Feds cast wary eye on mergers in health care arena.

Pace of mergers, joint venture formations accelerates

As Southern California moves further into the managed care arena, hospitals, physicians groups and ancillary health care providers, such as labs and home care firms are merging and joint venturing at an increasing pace.

But the ongoing industry consolidation is now drawing the scrutiny of the U.S. Department of Justice and the Federal Trade Commission, which have overlapping jurisdiction on potential antitrust matters.

According to Sue L. Frauens, acting director of the Los Angeles regional office of the Federal Trade Commission, merger activity is increasing in the economy as a whole and is now at the highest level in five years.

Merger activity is measured by the number of "pre-merger notifications" filed with the federal government, as required under the Hart-Scott-Rodino Act.

There were 2,305 such notifications filed in fiscal 1994, which ended Sept. 30. That represents nearly a 25-percent increase from the 1,846 such filings in fiscal 1993 and a 45-percent increase from the 1,589 filings in 1992.

That dramatic jump in merger activity has drawn the attention of regulators concerned about antitrust matters. "Our enforcement actions span a wide range of industries, but health care tops the list and will continue to do so," Frauens said.

An August Government Accounting Office report for the 12-year period of 1981-93 showed 397 health care pre-merger filings, 68 preliminary investigations, 28 intensive investigations and 15 instances in which mergers were challenged or the parties dropped their plans.

"Since 1987, there have been over 200 hospital mergers, and we've probably challenged fewer than a dozen. So fear of our increased antitrust scrutiny may be unjustified," Frauens added. "We see true joint ventures as a legitimate form of collaboration when there is a meaningful amount of functional integration -- vs. when the venture is a guise for price-fixing."

Types of violations

In the antitrust arena, two primary types of serious violations exist. The first type is illegal conduct such as price fixing, division of markets and agreements among competitors on those issues. As providers have incentives to collaborate on providing services, they have increasing risk of falling into these illegal practices.

The second primary type of violation arises only if there are adverse affects to the market. These include mergers and joint ventures which attempt to monopolize a market.

Robert Enders, professor of business law at California State Polytechnic University, Pomona, said the health care mergers are a function of the "incredible pressures" to keep costs down being placed on providers by the government and insurance plans.

"Because the communities have become more concentrated, with fewer competitors, the danger of an affiliation or merger creating anti-competitive effects is always increasing," Enders explained. In the past year, there have been three non-public antitrust investigations of hospital mergers in California (one in L.A. County), with the government ultimately deciding not to challenge the mergers.

The L.A. County merger investigated by the FTC, and ultimately allowed to proceed unchallenged, was between Intercommunity Health Services in Covina and Queen of the Valley Hospital in West Covina, Enders said.

Martin J. Thompson, a principal with Riordan & McKinzie, a downtown corporate law firm, said he believes government probes should not be of major concern for health care operations.

"I think governments have become more understanding," Thompson said. "The managed care environment has created greater tolerance of certain consolidations because government sees the benefits more readily. However, some have had adverse experiences when they tried to hide the ball."

Said Beau Miller, partner in the downtown law firm Musick, Peeler and Garrett: "Everybody's worried about antitrust today, which is a good thing. The government's interest in mergers has made entities aware that the antitrust laws are the rules by which they have to play."

Agencies cite guidelines

In 1993 and 1994, the FTC and Justice Department issued nine guidelines covering joint ventures which created safe harbors and helped the health care industry understand what is and is not permissible under antitrust laws.

Topic areas included hospital mergers, mergers between physicians and hospital organizations, acceptable ways in which physicians may share information and acceptable ways in which two hospitals may jointly own expensive equipment.

Mergers between physicians' groups and hospitals are rarely challenged by the federal agencies because hospitals don't really compete with doctors. On the other hand, mergers between hospitals are coming under increasing scrutiny, but even most of those have been passing muster, according to Tom McCarthy, vice president and health care chief in the L.A. office of international economic consulting firm National Economic Research Associates.

There have been important recent exceptions, however. One hospital merger was blocked in Pueblo, Colo.; another went to trial in Dubuque, Iowa. Also the FTC dropped a six-year investigation in Ukiah, Calif. and two Florida hospitals were forced by the Justice Department to joint venture rather than merge all their services.

"Most current mergers in California are in urban areas, where there is plenty of competition, so very few of them are attacked," Miller said.

Lately, there has been almost as much merger activity between physician groups as among hospitals, Miller added.

McCarthy of National Economic Research elaborated: "Doctor groups are having to be increasingly concerned about the antitrust implications of what they do because they have often aligned themselves into multi-specialty groups."

If there are only two obstetric groups in a market, for example, merging them may be anti-competitive, particularly if the merged entity ends up charging a higher, monopolistic price.

Lately, the increasing market consolidation and concentration has led to more private-sector antitrust litigation being entered into among providers. Medical groups are currently suing other medical groups in California and there is litigation between two Northern California health systems, Enders said. In many states, including California, all the pharmacists in the state are suing pharmaceutical manufacturers and drug distributors, charging conspiracy, price discrimination and antitrust violations, McCarthy said.

"Los Angeles is such a large, diverse health care market that there is generally less antitrust exposure here than elsewhere -- for the time being," McCarthy said. "But physicians can still get into trouble by being stupid. You can't sit down and discuss fixing prices, regardless of how many of you there are."