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U.S. District Court For The Western District Of North Carolina Denies FTC Bid To Block North Carolina Hospital Deal
06/11/2024On June 5, 2024, the U.S. District Court for the Western District of North Carolina denied the Federal Trade Commission’s request for a preliminary injunction barring Novant Health, Inc.’s $320 million acquisition of two North Carolina hospitals, Lake Norman Regional Medical Center and Davis Regional Psychiatric Hospital, both operated by Community Health Systems, Inc. (“CHS”).
The FTC’s complaint and request for preliminary injunction, filed in March 2024 pending an agency administrative proceeding, alleged that the proposed transaction would allow Novant to control nearly 65 percent of the market for inpatient general acute care services in the Eastern Lake Norman area of North Carolina. The alleged market includes a broad range of essential medical, surgical, and diagnostic services requiring overnight care. According to the FTC, the transaction would likely increase annual health care costs in the alleged market by several million dollars and that these increases would be passed on to patients. The FTC also alleged that the transaction would reduce Novant’s incentive to compete and improve its quality of care, service offerings, and facilities to the benefit of patients. According to the FTC, the transaction was presumptively illegal under the structural principles articulated in the 2023 Merger Guidelines. In order to prevent the transaction from proceeding while the administrative proceeding was pending, the FTC filed a request for a temporary restraining order and a preliminary injunction in federal district court on January 25, 2024. In early May, the district court held a multi-day preliminary injunction hearing.
In denying the motion for a preliminary injunction, the court largely adopted the FTC’s approach to market definition and agreed with the agency that the level of combined market share and market concentration in “one or more ‘relevant markets’” would be “outside the permitted guideline range.” To determine whether the defendants met their burden of rebutting the FTC’s prima facie case, the court evaluated whether the defendants had shown “unique economic circumstances that undermine the predictive value of the government’s statistics.” Therefore, the court looked “beyond the economic numbers to assess the likelihood that, considering commercial realities, the merger may in fact ‘substantially lessen’ competition.”
The court then embarked on a detailed and thorough examination of both existing competition in the market and predictions of how competition was likely to play out in the future. First, the court accepted the merging parties’ arguments that both the CHS hospitals proposed for acquisition had not been successful in recent years and were likely either to exit soon or to fade even further in competitive significance. The Davis hospital was losing $1 million per month and would close without the transaction. Therefore, the court found that the sale of Davis to Novant would “maintain, not eliminate, competition (and services) that will be lost if the hospital closed.” As to the Lake Norman facility, the court found that CHS had been unable to make necessary capital investments to support it, causing the facility to discontinue important service lines which had “consigned Lake Norman to a relatively insignificant competitive position.” The court noted that the competitive problems of Lake Norman were “real” and long pre-dated CHS’ decision to sell the hospital to Novant. Therefore, competition from Lake Norman was likely to be substantially reduced in the future, “if it even remains open given CHS’ financial difficulties.” The court also found that CHS had no other bidders for Lake Norman or Davis despite reasonable efforts to sell to others.
Further, the court found that in these “unique economic circumstances,” the sale of Lake Norman to Novant “is at least as likely to enhance competition as it is to reduce it,” particularly as Novant’s promised resources would replace the lost lines of services and otherwise reinvigorate the hospital and its staff. The court also found that the acquisition would put Novant in a better competitive position versus Atrium Health, the largest hospital system in the area, for Lake Norman area patients, and so while the competition between Novant and CHS would be eliminated, there would still be vigorous competition for those patients from Atrium and, to a lesser extent, from another health system, Iredell Health.
The court also weighed the equities of enjoining the transaction pending the conclusion of the FTC administrative process, considering whether the injunction, and not the merger, would be in the public interest. In this respect, the court stated that it did not find that “immediate” competitive harm was likely. In particular, the court found that while the reimbursements rates paid by insurers at the hospitals would likely rise after the merger, primarily as a result of Novant’s practice of negotiating system-wide, rather than hospital-specific, contracts with health insurers, Novant had committed and testified that it would not increase prices for at least three years post-close.
In assessing weighing the public interest, the court found that the risk of losing “critically needed psychiatric medical services” supplied by Davis and the loss of other closed service lines ultimately outweighed the potential harms brought about by the transaction, such as reduced tax revenues to state and local governments resulting from the hospitals’ ownership by a non-profit entity.
While the transaction has overcome this initial challenge, Novant and CHS remain teed up for an administrative review process—and the possibility of an FTC appeal of the district court’s order—that could halt closing. A merits hearing before an administrative law judge has been scheduled for June 26, 2024.
This decision is a good example of merging parties presenting a compelling factual case that the “unique circumstances” of the relevant market and the merging parties should overcome the structural presumption of illegality articulated in the Merger Guidelines. It is also an example of a rare successful application of variations of the “failing firm” defense, which applies to otherwise anticompetitive mergers where the target company would exit the market but for the acquisition, and the “weakened competitor” defense, which applies when the prospective acquiree “would have been too weak to affect competition” in the absence of the transaction. Both defenses require that there be no reasonable alternative to the transaction. Here, the court found the seller had in good faith pursued alternatives to the challenged transaction and that there were independent economic reasons that those efforts did not succeed. The standard, the court stated, is that “only those bona fide economic difficulties which are so existential as to establish that the entity being acquired will no longer be a viable competitor in the absence of the proposed transaction may justify an otherwise unlawful loss of competition.” Based on its evaluation of the record, the court concluded that “this is the ‘rare case’ which meets that high threshold.” This result demonstrates again that, while market shares are always important, they are a starting point, not an ending point, and that a compelling presentation on how competition in the relevant market actually works, and how it is likely to work in the future, is more important.
