Value-based Care Collides with Competition: Antitrust and Enforcement Considerations

July 13, 2023
17:38 minutes

On this final episode of Ropes & Gray’s Value-based Care Collides with Competition podcast series, antitrust attorneys Jane Willis and David Young discuss the intersection between federal antitrust enforcement and state regulatory review of health care transactions.

On the Value-based Care Collides with Competition series, Ropes & Gray attorneys explore how aggressive federal and state enforcement of antitrust and other competition laws appears to be in tension with the nationwide shift to value-based care models.

The series examines how the adoption of new state competition, quality, access and cost laws is creating additional burdens on health care entities, including private equity-backed entities and management services organizations, that are considering new transactions—and how to mitigate the impact of these potential impediments. For more on this topic, please visit our resource center with dedicated resources on the changing regulatory landscape.


David Young: Hello, and welcome to today’s podcast. My name is David Young and I’m a senior attorney, and with me today is Jane Willis, a partner in Ropes & Gray’s antitrust group. Together, we represent clients in a range of industries, including health care and life sciences in antitrust litigation, counseling, and transactions.

This is the sixth and final installment of Ropes & Gray’s podcast series analyzing current and proposed efforts by states to increase scrutiny of health care transactions. Today, we’re going to discuss the intersection between federal antitrust enforcement in the health care space and recent trends at the state level—this includes an increased focus on for-profit and private equity-backed entities, as well as a wider focus on a broad set of competition and other considerations. We’ll also discuss the degree to which these review processes may burden otherwise praiseworthy efforts to control the costs of health care, including efforts to improve care coordination and implement value-based care.

Jane, in prior podcasts, Ropes & Gray attorneys have discussed various proposed state regulatory efforts and the potential implications for health care transactions in the industry. I want to take a step back for a moment and talk about the rationale for these broader state reviews. What are state legislators and regulators trying to accomplish?

Jane Willis: A recurring theme in some of this new legislation is that it fills a perceived regulatory gap by targeting transactions involving for-profit entities. Take New York, for example—New York already has a regulatory regime that addresses non-profits and licensed entities like hospitals. But the newly enacted legislation’s focused on for-profit transactions, either because there’s a view that (i) for-profit was getting a free pass and wasn’t subject to the existing regulatory framework or (ii) there’s a belief that there’s something inherently inimical about for-profit health care, or both.

David Young: It is interesting that the non-profit health care sector was—until now—subject to more scrutiny than for-profit peers. I think there’s also an underlying concern here that certain transactions—and, in particular, transactions that do not meet the Hart-Scott-Rodino (HSR) reportability threshold, which, today, is about $111 million—are evading federal antitrust scrutiny, and whether that’s because different antitrust priorities are there or just resource constraints. And these new state legislative efforts seem to step into that perceived gap in federal enforcement and give those state attorneys general or other agencies the authority to review—and potentially block—problematic transactions or otherwise impose conditions.

Jane Willis: That’s right—they are targeting smaller transactions. In addition, we’re seeing some states requiring transacting parties to go under review even where the merging parties have very small holdings in that state where there’s basically no overlap. We’ve seen multi-billion-dollar transactions where just a handful of physician offices were located in Oregon, and that still required review by the Oregon Health Authority and they held up that transaction for a while. So, that’s where the dynamic is worrying also to the extent that it becomes more common across the country—not only are the states targeting smaller transactions that don’t reach the HSR threshold, but targeting transactions where they have very little intersection with the larger companies.

David Young: Other than covering smaller-value transactions, what do you think are some of the other key differences between state review and traditional federal antitrust review?

Jane Willis: The state reviews, in theory, are different from the federal antitrust reviews in a few important ways. And I say “in theory” because it’s important to remember we do not yet have enough examples, enough precedent set, of enforcement from which to draw conclusions about what these state reviews are going to entail.

One difference is that, unlike the federal agencies, some state agencies have the ability to unilaterally block or impose conditions on a transaction without even going to court. In California, for example, the attorney general has used his authority to approve nonprofit hospital transactions, to impose conditions on several hospital mergers in recent years. These conditions can be quite significant, including limitations on hospitals’ contracts with payors, capping commercial rates, and capping increases—these conditions can be imposed again without judicial review, without going to court. In contrast, the FTC needs to go to court unless the parties will agree to a remedy.

David Young: What about the concerns that state regulators are bringing to these transactions? One common criticism of federal antitrust enforcement was that it had been overly focused on price competition and/or broader concerns that might be relevant.

Jane Willis: That’s right. These newer state review processes often take into account a broader set of concerns, not just competition, but factors such as access to health care and factors such as equity across populations.

David Young: When it comes to remedies, for instance, what are state regulators seeking in terms of conditions on deals that they do let through?

Jane Willis: Like I said, some of these states have unilateral authority, like the Oregon Health Authority, and can unilaterally disapprove of a transaction or can require that the transaction meet conditions as well as have annual reports over a period of years, so those remedies can be pretty onerous.

For the state regulatory reviews, there’s really a wide range of remedies that could happen. Places like Oregon could disapprove of the transaction or, as we said, approve it with conditions, including reporting obligations for a period of years after the transaction closes.

In contrast, the federal antitrust agencies must challenge transactions in court and it’s really an up-down decision, or maybe a divestiture, but the federal agencies generally don’t impose conditions.

Under some of these new state laws, there’s really the possibility that they will hold up the transaction process, both the diligence process as well as the regulatory approval process. And so, it creates a lot of uncertainty for our clients and for parties doing transactions when you have to look at all these state regimes, figure out how your transaction may overlap with these state regimes, and how to plan for successful regulatory approvals in closing.

David Young: The conditions that they’re imposing, are these jeopardizing the transactions themselves or are state regulators aware of how parties might react and how it might affect the economics of the deal?

Jane Willis: I think it really depends on the regulator. Certainly, these types of reviews can jeopardize transactions or make it difficult for the transaction to achieve the very purpose for which it’s being entered into. Certainly, in one example, in California, a transaction involved a troubled rural hospital, and the attorney general tried to impose unilateral conditions on the buyer’s ability to raise rates. As a result, the transaction fell through and the hospital went bankrupt. So, that’s a situation where I don’t think the regulator necessarily understood the objectives of the transaction and how important it was to the parties.

David Young: On the substance of the reviews, the state laws that have been proposed or enacted contemplate this broad range of criteria that state agencies consider, not all of which are directly related to competition. What are your views on those criteria and how parties can consider them?

Jane Willis: Yes, the federal antitrust laws—which I am a bit partial to—focus solely on competition, that’s avoiding adverse effects or anti-competitive effects. In contrast, these state laws are looking at a wide variety of factors. New York, for example, has five factors it focuses on: (1) cost, (2) access, (3) equity, (4) quality, and (5) competition. So, by focusing on factors other than competition, it does create uncertainty and broadens the review.

I do want to step back and remind our listeners that, under federal antitrust law, the focus is on competition, including overlaps between actual and potential competitors—and that’s either horizontal overlaps that reduce competition and raise market share, or vertical relationships that cause foreclosure and reduce competition by foreclosing access to a competitor to be able to get to the market and compete.

David Young: Just for our listeners’ benefits, can you just give some basic examples of what horizontal and vertical overlaps might look like?

Jane Willis: Sure. A simple example of a horizontal overlap is if, for example, there’s two practices (physician practices) in the same specialty, in the same city, and they do a transaction. That raises a potentially significant antitrust issue to the extent that their market share might be higher and they might be able to get higher rates. Importantly, for a horizontal overlap, it must exist both as to the geography and as to the service line.

An example of a vertical transaction causing foreclosure would be, for example, if the largest commercial payor in a region acquired the largest health system in the region. So, the high-market share at both the payor level and at the hospital level could create foreclosure and make it harder for other insurers or other hospitals to compete.

David Young: Turning back to the state reviews, what is your view of what’s driving these broader state reviews? And what are the pitfalls to the broader approach that they have to evaluating transactions?

Jane Willis: These states are clearly signaling a broader agenda and opening themselves up to—or even welcoming—a broader set of narratives and special interests, whether it’s an animus towards private equity or a concern about unionized workers. Or there may be other issues relating to access that get addressed in the context of these reviews such as access to reproductive services or access for non-English-speaking patients, and these state reviews can address those types of issues, as well. But by focusing on factors other than competition, states adopting these regimes may end up spending a lot of time and effort on transactions that don’t pose any conceivable antitrust concern.

David Young: Do you think the states with these review regimes are going to be more aggressive than the federal antitrust agencies?

Jane Willis: Not necessarily, because I would say that federal antitrust agencies are aggressive in different ways.

The current Federal Trade Commission (FTC) is concerned about roll-up transactions by private equity sponsors or their portfolio companies. And there’s a concern that these transactions are generally under the HSR threshold, which makes them hard for the federal antitrust agencies to detect. The FTC chair, for example, has been quite vocal about the impact of private equity on health care.

Recent state regimes have picked up on this, as well. An earlier version of the New York legislation specifically referenced the “proliferation” of investor-backed transactions in the physician space.

Another concern of the FTC currently is impact of transactions on labor markets, particularly for nurses. We saw that concern on display in connection with a Rhode Island transaction last year that was abandoned after it was challenged. There was a concern by a couple of the commissioners that not only was the transaction going to increase cost for patients but could have an impact on nurse wages.

Another, third area where the FTC is more aggressive is in pursuing cross-market antitrust theories. That’s the idea that a transaction involving entities, even if they’re pretty far away from one another, could result in an anti-competitive effect and raise prices for patients.

David Young: What about the Department of Justice (DOJ), the other antitrust agency at the federal level—are they involved in health care at all, in mergers or conduct?

Jane Willis: The Department of Justice Antitrust Division, of course, is the other federal antitrust agency, and they are focused on health care—more of a focus, though, on insurers, national insurers, such as United. There’s been some inquiry into whether national insurers, by acquiring technologies and capabilities, are able to increase their power and cause an adverse effect on competition.

The DOJ’s also focused on contracting practices in the health care markets. They’re concerned about anti-steering provisions, anti-tiering provisions, and contracts between health care providers and payors. So, those are some of the concerns that the DOJ is focused on—different than the FTC, but we’re also seeing more aggressive enforcement by the DOJ, as well.

David Young: Turning to thinking about some of the other major trends in health care have been efforts to control the cost of health care, such as value-based contracting or digital health transformations. Those are, of course, critical to the health care industry and aimed at controlling costs, but they’re often reliant on scale of a provider or coordination between health care providers. And those two things, scale and coordination, appear to be disfavored by some of these new state regimes and the federal antitrust agencies, even if they are necessary for value-based health initiatives. Looking at these new state regimes and past federal experience, is there a way for providers to thread the needle and get these sorts of cost-saving health care initiatives done while, at the same time, complying with all these regulatory efforts?

Jane Willis: David, I do think there is because I do think that care coordination is unambiguously a good thing. For decades now, it’s been understood by the federal antitrust agencies that care coordination is helpful. For example, it’s pretty commonplace to think about a patient’s primary care physician, that that primary care physician would refer patients to specialist physicians and coordinate with those specialists as necessary. Same thing with electronic medical record systems—those have generally been considered to be a positive and to promote care coordination.

Now, of course, today, care coordination’s even more sophisticated. It’s not only between physicians, but between hospitals, skilled nursing, rehab, home health—the whole continuum of care.

Care coordination also is essential to value-based care—efforts to have payment methodologies that are different than fee-per-service, such as paying based on the entire course of treatment or the episode of care or based on outcomes.

David Young: Are you saying that antitrust law does take a favorable view of care coordination?

Jane Willis: I am, because I think antitrust law generally and rightfully has been focused on overlaps in the same or similar service lines, in the same geographies, such as a combination of the same types of health care providers. When we think about care coordination and value-based care, that the focus of the overlap is across different specialties, different areas of the health care continuum, and across different geographies—that’s a way to achieve scale that can benefit patients. And so, antitrust law, generally (I would say), has allowed the formation of multi-specialty physician groups, it’s allowed hospitals to employ physicians and provide outpatient services, and it’s allowed the creation of integrated health care delivery systems—the large hospital systems that we see today.

David Young: What I think you are saying is that there is scale that is permissible under the antitrust laws and promotes value-based care, but scale that results in market power—high market share in the same services, in the same geography—is generally rejected, even if it would enable value-based care arrangements?

Jane Willis: Yes, I agree with that.

David Young: So, that has been the agencies’ historical approach to the antitrust laws. Isn’t it the case, though, that under the current administration we are seeing a shift?

Jane Willis: We are. We are seeing the federal agencies become more aggressive in ways that might limit praiseworthy efforts to create cost efficiencies and engage in value-based care.

The apparent animosity to private equity roll-ups of physician practices, or to MSO arrangements, that is in tension with legitimate value-based care to the extent that it’s not rooted in an overlap analysis, but it’s based on a bias against, for example, private equity.

The FTC’s new focus on labor markets and cross-market effects, those also may be at odds with pro-competitive efforts because integrated health care delivery systems can obtain cost efficiencies, including the labor markets, that would benefit patients.

David Young: What about the states?

Jane Willis: Certainly, as we’ve been discussing, the states seem to be focused on things that could indeed impede value-based care.

We’ve already discussed that the state regimes may catch in their net transactions that don’t reduce competition or transactions that don’t even have much intersection with the state at all, and that will make it harder to do transactions and may slow down the path from signing to closing and may even require conditions.

In addition, to the extent that some of the review criteria are vague or broad at the state level, that’s going to create more uncertainty.

David Young: Jane, it sounds like the increasing headwinds that transactions are facing in the federal HSR process, while directionally similar, are also quite different from those in the state review processes, which have this broader scope and pose more risks for health care transactions generally and value-based care efforts in particular.

Jane Willis: I think that’s right, at least in theory. In practice, a lot is going to depend on regulations still under development that define the scope of these state reviews, how the reviewing agencies choose to exercise authority, and the resulting outcomes.

David Young: We’ll keep an eye on those developments. Thanks for the conversation, Jane. And if those listening would like more information on this topic, please don’t hesitate to contact either one of us or visit the health care group’s resource center, Navigating Emerging State Regulation of Health Care Transactions. You can also subscribe and listen to other Ropes & Gray podcasts wherever you regularly listen to your podcasts, including on Apple, Google, and Spotify. Thanks again for listening.

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