"Wheels Fall Off" FTC's Latest Hospital Merger Challenge

In FTC v. Community Health Systems Inc. & Novant Health Inc., No. 5:24-cv-0028 (W.D.N.C.), Judge Kenneth D. Bell of the U.S. District Court for the Western District of North Carolina on June 5, 2024, denied the Federal Trade Commission's (FTC) motion to enjoin Novant Health Inc.'s $320 million acquisition from Community Health Systems Inc. (CHS) of two hospitals in the Lake Norman area north of Charlotte, North Carolina. This is only the second time in the past decade that the FTC has lost a merger challenge directed at competing hospitals.

As explained below, this was not a typical hospital merger case and may be most remembered for breathing new life into the "failing firm" defense, which, at least as articulated in the Merger Guidelines, appears to require more from merging parties than the court required in Novant Health. According to the current Merger Guidelines, "[t]his defense applies when the assets to be acquired would imminently cease playing a competitive role in the market even absent the merger." Guidelines § 3.1. To meet the "failing firm" defense, a party must prove a "grave probability" of failure and "dim or nonexistent" reorganization prospects and the acquirer is the "only available purchaser." Id. Because the doctrine is a defense, parties typically assert it in response to arguments that the proposed merger is anti-competitive.

Indeed, the Novant Health case bore significantly greater resemblance to the FTC's recent wins than it did to the FTC's only recent loss. The principal battleground in most hospital merger litigation has been how to delineate the geographic market in which to assess the proposed merger's likely impact. In the FTC's only recent loss, the court in 2020 refused to enjoin the merger of two Philadelphia-area hospitals, finding that the FTC's proposed market definition inappropriately excluded important competing hospitals that the court believed were potential substitutes for patients and insurers. The FTC had succeeded in blocking hospital mergers in areas more closely resembling the Lake Norman area, with less population density and fewer existing hospitals, such as in the Wasatch Front area in Utah or Middlesex County, New Jersey.

Notably, the court's decision not to enjoin Novant Health's acquisitions did not turn on how the FTC proposed to define the relevant geographic market. Although the court rejected the FTC's narrowest proposed market, it still found that the proposed acquisition would result in market shares and market concentration that would trigger a presumption that the transaction would harm competition. But the court determined nevertheless that Novant's acquisition of the two hospitals would reverse a downward spiral in investment in the two hospitals and likely increase competition between Novant and its largest competitor in the Charlotte area, Atrium Health. CHS had already converted one of the two target hospitals to a behavioral health center and, as the court found, if the other were not sold to Novant, "it seems clear that – like a car that its owner can't afford to replace – CHS plans to just continue to drive [the hospital] down the same road until the proverbial wheels fall off," with a "competitive 'wreck' … on the immediate horizon."

The FTC has already filed a notice of appeal to the U.S. Court of Appeals for the Fourth Circuit, and the court's application of the failing firm defense will likely be a principal issue on appeal. Judge Bell did determine that CHS solicited alternative offers for the two hospitals and that "none submitted an offer, at any price" but did not find a "grave probability" of failure – instead predicting that, in the absence of an acquisition by Novant, CHS would "continue to operate" the hospital, but "with very limited investments." If the Fourth Circuit upholds Judge Bell's application of the defense, expect other struggling hospitals to look to his decision as providing a potential path to surviving an antitrust challenge to an acquisition by a competitor.