‘Business as Usual’ in FTC Hospital Deal Enforcement, Former Official Says

The former FTC executive outlined the factors the agency is using these days to weigh whether to take enforcement actions against a pending hospital deal.

Feb. 26—Despite an expected continuation of record hospital merger-and-acquisition deal volume, and warnings from the Trump administration, a former law enforcement leader said antitrust enforcement is not expected to change in 2018.

Deborah Feinstein, director of the Bureau of Competition for the Federal Trade Commission (FTC) in 2013-17, said the rate of hospital deals is not always clear, but the heavy volume seems to be continuing. So, FTC enforcement against deals that appear to violate federal antitrust rules will continue.

“For the FTC it will be business as usual; this is a very bipartisan issue,” Feinstein said at a recent media briefing. “I see no change in how the FTC enforces the antitrust laws under the Trump administration; it is a very case-by-case approach.”  

In 2017, there were 118 announced hospital transactions, which was an increase of more than 35 percent from 2016 and the highest count since 2012, according to a Ponder & Co. analysis.

That finding followed an Oct. 12 executive order from President Trump that contained numerous provisions affecting both insurers and hospitals, including a directive for agencies to limit “excessive consolidation.”

Feinstein said it is hard to tell whether the FTC’s recent enforcement actions against some pending hospital deals have had a “chilling effect.”

Feinstein noted that most hospital deals raise no concerns at the FTC and that the agency brings lawsuits to block only a small percentage of deals.

Among the factors considered by the FTC regarding whether to bring an antitrust lawsuit against a pending hospitals deal are the impact on “patient flows,” the impact on hospital market shares, insurer concerns about being able to offer local plan networks without the merged hospitals, and the financial health of the hospitals, Feinstein said.

The FTC rejects arguments from hospitals that M&A is needed to implement the greater coordination of care and provider risk-taking that are encouraged by the Affordable Care Act (ACA), Feinstein said.

“If you look at the ACA, it specifically says it’s not meant to displace competition, and the rules of the ACA and competition encodes it [competition],” Feinstein said. “So when parties used to come in with healthcare mergers and say, ‘The ACA made me do it,’ that was not a defense that was particularly persuasive to the agency.”

Regardless of how such arguments appear to the FTC, industry advocates have found that M&A brings practical benefits for value-based care.

“At the end of the day, those are expensive and complicated ventures and honestly work better with scale,” said Eb LeMaster, managing director of Ponder & Co.’s strategic advisory and M&A practice.

2018 Trends

The record-setting 2017 pace is expected to continue.

“Volume of transactions was very strong in 2017, and that same momentum is going to carry into 2018,” LeMaster said. “We think we’ll see a like number of transactions, in terms of announced transactions, in the 100 to 120 range.”

Thomas Scully, general partner at Welsh, Carson, Anderson & Stowe and administrator of the Centers for Medicare & Medicaid Services under President George W. Bush, said M&A is needed in some markets, such as when hospitals otherwise would close.

“There were markets that were over-bedded and over-hospitalized, and you’re going to see some mergers and that’s not bad at all,” Scully said. “When you get big consolidated markets and you have one dominant player, I hope the FTC is active.”

Chapin White, senior policy researcher at the RAND Corporation, expects deal volume to continue this year because the incentives that have been driving it remain in place.

“The rewards are there; that comes from the lack of site-neutral payments and the fact that the bigger you get, the more indispensable you become to private health plans,” White said.

Additionally, employer plans managed by private insurers have no incentive to push back on the ever-higher rates that are negotiated by providers, he said.

However, Scully argued that many hospitals have had to shift costs to private payers as Medicare and Medicaid rates have stagnated. As a result, Medicare payment rates are substantially below hospital costs, while private-payer rates are substantially above them.

Specific Changes

In 2017, Ponder’s analysis found that the average hospital transaction value nearly doubled from about $290 million the preceding year to more than $500 million.

“We think we will see larger transactions continue in 2018,” LeMaster said.

The last two years have seen a number of large systems—especially for-profit hospital systems—divesting some of their hospitals.

“Regional networks continue to explode and find new partners,” LeMaster said. “The real focus is regional relevance, versus just a large footprint.”

Also likely to accelerate in 2018 is the increasing tendency of financially healthy hospitals to seek partners, LeMaster said.

“At the end of the day, we virtually don’t visit with a system that is not contemplating some kind of alignment,” LeMaster said.

The expected 2018 deal volume likely will be driven by continued pressure on payment and patient volumes, he said.

“As you try to maintain margin, you need growth to do that,” LeMaster said. “And especially in light of declining inpatient trends, you really need to find new sources of revenue.”

Additional considerations include physician alignment, IT needs, and emerging healthcare delivery models.

Another factor is increasing consolidation in the health insurance market, which some leaders see a need to counter by increasing their own organization’s size.

One change in recent years is the increasingly direct competition posed by insurers that use their own providers. Health insurers recently have announced significant deals to purchase healthcare service providers, as noted in a recent report from Moody’s Investors Service.

CVS Health plans to merge with Aetna Inc., and Optum, a division of UnitedHealth Group and an active acquirer of physician groups, plans to buy DaVita Inc.’s medical group division

“These transactions will result in shifting more care away from higher cost hospital settings,” Moody’s noted. “Optum’s moves will raise uncertainty for hospitals in markets where it owns physicians.”

Hospital volume could take a further hit as Optum and health insurers attempt to move to value-based payment models that emphasize quality over quantity of care, Moody’s noted.

“Hospitals would lose more business if Optum’s medical groups and its contracted health plans accelerate the shifting of patients out of the more expensive hospital setting,” the report stated. “As a result, hospitals’ revenue and income would also be at further risk as insurers seek to add value by reducing healthcare spending.”

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Rich Daly is a senior writer/editor in HFMA’s Washington, D.C., office. Follow Rich on Twitter: @rdalyhealthcare