District Court Denies FTC Request to Block Novant’s Purchase of Hospitals from CHS — Purchase Can Go Forward

Background

In February, 2023, Novant Health and Community Health Systems (CHS) entered into an Asset Purchase Agreement pursuant to which Novant agreed to acquire Lake Norman Regional Medical Center (LNR) and Davis Regional Psychiatric Hospital (Davis) and related assets in North Carolina from CHS for $320 million.

Immediately thereafter, the Federal Trade Commission (FTC) conducted an extensive merger review, resulting in its concluding that the effect of the transaction may be substantially to lessen competition, or to tend to create a monopoly in violation of Section 7 of the Clayton Act and Section 5 of the FTC Act, or constitute an unfair method of competition in violation of Section 5 of the FTC Act.

On January 25, 2024, the FTC issued an administrative complaint and that same day filed suit in U.S. District Court for the Western District of North Carolina seeking the issuance of a preliminary injunction to stop the parties from completing the purchase while the FTC’s administrative proceeding was ongoing.

Request for Injunction Denied

Yesterday, U.S. District Court Judge Kenneth D. Bell in a 55-page opinion denied the FTC’s request for the injunction thereby allowing the parties to go forward and complete the sale/purchase while the FTC continues its administrative proceeding.

For reasons summarized below, Judge Bell concluded that the proposed merger carries at least as much likelihood of competitive benefits as it does competitive harm and that the FTC is unlikely to ultimately be successful in proving that the transaction may “substantially lessen competition.”

The Court’s Analysis

As a starting point for its analysis and conclusion, the Court described the already highly concentrated hospital market in both the greater Charlotte metropolitan area, where of the 19 hospitals, nine are operated by Atrium Health (a large healthcare system operating 40 hospitals in four states) and seven by Novant, and in the Lake Norman area where Novant operates its Huntersville Medical Center (HMC), located 12 miles north of LNR, and where Atrium is building a new hospital, Atrium Lake Norman (ALN), which will be located between LNR and HMC.

In seeking the issuance of the injunction, the FTC alleged that the proposed transaction would allow Novant to control nearly 65% of the market for inpatient general acute care services in the Eastern Lake Norman area, and would be presumptively illegal under the FTC’s 2023 Merger Guidelines.

Further, according to the FTC, with fewer alternatives for inpatient general acute care services, Novant would be able to demand higher rates for its services, and that the proposed acquisition would likely increase annual healthcare costs by several million dollars, which costs would be passed on to patients.

In addition, according to the FTC, the transaction would also reduce Novant’s incentive to compete to attract patients by improving its facilities, service offerings, and quality of care.

In denying the injunction, the Court acknowledged that in one or more relevant markets the level of combined market share and market concentration will be outside the permitted guideline range following Novant’s purchase; nevertheless, this appears to be in large measure the result of Novant’s substantial current market share and the already concentrated market rather than LNR’s own competitive presence.

Accordingly, 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.”

Here, the Court rejected CHS’s and Novant’s argument that quality and occupancy issues were combining to result in LNR’s failure, noting that LNR had operated for years with its present occupancy levels and that its quality ratings were in line with those of many Novant hospitals.

What the Court did focus on was the fact that LNR had lost important service lines during the past few years, including the ability to regularly treat dangerous heart attacks in its emergency room, staff a higher level Neonatal Intensive Care Unit and treat certain oncology patients. This loss of services, together with CHS’ decision to strictly limit any investments in LNR (including paying low nursing salaries which has led to staffing shortages), has consigned LNR to a relatively insignificant competitive position.

According to the Court, “although LNR is profitable for now, if LNR is not sold to Novant it seems clear that – like a car that its owner can’t afford to replace – CHS plans to just continue to drive LNR down the same road until the proverbial wheels fall off. And, unfortunately for LNR, a competitive ‘wreck’ appears to be on the immediate horizon.”

Atrium’s new hospital, which is only five exits away on the interstate, will open in mid-2025. CHS and third-party evaluators conservatively believe that ALN will cut LNR’s revenue by 20% to 30%, to the point where CHS will need to incur additional debt to keep the hospital running, which in all likelihood it will not do.

Moreover, changes in North Carolina’s Certificate of Need (CON) law, which permit the opening of outpatient surgery facilities without a CON, will likely further increase competition for outpatient services, which are a primary source of LNR’s revenues.

From an overall market competition question, the Court concluded that the combination of LNR and Novant will result in the presence of two Novant hospitals on either side of ALN, and this will provide a more competitive balance than the combination of NH and LNR operated separately.

Put another way, according to the Court, it is unlikely that LNR will be much of a competitive threat to ALN (or Novant) as currently operated by CHS. Therefore, Novant’s purchase of LNR is likely to promote added competition with Atrium.

Assessing the Public Equities

Before reaching its ultimate conclusion, the Court weighed what it refers to as the “public equities” to determine whether it is in the public interest to allow Novant to buy LNR and Davis.

In this regard, the FTC asserted that:

1. Insurance companies and ultimately their customers will be charged Novant’s higher prices;
2. State and local governments will receive millions less in tax revenues as soon as LNR and Davis are owned by a nonprofit hospital system; and
3. CHS could make additional investments or enter into partnerships with other healthcare companies if the transaction is not enjoined.

Novant and LNR asserted that the equities favor allowing the sale to proceed because:

1. Otherwise Davis will quickly close, depriving the community of important mental health services;
2. The important medical service lines that have been lost at LNR will immediately be added to LNR; and
3. Novant has committed not to raise prices at LNR for three years, to support LNR’s doctors and nurses with additional staff and higher pay, and to add numerous capital improvements (which CHS will either be unwilling or unable to provide).

In reaching a conclusion with respect to public equities, the Court emphasized that it “must look at the future not as an economist or scholar but as a judge, determining whether it believes the witnesses will do what they say they will do as well as considering what has actually been done in the past.”

Here, the Court concluded that, absent the transaction:

1. Davis will close;
2. There is no plausible alternative buyer for LNR or Davis;
3. LNR is unlikely in the near term to resume important services in cardiology, newborn care and oncology because of CHS’s decision not to invest in the growth of the hospital; and
4. LNR’s external competitive challenges, particularly the opening of ALN and the changes in the CON process for outpatient facilities, likely will shortly lead to its closing in light of CHS’ difficult financial position.

All of this the Court concluded, especially the closure of the hospitals, will reduce rather than enhance competition. At most, on its current and expected path, LNR can only hope to maintain its already limited competitive position for a short time. Therefore, the proposed merger carries at least as much likelihood of competitive benefits as it does competitive harm and the FTC is unlikely to ultimately be successful in proving that the transaction may “substantially lessen competition.”

Accordingly, while the loss of tax revenue is a concern, it is outweighed by the loss of critically needed psychiatric medical services, the addition of medical service lines that are no longer offered at LNR and the commitment of Novant executives (which the Court believes and accepts) not to raise prices at LNR for three years after the acquisition.

The FTC’s request for an injunction is denied.

Looking Ahead

In an upcoming post, we will consider in greater detail the Court’s analytical framework and how it compares to that articulated by other courts in recent hospital merger cases and what that might mean in future cases.