Outpatient Services Competition Not Enough to Save Hospital Mergers

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By Matthew Loughran and Liz Crampton

Dec. 12 — Antitrust officials won’t approve hospital mergers that eliminate inpatient services competition even if there is plenty of outpatient services competition in a market, an FTC official said Dec. 12.

The nature of the catastrophic care that inpatient facilities provide makes it unlikely that outpatient services providers can be considered reasonable substitutes when determining whether a merger has anticompetitive effects, Deborah Feinstein, the director of the Federal Trade Commission’s Bureau of Competition, said.

The question of including outpatient services in the product market for a hospital merger came up in a challenged merger between two major hospitals in Chicago. Judge Jorge Alonso of the U.S. District Court for the Northern District of Illinois originally refused to block the merger of Advocate Health Care and NorthShore University HealthSystem in part because the FTC had disregarded the competition for outpatient services provided in the geographic area ( 120 ATD, 6/22/16 ).

The U.S. Court of Appeals for the Seventh Circuit reversed that decision in October, saying that the district court made clear factual errors in its application of the “hypothetical monopolist” test to assess the competitive impact of the merger.

Disregard Outpatient Services

“We often hear about outpatient and how outpatient competes with inpatient and so shouldn’t they be in the same market,” Feinstein said. “The answer is no. I’m surprised we still hear debates about it.”

“I think you see why there’s always going to be a product market that excludes outpatient and is always going to be something where insurers say ‘I’m not going to be able to sell something to someone that says if they get into a car accident and something terrible happens, they have to pay for out of network services’,” Feinstein continued.

“I think the chance that you’re going to be able sell very many of those networks to employers is slim to none and that’s why I think there’s always going to be a role for a market that includes hospitals but doesn’t include [outpatient clinics],” she said.

David Dahlquist, a health law and antitrust attorney with Winston & Strawn LLP in Chicago, argued at the ABA event that outpatient services were becoming more prevalent, such that the FTC might have to reconsider excluding them from product markets.

“We do think that services are moving more and more toward outpatient and we see less and less inpatient services being performed,” said Dahlquist, who represented NorthShore in the proposed Chicago merger.

He noted that market definitions have changed over time and that the change from inpatient to outpatient could force the FTC to at least consider including outpatient services in its market definitions.

Leigh Oliver, a health care and antitrust attorney with Hogan Lovells LLP in Washington, agreed, adding that many hospitals were using outpatient service centers as a way of expanding their geographic reach and driving patients to their inpatient facilities.

Unwinding Costs Should Be Considered

At the same time, providers who have decided to attempt a merger should consider the costs and difficulty of unwinding the combination if the FTC is successful in challenging the merger.

“This is a long and costly process, and providers have to recognize from the beginning how costly the process is going to be,” said Anne Schenof, an attorney with the FTC’s compliance division.

She said that providers considering a combination should consider entering into an agreement with the FTC where the two factions will be kept separate until the merger obtains full approval. “It is difficult to separate hospitals once they merge,” she said. “We want there to be a viable hospital there at the end of the day after they are unwound.”

As a example she pointed to the process that lead to the divestiture of St. Luke’s Hospital by Promedica Health System in Ohio, which wasn’t completed until four years after the FTC’s order blocking the merger.

To contact the reporters on this story: Matthew Loughran in Washington at mloughran@bna.com; Liz Crampton in Washington at lcrampton@bna.com

To contact the editor responsible for this story: Peyton M. Sturges at PSturges@bna.com

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