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From Health Law Daily, February 10, 2015

Health care merger lessened competition, providers must unwind merger

By Harold M. Bishop, J.D.

The Ninth Circuit Court of Appeals has upheld the judgment of an Idaho district court in favor of the Federal Trade Commission (FTC), the State of Idaho, and two local hospitals, which found that, although the merger of two health care providers in Nampa, Idaho was intended to improve patient outcomes and might well do so, it violated Section 7 of the Clayton Act (15 U.S.C. §18), which bars mergers whose effect “may be substantially to lessen competition, or tend to create a monopoly.” The providers were ordered to unwind the acquisition (St. Alphonsus Medical Center-Nampa, Inc. v. St. Luke’s Health System, Ltd.,February 10, 2015, Hurwitz, A.).

Background. Before the merger, St. Luke’s Health Systems, Ltd. (St. Luke’s) operated an emergency clinic in Nampa, Idaho. Saltzer Medical Group, P.A. (Saltzer), the largest independent multi-specialty physician group in Idaho, had 34 physicians practicing at its offices in Nampa. The only hospital in Nampa was operated by Saint Alphonsus Health System, Inc. (Saint Alphonsus). Saint Alphonsus and Treasure Valley Hospital Limited Partnership (TVH) jointly operated an outpatient surgery center. The largest adult primary care physician (PCP) provider in the Nampa market was Saltzer, which had 16 PCPs. St. Luke’s had eight PCPs and Saint Alphonsus nine. Several other PCPs had solo or small practices.

Acquisition. In 2012, St. Luke’s acquired Saltzer’s assets and entered into a five-year professional service agreement (PSA) with the Saltzer physicians. Saltzer received a $9 million payment for goodwill. The initial PSA contained language about the parties’ desire to move away from fee-for-service reimbursement, but included no provisions implementing that goal. An amended PSA, however, contained some quality-based incentives. The merger did not require Saltzer doctors to refer patients to the St. Luke’s Boise hospital, nor did it require that Saltzer physicians use St. Luke’s facilities for ancillary services.

Procedural history. In November 2012, Saint Alphonsus and TVH filed a complaint seeking to enjoin the merger under Section 7 of the Clayton Act. After the denial of a preliminary injunction for the private hospitals, in March 2013, the FTC and the state of Idaho filed a complaint seeking to enjoin the merger pursuant to the Federal Trade Commission Act (FTC Act), the Clayton Act, and Idaho law (see FTC files federal antitrust suit against St. Luke’s Health System to halt acquisition of Saltzer Medical Group, March 13, 2013). The complaint alleged anticompetitive effects only in the adult PCP market. The district court consolidated this case with the one filed by the private hospitals, and after a 19 day bench trial, found the merger prohibited by the Clayton Act and the Idaho Competition Act because of its anticompetitive effects on the Nampa adult PCP market.

In its decision ordering divestiture, the district court noted the troubled state of the U.S. health care system, found that St. Luke’s and Saltzer genuinely intended to move toward a better health care system, and expressed its belief that the merger would “improve patient outcomes” if left intact. Nevertheless, the court found that the “huge market share” of the post-merger entity “creates a substantial risk of anticompetitive price increases” in the Nampa adult PCP market (see Combination of Idaho’s largest health system and largest physician practice must be unwound, January 28, 2014).

Clayton Act analysis. Under Section 7 of the Clayton Act the government must first establish a prima facie case that a merger is anticompetitive. If the defendant successfully rebuts the prima facie case, the burden of persuasion shifts back to the government.

Another necessary predicate to deciding whether a merger violates the Clayton Act is the determination of the relevant product and geographic markets. The parties agreed that the relevant product market in this case is adult PCPs. St. Luke’s, however, disputed the district court’s determination that Nampa is the relevant geographic market. Because the relevant geographic market is defined as the “area of effective competition where buyers can turn for alternate sources of supply,” the Ninth Circuit panel held that the district court did not clearly err in determining that Nampa, Idaho, was the relevant geographic market.

The panel also held that the district court did not clearly err in its factual findings that the government established a prima facie case that the merger would probably lead to anticompetitive effects in that market. Specifically, the district court held that the prima facie case was established because of the post-merger entity’s market share, its ability to negotiate higher PCP reimbursement rates with insurers, and its ability to charge more ancillary services at the higher hospital billing rates.

Because the panel found that the government established a prima facie case, the burden shifted to St. Luke’s to cast doubt on the accuracy of the government’s evidence of anticompetitive effects. St. Luke’s rebuttal evidence focused on the alleged procompetitive effects of the merger, particularly its contention that the merger would allow St. Luke’s to move toward integrated care and risk-based reimbursement. According to the panel, although the U.S. Supreme Court has never expressly stated the post-merger efficiencies could rebut a Section 7 prima facie case, the Sixth, D.C., Eighth, and Eleventh Circuits have all suggested that they could.

The panel found that even if it adopted the suggestion of its sister circuits, and assumed that the claimed efficiencies were merger-specific, the rebuttal evidence would nonetheless fail. The panel decided that at most, the district court concluded that St. Luke’s might provide better service to patients after the merger. While that is a laudable goal, the panel concluded that the Clayton Act does not excuse mergers that lessen competition simply because the merged entity can improve its operations. Therefore, the panel found that the district court did not clearly err in concluding that St. Luke’s did not demonstrate that efficiencies resulting from the merger would have a positive effect on competition.

Finally, the panel held that the district court did not abuse its discretion in choosing a divestiture remedy.

The case is 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 Federal Trade Commission. 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.

Companies: Saint Alphonsus Medical Center-Nampa Inc; Saint Alohonsus Health System Inc.; Saint Alphonsus Regional Medical Center, Inc.; Treasure Valley Hospital Limited Partnership; St. Lukes’s Health System, Ltd.; St. Luke’s Regional Medical Center, Ltd.; Saltzer Medical Group PA; Idaho Statesman Publishing, LLC; The Associated Press; Idaho Press Club; Idaho Press-Tribune LLC; Lee Publications Inc.

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