Health Care Transaction Laws Unwrapped: Recent Antitrust Developments

Join us for the final episode of our Health Care Transaction Laws Unwrapped podcast series, where Ropes & Gray antitrust partner Jane Willis and counsel David Young explore the intersection of health care transaction laws and antitrust enforcement. They discuss major trends influencing health care transactions, the impact of political changes on antitrust enforcement, and specific issues such as community hospital acquisitions, system-to-system mergers, and private equity investments in health care. The episode provides insights into how these factors shape the regulatory landscape and what health care providers and investors can expect moving forward.

Transcript:

David Young: Hello, and welcome. This is the latest installment on the podcast series on health care transaction laws and how those laws intersect with the federal and state antitrust enforcement. My name is David Young and I’m counsel in Ropes & Gray’s Washington, D.C. office. I’m with Jane Willis, a partner in Ropes & Gray’s litigation group in the Boston office. We both specialize in antitrust and represent clients across the health care space, in transactions and litigation.

Major Trends

Health care transaction activity is being driven by the same economic trends affecting the overall M&A environment. Inflation, interest rates, and the antitrust enforcement environment are all dictating what deals can get done, but health care, in particular, has some unique factors in play. One of those has been the very tight labor market that providers are facing—those higher costs haven’t always been something they can recover from insurance companies. We’re also seeing a number of one-off community hospitals being acquired by regional system partners in order to find a more stable financial footing. And then, we’re also seeing a lot of system-to-system combinations, sometimes because one system is in financial trouble, and other times because both systems see the value in combining and obtaining greater efficiencies. We also see a lot more activity by private equity (“PE”), both in the provider space through joint ventures, MSOs, and ambulatory surgical centers, but also in the health care IT space.

The obvious question, of course, is: What impact does the election of Donald Trump have on the enforcement environment, given the trends of the past few years? So, I’ll put that to you, Jane, and what you think we’re going to see in the coming months.

Jane Willis: Thanks David. By definition, when we have a Republican president, at the Federal Trade Commission, the five commissioners will switch, and a majority will be Republican—so, there will be three Republican commissioners and two Democratic commissioners. Today, we have three Democrats and two Republicans. So, soon after the inauguration, I would expect that President Trump will appoint an acting chair, a new chair of the FTC, from one of the two Republican commissioners today—that’s Commissioner Holyoak or Commissioner Ferguson. And, of course, at the Department of Justice, there will be a new attorney general for the United States, and then, also a new assistant attorney general for antitrust. But things may not happen as rapidly as clients may expect, in that it takes a while to make those appointments and get them confirmed. Now, again, at the FTC, there will be a new acting chair—Republican chair—pretty promptly. But President Trump would need to appoint a new commissioner—a Republican commissioner—and get that commissioner confirmed, and potentially confirmed as a new chair. So, that process will play out probably over a few months after the inauguration. In terms of what to expect for health care antitrust enforcement, it’s always been a popular topic. Obviously, with rising costs of health care, that’s a popular topic for Republicans and for Democrats. The Biden administration certainly has been quite aggressive, but I think it’s too early to tell what the Trump administration will do, either at the FTC or at the DOJ, and it depends a lot on who ends up getting those positions and what their views are.

Community Hospital Acquisitions and “Flailing Firms”

David Young: We’ve seen in the past few years that a lot of community hospitals after COVID are in a lot of financial distress, and they’re increasingly trying to find an affiliation partner or a regional system that they can partner with. Do you have a sense of how those deals are going to be looked at going forward, and what some of the antitrust concerns have been historically? And what you think the impact of this new environment will be there?

Jane Willis: The antitrust laws haven’t changed and they’re the same, generally, regardless of which party controls the government. We see with hospital transactions and health care transactions that there are horizontal issues where there are competing providers in similar geographies—that would be a classic horizontal issue. In recent years, there’s been an increased interest in vertical issues such as vertical integration among providers at different parts of the provider continuum, as well as payors integrating with other parts of the health care distribution chain. So, we can expect, I believe, that horizontal and vertical issues will continue to be scrutinized in the years to come.

David Young: What about the “failing firm” defense that we often hear about? It’s rarely seen, but do you have any expectation that that sort of defense will become more common or gain more traction?

Jane Willis: Doctrinally speaking, it’s a very difficult defense to make out—it’s difficult to make out each element of the “failing firm” defense. That being said, I think in recent times, we have seen that financial distress, and particularly, bleak financial future can be an effective consideration for the regulators to take into account and for the enforcers to take into account when they’re considering whether or not to issue a second request, or whether or not to challenge a health care provider transaction. What do you think, David?

David Young: I think it has increasingly been more effective, at least as a part of a story for clients to be telling about why they’re doing a deal. Often, clients come in here and say that “We absolutely have to do this deal,” and expect that the FTC is just going to agree. I think historically, there’s been a lot of resistance to the notion that some near-term financial losses are a reason to do a deal that’s otherwise anti-competitive. What I think clients need to be aware of is the FTC is going to closely scrutinize whatever the transaction looks like and its comparative impact, and they’re going to want to know what is the actual financial situation at this hospital that’s being acquired. If it’s a community hospital, they’re going to look at who are the alternative buyers. Because if the community hospital is picking the most powerful local partner in the region, that’s not always going to be satisfactory to the FTC if there’s alternatives out there that could provide the same sort of financial synergies and benefits of scale without reducing the competition in the particular geography where those hospitals compete. So, I think it’s a helpful argument if it’s actually substantiated—in practice, though, it can often carry less weight than I think many clients may recognize when they’re going into it.

Jane Willis: Yes, and that’s a good point—it needs to be substantiated in that regard. More than just saying that the hospital’s in financial distress, we need to focus on what’s the cash on hand. What has the capital spending been relative to depreciation? Really get into some financial analysis to present the picture effectively.

David Young: Yes, and show that the selling hospital actually went out and looked for partners. It’s not enough to just say, “This is our buyer, and this is the only thing we’ve got.” There actually needs to be an adequate search. And again, if you’re not necessarily raising the formal “failing firm” defense, it gives you the atmospherics that you may need to get a deal through the HSR process when there might be horizontal concerns on the face.

System-to-System Transactions

With respect to system-to-system mergers, what are you seeing from state and federal regulators? What concerns are they articulating, and how do you navigate them?

Jane Willis: We’ve been talking about hypothetically a community hospital being acquired by a system. We’re also seeing a trend towards systems affiliating or merging with other systems, whether in state or across state lines. So, the same types of considerations apply in terms of traditional, horizontal, or vertical considerations. But there’s also been—obviously, over the last few years—an interest in cross-market theories, so, the idea that systems that are not geographically that proximate to one another may still have anti-competitive effects. We’ve yet to see the Federal Trade Commission challenge a transaction on that basis. There are differing views about whether they will find a test case to challenge or whether they’ll want to pursue that theory, and I think that’s certainly an open question in the next couple years about whether that will continue to be a theory that is a part of their inquiry. Also, of course, in recent years, we’ve seen labor market concerns and concerns about the effect on nurses. We’ve been getting questions about that in the context of transactions, and again, it’ll be interesting to see if that continues. Of course, nurse wages and labor markets are something of concern, potentially, to both Republicans and Democrats.

David Young: Yes. On nurse wages, nursing is one of the few areas where a labor market case really seems like it has some legs, because nurses obviously have a very specialized skill set—nurses are not necessarily competing to go work in any other job. So, when the few employers that can actually employ, say, a critical care nurse, merge, it’s more realistic to say, “That really reduces the options for nurse wages.” And it could theoretically create monopsony or buyer power over those nurses. Hospitals and health care present a unique opportunity for the agencies to bring up labor market concerns, which has been a broader interest of the antitrust agencies generally—they want to look at labor markets across industries.

Another point to raise here is it’s not just the FTC looking at cross-market theories in labor markets, but also several of the states. California’s AG has a unique transaction approval law where they can review the effects of any health care merger—they have a lot of authority to look at these types of deals and put conditions on them. And we’re seeing that, increasingly, they are using that power to closely scrutinize deals and they’re invoking theories that may not necessarily have a lot of traction with the Federal Trade Commission or with a federal court, although, we haven’t seen a court test across market or a labor theory yet. The states are serving as the laboratories for a lot of those types of concerns, and we are seeing enforcement actions premised on cross-market theories of harm and labor market theories of harm—we’re seeing those come out in these state enforcement practices.

Private Equity Deals

Jane Willis: Let’s jump to the topic of private equity. Obviously, private equity firms have focused on health care to some extent, and many private equity firms are looking for transactions or have engaged in transactions with providers. Ropes & Gray has a number of private equity clients—David, perhaps you can describe what we’ve been seeing there.

David Young: Yes, so, there’s a unique, and I would call it ideological dislike or hostility to the private equity model, and the stereotype of private equity firms and what they sometimes do with their portfolio companies. The classic story is that a PE firm buys up a troubled but important employer in a town, strips the assets, sells it off, leaves people and pensions unfunded, and takes a lot of profit. That’s sort of the story that the federal regulators—at least in the Biden administration and at the state level—have had in the background when they look at PE and health care. The agencies have both scrutinized a number of PE deals in recent years, and they’ve shown a lot of concern when private equity is making investments in physician practices through managed service organizations (“MSOs”), in IT providers, in nursing homes, or ambulatory surgical centers and the like. The commissioners are issuing these statements—or they were during the Biden years—raising concerns, not necessarily traditional antitrust concerns, but talking about private equity as uniquely interested in consolidating markets and raising prices. Jane, I know you have a lot of experience with this. Maybe you can describe a bit more about the Welsh Carson case and the role Ropes & Gray played in that.

Jane Willis: Sure. In the last couple years, we’ve been very busy representing Welsh Carson, a private equity firm, in connection with its investment in U.S. Anesthesia Partners (USAP). The FTC investigated and then challenged USAP and Welsh Carson on a theory of monopolization, that the firm and its portfolio company have monopolized anesthesia services in Texas. We were able to win a dismissal for that private equity firm on the basis that there was no conspiracy between the private equity firm and the portfolio company, and also, on the basis that Welsh Carson was not the actor—Welsh Carson was not the company engaging in the payor contracting and doing the add-on acquisitions. There was a lot of animosity, and I believe it was unfair by the FTC, towards both USAP and Welsh Carson. The case continues against USAP at this time in Texas, so we’ll have to see what happens there. We certainly hope that the Welsh Carson decision provides a road map for other companies who need to fight against the FTC on this basis.

It’s important to know the benefits that private equity and other investment have brought to the health care provider space. I think it’s completely unrecognized by the FTC and by other antitrust enforcers, in that investment is sorely needed in communities, and that by bringing this investment to health care providers, health care providers have been able to improve quality; they’ve been able to improve care coordination; they’ve been able to practice evidence-based medicine. You see even coordination across geographies and the use of telemedicine as well. So, really the animosity that we’ve seen at the FTC hasn’t really taken into account some of the real positives that should be recognized under the antitrust laws as well, in lower prices and higher quality.

David Young: Yes, I think that’s right. And one of the important things to note around PE is a lot of that investment is helping providers and communities maintain access to health care that they may not otherwise have. We started this podcast talking about community hospitals and the financial distress they face. That also applies to independent physicians who often need the investment and support of a larger entity, but still want to maintain their independence. PE is really providing the vehicles that can do that, and those are trends that the FTC should nominally want to encourage. We’re going to see a lot of changes, I think, in the next few years. Some things will stay the same. I think some things are going to shift back. Antitrust is still going to be a hot topic, and on the desire to have a stronger antitrust enforcement, I think it’s going to continue across the bipartisan spectrum. So, I think we’re going to keep seeing these types of issues coming up for health care providers and for other players in the health care space.

Jane Willis: Yes, as always, I think it’s an exciting time for antitrust and will continue to be.

David Young: This concludes our series discussing recent developments and trends in emerging laws addressing health care access, quality, and costs. If those listening would like more information on this topic or from our health care group, please don’t hesitate to contact one of us or visit our website at ropesgray.com/healthcaretransactions. Our website’s interactive map provides detail on the various pending and enacted state health care transaction laws nationwide. You can also listen and subscribe to this and other Ropes & Gray podcasts wherever you regularly listen to your podcasts, including on Apple and Spotify. Thanks again for listening.