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FTC Challenges Hospital Merger Despite Conduct Remedy Accepted by State AG

Last week the Federal Trade Commission (“FTC” or “Commission”) issued an administrative complaint challenging the merger of two West Virginia hospitals that had earlier been cleared by the state’s Attorney General (“W.V. AG”) following the entry of two agreements between the hospitals and the W.V. AG (“Agreements”).  While the W.V. AG accepted the conduct remedies contained in the Agreements, the FTC argued that those remedies fall short of replicating the benefits of competition that would be lost as a result of the merger.  In the Matter of Cabell Huntington Hospital, Inc., Pallottine Health Services, Inc., and St. Mary’s Medical Center, Inc. (FTC Docket No. 9366) (November 5, 2015).

In November 2014 Cabell Huntington Hospital (“Cabell”) entered into an agreement to acquire St. Mary’s Medical Center (“St. Mary’s”).  In its administrative complaint challenging the proposed merger, the FTC alleged that the combined entity would account for more than 75% of the market for general acute care inpatient services, as well as a high share of the market for outpatient surgical services in the adjacent counties of Cabell, Wayne and Lincoln, West Virginia and Lawrence County, Ohio.  Based on the high market shares and related HHI market concentration levels, the FTC alleged that the transaction is presumptively unlawful.

The hospitals cooperated with the W.V. AG’s investigation into the proposed transaction, ultimately entering into the Agreements in July which set forth several behavioral conditions related to rate limitations, market entry, efficiencies, and the preservation of St. Mary’s as an institution.  For the details of the Agreements, please see our earlier Alert.  Consistent with its disfavored view of merger conduct remedies (as opposed to structural remedies such as injunctions or divestitures), the FTC authorized a challenge to the proposed merger despite the conduct remedy approved and supported by the W.V. AG.  In particular, the FTC argued that the rate limitations contained in the Agreements consist of price controls shown by economic theory and evidence to be ineffective, that entry or expansion by other providers is unlikely to occur in a timely manner, and that the hospitals’ efficiency and quality claims are not verifiable and not merger specific.

Of note, the FTC staff has not yet pursued in federal court a temporary restraining order or preliminary injunction, which the Commission authorized along with the administrative complaint.  According to the FTC’s press release in the matter, it has not yet pursued action in federal court because the transaction is also awaiting a Certificate of Need (“CON”) from the West Virginia Health Care Authority and approval from the Catholic Church.  However, the FTC has left open the option of a challenge in federal court even if the hospitals obtain the required CON.  In its administrative complaint, the FTC stated that the rate review scheme contained in the CON process is not an adequate substitute for competition as it only sets a ceiling on negotiated rates but does not preclude a significant increase in those negotiated rates, nor does the CON process protect non-price competition.

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Dionne Lomax