On December 15, 2017, United States Magistrate Judge Alice Senechal of the District of North Dakota entered an order preliminarily enjoining the merger between two large physicians practices in the Bismarck/Mandan market, Sanford Bismarck and Mid-Dakota Clinic, PC, on the grounds that the proposed merger would substantially lessen competition in four physician service lines: General Surgery, OB/GYN, Adult Primary Care and Pediatric Services. FTC and State of North Dakota v. Sanford Health, Sanford Bismarck and Mid-Dakota Clinic, P.C., Case No. 1:17-133 (USDC, N.D.) The Court found that the proposed merger would result in significantly increased concentration levels in each of the four physician service lines which were already highly concentrated prior to the proposed merger. As a result of the merger, the combined entity would have had between 80% and 100% of the market share of the four service lines in question. In granting the preliminary injunction, the Court rejected Sanford’s defenses based on enhanced efficiencies and the need to maintain its negotiating power with Blue Cross/Blue Shield of North Dakota, which is the largest commercial insurer in North Dakota. The Court also discounted Sanford’s promise to not to raise reimbursement rates. The Court found instead that the creation of a near monopoly provider of physician services in the Bismarck-Mandan area would likely lead to higher reimbursement rates and higher premiums for consumers.
As an initial matter, the Court found that the relevant product market was the sale of the four physician services to commercial health insurance plans. The Court specifically excluded Government payers from the market. More specifically, it found that the products in question, Adult Primary Care Physician Services, Pediatric Services, OB/GYN Services and General Surgery were separate product markets without close substitutes. The Court also found that the relevant geographic market was the Bismarck-Mandan area and that commercial health insurers would accept a small but significant non-transitory increase in price post-merger rather than accept a plan in the Bismarck-Mandan area that did not include Bismarck-Mandan area physicians in those four specialties.
The Court rejected the “powerful buyer defense” in light of testimony from Blue Cross/Blue Shield of North Dakota that it would be forced to agree to increase reimbursements to a post-merger Sanford and also because it found that Blue Cross/Blue Shield North Dakota actually does negotiate and modify contract terms currently with providers and is not able to largely dictate terms to providers. The Court also rejected the defense that there would be entry of new physicians into the marketplace in response to the merger. The Court concluded that the evidence did not demonstrate that Sanford’s chief competitor, CHI, would be able to recruit enough physicians to timely replace the lost patient referrals from MDC physicians who currently refer to CHI’s competing hospital. The evidence showed that recruitment of physicians to North Dakota was difficult historically due to the weather and other market conditions. Finally, the Court rejected the defense that MDC would go out of business without the opportunity to merge with Sanford. There was evidence in the record that MDC’s finances were strong.
There was much more to this case than just the proposed physician practice merger. MDC had previously attempted to merge with CHI, but CHI had cancelled the deal at the last minute, leading to hard feelings. Sanford is a very large regional player in the upper Mid-West with a long record of growth by acquisition. The FTC’s challenge of this deal was likely meant to send a message to Sanford that its acquisitions would face careful review in the future. What’s more, because Sanford is an integrated network, including a hospital and insurance plan, the impact of the merger would affect more than just the physician services market. Sanford Health Plan had already taken significant government business away from Blue Cross/Blue Shield of North Dakota and the combined Sanford physician and MDC groups would clearly have given Sanford the ability to drive business to Sanford’s health plan in the Bismarck-Mandan area. Furthermore, it was clear that the loss of referrals from MDC to the competing hospital, CHI, would be significant and would weaken CHI as a hospital competitor.
This was a merger that was doomed from the beginning. The consultants from Deloitte should have advised the two practices that this merger would never be approved. The increase in HHI concentration levels was significant (HHI increases ranging from 1100 points to 4400 points). Sanford is the largest private employer in the State of North Dakota and its merger with MDC would have created a virtual monopoly in these four significant service lines in the relevant market. The message here, as it was in the St. Luke’s merger in Boise, Idaho, is that mergers of this type, especially in rural areas where entry is going to be difficult and where markets are relatively well-defined, are not likely to succeed. Organic growth by recruitment would have been more likely to have succeeded in this case.