Antitrust & Competition Healthcare Quarterly Update Q3 2022

Summary

• The FTC and DOJ suffered twin setbacks in the healthcare space. In both UnitedHealth/Change and Illumina/Grail, the agencies’ reliance on more novel theories of harm failed to convince skeptical judges.
• Despite these litigation setbacks this past quarter, the agencies continue to pursue aggressive antitrust enforcement in the healthcare space, with the FTC pursuing three hospital merger challenges.
• Consistent with their leadership’s recent statements, the agencies are scrutinizing private equity investment, especially in the healthcare space. An expanding list of state attorneys general are now also reviewing healthcare transactions in their states, and state enforcers have also expressed interest in private equity.
• The FTC continues to oppose Certificates of Public Advantage (COPAs). The agency released a policy paper finding that COPAs create concentrated healthcare markets that are detrimental for patient costs, patient care, and healthcare worker wages.

Antitrust Agencies’ Enforcement Push Stymied in Court

The agencies’ appetite to bring aggressive enforcement actions suffered twin setbacks over the past quarter in the healthcare space. In both UnitedHealth/Change and Illumina/Grail, the agencies’ reliance on potential competition and other more novel theories of harm faced skeptical judges, who weighed sworn testimony from executives and real-world evidence more heavily than theoretical harm posited by economists. But, both cases inflicted meaningful costs and delays on the merging parties. The Illumina/Grail transaction is entering its third year and facing a potential divestment order from the European Commission (EC) as well as an FTC appeal. Further, UnitedHealth/Change took over 21 months to consummate. 

UnitedHealth/Change Healthcare

UnitedHealth (United) announced its $13 billion acquisition of the health data analytics company Change Healthcare Change) in January 2021. The DOJ sued to block the acquisition in February, 2022 after a lengthy investigation. Trial commenced on August 1, 2022 in the United States District Court for the District of Columbia, with the court ultimately ruling against the DOJ on September 19, 2022.

DOJ’s challenge hinged on both horizontal and vertical theories of harm. Horizontally, both United’s OptumInsight platform and Change provide electronic data interchange (EDI) clearinghouse services, which facilitate data transfers between healthcare providers and insurers. DOJ alleged the merger would establish a monopoly for a type of EDI clearinghouse services — first-pass claims editing tools.

DOJ also alleged several vertical theories of harm. The agency argued United would misuse Change’s data, giving United an unfair advantage over competitors, and would have an incentive to withhold Change’s product from rivals or raise their costs.

Conversely, United argued it already remedied any potential horizonal competition issue by agreeing to divest its claims editing business to a third-party. With respect to the vertical claims, United countered that its Optum business had an extensive history serving other payers and honoring firewalls and confidentiality agreements. It also argued any benefit from misusing competitor information would be minimal compared to Optum’s potential loss of business. 

The court’s decision to permit the merger is notable for several reasons.¹ First, the court framed the dispute as one between the merging parties’ real-world evidence regarding Optum and the government’s “antitrust theories and speculation.” For example, the court found Optum’s past conduct persuasive as a “natural experiment,” showing how the combined company would handle competitor data post-merger. In addition, the court found United’s executives’ testimony to be “far more probative of post-merger behavior than [the government’s] independent weighing of costs and benefits.” Finally, the court determined that a divestiture should be considered with the underlying transaction as to whether it would “substantially lessen competition” and found United’s proposed divestiture to be adequate. 

In sum, the court rejected the core evidence underpinning the DOJ’s allegations, finding that the government needed to do more than assert that “things may change.” While the government may appeal, the decision allowed United and Change to close the deal, albeit over 21 months after its original announcement.

Illumina/GRAIL

Illumina first announced its proposed $7.1 billion acquisition of the early cancer detection company GRAIL in September, 2020. The deal attracted scrutiny from antitrust regulators in the United States and Europe, with the FTC issuing a second request in November, 2020 and the European Commission (EC) receiving member state referrals under its new Article 22 procedure. Following its investigation, the FTC filed an administrative complaint in March, 2021, with a federal court complaint filed soon after. But, due to the EC opening its own investigation, the FTC withdrew its federal court complaint in May, 2021, believing it did not need a preliminary injunction from a federal court because the EC process would prevent the merger from consummation.

The merging parties, however, disputed the EC’s jurisdiction and with the federal court complaint withdrawn, closed the deal in August, 2021. The administrative trial at the FTC commenced that same month. Following a two-part, four-week trial than spanned several months, the court ruled in favor of the merging parties in September, 2022.

In his opinion,² the administrative law judge (ALJ) held that the FTC failed to prove the merger’s anticompetitive effects. First, the ALJ found that Illumina lacked an incentive to harm GRAIL’s rivals, primarily because, according to the ALJ, no competitors were close to developing a test that could rival GRAIL’s. Even if these competitors did bring a test to market, the ALJ reasoned, there is no guarantee that these tests would be considered substitutes for GRAIL’s test. As a result, the court was not convinced that Illumina would cut off its sequencing instrument revenue based on speculative future competition.

Second, the ALJ gave significant weight to Illumina’s remedy, referred to as the “Open Offer.”  Under the Open Offer, Illumina committed to supplying GRAIL’s potential competitors on the same terms as GRAIL for a period of 12 years. The offer included firewalls and price protections, along with compliance audits, and several of GRAIL’s competitors signed on to the program. The Open Offer remedy appears to have persuaded the court that although Illumina may have the ability to harm GRAIL’s potential competitors through input foreclosure or price increases, the Open Offer in fact was not engaging in such foreclosure. 

Overall, despite the differing subject matter and venue, both courts refused to give credence to the agencies’ theories because they were based on potential competition and unknown future market conditions contradicted by fact witnesses and corporate conduct.

Healthcare Antitrust Enforcement Continues to Be Active

Healthcare Antitrust Enforcement Updates

While the FTC and DOJ have suffered setbacks this past quarter in both the UnitedHealth/Change and Illumina/Grail cases, healthcare targeted antitrust enforcement remains active.

Recent enforcement actions FTC suits to block healthcare transactions. The FTC filed to block the merger between HCA Healthcare and Steward Health Care System (the administrative trial is scheduled to begin on December 13, 2022)³; the acquisition of Saint Peter’s Healthcare System by RWJBarnabas Health, one of the largest hospital systems in New Jersey⁴; and the merger between Lifespan Corp. and Care New England Health System, Rhode Island’s two largest healthcare providers (who ultimately abandoned their merger).⁵

The enforcement actions are not limited to notifiable merger activities. The FTC recently opened an investigation into antitrust conduct by U.S. Anesthesia Partners (USAP), a private equity-owned company that operates in nine states.⁶ USAP confirmed the FTC’s investigation was a “comparatively widespread” inquiry focused on competition in healthcare and USAP’s prior acquisitions.⁷ The FTC is also litigating against Surescripts, an e-prescription company.⁸ The FTC alleges that Surescripts intentionally kept e-prescription customers from using rival platforms through their use of anticompetitive exclusivity agreements, threats, and other exclusionary tactics.⁹

This past quarter, we have also seen continued statements from the antitrust agencies’ enforcers on competition in labor markets.¹⁰ Labor related antitrust enforcement also covers scrutinizing employee non-compete clauses. For example, the FTC took action against non-compete clauses in an order against DaVita, Inc., a large provider of dialysis services, to prevent the company from entering into agreements with physicians that would restrict their ability to work for a competitor.¹¹

Increasing Antitrust Scrutiny at the State-Level 

As more and more states are introducing local merger notification regimes targeted to cover healthcare related transactions, we expect to see further antitrust enforcement actions at the state level.

Just recently, California passed a mandatory notification regime for healthcare transactions that will take effect in April, 2024.¹² Notifiable transactions are those involving healthcare service plans, health insurers, hospitals or hospital systems, physician organizations, providers, pharmacy benefit managers, and other healthcare entities. Notifiable transactions will be required to observe a 90-day waiting period during which the California regulators will examine the impact of the consolidation “on competition, prices, access, quality, and equity”.  

The newly passed regime in California joins similar notification requirements for healthcare transactions in Connecticut, Colorado, Massachusetts, Washington, Oregon, and Nevada. You can read further details on these requirements in an alert written by our Goodwin colleagues here: An Emerging State Trend: Increasing Oversight of Physician Group Practice Transactions (goodwinlaw.com). 

Agencies Intensify Focus on Private Equity Investments, Particularly in Healthcare

Recent comments from DOJ Deputy Assistant Attorney General (DAAG) Andrew Forman raised the specter of additional scrutiny of private equity, especially when investing in the healthcare space.¹³ For example, his remarks specifically highlighted healthcare when discussing how the government was considering “enhancing antitrust enforcement” with respect to private equity. He noted that private equity’s “undue focus on short-term profits and aggressive cost-cutting” is particularly problematic for healthcare, alleging potentially “disastrous patient outcomes” as a result, along with potential competition concerns. 

The remarks highlighted four specific areas of enforcement regarding private equity and healthcare: (1) private equity “roll-ups,” or cumulative transactions, (2) private equity investment blunting the incentive of a target company to act as a maverick or disruptor to focus on short-term profits, (3) Section 8 enforcement against interlocking directorates, and (4) private equity HSR filing deficiencies.

For example, the FTC’s investigation into USAP, described above, demonstrates how the agencies are looking into private equity “roll-ups.” USAP is backed by the private equity firm Welsh, Carson, Anderson & Stowe and a media outlet reported that the company has grown by “roll up” acquisitions of smaller anesthesiology players.¹⁴

Further, the agencies’ focus on private equity board appointments is part of a broader enforcement push regarding Section 8 of the Clayton Act, which prohibits interlocking directorates, i.e., individuals serving as directors of competing companies. DOJ previewed its plans to take “aggressive action” against any perceived interlocking directorates. DOJ announced on October 19, 2022 that seven directors resigned board positions due to alleged violations of Section 8 in the first of a “broader review.”¹⁵ In the press release, Assistant Attorney General Jonathan Kanter stated DOJ would continue its review across the “entire economy.” 

Notably, earlier this month during a Georgetown University panel, Gwendolyn Cooley, Wisconsin’s Assistant Attorney General for antitrust, stated that there is also a growing interest in private equity by state-level enforcers. This remark, in light of the increasing numbers of state-level merger notification requirements discussed above, signals more scrutiny of private equity healthcare transactions at the state-level as well.

At bottom, the agencies’ enforcement focus on private equity is consistent with their recent rhetoric surrounding the space. Private equity firms should expect increased scrutiny of their transactions (even if not HSR reportable), portfolios, HSR filings, and even of their board appointments as part of a broad enforcement push by the antitrust agencies. These firms should also be aware of an increasing level of scrutiny from state level enforcers (in addition to state level notification requirements).

Certificates of Public Advantage Continue to Receive the FTC’s Ire

A Certificate of Public Advantage (“COPA”) is a regulatory regime passed by a state government to shield hospital mergers and collaborations from antitrust scrutiny. State governments pass COPAs to immunize these transactions when the state believes the benefits of the deal outweigh any antitrust concerns. The FTC, however, has been skeptical of and vocally opposed to COPAs.

The FTC first announced a COPA assessment project in 2017. Meanwhile, the FTC opposed proposed COPAs in West Virginia (2016), Tennessee and Virginia (2016-17), and Texas (2020).  The agency released its COPA assessment report as a staff policy paper on August 15, 2022,¹⁶ finding that COPAs create concentrated healthcare markets and are often detrimental for patient costs, patient care, and healthcare worker wages. Continuing on this path, the FTC on October 14, 2022 announced it submitted a public comment opposing a proposed COPA covering a merger between SUNY Upstate Medical University and Crouse Health System.¹⁷

The FTC will likely continue to exert public pressure on state governments to oppose COPAs.  Given this pressure, merging healthcare providers should not expect to be shielded by COPAs as it becomes increasingly difficult to convince states that the deal’s benefits outweigh antitrust concerns.