December 3, 2022
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Surgery centers at issue in health care merger


The sale of outpatient surgery clinics that will push the South Coast’s biggest health care merger back by six months or more has at least one prior case that resulted in a formal order by the Federal Trade Commission.

Cottage Health System said April 8 that it is looking to sell its Santa Barbara Outpatient Surgery Center operations in an effort to smooth the path for its proposed merger with Sansum Clinic, the largest physician group on the South Coast. It will take six months or more to complete the transaction, Cottage said.

A deal to bring the two nonprofit healthcare providers together has been in the works for almost two years, with Cottage and Sansum in talks with the Bureau of Competition at the FTC for the last 18 months. The FTC would not comment on the merger, but officials at the two companies say the agency has questioned at length the merger of the only inpatient hospital on the South Coast with the large physician practice.

Through those talks, officials said, the sale of the outpatient facility appeared to address the biggest FTC issues about market concentration. “What’s become very clear to us is that their focus has been on outpatient surgery,” Cottage CEO Ron Werft told the Business Times. “Unless we find a way to continue competition in this area, it will be very difficult for us to move forward.”

In a  case that appears to raise parallel issues, the FTC last October voted 5-0 to approved the sale of an ambulatory surgery center in Orange City, Florida owned by Symbion. The center was sold to a third party in order to gain approval for a $792 million merger of Symbion with rival operator Surgery Partners of Chicago.

In that case, the FTC said its goal was to “restore the competition that otherwise would be lost as a result of the merger.” The commission’s unanimous vote, which followed a formal FTC complaint, signaled that regulators want independent doctors to have unfettered access to facilities for arthroscopic surgery, colonoscopies and other outpatient procedures.

Some similar issues appear to apply to the Cottage-Sansum merger. The deal would  result in six surgical suites coming under Sansum-Cottage control, versus the four that Sansum controls today and the two suites Cottage now operates. Cottage’s divestiture would ensure the status quo that exists today would be maintained.

Cottage has enlisted investment banking firm Cain Brothers to sell the operation. Cottage would likely retain ownership of the Castillo Street building that houses the outpatient surgery suites, Werft said.

Once a buyer is identified, the sale would be contingent on the Sansum-Cottage merger being closed. The sale of the centers and closing of the Sansum-Cottage merger would likely happen in a fairly quick sequence, Werft said.

Sansum operates its own outpatient surgery centers, including the four-suite facility at its new building on Foothill Road. Dr. Kurt Ransohoff, Sansum’s CEO, likened the sale of the Cottage suites to the FTC ordering airlines seeking approval for a merger to sell some gates at a large airport to allow for more competition.

Ironically, the Sansum-Cottage merger is designed to produce an integrated health care system, one of the stated goals of the Affordable Care Act.

“The FTC knows the landscape,” said Werft. “They want the same level of competition or more” in outpatient surgery after the merger is completed, he added.