Becker's Hospital Review

Hospital Transactions & Consolidation 60 Market Matters: How Major Hospitals Mergers Have Avoided Antitrust Issues (continued from page 1) News of the mammoth mergers has spurred concern about potential price hikes for consumers as a few powerful players take over more and more of the hospital market. In July, Moody's Investors Service released a report declaring the Tenet-Vanguard deal bad news for nonprofit hospitals, particularly small standalone ones. The merger will strengthen Tenet's market power, possibly driving further consolidation, according to Moody's. That could be even more bad news for payers. A study last year from the Robert Wood Johnson Foundation found hospitals merging in already consolidated markets can send prices soaring by more than 20 percent. Major mergers, major antitrust concerns Hospitals and health systems looking to join forces have to worry about objections from more than economists and health insurers concerned about skyrocketing prices. The Federal Trade Commission has expressed its intent to keep a close eye on hospital mergers, especially in recent years as consolidation activity has increased under growing pressure to cut costs and improve quality of care. At the National Policy Forum of America's Health Insurance Plans in March 2013, FTC Commissioner Maureen Ohlhausen emphasized the importance of preventing the possibly harmful effects of increases in provider market power. However, Ms. Ohlhausen also noted the potentially positive side of consolidation, noting the benefits — such as improved quality of care and lower costs — that can result from providers working together rationally. Furthermore, she described the FTC's approach to intervening in healthcare markets as cautious, especially given the continuing implementation of the Patient Protection and Affordable Act, which calls for increased clinical integration. Despite its considerable scope and effect on market power, the TenetVanguard deal has avoided butting heads with the FTC. The commission recently granted early termination of mandated waiting period under the Hart-Scott-Rodino Act, which outlines the federal premerger notification program, according to a D Healthcare Daily report. Although the CHS-HMA deal has yet to receive the green light from the FTC, healthcare legal experts say it's unlikely to run into any antitrust roadblocks. These experts say mega-mergers don't necessarily mean big problems with the FTC. Whether or not a merger raises red flags with the enforcement agency depends on various factors such as market overlap and the intent behind the transaction. "The question is 'What's the nature of the market?,'" says Lee Simowitz, JD, partner with Baker & Hostetler in Washington, D.C. "The first line of defense against an antitrust investigation is what the market looks like." Register Today! Becker's Hospital Review CEO Strategy Roundtable November 14, 2013 The Ritz-Carlton Chicago Co-chaired by Scott Becker, Publisher, Becker's Hospital Review, and Chuck Lauer, Former Publisher, Modern Healthcare To register, visit www.BeckersHospitalReview.com/novhospitalevent.html, email registration@beckershealthcare.com or call (800) 417-2035. CHS-HMA: FTC challenge unlikely Once the CHS acquisition of HMA is completed, CHS will be the largest for-profit hospital operator in the U.S. by number of facilities, owning 206 acute-care hospitals across 29 states. The deal is expected to close in the first quarter of 2014, although it must undergo FTC scrutiny first, and at least 70 percent of HMA shareholders must vote to approve the merger. Under the merger agreement, CHS will pay HMA $3.9 billion in cash and stock. CHS will also assume $3.7 billion of HMA's debt and has valued HMA's stock at $13.78 per share. CHS currently owns, operates or leases more than 135 hospitals in 29 states, while HMA has a portfolio of 71 hospitals in 15 states. CHS and HMA both operate hospitals for the most part in rural or smaller regions, and their lack of localized overlap means the merger likely won't raise any alarms with the FTC, says George Paul, JD, partner at White & Case in Washington, D.C. The FTC will probably review the proposed merger on a highly localized level to determine how likely the two hospital operators are to create a monopoly, Mr. Paul says. Under that method of scrutiny, it seems like HMA and CHS won't run into any problems because of their lack of local overlap. For example, although they both have hospitals in Tennessee, those facilities aren't close enough to each other to dominate the market, Mr. Paul says. "No one's going to go from Knoxville to Memphis to go to the hospital," he says. "They're complimentary rather than having an overlap." Melesa Freerks, JD, associate at McGuireWoods in Chicago, agrees the companies' hospital locations in smaller, rural areas means their consolidation poses little threat of being an anticompetitive force. "A lot of the CHS and HMA hospitals are sole providers," she says. "They're not necessarily competing with anyone else." Tenet-Vanguard: Venturing into new markets After Tenet completes its acquisition of Vanguard, it will own 79 hospitals, possibly 82 if Vanguard successfully assumes ownership of three hospitals in Connecticut. It will also operate 157 ambulatory surgery centers and outpatient centers. Tenet will enter new markets such as Chicago, Detroit, San Antonio, Phoenix and New England. The company will additionally gain health plans associated with Vanguard. Tenet currently owns hospitals in 10 states, while Vanguard has a presence in five states. They both operate facilities in Texas but do not overlap on a state level otherwise. Because the merger mostly involves Tenet expanding into new and bigger markets which have plenty of competitors, it's not surprising the FTC didn't challenge the transaction, Ms. Freerks says. "A lot of it goes back to just how the FTC defines a market," she says. "They seem to focus on a very local level." The FTC, PPACA and antitrust enforcement Given the significant changes currently happening within the healthcare industry, the FTC will likely have to adjust its approach toward antitrust enforcement, Ms. Freerks of McGuireWoods says. Coverage expansion under the PPACA will soon bring millions more insured patients to the market, and access to care could become an issue if the FTC's approach is too strict. Ms. Freerks says the regulators could potentially drive companies into bankruptcy if they are prevented from merging with other hospitals and health systems, an action that is often taken to cope with reimbursement reductions, new quality requirements and other economic pressures. "They're going to have to be lax in certain areas to allow these mergers to happen to make sure there are enough companies," she says. HMA, CHS, Tenet and Vanguard are far from the only hospital operators looking to join forces with others. Hospital merger and acquisition activity has surged in recent years due to various factors, with more than 300 estimated hospital mergers since 2007, according to the FTC. In the second

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