Dramatic changes in the health care field have prompted many hospitals to explore merger strategies as a means of remaining competitive in the future. But the Federal Trade Commission's (FTC) aggressive prosecution of hospital mergers may thwart hospitals' efforts to adapt to these changes. The critical legal question in any merger analysis is whether, as a result of the merger, a future lessening of competition is probable. Given the pro-competitive benefits of hospital mergers, allowing such mergers to proceed may often result in more competition, rather than less.

 

The FTC's renewed zeal for challenging hospital mergers is impacting hospitals across the country. For example, a merger in Toledo, Ohio, is the subject of a case pending in the U.S. Court of Appeals for the Sixth Circuit, ProMedica Health System, Inc. v. FTC. And the Supreme Court of the United States recently granted the government's request to review FTC v. Phoebe Putney Health System, Inc., which involves a merger in southwest Georgia. In both cases, the FTC initiated proceedings to block the mergers, alleging that the mergers would have anti-competitive effects.

Despite the FTC's dim view of hospital mergers, such mergers frequently enhance, rather than reduce, competition among hospital providers. Mergers enable hospitals to respond to changing market forces by improving their access to capital and economies of scale. For many hospitals — particularly stand-alone hospitals — merging with another hospital or system may present the best opportunity for remaining competitive in the future. The American Hospital Association recently raised these points in an amicus brief filed in the ProMedica case.

Market Forces Driving Hospital Mergers

Hospital providers are facing a critical juncture in history. Several market forces, detailed below, are creating an urgent need for hospitals to make significant capital investments and achieve greater economies of scale.

 

Hospital reimbursement reductions and changes. Hospital revenues are declining, and much of the decline is attributable to cuts in Medicare and Medicaid reimbursements. As hospitals struggle to make ends meet, they also must adapt to a revolutionary reimbursement trend: the shift from volume to value. Instead of receiving reimbursement payments based on the volume and type of services provided, hospital reimbursements will now depend on the "value" of services provided, as measured by the quality and cost-effectiveness of care. To maximize the value of care, hospitals must implement deep cost reductions that require greater economies of scale. Moreover, hospitals must make significant investments in information technology to track and report their progress.

Electronic health records. Not only are electronic health records necessary for hospitals to succeed in a value-based reimbursement model, but a portion of Medicare and Medicaid reimbursements are now conditioned on hospitals' adoption of electronic health records that meet federal requirements. Implementing electronic health records is expensive, however, and the steep price tag may cause serious financial strain on already-struggling hospitals. In the future, hospitals that do not make the necessary investment in electronic health records are unlikely to remain competitive.

Limited access to capital. Despite hospitals' strong need to invest in electronic health records and other technology, it is increasingly difficult for hospitals to access capital to make those investments. Hospitals that are struggling financially typically receive lower bond ratings and, thus, are less credit-worthy, which limits their ability to access capital. These hospitals can quickly fall into a downward spiral — without adequate access to capital, they are unable to make necessary investments for the future, and their financial health continues to plummet. Unless hospitals short-circuit the downward spiral by improving their access to capital, they will continue to fall behind and may never regain their footing.

Mergers Are Critical to Hospitals' Future Ability to Compete

For many struggling hospitals, mergers offer a glimmer of hope during this period of transformation and uncertainty. Through a merger, hospitals can adapt to these changes by achieving greater economies of scale and improved access to capital. These tools arm hospitals with the ability to compete in the changing world of health care.

 

Through a merger, hospitals can gain the economies of scale necessary to reduce costs and waste, eliminate duplicative services and technology, and spread costs over a larger base. These improvements allow hospitals to provide greater value to patients, which is critical in the new era of value-based purchasing.

Mergers also can provide hospitals with greater access to capital, allowing them to make necessary investments to remain competitive in the future. A merger may increase the size of a hospital, which often leads to a higher bond rating due to broader services and improved efficiencies. And if an acquired hospital joins a larger hospital system through the merger, its bond rating will likely improve due to the diversification of risk among several facilities, services and even geographic locations.

In light of these benefits, it is not surprising that many experts are advising the boards and management of hospitals — especially stand-alone hospitals — to seriously consider merger opportunities. Mergers offer hospitals the potential to remain competitive in the rapidly changing field of health care. If the FTC blocks beneficial hospital mergers, struggling hospitals may be forced to reduce their staff and services, and they may eventually wind down and close. As hospital facilities and quality deteriorate, patients and the community will suffer. The hospital merger wave is only beginning, and the response of regulators and courts will have a lasting impact on the future competitive landscape of health care.

Toby Singer is a partner in the Antitrust practice at the law firm of Jones Day in Washington, D.C. Beth Heifetz is a partner in the Issues & Appeals practice at Jones Day. Tara Stuckey Morrissey is an associate in the Issues & Appeals practice.

For more information about the impact of hospital mergers on competition among hospital providers, see the AHA's recently filed amicus brief here.