United States: Pennsylvania Attorney General Requires Merging Hospitals To Contract Separately With Payors In Settlement Agreement

In addition to the federal antitrust enforcement agencies, state attorneys general continue to take an active role in antitrust enforcement, especially in the health care industry.  Last week, the Pennsylvania Attorney General announced that it had entered into a settlement agreement with two merging hospitals requiring the hospitals to contract separately with payors post-closing.  Early on in transaction planning, hospitals and health systems considering transactions with potential competitive implications should identify the rationale for and benefits of the transaction, in preparation for both state and federal antitrust agency review.

On June 7, 2012, Pennsylvania, through its Attorney General (AG), filed an antitrust complaint and consent order in the U.S. District Court for the Middle District of Pennsylvania, settling charges that the acquisition by Geisinger Health System Foundation (GHS) of Bloomsburg Hospital violated section 7 of the Clayton Act and the state common law prohibition on suppression of competition.  The Pennsylvania AG alleged that the merger of GHS and Bloomsburg would reduce from three to two the number of principal rival hospitals in the Columbia County area and employers of physicians, and therefore would likely lead to higher prices for (i) primary and secondary inpatient acute care services and (ii) primary and non-tertiary specialist physician services. 

Pennsylvania AG Settlement

Rather than enjoining the transaction, the AG agreed to a multi-faceted "conduct" remedy.  Perhaps the most significant of the many remedial conduct restrictions is the enablement of health plans to trigger (with AG involvement) independent third party review of GHS rate proposals, if GHS and the health plan are at an impasse after 60 days of negotiations.  Under the order, GHS must base its rates on Bloomsburg Hospital costs, not on its system-wide costs, so as to obtain "a reasonable profit margin for similarly sized and well run community hospitals."  Accordingly, GHS may not readily apply system rates to Bloomsburg.  The independent consultant, if retained to resolve a GHS-payor contracting impasse, is tasked with reviewing GHS's pricing and negotiation methodologies to validate an acceptable "negotiation range" and other appropriate contract terms and conditions.  Following subsequent negotiations between GHS and the payor, GHS must accept the payor's rate proposal if it falls within the "negotiation range." 

The order imposes additional contracting restrictions on GHS.  These include a provision that prohibits GHS from conditioning a contract for network participation by Bloomsburg on the health plan's agreement not to contract with any other provider.  In addition, GHS may not require a health plan to contract with other GHS entities as a condition for obtaining a network contract with Bloomsburg.

The Pennsylvania AG implied that it accepted a conduct remedy over an injunction in light of Bloomsburg's difficult financial condition.  Bloomsburg said that by October 2012 it would have insufficient cash to meet its obligations and could not continue operations.  The AG consented to the order "[g]iven the Acquired Parties' financial condition and the potential for the loss of 900 jobs."

Key Takeaways for Hospital and Health System Transactions

The Pennsylvania hospital merger investigation and settlement is notable in several respects:

  • The state AG pursued the challenge and the Federal Trade Commission (FTC) did not.  State AGs continue to investigate transactions in the health sector—including the Pennsylvania AG's investigation of and settlement with a urology practice, and the Maine AG's investigation of and settlement regarding the merger of cardiology groups, both in 2011.  Hospitals and health systems contemplating transactions with competitive implications should identify and develop their rationale for—and the anticipated community benefits of—a transaction well in advance of any likely state or federal review of the transaction.
  • The state AG agreed to a conduct remedy and did not enjoin the transaction.  Historically, the FTC has favored enjoining prospective mergers or requiring divestiture over post-merger conduct remedies.  (The FTC did accept a conduct remedy in the unusual case of a hospital merger that had been consummated for some seven years prior to the FTC's finding of antitrust liability.  At that point, the FTC concluded that divestiture would do more harm than good and instead required separate contracting between the merged hospitals.  See In the Matter of Evanston Northwestern Healthcare Corporation and ENH Medical Group, Inc, FTC Docket No. 9315.)  The Pennsylvania AG's willingness to agree to a conduct remedy may signal that the state AGs are better able to devote resources to monitoring post-merger conduct and, therefore, are more receptive to post-merger conduct requirements, such as separate managed care contracting as an alternative to barring the transaction altogether.  As a result, some hospital transactions that otherwise would have been enjoined may be able to move forward with post-merger conduct remedies.
  • Conduct remedies are not without costs.  Hospitals and health systems facing the potential for settlements with post-merger conduct remedies must carefully weigh the costs of compliance with settlement restrictions, as well as the monitoring and oversight of their post-merger activities.
  • For hospitals that face serious and difficult financial challenges, this case offers the promising precedent (from the limited perspective of state enforcement) of an alliance between a struggling hospital and its larger and more financially sound, but proximately close, rival.  However, the order's prohibition on application of system-wide rates to the acquired hospital may result in a revenue stream that does not fully reflect the hospital's enhanced value as an integrated member of a more efficient system.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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