FTC Draws Another Line on Hospital Mergers: Buyer Search Standards and the Failing-Firm Defense

Recently, the Federal Trade Commission (FTC) issued a statement following its investigation of a proposed transaction between Fairfield Medical Center and OhioHealth. The statement and corresponding guidance offer health care organizations a clear signal that the FTC continues to closely scrutinize hospital transactions. The case is worth close attention for any hospital or health system currently structuring, negotiating, or contemplating a transaction.

Fairfield Medical Center in Lancaster, Ohio, entered into a letter of intent for a transaction with Columbus-based OhioHealth. The FTC investigated and identified serious competitive concerns related to cost and quality within Fairfield’s market. Partially as a result of the investigation, Fairfield abandoned the OhioHealth deal.

Fairfield reportedly attempted to invoke a “failing firm” defense to overcome antitrust concerns. However, the FTC questioned whether Fairfield had conducted a sufficiently thorough search for alternative buyers before selecting OhioHealth. After the FTC encouraged Fairfield to broaden its search, the process attracted multiple interested parties, and Fairfield ultimately partnered with Chillicothe, Ohio-based Adena Health. That transaction closed on September 1. The outcome is a clear reminder that the failing-firm defense does not give a party carte blanche to pursue any transaction. Rather, the defense imposes exacting requirements, and parties must demonstrate that they conducted an adequate search for alternative partners.

Alongside the Fairfield statement, FTC Chairman Andrew Ferguson, joined by Commissioner Mark Meador, issued a companion statement on September 2 setting out best practices for hospitals and health systems seeking a buyer. The statement identifies the specific factors the FTC examines when assessing whether a hospital’s sale process was adequate:

• whether the seller solicited interest from the full universe of potential buyers;
• whether potential buyers were given sufficient time and access to information to evaluate the deal;
• whether the seller engaged with interested buyers in good faith; and
• whether the seller appropriately considered offers from buyers that did not raise competitive concerns.

In the Commission’s words, financial distress is not “a blank check for mergers that would substantially reduce competition between hospitals and risk leaving patients with higher costs and lower quality care.” 

This enforcement action, paired with the companion statement, has concrete implications for parties structuring health care transactions. Regardless of financial condition, a selling hospital should conduct a thorough search for potential buyers and engage with all interested parties on equal terms. The process should be well documented so the FTC can efficiently review whether a broad range of buyers was solicited and given a meaningful opportunity to acquire the hospital. Given current industry conditions, parties should expect continued attention to regional and local hospital consolidation. FTC scrutiny is not limited to large, multi-state deals. Smaller community hospital transactions are squarely within the agency’s current enforcement focus.