Given the track record of merger antitrust enforcement since 2007, parties seeking to combine entities at the same level of the healthcare supply chain have faced an increasingly difficult environment. The Federal Trade Commission (FTC) has consistently and successfully challenged several horizontal transactions between healthcare providers since 2007. And in 2017, the DOJ blocked two major horizontal mergers of insurers, following up on a decade of enforcement activity in the health insurance space. But vertical transactions—deals between entities at different levels of the healthcare supply chain—are treated very differently. We saw a prime example of the contrasting approach in 2018.
In 2018, the DOJ approved Cigna Corp.’s $67 billion acquisition of Express Scripts Holding Co. and CVS Health Corp.’s $69 billion merger with Aetna Inc. (See October “Health Update” article.) While the DOJ required CVS and Aetna to divest Aetna’s Part D prescription drug plan business in order to merge (a horizontal overlap between the parties), the DOJ imposed no conditions on Cigna and Express Scripts.
These recent clearances reflect that large transactions—even those in a concentrated industry such as healthcare—can pass antitrust muster. When a transaction combines entities at different levels of the supply chain, it is generally held to promote efficiencies and will be approved when it does not increase barriers to entry, create customer foreclosure or lead to anticompetitive information exchanges. Further, where competitive issues arise and can be remedied structurally, the deal will likely still be cleared. We likely will see 2019 yield more vertical deals by entities emboldened by the DOJ’s recent clearances.
To read more about current themes in U.S. merger control, with a particular focus on vertical transactions and behavioral remedies, see our white paper available here.
2. Limited or No Behavioral Remedies
There are two basic types of merger remedies: structural and behavioral. Structural remedies restructure the merger transaction by requiring asset divestitures or similar relief as a condition for clearance. By contrast, behavioral remedies are conditions that impact the company’s future and ongoing business functions.
Historically, the FTC and the DOJ maintained that behavioral remedies can serve as an effective method of handling competition concerns raised by vertical mergers. Since his confirmation in late 2017, however, Assistant Attorney General (AAG) Makan Delrahim has consistently emphasized that the DOJ is a law enforcement agency, not a regulatory agency. The AAG has criticized the prior administration for entering behavioral consent decrees to resolve vertical mergers. In 2018, the FTC has echoed these views. Bruce Hoffman, director of the FTC’s Bureau of Competition, has described the FTC’s role as an antitrust enforcer, not the price police.
Behavioral remedies are often invoked in vertical transactions. In order to preserve the inherent efficiencies in the transaction, the agencies historically allowed vertical deals to go through with undertakings to permit access to key assets or platforms or implement firewall and information flow restrictions. Two recent FTC consent decrees have permitted vertical transactions to proceed with limited behavioral remedies implementing firewalls and restricting the flow of competitive information. Beyond this limited type of remedy, however, parties seeking to combine in 2019 should not rely on the availability of behavioral remedies to solve potential competitive issues.
3. Increasingly Prominent Role of State Regulators in Healthcare Transactions
In 2018, state antitrust regulators took on a prominent role in healthcare transactions, occasionally supplanting federal antitrust enforcement. We expect to see this trend continue in 2019.
In November 2018, the FTC closed its investigation of the proposed merger of several healthcare institutions that would create the second-largest healthcare system in Massachusetts—the combination of Care Group, Inc. (the parent company of Beth Israel Deaconess Medical Center, Mount Auburn Hospital and New England Baptist Hospital), with Lahey Health System, Inc., and Seacoast Regional Health System. The FTC’s decision not to challenge this transaction followed the Massachusetts Attorney General’s (AG) announcement of a settlement with the parties that would allow the merger to take place subject to detailed conditions related to healthcare access and the imposition of pricing caps. The Massachusetts AG’s announcement followed a detailed review by the Massachusetts Health Policy Commission.
Although the FTC’s closing statement highlighted its successes in challenging hospital transactions and its aversion to behavioral remedies, the FTC decided to step back, because it believed that the settlement helped achieve Massachusetts’ healthcare goals by preserving access to healthcare for underserved populations in the state and limiting price increases for Massachusetts healthcare consumers. The FTC’s restraint despite considering the case a close call signals the importance of states’ interests in healthcare for their communities. It also highlights the ability of state institutions to monitor and enforce complex behavioral remedies to avoid potential price increases or other anticompetitive outcomes from a healthcare transaction. For a more detailed discussion of the FTC’s decision, see our article here.
Recent years also have seen an increase in state activity under Certificate of Public Advantage (COPA) laws for exempting hospital merger transactions from federal antitrust oversight. While competition concerns are factored into a COPA review, they may be overshadowed by perceived public benefits to the local community in terms of enhancing quality of services and addressing particular public health concerns. During a COPA review, the FTC often will send letters to the state urging it not to grant a COPA, but the state retains deciding authority over the transaction. For instance, Tennessee and Virginia both granted Wellmont Health System and Mountain States Health Alliance a COPA in 2017 despite strong FTC protests. For more information on this decision, see our article here. Several other states have COPA laws, including New York, North Carolina, Montana and Louisiana.
4. Focus on Restrictive Agreements
Agreements that restrict the free competitive operation of the healthcare system will continue to be an area of focus for the FTC and the DOJ as well as private litigants. The DOJ recently settled its case against Atrium Health over restrictive provisions in its contracts with insurers that effectively prevented them from implementing narrow or tiered networks that excluded Atrium facilities. As part of the settlement, Atrium agreed to cease using such provisions. The DOJ also has challenged other types of restrictive agreements between hospital systems over marketing and the types of services that will be provided. We expect to see more investigations along the lines of the Atrium case in 2019.
5. No-Poach Cases
“No-poach” or “no-hire” agreements involve employers agreeing not to steal each other’s employees and have long been a feature of industries in which skilled talent is in short supply. While employers can expect to see litigation continue over these agreements in 2019, some recent cases have faced headwinds.
The DOJ has increasingly stepped up its enforcement against these agreements since about 2010, when it announced a settlement requiring Adobe Systems Inc., Apple Inc., Google Inc., Intel Corp., Intuit Inc. and Pixar to cease entering into nonsolicitation agreements for employees. In 2016, the DOJ and the FTC issued Antitrust Guidance for Human Resources Professionals, focusing on wage-fixing and no-poaching agreements.
Not surprisingly, the DOJ’s actions against employers over these issues were followed by private suits. After the DOJ’s 2010 settlements, private plaintiffs filed class actions against the tech companies, culminating in a $415 million settlement against Apple, Google, Intel and Adobe in 2015. Also in 2015, a class action was filed against Duke University, the University of North Carolina (UNC) and their respective health systems, alleging that they conspired to suppress the compensation of their employees by entering into agreements not to poach certain medical facility faculty and staff from each other. In February 2018, Judge Catherine Eagles certified a class of persons employed as faculty members with an academic appointment at the Duke or UNC medical schools.
In April 2018, the DOJ simultaneously filed a civil antitrust suit and announced civil settlements with Knorr-Bremse AG and Westinghouse Air Brake Technologies Corp. over alleged no-poach agreements. It has recently weighed in on a follow-on civil class action in support of the plaintiffs. We can expect to see further employment-related investigations and enforcement action throughout 2019.