How New Horizontal Merger Guidelines Could Influence Health Care Reform

On August 19, 2010, the Federal Trade Commission and Department of Justice published revised Horizontal Merger Guidelines that explain how federal agencies evaluate the likely competitive impact and legality of mergers.

With the Patient Protection and Affordable Care Act likely to spur consolidation involving hospitals, physicians, and other industry stakeholders, these new guidelines articulating the federal agencies' approach to competitive impact and legality of mergers will provide important guidance for health care transactions in the field.  

The guidelines are also an important consideration for health care providers contemplating various mergers and combinations, including partial acquisitions in connection with the movement toward accountable care organizations, integrated delivery systems, and other consolidated enterprises.

Regardless of the form of combination pursued, antitrust compliance variables—including post-closing market share—are often threshold concerns. Ideally, these new guidelines will inform health care organizations' strategic thinking well in advance of any discussions regarding such consolidation.

Guidelines Signal Agencies' Concerns About Anti-Competitive Mergers

The overarching purpose of the guidelines, which represent the first major revision in 18 years, is the same as previous versions: to outline the methods and types of evidence used "to predict whether a horizontal merger may substantially lessen competition" and "create, enhance, or entrench market power."  The guidelines are also different in several important ways.

Among their primary functions, the guidelines do the following:

Emphasize that contemporary merger analysis is not formulaic and does not follow a predetermined, step-by-step process. Instead, it is a fluid, fact-specific process by which the agencies may "apply a variety of analytical tools" to evaluate competitive concerns.

De-emphasize the importance of market definition. Under the old guidelines the first step in any analysis was to define a relevant geographic and product/service market. The new guidelines state that "the measurement of market shares and definition is not an end in itself . . . . The Agencies' analysis need not start with market definition." This change signals the agencies' readiness to act on anti-trust theories of direct market impact that do not require traditional proof of separate products/services and geographic markets.

Eliminate "safe harbor" market share presumptions. Under the old guidelines, a merger resulting in a market share determination below 35 percent would usually not raise concerns. The new guidelines eliminate that safe harbor and state that the agencies "may rely on any reasonably available and reliable information to evaluate the extent of direct competition" between merging firms. Consequently a specific factual analysis is recommended for a broader group of contemplated mergers.

Introduce a new set of analytic tools agencies may use to examine the competitive impact of mergers. Most controversially, the new guidelines provide for the use of "diversion ratios," which is a measure of the proportion of sales that one merging firm would capture from the other merging firm in response to a price increase. This method has been criticized for overstating the price increases and anti-competitive effects that are likely to result from a merger, and the new guidelines provide little detail on the process.

Old Assumptions May Not Hold True Under New Guidelines

By replacing more rigid, formulaic modes of analysis with a broader, more flexible set of tools and principles, the new guidelines are likely to give the FTC and DOJ more leeway to challenge mergers they believe will have anticompetitive effects. Whether courts will adopt the approaches of the guidelines, especially when the guidelines conflict with existing precedent, is less certain.

The merger review currently conducted by the FTC and DOJ is increasingly fact intensive and context specific—and few bright-line rules or safe-harbors apply. The agencies have also expanded their theories of anti-competitive effects to include the loss of innovation and elimination of "mavericks," which may increase the complexity of some combinations and the risk of a government challenge.

As a result, hospitals, health systems and others contemplating a merger may no longer be able to rely on old assumptions about what mergers are "safe" and would be well advised to review potential combinations with antitrust counsel using a fact-specific approach that reflects the new approach.

To view Horizontal Merger Guidelines, click here.