A more exacting system for regulatory reviews is a factor in the short-term outlook for healthcare mergers and acquisitions.
New M&A guidelines from the Federal Trade Commission (FTC) and the U.S. Department of Justice (DOJ) add a wrinkle to the process of consummating deals, especially in the short term as the parties adjust to the rules.
PwC nonetheless described the healthcare M&A outlook for 2024 as “cautiously optimistic.”
The consultancy noted that 2023 deal volumes decreased by 13% (through Nov. 15) from 2022, with regulatory concerns cited as an issue along with interest rates, valuation gaps and the macroeconomic picture. Still, trailing 12-month volumes were nearly double the average from 2018 through 2020.
Among the healthcare M&A trends predicted by Juniper Advisory is more cross-region consolidation of the sort seen in last year’s Kaiser Permanente-Geisinger deal.
“While the scale benefits of hospital transactions can include in-market clinical and referral synergies, those tend to be secondary to the market-independent structural synergies of best practices, corporate finance, population health infrastructure, purchasing and other gains,” wrote Juniper Advisory’s Jordan Shields. “To fully realize those benefits, organizations typically need to undergo structural and ownership change, indicating that loose affiliations and other ‘dip-the-toe-in’ partnerships are likely to cool off in 2024.”
A side benefit of interregional deals theoretically is the lesser impact on competition within a market, given that larger intra-market transactions seem increasingly likely to undergo close inspection in the wake of the new regulatory guidance.
Regulations ramping up
The FTC and DOJ initially sought comments in January 2022 on potential updates to merger enforcement guidelines.
“Commenters highlighted excessive market consolidation across industries and overwhelmingly urged the agencies to strengthen their approach to merger enforcement,” the agencies stated in a December 2023 news release. “At the agencies’ four listening sessions, business owners, workers and other advocates similarly highlighted the potential for mergers and acquisitions to undermine open, vibrant and competitive markets in industries ranging from food and agriculture to healthcare.”
Proposed changes to the guidelines were released last July, drawing more than 30,000 comments.
Along with issuing the new guidance, the FTC and DOJ in 2023 withdrew their support of policy statements that had established partial safe harbors from healthcare antitrust enforcement with respect to joint purchasing arrangements and information exchanges, as well as accountable care organizations in federal programs.
In addition, a 2023 proposed rule would require organizations to take a more comprehensive approach to filing premerger notifications with the agencies under the Hart-Scott-Rodino Act.
Tighter limits on market concentration
The new guidance emphasizes that mergers raise a presumption of illegality if they significantly increase concentration in an already concentrated market.
The new thresholds for determining the presumption of illegality are a post-merger Herfindahl-Hirschman Index (HHI) of greater than 1,800, with a projected change of more than 100; or a market share of greater than 30%, with an HHI change of more than 100.
“When exceeded, these concentration metrics indicate that a merger’s effect may be to eliminate substantial competition between the merging parties and to increase coordination among the remaining competitors after the merger,” the guidance states. “This presumption of illegality can be rebutted or disproved. The higher the concentration metrics over these thresholds, the greater the risk to competition suggested by this market structure analysis and the stronger the evidence needed to rebut or disprove it.”
For more than a decade, the relevant HHI threshold had been 2,500, with a change of more than 200 indicating an excessive increase in market concentration. The new, lower thresholds mirror those that were in place from the early 1980s until 2010.
“Based on experience and evidence developed since , the agencies consider the original HHI thresholds to better reflect both the law and the risks of competitive harm suggested by market structure and have therefore returned to those thresholds,” the guidance states.
Various risk factors described
The new guidance also establishes that among other factors, mergers will draw close scrutiny if they potentially would:
Eliminate substantial competition between firms (even in a relatively unconcentrated market). “Understanding how the businesses look at each other in their ordinary course documents is important to evaluating the likelihood of successfully navigating the review process,” a McDermott analysis states.
Increase the risk of coordination across the remaining firms in the market. “This does not require an illegal agreement, but the theory is that with fewer firms there is a greater likelihood that competitors will be able to observe each other’s actions and pull their punches,” the analysis states.
Eliminate a potential entrant into a concentrated market. This standard was well-established in prior guidance, but the new guidelines “take an expansive approach to potential entry and the competitive benefits such entry would deliver to customers,” according to the analysis.
Entrench or extend dominance. An analysis by attorneys with the law firm of Paul Hastings, LLP notes that the focus on this criterion serves to “resurrect a theory of anticompetitive harm largely seen in cases in the 1960s and 1970s,” with “the unifying theme that for many companies, getting bigger is presumptively problematic.”
Lessen competition for workers and supplies. The Paul Hastings analysis observes that while “antitrust enforcement has historically focused on harm to purchasers of a merged firm’s products, the 2023 merger guidelines emphasize the importance of avoiding harm to the merged company’s employees and suppliers.”
Other key developments in the new guidelines, according to the McDermott analysis, are increased scrutiny on vertical transactions and closer consideration of broader trends toward consolidation within the particular industry. Private equity transactions also likely will be evaluated in the context of broader consolidation patterns.