Last month, a federal appellate court issued a decision that may have wide-reaching implications for acquisitions and mergers of physician practices. The 9th Circuit Court of Appeals upheld a challenge by the Federal Trade Commission (FTC) and competing hospitals to the December 2012 acquisition of a 40-physician group practice in Canyon County, Idaho, by St. Luke’s Healthcare System in Boise, Idaho. The 9th Circuit upheld a district court’s determination that the acquisition violated state and federal antitrust laws and had to be unwound.
The deal at issue involved the largest independent physician practice in Idaho, Saltzer Medical Group, and the largest hospital system in Idaho at the time, St. Luke’s Health System, a non-profit system with nine hospitals in Southern Idaho. The acquisition gave St. Luke’s ownership of 80 percent of the primary care practices in Namba, Idaho, a city located about 25 miles from Boise. St. Luke’s had paid approximately $28 million for the practice and the physicians get to keep almost $9 million if the transaction is actually unwound.
In its decision issued in January of 2014, the district court had specifically found that the transaction would increase healthcare costs for both consumers and payors. The lower court judge determined that the transaction would allow St. Luke’s to dominate the health care market in Canyon County and use this dominance to pass rate increases onto payors and consumers. He also found that St. Luke’s would impose higher hospital-based rates for ancillary services such as lab work and x-rays.
St. Luke’s argued that the acquisition was necessary to maintain and improve patient care. The health system contended that the deal was necessary to implement an innovative payment system whereby providers would be paid for quality. St. Luke’s also argued that the deal would help stabilize insurance rates in Idaho and permit greater numbers of indigent patients to get medical care.
Lawyers for the FTC introduced internal emails and accounts of conversations to demonstrate that executives wanted to acquire the Saltzer practice for economic reasons and to avoid competition with the Saltzer doctors and other hospitals for market share in Canton County. They also provided evidence that other acquisitions of physician practices had raised costs and stifled competition.
Idaho’s Attorney General had supported the challenge to the transaction and argued that the transaction also violated state prohibitions on monopolistic behavior. In August of last year, the attorneys general of 16 states filed a brief supporting the district court’s decision and the position of the Idaho Attorney General. Although they recognized the benefits of healthcare integration, they argued that these benefits could be obtained without the actual large-scale consolidation of hospital and physician care.
Because this decision follows a string of FTC successes in challenges to physician practices, a number of national experts believe that this case will have a chilling effect on mergers and acquisitions involving large physician practices, unless the acquiring party has some sort of sustainable exception from antitrust review such as a state law protection. Problematically for mergers and similar transactions, it appears as though the FTC is able to assert successfully that healthcare markets are local as opposed to regional or statewide for assessing the resulting consolidated market share. Moreover, it appears as though the consolidation of primary care practices may be subject to heightened scrutiny because of their role as “gatekeepers” to specialists and health care systems.
This case arguably undermines efforts to achieve greater integration of healthcare delivery through common ownership and legal acquisitions. There is no question that hospitals and their counsel will become more conservative in pursuing the acquisition of larger physician practices. As pointed out in the two decisions in this case, however, similar levels of clinical integration and efficiencies may be achieved through more innovative methods such as co-management agreements, the sharing of health information systems or accountable care organizations. These mechanisms may become even more commonplace.
It will be interesting to see what impact, if any, the St. Luke’s case and other physician practice challenges will have on the cases pending against various Blue Cross/Blue Shield plans with respect to their market power and consolidation. It would seem unlikely that federal courts will only rule against physicians and hospitals for anticompetitive behavior if federal courts remain so focused on the ultimate costs to employers and consumers.
It is also important to note that the St. Luke’s case may end up at the United States Supreme Court and that a more definitive national set of standards may emerge for the review of physician practice mergers and acquisitions.
Colin Luke is the former chair of the Alabama Bar’s Health Law Section and is a partner with Waller where he specializes in healthcare law.