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Hospital Acquisition of a Large Physician Practice Draws Federal Antitrust Enforcement

February 10, 2014

As hospital mergers increase the market share of certain hospital systems, physician acquisitions by those hospital systems also trigger harsher antitrust scrutiny.

In the first federal case decided against a physician practice acquisition on antitrust grounds, an Idaho District Court held that a hospital’s acquisition of a multi-specialty physician practice group violated Section 7 of the Clayton Act (the “Act”) and state law.  Section 7 of the Act is intended to allow the Federal Trade Commission (“FTC”) to regulate all mergers, and gives the government discretion whether to give approval to a merger or not. Its goal is to prevent monopolies by nipping in the bud mergers that are anticompetitive.  The Court has ordered that the merger be unwound.

In 2012 St. Luke’s Health System (“St. Luke’s”), a six hospital group, paid $16 million to acquire the Saltzer Medical Group (“Saltzer”), a 44 physician multi-specialty group. The acquisition went forward even though two competitor health systems that were dependent on referrals from Saltzer physicians sought a preliminary injunction to block the acquisition on antitrust grounds.  While the Court denied the request for a preliminary injunction, it did not dismiss the case.  St. Luke’s went ahead with the merger despite the pending case.

In March 2013 the FTC and the state jointly filed a complaint seeking the unwinding of the merger on the ground that it was anticompetitive. The suit was joined by the two competitor health systems.

In assessing potential mergers, antitrust enforcement agencies use a scale known as the Herfindahl-Hirschman Index (“HHI”) to determine if the merger needs a closer review.  First, they assess the increase in market concentration from the pre-acquisition level to the post-acquisition level.  If there is too great an increase (more than 200 points), the FTC will scrutinize the merger to determine if there are anti-competitive effects and, if so, are they nevertheless allowable in light of the pro-competitive effects. Here the increase in concentration was 1,600 points.  Also, the post-acquisition market concentration registered 6,219, while 2,500 is considered to be a highly concentrated market.  While this is tediously technical, it was more than enough to trigger antitrust scrutiny by state and federal antitrust officials.

Significantly, under the deal, St. Luke’s acquired a five year agreement for Saltzer physicians to provide services exclusively to St. Luke’s, as well as the ability to negotiate payer contracts and rates for physicians.

The Court found that the acquisition gave St. Luke’s control over 80% of the relevant market, which the Court determined to be adult primary care services provided to commercially-insured patients in the geographic area.  This share of the market created a market dominance that allowed St. Luke’s to command higher rates from commercial payers for both physician services and hospital-based ancillaries. These increased costs would be passed down to employers and their employees. 

Based on the post-merger HHI numbers, the Court found the acquisition by the hospital gave it such market dominance as to be presumptively anticompetitive under the Act.

Interestingly, part of the hospital’s defense was its intention to put together a strong Accountable Care Organization (“ACO”) to integrate care and make it more efficient. While lauding these efforts, the Court found that integrated care could be achieved through commitment and affiliations other than a full merger.  The Court found that the anticompetitive effects of the acquisition outweighed the benefits to be derived from this hospital ownership of a large physician practice, and accordingly ordered the parties to unwind the deal.

The hospital may appeal to the U.S. Court of Appeals for the Ninth Circuit.

A few points to consider:

1. This transaction was well below the dollar threshold for an advance Hart-Scott-Rodino filing. Nevertheless, antitrust enforcement authorities did not hesitate to pursue it well after the closing of the transaction.

2. Claims that ACO integrated system models are pro-competitive because they produce more efficient, cost-effective care will not take precedence over the FTC’s antitrust analysis.

3. While most physician markets are not as highly concentrated as this one became, it is worthwhile for acquisitive entities to consider the relevant market as they integrate with more and more formerly independent physician practices.

If you would like further information about the issues discussed in this newsletter, please contact your regular Murtha Cullina attorney or Kennedy Hudner at 860.240.6029 or khudner@murthalaw.com, Paul Knag at 203-653-5407 or pknag@murthalaw.com, or Stephanie Sprague Sobkowiak at 203-772-7782 or ssobkowiak@murthalaw.com.

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