Health Highlights

Five Lessons From 2015 Healthcare Deals

Author: Lisl Dunlop, Partner, Antitrust/Litigation

In 2015, we already have seen a great deal of activity in healthcare transactions that is attracting antitrust scrutiny, with mixed results. Among the winners have been Cabell and St. Mary's, which received state clearance for their acquisition on July 31, 2015, and Phoebe Putney's acquisition of Palmyra, which survived four years of merger litigation with the Federal Trade Commission (FTC). Losers include St. Luke's which lost its appeal from an injunction against its acquisition of Salzer Medical Group; Promedica, which failed in a bid to have the Supreme Court review an FTC challenge to its 2010 acquisition of St. Luke's; and Partners HealthCare, whose deal to acquire South Shore Hospital and Hallmark Health Systems in Massachusetts was knocked back by a Superior Court judge in January 2015.

On the current regulatory agenda, perhaps the biggest news in healthcare M&A are the pending transactions between Anthem and Cigna and Humana and Aetna. What are the top messages to be drawn from the merger successes and failures of 2015 to date? And what do these messages predict for the treatment of upcoming deals?

1. The Affordable Care Act (ACA) Is Not a Shield for Anticompetitive Transactions.

It is well understood that the Affordable Care Act seeks to achieve synergies and scale in the healthcare system. In an apparent response to the enactment of the ACA, hospitals started merging with competitors at unprecedented rates. In 2009 (pre-ACA), there were 52 announced transactions involving 80 hospitals. That number had more than doubled by 2012, with 107 announced transactions involving 244 hospitals, and the numbers have continued to rise.1 Over the same period, federal antitrust authorities and state attorneys general have stepped up their efforts to challenge anticompetitive mergers in the healthcare sector.

This has led many providers to feel conflicted between their desire to meet the ACA's goals of economic efficiencies through mergers and consolidations, and concern that antitrust regulators are being unduly harsh. The FTC, which reviews most of the hospital transactions at the federal level, has responded to such concerns with numerous statements asserting that the ACA and the antitrust laws are not inconsistent, and that the ACA is not a "free pass" to avoid FTC regulation. The FTC and other regulators have demonstrated that they will continue to apply antitrust principles to prevent healthcare firms from accumulating undue market power through mergers and acquisitions, and will not accept the ACA's encouragement of efficiencies as a defense.

2. Efficiencies Are Subject to a High Burden of Proof.

The 9th Circuit decision in the St. Luke's/Salzer case was a major wake-up call for proponents of broad concepts of procompetitive effects through efficiencies. The court effectively rejected any benefit of the transaction that did not directly address the potential for anticompetitive harm. In that case, the justifications of a need for scale to implement novel, risk-based patient management and contracting, as well as the implementation of consistent electronic medical information systems, were rejected for having no relevance to the question of whether prices paid by insurers would increase post-merger.

The court's skepticism was not without precedent. It drives home to merging parties, however, the importance of efficiencies in the regulatory review phase and brings into sharper focus the need for persuasive, well-developed evidence of efficiencies at that stage. Since St. Luke's, numerous FTC staff and commentators have emphasized the rigor and attention paid to efficiencies claims in the agency review, the types of claims that will be credited, and the need for persuasive evidence at that stage. If a deal depends on gaining efficiencies—as so many ACA-inspired transactions do—the time to make that case is before the FTC and Department of Justice (DOJ).

3. Traditional Merger Analysis Still Carries the Day in Court.

The tools that antitrust regulators use to evaluate hospital and other healthcare mergers are well established and understood. There is a significant amount of precedent in agency complaints and consent decrees, as well as recent court decisions. Hospital markets are defined by patient draw areas based on discharge data. Overlapping services are analyzed and compared. Herfindahl-Hirschman index screens are applied to each product and geographic market, and the impact on negotiating leverage against commercial payers remains a key question. Transactions that result in aggregation of market power through high combined shares and could be expected to lead to increased reimbursement rates are presumptively suspect. Such principles can also be applied to aggregation of market power on the payer side, with concern over artificially reduced reimbursement rates.

Although the agencies' revised Horizontal Merger Guidelines outline an iterative and evidence-based approach, the cases that reach court rely on traditional market definition principles and competitive effects analyses, and these factors have usually proven persuasive. A good indicator of the likelihood of success in any deal is still traditional market and concentration analysis. Although FTC and DOJ economists also use newer and more intricate tests for merger analysis and screening in the investigation phase, once a decision is made to challenge a deal in court, the case will be framed in a more traditional manner.

4. State Review Is as Important as Federal Review.

Healthcare markets are typically local or state-wide geographic markets, and the cost and access to healthcare is a key political issue in most states. State antitrust enforcers are highly motivated and well-placed to investigate and respond to transactions having a direct impact on their citizens.

In most hospital reviews, federal and state regulators seek confidentiality waivers enabling them to discuss information obtained through their respective investigations and coordinate on theory and prosecution of anticompetitive mergers. Several states also have implemented state-based instrumentalities, such as Massachusetts' Health Policy Commission, to conduct in-depth research and aid state regulators in antitrust reviews. State regulators other than Attorneys General also may be important in healthcare mergers. For example, State Departments of Health may be required to approve hospital transactions, and State Insurance Commissioners will review health insurance mergers.

The results of state involvement in the merger review process are often helpful to merging parties. In the Cabell Huntington/St. Mary's transaction, for example, the West Virginia Attorney General approved the merger subject to limitations on rates, achievement of efficiency goals, and the preservation of St. Mary's as an independent institution. Although the FTC's review of the transaction is ongoing, in the past the FTC has recognized states' interest in crafting solutions that serve local needs, even if they might not meet the FTC's standards for merger remedies (typically requiring divestitures). A similar dynamic can be observed in the Partners agreement with the Massachusetts Attorney General, where the Department of Justice was the reviewing federal antitrust agency and took no independent action. Working closely with state agencies is key to any close deal.

5. State Laws Can Limit Effective Federal Antitrust Enforcement.

The Phoebe Putney/Palmyra transaction showed how state Certificate of Need laws can prevent federal enforcement actions. In that case, the FTC was unable to achieve its desired relief of divestiture of Palmyra to a third party due to the impact of Georgia's CON laws, which would have effectively prevented the transfer of Palmyra's beds to the third party.2 State attempts to invoke the "state action" doctrine to shield transactions and other conduct from antitrust scrutiny have been less successful.3 It is conceivable, however, that a transaction involving state-owned institutions will benefit from the protection. Finally, several states have enacted other healthcare regulation granting antitrust immunity for actions undertaken under certain state programs. The New York Certificate of Public Advantage (COPA) program is one example.4

The FTC has upped its advocacy efforts against such state attempts to circumvent and shelter state-based healthcare collaborations from scrutiny under the federal antitrust laws, as seen through its letters to New York,5 Oregon,6 and Connecticut.7 Following the Phoebe Putney experience, the FTC is unlikely to fall foul of CON issues in the future so long as it can hold assets separate until adjudication. However, there may yet be other shoals of state regulation that could cause federal efforts seeking strict relief to founder.

Conclusion

With what some in the media have dubbed "merger mania" underway, the spate of healthcare consolidations is expected to continue. For instance, some experts are predicting that 20% of the nation's hospitals will seek to merge in the next five to seven years, driven by increasing pressures to lower costs, increase efficiency and improve quality. Hospitals say that mergers allow them to focus more resources on care, technology and patient services. But those arguments are not necessarily outweighing anti-trust issues. Clearly, for example, St. Luke's argument of improved efficiencies did not trump anticompetitive concerns.

As both payers and providers look to join together—within and across segments—the success of their deals will depend on heeding the lessons learned from those who have gone before them. Those organizations considering mergers or acquisitions would be wise to study the arguments of this year's winners—and losers—to craft their strategies effectively and ensure there is clear, persuasive proof of the market benefits.

1American Hospital Association Trendwatch Chartbook 2014, chart 2.9: Announced Hospital Mergers & Acquisitions, 1998-2013. http://www.aha.org/research/reports/tw/chartbook/2014/chart2-9.pdf

2See Phoebe Putney: A Collision of Federal Antitrust and State Certificate of Need Laws, A. Antler and L. Dunlop, Manatt Healthcare Newsletter, April 27, 2015, https://www.manatt.com/insights/newsletters/health-update/phoebe-putney-a-collision-of-federal-antitrust-a#Article1

3The state action doctrine was unsuccessfully invoked in Phoebe Putney/Palmyra itself, as well as North Carolina State Board of Dental Examiners, a case concerning the regulation of non-dentist tooth whitening services.

4See Who Should Regulate Healthcare Competition? The New York COPA Dispute, L. Dunlop, Manatt Health Newsletter, https://www.manatt.com/Who-Should-Regulate-Healthcare-Competition-The-New.aspx

5https://www.ftc.gov/system/files/documents/advocacy_documents/ftc-staff-comment-new-york-state-senator-tanzenhofer-new-york-state-assemblyman-abinanti-concerning/150605nypublichealthletter.pdf and https://www.ftc.gov/system/files/documents/advocacy_documents/ftc-staff-comment-center-health-care-policy-resource-development-office-primary-care-health-systems/150422newyorkhealth.pdf

6https://www.ftc.gov/system/files/documents/advocacy_documents/ftc-staff-comment-regarding-oregon-senate-bill-231a-which-includes-language-intended-provide-federal/150519oregonstaffletter.pdf

7https://www.ftc.gov/sites/default/files/documents/advocacy_documents/ftc-staff-comment-connecticut-general-assembly-labor-and-employees-committee-regarding-connecticut/130605conncoopcomment.pdf and https://www.ftc.gov/policy/policy-actions/advocacy-filings/2011/06/ftc-staff-comment-senators-coleman-kissel.

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Medicaid's New Role in the Healthcare System

Authors: Cindy Mann, Partner, Healthcare Industry | Elizabeth Osius, Manager

Editor's Note: On July 30, 1965, President Lyndon B. Johnson signed the Medicaid program into law. In a new article for the Journal of the American Medical Association (JAMA), summarized below, Manatt Health takes a look at Medicaid's evolution over the past 50 years from an adjunct to state welfare programs to the nation's largest health insurer. To download a free PDF of the full article, click here.

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The Affordable Care Act (ACA) affirmed Medicaid's insurance credentials as one of three "insurance affordability" programs—along with subsidized coverage through a state-based Federally-Facilitated Marketplace and the Children's Health Insurance Program (CHIP)—that make up the new coverage continuum for people who do not have access to affordable workplace coverage. As the foundation of the new coverage continuum, Medicaid was slated to cover adults who earn up to 138% of the Federal Poverty Level (FPL) and children at least to that income level. The Supreme Court's 2012 ruling in National Federation of Independent Business v. Sebelius, however, made the adult coverage voluntary for states. Currently 21 states have yet to expand their Medicaid programs, creating disparities between the expansion and nonexpansion states.

Other ACA Medicaid reforms that were not affected by the Supreme Court's ruling apply in all states. Among the most significant is that the ACA overhauled Medicaid's eligibility and enrollment procedures to achieve a simple, seamless enrollment experience across all three insurance affordability programs. Complex rules and practices that were remnants of Medicaid's historic association with welfare programs and often discouraged enrollment were replaced by ones that promote enrollment and align with the Marketplace. In every state, people younger than 65 can now enroll in Marketplace subsidies, Medicaid or CHIP through one online application—and, to varying degrees, depending on the IT status—have their eligibility determined through a coordinated and largely automated review process.

Given Medicaid's Role and Size, Program Costs Remain an Issue

Given Medicaid's role and size, program costs remain an issue, as they are in the healthcare system more broadly. Although the costs of newly-eligible adults and the new IT infrastructure are largely borne by the federal government, Medicaid still accounts for, on average, 15% of state budgets, looking at nonfederal sources of spending. Unlike Medicare and private insurance, Medicaid spending growth in recent years has been driven mostly by enrollment, not per-enrollee costs. Medicaid is now covering more than 70 million people.

As is true across the healthcare system, cost concerns and a desire to improve care are prompting state and federal Medicaid agencies to focus on delivery and payment reforms. Among others, aligning Medicaid with the commercial market is a priority. Approximately 40% of families with incomes below 400% FPL will experience a change in circumstances within a year of enrollment that will lead them to move between Medicaid and Marketplace coverage (in both directions). Health plans increasingly operate in both markets. Coordinating with Medicare is also important, given that about 61% of Medicaid's highest-needs beneficiaries are enrolled in both programs.

Looking Ahead

Looking forward, the most pressing question for Medicaid and the goal for near universal coverage is whether and when the states that have not yet expanded their Medicaid programs will expand. About 4.3 million adults who could be covered by Medicaid remain uninsured in nonexpansion states. The case for expansion is compelling:

  • First-year results in expansion states show robust take-up and steep declines in uninsurance and uncompensated care costs.
  • Expansion is largely funded by federal dollars (100% through 2016 and never less than 90% thereafter), and in all states expansion brings significant economic benefits by relieving current state spending and bringing in new healthcare-related revenues. A post-implementation study Manatt prepared for the Robert Wood Johnson Foundation's State Health Reform Assistance Network shows savings and revenues across eight expansion states are projected to top $1.8 billion by the end of 2015.

Opposition to expansion persists in some states, however, driven largely by a philosophy favoring less government, opposition to any association with "Obamacare," and objections to covering the "able-bodied poor." In contrast, hospitals, other healthcare providers, many business groups and the public widely support Medicaid expansion. Waivers, which allow states to put their unique stamp on expansion, will play a key role in this debate. As the contours of federalism continue to be tested, the challenge is to support states' ability to test new ways to provide coverage while maintaining or even strengthening the program's ability to coordinate closely with the Marketplace and CHIP, as well as to function effectively as a value-based purchaser and source of insurance for low-income residents.

Delivery and payment reform are ultimately as important to Medicaid's future as its coverage responsibilities. Medicaid can both drive delivery system reform and partner with others moving reform forward. Overall, Medicaid's success will depend on the same issues that are affecting the rest of the healthcare system, along with some Medicaid-specific challenges.

Finally, it is impossible to contemplate Medicaid's future without noting the cost pressures associated with new treatments and an aging population. The 22% of Medicaid enrollees who qualify based on age or disability account for 56% of Medicaid expenditures. Much of the attention to delivery and payment reform is focused on these high-need individuals. Increased cost pressures add to the imperative to improve care and prevent cost inefficiencies.

Conclusion

Medicaid has regularly been reinvented to meet the needs of a new time, population or healthcare crisis. Reinvention is under way again, and while the path may not be easy, Medicaid will continue to move forward.

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Can Technical Violations of Healthcare Statutes Serve as a Basis for Uninjured Plaintiffs to Sue? The U.S. Supreme Court Agrees to Decide.

Author: Luke Punnakanta, Associate, Litigation

Last year, in Robins v. Spokeo, Inc., 742 F.3d 409 (9th Cir. 2014), the Ninth Circuit Court of Appeals held that an uninjured plaintiff may have standing to bring suit under Article III of the U.S. Constitution* due to a defendant's technical violation of a statute. In April of this year, the United States Supreme Court granted certiorari and will review this case in its next term. (In layman's terms, granting certiorari means the Supreme Court will review the decision of the lower court.) The upcoming decision may be relevant to claims litigated in federal court against healthcare providers, particularly class claims, that involve statutory penalties for technical violations of statutes where there is no actual harm to plaintiffs.

Robins v. Spokeo, Inc.

Spokeo is a website that publishes information about individuals, including age, occupation and wealth level. The plaintiff alleged in the complaint that Spokeo published false information about him in violation of the Fair Credit Reporting Act which could negatively impact his job prospects. Spokeo's position is that without a showing of actual harm, plaintiff lacked Article III standing. The Ninth Circuit rejected Spokeo's argument, holding that Congress may, within the constraints of the Constitution, confer Article III standing to a plaintiff whose injury would be inadequate without the statutory right: "When, as here, the statutory cause of action does not require proof of actual damages, a plaintiff can suffer a violation of the statutory right without suffering actual damages." Id. at 413. The United States Supreme Court granted certiorari in April of this year.

Statutory Rights

The Spokeo decision could impact claims brought under healthcare statutes that confer on plaintiffs statutory rights even if they have suffered no actual damage. California Health and Safety Code section 1430(b), for example, allows a resident of a skilled nursing facility to recover up to $500 in an action for violation of certain statutory rights, such as the right to patient health records that meet certain requirements, including that nurses' notes be signed and dated. (22 CCR § 72547.) Section 1430(b) also allows enforcement of the right to reside in a skilled nursing facility staffed at a certain level. (See Cal. Health & Safety Code § 1276.5.) A defendant could potentially violate both rights without a plaintiff ever suffering any injury in fact. Spokeo could particularly impact class claims against skilled nursing facilities alleging facility-wide understaffing because those claims implicate injuries to a resident group rather than any resident in particular (including a named plaintiff). Significantly, class relief cannot be reached unless a named plaintiff has stated a valid claim, which necessarily includes satisfying Article III standing requirements. See O'Shea v. Littleton, 414 U.S. 488 (1974).

Likewise, actions brought under other healthcare statutes could be vulnerable to standing challenges should the Supreme Court disagree with the Ninth Circuit. For example, California Insurance Code section 10753.18 provides that "in any civil action, a court may also assess the penalties described in this chapter" for violation of the Nongrandfathered Small Employer Health Insurance chapter of the Insurance Code. The chapter provides elsewhere that sales and solicitations materials must disclose, among other things, that "no preexisting condition provisions shall be allowed." Cal. Ins. Code § 10753.16(c). Again, a defendant could potentially fail to include that disclosure in sales materials without a plaintiff ever suffering any injury in fact—perhaps sufficient injury under the Ninth Circuit's holding.

Conclusion

If the U.S. Supreme Court disagrees with the Ninth Circuit and overturns Spokeo, future actions brought in or removed to federal court to enforce statutory rights like those described above, without any actual injury to a plaintiff, could be vulnerable to standing challenges. Those outside California should likewise consider Spokeo's impact when assessing claims brought under similar statutes from other states.

*In basic terms, among other things, Article III describes the jurisdiction of the federal courts.

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Five Manatt Health Attorneys Named to 2016 Best Lawyers List

Five Manatt Health attorneys have been named to the prestigious 2016 Best Lawyers in America list:

The five are among 67 Manatt attorneys that Best Lawyers in America recognized this year.

The Best Lawyers lists of outstanding attorneys are compiled by exhaustive surveys in which tens of thousands of leading lawyers evaluate their peers. Inclusion in this year's publication is based on more than 6.7 million detailed assessments of lawyers by other lawyers.

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Now, You Have a Second Chance to Benefit From "Proceed With Caution: Navigating Safely Through the Intersection of the TCPA and HIPAA," a New Webinar From Manatt and Bloomberg BNA

Click Here to Download a Free PDF of the Presentation.

The FCC has established an exemption from the Telephone Consumer Protection Act (TCPA) consent requirements for healthcare messages that are regulated by the Health Insurance Portability and Accountability Act (HIPAA). On the surface, healthcare providers and others covered by HIPAA appear to have broad latitude in calling and texting patients. However, since HIPAA doesn't specifically define what a healthcare message is, there is substantial ambiguity that can translate into significant risks.

In a recent webinar from Manatt and Bloomberg BNA, Marc Roth and Christine Reilly, co-chairs of Manatt's TCPA Compliance and Class Action Defense Group, and Anne O. Karl, an associate in Manatt's healthcare practice, helped clarify the ambiguities at the intersection of HIPAA and the TCPA. And we don't want you to miss out on this critical information.

If you'd like a free copy of the presentation for your continued reference, click here.

During the comprehensive session, the panelists shared the latest news from the FCC and discussed the newest technological advances designed to help minimize TCPA-related risk. The program also gave participants the chance to:

  • Gain insights into the TCPA's healthcare message exemptions.
  • Understand what is—and isn't—defined as marketing under HIPAA.
  • Learn how the HIPAA Privacy and Security Rules regulate how health insurers and providers use and disclose protected health information (PHI)—and how the disconnect between HIPAA and TCPA terminology creates compliance challenges.
  • Discover the four key questions all HIPAA-covered entities and their business associates should ask themselves before making automated calls to mobile devices or prerecorded calls to landlines.
  • Explore the newest regulations and consent requirements.
  • Examine case studies to help evaluate TCPA and HIPAA risks when promoting wellness programs, providing payment and appointment reminders, and performing market research.

If you have any questions—or issues specific to your organization that you want to discuss—please reach out to our presenters:

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