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California Attorney General Settlement of Hospital Merger Challenge Potentially Raises the Stakes for Hospital Mergers Nationwide

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California Attorney General Settlement of Hospital Merger Challenge Potentially Raises the Stakes for Hospital Mergers Nationwide

A California Superior Court recently approved the settlement of a hospital merger challenge brought by the California Attorney General’s Office against Cedars-Sinai Health System and Huntington Hospital. The action – and subsequent settlement – is noteworthy for at least two reasons. First, unlike in most other health system merger challenges, the two merging systems in this matter were not direct competitors. Second, the merging parties agreed to a number of limitations on their conduct going forward - including price controls and the appointment of a “monitor” to oversee their compliance going forward – that are quite uncommon and restrictive.

The California Attorney General’s challenge to a merger of hospitals that were not direct competitors is highly unusual; in almost all prior challenges to hospital mergers - by either federal or state antitrust enforcers - the regulators have maintained that the proposed combination would materially reduce competition between two or more competitors in the same market.  However, in this case, aided by the opinion of an expert witness who opined that, despite the absence of direct competition between the parties (Huntington Hospital is located in Pasadena, California, while Cedar-Sinai is in West Hollywood), the transaction would nonetheless have anticompetitive effects, the Attorney General’s Office filed suit to block the merger in late 2020. See report here.

Faced with a rapidly approaching trial date, the parties ultimately agreed to a settlement pre-trial. After reaching the settlement, the California Attorney General’s Office announced that “The conditions [of the settlement] serve to keep our healthcare market competitive and ensure that this affiliation will be a benefit to the people and taxpayers of greater Los Angeles.”

In addition to being notable because the challenge did not involve direct competitors, the settlement terms are also somewhat unusual, and quite restrictive with respect to the parties’ conduct going forward. Under the settlement, the merging hospitals agreed to a 10-year prohibition on: (1) requiring payers to contract with all hospitals in the Cedars-Sinai system to contract with any of them – so-called “all or nothing” contracting, a practice that has drawn antitrust scrutiny in some other cases when sought to be imposed by large regional systems or payers; (2) imposing financial penalties on payers that elect not to contract with all of the hospitals in the system; and (3) interfering with payer efforts to create “narrow networks” that might not include some or all of the system’s hospitals. The settlement also limits the ability of Cedars-Sinai to increase prices for services provided at Huntington Hospital for a period of five years. Finally, the settlement provides that the Attorney General’s Office will appoint a “monitor” who will oversee the parties’ contract negotiations with payers going forward to ensure that the terms of the settlement are followed.  Typically, no such outside oversight is provided for in the terms of such settlements.

While this merger challenge was brought by a State antitrust enforcer (rather than the Federal Trade Commission or the U.S. Department of Justice Antitrust Division), and was brought pursuant to a specific California statute that provided the California Attorney General with authority to review mergers of non-profit hospitals in the state, the implications of this merger challenge, and the terms of the settlement, may well reverberate well beyond California. Indeed, if the reasoning of the California Attorney General’s expert is embraced going forward, hospital mergers in which  the merging entities are not direct competitors may become more common (not only in California, but elsewhere as well), greatly increasing the number of potential transactions that may become ensnared in significant antitrust review. In addition, should the settlement terms of the Cedars-Sinai matter become more common, this could also have a material impact on hospital mergers – all across the county – going forward. Stay tuned.

If you have questions about the information in this post or other antitrust issues, please contact the author, James Burns, or any other member of Dykema’s Healthcare Antitrust group for guidance.