In June 2023 – and notably for the first time in 45 years – the Federal Trade Commission (“FTC”) proposed substantial changes to the rules governing notification and oversight of corporate mergers. This marks the first major overhaul of these rules, which could spell potential new regulatory concerns even for mid-sized healthcare entities considering acquisitions; in addition, the proposals (if adopted) will open the door to parties opposing M&A deals to a greater extent, as more disclosures will be required of the transacting parties. The healthcare industry, which has witnessed substantial market consolidation in recent years, is likely to experience significant consequences from these proposed changes. The FTC has specifically proposed lowering the thresholds for presuming an antitrust violation in corporate mergers and acquisitions – both in terms of the absolute size of a company, and overall market concentration.
The FTC’s Proposed Rule Changes
On July 19, 2023, the FTC sought public comment on the proposed rule changes, describing thirteen ‘guidelines’ underlying the changes:
- Mergers should not significantly increase concentration in highly concentrated markets.
- Mergers should not eliminate substantial competition between firms.
- Mergers should not increase the risk of coordination.
- Mergers should not eliminate a potential entrant in a concentrated market.
- Mergers should not substantially lessen competition by creating a firm that controls products or services that its rivals may use to compete.
- Vertical mergers should not create market structures that foreclose competition.
- Mergers should not entrench or extend a dominant position.
- Mergers should not further a trend toward concentration.
- When a merger is part of a series of multiple acquisitions, the agencies may examine the whole series.
- When a merger involves a multi-sided platform, the agencies examine competition between platforms, on a platform, or to displace a platform.
- When a merger involves competing buyers, the agencies examine whether it may substantially lessen competition for workers or other sellers.
- When an acquisition involves partial ownership or minority interests, the agencies examine its impact on competition.
- Mergers should not otherwise substantially lessen competition or tend to create a monopoly.
These guidelines reflect the FTC’s commitment to ensuring fair competition and preventing anticompetitive behavior, also in the healthcare sector.
While it remains to be seen whether the federal agencies (including the Department of Justice’s Antitrust Division, which also has a stake in the application of the HSR rules) will follow through with the changes, the implications of these proposed rule changes are not limited to large corporations but extend to mid-sized healthcare companies as well, as some of their divestitures or acquisitions may in the future be subjected to greater regulatory review.
One of the key changes (if enacted) involves the future mandatory disclosure of subsidiaries of the merging parties. They would be required to answer, in simple terms, fundamental deal-related questions that were previously not part of the 1978-era forms, for example, queries as to the deal rationale, disclose memberships on the parties’ Boards, and inform the feds of other creditors and investors with a stake in the deal. Moreover, the proposals involve lowering the market “concentration” thresholds, which will have a likely effect on healthcare firms active in an already concentrated market (such as PBMs). The agencies currently use a Herfindahl-Hirschman Index (HHI) of 2,500 as a benchmark concentration level for a merger causing a presumptively illegal consolidation of market share. The proposed reduction of the HHI benchmark from 2500 to 1,800, a 28% reduction, will doubtless trigger more frequent antitrust concerns.
This reduction aims to steer the market towards the lower end of “moderately concentrated” and away from the high end of “highly concentrated” levels. Given the high level of market consolidation in the healthcare industry in recent years, these changes could have a profound effect on mid-sized healthcare firms seeking mergers or acquisitions.
Opposition and Support for the Proposed Changes
Not surprisingly, these proposed changes have generated both opposition and support from various stakeholders. Large corporations with proven track records of serial M&A activity, as well as organizations representing large hospital systems have objected, such as the American Hospital Association and the National Association of Manufacturers. Pharmaceutical companies Amgen Inc., Gilead Sciences Inc., Novartis AG, Merck & Co., AbbVie Inc. and about two dozen other life sciences organizations and trade associations also formed a coalition to oppose the proposed merger rule changes. Their main concern is that the new rules may drive up costs and delays, with one group asserting that the “FTC estimates a quadrupling of the time required to prepare the information under the proposed amendments,” and some private legal practitioners warning of “exponentially more challenging” merger filings. On the other hand, on September 19, 2023, a group of progressive Senators, including Elizabeth Warren and Bernie Sanders, issued a press release urging the FTC to adopt the new rules, emphasizing the need to protect against anticompetitive practices in the healthcare sector.
Conclusion
The proposed rule changes by the FTC have the potential to impact significantly various entities active in the healthcare sector, possibly limiting successful deal activity given the already high levels of market consolidation in the industry. They will also, on the flip side, provide additional incentives to opponents of M&A deals to voice their disapproval and actively seek legal counsel to assist in opposing a perceived anti-competitive deal in Washington. While the final decision on these rule changes remains pending, it’s essential for healthcare entities to stay informed and prepared for potential shifts in the regulatory landscape.
How Frier Levitt Can Help
Mid-sized healthcare firms, even some smaller vendors, IPAs, and ACOs, faced with the prospect of navigating these regulatory changes and the complexities of antitrust laws may find it challenging to ensure compliance and understand the broader market implications. Experienced legal counsel can play a pivotal role in helping these firms navigate the evolving healthcare regulatory environment, ensuring compliance and protecting their interests in an ever-changing industry.
Frier Levitt is a national healthcare law firm where firm attorneys have handled thousands of regulatory cases, including allegations of anti-competitive conduct, and regularly represent independent providers in disputes with large, private-equity-backed healthcare systems.
We can help firms of all sizes navigate the legal and regulatory challenges specific to healthcare firms. Whether it’s ensuring regulatory compliance, handling litigation, participating in the notice and comment process, or engaging in national policy advocacy, Frier Levitt has experienced attorneys who can guide healthcare entities through this period of regulatory change. Frier Levitt’s litigation team routinely handles commercial and regulatory disputes and has also handled legal and policy advocacy on the national level.
If your firm has any concerns stemming from the proposed FTC rule changes – from run-of-the-mill regulatory compliance to litigation of potential disputes, participating in the notice and comment process or even national policy advocacy – Frier Levitt can help discuss how to best serve your organization’s needs.
