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From Antitrust Law Daily, February 10, 2015

Order to unwind merger of Idaho health care providers upheld

By Jeffrey May, J.D.

The 2012 merger of two health care providers in Idaho's second-largest city, Nampa, was properly found to violate Section 7 of the Clayton Act, the U.S. Court of Appeals in San Francisco ruled today. A decision of the federal district court in Boise, ordering St. Luke’s Health System, Ltd.—the largest health care system in Idaho—to divest Saltzer Medical Group—the state’s largest independent, multi-specialty physician practice—was upheld (Saint Alphonsus Medical Center-Nampa Inc. v. St. Luke’s Health Systems, Ltd., February 10, 2015, Hurwitz, A.).

Like the trial court below, the appellate court noted how the case demonstrates the possible tension between health care policy and the federal antitrust laws. The district court had concluded that the merger violated the antitrust laws, even though it believed that the merger might “improve patient outcomes” if left intact. In any event, the appellate court explained that “the job before [it was] 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.”

In 2012, St. Luke’s acquired Saltzer’s assets and entered into a five-year professional service agreement. Saltzer was the largest adult primary care physician (PCP) provider in the Nampa market, and St. Luke’s had eight PCPs.

The challenge to the merger was initiated in November 2012 by Saint Alphonsus Health System, Inc. and Treasure Valley Hospital (TVH). Saint Alphonsus is the operator of the only hospital in Nampa. With TVH, Saint Alphonsus also operates an outpatient surgery center. In Nampa, Saint Alphonsus had nine PCPs.

After a preliminary injunction was denied in the action brought by the private parties, the FTC and the State of Idaho filed a complaint, and the cases were consolidated. Following a 19-day bench trial, the district court found the merger had anticompetitive effects on the Nampa adult PCP market and ordered divestiture.

Relevant market. The district court did not err in its factual finding that the relevant geographic market for purposes of evaluating the merger's competitive effects was limited to Nampa. The parties had agreed to define the relevant product market as adult PCPs. Adult PCP services included internal medicine, family practice, and general practice physician services for commercially insured patients aged 18 and over.

According to the appellate court, the district court properly determined that consumers would not look to purchase PCP services outside the proposed geographic market in the event of a “small but significant nontransitory increase in price” (SSNIP) in the proposed market. Thus, a hypothetical Nampa PCP monopolist could profitably impose a SSNIP on insurers. There was evidence that insurers needed local PCPs to market a health care plan. The appellate court also ruled that the lower court did not err in concluding that evidence that one-third of Nampa residents traveled to nearby Boise for PCPs did not prove that a significant number of other residents would travel there in the event of a SSNIP.

Prima facie case. The district court did not clearly err in its factual findings supporting its ultimate conclusion that the plaintiffs established a prima facie case that the acquisition was anticompetitive, the appellate court ruled. The extremely high Herfindahl-Hirschman Index (HHI), a commonly used metric for determining market share, standing alone established the prima facie case. The HHI numbers were well above the thresholds for a presumptively anticompetitive merger, it was noted. The appellate court also pointed to a finding that statements and past actions by the merging parties made it likely that St. Luke’s would raise reimbursement rates in a highly concentrated market.

Impact on market for ancillary services. The appellate court, however, took issue with the lower court's finding that St. Luke’s increased leverage with respect to PCP services would allow it to demand higher fees for ancillary services. This finding was not supported by the record. Because there was no finding regarding St. Luke’s’ market power in the ancillary services market, it was difficult to conclude that the merged entity could easily demand anticompetitive prices for such services, the appellate court explained.

Efficiencies. St. Luke’s was unable to rebut the plaintiffs’ prima facie case with predicted efficiencies, the appellate court ruled. Noting that the parameters of the so-called efficiencies defense to a Section 7 claim were imprecise and that the status of the defense in the Ninth Circuit remained “uncertain,” the appellate court assumed that a defendant could rebut a prima facie case with evidence that the proposed merger would increase competition.

The appellate court ruled, however, the district court properly found that, even if the predicted efficiencies were true, they were insufficient to rebut the presumption because they were not merger-specific and would not have a positive effect on competition. The appellate court noted that the defendants failed to show that the prediction of anticompetitive effects from the prima facie case was inaccurate.

“The Clayton Act does not excuse mergers that lessen competition or create monopolies simply because the merged entity can improve its operations,” the appellate court explained. “The district court did not clearly err in concluding that whatever else St. Luke’s proved, it did not demonstrate that efficiencies resulting from the merger would have a positive effect on competition.”

Remedy. Noting that the customary form of relief in Section 7 cases was divestiture, the appellate court upheld the divestiture remedy imposed by the district court. St. Luke’s had unsuccessfully argued that the district court erred in ordering divestiture because (1) divestiture would not actually restore competition because Saltzer would no longer be able to compete post-divestiture; (2) divestiture eliminated the transaction’s procompetitive benefits; and (3) a proposed conduct remedy—the establishment of separate bargaining groups to negotiate with insurers—was preferable.

St. Luke’s reaction. St. Luke’s President and CEO Dr. David Pate said today, following the decision, that the company was disappointed with the outcome. “We will take some time to review the Ninth Circuit’s full decision and evaluate what the next steps might be,” he added.

FTC chairwoman's statement. “Today’s decision by the Ninth Circuit is a win for consumers and healthcare competition in the Nampa, Idaho area,” FTC Chairwoman Edith Ramirez said in a statement today, announcing the decision. “If left unchallenged, St. Luke’s acquisition of Saltzer would have created a dominant provider of physician services for adults seeking primary care in Nampa, leading to higher costs for consumers and employers there. The acquisition would have delivered no benefit to consumers that could not be achieved in ways other than the anticompetitive merger.”

This is Case No. 14-35173.

Attorneys: Keely Elizabeth Duke (Duke Scanlan & Hall) and David A. Ettinger (Honigman Miller Schwartz and Cohn LLP) for Saint Alphonsus Medical Center - Nampa Inc., Saint Alphonsus Health System Inc., and Saint Alphonsus Regional Medical Center, Inc. Raymond D. Powers (Powers Tolman Farley PLLC) for Treasure Valley Hospital Limited Partnership. Michael Daniel Bergman for FTC. Brett T. DeLange, Office of the Attorney General, for State of Idaho. Jack R. Bierig (Sidley Austin LLP) and James Walter Sinclair (Holland & Hart, LLP) for St. Luke's Health System, Ltd., and St. Luke's Regional Medical Center, Ltd. Brian K. Julian (Anderson, Julian & Hull) for Saltzer Medical Group P.A.

Companies: Saint Alphonsus Medical Center - Nampa Inc.; Saint Alphonsus Health System Inc.; Saint Alphonsus Regional Medical Center, Inc.; Treasure Valley Hospital Limited Partnership; St. Luke's Health System; St. Luke's Regional Medical Center, Ltd; Saltzer Medical Group P.A.

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