FTC Approves UNH’s Acquisition of Ascend Health Corporation With Conditions

On October 5, 2012, the FTC announced that it entered into a consent agreement requiring the divestiture of an acute inpatient psychiatric hospital in the El Paso, Texas/Santa Teresa, New Mexico area to resolve antitrust concerns arising from Universal Health Services, Inc.'s (“UNH”) proposed acquisition of Ascend Health Corporation (“Ascend”).
Background

On June 3, 2012, UHS agreed to acquire Ascend in a deal valued at approximately $517 million. UHS owns or operates 25 general acute care hospitals and 198 behavioral health facilities in 36 states, Washington, D.C., Puerto Rico, and the United States. Ascend owns or operates nine behavioral health facilities in Arizona, Oregon, Texas, Utah, and Washington State, including seven acute inpatient psychiatric hospitals, a substance abuse residential treatment center, and an addiction treatment center.

The FTC reached a settlement with UNH within four months of signing the merger agreement so the investigation and settlement was handled very quickly. Along with the settlement agreement, the FTC filed a complaint which identifies the relevant product and geographic markets as well as the competitive problem posed by the transaction.

FTC Allegations

The FTC's complaint alleges that the transaction as originally proposed would have been a merger to monopoly in the El Paso/Santa Teresa geographic market, within a product market consisting of acute inpatient psychiatric services provided to commercially insured patients. Acute inpatient psychiatric services are those services provided for the diagnosis, treatment, and care of patients deemed to be a threat to themselves or others or unable to perform basic life functions, due to an acute psychiatric condition. Excluded from this alleged market are other psychiatric services such as partial hospitalization, intensive outpatient programs, outpatient care, and residential treatment. The FTC also found that other, less intensive, psychiatric services are not substitutes for acute inpatient psychiatric services.

The FTC also found that the acute inpatient psychiatric services market is local in nature. The staff analyzed patient flow data and evidence gathered from market participants indicating that patients and their families prefer to find care as close to where they live as possible and to stay within the city where they live or work. The data demonstrated that most residents of El Paso and Santa Teresa obtain acute inpatient psychiatric services from providers located in El Paso or Santa Teresa. Moreover, the FTC discovered that health plans have internal guidelines or regulatory “geo-access” standards requiring that services be made available within a certain distance from their members. Therefore, the FTC staff concluded that the geographic market is limited to the El Paso/Santa Teresa market.

The FTC alleged to uncover evidence of close head to head competition between the UHS and Ascend owned facilities that would have been eliminated by the proposed merger.

No Upfront Buyer Required

Notably, the FTC's decision and order does not designate a buyer that the agency already has approved so there is no upfront buyer. Historically, the FTC has required merging parties to identify buyers of assets to be divested before the agency will accept a consent agreement. The FTC, in many cases, requires the acquiring firm to execute a divestiture agreement and all ancillary agreements with a divestiture buyer before the parties formally present that buyer to the FTC for approval. The FTC staff then reviews the qualifications of the upfront buyer and the definitive divestiture agreement and, once satisfied, the FTC approves the divestiture package. Generally, the FTC's investigation delays the closing of the transaction until the Commission approves the package. The reason the FTC has traditionally used this practice of requiring upfront buyers is because it minimizes the risk that a remedy will fail to preserve competition. In any event, the order continues a trend in FTC merger enforcement that allows for a speedier process as merging parties can eliminate the delay associated with locating and entering into a divestiture agreement with an upfront buyer. Here, the FTC reached a settlement with UNH within four months of UNH signing the merger agreement with Ascend.

The FTC entered into a settlement agreement with UNH requiring it to sell its Peak Behavioral Health Services facility within six months. The FTC added a clause that if the six-month deadline is not met, a second facility located outside the geographic market must also be divested if ordered by the Commission. The FTC justified the penalty provision to ensure that UNH tries to find an acceptable buyer in a timely manner.

Lesson Learned

The case is noteworthy because it further demonstrates that the FTC is willing to enter into consent decrees that do not require upfront buyers to resolve a competitive problem when stand alone businesses can be sold and the stand alone business is easily saleable meaning that the assets are expected to attract interest from several purchasers. It also demonstrates that the FTC and merging parties can work out a settlement agreement very quickly if the merging parties cooperate with the FTC's investigation. Here, the FTC and the merging parties were able to identify the competitive problem and work out a remedy within four months of signing the merger agreement.

Andre Barlow
(202) 589-1834
abarlow@dbmlawgroup.com