Draft Antitrust Rules: Healthcare M&A Faces Stricter Scrutiny

U.S. federal antitrust agencies recently proposed draft updates to merger guidelines. Antitrust experts point out that if the draft is finalized, regulators will gain more room to more effectively curb the wave of consolidation in the healthcare industry.

This document, jointly issued by theFederal Trade Commission (FTC) and the Department of Justice (DOJ), incorporates review elements that can be used for vertical mergers and cross-market transactions. Lawyers say the new guidelines could have a chilling effect on overall M&A activity—at least in the short term, as the business community watches how merger challenges fare in court.

"If these guidelines are adopted, they will lead to stricter scrutiny and increase the likelihood of challenges to overall deals," said Jim Burns, antitrust lawyer at Williams Mullen.

Although the guidelines are not legally binding, they serve as a roadmap for regulators in deciding which mergers to challenge, and courts often use them as a basis for determining the legality of proposed transactions.

The current guidelines have not been revised for more than a decade, leading regulators to be criticized for lagging behind current market realities—including in the healthcare industry, whereconsolidation has been shown topush up already high healthcare prices.

Historically, regulators have often faced difficulties in bringing cases against complex and non-traditional mergers, as many hospitals and insurers seek to diversify revenue streams and retain more patient spending through M&A.

Experts say the new guidelines are expected to change that.

"I think the guidelines focus on the types of mergers the FTC has previously failed to challenge, and they are providing more grounds to use regulatory power in similar situations," said Pahl Zinn, lawyer at Dickinson Wright.

Vertical and Cross-Market Deals

Experts say that if the guidelines are finalized, antitrust regulators will be more likely to challenge mergers they previously lacked the statutory authority to pursue, including vertical mergers and cross-market transactions.

Under the new guidelines, vertical mergers must not create anticompetitive market structures; even if the combined parties' market share is below 50%, regulators will review vertical deals.

Zinn noted that the vertical merger guidelines are "particularly relevant to the healthcare industry." "The daily reality of the healthcare industry is that this will allow regulators to examine situations where large hospital systems attempt vertical integration."

Vertical integration is a common strategy among large insurers and hospitals. By acquiring physician practices, they keep more revenue within the system and push toward value-based payment models.

The sector has seen several large vertical deals recently, includingCVS's $10.6 billion acquisition ofOak Street Health, a healthcare chain focused on senior care, andUnitedHealth's $3.3 billion acquisition ofAmedisys, a home health and hospice services provider.

Hospitals and other corporate entities are also heavily acquiring physician groups—currently, aboutthree-quarters of U.S. physiciansare employed by hospitals, health insurers, or private equity firms.

Experts say that under the new guidelines, regulators may also gain more freedom to challenge deals that span multiple states or markets. Current regulations give regulators limited leverage in analyzing cross-market transactions, which has allowedhealth systems to grow into cross-regional giantswhile largely avoiding antitrust enforcement.

Burns noted that the guidelines suggest that if a proposed deal puts an emerging player on a path toward monopoly—even if not yet a monopoly—the deal could attract more antitrust scrutiny.

"In traditional antitrust analysis, when two entities are not competitors at all, it is often difficult to make a compelling argument to the court about how a deal could substantially reduce competition," Burns said. "This provides some starting point for making arguments against non-traditional deals."

Serial Acquisitions and Data Integration

The FTC and DOJ are also targeting private equity roll-ups, a model of acquiring and merging multiple small businesses into one large company.

Private equity roll-ups are becomingincreasingly commonin healthcare, despite controversy over negative impacts on quality and costs, including innursing homesandrural hospitals.

Antitrust experts say the new guidelines provide an entry point for regulators to challenge potentially anticompetitive roll-ups—by analyzing past deals and the likelihood of future deals, rather than reviewing each transaction in isolation.

By reviewing entire series of deals, regulators may also intensify scrutiny of hospital or retail healthcare acquisitions involving multiple physician practices.

For example, Walgreens entered the healthcare delivery business in 2021 by acquiringa majority stake in VillageMD, then acquiredSummit Health, a New York-based healthcare chain,at the end of 2022. Four months later, it acquired aConnecticut physician group。

Experts say increased scrutiny of multiple acquisitions could become a particular obstacle for companies seeking to merge.

"It's interesting to see these giants—their growth and strategy, all the Optum and UnitedHealth shareholders, I don't think they hold these assets expecting them to grow organically," said Nathan Ray, healthcare M&A lead at consulting firm West Monroe.

Other deals that may face more scrutiny involve health technology and competitive data. Regulators recently failed to blockUnitedHealth's $13 billion acquisition of Change Healthcare, which closed at the end of 2022 after the two companies defeated a DOJ challenge in federal court.

Regulators had sued to block the deal, fearing UnitedHealth could mine Change's billions of medical claims data, including data from its health insurance competitors.

"In (the regulators') view, they should not have lost any of these challenges," Burns said. Presumably, "they think they will be better able to convince courts to side with them in merger challenges in the future and won't lose cases like UnitedHealth-Change again."

Under the proposed guidelines, regulators will review deals that give the combined company control over products or services competitors might use to compete, as well as deals involving access to competitors' sensitive competitive information. The guidelines cite existing case law.

Ray believes these restrictions could also apply to cross-market mergers. For example,the merger of Michigan systems Spectrum and Beaumontwas not challenged by regulators because the two operators did not compete in the same geographic area, but the deal led to data integration, Ray said.

"This is the beginning of providing some starting point for making arguments against non-traditional deals."

— Jim Burns, antitrust lawyer at Williams Mullen

Focus on Labor and Presumptive Harm

Under the guidelines, regulators also plan to place greater emphasis on potential harm to workers from mergers.

In healthcare, for example, regulators could consider the impact of hospital mergers on doctors and nurses, including whether market concentration could suppress wages or give employers excessive power.

Research shows that after hospital mergers,wage growth slowsdue to shifts in labor market power; and when physician practices are acquired by hospitals,doctor incomes decline。

"I think this is an important factor, especially in areas of healthcare where there is a shortage of qualified labor, such as nursing," Zinn said.

The guidelines also lower the market share threshold for presumptive harm from mergers.

Carrie Amezcua and Abigail Cessna, lawyers at Buchanan Ingersoll & Rooney, noted that horizontal mergers could be deemed illegal if the combined company's market share exceeds 30%—a threshold lower than the high market share standard courts currently recognize.

The public comment period for the guidelines is open until September. The changes have already faced opposition from the American Hospital Association (AHA), which said it plans to review the proposal and submit formal comments, butreiterated its previous stancethat the guidelines do not need major revisions.

"Hospital mergers benefit patients and their communities in many ways, and the guidelines do not need major revisions," Melinda Hatton, AHA general counsel, told Healthcare Dive.

The Biden administration has beenincreasing pressure on healthcare M&A. Earlier this month, the FTC withdrew antitrust policy statements that included a safe harbor for hospital mergers. The agency alsoproposed changes topre-merger notification requirements to give regulators more time to review deals.

Antitrust experts say these proposals show regulators intend to modernize antitrust enforcement, but whether courts will accept this more aggressive stance—and whether it can curb rising M&A activity—remains to be seen.

"Regulators are clarifying that the positions they have expressed to courts over the past few years are consistent with precedent," Burns said. "The business community may disagree."