United States: Healthcare

Introduction

The provision of healthcare remains among the singularly most important industries in the United States both in terms of total dollars spent (estimated at over US$3 trillion) but also in terms of direct impact on citizens’ daily lives. As such, it is no surprise that the antitrust enforcement agencies, the US Federal Trade Commission (FTC) and Antitrust Division of the Department of Justice (DOJ), monitor these markets closely. The past year was no exception. While discussion of the Affordable Care Act was at the forefront of the policy debate just 18 months ago and could have had a major impact on the enforcement of the antitrust laws, that has largely receded in light of changes made by President Donald Trump and his administration. Nevertheless, there remain any number of other mechanisms by which the FTC and DOJ have sought to enforce the antitrust laws. The matters described below provide important context for parties contemplating transactions implicating hospitals and providers (of any kind) or policy shifts in the healthcare space.

The Federal Trade Commission

The FTC’s activity in the healthcare space ran the gamut from the provision of public comments to intervention in particular transactions.

Public certification process comments

In the past year, FTC staff comments on healthcare transactions and their application to state laws continue to demonstrate the FTC’s focus on these issues. On 6 February 2018, the FTC staff endorsed a statement supporting Alaska Senate Bill 62, which would repeal Alaska’s certificate-of-need (CON) laws.1 Though enacted to reduce healthcare costs and improve access to care, the FTC argued that the CON laws have not succeeded in those efforts, and ultimately work against intended policy goals.2 The FTC staff identified three problems with Alaska’s CON laws that can be viewed as transcending CON laws generally:

• they create obstacles to competitor entry and expansion, which limit consumer choice, raise prices and suppress innovation;

• CON laws can be used to delay or prevent entry and expansion of new or existing competitors; and

• the laws prevent consumers from obtaining a remedy after an anticompetitive merger closes.3

Indeed, the FTC staff referred to studies that analysed the effect of CON laws on health outcomes, finding that repealing or narrowing CON laws may actually improve the quality of healthcare.4

While generally sceptical of CON laws, where they are in force, the FTC showed willingness to support CON applications that will increase competition. For example, on 16 October 2017, the FTC staff submitted a public comment supporting Lee County Medical Center’s CON application to build a new hospital in Lee County, Georgia.5 Lee County, located in Southwest Georgia, has no hospitals.6 It relies primarily on the Phoebe Putney Health System, which is located in another county and faces little competition as the owner of the only hospitals in the counties surrounding Lee County.7 According to the staff, a new hospital would promote competition in this area, encouraging current providers to offer more efficient and cost-effective services, ultimately benefitting the consumer.8

The FTC has also been vocal about transactions in the healthcare industry. On 18 July 2017, following two prior comments and an investigation, the FTC staff issued a public comment on the proposed merger between Mountain States Health Alliance and Wellmont Health System in Tennessee.9 Hospitals there that wish to merge must obtain a Certificate of Public Advantage (COPA) to demonstrate ‘by clear and convincing evidence that the likely benefits resulting from the agreement outweigh any disadvantages attributable to a reduction in competition that may result from the agreement’.10 The FTC staff commented that the applicants did not meet this burden.11 They noted that the applicants did not adequately discuss the potential harms of the transaction, choosing instead to focus on the benefits of the proposed transaction and ways to mitigate harm.12 Although the applicants did provide a single paragraph analysis of the competitive landscape, the analysis omitted information about the level of competition and market concentration in that area.13 The omission of standard economic tools to assess potential harm raised questions for the FTC staff.14 They maintained that the loss of competition between the hospitals would negatively affect prices, quality and availability of care, and that the merger would be a bigger detriment to consumers than benefit. 15

Remedies in non-provider healthcare matters

Though most of the FTC’s healthcare focus is on hospitals and providers, a series of FTC actions demonstrates that the FTC takes a fulsome view about what is required to assure competition in the healthcare market generally, including in the transportation of those seeking care and in the use of virtual telemedicine.

Air transport services in Hawaii

On 24 April 2018, the FTC approved a final order imposing conditions on a merger between the only two air-transport services in Hawaii – Air Medical Group Holdings, Inc and AMR Holdco, Inc.16 The FTC found that residents rely on these two companies to provide transportation between the islands when medical care is not available in their own communities.17 To prevent the creation of a monopoly, AMR was ordered to divest its air ambulance services to AirMD LLC, a company that operated AMR’s air-transport services in Hawaii as LifeTeam.18 AMR was ordered to sell to LifeTeam all of its air transport assets (including the aircraft that it used for the transportation services), support LifeTeam’s certificate of need application, and allow LifeTeam the option of purchasing four ground ambulances to support the air-transport business.19

Telemedicine and telehealth in Texas

On 21 June 2017, the FTC closed its investigation into whether the Texas Medical Board (TMB) violated antitrust laws by restricting telemedicine and telehealth after the state enacted a law overriding the TMB’s restrictions.20 Before the FTC could investigate, Texas passed laws preventing the TMB from adopting a more stringent standard of care for telehealth services than it imposes on in-person services.21 The new laws also prevent the TMB from requiring that patients establish a relationship with a physician in person prior to receiving telehealth services.22 Texas and the FTC agreed that telehealth and telemedicine services broaden access to health services, improve quality and lower costs, eliminating the need for an investigation.23

Transactions implicating hospitals and providers

Without question, the bulk of the FTC’s focus in the healthcare space remains on transactions implicating hospitals and providers. While less active in years past in terms of total number of actions, the FTC’s willingness to challenge transactions where it believes a substantial lessening of competition may result remains evident.

North Dakota

In December 2017, the FTC and Attorney General of North Dakota (NDAG) sought federal court intervention via a preliminary injunction to prevent a merger between Sanford Health and Mid Dakota Clinic.24 The FTC and NDAG argued that Sanford Health and Mid Dakota Clinic each considered the other as their primary competitor, and that a merger between the two would cause the four-county region’s physician group to have market shares of roughly 75 per cent to 85 per cent in the applicable geographic region.25 The United States District Court for North Dakota, Western Division, granted the preliminary injunction against the merger.26 The court found that in most cases, the merger would almost completely overshadow other providers.27 For example, post-merger, Sanford Health and Mid Dakota Clinic would provide 85.7 per cent of the primary care physician services, as opposed to the 34.4 per cent and 51.3 per cent they each provide separately.28

The district court further determined that the merger was unlawful because of the effect on payors’ (and therefore consumers’) negotiating leverage. Here, the court found that the merger would eliminate competition for Primary Care Physicians, OB/GYN services and general surgeon services in the market area, which would cause harm.29 The merger was deemed presumptively illegal, causing the burden to shift to the medical centres to rebut such a presumption.30

Neither of the defences offered by the defendants – which can be bucketed into two areas: the resulting efficiencies and ‘powerful buyer defence’ – convinced the court.31 Indeed, the court held that a merger that would create a near-monopoly, as this merger would, can almost never be justified by an ‘efficiency’ defence. Sanford and Mid Dakota argued that the presence of a powerful buyer, insurance company Blue Cross Blue Shield NC (BCBSNC), would restrict the parties from being able to raise prices.32 But this contention was also rejected by the court, weakened by BCBSNC’s testimony stating that if a merger occurred, it would be forced to increase post-reimbursements.33 Thus, the district court found that the parties could not overcome the presumption of illegality and blocked consummation of the transaction.34

Idaho

In May 2017, a federal court approved a district court order requiring St Luke’s Health System to divest itself of Saltzer Medical Group’s physicians and assets.35 This opinion endorsed an earlier 2015 FTC and Idaho Office of the Attorney General action that sought to unwind the acquisition of an independent physician group at Saltzer by St Luke’s.36 The transaction created a singular practice of adult primary care physicians for patients living in Nampa, Idaho, eliminating, according to the court, competition and choice for patients.37 Although the goal of the acquisition was to improve patient outcomes, the court found that the objective could be completed using mechanisms other than full acquisition. Accordingly, St Luke’s Health System was ordered to reestablish Saltzer Medical Group.38

The Department of Justice

Under the leadership of Republican Makan Delrahim, the Antitrust Division of the Department of Justice has also began signaling it will take an active interest in the enforcement of antitrust principles in healthcare markets.

Healthcare conference signals enforcement to come

On 17 May 2018, Deputy Assistant Attorney General Barry Nigro delivered remarks at the American Bar Association’s Antitrust in Healthcare Conference, hinting towards a focus on criminal antitrust enforcement in the healthcare space.39 At least one priority of the DOJ is combating rising healthcare prices.40 In late 2016, the DOJ began an investigation into the price spikes of generic drugs.41 Since then, the CEO and president of a generic drug company pleaded guilty to bid-rigging, price fixing and customer allocation of a diabetes drug, a crime that Nigro viewed as especially brazen.42 Nigro made clear that the DOJ is committed to using its criminal enforcement authority to eliminate the criminal antitrust violations mentioned previously, as well as limiting competition through no-poach and market allocation agreements.43

The DOJ also celebrated its successes on the civil side of healthcare and antitrust, including blocking the proposed mergers of Anthem and Cigna, as well as Aetna and Humana.44 They are currently investigating CVS’s proposed acquisition of Aetna, as well as Cigna’s proposed acquisition of Express Scripts.45 Both of these are vertical transactions – that is neither side to the deal competes directly today – but they present some interesting analytical challenges because of the size of the combined entities that will result. The DOJ’s decisions here will be closely watched given the paucity of recent vertical merger enforcement case law (the AT&T/Time Warner decision notwithstanding, which addresses a market wholly unrelated to healthcare).

Michigan

On 9 February 2018, the Department of Justice settled with Henry Ford Allegiance Health for conspiring with a rival hospital to restrict marketing in the rival hospital’s county.46 According to the DOJ, Allegiance’s agreement to restrict marketing of competing services in Hillsdale County was per se illegal.47 Allegiance and three other South Central Michigan hospitals were charged with agreeing not to solicit customers outside of the counties they were located in, an agreement that restricted competition.48 The DOJ settled with the other three hospitals before the settlement with Allegiance.49 The proposed settlement prohibits Allegiance from inappropriately communicating with the other hospitals about their marketing practices, prevents Allegiance from restricting Hillsdale County from its marketing activities, and imposes an annual compliance measure to ensure compliance with the final judgment.50 Allegiance must submit compliance materials whenever the DOJ requests them.51 Additionally, Allegiance is required to reimburse the state of Michigan and the DOJ for costs associated with litigating the case.52 The settlement came after a three-year battle.53

North Carolina

On 30 March 2017, a North Carolina District Court found that the DOJ’s lawsuit against Carolina’s Healthcare System (CHS) should continue to discovery.54 The DOJ alleged that CHS used illegal contract terms to restrict competition.55 They claimed that terms of the contracts prevented health insurers from offering financial incentives to use a less expensive hospital.56 CHS dominated the market, representing almost 50 per cent of Charlotte’s medical services.57 The DOJ alleged that this market power allowed CHS to have high reimbursement prices for insured patients.58 CHS attempted to avoid a common mechanism called steering, which allowed insurance providers to offer incentives for individuals to choose less expensive services.59 Steering threatened CHS’ profitability by encouraging competition, and in response, CHS decided to include anti-steering language in their contracts with insurers.60 85 per cent of the insurance coverage in the area is provided by four major insurance companies: Aetna Health of the Carolinas, Inc, Blue Cross Blue Shield of North Carolina, Cigna Healthcare of North Carolina, Inc and United Healthcare of North Carolina, Inc.61

According to the DOJ, CHS had anti-steering provisions in many of their contracts, dramatically reducing competition.62 The DOJ alleged that individuals and employers pay higher prices for insurance than they would had there been competition with CHS.63 The case is ongoing, though the hospital changed its name to Atrium Health.64 Shortly afterwards, in April 2018, Atrium Health was sued in a class action under the same theory in which the DOJ is proceeding: namely, that CHS’s anti-steering provisions caused them to pay more than it would have had competition been allowed.65 Ultimate resolution of this case will provide meaningful insights into how those with significant market share can undertake steering agreements (or not).

Conclusion

The FTC and DOJ’s attention to antitrust and healthcare remains sharp. It is clear from the federal enforcement agency’s involvement that consumer protection in healthcare will continue to be taken seriously and all members of the healthcare industry should expect close scrutiny in the event transactions, agreements or public policies appear to restrict competition.

The author would like to thank summer associate Iyanna Draper for her assistance in crafting this article.