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Obamacare Drives Health Sector Consolidation Prompting Heightened FTC Enforcement Efforts

By Andrew Kasper

The Patient Protection and Affordable Care Act of 2010 (the “ACA” or “Obamacare”) included a number of provisions designed to facilitate coordination between health care providers and thereby improve care quality and lower costs. Most significantly, the ACA authorized the Medicare program to enter into contracts with accountable care organizations (“ACOs”). ACOs are networks of hospitals, primary care physicians, specialists, and other providers that contract with the federal Medicare program and private payers to supply medical services for a defined population of patients. ACOs develop and implement processes and guidelines designed to improve quality and reduce costs through increased coordination of care, and are financially rewarded by payers if they achieve cost savings without reducing quality.

As many observers predicted, Obamacare has driven a wave of consolidation in the health care sector, with 95 hospital mergers occurring in 2014 alone. Marty Makary, “The Obamacare Effect: Hospital Monopolies,” The Wall Street Journal, April 19, 2015, available at; Robert Pear, “As Health Law Spurs Mergers, Risks Are Seen,” N.Y. Times, Nov. 21, 2010, at A1. The wave of consolidation among health care providers has been accompanied by an uptick in the number of health care provider mergers challenged by the Federal Trade Commission (“FTC”), with the agency lodging challenges to four mergers in the last six months alone. These renewed efforts come on the heels of the FTC’s successful challenge to the consummated merger between a hospital and multispecialty physician practice in Idaho. See St. Alphonsus Med. Ctr.—Nampa Inc. v. St. Luke’s Health Sys., Ltd., 778 F.3d 775 (9th Cir. 2015). This Article analyzes the FTC’s four most recent challenges to health care mergers, concluding that potential, but undocumented efficiency benefits will not forestall an FTC challenge to an otherwise presumptively unlawful merger.

Keystone Orthopaedic Specialists, LLC/Orthopaedic Associates of Reading, Ltd.

Keystone involved the 2011 merger of six independent orthopedic group practices in Berks County, Pennsylvania into Keystone Orthopaedic Specialists, LLC (“Keystone”). (Information regarding Keystone, including the Complaint and Consent Order, is available at Prior to the merger, 25 orthopedists practiced in 11 separate physician groups. The merger combined six of the practices, with the combined entity employing 19 out of 25, or 76 percent, of the practicing orthopedists in Berks County, which the FTC treated as the relevant geographic market. In 2014, 6 of the 19 orthopedists left Keystone and formed Orthopaedic Associates of Reading, Ltd. (“Orthopaedic Associates”).

On October 15, 2015—approximately four years after consummation of the original merger—the FTC filed an administrative complaint challenging the merger under Section 7 of the Clayton Act. The FTC said that combination had given Keystone substantial market power in negotiating contracts with payers, which it had used to raise prices. The harm to competition was not offset by any merger-specific efficiencies, the FTC said. Along with the complaint, the FTC provided a negotiated consent order pursuant to which Keystone and Orthopaedic Associates must obtain FTC approval before merging together or before acquiring any other Berks County orthopedics practices or affiliating with any other Berks County orthopedists. Among other provisions, the consent order also prohibits Keystone and Orthopaedic Associates from jointly negotiating with payers, except as part of a risk-sharing arrangement or clinically integrated network. In an analysis provided with the proposed consent order, the FTC said it would have pursued structural relief if Orthopaedic Associates had not already left Keystone.

Cabell Huntington Hospital/St. Mary’s Medical Center

In a complaint filed November 5, 2015, the FTC challenged the proposed merger of the two general acute care hospitals located three miles apart in Huntington, West Virginia: Cabell Huntington Hospital (“Cabell”) and St. Mary’s Medical Center (“St. Mary’s”). (Information regarding Cabell, including the Complaint, is available at In evaluating whether the merger was likely to harm competition, the FTC focused on two service markets: general acute care inpatient hospital services and outpatient surgical services. The FTC defined the general acute care inpatient services market as a group of medical and surgical diagnostic services that require an overnight stay and were offered by both hospitals. The FTC estimated that post-acquisition the combined entity would hold a 75.4% share of the general acute care hospital services market in the four-county region around Huntington that the hospitals served. The FTC’s complaint alleged that the merger was presumptively illegal under its Horizontal Merger Guidelines because the merger would increase the Herfindahl-Hirschman Index (“HHI”)—a measure of market concentration—for general acute care hospital services in the relevant market by 2,825.

The FTC also pointed to internal documents from both entities indicating that each viewed the other as its principal competitor. The FTC said that the combination would lead to higher prices, without providing any offsetting benefits to consumers. In support of this contention, the complaint referenced statements from payers that the combination would lead to higher costs because payers would be unable to play Cabell and St. Mary’s off each other to extract price concessions and cited examples of payers contracting exclusively—or threatening to contract exclusively—with one hospital or the other. The FTC further averred that high barriers to entry—due to the high costs to build a new hospital and state certificate-of-need laws that would preclude entrants from providing duplicative services—means that new entrants were unlikely to offset harms to competition. The FTC rejected as “conclusory” and not “substantiated” Cabell and St. Mary’s assertion that the merger would improve quality through consolidation and coordination of clinical services.

In response to the FTC’s challenge, the West Virginia legislature passed a law that potentially provided the merger with state action immunity from federal antitrust laws. See generally F.T.C. v. Phoebe Putney Health Sys., Inc., 133 S.Ct. 1003, 1010-11 (2013) (discussing state action immunity).  After the Governor of West Virginia signed the bill into law, the FTC and the hospitals decided to remove the matter from adjudication pending a determination of the impact of the legislation on the FTC’s challenge.

Penn State Hershey Medical Center/PinnacleHealth System

Penn State also involves the proposed merger of two general acute care hospital systems: the Penn State Hershey Medical Center (“Penn State”), which operates one hospital in the Harrisburg, Pennsylvania area, and PinnacleHealth System (“Pinnacle”), which operates three hospitals in the same area. (Information regarding Penn State, including the Complaint, is available at According to the FTC’s complaint, which the agency filed on December 8, 2015, the combined health system would hold 64% of the market for general acute care inpatient hospital services in the four counties in-and-around Harrisburg. The FTC estimated the merger would increase the HHI by 2,000, rendering the combination presumptively unlawful under the agency’s Horizontal Merger Guidelines.

In support of its contention that the merger would harm competition, the FTC emphasized that Penn State and Pinnacle offered “very similar services” and were the “dominant” hospitals in the geographic market with regard to those services. Like with Cabell, the complaint points to internal documents from Penn State and Pinnacle as establishing that each entity viewed the other as its principal competitor. Also like with Cabell, the complaint states that payers had expressed concern that the merger would result in higher prices by giving the combined entity greater leverage in negotiations. And also like with Cabell, the FTC rejected the hospitals’ efficiency justifications as “overstated, speculative, unverifiable, not merger-specific or result[ing] from an anticompetitive reduction in output, quality, or services,” emphasizing that “[n]o court ever has found, without being reversed, that efficiencies rescue an otherwise illegal transaction.” Penn State, Complaint ¶ 68.

Advocate Health Care Network/NorthShore University HealthSystem

On December 18, 2015, the FTC challenged a proposed transaction between Advocate Health Care (“Advocate”) and NorthShore University HealthSystem (“NorthShore”), the two largest general acute care inpatient hospital services providers in the “North Shore” suburbs of Chicago. (Information regarding Advocate Health, including the Complaint, is available at Under the transaction, NorthShore’s four North Shore area hospitals and Advocate’s two North Shore area hospitals would be brought under common ownership. The combined health system would hold 55% of the market for general acute care inpatient hospital services in the North Shore geographic market defined by the FTC. The merger would increase the HHI in the already concentrated market from 2,094 to 3,517, rendering it presumptively lawful under the Horizontal Merger Guidelines.

Unlike with Cabell and Penn State, the FTC’s complaint does not allege that payers had expressed concern to the agency that the merger would lead to increased prices. Rather, the complaint appeals to economic principles—that increased market share would give the combined entity greater negotiating leverage—and anecdotal evidence that an employer had deemed an insurer’s proposed network inadequate when it did not include either Advocate or NorthShore. The complaint also emphasizes that the merger would offset the cost savings to beneficiaries associated with insurers’ move to “narrow” networks—which many observers believe is a result of the ACA. Dan Polsky & Janet Weiner, The Robert Wood Johnson Foundation, “The Skinny on Narrow Networks in Health Insurance Marketplace Plans” (June 2015), available at Like with Cabell, the FTC concluded that potential entrants could not offset the harm to competition associated with the proposed merger because state certificate-of-need laws created high barriers to entry. And as with Cabell and Penn State, the FTC rejected Advocate’s and NorthShore’s efficiency arguments—most significantly, that the transaction would lead to sufficient cost savings to allow the combined entity to participate in low-price, ultra-narrow networks—as “not substantiated.” Advocate, Complaint ¶ 56.


Several themes emerge from the FTC’s recent spate of challenges to mergers between and among health care providers. First, the agency evaluates health care mergers under the same framework it looks at other mergers. In particular, for each of the four mergers, the FTC identified a relevant service and geographic market, calculated the likely change in the HHI, and determined that the transaction was presumptively unlawful under the Horizontal Merger Guidelines. Second, the agency listens to payers’ concerns about a transaction’s potential for competitive harm and is likely to highlight any such concerns in an enforcement action. Third, mergers between health care providers in states with certificate-of-need laws, like North Carolina, will have a particularly difficult time surviving agency scrutiny because the agency views such laws as creating significant barriers to entry. Fourth, the FTC will not accept efficiency defenses, particularly efficiency defenses premised on improved quality through care coordination, unless, at the time of the transaction, the merging firms can “substantiate” those efficiencies. Accordingly, unsupported assertions that a transaction furthers the quality and care coordination goals of Obamacare and the ACO program in particular, are unlikely, standing alone, to resurrect an otherwise problematic transaction.

Andrew Kasper is a litigation associate with Robinson, Bradshaw & Hinson, P.A. in Charlotte. As part of his antitrust practice, Mr. Kasper regularly advises health care providers regarding compliance with federal and state competition laws.