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From Health Law Daily, April 8, 2015

Professors offer brief lesson on “do no harm” to Ninth Circuit, quality efficiencies,(Apr. 8, 2015)

By Anthony H. Nguyen, J.D.

Sixteen professors of law and economics, along with the International Center for Law and Economics, filed an amicus brief expressing concern that the dispositions of a Ninth Circuit decision in St. Alphonsus Medical Center-Nampa, Inc. v. St. Luke’s Health System, Ltd. could have national implications on health care transactions and acquisitions intended to improve the quality of care in the United States. The amicus brief was filed with the Ninth Circuit in support of St. Luke’s Health System’s petition for a panel rehearing and rehearing en banc. The amicus professors noted that the Ninth Circuit failed to consider the advantages that health care acquisitions may have over contractual alternatives or how these advantages impact the feasibility of contracting as a less restrictive alternative.

Background. The Ninth Circuit had upheld the judgment of an Idaho district court in favor of the Federal Trade Commission (FTC), the State of Idaho, and two local hospitals (see Health care merger lessened competition, providers must unwind merger, February 10, 2015). The district court had found the merger of St. Luke’s and Saltzer Medical Group, P.A. (Saltzer), an independent multi-specialty physician group with 34 physicians practicing at offices in Nampa, Idaho, violated Section 7 of the Clayton Act (15 U.S.C. § 18), which bars mergers that substantially lessen competition or create a monopoly. Although the district court noted that the merger of St. Luke’s and Saltzer was intended to improve patient outcomes, the providers were ordered to unwind the acquisition.

At the time of the merger, Saint Alphonsus Health System, Inc., operated an outpatient surgery center in Nampa. 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. Saint Alphonsus, a smaller hospital system, filed a lawsuit in 2012 to block the proposed combination of St. Luke’s and Saltzer (see Combination of Idaho’s largest health system and largest physician practice must be unwound, January 28, 2014). Subsequently, the FTC and the state of Idaho filed a complaint seeking to enjoin the merger (see FTC files federal antitrust suit against St. Luke’s Health System to halt acquisition of Saltzer Medical Group, March 13, 2013).

Efficiencies defense. An implication of the Ninth Circuit’s decision was its limitation of the efficiencies defense, generally raised in merger challenges. The efficiencies defense allows a defending party to rebut the presumption that an acquisition is anti-competitive with evidence that the merger will create a more efficient, combined entity, increasing competition overall (see Ninth Circuit’s decision in St. Luke’s case likely to have lasting implications for health care acquisitions, February 13, 2015). Instead, the Ninth Circuit held that merging parties needed to provide verifiable, merger-specific efficiencies to support their transactions.

Conflict with antitrust laws. The amicus brief noted that one of the core guiding principles of modern antitrust law is the focus on maximizing the welfare of consumers. As such, the amicus professors stressed that this guiding principle should lead to the conclusion that antitrust laws may be violated when a transaction reduces consumer welfare, but not when consumer welfare is increased. Comparing it to the underlying principle of the Hippocratic Oath, the amicus brief advocated that the consumer welfare focus should be, first and foremost, “do no harm.”

The common view was that the antitrust law should properly recognize efficiencies and allow efficiency defenses in antitrust matters, particularly those in matters involving quality efficiencies found in health care. In finding that the acquisition of Saltzer by St. Luke’s would substantially harm competition, however, the amicus professors expressed concerns that the Ninth Circuit had established a precedent for merger efficiencies that conflicted with antitrust laws and was contrary to the understanding of consumer welfare.

The amicus brief in particular highlighted the Ninth Circuit’s holding that “[i]t is not enough to show that the merger would allow St. Luke’s to better serve patients.” The professors disagreed with this statement, especially in relation to the Ninth Circuit’s analysis of quality-enhancing health care efficiencies. The Ninth Circuit’s language appeared to disregard quality-enhancing efficiencies in merger analysis, a legal holding that directly contradicted Federal Trade Commission Merger Guidelines on the matter.

According to the amicus professors, the Ninth Circuit’s explicit rejection of quality efficiencies was a “radical and problematic” departure from modern antitrust jurisprudence. The Ninth Circuit’s decision implied that only price impacts were cognizable efficiencies. The amicus professors disagreed, however, as price separated from product characteristics was an irrelevant concept. The relevant concept the Ninth Circuit should consider was quality-adjusted price, i.e. showing that a merger resulting in a higher product quality at the same price as before would establish a cognizable efficiency. The amicus professors urged the Ninth Circuit to apply a less restrictive alternative analysis and consider the effects of the appellate decision on the “asymmetric burdens of proof on proving efficiencies.”

Impact. If the decision were permitted to stand, the amicus professors argued the Ninth Circuit was signaling market participants that the efficiencies defense was essentially unavailable, especially if the efficiencies were improving quality. As a result, companies contemplating mergers designed to make each entity more efficient might avoid transactions that promoted consumer welfare in the circuit.

The amicus brief stressed that by placing the ultimate burden of proving efficiencies on the merging parties and by applying a narrow, impractical view of merger specificity, the Ninth Circuit was incorrectly denying application of known pro-competitive efficiencies. Under said ruling, it would be nearly impossible for any merging party to disprove all alternatives, especially when the burden was on the merging parties to address all alternatives, tested or untested.

Companies: Saint Alphonsus Medical Center-Nampa Inc; Saint Alophonsus 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.; International Center for Law and Economics; University of Kansas; George Mason University; University of Michigan; University of California, Los Angeles; University of Texas at Dallas; University of Nebraska-Lincoln; Boston University; University of Missouri; Pennsylvania State University; North Carolina State University; University of Miami; George Washington University; Boston College; Emory University; University of Florida

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