The abandoned transaction between Novant Health (Novant) and Community Hospital System (CHS) for two North Carolina (NC) hospitals received substantial attention from the media, lawyers, and economists. Even though an initial district court ruling rejected FTC’s preliminary injunction request, a subsequent court decision pushed the parties to abandon the deal. This case was not a plain-vanilla deal. Some features made the antitrust discussion and the first instance ruling of particular interest, particularly for economic analysis of hospital mergers and considering deal-specific factors.
In February 2023, Novant agreed to purchase Lake Norman Regional Medical Center (LNR) and Davis Regional Psychiatric Hospital (Davis) from CHS. Novant is one of the largest health systems in NC, operating multiple facilities across the state. On the other hand, CHS is a national for-profit health system, and the LNR and Davis facilities represent CHS’s most important assets in NC. CHS wanted to sell LNR because the facility needed substantial capital investments, which CHS was not willing to make. Given its poor performance and investment needs, The Davis facility was a former care hospital that, due to its poor performance and investment needs, was repurposed as a psychiatric facility. The transaction between Novant and CHS aimed to improve Novant’s competitive edge relative to Atrium Health (Atrium), NC’s largest health system.
The FTC decided to challenge the transaction in January 2024, initiating an administrative procedure and subsequently filing a complaint to block the deal in the US District Court for the Western District of NC. The FTC argued that LNR and Novant’s nearby hospital are head-to-head competitors and the main hospital options in the Eastern Lake Norman area, the relevant geographic market for the transaction. As such, LNR exerts competitive pressure on Novant, limiting Novant’s ability to increase prices.
In June 2024, the district court ruled in favor of CHS and Novant by rejecting FTC’s preliminary injunction request. However, the FTC appealed at the US Court of Appeals for the 4th Circuit, which, in a divided decision, reverted the district court’s decision and granted the request to enjoin the CHS-Novant deal. Following this setback, the parties abandoned the deal. The appeals court’s ruling does not explain why the district court decision had to be reverted, with the dissenting judge explicitly agreeing with the district court that the injunction is not in the best public interest.
Three features make this case of particular interest for antitrust economic analysis. First, one of the parties, CHS, had decided to exit the market and stopped actively competing. Second, the transaction seemed to have meaningful potential pro-competitive effects. Third, the buyer, Novant, committed not to increase prices for three years after the transaction.
The economic analysis of a standard hospital merger assumes that if the deal is blocked, the parties will continue operating. Hence, the analysis focuses on the competitive effects of the deal compared to the status quo. However, in this particular transaction, CHS stated its plan to exit the market and stop investing additional capital in LNR. There have been several hospital transactions where the parties have put forward the failing firm argument to support the deal. A recent example is John Muir Health’s failed takeover of San Ramon Regional Medical Center in California. The possibility that, in the near future, one of the parties may exit the market changes the but-for-world when evaluating the effect of the merger on consumers. That is, in these situations, the economic analysis must consider a scenario where the likely-exiting hospital is not available to consumers.
A second feature of the CHS-Novant deal was the potential pro-competitive effects of the transaction. LNR had experienced an overall-deteriorating process and CHS ha no interest in continuing to invest in this facility. As such, the transaction was likely to enhance LNR’s competition pressure and increase Novant’s competitive edge against Atrium, the dominant health system in NC. Stronger competition between the state’s two largest health systems was a factor to consider in evaluating the antitrust effects of Novant’s acquisition of LNR. Even if the transaction would increase concentration in the local geographic market, there is value in the competition effect in the broader market. This factor gained relevance given the alleged declining status of LNR and its lack of ability to effectively compete with Atrium’s facilities.
A final interesting feature of the CHS-Novant proposed deal is the expected hospital price increases following the acquisition. Economic analysis of a hospital merger involving head-to-head competitors is likely to find that prices would increase if the merger took place. Potential price increases are the main concerns regarding any hospital merger. The underlying reasoning is that the combined entity would increase its bargaining leverage when negotiating contract terms with health insurance companies, allowing the merged system to push for higher prices. Novant’s management committed to maintaining current LNR prices during the three years after the acquisition, posing a challenge to the consideration of the merger’s price effect. In a way, the empirical analysis may conclude that the merged entity would have the incentives and ability to meaningfully increase prices; however, deals’ features or market realities, like Novant’s management commitment, may assuage one of the critical concerns about any hospital merger. How credible such commitments are is subject to judges’ and courts’ consideration.
The appeals court ruling unfortunately offers no clues as to the arguments that supported its decision to enjoin the transaction. Notably, the district court and the dissenting appeal judge sided with the parties on the relevance of the failing firm factor, the pro-competitive effects of the transaction, and the no-price increase commitment. Those factors and considerations will likely get more attention in the economic analysis of future proposed hospital transactions.