On February 10, 2015, the Ninth Circuit Court of Appeals affirmed an Idaho district court ruling to unwind the acquisition of Saltzer Medical Group, Idaho’s largest independent physician group, by St. Luke’s Health System on the basis of federal antitrust law violations, specifically Section 7 of the Clayton Act. The decision by the Ninth Circuit in FTC v. St. Luke’s is significant because it is a key indicator of how courts will balance Affordable Care Act (“ACA”) provisions that incentivize integrated healthcare services with antitrust scrutiny.
In enacting the Affordable Care Act, Congress found that the lack of integration in the nation’s health care system was a major source of inefficiency; at the clinical level due to inadequate or unnecessary care caused by lack of coordination between providers, and at the administrative level due to high administrative costs and ineffectual competition. In taking a major step towards speeding up integrated healthcare delivery approaches, the ACA adopted a provision (Section 3022 Medicare Shared Savings Program) that rewards healthcare organizations who improve quality of care and reduce costs by allowing them a “share” of the cost savings under Medicare. In order to participate, qualifying provider groups must report data to the Center for Medicare and Medicaid Services (“CMS”) and meet quality, performance, and cost reduction targets set by the agency. In the wake of this legislation, healthcare organizations have rushed to integrate – through mergers, physician hospital networks, physician practice associations, and accountable care organizations (“ACOs”).
This trend has implications for healthcare markets, especially those that are already dominated by large providers and insurers with market power. Healthcare integration runs afoul of the antitrust laws when the combining entities threaten to raise prices and restrain competition. Economic research shows that higher concentration in healthcare markets leads to significantly higher prices, as high as 40-50 percent. For healthcare consumers in highly concentrated markets, this means that the price for the same service can vary drastically across, and even within, markets simply based on the number and relative strength of healthcare providers. Antitrust enforcement aims to protect healthcare consumers from these harmful effects by ensuring there is enough competition between firms.
The balancing of antitrust concerns and ACA opportunities presents a potentially problematic tradeoff for integrated care groups: providers need sufficient size to capture the benefits of integration including lower costs and higher quality care, but to the extent they acquire too much of the market, they may trigger antitrust scrutiny by exercising market power. Healthcare providers involved in an existing joint venture or looking to merge would be wise to take note of the court’s analysis in FTC v. St. Luke’s. But first, a brief background on the case.
The district court detailed in its Findings of Facts and Conclusions of Law that St. Luke’s Health System and Saint Alphonsus are two competing health systems in Idaho’s Treasure Valley, an area stretching west of Boise to Nampa. St. Luke’s operates two hospitals and has physicians in three locations. Saint Alphonsus also operates two hospitals and employs physicians at various locations in the area. In 2012, St. Luke’s acquired Saltzer Physician Group, over the request by the Idaho Attorney General to hold off completing the deal until it could complete an investigation. Despite that request, St. Luke’s closed the deal by the end of 2012 paying $16 million for Saltzer. All of the doctors in the Saltzer group were required to enter into five-year professional service agreements with St. Luke’s that included a non-compete.
In March 2013, the FTC and Idaho Attorney General filed a joint complaint seeking to undo the merger based on horizontal antitrust theory that the merger would substantially lessen competition in the market for adult primary care physician services in Nampa, ID. The FTC alleged that the acquisition could create two kinds of anticompetitive effects: (1) increased negotiating leverage with commercial payers that would result in higher prices for St. Luke’s primary care physician services, and (2) increased costs of ancillary services, like laboratory tests and X-rays, from primary care physicians referring patients to St. Luke’s higher-cost facilities.
In its January 2014 ruling, the district court focused extensively on the market for adult primary care physician services in Nampa. In a classic antitrust horizontal merger analysis, the court first determined the relevant product and geographic markets, calculated market shares and concentration, identified barriers to entry in the market, and then assessed whether the network’s market power caused a restraint on competition. St. Luke’s acquisition of Saltzer gave it 80% of the primary care physician services in Nampa (measured by visits). This made it the “dominant provider in the Nampa area for primary care” and gave it “significant bargaining leverage over health insurance plans.” This percentage share the district court considered “well above the thresholds for a presumptively anticompetitive merger.” The court also found that Saltzer and St. Luke’s were each other’s closest substitute as providers of primary care services in the Nampa area.
In the February 2015 appellate decision, the 9th Circuit affirmed the district court’s finding that the acquisition was anticompetitive. It held the evidence of “extremely high” market concentrations and prior “statements and past actions by the merging parties made it likely that St. Luke’s would raise reimbursement rates in a highly concreated market.” The Ninth Circuit also accepted the district court’s structural remedy to break up the merged entity in order to restore the competitive status quo existing pre-merger.
There are several important takeaways from this case for integrating healthcare providers.
First, both courts focused on the lack of empirical evidence in St. Luke’s procompetitive justifications that its merged entity would improve quality of care. St. Luke’s argued the acquisition created efficiencies by employing physicians and better positioning itself to deliver integrated care. It also claimed that implementing an electronic medical record system across its locations would drive more efficient care. The court found its defenses lacking because there was no empirical evidence suggesting that the hospital by employing the physician-group doctors would reduce costs or improve quality. The appeals court highlighted the efficiency defenses were not merger specific and that St. Luke’s had failed to justify its claim that the merger would improve patient outcomes. The focus on empirical data, and the lack thereof in this case, should serve as a warning to future providers. Accepting the premise of antitrust law that competition fosters innovation, healthcare providers should be prepared to explain why reducing competition through a combination (merger) or contract (ACO or other network) would enhance rather than impair their incentive to innovate. As future providers begin to collect quality metrics under the Affordable Care Act MSSP, courts will look more and more to actual performance data to determine if defendants’ procompetitive justifications are genuine.
Second, transactions of all sizes may be subject to challenge. This is especially significant for smaller provider groups looking to integrate through new operating models like ACOs and contractual physician group networks. Even though the market size in Idaho was relatively small and the transaction did not meet the reporting threshold in Hart-Scott-Rodino, St. Luke’s deal with Saltzer was not immunized from substantial state and federal antitrust scrutiny.
Finally, divestitures are still the preferred antitrust remedy and the FTC has successfully litigated the breakup of several healthcare mergers over the past few years. In the healthcare context, the FTC prefers structural remedies to conduct-based remedies, like consent decrees, because conduct remedies require monitoring of future behavior and