Methodist Le Bonheur’s $350 million acquisition of two Tenet Healthcare Corp.’s Memphis-area hospitals would increase costs and diminish competition, the Federal Trade Commission claimed in a lawsuit that aims to block the transaction.
Memphis-based Methodist would control nearly 60% of the “already highly concentrated” Memphis acute-care market as one of three health systems—down from four—with hospitals in the area, according to the FTC. Methodist would be able to negotiate higher reimbursement rates with insurers, which would pass on those costs to employers and their employees in the form of higher premiums, copays, deductibles and other out-of-pocket expenses, regulators concluded.
“It’s clear that patients in the Memphis area have benefited from the competitive pressure that Saint Francis brings to bear on Methodist, through lower rates, more options for insurers and patients, and quality improvements,” Daniel Francis, deputy director of the FTC Bureau of Competition, said in prepared remarks. “This transaction would take that competition away, and patients will pay the price.”
Most studies on hospital consolidation show that prices increase and quality declines after transactions are completed. Hospitals, which account for about a third of the $3.6 trillion healthcare industry, can use their dominant market share as leverage to exact higher rates from insurers and raise prices.
Hospital price increases are the main driver of U.S. healthcare spending inflation, one study found.
Methodist and Tenet said that they are surprised by the FTC action given stakeholders’ strong support of the transaction, claiming evidence shows the transaction will lead to lower prices, improved quality and enhanced access.
“Our two organizations promote a culture of compassion backed by strong core values, which together, we believe will have an even greater impact on care delivered in these communities. We are reviewing this recent action by the FTC and actively considering next steps,” the organizations said in a joint statement.
Methodist and Saint Francis are direct competitors. Methodist’s internal documents refer to Saint Francis as one of only two “direct competitors” and the organizations closely track each other’s quality scores, advertising and brand recognition, regulators wrote in the complaint. They also regularly oppose each other’s certificate of need applications, seeking to stifle competitively beneficial technology investments or facility expansions that might draw patients from one to the other, the FTC said.
If the transaction goes through, it would eliminate the competitive forces that keep prices and quality in check, the FTC argued, noting that Methodist has provided price concessions to commercial insurers to exclude Saint Francis from narrow network plans or otherwise disadvantage Saint Francis.
In addition to competing to be in insurers’ networks, Methodist and Saint Francis also compete with each other to attract patients by improving quality, expanding services and increasing access for patients in the Memphis area, according to the complaint. The FTC cited one instance where Saint Francis focused on improving services and access to operating rooms after Methodist hired a bariatric surgeon away from Saint Francis to help launch Methodist’s bariatric program.
It’s unlikely that competitors would enter the market post-transaction to offset the anticompetitive affects, the FTC concluded.
Also, Methodist and Tenet have not “substantiated verifiable, merger-specific efficiencies that would be sufficient to rebut the strong presumption of harm and other evidence of the proposed transaction’s likely significant anticompetitive effects,” the complaint reads. The efficiency argument does not work if systems can achieve those goals without merging, experts said.
Tenet, which recorded a net loss from continuing operations attributable to shareholders of $197 million in the quarter ended Sept. 30, had expected to complete the sale in 2020. Executives said in recent earnings calls that the proceeds would enhance its liquidity position, in addition to the potential sale leaseback of certain medical office buildings.
The FTC will file a complaint in a Tennessee federal court seeking a temporary restraining order and preliminary injunction to stop the deal, pending an administrative trial set for May 18.