The FTC Scores Another Win on Appeal of Hospital-Physician Practice Merger Injunction

In St. Alphonsus Medical Ctr. – Nampa Inc., et al. v. St. Luke’s Health System, Ltd., et al., the Court concluded that the merged provider could be anticipated to raise primary care physician (PCP) prices and that the patient-care efficiencies gained by the merger would not keep the local PCP market at least as competitive as it was without the merger. The decision reconfirms that provider-integration initiatives remain a delicate balancing act between improving outcomes and maintaining competition.

The Proposed Merger

The decision was prompted by the 2012 proposed merger of two providers — St. Luke’s Health System, which operated an emergency clinic in Nampa, Idaho, and the Saltzer Medical Group, a 34-member physician practice that included 16 Nampa-based PCPs. The combined entity would have employed 24 PCPs, while the next-largest provider employed nine, followed by several smaller and solo practices. A number of private hospitals initially challenged the merger, seeking to enjoin it under Section 7 of the Clayton Act for its anticipated anti-competitive effects in the PCP, acute-care, pediatric, and outpatient markets. That request was denied. But a year later, the FTC filed a complaint to enjoin the merger for its effects on the PCP market.

The Court’s Analysis

Section 7 of the Clayton Act bars mergers that are anticipated to substantially lessen competition, or that tend to create monopoly market power. In its ruling, the Ninth Circuit acknowledged that Section 7’s forward-looking scheme necessarily involves consideration of probabilities, not certainties. The FTC thus had the burden to demonstrate that the merger was likely to harm competition (i.e., raise prices or reduce quality).

Last year, after a 19-day bench trial, the federal district court enjoined the merger, concluding that it violated the Clayton Act. The court found that the proposed merger would have taken a so-called “highly concentrated” market for PCPs and further accentuated that concentration by a factor of almost 30 percent. The court determined that the contours of the local geographic and insurance markets rendered it unlikely that patients or payers could respond to price increases by seeking care from other providers.

The providers responded that the merger would vastly expand patients’ access to electronic health records and thus enable greater continuity of care. The court explained that it was not enough, however, to demonstrate even greatly improved patient care — the efficiencies gained must counteract the predicted reduction in competition by either increasing competition or decreasing prices. The court also found that the efficiencies in patient care were not “merger specific,” meaning that the gains could be accomplished through other means that did not involve employing the PCP group. For instance, the court was presented with evidence that physician groups could access the same electronic resources and risk-based reimbursement models without the merger. The court thus enjoined the deal, in large part, because the merger was predicted to grant St. Luke’s the power to increase the amounts insurers would pay for PCP services.

On appeal, the Ninth Circuit scrutinized the record, re-evaluated all of the evidence, and reached the same conclusion. The appeals court confirmed that the resulting market concentration and effects on PCP pricing would substantially reduce competition. The Ninth Circuit highlighted pre-merger correspondence in which the providers stated that the merger would increase the parties’ “clout” to negotiate favorable terms with third-party payers. Like the district court, the appeals court gave little weight to the providers’ anticipated efficiencies, explaining, “[i]t is not enough to show that the merger would allow St. Luke’s to better serve patients. The Clayton Act focuses on competition, and the claimed efficiencies therefore must show that the prediction of anticompetitive effects … is inaccurate.”

Implications for Provider Integration

The FTC has shown little reluctance to attack provider mergers, and this strategy has proven highly successful in the last decade. The FTC is not alone in this: The Ninth Circuit’s ruling came on the heels of a decision at the end of January by a Massachusetts county court barring the merger of Partners HealthCare with another Boston-area hospital system, notwithstanding efforts by the state’s attorney general to hammer out a set of price-caps and other protective measures.

Yet the current head of the FTC’s Competition Bureau, Debbie Feinstein, has repeated many times that integration initiatives, including those underlying many aspects of the Affordable Care Act, do not conflict with the antitrust laws. Within that context, the St. Luke’s decision confirms the FTC’s view that provider integration cannot be an end in itself. Integration must also increase providers’ ability to compete for patient care. The message to providers appears to be that they should identify opportunities to integrate without merging (e.g., Accountable Care Organizations) and merge only when there is a competitive justification to do so.

St. Alphonsus Medical Ctr. – Nampa Inc., et al. v. St. Luke’s Health System, Ltd. et al, No. 14-35173 (9th Cir. February 10, 2015) is available here.