Keystone Orthopaedic Specialists, LLC (“Keystone”), and Orthopaedic Associates of Reading, Ltd. (“OA”) reached a settlement with the Federal Trade Commission last week that they had violated the antitrust laws through the consolidation of six independent orthopedic practices (one of which was OA who later broke away from Keystone) in Berks County, Pennsylvania into a single practice.  The Commission accused Keystone of leveraging its 76% market share to impose higher prices for most Berks County health plans — all the while offering no merger-specific efficiencies in a market facing recruiting, entry and expansion challenges.  The resulting consent holds Keystone and OA separate and oversees their individual efforts to hire additional Berks County orthopedists.  This investigation and consent follows the Commission’s recent physician merger efforts and state policy goals to improve competition in physician markets by targeted antitrust enforcement aimed at those specialties and locales marked by high market concentrations.  

Background & FTC Analysis

In 2011, six orthopedic practices merged to create Keystone, combining 19 of the 25 practicing orthopedists in Berks County.  The Commission alleged that Keystone held 76% of the market for orthopedic services in Berks County.  In 2014, six orthopedists split from Keystone and formed OA as a new competing entity, bringing Keystone’s share down to 52 %. Nonetheless, as discussed below, this functional equivalent of divestiture relief did not deter the Commission from proceeding here.  

The Commission alleged that the 2011 practice consolidation and Keystone’s subsequent market power eliminated both price and nonprice competition among formerly competing physicians.  Requiring health plans to contract exclusively with Keystone, and not its contingent of orthopedists separately, according to the Commission, eradicated any pre-existing price competition, and resulted in significantly higher prices.  Compl. ¶¶ 12-14 & 21.  And the FTC alleged that the joint contracting requirement reduced any incentive for Keystone member orthopedists to compete with one another on quality, convenience, and service.  Compl. ¶¶ 15 & 21.  

The Complaint reflected the Commission’s distaste for network-exclusive contracting by asserting that the requirement that health plans contract only through Keystone prevented health plans from “creat[ing] a commercially marketable and appealing provider network without Keystone,” evidence of greater bargaining power and higher prices.  Compl. ¶¶ 20 & 22.  The FTC alleged that health plans were unable to contract separately with individual practitioners, but were instead required to deal exclusively with Keystone in order to contract with any or all of its member orthopedists.  Compl. ¶¶ 3, 9 & 10.  As a result, Keystone was able to unilaterally raise prices for orthopedic physician services for most health plans serving Berks County.  Compl. ¶ 3.  

The Complaint alleged that there were no offsetting factors to rebut the concentration presumption: First, the agency stated simply that “[i]n the more than four years since Keystone’s formation, the Merger has not produced merger-specific efficiencies sufficient to offset the actual anticompetitive harm.”  Compl. ¶ 24.  Second, the Commission alleged that recruitment of new orthopedists to Berks County was “difficult, expensive, and time intensive,” and that there has been no new entry that was “timely or sufficient to deter, prevent, or counter the anticompetitive effects” of the consolidation.  Compl. ¶ 23.

Takeaways

The result here is interesting along several dimensions.  Spurred by reimbursement pressures, health care reform, and increased expenses such as for electronic medical records, physician consolidation is occurring across the country, and there are indications that it is an increasing focus of antitrust enforcement efforts, both at the FTC and at state levels.  This attention goes beyond hospital acquisitions of physician groups, as was at issue in the recent St. Luke’s case.  Here is a concrete example of such enforcement, involving one specialty in one County.

Even more interestingly, the FTC (and DOJ) has proclaimed multiple times its preference for structural relief.  Here, there had already been a marketplace event akin to a divestiture, as some of the Keystone doctors broke off to form a competing group.  Even the FTC’s analysis acknowledged that the concentration levels alleged in the complaint had been reduced.  Nonetheless, the Commission went forward with a complaint and consent decree.

The FTC imposed two additional remedies: (1) agency oversight to approve or deny all of OA and Keystone’s orthopedist hiring decisions for the next decade, and (2) the reopening of contract negotiations between both practices and health plans serving Berks County.  The former was aimed at preventing Keystone from recreating the market power the FTC perceived; the latter was to eliminate the supracompetitive reimbursement prices Keystone had obtained before the physicians had broken off to form OA.[1]

The inclusion of OA as a respondent and subject to the consent decree is also noteworthy.  The Staff’s analysis of the Consent Order explained that OA “is a named Respondent because its orthopedists helped form Keystone and benefitted from Keystone’s post-merger price increases.”

More importantly, the Commission explained that putting OA under the Order was necessary to obtain appropriate relief.  The Commission indicated that the structure of the market shows signs of vulnerability to coordinated conduct — particularly because of the close ties developed between Keystone and OA; Keystone and OA orthopedists jointly negotiated with payors and shared price information for over three years before the OA physicians left Keystone.  The relief in the Order was designed to limit the risk of coordination between them.

Finally, it is worth underscoring that the FTC pursued here a non-reportable physician consolidation, underscoring that a transaction that does not require a Hart-Scott filing is still not necessarily safe from antitrust scrutiny.