Antitrust & Competition Healthcare Quarterly Update Q4 2022

Summary

• The FTC’s proposed ban on non-competes does not apply to nonprofit entities, but the healthcare space should still expect active enforcement in healthcare-related labor markets.
• Both the FTC and DOJ appealed lower-court losses in the healthcare space after more novel theories of antitrust harm failed. Both cases will likely be decided in federal circuit courts and provide additional clarity on the future of antitrust law. 
• Antitrust enforcement in healthcare is expected to be active in 2023, with agencies likely focusing on unlawful anticompetitive conduct and alleged serial acquisitions.
• Despite the cooling of M&A activity and increased scrutiny of healthcare-related deals, several large transactions closed or progressed toward closing.

The Impact of the FTC’s Proposed Sweeping Ban on Non-Competes 

On January 5, 2023, the United States Federal Trade Commission (FTC) proposed a new rule (the Proposed Rule) that would define an employer’s use of “noncompete clauses” with its workers as an unfair method of competition in violation of Section 5 of the Federal Trade Commission Act (the FTC Act). If implemented, the Proposed Rule could dramatically restrict the use of noncompete agreements throughout the United States across all sectors, including healthcare. The Proposed Rule is covered in more detail by our colleagues on our website.

The Proposed Rule is very broad and defines “workers” as any natural person who works, whether paid or unpaid, for an employer. The term includes employees, independent contractors (both individuals and sole proprietors, apparently irrespective of the contractor’s corporate form), interns, and volunteers. As such, the Proposed Rule is not limited to employees with a certain seniority or skill level. 

While the Proposed Rule is not final and any final rule ultimately adopted by the FTC may be meaningfully less prohibitive than the near-absolute Proposed Rule, market participants should be aware of its potential effects on their businesses.

In the healthcare industry context, the Proposed Rule effectively applies to all employers but excludes nonprofit entities. Although the Proposed Rule defines “employer” as any natural person, partnership, corporation, association, or other legal entity that hires or contracts with a worker to work for the person, limitations on the FTC’s jurisdiction suggest that as of now, nonprofit hospitals will not be affected. While the FTC has jurisdiction to review all hospital mergers, the FTC is prohibited from enforcing antitrust laws directed at anticompetitive practices by nonprofit entities, which make up more than 48% of all US hospitals.¹  

If a newly introduced bill passes, however, this exception is subject to potential changes. On December 13, 2022, US Representatives Pramila Jayapal and Victoria Spartz introduced the bipartisan Stop Anticompetitive Healthcare Act — a bill that would amend the FTC Act to expand enforcement to nonprofit hospitals.² If the bill passes, nonprofit hospitals would also be subject to the Proposed Rule. 

The Proposed Rule follows recent statements from the antitrust enforcers on competition in labor markets and enforcement actions in the healthcare sector. For example, as noted in our Q3 2022 Healthcare update, the FTC took action against noncompete 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 the physicians’ ability to work for a competitor. Even if the Proposed Rule is not adopted or is significantly amended prior to adoption, market participants should expect active enforcement in healthcare labor markets.

Cooperation Agreement Between HHS and DOJ 

On December 9, 2022, the Antitrust Division of the US Department of Justice (DOJ) entered into a memorandum of understanding (MOU) with the Office of the Inspector General of the US Department of Health and Human Services (HHS).³  While it’s not uncommon for the DOJ to enter into such agreements — it has similar agreements with the Department of Labor⁴and National Labor Relations Board,⁵ the MOU signals shifting focus and resources to enforcement of antitrust violations by healthcare companies. 

The MOU is designed to strengthen the agencies’ collaboration and enforcement efforts to support their common interest in “protecting Federal healthcare programs and the people they serve and promoting competition in healthcare markets, including through the protection of American healthcare consumers and workers” and “holding individuals or entities accountable for violations of the law, while preventing further harm to the healthcare system and patients.”⁶ 

The agencies aim to achieve the stated goals through better coordination; for example:

• Designees from each agency will meet on a regular basis to liaise on matters such as interagency collaboration and “approaches to identifying and remedying anticompetitive conduct or deceptive trade practices that may implicate HHS’s exclusion authority and activities.”
• The agencies will share information, including complaints, investigative files, reports, and analyses prepared by either agency. 
• Each agency will conduct training to train the other to spot violations that may arise under the other agency’s jurisdiction. 
• The agencies will establish procedures for consulting on and coordinating their investigations and enforcement activities, such as procedures that would allow each agency to review information on a specific complaint. In the event that a person or an entity resolves a criminal antitrust investigation and is subject to HHS’s exclusion authority, the agencies will work together to ensure that exclusions are appropriate.
• Each agency will refer potential violations to the other. Under the MOU, “when HHS detects potential antitrust violations while investigating conduct, it will evaluate and, as appropriate, refer the matter to the Antitrust Division.” The DOJ will likewise refer to the HHS potential violations of law or regulations within HHS’s jurisdiction.

The Agencies Challenge Lower-Court Losses

We covered the antitrust agencies’ recent lower-court losses in the healthcare space in our Q3 2022 update. As noted in the Q3 update, the agencies — relying on allegations of potential competition and other more novel theories of antitrust harm — faced skeptical courts in their attempts to block transactions in Illumina/GRAIL and UnitedHealth/Change Healthcare. Both lower courts sided with the merging parties.

But since the Q3 update, the FTC commissioners heard oral arguments in Illumina/GRAIL, and the DOJ filed its notice of appeal in UnitedHealth. While the FTC will likely succeed in its initial appeal to the full commission (as detailed below), the ultimate outcome of both cases remains murky. We will continue to monitor the cases’ progression and the implications for healthcare moving forward.  

FTC Commissioners Hear Appeal of Illumina/GRAIL Decision 

As expected following the lower-court loss, the FTC’s complaint counsel filed its notice of appeal in Illumina/GRAIL on October 6, 2022. Given that Illumina/GRAIL is in the FTC’s administrative court, complaint counsel filed its notice of appeal of the administrative law judge’s (ALJ’s) decision to the full FTC Commission. In other words, the direct appeal is heard by the same commission that authorized the original complaint. Oral arguments were held in front of the commission on December 13, 2022.⁷

At the oral hearing, the parties made largely the same arguments that were litigated in front of the ALJ. The FTC argued that GRAIL’s rivals may have a harder time obtaining inputs to run their rival cancer detection tests if the transaction is approved. Illumina’s counsel countered that blocking rivals would make no economic sense, and that the parties had committed to lengthy contracts with competitors without price increases.

Given that the commission authorized the original complaint against Illumina, it is likely that the complaint counsel will succeed in its appeal. In the past 25 years, the FTC has ruled in favor of itself in nearly 100% of cases, either affirming or overruling the decision of the ALJ.⁸  

But although the commission’s ruling is the final step in the administrative proceeding, the merging parties can appeal the FTC’s ultimate decision (if unfavorable) to a more neutral venue in federal circuit court. 

DOJ Appeals UnitedHealth/Change Healthcare Decision

Similar to the Illumina/GRAIL decision, the district court in UnitedHealth/Change Healthcare disregarded the government’s “antitrust theories and speculation” versus the merging parties’ more tangible evidence.⁹ The district court held that the DOJ must do more than assert “things may change” when challenging a merger and noted the “serious flaws” in the agency’s case.

With the district court ruling in the merging parties’ favor on September 19, 2022, the parties closed their transaction on October 3, 2022, and the agency filed its notice of appeal on November 18, 2022.¹⁰ But unlike the administrative process at the FTC, the DOJ must immediately appeal to a federal circuit court.

While the grounds for the DOJ’s appeal are not known at this time, the agency may be taking a risk. On appeal, the government will need to overcome the deficiencies noted by the trial court to avoid creating additional unfavorable precedent that could affect future merger challenges.

With two potential circuit court decisions looming, the year ahead promises further developments in antitrust law — in the healthcare space in particular.

Healthcare Enforcement Trends for 2023

Increased Enforcement of Unlawful Antitrust Conduct by Healthcare Companies 

With the decline in M&A activity and the corresponding decline in the number of HSR filings the agencies are required to review, we anticipate that the DOJ and FTC will shift available resources to enforcement against anticompetitive conduct and continue their focus on the healthcare sector. Anticompetitive conduct in healthcare markets was stated as a priority in President Biden’s July 9, 2021, executive order (read more about it on our website), and the DOJ has reaffirmed this goal in recent statements.¹¹ The cooperation agreement between the DOJ and the HHS discussed above also indicates that anticompetitive conduct by healthcare companies will be a focus for the DOJ in the upcoming year. 

Cumulative Acquisitions in Healthcare Markets Continue to Draw Focus (and There May Be a New Tool to Address These)

As we noted in our Q3 2022 update, the agencies have focused on private equity “roll-ups,” or cumulative transactions, and we anticipate that this heightened scrutiny will continue. 
A policy paper published on December 15, 2022, by the American Economic Liberties Project (a nonprofit organization that advocates for aggressive enforcement of antitrust regulations) titled “The Roll-Up Economy: The Business of Consolidating Industries with Serial Acquisitions” aims to influence the FTC and the DOJ and the forthcoming new merger guidelines.¹² The report calls on antitrust regulators to restrain nonreportable deals that “fly under the regulatory radar into an antitrust twilight zone” with “private equity’s roll-up of physician practices” noted as an example of serial acquisitions.¹³ The paper lists several recommended actions to address serial acquisitions, including making suggested changes to the forthcoming revised merger guidelines. 

Cumulative acquisitions may also be addressed by a new interpretation of the FTC Act. In a November 2022 policy statement on its enforcement powers under Section 5 of the FTC Act (the Policy), the FTC introduced a novel approach to its enforcement power under Section 5, which purports to grant the FTC sweeping powers to pursue enforcement actions against a wide range of business conduct, even when such conduct might not rise to the level of a violation under the Sherman or Clayton Acts. One example the Policy cites as an unfair method of competition that may violate Section 5 is “a series of mergers, acquisitions, or joint ventures that tend to bring about the harms that the antitrust laws were designed to prevent, but individually may not have violated the antitrust laws.”¹⁴  

It is still unclear how the FTC is planning to use this “renewed” tool when it comes to “serial” acquisitions or whether any of the policy paper recommendations would find a listening partner at the FTC or the DOJ, but is it clear that “serial” acquisitions, especially in healthcare markets, will continue to draw focus in 2023. 

Other Healthcare Deal Updates

Advocate/Atrium Deal Closes

On December 12, 2022, Advocate Aurora Health and Atrium Health announced the closing of their transaction, making the combined health system the fifth largest nonprofit health system in the country, with 67 hospitals in six states.¹⁵  

The deal was initially announced in May 2022 and was watched closely to see whether the FTC would challenge the transaction given the lack of geographic overlap between the two health systems. Traditionally, the FTC has moved to block hospital mergers when hospitals compete for the same patient population in a given area. However, there have been calls for changes to this approach. For example, the authors of a recent article¹⁶ called on the FTC to look into insurer overlaps, arguing that because many payers insure employers with national or regional presence, a health systems merger, even if not in the same geographic market, could expand the system’s power and, ultimately, lead to higher insurance prices.¹⁷ Yet while the deal encountered a setback in Illinois (state health regulators initially voted to reconsider the deal and only later approved it¹⁸ ), the combination closed without an FTC challenge.  

LCMC/HCA: COPA Update

On January 3, 2023, the Louisiana Department of Justice granted a Certificate of Public Advantage (COPA) to LCMC Health’s $150 million acquisition of three Tulane University hospitals from HCA Healthcare, adding to its existing operations of six hospitals in the New Orleans metropolitan area.¹⁹

The Louisiana Department of Justice approved the transaction despite objections to the deal expressed by National Nurses United (an organization of 222,000 nurses).²⁰  In a letter to the Louisiana attorney general, the nurses argued that the deal would increase LCMC market share to 55% and create a two-system duopoly in New Orleans that would give “LCMC and its competitor, Ochsner Health, unrestrained leverage over patients and health care workers.”²¹ The nurses argued that the deal “goes against the public interest, by leading to further consolidation, higher healthcare prices and cuts to vital services” and does not meet Louisiana’s threshold to garner a certificate of public advantage.²²

COPAs drew criticism from the FTC in the second half of 2022. In its COPA assessment report, released on August 15, 2022, the agency found that COPAs create concentrated healthcare markets and are often detrimental for patient costs, patient care, and healthcare worker wages. The FTC also submitted an objection to a proposed COPA covering a merger between SUNY Upstate Medical University and Crouse Health System. Nonetheless, the COPA was granted to LCMC and HCA with no known or public objections by the FTC.