FTC Fails to Halt Hospital Merger – For Now
Update: On June 18, 2024, a split 2-1 Fourth Circuit Court of Appeals panel granted the FTC’s emergency motion for an injunction pending appeal, enjoining Novant’s acquisition of LNR and Davis until the Court reaches a decision on the FTC’s efforts to block the transaction.
As a result of the Fourth Circuit’s decision to extend a freeze on the acquisition and the FTC’s continued roadblocks, Novant has opted to abandon the $320 million deal to buy LNR and Davis.
A federal judge has ruled against the Federal Trade Commission’s (FTC) bid for a preliminary injunction to stop Novant Health, Inc. (Novant), a Winston-Salem, North Carolina based hospital system, from buying two Community Health Systems, Inc.’s (CHS) hospitals, a Franklin, Tennessee based hospital system, in Lake Norman, North Carolina. The reasoning behind Judge Kenneth D. Bell’s decision to deny the FTC’s sought-after preliminary injunction indicates court receptivity to the “failing firm” defense and the practicalities of a changing healthcare landscape in the area—even while the FTC stands fast against hospital mergers.
Novant’s Acquisition and the FTC’s Objections
On February 28, 2023, Novant agreed to purchase CHS’ Lake Norman Regional Medical Center (LNR) and Davis Regional Psychiatric Hospital (Davis) and related assets in North Carolina for $320 million. On January 25, 2024, after investigating the potential acquisition, the FTC filed an administrative complaint to challenge the acquisition. The FTC then moved for a preliminary injunction on March 6, 2024, to stop Novant from buying LNR and Davis until the administrative hearing, arguing that Novant would control a large share of the market with the deal and that could hurt consumers by wiping out competition, leave fewer options for patients, and increase insurance rates.
According to the FTC, Novant’s total revenue in 2022 was $7.6 billion, in part due to its operations entailing more than 800 outpatient facilities and physician offices in the Carolinas—making it one of the two major healthcare systems in the Charlotte metropolitan area, along with Atrium Health (Atrium). The FTC argued in its brief that the deal was unlawful because it would give the combined entity a 64% market share of general acute care services in the Eastern Lake Norman area. Under the new Merger Guidelines, mergers are generally perceived as unlawful if a single group controls 30% or more of a relevant market. Another anticompetitive concern from the FTC was that the planned transaction would remove direct competition between Novant and LNR.
The parties disputed whether the acquisitions would decrease competition by bolstering the region’s second largest healthcare provider or maintain struggling healthcare facilities likely to close, as well as a healthcare system facing crushing competition amid Atrium’s plans to open a new hospital nearby.
The Failing Firm Defense
Section 7 of the Clayton Act prohibits mergers and acquisitions where the effect of such acquisition may substantially lessen competition or tend to create a monopoly. An acquisition that may substantially lessen competition or create a monopoly may still be permitted if the target firm qualifies as “failing.” The rationale behind the defense is that a merger is not likely to create or enhance market power or to facilitate its exercise, if imminent failure of one of the merging firms would cause the assets of that firm to exit the relevant market.
The failing firm defense requires proof that a company (1) is in danger of imminent business failure, (2) cannot reorganize successfully in bankruptcy, (3) made unsuccessful good faith efforts to find alternative purchasers, and (4) absent the acquisition, the assets of the failing firm would exit the relevant market. This defense is typically a high bar for parties to meet, with a small body of case law evaluating the principle and agencies rarely concluding that a target firm qualifies as failing.
In determining whether a company faces imminent business failure, courts and agencies consider a variety of factors to determine whether the firm is insolvent, on the brink of bankruptcy, no net worth, or unable to meet its debts as they come due. As for proving that no alternative purchaser exists, general expressions of interest from alternative purchasers are insufficient; however, any offer above liquidation value is considered a viable alternative.
The Court’s Opinion
Even though Judge Bell credited the FTC’s affirmative case and agreed that the market shares and HHI numbers were over the threshold to presume the merger is anticompetitive, he credited the hospitals' rebuttal arguments and examined the public equities of enjoining the transaction, stating “the Court needs to look beyond the economic numbers to assess the likelihood that, considering commercial realities, the merger may in fact ‘substantially lessen’ competition.” In denying the motion, the court found that both LNR and Davis were likely to close soon, exiting the market as competitors. He noted that while neither LNR nor Davis were as bad as the defendants made them out to be, Judge Bell recognized the fact that LNR lost several service lines recently and CHS made decisions not to invest in LNR prior to contemplating a sale, as well as Atrium’s opening of a new hospital that would cut LNR’s revenue by 20 to 30 percent and a change to North Carolina’s CON law that would increase competition for outpatient services. Judge Bell also credited evidence and testimony that CHS had conducted a reasonable search for alternative buyers, but received no bids. While Judge Bell’s decision did not discuss specific elements of the failing firm defense, it relied on the underlying principle of whether, absent the proposed transaction, the assets would exit the market.
The court also found that “public equities” were such that the injunction should not be granted. Judge Bell specifically found that immediate competitive harm from the merger was not likely because Novant committed to not increasing prices at LNR or Davis for three years. Judge Bell also noted that if LNR and Davis could continue operating—and Novant has committed to doing so—patients could continue seeing their current physicians and, generally, the community would continue to have these facilities as options. Finally, there was no evidence that a divestiture would be any more difficult than the current sale and may actually be easier if Novant improves LNR and Davis.
According to the court, Novant’s purchase of LNR and Davis is likely to promote added competition with Atrium, rather than decrease competition.
Key Takeaways
The FTC filed a notice to appeal the decision on June 9, 2024, and, in addition, the deal still faces an administrative challenge before the FTC, with an administrative hearing scheduled for July 26, 2024. Judge Bell was careful to note that he was only deciding on the preliminary injunction, not the ultimate merits of the acquisition. Regardless, the decision provides companies with more support to articulate that a potential acquisition of a failing, or even a “flailing,” firm will provide competitive benefits that outweigh anticompetitive harms and is in the public interest.
Companies should consider engaging antitrust counsel at the early stages of mergers and acquisitions to discuss when they plan to use the failing firm defense or other arguments relating to industry realities to ensure that proper steps are taken in their good faith efforts to seek alternative purchasers and to properly structure the transaction to depict their efforts and failing status. Buchanan’s antitrust and healthcare teams are available to guide companies through the acquisition process.