A recent federal appellate court ruling demonstrates the tension within the healthcare sector that arises when the need to consolidate runs up against the Clayton Act and enforcers at the FTC, says one legal observer.
Consolidation has been a mantra and a movement in the healthcare sector for years, but that doesn't mean the federal government won't step in to block monopolies formed with the intent of improving care delivery.
That was demonstrated this month when the 9th U.S. Court of Appeals upheld an Idaho federal district court ruling that negated the 2012 acquisition of Nampa, ID-based Saltzer Medical Group by St. Luke's Health Systems, Ltd.
A federal district judge in Boise had sided with the Federal Trade Commission, the State of Idaho, and two rival hospitals that had complained that St. Luke's $9 million acquisition of Saltzer, Idaho's largest independent multi-specialty physician group, was a violation of the Clayton Act on monopolies.
The federal courts ruled against St. Luke's and Saltzer even as judges at the district and appeals court level acknowledged the validity of their stated need to consolidate.
"The district court expressly noted the troubled state of the U.S. healthcare system, found that St. Luke's and Saltzer genuinely intended to move toward a better healthcare system, and expressed its belief that the merger would "improve patient outcomes" if left intact," the 9th Circuit Court wrote in its affirmation.
"Nonetheless, 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. Rejecting an argument by St. Luke's that anticipated post-merger efficiencies excused the potential anticompetitive price effects, the district court ordered divestiture."
Jay L. Levine, an antitrust litigator and partner with Porter Wright Morris & Arthur LLP, says St. Luke's case demonstrates the tension within the healthcare sector that arises when the need to consolidate, tacitly encouraged by the Patient Protection and Affordable Care Act, runs up against the Clayton Act and enforcers at the FTC.
"It further marks that the FTC is going to look at these things critically and you can't just wave the ACA flag and say 'this is why we are doing it. We are OK,'" Levine says. "By now, we are pretty confident that just saying 'we need to get bigger to become more cost-effective' is not going to impress the FTC."
Levine says the FTC and the co-plaintiffs had an advantage with their argument because "the anticompetitive effects are somewhat intuitive." No matter how sincere the efforts of St. Luke's and Saltzer, he says, they would have a more difficult time convincing a judge that the acquisition would prove cost-effective for consumers in the service area.
"It is difficult to figure out how to measure quality in healthcare. Measuring a unit of healthcare is not quite the same as in other industries where there is more objective criteria," Levine says. "They are developing those criteria, and it may well be in the coming days that someone can demonstrate a prospective proof that the merger will in fact bring enough cost-effectiveness and integration that it will ultimately lower pricing, notwithstanding the additional market power the merger gives."
There is No Conflict
Michael L. Sibarium, a Washington, DC-based litigator and partner with Pillsbury, says that many people in the healthcare sector mistakenly believe they're caught between a push for consolidation encouraged under the ACA and established antitrust laws.
"If you spoke with people in the antitrust community, they would say overwhelmingly that there is not a conflict and that these two things can live in harmony with each other," Sibarium says. "For different reasons at different times over the years there have been pushes for consolidation in healthcare. Long before the ACA, people were saying antitrust was standing in the way of consolidating."
"There is no reason why you cannot have pro-competitive consolidations to achieve efficiencies on a scale with clinical cooperation, electronic medical records, better quality and service and still avoid anticompetitive price increases."
Sibarium says the St. Luke's ruling shows that the FTC isn't "going to just roll over and say the ACA statute trumps the antitrust laws." It means that healthcare providers will have to do their homework to understand the potential anticompetitive effects of a merger or acquisition.
"Look at the St. Luke's case and you can see how the court defined the geographic market being this city of Nampa and how many physicians St. Luke's and Salters had when combined and how many were left at the other hospitals," Sibarium says. "Do the math and you can quickly see that how they define the market they end up with an enormous market share and probably an antitrust problem."
The homework can get a little more complicated at times because "there is no bright line test" to determine a monopoly, Sibarium says.
"There are different antitrust laws with different thresholds," he says. "When you are suing somebody for monopolization, using what they call exclusionary conduct to keep a monopoly you have or to obtain a monopoly, you have different thresholds. Share numbers is one piece of it, but other factors are relevant."
"For example," he says, "what are the entry barriers in a given industry? If you have higher entry barriers then a lower number will satisfy the monopoly test. If you have low entry barriers you are going to need a higher number, or maybe no number."
"Building a new hospital is a high entry barrier, but bringing in a new physician practice, maybe not," Sibarium says. "Unless the nature of the physician practice is that you have to have admitting privileges in a particular town and the hospital won't grant them, then you have an entry barrier. It becomes more fact-specific than just saying 50% or more doesn't help that much."
Levine says healthcare executives contemplating a merger or acquisition should examine how the deal will affect their relationship with payers, because that's the first thing the FTC will look at.
"The FTC is going to say that managed care companies need systems that play off of each other to get the best prices for the consumer," Levine says. "At the end of the day, whether it is a physician practice merger, a hospital merger, an acquisition of a physician practice by a hospital, the question is 'what are the alternatives?' "
"If you are the biggest health system and the biggest by far independent physician practice and they are hooked up, it becomes difficult to figure out what the alternatives are for consumers. If your options are telling people 'Go to the next city that is 200 miles away' that is probably not going to be too effective an argument."
John Commins is the news editor for HealthLeaders.