Restructuring in the hospital sector

This article aims at providing an overview of the impact of competition law provisions on hospitals, and hospital mergers in particular, by analysing some of the recent merger cases in Germany.

Introduction

The restructuring process in the hospital sector has accelerated over the last couple of years. Since 2005 the FCO, for instance, has reviewed more than 50 hospital merger notifications.

The first prohibition of a public-law 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 from 10 March 2005. However, despite the basic similarity, the final outcome of the two cases was different. Whereas in its ruling of 16 January 2008 on Rhön Klinikum AG/Bad Neustadt, the German Federal Supreme Court upheld [1]  the merger prohibition, the merger Greifswald/ Wolgast could be consummated after receiving an exceptional authorisation from the Federal Ministry of Economics and Technology on 17 April 2008.

 

 

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-law 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.) have to be notified with the FCO if the total global turnover of the parties involved exceeds EUR 500 million and if at least one of the companies involved generates turnover in Germany exceeding EUR 25 million. The fact that such mergers do not generally 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 EUR 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 EUR 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.

 

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 three or fewer 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.

 

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 rehabilitaion 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 owns already 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 inreased and, since the parties had not been able to demonstrate significant positive effects on competition, the mergers were prohibited.

 

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 Ministry 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 which basically followed the argumentation of the Monopolies Commission. The Federal Minister of Economics and Technology treated the two cases differently. 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 exepcted to establish an exclusive research region of "Model Region Eastern Pomerania".

 

 

Which conclusions can be drawn from the two merger cases? First, hospital service providers or investors have to 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-law hospitals. However, not every hospital merger in Germany requires a notification. The only mergers that trigger a merger filing (in Germany) are still those exceeding the turnover thresholds set out in the ARC. 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-law acquirer are very likely to exceed the thresholds set out in the ARC.

A second, separate issue are the conditions which have to be met to obtain clearance from the FCO. 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-law undertakings in economically underdeveloped regions in Germany have probably better chances to be granted a ministerial authorisation under sec. 42 of the ARC. It remains to be seen whether the FCO will adopt a similar legal position.

 

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.

 

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