In the first litigated Federal Trade Commission (FTC) challenge to a hospital-physician group merger, a federal court found the merger violated the Clayton Act and ordered divestiture. This was a small case (the acquisition price was US$16 million), involving a small community, and the technical antitrust issues were clearly on the FTC’s side. But the case raises broader social issues – whether the antitrust laws are the best way to regulate the changes of the medical industry in small communities where a major buyout may be the only way to upgrade the medical facilities, enhance medical delivery, and ultimately benefit the community.

FTC v. St. Luke’s Health System (D. Idaho, Jan. 24, 2014) involved a hospital’s acquisition of the leading local physician’s group in Nampa, Idaho (population 81,000). Hospital acquisitions of physician groups is a rapidly accelerating trend in the US, driven at least partly by the Affordable Care Act’s push to eliminate the traditional feefor- service model and move to one where many different medical practitioners take joint responsibility for a single patient’s “wellness.”

Here, the judge found that St. Luke’s Hospital foresaw the trend towards integrated health care. In fact, the court repeatedly complimented both merger parties on their foresight and vision, and their dedication to improving medical care in the community. Unfortunately, they were so aggressive in executing that vision that they ended up with 80 percent of the primary care physicians in town, no prospect of new entry and a post-transaction HHI over 6,200 (2,500 is presumptively anti-competitive).

That alone would normally be enough to condemn the transaction, but there were other egregious facts. Essentially, the court found that the merger combined not only the two largest primary-care providers, but that it also merged the closest substitutes; that the merger stripped buyers of the ability “to walk away” from negotiations, because there was essentially no other first-choice provider to walk towards; that medical costs to insurers would increase; and that referrals to physicians outside the group would shrink or disappear. And, as is typical, the internal documents contained what were, at the very least, ambiguities, such as “Price Increase ($ unknown)” and “Pressure Payors for new/direct agreements.” Among other things, St. Luke’s also projected increasing revenues by escalating office charges to “hospital” rates. For example, the price of routine services, such as x-rays or lab tests, were more expensive when billed as “hospital rates,” even when the tests were done in their original locations. It is possible that these statements were taken out of context, and it also seems likely that the merger parties did not document their intentions properly.

The FTC (and others) sued to challenge the merger, winning a divestiture order. The hospital intends to appeal. Based on these facts, this merger seems like a prototype loser. So much so, that you might wonder why the parties even tried the transaction.

But presumably what motivated them were the unique factors affecting US health care. As the judge pointed out in this case, in the rankings of global spending on health care, the US spends more than the next ten countries combined – but ranks last out of 16 industrialized countries (measured on mortality amenable to medical care). The judge credited the expert testimony that the only way to change this failing health model was to adopt an integrated health care model that involves vast and fundamental changes to the medical industry. But this noble goal is saddled with huge expenses to pay for the conversion. As just a single example, integrated medical care is not possible without an electronic medical records system. But the Rand Institute estimated that the cost of the records project alone would be a staggering US$115 billion.

Hospitals and medical groups now argue that, given the impending fundamental changes in health care, declining hospital revenues, the need for efficiencies and economies of scale, the shift from paid services to delivering value, the huge cost of funding these changes and the increasing difficulty in raising capital, large-scale consolidation is the only solution. That works great in metropolitan areas, where there are large groups of medical facilities.

But what about small, isolated communities, like the one in Nampa, Idaho? The judge found that no entry was likely because young physicians don’t want to live or work in isolated communities, and patients are not going to drive 30 miles just to see a primary care physician. This is not the first time that an FTC “victory” left the community with the appearance of competition but the actual prospect of being served by a medical facility that can’t afford to buy new medical equipment and can’t attract young physicians. Last year, even the Secretary of Health and Human Services observed that some provisions of the ACA, such as the call for integration and economies of scale, were in “constant tension” with the antitrust laws.

The judge in this case diligently applied the Clayton Act standards to this merger and found it wanting. But, conspicuously, the judge was sensitive to issues that went beyond antitrust law. For example, throughout the decision, he emphasized the radical change that was needed to try to repair the US medical system by adopting an integrated treatment model. The court repeatedly acknowledged that the goal of the merger parties was to improve patient care. And he found that the physician’s group did try unsuccessful alternatives short of merger, like partnering with other hospitals (including one of the co-plaintiffs), and joint venturing with St. Luke’s (as opposed to a full merger). But after three years of only “limited success,” they decided to merge. Had the parties documented their efforts better, the outcome might have been different. The merger issues in this case are a small example of a larger picture that is playing out across the US, where buyouts seem to be a community’s best hope for newer, better facilities and the delivery of higher levels of medical care. And even though the judge condemned the merger for failing the Clayton Act test, he seemed to have questions about the ultimate benefit of a purely antitrust analysis:

“In a world that was not governed by the Clayton Act, the best result might be to approve the Acquisition and monitor its outcome to see if the predicted price increases actually occurred. In other words, the Acquisition could serve as a controlled experiment.

“But the Clayton Act is in full force, and it must be enforced. The Act does not give the Court discretion to set it aside to conduct a health care experiment.”

The bottom line is that the pure, technical antitrust answer in this case may be easy. But the antitrust laws are also supposed to be consumer protection laws. As medical facilities in smaller communities come under intense pressure to meet new requirements, the question here really is whether competition is the best way to regulate medical services in small communities. The teaching of this case is two-fold. First, Medical practitioners who want to merge for scale or efficiency cannot expect any leniency from the antitrust agencies, which will continue to apply standard merger law. Second, accepting that it might be a long shot, the medical community might consider an extensive lobbying program for some form of regulation that would displace competition. Though it is unlikely to happen on the federal level, state legislatures can and have granted antitrust immunities for activities within their own area of jurisdiction, including the delivery of medical services. The trade-off would obviously deliver the benefits of scale and efficiency, but at the cost of a regulated cap on charges.