In a challenge brought both by private plaintiffs and the government, a court has ruled that a health system’s acquisition of a competing physician group practice violated the antitrust laws where the transaction resulted in the health system employing 80 percent of the primary care physicians in one area.  Hospitals and health systems pursuing physician practice mergers should carefully consider the implications of this decision on proposed acquisitions and should incorporate antitrust due diligence into their transaction planning.

Summary of Court Opinion

Background and Procedural History

St. Luke’s Health System (St. Luke’s), based in Boise, Idaho, sought to acquire the tangible practice assets of a multi-specialty group practice, Saltzer Medical Group (Saltzer), and enter into a five-year professional services agreement with Saltzer for the services of its physicians.  Two competing health care systems that operated facilities in Nampa, Idaho—St. Alphonsus Health System, Inc. (St. Alphonsus) and Treasure Valley Hospital—filed a private suit in federal district court in Idaho challenging the proposed acquisition.  The judge denied the plaintiff’s motion for a preliminary injunction to prevent consummation of the transaction, and St. Luke’s and Saltzer closed their transaction effective December 31, 2012.  The Federal Trade Commission (FTC) and Idaho Attorney General filed a complaint in March 2013 challenging the transaction, and the cases were consolidated in federal district court.  The court conducted a bench trial in October and November 2013 and issued an opinion on January 24, 2014.

Relevant Markets

The court held that the relevant product market was adult primary care services sold to commercially insured patients (a market definition the parties did not dispute).  The court held that the relevant geographic market was Nampa, Idaho, where 68 percent of Nampa residents receive primary care services from providers who are located in Nampa; only 15 percent of Nampa residents obtain their care in Boise (mostly those who work in Boise).  Nampa is approximately a 22-mile or 28-minute drive west of Boise.  Based on testimony from commercial health plans, as well as local providers, the court concluded that a health plan could not successfully offer a network of adult primary care services to Nampa residents that included only Boise adult primary care physicians.

Market Share and Anti-Competitive Effects

The court found that prior to the transaction, both St. Luke’s and Saltzer employed adult primary care physicians who practiced in Nampa and that the combined entity comprised 80 percent of the adult primary care physicians in Nampa.  The size and reputation of both groups made the merged group the dominant provider in the Nampa area for primary care, and gave it significant bargaining leverage over health insurance plans.  Specifically, the court found that the parties to the transaction were each other’s closest substitutes; meaning, if a health plan would not have been able to reach amicable contract terms with either St. Luke’s or Saltzer prior to closing, the health plan would have considered the other group as its next closest substitute.  As a result, the transaction eliminated the ability of health plans to substitute between St. Luke’s and Saltzer if they were unable to agree to contract terms with one of them.  The court cited a situation in the Twin Falls area in which Blue Cross Blue Shield of Idaho (BCI) went out of network with St. Luke’s Health System for six years when the parties were not able to agree on contract terms.  BCI testified that employers in the Twin Falls area purchased very little insurance from BCI during that period.

The court also predicted that the combination would have anti-competitive effects in the form of: (i) the merged entity’s ability to negotiate higher reimbursement rates from payors that would be passed on to patients; (ii) higher prices for ancillary services in the form of hospital outpatient provider-based (HOPB) rates for those services; and (iii) a reduction in referrals to third-party providers.

Pricing

BCI testified that the transaction extended St. Luke’s Health System’s existing dominance in Idaho to the Nampa area.  The court found that BCI’s concerns were supported by St. Luke’s own documents, citing an e-mail communication from a St. Luke’s executive in December 2011 that said that one of the ways to increase financial performance was through “price increases” and “pressuring payors” for new agreements, as well as a board presentation from 2009 that concluded that “market share in primary care is a key success factor, critical to sustaining a strong position relative to payor contracting.”  It is noteworthy that both of these documents preceded the transaction at issue by several years and were not even specific to the particular transaction.

HOPB Rates

Regarding HOPB rates, BCI testified that ancillary costs would increase 30 to 35 percent if St. Luke’s was to bill for the services provided by Saltzer physicians at the higher, hospital-based rates.  A consultant retained by St. Luke’s had concluded that those rates would have been more than 60 percent higher.

Referrals

The court found that, even though Saltzer’s physicians retained the ability to refer their patients to any practitioner or facility regardless of its affiliation with St. Luke’s, it was likely that the Saltzer physicians would increase their referrals to St. Luke’s following the transaction.  It is notable that the private plaintiffs own and operate the only health care facilities in Nampa—St. Luke’s does not own a hospital in Nampa.  The court found the likely shift in referrals to be an anti-competitive effect of the transaction.

Entry

The court found that entry was unlikely to mitigate anti-competitive effects because the private plaintiff physician group was unable to recruit any family practitioners to Nampa in 2013 and had been unable to recruit any pediatricians or general internists to Nampa in the last two years.  This finding is significant, as most courts that have addressed the issue of entry in physician markets have found barriers to entry to be low, given the high level of physician mobility and the fact that physician recruitment typically occurs on a national not local basis.

Efficiencies

While acknowledging that the transaction was motivated by pro-competitive intent—to improve the delivery of health care in the Nampa area—the court concluded that the defendants’ proffered efficiencies were not merger specific because the parties could achieve the same goals with alternative types of collaborations that did not have the potential to raise prices.  The judge reached this conclusion despite testimony that the parties had attempted other forms of affiliation that were not successful.  The judge also found that the merging parties intended for the transaction to improve patient outcomes and that the transaction was likely to have that effect if left intact.

St. Luke’s argued that it needed a core group of employed primary care physicians in order to successfully transition to integrated care and population health management, but the judge found that there was no evidence that St. Luke’s needed more employed primary care physicians than the number they employed prior to acquiring Saltzer.  Saltzer argued that it could not afford needed health information technology on its own.  However, the judge concluded that St. Luke’s Affiliate Electronic Medical Records program, which provides access to electronic health records to independent physicians, undercuts this argument.  Saltzer also argued that it did not have the financial reserves to transition to value-based compensation on its own.  However, the court concluded that in Idaho, independent physicians were using risk-based contracting successfully and that it is a committed team, rather than one organizational structure, that is critical to integrated medicine.

Key Implications

This case is important for several reasons.  First, it illustrates the FTC’s long-stated commitment to challenge acquisitions of physician practice groups, if the government believes they may have anti-competitive effects.  While the FTC had previously threatened to challenge physician practice group mergers and alleged that a merger of health care systems that would have anti-competitive effects in the general acute care inpatient hospital market also would adversely affect the market for primary care physicians, this is the first case the FTC has filed based solely on the acquisition of a physician practice and the first physician practice acquisition that the FTC has litigated to conclusion in federal district court.

Second, it reaffirms the FTC’s willingness to challenge transactions that involve health care providers, even after they have been consummated, and to seek divestiture, rather than a conduct-based remedy, if the court concludes that the transaction is likely to have anti-competitive effects.  The court in this case specifically rejected the defendants’ request for a conduct-based remedy in favor of returning the market to its pre-acquisition structure.  The FTC’s approach in this case contrasts with the relief in a consent order settling the FTC’s challenge to Renown Health’s (Renown) acquisition of cardiologists in Nevada.  Under the terms of the consent order, Renown was ordered to release up to a certain number of its employed physicians from covenants not to compete in their employment agreements, but it was not required to divest any practice assets.

Third, the court’s ruling highlights the burden on the merging parties to demonstrate the transaction’s merger-specific, pro-competitive benefits.  To meet that burden, merging physician practice groups likely will have to demonstrate that the transaction will increase quality outcomes and, to the extent that rates might increase, that those increases will be offset by enhanced quality; that is, on a quality-adjusted basis, prices will not increase.  Acquiring parties in mergers often focus on “revenue enhancement” as one of the transaction’s objectives; payors and the government enforcers view that as an anti-competitive effect often because the revenue increase is based on a price or rate increase.  It is imperative, therefore, that merging parties directly tie any projected revenue increases to improvements in quality.  That can be accomplished, for example, by basing physician compensation, at least in part, on their performance in reducing healthcare costs, decreasing readmission rates and meeting other objective quality-improvement metrics.