FTC, DOJ’s new 'anti-merger' stance: How the feds will scrutinize health care in 2024

The Federal Trade Commission and the Justice Department jointly issued the long-awaited new merger guidelines at the end of 2023. The guidelines highlight the agencies’ focus on “excessive market consolidation” and continue their aggressive approach to antitrust enforcement.

The health care industry has undoubtedly experienced significant consolidation. This has sparked concerns from the agencies and others that the consolidation has resulted in diminished choice, lower quality and increased health care costs. The revamped guidelines are yet another tool for the agencies to use as they seek to push back against consolidation— particularly with respect to cross-market and vertical mergers that the agencies have previously had less success in challenging.

The new guidelines directly address the various forms of consolidation seen in the health care industry during recent years, including vertical and cross-market mergers, roll-up acquisitions (particularly by private equity firms), and joint ventures in which health care systems hold partial ownership interests. The guidelines also emphasize the impact that transactions may have on labor markets. Perhaps the most important change from previous versions of the guidelines is the new, lower levels of market concentration that will trigger a presumption of illegality.

Under the 2023 guidelines, a transaction will be presumed to be anticompetitive if the post-merger Herfindahl-Hirschman Index (HHI), the commonly accepted measure of market concentration, is greater than 1,800 and the HHI change is more than 100 or the merger results in a combined market share of over 30% and an increase in the HHI of more than 100. This lower threshold means that more mergers may be classified as presumptively anticompetitive and undergo the Agencies’ investigative process. However, the presumption of illegality may be rebutted.

Here’s an evaluation of what the guidelines may mean for the health care industry.

How the guidelines might impact the health care industry

While the agencies have historically taken an aggressive stance in challenging mergers in the health care sector, the 2023 guidelines suggest the agencies will take an even stronger “anti-merger” stance and will beef up their opposition to consolidation in the health care industry. It is certainly the case that parties to potential transactions should proceed with the expectation that all mergers will be presumed illegal when the merger significantly increases the concentration in a highly concentrated market, which does not have to be as “highly concentrated” as in years past. These presumptions may be rebuttable, and it is simply not possible for the agencies to challenge every merger that triggers the presumption. We expect that antitrust enforcers will prioritize matters they believe clearly demonstrate a likelihood of competitive harm and which the agencies have a reasonable chance of winning.

That said, the guidelines put a laser focus on the need for health care firms to be proactive when considering transactions. This is especially true for horizontal mergers of direct competitors in highly concentrated markets, vertical mergers that present foreclosure concerns, and private equity roll-up transactions.

For a recent enforcement example in a vertical merger context, Illumina, Incorporated, a next-generation sequencing provider, finalized a merger with Grail, L.L.C., the exclusive developer of a commercially available multicancer detection test, which test relies upon Illumina’s technology. The commission determined that the Illumina/Grail merger would likely substantially decrease competition and the U.S. Court of Appeals for the Fifth Circuit upheld the FTC’s determination. The court agreed that the “merger will result in the potential foreclosure of a key input by the sole supplier, that it was intended to transform Illumina’s business model by shifting its focus from NGS products to clinical testing, and that investment by other MCED-test developers may be chilled … This was sufficient to support a determination that complaint counsel had made a prima facie showing that the merger was likely to substantially lessen competition under the Brown Shoe test.” The court remanded the case, finding that the commission applied the incorrect legal standard in evaluating the supply agreement offered to rival developers of MCED tests. Two days after the Fifth Circuit released its decision, Illumina announced that it would divest Grail.

The new guidelines place private equity roll-up transactions squarely in the sights of the Agencies for review. While no single component of the roll-up might be enough to trigger potential antitrust concerns, the cumulative effect of a roll-up in a given segment of the health care industry may result in a potential antitrust investigation or challenge. Accordingly, private equity firms may wish to routinely involve their antitrust counsel in evaluating transactions.

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In September 2023, the FTC sued U.S. Anesthesia Partners, Inc., “the dominant provider of anesthesia services in Texas, and private equity firm Welsh, Carson, Anderson & Stowe, alleging the two executed a multiyear anticompetitive scheme to consolidate anesthesiology practices in Texas, drive up the price of anesthesia services provided to Texas patients and boost their own profits.”

While not a merger case, the U.S. Anesthesia case is nevertheless a strong example of the FTC’s negative view of private equity in health care. As further evidence of anti-private equity sentiment, on March 5, 2024, the FTC hosted a virtual workshop, Private Capital, Public Impact: An FTC Workshop on Private Equity in Health Care, examining the role of private equity investment in health care markets. Also on March 5, the FTC and DOJ announced the issuance of a request for information (RFI) requesting public comment on deals conducted by health systems, private payers, private equity funds and other alternative asset managers that involve health care providers, facilities or ancillary products or services. The RFI also requests information on transactions that would not be reported to the Justice Department or FTC for antitrust review under the Hart-Scott-Rodino Antitrust Improvements Act.

While premerger notification under the Hart-Scott-Rodino Antitrust Improvements Act of 1976 (the HSR Act) may increase the likelihood of a transaction appearing on the agencies’ radar screen, the agencies find out about deals in other ways. The agencies always have the power to investigate and challenge transactions they believe raise significant competition concerns regardless of whether a transaction is HSR reportable. Even before a deal is signed, parties are well served by conducting an early market share analysis to see if the presumption of illegality under the guidelines is triggered. If the presumption is triggered, the next step is gathering data and developing arguments that could rebut a presumption of anti-competitiveness. Acquiring parties may understandably be reluctant to invest heavily in such analysis early on but taking a “wait and see” approach in higher-risk situations may prove costly in the long run, as evidence that is created after a government subpoena arrives will be viewed with extreme skepticism. Avoiding unpleasant surprises for C-Suite executives and corporate boards is also important. Early antitrust analysis may educate key stakeholders on potential antitrust pitfalls and possible outcomes, which may influence deal appetite and deal value.

Moreover, the guidelines require health care firms to think more broadly about potential antitrust concerns when vetting transactions. Gone are the days when the focus of any antitrust analysis was firmly fixed on horizontal mergers in a single market and health care firms could pay less attention to antitrust concerns for mergers with firms in another market or a different service line. The guidelines make clear that the Agencies view vertical mergers and cross-market mergers as having the potential to harm competition and intend to challenge those transactions with just as much vigor as horizontal mergers they deem harmful.

Takeaways for health care firms

It is an open question whether the guidelines will chill merger and acquisition activity in health care and what their full impact will be. The guidelines do highlight, however, the need for parties considering a potential merger or acquisition in health care to consult antitrust counsel early in the process, given the robust regulatory and enforcement environment. Health care firms should proactively vet all potential transactions for antitrust concerns as part of their initial due diligence.

Denise M. Gunter is managing partner of Nelson Mullins Riley & Scarborough’s Winston-Salem office and serves on the firm’s executive committee. Carrie A. Hanger is a partner with the firm. Candace S. Friel is a partner with the firm.