations where a court has refused to issue a preliminary injunction. She stated that the new rule was not a departure from past practice and that the Commission always assessed each case to determine whether to continue with an administrative hearing in the wake of the denial of an injunction.

Ramirez also faced questioning about the proposed SMARTER Act. The proposed legislation, which passed out of committee in the House last fall, would require the DOJ and FTC to satisfy the same standards to obtain preliminary injunctions against mergers. Currently, for the DOJ to obtain an injunction, it must show that the transaction would cause irreparable harm if allowed to go forward. The FTC faces a different test, and must only show that the injunction is in the public interest. Under the proposed legislation, both agencies would be held to the irreparable harm standard. In addition, the legislation would prevent the FTC from using its administrative court for mergers where an injunction has been denied.  Chairwoman Ramirez contended that the proposed Act “undermines one of the central strengths of the Federal Trade Commission and one of the reasons the FTC was created in the first instance, which was to have an expert body of bipartisan commissioners rule on and develop antitrust doctrine.” She pointed also to the agency’s record of appellate success to stress her view that the [...]

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ABA Antitrust Spring Meeting Highlight: “Antitrust & Health Care: Square Peg in a Round Hole?”

In this month’s American Bar Association (ABA) Section of Antitrust Law Spring Meeting, the program “Antitrust & Health Care: Square Peg in a Round Hole?” featured debate and discussion about antitrust law treatment of health care transactions and how that treatment might (or should) evolve (via regulation, legislation, or some combination of approaches), or conversely, whether the intersection of antitrust law and health care is more akin to a square peg meeting a round hole.  Moderated by Jim Donahue (Office of the Pennsylvania Attorney General), the panel’s speakers included Robert Berenson, MD (The Urban Institute), Alexis Gilman (the Federal Trade Commission (FTC)), Melinda Hatton (American Hospital Association (AHA)) and Elinor Hoffmann (Office of the New York Attorney General (AG)).

Horizontal Mergers

The program first considered a hypothetical merger of specialty physician practices, where the acquiring practice has privileges at one of the market’s two hospitals and the merger would consolidate privileges at that hospital.

The FTC said it would likely look at the transaction on a specialty-by-specialty basis; the New York AG agreed, but thought it was worth considering: is multi-specialty a market itself? She referenced ProMedica’s cluster markets as a possible route for analyzing the transaction (e.g., a parent might take two children to a multi-specialty practice at the same time, one to see a pediatrician and the other to see a dermatologist).

The American Hospital Association (AHA) thought that with the Affordable Care Act’s (ACA’s) incentive to keep the population out of the hospital, hospitals are repurposing services toward population health goals, and referenced remote medicine and affiliations.

Remedies

The FTC stated that it continued to prefer structural remedies in the form of injunctions or divestitures for health care transactions, pointing to its rejection of Phoebe Putney’s proposed conduct remedy. The New York AG agreed that while structural remedies are typically best, the states (particularly Pennsylvania and New York) tend to be more willing to consider conduct remedies, often with the goal of marrying regulation with achievement (efficiencies).

Dr. Berenson posited that physician group acquisitions are the wave of the future, because the current regulatory environment makes solo practice difficult. So, he said, where physicians or specialties must be divested, those doctors are now likely to seek hospital employment.

From the hospital perspective, the AHA noted that health care transactions are a peculiar breed— health care cannot be divorced from regulation, acquisition costs are usually very high, and hospitals must pay fair market value under Stark and Anti-Kickback laws—and commented that the peculiarities of such transactions are not always adequately taken into consideration in merger challenges.

Vertical Mergers; Narrow vs. Broad Networks

The panel next considered a hypothetical merger where a health plan with 60 percent market share in a mid-size city purchases one of the two hospitals and changes its network from broad to narrow.

The FTC noted that although they have not challenged this sort of vertical health care transaction, it would do so under the right circumstances (e.g., if the hospital had no excess capacity, [...]

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