The U.S. Court of Appeals for the 9th Circuit affirmed a lower court’s findings Feb. 10, 2015, that the acquisition by St. Luke’s Health System (“St. Luke’s”) of Saltzer Medical Group (“Saltzer”), a physician group consisting mostly of primary care physicians, violated Section 7 of the Clayton Act. This is the first case in which the Federal Trade Commission (“FTC”) litigated through trial a challenge to a physician acquisition.

The litigation began in 2012, when Saint Alphonsus, a rival health system, filed suit to challenge the proposed acquisition of Saltzer by St. Luke’s. Soon after the case was filed, the transaction was consummated, and in early 2013, the FTC and the State of Idaho joined the suit. In January 2014, the U.S. District Court for the District of Idaho held that the acquisition violated Section 7 of the Clayton Act and ordered divestiture as a remedy.

The Court of Appeals upheld most of the District Court’s findings. First, the Court of Appeals rejected St. Luke’s argument that the geographic scope should be expanded to encompass “Treasure Valley” and held that the appropriate geographic market was Nampa. The Court focused on testimony that Nampa residents preferred local primary care providers and insurers were unable to successfully market health plans without local primary care providers.

The Court then concluded that the plaintiffs had established a prima facie case that the merger would probably lead to anticompetitive effects in the market. The Court reviewed the Herfindahl-Hirschman Index (“HHI”), a measure of market concentration, and found the post-merger HHI number and the increase over the pre-merger HHI “were well above the thresholds for a presumptively anticompetitive merger (more than double and seven times their respective thresholds, respectively).”

Once the plaintiffs established a prima facie case, the burden shifted to the defendants to rebut the presumption of anticompetitive effects. St. Luke’s advanced a defense arguing the merger would create efficiencies, allowing the entities to move toward integrated care and risk-based reimbursement. The Court showed skepticism toward the efficiencies defense in general. It stated, “We remain skeptical about the efficiencies defense in general and about its scope in particular. It is difficult enough in Section 7 cases to predict whether a merger will have future anticompetitive effects without also adding to the judicial balance a prediction of future efficiencies.” Nonetheless, the Court stated that a defendant could rebut a prima facie case with evidence that a proposed merger will create a more efficient combined entity and thus increase competition.

In this case, the Court agreed with the district court and held that the efficiencies argument advanced by St. Luke’s was not enough to rebut the prima facie case. Specifically, St. Luke’s argued the merger would benefit patients by creating a team of employed physicians with access to Epic, the electronic medical records system used by St. Luke’s. The Court stated, “It 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 from the prima facie case is inaccurate.” The Court also agreed with the district court that the claimed efficiencies were not merger-specific. The Court found there was “no empirical evidence to support the theory that St. Luke’s needs a core group of employed primary care physicians beyond the number it had before the Acquisition to successfully make the transition to integrated care,” and “a committed team can be assembled without employing physicians.” The Court then stated that even if the claimed efficiencies were merger-specific, the defense would nonetheless fail because “[a]t 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.”

This was a victory for the FTC. Healthcare providers, especially when the market is already concentrated, isolated or rural, must proceed with caution and have in hand clear and convincing evidence that the acquisition or merger produces local efficiencies. Even with such clear and convincing evidence, given the Court’s skepticism toward the efficiencies defense, and the high burden to establish such defense, the Clayton Act will pose a challenge to many healthcare providers looking to merge or acquire with other providers to achieve quality care and reduce costs.