Federal antitrust agencies have proposed updates to U.S. merger guidelines that, if finalized, could free up regulators to more successfully crack down on consolidation in the healthcare industry, according to antitrust experts.
The new Federal Trade Commission and Department of Justice guidelines include a number of facets that regulators could use to target vertical and cross-market deals. The guidelines are likely to have a chilling effect on merger activity overall — at least temporarily, until corporate America sees how M&A challenges play out in the courts, lawyers said.
“These guidelines, if adopted, will result in greater scrutiny and raise the likelihood of more challenges overall,” said Jim Burns, an antitrust lawyer at Williams Mullen.
Although the guidelines are non-binding, they’re an authoritative roadmap that regulators use to decide which mergers to challenge. Courts also utilize them to determine the legality of proposed deals.
The guidelines haven’t been changed in upwards of a decade, sparking criticism that regulators have fallen behind on current market realities — including in the healthcare industry, where consolidation has been shown to drive up already sky-high medical prices.
Regulators have historically struggled to make a case against complex and non-traditional tie-ups, as many hospitals and health insurers pursue deals to differentiate income streams and retain more of patients’ medical dollars.
That could change with the new guidelines, experts said.
“I think there is an eye towards those type of mergers that the FTC was not successful in challenging [and] they’re providing more guidelines to potentially bring to bear in those types of situations,” said Pahl Zinn, an attorney at Dickinson Wright.
Vertical, cross-market deals
If the guidelines are finalized, antitrust regulators are more likely to challenge mergers they’ve had less statutory authority to pursue in the past, including vertical and cross-market deals, experts say.
Vertical mergers will not be allowed to create anticompetitive market structures, and regulators will examine vertical deals even when the merging companies are below a 50% market share, according to the new guidance.
The guidance on vertical mergers “is pertinent to healthcare in particular,” Zinn said. “The day-to-day reality for the healthcare industry is it’s going to enable the agencies to look at situations where large hospital systems are trying to integrate vertically.”
Vertical consolidation is a prevalent strategy among large insurers and hospitals, who have acquired physician practices to keep a greater share of revenue in-house and spur a shift to value-based payment arrangements.
The sector has seen a number of recent big-ticket vertical deals, including CVS’ $10.6 billion acquisition of senior-focused medical chain Oak Street Health and UnitedHealth’s $3.3 billion acquisition of home health and hospice provider Amedisys.
Hospitals and other corporate entities have also been buying physician groups in droves — currently, about three-quarters of U.S. doctors work for hospitals, health insurers or private equity firms.
Regulators could also have greater carte blanche to challenge deals spanning multiple states or markets under the new guidelines, experts say. Currently, existing statute gives regulators little leverage when analyzing cross-market deals, which have allowed health systems to evolve into multi-regional players while largely sidestepping antitrust enforcement.
The guidelines suggest that, if a proposed transaction appears to put an emerging party on the path towards becoming a monopoly — even if they’re not there yet — the deal could invite more antitrust scrutiny, according to Burns.
“Under traditional antitrust analysis, when two entities are not competitors at all, it’s typically pretty difficult to put forward a compelling argument to the courts on how this could actually substantially lessen competition,” Burns said. “This is the beginning of some sort of basis for making arguments on non-traditional transactions.”
Roll-ups, data consolidation
The FTC and DOJ are also targeting private equity roll-ups, where firms acquire and merge multiple small businesses into one larger company.
PE roll-ups have grown increasingly common in healthcare, despite controversy over negative profit-motivated effects on medical quality and cost, including at nursing homes and rural hospitals.
The new guidelines provide a hook for regulators to challenge roll-ups that may be anticompetitive by analyzing prior transactions and the possibility of future transactions, not just every transaction in isolation, according to antitrust experts.
By examining an entire series of deals, regulators could also invite greater scrutiny into hospital or retail health buy-ups involving multiple physician practices.
For example, Walgreens stepped into the medical delivery business by acquiring a majority stake in VillageMD in 2021, before going on to purchase New York-based medical chain Summit Health late 2022. Four months later, it acquired a Connecticut physician group.
Heightened scrutiny of multiple acquisitions could be a particular stumbling block for companies looking to pursue M&A, experts said.
“What will be funny is to see some of these behemoths — their growth and their strategy, all these shareholders of Optum and UnitedHealth, I don’t think they’re sitting on those assets expecting that they’re going to grow organically,” said Nathan Ray, healthcare M&A lead at consulting firm West Monroe.
Other transactions that could now face more scrutiny involve health technology and competitive data. Regulators recently failed to halt UnitedHealth’s $13 billion acquisition of Change Healthcare, which closed in late 2022 after the companies defeated a DOJ challenge in federal court.
Regulators had sued to block the deal over concerns UnitedHealth could mine data from billions of Change’s healthcare claims, including from its health insurance rivals.
“In [regulators’] view, they shouldn’t have lost any of those challenges,” Burns said. Presumably, “they feel that they will be much more likely to persuade courts going forward to take their side on merger challenges, and they won’t lose cases like UnitedHealth-Change.”
Regulators will scrutinize mergers that create a firm that controls products or services its rivals may use to compete and deals involving access to rivals’ sensitive competitive information, according to the proposed guidelines, which cite existing case law.
Those strictures could also be applied to cross-market mergers, according to Ray. For example, the merger of Michigan systems Spectrum and Beaumont wasn’t challenged by regulators because the two operators didn’t compete in the same geographic area, but the deal resulted in the consolidation of data, Ray said.
"This is the beginning of some sort of basis for making arguments on non-traditional transactions."
Jim Burns
Williams Mullen antitrust lawyer
Eye toward labor, presumptive harm
Regulators also plan to place more weight on how a merger could harm workers, according to the guidelines.
In healthcare, for example, regulators could consider the impact on doctors and nurses as a result of a hospital merger, including whether concentration in the market might depress wages or give an employer too much power.
Research suggests that wage growth slows following hospital mergers due to shifting labor market power, and that physician income dips when their practices are acquired by hospitals.
“I think that is a significant factor, particularly as you’re dealing with areas of the healthcare industry where there’s a shortage in qualified labor, such as nursing,” Zinn said.
The guidelines also include lower market share thresholds for presumptive harm for mergers.
A horizontal merger could be considered illegal if the merged company has a market share greater than 30%, which is lower than what courts currently view as a high market share, Buchanan Ingersoll & Rooney lawyers Carrie Amezcua and Abigail Cessna said.
Comments on the guidelines are open until September. The changes are already facing opposition from the American Hospital Association, which said it plans to review the proposal and submit formal comments but doubled down on its previous stance that revisions to the guidelines were not necessary.
“Hospital mergers benefit patients and their communities in multiple ways, and the guidelines do not require major revisions,” AHA general counsel Melinda Hatton told Healthcare Dive.
The Biden administration has been turning up the heat on M&A in the healthcare industry. Earlier this month, the FTC withdrew antitrust policy statements that included safe harbors for hospital mergers. The agency has also proposed a change to pre-merger notification requirements to give regulators more time to review deals.
The proposals signal a willingness to modernize antitrust enforcement, but it remains to be seen whether the courts will buy into the agencies’ more aggressive approach — and whether they’ll stem the rising tide of M&A activity as companies pursue deals to weather a volatile economic and regulatory environment, antitrust experts said.
“Regulators are clarifying that the views they’ve expressed to the courts in the last several years are appropriate under prior precedent,” Burns said. “Corporate America might disagree.”
