Mid-Atlantic Health Law TOPICS

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Green Light for Vertical Mergers

On June 30, 2020, the U.S. Department of Justice (DOJ) and the Federal Trade Commission (FTC) finalized guidelines for vertical mergers for the first time in more than 30 years. Although the updated guidelines are applicable to all industries, they will have a particular impact on the health care industry. 

Specifically, the updated guidelines indicate that the government might intervene in only limited instances to stop a vertical merger. Accordingly, since many vertical mergers have occurred in the health care sector in recent years, the guidelines will likely accelerate that trend.

Vertical Mergers

A vertical merger occurs when companies that provide different goods or services in a supply chain merge. In health care, vertical mergers include insurers merging with providers, or providers acquiring related services such as home health care companies or rehabilitation centers. Deals range in size from hospitals acquiring local practice groups to Fortune 500 company mergers, such as CVS acquiring Aetna.

The federal government rarely challenges vertical mergers, and the cases are often unsuccessful when they do occur. The DOJ and the FTC take the position that vertical mergers are generally procompetitive because integrating the supply chain often creates cost efficiencies, decreasing the pressure to raise consumer prices.

Critics point to examples where despite this theoretical logic, newly merged companies have actually charged more for services. For example, when the federal government attempted to stop AT&T from merging with Time Warner, the companies argued that consumers would see lower prices after the merger, but prices actually increased.

In health care, proponents of these deals suggest that merged companies can provide more streamlined and affordable care. Critics say that mergers risk cutting off access to supplies or products for competitors outside of the merged supply chain, ultimately harming competition and increasing patient costs.

 New Guidelines

The new guidelines articulate a generally procompetitive view of vertical mergers, focusing on the elimination of double marginalization (EDM). Basically, EDM recognizes that, by merging parts of the supply chain, the consumer price will only be marked up once by the single controlling entity, instead of multiple times at separate points along the chain controlled by different entities.

However, the new guidelines require companies to offer merger-specific and substantiated EDM projections, and allow the agencies independently to quantify the EDM of a proposed deal.

The guidelines also contemplate assessing potential anti-competitive effects beyond the vertical merger itself. For example, the review could look at a planned merger’s effect on the demand for a product adjacent to, but outside of, the supply chain. Additionally, diagonal mergers, which are combinations of firms or assets at different stages of competing supply chains, can also be reviewed.

Though the final guidelines eliminated a controversial proposal to set an impact threshold to trigger review, both of the FTC’s Democratic commissioners on the five-person politically appointed Commission still objected to the new guidelines. These two commissioners sided with critics who felt that the new guidelines enshrined a procompetitive view of vertical mergers and gave companies so much leeway that increased enforcement of these types of transactions is unlikely.

Alexandria K. Montanio
410-576-4278 • amontanio@gfrlaw.com