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Court Upholds FTC’s Aggressive Position on Anti-Competitive Acquisitions by Hospitals

By on April 8, 2015 in Uncategorized with 0 Comments

As part of the recent tidal wave of physician practice groups being swallowed up by ever-growing hospital systems, the Federal Trade Commission (the “FTC”) has taken an increasingly aggressive position that certain acquisitions threaten trade, are anti-competitive, and must be divested.  Most recently, last month, the influential federal Ninth Circuit Court of Appeals issued an alarming decision largely upholding the FTC’s position.  In light of the FTC’s newly aggressive stance, and supporting federal appeals court decision, providers must actively assess the viability of their mergers and acquisitions through the lens of whether such a merger or acquisition stifles competition, is anti-competitive, or whether it negatively effects healthcare consumers. [1]

Litigation began in 2012 when the Saint Alphonsus Medical Center, a rival health system of the St. Luke’s Health System, both of which operate hospitals and employ physicians in the suburbs of Boise, Idaho, filed a lawsuit to challenge the proposed acquisition by St. Luke’s of the 41-physician Saltzer Medical Group.

Soon after filing the lawsuit, St. Luke’s completed the acquisition — however, the completion of the acquisition was not ultimately a barrier to Saint Alphonsus proceeding with its lawsuit.  The FTC joined entered the mix as a co-plaintiff in early 2013.

In 2014, following a bench trial, the trial-level district court found that the acquisition violated Section 7 of the Clayton Act, 15 U.S.C.A. § 12 et seq., determining that such an acquisition threatened to reduce competition in the adult primary care physician services market in the town of Nampa, Idaho, a suburb of Boise.

Of note, for the first time, the FTC litigated, through trial, a challenge to a physician group acquisition by a health system, suggesting a shift in policy for the Obama administration and an FTC that is looking more closely at the effects on health-care consumers of the wave of hospital-physician group mergers and acquisitions.

The Ninth Circuit determined that its analysis would be limited to the geographic market to Nampa, rather than a much broader market argued by St. Luke’s. In Nampa, the market share of the merging parties were high, together Salzter and St. Luke’s accounted for almost 80% of the Nampa primary care physician market.

A commonly used metric for determining market share is the Herfindahl-Hirschman Index (the “HHI”). The analysis considers both the post-merger level of the HHI and the increase in the HHI resulting from the merger.  The merger guidelines, utilized by regulatory agencies in reviewing the competitive/anti-competitive results of mergers and acquisitions, classify markets as (1) unconcentrated (HHI below 1500); (2) moderately concentrated (HHI between 1500 and 2500); or (3) highly concentrated (HHI above 2500).  Sufficiently large HHI figures establish the FTC’s prima facie case that a merger is anti-competitive. The district court calculated the post-merger HHI in the Nampa primary care physician market as 6,219, and the increase as 1,607.

Though the market shares were high, the number of physicians involved was surprisingly small as Saltzer employed sixteen primary care physicians in Nampa, St. Luke’s employed eight, and rival Saint Alphonsus employed only nine, again suggesting that the FTC is taking a more aggressive approach with regard to mergers and acquisitions, even when the total number of physicians involved was only thirty three.

Notably, the Ninth Circuit rejected the idea that an anti-competitive merger could be justified because a merger will produce efficiencies. The Ninth Circuit even accepted the lower court’s finding that the acquisition would improve health care in the area but said, given a very anti-competitive acquisition, efficiencies alone were insufficient so save an otherwise illegal acquisition.

Of perhaps the most importance, the Ninth Circuit rejected the argument that if a merger is anti-competitive, a remedy less than divestiture is sufficient to protect competition — rather, the Ninth Circuit found divestiture is simple to administer is the preferred remedy for anti-competitive mergers between hospitals and physician groups.

Again, as hospitals are in the process of actively acquiring and merging with physician groups, the FTC has equally become active in scrutinizing, and litigating through trial, mergers and acquisitions which it believes threaten trade and are anti-competitive, even when the number of physicians who are part of the transaction are low.  With the Ninth Circuit’s decision largely upholding the FTC’s position, providers need to continually examine how any proposed merger or acquisition effects trade, competition, and ultimately the healthcare consumer.

[1] See St. Alphonsus Med. Ctr. – Nampa, Inc. v. St. Luke’s Health Sys., 2015 U.S. App. LEXIS 2098 (9th Cir. Idaho Feb. 10, 2015), affirming, St. Alphonsus Med. Ctr.-Nampa, Inc. v. St. Luke’s Health Sys., 2014 U.S. Dist. LEXIS 9264 (D. Idaho Jan. 24, 2014).


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