Preparing for regulatory and antitrust scrutiny is critical to the success of mergers and acquisitions. Healthcare organizations need to know which steps to take, especially in light of the potential repercussions of the increased scrutiny at the state and federal levels.
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Sue Anderson:
As you may have seen in the press, since last year there's been heightened regulatory and antitrust scrutiny for health system mergers and acquisitions. Can you provide some insight on what has happened?
Jodi Capistrant:
A couple of things happened back in the summer of 2021, the most notable being that the Biden Administration signed an executive order that encouraged agencies that oversee merger review—the Department of Justice (DOJ) and the Federal Trade Commission (FTC)—to revise their guidelines to ensure patients are not harmed by such mergers.
This executive order specifically cited large health systems’ control of market share, the impact on rural communities. It cited research around shuttering or closing of rural hospitals and rationalizing care in rural settings and also consolidating markets and higher prices. And even before this, the FTC had voted along party lines to approve specific resolutions that put hospitals in their crosshairs, along with companies like pharmaceutical manufacturers and pharmacy benefit managers (PBMs). And this has a big impact for our clientele.
We think the burden of proof is really going to be on the organizations who are moving forward with transactions, as opposed to being on the government. The government has even gone so far as to send out letters—warning letters, that is—to say “close at your own risk.” These actions have also heightened the awareness of what we believe are local and state government officials who are taking their cues from the federal government.
The last thing is that we think it's going to take more time to get to close, and it's going to require a greater thought process around what is going to get them to close. We think that the inspection, the scrutiny, is going to be at a higher level.
Harrison Burns:
A piece of this that has really garnered the attention of a lot of our clients is the potential for retrospective reviews. This was part of the new guidance that came out, where mergers that have closed over the past 10 years could be looked back upon and reviewed; a large data request could be reviewed.
I'd say that Chartis has not seen substantial evidence of this happening yet, and [we] would actually question how feasible this truly is, just given some of the backlog and all of the Hart-Scott-Rodino requests flowing into the FTC for new merger reviews. But it is something important to be aware of.
Capistrant:
It's actually really important to note that they have certainly made comments to that effect—that they would retrospectively look at deals. It’s sort of unprecedented because I do believe that they’re providing signals that they're not going to be challenging these transactions just based on what has been legal precedent, i.e. the Sherman Act around monopolies or the Clayton Act, and the effect of the transactions being mostly around driving less competition, but looking at “risk.”
Also, there are some folks out there who really do believe that there's going to be a challenge with regard to hospitals that are in separate markets, which has been largely untouched before. It’s difficult to think of substitution across markets for hospital services, but that is something that is being discussed in our field.
And then the last thing I'll say in terms of retrospective or prospective looks is also around this idea of the concepts that are being brought forward—or could be brought forward—in terms of challenges to these deals. It is beyond what we would typically think of as consumer price impact or products and services, but actually extending to social forces.
So, for instance, as we know, a lot of the hospitals are the largest, or one of the largest, employers in their community, and social forces like employment and wages are also being considered as ideas that could pause or stop or challenge a transaction.
Sue Anderson:
How are you seeing this take shape in the market and for your clients? Particularly, how are state governments and attorneys general (AGs) following suit?
Melissa Anderson:
We're seeing this impact our clients in a few ways. They definitely are thinking about antitrust and regulatory review much earlier in the process. So even before they’re seeking out targets or opportunities, they're thinking through what might be the antitrust implications for that and often assessing various scenarios or options that they could pursue that maybe would limit some of the risk around a regulatory environment.
The second thing we’re working with our clients on and also seeing them do is being better able to articulate the value of those mergers and partnerships. Historically, you heard a lot about cost synergies. Those really are table stakes at this point, and they're still highly contested.
They need to go the step further and talk about some of Jodi's points: What is the value to the community that you're serving? How might you be able to improve and enhance access to care? What's the broader economic impact?
I currently am working on 2 different mergers, where we spend a lot of time and analysis thinking about the broader economic impact—in terms of, “Could we enhance and expand research? How might we elevate and be more of an innovation hub that could drive economic development for the region?”
And also thinking about the workforce, recognizing their significant needs. How, through this merger, could you actually help bolster and enhance the workforce that you need and then really drive economic input for the region?
Once you articulate that value, it's really important in this environment that our clients can then be able to talk about how they're going to achieve that value. What's the plan they're going to have, being specific?
There’s a lot of pushback from states, particularly, saying, “Great, you're going to drive all this value, but how are you going to do it? What are the resources you need? What's the timeline to achieve it?” Being able to demonstrate, “Here’s the path we're going to take. Here are the resources. And here's how we're going to hold ourselves accountable from a measures-of-success perspective.”
Isaac Squyres:
When you're talking about the articulation of the value proposition, I think that's one thing that we're seeing from a communications perspective as being particularly valuable—giving that context, telling the story both internally and externally about why the partnership is going to be a good thing. Some of that can create the right context and soft ground, favorable ground, for the partnership to be received both internally and externally.
From a communications perspective, our goal is to keep the waters calm, to keep the noise internally and externally to a minimum. And that can be helpful, I think, in terms of giving elected officials and regulators and, eventually, the FTC no reason to look into deals that have already been described as good for the community, good for the physicians, good for the employees, etc.
So that's part of what we try to do from a communications perspective—give that context, articulate the value proposition to keep the noise low and the waters calm.
Capistrant:
We also have clients who are looking at, very specifically, how to impact social determinants of health and address health equity, and they believe that that's going to really make an impact for their communities realistically. But also they want to be able to send those messages very clearly.
Melissa Anderson:
That's a great segue to Sue’s second question, where she was asking, “What are we seeing at the state level?” recognizing that the states very much are making sure that there's equitable access to care and addressing some of the healthcare disparities.
From a state perspective, there's definitely an enhanced level of scrutiny around healthcare M&A. I think there are 2 paths we've seen for states, either through the greater engagement of the AG’s office [or] with some states also passing legislation.
If you think about California, historically they've had very strong AG engagement, and that's continued. We've seen some other states continue down that path, most recently in Rhode Island regarding the merger that was proposed there.
We're also seeing states that have taken a legislative approach. Most recently, towards the end of 2021 in Oregon and Nevada, both states put requirements in around just notification of mergers. And then they also, in Oregon, have defined review processes and approval processes that are required.
How does that play into your broader timeline? How are you going to satisfy some of the questions? That's becoming increasingly important as you think about these mergers.
One piece here that's different too is the perspective that the attorney general or the state brings is very different from the FTC. Often the state is very concerned with how you make sure access is maintained, that rural communities aren't disadvantaged—hospitals are big economic hubs. So they're bringing very much a different perspective on these transactions than historically the FTC or DOJ has.
Squyres:
I think one other thing there in terms of the state is: Elected officials and people in the state are going to listen to their constituents. So to the extent that their employees and their communities are weighing in and saying, “Hey, I think this will be a good thing,” or at least staying neutral, can be helpful to keep state interest and scrutiny lower.
So again, back to that engaging and articulating the value proposition can be helpful at the state level for sure.
Sue Anderson:
In a recent announcement, the proposed merger between Englewood Health and Hackensack Meridian Health, which is challenged by the FTC, a preliminary injunction blocking the acquisition has now been affirmed by the federal appeals court.
Specifically, the court noted it believes that the merger is likely to substantially lessen competition, and an FTC representative further commented they believe that if the deal had gone through, “Patients would have been left with fewer alternatives for inpatient general acute care services, which likely would have driven up prices and diminished the quality of care available.”
This is just one example of some recent rulings. Are there other examples that you would cite as bellwether cases of this heightened scrutiny?
Melissa Anderson:
One of the others that we had worked on was with Jefferson Health and Einstein Healthcare Network. So that was one that if you were paying attention was very much in the news and contested by the FTC and the Pennsylvania AG office. And that's a place where they had really thoughtfully considered the implications of the merger.
They had thought through the value it would bring to the community. We had the privilege of working with them to actually create the plan of how they would execute upon that. So they really took a robust and comprehensive approach to pursuing this merger, and they did many of the things that Harrison and Isaac talked about as well.
So thinking through, “What's our engagement strategy? How are we going to pursue and approach that?” They also looked at their historic transactions to better inform and articulate the value they had already achieved through previous mergers. They really took that comprehensive approach, which ultimately ended up in their favor from their review that occurred with the circuit court there.
Burns:
Circling back to your point, Melissa, just the broader impact in communities. I think that also raises the importance of thinking through scenarios when you approach a new merger partner, just due to potential market concentration.
So Jodi and I are working with a client that just acquired 7 hospitals from another regional player. And they actually had 2 scenarios. The ideal one was to acquire all 7, but there was a Scenario B, where they just acquired 6 of the 7—because one of those hospitals was in a market where they were expecting additional regulatory scrutiny, just due to market of the combined enterprise.
Capistrant:
I'm working with 2 other clients where we've done very robust scenario planning to both that point and related to what the threshold is within which they could still afford to do the deal and have the impact that they want to have long term. And then also to that point, how they approach regulatory bodies and how that might need to shift. So it's becoming very common in the work that we're doing as a firm.
Sue Anderson:
What are some of the other things that health systems who are engaging a partnership, or who are thinking about entering into a merger, should be considering?
Burns:
I think on that point, it really depends on where the organization is in the merger process. I think about that in 3 ways. First, the organizations who are seeking a merger partner but have yet to make outreach. The second piece is those that are already in flight. They've already found a partner and are negotiating, but the deal hasn't closed yet. And then third, those that have already integrated and are one.
On the first piece—those who are still forward-looking and looking for that partner—it’s really important for them to refresh their M&A strategy. So thinking about, given this new regulatory landscape and anticipated scrutiny, what's the right timing and sequencing for engaging new organizations? For potential targets, what is the right scale?
For example, is it really the right time to go after the second, third, fourth, or fifth largest player in the market? Or should we prioritize targeted one-off mergers and acquisitions there to bring us the capabilities and scale we need?
And then there's this piece about the geographic proximity too. Are there opportunities to leapfrog into new markets, as opposed to staying contiguous? That said there is an anticipation of enhanced scrutiny over cross-market mergers and potential pricing implications. I will say that that's not necessarily the easy answer now, just leapfrogging into new markets, because again market lines are becoming more blurred, and that could be a potential risk.
For the second piece, organizations who are still under negotiations and have in-flight partnership planning discussions, I think Isaac's point was spot on. Do not wait to create that compelling narrative and cleanly articulate the “why.” It’s really important to think about the various audiences you could be engaging with.
For example, what's the narrative to the FTC, and what are the supporting data points you would need to show them? It's probably slightly different than what you would need to articulate to your state AG or other community constituencies. What's the narrative for your board? Or your employee base?
All of these parties have slightly different priorities and motivations, so it's really important to think about each segment and tailor those communications accordingly.
Sue Anderson:
I know we've talked a lot about the role of communications and how it can be a lever for mitigating risk. What are some of the other things executives should be thinking about based on where they are in the deal cycle?
Squyres:
I think one thing that is important is relationship building. On an ongoing basis, be thinking about how you're building relationships in your community, with your physicians, with your nurses and employee base and elected officials.
So even if you are not necessarily actively considering something at the moment, there's real value in laying that groundwork now through strong internal engagement with your physicians and employees, as well as that external community and elected official engagement—so that they understand what your organization is doing and the value that it's bringing today.
They know who you are and what you are up to, so that when you're down the line and actively exploring, you're not starting from zero. You’ve built a relationship. Having that early engagement and ongoing involvement in your community with elected officials is something that people should really be considering.
As we're coming out of the pandemic, I think there's a real opportunity for hospitals to leverage the great work they've done in their communities and not go back and disappear and retreat. They’ve been so out there and engaged. Building on that can be of strategic value down the line on any front, but certainly should organizations be pursuing a partnership of some type.
Sue Anderson:
Any other final thoughts that have been spurred by these discussions?
Melissa Anderson:
I had one thing I wanted to circle back to, just around when we were talking about working with the states and the AG’s office or various legislation. One thing we have seen in certain transactions—for example, with Beth Israel Lahey Health, where they have agreed to certain conditions with the state.
Often, conditions might be around being willing to cap price increases at a certain level for a certain period of time. It could be around that you're going to continue to have a certain set of services always available for a region. It can also be around expanding services. Are there areas, like behavioral health, where there's unmet need and you're willing to commit to investing in that?
I think that's one of the things our clients should also be thinking about proactively. If they are in that position, what would they or would they not be willing to do—and actually understanding the implications should they go down that path.
So using some of the data to understand, “If we did cap prices, what would be the implication? Or if we want to go forward and expand behavioral health services, could we realistically execute on that? Do we have the capabilities in place or not?” So that when they're in that place, perhaps in those discussions with the states, they're better prepared to have a more compelling and informed discussion.
Sue Anderson:
This is a very dynamic environment in which federal and state scrutiny of mergers and acquisitions continues to change and evolve. With that in mind, we'll be sure to update this information routinely. Also, we have a range of resources within the partnership practice at Chartis that can guide you in all stages of the deal continuum. Thank you.
