Law360 (May 22, 2020, 6:48 PM EDT) -- Hospitals reeling from COVID-19's financial body blow might pursue consolidation to regain their balance, but pocketbook pain will need to be serious to have any chance of offsetting competition concerns, top Federal Trade Commission attorneys told Law360 in an exclusive interview.
Melissa Hill and Mark Seidman, co-leaders of the FTC's Mergers IV division, which oversees transactions involving hospitals and doctors, shared the insights against the backdrop of mounting expectations that health care mergers and acquistions will tick up considerably as a result of the pandemic.
Hill and Seidman are the deputy assistant directors of Mergers IV, where the head position of assistant director is currently vacant. Their comments reflect their own views and not necessarily those of the FTC or any of its commissioners, an agency spokesperson said.
This interview has been edited for length and clarity.
How has the pandemic affected Mergers IV's ability to do its work?
Hill: The Mergers IV work has actually been, surprisingly, not affected to date in terms of the workload that we have. We had a number of ongoing investigations prior to the pandemic, and there has been a reduction in new deals overall, but in terms of Mergers IV's work, we are kind of at the same pace that we had been.
We are working remotely but have seen resilience among staff. And I would say our investigations are carrying on pretty similar to how they would if we were in the office.
Do you expect that providers will cite financial pressures created by the pandemic to justify M&A?
Seidman: That's certainly a possibility — that the financial impact of the pandemic could end up leading to some mergers. I think the framework for evaluating those mergers is well laid out in the guidelines and the case law and the failing firm doctrine and related evaluations.
And I don't know that this is necessarily a new situation to us. We've looked at a lot of transactions that involve health care providers facing financial difficulty. In a transaction with financial difficulties created by the pandemic, our questions would be really the same as they would be in any other situation.
We would want to see a demonstration that the financial difficulties are not short-term, that they really are significant financial difficulties — not just a blip. And one of the most important issues for us is: What would happen to the provider's assets but for the merger? Would they exit the market? Would they go to a different purchaser? Would they find some way to reorganize and remain in the market?
Those are the questions that we would ask. I don't think those are different than the questions we would ask normally.
Hill: That all sounds right. The only thing I would clarify is it seems possible that this situation — the pandemic circumstances — could lead to a short-term financial struggle or difficult situation that would nonetheless still be convincing to us if it was dire enough. I wouldn't expect that we would require the firm to have shown that they have long-term financial difficulties, but the ability to recover would be part of our inquiry.
Do you expect increased horizontal and vertical mergers, or more of one or the other?
Seidman: We've been seeing both types of transactions already for a number of years. Whether the pandemic would create an incentive to do more of different types of transactions is really hard to predict. It's fair to say that health care transactions have taken a lot of forms over the last few years. There's been a lot of vertical transactions, horizontal transactions and other types of conglomerate transactions.
Hill: I would say it seems plausible that the pandemic could create circumstances that would accelerate some of the trends we've already seen.
Have any deals come across your desks yet that have cited the pandemic?
Seidman: I don't think we want to comment even in the abstract about any transactions. That gets a little bit close to talking about specific deals.
Hill: All these cases are always evolving, so I don't think we should make a comment on that.
There's been talk about wider use of the failing firm defense to anti-competitive deals. Is there any chance government officials could revise the narrow guidelines for accepting that defense?
Hill: The revision of the guidelines is definitely something that is above our pay grade. But I wouldn't necessarily expect that, because the way that the guidelines are written allows for the flexibility that you would want to analyze situations created by the pandemic.
Seidman: I would echo that. It's not a new phenomenon that there are health care providers in financial distress. That's an area that we've grown very experienced at evaluating. The guidelines provide a clear framework for that and allow us to evaluate the particular, individualized situations of health care providers that come to us with a merger.
Congress has earmarked $175 billion in rescue funds for providers and is facing calls to spend even more. Has that affected your thinking, since providers could come to you and say the financial distress is unprecedented?
Seidman: We're just going to have to react to what happens. It's always hard to handicap what the deal picture is going to look like several months or years from now. If we start to see an uptick in mergers generally, or certain types of mergers, we'll find a way to [manage] that. But it's hard to anticipate exactly how it's going to play out and do anything in advance to prepare for that.
Hill: I agree with that totally. We of course are aware of the circumstances that hospitals are facing now with their financial situation, and also the money coming to them through various relief bills. We're going to be very interested to hear if that's part of merging parties' story. Our heads aren't in the sand — we're paying attention to what's happening out there. So we will still be turning to our guidelines for the way that we're going to analyze it, but we have the context in mind.
I've seen people say that the FTC had good reasons, such as economies of scale, for letting many mergers proceed over the past couple decades, but that the pandemic's strain on hospital capacity shows that it was perhaps too tolerant of consolidation. What do you think of that argument?
Hill: We have taken each merger that we've investigated and assessed its facts, and we're really looking for whether the merger substantially reduces competition between the merging parties. And I think that economies of scale are going to factor into that. But I don't think it would be fair to say that a lot of hospital mergers have gotten through on that basis.
We're really making an assessment about the competitive landscape before and after the merger on each of the mergers we've looked at. And I also would point out that with some mergers that we think will substantially reduce competition, we end up not being able to enforce because they are shielded by state law that allows the merger to go through with certain kinds of regulatory provisions around it, like with the COPA [certificates of public advantage] idea.
Not to belabor this, but given the bed capacity issues highlighted by the pandemic, might you be more wary of authorizing mergers that could reduce capacity?
Seidman: As Melissa said, this is very much [assessed on] a case-by-case basis. And we're focused much more on the effect of a merger on competition. There might be situations where reducing bed count could make sense, and there are times when reducing bed count could be anti-competitive. It's hard to generalize about that. I do think we evaluate closely the claims of merging hospitals if part of their claim is that they're going to be able to consolidate their beds. That's something we would look closely at.
On the other hand, some people have suggested that large health care systems are weathering the pandemic better, and so that's a point in favor of consolidation. Any thoughts on that?
Seidman: First of all, I think it's a little too early to tell exactly what the financial impact of the pandemic is going to be. Certainly the short-term impact is likely to be significant, but there will also be some government assistance to help deal with that. And that assistance looks like it's going to apply beyond health care. So I think it's a little early to tell exactly what the overall impact is going to be. But our merger analysis focuses on competition between merging parties, not on some standard of what the right size is for a health system.
Is there any chance the FTC will relax its information demands, such as second requests during merger reviews, in light of the pandemic's financial toll?
Seidman: We go through a lot of effort to reduce the burden of second requests. We spend a lot of time talking to merging parties and negotiating the bounds of the second requests [to get] what we need to give the commission an informed decision, but doesn't place needless burdens on merging parties. That said, if someone's merging with a direct and significant competitor, it's likely that we're going to need a lot of information to do that evaluation. The commission is going to have some very detailed questions that are going to demand of us a detailed investigation. I don't see how that would change.
Hill: We also have that mindfulness in advance of the second request issuing. I don't think staff has an interest in gratuitous second requests, so to the extent we can work with merging parties before a second request issues, we're already trying to do that.
Seidman: I would add, on that point, that there are some parties who have come to us early in the process, and even before [a Hart-Scott-Rodino Antitrust Improvements Act of 1976] filing, or even well in advance of a deal, to start working with us and get us information. It's certainly never a guarantee that we don't move to a second request and ultimately go to a full-phase investigation, but it can be really helpful to get an early heads-up. That can be a way of doing some more efficient, but still very complete, looks at some of the issues.
In closing, is there anything else you'd like to add?
Hill: The one thing I would add is, with hospital merger investigations, the folks that we need to be communicating with are all either other providers or health insurers or employers in the market, and every one of them is being affected by the pandemic. And so that has been one challenge for us as the pandemic has understandably diverted people's attention and made people harder to reach.
I think we're rising to meet that challenge, and we'll always work within the timeline that we have from the parties or from the statute. But that's a context we think is useful for everyone to understand, that hospital merger investigations right now involve getting information from a lot of parties that are perhaps slightly less available to us than they normally would be.
So are reviews slower now than usual?
Hill: I wouldn't say reviews are slower, but it is something that, for key information that we need from third parties, it may be something that takes us longer to get than it might under normal circumstances.
--Editing by Jill Coffey.
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