Key takeaways
- Hot documents play an important role in FTC and Justice Department merger enforcement.
- This is especially so for the FTC’s hospital merger enforcement challenges.
- Senior management documents projecting higher hospital pricing or greater clout over payers have received scrutiny.
- Fact-based, procompetitive deal themes may reduce the risk of deal delays or challenges due to hot documents.
The government had lost seven consecutive hospital merger litigations before the FTC’s challenge to the Evanston Northwestern/Highland Park merger in 2003. That losing streak forced the FTC to reassess the economic tests used for geographic market definition, often the dispositive issue in hospital merger litigation. Advancing the economic thinking was the focus, with the FTC forming a task force to contribute to that effort.
The FTC has succeeded in reversing course over the past twenty years. It has been winning most of its hospital merger litigations; its record in 2021 was 2-0. While better economic tests for geographic market definition may be part of the story, hot documents have played a big role. An analysis of publicly-available government submissions, including from the two most recent cases, shows that the FTC has placed great weight on hot documents in deciding whether to challenge a hospital merger and in framing its cases before the courts.
This analysis is telling not just for hospital merger assessment but also to understand how the government uses hot documents across sectors in merger review. Dechert’s Boiling Points collection contains real-world illustrations, across sectors, of hot documents used by the government in merger challenges. While more tailored than Boiling Points, this analysis shows the importance of hot documents in the FTC’s hospital merger challenges.
Market shares. Documents containing internal estimates or measures of market shares may become important. In one hospital merger challenge, the FTC relied on a CEO’s statement that the merging companies will “collectively control almost 90% of the market.”1 In another hospital merger challenge, the FTC cited to ordinary course documents from the buyer showing that the merging parties controlled 86.2% of the market for inpatient rehabilitation facilities in a county.2
Leverage or clout. Linking increased “leverage” with a merger may draw government scrutiny. Documentary evidence in the Evanston Northwestern/Highland Park litigation included the statement that “better integration with the ENH Medical Group and the addition of Highland Park will substantially improve ENH’s leverage.” Another illustration of use of “leverage” comes from this document: “Why ProMedica? Payer System Leverage.”3
“Clout” is another term drawing government attention. Statements that the acquisition “would provide the clout of the entire network”4 and that the “partnership would have a lot of negotiating clout”5 drew attention in two separate hospital mergers challenges.
Strengthened negotiating capabilities. The FTC has focused on hospital executive statements linking the merging with stronger negotiating capabilities. The FTC highlighted in one case a statement to the board that the merger will “strengthen negotiating capability with managed care companies through merged entities”6 Likewise, a State AG office pointed to a document stating: “If you’re bigger, you are able to negotiate better contracts.”7
In a recent challenge to a Philadelphia-area hospital merger, the FTC relied on a CEO’s documented statement linking the combination with achieving “essentiality” in negotiations: "We have to continue strategically on the path to essentiality and the Seller is the key…We become the path to any new payor that wants to serve Philadelphia."8
Eliminating rivalry. As highlighted by the FTC, a buyer’s CEO stated in writing that a proposed merger affords the opportunity to “get the rivalry behind us.”9 Another case quoted a statement about reducing rivalry or competition: “A merger would accomplish the following: a. Reduce competition."10
In a hospital merger, a Q&A document drafted by the seller after the merger was announced asked: “For a long time, Hackensack has been a fierce but respected competitor. So how do we now become partners and colleagues?.”11 For the same merger, “eliminat[ing] competition of [the] largest provider” in the county was one of the stated strategic benefits of the deal.12
In another hospital merger, the stated benefits of the deal include “revers[ing] outmigration” to the other party.13 The FTC also relied on an email where the buyer wrote that “[the seller] is a great competitor for normal obstetrics. . . . If we do nothing, [we] will lose 1000 deliveries over the next few years to [the seller]. Thus, should I develop plans to move our practices closer to them to compete? If they become part of our system there is no need for me to do this.”14
Absence of cost savings. Merging companies are best positioned when they have fact-based, procompetitive justifications for the merger. This may consist of cost savings or quality improvements enabled by the combination. Documents that undermine such claims may come into play, as did the following board member statement: “[L]et’s be realistic. Employing physicians is not achieving better cost, it’s achieving better profit.”15 A CEO describing the purpose of the merger as “a smart defensive move to protect the hospital’s market share” may also be viewed as inconsistent with synergies based on cost savings or quality improvements.
Higher prices. Market definition and other antitrust exercises are designed to get at the question of whether a merger is likely to lead to higher prices. Documents speaking directly to pricing may be viewed by the government as most significant. The FTC’s successful litigation challenging a ProMedica merger rested on these types of documents:
- “A ProMedica…Affiliation could stick it to employers, that is, to continue forcing high rates on employers and insurance companies.”16
- “An SLH affiliation with ProMedica has the greatest potential for higher hospital rates.”17
The Evanston Northwestern/Highland Park merger, which turned the tide for the government, was a consummated merger. In that case, the FTC relied on evidence of achieved price increases:
- "Some US$24 million of revenue enhancements have been achieved – mostly via managed care renegotiations” and “none of this could have been achieved by either Evanston or Highland Park alone.”18
- “The larger market share created by adding Highland Park Hospital has translated to better managed care contracts.”19
Standing alone or in isolation, the documentary quotes above do not necessarily support a government decision to seek to block a merger. Additional context, explanation, or other documents often provide more probative evidence and can rebut use of isolated statements in documents. What this does show is that hot documents have played an outsized role in the FTC’s hospital merger challenges. For analysis of hot documents in other industries, see here.
Footnotes
1) In re Cabell Huntington Hospital, Inc., Complaint, at 3 (Nov. 5, 2015).
2) FTC v. Thomas Jefferson University et al., Plaintiffs' Proposed Findings of Fact, at 19-20 (Oct. 12, 2020).
3) FTC v. ProMedica Health System, Inc., Post-Trial Findings of Fact and Conclusions of Law, at 54 (Sept. 20, 2011).
4) St. Alphonsus Medical Center – Nampa, Inc. v. St. Luke’s Health System, Ltd., Findings of Fact and Conclusions of Law, at 22 (Jan. 24, 2014).
5) FTC v. ProMedica Health System, Inc., Post-Trial Findings of Fact and Conclusions of Law, at 2 (Sept. 20, 2011).
6) In re Evanston Northwestern Healthcare Corp., Opinion of the Commission, at 15-16 (Apr. 28, 2008).
7) State of Washington v. Francis Health System, Complaint, at para. 6 (Aug. 31, 2017).
8) United States v. Thomas Jefferson University et al., Complaint, at 27 (Aug. 20,2019).
9) In re Phoebe Putney Health System, Inc., Complaint, at 3 (April 19, 2011).
10) FTC v. University Health, Inc. 938 F.2d 1206, 1220 n. 27 (11th Cir. 1991).
11) FTC v. Hackensack Meridian Health et al, Decision at 18 (D. NJ 2021).
12) FTC v. Hackensack Meridian Health et al, Proposed Findings of Fact at 30 (D. NJ 2021).
13) FTC v. Thomas Jefferson University et al., Plaintiffs' Proposed Findings of Fact, at 30 (Oct. 12, 2020).
14) FTC v. Thomas Jefferson University et al., Plaintiffs' Proposed Findings of Fact, at 31 (Oct. 12, 2020).
15) FTC v. St. Luke’s Health System, Ltd., Complaint, at 4 (Mar. 26, 2013).
16) FTC v. ProMedica Health System, Inc., Findings of Fact and Conclusions of Law, at 30-31 (Mar. 29, 2011).
17) FTC v. ProMedica Health System, Inc., Findings of Fact and Conclusions of Law, at 30 (Mar. 29, 2011).
18) In re Evanston Northwestern Healthcare Corp., Opinion of the Commission, at 17 (Apr. 28, 2008).
19) Id.
