In prior posts, we discussed the draft, updated merger guidelines that had been issued by the Federal Trade Commission and the Department of Justice (sometimes referred to as the “Agencies”) in July of last year. At that time, the Agencies solicited public comments and subsequently more than 30,000 were received.
On December 18, the Agencies issued final guidelines (the “Guidelines”). These guidelines replace the 2010 Horizontal Merger Guidelines and the 2020 Vertical Merger Guidelines.
In considering the Guidelines, it is important to bear in mind that they are not themselves legally binding and do not predetermine enforcement action by the Agencies. Instead, they provide insight into the Agencies’ decision-making process by identifying the factors and frameworks the Agencies consider when investigating mergers.
While the Guidelines reflect in many respects how the Agencies have recently been applying the antitrust laws to mergers, they markedly differ from the guidelines they are replacing in important respects and, in some instances, certain aspects of them have already been the subject of litigation, including in cases which the Agencies have recently lost.
In the Guidelines and on the question of enforcement, the Agencies’ principal focus is on Section 7 of the Clayton Act. Section 7 prohibits mergers and acquisitions where “in any line of commerce or in any activity affecting commerce in any section of the country, the effect of such acquisition may be substantially to lessen competition, or to tend to create a monopoly.”
This article is intended to provide a detailed discussion of the Guidelines. What follows is a list of all of the Guidelines in summary form followed by a more detailed discussion of those Guidelines that are most likely to impact healthcare system mergers.[1] A subsequent article will discuss how the Agencies are likely to assess rebuttal arguments/evidence that merging parties may offer to demonstrate that their merger will not substantially lessen competition or tend to create a monopoly.
The Guidelines in Summary Form
Guideline 1: Mergers Raise a Presumption of Illegality When They Significantly Increase Concentration in a Highly Concentrated Market.
Market concentration is often a useful indicator of a merger’s likely effects on competition. The Agencies therefore presume, unless sufficiently disproved or rebutted, that a merger between competitors that significantly increases concentration and creates or further consolidates a highly concentrated market may substantially lessen competition.
Guideline 2: Mergers Can Violate the Law When They Eliminate Substantial Competition Between Firms.
The Agencies examine whether competition between the merging parties is substantial since their merger will necessarily eliminate any competition between them.
Guideline 3: Mergers Can Violate the Law When They Increase the Risk of Coordination.
The Agencies examine whether a merger increases the risk of anticompetitive coordination. A market that is highly concentrated or has seen prior anticompetitive coordination is inherently vulnerable, and the Agencies will infer, subject to rebuttal evidence, that the merger may substantially lessen competition. In a market that is not highly concentrated, the Agencies investigate whether facts suggest a greater risk of coordination than market structure alone would suggest.
Guideline 4: Mergers Can Violate the Law When They Eliminate a Potential Entrant in a Concentrated Market.
The Agencies examine whether, in a concentrated market, a merger would (a) eliminate a potential entrant or (b) eliminate current competitive pressure from a perceived potential entrant.
Guideline 5: Mergers Can Violate the Law When They Create a Firm That May Limit Access to Products or Services That Its Rivals Use to Compete.
When a merger creates a firm that can limit access to products or services that its rivals use to compete, the Agencies examine the extent to which the merger creates a risk that the merged firm will limit rivals’ access, gain or increase access to competitively sensitive information, or deter rivals from investing in the market.
Guideline 6: Mergers Can Violate the Law When They Entrench or Extend a Dominant Position.
The Agencies examine whether one of the merging firms already has a dominant position that the merger may reinforce, thereby tending to create a monopoly. They also examine whether the merger may extend that dominant position to substantially lessen competition or tend to create a monopoly in another market.
Guideline 7: When an Industry Undergoes a Trend Toward Consolidation, the Agencies Consider Whether It Increases the Risk a Merger May Substantially Lessen Competition or Tend to Create a Monopoly.
A trend toward consolidation can be an important factor in understanding the risks to competition presented by a merger. The Agencies consider this evidence carefully when applying the frameworks in Guidelines 1-6.
Guideline 8: When a Merger is Part of a Series of Multiple Acquisitions, the Agencies May Examine the Whole Series.
If an individual transaction is part of a firm’s pattern or strategy of multiple acquisitions, the Agencies consider the cumulative effect of the pattern or strategy when applying the frameworks in Guidelines 1-6.
Guideline 9: When a Merger Involves a Multi-Sided Platform, the Agencies Examine Competition Between Platforms, on a Platform, or to Displace a Platform.
Multi-sided platforms have characteristics that can exacerbate or accelerate competition problems. The Agencies consider the distinctive characteristics of multi-sided platforms when applying the frameworks in Guidelines 1-6.
Guideline 10: When a Merger Involves Competing Buyers, the Agencies Examine Whether It May Substantially Lessen Competition for Workers, Creators, Suppliers, or Other Providers.
The Agencies apply the frameworks in Guidelines 1-6 to assess whether a merger between buyers, including employers, may substantially lessen competition or tend to create a monopoly.
Guideline 11: When an Acquisition Involves Partial Ownership or Minority Interests, the Agencies Examine Its Impact on Competition.
The Agencies apply the frameworks in Guidelines 1-6 to assess if an acquisition of partial control or common ownership may substantially lessen competition.
A More Detailed Examination of The Guidelines Likely To Impact Healthcare System Mergers
Guideline 1
This guideline will impact every healthcare system merger. It provides that mergers raise a presumption of illegality when they significantly increase concentration in a highly concentrated market.
Market concentration and the change in concentration due to a merger are often useful indicators of a merger’s risk of substantially lessening competition as explained by the Agencies. In highly concentrated markets, a merger that eliminates a significant competitor creates significant risk that the merger may substantially lessen competition or tend to create a monopoly.
Concentration levels are generally measured using the Herfindahl-Hirschman Index (“HHI”). The HHI is calculated by squaring the market share of each firm competing in the market and then summing the resulting numbers. For example, for a market consisting of four firms with shares of 30, 30, 20, and 20%, the HHI is 2,600 (302 + 302 + 202 + 202 = 2,600). Under Guideline 1, markets with an HHI greater than 1,800 are highly concentrated. A merger that creates or further consolidates a highly concentrated market and involves an increase in the HHI of more than 100 points is presumed to substantially lessen competition or tend to create a monopoly.
The Agencies may also examine the market share of the merged system: a merger that creates a system with a share over 30% is presumed to substantially lessen competition or tend to create a monopoly if it also involves an increase in HHI of more than 100 points.
This is a significant change from the 2010 Guidelines under which a highly concentrated market was one with an HHI of 2,500. The lower threshold will likely result in many more mergers being challenged.
By way of example, in a six-firm market consisting of four firms with a 20% market share and two with a 10% market share, if one of the firms with a 20% market share merges with one of the firms with a 10% market share, that merger will be presumptively illegal under the Guidelines notwithstanding that-post merger the market will still be left with five competitors and notwithstanding that that the merger would not have been presumptively illegal under the 2010 Guidelines.
Also, under the 30% rule in the Guidelines, a merger that results in a firm with a 28% market share owning a 31% market share post-merger will be presumptuously illegal if there is an increase in HHI of over 100 points. This was not the case under the 2010 Guidelines.
Guideline 2
Under this guideline, a merger can violate the law when it eliminates substantial competition between the parties to the merger irrespective of how it affects HHI.
A merger eliminates competition between the parties by bringing them under joint control. According to the Agencies, if evidence demonstrates substantial competition between the parties prior to the merger, that ordinarily suggests that the merger may substantially lessen competition.
Under this guideline, relevant evidence may include, among other things:
Strategic Deliberations or Decisions. The Agencies may analyze the extent of competition between the merging parties by examining evidence relating to strategic deliberations or decisions in the regular course of business. In the case of a healthcare system merger, this might involve examining evidence that the systems monitor each other’s pricing, service offerings, marketing campaigns, facility locations, improvements, strategic initiatives and the like.
Patient Substitution. Patients’ willingness to switch between different system’s services is an important part of the competitive process. Systems are closer competitors the more that patients are willing to switch between their services. The Agencies use a variety of tools to assess patient substitution.
Guideline 3
Under this guideline, a merger of healthcare systems may substantially lessen competition when it meaningfully increases the risk of coordination among the remaining systems in the relevant market or makes existing coordination more stable or effective.
According to the Agencies, coordination can occur across any or all dimensions of competition, such as price, services offered, patients serviced, wages, benefits and geography. Coordination among rivals lessens competition whether it occurs explicitly—through collusive agreements between competitors not to compete or to compete less—or tacitly, through observation and response to rivals.
To assess the extent to which a merger may increase the likelihood, stability, or effectiveness of coordination, the Agencies consider various factors. Among others:
Highly Concentrated Markets. By reducing the number of systems and their hospitals in a market, a merger increases the risk of coordination under this guideline. According to the Agencies, the fewer the number of competitively meaningful rivals prior to the merger, the greater the likelihood that merging two competitors will facilitate coordination. Markets that are highly concentrated after a merger that significantly increases concentration are presumptively susceptible to coordination.
The Agencies also state that even in markets that are not highly concentrated, coordination becomes more likely as concentration increases, i.e., the more concentrated a market, the more likely the Agencies are to conclude that the market structure suggests susceptibility to coordination.
Prior Actual or Attempted Coordination. Evidence that the parties to a merger representing a substantial share in the relevant market appear to have previously engaged in express or tacit coordination to lessen competition is highly informative as to the market’s susceptibility to coordination.
The Pesence of a Maverick. A maverick is a firm with a disruptive presence in a market. The presence of a maverick, however, only reduces the risk of coordination so long as the maverick retains the disruptive incentives that drive its behavior. A merger that eliminates a maverick or significantly changes its incentives increases the susceptibility to coordination.
Market Observability. A market is more susceptible to coordination in the context of a healthcare system merger if the behavior of one system can be promptly and easily observed by its rivals, i.e., readily discernible and relatively observable – known to rivals.
Observability can refer to the ability to observe or readily discern prices, services offerings, contractual terms, strategic initiatives, or any other competitive actions of others. Information exchange arrangements among market participants, such as public exchange of information through announcements or private exchanges through trade associations or publications, increase market observability. Regular monitoring of one another’s prices can indicate that the terms offered to patients, or as applicable third-party payors, are relatively observable.
Aligned Incentives. Removing a firm that has different incentives from most other firms in a market can increase the risk of coordination. For example, a firm with a small market share may have less incentive to coordinate because it has more to gain from winning new business than other firms.
Guideline 4
Under this guideline, mergers can substantially lessen competition by eliminating a potential entrant into a market. For instance, a merger of two healthcare systems could eliminate the possibility that entry or expansion by one or both systems into the relevant market would have resulted in new or increased competition in the market in the future.
According the Agencies, a merger can also eliminate current competitive pressure exerted on other market participants by the mere perception that one of the systems might enter. Both of these risks can be present simultaneously.
Under this guideline, the more concentrated the market, the greater the magnitude of harm to competition from any lost potential entry and the greater the tendency to create a monopoly. In general, expansion into a concentrated market via internal growth rather than via acquisition benefits competition.
To determine whether an acquisition that eliminates a potential entrant into a concentrated healthcare market may substantially lessen competition, the Agencies examine (i) whether one or both of the merging systems had a reasonable probability of entering the relevant market other than through an anticompetitive merger, and (ii) whether such entry offered a substantial likelihood of ultimately producing deconcentration of the market or other significant pro-competitive effects.
According to the Agencies, a perceived potential entrant can stimulate competition among incumbents. That pressure can prompt current market participants to make investments, raise wages, increase quality, lower prices, or take other pro-competitive actions.
Guideline 6
The Agencies consider whether a merger may entrench or extend an already dominant position because the effect of such a merger may be substantially to lessen competition or tend to create a monopoly.
The Agencies therefore seek to prevent those mergers that would entrench or extend a dominant position through exclusionary conduct, weakening competitive constraints, or otherwise harming the competitive process (e.g., in the healthcare system context by the use of tying arrangements, “all or nothing” contracting, or “gag” clauses).
A merger that creates or preserves dominance may also reduce the merged system’s longer-term incentives to increase efficiencies, lower prices, enhance quality, expand access and make investments.
Guideline 7
Under this guideline, when an industry undergoes a trend toward consolidation, the Agencies will consider whether that fact alone increases the risk that a merger may substantially lessen competition or tend to create a monopoly.
According to the Agencies, the recent history and likely trajectory of consolidation in a geographic market can be an important consideration when assessing whether a merger presents a threat to competition, especially because Section 7 of the Clayton Act is intended to “arrest anticompetitive tendencies in their incipiency.”[2]
Guideline 8
Under this guideline, when a merger is part of a series of multiple acquisitions by an acquiring firm (the acquiring system in the case of a healthcare system merger), the Agencies may examine the whole series to assess whether the serial acquisitions are part of an anticompetitive pattern or strategy that may violate Section 7 of the Clayton Act. In these situations, the Agencies may evaluate the series of acquisitions as part of an industry trend (Guideline 7) or evaluate the overall pattern or strategy of serial acquisitions by the acquiring firm collectively under Guidelines 1-6.
Evidence of an acquiring system’s current incentives includes documents and testimony reflecting its plans and strategic incentives both for the individual acquisition and for its position in the market more broadly.
Guideline 10
Under this guideline, a merger between competing buyers may harm sellers just as a merger between competing sellers may harm buyers. Accordingly, the same or analogous tools used to assess the effects of a merger of sellers are used to analyze the effects of a merger of buyers.
In the healthcare context, healthcare systems compete for the recruitment and retention of employees and other service providers, both clinical and nonclinical. The Agencies will consider whether workers face a risk that a merger may substantially lessen competition for their labor, and that reduction in labor market competition may lower wages or slow wage growth, worsen benefits or working conditions, or result in other degradations of workplace quality.
Guideline 11
In many acquisitions, two companies come under common control. In some situations, however, the acquisition of less-than-full control may still influence decision-making at the target firm or another firm in ways that may substantially lessen competition.
In the healthcare context, an affiliation between two systems short of a full merger may give one of the systems rights to appoint board members, observe board meetings, influence the other system’s ability to raise capital, impact operational decisions, or access competitively sensitive information.
The Agencies have concerns with respect to these types of affiliations, and under this guideline, such “partial acquisitions” are subject to the same legal standard as any other “acquisition.”
Having described and discussed the Guidelines, the Agencies next discuss how they will assess rebuttal evidence provided by the parties in situations where, having applied the Guidelines on a fact-specific basis, the Agencies have concluded that the merger may substantially lessen competition or tend to create a monopoly.
As explained above, a subsequent article will discuss rebuttal evidence under the Guidelines.
[1] In the Guidelines, the Agencies regularly refer to the merging parties as “firms” and often use the term “products” to describe what the merging parties offer. In the healthcare system context for purposes of this description of the Guidelines, the term “systems” is generally used instead of “firms” and “services” often replaces the term “products.” Similarly, the Guidelines routinely refer to “customers.” In the healthcare context and for purposes of describing the Guidelines, the term “patients,” or as applicable “payors,” is substituted for “customers.”
[2] The Agencies quote from the Supreme Court’s decisions in United States v. Pabst Brewing, 384 U.S. 546, 552-53 (1966) (“a trend toward concentration in an industry, whatever its causes, is a highly relevant factor in deciding how substantial the anticompetitive effect of a merger may be”); United States v. Phila. Nat’l Bank, 374 U.S. 321, 362 (1963) (“Congress intended Section 7 to arrest anticompetitive tendencies in their incipiency.”)
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