Health care mergers facing added scrutiny from a wave of new state anti-trust laws

More states are passing laws requiring their attorney general or another regulator to conduct pre-merger antitrust reviews of health care transactions, creating a new headache for dealmakers already facing stepped-up antitrust scrutiny at the federal level.

Health care attorneys say that as a result of the new state hurdles, legal departments should expect deals may take longer and be more costly to close. And in a worst-case scenario, “you may see deals fall apart if they drag out,” said April Schweitzer, a partner in the health care practice at Nixon Peabody, in Chicago.

“You want to build-in extra time and add this to your strategic considerations.”

Fueling the increased state scrutiny are concerns that health care deals have the potential to sharply increase consumer costs and access to health care.

In its report Empowering State Attorneys General to Fight Health Care Consolidation, the liberal Center for American Progress said some markets have seen prices for medical care jump as much as 54% following horizontal mergers between hospitals or hospital systems.

It also cited a survey that found prices typically rose about 14% following vertical mergers, such as when a hospital system buys a physician practice.

Last month, Illinois became the latest of at least 12 states to create what many are calling “baby HSRs” or “mini-HSRs,” in a nod to the federal Hart-Scott Rodino Antitrust Improvements Act.

The federal HSR requires parties of deals valued at $119.5 million or more to file with the Federal Trade Commission and U.S. Department of Justice for a determination that the transaction will not substantially harm competition.

But these state laws require reporting of health care transactions involving more modest amounts or even without a threshold at all. Minnesota’s threshold for filing is $80 million but lower in some circumstances. Illinois has no threshold for deals involving in-state health care firms.

Beginning last month, Illinois required health care facilities and providers provide a minimum of 30 days notice of a proposed deal. These may include kidney disease treatment centers, cardiac catheterization centers and a slew of other facilities not previously under common ownership or contracting affiliation.

The same goes for deals with out-of-state companies that generate at least $10 million in annual revenue from Illinois residents.

It could be worse. California and Oregon take an expanded view that also looks to capture investments in such deals made by private equity firms, according to a client advisory by Ropes & Gray.

Other states with health care transaction reporting requirement include New York, Washington and Minnesota. Making matters more vexing for merging parties is that requirements vary widely among states. Even what defines a health care facility varies by state.

Some states also require filing notice not only with the AG but also with the state secretary of health. Among these is Rhode Island, where Attorney General Peter Neronha in recent years granted conditional approval involving the change in ownership of two Providence hospitals. Neronha also denied a merger application of Lifespan and Care New England Health Systems, saying the combination would give them “extraordinary” market power.

Waiting periods set by state laws also vary wildly, ranging from 30 days to 180 days.

“These laws, I do expect, are going to continue to proliferate,” said Schweitzer, who tells clients to make sure their filings are accurate and adequately detailed so not to invite needless further reviews and delays.

This quilt of state premerger notification laws, and ever-changing tweaks to HSR, are being felt by the health care industry.

Melinda Reid Hatton, general counsel and secretary for the American Hospital Association, wrote a letter last fall to FTC Chair Lina Khan, complaining of additional reporting requirements the commission proposed HSR. Those changes remain under consideration.

Hatton noted that since 1990s the FTC has filed more than 40 administrative complaints related to transactions involving hospitals and health systems. She also rattled off a list of hospital mergers squashed by state attorneys general and state health authorities.

“Many health care providers, including community hospitals, face unprecedented economic challenges. Rural hospitals in particular are at risk, despite being critical access points for care and economic anchors for the communities they serve. They are least able to afford the increased costs and burdens of HSR compliance,” Reid wrote.

Some wonder whether states requiring premerger notifications is justified in smaller deals.

“I get the theory. The probability is small transactions don’t threaten to do great consumer harm,” however, said John Lopatka, a professor at the Penn State University School of Law and former assistant director of planning at the FTC’s Bureau of Competition.

Lopatka noted that many states already have regulatory mechanisms in place where the effects of potential health transactions are reviewed—such as through a certificate of need process.

Those reviews already provide a conduit for highly motivated stakeholders—such as insurers, doctors’ practices and community members—to raise questions about the appropriateness of a deal, he added.

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State attorneys general, on the other hand, tend to be politically ambitious, Lopatka noted, adding a potential political element to the process.

But more predictable, experts say, is that attorney general reviews that drag on could make deals more expensive and potentially untenable.

An AG need not file a lawsuit to scuttle some deals, Lopatka said, but rather make a second request for information.

“You could imagine some entities saying the cost of complying with a second request is too great, depending on what (they’re) to accomplish” through a merger or acquisition.