The Federal Trade Commission maintained its winning streak in health care merger cases after the 9th Circuit affirmed an Idaho district court’s ruling that the acquisition of Idaho’s largest physician group by one of the state’s largest health care systems violated Section 7 of the Clayton Act. St. Alphonsus Medical Center-Nampa, Inc. v. St. Luke’s Health System, No. 14-35173, 2015 WL 525440 (9th Cir. Feb. 10, 2015). The 9th Circuit’s opinion supports what the federal antitrust enforcement agencies have been saying since the Affordable Care Act was enacted: reliance on health care reform and the ACA’s emphasis on integration will not save an otherwise anticompetitive merger. The opinion also confirms the very heavy burden that defendants in merger cases face when they attempt to justify an anticompetitive merger by relying upon efficiencies that the merger may provide.

Background

In 2012, St. Luke’s Health System acquired the Saltzer Medical Group after the federal district court in Idaho denied a motion to enjoin the merger that had been filed by a hospital and outpatient surgery center that competed with St. Luke’s. Shortly after, the FTC and the State of Idaho filed a separate action, asserting that the merger violated Section 7 and Idaho law because of its anticompetitive effects on the adult primary care physician (“PCP”) provider market in Nampa, Idaho. Nampa is the second largest city in Idaho and is located about 35 miles from the largest city, Boise. At the time of the merger, Saltzer had 16 PCPs and St. Luke’s had 8 PCPs in Nampa. The cases were consolidated, and, following a 19-day bench trial, the district court found that although St. Luke’s and Saltzer intended to improve health care and the merger would improve patient outcomes, the huge market share of the merged entity created a substantial risk of anticompetitive price increases in the Nampa PCP market, and it ordered St. Luke’s to divest Saltzer.

Section 7

Section 7 prohibits mergers where the effect “may be substantially to lessen competition, or to tend to create a monopoly.” In reviewing the lower court’s ruling, the 9th Circuit followed the standard burden-shifting framework that is applied to Section 7 claims. First, the plaintiff must establish a prima facie case that the challenged merger is anticompetitive. The burden then shifts to the defendants to rebut the prima facie case. If the defendants successfully rebut the prima facie case, then the burden of production shifts back to the plaintiff to prove an appreciable danger that the merger would harm competition. In this case, the 9th Circuit concluded that the defendants failed to rebut the prima facie case.

The trial court’s definition of the relevant geographic market was not clearly erroneous

The parties agreed that the relevant product market was adult PCP services but vigorously disagreed on the relevant geographic market. Plaintiffs contended that the relevant geographic market was limited to PCPs in Nampa, while the defendants argued that PCPs in Boise should be included. The district court accepted the plaintiffs’ geographic market definition, finding:

  • Consumers (which the court identified as insurers) would not contract with PCPs outside of Nampa to provide care for Nampa residents in response to a “small but significant nontransitory increase in price.”
  • Insurers must contract with local PCPs to market a health care plan, particularly in Nampa. For example, the state’s largest insurer, Blue Cross of Idaho, contracts with PCPs in every zip code in which it has customers.
  • Nampa residents strongly prefer PCPs in Nampa, and most of those Nampa residents who obtain primary care in Boise also work in Boise. 

The trial court’s determination that the plaintiffs had established a prima facie case that the acquisition was anticompetitive was supported by the record

The acquisition of Saltzer by St. Luke’s gave the combined entity 80% of the PCPs practicing in Nampa and would increase what was already a highly concentrated market as measured by the Herfindahl-Hirchman Index well above the thresholds for a presumptively anticompetitive merger (the HHI rose from 4,612 to 6,219). In addition, the district court found it likely that St. Luke’s would use its post-merger power to negotiate higher reimbursement rates because:

  • St. Luke and Saltzer previously had been each other’s closest substitutes in Nampa.
  • Internal pre-acquisition communications touted the transaction’s creation of “clout,” “leverage” and “dominance,” and specifically discussed using the network to negotiate favorable terms with insurers.
  • St. Luke’s had used its leverage from a previous acquisition in a different market to force insurers to accept St. Luke’s pricing.

Based on this evidence, the 9th Circuit concluded that the district court’s factual findings were not clearly erroneous and that they supported the trial court’s conclusion that the plaintiffs had established a prima facie case that the acquisition would be anticompetitive.

The trial court’s ruling that the defendants failed to rebut the prima facie case was supported by the record

In order to rebut the prima facie case, the defendants contended that the merger would allow St. Luke’s to move toward integrated care and risk-based reimbursement, creating efficiencies that would outweigh the anticompetitive effects of the merger. While the enforcement agencies’ Merger Guidelines recognize that efficiencies can be relied upon to rebut a prima facie case, the 9th Circuit expressed its skepticism “about the efficiencies defense in general and about its scope in particular.” The court also observed that even if a defendant could rebut a prima facie case with evidence of efficiencies, the district court had properly concluded that the defendants in this case had not made a sufficient showing to rebut the prima facie case because:

  • Even though the merger might have a beneficial effect on patient care, there had been no showing that the merger would actually lead to integrated health care or a new reimbursement system.
  • There had been no showing that the claimed efficiencies were merger-specific, as they could be achieved without the acquisition.
  • There was no showing that any savings from the claimed efficiencies would be passed on to benefit consumers.

The trial court did not abuse its discretion in ordering divestiture

The customary form of relief in Section 7 cases is divestiture, particularly when the government is the plaintiff. The 9th Circuit accepted the district court’s conclusion that divestiture was (1) feasible, (2) appropriate because any benefits of the merger were outweighed by anticompetitive concerns and (3) far simpler to administer than the defendants’ proposed conduct remedies.

Summary

The most important takeaway from this decision is the 9th Circuit’s agreement with the enforcement agencies’ contention that the ACA and its emphasis on integration are not inconsistent with the antitrust laws and will not excuse otherwise anticompetitive conduct. As the 9th Circuit noted: “At most, the district court concluded that St. Luke’s might provide better service to patients after the merger. That 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.” The court’s rejection of the defendant’s contention that the merger was not anticompetitive because it promoted the ACA’s goals also tied into the court’s general skepticism (if not rejection) of the efficiencies defense in a Section 7 case. Any touted efficiencies from a merger need to be rigorously supported and are best argued directly to the enforcement agencies in the context of a review prior to litigation. Once a merger challenge reaches court, an efficiencies defense will rarely succeed.