Ninth Circuit Unwinds Idaho Health System’s Acquisition of Physician Group

Court Rejects Argument the Transaction Was Necessary to Improve Efficiencies and Meet ACA Goals

February 19, 2015

The Ninth Circuit Court of Appeals recently ruled that an Idaho health system’s acquisition of the largest independent multi-specialty physician group in Idaho violated federal antitrust law. The Court rejected defendants' claim that the integration accomplished by the acquisition was necessary to achieve efficiency goals of the Affordable Care Act (ACA). 

The Federal Trade Commission (FTC), the State of Idaho, and two local hospitals challenged the 2012 acquisition of Saltzer Medical Group, P.A. by St. Luke’s Health Systems, Ltd. The district court initially denied the FTC’s motion to block the acquisition. However, following a trial, the district court held that the Clayton Act and the Idaho Competition Act prohibited the acquisition because of its anticompetitive effects on the adult primary care physician (PCP) market in Nampa, Idaho, a city with slightly more than 80,000 people located 20 miles from Boise. It ordered St. Luke’s to divest its ownership of Saltzer.

Effect on Rates

The district court concluded that St. Luke’s and Saltzer had been each other’s closest PCP competitors and would likely use their post-merger power to negotiate higher reimbursement rates from insurers. In reaching this conclusion, the court cited to pre-acquisition internal correspondence showing that the merged companies intended to use their increased bargaining power to raise prices.

Relevant Market

St. Luke’s argued on appeal that the geographic market of Nampa was too narrow. But the Ninth Circuit upheld the district court’s finding that Nampa was a properly defined geographic market, relying on evidence that commercial health plans must include Nampa PCPs in their plans offered to Nampa residents.  The Ninth Circuit was not persuaded that Boise should be included in the relevant market even though one-third of Nampa residents travel to Boise to see a PCP.  The Ninth Circuit dismissed this as evidence of Nampa’s residents’ willingness to travel beyond Nampa to see a PCP because those residents that saw a PCP in Boise also worked in Boise.

“Efficiencies” Defense Rejected

St. Luke’s also argued on appeal that any harm the acquisition may cause to competition in Nampa was outweighed by its pro-competitive benefits, including facilitating St. Luke’s provision of integrated care and risk-based reimbursement—both encouraged by the ACA. St. Luke’s, for example, argued that the merger would create a team of employed physicians with access to the electronic medical records system used by St. Luke’s.

While the Ninth Circuit noted it was “skeptical” of the efficiencies defense in general, it did not reject the defense as a matter of law. However, it held that St Luke’s did not establish the defense, noting that a defendant must “clearly demonstrate” that “the proposed merger enhances rather than hinders competition because of the increased efficiencies.” Even though the Ninth Circuit observed that the transaction would eventually improve the delivery of health care in the Nampa market, it concluded that St. Luke’s failed to demonstrate that efficiencies resulting from the acquisition would have a net positive effect on competition. The Court also stated that although the ACA’s goals for providing quality care are “laudable,” “the Clayton Act does not excuse mergers that lessen competition or create monopolies simply because the merged entity can improve its operations.”

Practical Implications of the Decision

This case marks the federal antitrust enforcers’ latest in a string of victories in health care merger cases. It is significant because it demonstrates that:

  • ACA’s push toward integrated care does not relieve defendants from demonstrating that claimed efficiencies are merger-specific and clearly outweigh potential anticompetitive effects. Parties intending to rely on the “efficiencies” defense must present substantial evidence that the impact will be a net positive.
  • Small transactions in narrowly-defined markets are not immune from the reach of the antitrust enforcers. The St. Luke’s/Saltzer transaction resulted in a combination of only 24 PCPs valued at only $9 million—a transaction small enough that it did not require Hart-Scott-Rodino approval—in a “market” consisting of a Boise suburb with a population of slightly more than 80,000.
  • Contemporaneous documents (including emails) may doom a transaction. Here, pre-acquisition internal emails discussed the transaction as a means of increasing the parties’ leverage in payor negotiations. Parties contemplating transactions with competitors should, at a very early stage, review their existing documentation and avoid creating documents that may give the unintended impression the transaction will raise prices or reduce output.

For more information on this article or on health care antitrust issues, please contact Howard Iwrey at (248) 203-0526, Eric Klein at (248) 203-0891, any of the attorneys in Dykema’s Antitrust & Trade Regulation team, or your relationship attorney.

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