Before Exclusivity: Strengthening the Antitrust Position in Hospital Deals

A hospital facing financial pressure may see affiliation with a larger system as its best path forward. Its board may already favor a partner with familiar physicians, substantial capital, and an established local presence. But preferring a partner is not the same as having no alternative to it. If the hospital’s antitrust position depends on having no reasonable alternative, its buyer search must support that claim. The hospital should address gaps in that search before granting exclusivity, usually through a no-shop provision in the letter of intent that limits discussions with other buyers before signing a definitive agreement.

What the FTC Said

The Federal Trade Commission’s September 2 statements on Fairfield Medical Center show the risks of a thin shopping process. According to FTC staff, its investigation raised concerns about OhioHealth’s proposed acquisition of Fairfield and the thoroughness of Fairfield’s buyer search. Staff pushed for a broader search, which drew multiple bidders and ultimately led to a transaction with Adena Health.

In an accompanying statement, Chairman Andrew Ferguson, joined by Commissioner Mark Meador, set out what he expects when parties rely on financial distress to justify a merger. He lists five markers of an adequate search:

1. Whether the seller solicited the full set of potential buyers;
2. Whether those buyers had enough time;
3. Whether they had sufficient and equal access to information;
4. Whether the seller engaged in good faith; and
5. Whether it appropriately considered offers from buyers that raised no competitive concerns.

For Ferguson, an adequate search is not one factor among several. It is a precondition to raising the defense at all.

The statement itself does not create binding legal requirements, and it stops short of requiring an auction. But it explains how FTC leadership will evaluate a hospital’s buyer search under the failing-firm defense. Ferguson goes further: If the search turns up an offer that preserves competition, the seller cannot justify an otherwise anticompetitive transaction merely because it pays more. Sellers need to understand that before their financial advisors build a recommendation around one deal’s economics.

Financial Distress Does Not Necessarily Justify the Deal

The first task is to identify what role financial distress plays in the antitrust analysis. If the parties argue that an otherwise anticompetitive acquisition should proceed because the hospital would fail without it, they must satisfy the demanding failing-firm defense. They must show that business failure is highly likely, successful reorganization in bankruptcy is unlikely, and a good-faith search has produced no reasonable alternative offer that would keep the hospital’s assets in the market and pose less risk to competition.

Financial weakness may support a different argument: that historical market share overstates the hospital’s ability to compete in the future. Departing physicians or closing service lines, for example, may make past patient volumes a poor guide to future competition. That is different from arguing that an otherwise anticompetitive merger should proceed because the hospital would fail without it. Counsel should determine which argument the evidence supports before the seller describes its options as “merge or close.”

Separate Essential Requirements from Preferences

Where the absence of alternatives matters, the seller should examine how it has defined an acceptable partner. Requirements concerning patient access, essential services, financing, and operating capability deserve careful consideration. Preferences about branding, governance seats, or retaining particular management arrangements should be identified separately. A bidder’s unwillingness to satisfy every preference does not, by itself, establish that the bidder is unavailable.

Consider two hypothetical offers. A nearby competing system offers more capital and promises to preserve every current service. A system with fewer competitive overlaps offers less capital but proposes a different model for maintaining local access. The seller’s board should evaluate which services patients need, whether each model can deliver them, and how durable and enforceable the commitments would be. It should also test financing and execution assumptions. An unsupported expression of interest is different from a credible alternative offer. If the preferred transaction would otherwise be anticompetitive, a larger capital commitment does not necessarily justify it when a reasonable alternative would present fewer competitive concerns.

The comparison cannot stop at which proposal is more attractive. For purposes of the failing-firm inquiry, the agencies’ merger guidelines treat an offer above the assets’ liquidation value as a reasonable alternative offer. Liquidation value means the value of those assets in their best use outside the relevant market. That benchmark can differ sharply from a seller’s preferred valuation or investment package. Counsel should assess a rejected offer against the applicable legal standard, rather than assume that inferior economics remove it from consideration.

Evaluate Alternatives Before Granting Exclusivity

Exclusivity is not inherently disqualifying, but it can make gaps in the buyer search harder to address. Once deal protections restrict further discussions, the absence of new bids may reflect those restrictions rather than a lack of interested buyers. Before agreeing to exclusivity, a hospital relying on the absence of alternatives should understand what its search has established and what remains unresolved. The duration of exclusivity, restrictions on responding to unsolicited proposals, termination provisions, and access to interim funding should be evaluated together. A contractual ability to reopen discussions offers limited practical protection if the hospital would lack the resources to complete another process.

Buyers have a corresponding diligence interest. If the investment case assumes that the target has no viable alternative, test that assumption by asking who was contacted, what information was received, when and why did discussions end, and could financing concerns that caused a bid to fall through have been resolved with different terms? Buyers should obtain the record supporting the seller’s account rather than rely on an assurance that “nobody else was interested.”

The board record should pull all of this together: the hospital’s financial timetable, its essential patient-service requirements, the credible alternatives, and why each proposal was chosen or rejected. Aim for an accurate account of the decision, including what remained uncertain.

A thorough search will not cure every competitive problem, and it will not supply the other elements of a failing-firm defense. It may even turn up an alternative that makes the preferred transaction harder to justify. Hospitals should confront that possibility while they can still act on it. Before selecting a buyer, the seller should be able to explain both why it prefers that transaction and, if its antitrust position depends on the absence of reasonable alternatives, why the other proposals do not qualify.