How Will the FTC Evaluate Pandemic-Weakened Hospitals?

It would be a serious understatement to say that the COVID-19 pandemic and the public response to it has had an adverse impact on the hospital services industry. Recent estimates of the financial impact on U.S. hospitals have been as high as $200 billion in lost revenue and increased costs between March and June, with ongoing losses of $50 billion a month. Whether these continuing losses bear out fully is still uncertain, but some hospitals likely will seek mergers in response to the losses they already have incurred. Although any such transaction should expect to receive no special treatment from the Federal Trade Commission (“FTC”) regarding flailing- or failing-firm defenses, it may still be the best option available.

The pandemic has driven many hospitals well into negative profit margins. Treating COVID-19 patients required higher costs for staffing, supplies, and hospital operations, while state mandates prevented hospitals from providing elective surgical services. The financial pressure threatens to deepen as state governments cut Medicaid rates to help balance their budgets. Additionally, upcoming managed care contract negotiations for these hospitals may be affected by their financial weakness relative to health plans, which so far have been spared most of the adverse consequences of the pandemic. Stand-alone community hospitals, in particular, often lack the strong balance sheets of larger systems and are more prone to face financial crises. These weakened hospitals likely will seek the shelter of stronger systems. The FTC staff, however, has affirmed its intention to look skeptically at hospitals presenting pandemic-related failing firm justifications, and FTC Commissioner Wilson has promised broad scrutiny of all hospital transactions.

Some of the key questions the FTC will consider in reviewing hospital mergers related to the pandemic include how much will the cost increases abate as COVID-19 hospitalizations diminish, supply chain bottlenecks improve, and treatment plans evolve to rely on less of the high-cost intensive care, and how much cancelled elective hospital volume will emerge as pent-up demand in 2021. By all indications, the FTC will continue to demand high levels of proof for a failing-firm defense regarding the availability of other buyers or the feasibility of bankruptcy reorganization. Nevertheless, failing-firm arguments remain available to merging hospitals, along with arguments that a hospital’s pandemic-weakened financials condemns it to being an ineffective future competitor in the high-cost world of hospital competition. The hurdle for FTC approval is high, but some hospitals will have no choice but to leap.

EI Principal David A. Argue has extensive experience with competition in the healthcare industry, having taught, written and testified on the subject numerous times.