Denial of St. Luke's Appeal Shows Importance of Competitive Review of Transactions02.16.15
Healthcare providers planning a merger must conduct an antitrust analysis that considers market share, the ability to negotiate higher reimbursement rates with insurers and ease of entry into the market, even if the proposed transaction would likely result in increased quality through coordinated care. In a widely anticipated decision, Saint Alphonus Medical Center - Nampa, Inc. et. al v. St. Luke’s Health System, Ltd., et. al, No, 14-35173 (9th Cir., February 10, 2015), the Ninth Circuit affirmed the decision of the U.S. District Court for the District of Idaho ordering divestiture of St. Luke’s 2012 acquisition of Nampa, Idaho-based Saltzer Medical Group, even though the Court agreed that the merger would likely improve patient care. Providers considering a combination in an effort to coordinate care must consider that any benefits arising from such a transaction may not save it if there is a substantial risk of anticompetitive effects based on a traditional antitrust analysis.
The Court upheld the district court’s judgment in favor of the FTC, the State of Idaho, and two local hospitals, which held that the proposed transaction violated Section 7 of the Clayton Act. This section bars mergers whose effect “may be substantially to lessen competition, or tend to create a monopoly.” The court ruled that evidence of possible efficiencies resulting from a merger must show a positive effect on competition. Providing evidence of better patient outcomes through implementing goals of the Affordable Care Act will not overcome antitrust concerns. As the Court stated, “the job before us is not to determine the optimal future shape of the country’s health care system, but instead to determine whether this particular merger violates the Clayton Act.”
St. Luke’s acquisition of Saltzer would have created a dominant provider of primary care physician services in Nampa, Idaho, where Saltzer was the largest provider of adult primary care physician services, with 16 primary care physicians. St. Luke’s had eight primary care physicians, and Saint Alphonsus Health System had nine. Several other primary care doctors had solo or small practices.
The defendants asserted that the merger would allow St. Luke’s to move toward integrated care and risk-based reimbursement. The Court stated that any claimed efficiencies must be merger-specific and found no evidence to support the theory that St. Luke’s needed an additional core group of employed primary care physicians in order to transition to integrated care. More importantly, the Court also ruled that a defense relying on transaction efficiencies would be permissible only in cases where the proposed merger would create a more efficient combined entity and thus increase competition. Even if the efficiencies had been merger-specific, the Court noted that the defense would have failed because St. Luke’s had not shown that the asserted efficiencies would have a positive effect on competition. The Clayton Act does not excuse mergers that lessen competition simply because the merged entity can improve its operations or even improve the quality of patient care.
The Court also upheld the district court’s remedy. St. Luke’s argued that Saltzer would no longer be able to compete post-divestiture and that divestiture would therefore not restore competition in the Nampa primary care physician market. The Court noted that, in opposing a preliminary injunction, St. Luke’s had assured the district court that divestiture was feasible. Also, Saltzer’s employees had been assured by management that they would retain their jobs regardless of the outcome of the litigation. Defendants should note that such statements in the course of litigation may be used against them later when challenging a particular remedy.
Based on the results in this case, providers considering consolidation should not rely on expected efficiencies and quality of care improvements from coordinated care unless they can show that the transaction at issue is necessary to reach the desired goals and is not likely to substantially lessen competition. Attaining the goals of the Affordable Care Act may very well be trumped by concerns about competition. Parties should therefore not neglect an antitrust analysis in advance of consummating such transactions.