On January 24, 2014, the U.S. District Court in the District of Idaho ruled in favor of the Federal Trade Commission (the “FTC”), the State of Idaho, and competing health plans in their challenge to St. Luke’s Health System Ltd.’s acquisition of Saltzer Medical Group, P.A. (“Saltzer”), and ordered St. Luke’s to fully divest itself of Saltzer’s physicians and assets.1
The court agreed with the FTC and the Idaho Attorney General that the transaction would likely have anticompetitive effects in the sale of adult primary care services to commercially insured patients in Nampa, Idaho (near Boise). Specifically, the court predicted that the combined entity’s dominant market position would enable it to negotiate higher insurance company reimbursement rates (that would not be passed on to consumers), and raise rates for ancillary services (like x-rays) to higher hospital-billing rates.2 The court noted that St. Luke’s intent was to provide better care, but commented that there were less antitrust problematic ways to achieve this goal.3 St. Luke’s challenged the district court’s findings by explaining that hospital-based billing is regulated under Medicare laws, and emphasizing that previous price increases after similar acquisitions by St. Luke’s were not above market levels. St. Luke’s noted that “any increase in price was designed to enable St. Luke’s to provide the community with better health care locally.”4
The FTC’s challenge to this acquisition is notable for a number of reasons. It is the first time a federal antitrust agency has challenged a hospital group’s merger with a physician practice group. Although the value of the business being acquired was below the Hart-Scott-Rodino Act’s “size of transaction” threshold, and the transaction was not reportable to the federal antitrust agencies, the FTC and the State of Idaho joined the group of other health care providers in their lawsuit challenging the transaction after it had closed.
At issue in the suit was the 2012 acquisition by St. Luke’s, which operates seven hospitals in Idaho and employs 500 physicians in numerous medical specialties,5 of the 41 physicians affiliated with Saltzer, a group of doctors the FTC identified as “the largest independent, multi-specialty physician practice group in Idaho.”6 Prior to the fall of 2011, St. Luke’s did not employ any primary care physicians (“PCPs”) in Nampa, Idaho, but since then they have been recruiting PCP’s to join St. Luke’s.7 In November 2012, St. Alphonsus Health System, Inc. and Treasure Valley Hospital LP, rival hospitals in Nampa, sued to block the acquisition, claiming “that St. Luke’s has a demonstrated pattern of cutting off referrals to nearby hospitals after it purchases physician groups like Saltzer,”8 and alleging anticompetitive effects in the PCP market as well as additional physician, hospital, and surgical services markets in Nampa and the surrounding area.9 The plaintiffs’ motion for a preliminary injunction was denied because the court believed at that time that there would not be a measurable reduction in referrals to St. Alphonsus from Saltzer’s physicians in the near term, and St. Luke’s would not immediately integrate Saltzer, allowing for divestiture if the plaintiffs prevailed at trial.10
The acquisition was valued below the applicable transaction size threshold of the HSR Act,11 and therefore was not subject to pre-closing review by the federal antitrust agencies. Nevertheless, The FTC challenged the acquisition as anticompetitive in March 2013, claiming it would give St. Luke’s the market power to demand higher rates for health care services provided by PCPs in Nampa, leading to higher health care costs for consumers.12 The FTC and Idaho case was consolidated with that of the competing health plan competitors in March 2013, and according to the joint complaint the acquisition resulted in St. Luke’s enjoying nearly 60% of the adult PCPs in Nampa.13
During the bench trial in October 2013, the plaintiffs claimed that the acquisition resulted in St. Luke’s becoming the largest provider of PCP services in Nampa. 14 The FTC put forth evidence showing that the measure of market concentration (the “HHI Index”) post-merger would be 6,219, more than twice the “highly concentrated” HHI level set forth in the federal antitrust enforcers’ Horizontal Merger Guidelines. The plaintiffs also claimed that the merger would combine the first and second largest providers for PCP’s in the area, and noted that they were each other’s closest substitutes.15
The FTC introduced testimony from Blue Cross of Idaho (“BCI”), the largest health plan in Idaho,16 that Saltzer was a “must have provider” in Nampa. The FTC relied on BCI statements and company documents in claiming that St. Luke’s had such pre-acquisition leverage that BCI had no choice but to give in to their pricing demands, and post-acquisition the merged entity’s enhanced bargaining leverage would allow it to charge services at higher rates.17
The FTC also claimed that St. Luke’s would use its enhanced bargaining power to charge more for services that would be rendered post-acquisition in a hospital instead of at a physician’s office. According to testimony by BCI, costs under BCI commercial contracts would rise by 30-35 percent if the combined entity were to start billing for such services (such as x-rays, lab tests and therapy services, among others) at the higher “hospital-based” rates. St. Luke’s internal documents also showed increased revenue from hospital-based billing.18
Saltzer claimed that its primary motivation for affiliating with St. Luke’s was “to provide the best possible health care to the community,” and stated that it believed that the acquisition would “increase the likelihood that St. Luke’s would invest the time, resources , and risk to bring much-needed additional services and facilities to Canyon County.”19 Saltzer did not believe it was big enough on its own to pursue some of the services and cost cutting made possible through a close affiliation with St. Luke’s.20
District Court Decision
The District Court based its decision to unwind the acquisition on the fact that it resulted in a 80% market share for St. Luke’s in PCP services in Nampa, which would give St. Luke’s a dominant bargaining position over health plans in the Nampa market.21 The court was of the view that it would be highly likely that St. Luke’s would use this bargaining leverage to receive increased reimbursements that health plans would pass along to consumers. The court did recognize that the acquisition was intended primarily to improve patient outcomes, and that St. Luke’s had been responsible for recent improvements in health care in the area. 22 In sum, the court was convinced that the level of increase in bargaining power was in violation of Section 7 of the Clayton Act and the Idaho Competition Act, and that “although possibly not the intended goal of the acquisition, it appears highly likely that health care costs will rise as the combined entity obtains a dominant market position that will enable it to (1) negotiate higher reimbursement rates from health insurance plans that will be passed on to the consumer, and (2) raise rates for ancillary services … to the higher hospital-billing rates.”23
St. Luke’s post-decision press release explained that it would only be entitled to increased revenue from hospital-based billing rates under the federal Medicare program “if St. Luke’s invested the resources to meet the requirements for [hospital-based] facilities…. Significantly, St. Luke’s financial modeling did not anticipate any increase in payments from commercial health plans for Saltzer physicians’ services.24 In particular, St. Luke’s noted, among other things, that (i) the “potential for increased revenue from the Medicare program has nothing to do with market power,” (ii) it “estimated the upper limit of potential reimbursement changes by applying St. Luke’s existing rates to Salter’s historical volumes of ancillary services,” and (iii) the hospital did not anticipate or model any change in commercial reimbursements for adult primary care physicians’ services – the only product of concern in the government plaintiffs’ case.”25
One of the major efforts of the Affordable Care Act (“ACA”) was to consolidate physician groups, so they can be modeled after integrated health systems such as the Minnesota’s Mayo Clinic or California’s Kaiser Permanente.26 In furtherance of this goal, hospitals are rapidly buying physician practices to create integrated health systems. According to one report, only 39 percent of physicians practice independently today, down from 57 percent in 2000.27 St. Luke’s had acquired other physician groups over the past few years; this acquisition apparently was the one that went too far for the FTC. A similar result happened recently in the airline industry after years of consolidation.28
The federal antitrust agencies, at times joined by the states, have a long history of challenging hospital mergers. However, this decision is the first by a federal reviewing agency to go to trial challenging a hospital group’s purchase of a physician practice group.29 These types of challenges have typically been resolved through consent decrees.30 That said, this is just one of a continuing string of transactions demonstrating that the enforcement agencies are willing to challenge non-HSR reportable deals post-closing, and if necessary, even to pursue litigation to reverse the effects of acquisitions they believe to be potentially anticompetitive.
The federal enforcement agencies have shown flexibility in using conduct remedies in recent merger challenges. Indeed, previous challenges to physician practice consolidations have been resolved with remedies such as the FTC’s 2012 settlement with Renown Health, the largest provider of acute care hospital services in northern Nevada. In that case, the acquiring party agreed to release its cardiologist employees from “non-compete” contract clauses, allowing up to 10 of them to join competing cardiology practices in the Reno area.31 Here, St. Luke’s had earlier convinced the court not to grant a preliminary injunction stopping the acquisition by agreeing it would not later oppose a divestiture order.32 Thus, the FTC was able to obtain its preferred remedy despite the potential cost and complexity of unwinding the transaction.