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FTC Wins Antitrust Challenge to Health System's Acquisition of Physician Practice

February 4, 2014

The potential tension between the antitrust laws and the Affordable Care Act was on full display recently as the Federal Trade Commission successfully blocked a health system's acquisition of an independent physician practice – the first time the FTC had successfully challenged such a transaction in court. The United States District Court for the District of Idaho handed the FTC its initial win and ordered the immediate unwinding of the transaction and a permanent injunction against the acquisition as violative of Section 7 of the Clayton Act and analogous state competition laws. The decision illustrates that even though consolidation can lead to greater coordination and improved patient care, the FTC and state attorneys general will not hesitate to oppose consolidation in highly concentrated markets that they believe will lead to the reduction in competition, creating the potential for increased prices. Given the ongoing consolidation in the health care industry – largely fueled by the ACA – it is unlikely that this will be the last case of its kind.

The Acquisition and the Court's Decision

On December 31, 2012, St. Luke's Health System (St. Luke's) acquired the assets of the Saltzer Medical Group (Saltzer), and Saltzer entered into an agreement to provide professional services exclusively on behalf of St. Luke's for a term of five years. St. Luke's operates eight hospitals and emergency clinics in Idaho and employs or is affiliated with several hundred physicians, including 450 in the geographic market at issue. At the time of the acquisition, Saltzer employed 41 physicians as an independent physician practice. The combined entity included 80 percent of the primary care physicians in the area. According to the district court, the entity's size and the "sterling reputations" of St. Luke's and Saltzer made it the "dominant" provider in the market for primary care.

Two groups of plaintiffs sued, claiming the combination violated the antitrust laws, namely Section 7 of the Clayton Act and the analogous Idaho state law. First, two of St. Luke's competitors alleged that the transaction will harm competition by effectively cutting off access to Saltzer physicians for competitors. And the FTC and the State of Idaho (hereafter, the "Government Plaintiffs") joined the suit, alleging that the transaction would result in undue concentration in the market for adult primary care physician services. That market power would allegedly allow St. Luke's to extract higher reimbursements from health plans, which would pass those price increases to consumers and employers. As a result, the Government Plaintiffs argued that healthcare costs would rise for Idaho consumers.

St. Luke's defended the acquisition on numerous grounds, focusing on the value of integrated delivery systems, an important tenet of the Affordable Care Act. St. Luke's framed their arguments as an efficiencies defense that would produce beneficial outcomes for the patient and facilitate a move away from the current fee-for-service reimbursement system to a risk-based capitation system. St. Luke's pointed to studies demonstrating that integrated delivery systems could better align incentives between providers and patients and enhance information sharing across providers, thereby improving patient care at lower cost.

The district court agreed with St. Luke's that patient care might be enhanced and applauded the medical center's efforts to improve healthcare delivery, but, applying a rule-of-reason analysis, the court ultimately decided that the transaction violated the antitrust laws. The court held that the combined parties' dominant market position would likely lead to anticompetitive effects. Specifically, St. Luke's would be able to negotiate higher reimbursement rates from health insurance plans and raise rates for ancillary services, like x-rays, by charging hospital-based rates for services that can be provided on an outpatient basis. These higher rates would likely be passed to the consumer, who would face higher healthcare rates in the impacted area post-transaction. 

The district court determined that St. Luke's proffered efficiencies defense could not overcome the presumption of illegality created by its dominant market share. The district court noted that efficiencies achieved by a transaction must be "merger-specific" so that the transaction is the only way the efficiencies can be gained. In this case, the district court found that St. Luke's could achieve the same efficiencies without acquiring its competitor. The district court ordered St. Luke's to divest itself fully of the Saltzer assets and permanently enjoined the acquisition.

Potential Impact of the Case

The FTC's victory affirms that there are procompetitive justifications for hospital-physician mergers but also confirms that the antitrust laws can impose limits on vertical integration in health care. The district court recognized the benefits of an integrated care system, noting that a risk-based reimbursement system could lead to providers supplying higher-value care at lower cost. On a macro level, this type of merger could achieve the goals of the ACA by tackling concerns over cost and quality through integration of primary care physicians with teams of specialists committed to a common goal for the patient.

But vertical integration can also raise competition concerns – which, in this case, outweighed the potential benefits. Hospital-physician mergers that create a large or dominant market share in physician services can greatly increase a health system's bargaining power with insurers. The district court accepted the Government Plaintiffs' contention that the acquisition would create enormous leverage for St. Luke's with health plans, which would likely lead to higher reimbursement rates that would ultimately be passed to the consumer. 

The district court also emphasized the need for any claimed efficiencies to be merger-specific. In this case, the court focused on St. Luke's significant market share, indicating that efficiency gains from such a transaction would have to be extraordinary to overcome the potential anticompetitive effects of St. Luke's enhanced bargaining power. Moreover, the court observed that St. Luke's has been or will be able to achieve similar benefits through affiliation arrangements that do not increase concentration. The court therefore refused to credit the defendant's efficiency arguments.

The case once again underscores the FTC's willingness and intent to closely scrutinize health care transactions, even those that are well below the thresholds for premerger notification under the Hart-Scott-Rodino Act. The St. Luke's transaction was valued at approximately $25 million and affected only a small geographic area. But the FTC balked at the potential for the transaction to result in higher costs to payors and, ultimately, to consumers.

Finally, we note that St. Luke's is a participant in the Medicare Shared Savings Program, which is Medicare's Accountable Care Organization (ACOs) program designed to coordinate care among hospitals and physicians. While ACOs will continue to drive consolidation within the healthcare industry, this case demonstrates that the government will not hesitate to enforce the antitrust laws against ACO participants when their activities will have anticompetitive effects. This in turn could lead to a loss of enthusiasm for this popular government program. 

For more information, please contact the professional(s) listed below, or your regular Crowell & Moring contact.

Shawn R. Johnson
Partner – Washington, D.C.
Phone: +1.202.624.2624