Home-Based Care M&A Likely To Be Affected By ‘Warning Shot’ Sent Out By Regulators

A recent Federal Trade Commission (FTC) proposal focused on health care dealmaking could create roadblocks for future home-based care deals.

Last month, the antitrust agency rolled out a proposed rule that would force merging companies to disclose information regarding minority investors, supplier agreements, subsidies from foreign entities, past acquisitions and workforce data.

That would be an update of the existing Hart-Scott-Rodino Act. Essentially, the FTC is trying to suppress anticompetitive M&A, particularly in health care.

“The way that the FTC has proposed this is to say: this is a modernization of pre-existing rules, because the world has gotten much more complicated, and therefore we need greater notification of potential mergers and acquisitions,” Griffin Pivateau, an associate professor of legal studies in the Spears School of Business at Oklahoma State University, told Home Health Care News.

Under the current law, there is a notification requirement for transactions that clear certain thresholds. The FTC is allowed to ask for more information within 30 days of the filing of the original notice, sometimes referred to as a second request.

“This measure compels the parties to provide information that might be supplied in a second request much earlier,” William E. Kovacic, the global competition professor of law and policy at George Washington University Law School, told HHCN. “That’s going to mean that parties who propose mergers have to assemble a body of information earlier in the transaction, and make that available when they make they’re filing. There is a greater administrative burden for the parties.”

Kovacic served as a commissioner of the FTC from 2006 to 2011. He was the agency’s chairperson from 2008 to 2009.

He believes larger organizations will likely have an easier time navigating this requirement, while small- to medium-sized organizations will struggle more.

“The medium-sized and smaller enterprises don’t ordinarily maintain the same number of lawyers and other specialists in the house to respond to government requests,” he said. “For them, it’s a bit more expensive and difficult to turn to outside parties.”

The FTC’s goals

Overall, the FTC predicts that this requirement would add an average of 107 additional hours to the current average merger filing preparation time of 37 hours.

Under the leadership of Lina Khan, chairperson of the FTC, the antitrust agency has set its sights on increasing competition.

Pivateau considers the proposed rule a “warning shot” to the health care industry.

“It’s not really about conflict of interest, so much as it is aimed at slowing down the pace of health care mergers and acquisitions,” he said. “These sorts of acquisitions are going to come under much greater scrutiny than in the past because of the fear that increased consolidation is going to raise prices and harm the quality of care.”

Pivateau also pointed out that there’s been a growing concern about the increase in health insurers acquiring home-based care companies.

“[Insurers] are going to be able to keep more of those premium dollars for themselves, if their members receive care through businesses that they own,” he said. “This is why we’ve seen a lot of health insurance companies like UnitedHealth, Cigna, and even CVS attempt to pursue this vertical integration.”

Recently, Optum’s acquisition of home health giant LHC Group caught the FTC’s attention. Ultimately, the agency didn’t challenge the deal, but it called for more information twice. In one case, a request focused on home health wages.

A part of UnitedHealth Group (NYSE: UNH), Optum is now in the process of trying to finalize a purchase of Amedisys Inc. (Nasdaq: AMED), another one of the top home health providers in the country.

Kovacic thinks that the FTC has an interest in expanding its field of vision when it comes to the health care sector, and this includes a focus on home-based care.

“I would anticipate we’ll see a deeper examination of all of these individual components of the larger constellation,” he said.

Nathan Ray, a partner at the Chicago-based management and technology consulting firm West Monroe, believes that the proposal could potentially slow down dealmaking.

He noted that home-based care stakeholders should receive more guidance from the FTC.

“Tell us of the acquisitions that occurred that they think did impact or create a conflict of interest, use those as the touch points for how we’re discussing the market and understanding what mergers are going to be reviewed,” he said. “This is essentially just a blank check to review anything. It doesn’t feel that it helps anyone that is involved in M&A.”

A 60-day comment period is taking place now. Ray expects that home-based care stakeholders will exercise the opportunity to offer comments.

“Home health care is one of many consolidating – but also growing – areas of new platform formation that will be impacted by how these guidelines are interpreted and enforced,” he said.

Kovacic believes that early concern may be overblown.

“I had a supervisor once who put developments in three baskets — the good, the bad and the don’t overreact,” he said. “I think that predictions of an enormous slowdown in M&A activity should be put in the don’t overreact basket. Firms have shown a remarkable ability to adapt in this sector to a wide range of regulatory controls. That adaptability is evident in so many areas of health care services. The real concern is going to be how this lands on smaller- and medium-sized enterprises.”

Other regulatory M&A concerns

Aside from the recent FTC proposal, home-based care providers have identified other regulatory trends that they believe will impact M&A in their industry — both positively and negatively.

The increasing impact of Medicare Advantage (MA) and Medicaid managed care penetration, pushed by the support of federal and state regulators, is likely to incentivize M&A, according to National Association for Home Care & Hospice President William A. Dombi.

“MCOs seem to prefer relationships with organizations that have a wide footprint,” he told HHCN in email.

Dombi also pointed to the threat of Medicare payment rate reductions as a factor that could influence the flow of M&A.

“[This] may also trigger increased consolidations as providers look for cost savings through economies of scale,” he said. “Correspondingly, some prospective sellers may have reduced valuations and decide to hold on to ownership hoping for an improved environment in the future.” 

On the hospice side, a new 36-month rule ownership rule may cause parties to speed up transactions prior to its effective date.