Restructuring in the hospital sector
Merger control and other pitfalls under competition law
The hospital sector has recently faced increased competition law scrutiny, particularly in Germany. In recent years the German Federal Cartel Office (FCO) has made it clear, on numerous occasions, that mergers between hospitals (private and public) are as much subject to competition law provisions as any other merger cases. Here, Marc Besen analyses a few recent German merger cases to provide an overview of the impact of competition law provisions on hospitals – and on hospital mergers in particular
As a lawyer and partner at Clifford Chance, Dusseldorf-based Marc Besen primarily specialises in German and European antitrust law. He advises companies during the implementation of merger control proceedings at the German FCO and EC and co-ordinates worldwide multi-jurisdictional filings. He also has broad expertise in advising interested third parties in successfully intervening proposed transactions within merger control and court proceedings. In addition, he focuses on cartel investigations, issues of compliance systems, contractual implementation of competition and antitrust law requirements, and distribution law across a wide range of industry sectors (in particular healthcare and hospitals).
The first prohibition of a public hospital merger was issued on 13 December 2006. The FCO prohibited the University Hospital of Greifswald from taking over the Wolgast district hospital. It argued that the merger would further strengthen the dominant position of the Greifswald University Hospital in the relevant market. In its decision, the FCO followed the principles established in the earlier merger case Rhön Klinikum AG/Bad Neustadt (10/3/05). However, despite the basic similarity, the final outcome of the two cases was different. Whereas in its ruling of 16/1/08 on Rhön Klinikum AG/Bad Neustadt, the German Federal Supreme Court upheld1 the merger prohibition, the merger could be consummated after receiving an exceptional authorisation from the Federal Minister of Economics and Technology on 17 April 2008.
Relevant provisions
Turnover thresholds
In its ruling on Rhön Klinikum AG/Bad Neustadt the Federal Supreme Court supported the view of the FCO and stated that hospital mergers are subject to merger control provisions in accordance with the provisions of the German Act against Restraints of Competition (ARC). As the ARC does not distinguish between mergers of private and public undertakings, the merger control provisions apply irrespective of the legal status of the hospitals concerned.
Mergers (incl. the acquisition of at least 25% of shares in a company, etc.) must be notified with the FCO if the total global turnover of the parties involved exceeds )500 million and if at least one of the companies involved generates turnover in Germany exceeding )25 million. The fact that such mergers do not normally take place in so-called de minimis markets (which are exempt from German merger control provisions) means that merger applications may only be dispensed if a company having generated global turnover of less than )10 million in the last fiscal year (including parent company and subsidiary turnover) merges with another company. Mergers must be notified with the European Commission if the total global turnover of the parties exceeds the threshold laid down in the EU Merger Control Regulation. The turnover thresholds for German merger control were met both by Rhön Klinikum AG/Bad Neustadt and Greifswald/Wolgast. In the latter case the state of Mecklenburg-Western Pomerania argued that its total turnover on the hospital sector does not meet the threshold of )500 million. However, the FCO rejected this assessment arguing that the relevant turnover achieved by the state includes not only the hospital but also any other commercial activities of the state.
Substantive assessment criteria
If a merger is likely to create or strengthen a dominant market position, it will be prohibited by the FCO under sec. 36 (1) of the ARC, unless the parties are able to demonstrate that the merger will have a significant positive effect on competition. A company is regarded as having a dominant market position if it is able to supply or demand certain goods or services on a specific market without having any competitors or being exposed to any substantial competition, or if it has a paramount market position in relation to its competitors (sec. 19 of the ARC). This is presumed to be the case if the company has a market share of at least one third. It is also possible for several companies jointly to hold a dominant market position, if up to three companies have a joint market share of at least 50% or five or fewer companies have a joint market share of at least two thirds. These thresholds are likely to be met on a regular basis in the case of hospital mergers given the overlaps in catchment areas resulting from the regional market set-up.
Market definition
The central issue in both merger cases was the determination of the relevant market and thereby of the relevant market shares.
In both cases the relevant product market was defined as the market for acute hospital services comprising all general hospitals and specialised clinics, but not rehabilitation and other nurse centres.
The geographical scope of the markets was defined regionally by the FCO. The main criteria for the regional delineation was the patient flow, which itself depended on the hospitals in the vicinity of the patients offering a genuine possibility for treatment. In both merger cases the market definition was based on a comprehensive analysis of the market conditions.
This means that, for the purpose of hospital mergers, the market is defined quite narrowly both, in terms of the services offered and the relevant geographical territory. As a consequence, some hospitals will be considered to have a dominant market position in their catchment areas even if they have a relatively low turnover.
In the Bad Neustadt market, in which Rhön Klinikum AG already owns five clinics, Rhön would have – according to the findings of the FCO – increased its market share from 25% to approx. 65%. In the Greifswald market, the FCO concluded that the market share of the Greifswald University Hospital would have increased by 25% to approx. 80% of the overall market and, concerning some specialised departments, such as surgery or gynaecology, to approx. more than 90%. In both cases, the FCO found that a market dominating position would have been created/strengthened and, since the parties had not been able to demonstrate significant positive effects on competition, the mergers were prohibited.
Ministerial authorisation
Under sec. 42 of the ARC, the Federal Minister of Economics and Technology shall, upon application, authorise a concentration prohibited by the FCO, if the restraint of competition is outweighed by advantages to the economy as a whole following from the concentration, or if the concentration is justified by an overriding public interest. Prior to the decision the Federal Minister of Economics and Technology shall obtain an opinion from the Monopolies Commission. The Monopolies Commission constitutes an independent advisory board to the Federal Government concerning merger control and other topical issues of competition policy.
Despite the basic similaritiy between the two merger cases, the ministerial authorisation was rejected in the case Rhön Klinikum AG/Bad Neustadt, but the Greifswald/Wolgast merger was approved by the Federal Minister of Economics and Technology, who basically followed the argumentation of the Monopolies Commission. In Greifswald/Wolgast the Minister argued that the merger can be justified by the overriding public interests in the long term preservation of the medical faculty and the affiliated hospital of Greifswald University. The second overriding interest approved was the further development of the exploratory focus of ‘Community Medicine’ being a unique selling point of the University of Greifswald. Both aspects are expected to establish an exclusive research region of ‘Model Region Eastern Pomerania’.
What conclusions can be drawn from the two merger cases? First, hospital service providers as well as investors must comply with the merger control law provisions just like any other undertaking. This principle applies irrespective of the legal nature of the hospitals, i.e. for both private and public hospitals. However, not every hospital merger in Germany requires a notification, where the only mergers that trigger a merger filing are still those exceeding the ARC turnover thresholds. Having said that, in cases involving public entities, such as federal states, it must also be taken into consideration that the relevant turnover of the acquirer includes the whole turnover achieved through all its commercial activities. This means that hospital mergers involving a public acquirer are very likely to exceed the thresholds set out in the ARC.
A second, separate issue are the conditions that must be met to obtain FCO clearance. The initial consideration would be whether there is any regional overlap between the catchment areas of the hospitals concerned. The next key factor is whether the merger would create or strengthen a dominant market position on the relevant market.
From Greifswald/Wolgast it can be concluded that mergers between public undertakings in economically underdeveloped German regions probably have better chances to be granted ministerial authorisation under sec. 42 of the ARC. It remains to be seen whether the FCO will adopt a similar legal position.
Risks
If a merger triggering German merger control is not notified before closing at all, or not correctly notified, this may have a number of consequences under civil and regulatory provisions. The first consequence is that the underlying purchase agreement is void according to sec. 41 (1) 2 of the ARC. Moreover, the FCO may impose severe fines on the parties, which can amount to up to 10% of the overall turnover generated in the previous financial year.
There are also other potential forms of cooperation between hospitals in addition to mergers that need careful consideration under an antitrust perspective before being put into practice. The main types of cooperation affected are agreements on specialisation or regional focus and joint purchasing arrangements in particular. The latter can become critical when the joint market share held by the parties involved is 15% or more. Certain risks are also associated with long-term supply agreements including exclusive supply arrangements, non-competition clauses or other exclusivity provisions. In general, there are also considerable antitrust risks related to taking part in meetings held by professional associations or in committees or trade fairs where these involve meeting with competitors. The provisions of the ARC prohibiting the abuse of a dominant market position are also relevant (e.g. discrimination, predatory pricing, etc.). These anti-abuse provisions may also apply to smaller hospitals with a strong market position in their catchment areas.
1At the time of the draft of this article, the full statement of grounds was not yet published by the Federal Supreme Court.
This article was published on 07/01/2008