The confluence of forces due to COVID-19 is likely to affect the healthcare industry in serious and unpredictable ways. And the antitrust laws, as well as how they are enforced, will play a big part in shaping (or re-shaping) the industry.
With the contracting economy making capital more difficult to obtain and politicians calling for a moratorium on mergers, especially those which could reduce healthcare capacity, healthcare companies must think carefully and strategically about where they turn for resources and in which forms they come.
To add to the uncertainty, a number of states are considering legislation restricting mergers and acquisitions within the healthcare industry, instead of relying on traditional antitrust enforcement to prevent anticompetitive consolidations. It is critical, then, that healthcare companies understand the legal landscape they will be forced to navigate.
In March, when COVID-19 began to publicly take hold in the U.S., the Department of Justice (DOJ) and Federal Trade Commission (FTC) issued a Joint Antitrust Statement Regarding COVID-19. The joint statement recognizes that combatting COVID-19 would “require unprecedented cooperation between federal, state and local governments and among private businesses to protect Americans’ health and safety.” The need for cooperation among healthcare entities was specifically noted and the joint statement referenced guidance issued by the agencies with respect to competitor collaborations back in 1996.
The agencies’ approach has consistently been that the current antitrust laws provide the framework for dealing with crises such as the current pandemic. In an interview with CNBC, Makan Delrahim, Assistant Attorney General of DOJ’s Antitrust Division, stated, “The legal standards are the same but… provide flexibility to deal with these exigent circumstances.” Many merging companies argue that, given the dire economic circumstances, the merger is necessary to their economic survival. Delrahim explained that the so-called “failing firm defense” provides the necessary framework for antitrust guidance during the COVID-19 pandemic. Specifically, an otherwise anticompetitive merger will be allowed to proceed on three conditions:
- The allegedly failing firm would be unable to meet its financial obligations in the near future;
- It would not be able to reorganize successfully under Chapter 11 of the Bankruptcy Act; and
- It has made unsuccessful good-faith efforts to elicit reasonable alternative offers that would keep its tangible and intangible assets in the relevant market and pose a less severe danger to competition than does the proposed merger.
Notwithstanding this framework, many have suggested that mergers, especially in the healthcare industry, be forbidden entirely during the pandemic. On April 28, 2020, Sen. Elizabeth Warren and Rep. Alexandria Ocasio-Cortez introduced the Pandemic Anti-Monopoly Act, HR 6989 (PAMA). PAMA is aimed at preventing “private equity and other big businesses” from trying to “scoop up smaller businesses and consolidate industry for their gain.” The summary that accompanied the announcement of the proposed legislation claims that the “pandemic triggered an economic crisis that has hit small businesses especially hard, making them potential targets of large corporations seeking to increase their power through predatory mergers.”
The PAMA includes a moratorium on “risky mergers and acquisitions until the [FTC] unanimously determines that small businesses, workers, and consumers are no longer under severe financial distress.” The moratorium would apply to:
- Companies with over $100 million in revenue or financial institutions with over $100 million in market capitalization;
- Private equity companies, hedge funds, or companies that are majority-owned by a private equity company or hedge fund;
- Companies with an exclusive patent that impacts the crisis, like personal protective equipment; and
- Transactions that must otherwise be reported to the Federal Trade Commission under current law.
Obviously, these situations could easily include healthcare entities and could prevent healthcare companies, including hospitals and health systems, from obtaining the necessary capital from the only entities capable of providing the necessary funds at a time when they need it most. A moratorium on mergers and acquisitions could hinder the efforts of healthcare companies to engage in entity-saving measures.
Furthermore, under the terms of the legislation, as announced, the moratorium could last indefinitely. The proposal specifies the criteria for ending the moratorium that the FTC “unanimously determines that small businesses, workers, and consumers are no longer under severe financial distress.” Given that the current unemployment rate is higher than the peak rate during the Great Recession (2007-2009) and economists predict another 6.8 percent contraction in the third quarter, “small businesses, workers, and consumers” are likely to be “under severe financial distress” for quite some time, perhaps even well into 2021.
While federal legislation is still incubating, several states have taken steps to pass legislation directly aimed at healthcare companies and efforts to merge. Among the states already grappling with this issue, California is closest to actually making law. Senate Bill 977 already passed the first committee and is expected to be heard by the Assembly Health Committee shortly. The proposed legislation provides that healthcare mergers are presumptively anticompetitive unless the acquirer demonstrates that the change of control will “will result in a substantial likelihood of clinical integration, a substantial likelihood of increasing the availability and access of services to an underserved population, or both.”
Florida also proposed legislation specifically aimed at healthcare company mergers, like hospitals and even certain group practice. House Bill 1243, had two distinct components, one of which required a copy of Hart–Scott–Rodino Antitrust Improvements Act (HSR) filings to be provided to the attorney general and required a 90-day notice of any transaction between “a hospital or hospital system and any other hospital or hospital system.” The bill also limited the validity of restrictive covenants for certain doctors. While HB 1243 unanimously passed in the Florida House it “[d]ied in Commerce and Tourism.” The final bill, enacted on April 29, 2019 only included the ban on restrictive covenants.
South Carolina is another state with proposed legislation aimed at stemming merger-induced healthcare capacity reduction. The proposed bill would require each hospital or hospital system to develop a strategic plan to ensure that any merger will not increase cost or reduce service especially in underserved areas. The strategic plan must be provided to the South Carolina General Assembly by Jan. 2, 2021. Going a step further, the proposed legislation includes serious consequences for failure to comply “failure to comply with the reporting requirement is grounds for denial, revocation, or suspension of the hospital’s license, the subsection also allows for monetary penalties.” This bill is highly likely to pass to the next stage.
New York took a different approach. While New York has not introduced or passed legislation specifically addressing healthcare mergers, it has included a provision in the 2020‑21 budget. The 2020-21 budget appropriated up to $83 million dollars for expenditure to assist failing hospitals with projects, including mergers and consolidations, which “promotes a patient-centered model of health care delivery.”
While antitrust enforcers declare that the current landscape provides them with the necessary framework to be flexible in responding to COVID-19, the framework, both federal and state, may be shifting. These shifts could affect the decision-making processes at the DOJ and FTC. The effects of COVID-19 could include both a spike in mergers and acquisitions in the healthcare industry as well as a spike in enforcement actions by these agencies, as well as new legislation or regulation.
Information about COVID-19 and its impact on local, state and federal levels is changing rapidly. This article may not reflect updates to news, executive orders, legislation and regulations made after its publication date. Visit our COVID-19 resource page to find the most current information.