Antitrust Law

February 25, 2015

What Is the Impact of St. Luke’s Loss on Merging Providers?

Authors: Martin Thompson, Partner, Healthcare Industry | Lisl Dunlop, Partner, Litigation

Last February, Manatt Health Update examined the January 24, 2014, decision of the U.S. District Court in Boise that St. Luke’s Health System’s acquisition of Saltzer Medical Group, Idaho’s largest independent physicians’ practice, violated the Clayton Act. The case marked the first time that a hospital’s acquisition of a physician group had been ruled an antitrust violation.

Now a three-judge panel of the Ninth Circuit Court of Appeals in Portland has upheld that ruling, agreeing that the 2012 merger of St. Luke’s and the Saltzer Medical Group violated the Clayton Act, which bars mergers that may substantially lessen competition or create a monopoly. The Ninth Circuit also backed the District Court’s order that St. Luke’s unwind the deal.

What Did the Courts Say?

The District Court and Ninth Circuit’s decisions focused first on market definition. By accepting the Idaho Attorney General and FTC’s position that the market was as narrow as the single town of Nampa, Idaho, in which Saltzer accounted for over 80% of available primary care physicians, the District Court found the transaction presumptively anticompetitive and likely to result in price increases. The Ninth Circuit agreed with this conclusion.

In its defense, St. Luke’s argued that the acquisition would improve patient outcomes and healthcare quality in the communities it serves, such as through access to the Epic electronic records system and greater scale to successfully make the transition to integrated care. Many of these claimed efficiencies were rejected by the District Court as not being directly tied to the merger, but rather things that could be achieved by contracting or other means. But the court held that even if true, the predicted efficiencies were insufficient to overcome the finding that the transaction would result in higher reimbursement rates for primary care physician (PCP) services.

The Ninth Circuit seems to have been even more hostile to St. Luke’s efficiencies claims, expressing skepticism about the scope of the efficiencies defense. Judge Andrew D. Hurwitz wrote: “At most, the District Court concluded that St. Luke’s might provide better service to patients after the merger. This is a laudable goal, but the Clayton Act does not excuse mergers that lessen competition or create monopolies simply because the merged entity can improve its operations.” In the Ninth Circuit’s view, unless the efficiencies can be tied directly to enhancing competition as a result of the efficiencies, they cannot save an anticompetitive merger.

The Importance of Evidence

The St. Luke’s case highlights the importance of company documents and other evidence in an antitrust case. Two types of evidence were particularly devastating for St. Luke’s defense: a statement in internal emails about the possible impact of the transaction, and St. Luke’s past conduct in negotiating with payers following other transactions.

With all the information at its disposal, the courts looked to internal emails in which executives predicted that their bargaining power would allow them to raise prices after the acquisition, using phrases such as having the “clout of the entire network” at its disposal. As we see every day in the news, what we put in emails can come back to haunt us in ways we may never have anticipated.

In addition to internal speculation about the ability to raise prices after the merger, the courts also looked to evidence of St. Luke’s conduct following an earlier acquisition in Twin Falls, Idaho, where St. Luke’s used its leverage to force insurers to concede to its higher pricing proposals. This was strong evidence in support of the finding that St. Luke’s would likely use its postmerger power to negotiate higher reimbursement rates from insurers for PCP services.

How Does the Rule Affect Systems Seeking to Consolidate?

In our original article, we noted that the ruling would be likely to increase FTC scrutiny of hospital acquisitions of physician practices and other clinical operations. With health systems across the country forming Integrated Delivery Networks, the Ninth Circuit’s opinion is an important wake-up call that improving patient outcomes and cost efficiencies on their own will not outweigh antitrust issues.

Even “laudable” efforts to meet the goals of the Affordable Care Act (ACA) will not win the day if consolidations have the potential to result in higher prices. The St. Luke’s decision came down to high levels of market concentration—with St. Luke’s and Saltzer making up 80% of the primary care physician market in Nampa—which would “increase the bargaining power to raise prices.”

On the other side, there are those who argue that consumers can benefit from the new value-based delivery arrangements in ways that traditional antitrust analyses don’t take into account. They put forth the premise that consumers’ best interests should be considered in conjunction with market forces. But St. Luke’s makes clear that unless the benefits of consolidation translate into tangible, quantifiable benefits for consumers and insurers, they will not carry the day in traditional antitrust analysis.

As providers across the country explore new and innovative ways to join together to improve value, quality and outcomes, they will need to take a close look at potential antitrust challenges and how best to develop procompetitive efficiencies.